ATTORNEYS FOR APPELLANTS
Eric Allan Koch
Timothy J. Storm
ATTORNEYS FOR APPELLEES
Joseph H. Yeager, Jr.
Thomas A. Withrow
O. Wayne Davis
B. Keith Shake
Geoffrey M. Grodner
Kendra Gowdy Gjerdingen
Lonnie D. Johnson
Id. at § 23-1-42-1. The effect of this chapter is that a
party who acquires ownership or the power to direct the voting power with
respect to control shares is prohibited from exercising the accompanying voting power unless
and until that power is granted by vote of a majority of the
remaining shareholders. Id. at § 23-1-42-9.
It is not entirely clear how the plaintiffs seek to deploy the control share statute. They contend that the merger of GAC into CIHC was void because the control share statute nullified any action taken by GAC by virtue of shareholder action in which Conseco purportedly exercised or directed the exercise of 20 percent or more of the voting power of GAC. This misconceives the effect of a control share transfer. The effect of the application of the statute is not to disable all shares owned by the acquirer. Rather it prevents only the voting of the shares acquired in the control share acquisition, i.e. only the shares in the regulated transaction are prevented from voting until the remaining shareholders approve. There appears to be no claim here that the board of GAC was not elected by a majority of other shares, so even if the statute disabled some shares from voting, the challenged actions appear to have been taken by properly elected directors. Similarly, the only shareholder action appears to be the merger itself, which appears to have been presented to a meeting at which the vast majority of Consecos shares were acquired from GAC as originally issued shares. These, by definition, are not subject to the control share statute, section 23-1-42-2, and are sufficient in number to approve the merger.
In any event, we do not find a transaction subject to the control share statute. The gist of the minority shareholders complaint is not that Consecos acquisition of the Algoods shares constituted a control share acquisition. Rather they contend that when Conseco acquired the power, through the Stockholders Agreement, to direct the Algoods to vote for Consecos nominees to GACs six-member board of directors, Conseco acquired control shares as that term is used in the chapter. The remaining shareholders were never asked to vote to grant voting power to the Algoods shares after Conseco acquired the right. The plaintiffs contend that the transaction disabled those shares, and therefore any subsequent action taken by GAC requiring the voting of those shares is void.
The trial court denied the plaintiffs request for an injunction against consummation of the merger. The trial court focused on Consecos acquisition of the shares of stock, rather than the power to direct voting. To that extent, the trial court correctly found the statute did not apply because the shares acquired by Conseco were not already issued and outstanding. In dismissing the plaintiffs complaint, the trial court also stated that the Algoods agreement to vote their shares for Consecos nominees was not a control share acquisition. This appears to have been based on the defendants contention that a contractual commitment to vote shares is not subject to the statute. We do not agree with that claim, but agree that the transaction was nevertheless exempt from the statute for the reasons explained below.
The Court of Appeals agreed that there was no violation of the Control Share Acquisition Statute, but relied on its interpretation of the legislative intent behind the statute, as expressed in the official comments to the Control Share Acquisition chapter. The court quoted the comments opening paragraph, which discussed the intent of the legislature to allow shareholders to vote on a potentially fundamental change in the nature of their corporationnamely, its shift to being an entity in which a single shareholder acquires a significant level of dominance over the future governance of the corporation. I.C. § 23-1-42, Introductory Cmt. The court reasoned that what Conseco acquired was an already-existing single block of voting rights and, thus, there was no fundamental change in the nature of GAC. In other words, the effect of the Stockholders Agreement was simply that GAC went from a corporation dominated by the Algoods to a corporation dominated by Conseco.
