Speed v. Transamerica Corporation

• Decision Date: 14 August 1956
• Docket Number: 11839,11835,No. 11836,11840.,11837,11838,11834,11836
• Citation: 235 F.2d 369
• Parties: William S. SPEED et al. v. TRANSAMERICA CORPORATION. Appeal of William S. SPEED et al. Appeal of TRANSAMERICA CORP. (three cases). Jack FRIEDMAN et al. v. TRANSAMERICA CORP. Appeal of FRIEDMAN ASSOCIATES et al. Appeal of Estelle FRIEDMAN, Administratrix of Estate of Jack Friedman, deceased. Philip ZAHN, Suing individually and on behalf of all similarly situated holders of Class A Common Stock of The Axton-Fisher Tobacco Company v. TRANSAMERICA CORPORATION. Appeal of Philip ZAHN.
• Court: U.S. Court of Appeals — Third Circuit

235 F.2d 369 (1956)

William S. SPEED et al. v. TRANSAMERICA CORPORATION.

Appeal of William S. SPEED et al.

Appeal of TRANSAMERICA CORP. (three cases).

Jack FRIEDMAN et al. v. TRANSAMERICA CORP.

Appeal of FRIEDMAN ASSOCIATES et al.

Appeal of Estelle FRIEDMAN, Administratrix of Estate of Jack Friedman, deceased.

Philip ZAHN, Suing individually and on behalf of all similarly situated holders of Class A Common Stock of The Axton-Fisher Tobacco Company v. TRANSAMERICA CORPORATION.

Appeal of Philip ZAHN.

Nos. 11836, 11839, 11834, 11835, 11838, 11837, 11840.

United States Court of Appeals Third Circuit.

Argued May 29, 1956.

Decided August 14, 1956.

Edwin D. Steel, Jr., Wilmington, Del., Gerhard A. Gesell, Washington, D. C. (William S. Megonigal, Jr., Wilmington, Del., Paul C. Warnke, Washington, D. C., Morris, Steel, Nichols & Arsht, Wilmington, Del., Covington & Burling, Washington, D. C., on the brief), for Transamerica Corp.

Daniel O. Hastings, Wilmington, Del. (Hastings, Lynch & Taylor, Wilmington, Del., Frank & Gonnet, Claude L. Gonnet, New York City, Weinstein & Levinson, New York City, Arthur Frank, New York City, Clarence W. Taylor, Wilmington, Del., on the brief), for plaintiffs-appellees Speed et al. and Friedman et al.

Frank Weinstein, New York City (Samuel J. Levinson, New York City, Samuel Handloff, Wilmington, Del., William H. Foulk, Herbert L. Corbin, Wilmington, Del., on the brief), amici curiae.

Thomas G. Meeker, General Counsel, Washington, D. C. (Alexander Cohen, Sp. Counsel, Securities and Exchange Commission, Washington, D. C. on the brief), for Securities and Exchange Commission.

Before MARIS, McLAUGHLIN and HASTIE, Circuit Judges.

MARIS, Circuit Judge.

These consolidated appeals involve three class actions brought in the District Court for the District of Delaware by former and present stockholders of Axton-Fisher Tobacco Company, a Kentucky corporation which manufactured tobacco products, against its majority stockholder, Transamerica Corporation, a holding and investment company incorporated in the state of Delaware. The stockholders charged that Transamerica had fraudulently deprived them of their rightful participation in the liquidation of Axton-Fisher in 1944.

Prior to April 30, 1943, Axton-Fisher had outstanding three classes of stock, designated as Preferred and Class A and Class B common. The Preferred stock, which had a par value of $100 per share, was entitled to preferential cumulative dividends of $6 per share annually, was redeemable at $105 per share plus accrued dividends and was entitled to this same amount on liquidation, before participation of any other class of stock. The Class A common stock had a par value of $10 per share and was entitled to cumulative dividends of $3.20 per share after payment of dividends on the Preferred stock but before dividends on the Class B stock and was entitled further, after the Class B stock had received $1.60 per share in any year, to participate as a class equally with the Class B stock in the distribution of any additional dividends. The Class A stock was redeemable on 60 days' notice at $60 per share plus accrued dividends, and was convertible into Class B stock, share for share, at the option of the holder at any time prior to the date set for redemption. In the event of the dissolution, liquidation, merger or consolidation of Axton-Fisher, or the sale of substantially all of its assets, and after the payment on each share of Preferred stock of $105 plus any unpaid dividends, the Class A stock was entitled to receive all unpaid accrued dividends and thereafter, for each share, twice the amount paid upon each share of the Class B stock. The Class B common stock also had a par value of $10.00 per share and had the sole voting rights except when four quarterly dividends were in default on the other classes of stock. As of December 31, 1941 due to default in dividends since 1937 all the classes of stock had voting rights and there were outstanding 14,136 shares of Preferred stock, 45,465 shares of Class A stock, and 112,012 shares of Class B stock.

