Samuel M. Feinberg Testamentary Trust v. Carter

• Decision Date: 15 January 1987
• Docket Number: No. 86 Civ. 0698 (JMW).,86 Civ. 0698 (JMW).
• Citation: 652 F. Supp. 1066
• Parties: SAMUEL M. FEINBERG TESTAMENTARY TRUST and Edith Citron, Plaintiffs, v. Leigh CARTER, John C. Duncan, David L. Luke III, John D. Ong, David V. Ragone, Ian M. Ross, Patrick C. Ross, Thomas C. Simons, William P. Stiritz, G. Jack Tankersley, John L. Weinberg, Carl Icahn and Crane Associates, Defendants, and The B.F. Goodrich Company, Nominal Defendant.
• Court: U.S. District Court — Southern District of New York

652 F. Supp. 1066

SAMUEL M. FEINBERG TESTAMENTARY TRUST and Edith Citron, Plaintiffs, v. Leigh CARTER, John C. Duncan, David L. Luke III, John D. Ong, David V. Ragone, Ian M. Ross, Patrick C. Ross, Thomas C. Simons, William P. Stiritz, G. Jack Tankersley, John L. Weinberg, Carl Icahn and Crane Associates, Defendants, and The B.F. Goodrich Company, Nominal Defendant.

No. 86 Civ. 0698 (JMW).

United States District Court, S.D. New York.

January 15, 1987.

COPYRIGHT MATERIAL OMITTED

Klari Neuwelt, Wolf Popper Ross Wolf & Jones, Joseph H. Weiss, New York City, Barbara Wolf, Sachnoff Weaver & Rubenstein, Chicago, Ill., for plaintiffs.

Richard Reinthaler, White & Case, New York City, John M. Newman, Jones, Day, Reavis & Pogue, Cleveland, Ohio, for defendant Goodrich.

Steven Coploff, Gordon, Hurwitz, Butowsky, Weitzen, Shalov & Wein, New York City, for defendant Icahn.

OPINION

WALKER, District Judge:

INTRODUCTION

The instant case arises out of the November 5, 1984 repurchase by Defendant The B.F. Goodrich Company ("Goodrich"), a New York corporation with its principal place of business in Ohio, of more than 1,000,000 shares of Goodrich common stock held by Defendant Carl Icahn ("Icahn"). Plaintiffs Samuel M. Feinberg Testamentary Trust ("Feinberg Trust"), an Illinois trust, and Edith Citron ("Citron"), a Florida resident, bring the instant action against the Goodrich board of directors who approved this stock repurchase ("Goodrich Directors"), Goodrich, Icahn, and Crane Associates, a New York limited partnership controlled and largely owned by Icahn, through which Icahn acquired his Goodrich shares. Plaintiffs' complaint, filed April 18, 1986, alleges federal claims against the Goodrich Directors under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as Rule 14a-9, 17 C.F.R. § 240.14a-9, promulgated pursuant to section 14(a) of the 1934 act, 15 U.S.C. § 78n(a). In addition, the complaint alleges state law claims against the Goodrich Directors for waste and breach of fiduciary duty. Further, plaintiffs bring claims against Icahn and Crane Associates, alleging that these defendants aided and abetted the acts of federal securities fraud and breach of fiduciary duty committed by the Goodrich Directors in connection with the repurchase of stock from Icahn ("the Icahn repurchase").

Claiming the lack of an adequate remedy at law, plaintiffs seek to rescind the $41 million payment to Icahn. Plaintiffs also ask this Court to require that the Goodrich Directors reimburse Goodrich for all damages arising out of the Icahn repurchase, including the costs of a subsequent SEC investigation of this transaction, as well as plaintiffs' costs incurred in bringing the instant action. Further, plaintiffs seek to void the results of elections held at Goodrich's 1985 and 1986 annual meetings, including the reelection of directors which occurred at those meetings.

Defendants Goodrich Directors, Icahn, Crane Associates, and Goodrich move to dismiss each of the counts in plaintiffs' complaint, for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6). Each defendant first argues that plaintiffs' failure to make demand on the Goodrich Directors requires dismissal of the instant action. This Court concludes that demand futility excuses plaintiffs' failure to make demand, and accordingly denies defendants' motion to dismiss plaintiffs' entire action on this ground.

The Goodrich Directors' motion to dismiss plaintiffs' claims brought under Rule 14a-9, promulgated pursuant to the 1934 Securities Act, is granted in part and denied in part. The Directors' motion to dismiss plaintiffs' section 10(b) action is granted. The Directors' motion to dismiss plaintiffs' state law action for breach of fiduciary duty and corporate waste is denied.

This Court grants the motion of Icahn and Crane Associates to dismiss plaintiffs' claim that these defendants aided and abetted the Goodrich Directors' federal securities fraud. This Court denies the motion of these defendants to dismiss plaintiff's claim that Icahn and Crane Associates aided and abetted the Goodrich Directors' breach of fiduciary duty.

