Mendell v. Greenberg

Decision Date07 March 1991
Docket NumberNos. 532,725,D,s. 532
Citation927 F.2d 667
PartiesFed. Sec. L. Rep. P 95,819 Ira L. MENDELL, on behalf of himself and others similarly situated, Plaintiffs-Appellants, Cross-Appellees, v. George J. GREENBERG, Frederick R. Adler, James R. Swartz, Anita Loehmann Stafford, Donald H. Balleisen, Allan S. Gordon, Christopher D. Illick, Cecily C. Selby, Kenneth J. Thornhill, John D. Mack, AEA Investors Inc., LHI Inc., LH Investors, Inc., LH Holdings Inc., Loehmann's Inc., and Drexel Burnham Lambert Incorporated, Defendants-Appellees, Cross-Appellants. ockets 89-7718, 89-7760.
CourtU.S. Court of Appeals — Second Circuit

David C. Birdoff, New York City (Neil G. Sparber, Fulbright Jaworski & Reavis McGrath, New York City, of counsel), filed a brief for defendants George J. Greenberg, Frederick R. Adler, James R. Swartz, Allan S. Gordon, Christopher D. Illick and Cecily C. Selby.

Arnold S. Klein, New York City (Lisa K. Eastwood, Kelly Drye & Warren, New York City, of counsel), on the brief for defendants AEA Investors Inc., LHI Inc., LH Investors Inc., LH Holdings Inc., and Loehmann's Inc.

Robert W. Brundige, Jr., New York City (Hughes Hubbard & Reed, New York City, of counsel), on the brief for defendants Anita Loehmann Stafford and John D. Mack.

Irving Malchman, New York City (Kaufman Malchman Kaufmann & Kirby, New York City, of counsel), filed a brief for plaintiff-appellant Ira L. Mendell.

Before: VAN GRAAFEILAND, CARDAMONE and ALTIMARI, Circuit Judges.

CARDAMONE, Circuit Judge:

Sixty years ago in 1930 Charles Loehmann founded what later became a chain of women's clothing stores offering customers high quality clothing at prices below those of many upscale department stores. When Mr. Loehmann who held the largest block of the company's stock died in 1977, and his widow, Anita T. Loehmann, died three years later, their daughter, Anita Loehmann Stafford, became the fiduciary of the estates. She sought to sell the Loehmann family's holdings. Divestment of the stock came by way of a merger in January 1981 with a subsidiary of defendant AEA Investors, Inc. (AEA).

Plaintiff Ira L. Mendell, a shareholder of Loehmann's Inc. common stock at the time of its merger, thereafter brought an action under Sec. 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 of the Securities and Exchange Commission alleging that shareholder approval of the merger was obtained by means of a materially misleading proxy statement issued on December 9, 1980. Most of the claims of misrepresentation were dismissed by the district court in Mendell v. Greenberg, 612 F.Supp. 1543 (S.D.N.Y.1985) (Mendell I ), for failure to state a claim upon which relief could be granted. Plaintiff appeals the dismissal of one claim in Mendell I and two claims that the district court initially refused to dismiss in Mendell I--but subsequently dismissed in Mendell v. Greenberg, 715 F.Supp. 85 (S.D.N.Y.1989) (Mendell II ).

When a corporation issues a proxy statement it must not contain any false or misleading statements respecting any material fact, or omit stating material facts necessary to make the statements in it not false or misleading. SEC Rule 14a-9(a), 17 C.F.R. Sec. 240.14a-9(a). We deal on this appeal with both mandates. A proxy statement should honestly, openly and candidly state all the material facts, making no concealment of the purposes for the proposals it advocates. Unlike poker where a player must conceal his unexposed cards, the object of a proxy statement is to put all one's cards on the table face-up. In this case only some of the cards were exposed; the others were concealed. Consequently, we affirm the judgment appealed from in part, and reverse and remand in part.

BACKGROUND
A. The Loehmann Family's Decision to Sell Their Stock

Plaintiff first alleges that at the time of the AEA merger the Loehmann family sought a prompt sale of its Loehmann's stock because it needed cash to pay estate taxes. Mendell believed that Anita Loehmann Stafford (Stafford) had a conflict of interest when she gave her support in the proxy statement to the proposed merger at a price of $31.30 a share. Mendell claims Stafford--as a representative and beneficiary of the largest shareholder of Loehmann's and as a company director--had the ability to persuade the other directors and shareholders to approve the transaction. In making this allegation Mendell relied upon the following facts to indicate that family financial pressures rather than what was best for Loehmann's was the paramount purpose in the recommendation of the merger proposal to the shareholders.

