Petition for Writ of Certiorari — Grimes v. Vitalink Communications Corp.

|) Supreme Court, U.S.

73h E D

N 26 1996

No. 97- 98 @ wv

OR Ce OF TES LERK

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1997

CHARLES L. GRIMES,

Petitioner,

Vv.

VITALINK COMMUNICATIONS CORPORATION,

Respondent.

On Petition for a Writ of Certiorari

to the Supreme Court of Delaware

PETITION FOR A WRIT OF CERTIORARI

THADDEUS HOLT

Counsel of Record

P.O. Box 14464

Washington, DC 20044-4464

(334) 990-8750

DAVID A. JENKINS

SMITH, KATZENSTEIN & FURLOW LLP

800 Delaware Avenue

P.O. Box 410

Wilmington DE 19899

(302) 652-8400

Attorneys for Petitioner

PRESS OF BYRON S. ADAMS # WASHINGTON, D.C. 1-800-347-8208

i

QUESTIONS PRESENTED

When property is taken under state authority, the “just

compensation” to the owner mandated by the Fifth and

Fourteenth Amendments includes both (a) “taking

compensation,” i.e., the value of the property of which the

owner was deprived at the time of taking, and (b) “post-taking

compensation,” the value of the use of the property of which

the owner was deprived from the time of taking to the entry

of judgment. E.g., Seaboard Air Line Ry. Co. v. United

States, 261 U.S. 299 (1923).

1. Is compensation “just” that calculates post-taking

compensation by using an arbitrary “interest rate” wholly

unrelated to the actual earning power of which the owner was

deprived during the post-taking period?

2. Specifically, where the taken property is corporate

stock, is compensation “just”, which is ascertained by

employing one number for the earning power of the stock in

calculating the first element of compensation, to the detriment

of the stockholder, and refusing to employ the same number

for the earning power in calculating the second element when

doing so would help the stockholder?

il

PARTIES TO THE PROCEEDING

The names of all parties appear in the caption of the case.

Petitioner is an individual.

ill

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED .........-.-----::: i

PARTIES TO THE PROCEEDING .............- ii

[yp Se es 5) 1. yp. TREN rer ere ree ili

TABLE OF AUTHORITIES ........--..--+--- Vv

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF DELAWARE ........ 1

I. Citations Below, Jurisdiction, and Statutes Involved. . 1

H. Statememt ofthe Case... 1 eee 2

III]. Reasons for Allowance of the Writ ........... 3

A. This Court Should Make It Clear That in

Ascertaining “Just Compensation” for the

Taking of Property, a Court Cannot Refuse to

Consider the Earning Power Which the Property

Would Have Had in the Owner’s Hands After

the Taking and Before Payment of

COMMONSATION wets 4

B. In Particular, This Court Should Make It Clear

That in Ascertaining “Just Compensation” for

the Taking of Stock in a Forced Merger

“Squeezeout,” a Court Cannot Refuse to

Consider the Earnings Rate at Which the Stock

gg ee a rere sere oe 7

a gk a ea ek Mid ae eS 11

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iV

APPENDIX

Grimes v. Vitalink Communications Corp., 708 A.2d

oe Ce: ME SPU i eee ee a ees la

Grimes v. Vitalink Communications Corp., C.A.

No. 12334, 1997 WL 538676 (Del. Ch. Aug. 28,

SPE ho aie CELE RR ee 3a

SJce, Se QU Ws es ere eae eS 40a

o).s CE: I es hc oo eek eee 4la

Bare Base ns ee ee er as 42a

BGMG: 0B ee 6k sae 0 RE RR ee

Vv

TABLE OF AUTHORITIES

Page

Cases

Alabama By-Products Corp. v. Cede & Co., 657 A.2d

Bs Bo Ko ae ee eh ak Bee 8

Bauman v. Ross, 167 U.S. 548 (1897) ............ 9

Beerly v. Department of the Treasury, 768 F.2d 942 (7th

Cir.), cert. denied, 475 U.S. 1010 (1985) ... .. 8

Grimes v. Vitalink Communications Corp., C.A. No.

