Barnett v. Anaconda Company

• Decision Date: 17 February 1965
• Citation: 238 F. Supp. 766
• Parties: Harold BARNETT, Plaintiff, v. ANACONDA COMPANY and Anaconda Wire and Cable Company, Defendants.
• Court: U.S. District Court — Southern District of New York

238 F. Supp. 766

Harold BARNETT, Plaintiff, v. ANACONDA COMPANY and Anaconda Wire and Cable Company, Defendants.

United States District Court S. D. New York.

February 17, 1965.

Louis Kipnis, New York City, for plaintiff.

Chadbourne, Parke, Whiteside & Wolff, New York City, for defendant Anaconda Co., Melvin D. Goodman, Edward C. McLean, Jr., James W. Hagan, New York City, of counsel.

FREDERICK van PELT BRYAN, District Judge:

Plaintiff alleges that he is a minority stockholder (100 shares) of Anaconda Wire and Cable Company (Wire and Cable), a Delaware corporation now dissolved. Prior to dissolution, more than 73% of the stock of Wire and Cable was owned by defendant Anaconda Company (Anaconda). The shares of both companies were listed on the New York Stock Exchange. Plaintiff brings this action against Anaconda in a representative capacity on behalf of himself and all minority stockholders similarly situated and derivatively on behalf of Wire and Cable, naming Wire and Cable as a nominal defendant.

There is no diversity jurisdiction asserted here. The claims asserted by the plaintiff are alleged to arise under the Securities Act of 1933, § 17(a), 15 U.S.C. § 77q(a), and the Securities Exchange Act of 1934, §§ 10(b), 14(a), 15 U.S.C. §§ 78j(b), 78n(a). Jurisdiction is predicated solely on § 22(a) of the 1933 Act, 15 U.S.C. § 77v(a), and § 27 of the 1934 Act, 15 U.S.C. § 78aa.

Defendant Anaconda now moves to dismiss the amended complaint pursuant to Rules 12(b) (1) and 12(b) (6), F.R.Civ. P., for want of subject matter jurisdiction and failure to state a claim upon which relief can be granted. In the alternative, Anaconda seeks to have this court decline jurisdiction on the ground that the action involves the administration and supervision of the affairs of a Delaware corporation, that should be decided by the Delaware courts, or, in any event, to have the action stayed pending determination of a suit of similar import brought by plaintiff in the Delaware Chancery Court. Affidavits have been submitted in support of the alternative branch of the motion.

The questions raised concern the extent to which actions primarily involving minority stockholders' rights under state law may be maintained in the federal courts under the umbrella of the federal Securities Acts. Aspects of these questions have been arising with increasing frequency.

The amended complaint here centers on transactions by which all of the assets of Wire and Cable were conveyed to Wireco, Inc., a newly organized wholly owned Delaware subsidiary of Anaconda, in consideration for 590,773 shares of Anaconda capital stock delivered to Wire and Cable. Wire and Cable was dissolved, and on its liquidation the Anaconda stock was distributed to the Wire and Cable stockholders. Wireco, with its name changed to Anaconda Wire and Cable Co., continues the business formerly conducted by Wire and Cable.

An agreement was entered into between Wire and Cable, Anaconda and Wireco dated October 25, 1963, providing for these transactions subject to the approval of stockholders holding two-thirds of the Wire and Cable shares, as required by Delaware law. Such approval was plainly a foregone conclusion, however, since Anaconda owned more than 73% of the Wire and Cable stock. A notice of stockholders' meeting for December 10, 1963, and a proxy statement were sent out to Wire and Cable stockholders on November 18, 1963. The stockholders' meeting approved the agreement, which was consummated on December 31, 1963. The dissolution and stock distribution provided for then took place.

On November 19, 1963, almost a month before the stockholders' meeting was scheduled to take place, plaintiff commenced this action upon a complaint seeking to enjoin the consummation of the agreement and to have the court appoint an "independent fiscal officer" to "assist Wire and Cable to renegotiate" the terms of the sale of its assets, and to "provide to dissenting stockholders the right to obtain the fair and full value of their shares if new terms are unsatisfactory to them." A motion to dismiss the complaint made by Anaconda on December 6, 1963, was withdrawn when plaintiff requested leave to serve an amended complaint. No further steps in this action were taken by plaintiff until after transactions had been consummated.

