Popkin v. Bishop

• Decision Date: 29 June 1972
• Docket Number: Dockets 71-2027,71-2133.,480,No. 479,479
• Parties: Irwin POPKIN, Plaintiff-Appellant, v. Warner B. BISHOP et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

464 F.2d 714 (1972)

Irwin POPKIN, Plaintiff-Appellant, v. Warner B. BISHOP et al., Defendants-Appellees.

Nos. 479, 480, Dockets 71-2027, 71-2133.

United States Court of Appeals, Second Circuit.

Argued January 18, 1972.

Decided June 29, 1972.

Martin A. Coleman, New York City (Rubin Wachtel Baum & Levin, Stephen A. Marshall and Carl Robert Aron, on brief), for plaintiff-appellant.

Robert B. von Mehren, New York City (Debevoise, Plimpton, Lyons & Gates, Eldon V. C. Greenberg, on brief), for defendants-appellees The Equity Corp. and Michael D. Dingman.

Simpson Thacher & Bartlett, James G. Greilsheimer and Ronald A. Zanoni, New York City, for defendant-appellee Bell Intercontinental Corp. Palmer & Serles, William A. Metz, New York City, for defendant-appellee Frye Industries, Inc.

Hughes Hubbard & Reed, Powell Pierpoint, New York City, for defendant-appellee The Wheelabrator Corp.

Before SMITH, FEINBERG and MULLIGAN, Circuit Judges.

FEINBERG, Circuit Judge:

Irwin Popkin appeals from an order of the United States District Court for the Southern District of New York, Sylvester J. Ryan, J., dismissing his complaint which alleged a violation of Rule 10b-5. Appellant, a shareholder of Bell Intercontinental Corporation (Bell), commenced this derivative action in June 1971 to enjoin the proposed merger of Bell and its two subsidiaries into The Equity Corporation (Equity), the majority shareholder of Bell. Appellant sought injunctive relief on the ground that the exchange ratios in the proposed merger agreement were unfair to the minority shareholders of Bell and its subsidiaries as well as to the companies themselves. Allegedly, by proposing those ratios Equity and various individual officers and directors of Bell breached a variety of fiduciary duties. According to appellant, such breaches entitled him to injunctive relief under Rule 10b-5 despite the complete disclosure of the merger terms. We do not agree, and affirm the dismissal of the complaint.

I

The proposed merger here at issue was consummated on November 4, 1971. Prior to that date, Bell was a holding company which owned 66.1 per cent of the common stock of Frye Industries (Frye) and approximately 81 per cent of the voting stock of The Wheelabrator Corporation (Wheelabrator). All three were Delaware corporations. The common stock of Bell was listed on the New York Stock Exchange, while the common stock of Frye and Wheelabrator were listed on the American Stock Exchange. Equity, also a Delaware corporation with its stock listed on the American Stock Exchange, was a holding company which owned 51.7 per cent of Bell's common stock. Concededly, Equity controlled Bell and through Bell, Wheelabrator and Frye. According to the Joint Proxy Statement issued in August 1971 in connection with the proposed merger: Equity "controls the managements of Bell, Wheelabrator and Frye" and "has sufficient voting power to effect the vote required for adoption of the Merger Agreement. . . ."

Equity was thus in a commanding position to orchestrate the proposed merger. It should be noted, however, that the decision to merge was not made by Equity alone. The merger was required by one of the principal terms of the Stipulation of Settlement filed in an earlier consolidated derivative action, Kaufman v. Jeffords (New York Supreme Court, N.Y. County) (Index No. 01615/1967). That action, brought by shareholders of Equity,¹ was principally concerned with alleged wrongdoing and mismanagement by certain officers and shareholders of Equity. According to the Referee appointed to investigate the proposed settlement, plaintiffs in that action insisted "that there be a simplification of the Equity system corporate structure, including an Equity-Bell merger or some other simplification basis . . .," presumably to avoid the possibility that future misconduct could take place in the comfortable darkness of a corporate labyrinth.²

The crux of the Merger Agreement was the exchange ratios. In March 1971, the investment banking firm of Dillon, Read & Co., Inc. was retained by Bell, Frye and Wheelabrator to evaluate the four companies involved and to recommend ratios for the conversion of common stock of Bell, Frye and Wheelabrator into shares of Equity common stock. In May 1971, Dillon, Read made its recommendations and in that same month the respective boards of the corporations approved the exchange ratios recommended. Those ratios were incorporated into the Merger Agreement, dated August 11, 1971. As already indicated, in June 1971, appellant had commenced this action in the United States District Court for the Southern District of New York, seeking preliminary and permanent injunctive relief against the proposed merger.³ The suit was brought derivatively on behalf of Bell and its shareholders and double-derivatively on behalf of Wheelabrator and Frye and their respective shareholders.