12334, 1997 WL 538676 (Del. Ch. Aug. 26, 1997),

aff'd, 708 A.2d 630 (Del. 1998) ............ 1,3

Hawaii Housing Auth. v. Midkiff, 467 U.S. 229 (1984) .. 9

Hughes Aircraft Co. v. United States, 31 Fed. Cl. 481

(1994), aff'd, 86 F.3d 1566 (Fed. Cir. 1996)..... 6

Kimball Laundry Co. v. United States, 338 U.S. 1

POPE 26 ook Sen eae ee eae 5, 6, 8

Kirby Forest Indus. v. United States, 467 U.S. 1 (1984) . 4

Offield v. New York, New Haven & Hartford R.R. Co.,

Mae Sais STE CA A ho OS RRS 8,9

Olson v. United States, 292 U.S. 246 (1934)........ 4

Phelps v. United States, 274 U.S. 341 (1927) .... 4,5, 7

Seaboard Air Line Ry. Co. v. United States, 261 U.S.

Be CASE ek EOL RA ee OER passim

United States v. Blankenship, 543 F.2d 1272 (9th Cir.

SPM hs oS So ate ee he ee 7

Vi

Table of Authorities (continued)

Page

United States v. Commodities Trading Corp., 339 U.S.

See ASE Shs 8 ONE eae a eis ek 9

United States v. Miller, 317 U.S. 369 (1943) ....... 5

United States v. 50.50 Acres of Land, 931 F.2d 1349

Ce, SO her et eee ey ee os 7

United States v. 329.73 Acres of Land, 704 F.2d 800

GEN RE eb oo Ce ea et 7

Statutes

ra, CE ONE i ee eae io

Mah Se, Be OS. ek ee i, 2, a0

Wer Ne RT ss a cee boy PE ee ee ]

SP Sees NS oS ip ee i er te 5

ee ernie ED ky cn cs ch wk Dh ea Ceo 7

ee Si Be ek oi ee a Oe ew anes 2

IN THE

Supreme Court of the United States

OCTOBER TERM, 1997

CHARLES L. GRIMES,

Petitioner,

Vv.

VITALINK COMMUNICATIONS CORPORATION,

Respondent.

On Petition for a Writ of Certiorari

to the Supreme Court of Delaware

PETITION FOR A WRIT OF CERTIORARI

Charles L. Grimes respectfully petitions the Court for a

writ of certiorari to review the judgment of the Supreme

Court of Delaware in this proceeding.

I. CITATIONS BELOW, JURISDICTION, AND

STATUTES INVOLVED

This case in the lower courts is reported at Grimes v.

Vitalink Communications Corp., C.A. No. 123334, 1997 WL

538676 (Del. Ch. Aug. 26, 1997), and Grimes v. Vitalink

Communications Corp., 708 A.2d 630 (Del. 1998). The

opinion of the Supreme Court of Delaware was issued on

April 1, 1998. This Court has jurisdiction under 28 U.S.C.

§ 1257.

The case involves the due process clause of the

Fourteenth Amendment to the Constitution of the United

States and the just compensation clause of the Fifth

Amendment to the Constitution of the United States, together

with the appraisal provisions of the Delaware Corporation

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Law, 8 Del. Code § 262: all of which are printed in the

Appendix (“App.”).

Il. STATEMENT OF THE CASE

Petitioner Grimes held 200,000 shares in respondent

Vitalink Communications Corporation. More than 90% of

Vitalink’s stock was acquired by a subsidiary of another

company pursuant to a tender offer (which Grimes did not

accept). Delaware law allows a 90% stockholder to “squeeze

out” the remaining stockholders by forcing a merger upon

them, but permits dissenting stockholders to obtain the fair

value of their stock through an appraisal action brought

against the corporation in the Delaware Court of Chancery.

8 Del. Code §§ 251, 262 (App. 42a - App. 62a). Exercising

the authority of a 90% owner, the acquiring company forced

a merger of itself into Vitalink, effective July 1, 1991, thus

converting Vitalink into a wholly-owned subsidiary of its

parent. Grimes dissented from the merger and his strenuous

objections to settlement of a fraud, non-opt out class action

were disregarded. He accordingly brought an appraisal

action.

The Court of Chancery awarded Grimes a sum for the

value of his stock at the time of taking that was arrived at, so

far as here material, by calculating the present value of

Vitalink’s forecasted cash flow over the next five years,

employing as the discount rate for the present value

calculation a figure reflecting the earning power that had been

accepted by the boards of both Vitalink and the acquiring

company, and used by both of their investment bankers. This

figure was relatively high (20.83%); since the higher the

discount rate the lower the present value, use of such a figure

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worked to the advantage of the company by reducing the

compensation payable to Grimes.’

