Sundstrand Corp. v. Sun Chemical Corp.

Decision Date23 February 1977
Docket Number76-1317,76-2058 and 76-2059,Nos. 76-1316,76-1318,s. 76-1316
PartiesFed. Sec. L. Rep. P 95,887 SUNDSTRAND CORPORATION, Plaintiff-Appellee, v. SUN CHEMICAL CORPORATION et al., Defendants-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

Frank F. Fowle, Albert E. Jenner, Jr., Chicago, Ill., for defendants-appellants.

W. Donald McSweeney, William A. Montgomery, Chicago, Ill., for plaintiff-appellee.

Before FAIRCHILD, Chief Judge, and SWYGERT and CUMMINGS, Circuit Judges.

CUMMINGS, Circuit Judge.

These five appeals were consolidated and heard together. They arise out of an action brought by Sundstrand Corporation to secure redress for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j) and SEC Rule 10b-5 (17 C.F.R § 240.10b-5) by Standard Kollsman Industries, Inc. (SKI), 1 John B. Huarisa, 2 and Henry W. Meers in connection with the transfer to Sundstrand of an option held by Huarisa to purchase stock of SKI. Sundstrand sought a rescission of the transfer or the assessment of damages against the defendants. The case was first tried without a jury from September 21 to December 8, 1971. At the close of Sundstrand's case, the district judge granted the defendants' motions to dismiss under Rule 41(b) of the Federal Rules of Civil Procedure. On Sundstrand's motion, he also dismissed Huarisa's counterclaim against Sundstrand for specific performance, where Huarisa alleged that Sundstrand failed to honor a monetary obligation due Huarisa under the stock option transfer agreement between them. We reversed both dismissals and remanded for a new trial largely because the district judge had unduly limited the scope of Sundstrand's proof. Sundstrand Corp. v. Standard Kollsman Industries, Inc., 488 F.2d 807 (7th Cir. 1973).

Another judge tried the case without a jury from September 16 to October 8, 1975, and rendered judgment against defendants for $6,287,190 (including prejudgment interest) plus costs and dismissed Huarisa's counterclaim. The judgment was accompanied by a 76-page unreported memorandum opinion containing numerous unsegregated findings of fact and conclusions of law. We of course accept the credibility findings therein. Brennan v. Midwestern United Life Ins. Co., 417 F.2d 147, 149 (7th Cir. 1969), certiorari denied, 397 U.S. 989, 90 S.Ct. 1122, 25 L.Ed.2d 397. Appeal No. 76-1317 was brought by Sun Chemical and the co-executors of Huarisa's estate; appeal No. 76-1316 was brought by defendant Henry W. Meers; and appeal No. 76-1318 was brought by Huarisa's estate because of the dismissal of Huarisa's counterclaim. The remaining two appeals concern costs in the district court. We affirm as to liability but the damages assessed below are modified.

The district court summarized the pleadings as follows:

"The transactions in dispute occurred on January 9, 1969, when Sundstrand, in connection with merger negotiations which were taking place between Sundstrand and SKI, transferred to Huarisa 5,686 shares of Sundstrand common stock, in exchange for the right to acquire a block of 223,190 shares of SKI common stock owned by the Burke family on which Huarisa had a right of first refusal; and on February 6, 1969, when Sundstrand paid $6,360,915 for that stock. The gravamen of Sundstrand's complaint is that Huarisa, Meers and SKI conspired to violate and did violate Rule 10b-5 by misrepresenting material facts and failing to disclose material facts about the performance and financial condition of SKI during the merger negotiations which resulted in Sundstrand's purchase of the SKI stock. Huarisa has filed a counterclaim alleging that Sundstrand is obligated to repurchase from him the 5,686 shares of Sundstrand stock transferred to him." (Mem. op. 2.)

As might be expected in litigation which is completing its eighth year, the factual setting is complex. Prior to its merger into Sun Chemical on December 31, 1972, SKI was an Illinois corporation with places of business in Melrose Park, Illinois, and other parts of the United States. Its common stock was traded on the New York Stock Exchange, and 2,380,000 shares were outstanding during the pertinent period. SKI's financial reports to the stockholders and public usually consolidated the financial information for itself, Kollsman Instrument Corporation (KIC), and its other subsidiaries.