On December 6, 1963, plaintiff also instituted a representative and derivative action in the Chancery Court of Delaware against Wire and Cable, certain of its officers and directors and Anaconda, likewise attacking the proposed transaction and seeking preliminary and permanent injunctive relief against its consummation. The allegations of the complaint in that action were similar to those of the amended complaint here, plaintiff claiming that rights of the Wire and Cable minority would be impaired if the transaction was consummated. In addition to injunctive relief the complaint sought damages and an accounting of any profits which might have been derived from the dealings complained of. A motion for a temporary restraining order was denied from the bench by the Delaware Chancellor. Plaintiff's later motion for a preliminary injunction was withdrawn. Apparently no further steps have been taken in the Delaware action, the damage and accounting aspects of which remain pending and undetermined.

On January 27, 1964, the plaintiff filed, in the action in this court, the amended complaint which is the subject of the present motions. It alleges a "plan and scheme" by the officers and directors of Anaconda in concert with interlocking officers and directors of Wire and Cable to acquire the assets of Wire and Cable for an inadequate consideration so as to deprive its minority stockholders of their "statutory rights to obtain the true and full value of their shares."¹ This scheme, it is alleged, was carried out by the agreement which has been described and its consummation.

In implementation of the scheme it is alleged that the proxy statement for the special meeting of Wire and Cable stockholders to approve the transaction, called for December 10, 1963, was false or misleading and omitted material facts. Plaintiff claims that audited balance sheets for relevant final periods of Anaconda and Wire and Cable were omitted from the proxy statement, earnings and book value comparisons were distorted in favor of Anaconda and other facts were distorted or omitted. Among alleged "adverse consequences" of the transactions on the minority are the deprivation of "rights to have their stock appraised" and of a New York Stock Exchange listing for transactions in their shares, the timing of the December 10 meeting so as to deprive them of final, audited year end Wire and Cable figures, disadvantages as Anaconda stockholders, and the forfeiture of a large Wire and Cable earned surplus.

It is affirmatively alleged that at the December 10 meeting Anaconda voted its more than 73% of the Wire and Cable shares for approval of the transaction, although whether and how plaintiff voted is not stated.

On the first and representative claim plaintiff seeks to obtain from Anaconda for the minority stockholders the "true and full dollar value for their shares." On the second and derivative claim plaintiff seeks to recover on behalf of Wire and Cable "unjust enrichment" of Anaconda resulting from the transaction, alleged in the complaint to be some 35 million dollars. He asks an accounting in equity to determine the sums due and also the usual allowance of counsel fees and expenses.

I will assume that if plaintiff is able to sustain the allegations of his amended complaint, he has stated some claim for relief under state law. The question here is whether he has alleged claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 which are cognizable in the federal courts absent diversity.

Though the amended complaint is couched in terms of the two Securities Acts generally, the only sections which plaintiff claims bring the action within the purview of these Acts are § 17(a) of the 1933 Act, and §§ 10(b) and 14(a) of the 1934 Act. Section 14(a) of the 1934 Act and SEC Rule 14a-9 implementing it, proscribe the use of proxy solicitations containing false and misleading statements or omissions of material fact. Section 17(a) of the 1933 Act, § 10(b) of the 1934 Act and SEC Rule 10b-5 promulgated thereunder deal with manipulative schemes and devices and fraud in connection with the purchase and sale of securities.

It is now settled that federal private rights of action may arise in favor of a corporation or its stockholders for violation of § 14(a). J. I. Case v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). Private rights of action have also been recognized for violation of §§ 17(a) and 10(b). See, e. g., Ruckle v. Roto American Corp., 339 F. 2d 24 (2 Cir. 1964); Matheson v. Armbrust, 284 F.2d 670 (9 Cir. 1960), cert. den., 365 U.S. 870, 81 S.Ct. 904, 5 L.Ed. 2d 860 (1961); Hooper v. Mountain States Secs. Corp., 282 F.2d 195 (5 Cir. 1960), cert. den., 365 U.S. 814, 81 S. Ct. 695, 5 L.Ed.2d 693 (1961); Speed v. Transamerica Corp., 235 F.2d 369 (3 Cir. 1956); Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 n. 2 (2 Cir. 1951) (dictum). But this does not mean that the Securities Acts have swallowed the whole body of state statutory and common law covering the internal administration of the affairs of corporations and the fiduciary obligations of those who manage and control them. An allegation that specific sections of the Securities Acts have been violated does not necessarily give rise to a federal private right of action absent some connection between the alleged violation and the injury claimed.

It has become increasingly common for minority shareholders claiming a grievance to sue in the federal courts upon the assumption that all violations of duties or obligations in the field of corporate affairs fall within the purview of the federal Securities Acts....