Kohler v. Kohler Co.

• Decision Date: 26 June 1963
• Docket Number: No. 14028.,14028.
• Citation: 319 F.2d 634
• Parties: Walter J. KOHLER, Plaintiff-Appellant, v. KOHLER CO., a corporation, Herbert V. Kohler, Ernst & Ernst, a partnership, and Paul F. Johnson, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

319 F.2d 634 (1963)

Walter J. KOHLER, Plaintiff-Appellant, v. KOHLER CO., a corporation, Herbert V. Kohler, Ernst & Ernst, a partnership, and Paul F. Johnson, Defendants-Appellees.

No. 14028.

United States Court of Appeals Seventh Circuit.

June 26, 1963.

Steven E. Keane, Marvin E. Klitsner, William J. Kiernan, Jr., and Foley, Sammond & Lardner, Milwaukee, Wis., for appellant.

Louis Quarles, Lyman C. Conger and E. J. Hammer, Kohler, Wis., Maxwell H. Herriott, Quarles, Herriott & Clemons, Milwaukee, Wis., for appellees Kohler Co. and Herbert V. Kohler.

Norman C. Skogstad, Paul J. Schierl, Wickham, Borgelt, Skogstad & Powell, Milwaukee, Wis., for appellees Ernst & Ernst and Paul F. Johnson.

Before SCHNACKENBERG, CASTLE, and SWYGERT, Circuit Judges.

SWYGERT, Circuit Judge.

This action was brought by Walter J. Kohler against Kohler Co., a Wisconsin corporation that manufactures plumbing fixtures and has its principal place of business at Kohler, Wisconsin; Herbert V. Kohler, its president, Ernst & Ernst, a partnership that is engaged in public accounting; and Paul F. Johnson, a partner of that firm.

Plaintiff sought damages arising out of a sale of Kohler Co. common stock which he sold to the company for $115 per share on February 20, 1953. In his complaint plaintiff alleged that he was induced to sell his stock by "misrepresentation, half truths, and omissions" of defendants and as a result sold his stock for at least $10 per share less than its "actual" or "fair market" value. He contended that defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),¹ and Rule X-10b-5 of the Securities and Exchange Commission, 17 C.F.R. 240.10b-5,² in that their conduct constituted a breach of their duties as "fiduciaries" and "insiders" to fully and accurately disclose all facts material to the value of his Kohler Co. stock.

The district judge made findings of fact and wrote an opinion which appear in 208 F.Supp. 808. Plaintiff appeals from the judgment dismissing the action.

In view of the detailed treatment accorded the facts by the district judge, only an abbreviated summary seems necessary.

Plaintiff was a stockholder of Kohler Co. from 1931 to February 20, 1953. He owned 21,415.6139 of the 200,000 shares of common stock outstanding. Also, he was an employee of the company in various capacities from 1925 to 1947, a director from 1936 to 1947, and its secretary from 1937 to 1947.

Herbert V. Kohler is plaintiff's uncle and was at all times pertinent hereto the president and chairman of the board of directors of Kohler Co. The company is a closely held corporation, having had only twenty-six common stockholders to the time plaintiff sold his stock, many of whom were and are related to plaintiff.

On February 2, 1953, plaintiff wrote Herbert V. Kohler that he held an option to buy stock in the Vollrath Company, of which plaintiff was then president, and in order to exercise the option it was necessary that he sell his Kohler stock. Upon receipt of the letter, Herbert V. Kohler consulted with his fellow directors and officers to find out if the company was interested in buying plaintiff's stock. It was decided that Johnson, a partner in the accounting firm of Ernst & Ernst, the firm that handled the Kohler Co. audits, should act as an intermediary and meet with plaintiff to "negotiate" the terms of the sale and find out what price plaintiff had in mind.

On February 5, Herbert V. Kohler wrote plaintiff that Johnson would contact plaintiff and that "He Paul F. Johnson has available the facts which might play a part in a discussion of values." At a meeting on February 13, plaintiff informed Johnson that he had a price of $125 per share in mind and that he wanted an answer to his proposal by February 18. On February 19, Herbert V. Kohler wrote Johnson authorizing him to purchase plaintiff's stock at $115 per share.

In the meantime, on February 16, Johnson mailed plaintiff certain satistical data with the following letter:

"At the time of our discussion last Friday afternoon, it was agreed that I would furnish you with the statistical data that I had used in projecting the possible value of Kohler Co. common stock. These projections are based upon average earnings and other data of Crane Company and American Radiator & Standard Sanitary Mfg. Co. I believe that these schedules are self-explanatory but should any question occur to you, I shall endeavor to answer it."

