478 F.2d 1281 (2nd Cir. 1973), 604, Gerstle v. Gamble-Skogmo, Inc.
|Docket Nº:||604, 605, 72-2259, 72-2345.|
|Citation:||478 F.2d 1281|
|Party Name:||Gustave GERSTLE et al., Plaintiffs-Appellees (Cross-Appellants), v. GAMBLE-SKOGMO, INC., Defendant-Appellant (Cross-Appellee).|
|Case Date:||May 09, 1973|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued Feb. 16, 1973.
[Copyrighted Material Omitted]
Emanuel Becker, Becker Schreiber & Gordon, New York City, for plaintiffs-appellees (cross-appellants).
John F. Arning, New York City (Charles W. Sullivan, and Sullivan & Cromwell, New York City, of counsel), for defendant-appellant (cross-appellee).
Before FRIENDLY, Chief Judge, OAKES, Circuit Judge, and DAVIS, [*] Judge.
FRIENDLY, Chief Judge:
This appeal and cross-appeal in a class action by minority stockholders of General Outdoor Advertising Co. (GOA), attacking its merger into defendant Gamble-Skogmo, Inc. (Skogmo), raise a variety of new and difficult questions with respect to the SEC's Proxy Rules, adopted under § 14(a) of the Securities Exchange Act, and the remedy for their violation. Three comprehensive opinions
by Judge Bartels, 298 F.Supp. 66 (E.D. N.Y.1969), 332 F.Supp. 644 (E.D.N.Y. 1971), and 348 F.Supp. 979 (E.D.N.Y. 1972), along with two elaborate reports by the special master, Arthur H. Schwartz, Esq., on the amount of damages, attest to the problems which the recognition of a private right of action for violation of § 14(a) in J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), have thrust upon the federal courts, and also the assiduity with which the judge and the special master tackled them.
I. The Facts
The facts are stated in such detail in Judge Bartels' first opinion, 298 F.Supp. at 74-89, that we can limit ourselves to those that are vital for understanding the issues on appeal. In order to make the following summary more enlightening, it will be well to state at the outset that the gravamen of plaintiffs' complaint concerning the Proxy Statement sent to GOA's stockholders was that its disclosure that Skogmo expected to realize large profits from the disposition of such of GOA's advertising plants as had not been sold at the date of the merger was inadequate.
GOA had been the largest company in the outdoor advertising business in the United States. It had also acquired over 96% of the stock of Claude Neon Advertising, Limited, the largest outdoor advertising company in Canada, and all the stock of Vendor, S.A., the largest such company in Mexico. Skogmo was a company engaged in wholesale and retail merchandising of durable and soft goods through subsidiaries, franchised dealers, and discount centers in the United States and Canada, and related activities.
Between April, 1961 and March, 1962, Skogmo acquired 50.12% of GOA's common stock. Bertin C. Gamble, chairman of the board of directors and controlling stockholder of Skogmo, was elected to GOA's board in October, 1961. He was followed by Roy N. Gesme, a former consultant to Skogmo, who was to act as liaison between the two companies. Two Skogmo vice presidents were added to the GOA board in April, 1962. In the same month Gamble engaged Donald E. Ryan, who had no previous experience in the outdoor advertising business, as an officer of GOA, primarily in charge of the sale of plants, and had him elected as a member of the board and executive vice president of GOA; the district court found, 298 F.Supp. at 75, that "Ryan was indisputably Skogmo's man at General and was expected to evaluate General's prospects and make recommendations to Skogmo for the future." There were seven other directors. Four, including Burr L. Robbins, the president of GOA, had been associated with GOA before Skogmo's acquisition of control; three were outsiders. Despite the fact that only five of the twelve directors were Skogmo men, Skogmo does not dispute that it had effective control of GOA.
Beginning in 1961 the outdoor advertising business began to encounter serious difficulties. Disappointing reports, indicating that income from advertising plants had fallen off substantially during 1961 and that the expected rate of return in the business was declining, were made to Gesme by the management in the early months of 1962. Upon assuming his duties in May 1962, Ryan, after an intensive study, reported to Gamble that GOA's advertising plants could not be operated profitably and should be sold. A strong impulse in that direction had been furnished by the sale, in January 1962, of GOA's St. Louis plant to a competitor at a price described as "fantastic". 1 After this sale, Gesme had prepared a detailed report on the property and earnings of each of GOA's plants, referred to as the "Green Book", which listed sales prices for the plants, apparently calculated on
the basis of the St. Louis sale, that were generally well in excess of their book values.
