The opinion of the court was delivered by: MANSFIELD
MANSFIELD, District Judge.
This lawsuit arises out of dissatisfaction on the part of four (out of more than 1,300) stockholders of the George A. Fuller Company of New Jersey ("Fuller" herein), who own approximately 1/10th of 1% of its issued stock, with the decision of fellow-stockholders, who own 70.6%, to sell its business as a going concern and liquidate the corporation in accordance with the law of its state of incorporation (New Jersey) which permits such sale and liquidation upon approval by 66 2/3% of the issued shares. N.J. Stat. Ann. 14:3-5 (1939). On June 30, 1965 its business was sold to BCLM, Inc., a Maryland corporation, for $15,917,370 (or $37 per share) plus certain possible tax adjustments, pursuant to approval by Fuller's Board on April 6, 1965 and more than two-thirds of its stockholders on June 7, 1965.
In May and June 1965, before the sale, the four dissatisfied plaintiffs launched their attacks in separate suits against Fuller's directors, principal officers, and BCLM, Inc., claiming violations of the Securities Exchange Act. After denial of preliminary injunctive relief on June 4, 1965 (see Richland v. Crandall, 353 F.2d 183 (2d Cir. 1965); Klastorin v. Roth, 353 F.2d 182 (2d Cir. 1965)), plaintiffs on November 15, 1965 filed a consolidated complaint asserting that they sued derivatively, individually, and on behalf of all Fuller stockholders as a class, for rescission of the sale and for damages. The gravamen of the lengthy and prolix complaint is the claim that the officers and directors obtained stockholder approval through false proxy material in violation of § 10(b) (15 U.S.C. § 78j(b) (1964)) and § 14(a) (15 U.S.C. § 78n(a) (1964)) of the Securities Exchange Act.
Jurisdiction was asserted under § 27 of the Securities Exchange Act (15 U.S.C. § 78aa (1964)). In addition, "on the doctrine of pendent jurisdiction," plaintiffs alleged that Fuller's directors and officers had been guilty of breach of fiduciary duty to the corporation and its stockholders.
After extensive pretrial depositions, most of them before Judge Henry N. Graven, then sitting by designation, plaintiffs' demand for a jury trial was sustained with respect to their individual and class action claims for damages under the Securities Exchange Act as "Suits at common law" within the meaning of the Seventh Amendment (see Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 Sup. Ct. 894, 8 L. Ed. 2d 44 (1962)), even though joined with equitable claims. See J.I. Case Co. v. Borak, 377 U.S. 426, 84 Sup. Ct. 1555, 12 L. Ed. 2d 423 (1964). A jury trial was denied as to the balance of the claims for the reason that being equitable they did not qualify as "Suits at common law."
(See 259 F. Supp. 274.) The case was then tried to a jury pursuant to a stipulation that the record would constitute the record of the non-jury trial for purposes of resolving the latter claims, together with certain additional evidence received by the Court pertaining solely to the equitable claims. It is these latter claims that are the subject of this opinion, which will serve both as findings of fact and conclusions of law under Rule 52(a), F.R.C.P.
After a series of pretrial hearings directed principally to simplification of the issues, stipulations of fact, housekeeping matters (including premarking of hundreds of exhibits) and evidentiary rulings, the individual and class action issues were tried to a jury from November 17, 1966, to December 9, 1966.
In answer to interrogatories, the jury found that the price paid for the Fuller assets and business was not grossly inadequate (as claimed by plaintiffs) and that there was no material misstatement of fact, or omission of a material fact, in the proxy statement used to solicit stockholder approval. Thereupon the jury rendered a verdict for the defendants.
There remain for consideration the pendent jurisdiction and derivative claims tried to the Court. After reviewing the evidence, the Court accepts and adopts the jury's answers to interrogatories and finds for the defendants.
