Lipton v. News International, Plc

514 A.2d 1075, 1986 Del. LEXIS 1242

• Court: Supreme Court of Delaware
• Decided: September 16, 1986
• Status: Published

Opinions

McNEILLY, Justice joined by HORSEY, Justice:

The case before us represents the efforts of two shareholders of Warner Communications, Inc. (“Warner”) to vacate a stipulation of dismissal in an action against Warner by News International, pic (“News”), an English company controlled by K. Rupert Murdoch and formerly Warner’s largest shareholder. The two shareholders (“Proposed Intervenors”) contend that the action by News was derivative in nature, and that therefore the stipulation of dismissal was improper because the parties to it failed to comply with the notice and court approval provisions of Chancery Court Rule 23.1.¹ Thus, we must now determine whether News brought suit against Warner in its derivative or, as News contends, in its individual capacity.

I.

In October 1983, News began purchasing shares of Warner common stock on the open market. On December 1, 1983, News filed a Schedule 13D with the Securities and Exchange Commission disclosing that it had acquired a 6.7% interest in Warner, thereby making News Warner’s largest stockholder. By December 7, News had increased its holdings to approximately 7%.

By the end of December, and apparently in response to News’ increased holdings in it, Warner had finalized an exchange agreement with Chris-Craft Industries, Inc. (“Chris-Craft”) and BHC, Inc. (“BHC”), a wholly-owned subsidiary of Chris-Craft, pursuant to which Warner would exchange a 19% interest in its stock for a stock interest in BHC. Because Warner has in place an 80% supermajority voting requirement for certain shareholder actions, including the removal of directors, this 19% interest, if combined with those shares owned or controlled by Warner’s management, would, in effect, give Chris-Craft a veto power over a change in Warner management or over other shareholder actions subject to the supermajority voting requirement.

In response to the Wamer/Chris-Craft exchange agreement, News instituted the underlying action against Warner and certain members of its Board of Directors, Chris-Craft and its president, and BHC. News alleged that the agreement deprived News of its voting rights, wasted corporate assets, and was designed to entrench management. Initially, News sought to enjoin the consummation of the exchange agreement. The Court of Chancery refused to grant injunctive relief, noting that because Chris-Craft apparently had no obligation to vote its Warner shares with Warner management, the exchange agreement would not “deprive the plaintiff of any voting right or position which it now has.” News International plc v. Warner Communications, Inc., et al., Del.Ch., C.A. No. 7420, slip op. at 3 (Brown, C.) (January 12, 1984) (letter opinion).

Approximately two months later, the parties resolved their differences and, on March 16, 1984, entered into an agreement pursuant to which Warner purchased all Warner stock owned by News. On March 19, 1984, in accordance with their agreement, the parties filed a stipulation of dismissal in the action by News pursuant to Chancery Court Rule 41(a)(1).² The parties made no attempt to comply with the notice and court approval provisions of Chancery Court Rule 23.1.

Three days after the stipulation of dismissal was filed, the Proposed Intervenors moved both to vacate the dismissal for failing to comply with Rule 23.1 and to intervene in the action under Chancery Court Rule 24.³ The original parties opposed the motion to vacate, claiming first that because News brought, or intended to bring, an individual and not a derivative action, Rule 23.1 did not apply, and second that there was no independent basis for intervention.

Shortly thereafter, the Proposed Inter-venors and several other Warner shareholders commenced new actions in the Court of Chancery and in courts of New York and California challenging both the Wamer/Chris-Craft exchange agreement and the Wamer/News settlement agreement. In these actions, News was designated as a defendant, along with Warner, Chris-Craft, and BHC, on the ground that it conspired with Warner in Warner’s breach of fiduciary duty.

In response to the Proposed Intervenors’ motion to intervene and vacate the stipulation of dismissal, the Court of Chancery found that while News’ complaint supports derivative as well as individual causes of action, News could and did proceed with its individual action only, noting that the complaint alleges “special injury” to News’ contractual voting rights in Warner. The Court accordingly concluded that dismissal of News’ suit was not subject to the notice and court approval provisions of Rule 23.1, and it denied the Proposed Intervenors’ motion. See News International, plc v. Warner Communications, Inc., et al., Del.Ch., C.A. No. 7420, slip op. at 5-9 (Walsh, V.C.) (April 10, 1985) (unreported decision).

II.

To determine whether a complaint states a derivative or an individual cause of action, we must look to the nature of the wrongs alleged in the body of the complaint, not to the plaintiffs designation or stated intention. Elster v. American Airlines, Inc., 34 Del.Ch. 94, 100 A.2d 219, 223 (1953); Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059, 1069-70 (1985). In Elster, the Court of Chancery established that a stockholder can maintain an individual action against the corporation if he has sustained a “special injury,” which the Court impliedly defined as “a wrong inflicted upon him alone or a wrong affecting any particular right which he is asserting,—such as his preemptive rights as a stockholder, rights involving the control of the corporation, or a wrong affecting the stockholders and not the corporation.” 100 A.2d at 222.

