Edelman v. Salomon

• Decision Date: 18 March 1983
• Docket Number: Civ. A. No. 83-9.
• Citation: 559 F. Supp. 1178
• Parties: Asher B. EDELMAN, Canran Associates I, L.P., Plaza Securities Company, and Arbitrage Securities Company, Plaintiffs, v. Sir Walter H. SALOMON, John Legge, the Earl of Dartmouth, Montagu Investment Management Limited, Canal-Randolph Corporation, Alfred D. Timm, A.B. Robbs, Jr., Dwight D. Sutherland, Rea Brothers Plc., Rea Brothers (Guernsey) Limited, Rea Brothers (Isle of Man) Limited, the Scottish and Mercantile Investment Company, Plc., Lancashire & London Investment Trust Plc., Ocean Wilsons (Holdings) Plc., Jastlin Limited, Fashion & General Investment Plc., Scottish Cities Investment Trust Plc. and Jocelin Harris, Defendants.
• Court: U.S. District Court — District of Delaware

559 F. Supp. 1178

Asher B. EDELMAN, Canran Associates I, L.P., Plaza Securities Company, and Arbitrage Securities Company, Plaintiffs, v. Sir Walter H. SALOMON, John Legge, the Earl of Dartmouth, Montagu Investment Management Limited, Canal-Randolph Corporation, Alfred D. Timm, A.B. Robbs, Jr., Dwight D. Sutherland, Rea Brothers Plc., Rea Brothers (Guernsey) Limited, Rea Brothers (Isle of Man) Limited, the Scottish and Mercantile Investment Company, Plc., Lancashire & London Investment Trust Plc., Ocean Wilsons (Holdings) Plc., Jastlin Limited, Fashion & General Investment Plc., Scottish Cities Investment Trust Plc. and Jocelin Harris, Defendants.

Civ. A. No. 83-9.

United States District Court, D. Delaware.

March 16, 1983.

As Amended March 18, 1983.

COPYRIGHT MATERIAL OMITTED

Rodman Ward, Jr., Stephen P. Lamb, Stephen E. Jenkins, Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del., Stuart L. Shapiro, Michael W. Mitchell, Deborah Lin Smith, Jeremy A. Berman, Yvonne V. Miller, Skadden, Arps, Slate, Meagher & Flom, New York City, for plaintiffs.

A. Gilchrist Sparks, III, Kenneth J. Nachbar, Morris, Nichols, Arsht & Tunnell, Wilmington, Del., Wachtell, Lipton, Rosen & Katz, Proskauer, Rose, Goetz & Mendelsohn, New York City, for all defendants except Montagu, Robbs and Sutherland.

Michael D. Goldman, Donald J. Wolfe, Jr., John E. James, Potter, Anderson & Corroon, Wilmington, Del., Joseph T. McLaughlin, Charles B. Manuel, Jr., James P. Fallon, Shearman & Sterling, New York City, for defendant Montagu.

R. Franklin Balotti, Donald A. Bussard, Richards, Layton & Finger, Wilmington, Del., Walsh & Frisch, New York City, for defendants Robbs and Sutherland.

OPINION

STAPLETON, District Judge:

This securities action arises out of a proxy contest for control of Canal-Randolph Corporation ("Canal-Randolph"). Plaintiffs seek preliminary and permanent injunctive relief which would, inter alia, postpone the annual meeting of Canal-Randolph stockholders currently scheduled for March 18, 1983, require that there be cumulative voting in the election of directors at that meeting, and direct that certain shares of Canal-Randolph in which defendants have an interest be "sterilized" at that meeting.

Plaintiff Canran Associates I, L.P. ("Canran") is a Delaware limited partnership and plaintiffs Plaza Securities Company ("Plaza") and Arbitrage Securities Company ("Arbitrage") are New York limited partnerships. Plaintiff Asher B. Edelman ("Edelman") is the controlling general partner of Canran, Plaza and Arbitrage. Edelman, indirectly through Plaza, Arbitrage and Canran, and directly, beneficially owns 322,200 shares, or 20.8 percent of the outstanding shares of Canal-Randolph stock. Plaintiff Eugene Eichenberg ("Eichenberg") is a resident of New York and is, and at all times relevant to this complaint has been, the owner of shares of the common stock of Canal-Randolph.

Defendant Walter H. Salomon ("Salomon"), a citizen and resident of England, is the Chairman of the Board of Canal-Randolph. Salomon is the record owner of 1,000 shares of Canal-Randolph stock. He also serves as Chairman of the Board of defendant Rea Brothers Plc. ("Rea Brothers"), and owns approximately 10% of its stock.

Defendants Rea Brothers, Rea Brothers (Guernsey) Limited ("RBG"), and Rea Brothers (Isle of Man) Limited ("RBI") (sometimes collectively referred to as "Rea Brothers") are corporations organized under the laws of England and Wales, the States of Guernsey and the Isle of Man, respectively, and are private banks involved in the investment management business. RBG and RBI are wholly-owned subsidiaries of Rea Brothers.

Defendants Alfred D. Timm ("Timm"), A.B. Robbs, Jr. ("Robbs") and Dwight D. Sutherland ("Sutherland") are directors of Canal-Randolph who beneficially own 200, 2,400 and 5,000 shares of Canal-Randolph stock, respectively.

