Complaint Breach of Contract Merger - PDF - PDF by fqk21358

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									                  Cohen v. Mirage, 62 P.3d 720 (Nev. 2003)1
          PROPERTY, BREACH OF CONTRACT, FIDUCIARY DUTY,
                       DERIVATIVE ACTION
Summary

         Appeal from a district court order dismissing a former shareholder’s complaint for failure
to state a claim upon which relief can be granted.

Disposition/Outcome

        Reversed in part, with respect to claims for rescission, breach of loyalty, breach of
fiduciary duty, and conspiracy regarding the merger. Affirmed in part, with respect to the order
dismissing derivative causes of action based upon operation of the casino’s race book, the loss of
land options, the impairment of the casino’s expansion, and recovery of fees. The case was
remanded.

Factual and Procedural History

         Appellant Harvey Cohen was a minority shareholder in the Boardwalk, a “Strip” property
located between the Bellagio and the Monte Carlo on Las Vegas Boulevard. The Mirage owned
twenty-three acres adjacent to the Boardwalk and had an interest in acquiring the property.
Adjoining the twenty-three acre parcel owned by Mirage were three parcels of vacant land in
which the board of directors, officers, and/or majority shareholders had personal interests and
options. The Mirage sought to negate these interests or options and purchase the three adjacent
properties for the purposes of expansion.
         Shortly thereafter, Mirage made an offer, in conjunction with a company named
Acquisition, to acquire the Boardwalk’s shares through a merger. Prior to or contemporaneous
with the merger, the Mirage acquired the surrounding three-parcels. On May 27, 1998, the
Boardwalk convened for a shareholder’s meeting, in which the majority shareholders approved
the merger. Cohen and other members of the class tendered their shares without exercising their
rights of dissenting shareholders under Nevida Revised Statutes 92A.380-92A.500e.2
         On September 28, 1999, Cohen filed suit for damages alleging breach of fiduciary duty
and/or loyalty by the majority shareholders, board of directors, and financial advisor. He also
alleged tortious interference claims against Mirage and Acquisition. Cohen asserted that the
Mirage conspired with the majority shareholders of Boardwalk to purchase the Boardwalk at an
artificially low price, in exchange for artificially high purchase prices for the surrounding three
parcels of land. Cohen contended that these shareholders and directors conspired, then agreed, to
approve or recommend the merger for an amount per share that was less than the fair market
value of the company. Finally, he alleged that the directors mismanaged the Boardwalk, causing
1
  By: Ryan J. Works
2
   Shareholders who oppose the merger are not forced to become stockholders in the new corporation. Instead, the
statutes give such shareholders three choices: (1) accept the terms of the merger and exchange their existing shares
for new shares; (2) dissent from the merger, compelling the merged corporation to purchase their shares pursuant to
a judicial appraisal proceeding; and/or (3) challenge the validity of the merger based on unlawful or wrongful
conduct committed during the merger process. NEV. REV. STAT. 92A.300-92A.500.


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decreased profits, and that they and majority shareholders usurped the corporate opportunities.
Cohen further alleged that the company which rendered a fairness opinion to the Boardwalk’s
shareholders was controlled by a former Boardwalk director who received special incentives to
prepare an inaccurate opinion.
        Respondents moved to dismiss for failure to state a claim upon which relief can be
granted, arguing that, even assuming the truth of the allegations, Cohen lacked standing to sue
for breach of fiduciary duty. Also, he failed to exercise his statutory right to dissent to the
merger within one year, pursuant to Nevada Revised Statutes 92A.300-92A.500, and, instead,
tendered his shares thereafter. Respondents stated that the statute is the exclusive remedy to the
dissenting shareholder who wishes to challenge the value of a merged corporation’s stock and,
because Cohen failed to exercise his statutory right to dissent, he lost the right to do so.
Respondents also claimed that because Cohen and the class were no longer shareholders, they
could not bring derivative claims for lost profits and usurpation of corporate opportunities.
Cohen did not challenge this assertion, but claimed that the merger was approved unlawfully,
therefore, the time frames set for an appraisal proceeding under Nevada Revised Statutes
92A.300-92A.500, did not apply. Cohen argued that he should be able, as an individual and as a
representative of the class, to establish that the merger was approved as a result of wrongful
conduct on behalf of the shareholders and directors. Finally, Respondents claimed that Cohen
knew about the alleged wrongdoing before he tendered his shares and, therefore, acquiesced in
the merger, which barred him from recovery.
        The Eighth Judicial District Court of Clark County dismissed part of Cohen’s complaint
regarding breach of fiduciary duty and/or loyalty by the Mirage Resorts, its majority
shareholders, board of directors, and financial advisors in connection with the merger between
Boardwalk and Mirage. Judge Valorie Vega dismissed the action for failure to state a claim
upon which relief can be granted.
        Justice Nancy Becker, writing the majority opinion for the Nevada Supreme Court, held
that (1) Nevada Revised Statutes 92A.300-92A.500 were not the exclusive remedy provisions for
actions relating to mergers based upon fraud or unlawful conduct; (2) a former shareholder lacks
standing to bring actions in the nature of derivative claims; and (3) the trial court abused its
discretion in denying the former shareholder’s motion to amend his complaint orally, regarding
the non-derivative claims, in order to clarify the damages sought.

