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December 27, 1974

Pierre J. LeLandais & Co., Inc., et al., Plaintiffs
MDS-Atron, Inc., et al., Defendants

Brieant, District Judge.

The opinion of the court was delivered by: BRIEANT

BRIEANT, District Judge:

This action was initiated May 25, 1972 and tried before me without a jury commencing on February 11, 1974. The post-trial briefs and memoranda of the parties have been considered.

 By their amended complaint filed June 1, 1973, plaintiffs assert numerous and variously stated claims against some or all of the defendants. The Court has subject matter jurisdiction of those claims pleaded under the federal securities laws, and pendent jurisdiction of common law claims pleaded, as well as personal jurisdiction over all of the parties except for defendant Joseph S. Stoutenburgh, upon whom personal service of the summons and complaint was never effected. *fn1"

 Plaintiffs seek to recover damages by reason of claimed breach of §§ 14(a) and 10(b) of the Securities Exchange Act of 1934; Rules 14a-9 and 10b-5, arising out of the corporate merger hereinafter described. While eight (8) separate counts or causes of action are pleaded, it is unnecessary to summarize or list them.

 A detailed pre-trial order was filed January 3, 1974. The stipulations and concessions of fact contained therein are incorporated herein by reference without specific restatement.

 The Parties.

 Plaintiffs are purchasers or successors in interest of purchasers of common stock of Atron Corporation ("Atron"), incorporated in Minnesota on November 27, 1968. Pierre J. LeLandais & Co., Inc., for purposes of this litigation, may be treated as the alter ego of Pierre J. LeLandais, whose Atron stock it acquired as beneficial owner. See Pre-Trial Order, para. 10. Intercontinental Technology & National Resources, S.A. (hereinafter "ITNR"), a Luxembourg corporation, became on or about November 18, 1969, the beneficial owner of Atron stock, originally purchased by plaintiff Research and Science Investors, Inc. ("RSI").

 RSI is a Maryland corporation which refers to itself as a venture capital fund. ITNR is an investment fund. Plaintiff Coronet Fund ("Coronet") is a partnership in which Rudi E. Ludt is general partner. It is a venture capital fund. Ludt is by occupation a professional money manager. Creative Capital Fund ("Creative") is likewise a partnership operated as a venture capital fund in which Erwin LePow is general partner. LePow's prior professional experience is that of senior vice-president of a company listed on the American Stock Exchange. Mr. LeLandais' professional experience has been that of an investment banker and stock broker.

 Plaintiffs may be classified as experienced and knowledgeable investors of the sort to whom the relatively meaningless description "sophisticated" is so often applied. Indeed, defendants claim, with some justification, that their adversaries are "super-sophisticated."

 Defendant Mohawk Data Sciences Corp. ("Mohawk") is a publicly owned New York corporation whose common stock is and was at all relevant times registered and publicly traded on the New York Stock Exchange. It is and was engaged in the design, development, manufacture and sale, or disposition by rental arrangements having many characteristics of a sale, of electronic data processing equipment to be used by the ultimate computer customer. Defendant Richard L. Karpen was from January 1st to April 30, 1971 an officer and director of Mohawk, and a director of Atron. Defendant Joseph S. Stoutenburgh was President and a Director of Atron from its inception until April 30, 1971. Thereafter, until the date of trial, he was employed by a wholly owned subsidiary of Mohawk.

 MDS-Atron, Inc. is a Delaware corporation wholly owned by Mohawk. It was formed as a corporate vehicle to effect a statutory merger of Atron whereby shareholders of Atron would acquire common stock of Mohawk, and Mohawk through its sole ownership of MDS-Atron stock would become in effect the owner of the business and assets of Atron. Atron merged with MDS-Atron, Inc., and in practical effect merged with Mohawk on April 30, 1971.

 Factual Background.

