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A defective merger is not absolutely void but rather is voidable, a Pennsylvania common pleas court judge has ruled, choosing not to adopt Delaware’s general rule of finding such mergers void ab initio. Philadelphia Common Pleas Court Judge Albert W. Sheppard instead found Massachusetts law more persuasive in ruling on the issue of first impression in the Keystone State. “Although no Pennsylvania cases address this precise issue, the courts of this commonwealth have refused to regard corporate decisions that fail to comply with the [Business Corporation Law] as void,” Sheppard wrote in First Union National Bank v. Quality Carriers Inc. “There are reasons favoring the view that a merger that fails to comply with the BCL should be deemed voidable, not void,” Sheppard wrote. “This approach allows a court to evaluate the significance of the defects in the merger process and to weigh the seriousness of any harm done to the aggrieved parties before declaring the merger invalid. It also allows for a determination whether the errors were made in good faith and what additional damage the injured party may suffer if the merger is voided.” An agreement that is void ab initio is null from the beginning if it “offends law or public policy.” Something is voidable if it can be declared void after the fact. Although the court ruled the merger in the instant case was voidable, the court passed up the opportunity to invalidate the transaction because the request was made by the defendants, not the plaintiff-shareholders. The decision was an answer to preliminary objections in a case funneled through Philadelphia’s Commerce Case Management Program. MERGER Chemical Leaman Corp., based in Exton, Pa., was formed in 1977 as a holding company to hold stock of Chemical Leaman Tank Lines and several smaller entities. As part of a plan in the 1980s, plaintiffs alleged in their complaint, two higher-ups of CLC had a goal of buying out public shareholders and making the company go private. CLC negotiated with one family in particular who owned a substantial number of stocks in the company. The family’s shares of stock were eventually deeded to several family trusts – the plaintiff trusts in this case. The negotiations led to an agreement by which the plaintiff trust shares would be exchanged for a new class of CLC preferred stock worth $2.6 million. In August 1992, plaintiffs formalized an exchange agreement with CLC, exchanging more than 130,000 shares of stock for a total of 130 shares of CLC Series A Preferred Stock for $20,000 per share. The agreement said that in the event of liquidation, Series A stockholders would receive the value of their shares and any accrued dividends. Those shareholders could also redeem their stock any time before the year 2000. CLC eventually issued two other classes of capital stock: Series B Convertible Preferred Stock and Series C Preferred Stock. The two new classes were “junior” to the Series A Stock. Plaintiffs alleged that a company called Quality Distribution, formerly known as MTL Inc., acquired CLC in a stock purchase transaction merger. Former CLC shareholders got $70 million in cash, $5 million in MTL preferred stock and $1.1 million in MTL common stock. In early 1999, Quality Distribution finalized the merger and three wholly owned subsidiaries of Quality Distribution, including CLC, were merged into a single corporation known as Montgomery Tank Lines. The name of the corporation was also changed to Quality Carriers Inc. All outstanding shares of CLC were canceled as a result of the merger. The court opinion says the plaintiff trusts were never notified of the merger and were not given compensation for their CLC shares. By the end of 1999, the plaintiffs alleged, the merger was “complete and irreversible.” Plaintiffs realized that CLC was no longer in existence and demanded payment. Quality Carriers Inc. then filed a Statement of Correction to the Pennsylvania Secretary of State to try to undo the merger. In April 2000, the plaintiffs filed suit for breach of the BCL and alleged claims of breach of fiduciary duty, breach of exchange agreement and designation statement, breach of consulting agreements and misrepresentation. Quality Coach filed preliminary objections to the suit, asserting the plaintiffs suffered no harm because no valid merger occurred. Also, the defendant companies argued that even if the merger were valid, the plaintiffs’ rights are limited. Additional objections filed by the defendants were that: the misrepresentation count was not sufficiently specific; there was no sufficient claim for breach of consulting agreements; Quality Distribution and Quality Carriers are protected from liability because of their corporate forms; and the breach of fiduciary duty claim should be dismissed. VOID vs. VOIDABLE Quality Carriers asserted that the action should be dismissed because it “concerns a mistake.” “They claim that because the merger was flawed, it was void ab initio and no injury to the plaintiffs occurred,” Sheppard wrote. “What the defendants fail to emphasize is that they were the architects of the merger and that they themselves failed to give the plaintiff trusts the notice required by Pennsylvania law.” The court noted that Delaware law does not regard every “flawed” merger as void ab initio but has a “general rule” of finding mergers void ab initio if they do not comply with the relevant statutes. Massachusetts case law has rejected Delaware’s reasoning and instead has held that a merger that does not adequately follow the statutory requirements is voidable. Sheppard said he found the Massachusetts approach more persuasive than Delaware’s. Having concluded the merger in the instant case was voidable, Sheppard then set out to determine if a court may invalidate such a merger. Again seeking guidance from other states, the court ruled that it could indeed void the merger in the instant case because of the “grave breach of the BCL.” But, the “procedural posture” of the case was a problem, Sheppard said. If the plaintiffs sought to declare the merger void, the court said it would grant the request. In this case, the defendants are seeking to declare the merger invalid. “It is the aggrieved shareholder, and not the corporate violator of the law, who has the option of asking a court to rescind a transaction or declare a merger void,” Sheppard said. “To permit a culpable defendant to prevent the victim from recovering based on the violator’s own errors would be inequitable.” The court refused to declare the merger void, ruling that to do so would “inequitably punish” the plaintiff and “relieve the defendants of liability for their actions.” The court also said that the plaintiffs have suffered harm by the defendants’ actions. OTHER ISSUES The court also said it was unconvinced by Quality Carriers’ argument that the plaintiffs’ recovery was limited to the dissenters’ appraisal rights of the BCL. Again siding with the plaintiff, the court found the count for misrepresentation was adequately specific, overruling that objection. The court did sustain a few of the defendants’ objections, ruling in one that Quality Distribution could not be held liable for actions of CLC or Quality Carriers because the state’s courts “are strongly inclined not to pierce the corporate veil.” Sheppard also ruled that several executives could not be held individually liable for any alleged breaches of fiduciary duty. The court also said that although Quality Carriers assumed the liability of CLC through the merger, it did not absorb the liabilities of one of CLC’s subsidiaries. The court ordered the plaintiffs to file an amended complaint within 20 days.

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