California Federal District Court Holds That Section 1312(a) Of The California Corporations Code Provides The Exclusive Remedy For Minority Shareholders Seeking To Challenge A Proposed Merger
In Dixon v. Cost Plus, Inc., No. 12-2721, 2012 U.S. Dist. LEXIS 90854 (N.D. Cal. Jun. 27, 2012), the United States District Court for the Northern District of California held that Section 1312(a) of the California Corporations Code precluded plaintiff-minority shareholder's breach of fiduciary duty claim to the extent that the claim relied upon arguments that a proposed merger price was unfair, or that the process employed by the board of directors was inadequate. Nonetheless, the court noted a "recognized exception" to this bar for challenges based upon "the question of an insufficient vote to authorize a merger or consolidation." In so holding, the court upheld a "unique" California statute which limits the availability of relief for allegations that directors breached their fiduciary obligations in agreeing to merger terms and in the process engaged in self-dealing and other breaches of duty, while also noting an exception to the general bar.
This case centers around a putative class action filed by a minority shareholder of Cost Plus Inc. ("Cost Plus") in connection with the proposed sale of Cost Plus to Bed Bath & Beyond, Inc. ("BBBY") ("Merger"). The defendants were Cost Plus, members of the Cost Plus' board of directors and the Merger Sub and the Parent of BBBY. Plaintiff filed a motion for preliminary injunction to enjoin the tender offer in connection with the Merger. Among other claims, plaintiff argued that the Cost Plus directors breached their fiduciary duty to obtain the best price reasonably available for shareholders in the merger process. Defendants opposed plaintiff's motion for preliminary injunction, arguing that plaintiff is barred by Section 1312(a) from seeking injunctive relief based upon the "unfair price" and "unfair process" arguments. Specifically, defendants argued that Section 1312(a) provides that an appraisal proceeding is the exclusive remedy for challenges to mergers.
The district court held that California's "unique" Section 1312(a) limits the availability of relief for allegations of breach of fiduciary duty in mergers. Section 1312(a) provides:
No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity...