Pacemaker Plastics Co., Inc. v. Afm Corp.
| Decision Date | 14 May 2001 |
| Docket Number | No. 5:01-CV-132.,5:01-CV-132. |
| Citation | 163 F.Supp.2d 795 |
| Parties | PACEMAKER PLASTICS CO., INC., et al., Plaintiffs, v. AFM CORPORATION, et al., Defendants. |
| Court | U.S. District Court — Northern District of Ohio |
On March 26, 2001, the defendants1 moved, under Fed.R.Civ.P. 12(b)(6), to dismiss the second amended complaint for failure to state a claim [Doc. 31]. Plaintiffs Pacemaker Plastics Co. Inc., Thermal Foams, Inc., and Therma Foam, Inc., oppose the motion. On April 17, 2001, the plaintiffs filed a motion to amend the judgment of the dismissal of the first amended complaint under Fed.R.Civ.P. 59(e) [Doc. 40]. For the reasons discussed below, the Court denies the plaintiff's motion to amend judgment and grants the defendant's motion to dismiss the second amended complaint.
This dispute arises from an abandoned corporate merger. Plaintiffs are shareholders in Defendant AFM. The plaintiffs generally say that other shareholders in AFM should not have considered merging AFM with another company. The merger never took place. The plaintiffs say several of their fellow shareholders took certain acts in supporting the merger that triggered AFM's right to redeem the stock of the other shareholders considering the merger. The plaintiffs seek to assert these redemption rights on AFM's behalf. The plaintiffs also say the defendant shareholders violated the individual participation agreements between the defendants and AFM. The plaintiffs also seek to assert breach of fiduciary duty and contract claims on AFM's behalf.
The defendants say that the plaintiffs fail to state a claim for which relief maybe granted. First, the defendants say the plaintiffs are not proper representatives to bring a derivative action. Second, defendants argue that the plaintiffs are not parties to the redemption agreement with other shareholders and AFM. The defendants also say that the Court lacks subject matter and personal jurisdiction. Finally, the defendants argue the Court should dismiss the second amended complaint because the plaintiffs filed it without permission.
AFM is a corporation organized to provide development, research and support services to its shareholders. Sixteen shareholders have equal ownership rights in AFM. Fifteen shareholders are corporations involved in the manufacture and sale of expanded polystyrene foam ("ESP") products and systems. The remaining shareholder is Michael Tobin, AFM's president.
AFM is structured to provide support services to its fifteen corporate shareholders. Those services, called the AFM Program, include joint product development and marketing. Each corporate shareholder entered an individual participation agreement with AFM that defined the participant's rights and obligations in the AFM Program. Under their participation agreement, each participant appoints one member to AFM's board of directors. Additionally, the agreements contain sections on confidentiality and covenants not to solicit employees. Finally, the participation agreements have forum-selection and arbitration clauses covering any disputes concerning the agreements.
AFM's bylaws allow the board of directors to appoint an executive committee that exercises complete authority in managing AFM. During the times relevant to this case, representatives from Advance Foam Plastics and Defendants IBS, Team, Big Sky, Contour, and Pacific Allied made up the executive committee. Defendant Tobin also participated in executive committee meetings.
One of the products developed by AFM, R-Control structural building panels, provided the impetus for the proposed merger underlying this action.
R-Control structural building panels are used in commercial and residential construction. AFM developed these panels, but its fifteen corporate shareholders generally manufacture and sell the panels. As shareholders, these fifteen companies receive the licensing rights to use AFM's technology and to sell AFM products.
The merger negotiations that give rise to Plaintiffs' claims under the stock redemption and participation agreements began after a newly-formed company expressed interest in obtaining AFM's interest in the R-Control structural building panels. This new company, R Merger Company, Inc., was formed by three shareholders, Timothy Feagan, Michael Terpak, and William Jaeger. Feagan is the president and a shareholder of Defendant Team while Terpak is the president and a shareholder of Defendant IBS. Team and IBS are both corporate shareholders of AFM. In fact, Feagan and Terpak served on AFM's executive committee as representatives of Defendants Team and IBS.
R Merger sought to acquire and more aggressively market the R-Control building panels. Prior to beginning negotiations about whether an acquisition of the R-Control system made sense, R Merger requested that each AFM shareholder agree to exclusively negotiate with R Merger for a specific time period. R Merger made this request through a proposed letter agreement dated November 30, 2000.
