Terry v. The Penn Central Corporation

United States Court of Appeals, Third Circuit
668 F.2d 188 (1981)

ELI5:

Rule of Law:

Under Pennsylvania law, the de facto merger doctrine does not grant appraisal rights to shareholders of a parent corporation in a triangular merger, as the parent is not a statutory party to the merger and the legislature has explicitly abolished the doctrine for determining such shareholder rights.

Facts:

The Penn Central Corporation ('Penn Central') embarked on a program of acquiring other corporations, using its wholly-owned subsidiary, PCC Holdings, Inc. ('Holdings'), as the acquisition vehicle.
Howard L. Terry and W. H. Hunt were shareholders of Penn Central, holding 'First Series Preference Stock' which they obtained from a previous acquisition.
In 1981, Penn Central arranged for Holdings to acquire Colt Industries Inc. ('Colt').
The transaction was structured as a merger of Colt into Holdings, with Colt's shareholders to be compensated by the issuance of a new 'Second Series Preference Stock' from Penn Central.
Under this structure, Penn Central itself was not a constituent party to the merger; both Penn Central and its subsidiary Holdings would continue to exist as separate corporate entities after the transaction.
Terry, a member of Penn Central's board, opposed the merger, and he and Hunt objected to the transaction's terms.

Procedural Posture:

Howard L. Terry and W. H. Hunt sued Penn Central Corporation in the U.S. District Court for the Eastern District of Pennsylvania (a federal trial court).
The plaintiffs sought an injunction to stop a shareholder vote on the proposed merger and a declaratory judgment affirming their alleged right to a class vote and dissenters' appraisal rights.
After a hearing, the district court denied the plaintiffs' requests for both injunctive and declaratory relief.
Terry and Hunt, as appellants, filed an appeal of the district court's decision in the U.S. Court of Appeals for the Third Circuit.
After the appeal was filed but before oral argument, the Penn Central shareholders voted to disapprove the merger, and the corporations subsequently abandoned the transaction.

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Issue:

Does the de facto merger doctrine under Pennsylvania law apply to grant a parent corporation's shareholders dissent and appraisal rights when the parent structures an acquisition as a triangular merger between its wholly-owned subsidiary and a target corporation?

Opinions:

Majority - Adams, Circuit Judge

No. The de facto merger doctrine does not apply to grant dissent and appraisal rights to the shareholders of a parent corporation in a triangular merger. The Pennsylvania Business Corporation Law (PBCL) grants appraisal rights only to shareholders of corporations that are direct 'parties' to a merger, which it defines as the corporations that are actually combined into a single entity. In this triangular merger, Penn Central is not a party because it is not being combined; only its subsidiary, Holdings, and the target, Colt, are. The court rejected the appellants' argument that the substance of the transaction was a de facto merger between Penn Central and Colt, citing the Pennsylvania legislature's 1959 amendments to the PBCL which explicitly abolished the de facto merger doctrine for the purpose of shareholder rights and reversed prior case law that had applied it. The doctrine is now reserved for exceptional cases involving fraud or fundamental unfairness, neither of which exists simply because a corporation chooses a legally permissible merger structure that avoids triggering appraisal rights.

Analysis:

This decision solidifies the legal principle of 'equal dignity,' allowing corporations to choose a specific transactional form, such as a triangular merger, with the certainty that courts will respect its legal consequences. It confirms the effectiveness of the Pennsylvania legislature's move to abolish the de facto merger doctrine in the context of shareholder rights, thereby prioritizing the statutory text over judicial interpretations of a transaction's substance. This ruling provides corporate planners with a clear and reliable method for structuring acquisitions through a subsidiary without triggering dissenters' rights for the parent company's shareholders, a practice which has since become a standard in corporate law.

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