Borden v. Guthrie
| Decision Date | 17 June 1965 |
| Citation | 260 N.Y.S.2d 769,23 A.D.2d 313 |
| Parties | Leon E. BORDEN, Plaintiff-Appellant, v. W. D. GUTHRIE, Robert G. Johnson, George M. Levy, Malvin B. Mariash, J. S. Stone, Alvin L. Weil, William H. Walters and William Weisman, Defendants, and Roosevelt Raceway, Inc., Defendant-Respondent, and Harry G. Starr and J. Alfred Valentine, Defendants-Appellants-Respondents. |
| Court | New York Supreme Court — Appellate Division |
Milton Paulson, New York City, for appellant Leon E. Borden.
Samuel I. Rosenman, New York City, of counsel (Max Freund, Stuart Robinowitz and Joseph Zuckerman, New York City, with him on the brief, Rosenman, Colin, Kaye, Petschek & Freund, New York City, attorneys), for respondent Roosevelt Raceway, Inc.
Edmund H. H. Caddy, New York City, of counsel (Caddy & Shepard, New York City, attorneys), for appellant Harry G. Starr.
David W. Peck, New York City, of counsel (Lester Kissel, Marvin Schwartz and Henry V. Kensing, New York City, with him on the brief, Meyer, Kissel, Matz & Seward, New York City, attorneys), for appellant J. Alfred Valentine.
Before BREITEL, J. P., and VALENTE, McNALLY and STEVENS, JJ.
In a stockholder's derivative action, defendants-appellants-respondents J. Alfred Valentine and Harry G. Starr have been cast in judgment, after a nonjury trial, for $371,495.45 and $215,652.83, respectively
The issue presented is whether Valentine and Starr, officers, directors and the largest stockholders of defendant-respondent Roosevelt Raceway, Inc. (Roosevelt), violated any fiduciary duty in connection with the sale of their stock to Roosevelt.
The trial court held it was unfair for Valentine and Starr as fiduciaries, knowing that defendants George M. Levy and Alvin L. Weil, officers and directors of Roosevelt, feared the possibility that the shares might fall into undesirable hands, to demand and accept from Roosevelt a price more than its fair market value and that the excess thereof represented damage to Roosevelt. As to the directors other than Valentine and Starr, who voted to accept the tender of the stock, the court held that they acted in the highest good faith and definitely in the best interests of Roosevelt and its stockholders, and dismissed the complaint as against them.
We hold, in the circumstances, that as directors Valentine and Starr owed the paramount duty to deal fairly with Roosevelt, which was a cestui que trust; but this record shows no violation of any fiduciary duty. Accordingly, the judgment should be reversed and the complaint dismissed.
Roosevelt was organized in 1940. It owns and operates a harness raceway at Westbury, Long Island. In addition, Roosevelt owns considerable and valuable real property, improved and unimproved, in and about the raceway.
Levy, a member of the Bar for over 50 years, was the principal organizer of Roosevelt. In 1940 Levy owned 32% of the outstanding stock, the largest block. In 1962 7,000,000 shares were outstanding. Levy and his family then owned the third largest block, exceeded only by the holdings of Valentine and Starr. In 1962 Valentine and Starr respectively owned 616,410 and 357,825 shares, whereas Levy and his family owned 340,000 shares. Since 1940 Levy has been Roosevelt's general counsel, chairman of the board of directors and chairman of the executive committee. Levy has been and is in charge of racing operations, real property and all policy matters.
In or about 1959 Valentine informed Levy of his desire to sell his stock in Roosevelt. Valentine was then about 65 years of age and desired to retire. Apart from his Roosevelt holdings he was a millionaire. Thereafter Levy considered two offers to purchase a controlling interest consisting of the holdings of Levy, Valentine and Starr; one of them assigned $4.50 to $4.75 and the other $6 per share to the Valentine-Starr block.
The proposal involving the $6 price for the Valentine-Starr block was opposed by Arthur Feigenbaum, a stockholder. He organized a group of stockholders to object to the sale and advocated that Roosevelt purchase the shares of any director desiring to sell. Thereafter two other offers to purchase a controlling interest were submitted to Levy, each involving a price of $6 per share for the Valentine-Starr block. Levy finally decided against any sale involving a controlling interest.
