ATTORNEYS FOR APPELLANTS: ATTORNEYS FOR APPELLEES:
ERIC ALLAN KOCH THOMAS A. WITHROW
Applegate, McDonald & Koch, P.C. O. WAYNE DAVIS
Bloomington, Indiana B. KEITH SHAKE
Henderson, Daily, Withrow & DeVoe
TIMOTHY J. STORM Indianapolis, Indiana
Storm & Gottesman
Chicago, Illinois GEOFFREY M. GRODNER
LONNIE D. JOHNSON
Mallor, Clendening, Grodner & Bohrer, LLP
JOSEPH H. YEAGER
DAVID K. HERZOG
MICHAEL J. VALAIK
Baker & Daniels
COURT OF APPEALS OF INDIANA
RODNEY E. YOUNG, JASON R. BANACH, )
KAREN T. BANACH, TED E. HALL, and )
MICHAEL E. HALL, on behalf of themselves )
and all others similarly situated, )
vs. ) No. 53A04-9911-CV-498
GENERAL ACCEPTANCE CORPORATION, )
MALVIN L. ALGOOD, RUSSELL E. ALGOOD, )
ROLLIN M. DICK, EUGENE L. HENDERSON, )
DONALD E. BROWN, JAMES J. LARKIN, )
JOHN G. ALGOOD, JANET ALGOOD, )
SHIRLEY COOK, JEFFREY J. ALGOOD )
IRREVOCABLE TRUST, DAVID R. ALGOOD )
IRREVOCABLE TRUST, STUART R. ALGOOD )
IRREVOCABLE TRUST, and CONSECO, INC., )
APPEAL FROM THE MONROE CIRCUIT COURT
The Honorable Richard D. McIntyre, Sr., Special Judge
Cause No. 53C02-9808-CP-1184
November 22, 2000
OPINION - FOR PUBLICATION
Rodney E. Young, Jason E. Banach, Karen T. Banach, Ted E. Hall and
Michael E. Hall, on behalf of themselves and all others similarly situated (referred
to collectively as the common shareholders) sued General Acceptance Corporation (GAC), Malvin L.
Algood, Russell E. Algood, Rollin M. Dick, Eugene L. Henderson, Donald E. Brown,
James J. Larkin, John G. Algood, Janet Algood, Shirley Cook, the Jeffrey J.
Algood Irrevocable Trust, the David R. Algood Irrevocable Trust, the Stuart R. Algood
Irrevocable Trust, and Conseco, Inc. (referred to collectively as the defendants) for breach
of fiduciary duties, violation of the Indiana Control Shares Acquisition Statute and appraisal
rights under the Indiana Dissenters Rights Statute arising from the merger of GAC
with a wholly-owned subsidiary of Conseco. The defendants moved for summary judgment,
and the common shareholders filed a cross-motion for summary judgment. The trial
court granted the defendants motion and denied the common shareholders motion. The
common shareholders now appeal.
The common shareholders raise the following restated issues for our review:
Whether the trial court properly dismissed Count XI
of the common shareholders complaint
alleging violation of the Control Shares Acquisition Statute for failure to state a
Whether the trial court properly granted summary judgment on Counts I through X
of the common shareholders complaint on finding that the Indiana Dissenters Rights statute
barred such claims and also that the claims asserted were derivative and should
have been asserted by GAC.
Facts and Procedural History
Prior to 1988, Malvin Algood and Russell Algood operated several businesses, including car
dealerships. In 1988, they founded GAC, a specialized consumer finance company which
funded and serviced high risk installment contracts primarily secured by automobiles. Malvin
served as the chairman of the Board of Directors and as chief executive
officer, and Russell served as president and chief operating officer of GAC.
GAC is a publicly traded company. GAC had a $100 million line
of credit with General Electric Capital Corporation (GECC), which provided the majority of
GACs working capital for buying auto loans.
On April 10, 1997, there were 6,022,000 shares of GAC common stock issued
and outstanding. Of those, 1,793,100 shares, or approximately thirty percent, were held
by public shareholders. The remainder of the shares were held by Malvin,
Russell, and six other Algood family members or family trusts. On April
10, GAC shares closed at $3.25 per share.
On April 11, 1997, a Stockholders Agreement and Securities Purchase Agreement were entered
into between Conseco, GAC, Capitol American Life Insurance Company (CALI), and the Algood
defendants. CALI is a wholly-owned subsidiary of Conseco. The Stockholders Agreement
was entered into for the purpose of establishing the composition of GACs Board
of Directors, limiting the manner by which the Algood defendants stock could be
transferred, and establishing the terms of an acceptable tender offer by Conseco.
The execution of the Stockholders Agreement was a condition to CALIs acquisition of
GAC securities pursuant to the Securities Purchase Agreement also entered into on that
date. For our purposes, the relevant portions of the Stockholders Agreement provided
The GAC Board of Directors was increased in size from five to six
Until the debentures represented by the Securities Purchase Agreement were no longer outstanding,
the Algood defendants would vote their shares to elect or appoint two persons
designated by Conseco to GACs Board of Directors; and
As long as the Algood defendants owned more than ten percent of the
issued and outstanding shares of GAC stock, CALI would vote all of its
shares to elect or appoint one person designated by the majority stockholders to
GACs Board of Directors.
