Fundamental Partners v. Eggemeyer CA4/1

Filed 5/23/14 Fundamental Partners v. Eggemeyer CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

FUNDAMENTAL PARTNERS, D064252

Plaintiff and Appellant,

v. (Super. Ct. No. 73-2013-00029777-
CU-SL-CTL)
JOHN M. EGGEMEYER, III et al.,

Defendants and Respondents.

APPEAL from a judgment of the Superior Court of San Diego County, Ronald S.

Prager, Judge. Affirmed.

Hulett Harper Stewart and Blake Muir Harper; The Brualdi Law Firm and John F.

Keating, Jr. for Plaintiff and Appellant.

Paul Hastings and William F. Sullivan, John S. Durrant, Elizabeth C. Mueller for

Defendants and Respondents White River Capital, Inc., William E. McKnight, John M.

Eggemeyer, III, John W. Rose, Richard D. Waterfield, Daniel W. Porter, and Thomas C.

Heagy.
 Kirkland & Ellis and Eliot A. Adelson, David S. Mitchell for Defendants and

Respondents Parthenon Investors IV, Coastal Credit Holdings, Inc., and Coastal Credit

Merger Sub, Inc.

White River Capital, Inc. (White River), was a publicly traded Indiana corporation

headquartered in San Diego County. White River was merged with Coastal Credit

Holdings, Inc. Appellant Fundamental Partners is a former shareholder of White River.

Fundamental Partners sued respondents White River and its former directors William E.

McKnight, John M. Eggemeyer, III, John W. Rose, Richard D. Waterfield, Daniel W.

Porter, and Thomas C. Heagy. In addition, Fundamental Partners sued Parthenon Capital

Partners and its affiliates, including Parthenon Investors IV, LP, Coastal Credit Holdings,

Inc., and Coastal Credit Merger Sub, Inc. (collectively Parthenon). The complaint

alleged causes of action for breach of fiduciary duty and aiding and abetting.

Fundamental Partners appeals a judgment entered after the trial court sustained a

demurrer without leave to amend in favor of respondents, and contends the trial court

erroneously ruled: (1) Fundamental Partners lacked standing to bring derivative causes of

action challenging Parthenon's acquisition by merger of White River; (2) Indiana's

dissenters' rights statutes barred this post-merger shareholder lawsuit; and (3) as a matter

of law, Fundamental Partners cannot state a breach of fiduciary duty claim. We affirm

the judgment.

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 FACTUAL AND PROCEDURAL BACKGROUND

In its operative "second amended class action complaint" (capitalization omitted),

Fundamental Partners alleged White River "was a specialized subprime auto finance

company engaged in acquiring subprime auto receivables from both franchised and

independent automobile dealers which have entered into contracts with purchasers of

typically used, but some new, cars and light trucks." Fundamental Partners alleged

causes of action for breach of fiduciary duty against White River and the individual

defendants, and a cause of action for aiding and abetting against Parthenon. Specifically,

Fundamental Partners alleged the individual defendants: (1) approved the merger of

White River for $79.5 million despite receiving a higher bid, and notwithstanding the fact

the directors had valued White River at $88.2 million; (2) permitted Parthenon to reduce

the merger cost by up to 55 cents per share if the targeted net expenses were exceeded in

certain circumstances; (3) stood to gain financially from the merger; in particular,

Eggemeyer would receive over $1.2 million for his unvested performance shares, and

McKnight would receive "hundreds of thousands of dollars that he would not otherwise

receive at this time," and also keep his job; (4) "dissuaded any superior bid for [White

River] by causing White River to agree to pay Parthenon a termination fee of

$3,975,000—which amounts to an unusually high 5 [percent] of the total consideration

payable to shareholders—in the event White River enters into a superior transaction"; (5)

benefitted personally, including by obtaining indemnification for acts or omissions

occurring before the consummation of the sale agreement and for six years afterwards;

and (6) filed a deficient proxy statement with the SEC that "misrepresented and/or

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omitted material information."1

Fundamental Partners also alleged that Parthenon "aided and abetted the

individual defendants in the breaches of their fiduciary duties to White River's

shareholders by, among other things, (a) incentivizing McKnight to favor a sale to it by

continuing his employment following Parthenon's acquisition of [White River], (b)

negotiating a sale of White River to Parthenon with knowledge of the conflicts of interest

and the inadequate price the individual defendants have agreed to as a result of the same,

and (c) requiring White River to pay a termination fee of $3,975 million in the event

[White River] enters into a superior agreement to be acquired—which amounts to

approximately [5 percent] of the total transaction value." (Some capitalization omitted.)

