PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
N0. 10-404()
MITCHELL PARTNERS, L.P.,
Appellant
V.
IREX CORPORATlON;
NORTH LIME HOLDINGS CORP.;
W. KlRK LIDDELL; DAVID C. KLEINMAN;
PAUL J. ISAAC; JOANN M. ]UDGE;
MICHAEL J. LARDNER; JOHN O. SHIRK;
THOMAS W. WOLF; LORI A. PICKELL;
JAMES E. HIPOLIT; JANEE. PINKERTON;
KENNETH G. STOUDT; N. THOMPSON WASHBURN
N0. 10-409l
MITCHELL PARTNERS, L.P.
v.
IREX CORPORATION;
NORTH LIME HOLDINGS CORP.;
W. KIRK LIDDELL; DAVID C. KLEINMAMN;
PAUL J. ISAAC; JOANN M. JUDGE;
MICHAEL J. LARDNER; JOHN O. SHIRK;
THOMAS W. WOLF; LORI A. PICKELL;
JAMES E. HIPOLIT; JANE E. PINKERTON;
KENNETH G.STOUDT; N. THOMPSON WASHBURN,
Appellants
On Appeal from the United States District Court
for the EaStern District of Pennsy1vania
(D.C. No. 5-08-cv-04814)
District Judge: Honorable J ames Kno11 Gardner
Argued July 12, 2011
Before: SLOV1TER, FUENTES, and GARTH, Circuit Judges
(Fi1ed: August 31, 2011)
George W. Croner (Argued)
Christina Donato Saler
Robert J. LaRocca
Kohn, Swift & Graf
Phi1ade1phia, PA 19107
Attorneys for Appel1ant/Cross-Appe11ees
Steven B. Feirson
Erin C. FiSher
Chery1A. Krause (Argued)
E1isa T. Wiygu1
Dechert
Phi1ade1phia PA 19104
Attorneys for Appe11ees/Cross-Appe11ants
OPIN1ON OF THE COURT
2
SLOVITER, Circuiz‘ Judge.
This matter comes to us under our jurisdiction over
diversity of citizenship cases. 28 U.S.C. § 1332. Beginning
with the First Judiciary Act of l789, Congress authorized
federal courts to hear suits "between a citizen of the State
where the suit is brought, and a citizen of another State."
§ ll, l Stat. 73, 78 (l789). The grant of diversity jurisdiction
to federal courts was controversial at its inception and
continues to be. See Charles Alan Wright, Law of F ederal
C0urts § 23 (5th ed. 1994). A byproduct of that jurisdiction
is the requirement that the federal court must apply the law
declared by the supreme court of the relevant state. See
Klax0n C0. v. Stent0r Electric Mfg. C0., 313 U.S. 487,
496-97 (1941). If there is no applicable decision of the
highest court of the state, then federal courts must make a
prediction as to the law that would be applied were the issue
before it, an issue that has occupied many judges and courts.'
The issue, however, does arise in the present case and the
Supreme Court has made clear that a federal court is not free
to decline jurisdiction in a diversity case merely because the
issue is a difficult one.
Therefore, we must decide the important issue of
Pemisylvania corporate law that the Supreme Court of
Pennsylvania has not yet explicitly addressed. The issue is
whether the Pennsylvania statute providing for appraisal of
the value of the shares of minority shareholders who are
"squeezed out" in a cash-out merger precludes all other
remedies. ln this case, a substantial minority shareholder of
Irex Corp., that is, Mitchell Partners, L.P., which is
participating in an appraisal proceeding in state court, also
asserted a post-merger claim for damages in federal district
court in Pennsylvania, alleging breach of fiduciary duties by
the majority shareholders in connection with Irex’s cash-out
1 One reasonable test suggested for the federal judge is
"[w]hat would be the decision of reasonable intelligent
lawyers, sitting as judges of the highest [state] court, and fully
conversant with [that state’s] ‘jurisprudence’?" C00per v.
Am. Az`rlz`nes, Inc., 149 F.2d 355, 359 (2d Cir. l945).
3
merger with North Lime Holdings. The District Court held
that the appraisal remedy was exclusive and therefore
dismissed Mitchell Partners’ complaint in its entirety.
Mitchell Partners filed this timely appeal.
19
Appellant Mitchell Partners, L.P., a Califomia limited
partnership, was formerly a minority shareholder of Irex
Corporation ("1rex"), owning more than 11,000 shares of Irex
common stock. Irex was a privately held Pennsylvania
corporation with its shares traded over the counter and not on
a public stock exchange. Irex was the parent corporation of
several companies that installed and maintained mechanical
insulation, sheet metal, and passive fire protection. lrex’s
companies also removed asbestos, lead, and other hazardous
materials.
Irex was governed by a board of directors and several
corporate officers Collectively, the directors and officers
owned approximately 43% of Irex stock. With the exception
of two officers, the Irex directors and officers are all
defendants in this case.3
On April 26, 2006, defendant W. Kirk Liddell,
President, CEO and Chairman of the Irex board, sent a
confidential memorandum to the directors and officers
2 Because this is an appeal of an order granting a
motion to dismiss under Fed. R. Civ. P. 12(b)(6), we must
adopt the facts as alleged in the complaint.
3 Specifically, the complaint names David Kleinman,
Paul Isaac, Joann Judge, Michael Lardner, John Shirk, and
Thomas Wolf as members of the Irex board and defendants.
The complaint lists Lori Pickell and James Hipolit as Irex
officers and W. Kirk Liddell as President, CEO, and
Chairman of the Board; also all defendants. Irex had two
other officers, David Andrew and Dennis Gray, who are not
defendants to this case.
4
outlining a plan, referred to as the North Lime Proposal, that
was designed to enhance their own net worth by consolidating
ownership of Irex among themselves and a handful of other
"participating" shareholders by buying out the minority Irex
shareholders. The directors, officers, and certain other
favored participating shareholders are the insider or North
Lime shareholders. Under the North Lime Proposal, the
insider shareholders were to create a separate holding
company, North Lime Holdings Corporation, under the
insiders’ exclusive ownership and control. North Lime would
then acquire l00% of Irex through a cash-out merger between
Irex and a wholly-owned North Lime subsidiary, Irex
Acquisition Corporation.
Specifically, the North Lime Proposal detailed that
prior to the merger, the insider shareholders would exchange
their Irex stock for North Lime stock. By so doing, North
Lime would obtain majority ownership of lrex. At the same
time, the insider shareholders would retain ownership of Irex
indirectly through their ownership of North Lime.4 Under the
terms of the merger, the non-participating, non-insider
minority shareholders would be given cash in exchange for
their ownership interest in lrex. The defendants proceeded as
planned
Once Liddell had gamered sufficient insider
shareholder support for the North Lime Proposal, the insider
defendants, through defendant Lori Pickell, 1rex’s CFO,
informed all Irex shareholders by mail of the proposed
merger, The letter explained that "[a] group of Irex
shareholders holding approximately 5()% of the outstanding
Irex shares will contribute their shares to a new holding
company [North Lime Holdings]; . . . [that] Irex will become
a subsidiary of [North Lime]; . . . [and that] Irex shareholders,
other than [North Lime] shareholders, will receive $60 per
share in cash in exchange for their Irex shares." App. at l83.
4 Indeed, by eliminating the minority shareholders, the
insider shareholders would not only retain their ownership
interests in lrex, they would increase their proportional
ownership share.
5
A week later, Mitchell Partners wrote to Pickell and lodged
its opposition to the proposed merger, which it viewed as a
squeeze out of minority shareholders at an unfair price.
