Ramey v. Cincinnati Enquirer, Inc.
| Decision Date | 26 December 1974 |
| Docket Number | Nos. 74-1110,s. 74-1110 |
| Parties | Fed. Sec. L. Rep. P 94,925 Jean Whitehouse RAMEY, Plaintiff-Appellee, v. The CINCINNATI ENQUIRER, INC., and American Financial Corporation,Defendants-Appellants. Angiolina MORELLI, Plaintiff-Appellee, v. The CINCINNATI ENQUIRER, INC., and American Financial Corporation,Defendants-Appellants. Albert HARRIS, Plaintiff-Appellee, v. The CINCINNATI ENQUIRER, INC., and American Financial Corporation,Defendants-Appellants. Jean W. RAMEY et al., Plaintiffs-Appellees, v. The E. W. SCRIPPS COMPANY et al., Defendants-Appellants. Cecil F. SCHOEN, a.k.a. Cecile F. Schoen, Plaintiff-Appellant and Cross-Appellee, v. The CINCINNATI ENQUIRER, INC., et al., Defendants-Appellees and Cross-Appellants (3 cases). to 74-1116. |
| Court | U.S. Court of Appeals — Sixth Circuit |
John A. Lloyd, Jr., Frost & Jacobs, John L. Muething, Louis F. Gilligan, Cincinnati, Ohio, for appellants in Nos. 74-1110 to 74-1113.
Jerome Goldman, Douglas G. Cole, C. R. Beirne, Cincinnati, Ohio, for appellee in No. 74-1110.
Arnold Morelli, Cincinnati, Ohio, for appellee in No. 74-1111.
Irving Harris, Cincinnati, Ohio, for appellee in No. 74-1112.
James W. Henglebrok, Cincinnati, Ohio, Richard F. Stevens, H. Stephen Madsen, Baker, Hostetler & Patterson, Cleveland, Ohio, for appellants in Nos. 74-1114, 74-1115 and appellees in No. 74-1116.
C. R. Beirne, Cincinnati, Ohio for appellees in No. 74-1114.
Ambrose H. Lindhorst, Gene Mesh, Cincinnati, Ohio, David C. Bayne, Professor of Law University of Iowa College of Law, Iowa City, Iowa, for appellees in No. 74-1113.
Ambrose H. Lindhorst, Gene Mesh, Cincinnati, Ohio, for appellees in No. 74-1115 and appellants in No. 74-1116.
Before PHILLIPS, Chief Judge, and EDWARDS and McCREE, Circuit Judges.
These are appeals from an order granting attorneys' fees in four stockholder derivative suits that were dismissed on grounds of mootness after trial but before adjudication. The District Judge's order awarded a total of $865,000 in attorneys' fees and $35,115.96 in expenses to be paid to plaintiffs' attorneys in four cases by defendants Enquirer 1 and Scripps, 2 with a contribution of $145,375.00 on the part of the minority shareholders to be paid by American Financial Corporation. 3
This litigation had its genesis in an antitrust action filed against the E. W. Scripps Company by the Department of Justice in 1964. The Scripps-Howard interests while owning Cincinnati's only evening newspaper, The Cincinnati Post and Times Star, also acquired the majority interest in the stock of The Cincinnati Enquirer, Cincinnati's only morning newspaper. The antitrust action was tried before the same District Judge who rendered the judgment involved in the present appeal and was terminated by a consent decree requiring that Scripps divest itself within 18 months of its controlling interest in the Enquirer.
Early in 1970 the management of the Enquirer, ultimately supported by a majority of the minority shareholders, put together a bid to Scripps-Howard to purchase Scripps-Howard's 60 per cent share of the Enquirer stock. A stock acquisition agreement was signed which provided that the Enquirer would purchase all of the Enquirer stock owned by Scripps-Howard at $35 per share, 11 1/2 million dollars to be paid in cash and the balance to be paid by the issuance of 60,000 shares of preferred stock.
The details of the plan and its proposed financing by the Prudential Life Insurance Co. of America were as follows:
1) The Enquirer would purchase directly from the Scripps group 330,558 Enquirer shares at $35 a share, totalling $11,569,530.
2) Of this sum the Enquirer was to borrow $10,500,000 from the Prudential Life Insurance Co., to be repaid at 12 per cent interest over 16 years.
3) The balance of 171,428 shares owned by the Scripps group would be purchased by the Enquirer by issuance and exchange of 60,000 newly authorized shares of convertible preferred stock that Scripps then agreed to sell (and Prudential by separate contract agreed to buy) for $6,000,000 in cash. The Enquirer would be obligated to pay a yearly dividend of $7.65 on each share of preferred stock and to redeem a minimum of 3,000 shares a year at $110 per share.