 A group of persons having special talents in the electronic data processing field, most of whom had previously been employed by Sperry-Rand, and participated thereby in the early development of "Univac", formed Atron in 1968 for the purpose of designing, developing and manufacturing computer equipment or components to be sold to original equipment manufacturers. At all relevant times, Mohawk was Atron's principal customer, to the extent of approximately 90% of sales, and in addition, Mohawk was a supplier of peripheral devices such as line printers and cardreaders to Atron for inclusion as components of Atron's systems.

 In early 1971, Mohawk owned 195,000 shares of Atron common stock, and the Mohawk Pension Trust owned 16,000 shares, making a total of 211,000 shares out of 1,090,110 shares outstanding. Mohawk acquired some of its shares as original issue, and purchased the balance in January, 1969. All Mohawk's shares of Atron were purchased without registration under the Securities Act of 1933. All were subject to transfer restrictions, pursuant to a so-called investment letter, or otherwise, which prevented sale thereof by Mohawk without registration.

 Mohawk, after January, 1971, had the contract right to terminate its purchases of Atron's principal product, and manufacture the product itself. Atron, in brief, was a single customer company, faced with the realistic possibility of losing that customer. It was operating at a substantial loss ($1,298,945.00 for its fiscal year ending September 30, 1970, and continuing during the months immediately prior to April 30, 1971), but it possessed $3,000,000.00 in uninvested cash or cash equivalent.

 Most, if not all, of plaintiffs, had acquired their shares directly or indirectly as a result of the efforts of LeLandais, or securities firms with which he had been associated. In December, 1968, Mohawk, together with other principals of Atron, purchased its first stock issue. In the course of these sales to so-called "founders", SCI Capital, Inc., a wholly owned subsidiary of LeLandais' then employer Stralem & Co., investment bankers, bought 3,750 shares. *fn2" Later, of this stock, 1,668 shares were issued to LeLandais. Each of these shares were restricted as to transfer, and bore the customary legend on the certificates to that effect. In January, 1969, Mohawk purchased 187,500 additional shares. A private placement was effected that same month, in part through the efforts of LeLandais, and it was at that time that plaintiffs Coronet, Creative, LeLandais & Co. and RSI also acquired various holdings of Atron shares, all as detailed in the pretrial order.

 A second private placement took place in September, 1969, effected by Hamershlag, Borg & Co., an investment banking firm which then included LeLandais among its members. In January, 1970 Ladenburg Thalman & Co. sold 300,000 shares to the public pursuant to a registration statement. These shares were sold in units of one warrant and two shares.

 All shareholders of Atron, except those who purchased through the Ladenburg offering, had purchased unregistered shares pursuant to so-called investment letters, given according to the custom and practice in the financial community. The Court finds that the purchaser plaintiffs had actual knowledge of the terms and conditions of their respective subscription agreements and the letters given in usual form, representing their investment intent. These plaintiffs specifically agreed with Atron that the shares to be received by them were to be restricted as to transferability and that the certificates representing these shares would carry a restrictive legend. Each purchaser represented that he or it was purchasing the Atron shares for investment purposes only, and not with a view to distribution, and agreed that the shares would not be sold unless registered with the Securities and Exchange Commission, or following receipt of an opinion from Atron's counsel that the shares could be sold without registration.

 Each of these plaintiffs, sophisticated and experienced investors, had participated in similar purchases of investment letter stock in the past, and knew the nature, extent and legal effect of their express representations and agreements with Atron placing limitations upon resale of the Atron private placement shares they purchased. *fn3"

 We must exclude plaintiff ITNR from any of the foregoing generalizations. The shares which ITNR claims to own were purchased in a block of 5,000 in connection with the September, 1969 private placement through Hamershlag, Borg & Co. These certificates were originally issued to plaintiff RSI as investment letter shares, and RSI executed the subscription agreement, which included representations of an intent to hold as an investment. These shares were "sold" to ITNR on November 18, 1969. All that ITNR acquired at that time, or held at any relevant time, was equitable ownership. No letter of investment intent was given by ITNR to Atron or to RSI. On December 9, 1969, at the request of RSI, record ownership of this stock was placed in the name of Boyd & Co., a nominee of the Schroder Trust Company in New York. Payment to Atron was made by RSI at the time of issue of the shares, when ITNR had no funds.

