Voege v. American Sumatra Tobacco Corporation

• Decision Date: 23 April 1965
• Docket Number: Civ. A. No. 2301,2316.
• Citation: 241 F. Supp. 369
• Parties: Ida May VOEGE, Plaintiff, v. AMERICAN SUMATRA TOBACCO CORPORATION et al., Defendants. Harry Walter VOEGE et al., Plaintiffs, v. TOBACCO HOLDINGS, INC., et al., Defendants.
• Court: U.S. District Court — District of Delaware

241 F. Supp. 369

Ida May VOEGE, Plaintiff, v. AMERICAN SUMATRA TOBACCO CORPORATION et al., Defendants.

Harry Walter VOEGE et al., Plaintiffs, v. TOBACCO HOLDINGS, INC., et al., Defendants.

Civ. A. Nos. 2301, 2316.

United States District Court D. Delaware.

April 23, 1965.

COPYRIGHT MATERIAL OMITTED

Aubrey B. Lank, Theisen & Lank, Wilmington, Del., Gustave B. Garfield, New York City, of counsel, for plaintiff.

Richard F. Corroon, Berl, Potter & Anderson, Wilmington, Del., Willkie, Farr, Gallagher, Walton & FitzGibbon, New York City, of counsel, for defendants.

STEEL, District Judge.

Plaintiff, Ida May Voege, brings Civil Action 2301 as the "owner" of 450 shares of American Sumatra Tobacco Corporation ("Old Company"), and has named as defendants "Old Company", Tobacco Holdings, Inc., ("New Company"), N. V. Deli Maatschappij ("Deli"), and George J. Fisher, the Register-in-Chancery of Delaware. Deli is incorporated under the law of The Netherlands, Old Company and New Company are incorporated in Delaware, and Fisher resides in Delaware. Jurisdiction is purportedly based upon § 27 of the Securities Exchange Act of 1934 ("Act of 1934") for alleged violations of Section 10(b) of that Act, and Rule 10b-5 promulgated thereunder.¹

The Complaint alleges that the suit is brought individually and in a representative capacity on behalf of "all present stockholders of Old Company and all former stockholders of of sic the Common Stock of Old Company who have sold their shares pursuant to an offer to purchase said shares dated June 28, 1960."² The Complaint also alleges that the action is brought derivatively on behalf of Old Company because the latter, being under the control of the other defendants who are the wrongdoers, cannot enforce its rights.

Defendants have moved under Fed.R. Civ.P. 12(b) (1) and (6) to dismiss the Complaint for lack of jurisdiction over the subject matter, and for failure to state a claim upon which relief can be granted.

The Complaint falls far short of alleging "a short and plain statement of plaintiff's claim as Fed.R.Civ.P. 8(a) requires. But interpreting it liberally in accordance with Fed.R.Civ.P. 8(f), the claims as alleged may be summarized as follows:

By a series of preconceived actions dictated by New Company and Deli which involved the use of the mails and other instrumentalities of interstate commerce, those two companies, as holders of the majority of the stock of Old Company, fraudulently brought about a merger between Old Company and New Company. Under the terms of the merger, minority stockholders of Old Company, including plaintiff, were required to surrender their stock in Old Company for $17 a share, a price grossly below its real value, to the end that New Company and Deli might appropriate to themselves assets to which the minority stockholders were entitled. This series of actions constituted a device, scheme or artifice to defraud the minority stockholders of Old Company in derogation of § 10(b) of the Act of 1934 and Rule 10b-5.

Without detailing the facts relied upon by plaintiff at this point, it is clear that if they are true, plaintiff is entitled to relief of some kind in some court. Indeed, defendants make no contention to the contrary. They simply argue that a federal court is not a proper forum because the protection accorded by Rule 10b-5 has application only when a device, scheme or artifice to defraud occurs, as the Rule expressly states, "in connection with the purchase or sale of a security." Defendants assert that plaintiff did not "sell" her stock either in connection with the acts of wrongdoing alleged or otherwise, and hence no rights could accrue to her under Rule 10b-5. This argument, it would appear, is advanced to negate both subject matter jurisdiction and the validity of the claim itself. Of course, if the Complaint alleges facts which, if proven, will establish a violation of Rule 10b-5, then it is obvious that jurisdiction exists by the express terms of § 27 of the Act of 1934.³

At the argument, plaintiff agreed with defendants that she could base no rights upon Rule 10b-5 unless she was a seller of securities. Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2nd Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), supports this view.^3a Whether, when suit was begun, plaintiff had the status of a vendor of securities, requires a consideration of at least some of the details of the claim. In further summary the Complaint alleges:

Old Company was organized in 1926 under the name of American Sumatra Tobacco Corporation. Its principal business was the growing of shade-grown tobacco leaf used for wrappers in the manufacture of cigars. A collateral and secondary activity was the grazing of cattle and the sale of lumber. Old Company owned large and extensive holdings of real estate in Florida, Georgia, Connecticut and Massachusetts.

