Gerstle v. Gamble-Skogmo, Inc.

• Decision Date: 07 March 1969
• Docket Number: No. 64-C-1253.,64-C-1253.
• Citation: 298 F. Supp. 66
• Parties: Gustave GERSTLE and Muriel Silverstein, Fannie Davenman, Stanley Nathanson, Irwin Kamin and Harold Berliner, d/b/a Miths & Company, M. Martin Nathanson, Raoul L. Rousseau and Wilma L. Rousseau and I. Stanley Kriegel, Plaintiffs, v. GAMBLE-SKOGMO, INC., Defendant.
• Court: U.S. District Court — Eastern District of New York

298 F. Supp. 66

Gustave GERSTLE and Muriel Silverstein, Fannie Davenman, Stanley Nathanson, Irwin Kamin and Harold Berliner, d/b/a Miths & Company, M. Martin Nathanson, Raoul L. Rousseau and Wilma L. Rousseau and I. Stanley Kriegel, Plaintiffs, v. GAMBLE-SKOGMO, INC., Defendant.

No. 64-C-1253.

United States District Court E. D. New York.

March 7, 1969.

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Emanuel Becker, New York City, for plaintiffs.

Lord, Bissell & Brook, Stephen A. Milwid, David M. Gooder, Charles H. Weiland, R. Michael Stillwagon, Chicago, Ill., Holtzmann, Wise & Shepard, James W. Deer, New York City, for defendant (Edmund H. H. Caddy, New York City, of counsel).

BARTELS, District Judge.

This is a class suit by minority stockholders of former General Outdoor Advertising Co., Inc. (General) against Gamble-Skogmo, Inc. (Skogmo), seeking an accounting and restitution arising out of the merger of General into Skogmo. The claim is predicated upon various grounds including breach of fiduciary obligations by Skogmo as a majority stockholder of General, illegality of the merger and misrepresentations contained in the proxy material.

Plaintiffs and intervening plaintiffs are citizens and residents of the State of New York and were at the time of the merger on October 17, 1963, holders of 6,580 shares of stock of General, one of whom had owned 100 shares since February, 1961. Since the merger, some of the plaintiffs and intervenors have exchanged their shares of stock for Skogmo's stock. General was a New Jersey corporation with its principal place of business in Chicago, Illinois, and Skogmo is a Delaware corporation with its principal place of business in Minneapolis, Minnesota.

Federal jurisdiction is founded upon diversity of citizenship and violation of Section 17(a) of the Securities Act of 1933, as amended (15 U.S.C.A. § 77q), (1933 Act), and violations of Section 10 (b) and 14(a) of the Securities Exchange Act (15 U.S.C.A. §§ 78j and 78n (a)), (1934 Act), and Rules 10b-5 and 14a-9 of the Securities and Exchange Commission.

COMPLAINT

The allegations pertinent to the asserted violations of the fiduciary obligations and of the 1933 and 1934 Acts charge that from February, 1962 until the date of the merger Skogmo and its key officers owned 50.1% of General's stock, controlled the affairs of General, its board of directors, executive committee and officers, and between June, 1962 and October, 1963, caused General to sell a substantial portion of its outdoor advertising properties at a profit resulting in an unnecessary tax of approximately $6,000,000, which could have been avoided had General been liquidated for the benefit of the stockholders; between May, 1962 and October, 1963 Skogmo caused General through a subsidiary, General Outdoor Realty Corp. (GOR) to assume certain financial commitments of Skogmo in order to assist Skogmo to obtain control of other companies which Skogmo intended to own and operate, in violation of General's charter; in February, 1963 Skogmo determined to merge with General and liquidate the remaining General outdoor advertising assets after giving the stockholders of General shares of convertible preferred stock of Skogmo of the par value of $40 per share with a market value of $37 per share, in exchange for stock of General whose assets upon liquidation were worth $63 per share and after recoupment of General's assets diverted by Skogmo for its own purposes, $68 per share; and to accomplish the merger Skogmo caused General's directors to vote in favor of the merger and also to circulate a false and misleading proxy statement, in violation of the 1933 and 1934 Acts and the rules issued thereunder. Plaintiffs assert that the merger was illegal because it did not comply with the New Jersey corporation laws and that the proxy statement was misleading in that, among other things, it failed to disclose (i) the excess worth upon liquidation of the General assets above the value fixed by the merger terms; (ii) the intention of Skogmo to liquidate the General assets at such excess value after the merger pursuant to prior misunderstandings; and (iii) the illegality of the merger.

