Busse v. United Panam Financial Corp. , 166 Cal. Rptr. 3d 520 ( 2014 )

Filed 1/8/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
LAVERNE BUSSE et al.,
Plaintiffs and Appellants, G046805
v. (Super. Ct. No. 30-2011-00439984)
UNITED PANAM FINANCIAL CORP. et OPINION
al.,
Defendants and Respondents.
Appeal from a judgment of the Superior Court of Orange County, Kim
Garlin Dunning, Judge. Affirmed in part and reversed in part.
Faruqi & Faruqi, David E. Bower and Barbara Rohr for Plaintiff and
Appellant Laverne Busse.
Robbins Geller Rudman & Dowd, Randall J. Baron, Kevin K. Green and
David T. Wissbroecker for Plaintiff and Appellant Sydne & Allan Bortel Living Trust
U/A/D 9/14/1998.
Jones Day, Eric Landau, Erica L. Reilley, Travis Biffar and Kevin H.
Logan for Defendants and Respondents United Panam Financial Corp., Ravi Gandhi,
Mitchell Lynn, Luis Maizel, Preston Miller and James Vagim.
I. INTRODUCTION
Occasionally we are faced with a difficult question of statutory
interpretation that qualifies as a “Halbert’s Lumber issue.” (E.g. Halbert’s Lumber, Inc.
v. Lucky Stores, Inc. (1992) 6 Cal.App.4th 1233, 1235 [“a real doozy of a puzzle”].) This
is such a case, involving section 1312 of the Corporations Code, which generally governs
the rights of minority shareholders who dissent from mergers and buyouts.1 No
published case has confronted the problem of how subdivision (b) of section 1312 –
which involves buyouts when parties to a merger are under common control – interacts
with subdivision (a) of section 1312, which – we know because the Supreme Court said
so in Steinberg v. Amplica, Inc. (1986) 42 Cal.3d 1198 – limits the rights of dissenting
minority shareholders to an independent appraisal of the value of their shares.2
Here, the trial judge was faced with two radically different views of section
1312, subdivision (b): Plaintiffs, former minority shareholders in United Panam
Financial Corporation, assert subdivision (b) should be read as a broad exception to
Steinberg’s interpretation of subdivision (a). Under their thinking, in cases of common
1 All further undesignated statutory references are to the Corporations Code. All further references
to any subdivision are to section 1312.
2 Technically, the idea that section 1312, subdivision (a) limits dissenting shareholders to an
appraisal is shorthand. Reminiscent of some federal Supreme Court litigation 13 years ago, the statute also allows
attacks on the process of the vote for reorganization, i.e., were enough “legal votes” cast in its favor? That part of
the statute, however, has not generated any published litigation, so saying “limited to appraisal” adequately conveys
the flavor of the statute.
2
control, subdivision (b) allows dissenting minority shareholders all common law rights,
including the right to sue the majority owners and collaborating board members for
damages arising out of breach of fiduciary duty. (Cf. Jones v. H. F. Ahmanson & Co.
(1969) 1 Cal.3d 93, 108 [general fiduciary duty of majority shareholders not to “use their
power to control corporate activities to benefit themselves alone or in a manner
detrimental to the minority”].) Defendants, on the other hand, largely centered around
the company’s alleged controlling shareholder, Guillermo Bron, proffer a more modest
view of the subdivision (b) exception: In addition to the appraisal rights which all
shareholders have in all situations, in common control situations dissenting minority
shareholders have the additional right, if they timely choose to use it, of having a merger
itself set aside or rescinded. But they still do not have any right to sue for damages for
breach of fiduciary duty.
The trial judge chose the more modest reading of subdivision (b), and,
accordingly, sustained the defendants’ demurrer to the minority’s suit for “rescissionary
damages” based on breach of fiduciary duty. She was correct to do so and we affirm that
part of the judgment. We are convinced that when section 1312 is read in light of its
history and its judicial construction, no other result is tenable.
However, since the minority shareholders have never withdrawn their
alternative request to set aside the merger, we cannot affirm the judgment entirely. The
minority shareholders did sufficiently allege common control of the corporation, and
subdivision (b) does, plainly, allow for suits to set aside or rescind mergers in common
control situations. Therefore, we must reverse and remand for resolution of that question.
3
II. FACTS
A. Standard of Review
This case comes to us after a demurrer to the minority’s second amended
complaint was sustained without leave to amend.3 Thus the minority receives the benefit
of having its version of the facts accepted. What should be stressed here, however, is that
the minority’s second amended complaint also receives the benefit of reasonable
inferences drawn from the facts alleged. (E.g., Kruss v. Booth (2010) 185 Cal.App.4th
699, 727 [rejecting corporate directors’ arguments that alleged self-dealing was otherwise
justified because defenses, which might be “valid” in “other procedural contexts,” were
unavailing on demurrer].)
The standard of review is particularly important in this case because the
second amended complaint alleges that defendant Guillermo Bron has always controlled
about 40 percent of Panam Financial’s stock throughout its history, and “no director
whom Bron has supported for election has ever failed to receive the requisite number of
votes for election or reelection.” The pleading also alleges that in public filings in 2007
and 2008, the company actually admitted Bron would “have substantial influence” over
the “management and affairs” of the company, “including the ability to control
substantially all matters submitted to our shareholders for approval.”
Against these allegations is set the text of section 1312, subdivision (b)
itself. The statute is clear that allegations of common control can be founded on even
indirect control. It opens with the language: “If one of the parties to a reorganization or
short-form merger is directly or indirectly controlled by, or under common control with,
3 Two sets of minority shareholders have appeared in this appeal: The Sydne & Allan Bortel Living
Trust U/A/D 9/14/1998 and LaVerne Busse, an individual. We refer to them as “the minority,” or sometimes as “the
minority shareholders,” and when the need to refer to them separately arises, as either “the Bortels” or “Busse.” We
refer to the defendants as “Bron” or, in some cases, “the Bron group.” We refer to the corporation as “Panam
Financial” or sometimes as “the company” or “the corporation.”
4
another party . . . .” (Italics added.) So, if the second amended complaint states facts that
give rise to an inference of even indirect control, that is sufficient to defeat a demurrer.
While no case law has yet interpreted subdivision (b)’s indirect common
control language, we do have the holding in Hellum v. Breyer (2011) 194 Cal.App.4th
1300 to help us. There, three “outside” – meaning nonemployee – directors of a five-
director company were sued under a Corporations Code statute (§ 25504) which provides
for the liability of everyone who “directly or indirectly controls” an entity that sells
unqualified securities.4 (See Hellum, supra, 194 Cal.App.4th at pp. 1306-1307.) The
appellate court reversed a judgment on a sustained demurrer, reasoning the plaintiffs’
allegation that the three outside directors directly or indirectly controlled a lending entity,
a corporation called Prosper Marketplace, Inc., were sufficient at the pleading stage. (See
id. at pp. 1315-1318.) The Hellum court thought it enough the defendants had the power
to control the general affairs of the corporation. (Id. at p. 1317.)
