Appeal from judgment entered after bench trial in the District of Connecticut, Jon O. Newman, District Judge, dismissing stockholder's derivative action on the ground that plaintiff had failed to prove that corporation had been damaged.
Kaufman, Chief Judge, Smith and Timbers, Circuit Judges.
On this appeal from a judgment entered January 9, 1974 after a seven day bench trial in the District of Connecticut, Jon O. Newman, District Judge, dismissing a stockholder's derivative action, the essential issue is the correctness of the district court's determination that the corporation had not been damaged. For the reasons below, we affirm.
In view of the district court's clear and comprehensive statement of the facts, 393 F. Supp. 139, it is sufficient for our purpose briefly to summarize only those facts necessary to an understanding of our ruling on the essential issue before us.
The action in the district court was commenced April 24, 1964. It arose out of the merger earlier that year of several Florida companies into The New Haven Board & Carton Company (New Haven or the company). The Florida companies were owned by defendants Leon J. Simkins, Morton H. Simkins and Dorothy Simkins and their families (the Simkins). The Simkins were in effective control of New Haven. Leon J. Simkins was president of New Haven. The merger was accomplished by New Haven's issuance of 1,377,774 shares of its common stock to the shareholders of the Florida companies in exchange for all of the outstanding shares of the common and preferred stock of the Florida companies. On the exchange, New Haven stock was acquired at a price of $4.50 per share, pursuant to approval by the directors and stockholders of New Haven.
Defendants Edwin W. Miller, Sterling R. Chatfield and William B. Gumbart were directors of New Haven at the time of the merger. Plaintiff is the custodian of a minor who owned stock of New Haven.
The complaint set forth two causes of action: one, based on diversity jurisdiction, alleged that the three director-defendants had breached their fiduciary duties under Connecticut law (state law claim); the other alleged that all defendants had violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1974) (10b-5 claim). Plaintiff's 10b-5 claim was based on alleged misrepresentations and omissions in the proxy statement and accompanying 1963 annual report which were mailed to stockholders of New Haven prior to the stockholders meeting that approved the merger on February 28, 1964.
Plaintiff's evidence at trial was directed chiefly at one challenged omission: the non-disclosure of an unaudited internal financial report for New Haven's first quarter of its 1964 fiscal year, the quarter ending December 31, 1963, which showed profits for that quarter of $148,590 prior to correction. Plaintiff claimed that disclosure of this information would have provided a basis for valuing the New Haven shares at the time of the merger at $8.62 1/2, rather than $4.50, per share, and therefore the company was damaged by the non-disclosure.
Plaintiff also claimed non-disclosure of other matters favorable to the company, including the contracted sale of New Haven's Grand Avenue property at a profit, the discounting of a New Haven note held by the Penn Mutual Life Insurance Company, and the valuation of New Haven's interest in the Grinnell Lithographic Company, Inc. in excess of that reported in the proxy material. Plaintiff claimed that, as of the merger date, these undisclosed assets and profits amounted to $2.055 per share not reflected in the merger price of $4.50 per share.
Plaintiff also claimed non-disclosure of facts said to entitle New Haven to a premium upon the sale of its stock which gave the purchaser control of the company.
At trial plaintiff abandoned his claim for rescission and limited his demand for relief to a claim for damages and an accounting. There was no evidence at trial that the company's ability to attract capital through public investment or institutional financing had been impaired as a result of the ratio at which the company's shares were exchanged upon the merger. As the district court aptly put it, "The linchpin of the claim for damages is the alleged price of New Haven shares of $8.62 1/2, or any price above the merger price of $4.50. . . . Plaintiff is entitled to no judgment unless the company has been damaged by issuance of its shares at the $4.50 price." 393 F. Supp. at 142.
Recognizing that this is the essential issue in the case, we turn directly to the district court's determination that ...