Sanders v. Thrall Car Mfg. Co., 79 Civ. 4292-CSH.

Citation582 F. Supp. 945
Decision Date16 September 1983
Docket NumberNo. 79 Civ. 4292-CSH.,79 Civ. 4292-CSH.
PartiesPhyllis SANDERS, Plaintiff, v. THRALL CAR MANUFACTURING COMPANY; Arthur M. Barrett, Jr.; Thomas J. Boyce, Jr.; John J. Bergstrom; Stanley D. Christianson; Richard Duchossois; George F. Gerk, Sr.; Robert H. Hayes; Paul T. Kessler, Jr.; James L. Krum; Ralph Schultz; Joseph V. Scott; John P. Sommers; and Chamberlain Manufacturing Corporation, Defendants.
CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York



Avrom S. Fischer, Brooklyn, N.Y., for plaintiff.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendants Thrall Car Mfg. Co., Barrett, Christianson, Duchossois, Gerk, Hayes, Scott and Chamberlain Mfg. Corp.; Lewis A. Kaplan, Harriet L. Goldberg, New York City, of counsel.

Parker, Auspitz, Neesemann & Delehanty, New York City, for defendants Boyce, Bergstrom, Kessler, Krum, Schultz and Sommers; Charles S. Barquist, Jack C. Auspitz, New York City, of counsel.

HAIGHT, District Judge:

Plaintiff Phyllis Sanders, a former minority shareholder of defendant Chamberlain Manufacturing Corporation ("Chamberlain"), brings this action to redress alleged violations of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., arising out of events preceding defendant Thrall Car Manufacturing Company's ("Thrall") 1979 tender offer for Chamberlain shares. Also named as defendants are Chamberlain and the individual members of its board of directors at the time of the disputed transaction. The case is presently before the Court on defendants' motion to dismiss the second amended complaint pursuant to Fed.R.Civ.P. 12(b)(1) and (6) and plaintiff's motion for leave to amend the complaint to assert an additional claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq. For the reasons stated below, plaintiff's motion is denied and defendants' motion to dismiss is granted.

I. Factual Background

At the time of the events giving rise to this suit, Chamberlain Manufacturing Corporation was a publicly owned Iowa corporation engaged primarily in the manufacture and sale of electronic, home improvement, and forging and machining products. Thrall Car is a privately held Delaware corporation engaged in the manufacture, assembly, and repair of railroad freight cars and, through various subsidiaries, in the leasing of railroad freight cars and the repair of railroad rolling stock and other equipment. All Thrall Car common stock is owned beneficially by the families of Jerome A. Thrall and defendant Richard L. Duchossois; all outstanding shares of preferred stock are owned by Mildred E. and Arthur J. Thrall, parents of Jerome Thrall.

Prior to January 1977, when Thrall first purchased shares in Chamberlain, Thrall held discussions with certain Chamberlain officers and directors concerning Thrall's potential interest in acquiring control of the company. (Offer Booklet, Def.Exh. 1 at B-19). Defendants state that such discussions were terminated prior to any actual purchase of shares and that "it was not until August 1978 that Thrall formed a definite intention to acquire control." Id. Between January 10, 1977 and April 6, 1979, Thrall acquired approximately 53.8% of Chamberlain's common stock through a series of some thirty different purchase transactions. (Id. at B-30; Comp. ¶ 7).1 As stated in the informational materials ("Offer Booklet") accompanying Thrall's subsequent tender offer:

"Such Shares were purchased for investment, and such purchases were not made for the purpose of acquiring control of the Company. Throughout that period, however, the Purchaser consistently stated (i) that it might (and probably would) purchase additional Shares, and (ii) that it intended regularly to review its position in the Company and might (a) increase or decrease its holdings of Shares, and/or (b) seek to acquire control of the Company." Id. at B-19.

In July of 1977, Thrall indicated to Chamberlain its intention to seek representation on Chamberlain's board of directors. At the request of Thrall, the board subsequently voted to increase its membership from twelve to fourteen directors, and immediately thereafter elected defendants Duchossois and Christianson, Thrall's president and vice-president of finance, respectively, to fill the vacancies thereby created (Id. at B-20; Comp. ¶ 10). On April 10, 1978, Thrall announced that it intended to expand its representation on the board. Shortly thereafter, the directors voted 12 to 2 to return to a twelve-member board, effective at the 1978 annual meeting, and to recommend as part of management's slate three individuals nominated by Thrall: defendants George F. Gerk, a financial consultant to Thrall; Robert H. Hayes, a Thrall director; and Arthur M. Barrett. Two directors voted against, and one director abstained from voting on, the proposal to increase Thrall's representation from two directors to five. All five Thrall candidates were elected to the Chamberlain board at the 1978 annual meeting, and were reelected in 1979 (Id. at B-20).

