Am. General Ins. Co. v. Equitable General Corp.
| Citation | 493 F. Supp. 721 |
| Decision Date | 16 June 1980 |
| Docket Number | Civ. A. No. 78-0639-R. |
| Parties | AMERICAN GENERAL INSURANCE COMPANY v. EQUITABLE GENERAL CORPORATION et al. |
| Court | U.S. District Court — Eastern District of Virginia |
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Hugh V. White, Jr., R. Kenneth Wheeler, C. Porter Vaughan, III, James E. Farnham, Jack E. McClard, Virginia W. Powell, Hunton & Williams, Richmond, Va., for plaintiff.
M. Scott Hart, Collins Denny, III, Anthony F. Troy, Mays, Valentine, Davenport & Moore, Richmond, Va., for defendants.
On 12 January 1978, the plaintiff American General Insurance Company (American General), a company incorporated under the laws of and having its principal place of business in the State of Texas, sold to Equitable General Corporation (Equitable), an insurance holding company incorporated under the laws of and having its principal place of business in the Commonwealth of Virginia, 315,000 shares of stock1 in Equitable for $32.50 per share. On 26 June 1978, a merger agreement was entered into by Equitable, Gulf Life Insurance Company (Gulf Life), a company incorporated under the laws of and having its corporate headquarters in the State of Florida, and Gulf United Corporation (Gulf United), a company incorporated under the laws of the State of Florida. According to the terms of the merger agreement, the owners of Equitable stock could elect to receive for their stock either $51.00 cash per share or one share of Gulf United $3.78 cumulative convertible preferred stock, Series B.2 The merger be tween Equitable, Gulf Life and Gulf United was consummated on or about 11 January 1979 by the merger of Equitable into Gulf Life and the assumption by Gulf Life of the obligations and liabilities of Equitable. Following the merger Equitable ceased to exist as a separate corporate entity.
American General, on 12 June 1978, filed its initial complaint3 in this action, asserting several claims for relief against Equitable and the individual directors of Equitable4 based upon the circumstances surrounding the January 1978 sale of Equitable shares. American General alleged specifically that Equitable and its directors, in misrepresenting and failing to disclose to American General prior to the sale of the shares the existence of recent substantive merger negotiations between Equitable and interested acquirer companies as well as the existence and content of certain recent actuarial appraisals of Equitable, was liable to American General upon several legal theories. Such acts and omissions were alleged to have breached the terms of a warranty contained in the Agreement and Mutual Release5 entered into by Equitable and American General attendant to the sale of the securities, to have violated a Virginia common law fiduciary duty to shareholders, to have violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),6 and Rule 10b-5 of the Securities and Exchange Commission promulgated thereunder, 17 C.F.R. § 240.10b-5 (1979),7 and to have violated the Texas Securities Act, Tex. Code Ann. § 581-33(B) (1978).8 American General sought rescission of the contract and restitution of the Equitable shares, or, alternatively, damages.
Defendant Equitable filed a counterclaim on 7 September 1978 asserting that American General was liable to Equitable upon several legal theories. Equitable alleged that American General, by representing to Equitable that it was in possession of a firm offer from a third party regarding the 315,000 shares of Equitable which offer had been accepted by the board of directors of American General subject to American General's first offering the same to Equitable, which offer, it was alleged, had neither then been received nor so preliminarily approved, violated § 10(b) of the Securities Exchange Act of 1934, supra, Rule 10b-5 promulgated thereunder, supra, the Texas Securities Act, supra, and the Virginia Securities Act, Va.Code § 13.1-522(a) (Repl. Vol.1978).9 Equitable sought damages and an injunction against the collection of the note comprising part of the consideration for the stock transaction.
The case came on to trial to the Court on 10 September 1979. Presentation of the evidence was completed on 21 September 1979, following which the Court delivered preliminary findings of fact from the Bench. Argument was heard on 5 October 1979 relating solely to the issues of the law and damages. Following this hearing, the parties exhaustively briefed the Court on the law applicable to the facts as preliminarily found. This case is ripe for final adjudication.
