Bunker Ramo-Eltra Corp. v. Fairchild Industries

• Decision Date: 19 June 1986
• Docket Number: Civ. A. No. HAR 84-2676.
• Citation: 639 F. Supp. 409
• Parties: BUNKER RAMO-ELTRA CORP., et al., Plaintiffs, v. FAIRCHILD INDUSTRIES, INC., et al., Defendants.
• Court: U.S. District Court — District of Maryland

639 F. Supp. 409

BUNKER RAMO-ELTRA CORP., et al., Plaintiffs, v. FAIRCHILD INDUSTRIES, INC., et al., Defendants.

Civ. A. No. HAR 84-2676.

United States District Court, D. Maryland.

June 19, 1986.

COPYRIGHT MATERIAL OMITTED

Noel C. Crowley, and Allied-Signal, Inc., Morristown, N.J., for plaintiffs.

James Schropp, and Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C., for defendants.

MEMORANDUM OPINION

HARGROVE, District Judge.

Plaintiffs, Allied Corporation and Bunker Ramo-Eltra Corporation, the successor to Bunker Ramo and a wholly owned subsidiary of Allied Corporation (hereinafter referred to as "Bunker Ramo-Eltra") originally filed this lawsuit in the United States District Court for the Southern District of New York on May 9, 1983, against defendants, Fairchild Industries (hereinafter referred to as "Fairchild") and its wholly owned subsidiary Fairchild Industries of Delaware (hereinafter referred to as "FIDEL") to recover "short-swing" insider profits allegedly realized by the defendants in violation of Section 16(b) of the Securities and Exchange Act of 1934 (hereinafter referred to as "Exchange Act"), 15 U.S.C. § 78p(b) (1964). This section provides:

(b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized...

The defendants answered the complaint and filed a counterclaim on July 6, 1983. In their answer, defendants raised the following defenses: failure to state a claim; plaintiffs' lack of standing under section 16(b); improper venue; waiver; and estoppel.

The counterclaim is an action based on the Declaratory Judgment Act, 28 U.S.C. § 2201 et seq. The defendants allege in the counterclaim that they are entitled to recover from plaintiff Allied all costs, damages, liabilities, losses and expenses which might result from Counts I and II of the complaint by virtue of an indemnification agreement between Allied and Fairchild and FIDEL.

The district courts of the United States have exclusive jurisdiction of violations of the Exchange Act under Section 27 of the Exchange Act, 15 U.S.C. § 78aa (1964).

Venue for violations of the Exchange Act is governed by Section 27 of the Exchange Act, 15 U.S.C. § 78aa (1964) which provides in pertinent part that:

any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder, or to enjoin any violation of such chapter or rules and regulations, may be brought in any such district or in the district wherein the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found.

After the defendants filed a Motion to Dismiss for Improper Venue, or in the Alternative, to Transfer, to which the plaintiffs responded, the Honorable Mary Johnson Lowe of the United States District Court for the Southern District of New York, found that venue was proper in Maryland and New York, and transferred this case in accordance with the doctrine of forum non conveniens based on 28 U.S.C. § 1404(a) to the District of Maryland on June 6, 1984.

Before the transfer, the parties had filed cross motions for summary judgment and pre-trial memoranda including a 35-page Joint Stipulation of Facts. After the transfer, both parties filed respective Motions for Summary Judgment and opposition thereto. The court held a hearing on these motions on May 2, 1986.

STIPULATED FACTS¹

From on or about May 7, 1981, through on or about July 31, 1981, Allied Acquisition Corporation ("Allied Acquisition") was a wholly-owned subsidiary of Allied, and was a corporation incorporated under the laws of the State of Delaware. Allied Acquisition was formed for the purpose of acquiring all of the common stock of Old Bunker Ramo and thereby effecting a merger with Old Bunker Ramo. On or about July 31, 1981, Old Bunker Ramo was merged into Allied Acquisition. Allied Acquisition survived the merger and changed its name to Bunker Ramo Corporation (hereinafter referred to as "New Bunker Ramo"). New Bunker Ramo was a wholly-owned subsidiary of Allied. On or about June 1, 1982, Eltra Corporation, then a wholly-owned subsidiary of Allied, was merged into New Bunker Ramo. New Bunker Ramo survived the merger, and changed its name to Bunker Ramo-Eltra. Although it is a named plaintiff in this proceeding, Bunker Ramo-Eltra merged on January 16, 1986, with Allied as noted above.²