In Moran, the Court of Chancery set forth a test to determine whether a plaintiff has established an individual action:

To set out an individual action, the plaintiff must allege either “an injury which is separate and distinct from that suffered by other shareholders,” ... or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of any right of the corporation.

490 A.2d at 1070 (quoting 12B Fletcher Cyclopedia Corps. § 5921, at 452 (Perm. Ed.1984)) (citations omitted).

In comparing the two-pronged test of Moran with the definition of the term “special injury” in Elster, it appears that the term encompasses both prongs of the Moran test. That is, a plaintiff alleges a special injury and may maintain an individual action if he complains of an injury distinct from that suffered by other shareholders or a wrong involving one of his contractual rights as a shareholder. Moreover, while Moran serves as a quite useful guide, the case should not be construed as establishing the only test for determining whether a claim is derivative or individual in nature. Rather, as was established in Elster, we must look ultimately to whether the plaintiff has alleged “special” injury, in whatever form.

The plaintiffs in Moran alleged, inter alia, that a majority of the corporation’s directors had “manipulated the corporate machinery to entrench themselves in office by restricting the shareholders’ right to make use of the proxy machinery to gain control of” the corporation. 490 A.2d at 1070. The Court of Chancery found that because the plaintiffs were not engaged in a proxy battle, they suffered no injury distinct from that suffered by other shareholders. In addition, the Court found that while the plaintiff corporation was the defendant corporation’s largest shareholder, holding approximately 5% of the latter’s stock, it did not suffer any unique harm merely by virtue of its holdings because it had alleged no intent to use its block position to gain control of the defendant corporation. The Court, therefore, required that the claim be brought derivatively. Id.

A review of the allegations in News’ complaint in the case now before us reveals that the complaint clearly supports individual as well as derivative causes of action. News alleges that the Warner/Chris-Craft exchange agreement: (1) was designed to entrench management; (2) constituted a gross waste of corporate assets; (3) undermined Warner shareholders’, and in particular News’, voting and other fundamental shareholder rights; and (4) was specifically aimed at preventing News from exercising its 7% interest and influencing Warner management.

Following the precedent established in Moran and discussed above, News has not suffered any distinct harm merely by virtue of its 7% stock interest in Warner, because as of the time of the complaint News had not indicated a desire to use its holdings to gain control of the corporation. However, unlike the plaintiffs in Moran, News alleges harm to one of its contractual rights. Specifically, it contends that the Wamer/Chris-Craft exchange agreement violated its voting rights by securing for Warner management veto power over all shareholder actions subject to the 80% su-permajority voting requirement. We find that this allegation constitutes special injury to News under Elster, thus forming the basis of a viable individual cause of action against Warner. The right to vote is a contractual right that News possesses as a shareholder of Warner which is independent of any right of Warner. The alleged interference with that right meets the requirements of Elster and Moran in setting forth an individual action.⁴ A shareholder who suffers an injury peculiar to itself should be able to maintain an individual action, even though the corporation also suffers an injury from the same wrong. See also Reifsnyder v. Pittsburgh Outdoor Advertising Co., 405 Pa. 142, 173 A.2d 319 (1961) (Pennsylvania Supreme Court found a direct, or individual, action, concerned primarily with the protection of the plaintiffs voting rights, where plaintiff alleged that his own votes had been wrongly diluted by the majority shareholder’s improper votes on a resolution in which the majority shareholder had a pecuniary interest). Cf. Colonial Securities Corporation v. Allen, Del.Ch., C.A. No. 6778 (Longobardi, V.C.) (April 18, 1983) (unreported decision) (Court of Chancery stated as dicta: “If the Plaintiff had sought to enjoin the ... vote due to the potential coercive effect of these agreements, that action might have appeared as a personal one to vindicate the right of the plaintiff and other stockholders’ [sic] to vote freely, a right which is theirs and not the corporation’s.”) Elster’s dicta, previously referred to, supports the same result in the instant case. Here, the amended complaint clearly sets forth a challenge by News for the control of Warner and Warner’s efforts to frustrate News’ challenge, in addition to a claim for breach of News’ contractual rights. Further, we note that counsel for Warner argued below, on a preliminary motion to dismiss for failure of News to make pre-suit demand on the Board of Warner, that the complaint “studiously avoids any claim for derivative relief [because] Murdoch doesn’t want to be a derivative plaintiff.”

Having concluded News pleaded claims that support both individual and derivative causes of action, we must now determine whether News proceeded with its individual action only. If it did, then it was not required to comply with the provisions relating to derivative actions in Chancery Court Rule 23.1. As the Court of Chancery stated in Elster.

In such case a stockholder, if he should so desire, may proceed on his claim for the protection of his individual rights rather than in the right of the corporation. The action would then not constitute a derivative action.

100 A.2d at 222.

We believe the Court of Chancery was correct in concluding that News proceeded with its suit individually and not on behalf of Warner. At no time did News make any effort to comply with the demand requirements of Rule 23.1. In fact, rather than plead futility of demand, News argued that it need not comply with Rule 23.1 because it brought individual claims. While such an argument cannot create an individual action where the complaint does not support one, it is an indication that a plaintiff is pursuing individual, and not derivative, claims.

