ATTORNEYS FOR APPELLANTS
Eric Allan Koch
Bloomington, Indiana
Timothy J. Storm
Chicago, Illinois
ATTORNEYS FOR APPELLEES
Joseph H. Yeager, Jr.
Indianapolis, Indiana
Thomas A. Withrow
O. Wayne Davis
B. Keith Shake
Indianapolis, Indiana
Geoffrey M. Grodner
Kendra Gowdy Gjerdingen
Lonnie D. Johnson
Bloomington, Indiana
__________________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
RODNEY E. YOUNG, JASON E. )
BANACH, KAREN T. BANACH, TED )
E. HALL, and MICHAEL E. HALL, on )
behalf of themselves and all others )
similarly situated, )
) Indiana Supreme Court
Appellants (Plaintiffs Below), ) Cause No. 53S04-0206-CV-345
)
v. ) Indiana Court of Appeals
) Cause No. 53A04-9911-CV-498
GENERAL ACCEPTANCE )
CORPORATION, et al., )
)
Appellees (Defendants Below). )
__________________________________________________________________
APPEAL FROM THE MONROE CIRCUIT COURT
The Honorable Richard D. McIntyre, Sr., Special Judge
Cause No. 53C02-9808-CP-1184
__________________________________________________________________
ON PETITION TO TRANSFER
__________________________________________________________________
June 21, 2002
BOEHM, Justice.
This case concerns the proper application of Indiana’s Control Share
Acquisition Statute where the control at issue does not arise from the
acquisition of shares, but by a contractual agreement to elect certain
members to a public corporation’s board of directors.
Factual and Procedural Background
In 1988, Malvin and Russell Algood, father and son, founded a closely
held consumer finance company, General Acceptance Corporation (“GAC”). GAC
was initially owned exclusively by Algood family members. Its business was
the funding and servicing of high-risk installment contracts to purchase
automobiles. Malvin was Chief Executive Officer and chair of the board of
directors, and Russell served as president and Chief Operating Officer. In
April 1995, GAC made an initial public offering and from that time forward
shares of its stock were traded on NASDAQ. In April 1997, when the present
controversy arose, there were approximately six million shares of GAC
common stock issued and outstanding. Approximately 30 percent of those
shares were held by the public, with the remainder held by Malvin and
Russell, and their family members and family trusts.
On April 10, 1997, GAC shares closed at $3.25 per share. The next
day, Capitol American Life Insurance Company (“CALI”), a Conseco,
Incorporated subsidiary, entered into a Securities Purchase Agreement with
GAC whereby CALI purchased $10 million face amount of GAC 12 percent
subordinated notes, convertible into GAC common stock at $3 per share.
Concurrent with that agreement, GAC, Conseco, CALI, and the Algoods entered
into a “Stockholders Agreement” which provided that: (1) GAC would increase
its board of directors from five to six members; (2) as long as the Algoods
owned more than ten percent of GAC’s outstanding shares, CALI would vote
all of its shares to elect one person designated by the Algoods to GAC’s
board; and (3) as long as the debentures represented by the Securities
Purchase Agreement were outstanding, the Algoods would vote their GAC
shares to elect two directors designated by Conseco. This third provision
was later amended to expand the board to eight members and give Conseco the
right to designate three nominees.
Over the next eleven months, Conseco, directly or through
subsidiaries, made substantial additional investments in GAC. These took
the form of purchases of newly issued shares from GAC, and also acquisition
of warrants and debentures convertible into GAC common stock. All of these
transactions were at prices significantly lower than $3 per share, and the
last block of shares was purchased for 25 cents per share. Ultimately
Conseco acquired all of the Algoods’ shares in addition to these blocks of
newly issued shares.[1] The net result of those transactions was that
Conseco or its subsidiaries came to acquire over 90 percent of GAC common
stock. Conseco then proposed to eliminate GAC’s remaining public
shareholders for cash. The mechanism adopted to accomplish this was a
proposed merger between GAC and CIHC, Incorporated, Conseco’s wholly owned
subsidiary, whereby all GAC shareholders other than Conseco would receive
30 cents for each share. GAC’s board called a shareholders meeting for
August 31, 1998 to vote on the proposed merger.