White River, the individual defendants and Parthenon demurred to the second

amended complaint. White River also moved to strike allegations in the second amended

complaint relating to the directors' breach of fiduciary duties caused by their selling

White River for insufficient consideration, inadequate price, and on the condition that

White River pay a termination fee. Fundamental Partners opposed the demurrer and the

motion to strike. It argued its claims were direct and not derivative; Indiana law does not

bar postmerger lawsuits; and it had pleaded sufficient facts to support the causes of action

for breach of fiduciary duty. Fundamental Partners did not seek leave to amend its

complaint.

1 We grant Fundamental Partners' request for judicial notice of its disclosures in
Securities and Exchange Commission documents that were filed in the trial court, which
took judicial notice of them.
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 The trial court sustained the demurrer and ruled the motion to strike was moot,

acknowledging the parties had agreed Indiana law applied here.2 It ruled Fundamental

Partners lacked standing because its claims were derivative and not direct; Indiana law

barred shareholder postmerger litigation; and there was no actionable claim under a

provision of the Indiana Constitution stating that " 'every person, for injury done to him

in his person, property or reputation, shall have remedy by due course of law.' " It further

ruled that under Indiana law, directors deciding on a merger need not maximize

shareholder value above all other considerations.

DISCUSSION

I. Standard of Review

"On appeal from a judgment dismissing an action after sustaining a demurrer

without leave to amend, . . . [w]e give the complaint a reasonable interpretation, reading

it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as

admitting all material facts properly pleaded, but do not assume the truth of contentions,

deductions or conclusions of law." (City of Dinuba v. County of Tulare (2007) 41 Cal.4th

859, 865.) We review the complaint de novo and determine whether the pleading alleges

facts sufficient to state a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25

2 California's Corporations Code section 2116 provides that the directors of a
foreign corporation transacting intrastate business are liable to the corporation and its
shareholders for violations of official duty according to any applicable laws of the state or
place of incorporation or organization, whether committed or done in California or
elsewhere.
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Cal.4th 412, 415.) When a demurrer is sustained without leave to amend, "we decide

whether there is a reasonable possibility that the defect can be cured by amendment: if

it can be, the trial court has abused its discretion and we reverse." (City of Dinuba, at

p. 865.) A plaintiff may seek leave to amend for the first time on appeal. (Code Civ.

Proc., § 472c, subd. (a); City of Stockton v. Superior Court (2007) 42 Cal.4th 730, 746;

San Diego City Firefighters, Local 145, v. Board of Administration etc. (2012) 206

Cal.App.4th 594, 606.) If the judgment is correct on any ground stated in the demurrer,

we will affirm it regardless of the trial court's stated reasons. (San Diego City

Firefighters, at p. 605; Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312.)

II. Fundamental Partners' Claims are Derivative

Fundamental Partners, relying primarily on an Indiana case dealing with a closely-

held corporation (G&N Aircraft v. Boehm (Ind. 2001) 743 N.E. 2d 227), contends it had

standing to pursue this lawsuit because its claims were direct and not derivative. We

disagree and instead rely on a case dealing with a publicly traded corporation that

describes the features of a derivative action: "On its face, plaintiffs' complaint alleges a

near-classic derivative injury: a third party . . . allegedly caused harm to a corporate entity

. . . resulting in a diminution in the value of the corporation's stock, which in turn caused

the plaintiffs' harm." (Massey v. Merrill Lynch & Co., Inc. (Ind. 2006) 464 F.3d 642,

647, & fn. 2.)

The distinction established in Indiana law between derivative and direct actions

has been explained as follows: "Indiana law adheres to the well-established corporate

law principle 'that shareholders of a corporation may not maintain actions at law in their

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own names to redress an injury to the corporation even if the value of their stock is

impaired as a result of the injury.' [Citations.] That is, '[g]enerally speaking, the

stockholders of a corporation for the purposes of litigation growing out of the relations

between the corporation and a third person, surrender their personal or individual entities

to the corporation in which they are stockholders.' [Citation.] As a result, when a

corporation suffers injury, either from corporate insiders or . . . from a third party, it is the

corporate entity—not the individual shareholders—who retains the cause of action.

