Wilson v. Great American Industries, Inc.

• Decision Date: 12 June 1987
• Docket Number: No. 80-CV-841.,80-CV-841.
• Citation: 661 F. Supp. 1555
• Parties: Alexander WILSON, individually and as representative of all minority shareholders of Chenango Industries, Inc., other than defendants on and before October 18, 1979, Plaintiff, v. GREAT AMERICAN INDUSTRIES, INC., as a corporate entity and as a sole shareholder of Chenango Industries, Inc., Milton Koffman, Burton I. Koffman, Richard E. Koffman, as directors of Great American Industries, Inc., Chenango Industries, Inc., Joseph M. Stack as the representative of Chenango Industries in the merger between Chenango and Great American Industries, and Gary Crounse, David Keith Dyer and Sharon Lee Dyer, as Co-Executors of the Estate of David L. Dyer, Deceased, William Starner, and Anthony Mincolla as directors of Chenango Industries, Inc., Defendants.
• Court: U.S. District Court — Northern District of New York

661 F. Supp. 1555

Alexander WILSON, individually and as representative of all minority shareholders of Chenango Industries, Inc., other than defendants on and before October 18, 1979, Plaintiff, v. GREAT AMERICAN INDUSTRIES, INC., as a corporate entity and as a sole shareholder of Chenango Industries, Inc., Milton Koffman, Burton I. Koffman, Richard E. Koffman, as directors of Great American Industries, Inc., Chenango Industries, Inc., Joseph M. Stack as the representative of Chenango Industries in the merger between Chenango and Great American Industries, and Gary Crounse, David Keith Dyer and Sharon Lee Dyer, as Co-Executors of the Estate of David L. Dyer, Deceased, William Starner, and Anthony Mincolla as directors of Chenango Industries, Inc., Defendants.

No. 80-CV-841.

United States District Court, N.D. New York.

June 12, 1987.

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Coughlin & Gerhart, Binghamton, N.Y., for plaintiff; Peter H. Bouman, of counsel.

Schwab & Hudanich, Binghamton, N.Y., Beveridge & Diamond, Washington, D.C., for defendants; Manual Schwab, Binghamton, N.Y., John N. Hanson, John S. Guttmann, Washington, D.C., of counsel.

Hancock & Estabrook, Syracuse, N.Y., for defendant Chenango Industries; Donald Kemple, of counsel.

MEMORANDUM-DECISION AND ORDER

McCURN, District Judge.

This action has been brought by plaintiff Alexander Wilson against defendants Great American Industries, Inc. (GAI), Milton Koffman, Burton I. Koffman, Richard E. Koffman, Chenango Industries, Inc. (Chenango or Chenango I), Joseph M. Stack, Gary Crounse, David Keith Dyer and Sharon Lee Dyer as co-executors of the estate of David L. Dyer, William Starner, and Anthony Mincolla to challenge the legality, inter alia, of a joint proxy/prospectus (proxy) issued by GAI and Chenango in conjunction with a merger of the companies that occurred in 1979. As a result of the merger, Chenango became a wholly-owned subsidiary of GAI.

The complaint contains claims that a variety of federal securities laws were violated due to alleged misrepresentations and omissions in the proxy. The complaint also contains a pendent New York State law claim involving an alleged breach of fiduciary duty by the Chenango board of directors in voting to approve the merger with GAI.

The court has previously granted the plaintiff's motion for class certification and denied the parties' motions for summary judgment. Trial began on February 11, 1987 and concluded on March 5, 1987. At the conclusion of the trial, and for reasons stated on the trial record, the court dismissed the plaintiff's federal securities law claim based on an alleged violation of 15 U.S.C. § 77k (Section 11 of the Securities Act of 1933) and the pendent state law claim. This memorandum opinion, which for convenience will intertwine factual findings with legal conclusions, will address the remaining claims and is issued by the court in accordance with Fed.R.Civ.P. 52(a).

Background

The basic chronology of events leading up to the merger of GAI and Chenango has never been the subject of serious dispute by the parties. The court does note, though, that the corporate structure of GAI has changed dramatically since the time of the merger. The company, whose shares were previously traded on the American Stock Exchange, has since the time of the merger, gone private. However, as that change has little, if any, relevance to the issues before the court, the status of GAI, as well as of the other parties, will be addressed as it existed at the times relevant to this action.

GAI was incorporated in Delaware and is based in Binghamton, New York. It has a number of subsidiaries that are involved in a wide range of enterprises, from the manufacturing and marketing of closed cellular rubber products to the sale of scuba equipment. At times relevant to this action, Milton Koffman was Treasurer and Secretary of GAI and a member of its board of directors. He also served as a director of Chenango. Burton Koffman was President of GAI and Chairman of its board of directors. Richard Koffman was a GAI board member as well. The Koffmans, and interests that they controlled, owned approximately twenty-eight percent of GAI's outstanding shares at the time of the merger. They also owned the same percentage of Chenango's shares.