On May 31, 2006, a special meeting of the Irex board
was convened to discuss the North Lime Proposal. At the
meeting, the board amended its bylaws to add three additional
directors who were supposedly "disinterested" in the North
Lime Proposal. That is, unlike the rest of the board, they had
no financial stake in the outcome and did not sit on either side
of the proposed merger. These "disinterested" board
members would form a Special Committee charged with
reviewing and commenting on the fairness of the proposed
merger and independently negotiating with North Lime on
behalf of the minority shareholders.
However, as alleged in the complaint, rather than
being neutral, the selected Special Committee members had
strong ties to the North Lime insiders: two were former Irex
directors and the third was a businessman who provided
services to one or more of the insider defendants.5 In June
2006, the Irex bylaws were once again amended to indemnify
the Special Committee from liability for actions taken in the
course of their evaluation of the proposed merger.
The complaint alleges that once the Special Committee
began its review, the insider directors influenced and
controlled the Special Committee’s consideration of fair value
for the minority stock in several ways, thereby breaching the
fiduciary duties they owed to minority shareholders. First,
the insiders influenced the Special Committee and its
financial advisor, Curtis Financial Group ("Curtis"), to accept
the conclusion that the bankruptcy filed by one of Irex’s
subsidiaries, AC&S, had greatly depressed the value of Irex
stock AC&S had filed for bankruptcy in 2002 because it was
the subject of approximately 100,000 unresolved asbestos
litigation claims. But in 2000, AC&S had initiated litigation
5 The three Special Committee members, Jane
Pinkerton, Thomas Washbum, and Kenneth Stoudt, are also
named defendants in this case.
6
of its own against its insurer, Travelers lndemnity Company
("Travelers"), for coverage of those claims. By the summer
of 2006, the insiders knew or had reason to know that the
litigation between AC&S and Travelers was likely to be
resolved by a settlement highly favorable to AC&S,
positively impacting the value of Irex stock.
Notwithstanding, a key Irex board member and North Lime
participant, Joann Judge, repeatedly urged that the Special
Committee be comprised only of people who understood "the
status of the AC&S bankruptcy and its impact on Irex share
va1ue." App. at 57. For three months, the insider defendants
allegedly urged the Special Committee to apply a substantial
"asbestos discount" in the recommended price. lndeed, at
times the Special Committee was infonned by Liddell and
other defendants that the asbestos discount was "the most
significant factor impacting the valuation of the Irex common
stock." App. at 62. Yet, the Special Committee’s financial
advisor, Curtis, never received a report or assessment
regarding the settlement negotiations with Travelers
Second, defendant Liddell, acting simultaneously as
CEO of both Irex and North Lime, controlled the flow of
information that the Special Committee received. Snyder &
Co. was the investment bank that had historically provided
appraisals of Irex stock for purposes of valuing Irex
employees’ 401(k) plans. But Snyder was retained by North
Lime as an advisor for purposes of the merger and was
serving in that capacity when Liddell arranged to have a
Snyder representative brief the Special Committee on the
value of Irex’s stock. In addition to this alleged conflict of
interest, Liddell insisted that he meet with the Committee to
explain the proposed transaction before anyone from Snyder
met with the Committee. Thereafter, he was present when
Snyder briefed the Committee in July 2006. Curtis was
excluded from the Committee’s meeting with Snyder.
1n August 2006, Curtis presented its initial analysis of
the proposed merger to the Special Committee. Based
principally on information provided by the North Lime
insiders and without independent verification, Curtis valued
the stock at between $65 and $67 per share. Included in this
7
price was a 22.5% asbestos discount (because of the pending
asbestos actions against an Irex subsidiary), which failed to
take into account the likelihood of settlement with Travelers
The valuation was also based on an assumption of 3% annual
projected growth That figure was significantly smaller than
lrex’s historical rate of growth In fact, between 2001 and
2005, Irex experienced annual compound revenue growth that
exceeded 14%.
Compounding Curtis’ undervaluation, the Special
Committee used the $67 per share valuation as the starting
point for negotiations, thereby setting a ceiling on the price
the minority shareholders would receive. By this time, mid-
August 2006, one or more of the insider defendants were
directly involved in the Travelers settlement negotiations.
Despite their knowledge of the imminent settlement, they
sought to have the Special Committee increase the asbestos
discount Curtis had used in its valuation Curtis and the
Special Committee promptly agreed and decreased the
proposed price to 366 per Irex share.
Shortly thereafter, on August 31, 2006, Irex and North
Lime entered into a Merger Agreement based on the $66 per
share price. The agreement was subject to shareholder
approval and, on September 11, 2006, a proxy statement was
distributed to Irex shareholders whereby they were infonr1ed
that the Special Committee had determined that $66 per share
was a fair price and that the merger was "in the best interest
of Irex." App. at 69.
1n addition to the above alleged breaches of fiduciary
duties, Mitchell Partners contends that the proxy statement (1)
omitted material facts conceming Curtis’ valuation analysis
and fairness opinion, (2) omitted Irex’s intemal management
projections used by Curtis and never independently verified,
(3) omitted any factors that might weigh against the
transaction, (4) falsely described the transaction as
substantively and procedurally fair to minority shareholders,
and (5) misrepresented material facts concerning the status of
the asbestos litigation and AC&S bankruptcy. In fact, in July
2007, less than a year after the plan was presented to the
8
shareholders, Liddell announced that AC&S had settled with
Travelers for $449 million_terms that Liddell described in
the press as "good news for AC&S." App. at 70.
At the time of the shareholder vote in October 2006,
North Lime held 7l% of outstanding Irex shares through the
exchange of Irex stock for North Lime stock and/or the grant
of proxies. On October l0, 2006, it voted those shares in
favor of the merger. Mitchell Partners and one other
shareholder dissented and did not vote in favor of the merger.
The transaction closed ten days later on October 20, 2006.
On February 7, 2007, Irex filed an appraisal action
against these dissenters in the Pennsylvania Court of
Common Pleas. The suit averred that Mitchell Partners had
dissented from the merger and that the fair value of the shares
was $66 per share. Irex requested that the court confinn this
price. Mitchell Partners counters that the fair value was
approximately $l 81 per share. The appraisal proceeding is
ongoing.
Based on the foregoing facts, Mitchell Partners filed
this putative class action complaint on October 8, 2008,
alleging breach of fiduciary duty against Irex, North Lime,
and the individual insider directors/officers (count 1), breach
of fiduciary duty and aiding and abetting breach of fiduciary
duty against the Special Committee members (count 2), and
unjust enrichment against 1rex, North Lime, and the
individual insider directors/officers (count 3). The defendants
moved to dismiss all counts for failure to state a claim. The
District Court granted the motion. Mitchell Partners appeals.
116
6 The District Court had jurisdiction of this diversity
action pursuant to 28 U.S.C. § 1332. We have jurisdiction
over Mitchell Partners’ direct appeal pursuant to 28 U.S.C. §
1291 because the District Court issued a final order
dismissing all claims as to all parties and entering judgment
in favor of the defendants. "We review de novo a district
court’s decision to dismiss the complaint for failure to state a
9
As to count 1, the parties do not dispute that as a
general matter of Pennsylvania state 1aw, "[i]t has long been
recognized that majority shareholders have a duty to protect
the interests of the minority." Ferber v. Am. Lamp C0rp., 469
A.2d l046, 1050 (Pa. l983). "[M]ajority stockholders
occupy a quasi-fiduciary relation toward the minority which
prevents them from using their power in such a way as to
exclude the minority from their proper share of the benefits
accruing from the enterprise." H0rnsby v. L0hmeyer, 72 A.2d
294, 298 (Pa. 1950) (citation omitted). lndeed, the Supreme
Court of Pennsylvania recognized in In re J0nes & Laughlz`n
Steel C0rp. (J0nes 1I), "that a freezing out of minority holders
with the purpose of continuing the business for the benefit of
the majority holders is a violation of the fiduciary duty owed
to minority shareholders by the majority shareholders." 412
A.2d 1099, 1103 (Pa. 1980) (intemal quotations and citations
omitted).