Secondarily, Hellum emphasized that control is often a factual question not
readily susceptible to disposal on the pleadings. The court reasoned that dismissal based
on insufficiency of allegations of control “is appropriate only when ‘a plaintiff does not
plead any facts from which it can reasonably be inferred the defendant was a control
person.’ [Citations.]” (Hellum, supra, 194 Cal.App.4th at p. 1317.) Thus the allegations
in Hellum that the three outside directors had ownership interests in the company (to be
sure, the three had a “collective” ownership interest exceeding 50 percent) giving them
“significant voting power,” plus their management responsibility under the company’s
by-laws, their presumptive authority to sign key corporate documents, and their
affiliation with outside firms on which the company relied, all supported the “inference”
4 Like Panam Financial, the corporation in Hellum was in the lending business. Unfortunately for
it, its basic business idea of selling loan notes to third party lenders raised the ire of the SEC, which determined the
loan notes themselves were securities and needed to be either registered or determined to be validly exempt from
registration. (See Hellum, supra, 194 Cal.App.4th at p. 1306.)
5
they could directly or indirectly influence the company’s “corporate policies and
decisionmaking.” (Id. at pp. 1317-1318.)
Applying Hellum to the case at hand, we think the allegations of Bron’s
common control sufficient. While Bron personally only controlled about 40 percent of
Panam Financial’s stock, he still had “significant voting power” over the company. In
Hellum, more than 50 percent was split three ways; here 40 percent is in the hands of one
person and Bron’s 40 percent “voting power” is further augmented by the absence of any
indication anyone else was even close to his 40 percent at the time of the buyout.
Additionally, there is his position as chairman of the board, his acknowledged power over
the general affairs of the corporation, and the filings acknowledging his power to
formulate key corporate policy. Together, as in Hellum, this congeries of facts readily
supports an inference of at least indirect control, though such a conclusion seems no more
than common sense anyway. A person who owns 40 percent of a company with the rest
of the ownership not concentrated in any rival can easily put his allies on the board.5
Moreover, the complaint alleges all of Bron’s fellow directors owe their
jobs to him, so they are dependent on his good graces. And of course in other contexts
dealing with questions of indirect control, courts have recognized that economic
dependence means indirect control. (E.g., S. G. Borello & Sons, Inc. v. Department of
Industrial Relations (1989) 48 Cal.3d 341, 355 [cucumber harvesters not independent
contractors but really controlled by growers because economically dependent on them];
Yellow Cab Cooperative, Inc. v. Workers’ Comp. Appeals Bd. (1991) 226 Cal.App.3d
1288, 1297-1298 [indicia of indirect control by taxi company over taxi drivers who were
dependent on the company for business].)
5 For a period in its history, Panam Financial may, or may not, have had cumulative voting for its
board of directors. But Bron and friends have not explained how the presence or absence of such voting would have
so lessened Bron’s ability to put his allies on the board that it would refute the natural inference of indirect control
shown by his voting power and board chairmanship.
6
Like all reviews on demurrer, the standard of review in this case is a
combination of giving the pleading the benefit of all facts properly alleged and
reasonable inferences drawn therefrom, and then, in the light of those facts and
inferences, deciding de novo whether the pleading has stated a cause of action. Under
this standard, we conclude common control has been properly alleged.
B. The Facts Under the Standard of Review
Having taken eight paragraphs to explain how the standard of review
controls the facts of the case before us, it will take us but one to set them forth: Bron
founded Panam Financial in 1994. Basically, the corporation makes subprime loans on
used cars, i.e., auto loans to the less-than-one-hundred-percent creditworthy. The
company went public in the late 1990’s. By 2006 the corporation’s shares were selling at
$26 per share, but the recession hit the company hard, and share prices dove to $5 per
share at the beginning of 2008. By the end of 2008 share prices were as low as $1.59.
However, Panam Financial management instituted a number of cost cutting measures
(some draconian – including laying off 310 of its 469 employees), and reduced its
portfolio of shaky auto loans, so that by May 2010, the Bron group thought the company
a good opportunity to take private to benefit themselves. Accordingly, they developed a
buyout scheme in which Bron and his partner, the Pine Brook Financial Group, would
acquire the corporation’s stock in the company on the cheap.6 At the time, Bron owned
38 percent of the company’s stock and controlled the board of directors. So the Bron
group had the directors set up a supposedly independent special committee to value the
stock for a buyout. The independent committee, however, didn’t fight very hard for a
6 Technically, the “merger” involved Panam Financial being merged into United Holdings Corp., a
Delaware corporation. To emphasize the fact that the second amended complaint alleges this is a common control
case governed by section 1312, subdivision (b), we will speak of the “merger” as a “buyout” of Panam Financial by
“Bron and friends.” In fact, the second amended complaint refers to the acquiring entity as the “Buyout Group,” not
“Unitas Holdings.” Even so, this is not a case of a classic merger involving a big fish gobbling up a small fish. The
facts as alleged in the second amended complaint show this reorganization to be better described as a “management
buyout.”
7
good price, and in mid-November 2010 the committee agreed to a price of $7.05 a share.
The $7.05 per share price was clearly a bargain for the Bron group, because the book
value of the company was no less than $8.54 at the time. On December 27, 2010, the
special committee and the board recommended the shareholders approve the buyout of
Panam Financial by the Bron group. The buyout was announced the next day, December
28, 2010.
C. The Litigation
On January 11, Busse filed a class action for breach of fiduciary duty. The
original complaint sought an injunction against the proposed buyout, but added that if the
buyout was consummated prior to the judgment in the action, plaintiffs would accept
either rescinding the “transaction” (presumably meaning setting aside the buyout) or an
award of what they called “rescissionary damages.” Nine days later, the Bortels followed
suit, also alleging breach of fiduciary duty, and also seeking an injunction to prevent the
reorganization, and alternatively asking for “compensatory damages” if the buyout was
consummated.
No injunction was obtained. On February 24, 2011, the buyout was
approved by a vote of the outstanding shares, though the vote was relatively close, about
4.8 million shares for to 4 million shares against. As far as our record shows, the buyout
was consummated sometime after February 24, 2011.
Busse’s and the Bortels’ cases were consolidated in May 2011. By July,
Busse and the Bortels had filed an amended complaint, seeking rescission, but again
asking for rescissionary damages in the alternative. After several rounds of demurrers,
the minority shareholders filed a second amended complaint (the operative one for
purposes of this appeal), alleging two causes of action based on the facts above, namely
breach of fiduciary duty under subdivision (b) of section 1312, and aiding and abetting
breach of fiduciary duty under subdivision (b) of section 1312. Even under the second
8
amended complaint, however, the minority shareholders were still seeking to rescind the
buyout approved in February 2011 if they could not obtain rescissionary damages.
