Dowling v. Narragansett Capital Corp.
| Decision Date | 17 April 1990 |
| Docket Number | Civ. A. No. 87-0213-T. |
| Citation | 735 F. Supp. 1105 |
| Parties | Daniel K. DOWLING and Stephen Casner, on behalf of themselves and all other similarly situated former stockholders of Narragansett Capital Corporation v. NARRAGANSETT CAPITAL CORPORATION, Arthur D. Little, Gregory P. Barber, Roger A. Vanderberg, Jonathan M. Nelson, Geraldine M. McNulty, Robert D. Manchester, Robert S. Davis, Raymond J. Armstrong, William P. Consodine, Harvey J. Sarles, John R. Rockwell, Frederick G. Frost, III, Rosalie J. Wolf, John M. Fox, Norman E. McCulloch, Jr., Paul A. Gusti, Lillian C. Martin, Doris M. Vigliotti, and Salomon Brothers, Inc. |
| Court | U.S. District Court — District of Rhode Island |
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Dennis E. Murray, Kirk J. Delli Bovi, Sandusky, Ohio, Robert D. Fine, Melvin L. Zurier, Licht & Semonoff, Providence, R.I., for plaintiffs.
Robert Flanders, Jeffrey C. Schreck, Robert Karmen, Flanders & Medeiros, Providence, R.I., for defendants.
Allen P. Rubine, Providence, R.I., for Salomon Brothers.
Thomas J. Schwarz, Skadden, Arps, Slate, Meagher & Flom, New York City, for Robert Manchester.
This is a suit by some former shareholders of Narragansett Capital Corporation who seek damages for the sale of all of the corporation's assets for what they say was a grossly inadequate price. Most of the defendants are directors, officers and/or shareholders who are accused of having orchestrated the sale for their own benefit and having solicited the approval of the remaining shareholders without adequately informing them about the nature of the transaction. It is before the Court on the defendants' motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) for failure to state a claim upon which relief may be granted and for failure to aver fraud with sufficient particularity. Those motions require the Court to address the disclosure requirements of the Securities and Exchange Act of 1934 (1934 SEA) and the self-dealing prohibitions of the Investment Company Act of 1940 (ICA) as well as the scope of an investment banker's liability for "fairness opinions" rendered in connection with such sales.
The complaint alleges that, in 1986, the plaintiffs were shareholders of Narragansett Capital Corporation (NCC), a Rhode Island corporation. NCC was a publicly traded closed-end investment company that invested in securities and provided venture capital to finance leveraged buyouts. The individual defendants were NCC's directors, officers, and controlling shareholders. Several of them (to wit: Little, Manchester, Barber, Vanderberg, Nelson, and McNulty who are hereinafter referred to as the "NMC owners") also own Narragansett Management Company (NMC), a Delaware corporation engaged in the business of providing investment advice.
The complaint further alleges that on June 30, 1986 the individual defendants caused NCC and its wholly-owned subsidiary, Narragansett Venture Capital (NVC), to enter into an asset purchase agreement with Monarch Capital Corporation (Monarch). Under the terms of that agreement, NCC and NVC were to sell all of their assets to Monarch. A special meeting of NCC's shareholders was scheduled for September of 1986 to approve the sale and adopt a plan to liquidate and dissolve NCC and NVC. Pursuant to that plan, NCC's shareholders were to receive approximately $56 in cash and tax credits for each share owned. Notice of the meeting was accompanied by a proxy statement in which NCC's board of directors recommended approval of the proposed transactions describing it as "fair" and in the "best interest of the stockholders." The board's recommendation was buttressed by an opinion expressed by Salomon Brothers, Inc. (Salomon), an investment banking firm hired by NCC, that the proposed purchase price fairly reflected the value of NCC's stock.
According to the complaint, the purchase price was not a fair one and the shareholders were unable to recognize its inadequacy because the proxy statement omitted and misrepresented a number of facts material to an accurate determination of value. The complaint further alleges that the defendants' motives and actions were tainted by an agreement between Monarch and NMC. Pursuant to that agreement, Monarch was to employ NMC as its investment adviser, and NMC was to receive an annual fee of 2-3% of the value of assets under management plus 20% of any profit realized by Monarch upon the sale of the assets acquired from Narragansett. In any event, the plaintiffs opposed the transaction, but it was approved by a majority of the shareholders. Accordingly, the sale and liquidation were consummated, and this action ensued.
