1. “Fundamental corporate changes” may be defined as those alterations in a corporation that require a charter amendment and thus consent of the shareholders as parties to the contract represented by the charter. A rather complete jurisprudence once existed around this subject, since a “fundamental” change that made “a material, radical or fundamental change in the charter binds only the accepting majority, and discharges a dissenting shareholder from his contract of subscription.” 1 Seymour D. Thompson, Commentaries on the Law of Corporations § 72 (San Francisco: Bancroft-Whitney Co., 1895). See also E. M. Dodd, Jr., Dissenting Shareholders and Amendments to Corporate Charters, 75 U. Pa. L. Rev. 585, 730 et seq. (1927). In this category Manning lists mergers and consolidations, dissolution, charter amendments, and some sales of assets. Bayless Manning, The Shareholder's Appraisal Remedy: An Essay for Frank Coker, 72 Yale L.J. 223, 249 (1962).Google Scholar

2. Mason v. Pewabic Mining Co., 133 U.S. 50 (1890); Treat v. Hubbard-Elliott Copper Co., 4 Alas. 497 (Dist. Ct. 1912); McCray v. Junction R.R., 9 Ind. 358 (1857); State ex rel. Brown v. Bailey, 16 Ind. 46 (1861); Abbot v. American Hard Rubber Co., 33 Barb. 578 (1861); People v. Ballard, 134 N.Y. 269, 32 N.E. 54 (1892); Murrin v. Archbald Consol. Coal Co., 232 N.Y. 541, 134 N.E. 563 (1921); Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851); Victor Morawetz, A Treatise on the Law of Private Corporations § 951, at 908–9 (2d ed. Boston: Little, Brown & Co., 1886); 1 Thompson, supra note 1, § 343; cf. Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819).Google Scholar

3. A summary of the rights of minority shareholders to dissent from certain actions under various state laws can be found in 2 ABA Model Bus. Corp. Act Ann. 2d § 80 ¶ 6 (1971 & Supps.). See also Manning, supra note 1.Google Scholar

4. Majority shareholders may “take” the interests of minority shareholders by placing their majority interests in a new wholly owned corporation and then merging the two, with the wholly owned corporation surviving. Shares in the original corporation are canceled, with the minority shareholders receiving either a debt instrument or cash as compensation for their shares in the merged company. Prior to the advent of modern corporation statutes allowing conversion of shares through merger “into cash or other property” in the manner provided in ABA-ALI Model Bus. Corp. Act § 71(c) (1979), the same result was often achieved by having the corporation sell all of its assets to another corporation wholly owned by the majority shareholders of the seller. See, e.g., Jackson Co. v. Gardiner Inv. Co., 220 F. 297 (1st Cir. 1915), and Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004 (1904).Google Scholar

5. A rare discussion of the treatment of minority shareholders in an asset sale as involving the exercise of the power of eminent domain is found in Perkins v. New Hampshire Power Co., 90 N.H. 534, 11 A.2d 811, 812–13, reh. denied, 90 N.H. 534, 538, 13 A.2d 475 (1940). In the same year, the Delaware Supreme Court was busy solving its problems with the same concept by defining certain claims of preferred stockholders to accrued dividends as not involving any vested contract rights. Federal United Corp. v. Havender, 24 Del. Ch. 318, 11 A.2d 331 (Sup. Ct. 1940). Some of the modern judicial references to the issue refer to the treatment of the minority as “somewhat analogous to the right of eminent domain.” Id., 11 A.2d at 338, cited with approval in Singer v. Magnavox Co., 380 A.2d 969, 978 (Del. 1977). See also Jutkowitz v. Bourns, No. C.A. 000268 (Cal. Super. Ct., L.A. Co., Nov. 19, 1975), reprinted in part in 1 Martin Lipton & Erica H. Steinberger, Takeovers and Freezeouts § 9.3.1.3 (New York: Law Journal Seminars Press, 1978). An early article suggested that this power to take minority shares was limited to “public” corporations exercising the power of eminent domain and that no such public use was involved in ordinary business corporations. Irving J. Levy, Rights of Dissenting Shareholders to Appraisal and Payment, 15 Cornell L.Q. 420, 425 (1930). Lattin attributes the lack of discussion of the “taking” problem in constitutional terms to the doctrine that under the reserved power to amend corporate charters, shareholders waived their rights to object to such takings and thus had no “vested” rights that raised constitutional questions. Norman D. Lattin, Minority and Dissenting Shareholders’ Rights in Fundamental Changes, 23 L. & Contemp. Prob. 307 (1958). See also Keller v. Wilson & Co., 21 Del. Ch. 391, 190 A. 115, 121 (Sup. Ct. 1936), where, ironically, in upholding certain interests of preferred shareholders as “vested” contract rights that could not be constitutionally impaired, the court, tracing the use of the reserved power to amend the charter, said: “In short, all rights of shareholders are made subservient to ‘financing corporate needs.’ ” This development is traced in George D. Gibson, How Fixed Are Class Shareholder Rights? 23 L. & Contemp. Prob. 283 (1958). Delaware's short-form merger statute was upheld against a constitutional challenge in Coyne v. Park & Tilford Distillers Corp., 38 Del. Ch. 514, 154 A.2d 893 (Sup. Ct. 1959). The New York statute was upheld in Beloff v. Consolidated Edison Co., 300 N.Y. 11, 87 N.E.2d 561 (1949). See also Willcox v. Stern, 18 N.Y.2d 195, 219 N.E.2d 401, 273 N.Y.S.2d 38 (1966) (upholding similar provisions of law governing insurance companies).Google Scholar

6. See, e.g., ABA-ALI Model Bus. Corp. Act § 81 (1979).Google Scholar

7. See text at notes 89–98 infra. Google Scholar

8. Opelka v. Quincy Memorial Bridge Co., 335 Ill. App. 402, 82 N.E.2d 184, 188 (1948); Imperial Trust Co. v. Magazine Repeating Razor Co., 138 N.J. Eq. 20, 46 A.2d 449 (Ch. 1946); Colgate v. United States Leather Co., 75 N.J. Eq. 229, 72 A. 126, 130 (1909); Jones v. Rhea, 130 Va. 345, 107 S.E. 814, 818 (1921); cf. Ribakove v. Rich, 13 Misc. 2d 98, 173 N.Y.S.2d 306, 310 (Sup. Ct. 1958) (asset sale enjoined for fraud), and Wick v. Youngstown Sheet & Tube Co., 46 Ohio App. 253, 188 N.E. 514, 519 (1932) (merger enjoined for fraud). See also Stauffer v. Standard Brands, Inc., 41 Del. Ch. 7, 187 A.2d 78, 80 (Sup. Ct. 1962); Cole v. National Cash Credit Ass'n, 18 Del. Ch. 47, 156 A. 183, 187 (Ch. 1931); Blumenthal v. Roosevelt Hotel, Inc., 202 Misc. 988, 115 N.Y.S.2d 52, 57 (Sup. Ct. 1952); Zobel v. American Locomotive Co., 182 Misc. 323, 44 N.Y.S.2d 33, 37 (Sup. Ct. 1943) (fraud); Johnson v. Baldwin, 221 S.C. 141, 69 S.E.2d 585, 591 (1952). But see Gordon v. Public Serv. Co., 101 N.H. 372, 143 A.2d 428, 431 (1958), and Burg v. Burg Trucking Corp., 26 Misc. 2d 619, 203 N.Y.S.2d 699 (Sup. Ct. 1960).Google Scholar

9. Mergers of this type may occur under “short-form” merger statutes where the parent corporation owns enough of the stock of the subsidiary, usually 90 percent or more. See note 107 infra. Where the parent's ownership of the subsidiary is less complete, merger under the older, so-called “long-form” merger statutes, which require a vote of the shareholders, is required. See, e.g., Del. Code Ann. tit. 8, § 251 (1974 & Cum. Supp. 1978), and ABA-ALI Model Bus. Corp. Act §§ 71–74 (1979). Cases involving mergers where one of the corporations controls sufficient votes to assure the outcome are numerous. See, e.g., Bryan v. Brock & Blevins Co., 490 F.2d 563 (5th Cir.), cert. denied, 419 U.S. 844 (1974); Levin v. Great W. Sugar Co., 406 F.2d 1112 (3d Cir.), cert. denied, 396 U.S. 848 (1969); General Inv. Co. v. Lake Shore & M.S. Ry., 250 F. 160 (6th Cir. 1918); Jones v. Missouri-Edison Elec. Co., 199 F. 64 (8th Cir. 1912), aff'd on reh., 203 F. 945 (1913); Harriman v. E. I. DuPont de Nemours & Co., 411 F. Supp. 133 (D. Del. 1975); Grimes v. Donaldson, Lufkin & Jenrette, Inc., 392 F. Supp. 1393 (N.D. Fla. 1974); Albright v. Bergendahl, 391 F. Supp. 754 (D. Utah 1974); Lachman v. Bell, 353 F. Supp. 37 (S.D.N.Y. 1972); Marshel v. AFW Fabric Corp., 398 F. Supp. 734 (S.D.N.Y. 1975), rev'd, 533 F.2d 1277 (2d Cir.), vacated as moot, 429 U.S. 881 (1976); Young v. Valhi, Inc., 382 A.2d 1372 (Del. Ch. 1978); Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977); Tanzer v. International Gen. Indus., Inc., 379 A.2d 1121 (Del. 1977); David J. Greene & Co. v. Schenley Indus., Inc., 281 A.2d 30 (Del. Ch. 1971); Bastian v. Bourns, Inc., 256 A.2d 680 (Del. Ch. 1969), aff'd per curiam, 278 A.2d 467 (Del. Sup. Ct. 1970); David J. Greene & Co. v. Dunhill Int'l, Inc., 249 A.2d 427 (Del. Ch. 1968); Bruce v. E. L. Bruce Co., 40 Del. Ch. 80, 174 A.2d 29 (Ch. 1961); Sterling v. Mayflower Hotel Corp., 33 Del. Ch. 293, 93 A.2d 107 (Sup. Ct. 1952); Gabhart v. Gabhart, 370 N.E.2d 345 (Ind. 1977); Tanzer Economic Assocs., Inc. Profit Sharing Plan v. Universal Food Specialties, Inc., 87 Misc. 167, 383 N.Y.S.2d 472 (Sup. Ct. 1976); People v. Concord Fabrics, Inc., 83 Misc. 2d 120, 371 N.Y.S. 2d 550 (Sup. Ct.), aff'd, 50 A.D.2d 787, 377 N.Y.S.2d 84 (1975); Willcox v. Stern, 18 N.Y.2d 195, 219 N.E.2d 401, 273 N.Y.S.2d 38 (1966); Southdown, Inc. v. McGinnis, 89 Nev. 184, 510 P.2d 636 (1973); Berkowitz v. Power/Mate Corp., 135 N.J. Super. 36, 342 A.2d 566 (1975); Out water v. Public Serv. Corp., 103 N.J. Eq. 461, 143 A. 729 (Ch. 1928), aff'd, 104 N.J. Eq. 490, 146 A. 916 (1929). Similar cases have arisen under the federal securities laws, although the incidence of such litigation in the federal courts should be considerably reduced by Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977), which held that claims of breach of fiduciary duty did not state a claim under the antifraud provisions of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976).Google Scholar

10. Geddes v. Anaconda Copper Mining Co., 254 U.S. 590 (1921); Lebold v. Inland Steel Co., 125 F.2d 369 (7th Cir. 1941); May v. Midwest Ref. Co., 121 F.2d 431 (1st Cir.), cert. denied, 314 U.S. 668 (1941); Marks v. Merrill Paper Co., 203 F. 16 (7th Cir. 1913); Wheeler v. Abilene Nat'l Bank Bldg. Co., 159 F. 391 (8th Cir. 1908); Cathedral Estates, Inc. v. Taft Realty Corp., 157 F. Supp. 895 (D. Conn. 1954), aff'd, 228 F.2d 85 (2d Cir. 1955), 251 F.2d 340 (2d Cir. 1957); Binney v. Cumberland Ely Copper Co., 183 F. 650 (D. Me. 1910); Ervin v. Oregon Ry. & Navigation Co., 27 F. 625 (S.D.N.Y. 1886); Ervin v. Oregon Ry. & Navigation Co., 20 F. 577 (S.D.N.Y. 1884); Abelow v. Midstates Oil Corp., 41 Del. Ch. 145, 189 A.2d 675 (Sup. Ct. 1963); Allaun v. Consolidated Oil Co., 16 Del. Ch. 318, 147 A. 257 (Sup. Ct. 1929); Allied Chem. & Dye Corp. v. Steel & Tube Co. of America, 14 Del Ch. 1, 120 A. 486 (Ch. 1923); Rossing v. State Bank, 181 Iowa 1013, 165 N.W. 254 (1917); Homer v. Crown Cork & Seal Co., 155 Md. 66, 141 A. 425 (1928); Blumenthal v. Roosevelt Hotel, Inc., 202 Misc. 988, 115 N.Y.S.2d 52 (Sup. Ct. 1952); In re American Tel. & Cable Co., 139 Misc. 625, 248 N.Y.S. 98 (Sup. Ct. 1931); Andrews v. Sumter Commercial & Real Estate Co., 87 S.C. 301, 69 S.E. 604 (1910); Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004 (1904); Claus v. Farmers & Stockgrowers State Bank, 51 Wyo. 45, 63 P.2d 781 (1936); and Smith v. Stone, 21 Wyo. 62, 128 P. 612 (1912); cf. Southern Pac. Co. v. Bogert, 250 U.S. 483 (1919) (foreclosure of mortgage by controlling shareholder).Google Scholar

11. Voidability originally occurred because a sale by the majority to itself could not occur without the approval of the minority shareholders, since such transactions required unanimous consent. Compare Mason v. Pewabic Mining Co., 133 U.S. 50 (1890), with the cases cited in note 10 supra. See also Nave-McCord Mercantile Co. v. Ranney, 29 F.2d 383 (8th Cir. 1928); Treat v. Hubbard-Elliott Copper Co., 4 Alas. 497 (Dist. Ct. 1912); and Murrin v. Archbald Consol. Coal Co., 232 N.Y. 541, 134 N.E. 563 (1921). In other settings the erosion of the rigid rule against self-dealing is traced in Harold Marsh, Jr., Are Directors Trustees? Conflicts of Interest and Corporate Morality, 22 Bus. Law. 35 (1966).Google Scholar

12. See generally Pepper v. Litton, 308 U.S. 295 (1939); Sterling v. Mayflower Hotel Corp., 33 Del. Ch. 293, 93 A.2d 107 (Sup. Ct. 1952); and Robb v. Eastgate Hotel, Inc., 347 Ill. App. 261, 106 N.E.2d 848, 854 (1952). But if the transaction is ratified by a majority of the disinterested shareholders, the burden of proving unfairness may shift to the minority. Wall v. Anaconda Copper Mining Co., 216 F. 242, 244–45 (D. Mont. 1914), aff'd sub nom. Wall v. Parrot Silver & Copper Co., 244 U.S. 407 (1917); Gottlieb v. Heyden Chem. Corp., 33 Del. Ch. 177, 91 A.2d 57 (Sup. Ct. 1952).Google Scholar

13. The disclosure issue usually arises in the context of approval of self-dealing by disinterested parties, as in the case of the disinterested members of the board of directors, e.g., ABA-ALI Model Bus. Corp. Act § 41(a) (1979), or the shareholders, id. § 41(b). Once the transaction is fully disclosed and is approved or ratified by disinterested parties who control the decision, the burden of proving a breach of fiduciary duty shifts from the self-dealing parties to the complaining parties. Alcott v. Hyman, 42 Del. Ch. 233, 208 A.2d 501 (Sup. Ct. 1965); Gottlieb v. Heyden Chem. Corp., 33 Del. Ch. 177, 91 A.2d 57 (Sup. Ct. 1952); Kaye v. Kentucky Pub. Elevator Co., 295 Ky. 661, 175 S.W.2d 142 (1943); In re American Tel. & Cable Co., 139 Misc. 625, 248 N.Y.S. 98 (Sup. Ct. 1931); and Wick v. Youngstown Sheet & Tube Co., 46 Ohio App. 253, 188 N.E. 514 (1932). Approval of a transaction by the controlling shareholders does not shift the burden to the minority challenging the transaction. Bastian v. Bourns, Inc., 256 A.2d 680 (Del. Ch. 1969), aff'd per curiam, 278 A.2d 467 (Del. Sup. Ct. 1970).Google Scholar

14. The requirement of proving that a business purpose exists is usually not phrased in those terms but in terms of showing “good faith” as well as the fairness of the transaction. Pepper v. Litton, 308 U.S. 295 (1939); Mueller v. MacBan, 62 Cal. App. 3d 258, 132 Cal. Rptr. 222, 232 (1976); Cathedral Estates, Inc. v. Taft Realty Corp., 157 F. Supp. 895 (D. Conn. 1954), aff'd, 228 F.2d 85 (2d Cir. 1955), 251 F.2d 340 (2d Cir. 1957) (burden “of showing the entire fairness and corporate necessity of the transfer to themselves,” 157 F. Supp. at 898); Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548 (Del. Sup. Ct. 1964). More recently, in Singer v. Magnavox, 380 A.2d 969 (Del. 1977), while the court did not specifically discuss the burden of proof with regard to the business-purpose tests, in discussing the fiduciary duty of the majority, which requires a business purpose, the court did quote with approval from Sterling v. Mayflower Hotel, 33 Del. Ch. 293, 93 A.2d 107 (Sup. Ct. 1952): “[t]he dominant corporation, as a majority stockholder standing on both sides of a merger transaction, has ‘the burden of establishing its entire fairness’ to the minority stockholders,” 380 A.2d at 976. In Lachman v. Bell, 353 F. Supp. 37, 40 (S.D.N.Y. 1972), the court stated: “The complaint, however, does allege self-interest and a breach of fiduciary duty in that the defendant himself changed the deal for no valid corporate purpose but rather to benefit himself. That is a sufficient allegation.”Google Scholar