Levy's decision against the sale of a controlling interest who on policy grounds concurred in by all interested parties. All concerned were eminently satisfied with the conduct of Roosevelt's affairs under the guidance of Levy. The intrinsic value of the stock was considerably more than its market value; Roosevelt had a cash surplus of $5,000,000. A shift in the control of Roosevelt in the wrong direction presented the possibility of a raid on the treasury and the likehood of an investigation by one or more regulatory public agencies.
The only two directors desiring to sell their stock were Valentine and Starr. Starr had been gradually liquidating his holdings at favorable market levels. Valentine was not disposed to sell, except as part of a controlling interest. In any case, Valentine was not inclined to sell without consulting Levy.
The holdings of Valentine and Starr did not constitute a controlling interest. Valentine's holdings, however, under the cumulative voting of the corporation, enabled the election of one of 10 directors. Nevertheless, Valentine and Starr did not constitute a control group. Their aggregate of stock holdings was less than 1,000,000 of 7,000,000 outstanding shares and they did not control the board of directors or the management. We are not called upon at this time to pass on the duty or obligation of a member of a control group in respect of the sale of his stock to the corporation at what might be a profit to him. If members of a control group were involved, then, to be sure, a higher duty would be indicated, but as the concurring opinion reasons even the higher duty was not breached in this case.
If, however, the large holdings of Valentine and Starr came into the hands of persons unacceptable to the Harness Racing Commission as stockholders of Roosevelt, a stock appraisal proceeding might be necessary to liquidate their holdings. In that event the intrinsic value of the stock would be a relevant consideration in the statutory appraisal proceeding.
It was also the sentiment of the board of directors of Roosevelt as well as its principal stockholders that a reduction in capital with consequent increased equity per share was desirable.
During and prior to early 1962, Levy and Valentine had many talks regarding his desire to liquidate his Roosevelt holdings. Valentine's purpose to sell was fixed but he was reluctant to do so without the concurrence of Levy. Levy was fully cognizant of all the implications of a sale of Valentine's stock. All of the relevant data was known to the interested parties.
Feigenbaum suggested to Weil, Roosevelt's president, that the corporation purchase the shares of Valentine and Starr. Weil conveyed this to Levy who negotiated thereafter with Valentine and Starr. At a special meeting of the board of directors held March 14, 1962, the corporation was authorized to purchase not in excess of 1,000,000 shares of its stock at not more than $5 per share.
A special meeting of the board of directors of Roosevelt was held on April 16, 1962, attended by all the directors. The board, Valentine and Starr abstaining, voted a resolution authorizing an invitation to stockholders to tender shares of the corporation at $4.875 per share. On April 16, 1962 the market price of the Roosevelt stock ranged between $4.375 and $5.25 per share. The directors, other than Valentine and Starr, agreed in writing not to tender their stock. Tender was required by May 8, 1962 and action thereon by the corporation was to be on or before May 15, 1962. Payment for blocks of stock less than 20,000 was to be in cash, and for larger blocks 29% in cash and the balance in two equal installments payable January 2, 1964 and January 2, 1965 with interest at 3%, and the right in the corporation to prepay with interest to such date, without penalty. The tender was limited to one million shares and with no obligation to accept on the part of the corporation.
At the annual meeting of stockholders held April 17, 1962, the stockholders were fully informed of the tender authorized by the board of directors on April 16, 1962. The subsequent notice of tender to the stockholders apprised them of the intention of Valentine and Starr to tender their shares, 616,410 and 357.825, respectively, and of their intention to resign as officers and directors; also that the other directors had agreed not to tender their stock.
The substance of the resolution authorizing the tender had been discussed between Levy and Valentine and between Levy and Starr. Valentine and Starr acted independently, each following his own dictates.
On May 14, 1962 the market price of the stock was $4 5/8ths per share. Levy informed Valentine and Starr the corporation would not act on the tender at a price in excess of the market. In the light of Levy's stand, the terms of the tender were modified to provide for an additional period of six months to pay the price above cash, the rate of interest to remain the same.
The tender totaled 1,060,659 shares, of which 616,410 were Valentine's and 357,825 Starr's. Valentine and Starr voluntarily reduced their tenders to 578,030 and 335,546 shares, respectively, which, together with 86,424 shares tendered by other stockholders, brought the tender within the prescribed maximum of 1,000,000 shares.
The board of directors, at the meeting of May 14, 1962, deliberated on, voted and accepted the tenders, Valentine and Starr not being present or participating.
Plaintiff's expert was of the opinion that the fair and reasonable price of the stock on May 14, 1962 was $3 to $3.75 per share, net, on a cash basis, and...
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