Rauch v. RCA Corp. - 861 F.2d 29 (2d Cir. 1988)

Rule:

Minority stock interests may be eliminated by a merger. And, where a merger of corporations is permitted by law, a shareholder's preferential rights are subject to defeasance. Stockholders are charged with knowledge of this possibility at the time they acquire their shares.

Facts:

In 1985, General Electric Company and RCA Corporation entered into an agreement of merger. Pursuant to the terms of the agreement, each share of RCA common stock would be converted into $ 66.50, each share of $ 3.65 cumulative preference stock would be converted into $ 42.50, and each share of $ 3.50 cumulative first preferred stock would be converted into $40.00. Subsequently, plaintiff, a holder of 250 shares of Preferred Stock, commenced the present diversity class action on behalf of a class consisting of the holders of Preferred Stock. Plaintiff claimed that the merger constituted a "liquidation or dissolution or winding up of RCA and a redemption of the Preferred Stock, as a result of which holders of the Preferred Stock were entitled to $ 100 per share in accordance with the redemption provisions of RCA's certificate of incorporation, that defendants were in violation of the rights of the holders of Preferred Stock as thus stated; and that defendants thereby wrongfully converted substantial sums of money to their own use. Plaintiff sought damages and injunctive relief. Defendants moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6), and plaintiff cross-moved for summary judgment. The district court concluded that the transaction at issue was a bona fide merger carried out in accordance with the relevant provisions of the Delaware General Corporation Law. Accordingly, the district court held that plaintiff's action was precluded by Delaware's doctrine of independent legal significance, and dismissed the complaint. Plaintiff sought review of the judgment. 

Issue:

1. Did the transaction at issue violate the rights of the holders of the Preferred Stock?  
2. Was the transaction at issue a bona fide merger carried out in accordance with the relevant provisions of the Delaware General Corporation Law? 

Answer:

1) No. 2) Yes.

Conclusion:

On appeal, the court found the merger agreement complied fully with Delaware General Corporation Law under Del. Code Ann. tit. viii, § 251(c) (1983). The court rejected plaintiff's contention that the transaction between defendant corporations was essentially a redemption rather than a merger. The court held that defendants were entitled to choose the most effective means to achieve the desired reorganization subject only to their duty to deal fairly with the minority interest. The court held that the district court properly dismissed plaintiff's complaint because it was barred by Delaware's doctrine of independent legal significance. The court affirmed the district court's judgment, which dismissed plaintiff's complaint.