A preliminary review of some background facts is essential. For many years prior to the events in question, Fuller was one of the country's leading construction companies. It had built many outstanding structures (monuments, office buildings, banks, plants, hospitals and the like, including Lincoln Memorial, United Nations building, and the new Metropolitan Opera House in New York City). Its principal business had been such construction, which was essentially a service type of operation involving employment of large numbers of people in connection with obtaining and carrying out construction jobs. In addition to its construction business, it had in recent years also invested in some other assets related to construction. It owned a substantial stock interest in the Oklahoma Cement Company, for which it had completed a cement plant in 1962. Oklahoma Cement made and sold cement and related supplies, its business depending in part on orders received from Fuller and its subcontractors for cement used on their many construction jobs. Fuller also owned partial equity interests in several real estate ventures, including some buildings under construction by it (330 Madison Avenue, New York City; the Brunswick Building, Chicago; the Wilson Park Apartments, Santa Monica; 550 Broad Street, Newark (the construction of which had just begun in the spring of 1965)), and stock in a land development project called Mission Viejo, Orange County, California.
Fuller was managed by its Chairman of the Board, Lou R. Crandall, who was also its Chief Executive Officer; a 16-man Board of Directors, of which 8 were outside directors and 8 were officers of Fuller; and its President, William V. Lawson, and various vice presidents, under whom were its large staff of personnel in lower echelons. The company faced the problem that officers responsible for almost all of its profits were either on the verge of or past retirement age. Crandall was in his 70's. A key vice president in charge of the Chicago office had died suddenly, leaving no replacement. Four other vice presidents were near or past 65. Since Fuller was essentially a personal service type of enterprise, like a law firm or advertising agency, it depended on the ability of its officers to obtain construction business. In recent years its profits had declined. Although there were younger officers in the company, including William V. Lawson, Crandall's son-in-law, who had been elected president in 1964, they had not proven their ability to maintain the company's business.
In 1964 the defendant Cloyce K. Box, a Vice President and Director who had been responsible for the Oklahoma Cement project, attempted unsuccessfully to interest Winthrop Rockefeller and a wealthy Texas friend of the Rockefellers, Trammel Crow, in purchasing the company. Thereafter Box formed a group consisting of himself, Crow, Lawson and a company called Western Sales, Ltd., of which one Maurice Moore was the chief executive officer, for the purpose of attempting to purchase the company's business. They formed BCLM, Inc., and in January 1965 initiated negotiations with Crandall, who refused to talk price or take further steps (other than to insist upon continuation of Fuller's pension plan and retention of all employees as a unit as preliminary conditions) until the group could demonstrate that they had the cash and financing needed to consummate such a purchase, especially since news of any proposed sale could damage Fuller and its employees' morale if news leaked out and it proved abortive.
The purchasing group then sought and obtained a commitment from The Chase Manhattan Bank to loan $12,500,000 provided it had certain personal guarantees by Messrs. Box and Crow, a wealthy man; a commitment from the New York Life Insurance Company for $3,500,000 of subordinated debt on various conditions, including a partial guarantee by the Marquette Cement Manufacturing Corp. The group also made plans for the capitalization of BCLM through sale of $3,000,000 of preferred stock and $1,000,000 of common stock, the latter to be raised by sale of a 25% interest to each of the four members of the purchasing group for $250,000 apiece. Box, acting for the purchasing group, obtained from the First Boston Corporation a written opinion, based on its study of the Fuller company, that a fair and reasonable price for Fuller's net assets and business would be $37 per share.
On March 12, 1965 the purchasing group advised Crandall that they were going to offer $37 a share for Fuller's business as a going concern, a price that was described as final, and on March 16 a formal written offer was submitted. One of the conditions was that Crandall serve for a transitory period as chairman and director of BCLM, to assure continuity in handling jobs in process and maintaining customer relations.
Crandall, who was thoroughly familiar with Fuller's assets and business, considered the offer a very fair one to Fuller and its stockholders. He desired to obtain the highest possible price for its stockholders, including himself. He, together with members of his immediate family, owned approximately 37,500 Fuller common shares. On the basis of his many years of experience with Fuller and his intimate knowledge of its assets and business, he believed that the company was not worth more than $37 per share, even after allowing a few dollars per share for good will and going concern value, and that it was unnecessary, and would be wasteful, for Fuller to obtain another appraisal. Fuller common stock then traded on the American Stock Exchange at prices ranging from $31 to $35.50 per share. During 1963 the stock had ranged from $30.50 to $36.50 per share, and in 1964 from $29 to $37.75 per share.
After receiving the offer Crandall consulted, either in person or by phone, with some of the company's key directors who, like himself, were owners of large amounts of Fuller stock and whose opinions, by reason of their expertise and experience, were considered by him to be entitled to considerable weight. Among these were E. J. Beinecke, former chairman of the Board of Fuller, who owned and controlled, either personally or through foundations and close members of his family, approximately 74,260 shares, or 17% of the outstanding common stock. Beinecke was an outstanding business executive, who, in addition to having been associated with the Fuller company for 60 years, was the head of the Sperry & Hutchinson Company and a member of boards of many different companies. Other directors consulted at an Executive Committee meeting were John S. Hilson, an investment banker, income beneficiary of trusts holding several thousand Fuller shares, and member of the banking firm of Wertheim & Co., clients of which owned approximately 50,000 shares; and Charles J. Stewart, former president of Manufacturers Trust Company. Both Hilson and Stewart were members of Fuller's Executive Committee. Crandall also had extensive discussions with Hugh E. Drayer, treasurer and chief financial officer of the company, who was elected a director in April 1965. All officers and directors consulted by Crandall considered the offer to be a fair one and recommended its acceptance, Beinecke even urging Crandall to take it and not risk losing it by trying to negotiate a higher price.
Except for the foregoing discussions, the purchase offer was kept confidential until it was formally presented to the Board, since Crandall did not want to risk harm to the morale of Fuller employees that could result if the proposal were disclosed earlier and then not approved by the Board. On April 6, 1965, the Board met to consider the proposal. The meeting was attended by all members except E. J. Beinecke, who was ill, and Crandall, Box and Lawson. Since Box and Lawson were members of the purchasing group, and the proposal contemplated that Crandall would become a director and chairman of BCLM for a transitory period,
these three absented themselves. Also attending the meeting were Fuller's Treasurer and Chief Financial Officer, Hugh E. Drayer, and its legal counsel, Henry M. Marx. Each member of the Board had before him a set of documents relating to the proposal, including the sales agreement with BCLM, a proposed form of proxy and proxy statements that might be used in connection with any stockholders' meeting called to consider the proposal, the First Boston Corporation opinion that a fair and reasonable price for the company's net assets would be $37 per share or $15,885,788, and various proposed agreements by members of the purchasing group indicating that they would invest $1,000,000 of their own money in BCLM, that they expected to obtain a $12,500,000 loan from The Chase Manhattan Bank, a $3,500,000 loan from the New York Life Insurance Company, and an investment of $3,000,000 in BCLM by Western Sales, Ltd.
After discussing the proposal for about two or three hours, the Board unanimously approved it, recommending it to its stockholders, and approved a notice of a special meeting of stockholders to consider the proposal, forms of proxy and proxy statement for use in connection with the meeting, and an authorization to the officers of the corporation and its counsel to call the special meeting.
Following the April 6 Board meeting, the company's counsel, on April 14, 1965, submitted the proposed notice of special meeting, proxy and proxy statement to the Securities Exchange Commission for approval or comment in accordance with Rule 14A-6(a) (17 C.F.R. § 240.14a-6 (1964)) of SEC Regulation X14. An exchange of correspondence between the SEC and Fuller's counsel followed, resulting in a series of revisions suggested by the SEC, which were incorporated in the final draft of the notice and proxy statement. Various underlying documents were submitted to the SEC, including the First Boston Corporation's opinion letter of March 10, 1965.
At a May 17, 1965, meeting the Fuller Board approved the calling of a special meeting of stockholders for June 7, 1965, to consider the proposal and the proxy statement, recommending acceptance of the proposal, which was thereupon sent to the stockholders. On June 7, 1965, the special meeting of stockholders was held at the company's offices at Flemington, New Jersey, and 70.6% of the company's issued and outstanding stock entitled to vote voted in favor of the proposal. On June 30, 1965, the business and assets of the old Fuller company were sold to BCLM, Inc.
With this brief account of the main events leading up to the sale of the old Fuller company's business, we turn to the derivative claims tried to the Court: (1) That the defendants, in approving the sale and recommending it to the stockholders, violated their fiduciary obligations to the corporation and its stockholders; and (2) That the defendants obtained the approval of the stockholders through use of a proxy statement that violated the corporation's rights under §§ 10(b) and 14(a) of the Securities Exchange Act.