The minority shareholders responded to the proposed merger by filing
a class action suit. The complaint consisted of twelve counts, alleging,
inter alia, breaches of fiduciary duties, non-compliance with the Indiana
Control Share Acquisition Statute, and appraisal rights under the Indiana
Dissenters’ Rights Statute arising from the merger. The plaintiffs also
sought a preliminary injunction to block the vote on the proposed merger.
The trial court denied the injunction request, and the merger was
completed. The court then granted the defendants’ motion for summary
judgment on the breach of fiduciary duty claims, finding that the
dissenters’ rights and appraisal procedure provided the plaintiffs their
only remedy arising from the merger, and also that the plaintiffs were
barred from bringing a direct action as shareholders, as opposed to a
derivative action on behalf of GAC.
The trial court also dismissed the plaintiffs’ count based on the
Control Share Acquisition Statute, holding that no “control share
acquisition,” as that term is defined in Indiana Code chapter 23-1-42, took
place in the course of Conseco’s dealings with the Algoods. Finally, the
trial court dismissed the plaintiffs’ claim for dissenters’ rights,
explaining that the plaintiffs’ attempt to initiate an appraisal in this
proceeding was inappropriate. The Court of Appeals affirmed.
We grant transfer to address the proper application of the Control
Share Acquisition Statute to this unusual situation. We affirm the trial
court, but for different reasons.
Control Share Acquisitions
The minority shareholders contend that the proposed merger was in
violation of Indiana’s Control Share Acquisition Statute, Indiana Code 23-1-
42 (1998). A control share acquisition is defined by that chapter as “the
acquisition (directly or indirectly) by any person of ownership of, or the
power to direct the exercise of voting power with respect to, issued and
outstanding control shares.” I.C. § 23-1-42-2(a). “Control shares” are
defined as:
shares that, except for this chapter, would have voting power with
respect to shares of an issuing public corporation owned by a person
or in respect to which that person may exercise or direct the exercise
of voting power, would entitle that person, immediately after
acquisition of the shares (directly or indirectly, alone or as a part
of a group), to exercise or direct the exercise of the voting power of
the issuing public corporation in the election of directors within any
of the following ranges of voting power:
(1) One-fifth (1/5) or more but less than one-third (1/3) of all
voting power.
(2) One-third (1/3) or more but less than a majority of all
voting power.
(3) A majority or more of all voting power.
Id. at § 23-1-42-1. The effect of this chapter is that a party who
acquires “ownership or the power to direct the voting power with respect
to” control shares is prohibited from exercising the accompanying voting
power unless and until that power is granted by vote of a majority of the
remaining shareholders. Id. at § 23-1-42-9.
It is not entirely clear how the plaintiffs seek to deploy the
control share statute. They contend that the merger of GAC into CIHC was
void because the control share statute nullified any action taken by GAC by
virtue of shareholder action in which Conseco purportedly exercised or
directed the exercise of 20 percent or more of the voting power of GAC.
This misconceives the effect of a control share transfer. The effect of
the application of the statute is not to disable all shares owned by the
acquirer. Rather it prevents only the voting of the shares acquired in the
control share acquisition, i.e. only the shares in the regulated
transaction are prevented from voting until the remaining shareholders
approve. There appears to be no claim here that the board of GAC was not
elected by a majority of other shares, so even if the statute disabled some
shares from voting, the challenged actions appear to have been taken by
properly elected directors. Similarly, the only shareholder action appears
to be the merger itself, which appears to have been presented to a meeting
at which the vast majority of Conseco’s shares were acquired from GAC as
originally issued shares. These, by definition, are not subject to the
control share statute, section 23-1-42-2, and are sufficient in number to
approve the merger.