Between 1955 and 1960, Deli owned more than 50%, but less than 90% of the common stock of Old Company. As a result of a written offer of $17 per share which Deli made to stockholders of Old Company on June 28, 1960, it acquired in excess of 200,000 additional shares of Old Company stock. This gave Deli more than 90% of the stock of Old Company.

The offer of June 28, 1960 contained false and misleading statements and omitted to state material facts to the end that the true value of the stock which was substantially in excess of $17 per share should be concealed from the stockholders. Among other information which Deli withheld was the fact that it had seized for itself a valuable corporate opportunity which rightfully belonged to Old Company, that it had determined that the growing by Old Company of shade-grown tobacco leaf for cigar wrappers was an obsolete method of production, and that Old Company should cease large scale production of shade-grown leaf tobacco and dispose of its surplus lands not needed for such production. Deli failed to reveal that if such lands were liquidated in the normal course of events over a long period of time, say upwards of five years, stockholders of Old Company would receive a sum of money greatly in excess of $17 per share. The stockholders who accepted the offer of June 28, 1960, did so without knowing that the statements which it contained were false and misleading.

Having acquired more than 90% of the stock of Old Company, on October 21, 1960, Deli incorporated New Company in Delaware under the name of Tobacco Holdings, Inc. It then transferred all its shares in Old Company to New Company in exchange for all of the stock of New Company. Following this, Old Company was merged into New Company pursuant to the provisions of 8 Del.C. § 253, and the name of the New Company was simultaneously changed to American Sumatra Tobacco Company.⁴ The merger was accomplished without the vote of the stockholders of Old Company.⁵ Under the terms of the merger, the holders of stock of Old Company (other than New Company) received $17 per share in lieu of securities or other consideration.

Plaintiff elected not to accept the $17 per share but demanded an appraisal of all of her stock under 8 Del.C. § 262. After making the demand, plaintiff took no further action to obtain an appraisal and as yet her shares have not been appraised. Plaintiff made her demand, as did other persons holding approximately 8,000 shares of the stock of Old Company, in ignorance of the series of actions which had been taken by Deli and New Company to defraud the minority stockholders of Old Company.

Defendant's contention that plaintiff is not a purchaser or seller of securities, and that even if she is the wrongs alleged do not relate to the purchase or sale, will not withstand analysis.

Section 3(a) (14) of the Act of 1934 provides that when "sale" or "sell" is used in the Act, the terms each include "any contract to sell or otherwise dispose of." The charter of a Delaware corporation constitutes, among other things, a contract between the corporation and its stockholders, and between the shareholders inter sese. Lawson v. Household Finance Corp., 17 Del.Ch. 343, 352-353, 152 A. 723, 727-728 (1930); Duffy v. Loft, Inc., 17 Del.Ch. 140, 151 A. 223, aff'd, 17 Del.Ch. 375, 152 A. 849 (1930); Morris v. American Public Utilities Co., 14 Del.Ch. 136, 122 A. 696 (1923); Peters v. United States Mortgage Co., 13 Del.Ch. 11, 114 A. 598 (1921). With exceptions not presently applicable, the provisions of the Delaware Corporation Law are a part of the charter of every corporation. 8 Del.C. § 364; Goldman v. Postal Telegraph, 52 F.Supp. 763 (D.Del.1943); Hartford Accident & Indemnity Co. v. W. S. Dickey Clay Mfg. Co., 26 Del. Ch. 411, 24 A.2d 315 (1942).⁶ When plaintiff purchased her shares in Old Company in 1945, she agreed, by virtue of the terms of the Delaware Corporation Law, that if Old Company should ever merge, she would surrender her shares for whatever amount of cash or securities the merger agreement specified, or in lieu thereof, would accept their appraised value as determined in an appraisal proceeding.⁷ Passing for the moment the significance of the plaintiff's right to have her shares appraised, in net effect when plaintiff bought her shares, she agreed that in the event of a merger the corporation surviving the merger should have an option to buy her shares at a price to be determined in the future.

The frauds allegedly perpetrated upon plaintiff were, in a very real sense, related to a vital part of the contract (the fixation of the purchase price) under which plaintiff had agreed to sell. They were committed "in connection with the purchase and sale" of a security within the meaning of Rule 10b-5.⁸ Any other view of the transaction would defeat the purpose of Rule 10b-5, which, as stated in Hooper v. Mountain States Securities Corp., 282 F.2d 195, 202 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961) is "to keep the channels of interstate commerce, the mail, and...