Aside from the claim of breach of trust on the part of Skogmo in conducting General's affairs for the benefit of Skogmo, the crucial thrust of the complaint is the contention that Skogmo failed in the proxy statement to disclose the true value of General's outdoor advertising plants and its intention to sell those assets immediately after the merger at an expected profit of approximately $15,000,000, thus depriving the General stockholders of an undiluted interest in such capital gains realized on the sale of the General assets within nine months after the merger.

Plaintiffs moved for a summary judgment before Judge Dooling who, while denying the motion, made a limited adjudication of the facts under Rule 56 (d), Fed.Rules Civ.Proc., 28 U.S.C.A., which while deemed to be established without substantial controversy are nevertheless subject to such modification and additions revealed by the testimony at the trial to prevent manifest injustice. Audi Vision Inc. v. RCA Mfg. Co., 136 F.2d 621, 147 A.L.R. 574 (2d Cir. 1943). After hearing the evidence, these findings are adopted by this Court subject to such clarification, embellishment and additions as appear from the following.

I GENERAL BACKGROUND

The background of this controversy has been developed at considerable length through many pages of testimony and innumerable exhibits, the substance of which it is necessary to narrate in order to properly focus and resolve the critical issues. This is singularly true with respect to the issues of Skogmo's intent to sell and liquidate General's properties after the merger. While it is impossible to delve into the human mind, a course or pattern of human conduct may be such that the implication of the existence of a particular state of mind is not only permissible but frequently inescapable. Union Pacific R. Co. v. Chicago and North Western Ry. Co., 226 F.Supp. 400 (N.D.Ill.E.D.1964).

In and before 1961-1963 Skogmo was engaged, directly and indirectly, through subsidiaries and franchised dealers and discount centers in the United States and Canada, in the wholesale and retail merchandising of durable and soft goods including major appliances, automotive equipment, hardware, furniture and floor coverings. It also purchased and financed the retail installment obligations acquired by owned and franchised stores. During the same period of 1961-1963, General was engaged in various aspects of the outdoor advertising business and was the largest company in that industry in the United States. Its principal outdoor advertising activities were the display of advertisers' copy in the form of posters or paint bulletins upon outdoor structures owned by the company and located on sites leased for that purpose or, in some instances, on property owned by the company. In 1957 General acquired over 96% of the capital stock of Claude Neon Advertising, Limited, the largest outdoor advertising company in Canada, and in 1959 the company entered the Mexican market by acquiring 100% of the capital stock of Vendor, S.A., the largest Mexican outdoor advertising company. In the latter half of 1961 General was operating 36 branches, providing outdoor advertising in over 50 principal metropolitan areas in the United States. As an incident to its business, it owned approximately 600 parcels of real estate on which were located its offices, studios, manufacturing facilities and advertising display plants. During 1960 and 1961 General entertained proposals by persons desiring to purchase outdoor advertising plants and particularly from those who offered to purchase plants in major cities where there was direct local poster competition plus resulting low profit margins.

Thereafter, between April 27, 1961 and March, 1962, Skogmo acquired 50.12% of the General stock as follows: (a) 310,958 shares at $40 per share in 1961, by an offer to General stockholders made through Allen & Co.; (b) 150,118 shares at $42 per share in 1962, by a second offer to General stockholders made through Allen & Co.; (c) 139,460 shares between December 8, 1961 and May 29, 1962, in exchange and off-the-market transactions; and (d) 98,000 shares at $42 per share in 1962, from Burr L. Robbins, General's president since 1925 and also at the time of the merger. After the acquisition by Skogmo of control of General, a number of transactions and sales were consummated which it is necessary to relate in order to comprehend the value of the properties, the purpose of the merger and the intent of Skogmo as the surviving corporation.

On October 31, 1961, Bertin C. Gamble, Chairman of the Board of Directors and controlling stockholder of Skogmo, was elected to the Board of Directors of General. On January 25, 1962, Roy N. Gesme, a retired vice-president of a bank and a former consultant to Skogmo, was also elected a director of General and functioned as a liaison man between Skogmo and General. In April, 1962, two vice-presidents of Skogmo, Gus S. Younger and Cyrus Rachie, were also elected members of the General board. While the General board of directors consisted of twelve, four were linked with Skogmo either as a director, officer or consultant. In April, 1962, Bertin C. Gamble personally negotiated a contract in the name of Skogmo and without the knowledge of General to engage one Donald E. Ryan as chief executive officer of General primarily in charge of sales of plants. Ryan had no previous experience in the advertising field, his experience being limited to the field of evaluating loan risks, especially construction loans and real estate mortgages. Thereafter Bertin C. Gamble assigned this contract to General which assumed the same. In the same...