Grimes v. Donaldson, Lufkin & Jenrette, Inc.

• Decision Date: 15 July 1974
• Docket Number: Civ. A. No. 74-59.
• Citation: 392 F. Supp. 1393
• Parties: C. L. GRIMES, Plaintiff, v. DONALDSON, LUFKIN & JENRETTE, INC., Meridian Investing & Development Corporation, et al., Defendants.
• Court: U.S. District Court — Northern District of Florida

392 F. Supp. 1393

C. L. GRIMES, Plaintiff, v. DONALDSON, LUFKIN & JENRETTE, INC., Meridian Investing & Development Corporation, et al., Defendants.

Civ. A. No. 74-59.

United States District Court, N. D. Florida, Tallahassee Division.

July 15, 1974.

COPYRIGHT MATERIAL OMITTED

C. L. Grimes, pro se.

John C. Ausley, Ausley, McMullen, McGehee, Carothers & Proctor, Tallahassee, Fla., for plaintiff.

Bedell, Bedell, Dittmar, Smith & Zehmer, Jacksonville, Fla., Turk, Marsh, Kelly & Hoare, New York City, for defendant Meridian Investing.

Ervin, Varn, Jacobs & Odom, Tallahassee, Fla., David, Polk & Wardell, New York City, for defendant Donaldson, etc.

MIDDLEBROOKS, District Judge.

PRELIMINARY STATEMENT OF ACTION

This action was commenced under the Securities Exchange Act of 1934, as amended, Title 15, U.S.C.A., § 78a et seq, and jurisdiction is invoked pursuant to § 27 of the Act, Title 15, U.S.C.A. § 78aa, and the principles of pendent jurisdiction. Plaintiff brings this action individually and derivatively on behalf of Meridian Investing and Development Corporation ("Meridian").

Proceedings to Date

Plaintiff C. L. Grimes seeks, inter alia, to permanently enjoin defendant Meridian and any subsidiary or affiliate of Meridian from merging with defendant Donaldson, Lufkin & Jenrette, Inc. ("DLJ") or any subsidiary or affiliate of DLJ, specifically DLJ Real Estate, Inc. (DLJRE), a wholly owned subsidiary. By order of this Court on April 25, 1974, plaintiff's motion for a preliminary injunction was denied.

Plaintiff subsequently moved pursuant to Rule 65(a)(2) for a rehearing on his preliminary injunction motion and an expedited trial on the merits of the complaint for injunctive relief. This motion was granted and trial on the merits on all issues raised in the complaint upon which plaintiff's request for injunctive relief is based was held on May 16 and 17, 1974, at which time the Court heard testimony and received evidence. On May 17, 1974, at the conclusion of the trial the Court announced in open court that plaintiff's motion for a rehearing on his motion for a preliminary injunction was denied but reserved decision on the request for a permanent injunction.

The complaint

Plaintiff's 53 page complaint alleges that DLJ acted improperly in acquiring 57% of the outstanding stock of Meridian through tender offers in May and September of 1973. Plaintiff alleges that DLJ failed to disclose inside information in connection with the May and September tender offers, that DLJ and Meridian had a duty to disclose at the time of the May and September tenders that a merger under Delaware law with the minority shareholders of Meridian receiving cash was a possibility, that DLJ had an intention which it failed to disclose to acquire all the stock of Meridian, that filings made with the Securities and Exchange Commission were deficient in various respects, that the 1973 Proxy Statement sent to Meridian shareholders was false and misleading, that Meridian has failed to pursue certain claims against former Meridian employees, that DLJ has misappropriated Meridian's corporate opportunity to purchase its own shares and that Meridian has been charged excessive amounts for services rendered to it by DLJRE and Meridian has not been compensated for services rendered to DLJRE. Plaintiff further alleges that the proposed merger between a subsidiary of DLJRE and Meridian is a sham and has no business purpose.

Defendants Meridian and DLJ filed an answer denying all plaintiffs' allegations of improper conduct.

Having considered the pleadings, exhibits, stipulations, evidence and argument of counsel before the Court in this cause, having considered the demeanor of the witnesses who have testified and having resolved as trier of fact the credibility choices to be made, this Court makes the following findings of fact and conclusions of law as required by Rule 52(a), Federal Rules of Civil Procedure:

FINDINGS OF FACT

1. Plaintiff C. L. Grimes owns 3,800 shares of Meridian common stock and has held these shares since the first public offering of Meridian shares in 1969. Grimes^*.

2. The defendant DLJ is a Delaware corporation with headquarters in New York. Through its various subsidiaries DLJ is engaged primarily in the securities business. It also has subsidiaries engaged in other businesses including real estate.

