The opinion of the court was delivered by: WARD
Plaintiff moves, pursuant to Rule 23, Fed. R. Civ. P., for an order declaring that this action may be maintained as a class action and, pursuant to Rule 56, Fed. R. Civ. P., for the entry of partial summary judgment. Defendants, American Telephone and Telegraph Company ("AT&T"), John D. deButts, Edward B. Hanify, Robert D. Lilley and William L. Lindholm, cross-move, pursuant to Rule 12(c) and (h)(3), Fed. R. Civ. P., for judgment on the pleadings on the ground that the complaint fails to state a claim upon which relief can be granted, and on the further ground that the Court lacks subject matter jurisdiction. Inasmuch as material outside the pleadings has been considered, this motion will be treated as one for summary judgment. For the reasons hereinafter stated, plaintiff's motions are denied and defendant's cross-motion to dismiss for failure to state a claim is granted.
This action was commenced by plaintiff, the record owner of 12 shares of AT&T common stock, on March 13, 1975. The first count of the complaint alleges that the proxy statement sent to AT&T shareholders on or about February 27, 1975, in connection with the April 16, 1975 shareholders meeting, was false and misleading with respect to management's proposal to eliminate mandatory preemptive rights in violation of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) and Rule 14a-9 promulgated thereunder, 17 C.F.R. § 240.14a-9. The second count of the complaint alleges that the proposal to eliminate mandatory preemptive rights constitutes in fact a tender offer and violates Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e).
Defendants argue that the first count is insufficient to state a claim under Rule 14a-9 because the proxy statement contains neither material misstatements nor omissions and is not misleading. They argue that the second count is legally insufficient because the statutorily required purchase of dissenting shareholders' stock by the issuer cannot be considered a tender offer.
No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
There are at least two elements necessary to state a cause of action in violation of the rule: there must be either a statement which is false or misleading or an omission and the statement or omission must relate to a material fact. The complaint sets forth seven allegedly false statements or omissions. With respect to each of these alleged violations of Rule 14a-9, one of the two essential elements of a cause of action is absent.
The first claimed violation is:
(i) the fact that Telephone will not pay to shareholders who dissent from the defendants' proposal relating to preemptive rights the net asset value of their Telephone shares, but will pay an amount arbitrarily set by Telephone; . . .
Although it is not clear whether plaintiff considers this a false statement or an omission, inasmuch as the Court finds no such statement anywhere in the proxy material, the court assumes that this is charged as an omission of a material fact.
The proxy statement, in accordance with Schedule 14A, 17 C.F.R. § 240.14a-101, contains a brief summary of the appraisal rights of dissenters under N.Y.B.C.L. § 623. (McKinney's 1963) With reference to the amount to be offered to dissenting shareholders, the proxy statement points out:
If an election to dissent is filed the Company will offer the shareholder, within seven days after the expiration of the period for filing such election, what it considers to be the fair value of his shares as of the day prior to the Annual Meeting. In the event of disagreement as to fair value the Company will institute a court proceeding for determination of such value. The final order in the proceeding will include an allowance for interest. The costs and expenses of such proceeding will be assessed against the Company except that all or any part of such costs and expenses may be assessed against, and no interest need be paid to, a dissenting shareholder if the court finds that refusal to accept the Company's offer was arbitrary, vexatious or otherwise not in good faith.
Although various factors have been considered in determining the fair value of shares, attention is called to Application of Deutschmann, 281 A.D. 14, 116 N.Y.S.2d 578 (1952), in which the Appellate Division of the New York Supreme Court specifically held that a dissenting shareholder's refusal to accept an offer to pay him the market value of his AT&T shares was arbitrary and vexatious.
This portion of the proxy statement is a summary of N.Y.B.C.L. § 623(g) which requires the corporation to offer dissenting shareholders a price "which the corporation considers to be their (shares) fair value." In the event a shareholder disagrees with the price set by the corporation, § 623(h)(4) specifies that the court shall fix the value of the shares which for purposes of the statute is "the fair value as of the close of business on the day prior to the shareholders' authorization date, excluding any appreciation or depreciation directly or indirectly induced by such corporate action or its proposal." The considerations which apply to fixing the fair value of stock under the statute have been repeatedly enunciated by the New York courts. In Application of Behrens, 61 N.Y.S.2d 179, 182 (Sup. Ct. 1946), aff'd, 271 A.D. 1007, 69 N.Y.S.2d 910 (1st Dep't. 1947), the court stated:
While there is no legal formula which can be enunciated or applied in valuation proceedings, the appraisal remaining a matter of judgment on the facts in each case, the Court can reiterate accepted principles which, simply stated, are that the appraisal should take account of market value, investment value, and net asset value. Matter of Fulton, 257 N.Y. 487, 494, 495, 178 N.E. 766, 768, 769, 79 A.L.R. 608. The weight to be attached to each factor will naturally vary in accordance with the facts of each case, but appraisers should take account of all these factors, and should not exclude any one from consideration in favor of placing complete reliance upon any other.
Accord In re Kaufmann, Alsberg & Co., 15 A.D.2d 468, 222 N.Y.S.2d 305 (1st Dep't. 1961); Application of Silverman, 282 A.D. 252, 122 N.Y.S.2d 312 (1st Dept. 1953); Lipe-Rollway Corporation v. Seligson, 59 Misc.2d 805, 300 N.Y.S.2d 478 (Sup. Ct. 1969). Where there is a free market in a stock and the volume of the transactions and market conditions make it a fair reflection of the buying and selling public's judgment of the stock, market value may be the controlling consideration. Application of Silverman, supra; Application of Deutschmann, 281 A.D. 14, 116 N.Y.S.2d 578 (1st Dep't. 1952); Application of Behrens, supra; Lipe-Rollway Corporation v. Seligson, supra. In Application of Deutschmann, supra, the court explained that the market value of AT&T stock, given the large number of shares trading on the public exchanges, accurately reflected the ...