[Citation.] As a result, any claims that belong to the corporation must be made

derivatively (i.e., brought in the name and on behalf of a corporation), and any resulting

recovery flows to the corporate coffers. [¶] In contrast, a shareholder may bring a direct

action (i.e., an action on behalf of an individual shareholder or a class of shareholders) to

vindicate rights that belong to shareholders. For instance, a shareholder can generally

bring an action to enforce voting rights, compel dividends, prevent oppression or fraud

against minority shareholders, inspect corporate books, or compel shareholder meetings.

[Citation.] In addition, Indiana law allows a shareholder to bring a direct action when the

shareholder has suffered a distinct personal injury that is different from the type

experienced by the other shareholders. [Citations.] For instance, a shareholder may

maintain a direct action against a third party who harmed a corporation if the shareholder

had a separate contractual agreement with the third party or the corporation that exposed

the shareholder to a unique harm, different than general diminution of share price, such as

personal exposure on a loan guarantee." (Massey v. Merrill Lynch & Co., Inc., supra,

464 F.3d at pp. 645-646.)

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 Sound public policy considerations support the rule that shareholders may not

maintain individual lawsuits to redress an injury to the corporation: " 'It is recognized

that authorization of shareholder actions in such cases would constitute authorization of

multitudinous litigation and disregard for the corporate entity. Sound policy

considerations have been said to require that a single action be brought rather than to

permit separate suits by each shareholder even when the corporation and the shareholder

are the same.' " (Hubbard v. Tomlinson (Ind. Ct.App. 2001) 747 N.E. 2d 69, 71.)

In the context of closely-held corporations, the Indiana Supreme Court "has

created an exception to the rule preventing shareholders from maintaining actions in their

own names." (Hubbard v. Tomlinson, supra, 747 N.E. 2d at p. 71.) The exception states:

"In the case of a closely held corporation, the court in its discretion may treat an action

raising derivative claims as a direct action, exempt it from those restrictions and defenses

applicable only to derivative actions, and order an individual recovery, if it finds that to

do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of

actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii)

interfere with a fair distribution of the recovery among all interested persons." (Barth v.

Barth (Ind. 1995) 659 N.E. 2d 559, 562.)

The exception is inapplicable here because Fundamental Partners is a publicly

traded company, and the gravamen of its lawsuit relates to "[Respondents'] willful

misconduct and recklessness in causing White River to be sold to Parthenon in a

transaction which protects and advances their own interests to the detriment of

[Fundamental Partners] and [White River's] other public shareholders." Fundamental

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Partners also alleged respondents willfully or recklessly concealed material information

from the shareholders in the proxy statement. We conclude the court did not err in

finding that Fundamental Partners' claims were derivative. Fundamental Partners did not

allege it suffered a distinct harm separate from general diminution of share price.

Therefore, any purported harm was borne by all shareholders and any resulting benefit

would belong to the corporation.

Our conclusion applies equally to the trial court's decision to sustain the demurrer

as to Fundamental Partner's claim that Parthenon engaged in aiding and abetting. As

noted, Parthenon had joined in White River's demurrer and argued that Fundamental

Partners' claims were derivative, not direct.

III. Indiana Law Bars Postmerger Lawsuits

We also affirm the trial court's ruling because the Indiana Business Corporation

Law (Ind. Code, Art. 1; the BCL) prohibits postmerger lawsuits. We note that the official

comments to the BCL may " 'be consulted by the courts to determine the underlying

reasons, purposes, and policies of the BCL' and 'be used as a guide in its construction and

application.' " (Fleming v. International Pizza Supply Corp. (Ind. 1997) 676 N.E. 2d

1051, 1054-1055 & fn 5.)

Section 23-1-44-8, subsection (a) of the BCL, which deals with the "Right to

dissent and obtain payment for shares," states: "A shareholder is entitled to dissent from,

and obtain payment of the fair value of the shareholder's shares in the event of, any of the

following corporate actions: [¶] (1) Consummation of a plan of merger to which the

corporation is a party if: [¶] (A) shareholder approval is required for the merger by

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[statute] or the articles of incorporation; and [¶] (B) the shareholder is entitled to vote on

the merger."

