Corporations_mergers_cash-out_exclusive remedy for inadequate price
Dissent and appraisal is the exclusive remedy for shareholders who are aggrieved by the
price offered and the method used to set the price in a cash-out merger of a North Carolina
corporation. A class-action complaint alleging breach of fiduciary duties by a board of directors
during a buy-out was properly dismissed for failure to state a claim. N.C.G.S. § 55-13-02.
Lesesne & Connette, by Edward G. Connette, and Schiffrin &
Barroway, LLP, by Gregory M. Castaldo, pro hac vice, for
plaintiff-appellant.
Womble Carlyle Sandridge & Rice, PLLC, by Pressly M. Millen,
for defendant-appellees.
Smith, Anderson, Blount, Dorsett, Mitchell & Jenrigan,
L.L.P., by Carl N. Patterson, Jr. and J. Mitchell
Armbruster, on behalf of the North Carolina Biosciences
Organization, the Council for Entrepreneurial
Development, the Piedmont Entrepreneurs Network, and the
Metrolina Entrepreneurial Council, amici curiae.
EAGLES, Chief Judge.
Plaintiff was a minority public shareholder of Market America,
Inc. The individual defendants, James and Loren Ridinger and
Martin Weissman, were the only members of Market America's board of
directors. On or about 17 October 2001, the Ridingers, who at that
time collectively owned 78% of the outstanding shares of common
stock of Market America, announced their intention to acquire all
of Market America's common stock that they did not already own for
$8.00 per share in cash. Generally, the common stock has traded inthe $4.00 to $5.00 range. Weissman joined the Ridingers in the
buyout group shortly after the proposal was made to Market America.
The proposal called for Market America to merge with Miracle
Marketing, a corporation completely owned by Mr. Ridinger. Market
America issued a proxy statement that made the merger conditional
upon the acceptance of a majority of the minority shareholders. A
majority of the minority shareholders voted in favor of the merger,
which was completed on or about 24 June 2002.
On 19 October 2001, plaintiff filed, individually and as a
class action on behalf of all public shareholders of Market
America, a complaint challenging the merger. Plaintiff filed an
amended complaint on 4 November 2002 alleging breach of fiduciary
duty by unfair dealing, unlawful coercion and unfair price. On 15
November 2002, defendants moved to dismiss the complaint pursuant
to N.C. Gen. Stat. § 1A-1, Rule 12(b) on the grounds that the
plaintiff lacked standing and failed to state a claim on which
relief can be granted. On 13 December 2002, the trial court
dismissed the action. (Though the order notes that the court
“[took] into consideration the Memorandum provided by Plaintiff and
the materials provided by Defendants,” the record is devoid of any
additional memorandum or materials and it appears that the court
did not consider anything that could have converted the motion to
one for summary judgment.) Plaintiff appeals.
In our review of the trial court's dismissal of this action
pursuant N.C. Gen. Stat. § 1A-1, Rule 12(b)(6), we must consider
the allegations of the plaintiff's complaint as true. Arroyo v.
Scottie's Professional Window Cleaning, 120 N.C. App. 154, 155, 461S.E.2d 13, 14 (1995), disc. review improvidently allowed, 343 N.C.
118, 468 S.E.2d 58 (1996).
The plaintiff contends that the Ridingers began to investigate
the possibility of “squeezing out” the minority shareholders by
instituting a cash merger whereby the Ridingers would purchase the
outstanding shares owned by the minority shareholders. A cash
merger, also known as a “freeze-out” or “squeeze-out” merger,
occurs when the majority shareholders of a corporation attempt to
gain control of the corporation by “chasing out” the shares of the
minority shareholders. See Russell M. Robinson, II, Robinson on
North Carolina Corporation Law § 24-09, at 24-17 and 24-18 (7th ed.
2002). When shareholders oppose these actions, N.C. Gen. Stat. §
55-13-02, the dissent and appraisal statute, provides that a
shareholder may dissent from a plan of a merger proposed by the
corporation or the majority shareholders and obtain the fair value
of his shares. See N.C. Gen. Stat. § 55-13-02(a) (2003).