The trial court sustained the Bron group’s demurrer to the second amended
complaint, reasoning along two lines: First, subdivision (b) of section 1312 does not
allow for damages, even when “couched” as an “equitable remedy” under the rubric of
rescissionary damages. Additionally, the second amended complaint did not sufficiently
allege “Bron’s common control.” The minority shareholders then timely filed this
appeal.
III. DISCUSSION
A. Damages, By Any Other Name
1. Preliminary Considerations
The minority shareholders’ claim for “rescissionary damages,” centers on a
single phrase in subdivision (b), which states that in common control situations
“subdivision (a) shall not apply.” 7 As the minority read subdivision (b), in the absence
7 For easy reference, we quote the entirety of section 1312 in this footnote:
“(a) No shareholder of a corporation who has a right under this chapter to demand payment of
cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the
reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded,
except in an action to test whether the number of shares required to authorize or approve the reorganization have
been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set
forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to
payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved
pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of
the approved reorganization.
“(b) If one of the parties to a reorganization or short-form merger is directly or indirectly
controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision
(a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholder’s
shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization
or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall
not thereafter have any right to demand payment of cash for the shareholder’s shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except
upon 10 days’ prior notice to the corporation and upon a determination by the court that clearly no other remedy will
adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member.
9
of subdivision (a), shareholders enjoy the common law right to sue a controlling majority
of corporate insiders for breach of fiduciary duty, even if the alleged breach only arises
out of conduct in the course of a corporate reorganization. And that suit would include
the right to damages. But our interpretation of the statute does not allow for damages.
“In construing a statute, our fundamental task is to ascertain the
Legislature’s intent so as to effectuate the purpose of the statute.” (Smith v. Superior
Court (2006) 39 Cal.4th 77, 83.) There is a classic sequence in discussing problems of
statutory construction, as solid in its approach to the issue of ascertaining textual meaning
as the queen’s gambit is to safe openings in a game of chess. (See Halbert’s Lumber,
supra, 6 Cal.App.4th at p. 1238 [“There is order in the most fundamental rules of
statutory interpretation if we want to find it. The key is applying those rules in proper
sequence.”].) The classic sequence of discussing statutory construction is: First look at
the text, if it’s plain and unambiguous, stop there. If the text is not plain and
unambiguous, go to legislative history. If there is evidence of clear legislative intent,
implement that intent, and stop there. If there is no clear evidence of intent, use reason,
practicality and common sense to ascertain what best approximates the legislative intent.
(See Kachlon v. Markowitz (2008) 168 Cal.App.4th 316, 337-338; Halbert’s Lumber,
supra, 6 Cal.App.4th at pp. 1237-1240; see also J.A. Jones Construction Co. v. Superior
Court (1994) 27 Cal.App.4th 1568, 1578 [importance of clarity in legislative history].)
There is, however, another principle of statutory interpretation that fits
especially well the situation where the statute is less than clear, yet the Legislature has
amended it at a time when there was some case law interpreting it. The principle is that
“(c) If one of the parties to a reorganization or short-form merger is directly or indirectly
controlled by, or under common control with, another party to the reorganization or short-form merger, in any action
to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger
set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to
the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall
have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so
controlled.”
10
the Legislature is “presumed to know about existing case law when it enacts or amends a
statute.” (E.g., In re W.B. (2012) 55 Cal.4th 30, 57 [noting Legislature “did not signal an
intent to supersede” a prior appellate decision involving how dependency courts should
inquire into possible native American ancestry when it enacted statute governing such
inquiries]; People v. Overstreet (1986) 42 Cal.3d 891, 897 [“the Legislature is deemed to
be aware of existing laws and judicial decisions in effect at the time legislation is enacted
and to have enacted and amended statutes ‘“in the light of such decisions as have a direct
bearing upon them.”’”].)
This principle is important because it focuses our attention on what one
might expect to be there if a given interpretation were correct, but isn’t. For example, in
W.B., our Supreme Court noted that if the Legislature had intended, in enacting a certain
statute, to expand the reach of a certain federal law, one would have expected evidence of
such “intent to feature prominently in the legislative history.” (W.B., supra, 55 Cal.4th at
p. 56.) The W.B. court thus found it significant that there was no evidence of any such
intent. (Ibid.)
The case before us is perfectly suited to application of this variation on the
classic approach to laying out the problem of ascertaining legislative intent. Section 1312
is not the most pellucid of statutes, a fact noted twice by our high court in Steinberg.
(See Steinberg, supra, 42 Cal.3d at pp. 1205-1206 [“the scope of the prohibition stated in
this section is not clear”] & p. 1207 [“The language of section 1312(a) does not provide a
ready answer, for it is not entirely clear whether such a claim amounts to an attack on the
‘validity’ of the merger.”].) But when one examines the judicial history of section 1312,
any mystery as to the Legislature’s intent seems to dissipate. Taking our cue from W.B.,
we find no evidence the Legislature wanted, in subdivision (b) to establish or even
recognize a monetary remedy that hadn’t previously been there (at least after 1931). It
merely wanted to add one additional big, but wholly equitable stick to the remedies
minority stockholders already had – the ability to sue to set aside a reorganization.
11
2. A Not So Brief History of Section 1312
It all started in 1931 with the enactment of (now former) Civil Code section
369. Before that, any shareholder could block a merger by withholding consent. (See
Gallois v. West End Chemical Co. (1960) 185 Cal.App.2d 765, 771.) There were “two
principal reasons” for the enactment of the statute: one was to “permit mergers over the
objection of a defined minority of shareholders” while the other was to give such
minority shareholders the chance to obtain compensation for their stock. (Ibid.)
The statute was given its first judicial consideration some eight years after
its enactment, in Beechwood Securities Corp. v. Associated Oil Co. (9th Cir. 1939) 104
F.2d 537, where minority shareholders wanted to set aside a merger they considered
disadvantageous to their own interests, so they attacked the statute as an unconstitutional
deprivation of private property. The Ninth Circuit turned back the constitutional
challenge (id. at pp. 540-541) in an opinion stressing the complexity of trying to unwind
a merger. (See id. at p. 541 [noting the “injustice of disturbing the vast and complicated
interests of the consolidated companies because of a contention which the dissentient
shareholder had not raised”].) The Beechwood court then summarized the law, as if
speaking to a disappointed minority shareholder, in vibrant language that would be
quoted 47 years later in Steinberg: “In effect, these code sections, as construed by both
parties, say to a shareholder, ‘When you buy stock in a California corporation you are
advised that your associate shareholders holding two-thirds of the shares may consolidate
your corporation with another into a third corporation, offer you what they please of its
shares in exchange for those you hold, and, if you do not like the offer, may buy out your
shares at their fair market value at the time they vote the consolidation.’” (Id. at p. 540;
see also Steinberg, supra, 42 Cal.3d at p. 1206, fn. 11 [quoting same passage].)