On December 18, 2000, the R Merger principals met with the AFM shareholders. At this meeting, R Merger's shareholders generally described the outline of their desired acquisition agreement. They suggested that R Merger acquire AFM and then exclusively license all of its technology back to AFM, save the R-Control structural building panels. After R Merger's presentation, a straw poll showed that 13 of AFM's 16 shareholders had a general interest in entering into negotiations with R Merger. Plaintiffs Therma Foam and Thermal Foams opposed any transaction. Plaintiff Pacemaker Plastics abstained.
On December 27, 2000, R Merger sent out proposed revisions to its earlier proposed letter agreement. This revised letter agreement proposal outlined the basic terms of the proposed acquisition and license-back. The letter agreement also included provisions calling for (1) confidentiality, (2) an exclusive negotiating period, and (3) a voting agreement executed by a majority of AFM's shareholders that confirmed their agreement "to vote in favor of the transaction" and providing "that the shareholders will cause AFM to eliminate any redemption rights that AFM may have with respect to AFM stock that may arise as a result of the transaction." The letter agreement states that only the confidentiality and exclusive negotiating period provisions were binding. The voting agreement provision stated that it was non-binding.
Nine AFM shareholders executed the letter agreements. But prior to any merger negotiations, R Merger rescinded its letter agreements on January 18, 2001. Each of the nine AFM shareholders agreed to the recision. As a result, there is no agreement for R Merger to acquire AFM. Nor are there any current negotiations for such an acquisition.
Plaintiffs nevertheless contend that the nine AFM shareholders triggered AFM's redemption rights by executing the letter agreements. These redemption rights are contained in stock redemption agreements previously executed between AFM and each of its shareholders.
The separate stock redemption agreements between AFM and its corporate shareholders are substantially similar. These agreements are designed to prevent unwanted ownership interests. Thus, the agreement allows a shareholder to sell its interest in AFM to any other shareholder. But AFM has the right to redeem stock to prevent its sale to a non-related entity:
No mortgagee, pledgee, Trustee in bankruptcy, or other person, individual or business entity, shall acquire any ownership or interest in Shareholder's Shares, and any attempt at any sale, transfer or other disposition of such Shares, voluntary or involuntary, shall constitute an irrevocable offer by Shareholder to sell the same to Company and Company shall thereupon redeem all Shares then owned by Shareholder.
Stock Redemption Agreement, Paragraph 4.
Michael Tobin's agreement differs. With regard to Tobin, AFM has a right of first refusal. His agreement provides that if he ever "desires to sell, encumber, transfer or otherwise dispose of any of his Shares," he must "first provide the Corporation and the other Shareholders with written notice [of the terms of the proposed sale] ... [and then] [f]or a period of sixty (60) days from the date of such Notice, the Corporation shall have the option to purchase all, but not less than all, of the Shares identified in such notice...."
According to Plaintiffs, the execution of the letter agreements with R Merger constituted an attempted sale of AFM stock. Thus, they say AFM is obligated to redeem the nine shareholders' AFM stock.
In addition, the plaintiffs allege that the defendants utilized confidential information in preparing the plan presented to AFM's board of directors. The plaintiffs also say the defendants used AFM's assets in furtherance of the plan at AFM's expense. Specifically, the plaintiffs allege a number of AFM board meetings were called to consider the merger plan at AFM's expense. The plaintiffs say Defendants IBS, Team, and Big Sky negotiated with Tobin, while he was AFM's president, to become an executive of their new corporation. Finally, the plaintiffs say the defendants did not recuse themselves from a vote by which AFM assessed each shareholder $10,000 to defray the costs of defending the present lawsuit.
On January 17, 2001, the plaintiffs filed their first amended complaint in this action. The complaint asserted four claims revolving around the stock redemption agreements executed between AFM and each stockholder.2 On February 8, 2001, the defendants, except AFM,3 moved to dismiss the first amended complaint. On March 16, 2001, the plaintiffs filed their second amended complaint. Besides re-stating the four claims from the original complaint, the second amended complaint asserted five new counts seeking monetary and declaratory relief for alleged breach of fiduciary duty and breach of contract by the defendants under the...
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Isp. com LLC. v. Theising
...120 S.Ct. 1331, 146 L.Ed.2d 171 (2000); Jumara v. State Farm Ins. Co., 55 F.3d 873, 875 (3d Cir.1995); Pacemaker Plastics Co. v. AFM Corp., 163 F.Supp.2d 795, 807 (N.D.Ohio 2001). Several considerations may lead to the inclusion of both. First, and obviously, arbitration may be waived by th......