Ward v. Succession of Freeman

• Decision Date: 15 September 1988
• Docket Number: No. 87-3182,87-3182
• Citation: 854 F.2d 780
• Parties: Fed. Sec. L. Rep. P 94,019 Mary Margaret WARD, et al., Plaintiffs-Appellees, Cross-Appellants, v. SUCCESSION OF Richard W. FREEMAN, et al., Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 780

854 F.2d 780

Fed. Sec. L. Rep. P 94,019

Mary Margaret WARD, et al., Plaintiffs-Appellees, Cross-Appellants, v. SUCCESSION OF Richard W. FREEMAN, et al Defendants-Appellants, Cross-Appellees.

No. 87-3182.

United States Court of Appeals Fifth Circuit.

Sept. 15, 1988.

Lawrence R. Levin, Kenneth A. Grady, Vance L. Liebman, Damon E. Dunn, Sheri A. Young, Deborah G. Moore, Chicago, Ill., for Richard & Louis Freeman.

Curtis R. Boisfontaine, Sally A. Shushan, New Orleans, La., for Louisiana Coca-Cola Bottling Co.

Charles Thensted, Skye McLeod, John F. Whitney, New Orleans, La., for Succession of Richard W. Freeman.

Charles K. Reasonover, Robert E. Kerrigan, Jr., Michael R. Testerman, Duris L. Holmes, David L. Campbell, Darrell K. Cherry, New Orleans, La., for plaintiffs-appellees, cross-appellants.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before GEE, DAVIS and SMITH, Circuit Judges.

GEE, Circuit Judge:

This appeal concerns issues that arose in an action brought by shareholders against Louisiana Coca-Cola Bottling Company ("LA Coke") and its corporate officers. We reverse the district court's decision to compel disclosure of attorney-client communications and the ruling at trial that defendants waived their privilege in other communications. We also reverse the district court's directed verdict against defendants' prescription defense, vacate the judgment, and remand the case for a new trial.

Facts and Proceedings Below

This case arises from LA Coke's decision to redeem its outstanding stock in 1982 (the "1982 Tender"). LA Coke was a closely held Louisiana corporation engaged in the bottling and sale of soft drinks in southeastern Louisiana. Several shareholders holding an aggregate total of less than four percent (4%) of outstanding shares in the corporation decided to redeem their shares at the offering price of $850.00 per share. This stock redemption occurred two years after the company had redeemed shares for $321.57 per share from two families holding twenty-eight percent (28%) of the outstanding shares. A year after the 1982 Tender, the company again redeemed some of its stock in a third tender offer and repurchased a large bloc of its outstanding shares from an institutional shareholder. As a result of the three tenders and several other stock transactions, defendants' ownership interest in LA Coke increased from 20% to 86% between 1979 and 1983. At the end of 1984, the Coca-Cola Company ("Big Coke") offered to buy LA Coke for $148,000,000. ¹

After learning of the lucrative sale to Big Coke, plaintiffs (the "Ward Parties") sought counsel and instituted this action against LA Coke, Richard Freeman Jr., Louis Freeman, and the Succession of Richard Freeman. Before discussing the course of the trial proceedings, we sketch a summary of how the parties view the sequence of transactions that led to the 1984 sale to Big Coke.

In 1979, the Freemans attended a convention of Coca-Cola bottlers where Big Coke announced its plan to engage in a bottler restructuring program whereby Big Coke would "actively participate" in changes of bottler ownership. Soon thereafter, LA Coke began to redeem its shares. Plaintiffs view the several individual redemptions and the three successive tender offers in 1980, 1982, and 1983 as part of a calculated plan by the Freemans to acquire over eighty percent (80%) of LA Coke's stock with the intent to sell the company for a windfall profit to Big Coke. LA Coke discontinued dividends in the latter half of 1981 (for the first time in the company's history) and contemplated a reverse stock split to reduce the number of shareholders in the corporation. Plaintiffs suggest that these actions constituted part of the Freemans' plans to "squeeze out" and "freeze out" the minority shareholders.

