Alameda Oil Company v. Ideal Basic Industries, Inc.

• Decision Date: 15 April 1971
• Docket Number: Civ. A. No. C-2201.
• Citation: 326 F. Supp. 98
• Parties: ALAMEDA OIL COMPANY et al., Plaintiffs, v. IDEAL BASIC INDUSTRIES, INC., et al., Defendants.
• Court: U.S. District Court — District of Colorado

326 F. Supp. 98

ALAMEDA OIL COMPANY et al., Plaintiffs, v. IDEAL BASIC INDUSTRIES, INC., et al., Defendants.

Civ. A. No. C-2201.

United States District Court, D. Colorado.

April 15, 1971.

COPYRIGHT MATERIAL OMITTED

Linde, Thomson, Van Dyke, Fairchild & Langworthy, by Harold T. Van Dyke and Edward W. Kriss, Kansas City, Mo., and Wood, Ris & Hames, by William K. Ris, Denver, Colo., for plaintiffs.

Holland & Hart, by William C. McClearn, Denver, Colo., and Hugh B. Cox, Washington, D. C., for defendants.

MEMORANDUM OPINION AND ORDER

I.

WILLIAM E. DOYLE, Judge.

This suit was commenced on February 2, 1968, in the District Court for the Western District of Missouri. The Court on March 23, 1970, sua sponte transferred the case to this District, 313 F.Supp. 164. As presently amended the complaint asserts claims under Sections 10 (b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j (b), 78n(a) (1964) and under state fiduciary law. The asserted claims arise out of the merger on December 31, 1967, of the Potash Company of America and the Ideal Cement Company into a successor corporation named Ideal Basic Industries, Inc. The present question was orally presented on February 26, 1971, and was submitted to the Court on that day.

This suit is currently maintained on behalf of approximately 132 named plaintiffs who allegedly owned Potash stock prior to the merger, and the complaint seeks to maintain the suit on behalf of all other Potash stockholders similarly situated. This case is presently before this Court on the plaintiffs' application for an order determining this suit to be a class action under Rule 23 of the Federal Rules of Civil Procedure.

II. BACKGROUND

The complaint alleges that on August 28, 1967, the Chairman of the Board of Potash received a letter signed by H. F. Korholz, then Chairman of the Board of Susquehanna Corporation, relating to a possible exchange of stock of Susquehanna for all the issued and outstanding stock of Potash on the basis of one share of Susquehanna $50 convertible preferred stock, convertible at any time into one share of Susquehanna common stock, plus one share of Susquehanna common stock, for each share of Potash stock. This offer was never communicated to the Potash stockholders because, according to the defendants, the letter was withdrawn the same day it was received.

On September 20, 1967, the individual defendants, as Directors of Potash, voted to approve and authorize the execution of a certain Agreement & Plan of Merger by and among Ideal, American Crystal Sugar Company and Potash dated September 20, 1967. Under the terms of said Agreement & Plan of Merger, stockholders of Potash were to receive in exchange for each share of Potash two shares of Ideal Common Stock and 0.27 of a share of Ideal Preferred Stock, $100 par value, convertible into Ideal Common Stock at $23 per share, considering the Preferred Stock at $100 per share for the purposes of such conversion.

On or about October 31, 1967, the directors in attendance unanimously approved the distribution of Potash proxy material which, among other things, recommended approval of the aforementioned merger. The proxy statement did not contain any reference to the allegedly outstanding offer made by Susquehanna.

On December 5, 1967, a special meeting of Potash stockholders was held to vote upon the proposed merger with Ideal, and said Agreement & Plan of Merger was approved by over two-thirds of the outstanding shares of Potash. The plaintiffs contend that approval was obtained because of the defendants' failure to disclose the Susquehanna offer.

The plaintiffs have also made a brief reference (in their first brief supporting their motion for a class action) to an undisclosed December merger proposal made by Korholz after the Potash and Ideal Cement shareholders approved the merger of the two companies. There is no mention of this in the amended complaints and subsequent briefs, nor do the various discussions of liability and damages touch upon it, and it has been asserted during arguments that the plaintiffs' claims relate solely to the nondisclosure of the earlier August offer. Accordingly, it is to be assumed for present purposes that the plaintiffs are not claiming damages for the nondisclosure of the alleged December offer.