The plaintiff, American General, is a diversified financial services organization engaged almost exclusively in the insurance field. American General is a sophisticated financial investor with a reputation in the insurance industry for the acquisition of smaller, independent insurance companies. Among the persons comprising the management of some insurance companies, American General is viewed with trepidation on the basis of its past willingness to pursue attractive business opportunities by takeover bid, irrespective of the wishes of the target company management.
Equitable was an insurance holding company whose principal asset was Equitable Life Insurance Company (Equitable Life), a regional industrial life insurance company incorporated under the laws of and having its principal place of business in the Commonwealth of Virginia. Equitable had less than 1,000 shareholders; approximately one half of the shares outstanding were controlled in four or five large blocks, although the evidence indicates that the overall fractionalization of shareholding was such that effective control of the corporation by one shareholder was not present.10
The management of Equitable in 1977 had been ensconced in the Company for over twenty years. Mr. Charles E. Phillips, president and chief executive officer of Equitable, was largely responsible for the steady growth and success of Equitable during his tenure. Mr. Phillips was clearly in control of Equitable during 1977 and 1978, the period of time during which the operative facts of the case occurred.
By mid-1977, a combination of several factors had set the stage for the facts at bar. Equitable had become very attractive for acquisition either by another insurance company or by an industrial conglomerate. Not only had Equitable become an attractive company for acquisition, but the general financial atmosphere extant at this time generated substantial interest in the acquisition of companies like Equitable.11
During this period a block of Equitable stock approximating ten percent of the outstanding shares of Equitable was held by Commercial Credit Company (Commercial Credit), a subsidiary of Control Data Corporation (Control Data), a company incorporated under the laws of the State of Delaware. Mr. Norris, the president and chairman of the board of Control Data, was of the opinion that the acquisition of one company by another should occur only under congenial circumstances and not by unnegotiated takeover bids. He believed a prospective purchaser should deal with the officers and directors rather than with the stockholder-owners. When it became apparent that Commercial Credit would be unable to reach agreement with Equitable's management to acquire shareholdings in Equitable up to 20 percent of Equitable's outstanding shares, which percentage holding would have entitled Commercial Credit to place that portion of Equitable's earnings on the account books of Commercial Credit as earnings of Commercial Credit by the use of equity accounting,12 Commercial Credit determined to sell its Equitable holdings. American General was contacted by Commercial Credit and was made an offer relating to the greater part of these shares.13 Negotiations were successful and the purchase of 315,000 shares by American General was consummated in July of 1977. American General purchased these shares of Equitable stock, 9.9 percent of the shares outstanding, with the goal of eventually purchasing sufficient shares for equity accounting whether or not the management of Equitable had objection to this course of action.14 The immediate goal of American General in the planned acquisition was equity accounting15; the long-range goal was complete acquisition.16
The purchase of the substantial block of stock by American General was of grave concern to the management of Equitable. Management was familiar with American General's reputation as an acquisitor and was frightened that Equitable would be sought by a company which might by-pass management and deal directly with the owners. This fear pervaded the management of Equitable despite the existence of years of at least superficially congenial relations between Mr. Woodson, then chief executive officer and chairman of the board of directors of American General, and Mr. Phillips, president and chief executive of Equitable. Moreover, it continued despite the fact that immediately after American General acquired the stock from Commercial Credit, Mr. Woodson contacted Mr. Phillips and told Mr. Phillips that he would be pleased to work out future affiliations between the two companies in an agreeable manner.17
Equitable took several steps in response to the purchase by American General. Counsel was retained to contest the efforts of American General before the State Corporation Commission of Virginia (hereinafter State Corporation Commission) for the requisite approval to permit American General to acquire shareholdings in Equitable in excess of 10 percent.18 Equitable also consulted with Mr. Webb Hayes, a securities investment lawyer, and several other individuals or firms in the investment field that Equitable thought could help in avoiding a takeover by American General.
On 28 September 1977,...
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