Andrews v. Precision Apparatus, Inc.

• Decision Date: 13 May 1963
• Citation: 217 F. Supp. 679
• Parties: Elmer ANDREWS, Plaintiff, v. PRECISION APPARATUS INC., Transvision Electronics, Incorporated, and Pacotronics, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

217 F. Supp. 679

Elmer ANDREWS, Plaintiff, v. PRECISION APPARATUS INC., Transvision Electronics, Incorporated, and Pacotronics, Inc., Defendants.

United States District Court S. D. New York.

May 13, 1963.

Fisch, Kaplan & Goldman, New York City, for plaintiff; Richard L. Fisch, New York City, of counsel.

Burton H. Brody, New York City, for defendants.

WYATT, District Judge.

This is an application by plaintiff for a preliminary injunction restraining defendants

(a) from merging Pacotronics Inc. and Transvision Electronics Incorporated into Precision Apparatus, Inc., and

(b) from utilizing assets of Transvision to pay indebtedness of Pacotronics.

The action is for a permanent injunction against the same acts, for judgment rendering "the fraudulent merger null and void" and returning "the parties to their status quo", and for an accounting. Although not alleged in the complaint, it is assumed that plaintiff claims an interest in this matter as a stockholder of Transvision.

For the reasons set forth herein, the application is denied.

Plaintiff is a citizen of New Jersey, Precision is a Delaware corporation, Transvision and Pacotronics are New York corporations. Diversity of citizenship is the basis of jurisdiction (28 U.S. C.A. § 1332).

Transvision was incorporated in 1960 and acquired the assets of a predecessor corporation. It had outstanding at all relevant times 287,000 shares of common stock.

The status of plaintiff as a stockholder of Transvision is unusual. As noted above, the complaint does not allege that he is the owner of any shares. His moving affidavit states, however, that he is "a shareholder of shares of stock" of Transvision.

It appears that under date of August 4, 1960 Suesholtz, then president of Transvision, signed a memorandum transferring ownership of two shares to plaintiff, then an employee of Transvision. The memorandum states that the shares were at the time held as collateral for a debt, that plaintiff would not leave his employment for two years and that Suesholtz would have all the voting rights of the two shares for five years. The memorandum was kept by plaintiff.

The shares of Transvision were thereafter split 200 for 1 and on September 6, 1962 (just before his removal as president on September 7, 1962) Suesholtz endorsed and gave to plaintiff a certificate for 400 shares of Transvision common stock; this certificate has since been in the possession of plaintiff. The certificate was then and has remained in the name of Suesholtz, doubtless because (under the memorandum) Suesholtz is to have the voting rights of the shares until August 4, 1965.

Transvision engaged in the production and sale of specialized TV equipment and electronic devices, especially for educational purposes. Suesholtz was chief executive officer and a principal promoter of Transvision until September 7, 1962. Plaintiff was an employee of Transvision until March 1, 1963.

Transvision stock had been publicly offered as a speculation by underwriters in September 1961 and, at least since that time, had been traded over-the-counter.

In the period from June 20, 1960 to April 30, 1961 Transvision had net income of $853 on sales of $467,768; for the year ended April 30, 1962 it had a net loss of $232,276 on sales of $548,841; for the 6 months ended October 31, 1962 it had a net loss of $120,506 on sales of $237,814; thereafter it continued to have substantial losses. The complaint (verified March 21, 1963) alleges that "Transvision, except for a minor segment of its business, is virtually in liquidation".

In July 1962 Baruch-Foster Company bought 151,970 shares of Transvision, or about 54 per cent of the shares outstanding. Suesholtz had recommended shortly before that Transvision itself buy 90,000 shares of its own stock at $3.25 per share, but this was not done.

After its purchase, Baruch-Foster elected a majority of directors of Transvision; there were seven Transvision directors, of whom Baruch-Foster elected four. On September 7, 1962 the directors removed Suesholtz as president, apparently because of the operating losses sustained. Suesholtz remained as a director and began an arbitration proceeding over his right to remain as president, evidently basing his claim on an employment contract between him and Transvision.

On January 31, 1963 Pacotronics bought from Baruch-Foster the same 151,970 shares of Transvision for $539,000, or about $3.55 per share. Pacotronics paid the purchase price to Baruch-Foster in full, using $39,000 of its own funds and borrowing $500,000 on its note, secured by pledge of the 151,970 Transvision shares and also other securities.