15. See cases cited notes 12 and 14 supra, and Levin v. Great W. Sugar Co., 406 F.2d 1112, 1116 (3d Cir.), cert. denied, 396 U.S. 848 (1969); Kohn v. American Metal Climax, Inc., 322 F. Supp. 1331 (E.D. Pa. 1970), appeal dismissed in part, modified in part, 458 F.2d 255 (3d Cir.), cert. denied, 409 U.S. 874 (1972); Tanzer v. International Gen. Indus., Inc., 379 A.2d 1121 (Del. 1977); Fliegler v. Lawrence, 361 A.2d 218 (Del. 1976); David J. Greene & Co. v. Dunhill Int'l, Inc., 249 A.2d 427 (Del. Ch. 1968); Sterling v. Mayflower Hotel Corp., 33 Del. Ch. 293, 93 A.2d 107 (Sup. Ct. 1952); Kemp v. Angel, 381 A.2d 241 (Del. Ch. 1977); Smith v. Stone, 21 Wyo. 62, 128 P. 612 (1912); cf. Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971) (dividends). The difficulty with this rule is that courts often require the plaintiff to plead the unfairness with some particularity before the court will reach the merits, which places a substantial burden of proof on the plaintiff at the onset of the case. See, e.g., Baron v. Pressed Metals of America, Inc., 35 Del. Ch. 581, 123 A.2d 848, 855 (Sup. Ct. 1956) (“plaintiff has the burden of showing such a gross disparity as will raise an inference of improper motives or reckless indifference to or intentional disregard of stockholders’ interests”); Cole v. National Cash Credit Ass'n, 18 Del. Ch. 47, 156 A. 183, 187 (Ch. 1931) (charges of undervaluation equivalent to fraud “must be so plainly made out as to disclose a breach of trust or such maladministration as works a manifest wrong to the dissentients”); Homer v. Crown Cork & Seal Co., 155 Md. 66, 141 A. 425, 432 (1928) (“gross inadequacy of price” raises question of fraud). But see Najjar v. Roland Int'l Corp., 387 A.2d 709, 712–13 (Del. Ch. 1978), which suggests that virtually any pleading of a breach of fiduciary duty by the majority triggers a “fairness hearing” under Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977), and Tanzer v. International Gen. Indus., Inc., 379 A.2d 1121 (Del. 1977).Google Scholar

16. Seagrave Corp. v. Mount, 212 F.2d 389, 395 (6th Cir. 1954); Hottenstein v. York Ice Mach. Corp., 136 F.2d 944, 952 (3d Cir. 1943); Massaro v. Fisk Rubber Corp., 36 F. Supp. 382, 385 (D. Mass. 1941); Wall v. Anaconda Copper Mining Co., 216 F. 242, 246 (D. Mont. 1914), aff'd sub nom. Wall v. Parrot Silver & Copper Co., 244 U.S. 407 (1917); Porges v. Vadsco Sales Corp., 27 Del. Ch. 127, 32 A.2d 148, 151 (Ch. 1943); Gabhart v. Gabhart, 370 N.E.2d 345, 356 (Ind. 1977) (rejecting the unfairness of the terms as a ground for setting aside a merger on the basis that “[w]e do not believe the judiciary should intrude into corporate management to that extent”); Zobel v. American Locomotive Co., 182 Misc. 323, 44 N.Y.S.2d 33, 37 (Sup. Ct. 1943) (claim that extreme unfairness amounts to fraud “is here nothing more than an emphatic way of saying that as a matter of business judgment plaintiffs would rather keep what they now have”); and Colby v. Equitable Trust Co., 124 A.D. 262, 108 N.Y.S. 978, 985 (1908), aff'd mem., 192 N.Y. 535, 84 N.E. 1111 (1908).Google Scholar

17. The literature on fairness is massive. See especially Victor Brudney & Marvin A. Chirelstein, Fair Shares in Corporate Mergers and Takeovers, 88 Harv. L. Rev. 297 (1974), and SEC Securities Exchange Act Release No. 14185, 42 Fed. Reg. 60,090 (1977), reprinted in [1977–1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 81,366, proposing Securities Exchange Act Rule 13e-3, dealing with going-private transactions. See also A. A. Sommer, Jr., “Going Private”: A Lesson in Corporate Responsibility, reprinted in [1974–1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 80,010, at 84,695, where the author describes the treatment of minority shareholders in going-private transactions as “serious, unfair, and sometimes disgraceful, a perversion of the whole process of public financing.” This article will be limited to the business-purpose test, which concedes that some unfairness may be necessary to achieve utilitarian goals. The disclosure literature, centering on §§ 10(b) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), 78n(e) (1976), is even more extensive. The SEC'S attempt to deal with substantive fairness problems in its 1977 proposal, supra, under the aegis of § 13(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(e) (1976), has been strongly criticized as unauthorized. See, e.g., Comment, An Appraisal of Authority for the Fairness Standard Contained in the SEC'S Proposed “Going-Private” Regulations, 28 Emory L.J. 111 (1979). The final going-private rules adopted by the SEC deal only with disclosure issues, while continuing to defend the SEC'S authority to deal with questions of substantive fairness. SEC Securities Exchange Act Release No. 16075, 44 Fed. Reg. 46,736 (1979), reprinted in [1979 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 82,166 (as amended in Release No. 16076, 44 Fed. Reg. 46,748 (1979), reprinted in id. ¶ 82,167), adopting Securities Exchange Act Rule 13e-3, 17 C.F.R. § 240.13e-3, reprinted in 2 Fed. Sec. L. Rep. (CCH) ¶ 23, 703A.Google Scholar

18. Henry Sumner Maine, Ancient Law: Its Connection with the Early History of Society and Its Relation to Modern Ideas 163–65 (4th American ed., New York: Henry Holt & Co., 1906), traces the development of law from status to contract, or from a situation where legal relations are determined by family relationships to one where they are determined by free agreement. See Howard O. Hunter, An Essay on Contract and Status: Race, Marriage, and the Meretricious Spouse, 64 Va. L. Rev. 1039, 1042–45, 1049–53 (1978). In modern corporate law, while much is made of the freedom of shareholders to contract, cf. Federal United Corp. v. Havender, 24 Del. Ch. 318, 11 A.2d 331, 338 (Sup. Ct. 1940) (cancellation of accumulated preferred dividends by merger), individual contract rights are often more apparent than real. The shareholder in a publicly held corporation receives a negotiable instrument in most cases, as provided for by art. 8 of the Uniform Commercial Code. While the Dartmouth College case, Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819), characterizes the rights of the shareholder under the charter as contract rights that cannot be unilaterally altered, Justice Story suggested, in that case, the means for such alterations—a reservation by the state of the power to amend the charter at a subsequent date. 17 U.S. at 712. That suggestion has been taken up by every state, with the possible exception of Utah, so what the shareholder obtains is a contract that is subject to alteration by the state, or in a manner that may be subsequently altered by the state. The shareholder who purchases stock in a large existing enterprise has “agreed” to the terms of the charter and the legal relationships created by the charter and state corporation law only in the sense that he or she has selected among several previously structured economic relationships that were offered to him or her. In the sense that the shareholder is free to reject them all, he or she retains contractual independence; but to the extent that the shareholder has decided to invest in shares in a publicly held corporation his or her choices of terms, in some respects, are extremely limited. Problems of information costs and transaction costs bar negotiations in publicly held corporations. Further, the circumstances under which the “contract” may be altered are so remote and contingent that the shareholder is unlikely to place any present value on differences that may exist between state laws affecting fundamental corporate changes, Winter's thesis notwithstanding. See Ralph J. Winter, State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251 (1977), and notes 189–90 infra. Google Scholar

19. Manning suggested that these rules raised questions of constitutionality, which were solved by granting shareholders the appraisal remedy. Manning, supra note 1, at 246–47 n.38. This view is disputed by Eisenberg, who suggests that legislatures conferred appraisal rights on shareholders as a matter of fairness, not as a matter of compulsion. Melvin A. Eisenberg, The Structure of the Corporation: A Legal Analysis 75 (Boston: Little, Brown & Co., 1976), and note 103 infra. This article concludes that appraisal remedies were not granted as a matter of constitutional necessity, since the reserved power of both the state and the majority to amend the charter solved the constitutional problem. What remained for shareholders under this scheme was a status that was subject to change by either the majority or the state. Federal United Corp. v. Havender, 24 Del. Ch. 318, 11 A.2d 331 (Sup. Ct. 1940); Hottenstein v. York Ice Mach. Corp., 136 F.2d 944 (3d Cir. 1943). It appears that when legislatures granted appraisal rights they did no more than reflect concurrent judicial developments, discussed in text at notes 94–98 infra, and granted appraisal rights out of considerations not of fairness but of efficiency.Google Scholar

20. Defenders of the corporation should become particularly uncomfortable when it is realized that entailed in this is the notion that all shareholders take their shares subject to whatever claims on their rights might be made by the state. Ralph Nader has carried this notion to its logical conclusion when he argues that the corporation is a creature of the state and the corporations (and thus their shareholders) have rights only to the extent that they serve the interests of the state and “society.” Ralph Nader, Mark Green, & Joel Seligman, Constitutionalizing the Corporation: The Case for the Federal Chartering of Giant Corporations ch. 1 (Washington, D.C.: Corporate Accountability Research Group, 1976). The history of this notion is traced in James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (Charlottesville: University Press of Virginia, 1970). Robert Hessen, In Defense of the Corporation (Stanford, Cal.: Hoover Institution Press, Stanford University, 1979), responds to the Nader arguments. For a philosophical defense of the rights of participants in the corporation, see Roger Pilon, Do Corporations Have Rights? On Treating Corporate People Justly, 13 Ga. L. Rev. 1245 (1979). Cf. the famous definition of a corporation by Chief Justice Marshall in Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 636 (1819), which concludes: “It is no more a state instrument, than a natural person exercising the same powers would be.”Google Scholar

21. As one author noted, “there will be many cases where courts will have difficulty judging the substantiality and genuineness of what is proposed.” James Vorenberg, Exclusiveness of the Dissenting Stockholder's Appraisal Right, 77 Harv. L. Rev. 1189, 1204 (1964). Referring to contrived mergers to effect freeze-outs in publicly held corporations, Brudney argued, “The reasons offered thus far by commentators and proponents of such freeze-outs do not satisfy the reasonable requirements of legitimate business purposes or of efficiency gains which can be shared.” Victor Brudney, A Note on “Going Private,” 61 Va. L. Rev. 1019, 1032 (1975). See also Victor Brudney & Marvin A. Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale L.J. 1354 (1978), and Note, Going Private, 84 Yale L.J. 903, 907 (1975).Google Scholar

22. Vorenberg, supra note 21; Brudney & Chirelstein, supra note 17; Sommer, supra note 17; id., Further Thoughts on “Going Private,” [1975] Sec. Reg. & L. Rep. (BNA) No. 278, D-1; Remarks of SEC Division of Enforcement Director Stanley Sporkin before Society of American Business and Economic Writers, in [1977] Sec. Reg. & L. Rep. (BNA) No. 402, G-1. Arthur M. Borden, Going Private—Old Tort, New Tort, or No Tort? 49 N.Y.U.L. Rev. 987 (1974).Google Scholar

23. This process is traced in Brudney & Chirelstein, supra note 17. See also People v. Concord Fabrics, 83 Misc. 2d 120, 371 N.Y.S.2d 550 (Sup. Ct.), aff'd, 50 A.D.2d 787, 377 N.Y.S.2d 84 (1975). But see Kaufmann v. Lawrence, 386 F. Supp. 12 (S.D.N.Y. 1974), aff'd per curiam, 514 F.2d 283 (2d Cir. 1975), discussed in note 214 infra, which suggests that sometimes the low market price creates the business reasons for going private. But to the extent that the reasons are long term, the costs of engaging in the transaction are obviously lowered at such times, and the fact that the majority chooses to go private at the time of lowest market prices should not by itself render the transaction suspect.Google Scholar

24. Manning attempted a re-examination of the rights of minority shareholders to obtain appraisal that implied that the problem was an economic one rather than a legal one and that appraisal should be broadened to include additional grounds unrelated to the actions of the board of directors and the holders of a majority of the shares, but his suggestions in this area have not met with any legislative or judicial response. Manning, supra note 1, at 242. He concluded that “[t]o limit our concern to acts of shareholders makes it now apparent that we are not dealing with an economic problem or with economic solutions… . [T]he statutes … do not make the differentiation in economic categories, but in lawyer's categories.” Id. This article suggests that the lawyer's categories were drawn not out of any concern for antiquated notions of corporate entity or for questions such as, “How could a man who owned a horse suddenly find he owned a cow?” (id. at 246), but from concerns with efficiency, which justified kicking out the minority or forcing them to participate in a new and more efficient enterprise.Google Scholar

25. From the rather general suggestions of William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 Yale L.J. 663 (1974), reform has proceeded to the more specific suggestions for “Legislative Solutions for Fiduciary Problems” made by Marvin A. Chirelstein in The Role of the Shareholder in the Corporate World, in Hearings Before the Subcomm. on Citizens and Shareholders Rights and Remedies of the Senate Comm. on the Judiciary, 95th Cong., 1st Sess. 264 (June 27, 28, 1977). “Professor Chirelstein's paper takes the Cary proposal as a starting point for a more detailed and more explicit examination of what Federal law might accomplish in the area of fiduciary problems arising from recapitalizations and reorganizations of public companies.” Marshall, id. at 24.Google Scholar

26. Nader et al., supra note 20.Google Scholar

27. The market analysis that supports the argument that current legal rules benefit shareholders is made in Winter, supra note 18. See also Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965); id., Some Theoretical Aspects of Share Voting: An Essay in Honor of Adolf A. Berle, 64 Colum. L. Rev. 1427 (1964); Richard A. Posner, Economic Analysis of Law § 14.9 (2d ed. Boston: Little, Brown & Co., 1977).Google Scholar

28. The earliest American authors on corporation law noted that the only extant treatise on the subject was of little use to nineteenth-century lawyers because of its mix of cases dealing with municipal and private corporations. Joseph K. Angell & Samuel Ames, Treatise on the Law of Private Corporations Aggregate vi–vii (1832; reprint ed., New York: Arno Press, 1972). See also Morton J. Horwitz, The Transformation of American Law, 1780–1860, ch. 4 (Cambridge, Mass.: Harvard University Press, 1977); Hurst, supra note 20, at 7; L. C. B. Gower, Some Contrasts Between British and American Corporation Law, 69 Harv. L. Rev. 1369, 1370–71 (1956); Samuel Williston, History of the Law of Business Corporations Before 1800, 2 Harv. L. Rev. 105 (1888).Google Scholar

29. Alfred Fletcher Conard, Corporations in Perspective 131 (Mineola, N.Y.: Foundation Press, 1976), describes the modern corporation as “the wedding of the entity concept with the business practices of a joint stock company.” See also Hessen, supra note 20. That the wedding was an early one appears in the discussion of its origins in William Robert Scott, The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720, ch. 1 (Gloucester, Mass.: Peter Smith, 1968). While the notion of an “entity” cognizable at law separate from its participants is the distinctive feature of the corporation, the structural characteristics we associate with it could be, and were, achieved by the joint stock association. Edward H. Warren, Corporate Advantages Without Incorporation 17–28, 327 ff. (New York: Baker, Voorhis & Co., 1929). Hurst observes that the use of the deed-of-settlement techniques in connection with the creation of joint stock associations “accustomed businessmen and lawyers alike to the idea that men should enjoy considerable contractual freedom in arranging business associations.” Hurst, supra note 20, at 6. For a more detailed account of the vigor of early joint stock associations, see Scott, supra, and Armand Budington DuBois, The English Business Company After the Bubble Act 1720–1800 (New York: Commonwealth Fund, 1938).Google Scholar

30. Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819). Dodd has observed that many of the early cases involving dissenting shareholders were decided without reference to constitutional rights. “Nevertheless, it had by the fourth decade of the nineteenth century become … obvious that any contract rights which the dissenter might have were protected by the United States Constitution.” E. Merrick Dodd, Jr., American Business Corporations Until 1860, at 136 (Cambridge, Mass.: Harvard University Press, 1954).Google Scholar

31. 2 Morawetz, supra note 2, at 908–9. See also 7 Thompson, supra note 1, § 8231. But see Horwitz, supra note 28, at 111–13, noting early judicial analogies to the municipal corporation and early acceptance of notions of majority rule for assessments of shareholders and members of the corporation, citing Currie's Adm'rs v. Mutual Assurance Soc'y, 14 Va. (4 Hen. & M) 900, 4 Am. Dec. 517 (1809), a case that appears not to have been cited for that proposition by later authorities. Horwitz notes that this was an early judicial view in the United States and that “as corporations thus were classified from public to private bodies, they inevitably invoked emerging constitutional restrictions on the state's discretion to deal with vested property rights.” Id. at 113. This conclusion may overstate the doctrinal trend in American corporation law, since the Currie case seems to stand alone, citing no authority for its proposition. Such a conclusion also ignores the strong contract theme already present in corporation law by virtue of its ties to the joint stock association, with its roots in partnership law. Gower, supra note 28, observes that the English corporation has a much closer kinship to a partnership than does its American counterpart.Google Scholar

32. By 1866, if not earlier, the eighth edition of Angell & Ames, supra note 28, had been revised to refer to the rule of contract law that no powers can be exercised by a partnership without the consent of all, and stated that “[s]uch, precisely, is the law with regard to partnership associations which are incorporated, and no point of law is more cleary and firmly settled, than that if a corporation procure an alteration to be made in its charter, by which a new and different business is super-added to that originally contemplated, such of the stockholders as do not assent to the alteration, will be absolved from liability.” Joseph K. Angell & Samuel Ames, Treatise on the Law of Private Corporations Aggregate § 537, at 569 (11th ed., Boston: Little, Brown & Co., 1882). According to its preface, the text of the eleventh edition is unaltered from the 8th edition. I lacked access to intervening editions to determine the exact date of the appearance of this material.Google Scholar

33. Stevens v. Rutland & B.R.R., 29 Vt. 545, 548 (Ch. Chittenden County 1851).Google Scholar

34. Mason v. Pewabic Mining Co., 133 U.S. 50 (1890) (asset sale); Jackson v. Gardiner Inv. Co., 200 F. 113 (1st Cir. 1912) (asset sale); Treat v. Hubbard-Elliott Copper Co., 4 Alas. 497 (Dist. Ct. 1912) (asset sale); State ex rel. Brown v. Bailey, 16 Ind. 46 (1861) (consolidation); McCray v. Junction R.R., 9 Ind. 358 (1857) (consolidation); Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851) (charter amendment); Tanner v. Lindell Ry., 180 Mo. 1, 79 S.W. 155 (1904) (consolidation); cf. Murrin v. Archbald Consol. Coal Co., 232 N.Y. 541, 134 N.E. 563 (1921) (asset sale); Lange v. Reservation Mining & Smelting Co., 48 Wash. 167, 93 P. 208 (1908) (asset sale); and Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004 (1904). In Mason, Justice Miller, responding to claims of the majority to the power to sell assets, wrote:Google Scholar

133 U.S. at 59.

35. Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851), points out that if the state were to authorize a charter amendment upon majority vote of the shareholders,Google Scholar

Id. at 556.

