On appeal from Superior Court, Law Division, Morris County.
Approved for Publication August 8, 1995
Before Judges Muir, Jr., D'Annunzio and Eichen. The opinion of the court was delivered by Eichen, J.s.c. (temporarily assigned)
The opinion of the court was delivered by: Eichen
The opinion of the court was delivered by EICHEN, J.S.C. (temporarily assigned)
Plaintiffs are minority stockholders of Wheaton Industries of Millville, New Jersey (Wheaton), a large, privately held, family-owned company with global affiliates and subsidiaries and an income of nearly one-half billion dollars per year. Wheaton is engaged in the glass, plastic, packaging, and cartage business. Most of the plaintiffs are fourth or fifth generation descendants of Dr. Theodore Corson Wheaton, who founded the company a century ago. Defendants were all either senior officers or directors of the company who, plaintiffs allege, represent only the interests of the majority stockholders, Dr. Wheaton's third generation descendants.
Plaintiffs brought this action to recover damages individually against defendants, charging that defendants abused their "positions of power" by "misappropriating and misusing corporate assets and opportunities" and by artificially deflating the value of their stock. In their complaint, plaintiffs allege that defendants "sought to reduce the value of the company's stock to . . . reduce [defendants'] estate and gift tax liability, and to make the company a less attractive acquisition target so as to perpetuate their control over the company and conceal their misconduct." Plaintiffs contend that the third generation stockholders are advanced in age and benefitted from the illiquidity of the stock, whereas the fourth and fifth generation minority stockholders suffered from the effects of defendants' scheme to artificially deflate the stock. The effect of this disparate impact, plaintiffs contend, is what permits them to sue defendants individually rather than in a derivative capacity.
An eight-count amended complaint (complaint) charges a variety of specific practices by defendants which plaintiffs contend constitute common law fraud (count I), negligent misrepresentation (count II), breach of fiduciary duties (count III), waste (count IV), federal RICO violations (counts V and VI) (stayed by the federal court), and New Jersey civil RICO violations (counts VII and VIII).
The complaint states, among other things, that defendants knowingly and recklessly made materially misleading statements in annual reports and other communications to shareholders with the intent that they be deceived. The complaint charges that defendants falsely asserted that a newly created shareholders' liquidity plan would give shareholders the liquidity necessary to meet their diverse financial needs; that defendants' communications to the shareholders to that effect were false and misleading because they failed to explain the true effect of the plan; and that as a result of these deceptive communications, defendants "duped a majority of the shareholders into approving the plan." The shareholder liquidity plan apparently gave the company a ninety-day right of first refusal before shareholders could sell their shares to persons not members of the Wheaton family. The complaint alleges reliance in the retention of their stock and in failing "to take action to remedy defendants' abuses."
The complaint alleges that defendants intentionally misrepresented that they would conduct a public offering of the company's stock to satisfy the shareholders' needs for liquidity and falsely promised that third party offers to purchase the company would be fairly entertained. Although several companies made attractive offers to buy Wheaton, including a British company, Bowater plc., plaintiffs contend defendants thwarted their efforts to acquire Wheaton by mischaracterizing the nature of the Bowater offer as a hostile takeover bid when it was not. The complaint alleges that defendants improperly rejected two offers to purchase the company which would have generated a price per share ranging from $65 to $80. In addition, the complaint states that defendants created a one-year voting trust, "among a group of favored shareholders" without informing plaintiffs, whereby the majority of shareholders delegated their voting rights to defendants. They claim the voting trust was foisted upon a number of shareholders under false pretenses, which conduct plaintiffs contend was designed to isolate and further injure them.
Defendants successfully moved for dismissal of the complaint for failure to state a claim upon which relief can be granted pursuant to R. 4:6-2(e). They argued that Wheaton had completed a corporate restructuring from which plaintiffs and others had Dissented; that the Dissenters had "made [a] formal statutory demand for payment of the fair value of their shares," pursuant to N.J.S.A. 14A:11-1 to -11 (appraisal proceeding), on the same day that they filed this action; and that by filing an appraisal proceeding, plaintiffs were "divested . . . of their status as [Wheaton] shareholders," and therefore, plaintiffs no longer had any right to pursue other relief against defendants, either individually or in a derivative capacity.
In sum, defendants argued that (1) the appraisal proceeding was plaintiffs' sole and exclusive remedy; (2) plaintiffs were not current shareholders by virtue of the appraisal proceeding and, therefore, lacked standing to pursue their claims in this action, either derivatively or individually; (3) plaintiffs' claims were derivative claims which could not be individually asserted because based on diminution in share value; (4) plaintiffs' claims failed to state a state civil RICO violation, N.J.S.A. 2C:41-2; (5) plaintiffs' state civil RICO claims were barred because they are derivative claims; and, (6) plaintiffs' remaining claims were too generally pleaded, and plaintiffs should not be permitted to amend their complaint to replead with more particularity.
Plaintiffs opposed the motion contending that their claims were not derivative, and even if they were, plaintiffs could also sue individually. Plaintiffs argued that their election to Dissent was not a bar to the present action, which was based on antecedent events unrelated to the appraisal proceeding which had occurred before the corporate restructuring, the event that triggered the appraisal proceeding. Moreover, plaintiffs argued that if their complaint was deficient, they should be granted leave to amend the complaint. The Judge heard oral argument and dismissed the complaint finding plaintiffs' claims for fraud and negligent representation "absolutely vague." The Judge also dismissed plaintiffs' claims for breach of fiduciary duty, waste, and determined their civil RICO claims to be "clearly derivative."
For purposes of the motion, the Judge assumed the value of the stock had been depressed by defendants' actions, as plaintiffs alleged, but found, nevertheless, that no special or specific injury had occurred to plaintiffs as opposed to the company or the shareholders generally. The record reflects that the Judge considered plaintiffs' allegations to be derivative claims only, which plaintiffs could not raise because of their status as Dissenting shareholders under N.J.S.A. 14A:11-5. Finally, the Judge denied plaintiffs' request to replead concluding that "they had [had] plenty of time to do so. . . ." This appeal followed.
The standard of review on defendants' motion to dismiss for failure to state a claim upon which relief could be granted, pursuant to R. 4:6-2(e), is "limited to examining the legal sufficiency of the facts alleged on the face of the complaint." Printing Mart-Morristown v. Sharp Electronics Corp., 116 N.J. 739, 746, 563 A.2d 31 (1989) (citation omitted). "For purposes of analysis plaintiffs are entitled to every reasonable inference of fact," and the analysis "is at once painstaking and undertaken with a generous and hospitable approach." Ibid. (citation omitted). From this perspective, we cannot agree with the motion Judge's dismissal of the entire complaint at this preliminary stage of the proceedings because plaintiffs have stated causes of action based on their disparate impact theory on all but count IV of the complaint. Accordingly, we reverse the order dismissing plaintiffs' claims of ...