Jones v. H. F. Ahmanson & Co.

• Decision Date: 07 November 1969
• Court: California Supreme Court
• Parties: , 460 P.2d 464 June K. JONES, Plaintiff and Appellant, v. H. F. AHMANSON & COMPANY et al., Defendants and Appellants. L.A. 29651.

Page 592

81 Cal.Rptr. 592

1 Cal.3d 93, 460 P.2d 464

June K. JONES, Plaintiff and Appellant, v. H. F. AHMANSON & COMPANY et al., Defendants and Appellants.

L.A. 29651.

Supreme Court of California In Bank.

Nov. 7, 1969.

As Modified on Denial of Rehearing Dec. 10, 1969.

Darling, Mack, Hall & Call and W. John Kennedy, Los Angeles, for plaintiff and respondent.

Edward M. Raskin, Gerald E. Lichtig, Mitchell, Silberberg & Knupp and Howard S. Smith, Los Angeles, for defendants and respondents.

TRAYNOR, Chief Justice.

June K. Jones, the owner of 25 shares of the capital stock of United Savings and Loan Association of California brings this action on behalf of herself individually and of all similarly situated minority stockholders of the Association. The defendants are United Financial Corporation of California, fifteen individuals, and four corporations, all of whom are present or former stockholders or officers of the Association. Plaintiff seeks damages and other relief for losses allegedly suffered by the minority stockholders of the Association because of claimed breaches of fiduciary responsibility by defendants in the creation and operation of United Financial, a Delaware holding company that owns 87 percent of the outstanding Association stock.

Plaintiff appeals from the judgment entered for defendants after an order sustaining defendants' general and special demurrers to her third amended complaint without leave to amend. Defendants have filed a protective cross-appeal. We have concluded that the allegations of the complaint and certain stipulated facts sufficiently state a cause of action and that the judgment must therefore be reversed.

The following facts appear from the allegations of the complaint and stipulation.

United Savings and Loan Association of California is a California chartered savings and loan association that first issued stock on April 5, 1956. ¹ Theretofore it had been owned by its depositors, who, with borrowing members, elected the board of directors. No one depositor had sufficient voting power to control the Association.

The Association issued 6,568 shares of stock on April 5, 1956. No additional stock has been issued. Of these shares, 987 (14.8 percent) were purchased by depositors pursuant to warrants issued in proportion to the amount of their deposits. Plaintiff was among these purchasers. The shares allocated to unexercised warrants were sold to the then chairman of the board of directors who later resold them to defendants and others. The stockholders have the right to elect a majority of the directors of the Association.

The Association has retained the major part of its earnings in tax-free reserves with the result that the book value of the outstanding shares has increased substantially. ² The shares were not actively traded. This inactivity is attributed to the high book value, the closely held nature of the Association, ³ and the failure of the management to provide investment information and assistance to shareholders, brokers, or the public. Transactions in the stock that did occur were primarily among existing stockholders. Fourteen of the nineteen defendants comprised 95 percent of the market for Association shares prior to 1959.

In 1958 investor interest in shares of savings and loan associations and holding companies increased. Savings and loan stocks that were publicly marketed enjoyed a steady increase in market price thereafter until June 1962, but the stock of United Savings and Loan Association was not among them. Defendants determined to create a mechanism by which they could participate in the profit taking by attracting investor interest in the Association. They did not, however, undertake to render the Association shares more readily marketable. Instead, the United Financial Corporation of California was incorporated in Delaware by all of the other defendants except defendant Thatcher on May 8, 1959. On May 14, 1959, pursuant to a prior agreement, certain Association stockholders who among them owned a majority of the Association stock exchanged their shares for those of United Financial, receiving a 'derived block' of 250 United Financial shares for each Association share. ⁴

After the exchange, United Financial held 85 percent of the outstanding Association stock. More than 85 percent of United Financial's consolidated earnings ⁵ and book value of its shares reflected its ownership of this Association stock. The former majority stockholders of the Association had become the majority shareholders of United Financial and continued to control the Association through the holding company. They did not offer the minority stockholders of the Association an opportunity to exchange their shares.

