TBK PARTNERS v. Shaw

• Decision Date: 05 January 1988
• Docket Number: Civ. A. No. C 82-0695-L(A).
• Citation: 689 F. Supp. 693
• Parties: TBK PARTNERS, Plaintiff, v. Robert T. SHAW, et al., Defendants.
• Court: U.S. District Court — Western District of Kentucky

689 F. Supp. 693

TBK PARTNERS, Plaintiff, v. Robert T. SHAW, et al., Defendants.

Civ. A. No. C 82-0695-L(A).

United States District Court, W.D. Kentucky.

January 5, 1988.

Galen J. White, Jr., Donald W. Darby, Boehl, Stopher, Graves & Deindoerfer, Louisville, Ky., William Klein, II, Ira A. Finkelstein, Owen D. Kurtin, Stuart Wechsler, Edward Labaton, Goodkind, Wechsler & Lebaton, New York City, for plaintiff.

Robert L. Maddox, Robert C. Ewald, H. Alexander Campbell, Louisville, Ky., Rodney

Moore, Moore & Peterson, Dallas, Tex., for defendants.

MEMORANDUM OPINION AND ORDER

ALLEN, Senior District Judge.

This action is before the Court on defendants' motion for summary judgment. Plaintiff, TBK, brought this action claiming securities fraud. Specifically, plaintiff claims defendants violated sections 11 and 12(2) of the 1933 Act which make unlawful any material omissions or misstatements in a registration statement or in an offer or sale of securities. Plaintiff also alleges violation of sections 10(b) and 14(a) of the 1934 Act. These statutory provisions apply, respectively, to the purchase or sale of a security and to the solicitation of proxies, and make it unlawful to employ any device or scheme to defraud, or to engage in any act, practice or course of business which operates or would operate as a fraud or deceit.

The plaintiff has also claimed a violation under 18 U.S.C. § 1962 (RICO statute) alleging the individual defendants conducted and participated in the affairs of defendant corporation (I.C.H.) and of the subsidiaries through a pattern of racketeering. Plaintiff claims the individual defendants' conduct in manipulating the Merger Exchanges for all of the subsidiaries is evidence of racketeering.

I. Factual Background.

TBK Partners, a New York partnership, originally brought this action against Robert T. Shaw ("Shaw"), C. Fred Rice ("Rice"), Consolidated National Corporation ("CNC"), Independence National Corporation ("INC"), American Consolidated Corporation ("ACC"), Western Pioneer Life Insurance Company ("WPLIC"), and I.C.H. Corporation ("ICH"), alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and common law fraud and breach of fiduciary duty. In the complaint, plaintiff alleges that Shaw and Rice control ICH and CNC, and that through CNC, Shaw and Rice control INC, ACC, and WPLIC. Plaintiff also alleges that through the CNC network of corporations, Shaw and Rice acquired varying degrees of control over All American Assurance Company ("AAA"), American Commonwealth Financial Corporation ("ACFC"), Bankers Union Life Insurance Company ("BULIC"), Chase National Life Insurance Company ("CNLIC"), Founders Security Life Insurance Company ("FSLIC"), HCA, Inc. ("HCA"), Modern American Life Insurance Company ("MALIC"), Modern Security Life Insurance Company ("MSLIC"), National Heritage Management Corporation ("NHMC"), and Progressive National Life Insurance Company ("PNLIC").

Plaintiff alleges that Shaw, through ICH, offered to merge AAA, ACFC, BULIC, CNLIC, FSLIC, HCA, MALIC, MSLIC, NHMC, and PNLIC with ICH. Shaw allegedly registered with the Securities and Exchange Commission 2,620,254 shares of ICH stock to be exchanged for stock in the ten target companies. Allegedly, Shaw then sent each stockholder of the target companies a three-part prospectus. Plaintiff also claims that Shaw sent ICH stockholders a proxy statement with parts of the prospectus attached, calling for a meeting to increase ICH's authorized common stock. In this regard, Plaintiff alleges that the prospectus was misleading because Shaw either omitted or misrepresented material facts. Plaintiff claims that these acts depressed the fair value of the stock of the target companies.

Plaintiff further alleges that they were "forced" or "coerced" into selling their stock at an unfair and undervalued price. At the date of the stockholders meeting of the ten target companies, plaintiff claims to have `beneficially' owned stock in MSLIC, CNLIC, MALIC, and PNLIC.

