Jordan v. Duff and Phelps, Inc.

Decision Date28 April 1987
Docket Number86-1727,Nos. 86-1611,s. 86-1611
Parties, Fed. Sec. L. Rep. P 93,196 James S. JORDAN, Plaintiff-Appellant, Cross-Appellee, v. DUFF AND PHELPS, INC., Claire V. Hansen, and Francis E. Jeffries, Defendants- Appellees, Cross-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

Thomas P. Ward, Thomas P. Ward, Ltd., Chicago, Ill., for plaintiff-appellant, cross-appellee.

Edward Fitzpatrick, Lord, Bissell & Brook, Chicago, Ill., for defendants-appellees, cross-appellants.

Before CUDAHY, POSNER, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Flamm v. Eberstadt, 814 F.2d 1169 (7th Cir.1987), holds that a corporation need not disclose, to investors trading in the stock market, ongoing negotiations for a merger. A public corporation may keep silent until the firms reach agreement in principle on the price and structure of the deal. See also, e.g., Staffin v. Greenberg, 672 F.2d 1196, 1204-07 (3d Cir.1982); Reiss v. Pan American World Airways, Inc., 711 F.2d 11, 14 (2d Cir.1983). Things are otherwise for closely held corporations. Michaels v. Michaels, 767 F.2d 1185, 1194-97 (7th Cir.1985), holds that a closely held firm must disclose material information to investors from whom it purchases stock, and that a decision to seek another firm with which to merge may be the sort of material information that must be disclosed to the investor selling his shares, even though the firm has not reached agreement in principle on the price and structure of a deal. See also Kohler v. Kohler Co., 319 F.2d 634, 637-38 (7th Cir.1963).

The treatment of public and private corporations is different because of the potential effects of disclosure. Often negotiations must be conducted in secrecy to increase their prospects of success. See Flamm, 814 F.2d at 1175-77. The prospect of disclosure to the public, and therefore to potential rival bidders, may reduce the willingness of some firms to enter negotiations and lead others to cut back on the best price they will offer. Investors are entitled to the benefits of secrecy during the negotiations; a law designed to prevent frauds on investors tolerates silence that yields benefits for investors as a group. Flamm also points out that negotiating firms need to know when they must disclose. Uncertainty may lead to premature disclosures that investors would like to avoid. A close corporation may disclose to an investor without alerting the public at large, however, so that disclosure does not injure investors as a whole. Moreover, a rule that the close corporation (or its managers) must disclose in the course of negotiating to purchase stock supplies a timing rule on which the firm may rely. It need disclose the existence of the decision to sell (and the status of negotiations) only to the person whose stock is to be acquired. The face-to-face negotiations allow the investor to elicit the information he requires, see Michaels, 767 F.2d at 1196, and Hamilton v. Harrington, 807 F.2d 102, 106-07 & n. 5 (7th Cir.1986), while permitting the firm to extract promises of confidentiality that safeguard the negotiations.

This case contains two wrinkles. First, it involves the acquisition of a closely held corporation by a public corporation. Second, the investor in the closely held corporation was an employee, and he was offered shares to cement his loyalty to the firm; yet he quit (and was compelled by a shareholders' agreement to sell his shares) for reasons unrelated to the value of the stock. The parties hotly contest the effects of these facts.

I

The case is here following a grant of summary judgment for the defendants. Judge Hart denied one motion for summary judgment and told the parties to address in their trial briefs the defendants' second motion. Judge Leinenweber, to whom the case was reassigned, then granted this motion shortly before the trial. The materials that were identified in plaintiff's trial brief and the pretrial order, taken with reasonable inferences in the light favorable to him, support the following tale.

Duff and Phelps, Inc., evaluates the risk and worth of firms and their securities. It sells credit ratings, investment research, and financial consulting services to both the firms under scrutiny and potential investors in them. Jordan started work at Duff & Phelps in May 1977 and was viewed as a successful securities analyst. In 1981 the firm offered Jordan the opportunity to buy some stock. By November 1983 Jordan had purchased 188 of the 20,100 shares outstanding. He was making installment payments on another 62 shares. Forty people other than Jordan held stock in Duff & Phelps.

Jordan purchased his stock at its "book value" (the accounting net worth of Duff & Phelps, divided by the number of shares outstanding). Before selling him any stock, Duff & Phelps required Jordan to sign a "Stock Restriction and Purchase Agreement" (the Agreement). This provided in part:

Upon the termination of any employment with the Corporation ... for any reason, including resignation, discharge, death, disability or retirement, the individual whose employment is terminated or his estate shall sell to the Corporation, and the Corporation shall buy, all Shares of the Corporation then owned by such individual or his estate. The price to be paid for such Shares shall be equal to the adjusted book value (as hereinafter defined) of the Shares on the December 31 which coincides with, or immediately precedes, the date of termination of such individual's employment.

Duff & Phelps enforced this restriction with but a single exception. During 1983 the board of directors of Duff & Phelps adopted a resolution--of which Jordan did not learn until 1984--allowing employees fired by the firm to keep their stock for five years. The resolution followed the discharge of Carol Franchik, with whom Claire Hansen, the (married) chairman of the board, had been having an affair. When Franchik threatened suit, the board allowed her to keep her stock.

