Pink v. Cambridge Acquisition, Inc.

MARVIN H. SMITH (Retired, Specially Assigned), Judge. The appellants are minority shareholders in Cambridge, Inc. (“Cambridge”), a Maryland corporation doing business in Cambridge, Maryland. Appellants were forced to give up their shares in Cambridge in a management buyout. 1 The appellees are Cambridge, Inc. and Cambridge Acquisition, Inc. (“Acquisition”), a Delaware corporation that was formed to ⁶⁴ effectuate the buyout. In this appeal, appellants challenge a ruling by the Circuit Court for Dorchester County which terminated their efforts to exercise their appraisal rights.

Although, for reasons that we shall explain, we find that we must vacate the judgment and remand the case for further proceedings, appellants shall not prevail. APPLICABLE STATUTORY PROVISIONS The management buyout took the form of a share exchange. Title 3 of the Corporations and Associations article sets forth the procedures for effectuating a share exchange and the rights of objecting shareholders. A preliminary review of the applicable statutory provisions is necessary to a complete understanding of the facts of the case.

Section 3-202 provides, in pertinent part: (a) General rule.— ... [A] stockholder of a Maryland corporation has the right to demand and receive payment of the fair value of the stockholder’s stock from the successor if ... [t]he stockholder’s stock is to be acquired in a share exchange.... Md.Code (1975, 1993 RepLVoL, 1998 Cum.Supp.), § 3-202(a) of the Corps. & Ass’ns art. Section 3-203 directs: (a) Specific duties. — A stockholder of a corporation who desires to receive payment of the fair value of his stock under this subtitle: (1) Shall file with the corporation a written objection to the proposed transaction: (ii) With respect to [a share exchange], at or before the stockholders’ meeting at which the transaction will be considered; (2) May not vote in favor of the transaction; and (3) Within 20 days after the [State] Department [of Assessments and Taxation (“SDAT”) ] accepts the articles for record, shall make a written demand on the successor for ⁶⁵ payment for his stock, stating the number and class of shares for which he demands payment. (b) Failure to comply with section. — A stockholder who fails to comply with this section is bound by the terms of the ... share exchange____ Code (1975, 1993 Repl.

Vol), § 3-203 of the Corps. & Ass’ns art. Under § 3-208(a), Within 50 days after [SDAT] accepts the articles for record, the successor or an objecting stockholder who has not received payment for his stock may petition a court of equity in the county where the principal office of the successor is located or, if it does not have a principal office in this State, were the resident agent of the successor is located, for an appraisal to determine the fair value of the stock. Code (1975, 1993 RepLVol.), § 3-208(a) of the Corps. & Ass’ns art. Although ordinarily “ ‘[sjucessor’ means ... a corporation acquiring stock in a share exchange,” Code (1975, 1993 RepLVol., 1998 Cum Supp.), § l-101(u)(3) of the Corps. & Ass’ns art., § 3-201(b) specifically addresses the rights of objecting stockholders and provides: “When used with reference to a share exchange, ‘successor’ means the corporation the stock of which was acquired in the share exchange.” Code (1975, 1993 RepLVol.), § 3-201(b) of the Corps. & Ass’ns art. 2 FACTS In the Spring of 1997, Cambridge’s management informed appellants and the other Cambridge shareholders that the Board of Directors had approved a buyout plan by a management group.

The group consisted of Cambridge’s President, Theodore Dragich, and Secretary, Andrew Morris, as well as ⁶⁶ two other persons. The shareholders were told that the majority of Acquisition’s stock would be owned by Morgen-thaler Ventures Partners IV (“Morgenthaler”), an investment group located in Cleveland, Ohio. The members of the management group would “invest” their shares of Cambridge stock in Acquisition and, in return, would receive a minority of Acquisition’s stock. Acquisition would pay cash for the shares of Cambridge’s remaining stockholders.

Holders of Class A common stock, such as appellants, would receive $40.00 per share. Cambridge would thus become a wholly owned subsidiary of Acquisition and would continue to operate in Cambridge, Maryland with the same management group in place. A letter to one of the stockholders from the chairman of the Cambridge board, dated May 8, 1997 and reproduced in the record extract, explained: “The board has recognized that many of the Company’s stockholders want to realize cash for their non-liquid shares so as to have diversification and an opportunity to realize a greater return on the investment.” On July 2, 1997, a special meeting of holders of Class A common stock was held and the shareholders voted on the proposed share exchange. All of the shareholders except appellants approved the proposal.

At the meeting, appellants hand-delivered to Cambridge’s management written objections to the proposal. 3 Appellants then voted against the proposal. 4 On July 8, counsel for appellants sent a letter, by certified mail, to Dragich. Counsel indicated that he was representing appellants and requested that “Cambridge Inc, and/or its successor, Cambridge Acquisition, Inc., contact my office ... within 20 days of the date Articles are accepted for record by [SDAT].” (Emphasis added.) Cambridge and Acquisition filed “Articles of Share Exchange” with SDAT on July 18, 1997. The second article expressly states that “Acquisition is the successor in the share ⁶⁷ exchange.” Thereafter, on July 30, 1997, appellants sent to Acquisition, by certified mail, a letter demanding from Acquisition the payment of fair value for their shares. 5 The face of the letter itself reflects that the letter was sent to (i) Cambridge Acquisition, Inc. at the Cambridge, Maryland location, and (ii) John Lutsi and Peter Taft, the President and Secretary of Acquisition, care of Morgenthaler in Cleveland, Ohio. The return receipts indicate that the envelopes were addressed to (i) Cambridge Acquisition, Inc. and Cambridge, Inc. at the Cambridge, Maryland location and, (ii) Cambridge Acquisition, Inc., care of Morgenthaler in Cleveland.