According to the plaintiffs, they and all other former Potash stockholders similarly situated were damaged in an amount equal to the difference ($90/share) between the market value (as of the date this action was filed) of the securities offered to be exchanged by the Susquehanna Corporation for each outstanding share of Potash ($146/share) and the price paid, so to speak, that is the market value of the securities actually received or to be received as a result of the merger with Ideal. Total damages for all Potash stockholders would be a tremendous amount. Of the over 1,260,000 shares of Potash stock issued and outstanding prior to January 1, 1968, the plaintiffs herein held a total of over 40,000 shares. Potash had approximately 5,600 stockholders at this time. The defendants dispute the damages formula employed by the plaintiffs as well as the other allegations.

It is further alleged that the defendants' material misrepresentations and nondisclosures violated Section 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(a) and Rule 10b-5 thereunder, 17 C.F.R. 240.14a-9. Count II alleges a violation of common law fiduciary duties owed Potash stockholders arising out of the nondisclosures and the merger with Ideal.

The defendants contend that a number of the plaintiffs (but not all) purchased their Potash shares as a result of inside information. It is alleged that Herbert Korholz, President of Susquehanna, revealed on a number of occasions throughout 1967 to M. J. Coen, President of the brokerage firm of Midland Securities Co., his interest in acquiring control of Potash. On the basis of his conversations with Korholz, Mr. Coen recommended — especially strongly during the summer of 1967—that his customers purchase Potash stock. Various statements regarding a possible merger between Potash and Susquehanna were related by Coen to his customers. In late August or early September, Coen told Donald Anderson, the vice president of the investment firm of Chiles & Co., that Susquehanna had made an offer to obtain control of Potash and was contemplating a further attempt. In turn, beginning in September, Chiles & Co. made a significant number of purchases for customers who now appear as plaintiffs in this action. The alleged tips are of varying specificity, and originated with different sources.

There has been but slight reference to Section 14(a) of the 1934 Act in the briefs before us. Most of the discussion has centered around Rule 10b-5 for purposes of this Rule 23 motion. The considerations now presented seem similar. Cf. Causation and Liability in Private Actions for Proxy Violations, 80 Yale L.J. 107 (1970). The defense of "unclean hands" sought to be used by the defendants against alleged tippee-plaintiffs has arisen in § 14(a) cases. In Pari Delicto and Unclean Hands as Defenses to Private Suit Under SEC Rule 10b-5, 30 Md.L.Rev. 75, 80 (1970).

Assuming that there was a legally sufficient offer and that the defendants owed a duty to disclose, the class—as regards the 10b-5 claim—should be made up of those plaintiffs who held stock when that duty arose (within a reasonable time after the offer was made) and who sold stock thereafter. Those who sold their Potash stock prior to the duty of disclosure date are not within the class since no 10b-5 violation could possibly have occurred as to them. While those who bought after the duty to disclose arose cannot claim inheritance of their sellers' causes of action, it may be that they are includable in the plaintiff class on the theory that the defendants had a continuing duty to disclose until the Ideal merger occurred, but not thereafter. However, since the prices at which they purchased were lower than they allegedly would have been had disclosure been made, they may have problems proving damages. That would not bar them from inclusion now.

III.

A. CLASS ACTION REQUISITES

Rule 23 of the Federal Rules of Civil Procedure has been liberally construed. Thus, even in doubtful cases the maintenance of the class action is favored. Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968); Eisen v. Carlisle & Jacquelin, 391 F.2d 555 (2d Cir. 1968); Contract Buyers League v. F & F Investment, D.C., 48 F.R.D. 7 (N.D.Ill.1969); Dolgow v. Anderson, D.C., 43 F.R.D. 472 (E.D.N.Y.1968). As we said in Gerstle v. Continental Airlines, 50 F.R.D. 213 (D. Colo.1970):

"The theory behind liberal construction of the rule is that determination of the propriety of a class action is to be made at an early stage of the proceedings; thereafter the court maintains the power to supervise the course of the action, and to modify the order as necessary when the facts become developed. If subsequent developments call for it, the court in its discretion can even strike the entire class allegation." Id. at 216.

Under Rule 23 a class action is proper only if all four separate prerequisites of Rule 23(a) are satisfied and if in addition the requirements of either Rule 23(b) (1), (b) (2), or (b) (3) are met. The plaintiffs' briefs make it evident that they are relying on (b) (3).

The defendants contend that the present suit does not qualify as a class action on three separate grounds:

1. There are conflicts of interest between a majority of the named plaintiffs and the class they seek to represent. Thus, the typicality requirement of Rule 23(a) (3) and the adequate representation requirement of (a) (4) are not satisfied.

2. Common questions of law or fact do not predominate over questions affecting only individual members. Rule 23(b) (3).

3. The class action is not superior to other available methods of adjudicating the

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