While Jordan was accumulating stock, Hansen, the chairman of the board, was exploring the possibility of selling the firm. Between May and August 1983 Hansen and Francis Jeffries, another officer of Duff & Phelps, negotiated with Security Pacific Corp., a bank holding company. The negotiators reached agreement on a merger, in which Duff & Phelps would be valued at $50 million, but a higher official within Security Pacific vetoed the deal on August 11, 1983. As of that date, Duff & Phelps had no irons in the fire.

Jordan, however, was conducting a search of his own--for a new job. Jordan's family lived near Chicago, the headquarters of Duff & Phelps, and Jordan's wife did not get along with Jordan's mother. The strain between the two occasionally left his wife in tears. He asked Duff & Phelps about the possibility of a transfer to the firm's only branch office, in Cleveland, but the firm did not need Jordan's services there. Concluding that it was time to choose between his job and his wife, Jordan chose his wife and started looking for employment far away from Chicago. His search took him to Houston, where Underwood Neuhaus & Co., a broker-dealer in securities, offered him a job at a salary ($110,000 per year) substantially greater than his compensation ($67,000) at Duff & Phelps. Jordan took the offer on the spot during an interview in Houston, but Underwood would have allowed Jordan to withdraw this oral acceptance.

On November 16, 1983, Jordan told Hansen that he was going to resign and accept employment with Underwood. Jordan did not ask Hansen about potential mergers; Hansen did not volunteer anything. Jordan delivered a letter of resignation, which Duff & Phelps accepted the same day. By mutual agreement, Jordan worked the rest of the year for Duff & Phelps even though his loyalties had shifted. He did this so that he could receive the book value of the stock as of December 31, 1983--for under the Agreement a departure in November would have meant valuation as of December 31, 1982. Jordan delivered his certificates on December 30, 1983, and the firm mailed him a check for $23,225, the book value (at $123.54 per share) of the 188 shares of stock. Jordan surrendered, as worthless under the circumstances, the right to buy the remaining 62 shares.

Before Jordan cashed the check, however, he was startled by the announcement on January 10, 1984, of a merger between Duff & Phelps and a subsidiary of Security Pacific. Under the terms of the merger Duff & Phelps would be valued at $50 million. If Jordan had been an employee on January 10, had quickly paid for the other 62 shares, and the merger had closed that day, he would have received $452,000 in cash and the opportunity to obtain as much as $194,000 more in "earn out" (a percentage of Duff & Phelps's profits to be paid to the former investors--an arrangement that keeps the employees' interest in the firm keen and reduces the buyer's risk if profits fall short). Jordan refused to cash the check and demanded his stock back; Duff & Phelps told him to get lost. He filed this suit in March 1984, asking for damages measured by the value his stock would have had under the terms of the acquisition.

The public announcement on January 10 explained that the boards of the two firms had reached an agreement in principle on January 6. The definitive agreement was signed on March 23. Because Security Pacific is a bank holding company, the acquisition required the approval of the Board of Governors of the Federal Reserve. The Fed granted approval, but with a condition so onerous that the firms abandoned the transaction. The Fed objected to Security Pacific's acquisition of Duff & Phelps's credit rating business. 71 Fed.Res.Bull. 118 (1985). The agreement was formally cancelled on January 9, 1985. Duff & Phelps quickly asked the district court to dismiss Jordan's suit, on the ground...

To continue reading

Request your trial
133 cases
  • In re Midway Airlines, Inc., Bankruptcy No. 91 B 06449
    • United States
    • United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois
    • 10 d5 Março d5 1995
    ...908 F.2d 1351, 1357 (7th Cir.1990) (regarding equitable subordination of priority claims in bankruptcy); Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 438 (7th Cir.1987) (former shareholder-employee of closely held corporation brought lawsuit against that corporation for fraud), cert. dismis......
  • Coe v. County of Cook
    • United States
    • U.S. Court of Appeals — Seventh Circuit
    • 4 d5 Dezembro d5 1998
    ...alter the judgment in their favor, which does. See, e.g., Byron v. Clay, 867 F.2d 1049, 1050-51 (7th Cir.1989); Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 439 (7th Cir.1987); 15A Wright, Miller & Cooper, supra, § 3904, p. It is high time that we abandoned the rule as a rule of jurisdictio......
  • Dumas v. Auto Club Ins. Ass'n
    • United States
    • Michigan Supreme Court
    • 17 d2 Setembro d2 1991
    ... ... of Employers, Motor Vehicle Mfrs. Ass'n of U.S., Inc., Greater Detroit Chamber of Commerce, and Mich. State Chamber of ... Jordan v. Duff & Phelps, Inc., 815 F.2d 429 (CA 7, 1987) ... ...
  • Crocker v. Piedmont Aviation, Inc.
    • United States
    • U.S. Court of Appeals — District of Columbia Circuit
    • 19 d3 Abril d3 1995
    ...Unless a party requests the alteration of the judgment in its favor, it should not file a notice of appeal. Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 439 (7th Cir.1987). See also 15A Wright, Miller & Cooper Sec. 3904, at 205 ("Cross-appeal procedure complicates briefing schedules and the......
  • Request a trial to view additional results
1 books & journal articles
  • "Fair value" as an avoidable rule of corporate law: minority discounts in conflict transactions.
    • United States
    • University of Pennsylvania Law Review Vol. 147 No. 6, June 1999
    • 1 d2 Junho d2 1999
    ...measurement period based on market prices could be viewed as a violation of Rule 10b-5. Compare Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 436 (7th Cir. 1987) (holding that the failure of a company to disclose its impending merger negotiations, resulting in the buyout of an employee's......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT