South Coast Services Corp. v. Santa Ana Valley Irr. Co.

• Decision Date: 24 February 1982
• Docket Number: No. 78-1964,78-1964
• Parties: Fed. Sec. L. Rep. P 98,601 SOUTH COAST SERVICES CORP., a California corporation, et al., Plaintiffs-Appellants. v. SANTA ANA VALLEY IRRIGATION CO., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1265

669 F.2d 1265

Fed. Sec. L. Rep. P 98,601

SOUTH COAST SERVICES CORP., a California corporation, et

al., Plaintiffs-Appellants. v. SANTA ANA VALLEY IRRIGATION CO., et al., Defendants-Appellees.

No. 78-1964.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 6, 1980.

Decided Feb. 4, 1982.

Dissenting Opinion Filed Feb. 24, 1982.

Frederic J. Milberg, William S. Lerach, Milberg, Weiss, Bershad & Specthrie, San Diego, Cal., for plaintiffs-appellants.

Thomas S. Salinger, Rutan & Tucker, Santa Ana, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before KENNEDY, FLETCHER, and POOLE, Circuit Judges.

POOLE, Circuit Judge:

This lawsuit concerns the adequacy of proxy statements soliciting shareholder approval of the sale of the assets of Santa Ana Valley Irrigation Company (SAVI) to Intercoast Investments, Inc. (Intercoast). Plaintiffs-Appellants, invoking this court's jurisdiction under 28 U.S.C. § 1291 (1976), appeal from an order of the District Court for the Central District of California denying a claim for injunctive relief for alleged violations of section 14(a) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78(n) (1976) and Rule 14a-9 of the Securities and Exchange Commission, 17 C.F.R. § 240.14a-9 (1981). Because we find that the proxy materials in question were not materially false or misleading we affirm the judgment of the district court.

FACTS

Appellants are former shareholders and directors of appellee corporation, Santa Ana Valley Irrigation Company (SAVI). SAVI was organized in 1877 to distribute water to irrigate the farms of its member shareholders in what is now the eastern portion of Orange County, California. As urban sprawl displaced farming in southern California, SAVI's emphasis shifted from irrigation to real estate holding and development. By the end of 1974 all irrigation operations had been phased out.

In 1977, the year this litigation began, SAVI had diverse land holdings totalling approximately 1,134 acres and was a member of various partnerships and joint ventures engaged in land development. There were 9,281.01 shares of stock outstanding: the approximately 1,400 shareholders were mainly retired farmers, churches, school districts and municipalities. There was no established market for SAVI stock, although occasionally in the three years prior to 1977 a few shares were traded for prices ranging from $400 to $700 per share. The board of five directors collectively owned only about 3% of the outstanding stock. The board was self-perpetuating, there having been no shareholder election of directors in forty or fifty years.

In early 1977 discussions regarding the sale of SAVI commenced between SAVI's General Manager, Thomas Terry, and one Robert Walker. In March, Terry assisted Walker in acquiring the services of Cedric White, a professional real estate appraiser familiar with the SAVI properties. On April 21, 1977, Terry presented to the board on Walker's behalf an offer to purchase SAVI's assets for $700 per share or $5,800,000 total. The board rejected the offer, at least in part because of a lack of information on which to assess its sufficiency and to make a recommendation to shareholders. Awareness of this inadequacy and anxiety regarding a possible tender offer from Walker spurred the board to seek the services of a professional appraiser. White, the logical choice, refused on the basis of a conflict of interest, since he had already Inquiries to other appraisers caused the board to conclude that appraisal of all assets by outside appraisers would be too costly and time consuming. The board settled on a plan whereby professional appraiser Robert Harrison was engaged to appraise only Weir Canyon and a portion of Green River, the two parcels considered the most difficult to evaluate, while management and the board estimated the value of the balance of the properties. In June 1977, the SAVI board instructed its accounting firm to prepare a balance sheet of corporate assets including the historical cost and estimated market value of each property (from information to be furnished by the board and Harrison) with the thought that such figures could be given to the shareholders in response to a possible tender offer from Walker.

been retained by Walker. White subsequently asked the board for some information to assist him in making his appraisal. The board conditioned the release of the information on receipt of a copy of the appraisal when finished. White told the board that he could not give them a copy since the appraisal was the property of Walker. White continued his efforts without the information from the board.

