United States Court of Appeals,
Eleventh Circuit.
No. 94-9216.
Matter of MUNFORD, INC., d.b.a. Majik Market, Debtor.
Danné Brokaw MUNFORD, as Executrix of the Estate of Dillard
Munford; Russell C. Fellows; Winton M. Blount; Herbert J.
Dickson; James L. Ferguson; Robert M. Gardiner; Richard K.
Leblond, II; Andrall E. Pearson; S.B. Rymer, Jr., Plaintiffs-
Appellants,
James M. Carroll; Joseph W. Hardin; Jay Rubel; Shearson Lehman
Brothers, Inc.; DFA Investment Dimensions Group, Inc.; State
Street Bank & Trust Company; PNC Bank, National Association,
Plaintiffs,
Shearson Lehman Brothers, Inc., Plaintiff,
v.
VALUATION RESEARCH CORPORATION, Defendant,
Munford, Inc., Defendant-Appellee.
Oct. 10, 1996.
Appeal from the United States District Court for the Northern
District of Georgia. (No. 1:94-00348-CV-GET), G. Ernest Tidwell,
Chief Judge.
Before HATCHETT, Chief Judge, CLARK, Senior Circuit Judge, and
MILLS*, District Judge.
HATCHETT, Chief Judge:
In this corporate leveraged-buy-out merger case, we affirm the
district court's ruling that Georgia's stock distribution and
repurchase statutes apply.
FACTS
In May 1988, the Panfida Group offered to purchase Munford,
Inc., a public company on the New York Stock Exchange, through a
*
Honorable Richard H. Mills, U.S. District Judge for the
Central District of Illinois, sitting by designation.
leverage buy out (LBO) structured as a reverse triangle merger for
$18 per share. Under the terms of the proposed merger agreement,
the Panfida Group agreed to create Alabama Acquisition Corporation
(AAC) and a subsidiary, Alabama Merger Corporation (AMC), and
through AAC or AMC deposit the funds necessary to purchase Munford,
Inc.'s outstanding stock with Citizens & Southern Trust Company.
As evidence of its commitment to purchase Munford, Inc., the
Panfida Group bought 291,100 of Munford, Inc.'s stock. In June
1988, the Panfida Group also told Munford, Inc.'s board of
directors that it, upon the sale of Munford, Inc., intended to put
additional capital into Munford, Inc. but would only invest as much
as Citibank required to finance the proposed merger.
After consulting its lawyers and financial experts at Shearson
Lehman Brothers (Shearson), the board of directors accepted the
Panfida Group's offer pending shareholder approval of the purchase
agreement. Prior to the directors seeking shareholder approval,
the Panfida Group learned that Munford, Inc. had potential
environmental liability. Consequently, the Panfida Group reduced
the purchase price from $18.50 a share to $17 a share. On October
18, 1988, the shareholders approved the merger plan. On November
29, 1988, the sale of Munford, Inc. to the Panfida Group closed.
Pursuant to the purchase agreement, the LBO transaction converted
each share of common stock into the right to receive the merger
price of $17 per share and extinguished the shareholders' ownership
in Munford, Inc. On January 2, 1990, thirteen months after the
merger, Munford, Inc. filed for Chapter 11 proceedings in
bankruptcy court.
PROCEDURAL HISTORY
On June 17, 1991, Munford, Inc. brought an adversary
proceeding in bankruptcy court in the Northern District of Georgia
on behalf of itself and unsecured creditors pursuant to 11 U.S.C.
§§ 544(b) and 1107(a) (1988), seeking to avoid transfers of
property, disallow claims and recover damages against former
shareholders, officers, directors, and Shearson. In Count III of
its complaint, Munford, Inc. asserted that the directors violated
legal restrictions under Georgia's distribution and share
repurchase statutes in approving the LBO merger. Specifically,
Munford, Inc. asserts that the LBO transaction constituted a
distribution of corporate assets that rendered Munford, Inc.
insolvent. The directors moved for summary judgment contending
that the Georgia distribution and repurchase statutes did not apply
to LBO mergers. On August 10, 1994, the district court, adopting
the bankruptcy court's report and recommendation in part, denied
the directors' motion for summary judgment on Munford, Inc.'s stock
repurchase and distribution claim, ruling that Georgia's stock
distributions and repurchase restrictions applied to LBO
transactions. The district court also found that a genuine issue
of material fact existed as to whether the LBO merger rendered
Munford, Inc. insolvent in violation of Georgia law. On August 26,
1994, the district court amended its order and entered final
judgment pursuant to Federal Rules of Civil Procedure 54(b) to
permit this appeal. Fed.R.Civ.P. 54(b).
CONTENTIONS
The directors contend that the district court erred in
concluding that the LBO merger constituted a distribution of assets
within the meaning of Georgia's distribution and repurchase
statutes. They contend that these statutes do not apply to an
arm's-length sale of a company to a third party through an LBO
merger. In the alternative, the directors contend that they should
not face personal liability for alleged violations of Georgia's
distribution and repurchase statutes because they approved the LBO
merger in good faith with the advice of legal counsel.
Munford, Inc. contends that the district court properly denied
the directors' motion for summary judgment on this claim.
ISSUE
The sole issue on appeal is whether the district court erred
in ruling that Georgia's stock distribution and repurchase statutes
apply to a leverage acquisition of a corporation.
DISCUSSION
We review the denial of summary judgment de novo applying the
same legal standard that controlled the district court in rendering
its decision. Brown v. Crawford, 906 F.2d 667, 669 (11th
Cir.1990), cert. denied, 500 U.S. 933, 111 S.Ct. 2056, 114 L.Ed.2d
461 (1991).
