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KELLOGG v. GEORGIA-PACIFIC PAPER CORPORATION

March 24, 1964

L. D. KELLOGG, JOSEPHINE S. KELLOGG, AND L. D. KELLOGG LUMBER CO., INC., PLAINTIFFS,
v.
GEORGIA-PACIFIC PAPER CORPORATION ET AL., DEFENDANTS.



The opinion of the court was delivered by: Henley, District Judge.

This is an equitable action brought by minority stockholders of The Crossett Company (hereinafter Crossett), a dissolved Arkansas corporation, against that corporation, its former directors and present trustees in dissolution, fourteen in number and hereinafter called the Trustees, and against Georgia-Pacific Paper Corporation (hereinafter Georgia-Pacific), a Delaware Corporation authorized to do business and doing business in Arkansas. Federal jurisdiction based upon diversity of citizenship and the requisite amount in controversy is not questioned and is present. The cause is now before the Court on plaintiffs' motion for partial summary judgment filed pursuant to Rule 56 of the Federal Rules of Civil Procedure.

By their action, as it now stands, plaintiffs seek equitable relief with respect to the plan of liquidation and distribution of the assets of Crossett which was adopted following its dissolution on July 30, 1962, at the instance of Georgia-Pacific which had by that time acquired more than 99 per cent of the common and preferred stock of Crossett. In a nutshell the plan of liquidation and distribution contemplates that Georgia-Pacific is to take over, and indeed Georgia-Pacific has taken over, all of the assets and the business of Crossett as Georgia-Pacific's distributive share in liquidation, except that plaintiffs, as minority stockholders, are to be paid for their shares in cash at the rate of $54.85 per share, a rate fixed by Georgia-Pacific and apparently based on the book value of the Crossett stock. Plaintiffs have refused to accept the cash payments contemplated by the plan, and by their instant motion they seek a declaration that the plan is invalid as a matter of law, while leaving for future determination the question of the precise relief which should be granted to them.*fn1

Prior to its dissolution Crossett had its principal place of business in the City of Crossett, Ashley County, Arkansas, located in the southern portion of the State which is heavily forested with valuable pine timber. Crossett was engaged extensively in the production, conservation, and harvesting of that timber, and in the manufacture and sale of lumber and other forest products. It owned timber and timberlands, mills and factories, town lots in Crossett, and other properties of various and sundry kinds. Its net assets upon which the $54.85 per share valuation of Crossett's stock was based were in excess of $125,000,000. The overall Crossett operations were not only of significance to the stockholders, suppliers, and employees of the company, but were also of great significance to the economic welfare of South Arkansas and North Louisiana. The present Crossett operations of Georgia-Pacific are of equal if not greater overall significance.

In the spring of 1962 a large majority of Crossett stock*fn2 was owned by the Crossett, Gates, and Watzek families; the remainder of the stock was held by the public, including plaintiffs. During the period just mentioned Georgia-Pacific began to acquire Crossett stock at a price of $55 per share, and by July 1962 had acquired approximately 99.6 per cent of the stock, which acquisitions, of course, gave it full control over the assets and affairs of Crossett. While plaintiffs were given an opportunity to sell to Georgia-Pacific at the $55 per share price, they did not do so.

On or about July 9, 1962, after Georgia-Pacific had acquired control of Crossett, the then members of Crossett's board of directors resigned, and a new board of fourteen men, the present Trustees, was elected.*fn3 On July 9, 1962, the new board adopted a resolution to the effect that it was in the best interest of Crossett that it be dissolved, and it was further resolved that a special meeting of stockholders would be held on July 30, 1962, to consider the question of dissolution.*fn4

Notice of the stockholders' meeting was mailed on July 14, 1962, and the notice recited that the meeting would be held at Crossett. However, it seems that the meeting was actually held in Portland, Oregon, the home office of Georgia-Pacific or its parent corporation. The record does not indicate that any stockholder other than Georgia-Pacific attended the meeting or was represented thereat. The record does establish that plaintiffs did not attend, nor were they represented.

At the July 30 meeting a resolution was adopted calling for Crossett's dissolution and for the winding up of its affairs in the manner that has been outlined. On July 31, 1962, the Crossett directors, acting as trustees in dissolution, held another meeting in Portland and took appropriate steps to implement the plan of liquidation.

