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FERRAIOLI v. CANTOR

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


November 29, 1967

Ferraioli, Plaintiff,
v.
Cantor, et al., Defendants

Bonsal, District Judge.

The opinion of the court was delivered by: BONSAL

BONSAL, District Judge.

Defendants Denison Mines, Ltd. (Denison), Goldfield Corp. (Goldfield), and General Baking Company (General Baking) move for summary judgment pursuant to Rule 56, F.R. Civ. P., dismissing plaintiff's amended complaint. Defendants' motions are denied.

 Plaintiff's amended complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the Act) (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5), and violations of Denison's fiduciary duties to General Baking and its stockholders. Jurisdiction is based upon Section 27 of the Act (15 U.S.C. § 78aa), and on pendent jurisdiction. For purposes of defendants' motions for summary judgment, the parties agree that the following facts are to be taken as true.

 Prior to February 1, 1965, Denison owned 553,900 shares of General Baking stock, constituting approximately 33% of the 1,577,755 shares outstanding, and had control of General Baking, electing its president and certain of its directors. Between February 1, 1965 and May 13, 1965 there were negotiations between Denison and Goldfield concerning the possible purchase by Goldfield of the General Baking stock owned by Denison and others associated with Denison. On May 6, 1965 the presidents of Denison and Goldfield tentatively agreed on a price of $12.50 per share for the stock, and on May 10, 1965 Goldfield's Board of Directors approved the purchase from Denison of up to 665,000 shares of General Baking at $12.50 per share and authorized Goldfield's officers to negotiate an agreement with Denison. On May 10 Goldfield delivered a letter to Denison outlining the terms upon which Goldfield would be willing to make the purchase. The terms of the purchase were worked out between May 10 and May 13, 1965, and on May 13 a written agreement was executed providing for the sale by Denison of 553,900 shares of General Baking common stock to Goldfield at $12.50 per share. The agreement was subject to approval by Denison's Board of Directors. On May 13, 1965 General Baking stockholders "associated with Denison" agreed to sell their shares to Goldfield at $12.50 per share, and Goldfield agree to purchase a total of 629,000 shares.

 At the time of the sale to Goldfield, the market price of General Baking stock was $9.00 per share. The difference between the market price and the sales price, viz., $3.50 per share, represented a premium paid for control and, as a condition of the sale, Denison agreed to deliver to Goldfield the resignations of the president of General Baking and of at least six of the thirteen members of its Board of Directors. On May 17, 1967 the Denison Board of Directors approved the sale and Denison and Goldfield made a public announcement, giving the price and quantity of stock that was sold.

 Plaintiff purchased 400 shares of General Baking stock in April and May, 1964, and on May 10, 1965 he sold his shares at $8 7/8 per share, the market price on that day. In this action, plaintiff sues on his own behalf and on behalf of all other owners of General Baking stock who sold their shares between February 1, 1965 and May 17, 1965, seeking to recover the premium paid by Goldfield for the 629,000 shares of General Baking stock that it purchased. Plaintiff did not know of the negotiations between Denison and Goldfield when he sold his stock, and had he and the other owners of General Baking stock whom he represents known of the negotiations, they would not have sold their stock. He claims that payment of a premium by Goldfield constituted a fraud upon minority stockholders of General Baking under Section 10(b) and Rule 10b-5 since they were not told of the negotiations between Denison and Goldfield and were not offered an opportunity to participate in the sale of General Baking stock at a premium.

 Moreover, plaintiff claims that Denison made it possible for stockholders of General Baking "associated with Denison" to sell their General Baking stock to Goldfield at a premium, and that these sales were made through a trust company without the names of the owners of the stock being disclosed. Plaintiff contends that defendants had a duty to make the same offer to all General Baking stockholders and not only to stockholders "associated with Denison."

 In view of plaintiff's claim that the defendants offered to some stockholders the opportunity to sell their General Baking stock to Goldfield at a premium and did not make the same offer to others, including the plaintiff, defendants are not entitled to summary judgment dismissing plaintiff's complaint. It may be that some General Baking stockholders "associated with Denison" were offered the opportunity to participate prior to plaintiff's sale of his stock on May 10, 1965. If so, the defendants' failure to offer the same opportunity to the plaintiff and other General Baking stockholders may have constituted an "act, practice, or course of business which operates or would operate as a fraud or deceit . . ., in connection with the purchase or sale of any security." Rule 10b-5(3).

 Moreover, there may be an issue as to whether the defendants, in offering the opportunity to participate to some General Baking stockholders and not to the others, were using material undisclosed information. Denison, as a controlling stockholder of General Baking, was an insider (see Cochran v. Channing Corporation, 211 F. Supp. 239 (S.D.N.Y. 1962); see generally S.E.C. v. Texas Gulf Sulphur Co., 258 F. Supp. 262 (S.D.N.Y. 1966)), and if Denison used material undisclosed information for its benefit or for the benefit of its "associates" or "tippees," plaintiff would be entitled to seek recovery under Section 10(b) and Rule 10b-5. See S.E.C. v. Texas Gulf Sulphur Co., supra. The date on which Denison offered participation to its "associates" would be a factor in determining when the negotiations between Denison and Goldfield became material information from the point of view of General Baking stockholders, if such information was material. See List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir. 1965).

 It is clear from the foregoing that there are issues of fact raised by plaintiff's amended complaint which can only be decided at trial. These include, but are not limited to, the following:

 1) Did the defendants, prior to the sale of plaintiff's stock, offer to the stockholders "associated with Denison" the opportunity to sell their General Baking stock to Goldfield at a premium?

 2) Did the negotiations between Denison and Goldfield become material information from the point of view of General Baking stockholders, and if so, when?

 3) Did the defendants or their "tippees" use material undisclosed information regarding the sale for their own benefit?

 4) If the defendants used material undisclosed information for their own benefit, or breached their duty to minority stockholders of General Baking in violation of Section 10(b) and Rule 10b-5, what damages, if any, did plaintiff sustain?

 It is not necessary for the court to reach the question of whether a controlling stockholder violates Section 10(b) and Rule 10b-5 when he sells his control stock at a premium without notifying any of the other stockholders. It is sufficient here to hold that where a control stockholder invites some but not other stockholders to participate in the sale, a claim may be stated.

 Defendants' motions for summary judgment are denied.

 It is so ordered.

19671129

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