Plaintiff sought certification of a class action and this Court in an order entered on October 14, 1983, approved two classes: (1) all minority stockholders (and their successors) of the common stock of PNLIC who received the ICH "Prospectus/Proxy Statement" relating to the shares of ICH stock to be exchanged for their shares of subsidiary common stock and who exchanged their stock for shares of ICH stock; and (2) all minority stockholders (and their successors) of the common stock of CNLIC who received the ICH "Prospectus/Proxy Statement" relating to the shares of ICH stock to be exchanged for their shares of common stock and who sold their stock after receipt of the "Prospectus/Proxy Statement" but before the merger with ICH. The Court declined to certify the MALIC and MSLIC classes because of the possibility of inconsistent judgments leading to possible class conflicts if those classes were also certified in pending actions in Delaware state court.

In an order entered on March 5, 1986, this Court granted plaintiff leave to amend its complaint and to assert a claim under the Racketeer Influenced and Corrupt Organization Act ("RICO"). In this regard, plaintiff seeks to represent all shareholders of ICH who, as minority shareholders in the ten subsidiaries, received ICH shares as a result of the merger. Further plaintiff sought to drop all of the original corporate defendants except ICH. In addition, plaintiff asserts new claims in "RICO" and negligent misrepresentation.

II. Disputed Facts.

Plaintiffs claim the following facts are in dispute between the parties:

A. Selection of Independent Directors for the Special Committee.

The defendants state they wanted to establish a special committee to select an independent investment banker to be retained by the subsidiaries who would recommend exchange values and to select a law firm to represent public shareholders for the proposed transactions. Defendants claim ICH asked the Board of Directors of each of the most important subsidiaries involved to select a representative to serve on the committee. Defendants claim the existence of a special committee with independent directors would alleviate any possible conflict of interest between ICH and the subsidiaries.

However, the plaintiff alleges that the "independent" status of the selection committee was merely illusory. Plaintiff claims there are no facts on the record to support defendants' statement that ICH asked the Board of Directors of each of the most important subsidiaries to chose a representative for the special committee. Plaintiff specifically alleges that defendant Shaw, upon advice from an attorney named Moore, personally picked three of the committee members. Two committee members, Parker and Peeples, were clients of attorney Moore, and a third committee member, Wiley, was a personal friend of Moore. Also, plaintiff alleges Peeples could not be independent since he was employed by a major ICH shareholder. Further, plaintiff claims Shaw did not get prior approval of his selection of special committee members from the subsidiary boards.

B. Selection of an Independent Investment Banker.

Plaintiff alleges that the selection of Shearson as the independent banker was contrary to the prospectus. Defendants state the special committee heard presentations by Shearson as well as Stephens. The committee members had two or three conference calls regarding a recommendation for Shearson and ultimately decided upon Shearson. Plaintiff claims Shearson was selected by attorney Moore, with no alternative given to the special committee. Plaintiff asserts that while the prospectus indicates that the date of the selection of Shearson by the committee was May 12, 1982, Mr. Moore gave information to a reporter for the Wall Street Journal about Shearson's selection one month before the stated selection date. This resulted in a Wall Street Journal article dated April 12, 1982.

Plaintiff claims that after Shearson was selected he held no meetings with the special committee or with the attorney chosen to represent the shareholders. Further, plaintiff claims Shearson used ranges of value rather than specific values allowing defendant Shaw to manipulate exchange ratios and to remain within a previously established cap on the number of ICH shares to be provided. The defendants assert that no established cap existed.

C. Selection of Independent Counsel for Minority Shareholders.

The plaintiff claims that the law firm of Vinson & Elkins was not retained by the special committee. The individual attorney (Whilden) from Vinson & Elkins was introduced by attorney Moore to members of the special committee as their counsel. Plaintiff further claims that while representing the minority stockholders, Whilden made no effort to obtain the best possible price for exchange.

D. Issues Omitted from the Prospectus.

Plaintiff alleges that the prospectus for each subsidiary did not disclose the acquisition prices of the other subsidiaries involved in the merger; yet all the prices were disclosed to ICH shareholders. Furthermore, the shareholders were not informed that Shearson's ranges for five of the subsidiaries were below the actual acquisition prices paid by ICH and that the takeover prices were lower than merger book value prices. Also, the prospectus did not declare the number of ICH shares to be exchanged for the minority shares in each of the other nine subsidiaries.

Plaintiff also contends that defendants did not disclose the relationship between the cap on the number of shares and the exchange ratios involved in the mergers. Defendants assert that the cap was merely an estimated range of reasonable value of the companies.

Further omitted from the prospectus is the $90 million tax benefit defendants would receive if the mergers occurred before October 28, 1982.

Lastly, the shareholders were not made aware that one of the ten subsidiaries in the merger...