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H. L. FEDERMAN & CO. v. GREENBERG

December 4, 1975

H. L. Federman & Co., Plaintiffs,
v.
Harold Greenberg, et al., Defendants


Pierce, District Judge.


The opinion of the court was delivered by: PIERCE

OPINION AND ORDER

PIERCE, District Judge.

 On June 12, 1975, this Court granted the motion of defendant Tokyo Boeki (U.S.A.), Inc. to dismiss the complaint as to it pursuant to Rule 12(b) F.R. Civ. P. The Court wrote that "the complaint as it now reads does not set out any discernible claim against that entity and must be dismissed." However, plaintiff was granted leave to file an amended complaint. H. L. Federman & Co. v. Greenberg, 74 Civ. 1749 (S.D.N.Y. June 12, 1975). Plaintiff has filed an amended complaint and defendant Tokyo Boeki now moves to dismiss that complaint. For the reasons stated below, the motion is denied.

 For purposes of this 12(b)(6) motion, the Court must treat the allegations of the complaint as true. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 353 F. Supp. 264 (S.D.N.Y. 1972), aff'd, 495 F.2d 228 (2d Cir. 1974). Accordingly, the pertinent allegations of the complaint are summarized as follows.

 Plaintiff brings this action derivatively, as a shareholder of defendant Florida Water and Utilities Co. ("Florida"), asserting that Florida, its directors, its subsidiary, United Steel and Strip Corp. ("United"), defendant Galvatron Industries Corp. ("Galvatron") and defendant Tokyo Boeki, singly and in concert, directly and indirectly, and aiding and abetting each other violated § 14(a) and § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78j & 78n (1970)) and Rules 14a-5, 14a-9 and 10b-5 thereunder. Plaintiff alleges that defendants, through the means of a false and misleading proxy statement issued by Florida, fraudulently obtained shareholder approval of a sale of all the outstanding stock of United to defendant Greenberg, a Florida director, and further obtained approval of the termination of a proposed acquisition by Florida of Galvatron. The sale of United stock to Greenberg is alleged to violate Rule 10b-5. The proxy statement is said to violate Rules 14a-5 and 14a-9. Plaintiff asserts that these two transactions were vital segments of a larger scheme whereby certain defendants undertook to defraud Florida shareholders for their own pecuniary benefit. The complaint alleges sixteen specific deficiencies in the proxy statement.

 According to the plaintiff, the scheme to defraud the best interests of Florida was as follows. In 1969, defendant Greenberg and certain other individual defendants were the owners of both United and Galvatron; at that time Greenberg was not connected with Florida. However, Florida then entered into a transaction whereby it acquired United and also acquired an option to acquire Galvatron at a later time in return for Florida shares. As a result of this 1969 transaction, Greenberg and his associates retained ownership of Galvatron and Greenberg received 20 percent of the outstanding shares of Florida and became a director and the largest shareholder thereof.

 Galvatron showed no earnings in 1970 and 1971; however, the option to acquire was extended by Florida in that Galvatron's future prospects were favorable.

 In October 1973, United entered into an agreement with Tokyo Boeki. Tokyo Boeki is a subsidiary of a larger trading company which is engaged in the steel manufacturing business, as is United. Under the terms of the agreement, Tokyo Boeki was to transfer $1,300,000 to United in return for convertible subordinated notes of United due five years from the date of issuance, unless sooner converted or prepaid. The notes could not be prepaid by United until after January 31, 1975 but became convertible into 50% of the shares of United at Tokyo Boeki's option after January 1, 1975. In the event Tokyo Boeki elected to convert the notes, it would become, in effect, a co-owner of United with Greenberg in that the subsequent sale of United was approved by Florida's management and shareholders. Under the terms of the agreement with Tokyo Boeki, United warranted that it would pay $1,200,000 of the $1,300,000 to Florida by means of an upstream dividend. Plaintiff alleges that this upstream dividend was consideration to Florida for the sale of United.

 According to plaintiff, the Tokyo Boeki transaction with United was subject to the approval of Florida's management, and that approval was obtained. However, plaintiff does not assert that the transaction was or should have been approved by the Florida shareholders. Nor is it asserted that the Tokyo Boeki transaction was expressly conditioned upon shareholder approval of the other transactions complained of. In no way does plaintiff assert that the Tokyo Boeki transaction was illegal.

 However, plaintiff does assert that the Tokyo Boeki transaction provided United and Florida with the necessary funds to complete the following transactions which were approved by the Florida shareholders.

 Those transactions are alleged to have been as follows. In December, 1973, Florida's management entered into a Plan of Separation and Agreement, subject to shareholder approval, whereby Greenberg would receive all outstanding shares of United in return for a transfer to Florida of 250,000 Florida shares then owned by Greenberg. As a consideration to Florida under the agreement, Florida's intra-corporate indebtedness to United was reduced by $95,000. Plaintiff asserts that the primary consideration was the $1,200,000 paid "upstream" to Florida. Plaintiff concludes that through this transaction Greenberg reacquired control of United by returning less than one-half the Florida stock he had received when he sold United to Florida in 1969. Further, plaintiff concludes that Greenberg retained control of Florida and remained its largest shareholder.

 At the same time, Florida entered into another transaction with Greenberg and another defendant whereby Florida, subject to its shareholders' approval, would terminate its option to acquire Galvatron in return for 20,000 shares of Florida then owned by Galvatron shareholders. Plaintiff concludes that as a result of this transaction the Galvatron shareholders reacquired full rights to Galvatron by the return of less than one-half of the shares of Florida received by them in 1969 under the original Florida option to acquire Galvatron.

 On or about December 13, 1973, Florida issued to its shareholders a proxy statement which asked them to approve the sale of United and the termination of the Galvatron option. On December 26, 1973, the shareholders approved these transactions, and the transactions were consummated the following day. Among the more pertinent allegations as to the proxy statement, it is asserted that the document misleadingly described the transaction with Tokyo Boeki as a "loan". Plaintiff asserts that this transaction should have been described as the sale of an option to purchase stock. Further, it is charged that the proxy statement failed to disclose that Tokyo Boeki is not a conventional commercial lender but is in fact a subsidiary of a larger corporation which is engaged in the steel business and which is United's largest supplier of steel. Plaintiff also charges that the proxy statement made various other false and misleading statements regarding the true financial condition of United and Galvatron, the true nature of the challenged transactions, the personal benefits flowing to the individual defendants as a result of the transactions, and the financial impact of these transactions upon Florida.

 As against Tokyo Boeki, plaintiff asserts that Tokyo Boeki knew that the funds it provided to United were to be used in completing the challenged sale of United to Greenberg. Plaintiff asserts that Tokyo Boeki had received a copy of the agreement entered into between Greenberg and Florida regarding United and that Tokyo Boeki had full knowledge of the contents of the proxy statement and the actual facts of the transactions described therein and was fully aware of the false and misleading statements therein. Plaintiff charges that Tokyo Boeki knew that the proxy statement misleadingly described its transaction with United as a "loan" and that it gave the misimpression that Tokyo Boeki was a conventional lending institution. Plaintiff asserts that Tokyo Boeki was aware of the failure of the proxy statement to reveal the true financial condition of United and Galvatron, and that it knew of the personal benefits flowing to Greenberg and others of the defendants as a result of the three transactions. Plaintiff alleges that Tokyo Boeki knew that its participation in the transactions was vital to the ...


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