Applying the facts alleged in the complaint to this
standard, the District Court held that Mitchell Partners had
stated a cognizable claim for breach of fiduciary duty against
North Lime and the other insider, majority shareholders.
However, the District Court held that because the breach of
fiduciary duty lawsuit was brought after the merger had been
consummated, it was barred by Pennsylvania’s appraisal
statute, which the District Court reasoned provided the sole
post-merger remedy to dissenting minority shareholders.
Therefore, the District Court dismissed the entire complaint.7
claim upon which relief may be granted." Eur0fins Pharma
U.S. H0la’z`ngs v. Bz'0Allz`ance Pharma SA, 623 F.3d 147, 158
(3d Cir. 2010).
7 The District Court also provided altemative grounds
for the dismissal of certain claims.
As to count 1, the District Court dismissed the breach
of fiduciary duty claim against Irex because a corporation, as
an entity itself, does not have a fiduciary duty to shareholders.
Mitchell Partners does not challenge the dismissal of this
claim against lrex.
10
Pennsylvania law provides a shareholder who dissents
to a merger the right "to obtain payment of the fair value of
his shares." 15 Pa. Cons. Stat. § 1571. This appraisal remedy
is to be pursued in a state court action initiated by the
corporation against the dissenting shareholder after the
shareholder has dissented and after the merger has been
consummated Id. § 1579. The relief provided by the
appraisal remedy is limited to the fair valuation and payment
of the dissenter’s shares Id. § 1571. Fair value is defined as
As to count 2, which alleged that the Special
Committee defendants possessed andbreached an
independent fiduciary duty as well as aided and abetted the
majority shareholders breach, the District Court dismissed
the independent fiduciary duty claim because there was no
such duty. Mitchell Partners does not challenge that decision.
With regard to aiding and abetting, the District Court held
that such a claim was cognizable under Pennsylvania1aw, but
dismissed the claim without prejudice because Mitchell
Partners’ factual allegations were inadequate. Mitchell
Partners does not challenge this decision, but instead asserts it
will seek leave to amend on remand.
The defendants attempted to cross-appeal, arguing that
because the District Court evaluated their alternative grounds
for dismissal and, in some instances ruled against the
defendants they are aggrieved parties entitled to cross-appeal
This is not so. "Ordinarily, a party may appeal only if
aggrieved by the district court’sjudgment." Arm0tek 1ndus.
Inc. v. Emp’rs Ins. of Wausau, 952 F.2d 756, 759 n.3 (3d Cir.
1991). Although, as outlined above the District Court’s
opinion contained rulings which were adverse to the
defendants the District Court did not enter judgment in favor
of the plaintiff. To be clear, we leave untouched the District
Court’s rulings that, absent the appraisal statute, Mitchell
Partners has adequately stated a claim in count 1 for fiduciary
breach against the majority shareholders that count 1 is not
barred by the statutes of limitations and that aiding and
abetting breach of fiduciary duty, count 2, is a cause of action
under Pennsylvania law.
11
"[t]he fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects taking
into account all relevant factors but excluding any
appreciation or depreciation in anticipation of the corporate
action." Id. § 1572.
ln another provision, Pennsylvania law limits the relief
a dissenting shareholder may obtain outside of the statutory
appraisal remedy provided by 15 Pa. Cons. Stat. § 1571 et
seq. Specifically, 15 Pa. Cons. Stat. § l105, titled
"Restriction on equitable relief," provides:
A shareholder of a business corporation shall
not have any right to obtain, in the absence of
fraud or fundamental unfaimess, an injunction
against any proposed plan or amendment of
articles authorized under any provision of this
subpart, nor any right to claim the right to
valuation and payment of the fair value of his
shares because of the plan or amendment,
except that he may dissent and claim such
payment if and to the extent provided in
Subchapter D of Chapter 15 (relating to
dissenters rights) where this subpart expressly
provides that dissenting shareholders shall
have the rights and remedies provided in that
subchapter. Absent fraud or fundamental
unfaimess, the rights and remedies so
provided shall be exclusive. Structuring a
plan or transaction for the purpose or with the
effect of eliminating or avoiding the
application of dissenters rights is not fraud or
fundamental unfairness within the meaning of
this section
Although this provision clearly imposes some restrictions on
the relief available to a dissenting shareholder outside of the
appraisal remedy proceeding, the extent of that restriction is
disputed and the subject of this litigation. The District Court
adopted the position of the defendants and concluded that this
provision and related Pennsylvania Supreme Court
12
jurisprudence preclude post-merger suits for damages
Mitchell Partners concedes as it must, that Section 1105
prohibits dissenting shareholders from enjoining the merger,
absent fraud or fundamental unfairness but asserts that
nothing limits dissenters ability post-merger to seek common
law damages based on a breach of fiduciary duty.
Admittedly, the language of Section 1105 is difficult to
dissect. The first sentence, divided into its constituent parts
discusses two forms of relief and when each is available.
First, it provides that a shareholder "shall not have any right
to obtain, in the absence of fraud or fundamental unfaimess,
an injunction against any proposed" merger. Thus, a
dissenting shareholder may only seek to enjoin a merger if
there is fraud or fundamental unfaimess. Second, that
sentence provides that a shareholder shall not have "any right
to claim the right to valuation and payment of the fair value
of his shares because of the [merger], except that he may
dissent and claim such payment" as provided by the statutory
appraisal remedy. Accordingly, the right to valuation may
only be pursued in the statutory appraisal proceeding.
The second sentence of Section l105, which modifies
both the availability of injunctive relief and statutory
appraisal described in the first sentence, provides that
"[a]bsent fraud or fundamental unfaimess, the rights and
remedies so provided shall be exclusive." The application of
this second sentence to the prior sentence creates some
confusion and raises the questions exclusive to what and
exclusive against whom‘? As the Pennsylvania Supreme
Court has suggested when interpreting Section 1105’s
substantively similar predecessor, the appraisal remedy is not
the only remedy available_just the only remedy in certain
contexts The Pennsylvania Superior Court stated in In re
J0nes & Laughlz`n Steel C0rp. (]0nes III), 477 A.2d 527, 532
(Pa. Super. Ct. 1984), that, "[t]he [Supreme Court of
Pennsylvania] . . . recognized [in J0nes I1] that dissenters
could seek relief for unfair or fraudulent corporate actions in
separate actions Thus, our highest court has recognized in
this very case that separate and distinct causes of action may
be pursued as [a] result of the same purchase offer." The
13
statute also leaves unresolved the meaning of fraud or
fundamental unfaimess. See Barter v. Dz'0d0ard0, 771 A.2d
835, 839 (Pa. Super. Ct. 200l) (noting that the statute does
not define fraud or fundamental unfaimess).
Though the current version of Section 1105 was
enacted by the Pennsylvania legislature in 1988, both parties
agree that it did not substantively alter its predecessor statute
which was divided into two separate provisions 15 Pa. Stat.
Ann. §§ 1005E and 1515K. 8 Accordingly, although few
cases have touched on the meaning of Section 1105, we will
continue to take guidance from those cases interpreting the
predecessor provisions §§ 1005E and 15l5K.
8 Indeed, the Official Source Note to the 1988
amendment describes Section 1105 as "[s]ubstantially a
reenactment of act of May 5, 1933 (P.L. 364, No. 106), §§ 5E
and 515K (l5 P.S. §§ 1005E and l515K), except [the] last
sentence which is new," and not relevant here.
