Willheim v. Murchison

Decision Date10 February 1965
Docket NumberNo. 190,Docket 29126.,190
Citation342 F.2d 33
PartiesElse WILLHEIM and Randolph Phillips, Plaintiffs-Appellants, v. John D. MURCHISON and Clint W. Murchison, Jr., co-partners d/b/a Murchison Brothers, and Investors Diversified Services, Inc., Defendants-Appellees, and Investors Mutual, Inc., Defendant.
CourtU.S. Court of Appeals — Second Circuit

Randolph Phillips, New York City, appellant pro se (Leonard I. Schreiber, New York City, on brief, for appellant Else Willheim).

Samuel E. Gates, New York City (Debevoise, Plimpton, Lyons & Gates, New York City, J. Asa Rountree, Robert J. Geniesse, J. Edward Fowler, New York City, of counsel), for Investors Diversified Services, Inc.

Stuart N. Updike, New York City (Townley, Updike, Carter & Rodgers, New York City, Lee W. Meyer, Peter G. Kelly, New York City, of counsel), for John D. Murchison and Clint W. Murchison, Jr.

Taggart Whipple, New York City (Davis, Polk, Wardwell, Sunderland & Kiendl, New York City), for Investors Mutual, Inc.

Before FRIENDLY and SMITH, Circuit Judges, and BLUMENFELD, District Judge.*

FRIENDLY, Circuit Judge.

The affairs of Alleghany Corporation, from its founding by the Van Sweringen brothers in 1929, have given rise to a flood of litigation that must be unparalleled in American corporation law. Even a single phase of its activity, its relationship with Investors Diversified Services, Inc. (IDS), of which Alleghany obtained control in 1949, has been a bounteous provider for the Securities and Exchange Commission and the courts, especially the District Court for the Southern District of New York and this court. This appeal concerns a chapter of Alleghany ten years after the one that recently occupied our attention in Alleghany Corp. v. Kirby, 333 F.2d 327 (2 Cir. 1964), court equally divided on rehearing in banc, 340 F.2d 311 (1965); the present case concerns the dislodgment in 1961 of the Kirby management by its quondam ally, the Murchison brothers, and the effect of this on the contracts between IDS and one of the investment companies for which IDS acts as investment adviser and underwriter.

Alleghany bought a controlling interest in IDS in 1949; though its holdings have varied, it has held 47.6% of IDS's voting stock during the period in 1960 and 1961 here relevant. As of January 1, 1960, Allan P. Kirby and two corporations controlled by him owned 571,200 shares of Alleghany common stock and 143,210 shares of 6% preferred, each convertible into 4.7 shares of common on payment of $3.75 per common share. The next largest stockholding was that of Robert R. Young's widow, who individually and as executrix owned 250,717 shares of common and 160,320 shares of 6% convertible preferred. Kirby's nominees were elected as directors at the Alleghany annual meeting on May 2, 1960.

In September, 1960, the Murchison brothers, with two other Alleghany stockholders, organized a committee to elect a new board of directors at the annual meeting of stockholders on May 1, 1961. Earlier in 1960, they had contracted to acquire Mrs. Young's holdings, on which they immediately obtained the voting rights; as a result of the purchase of her common stock and the conversion of preferred stock acquired from her, they obtained 1,004,221 common shares.1 Before the record date for the Alleghany annual meeting in 1961, they and their participants and associates had acquired by miscellaneous purchases of common stock (or by conversion of preferred stock or exercise of warrants similarly purchased) another 1,132,117 shares of common, and other members of their committee with participants and associates owned or had similarly acquired a further 717,632 common shares. These three items totaled 2,853,970 shares of the common stock. Meanwhile Kirby had been fighting fire with fire; on the record date he and the other participants and associates with him owned 3,303,289 shares of Alleghany common. 3,043,746 common shares represented at the 1961 meeting were not owned by either side.2 Approximately 71% of these "free" shares were voted for the Murchison slate, which won by some 854,000 votes. The tellers certified the victory on May 23, 1961; on that day the newly chosen directors elected John D. Murchison as president and chief executive officer of Alleghany. At a special meeting of IDS stockholders on July 18, 1961, Alleghany caused the election of eight new directors while retaining two others as holdovers from the IDS board that Kirby had selected; the new IDS board was under Murchison control and Clint W. Murchison, Jr. became chairman.