However, in calculating compensation to Grimes for the

post-taking period the Court of Chancery refused to use this

figure for the earning power of which Grimes was deprived

during that period, employing instead a much lower arbitrary

rate based on the legal rate of interest. App. 22a - App. 38a.

It gave no reason for assuming that the earning power of

which Grimes was deprived should have fallen off by some

two-thirds immediately after the taking, nor for applying the

20.83% rate when doing so benefitted the company yet

refusing to apply it when doing so would benefit the

stockholder. (It also refused to consider evidence of Grimes’s

own individual track record with comparable investments,

which was a much higher number. App. 27a - App. 29a).

Grimes appealed to the Supreme Court of Delaware. It

affirmed in a two sentence order. App. la- App. 2a. Hence

this petition.

III. REASONS FOR ALLOWANCE OF THE WRIT

The questions presented are important ones that warrant

consideration by this Court. They deal with the ascertainment

of “just compensation” for a taking of property pursuant to

state law, under the Fourteenth Amendment, which imposes

upon the states the same requirements as the Fifth Amendment

The present value of a stream of future payments for a given

time period is that sum which, invested at a given interest rate, would

produce the same amount at the end of the time period as the cumulative

value of that stream of payments, earning interest at that given rate. The

higher the assumed interest rate (called the “discount rate”), the lower the

present value. (In lay terms, the greater your earning power, the less you

need at the outset to reach the same goal.) Thus, the present value of

$1000 a year for five years at 10% is $3790.79, while at 20% it is only

$2990 61.

4

imposes on the United States. Olson v. United States, 292

U.S. 246, 254 (1934). In particular, they deal with the

ascertainment of just compensation in a specific type of

taking: the “squeezeout” of dissenting stockholders in a

corporate merger. This is a particularly timely and important

question as the economy moves into a new wave of “mega-

mergers.”

A. This Court Should Make It Clear That in

Ascertaining “Just Compensation” for the

Taking of Property, a Court Cannot Refuse

to Consider the Earning Power Which the

Property Would Have Had in the Owner’s

Hands After the Taking and Before Payment

of Compensation.

Since Seaboard Air Line Ry. Co. v. United States, 261

U.S. 299 (1923), it has been established that “just

compensation” for taken property has two components. The

first component is compensation for the property itself, i.e. ,

its ascertained value at the time of taking (for convenience we

refer to this herein as the “taking value”). The other

component is the value which the owner was deprived of

between the time of taking and the payment of compensation.

“The Government's obligation is to put the owners in as good

position pecuniarily as if the use of their property had not

been taken,” Phelps v. United States, 274 U.S. 341, 344

(1927); only inclusion of such a component can “ensure that

(the owner] is placed in as good a position pecuniarily as he

would have occupied if the payment had coincided with the

[taking].” Kirby Forest Indus., Inc. v. United States, 467

U.S. 1, 10 (1984).

This second component-for convenience we will call it

herein the “post-taking deprivation value’-is commonly

referred to as “interest” and measured by applying a

5

percentage rate to the taking value. But it is not true interest,

i.€., payment for the use of money. Rather, it is

compensation for what the owner would have earned on the

taken property during the post-taking period.’

The first component, the taking value, is normally

measured by reference to a hypothetical construct, “fair

market value,” i.e., the cash bargain a hypothetical willing

seller of the taken property would strike with a hypothetical

willing buyer. E.g., United States v. Miller, 317 U.S. 369,

373-75 (1943). The second component, the post-taking

deprivation value, by contrast, is specific to the property and

the owner. In order to put the owner into “as good position

pecuniarily as he would have been if his property had not

been taken,” Seaboard, 261 U.S. at 304, it reflects the actual

money’s worth’ it would have meant to the owner-not some

postulated hypothetical owner, but the particular real

individual in question-to have had the property in hand during

the post-taking period. It reflects the earning power that the

owner was deprived of during the limited period from the

time of taking to the time of payment. The underlying

principle is identical to that set forth in Kimball Laundry Co.

v. United States, 338 U.S. 1 (1949), that compensation for

such a deprivation for a limited period is to be determined

with reference to the deprivation suffered by the specific

> Accordingly, when the United States takes property it must pay

post-taking compensation as part of “just compensation” notwithstanding

the general rule (now codified to 28 U.S.C. § 2516(a)) that interest on a

claim against the United States is not allowed absent agreement or special

statute. Seaboard, supra. “It is not a claim for interest within the purpose

or intention of [28 U.S.C. § 2516(a)].” Phelps v. United States, 274 U.S.

at 344.

