Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Coleman v. Taub

decided: January 8, 1981.

LEON COLEMAN AND THELMA COLEMAN, APPELLEES
v.
AARON TAUB, GLORIA TAUB, TAUB BUILDERS, INC. AND TAUB BUILDERS, INC. EMPLOYEES' PROFIT-SHARING PLAN, AARON TAUB, GLORIA TAUB AND TAUB BUILDERS, INC., APPELLANTS



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE (D.C. Civil No. 78-0390)

Before Gibbons and Rosenn, Circuit Judges, and Weber,*fn* District Judge.

Author: Rosenn

Opinion OF THE COURT

The sole question presented on this appeal is whether a "freeze-out" merger was impermissible under Delaware law. On cross motions for summary judgment, the district court found, in this diversity action, that no valid purpose existed for the merger. For this reason, the court concluded that the cashed-out minority shareholder was entitled to relief under Delaware law.*fn1 It thereupon entered summary judgment for the plaintiff and denied defendants' cross motion. 487 F. Supp. 118 (D.Del.1980). Due to the special contractual relationship between the parties in this case, we conclude that the merger was not necessarily improper. We therefore reverse and remand.

I.

Plaintiff Leon Coleman was employed by defendant Taub Builders, Inc. ("Old Taub"). In connection with his employment, Coleman acquired 10 shares, or 1%, of Old Taub. The other 99% of Old Taub was owned by defendant Aaron Taub, who was also President of Old Taub. Coleman's employment contract with Old Taub provided that upon termination of Coleman's employment for any reason whatsoever, Old Taub would have the right to purchase all of Coleman's stock at a price to be agreed upon mutually, or in the alternative, by three impartial appraisers.*fn2

By letter dated February 15, 1978, Old Taub terminated Coleman's employment and gave him "90 days notice of its intention to repurchase 10 shares of common stock in the corporation." The letter went on to say that "(w)e shall be happy to discuss the price of same with either you or your representative." Coleman did not respond. Instead, Coleman commenced on September 19, 1978, this diversity action in the United States District Court for the District of Delaware against Old Taub, Aaron Taub, and Gloria, his wife, the Secretary of Old Taub. Count I alleged wrongful termination of Coleman's employment. In Count V, Coleman brought a derivative action on behalf of Old Taub against directors Aaron and Gloria Taub. Coleman claimed that after his discharge, the Taubs wrongfully diminished the value of Coleman's shares by transferring Old Taub's major asset to themselves for inadequate consideration. In another count, Coleman had asserted that he was terminated for refusing to agree to this transfer.

Throughout this period, despite Old Taub's February 15th statement of intent, none of the parties pursued the contractually prescribed method for fixing a buy-back price for Coleman's shares. Instead, they occupied themselves with discovery in preparation for litigating the various substantive issues raised by Coleman's lawsuit. However, in April or May 1979, Taub set in motion, without Coleman's knowledge, steps that culminated on May 4, 1979, in a merger of Old Taub into a corporation ("New Taub") wholly owned by Aaron Taub. New Taub was created solely as a merger vehicle. The merger was carried out in compliance with the Delaware short-form merger statute, Del.Code tit. 8, § 253. Coleman's shares in Old Taub were cancelled, and he was tendered $1000, the price at which he purchased the shares in 1974.

When Coleman learned of the merger he supplemented his complaint by adding a Count X, alleging that "(t)he merger was not accomplished for a valid or corporate purpose. The sole purpose of the merger was to eliminate plaintiff as a shareholder of Old Taub, and to terminate plaintiff's derivative claim against Aaron and Gloria Taub." He requested that any further steps in the merger be enjoined, and that the court order rescission of the merger.

Meanwhile the defendants filed a motion to dismiss Count V, the derivative claim, on the ground that cancellation of Coleman's Old Taub shares deprived him of standing to sue the Taubs derivatively on Old Taub's behalf. The success of this claim was, however, tied to the validity of the merger. Thus, the defendants also moved for dismissal of Count X. The district court, treating the motion as one for summary judgment, refused to dismiss Count X. It held that the allegations of Count X stated a claim for breach of the fiduciary duty owed to a minority shareholder under Delaware law as stated in Singer v. Magnavox Co., 380 A. 2d 969 (Del.1977) and Roland International Corp. v. Najjar, 407 A.2d 1032 (Del.1979). It also held that the buy-back clause, paragraph 11 of the Coleman-Old Taub agreement, did not operate as a waiver of Coleman's right to object to a merger allegedly constituting a breach of fiduciary obligations owed to Coleman.

The district court then turned to Coleman's motion for summary judgment on Count X. For purposes of this motion the court relied on defendants' counsel's statement to the court, on August 3, 1979, concerning the purposes of the merger.

This merger was done for the purposes of permitting the enterprise to continue in a corporate vehicle in which Mr. Coleman ... is not a stockholder ...; and for the purpose of thereby mooting the derivative claim asserted in this action, and thereby saving substantial legal costs to all concerned; and, for the purpose, as stated in the brief, of effectuating the contractual right to cash Mr. Coleman out, which, under the agreement on which he sues here, we say that we had. Those were the purposes.

As this passage indicates, defendants put in issue the existence of two purposes other than simply ridding themselves of Coleman. The first alleged purpose was to moot the derivative litigation, avoid substantial legal costs, and relegate Coleman's claims therein to a statutory appraisal proceeding under Del.Code tit. 8, § 262. All parties agree on the existence of this purpose. Characterizing this as a case "where the majority shareholder has used his position to foreclose a claim raised against himself and other corporate officers by the minority shareholder," the district court rejected the validity of Taub's purpose to moot the derivative claim.

The other purpose was to effectuate the contractual right of the corporation to acquire Coleman's stock for cash. The parties disagree as to whether "cashing out" Coleman under paragraph 11, the buy-back agreement, was a purpose of the merger. Outside of paragraph 11 itself, defendants have introduced no affidavits, or material "as otherwise provided in" Rule 56, to defend this version of the facts. Defendants' counsel did, however, state to the district court that this was a purpose of the merger. He also points out on appeal that a brief submitted to the trial court by Coleman's counsel indicated that any request made by defendants to Coleman, asking that he proceed with a paragraph 11 cash-out, would have met with ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.