Pursuant to the Securities Purchase Agreement (which is not a part of the
record), CALI made a $10 million dollar investment in GAC by purchasing $10
million in 12% subordinated convertible notes. These notes were convertible, at any
time at the option of CALI and upon ten days written notice to
GAC, into shares of GAC common stock. Also on April 11, 1997,
GAC issued approximately $3.5 million in 12% subordinated convertible notes to several members
of the Algood family in exchange for certain promissory notes previously given by
GAC to those family members in an equivalent amount. Finally, the GAC
Board of Directors increased the number of Directors from five to six pursuant
to the Shareholder Agreement. On July 8, 1997, defendants Rollin Dick and
James Larkin were added to the Board of Directors pursuant to that provision
of the Shareholder Agreement allowing Conseco to designate two Directors.
On September 16, 1997, Conseco agreed to guarantee $10 million of GACs indebtedness
to GECC and GECC agreed to restructure GACs existing credit agreement. In
exchange for the Guaranty, GAC executed and delivered $10 million in 12% subordinated
convertible notes to Conseco. As further consideration for the Guaranty, GAC issued
warrants to Conseco for the purchase of 500,000 shares of authorized but unissued
common stock at $1.00 per share. To compensate for the corresponding reduction
in conversion price of the 12% convertible subordinated notes previously issued on April
11, 1997, to CALI and the Algood family, an additional number of shares
of authorized but unissued common stock were reserved for issuance to the holders
of those notes. Also, GAC borrowed $1.5 million from members of the
Algood family and executed and delivered a comparable amount of 12% convertible subordinated
notes to them, subordinate to GACs indebtedness to GECC and Conseco. Six
million additional shares of authorized but unissued common stock were reserved for issuance
pursuant to those notes.
On March 11, 1998, GAC entered into an agreement with Conseco whereby Conseco
reaffirmed its $10 million Guaranty of GACs indebtedness to GECC, and GAC sold
to Conseco or its affiliate sixteen million shares of GACs authorized but unissued
common stock at a price of $0.25 per share, for a total purchase
price of $4 million. The purchase price for the 500,000 shares of
common stock previously reserved for Conseco pursuant to the warrants issued September 16,
1997, was reduced from $1.00 per share to $0.25 per share. Also,
to compensate for the reduction in the conversion price of the previously issued
12% convertible subordinated notes, fifty-three million shares of authorized but unissued common stock
were reserved for issuance to the holders of those notes, which total includes
the six million shares previously reserved. Finally, the shares of common stock
and 12% convertible subordinated notes then owned by members of the Algood family
were transferred to Conseco or its affiliates. Thus, Conseco acquired 3,814,000 shares
of common stock in GAC at $0.30 per share.
Thereafter, Conseco made a merger proposal between GAC and CIHC, a wholly-owned subsidiary
of Conseco, to GACs Board of Directors, proposing that all shares of common
stock then held by persons other than Conseco would be canceled and exchanged
for the right to receive $0.30 per share. GAC then announced an
August 31, 1998, shareholders meeting to vote on the proposed merger.
On August 19, 1998, the common shareholders filed a Class Action Complaint against
the defendants, alleging twelve counts:
Four counts of breach of the fiduciary duty of loyalty against members of
GACs Board of Directors in connection with the April 1997, September 1997, November
1997, and March 1998 transactions as described above;
Four counts of breach of the fiduciary duty of due care against members
of GACs Board of Directors in connection with the April 1997, September 1997,
November 1997, and March 1998 transactions;
One count of breach of the fiduciary duty of loyalty to GAC against
members of the Algood family, who were the controlling shareholders in GAC;
One count of breach of fiduciary duty of loyalty to GAC against controlling
One count of violation of Indiana Code chapter 23-1-42, the Control Shares Acquisition
One count alleging Dissenters Rights and seeking appraisal.
The common shareholders also sought a preliminary injunction to preserve the
by preventing Conseco from voting its shares and also preventing GAC from recognizing
the votes of Consecos shares at the August 31, 1998 shareholders meeting pending
the outcome of their class action suit. After a hearing, the trial
court denied the common shareholders motion for preliminary injunction. Thereafter, the merger
The defendants filed motions to dismiss, or in the alternative, for summary judgment.
The common shareholders also filed a motion for summary judgment. Following
a hearing, the trial court entered its order granting the defendants motions to
dismiss and for summary judgment and denying the common shareholders motion. In
pertinent part, the order provides as follows:
. . . The Court now finds that there is no genuine issue
as to any material fact and that all defendants are entitled to summary
judgment [ ] on the [common shareholders] claims in Counts 1 through 10
as a matter of law, and to dismissal of Counts 11 and 12
for the following reasons:
. . .
