Speed v. Transamerica Corp.
| Decision Date | 20 September 1951 |
| Docket Number | 490.,468,Civ. A. No. 430 |
| Citation | 99 F. Supp. 808 |
| Parties | SPEED et al. v. TRANSAMERICA CORP. FRIEDMAN et al. v. TRANSAMERICA CORP. ZAHN et al. v. TRANSAMERICA CORP. |
| Court | U.S. District Court — District of Delaware |
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Hugh M. Morris, Edwin D. Steel, Jr., and William S. Megonigal, Jr., Morris, Steel, Nichols & Arsht, all of Wilmington, Del., for defendant.
Daniel O. Hastings, Ayres J. Stockly and Thomas R. Hunt, Hastings, Stockly, Walz & Wise, all of Wilmington, Del., Arthur Frank and Claude L. Gonnet, Frank & Gonnet, of New York City, for plaintiffs, William S. Speed and Jack Friedman et al.
Roger S. Foster, Gen. Counsel, Milton P. Kroll, Asst. Gen. Counsel, and Alexander Cohen, amicus curiæ, all of Washington, D. C., for Securities and Exchange Commission.
William H. Foulk and Herbert L. Cobin, of Wilmington, Del., for interveners.
Samuel J. Levinson, Frank Weinstein and Robert Bernstein, all of New York City, and Samuel Handloff, of Wilmington, Del., for plaintiffs, Philip Zahn et al.
Subsequent Opinion September 20, 1951. See 100 F.Supp. 461.
Speed v. Transamerica: CA 480.
Plaintiffs' amended complaint seeks damages from Transamerica Corporation for alleged fraud and deceit in the purchase from plaintiffs of certain shares of stock of Axton-Fisher Tobacco Company, pursuant to a written offer dated November 12, 1942.1 Various phases of the litigation have already been reported in Geller v. Transamerica Corp., D.C.Del., 53 F.Supp. 625; Id., 63 F.Supp. 248, affirmed 3 Cir., 151 F.2d 534; Zahn v. Transamerica Corp., D.C.Del., 63 F.Supp 243, reversed 3 Cir., 162 F.2d 36, 172 A.L.R. 495; Friedman v. Transamerica Corp., D.C.Del., 63 F.Supp. 247; Id., 5 F.R.D. 115; Speed v. Transamerica Corp., D.C.Del., 5 F.R.D. 56; Id, D.C., 71 F.Supp. 457.2
Plaintiffs have sued defendant, Transamerica Corporation, for having purchased from them Class A and Class B stock of the Axton-Fisher Tobacco Company at $40 and $12 per share, respectively, pursuant to a written offer dated November 12, 1942, which Transamerica made to all minority stockholders. The complaint alleges at the time of the sale the true value of the Class A stock was more than $200 per share and such value of the Class B stock was in excess of $100 per share. Plaintiffs allege Transamerica deceived them into selling their shares in the manner hereinafter stated. Plaintiffs seek judgment in an amount equal to the difference between the sales price and the alleged true value. The action purports to be a class action on behalf of all Class A and Class B stockholders who accepted the offer.
The complaint alleges in accepting Transamerica's offer, plaintiffs determined the value of their shares in reliance upon the Axton-Fisher annual report for 1941 and its accompanying letter, which Transamerica had caused to be mailed to the Axton-Fisher stockholders. The 1941 report showed the average cost of Axton-Fisher tobacco inventory to be $7,516,970, and the accompanying letter showed a decline in sales and net income since 1938; whereas, the complaint alleges, at the time when plaintiffs sold their stock the Axton-Fisher tobacco inventory had a real value in excess of $17,000,000 and its earnings were improving.
The complaint further alleges that prior to the time when Transamerica made its offer, it had determined to purchase as many Class A and Class B shares as possible and thereafter to convert its Class A stock into Class B stock, to redeem the remaining Class A stock, and as a final step, to merge or dissolve Axton-Fisher, to the end it might capture for itself the increased but undisclosed value of the Axton-Fisher inventory, all of which Transamerica did. Under these circumstances, the complaint alleges, Transamerica was under a fiduciary duty as a majority stockholder to inform the minority stockholders the real value of the Axton-Fisher inventory was in excess of $17,000,000; that its earnings were improving; and that Transamerica had determined upon a plan which had as its ultimate objective the merger or dissolution of Axton-Fisher; and that if Transamerica had made known these facts to plaintiffs, they would not have sold their stock.
