Alabama Farm Bureau Mut. Cas. Co., Inc. v. American Fidelity Life Ins. Co., 77-1661
| Citation | 606 F.2d 602 |
| Decision Date | 15 November 1979 |
| Docket Number | No. 77-1661,77-1661 |
| Parties | Fed. Sec. L. Rep. P 97,192 ALABAMA FARM BUREAU MUTUAL CASUALTY COMPANY, INC., etc., Plaintiff-Appellant, v. AMERICAN FIDELITY LIFE INSURANCE COMPANY, etc., et al., Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Christine Reiger Milton, John H. Wilbur, Dudley Allen, Jacksonville, Fla., for plaintiff-appellant.
D. L. Middlebrooks, Pensacola, Fla., Charles N. Brower, Donald T. McNaughton, Alan L. Morrison, Washington, D. C., for Woodbury, Marques, Mauch, Richardson & Mertins.
Bert H. Lane, William H. Clark, Pensacola, Fla., for Hulse, Sikes, Smith & Riera.
Appeal from the United States District Court for the Northern District of Florida.
Before SKELTON *, Senior Judge, HILL and RUBIN, Circuit Judges.
The plaintiffs in this stockholders' derivative action seek to recover for alleged violations of Rules 10b-5, 17 C.F.R. § 240.10b-5 (1976), and 14a-9, 17 C.F.R. § 240.14a-9 (1976) of the Securities and Exchange Commission, and corresponding provisions of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(a), in the course of a stock repurchase program instituted by the defendants in 1974 and 1975. Finding certain facts to be undisputed, the district court granted summary judgment for the defendants on the basis that: (1) Rule 10b-5 was not violated because there was no "deception" of or "injury" to the plaintiffs in connection with the repurchase program; and (2) Rule 14a-9 was not violated because there were no significant misstatements or omissions in the proxy materials. The plaintiffs, who were never allowed to complete discovery in this matter, contest the court's conclusions and also assert that there was a genuine issue of material fact concerning whether the repurchase program was a "manipulative device" to boost the price of the corporation's stock and thereby protect management's control of the corporation. This is an issue that was raised in Alabama Farm's amended complaint but not directly considered by the district court. Despite the lengthy and able consideration of the issues by the trial judge on the motion for summary judgment, we find that there are genuine issues of material fact as to whether the stock repurchase program, as intended and carried out, was a manipulative device that injured the corporation by artificially boosting the price of the shares purchased by the corporation, and regarding whether the shareholders were "deceived" by the nondisclosure of this alleged scheme. It was, therefore, inappropriate, at least at the stage reached in the proceedings, to dispose of these portions of the case by summary judgment. With respect to the other charges, however, summary judgment was proper.
American Fidelity (AMFI), a Florida life insurance company, issued stock to the public in the early 1960's at an average price of $25 per share. The stock, which is traded over the counter, reached a high of $45 per share on January 2, 1973; thereafter, during a general market decline the price fell until it was below $10 per share.
In September, 1973, a committee of AMFI's Board of Directors discussed repurchasing some of the company's stock. In October the committee voted to seek permission from the State of Florida and the SEC to repurchase up to $2,000,000 of its own stock on the open market. 1
Then, beginning in October, 1973, Alabama Farm began to buy AMFI stock. By November, 1974, it had spent $2,530,000, and had acquired over 300,000 shares, approximately 20 percent of the then outstanding stock.
Shortly after Alabama Farm commenced its purchases of AMFI stock, the AMFI Board unanimously approved its committee's decision to seek authorization for a repurchase program. The program was launched with a press release on January 2, 1974, which also stated the Board's intention to carry out the purchases in a manner that would not unduly affect the market for the stock. The repurchase program was also described in AMFI's 1973 annual report, its 1974 mid-year report, and in additional press releases issued during the course of the program. In September, 1974, AMFI issued a press release announcing that, although the company had not completed the initial $2,000,000 stock repurchase program, it had increased the amount authorized for the program to $3,000,000. By February, 1975, AMFI had acquired a total of 314,535 shares at an average price of $8.41 per share.
In December, 1974, Alabama Farm filed this action in United States District Court for the Middle District of Florida charging AMFI and five of its directors with various violations of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a Et seq.