To arrive at market values for the properties that were not appraised by Harrison, the board members and general manager, Terry, met and discussed their individual estimates of the value of each separate property. No guidelines were established and no method of evaluation was followed. Instead, each director, on the basis of his own experience and knowledge of the properties, suggested a high, medium and low value for each parcel. Some directors did not give their estimates in writing, and underlying assumptions were not discussed. None of the figures discussed was approved by a vote of the board. Instead, the general manager selected in some fashion from the individual estimates a high, medium and low estimated market value for each property and transmitted this to the accountants. The totals for all the properties if sold individually ranged from a low of $8,150,000 to a high of $12,950,000, compared to a cost basis of $3,349,379.

John Graham, SAVI's accountant, advised the board that, because the estimates were based on speculation and unconfirmed assumptions, the documents he prepared should be restricted to internal use by the board. A cover letter attached to his report contained a disclaimer as to the accuracy or reasonableness of the estimated market values contained therein.

As word circulated that the company was contemplating a sale of all its assets, several potential purchasers surfaced. Shappel Industries expressed strong interest, and, in the course of discussions with SAVI, representatives of Shappel were furnished with a copy of the Harrison appraisals and the board estimates. Meanwhile, Terry had been discussing a possible sale with Intercoast. The negotiations ripened into an offer from Intercoast on July 13, 1977, to purchase SAVI's assets at $800 per share, or $7,425,000 total. On July 18, 1977, the board voted to send a letter to Intercoast rejecting the offer but indicating continuing interest and, further, to send it the same valuation information furnished to Shappel.

Two days later a meeting of the SAVI board was called to discuss a one day only offer from Intercoast to purchase SAVI's assets for $950 per share ($8,994,000 total). As part of the offer, Intercoast agreed to accept SAVI's tax liabilities and pay all costs relating to shareholder approval. The meeting was interrupted by telephone calls from outside companies, including Cadillac-Fairview and Signal Oil, expressing interest in meeting with the SAVI board to discuss the possibility of a purchase. Most notably, Shappel called director Pankey and mentioned a possible $1,300 per share purchase price if the Weir Canyon property could be developed within three years. None of these companies presented a firm offer to purchase SAVI. After lengthy discussion, the board voted three to two to accept the Intercoast offer. Pankey and Balmer, also appellants in this suit, were the two dissenting directors.

On August 18, 1977, by the same three to two majority, the board voted to approve a final agreement providing for the sale of substantially all of SAVI's assets to Intercoast. On that same date, the board unanimously approved a proxy statement soliciting shareholder approval of the sale and authorized the filing of this statement with the Securities and Exchange Commission (S.E.C.). On September 28, 1977, the board approved final proxy materials which were subsequently approved by the S.E.C. on October 6, 1977. On October 7, 1977, the proxy materials were mailed to SAVI's shareholders.

The textual portion of the proxy statement noted the three to two division in the board and stated that the majority had considered the alternatives of a possible sale to a third party, a series of separate sales over time, and continued operation, and that it had concluded that a sale to a third party would maximize return and minimize risk to the shareholders. The statement also informed the shareholders that the majority considered the Intercoast offer fair and more favorable than other proposals considered by the board while the dissenters believed that the SAVI properties were worth more than Intercoast was offering. The statement explained that both the majority and the dissenters had reached their conclusions on the basis of their general knowledge of SAVI and the value of its assets.

The materials additionally stated that SAVI had no current appraisals on any of its properties except Green River and Weir Canyon. It was explained that the board had not obtained current appraisals of the other properties because of the expense and because current market information concerning them was more readily available. No mention was made of the balance sheet prepared by the accountants showing the board's valuations of the properties. In another section, the proxy statement set forth a full description of each property, noting factors bearing on development potential. The descriptions of Green River and Weir Canyon were augmented by the Harrison appraisal, and in each instance the appraisal was qualified by a disclaimer stating that an appraisal is only an opinion and that there was no assurance that the appraised value represented the realizable value of the property.

On November 4, 1977...