## Facts

- After a bankruptcy reorganization, Penn Central Corporation sought to use tax loss carryforwards by acquiring profitable companies.
- Penn Central formed a wholly owned subsidiary, PCC Holdings, Inc., to conduct acquisitions.
- Penn Central and Colt Industries agreed to a transaction in which Colt would merge into Holdings; Colt shareholders would receive a new Second Series Penn Central preference stock.
- Holders of Penn Central First Series Preference Stock alleged they were entitled to (i) a separate class vote on creating/issuing the Second Series preference stock under the articles of incorporation, and (ii) dissenters’ and appraisal rights under Pennsylvania law.
- Plaintiffs also alleged the proxy materials were misleading for not disclosing the asserted voting and appraisal rights.
- The district court, treating the preliminary-injunction proceeding as a hearing on the merits, denied injunctive and declaratory relief.
- During the appeal, Penn Central shareholders voted against the proposed transaction, and the merger was publicly abandoned.

## Issues

1. Whether Penn Central’s articles of incorporation required a separate class vote of First Series Preference shareholders to authorize and issue a new Second Series preference stock for the transaction.
2. Whether First Series Preference shareholders had dissenters’ and appraisal rights under Pennsylvania law where the merger formally involved only Colt and Penn Central’s subsidiary.
3. Whether the proxy solicitation was materially misleading by omitting discussion of the asserted class-vote and appraisal rights.
4. Whether the claims for injunctive and declaratory relief were moot after the shareholder vote rejected the transaction and it was abandoned.

## Decision

- The Third Circuit dismissed the requests for injunctive relief as moot because the merger was voted down and abandoned.
- The court held the request for declaratory relief was justiciable under the “capable of repetition, yet evading review” exception, given Penn Central’s ongoing acquisition program and the short timelines for shareholder votes.
- On the merits, the court affirmed denial of declaratory relief:
  - No separate class-vote right existed under the articles for creation/issuance of the Second Series preference stock.
  - No statutory dissenters’ or appraisal rights existed because Penn Central was not a statutory “party” to the merger, and Pennsylvania law did not extend appraisal rights to the parent’s shareholders under a de facto merger theory in this structure.
  - The proxy-disclosure claim failed because it depended on rights the shareholders did not possess.

## Legal Principles

- Preference shareholders’ voting and protective rights are determined by the corporation’s charter; courts enforce only those rights clearly granted and do not imply additional class-vote protections.
- Under Pennsylvania merger appraisal provisions, dissenters’ rights generally require that the shareholder’s corporation be a statutory “party” to the merger; a parent corporation’s shareholders do not gain appraisal rights merely because a wholly owned subsidiary is the merger party.
- Where state law restricts de facto merger theories, courts will not use functional equivalence to expand statutory appraisal rights beyond the statute’s terms.
- A proxy-disclosure claim premised on nondisclosure of alleged shareholder rights fails when the claimed underlying rights do not exist.
- Challenges to recurring, time-sensitive corporate transactions may remain justiciable for declaratory relief under the “capable of repetition, yet evading review” exception, even if the specific transaction is abandoned.

## Conclusion

The Third Circuit held that Penn Central First Series Preference shareholders were not entitled to a separate class vote or to dissenters’ and appraisal rights in connection with a subsidiary merger transaction, and that the proxy-disclosure challenge failed because it relied on nonexistent rights; injunctive relief became moot after the transaction was rejected, but declaratory relief was decided because similar disputes could recur yet evade review.


Terry v. Penn Cent. Corp., 668 F.2d 188 (3d Cir. 1981)