Watts v. Des Moines Register and Tribune

• Decision Date: 17 November 1981
• Docket Number: Civ. No. 78-400-1.
• Citation: 525 F. Supp. 1311
• Parties: Frank S. WATTS, et al., Plaintiffs, v. DES MOINES REGISTER AND TRIBUNE, et al., Defendants. Minneapolis Star & Tribune Co., Intervenor Defendant.
• Court: U.S. District Court — Southern District of Iowa

525 F. Supp. 1311

Frank S. WATTS, et al., Plaintiffs, v. DES MOINES REGISTER AND TRIBUNE, et al., Defendants Minneapolis Star & Tribune Co., Intervenor Defendant.

Civ. No. 78-400-1.

United States District Court, S. D. Iowa, C. D.

November 17, 1981.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert B. Scism, Scalise, Scism, Gentry, Brick & Brick, John D. Hudson, Des Moines, Iowa, for plaintiffs.

James Rayhill and Robert M. Riggs, Carter, Ledyard & Milburn, New York City, Glenn L. Smith and Robert Riley, Des Moines, Iowa, for defendant Directors.

James E. Cooney and Richard G. Santi, Des Moines, Iowa, for corporation defendant.

Gary G. Gerlach, Michael Guidicessi and Barbara M. Mack, J. Michael Downey, Des Moines, Iowa, William R. Busch Jr. and Duane W. Krohnke, Minneapolis, Minn., and Thomas D. Hanson, Des Moines, Iowa, for intervenor-defendant.

RULING AND ORDER

STUART, Chief Judge.

This matter is before the Court pursuant to the following motions filed by plaintiffs, the individual defendants and the corporate defendant, all of which came on for hearing before the Court on June 11, 1981: (1) Motion for summary judgment on Counts 5, 6, 7, and 8 of the amended complaint, filed by the defendant Register and Tribune Co. (R & T) on March 2, 1981; (2) motion for summary judgment as to Counts 1 through 8 of the amended complaint, filed by the individual defendants on March 16, 1981; (3) R & T's March 24, 1981 motion for summary judgment on Counts 1 through 4, adopting the March 16, 1981 motion of the individual defendants; (4) plaintiffs' cross-motion for summary judgment on Count 4 and (5) plaintiff's motion for certification of question of law to the Iowa Supreme Court, both of which were filed April 10, 1981; (6) plaintiffs' motion for reconsideration of Magistrate Longstaff's Pretrial Order limiting discovery into the bases for the decision of the R & T's Special Litigation Committee (SLC), filed on May 1, 1981; and (7) plaintiffs' May 15, 1981 motion to strike the report of the R & T Special Litigation Committee.

Since the date of hearing, on July 13, 1981, plaintiffs moved for summary judgment in their favor on Count 5 of the complaint. The Court will consider said motion in connection with the motions for summary judgment filed by the corporate and director defendants, respectively.

After careful consideration of the pertinent portions of the record, briefs and affidavits filed in this matter, together with the oral arguments of counsel, and being otherwise fully advised in the premises, the Court enters the following Ruling and Order.

BACKGROUND

This is an action originally initiated on December 7, 1978 by minority shareholders of the R & T against the company and its directors, alleging a breach of fiduciary duties and violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 and the Iowa Uniform Securities Act.

Four additional derivative counts were added pursuant to an amended complaint filed January 17, 1979, wherein plaintiffs alleged that the terms of a voting trust established in August of 1978 violated Iowa law, that corporate expenses incurred in connection with the trust were improper and that the defendant directors acted to the detriment of the corporation in approving the R & T's purchase of the McCoy Broadcasting Company (McCoy) and its sale of shares of Cowles Communications, Inc. (CCI) to Gardner Cowles, Jr. An eighth count challenging the administration of the R & T's stock purchase plan was subsequently added.

On June 4, 1980, the R & T's board of directors adopted a resolution delegating to a special litigation committee the authority to conduct a comprehensive review of the substance of the plaintiffs' derivative claims and to determine whether pursuit of such claims was in the best interests of the corporation. Two disinterested directors, John Chrystal and Burke Marshall, were thereafter appointed to the committee. Independent counsel, Professor Marvin Chirelstein and Ms. Julia Mears, were retained to examine and analyze pertinent documents and to render advisory opinions regarding the factual and legal merit of the derivative causes of action, set forth in Counts 4 through 8 of the amended complaint.

