Shanno v. Magee Indus. Enterprises, Inc.

• Decision Date: 08 September 1988
• Docket Number: 87-1707,Nos. 87-1680,s. 87-1680
• Citation: 856 F.2d 562
• Parties: Fern Barbara SHANNO and Luanne Law Sukenik, on behalf of themselves and all others similarly situated v. MAGEE INDUSTRIAL ENTERPRISES, INC., and James A. Magee, Individually and as President and director of Magee Industrial Enterprises, Inc. Appeal of MAGEE INDUSTRIAL ENTERPRISES, INC. and James A. Magee. Appeal of Fern Barbara SHANNO and Luanne Law Sukenik.
• Court: U.S. Court of Appeals — Third Circuit

Page 562

856 F.2d 562

Fern Barbara SHANNO and Luanne Law Sukenik, on behalf of themselves and all others similarly situated v. MAGEE INDUSTRIAL ENTERPRISES, INC., and James A. Magee Individually and as President and director of Magee Industrial Enterprises, Inc Appeal of MAGEE INDUSTRIAL ENTERPRISES, INC. and James A. Magee Appeal of Fern Barbara SHANNO and Luanne Law Sukenik.

Nos. 87-1680, 87-1707.

United States Court of Appeals Third Circuit.

Argued June 2, 1988.

Decided Sept. 8, 1988.

Eugene A. Spector (argued), John F. Innelli, Eugene A. Spector & Associates, Philadelphia, Pa., for appellants, Magee Indus. Enterprises, Inc. and James A. Magee.

Robert C. Heim (argued), Melvin A. Schwarz, Linda J. Wharton, Dechert Price & Rhoads, Philadelphia, Pa., for appellants, Fern Barbara Shanno and Luanne Law Sukenik.

Leroy S. Zimmerman, Atty. Gen., Carl Vaccaro, Deputy Atty. Gen., Philadelphia, Pa., Joan Dawley Maher, Pennsylvania Securities Com'n, Harrisburg, Pa., for amicus curiae, Com. of Pa.

Before SEITZ, SLOVITER and HUTCHINSON, Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

I. Introduction

This appeal and cross-appeal arise out of litigation over a close corporation's tender offer to minority shareholders. Following a jury trial, the district court denied plaintiffs' motion for a judgment n.o.v. on the jury's determination of share value and granted plaintiffs a new trial on the question of share value. The parties agree that if we affirm the district court's decisions in these respects, a stipulation that they reached will obviate any need to consider the other issues presented on appeal, including the district court's ruling on the unconstitutionality of the Pennsylvania Takeover Disclosure Law and the court's instructions on the securities claims.

II. Background

When the chain of events leading to this suit began in August, 1977, eighty-five percent of the stock of Magee Carpet Company (MCC), a closely held corporation, was held by Magee Industrial Enterprises (MIE). Both entities were Pennsylvania corporations. James Magee (Magee) was president and a director of both corporations, which were controlled by the Magee family. Most of the remaining shares had been issued to employees or past employees of MCC. (MIE, MCC and Magee shall be collectively referred to as the defendants.)

On August 29, 1977, Magee wrote a letter to shareholders who had previously expressed a desire to sell their stock announcing MIE's offer to purchase the outstanding common stock at $20 per share. Shares were to be tendered by September 30. Magee included no written financial information with his letter, but offered "to arrange to make financial information concerning Magee Carpet Company available to you and to meet with you to answer your questions concerning the company at the offices of the company" in Bloomsburg, Pa.App. at 76. A similar offer dated September 29, with an October 30 deadline, was extended to all other stockholders. The plaintiffs represent a certified class of minority shareholders who tendered shares in response to these offers.

Plaintiffs' claim was that defendants failed to disclose to the minority shareholders that they initiated the tender offer with a settled intention to merge MCC into MIE and with full knowledge that the price offered to the minority shareholders was considerably lower than the true value of the shares. Plaintiffs' evidence included the testimony of defendants' accountant and attorney that merger and/or liquidation were discussed by Magee both before the first tender offer and thereafter at a meeting on September 29, 1977; the admission of defendants' chief financial officer that MCC had recently sold $6 million in assets which added approximately $3 million to the company's cash reserves, a transaction that was not disclosed to the minority stockholders; and the same witness' further testimony, corroborated by its expert, that after several years of significant losses the company had achieved a modest return to profitability. Plaintiffs also introduced letters in which Magee told minority shareholders who inquired about the possibility of merger that "there is nothing to be acquired," App. at 81, and that "[f]rom a business standpoint there is no advantage to us [i.e., the defendants] to buy this stock," App. at 82.

