ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (C.A. No. 81-3955)
Before Adams, Maris and Higginbotham, Circuit Judges.
The Penn Central Corporation ("Penn Central"), an appellee in this case, has sought to acquire Colt Industries Inc. ("Colt"), also an appellee, by merging Colt with PCC Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of Penn Central. Howard L. Terry and W. H. Hunt, the appellants, are shareholders of Penn Central who objected to the transaction. In a diversity action before the United States District Court for the Eastern District of Pennsylvania, appellants sought injunctive and declaratory relief to enforce voting and dissenters' rights to which appellants asserted they were entitled. Appellants further sought to enjoin Holdings from proceeding with the proposed merger, and in particular moved to enjoin a vote on the transaction, scheduled for October 29, 1981, by the shareholders of Penn Central. In an opinion issued on October 22, 1981, Judge Pollak denied appellants' requests. Appellants thereupon filed an appeal in this Court, and then petitioned for a temporary injunction against the proposed shareholder vote until the appeal on the merits of the district court order could be heard. On October 27, following oral argument, we entered an order denying the petition for temporary injunction, stating that appellants had failed to demonstrate a sufficient likelihood of prevailing on the merits. C.A. No. 81-3955. The shareholders of Penn Central voted, as scheduled, on October 29. Pursuant to an expedited hearing schedule, the appeal from the district court's denial of injunctive and declaratory relief was submitted to this Court following oral argument on November 5.
After argument on appeal, the shareholders disapproved of the merger, and the corporations thereafter publicly announced their abandonment of this particular merger. Penn Central, however, has not abandoned its proposed series of acquisitions, of which the Colt acquisition was merely one instance.
Penn Central is the successor to the Penn Central Transportation Corporation, which underwent a reorganization under the bankruptcy laws that was completed in 1978. No longer involved in the railroading business, Penn Central, since 1978, has had the advantage, for tax purposes, of a large loss carry-forward. In order to put that loss carry-forward to its best use, Penn Central has embarked on a program of acquiring corporations whose profits could be sheltered. To this end Penn Central created Holdings, a wholly-owned subsidiary which was to acquire the businesses that Penn Central desired. The first acquisition under the plan was Marathon Manufacturing Company ("Marathon"), in 1979. In the Marathon acquisition, a class of preferred Penn Central stock was created, and 30 million shares of "First Series Preference Stock" was issued to the owners of Marathon stock. Appellants were shareholders of Marathon who thereby obtained shares of this First Series Preference Stock. Terry was promptly elected to the Penn Central board of directors.
In 1981, Penn Central decided upon another acquisition: Colt. The management and directors of Colt and Penn Central agreed upon a merger of Colt into Holdings, compensated for by issuance of a second series of Penn Central preference stock to Colt shareholders. Terry opposed the merger at the directors' meeting, and sought to preclude the consummation of the transaction.
Appellants proffered before the district court and reiterate before this Court a number of arguments. First, appellants assert that under the terms of the Penn Central Articles of Incorporation, as amended in 1979, the holders of First Series Preference Stock are entitled to a class vote on a transaction such as the Colt-Holdings merger, in which vote a two-thirds majority of First Series shareholders would be required to authorize the merger.*fn1 Second, appellants argue that under Pennsylvania's corporate law, they are entitled to dissent and appraisal rights if the merger is adopted over their opposition.*fn2 Finally, appellants maintain that the Penn Central proxy statement regarding the merger contained materially misleading statements regarding the above matters. The district court held that neither of the first two claims was correct as a matter of law. It then noted that the third claim was contingent on the merits of the first two claims, and accordingly held against appellants on that claim as well.
Because Colt and Penn Central have now announced their abandonment of the proposed merger, the request for injunctive relief considered by the district court is now conceded by all parties to be moot. However, the appellants' request for declaratory relief, which the appellants now contend is moot as well, involves legal questions that go to Penn Central's plan of acquisitions, rather than to the Colt transaction alone, and these questions appear likely to recur in future disputes between the parties here. It is clear from the record that the Colt merger was one in a series of similar acquisitions by Penn Central. The appellants, one of whom has now objected to each of the last two proposed acquisitions by Penn Central, will continue to have a lively interest in challenging any future amalgamations structured in roughly the same manner as the transaction before us now. The declaratory relief requested here thus arises from a genuine and continuing controversy, and involves adverse parties who have diligently presented their cases to this Court. The continuing threat of legal action creates some present injury, and not merely a speculative future injury, to Penn Central: without a judgment on the merits of this appeal, Penn Central's present ability to negotiate other acquisitions will be severely impaired by the desire of potential merger partners to avoid the legal complications faced by Penn Central and Colt. In a case such as this, a voluntary termination by the parties of the specific activity challenged in the lawsuit-here, the proposed treatment of the dissenting preferred shareholders in the Colt-Holdings plan-does not render the action moot because there is "a reasonable likelihood that the parties or those in privity with them will be involved in a suit on the same issues in the future." American Bible Society v. Blount, 446 F.2d 588, 595 (3d Cir. 1971); Marshall v. Whittaker Corp., 610 F.2d 1141, 1147 (3d Cir. 1979).*fn3
Although we order that the district court dismiss as moot its order with respect to injunctive relief, we do not conclude that the entire case is moot. Instead, we affirm the judgment of the district court to the extent that it denies the declaratory relief sought by appellants, for substantially the reasons set forth by the district court.
In light of the complete and well-reasoned opinion of the district court 527 F. Supp. 118 (E.D.Pa.1981), we do not believe it necessary to discuss each of the appellants' claims in detail. However, we briefly set out below our reasons for affirming the district court's order.
Appellants assert that under Section 5(d) of the Penn Central Amended Articles of Incorporation,*fn4 they are entitled, as holders of First Series Preference Stock, to a class vote on the authorization of the issuance of any later series of preference stock. Specifically, they maintain that Penn Central may not issue the proposed Second Series Preference Stock to the acquired company's shareholders without the approval of two-thirds of the present First Series shareholders. Reviewing the language of Section 5(d), we note that a careful distinction is drawn between the rights of Preference shareholders against other shareholders on the one hand, and of First Series stockholders against other Series stockholders on the other. Because the proposed merger does not create shares that are superior in any way to the Preference shares generally, we conclude that the only language even arguably relevant is the language addressing the rights of First Series stockholders against the issuance of a later series. Section 5(d) provides, in that respect, that First Series shareholders are entitled to a class vote before the corporation may modify the Articles of Incorporation or authorize a merger that would "adversely affect the First Series Preference Stock but would not adversely affect each other series of Preference Stock." No class vote, however, is required for the issuance of "any shares of any class or series of capital stock which is subordinate to shares of First Series Preference Stock...." Appellants construe these ...