Brown v. Eastern States Corporation

• Decision Date: 26 October 1949
• Docket Number: Civ. No. 4699.
• Citation: 86 F. Supp. 887
• Parties: BROWN v. EASTERN STATES CORPORATION et al.
• Court: U.S. District Court — District of Maryland

86 F. Supp. 887

BROWN v. EASTERN STATES CORPORATION et al.

Civ. No. 4699.

United States District Court, D. Maryland.

October 26, 1949.

Simon E. Sobeloff and Eugene Feinblatt, of Baltimore, Maryland, and David I. Shivitz, of New York City, for plaintiff.

George Cochran Doub (Marshall, Carey & Doub), of Baltimore, and Horace R. Lamb (LeBouef & Lamb), of New York City, for defendants.

WILLIAM C. COLEMAN, Chief Judge.

This is a suit brought by the plaintiff, Arthur Brown, a citizen of New York, against Eastern States Corporation, an investment company incorporated under the laws of Maryland, and the individual defendants who are officers and members of the Board of Directors of that corporation, to enjoin all of the defendants from putting into effect a plan which was presented under date of August 30, 1949, to the preferred stockholders of that corporation, whereby they were offered common stock of the St. Regis Paper Company (of which Eastern States Corporation owned 1,000,000 shares) and cash, in exchange for outstanding shares of preferred stock of Eastern States Corporation.

The proceeding was originally begun and a preliminary injunction obtained in the Circuit Court No. 2 of Baltimore City solely on the bill of complaint and affidavits, but was then removed to this Court under 28 U.S.C.A. § 1441(b), on the ground that, as the bill of complaint alleged, questions of violation of federal laws were involved.

The following is a summary of the major features of the terms of the proposed exchange, as set forth in Eastern States' plan submitted to its preferred stockholders:

"For each share of Series A $7 Dividend Preferred Stock tendered to the Corporation for exchange, the Corporation will transfer and deliver 9 shares of St. Regis Paper Company Common Stock of the par value of $5 per share, now held by the Corporation, and $4.79 in cash.

"For each share of Series B $6 Dividend Preferred Stock tendered to the Corporation for exchange, the Corporation will transfer and deliver 8 1/3 shares of St. Regis Paper Company Common Stock of the par value of $5 per share, now held by the Corporation, and $4.43 in cash.

* * * * * *

"The exchange of the outstanding shares of the Corporation's Preferred Stock on the terms stated above, assuming all of the 100,000 shares of Preferred Stock are tendered for exchange, would reduce the Corporation's holding of St. Regis Paper Company Common Stock by a total of 860,000 shares, or from 1,000,000 shares to 140,000 shares, and would require the payment by the Corporation of $457,400 in cash (exclusive of the expenses of the proposed exchange).

"On August 1, 1949 St. Regis Paper Company Common Stock had a market value of $6.75 per share. Based upon such market value, a holder of one share of Series A $7 Dividend Preferred Stock tendering such share for exchange would receive in exchange St. Regis Paper Company Common Stock having a value of $60.75 and $4.79 in cash, or a total of $65.54, and a holder of one share of Series B $6 Dividend Preferred Stock tendering such share for exchange would receive St. Regis Paper Company Common Stock having a value of $56.25 and $4.43 in cash, or a total of $60.68.

"Assuming all of the outstanding Preferred Stock is tendered for exchange pursuant to the terms stated above, and assuming a market valuation of $6.75 per share (or a total of $6,750,000) for the Corporation's 1,000,000 shares of St. Regis Paper Company Common Stock, upon such exchange the holders of the Series A and Series B Preferred Stocks, as a class, would receive a participation equal to approximately 87% of the total net assets of the Corporation, and there would remain for the holders of the presently outstanding shares of Common Stock, as a class, a participation equal to approximately 13% of the total net assets of the Corporation.

"Assuming, further, that all the 100,000 outstanding shares of Preferred Stock of the Corporation is tendered for exchange on the terms stated above, so that all of the remaining net assets, amounting, as stated above, to approximately 13% of the total net assets of the Corporation, are reserved for the Common Stock as a class, it is estimated that in a liquidation and dissolution of the Corporation at the market price on August 1, 1949, of $6.75 per share for the 140,000 shares of St. Regis Paper Company Common Stock retained by the Corporation, the remaining net assets of the Corporation would have a net value of approximately $945,000 or approximately $1.65 per share for the 572,132 outstanding shares of Common Stock.

