Speed v. Transamerica Corporation

• Decision Date: 02 November 1955
• Docket Number: 490.,468,Civ. A. No. 480
• Citation: 135 F. Supp. 176
• Parties: William S. SPEED et al., Plaintiffs, v. TRANSAMERICA CORPORATION, Defendant. Jack FRIEDMAN et al., Plaintiffs, v. TRANSAMERICA CORPORATION, Defendant. Philip ZAHN, suing individually and on behalf of all similarly situated holders of Class A Common Stock of Axton-Fisher Tobacco Company, Plaintiff, v. TRANSAMERICA CORPORATION, Defendant.
• Court: U.S. District Court — District of Delaware

135 F. Supp. 176

William S. SPEED et al., Plaintiffs, v. TRANSAMERICA CORPORATION, Defendant.

Jack FRIEDMAN et al., Plaintiffs, v. TRANSAMERICA CORPORATION, Defendant.

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

Civ. A. Nos. 480, 468, 490.

United States District Court D. Delaware.

September 21, 1955.

On Form of Final Decree November 2, 1955.

COPYRIGHT MATERIAL OMITTED

Daniel O. Hastings, Ayres J. Stockly and Clarence W. Taylor (Hastings, Lynch & Taylor), Wilmington, Del., and Arthur Frank and Claude L. Gonnet (Frank & Gonnet), New York City, for plaintiffs Friedman and Speed.

Samuel Handloff, Wilmington, Del., and Samuel J. Levinson and Frank Weinstein (of Weinstein & Levinson), New York City, for plaintiff Zahn.

William H. Foulk and Herbert L. Cobin, Wilmington, Del., for intervenors.

Edwin D. Steel, Jr. and William S. Megonigal, Jr. (Morris, Steel, Nichols & Arsht), Wilmingon, Del., Gerhard A. Gesell, Abram J. Chayes, David E. McGiffert, and George H. Buschmann (Covington

& Burling), Washington, D. C., and Thomas B. K. Ringe and J. Wesley Oler (Morgan, Lewis & Bockius), Philadelphia, Pa., for defendant.

LEAHY, Chief Judge.

Defendant's legal responsibility for damages was decided. Speed v. Transamerica Corp., D.C.Del., 99 F.Supp. 808. Col. E. Ennalls Berl was appointed Special Master, to find and determine the amount of plaintiffs' recovery, and to determine any personal defenses which defendant might urge.¹

The Special Master commenced the performance of his duties.² He completed his final report on March 31, 1954. On that day he made corrections on the last several pages. The next day he died. He never signed his final report.

The parties disagreed as to whether the final report could have judicial acceptance for filing. I resolved the problem by entering an order providing for my independent determination of all the issues relating to defendant's liability for damages and to the special defenses urged by defendant. It was agreed the Court's determination might be had upon the record made before the deceased Special Master and upon any additional proof the parties might offer the Court.³

This old and complex litigation is now approaching its final phase in this Court. Questions of law must be considered as well as factors affecting the exercise of the Court's discretion. The record before the late Master shows few, if any, disputed issues of fact. The Court must determine the measure of damages. Once the appropriate rule is settled, the record before the Master furnishes all the data necessary to compute the amounts payable to plaintiffs. The questions for decision are: 1. the measure of recovery of the several classes of plaintiffs; 2. what interest, if any, should be allowed on the sums awarded; 3. the right of certain individual plaintiffs to participate in the recovery.

The purpose here is to assess damages which will compensate plaintiffs for any harm suffered as a result of defendant's improper conduct. Various plaintiffs do not stand in the same relationship to Transamerica. The Zahn-Friedman plaintiffs surrendered their shares at the call of the directors of Transamerica. The finding was made⁴ that the call was illegal. Damages for such breach are usually, but not always, measured according to principles of restitution.⁵ As to Speed plaintiffs, Transamerica did not acquire the shares through the exercise of any call. Defendant was a purchaser of these shares. A restitution theory of recovery, based on breach of fiduciary duty, would seem inapplicable, for the liability in these cases is based upon an implied misrepresentation of fact. The measure here, defendant suggests, is the difference between what the Speed plaintiffs received and the fair value of their shares at the time they sold their shares to defendant.

Part I. Principal Amount Recoverable

1. The Zahn-Friedman Case

a. In the Zahn-Friedman case, 15,397 shares of stock were denied by the call from sharing in the net proceeds of Axton-Fisher available on dissolution. There is apparently no conflict between the parties that these proceeds, adjusted to take account of the rescission of the call, amounted to $16,034,631.33. The single issue as to these particular plaintiffs is what basis is to be determined, assuming they would have participated in these proceeds.

