Summary
finding that plaintiff did not allege any injury to himself or the other members of his purported class which was separate and independent from the alleged injury suffered commonly by all other shareholders
Summary of this case from Smith v. Robbins & Myers, Inc.Opinion
No. 00-415.
Decided May 19, 2000.
Appeal from the Court of Common Pleas, Montgomery County, Dennis J. Langer, J.
Richard S. Wayne and William K. Flynn William S. Lerack, Darren J. Robbins, Randall H. Steinmeyer and William J. Doyle II; and Paul Geller, for plaintiffs.
Faruki, Gilliam Ireland, P.L.L., Charles J. Faruki and Paul G. Hollinan, for defendants.
This matter is before the court on defendants' motion to dismiss plaintiffs amended complaint for lack of subject-matter jurisdiction. Plaintiff Gregory Kadel has filed a memorandum contra. Defendants have filed a memorandum in support of their original motion. This matter is properly before the court.
I. Statement of the Case
This case arises out of a proposed agreement and plan of merger involving Dayton Superior Corporation ("DSC"). DSC is an Ohio corporation involved in the manufacture and distribution of metal accessories and chemicals used in the construction industry. On January 19, 2000, an agreement and plan of merger was entered into whereby DSC would recapitalize through a merger with Stone Acquisition Corporation ("Stone"). According to the terms of the agreement, and with approval of the DSC Board of Directors, the holders of DSC common shares were to receive $27 per share. To evaluate this proposed price, DSC engaged the independent firms of Merrill Lynch, Pierce, Fenner Smith, Inc. ("Merrill Lynch") and Robert W. Baird Co., Inc. ("Baird"). These independent firms reported that the offer price of $27 per share was financially fair to the shareholders, and that the price was significantly higher than the then current trading price of the stock. These independent firms performed their evaluations, however, with estimated earnings numbers that were supplied by DSC. DSC earned significantly more money in the fourth quarter of 1999 than the estimates that DSC provided to Merrill Lynch and Baird. DSC subsequently released the final fourth-quarter 1999 earnings reports.
On January 25, 2000, Gregory Kadel filed a class action complaint against DSC and its directors for breach of fiduciary duty. On March 22, 2000, Kadel filed an amended complaint. In both the original complaint and the amended complaint, Kadel seeks an injunction preventing DSC and its officers from closing or consummating the proposed transaction.
II. Law and Analysis
A. Motion-to-Dismiss Standard
The standard to apply for a dismissal pursuant to Civ.R. 12 (B)(1), lack of jurisdiction over the subject matter, is whether the plaintiff has alleged any cause of action that the court has authority to decide. McHenry v. Indus. Comm. (1990), 68 Ohio App.3d 56, 62, 587 N.E.2d 414, 418, citing Avco Financial Serv. Loan, Inc. v. Hale (1987), 36 Ohio App.3d 65, 520 N.E.2d 1378. However, in determining whether plaintiff has alleged a cause of action sufficient to withstand a Civ.R. 12 (B)(1) motion to dismiss, "[t]he trial court is not confined to the allegations of the complaint * * * and it may consider material pertinent to such inquiry without converting the motion into one for summary judgment." Southgate Dev. Corp. v. Columbia Gas Transm. Corp. (1976), 48 Ohio St.2d 211, 2 O.O.3d 393, 358 N.E.2d 526, paragraph one of the syllabus; McHenry, 68 Ohio App.3d at 62, 587 N.E.2d at 418-419. "[A] court may dismiss a complaint for lack of jurisdiction over subject matter on the basis of "(I) the complaint alone; (2) the complaint supplemented by undisputed facts evidenced in the record; or (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts.'" Jenkins v. Eberhart (1991), 71 Ohio App.3d 351, 355, 594 N.E.2d 29, 31, quoting Williamson v. Tucker (C.A.5, 1981), 645 F.2d 404, 413.
B. Kadel and the purported class that he represents lack standing to bring this action in their capacities as individual shareholders of Dayton Superior Corporation.
