The opinion of the court was delivered by: POLLACK
This case is on remand from the Court of Appeals to determine the quantum of compensatory damages due to Chris-Craft Industries, Inc. (CCI or CC herein) from the defendants who were not dismissed from this suit and to include in the judgment an injunctive provision barring Bangor Punta Corporation (BPC or BP herein) from voting for a period of at least 5 years the Piper shares it obtained through purchases for cash and by an exchange offer which did not comply with the securities laws.
Briefly, the Court of Appeals held herein that where a successful contender for control of a target corporation has attained part of its majority of the voting shares of the target corporation by purchases made in violation of the securities laws, the defeated contestant for control, although it neither purchased any securities from its competitor nor was deceived by any acts or statements of the latter, was entitled to sue the winner for damages as may be shown, measured by the reduction, if any, in the appraisal value of its shares of the target corporation when its opponent's position as a majority owner became established.
The right to sue and to claim such damages was accorded to encourage and implement the enforcement of the securities laws through private litigation and to deny to a securities law violator the fruits of obtaining shares of stock illegally, even though the unsuccessful contender was not induced by its competitor to enter the contest or to become a purchaser of the shares of the target corporation. The harm done to the defeated contestant according to the Court of Appeals is not that it had to pay more for the stock it bought but that it obtained less stock than it needed for control, and this irrespective of whether it be shown that it could in fact have obtained control if there had been no interference with its opportunity.
Twice in the main opinion on appeal, it was clearly stated that, although there was an interference with CC's opportunity to obtain control, CC failed to establish that it could otherwise have succeeded in obtaining enough shares to give it control.
We agree with the district court's finding that CCI failed to show with reasonable certainty that it would have obtained a controlling position in Piper had it not been for the violations of the securities laws by BPC and First Boston. 480 F.2d 341, at 373.
We cannot say that CCI would have obtained a majority of Piper stock had BPC not violated the law, . . . 480 F.2d at 378-79.
The Court of Appeals pointed out that "the questions presented are of first impression", 480 F.2d 341, at 379, and as a moment's reflection will show, in ascertaining the damages called for, the appraisal mandated by the Court of Appeals requires the use of hypothetical figures and values. The parties constructed and theorized such figures and values from circumspectly selected data to supply their damage estimate contentions. Not surprisingly, each side charges the other's expert witnesses with internal factual inconsistencies. The Court, in a sense, agrees in the main with both parties.
The Court of Appeals set forth the damage issue for this Court as follows:
The measure of damages should be the reduction in the appraisal value of CCI's Piper holdings attributable to BPC's taking a majority position and reducing CCI to a minority position, and thus being able to compel a merger at any time. 480 F.2d at 380.
Controversy produced by the mandate has arisen in part from perplexity in grasping its concept and forging a rational method of application. The words used are capable of a variety of interpretations and shadings, as the parties have demonstrated in their respective briefs, and they have put this Court to the difficult choice between following the strict literal meaning of the words and the broader remedial intent evidenced by the general thrust of the appellate decision. The task of reconciling the often conflicting results stemming from each course, has in turn produced as many complexities as it has clarified. Additionally, the quantification of unliquidated damages is hardly an exact science; computation thereof is accomplished basically by estimation and inference. See generally Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264-65, 90 L. Ed. 652, 66 S. Ct. 574 (1946); Columbia Pictures Industries, Inc. v. American Broadcasting Companies, Inc., 501 F.2d 894 (2d Cir. 1974) (slip op. at 4667); Crane Co. v. American Standard, Inc., 490 F.2d 332, 343 (2d Cir. 1973) (damage computations "demand prodigies of prophecy and measurement beyond the capacity of jurors and perhaps of a judge").
The damage inquiry herein, naturally enough, called for expert testimony to assist in the evaluation of the manner and extent to which CC had been damaged by the violations established. The parties took many months to prepare for the hearing on damages. The selection and preparation of their experts was obviously carefully orchestrated; indeed, it would be naive to assume that the experts were selected and proceeded without regard to the interests of the party who called them. Rather, the record clearly reflects that by and large the experts were result-oriented, a fact which tended to restrict their contribution to something less than a full view of the damage problem and to make their results fall short of meeting the full scope of the real questions to be decided.