The defendants, on the other hand, characterize the stock redemptions as a response to shareholder requests for liquidity and an opportunity to unify management and ownership interests so as to promote flexibility in giving the business new direction. From the defendants' perspective, the early 1980's were difficult years for LA Coke. After a decade of turbulence in the bottling industry caused by huge increases in the costs of raw materials, increases in interest rates, and new competition spawned by new products, LA Coke found itself foreclosed from growth in its historic territory because of its already high market share. To maintain its competitive position in a market where it offered ten products in fifteen containers (resulting in approximately 100 different product-package choices), LA Coke sought expansion through acquisition. The company's decision to suspend its attempt to purchase the Lake Charles Coca-Cola bottler (because of unexpected liabilities attached to the purchase) left the company with a $30 million credit line. LA Coke characterizes 1981 as an unsettling year, with sugar experiencing dramatic price fluctuations and the "Pepsi Challenge" (resulting in record promotional costs and discounting by Pepsi) forcing LA Coke to respond with a number of high-cost promotions. Thus, LA Coke suspended dividends in the latter half of the year.

Having the line of credit at its disposal, LA Coke prepared the 1982 Tender. The 1982 Tender document provided detailed information regarding LA Coke's financial and business condition. The Tender statement noted that the directors were considering a reverse stock split proposal to present to shareholders for a vote at an "unspecified future date" but that there "are no current plans for such a reverse split." The directors disclosed that they did not intend to sell their own shares, and thus that their percentage ownership in LA Coke would increase. The directors did not make recommendations about whether other shareholders would sell, instead urging each shareholder "to consult with his financial advisor in evaluating this offer."

Six months before trial, the district judge compelled LA Coke to disclose its attorney-client communications to plaintiffs. At trial, the district judge determined that the defendants had waived their privilege in other communications, giving rise to evidence heavily relied upon by plaintiffs to prove fraud. The district judge also submitted a list of numerous charges to the jury in order to clarify the alleged misrepresentations and omissions that gave rise to plaintiffs' claims. The disclosure of the attorney-client communications and the propriety of the charges sent to the jury are the main sources of dispute in this appeal.

Issues on Appeal

1. Attorney-Client Privilege

LA Coke contends that the district court erroneously compelled the disclosure of communications between LA Coke's managers and attorneys regarding the 1982 Tender. In 1970, we held that in litigation involving a corporation and its shareholders, the shareholders may have access to otherwise privileged information after a showing of good cause. Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir.1970), cert. denied 401 U.S. 974, 91 S.Ct. 1191, 28 L.Ed.2d 323 (1971). Recognizing that the beneficiaries of a corporate managements' actions are the corporation's shareholders, we found a sufficient mutuality of interest between management and shareholders in communications with attorneys to bar any assertion by management alone of an absolute privilege against the shareholders. 430 F.2d at 1101. We did not attempt in Garner, however, to prevent entirely managements' assertion of the privilege against shareholders.

The attorney-client privilege still has viability for the corporate client. The corporation is not barred from asserting it merely because those demanding information enjoy the status of stockholders. But where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.

430 F.2d at 1103-1104.

Garner set forth a non-exclusive list of indicia that "may contribute to the decision of presence or absence of good cause."

[T]he number of shareholders and the percentage of stock they represent; the bona fides of the shareholders; the nature of the shareholders' claim and whether it is obviously colorable; the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; whether, if the shareholders' claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; whether the communication related to past or to prospective actions; whether the communication is of advice concerning the litigation itself; the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.

430 F.2d at 1104.

LA Coke attacks the district court's application of Garner on both extension and good cause grounds. First, LA Coke contends that as a matter of law the Garner holding does not extend to alleged violations of securities and fraud laws arising from tender offers because of the lack of mutual corporate, management, and shareholder interests when shares are being redeemed. Managers of a tendering corporation must seek to conserve assets by not over-paying for redeemed stock; shareholders wishing to redeem, however, are naturally interested in obtaining the highest price they can get. Shareholders redeem their stock voluntarily, based upon whether the price being offered is satisfactory to them individually. Valuing a closed corporation for purposes of redeeming its stock is a difficult task because the mutual...