Nanfito v. TEKSEED HYBRID COMPANY

• Decision Date: 27 March 1972
• Docket Number: Civ. No. 03507.
• Citation: 341 F. Supp. 240
• Parties: Charles A. NANFITO, Administrator of the Estate of Alice C. Major, Plaintiff, v. TEKSEED HYBRID COMPANY, a Nebraska Corporation, et al., Defendants.
• Court: U.S. District Court — District of Nebraska

341 F. Supp. 240

Charles A. NANFITO, Administrator of the Estate of Alice C. Major, Plaintiff, v. TEKSEED HYBRID COMPANY, a Nebraska Corporation, et al., Defendants.

Civ. No. 03507.

United States District Court, D. Nebraska.

March 27, 1972.

J. Patrick Green, Eisenstatt, Higgins, Kinnamon & Green, and Charles Nanfito, Nanfito & Nanfito, Omaha, Neb., for plaintiff.

Waldine H. Olson, Schmid, Ford, Mooney, Frederick & Caporale, Omaha, Neb., for defendants.

MEMORANDUM AND ORDER

DIER, District Judge.

This matter comes before the Court following trial to the Court without a jury.

The plaintiff, Administrator of the Estate of Alice C. Major, Deceased, brings this action to recover damages for alleged fraud, deceit, undue influence and negligent misrepresentation practiced upon Alice C. Major by the defendants in connection with both a corporate merger and the execution of a stock restriction agreement, or in the alternative, for recision of the stock restriction agreement.

The defendants, on the other hand, have filed a counterclaim praying for specific performance of the stock restriction agreement.

Plaintiff alleges that his claim is cognizable under Section 10(b) and Rule 10(b)-5 of the Securities Exchange Act of 1934, and that this Court has jurisdiction of the action by virtue of 28 U. S.C. §§ 1331 and 1337. Any theory of recovery pursued by the plaintiff, based upon the law of the State of Nebraska, is alleged to be pendent to the claim for relief under Federal law.

On July 1, 1968, Tekseed Hybrid Company, a Nebraska corporation, merged with Tek Annex Company, also a Nebraska corporation. Tekseed Hybrid Company was the surviving entity. On the day of the merger Alice C. Major owned five hundred of the outstanding two thousand, five hundred shares of capital stock of Tekseed Hybrid Company. On that date, her five hundred shares were converted into three thousand, five hundred shares as a result of a stock dividend, which constituted part of the merger process. Alice C. Major had previously owned one hundred of the outstanding five hundred shares of capital stock of Tek Annex Company, but she sold these shares back to that Company approximately a year before the merger occurred.

All of the named individual defendants were, on the date of the merger, stockholders and directors of both corporations. Defendants James Cornish, Gordon Cram, and Raymond Cram were also officers of both corporations, and continued to hold their offices in Tekseed Hybrid Company following the merger.

Tekseed Hybrid Company was, at the time of the merger, and still is, an active corporation, producing and selling hybrid seedcorn and to a lesser extent alfalfa and sorghum seed. In the fiscal year, which ended June 30, 1968, immediately prior to the merger, Tekseed Hybrid had an income, before taxes, of $75,468.00. In the five fiscal years preceding the merger, Tekseed Hybrid Company had realized income, before taxes, ranging from a low of $7,773.00 to a high of $104,283.00.

Tek Annex, on the day of the merger, was essentially a dormant corporation. It had ceased doing business and all of its assets had been liquidated. The Company had produced no more than a minimal income in the years between the liquidation of its assets and its merger with Tekseed Hybrid Company.

On June 30, 1968, the day before the merger, the book value per share of Tek Annex stock was $106.02, and the book value of Tekseed Hybrid stock was $73.22 per share.

Book value per share was the only factor used by the defendants in establishing the exchange ratio of the stock for merger purposes. Each of the individual defendants testified that little weight was given to the history of earnings of the two companies, and that they did not deem it necessary to give any weight to the potential future earnings and goodwill of Tekseed Hybrid Company in setting the exchange ratio. They discounted this latter factor for various reasons, such as obsolescence of the corporation's plant and equipment; poor plant layout and location; anticipated loss of the firm's business manager; and the absence of a qualified replacement for the manager.

In establishing the exchange ratios, the individual defendants consulted with the corporation's accountant, Mr. Gurd, a member of a national accounting firm, who had performed accounting work for the corporation for approximately twenty years. Mr. Gurd also testified that the potential earnings and goodwill of Tekseed Hybrid Company, compared with the lack of potential earnings and goodwill of Tek Annex, was a factor entitled to no weight in setting the exchange ratios. He gave substantially the same reasons for ignoring this factor as did the defendants.

