Calvary Holdings, Inc. v. Chandler

• Citation: 948 F.2d 59
• Decision Date: 03 September 1991
• Docket Number: No. 91-1445,91-1445
• Parties: , Fed. Sec. L. Rep. P 96,292 CALVARY HOLDINGS, INC., et al., Plaintiffs, Appellants, v. Burton CHANDLER, Defendant, Appellee. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 59

948 F.2d 59

60 USLW 2310, Fed. Sec. L. Rep. P 96,292

CALVARY HOLDINGS, INC., et al., Plaintiffs, Appellants, v. Burton CHANDLER, Defendant, Appellee.

No. 91-1445.

United States Court of Appeals, First Circuit.

Heard Sept. 3, 1991.

Decided Oct. 30, 1991.

Daniel J. Kelly with whom Robert A. Trevisani and Gadsby & Hannah, Boston, Mass., were on brief for plaintiffs, appellants.

Edward P. Leibensperger with whom David Abelman, Lori J. Shapiro and Nutter, McClennen & Fish, Boston, Mass., were on brief for defendant, appellee.

Before CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, and CYR, Circuit Judge.

BOWNES, Senior Circuit Judge.

Plaintiff-appellants Calvary Holdings, Inc., Calvary Partners, Inc., and Calvary Partners, L.P. appeal from a finding of summary judgment against them. ¹ They had sued defendant-appellee Burton Chandler ("Chandler") alleging failure to file a Schedule 13D as required under section 13(d) of the Securities and Exchange Act as a "beneficial owner" of more than five percent of the outstanding stock of Diceon Electronics, Inc. ("Diceon"). The central question in this action is whether a nominee who may vote only at the direction of third parties must file a Schedule 13D under the Securities and Exchange Act as a "beneficial owner." Holding that section 13(d) does not require that such individuals must file a disclosure form, we affirm the summary judgment ruling of the district court.

I. Background

The undisputed facts are the following. On November 22, 1989, Chandler, a Massachusetts attorney, became the record owner of 12.9 percent of the outstanding shares of Diceon. The shares were transferred to him from the Arizona D.E. Service Corporation which had previously held the stock as nominee for Roland Matthews ("Matthews") and Peter S. Jonas ("Jonas"), two directors of Diceon. As part of the transaction Chandler and each respective director entered into a nominee agreement limiting the rights, powers and obligations of Chandler in regard to the shares. ² At the time Chandler acquired the shares he did not file a Schedule 13D under the Securities and Exchange Act. 15 U.S.C. § 78m(d).

In the fall of 1990, Calvary made a tender offer and entered into a proxy fight in an effort to acquire control of Diceon. At that time Calvary discovered that Chandler had not filed a Schedule 13D. It instituted an action for preliminary injunction in the District Court for the District of Massachusetts. At that point Chandler filed a precautionary Schedule 13D disclaiming beneficial ownership. The district court denied a preliminary injunction and this court affirmed.

Nevertheless, Calvary continued with the suit, seeking an order requiring a complete Schedule 13D from Chandler. After deposing Chandler, Calvary moved to compel answers to questions regarding the purpose of the transactions between Chandler and Jonas and Matthews. Chandler had refused to answer these questions on the grounds of attorney-client privilege.

While the motion to compel was still pending, Chandler moved for summary judgment on the grounds that he was not a beneficial owner of the stock. In opposition, Calvary argued that it needed further discovery including the responses to the questions that were the subject of the motion to compel under Federal Rule of Civil Procedure 37(a). The district court dismissed the action, finding that "Chandler, as a matter of law, does not have the 'benefits of ownership.' " Calvary appeals the dismissal.

II. Discussion

Calvary raises two issues on appeal: (1) whether the district court, as a matter of law, erred in finding that Chandler was not required to file a Schedule 13D because he is not a "beneficial owner" of Diceon stock; and (2) whether the district court prematurely granted defendant summary judgment, denying plaintiffs a continuance to investigate the purpose or purposes behind the nominee transactions.

A. Summary Judgment

Calvary first claims that the district court erroneously granted summary judgment by ruling that individuals who have no actual voting power or ability to dispose of stock held in their name are not required to file a Schedule 13D. It contends that Chandler as a record owner of more than five percent of Diceon's outstanding stock was required under the Securities and Exchange Act to file a Schedule 13D disclosure form.

