563 F.2d 35 (2nd Cir. 1977), 1278, Cole v. Schenley Industries, Inc.
|Docket Nº:||1278, 1279, 1280, Dockets 77-7125, 77-7126 and 77-7139.|
|Citation:||563 F.2d 35|
|Party Name:||Dorothy L. COLE, Lois H. Zisook, Harry W. Voege, and Anna May Tunmore, as Trustees, Samuel Greenfield Fund, Inc. and Harold Stiller and Mildred Stiller, as joint tenants, Plaintiffs, Dorothy L. Cole, Harry W. Voege, and Anna May Tunmore, as Trustees, and Harold Stiller and Mildred Stiller, as joint tenants, Plaintiffs-Appellants, v. SCHENLEY INDUST|
|Case Date:||September 09, 1977|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued June 13, 1977.
As Modified on Rehearing Oct. 25, 1977.
[Copyrighted Material Omitted]
Herman Odell, New York City (Victor Brudney and John F. Zulack, New York City, of counsel), for plaintiff-appellant Cole.
Charles Trynin, New York City, for plaintiffs-appellants Voege and Tunmore.
Leon Silverman, New York City (Fried, Frank, Harris, Shriver & Jacobson, New York City, Simpson, Thacher & Bartlett, Rubin, Baum, Levin, Constant & Friedman, Milton B. Seasonwein, New York City, of counsel), for defendants-appellees.
Before SMITH and OAKES, Circuit Judges, and CARTER, [*] District Judge.
J. JOSEPH SMITH, Circuit Judge:
This is an appeal from a final judgment entered in the United States District Court for the Southern District of New York, Richard Owen, Judge, dismissing a consolidated complaint challenging the merger of Schenley Industries, Inc. ("Schenley"), a subsidiary of Glen Alden Corporation ("Glen Alden"), with a wholly-owned subsidiary of Glen Alden. Appellants appeal from Judge Owen's decision after a non-jury trial on the issue of liability, dismissing the federal securities claim and a third party beneficiary claim on the merits, and from his refusal to assume pendent jurisdiction over state claims alleging breach of fiduciary duty by the controlling shareholders and unfairness of the merger terms. They also raise a state statutory claim and a federal constitutional claim not explicitly addressed in the district court opinion. We remand for further consideration in light of a recent state court decision.
The pertinent facts leading to the instant action are as follows. In March 1968, during a contest for control of Schenley, Glen Alden purchased 18 percent of Schenley's common stock at $53.33 1/3 per share from Lewis S. Rosenstiel, founder and chairman of the board of Schenley. The agreement of purchase and sale with Rosenstiel recited that it was the intention of the parties that the remaining minority holders of Schenley common stock were to be afforded an opportunity to sell their shares to Glen Alden at a price comparable to or more favorable than the price paid to Rosenstiel. In August 1968 Glen Alden made a formal offer to purchase the common stock of the remaining shareholders of Schenley for
$58.66 2/3 per share. Through open market purchases followed by this tender offer Glen Alden acquired more than 86 percent of Schenley's common stock.
In February 1971 Glen Alden announced a proposed merger with Schenley. Under the terms of the merger, Glen Alden offered Schenley's minority common shareholders a cash payment of $5 and a 7 1/2 percent Glen Alden debenture in the principal amount of $30 due in 1985 in exchange for each share. Schenley's preferred shareholders were offered a cash payment of $4.50 and a 7 1/2 percent Glen Alden debenture in the principal amount of $27 due in 1985 in exchange for each share. It is undisputed that the fair market value of this offer was $29 per share of common stock and $26.10 per share of preferred stock. On June 17, 1971 Schenley and Glen Alden Subsidiary Corporation, a wholly-owned subsidiary of Glen Alden, merged, with Schenley surviving as the resulting corporation.
Four separate suits were originally filed challenging the merger. 1 In each, Schenley, its board of directors, and Glen Alden were the principal defendants. By order of Judge Motley, the four actions were consolidated pursuant to Rule 42(a), Fed.R.Civ.P., on August 10, 1971. This appeal follows a non-jury trial on the issue of liability based on the consolidated complaint.