When Beechwood was decided in 1939, there was no equivalent to what is
today section 1312, subdivision (b). But there was an equivalent of section 1312,
subdivision (a), namely former Civil Code section 369, subdivision (17), which the court
12
helpfully quoted in a footnote.8 And Beechwood prompted a law review article strongly
defending the decision written by one of the drafters of the 1931 legislation, Professor
Henry Winthrop Ballantine of Boalt Hall (see Gallois, supra, 185 Cal.App.2d at p. 772),
along with his colleague, Graham L. Sterling. (See Ballantine & Sterling, Upsetting
Mergers and Consolidations: Alternative Remedies of Dissenting Shareholders in
California (1939) 27 Cal.L.Rev. 644, 652 (hereinafter “Ballantine & Sterling 1939
article”). The clear import of the article is that when it comes to corporate
reorganizations, the needs of the many – at least measured by the shares they own –
outweigh the needs of the few. (See also Steinberg, supra, 42 Cal.3d at p. 1205
[explaining the origins of appraisal statutes generally].9) Hence the authors minced no
words about what they considered the lamentable tendency of some minority
shareholders to try to “extort” (a word indicative of the authors’ tone in the article) by
holding up economically beneficial reorganizations.10
8 Former Civil Code section 369, subdivision (17) provided: “The rights and remedies of any
shareholder at law or in equity to object to or litigate as to any such merger or consolidation shall be and are hereby
limited to the right to receive the fair market value of his shares in the manner and upon the terms and conditions
provided in this section, except actions to test whether the number of legal votes of shareholders required by statute
to authorize or approve the proposed action of the corporation has been given.” (Beechwood, supra, 104 F.2d at p.
538, fn. 1.)
9 The whole passage is worth quoting, if only for the general history of appraisal statutes and to
show that in 1986 our high court was still relying on Ballantine and Sterling’s reading of the statute: “Every
American state except West Virginia has an appraisal statute. At common law, consent of all stockholders of a
corporation was necessary to accomplish basic changes in corporate structure. This was a severe impediment to the
ability of the majority to effect reorganizations; a minority, by refusing to agree to a merger, or by demanding an
unreasonable amount for their shares as a condition to agreement, could delay or thwart a merger altogether. To
solve this problem, appraisal statutes were enacted, enabling the majority to effect a merger, but the minority were
granted the right to receive fair cash value for their shares, with the remedy of appraisal in the event of a
disagreement. Thus, the minority could not victimize the majority by failing to cooperate in the merger plan, but
they were not at the mercy of the majority as to the value of the shares of the merged corporation. (See 1A
Ballantine & Sterling, Cal. Corporation Laws (4th ed. 1986) § 262.05, pp. 12-75 to 12-76; 12B Fletcher, Cyc. Corp.
(Perm. ed.) § 5906.1, pp. 342-343; 15 Fletcher, supra, § 7165, p. 297.)” (Steinberg, supra, 42 Cal.3d at pp. 1204-
1205.)
10 The descriptive language they used was quite piquant: “sabotage the joint enterprise,” “piratical
minorities,” “protect the majority against outrageous extortion and obstruction,” “piratical obstructionists”
“extortionate corporate litigation” “blackmail and extortion against a majority.” (Ballantine and Sterling 1939
article, supra, 27 Cal.L.Rev. at pp. 645, 648, 649, 651.)
13
Ballantine and Sterling emphasized an interesting fact about the Beechwood
decision – it clearly arose out of a common control situation. There, a parent owned
more than 98 percent of two companies which were then merged into the parent. The
minority stockholders of one of the companies basically thought they were getting a
much worse exchange rate than the stockholders of the other company. (See Ballantine
and Sterling 1939 article, supra, 27 Cal.L.Rev. at pp. 652-655.)
In 1947, former Civil Code section 369 was converted into former
Corporations Code section 4123, which was then followed by former sections 4300 to
4318, which actually laid out the process of an appraisal remedy. (See Gallois, supra,
185 Cal.App.2d at p. 771.) The first evaluation of the statute in its new Corporations
Code incarnation came in Gallois, supra, 185 Cal.App.2d 765. Like Beechwood, Gallois
arose out of a reorganization in the common control context. A certain investment group
owned, respectively, 56 and 30 percent of two classes of stock in a company, and used its
control to merge the company into another company of which it owned, respectively 16
and 37 percent of the same respective classes of stock. The terms of the merger meant
one stockholder in the original company was going to receive $1.30 a share for his stock,
even though the terms of the class of that stock specified it could be “called” at a much
lower price, namely $1.05 per share. The stockholder, however, offered an interesting
theory as to why his stock was worth more than $1.30: The word on the street was the
company which lost its identity in the merger would never “call” the stock at all, because
if it did, the investment group who controlled it would suffer serious tax consequences.
(See id. at p. 679.) In the process of affirming the award at $1.30 – at root Gallois was a
substantial evidence case – the court had occasion to examine the history of former
section 4123 from its origins in 1931 to 1960, and demonstrate that the point of the
legislation was to allow mergers even if there were dissenting stockholders, but also to
give those stockholders a “means of getting compensation” for their stock. (Id. at p.
771.)
14
From 1931 to 1947 the statute grew longer, but the key language precluding
attacks on reorganizations “at law or in equity” except for appraisal remained.11 In 1966,
former section 4123 again came under appellate scrutiny in Giannini Controls Corp. v.
Superior Court of Los Angeles County (1966) 240 Cal.App.2d 142, and, yes, the litigation
again arose out of a common control reorganization. Like Gallois, it was an appraisal
case, but with an intriguing element. In Giannini, a New York corporation owned 80
percent of the shares of a California corporation, and the New York corporation wanted
to buy out the remaining 20 percent of the stock, held as it turned out, by one stockholder.
That stockholder, however, objected that the price was not fair to him. (Id. at pp. 144-
145.) The hook was that the California Commissioner of Corporations sympathized with
the holdout stockholder, and so refused to issue a certificate to allow the merger to be
consummated. The case reached the Court of Appeal, then, via the New York
corporation’s writ proceeding against the Commissioner, challenging his refusal to issue
the certificate. (Id. at pp. 149-150.) And, in fact, the trial court agreed with the
Commissioner, denying the requested writ.
The appellate court reversed, reasoning that under the law the
Commissioner had no choice. (See Giannini, supra, 240 Cal.App.2d at pp. 154-156.)