4. Counts 1 through 10 of the Complaint are barred by the
Indianas [sic] Dissenters Rights Statute because the claims asserted challenge corporate action, i.e.
a merger, that entitled the [common shareholders] to the right to receive cash
in the amount of the face value of their shares. According to
the Dissenters Rights Statute, this appraisal right is the [common shareholders] exclusive remedy,
whether or not [they] exercise it, and [they] are precluded from maintaining separate
actions outside of the dissenters rights process. . . . Thus,
the [common shareholders] claims for breach of fiduciary duty are barred.
5. Independent of the Dissenters Rights Statutes bar to Counts 1-10 of
the Complaint, there is another reason these claims are defective as a matter
of law. The Complaint alleges that the [common shareholders] suffered dilution of
their position and direct economic harm due to a drastic decline in the
value of their GAC stock as a direct result of the breaches of
duty alleged in the complaint. Although [the common shareholders] claim that the
alleged fiduciary duties that the defendants breached may be enforced directly by [them],
Indiana law directly contradicts this allegation. . . .
6. . . . The [common shareholders] make no allegation supporting application
of any of the exceptions to Indianas general rule requiring derivative actions.
Therefore, counts 1 through 10 of the Complaint also fail as a matter
of law because the claims are derivative and may be asserted only by
. . .
7. Count 11 is defective because, as this Court correctly found in
the injunction proceeding, no defendant violated the Control Share Acquisition Statute. The
Complaints allegations regarding agreements by certain shareholders to vote their shares in favor
of two director nominees do not constitute a control share acquisition within the
meaning of the Statute. That Statute also does not grant a private
right of action under the circumstances now before the Court.
8. Moreover, [the common shareholders] are estopped to argue that there was
no valid merger to trigger the Dissenters Rights Statute. [The common shareholders]
themselves plead in Count XII of the Complaint, that they are entitled to
appraisal under the Dissenters Rights Statute. That allegation presupposes the validity of
the GAC merger as an event triggering dissenters rights.
. . .
9. Count 12, [the common shareholders] assertion of dissenters rights, is barred
by the Dissenters Rights Statute itself. First, the Dissenters Rights Statute provides
that the corporation, in this case GAC, must commence the appraisal proceeding.
. . . There is no provision for an action by the shareholders.
Second, the Dissenters Rights Statute also sets forth a series of notice
requirements. . . . However, [the common shareholders] do not allege compliance
with these requirements. Accordingly, [the common shareholders] claim for appraisal under Count
12 is dismissed.
10. In sum, the Court finds that judgment is appropriate as a
matter of law on Counts 1 through 10 of the Complaint because (a)
Indiana law bars the post-merger pursuit of the [common shareholders] breach of fiduciary
duties claims outside of the dissenters rights process, and (b) the Complaint alleges
wrongdoing to GAC, and any action based on those alleged wrongs belongs solely
to GAC, not its shareholders. Counts 11 and 12 are dismissed for
failure to state a claim under the Control Share Acquisition Statute and the
Dissenters Rights Statute.
R. 1101-04. The common shareholders filed a motion to correct errors,
which motion was denied. This appeal ensued.
Discussion and Decision
I. Dismissal of Control Share Acquisition Violation Claim
The common shareholders contend that the defendants violated the Indiana Control Shares Acquisition
Statute, rendering the purported merger void, and that the trial court erred in
dismissing Count XI of their complaint which alleged such a violation.
A. Standard of Review
Our standard of review of a dismissal granted pursuant to Trial Rule 12(B)(6)
A trial rule 12(B)(6) motion to dismiss for failure to state a claim
upon which relief can be granted tests the sufficiency of a claim, not
the facts supporting it. Therefore, we view the pleadings in the light
most favorable to the nonmoving party and draw every reasonable inference therefrom in
favor of that party. When reviewing a ruling on a motion to
dismiss, we stand in the shoes of the trial court and must determine
if the trial court erred in its application of the law.
Borgman v. Aikens, 681 N.E.2d 213, 216-17 (Ind. Ct. App. 1997), trans. denied.
When reviewing a motion to dismiss for failure to state a
claim, this court accepts as true the facts alleged in the complaint.
Minks v. Pina, 709 N.E.2d 379, 381 (Ind. Ct. App. 1999), trans. denied.
We will affirm a successful T.R. 12(B)(6) motion when a complaint states
a set of facts, which, even if true, would not support the relief
requested in that complaint. Id. Furthermore, we will affirm the trial
courts ruling if it is sustainable on any basis found in the record.
Id.B. Propriety of Dismissal
The trial court found that dismissal of the common shareholders claim that the
defendants had violated the Control Shares Acquisition Statute was appropriate because the complaints
allegations regarding the Stockholder Agreement amounting to a control share acquisition are insufficient
as a matter of law to show that such an acquisition in fact
1. Control Shares Acquisition Statute
The common shareholders contend that the purported merger was void because it violates
the Indiana Control Shares Acquisition Statute. As explained by the Supreme Court,
the Control Shares Acquisition Statute
focuses on the acquisition of control shares in an issuing public corporation.