As a general concept, both parties agree that CC's damages must be measured by comparing the value of its Piper holdings prior and subsequent to BP's acquisition of majority ownership. The disagreement surfaces, however, in the differing paths which the parties take in reaching a valuation.
Preliminarily, there is a deep dispute over the base from which the CC ownership is to be valued for the damage inquiry. BP suggests that no injury occurred until the moment immediately preceding its acquisition of majority ownership. CC, however, argues that its Piper stock should be valued as if CC was the owner of 41%, and BP owned 31% of Piper.
Neither BP nor CC, however, have fully addressed the purpose of the mandate in their analysis of the inquiry before the Court. The Court of Appeals' determination that BP unlawfully purchased 14% of the Piper shares suggests that the 14% must be effectively "discarded" by BP; indeed, the injunction ordered by the Court of Appeals is aimed at effectively freezing the voting of that stock for a significant period. Without that 14%, BP would have owned but 37% on September 5, the date it gained a majority. CC, meanwhile, would have held at least 42%, the amount it in fact ended up with on that date. Since the inquiry here is to determine the damage suffered by CC attributable to BP, it is therefore appropriate to determine what the value of CC's block of stock would have been worth on September 5
absent BP's illegal conduct, i.e., if CC on that date had led in the contest 42% to 37%. In turn it must be determined how that value was affected by BP's taking a majority position and reducing CC to a minority position.
The methodology of that quantification is by no means simple. The Court of Appeals directed this Court to measure the "reduction" in the "appraisal value" of CC's Piper holdings attributable to BP's unlawful conduct. BP, therefore, insisting that the instructions must be literally followed, would have this Court consider BP's merger power and look only at whether there was any reduction in the appraisal value of the Piper stock in the context of a statutory appraisal proceeding, i.e., the amount that a Court would have awarded a Piper stockholder in a statutory appraisal proceeding on September 5, 1969.
CC, on the other hand, argues that BP's literal interpretation of the mandate and any use of the concepts of a statutory appraisal would render the Court of Appeals' decision nugatory. CC argues that BP's interpretation would erase any difference in the statutory appraisal value of the Piper shares measured on September 5 just prior and then subsequent to BP's gaining majority ownership.
CC's reading would jettison the measured phrasing of the Court of Appeals' mandate. It must be presumed that the talisman, "appraisal value", was chosen purposefully. The words so used must be viewed in the legal context in which they appear in the mandate. The Court of Appeals associated the reduction of the appraisal value to be found with BP's "being able to compel a merger at any time."
If the word "appraisal" is to be considered in its more colloquial meaning, i.e. "to fix a price . . . as an official value" (Oxford English Dictionary, 3d Ed. 1965), the phrase "appraisal value" would be redundant. To be sure, the Pennsylvania appraisal statute eschews the term "appraisal value" in favor of the words "fair value"; nonetheless, the Pennsylvania cases, as well as the common legal usage in this Circuit and elsewhere, clearly acknowledge the significance of the term "appraisal value" (in the context of merger) as referring solely to statutory proceedings, see Lowry v. General Waterworks Corp., 26 Pa. D. & C. 2d 154 (1963); Petition of Kreher, 108 A.2d 708, 379 Pa. 313 (1954). See also Miller v. Steinbach, 268 F. Supp. 255 (S.D.N.Y. 1967) (applying Pennsylvania law). That CC could not have been forced by BP's voting power alone into such an appraisal proceeding while CC hypothetically held a five percentage-point lead over BP is of no moment. For reasons best known to it, the Court of Appeals has directed this Court to determine the "appraisal value" of CC's Piper holdings as if keyed to such a proceeding, viz., being able to compel a merger.
BP, however, has not convinced the Court with its argument that there was no "reduction" in the appraisal value of CC's Piper holdings. Other considerations could well come into play which might involve advantages from which CC was foreclosed.
Prior to the time that BP gained majority ownership, CC clearly possessed at least the opportunity to itself gain control of Piper, and this opportunity was erased once BP emerged as the holder of a majority of the Piper shares on September 5. Thus, at the moment that CC was confined to its minority ownership status, the "appraisal value" of its Piper shares was possibly reduced because of the removal of CC's opportunity to gain control of Piper and would have to be discounted to reflect the uncertainty of its position due to its dependence in some respects on BP's future conduct. CC contends that BP could be expected to choose the bottom of a business cycle to merge and force CC to seek its appraisal rights then under Pennsylvania law.