The Proposed Intervenors argue that News made statements in its press releases and in its complaint that exhibited concern for the interests of all Warner shareholders and not merely for itself, and that it therefore was proceeding derivatively. As the Court of Chancery noted, it was not unusual for News to comment on the plight of shareholders in general in order to gain public support in its fight against Warner management. The Court stated: “Litigation over corporate control is usually accompanied by orchestrated public relations efforts designed to picture each side as the champion of shareholder interests.” News International, plc v. Warner Communications, Inc., Del.Ch., C.A. No. 7420, slip op. at 7 (Walsh, V.C.) (April 10,1985) (unreported decision).

We find that News proceeded with its individual action only, and that therefore it was not required to comply with the notice and court approval provisions of Rule 23.1 in dismissing its action against Warner.

Further, we cannot support the proposition that the mere finding of a derivative claim within a plaintiffs complaint that also states individual claims for relief compels a ruling that Rule 23.1 necessarily applies to a dismissal with prejudice of the individual claims for relief. A shareholder whose complaint arguably asserts both derivative and individual claims but who eschews any effort to proceed derivatively should be permitted to resolve his individual claim, provided it does not prejudice or adversely affect the viability of a perceived derivative claim.

Here, it is clear from the record that the claims that were dismissed with prejudice were individual claims and not derivative claims; and defendants have stipulated, as well as represented to this Court, that any derivative claims asserted shall survive without prejudice and that the defendants remain subject to the Trial Court’s jurisdiction for resolution of all such derivative claims. Since the perceived derivative claims stated in the amended complaint remain vaiable and pending, the Court of Chancery did not commit legal error or abuse its discretion in dismissing with prejudice the individual claims asserted based on the private suit settlement reached by the parties. For these reasons, we conclude that the stipulation of dismissal must stand.

III.

The Proposed Intervenors also argue that they should be permitted to intervene in this action under Chancery Court Rule 24 in order to vacate the stipulation of dismissal and prosecute the derivative claims against Warner as well as new claims against News. In general, intervention is allowed only in pending actions. Braasch v. Mandel, 40 Del.Ch. 12, 172 A.2d 271, 273 (1961). Because we now uphold the dismissal of News’ action, that action is no longer pending. An exception to the rule may exist, however, for “the reopening of judgments entered by reason of collusion and fraud between the parties to the prejudice of intervenors’ rights.” Id. 172 A.2d at 274. This exception does not apply here. Because News and Warner were free to stipulate to a dismissal of this action without complying with Chancery Court Rule 23.1, as we have found above, there is no improper conduct to warrant intervention under the exception. Moreover, as noted, the dismissal of News’ individual action will not prejudice the rights of the Proposed Intervenors nor of any Warner shareholder other than News. They are still free to pursue derivative claims arising out of the Wamer/Chris-Craft exchange agreement or the Warner/News settlement agreement. In fact, several such actions have already been filed in the Court of Chancery and in courts of other states. The Proposed Intervenors must look to those actions to pursue their claims. * * *

AFFIRMED.

1 . Chancery Court Rule 23.1 provides:

In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort. The action shall not be dismissed or compromised without the approval of the Court, and notice by mail, publication or otherwise of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the Court directs; except that if the dismissal is to be without prejudice or with prejudice to the plaintiff only, then such dismissal shall be ordered without notice thereof if there is a showing that no compensation in any form has passed directly or indirectly from any of the defendants to the plaintiff or plaintiffs attorney and that no promise to give any such compensation has been made.

(emphasis added).

2 . Chancery Court Rule 41(a)(1) provides:

(a) Voluntary Dismissal; Effect Thereof.

(1) By Plaintiff; by Stipulation. Subject to payment of costs and the provisions of Rule 23(e) and Rule 23.1 an action may be dismissed by the plaintiff without order of court (i) by filing a notice of dismissal at any time before service by the adverse party of an answer or of a motion for summary judgment, whichever first occurs or (ii) by filing a stipulation or dismissal signed by all the parties who have appeared in the action. Unless otherwise stated in the notice of dismissal or stipulation, the dismissal is without prejudice, except that a notice of dismissal operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of the United States or of any state an action based on or including the same claim.

3 . Chancery Court Rule 24 provides in pertinent part:

(a) Intervention of Right. Upon timely application anyone shall be permitted to intervene in an action: (1) When a statute confers an unconditional right to intervene; or (2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action may as a practical matter impair or impede his ability to protect that interest, unless the applicant’s interest is adequately represented by existing parties.

(b) Permissive Intervention. Upon timely application anyone may be permitted to intervene in an action: (l) When a statute confers a conditional right to intervene; or (2) when an applicant’s claim or defense and the main action have a question of law or fact in common. In exercising its discretion the Court shall consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties.

4 . It is important to note that, while the substantive validity of News’ allegation of interference with its right to vote may be doubtful (i.e.. News was still able to exercise its vote and Chris-Craft was not obligated to vote its shares with Warner management), the inquiry here is to the nature of the claim and not to its merit. The plaintiff need not prove the wrong; all he need do is allege it. Moran, 490 A.2d at 1070.