 On or shortly after September 17, 1969, Stoutenburgh, then President of Atron, received a letter (Exhibit 32) from the attorney for RSI who advised that his client

"expects that it will transfer these shares to a new foreign investment company to which RSI expects to act as Investment Counselor. I understand that John French has discussed this matter with you, and I have discussed it with David Finkelman of Stroock & Stroock & Lavan. The transferee would take the shares, of course, subject to the rights and obligations of an Investor as stated in the Stock Purchase Agreement. Will you please have an officer of Atron execut the duplicate of this letter enclosed herewith to indicate that Atron agrees to this arrangement.
The name of the foreign investment company is Intercontinental Technology & Natural Resources S. A. Its custodian in the United States is Schroder Trust Company, which usually requests that securities carried by it be registered in the name of its nominee, Boyd & Co."

 Stoutenburgh, acting for Atron, endorsed a carbon copy of the above letter "receipt acknowledged". The Court interprets this acknowledgement of receipt to indicate agreement or acquiescence in the transaction by Atron, but finds no particular legal significance therein.

 On Deecmber 9, 1969 Boyd & Co., as nominee of Schroder Trust Company, did become the holder of record of ITNR's shares. With respect to proxy solicitation material a corporation is entitled to deal in all respects with its shareholders of record. See Vol. II, Loss, Securities Regulation, p. 876, and Vol. 5, Fletcher Cyclopedia Corporations, §§ 2007, 2053. If further authority be required for this simple proposition, see 17 CFR 240.14a-3(12)d, which became effective December 20, 1974. Adoption of this regulation by the Commission is some evidence that no such practice was required in 1971. *fn4"

 In 1971, a corporation such as Atron was not required to concern itself with whether nominees acting for offshore equitable owners of stock discharged their duties adequately, or communicated properly or sufficiently with their principals. When the owner of stock elected not to become the holder of record, but to place legal title in a nominee or custodian, or, as here, the nominee of a custodian, he accepted the risks consequent thereon. As will be seen below, ITNR at a critical point, "failed to get the word" from Atron or Mohawk, and was damaged as a result.

 The Merger Proposal.

 But, we are ahead of our story. We turn back to January 29, 1971, when, at Mohawk's invitation, Atron management met with officers of Mohawk, and agreed, subject to the approval of Atron's shareholders, that a merger would be proposed.

 The Court finds nothing inappropriate about this suggestion, or its timing, or the way in which it was presented. There were good business reasons for the merger, both from the point of view of Mohawk and from Atron's position. Mohawk had the opportunity as a result of the merger to turn its restricted shares in Atron, a corporation undergoing a substantial monthly operating loss, into assets which had a net book value of approximately $4,300,000.00, of which $3,000,000.00 consisted of cash equivalents. Mohawk, together with its pension trust, owned approximately 19% of Atron.

 Generally accepted principles of corporate democracy, which need not be amplified here, permit the shareholders to propose and vote upon a merger transaction, and grant to dissident minorities the right of appraisal. The Court finds no significance in the facts, taken separately or together, that the subject of a merger was tendered to Atron by surprise, two days following Atron's annual meeting of shareholders which had been attended by Mohawk; that the subject was raised with no prior notice; that the Atron officers agreed forthwith, and set the exchange ratio of one share of Mohawk for four shares of Atron, that Ladenburg Thalman & Co., then considering itself Atron's investment banker, objected strenuously to the merger at first; that the final terms were agreed upon in the first and only discussion; and that neither Atron nor Mohawk made any independent study or appraisal of the proposed merger; or that Atron made no attempt to seek out other more favorable merger partners.

