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LAURENZANO v. EINBENDER

November 29, 1966

Salvatore and Laurenzano Plaintiffs-Appellants
v.
Alvin H. Einbender et al., Defendants-Respondents, and Retail Centers of the Americas, Inc., Defendant


Dooling, District Judge.


The opinion of the court was delivered by: DOOLING

DOOLING, District Judge:

The allegations of the amended complaint, seeking to rescind two transactions, would, if true, appear to state a case under state law for breach of fiduciary duty owed to a corporation. The defendants, in effecting the formal corporate action involved in completing the transactions, solicited the votes of the corporation's shareholders through a proxy statement alleged to have been false and misleading, and the defendants allegedly caused the corporation, relying on the proxy material, to acquire a large amount of its own stock at an inflated cost. Plaintiffs invoke federal jurisdiction under the Securities Exchange Act of 1934, Sections 10(b), 14(a), and 27 (15 U.S.C.A. §§ 78j(b), 78n(a), and 78aa) and the related regulations, 17 C.F.R. § 240.10b-5 and 14a-9. Defendants' objection to jurisdiction is that the proxy solicitation was needless, since the majority vote needed for approval of the transaction was in hand without any proxy solicitation, and that, in consequence, any misrepresentations in the proxy material were not, in legal contemplation, the cause of the wrongs complained of.

 Diversity of citizenship is not present, and, while Sections 12(2), 17 and 22(a) of the Securities Act of 1933 are referred to in the complaint, it is not argued that they would support jurisdiction if the cited sections of the '34 Act fail to do so.

 The motion to dismiss the action for want of jurisdiction must be denied.

 The suit is brought by two stockholders suing derivatively on behalf of Retail Centers of the Americas, Inc. (Retail) and representatively on behalf of Retail's similarly situated stockholders. The defendants are Dobin and Horne, who owned about 985,000 shares - over 70 percent - of Retail's stock until the events complained of occurred; National Industries, Inc. (National), which on October 7, 1964, bought 690,100 shares of Retail stock from Dobin and Horne, giving National voting control of Retail; and individuals active in the managements of Retail and National.

 Before October 7, 1964, Retail operated six stores, and National, through a subsidiary, controlled a group of three " closed-door membership" department stores (identified as G*E*S). The two companies were unrelated in ownership. On October 7, 1964, Dobin and Horne completed arrangements with National by which (i) Dobin and Horne sold to National just over 50 percent of the stock of Retail (690,100 shares); and (ii) Retail - then under the voting control of National - formally agreed to transfer two of its stores (separately incorporated as Buy-Rite Discount Centers, Inc.) to Dobin and Horne in redemption of the remaining twenty-odd percent (294,606 shares) of Retail's stock that they owned. On November 30, 1964, (iii) National agreed to sell G*E*S to Retail for $2,100,000 which Retail undertook to raise through a public offering of convertible debentures.

 In both the transactions involving Dobin and Horne it appears that their stock in Retail was treated as worth $4 a share; the Dobin and Horne shares were not registered on any national securities exchange (see '34 Act, § 12, 15 U.S.C.A. § 78l). The remaining 375,000 odd shares of Retail were owned by the public and were registered on the American Stock Exchange. On October 7, 1964, the closing price of the registered stock on the Exchange was $6 1/8.

 The number of shares to be redeemed by Retail was fixed, the proxy statement asserts, by determining "the fair value of the assets" of Buy-Rite, dividing that value by $4 a share, and allocating that number of shares to the redemption transaction. The rest of the Dobin and Horne shares thus fell to be allocated to the sale transaction, at $4 a share; they amounted to 690,100 shares, 50.99 percent of Retail's stock. National paid only 29% of the purchase price on October 7, 1964; it was to pay the balance on or before July 7, 1965, and the 690,100 shares were transferred to a bank under a Collateral Security Agreement to secure payment of the balance of the purchase price. Dobin and Horne put the remaining 294,606 shares in escrow, and they were shorn of voting power, until the closing of the redemption transaction.

 The agreement for the redemption of the 294,606 shares of Retail through a distribution of all the stock of Buy-Rite to Dobin and Horne required that the transaction be authorized and approved at a special stockholders' meeting of Retail. Since the sale price of G*E*S to Retail was admittedly not arrived at in arms-length bargaining, the G*E*S purchase agreement similarly required that the transaction be authorized and approved at a special stockholders' meeting of Retail. The issuance of the convertible debentures, too, required the approval of Retail's stockholders.

 The proxy statement, mailed to the Retail stockholders on December 30, 1964, declared that, "The transaction . . . involving the acquisition . . . of the remaining shares of Messrs. Dobin and Horne in exchange for all of the stock of a corporation that . . . operates two of the . . . stores, is an integral part of the plan for the acquisition by National of the controlling interest in Retail. It is therefore deemed advisable that such transaction be submitted to a vote of the shareholders of Retail . . . ." The proxy statement said further, "Since National is the owner of G*E*S shares and also holds the controlling interest in the Common Stock of Retail, it is deemed advisable that this transaction should also be submitted to the shareholders of Retail . . . ." The proxy statement noted that since the issuance of the convertible debentures was an integral part of the plan to acquire the G*E*S shares, "it is deemed advisable that this matter also be submitted to the vote of the shareholders" of Retail.

 The proxy statement advised the Retail stockholders that National owned just over 50 percent of Retail's stock beneficially and of record, that its stockholdings sufficed to secure approval of all of the matters to be voted upon, and that National had advised Retail's management that it intended to vote favorably on each of the matters. The Retail stockholders were also advised that the 294,606 escrowed shares, still owned by Dobin and Horne, could not be voted. At the special meeting, held January 14, 1965, National voted its shares for the various resolutions. Although 375,000 other shares were entitled to vote on the proposals, only the following votes additional to National's own vote were recorded: Transaction For Against Acquire the 294,606 shares 93,690 1,705 Acquire G*E*S 89,529 5,866 Issue convertible debentures 90,029 5,366

 That is, roughly a quarter of the minority shares cast votes, and they voted overwhelming for the transactions.

 The redemption transaction was closed on January 29, 1965, the G*E*S transaction was completed on February 1, 1965, and the debentures were duly sold.

 Plaintiffs' complaint analyzes the transactions as a sale by Dobin and Horne of a bare majority of Retail's voting stock to National at less than market value, a redemption of the remaining twenty-odd percent of the Dobin and Horne stock at an excessive cost to Retail through National's exercise of its control over Retail (amounting, plaintiffs assert, to National's paying a premium for the Dobin-Horne control stock out of Retail's assets), and a sale of G*E*S to Retail at an excessive price (recouping most of National's cash outlay for the control stock). Plaintiffs had earlier started a state court suit for relief against the transactions, and that suit ...


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