In any event, we do not find a transaction subject to the control
share statute. The gist of the minority shareholders’ complaint is not
that Conseco’s acquisition of the Algoods’ shares constituted a control
share acquisition. Rather they contend that when Conseco acquired the
power, through the Stockholders Agreement, to direct the Algoods to vote
for Conseco’s nominees to GAC’s six-member board of directors, Conseco
acquired “control shares” as that term is used in the chapter. The
remaining shareholders were never asked to vote to grant voting power to
the Algoods’ shares after Conseco acquired the right. The plaintiffs
contend that the transaction disabled those shares, and therefore any
subsequent action taken by GAC requiring the voting of those shares is
void.
The trial court denied the plaintiffs’ request for an injunction
against consummation of the merger. The trial court focused on Conseco’s
acquisition of the shares of stock, rather than the power to direct voting.
To that extent, the trial court correctly found the statute did not apply
because the shares acquired by Conseco were not already issued and
outstanding. In dismissing the plaintiffs’ complaint, the trial court also
stated that the Algoods’ agreement to vote their shares for Conseco’s
nominees was not a control share acquisition. This appears to have been
based on the defendants’ contention that a contractual commitment to vote
shares is not subject to the statute. We do not agree with that claim, but
agree that the transaction was nevertheless exempt from the statute for the
reasons explained below.
The Court of Appeals agreed that there was no violation of the Control
Share Acquisition Statute, but relied on its interpretation of the
legislative intent behind the statute, as expressed in the official
comments to the Control Share Acquisition chapter. The court quoted the
comment’s opening paragraph, which discussed the intent of the legislature
to allow shareholders to vote on “a potentially fundamental change in the
nature of their corporation—namely, its shift to being an entity in which a
single shareholder acquires a significant level of dominance over the
future governance of the corporation.” I.C. § 23-1-42, Introductory Cmt.
The court reasoned that what Conseco acquired was an already-existing
single block of voting rights and, thus, there was no fundamental change in
the nature of GAC. In other words, the effect of the Stockholders
Agreement was simply that GAC went from a corporation dominated by the
Algoods to a corporation dominated by Conseco.
The plaintiffs’ contention as to the Control Share Statute proceeds
from the foundation that the Stockholders Agreement, by giving Conseco the
power to direct voting of the Algoods’ shares in election of directors of
the GAC Board, constituted a “control share acquisition” within the meaning
of the statute. Plaintiffs are correct in that contention. Because
Conseco gave value for the right to direct the voting of these shares, the
Stockholders Agreement granted a proxy “coupled with an interest” and not a
revocable proxy of the kind typically solicited for shareholder meetings of
public companies. 5 William Meade Fletcher, Cyclopedia of the Law of
Private Corporations § 2062 (perm. ed., rev. vol. 1996). Unlike a
revocable proxy, this constituted an acquisition of the “power to direct
the voting” for the Board and is therefore subject to the statute. The
defendants contend that the plaintiffs’ view of the Control Share
Acquisition Statute would result in the invalidating of proxies generally.
We do not agree. It is true that a proxy is a grant of authority to
exercise voting power. But it is not a grant of the “power to direct” the
vote. With limited exceptions, conventional proxies are revocable at any
time. The Stockholders Agreement did not expire until the debentures
represented by the Securities Purchase Agreement were no longer outstanding
and required the Algoods to vote as Conseco directed. The official comment
to Indiana Code section 23-1-42-3, defining “interested shares,” explains
this:
The critical inquiry in determining whether shares are “interested
shares” is who has the ultimate power to exercise or direct the
exercise of the voting power of the shares on the date in question . .
. . [S]hares do not become “interested shares” simply because the
owner grants a revocable proxy . . . . In that case, the beneficial
owner, rather than the proxy holder, retains ultimate control over the
exercise of the voting power of the shares.