36. Some such opinions antedate the Dartmouth College case, Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819), e.g., Middlesex Turnpike Corp. v. Locke, 8 Mass. 268 (1811); Union Locks & Canals v. Towne, 1 N.H. 44 (1817). In these cases the subscribers raised the charter change as a defense to actions on their subscriptions. The defense continued to be successful after the Dartmouth College case. McCray v. Junction R.R., 9 Ind. 358 (1857), and cases cited in Dodd, supra note 30, at 136 nn.61–67.Google Scholar

37. Sprague v. Illinois River R.R., 19 Ill. 173, 180 (1857). But see Clearwater v. Meredith, 68 U.S. (1 Wall.) 25 (1864), which indicates that a railroad consolidation to which a shareholder does not consent is such a fundamental change as to impair his contract rights. The court noted that the shareholder “could have prevented this consolidation had he chosen to do so … . If a majority of the stockholders of the corporation of which he was a member had undertaken to transfer his interest against his wish, they would have been enjoined.” Id. at 40–41. The New York Central consolidation required the approval of the holders of two-thirds of the shares of the participating railroads, but it is not clear from the historical account of the consolidation whether each of the participating railroads was chartered under an act reserving to the state the power to amend the charter. In 1853 there was no general law in New York authorizing railroad consolidations. Frank W. Stevens, The Beginnings of the New York Central Railroad: A History 350, 358–61 (New York: G. P. Putnam's Sons, 1926; reprint ed., Ann Arbor, Mich.: University Microfilms, 1972). Later consolidations extended the New York Central system beyond New York State and encountered the same problem of unanimous consent under the laws of the other jurisdictions. General Inv. Co. v. Lake Shore & M. S. Ry., 250 F. 160, 174 (6th Cir. 1918).Google Scholar

38. Chief Justice Caton's opinion in Sprague v. Illinois River R.R., 19 Ill. 173 (1857), stands out as an early example:Google Scholar

Id. at 178.

Similar agruments are spread through more modern opinions as well. See, e.g., American Elementary Elec. Co. v. Normandy, 46 App. D.C. 329, 340–42 (1917); Binney v. Cumberland Ely Copper Co., 183 F. 650 (D. Me. 1910); Salt Dome Oil Corp. v. Schenck, 28 Del. Ch. 433, 41 A.2d 583, 587 (Sup. Ct. 1945); Chicago Corp. v. Munds, 20 Del. Ch. 142, 172 A. 452, 455 (Ch. 1934); Tanner v. Lindell Ry., 180 Mo. 1, 79 S.W. 155, 161 (1904) (“To concede to the plaintiffs the right to annul the sale … would be to place the holder of one share of stock in position to dictate to the majority the terms on which a sale might be made, giving him an advantage which reason and justice cannot approve.”); Ribakove v. Rich, 13 Misc. 2d 98, 173 N.Y.S.2d 306, 309–10 (Sup. Ct. 1958); In re Timmis, 200 N.Y. 177, 93 N.E. 522, 523 (1910); Pearson v. Clam Falls Coop. Dairy Ass'n, 243 Wis. 369, 10 N.W. 2d 132, 134 (1943). Scholars seem to be unanimous in their agreement that unanimous consent is totally impracticable. Gibson, supra note 5, at 291, in referring to the claims of preferred shareholders in recapitalizations, put it neatly: “No veto by a small group can be tolerated.” Lattin stated: “The life of the corporation may depend upon an unshackled freedom which can not be hampered by a small minority … who have honest convictions in the matter.” Norman D. Lattin, Remedies of Dissenting Stockholders Under Appraisal Statutes, 45 Harv. L. Rev. 233, 233–34 (1932). See also id., supra note 5; 13 William Meade Fletcher, Cyclopedia of the Law of Private Corporations § 5906.1, at 237 (Perm. ed. 1970 rev. vol., Mundelein, Ill.: Callaghan & Co., 1970); and Henry Winthrop Ballantine, Questions of Policy in Drafting a Modern Corporation Law, 19 Calif. L. Rev. 465, 482 (1931). Posner states the rationale in terms of economic analysis. Posner, supra note 27, § 14.7. Contrast these views with that of the court in Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851), where the court stated:

Id. at 564.

39. The relationship between the law of municipal and private corporations is traced in Horwitz, supra note 28, at 111–13, citing the municipal corporation rule that the majority could bind the minority without their consent, relied on in Currie's Adm'rs v. Mutual Assurance Soc'y, 14 Va. (4 Hen. & M.) 900, 912, 4 Am. Dec. 517 (1809).Google Scholar

40. “At common law, unanimous shareholder consent was a prerequisite to fundamental changes in the corporation. This made it possible for an arbitrary minority to establish a nuisance value for its shares by refusal to cooperate.” Voeller v. Neilston Warehouse Co., 311 U.S. 531, 535 n.6 (1941) (Black, J.).Google Scholar

Justifying a vote by a majority to sell the assets of a failing business over the objection of the minority, the Court earlier wrote, “the law recognizes that under such conditions the majority stockholders have rights as well as the minority and that it should not require the former to remain powerless until the creeping paralysis of inactivity shall have destroyed the investment of both.” Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 596 (1921). In a case involving an asset sale to a new corporation where the objecting minority declined to put in additional capital required to make a success of the business, the court clearly dismissed them as free riders, stating, “The latter seem to have rested supinely upon what they conceived the majority would have been compelled to do for them in order to protect their own interests. Their attitude was justified neither by the law nor good business sense.” Marks v. Merrill Paper Co., 203 F. 16, 19–20 (7th Cir. 1913).Google Scholar

41. The terms shareholder “wealth” and “welfare” are used interchangeably and somewhat loosely herein. By wealth I do not mean an “objective” valuation of the firm, but the sum of the total value of the shares of a firm placed on such shares by their respective owners. Thus it is possible that no two shareholders place the same value on their shares. Value, in this sense, is the total area lying beneath the supply curve for the firm's shares. This value may or may not coincide with value set by prospective buyers of the firm's shares, which is represented by the total area under the demand curve. Neither is related to values set by current market prices, since such prices do not reflect transfers of control nor the benefits of 100 percent ownership. This notion of “value” as being set by each owner gives content to the perception of some shareholders that their shares are currently “undervalued” by the market and recognizes different preferences or expectations in the long run versus the short run. It also may take account of reduced costs in a declining market, which may affect shareholders’ willingness to accept losses at certain times.Google Scholar

42. This utilitarian theme generally in corporate law is traced by Hurst, supra note 20. The development of a similar theme in other areas of the law is traced by Horwitz, supra note 28. The Horwitz thesis with respect to the law of contracts is vigorously contested in A. W. B. Simpson, The Horwitz Thesis and the History of Contracts, 46 U. Chi. L. Rev. 533 (1979). While that debate is not of immediate concern here, the attribution of an instrumental approach to legal doctrine at an early stage in the development of corporate law may be somewhat overstated by Horwitz, who attributes early notions of monopoly which were associated with the grant of a corporate charter to the need to encourage investment of private capital. But Horwitz's view is supported at least in part by Dodd's discussion of the conflict between Justices Taney and Story in the Charles River Bridge case (36 U.S. (11 Pet.) 536 (1837)). Dodd, supra note 30, at 126. The thesis of this article is that an instrumental approach existed during the nineteenth century, if not before.Google Scholar

43. See generally Hurst, supra note 20, at 17–18, and the discussion by Mr. Justice Story of the distinction between public and private corporations in his concurring opinion in Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 668–73 (1819).Google Scholar

44. Horwitz observes that by 1800 a pattern of private ownership of such “public” businesses had become dominant in America, supra note 28, at 110, and concludes that early legislators chose private capital formation and operation for these public functions rather than use of the taxing power to raise capital for the state to engage in such activities on a deliberate basis, fearing the redistributive potential of the taxing power. Id. at 99–101.Google Scholar

45. Id. at 47–54.Google Scholar

46. Compare the list of manufacturing and mining corporations with the lists of corporations in such areas as banking, bridge, canal, and other “public” corporations listed in the Table of New England Corporations in Dodd, supra note 30, at 459–66. The author also indicates “that by 1830, … the New England states alone had chartered some 1900 business corporations, of which nearly 600 were manufacturing and mining companies.” Id. at 123. Hurst indicates that of the 317 special charters granted from 1780 to 1801 in the states, nearly two-thirds were for transportation enterprises, 20 percent for banks and insurance companies, 10 percent for local public service enterprises such as water supply, and less than 4 percent for general business enterprises. Hurst, supra note 20, at 17. The rapidity with which railroad charters were granted is indicated in Horwitz, supra note 28, at 137, where he points out that while Massachusetts had only chartered 2 insignificant railroads by 1829, in the next six years it authorized 15 new lines, while New York, with only 2 in 1829, authorized 48 more in the next five years.Google Scholar

47. Angell & Ames, supra note 32, at 25. This language did not appear in the first edition.Google Scholar

48. Horwitz, supra note 28, at 114–22; Hurst, supra note 20, at 20. In many cases the grant of a monopoly was implied or treated as inherent in the franchise from the sovereign, according to Horwitz, supra note 28, at 115–16. The turning point in this debate was Charles River Bridge v. Warren Bridge, 36 U.S. (11 Pet.) 536 (1837), where the owners of the Charles River Bridge claimed that their charter was an exclusive grant from the state, which thus prohibited the construction of a later bridge pursuant to a later charter, without compensation for the taking of their property. Chief Justice Taney ruled against the Charles River Bridge owners, holding that the grant from the state was to be strictly construed and that no grant of monopoly could be implied where none was expressly granted.Google Scholar

49. See Dodd, supra note 30, at 44; Hurst, supra note 20, at 23; 4 Thompson, supra note 1, ch. 122; and Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851).Google Scholar

50. Cf. McCray v. Junction R.R., 9 Ind. 358 (1857) (consolidation); Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851) (charter amendment to extend line); Lauman v. Lebanon Valley Ry., 30 Pa. 42 (1858) (consolidation). See also Morawetz, supra note 2, ch. 16, and Dodd, supra note 30, at 124 ff. Mr. Justice Story's dissent in Charles River Bridge v. Warren Bridge, 36 U.S. (11 Pet.) 536, 587–88 (1837), describes such a grant.Google Scholar

51. Hurst concludes that this privilege was not as universal as most commentators suggest. Hurst, supra note 20, at 26–27. This is more fully developed in Dodd, supra note 30, at 84–90. Angell & Ames, supra note 32, § 41, at 595–98, state the rule more firmly. Horwitz, tracing early confusion of municipal and private corporations, notes that some notions of assessment of members of private corporations lingered in a few early American cases. Horwitz, supra note 28, at 112–13 (citing Currie's Adm'rs v. Mutual Assurance Soc'y, 14 Va. (4 Hen. & M.) 900 (1809).Google Scholar

52. Horwitz, supra note 28, at 118–20.Google Scholar

53. Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819).Google Scholar

54. Id. at 675, 708, 712 (1819) (Story, J., concurring). The notion did not originate with Story's opinion. In Wales v. Stetson, 2 Mass. 143, 146 (1806), concerning the question of the effect of subsequent general legislation on an earlier grant to a toll road company, the Massachusets Supreme Judicial Court stated: “We are also satisfied that the rights legally vested in this, or in any corporation, cannot be controlled or destroyed by any subsequent statute, unless a power for that purpose be reserved to the legislature in the act of incorporation.”Google Scholar

55. Dodd, supra note 30, at 141 nn.99–101 and accompanying text (1954); Looker v. Maynard, 179 U.S. 46, 52 (1900); William J. Cary, Cases and Materials on Corporations 1768–69 (4th ed., Mineola, N.Y.: Foundation Press, 1969); Angell & Ames, supra note 32, § 767, at 837–38; Hurst, supra note 20, at 63.Google Scholar

56. “An Act relating to Joint Stock Corporations,” Act of June 10, 1837, Conn. Pub. Acts, May 1836-May 1837 Sess., ch. 63, p. 49. Dodd describes the passage of this act in Dodd, supra note 30, at 414–18, and points out that other acts may be credited as earlier general incorporation statutes. Id. at 417 n.28. See also Hurst, supra note 20, at 132. Hurst indicates that widespread adoption of general incorporation statutes did not occur until the 1870s. Id. The use of the reserved power led to questions about the extent of the reservation and whether it related solely to matters of relations between corporation and state or extended to questions involving the corporation and its shareholders. An example of the judicial response that developed appears in Davis v. Louisville Gas & Elec. Co., 16 Del. Ch. 157, 142 A. 654, 657 (Ch. 1928). The case involved a recapitalization that altered both redemption and dividend rights of shares, and the court noted the state's interest in granting corporations powers “best calculated to promote their welfare.” The opinion conceded that the reserved power mightGoogle Scholar

Id. at 658. See also U.S., Securities and Exchange Commission, Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees, Part VII: Management Plans Without Aid of Committees 516 (Washington, D.C.: Government Printing Office, 1938).

57. While no comprehensive figures on corporate charters for the entire country appear available, by 1830 the New England states alone had chartered some 1,900 business corporations. Dodd, supra note 30, at 122. New York incorporated 993 business corporations between 1800 and 1830, while New Jersey incorporated 190, Pennsylvania 428, and Ohio, a relative newcomer, 117. Source: George H. Evans, Jr., Business Incorporations in the United States, 1800–1943 (New York: National Bureau of Economic Research, 1948). One can only assume that the numbers were somewhat smaller in other states during this period.Google Scholar

58. Dodd, supra note 30, at 133. Where no such reservation was made, it was still possible for the state to unilaterally alter charters of corporations and to provide compensation for the taking. In Wales v. Stetson, 2 Mass. 143, 146 (1806), in dicta, the Massachusetts Supreme Judicial Court pointed out: “There is an implied reservation in every legislative grant, that the property or right granted may be taken for the public use, when public necessity or utility requires it, paying therefor a reasonable compensation.” 2 Mass. at 146 n.(a). West River Bridge Co. v. Dix, 47 U.S. (6 How.) 529, 532 (1848), held that a legislatively authorized taking of a toll bridge by a community did not unconstitutionally impair its charter, since the power of eminent domain is “paramount to all private rights vested under the government.” See also the dissenting opinion of Mr. Justice McClean in Charles River Bridge v. Warren Bridge, 36 U.S. (11 Pet.) 536, 579–80 (1837), discussing the power of the state to alter even an exclusive bridge charter by eminent domain, and Dodd, supra note 30, at 128. Cf. Piscataqua Bridge v. New Hampshire Bridge, 7 N.H. 35 (1834) (permitting second bridge in same area of chartered monopoly if compensation provided).Google Scholar

59. See generally Walter Chadwick Noyes, A Treatise on the Law of Intercorporate Relations § 2, at 4–5 (Boston: Little, Brown & Co., 1902), and cases cited note 50 supra. The history of the development of the railroad network, including the early consolidations of short lines into more complex systems, is recounted in Emory R. Johnson, American Railway Transportation 24–26 (2d rev. ed., New York: D. Appleton & Co., 1909). While there were only 30 miles of railroad track in 1830, in 1860 there were 30,626. Dodd, supra note 30, at 123.Google Scholar

60. See General Inv. Co. v. Lake Shore & M.S. Ry., 250 F. 160 (6th Cir. 1918).Google Scholar

61. Ervin v. Oregon Ry. & Navigation Co., 20 F. 577 (S.D.N.Y. 1884) (statute); Davis v. Louisville Gas & Elec. Co., 16 Del Ch. 157, 142 A. 654 (Ch. 1928) (statute); Gordon v. Public Serv. Co., 101 N.H. 372, 143 A.2d 428 (1958) (statute); Perkins v. New Hampshire Power Co., 90 N.H. 534, 11 A.2d 811, reh. denied, 90 N.H. 534, 13 A.2d 475 (1940) (tracing statutory history); Outwater v. Public Serv. Corp., 103 N.J. Eq. 461, 143 A. 729 (Ch. 1928), aff'd, 104 N.J. Eq. 490, 146 A. 916 (1929) (statute); Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004 (1904) (statute). Where the charter did not so provide, legislatures sometimes authorized consolidations by shareholder votes of something less than 100 percent, with mixed results in the courts. Compare Lauman v. Lebanon Valley Ry., 30 Pa. 42 (1858), and State ex rel. Brown v. Bailey, 16 Ind. 46 (1861), with Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851). The early history of consolidation provisions in statutes governing railroads is also briefly traced in Manning, supra note 1, at 246–47 n.38.Google Scholar

62. But see Perkins v. New Hampshire Power Co., 90 N.H. 534, 11 A.2d 811, 813, reh. denied, 90 N.H. 534, 13 A.2d 475 (1940).Google Scholar

63. See Eugene V. Rostow, To Whom and for What Ends Is Corporate Management Responsible? in Edward S. Mason, ed., The Corporation in Modern Society (Cambridge, Mass.: Harvard University Press, 1960). See generally Hurst, supra note 20.Google Scholar

64. Gordon v. Public Serv. Co., 101 N.H. 372, 143 A.2d 428 (1958).Google Scholar

65. Act of Aug. 26, 1935, ch. 687, tit. I, § 33, 49 Stat. 803 (codified at 15 U.S.C. § 79 et seq. (1976)). See generally §§ 9–13. New York encouraged mergers of utilities by adopting a short-form merger statute “to effectuate greater economies, more efficient management and rate reductions” for public utilities. Beloff v. Consolidated Edison Co., 300 N.Y. 11, 87 N.E.2d 561, 565 (1949); N.Y. Bus. Corp. Laws §§ 623, 901, 905, 906, 910 (McKinney 1965 & Cum. Supp. 1979–80).Google Scholar

66. The provisions of § 11 of the Public Utility Holding Company Act, 15 U.S.C. § 79k (1976), are of particular interest. The general charge of the section to the SEC is simplification of corporate structures of public utilities and their holding companies. This is effected by requiring holding companies to limit their operations to a single integrated system, under § 11(b), 15 U.S.C. § 79k(b) (1976). Provision was made for holding companies to submit plans of simplification for commission orders, and judicial enforcement. Section 11(b) also requires simplification of financial structures. The provisions for operational simplification that allowed the SEC to order divestiture of nonintegrated holdings were held not to involve an unconstitutional taking in North Am. Co. v. SEC, 327 U.S. 686 (1946), while the provisions for financial simplification were sustained against a similar constitutional attack in American Power & Light Co. v. SEC, 329 U.S. 90 (1946). In the North American case the Court rejected the notion that simplification orders might destroy substantial values, observing that “Congress has concluded … that the economic advantages of a holding company at the top of an unintegrated, sprawling system are not commensurate with the resulting economic disadvantages,” and declined to review the reasonableness of that conclusion. 327 U.S. at 708. The Court appeared to rely on Congress to make the judgment whether values were destroyed and thus a taking involved. The economic judgments of the shareholders and the market thus played no part in this determination.Google Scholar

67. See note 31 supra and accompanying text.Google Scholar

68. Morawetz, supra note 2, § 412. See also Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 596 (1921); Hill v. Page & Hill Co., 198 Minn. 30, 268 N.W. 705, 706, reh. denied, 198 Minn. 30, 268 N.W. 927 (1936); Tanner v. Lindell Ry., 180 Mo. 1, 79 S.W. 155, 160 (1904); Weingreen v. Michelbacher, 149 N.Y.S. 110 (Sup. Ct. 1914); Phillips v. Providence Steam-Engine Co., 21 R.I. 302, 43 A. 598 (1899); Smith v. Stone, 21 Wyo. 62, 128 P. 612, 617 (1912); cf. Allied Chem. & Dye Corp. v. Steel & Tube Co. of America, 14 Del. Ch. 1, 120 A. 486, 489–90 (Ch. 1923) (sale of assets by going business). But Noyes argued that the power to sell assets and wind up the business existed for any corporation that did not have a specific term in its charter, since the charter did not imply that a business would be carried on for any particular term. See Noyes, supra note 59, § 110. Contra, Abbot v. American Hard Rubber Co., 33 Barb. 578 (1861); 2 William Wilson Cook, A Treatise on the Law of Corporations Having a Capital Stock § 670, at 1338–39 (4th ed., Chicago; Callaghan & Co., 1898); 3 Thompson, supra note 1, § 2424.Google Scholar

69. 1 Morawetz, supra note 2, put it in the following terms:Google Scholar

Id. § 412, at 390. Morawetz also states that the majority may wind up the business of a trading corporation at any time, without the consent of the minority, qualifying this rule by stating, “The majority would have no implied authority to sell out the company's property as a speculation, with the intention of starting the company's business anew at a subsequent date.” Id. § 413, at 392–93. See also Lange v. Reservation Mining & Smelting Co., 48 Wash. 167, 93 P. 208 (1908). Contra, 2 Cook, supra note 68, § 670, at 1339, and 1 Charles Fisk Beach, Jr., Company Law: Commentaries on the Law of Private Corporations § 357, at 582 (Chicago: T. H. Flood & Co., 1891).

