MOORE, C.J. - The plaintiff (appellant) brought this derivative action as a stockholder of Kaiser-Frazer Corporation, (referred to as "KF") to reclaim for KF from the defendant Graham-Paige Motors Corporation (referred to as "GP") profits allegedly received by GP on the sale of 155,000 shares of KF stock within six months after their purchase by GP. The action is based upon the theory that under section 16(b) of the Securities Exchange Act of 1934 (48 Stat. 896, 15 U.S.C.A. section 78p(b) ), the seller (KF) may recover any profit made by the purchaser (GP), a so-called "insider," in the event the stock was sold after having been held less than six months. GP's position as an insider has been established upon a previous appeal (2 Cir., 1956, 232 F.2d 299, cert. den. 352 U.S. 831).
Upon the first trial the district court found that plaintiff had failed to sustain his burden of proving that profits had been realized and, therefore, decided in favor of GP (132 F. Supp. 100). This court (232 F.2d 299), holding that GP and not plaintiff had the burden of proof of showing that the profits on the sale were less than the $434,787.86 reported by GP in its income tax return, remanded with directions that the trial court make specific findings as to whether GP had made any profits and, if so, to what extent. The parties submitted the case to the same trial court on the original record which the district court reconsidered to determine whether GP in fact had sustained the burden of proving that it had not profited. The trial court found that instead of a profit GP had actually suffered a loss of $671,150 on its sale of the 155,000 shares of KF stock (149 F. Supp. 390). Plaintiff again appeals, complaining primarily that the trial court did not follow the opinion of this court on the previous appeal.
The facts are set forth in such detail in the previous opinions that they need not be repeated except as necessary to clarify the points now presented.
In late 1945, after World War II, KF and GP were engaged in the manufacture of automobiles. They shared a plant at Willow Run, Michigan. KF was a new company in the field but GP had some 146 distributors and 3,564 dealers obtained as a result of substantial expenditures. The joint operation proved to be unsuccessful and the management of both companies sought a solution of their problems. Discussions ensued between the officers, accountants and counsel for the two companies and a plan was evolved whereby the tangible and intangible assets of GP were to be transferred to KF in exchange for the issuance to GP by KF of 750,000 shares of KF stock and an undertaking by KF to pay to GP an amount equal to the principal of, and interest on, $8,524,000 face amount of GP's 4% convertible debentures due April 1956. The assets tranferred by GP to KF consisted of a substantial amount of cash and assets tangible and intangible. Because they proposed to issue stock for the acquisition, the number of shares to be given had to be fixed in relation to some dollar value. At the time of the negotiations the KF stock was selling at approximately $8 per share in the market. Market value, absent any manipulation or artificiality (and there is no proof of such a situation here), usually represents the collective judgment of the financial and investing community of the value of the property.
KF approached the valuation problem from the point of view of the net proceeds of a sale to the public of 750,000 shares of stock in the light of the then market price of $8 per share and concluded that not more than $6.50 a share or $4,875,000 would be realized from such a public offering. Accordingly, the KF directors decided that they would buy all of GP's automotive assets, accounts receivable, $3,000,000 in cash and $1,250,000 subject to adjustment in exchange for KF's undertaking to pay to GP an amount equal to GP's outstanding 4% debentures ($8,524,000), the issuance of 750,000 shares of KF's common stock and KF's assumption of GP's automobile business at Willow Run.
The transaction was consummated. Less than six months after GP had acquired the 750,000 KF shares it sold 155,000 of these shares for $6.75 a share. On its Federal income tax return GP reported a cost of $3.94 a share for the stock and a profit of $2.81 a share or a total profit of $434,787.86 on the 155,000 shares. It is this profit which plaintiff seeks to recover for KF.
Two principal questions must be resolved: (1) did GP actually realize a profit on the sale; and (2) having declared a profit on its income tax return and in its S.E.C. proxy statement, is GP estopped from asserting otherwise in this case.
In view of this court's opinion the trial court was under a duty to re-examine the facts to determine whether GP had met its burden of proof that it had not made an actual profit upon the stock sale.
Many factors enter into value. The weight to be given to these factors involves the business judgment of the bargaining parties. In the absence of fraud or self-interest, the judgments of corporate directors representing KF and GP are not lightly to be disregarded. At the threshold of the transaction the directors of KF had to determine the price to be paid for the GP assets. If KF, instead of issuing 750,000 shares of stock to GP, had paid $7,500,000 for the assets transferred because of the special and unique value which they had to KF, this dollar amount would have represented to KF and GP the value of the assets. A purchaser of scrap or a dealer in secondhand machinery might only have paid $500,000 for these assets as scrap metal or second-hand machinery and, not being an automobile manufacturer, paid nothing for the investment in name and dealer organization. But such a purchase offer under such circumstances would not be relevant. In fact, any assumption of a sale of this type would violate the fundamental concepts of proper valuation. The fair value of large industrial properties cannot be fixed by the estimated price which might be received on the auction block in liquidation. The best price would undoubtedly be offered by some company which had the greatest need for the property being sold. Only when such a purchaser were found would the seller obtain the optimum value. It is meaningless to talk in terms of a "willing seller - willing buyer" rule upon which appellant seems to found his principal argument unless there be a realistic and common sense approach to the rule. Obviously no seller is going to become "willing" until he finds the buyer who will pay the best price because of his belief that these particular assets will be peculiarly beneficial to him.
The fallacy of appellant's theory is well illustrated in his brief wherein he attacks appellees' witnesses because "neither was testifying in terms of what a willing buyer dealing at arms length would pay for the intangibles" (p. 26). Naturally a willing buyer might willingly offer nothing for the intangibles. But would the seller be as willing to accept?
In the same unrealistic vein, appellant would calculate the value of GP's property on the hypothesis that it "was unsaleable to an outside purchaser for any more than scrap value" and that a substantial part of the machinery "would have only scrap value to a purchaser not interested in securing such parts" (Applt.'s Br., p. 25). Such assumptions are neither relevant nor helpful as guides to a correct valuation. GP was not driven to sell its machinery to junk dealers or to discard its car designs and its dealer organization built up at great expense. KF recognized that there was value in these and other intangibles and issued its stock accordingly.
Appellant, as a stockholder of KF is, in effect, challenging the judgment of his own officers and directors and is endeavoring to substitute his hindsight judgment for their business judgment exercised at a critical period in the corporate lives of both KF and GP. Nevertheless, he recognizes that "The value of property which is to be fixed by a board of directors when the company issues stock for such property is the special value to the company" (Applt.'s Br., p. 28). Having asserted a generally sound principle, appellant can only avoid it by falling back on his underlying misconception that special value "is no evidence of what a willing buyer would pay" or "of the price which would be paid by the hypothetical willing buyer" (Applt.'s Br., pp. 28, 29). Again appellant completely ignores the fact that a "willing buyer" cannot buy unless there be a "willing seller" to sell for a price which he regards as fair value of the assets sold.
The principal issue on this appeal is defined in issue number 6 in the Pre-Trial order as follows:
"Was there any actual profit realized by Graham-Paige within the comprehension, intent, meaning and purview of Section 16(b) by the sale of ...