The data included a series of ten projected values of Kohler Co. stock ranging from $58.83 to $149.38 based upon certain comparative ratios of Crane and American-Standard, Kohler Co. competitors, whose stocks are publicly traded.

Upon receipt of the data, plaintiff ascertained the percentage ratio of market selling price to book value of both Crane's and Standard's stock and took an average of the two. He then applied this average figure to the Kohler Co. book value of $155.60 per share listed in the data. The computation resulted in a figure of $117.48 per share.

On February 20, plaintiff again met Johnson. Plaintiff discussed the figure of $117.48, and commented that in his judgment this calculation would justify a price of $120 per share as well as a price of $115. Johnson agreed that it would. The parties then signed the sales contract at the latter figure, and the shares were transferred.

We hold that the fact determinations by the trial judge are not erroneous and that when the applicable law is applied to these determinations, the district court's decision is correct.

In regard to the legal criteria that should be applied, we look to the statute and consider it in the light of the implemental interpretation given it by Rule X-10b-5, and to prior decisions that have dealt with the statute and the rule. It is clear from such examination that the statute was meant to cover more than deliberately and dishonestly misrepresenting or omitting material facts which ordinarily are badges of fraud and deceit. See Ellis v. Carter, 291 F.2d 270 (9th Cir., 1961); Texas Continental Life Ins. Co. v. Bankers Bond Co., 187 F.Supp. 14 (W.D. Ky.1960).

This court in James Blackstone Memorial Library Ass'n v. Gulf, M. & O. R. Co., 264 F.2d 445, 450 (7th Cir., 1959), after citing a number of decisions, said "These cases furnish support * * for the proposition that majority stockholders * * * occupy a fiduciary relationship toward minority stockholders and, when purchasing their shares are under an obligation to divulge all material facts." In other words, as Judge Grubb in this case pointed out, knowledge of the falsity or misleading character of a statement and a bad faith intent to mislead or misrepresent are not required to prove a violation of the statute upon which a civil remedy for damages will lie.

It is clear that the statute was intended to create a form of fiduciary relationship between so-called corporate "insiders" and "outsiders" with whom they deal in company securities which places upon the insider duties more exacting than mere abstention from what generally is thought to be fraudulent practices. If so, the question arises: What are the limits of those duties? We are satisfied that the answer cannot be confined to an abstract rule but must be fashioned case by case as particular facts dictate.

Of course general principles, implicit in the statute and the rule and elucidated by decisions, are helpful and may be utilized.

We think Judge Leahy in Speed v. Transamerica Corp., 99 F.Supp. 808, 828-829 (D.C.Del.1951), stated the general principles that are applicable in terms upon which we cannot improve:

"It is unlawful for an insider, such as a majority stockholder, to purchase the stock of minority stockholders without disclosing material facts affecting the value of the stock, known to the majority stockholder by virtue of his inside position but not known to the selling minority stockholders, which information would have affected the judgment of the sellers. The duty of disclosure stems from the necessity of preventing a corporate insider from utilizing his position to take unfair advantage of the uninformed minority stockholders. It is an attempt to provide some degree of equalization of bargaining position in order that the minority may exercise an informed judgment in any such transaction. Some courts have called this a fiduciary duty while others state it is a duty imposed by the "special circumstances". One of the primary purposes of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a et seq., was to outlaw the use of inside information by corporate officers and principal stockholders for their own financial advantage to the detriment of uninformed public security holders."

These underlying principles apply not only to majority stockholders of corporations and corporate insiders, but equally to corporations themselves when acting through their officers, directors or agents.

We now turn to a discussion of the specific items of nondisclosure.

As heretofore noted, the president of Kohler requested Johnson to "negotiate" the stock purchase. Whether plaintiff initiated the discussions because he wanted to exercise his option with Vollrath or to avoid an embarrassing situation developing because of the Kohler company's labor difficulties and his position as Governor of the State of Wisconsin is immaterial except as it bears upon the conclusion that plaintiff was intent on selling his stock in as short a time as possible.

The company asked for a thirty day option — time in which to consider the financial implications of the purchase of plaintiff's stock. The effort was abandoned when it became clear that plaintiff would not agree to it.

It is pertinent to note that even though the stock owned by Walter Kohler constituted more than ten per cent of the outstanding common stock of one of the large plumbingware manufacturers in the country, this sale was accomplished, from the first suggestion made by plain...