Quantifying that reduction in present value, however, is well-nigh an impossible task. It is one thing to recognize in the abstract that there has been a "reduction", but quite another to assign a value to that concept. No one can guess when, or even if, BP would ever force CC to submit to or seek a statutory appraisal or predict in what presently unforeseeable way BP might legitimately turn control to its advantage and CC's disadvantage. Indeed, the injunction ordered by the Court of Appeals expressly obviates that possibility for at least five years. BP's "power" to compel a merger is, standing alone, too speculative to quantify. It is highly doubtful that the Court of Appeals intended that this Court should engage in such guesswork. The more logical inference is that this Court should on the basis of good sense as applied to the record reach an appraisal decision making the best estimate possible under the circumstances of what "reduction" in "appraisal value" occurred.
Thus, this Court must find a value for CC's Piper holdings both before and after BP gained majority ownership. Obviously, the objective components of that value, as recognized by the experts -- such as asset value, and market value -- remained unchanged in BP's gaining a majority. The relevant block for purposes of such an evaluation is merely an anonymous 100-share block, and each of the experts so proceeded. The "value" of such a block was not altered by BP's unlawful conduct. Consequently, the only issue for determination is what premium CC's block would have commanded that disappeared once BP took "control". CC is presently in a position no different from that of any minority owner (albeit a large one) of any publicly held corporation. Only that premium representing the value of CC's opportunity to gain control has been removed. Thus, it is the removal of that premium which represents the reduction in value of CC's Piper holdings attributable to BP's acquisition of majority ownership.
The value of the plurality position
The determination of the value of CC's hypothetical "lead" of 42% to 37% (and hence the value of CC's lost opportunity to gain control) must be preceded by an estimate of the fair market value of the Piper stock on September 5, 1969. For it is elementary that whatever premium CC's stock contained expressive of its lead position and its opportunity therewith to gain control must be added to the fair market value of its holding in Piper stock on that date.
Once the fair market value is determined, the value of CC's opportunity to gain control can be evaluated by determining the value of actual possession of control of Piper to CC. That value will be a figure that must be discounted by the factors of probability of success, time, and the economic benefit of that control to CC's holdings.
The "fair market value" of Piper which must be determined is that market value of Piper uninfluenced by the fight for control.
Each of the experts attempted to formulate the fair market value of the Piper stock as of September 5. Their somewhat surprisingly narrow range of disagreement highlights the relative acceptability and uniformity of their techniques and methodologies with respect to estimating a fair market value.
The relevant testimony as to "fair market value" can be summarized as follows:
Dr. Sigmund Wahrsager, testifying for CC, determined that the fair market value of the Piper shares on September 5, 1969 would have been $52 per share. Wahrsager is a partner in the Wall Street firm of Bear, Stearns & Co. responsible for the activities of the corporate finance department, which deals with public offerings, private placements, mergers and acquisitions, tenders and evaluation of securities. Wahrsager's testimony as to fair market value reflected utilization of the same technique used by all the experts, viz., to apply a selected price-earnings multiple to Piper's earnings during the period considered. Such a computation has long been recognized as an accepted technique in determining fair market value. See, e.g., Morris v. Burchard, 373 F. Supp. 373 (S.D.N.Y. 1974); Vandervelde v. Put and Call Brokers, 344 F. Supp. 118, 150-151 (S.D.N.Y. 1972). See generally Dewing, The Financial Policy of Corporations 390-391 (5th Ed. 1953).
Professor Roger Murray, a professor of finance at Columbia University's Business School with a long list of financial credits, another of CC's experts, was somewhat more oblique in his approach. His "fair market value" computation reflected a built-in premium value for CC's lead position. However, stripped of its semantics, Murray concluded that the Piper stock, absent the control fight, would have been valued at $36.75 per share -- by far the lowest figure offered by any of the experts.
Plaintiff's remaining expert, Robert Rosenkranz, carrying responsibilities in the corporate finance area, had introduced the Chris-Craft account to his firm, Messrs. Oppenheimer ...