DEUTSCH v. BLUE CHIP STAMPS (1981)

This consolidated appeal arises from two action filed by appellant, one of which was a class action and the other a shareholder derivative suit. Appellant was formerly a shareholder of See's Candy Shops, Inc. Respondents' demurrer to the class action complaint was granted with leave to amend only to frame a cause of action for a judicial appraisal of her stock. The trial court also ruled that appellant was to post $15,000 security in the derivative action. From the judgment of dismissal following appellant's failure to amend and appellant's failure to post the security, this appeal followed.

The actions involved here concern a short-form merger of the See's Candy Shops, Inc., in 1978 pursuant to Chapter 11 of the Corporations Code in which Blue Chip Stamps, which owned 99% of the stock of See's prior to the merger, became the owner of 100% of the stock of a new See's. The complaints allege that, when Blue Chip Stamps became the majority shareholder of See's, See's paid excessive dividends to all of its shareholders, including appellant and other minority shareholders and that See's should have retained the dividends to use for its own expansion and investment opportunities.

In May 1978 the minority shareholders of See's were sent a notice informing them that See's would be merged into See's parent pursuant to the short form merger provisions of the Corporations Code of the State of California and that, after such merger, See's parent would change its name to See's Candy Shops, Inc. The notice further stated that the boards of directors of See's parent and See's had established the fair market value of each outstanding share of See's at $55. In a cover letter accompanying the notice, the shareholders were informed that the reason for the merger was that Blue Chip Stamps desired the “simplification and flexibility” which would result from having See's become a 100% subsidiary of Blue Chip Stamps. The letter further informed the shareholders of their remedies should they feel that $55 per share was too low. The letter stated that they must undertake the following in order to preserve their rights under California law: (1) make written demand on See's parent for payment of the fair market value of their shares; (2) submit the share certificates to the transfer agent; and (3) file a lawsuit if See's parent refuses to pay the price demanded by the dissenting shareholder. The letter enclosed copies of California Corporations Code sections 1300, 1301, 1302, 1303, and 1304.

On June 8, 1978, the merger was consummated pursuant to the California Corporations Code. On that same date appellant sent a letter to the transfer agent demanding $150 per share for her shares. That offer was rejected and was followed by this action. The complaint sought recision of the merger, general damages, exemplary damages, and imposition of a constructive trust for the benefit of See's upon dividends of See's and all profits accruing therefrom, which were received by Blue Chip Stamps. The complaint in the derivative action is essentially the same as that for the class action.

I

The trial court was correct in sustaining respondents' demurrer because appellant's exclusive remedy is the judicial appraisal of the value of her stock pursuant to Chapter 13 of the Corporations Code. California Corporations Code, section 1312(a) provides that “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․” When section 1312(a) was enacted to replace section 4123, the Legislature also enacted section 1312(b) as a limited exception to section 1312(a). Section 1312(b) provides: “… 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․” This allows an election of remedies for the dissenting shareholder. He may attack the merger and relinquish any right to a cash demand or he may make a cash demand and relinquish any right to attack the merger. Professor Marsh, who participated in the drafting of section 1312 explained the election of remedies created by section 1312(b) as follows: “This provision [§ 1312b] … eliminates the exclusivity of the appraisal remedy in connection with a reorganization, in any case where the corporations involved in the reorganization transaction are under common control. However, it does require an election of remedies so that a shareholder who has demanded an appraisal cannot thereafter bring an action under this section to attack the validity of the reorganization, and conversely, a shareholder who has brought such an action cannot thereafter demand an appraisal.” (H. Marsh, Jr., Cal.Law & Prac. (1977), § 18.26 at p. 521.) Because Mrs. Deutsch, in a letter dated June 8, 1978, elected to demand cash for her shares, she has elected her remedy and is precluded from attacking the merger. Because she is precluded, she is also precluded as the representative of a class.

Appellant seeks to avoid the exclusivity of the appraisal remedy by requesting the court to carve out an exception to the statutory provision. Appellant cites cases from other jurisdictions which have made an exception when the purpose of the merger was solely to freeze out the minority without a valid business purpose. The cases are inapplicable here. In Gabhart v. Gabhart, Ind. (1977), 370 N.E.2d 345 the appraisal remedy was the sole remedy and the shareholders were precluded from attacking the merger because they failed to take a necessary procedural step. In the instant case the shareholders were not precluded from attacking the merger until they chose to elect a cash settlement for their shares. Those shareholders have made their choice and it is through their own actions that they are precluded from maintaining an action. Any shareholder who has not demanded cash may still attack the merger.