Under the Act, an entity acquires control shares whenever it acquires shares that,
but for the operation of the Act, would bring its voting power in
the corporation [in the election of directors] to or above any of three
thresholds: 20%, 33 1/3%, or 50%. [Ind. Code] § 23-1-42-1.
An entity that acquires control shares does not necessarily acquire voting rights.
Rather, it gains those rights only to the extent granted by resolution approved
by the shareholders of the issuing public corporation. [Ind. Code] § 23-1-42-9(a).
Section 23-1-42-9(b) requires a majority vote of all disinterested shareholders holding
each class of stock for passage of such a resolution. The practical
effect of this requirement is to condition acquisition of control of a corporation
on approval of a majority of the pre-existing disinterested shareholders.
CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 72-75 (1987).
The purpose of the Control Shares Acquisition Statute is to give the shareholders
of certain qualifying corporations a right to vote collectively on a potentially fundamental
change in the nature of their corporation namely, its shift to being
an entity in which a single shareholder acquires a significant level of dominance
over the future governance of the corporation. Official Introductory Comment to Ind.
Code chapter 23-1-42. Because Indianas Business Corporation Law gives shareholders the right
to vote on significant matters such as mergers, share exchanges, and the sale
of all or substantially all of a corporations assets, the Control Shares Acquisition
Statute reflects the General Assemblys recognition that a single shareholders acquisition of a
controlling block of shares can be an equally fundamental, far-reaching event for the
corporation, and its decision . . . that it is appropriate for shareholders
to vote collectively on this issue as well. Id.
2. Applicability of the Control Shares Acquisition Statute
The common shareholders contend that Conseco acquired control shares upon execution of the
Stockholders Agreement because with that Agreement, Conseco acquired the power to direct the
exercise of the Algood familys shares to elect one-third of GACs directors.
The Agreement, as described above, increased the size of GACs Board of Directors
to six, and stated that the Algood family would exercise their votes to
elect or appoint to the Board two people nominated by Conseco.
If Conseco did effect a control share acquisition via this Agreement, certain steps
are required to comply with the statute, none of which were complied with
The shareholders decide whether to confer rights on the control shares at the
next regularly scheduled meeting of the shareholders, or at a specially scheduled meeting.
The acquiror can require management of the corporation to hold such a
special meeting within 50 days if it files an acquiring person statement, requests
the meeting, and agrees to pay the expenses of the meeting. See
[Ind. Code] § 23-1-42-7. If the shareholders do not vote to restore
voting rights to the shares, the corporation may redeem the control shares from
the acquiror at fair market value, but it is not required to do
so. [Ind. Code] § 23-1-42-10(b). Similarly, if the acquiror does not
file an acquiring person statement with the corporation, the corporation may, if its
bylaws or articles of incorporation so provide, redeem the shares at any time
after 60 days after the acquiror's last acquisition. [Ind. Code] § 23-1-42-10(a).
CTS Corp., 481 U.S. at 75.
Thus, the common shareholders contend that
any action, specifically the merger, taken by GAC in which Conseco voted its
shares is void.
II. Summary Judgment on Breach of Fiduciary Duty Claims
The defendants counter with several arguments regarding why the trial courts finding that
the Control Shares Acquisition Statute does not apply is correct. The most
compelling argument is that the statute was intended to disenfranchise control shares in
a hostile takeover or similar transaction in which there is a shift to
being an entity dominated by a single shareholder or group of shareholders.
Such intention is manifested in the Official Comments, and quoted above: the
purpose of the Statute is to give shareholders a right to vote on
a potentially fundamental
change in the nature of their corporation namely, its
shift to being an entity in which a single shareholder acquires a significant
level of dominance . . . . Official Introductory Comment to Ind.
Code chapter 23-1-42 (emphasis added). See also CTS Corp., 481 U.S. at
82-83 (The Indiana Act operates on the assumption . . . that independent
shareholders faced with tender offers often are at a disadvantage. By allowing
such shareholders to vote as a group, the Act protects them from the
coercive aspects of some tender offers.).
Even assuming that the facts as alleged in the common shareholders complaint are
true, they do not support application of the Control Shares Acquisition Statute.
It is not as though Conseco acquired small amounts of stock from various
shareholders to amass a large block of stock which had not previously resided
in the hands of a single shareholder. Rather, Conseco acquired a large
block of stock which already existed. Thus, there was no change in
the nature of GAC when Conseco acquired its stock: prior to Consecos
acquisition, the Algood family had controlled the corporation. Consecos acquisition of shares
did not shift GAC to being a corporation dominated by a single shareholder.
Instead, GAC has always been dominated by a single shareholder. Further,
Consecos acquisition did not put the common shareholders at a disadvantage. The
common shareholders had always been at a disadvantage when it came to governance
of GAC because of the concentration of GAC stock in Algood family members
hands. Because there was no fundamental change in the nature of GAC
when Conseco acquired its shares, there was no violation of the Control Shares
Acquisition Statute, and the trial court did not err in dismissing Count XI
of the common shareholders complaint.