 As previously noted, there were good business reasons for the merger. The parties had a right to merge. Even if it be concluded that the management of Atron acted hastily, this, under the entire circumstances of the case, was not inappropriate, and as noted, those who are aggrieved may vote against the proposed merger and exercise the appraisal rights granted to them by the statutes of Minnesota and most states, to receive the value of their shares in cash.

 The agreement in principle to merge was made public immediately on January 29, 1971, by means of a press release. The record date for determination of Atron shareholders entitled to vote was fixed at March 26, 1971. The proxy solicitation material was mailed on April 16, 1971, for the meeting to be held at Bloomington, Minnesota on April 30, 1971.

 At the time the exchange ratio was fixed, Mohawk was selling at slightly more than four times the price of Atron. The relative market prices of the two stocks was the principal factor relied upon by the directors of Atron and Mohawk in fixing the exchange ratio. Their decision was not unreasonable. Atron faced difficulties, including an operating loss, and the possibility that its sole customer, Mohawk might, as it was permitted to do, seek a different resource, or manufacture the components itself. The market value of the Mohawk stock to be received was twice Atron's book value, two-thirds of which consisted of cash.

 The Ladenburg firm expressed initial dissatisfaction with the exchange ratio of four shares of Atron for one of Mohawk. At a meeting held March 18, 1971, Mohawk's executive vice-president, Rifenburgh, convinced Ladenburg that the merger was prudent, and indeed necessary. Ladenburg indicated then that it would support the merger and urge its clients to do likewise. Following that date, Stoutenburgh expected to receive the favorable votes of those shares owned beneficially or of record by Ladenburg, and also the votes of any public shareholders who would rely upon or seek the opinion of Ladenburg.

 On February 5, 1971, LeLandais, then affiliated with Merkin & Company, a stock brokerage house, mailed a letter and research report (Exhibit 27) to a number of Atron shareholders with whom he or his former firms had prior business relationships. The letter treats the projected merger as a fait accompli. The report neither favored nor opposed the merger, but expressed a view that Mohawk's future prospects did not justify its present high price earnings multiple, and that holders of Atron shares should consider the advisability of making sales, prior to the merger and exchange.

 On February 17, 1971, Stoutenburgh, President of Atron, visited LeLandais at Merkin's office. Although LeLandais and Stoutenburgh did not at that time enjoy cordial relations, Stoutenburgh, in order to obtain a favorable vote, desired to explain why the proposed merger was advantageous. What took place at this meeting is discussed below in connection with the claim of deception concerning "free stock" (infra, p. 28).

 On February 26, 1971, Stoutenburgh, continuing his missionary efforts, met with an officer of Morgan Guaranty Trust Company, which owned 40,000 Atron private placement shares, purchased in September 1969. After Stoutenburgh's explanation, Morgan advised that it would support the merger, and voted 40,000 shares in favor.

 Seven hundred four shareholders of record were entitled to vote 1,090,110 shares of Atron common stock, and under Minnesota law, the affirmative vote of two-thirds of the outstanding shares (726,740) was required to approve the merger. As previously noted, Mohawk, and the officers, directors and employee founders of Atron and Halsey, held approximately 455,250 shares. The proxy solicitation was mailed on April 16, 1971, and within ten days, Atron's transfer agent reported that it had received proxies voting 770,649 shares in favor of the merger, and only 2,740 shares against. There was then no known organized opposition to the merger, and all persons including LeLandais, Ladenburg and Morgan, who had or controlled substantial positions, had supported the merger.

 The "Free Stock" Deception.

 Plaintiffs seek to recover on two separate theories, the first of which is the so-called "free stock deception" theory. Briefly stated, plaintiffs claim that they were deceived by the written proxy solicitation materials (Exhibit 18), and also by oral representations made on behalf of defendants to plaintiffs either directly or through their group leader, LeLandais, into believing they would receive unrestricted Mohawk stock on the merger.

