Opinion
Civil Action No. 13397.
Date Submitted: May 9, 1995.
Date Decided: August 9, 1995.
Joseph A. Rosenthal, Esquire, of ROSENTHAL, MONHAIT, GROSS GODDESS, P.A., Wilmington, Delaware; OF COUNSEL: Joshua N. Rubin, Esquire, of ABBEY ELLIS, New York, New York, Todd S. Collins, Esquire and Ivonia K. Slade, Esquire, of BERGER MONTAGUE, P.C., Philadelphia, Pennsylvania, Richard S Wayne, Esquire, of STRAUSS TROY, Cincinnati, Ohio; Attorneys for Plaintiffs.
Alan J. Stone, Esquire, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; OF COUNSEL: Norman S. Jeavons, Esquire and Daniel P. Mascaro, Esquire, of BAKER HOSTETLER, Cleveland, Ohio; Attorneys for Defendants.
MEMORANDUM OPINION
Pending is a motion to dismiss a class action brought by persons who had been minority shareholders of Scripps Howard Broadcasting Company ("SHB"), an Ohio corporation, prior to its stock-for-stock merger into defendant, E.W. Scripps Company ("Scripps"), a Delaware corporation that had owned 86% of SHB prior to the merger. Plaintiffs filed this action alleging that the merger represented a breach by Scripps of the fiduciary duty that, as controlling shareholder, it owed under Ohio law. Plaintiffs contend that the timing of the offer, among other alleged manipulations, deprived plaintiffs of the true value of their SHB holdings. Plaintiffs' Second Amended Complaint also alleges that a number of material facts were omitted from the proxy statement distributed to SHB stockholders in connection with the stockholder vote approving the merger. Plaintiffs contend that had defendant disclosed these facts, plaintiffs would have been aware that the exchange ratio offered for the minority shares was grossly inadequate, and therefore, would have sought appraisal.
Scripps has moved to dismiss the complaint as failing to state a claim upon which relief may be granted. It contends that Ohio law, which the parties agree controls this suit, does not recognize claims of fiduciary breach that essentially challenge the amount paid for shares of stock in a merger, such as that the "[e]xchange [r]atio grossly undervalues" SHB. See Second Amended Class Action Complaint ¶ 12, 13. According to defendant, Ohio law permits dissenting shareholders a judicial appraisal as the exclusive remedy through which to attain the full and fair value of their stock. Defendant further contends that even if Ohio law did recognize disclosure claims, defendant did make full disclosure of material facts pertaining to the merger in its proxy statement and that omissions cited by plaintiffs are not material. Defendant, therefore, argues that plaintiff has failed to state a claim upon which relief may be granted.
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For the reasons set forth below, I conclude, that under Ohio law, plaintiffs' exclusive remedy for the facts alleged, if any, is through an appraisal of the fair value of their shares, which action must be brought in the courts of the State of Ohio. Therefore, the pending motion will be granted.
I. FACTS
The facts set forth below are those alleged in the complaint, and are taken as true for purposes of this motion.
SHB operated television, cable, and radio stations. Its controlling shareholder, Scripps, is a diversified media company owning television, radio, newspapers, wire services, and cable operations. As of October 15, 1993, Scripps owned 86% of the approximately 10.3 million shares of SHB outstanding stock. In turn, Scripps officers and directors owned approximately 79% (or 59 million of 74.6 million outstanding shares) of Scripps.
On February 17, 1994, Scripps announced that it had extended an offer to SHB to acquire each of the SHB shares that Scripps did not own in exchange for three Scripps' Class A shares. The market price of a share of Scripps immediately prior to the announcement was $28 per share, or $84 for three shares. On the same day, the SHB board of directors appointed a special committee to review the fairness of the proposed merger and to report its conclusion to the full SHB board. The Special Committee hired legal counsel and Lehman Brothers, Inc. ("Lehman Brothers") to act as its financial advisor. It negotiated with Scripps. After receiving an opinion from Lehman Brothers that the consideration offered by Scripps (3.45 Scripps A shares for each SHB share) was fair to the SHB shareholders, the Special Committee recommended approval of the merger to the full SHB board. On May 4, 1994, the board unanimously approved the merger, and Scripps and SHB announced that their respective boards had approved the merger at an exchange ratio of one SHB share for 3.45 Scripps Class A shares, subject only to shareholder approval. As of the date of the announcement, the value that this exchange ratio assigned to SHB was $953.33 million.