, Not, of course, mere sentimental or idiosyncratic “value to the

owner,” but tangible or “transferable” value.

owner. There, this Court held that just compensation for a

ter1porary taking of business premises, thereby shutting down

the business, must take into account not only the rental value

of the property but the going-concern value of the business.

Beyond the implications of Kimball Laundry when taken

together with the principle of Seaboard, this Court has never

given guidance as to the ascertainment of post-taking

deprivation value, and in particular as to the role to be played

by the specifics of the taken property and the owner’s own

experience. Some courts have played fast and loose as a

result. Thus, disregarding the basis for compensation

expressed by this Court, the Court of Claims and its

successors have generally employed a uniform fixed “interest”

rate for specific periods for all owners without regard for

individual circumstances, expressing “a strong judicial policy

in favor of uniform rates to apply to all those entitled to” post-

taking compensation. E.g., Hughes Aircraft Co. v. United

States, 31 Fed. Cl. 481, 492 (1994), aff’d, 86 F.3d 1566

(Fed. Cir. 1996), and cases cited. The theory of this

approach is that to do otherwise would discriminate against

some owner; but in fact the approach obviously discriminates

against owners who would have made a substantial return on

their investments and confers a windfall on those who would

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not. And it is manifestly contrary to the basic principles

articulated by this Court.‘

Guidance from this Court on this subject is thus clearly

needed.

B. In Particular, This Court Should Make It

Clear That in Ascertaining “Just

Compensation” for the Taking of Stock in a

Forced Merger “Squeezeout,” a Court Cannot

Refuse to Consider the Earnings Rate at

Which the Stock Itself Was Valued

A specific element of this general subject of valuing post-

taking deprivation on which the Court’s guidance is needed

and timely is its application to “squeezeouts” of minority

stockholders, as in the case at bar.

* In many taking cases-reflecting no doubt the fact that the

majority of such cases deal with fairly routine real property

condemnations-the owners appear not to have offered evidence of specific

earning power and to have been content with the legal interest rate as the

measure of post-taking compensation. £.g., Seaboard, supra; Phelps,

supra. But it is clear that such an arbitrary statutory rate is not to be

forced on an unwilling owner, and that, constitutionally, at the owner’s

instance post-taking compensation must be tailored to fit the deprivation

suffered by the particular owner in the particular case. Thus, in the

Declaration of Taking Act of 1931, 46 Stat. 1421, 40 U.S.C. § 258a,

Congress decreed a flat 6% rate for post-taking “interest.” The courts

rejected this effort, interpreting the statute as setting a floor but not a

ceiling, e.g., United States v. Blankinship, 543 F.2d 1272 (9th Cir. 1976);

United States v. 329.73 Acres of Land, 704 F.2d 800 (Sth Cir. 1983); and

rejected a 1986 effort by Congress to replace the 6% rate with one based

on 52-week Treasury bills. United States v. 50.50 Acres of Land, 931

F.2d 1349 (9th Cir. 1991). (We do not necessarily endorse the method of

ascertaining compensation, which the courts there applied in lieu of the

Statutory rates, however.)

The rights of stockholders inter se are for many purposes

deemed to arise from a contract among them adopting the

provisions of the corporate documents and the general

corporation law of the state of incorporation. But the widely

disseminated investment-backed expectations of stockholders

are not deemed to be subject to arbitrary forfeiture no matter

what the particular provisions of a general corporation law

may be, so that a “squeezeout” of a minority stockholder is a

compensable “taking” of his shares, which is subject to the

requirements of due process. Beerly v. Department of the

Treasury, 768 F.2d 942, 948 (7th Cir.), cert. denied, 475

U.S. 1010 (1985); cf. Offield v. New York, New Haven &

Hartford R.R. Co., 203 U.S. 372 (1906). The “squeezeout”

provisions of state corporation laws° are thus subject to the

overriding constitutional principles of just compensation; and

in particular to the requirement of compensation for post-

taking deprivation.