The common shareholders also contend that the trial court erred in granting summary
judgment for the defendants on Counts I through X of their complaint.
They contend that the trial courts conclusions that the Dissenters Rights Statute provides
their exclusive remedy and that the action is a derivative one which should
have been brought by GAC are erroneous.
A. Standard of Review
Our standard of review of a summary judgment order is well-settled: summary
judgment is appropriate if the designated evidentiary matter shows that there is no
genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law. Ind. Trial Rule 56(C).
Relying on specifically designated evidence, the moving party bears the burden of
making a prima facie showing that there are no genuine issues of material
fact and that the moving party is entitled to judgment as a matter
of law. State Farm Fire & Cas. Co. v. T.B. ex rel.
Bruce, 728 N.E.2d 919, 922 (Ind. Ct. App. 2000). If the moving
party meets these two requirements, the burden shifts to the nonmovant to set
forth specifically designated facts showing that there is a genuine issue for trial.
Id. A genuine issue of material fact exists where facts concerning
an issue which would dispose of the litigation are in dispute or where
the undisputed material facts are capable of supporting conflicting inferences on such an
issue. Gilman v. Hohman, 725 N.E.2d 425, 428 (Ind. Ct. App. 2000),
trans. denied. Even if the facts are undisputed, summary judgment is inappropriate where
the record reveals an incorrect application of the law to the facts.
On appeal, we are bound by the same standard as the trial court,
and we consider only those matters which were designated at the summary judgment
stage. Interstate Cold Storage v. General Motors Corp., 720 N.E.2d 727, 730
(Ind. Ct. App. 1999), trans. denied. We do not reweigh the evidence,
but we liberally construe all designated evidentiary material in the light most favorable
to the nonmoving party to determine whether there is a genuine issue of
material fact for trial. Estate of Hofgesang v. Hansford, 714 N.E.2d 1213,
1216 (Ind. Ct. App. 1999). The party that lost in the trial
court has the burden to persuade the appellate court that the trial court
erred. Id. Specific findings and conclusions by the trial court are
not required, and although they offer valuable insight into the rationale for the
judgment and facilitate our review, we are not limited to reviewing the trial
courts reasons for granting or denying summary judgment. Bernstein v. Glavin, 725
N.E.2d 455, 458 (Ind. Ct. App. 2000), trans. denied. A grant of
summary judgment may be affirmed upon any theory supported by the designated materials.
B. Dissenters Rights Statute
The trial court found that Counts I through X of the common shareholders
complaint were barred by the Dissenters Rights Statute. Ind. Code §§ 23-1-44
et seq. Indiana Code section 23-1-44-8(a) provides that a shareholder is entitled both
to dissent from the consummation of a plan of merger to which the
corporation is a party, and to obtain the payment of the fair value
of the shareholders shares in the event of the consummation of the merger.
If proposed corporate action is submitted to a vote at a shareholder meeting,
as the merger herein was, the meeting notice must state that shareholders are
entitled to dissent. Ind. Code § 23-1-44-10(a). Any shareholder wishing to
assert dissenters rights must deliver to the corporation before the vote written notice
of his or her intent to demand payment for his or her shares
and must not vote those shares in favor of the proposed action.
Ind. Code § 23-1-44-11(a). A shareholder who does not deliver this written
notice is not entitled to payment. Ind. Code § 23-1-44-11(b). If
the proposed action is authorized, then the corporation must deliver within ten days
after the action was taken a written dissenters notice to a shareholder who
has delivered the written notice of intent to dissent. Ind. Code
§ 23-1-44-12(b). In order to obtain payment for his shares, the shareholder
who receives such notice must demand payment, certify ownership of his shares, and
deposit his shareholders certificates in accordance with the terms of the notice.
Ind. Code § 23-1-44-13(a).
A shareholder who fails to do so is
not entitled to payment for his or her shares and is considered to
have voted his or her shares in favor of the corporate action.
Ind. Code § 23-1-44-13(c). The corporation must then pay each dissenter the
amount the corporation estimates to be the fair value of his or her
shares. Ind. Code § 23-1-44-15(a). If the dissenter believes that the
amount the corporation paid is less than the fair value of the shares,
the dissenter may notify the corporation in writing within thirty days of the
corporations payment of his or her own estimate of the fair value and
demand payment of that amount. Ind. Code § 23-1-44-18(a). Failure to
make a written demand within thirty days waives the right to demand additional
compensation for shares. Ind. Code § 23-1-44-18(b).
If the dissenters demand for payment then remains unsettled, the corporation must commence
a proceeding within sixty days after payment was demanded and ask the court
to determine the fair value. If the corporation fails to do so,
it must pay the amount demanded by the dissenter. Ind. Code §
23-1-44-19(a). All dissenters whose demands have not been settled are to be
named parties. Ind. Code § 23-1-44-19(c). Section 23-1-44-8(c) (the exclusivity provision)
provides that a shareholder entitled to dissent and obtain payment for the shareholders
share may not challenge the corporate action creating . . . the shareholders
entitlement. Thus, a dissenter is barred from bringing a derivative action against
the corporation after his or her dissenters rights have arisen, but the appraisal
proceeding affords the dissenter the opportunity not only to have the fair value
of his or her shares to be determined, but also to argue any
breach of fiduciary duty or fraud claims.