Acquisition did not respond to the demand letter and, on September 5,1997, appellants filed a “Petition for Appraisal to Determine Fair Value of Stock” in the Circuit Court for Dorchester County. 6 The Petition named Acquisition as the sole defendant, and service was made upon Acquisition’s resident agent in Baltimore. On October 15, 1997, Acquisition filed a “Motion to Dismiss or, alternatively, for Summary Judgment.” In a supporting memorandum, Acquisition asserted that Cambridge, not Acquisition, was the successor corporation and was therefore the proper party to be named in the demand and petition. Acquisition pointed out that the time for filing a demand and petition against Cambridge had expired. On October 24, 1997, appellants sent a letter, by certified mail, to Cambridge.

The letter contained the heading “AMENDED NOTICE.” It stated: “The purpose of this letter is to amend the Demand for Payment of fair value ... and to correct a misnomer contained in the Plaintiffs original notice errantly addressed to Cambridge Acquisition, Inc. on July 30, 1997.” The letter went on to state that the plaintiffs “are hereby making written demand, on Cambridge, Inc., for payment of the fair value of the ... shares of Common Stock.” ⁶⁸ On November 4, appellants filed a response to Acquisition’s motion in which they asserted, in essence, that the naming of Acquisition rather than Cambridge was nothing more than a misnomer, that they should be permitted to amend the demand letter and the petition for appraisal, and that the amendments should relate back to the dates of the original letter and petition. On that same date, appellants filed an “Amended Petition for Appraisal to Determine Fair Value of Stock.” As in the amended demand letter, they explained that the amendment was “to correct a misnomer in naming Cambridge Acquisition, Inc. instead of Cambridge, Inc.” Counsel attached to the letter his own affidavit in which he affirmed, in pertinent part: 4. The demand letter, dated July 30, 1997, and sent certified mail, return receipt requested to both Cambridge, Inc. and Cambridge, Acquisition, inadvertently omitted Cambridge, Inc. as an addressee in the letter[. The letter], however[,] was addressed, on the envelope and certified mail receipt to Cambridge, Inc: and Cambridge, Acquisition, Inc. and to Acquisition’s President, John Lutsi. 5.

The demand letter was intended to serve as notice to both Cambridge, Inc. and Cambridge Acquisition, Inc. of the Plaintiffs assertion of their right to payment of the fair value of their respective shares in Cambridge, Inc. 6. The naming of Cambridge Acquisition, Inc., in the Plaintiffs Original Petition was a misnomer. The amended petition was served upon Theodore Dragich. On November 24, 1997, Cambridge and Acquisition filed a joint “Motion to Dismiss or to Strike Amended Petition.” 7 Cambridge and Acquisition argued that appellants failed to ⁶⁹ comply with the requirements of (i) § 3-203(a)(3) of the Corporations and Associations article, in that they failed to make a written demand upon Cambridge within 20 days of SDAT’s acceptance of the Articles of Share Exchange, (ii) § 3-208(a) of the Corporations and Associations article, in that they failed to file a petition for appraisal against Cambridge within 50 days of SDAT’s acceptance of the Articles.

A hearing was held in the Circuit Court for Dorchester County on March 4, 1998 on Acquisition’s “Motion to Dismiss or, alternatively, for Summary Judgment” and the joint “Motion to Dismiss or to Strike Amended Petition.” The court took the matters under advisement and subsequently issued a written “Opinion and Order.” In the “Opinion and Order,” the court granted Acquisition’s motion for summary judgment, seemingly in favor of both Acquisition and Cambridge. The court determined that §§ 3-203 and 3-208 required strict compliance, and concluded: It is clear that Plaintiffs made their demand upon Cambridge Acquisition, Inc. [Acquisition], being under no obligation to accede to Plaintiffs demand, made no effort to do so or to delude Plaintiffs into believing that it would. Indeed, under the statute, [Acquisition] had no authority to cause an appraisal to be made of Plaintiffs stock holdings in Cambridge, Inc., or to pay them the fair market value of that stock. Conversely, Cambridge had no obligation to cause such an appraisal to be made or to tender such payment, unless and until a demand was made upon it in compliance with the statute.

The court observed that appellants’ assertion that the naming of Acquisition in the original demand letter and petition was a mere misnomer was inconsequential in light of its application of the rule of strict compliance. It nevertheless noted that “[t]he original petition contains much fodder for the raising of a skeptical eyebrow,” in that the petition “names [Acquisition] as the only Defendant and avers that [appellants] made their demand upon [Acquisition], and that [Acquisition] failed to respond to that demand.” The court further observed that “[i]n light of the Court’s disposition of the [summary judg ⁷⁰ ment] motion[ ], ... it is unnecessary to rule upon the motion to strike.” ISSUES Appellants argue, in essence, that I. The trial court erred in determining that the rule of strict compliance foreclosed them from amending their demand letter and their petition for appraisal, and II. The original demand letter is a “paper” subject to amendment under Md. Rule 2-342. DISCUSSION - Procedural Improprieties - Preliminarily, we point out that, regardless of the propriety of the trial court’s application of the rule of strict compliance, we must vacate the court’s “Opinion and Order” and remand the case to that court to correct certain procedural improprieties.

As we have explained, the original petition for appraisal was filed against Acquisition alone. Acquisition alone responded by filing the “Motion to Dismiss or, alternatively, for Summary Judgment.” Although Acquisition contended in its supporting memorandum that the time for filing a petition against Cambridge had expired, Acquisition was not the proper party to assert Cambridge’s position and the trial court could not properly resolve appellants’ rights against