The other cases cited by appellant (Singer v. Magnavox (Del.1977) 380 A.2d 969 & Roland International Corp. v. Najjar (Del.1979) 407 A.2d 1032) are inapplicable because section 1110 of the California Corporations Code was enacted to enable a corporation which owned 90% of another corporation to cash out the minority shareholders. This is not a breach of any fiduciary duty. Professor Marsh describes the provisions of section 1110 as follows: “It [[[[the short form merger section] is also not intended to require that the minority interest to be given a common stock of the parent corporation rather than cash. That proposal was made to the drafting committee and expressly rejected. The provisions requiring such nonredeemable common stock to be consideration in connection with certain mergers or other reorganizations expressly excepted in each instance a short form merger from the prohibition of the payment of cash to eliminate minority shareholders.” (Id. § 18.26 at p. 522.)

The legislative intent in enacting the section is clear and the language of the code is equally free from ambiguity. Appellant has elected her remedy and must pursue it under the appraisal statute. If there is to be an exception to section 1312(b), it is for the Legislature to create not the courts.

II

The trial court was correct in ordering appellant to post security in the derivative action. Under California Corporations Code section 800(c)(1) the court may require security to be posted on the following grounds: “That there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders.”

The stockholders' derivative action is one in equity. Section 1312(a) precludes any action “at law or in equity.” Hence the derivative action will fall for the same reason that the class action must fall. It follows that the trial court acted correctly in requiring plaintiff to post security.

As we understand plaintiff, she contends that the derivative action would reach the alleged misconduct of Blue Chip Stamps in declaring excessive dividends prior to the merger was undertaken. That contention must fail.

Here, the merger was consummated in June 1978 and the corporation on whose behalf appellant attempts to maintain this action is no longer in existence. The benefit cannot flow to a nonexistent entity. Section 1107 of the Corporations Code prescribes the following effects of a merger: “(a) Upon merger pursuant to this chapter the separate existence of the disappearing corporation ceases and the surviving corporation shall succeed without other transfer, to all the rights and property of each of the disappearing corporations and shall be subject to all the debts and liabilities of each in the same manner as if the surviving corporation had itself incurred them. * (c) Any action or proceeding pending by or against any disappearing corporation may be prosecuted to judgment, which shall bind the surviving corporation, or the surviving corporation may be proceeded against or substituted in its place.” (Emphasis added.)

It is clear that the disappearing corporation no longer exists and any action against it must have been brought before the merger. This is true whether the corporation is a plaintiff or defendant. California law is clear that a corporation is not subject to suit unless the action was pending prior to the merger. (See, Asher v. Pacific Power & Light Co. (N.D.Cal.1965) 249 F.Supp. 671.) In J. C. Peacock, Inc. v. Hasko (1960) 184 Cal.App.2d 142, 7 Cal.Rptr. 490, the court stated (at p. 151, 7 Cal.Rptr. 490): “It seems clear that the exception referred to in the aforementioned section is applicable to only ‘pending’ actions or proceedings. Had the Legislature intended to permit constituent corporations to initiate and maintain any actions it would not have used the work ‘pending.’ Under the aforementioned code section, a pending action can be maintained by the constituent corporations, but an action or proceeding not yet begun cannot be initiated in the name of the dead (constituent) corporation․ It is fundamental that an action brought in the name of a nonexistent plaintiff, natural or artificial, is a nullity.” (Italics in original.) As the corporation itself cannot maintain this suit on its own behalf, appellant cannot maintain the suit on behalf of the corporation.¹

The judgments are affirmed.

FOOTNOTES

1.  Although raised in the oral argument before us, we express no opinion on whether, had plaintiff elected to pursue the appraisal procedure, she could have relied on the alleged premerger conduct of Blue Chip Stamps to enhance the redemption price of her stock.

KINGSLEY, Acting Presiding Justice.

WOODS and McCLOSKY, JJ., concur. Hearing denied; MOSK, J., dissenting.