In due course the Trustees offered plaintiffs, or at least offered Mrs. Kellogg, the $54.85 per share cash payments for the outstanding stock. Plaintiffs refused to accept such payments and commenced this action.

It is the theory of the plaintiffs that Georgia-Pacific, as the majority stockholder of Crossett, owed plaintiffs, as minority stockholders, a fiduciary duty to manage the affairs and wind up the business of Crossett, including the liquidation of its assets, for the benefit and best interests of all of the stockholders, including the minority; that Georgia-Pacific and the Trustees had no right to adopt a plan of liquidation which would favor Georgia-Pacific at the expense of the plaintiffs; that plaintiffs and Georgia-Pacific were the beneficial owners of all of the assets of Crossett as tenants in common; that having dissolved the corporation Georgia-Pacific and the Trustees, after making provision for the payment of corporate debts (which appears to have been done), were required either to distribute the assets in kind among all of the stockholders in proportion to their stock ownership, or to sell all of the assets on the open market and divide the proceeds on a pro-rata basis. As indicated, plaintiffs contend that Georgia-Pacific had no right to take over the assets and affairs of Crossett as a going concern and require plaintiffs to accept a pre-determined cash payment as compensation for their stock ownership.

In resisting the claim of plaintiffs the defendants contend that plaintiffs' interest in Crossett was too small to give them standing to contest the plan of liquidation; that they were dilatory in asserting their objections; that Georgia-Pacific and the Trustees have acted in the utmost good faith and with the utmost regard for the interests of plaintiffs; that the Trustees in working out a method of liquidation were faced with a number of alternatives, and selected the one which was most feasible and which was actually in the best interests of all concerned.

From its consideration of the facts of record in the light of what appear to be governing provisions and principles of law the Court is persuaded that while some of the contentions of the defendants may have some relevancy on the question of what relief is to be granted plaintiffs, none of them can be sustained as far as the legality of the plan of liquidation is concerned, and that plaintiffs are entitled at this time to a binding adjudication that the plan adopted was illegal.

The Arkansas statutes prescribe the method by which the affairs and assets of dissolved domestic corporations are to be liquidated. Ark.Stats. §§ 64-806, 64-807, and 64-811. Without stopping to abstract those statutory provisions in detail, they contemplate that the trustees in liquidation shall collect the corporate assets, pay or provide for the payment of corporate debts and liabilities, and distribute remaining assets in cash or in kind to the former stockholders in proportion to their stock ownership. Those statutes do not contemplate that the trustees in the absence of an agreement among the stockholders shall turn the corporate business and physical assets over to one stockholder or group of stockholders while requiring some other stockholder or stockholders to accept cash as his or their distributive share in liquidation.*fn5

As to the legality of the plan of liquidation, the case of Mason v. Pewabic Mining Company, 133 U.S. 50, 10 S.Ct. 224, 33 L.Ed. 524, decided in 1890, appears to be in point here. In that case the Pewabic Mining Company was in distressed financial condition; the majority stockholders of Pewabic were apparently not willing to put any more money into that corporation. Instead, they organized a new corporation which they controlled. It was decided that Pewabic would be dissolved; that Pewabic's assets would be turned over to the new corporation in satisfaction of the stock interest of the majority stockholders, and that the owners of the minority stock would be paid in cash for their stock on the basis of a valuation fixed by the majority. It was held that this method of winding up the affairs of Pewabic was illegal and was subject to injunction. The Court said (pp. 58-59 of 133 U.S., p. 228 of 10 S. Ct., 33 L.Ed. 524):

    "With regard to the main question, the power of
  the directors and of the majority of the
  corporation to sell all of the assets and
  property of the Pewabic Mining Company to the new
  corporation under the existing circumstances of
  this case, we concur with the circuit court. It
  is earnestly argued that the majority of the
  stockholders — such a relatively large majority in
  interest — have a right to control in this matter,
  especially as the corporation exists for no other
  purpose but that of winding up its affairs, and
  that, therefore, the majority should control in
  determining what is for the interest of the whole,
  and as to the best manner of effecting this object.
  It is further said that in the present case the
  dissenting ...

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