Benson v. RMJ Securities Corp.

• Decision Date: 31 March 1988
• Docket Number: No. 85 Civ. 2109 (RJW).,85 Civ. 2109 (RJW).
• Parties: Frances BENSON, Plaintiff, v. RMJ SECURITIES CORP., Eugene Cates, George Wunsch, Paul Ryan, Richard Jackson, Security Pacific Corporation and the Estate of John McSharry, Defendants.
• Court: U.S. District Court — Southern District of New York

683 F. Supp. 359

Frances BENSON, Plaintiff, v. RMJ SECURITIES CORP., Eugene Cates, George Wunsch, Paul Ryan, Richard Jackson, Security Pacific Corporation and the Estate of John McSharry, Defendants.

No. 85 Civ. 2109 (RJW).

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

March 31, 1988.

COPYRIGHT MATERIAL OMITTED

Goldschmidt, Oshatz & Saft, New York City, Torre, Garman & Amdur, East Rutherford, N.J., for plaintiff; Edward Sussman, New York City, Harry L. Garman, East Rutherford, N.J., of counsel.

Simpson Thacher & Bartlett, New York City, for defendants RMJ Securities Corp., Eugene Cates, George Wunsch, Paul Ryan and Richard Jackson; Kenneth R. Logan, Joseph F. Tringali, Charles C. Graves II, of counsel.

Jones, Hirsch, Connors & Bull, New York City, for defendant Estate of John McSharry; John F. Cambria, of counsel.

ROBERT J. WARD, District Judge.

Frances Benson, a residuary beneficiary of the estate of John McSharry ("the Estate" or "the McSharry Estate"), brought this action claiming violations of the federal securities laws, with pendent state law claims, in the redemption from the McSharry Estate by RMJ Securities Corporation ("RMJ") of McSharry's stock holdings in RMJ. The parties have filed cross-motions for summary judgment. For the reasons that follow, the Court grants defendants' motion in part and denies it in part. Plaintiff's motion is denied in its entirety.

BACKGROUND

John McSharry founded RMJ in 1974 for the purpose of trading in government securities and obligations. RMJ was organized as a closed corporation, and its management was governed by a series of shareholders' agreements entered into by McSharry and his fellow shareholders. According to the first agreement, dated December 1985, McSharry, Paul Ryan, George Wunsch and Eugene Cates were senior partners with equal holdings in RMJ, and Richard Jackson was a junior partner.¹ A second agreement, entered into in April 1976, preserved the distribution of shares among the principals set forth in the original agreement. Exhibit B, annexed to Affidavit of Richard G. Jackson, filed October 14, 1986 ("Jackson Aff."). A third agreement, dated April 1977, doubled Jackson's stake in the company, while maintaining his inferior status as a junior shareholder.² This distribution was retained in the April 1977 agreement, which was the last agreement to be executed by the parties. A draft agreement, dated November 1979, was drawn up at the direction of the shareholders, but this draft was never executed. According to the terms of the November 1979 draft agreement, each of the five original shareholders, plus a sixth, Edward O'Connell, each held equal shares in RMJ. Exhibit E, annexed to Jackson Aff.

Each successive agreement provided that it could be amended only by a writing signed by all the parties. Since the November 1979 agreement was never signed, the terms of the April 1977 agreement governed the operations of RMJ at all times relevant to the instant action,³ although the draft November 1979 agreement is probative as to the intent of the shareholders, where that intent is relevant.⁴

The April 1977 Agreement provided that none of the shareholders would encumber or dispose of his stock in RMJ without the consent of the others.⁵ The Agreement also provided for the redemption by RMJ of a shareholder's stock upon his death. The redemption at death was mandatory on both the shareholder and RMJ. The redemption price was set as the book value of the shares, plus the sum shown on an exhibit attached to the Agreement. This sum was intended to reflect the present value of RMJ's goodwill and was intended to be flexible. The Agreement set the Goodwill factor at $100,000 and provided that this Goodwill factor could be changed by a signed writing upon agreement of the shareholders.⁶ The representatives of a deceased shareholder would also be entitled to any accumulated commission earnings credited to his account.⁷

The Agreement also provided that a shareholder would tender his shares to RMJ in the event he were to leave the employ of RMJ. The price of the buy-back upon termination was to be the same as that provided for in the event of death. If a shareholder tendered his shares to RMJ for redemption and if RMJ refused to redeem the shares, then the remaining shareholders were obligated to purchase the tendered shares upon the same terms and conditions that would be applicable to RMJ. In the event the remaining shareholders refused to purchase the shares, the selling shareholder could then force the dissolution of RMJ.⁸

Any action of the Board of Directors required the President's affirmative vote to carry. In addition, the shares held by the President had to be voted affirmatively for any action at a shareholders' meeting to carry.⁹

Early in 1978 Jackson became an equal partner in RMJ. Also at that time, O'Connell was admitted into RMJ on an equal basis with the other shareholders. The April 1977 agreement was not immediately amended to reflect these events, but the unsigned November 1979 agreement does reflect these personnel changes.

