## Facts

- Lillian S. Rauch owned 250 shares of RCA $3.50 cumulative first preferred stock.
- RCA, General Electric Co. (GE), and Gesub, Inc. (a GE subsidiary) executed a merger agreement under which Gesub merged into RCA and RCA shareholders were cashed out.
- The merger terms converted Rauch’s $3.50 preferred shares into the right to receive $40.00 per share in cash, subject to Delaware appraisal rights for stockholders who perfected them.
- A different series of RCA preferred stock ($4.00 cumulative convertible first preferred) was called for redemption according to its own terms before the merger.
- RCA’s certificate of incorporation provided that, in a “liquidation or dissolution or winding up” of RCA, holders of the $3.50 preferred were entitled to $100 per share.
- Rauch filed a diversity class action alleging the merger should be treated as a liquidation/winding up and a “redemption” of the $3.50 preferred, entitling holders to $100 per share rather than the $40 merger consideration.
- Rauch did not allege statutory noncompliance with Delaware’s merger statute, did not claim the merger price was unfair, and did not pursue appraisal.
- The district court dismissed for failure to state a claim, and Rauch appealed.

## Issues

1. Whether a merger executed in compliance with Delaware’s merger statute must be treated as a “liquidation,” “winding up,” or “redemption” that triggers a charter’s preferred-stock redemption/liquidation price.
2. Whether Delaware’s doctrine of independent legal significance permits a corporation to structure a transaction as a merger even if a different statutory route would have triggered greater preferred-stock payments.

## Decision

- The Second Circuit affirmed dismissal for failure to state a claim.
- The court held the transaction was a statutory merger, not a redemption or liquidation.
- Under Delaware’s doctrine of independent legal significance, the merger’s validity was not measured by charter or statutory provisions governing redemptions or liquidations.
- Because the complaint alleged no merger-statute violation and raised no appraisal or fairness challenge, the preferred holders were limited to the merger consideration of $40 per share.

## Legal Principles

- Under Delaware law, acts taken pursuant to one statutory mechanism (e.g., merger) are not invalidated by comparing them to different mechanisms (e.g., redemption) with different shareholder consequences (independent legal significance).
- Converting shares into cash by operation of a merger is legally distinct from a corporate redemption of shares; redemption provisions do not automatically apply to merger consideration.
- Preferred stock rights are primarily contractual; unless the charter grants merger-specific protections, preferred holders cannot extend liquidation/redemption terms to a statutory merger.
- When a merger complies with the governing merger statute, a stockholder’s remedy for value disputes is generally appraisal or a properly pleaded fiduciary/fairness claim, not recharacterization of the transaction as a different corporate act.

## Conclusion

The court held that a Delaware-law merger cashing out preferred shares at a specified merger price does not trigger higher charter payments reserved for redemption or liquidation events, and the complaint failed because it sought to reclassify a valid merger as a redemption without alleging unfairness, appraisal, or statutory noncompliance.


Rauch v. RCA Corp., 861 F.2d 29 (2d Cir. 1988)