During the relevant period, Huarisa was chairman of the board and president of SKI. He owned 172,000 shares of its stock, which he had acquired at an average cost of $8.75 per share. He also had a right of first refusal on 223,190 shares of common stock owned by members of the family of James O. Burke, the late founder of Standard Kollsman. On January 8, 1969, he exercised that option by delivering to the Burke family his written election to purchase their shares, together with 5 per cent of the purchase price, namely, $334,785. On January 9, Sundstrand and Huarisa entered into a stock option transfer agreement which provided that Huarisa was selling the 223,190 shares of SKI stock to Sundstrand "subject to payment by Sundstrand of the unpaid balance of $6,360,915 due * * *." 3 At the same time, to reimburse Huarisa for his payment of 5 percent of the purchase price, Sundstrand agreed to convey 5,686 shares of its common stock to him. The actual transfer of those shares to Huarisa took place on March 3. On February 6, Sundstrand paid $6,360,915 for the Burke shares through an escrowee bank. The bank delivered them to Huarisa's agent, Hart, who turned them over to Sundstrand.

The stock option transfer agreement of January 9 was preceded by merger negotiations between Sundstrand and SKI commencing in November 1968. Meers, a managing partner of the Chicago office of White, Weld & Co., underwriter of securities and merger broker for corporations, was an outside director of SKI. He served as such from May 1967 to May 1970. In late spring or early summer of 1968, Meers recommended several companies, including Sundstrand, to Huarisa as good merger prospects for SKI. In mid-November 1968, at Huarisa's direction, Meers telephoned James Ethington, Sundstrand's president, to inquire as to his present interest in a merger. 4 Meers informed Ethington of SKI's 1967 earnings of $1.30 per share and its published earnings for the first nine months of 1968. Ethington told Meers that Sundstrand would be interested in merger discussions. During the ensuing November-December 1968 merger talks, Huarisa told Sundstrand's officers that SKI's earnings for the first three quarters of 1968 were 86cents per share, in accordance with its published nine months' earnings statement.

On the afternoon of December 26, 1968, Ethington and Louis H. Schuette, vice chairman of Sundstrand, met with Meers to negotiate a price for Sundstrand's proposed acquisition of SKI. Meers was acting as an agent for Huarisa at the meeting and periodically called Huarisa about the price terms. After three hours of bargaining, Ethington and Schuette offered $38.25 per share for SKI's stock. This offer was accepted by Huarisa who agreed to submit it to his board of directors. On December 27, 1968, Ethington delivered a written proposal for Sundstrand to acquire SKI in exchange for Sundstrand's common stock at its market value, which was approximately equivalent to $38.25 for each share of SKI stock. On January 2, 1969, SKI's board of directors authorized Huarisa to proceed on the basis of Sundstrand's proposal, which was made public the same day. On January 7, officers and employees of Sundstrand began to survey SKI's operation in order to determine whether the merger should be consummated. On January 20, Sundstrand concluded to cancel the merger negotiations. The district court found that the reasons were as follows:

"certain aspects of the SKI operation, including an increase in labor costs which a merger would cause, undesirable SKI labor practices, and lack of the expected compatibility of SKI's and Sundstrand's products, made the acquisition unattractive. The opinion was also expressed that SKI's earnings projects were somewhat optimistic (due in large part to SKI's heavy deferral of preproduction costs)." (Mem. op. 23-24.)

At a January 22 meeting with SKI officials and Meers, Sundstrand adhered to its decision to call off the merger negotiations, but Sundstrand president Ethington said that Sundstrand was going to honor "its commitment" of January 9 to Huarisa with respect to purchasing the Burke shares. The next day, the two companies announced that the merger plans had been dropped.

As already noted, on February 6, 1969, Sundstrand paid an escrowee the balance of $6,360,915 for the Burke family's 223,190 shares of SKI stock. Four days later, Sundstrand was looking for a purchaser for those shares. On March 21, Norman Alexander, president of Sun Chemical, telephoned Sundstrand president Ethington and said that Alexander had copies of adverse reports on SKI by James W. Burke, a dissatisfied SKI director, and Ernst & Ernst, his firm of certified public accountants. Ethington and Ross, secretary of Sundstrand, flew to New York the next day to read those reports which questioned as of May 1968 the propriety of SKI's continued deferral of preproduction costs and the failure to recognize losses on some of the contracts which ultimately resulted in a net loss of 15cents per share in SKI's report for 1968 published on March 21, 1969. After learning of SKI's financial results for 1968 and of the Burke and Ernst & Ernst reports, Sundstrand again tried unsuccessfully to dispose of its SKI stock and demanded rescission in July 1969. When rescission was refused, Sundstrand filed this action on August 9, 1969. In December 1975, Sundstrand sold its SKI stock, which had been converted into Sun Chemical stock through the ...

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