Zahn v. Transamerica Corporation

• Decision Date: 30 June 1947
• Docket Number: No. 9056.,9056.
• Citation: 162 F.2d 36
• Parties: ZAHN v. TRANSAMERICA CORPORATION.
• Court: U.S. Court of Appeals — Third Circuit

162 F.2d 36 (1947)

ZAHN v. TRANSAMERICA CORPORATION.

No. 9056.

Circuit Court of Appeals, Third Circuit.

Argued March 7, 1946.

Reargued January 21, 1947.

Decided June 30, 1947.

COPYRIGHT MATERIAL OMITTED

Samuel Handloff, of Wilmington, Del. (Samuel J. Levinson, and Frank Weinstein, both of New York City, on the brief) for appellant.

Edwin D. Steel, Jr., of Wilmington, Del., (Morris, Steel, Nichols & Arsht, of Wilmington, Del., on the brief), for appellee.

Daniel O. Hastings, of Wilmington, Del., amicus curiae.

Before BIGGS, MARIS, GOODRICH, McLAUGHLIN, O'CONNELL, and KALODNER, Circuit Judges.

BIGGS, Circuit Judge.

Zahn, a holder of Class A common stock of Axton-Fisher Tobacco Company, a corporation of Kentucky, sued Transamerica Corporation, a Delaware company, on his own behalf and on behalf of all stockholders similarly situated, in the District Court of the United States for the District of Delaware. His complaint as amended asserts that Transamerica caused Axton-Fisher to redeem its Class A stock at $80.80 per share on July 1, 1943, instead of permitting the Class A stockholders to participate in the assets on the liquidation of their company in June, 1944. He alleges in brief that if the Class A stockholders had been allowed to participate in the assets on liquidation of Axton-Fisher and had received their respective shares of the assets, he and the other Class A stockholders would have received $240 per share instead of $80.80. Zahn takes the position that he has two separate causes of action, one based on the Class A shares which were not turned back to the company for redemption; another based on the shares which were redeemed.¹ He prayed the court below to direct Transamerica to pay over to the shareholders who had not surrendered their stock the liquidation value and to pay over to those shareholders who had surrendered their stock the liquidation value less $80.80. Transamerica filed a motion to dismiss. The court below granted the motion holding that Zahn had failed to state a cause of action. See 63 F.Supp. 243. He appealed.

The facts follow as appear from the pleadings, which recite provisions of Axton-Fisher's charter. Prior to April 30, 1943, Axton-Fisher had authorized and outstanding three classes of stock, designated respectively as preferred stock, Class A stock and Class B stock. Each share of preferred stock had a par value of $100 and was entitled to cumulative dividends at the rate of $6 per annum and possessed a liquidation value of $105 plus accrued dividends. The Class A stock, specifically described in the charter as a "common" stock, was entitled to an annual cumulative dividend of $3.20 per share. The Class B stock was next entitled to receive an annual dividend of $1.60 per share. If further funds were made available by action of the board of directors by way of dividends, the Class A stock and the Class B stock were entitled to share equally therein. Upon liquidation of the company and the payment of the sums required by the preferred stock, the Class A stock was entitled to share with the Class B stock in the distribution of the remaining assets, but the Class A stock was entitled to receive twice as much per share as the Class B stock.²

Each share of Class A stock was convertible at the option of the shareholder into one share of Class B stock. All or any of the shares of Class A stock were callable by the corporation at any quarterly dividend date upon sixty days' notice to the shareholders, at $60 per share with accrued dividends.³ The voting rights were vested in the Class B stock but if there were four successive defaults in the payment of quarterly dividends, the class or classes of stock as to which such defaults occurred gained voting rights equal share for share with the Class B stock. By reason of this provision the Class A stock had possessed equal voting rights with the Class B stock since on or about January 1, 1937.

On or about May 16, 1941, Transamerica purchased 80,160 shares of Axton-Fisher's Class B common stock. This was about 71.5% of the outstanding Class B stock and about 46.7% of the total voting stocks of Axton-Fisher. By August 15, 1942, Transamerica owned 5,332 shares of Class A stock and 82,610 shares of Class B stock. By March 31, 1943, the amount of Class A stock of Axton-Fisher owned by Transamerica had grown to 30,168 shares or about 66 2/3% of the total amount of this stock outstanding, and the amount of Class B stock owned by Transamerica had increased to 90,768 shares or about 80% of the total outstanding. Additional shares of Class B stock were acquired by Transamerica after April 30, 1943, and Transamerica converted the Class A stock owned by it into Class B stock so that on or about the end of May, 1944 Transamerica owned virtually all of the outstanding Class B stock of Axton-Fisher. Since May 16, 1941, Transamerica had control of and had dominated the management, directorate, financial policies, business and affairs of Axton-Fisher. Since the date last stated Transamerica had elected a majority of the board of directors of Axton-Fisher. These individuals are in large part officers or agents of Transamerica.