The first public offering of United Financial stock was made in June 1960. To attract investor interest, 60,000 units were offered, each of which comprised two shares of United Financial stock and one $100, 5 percent interest-bearing, subordinated, convertible debenture bond. The offering provided that of the $7,200,000 return from the sale of these units, $6,200,000 would be distributed immediately as a return of capital to the original shareholders of United Financial, I.e., the former majority stockholders of the Association. ⁶ To obtain a permit from the California Corporations Commissioner for the sale, United Financial represented that the financial reserve requirement for debenture repayment established by Commissioner's Rules 480 subdivision (a) and 486 ⁷ would be met by causing the Association to liquidate or encumber its income producing assets for cash that the Association would then distribute to United Financial to service and retire the bonds. ⁸

In the Securities and Exchange Commission prospectus accompanying this first public offering, United Financial acknowledged that its prior earnings were not sufficient to service the debentures and noted that United Financial's direct earnings would have to be augmented by dividends from the Association.

A public offering of 50,000 additional shares by United Financial with a secondary offering of 600,000 shares of the derived stock by the original investors was made in February 1961 for a total price of $15,275,000. The defendants sold 568,190 shares of derived stock in this secondary offering. An underwriting syndicate of 70 brokerage firms participated. The resulting nationwide publicity stimulated trading in the stock until, in mid-1961, an average of 708.5 derived blocks were traded each month. Sales of Association shares decreased during this period from a rate of 170 shares per year before the formation of United Financial to half that number. United Financial acquired 90 percent of the Association shares that were sold.

Shortly after the first public offering of United Financial shares, defendants caused United Financial to offer to purchase up to 350 shares of Association stock for $1,100 per share. The book value of each of these shares was $1,411.57, and earnings were $301.15 per share. The derived blocks of United Financial shares then commanded an aggregate price of $3,700 per block exclusive of the $927.50 return of capital. United Financial acquired an additional 130 shares of Association stock as a result of this offer.

In 1959 and 1960 extra dividends of $75 and $57 per share had been paid by the Association, but in December 1960, after the foregoing offer had been made, defendants caused the Association's president to notify each minority stockholder by letter that no dividends other than the regular $4.00 per share annual dividend would be paid in the near future. The Association president, defendant M. D. Jameson, was then a director of both the Association and United Financial.

Defendants then proposed an exchange of United Financial shares for Association stock. Under this proposal each minority stockholder would have received approximately 51 United Financial shares of a total value of $2,400 for each Association share. When the application for a permit was filed with the California Corporations Commissioner on August 28, 1961, the value of the derived blocks of United Financial shares received by defendants in the initial exchange had risen to approximately $8,800. ⁹ The book value of the Association stock was in excess of $1,700 per share, and the shares were earning at an annual rate of $615 per share. Each block of 51 United Financial shares had a book value of only $210 and earnings of $134 per year, 85 percent of which reflected Association earnings. At the hearings held on the application by the Commissioner, representatives of United Financial justified the higher valuation of United Financial shares on the ground that they were highly marketable, whereas Association stock was unmarketable and poor collateral for loans. Plaintiff an other minority stockholders objected to the proposed exchange, contending that the plan was not fair, just, and equitable. Defendants then asked the Commissioner to abandon the application without ruling on it.

Plaintiff contends that in following this course of conduct defendants breached the fiduciary duty owed by majority or controlling shareholders to minority shareholders. She alleges that they used their control of the Association for their own advantage to the detriment of the minority when they created United Financial, made a public market for its shares that rendered Association stock unmarketable except to United Financial, and then refused either to purchase plaintiff's Association stock at a fair price or exchange the stock on the same basis afforded to the majority. She further alleges that they also created a conflict of interest that might have been avoided had they offered all Association stockholders the opportunity to participate in the initial exchange of shares. Finally, plaintiff contends that the defendants' acts constituted a restraint of trade in violation of common law and statutory antitrust laws.

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