Umbriac v. Kaiser
| Decision Date | 27 March 1979 |
| Docket Number | Civ. No. R-77-0071 BRT. |
| Citation | 467 F. Supp. 548 |
| Parties | Rosemary L. UMBRIAC, as Executrix of an estate and as a representative of a class and of Kaiser Industries, Catherine A. Lyman, as Executrix of an estate and as a representative of a class and of Kaiser Industries, Alice J. Lyman, as Executrix of an estate and as representative of a class and of Kaiser Industries, and Cletus P. Lyman, as Executor of an estate, Plaintiffs, v. Edgar F. KAISER, Individually, and as liquidating trustee of Kaiser Industries and as trustee of The Henry J. Kaiser Family Foundation ("Kaiser Foundation"), William R. Roesch, Individually, and as a liquidating trustee of Kaiser Industries, George E. Link, Individually, and as a liquidating trustee of Kaiser Industries, Lloyd N. Cutler, Individually, and as a trustee of Kaiser Industries, Walter A. Rosenblith, Individually, and as a liquidating trustee of Kaiser Industries, Roger W. Heyns, Individually, and as a liquidating trustee of Kaiser Industries, James N. Land, Jr., Individually, and as a liquidating trustee of Kaiser Industries, James K. Parker, Individually, and as a liquidating trustee of Kaiser Industries, George L. Farinsky, Individually, and as a liquidating trustee of Kaiser Industries, E. E. Trefethen, Jr., S. A. Girard, P. S. Hass, Edgar F. Kaiser, Jr., Individually, and as trustee of the Kaiser Foundation, Cornell C. Maier, James F. McCloud, George A. Jedenoff, George D. Woods, as trustee of the Kaiser Foundation, Robert J. Glasser, as trustee of the Kaiser Foundation, Kingman Brewster, Jr., as trustee of the Kaiser Foundation, W. L. Hadley Griffin, as trustee of the Kaiser Foundation, Robert D. Haas, as trustee of the Kaiser Foundation, Henry M. Kaiser, as trustee of the Kaiser Foundation, Kim J. Kaiser, as trustee of the Kaiser Foundation, Girard Piel, as trustee of the Kaiser Foundation, The Henry J. Kaiser Family Foundation, a California Charitable Trust, and The First Boston Corporation, a Massachusetts Corporation, Defendants, Kaiser Industries Corporation, a Nevada Corporation, Nominal Defendant. |
| Court | U.S. District Court — District of Nevada |
Breen, Young, Whitehead & Hoy, Chartered, Reno, Nev., Cletus P. Lyman, Philadelphia, Pa., Richard A. Westin, Calais, Vt., for plaintiffs.
Woodburn, Wedge, Blakey & Folsom, Reno, Nev., John R. Hupper, New York City, Andrew P. Tashman, New York City, for defendants, Edgar F. Kaiser, George E. Link, Lloyd N. Cutler, Walter A. Rosenblith, Roger W. Heyns, James N. Land, Jr., James K. Parker, George L. Farinsky, S. A. Girard, P. S. Hass, James F. McCloud, George A. Jedenoff, E. E. Trefethen, Jr., Edgar F. Kaiser, Jr., Cornell C. Maier and William R. Roesch.
McCutchen, Doyle, Brown & Enerson, Gordon M. Weber, Graham B. Moody, Jr., Boake Christensen, San Francisco, Cal., for defendants, Robert J. Glasser, as trustee of the Kaiser Foundation, W. L. Hadley Griffen, as trustee of the Kaiser Foundation, Robert D. Haas, as trustee of the Kaiser Foundation, Kim J. Kaiser, as trustee of the Kaiser Foundation, Girard Piel, as trustee of the Kaiser Foundation, and Henry J. Kaiser Family Foundation, a California charitable trust.
This suit for damages and injunctive relief arises out of the adoption by the shareholders of Kaiser Industries Corporation ("KIC") of a plan of liquidation. The plaintiffs concede and the undisputed facts show that the liquidation plan, as adopted and implemented, has benefited KIC stockholders, nearly doubling the value of their holdings.1 However, the plaintiffs contend that even more favorable results could have been accomplished had an alternative plan of liquidation been pursued. The Second Amended Complaint couches this contention in terms of an alleged violation of the truth-in-proxy provisions of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n. Thus it is alleged that the proxy materials soliciting shareholder approval of the plan of liquidation were materially misleading in their failure to discuss either the plaintiffs' proposed alternative plan or, at a minimum, certain facts that allegedly would have alerted shareholders to the possibility that management was blind to its existence. To their Securities Exchange Act claims plaintiffs have appended state law claims charging the KIC Directors with breach of their fiduciary duties. The matter is before this Court on defendants' motion to dismiss or, in the alternative, for summary judgment.
