St. Louis U. Tr. Co. v. MERRILL LYNCH, PIERCE, ETC.

• Court: U.S. District Court — Eastern District of Missouri
• Writing for the Court: MEREDITH
• Citation: St. Louis U. Tr. Co. v. MERRILL LYNCH, PIERCE, ETC., 412 F.Supp. 45 (E.D. Mo. 1976)
• Decision Date: 24 March 1976
• Docket Number: No. 73 C 373 (1).,73 C 373 (1).
• Parties: ST. LOUIS UNION TRUST COMPANY, a corporation, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, a corporation, et al., Defendants.

412 F. Supp. 45

ST. LOUIS UNION TRUST COMPANY, a corporation, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, a corporation, et al., Defendants.

No. 73 C 373 (1).

United States District Court, E. D. Missouri, E. D.

March 24, 1976.

COPYRIGHT MATERIAL OMITTED

Veryl L. Riddle, William H. Charles, John J. Hennelly, Jr., Bryan, Cabe, McPheeters & McRoberts, St. Louis, Mo., for plaintiffs.

John J. Cole, Thomas E. Wack, Armstrong, Teasdale, Kramer & Vaughan, St. Louis, Mo., James B. May, Roger J. Hawke, Brown, Wood, Ivey, Mitchell & Petty, New York City, for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

MEREDITH, Chief Judge.

This matter was tried to the Court without a jury. The Court has been duly informed by briefs, exhibits, depositions, and testimony.

Findings of Fact

1. Plaintiffs are the executors of the estate of Kenneth H. Bitting, deceased, and all are citizens of the State of Missouri.

2. Defendant Merrill Lynch, Pierce, Fenner & Smith, Incorporated (Merrill Lynch), is a corporation organized under the laws of the State of Delaware, with its principal place of business in New York City. It was incorporated on November 7, 1958. Prior to that time it had been a partnership. The defendant Donald T. Regan was president and a director of Merrill Lynch during 1970 and became chairman of the Board of Directors on January 1, 1971. George L. Shinn was vice-chairman of the Board of Merrill Lynch and was in charge of planning in 1970. Ned B. Ball was a senior vice-president and a director of Merrill Lynch in 1970 and president in 1971. None of the individual defendants were residents of the State of Missouri at any time relevant to this suit.

3. Pursuant to the terms of Kenneth H. Bitting's last will and testament, the 40,000 shares of Merrill Lynch non-voting common stock owned by him at the time of his death were to become the corpus of the Kenneth H. Bitting revocable trust. The beneficiaries of that trust are the four Bitting children, Kenneth, Jr., William, George, and Barbara B. Fraser, and the deceased's wife, Esther C. Bitting.

4. Merrill Lynch is the largest firm in the securities industry. Its assets exceed three billion dollars. It has over 1,500,000 customers, 5,600 registered representatives, and 245 branch offices in the United States and several foreign countries, and employs over 20,000 people.

5. In 1947, Kenneth H. Bitting was a stockbroker in the City of St. Louis, Missouri. His partnership merged into and became the St. Louis office of Merrill Lynch. Bitting became an employee of the Merrill Lynch partnership and was in charge of its St. Louis office. He became a general partner in Merrill Lynch in 1951.

6. (a) When Merrill Lynch was incorporated in November of 1958, Kenneth H. Bitting received 9,100 shares of the corporation's voting common stock and a debenture in the amount of $58,000 in exchange for his partnership capital of $240,000.

(b) On October 30, 1959, Merrill Lynch split its common stock on a basis of three for one. Bitting's holding increased to 27,300 shares. In December 1962, Bitting retired. Upon retirement, under the provisions of the corporate charter, he sold his voting stock to the corporation, and received 10,000 shares of non-voting common stock and $423,642.40, representing the net book value of 17,300 shares as of December 28, 1962.

(c) On July 6, 1966, and on January 15, 1969, Merrill Lynch split its common stock on a two-for-one basis, resulting in Bitting's holdings having increased to 40,000 shares of non-voting common stock at the time of his death on October 8, 1970. The cost basis of this stock was $66,700.

7. Pursuant to Rule 313.21 of the New York Stock Exchange, the certificate of incorporation of Merrill Lynch contained provisions in Article VI, section (1)(a), granting the corporation the first right and option to purchase within a ninety-day period a stockholder's shares in certain events, including the death of the stockholder. In addition, subsection (1)(g) authorized a call whenever the Board of Directors determined, and a majority of the shareholders of voting stock agreed, that it was necessary for the welfare of the corporation. Subsection (10) required approval of any transferee by the exchanges, boards of trade, and similar institutions to which the corporation belongs, when such approval is a condition of the corporation's membership, and also triggered a new ninety-day option period if the holder could not secure an approved transferee within the original ninety-day period. The certificates of stock issued by Merrill Lynch provided that the owner, by accepting the certificate, expressly assented to the provisions of the certificate of incorporation.