70. Noyes, supra note 59, § 111, at 175–76.Google Scholar

71. Id. § 110; Morawetz, supra note 2, § 110.Google Scholar

72. Restatement of Contracts § 288 (1932); 6 Arthur Linton Corbin, Corbin on Contracts: A Comprehensive Treatise on the Working Rules of Contract Law § 1353 (St. Paul, Minn.: West Publishing Co., 1962). It seems odd that the courts have not used this notion of frustration to explain their decisions allowing the sale of assets of failing and insolvent corporations over the objection of the minority. Typical is the language in Phillips v. Providence Steam-Engine Co., 21 R.I. 302, 43 A. 598 (1899):Google Scholar

43 A. at 598 (quoting Wilson v. Proprietors, 9 R.I. 590).

73. Mason v. Pewabic Mining Co., 133 U.S. 50, 58–59 (1890); McCutcheon v. Merz Capsule Co., 71 F. 787 (6th Cir. 1896). In the latter case Judge Lurton employed colorful language to condemn the sale of assets for stock:Google Scholar

71 F. at 793.

74. Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 597–98 (1921); Metcalf v. American School Furniture Co., 122 F. 115 (W.D.N.Y. 1903); Butler v. New Keystone Copper Co., 10 Del. Ch. 371, 93 A. 380 (Del. Ch. 1915); Traer v. Lucas Prospecting Co., 124 Iowa 107, 99 N.W. 290 (1904); Hill v. Page & Hill Co., 198 Minn. 30, 268 N.W. 705, reh. denied, 198 Minn. 30, 268 N.W. 927 (1936). But see In re San Joaquin Light & Power Corp., 52 Cal. App. 2d 814, 127 P.2d 29 (1942). In Geddes the Court stated:Google Scholar

254 U.S. at 598.

75. Metcalf v. American School Furniture Co., 122 F. 115 (W.D.N.Y. 1903); Butler v. New Keystone Copper Co., 10 Del. Ch. 371, 93 A. 380 (Del. Ch. 1915); In re San Joaquin Light & Power Corp., 52 Cal. App. 2d 814, 127 P.2d 29 (1942).Google Scholar

76. Geddes v. Anaconda Copper Mining Co., 254 U.S. 590 (1921); Metcalf v. American School Furniture Co., 122 F. 115 (W.D.N.Y. 1903); Butler v. New Keystone Copper Co., 10 Del. Ch. 371, 93 A. 380 (Del. Ch. 1915).Google Scholar

77. Geddes v. Anaconda Copper Mining Co., 254 U.S. 590 (1921); In re San Joaquin Light & Power Corp., 52 Cal. App. 2d 814, 127 P.2d 29 (1942).Google Scholar

78. In re San Joaquin Light & Power Corp., 52 Cal. App. 2d 814, 127 P.2d 29 (1942). Most of the cases deny that such asset sales for stock are de facto consolidations, on the ground that if the shares are not distributed to the shareholders, the selling corporation continues its existence and retains the ability to engage in the business for which it was chartered. Butler v. New Keystone Copper Co., 10 Del. Ch. 371, 93 A. 380 (Del. Ch. 1915); Traer v. Lucas Prospecting Co., 124 Iowa 107, 99 N.W. 290 (1904).Google Scholar

79. American Elementary Elec. Co. v. Normandy, 46 App. D.C. 329 (1917); cf. Smith v. Stone, 21 Wyo. 62, 128 P. 612 (1912) (complaint dismissed).Google Scholar

80. Tanner v. Lindell Ry., 180 Mo. 1, 79 S.W. 155 (1904); Beidenkopf v. Des Moines Life Ins. Co., 160 Iowa 629, 142 N.W. 434 (1913). In Beidenkopf the founders and principal officers and shareholders were of advanced years and lacked the capacity to continue the efforts that had thus far made the corporation successful, while in Tanner the profits were at what the majority thought was an unsatisfactory level.Google Scholar

81. In Bowditch v. Jackson Co., 76 N.H. 351, 82 A. 1014 (1912), the court reasoned:Google Scholar

82 A. at 1017.

82. See cases cited note 78 supra. Google Scholar

83. The leading case is Treadwell v. Salisbury Mfg. Co., 7 Gray 393 (Mass. 1856), where the court characterized a manufacturing corporation as a trading corporation, without quoting from its charter, and stated:Google Scholar

Id. at 404–5 (emphasis added). Accord, Maben v. Gulf Coke & Coal Co., 173 Ala. 259, 55 So. 607 (1911). Beidenkopf v. Des Moines Life Ins. Co., 160 Iowa 629, 142 N.W. 434 (1913), describes the cases as in direct conflict on this issue. 142 N.W. at 438. The annotation to Maben takes the view that the common law was “well settled” that a solvent and prosperous corporation could not sell all its property without unanimous consent of its shareholders and distinguishes Treadwell and Maben on the basis of the particular language of their charters, which authorized the sales in question. Annot., 1912 L.R.A. 396, 402–03.

84. Noyes, supra note 59, § 110. Noyes states his position aggressively. For example, he fails to note that the language of the Treadwell case, quoted in note 82 supra, is dicta, while noting that language to the contrary is dicta. Id. at 173 n.2, 174 n.3. Similarly, in support of his statement that “[c]orporate action towards dissolution is essentially within the powers of a corporation and, consequently, may be exercised by a majority of the stockholders,” he cites, among other authorities, Lauman v. Lebanon Valley Ry., 30 Pa. 42 (1858), which involved a consolidation authorized by statute, not a sale of assets leading to dissolution. Further, Noyes fails to distinguish between so-called public and private corporations.Google Scholar

85. 1 William Blackstone, Commentaries 460–68 (1765 reprint ed., New York: Oceana Publications; London: Wiley & Sons, 1966), describes all corporations as being founded by the sovereign, including those where no grant exists, which, he explains, were founded by prescription, and a lost grant from the king is presumed. The history of this strict construction is traced in Hurst, supra note 20, at 16. See also Angell & Ames, supra note 32, § 256, and Morawetz, supra note 2, § 648. As constitutional doctrine, to determine what property rights were constitutionally protected, a strict construction was adopted in Charles River Bridge v. Warren Bridge, 36 U.S. (11 Pet.) 536 (1837).Google Scholar

86. 1 Thompson, supra note 1, at § 72. In earlier times this raised the nice question whether an alteration in ways of doing business by a corporation was so material that it violated the agreement or was so minor that it was incidental to the powers granted in the charter. See generally Angell & Ames, supra note 32, § 271; Dodd, supra note 30, 136–38; 1 Thompson, supra, ch. 4. Manning describes these issues as representing the “nineteenth century obsession with corporate ‘powers,’ ‘franchises’ and ultra vires [which] was grounded upon the insistence that corporation law was about corporate ideology, not about economic policy.” Manning, supra note 1, at 245. He points out that an asset sale might be either a sale of all the stock, which could be replaced, or a sale of the corporate franchise, which involved a fundamental change. Because of this, he concludes that appraisal remedies for dissenters came later to asset sales than to mergers “because legal thinkers were uncertain of the conceptual location of the asset sale.” Id. at 256. While this article provides some support for that thesis, it also suggests another reason: the courts were capable of working out the same result without the authorization of an appraisal statute, by creative adaptation of the equitable lien to the task.Google Scholar

87. Sprague v. Illinois River R.R., 19 Ill. 173 (1857). The precise manner of acceptance by the corporation is not clear from the opinion, which refers both to the measures being “in contemplation of the board of directors” and also to the fact that “the minority of the stockholders must submit to the better judgment of the majority.” 19 Ill. at 182. The statute referred to by the court does not appear in the 1854 Illinois session laws available to me, but acceptance of an amendment either by the board or the majority in interest of the shareholders was apparently possible. Compare An Act to Amend the Act Incorporating the Illinois Central Railroad Co. § 6, 1854 Ill. Sess. L. 192, at 193 (Feb. 28, 1854) (providing for board acceptance of an amendment), with An Act to Enable Railroad Companies to Consolidate Their Stock § 7, 1854 Ill. Sess. L. 9, at 10 (Feb. 28, 1854), which provides in part that “such consolidation shall not take place until the terms of such consolidation shall have been approved by a majority of the stockholders in interest.”Google Scholar

88. Id. at 178.Google Scholar

89. Id. at 181. But see Opelka v. Quincy Memorial Bridge Co., 335 Ill. App. 402, 82 N.E.2d 184 (1948), where a payment to common stockholders in a plan of dissolution in violation of the contract rights of the holders of preferred stock was justified by defendants on the basis of business exigency and rejected by the court, which stated:Google Scholar

82 N.E.2d at 191.

90. Dodd, supra note 30, at 139 n.84.Google Scholar

91. Stevens v. Rutland & B.R.R., 29 Vt. 545 (Ch. Chittenden County 1851); Mason v. Pewabic Mining Co., 133 U.S. 50 (1890).Google Scholar

92. Stevens v. Rutland & B.R.R., 29 Vt. 545, 564 (Ch. Chittenden County 1851).Google Scholar

93. Binney v. Cumberland Ely Copper Co., 183 F. 650, 653 (D. Me. 1910). See also Tanner v. Lindell Ry., 180 Mo. 1, 79 S.W. 155, 158 (1904), where the court noted that the plantiffs did not argue that the transaction was a bad business venture or unfair to them but only “the bare, naked legal proposition that it is a violation of the implied contract between the stockholders”; Treat v. Hubbard-Elliott Copper Co., 4 Alas. 497 (Dist. Ct. 1912).Google Scholar

94. After the decision of the court of appeals in People v. Ballard, 134 N.Y. 269, 32 N.E. 54 (1892), affirming the rule of unanimous consent announced in Abbot v. American Hard Rubber Co., 33 Barb. 578 (1861), New York adopted a statute providing for a sale of corporate assets on approval of the holders of two-thirds of the shares and for appraisal rights for dissenting shareholders. In re Timmis, 200 N.Y. 177, 93 N.E. 522, 523–24 (1910).Google Scholar

95. Mason v. Pewabic Mining Co., 133 U.S. 50 (1890).Google Scholar

96. Lauman v. Lebanon Valley R.R., 30 Pa. 42 (1858).Google Scholar

97. Id. at 49.Google Scholar

98. State ex rel. Brown v. Bailey, 16 Ind. 46 (1861).Google Scholar

99. Jones v. Missouri-Edison Elec. Co., 199 F. 64 (8th Cir. 1912), aff'd on reh., 203 F. 945 (1913); Jackson Co. v. Gardiner Inv. Co., 200 F. 113 (1st Cir. 1912). The Jackson case is particularly interesting for its refusal to follow Mason v. Pewabic Mining Co., 133 U.S. 50 (1890), relying on the criticism of the grant of injunctive relief in the dissent as authority.Google Scholar

100. Jones v. Missouri-Edison Elec. Co., 199 F. 64, 70 (8th Cir. 1912), aff'd on reh., 203 F. 945 (1913).Google Scholar

101. In many states incorporation solely by general incorporation laws became a constitutional requirement. By 1913, 44 states had adopted such requirements, with the bulk of them being adopted before 1880. Evans, supra note 57, at 11 table 5. See Hurst, supra note 20, at 132.Google Scholar

102. By 1927 at least 20 states had adopted statutes providing for an appraisal remedy for minority shareholders dissenting to a consolidation. Joseph L. Weiner, Payment of Dissenting Stockholders, 27 Colum. L. Rev. 547, 548 n.7 (1927). Judicial descriptions of particular statutory developments are found in In re Timmis, 200 N.Y. 177, 93 N.E. 522 (1910); Meade v. Pacific Gamble Robinson Co., 29 Del. Ch. 406, 51 A.2d 313, 316 (Ch. 1947), aff'd, 30 Del. Ch. 509, 58 A.2d 415 (Sup. Ct. 1948); and Gabhart v. Gabhart, 370 N.E.2d 345 (Ind. 1977). A more recent survey of appraisal statutes appears as an appendix to Manning, supra note 1, at 262–65. As late as 1938, only 31 states expressly provided for corporate merger or consolidation by general statutes, while two more apparently permitted it without express authorization, leaving the remainder to special legislation. U.S., Securities and Exchange Commission, supra note 56, at 526–27 nn.4–7 (1938).Google Scholar

103. Manning, supra note 1, at 246–47 n.38.Google Scholar

104. Eisenberg, supra note 19, at 75. Pearson v. Clam Falls Coop. Dairy Ass'n, 243 Wis. 369, 10 N.W.2d 132, 134 (1943), expressly held that while “[i]t is true that most statutes have a provision that dissenting stockholders have the option of taking cash instead of stock in the new corporation [citation omitted] … such a provision is not necessary to make the statute constitutional.”Google Scholar

105. Ballantine, supra note 38, at 482. While the analogy to eminent domain is clear, it is rarely discussed. See Perkins v. New Hampshire Power Co., 90 N.H. 534, 11 A.2d 811, reh. denied, 90 N.H. 534, 13 A.2d 475 (1940). No discussion of why appraisal rather than a suit for damages for breach of contract is the appropriate remedy appears in any literature I reviewed. In another context, it has been speculated that appraisal was devised to take damage actions in eminent domain cases out of the hands of juries that might be sympathetic to the plight of small landowners facing eminent domain takings by railroads and large corporations. Horwitz, supra note 28, at 67. In the case of shareholders, the equitable origins of the remedy and the analogy to masters appointed by the court seem a more likely explanation.Google Scholar

106. Perhaps representative of this shift is the model act, which reduced the requirement from two-thirds to a majority of the total shares in 1962. 2 ABA Model Bus. Corp. Act Ann. 2d §§ 78, 79 ¶ 2 (1971). Delaware shifted from a two-thirds to majority requirement in 1967. Del. Code Ann. tit. 8, § 251(c) (Cum. Supp. 1978); Ernest L. Folk III, The Delaware General Corporation Law: A Commentary and Analysis 381 (Boston: Little, Brown & Co., 1972). Other states that have shifted to a majority requirement in recent years include Kansas and Wisconsin. 2 ABA Model Bus. Corp. Act Ann. 2d §§ 78, 79 ¶ 3.03(4)(d) (1973 Supp.). A substantial majority of states retain requirements of greater than majority votes for fundamental changes. 2 ABA Model Bus. Corp. Act Ann. 2d §§ 78, 79 ¶ 3.03(d) (1971 & Supps.). An earlier author commented with respect to the variation in these requirements: “So varied are these provisions that one is likely to wonder whether the framers really understood the main problem involved.” Lattin, supra note 38, at 239. Once the statutes shifted to majority rule, some courts found this rule to be mandatory and thus not subject to contractual modificaton by the shareholders. Cf. Banintendi v. Kenton Hotel, 294 N.Y. 112, 60 N.E.2d 829 (1945) (requirement of unanimous shareholder votes).Google Scholar

107. See, e.g., ABA-ALI Model Bus. Corp. Act § 75 (1979); Del. Code Ann. tit. 8, § 253 (1974 & Cum. Supp. 1978). The history of the Delaware statute is traced in Coyne v. Park & Tilford Distillers Corp., 38 Del. Ch. 514, 154 A.2d 893, 894 (Sup. Ct. 1959). The Model Act short-form provision was added in 1957. Elvin R. Latty, Some Miscellaneous Novelties in the New Corporation Statutes, 23 Law & Contemp. Prob. 363, 392 (1958). At the same time, Delaware added a provision that shareholders could receive cash or other consideration, thus facilitating elimination of the minority as equity participants. Folk, supra note 106, at 353. Recent Delaware developments have encroached on the board's discretion, both as to the necessity for a business purpose for such a merger, text at note 129 infra, and as to the fairness of the treatment of the minority. Kemp v. Angel, 381 A.2d 241 (Del. Ch. 1977).Google Scholar

108. N.H. Rev. Stat. Ann. § 374:32 (1966) provides that shareholder authorization of a sale or lease may be allowed by the New Hampshire public service commission “if the commission shall find that the public good so requires.” See Gordon v. Public Serv. Co., 101 N.H. 372, 143 A.2d 428 (1958). New York made the short-form merger, discussed in note 107 supra, available to utilities on terms more liberal than those offered to other companies. In Beloff v. Consolidated Edison Co., 300 N.Y. 11, 87 N.E.2d 561 (1949), this distinction was justified by the need for simplification of utility holding company financial structures. 87 N.E.2d at 565.Google Scholar