In contrast, these commitments to vote for the Board were given for
consideration and became enforceable obligations. Fletcher, supra, at §
2062. As such, they became subject to the control share statute unless
some exemption applies. Here, an exemption does apply.
The shares to which the provision related were originally issued to
the Algoods who, at the time, were the only shareholders. Section 23-1-42-
2(e) of the statute provides an exemption from the definition of control
share acquisitions. It states:
The acquisition of shares of an issuing public corporation in good
faith and not for the purpose of circumventing this chapter by or
from:
(1) any person whose voting rights had previously been
authorized by shareholders in compliance with this chapter . . .
does not constitute a control share acquisition, unless the
acquisition entitles any person . . . to exercise or direct the
exercise of voting power of the corporation in the election of
directors in excess of the range of the voting power otherwise
authorized.
As this subsection explains, and as the comment to it makes clear, where
the voting power that is being transferred does not exceed a level of
control that was already properly authorized, the transfer of that voting
power—through the sale of shares or, in this case, by contract—is not
subject to another authorizing vote by the shareholders. As the comment
points out, “Subsection (e) was included because such transfers generally
will not . . . significantly alter the existing pattern of voting power
concentration in the corporation.” I.C. § 23-1-42-2(e), Official Cmt.
Simply put, a shareholder who purchases shares in a corporation that has,
at the time, a dominant shareholder, has no complaint if that dominant
shareholder transfers its holdings to another. This is basically the point
on which the Court of Appeals relied. We agree with the theory adopted by
the Court of Appeals, but note that the statute itself supports it.
Although GAC’s initial prospectus is not included in the record, the
plaintiffs’ complaint states that after GAC’s initial public offering in
April 1995 only 32 percent of the corporation’s shares were in public
hands. Otherwise stated, 68 percent remained owned by Algood interests.
This exceeds 50 percent and was a transfer in the highest “range” of voting
power defined by section 23-1-42-1. The transfer to Conseco did not
(indeed no transaction could) raise Conseco’s voting power to a higher
range. As a result, the exception of subsection 2(e) applies.
It is correct that this exception arguably does not literally apply
because the Algood holdings were acquired at the initial founding of the
corporation and were not subject to a vote of shareholders. At the time
the Algoods acquired their initial shares GAC was presumably exempt from
the Control Share Statute because it had fewer than 100 shareholders. I.C.
§ 23-1-42-4. In any event, the initial issue to the Algoods was not
subject to the Control Share Statute because the Algoods acquired the
shares from GAC in a transaction approved, indeed designed, by GAC’s
organizers. Thus there was never a shareholder vote granting voting rights
to the Algoods. But the voting rights of the original shares issued to the
Algoods were, we think, “authorized by the shareholders” of the closely
held corporation when the initial shareholders acquired stock in the
corporation with that capital structure. When the initial public offering
took place, the public shareholders bought into the existing arrangement,
presumably with full knowledge of the Algoods’ dominant voting position.
We can see no reason why a majority shareholder who acquired that status
from the outset of the corporation in an exempt transaction should be in
any different position from one who acquired the shares after the company
became publicly owned and received shareholder approval under the Act.
Accordingly, the Algoods were able to transfer their shares or grant to
Conseco the power to direct the voting of their shares without further
shareholder action.
Conclusion
For the reasons given above, we grant transfer and affirm the trial
court’s dismissal of the count of the plaintiffs’ complaint alleging a
violation of the Control Share Acquisition Statute. As to all other
issues, the Court of Appeals is summarily affirmed. Ind. Appellate Rule
58(A)(2).
SHEPARD, C.J., and DICKSON, SULLIVAN and RUCKER, JJ., concur.
-----------------------
[1] The transactions are set forth in detail in the Court of Appeals
opinion. Young v. Gen. Acceptance Corp., 738 N.E.2d 1079, 1083-84 (Ind.
Ct. App. 2000).