Egan v. First Opportunity Fund Inc. (Cir. Ct. Balto. City)

Filed: April 22, 2016

Opinion by: Judge W. Michel Pierson

Holding: Stockholders of a Maryland corporation were not entitled to payment of fair value for their shares of stock (commonly referred to as “appraisal” rights) under the Maryland General Corporation Law (the “MGCL”), § 3-202, where the corporation’s charter was amended to expressly divest the stockholders of any appraisal rights in connection with a subsequent consolidation of the fund into another fund because (i) appraisal rights are not “contract rights” nor were they “expressly set forth” in the corporation’s charter as required under MGCL § 3-202(a)(4), and (ii) the amendment of the charter to divest the stockholder appraisal rights occurred prior to the consolidation and thus, at the time of the vote on the consolidation, the charter had eliminated appraisal rights in accordance with MGCL § 3-202(c)(4).

Facts: First Opportunity Fund, Inc., was a registered closed-end investment fund formed as a Maryland corporation (“FOFI”).  In 2014, the stockholders of FOFI and the stockholders of two other funds managed by affiliated directors and fund advisors were asked to approve a plan of reorganization (the “Consolidation”), under which the assets of those three funds would be transferred to Boulder Growth and Income Fund, Inc. (“BIF”).  Of all the funds involved in the Consolidation, FOFI was the only corporation whose stockholders enjoyed Maryland’s statutory appraisal rights under MGCL § 3-202 (because the other funds were publicly traded and thus excepted from the appraisal rights requirement pursuant to MGCL § 3-202(c)(1)).  Therefore, prior to submitting the proposed Consolidation to the stockholders for their consideration, the board of directors of FOFI proposed that the charter of FOFI be amended to divest FOFI’s stockholders of any appraisal rights (“Proposal 1”).

The proxy statement issued by the directors of the four funds disclosed that if Proposal 1 was approved, the stockholders meeting would be temporarily adjourned and FOFI would file articles of amendment to amend the charter to include Proposal 1.  If Proposal 1 was not approved, the proposal to consider the Consolidation would not be considered.

At the FOFI stockholders meeting, Proposal 1 was approved.  The meeting then adjourned and articles of amendment containing Proposal 1 were accepted for record by the State Department of Assessments and Taxation.  The meeting then resumed and the transfer of assets from FOFI to BIF was approved by the FOFI stockholders.  Following these actions, two of FOFI’s stockholders (the “Plaintiffs”) submitted a written demand for the fair value of their shares and otherwise complied with the statutory requirements for perfecting appraisal rights under the MGCL.  FOFI and BIF denied the demand and the Plaintiffs filed suit, seeking fair value of their stock pursuant to MGCL § 3-202.  The defendants moved to dismiss the action, and, for the reasons detailed below, the Court granted the defendants’ motion and dismissed the Plaintiffs’ claims.

Analysis: MGCL § 3-202 provides that stockholders of a Maryland corporation may demand and receive payment of fair value of their stock in the event of certain fundamental corporate changes.  The statute also provides a number of circumstances where a dissenting stockholder has no such appraisal right.  See MGCL § 3-202(c).  In Egan, the Plaintiffs alleged that two fundamental changes occurred in connection with the Consolidation process, thus triggering their appraisal rights under the MGCL.  First, in Count I of the Plaintiffs’ complaint, based on the Consolidation of FOFI into BIF, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(1), which provides for appraisal rights in the event a “corporation consolidates or merges with another corporation.”  Second, in Count II of their complaint, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(4), which provides for appraisal rights if a “corporation amends its charter in a way which alters the contract rights, as expressly set forth in the charter, of any outstanding stock and substantially adversely affects the stockholder's rights, unless the right to do so is reserved by the charter of the corporation.” 

As to Count I, the Court found that, although there was “no dispute” that the Consolidation of FOFI into BIF was a consolidation or merger under MGCL § 3-202(a)(1), the Plaintiffs’ claims were subject to the provisos of MGCL § 3-202(c).  Among other things, that subsection provides that “a stockholder may not demand the fair value of the stockholder’s stock and is bound by the terms of the transaction if: … [t]he charter provides that the holders of the stock are not entitled to exercise the rights of an objecting stockholder under this subtitle.”  MGCL § 3-202(c)(4).  The Court found that the amendment to FOFI’s charter was adopted in accordance with the literal requirements of the MGCL and, consequently, pursuant to MGCL § 3-202(c)(4), the Plaintiffs had no appraisal rights by virtue of the Consolidation.  In reaching this conclusion, the Court rejected the Plaintiffs’ arguments that the adoption of Proposal 1 and the consolidation were really one and the same transaction and that the amendment of FOFI’s charter should therefore be ignored for purposes of determining the Plaintiffs’ appraisal rights.  Rather, the Court held that the independent nature of the adoption of Proposal 1 and the approval of the Consolidation could not be ignored by the Court in search of a higher equity under the guise of a substance over form analysis.

As to Count II, the Court found that the Plaintiffs had no appraisal rights as a result of the amendment of FOFI’s charter because, after reviewing the legislative history of MGCL § 3-202(a)(4), the Court concluded that appraisal rights are not “contract rights” as used in the statute but that the statute instead refers to “contractual attributes of the stock itself, and does not mean every contract right included in the corporate charter.”  The Court also found that, even if appraisal rights were contract rights, FOFI’s charter made no mention of such rights and thus they were not “expressly set forth” in FOFI’s charter prior as required under MGCL § 3-202(a)(4).  In reaching this conclusion, the Court rejected the Plaintiffs’ assertion that appraisal rights should be deemed to be expressly set forth in FOFI’s charter because a corporation’s charter is a contract between the corporation and its shareholders and statutory law is incorporated into a contract under Maryland law.  On this issue, the Court concluded that “treating an object ‘as though’ it is expressly set forth is not equivalent to that object actually being expressly set forth.”

The full opinion is available in PDF.