Simon v. New Haven Bd. & Carton Co., Inc., 27
| Citation | 516 F.2d 303 |
| Decision Date | 05 March 1975 |
| Docket Number | No. 27,D,27 |
| Parties | Fed. Sec. L. Rep. P 95,015 Jeff SIMON, as Custodian for Gail Nina Simon under the New York Uniform Gifts to Minors Act, Plaintiff-Appellant, v. The NEW HAVEN BOARD & CARTON COMPANY, INCORPORATED et al., Defendants-Appellees. ocket 74-1272. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Herbert L. Scharf, New York City (Alfred Olonoff, Harold Bobroff and Bobroff, Olonoff & Scharf, New York City, on the brief), for plaintiff-appellant.
William J. Doyle, New Haven, Conn. (J. Michael Eisner and Wiggin & Dana, New Haven, Conn., on the brief), for defendants-appellees, except William B. Gumbart.
Louis M. Winer, New Haven, Conn. (Tyler, Cooper, Grant, Bowerman & Keefe, New Haven, Conn., on the brief), for defendant-appellee William B. Gumbart.
Before KAUFMAN, Chief Judge, and SMITH and TIMBERS, Circuit Judges.
On this appeal from a judgment entered January 9, 1974 after a seven day bench trial in the District of Connecticut, Jon O. Newman, District Judge, dismissing a stockholder's derivative action, the essential issue is the correctness of the district court's determination that the corporation had not been damaged. For the reasons below, we affirm.
In view of the district court's clear and comprehensive statement of the facts, --- F.Supp. ---, it is sufficient for our purpose briefly to summarize only those facts necessary to an understanding of our ruling on the essential issue before us.
The action in the district court was commenced April 24, 1964. It arose out of the merger earlier that year of several Florida companies into The New Haven Board & Carton Company (New Haven or the company). The Florida companies were owned by defendants Leon J. Simkins, Morton H. Simkins and Dorothy Simkins and their families (the Simkins). The Simkins were in effective control of New Haven. Leon J. Simkins was president of New Haven. The merger was accomplished by New Haven's issuance of 1,377,774 shares of its common stock to the shareholders of the Florida companies in exchange for all of the outstanding shares of the common and preferred stock of the Florida companies. On the exchange, New Haven stock was acquired at a price of $4.50 per share, pursuant to approval by the directors and stockholders of New Haven.
Defendants Edwin W. Miller, Sterling R. Chatfield and William B. Gumbart were directors of New Haven at the time of the merger. Plaintiff is the custodian of a minor who owned stock of New Haven.
The complaint set forth two causes of action: one, based on diversity jurisdiction, alleged that the three director-defendants had breached their fiduciary duties under Connecticut law (state law claim); the other alleged that all defendants had violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1974) (10b-5 claim). Plaintiff's 10b-5 claim was based on alleged misrepresentations and omissions in the proxy statement and accompanying 1963 annual report which were mailed to stockholders of New Haven prior to the stockholders meeting that approved the merger on February 28, 1964.
Plaintiff's evidence at trial was directed chiefly at one challenged omission: the non-disclosure of an unaudited internal financial report for the first quarter of New Haven's 1964 fiscal year, the quarter ending December 31, 1963, which showed profits for that quarter of $148,590 prior to correction. Plaintiff claimed that disclosure of this information would have provided a basis for valuing the New Haven shares at the time of the merger at $8.621/2, rather than $4.50, per share, and therefore the company was damaged by the non-disclosure.
Plaintiff also claimed non-disclosure of other matters favorable to the company including the contracted sale of New Haven's Grand Avenue property at a profit, the discounting of a New Haven note held by the Penn Mutual Life Insurance Company, and the valuation of New Haven's interest in the Grinnell Lithographic Company, Inc. in excess of that reported in the proxy material. Plaintiff claimed that, as of the merger date, these undisclosed assets and profits amounted to $2.055 per share not reflected in the merger price of $4.50 per share.
Plaintiff also claimed non-disclosure of facts said to entitle New Haven to a premium upon the sale of its stock which gave the purchaser control of the company.
At trial plaintiff abandoned his claim for rescission and limited his demand for relief to a claim for damages and an accounting. There was no evidence at trial that the company's ability to attract capital through public investment or institutional financing had been impaired as a result of the ratio at which the company's shares were exchanged upon the merger. As the district court aptly put it, . . . .
Recognizing that this is the essential issue in the case, we turn directly to the district court's determination that the corporation was not damaged.
Our careful examination of the record satisfies us that there was substantial evidence to support the following essential findings of fact by the district court on the issue as stated.
In seeking to establish at trial a value in excess of $4.50 per share for the New Haven stock, plaintiff relied chiefly on the unaudited report for the first quarter of the company's 1964 fiscal year.
The district court was not persuaded by plaintiff's expert in his attempt to project on the basis of a single quarter's earnings the earnings for a full year as a method of valuing stock according to a price-earnings ratio. The court found defendants' evidence more persuasive in establishing that New Haven stock was not undervalued at $4.50. Indeed, the court found that, if earnings were to be relied on at all as a basis for valuing the company's stock, New Haven's condition "was too risky . . . to justify an investment at a $4.50 price per share."
The court concluded that the evidence did not establish a value in excess of $4.50 per share for the shares issued to the Simkins and that disclosure of the unaudited quarterly report would have provided no basis for an increased value.
Plaintiff established that the Simkins had paid an average of $4.64 per share for their New Haven stock in July 1963. He claimed that the merger price of $4.50 in 1964 therefore was too low, particularly since some elements of control were acquired in 1964.
The court found, however, that, while elements of control were acquired in both 1963 and 1964 by the Simkins, they actually acquired effective control of the corporation in 1963 when their purchases gave them ownership of approximately one-third of the outstanding shares and the right to elect a majority of the board of directors. The elements of control acquired in 1964 were worth a considerably smaller premium than the value of the control they had acquired in 1963. The court also noted that the ...
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