In 1944 William S. Speed brought suit on behalf of Class A and Class B stockholders of Axton-Fisher who had sold their stock to Transamerica pursuant to a public offer made by Transamerica by letter dated November 12, 1942,¹ at $40 and $12 per share, respectively. They alleged that by reason of the greatly increased value of the leaf tobacco inventory carried by Axton-Fisher the stock was actually worth many times the amount for which they were deceived into selling it to Transamerica and they sought the difference between the sale price and the alleged true value. The first count of the complaint was based on a common law action of fraud and deceit. The other counts charged that in acquiring the stock of public holders Transamerica did not make disclosure of facts materially affecting the value of such stock which were known to it as an insider and hence violated § 10(b) of the Securities Exchange Act of 1934, 15 U. S.C.A. § 78j(b), and Rule X-10B-5 promulgated by the Securities and Exchange Commission.² About the same time in 1944 Jack Friedman and Philip Zahn brought actions on behalf of themselves and all other holders of Axton-Fisher Class A common stock whose stock had been called on April 30, 1943 by the board of directors of Axton-Fisher at Transamerica's instigation for redemption on July 1, 1943 at $60 per share plus accrued dividends of $20.80, amounting to a total of $80.80 a share. They alleged that Transamerica had planned to capture exclusively for itself, upon the sale, liquidation or merger of Axton-Fisher, the profit resulting from the increased value of its large inventory of leaf tobacco and they sought the right to participate in the liquidation of Axton-Fisher, which had occurred in May, 1944.

The matter of Transamerica's controlling ownership has been the subject of much litigation in the district court and this court³ and in the state courts of Kentucky.⁴ It would serve no useful purpose to review the various phases of the litigation preceding the trial of the Speed, Friedman and Zahn cases which culminated into the judgments here under review. These cases, having a common subject matter involving the same evidence, were consolidated for trial. In the Speed case the district court found that Transamerica at the time it sent out the letter of November 12, 1942, was secretly planning to capture the increased value of the Axton-Fisher inventory by subsequently merging, dissolving or liquidating Axton-Fisher, and that by failing to disclose the increased value of the tobacco inventory it had failed to comply with the mandate of Rule. X-10B-5 of the Securities and Exchange Commission to disclose material facts which would be likely to influence the stockholders. Accordingly the district court concluded that Transamerica was liable in damages to those stockholders who had accepted the offer of November 12, 1942 and had thus sustained damages through the sale of their stock to Transamerica.

In the Zahn and Friedman actions the district court found that Transamerica had exercised its position as controlling stockholder to cause the board of directors of Axton-Fisher to call the Class A stock for redemption and that although Transamerica at that time knew that the board was doing so on the assumption that it was for the purpose of improving the capital structure of the company as a going concern, the real purpose of Transamerica in causing the call to be made was by liquidation, merger, consolidation or sale of Axton-Fisher's assets to gain for itself the appreciation in the value of those assets. Accordingly the district court held Transamerica accountable to the Class A stockholders, both those who had redeemed their stock pursuant to the call and those who had not done so. The amount of damages and the persons for whose benefit the judgments should run were left for determination by a special master. Speed v. Transamerica Corp., D.C.1951, 99 F. Supp. 808.⁵ On October 18, 1951, E. Ennalls Berl, Esquire, was appointed master. He substantially completed his final report on March 31, 1954 but died before signing it. The district court decided independently to determine all the issues relating to Transamerica's liability for damages, including the personal defenses it had urged before the master. The court found that a disinterested board of directors of Axton-Fisher would undoubtedly have exercised its powers to call the Class A stock before liquidation, disclosing the intention to liquidate together with full information as to the appreciated value of Axton-Fisher's tobacco inventory, and that the Class A stockholders would thereupon have exercised their privilege to convert their stock, share for share, into Class B stock and would thus have participated equally with the Class B stockholders in the proceeds of the liquidation. Applying this rule in the Friedman and Zahn cases, after deducting the sum of $80.80 per share received by the Class A stockholders or set aside for them on the redemption call of April 30, 1943, the court found those stockholders entitled to $21.02 per share. In the Speed case the court applied the same...