On June 17, 1968, Tekseed Hybrid Company, through one of its officers, wrote a letter to Alice C. Major, in Thompson, Missouri. The letter was posted at Tekemah, Nebraska. The letter requested Alice C. Major to vote for the merger as a stockholder of Tekseed Hybrid Company. Also included was notice of a shareholder's meeting and a proxy for Mrs. Major to sign.¹

It appears to be plaintiff's position that the individual defendants were as fiduciaries for the corporation and all its shareholders under a definite duty to fully consider all factors tending to have a bearing upon the exchange ratio for the stock for merger purposes, and then to advise all the shareholders, particularly Alice C. Major, of what factors were actually used, and the reasons for the use of those factors and the rejection of other factors. Without such information, plaintiff contends, Alice C. Major, could not make the truly informed type of investment decision which the federal securities laws, specifically Section 10(b) and Rule 10(b)-5, are intended to encourage.

However, plaintiff goes further, and would require the officers and directors of a corporation, such as the defendant herein, to not only supply investors and shareholders with full information regarding a major corporation decision affecting the value of its assets and stock, but to also interpret their information and provide an expert opinion as to all the possible ramifications such decision might have on the investor's interests.

This Court, however, does not read Section 10(b) or Rule 10(b)-5 as requiring any more than full disclosure of all information which the ordinary investor of common business experience would require in making an informed investment decision.

In any event, the primary aspects necessary to make plaintiff's claim cognizable under Section 10(b) are present. A merger has been held to involve a "purchase" and "sale", under the terms of the statute. Simon v. New Haven Board & Carton Co., 250 F.Supp. 297 (D.Conn. 1966); Dasho v. Susquehanna Corp., C.C.H. Fed.Sec. L.Rep. Par. 91, 955 (7th Cir. 1967), and the United States mails were obviously used in connection with the merger.

The Court, therefore, has only to determine whether the individual defendants exercised due care in establishing the exchange ratios for the stock and in advising Alice C. Major of the basis of their decision.²

The so-called "business judgment" rule validates corporate dealings and protects corporate management from liability for any transaction within the powers of the corporation, intra vires, and the authority of management, and involves the exercise of due care and compliance with applicable fiduciary duties. Under this rule a Court will not interfere with the internal management and substitute its judgment for that of the directors to enjoin or set aside the transaction or to hold the directors responsible for any resulting loss. Otis & Co. v. Pennsylvania R. R. Co., 61 F. Supp. 905 (E.D.Pa.1945), aff'd 155 F.2d 522 (3rd Cir. 1946); Conviser v. Simpson, 122 F.Supp. 205 (D.Md.1954); Diston v. Loucks, 62 N.Y.S.2d 138 (Sup.Ct. 1941); Henn, Law of Corporations, § 233 (1st Ed. 1961).

Directors and officers of a corporation may become liable to it or the shareholders for negligence in the performance of their corporate duties. However, they are not insurers and are not generally held liable for errors of judgment or mistakes while acting with reasonable skill and prudence.

The standard of care has been variously described as that of a "reasonably prudent man", or of an ordinarily prudent director in a similar business, or "the same degree of fidelity and care as an ordinarily prudent man would exercise in the management of his own affairs of like magnitude and importance." See Anderson v. Akers, 7 F.Supp. 924 (W.D.Ky.1934), modified sub nom.; Anderson v. Atherton, 302 U.S. 643, 58 S. Ct. 53, 82 L.Ed. 500 (1937); Atherton v. Anderson, 99 F.2d 883 (6th Cir. 1938); Simon v. Socony-Vacuum Oil Co., 179 Misc. 202, 38 N.Y.S.2d 270 (Sup.Ct.1942), aff'd 267 App.Div. 890, 47 N.Y.S.2d 589 (1st Dept. 1944); Strauss v. United States Fidelity & Guaranty Co., 63 F.2d 174 (4th Cir. 1933).

Directors and officers must act carefully in light of the circumstances which confront them, in light of actual knowledge, and such knowledge as they should have gained by reasonable care and skill.³

This Court is of the opinion that the individual defendants used all due care in establishing the exchange ratios of the stock for merger purposes. They, in testifying, explained to this Court's satisfaction why future earnings potential and goodwill of the two corporations were not significant factors in setting the ratios. There is also evidence that they relied upon the advice and judgment of their accountant, a member of the accounting firm of Peat, Marwick, Mitchell & Co., in setting the ratios. Reasonable reliance on others has been found by some Courts to be consistent with the duty of due care imposed upon corporate management. See Pool v. Pool, 22 So.2d 131 (La.App.1945); Winkelman v. General Motors Corp., 39 F. Supp. 826, 44 F.Supp. 960, 48 F.Supp. 500, 48 F.Supp. 504 (S.D.N.Y.1942) aff'd per curiam sub nom. Singer v. General Motors Corp., 136 F.2d 905 (2nd Cir. 194...