On March 24, 1975, the directors of AMFI mailed proxy materials to the company's stockholders in anticipation of the annual meeting to be held on April 22, 1975, at which the shareholders were to vote on resolutions to approve the past stock repurchases and an amendment to AMFI's certificate of incorporation reducing the number of directors from twelve to nine. In addition, the proxy materials sought votes on resolutions to approve amendments to AMFI's by-laws raising to three-quarters of the outstanding common stock the percentage of common stock necessary to remove a director without cause or to constitute a quorum for any meeting at which election or removal of directors was considered. The proxy materials consisted of a notice of the annual meeting, a proxy statement, and AMFI's 1974 Annual Report, and they disclosed the existence and nature of plaintiff's present suit.
Alabama Farm responded by filing a second lawsuit in the United States District Court for the Middle District of Alabama seeking to enjoin the annual meeting on the grounds that the proxy materials contained misstatements and omissions in violation of Rule 14a-9 of the SEC. Thereafter, AMFI mailed to its stockholders a supplemental proxy statement informing them of the allegations contained in the recently filed lawsuit.
Alabama Farm then filed another action, this time in the Circuit Court for Escambia County in Pensacola, Florida. This action charged violations of Florida law governing the right of stockholders to inspect corporate records. After a hearing in April, 1975, the Florida district court denied the plaintiff's request for preliminary relief and entered an order enjoining further prosecution of the other suits and requiring Alabama Farm to file an amended complaint presenting all related claims.
In May, 1975, Alabama Farm filed the amended complaint now before this court. This pleading combined the charges made in all of the previously filed actions and added one additional state law claim. Count I charged that the individual defendants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and rule 10b-5 of the SEC, 17 C.F.R. § 240.10b-5 (1976), by causing AMFI to launch a stock repurchase program resulting in the acquisition of over 300,000 shares of AMFI common stock during 1974. The individual defendants were alleged to have entered into a plan "to perpetuate and maintain their control of American Fidelity by manipulating the market in the Shares and artificially inflating the market price of the Shares by causing American Fidelity to repurchase Shares in order to discourage other shareholders or nonshareholders from purchasing Shares or attempting to gain control of American Fidelity through the purchase of Shares." The complaint also alleged that these defendants deceived the shareholders in numerous ways in executing this scheme, and sought $3,423,078 in damages.
Count II charged that the individual defendants violated § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) (1970), and Rule 14a-9 of the SEC, 17 C.F.R. § 240.14a-9 (1976), by mailing proxy and supplemental proxy statements containing material misstatements and omissions. The plaintiff sought a declaratory judgment declaring all proxies obtained by use of the disputed proxy statements null and void and declaring the stockholders meeting of April 22, 1975, at which these proxies were voted, unlawful and all acts and resolutions of that meeting null and void; plaintiff also requested an order directing that a new stockholders' meeting be held and providing for the solicitation of new proxies. Counts III and IV asserted pendent state claims.
Alabama Farm made a number of attempts to exercise its discovery rights, but they were largely resisted by the defendants, and the district court did not order full discovery. For example, the defendants were served with interrogatories in January, 1975, but only one interrogatory was answered, and that was only after the district court had ordered a response.
In January, 1975, Alabama Farm also sought the production of minute books of AMFI's Executive Committee, Finance Committee and Board of Directors. These books were never produced, even though Alabama Farm offered to examine them at any location specified by the defendants so as not to disrupt AMFI's operations. The district court never heard or ruled on two motions Alabama Farm filed seeking to compel production of these records.
Alabama Farm fared little better with its attempts to obtain depositions. Of thirty-eight depositions scheduled by it, only fifteen were actually taken, with five of those restricted to a motion to transfer. The defendants filed fourteen motions for protective orders with respect to scheduled depositions. Alabama Farm found it necessary to file fifteen motions to compel answers to questions that witnesses refused to answer. The district court never heard or ruled on any of these motions.
On December 22, 1975, the district court held a hearing on the defendants' motion to dismiss, or in the alternative for summary judgment, and on the plaintiff's motion for partial summary judgment on one of ...
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