In re Penn Central Securities Litigation, M.D.L. Docket No. 56

• Decision Date: 17 April 1973
• Docket Number: 71-268,M.D.L. Docket No. 56,70-2818,Civ. A. No. 70-2005,70-2010,71-476,71-277,70-2933,71-278,70-2137,70-2505,71-265,70-2320,71-280,71-266,71-267,and 71-971.,70-2696,70-2596
• Citation: 357 F. Supp. 869
• Parties: In re PENN CENTRAL SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

357 F. Supp. 869

In re PENN CENTRAL SECURITIES LITIGATION.

M.D.L. Docket No. 56 Civ. A. Nos. 70-2005, 70-2010, 70-2137, 70-2320, 70-2505, 70-2596, 70-2696, 70-2818, 70-2933, 71-265, 71-266, 71-267, 71-268, 71-277, 71-278, 71-280, 71-476, and 71-971.

United States District Court, E. D. Pennsylvania.

April 17, 1973.

COPYRIGHT MATERIAL OMITTED

David Berger, Gerald J. Rodos, Leonard Barrack, David Berger, P. A., Philadelphia, Pa., Alfred S. Julien, Julien, Glaser, Blitz & Schlesinger, New York City, Stanley Nemser, Nemser & Nemser, New York City, for plaintiffs.

Lewis H. Van Dusen, Jr., Raymond K. Denworth, Jr., Drinker, Biddle & Reath, Joseph W. Swain, Jr., John S. Estey, Montgomery, McCracken, Walker & Rhoads, Henry T. Reath, Duane, Morris & Heckscher, Thomas Raeburn White, Jr., White & Williams, Philadelphia, Pa., for defendants.

Mahlon F. Perkins, Jr., Donovan, Leisure, Newton & Irvine, New York City, for defendants Rabe, Routh and Taylor.

Edwin P. Rome, Morris L. Weisberg, Norman L. Holmes, Philip C. Patterson, Blank, Rome, Klaus & Comisky, Robert W. Blanchette, Philadelphia, Pa., for trustees of the Property of Penn Central Trans. Co.

OPINION AND ORDER

JOSEPH S. LORD, III, Chief Judge.

On August 7, 1972, we handed down an Opinion and Order granting in part defendants' motions for partial summary judgment. In Re Penn Central Securities Litigation, 347 F.Supp. 1327 (E.D. Pa.1972).¹ Plaintiffs then filed a motion for reconsideration and reargument. Because of the complexity of the issues in this litigation, as well as our desire to hear fuller oral argument than we had previously heard, we granted plaintiffs' motion. The parties in due course submitted new briefs and presented oral argument.

Plaintiffs ask us to reconsider two of our conclusions: (1) that the 1969 merger and reorganization did not involve a purchase or sale for the purposes of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S. C.A. § 78j(b), and Rule 10b-5 adopted thereunder; and (2) that § 13(a) of the Exchange Act, 15 U.S.C.A. § 78m(a), affords no private right of action. Defendants ask that we modify our August 7 Order to grant summary judgment against those plaintiffs who were only sellers of Penn Central stock during the relevant period and who have sued pursuant to §§ 10(b) and 9(a) of the Exchange Act and §§ 11(a) and 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C.A. §§ 77k(a) and 77q(a).

I. The 1969 Reorganization²

Nothing in plaintiffs' new briefs, affidavits or oral argument has convinced us that we should change our determination that the 1969 merger and reorganization did not involve a § 10(b) purchase or sale, nor has a careful review of the previous pleadings and the case law persuaded us to do so. Although the question is undeniably a close one, we think our previous conclusion was sound.

Plaintiffs have now presented us with a number of internal Penn Central documents dating from the months before the Plan of Merger and Reorganization was submitted to the shareholders for their approval. Most of the documents are memoranda from Penn Central's legal department to company officers, dealing with a range of subjects related to the planned reorganization. From the existence and the content of these exhibits we are asked to conclude (i) that the 1969 merger had a substantial economic and legal impact on the rights and interests of the shareholders; and (ii) that not all of the changes effected by the merger could have been brought about simply by amending the articles of incorporation. Plaintiffs also argue, as they did when this motion was first before us, that the fact that many of the same results could have been achieved by amendment is of no consequence, since defendants chose the merger route rather than alternative means and a court must look to what they actually did, not what might have been. The ultimate conclusion we are asked to draw from all of this is that the holders of Penn Central stock at the time of the 1969 upwards merger were required to make a significant investment decision and hence were 10b-5 purchasers and sellers.

We are hardly surprised to learn from plaintiffs' exhibits that there was a great deal of planning and debate during the months preceding the submission of the reorganization plan to the shareholders. One would assume that before consummating this reorganization management would have given considerable thought to such matters as the tax consequences of the merger, the possible liability of officers and directors, and the capital structure of the proposed Holding Company. However, while the flurry of memoranda may well indicate that management thought the merger a corporate change with great economic consequences, the opinions of Railroad's officers and legal department are not binding on this court, and therefore need not concern us.

Plaintiffs appear to believe that our decision that the 1969 merger did not involve a 10b-5 purchase or sale was based on a conclusion that the 1969 merger was without economic consequences. If so, they have misinterpreted what we said. We were not unaware last August, nor are we unaware now, that the 1969 merger had certain economic consequences for the Penn Central corporate entity, as any important internal corporate reorganization ordinarily will have. However, to say that the reorganization had economic consequences is not necessarily to say that it also involved a purchase or sale for the purposes of § 10(b) and Rule 10b-5. Nothing we have been shown has cast doubt on our conclusion that the economic consequences of the upwards merger were not those of a 10b-5 purchase or sale, but rather were those attendant upon the restructuring of an existing corporation. As we stated in our previous Opinion:

"There were no additions to the corporation by way of merger or acquisition, and the stockholders' interests in the corporation were materially unchanged by the reorganization. In terms of the total assets represented by each share of stock, the stockholders of Penn Central Co. were in exactly the same position after the reorganization as they were before it occurred." 347 F.Supp. at 1338.

The flurry of internal memoranda, and plaintiffs' claims of great economic and legal consequences, do not alter these basic facts.

Plaintiffs point to two corporate changes resulting from the 1969 reorganization which, they argue, suggest that we were mistaken in our determination that the same results could have been achieved by amending the articles of incorporation.

The first has to do with the appraisal rights of dissenting shareholders. Railroad³ had long been governed by statutes which gave dissenting shareholders appraisal rights in certain situations. Shortly before the merger, the directors elected to be governed by the Pennsylvania Business Corporation Law, an election which under the provisions of 15 P.S. § 1004, subd. C became effective immediately and did not require shareholder approval. The B.C.L. provides that dissenting shareholders have no appraisal rights if their stock is listed on the New York or American Stock Exchange. 15 P.S. § 1515, subd. L (pocket part). Railroad's stock was listed on the New York Stock Exchange. Therefore, once the directors elected B. C.L. coverage, shareholders who objected to the plan of merger and reorganization had no right of appraisal.

Plaintiffs contend that defendants' conduct, beginning with their election of B.C.L. coverage and ending with the approval of the merger, fraudulently robbed the shareholders of appraisal rights which they had previously possessed under the old statutes governing the Railroad. They argue in effect that this deprivation of appraisal rights not only could not have been achieved merely by amending the articles of incorporation, but so materially changed the shareholders' interests that the entire transaction must be viewed as a 10b-5 purchase or sale.

Plaintiffs rely heavily on S. E. C. v. National Securities, 393 U.S. 453, 89 S. Ct. 564, 21 L.Ed.2d 668 (1969), which they claim is controlling here. We disagree. In National Securities, the SEC alleged that defendants had made material misstatements and omitted to state material facts in proxy materials sent to the shareholders of a stock insurance company (Producers) seeking their approval of a merger of Producers with defendants' insurance company. The Supreme Court concluded that "the broad antifraud purposes of the statute and the rule would clearly be furthered by their application to this type of situation," and held that the purchase-or-sale requirement of § 10(b) and Rule 10b-5 was satisfied by a stockholder's exchange of shares pursuant to a merger. The Court reached this conclusion because the defendants' deception

"furthered a scheme which resulted in Producers shareholders' losing their status as shareholders in Producers and becoming shareholders in a new company. Moreover, by voting in favor of the merger, each approving shareholder individually lost any right under Arizona law to obtain an appraisal of his stock and payment for it in cash. Ariz.Rev.Stat. § 10-347 (1956). Whatever the terms `purchase' and `sale' may mean in other contexts, here an alleged deception has affected individual shareholders' decisions in a way not at all unlike that involved in a typical cash sale or share exchange." Emphasis supplied. 393 U.S. at 467, 89 S.Ct. at 572.

The 1969 plan of merger and reorganization, and its effect on the interests of the shareholders, is readily distinguishable from the scheme in National Securities. The Arizona statute cited by the Court in National Securities deals with the payment for and valuation of shares of dissenting shareholders of corporations which consolidate pursuant to a merger agreement. It provides in relevant part:

"Any shareholder of the corporations consolidating who votes to reject the agreement, and who does not consent to the agreed manner of

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