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KERRIGAN v. MERRILL LYNCH

May 15, 1978;

EDITH SHEARN KERRIGAN, as Executor and Trustee and JOHN K. WATSON, JR., as Successor Trustee in lieu of John K. Watson, Deceased Executor and Trustee under the Will of ARTHUR L. KERRIGAN, Deceased, and EDITH SHEARN KERRIGAN, Individually, Plaintiffs,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH n INCORPORATED, DONALD T. REGAN, GEORGE L. SHINN and NED B. BALL, Defendants



The opinion of the court was delivered by: GOETTEL

GOETTEL, D.J.

 In this securities action, the defendants moved to dismiss for failure to state a claim upon which relief can be granted or, alternatively, for summary judgment. In response, the plaintiffs moved for leave to amend their complaint, in order to add several factual allegations and substantive claims. The defendants opposed the motion for leave to amend on several grounds, but primarily on the basis that the complaint if amended as proposed still fails to state a claim or is equally vulnerable to summary judgment.

 Since all the defendants' arguments for dismissal of the original complaint may be considered against the complaint as amended, the Court granted plaintiffs' motion for purposes of deciding the merits of the defendants' motion to dismiss. *fn1" Because a decision of the motion to dismiss requires the aid of some materials outside of the pleadings, the motion is treated as one for summary judgment. Fed. Rs. Civ. P. 12(b)(6) & 56.

 I.

 In 1970, the death of Arthur Kerrigan ended his participation in a corporation that was on the verge of a major financial achievement. His executors now challenge the right of that privately held corporation to exercise, upon his death, an option to repurchase his restricted shares when the company was preparing to capitalize on a public offering of its stock in 1971.

 The amended complaint alleges three federal securities claims, with jurisdiction based on section 27 of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. § 78aa. Seven claims grounded on state statutory and common law are alleged on the basis of pendent jurisdiction. The federal claims charge violations of sections 9 and 10(b) of the 1934 Act, 15 U.S.C. §§ 78i, 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. The plaintiffs are the executors of the estate of Arthur Kerrigan, a former vice-president of Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch). Mrs. Kerrigan also sues in her individual capacity. Generally, the plaintiffs assert that defendant Merrill Lynch and the named defendant directors of the company defrauded them in connection with the repurchase of Mr. Kerrigan's shares of Merrill Lynch upon his death in 1970.

 As set out in the complaint, Mr. Kerrigan retired from Merrill Lynch in 1964. At that time, Merrill Lynch was a privately held corporation incorporated under Delaware law, and a member of the New York Stock Exchange. Pursuant to company policy and the corporate certificate, as a part of his retirement Kerrigan exchanged his shares of voting stock with the company and received a smaller number of non-voting, restricted shares. The restriction appeared plainly on the stock certificates. At the time of his retirement, Kerrigan also entered into an agreement with the company, in which he gave Merrill Lynch the right to repurchase his non-voting stock "at any time" for a "net book value" price per share. This agreement was a supplement to the provisions of article VI of the certificate of incorporation, which granted to the company the option to repurchase such shares, under a net book value formula, upon the death of the shareholder. *fn2"

 Kerrigan died on November 26, 1970, and on December 14th Merrill Lynch notified the executors that it would exercise the option to repurchase Kerrigan's 40,000 non-voting shares for the total net book value of $1,077,360. The transaction was completed in January of 1971.

 The repurchase option granted by article VI of the certificate was in accord with Rule 313.21 of the New York Stock Exchange, which required a member company to repurchase the shares of any shareholder who died, so long as the shares were not freely transferable. Until 1970, the Exchange's policy required member companies to be closely held corporations whose shares were not publicly traded. On March 26, 1970, however, the exchange had amended its rules to permit member firms to issue tradable shares. Around that same time, Merrill Lynch had begun an investigation of "going public." A confidential study group allegedly recommended, on April 3, 1970, that the company undertake a public offering.

 The complaint further alleges that on July 14th of that year, Merrill Lynch's directors approved the formation of a legal and accounting task force to conduct an audit of the firm in preparation for such an offering. The alleged plan of at least a few insiders called for a registered offering in March of 1971. Preparations proceeded during the fall and winter, and, finally, on April 8, 1971, the board of directors gave formal approval to the proposals. This decision was publicly announced on April 12th, and approved by the shareholders on April 20th. In June, the offering went forward, and the corporation's common stock was split three for one, all reclassified as voting stock and sold at the offering at $28 per share.

 The preparations for the offering were allegedly kept strictly confidential by a few insiders, including the individual defendants. No mention of the plan was made at the annual shareholders' meeting in April of 1970, nor even to the executive committee of the board after the submission of the study group's report. The complaint alleges, however, that the decision to go public was in fact made by the insiders substantially before the exercise of the option to repurchase Kerrigan's shares.

 The plaintiffs also state that there was no uniform company policy regarding the exercise of the options upon the death of a shareholder, and that there was a company policy which permitted some widows to retain or repurchase some of their husbands' shares after the company's repurchase. Such an offer was not made to Mrs. Kerrigan, and the complaint alleges that she was not informed of this company policy and was not aware of the alleged discriminatory manner in which it was carried out.

 Finally, the complaint alleges that during this "twilight" period, when the plan for the public offering had been decided upon but not publicly disclosed, several insiders bought Merrill Lynch stock for their own accounts with the knowledge that the company would soon be making an offering. The complaint does not allege that any of Mr. Kerrigan's shares were brought by any ...


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