Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557 (1984)

Under New York Business Corporation Law, shareholders who elect statutory appraisal rights in response to a merger generally forfeit other rights as shareholders, and any action they may bring alleging fraud or illegality is limited to actions seeking equitable relief, not monetary damages, in their individual capacity.

Summary

Minority shareholders of Old Shepard dissented from a merger and sought appraisal. They then sued derivatively and individually, alleging an inadequate price due to Vulcan’s controlling influence and director misconduct. The New York Court of Appeals held that exercising appraisal rights generally precludes other actions as shareholders. While an exception exists for actions alleging fraud or illegality, this exception is narrowly construed to allow only individual actions for equitable relief, not derivative suits or actions for monetary damages, as the appraisal proceeding provides an adequate legal remedy.

Facts

Shepard Niles Crane and Hoist Corporation (Old Shepard) merged into Shepcan Corporation, a subsidiary of Vulcan, Inc. Appellants, minority shareholders of Old Shepard, dissented from the merger and initiated appraisal proceedings to determine the fair value of their shares. Subsequently, they filed an action as individuals and derivatively on behalf of Old Shepard, alleging that Vulcan, while exerting control over Old Shepard, offered an inadequate price for their stock in the merger agreement. They also claimed that Old Shepard’s directors knew or should have known about untrue statements and material omissions in the merger agreement.

Procedural History

The respondent moved to dismiss the complaint. Special Term dismissed the derivative action claims but upheld the individual claims. The Appellate Division reversed, dismissing the complaint entirely. The New York Court of Appeals then reviewed the Appellate Division’s decision.

Issue(s)

1. Whether shareholders who dissent from a corporate merger and pursue their statutory appraisal rights can simultaneously maintain a derivative action on behalf of the merged corporation.

2. Whether these dissenting shareholders can maintain an action for money damages in their individual capacity for fraud alleged to have occurred in connection with the merger, absent a primary request for equitable relief.

Holding

1. No, because subdivision (k) of section 623 of the Business Corporation Law permits a dissenting shareholder to pursue an appropriate action only in his individual capacity and not as the instigator of a derivative suit.

2. No, because the exception to the exclusivity rule codified in subdivision (k) of section 623 permits a dissenting shareholder to bring an “appropriate action” in his individual capacity, which is construed to mean an action seeking some form of equitable relief, not monetary damages.

Court’s Reasoning

The court reasoned that upon filing a notice of election to dissent and seek appraisal, shareholders relinquish their other rights as shareholders, as per Section 623(e) of the Business Corporation Law, which states they cease “to have any of the rights of a shareholder except the right to be paid the fair value of his shares”. The exception in subdivision (k) allows a dissenting shareholder to bring an “appropriate action to obtain relief on the ground that such corporate action will be or is unlawful or fraudulent as to him”. However, the court interpreted “as to him” to mean that the exception applies only to individual actions, not derivative suits.

The court further clarified that an “appropriate action” under subdivision (k) is limited to actions seeking equitable relief, such as injunctions or rescission, rather than monetary damages. The court noted that subdivision (k) codified the common-law exception to the exclusivity rule that a proceeding in equity will lie when corporate action is alleged to be fraudulent or illegal. Allowing a legal action for damages would be unnecessarily duplicative, as the appraisal proceeding provides a full monetary recovery. The court stated, “Limiting the exception to equitable relief thereby serves the valid function of denying dissenting shareholders the ability to reopen prior appraisal proceedings and again seek the identical relief merely by alleging fraudulent or unlawful corporate conduct in relation to the merger.” Since the complaint lacked a primary request for equitable relief, the action for monetary damages was not permissible.