California Court of Appeal, Fourth District, Third Division
Appeal from a judgment of the Superior Court of Orange County, Kim Garlin Dunning, Judge. Affirmed in part and reversed in part. (Super. Ct. No. 30-2011-00439984)
[Copyrighted Material Omitted]
Faruqi & Faruqi, David E. Bower, Culver City, and Barbara Rohr for Plaintiff and Appellant Laverne Busse.
Robbins Geller Rudman & Dowd, Randall J. Baron, Kevin K. Green and David T. Wissbroecker, San Diego, for Plaintiff and Appellant Sydne & Allan Bortel Living Trust U/A/D 9/14/1998.
Jones Day, Eric Landau, Erica L. Reilley, Travis Biffar, Irvine, and Kevin H. Logan, Los Angeles, for Defendants and Respondents United Panam Financial Corp., Ravi Gandhi, Mitchell Lynn, Luis Maizel, Preston Miller and James Vagim.
Gibson, Dunn & Crutcher, Joel A. Feuer, Los Angeles, and Jeremy Stamelman for Defendant and Respondent Guillermo Bron.
Skadden, Arps, Slate, Meagher & Flom, Garrett J. Waltzer, Richard Horvath, Jr., Palo Alto, and Eric Waxman, Los Anegeles, for Defendants and Respondents Pine Brook Capital Partners, L.P., Pine Brook Capital Partners (SSP Offshore) II, L.P., Pine Brook Capital Partners (Cayman), L.P., and Pine Brook Road Associates, L.P.
Occasionally we are faced with a difficult question of statutory interpretation that qualifies as a " Halbert's Lumber issue." (E.g. Halbert's Lumber, Inc. v. Lucky Stores, Inc. (1992) 6 Cal.App.4th 1233, 1235, 8 Cal.Rptr.2d 298 [" a real doozy of a puzzle" ].) This is such a case, involving section 1312 of the Corporations Code, which generally governs the rights of minority shareholders who dissent from mergers and buyouts. No published case has confronted the problem of how subdivision (b) of section 1312— which involves buyouts when parties to a merger are under common control— interacts with [166 Cal.Rptr.3d 522]subdivision (a) of section 1312, which— we know because the Supreme Court said so in Steinberg v. Amplica, Inc. (1986) 42 Cal.3d 1198, 233 Cal.Rptr. 249, 729 P.2d 683— limits the rights of dissenting minority shareholders to an independent appraisal of the value of their shares.
Here, the trial judge was faced with two radically different views of section 1312, subdivision (b): Plaintiffs, former minority shareholders in United Panam Financial Corporation, assert subdivision (b) should be read as a broad
exception to Steinberg's interpretation of subdivision (a). Under their thinking, in cases of common control, subdivision (b) allows dissenting minority shareholders all common law rights, including the right to sue the majority owners and collaborating board members for damages arising out of breach of fiduciary duty. (Cf. Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108, 81 Cal.Rptr. 592, 460 P.2d 464 [general fiduciary duty of majority shareholders not to " use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority" ].) Defendants, on the other hand, largely centered around the company's alleged controlling shareholder, Guillermo Bron, proffer a more modest view of the subdivision (b) exception: In addition to the appraisal rights which all shareholders have in all situations, in common control situations dissenting minority shareholders have the additional right, if they timely choose to use it, of having a merger itself set aside or rescinded. But they still do not have any right to sue for damages for breach of fiduciary duty.
The trial judge chose the more modest reading of subdivision (b), and, accordingly, sustained the defendants' demurrer to the minority's suit for " rescissionary damages" based on breach of fiduciary duty. She was correct to do so and we affirm that part of the judgment. We are convinced that when section 1312 is read in light of its history and its judicial construction, no other result is tenable.
However, since the minority shareholders have never withdrawn their alternative request to set aside the merger, we cannot affirm the judgment entirely. The minority shareholders did sufficiently allege common control of the corporation, and subdivision (b) does, plainly, allow for suits to set aside or rescind mergers in common control situations. Therefore, we must reverse and remand for resolution of that question.
A. Standard of Review
This case comes to us after a demurrer to the minority's second amended complaint was sustained without leave to amend. Thus the minority receives the benefit of having its version of the facts accepted. What should be stressed here, [166 Cal.Rptr.3d 523] however, is that the minority's second amended complaint also
receives the benefit of reasonable inferences drawn from the facts alleged. (E.g., Kruss v. Booth (2010) 185 Cal.App.4th 699, 727, 111 Cal.Rptr.3d 56 [rejecting corporate directors' arguments that alleged self-dealing was otherwise justified because defenses, which might be " valid" in " other procedural contexts," were unavailing on demurrer].)
The standard of review is particularly important in this case because the second amended complaint alleges that defendant Guillermo Bron has always controlled about 40 percent of Panam Financial's stock throughout its history, and " no director whom Bron has supported for election has ever failed to receive the requisite number of votes for election or reelection." The pleading also alleges that in public filings in 2007 and 2008, the company actually admitted Bron would " have substantial influence" over the " management and affairs" of the company, " including the ability to control substantially all matters submitted to our shareholders for approval."