Georgia's capital surplus distribution statute provides, in
pertinent part:
(a) The board of directors of a corporation may from time to
time distribute to shareholders out of capital surplus of the
corporation a portion of its assets in cash or property
subject to the following [provision]:
(1) No such distribution shall be made at a time when the
corporation is insolvent or when such distribution would
render the corporation insolvent[.]
O.C.G.A. § 14-2-91 (1988). Similarly, Georgia's stock repurchasing
statute prohibits directors of a corporation from repurchasing the
corporation's shares when such purchase would render the
corporation insolvent. O.C.G.A. § 14-2-92(e) (1982).1 Under both
statutes, directors who vote for or assent to a corporate
distribution or stock repurchase in violation of these statutes are
jointly and severally liable for the amount distributed or paid to
the extent the payments violated the restrictions. O.C.G.A. § 14-
2-154(a)(1), (2) (1982).
The directors appeal the district court's denial of summary
judgment contending that Georgia's distribution and share
repurchase statutes do not apply to LBO mergers. The directors
argue that Georgia's distribution and repurchase statutes only
apply in circumstances where the directors take assets of the
corporation and either distribute them to shareholders or use them
to repurchase shares. In both cases, the directors assert, control
of the company does not change hands and the directors determine
the source of the assets used. The directors note that in this
case the Panfida Group owned Munford, Inc. at the completion of the
LBO merger and thereafter ran the company. The directors therefore
argue that only Georgia's merger statutes apply to this
transaction.
The district court denied the directors' motion for summary
judgment adopting the reasoning of the bankruptcy court. The
bankruptcy court, in analyzing the LBO merger, considered the
substance of the transaction and equated the LBO merger to a stock
1
On July 1, 1989, O.C.G.A. § 14-2-640 superseded O.C.G.A. §§
14-2-91 and 14-2-92(e).
distribution or repurchase, disregarding the fact that Munford,
Inc. had new owners and stockholders as a result of the merger at
the time the shareholders received the LBO payments. The
bankruptcy court specifically found that: (1) the directors
"approved or assented to the underlying [m]erger [a]greement which
structured and required payment to the shareholders"; (2) the
merger agreement contemplated the Panfida Group's pledging of
"virtually all of Munford[, Inc.]'s assets as collateral" for the
loan that funded the LBO payments made to the shareholders; and
(3) the directors knew or should have known "the source, purpose,
or use of" Munford, Inc.'s assets prior to or at the time the
directors approved the merger plan. Based on these findings, the
bankruptcy court concluded that a reasonable jury could conclude
that the merger rendered Munford, Inc. insolvent in violation of
Georgia's distribution and stock repurchase statutes.
In reaching its conclusion, the bankruptcy court rejected a
Fourth Circuit case that refused to apply Virginia's corporate
distribution statute to recapture payments made to shareholders
pursuant to an LBO merger. See C-T of Virginia, Inc. v. Barrett,
958 F.2d 606 (4th Cir.1992).
In C-T of Virginia, the Fourth Circuit held that the LBO
merger did not constitute a distribution within the meaning of
Virginia's share repurchase and distribution statutes reasoning
that Virginia's distribution statute
[was] not intended to obstruct an arm's-length acquisition of
an enterprise by new owners who have their own plans for
commercial success. The reason for this distinction is
simple: a corporate acquisition, structured as a merger, is
simply a different animal from a distribution.
C-T of Virginia, 958 F.2d at 611. The court in C-T of Virginia
further reasoned that because such distribution statutes derive
from the regulation of corporate dividends courts should limit
their restriction to situations in which shareholders after
receiving the transfer from the corporation retain their status as
owners of the corporation.
The bankruptcy court, in this case, rejected this line of
reasoning, reasoning that the legislature enacted the distribution
and share repurchase statutes of the Georgia Code to protect
creditors "by prohibiting transfers at a time when a corporation is
insolvent or would be rendered insolvent." Such intent, the
bankruptcy court noted, "furthers the longstanding principle that
creditors are to be paid before shareholders." We agree with the
district court and the reasoning of the bankruptcy court and
decline to join the Fourth Circuit in holding that "[a] corporate
acquisition, structured as a merger, is simply a different animal
from a distribution." C-T of Virginia, Inc., 958 F.2d at 611.
We note that the LBO transaction in this case did not merge
two separate operating companies into one combined entity.
Instead, the LBO transaction represented a "paper merger' of
Munford, Inc. and AMC, a shell corporation with very little assets
of its own. To hold that Georgia's distribution and repurchase
statutes did not apply to LBO mergers such as this, while nothing
in these statutes precludes such a result, would frustrate the
restrictions imposed upon directors who authorize a corporation to
distribute its assets or to repurchase shares from stockholders
when such transactions would render the corporation insolvent. We
therefore affirm the district court's ruling that Georgia's
restrictions on distribution and stock repurchase apply to LBO.
In the alternative, the directors argue that their approval
of the LBO merger should not subject them to liability under the
distribution and repurchase statutes because they approved the
merger in good faith and with the advice of legal counsel. Because
we are not aware of any Georgia courts that recognize good faith or
reasonable reliance on legal counsel's advice as an affirmative
defense to liability under Georgia's distribution and repurchase
statutes, we reject this argument.
CONCLUSION
For the reasons stated above, we affirm the district court's
denial of the directors' motion for summary judgment on Munford,
Inc.'s stock distribution and repurchase claim.
AFFIRMED.