This class action, tried without a jury, arises out of a short form corporate merger in which a defendant corporation, owner of 90% of the stock of a subsidiary, acquired all of the remaining shares of the subsidiary and merged it with another wholly owned subsidiary pursuant to N.J.S.A. 14A:10-5 and N.J.S.A. 14A:10-7(4).
The issue before me is whether the minority shareholders of the subsidiary, whose approval of the merger was not required by the statute, were paid "fair value" for their interest. I find that they were.
At common law the consent of all stockholders was required to carry out corporate mergers and a minority of the shareholders could always block a merger if it was not to their liking or for no reason at all. To protect majorities from arbitrary minorities all states have enacted statutes under which a merger may be ratified by less than a unanimous vote. See Note, 79 Harv.L.Rev. 1453 (1966).
In New Jersey today, mergers proposed by the directors need be approved by only a majority or two-thirds of the shareholders, depending on when the corporation was organized. N.J.S.A. 14A:10-3.
In addition, New Jersey has adopted a short form merger statute, derived from the Delaware Corporation Act. N.J.S.A. 14A:10-5. It provides that a corporation owning at least 90% of the outstanding shares of each class and series of another corporation's stock may merge such other corporation into itself without any shareholder approval at all.
In effect, the parent corporation is authorized to buy out the minority shareholders of the corporation to be merged by converting their shares into cash whether they want to sell or not. N.J.S.A. 14A:10-2(2)(b) and (c). The only limitation is that they must be paid "fair value" for their shares. The statute has never been construed in a reported opinion in this State.
The essential facts in this case were stipulated.
In December of 1979, defendant International Controls Corp. (ICC), a Florida corporation was the owner of more than 90 percent of the outstanding shares of common stock of defendant Datron Systems, Inc. (Datron), a New Jersey corporation, and was the owner of all of its outstanding preferred stock. Datron was a manufacturer and distributor of electro-mechanical and microwave transmission components, electronic relays, power conversion products and steam traps used mainly by the refining industry.
The issued stock of Datron at the time consisted of 5,336,904 shares of common stock, 100,000 cumulative preferred shares and 26,000 cumulative convertible serial preferred shares. On the financial side, Datron was in arrears on its preferred stock dividends in the amount of $9,747,000 and was faced with the obligation of commencing sinking fund payments to redeem the convertible shares within 15 months thereafter.
On December 4, 1979, ICC announced a short form "triangular" merger plan in which it proposed to merge Datron with Nortand Systems, Inc., a wholly-owned subsidiary of ICC. Datron was to be the surviving corporation as a wholly-owned subsidiary of ICC. The merger was effected as proposed on December 24, 1979.
The plan provided that the Datron common stockholders would be paid $1.25 per share. The figure had been determined by a major investment banking firm retained by ICC to provide an independent appraisal. A member of that firm who was defendants' expert at the trial testified that his firm's assignment was to deliver its opinion as to a fair price rather than to marshal evidence in support of any prior valuation made by defendants.
Plaintiff, who owned 1,000 shares of Datron's common stock, was the only one of 470 minority holders -- other than those not contacted because of a change of address -- who did not tender his shares and accept the payment offered. He was of the
opinion that $1.25 a share was not "fair value" and instituted this suit to recover the difference between the offer and what he ...