## Facts

- Natomas Company had outstanding preferred stock whose rights (including any class-vote protections) were set out in Natomas’s governing documents and the terms of the preferred.
- Diamond Shamrock Corporation and Natomas agreed to a merger/reorganization plan after Diamond Shamrock sought to acquire Natomas.
- The plan used a newly formed holding company, New Diamond, which created two subsidiaries: D Sub, Inc. and N Sub, Inc.
- D Sub merged into Diamond Shamrock, and N Sub merged into Natomas, leaving both operating companies under the New Diamond holding-company structure.
- New Diamond issued its common stock and exchanged it for common stock held by the common shareholders of Natomas and Diamond Shamrock, so that the former common shareholders became common shareholders of New Diamond.
- The transaction documents were structured so that Natomas’s preferred stock was not given a separate approval right for the reorganization; the plan proceeded without a separate preferred-shareholder vote.
- Kirschner Brothers Oil, Inc., a Natomas preferred shareholder acting for a class of preferred holders, sued Natomas and Diamond Shamrock seeking to stop the transaction and alleging the structure improperly disadvantaged the preferred.
- The trial court denied injunctive relief, and the transaction closed. The case proceeded to judgment in defendants’ favor, and the preferred-shareholder representative appealed.

## Issues

1. Whether Natomas’s preferred shareholders were entitled, under California corporate law or Natomas’s governing documents, to a separate class vote to approve the merger/reorganization.
2. Whether Natomas’s directors (and Diamond Shamrock as a deal participant) breached fiduciary duties to the preferred shareholders by structuring and approving the transaction without granting the preferred additional protections, voting rights, or consideration.

## Decision

- The Court of Appeal affirmed judgment for defendants.
- The court held that the preferred shareholders did not have a separate class vote on this merger/reorganization absent a statutory trigger or a charter-based provision granting such a vote.
- The court rejected the attempt to expand fiduciary-duty doctrine to give preferred shareholders rights beyond those granted by the preferred terms and governing corporate law.
- Because the claimed duties and voting rights were not supported by the controlling legal and contractual framework, defendants were entitled to judgment as a matter of law.

## Legal Principles

- Preferred shareholders’ rights are primarily contractual; they are defined by the corporation’s articles, the certificate/terms creating the preferred, and applicable statutes.
- A separate class vote for preferred shareholders is required only when mandated by statute or when the corporation’s governing documents grant that right; economic disadvantage alone does not create a class-vote requirement.
- Corporate directors owe fiduciary duties, but courts assess alleged duties to preferred shareholders in light of the preferred’s bargained-for rights; courts do not add new preferences through fiduciary-duty claims when the charter and statutes do not provide them.
- The existence and scope of a fiduciary duty are questions of law for the court, and when the alleged duty is not recognized under the governing documents and statutes, defendants may obtain judgment without trial.

## Conclusion

Kirschner Brothers Oil, on behalf of Natomas preferred shareholders, challenged a Natomas–Diamond Shamrock holding-company reorganization on the ground that preferred holders were entitled to a separate approval vote and greater protection from a deal structure favoring common holders. The court ruled that, because California law and Natomas’s governing documents did not grant the preferred a class vote or the additional rights sought, the transaction could proceed without preferred approval and the directors were not liable for failing to provide extra-contractual protections.


Kirschner Brothers Oil v. Natomas Co., 299 Cal. Rptr. 899 (1986)