Beaumont v. American Can Co., 82 Civ. 3533(MEL).

• Decision Date: 06 November 1985
• Docket Number: No. 82 Civ. 3533(MEL).,82 Civ. 3533(MEL).
• Citation: 621 F. Supp. 484
• Parties: Geoffrey C. BEAUMONT, Stephen A. Kramer, and Adele Slutsky, Plaintiffs, v. AMERICAN CAN COMPANY, Gerald Tsai, Jr., Norman Alexander, Joseph Auerbach, Gilbert Butler, Max Caplan, Frank T. Crohn, Joseph Fafian, Jr., A. Leon Fergenson, Ronald D. Grimm, E. John Rosenwald, William A. Shea, Brian Yeowell, and Stanley R. Zax, Defendants.
• Court: U.S. District Court — Southern District of New York

621 F. Supp. 484

Geoffrey C. BEAUMONT, Stephen A. Kramer, and Adele Slutsky, Plaintiffs, v. AMERICAN CAN COMPANY, Gerald Tsai, Jr., Norman Alexander, Joseph Auerbach, Gilbert Butler, Max Caplan, Frank T. Crohn, Joseph Fafian, Jr., A. Leon Fergenson, Ronald D. Grimm, E. John Rosenwald, William A. Shea, Brian Yeowell, and Stanley R. Zax, Defendants.

No. 82 Civ. 3533(MEL).

United States District Court, S.D. New York.

November 6, 1985.

COPYRIGHT MATERIAL OMITTED

Dewey, Ballantine, Bushby, Palmer & Wood, New York City (Kenneth H. Holmes, Martha E. Solinger, Junaid H. Chida, of counsel), for defendant American Can Co.

Shea & Gould, New York City (Michael Lesch, Alfred R. Fabricant, of counsel), for the Served Individual Directors-defendants.

Mordecai Rosenfeld, P.C., New York City, and Alton I. Crowell, Newport Beach, Cal., for plaintiff Geoffrey C. Beaumont.

Garwin, Bronzaft & Gerstein, New York City, for plaintiff Stephen A. Kramer; Bruce E. Gerstein, Scott Fisher, on brief.

Kaplan, Kilsheimer & Foley, New York City, and Kohn, Milstein, Cohen & Hausfeld, Washington, D.C., for plaintiff Adele Slutsky.

LASKER, District Judge.

This litigation arises out of the April 8, 1982 merger of Associated Madison Companies, Inc. ("Associated") into AC Financial Services, Inc., a wholly-owned subsidiary of American Can Company ("American Can" or "American"). Before the merger, American Can, a New Jersey corporation, was engaged in a variety of enterprises, including the manufacture of cans and different paper products. Through its "Fingerhut Corporation" unit American Can also was involved in direct-mail marketing. Associated, a New York corporation prior to the merger, was a holding company engaged in the life insurance business. The stocks of both American Can and Associated were listed and traded on the New York Stock Exchange ("NYSE").

On April 8, 1981 Gerald Tsai, Jr., then Chairman of Associated, wrote a letter to William S. Woodside, Jr., then Chairman of American Can. Tsai's letter complimented Woodside on the "bold, but highly intelligent" diversification plans for American Can that were announced in the April 2, 1981 edition of the New York Times. See Affidavit of Mordecai Rosenfeld and Bertram Bronzaft, Exhibit 3 (Mar. 7, 1984).¹ Tsai suggested that Associated and American Can's Fingerhut division shared a mutuality of business interests and requested a meeting with Woodside to "enjoy a brief exchange of ideas." Id. Subsequent to Woodside's receipt of Tsai's letter, Tsai met several times with members of American Can's management. Shortly after mid-September, 1981, Kenneth Yarnell, Jr., an American Can senior vice president, telephoned Tsai and proposed that American acquire 100% of Associated.

On October 27, 1981 American Can and Associated reached an agreement in principle with respect to a proposed merger. On that date the companies signed a Memorandum of Intent which included, inter alia, a provision stating that

holders of up to 49% of Associated's common stock, par value $.40 per share ("Company Common Stock"), will receive per such share $15 in cash, and the balance of such holders will receive per such share the number of shares of American Can's common stock, par value $12.50 per share ("Purchaser Common Stock"), determined by dividing $15 by the average closing price per share of Purchaser Common Stock as reported on the New York Stock Exchange Composite Tape during a period to be agreed upon, provided that no share of Company Common Stock shall be converted into less than .4110 or more than .5085 of a share of Purchaser Common Stock.

Rosenfeld Aff., Exh. 4 at 1-2 (emphasis in the original). In addition, the Memorandum of Intent embodied the parties' acknowledgement that

it may be desirable in facilitating the Merger that American Can acquire certain outstanding shares of Company Common Stock or Company Preferred Stock prior to the effective date of the Merger by open market purchase, tender offer or otherwise, and Associated agrees to cooperate with and support American Can with any such acquisition.

