CPC Intern., Inc. v. McKesson Corp.

• Decision Date: 13 November 1986
• Citation: 120 A.D.2d 221,507 N.Y.S.2d 984
• Parties: , Blue Sky L. Rep. P 72,459, 55 USLW 2328, Fed. Sec. L. Rep. P 93,023 CPC INTERNATIONAL, INC., Plaintiff-Respondent-Appellant, v. McKESSON CORPORATION, Corporation of America, Morgan Stanley & Co. Incorporated, H. Eugene Blattman, G. Clinton Merrick and Steven M. Brounstein, Defendants-Appellants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 984

507 N.Y.S.2d 984

120 A.D.2d 221, Blue Sky L. Rep. P 72,459,

55 USLW 2328,

Fed. Sec. L. Rep. P 93,023

CPC INTERNATIONAL, INC., Plaintiff-Respondent-Appellant, v. McKESSON CORPORATION, Corporation of America, Morgan Stanley

& Co. Incorporated, H. Eugene Blattman, G. Clinton

Merrick and Steven M. Brounstein,

Defendants-Appellants-Respondents.

Supreme Court, Appellate Division,

First Department.

Nov. 13, 1986.

Moses Silverman, of counsel (Arthur Liman, Stuart Robinowitz and Abby L. Jennis, with him on the brief; Paul, Weiss, Rifkind, Wharton & Garrison, New York City, attorneys) for defendants-appellants-respondents McKesson Corp., Corporation of America and the individual defendants-appellants-respondents.

Lewis B. Kaden, of counsel (Jayne S. Robinson, Lisa Huestis and Karoly Gutman with him on the brief; Davis Polk & Wardwell, New York City, attorneys) for defendant-appellant-respondent Morgan Stanley.

Stephen Rackow Kaye (Claire P. Gutekunst, Mary C. Mone, Catherine McGrath and William S. Wells, with him on the brief; Proskauer Rose Goetz & Mendelsohn, New York City, attorneys) for plaintiff-respondent-appellant.

Before MURPHY, P.J., and KUPFERMAN, ROSS and LYNCH, JJ.

ROSS, Justice.

In these two appeals and cross-appeal we are presented with an issue that apparently has not been decided by an appellate Court in this State, to wit: is there a private right of action under § 352-c of the Martin Act (General Business Law (GBL) Article 23-A). The general objective of the Martin Act "... is to prevent all kinds of fraud in connection with the sale of securities and commodities and to defeat all unsubstantial and visionary schemes in relation thereto whereby the public is fraudulently exploited ..." (People v. Federated Radio Corporation, 244 N.Y. 33, 38, 154 N.E. 655 (1926)). The Martin Act was amended in 1955 to add the subject § 352-c.

The McKesson Corporation (McKesson) is incorporated in Maryland, has its headquarters in California, is qualified to do business in New York State, and its main office in this State is located in New York County.

In 1976 McKesson was allegedly principally engaged in, inter alia, the business of the wholesale distribution of drug and pharmaceutical products, chemicals and spirits. During 1976 McKesson purchased the C.F. Mueller Company (Mueller a leading pasta manufacturer, from New York University Law School.

Mueller was founded in 1867, incorporated in Delaware, and its headquarters and manufacturing plant were located in Jersey City, New Jersey. Following its purchase, Mueller became a wholly-owned subsidiary of McKesson, and the Mueller stock was held by the Corporation of America (Corp-Am), which was another wholly-owned subsidiary of McKesson. Corp-Am is a California corporation, and it has its offices and principal place of business in California.

Between the date of Mueller's acquisition in 1976 and 1983, McKesson claims that it operated Mueller's successfully. However, according to McKesson, in 1983, as part of its strategy of redeploying its assets and reducing its activities in the food distribution business, McKesson made a decision to examine the possibility of divesting itself of Mueller. As a result of that decision, McKesson conferred with Morgan Stanley & Co. Incorporated (Morgan Stanley), McKesson's financial advisor, for the purpose of arranging for the sale of Mueller's stock.

Morgan Stanley is a Delaware Corporation, is qualified to do business in New York State, and its principal place of business and executive headquarters are located in New York County. The business activities of Morgan Stanley include, inter alia, investment banking, underwriting, financial counseling, and providing professional assistance to companies and firms in the marketing and sale of businesses and securities.

Subsequent to McKesson's conference with Morgan Stanley, McKesson decided to solicit bids for Mueller from leading food companies throughout the United States. Thereafter, Morgan Stanley provided assistance to McKesson in carrying out this plan, by, inter alia: formulating a solicitation and selling process; preparing an outline of an Offering Memorandum; gathering facts, data, and other information from McKesson and Mueller personnel about Mueller's business and operations; participating in the preparation of the Offering Memorandum and a Confidential Addendum to it that contained financial information and projections, which documents were ultimately to be submitted to serious bidders for Mueller; privately advertising the availability of the Mueller stock; contacting selected potential purchasers and supplying them with the Offering Memorandum and Confidential Addendum, mentioned supra; and soliciting bids for the purchase of the Mueller stock.