See Fleming v. International Pizza
Supply Corp., 707 N.E.2d 1033, 1037-38 (Ind. Ct. App. 1999).
The common shareholders acknowledge the exclusivity provision of the Dissenters Rights Statute, but
argue that it should not apply in this case for several reasons.
First, they argue that it should not apply because the purported merger was
in violation of the Indiana Control Share Acquisition Statute, and therefore void.
Next, they argue that it should not apply because of false and misleading
statements which tainted the approval process and again, rendered the purported merger void.
Finally, they argue that it should not apply for public policy reasons:
to apply the Dissenters Rights statute would be to sanction the defendants
wrongdoing. Each of these arguments will be addressed in turn.
1. Exclusivity Provision
In Fleming v. Intl Pizza Supply Corp., 676 N.E.2d 1051 (Ind. 1997), our
supreme court, in interpreting Indiana Code section 23-1-44-8, held that in a merger
or asset sale, the exclusive remedy available to a shareholder seeking payment for
the value of the shareholders shares is the statutory appraisal procedure. Id.
at 1056. The court concluded that the legislature, in promulgating the current
version of Indiana Code section 23-1-44-8, stated its intention to so limit a
dissenting shareholders remedy. Id. at 1057. In reaching that conclusion, the
court noted that the previous version of the exclusivity provision provided:
Every shareholder who did not vote in favor of such merger . .
. and who does not object in writing and demand payment of the
value of his shares at the time and in the manner stated in
shall be conclusively presumed to have assented to such merger .
. . .
Ind. Code § 23-1-5-7(c) (emphasis added). This section was interpreted in
v. Gabhart, 267 Ind. 370, 370 N.E.2d 345 (1977), to establish the exclusive
remedy only for mergers with a valid purpose. Absent a valid purpose,
the court held that minority shareholders were not limited to the statutory appraisal
rights. Id. at 356. Several years after Gabhart, a special commission
which had been created to study Indianas existing General Corporation Act, Ind. Code
§§ 23-1-1-1 et seq., recommended that it be replaced with the 1984 version
of the Revised Model Business Corporation Act (the RMA) published by a section
of the American Bar Association. Fleming, 676 N.E.2d at 1054. The
legislature then adopted Indianas current Business Corporation Law, Ind. Code §§ 23-1-17-1 et
seq. (the BCL), and authorized the publishing of the Official Comments, which can
be consulted by the courts to determine the underlying reasons, purposes, and policies
of the BCL and be used as a guide in its construction and
application. Ind. Code § 23-1-17-5.
However, in adopting the BCL, the legislature modified the RMAs exclusivity provision.
The RMA version provides:
A shareholder entitled to dissent and obtain payment for his shares under this
chapter may not challenge the corporate action creating his entitlement
unless the action
is unlawful or fraudulent with respect to the shareholder or the corporation.
RMA § 13.02(b) (1984) (emphasis added). Indianas version of the exclusivity provision
provides that a shareholder who is entitled to dissent and obtain payment for
the shareholders shares . . .
may not challenge the corporate action creating
. . . the shareholders entitlement. Ind. Code § 23-1-44-8(c) (emphasis added).
The Official Comment to this subsection provides:
Subsection (c), which establishes the exclusivity of Chapter 44s dissenters rights remedies, deletes
RMA language stating that such rights are exclusive unless the action is unlawful
or fraudulent with respect to the shareholder or the corporation. Deletion of
this language reflects a conscious response to the Indiana Supreme Courts decision in
Gabhart v. Gabhart, 267 Ind. 370, 370 N.E.2d 345 (1972) [sic].
. . .
Given the potential for disruption of corporate transactions where a
Gabhart rule applied
to the BCL, the General Assembly adopted subsection (c) as a categorical statutory
rule that shareholders entitled to dissenters rights may not challenge the corporate action
creating that entitlement. Hence, the kind of minority shareholder challenge to corporate
action permitted by Gabhart under IC 23-1-5-7(c) is not permitted under subsection (c).
Official Comments to Ind. Code § 23-1-44-8.
2. Application to This Case
The court in
Fleming went on to hold that a dissenting shareholders breach
of fiduciary duty or fraud claims must be litigated within the appraisal proceeding:
the legislature meant to limit a dissenting shareholder seeking payment for the
value of the shareholders shares to the statutory appraisal procedure [but] did not
foreclose the ability of dissenting shareholders to litigate their breach of fiduciary duty
or fraud claims within the appraisal proceeding. 676 N.E.2d at 1057.
In part, this decision was based upon the right of a dissenting shareholder
to obtain payment of the fair value of his or her shares:
the expression corporate action to which the dissenter objects as used in Ind.
