Bowers v. Columbia General Corporation

• Citation: 336 F. Supp. 609
• Decision Date: 27 December 1971
• Docket Number: Civ. A. No. 4248.
• Parties: Charles E. BOWERS, Sr., et al., Plaintiffs, v. COLUMBIA GENERAL CORPORATION et al., Defendants.
• Court: U.S. District Court — District of Delaware

336 F. Supp. 609

Charles E. BOWERS, Sr., et al., Plaintiffs, v. COLUMBIA GENERAL CORPORATION et al., Defendants.

Civ. A. No. 4248.

United States District Court, D. Delaware.

December 27, 1971.

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COPYRIGHT MATERIAL OMITTED

James M. Tunnell, Jr., Andrew B. Kirkpatrick, Jr., and Richard S. Paul, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., and Richard H. Keatinge, Robert Yale Libott and Frank E. Merideth, Jr., of Keatinge, Libott, Bates & Loo, Los Angeles, Cal., of counsel for plaintiffs.

Arthur G. Connolly, Jr., and John R. Bowman, of Connolly, Bove & Lodge, Wilmington, Del., and Keehn Landis, Voyle C. Wilson and Richard A. Makarski, of Chapman & Cutler, Chicago, Ill., of counsel for defendants.

OPINION

STAPLETON, District Judge.

This action seeks injunctive relief, rescission and damages for violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, breach of contract and fraud. The matter is currently before me on plaintiffs' motion for a preliminary injunction.

Prior to October 29, 1970, plaintiffs owned all of the outstanding capital stock of Fibre-Metal Products Company, a Pennsylvania corporation engaged in the manufacture and sale of welding and industrial safety supplies ("Fibre-Metal"). Fibre-Metal's business was founded in 1905 by Frederick M. Bowers. Plaintiff Naomi Bowers is his widow. Plaintiffs John Bowers and Charles Bowers, Sr. are his sons and plaintiff Charles Bowers, Jr., is his grandson; as of the fall of 1970, each of these three had occupied executive positions with Fibre-Metal for approximately 25 years. Up until that time Fibre-Metal had always been owned and operated by members of the Bowers family.

Defendant Columbia General Corporation, a Delaware corporation, ("CG") was organized in October of 1968 as a result of an amalgamation of two other enterprises. In the period between October 1968 and the present, CG has had serious acquisition discussions with approximately 25 business entities. These discussions resulted in 10 consummated acquisitions.

In the spring of 1970, Fibre-Metal and CG began merger discussions. After several months of negotiations, the acquisition of Fibre-Metal by CG was closed on October 29, 1970. For the purpose of effecting the acquisition, CG formed a wholly owned subsidiary, CGA, Inc., a Delaware corporation. Fibre-Metal was merged into CGA, Inc. whose name was contemporaneously changed to Fibre-Metal Products Company ("FM"). Immediately prior to the merger, CG transferred to CGA, Inc., as a contribution to capital, the capital stock and rights of CG necessary to consummate the merger. Upon the effective date of the merger, the capital stock in Fibre-Metal was converted into 200,000 shares of CG Common Stock, 200,000 shares of CG Series C Cumulative Convertible Preferred Stock, 7,000 shares of CG Series D Cumulative Preferred Stock,¹ and certain "participation units" evidenced by "Participation Certificates". In addition, the holders of the common stock of Fibre-Metal were given the right to receive up to 233,334 shares of CG Common Stock from an escrow agent in the event that the business of FM, measured by its "net income" as defined in the agreement, exceeded certain specified levels during fiscal 1971, 1972 and 1973. Under the participation certificates, additional shares of CG Common Stock are issuable in the event that the CG shares become issuable under the escrow agreement but have an aggregate market value of less than a specified amount.

Pursuant to the Plan and Agreement of Reorganization, Charles Bowers, Jr. was employed as the Chief Executive Officer of FM and Charles Bowers, Sr. and John W. Bowers were employed as consultants of FM, all for a period of five years. The Board of Directors, however, was to consist, and does consist, of four nominees of the former Fibre-Metal management and five nominees of CG management.

The complaint in this action sets forth seventeen claims. In connection with their application for preliminary relief, however, plaintiffs stress the five of these claims which they believe entitled them to rescission of the above-described transaction. In plaintiffs' First claim, it is alleged that the offer and sale of CG stock to plaintiffs violated Sections 5 and 12l(1) of the Securities Act of 1933 in that no registration statement was in effect with respect to the CG stock issued to plaintiffs and no exemption from the Act's registration requirements was available.