15 Pa. Stat. Ann. § 15 1 5K provided: "Any
shareholder, who desires to object to, or to dissent from, any
proposed plan authorized under any section of this act, and
where this act provides that shareholders so objecting or
dissenting shall have the rights and remedies herein provided,
shall be limited to the rights and remedies prescribed under
this section, and the rights and remedies prescribed by this
section shall be exc1usive."
15 Pa. Stat. Ann. § 1005E provided: "[A] shareholder
shall not have any right to obtain, in the absence of fraud or
fundamental unfairness an injunction against any proposed
plan or amendment of articles authorized under any section of
this act, or to claim the right to valuation of and payment for
his shares because of any such plan or amendment except that
he may dissent and claim payment if and to the extent
provided in section [1]515 of this act where this act expressly
provides that dissenting shareholders shall have the rights and
remedies provided in section [1]515 of this act."
14
As this case presents an issue of Pennsylvania state
1aw, we look first to the jurisprudence to the Supreme Court
of Pennsylvania. We are, of course, also bound by our own
precedent interpreting state law so long as it has not been
contradicted by the Supreme Court of Pennsylvania. To the
extent no directly controlling precedent exists we must
predict what the Supreme Court of Pennsylvania would hold.
See Nati0nwia’e Mut. Ins. Co. v. Buyj‘etta, 230 F.3d 634, 637
(3d Cir. 2000).
We start with an attempt to keep up with the Joneses.
In In re J0nes & Laughlin Steel C0rp. (J0nes I), the minority
shareholders of J&L Steel were squeezed out after the merger
of J&L Steel with another entity owned by the majority
shareholders 398 A.2d 186, 187 (Pa. Super. Ct. 1979).
Some of the minority shareholders dissented from the merger
at the shareholder meeting. After the merger was
consummated, an appraisal proceeding was initiated by J&L
Steel as required under the Pennsylvania appraisal statute. In
the appraisal proceeding, the dissenting minority shareholders
raised additional claims against J&L Steel, alleging that the
squeeze out merger was unfair and invalid, warranting
rescission of the merger or damages 1d. at 188-89. J&L
Steel obj ected, arguing that the appraisal court lacked
jurisdiction over those claims
ln J0nes 1, the Superior Court of Pennsylvania held
that the appraisal statute in effect at the time, Section 1515K,
precluded an appraisal court from exercising its jurisdiction to
entertain the minority shareholders’ claim that the merger was
invalid Id. at 192. The court analyzed the history and
rationale for the statutory changes in connection with
corporate mergers and stated:
With the recognition that mergers and other
fundamental corporate changes were often
in the corporation’s interest, and sometimes
were even necessary for its survival,
corporation statutes were enacted providing
that a merger could be authorized by a
majority of the shareholders
15
Id. at 191. On the other hand,
the statutes provided a dissenting
shareholder with the opportunity to remove
himself from a fundamental corporate
change he did not wish to be subject to, by
electing to withdraw from the corporation
and receive the value of his shares as
determined by an appraisal.
Id. The court reasoned that "[t]he legislature’s expectation, or
hope, must have been that if it did not allow the [appraisal]
court to entertain an action for rescission-in other words if it
limited the court’s power of inquiry, i.e., its jurisdiction, to
making an appraisal-it would achieve the objective of
preventing dissenting shareholders who objected to a merger
from frustrating or impeding the will of both the majority,
who wanted the merger, and of other dissenters who wanted
an appraisal." Ia’. at 192. 1n so reasoning, the court noted that
the appraisal remedy was limited to an appraisal of the value
of the dissenter’s stock The court concluded that if the
legislature had intended the appraisal procedure to be used to
declare a merger invalid, surely the remedy would have been
more expansive. Id.
The court made two other statements significant for
our purposes First, it indicated that the appraisal statute does
not bar an action for fraud under federal securities laws. Ia’.
at 192 n.13. Thus, notwithstanding the use of the word
"exc1usive," the appraisal remedy may not be exclusive of all
other actions Second, the court noted that "[n]othing in this
opinion should be read as in any way reflecting on the issue
of whether an action to enjoin a proposed merger before the
vote may lie. Our decision is only that [the appraisal statute]
clearly manifests the legislative intent to bar all actions except
for an appraisal after the merger had been consummated." Id.
at n.14. This statement, in contrast to the first, supports the
defendants contention that the current suit is barred.
However, we are reluctant to put too much stock in this
language both because it occurs in a footnote and because the
16
comment is part of the court’s caveat noting that it takes no
position on whether an injunction may be brought pre-merger,
as opposed to afterwards
Importantly, the court in J0nes 1 also recognized that
Delaware had recently reversed its prior case law and held
that appraisal was not the exclusive remedy of dissenters to a
merger. Nonetheless, the court stated that "[i]f the doctrine of
exclusiveness were a product of our case law we might be
inclined to re-examine the policy supporting it in light of
criticism directed against it. However, the question is one
upon which our legislature has spoken; it has enacted the
doctrine of exclusiveness and has not been persuaded to
abandon it." Id. at l93. Accordingly, the court held that the
appraisal court only had authority to consider the fair value of
the dissenters shares and not the new claims raised by the
dissenters
J0nes 1 was the decision of Pennsy1vania’s
intermediate appellate court. In J0rzes II, the Supreme Court
of Pennsylvania affinned. 412 A.2d 1099. The Court
characterized the issue as fo11ows: "[t]he crucial question is
whether the legislature intended the [the statutory appraisal
remedy] to be the exclusive post-merger remedy available to
dissenting shareholders." 1a’. at 1102. The Court held that
"[o]n its face, the exclusive remedy provided dissenting
shareholders does not include the right to challenge the
validity of the merger in the appraisal proceeding." Ia’. The
Court noted that freezing out minority shareholders for the
sole benefit of the majority was a violation of the majority’s
fiduciary duty, but that the existence of that cause of action
was "insufficient to confer jurisdiction upon an appraisal
court." Id. at 1103. Rather, the fiduciary duty cases "merely
recognize the equitable power of a court of common pleas in
an appropriate proceed.ing, to enjoin the unfair use of power
by the majority stockholders for their selfish interest to the
detriment of the minority stockholders" Id. However, the
Court was careful to note that, in its view, limiting the
appraisal proceeding to questions of fair value did not keep
plaintiffs from seeking to enjoin the merger before it was
17
consummated based on fraud or fundamental unfairness 1d.
at 1l04.
That said, the Court emphasized that its decision "does
not condone the manner in which appellants and other
minority shareholders were deprived of their equitable
interest in J&L. We are not unmindful of the grave
unfairness and fraud frequently present in mergers of this
type, especially where there is a ‘cash-out’ of the minority
shareholders." 1d. (citation omitted). That concern did "not
change the [court’s] view that appellants post-merger
remedies were limited to the appraisal of the fair value of
their stock." Id.
Based on J0nes II, the defendants argue, and the
District Court concluded, that the Supreme Court of
Pennsylvania has held that post-merger, a minority
shareholder’s only relief is the fair value of the stock as
determined in the appraisal proceeding Mitchell Partners
contends that J0rzes 11 merely held that the sole issue over
which the court in an appraisal proceeding had jurisdiction
was the appraisal itself In fact, that was the narrow question
presented. Further, Mitchell Partners persuasively contends
that the J0nes cases recognized, at least in a broad sense, that
separate and distinct causes of actions may be pursued against
the majority shareholders However, as the defendants argue,
and as the District Court agreed, the other actions approved of
in J0nes 1 & 11 were instituted pre-merger, whereas the
fiduciary breach claim at issue here was initiated post-merger.