It was conceded by defendants that the taxes due upon the estates of Charles and Anita Loehmann exceeded their liquid assets by millions of dollars. To resolve the problem Stafford had two options: have the estate taxes paid over a 15-year period, with only the interest due for the first five years and the principal payable in subsequent ten annual installments, pursuant to I.R.C. Sec. 6166 (1988), or sell off a substantial portion of Loehmann's stock to raise funds.

Prior to the deaths of Charles and Anita Loehmann the family had considered selling its holdings. In the mid-1970s offers from three potential bidders, including AEA, had been considered, and though a sale was never consummated, negotiations had brought it close. In 1977 Anita Loehmann had retained Drexel Burnham, Lambert, Inc. (Drexel) to locate a purchaser because she was dissatisfied with corporate management. Drexel was unable to come Later, Stafford called upon Drexel to find a purchaser, expressing an interest in selling the family holdings alone or in conjunction with a sale of the entire company. Stafford's financial advisers had suggested that she diversify the estates' assets, and that the family's shares would command a higher price were they to be sold as a block. Stafford rather surprisingly stated that the advisers never told her that the stock had to be sold to raise funds for the estate taxes.

up with an offer from the companies it contacted.

B. The Sale to AEA and the Proxy Statement

Stafford's intention to sell the family's holdings was disclosed in a Schedule 13D filing made with the SEC in May 1980. When AEA learned from Drexel that the Loehmann family was interested in selling, AEA entered into negotiations to purchase the entire company. No other offers surfaced. On September 25, 1980 a merger agreement in principle was approved by Loehmann's Board of Directors and the December 9 proxy statement expressing the Board's approval of the merger and recommending it to the stockholders of Loehmann's described its terms.

Mendell's appeal concerns alleged misstatements and omissions in the proxy statement. He alleges that the proxy statement failed to inform the shareholders of the Loehmann family's large estate tax liability, and that Stafford's purpose in recommending the merger which, Mendell charges, offered shareholders a price for their stock well below its true value was to discharge this debt. Mendell asserts that a shareholder could reasonably have inferred from these facts that Loehmann's was being sold because the Loehmann family needed to raise cash rather than because it was in the shareholders' best interests.

Mendell's second contention is somewhat connected to the first one. He states that the Loehmann family expected to realize a substantial savings in the amount of estate taxes due the Internal Revenue Service if it were able to pay the taxes immediately rather than on the deferred basis provided in Sec. 6166 of the Internal Revenue Code. He asserts that had the family elected to pay the estate taxes on a deferred basis it would have obtained only an 8.1 percent blockage discount on the value of its stock, but if the taxes were paid in full immediately, a blockage discount of about 30 percent was available. According to Mendell, the higher discount amounted to a net after-tax savings of $1,135,000 or $2.46 per share of the estate's stock. Such a substantial benefit accruing to the major shareholder of the company--one that did not accrue to any of the smaller shareholders--Mendell believes should have been disclosed in the proxy statement, particularly since Stafford's recommendation to approve the merger may have influenced the decisions of the other shareholders.

Mendell's last two challenges involve post-merger arrangements between AEA and defendant George Greenberg, Loehmann's Chief Executive Officer. The proxy statement expressly stated that "[u]pon consummation of the Merger, Mr. Greenberg will continue as the President, Chief Executive Officer and a Director of the Company." Mendell asserts that certain incentive arrangements given to Greenberg and other remaining managers of the company after the merger were part of a secret "handshake agreement" made between Greenberg and AEA prior to the merger and were not disclosed in the proxy statement. He avers that Greenberg's post-merger purchase of stock in AEA's subsidiary, LH Investors, Inc. (LH Investors), was also arranged prior to the merger and was contrary to an indication in the proxy statement that "[n]either Mr. Greenberg nor any other present director or officer of the Company owns beneficially or will acquire an equity or debt interest in AEA, LHI, Holdings or [LH] Investors."

C. Procedural History

In Mendell I the district court dismissed most of Mendell's claims as legally insufficient. It denied the motion to dismiss those claims relating to the Loehmann family's need to raise cash to pay the estate With respect to the agreements between AEA and Greenberg, the district court agreed that failure to reveal them--assuming they actually existed--might be misleading, and that a jury would need to determine whether such omissions were material. Because Mendell had failed to set forth adequate facts to demonstrate the agreements' existence, the district court...

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