109. Compare Hariton v. Arco Elec., Inc., 40 Del. Ch. 326, 182 A.2d 22 (Ch. 1962), aff'd, 41 Del. Ch. 74, 188 A.2d 123 (Sup. Ct. 1963), with Farris v. Glen Alden Corp., 393 Pa. 427, 143 A. 2d 25 (1958).Google Scholar

110. See Vorenberg, supra note 21. See also Marshel v. AFW Fabric Corp., 398 F. Supp. 734 (S.D.N.Y. 1975), rev'd, 533 F. 2d 1277 (2d Cir.), vacated as moot, 429 U.S. 881 (1976); Beloff v. Consolidated Edison Co., 300 N.Y. 11, 87 N.E.2d 561 (1949); Anderson v. Int'l Minerals & Chem. Corp., 295 N.Y. 343, 67 N.E.2d 573 (1946); Burg v. Burg Trucking Corp., 26 Misc. 2d 619, 203 N.Y.S.2d 699 (Sup. Ct. 1960); Blumenthal v. Roosevelt Hotel, Inc., 202 Misc. 988, 115 N.Y.S.2d 52 (Sup. Ct. 1952); Katz v. R. Hoe & Co., 199 Misc. 459, 103 N.Y.S.2d 106 (Sup. Ct. 1950), aff'd, 278 A.D. 766, 104 N.Y.S.2d 14 (1951); Johnson v. Baldwin, 221 S.C. 141, 69 S.E.2d 585 (1952). But see May v. Midwest Ref. Co., 121 F.2d 431 (1st Cir.), cert. denied, 314 U.S. 668 (1941); Lachman v. Bell, 353 F. Supp. 37 (S.D.N.Y. 1972); Miller v. Steinbach, 268 F. Supp. 255 (S.D.N.Y. 1967); Voege v. American Sumatra Tobacco Corp., 241 F. Supp. 369 (D. Del. 1965); General Inv. Co. v. Lake Shore & M.S. Ry., 250 F. 160 (6th Cir. 1918); MacArthur v. Port of Havana Docks Co., 247 F. 984 (D. Me. 1917); Stauffer v. Standard Brands, Inc., 41 Del. Ch. 7, 187 A.2d 78 (Sup. Ct. 1962); MacFarlane v. North Am. Cement Corp., 16 Del. Ch. 172, 157 A. 396 (Ch. 1928); Robb v. Eastgate Hotel, Inc., 347 Ill. App. 261, 106 N.E.2d 848 (1952); Opelka v. Quincy Memorial Bridge Co., 335 Ill. App. 402, 82 N.E.2d 184 (1948); Gabhart v. Gabhart, 370 N.E.2d 345 (Ind. 1977); Colgate v. United States Leather Co., 73 N.J. Eq. 72, 67 A. 657 (Ch. 1907), rev'd on other grounds, 75 N.J. Eq. 229, 72 A. 126 (1909); Ribakove v. Rich, 13 Misc. 2d 98, 173 N.Y.S.2d 306 (Sup. Ct. 1958); Zobel v. American Locomotive Co., 182 Misc. 323, 44 N.Y.S.2d 33 (Sup. Ct. 1943); Wick v. Youngstown Sheet & Tube Co., 46 Ohio App. 253, 188 N.E. 514 (1932); Goodison v. North Am. Sec. Co., 40 Ohio App. 85, 178 N.E. 29 (1931); Jones v. Rhea, 130 Va. 345, 107 S.E. 814 (1921).Google Scholar

111. This was suggested by Manning, supra note 1, at 261. At the time of his article, two states, Connecticut and North Carolina, had provisions denying appraisal where a trading market existed. Id. at 261 n.63. By 1973 such provisions existed in Connecticut, Delaware, Florida, Georgia, Indiana, Kansas, Pennsylvania, Rhode Island, and Virginia. 2 ABA Model Bus. Corp. Act Ann. 2d § 80 ¶ 3.303(6)(a), at 438 (1971); id. at 365 (1973 Supp.). California added a similar exception in its recent revisions of its corporation code. Cal. Corp. Code § 1300(b)(1) (Deering 1977). Recent literature has been critical of this development. Eisenberg, supra note 19, § 7.1, and Note, A Reconsideration of the Stock Market Exception to the Dissenting Shareholder's Right of Appraisal, 74 Mich. L. Rev. 1023 (1976). The stock market exception in § 80 of the model act has been eliminated in the latest revisions. Alfred F. Conard, Amendments of Model Business Corporation Act Affecting Dissenters’ Rights (Sections 73, 74, 80, and 81), 33 Bus. Law. 2587, 2595–96 (1978). The comments on the elimination of this exception indicate it was inspired by the demoralized stock market of the 1970s, which demonstrated that it was not always possible to obtain “fair” value for shares in the market.Google Scholar

112. See authorities cited in note 25 supra. Google Scholar

113. After reviewing the new powers of the majority shareholder, one court stated:Google Scholar

Wheeler v. Abilene Nat'l Bank Bldg. Co., 159 F. 391, 394 (8th Cir. 1908).

The opinion did not seem to notice the tension between the notion of maximizing the production of the corporate property and protecting the interests of the minority.

114. Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004, 1006 (1904).Google Scholar

115. Id. Google Scholar

116. 74 P. at 1007.Google Scholar

117. Id. Google Scholar

118. Colby v. Equitable Trust Co., 124 A.D. 262, 108 N.Y.S. 978, aff'd mem., 192 N.Y. 535, 84 N.E. 1111 (1908).Google Scholar

119. Id., 108 N.Y.S. at 982.Google Scholar

120. Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 123 N.E. 148, 151 (1919).Google Scholar

121. 123 N.E. at 151, 152.Google Scholar

122. MacArthur v. Port of Havana Docks Co., 247 F. 984, 991 (D. Me. 1917).Google Scholar

123. Marks v. Merrill Paper Co., 203 F. 16 (7th Cir. 1913); Murrin v. Archbald Consol. Coal Co., 232 N.Y. 541, 134 N.E. 563 (1921); Martin Orchard Co. v. Fruit Growers’ Canning Co., 203 Wis. 97, 233 N.W. 603 (1930).Google Scholar

124. 40 Wash. 2d 286, 242 P.2d 1025 (1952).Google Scholar

125. Vorenberg, supra note 21.Google Scholar

126. Kors v. Carey, 39 Del. Ch. 47, 158 A.2d 136 (Ch. 1960); Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548 (Sup. Ct. 1964).Google Scholar

127. Condec Corp. v. Lunkenheimer Co., 43 Del. Ch. 353, 230 A.2d 769 (Del. Ch. 1967).Google Scholar

128. 41 Del. Ch. 7, 187 A.2d 78, 80 (Sup. Ct. 1962).CrossRefGoogle Scholar

129. Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977); Najjar v. Roland Int'l Corp., 387 A.2d 709 (Del. Ch. 1978).Google Scholar

130. Compare Gabhart v. Gabhart, 370 N.E.2d 345 (Ind. 1977), with Comolli v. Comolli, 241 Ga. 471, 246 S.E.2d 278 (1978). But see Bryan v. Brock & Blevins Co., 490 F.2d 563, 570 (5th Cir.), cert. denied, 419 U.S. 844 (1974) (applying Georgia law).Google Scholar

131. Colby v. Equitable Trust Co., 124 A.D. 262, 108 N.Y.S. 978, 982, aff'd mem., 192 N.Y. 535, 84 N.E. 1111 (1908) (citing Gamble v. Queens County Water Co., 123 N.Y. 91, 25 N.E. 201 (1890)); cf. Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548 (Sup. Ct. 1964) (share repurchase).Google Scholar

132. See Cary, supra note 25. The shift from Keller v. Wilson, 21 Del. Ch. 391, 190 A. 115 (Sup. Ct. 1940), to Federal United Corp. v. Havender, 24 Del. Ch. 318, 11 A.2d 331 (Sup. Ct. 1940), is criticized by Cary as an example of how “the Delaware courts have avoided looking through form to substance.” Cary, supra note 25, at 677. Referring to Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548 (Sup. Ct. 1964), and comparing Delaware decisions to New York cases, Cary states (at 673) that “the Delaware decisions indicate a clearer penchant in favor of management.” Describing the board's conclusion that the threatened take-over would be damaging to the corporation and the court's acceptance of this as a sufficient business purpose, Cary states:Google Scholar

Id. at 674.

133. The rule is usually phrased in terms of the exclusivity of the shareholder's appraisal remedy. See Vorenberg, supra note 21. The rule is usually applied when a dissenting shareholder's only complaint is that the terms of the change are not satisfactory. See, e.g., Bruce v. E. L. Bruce Co., 40 Del. Ch. 80, 174 A.2d 29 (Ch. 1961); Meade v. Pacific Gamble Robinson Co., 29 Del. Ch. 406, 51 A.2d 313 (Ch. 1947), aff'd, 30 Del. Ch. 509, 58 A.2d 415 (Sup. Ct. 1948); Beloff v. Consolidated Edison Co., 300 N.Y. 11, 87 N.E.2d 561 (1949); Blumenthal v. Roosevelt Hotel, Inc., 202 Misc. 988, 115 N.Y.S.2d 52 (Sup. Ct. 1952); Johnson v. Baldwin, 221 S.C. 141, 69 S.E.2d 585 (1952). The New York cases indicate that proper allegations of illegality will trigger equitable remedies and that fraud is such illegality, although mere allegations of “bad faith” are not sufficient. Blumenthal, supra, and Burg v. Burg Trucking Corp., 26 Misc. 2d 619, 203 N.Y.S.2d 699 (Sup. Ct. 1960). A few cases state the rule more rigidly, suggesting that appraisal is the exclusive remedy, regardless of allegations of fraud or illegality. Gordon v. Public Serv. Co., 101 N.H. 372, 143 A.2d 428 (1958) (citing Perkins v. New Hampshire Power Co., 90 N.H. 534, 11 A.2d 811, reh. denied, 90 N.H. 534, 13 A.2d 475 (1940)). The more conventional treatment states that appraisal is not the exclusive remedy where fraud or illegality is properly pleaded. May v. Midwest Ref. Co., 121 F.2d 431 (1st Cir.), cert. denied, 314 U.S. 668 (1941); Lachman v. Bell, 353 F. Supp. 37 (S.D.N.Y. 1972) (applying Delaware law); Miller v. Steinbach, 268 F. Supp. 255 (S.D.N.Y. 1967) (applying Pennsylvania law); MacArthur v. Port of Havana Docks Co., 247 F. 984 (D. Me. 1917) (applying Maine law); Stauffer v. Standard Brands, Inc., 41 Del. Ch. 7, 187 A.2d 78 (Sup. Ct. 1962); Cole v. National Cash Credit Ass'n, 18 Del. Ch. 47, 156 A.2d 183 (Ch. 1931); MacFarlane v. North Am. Cement Corp., 16 Del. Ch. 172, 157 A. 396 (Ch. 1928); Robb v. Eastgate Hotel Inc., 347 Ill. App. 261, 106 N.E.2d 848 (1952); Opelka v. Quincy Memorial Bridge Co., 335 Ill. App. 402, 82 N.E.2d 184 (1948); Gabhart v. Gabhart, 370 N.E.2d 345 (Ind. 1977); Colgate v. United States Leather Co., 73 N.J. Eq. 72, 67 A. 657 (Ch. 1907), rev'd on other grounds, 75 N.J. Eq. 229, 72 A. 126 (1909); Ribakove v. Rich, 13 Misc. 2d 98, 173 N.Y.S.2d 306 (Sup. Ct. 1958); Zobel v. American Locomotive Co., 182 Misc. 323, 44 N.Y.S.2d 33 (Sup. Ct. 1943); Wick v. Youngstown Sheet & Tube Co., 46 Ohio App. 253, 188 N.E. 514 (1932); Jones v. Rhea, 130 Va. 345, 107 S.E.2d 814 (1921). Many of these decisions phrase the question in terms of whether appraisal is an adequate remedy at law, treating it thus as a specialized form of damage procedure rather than as a foreclosure of an equitable lien, as it began when it was judicially created.Google Scholar

134. In MacCrone v. American Capital Corp., 51 F. Supp. 462, 466 (D. Del. 1943), the court stated that “the reasons for the merger or the business necessity behind it are not matters for my judicial determination.” See also Massaro v. Fisk Rubber Corp., 36 F. Supp. 382 (D. Mass. 1941). Where one of the merging parties has an interest, but not a controlling one, in the other, and where the shareholder approval is overwhelming, the same attitude appears. Imperial Trust Co. v. Magazine Repeating Razor Co., 138 N.J. Eq. 20, 46 A.2d 449 (Ch. 1946), and Schulwolf v. Cerro Corp., 86 Misc. 2d 292, 380 N.Y.S.2d 957 (Sup. Ct. 1976). Cf. Phillips Steam-Engine Co., 21 R.I. 302, 43 A. 598 (1899) (asset sale).Google Scholar

135. Seagrave Corp. v. Mount, 212 F.2d 389, 395 (6th Cir. 1954). Cf. Gottlieb v. Heyden Chem. Corp., 33 Del. Ch. 177, 91 A.2d 57 (Sup. Ct. 1952), where the court indicated where there was stockholder ratification of a self-dealing transaction involving stock options:Google Scholar

91 A.2d at 58.

In Armstrong v. Hayden, 126 Misc. 786, 214 N.Y.S. 747 (Sup. Ct. 1926), the court stated that the test of a merger is whether it is so far opposed to the interest of the corporation as to negate any inference that it was done for a business purpose and rejected any further inquiry, stating: “Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans… . This is no business for any court to follow.” 214 N.Y.S. at 749. And in MacFarlane v. North Am. Cement Corp., 16 Del. Ch. 172, 157 A. 396 (Ch. 1928), rejecting arguments concerning the fairness of the terms of an arm's-length merger, the court stated:

157 A. at 399.

136. The rationale is well developed in Earl Sneed, The Stockholder May Vote as He Pleases: Theory and Fact, 22 U. Pitt. L. Rev. 23 (1960).Google Scholar

137. See, e.g., Wood v. Manchester Fire Ins. Co., 30 Misc. 330, 63 N.Y.S. 427 (Sup. Ct.), aff'd, 54 A.D. 522, 67 N.Y.S. 1150 (1900); Porter v. Healy, 244 Pa. 427, 91 A. 428 (1914); and Gerdes v. Reynolds, 28 N.Y.S.2d 622 (Sup. Ct. 1941). Such rules do not prevent corporate officers from trying, however. In Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544, 557 (E.D.N.Y. 1971), Judge Weinstein noted that the chief executive officer of a target received a bonus of approximately $435,000, a salary increase, and stock options. In Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977), Magnavox management first opposed a tender offer, but dropped its opposition when the offeror raised the price from $8 to $9 and suggested that Magnavox management vote itself new two-year employment contracts. Stock options in North American's stock, effective on the date of the merger, were also granted. Id. at 972. See also Alfred Hill, The Sale of Controlling Shares, 70 Harv. L. Rev. 986 (1957); Manne, Mergers, supra note 27, at 117–18; Brudney & Chirelstein, supra note 17, at 340–44; and Posner, supra note 27, § 14.7.Google Scholar

138. Singer v. Magnavox Co., 380 A.2d 969, 979–80 (Del. 1977). In rare cases the business-purpose test may not apply. The Georgia Supreme Court has recently rejected the test, without reference to the contrary result in Bryan v. Brock & Blevins Co., 490 F.2d 563 (5th Cir.), cert. denied, 419 U.S. 844 (1974) (applying Georgia law). In Comolli v. Comolli, 241 Ga. 471, 474, 246 S.E.2d 278, 280 (1978), the court merely said, “We agree with defendants’ contention that the so called ‘business purpose’ test, adopted by some states to determine whether the purchase of its own stock by a close corporation is valid, does not apply in Georgia.” And it has recently been held that a shareholder's agreement giving the corporation a repurchase option at death is valid and enforceable without showing a business purpose. St. Louis Union Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 562 F.2d 1040, 1046–47 (8th Cir. 1977), held that revisions to the Delaware General Corporation Act with respect to such repurchases rejected the earlier case law requiring such justification (citing Greene v. E. H. Rollins & Sons, Inc., 22 Del. Ch. 394, 2 A.2d 249 (Ch. 1938)).Google Scholar

139. Brudney & Chirelstein, supra note 21, at 1362; Edward F. Greene, Corporate Freeze-out Mergers: A Proposed Analysis, 28 Stan. L. Rev. 487, 508 (1976). All such arguments (including the one in this paper) are based on the assumption that shareholders are supplied with adequate information about their choices and can obtain sufficient information about probable future events to act in their own self-interest. Costs of production of such information are not relevant for our purposes any more than are the difficulties of predicting future stock market behavior. Since all investors suffer comparable disabilities in this area, we can be comfortable, in comparing arm's-length mergers and two-step takeovers, that all other factors are identical.Google Scholar

140. Securities Exchange Act, Schedule 13 E-3, item 8, 17 C.F.R. § 240.13e-3, reprinted in 2 Fed. Sec. L. Rep. (CCH) 1 23,706, requires a discussion of the fairness of certain going-private transactions, considering, inter alia, “whether the transaction is structured so that approval of at least a majority of the unaffiliated security holders is required.” Id. 44 Fed. Reg. at 46,746. See also Levin v. Great W. Sugar Co., 406 F.2d 1112 (3d Cir.), cert. denied, 396 U.S. 848 (1969); Kohn v. American Metal Climax, Inc., 322 F. Supp. 1331 (E.D. Pa. 1970), appeal dismissed in part, modified in part, 458 F.2d 255 (3d Cir.), cert. denied, 409 U.S. 874 (1972); Porges v. Vadsco Sales Corp., 27 Del. Ch. 127, 32 A.2d 148 (Ch. 1943); and Schulwolf v. Cerro Corp., 86 Misc. 2d 292, 380 N.Y.S.2d 957 (Sup. Ct. 1976). Cf. David J. Greene & Co. v. Dunhill Int'l, Inc., 249 A.2d 427 (Del. Ch. 1968) (placing burden of proof of fairness on defendant). The New York law firm of Parker, Chapin, Flattau & Klimpl, commenting on the SEC'S going-private rules,Google Scholar

Proposed Going Private Rule Provokes Strong Criticism from Legal Community, [1978] Sec. Reg. & L. Rep. (BNA) No. 446, A-12, at A-14. See also Wisconsin's going-private rules, Wis. Admin. Code §§ SEC 5.05, SEC 202(11), SEC 6.02(1)(b), SEC 6.02(1)(e)(1976), [1978] 3 Blue Sky L. Rep. (CCH) (Wis.) 1 64,605.

