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Rauch v. RCA Corp.

decided: November 3, 1988.

LILLIAN S. RAUCH, PLAINTIFF-APPELLANT,
v.
RCA CORPORATION, GENERAL ELECTRIC COMPANY AND GESUB, INC., DEFENDANTS-APPELLEES



Appeal from a judgment entered in the United States District Court for the Southern District of New York, John F. Keenan, Judge, dismissing plaintiff's complaint for failure to state a claim upon which relief can be granted. Affirmed.

Oakes, Cardamone and Mahoney, Circuit Judges.

Author: Mahoney

MAHONEY, Circuit Judge:

Plaintiff Lillian S. Rauch appeals from a judgment of the United States District Court for the Southern District of New York, John F. Keenan, Judge, dismissing her class action complaint challenging the propriety of a merger effected by defendants for failure to state a claim upon which relief can be granted. The district court held that Rauch's action was barred by Delaware's doctrine of independent legal significance. We affirm.

Background

This case arises from the acquisition of RCA Corporation ("RCA") by General Electric Company ("GE"). On or about December 11, 1985, RCA, GE and Gesub, Inc. ("Gesub"), a wholly owned Delaware subsidiary of GE, entered into an agreement of merger. Pursuant to the terms of the agreement, all common and preferred shares of RCA stock (with one exception) were converted to cash, Gesub was then merged into RCA, and the common stock of Gesub was converted into common stock of RCA. Specifically, the merger agreement provided (subject in each case to the exercise of appraisal rights) that each share of RCA common stock would be converted into $66.50, each share of $3.65 cumulative preference stock would be converted into $42.50, and each share of $3.50 cumulative first preferred stock (the stock held by plaintiff and in issue here, hereinafter the "Preferred Stock") would be converted into $40.00.*fn1 A series of $4.00 cumulative convertible first preferred stock was called for redemption according to its terms prior to the merger.

On February 27, 1986, plaintiff, a holder of 250 shares of Preferred Stock, commenced this diversity class action on behalf of a class consisting of the holders of Preferred Stock. It is undisputed that this action is governed by the law of Delaware, the state of incorporation of both RCA and Gesub. Plaintiff claimed that the merger constituted a "liquidation or dissolution or winding up of RCA and a redemption of the [Preferred Stock]," as a result of which holders of the Preferred Stock were entitled to $100 per share in accordance with the redemption provisions of RCA's certificate of incorporation,*fn2 that defendants were in violation of the rights of the holders of Preferred Stock as thus stated; and that defendants thereby wrongfully converted substantial sums of money to their own use. Plaintiff sought damages and injunctive relief.

Defendants moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6), and plaintiff cross-moved for summary judgment. The district court concluded that the transaction at issue was a bona fide merger carried out in accordance with the relevant provisions of the Delaware General Corporation Law. Accordingly, the district court held that plaintiff's action was precluded by Delaware's doctrine of independent legal significance, and dismissed the complaint.

Discussion

At the outset, we note that in ruling on a motion pursuant to Fed. R. Civ. P. 12(b)(6), a district court should deny the motion "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of [her] claim which would entitle [her] to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957) (footnote and citations omitted). The allegations in the complaint, moreover, must be liberally construed. Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 85 L. Ed. 2d 144, 105 S. Ct. 1845 (1985).

According to RCA's Restated Certificate of Incorporation, the owners of the Preferred Stock were entitled to $100 per share, plus accrued dividends, upon the redemption of such stock at the election of the corporation. Plaintiff contends that the merger agreement, which compelled the holders of Preferred Stock to sell their shares to RCA for $40.00, effected a redemption whose nature is not changed by referring to it as a conversion of stock to cash pursuant to a merger. Plaintiff's argument, however, is not in accord with Delaware law.

It is clear that under the Delaware General Corporation Law, a conversion of shares to cash that is carried out in order to accomplish a merger is legally distinct from a redemption of shares by a corporation. Section 251 of the Delaware General Corporation Law allows two corporations to merge into a single corporation by adoption of an agreement that complies with that section. Del. Code Ann. tit. viii, § 251(c) (1983). The merger agreement in issue called for the conversion of the shares of the constituent corporations into cash. The statute specifically authorizes such a transaction:

The agreement shall state . . . the manner of converting the shares of each of the constituent corporations into shares or other securities of the corporation surviving or resulting from the merger or consolidation and, if any shares of any of the constituent corporations are not to be converted solely into shares or other securities of the surviving or resulting corporation, the cash . . . which the holders of such shares are to receive in exchange for, or upon conversion of such shares . . ., which cash . . . may be in addition to or in lieu of shares or other securities of the surviving or resulting corporation . . . .

Id. § 251(b) (emphasis added). Thus, the RCA-GE merger agreement complied fully with the merger provision in question, and ...


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