Alpert v. 28 Williams Street Corp.

New York Court of Appeals · Corporations

Corporationsfreeze-out mergersfiduciary dutiesminority shareholder rightstwo-step mergerfreeze-outsqueeze-outcash-out merger

Facts

79 Realty Corporation's principal asset was a Manhattan office building. Defendants, outside investors, bought the controlling shareholders' block through a newly formed corporation, replaced the old directors with their own representatives, and then caused Realty Corporation to merge with the purchaser corporation in a two-step transaction that cashed out the minority shareholders and left defendants in complete control. The merger materials disclosed defendants' conflict of interest, the planned cash buyout of the minority, and the intention to dissolve the surviving corporation and operate the business as a partnership. Plaintiffs resisted selling their shares and sued to block or rescind the merger, claiming lack of legitimate corporate purpose, conflict-tainted decisionmaking, inadequate disclosure, and unfair pricing.

Issue

When majority shareholders use a two-step merger to freeze out minority shareholders, what standard governs whether the merger is lawful? Under that standard, was this merger valid or did it unlawfully breach fiduciary duties owed to the minority?

Rule

A majority's exclusion of minority shareholders through a two-step freeze-out merger does not breach fiduciary duty if the transaction, viewed as a whole, is fair to the minority shareholders and is supported by an independent corporate business purpose. Fairness includes both fair dealing and fair price; where inherent conflict of interest exists, the burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the merger. Even if statutory merger procedures are followed, equitable relief remains available if the merger is unlawful or fraudulent.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Harbor Square Properties, a closely held corporation in Buffalo, owns a single commercial warehouse. After buying a 72% block, Orion Development Holdings installs its own directors and causes Harbor Square to merge with an Orion affiliate, cashing out the remaining shareholders at a price supported by an outside valuation. Internal emails show Orion's only reason for the merger was that it wanted fewer people sharing future profits.

If the cashed-out minority shareholders seek rescission, which argument gives them the strongest basis for equitable relief?

Explanation. In a two-step freeze-out merger, the majority must show the transaction as a whole was fair to the minority and justified by an independent corporate business purpose. Fair dealing and fair price are necessary, but not sufficient by themselves. The majority opinion specifically distinguishes a proper corporate purpose from the mere desire to reduce the number of profit sharers; the latter is not an independent corporate interest. Because equitable relief remains available for an unlawful merger despite statutory compliance, the minority has its strongest argument on lack of corporate purpose. (Derived from Alpert v. 28 Williams Street Corp. (n.d.).)