The opinion of the court was delivered by: WYATT
These are motions for summary judgment, the first in time by defendant and the other by plaintiffs. Fed. R. Civ. P. 56. All parties agree that there is no genuine issue as to any material fact and that summary judgment is appropriate. Each side insists that summary judgment must be for it. The conclusion reached is that defendant is entitled to summary judgment.
The action is brought under Section 10(b) of the Securities Exchange Act of 1934 ("the Act"; 15 U.S.C. § 78j) and Rule 10b-5 thereunder. Jurisdiction is claimed under Section 27 of the Act (15 U.S.C. § 78aa) and "the doctrine of pendent jurisdiction". There is no claim to diversity jurisdiction and apparently there is none in fact, plaintiffs being citizens of New York and defendant, whether treated as a New York or a Delaware corporation, has its principal place of business in New York (28 U.S.C. § 1332(c)).
The complaint in one count asks for rescission of a sale of stock by plaintiffs to defendant. The sale was made on the exercise by defendant of an option which the complaint avers was unenforceable at the time of its exercise. The complaint also avers that defendant, as purchaser, failed to disclose a material fact to plaintiffs (a contemplated public offering of Thompson stock) and that had plaintiffs known such fact they would not have made the sale.
The facts are as follows.
J. Walter Thompson Company was founded in 1864 and was incorporated in New York in 1907. At all relevant times it was the largest advertising agency in the world.
This action was commenced on May 26, 1969, defendant being described as a New York corporation, which it then was. The New York corporation, however, after March 1969 had a wholly owned subsidiary, a Delaware corporation. For reasons which will later appear, the New York corporation on June 12, 1969 was merged into its Delaware subsidiary which was the surviving corporation.
When the answer was served and filed on July 16, 1969, the answering defendant described itself as a Delaware corporation and recited the corporate events mentioned. These do not appear to be of significance here. "Thompson" will be used to refer to defendant and to its predecessor.
Plaintiff Ryan was employed by Thompson in three different periods: from 1932 through 1936; again from 1941 through 1950; and again from 1954 until January 31, 1966 when he retired for age.
Thompson had a fixed policy that the business should be owned by those who were active workers in its employ. From time to time, therefore, Thompson made available shares of its capital stock to its officers and other employees. If its policy were to be effective, Thompson had to be able to buy back its stock whenever any holder desired to sell or ceased to be an employee. Accordingly, when its shares were sold, Thompson reserved an option to repurchase; it was the fixed policy to exercise all such options in aid of the primary policy that Thompson should be wholly owned by its employees.
Ryan bought no stock in his first employment period. He did buy stock in his second employment period. He resigned from his employment on September 18, 1950 and shortly thereafter Thompson, exercising its option, repurchased his stock.
Ryan returned to the employment of Thompson in 1954. Ryan purchased capital stock from Thompson in 1956, 1957, 1960 and 1963. The purchase price, according to the practice of Thompson, was net asset value excluding any value for good will.
Effective December 31, 1964, Thompson had a retirement age of 65 for all employees.
As already noted, the shares owned by Ryan (and all other shares) were subject to an option in Thompson to repurchase in certain events. The terms of the option were expressed in the certificate of incorporation of Thompson. Among other events, Thompson had an option to repurchase the stock when Ryan ceased to be a director, officer or employee of Thompson by reason of his retirement. This option could be exercised between January 1 and March 31 of the third year after the year in which retirement occurred. The option price was specified and for common stock was the net asset value, excluding any value for good will. It was specifically provided that "in all cases" the decision whether to exercise an option was to be made by the board of directors of Thompson.
After the last purchase of shares by Ryan in 1963, he and the other directors and (apparently) the other employees executed written option agreements. The option agreement executed by Ryan was under date of June 27, 1963. The purpose and effect of this agreement was to vary (among other things, by lengthening) the option period if a stockholder ceased to be a director, officer or employee before retirement age.
Ryan became 65 years old during the year 1963 and was therefore scheduled to retire on December 31, 1964. Thompson elected, however, to continue his employment for another year. Before December 31, 1965, it appeared that Ryan required an operation and to give him certain medical benefits available to Thompson employees, the date of retirement was made January 31, 1966. This was done by written agreement under date of December 1, 1965 (signed by Ryan on December 2, 1965). This agreement provided, however, that the option period to Thompson should be the same as if Ryan had retired on December 31, 1965.
Ryan did in fact retire on January 31, 1966. At that time he owned 500 shares of Class A common stock and 1,500 shares of Class B common stock of Thompson. The option to Thompson was exercisable between January 1 and March 31, 1968.
There was a recapitalization of Thompson in April 1966 and a stock dividend in March 1967. As a result of these events, after March 1967 Ryan owned -- subject to the option -- 2,000 shares of 6% preferred stock, 1,000 shares of Class A common stock, and 4,000 shares of Class B common stock of Thompson. Ryan had paid for this stock $83,686 (according to his counsel) or $93,492.23 (according to counsel for Thompson). It is not necessary to determine the exact figure. Whatever it was, nothing was paid for good will as an element of the purchase price.
In October 1967, there was an agreement between Thompson and Ryan -- apparently oral -- under which the option period to Thompson was postponed for one year to January 1 -- March 31, 1969. This is said for Thompson to have been at the "urging" of Ryan. In any event, the postponement was a financial benefit to Ryan because, during the additional year he was permitted to retain his shares, the net asset value (and thus option price) of his common shares increased by $9 per share and there were dividends of $7,150.
In April 1968, Ryan transferred to plaintiff United States Trust Company in trust for his daughter 2,000 shares of 6% preferred stock and 2,250 shares of Class B common stock of Thompson. This is said by Ryan to have been "with the consent of Thompson". Ryan continued to own 1,000 shares of Class A common stock and 1,750 shares of Class B common stock of Thompson. The transfer in trust is of no significance here and all of the stock will be treated as owned by Ryan himself.
In August 1968, Thompson had need of additional working capital and considered in this connection a sale to the public of shares of its stock (sometimes called "going public" or to "go public"). In that month, Thompson began consultations with investment bankers. The sale of stock to the ...