Certification of Question of Law from the United States Court of Appeals for the Third Circuit at Nos. 10-4040 and 10-4091
The opinion of the court was delivered by: Mr. Justice Saylor
CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ.
We accepted certification from the United States Court of Appeals for the Third Circuit to address the exclusiveness of a statutory appraisal remedy provided, under Pennsylvania corporate law, to minority shareholders in certain merger scenarios.
Per Pennsylvania's Business Corporation Law,*fn1 a shareholder of a domestic business corporation may have prescribed entitlements -- termed "dissenter's rights" -- upon the shareholder's objection to the corporation's participation in a merger (or some other transactions entailing fundamental corporate changes). See 15 Pa.C.S. §1930(a). In certain of these scenarios, objecting shareholders are entitled to receive the fair value for their shares. See id. §1571(a). Where there is a fair value dispute, the BCL provides for post-merger judicial valuation or appraisal of the shares. See id. §1579(a). Furthermore, and of particular relevance to this appeal, the general provisions of the BCL impose the following constraint upon the rights of objecting and dissenting shareholders: §1105. Restriction on equitable relief.
A shareholder of a business corporation shall not have any right to obtain, in the absence of fraud or fundamental unfairness, an injunction against any proposed plan or amendment of articles authorized under any provision of this subpart, nor any right to claim the right to valuation and payment of the fair value of his shares because of the plan or amendment, except that he may dissent and claim such payment if and to the extent provided in Subchapter D of Chapter 15[, 15 Pa.C.S. §§1571-1580,] (relating to dissenters rights) where this subpart expressly provides that dissenting shareholders shall have the rights and remedies provided in that subchapter. Absent fraud or fundamental unfairness, the rights and remedies so provided shall be exclusive. Structuring a plan or transaction for the purpose or with the effect of eliminating or avoiding the application of dissenters rights is not fraud or fundamental unfairness within the meaning of this section.
15 Pa.C.S. §1105 (emphasis added).
Mitchell Partners, L.P., was a minority shareholder of Irex Corporation, a privately-held Pennsylvania business corporation. In 2006, Irex participated in a merger transaction structured so that some minority shareholders would be "cashed out" and would not receive an equity interest in the surviving corporation, a wholly owned subsidiary of North Lime Holdings Corporation.*fn2 Mitchell objected to the acquisition, as it viewed the transaction as a "squeeze out" of minority interests at an unfair price.*fn3 The merger proceeded nonetheless, and Irex commenced valuation proceedings in state court, per Section 1579 of the BCL, to address the dispute with Mitchell.
Meanwhile, Mitchell pursued common law remedies in a diversity action in federal court, naming as defendants Irex, its directors, most of its officers, and North Lime. The complaint asserted claims for breach of fiduciary duties, aiding and abetting breach of fiduciary duties, and unjust enrichment.*fn4 The defendants sought dismissal on the ground that, under Section 1105 of the BCL, judicial valuation is the sole remedy available to dissenting shareholders in the post-merger timeframe.
The district court agreed, relying on In re Jones & Laughlin Steel Corporation, 488 Pa. 524, 412 A.2d 1099 (1980) (holding that, under Section 1105's predecessor, an appraisal court lacks jurisdiction to determine the validity of a merger). The court believed that Jones confirmed that post-merger remedies available to dissenting shareholders are limited to appraisal in a judicial forum. See Mitchell Partners, L.P. v. Irex Corp., Civil Action No. 08--cv--04814, slip op., 2010 WL 3825719, at *12 (E.D. Pa., Sept. 29, 2010). In terms of policy implications, the district court highlighted that the Jones Court "was not unmindful of the import of its decision and the limits it placed on minority shareholders." Id. at *5. In this regard, the court quoted from Jones, as follows:
We wish to emphasize that today's decision does not condone the manner in which the appellants and other minority shareholders were deprived of their equitable interest . . .. We are not unmindful of the grave unfairness and fraud frequently present in mergers of this type, especially where there is a "cash-out" of the minority shareholders. Our concern, however, does not change the view that appellants' post-merger remedies were limited to the appraisal of the fair market value of their stock.
