Scattergood v. Perelman

Citation945 F.2d 618
Decision Date24 October 1991
Docket NumberNo. 90-1411,No. 90-1680,90-1680,Nos. 90-1411,90-1411,s. 90-1411
Parties, Fed. Sec. L. Rep. P 96,248, 20 Fed.R.Serv.3d 956 Harold F. SCATTERGOOD, Jr., and Dorvin Rosenberg, individually and on behalf of a class of the public shareholders of Andrews Group, Inc. and as a minority shareholder of Andrews Group, Inc. acting on its behalf, Appellants in, v. Ronald O. PERELMAN, Andrews Group, Inc.; MacAndrews & Forbes Holdings, Inc.; William C. Bevins, Jr., Donald G. Drapkin; Donald A. Engel; Howard Gittis; Steven J. Green; E. Gregory Hookstratten; Linda Godsen Robinson; Bruce Slovin; Michael L. Tarnopol; Walter R. Yetnikoff; and Michael C. Curb Harold F. Scattergood, Jr., and Dorvin Rosenberg, Appellants in
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Tom P. Monteverde (argued), Jean C. Hemphill, Michael E. Scullin, Monteverde, Hemphill, Maschmeyer & Obert, Philadelphia, Pa., for appellants.

Stephen P. Lamb (argued), Paul L. Regan, Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del., Alan J. Davis, Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pa., for appellees.

MacAndrews & Forbes Holdings, Inc., Ronald O. Perelman, Howard Gittis, Donald G. Drapkin, Bruce Slovin, and William C. Bevins, Jr., Stephen E. Jenkins, Ashby, McKelvie & Geddes, Wilmington, Del., for appellee Andrews Group, Inc.

Before STAPLETON, HUTCHINSON and ROSENN, Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge:

This case arises out of a merger between AGI Acquisition Corporation ("AGI") and Andrews Group, Inc. ("Andrews"). Before the merger, MacAndrews and Forbes Holdings, Inc., ("M & F") owned AGI and owned most of the stock of Andrews. Former Andrews shareholders complained that they purchased Andrews stock in the open market in reliance on material misrepresentations by various defendants. They also contended that the "freeze-out" merger was consummated at a price lower than the true value of Andrews' shares by means of pre-merger misrepresentations and a proxy statement containing material misstatements and omissions. The district court dismissed the plaintiffs' federal claims pursuant to Fed.R.Civ.P. 12(b)(6) and denied leave for the plaintiffs to amend their complaint to plead diversity jurisdiction and proceed with their state law claims. We will affirm in part and reverse and remand in part.

I.

Former Andrews shareholders Harold Scattergood and Dorvin Rosenberg brought this action as individuals and as representatives of a class of former shareholders of Andrews. Their complaint named the following parties as defendants: Andrews; certain directors and officers of Andrews; M & F; certain directors and officers of M & F; and Ronald Perelman, the sole shareholder and Chairman of the Board of M & F. The merger between Andrews and AGI took place on June 4, 1990. The surviving corporation, Andrews, became a wholly owned subsidiary of M & F. Because this case was dismissed on a Rule 12(b)(6) motion, we accept as true the facts pleaded in the complaint. Colburn v. Upper Darby Township, 838 F.2d 663, 664-65 (3d Cir.1988).

Plaintiffs' first amended complaint, which was the focus of the proceedings in the district court, contained three counts: Count I alleged that the defendants had violated the federal securities laws "applicable to sales ... and the issuance of proxy materials" (emphasis supplied) and that they had violated their state-imposed fiduciary duty to plaintiffs by approving a merger agreement with a "woefully inadequate" price for the minority shares; Count II alleged derivative claims on behalf of Andrews based on alleged mismanagement of Andrews by some of the defendants; and the final count alleged that the defendants had violated Rule 14a-13 and Rule 14b-1 of the Securities Exchange Commission by failing to timely provide beneficial owners with proxies to vote on the merger. App. at 56-61, 692-697.

Despite the absence of a count asserting a federal securities claim based on fraudulently induced purchases of Andrews stock, the first amended complaint did contain allegations that certain defendants made misleading statements between February 1988 and June 1989 that induced members of the plaintiff class to purchase Andrews stock. These alleged misstatements occurred in a February 1988 proxy statement, a May 1989 magazine article, and a June 14, 1989, press release.

The primary focus of plaintiffs' federal claims concerns a course of conduct that commenced on June 14, 1989, and culminated in the merger of June 4, 1990. According to plaintiffs, the defendants during this period conceived a scheme to defraud by forcing a buy-out of plaintiffs' shares for a consideration far less than the true value of those shares. The scheme involved a series of misleading press releases and public statements designed to depress the market price of Andrews' stock and a misleading proxy statement in connection with a merger in which plaintiffs received debentures for their stock.

On December 12, 1989, the directors of M & F and Andrews executed a merger agreement. The merger was subject to approval by Andrews shareholders at a meeting to be held on June 4, 1990. On May 11, 1990, Andrews issued a notice of the meeting accompanied by a proxy statement containing alleged material misstatements and omissions. At the meeting, the shareholders approved the merger. This was no surprise as approval of the merger required only a simple majority, and M & F beneficially owned approximately 57% of the outstanding shares. On the effective date of the merger, each outstanding share of Andrews common stock (other than those shares owned by persons who had opted for appraisal in accordance with Delaware law) was converted into the right to receive $7.25 principal amount of Andrews 10% Senior Subordinated Debentures due 1999.