141. Brudney & Chirelstein, supra note 21, at 1362. See also Brudney, supra note 21, at 1028.Google Scholar

142. Gabhart v. Gabhart, 370 N.E.2d 345, 353 (Ind. 1977), describes the problem as one of “the reconciliation of conflicting policies consistent with the general goals of maximum shareholder benefit and equality of treatment.” Brudney & Chirelstein, supra note 21, at 1356, flatly state that “[s]uch a test has no role whatever to play” in the field of investor protection in squeeze-out mergers. Yet the authors go on to suggest a presumption in favor of two-step mergers, presumably because of their business purposes. Id. at 1362. I agree that the business-purpose test has no role to play in distinguishing good from bad freeze-outs but differ from Brudney and Chirelstein as to the reasons for that conclusion.Google Scholar

143. See, e.g., Brudney & Chirelstein, supra note 17, and Mills v. Electric Auto-Lite Co., 552 F.2d 1239 (7th Cir.), cert. denied, 434 U.S. 922 (1977), using the Brudney and Chirelstein test.Google Scholar

144. See note 68 supra. Google Scholar

145. American Elementary Elec. Co. v. Normandy, 46 App. D.C. 329 (1917); Hill v. Page & Hill Co., 198 Minn. 30, 268 N.W. 705, reh. denied, 198 Minn. 30, 268 N.W. 927 (1936).Google Scholar

146. See text at note 33 supra. Google Scholar

147. See 2 Cook, supra note 68, at 649.Google Scholar

148. 40 Wash. 2d 286, 242 P.2d 1025 (1952). The court rejected plaintiff's claims of fraud based on unfairness of his share of the transaction, noting that pleadings of “actual fraud” were required for relief. 242 P.2d at 1035. The court thus ignored the fact that plaintiff would receive 20 cents per share, while the other participants had the opportunity to receive over three dollars per share.Google Scholar

Matteson v. Ziebarth at first blush appears to fit the description of a one-step merger rather than that of a two-step transaction. But because it resulted in a take-over by another enterprise, it is treated here as a two-step transaction. The result is a complete take-over, and here the stock purchase followed the merger, which is the reverse of the usual order. A similar pattern is suggested by SEC v. Wej-It Corp., Fed. Sec. L. Rep. (CCH) ¶ 97,206 (D.D.C. 1979) (going-private tender offer terminated, followed by sell-out by controlling shareholder).

149. Manne, Mergers, supra note 27.Google Scholar

150. Matteson v. Ziebarth, 40 Wash. 2d 286, 242 P.2d 1025 (1952); Marks v. Merrill Paper Co., 203 F. 16 (7th Cir. 1913); Hill v. Page & Hill Co., 198 Minn. 30, 268 N.W. 705, reh. denied, 198 Minn. 30, 268 N.W. 927 (1936). The Delaware courts have been particularly careful to disregard motive. MacCrone v. American Capital Corp., 51 F. Supp. 462, 466 (D. Del. 1943) (applying Delaware law); Bruce v. E. L. Bruce Co., 40 Del. Ch. 80, 174 A.2d 29 (Ch. 1961).Google Scholar

151. 21 Del. Ch. 391, 190 A. 115 (Sup. Ct. 1936).Google Scholar

152. 24 Del. Ch. 318, 11 A.2d 331 (Sup. Ct. 1940).Google Scholar

153. This development is traced in Hottenstein v. York Ice Mach. Corp., 136 F.2d 944 (3d Cir. 1943). See also Porges v. Vadsco Sales Corp., 27 Del. Ch. 127, 32 A.2d 148 (Ch. 1943), and Katz v. R. Hoe & Co., 199 Misc. 459, 103 N.Y.S.2d 106 (Sup. Ct. 1950), aff'd, 278 A.D. 766, 104 N.Y.S.2d 14 (1951). Notions of what constitutes property rights and takings have continued to shift. In Keller the Delaware court firmly stated that accrued dividends were vested property rights that could not be cut off by charter amendments, despite the reserved power to amend. Four years later, in Havender, the court relied heavily on the reserved power to merge to hold that accrued dividends could be wiped out in a merger and that the shareholders had consented to this. In Hottenstein a federal court marveled over the rapidity of change in Delaware and applied Delaware law. The Illinois Supreme Court had reached esssentially the same result in 1857, in Sprague v. Illinois River R.R., 19 Ill. 173 (1857). Nevertheless, in 1948 the Illinois Court of Appeals was shocked by the suggestion that it should use business necessity as an excuse for eroding the preferences of preferred stockholders. Opelka v. Quincy Memorial Bridge Co., 335 Ill. App. 402, 82 N.E.2d 184 (1948). One can only conclude that the modern court had not read its history. More recently, legislative trends suggest a more sympathetic view of the property rights of the minority. Recent amendments to § 80 of the Model Business Corporation Act would provide dissenting shareholders with appraisal rights not only on mergers or asset sales but also in connection with charter amendments that would alter or abolish preferential rights, redemption rights, preemptive rights, or voting rights, including cumulative voting. ABA-ALI Model Bus. Corp. Act § 80(a) (1979); Conard, supra note 111, at 2590–91 (1978). The comments on the reasons for the changes indicate not sensitivity toward property rights and reasonable expectations of minority shareholders but a concern with eliminating situations where a court might enjoin certain changes for want of an adequate remedy at law. Id. at 2593. Truly this evidences a conscious willingness to “play for the rebound in history.” Manning, supra note 1, at 229. What were formerly regarded as property rights are restored to a more protected position in order to facilitate their alteration by the majority.Google Scholar

154. Tanzer v. International Gen. Indus., Inc., 379 A.2d 1121 (Del. 1977); Tanzer Economic Assocs., Inc. Profit Sharing Plan v. Universal Food Specialties, Inc., 87 Misc. 2d 167, 383 N.Y.S.2d 472, 483 (Sup. Ct. 1976). The latter case suggests both companies would be “in a stronger financial position with fewer problems in outside financing.” Id. In several cases the courts have rejected improved financing as a justification in one-step mergers where no accumulated preferred dividends were involved. Cathedral Estates, Inc. v. Taft Realty Corp., 157 F. Supp. 895, 897 (D. Conn. 1954), aff'd, 228 F.2d 85 (2d Cir. 1955), 251 F.2d 340 (2d Cir. 1957); Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004, 1007 (1904).Google Scholar

155. Kohn v. American Metal Climax, Inc., 322 F. Supp. 1331, 1338–40 (E.D. Pa. 1970), appeal dismissed in part, modified in part, 458 F.2d 255 (3d Cir.), cert. denied, 409 U.S. 874 (1972); Marks v. Wolfson, 188 A.2d 680 (Del. Ch. 1963). Cf. Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977), cert. denied, 434 U.S. 1069 (1978) (securities fraud). Since Tanzer v. International Gen. Indus., Inc., 379 A.2d 1121 (Del. 1977), Delaware has approved such purposes where the parent is the beneficiary of the business purpose. Would it do so where the controlling shareholder is an individual rather than a corporation? See the discussion of this problem infra, under one-step mergers.Google Scholar

156. Notes 59 and 69 supra. Google Scholar

157. A lengthy catalog of reasons appears in Tanzer Economic Assocs., Inc. Profit Sharing Plan v. Universal Food Specialties, Inc., 87 Misc. 2d 167, 383 N.Y.S.2d 472 (Sup. Ct. 1976), involving the merger of Libby, McNeil & Libby into a unit of Nestle's:Google Scholar

383 N.Y.S.2d at 483.

Grimes v. Donaldson, Lufkin & Jenrette, Inc., 392 F. Supp. 1393 (N.D. Fla. 1974), focuses more on management and administrative services. See also Schulwolf v. Cerro Corp., 86 Misc. 2d 292, 380 N.Y.S.2d 957, 962 (Sup. Ct. 1976). The reasons for adoption of a short-form merger statute for public utilities are described in Beloff v. Consolidated Edison Co., 300 N.Y. 11, 87 N.E.2d 561 (1949).

Separate reporting for a publicly owned subsidiary may create difficulties beyond mere duplication. For a discussion of the practical difficulties with such disclosures where separate reports have not been filed in the past and where separate audited financial statements are not available, see Carl W. Schneider & Joseph J. Manko, Rule 145, 5 Rev. Sec. Reg. 835 (1972), and Rule 145-Part II, 6 Rev. Sec. Reg. 999 (1973).

158. Tanzer Economic Assocs., Inc. Profit Sharing Plan v. Universal Food Specialties, Inc., 87 Misc. 2d 167, 383 N.Y.S.2d 472 (Sup. Ct. 1976).Google Scholar

159. For a discussion of operating economies that may be achieved by vertical integration, see Oliver E. Williamson, The Vertical Integration of Production: Market Failure Considerations, 61 Am. Econ. Rev. 112 (1971). It seems unlikely that these transactions will have a significant impact on solving problems of bilateral monopoly, since integration by contract is already possible. The entire take-over process may resolve such problems, however. See Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. Political Econ. 347 (1950).CrossRefGoogle Scholar

160. See R. H. Coase, The Nature of the Firm, 4 Economica (n.s.) 386 (1937).Google Scholar

161. See Armen A. Alchian & Harold Demsetz, Production, Information Costs, and Economic Organization, 62 Am. Econ. Rev. 777 (1972), for a description of the theoretical model of how the firm allocates resources.Google Scholar

162. But see Young v. Valhi, Inc., 382 A.2d 1372, 1377 (Del. Ch. 1978), rejecting a tax savings as a business purpose, because the same savings can be obtained by the parent's 80 percent ownership of the subsidiary's common stock.Google Scholar

163. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 378–79 (2d Cir. 1974); Greenstein v. Paul, 400 F.2d 580 (2d Cir. 1968); Southdown, Inc. v. McGinnis, 89 Nev. 184, 510 P.2d 636, 640 (1973). Allocation of business opportunities between parent and subsidiary, while perhaps more efficient in the combined firm, offers opportunities for abuse where the subsidiary is not wholly owned and a squeeze-out by the parent is contemplated. See Schlick, supra, and David J. Greene & Co. v. Dunhill Int'l, Inc., 249 A.2d 427 (Del. Ch. 1968).Google Scholar

164. The theoretical problems of joint costs are described in Alchian & Demsetz, supra note 161. There were accusations of excessive intercompany costs being charged to the subsidiary in Schlick v. Penn-Dixie Cement Co., 507 F.2d 374, 378 (2d Cir. 1974). For similar charges in the absence of fundamental corporate changes, see Marony v. Applegate, 266 A.D. 412, 42 N.Y.S.2d 768 (1943).Google Scholar

165. See Schlick v. Penn-Dixie Cement Co., 507 F.2d 374 (2d Cir. 1974); Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971); and Getty Oil Co. v. Skelly Oil Co., 267 A.2d 883 (Del. 1970).Google Scholar

166. See Vorenberg, supra note 21, at 1198.Google Scholar

167. In the proposed merger of Marmon Corporation and Cerro Corporation, the parent, which owned 45 percent of the common stock of the subsidiary, was engaged in diversified manufacturing operations in fields related to those of the subsidiary's operations. While the parent corporation intended to operate both businesses separately after the merger, certain fabricating operations were to be integrated, and the merger was stated to be intended to allow further combinations of “management and other resources of Cerro and Marmon, thereby allowing intercompany transactions between Cerro and Marmon that could be beneficial to both but which are presently restricted because of possible conflicts of interest.” Cerro Corporation, Prospectus and Proxy Statement (Jan. 26, 1976), reprinted in 2 Joseph H. Flom, ed., Takeovers and Takeouts—Tender Offers and Going Private 423 (New York: Law Journal Press, 1976).Google Scholar

168. Tanzer Economic Assocs., Inc. Profit Sharing Plan v. Universal Food Specialties, Inc., 87 Misc. 2d 167, 383 N.Y.S.2d 472 (Sup. Ct. 1976); Schulwolf v. Cerro Corp., 86 Misc. 2d 292, 380 N.Y.S.2d 957 (Sup. Ct. 1976); Merrit v. Libby, McNeil & Libby, 533 F.2d 1310 (2d Cir. 1976); Grimes v. Donaldson, Lufkin & Jenrette, Inc., 392 F. Supp. 1393 (N.D. Fla. 1974). But see Young v. Valhi, Inc., 382 A.2d 1372, 1377 (Del. Ch. 1978). The Delaware court questioned the bona fides of the conflicts of interest justification, primarily because of the small amount of independent operations of the parent, which made the combination look more like a one-step transaction, discussed infra. Google Scholar

169. Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 (1976), which outlaws “[e]very contract, combination …, or conspiracy, in restraint of trade or commerce,” applies to mergers between competitors, but the more significant prohibition is contained in § 7 of the Clayton Antitrust Act, as amended in 1950, Celler Anti-Merger Act of Dec. 29, 1950, Pub. L. No. 899, 64 Stat. 1125 (codified at 15 U.S.C. § 18 (1976)), which prohibits any corporation from acquiring either the stock or assets of another “where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly.” Agricultural cooperatives are exempted by § 6 of the Clayton Act, 15 U.S.C. § 17 (1976), as are labor organizations. Thus it is not surprising that one of the few cases that speaks of market power as a positive factor is found in Martin Orchard Co. v. Fruit Growers’ Canning Co., 203 Wis. 97, 233 N.W. 603 (1930), which involved organization through merger of a growers’ cooperative that would market 40 percent of the nation's sour cherries.Google Scholar

170. Young v. Valhi, Inc., 382 A.2d 1372, 1373–74 (Del. Ch. 1978) (quoting Salt Dome Oil Corp. v. Schenk, 28 Del. Ch. 433, 41 A.2d 583 (Sup. Ct. 1945)).Google Scholar

171. See, e.g., Lattin, supra note 5, at 313; Lattin, supra note 38; Ballantine, supra note 38, at 482; Posner, supra note 27, § 14.7; Gibson, supra note 5, at 291.Google Scholar

172. Posner, supra note 27, § 14.7; Manne, Mergers, supra note 27; id., Theoretical Aspects, supra note 27.Google Scholar

173. The Williams Act, Act of July 29, 1968, Pub. L. No. 90–439, 82 Stat. 455, added sections 13(d) and (e) and 14(d)–(f) to the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(d), (e), 78n(d)–(f) (1976). The tender offer provisions provide for disclosures and for withdrawal rights for shareholders, assurance that early tenders will be taken pro rata, and that if the price is subsequently raised, those who tendered prior to that time will receive the better price. 15 U.S.C. § 78n(d)(5)–(7) (1976). More recently there has been criticism of the leverage obtained by companies that use a going-private merger in connection with a tender offer. See Brudney & Chirelstein, supra note 17. See also Chirelstein, supra note 25. While the SEC has considered adopting substantive fairness regulations in connection with the use of going-private transactions as the final step in a take-over, thus far it has contented itself with disclosure requirements in Exchange Act Rule 13e-3. See note 17 supra. Extensive reforms, including expanded coverage for tender offer rules, increased disclosures, conflict-of-interest rules for banks, and preemption of state take-over laws, have recently been proposed by the SEC. SEC Seeks Takeover Rule Changes to End Controversy, Could Increase Firms’ Costs, Wall St. J., Feb. 20, 1980, at 2, col. 3. Securities and Exchange Commission: Legislative Proposals on Tender Offers, Beneficial Ownership, Issuer Repurchases, in [1980] Sec. Reg. & L. Rep. (BNA) No. 542, Special Supplement. State take-over laws, while more restrictive, generally follow the same pattern. See generally C. Porter Vaughan III, State Tender Offer Regulation, 9 Rev. Sec. Reg. 969 (1976).Google Scholar

174. Brudney and Chirelstein argue that even take-overs where control is gained by a successful tender offer may not involve the freely given consent of the holders of a majority of the shares, because of the prospect of a squeeze-out merger at a lower price, supra note 17, at 336–40. For purposes of this analysis, we will assume no such duress on the majority.Google Scholar

175. The fallacy of composition occurs when one reasons from the properties of constituent parts of a whole to the properties of the whole itself. Thus, to reason that since the holders of a majority of the shares will benefit from a transaction, the shareholder group will likewise benefit, involves such a fallacy. W. H. Werkmeister, An Introduction to Critical Thinking: A Beginner's Text in Logic 28–29 (rev. ed., Lincoln, Neb.: Johnsen Publishing Co., 1963). See also Paul Samuelson, Economics 14 (9th ed., N.Y.: McGraw-Hill, 1973).Google Scholar

176. The same difficulties arise in the area of zoning and land use controls. Frank I. Michelman, Property, Utility and Fairness: Comments on the Ethical Foundations of “Just Compensation” Law, 80 Harv. L. Rev. 1165 (1967). This is not to suggest that such is the case in all or even a majority of two-step mergers. Given transactions costs in negotiating for unanimous consent and a judgment about the likelihood of being in the majority more often than not, a rational investor may find a rule of simple majority control in his self-interest. James M. Buchanan & Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy ch. 6 (Ann Arbor: University of Michigan Press, 1962). Trading in votes has been suggested as one method of maximizing shareholder welfare. Manne, Theoretical Aspects, supra note 27.Google Scholar

177. While Manning raised this problem, supra note 1, at 234–37, Eisenberg has suggested that there is no evidence to support the suggestion that the threat of a demand for appraisal has deterred mergers. Eisenberg, supra note 19, at 69–72.Google Scholar

178. Coase has brilliantly demonstrated that in many situations rules of liability, or who bears the external costs of transactions, will not influence the results, since efficient transactions will justify the costs involved and take place in any event. Ronald Coase, The Problem of Social Cost, 3 J.L. & Econ. 1 (1960). This analysis should apply to corporate mergers as well as the transactions described there. But Demsetz has refined that analysis to demonstrate that where transaction costs, the costs of negotiating contractual agreements with all participants, are high enough, rules of liability do affect whether or not efficient transactions will take place. Harold Demsetz, When Does the Rule of Liability Matter? 1 J. Legal Stud. 13 (1972). Appraisal proceedings involve transaction costs, which are generally agreed to be heavy and to be weighted against dissenting shareholders. Generally each shareholder must bear his or her own expenses, and no proceeding similar to a class action has been available. Until passage of the 1976 amendments, Delaware left each party to bear its own attorney's and expert witness costs. Compare 1967 Del. Laws ch. 50, § 262(h), p. 221, with Del. Code Ann. tit. 8, § 262(h) (Cum. Supp. 1978). See also ABA-ALI Model Bus. Corp. Act § 81 (1979). In this context critics were harsh on the efficacy of the appraisal remedy. See Green v. Santa Fe Indus., Inc., 533 F.2d 1283, 1294, 1297–98 (2d Cir. 1976) (Mansfield, J., concurring), rev'd, 430 U.S. 462 (1977); Sommer, supra note 17, at 84,696.Google Scholar

In 1976, § 262(h) of the Delaware statute was amended to provide that the court may allocate a portion of counsel and witness fees, as well as other appraisal expenses of the shareholder, “pro rata against the value of all of the shares entitled to an appraisal.” While this reduces the possibility of free riders among the dissenting shareholders, it does not recognize that appraisal expenses are at least jointly caused, since it is the approval of the fundamental change by the majority on terms unacceptable to the minority that creates the occasion for appraisal. Recent amendments to § 81 of the model act provide the possibility, but not the certainty, of a further sharing of such expenses. Section 81 (i) now provides that the costs and expenses of the proceeding shall be borne by the corporation, unless the court finds the dissenters who have requested appraisal to have acted arbitrarily, vexatiously, or in bad faith. The new provisions for counsel fees and expert witness fees provide that they shall be assessed against the corporation if it failed to comply with all of the provisions of the act or may be assessed against either the corporation or the dissenters if the court finds that one side or the other acted arbitrarily, vexatiously, or in bad faith. If the court finds that the services of counsel for any dissenter benefited other dissenters substantially, counsel fees may be awarded from the total recovery for dissenters. Conard, supra note 111, at 2599–2600. The provisions with respect to the sharing of fees among the dissenters are said to be similar to the Delaware amendments described above. Id. at 2604.