In sum, Zahn-Friedman plaintiffs' position is the call of their A shares was illegal. Hence, they are entitled to participate in the liquidation in accordance with their liquidation rights as described in the Axton-Fisher charter as to the A shares. These plaintiffs warn of the error of the Special Master in the amount of the per share recoverable principal per unredeemed and per redeemed A share, because, they claim, he erroneously excluded $80.80 which should be paid as part of the recoverable principal. They also argue he was in error in reducing the recoverable principal per unredeemed and per redeemed Zahn-Friedman A share by $16.90, by improperly combining with the 15,397 Zahn-Friedman A shares the 13,796 Speed A shares and the 5,707 Speed B shares so as to make the number of A shares participating in the preferential dividend arrears payment 21,193 instead of 15,397, with the result the number of combined residual liquidation units were 186,670 instead of 172,874.

The apparent specificity of these arithmetical figures will come into focus, infra, when it is disclosed they are irrelevant until the final decree is entered herein fixing exact liability of defendant Transamerica.

We are now driven to the utilization of the first basic assumption, e. g., that the call would have been made, accompanied by adequate disclosure of intent to liquidate and disclosure of the true values underlying all shares outstanding. Given such a call and disclosure, the Zahn-Friedman plaintiffs would have exercised the privilege, granted under the charter and their share contracts, to convert their shares from Class A to Class B stock. They would have participated in the liquidation as B shareholders. On this basis, their participation in the proceeds would have amounted to $101.82 a share (or such other mathematical figure to be fixed in the final decree to be entered) against which would have been credited the redemption price of $80.80 which these plaintiffs each received or could have received since the redemption date. Under this view, $21.02, for example, is the principal amount of the damages per share. In short, these plaintiffs should be put in the position they would have had ex the illegal call, and had the affairs of Axton-Fisher proceeded to its dissolution without any improper conduct on the part of defendant Transamerica.

The Zahn-Friedman cases were given prior consideration in Zahn v. Transamerica Corp., 3 Cir., 162 F.2d 36, where the Court held the resolution redeeming the A shares was "voidable in equity at the instance of a stockholder injured thereby."⁶ Thus, the Court said these plaintiffs might "maintain their cause of action to recover from Transamerica the value of their stock * * * as that shall be represented by its aliquot share of the proceeds of Axton-Fisher on dissolution."⁷ The Court of Appeals' opinion left two unknowns to be found: 1. the amount of the "proceeds of Axton-Fisher on dissolution" and 2. the "aliquot share" of the proceeds allocable to each share held by plaintiffs.

At the threshhold of the matter for decision here, I must apply the "what might have been" doctrine. Necessarily this is conjectural; but the problem must be worked out with regard for the reasonable expectations of stockholders, based upon the corporate relationships, in order to reach a result which is fair and equitable. The litigants agreed, on recreating a valid liquidation I must give effect to the presence of assets which were not available for distribution in the actual liquidation,⁸ and of shares which did not, in fact, participate in the distribution of those assets.⁹ In passing, I note plaintiffs contend for reconstruction of corporate acts which might have been — but were not. To do equity to plaintiffs, they argue, all conjectures must be for the highest dollar of recovery. This view, of course, ignores examination of any intervening circumstances; and is bottomed on the proposition plaintiffs would have continued as Class A shareholders with power to enforce liquidation preferences during the eleven months that elapsed between the illegal call and the dissolution on May 31, 1944. Plaintiffs thus demand $23.73 per share, corresponding to accrued dividends, and a division of the remaining proceeds on the basis of an amount per share equal to double that allocable to each B share. Such a distribution would amount to three times the call price fixed by the charter of Axton-Fisher for the A shares.

The invalid call of April 30, 1943 restores plaintiffs to the status of Class A shareholders as of July 1, 1943, the redemption date. But, this does not solve the difficult damage question to be decided. Plaintiffs' status as of May 31, 1944, the liquidation date, will be determinative of their "aliquot share".

Under the real or "what might have been" liquidation, a disinterested board could have legally called the A stock. The A shares then would be powerless to exercise their two-for-one liquidation preference. Three Courts, analyzing the particular problem, agree on this legal exercise of power by disinterested directors (for the benefit of the B shares, who, under the charter, were the beneficiaries of the residual assets). For example, in Taylor v. Axton-Fisher Tobacco Co., 295 Ky. 226, 173 S.W.2d 377, 148 A.L.R. 834, the Kentucky Court held the benefit to the B shareholders resulting from a call was the legal fact which made the call irrevocable. This is primer corporate law. In Zahn v. Transamerica Corp., D.C.Del....