Defendants Scottish and Mercantile Investment Company, Plc. ("Scottish"), Lancashire & London Investment Trust, Plc. ("Lancashire"), Ocean Wilsons (Holdings), Plc. ("Ocean"), Jastlin Limited ("Jastlin"), Fashion & General Investment, Plc. ("Fashion"), and Scottish Cities Investment Trust, Plc. ("Cities") (the "Scottish Group") are corporations organized under the laws of England and Wales. Scottish, Lancashire, Cities and Fashion are closed end investment companies, Jastlin is an investment company and Ocean is a trading company.

Defendant Canal-Randolph is a corporation engaged in the business of real estate and stockyard ownership and management. Canal-Randolph had outstanding approximately 1,545,805 common shares as of January 19, 1983. Its common shares are registered with the Securities and Exchange Commission pursuant to Section 12(b) of the 1934 Act, 15 U.S.C. § 78l(b), and are traded on the New York and London Stock Exchanges.

Defendant Montagu Investment Management Limited ("Montagu"), a corporation organized under the laws of England, is an investment adviser.

Since 1956, when shares of the common stock of Canal-Randolph were first distributed to the public, Rea Brothers has acquired such stock on its own behalf, as market maker in Canal-Randolph common stock, on behalf of both discretionary and nondiscretionary account customers, and for investment companies managed by Rea Brothers, including Scottish, Fashion, Jastlin and Cities. A substantial amount of the Canal-Randolph common stock owned by discretionary account customers was registered in the name of a nominee company, Walsa (Nominees) Limited ("Walsa"). Walsa is an acronym for Walter Salomon.

Since 1956 and continuing to date, Rea Brothers has had the power to dispose of the common stock of Canal-Randolph held by discretionary account customers and investment companies it manages, aggregating in an amount in excess of five percent. As of January 1983, Rea Brothers had the power to dispose of approximately 438,000 shares of common stock of Canal-Randolph (approximately 28.6% of the outstanding shares). Rea Brothers has maintained the power to dispose of at least approximately 400,000 shares of Canal-Randolph common stock since approximately 1964.

Although the agreements between Rea Brothers and its discretionary account customers do not contain any provisions with respect to the manner in which securities held by Rea Brothers on behalf of such discretionary account customers are to be voted, Rea Brothers has had a general instruction from such customers to vote the Canal-Randolph common stock held by Rea Brothers on behalf of such customers in accordance with recommendations of the Board of Directors of Canal-Randolph, unless otherwise instructed.

Fifty (50) percent or more of the members of the Board of Directors of the managed investment companies owning Canal-Randolph stock are affiliated with Rea Brothers. The management agreement between Rea Brothers and the managed investment companies does not contain provisions with respect to the manner in which securities held by Rea Brothers on behalf of the applicable investment company are to be voted. In practice, however, the managed investment companies have authorized, and Rea Brothers has exercised, the power to vote the Canal-Randolph common stock owned by the managed investment companies in favor of management positions.

Montagu is an investment adviser to nine investment trusts and unit trust companies that own 7.7% of Canal-Randolph shares. Each trust is a separate legal entity under United Kingdom law and has a separate board of directors. While Montagu initiates investments for the trusts, the respective boards review those investments and have the right to rescind any purchase. Montagu owns no shares of Rea Brothers or its affiliates, and Rea Brothers owns no shares of Montagu. There are no cross-directorships between Montagu and any of the other defendants, including Canal-Randolph. Montagu owns no shares of Canal-Randolph.

Before 1981, Article TENTH of the Certificate of Incorporation of Canal-Randolph provided for the use of cumulative voting in the election of directors, but no stockholder had ever before used that provision to elect to the Board someone opposed by management. At the March 11, 1981 Annual Meeting, John Cushman, a stockholder owning 7.0 percent of the common stock of Canal-Randolph, voted his shares cumulatively in an unsuccessful effort to elect his nominee to the Board.

In reaction to Cushman's failed effort, Salomon decided to cause the Company to call a special meeting of stockholders to eliminate the cumulative voting provisions in the Certificate. At Salomon's request, the Board of Directors of Canal-Randolph unanimously adopted resolutions setting forth a proposed amendment to the Certificate eliminating cumulative voting and instituting a classified or "staggered" board of directors.

On September 4, 1981, the Board distributed a Notice of Special Meeting of Stockholders to be held October 5, 1981 and management's Proxy Statement in connection with that meeting (the "1981 Proxy Statement"). By means of the proxy statement, the Board solicited stockholder approval of the charter amendment proposed by the Board. In a chart appearing prominently on page 2, the 1981 Proxy Statement stated that all directors and officers of Canal-Randolph, as a group, "beneficially owned" only 2.82 percent of Canal-Randolph's common stock and that Salomon was the beneficial owner of only 1,000 shares. The term "beneficially owned" was defined in a note to the chart which stated that "under regulations of the SEC, a person who has or shares the power to direct the voting or disposition of stock is considered a `beneficial owner'." Thus, the 1981 Proxy Statement created the impression that management had the power to vote or dispose of 2.82 percent of the shares of the Company's stock.

The 1981 Proxy Statement failed to disclose that 425,000 Canal-Randolph shares were held by Rea Brothers' customers.¹ Moreover, it failed to report the facts concerning the voting of...