775 F.2d 917 (8th Cir. 1985), 84-2398, Shidler v. All American Life & Financial Corp.

Docket Nº:84-2398, 84-2485.
Citation:775 F.2d 917
Party Name:William F. SHIDLER, et al., Appellant, v. ALL AMERICAN LIFE & FINANCIAL CORP., etc., et al., Appellees.
Case Date:October 09, 1985
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 917

775 F.2d 917 (8th Cir. 1985)

William F. SHIDLER, et al., Appellant,

v.

ALL AMERICAN LIFE & FINANCIAL CORP., etc., et al., Appellees.

Nos. 84-2398, 84-2485.

United States Court of Appeals, Eighth Circuit

October 9, 1985

Submitted May 13, 1985.

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J. Vernon Patrick, Birmingham, Ala., for appellant.

Aaron J. Kramer, Chicago, Ill., for appellees.

Before ROSS, Circuit Judge, HENLEY, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

William F. Shidler and Glen F. Nelson and their wives appeal a final judgment of the district court rejecting their claims against All American Life & Financial Corporation. Appellants' claims arise out of a cash-out merger of shareholders of common stock of the General United Group, Inc. Appellants contend that the merger was accomplished in violation of various Iowa statutes and common law, and federal

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securities laws. They seek money damages for wrongful cancellation and conversion of their common shares. At the heart of the controversy is the question whether under Iowa corporations law consent of two-thirds of the common shares is required to effect a cash-out merger.

We conclude that the district court, following a jury trial of some issues and a bench trial of other issues, correctly rejected appellants' claims asserted under section 14(a) of the Securities Exchange Act of 1934 and its appurtenant SEC rule 14a-9. It also properly rejected plaintiffs' claim for breach of contract. We conclude, however, the district court erred in ruling that there is no implied cause of action arising from the Iowa Business Corporation Act and that the Shidlers and Nelsons therefore are barred from recovery on the Iowa state law claims. The district court also erred in rejecting appellants' common law conversion action. We thus affirm in part and reverse in part and remand for a new trial on the state law claims.

In May, 1973, an attempt was made to merge General United Group, Inc. ("GUG"), an Iowa corporation, into All American Delaware Corporation. All American Delaware was a wholly-owned subsidiary of All American Life & Financial Corporation ("All American"), and was created solely for the purposes of this merger. GUG had three classes of stock outstanding, held by each group as follows:

All American Others Total ------------ ------ ----- Preferred 105,000 ---- 105,000 Class B Common 10,623,150 ---- 10,623,150 Common 67,043 2,892,5171 2,959,560 The Class B and preferred shares were convertible to common stock. 2 Under the terms of a merger agreement between GUG and All American Delaware, all holders of GUG stock would be cashed out, their certificates cancelled in exchange for a price determined by the agreement.

Notice of a meeting was given to GUG stockholders. It stated that one of the purposes of the meeting was

[t]o consider and vote upon the approval and adoption of an Agreement of Merger dated as of April 20, 1973, pursuant to which GUG will be merged into All American Delaware Corporation ("The New Corporation"), a wholly-owned subsidiary of All American Life and Casualty Company ("All American"). As a result, GUG will become a wholly-owned subsidiary of All American and the holders of Common Stock of GUG other than All American will receive $3.25 in cash in payment for each outstanding share of Common Stock of GUG, all as more fully set forth in the accompanying Proxy Statement and in the copy of the Agreement of Merger attached as Exhibit A to the Proxy Statement.

The proxy statement sent to the shareholders stated: "The affirmative vote of shares representing at least two-thirds of the Common and Class B Common Stock entitled to vote at the meeting, voting as one class, in person or by proxy, is required to approve the Merger Agreement." This assertion was based on Iowa statutes in effect at the time providing that a plan of merger or consolidation must receive the affirmative vote of the holders of at least two-thirds of the outstanding shares "unless any class of shares of any such corporation is entitled to vote as a class thereon," in which case a two-thirds vote of each class was required. 3

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At the GUG stockholders' meeting called to consider the merger, the stockholders in control required all classes of stock to vote together on the question. The merger proposal carried more than two-thirds of all outstanding stock. However, the proposal did not carry two-thirds of the outstanding common stock. Rather, it garnered the consent of only about 41.8% of the common stock. Virtually all the shareholders, but not the plaintiffs, subsequently surrendered their shares for cash.