The important point of the opinion for our purposes is that the Giannini court issued a
strong assertion of the exclusivity of the holdout stockholder’s appraisal remedy. In fact,
it quoted Ballantine and Sterling’s general corporate law treatise in echoing its concern
11 Quoting from the 1947 version of the statute:
“When the merger or consolidation of a corporation with one or more other corporations, domestic
or foreign, has been approved by the requisite number of its shareholders, no shareholder of the corporation shall
have any right at law or in equity to attack the validity of the merger or of the consolidation, or to have the merger
or consolidation set aside or rescinded, except in an action to test whether the number of shares required by statute
to authorize or approve the merger or consolidation have been voted in favor thereof by persons legally entitled to
vote them; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid
in respect to them in the event of consolidation or merger is entitled to payment in accordance with those terms and
provisions, and any other shareholder who did not approve the merger or consolidation at the meeting at which it
was approved is entitled to receive the fair market value of his shares in the manner and upon the terms and
conditions provided in Article 2 of this chapter.” (See Stats. 1947, ch. 1038, pp. 2380-2384, italics added.) Article
2 consisted of former sections 4300 through 4318, which detail appraisal procedures similar to those in current
sections 1300 through 1313.
15
that the point of the statutory scheme was to prevent extortion of the many by the few:
“The statutory procedures whereby the dissenting shareholder may demand and receive
cash for his shares in an amount equal to their fair market value, is exclusive of other
legal and equitable remedies by which minority shareholders might seek to enjoin or
attack changes such as a merger or consolidation, except on the question of an
insufficient vote to authorize a merger or consolidation. (Corp. Code, § 4123.) It has
been said in this connection that ‘It was deemed advisable to protect the majority against
strike suits by abrogating equitable remedies by way of injunction or rescission to litigate
charges of fraud or unfairness, which may be used to extort a settlement by obstruction of
a transaction duly authorized.’ (Ballantine on Corporations (1946), p. 703.) Professor
Ballantine was speaking with reference to the provisions of former section 369 of the
Civil Code, the substance of which has now been incorporated in sections 4109 et seq. of
the Corporations Code. ‘The crucial point at issue in equitable suits for rescission and
also for preventive relief against merger or consolidation is after all usually one of price,
as to the true exchange value of the dissenting shares, perhaps of only a small number of
shares. The confining of litigation with dissenters to the question of value and
compensation simplifies the issues to be tried and protects all parties.’ (Ballantine on
Corporations, supra.)” (Gianinni, supra, 240 Cal.App.2d at pp. 154-155, italics added.)
Notanda bene: no damages.
The final case in the journey to 1975’s enactment of section 1312 was
Jackson v. Maguire (1969) 269 Cal.App.2d 120. Jackson arose out of litigation in which
cashed-out minority shareholders in one of the divisions of the conglomerate sought
additional consideration for their shares. The trial court disagreed, and substantial
evidence supported the trial court’s finding so the judgment was affirmed. (See id. at p.
128 [“We, thus, have a record which shows that the full reasonable market value of the
stock was paid.”].) The appellate court also had occasion to opine, “in passing,” that the
16
remedy of appraisal provide by the statutory scheme of former sections 4300 through
4318 was “exclusive.” (Id. at p. 131.)
Beechwood, Gallois, Giannini and Jackson thus formed the existing case
law construing former section 4123, as it stood going into 1975, when the Legislature
recodified the statute into what is now section 1312, subdivision (a) and, at the same
time, added new section 1312, subdivision (b), plus reincarnating the process-of-
appraisal statutes into new sections 1300 through 1311. At least three of the four cases
leading up to the 1975 enactment involved common control situations.12
It fell to the court in Sturgeon Petroleums, Ltd. v. Merchants Petroleum Co.
(1983) 147 Cal.App.3d 134, to first explore the statutory scheme enacted in 1975, its
current form. Sturgeon involved this scenario: Oil company M was to be merged into
Oil company D. The merger was approved by an “‘overwhelming’” majority of the
shares of the M company. The shareholders of M company who voted against the merger
were offered a price of $2.94 for their shares, but they demanded to be cashed out at $12
per share. The D company then took the initiative and it filed an appraisal action under
section 1304. The dissenting M company stockholders countered with an action for
damages based on breach of fiduciary duty against M company, its respective board
members, D company, and its board chairman. (Sturgeon, supra, 147 Cal.App.3d at pp.
136-137.) D company then sought summary judgment on the theory appraisal was the
plaintiffs’ exclusive remedy. The trial court granted it and the appellate court affirmed.
The Sturgeon court had this insight: The language of section 1312,
subdivision (a) “taken at face value,” indeed “might possibly be susceptible” to the
interpretation it does not preclude “‘direct actions for damages if fraud or other
12 It’s not clear what the respective control percentages in Jackson were, since most of the opinion
simply quotes portions of the statement of decision. (See Jackson, supra, 269 Cal.App.2d at pp. 126-128.)
17
misconduct can be shown.’” (Sturgeon, supra, 147 Cal.App.3d at p. 139.)13 But the
Sturgeon court rejected that interpretation as not “the most reasonable one.” (Sturgeon,
supra, 147 Cal.App.3d at p. 139.) The court noted that authorities prior to 1983
(including Beechwood, Giannini, Jackson and the Ballantine and Sterling 1939 article)
held recovery of fair market value of shares was the “‘only remedy’” of a dissenting
stockholder (other than testing the validity of the vote). (Id. at pp. 139-140.)
The court then pointed out that section 1312 subdivision (a) was a “reenactment” of
former section 4123, and specifically noted that subdivisions (b) and (c) were not in the
prior statute. The Sturgeon court opined that subdivision (b) presented a “limited
exception” to what would otherwise happen if subdivision (a) were operative. (See
Sturgeon, supra, 147 Cal.App.3d at p. 140.) Significantly, however, the Sturgeon court
did not elaborate on the nature of the “limited exception” represented by the arrival of
new subdivisions (b) and (c). (Id. at p. 140.)
Then came the California Supreme Court opinion in Steinberg. The
Sturgeon decision survived Steinberg scrutiny quite nicely; the two decisions are on the
same wavelength. Steinberg put its imprimatur on Sturgeon’s basic conclusion that in
subdivision (a) situations, appraisal is the exclusive remedy.14 Like Sturgeon, Steinberg
noted that subdivision (b) is framed as an exception to subdivision (a). And like
Sturgeon, Steinberg also chose not to explore the nature of subdivision (b)’s limited
13 Ironically the internal quotes representing the minority shareholder’s position were taken by them
from a treatise by Ballantine and Sterling. (See Sturgeon, supra, 147 Cal.App.4th at p. 139, noting appellants were
relying on language from 1A Ballantine and Sterling, Cal. Corporation Laws (4th ed. 1982) § 262.05[8][c], pp. 12-
88 & 12-89.)
14 See footnote 2, ante, for a small qualification.
18
exception to subdivision (a).15 Finally, like Sturgeon, Steinberg was clearly a non-
common control subdivision (a) case, so an investigation into the meaning of subdivision
(b) was not necessary.