Sections 15(a) and (b) of the Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 to 80a-52), make it unlawful to act as investment adviser for a registered investment company or as principal underwriter for a registered open-end company except pursuant to a written contract, approved by a majority of the outstanding voting securities in the case of the investment adviser and by a disinterested majority of the directors in the case of the underwriter, which must provide, inter alia, "for its automatic termination in the event of its assignment" by the investment adviser or underwriter. In May, 1961, IDS was acting as investment adviser and as principal underwriter to Investors Mutual Inc., an open-end company, under contracts with such termination provisions. Section 15 (d) ties the knot by making it unlawful to act as investment adviser or principal underwriter under a written contract after assignment thereof. Finally, § 2(a) (4) instructs us that:

"(4) `Assignment\' includes any direct or indirect transfer or hypothecation of a contract or chose in action by the assignor, or of a controlling block of the assignor\'s outstanding voting securities by a security holder of the assignor * * *."

The gravamen of the complaint in the instant derivative action, brought by two stockholders of Investors Mutual in the District Court for the Southern District of New York, as authorized by § 44 of the Act, is that IDS continued to act as investment adviser and principal underwriter for Investors Mutual although, allegedly, the events here recounted were an "assignment." The principal relief asked was an injunction preventing further performance of the contracts allegedly terminated3 and repayment to Investors Mutual of profits and damages that had accrued since the assignment. See, e. g., Lutz v. Boas, 39 Del.Ch. 585, 171 A.2d 381 (1961). Contending that on the undisputed facts there was no assignment, IDS and the Murchisons made motions for summary judgment dismissing the complaint, which Judge Dawson granted, 231 F.Supp. 142 (1964). Although we consider the case closer than he did, we affirm.4

There is little dispute that certain of the possible forms of "assignment" listed in § 2(a) (4) must be eliminated straight away. There was no "hypothecation of a contract or chose in action by the assignor." Likewise there was no "direct * * * transfer" of a contract; IDS made no attempt to substitute another as holder of its contracts for investment advisory and underwriting services with Investors Mutual. Neither was there a "direct * * * transfer * * * of a controlling block of the assignor's outstanding voting securities by a security holder of the assignor." In the context of § 15 the "assignor" is the person rendering investment advisory or underwriting services — here IDS; and the "controlling block" of IDS has remained where it had been for over a decade — in Alleghany's treasury. The serious questions are whether there was an "indirect transfer," either of a "controlling block" or of the contracts themselves.

Since the statute requires transfer "of a controlling block of the assignor's outstanding voting securities by a security holder of the assignor," the absence of any transfer of IDS stock by Alleghany would thus, on a literal reading, be as complete an obstacle on the "indirect" as it is on the "direct" path. Yet this conclusion, it can well be argued, shows the need for avoiding such literalism in order to give some effect to the possibility, envisioned by the statute, of an "indirect" transfer of a controlling block by means such as there described. An answer might be that sufficient effect would be given by considering "indirect" to have been included to cover cases where a separate corporate layer was interposed, or some other device was used, in the absence of any significant business purpose, e. g., if ownership of IDS had been vested in a company created for the sole object of holding its stock, and a controlling block of stock in the holding company was transferred — a situation not contended to be present here, where Alleghany had existed long before its purchase of a controlling interest in IDS in 1949 and continued to have many other interests. We by no means reject this possible construction. Serious problems are created, particularly as regards stockholders having no connection with the transfer of a controlling block, if the Draconian sanctions of § 15(d) are visited upon a company, having many other purposes, that has acquired a controlling interest in an investment adviser or underwriter. Although minority stockholders in a company of the latter sort are likely to be familiar with the Investment Company Act — or may fairly be treated as if they were, it is somewhat unrealistic to suggest that the public stockholders of Alleghany, who voted predominantly with the Murchisons in the proxy contest, were on notice that a Murchison victory might impair the value of the brightest jewel in Alleghany's crown, and consequently unfair to penalize them for having done so.

However, we shall here assume, arguendo, that the definition is broad enough to include the transfer of a controlling block of the voting securities of an owner of a controlling block of the assignor's voting securities by a security holder of that owner, even when the owner is not a company created to hold the...

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