In September 1971, after the Joint Proxy Statement had been sent out but before the shareholders' vote, appellant moved for summary judgment or, in the alternative, for preliminary injunctive relief. Appellees cross-moved for summary judgment. On November 3, 1971, Judge Sylvester J. Ryan denied appellant's motion for a preliminary injunction, although he did temporarily stay consummation of the merger for six days.⁴ The judge further concluded that appellant's motion for summary judgment

must be denied for the complaint does not state a claim under Section 10(b) and Rule 10b-5 upon which relief can be granted, and the merger exchange ratios have been adjudged to be fair and reasonable with respect to the public shareholders of Bell, by a Court of competent jurisdiction.⁵

The second ground of Judge Ryan's decision refers to the state court order, entered in October 1971, approving the settlement in Kaufman v. Jeffords, supra. Apparently because the time to appeal from that order had not expired, Judge Ryan postponed any further rulings. On November 17, 1971, however, after noting that the state court order had become "final," Judge Ryan granted appellees' "motion to dismiss" "for the reasons set forth in my memorandum of November 3, 1971," and ordered that a "judgment of dismissal for lack of jurisdiction" be entered. This appeal followed.

II

The complaint in this action contains five separate counts which in essence allege that the exchange ratios incorporated into the Merger Agreement are "grossly inadequate" to Bell, Wheelabrator, Frye and their respective shareholders—other than Equity. Appellant has argued that "as a matter of simple arithmetic" the exchange ratios are unfair and amount to an attempt by Equity to retain for itself a "grossly disproportionate share" of the three corporations' assets.⁶ According to appellees, the mathematical attack upon those ratios is simplistic, "entirely unrelated to the realities of the merger itself."⁷ The fairness or unfairness of the exchange ratios is a complicated issue, but we do not believe that it must be resolved here. We are willing to assume that appellant is correct and that the exchange ratios are unfair. In addition, we agree that Equity's ability to push through the merger—with or without any other shareholder's vote—cannot by itself defeat a claim for federal injunctive relief. See Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L. Ed.2d 460 (1967); cf. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385 n. 7, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970).⁸ Having said all this however, we still conclude that appellant's action was properly dismissed.

The complaint contains no allegation or hint of any misrepresentation by defendants or of a failure on their part to disclose any material fact in connection with the merger proposal. Moreover, appellant did not contend in the district court that the Joint Proxy Statement issued in connection with the proposal was in any way false or misleading. As already indicated, appellant brought suit well before there ever was a Joint Proxy Statement. More significantly, in the district court, although appellant pointed to one alleged material omission, he was "willing to assume, arguendo, for the purpose of this motion only, that the Proxy Statement made a full and fair disclosure."⁹ Both in the district court and on appeal, appellant has relied heavily—almost exclusively—on the actual contents of the Proxy Statement in his attempt to demonstrate the unfairness of the merger proposal. Thus, the record before us hardly presents a picture of deception or nondisclosure, ordinarily alleged in private actions under Rule 10b-5. See Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968), cert. denied, 395 U.S. 903, 89 S. Ct. 1740, 23 L.Ed.2d 217 (1969).¹⁰ Nonetheless, appellant argues that "Rule 10b-5 is more than a disclosure provision" and that the Rule affords minority shareholders protection against overreaching by majority shareholders and directors "whether the facts remain hidden from the minority or are ultimately revealed in a Proxy Statement."¹¹ On the facts of this case, we do not think that appellant is correct.

Unquestionably this court has recognized that Rule 10b-5 reaches beyond traditional stock transactions and into the board rooms of corporations. See, e. g., Drachman v. Harvey, 453 F.2d 722 (1972) (en banc); SEC v. Fifth Avenue Coach Lines, Inc., 435 F.2d 510 (1970); Schoenbaum v. Firstbrook, 405 F.2d 215 (1968) (en banc), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Vine v. Beneficial Finance Co., 374 F.2d 627, cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967); Ruckle v. Roto American Corp., 339 F.2d 24 (1964). We also recognize that assertions by a defendant that the misconduct complained of "really" amounts to "just" corporate mismanagement will not cut off a plaintiff's federal remedy. Where Rule 10b-5 properly extends, it...