DSC asserts that Kadel and the purported class that he represents lack standing to bring this action in their capacities as individual shareholders in DSC, and that due to the nature of the alleged injury sustained, this action cannot be brought in any form other than a derivative action. As a general proposition, actions for "breach of fiduciary duties are to be brought in derivative suits. Cole v. Ford Motor Co. (1983), 566 F. Supp. 558, 568-569; Grand Council of Ohio v. Owens (1993), 86 Ohio App.3d 215, 220, 620 N.E.2d 234, 238; Adair v. Wozniak (1986), 23 Ohio St.3d 174, 23 OBR 339, 492 N.E.2d 426. "A [shareholder] does not have an independent cause of action where there has been no showing that he has been injured in any capacity other than in common with * * * other shareholders * * *." Adair, syllabus. "While a shareholder may bring a derivative action under Civ.R. 23.1 on behalf of the corporation, the shareholder generally does not have a direct cause of action unless injured in some way separate and distinct from any injury to the corporation." Gensemer v. Hallock (1997), 125 Ohio App.3d 84, 91, 707 N.E.2d 1156, 1160.
DSC contends that Kadel can show no injury to himself, or the other members of his purported class, which is separate and independent from the alleged injury suffered commonly by all other shareholders. Kadel contends that the directors of DSC are being treated differently from the rest of the shareholders because they are entitled to "roll over" their equity interest in DSC into the new ownership of the company. It is unclear how an equity rollover agreement between the directors and Stone injures Kadel while benefitting the directors. Kadel does not allege that the directors are being permitted to retain their equity interest in DSC. If the directors are not permitted to retain an equity interest in DSC, then the directors are relinquishing their interests in DSC under the same conditions as all other shareholders, regardless of some future interest in Stone. If, after the closing of this transaction, the directors have been paid the same amount per share as all other shareholders for the common shares in DSC that they held, then the directors have suffered the same alleged injury as Kadel and the purported class of shareholders that he represents.
Kadel further asserts that he and the class that he represents have been specially injured due to an alleged breach of a heightened fiduciary duty owed by the directors to the members of his class. Kadel cites Crosby v. Beam (1989), 47 Ohio St.3d 105, 548 N.E.2d 217, for the proposition that controlling and majority shareholders in a corporation owe a heightened fiduciary duty to noncontrolling and minority shareholders. Ohio certainly recognizes this heightened duty in close corporations. Id. However, Kadel has not directed this court's attention to a single Ohio case where this heightened fiduciary duty has been extended to corporations that are not closely held. It is beyond dispute that DSC is not a closely held corporation. DSC is a publicly traded corporation listed on the New York Stock Exchange. Because it is a publicly traded corporation, the heightened fiduciary obligations owed by the majority shareholders in a close corporation to minority shareholders simply do not apply.
Kadel does direct this court's attention to Bayberry Assoc. v. Jones (Tenn. 1990), 783 S.W.2d 553. In Bayberry, the Tennessee Supreme Court cited Elster v. Am. Airlines (1953), 34 Del. Ch. 94, 99, 100 A.2d 219, 222, for the proposition that "Delaware courts distinguish between derivative and direct suits on the basis of injury [rather than duty." Bayberry at 560. Further, "[a] shareholder can maintain a direct action only when he or she sustains a `special injury.'" Id. The court in Bayberry determined that shareholders had been specially injured due to the failure of the officers to "shop" for a better purchase price and due to the officer's solicitation of approval of the merger without full disclosure of certain facts relating to the value of the company. Id. at 562-563.
In the case sub judice, Kadel asserts that the price is unfair and inadequate because the buyout price is not reflective of DSC's true value. It is true that the independent valuations performed by Merrill Lynch and Baird were performed before the release of the fourth-quarter earnings by DSC. Those earnings were, however, subsequently released. The shareholders voting on this proposed merger have both the independent appraisals and the final, fourth-quarter earnings for 1999. If the "shareholders disagree that $27 per share is adequate consideration in light of the release of the fourth-quarter earnings for 1999, then the proposed merger will not be approved by a majority of the shareholders. If the merger is approved by a majority of the shareholders, then all common shares will be relinquished for the agreed price. If the merger is not approved by a majority of the shareholders, then all common shares will remain with the current holders. In either scenario, the effect is consistent across the class of common shareholders.
Kadel further asserts that the no-shop provisions contained within the agreement and plan of merger are unfair. The agreement and plan of merger provides at Paragraph 6.4 (b) that the occurrence of a "payment event" will result in a fee of $6 million. A "payment event" is defined in Paragraph 6.4 (b) as the termination of the agreement and plan of merger for a number of reasons. Any penalty will be charged against the corporation as a whole, and any injury to price based upon the existence of this no-shop provision will be felt by all shareholders relinquishing their equity interest in DSC under the terms of this agreement. Since any penalty arising from provisions of the agreement and plan of merger is charged to the corporation as a whole, any action for an alleged breach of fiduciary duty must be brought derivatively by the corporation against those actors allegedly so breaching.