Code 23-1-44-3 includes not only the merger . . . itself but genuine
issues of breach of fiduciary duty and fraud affecting the value of the
shares at the time of the transaction. Id. at 1058.
The common shareholders contend that the Dissenters Rights Statute does not apply in
this case because the purported merger was void. If there was no
merger, then there was no corporate action to trigger the Dissenters Rights Statute,
and the exclusivity provision does not bar their current action. They also
contend that even if the Dissenters Rights Statute does apply, it should not
represent their exclusive remedy in this case for public policy reasons.
a. Control Shares Acquisition Statute
The common shareholders first contend that the purported merger was void because it
violates the Indiana Control Shares Acquisition Statute. However, as has already been
decided above, the Control Shares Acquisition Statute is not applicable in this context.
Thus, there was no violation of the Statute, and the merger is
not void for this reason.
b. False and Misleading Statement in Merger Process
The common shareholders also contend that the merger was void because any vote
by the shareholders following the issuance of a proxy statement permeated with false
and misleading statements cannot constitute the valid action of GAC. Brief of
Appellants at 18. The common shareholders identify five false statements and corresponding
concealed facts which they allege are fatal to the purported merger. They
cite no caselaw and make no argument beyond their own assertions that such
conduct should render the merger void. The defendants do not directly respond
to this argument, and our research reveals no cases addressing the nature of
a merger when fraud in the process has been alleged.
The common shareholders claims in this respect are basically allegations of fraud on
the shareholders receiving the proxy statement. Under the RMA version of the
exclusivity provision, which restricts a dissenters right to challenge the corporate action unless
the action is unlawful or fraudulent, the common shareholders claims may have supported
a separate cause of action. If Indianas rejection of this language in
favor of an exclusivity provision which restricts a dissenters right to challenge the
corporate action without limitation is to have any meaning, however, these claims can
and must be litigated as part of the appraisal process. Thus, we
hold that fraud does not necessarily void a merger, but only provides a
cause of action for the common shareholders within the context of the Dissenters
Rights Statute process.
c. Public Policy
Finally, the common shareholders allege that the Dissenters Rights Statute should not apply
in this situation for public policy reasons. The basic lawlessness and disregard
for the property rights and voting rights of [the common shareholders] that form
the core of Consecos and GACs actions in this case are not
merely obnoxious they are heinous . . . [and] . . .
far removed from what the legislature had in mind when it enacted the
Dissent Statute. Brief of Appellant at 22-23. Thus, the common shareholders
argue that we should not sanction such behavior by limiting their remedy to
an appraisal proceeding.
We recognize the difficulties inherent in the Dissenters Rights Statute, which contains numerous
deadlines and requirements which a shareholder intending to assert his or her dissenters
rights must meet in order to be entitled to payment for his or
her shares and which puts the appraisal proceeding in the hands of the
corporation when the corporation clearly has an interest adverse to the interest of
However, the statute also balances the shareholders obligations to protect
their dissenters rights by requiring the corporation to notify them on no less
than three occasions of their rights and the steps they must take to
protect them. Thus, no shareholder can be said to have been blindsided
by the requirements of the statute if the corporation fulfills its obligations under
the statute. Also, the purpose of requiring the corporation to initiate the
appraisal proceeding seems clear: to consolidate all dissenters claims in one proceeding
and keep the corporation from becoming involved in multiple litigation over the same
corporate action. Although at first blush, it may appear that there is
a conflict of interest in requiring the corporation to initiate the appraisal proceeding
and name as defendants those very shareholders who would otherwise seek to sue
the corporation, the statute contains sufficient safeguards to keep this from being so.
If the corporation fails to initiate the action or fails to name
all shareholders who have properly preserved their claim, then the corporation will be
required to pay those shareholders what they have demanded.
Thus, there is
no benefit to the corporation if it fails to follow the requirements of
The general purpose of an appraisal statute is to protect the property rights
of dissenting shareholders from actions by majority shareholders which alter the character of
Settles v. Leslie, 701 N.E.2d 849, 856 (Ind. Ct. App.
1998) (quoting 12B Fletcher Cyclopedia of Corporations § 5906.10 (1993)). Our supreme
court in Fleming stated, While we acknowledge that the appraisal remedy does not
provide for the individual liability of majority shareholders . . . we believe
that those are the policy choices made by the legislature in adopting Ind.
Code § 23-1-44-8(c) and are clearly within the legislatures prerogative. 676 N.E.2d
at 1058. Thus, public policy has already been considered in determining that
the very claims the common shareholders seek to assert against GAC must be
litigated within the context of the appraisal proceeding, and we decline to hold
C. Derivative v. Direct Action
The trial court also found that, in the alternative, Counts 1 through 10
of the common shareholders complaint were barred because they are derivative and can
not be asserted in a direct action against GAC. Because the common
shareholders did not comply with the requirements of Indiana Code chapter 23-1-32, dealing
with derivative proceedings, and because the complaint does not support the application of
an exception to the general rule requiring derivative actions in this case, the
trial court found that Counts 1 through 10 also failed as a matter
of law for this reason. In the event we were to hold
that the Dissenters Rights Statute does not represent the common shareholders exclusive remedy,
the trial courts alternate disposition concludes that their action is nonetheless barred because
their remedy would be a derivative action, not a direct action.
we have held that the Dissenters Rights Statute applies in this situation, and
that the trial court properly granted summary judgment on that ground, the trial
courts alternative disposition based upon the derivative nature of the action is superfluous
and we need not discuss it.
