GAF Corp. v. Heyman

• Decision Date: 08 December 1983
• Docket Number: D,No. 1701,1701
• Citation: 724 F.2d 727
• Parties: Fed. Sec. L. Rep. P 99,585 GAF CORPORATION, Plaintiff-Appellee, v. Samuel J. HEYMAN, Daniel T. Carroll, Robert C. Wilson, Sanford Kaplan, Jacob E. Goldman, William P. Lyons, Scott A. Rogers, Jr., Edward E. Shea, William Spier, Joseph D. Tydings, individually and as members of the GAF Shareholders' Committee for New Management, H.J. Heyman Sons, Inc., Heyman Associates # 1, Heyman Joint Venture, the Gateway Company, General Realty Improvement Company, H.J. Heyman Realty Corp., Temple, Inc. and Annette Heyman, Defendants- Appellants. ocket 83-7468.
• Court: U.S. Court of Appeals — Second Circuit

Page 727

724 F.2d 727

Fed. Sec. L. Rep. P 99,585

GAF CORPORATION, Plaintiff-Appellee, v. Samuel J. HEYMAN, Daniel T. Carroll, Robert C. Wilson, Sanford Kaplan, Jacob E. Goldman, William P. Lyons, Scott A.

Rogers, Jr., Edward E. Shea, William Spier, Joseph D.

Tydings, individually and as members of the GAF

Shareholders' Committee for New Management, H.J. Heyman

Sons, Inc., Heyman Associates # 1, Heyman Joint Venture, the

Gateway Company, General Realty Improvement Company, H.J.

Heyman Realty Corp., Temple, Inc. and Annette Heyman,

Defendants- Appellants.

No. 1701, Docket 83-7468.

United States Court of Appeals, Second Circuit.

Argued Aug. 11, 1983.

Decided Dec. 8, 1983.

Jerome G. Shapiro, New York City (George A. Davidson, Theodore V.H. Mayer, Hughes, Hubbard & Reed, New York City, of counsel), for plaintiff-appellee.

Arthur L. Liman, New York City (Max Gitter, William P. Farley, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Harvey J. Goldschmid, P.C., New York City; Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, New York City, of counsel), for defendants-appellants.

Before VAN GRAAFEILAND and PRATT, Circuit Judges, and HOLDEN, District Judge. ^*

GEORGE C. PRATT, Circuit Judge:

This is an expedited appeal from a judgment of the United States District Court for the Southern District of New York (Lloyd F. MacMahon, Judge ), entered after a bitter proxy contest in which shareholders of plaintiff GAF Corporation voted decisively to replace the corporation's incumbent board of directors with an insurgent slate headed by defendant Samuel J. Heyman. The district court ruled that the insurgents violated Sec. 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78n(a) (1982), and Rule 14a-9(a) thereunder, 17 C.F.R. Sec. 240.14a-9(a) (1983), by failing to disclose in their proxy materials any information concerning an action for breach of trust, brought by Heyman's sister against him and his mother a year before the 1983 campaign began, which GAF alleged cast doubt on Heyman's fitness to serve as a director. Although this family dispute among the Heymans did not involve GAF, the district court enjoined the entire insurgent slate from assuming the directorships to which they had been elected, set a new record date, and ordered a resolicitation of proxies and a new election. For the reasons below, we hold that non-disclosure of the Heyman family lawsuit was not a material omission in the context of this proxy contest. Accordingly, we reverse.

I. BACKGROUND

As will be apparent from the following recitation, this appeal arises out of a unique set of circumstances. Because our resolution of the central issue on appeal--the materiality of the Heyman family lawsuit--is tied so closely to the specific facts before us, we find it necessary to recount them in great detail.

A. The Parties

GAF is a Delaware corporation primarily engaged in the manufacture of specialty chemicals and building materials. Its stock is publicly traded on the New York Stock Exchange. As of March 9, 1983, the record date for the election of directors at the 1983 annual meeting, GAF had 45,000 shareholders, with 14,333,750 shares of common and 2,478,062 shares of convertible preferred stock outstanding. Roughly 40 percent of these shares were controlled by institutional investors.

Since its initial public offering in 1965, GAF's chairman of the board and chief executive officer has been Dr. Jesse Werner, a chemist by trade, who headed the slate of incumbent director-nominees seeking re-election in 1983. Management's remaining nine nominees had served on the GAF board for periods ranging from two to thirteen years. As a group, GAF's incumbent directors and officers controlled approximately 3.8 percent of the corporation's common stock.