This Court certifies for interlocutory appeal defendants' motion to dismiss for failure to make demand.

STATEMENT OF FACTS

"On a motion to dismiss a complaint, all facts and inferences reasonably deductible therefrom are to be construed in favor of the plaintiff." Budco, Inc. v. The Big Fights, Inc., 594 F.2d 900, 902 (2d Cir.1979) (per curiam). Applying this standard of review, the Court bases its legal analysis on the following factual record.

On October 25, 1984, Icahn informed the Goodrich Directors that he had acquired 1,171,700 shares, or 4.9 percent, of Goodrich's common stock. Icahn stated that he planned to acquire as much as 30 percent of Goodrich common stock by the end of October. Icahn asserted that after obtaining 30 percent of the outstanding shares, he would consider joining with management or other investors to purchase a controlling interest in Goodrich stock. If such a takeover failed to materialize, Icahn suggested that he might use the voting power accompanying his 30 percent stock ownership to obtain a seat on the Goodrich board of directors.

However, Icahn also made a firm offer to sell his initial holdings of more than 1 million shares of stock to Goodrich at $35 per share. Icahn's $35 per share offer was about 25 percent above the market price for shares of Goodrich common stock, which in late October 1984 stood at about $28 per share. Goodrich's acceptance thus would result in Icahn realizing about $8 million more than if he had sold his shares on the open market.

On November 5, 1984, the Goodrich Directors, after limited discussion on October 31, accepted Icahn's $35 per share offer. Goodrich financed the Icahn repurchase primarily through short-term loans. As part of the repurchase transaction, Icahn entered into a "standstill agreement," under which he agreed to abstain from acquiring any Goodrich stock for five years. Icahn also agreed that he would not disclose either the repurchase of his Goodrich shares or the standstill agreement, unless such a disclosure was required by law.

At the time of the Icahn repurchase, the Goodrich Directors included all the individuals other than Icahn named as defendants in the instant action: Leigh Carter ("Carter"), John C. Duncan ("Duncan"), David L. Luke III ("Luke"), John D. Ong ("Ong"), David V. Ragone ("Ragone"), Ian M. Ross ("Ian Ross"), Patrick C. Ross ("Patrick Ross"), Thomas C. Simons ("Simons"), William P. Stiritz ("Stiritz"), G. Jack Tankersley ("Tankersley"), and John L. Weinberg ("Weinberg").¹ All of these defendants remain members of the board of directors after their reelection in 1985 and 1986, with the exception of Stiritz, who did not seek reelection in 1985.

Defendant Ong served as Goodrich chairman of the board and chief executive officer in 1984, a position he continues to hold. Defendants Carter and Patrick Ross also hold positions as executive officers of Goodrich. During 1984, Ong received a salary of $556,676, while Carter and Patrick Ross each received about $378,000. The other directors received a 1984 base salary of $18,000, as well as an additional $5,500, paid at a rate of $500 for each of 11 board meetings the directors attended. All directors also received benefits in the form of a stock option program. A retiring Goodrich director who is 55 years old and has served on the board at least five years receives a pension equal to between 50% and 100% of his salary, depending on his length of board service.

On November 9, 1984, Goodrich first announced the Icahn repurchase, describing the transaction only in the following press announcement:

The BFGoodrich Company announced today that it has acquired 1,171,700 shares of the Company's common stock. It is contemplated that the shares will be used to fund employee benefit and pension plans, for projected acquisitions and for other corporate purposes. From time to time, the Company purchases its shares for such purposes.

Goodrich did not disclose that the shares were purchased at a price significantly above the market rate, or that the shares were purchased from an individual stockholder. Although in the two weeks following the issuance of this press release Goodrich received inquiries from at least a dozen securities analysts and portfolio managers, Goodrich continued its policy of silence with respect to the details of the Icahn repurchase.

Similarly, Goodrich's Form 10-K for 1984, filed with the Securities and Exchange Commission ("SEC") on March 20, 1985, stated only that the company had repurchased 1,171,700 shares of common stock and had financed this purchase through an increase in debt. Like the earlier press release, the premium paid for the shares and the purchase of the more than 1,000,000 shares from an individual stockholder were not mentioned in the Form 10-K.

The first Goodrich public disclosure of specific details of the Icahn repurchase occurred on March 6, 1985 at a quarterly meeting with stock analysts, where Defendant Ong acknowledged that the company had paid $35 per share for the 1,171,100 shares repurchased from an individual shareholder. Ong admitted that the transaction could be characterized as "greenmail," and stated that the directors agreed to repurchase the shares because they did not wish to have Goodrich "put in play" for a possible takeover bid. In response to analysts' questions, Ong refused to identify Icahn as the individual who sold the stock to Goodrich.

On March 5, 1985, Goodrich filed its 1985 Proxy Statement with the SEC. The Proxy Statement included a proposed amendment to the company's certificate of incorporation, which the Goodrich Directors planned to submit for a shareholder vote at the company's annual meeting on April 15, 1985. Shareholder ratification...