Nelson v. All American Life & Financial Corp.
| Decision Date | 14 September 1976 |
| Citation | 889 F.2d 141 |
| Parties | Glenn F. NELSON, Sam Scheidler, and James E. Maloney, Suing on Behalf of Themselves, Individually, and (pursuant to Rule 23 of the Federal Rules of Civil Procedure and an Order entered |
| Court | U.S. Court of Appeals — Eighth Circuit |
J. Vernon Patrick, Birmingham, Ala., for appellants.
H. Blair White, Chicago, Ill., for appellees.
Before JOHN R. GIBSON and MAGILL, Circuit Judges, and HEANEY, Senior Circuit Judge.
This is a class action suit brought by minority shareholders resulting from a 1973 merger of General United Group, Inc. (GUG), an insurance company, into All American Life & Casualty Company and All American Life and Financial Corporation (collectively, All American). The plaintiffs objected to the merger, and some refused to cash in their shares at the $3.25 per share offered by All American. In their initial complaint, the plaintiffs alleged that the merger was accomplished in violation of various Iowa statutes and common law, as well as federal securities laws. A previous judgment for the defendants was reversed by this Court. On remand, plaintiffs prevailed and obtained compensatory damages, as well as $650,000 in punitive damages. The district court modified the judgment, entering judgment notwithstanding the verdict against the punitive damages and reducing the interest allowed the plaintiffs. Both sides appeal. We affirm in part and reverse in part.
Wheelabrator-Frye, Inc. (WFI) owned a majority interest in GUG. WFI accepted a purchase offer from All American in December 1971 at $3.07 a share. The agreement required that All American offer to purchase all minority interests in GUG within the next 12 months at $3.07 a share or better. All American decided to complete its purchase with a cash-out merger.
In 1973, a meeting of the stockholders was held to review the proposed merger. There were three classes of stock in the GUG corporation: preferred, Class B common, and common. All American owned 100% of the preferred and common B, but less than 1% of the regular common stock. Iowa law required approval of two-thirds of the stockholders for a merger, without indicating whether the approval of two-thirds of each class was necessary. Iowa Code Sec. 496A.70 (1962). The proxy statements sent to the shareholders indicated that the affirmative vote of shares representing at least two-thirds of the common and Class B common stock were necessary to approve the merger. At the stockholders meeting, the merger proposal carried more than two-thirds of all outstanding stock, but only obtained the consent of those representing 41% of the regular common stock. Taking the position that the merger had been lawfully approved, All American demanded that minority shareholders sell back their stock at a cash-out price of $3.25, fixed after consultation with the banking firm of Dillon and Reed. 1 Some shareholders surrendered their shares and others did not. The defendants set aside the purchase money for the unredeemed shares.
Plaintiffs filed suit alleging federal securities violations and state law claims. The action was certified as a class action, including shareholders who had and had not surrendered their shares. There are approximately 12,000 common stockholders represented. In the first trial, the jury found for the defendants on all claims. Meanwhile, the district court had certified to the Iowa Supreme Court the interpretation of the merger voting law. The Iowa The rejection of plaintiffs' claims under the Securities Exchange Act was affirmed by this Court in Shidler v. All American Life & Financial Corp., 775 F.2d 917 (8th Cir.1985). We reversed the district court, however, on plaintiffs' state law claims. We concluded initially that the purpose of the Iowa voting provision is "to protect the minority shareholders." Id. at 921. Failure to comply is no mere "technical flaw." Id. at 925. Compliance with the voting statutes is thus a condition precedent to a valid merger. Id. As a result, we held that the successor to GUG had no right to effectively cancel the plaintiffs' shares and that the stockholders had a right to bring private causes of action for violation of the voting statutes.
Supreme Court, after the jury verdict, held that Iowa law required separate voting by class. Shidler v. All American Life & Financial Corp., 298 N.W.2d 318 (Iowa 1980). The district court then held a bench trial and determined that the defendants were still not liable under state law because there could be no private action based on the voting statute, a question the Iowa Supreme Court declined to answer. The district court entered judgment for the defendants on all claims.
The Act vests minority shareholders with important rights incident to their stock ownership. The facts of this case show that the limited administrative enforcement scheme is inadequate to enforce the rights necessary to protect these shareholders. A private right of action for damages is necessary to make injured shareholders whole and to discourage future unlawful conduct in freeze-out mergers.
Id. at 924 (citation omitted). In addition, we held that in this case plaintiffs could pursue an action for conversion. Id. at n. 10 (citations omitted). We left open whether an action for breach of contract could be maintained. We remanded this case "for a new trial on the state law claims." Id. at 919.
On remand, the plaintiffs presented evidence that the defendants did not disclose information to the shareholders and to Dillon and Reed regarding recent significant improvements in GUG's financial position that rendered the $3.25 per share an undervaluation. Meanwhile, All American's offer of $3.25 had frozen the market price for the minority shares. Plaintiffs also alleged that at the time the merger was contemplated and before it was approved, U.S.L.I.F.E. had approached GUG and All American, indicating an interest in acquiring the resulting corporation. U.S.L.I.F.E. and the resulting company, in June of 1973, announced a merger with an exchange rate on stock that plaintiffs allege was exactly equal to a ratio that had been discussed prior to the merger. The U.S.L.I.F.E. acquisition was approved by the shareholders of the resulting company and became effective in February of 1974. The plaintiffs also introduced two letters from the Iowa attorney representing GUG to the president of GUG and counsel for All American. The letters expressed concern that the company's proposed voting rules violated Iowa law requiring each class to vote separately. The district court instructed the jury to consider these letters only with respect to punitive damages and that they were irrelevant to the fair value of the stock.
The district court granted summary judgment for the plaintiffs on their conversion claim, directed a...
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