"If less than all of the outstanding shares of Preferred Stock are tendered for exchange, the liquidating value of unexchanged shares of Preferred Stock would be enhanced, and the amount of the enhancement would increase in direct proportion to the number of shares of Preferred Stock that are tendered for exchange.

"Assuming, (1) that the Corporation could have sold its entire holdings of 1,000,000 shares of Common Stock of St. Regis Paper Company on August 1, 1949, at the then market price of $6.75 per share, and assuming (2) that effective as of August 1, 1949, the voluntary liquidation and dissolution of the Corporation could have been authorized by the requisite vote of the stockholders, it is estimated that in such liquidation and dissolution the holders of the shares of the Series A $7 Dividend Preferred Stock and of the Series B $6 Dividend Preferred Stock would be entitled to receive approximately $72 per share, such estimate being subject, however, to a final determination and payment of all taxes and other liabilities of the Corporation, then due and payable, and of the actual cost and expense of such liquidation and dissolution; and in such liquidation and dissolution the holders of the outstanding shares of Common Stock would receive nothing. * * *

"Assuming, further, that on August 1, 1949 the 1,000,000 shares of Common Stock of St. Regis Paper Company could have been sold at a market price (the market price would have to be not less than $20½ per share) the highest quoted market price in the 10 year period 1939 to August 1, 1949 was 15 1/8 to yield an amount sufficient to pay the full amount to which each holder of Preferred Stock is entitled to receive on voluntary liquidation and dissolution of the Corporation, * * * each holder of Series A $7 Dividend Preferred Stock would be entitled to receive in such liquidation and dissolution the sum of $100 plus accumulated arrears of dividend on said date, which amounted to $113.35, or a total of $213.35 per share, and each holder of Series B $6 Dividend Preferred Stock would be entitled to receive in such liquidation and dissolution the sum of $100 plus accumulated arrears of dividend on said date, which amounted to $97.1572, or a total of $197.1572 per share, both of such total amounts being subject, however, to a final determination and payment of all taxes and other liabilities of the Corporation, then due and payable, and of the actual cost and expense of such liquidation and dissolution; and in such liquidation and dissolution the holders of the outstanding shares of Common Stock would receive nothing."

Three major grounds are asserted in the bill of complaint as the basis for granting injunctive relief and for an accounting by the individual defendants for alleged waste of the Corporation's assets committed by them in connection with the plan. These grounds are first, wilful, fraudulent deception practised upon all classes of stockholders of the corporation by reason of the individual defendants' promotion and offering of the plan without the prior calling of a meeting of stockholders of any class, and without any prior vote, approval or consent of the stockholders in any form whatsoever. It is claimed that this action on the part of the individual defendants was all pursuant to a conspiracy on their part to cheat and defraud the Corporation's stockholders, and more specifically, that the plan is designed to serve the interests and purposes only of defendant R. K. Ferguson, president of the Company, and, as alleged, the chief moving spirit in the whole scheme, and of the other defendant directors acting with him. Second, it is claimed that such action on the part of the individual defendants is ultra vires; and third, that the plan as offered violates the Maryland corporation laws.

We will first consider plaintiff's second and third contentions, and will deal with them as one, since they are closely interrelated, and, in effect, as presented they raise basically the same questions.

It is true that the plan was never formally submitted to the Corporation's stockholders for their acceptance or rejection, but the stockholders on April 13, 1949, at their last meeting held prior to submission of the plan, considered and formally adopted a change in the Corporation's investment policy so as to possess more freedom of action with respect to concentration of its investments. In furtherance of this change, amendments were adopted in the Corporation's Registration Statement as filed with the Securities and Exchange Commission, and among these amendments is the following: "In respect of the Registrant's present holding of 1,000,000 shares of the outstanding common stock of St. Regis Paper Company it is not the policy of Registrant to retain this investment as a permanent investment, at least not to the extent now held. Subject to market conditions and other favorable circumstances, as may be determined by the Registrant's Board of Directors from time to time, it will be the policy of Registrant to sell, exchange or make other dispositions of all or any part of this investment as the Board of Directors may determine from time to time." Conceding that this was not the equivalent of formal action by the stockholders with respect to the precise plan here in issue, we are nevertheless satisfied that failure to present this plan to the stockholders for their...