Mr. Thomas J. Drohan, now deceased, who was the President and Chief Executive Officer of McKesson in 1983, and Mr. H. Eugene Blattman (Mr. Blattman), who in 1983 was Vice President of McKesson and President of its Foods Group, which included Mueller, were the senior members of McKesson's management, and allegedly directed and participated in McKesson's decision to sell Mueller's stock. Mr. Blattman is a California resident.

Soon after McKesson made the decision to sell Mueller, it advised several senior members of Mueller's management, including Mr. G. Clinton Merrick (Mr. Merrick), who was Mueller's President and a McKesson employee; and, Mr. Steven M. Brounstein (Mr. Brounstein), who was Mueller's marketing Vice-President, of that decision. Mr. Merrick is a Connecticut resident, and Mr. Brounstein allegedly is a California resident.

The Offering Memorandum, dated August 1983, was distributed to bidders and contained information relative to Mueller's, financial performance and business potential. As mentioned supra, this Offering Memorandum was accompanied by a Confidential Addendum, which contained, inter alia, projections or predictions of Mueller's sales and profits for the three fiscal years ending March 31, 1984-1986, indicating a steadily increasing profit and sales. On the first page of the Offering Memorandum appeared a disclaimer, which purported to release McKesson and Morgan Stanley from any liability relative to representations or warranties.

Eight serious bidders, who had received copies of the Offering Memorandum and the Confidential Addendum, in September 1983, visited Mueller's headquarters in Jersey City for a one-day presentation. During this presentation, Mueller executives allegedly described the business, industry trends, historical performance, and the projections, included in the Confidential Addendum. Furthermore, allegedly Mueller's management pointed out to these potential bidders that the projections were merely estimates, since they were based upon hypothetical assumptions, which by their nature contained uncertainties and risks, and the projections for the fiscal year ending 1984 could fall short by $2,000,000.00 to $2,500,000.00. Among the bidders, who attended this presentation, was CPC International, Inc. (CPC)

CPC is a Delaware corporation that has its principal place of business and executive headquarters in New Jersey. In addition, it maintains offices and facilities in New York State, where it is qualified to do business, and is a major food conglomerate. The April 29, 1985 issue of Fortune magazine, at page 286, listed CPC as the 87th largest industrial corporation in the United States.

McKesson contends that Mueller opened its books and records to interested bidders, and alleges that, while some bidders accepted that invitation, CPC did not. During this period of time, CPC received advice from its own investment banker, Dillon Read & Co., concerning the opportunity to acquire the Mueller stock.

In October 1983, CPC submitted the highest bid for Mueller, which was approximately $124 million, and McKesson accepted it. Direct negotiations for a contract of sale followed between executives of McKesson and CPC. Examination of the record indicates that, during those negotiations, CPC's attorneys demanded that the projections of, inter alia, forecast sales and profits, be included in the contract of sale, as representations and warranties, but McKesson refused to comply. Finally, while McKesson did not warrant the subject projections themselves, McKesson did warrant, in substance, that the projections were made in good faith, and in the ordinary course of business. In pertinent part, § 2.4 (entitled: Financial Statements), subdivision (e) of the AGREEMENT OF PURCHASE AND SALE OF STOCK (Agreement) reads:

"(e) The projections ... were generated by [Mueller], and reviewed by McKesson management, to support the financial operating plan of [Mueller] for the fiscal years ending March 31, 1984 through 1986 ... McKesson management are using the Projections relating to the fiscal year ending March 31, 1984 to measure the operating performance of [Mueller] for such fiscal year. The Projections have been prepared using the same general format and accounting principles used in the preparation of the Financial Statements referred to in paragraph (a) above ..." [material in brackets added].

Furthermore, McKesson warranted in § 2.5 (entitled: Absence of Specified Changes) of the Agreement that: "Since June 30, 1983, there has not been any change in the condition (financial or otherwise), operations, business or properties of [Mueller], except changes in the ordinary course of business, which changes have not in the aggregate been materially adverse. Since such date, [Mueller] has not made any change in any method of accounting or accounting practice" [material in brackets added].

CPC and McKesson entered into the contract of sale on November 9, 1983 in California, and the transaction was closed on November 30, 1983, also in California, with CPC buying the Mueller stock for $124.3 million.

It is undisputed that, subsequent to CPC's purchase, Mueller's business declined....