Heckmann v. Ahmanson

• Citation: 214 Cal.Rptr. 177,168 Cal.App.3d 119
• Court: California Court of Appeals
• Decision Date: 14 May 1985
• Parties: , Fed. Sec. L. Rep. P 92,346 Richard J. HECKMANN et al., Plaintiffs and Respondents, v. C.L. AHMANSON et al., Defendants. Saul P. Steinberg et al., Defendants and Appellants. B007847.

Page 177

214 Cal.Rptr. 177

168 Cal.App.3d 119, Fed. Sec. L. Rep. P 92,346

Richard J. HECKMANN et al., Plaintiffs and Respondents, v. C.L. AHMANSON et al., Defendants Saul P. Steinberg et al., Defendants and Appellants.

B007847.

Court of Appeal, Second District, Division 7, California.

May 14, 1985.

As Modified June 13, 1985.

Wyman, Bautzer, Rothman, Kuchel & Silbert and Andrew White, McCutchen, Black, Verleger & Shea and Peter W. James, Los Angeles, for defendants and appellants; Willkie Farr & Gallagher and Anthony F. Phillips and Gerald Kerner, New York City, John Mark Rochefort, Los Angeles, and Blair C. Fensterstock, New York City, of Counsel.

Greenberg, Hennigan & Mercer and J. Michael Hennigan and Dana Carli Brooks, Beverly Hills, Dye, Thomas & Luebs and Donald H. Dye and William Thomas, Riverside and Lovitt & Hannan and J. Thomas

Hannan, San Francisco, for plaintiffs and respondents.

JOHNSON, Associate Justice.

Plaintiffs, stockholders in Walt Disney Productions, are suing to recover the payoff in the greenmailing ¹ of Disney. Defendants are the Disney directors who paid the greenmail and the "Steinberg Group" ² to whom the money, approximately $325 million, was paid.

Plaintiffs obtained a preliminary injunction which, in effect, imposes a trust on the profit from the Disney-Steinberg transaction, approximately $60 million, and requires the Steinberg Group to render periodic accountings of the disposition of the entire proceeds. The Steinberg Group appeals from this preliminary injunction. We affirm.

As will be discussed more fully below, if plaintiffs prove the Steinberg Group breached a fiduciary duty to the corporation and its shareholders in the sale of stock to the corporation the plaintiffs would be entitled to a constructive trust upon the profits of that sale. Plaintiffs have established a reasonable probability of proving breach of fiduciary duties by the Steinberg Group. The trial court could reasonably conclude from the evidence a preliminary injunction was necessary to prevent the dissipation or disappearance of the profit during the pendency of the action and the balance of hardships involved in granting or denying the injunction incline in plaintiffs' favor.

FACTS AND PROCEEDINGS BELOW

In March 1984 the Steinberg Group purchased more than two million shares of Disney stock. Probably interpreting this as the opening shot in a takeover war, the Disney directors countered with an announcement Disney would acquire Arvida Corporation for $200 million in newly-issued Disney stock and assume Arvida's $190 million debt. ³ The Steinberg Group countered this move with a stockholders' derivative action in federal court to block the Arvida transaction. Nonetheless, on June 6, 1984, the Arvida transaction was consummated.

Undeterred by its failure to halt Disney's purchase of Arvida, the Steinberg Group proceeded to acquire some two million additional shares of Disney stock, increasing its ownership position to approximately 12 percent of the outstanding Disney shares. On June 8, 1984, the Steinberg Group advised Disney's directors of its intention to make a tender offer for 49 percent of the outstanding shares at $67.50 a share and its intention to later tender for the balance at $72.50 a share. The directors' response was swift. On the evening of the same day, the directors proposed Disney repurchase all the stock held by the Steinberg Group. Agreement was reached on June 11.

Under the agreement with the Steinberg Group, Disney purchased all the stock held by the group for $297.4 million and reimbursed the estimated costs incurred in preparing Disney borrowed the entire sum necessary to repurchase its shares. This transaction, coupled with the debt assumed in the Arvida purchase, increased Disney's total indebtedness to $866 million, two-thirds of Disney's entire shareholder equity. Upon the announcement of its agreement with the Steinberg Group, the price of Disney stock dropped below $50 per share. Thus, the Steinberg Group received a price 50 percent above the market price following the transaction.

the tender offer, $28 million, for a total of $325.4 million, or about $77 per share. The Steinberg Group garnered a profit of about $60 million. In return, the Steinberg Group agreed not to purchase Disney stock and to dismiss its individual causes of action in the Arvida litigation. It did not dismiss the derivative claims.

