Levner v. Prince Alwaleed, 1534

• Citation: 61 F.3d 8
• Decision Date: 26 July 1995
• Docket Number: D,No. 1534,1534
• Parties: Fed. Sec. L. Rep. P 98,833 Lawrence H. LEVNER, Plaintiff-Appellant, v. PRINCE ALWALEED Bin Talal Bin Abdulaziz Al Saud, and Citicorp, Defendants-Appellees. ocket 94-9134.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 8

61 F.3d 8

Fed. Sec. L. Rep. P 98,833

Lawrence H. LEVNER, Plaintiff-Appellant, v. PRINCE ALWALEED Bin Talal Bin Abdulaziz Al Saud, and Citicorp, Defendants-Appellees.

No. 1534, Docket 94-9134.

United States Court of Appeals Second Circuit.

Argued June 21, 1995.

Decided July 26, 1995.

John F. Harnes, New York City (Joan T. Harnes, Silverman, Harnes & Harnes, Levy, Sonet & Siegel, New York City, on the brief), for plaintiff-appellant.

Joseph M. Hassett, Washington, DC (David G. Leitch, Albert W. Turnbull, Hogan & Hartson, on the brief), for defendant-appellee Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud.

Joseph T. McLaughlin, New York City (Margaret A. Helen Macfarlane, Shearman & Sterling, on the brief), for defendant-appellee Citicorp.

Before: NEWMAN, Chief Judge, WALKER, and CALABRESI, Circuit Judges.

JON O. NEWMAN, Chief Judge:

This appeal by Lawrence H. Levner, a shareholder of appellee Citicorp, presents issues relating to the adequacy of demand in a shareholder derivative suit and the propriety of a grant of summary judgment against appellant on his claim for violations of section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78p(b) (1988). The District Court for the Southern District of New York (Loretta A. Preska, Judge) held, with respect to the first issue, that appellant's demand on the board of directors of Citicorp did not meet the requirements of Fed.R.Civ.P. 23.1. As an alternative basis for its holding, the Court stated that appellant had failed to plead with particularity that the board's refusal of his demand was wrongful. On the section 16(b) issue, the Court held that summary judgment was appropriate because appellee Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud ("Alwaleed") was not the beneficial owner of more than 10 percent of Citicorp common stock when he engaged in an alleged short-swing purchase and sale and for that reason did not violate section 16(b). In reaching this conclusion, the Court found it "dispositive as a matter of law that [Alwaleed's preferred] stock was not 'presently convertible' " at the time of the alleged short-swing transaction. Judgment was entered November 3, 1994.

We affirm as to both issues on the carefully reasoned opinion of Judge Preska. See --- F.Supp. ----, 1994 WL 570748 (S.D.N.Y.1994). In so holding, we reject appellant's arguments as to the section 16(b) claim that the District Court incorrectly found that the 5,900 shares of Citicorp non-voting convertible preferred stock that Alwaleed held at the time of the alleged short-swing transaction were not "presently convertible." The District Court based its holding, among other things, on paragraph 8 of the February 21, 1991, purchase agreement entered into between Alwaleed and Citicorp at the time he acquired the preferred shares (the "Purchase Agreement"). In the "Standstill Provision" of the Purchase Agreement, Alwaleed covenanted that he would not acquire beneficial ownership of more than 10 percent of Citicorp common stock during a certain standstill period--essentially five years. See Purchase Agreement p 8(a)(i). The Board of Governors of the Federal Reserve Board ("FRB") explicitly relied on this covenant in determining that Alwaleed's acquisition of preferred stock, which, if fully converted, would have rendered him the owner of more than 10 percent of Citicorp's common stock, ¹ did not require either the FRB's approval or the prior filing of a Notice of Change in Bank Control, see 12 U.S.C. Sec. 1817(j) (1994); 12 C.F.R. Sec. 225.41. See Letter from Jennifer J. Johnson, Associate Secretary of the FRB, to Richard J. M. Poulson, Esq. and Neal L. Petersen, Esq., Hogan & Hartson (Feb. 21, 1991).

Appellant contends, however, that another section of the Purchase Agreement, paragraph 19, gave Alwaleed the right to convert his preferred shares before the end of the standstill period. Paragraph 19 provided that Alwaleed would not convert his preferred stock before the earliest of (1) March 1, 1992, (2) a date 75 days after delivery to Citicorp of notice stating that the aggregate number of existing common shares and of common shares upon conversion held by Alwaleed was less than 10 percent, or (3) the date on which Alwaleed or his affiliates requested regulatory approval from the Board, but no earlier than October 1, 1991. See Purchase Agreement p 19(c). Alwaleed requested regulatory approval on January 7, 1992. Thus, Levner argues, he had the right to convert his shares on that date--the date he requested approval--prior to the occurrence of the alleged short-swing purchase and sale. Appellees argue, and the District Court held, that Alwaleed was legally prevented from converting his preferred stock during the sale and purchase period, because the FRB had not yet approved his request, as required by 12 U.S.C. Sec. 1817(j) and 12 C.F.R. Sec. 225.41(a) ("Regulation Y"). ²

Appellees and the District Court are correct. While paragraph 19 may, in an appropriate case, have permitted Alwaleed to convert some of his preferred shares at the time he requested FRB approval, it did not--indeed, it could not--have allowed him to convert his preferred shares in sufficient quantity, together with the common shares he already held, to render him the beneficial owner of more than 10 percent of Citicorp common stock. That conversion, as the Court found, would have required regulatory approval. See 12 U.S.C. Sec. 1817(j); Regulation Y, 12 C.F.R. Sec. 225.41(a); ³ cf. Citadel Holding Corp. v. Roven, 26 F.3d 960, 967 (9th Cir.1994) (stock options not "presently exercisable" where exercise required federal bank board approval or sale of sufficient stock to avoid 10 percent ceiling for federal reporting requirements).

Levner also argues that the Standstill Provision did not limit Alwaleed's right to convert his preferred stock. That Provision specified that Alwaleed would not:

(i) [i]n any way acquire,...