179. Aside from problems of transaction costs, discussed at note 177 supra, the appraisal process leaves much to be desired in other respects. Uncertainty of result adds an element of cost which cannot be quantified, but the major problem with appraisal as a protective device for a squeezed-out minority is that appraisal focuses on past values rather than future opportunities. Even the most modern appraisal statutes provide for value to be determined as of a time immediately before the corporate action to which the dissenter objects and provide that any change in value resulting from the action is to be excluded. ABA-ALI Model Bus. Corp. Act § 81(a)(3) (1979); Conard, supra note 153, at 2597; Del. Code § 262(b) (Cum. Supp. 1978). The difficulty is that such an approach allows the majority to capture the value generated by the merger and to exclude the minority from the value of the opportunities it may provide. Cf. Jones v. H. F. Ahmanson & Co., 1 Cal. 3d 93, 460 P.2d 464, 478, 81 Cal. Rptr. 592 (1969) (creation of a trading market in holding company's stock). See also Brudney & Chirelstein, supra note 17, at 304–7.Google Scholar

180. Vorenberg seems to suggest that the test does no more than prevent pure freeze-outs for purely selfish purposes, not that it will prevent all freeze-outs or that it will assure fair treatment of minorities that are squeezed out. Vorenberg, supra note 21, at 1204–5.Google Scholar

181. In the context of land use controls, Michelman put it more strongly:Google Scholar

Michelman, supra note 176, at 1180.

182. When I speak of gains in these transactions, I mean only increases in the value of shares, based on the valuations of the owners of the shares. Whether their assessments of value, based on expectations of future firm performance and stock market response, are accurate is beside the point. Any or all participants may be mistaken about such predictions, but all should be subject to the same disability, absent inside information.Google Scholar

183. If, for example, the acquiring corporation begins owning no shares of the target, the point of zero supply or at least of a minimal supply (in the short run) is represented by the current market price. (It is possible that a gradual process might lead to an accumulation of a significant number of shares through market transactions carefully disguised, but this is a longer run view of the supply curve.) The other end of the segment of the supply curve we can chart is represented by the percentage of shares tendered in response to the invitation for tenders at what is presumably a premium over the market price that prevailed prior to the tender offer regardless of whether the acquiring corporation accepts all of them. If not all are accepted at that price, a surplus exists. Diagrammed below are two supply curves, illustrating the premium paid, represented by the difference between the supply curve and the tender offer price. In the second example (fig. 1b) where not all shares are taken, we know something about the supply curve beyond the number of shares purchased. Thus, in fig. la, we know the share of the curve SS up to the tender offer price but not beyond: the rest is merely an extension of the earlier segment. We do not, of course, know the precise slope of the curve between these points. In fig. 1b, we know the general shape of the curve SS up to the tender offer price, even though the acquiring corporation did not take all of the shares tendered, but took only 51 percent of the total shares. This suggests either a miscalculation of the supply curve by the acquiring corporation or intervening events that caused a greater tender than required by the acquiring corporation. The latter could be the endorsement of the offer by target management, adverse business developments for the target in the interim, or a failure of target management to mount an effective defense against the tender offer.Google Scholar

184. See, e.g., Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977).Google Scholar

185. This can be illustrated in two ways. First, we must look at the slope of the supply curve. To the extent it slopes more steeply upward as we reach higher quantities of stock, the potential losses to dissenters will be greater. In fig. la below, constant elasticity of supply at all levels, illustrated arbitrarily here by a constant slope of the supply curve, indicates that a 51 percent approval of a squeeze-out merger will result in benefits only slightly exceeding costs. Put another way, the premium to voluntary sellers slightly exceeds the losses to forced sellers. In fig. 1b, the supply curve slopes more steeply at higher quantities and illustrates that the losses to forced sellers will be greater at the same price, and losses will exceed gains to sellers.Google Scholar

The second factor is the length of each segment of the supply curve, which reflects the percentage voting requirement of state law for fundamental changes. Thus a rule of simple majority approval for fundamental changes increases the number of shares whose holders may suffer losses, which is illustrated by fig. 2 below.

The heavily cross-hatched area represents the smaller losses that would be incurred under a rule of two-thirds consent to fundamental changes, while the larger lightly shaded area represents the losses under a rule of simple majority approval. Buchanan and Tullock describe the process of moving from unanimity to majority rule as one of shifting external costs to the minority. Buchanan & Tullock, supra note 176, at 89–90. As these authors observe, “Only the unanimity rule will insure that all external effects will be eliminated by collectivization.” Id. at 89. See also Michelman, supra note 176, at 1180. Buchanan and Tullock discuss the difficulties with majority rule in the absence of “logrolling,” or vote-trading, in terms of the possibility of relative indifference of the majority and strong preferences of the minority. In this situation, illustrated by fig. 1b above, unadulterated majority rule may lead to net losses for the group, in the absence of logrolling, or transactions in votes. Buchanan & Tullock, supra note 176, at 132–34. This analysis depends on either a series of transactions where votes can be traded or monetary payments for votes, neither of which are possible in a fundamental change under current legal rules.

186. If the target corporation has minority shareholders who share a common background, such as the purchase of their shares in the public market, with no individual or group holding a significant block, elasticity of supply may not vary greatly over the length of the supply curve and may be quite high. This may account for the high degree of success of some tender offers, which obtain 90 percent or more of the outstanding shares. On the other hand, if the target corporation has acquired other businesses in the past, some shareholders or groups may be more resistant to sale, thus rendering some portion of the supply curve relatively inelastic. Examples may be those who have acquired their shares in tax free exchanges. Aside from emotional ties to their former businesses, these shareholders, as founders of a business that has been absorbed, may have extremely low bases for tax purposes and thus a higher capital gains tax cost associated with their sale than other shareholders. Or if the corporation took advantage of a bull market for new issues to sell its shares to the public only to watch share prices decline drastically, those shareholders who paid the higher price may exhibit less elasticity in the face of a price increase that still leaves them with a loss, either because of a refusal to recognize that they have sunk costs that should no longer enter into the calculus of whether to sell or hold or because the long-term losses that they will recognize are not presently useful to them for income tax purposes. One suspects that the majority of shareholders are not so attached to their shares and will exhibit a high degree of supply elasticity.Google Scholar

187. Buchanan and Tullock describe this as the ability, under a system of majority rule, of the control group to externalize certain costs and have them borne by other members of the group. Buchanan & Tullock, supra note 176, at 89–90. In the context of the sale of a control block of stock in a corporation by one seller, the value of this ability to externalize may be capitalized in the “control premium” paid to the sellers. Control enables one group to unilaterally expel another, at a price determined by the control group, or to extract a disproportionate share of the profits of the enterprise through excessive expenses, salaries, or other means that involve policing costs for the minority in excess of the returns from such policing activities. The absence of control premiums would be evidence of the inability of the controlling shareholders to impose any externalities on the minority. On the other hand, too high a voting requirement, imposing excessive negotiations costs on fundamental changes, might result in a decline in share prices generally. One suspects that the occasional presence of modest control premiums is evidence that voting requirements are not too high.Google Scholar

188. Perhaps this is best illustrated by the Brudney and Chirelstein “fairness” test, which calls for an “equitable” sharing of the profits of the fundamental change between the controlling shareholder and the minority interests. These authors call for an equal sharing of the stock market appreciation that is presumed to result from an “efficient” merger, with equality based on the relative investments, in stock values, in each enterprise. Brudney & Chirelstein, supra note 17, at 319–22. This approach requires aggregating the stock market values of each firm and dividing the gains on a pro rata basis. This formula attempts to treat each shareholder equally, as he or she might expect to be treated in an ongoing enterprise for purposes of dividends. This approach ignores the fact that the nature of the transaction is materially different, involving not day-to-day business operations but a fundamental change in the contractual relations. Ordinarily, a shareholder expects to cease ownership in the concern at a time and price of the shareholder's own choosing, which results in different expectations in terms of a selling price and a supply curve that slopes upward to the right in the manner typical of supply curves for all property rights with the possible exception of labor. Singer v. Magnavox, 380 A.2d 969 (Del. 1977), is notable in its recognition of the varying preferences of investors. Quoting from Jutkowitz v. Bourns, C.A. 000268 (Cal. Super. Nov. 19, 1975), the court stated:Google Scholar

380 A.2d at 977 n.8. Michelman, supra note 176, at 1174 n.19, observes that welfare economics has been criticized for its failure to recognize that equivalent amounts of dollars in the hands of different persons do not necessarily represent equivalent amounts of welfare. This criticism is equally valid in the area of fundamental corporate changes.

189. Winter's thesis suggests that if legal rules promote inefficient transactions, the price of shares of companies incorporated in such jurisdictions should fall and ultimately market pressures will force a state to adopt a more efficient rule, or lose chartering business. Winter, supra note 18.Google Scholar

Assuming the Winter thesis is correct, the persistence of possibly inefficient rules in this area may be explained by the coincidence of less restrictive take-over statutes. Thus a state that has shifted to a 51 percent rule for mergers, which imposes substantial risks of a large loss on a minority, may also have less restrictive take-over statutes that reduce the negotiating costs of acquiring the first 51 percent through tender offer. If the benefits from a “liberal” take-over statute exceed the externalized costs to a larger minority, stock prices may be enhanced for corporations subject to these rules. Since several states’ take-over statutes may apply to a corporation, based on state of incorporation, location of assets, and so forth, precise testing may be very difficult. Other variations in state laws may also mask adverse investor reactions to inefficient rules governing fundamental corporate changes.

190. Another reason why Winter's model of the market for legal rules has not prevented such “unfair” or “inefficient” rules may relate to the investor's perception that there is a very low probability that he or she will be the victim of such a squeeze-out. The percentage of all shares traded in securities markets involved in such transactions seems likely to be quite low. Certainly investors in major “blue-chip” corporations would not concern themselves with the problem, and state corporation law would not be affected by any decline in stock prices of such firms. If the probability of one's being affected by a squeeze-out is perceived as low enough, it may not pay the investor to search out firms with more favorable legal arrangements, created either by statute or by contract. Contrast this with the close corporation, where the risk seems much higher, and investors are more likely to create contractual solutions to problems created by state laws. Evidence from the field of experimental psychology suggests that individuals tend to underestimate the likelihood of events that either are difficult to imagine or lie outside the realm of one's normal experience, as squeeze-outs are likely to be, and certainly have been prior to the 1970s. See Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, 185 Sci. 1124 (1974). See also Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 Econometrica 263 (1979); Paul Slovic, Baruch Fischoff, & Sarah Lichtenstein, Cognitive Processes and Societal Risk Taking, reprinted in John S. Carroll & John W. Payne, eds., Cognition and Behavior 165 (Hillsdale, N.J.: Lawrence Erlbaum Associates, 1976), and Slovic, The Psychology of Protective Behavior, 10 J. Safety Research 58 (1978). I wish to acknowledge the helpful insights of Steven Shavell, of Harvard University, in this area.Google Scholar

191. It should be emphasized that an efficient merger is one in which there is gain for the aggregate of all shareholders, when the gain and loss of each shareholder is measured individually.Google Scholar

192. Michelman, supra note 176, at 1180. Buchanan and Tullock point out that the “efficiency” of the unanimously approved solution may be seriously diminished by the high transaction costs involved in obtaining unanimous consent. Buchanan & Tullock, supra note 176, at 85–90. Most of the judicial commentary addresses the “injustice” of allowing a single dissenting shareholder to block fundamental changes desired by the majority. See note 38 supra. But the practicality issue, raising the transaction cost problem, has been addressed as well:Google Scholar

Gibson, supra note 5, at 291 n.38. Buchanan & Tullock, supra note 176, argue that the difficulties of unanimity are greatly overstated because many observers ignore the potential for exchanges that result in mutual gains. Id. ch. 17. The optimum solution to such problems might not necessarily be majority rule but facilitation of transactions in votes, thus allowing differing compensation for different sellers of votes. See Manne, Theoretical Aspects, supra note 27. Earlier writers suggesting the same solution include Jesse W. Lilienthal, Corporate Voting and Public Policy, 10 Harv. L. Rev. 428 (1897), and Chester Rohrlich, Corporate Voting: Majority Control, 7 St. John's L. Rev. 218 (1933).

193. The English Companies Act lacks a procedure for statutory merger similar to that of the American model but does provide for the compulsory acquisition of minority shares within a limited time after a successful tender offer, at the same price as the tender offer. As a condition of such acquisition, the successful offeror must own 90 percent in value of the outstanding shares. If the offeror owned more than 10 percent of the outstanding shares to begin with, the offer must be accepted by three-fourths in number as well as by nine-tenths in value of such shares. The acceptance must take place within four months of the tender offer. Companies Act, 1948, 11 & 12 Geo. 6, ch. 38, § 209. It is noteworthy that the tender offer must be accepted by a very high percentage within a short period of time, thus assuring a price that includes the control premium and precluding the kind of duress that concerned Brudney and Chirelstein in the American setting. Brudney & Chirelstein, supra note 17, at 336–37. The kind of pattern described in this article, of paying a premium for control and purchasing with it the power to expropriate the values of the minority interests, is also not possible. Neither would it be possible to purchase control and await a market decline before squeezing out the minority, since there are time limits on the power to forcibly purchase.Google Scholar

194. Then SEC commissioner A. A. Sommer summarized the critical view:Google Scholar

Sommer, supra note 17, at 84,695. Later he described it as “nothing less than scandalous, and a species of downright fraud, for small corporations to go public at higher prices, and then buy back substantial quantities of their stock at lower prices.” Sommer, Further Thoughts on “Going Private,” reprinted in [1974] Sec. Reg. & L. Rep. (BNA) No. 278, D-1. See also Sporkin, supra note 22.

195. Brudney & Chirelstein, supra note 21, at 1359.Google Scholar

196. While the focus of this discussion will be on the squeeze-out merger, it is important to note that a reverse stock split may serve essentially the same purpose by recapitalizing the corporation with units so large that all minority shareholders’ holdings are reduced to fractional shares and then providing that no fractional shares shall remain outstanding. See, e.g., Teschner v. Chicago Title & Trust Co., 59 Ill. 2d 452, 322 N.E.2d 54 (1975), and Clark v. Pattern Analysis & Recognition Corp., 87 Misc. 2d 385, 384 N.Y.S.2d 660 (Sup. Ct. 1976). In both of these cases the recapitalization provided that the corporation would repurchase all fractional shares.Google Scholar

197. See Sommer, supra note 17, at 84,695. Voluntary repurchase programs have been an important feature of the securities markets for the past several decades, and, when fraud or the elements of coercion have not been involved in mergers and other squeeze-outs, have not been criticized. In some periods net disinvestment by listed corporations through repurchases appears common. Charles Ellis & Allen E. Young, The Repurchase of Common Stock 12 table 1–5 (New York: Ronald Press Co., 1971), report that in 1965 almost $2 billion was spent by NYSE-listed companies to repurchase their shares, while all U.S. corporations had raised only $1.5 billion through common stock sales. The authors indicate that repurchases correlated with high interest rates, in part because companies are unlikely to use available funds to prepay older debts at lower rates and perhaps also because high interest rates tend to depress stock prices, making the shares a better buy. Id. at 38–39.Google Scholar

198. See, e.g., People v. Concord Fabrics, Inc., 83 Misc. 2d 120, 371 N.Y.S.2d 550 (Sup. Ct.), aff'd, 50 A.D.2d 787, 377 N.Y.S.2d 84 (1975). Brudney observes that in many cases involving the legitimacy of the business purpose invoked by close corporations “legitimacy tends to turn largely upon judicial perception of the obstructiveness or greed of the displaced parties; illegitimacy, upon judicial recognition of the innocence of the displaced parties and the visibility of the unshared injury which the majority imposes upon them.” Brudney, supra note 21, at 1031.Google Scholar

199. In January 1973 the Dow Jones Industrial Average broke 1,000 for the first time, but by the end of 1974 it had collapsed beneath 600. See chart, N.Y. Times, Dec. 7, 1974, at 39, col. 5. This decline does not fully disclose the magnitude of the decline in securities that were offered to the public for the first time in the bull market of the late 1960s and that were traded over the counter. Commissioner Sommer has stated that from 1967 to 1972 some 3,000 corporations filed registration statements with the SEC for the first time. Sommer, supra note 17, at 84,694. In addition, numerous smaller issuers tapped the same source of capital through Regulation A offerings. Id. The decline in the market from late 1968 to May 1970 was just as precipitous as the 1973–74 decline in listed securities. From September of 1968 to May of 1970 the Dow declined from 985 to 631, but this measured only the tip of the iceberg. If losses from the two leading exchanges and the over-the-counter markets were combined, they were over $300 billion, according to one account. John Brooks, The Go-Go Years: The Financial Annals of the ’60s, at 306 (New York: Weybright & Talley, 1973).Google Scholar

200. One issuer explained that a management company's success depended on retention and attraction of highly skilled professionals, which in turn depended on an attractive compensation program, including an attractive stock ownership plan. The decline in stock market prices by approximately 90 percent since its initial offering had led the board to conclude that the benefits of public ownership had not materialized. Booz, Allen & Hamilton, Inc., Notice of Annual Meeting of Shareholders and Proxy Statement (Feb. 27, 1976), reprinted in 2 Flom, supra note 167, at 383, 393. See also Wells, Rich, Greene, Inc., Exchange Offer Prospectus (Nov. 4, 1974), id. at 494, 506–7, and Note, supra note 21, at 907–9. One corporation put it more elliptically: “International Service Industries is not a viable vehicle for publicly held stock.” Albright v. Bergendahl, 391 F. Supp. 754, 756 (D. Utah 1974).Google Scholar