In July 1962, Gamble publicly announced GOA's intention to sell its "less profitable" and "competing plants," and expounded at a meeting of GOA executives his policy of "corporate mobility" and diversification, to be accomplished by selling the less profitable plants and investing the proceeds in new projects. Robbins had at this time prepared a list of what he considered GOA's most profitable plants, and urged that they be retained to form the nucleus of a profitable outdoor advertising operation. Nevertheless, Ryan continued to solicit offers for the sales of all the plants. He made available to prospective purchasers five-year operating statements, supplemented, in September 1962, by eight-year earnings projections for each plant. These indicated that, if 29% of the asking price were paid in cash, the balance could be paid out of eight-year earnings. 2 Through October 1, 1962, GOA had sold 13 of its 36 plants, including two of those on Robbins' list, and had almost fully negotiated several more sales. All this represented somewhat of a victory for Ryan over Robbins.
The sales program was temporarily interrupted in October 1962, when counsel raised a question whether the receipt of the large volume of purchasers' notes and a substantial investment by GOA in the stock of Allegheny Corporation might not have caused GOA to become an investment company within the purview of the Investment Company Act of 1940. Gamble took two important steps designed to avoid this result. First, he and Walter Davies, Skogmo's treasurer, negotiated an agreement with The First National Bank of Chicago and three other banks for the sale of $14,000,000 of the 6% purchasers' notes then held by GOA, at their face value, with the banks to collect the interest, retain 5%, and hold the additional 1% in escrow to be paid to GOA upon full payment of the notes. With the proceeds of the sales of the plants and notes, Gamble then caused GOA to invest $22,459,391 in the purchase of approximately 98% of the stock of Stedman Brothers, Limited, a Canadian corporation operating a chain of small wares stores.
Accordingly, in the latter part of December, Ryan and others announced that plant sales were being resumed and that all plants save that at Minneapolis were available for sale. Many more plants were sold in that month. The result was that by the end of 1962, GOA had sold 23 of its 36 plants, including 7 of the 11 listed by Robbins as the top earners, for a total price of $29,832,260, of which $5,247,506 was in cash and $24,584,754 was in notes. At the same time, preparations were made for future sales. Toward the end of December 1962, the agreement with the banks was revised so that the syndicate would buy up to $55,000,000 of purchasers' notes-a sum sufficient to take care of the sale of all GOA's remaining plants. A memorandum showing an up-to-date valuation of the remaining plants was prepared in late November by William H. Dolan, GOA's controller, on the basis of the prior sales and offers made by Curtis L. Carlson for eleven plants sold in December.
In December, 1962, the SEC instituted an investigation to determine whether Skogmo was an investment company. General's officers were subpoenaed, and extensive hearings were held in January. Apparently this led to a slowing up of the sales program. The sale of the Kansas City plant, which had been fully negotiated in October 1962, was closed in January 1963, but in the same month Ryan wrote prospective purchasers that all sales were being suspended. This did not mean, however, that GOA had altered its objective. On March 5, 1963, Allan Kander, a business broker, made an offer of $4,000,000 for the Philadelphia
and Harrisburg plants on behalf of Wayne Rollins, president of Rollins Broadcasting Company, and advised Ryan that Rollins had authorized him to negotiate, on an all-cash basis, for all the unsold GOA plants except those in the greater New York City area. Ryan rejected the $4,000,000 bid as too low, but indicated a desire for a further meeting after March 21, which was never held. In March, also, Gesme prepared and submitted to Skogmo a report showing the "Green Book Value," "Probable Sales Value," "Cost on General's Books," and "Net Profit after Tax" for each of the unsold plants; the total "Net Profit after Tax" after projected sales of all plants was $19,925,000. Offers were received for small plants at Hartford, Connecticut, and Binghamton, New York, but were not accepted. During this period, John W. Kluge, president of Metromedia, Inc., continually made known to Ryan his company's interest in acquiring the large Chicago plant.
On April 11, 1963, GOA's Board of Directors adopted a resolution included in its quarterly report to stockholders, that for the present "GOA will continue to operate the plants operated by it excepting Oklahoma City where negotiations for sale are now pending." On May 31, 1963, the Oklahoma...
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