The gravamen of the action against the Steinberg Group is that it used its tender offer and the Arvida litigation to obtain a premium price for its shares in violation of its fiduciary duties to Disney and the other shareholders. The complaint seeks, among other things, rescission of Disney's repurchase agreement with the Steinberg Group, an accounting and a constructive trust upon all funds the Steinberg Group received from Disney.

After due notice and hearing, the trial court issued a preliminary injunction enjoining the Steinberg Group from transferring, investing or disposing of the profit ⁴ from its sale of Disney stock except in accordance with the standards applicable to a prudent trustee under Civil Code section 2261. The injunction also requires the Steinberg Group to notify plaintiffs and the court of every change in the form or vehicle of investment of the entire proceeds of the repurchase agreement. The injunction became effective upon plaintiffs' posting an undertaking in the sum of $1 million.

DISCUSSION

I. SCOPE OF REVIEW

Trial courts consider two interrelated questions in deciding whether to issue a preliminary injunction: "1) are the plaintiffs likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant; and 2) is there a reasonable probability that the plaintiffs will prevail on the merits.... ' " '[By] balancing the respective equities of the parties, [the court] concludes that, pending a trial on the merits, the defendant should or that he should not be restrained from exercising the right claimed by him.' " ' [Citations omitted.]" (Robbins v. Superior Court, (1985) 38 Cal.3d 199, 206, 211 Cal.Rptr. 398, 695 P.2d 695.) The grant or refusal of a preliminary injunction is, generally speaking, within the discretion of the trial court and its order may be reversed on appeal only if abuse of discretion is shown. (Gosney v. State of California (1970) 10 Cal.App.3d 921, 924, 89 Cal.Rptr. 390.) Discretion is abused in the legal sense " 'whenever it may be fairly said that in its exercise the court ... exceeded the bounds of reason or contravened the uncontradicted evidence.' " " [Citations omitted.] (Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 527, 67 Cal.Rptr. 761, 439 P.2d 889.)

In the case before us, the Steinberg Group contends plaintiffs failed to demonstrate a likelihood of success on the issue of its liability or that they would be harmed in any way if the Steinberg Group maintained unfettered control over the proceeds and profits of the stock sale pending a final decision on the merits. As we review these contentions we bear in mind our inquiry is a limited one:

" 'The granting or denial of a preliminary injunction does not amount to an adjudication of the ultimate rights in controversy. It merely determines that the court, balancing the respective equities

of the parties, concludes that, pending a trial on the merits, the defendant should or that he should not be restrained from exercising the right claimed by him.' " [Citations omitted.] (Continental Baking Co. v. Katz, supra, 68 Cal.2d at p. 528, 67 Cal.Rptr. 761, 439 P.2d 889.)

II. PLAINTIFFS DEMONSTRATED A REASONABLE PROBABILITY OF SUCCESS ON THE MERITS ENTITLING THEM TO A CONSTRUCTIVE TRUST UPON THE PROFITS THE STEINBERG GROUP RECEIVED FROM ITS SALE OF DISNEY STOCK.

A. Liability of the Steinberg Group as an Aider and Abettor of the Disney Directors' Breach of Fiduciary Duty.

Although we have found no case in which a greenmailer was ordered to return his ill-gotten gains, precedent for such a judgment exists in California law.

In Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108-109, 81 Cal.Rptr. 592, 460 P.2d 464, our Supreme Court adopted the shareholders' Magna Carta set forth in Pepper v. Litton (1939) 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281:

" ' "A director is a fiduciary.... So is a dominant or controlling stockholder or group of stockholders.... Their powers are powers of trust....' " "He who is in such a fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency and honesty.... He cannot use his power for his personal advantage and to the detriment of the stockholders.... For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. Where there is a violation of these principles, equity will undo the wrong or intervene to prevent its consummation." ' "

The ultimate question "is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain." (Id., at pp. 306-307, 60 S.Ct. at pp. 245-246.)

Ahmanson involved a scheme in which the majority stockholders set up a holding company in a manner which made the minority shares unmarketable. (1 Cal.3d at p. 114, 81 Cal.Rptr. 592, 460 P.2d 464.) The court held the facts alleged in the complaint stated a cause of action for breach of fiduciary duty. "[D]efendants chose a course of action in which they used their control of the Association to obtain an advantage not made available to all stockholders. They did so without regard to the resulting detriment to the minority stockholders and in the absence of any compelling business purpose." (1 Cal.3d at p. 114, 81 Cal.Rptr. 592, 460 P.2d 464.)

While there may be many valid reasons why...