Pacotronics and its predecessors have been in business for a number of years, making and selling electronic test equipment, high fidelity components, etc. For the year ended January 31, 1961 it had net income of $27,551.09 on sales of $2,196,712.31; for the year ended January 31, 1962 it had net income of $9,286.86 on sales of $2,404,789.98; for the nine months ended October 31, 1962 it had a net loss of $58,231 on sales of $1,767,052.

Having acquired 54 per cent of the shares of Transvision on January 31, 1963, Pacotronics set about to effect a merger between it and Transvision. While Transvision was "virtually in liquidation", it did have substantial quick assets which, after a merger, could be used to pay off the debt which Pacotronics had incurred to buy the 54 per cent block of Transvision shares.

Pacotronics had a wholly owned subsidiary, Precision Apparatus, a Delaware corporation. The plan of Pacotronics was to consolidate Transvision, Pacotronics and Precision Apparatus into a new Delaware corporation to be called "Precision Apparatus". This could be done under New York Stock Corporation Law, McK.Consol.Laws, c. 59, § 91 by a two-thirds vote of the outstanding shares of Transvision and Pacotronics. This is the plan which has been largely carried out and against which and certain of its consequences plaintiff is here asking a preliminary injunction.

In putting its merger or consolidation plan into effect, Pacotronics failed in several respects to conform to accepted standards for proper corporate procedure; it is this failure which gives rise to many of the charges of plaintiff.

A meeting of the board of directors of Transvision was called for February 4, 1963. Purposes were set forth in the notice of meeting but — although it must have been a most important item — nothing was said in the notice about any proposed merger of Transvision and Pacotronics.

A meeting of directors of Transvision was held on February 4, 1963. The four Baruch-Foster directors resigned and in their place were elected four nominees of Pacotronics. The three other directors were Suesholtz, King and McKenna. The two last named were not employees of Transvision; they were independent outside directors. King is a member of the New York bar and apparently represented, or was connected with, persons who had invested from $80,000 to $100,000 in Transvision stock. McKenna is manager of public relations of a large industrial company and personally owns some Transvision stock.

At the February 4, 1963 meeting of directors, Nearing resigned as secretary of Transvision and Ezrine (a nominee of Pacotronics and its counsel) was elected in his place.

There is conflict in the testimony and other evidence as to whether at the February 4, 1963 meeting of directors there was a vote taken on the plan of consolidation. It is found that no such vote was taken, in the sense of a deliberate, meaningful, and understood act of the directors to approve a specific plan and to recommend its submission to stockholders. Undoubtedly there was discussion at the February 4 meeting of a merger of Transvision and Pacotronics and Precision, of the share for share basis thereof, of the make up of the directorate of the surviving corporation, of the retirement of some Transvision stock, and concerning the possible advantages of a merger. Undoubtedly some explanation was made by the Pacotronics representatives of the nature of that business and of its operating results; Suesholtz was already familiar with the name of Pacotronics and said at the meeting that it was a good name. The three directors present at the meeting and who were nominees of Pacotronics were clearly in favor of the merger but since Suesholtz, King and McKenna were at most neutral and uncommitted, it is apparent that no board action could have been taken to approve and recommend a plan of consolidation.

Under date of February 26, 1963 a printed notice was sent out of a special meeting of Transvision stockholders, to be held March 11, 1963, to vote on a proposed agreement of consolidation of Transvision, Pacotronics and Precision. A copy of the agreement was sent to each stockholder of Transvision as part of a proxy statement and proxies were solicited. It was stated that February 22, 1963 had been fixed as the record date to determine the stockholders of Transvision entitled to notice of and to vote at the special meeting.

The proposed agreement of consolidation provided, among other things, (a) that shares of Transvision and Pacotronics would be converted share for share into shares of the new Delaware Corporation, (b) that the 151,970 Transvision shares owned by Pacotronics would be cancelled, and (c) that the outstanding shares of the old Precision Apparatus (all owned by Pacotronics) would be cancelled. Provision was made for six directors of the new corporation; the directors of Transvision except Suesholtz were named as directors of the new corporation.

The notice to stockholders purported to be signed by order of the Board by Nearing as assistant secretary. In fact the Board had not in any formal meeting either ordered the call of the meeting or fixed a record date. Nearing did not sign the notice and he was not assistant secretary of Transvision when the notice was sent out.

After notice of the meeting had been...