Id. at 2-3.

The merger ultimately was effected by a common multistep transaction,² which, in this case, involved (1) American's purchase of 34% of Associated's stock from five institutions; (2) a tender offer by American Can for its own common stock; and (3) the merger transaction itself.

Before American engaged in any of the above transactions, Frederick Kanner, a partner at Dewey, Ballantine, Bushby, Palmer and Wood, outside counsel for American Can, wrote to the Securities Exchange Commission ("the SEC" or "the Commission") on behalf of the company. Kanner's November 13, 1981 letter requested an exemption from Rule 10b-6, 17 C.F.R. § 240.10b-6,³ a rule issued under the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) ("the Exchange Act"), which prohibits a corporation from making certain stock purchases when the corporation is in the course of a distribution of its own stock. Kanner's letter first summarized the salient points of the proposed Associated/American Can merger and then explained the contemplated private stock purchases:

American Can or its wholly-owned subsidiary may wish to enter into stock purchase agreements in the very near future with the three institutions referred to above providing for the purchase for cash of some or all of the convertible preferred stock of Associated held by them, as well as for the purchase for cash of the common stock of Associated held by one of such institutions. Alternatively, American Can or its wholly-owned subsidiary may wish to purchase in the very near future options to acquire for cash some or all of such convertible preferred stock or common stock. Assuming full conversion by the three institutions of the convertible preferred stock of Associated held by them, and no other issuance of Associated's common stock, the Associated stock held by them would constitute approximately 37% of Associated's common stock which would be outstanding.

Rosenfeld Aff., Exh. 6.

As set forth in Kanner's letter, the reason for the requested 10b-6 exemption was as follows:

American Can understands it is the position of the Staff that as a consequence of having entered into the agreement in principle, American may be deemed to be engaged in a distribution of its common stock, subject to Rule 10b-6, and that the Associated common stock may be deemed to be a "right to purchase" the American common stock to be distributed in the Merger. Accordingly, it could be argued that, absent an exemption, the proposed pre-merger purchases described above by American Can or its wholly-owned subsidiary of Associated's stock would be prohibited by Rule 10b-6.

Id. at 4.

On November 20, 1981 Kanner again wrote to the SEC, this time explaining that subsequent to November 13 American Can had made two additional decisions with respect to the proposed merger. The letter related to the SEC that American had decided:

(i) subject to market conditions, to commence a tender offer (the "Offer") as soon as practicable for its own common stock in an amount estimated to be sufficient to provide for the shares that would be deliverable to stockholders of Associated who become entitled to receive shares of American's common stock in the Merger and (ii) to permit stockholders of Associated to elect, during the period in which proxies are solicited for the Associated special stockholders' meeting to vote on the Merger, to receive in the Merger $15 in cash per share of Associated's common stock (or $37.50 in cash per share of Associated's preferred stock) in lieu of American's common stock (a "Cash Election"). The Cash Elections will be available for a maximum of 49% of Associated's shares of common stock and preferred stock, respectively, reduced by the number of shares thereof purchased in advance of the Merger by American ... and the number of such shares as to which dissenters' rights are duly exercised prior to the vote of Associated stockholders on the Merger.

Rosenfeld Aff., Exh. 7 at 3-4.

Based upon these considerations American Can sought an additional Rule 10b-6 exemption from the SEC since, arguably, "absent an exemption purchases of American's common stock pursuant to the Offer and purchases of Associated's stock pursuant to the Cash Elections would be prohibited until the distribution of American's common stock pursuant to the Merger has been completed or the Merger has been abandoned." Id. at 5. In addition, American Can requested the Commission to take a "no-action" position under Rule 10b-13,⁴ 17 C.F.R. § 240.10b-13 (which prohibits stock purchases other than pursuant to the terms of the tender offer during the pendency of such tender offer), because it was their belief "that the grant of the Cash Elections should not be considered a discrete transaction constituting a tender offer, separate from the Merger, and, accordingly, should not be deemed to be within the contemplation of Rule 10b-13." Id. at 6.

On December 1, 1981 the SEC responded to both of Kanner's letters and granted American Can's requests. See Rosenfeld Aff., Exh. 8. Further, by letter of December 24, 1981 the Commission took a "no-action" position under Rule 10b-13 with respect to the purchase of Associated stock from the institutional shareholders, although American Can apparently did not solicit a "no-action" letter with respect to those particular stock purchases. Rosenfeld Aff., Exh. 9. The December 24th letter states:

On the basis of your representations and the facts presented, the Commission has granted an exemption from Rule 10b-6 to permit the Company to make Pre-Merger Purchases of Associated's common stock and convertible preferred stock. In addition, on the basis of those facts and representations, in particular that (i) the institutions will not receive a price higher than the other shareholders of Associated will receive in the Merger and (ii) that full disclosure of the Purchase

...