Discussion

I. Claims for Fraudulent and Unlawful Merger3

       There are two circumstances in which a minority shareholder should be able to challenge
the merger process. A challenge may arise where a merger is unlawful or procedurally deficient,
or when there are allegations that the merger was accomplished through the wrongful conduct of
the majority shareholders, directors, or officers of the corporation. A shareholder may attempt to


3
  Cohen asserted: (1) Mirage paid more than fair market value for the adjacent land and options to purchase land to
entities owned or controlled by the Boardwalk’s directors, officers, or majority shareholders; (2) the excessive
payments were made in return for directors, officers, or majority shareholders’ votes to approve the merger; and (3)
the excessive fee was paid for the fairness opinion in return for the issuance of an opinion that would undervalue the
Boardwalk’s stock.


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hold these corporate actors liable for damages under theories of breach of fiduciary duty or
breach of loyalty.4
        Generally, a challenge to the validity of a merger should be asserted before the
completion of the merger.5 However, a dissenting shareholder may still pursue an action
alleging rescission and/or monetary damages on grounds of fraud or unlawfulness. Challenges to
the validity of a merger usually encompass either lack of fair dealing, lack of fair price, or both.
Lack of fair dealing implies that the board of directors did not make an independent, informed
decision to recommend approval of the merger.6 Sometimes these suits involve allegations that
the majority shareholders approved the merger at the expense of the minority shareholders.7
Cases about fair dealing frequently involve conflicts of interest where directors, officers, or
shareholders were improperly compensated or influenced in return for the approval of the
merger.8 Lack of fair price may involve similar allegations or claims that the price per share was
deliberately undervalued, and can also include negligent conduct.9
        Thus, a dissenting shareholder who wishes to attack the validity of a merger based on
improper actions must allege wrongful conduct that goes to the approval of the merger.
Shareholders are limited to appraisal-type actions unless they allege wrongful conduct or
procedures in the approval process. In addition, “[t]he term ‘fraudulent,’ as used in the Model
Act, has not been limited to the elements of common-law fraud; it encompasses a variety of acts
involving breach of fiduciary duties imposed upon corporate officers, directors, or majority
shareholders.”10 The court concluded that the term ‘fraudulent’ as used in Nevada Revised
Statutes 92A.380(2) has a similar scope and, therefore, is not the exclusive remedy provision for
actions relating to mergers based on fraud or unlawful conduct.
        Cohen and the other class members failed to exercise their dissenters’ rights under the
statute. Therefore, they are not entitled to maintain a court action based on a theory that the price
paid for shares pursuant to the merger was less than fair value. Nevertheless, Cohen maintained
an action for damages if the merger was based on fraud or misrepresentation. If successful in
showing fraud or misrepresentation, Cohen may be entitled to damages for the difference
between the merger price and the fair value price. The court held that the one-year period to
seek an appraisal remedy does not apply to claims for monetary damages arising from an
improper merger. Once shareholders prove that the merger was wrongfully accomplished, they
may also receive compensatory and punitive damages from either the surviving corporation or
the individuals whose wrongful conduct led to approval of the merger. The mere fact that
Cohen’s complaint alleges that his stock was worth more than the amount he received does not
constitute grounds for dismissing it under Nevada Revised Statutes 92A.380(2) so long as the
complaint contains allegations that the merger was approved through unlawful or fraudulent
conduct.