The amended consolidated complaint consisted of five counts, only three of which are at issue on appeal. Count I alleged violations of § 10(b) of the Securities Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j, and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, and of § 14(a) of the 1934 Act and Regulation 14a-9 thereunder, 15 U.S.C. § 78n(a). Count II alleged that the merger was invalid under the laws of Delaware because it involved a breach of fiduciary duty by Glen Alden and the Schenley directors toward the minority shareholders. Count III alleged violations of § 22 of the Securities Act of 1933, 15 U.S.C. § 77a et seq. and §§ 27 and 10(b) of the 1934 Act arising from the breach of a third-party beneficiary contract to which common stock owners of Schenley were alleged to be parties. Early in the course of trial Judge Owen ruled that he would not permit introduction of evidence which related solely to the state claim raised in Count II. He declined to exercise pendent jurisdiction as to this count.
We first address the jurisdictional basis for this action. Consolidation under Rule 42(a), Fed.R.Civ.P., is a procedural device designed to promote judicial economy, and consolidation cannot effect a merger of the actions or the defenses of the separate parties. It does not change the rights of the parties in the separate suits. Johnson v. Manhattan Ry., 289 U.S. 479, 496-97, 53 S.Ct. 721, 77 L.Ed. 1331 (1933); Garber v. Randell, 477 F.2d 711 (2d Cir. 1973). Rights are unaffected even though a consolidated complaint is filed. Katz v. Realty Equities Corp. of New York, 521 F.2d 1354 (2d Cir. 1975). We must therefore consider the jurisdictional basis of each complaint separately.
Appellant Dorothy Cole's complaint before us on appeal includes Counts I and II only. Jurisdiction on Count I rests on the 1934 Act, 15 U.S.C. § 78aa. Jurisdiction on Count II is based on diversity, 28 U.S.C. § 1332. Cole is a citizen of Florida, while the defendant corporations are citizens of Delaware and New York. Cole has alleged more than $10,000 in controversy, and this allegation is uncontested.
Harold and Mildred Stiller are citizens of New York. Jurisdiction on Count I rests on
the 1934 Act, as it does for Cole. Since there is no diversity between the Stillers and the appellees, the sole basis for jurisdiction on Count II as to the Stillers is discretionary exercise of pendent jurisdiction. The Stillers are not party to Count III of the complaint.
Voege and Tunmore invoke jurisdiction under 15 U.S.C. §§ 77v and 78aa. Voege is a citizen of New York. Tunmore is a citizen of Pennsylvania. Pendent jurisdiction is invoked as to their state claims.
We consider each count separately.
A lengthy proxy statement, 2 dated May 21, 1971, was sent to the shareholders in connection with a shareholders' meeting scheduled for June 17, 1971. Appellants claim that this proxy statement violated § 14(a) 3 of the 1934 Act and SEC Rule 14a-9, 4 in three principal ways: (1) the proxy statement did not accurately show how much cash Schenley had, (2) the proxy statement did not adequately reveal how much cash would be transferred from Schenley to Glen Alden, and (3) the proxy statement did not adequately reveal the value of a share of Schenley stock.
In May 1971 Glen Alden owned about 84 percent of the voting power of the outstanding capital stock of Schenley, 5 and the proxy statement said that Glen Alden intended to vote its shares in favor of the merger. 6 The threshold question is whether "the proxy solicitation itself . . . was an essential link in the accomplishment of the transaction." Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385, 90 S.Ct. 616, 622, 24 L.Ed.2d 593 (1970).
A Schenley minority shareholder had four options in May 1971: (1) accept Glen Alden's offer, (2) seek appraisal rights under Delaware law, (3) threaten to seek appraisal rights in an attempt to force Glen Alden to improve its offer, and (4) seek to enjoin the merger. The minority shareholders owned about 1.1 million shares of common stock and about 2.5 million shares of preferred stock of Schenley; if all, or a substantial portion, had exercised, or threatened to exercise, their appraisal rights, Schenley would have had to set aside a considerable sum of cash and the merger
might not have been consummated. 7 It was also possible that if additional information could be extracted the minority shareholders would have been able to enjoin the merger under Delaware law. 8 Popkin v. Bishop, 464 F.2d 714, 720 (2d Cir. 1972). We need not decide whether such a suit would have been successful under Delaware law. In view of these three alternatives to accepting the Glen Alden offer, we hold that the proxy solicitation was an essential part of the merger. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 381-84 (2d Cir. 1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975).
We turn now to the difficult question of whether there was a material misrepresentation in the proxy statement dealing with this merger. The Supreme Court has said that in a § 14 claim the test of materiality depends upon "a showing of a substantial likelihood that, under all the...
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