201. Where a large amount of the corporation's shares are in the hands of the public, an intervening step of voluntary share repurchases may be necessary before a squeeze-out merger can take place. See, e.g., Kaufmann v. Lawrence, 386 F. Supp. 12 (S.D.N.Y. 1974), aff'd per curiam, 514 F.2d 283 (2d Cir. 1975). But the major (though not controlling) shareholder may simply determine to go forward with a merger on terms favorable enough to persuade a sufficient number of the public shareholders to go along with the merger proposal. With regard to two-step mergers, see Levin v. Great W. Sugar Co., 406 F.2d 1112 (3d Cir.), cert. denied, 396 U.S. 848 (1969).Google Scholar

202. In the Booz, Allen & Hamilton proxy statement, the company explained that it believed the best interests of the company would be served if the value of the shares owned by officers was “not subject to the uncertainties of market conditions but was more directly related to the results of operations of the business.” Booz, Allen & Hamilton, supra note 199, at 394. The proxy statement indicated that a preferable method of valuing shares would be on the basis of a formula price, “which formula price will be directly related to the Company's results of operations.” Id. The formula price involved a combination of one-half of the book value and four times earnings for the prior four quarters. Id. at 388. Wells, Rich, Greene proposed to use stock options based on book value. Id. at 507, 510.Google Scholar

203. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969).Google Scholar

204. Borden, supra note 22, at 1008–13.Google Scholar

205. If, for example, Texas Gulf's shares had been sold and resold over a sufficiently long period of time so that the number of shares traded exceeded the number outstanding and if each former shareholder who had sold on the “bad news” of the early press release had been allowed as damages the full difference between his or her selling price and the price some time after full disclosure, damages might have exceeded the corporation's net worth. David S. Ruder, Texas Gulf Sulphur—the Second Round: Privity and State of Mind in Rule 10b-5 Purchases and Sale Cases, 63 Nw. U.L. Rev. 423, 428–29 (1968), observes that TGS'S potential liability could amount to $390 million, or $150 million more than its net worth.Google Scholar

206. This analysis assumes that discovery of a major securities fraud will cause the market to anticipate the magnitude of the liability accurately and thus discount the present value of shares of the guilty issuer accordingly. Thus shareholders at the time of discovery will bear most of the cost of the subsequent action, even though they may not necessarily be shareholders at the time of a subsequent judgment and its satisfaction.Google Scholar

207. Kaufmann v. Lawrence, 386 F. Supp. 12, 14 (S.D.N.Y. 1974), aff'd per curiam, 514 F.2d 283 (2d Cir. 1975). See also Wells, Rich, Greene, Inc., in 2 Flom, supra note 199, at 507.Google Scholar

208. A corporation that can reduce its shareholders to less than 300 can terminate its registration under § 12(g)(4) of the Securities Exchange Act of 1934, 15 U.S.C. § 78/(g)(4) (1976). Any undertaking to file reports under § 15(d) of the act, 15 U.S.C. § 78o(d) (1976), is suspended as of the beginning of the first fiscal year in which the number of shareholders is less than 300. Elimination of these costs was relied on, at least in part, by the unsuccessful defendants in Jutkowitz v. Bourns, No. C.A. 000268 (Cal. Super. Ct., L.A. Co., Nov. 19, 1975), reprinted in part in Lipton & Steinberger, supra note 5.Google Scholar

209. Ellis & Young, supra note 196, at 75, studied annual shareholder servicing costs and for 76 responses found costs in the following ranges:Google Scholar

One reported reason for a particular attempt to go private through a reverse stock split was a savings of $100,000 per year for a company with reported earnings for the previous year of only $250,000. North Central Companies, Inc., as reported in Wall St. J., Oct. 18, 1974, at 27, col. 3. Borden, supra note 22, at 1007, estimates the cost of being an average public company of Amex size at $75,000–$200,000. An experienced attorney recently placed the minimum cost for legal fees for a public company at $20,000 and suggested that the accounting and printing costs would each equal that amount. Kohn v. American Metal Climax, Inc., 322 F. Supp. 1331, 1336–37 (E.D. Pa. 1970), noted that the fees paid to the bank that served as American's depositary for a foreign issuer's shares amounted to $300,000 for mailing reports and dividends to shareholders for one year.

210. A news report cited costs of servicing shareholders of five dollars per year when the issuer's stock was selling for 37 cents per share. Wall St. J., Sept. 14, 1978, at 48, col. 2.Google Scholar

211. Sommer, supra note 17, at 84,699; Brudney, supra note 21, at 1028–29. See also House of Adler, Inc., [1971–1972 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,515 SEC Div. Trading & Markets, Sept. 30, 1971), suggesting that an intent to deprive remaining shareholders “of the protection that Congress intended to afford them” might violate the antifraud provisions of the securities laws.Google Scholar

212. Brudney argues that the cost savings are marginal at best when compared to the shareholder losses from going private. He argues that all shareholders lose when the issuer goes private, since they all sacrifice the liquidity of the public market. He then concludes that any small saving that is possible in this way is more than offset by the losses suffered by the minority in the reallocation of corporate wealth to the majority. Brudney, supra note 21, at 1033–34. See also Note, supra note 21, at 907.Google Scholar

213. Whether the cost of compliance with the federal securities laws is worth the benefits to the shareholders will remain an unknown as long as shareholders are prohibited from transactions concerning such compliance. The only real way to determine whether the cost is worthwhile is to allow issuers to attempt to purchase the consent of their shareholders to termination of reporting. In this way the benefits from reporting could be separated from the other benefits of owning the particular shares. But the securities laws expressly outlaw waivers of compliance. Securities Act of 1933, § 14, 15 U.S.C. § 77n (1976), and Securities Exchange Act of 1934, § 29(a), 15 U.S.C. § 78cc(a) (1976).Google Scholar

214. Brudney & Chirelstein, supra note 21, at 1366, state, “This, however, is an inadequate justification, and in many instances we would doubt its sincerity. The costs of monitoring management's conduct are incurred for the benefit of the public stockholders, and it hardly rests with the fiduciary to cite the saving of these costs as a reason for terminating the beneficiaries’ interest without their consent.” Note the separate treatment of the public shareholders in this analysis, distinct from the shareholders in the aggregate. Such analysis would freeze public ownership as an immutable value and would totally eliminate the balancing of costs and benefits that has historically served as the justification for fundamental change. This attitude is consistent with Hurst's observations, supra note 20, that until 1930 the law favored centralization of power in the corporate form as a means of furthering society's goal of encouraging the assembly of capital for industrial development. Id. at 90–91, 104. Thereafter he suggests that a social interest arose in maintaining the market for corporate securities “as a whole, as a now essential part of the machinery for distributing income and wealth.” Id. at 103. Also see Jutkowitz v. Bourns, supra note 207, at 431, where the court, referring to shareholder protection, concluded that “elimination of the nuisance of the protective procedures seems an insufficient reason to abolish the shareholding itself—at least one which the Court is reluctant to recognize.”Google Scholar

215. Then commissioner Sommer stated:Google Scholar

Sommer, supra note 17, at 84,698. Compare Note, supra note 21, at 917–18, with Borden, supra note 22, at 1006–16, and Kaufmann v. Lawrence, 386 F. Supp. 12 (S.D.N.Y. 1974), aff'd per curiam, 514 F.2d 283 (2d Cir. 1975):

386 F. Supp. at 17.

216. For an analogous demonstration of how passage of time changes the inferences that can be drawn from the sale of securities where the purchaser originally indicated an intent to hold for investment rather than resale, see 1 U.S., Securities and Exchange Commission, Disclosure to Investors—a Reappraisal of Administrative Policies Under the ’33 and ’34 Acts (The Wheat Report) 164 (1969), where it is noted that: “ ‘Of course, the longer the period of retention, the more persuasive would be the argument that the resale is not at variance with original “investment intent.” ’ ” enterprise fails, they bear their proportion of the losses. If, on the other hand, it succeeds, as soon as it passes the experimental stage, and the opportunity is presented to finally reap the reward of a judicious investment, they are coolly ejected from the corporation by a majority of the stockholders, who appropriate to themselves the accruing profits.²¹⁷ Google Scholar

217. Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004, 1007 (1904).Google Scholar

218. Investor Comments Favor SEC “Going Private” Proposals; Bar Opposes Them, [1975] Sec. Reg. & L. Rep. (BNA) No. 318, A-1.Google Scholar

219. Henry G. Manne, Economic Aspects of Required Disclosures Under the Federal Securities Laws, reprinted in Henry G. Manne, ed., Wall Street in Transition 21, 63–64 (New York: New York University Press, 1974); cf. Bruce A. Ackerman, Private Property and the Constitution 44 et seq. (New Haven, Conn.: Yale University Press, 1977) (in the context of investor disillusionment with land use controls and their uncertainties).Google Scholar

220. See, e.g., Booz, Allen & Hamilton, Inc., supra note 199, at 394.Google Scholar

221. See text at notes 164–68 supra. Google Scholar

222. Compare ALI-ABA Committee on Continuing Legal Education, The Lawyer's Basic Corporate Practice Manual § 1.06 (student ed., Philadelphia: American Law Institute, 1970), and William H. Painter, Corporate and Tax Aspects of Closely Held Corporations 8 (Boston: Little, Brown & Co., 1971), with People v. Concord Fabrics, Inc., 83 Misc. 2d 120, 371 N.Y.S.2d 550, 551, 554 (Sup. Ct.), aff'd, 50 A.D.2d 787, 377 N.Y.S.2d 84 (1975). After reviewing the recited benefits of the transaction, including the determination of salary and dividend policy solely for the benefit of the controlling shareholders, the court concluded, “Adding to the odium of the scheme is the fact that no real corporate purpose has been demonstrated.”Google Scholar

223. Cf. Marshel v. AFW Fabric Corp., 533 F.2d 1277 (2d Cir.), vacated as moot, 429 U.S. 881 (1976) (referring to the justification described in People v. Concord Fabrics, Inc., 83 Misc. 2d 120, 371 N.Y.S.2d 550 (Sup. Ct.), aff'd, 50 A.D.2d 787, 377 N.Y.S.2d 84 (1975)). “In the present case the ‘merger’ itself constitutes a fraudulent scheme because it represents an attempt by the majority stockholders to utilize corporate funds for strictly personal benefit.” 533 F.2d at 1282.Google Scholar

While this holding has been overruled by Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977), for purposes of Securities Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5 (1979), it is likely to represent the attitude of at least some state courts dealing with questions of abuse of fiduciary duties by controlling shareholders, as in Concord Fabrics.

224. See, e.g., the following comment by Cary: “The directors’ duties are in the main duties owed to the corporate entity as such rather than to the shareholders or creditors individually.” Cary, supra note 55, at 513.Google Scholar

225. Brudney and Chirelstein conclude:Google Scholar

Brudney & Chirelstein, supra note 21, at 1359. See also Greene, supra note 139, at 512.

226. Cf. Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548, 556 (Sup. Ct. 1964) (share repurchase). But see Note, supra note 21, at 906–7, suggesting that the benefits from such activities are quite limited.Google Scholar

227. Cf. Schwartz v. Marien, 37 N.Y. 487, 335 N.E.2d 334, 373 N.Y.S.2d 122 (1975) (involving a stock issue that diluted the interest of one shareholder group), where the court applied a multilevel business-purpose test:Google Scholar

335 N.E.2d at 338.

228. A statutory merger under state law qualifies as a tax free “A” reorganization under Internal Revenue Code of 1954 (I.R.C.) § 368(a)(1)(A), 26 U.S.C. 368(a)(1)(A) (1976). If the requirements for such a reorganization are met, it is tax free to the participating shareholders, except to the extent that they receive money or property other than voting stock in the surviving corporation. In such cases, the shareholder must recognize gain but only to the extent that property other than stock or securities in the surviving corporation is received. I.R.C. § 356(a).Google Scholar

229. Brudney & Chirelstein, supra note 21, at 1366. The expression of such doubts, coupled with suggestions for legal reform, illustrates how the market mechanism can be displaced by regulation. The assumption of “market failure” implicit in such a response does not cause the critics to examine the reasons for such a failure, which may be selection of an “inefficient” rule for shareholder decisions in such cases, which permits the majority to externalize excessive costs.Google Scholar

230. Such analysis suggests either that management of the acquiring corporation has no stake in its future, either as stockholders or officers, or that somehow those acting as fiduciaries on behalf of other stockholders will act less aggressively than those acting on their own behalf. This model suggests that management acts as some kind of neutral resource allocator, looking only for efficiency gains and discarding gains based solely on takings from others.Google Scholar

231. Management wishing to survive judicial scrutiny of a one-step transaction may well wish to structure it to provide the appearance of the consent of, and benefit to, a majority of the public shareholders. Courts looking to determine whether the terms of a self-dealing transaction are so unfair as to suggest fraud will look to the reaction of a majority of the public shareholders. Fairness issues are quickly dismissed where a majority approve an arm's-length asset sale or merger. Alcott v. Hyman, 42 Del. Ch. 233, 208 A.2d 501 (Sup. Ct. 1965); MacFarlane v. North Am. Cement Corp., 16 Del. Ch. 172, 157 A. 396 (Ch. 1928). Where self-dealing is involved, ratification by a majority of the public shareholders generally shifts the burden of proof of unfairness to the complaining minority. Wall v. Anaconda Mining Co., 216 F. 242, 244–45 (D. Mont. 1914), aff'd sub nom. Wall v. Parrot Silver & Copper Co., 244 U.S. 407 (1917); Gottlieb v. Heyden Chem. Corp., 33 Del. Ch. 177, 91 A.2d 57 (Sup. Ct. 1952); cf. Bastian v. Bourns, Inc., 256 A.2d 680 (Del. Ch. 1969), aff'd per curiam, 278 A.2d 467 (Del. Sup. Ct. 1970). Where the complaining minority represents an extremely small number of shares in a transaction that has been approved by a strong vote of the public shareholders, courts express extreme reluctance to overturn the decision, often referring to the risk that they may do more harm than good, thus invoking a utilitarian justification. General Inv. Co. v. Lake Shore & M.S. Ry., 250 F. 160, 177–78 (6th Cir. 1918); Binney v. Cumberland Ely Copper Co., 183 F. 650, 652–53 (D. Me. 1910); Imperial Trust Co. v. Magazine Repeating Razor Co., 138 N.J. Eq. 20, 46 A.2d 449, 453 (Ch. 1946); Schulwolf v. Cerro Corp., 86 Misc. 2d 292, 380 N.Y.S.2d 957 (Sup. Ct. 1976); In re American Tel. & Cable Co., 139 Misc. 625, 248 N.Y.S. 98, 100–101 (Sup. Ct. 1931). Courts have shown a proper reluctance to interfere with going-private tender offers, on the theory that each shareholder can make his or her own determination about whether tendering would be beneficial, thus negating questions of fairness. Kaufmann v. Lawrence, 386 F. Supp. 12 (S.D.N.Y. 1974), aff'd per curiam, 514 F.2d 283 (2d Cir. 1975), and Raffa v. Mechanics’ Bldg. Material Co., Inc. Employee Stock Ownership Trust, [1975–1976 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,535 (E.D.N.Y. 1976). Where a tender offer was followed by a merger in a two-step transaction that the court found not unfair to the minority, special note was taken of the fact that it was approved by 59 percent of the independent stockholders. Levin v. Great W. Sugar Co., 406 F.2d 1112, 1120 (3d Cir.), cert. denied, 396 U.S. 848 (1969). While discussions of fairness may not be directly related to a business purpose, evidence of gains for the vast majority of the shareholders lends credence to such arguments. It also makes possible arguments based on the fallacy of composition.Google Scholar

232. People v. Concord Fabrics, Inc., 83 Misc. 2d 120, 371 N.Y.S.2d 550, 554 (Sup. Ct.), aff'd, 50 A.D.2d 787, 377 N.Y.S.2d 84 (1975); Sommer, supra note 17, at 84,697; cf. Singer v. Magnavox Co., 367 A.2d 1349, 1358 (Del. Ch. 1976), rev'd in part, 380 A.2d 969 (Del. 1977). Commissioner Sommer made no distinction between tender offers and squeeze-outs by way of merger.Google Scholar

233. Investor comments, supra note 218. See also Sommer, supra note 17, and Sporkin, supra note 22.Google Scholar

234. But see Manne, supra note 219, at 63–74, suggesting that investors’ memories of recent stock market profits or losses are far more significant to investor participation in the securities markets than the existence of regulations designed to deal with what regulators perceive to be unfair. As long as going private in one-step transactions remains an isolated and random event, investors may not discount stock values for the uncertainty imposed by such prospects. See authorities cited at note 190 supra. Google Scholar

235. Where a controlling shareholder attempts dissolution, the same judicial rules discussed herein with respect to mergers are likely to be imposed. See, e.g., Lebold v. Inland Steel Co., 125 F.2d 369 (7th Cir. 1941). But where no single shareholder can control sufficient votes to cause a voluntary dissolution, the participants may face judicial reluctance to dissolve a prospering corporation, even if things would go better without one of the shareholders. See, e.g., In re Radom & Neidorff, Inc., 307 N.Y. 1, 119 N.E.2d 563 (1954). See also William J. Carney, Close Corporations and the Wyoming Business Corporation Act: Time for a Change? 12 Land & Water L. Rev. 537, 578–79 (1977). An old, honored, and efficient precedent for dispute resolution exists in the partition of jointly held property. Because of the magnitude of the assets in publicly held corporations, no single investor may wish to incur the costs involved in contacting other public shareholders and assembling the capital necessary to bid for the assets on dissolution. In such cases the present majority shareholder may be the only possible bidder for certain assets not readily useful in other enterprises. Lebold v. Inland Steel Co., supra. The problems of transaction costs and free riders on the efforts of some minority shareholders may prove insurmountable in such instances, whereas they would not in closely held enterprises. Consider the problems of registering a securities offering in order to fund a bid for the assets of the liquidating enterprise, for example.Google Scholar

236. See, e.g., Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548 (Sup. Ct. 1964). The subsequent misfortunes of the corporate repurchaser are reported in Cary, supra note 55, at 691–92. But see Schwartz v. Marien, 37 N.Y.2d 487, 335 N.E.2d 334, 37 N.Y.S.2d 122 (1975).Google Scholar

237. Cary, supra note 25.Google Scholar

238. General Corporation Law Committee of the Delaware State Bar Association, Resource Document on Delaware Corporation Law, 2 Del. J. Corp. L. 175 (1977).Google Scholar