4
   Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999).
5
   Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1191 (Del. 1988).
6
   Weinberger v. UOP, Inc., 457 A.2d 701, 710-11 (Del. 1983).
7
   Alpert v. 28 Williams St. Corp., 473 N.E. 2d 19 (N.Y. 1984).
8
   Weinberger, 457 A.2d at 710-11.
9
   Id.
10
    Stringer v. Car Data Sys., Inc., 841 P.2d 1183, 1192-93 (Or. 1992).




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II. Derivative Claims11

        The primary reason articulated by the district court in its order dismissing the complaint
was that the claims were derivative in nature. A former shareholder has no standing to sue for
breach of fiduciary duty on a derivative claim, which is one brought by a shareholder for harm
done to the corporation.12 The allegations involving the race book are derivative in nature
because they involve a loss of revenue, which affects all shareholders. The allegations
concerning damages to the Boardwalk resulting from the acquisition of land or bonds through
agents or subsidiaries, as well as allegations that the price paid for the fairness opinion was
excessive, were also derivative in nature. Therefore, these damages were dismissed because
Cohen lacked standing since he was not a current shareholder.
        Respondents argued that, even if the complaint properly challenged the validity of the
merger, the district court did not err in dismissing the complaint because it was barred by the
doctrine of acquiescence. Generally, shareholders who vote in favor of merger have no standing
to contest the validity of a merger. Only a dissenting shareholder has standing. In addition, even
a dissenting shareholder loses the right to challenge a merger’s validity after one year.13
Nevertheless, misinformed shareholders retain their right to challenge the merger regardless of
their vote on the merger.14 To be barred, a shareholder must have known about all of the alleged
wrongdoing, misrepresentation, or omitted information at the time he voted to approve the
merger.
        Cohen knew of some alleged wrongful conduct at the time of the special shareholder’s
meeting. He raised questions about these issues, but the evidence was insufficient to determine
whether Cohen tendered his shares with full knowledge of improper conduct. Thus, the court
found that the order granting the motion to dismiss was unfounded and, therefore, reversed it.
The finding that the complaint only contained derivative complaints was reversed in part and
affirmed in part.

Dissent

ROSE, J. CONCURRING in part and DISSENTING in part:

        Justice Rose concurred with the fact that a shareholder can sue for fraud and illegality
despite Nevada Revised Statutes 92A.300-92A.500. However, Justice Rose also dissented in
part. In his opinion, a minority shareholder has the unconditional right to sue a corporation for
fraud and illegality, notwithstanding the fact that the minority shareholder tendered his shares
with knowledge of the wrongful conduct. Therefore, Justice Rose would rather the doctrine of
acquiescence not apply when fraud and illegality are elements of the merger. Furthermore,
Justice Rose stated that an aggrieved shareholder should be able to sue for any damages

11
    Cohen asserted: (1) Improper management of the race book causing lost profits; (2) Mirage used agents or
subsidiaries to acquire the Boardwalk bonds so as to avoid generating an increase in stock and impairing the
Boardwalk’s ability to expand; (3) the Boardwalk management and/or Mirage caused the Boardwalk to lose land
options or opportunities to purchase land for expansion; and (4) the price paid for the fairness opinion was
excessive.
12
   See NEV. R. CIV. P. 23.1; Keever Jewelry Mountain Mines, 100 Nev. 576, 577 (Nev. 1984).
13
   Kahn v. Household Acquisition Corp., 591 A.2d 166, 176 (Del. 1991).
14
   Clements v. Rogers, 790 A.2d 122, 1236-38 (Del. Ch. 2001).


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proximately caused by illegal or fraudulent acts. The majority opinion restricted the aggrieved
shareholder’s right to sue by classifying some claims as derivative that were properly
characterized as individual.

Conclusion

        It is much easier for Cohen, and future challengers, to prove fraudulent mergers since the
common law elements of fraud no longer restrict its definition. Officers, directors, and
shareholders can be held liable for fraudulent mergers upon a showing of breach of fiduciary
duties. Therefore, the district court erred in not allowing Cohen to amend his complaint to
clarify that he was seeking rescission of the merger and/or monetary damages based on invalidity
of the merger. On the other hand, the district court was proper in dismissing claims derivative in
nature as long as the claims were not necessary to the unlawfulness or fraudulent nature of the
merger. Former shareholders who are fully informed of the facts supporting their challenge to
the merger, before approving the merger or tendering their shares for the merger price, have
acquiesced in the merger Mere knowledge of some wrongdoing is not enough. This may lead to
a case by case analysis of what constitutes full knowledge and may allow former shareholders to
survive summary judgment in these types of actions.




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