Blanchette v. Providence & Worcester Co.

• Decision Date: 17 January 1977
• Docket Number: Civ. A. No. 76-411.
• Citation: 428 F. Supp. 347
• Parties: Robert W. BLANCHETTE et al., Plaintiffs, v. PROVIDENCE AND WORCESTER COMPANY, a Delaware Corporation, et al., Defendants.
• Court: U.S. District Court — District of Delaware

428 F. Supp. 347

Robert W. BLANCHETTE et al., Plaintiffs, v. PROVIDENCE AND WORCESTER COMPANY, a Delaware Corporation, et al., Defendants.

Civ. A. No. 76-411.

United States District Court, D. Delaware.

January 17, 1977.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Bruce M. Stargatt, Jack B. Jacobs and Richard A. Levine, Young, Conaway, Stargatt & Taylor, Wilmington, Del., for plaintiffs; Edwin K. Taylor, Philadelphia, Pa., and Dennis J. Roberts, II, Roberts & Willey, Inc., Providence, R. I., of counsel.

Edmund N. Carpenter, II, Richards, Layton & Finger, Wilmington, Del., for defendants; Peter B. Archie, Peabody, Rivlin, Lambert & Meyers and John L. Richardson, Verner, Liipfert, Bernhard, McPherson & Alexander, Washington, D. C., of counsel.

OPINION

STEEL, Senior District Judge:

The Court has before it a motion of plaintiffs ("Trustees") to preliminarily enjoin the defendants, P & W Industries, Inc. ("Corporation"), Providence and Worcester Company ("Railroad"), together with named individuals who are their officers and directors, from soliciting the tender of Railroad shares in exchange for Corporation shares. The Exchange Offer was embodied in a Prospectus dated November 8, 1976, which Corporation issued to Railroad stockholders. This was accompanied by a letter from Eder, the president of Railroad. In addition the stockholders of Railroad were sent a proxy, with supplemental information relating to it, for use at a stockholders meeting, if one were held, to amend the Certificate of Incorporation of Railroad. These documents must satisfy the disclosure requirements of section 14(e) of the Securities Exchange Act of 1934 ("Act") which under section 14(d) is applicable to the Exchange Offer.

The motion was initially presented orally with supporting and opposing briefs on December 17, 1976. The record included the verified complaint, answer, affidavits, depositions, and documents. During the argument the Court expressed concern whether the tender material adequately disclosed the voting rights which the Railroad shareholders possessed and the effect which an exchange would have upon those rights. At the conclusion of the argument defendants sought and later obtained leave to have Corporation send to the Railroad stockholders a letter to supplement the Prospectus. Defendants invited plaintiffs to send any informational communication to the Railroad stockholders which they wished but plaintiffs have not done so. The supplemental letter of Corporation was mailed on December 24, 1976.¹ It made certain statements on the subject of the voting rights of the Railroad stockholders and the effect which the exchange would have upon them. In addition it called attention of the Railroad stockholders to the interest which the directors of Corporation had in recommending the exchange in order that the stockholders might evaluate that interest in considering the recommendation. The supplemental letter likewise called the stockholders' attention to certain alleged deficiencies (denied by defendants) which plaintiffs claimed existed in the Prospectus and stated that shares of Railroad which stockholders had previously tendered could be withdrawn by communications received prior to January 24, 1977, the earliest time that the Exchange Offer could be declared effective. As of January 5, 1977, of the 35,000 shares outstanding, 18,702 shares had been tendered and none had been withdrawn.

Because of the mailing of the supplemental letter a further hearing was held on January 6, 1977. The pending motion is to be decided on the "total mix" of the Prospectus, the materials which accompanied it, and the supplemental letter of December 24, 1976. After having considered all of them, the Court has concluded that a preliminary injunction should issue and makes the following findings of fact and conclusions of law:

Plaintiffs are trustees of the property of Penn Central Transportation Company ("PCTC"), a debtor in reorganization in the United States District Court for the Eastern District of Pennsylvania pursuant to section 77 of the Bankruptcy Act, 11 U.S.C. § 205. On December 31, 1968, in connection with a merger with the New York, New Haven and Hartford Railroad, PCTC acquired 9,551 of the total of 35,000 shares of a railroad incorporated in 1844 by special legislative charter in the states of Massachusetts and Rhode Island ("Old Railroad").

