Berg v. First American Bankshares, Inc., 85-5684

• Decision Date: 22 July 1986
• Docket Number: No. 85-5684,85-5684
• Parties: , Fed. Sec. L. Rep. P 92,833, RICO Bus.Disp.Guide 6314 Stephen BERG, et al., Appellants v. FIRST AMERICAN BANKSHARES, INC., et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 489

796 F.2d 489

254 U.S.App.D.C. 198, Fed. Sec. L. Rep. P 92,833,

RICO Bus.Disp.Guide 6314

Stephen BERG, et al., Appellants v. FIRST AMERICAN BANKSHARES, INC., et al.

No. 85-5684.

United States Court of Appeals, District of Columbia Circuit.

Argued April 15, 1986.

Decided July 22, 1986.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 83-03887).

David J. Eiseman, New York City, for appellants.

Paul C. Warnke with whom J. Griffin Lesher, Robert P. Reznick and Kathy E. Manning, Washington, D.C., were on brief, for appellees.

Before WALD and EDWARDS, Circuit Judges, and KOZINSKI ^*, Circuit Judge, United States Court of Appeals for the Ninth Circuit.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

In August of 1982, Financial General Bankshares, Inc. (Financial General), a registered bank holding company, became a wholly-owned subsidiary of FGB Holding Corporation by means of a corporate merger. ¹ Under the merger agreement, the two publicly traded classes of voting stock of Financial General were eliminated. The Class A common stock was cancelled at $28.00 a share while the regular common stock received $33.80 a share. Stephen Berg and 45 other owners of Class A common stock (hereinafter collectively referred to as Berg) brought an action for money damages alleging that certain defects in the proxy statement issued by Financial General in connection with the merger violated the Securities Exchange Act of 1934. The plaintiffs also sought damages for a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as common-law fraud and breach of fiduciary duty in connection with the merger. After extensive pretrial discovery, the District Court granted the defendants' motion to dismiss or in the alternative for summary judgment on the ground that the alleged defects in the proxy statement were immaterial as a matter of law. The Court also dismissed the RICO claim. 590 F.Supp 500. For the reasons stated herein, we affirm the District Court's dismissal of all claims against the defendants.

I. EVENTS LEADING UP TO THE MERGER

Prior to becoming a wholly-owned subsidiary of FGB Holding Corporation, Financial General had two classes of voting stock, Class A common and regular common. ² The Class A common stock had an $11 per share preference over the regular common in the event of liquidation and a 30 cent preference on cash dividends. The two classes of stock also differed in terms In December of 1977 and January of 1978, three Middle Eastern investors, Kamal Adham, Faisal Saud al Fulaij and Abdullah Darwaish ("the Investors"), each acquired a substantial number of shares of Financial General's regular common stock. In February of 1978, Financial General filed suit against the Investors, alleging that they had purchased their shares without making appropriate filings with the Securities and Exchange Commission (SEC) in violation of section 13(d) of the Securities Exchange Act of 1934. See 15 U.S.C. Sec. 78m(d). Financial General sought, among other things, to enjoin the Investors from making a tender offer for any additional shares of the company. A month later, on March 17, 1978, the SEC also instituted a lawsuit against the Investors alleging a violation of section 13(d) in connection with the Investors' purchase of shares. Pursuant to a consent judgment entered into between the SEC and the Investors on the day the SEC's suit was filed, the Investors, without admitting or denying the SEC's allegations, agreed to acquire additional shares of Financial General's common stock only through a cash tender offer at a price of at least $15 per share.

of their voting power. Each share of Class A common stock carried one vote, while each share of regular common stock carried ten votes. There were, furthermore, over ten times as many outstanding shares of regular common as of Class A common stock, and thus the regular common stock represented approximately 99% of Financial General's total voting equity.

The management of Financial General, however, continued to oppose the Investors' attempts to acquire control of Financial General. Finally, after a proxy contest waged by Adham in the spring of 1980 and after the Investors agreed to raise their offering price to $28.50 per share for the regular common stock, Financial General and the Investors entered into a Definitive Agreement on July 25, 1980. This agreement settled all existing litigation between the company and the Investors. The agreement further provided that if the necessary regulatory approvals for the tender offer were not obtained before the end of 1980, the tender offer price for the regular common stock would increase or decrease in accordance with a multiplier representing the ratio between the $28.50 price and the per share book value of the regular common stock. Because the tender offer for the regular common stock did not take place until March of 1982, the Investors under this formula were obliged to offer $33.80 per share.

