In re Brown Company Securities Litigation

• Decision Date: 22 January 1973
• Docket Number: Civ. A. No. 70 Civ. 5371.,M. D. L. No. 67
• Citation: 355 F. Supp. 574
• Parties: In re BROWN COMPANY SECURITIES LITIGATION. J. Wolfe GOLDEN and Fannette P. Stone, etc., Plaintiffs, v. GULF & WESTERN INDUSTRIES, INC., Brown Company, et al., Defendants. Raymond W. CROMER & Marybelle K. Cromer, Plaintiffs, v. GULF & WESTERN INDUSTRIES, INC., Brown Company, et al., Defendants. Michael SHAPIRO, etc., Plaintiff, v. GULF & WESTERN INDUSTRIES, INC., Brown Company, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

355 F. Supp. 574

In re BROWN COMPANY SECURITIES LITIGATION.

J. Wolfe GOLDEN and Fannette P. Stone, etc., Plaintiffs, v. GULF & WESTERN INDUSTRIES, INC., Brown Company, et al., Defendants.

Raymond W. CROMER & Marybelle K. Cromer, Plaintiffs, v. GULF & WESTERN INDUSTRIES, INC., Brown Company, et al., Defendants.

Michael SHAPIRO, etc., Plaintiff, v. GULF & WESTERN INDUSTRIES, INC., Brown Company, et al., Defendants.

M. D. L. No. 67; Civ. A. No. 70 Civ. 5371.

United States District Court, S. D. New York.

January 22, 1973.

Paul Bernstein, Ronald Litowitz, and Max Berger, of Kriendler & Kriendler, New York City, Robert Jarvis, of Beck, McGinnis & Jarvis, Pittsburgh, Pa., David Berger, P.A., Philadelphia, Pa., for plaintiffs.

Roy L. Reardon and James G. Greilsheimer, of Simpson, Thacher & Bartlett, New York City, for Gulf & Western Industries, Inc.

Leon Silverman and Matthew Gluck, of Fried, Frank, Harris, Shriver & Jacobson, New York City, for defendant Brown Co.

Robert Block, of Pomerantz, Levy, Haudek & Block, New York City, for individual defendants.

OPINION WITH RESPECT TO PROPOSED SETTLEMENT

ALVIN B. RUBIN, District Judge:

The parties to these consolidated class actions have agreed to settle the claims of those who were formerly preferred stockholders of Brown Company ("Brown") arising out of an exchange of their stock for debentures and warrants on June 9, 1970. Notice of the proposed settlement was given to all members of the class. Judicial approval of the settlement is now sought, in accordance with the requirements of Rule 23(e), F.R.Civ.P.

The original class consisted of the holders of 597,913 shares. The holders of 15,018 shares exercised their option not to be included in this action. One of these, Belsky & Co., Inc., ("Belsky") the holder of 2500 shares, requested the opportunity to revoke this "option out" so it could oppose the proposed settlement. Only Belsky appeared at the hearing held to determine whether the settlement would be approved.¹ In addition, the holders of 826 other shares filed written oppositions.²

The duties of the court with respect to a proposed settlement require it first to reach "an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated" and "form an educated estimate of the complexity, expense, and likely duration of such litigation . . . and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise." Protective Committee v. Anderson, 1968, 390 U.S. 414, 424-425, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1. Accordingly, we first consider the nature of the action and the potential evidence that has been developed in order to determine the likelihood of success by the plaintiffs and the likely quantum of damages in the event of recovery.

SUMMARY OF ACTION AND PROPOSED SETTLEMENT

Brown is, and has been for many years, a manufacturer of a variety of forest and paper products. Brown's common stock is listed on the New York Stock Exchange as was its preferrred stock prior to the recapitalization. At all relevant times the majority shareholder of Brown was defendant Gulf & Western Industries, Inc. ("G&W"), a diversified company, commonly called a conglomerate, based in New York. The individual defendants were officers or directors of Brown.

The essence of plaintiffs' case is that Brown and its controlling shareholder, G&W, effected the recapitalization for the benefit of G&W and to the detriment of the minority Brown preferred shareholders in violation of the federal securities laws and the common law, in breach of the directors' fiduciary obligations, and as a tortious interference with the contractual relationship between Brown and the preferred shareholders.

The proposed settlement seeks to readjust the package given to these minority shareholders by awarding them a gross additional consideration of $1,600,000, amounting to $2.75 per share, payable in the same warrants they were given as part of the original package. If defendants fail to comply with certain conditions, the additional consideration will be paid in cash. It is proposed that attorneys' fees be allowed in the amount of $400,000, or 69¢ per share, making the net recovery $2.06 per share.