McSharry was diagnosed with stomach cancer in May 1979 and underwent surgery for his condition. By late 1980, it was clear that McSharry's condition was terminal. At one point in March 1981, his doctors gave McSharry only twenty-four hours to live. He survived, however, for nearly two additional months, until May 2, 1981. Eugene Cates and Hugh McCarthy were named executors of the McSharry Estate. Cates and McCarthy presented McSharry's RMJ shares to the Company according to the terms of the Agreement. In August, 1981 the Estate was paid $228,892.60 in redemption of McSharry's shares. Of that amount, $78,892.60 represented McSharry's 20% interest in the book value of RMJ. In addition, the Estate received the $150,000 Goodwill factor provided for in the unsigned November 1979 agreement, and $130,320 in accumulated commission earnings, which were owed to McSharry.¹⁰

Roughly contemporaneously with McSharry's death and the redemption of his shares by RMJ, the remaining shareholders terminated O'Connell's employment and negotiated the buyback of his shares. O'Connell had become an equal shareholder in RMJ early in 1978. O'Connell's termination was carried out pursuant to two agreements between O'Connell and the remaining shareholders, exclusive of McSharry. Exhibits G, H, annexed to Jackson Aff. The first of these agreements was dated March 5, 1981, prior to McSharry's death, and the final agreement was dated September 30, 1981. RMJ redeemed O'Connell's shares in exchange for $350,000. The March 5, 1981 agreement acknowledged ongoing negotiations with Security Pacific Clearing & Services Corp. ("SPC") for the purchase of RMJ, and provided that if a contract for the sale of RMJ to SPC were signed on or before September 1, 1981, then O'Connell would share as an equal partner in the proceeds of that sale. The final employment termination agreement between O'Connell and RMJ characterized the $350,000 as payment for O'Connell's "interest in RMJ Securities Corp."¹¹ The agreement also notes that September 1, 1981 had passed without a contract for the sale of RMJ to SPC, and that O'Connell would not participate in any subsequent sale of RMJ.

Negotiations between RMJ and SPC began in December 1980, culminating in May 1982 with the sale of RMJ to SPC for $16,000,000. SPC management in April 1981 presented an offer for the acquisition of RMJ in exchange for $15,000,000 over a period of six years, contingent on RMJ meeting certain earnings goals.¹² On May 3, 1981, the day after McSharry's death, the RMJ shareholders held a special meeting at which they rejected SPC's offer. After receiving a counterproposal from Wunsch, SPC presented in a May 26, 1981 memorandum revised terms for the proposed acquisition. According to the revised acquisition terms, RMJ shareholders would receive $15,000,000 in cash three years after closing, subject to minimum average net after-tax profits over those three years. Exhibit C, annexed to Affidavit of Michael V. Caggiano, filed October 14, 1986 ("Caggiano Aff."). A June 4, 1981 meeting between the two companies ended in disarray when the RMJ shareholders could not agree among themselves whether to accept SPC's offer. Negotiations were formally broken off on July 9, 1981. Exhibit D, annexed to Caggiano Aff.

Negotiations resumed in September 1981, and the parties reached an agreement on pricing. The price remained at $15,000,000, with $6,000,000 to be paid at closing and the remainder three years later, subject to minimum after-tax earnings. Exhibit G, annexed to Caggiano Aff. The SPC Board of Directors approved the purchase of RMJ at its November 1981 meeting, and SPC filed for regulatory approval of the acquisition. The deal, however, fell through, and SPC withdrew its application for regulatory approval. Exhibit I, annexed to Caggiano Aff. Defendants assert that the cause of the failure was the concern among RMJ shareholders that they were retaining insufficient control of their company to assure that the minimum earnings targets would be met and that they would receive their contingent payments. Discussions between RMJ and SPC were reopened a third and final time in January 1982. Exhibits J, K, annexed to Caggiano Aff. The parties agreed to terms for the acquisition and entered into a Stock Purchase Agreement in February 1982. According to the terms of the final agreement, the RMJ shareholders would receive $16,000,000 in exchange for their interest in RMJ. Eight million dollars would be paid at closing, and $8,000,000 three years later, contingent on RMJ attaining minimum earnings over the intervening period. Exhibit L, annexed to Caggiano Aff.

With the redemption of McSharry's shares completed in August 1981, and the buyback of O'Connell's shares completed in September 1981, only Wunsch, Jackson, Cates and Ryan participated in the sale of RMJ to SPC. On July 22, 1981, after McSharry's death but...