Our review of summary judgment is plenary. Amsden v. Moran, 904 F.2d 748, 752 (1st Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 713, 112 L.Ed.2d 702 (1991); Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir.1990); Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir.1990). We, like the district court, must view the record in the light most favorable to the non-moving party, indulging all reasonable inferences in that party's favor. Griggs-Ryan, 904 F.2d at 115; Amsden, 904 F.2d at 752. Under Federal Rule of Civil Procedure 56(c) the moving party is entitled to summary judgment if "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law."

Appellants cannot and do not contest that, in light of the uncontradicted evidence, Chandler is a nominee by virtue of the agreements with Jonas and Matthews. In deposition testimony, Chandler stated that he was a nominee and that the nominee agreements signed on transfer of the stock represent the entire agreement between the parties. ³ According to the nominee agreements Chandler may only dispose of or vote the stock in accordance with the directions of Jonas and Matthews.

Calvary's argument is that all nominees, except those covered by a separate limited exception in the SEC regulations, must file a Schedule 13D even if their votes are controlled by third parties. Section 13(a)(1) of the Securities and Exchange Act states that:

Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security ... is directly or indirectly the beneficial owner of more than 5 per centum of such [stock] shall, within ten days after such acquisition, send to the issuer of security ... send to the exchange where the security is traded and file each with the Commission, a statement....

15 U.S.C. § 78m(a)(1) (emphasis added).

"Beneficial ownership" is defined by SEC regulations as:

[A]ny person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:

(1) Voting power which includes the power to vote, or to direct the voting of such security; and/or

(2) Investment power which includes the power to dispose, or to direct the disposition of, such security.

17 C.F.R. § 240.13d-3(1)(a) (1991).

Calvary focuses on the language "power to vote or to direct the voting." Relying on Delaware law, Calvary argues that because only record owners are entitled to vote, nominees like Chandler have the "power to vote" and therefore are required to file a Schedule 13D. See Del.Code Ann. tit. 8, § 213 (1987). It contends that both those entitled to vote and those that may control the record owner's vote are required to file a Schedule 13D as "beneficial owners" under 17 C.F.R. § 240.13d-3.

We are of the opinion, however, that neither Congress nor the SEC intended that nominees limited to purely ministerial tasks be required to file a Schedule 13D. In 1968 Congress amended the Securities and Exchange Act of 1934 to combat a perceived problem in the area of transfers of corporate control. Individuals were accumulating large blocks of stock in corporations in a short period of time and/or making cash tender offers without any public disclosure. H.R.Rep. No. 1711, 90th Cong., 2d Sess. (1968), reprinted in 1968 U.S.C.C.A.N. 2811, 2812-14 (hereinafter House Report); see also General Aircraft Corp. v. Lampert, 556 F.2d 90, 94 (1st Cir.1977). Other investors were unaware of these possible changes in corporate control. Such investors were therefore forced to invest blindly without the information necessary for rational decision-making. See Louis Loss & Joel Seligman, 4 Securities Regulation 2164 (1990).

The amendment, called the Williams Act, was intended to alleviate this problem by requiring those in the position to alter control of a company to disclose to the SEC and the corporation their ownership. House Report at 2814; see also Wellman v. Dickinson, 682 F.2d 355, 365 (2d Cir.1982) ("Section 13(d) was designed to alert investors in securities markets to potential changes in corporate control and to provide them with an opportunity to evaluate the effect of these potential changes."), cert. denied, 460 U.S. 1069, 103 S.Ct. 1522, 75 L.Ed.2d 946 (1983); GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir.1971), cert. denied, 406 U.S. 910, 92 S.Ct. 1610, 31 L.Ed.2d 821 (1972); Bath Indus., Inc. v. Blot, 427 F.2d 97, 102 (7th Cir.1970); Loss & Seligman, supra at 2165-66 ("The legislative history thus shows that Congress was intent upon regulating takeover bidders, theretofore operating covertly, in order to protect the shareholders of target companies.").

Section 13(d) requires "disclosure of information by persons who have acquired a substantial interest, or increased their interest in the equity securities of a company by a substantial amount, within a relatively short period of time." House Report at 2818. Thus the Williams Act is aimed at those who seek control of shares in order to effectuate changes in a corporation. Rule 13d-3(1)(a) defining "beneficial ownership" recognizes this. The regulation focuses on the "power to vote;" the ability to "direct a vote;" and the "power to dispose" of stock. 17 C.F.R. § 240.13d-3(1)(a). Implicitly the regulation concentrates on those individuals who have "the ability to control or influence the voting or disposition of the securities." Interpretive Release Applicable to Insider Reporting and Trading, Exchange Act Release No. 34-18114, 46 Fed.Reg. 48147-01 (October 1, 1981).

The SEC in its interpretative releases and...