8. The purpose of having two classes of common stock, voting and non-voting, was to comply with the rules of the New York Stock Exchange then in force, which limited the ownership of voting stock to persons who were full-time officers or employees of member firms. The rules of the New York Stock Exchange further required that approval be obtained from that Exchange when stock of member firms, which was restricted, was transferred to other persons.

9. After Bitting's death, Merrill Lynch exercised its option to purchase his 40,000 shares of non-voting common stock on November 18, 1970, and paid the estate $26.597 per share, the net book value, for a total sum of $1,063,880 on December 30, 1970. At the same time, it permitted his widow to purchase 10,000 shares at a price of $26.597 per share. She was one of eleven other widows of Merrill Lynch stockholders who was permitted to acquire non-voting common stock at the death of her husband.

10. Merrill Lynch normally purchased all a partner's voting common stock when the partner retired and permitted him to purchase forty percent of that amount in non-voting stock. Merrill Lynch usually purchased all of the non-voting stock when the stockholder died, however, there were some exceptions made to this policy to take care of individual stockholders. The options to purchase the voting stock of Winthrop C. Smith and E. A. Pierce were not exercised when these two men became incapacitated and for all practical purposes retired. When Smith died in 1961, the corporation's option to purchase his stock was not fully exercised and some of the shares were transferred to a trust. The option to purchase Pierce's stock when he retired was not exercised, instead Merrill Lynch amended its certificate of incorporation to permit Pierce to own a class of preferred stock in exchange for his common. In the case of stock owned by the Charles E. Merrill trust, Merrill Lynch entered into a contract with the trust permitting the stock to be sold each year over a period of ten years, the last year being in 1976, and Merrill Lynch did not purchase that portion of the stock it was to purchase in the year 1971. Since the stock in the Charles E. Merrill trust had all the restrictions removed when Merrill Lynch went public on June 23, 1971, it did not fulfill these purchases, and the trust benefited accordingly. Upon the deaths of Francis D. Willis and Edward E. Bartlett, Jr., some of their stock went into trusts. The estates of James Dwyer, Austin Graham, and Joseph C. Quinn were permitted to retain some of their stock when those stockholders died. Those cases in which the option was not uniformly exercised, either at retirement or death, were to benefit the individual partner or his family. This leads the Court to the inescapable conclusion that the corporation had no uniform policy in exercising the options to purchase stock at retirement or death of a stockholder.

11. James E. Thompson, chairman of the Board of Merrill Lynch, retired on December 31, 1970, owning 130,000 shares of voting common stock. Merrill Lynch paid cash to Thompson for the net book value of 78,000 shares and permitted him to exchange 52,000 shares of voting common stock for non-voting common stock, which he retained. He would not have retired had he known Merrill Lynch was going public in June 1971, and was shocked when he learned the news in 1971.

12. Darwin Fenner, Kenneth W. Martin, and James D. Corbett were all directors and officers of Merrill Lynch in 1970. Fenner owned 325,000 shares of voting common stock, Martin owned 122,000 shares, and Corbett owned 75,600 shares. Upon their retirement on December 31, 1970, Merrill Lynch paid cash for the net book value of sixty percent of said shares and permitted a share-for-share exchange of its non-voting common stock for the remaining forty percent. Fenner was assured by Donald T. Regan in December 1970 that Merrill Lynch was not going public any time in the near future.

13. Donald T. Regan did not acquire any voting or non-voting common stock after 1960. George Shinn's last acquisition of stock, 1,000 shares, was in May 1970.

14. The restrictions on the stock served a valid purpose at the time Merrill Lynch was incorporated in 1958. That purpose was to comply with the rules of the New York Stock Exchange. Merrill Lynch was advised by counsel that these restrictions served a valid purpose and were binding at that time.

15. The Board of Directors of Merrill Lynch from the time of its incorporation through 1970 were all employees of Merrill Lynch. They had worked up the ladder through the firm. Management consisted of a very small group of from three to five people who made the decisions for the corporation. The chairman of the Board determined when a stockholder could increase his holdings by additional purchases of stock. The chairman of the Board and the president determined when stockholders could advance from a non-voting status to a voting status. The chairman of the Board or the president determined whether the restrictions contained in Article VI of the Articles of Incorporation would be enforced in any given situation. The chairman of the Board and the president determined the composition of the ...