Robinson v. T.I.M.E.-DC, Inc.
1983 U.S. Dist. LEXIS 16435, 566 F. Supp. 1077 (1983)
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Rule of Law:
A spin-off of corporate assets to a subsidiary does not constitute a liquidation if the corporation's certificate of incorporation expressly excludes such transfers from the definition of liquidation. The board's actions in such a transaction are governed by the business judgment rule unless there is evidence of self-dealing where a parent company receives a benefit to the exclusion and at the expense of the subsidiary.
Facts:
- Jack Robinson was the owner of approximately 29,000 shares of preferred stock in T.I.M.E.-DC, a nationwide trucking firm.
- In November 1980, Harold Simmons, through a series of holding companies including National City Lines, Inc., acquired control of T.I.M.E.-DC and became chairman of its board.
- In late 1980, T.I.M.E.-DC's new board created a wholly-owned subsidiary, NLI, and transferred all of T.I.M.E.-DC's real estate holdings to it.
- In January 1981, T.I.M.E.-DC announced a plan to "spin-off" NLI by distributing NLI stock as a dividend to T.I.M.E.-DC's common stockholders.
- Robinson complained that the plan was unfair to preferred stockholders because they could not participate in the stock dividend without converting their shares and forfeiting accrued cash dividends.
- In response, the board amended the plan, allowing preferred stockholders to first receive their accrued cash dividends and then convert to common stock to receive the NLI stock dividend.
- Robinson elected to receive his cash dividend, convert his preferred stock to common stock, and receive the NLI stock.
- In April 1982, nearly a year after the spin-off, the Teamsters Union went on strike, causing T.I.M.E.-DC to cease most trucking operations and sell a majority of its rolling stock.
Procedural Posture:
- Jack Robinson filed a derivative stockholder’s action against T.I.M.E.-DC, its board of directors, and affiliated corporations.
- The suit was originally filed in the U.S. District Court for the Eastern District of Tennessee (a federal trial court).
- The case was subsequently transferred to the U.S. District Court for the Northern District of Texas (a federal trial court).
- A trial was held before the court without a jury.
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Issue:
Does a spin-off of a corporation's real estate assets into a wholly-owned subsidiary, followed by the distribution of the subsidiary's stock to common shareholders, constitute a de facto liquidation triggering preferred shareholders' liquidation preference rights as defined by the corporate charter?
Opinions:
Majority - Woodward, Chief Judge.
No, the spin-off did not constitute a liquidation. The rights of shareholders are contractual and defined by the certificate of incorporation. T.I.M.E.-DC's certificate explicitly stated that 'a sale, transfer or lease of all or any part of the assets of the Corporation, shall not be deemed to be a liquidation.' Therefore, the transaction did not trigger the preferred shareholders' liquidation preference rights. Furthermore, there was no de facto liquidation, as T.I.M.E.-DC continued to operate as a viable corporation with substantial assets after the spin-off. The board's decision is protected by the business judgment rule because it was made for a rational business purpose—separating the real estate assets from the trucking operations—and there was no evidence of fraud or bad faith. The stricter 'intrinsic fairness' test does not apply because the parent company did not receive a benefit to the exclusion of the subsidiary; rather, all shareholders who participated in the spin-off benefited financially.
Analysis:
This decision reinforces the principle that the certificate of incorporation is the primary source of shareholder rights, and courts will strictly interpret its plain language. It also clarifies the high bar for displacing the business judgment rule in parent-subsidiary transactions. The ruling establishes that the more stringent 'intrinsic fairness' standard is reserved for clear cases of self-dealing, not for transactions that offer proportional benefits to all shareholders. This gives corporate boards significant deference in structuring complex corporate reorganizations like spin-offs, as long as their actions are based on a rational business purpose and do not violate the express terms of the corporate charter.
