Monday, February 6, 2006
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C.A. Rules Withheld Documents Claim Is Insufficient To Support Damages Sought Over Corporate Merger
By Kenneth Ofgang, Staff Writer/Appellate Courts
A claim by stockholders that corporate officers withheld key documents regarding the company’s involvement in a merger was insufficient to overcome a statutory provision limiting their remedies to repurchase of their stock, the Sixth District Court of Appeal ruled Friday.
The justices affirmed the dismissal of a suit by former minority shareholders and employees of Soft Plus, Inc., a Silicon Valley software firm, claiming they were misled regarding the company’s merger with First Acquisition Co., Inc., a wholly owned subsidiary of U.S. Interactive, Inc.
The defendants in the case were controlling shareholders and officers and directors of Soft Plus.
U.S. Interactive went through bankruptcy proceedings, and the plaintiffs alleged that they lost the value of their Soft Plus shares and received no interest in U.S. Interactive.
“Plaintiffs strive mightily to avoid the statutory bar of [Business and Professions Code] section 1312, subdivision (a), which makes a court action to determine fair market value the only judicial remedy ordinarily available to shareholders with statutory dissenters’ rights who oppose a merger or other reorganization,” Justice Franklin Elia wrote for the Court of Appeal.
But the statute is clear, the justice wrote. Dissenting shareholders must take “three critical steps” within the time limits set out in the code, he explained; they must make a written demand that their shares be repurchased at fair market value, turn in the stock certificates, and file suit if they cannot reach an agreement with the corporation as to the fair market value.
Once the court action is filed, the justice continued, the court may appoint appraisers. The statute specifies that a shareholder who has “appraisal rights” shall not “have any right at law or in equity to attack the validity of the...merger, or to have the...merger set aside or rescinded.”
The plaintiffs, Elia said, cannot get around that prohibition by alleging that they were unable to exercise their dissenters’ rights because the defendants withheld information about what their shares were worth, or that the defendants’ misconduct prevented them from making a timely and informed decision about whether to exercise those rights.
The justice pointed out that the plaintiffs did not allege that they were unaware of their statutory rights, and that they in fact acknowledged receipt of a statement from the corporation stating those rights. Nor did the plaintiffs show that the company had any obligation to provide them with any information that they alleged was withheld or that they were denied the access to corporate records to which they were statutorily entitled, Elia said.
The justice went on to say:
“Although plaintiffs are vigorously maintaining that this action is ‘neither a cause of action for deprivation of appraisal rights nor a cause of action for deprivation of merger consideration’ and seek to make defendants liable for plaintiffs’ inaction, plaintiffs were simply not legally able to postpone the decision whether to exercise dissenters’ rights beyond the statutory time frame. A failure to timely perfect dissenters’ rights is a de facto choice by a shareholder to accept a merger or other reorganization and forego dissenters’ rights. The allegation in the complaint that ‘[d]efendants’ conduct herein alleged deprived plaintiffs of corporate records and the information described in...this complaint and proximately caused plaintiffs to sustain damages in that the merger closed and the merger consideration was distributed while plaintiffs waited for documents to evaluate the merger’ does not help plaintiffs avoid the bar of section 1312 because, by operation of law, they lost possible dissenter status when the time for exercising dissenters’ rights expired.”
It may be possible, Elia said, for shareholders who do not exercise dissenters’ rights to sue based on claims that they would have exercised those rights but for fraud or a lack of required disclosure. In this case, however, the plaintiffs did not allege that they had discovered facts which, had they known them at the time, would have caused them to make a timely exercise of dissenters’ rights.
The case is Singhania v. Uttarwar, 06 S.O.S. 580.
Copyright 2006, Metropolitan News Company