In the fall of 1978, and for a period of time prior thereto, Martin Marietta Corporation ("Martin Marietta") owned 1,166,667 shares of common stock of Old Bunker Ramo (the "Martin Marietta Shares"). The Martin Marietta Shares represented approximately 21% of the outstanding voting stock of Old Bunker Ramo in 1978. At that time, two representatives of Martin Marietta served as directors on the Board of Directors of Old Bunker Ramo. In the fall of 1978, Martin Marietta proposed to sell the Martin Marietta Shares to United States Filter Corporation ("U.S. Filter"). At a Special Meeting of the Board of Directors of Old Bunker Ramo, held on October 10, 1978, the Board of Directors of Old Bunker Ramo authorized the issuance of a letter of serious and irreparable damage to Old Bunker Ramo, and also authorized the institution of legal action to oppose said proposed sale "in the event Martin Marietta Corporation does not respond in a satisfactory manner." Following the issuance of the above-mentioned letter, U.S. Filter subsequently terminated its plan to purchase the Martin Marietta Shares.

Defendant Fairchild resolved to seek a business combination between itself and Old Bunker Ramo, a public corporation listed on the New York Stock Exchange. It was apparently in furtherance of this objective that Fairchild, acting through a subsidiary (the defendant FIDEL) which it formed for the purpose of purchasing Old Bunker Ramo stock, on February 20, 1979 purchased from another company 1,666,667 shares of Old Bunker Ramo stock, amounting to slightly less than 21% of Old Bunker Ramo's outstanding shares. At that time and at all other relevant times, Fairchild's chairman and chief executive officer, Edward G. Uhl, served on Old Bunker Ramo's board of directors.³

The management of Old Bunker Ramo, anticipating a hostile takeover by Fairchild and intending to prevent the same, sought and obtained from Fairchild a written pledge by means of a "Standstill Agreement" dated January 5, 1979 which, subject to certain exceptions, bound Fairchild not to acquire in excess of 21% of Old Bunker Ramo's stock during a 3-year period without Old Bunker Ramo's consent. This agreement also provided that Fairchild, subject to certain exceptions, would not sell the block it had acquired to a single entity. The agreement further provided that Old Bunker Ramo would not merge with another company without affording Fairchild the opportunity to make its own takeover proposal.

On May 18, 1979, Fairchild offered to buy an additional 27% of the total Old Bunker Ramo stock as part of a formal merger proposal. The proposal was rejected by the Old Bunker Ramo board. On September 25, 1979, Fairchild expressed its interest in buying all of Old Bunker Ramo's shares for cash, but did not specify a price. On October 3, 1979, Fairchild offered to buy 1,700,000 additional shares at $33 per share, again expressing its desire to bring about a business combination. This offer was rejected.

In preparing for the annual meeting of stockholders held on April 22, 1980, Old Bunker Ramo sought from Mr. Uhl a commitment to put the interests of Old Bunker Ramo ahead of the interests of Fairchild as regards any conflict between them. When Mr. Uhl refused, his name was deleted from the slate of directors sponsored by management. Mr. Uhl and another Fairchild director, Thomas H. Moorer, were nevertheless nominated and elected by reason of the votes cast by Fairchild under the company's cumulative voting procedures.

Old Bunker Ramo thereafter held discussions concerning mergers with several other companies, including Allied. Discussions with Allied started in the summer of 1980.

Between February 10, 1981 and February 17, 1981, FIDEL made five separate purchases of Old Bunker Ramo common stock on the New York Stock Exchange, buying a total of 10,000 shares for which it paid a total of $387,887.50 and a broker's commission of $2,000. On or about March 10, 1981 FIDEL filed a "Form 4" with the Securities and Exchange Commission reflecting the purchase of the 10,000 shares of Old Bunker Ramo common stock in February 1981. Drafts of proxy statements prepared by Old Bunker Ramo recite the total of Fairchild stockholdings, using a figure (1,275,167 shares) which reflects the addition of most of the February, 1981 stock purchases.

A formal merger agreement, made subject to approval by the Old Bunker...