There is some merit to both arguments Mitchell
Partners is correct that in the technical sense, J0nes only held
that the appraisal proceeding itself was limited to issues of
fair value, and that efforts to enjoin the merger in the
appraisal proceeding were not pennitted. J0nes neither
considered nor discussed whether minority shareholders
could seek damages post-merger for a breach of the
defendant’s fiduciary responsibility. Moreover, the
exclusivity provision seems to focus on limiting equitable
18
relief designed to forestall the merger. 1ndeed, it is titled
"Restrictions on equitable relief."9
Defendants emphasize some of the broader
pronouncements contained in the J0nes cases but the narrow
issue of whether a suit for damages based on breach of
fiduciary duties may be brought post-merger was not directly
presented to the Supreme Court. Defendants have not called
to our attention any decision of the Pennsylvania appellate
courts controlling the issue before us
III.
Absent a controlling Pemisylvania precedent, we turn
to our own jurisprudence. In Hersk0witz v. Nutri/System 857
F.2d 179 (3d Cir. 1988), minority shareholders filed a suit
pre-merger seeking damages for breaches of fiduciary duties
against Nutri/System and its Board of Directors based on their
unfair self-dealing. Defendants argued that the appraisal
statute precluded the fiduciary duty claim. We disagreed and
construed the holdings of the J0nes decisions to be "only that
an appraisal court lacks jurisdiction to consider the faimess of
the underlying merger." la’. at l86. We noted that Jones ll
"took pains to point out that [the appraisal remedy] preserved
shareholder remedies other than statutory appraisa1." Id.
lndeed, we noted that J0nes ll tacitly approved of a separate
pre-merger class action seeking injunctive relief and/or
damages both under federal law and Pennsylvania state law.
Ia’. at 186-87 (noting that J0nes 11 approved of the suit in
Tanzer Ec0n. Ass0cs., Inc_ v. Haynl'e (Tanzer I), 388 F. Supp.
365 (S.D.N.Y. l974)); see also Tanzer v. Haym`e (Tanzer II),
405 F. Supp. 650, 653 (S.D.N.Y. l976) (explaining that "[t]he
merger itself is attacked as illegal under the Pemisylvania
9 "lt is a well-settled rule of statutory interpretation
that titles and section headings cannot limit the plain meaning
of statutory text when that text is clear." M.A. ex rel. E.S. v.
State-Operaled Sch. Dist. of the Cily of Newark, 344 F.3d
33 5, 348 (3d Cir. 2003). However, in this case, the "plain
meaning" of the text is not clear.
19
Business Corporation Law, in that it seeks to freeze out the
public minority shareholders").
Accordingly, we held that "it is a clear holding that in
Pennsylvania the statutory appraisal cause of action coexists
with common law causes of action. Indeed no other rules
makes sense, for the appraisal remedy is available even
absent misconduct of corporate officials lt was hardly
enacted to provide a shield for misconduct." Hersk0witz, 857
F.2d at 187. The Hersk0wz`tz decision then predicted "that if
faced with the issue the Pennsylvania Supreme Court would
reject the defendants interpretation of [the appraisal statute]
as a bar to other causes of action for breach of fiduciary duty
or misrepresentation in a cash-out merger." Ia'.
Accordingly, the holding and language of Hersk0wz'tz
support Mitchell Partners claim that its breach of fiduciary
duty claim can go forward. Hersk0witz narrowly interpreted
J0nes as limiting the appraisal court’s jurisdiction, but not
excluding separate fiduciary duty suits However, as the
defendants point out, Hersk0wz`tz did not deal with a fiduciary
duty claim raised post-merger. ln fact, it appears that no
Pemrsylvania or Third Circuit case specifically holds that a
minority shareholder is entitled to bring a common law
breach of fiduciary claim post-merger, though it is clear based
on Herskowz'tz that a shareholder is entitled to do so pre-
merger.1O
Nevertheless, based on the language of Section 1105,
J0nes, and Hersk0witz, we predict that the Supreme Court of
Pennsylvania would permit a post-merger suit for damages
10 That said, in another Third Circuit case, Warden v.
McLellana’, 288 F.3d 105 (3d Cir. 2002), we held that a
minority shareholder was entitled to bring a claim for
equitable relief pre-merger, and distinguished the facts from
J0nes based on the pre-merger suit. We characterized the
pre-merger nature of the suit as a "critical distinction." Id. at
115. But Warder1 dealt with an equitable suit, not merely a
suit for damages and thus does not speak to the issue
presented in this case.
20
based on the majority shareholders breach of their fiduciary
duties There are several reasons why. First, as discussed
above, the specific holding of J0rzes was merely that no post-
merger equitable claim could be filed in an appraisal
proceeding J0nes did not hold that such a suit could not be
instituted separately. Second, nothing in the appraisal statute
itself distinguishes between pre-and post-merger relief
Therefore, there is no reason why common law causes of
action such as fiduciary breach should be permitted pre-
merger, as we held in Herskowitz and the Supreme Court
implicitly authorized in J0nes II, but barred post-merger.
Retuming to the rationale for the statute as discussed in Jones
I, it is to prevent a dissident group of shareholders from
blocking a merger desired by the majority shareholders A
post-merger damages action would not contravene that goal.
Third, as argued persuasively by Mitchell Partners, the
appraisal remedy only permits dissenters to recover from the
corporation. Ergo, the appraisal remedy’s corresponding
limitations also only apply to suits against the corporation.
This conclusion is also consistent with the purpose motivating
Section 1l05_the limitation on injunctions was intended to
allow the merger to proceed and avoid suits which stymied
corporate consolidation and growth. ln contrast, forbidding
fiduciary duty suits against majority shareholders does not
run the risk of thwarting the merger, particularly if the suit is
brought after the merger is consummated. Barring such suits
would do little more than insulate alleged tortfeasors from
responsibility for their conduct, an outcome which the
Court in J0nes 11 feared.“
ll The analysis of Miller v. Stez`nbach, 268 F. Supp.
255 (S.D.N.Y. 1967) supports this conclusion There, the
court held that:
to conclusively bind a corporate
shareholder to a plan of merger where
that shareholder has been lulled into a
false sense of security because of the
issuance of a glowing and misleading
proxy statement, would be to reach a
21
Related to the third reason is the fourth: namely, that
the appraisal remedy’s evaluation of fair value is more limited
than the damages available for fiduciary breaches_breaches
that may not become evident until after the merger has been
consummated.l2 Defendants assert that, because damages in a
suit for breach of fiduciary duty would be measured by
determining the amount by which minority shareholders were
underpaid for their stock, Mitchell Partners is simply seeking
a second forum in which to "claim the right to valuation and
payment of the fair value of [its] shares." Yet although
Pennsylvania has explicitly followed Delaware’s lead and
expanded the original definition of fair value so as to pennit
consideration of "a1l relevant factors" fair value still excludes
"any appreciation or depreciation in anticipation of the
corporate action." 15 Pa. Cons. Stat. § 1572; see 2001
Amended Committee Comment to § 1572 (outlining the
expanded definition of fair value and Pennsylvania’s
adherence to the Delaware approach enunciated in
Weinberger v. UOP, 457 A.2d 701 (Del. l983)).
highly inequitable result, a result not
required by the Pennsylvania statute,
and as will be demonstrated shortly, a
result not warranted by the
Pennsylvania decisions relied on by
defendants Even where a statute by its
terms stated that the remedy of appraisal
was exclusive, it has been held to relate
only to a good-faith sale and will not
include a sham sale or legal subterfuge.
Ia’. at 269-7 0 (quotation omitted). Although the Supreme
Court in J0nes 11 downplayed the decision in Miller because
it dealt with the permissibility of a complaint for federal
securities law, the Court did not address Miller ’s analysis
which we find compelling 412 A.2d at l103.