4) Under this arrangement the Prudential Life Insurance Co. would have invested $16,500,000, on which the Enquirer would be required to pay a return of 12 per cent on the loan and about ten per cent on the preferred stock. On default of the Enquirer's obligation on either the preferred stock or the debt, Prudential could acquire the entire assets of the Enquirer.
5) The Enquirer was able to contribute only one million dollars from its working capital to accomplish this purchase.
6) The redemption of preferred stock, plus the interest on the loan, would equal about one and one-half million dollars a year. Previously the Enquirer had been netting about two million dollars each year after taxes.
7) No provision was made for any offer to the minority stockholders of the Enquirer. At a stockholders' meeting on October 23, 1970, the stock acquisition plan described above was approved by a vote of 222,930 to 75,307, with the Scripps' 60 per cent of the shares not voting.
In October 1970 three stockholders' derivative suits (Ramey, Morelli and Harris) were filed to set aside this stock purchase plan, alleging, among other things, that the proxy statement contained untrue and misleading statements of material fact and that the plan violated various provisions of both federal and Ohio law. 4 Two of these suits (Ramey and Morelli) were filed before the stockholders' meeting and resulted in the order of the District Court on October 22 enjoining the execution of the purchase agreement until further order. The derivative action of Harris was filed on October 26. Later in November an action was filed on behalf of a stockholder named Schoen. This suit also attacked the acquisition agreement, essentially contending that the proposed transaction was fraudulent.
The cases were tried for about two months, concluding January 18, 1971. Ten days after the trial and before any opinion had been announced, the litigation was mooted when Scripps, making use of an escape clause in the acquisition agreement, terminated its proposed deal with the Enquirer group. This termination by Scripps was prompted by a bid of $35 a share (the same figure as the Enquirer bid, but extended to all minority shareholders) from a California-based trading stamp company called Blue Chip Stamps. Thereafter, and before the court had acted on a petition by the United States and the Enquirer to require the Scripps group to extend the Enquirer agreement, the American Financial Corporation offered Scripps-Howard $40 per share for its 60 per cent interest in the Enquirer's stock and offered the same amount per share to all of the minority shareholders. This offer was accepted by Scripps-Howard. AFC proceeded to acquire the entire Scripps-Howard interest and ultimately all of the minority shares.
The District Judge subsequently issued an informal opinion disclosing the findings of fact that he would have made and the conclusions of law that he would have entered had the case not been mooted. He then heard and decided the requests by the different attorneys for attorneys' fees.
In his fee opinion, the District Judge described the Emquirer-Scripps deal, as originally proposed, in the following language:
'However, it is to be noted that the transaction would have changed the Enquirer stock from 'safe' to 'risky' or 'high leverage.' And the Enquirer-Scripps deal was accurately described as 'thin.' As stated by one of the Enquirer directors, it was no deal for 'widows or orphans."
In the same opinion he also said in part:
'The purchase by a corporation of its own shares has a potential for abuse, and restrictive legislation has therefore grown up to meet the need to prevent such abuse. Hence, any time a corporation attempts to purchase its own shares, especially on a shoestring, the transaction has to be cast in a form which meets the legal requirements and a number of extremely difficult questions in the area of corporate law and finance arise. One restriction on purchase by a corporation of its own shares is the Impairment of Capital Statute, Ohio Revised Code 1701.35, which provides that after such purchase the 'debts' of the corporation must not exceed its assets plus 'stated capital.' That explains why only so much money could be borrowed from Prudential and the balance had to be raised by sale of preferred stock which could be determined to be 'equity' and not 'debt.' In this case the preferred stock had warrants, voting powers, conversion privileges, redemption and other rights, and a difficult and serious question was presented as to whether, though cast in the form of 'equity,' it was not in law and in fact 'debt.' If the shares were 'debt,' the assets of the Enquirer after the purchase of the Scripps shares would not have exceeded debts plus stated capital as required by ORC 1701.35, and the deal would have been illegal.
'That was just one of many complex questions. Another involved the corporate power and many others arose in connection with the proxy statement and the claims that statements therein were materially misleading. One of these was it was not accurate in its portrayal of the effect of the deal on the Enquirer's ability to pay dividends and its dividend policy. Another was that in describing the effect of the plan on the book value of the Enquirer stock (proxy statement, p. 6) instead of a drop from plus $15.42 per share to 'none,' the proxy statement should have shown a drop from $15.42 to minus $13.07. 'In the Enquirer case, by deciding to change stated capital as proposed from $5 per share to $1 per share, the shareholders were saying in effect they chose to embark on the proposed corporate venture and in order to do so to completely change the...
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