Delaware makes provision of post-taking “interest”

wholly discretionary with the court in an appraisal action.

Alabama By-Products Corp. v. Cede & Co., 657 A.2d 254,

267 (Del. 1995). That is not enough; as we have seen, due

process mandates the award of such “interest.” And, to

repeat, the rate of such “interest” must be sufficient to “put

[the squeezed-out stockholder] in as good position pecuniarily

as he would have been if his property had not been taken.”

Seaboard, 261 U.S. at 304. In light of the principles of

Seaboard and Kimball Laundry, that position must be

ascertained on the basis of the actual earning power of the

property in the stockholder’s hands on the facts of the

particular case. It is manifestly irrational not merely to reject

evidence of what the squeezed-out stockholder himself earned

* And federal ones, too. Beerly involved a national bank and the

“squeezeout” provisions of the National Bank Act.

9

on similar investments, but to refuse to apply the very earning

power that the stock was found to have in the very same

6

case.

There are other factors in the evaluating of stock taken in

a “squeezeout” that merit this Court’s consideration. One in

particular is the posture of the parties. While the distinction

between taking for a “public use,” which is permissible, and

a “private use,” which is not, has been drastically attenuated

in recent years, e.g., Hawaii Housing Auth. v. Midkiff, 467

U.S. 229, 239-44 (1984), surely a corporate “squeezeout”

such as the present one is about as close to the edge as

possible. (Here there is not even the public interest in a

public utility that justified the taking in Offield, supra.) This

implies a balancing of interests different from that applicable

when the sovereign takes property for the public. In a

compulsory purchase by the sovereign, “[jJust compensation

means a compensation that would be just in regard to the

public, as well as in regard to the ind: vidual,” Bauman v.

Ross, 167 U.S. 548, 570 (1897); “‘just’ both to [the] owner

whose property is taken and to the public that must pay the

bill.” United States v. Commodities Trading Corp., 339 U.S.

121, 123 (1950). Such solicitude for the interests of the taker

is inappropriate where, as here, the taker is not the sovereign

* To carry forward the example in foomote 1, suppose the

forecasted cash flow per share for the next five years was $1000 a year,

and the earning power of the stock was reckoned at 20% a year. A share

would then be valued at $2990.61. Suppose further that two years elapsed

between the time of taking and the payment of compensation. During that

period, the stockholder has been deprived of at least what the earning

power of the stock (20% per year compounded) would have produced

when applied to $2990.61, or $1315.87. If for this compensation he were

nevertheless arbitrarily limited to a rate of, say, 6%, he would receive

only $369.64 in compensation for his lost $1315.87. That is essentially

what the courts below did here.

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for the benefit of all, with the cost of taking falling on the

public fisc, but a corporate majority exercising its muscle to

cram a merger down the throats of a dissenting minority. In

particular, the private, one-on-one posture of a “squeezeout”

underscores the impropriety of determining post-taking

deprivation value on the basis of some generalized formula

applicable to all owners of all kinds of property.

And while a taking authorized by law is not a tort, in

such circumstances it is appropriate to look to such concepts

from tort law as that the defendant takes the plaintiff as he

finds him, and to estop the majority from denying to the

“squeezed-out” stockholder the benefit of the same earning

rate as it applied in valuing the stock.

Finally, we repeat the salient feature of this particular

case. The Constitution mandates just compensation. How

can compensation be “just,” which applies one level of earning

power to the first element of compensation, to the detriment

of the stockholder, and refuses to apply the same level of

earning power to the second element when that would help the

stockholder?

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CONCLUSION

The questions involved are important, warrant this

Court’s attention, and are very timely in view of the rising

wave of corporate mergers. The petition for certiorari should

be granted.

Respectfully submitted,

THADDEUS HOLT

Counsel of Record

P.O. Box 14464

Washington, DC 20044-4464

(334) 990-8750

| TELS. FS MO ng Pe he

I ET SD OY te

DAVID A> JENKINS

SMITH, KATZENSTEIN & FURLOW LLP

800 Delaware Avenue

P.O. Box 410

Wilmington DE 19899

(302) 652-8400

Attorneys for Petitioner