12 lndeed, in this case, the defendants alleged double-
speak regarding the impending asbestos insurance settlement
did not come to light until after the merger was completed
22
Notwithstanding its expanded approach to fair value,
Delaware permits separate suits for fiduciary breaches
because even the expanded appraisal remedy "may not be
adequate in certain cases particularly where fraud,
misrepresentation self-dealing, deliberate waste of corporate
assets or gross and palpable overreaching are involved."
Weinberger, 457 A.2d at 714. See also Cede & Co. v.
Technicolor, Inc., 542 A.2d ll82, 1186 (Del. l988) (holding
that because the appraisal remedy and suits for self-dealing
"serve different purposes and are designed to provide
different, and not interchangeable, remedies" a separate
common law suit for damages was not barred by the appraisal
statute). 13
Fifth, we note that the appraisal remedy is limited to
shareholders who have perfected their rights as dissenters
before the merger. 15 Pa. Cons. Stat. § l574. If we were to
adopt the interpretation of the statute advocated by
defendants this would mean that any shareholder who was
deceived by the majority shareholder into voting for the
merger would have no remedy at all for the breach of
fiduciary duty, ln extreme cases this might mean that no
action_whether appraisal or otherwise-could be brought
13 lt is also possible that punitive damages might be
available in such a case, which could be calculated without
reference to share value. See SHV Coal, Inc. v. Contz`nental
Grain C0., 587 A.2d 702, 704-05 (199l) (holding that
punitive damages are available when "a person’s actions are
of such an outrageous nature as to demonstrate intentional,
willful, wanton or reckless conduct"); Hutchins0n ex rel.
Hutchz'son v. Luda’y, 870 A.2d 766, 773 (2005) ("This Court
found that an award of punitive damages was proper for
claims sounding in breach of fiduciary duty"); see also Viener
v. Jacobs, 834 A.2d 546 (Pa. Super. 2003) (upholding
imposition of punitive damages based on majority
shareholder’s fiduciary breach in squeeze-out merger).
23
against a majority shareholder which had breached its
fiduciary duty.
Finally, Section 1105 provides that when there is
"fraud or H1ndamental unfaimess’ the appraisal remedy is not
exclusive Although Pennsylvania’s Business Corporation
law does not define these terms and case law is thin, relevant
authority indicates that a claim for breach of fiduciary duty
based on majority self-dealing and misrepresentations falls
within the ambit of fraud or fundamental unfaimess.
At least one Pennsylvania court has held that where a plaintiff
asserts "a plethora of technical and procedural omissions by
the defendants in completing the merger" there may be fraud
or fundamental unfaimess such that the plaintiffs are not
limited to appraisal rights First Unz'on Naz"l Bank v. Qualz`ty
Carrz'ers, Inc., 48 Pa. D. & C.4th 1, 13 (Pa. Ct. Com. Pl.
2000). Moreover, the Revised Model Business Corporation
Act ("MBCA") contains a similar provision permitting claims
alleging "fraud or material misrepresentation." § 13.02(d)
(2005). The commentary to that provision notes that it
"creates an exception for cases where fraud or material
misrepresentation have affected the shareholder vote to such
an extent as to have caused the corporate action to be
approved mistaken1y. The concept of misrepresentation
includes the omission of a material fact necessary to make
statements made not misleading."l4 Ia’. at cmt. 5.
14 The 2001 Amended Committee Comment to
Pennsylvania’s appraisal statute, 15 Pa. Cons. Stat. § 1571,
indicates that the procedure for exercising dissenters rights is
patterned generally after the MBCA, specifically the 1978
amendments to the MBCA. The 1978 Amendments, like the
most recent Revised l\/lBCA, suggest that there is no right to
attack the validity of the proposed merger except when the
merger is "un1awful or fraudulent." See 33 Bus. Law. 25 87,
2591 (1978). See also Robert B. Thompson, Exit, Liquia’z`ly,
and Majoril)) Rule.' Appraz`sal ’s R0le in Corporate Law, 84
Geo. L.J. 1, 43 (1995) (noting that "[t]he commentary to the
Model Business Corporation Act observes that its language
preserving claims that are ‘unlawful or fraudu1ent’ would also
preserve claims based on fiduciary duty").
24
ln this case, Mitchell Partners has alleged that the
majority shareholders of Irex engaged in self-dealing,
withheld critical information from and exerted influence over
the supposedly neutral Special Committee, and omitted
critical infonnation from the proxy statements These
allegations are, at this stage, sufficient to satisfy Section
1105’s carve out that pennits suits other than appraisal in the
event of fraud or fundamental unfaimess.
As briefly noted, caselaw from Delaware is in accord
with our analysis and conclusion Although we recognize
that these cases are not controlling, their logic has persuasive
force and to the extent that Delaware represents the vanguard
of corporate law, they are certainly worth noting.15 The
Delaware Supreme Court addressed the very question
presented in this litigation in Cea’e, 542 A.2d ll82. That is
the Court addressed "the standing and right of a minority
shareholder who has dissented from a cash-out merger and
commenced an appraisal proceeding under [Delaware’s
appraisal statute] to assert and pursue a later-discovered
individual claim of fraud in the merger through an action for
rescissory damages against the participants for breach of
fiduciary duty to the shareholder." Ial. at 1l83. The Court
reiterated its earlier holding from Wez`nberger, 457 A.2d 70l,
"that a statutory appraisal proceeding . . . and a rescissory suit
15 Although the Superior Court in Jones 1 minimized
the role of Delaware law on this issue, we note that
subsequently both the Pennsylvania legislature and
Pennsylvania courts have referenced Delaware corporate law
and its treatment of the appraisal statute as a model and a
guide. See, e.g., 2001 Amended Committee Comment to 15
Pa. Cons. Stat. §§ 1571 and 1572 (specifically noting and
discussing at length that under the Pennsylvania appraisal
statute certain Delaware practices are followed);1n re Glosser
Br0s., 1nc., 555 A.2d 129, 134 (Pa. Super. Ct. 1989)
(specifically noting Delaware’s "expertise in these matters"
and approving Wez`nberger and the Delaware approach to
valuation of fair value under the appraisal statute).
25
for fraud, misrepresentation self-dealing and other actionable
wrongs violative of ‘entire fairness to minority shareholders
serve different purposes and are designed to provide different,
and not interchangeable, remedies." Cecle, 542 A.2d at 1186
(footnote omitted). The Court explained that appraisal was a
limited legislative remedy intended to provide dissenters with
the fair value of their holdings and that the only defendant is
the surviving corporation ln contrast, a breach of fiduciary
duty claim affords more expansive remedies and is brought
against the alleged individual wrongdoers 1d. at 1187-88.
For those reasons the Delaware Supreme Court held that
claims based on majority shareholders fiduciary breaches
could be brought in separate suits (indeed, the Court held that
such claims should not be brought in the appraisal
proceeding, consistent with the Pennsylvania Supreme
Court’s holding in J0nes 11).
The Delaware Supreme Court’s holding in Cea’e is
even more persuasive when one considers that the Court had
previously expanded the definition of "fair value" applicable
to appraisal valuation See Wez'nberger, 457 A.2d at 712-13.
Notwithstanding the broadened inquiry available within
appraisal, the Court held that appraisal was not adequate and
did not prevent separate suits for fraud or fiduciary breach
against the majority shareholders
Guided by the above analysis we predict that the
Supreme Court of Pennsylvania would hold that
Pennsylvania’s appraisal statute does not exclude separate,
post-merger suits for damages alleging that majority
shareholders breached their fiduciary duties to minority
shareholders in the process of consummating a freeze out
merger, nor does it exclude the related claim that the Special
Committee members aided and abetted that breach. As we
held in Herskowilz, "it is a clear holding that in Pemisylvania
the statutory appraisal cause of action coexists with common
law causes of action Indeed no other rules makes sense, for
the appraisal remedy is available even absent misconduct of
26
corporate officials lt was hardly enacted to provide a shield
for misconduct." 857 F.2d at 187 .16
lV.
