Lawton v. Nyman

• Citation: 327 F.3d 30
• Decision Date: 29 April 2003
• Docket Number: No. 02-1407.,No. 02-1371.,02-1371.,02-1407.
• Parties: Judith A. LAWTON; Thomas Lawton; Marsha E. Daras; Stephen H. Lawton; Nancy Lawton Cronin; David T. Lawton; T. Michael Lawton; Joanna J. Lawton; Suzanne M. Lawton, Plaintiffs, Appellees/Cross-Appellants, v. Robert NYMAN; Keith Johnson; Kenneth Nyman, Defendants, Appellants/Cross-Appellees, Nyman Manufacturing Co., Defendant, Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

327 F.3d 30

Judith A. LAWTON; Thomas Lawton; Marsha E. Daras; Stephen H. Lawton; Nancy Lawton Cronin; David T. Lawton; T. Michael Lawton; Joanna J. Lawton; Suzanne M. Lawton, Plaintiffs, Appellees/Cross-Appellants, v. Robert NYMAN; Keith Johnson; Kenneth Nyman, Defendants, Appellants/Cross-Appellees, Nyman Manufacturing Co., Defendant, Cross-Appellee.

No. 02-1371.

No. 02-1407.

United States Court of Appeals, First Circuit.

Heard February 4, 2003.

Decided April 29, 2003.

COPYRIGHT MATERIAL OMITTED

Robert Corrente with whom Brian C. Newberry and Hinckley, Allen & Snyder LLP were on brief, for appellants.

Karen Pelczarski with whom Staci L. Kolb and Blish & Cavanagh, LLP were on brief, for appellees.

Before SELYA, Circuit Judge, STAHL, Senior Circuit Judge, and LYNCH, Circuit Judge.

LYNCH, Circuit Judge.

Following trial, the district court found officers and directors with voting control of a closely held family corporation, Nyman Manufacturing Co., to be in breach of their state law fiduciary duties to minority shareholders whose shares the three had caused the corporation to redeem without making adequate disclosures. Robert Nyman, Kenneth Nyman, and Keith Johnson were held jointly and severally liable to nine Nyman family members for the total sum of $2,096,798.50, which was, roughly, the value of those shares at the time of the sale of the Nyman corporation to a strategic buyer some sixteen months later, following the redemption of their shares. The court also awarded prejudgment interest under state law at the rate of 12 percent from May 30, 1996, the date the plaintiffs sold their shares.

The three defendants appeal, on the basis that the liability finding of breach of fiduciary duty was error in that the non-disclosed information was not material. They also argue the court erred in its award of damages and as to the date on which prejudgment interest started to run. The plaintiffs cross-appeal, find fault with the damages, and argue they were entitled to more.

We affirm the liability finding and remand for further proceedings on the appropriate measure of damages.

I.

Nyman Manufacturing Company was a closely held, fourth-generation family-owned company in Rhode Island that manufactured paper and plastic dinnerware. Robert Nyman, the President and CEO of the company, and his brother Kenneth, the Vice-President of Manufacturing, had worked in the business their entire adult lives.

There were two classes of company stock: Class A shares, which were non-voting, and Class B shares, which were voting stock. The company's articles of incorporation authorized 13,500 shares of Class A stock and 1,500 shares of Class B stock. Traditionally, one or two family members owned all of the Class B stock, while the Class A shares were dispersed throughout the family. No dividends were ever paid on either class of stock. Robert and Kenneth Nyman had each inherited 375 shares of the Class B voting stock from their uncle; this was the entirety of the issued Class B stock. Because they were the controlling shareholders, we refer to them as the majority shareholders of the company. In the beginning of 1995, there were 8,385 shares of Class A stock outstanding. Judith Lawton, the sister of Robert and Kenneth, owned Class A stock, as did her husband and eight children. The Lawtons together owned 952 Class A shares. The children of Robert and Kenneth together owned another 140 Class A shares. Beverly Kiepler, another Nyman sibling, and her daughter together owned 700 Class A shares. The Magda Burt Estate controlled 2,256 Class A shares, and the Walfred Nyman Trust controlled 1,677 Class A shares.

The company teetered on the verge of bankruptcy in the late 1980s. In 1991, the company's performance again began to suffer. In 1994, after three consecutive years of losses, the company hired Keith Johnson, a specialist in turning around and then selling companies, as a consultant. Johnson was made the Chief Financial Officer and Treasurer in August 1994, and his liability stems from his position as an officer.¹ He was promised an equity share of the company if he could revive the company's flagging profits.

