Green v. Santa Fe Industries, Inc.

Citations: 70 N.Y.2d 244; 519 N.Y.S.2d 793; 514 N.E.2d 105; 1987 N.Y. LEXIS 18544

Court: New York Court of Appeals; September 15, 1987; New York; State Supreme Court

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Plaintiffs, former minority stockholders of Kirby Lumber Corp., initiated a lawsuit for damages against Santa Fe Industries and its subsidiaries following a Delaware short-form freeze-out merger that made Kirby a wholly owned subsidiary of Santa Fe. The appeal addresses two primary issues: 1) whether the action is barred by res judicata or collateral estoppel due to a related Federal court dismissal (Green v Santa Fe Indus.), and 2) if not barred, whether the defendants’ actions could support claims for violations of New York’s Martin Act or breaches of fiduciary duties under Delaware law. The court determined that the previous dismissal does not bar the current action; however, plaintiffs failed to establish a valid claim under either the Martin Act or Delaware law, leading to a recommendation for summary judgment in favor of the defendants.

In 1974, Santa Fe Resources, a subsidiary of Santa Fe Industries, executed a short-form merger that resulted in Kirby becoming wholly owned by Santa Fe. Following the merger, minority stockholders were notified of their appraisal rights and offered $150 per share, which some accepted while others sought appraisal. A court-appointed appraiser determined the asset value per share at $456 and the fair price at $254.40, findings that were upheld in subsequent legal challenges (Bell v Kirby Lbr. Corp.). The Greens, nonappealing plaintiffs, previously filed a Federal lawsuit claiming the merger violated section 10(b) of the Securities Exchange Act and breached fiduciary duties under Delaware law. The District Court dismissed the case for failing to state a claim, but the Second Circuit reinstated it, asserting a cause of action was present under Rule 10b-5 due to alleged breaches of fiduciary duty. The Supreme Court later reversed this decision, ruling that the merger, as described, was neither deceptive nor manipulative, thus not violating 10(b) or Rule 10b-5.

Following the Supreme Court's ruling, the Greens revised their complaint to retain the Delaware common-law claim while substituting the federal cause of action with allegations that actions related to the merger breached section 352-c of the Martin Act. The Borgs, aware of the Greens' case since a 1976 Second Circuit decision, filed for class certification in 1979 and 1980, both of which were denied. The District Court granted the defendants' motion for summary judgment, concluding that the plaintiffs did not establish a breach of fiduciary duty under Delaware law and chose not to address the Martin Act claims. The Second Circuit upheld this decision without opinion, and the Supreme Court denied a subsequent certiorari request. After the dismissal of the Greens’ federal case, the plaintiffs, consisting of both the Greens and the Borgs, alleged in 1977 that the merger aimed to unfairly eliminate public stockholders at a price of $150 per share, significantly lower than the appraised value of $772. They claimed the defendants misled minority shareholders by providing a valuation of $125 per share that omitted critical information, constituting fraud and violations of General Business Law sections 339-a and 352-c. Additionally, the plaintiffs asserted that the low buyout price constituted a breach of fiduciary duty under Delaware law. The case remained inactive until the dismissal of the Greens' federal litigation in 1983. The Special Term denied the plaintiffs’ motion for summary judgment but granted the defendants’ cross-motion, ruling that the Borgs were in privity with the Greens, thus precluding their claims based on the previous dismissal. The Appellate Division affirmed this decision, leading to a grant of leave to appeal. The core issue is whether the Borgs, not part of the federal litigation, are barred from claiming based on the Greens' dismissal, with the court concluding they were not in privity.

A claim under the Martin Act requires proof of a breach of duty; without such proof, the court dismissed the Greens' action without resolving factual issues. Consequently, the Borgs are not precluded from relitigating specific factual issues in their New York action under collateral estoppel. Any potential preclusion against the Borgs must stem from res judicata due to the legal dismissal of the Greens' action. A prior judgment binds not only the parties but also those in privity, which necessitates that nonparties' interests were represented in the earlier proceeding. Examples include union actions binding subsequent member actions, judgments against insured parties affecting their insurers, and bankruptcy trustee actions barring subsequent creditor claims.

In this case, the Borgs lack the necessary privity with the Greens, as the Greens acted individually, not as a derivative group, and class certification was denied. Their only connection was ownership of different stock blocks in the same company, failing to establish traditional privity. Furthermore, while courts can preclude parties who control the prior action's conduct to protect their interests, the defendants argue that the Borgs, aware of the Greens' lawsuit and involved in the Federal action, did not represent their interests in that earlier case. They claim the Borgs monitored the proceedings and were represented by the same counsel as the Greens, but this does not equate to privity in the traditional sense.

Defendants' argument is rejected for several reasons. The case of Watts v Swiss Bank Corp. is distinguished as it involved identical claims to the proceeds of a joint bank account, with the same attorneys and practically identical parties involved. In contrast, the Borgs' claims in this case are not identical to those in the Green Federal court action. Although both the Greens and the Borgs share similar theories of recovery, the ownership of stock is distinct, leading to separate claims. Despite having the same counsel, there is no evidence that the Borgs' interests were adequately represented in the prior action. Additionally, applying res judicata would impose federal legal determinations on a state court, complicating the issue of privity between the Borgs and the Greens, which is a factual question precluding summary judgment. 