The foregoing is not intended to suggest that we accept
the validity of Mitchell Partners’ allegations They have yet
to be put to their proof. For the reasons set forth, we will
reverse the decision of the District Court dismissing all counts
based on the appraisal remedy’s purported exclusivity and
count 3 based on the alternative reason that Mitchell Partners
16 We note that neither the parties nor the District
Court examine whether the equitable claim for unjust
enrichment might be barred by the exclusivity provision
while the common law fiduciary breach claim is pennitted.
The District Court merely held that all claims are barred.
Without briefing on whether the unjust enrichment claim
should be treated differently than the fiduciary breach claim
under the appraisal statute, we leave that question to the
District Court in the first instance.
As an alternative ground for dismissal of the unjust
enrichment claim, the District Court held that Mitchell
Partners had failed to respond to defendants contention that
equitable remedies are not available when there is an
adequate remedy at law such as the appraisal remedy. The
District Court reasoned that this failure to respond warranted
dismissal under Local Rule 7. l(c), which requires any party
opposing a motion to serve a brief in response Mitchell
Partners attempted to respond to this argument and submitted
a brief contending that unjust enrichment was not precluded
and could be brought in tandem with its fiduciary breach
claim, Although Mitchell Partners’ brief may not be directly
responsive, dismissal under Local Rule 7.1(c) was not
appropriate because Mitchell Partners did timely respond,
complying with 7 . 1(c)’s requirements We reverse the
District Court’s decision on this count and remand to the
District Court for consideration of the merits of the
defendants motion to dismiss count 3.
27
violated Local Rule 7.1(c). We remand for proceedings
consistent with this opinion
28
Mitchell Partners v. Irex C0rg._,
N0s. 10-4040 & 10-4091
GARTH, Circuit .]ua’gg, dissenting.
1 must respectfully dissent from the majority opinion
The sole issue presented on this appeal is whether the
Pennsylvania remedies available to minority dissenting
shareholders in a pre-merger transaction are available to the
dissenters after the merger has taken place, i.e. in a post-
merger context. The majority, in its opinion has held that
there is no difference. l disagree Pennsylvania has clearly
distinguished between pre-merger and post-merger remedies
and has stated by statute and in decisional law that in a post-
merger context, dissenting stockholders have only one
remedy. That remedy is a statutory appraisal.
As a court sitting in diversity, we are "bound to follow
state law as announced by the highest state court," and to the
extent that "the state’s highest court has not addressed the
precise question presented, we must predict how the state’s
highest court would resolve the issue." Wayne Moving &
Storage of N.J ., lnc. v. Sch. Dist. of Phila., 625 F.3d l48, 154
(3d Cir. 2010) (citations, intemal quotation marks and
alterations omitted). Here, the Pennsylvania Supreme Court
has announced unambiguously in ln re J ones & Laughlin
Steel Corp. {Jones ll}, 412 A.2d 1099, 1102 (PA. 1980), that
statutory appraisal is "to be the exclusive post-merger remedy
available to dissenting stockholders" (Emphasis added).
The subject of this appeal is a purely Pennsylvania
merger transaction and is govemed only by Pennsylvania
law. ln this case, the minority shareholder, l\/1itchellPartners
L.P., took no action challenging the merger before the merger
was completed Aftg the merger was completed, then and
only then did it seek remedies in addition to a statutory
appraisal of the stock -- all in derogation of the Pennsylvania
Corporation Law of 1988, § 1105, (codified at 15
Pa.Cons.Stat. 1105).
1
The majority, however, has held that the interpretation
of the relevant Pennsylvania statutes has not yet been
addressed by the Pennsylvania Supreme Court and it
"predicts" (not by referring to Pennsylvania law, but relying
on Delaware law,) the Pennsylvania statute’s intent and
meaning
l cannot agree that the "prediction" is necessary, in
light of 1 ones ll, supra.1
I.
The pertinent provision of the Pennsylvania Business
Corporation Law of 1988 (1988 BCL) § 1105 (codified at 15
Pa. Cons. Stat. § 1105), provides in relevant part:
A shareholder of a business
corporation shall not have any
right to obtain in the absence of
fraud or fundamental unfaimess
an injunction against any
proposed plan . . . , nor any right
to claim the right to valuation and
payment of the fair value of his
shares because of the plan . . . ,
except that he may dissent and
claim such payment if and to the
extent provided in Subchapter D
of Chapter 15 (relating to
dissenter rights) where this
subpart especially provides that
1 However, if a prediction were to be deemed necessary, the
maj ority’s prediction under Pennsylvania law is flawed See
text, infra. Moreover, if indeed the majority harbored doubts
about the intent and meaning of Pennsylvania law, it should
have certified this appeal to the Pennsylvania Supreme Court
under Third Circuit Local Appellate Rule Misc. 110 and
lntemal Operating Procedure l0.9. lt has declined to do so.
2
dissenting shareholders shall
have the rights and remedies
provided in that subchapter.
Absent fraud or fundamental
unfairness the rights and
remedies so provided shall be
exclusive. . . .
(Emphasis added; footnote omitted.) This section refers to
Subchapter D of Chapter 15, codified at 15 Pa. Cons. Stat. §§
1571-1579, which outlines the process through which
dissenting shareholders may seek a statutory appraisa1, i.e., a
judicial determination of "fair value" of their shares
ln l ones ll, the Pennsylvania Supreme Court held that
the fair-value appraisal proceeding was intended "to be the
exclusive post-merger remedy available to dissenting
shareholders" l;d. at 1102 (emphasis added). The Court in
J ones ll rejected the plaintiffs efforts to obtain additional
relief from the appraisal court, concluding that even if the
plaintiffs could assert a viable claim for breach of fiduciary
duty, it would be "insufficient to confer jurisdiction upon an
appraisal court acting pursuant to § 5152 to determine the
validity of the transaction." l_d. at l103.
Although the immediate issue before 1 ones ll was
whether minority shareholders could seek to enjoin a merger
or recover damages for fiduciary breaches in a post-merger
appraisal proceeding, the Supreme Court of Pennsylvania did
not limit the scope of its holding to just appraisal-court
proceedings or claims in equity. lt observed that while
Pennsylvania case law "recognize[s] the right of shareholders
to enjoin proposed unfair or corporate actions[,] . . . [i]n each
case where this power was exercised it was in an action in
2 The fair-value appraisal proceeding was outlined in section
515 of the then-effective Pennsylvania Business Corporation
Law of 1933 ( 1933 BCL) -- codified at fonner 15 Pa. Cons.
Stat. § 1515K, one of the predecessors to current 15 Pa. Cons.
stat § 1105
3
equity instituted prior to the consummation of the proposed
transaction." I;d. at 1104 (emphasis added).
The J ones ll appellants had "failed to take any action
to prevent the merger despite the period of almost a full
month in which they could have acted" and "did not seek a
rescission of the merger for at least three and one-half months
following its consummation." I_d. The Court therefore held:
We are not unmindful of the grave
unfaimess and fraud frequently
present in mergers of this type,
especially where there is a ‘cash-
out’ of the minority shareholders.
. . . Our concern, however, does
not change the view that
appellants’ post-merger remedies
were limited to the appraisal of
the fair value of their stock."
Ld_. (emphasis added).