But there was a lot more to the Steinberg decision than just its holding there
are no damages in subdivision (a) situations. For one thing, Steinberg followed Sturgeon
in spotting a certain ambiguity in the language of section 1312, subdivision (a). And, like
Sturgeon, Steinberg reached its result by noting the context and history of the statute to
arrive at the more reasonable of two possible interpretations. Thus Steinberg considered
section 1312 in the context of the whole of chapter 13 (see id. at pp. 1201, 1209), and, in
fact, self-consciously tested its result against the strong reagent of the idea that the result
in the case was allowing wrongdoers to go unpunished. (See id. at p. 1211.) Only after
considerable weighing of the statute in the context of its history, and noting the
“balancing” it involved (see id. at p. 1214), did the court announce its conclusion that, at
least where the plaintiff was “aware of all facts leading up to his cause of action for
alleged misconduct in connection with the terms of the merger prior to the time the
merger was consummated but deliberately opted to sue for damages instead of seeking
appraisal, did section 1312(a) act as a bar.” (Ibid.)16
15 Steinberg expressly dealt with subdivision (b) in only one brief passage, and the passage was
merely framing an argument made by one of the parties, and apparently taken from the similar “limited exception”
passage in Sturgeon. Here is the entire passage. We highlight the fact the high court chose not to go into much
detail about the subdivision (b) exception: “Second, defendants claim that because the Legislature has provided in
subdivision (b) of section 1312 an exception to section 1312(a), it must have viewed appraisal as the exclusive
remedy whenever the exception does not apply. While the existence of an exception indicates that shareholders who
do not come within it are limited in some respect as to the remedies they may invoke, this fact does not shed much
light on the scope of such limitation, particularly since the exception itself is expressed substantially in the language
of section 1312(a).” (Steinberg, supra, 42 Cal.3d at p. 1208, italics added.)
After the passage, the court would quote subdivision (b) in a footnote, and then launch in to its
basic analysis, including emphasizing that appraisal was an adequate remedy even when there is a breach of
fiduciary duty. (See id. at pp. 1208-1209, and particularly p. 1209.) In any event, the passage from Steinberg
quoted above, which merely tells us what defendants were telling the court, cannot be viewed as establishing
anything more than that subdivision (b) does not throw much light on subdivision (a).
16 The qualification relating to awareness does not affect the case before us, as shown by the
minorities’ January 2011 complaints filed before the time the merger was consummated in February. By that time
they were certainly aware of whatever the Bron group might have been up to in having Panam Financial sold to
themselves.
19
But perhaps the most remarkable aspect of Steinberg is its endorsement of
appraisal as a truly adequate remedy. Steinberg pointed out that even breaches of
fiduciary duty could be redressed in appraisal proceedings, because any difference
between the true value of the minority stockholder’s shares and the value offered
minority shareholders could readily be accounted for in the appraisal.17 (See Steinberg,
supra, 42 Cal.3d at pp. 1209-1210.)
And finally, to validate our understanding of Steinberg, we consider the
dissent. Steinberg was a four-three decision, and Chief Justice Bird made no effort to
hide her displeasure with the majority’s result. But she accepted the implication of the
historical origins of section 1312 – 40 years previously the Legislature had seen
dissenting shareholders as “‘piratical obstructionists.’” (See Steinberg, supra, 42 Cal.3d
at p. 1216, quoting Ballantine and Sterling’s 1939 article (dis. opn. of Bird, C. J.).)
However, she decried the original view as “‘anachronistic’” as shown by unidentified
“current events.” (Id. at pp. 1216-1217.) For Presiding Justice Bird, and her colleagues
Justices Reynoso and Grodin, the majority result was a “license to commit fraud,” (id. at
p. 1220) and appraisal was not a remedy which could “adequately compensate those
individuals who have been damaged in a corporate merger or reorganization.” (Id. at p.
1214.) Clearly, the dissent read Steinberg as we do. 18
Only one published opinion, Singhania v. Uttarwar (2006) 136 Cal.App.4th
416, has addressed section 1312 since Steinberg. Singhania was an attempt by
disappointed shareholders to find some room to maneuver around section 1312,
subdivision (a) and Steinberg’s interpretation of it in two alleged facts: One, they had not
17 Indeed, to add our own two-cents as a gloss to Steinberg’s point, a related statute, section 1305,
has a one-way attorney and expert fee provision in case the reorganization offer is too low by a certain percentage.
18 A coda on Steinberg: Just as Beechwood generated a law review article from one its partisans
defending the court’s decision, so did Steinberg. In Steinberg’s case, the article came from Robert Dunn, who had
been lead counsel for the defendants. (See Dunn, Steinberg v. Amplica: The California Supreme Court Holds
Appraisal to be the Dissenting Shareholder’s Exclusive Remedy (1988) 22 U.S.F. L.Rev. 293 (“Dunn’s Steinberg
Article”).) The article asserted that Presiding Justice Bird’s argument that “the entire statutory appraisal remedy is
inadequate” was better made to the Legislature than the court. (Id. at p. 313.)
20
been provided with a statement of fair market value of their shares in the materials sent
them prior to a merger by their corporation, as is actually required by section 1301. (See
Singhania, supra, 136 Cal.App.4th at p. 430.) And two, the misconduct of their
company’s management, in not providing sufficient information about the merger (and
hiding some information, like management receiving stock without consideration),
effectively deprived them of the opportunity to make an informed decision as to whether
to accept the merger terms (which would mean receiving stock in the company gobbling
up theirs, plus some other consideration). The defendants successfully demurred to the
plaintiffs’ fourth amended complaint, and the appellate court affirmed; section 1312,
subdivision (a)’s “bar” held. (Id. at p. 430.)
As to the first assertion, the Singhania court’s analysis was that the
omission of the fair market value in the information materials sent to the shareholders
didn’t prejudice the plaintiffs: They knew their corporation had a legal duty to state a fair
market value (per § 1300), they didn’t use their right to make a lawful demand to inspect
corporate records (see §§ 1600 et seq.), the omission of a fair market value was
functionally no different from a deflated statement – as is usually alleged (and was in
Steinberg) – and, in any event, the shareholders were still safeguarded by the fact they
could obtain the fair market value of their shares in an appraisal. (See Singhania, supra,
136 Cal.App.4th at pp. 430-433.) As to the misconduct, there was no allegation the
plaintiff shareholders had been misled by the misinformation or material nondisclosures
into keeping their stock instead of cashing out. Their failure to exercise their dissenters’
rights was their own “de facto choice” to accept the reorganization. (Id. at p. 434.)
Moreover, there was no misconduct in the actual process of the merger, i.e., it wasn’t a
case where the plaintiff shareholders were shorted what they were supposed to receive
from the company into which their former company had been merged. (Id. at pp. 434-
435.)