The plaintiffs' claims are based on allegations that Forest Products, Inc., a subsidiary of Santa Fe, merged with Kirby without proper notice to minority stockholders, effectively freezing them out of the surviving corporation. The plaintiffs assert that the merger lacked a legitimate corporate purpose and that the offered cash freeze-out price of $150 per share was intentionally undervalued, knowing the fair market value was at least $772 per share. They claim that an information statement sent to minority stockholders omitted crucial facts, including a suggestion from Morgan Stanley to offer between $175 and $200 per share, Santa Fe's acknowledgment of a thorough appraisal valuing Kirby's assets at $320 million, and Kirby's promising expansion plans and capital appreciation.

Plaintiffs failed to establish a basis for recovery under the Martin Act due to the ruling in CPC Intl. v McKesson Corp., which determined there is no implied private action for fraud under section 352-c of the General Business Law. Consequently, the defendants' motion for summary judgment regarding this claim was appropriately granted. The viability of plaintiffs' second cause of action for breach of fiduciary duty hinges on Delaware law, which the courts previously held was precluded by the dismissal of a related federal action. The courts adopted the federal legal conclusion that no breach of fiduciary duty occurred under Delaware law. 

At the time of the 1974 merger, Delaware law permitted a parent corporation owning 90% or more of a subsidiary's stock to merge without minority shareholder consent, provided the merger was approved by the parent’s board. No corporate purpose was required for such mergers; their intent was to eliminate minority interests. A parent corporation was obligated to compensate minority shareholders for their shares, and dissatisfied shareholders had the right to seek judicial appraisal of their shares’ fair value. 

The plaintiffs did not allege any statutory violations but argued that, based on case law from the time of the merger, a claim of breach of fiduciary duty could arise if the majority acted solely to freeze out the minority without a legitimate business purpose. This argument relied on the business purpose rule from three prior cases, which was overruled by the Delaware Supreme Court in 1983. Judge Duffy did not apply this rejected rule but instead adhered to the previously established Delaware law that did not require a corporate purpose for short-form mergers and limited minority shareholders to appraisal remedies.

Plaintiffs argue that their claims should be governed by the Singer-Tanzer-Roland rule due to the timing of the merger in 1974, contrary to Judge Duffy's ruling that relied on earlier cases, Stauffer and Greene Co. The court interprets the savings clause in the Weinberger opinion as benefitting only those who abjured an appraisal based on the business purpose rule established in 1977, which was not applicable at the time of the Kirby-Forest Products merger. The court disagrees with the plaintiffs' interpretation, asserting that applying retroactive relief would not align with the Delaware Supreme Court's intentions and would unfairly benefit the plaintiffs. 

Additionally, plaintiffs contend that they have sufficient grounds to deny summary judgment based on prior Delaware decisions. However, the court maintains that in a properly conducted cash-out merger, minority shareholders are limited to statutory appraisal rights unless fraud or egregious misconduct is shown. The rationale for this limitation supports corporate consolidation and prevents judicial interference in business necessity determinations. The Delaware Supreme Court's recent decision in Rabkin v. Hunt Chem. Corp. reaffirmed that while it abrogated the Singer-Tanzer-Roland rule in favor of earlier precedents, it did not restrict the Chancellor's powers to provide equitable relief in cases involving serious misconduct.

The rule from Stauffer and Greene Co. is evaluated alongside the warnings from Weinberger and Rabkin. Upon reviewing the complaint, affidavits, and deposition excerpts from plaintiff Cecil R. Borg, it is determined that there is no evidence of fraud or severe misconduct that would exempt the case from the statutory appraisal proceeding, which is the plaintiffs' exclusive remedy. No claims of misrepresentation or fraudulent conduct are present. The plaintiffs received an appraisal of the corporation's asset value and the Morgan Stanley stock appraisal, valued at $125 per share. They concluded that both the Morgan Stanley appraisal and a $150 per share offer were unreasonable, arguing the asset value was significantly undervalued at $320,000,000. Their decision not to pursue an appraisal was based on a belief it would be cost-prohibitive, not on any deceptive actions by the defendants.

The case of Rabkin v. Hunt Chem. Corp. is distinguished, as it involved a clear commitment from Olin Corporation to pay $25 per share for stock, which was later manipulated to offer only $20 per share. Unlike Rabkin, the current case lacks claims against individuals for dual representation or bad faith beyond mere price inadequacy. The court noted that the plaintiffs' objections would have been resolved through an appraisal, which they failed to seek. Additionally, unlike in Weinberger, which involved allegations of director misconduct and fraud, the current case does not present similar specific fraud claims or issues of dual capacity among directors.

The case revolves around the valuation of Kirby stock, with plaintiffs alleging fraud and overreaching. However, evidence shows that the plaintiffs, after consulting legal counsel, made an informed decision to accept the offered price for Kirby stock, foregoing their appraisal rights due to concerns about the costs and duration of appraisal proceedings. The court affirms the dismissal of the plaintiffs' complaint, with costs awarded, noting that only the Borgs are appealing the Appellate Division's decision. The excerpt references a transaction where Santa Fe Resources, a subsidiary, transferred Kirby stock and cash to a new subsidiary, Forest Products, which was then merged into Kirby. The appraisal by Morgan Stanley, which assigned a 5% weight to asset value in determining fair stock value, is upheld as methodologically sound by the Delaware Supreme Court. The court also highlights a potential breach of fiduciary duty regarding undisclosed information that benefitted Signal at the expense of UOP shareholders.