Against these allegations is set the text of section 1312, subdivision (b) itself. The statute is clear that allegations of common control can be founded on even indirect control. It opens with the language: " If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party...." (Italics added.) So, if the second amended complaint states facts that give rise to an inference of even indirect control, that is sufficient to defeat a demurrer.
While no case law has yet interpreted subdivision (b)'s indirect common control language, we do have the holding in Hellum v. Breyer (2011) 194 Cal.App.4th 1300, 123 Cal.Rptr.3d 803 to help us. There, three " outside" — meaning nonemployee— directors of a five-director company were sued under a Corporations Code statute (§ 25504) which provides for the liability of everyone who " directly or indirectly controls" an entity that sells unqualified securities. (See Hellum, supra, 194 Cal.App.4th at pp. 1306-1307, 123 Cal.Rptr.3d 803.) The appellate court reversed a judgment on a sustained demurrer, reasoning the plaintiffs' allegation that the three outside directors directly or indirectly controlled a lending entity, a corporation called Prosper Marketplace, Inc., were sufficient at the pleading stage. (See id. at pp. 1315-1318, 123 Cal.Rptr.3d 803.) The Hellum court thought it enough the defendants had the power to control the general affairs of the corporation. ( Id. at p. 1317, 123 Cal.Rptr.3d 803.)
Secondarily, Hellum emphasized that control is often a factual question not readily susceptible to disposal on the pleadings. The court reasoned
that dismissal based on insufficiency of allegations of control " is appropriate only when ‘ a plaintiff does not plead any facts from which it can reasonably be inferred the defendant was a control person.’ [Citations.]" ( Hellum, supra, 194 Cal.App.4th at p. 1317, 123 Cal.Rptr.3d 803.) Thus the allegations in Hellum that the three outside directors had ownership interests in the company (to be sure, the three had a " collective" ownership interest exceeding 50 percent) giving them " significant voting power," plus their management responsibility under the company's by-laws, their [166 Cal.Rptr.3d 524] presumptive authority to sign key corporate documents, and their affiliation with outside firms on which the company relied, all supported the " inference" they could directly or indirectly influence the company's " corporate policies and decisionmaking." ( Id. at pp. 1317-1318, 123 Cal.Rptr.3d 803.)
Applying Hellum to the case at hand, we think the allegations of Bron's common control sufficient. While Bron personally only controlled about 40 percent of Panam Financial's stock, he still had " significant voting power" over the company. In Hellum, more than 50 percent was split three ways; here 40 percent is in the hands of one person and Bron's 40 percent " voting power" is further augmented by the absence of any indication anyone else was even close to his 40 percent at the time of the buyout. Additionally, there is his position as chairman of the board, his acknowledged power over the general affairs of the corporation, and the filings acknowledging his power to formulate key corporate policy. Together, as in Hellum, this congeries of facts readily supports an inference of at least indirect control, though such a conclusion seems no more than common sense anyway. A person who owns 40 percent of a company with the rest of the ownership not concentrated in any rival can easily put his allies on the board.
Moreover, the complaint alleges all of Bron's fellow directors owe their jobs to him, so they are dependent on his good graces. And of course in other contexts dealing with questions of indirect control, courts have recognized that economic dependence means indirect control. (E.g., S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 355, 256 Cal.Rptr. 543, 769 P.2d 399 [cucumber harvesters not independent contractors but really controlled by growers because economically dependent on them]; Yellow Cab Cooperative, Inc. v. Workers' Comp. Appeals Bd. (1991) 226 Cal.App.3d 1288, 1297-1298, 277 Cal.Rptr. 434 [indicia of indirect control by taxi company over taxi drivers who were dependent on the company for business].)
Like all reviews on demurrer, the standard of review in this case is a combination of giving the pleading the benefit of all facts properly alleged and reasonable inferences drawn therefrom, and then, in the light of those facts and inferences, deciding de novo whether the pleading has stated a cause of action. Under this standard, we conclude common control has been properly alleged.
B. The Facts Under the Standard of Review
Having taken eight paragraphs to explain how the standard of review controls the facts of the case before us, it will take us but one to set them forth: Bron founded Panam Financial in 1994. Basically, the corporation makes subprime loans on used cars, i.e., auto loans to the less-than-one-hundred-percent creditworthy. The company went public in the late 1990's. By 2006 the corporation's shares were selling at $26 per share, but the recession hit the company hard, and share prices dove to $5 per share at the beginning of 2008. By the end of 2008 share prices were as low as $1.59. However, Panam Financial management instituted a number of cost [166 Cal.Rptr.3d 525] cutting measures (some draconian— including laying off 310 of its 469 employees), and reduced its portfolio of shaky auto loans, so that by May 2010, the Bron group thought the company a good opportunity to take private to benefit themselves. Accordingly, they developed a buyout scheme in which Bron and his partner, the Pine Brook Financial Group, would acquire the corporation's stock in the company on the cheap. At the time, Bron owned 38 percent of the company's stock and controlled the board of directors. So the Bron group had the directors set up a supposedly independent special committee to value the stock for a buyout. The independent committee, however, didn't fight very hard for a good price, and in mid-November 2010 the committee agreed to a ...