Id. at *5 n.36 (quoting Jones, 488 Pa. at 533-34, 412 A.2d at 1104) (citations omitted). While the district court appreciated that several decisions of the Third Circuit Court of Appeals and of the Pennsylvania Superior Court sanctioned remedies beyond appraisal, see, e.g., Herskowitz v. Nutri-System, Inc., 857 F.2d 179 (3d Cir. 1988), Warden v. McLelland, 288 F.3d 105 (3d Cir. 2002), and In re Jones & Laughlin Steel Corp., 328 Pa. Super. 442, 477 A.2d 527 (1984), it distinguished these on the ground that they involved separate litigation that was filed before the consummation of merger transactions. See Mitchell, Civil Action No. 08--cv--04814, slip op., 2010 WL 3825719, at *7.
On appeal, a divided three-judge panel of the Third Circuit reversed. See Mitchell Partners, L.P. v. Irex Corp., 656 F.3d 201 (3d Cir. 2011). Initially, the majority recognized that Section 1105 "clearly imposes some restrictions on the relief available to a dissenting shareholder outside of the appraisal remedy proceeding[.]" Id. at 209. The majority disagreed, however, with the district court's position that the statute precludes all other remedies. Acknowledging that some of the broader language from Jones supported the defendants' position, the majority nonetheless highlighted that Jones arose in the context of a statutory valuation proceeding, such that "the narrow issue of whether a suit for damages based on breach of fiduciary duties may be brought post-merger was not directly presented to the Supreme Court." Id. at 212.
Absent a controlling Pennsylvania decision, the majority reviewed salient federal ones. It explained that, in Herskowitz, the Third Circuit previously had read Jones' rationale in light of the limited issue before this Court (namely, whether a post-merger equitable claim could be pursued in an appraisal proceeding), and had determined that common law claims asserted before the effectuation of a merger were not foreclosed under Section 1105. See Mitchell, 656 F.3d at 212-13 (discussing Herskowitz, 857 F.2d at 187). The majority predicted that this Court would essentially adopt the Herskowitz court's approach and extend it to post-merger scenarios. See id. at 213.
In support of its conclusion, the majority also observed that nothing in the appraisal statute itself distinguishes between pre- and post-merger relief. Furthermore, the court explained that the BCL's approach was intended to prevent a dissident group of shareholders from blocking a merger desired by majority shareholders. In the judgment of the Third Circuit, a post-merger damages action would not contravene this aim. See Mitchell, 656 F.3d at 213-14 ("Barring [post-merger suits] would do little more than insulate alleged tortfeasors from responsibility for their conduct, an outcome which the Court in Jones feared."). In this regard, the majority explained that other jurisdictions permit separate suits for fiduciary breaches, because even the expanded 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." Id. at 214 (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983)). In particular, the majority noted that Delaware courts have appreciated that the valuation remedy and suits for self-dealing "serve different purposes and are designed to provide different, and not interchangeable, remedies." Id. (quoting Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1186 (Del. 1988)). Additionally, the majority expressed the concern that, if exclusivity were the rule, a shareholder who was deceived by the majority into voting for a merger would have no remedy at all for the breach of fiduciary duty (since such a shareholder will have foregone an assertion of dissenter's rights). See id. at 214-15.
Finally, the majority highlighted that Section 1105 provides that when there is "fraud or fundamental unfairness" the valuation remedy is not exclusive. See Mitchell, 656 F.3d at 215 (citing 15 Pa.C.S. §1105). The majority concluded:
We predict that the Supreme Court of Pennsylvania would hold that Pennsylvania's appraisal statute does not exclude separate, post-merger suits for damages alleging that majority shareholders breached their fiduciary duties to minority shareholders in the process of consummating a freeze out merger . . .. As we held in Herskowitz, "it is a clear holding that in Pennsylvania the statutory appraisal cause of action coexists with common law causes of action. Indeed no other rule makes sense, for the ...