Foltz v. U.S. News & World Report, Inc., s. 87-7151

• Decision Date: 13 January 1989
• Docket Number: Nos. 87-7151,s. 87-7151
• Citation: 275 U.S. App. D.C. 145,865 F.2d 364
• Parties: , 57 USLW 2452, 10 Employee Benefits Ca 1689 Charles S. FOLTZ, et al., Appellants, v. U.S. NEWS & WORLD REPORT, INC., et al. Charles S. FOLTZ, et al., John Kirby, Appellant, v. U.S. NEWS & WORLD REPORT, INC., et al. David B. RICHARDSON, et al., Appellants, v. U.S. NEWS & WORLD REPORT, INC., et al. to 87-7153.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 364

865 F.2d 364

275 U.S.App.D.C. 145, 57 USLW 2452,

10 Employee Benefits Ca 1689

Charles S. FOLTZ, et al., Appellants, v. U.S. NEWS & WORLD REPORT, INC., et al.

Charles S. FOLTZ, et al., John Kirby, Appellant, v. U.S. NEWS & WORLD REPORT, INC., et al.

David B. RICHARDSON, et al., Appellants, v. U.S. NEWS & WORLD REPORT, INC., et al.

Nos. 87-7151 to 87-7153.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 3, 1988.

Decided Jan. 13, 1989.

Appeals from the United States District Court for the District of Columbia (Civil Actions No. 84-00447 and 85-02195).

Alan Raywid and Joseph M. Butler, with whom Margaret E. Haering, John D. Seiver, Susan Paradise Baxter, Washington, D.C., for Charles F. Foltz, and George A. Bangs, Rapid City, S.D., for David B. Richardson, et al., were on the brief, for appellants in 87-7151, 87-7152 and 87-7153.

Lawrence J. Latto, Leslie A. Nicholson, Jr. and Willis B. Snell, with whom William R. Galeota, Patrick M. Hanlon and Julie M. Edmond, for Profit Sharing Plan of U.S. News & World Report, Inc., et al.; Hannah E.M. Lieberman and Thomas J. Catliota, for U.S. News & World Report, Inc., and The Madana Realty Co.; Steuart H. Thomsen, for American Appraisal Associates, Inc.; Richard J. Wertheimer, Hadrian R. Katz and Edward L. Wolf, Washington, D.C., for director defendants; and Nell B. Strachan, Baltimore, Md., and William D. Quarles, Washington, D.C., for Mercantile Safe Deposit & Trust Co., were on the brief, for appellees in 87-7151, 87-7152 and 87-7153. Mark E. Newell, Washington, D.C., also entered an appearance for appellee Fred Drasner, in 87-7151.

Before EDWARDS, BUCKLEY and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

STEPHEN F. WILLIAMS, Circuit Judge:

Appellants are former employees of U.S. News & World Report, Inc. All retired between 1974 and 1982. At their retirements, U.S. News exercised its option to purchase the shares in the company that each had received as part of a stock bonus program. In addition, the U.S. News Profit-Sharing Plan issued retirement benefits to each of them, computed on the basis of their proportional interests in U.S. News stock held by the Plan (virtually its sole asset). The stock was not publicly traded, and in valuing the relevant stock interests for both purposes, the defendants treated them as minority interests, rather than including a "control" premium.

The gap between minority and majority valuation proved great because U.S. News, through a subsidiary (Madana Realty), owned a 3.8-acre parcel of real estate in a rapidly developing office district in Washington, D.C., known as the West End. The company used more than half of this land for employee parking, III Joint Appendix ("J.A.") 1044, and carried it on its books at a fraction of its market value. Foltz v. U.S. News & World Report, Inc., 663 F.Supp. 1494, 1503 (D.D.C.1987).

U.S. News annually engaged American Appraisal to value the company's stock for purposes of exercising its option to buy the holdings of retiring employees. American Appraisal almost entirely discounted the potential value of the real estate, at least until 1981, because its talks with the company's management convinced it that development plans remained remote and speculative. 663 F.Supp. at 1502-03.

The Plan in turn used American Appraisal's share valuation in calculating the severance benefit to be paid to employees who retired, died, or separated from U.S. News in each year.

The sale of all of U.S. News's stock in 1984 revealed the significance of these valuation decisions, exposing an immense gulf between the per share realizations of the plaintiff retirees and the beneficiaries of the company's sale. The total sale price was $176 million, or $2,842 per share. Employees who were in active service at the date of the sale, and who held U.S. News stock interests either directly or through the Plan, benefited accordingly. So did company directors, through what the litigants call "phantom stock" holdings ¹--in essence, bonuses in the form of promises by the company to pay the recipient at retirement the per share value of the company's stock at that date, multiplied by the number of "phantom" shares issued to the director. ² By contrast, valuations for the plaintiff retirees ranged from $65 per share in 1973 to $470 in 1981.