See Bernstein, 725 N.E.2d at 458
(stating that a grant of summary judgment may be affirmed on any supportable
We hold that the Control Shares Acquisition Statute does not apply
to a situation such as that before us, in which a controlling block
of shares was transferred from one entity, the Algood family, to another, Conseco,
and the trial court properly dismissed the common shareholders claim based upon an
alleged violation of this statute. Further, the Dissenters Rights Statute provides the
common shareholders with their exclusive remedy for the breach of fiduciary duty and
fraud claims they have attempted to assert in this independent action. Thus,
the trial court properly entered summary judgment on those claims for the defendants.
Accordingly, the judgment of the trial court is affirmed.
MATHIAS, J., and MATTINGLY, J., concur.
Oral Argument was heard in this case on October 12, 2000,
on the campus of the University of Indianapolis in Indianapolis, Indiana. We
extend our appreciation to the University administration, staff and students for their hospitality
and commend the parties attorneys for their advocacy.
Footnote: The common shareholders also contend in their statement of Issues Presented
for Review that the trial court erred in dismissing Count XII of their
complaint, which sought appraisal rights pursuant to the Dissenters Rights Statute. However,
as will be seen in the discussion below, the common shareholders maintain throughout
their brief that the Dissenters Rights Statute does not apply, and they have
not independently argued in their brief why their claim for dissenters rights was
erroneously dismissed. This issue is, therefore, waived. Moreover, the common shareholders
note in their brief that, although they dispute that the Dissenters Rights Statute
applies or that it represents their exclusive remedy, they have joined with other
GAC shareholders in an independent action seeking appraisal rights. Finally, as will
be seen in the discussion of the Dissenters Rights Statute below, the onus
is on the corporation to either institute the appraisal proceeding or pay the
dissenters the amount demanded. There is no procedure for the dissenters to
implement an appraisal proceeding.
The common shareholders brief also lists as an issue presented for
review [w]hether the trial court erred as a matter of law in denying
[their] cross-motion for summary judgment as to liability on Counts I through XI
of the Complaint. Brief of Appellant at 1. However, the common
shareholders wholly fail to make any independent argument with respect to this purported
issue, and thus, it is waived for our consideration.
Footnote: It should be noted that
CTS Corp., which dealt primarily with
the constitutionality of Indianas Control Share Acquisition Statute, is the only reported case
to discuss the statute.
It was noted at oral argument that, in addition to this
litigation, there is also an appraisal proceeding in progress, as well as an
additional lawsuit between shareholders who were excluded from the appraisal proceeding, including the
common shareholders herein, and GAC concerning whether or not those shareholders followed all
the requirements necessary to be included in the appraisal proceeding.
Footnote: We are especially sensitive to that in this case, wherein GAC
did not name the common shareholders as defendants in the appraisal proceeding, and
the common shareholders have had to initiate additional litigation regarding their right to
be a part of that proceeding. Thus, although we hold that the
common shareholders are barred by the exclusivity provision of the Dissenters Rights Statute
from bringing their claims in an independent action, we are mindful that the
common shareholders may be left without a remedy for their alleged injury if
they are not allowed into the appraisal proceeding.
Footnote: For this reason, it may be the better course of action
for a shareholder who believes he was wrongly left out of the appraisal
proceeding to intervene in that action, rather than instituting an entirely new action
to determine whether or not he should have been named as a party
to the appraisal proceeding. If the shareholder intervenes, all claims related to
the appraisal proceeding could be determined in one proceeding.
We note that the supreme court has stated that it believes
it is clear that the [BCL] did not intend to restrict any claims
of wrongdoing that a corporation or shareholder brings before the corporate action creating
dissenters rights occurs. Fleming, 676 N.E.2d at 1057 n.9 (emphasis added).
Thus, if the common shareholders had filed a derivative action before the occurrence
of the corporate action creating their dissenters rights, it is possible that action
could go forward. The Dissenters Rights statute states that a shareholder is
entitled to dissent from the consummation of a plan of merger. Ind.
Code § 23-1-44-8(a)(1). The merger was not consummated until after the common
shareholders filed the instant complaint. Had the common shareholders complied with the
dictates of Indiana Code chapter 23-1-32 and filed a derivative action, it may
well have been possible to go forward. However, they seem to concede
that their complaint is not a derivative action. Thus, if we hold
that a direct action by the shareholders is not allowed in this situation,
then the exception announced in Fleming does not save the common shareholders claims,