Railroad, the defendant, is a Delaware corporation with its principal place of business in East Providence, Rhode Island. It is the corporate successor of Old Railroad. Corporation, the defendant, is a Rhode Island corporation with its principal place of business in East Providence, Rhode Island. The defendants, Robert H. Eder, Raymond D. Finizia, Ernest Malo, Joseph R. DiStefano, Morris E. Laird, William M. Lese, Antonio Asquino, Charles Luna, and Pierre R. Bretey, are, and at the time of the Exchange Offer were, officers and directors of both Railroad and Corporation.

Jurisdiction exists under section 27 of the Act.

Railroad is a publicly held corporation which operates a railroad in Rhode Island, central Massachusetts and eastern Connecticut. It presently has issued and outstanding 35,000 shares of $100 per value common stock. These securities (which constitute the only class of Railroad's securities) are registered with the Securities and Exchange Commission ("Commission") pursuant to 15 U.S.C. § 78l, are traded over the counter, and are held by approximately 600 shareholders located across the United States. Railroad's largest single shareholder is plaintiffs, whose ownership of 9,551 shares as trustees of PCTC gives them approximately 28 percent of Railroad's common stock.

Since 1844, the Charter of Old Railroad contained a provision for "scale voting".² Rather than providing that each share should have one vote, the Charter allocated voting rights as follows: one vote for each share held up to 50 shares, and one vote for each additional 20 shares held in excess of 50 shares, with the limitation that no shareholder could vote more than one-fourth of the whole number of Railroad's issued and outstanding shares except as a proxy for other shareholders.

The defendant Railroad was created under Delaware law for the purpose of merging with Old Railroad. The merger took place in 1969 and Railroad is the surviving corporation. Article Ninth of its Certificate of Incorporation contained scale voting provisions identical with those of Old Railroad as well as for a staggered board of directors.

On July 6, 1972, Railroad's management convened a special stockholders' meeting to amend Article Ninth of its charter so as to raise the number of authorized shares from 70,000 to 1,400,000. Under the proposed amendment, the scale voting would be retained with a shareholder's first 1,000 shares being fully votable, with 20 votes for each 400 shares above 1,000, subject to the provision that no shareholder would be entitled to vote upon more than one-fourth part of the whole number of shares issued and outstanding, except as a proxy. The voting rights were proportionately the same as those of Old Railroad. Plaintiffs voted against the proposed amendment.

Before the amendment became effective³ plaintiffs filed an action on October 10, 1972, against Railroad in the Court of Chancery of Delaware seeking (i) an order declaring that Article Ninth of Railroad's charter violated the General Corporation Law of Delaware, and that each shareholder who owned stock was lawfully entitled to one vote per share without qualification, and (ii) an order enjoining the filing of the proposed amendment to the Railroad's charter.

On July 30, 1976, the Delaware Court of Chancery (The Honorable William T. Quillen) filed an opinion and order which (1) held to be void ab initio the scale voting provisions of Article Ninth, (2) permanently enjoined the filing of the amendment, and (3) ordered that henceforth the voting of Railroad shares would be on the basis of one share one vote. Baker v. Providence & Worcester Co., Del.Ch., 364 A.2d 838 (1976).

On August 17, 1976, Railroad appealed to the Supreme Court of Delaware from the July 30, 1976, opinion and order of the Court of Chancery. No stay of the Chancery order was applied for or entered. Railroad's appeal is still pending.

Aware that under the July 30, 1976, decision the plaintiffs had 28 percent of the voting rights of Railroad, Eder, the president of Railroad and Corporation, promptly sought to eliminate those rights. Almost immediately the directors decided to proceed with the Exchange Offer which is the subject of this action. The vehicle which the directors selected to make the offer was Corporation. It had been formed by Railroad under the name of Eastern Securities Inc. in 1969, with a special legislatively enacted Rhode Island charter which contained provisions for scale voting. It has been a wholly-owned inactive subsidiary of Railroad with no assets other than $3,500 of capitalized organizational expense. Its officers and directors were and are identical with those of Railroad. As a step preliminary to making the Exchange Offer the charter of Eastern Securities Inc. was amended to increase its capitalization from 35,000 to 700,000 authorized shares and its name was changed to that of the defendant, P & W Industries, Inc. ("Corporation").⁴ The shares of Corporation were then registered under the Securities Act of 1933.

The exchange which Corporation is offering to stockholders of Railroad is 20 shares of stock of Corporation for each one share of Railroad. If 51.1 percent of the stock of Railroad were tendered Corporation would be obligated to accept them, but it may in its discretion accept shares of less than 51.1 percent. If tenders are accepted Corporation will own stock of Railroad with each share having one vote. The stockholders of Railroad who exchange their shares will receive shares of Corporation having scale voting. The effect of the...