Since all the shareholders, including Kadel and the directors, have suffered the same injury, this action must be brought as a derivative action and must comply with Civ.R. 23.1. Civ.R. 23.1 provides:
"In a derivative action brought by one or more legal or equitable owners of shares to enforce a right of a corporation, the corporation having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder at the time of the transaction of which he complains or that his share thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors and, if necessary, from the shareholders and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders similarly situated in enforcing the right of the corporation. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders in such manner as the court directs." (Emphasis added.)
Kadel has not satisfied the requirements of Civ.R. 23.1. Kadel has not verified his complaint, nor has he alleged with particularity the efforts that he has taken through the board of directors to obtain the action that he desires, or the futility of taking such action. In the absence of standing to bring this action and compliance with Civ.R. 23.1, there has been no claim asserted that this court has authority to decide.
C. Kadel's amended complaint constitutes a dispute over the value of the common shares of Dayton Superior Corporation, the exclusive remedy for which is an action under R.C. 1701.85.
Assuming arguendo that Kadel and his purported class have standing to bring this action as stated in the amended complaint, the only remedy available to Kadel is an action for the fair value of the common shares held by Kadel and the members of his class. Kadel argues that the object of this action is hot to challenge the price offered for the outstanding common shares; rather, his goal is to ensure that the merger and purchase of the shares proceed on fair terms.
Kadel's complaint seeks an injunction rather than the reformation of the price offered for the common shares. "In deciding whether to grant [an] * * * injunction, a court must look at (1) whether there is a substantial likelihood that plaintiff will prevail on the merits, (2) whether plaintiff will suffer irreparable injury if the injunction is not granted, (3) whether third parties will be unjustifiably harmed if the injunction is granted, and (4) whether the public interest will be served by the injunction." Vanguard Transp. Sys., Inc. v. Edwards Transfer Storage Co., Gen. Commodities Div. (1996), 109 Ohio App.3d 786, 790, 673 N.E.2d 182, 184, citing Valco Cincinnati, Inc. v. N D Machining Serv., Inc. (1986), 24 Ohio St.3d 41, 24 OBR 83, 492 N.E.2d 814. Further, "[a]n injunction is an extraordinary equitable remedy that is appropriate only when there is no other adequate relief available." Tiemann v. Univ. of Cincinnati (1998), 127 Ohio App.3d 312, 324, 712 N.E.2d 1258, 1266, citing Fairview Gen. Hosp. v. Fletcher (1992), 63 Ohio St.3d 146, 586 N.E.2d 80, and Haig v. Ohio State Bd. of Edn. (1992), 62 Ohio St.3d 507, 584 N.E.2d 704. Ohio courts have held that when acts affect all of the shareholders, as well as the corporation itself, even in a close corporation, the owners may only receive an award equal to their proportionate share of the ownership. See McLaughlin v. Beeghly (1992), 84 Ohio App.3d 502, 508, 617 N.E.2d 703, 706. Thus, in a merger situation, the board of directors' obligation to dissenting shareholders is the payment of "fair cash value." Armstrong v. Marathon Oil Co. (1987), 32 Ohio St.3d 397, 513 N.E.2d 776, paragraph one of the syllabus.
Kadel and the members of his purported class have an adequate relief available for determining the fair cash value of the common shares that they hold. The fair cash value of the shares held by Kadel and the members of his purported class can be determined through an action under R.C. 1701.85. R.C. 1701.85 constitutes an adequate remedy at law to ensure that all shareholders obtain a fair price for their common shares. Kadel has not included a claim under R.C. 1701.85 in his amended complaint. Thus, even assuming standing, Kadel has failed to assert a claim that this court has authority to decide.
D. Kadel's request for leave to file a second amended complaint is denied.
Kadel requests leave to further amend his complaint if this court dismisses this action. Kadel provides no argument in support of the request for this court to consider. Therefore, this court denies Kadel's request to file a second amended complaint
III. Conclusion
Accordingly, defendants' motion to dismiss plaintiff's amended complaint for lack of subject-matter jurisdiction is hereby SUSTAINED.
SO ORDERED.
Judgment accordingly