21
In sum, then, the meaning of section 1312, subdivision (a), both in its
incarnations before and after it became section 1312, is unmistakable: Disappointed
minority shareholders cannot sue to stop or rescind a merger, and are limited to the
remedy of appraisal. That is an adequate remedy because the appraisal can take into
account breaches of fiduciary duty by corporate insiders. We are now in a position to
examine what the Legislature intended when it enacted section 1312, subdivision (b).
3. The Meaning of Subdivision (b).
a. What Subdivision (b) Doesn’t Say
With this background, we may now examine the minority shareholders’
core argument in this case. The minority read subdivision (b) to provide that in the
absence of subdivision (a) application, shareholders retain common law rights, including
the right to sue a controlling majority for monetary damages for breach of fiduciary duty.
We reject the argument for two reasons. The first we have alluded to
already: The historical context in which subdivision (b) was first enacted. As we have
seen, by 1975, a string of California cases had already held that appraisal was the
exclusive remedy of dissenting shareholders. The Legislature must be presumed to have
been aware of these cases in 1975 when it enacted subdivision (b). Going into 1975,
then, there was no residuum of common law remedies in the reorganization context
22
which would exist but for the interposition of subdivision (a).19 The enactment of
subdivision (b) did not involve a situation in which the Legislature was restoring a
remedy that subdivision (a) otherwise took away. Rather, when subdivision (b) was
enacted in 1975, the question was whether the Legislature would create something that
clearly wasn’t there.
Silence often speaks loudly when it comes to ascertaining the intent behind
text. (E.g., Citizens Assn. of Sunset Beach v. Orange County Local Agency Formation
Com. (2012) 209 Cal.App.4th 1182, 1191 [silence in initiative on question of impact on
annexations indicated a lack of voter intent that initiative apply to annexations].) In In re
W.B., supra, 55 Cal.4th at page 57, for example, our Supreme Court rejected the idea the
Legislature wanted to expand the coverage of a certain law when it amended a juvenile
dependency statute because there was no indication the Legislature wanted to
“supersede” the prior decision.
Here, similarly, we have no indication the Legislature, in enacting
subdivision (b), wanted to give subdivision (b) plaintiffs a right to monetary damages
which, under Beechwood, Gallois, and Gianinni, they clearly did not have at the time.
The silence is particularly loud given that those three cases had arisen out of common
19 The idea, as suggested by minority’s briefing, that the existence of fiduciary duties on the part of
corporate directors to minority stockholders was created ex nihilo, like some exotic massless subatomic particle, in
the 1969 case of Jones v. H.C. Ahmanson & Co., supra, 1 Cal.3d 93, does not hold up to examination. The
California Supreme Court made clear directors have fiduciary obligations to shareholders at least as early as 1940.
(American Trust Co. v. California Western States Life Ins. Co. (1940) 15 Cal.2d 42, 63.) Indeed, the Court of
Appeal declared such duties very plainly at least as early as 1932. (See Pasadena Mercantile Finance Corp. v. De
Besa (1932) 122 Cal.App. 575, 578 [“Defendants, as directors of plaintiff corporation, occupied a fiduciary relation
to the corporation and its stockholders. Having been entrusted with the management of the corporate property for
the common benefit of the stockholders, directors, by their acceptance of office, preclude themselves from doing any
act or engaging in any transaction in which their private interests conflict with the duty they owe to the stockholders,
and from making any use of their power or of the corporate property to secure to themselves an advantage not
common to all stockholders.”]; see also Remillard Brick Co. v. Remillard-Dandini Co. (1952) 109 Cal.App.2d 405,
419 [collecting authorities to the effect that “It is hornbook law that directors, while not strictly trustees, are
fiduciaries, and bear a fiduciary relationship to the corporation, and to all the stockholders. They owe a duty to all
stockholders, including the minority stockholders, and must administer their duties for the common benefit. . . .
Directors owe a duty of highest good faith to the corporation and its stockholders. It is a cardinal principle of
corporate law that a director cannot, at the expense of the corporation, make an unfair profit from his position.”].)
23
control situations, so the 1975 amendments presented the perfect opportunity to say that
monetary damages could be sought if a reorganization did involve common control.
The second reason we reject the minority shareholders’ reach for damages
is our perception of how section 1312 fits within the entire context of the then-
surrounding statutory scheme, sections 1300 through 1313. The minority shareholders
read subdivision (b) at something like a quantum level – focusing on but one part of a
single phrase in the introductory sentence, “subdivision (a) shall not apply” – with almost
no further examination. But statutory texts cannot be read in isolation; we must consider
the context of the statutory scheme of which they are a part. (E.g. Clean Air
Constituency v. California State Air Resources Bd. (1974) 11 Cal.3d 801, 814 [court
“should construe every statute with reference to the entire scheme of law of which it is
part so that the whole may be harmonized and retain effectiveness”].)
Reading chapter 13 as a whole, a unified theory of how the Legislature
elected to treat dissenting minority shareholders in corporate reorganizations emerges: In
non-common control situations, dissenting minority shareholders have the remedy of
appraisal but do not have the remedy of stopping or rescinding the reorganization. In
common control situations, dissenting minority shareholders still have the remedy of
appraisal unless they elect the remedy of stopping or rescinding the reorganization. But
they never have the remedy of seeking monetary damages.
In that regard we are particularly struck by section 1309, subdivision (c),
which says shareholders who do not avail themselves of an appraisal remedy “cease to be
entitled” to be cashed out by the corporation for their shares. The importance here is that
since Steinberg is clear that appraisal is an adequate remedy for common law breach of
fiduciary duty, allowing a common law remedy for monetary damages under section
1312, subdivision (b) would run counter to the operation of section 1309. It would allow
dissenting shareholders to avoid the appraisal process because they could still be
effectively cashed out in later litigation.
24
Moreover, a monetary remedy in subdivision (b) – outside the well-
delineated appraisal remedy provided for in section 1304 – would also tend to subvert the
appraisal remedy itself and allow the kind of gamesmanship the statutes indicate the
Legislature sought to avoid by passing section 1308. Specifically, sections 1302 and
1304 set out strict time limits to exercise the appraisal remedy, while section 1308
prevents the dissenting shareholder from reneging on a demand for a cashout without the
corporation’s consent. Section 1308 was obviously included to prevent dissenting
shareholders from giving themselves a free stock option in the event that after the
reorganization share prices declined. A common law remedy for monetary damages
would allow dissenting stockholders to hedge their bets by disclaiming an appraisal
remedy on the theory the company’s offer was sub-market as a result of breach of
fiduciary duty, and if the gamble didn’t pay off because share prices unexpectedly went
down, they could simply dismiss their case. The effect would be the same as a free stock
option. We cannot ascribe that intent to the framers of the statutory scheme.
b. And What Subdivision (b) Does Say
Of course, resolving what subdivision (b) doesn’t say does not tell us what
subdivision (b) does say. Recall that the overarching theme of both Beechwood and
Ballantine and Sterling’s 1939 article was the intolerability of the uncertainty created by
a suit to set aside or rescind a merger. However, by 1975 the potential for abuse in
common control situations was known, and something more than just appraisal as a
remedy was perceived to be needed by the Legislature. (See Dunn’s Steinberg Article,
supra, 22 U.S.F. L. Rev. at p. 314 [“The scope of exclusivity of the appraisal remedy has
been narrowed by the legislature to exclude those cases in which abuses might be
expected. Most notably, the appraisal remedy is not exclusive if there is common control
of the acquiring and acquired corporations.”].)