The plaintiffs contention as to the Control Share Statute proceeds from the foundation that the Stockholders Agreement, by giving Conseco the power to direct voting of the Algoods shares in election of directors of the GAC Board, constituted a control share acquisition within the meaning of the statute. Plaintiffs are correct in that contention. Because Conseco gave value for the right to direct the voting of these shares, the Stockholders Agreement granted a proxy coupled with an interest and not a revocable proxy of the kind typically solicited for shareholder meetings of public companies. 5 William Meade Fletcher, Cyclopedia of the Law of Private Corporations § 2062 (perm. ed., rev. vol. 1996). Unlike a revocable proxy, this constituted an acquisition of the power to direct the voting for the Board and is therefore subject to the statute. The defendants contend that the plaintiffs view of the Control Share Acquisition Statute would result in the invalidating of proxies generally. We do not agree. It is true that a proxy is a grant of authority to exercise voting power. But it is not a grant of the power to direct the vote. With limited exceptions, conventional proxies are revocable at any time. The Stockholders Agreement did not expire until the debentures represented by the Securities Purchase Agreement were no longer outstanding and required the Algoods to vote as Conseco directed. The official comment to Indiana Code section 23-1-42-3, defining interested shares, explains this:
The critical inquiry in determining whether shares are interested shares is who has the ultimate power to exercise or direct the exercise of the voting power of the shares on the date in question . . . . [S]hares do not become interested shares simply because the owner grants a revocable proxy . . . . In that case, the beneficial owner, rather than the proxy holder, retains ultimate control over the exercise of the voting power of the shares.
In contrast, these commitments to vote for the Board were given for consideration
and became enforceable obligations. Fletcher, supra, at § 2062. As such,
they became subject to the control share statute unless some exemption applies.
Here, an exemption does apply.
The shares to which the provision related were originally issued to the Algoods who, at the time, were the only shareholders. Section 23-1-42-2(e) of the statute provides an exemption from the definition of control share acquisitions. It states:
The acquisition of shares of an issuing public corporation in good faith and not for the purpose of circumventing this chapter by or from:
(1) any person whose voting rights had previously been authorized by shareholders in compliance with this chapter . . .
does not constitute a control share acquisition, unless the acquisition entitles any person . . . to exercise or direct the exercise of voting power of the corporation in the election of directors in excess of the range of the voting power otherwise authorized.
As this subsection explains, and as the comment to it makes clear, where
the voting power that is being transferred does not exceed a level of
control that was already properly authorized, the transfer of that voting powerthrough the
sale of shares or, in this case, by contractis not subject to another
authorizing vote by the shareholders. As the comment points out, Subsection (e)
was included because such transfers generally will not . . . significantly alter
the existing pattern of voting power concentration in the corporation. I.C. §
23-1-42-2(e), Official Cmt. Simply put, a shareholder who purchases shares in a
corporation that has, at the time, a dominant shareholder, has no complaint if
that dominant shareholder transfers its holdings to another. This is basically the
point on which the Court of Appeals relied. We agree with the
theory adopted by the Court of Appeals, but note that the statute itself
Although GACs initial prospectus is not included in the record, the plaintiffs complaint states that after GACs initial public offering in April 1995 only 32 percent of the corporations shares were in public hands. Otherwise stated, 68 percent remained owned by Algood interests. This exceeds 50 percent and was a transfer in the highest range of voting power defined by section 23-1-42-1. The transfer to Conseco did not (indeed no transaction could) raise Consecos voting power to a higher range. As a result, the exception of subsection 2(e) applies.
It is correct that this exception arguably does not literally apply because the Algood holdings were acquired at the initial founding of the corporation and were not subject to a vote of shareholders. At the time the Algoods acquired their initial shares GAC was presumably exempt from the Control Share Statute because it had fewer than 100 shareholders. I.C. § 23-1-42-4. In any event, the initial issue to the Algoods was not subject to the Control Share Statute because the Algoods acquired the shares from GAC in a transaction approved, indeed designed, by GACs organizers. Thus there was never a shareholder vote granting voting rights to the Algoods. But the voting rights of the original shares issued to the Algoods were, we think, authorized by the shareholders of the closely held corporation when the initial shareholders acquired stock in the corporation with that capital structure. When the initial public offering took place, the public shareholders bought into the existing arrangement, presumably with full knowledge of the Algoods dominant voting position. We can see no reason why a majority shareholder who acquired that status from the outset of the corporation in an exempt transaction should be in any different position from one who acquired the shares after the company became publicly owned and received shareholder approval under the Act. Accordingly, the Algoods were able to transfer their shares or grant to Conseco the power to direct the voting of their shares without further shareholder action.