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LOENGARD v. SANTA FE INDUS.

July 9, 1986

RICHARD O. LOENGARD, JR., et al., Plaintiffs, SANTA FE INDUSTRIES, INC., et al., Defendants


The opinion of the court was delivered by: DUFFY

KEVIN THOMAS DUFFY, D.J.:

MEMORANDUM & ORDER

Plaintiffs bring this action pursuant to New York's Martin Act, Gen. Bus. Law § 352-c (McKinney 1984). Plaintiffs are minority shareholders who were "cashed out" pursuant to a 1974 short-form merger between Kirby Lumber Corporation ("Kirby") and Santa Fe Natural Resources, Inc. ("Resources"). The defendants are Kirby Forest Products, Inc. (formerly known as Kirby Lumber Corporation), Santa Fe Industries, Inc. ("Santa Fe"), and Resources. Jurisdiction is based on diversity of citizenship. *fn1" 28 U.S.C. § 1332.

 Plaintiffs move for summary judgment, pursuant to Fed. R. Civ. P. 56, or alternatively, for partial summary judgment on the issue of defendants' liability and for a separate trial to determine damages. Defendants cross-move for summary judgment alleging plaintiffs have failed to state a claim under the Martin Act. Defendants further request the imposition of sanctions pursuant to Fed. R. Civ. P. 11. For the following reasons plaintiffs' motions are denied and defendants' motion for summary judgment is granted. Defendants' request for sanctions, however, is denied.

 FACTS

 The merger in this case has now been litigated for eleven years. Although familiarity with previous decisions concerning this merger is assumed, *fn2" some background facts, stated as briefly as possible, are nevertheless required. On July 11, 1974, Forest Industries, Inc., a wholly-owned subsidiary of Resources, was created for the purposes of the merger. At the time, Kirby was a 95 percent subsidiary of Santa Fe. Resources was, and is, a wholly-owned subsidiary of Santa Fe. On July 31, 1974, Santa Fe completed a short-form merger between Forest Industries, Inc. and Kirby pursuant to Del. Code Ann. Tit. 8, § 253 (1983). As a result of the merger, Resources acquired the 5 percent interest in Kirby not previously owned by Santa Fe.

 After the merger and pursuant to Delaware's short-form merger statute, Kirby's minority shareholders were given notice of their right to "cash out" at $150 per share, or to elect a judicial appraisal hearing. Under Delaware law, the exclusive remedy for minority shareholders who dispute the fair value of their shares is to seek a judicial appraisal. Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983).

 The notification sent to Kirby's minority shareholders contained information about Kirby's business condition and the estimated value of its assets. An appraisal by Morgan Stanley & Company, Inc., estimating the earnings value of the Kirby stock at $120 per share was also included in the notice.

 Plaintiffs accepted Resources' offer to pay $150 per share while other minority shareholders elected an appraisal. In the appraisal proceeding, Kirby's asset value was determined to be $456 per share and the fair market value of the shares was found to be $254.40. Bell v. Kirby Lumber, 413 A.2d 137, 139 (Del. 1980). Plaintiffs were also awarded $99.57 per share in prejudgment interest.

 DISCUSSION

 Plaintiffs claim the method used to cash them out, although done in accordance with the Delaware short-form merger statute, operated as a fraud against them because: (1) there was no legitimate business purpose for the merger; (2) the minority shareholders were not given prior notice of it; and (3) their shares were greatly undervalued. Regarding the latter point, plaintiffs claim that defendants are collaterally estopped from challenging either the fact of the under-valuation or the value of the shares determined by the appraiser and upheld in Bell. Even assuming plaintiffs' collateral estoppel argument is correct, that fact alone would not be determinative of the defendants' liability under the Martin Act.

 Martin Act

 Plaintiffs argue that the Martin Act prohibits a broader range of conduct than 15 U.S.C. § 78j(b) and Securities & Exchange Commission ("SEC") Rule 10b-5. The same short-form merger challenged here was previously found not to violate Rule 10b-5, because the merger involved no deception or manipulation. Santa Fe ...


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