The stock of DLJ is publicly traded on the New York Stock Exchange. George C. Gould ("Gould") is Vice Chairman of the Board of Directors and Executive Vice President of DLJ and is on the Board of Directors of DLJRE and Meridian. Gould; Harwood; Plaintiff's Exhibit 2C; 9.

3. DLJRE, a wholly owned subsidiary of DLJ, is a Delaware corporation with its headquarters in New York. DLJRE conducts business through a number of subsidiaries which are involved in various facets of the real estate industry, both on the financial and the development side. The President and Chief Executive Officer of DLJRE is Anthony H. Harwood ("Harwood") who has also been on Meridian's Board of Directors since June 27, 1973. Harwood; Plaintiff's Exhibit 9; 12(c).

4. The defendant Meridian is a Delaware corporation formed in 1969 as an investment company under the provisions of the Investment Company Act of 1940. Initially in that capacity it was only involved in passive investments in real estate related securities with respect to which it had no operating responsibilities. In the fall of 1971, with shareholder consent a decision was made to seek deregistration as an investment company and for it to become more actively involved in managing its real estate operations. It now operates as a multiregional land developer and builder and marketer of residential housing. Meridian continues to manage the part of its portfolio of real estate investments acquired when it was an investment company. Following deregistration a plan was adopted to sell such assets and reinvest the proceeds thereof and certain of these assets have been sold. DLJRE presently owns approximately 1,200,000 shares of Meridian with the remaining 900,000 shares distributed among over 1,000 public shareholders. Charles J. Kelly, Jr. ("Kelly") is President and Chief Executive Officer of Meridian and is on its Board of Directors. Kelly owns 3,300 shares of Meridian. Kelly; Harwood; Plaintiff's Exhibit 9.

5. In Mid 1972, Kelly was authorized by Meridian's Board of Directors to carry into effect various plans which he proposed at that time, one of which was to seek an invester which would be interested in making a substantial investment in Meridian through the purchase of its stock and in supporting Meridian in its affairs. It was Kelly's hope that the new invester would act as a stabilizing effect upon the market price of Meridian's stock and permit Meridian to take decisive action to make the company profitable. Among the institutional investers contacted by Kelly was American Express Company which owns 25% of the outstanding stock of DLJ. American Express stated that it was not interested in making a substantial investment in Meridian but suggested that DLJ might be. Kelly; Plaintiff's Exhibit 9.

6. Subsequently Harwood met with Kelly and discussed the possibility of DLJ purchasing a substantial amount of stock in Meridian. Kelly looked with favor on such a possibility. After a series of discussions and a review of Meridian's operations both Harwood and Kelly were of the opinion that with the assistance which DLJ could supply as a substantial shareholder, including its contacts within the financial community and the use of experienced personnel in DLJRE to assist Meridian in its future operations, Meridian's earnings would improve and that this in turn would increase the price of Meridian stock. Kelly; Harwood.

7. When the proposal of DLJ making a substantial investment in Meridian was presented to the DLJ Board of Directors it did not meet with unanimous approval. Of DLJ's nine man Board of Directors seven were from the securities end of its business and there was no representative from DLJRE on the Board. William H. Donaldson, Chairman of DLJ and its Chief Executive Officer was opposed to DLJ making a substantial investment in the housing business and felt that DLJ should concentrate instead on its securities business. Eventually Mr. Donaldson and others agreed to a substantial investment in Meridian but insisted that the investment be less than 50% of the total outstanding stock. The 50% figure was significant because if DLJ acquired more than 50% of the Meridian stock, under generally accepted accounting procedures it would have had to consolidate Meridian's financial statements into the DLJ statements. This would have meant that all of Meridian's assets and liabilities would have appeared on DLJ's balance sheet and all of Meridian's revenues and costs would have appeared on DLJ's income statements. Although Meridian had not in recent years been a profitable company, it did have substantial assets, liabilities and revenues which would have had a substantial impact upon DLJ's financial status. The effect can be seen by comparing DLJ's 1972 financial statements with its 1973 financial statements as set forth in the 1973 DLJ Annual Report (Plaintiff's Exhibit 2-C). Mr. Donaldson and other directors felt that such a consolidation would seriously change the appearance of DLJ to the financial community and its stockholders and distort the image of DLJ as a securities firm. It was felt that no such distortion would result if less than 50% was acquired since in that case it was necessary only to report the income from DLJ's stock ownership in Meridian on a single line of its income statement. See DLJ statement of earnings for the period ending 6/30/73, Plaintiff's Exhibit 2-A. Gould; Harwood.

8. On April 30, 1973, DLJ's Board of Directors approved the proposed investment in Meridian. On the same day DLJ presented its proposal to tender for less than 50% of the outstanding stock of...