Prior to the merger with GAI, Chenango was a New York corporation based in Vestal, New York. The company was founded in 1967 by Joseph Stack, and its shares were traded over the counter. Chenango, which as a company has generally been involved with the electronics and computer industries, is known as a "job shop." It does not design its own products, and it has no engineering department. Rather, the vast majority of its business comes from installing electrical components on circuit boards for large corporate customers such as IBM.

At the time of the merger, Joseph Stack was President of Chenango and Chairman of its board of directors. Gary Crounse was Chenango's Vice-President and General Manager and also served on the board. David L. Dyer, who is now deceased, was a partner in the Binghamton law firm of Levene, Gouldin & Thompson. He was Chenango's Secretary and General Counsel and a member of its board. As will be addressed shortly, on occasion, Dyer and his law firm represented the Koffmans and some of the companies that they controlled. William Starner was Chenango's Sales Manager and a board member, and Anthony Mincolla was a private businessman and a Chenango board member.

The process that culminated in the merger of GAI and Chenango began in June of 1978. Joseph Stack believed that in order for Chenango to grow, it needed to become part of a larger company with greater resources. He had known the Koffmans for many years, and he began discussing with Milton Koffman the possibility of merging Chenango with GAI. Milton Koffman's initial reaction to the idea was favorable, and he in turn discussed it with several GAI board members. They also found merit to the idea of merging the companies, and GAI began to formally study the possibility of a merger.

GAI officials examined Chenango's business and financial condition and reported to GAI management on their findings. On October 20, 1978, Milton Koffman, Burton Koffman, and William Lyons, who is not a defendant in this action, met in their capacity as GAI's executive committee. At that meeting, they decided to recommend to the GAI board that the company give serious consideration to the idea of merging with Chenango. Some of the conditions of a potential merger were discussed, and Stack, who was later informed of the substance of the meeting, generally posed no objections to the conditions. One area with which he was concerned, however, involved the tax consequences of the merger for Chenango shareholders. Stack had a strong preference that any merger should result in a tax-free exchange for his shareholders, and he made his preference known to the GAI board.

On November 14, 1978, the entire GAI board met to consider the merger but concluded after some discussion that further review was warranted before any final decision could be reached. At a meeting on January 30, 1979, the board, absent the Koffmans, who were Chenango shareholders, decided that a merger would be beneficial to GAI, and a special committee was appointed to negotiate the final terms of the merger. Those negotiations continued until the spring of 1979. Finally, at a board meeting on June 18, 1979, the GAI board formally authorized the merger with Chenango.

Stack was Chenango's sole negotiator for the merger, and he apparently did not apprise the other Chenango board members of much of what was transpiring. Although Stack did testify that he did discuss the merger with the other board members, it is clear to the court that by the time of the June 25, 1979 Chenango board meeting, the other Chenango board members were not well informed of many of the details regarding the merger. After Stack made a presentation to the board at that meeting, its members obviously concluded that they had sufficient information to vote on the merger. They did so, by giving their approval to the merger with GAI.

On June 28, 1979, Stack and Burton Koffman entered into a formal agreement to merge Chenango into GAI. Subsequently, the proxy that is the subject of this action was prepared, and it was sent to Chenango's shareholders on September 27, 1979.

The basic terms of the merger were as follows: (1) GAI acquired Chenango for the book value of its stock, which totaled approximately $1,200,000; (2) Chenango's shareholders exchanged their Chenango shares, which individually had a book value of $4.00, for newly issued GAI Series B preferred stock with a $10.00 per share par value. Accordingly, the exchange was made at a rate of two and a half Chenango shares for each share of GAI Series B preferred; (3) GAI Series B preferred stock would pay a six percent annual dividend; (4) GAI Series B preferred stock could be converted into GAI common stock at a rate of six Series B preferred shares for five shares of GAI common stock; (5) GAI had the right to redeem Series B preferred stock for $10.00 per share after five years; and (6) Chenango shareholders who owned fewer than 110 shares could receive $5.00 per share instead of exchanging their stock for GAI Series B preferred.

A meeting of Chenango's shareholders was held on October 18, 1979 in order for the shareholders to vote on the merger. The plaintiff, along with the majority of the other shareholders, voted in favor of the merger. Five shareholders, who owned 4,500 of Chenango's 300,777 outstanding shares, dissented. The transaction officially closed on October 31, 1979, and Chenango became Chenango II, a wholly-owned subsidiary of GAI. After the merger, an appraisal was done, and cash settlements were reached with those shareholders who dissented from the merger.

Discussion

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