Daniel Ahlberg, et al., Appellants, vs. Timm Medical Technologies, Inc., n/k/a Endocare, Inc., Respondent.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2002).

STATE OF MINNESOTA

IN COURT OF APPEALS

A03-438

Daniel Ahlberg, et al.,

Appellants,

vs.

Timm Medical Technologies, Inc.,

n/k/a Endocare, Inc.,

Respondent.

Filed November 18, 2003

Affirmed in part, reversed in part, and remanded

Toussaint, Chief Judge

Hennepin County District Court

File No. 02-12068

Thomas P. Malone, Edward Peter Sheu, Barna, Guzy & Steffen, 200 Coon Rapids Boulevard, Coon Rapids, MN 55433 (for appellants)

David Y. Trevor, Amy S. Hartman, Dorsey & Whitney, LLP, 50 South Sixth Street, Suite 1500, Minneapolis, MN 55402 (for respondent)

Considered and decided by Toussaint, Chief Judge; Klaphake, Judge; and Halbrooks, Judge.

UNPUBLISHED OPINION

TOUSSAINT, Chief Judge

This is an appeal from summary judgment in a declaratory judgment action, in which appellant minority shareholders assert that a corporate stock split is void and seek compensatory damages.  Because the district court correctly interpreted Delaware law but abused its discretion in denying appellants' motion to continue the summary judgment motion pending discovery, we affirm in part, reverse in part, and remand.

FACTS

            In 1998, appellants Daniel and Linda Ahlberg purchased 35,000 shares of Timm Research Company common stock at $3.00 per share for $105,000.  Later that year, Timm Research merged with respondent Timm Medical Technologies, Inc., a Delaware Corporation.  After the merger, the common stock was repriced at $2.20 per share, which resulted in the issuance of 47,728 shares of Timm Medical to the Ahlbergs.

On October 1, 2001, the five directors on the Timm Medical board adopted and approved resolutions, including a board determination that the common stock fair market value was $.25 per share.  The board also approved a plan of recapitalization to be presented for approval to the shareholders.  The plan included a reverse stock split converting each share of common stock to one-quarter share.  The officers were directed to present the plan to the shareholders.  In lieu of a meeting, the directors and the shareholders approved the plan by written action, effective October 1, 2001.  The voting trustees, Gerald Timm and Gerald Mattys, and D&W Ventures I, LLC, signed the written action by the shareholders.  By letter dated December 17, 2001, Timm Medical notified the shareholders of the reverse stock split.  The reverse stock split left the Ahlbergs with 11,932 shares, valued at $24,183.78 after the merger with respondent Endocare, Inc.

On July 26, 2002, the Ahlbergs sued Timm Medical, seeking declaratory judgment that the reverse stock split was void due to lack of notice to the shareholders.  One month later, Timm Medical moved to dismiss the complaint and later moved in the alternative for summary judgment.  The Ahlbergs filed a Rule 56.06 affidavit and moved to continue the summary judgment motion for additional discovery.  The district court denied the Ahlbergs' motion and granted summary judgment for Timm Medical.  The Ahlbergs now appeal.

D E C I S I O N

Because Timm Medical is a Delaware corporation and Minnesota is the forum state, this court will apply Minnesota rules and law to procedural matters.  See Davis v. Furlong, 328 N.W.2d 150, 153 (Minn. 1983) (stating that law of forum governs matters of procedure).  The parties agree that Delaware law applies to the substantive issues.

I.

       The Ahlbergs claim that the district court erred by misapplying Delaware law, which, they argue, required Timm Medical to give the shareholders prior notice of the reverse stock split.  They rely on section 242 of the Delaware Code on corporations, which authorizes certain amendments to certificates of incorporation, including those that increase or decrease the authorized capital stock.  Del. Code Ann. tit. 8 § 242(a) (2001).  Section 242 also sets out the process for making and approving the amendments.  Id. at § 242(b).  The Delaware courts have construed section 242(b) to provide a two-step process that must be followed in precise sequence to amend a certificate of incorporation.  See AGR Halifax Fund, Inc. v. Fiscina, 743 A.2d 1188, 1192-93 (Del. Ch. 1999).  First, the board of directors must adopt a resolution proposing the amendment, declaring its advisability and calling for a shareholder vote at a special or annual shareholder meeting.  Id. at 1192.  Second, the proposed amendment must be considered and voted upon at a special meeting of the stockholders.  Id.