PRIOR PROCEEDINGS

This is a consolidation of three class actions, J. Wolfe Golden et al. v. Gulf & Western Industries, Inc., et al. (S.D.N. Y.); Raymond W. Cromer & Marybelle K. Cromer v. Gulf & Western Industries, Inc., et al. (W.D.Pa.), and Michael Shapiro, etc. v. Gulf & Western Industries, Inc., et al. (E.D.Pa.).

Shortly after the commencement of these three actions, defendants moved, pursuant to 28 U.S.C. § 1407, for the transfer of these actions to the Southern District of New York, and for coordinated and consolidated pre-trial proceedings including these suits and an individual action entitled Henry Folger v. Brown Company. That motion was granted by the Judicial Panel on Multidistrict Litigation on April 6, 1971, 325 F.Supp. 307, and these actions were accordingly transferred to the United States District Court for the Southern District of New York and assigned to Judge Alvin B. Rubin, of the Eastern District of Louisiana. Subsequently, an order was entered pursuant to 28 U.S.C. § 1404 and F.R.C.P. 42 transferring these actions to the United States District Court for the Southern District of New York for all purposes and consolidating them for all purposes. All proceedings have been held in the Southern District of New York except a conference to review the notice of the proposed settlement and to set a date for hearing on it, which was held in New Orleans, Louisiana. There have also been conferences among all counsel and the court by telephone, with the judge participating from his chambers in New Orleans, Louisiana.

By order dated June 4, 1971 this Court, pursuant to F.R.C.P. 23, determined that these actions were maintainable as class actions on behalf of all persons who were holders of Brown preferred stock on May 1, 1970 and their successors in interest, i.e., executor, administrator, trustee, heir, beneficiary or assignee, except defendants, and on October 5, 1971 notice of this determination was given to members of the class by mailing it to all preferred shareholders of record as of May 1, 1970.

THE TRANSACTIONS UNDER ATTACK

Pursuant to stipulation, plaintiffs were permitted to file a joint amended complaint superseding the individual complaints previously filed. After the conclusion of plaintiffs' discovery a second amended complaint was filed.

The Joint Second Amended Complaint is primarily concerned with the Brown Proxy Statement dated May 8, 1970 (the "Proxy Statement") which was sent to the members of the Class in connection with a special meeting of Brown stockholders held on June 9, 1970. At that special meeting, stockholders of Brown (including, by a two-thirds class vote, the preferred stockholders) approved a re-organization of Brown that served to convert the preferred stock into debentures and warrants. The reorganization was accomplished by means of a merger of Brown and a wholly owned subsidiary created for that purpose (the "Merger"). Pursuant to the Merger, each share of preferred stock was converted into a $19 face amount subordinated debenture with interest at the rate of 9% per annum³ and 1¼ warrants, each warrant for the purchase of one share of Brown common stock at a price of $16.50 per share. In addition, the stockholders of Brown at this meeting approved the acquisition by Brown of approximately 82% of the Class A common stock and all of the preferred stock of Livingston Rock & Gravel Co., Inc. ("Livingston").

PLAINTIFFS' ALLEGATIONS

The major allegations of the complaint, as it was finally put to the court, after amendment to delete claims found during discovery to lack merit, and to add claims learned of through discovery, can be briefly summarized as follows:

Since August 1968 when G&W completed a successful tender offer for the common and preferred stock of Brown, G&W and the individual defendants controlled Brown and operated it for their own benefit and to the detriment of the preferred stockholders. For some time the defendants fraudulently schemed to destroy the preferences and rights of the Brown preferred stockholders and embarked upon a course of conduct designed to carry this scheme into effect. Plaintiffs claim that this scheme was ultimately effectuated by means of an unfair merger and a false proxy statement.

In addition to their charge of a fraudulent scheme, plaintiffs make numerous allegations claiming that the Proxy Statement was false and misleading in several material respects. These allegations are discussed in more detail below.

Plaintiffs also claim that the Merger was unfair to members of the Class and that the acquisition of Livingston was detrimental to the members of the Class. The Joint Second Amended Complaint asserts that the actions of the defendants constituted violations of §§ 12(2) and 17(a) of the Securities Act of 1933 and §§ 10(b) and 14(a) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. In their prayer for relief, plaintiffs seek damages equal to the difference between the value of the Brown preferred stock and the value of the debentures and warrants issued in exchange therefor and claim that the value of such preferred stock was equal to its redemption price as of June 9, 1970 plus accrued dividend arrearages.

As of June 9, 1970, Brown preferred stock had an alleged estimated liquidation value of $33 per share and a redemption price of $34.65 per share. Both liquidation and redemption were solely at the option of Brown and could not be compelled by the preferred shareholders. In addition, as of that time, there were accumulated dividend arrearages of $2.25 per share on the preferred stock representing six quarters of nonpayment. On that date, however, the preferred stock traded on the New York...