In so holding, the Pennsylvania Supreme Court
aff1nned the decision of the Superior Court of Pennsylvania,
which had determined that "[b]y providing that the appraisal
remedy ‘shall be exclusive’ the legislature must have
intended to avoid the difficulties as it saw them to be that
would be experienced if the remedy was regarded as only an
alternative to an action for rescission." In re J ones &
Laughlin Steel Corp. (Jones I)_, 398 A.2d l86, 192 (Pa. Super.
l979). That being so, the Superior Court had concluded that
section 5 l5K "clearly manifests the legislative intent to bar
all actions except for an appraisal after the merger had been
consummated." . at 192 n.l4 (emphasis added).3
Id
3 In a later iterati0n of the J<)_ne_s litigation, J ones III, but in a
pre-merger context, the Pennsylvania Superior Court held
that a separate class action seeking relief for "unfair or
fraudulent corporate actions," which arose out of the same
merger at issue in J ones l and J ones II, could be pursued. 13
4
In other words, as has been pointed correctly out to us:
this suit "is precluded by Pennsylvania’s carefully considered
statutory dissenters’ rights scheme under which a dissenting
shareholder may bring an injunctive action alleging fraud or
fundamental unfairness to prevent a merger before it takes
place, but may not sit on its rights, allow the merger to
proceed, and then seek to evade the statutory appraisal
remedy. The exclusive remedy available to a dissenting
shareholder in these circumstances is an appraisal
proceeding." Appellees’ Brief at l7.
II.
We considered the import of the Jo_ne§ trilogy in
Herskowitz v. Nutri/System. Inc., 857 F.2d 179 (3d Cir.
l988). In Herskowitz, shareholders of a corporation
challenged a leverage buyout by filing suit against the
corporation’s management, alleging misrepresentation and
unfair consideration resulting from self-dealing by fiduciaries
Management, relying on the .lcLes cases, argued that section
5 l5K "exclude[s] all post-merger remedies, including
remedies for misrepresentation and for breach of fiduciary
duty." id at 186 (emphasis added). However, we
distinguished Herskowitz from J ones l and J ones Il, noting
that while the his cases dealt with a "post-merger appraisal
suit," "this [the Herskowitz case] was commenced at the pre-
merger stage," (emphasis added), which rendered it
analogous to and on all fours with J ones IIl. l_d. at 186-87.
(See note 2, supra).
In the wake of the J ones cases, ensuing decisions have
preserved the distinction between minority-shareholder suits
filed pre-merger as opposed to those filed post-merger.
re Jones & Laughlin Steel Corp. ( J ones III)_, 477 A.2d 527,
532 (Pa. Super. l984). However, as the Pennsylvania
Supreme Court had earlier emphasized in J ones II, the
separate class action discussed in J ones III had been filed
"[p]ri0r to the merger ’s c0nsummati0n." Jones ll, 412 A.2d
at ll0l (emphasis added).
5
Sikirica v. Nationwide Ins. Co., 416 F.3d 214, 224 (3d Cir.
2005) ("federal court may consider lower state court
precedents to be . . . predictive."). §g_., Warden v.
McLelland, 288 F.3d 105 (3d Cir. 2002) (allowing a pre-
merger injunction because the action was filed before the
merger, "a critical distinction" from J ones II, where the action
was filed after the merger); Dower v. Mosser Indus.. lnc. 648
F.2d 183, 189 (3d Cir. 1981) (construing J ones ll as dictating
that "[u]nder Pennsylvania law, . . . a minority shareholder
may act before a merger to seek an injunction." (emphasis
added); Barter v. Diodoardo, 771 A.2d 835, 838 (Pa. Super.
2001) (holding that suit for rescission of merger was not
precluded by J ones ll because "at the time the [minority
shareholder] brought suit seeking injunctive relief the merger
was not yet effective") (emphasis added); Shapiro v. Berwind
§§ 13 Pa. D & C. 647, 650 (Pa. Com. Pl. l980)
(dismissing minority shareholders’ post-merger fiduciary-
breach claim because J ones 1 "interprets section 515K to
manifest the legislative intent to bar all actions except for an
appraisal after the merger has been consummated.").4
4 The same distinction is reflected in the decisional law
of two other States that have enacted corporate statutes
providing, without exception, that statutory appraisal is
dissenting shareholders’ lone remedy. § Steinberg v.
Amp1ica, Inc., 729 P.2d 683, 685, 694 (Cal. 1986)
(considering whether Califomia appraisal statute, which
denies dissenting shareholder "any right at law or in equity"
to challenge completed short-form merger, "is the exclusive
remedy for a shareholder who alleges that his shares were
undervalued because of fraud and breach of fiduciary duty by
the majority stockholders," and concluding that "the section
prohibits an action for damages based on the fact that a
merger has taken place"); Yanow v. Teal lndus., Inc., 422
A.2d 311, 318 (Conn. l979) (affirming dismissal of claims of
objecting shareholder, who sought accounting, damages, and
nullification of merger on account of defendants’ alleged
corporate wrongs, in light of "the specific exclusivity of the
appraisal remedy envisioned by the Connecticut [appraisal]
statute").
6
The policy arguments that the majority opinion relies
upon to the exclusion of precedent are matters reserved for
the Pennsylvania legislature -- not our court -- to consider.
Nor are such Pennsylvania considerations the province of the
Delaware legislature.
III.
Section 1105 of the Pennsylvania Business
Corporation Law underwent a change in 1988 that neither the
log cases nor Herskowitz had occasion to address.
Although the language added may at first glance appear to
authorize suits such as Mitchell Partners’, the amendment,
which added only one clause -- "a shareholder shall not have
any right to obtain, in the absence of fraud or fundamental
unfaimess, an injunction against any proposed plan or
amendment. . . " -- did no more than reenact the existing
appraisal statute Both the plaintiff and the defendant, as the
majority opinion recites, agree that it did not substantively
alter the predecessor statute.5 Maj. op., 14. Accordingly, the
majority now also agrees that any interpretation of the present
statutes must look to the predecessor provisions.
The amending clause appears in the 1988 amendment
as "a shareholder shall not have any right to obtain, in the
absence of j$'aud or fundamental unfairness, an injunction
against any proposed plan or amendment. . . ." (emphasis
added). As 1 have pointed out, that provision has been
interpreted by the Pennsylvania Supreme Court to refer to
pre-merger transactions only. The revised statute did no
more than codify the principle that a shareholder could seek
an injunction to prevent any proposed corporate plan with
fraud or fundamental unfairness, providing that any action
was brought jLr to the completion of the merger.
Accordingly, plaintiff shareholders who had filed their action
5 After oral argument, we sought supplemental memoranda
from both parties discussing the 1988 amendment. Both
parties agreed that the amendment made no substantive
change to the earlier statutes.
7
after the merger was completed, i.e. post-merger, could not
benefit from the amendment.
Thus, the amended statute retained the distinction that
the J ones ll court had made explicit -- the "fraud or
fundamental unfaimess" clause and exception is confined to
the pre-merger context. Pennsylvania courts have
consistently upheld that principle, and thus we are bound to
apply Pennsylvania’s precedents.
IV.
In conc1usion, 1 would affinn the District Court’s order
which dismissed the plaintiffs complaint because: l) we are
bound to follow Pennsylvania law; 2) Pennsylvania law is
unequivocal that there is a pre-merger/post-merger
difference; 3) the only remedy available to a dissenting
minority stockholder who files a post-merger complaint is
that of statutory appraisal; 4) J ones ll provides the substantive
law holding that statutory appraisal is available as the
exclusive post-merger remedy; 5) the 1988 amendment to §
1105 did not modify the predecessor statute; 6) our decision
in Herskowitz is consistent with the principle announced in
J ones lI, inasmuch as Herskowitz was a pre-merger case; 7)
Delaware statutes, law, and policy have no place in our
analysis.
Because l find the majority’s decision 180 degrees at
odds with the Pennsylvania goveming law, l respectfully
dissent.
8