The complaint contains eight counts. The first seven seek damages from NCC and various individual defendants. Count Eight is directed solely at Salomon. Count One demands compensatory and punitive damages from NCC and all of the individual defendants for what is characterized as bad faith and fraud. It is based on allegations that the defendants knowingly misled the shareholders regarding the true value of their stock by using inaccurate valuation methods, by recommending an inadequate sale price, and by failing to disclose material information regarding the value of NCC's interest in two limited partnerships and the agreement between Monarch and NMC. In addition, it charges that the defendants made no effort to secure the best price obtainable for NCC's assets.
Count Two also seeks compensatory and punitive damages from NCC and the individual defendants. It alleges violations of Section 14(a) of the 1934 SEA and its implementing regulations. 15 U.S.C. § 78n(a) and 17 C.F.R. § 240.14a-9. More specifically, it charges that the proxy statement misrepresented and omitted material facts regarding the value of NCC's stock and the nature of the NMC owners' interest in the transaction.
Count Three demands compensatory damages from the NMC owners for breaches of their common law fiduciary duties. It focuses on two assertions. The first is that they negotiated the agreement between NMC and Monarch from which they personally profited at the same time that NCC and Monarch were negotiating the asset purchase agreement. The second is that, through NMC, they misappropriated corporate opportunities by utilizing investment knowledge and information gleaned through their association with NCC.
In Count Four, the plaintiffs ask for compensatory and punitive damages from the NMC owners for violating § 10(b) of the 1934 SEA and Rule 10b-51 by knowingly disclosing confidential inside information to Monarch in order to facilitate the asset purchase from which they expected to profit, and by failing to make required disclosures to NCC's shareholders.
Count Five seeks compensatory damages from the individual defendants for allegedly violating §§ 17(a)(2) and 48(a) of the ICA2 which prohibit a person "affiliated" with a registered investment company from, directly or indirectly, purchasing any property from it. The gist of this claim is that the defendants, in effect, made such a purchase by diverting a portion of the profits from the asset sale to themselves through the guise of arranging for NMC to manage those assets.
In Count Six, the plaintiffs demand compensatory and punitive damages from NCC and the individual defendants for alleged breaches of fiduciary duties imposed by § 36(a) of the ICA.3 Specifically, the plaintiffs claim the defendants failed to communicate to the disinterested directors all relevant information about the sale and that, in exchange for a share of the profits and incentive compensation to which they were not otherwise entitled, they conspired with Monarch to enable it to obtain NCC's assets at a grossly inadequate price.
Count Seven seeks compensatory and punitive damages from NCC and the individual defendants for their alleged failure to comply with the disclosure requirements of § 13(e) of the 1934 SEA and related SEC rules.4 In particular, it asserts that the defendants failed to adequately reveal and analyze the factors on which they relied in recommending the sale.
Count Eight is directed solely at Salomon. It claims damages for what is alleged to be Salomon's negligent misrepresentation of the adequacy of the sale price in its fairness opinion.
One of the motions to dismiss is based on the contention that the complaint fails to set forth the circumstances constituting the alleged fraud with the particularity required by Fed.R.Civ.P. 9(b). That rule states:
(b) Fraud, Mistake, Condition of the Mind. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.
Since fraud embraces a wide variety of conduct, one purpose of the rule is to provide the defendant with information that is sufficiently particularized to enable him to understand the precise nature of the allegations and to prepare a response. 5 C. Wright & A. Miller, Federal Practice and Procedure § 1296 (1969). Another purpose, that is especially applicable in the context of securities litigation, is to deter groundless claims that are asserted solely for tactical reasons or for purposes of extracting nuisance settlements. Wayne Investment v. Gulf Oil Corp., 739 F.2d 11, 13 (1st Cir.1984); Philippe v. Shape, 688 F.Supp. 783, 786 (D.Me.1988).
Generally speaking, the rule requires "specification of the time, place, and content of an alleged false representation, but not the circumstances or evidence from which fraudulent intent could be inferred." Hayduk v. Lanna, 775 F.2d 441, 444 (1st Cir.1985); McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir. 1980). Allegations based on "information and belief" do not satisfy the particularity requirement unless the complaint sets forth...
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