Section 23-1-44-8, subsection (d) of the BCL denies a dissenting shareholder the

right to challenge a corporate action when the shareholder may recourse to the market

and sell his shares: "A shareholder: [¶] (1) who is entitled to dissent and obtain payment

for the shareholder's shares under this chapter; or [¶] (2) who would be so entitled to

dissent and obtain payment but for the provisions of subsection (b); [¶] may not

challenge the corporate action creating (or that, but for the provisions of subsection (b),

would have created) the shareholder's entitlement."

The official comment to section 23-1-44-8, subsection (d) of the BCL states:

"[The Legislature] adopted subsection (d) as a categorical statutory rule that shareholders

entitled to dissenters' rights may not challenge the corporate action creating that

entitlement. . . . [¶] In 1987, subsection (d) was amended to extend this categorical

prohibition to shareholders who would be entitled to dissenters' rights but for the 'market

exception' of subsection (b). Such shareholders, who have the ability to sell their shares

in a recognized market and at a market price, also may not challenge the corporate action

that (but for the 'market exception') would have created dissenters' rights."

Fundamental Partners argues: "[T]he Indiana Supreme Court has had no occasion

to consider, and has not considered, the subsection (b) exemption to 'covered securities[,]'

the effect, if any, of subsection (b) on the holders of publicly traded stock, or the

remedies available to shareholders for director misconduct when judicial appraisal

remedies are unavailable."

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 The BCL's section 23-1-44-8, subsection (b) states: "This section does not apply

to the holders of shares of any class or series if, on the date fixed to determine the

shareholders entitled to receive notice of and vote at the meeting of shareholders at which

the merger, plan of share exchange, or sale or exchange of property is to be acted on, the

shares of that class or series were a covered security under [the Securities Act of 1993, as

amended.]" The official comment to subsection (b), states that subsection retains and

expands the market exception to dissenters' rights, explaining: "The policy reason for

this exception is that the market itself establishes both a fair price for the shares and a

means by which a 'dissenting' shareholder can sell his shares for that price."

Further reinforcing the point that a dissenting shareholder of a publicly traded

company may not bring a postmerger lawsuit, a case explains that "The Dissenters'

Rights Statute limits shareholders aggrieved by a 'corporate proceeding and contains a so-

called "Wall Street exception" that provides: "[A] dissenting shareholder of a public

company has no right to challenge a corporate action in court or even to seek a dissenter's

appraisal remedy (as provided for in this statute); the shareholder's exclusive remedy is to

sell his or her shares on the open market. [Citation.] The rationale behind this exception

is that the public market provides a mechanism whereby a dissenter could seek the 'fair

value' of its shares." (Footnote omitted.) (In re Guidant Corp. Shareholders Derivative

Litigation (S.D.Ind. March 27, 2008, No. 1:03-cv-955-SEB-WTL) [2008 WL 833502].)

In light of the official comment on BCL section 23-1-44-8, subsection (b)

explaining that a dissenting shareholder's choice is to sell his shares on the market, and

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the interpretation of that provision in In re Guidant, supra, we conclude Fundamental

Partners lacked standing to pursue this derivative claim.

IV. No Amendment Permitted

An appellant has the burden of showing "in what manner [it] can amend [its]

complaint and how that amendment will change the legal effect of [its] pleading."

(Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.) "[L]eave to amend should not be

granted where . . . amendment would be futile." (Vaillette v. Fireman's Fund Ins. Co.

(1993) 18 Cal.App.4th 680, 685.) Here, neither in the trial court nor on appeal has

Fundamental Partners sought leave to amend its complaint. We conclude that in light of

the fact this is a derivative action, and the BCL bars Fundamental Partners from bringing

a postmerger lawsuit, it cannot amend the complaint to state a viable cause of action.

Having disposed of this case on the above grounds, we need not address the merits of

Fundamental Partners' breach of fiduciary duty claim or its other arguments raised on

appeal.

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 DISPOSITION

The judgment is affirmed. Respondents are awarded costs on appeal.

O'ROURKE, J.

WE CONCUR:

HALLER, Acting P. J.

McINTYRE, J.

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