In the fall of 1942 and in the spring of 1943 Axton-Fisher possessed as its principal asset leaf tobacco which had cost it about $6,361,981. This asset was carried on Axton-Fisher's books in that amount. The value of leaf tobacco had risen sharply and, to quote the words of the complaint, "unbeknown to the public holders of * * * Class A common stock of Axton-Fisher, but known to Transamerica, the market value of * * * the tobacco had, in March and April of 1943, attained the huge sum of about $20,000,000."

The complaint then alleges the gist of the plaintiff's grievance, viz., that Transamerica, knowing of the great value of the tobacco which Axton-Fisher possessed, conceived a plan to appropriate the value of the tobacco to itself by redeeming the Class A stock at the price of $60 a share plus accrued dividends, the redemption being made to appear as if "incident to the continuance of the business of Axton-Fisher as a going concern," and thereafter, the redemption of the Class A stock being completed, to liquidate Axton-Fisher; that this would result, after the disbursal of the sum required to be paid to the preferred stock, in Transamerica gaining for itself most of the value of the warehouse tobacco. The complaint further alleges that in pursuit of this plan Transamerica, by a resolution of the Board of Directors of Axton-Fisher on April 30, 1943, called the Class A stock at $60 and, selling a large part of the tobacco to Phillip-Morris Company, Ltd., Inc., together with substantially all of the other assets of Axton-Fisher, thereafter liquidated Axton-Fisher, paid off the preferred stock and pocketed the balance of the proceeds of the sale. Warehouse receipts representing the remainder of the tobacco were distributed to the Class B stockholders.

Assuming as we must that the allegations of the complaint are true, it will be observed that agents or representatives of Transamerica constituted Axton-Fisher's board of directors at the times of the happening of the events complained of, and that Transamerica was Axton-Fisher's principal and controlling stockholder at such times. It will be observed also that jurisdiction in the suit at bar is based upon diversity of citizenship and jurisdictional amount. In such a suit the conflict-of-laws rule of Delaware requires the District Court of Delaware to refer to the law of the State of incorporation to determine the extent and nature of relationships between corporation and stockholder, corporate officer or director and stockholder and between stockholders inter sese. See Skillman v. Conner, 8 W.W.Harr. 402, 193 A. 563, and Black & Yates v. Mahogany Ass'n, 3 Cir., 129 F.2d 227, 233, 148 A.L.R. 841. As was well stated by the court below in Geller v. Transamerica Corporation, D. C., 53 F.Supp. 625, 629, 630, "* * * under the Delaware conflict of laws rule, the law of the place of the wrong determines the quantum of the breach of duty. * * * It would seem that the place of wrong is where the final act occurred which establishes liability." This court approved that reasoning by affirming per curiam the decision. See, 3 Cir., 151 F.2d 534.

The loci of the events complained of in the instant case are not set forth in the complaint. In Black & Yates v. Mahogany Ass'n, 129 F.2d at page 233, we stated, "We think that in the absence of allegations as to the place or places where the acts complained of occurred, the court below would have been entitled to assume that these operative facts took place within the State of Delaware," viz., the state of the forum. It is necessary therefore to assume that the events complained of took place within the State of Delaware. The law of Kentucky determines the existence of fiduciary duty, or the lack of it, between Transamerica (as the board of directors of Axton-Fisher, as its officership or as its controlling stockholder) and Axton-Fisher's minority Class A stockholders, and the law of Delaware determines the extent of the breach of fiduciary duty, if any.

Transamerica leans heavily upon the decision of the Court of Appeals of Kentucky in Taylor v. Axton-Fisher Tobacco Co., 295 Ky. 226, 173 S.W.2d 377, 148 A.L. R. 834, and to a lesser extent upon the decision of the court below in the Geller case. The latter authority held that a majority stockholder of a corporation is at liberty to deal at arm's length with a minority stockholder who sought to sell and did sell his stock to the majority stockholder in the absence of affirmative misrepresentation or fraud by the latter. This was a correct application of the law of Kentucky.⁴ See Waller v. Hodge, 214 Ky. 705, 283 S.W. 1047, and Barth v. Fidelity & Columbia Trust Company, 188 Ky. 788, 224 S. W. 351. These decisions and that of the Geller case are not apposite under the circumstances of the...