 At the time of public announcement of the proposed merger, and thereafter, approximately 71% of the outstanding shares of Atron stock were restricted by investment letter. Nothing was said by Atron or Mohawk in the press release announcing the proposed merger about the effect, if any, of the merger on these investment letter restrictions. The proxy statement, dated April 16, 1971, was received by all plaintiffs except ITNR, within a few days after its date and read. Plaintiffs found their argument in part on a contention that the proxy statement " implicitly. . . stated that all holders of Atron stock would receive freely transferable Mohawk stock" (Plaintiffs' Post Trial Memorandum, p. 8). There is no substance whatever in this argument. The provisions of the proxy statement, upon which reliance is placed, are found on pages 5 and 9 of the proxy statement. On page 5 it is stated that:

"Certificates for Atron common shares should be exchanged for Mohawk certificates prior to sale or disposition since Atron certificates will not constitute good delivery of Mohawk common stock on the New York Stock Exchange."

 Plaintiffs claim that they inferred from this indisputably correct and relatively standard boiler plate language, that Atron was informing them that the transfer agent will exchange Atron certificates for Mohawk certificates which will be in form satisfactory for delivery in transactions with member firms, that is to say, unrestricted and without any legend. There is no basis for drawing this conclusion. Atron did have considerable unrestricted stock outstanding. The restrictions and representations contained in the investment letters are self-executing, wholly without regard to whether the certificates bear a restrictive legend. The restrictive agreements or investment letters were clear, and their traditional meaning well known to plaintiffs. The Atron stock had been held by plaintiffs for relatively short periods. Plaintiffs each had substantial experience in dealing with restricted stock purchased from other issuers. It was generally known in 1971 by such investors that a merger was foreseeable when the state of mind represented to exist in their investment letters came into being, and that the mere occurrence of a subsequent merger is not one of the accepted changes of circumstances upon which counsel may found an opinion relieving parties to an investment letter therefrom and approving sale without registration. If plaintiffs drew the contrary inference subjectively, which they say they did from the provisions on page 5, that inference was unwarranted and unreasonable, and is no basis upon which to hold Atron or Mohawk liable for misleading proxy information released in violation of Rule 14a-9 or otherwise.

 Plaintiffs also rely on those provisions of the proxy statement devoted to dissenters' rights under the statutes of Minnesota regulating the internal affairs of corporations. At page 9 of the proxy statement, Atron shareholders are informed that dissenters may obtain "the fair cash value" of their shares. No distinction is made between restricted and unrestricted Atron stock in this paragraph, and plaintiffs assert that because the information concerning dissenters' rights "does not state that fair cash value would be reduced as a result of any transfer restrictions," the reasonable reader is entitled to infer that in appraising dissenters' stock, all would be considered unrestricted. This latter proposition appears valid. We are cited to no provision of Minnesota law which would permit or require that stock of a dissenter, restricted as to transferability, would be valued less than unrestricted stock. In a proceeding to appraise the shares of dissenters in New York, mere market value, concededly higher where a corporation is publicly traded, for unrestricted stock than for restricted shares, is not the sole criterion in fixing value, nor is it even a major factor. Most courts applying statutes in pari materia with the Minnesota provisions, have long held that the value of shares where dissenters' rights are exercised in connection with a corporate merger is their full and fair investment value, taking into consideration that:

"Offers for merger and consolidation are likely to be made to a corporation and accepted by it when the market price of its stock is depressed in relation to certain other valuation criteria . . . Therefore, limiting the dissenter to the market price of his shares may enrich the majority at his expense. * * * [The] theory of the dissenter's claim is that he desires a continuation of his investment unaffected by the change.
The resultant valuations have generally concentrated on three principal elements: (1) net asset value; (2) market value; and (3) investment (or earnings) value. Most courts have considered all three . . ." 79 Harv. ...

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