The plaintiffs filed suit in April 1975, alleging that the merger was conducted in violation of the federal securities laws as well as state statutory and common law. Six claims were raised: (1) violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j (1984) and SEC rule 10b-5, 17 C.F.R. Sec. 240.106-5 (1984), promulgated thereunder; (2) violation of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78n(a) (1984) and SEC rule 14a-9, 17 C.F.R. Sec. 240.14a-9 (1984), promulgated thereunder; (3) violation of the Iowa Business Corporation Act, Iowa Code Ann. Secs. 496A.1-.144 (West 1962 & Supp.1985); (4) common law breach of fiduciary duty; (5) common law conversion; and (6) violation of state statutes concerning insurance holding companies, Iowa Code Ann. Secs. 521A.1-.13 (West Supp.1985).

Before trial, the district court certified to the Iowa Supreme Court the question whether under Iowa law section 496A.70 permitted one-class voting on the merger. A three-week jury trial ensued on all other claims. Defendants' verdicts were rendered on all counts. Thereafter, the Iowa Supreme Court ruled that section 496A.70 did in fact require separate class voting. Shidler v. All American Life & Financial Corp., 298 N.W.2d 318 (Iowa 1980). The district court then held a bench trial to determine whether in light of the state court decision defendants were liable under state law. It concluded that they were not. The district court then certified to the Iowa Supreme Court the question whether the plaintiffs could maintain a private action for damages under section 496A.70. The state court declined to answer the question certified. The district court then entered judgment for the defendants on all claims. This appeal followed.

I.

We first consider whether a violation of the Iowa merger statute will support a private cause of action for damages. We recognize that on questions of state law great weight is to be accorded the decisions of experienced district court judges. Freeman v. Schmidt Real Estate & Ins., Inc., 755 F.2d 135, 137 (8th Cir.1985); Melia v. Ford Motor Corp., 534 F.2d 795, 799 (8th Cir.1976). However, we are not bound by a district court's interpretation of state law, and must reverse when our reading so compels. Kansas State Bank v. Citizens Bank, 737 F.2d 1490, 1496 (en banc) (8th Cir.1984); Luke v. American Family Mut. Ins. Co., 476 F.2d 1015, 1019 (8th Cir.1972), aff'd on rehearing en banc, 476 F.2d 1023, cert. denied,

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414 U.S. 856, 94 S.Ct. 158, 38 L.Ed.2d 105 (1973). We must do so here.

The parties agree that the relevant standard to determine whether a private cause of action should be judicially implied from a statute that does not expressly authorize private suits is set forth in Seeman v. Liberty Mutual Insurance Co., 322 N.W.2d 35 (Iowa 1982) (relying on Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975) ). Four factors are analyzed to ascertain whether the legislature intended that a private right of action be implied. We will address each factor in turn.

A.

Are the plaintiffs members of the class for whose special benefit the statute was enacted? The district court concluded that plaintiffs are members of the class for whose special benefit the statute was enacted. Plaintiffs are minority shareholders. We can determine whether a special benefit to minority shareholders is contemplated by the statute by examining the effect of the procedures the statute creates. It is clear that the merger statute as a whole was enacted for the benefit of the corporation and its controlling shareholders. Its procedures assure that corporate control is not lightly passed. However, the two-thirds and class voting requirements undoubtedly were implemented to protect the minority shareholders. The class voting requirement has the effect of granting to any single class of shareholders, often constituting less than the majority of all the shareholders, the power to block a merger. See Cosson, Iowa Business Corporations Act, 28A Iowa Code Ann. 1, 33 nn. 136-39 (1962) (among the provisions tending to protect minority shareholders from majority shareholders is class voting). Similarly, it is abundantly clear that a two-thirds voting requirement increases the influence of minority shareholders, enabling them to protect their interests against those of the majority shareholders. We therefore conclude, as did the district court, that plaintiffs, minority shareholders denied their right to have their shares voted as a class, are members of the class of persons for whose special benefit section 496A.70 was enacted.

B.

Is a private cause of action consistent with the underlying purpose of the Iowa Business Corporation Act? The district court opined that the Act "is more procedurally oriented than it is remedially oriented. * * * The Act defines the relationships between shareholders, directors and management with considerable precision but does not create any civil causes of action explicitly." 4 Thus, the...

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