In the district court the plaintiff retirees claimed that the defendants' valuation decisions (along with related statements or omissions) breached fiduciary duties imposed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. Secs. 1001, et seq. (1982) ("ERISA"), and violated the securities laws. ³ They brought claims against the Plan, the company, Madana Realty, and American Appraisal and also against several former directors of U.S. News (as directors and as Plan fiduciaries). See 663 F.Supp. at 1498 n. 3 (listing individual defendants). The trial court ruled for defendants on each count of the complaints. We affirm.

Our analysis proceeds through these steps:

1. U.S. News's purchase of stock from retiring employees were clearly purchases of minority interests and, under Article Fifth (e) of its Certificate of Incorporation, could not have been valued otherwise.

2. For the Plan's computation of retiring employees' interests in the Plan's U.S. News stock, the governing Plan document directed the Plan to use "the fair market value established" under Article Fifth (e). That valuation technique, further, accorded with one of the key purposes of the Plan--to perpetuate employee ownership of the company. Thus minority valuation complied with the explicit directive of the Plan document and also tended to fulfill its general purposes.

3. As ERISA instructs fiduciaries to carry out the aims of the Plan that they administer, it did not prohibit the fiduciaries' action. Nothing in ERISA contradicts the directive of the Plan document or the congruence of minority valuation with its purposes. ⁴

I. U.S. NEWS'S EXERCISES OF ITS PURCHASE OPTION

A 1962 reorganization of U.S. News created two classes of shares, Common and Class A. All shares of both classes had equal voting rights. The only difference was that Class A shares had a non-cumulative dividend preference of $2.00 per share per year and could be held only by the U.S. News Profit-Sharing Plan. III J.A. 936. Class A shares were designed to convert automatically to Common if they were acquired by anyone other than the Plan. U.S. News Certificate of Incorporation, Article Fourth (d)(ii).

As part of the 1962 reorganization, those employees who owned shares in the predecessor corporation were issued a total of 108,000 shares in the new company. About two-thirds of the shares in the predecessor company had belonged to the company's founder, David Lawrence, and to his family; the company purchased these shares for cash and for notes that it repaid by 1967.

After the reorganization, employees could acquire additional direct ownership of shares only through U.S. News's stock bonus plan. All employees were eligible to participate. I J.A. 168. U.S. News gave bonus shares to employees in the fifth year of their employment, and every five years thereafter. It calculated the dollar value of the shares to be awarded according to a consistent formula: the longer an employee's length of service, and the greater his salary, the larger the dollar value of the quinquennial bonus. U.S. News then divided this dollar figure by the current appraised value of a share to arrive at the number of bonus shares it would award the employee that year.

In order to keep the beneficial ownership of the company lodged among its active employees, Article Fifth of the U.S. News Certificate of Incorporation required employees to offer to sell their shares back to the company if the employee left for any reason, including retirement. The option price was to be established by an independent appraiser, according to a procedure spelled out in Article Fifth, paragraph (e):

(e) Option Price. The option price of stock shall be its fair market value as of the date of exercise of the option....

Fair market value as of any date shall be the fair market value agreed upon by the parties, or in the absence of such agreement, determined as follows: The board of directors of the corporation shall select each year a qualified appraiser of national standing, who shall, as soon after the close of each fiscal year of the corporation as complete financial statements are available, determine the fair market value of the stock of the corporation as of the close of such fiscal year. Such fair market value shall be determined without regard to the restrictions on transfer of stock contained in this Article. In making such appraisal the appraiser shall use methods and standards recognized by the regulations of the United States Internal Revenue Service as appropriate for determining fair market value of corporate stock.... The market value per share so determined shall be the option price ...

Article Fifth (e), III J.A. 918-19 (emphasis added). Article Fifth (e) also included a procedure by which aggrieved employees could contest the appraisal, but the parties agree that no employee invoked it during the period over which plaintiffs retired. Appellants' Joint Br. at 8, Appellees' Joint Br. at 25. Between 1962 and the retirement of the last retiring plaintiff, U.S. News always exercised its Article Fifth (e) purchase option. 663 F.Supp. at 1500-01.

Although plaintiffs make a game try, it seems quite plain that U.S. News acted properly in adopting a minority valuation for the small lots of bonus stock that it purchased from employees. Article Fifth (e) gives the appraiser two instructions on the subject. The appraiser is to assume that the stock could trade freely (i.e., ignore the fact that the Certificate of Incorporation limited stockholders' power of alienation), and to "use methods and standards recognized...