Werner v. Werner
| Decision Date | 18 December 1967 |
| Parties | (3rd Cir. 2001) ELIZABETH WERNER; JEFFREY R. ACKERMAN; MATTHEW W. WEISS, A MINOR, BY HIS PARENT, ELIZABETH WERNER; TIMOTHY F. BURKE, JR., IN HIS CAPACITIES AS EXECUTOR OF THE ESTATE OF ANNE L. WERNER AND AS TRUSTEE OF TRUSTS CREATED UNDER THE LAST WILL AND TESTAMENT OF ANNE L. WERNER, DECEASED; JEFFREY R. ACKERMAN, IN HIS CAPACITY AS TRUSTEE UNDER AGREEMENT OF TRUST FOR THE BENEFIT OF ELIZABETH WERNER, DATED |
| Court | U.S. Court of Appeals — Third Circuit |
On Appeal From the United States District Court for the Western District of Pennsylvania District Judge: Hon. Robert J. Cindrich (D.C. No.: 98-CV-00503) [Copyrighted Material Omitted]
Richard W. Gladstone, II (Argued), Jill M. Szafranski, Lauren E. Lindh, Eckert Seamans Cherin & Mellott, Llc, Pittsburgh, PA 15219, Counsel for Appellants
James S. Larrimer, Marcus & Shapira, 301 Grant Street One Oxford Centre, 35th Floor Pittsburgh, PA 15219, Robert E. Zimet (Argued), Skadden Arps Slate Meagher & Flom Llp, Four Times Square New York, NY 10036, Mitchell A. Karlan, Gibson, Dunn & Crutcher Llp, 200 Park Avenue New York, NY 10166, James J. Restivo, Reed Smith Shaw & McClay Llp, 435 Sixth Avenue Pittsburgh, PA 15219, Larry K. Elliot, Cohen & Grigsby, P.C., 2900 Cng Tower 625 Liberty Avenue Pittsburgh, PA 15222, Counsel for Appellees
Before: Mansmann, Nygaard and Rosenn, Circuit Judges.
The primary issue in this appeal raises important questions pertaining to the failure to disclose material corporate information as required by federal securities law in a corporation's repurchase of its capital stock. The Werner Company ("the Company"), founded by three brothers, was the largest manufacturer and marketer of ladders and other climbing products in the United States. The plaintiffs are the Anne Werner Estate, the Elizabeth Werner Trust, and other members of the Werner family and their representatives who, at all relevant times, were minority shareholders of the Company. The ten individual defendants ("the Management Defendants") are also members of the Werner family and were officers of the Werner Company at all times relevant to this action.1
In 1996, the Company redeemed shares held by two of the plaintiffs, the Anne Werner Estate and the Elizabeth Werner Trust, by purchase. The plaintiffs claim that, at the time of those redemptions, the Management Defendants fraudulently concealed from them material information which caused them to sell their shares at a price much lower than they would have accepted had they been fully informed.
The plaintiffs filed suit in the United States District Court for the Western District of Pennsylvania, alleging violations of Section 10(b) of the Securities Exchange Act of 1934,2 Rule 10b-5,3 promulgated thereunder, and numerous state laws. The District Court dismissed the twenty count complaint, as amended, in its entirety for failure to state a claim on which relief could be granted. It also dismissed the pendent state law claims for lack of subject matter jurisdiction. The plaintiffs timely appealed only on Counts One and Two. We will affirm in part and vacate in part.
To understand the issues on appeal, some background information on the Werner Company is necessary. In 1945 three brothers, R.D. Werner, Leo Werner, and Herbert Werner went into the ladder business and gave their company the family name. Over the years, the Company became extremely successful. Until November of 1997, when most of the Company was sold to a group of outside investors, all of the Company's stock was owned by members of the Werner family.
In 1992, the Company adopted a "Restricted Stock Plan." The proclaimed purpose of the plan was to give senior management officials an incentive to stay with the Company. It allowed the Board of Directors to award Restricted Class B Shares to certain individuals who were identified in the disclosure documents as "key employees" and "key executives." The disclosure documents did not reveal that only the ten management defendants would benefit from the Plan.
Under the Restricted Stock Plan, the recipients of the shares were not permitted to sell them until the earliest of: 1) seven years from the date of the award; 2) attainment of age 65; 3) death; or 4) permanent disability. The plan also provided the Company with a right of first refusal to acquire any awarded shares an employee wished to sell. Pursuant to that right, the Company could acquire the shares an employee wished to sell for an amount equal to the fair market value of the shares at the time of the sale minus the fair market value of the shares on the date of their award. The Plan was first disclosed to the shareholders in the 1991 Annual Report. A letter accompanying that report also alerted the shareholders to the existence of the plan, explaining its purpose and stating that it was "more restrictive and less generous" than "many such plans." As of that time, no shares had yet been issued under the Plan.
In Count One of their amended complaint, the plaintiffs assert that the existence and details of the Restricted Stock Plan were not adequately disclosed to them. The District Court dismissed this claim, holding that the 1991 annual report and the letter accompanying it, as well as the annual reports for 1992-1994, provided adequate disclosure of the plan.
In 1996 the Anne Werner Estate and the Elizabeth Werner Trust each sought to have the Company redeem some of its shares. Plaintiff Timothy Burke, in his capacity as executor of the Anne Werner Estate, communicated with the Company about the possibility of redeeming some of the estate's stock. By a letter written by Eric Werner on December 27, 1996 ("the Redemption Letter"), the Company agreed to repurchase the stock at approximately $1000 per share, a price determined by Management Planning Inc. ("MPI"), an independent valuation firm, in its most recent appraisal of the Company's stock ("the MPI appraisal"). The MPI appraisal discounted the value of the plaintiffs' minority interests in the Company based on the assumption that the Company would continue to remain in the Werner family. The Redemption Letter disclosed that the Company "was continuing to investigate the possibility that it... or someone else may offer to purchase shares from one or more shareholders... in the future at prices which cannot be determined at this time, but which may be less than or in excess of any price you may offer or accept."
On December 30, 1996, the Anne Werner Estate sold its shares under the conditions set forth in the Redemption Letter. The Elizabeth Werner Trust sold its shares in January 1997 under the same conditions.
On October 8, 1997, the Company signed a Recapitalization Agreement with a group of outside investors known collectively as Investcorp. This agreement, which was approved by 96% of the Werner Company shareholders, amounted to a sale of most of the Company. Under the Agreement, the Company agreed to: 1) redeem approximately 86% of the outstanding stock held by non-management shareholders and 81% of the stock held by management shareholders; 2) reclassify its remaining outstanding stock; and 3) issue additional stock to Investcorp in return for $123 million. In the redemptions following the Recapitalization Agreement, each shareholder received nearly $2500 per share redeemed.
Count One of the plaintiffs' amended complaint alleges that, at the time of the acquisitions from the Anne Werner Estate and the Elizabeth Werner Trust, the Management Defendants were seriously considering a sale of the Company and fraudulently concealed that information from the plaintiffs. They claim that this omission caused them to sell their shares at a price...
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