Knapp v. Kinsey

Decision Date06 December 1957
Docket NumberNo. 13355,13356.,13355
Citation249 F.2d 797
PartiesBurton S. KNAPP et al., Appellants, v. John P. KINSEY et al., Appellees. John P. KINSEY et al., Appellants, v. Burton S. KNAPP et al., Appellees.
CourtU.S. Court of Appeals — Sixth Circuit

George E. Brand and George E. Brand, Jr., Detroit, Mich., for John P. Kinsey and others.

Richard Ford and Arthur W. Sempliner, Detroit, Mich. (Kenneth B. McConnell, Detroit, Mich., on the brief), for Burton S. Knapp and others.

Before SIMONS, Chief Judge, and ALLEN and MILLER, Circuit Judges.

SHACKELFORD MILLER, Jr., Circuit Judge.

This is a Stockholders' suit brought by John P. Kinsey and others against Burton S. Knapp and others, individually, and as directors and stockholders of the Monroe Paper Products Company, hereinafter referred to as the Company, charging breach of fiduciary duties on the part of the directors, seeking their removal as directors of the Company, and demanding an accounting for the loss alleged to have been sustained by the Company by reason of said violations of fiduciary duties.1 The case has been before us previously on certain phases of the litigation. Reference is made to the opinions in those cases for the purpose of showing the history of the litigation and the facts more in detail than will be stated here. Appeal of U. S. Securities and Exchange Commission, 226 F.2d 501; Knapp v. Kinsey, 6 Cir., 232 F.2d 458; Knapp v. Kinsey, 6 Cir., 235 F.2d 129, certiorari denied 352 U.S. 892, 77 S.Ct. 131, 1 L.Ed.2d 86.

Following the death on March 10, 1953, of Alex J. Groesbeck, President of the Company, a director, and the largest single shareholder of the Company, differences arose between some of the stockholders and directors eventually resulting in the present fight for the control of the Company. A Stockholders' Committee was formed by the defendants, which drafted a Voting Trust Agreement, hereinafter referred to as the Trust, which gave to the defendant directors, who were the five Trustees under the Trust, the voting control of the majority of the Company's stock for five years. The present appeal involves the validity of this Trust.

The Trust was dated December 31, 1953. It states as the reasons for its existence that the business interests of the Company required stability and continuity in management in order to properly develop the property and earning capacity of the Company and that the subscribing stockholders believed it to be essential to their interests to protect themselves against the purchase of a majority of the Company shares by parties acting on behalf of other interests. Subscribing stockholders agreed to endorse and deposit their stock certificates forthwith and to receive in exchange therefor Voting Trust Certificates, hereinafter referred to as Certificates, thereby investing said Trustees with the legal title to such stock with the exclusive right to vote such shares of stock at every meeting of the stockholders of the Company during the life of the Trust.

The Trust provided that until and including December 30, 1958, the stockholders would not sell their respective company shares although they were at liberty to deal with their Certificates, and that during that period the Trustees would have the exclusive power to sell said shares of stock, provided that no sale could be made by the Trustees save of all the deposited shares in lump and that no sale should be made at a less price than at the rate of $15 for each share so deposited. The Trustees had the sole discretion to determine the advisability or the desirability of such a sale. Upon the expiration of the term of the Trust without a sale of the stock by the Trustees, the stock was to be returned to the holders of the Certificates upon surrender of said Certificates. There was evidence that the market value of the stock at the time was approximately $10.00 or $10.50 a share.

The present action was filed on February 2, 1954, by the plaintiffs, individually, and as stockholders of the Company, seeking, together with other relief hereinabove referred to, to invalidate the Trust. The plaintiffs were stockholders, but not Certificate owners. While the suit was pending, one of the plaintiffs, The Waterbury Corrugated Container Co., hereinafter referred to as the Waterbury Company, purchased through agents Certificates from depositing stockholders representing 11,797½ shares, paying in some instances as high as $17.00 and $19.00 per share. If these shares of stock were withdrawn from the Trust, the Trust would have been left with less than 50 per cent of the total outstanding stock, and if they were added to the plaintiffs' prior holdings, their total holdings in the Company would exceed 50 per cent.