THE CLAIMS OF BREACH OF FIDUCIARY DUTY
The first of these claims - the charge that the defendants were guilty of a breach of fiduciary duty - is three-pronged, resting on plaintiffs' contentions (1) that the sale price was so grossly unfair, inequitable and inadequate, and so far below the true value of the assets and business of the company, that its approval by the defendant-directors constituted a fraud upon the corporation and its stockholders; (2) that the defendants owed a duty to continue the corporation in business in the absence of a showing by them of necessity to discontinue; and (3) that the defendants owed a duty not to accept from the purchaser an indemnity that was conceived and entered into after the sale had been approved by the stockholders and after this litigation had been instituted.
Before considering the proof as to the claims of breach of fiduciary duty, reference to a few fundamental principles is important.
The defendant-directors owed an uncompromising duty, as fiduciaries, to protect the interests of the corporation and its stockholders and to exercise the same degree of care that an ordinary prudent man would exercise in his own behalf to insure that the proposed sale of Fuller's business and assets would be entirely fair to the stockholders and that the consideration to be received was adequate and equitable. Litwin v. Allen, 25 N.Y.S. 2d 667 (Sup. Ct. 1940); Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1 (1928). Since the purchasing group included two officers and directors of Fuller, it was particularly essential that the directors be convinced that the transaction neither have the purpose nor the effect of favoring them at the expense of Fuller and its stockholders, even though the interest of Lawson and Box as purchasers and the fact that Crandall was to become a director and transitory chairman of the board of BCLM might be fully disclosed to the stockholders when their approval was solicited. Litwin v. Allen, supra. The stockholders had the right to demand and expect from the defendants a completely honest and undivided loyalty in the exercise of their judgment as to whether the transaction was in the stockholders' interest.
On the other hand, there was no mechanical legal requirement that each director devote a specific number of days, hours, or minutes to consideration of the transaction (as plaintiffs seem to suggest) provided the time spent and consideration given to the matter was reasonable under all of the circumstances, taking into consideration the fact that two of the directors were members of the purchasing group. Certain directors, by reason of their intimate familiarity over many years of experience with Fuller's assets and business, could probably satisfy their obligations within a very short period of time. Others brought with them broad experience as financiers and businessmen which enabled them to size up this type of proposal and exercise mature judgment within a relatively short time, especially in view of their knowledge of the marketplace for such businesses. Still others, who had no expertise in such specialized aspects as taxes, accounting or the law, would of necessity be forced to rely with respect to such technical matters upon advice received from experts in such fields. The whole purpose of having such a variegated group as members of a board is to gain the benefit of their pooled experience, without expecting that each will apply identical talents and without requiring each to analyze every pertinent specialized document. Nor is there any mechanical legal requirement that the defendant-directors insist upon a certain type of appraisal or valuation in determining the fairness of an offer for the purchase of the company's assets and business, provided it appears that under all the circumstances they exercised reasonably prudent judgment in reaching their decision.
(a) The claim of gross inadequacy of price.
Plaintiffs allege, in support of their claim of breach of fiduciary duty, that the price was not only grossly inadequate, but that it represented the fruits of a scheme between Crandall, Lawson and Box to secure the company's business and assets for themselves at the expense of the other Fuller stockholders. The identical charges are asserted as one of the grounds for the claim that the proxy statement contained false statements in violation of the Securities Exchange Act, which was tried to the jury:
"10. In view of the fact that the corporation was a profitable and successful going concern, the purported 'reasons for sale' given in the proxy statement were false and misleading and designed to conceal the true purpose of the sale, which was solely to carry out the scheme and plan of the defendants Lawson, Box and Crandall, to enable the said defendants to acquire the benefit and value of the organized setup and the assets of the corporation as well as its going concern value and good will and in so doing to acquire the same for a price which was so grossly unfair, unjust and inequitable to Fuller and its stockholders as to constitute a fraud and to shock the conscience of the Court." (Complaint, Par. XV, subpar. 10, p. 31)
As plaintiffs concede (both in their complaint and request to charge), the term "grossly unfair, unjust and inequitable" or "grossly inadequate" does not refer to a price or consideration that might be simply less than the actual value of the property. It means, and was intended by the plaintiffs to mean, a price so far below the actual value of the property and so unconscionably and unreasonably low that it would shock the conscience.