To carry out the tender offer for Financial General's regular common stock, an entity called FGB Holding Corporation was established in June of 1981. FGB Holding Corporation was a wholly-owned subsidiary of Credit and Commerce American Investment, B.V. (CCAI), a Netherlands corporation that was in turn a wholly-owned subsidiary of Credit and Commerce American Holdings, N.V. (CCAH), a Netherlands Antilles corporation. The shareholders of CCAH were the three Middle Eastern Investors. FGB Holding Corporation commenced its tender offer for the regular common stock of Financial General on March 3, 1982 and eventually obtained 96% of it. This gave FGB Holding Corporation 95% of the voting equity of Financial General. FGB Holding Corporation promptly reduced the size of Financial General's board of directors and elected several new directors to the board.

Soon after FGB Holding Corporation gained voting control of Financial General, Financial General's board of directors approved a proposed merger with FGB Subsidiary, Inc. (FGB Sub), a wholly-owned subsidiary of FGB Holding Corporation. Under the merger proposal Financial General would become a wholly-owned subsidiary of FGB Holding Corporation, and the public shareholders would receive cash for their shares. The merger agreement proposed that holders of regular common stock not previously tendered would be entitled to receive $33.80 per share, while the holders of the Class A common stock would be entitled to receive $28.00 per share. FGB Holding Corporation's control of 95%

of the voting power of the company ensured that the merger agreement itself would be approved by the requisite two-thirds vote of the regular and Class A common stock voting together. Under Virginia law and Financial General's own Articles of Incorporation, however, the cancellation of the Class A shares also required a two-thirds vote of the Class A shares voting separately as a class. The merger agreement provided that if Class A approval was not given, the Class A shares would remain outstanding after the merger. On July 9, 1982, Financial General issued a proxy statement in connection with the proposed merger and cancellation of the Class A shares. At the annual meeting of shareholders on August 11, 1982, 70.6% of the Class A shares voted to cancel the Class A stock.

II. BERG'S SECURITIES CLAIMS

Berg's Amended Complaint alleges violations of sections 10(b), 13(e) and 14(a) of the Securities Exchange Act of 1934 in connection with the August 1982 merger of Financial General and FGB Sub. Only two of these statutory provisions are still at issue in this appeal. ³ Berg charges that Financial General issued a materially false and deceptive proxy statement in violation of sections 10(b) ⁴ and 14(a) ⁵ of the Securities Exchange Act of 1934 and Rules 10b-5 ⁶ and 14a-9 ⁷ promulgated thereunder.

The majority of the alleged omissions and misstatements occur in a single paragraph on page 8 of the proxy statement. That paragraph stated that Eugene B. Casey, a director of Financial General and the largest Class A shareholder, supported the cancellation of the Class A shares at $28 per share and intended to vote his shares in favor of the merger. The paragraph went on to set forth reasons why Casey thought that the $28 price was fair. The challenged portion of the paragraph reads:

On June 3, 1982, representatives of FGBHC [i.e., FGB Holding Corporation] proposed to Eugene B. Casey, who holds approximately 30.5% of the outstanding Class A Shares and is the largest single holder of Class A Shares, that FGBHC acquire all of the Class A Shares as well as the [regular common] Shares in the Merger. After discussion, FGBHC and Mr. Casey agreed that a price of $28.00 per Class A Share in cash would be fair. In reaching such agreement, FGBHC and Mr. Casey considered, among other things, the historical market prices of the Class A Shares, the book value of the Class A Shares, the fact that the 592,569 Class A Shares currently outstanding represent only approximately 1% of the combined voting power of the Company (except with respect to matters requiring the Class A Approval ...), the fact that each Class A Share is entitled to only one vote while each Share [of regular common] is entitled to 10 votes on matters on which the [regular common] Shares and Class A Shares vote together as a class and the price to be paid to holders of [regular common] Shares in the Merger.

Proxy Statement at 8. Berg argues that this paragraph materially misrepresents both the real basis for Casey's decision to support the cancellation of the Class A shares and the substance of the discussion between Casey and FGB Holding Corporation.

Berg also alleges that, irrespective of Casey's involvement, the proxy statement's discussion of historical market prices, voting power and book value as factors supporting the fairness of the $28 price for the Class A...