The merger generated a series of suits in state and federal courts. The suits in state court alleged, among other things, that the merger was unfair to Andrews shareholders and that Andrews' directors had breached their fiduciary duties. On May 18, 1990, the plaintiffs filed this action in federal court and requested injunctive relief and expedited discovery. The complaint sought to enjoin the defendants from consummating the merger and from freezing out the plaintiff class by tendering them "worthless junk bonds" in exchange for their tradeable Andrews common stock.

The district court denied the plaintiffs' motion for a preliminary injunction. After the plaintiffs filed an amended complaint, the district court granted the defendants' motion to dismiss under Fed.R.Civ.P. 12(b)(6). The plaintiffs filed motions for reconsideration and for leave to file another amended complaint, which were denied.

The plaintiffs appeal from the denial of pendente lite relief, from the dismissal of the complaint, and from the refusal to permit a second amended complaint. We have jurisdiction pursuant to 28 U.S.C. § 1291. We exercise plenary review over a Rule 12(b)(6) dismissal.

We confront a number of issues in this appeal. The first issue is procedural: whether the appeal from the denial of the preliminary injunction is moot. A second group of issues arises from the district court's dismissal of the plaintiffs' federal claims: whether the plaintiffs stated a claim under Securities Exchange Commission Rule 10b-5 for alleged material misstatements made by the defendants between February 1988 and June 1989; whether the plaintiffs stated a claim under Rule 10b-5 or Rule 14a-9 for misleading statements in the defendants' public statements between June 1989 and May 1990 or in the May 11, 1990, proxy statement; and whether the plaintiffs stated a claim under Rule 14b-1 or Rule 14a-13 for failing to deliver proxy materials sufficiently in advance of the June 4, 1990, meeting of shareholders. The next issue is whether the plaintiffs have standing to bring derivative claims against the defendants. The final issue is whether the district court abused its discretion in denying leave to file a second amended complaint.

II.

The appeal from the denied preliminary injunction is moot. The merger has taken place, and this court has held on numerous occasions that when the event sought to be enjoined in a preliminary injunction has occurred, an appeal from the order denying the preliminary injunction is moot. See, e.g., In re Cantwell, 639 F.2d 1050, 1054 (3d Cir.1981).

III.

We turn now to the plaintiffs' arguments supporting their federal claims. We start with the language of the relevant rules. Rule 10b-5, promulgated by the Securities and Exchange Commission under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), provides:

It shall be unlawful for any person, directly or indirectly, ...

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (1990).

Neither § 10(b) nor Rule 10b-5 explicitly provides a private right of action, but the courts have inferred one. In so doing, they have established a series of required elements. To state a claim under Rule 10b-5, the plaintiff must allege that the defendant

(1) with scienter--an intent to deceive, manipulate, or defraud, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194-214, 96 S.Ct. 1375, 1381-91, 47 L.Ed.2d 668 (1976),

(2) made misleading statements or omissions, Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 476-77, 97 S.Ct. 1292, 1302-03, 51 L.Ed.2d 480 (1977); Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 7-8, 105 S.Ct. 2458, 2462, 86 L.Ed.2d 1 (1985),

...

To continue reading

Request your trial
61 cases
  • Ciro, Inc. v. Gold
    • United States
    • U.S. District Court — District of Delaware
    • March 2, 1993
    ...of the security, (5) relied in entering the transaction, and (6) which caused economic loss to the plaintiff." Scattergood v. Perelman, 945 F.2d 618, 622 (3d Cir.1991) (citations omitted); see Shapiro v. UJB Financial Corp., 964 F.2d 272, 280 (3d Cir.1992) cert. denied ___ U.S. ___, 113 S.C......
  • Picard Chemical Inc. Profit Sharing Plan v. Perrigo
    • United States
    • U.S. District Court — Western District of Michigan
    • July 25, 1996
    ...inflated by defendants' materially misleading statements when plaintiffs made their respective purchases. Scattergood v. Perelman, 945 F.2d 618, 624 (3d Cir.1991) (plaintiffs adequately pled loss causation by alleging that "the market price paid by the plaintiffs exceeded the value of the s......
  • Multicultural Radio Broad., Inc. v. Korean Radio Broad., Inc.
    • United States
    • U.S. District Court — District of New Jersey
    • January 31, 2017
    ...or "technical error[s] in jurisdictional pleading." 3 Moore's Federal Practice § 15.14 (2015) (Matthew Bender 3d ed.); Scattergood v. Perelman, 945 F.2d 618 (3d Cir. 1991) ("section 1653 . . . 'permits amendments broadly so as to avoid dismissal of diversity suits on technical grounds'") (q......
  • Newton v. Merrill Lynch, 00-1586
    • United States
    • U.S. Court of Appeals — Third Circuit
    • August 6, 2001
    ...104, 107 (3d Cir. 1992) (injury assumed when security purchased at price inflated by fraudulent misrepresentation); Scattergood v. Perelman, 945 F.2d 618, 624 (3d Cir. 1991) (same). In assessing the question of economic loss, it is important to bear in mind how the facts here differ from th......
  • Request a trial to view additional results

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