Clark v. Freedman's Trust Co., 100 U.S. 149, 25 L. Ed. 573 (1879); Mandel v. Liebman, 303 N.Y. 88, 100 N.E. 2d 149 (1951); In re Downham Co., 35 Del. 294, 165 Atl. 152 (1932). Since the above-quoted claim was tried to the jury, the following interrogatory was put to it:
"Was the price to be paid for the assets and business of the George A. Fuller Company of New Jersey under the proposal submitted to its stockholders on June 7, 1965, grossly inadequate?"
to which the jury answered "No".
The Court not only accepts the jury's finding but reaches the same conclusion on the basis of its independent examination of the evidence. The value of the assets and business of the old Fuller company as a going concern was the subject of voluminous proof at trial, including testimony of the defendants and several expert witnesses, comparisons with the value of other large construction businesses, analyses of the company's earnings and of the market price of its stock, expert appraisals and studies made for use in this lawsuit, evaluations of prospective profits on the backlog of construction contracts on the company's books at the time of the sale, financial records of the company and of the purchasing group (including balance sheets, operating statements, earnings projections, and the like) made in 1965 before the sale, and the contemporaneous evaluation of the business made in March 1965 by the First Boston Corporation at the instance of the purchasing group.
After observing a dozen witnesses testify at length and carefully reviewing all of the proof, the Court finds that the price of $15,885,728, plus certain possible tax adjustments, was not grossly inadequate, inequitable or unfair to the corporation or its stockholders, but that on the contrary, when the business and assets of the company are viewed as a going concern in the spring of 1965, the price and terms were fair and reasonable. It would serve no useful purpose to attempt here a detailed analysis of the mass of evidence on the subject of value. However, reference to some of the principal facts may be helpful. The Court was impressed not only with the trustworthiness and reliability of the testimony of the principal defendants and the expert witnesses Swensen, O'Keefe, Udall and Abelmann, but also by the soundness and accuracy of the data and evaluation methods used by them. In their overall evaluation of Fuller as a going concern, these defendants and Mr. Swensen of the First Boston Corporation emphasized the past market performance of Fuller common stock on the American Stock Exchange, where it was traded, as a prime indicator of the value of the business as a going concern. The price of $37 per share recommended by Fuller's management represented a premium over the then current market price of approximately $34.75 per share. For several years prior to the proposal here under review the stock had usually sold below $37 per share, its low point in the first quarter of 1965 being $31 per share, and its monthly average market price had remained below $37 per share since early 1962. The market price was not separable from the value of the business as a going concern, since it represented what willing buyers and sellers had negotiated repeatedly as the price for a proportionate share of the company's equity, including its good will, after having had available its annual reports, operating statements and other published data as to its operations. Although the stock of the company was traded lightly on the American Stock Exchange, it was traded regularly and it had not been subject to any artificially depressing or inflationary pressures, such as offers of or bids for large blocks.
In reaching their conclusion that the Fuller stock was not worth more than $37 per share, the defendants and Swensen also gave weight to other factors, tested in the world of finance. The book value of Fuller's net worth, even after making adjustments to reflect the market price of securities owned by it, was substantially below the $37 per share figure. The company's earnings trend had been downward since 1959. A comparison of its earnings with those of other large construction companies, and use of earnings multiples that were fair and reasonable under the circumstances, confirmed the fact that the market price was a fair indication of actual value. An asset analysis made by the First Boston Corporation indicated a liquidation value of $34.57 per share. It is significant that after making their analysis of the company in late February and early March 1965, the five members of the internal committee of the First Boston Corporation who had participated in its study (including some of its top officers) took a secret vote in which each independently wrote down his opinion of the value of the Fuller business on a per share basis and their opinions all fell within a range from $35.50 per share to $37.50 per share, only one of them being above $37 per share.
In contrast to the foregoing methods, the plaintiffs and their expert, Martin J. Whitman, relied upon methods which, while ingenious and imaginative, were speculative. Foremost among these was the procedure of capitalizing heavily on mere possibilities of future profits, usually on the assumption that the projected activity would be profitable, even though there were predictions in the ...