            While section 242 expressly requires a meeting of the shareholders, courts interpreting the Delaware general corporation code allow for corporate action by written consent.  See id. at 1193-95.  Written consent in lieu of a meeting is specifically available through section 228(a), which states in relevant part that

[u]nless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

Del. Code Ann. tit. 8, § 228(a).  Section 228 "clearly and unambiguously permits a majority of the stockholders of a corporation to act immediately and without notice to the minority."  Allen v. Prime Computer, Inc., 540 A.2d 417, 420 (Del. 1988).  Therefore, the district court correctly concluded that written consent was available for corporate action in lieu of a meeting.

II.

While many jurisdictions allow written action by unanimous consent, Delaware is one of a handful of states that allows written action by less than unanimous consent.  5 Wm. Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 1996.10 (2003).  Any corporate action taken under section 228 "is effective only upon delivery of the proper number of valid and unrevoked consents to the corporation."  Allen, 540 A.2d at 420.  Courts have approved bylaws imposing some "minimal essential provisions for ministerial review of the validity of the action taken by shareholder consent," but have disallowed bylaws abrogating this important shareholder right.  Id.

Here, Timm Medical's bylaws did not provide for review of the written consent, and the Ahlbergs claim that the action was not properly taken.  They argue that the district court abused its discretion by denying their motion for a continuance to obtain additional discovery relevant to the reverse stock split action. 

A court may grant a continuance for additional discovery when it appears from the affidavits of a party opposing summary judgment that that party cannot present facts essential to justify its opposition.  Minn. R. Civ. P. 56.06.  If sufficient time was available for discovery and additional discovery would not yield evidence requiring a different result on summary judgment, a court may deny a continuance.  McCormick v. Custom Pools, Inc., 376 N.W.2d 471, 477 (Minn. App. 1985), review denied (Minn. Dec. 30, 1985).  This court typically reviews a district court's ruling on a motion for a continuance for an abuse of discretion.  See Dunshee v. Douglas, 255 N.W.2d 42, 45 (Minn. 1977). 

            The scope of permissible discovery is broad.  "Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party."  Minn. R. Civ. P. 26.02(a).  "The information sought need not be admissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence."  Id.  Consequently, there is a presumption in favor of granting a continuance to defer a summary judgment decision and to permit sufficient time for discovery.  Cherne Contracting Corp. v. Wausau Ins. Cos., 572 N.W.2d 339, 345 (Minn. App. 1997), review denied (Minn. Feb. 19, 1998).       

            The record indicates that Timm Medical initially moved for dismissal in lieu of an answer.  Despite a November 8, 2002 scheduling order allowing discovery until April 16, 2003, the matter was submitted to the court as a motion for summary judgment on December 17, 2002.  On December 16, the Ahlbergs had filed a Rule 56.06 affidavit specifically seeking a continuance and additional information that Timm Medical had failed to provide. 

            The Ahlbergs argue that the written consent process requires that the board passing the resolution and the shareholders providing the written consents be duly authorized.  The Ahlbergs sought discovery to determine if the shareholders who signed the written consents actually owned the stock or constituted the majority.  They argued that the information produced by Timm Medical raised the additional issue of whether the majority shareholders had paid adequate consideration for their stock holdings and whether the board acted in all of the shareholders' best interests.  They point to the substantial decrease in the value of their investment caused by the reverse stock split as evidence that the action was not in their best interests. The Ahlbergs' requests appear to be for discovery relevant to the subject matter of the action.

            While we conclude there is no support in the record for the Ahlbergs' claim that Timm Medical largely refused to respond and "refused to provide [them] any documents whatsoever," the Ahlbergs' diligent pursuit of discovery was met by limited and selective responses.  Even though some of the Ahlbergs' requests for discovery may have been overbroad, they were entitled to discovery regarding any matter relevant to the subject matter.  Under this broad standard, the Ahlbergs showed a good faith belief that discovery would uncover material facts.  Therefore, the district court prematurely granted summary judgment and should have granted a continuance for additional discovery.

            Affirmed in part, reversed in part, and remanded.