That something more was what Beechwood and Ballantine and Sterling in
1939 would have seen as the horror of the uncertainty of litigation which might, or might
25
not, result in unwinding a merger – or, to use the metaphor employed at oral argument at
the trial court in this case – the unscrambling of an egg. The Legislature faced that
eventuality. It recognized, at least on an intuitive level, that unlike most buyer and seller
scenarios where the seller knows more about what’s being sold than the buyer, the natural
order is reversed in common control situations. In common control scenarios,
management has better and quicker access to information about a company’s prospects
than its stockholders and yet it’s management who are the buyers. For example, as an
economy comes out of a recession and the company’s prospects start looking up, insiders
will know about the good news first. A common control situation involves, in effect,
management dealing with itself.
Common control under subdivision (b), then, is one of those times when the
Legislature is willing to allow a little dice to be played over the survivability of a
corporate reorganization. Subdivision (b) is like physicist Schrödinger’s
famous cat in a box, which might, or might not, have been exposed to a puff of deadly
gas. If a management buyout were analogized to that cat, one would never know if the
box contains a live cat or a dead cat until the outcome of the set-aside litigation becomes
final and the box, so to speak, is opened. Given the history of subdivision (a) with its
antipathy to litigation seeking to set aside corporate reorganizations, it is evident that the
Legislature had a different attitude for subdivision (b) common control situations: It was
willing to tolerate some dead cats to keep management honest.
The availability of set aside is also the way the Rutter Group Corporate
treatise commentators read the statute. We should add, as the Treatise notes, that if
dissenting shareholders do choose the big stick of a set aside remedy, they obviously
cannot also have the alternative of an appraisal. (See Friedman, Cal. Practice Guide:
Corporations (The Rutter Group 2013) ¶¶ 8:358, 8:365-8:366, pp. 8-65, 8-66.1.)
26
B. The Set Aside Remedy
The trial court sustained the demurrer to the second amended complaint
without leave to amend, in part because it correctly determined that the minority
shareholders of Panam Financial had no claim for monetary relief. They had their chance
with that by way of appraisal. But the second amended complaint also seeks to set aside
the buyout of Panam Financial by Bron et al., and an examination of the record reveals
the minority shareholders have never given up that alternative request. To be sure, the
trial judge pressed them to give it up. The judge understandably did not want to
unscramble any eggs. Even so, counsel for the shareholders managed to bob, weave and
duck around the trial judge’s efforts, so in the end he did not waive the request for the
alternative of a set aside.20
The reason the trial court sustained the demurrer to the entire second
amended complaint, including its prayer of unwinding the merger, was that the trial court
concluded the case wasn’t a subdivision (b) common control case at all. So the question
then becomes, where do we go from here? Because the trial court determined
subdivision (b) actually didn’t apply at all, the Bron group’s briefing in this case has
conspicuously avoided the question of whether the plaintiffs’ remedy of set aside could
be disposed of on demurrer. (Bron and friends have instead tried to hold the line on the
issue of whether the Panam Financial buyout was a subdivision (b) common control
situation at all.)
20 Here are pertinent parts of the exchange:
“The court: . . . . Well, let me ask one question for you, Mr. Wissbroeker. In your prayer, my
impression from reading the arguments was that nobody is looking to – I think your expression is, ‘unscramble the
egg.’ So you’re not looking to unwind the merger.
“ [¶] . . . [¶]
“Mr. Wissbroeker: Well, your honor, the response is as follows. And I’m not trying to be cute,
but we believe the appropriate remedy here is rescissory damages, which is obviously a monetary remedy.
“The court: Right.
“Mr. Wissbroeker: “If the court’s conclusion is that there’s no availability of rescissory damages,
unwinding the merger would be the fallback, but I think we all agree it’s probably difficult to do that at this point.”
27
There is only so much a court can do on demurrer. As in Kruss, supra, 185
Cal.App.4th at page 727, this case may indeed involve valid defenses to the minority’s
effort to set aside the buyout. Questions arise that were not the focus of proceedings
below, particularly centered on subdivision (b)’s requirements of “10 days’ prior notice
to the corporation” and the need to show “no other remedy will adequately protect the
complaining shareholder.” But those defenses need a much more factual record than we
have on a demurrer. Concomitantly, we note subdivision (c) of section 1312 shifts, in
common control situations, the burden of showing the buyout was just and reasonable.
The burden-shifting situation further suggests the need for a factual record that is not
possible on demurrer.21
We therefore decline the Bron group’s invitation to dispose of the case on
issues not considered by the trial court, such as the business judgment rule, or the nature
of the proxy statement sent out in the course of the buyout vote. (Cf. State Building &
Construction Trades Council of California v. Duncan (2008) 162 Cal.App.4th 289, 318,
fn. 17 [“We decline to reach these issues because they have not been fully developed in
the trial court papers or in the appellate briefs.”].) All we determine here is that
subdivision (b) does apply to the Panam Financial buyout and on this record the plaintiff
minority shareholders have stated a cause of action to rescind that buyout, even if they
have no claim for any monetary relief.
21 Professor Marsh’s treatise on corporate law opines that subdivision (c) simply codified existing
California law as exemplified in Efron v. Kalmanovitz (1967) 249 Cal.App.2d 187. (See Marsh’s Cal. Corporation
Law § 19.09.) Efron was a shareholder derivative arising out of the sale of corporate assets on the cheap in a
common control situation, and, significantly, noted that the unfairness of the transaction was a matter of fact for the
trial court. (See Efron, supra, 249 Cal.App.2d at p. 191 [“The question as to whether the terms of payment fixed by
the contract rendered the contract unfair was one of fact to be determined by the trial court and that court having
determined that the contract was unfair this court cannot substitute its judgment for that of the trial court.”].)
28
DISPOSITION
The judgment is affirmed to the extent it precludes the plaintiffs from
seeking any damage remedy, including “rescissory damages.” It is reversed to the extent
it precludes on demurrer the plaintiffs from seeking to unwind the buyout of Panam
Financial by Bron and friends. Beyond determining that the second amended complaint
alleges a cause of action for unwinding of the buyout under subdivision (b) of section
1312, we express no opinion. This result is a split decision, so each side will bear its own
costs on appeal.
BEDSWORTH, J.
WE CONCUR:
RYLAARSDAM, ACTING P. J.
MOORE, J.
29