After extensive investigation, the committee issued its report on February 19, 1981. Having concluded that the interests of the corporation would be best effectuated through dismissal of Counts 5 through 8, the committee directed corporate counsel to move for summary judgment on such counts. As to Count 4, however, the committee determined that the R & T would benefit from an adjudication of the validity of the voting trust, and thus required corporate counsel to oppose plaintiffs' request for a judicial declaration of the trust's illegality.

The counts will be discussed in the order presented in the complaint. As every count has been challenged by a motion for summary judgment, it is appropriate to set out the standards which will guide the Court's determination of that issue at this point.

Under Federal Rule of Civil Procedure 56(c), a motion for summary judgment should be granted only when the pleadings, discovery and affidavits on file show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. This is a drastic remedy and the movant bears the heavy burden of establishing his right to judgment with such clarity as to leave no room for controversy and of proving that the non-moving party could not recover under any discernable circumstances. Vette Co. v. Aetna Casualty & Surety Co., 612 F.2d 1076, 1077 (8th Cir. 1980). The evidence must be viewed in the light most favorable to the non-movant, who is entitled to the benefit of all reasonable inferences to be drawn from the facts. McLain v. Meier, 612 F.2d 349, 356 (8th Cir. 1979). However, when appropriate, summary judgment fulfills the salutory purpose of avoiding useless and time consuming trials. Butler v. M.F.A. Life Insurance Co., 591 F.2d 448, 451 (8th Cir. 1979).

FACTS

In summarizing the facts and circumstances surrounding the challenged trust transaction about which there is no genuine issue, the Court has relied heavily upon the factual exposition developed by Professor Chirelstein in his report of September, 1980.

Since 1903, when Gardner Cowles first acquired a majority interest in the R & T, the Cowles family has controlled more than half of the outstanding shares of this closely held corporation, either directly or in trust. In recent years, R & T management became concerned that dispersion of stock owned by Cowles family members would render the company vulnerable to acquisition by one of the national newspaper chains. Because approximately 25% of R & T shares were held in irrevocable trusts, management also feared that any family members who controlled the devolution of these shares in the capacity of trustee would be obligated as fiduciaries to accept a remunerative takeover offer.

Professor A. James Casner and the New York law firm of Carter, Ledyard and Milburn were thus retained in 1977 to examine various corporate control mechanisms and to select that mechanism which would best perpetuate Cowles dominance of R & T policies and operations, in order to preserve the "continuity, stability and independence of the management and policies of the Company so that the traditions of independence and journalistic excellence which mark the Company's newspapers may be continued and advanced." Private Placement Memorandum, August 22, 1978 (Defendants' Exhibit 36 at page 12). However, the record is devoid of any evidence that the R & T was threatened by hostile takeover attempts at any point during the relevant period.

Several procedures devised by special counsel were discussed with R & T management at a series of town meetings convened during 1978. Responsibility for payment of all expenses incurred in the compilation and presentation of Professor Casner's study was assumed by the corporation. Ultimately, a combined voting trust and recapitalization plan was settled upon as the mechanism best calculated to preserve the Cowles tradition of journalistic independence and integrity. Participation in the trust would be limited to a small group of family members and other large shareholders. Under the recapitalization plan, stockholders were required to exchange eight shares of existing stock for one voting and seven nonvoting shares, with no change in equity interests. The newly converted voting shares were then to be deposited by participating shareholders in the trust for a renewable term of ten years, and voting trust certificates were to be issued in exchange therefor. Also contemplated under the terms of the trust agreement was the free alienation by participating shareholders of their beneficial interests without a concomitant transfer of voting power from the five trustees designated in the agreement.

Once management decided to implement the voting trust, counsel prepared a private placement memorandum and related documents designed to ensure compliance with the private offering exemption of the Securities and Exchange Act of 1934. These materials were issued only to the small group of shareholders who were invited to deposit voting shares in the trust. Following formal board approval of the transaction in August of 1978, certain of the aforementioned shareholders and the five designated trustees executed the voting trust agreement on August 22, 1978. Fifty-seven shareholders, who together owned approximately 60% of eligible shares, had by December 7, 1978 agreed to place their voting shares in the trust.

On November 1, 1978, the R & T board of directors adopted the recapitalization plan and scheduled a special shareholders' meeting at which shareholder approval of the plan would be solicited. Information regarding the trust and...