Friday, October 19, 2012

Rauch v. RCA Corporation case brief

861 F.2d 29 (2nd Cir. 1988)

-The plaintiff owned 250 preferred shares of RCA.
-Defendant General Electric Company (”GE”) tried to acquire RCA, and set up a subsidiary, Gesub, Inc., to carry out the acquisition.
-Both RCA and Gesub shares were converted to cash.  Gesub then merged into RCA.
-The merger terms priced Plaintiff’s stock at $40.00 per share.
-A provision in RCA’s certificate of incorporation provided a $100 per share value if Plaintiff’s shares were ever redeemed by RCA.
-Plaintiff’s argues that the merger acts as an end-around to avoid paying Plaintiff her $100 per share.

-The Plaintiff shareholder filed a class action that challenged the propriety of a merger.
-The district court dismissed plaintiff's complaint pursuant to Fed. R. Civ. P. 12(b)(6).
-The district court had held that plaintiff's action was barred by Delaware's doctrine of independent legal significance.
-On appeal, the court found the merger agreement complied fully with Delaware General Corporation Law.
-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.

1.  Under Delaware law is a conversion of shares to cash that is carried out in order to accomplish a merger legally distinct from a redemption of shares by a corporation?
2.  The issue is whether the merger between Defendant corporations that resulted in a $40 per share payout to Plaintiff was invalid because it violated the redemption provision of RCA’s certificate of incorporation.

1.  Yes.  Under Delaware law a conversion of shares to cash that is carried out in order to accomplish a merger legally is distinct from a redemption of shares by a corporation.
2.  The court held the merger is valid and therefore Plaintiff’s action is dismissed under the doctrine of independent legal significance. The merger complied with Delaware’s merger statute, and Defendants had the right to choose to merge rather than redeem the shares. Delaware has given different corporate statutes equal dignity which allows a company to pursue different avenues without having to worry about violating other alternatives.

The doctrine of independent legal significance simplifies the complexity of corporate law because once a corporation satisfies the elements of one provision they will not have to worry about the large amount of other provisions that could possibly be applicable to a transaction.

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