Werner's counterpart in the insurgent camp was Samuel J. Heyman, a Connecticut businessman. During 1982 and 1983 Heyman organized, financed, and was the principal spokesman for "The GAF Shareholders' Committee for New Management" (the Committee). The Committee's slate of nominees included a number of businessmen and a former United States Senator, all of whom were handpicked by Heyman. As of the record date, Heyman, who owned no GAF stock prior to 1981, controlled approximately 4.72 percent of the corporation's common stock. Together, the insurgent slate controlled roughly 5.5 percent of all outstanding shares.

B. The Events of 1982: Threatened Contest, Settlement Agreement, and Litigation Fallout

Heyman first attempted to influence GAF's policies in January 1982, when he proposed that the corporation either be liquidated or buy back a significant percentage of its outstanding stock. Werner dismissed both alternatives as not "practically feasible".

In February and March, Heyman stepped up the pressure on management by preparing for a proxy contest at the 1982 annual meeting, scheduled for April. However, when Werner informed Heyman that GAF had received overtures from several corporations concerning a merger of the entire corporation or a sale of the building materials business, GAF and Heyman entered into a written settlement agreement under which Heyman agreed to forego any challenge at the 1982 annual meeting in exchange for management's commitment to pursue these transactions. GAF also agreed to reimburse Heyman for $250,000 in expenses he claimed to have incurred. On March 22, GAF announced in a press release, without disclosing the settlement that had been reached the night before, that it was entertaining proposals from three corporations regarding merger or sale transactions with a "view toward maximizing near-term benefits to [GAF] shareholders".

While the settlement agreement established a temporary truce, it ultimately created more problems than it resolved. Depending on which side is believed, GAF was either unwilling or unable to consummate any of the transactions contemplated by the agreement. On September 22, GAF formally renewed hostilities by suing Heyman in the District Court for the Southern District of New York claiming misrepresentation and breach of contract because Heyman had incurred less than $250,000 in expenses in connection with his threatened proxy contest. GAF sought to recover the shortfall.

On November 10, Heyman struck back in the same court with an individual and stockholders' derivative action against GAF and its board. His complaint alleged, among other things, that the board had made false representations concerning potential merger and sale negotiations in order to induce the Committee to withdraw its plan to wage a proxy contest in 1982, and continued to make such false representations in later progress reports to shareholders, with the objective of inducing shareholders to vote for management at the 1983 annual meeting. Both of these actions are pending.

C. The 1983 Campaign

Having been unable to influence the corporation's policies in 1982, Heyman decided to escalate his efforts in 1983. On January 27, he served a demand on GAF to inspect and copy a current list of shareholders under Del.Code Ann. tit. 8, Sec. 220 (1974 & Supp.1982). When management refused, Heyman secured an order in the Delaware Chancery Court on February 16 requiring GAF to comply with his demand.

Before this order was issued, Heyman and his counsel met with Werner and counsel to the board in a final attempt to avoid what promised to be a costly and disruptive proxy war. At this meeting, Heyman reportedly offered to withdraw his challenge if Werner would resign. Not surprisingly, his offer was rejected, thus clearing the stage for the 1983 campaign.

The proxy contest was fiercely fought on several fronts. In addition to sending proxy materials directly to shareholders, both sides placed advertisements in the New York Times and the Wall Street Journal. The "total mix" of information available at the time of the election also included the many news stories that the closely watched contest had generated.

In the early stages of the contest, the insurgent Committee hammered away at two central themes. First, the Committee challenged the Werner management's 18-year record at GAF. Specifically, the Committee emphasized that:

(1) GAF common shares had lost more than 80 percent of their market value (adjusted for inflation) (2) Dividends on GAF's common stock had recently been slashed by 75 percent to an all-time low;

(3) GAF had reported an average net income of less than $.22 per share annually, and the book value of its common stock had dropped from $14.97 per share to $4.58 per share;

(4) GAF had reported an aggregate operating loss of more than $46,000,000 in 1981 and 1982;

(5) Werner had pursued a program of random and haphazard acquisitions that cost the corporation hundreds of millions of dollars;

(6) Werner's record for executive turnover featured the termination of three successive GAF presidents in a two-year period; and

(7) Despite all of the foregoing, Werner had been "rewarded" with increasingly excessive compensation packages.

The Committee underscored these points by selectively quoting excerpts from the financial press that were sharply critical of GAF, in general, and Werner, in particular. For example, Forbes Magazine had described GAF as having "one of the worst corporate performance records in American industry." Similarly, Adweek had ranked Werner as one of the seven "most overpaid people in America."

The second theme in the platform unveiled by the Committee was its program to realize GAF's underlying values for its shareholders. The Committee advocated retention of GAF's building products division, at least until conditions in the housing market improved, and an immediate sale of the corporation's chemical business and classical radio station. After retirement of the corporation's long-term debt, the Committee's program envisioned a substantial distribution of the remaining cash proceeds to shareholders. Among the proxy materials...