The Waterbury Company tendered these Certificates to the Trustees and demanded the return of the stock which they represented, claiming that it had acquired through the purchase of the Certificates the right to rescind the Trust because the Certificates were not registered with the Securities and Exchange Commission, and were sold in violation of the Securities Act of 1933, 15 U.S. C.A. § 77a et seq., hereinafter referred to as the Act. Section 5(a) (1, 2) of the Act, Section 77e(a) (1, 2), Title 15 U.S.C.A. A similar claim was made with respect to the so-called Michigan Blue Sky Law, Comp.Laws 1948, § 451.101 et seq. Sections 19.741-19.773, M.S.A. Plaintiffs were permitted to file on May 3, 1955, their supplemental complaint bringing this issue into the case.

The defendant Trustees filed an answer to the amended complaint, which denied many of the allegations therein, affirmatively stated some of the factual background of the controversy, which they claimed fully justified the formation of the Trust, and contained several affirmative defenses.

A separate answer and counterclaim was filed by the defendants individually and as directors and officers of the Company, which also denied many of the allegations of the amended complaint and affirmatively alleged facts which they claimed gave a more complete picture of the controversy and fully justified their actions. This answer charged that the primary purpose of the plaintiffs in instituting the action was to gain control of the Company and not to correct the alleged wrongs recited in the complaint; that their action was in itself a combination in restraint of trade in violation of the Sherman Anti-Trust Law, 15 U.S.C.A. §§ 1-7, 15 note and the Clayton Act, 15 U.S.C.A. § 12 et seq. and the Michigan statutes; and that the plaintiffs did not come before the Court with clean hands.

The counterclaim charged that about 1950 a group of individuals, including the plaintiffs, entered into a conspiracy to acquire control of the Company for their own interests to the detriment of the general stockholders, and that throughout the years between 1950 and 1953 this group of conspirators used the assets of the Company for their own purposes and to acquire additional stock for the purpose of eventually gaining control. It charged that the purpose of acquiring control was to make the balance of the stock of small import by reason of which they would be able to purchase it at a depressed price, which was a fraud upon the stockholders.

The counterclaim also charged that a further purpose in gaining control was to loot the treasury of the Company, which in September 1953 contained a million dollars in cash and with such cash repay the loan they had made from the Chase National Bank, the proceeds of which were used to purchase large blocks of stock in the Company.

The counterclaim asked that the Court remove Kinsey as a director of the Company, that it enjoin the plaintiffs from acquiring or purchasing further shares of stock of the Company, and that it require them to forthwith dispose of their interest and stock in the Company in blocks not to exceed 5,000 shares each, and to such persons as would have the approval of the Court.

On June 11, 1957, the plaintiffs moved for a partial summary judgment enjoining the defendant Trustees under the Trust from carrying out said Trust, from voting any of the deposited stock and requiring them to cancel all deposits of stock made under the Trust, recall all Certificates issued thereunder and return all deposited stock to the depositing stockholders. Several different grounds were stated in support of the motion which were separately discussed and ruled upon by the District Judge in his opinion hereinafter referred to. But in view of the District Judge's ruling, we will confine our discussion to the alleged violation of the Securities Act.

The defendants filed the affidavit of two of the five Trustees, which stated that there was no issue of fact as to the text of the Trust or that the Certificates were not registered under the Act nor validated by the Michigan Corporation and Securities Commission, but that other assertions of fact in plaintiffs' motion were denied. With respect to the alleged violations of the Act, the affidavit stated that the invitation to join in the Trust was never extended to the general public; that it was addressed to only a limited group of people (approximately 300 named individuals) who were already stockholders of the Company; that most of them were residents of Monroe, Michigan, or its vicinity who were extensively informed regarding the Company's affairs; that more than 80 per cent of all the Company's stockholders, owning approximately 52 per cent of the Company's outstanding stock, had affiliated themselves with the Trust; and that the Trustees were advised by counsel that under the circumstances present the Trust invitees were "a limited class of informed persons able to fend for themselves" within the ruling of S. E. C. v. Ralston Purina Co., 346 U.S. 119, 125, 73 S.Ct. 981, 97 L.Ed. 1494, so that the transaction was not a public offering. The affidavit also stated that the plaintiffs were not original holders of Certificates or Certificate holders...

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