Appeal from the United States District Court For the District of Oregon. USDC NO. CV-88-140-MA. Malcolm F. Marsh, District Judge, Presiding.
Before: Browning, D.w. Nelson, and Canby Circuit Judges.
Between 1983 and 1988, American Network, Inc. ("AmNet"), a publicly traded corporation, engaged in a number of transactions, including mergers, acquisitions and investments. Appellants, minority shareholders of AmNet, claim that these transactions violated federal and state securities laws. Those claims, along with a breach of contract claim, were dismissed on summary judgment. Appellants appeal from the grant of summary judgment, and from the dismissal of their breach of fiduciary duty claim and the denial of leave to amend their complaint. We affirm the decision of the district court.
I. Breach of Fiduciary Duty.
In their first two complaints, appellants alleged intentional breach of fiduciary duty. The district court dismissed this allegation pursuant to Fed. R. Civ. P. 12(b)(6), concluding that appellants' breach of fiduciary duty claim was derivative in nature and that appellants had no standing to bring a direct action because AmNet had been sold and appellants no longer owned stock at the time they brought the suit.*fn1 Appellants claim that because they are barred from bringing a derivative suit, they should be allowed to maintain a direct action for common law breach of fiduciary duty. The district court's dismissal for failure to state a claim under Fed. R. Civ. P. 12(b)(6) is reviewed de novo. Sax v. Worldwide Press, 809 F.2d 610, 613 (9th Cir. 1987).
The general rule is that a "stockholder of a corporation has no personal right of action against directors or officers who have defrauded or mismanaged it and thus affected the value of his stock. The wrong is against the corporation and the cause of action belongs to it." Smith v. Bramwell, 31 P.2d 647, 648 (Or. 1934). Appellants contend that this rule has been eroded by Chiles v. Robertson, 767 P.2d 903 (Or. App.); modified on reconsideration, 774 P.2d 500 (Or. App.); review denied, 784 P.2d 1099 (Or. 1989). The plaintiffs in Chiles were minority shareholders in a close corporation who sued both directly and derivatively for breach of fiduciary duty. The Chiles court only considered the direct claims and held that the defendants had breached their fiduciary duty and ordered the defendants to purchase plaintiffs' shares. Chiles, 767 P.2d at 923-924. The Chiles court stated that because the remedies available in the direct action were equitable as to the issues in question, it would not consider the derivative claims. Chiles, 767 P.2d at 922 n.30.
Appellants argue that the result in Chiles extends to publicly held corporations because the Chiles court based its decision upon Jones v. H.F. Ahmanson, 460 P.2d 464 (Cal. 1969) and Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), both of which involved publicly traded corporations. Although the Chiles court did rely on Ahmanson and Weinberger, it did not do so for the proposition appellants are asserting, namely that its opinion can be extended to publicly traded corporations. Ahmanson was cited as an example of how dominating shareholders can breach their duty to the minority while Weinberger was cited for its definition of the concept of fairness between majority and minority shareholders. Chiles, 767 P.2d at 914, 915.
Nothing in Chiles suggests that the court intended its result to apply to publicly traded corporations. Although Chiles does not expressly limit itself to close corporations, this result is apparent from the remedy. If the court allowed recovery on the derivative claims, any damages recovered would go directly to the corporation. See Smith v. Bramwell, 31 P.2d at 648. The minority shareholders would still own stock in a corporation controlled by the oppressive majority. Since there is no public market for shares of a close corporation, the only remedy available to relieve the minority from oppression would be to require the majority to purchase their shares. Minority shareholders in a publicly traded corporation, by contrast, can sell their shares at any time. It appears that the Chiles court decided the case on the direct actions because only then could minority shareholders in a close corporation be adequately compensated and be free from the oppressive majority.*fn2
In addition, appellants attempt to characterize their allegations as direct rather than derivative by asserting that they have suffered individual harms. An action is considered derivative "if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders." 12B W. Fletcher, Cyclopedia of the Law of Private Corporations § 5911 (footnotes omitted). Each of the alleged instances of individual harm listed in appellants' amended complaint are examples of derivative claims because they would affect all shareholders equally. Waste and mismanagement of corporate assets, issuing stock for inadequate consideration, depreciation in the value of the stock and violation of federal securities laws are all examples of derivative claims because they affect the entire corporation, not just a few shareholders. See id. at §§ 5913, 5923, 5923.2. In fact, in P172(b) of appellants' amended complaint, appellants admit that the shares of all stockholders would be diluted, not just their own shares. Appellants argue that this court should recognize that minority shareholders have individual rights when they purchase stock in a corporation which was "looted by its majority shareholders." In essence, this is an allegation of diminution in the value of their shares due to corporate mismanagement and is thus a derivative claim. The district court properly dismissed appellants' claim.
Summary judgment is reviewed de novo. The evidence is reviewed in the light most favorable to the nonmoving party to determine whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir. 1989). If the nonmoving party's evidence is not sufficiently probative, summary judgment may be granted. In re Apple Computer Securities Litigation, 886 F.2d 1109, 1113 (9th Cir. 1989) (citations omitted), cert. denied, 110 S. Ct. 3229 (1990).
A. P122(a) -- The Misstated Value Allegation.
Appellants claim that appellees made misstatements regarding the value of the merger between AmNet, SaveNet and CP National Corp. ("CPN"). The district court concluded that appellants were contending that appellees understated the value of the purchase. The district court held that, assuming this was true, "anyone who might purchase in reliance on an understatement would gain by the increase worth to real value rather than lose. . . . Thus, understatement is not a fact the reasonable investor would consider in making an investment decision." Appellants argue on appeal that this allegation has been mischaracterized by the appellees and the district court. Appellants assert that the allegation should now be read as claiming that the true value of AmNet's purchase of CPN's Passport and Command Central divisions deal was misstated rather than understated.
Appellants claim that starting with the November 29, 1984 proxy statement, appellees made misstatements regarding the value of the AmNet shares given to CPN.*fn3 Appellants claim that the purchase of the two CPNNS divisions should have been disclosed separately because the Passport division was acquired with AmNet stock valued at $1 per share and the Command Central division was acquired with AmNet stock valued at market price, more than $4 per share.
Appellants' argument is without merit. The fact that AmNet received $3,586,328 worth of assets from CPN for CPNNS in exchange for 3,586,328 shares of AmNet stock valued at $1 per share was disclosed in AmNet's February 24, 1985 S-14. In order for appellants to recover they must prove "both transaction causation, that the violations in question caused the plaintiff to engage in the transaction, and loss causation, that the misrepresentations or omissions caused the harm." Hatrock v. Edward D. Jones & Co., 750 F.2d 767, 773 (9th Cir. 1984). See also Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380 (2nd Cir. 1974) ("a plaintiff must ...