Artfully, plaintiff does not allege any facts concerning the existence of the Special Committee. Attached to the affidavit of Alan J. Stone, an attorney for defendant, however, defendant has submitted a copy of the proxy statement distributed to the SHB shareholders that describes the Special Committee's role and actions. Facts concerning the actions of the Special Committee and the SHB board are taken from the proxy statement. In deciding a motion to dismiss under Rule 12(b)(6), the court may judiciously rely on proxy statements not to resolve disputed facts but at least to establish what was disclosed to shareholders. See Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991); Southmark Prime Plus, L.P. v. Falzone, 776 F.Supp. 888, 892-93 (D.Del. 1991); Gardner v. Federated Dep't Stores, Inc., 717 F.Supp. 136, 142 n. 6 (S.D.N.Y. 1989), rev'd in part on other grounds, 907 F.2d 1348 (2d Cir. 1990).
Plaintiff alleges that the increase from three Scripps shares to 3.45 shares per SHB share was not the result of impassioned negotiations by the SHB's Special Committee, but rather that it merely reflected an adjustment for the fact that the market price of Scripps stock had declined between the time of the initial offer and the board agreement.
Following the announcement, there were some changes in the television industry (the affiliations of certain stations with particular networks changed) that potentially could have impacted the value of SHB and/or Scripps. In light of this potential, after Lehman Brothers confirmed that the exchange ratio remained fair, the Special Committee voted unanimously to reaffirm its recommendation of the merger and the SHB board unanimously voted to call a Special Meeting of stockholders to vote on the merger.
Scripps and SHB filed a proxy statement with the SEC and distributed it to the SHB stockholders in anticipation of the vote on the merger at the September 14, 1994 stockholders' meeting. That meeting was held and a majority of the outstanding shares voted their proxies approving the merger.
The proxy statement contained a detailed account of the events leading up to the stockholder meeting and a description of the Lehman Brothers' fairness opinion, including a summary of the financial and comparative analyses that Lehman Brothers undertook before rendering its opinion of the merger consideration. Plaintiffs, though, allege that the proxy statement omitted material information about the Lehman Brothers' studies and conclusions.
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This action on behalf of a class of SHB's public shareholders was filed on March 2, 1994. No preliminary injunction against the consummation of the merger was sought. On March 24, 1994, Scripps moved to dismiss the complaint. On June 16, 1994, plaintiff amended the complaint and in August of 1994 Scripps sought to dismiss the Amended Complaint. On December 5, 1994, defendant agreed to permit plaintiff to amend her complaint for a second time, at which time the disclosure claims were added, and finally on January 9, 1995, defendant moved to dismiss the Second Amended Complaint.
II. OHIO LAW
Ohio law governs the outcome of this action. SHB was incorporated under the laws of Ohio and the internal affairs doctrine has long recognized that the law of the state of incorporation regulates matters involving internal corporate affairs. See CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987); First Nat'l City Bank v. Banco Para el Comercio Exterior de Cuba, 462 U.S. 611, 621 (1983); McDermott, Inc. v. Lewis, Del.Supr., 531 A.2d 206, 217 (1987). A shareholder's right to an appraisal of her stock is unquestionably a matter of internal corporate affairs; the procedural requirements to qualify for judicial appraisal and the method of valuation are dictated by the statutory provisions and common law of the state of incorporation.
As defendant argues, Ohio law is quite explicit that appraisal is the sole remedy available to a dissenting stockholder seeking the full and fair price for her stock following a merger. Ohio Revised Code Section 1701.85 establishes the procedures for determining the amount to be paid to dissenting shareholders. The Ohio Supreme Court has concluded that R.C. § 1701.85 permits valuation of shares to be based solely on a "willing seller-willing buyer" test (in an actively traded stock, this would amount to the market price, adjusted to eliminate any increase or decrease in the price caused by announcement of the merger transaction itself); other valuation methods, such as net asset value, discounted cash flow, and comparables, are disallowed by the statute. Armstrong v. Marathon Oil Co., 513 N.E.2d 776, 784-790 (Ohio 1987). In Armstrong, the Ohio Supreme Court also determined that because the willing seller-willing buyer is the only permitted valuation method, additional causes of action, centering upon such theories as:
breach of fiduciary duties, lack of proper business purpose in cashing out the minority shareholders, gross inadequacy of price, misrepresentations in the proxy statement, failure to consider the "full value" of the shares, and that by breach of these fiduciary duties, the corporation failed to pay the full, fair value of the shares held[,]
may not be brought under Ohio law because the value of a shareholder's stock may only be examined in terms of the willing seller-willing buyer standard to be accomplished within an appraisal action. Id. at 798.