Defendants portrayed their offer as an altruistic gesture towards old friends of the company who had no market for their shares and no prospect of a dividend. They pointed to Magee's numerous expressions of concern for the outside shareholders, and to the fact that MIE spent $860,000 buying stock expecting no more than $135,000 in direct tax savings and a one-time, one year deferral of $600,000 in taxes. Although defendants did not dispute that merger and/or liquidation was discussed in various contexts before and during the tender period, Magee and his attorney testified that no decision was made to merge until late November, 1977. Magee testified that he tried hard to keep the business going to preserve jobs in the community and because he was too young to retire.

MIE's offer was successful. By the end of October, 1977, MIE had acquired approximately 97% of the outside shares. Sometime before the end of November the companies made a "final" decision to merge. The merger was formally announced on November 20, 1978, a year later, and became effective in December of that year.

III. Procedural History

Plaintiffs' complaint, filed in June, 1979, alleged violations of the Securities Exchange Act of 1934, the Pennsylvania Securities Act, and the Pennsylvania Takeover Disclosure Law, 70 Pa.Stat.Ann. Secs. 71-85 (Purdon Supp.1988), as well as breach of fiduciary duty under state law. During the course of pre-trial proceedings, the district court ruled that the Pennsylvania Takeover Disclosure Law was unconstitutional because it imposed an impermissible burden on interstate commerce, and the court dismissed the count seeking recovery under that law.

The case was tried before a jury on the securities claims and the breach of fiduciary duty claim. The parties presented opposing expert witnesses on the value of MCC shares. Plaintiffs' witness testified that although the official book value was approximately $55, the corrected book value was $58.89, and the fair market value was $42.72. Defendants' expert testified that the liquidation value of each share was approximately $20 per share below book, or $36; that the investment value (price/earning value) was between $12.60 and $17.33; and that, to the degree that market experience was relevant in a close corporation, the "market value" was $10. It was the witness' opinion, based on these different valuations, that $20 was a fair price for the shares tendered. There was also evidence that in late October, 1977 the defendants' accountant had estimated the value of the shares as $31.

The jury was given special interrogatories. The first question asked was, "During the course of the offer to purchase the minority shares for $20 each in the summer and fall of 1977, did the defendants either knowingly or recklessly fail to disclose material information; that is, information bearing upon the fairness of the price offered, which a reasonable investor would take into account in deciding whether or not to sell at that price?" App. at 498. The jury answered "No" as to the named plaintiffs and as to the unnamed class members. This response represented the jury's verdict for defendants on the plaintiffs' securities acts claims. However, because the defendants as majority shareholders owed a fiduciary duty to their minority shareholders, Weisbecker v. Hosiery Patents, Inc., 356 Pa. 244, 250-51, 51 A.2d 811, 813-14 (1947), they were obliged to tender the fair market value price for the minority held stock. See Restatement of Restitution Sec. 138 (1937). Therefore, the jury was then obliged to find what the fair market value of MCC stock was during the tender period. The district court, sua sponte, instructed the jury to respond as to value on several dates during the tender period. The jury found that the fair market value of the stock was $20 on August 29 and September 29, 1977, the dates when the tender offers were made, that it was $23 per share on October 29, 1977, and that on November 29 and thereafter it was worth $31 per share. ¹

Based on these answers, both parties moved for judgment in their favor. In September of 1984, the district court entered judgment for the defendants on the state and federal securities counts, and for the plaintiffs on the fiduciary duty claim in the amount of $3 per share sold between October 29 and November 29, and $11 per share old thereafter.

Plaintiffs filed a motion for judgment n.o.v. or for a new trial. The district court declined to disturb the jury's rejection of plaintiffs' claims under federal and state securities laws but granted a new trial confined to the issue of the proper value of MCC stock during the pendency of the tender offer. The court ruled that the jury's finding that MCC stock was worth $31 as of November 29, 1977 was adequately supported by the evidence. However, based on evidence that there was a distinct likelihood that the merger would take place and that the only conceivable alternative to a merger would have been a liquidation which would have produced $36.50 per share, the court held that the jury's finding of a value less than $31 per share during the tender period was against the weight of the evidence.

The parties, wishing to appeal, stipulated that judgment be entered fixing the value of the stock during the tender offer at $31. They did not agree that figure was correct, but entered the stipulation to "avoid a needless retrial of the case should, on appeal, the view of the trial court as to the right of the class to (at least) $31 per share be upheld." App. at 61.

The district court refused to adopt the stipulation as an order, but...