Schreiber v. Carney

Delaware Court of Chancery · 1982 · Corporations

CorporationsDerivative suitsVote-buyingCorporate wasteShareholder standingderivative standingdouble derivative suit8 Del. C. § 327

Facts

Texas International planned a share-for-share reorganization merger into a newly formed holding company, Texas Air, but Jet Capital, which owned all of the Series C preferred stock and 35% of Texas International's stock, could block the merger under the certificate's class-voting provisions. Jet Capital said it would oppose the merger because it would trigger an intolerable tax burden unless it could exercise its warrants early, but it lacked funds to do so. After review by an independent committee and independent advisors, Texas International agreed to loan Jet Capital $3,335,000 at 5% interest until the warrants' scheduled expiration, secured by Jet Capital's Series C preferred stock, so Jet Capital could exercise the warrants and stop opposing the merger. The board unanimously approved the proposal, conditioned it on approval by a majority of all shares and a majority of disinterested shares, and the stockholders overwhelmingly approved after full disclosure.

Issue

Did the plaintiff have standing to maintain a derivative action after the reorganization merger converted his Texas International shares into shares of the new holding company? Was the loan to Jet Capital unlawful vote-buying that rendered the transaction void, or merely a voidable transaction subject to cure by informed disinterested stockholder approval? Did the record permit summary judgment for defendants on the corporate waste claim?

Rule

A stockholder ordinarily loses standing to maintain a derivative suit after a merger eliminates his shares, but standing remains where the reorganization is effectively a mere continuation of the same enterprise and denial of standing would not serve the purpose of 8 Del. C. § 327. Vote-buying is not illegal per se unless its object or purpose is to defraud or disenfranchise other stockholders; if not, it is a voidable transaction subject to intrinsic fairness and may be cured by approval of a majority of disinterested stockholders after full disclosure. A ratified waste claim still survives, but the objecting stockholder bears the burden to show that no person of ordinary, sound business judgment could view the consideration as a fair exchange, and such claims are seldom resolved on summary judgment.

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Lakefront Rail Systems, Inc., a Delaware corporation based in Chicago, reorganized through a share-for-share merger into a newly formed Delaware holding company, Prairie Transit Holdings, Inc. After the merger, every Lakefront shareholder received the same number of Prairie shares, and Lakefront continued operating as a wholly owned subsidiary with the same business and assets. Nina Patel, who owned Lakefront shares before the merger and voted against it, then filed a derivative suit challenging directors' pre-merger conduct on behalf of Lakefront.

Does Nina most likely have standing to maintain the derivative action?

Explanation. The majority held that a shareholder ordinarily loses derivative standing after a merger, but not where the transaction is effectively a mere continuation of the same enterprise. Here, the reorganization is share-for-share into a newly formed holding company, with the operating company continuing as a wholly owned subsidiary and Nina's equity interest substantially unchanged. Under that reasoning, the action is effectively double derivative and denying standing would not advance the anti-strike-suit purpose of the contemporaneous-ownership rule. (Derived from Schreiber v. Carney (1982).)