Harvey Cohen was a minority shareholder in the Boardwalk, a small, publicly held casino on Las Vegas Boulevard (The Strip). The Boardwalk had 1,200 feet of Strip frontage located between the Bellagio and the Monte Carlo, large casinos in which the Mirage Resorts had an interest. Mirage also owned twenty-three acres of land adjacent to the Boardwalk. Mirage wished to acquire the Boardwalk as well as three parcels of land surrounding the Boardwalk. The three parcels were either owned by entities connected with the Boardwalk’s majority shareholders and directors or were subject to options to purchase in favor of the Boardwalk. Mirage sought to negate the Boardwalk’s options and acquire the adjacent properties for purposes of expansion.

Mirage made an offer to acquire the Boardwalk’s shares through a merger with a Mirage subsidiary, Acquisition. Prior to or contemporaneous with the merger, Mirage acquired the surrounding parcels. On May 27, 1998, the Boardwalk convened a special shareholder meeting to consider the offer. A majority of the shareholders approved the merger, and it was consummated on June 30, 1998. Cohen and other members of the class tendered their shares without challenging the merger’s validity or claiming statutory dissenters’ rights.

On September 28, 1999, a little over a year after the consummation of the merger, Cohen filed a suit for damages, alleging breach of fiduciary duty and/or loyalty by the Boardwalk’s majority shareholders, board of directors, and financial advisors. Cohen asserts Mirage conspired with the Boardwalk’s majority shareholders and directors to purchase the Boardwalk at an artificially low price by offering special transactions to majority shareholders and/or members of the Boardwalk’s board of directors. Cohen claims that Mirage bought land or rights owned or controlled by majority shareholders or directors in properties around or involving the Boardwalk at inflated prices. Cohen contends that these shareholders and directors then agreed to approve or recommend the merger for an amount per share that was less than the fair value of the Boardwalk’s stock. Finally, Cohen asserts that the directors mismanaged the Boardwalk, causing decreased profits, and that they or majority shareholders usurped corporate opportunities.

The district court dismissed the case, finding that all of Cohen’s claims were derivative in nature and that Cohen and other ex-shareholders lacked standing to assert the claims. Cohen then appealed.

DECISION The order is affirmed as to the derivative causes of action; it is reversed as to the allegations of misconduct affecting the validity of the merger.

OPINION Becker, J. This case involves the rights of dissenting shareholders to challenge the validity of corporate mergers, issues of first impression in the State of Nevada. Under Nevada law, a corporate merger must be approved by a majority of the corporation’s shareholders. The existing shareholders then substitute their stock ownership in the old corporation for stock ownership in the new merged corporation. [Citation.] Shareholders who oppose the merger are not forced to become stockholders in the new corporation. Instead, the statutes give such shareholders three choices: (1) accept the terms of the merger and exchange their existing shares for new shares; (2) dissent from the merger, compelling the merged corporation to purchase their shares pursuant to a judicial appraisal proceeding; and/or (3) challenge the validity of the merger based on unlawful or wrongful conduct committed during the merger process. [Citation.] ***

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*** [T]he states and the Model Act *** recognize two circumstances when minority shareholders should be able to challenge the merger process. [Citation.] A merger may be challenged if it is unlawful, that is, procedurally deficient. For example, it may have been approved in a manner inconsistent with the articles of incorporation or there may have been irregularities in the voting process. [Citation.] In addition, minority shareholders may seek to stop a merger if fraud or material misrepresentation affected the shareholder vote on the merger; that is, the shareholders approved the merger based upon materially incorrect information. [Citation.] Under either theory, minority shareholders may bring suit to enjoin or rescind the merger or to recover monetary damages attributable to the loss of their shareholder interest caused by an invalid merger. They may also allege that the merger was accomplished through the wrongful conduct of majority shareholders, directors, or officers of the corporation and attempt to hold those individuals liable for monetary damages under theories of breach of fiduciary duty or loyalty. [Citation.]

Challenges to the validity of a merger based on fraud usually encompass either or both of the following: (1) lack of fair dealing or (2) lack of fair price. [Citation.] Both involve corporate directors’ general duties to make independent, fully informed decisions when recommending a merger and to fully disclose material information to the shareholders before a vote is taken on a proposed merger. [Citation.] ***

Lack of fair dealing involves allegations that the board of directors did not make an independent, informed decision to recommend approval of the merger, [citation] or that the majority shareholders approved the merger at the expense of the minority shareholders. [Citation.] ***

Lack of fair price may involve similar allegations plus claims that the price per share was deliberately undervalued, but it can also include negligent conduct. [Citation.] For example, the directors may have hired incompetent or inexperienced persons to determine if the merger price was fair or to evaluate the fair value of the corporation’s stock. [Citation.]

*** Shareholders who vote in favor of the merger generally have no standing to contest the validity of the merger. [Citations.] *** Misinformed shareholders [, however,] retain their right to challenge the merger regardless of their vote on the merger and a tender of their shares. [Citation.]

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Former shareholders, however, cannot simply seek more money for their stock. They must assert and prove in an equitable action that the merger was improper. [Citation.] If this is proven, then they are entitled to any monetary damages they are able to prove were proximately caused by the improper merger. [Citation.] Moreover, damages are not limited to the surviving corporation. They may also be levied against the individuals whose wrongful conduct led to the approval of the merger or the unfair stock evaluation. [Citation.]

A claim brought by a dissenting shareholder that questions the validity of a merger as a result of wrongful conduct on the part of majority shareholders or directors is properly classified as an individual or direct claim. The shareholder has lost unique personal property—his or her interest in a specific corporation. [Citations.] Therefore, if the complaint alleges damages resulting from an improper merger, it should not be dismissed as a derivative claim. [Citations.] On the other hand, if it seeks damages for wrongful conduct that caused harm to the corporation, it is derivative and should be dismissed. [Citation.] ***

We further conclude that the district court was correct in dismissing all of the derivative claims in the complaint, but erred in not permitting Cohen to amend the complaint to clarify that he was seeking rescission of the merger and/or monetary damages based upon the invalidity of the merger.

INTERPRETATION A shareholder who has a right to obtain payment for her shares does not have the right to attack the validity of the corporate action that gives rise to the right to obtain payment or to have the action set aside or rescinded, except when the corporate action is unlawful or fraudulent with regard to the complaining shareholders or to the corporation.

Did the defendants act unethically? Explain.