In plaintiffs' Second, Third and Fifth claims, it is alleged that defendants made certain untrue statements of material fact and omitted to state certain material facts in connection with the acquisitions of Fibre-Metal by CG in violation of Sections 12(2) and 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder.

In plaintiffs' Sixth claim, it is alleged that defendants have engaged in certain conduct in violation of the agreement and for the purpose of preventing the issuance to plaintiffs of the stock subject to earn-out, such conduct constituting a ". . . course of business which operates or would operate as a fraud or deceit . . . in connection with the purchase and sale of" a security in violation of Subsection (3) of Rule 10b-5.

I. THE APPLICABLE LEGAL STANDARDS.

When an application for a preliminary injunction is made, the moving party has the burden of showing that he is entitled to the relief sought based upon the following criteria: "(1) irreparable harm to . . . the moving party, absent such stay; (2) absence of substantial harm to other interested parties; (3) absence of harm to the public interest; (4) a likelihood that . . . the moving party prevail on the merits." Winkleman v. New York Stock Exchange, 445 F.2d 786 (3rd Cir. 1971); Nelson v. Miller, 373 F.2d 474 (3rd Cir. 1967); Babcock v. Local Bd. No. 5 for State of Del., 321 F.Supp. 1017 (D.Del.1970).²

I see in the present application no potential of injury to the public interest.³ Determination of the issue presented, accordingly, requires the Court to evaluate and weigh the potential irreparable injury to plaintiffs in the absence of preliminary relief, the potential irreparable injury to other interested parties in the event such relief be granted, and the probability of plaintiffs' ultimate success.

II. POTENTIAL IRREPARABLE INJURY TO PLAINTIFFS AND OTHER INTERESTED PARTIES.

Before examining plaintiffs' specific claims concerning irreparable injury, preliminary comment is appropriate. Plaintiffs assert that defendants, unless enjoined, will engage in various transactions involving the business and assets of FM which not only will be injurious to FM, but will also render meaningless any right plaintiffs may have to rescission⁴ or to damages for violations of the "earn-out provisions" of the Plan of Reorganization. Plaintiffs also maintain that the proposed transactions and the possibility of irreparable injury therefrom must be evaluated in the context of a behavior pattern on the part of defendants which, according to plaintiffs, demonstrates their bad faith.

It is not surprising, in the context of a situation in which the parties have views about business policy as divergent as those which exist here, to find that one side questions the good faith of the other. At the current stage, however, I am not prepared to conclude that any of the defendants have acted in bad faith. As hereinafter indicated, the principal charges of misrepresentation in the negotiation of the Plan of Reorganization are inconsistent with the express terms of the agreement itself. The attempt to take corporate action without a directors' meeting when all directors of FM did not approve of that action, while apparently in violation of Delaware law,⁵ does not compel an inference of bad faith. There was nothing surreptitious about these proceedings; those holding the minority view were informed of the proposed action, were given the opportunity to record their dissent, and approved in the procedure,⁶ apparently in the interest of saving the expense of getting the directors together for a meeting. Finally, I am satisfied that the attempt to hold a meeting of the FM board to ratify the actions contained in the challenged written consents, whether or not in violation of the letter of the Stipulated Temporary Restraining Order then in effect, was not calculated to circumvent the purpose of that Order. Accordingly, I think the question of the probability of irreparable injury must be decided without reference to any alleged bad faith on the part of the defendants.

To the extent plaintiffs' claim of irreparable injury is bottomed upon their claimed right to rescission, it is important to recognize that it is now, and will in the future be, impossible to put plaintiffs in exactly the same position they occupied prior to October of 1970. To some degree, Fibre-Metal as a business enterprise was altered upon the consummation of the reorganization; it has been further altered since that time.⁷ Indeed, it undoubtedly would be different today than in September of 1970 even if it had remained solely in the hands of the Bowers family. In short, business assets, in order to retain their value, need to be managed; changes need to be made to adapt to changing conditions.

This, of course, does not mean that preliminary relief is never appropriate in a rescission case of this kind. Changes may be proposed which will involve third parties or otherwise preclude effective remedy by way of rescission. Compare Deckert v. Independence Shares, 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189 (1940). It does mean, however, that where it appears that the court can allow a business to be managed by its board of directors and still do substantial justice if and when the time for rescission comes, it should not restrict management by preliminary order for the purpose of freezing the corporation's assets and the...