By the spring of 1995, it appeared that the fortunes of the ailing company were being reversed. Earlier, in the fiscal year ending March 25, 1995, the company reported a profit of nearly $1.6 million, in vivid contrast with its past losses. On April 3, 1995, the company granted Johnson 1,000 options to buy Class A stock at $145.36 a share. This price was equal to eighty percent of book value; no effort was made to ascertain the actual market value of the stock, as required by the bylaws.² In the words of the district court, at this time "the prospect of a future sale of the company to a strategic buyer was, at most, nothing more than a remote possibility."

In July 1995, after a series of discussions, the company offered to redeem 2,256 shares from the Magda Burt Estate. On November 6, 1995 the Burt shares were redeemed for $145.36 per share. That price represented eighty percent of the $180 book value of the stock in April 1995. The price was not pegged to the higher November 1995 book value of $312.02 a share.³ After probate court approval, the estate accepted and the deal closed on November 6, 1995. That same day, the Board, which now consisted of Johnson, Robert and Kenneth, issued options to these three to buy the same number of shares as those redeemed, at the same price, $145.36 a share. Robert received 1,128 options, while Kenneth and Johnson received 564 options each.

In January 1996, the company also offered to redeem the shares held by the Walfred Nyman Trust. The offer was again for $145.36 a share. By that time, the book value had risen to $318.59 a share. One of the beneficiaries of the trust, Beverly Kiepler, withheld agreement, and the offer was abandoned.

The company's fiscal year ended on March 29, 1996. The unaudited financials showed a profit of $3.5 million and a quadrupling of shareholder equity. Although it is true that much of the profit came from non-recurring items, it is also true that the three defendants, sitting as the Board, adopted deferred compensation plans for themselves which had a total value of $2 million.

They also decided to hire a consultant and, at the March 20, 1996 annual meeting, authorized Johnson to begin to interview candidates. Although the defendants dispute that their intent was for the consultant to help them sell the company, the district court permissibly inferred, from the evidence at trial, that such was their purpose. This inference was based, inter alia, on the contents of the retention letter with the consultant eventually hired, Shields & Co., dated in August 1996, which was, in turn, based on an earlier meeting. That letter made clear that Shields would offer services including:

1. strategic issues as they relate to the long-term value of Nyman;

2. operational issues to maximize Nyman's position in the future in the eyes of a potential acquirer;

3. the specific dynamics of the merger and acquisition market;

4. assist you in responding to the numerous acquisition inquiries when appropriate....

None of this information was disclosed to the minority shareholders. There is evidence, not specifically referred to by the district court, that by May 1996 the three defendants were also engaged in discussions, also undisclosed, to acquire other companies. Those discussions did not lead to a merger or acquisition.

In April 1996, Johnson, on behalf of the company, offered to purchase 700 shares of Class A stock directly from Kiepler and her daughter for $145.36 a share. By that point, shareholder equity had risen to $576.40 per share. Johnson put Kiepler under a false deadline, saying that the bank waivers which would permit the purchase would expire on May 1, 1996. This was untrue: no waivers had yet been secured. Kiepler declined the offer, based on the low price.

On May 8, 1996, the company, over Johnson's signature, sent letters to all Class A shareholders except Robert and Kenneth, their spouses, and the Walfred Nyman Trust, offering to redeem their shares for $200 per share. The letter said the following:

I would like to report to you some information about Nyman Mfg. and a limited term opportunity that you now have as a Nyman shareholder with [ ] shares of Class A Non-Voting Stock.

As you know, the Company has had major "ups and downs" over the past 10 years including 5 years in which significant losses were experienced. In the two most recent years, the Company's financial condition has improved and its lending banks have agreed that limited amounts of its common stock may be re-purchased. This is an opportunity for shareholders who are interested in achieving liquidity now.

Last November, the Company was able to re-purchase certain shares of stock held by Rhode Island Hospital Trust Bank as co-executor of Marge Burt's estate at a price of $145.36 per share. Since that time, the Company has received several inquiries from other minority shareholders concerning their desire to sell their shares of Nyman Mfg. Co. stock. In response to these inquiries, the Company has negotiated with its lending banks to allow it to offer to purchase additional shares of Nyman stock at this time.

Given favorable economic factors and current estimates of operating results, the Company is offering to purchase all of your shares at a price of $200 per share.

Since the Company cannot provide you with any advice as to whether the sale of the stock by you is in your best financial interest, we suggest that you discuss this matter with your financial advisor. You should know that these receipts will be subject to the appropriate federal and state taxes and that you should consult with a tax advisor, particularly with regard to your share of any tax-loss carry-over from the Magda Burt estate which may help to reduce any tax liability you may have.

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