Appraisal is the exclusive remedy for a shareholder who wishes
to exercise a dissenter's rights. N.C. Gen. Stat. § 55-13-02(b)
(2003) provides:
A shareholder entitled to dissent and obtain
payment for his shares under this Article may
not challenge the corporate action creating
his entitlement, including without limitation
a merger solely or partly in exchange for cash
or other property, unless the action is
unlawful or fraudulent with respect to the
shareholder or the corporation.
The statute does allow for remedies other than appraisal where
dissatisfied shareholders can show the transaction was “unlawful”
or “fraudulent.” This court has consistently concluded that where plaintiffs'
complaints are essentially about the price received in a merger and
the method by which the price was set, that plaintiffs have not
sufficiently alleged an “unlawful” or “fraudulent” transaction.
Werner v. Alexander, 130 N.C. App. 435, 502 S.E.2d 897 (1998); IRA
ex rel. Oppenheimer v. Brenner Companies, Inc., 107 N.C. App. 16,
419 S.E.2d 354, disc. review denied, 332 N.C. 666, 424 S.E.2d 401
(1992).
[Although] a statutory appraisal remedy “may
not be adequate . . . in certain cases,
particularly where fraud, misrepresentation,
self-dealing, deliberate waste of corporate
assets, or gross and palpable overreaching are
involved[,]” . . . a “remedy beyond the
statutory procedure is not available where the
shareholder's objection is essentially a
complaint regarding the price which he
received for his shares.”
Werner at 440, 502 S.E.2d at 901, quoting Oppenheimer at 20-21, 419
S.E.2d at 357-358.
Here, the plaintiff's allegations have similarities to those
in Oppenheimer and Werner, and include the following allegations:
11. Abandoned and at the same time threatened
by their Board, Market America's minority
shareholders accepted the $8.00 per share
proposal and the merger closed on or about
July 24, 2002. As described below, plaintiff
and the other minority shareholders have been
injured because $8.00 per share was not a fair
price for their shares.
. . . .
54. On or about July 22, 2002, Market
America's shareholders approved the merger and
the merger closed on or about July 24, 2002.
Market America's shareholders have been
damaged because the $8.00 merger price was
grossly unfair and inadequate . . . .
. . . .
56. The $8.00 per share price was
unilaterally set by Mr. Ridinger, the person
who benefitted the most from cashing out
Market America's minority shareholders for a
lowball price.
. . . .
70. Defendants' misleading representation
pressured Market America's shareholders to
accept the $8.00 per share price, denying them
free choice. Plaintiff and the Class were
wrongfully forced to vote for a merger at an
unfair price . . . .
. . . .
72. The price paid to the cashed-out minority
stockholders was entirely unfair and
inadequate.
(Emphasis added).
Plaintiff's complaint alleged breach of fiduciary duty on the
part of the defendants as a result of unfair dealing, unlawful
coercion and unfair price. Plaintiff has urged this court to adopt
the “entire fairness” test for analyzing cash-out mergers announced
in the Delaware Supreme Court's decision in Weinberger v. UOP,
Inc., 457 A.2d 701 (Del. 1983). Both Oppenheimer and Werner
discussed the Weinberger decision and did not adopt the “entire
fairness” test. We are bound by N.C. Gen. Stat. § 55-13-02 and our
decisions in Oppenheimer and Werner. Dissent and appraisal is the
exclusive remedy for shareholders who are aggrieved by the price
offered and the method by which the price is set in a cash-out
merger of a North Carolina corporation. All of the allegations in
plaintiff's complaint center around the plaintiff's allegation that
the defendants engaged in a course of conduct designed to enable
them to buy the shares of the minority at an unfair price. The
plaintiff's complaint has failed to adequately allege an unlawfulor fraudulent transaction by the defendants. The trial court did
not err in dismissing plaintiff's complaint.
Affirmed.
Judges MARTIN and LEVINSON concur.
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