The complaint contains four counts. The first count alleges a common law action of fraud and deceit. The last three counts allege violations of the three sub-paragraphs of Rule X-10B-5 of the Securities and Exchange Commission. I previously dismissed count 1, 71 F.Supp. 457. However, that count is regenerated now on a motion of plaintiffs asking me to reconsider that particular decision at this time.
The second count, in which the SEC has asked to be joined as amicus, alleges a violation of that portion of the SEC's Rule X-10B-5 which provides as follows:
The third count alleges a violation of that portion of Rule X-10B-5 which reads as follows:
The fourth count alleges violation of that portion of Rule X-10B-5 which reads as follows:
The substance of counts 2 and 3 is, defendant, prior to November 12, 1942, determined upon a plan to acquire as many shares as possible of Class A and Class B stock of Axton-Fisher Tobacco Company at prices far below their value in fact. The first attack alleged was a letter sent to Axton-Fisher stockholders dated November 12, 1942,3 which offered $40 for the A stock and $12 for the B stock, but the offer was conditioned upon the acceptance of at least 24,000 shares of the A stock and 18,000 shares of the B stock. The complaint charges defendant Transamerica, prior to November 12, 1942, planned to capture the Axton-Fisher Tobacco Company inventory by merging, dissolving or liquidating Axton-Fisher. In view of such plan, it is charged the letter of November 12, 1942 lacked information concerning the value of Axton-Fisher's inventory and its increased earnings and the non-disclosure of these matters by Transamerica constitutes a violation of subparagraphs 1 and 3 of Rule X-10B-5.
Count 4 in the first amendment made no reference to any plan by Transamerica to merge, liquidate or dissolve Axton-Fisher. It was charged there Transamerica deceived plaintiffs by failing to disclose the value of Axton-Fisher's inventory and the increase in earnings; and Transamerica's non-disclosure of these facts constituted a violation of subparagraph 2 of Rule X-10B-5. In a later amendment, however, count 4 charged intent to liquidate. I think this indicates, as I shall explain more fully later, that intent to liquidate, etc., is the heart of the case under plaintiffs' own theory.
Before stating the respective arguments of the parties and the legal issue as it appears to me, it will be necessary to state the facts in almost monotonous detail. The chronological order of important events looks like this:
1941
May 14: (1) Transamerica purchased 80,610 shares of Axton-Fisher B stock, subject to certain options, for $1,000,000. Such purchase enabled defendant to exercise effective control of Axton-Fisher.
(2) Through the offices of L. M. Giannini, Transamerica selected Carl B. Robbins to take charge of the operations of Axton-Fisher. Robbins' salary arrangement was agreed to initially by Transamerica.
May 24: Transamerica was responsible for the election of a new Board of Directors for Axton-Fisher.
October 22: Robbins reported to L. G. Hunt, a representative of Transamerica, that tobacco replacement value exceeded book value by 99.8%
December 19: Transamerica entered into an oral agreement with Axton-Fisher to purchase up to $1,000,000 of prior preferred stock to be issued under a plan to be submitted to the SEC.
February 13: Axton-Fisher filed its plan of recapitalization at the San Francisco office of the SEC.
March 23: SEC issued a deficiency letter.
April 21: Transamerica drafted a letter to be submitted by Axton-Fisher with respect to the withdrawal of the plan.
May 4-6: Axton-Fisher requested withdrawal of the plan. SEC agreed to the withdrawal.
May 7-8: Withdrawal announced by Robbins; at same time announcement made that thereafter Transamerica would feel free to buy and sell Axton-Fisher stock.
May 22: Cullman, a former director of Axton-Fisher and an experienced man in the tobacco business, wrote a letter to Giannini suggesting that Axton-Fisher be liquidated.
May 27: Reply by Giannini, stating that he did not think that Transamerica would be interested in liquidation at that time, but suggested that any recommendation be submitted in concrete form.
May 28: (1) Robbins, advised of the Cullman letter, visited San Francisco and discussed liquidation with Giannini.
(2) Testimony of Robbins that the possibility of liquidation was so real that he procured an oral agreement that in such event Robbins would receive 5% of Transamerica's profit in lieu of his bonus contract with Axton-Fisher.
(3) Testimony of Robbins that Giannini offered him the presidency of Transamerica at $50,000 per year as a method of enabling Robbins to share in Transamerica's profits with the least tax burden.
June 16: (1) Giannini replied to a second letter of Cullman...
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