All of plaintiffs' claims essentially challenge the adequacy of the price that Scripps paid in the merger. Many of plaintiffs' claims are in fact specifically listed among those claims that the Ohio Supreme Court concluded were attacks on price, wrapped in the guise of "entire fairness." For example, plaintiffs claim that the price (or exchange ratio) grossly undervalued SHB. They also contend that the timing of the merger, following a buildup of undistributed earnings, was unfair, which is essentially a claim that the price was unfair given the amount of money reinvested in SHB and the future benefits that could result from the reinvestment.
The omissions from the proxy statement that plaintiffs attack also have arguable pertinence insofar as they might suggest that the exchange ratio was unfairly low to the SHB shareholders. Plaintiff alleges that the proxy statement omitted the following material information:
a) Lehman Brothers' work product (analyses, assumptions, and results);
b) the range of values derived by Lehman Brothers from each valuation methodology;
c) projections used by Lehman Brothers and the assumptions on which those projections were based;
d) any of SHB's "hidden values";
e) the "magnitude of the operating synergies" between Scripps and SHB;
f) fuller description of the changes in television station affiliations and the resulting benefits that SHB may have experienced; and
g) that Lehman Brothers employed a per share value for Scripps' stock in excess of the stocks' market price when opining on the fairness of the exchange ratio.
Most of these claims of failure to disclose material information relate only to information generated by the investment banker as part of its professional work in preparation for reaching and expressing its professional opinion. Such information has an attenuated claim to materiality under the widely employed standard of TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). While the role and opinion of a banker may usually be claimed material to a shareholder, all of the work and consideration that enter into the ground leading to that opinion will, in my opinion rarely if ever be material. See In Re Vitalink Communications Corp. Shareholders Litigation, Del. Ch., C.A. No. 12085, Chandler, V.C. (Nov. 8, 1991). In all events, even assuming, arguendo, the materiality of these omitted facts, they are in this context (86% shareholder) material only to the question whether a public shareholder wants to accept the merger consideration or elect to dissent and seek judicial appraisal. Cf. Virginia Bankshares, Inc. v. Sandberg, 501 US 1083 (1991). That is plaintiffs cannot contend that if all material facts had been fully disclosed, the merger may not have been approved, since Scripps held sufficient shares to approve the merger. The only benefit to plaintiffs arising from fuller disclosure would have been that they might (presumably) have been alerted that they should seek appraisal.
Although the Supreme Court of Ohio did indicate in Armstrong that there may be causes of action arising from a merger in addition to an appraisal action, this subset of claims may notseek compensation for the dissenters' stock: The Court stated that its holding did not mean that "causes of action which seek compensation other than the value of a dissenter's shares of stock are not maintainable. Provable injury under whatever theory utilized is compensable so long as it does not seek to overturn or modify the fair cash value determined." Armstrong, 513 N.E.2d at 798.
The Supreme Court of Ohio did not enumerate permitted claims, but one may speculate that such claims might include claims of fraud where the value of the stock does not fully compensate for the loss. The action before this court, however, does not allege any facts that differentiate it from a common case of a controlling shareholder who forces out the minority at a price that one or more shareholders think is too cheap. Given the clarity of Ohio law, even on a theory that plaintiffs seek principally to be made whole for being misled in failing to seek their appraisal rights, this language of the Ohio Supreme Court precludes relief here. This court cannot provide a quasi-appraisal remedy under Ohio law. There appears to be no such remedy under Ohio law. Ohio law recognizes that dissenters will receive the full and fair value of their shares in an appraisal, and will thus be fully compensated for their forced relinquishment of their stock.
Plaintiffs remedy, if the Proxy Statement was deceptive, and if Ohio law provides a remedy, is a petition to join in the existing appraisal action (if they are not already parties) on the basis that (if it can be alleged consistent with Rule 11) a failure to comply with the procedure requirements of the appraisal statute was due to the alleged fiduciary breach of disclosure obligation. If such an allegation will not get a shareholder an appraisal remedy in Ohio, then I conclude that Ohio law provides no remedy to plaintiffs. In all events, under Armstrong it does not provide an "entire fairness" remedy on these facts. The amended complaint will therefore be dismissed.