Some background is necessary to an understanding of this suit. The following are undisputed facts: Before liquidation KIC was one of the nation's 250 largest industrial companies. Chief among its assets was its portfolio, comprising substantial stockholdings in three, publicly-traded Kaiser Affiliates. Its common stock ownership amounted to 56.3% of Kaiser Steel Corporation, 37.4% of Kaiser Aluminum & Chemical Corporation, and 37.1% of Kaiser Cement & Gypsum Corporation. Based on December 31, 1976 market quotations, these holdings had values of $126,849,000, $268,716,000 and $22,289,000, respectively. KIC also owned several large businesses: Kaiser Engineers, a world-wide engineering business which has since been sold for $30,500,000; Kaiser Broadcasting Corporation, which has been sold for a base price of $42,625,000 in cash, subject to contingent additional payments of up to $11,828,000; Kaiser Aerospace & Electronics Corporation, which has been sold for $13,793,000; and Kaiser Sand & Gravel, an unincorporated division of KIC, which has been sold for approximately $21,500,000, subject to a retained leasehold in KIC. In addition, KIC owns 50% of National Steel & Shipbuilding Co., a company with a backlog of construction orders of $554,000,000 as of December 31, 1976, and 25% of Kaiser Center, Inc., a corporation which owns the Kaiser Building in Oakland, California.
Despite the size and diversity of KIC's assets, its common stock historically sold at substantial discounts. In 1974 and 1975, for example, KIC stock traded at prices 32% lower than the then per share market value of the portfolio stocks, without even counting the non-portfolio assets. In addition, 15% of the dividends paid KIC by the Kaiser Affiliates were being subjected to double taxation, once at the corporate level and again upon distribution to KIC stockholders. To eliminate these and other problems KIC had for several years been exploring various ways to modify its financial structure. On May 5, 1976 the KIC Directors publicly announced their intention of submitting to stockholders a plan for the complete liquidation of KIC.
In general terms the plan that the Directors proposed called for the immediate distribution of KIC's portfolio; the other, non-portfolio assets were to be disposed of and cash distributions made of the proceeds to the shareholders. On March 20, 1977 the Directors sent all KIC stockholders of record as of March 14, 1977 a Notice and Proxy Statement for a Special Meeting of Stockholders to consider the plan. The special meeting was held on April 20, 1977, with 73.2% of all KIC shares represented in person or by proxy. The plan was adopted by the affirmative vote of 98.8% of all votes cast.
This suit was commenced on April 26, 1977. Both the original and First Amended Complaint sought to enjoin the imminent distribution of the KIC portfolio. Each did so on the basis that the proxy materials soliciting shareholder approval of the liquidation were materially misleading in failing to discuss the possibility that KIC might garner a higher price for the portfolio stock, that is, a "control premium" were the stock to be sold rather than distributed. Expedited discovery was ordered and numerous depositions taken. On May 27, 1977 the matter came on for hearing before this Court on plaintiffs' motion for a preliminary injunction and defendants' motion to dismiss. Upon reviewing the voluminous briefs, depositions, affidavits and other documents that the parties filed, it became apparent that plaintiffs' "alternative plan" was riddled with uncertain issues of state corporation and federal taxation law. Two issues in particular cast serious doubt on its feasibility: (1) whether any "control premium" would be dissipated by the requirement, emerging in California and other jurisdictions, that minority shareholders be invited to share in it, e. g., Jones v. Ahmanson & Co., 1 Cal.3d 93, 81 Cal.Rptr. 592, 460 P.2d 464 (1969); see Perlman v. Feldmann, 219 F.2d 173 (2d Cir.), cert. denied, 349 U.S. 952, 75 S.Ct. 880, 99 L.Ed. 1277 (1955); Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505 (1975); and (2) whether KIC could avail itself of the nonrecognition provisions of section 337 of the Internal Revenue Code to avoid the crushing $150,000,000 capital gains tax that would otherwise be imposed on the sale of its portfolio at its then market value and satisfy the twelve-month limitation period contained in that statute either by selling all its assets within that period or by transferring its unsold assets to a liquidating trust. Without voicing an opinion as to which way another court in another jurisdiction would decide these issues, this Court concluded that their genuinely unresolved character supported the soundness of the Directors' business judgment in opting for a plan, perhaps less rewarding than that proposed by plaintiffs, but whose success was assured. The balance of hardships, too, lay with the defendants. Accordingly, this Court denied plaintiffs' motion for a preliminary injunction and ordered that the First Amended Complaint be dismissed without prejudice.
On July 18, 1977 plaintiffs filed their Second Amended Complaint. The theory of the suit remains the same: that, by distributing the KIC portfolio, the Directors sacrificed a "control premium" that could have been realized without adverse tax consequences by resort to the liquidating trust device. However, the Second Amended Complaint expands...
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