Prior to the 1979 annual meeting, Chamberlain mailed proxy statements to all shareholders regarding two matters to be voted on at the meeting: the election of directors and a proposed merger of Chamberlain with one of its wholly owned subsidiaries, a Delaware corporation (Def.Exh. 2). The intent and effect of such a merger, known as a "migratory" merger, would be to change Chamberlain's state of incorporation from Iowa to Delaware. Both the merger and management's slate of directors, the party defendants in this action, were approved at the annual meeting. The new board elected Richard Duchossois to the position of chairman of the board.

On August 14, 1979, Thrall announced publicly its intention to make a tender offer for all outstanding shares of Chamberlain common stock at a price of $26.50 per share (Exh. 3), subject to completion of the necessary filings with the Securities and Exchange Commission and compliance with applicable state securities laws.2 The offer itself commenced on August 27, 1979 at a price of $30.00 per share (Offer Booklet, Def.Exh. 1 at B-1). In the Offer Booklet, Thrall stated that its attempt to acquire the entire equity interest in Chamberlain at this time was prompted by shareholder approval of the proposed migratory merger. More specifically, Thrall expressed concern over the right of dissenting shareholders under Iowa law to demand payment of the fair value of their shares and the consequent reduction in corporate assets occasioned by such cash payments. Thrall viewed the effects of a migratory merger as inconsistent with its own objectives and determined that it would be in Thrall's best interests to initiate a tender offer which, if successful, would set the stage for a merger of Chamberlain and a Thrall subsidiary.

Abandonment of the migratory merger would also benefit Thrall in two other respects. As stated in the Offer Booklet:

"Since the Purchaser presently intends to cause the Company to be merged with the Purchaser or to become a wholly-owned subsidiary of the Purchaser ..., abandonment of the migratory merger would ... avoid the expense (and possibly inconsistent results) of simultaneous appraisal proceedings in two separate jurisdictions (i.e., Iowa as to the migratory merger and Delaware as to the subsequent merger with the Purchaser or a subsidiary of the Purchaser which the Purchaser intends to propose). Moreover, a cash merger following migration to Delaware would involve a risk to the Purchaser which it does not believe will be encountered if the Company remains in Iowa. The Supreme Court of Delaware has held that the merger of a Delaware corporation caused by its majority stockholder solely for the purpose of compelling the minority stockholders to relinquish their shares in exchange for a cash payment is a violation of a fiduciary duty owed by such majority stockholder to the minority, even though all statutory requirements of Delaware law relating to mergers have otherwise been met.... Given the normal uncertainties of litigation, the Purchaser could not be assured that a subsequent merger would, if challenged in the Delaware courts, ultimately be sustained by such courts. So far as Purchaser has been able to determine, there are no holdings by Iowa courts which are similar to the Delaware decisions referred to above.
"In addition, participation by the Company in any merger (including the migratory merger) would require that the Company obtain the consents of certain creditors of the Company and, possibly, the consents of parties to other contracts with the Company; and, in light of the Purchaser's present plans discussed below to propose a merger of the Company with the Purchaser or with a wholly-owned subsidiary of the Purchaser (see `Effects of the Offer'), the obtaining of such consents incident to the migratory merger would involve efforts (and might involve financial inducements) which might have to be duplicated in the near future. The Purchaser wishes to avoid such duplication." (Def.Exh. 1 at B-3-B-4).

On September 6, 1979, Chamberlain's board of directors, noting the pendency of the Thrall tender offer, declared the merger proposal "terminated and null and void." (Palermo Aff., Def.Exh. 4).

Response to the tender offer was extremely positive. Pursuant to the offer, and in transactions subsequent to its termination, Thrall purchased 700,066 shares of Chamberlain common stock for a purchase price of $21,014,029.61, thereby increasing its interest in Chamberlain from 53.8 percent to approximately 98 percent (Def.Exh. 1 at 9). Plaintiff Sanders tendered 890 of the 900 shares of Chamberlain stock she owned (Comp. ¶ 60). On January 30, 1980, proxies were solicited from Chamberlain shareholders for approval of a merger between Chamberlain and New-C-Corp ("NCC"), a wholly owned subsidiary of Thrall. The accompanying proxy statement described...

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