The opinion of the court was delivered by: MOTLEY
On December 15, 1971 the George A. Fuller Company, Inc. (Fuller), a company deeply in debt and in serious financial condition, was sold to the Northrop Corporation (Northrop). The recapitalization of Fuller was an integral part of the sale. Prior to the recapitalization, there were 10,000 shares of common stock outstanding. Plaintiff, Cloyce K. Box owned 2,000 or 20% Of these shares. Pursuant to the recapitalization, the two major creditors of Fuller, The Chase Manhattan Bank, N. A. (Chase) and The Aetna Casualty and Surety Company (Aetna), received Fuller common stock in exchange for cancelling their debts and in exchange for Fuller preferred stock. Over 700,000 shares of common stock were issued to Chase and Aetna in return for the cancellation of over $ 20 million in debt. The unhappy result for the plaintiff, Box, was that his stock ownership of Fuller was reduced from 20% To .258%.
Box's primary contention is that the above transaction was designed to illegally squeeze Box out of his 20% Common stock ownership interest in Fuller, in violation of the common law fiduciary duties imposed upon all of the defendants. Box also alleges fraud in connection with the sale of Fuller in violation of the anti-fraud provisions of the federal securities laws.
Diversity of citizenship provides a basis for the jurisdiction of all of plaintiff's claims and the counterclaims of defendant Fuller. There is also federal question jurisdiction pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. Jurisdiction as to certain claims also rests upon the principles of pendent jurisdiction.
This action was tried before the court without a jury. The court has dismissed the counterclaims of Fuller. Plaintiff's first, second, fourth, seventh, eighth, thirteenth and fourteenth causes of action were dismissed on plaintiff's motion. All claims asserted against the individual defendants, except Max E. Greenberg, David A. Trager, and Louis Zircher (the three trustees of the common stock voting trust) have been dismissed. All claims against Fuller, with the exception of Box's derivative claims, have also been dismissed.
Events Preceding the Acquisition of Fuller by Northrop
The original George A. Fuller Company (Old Fuller) was founded in 1882 and was one of the nation's largest and most highly regarded construction companies of its kind. Old Fuller was responsible for the construction of such buildings as the United States Supreme Court, the United Nations, the United States Department of Justice, the Washington Cathedral, Lincoln Center, and the Lincoln Memorial. Box had been an employee of Old Fuller since 1952. By 1965 Box was a director and vice president of the company.
In early 1965, BCLM, Inc. (BCLM), a Maryland corporation, offered to purchase the assets of Old Fuller. Box was one of the four principals of BCLM.
Old Fuller was a public corporation. The principals of BCLM intended to convert Old Fuller to a close corporation. This was accomplished when Old Fuller was purchased by BCLM. Old Fuller was sold on June 30, 1965 to BCLM which paid $ 15,885,728 in cash for Old Fuller and assumed liabilities in the sum of $ 3,853,000. This purchase was financed, in part, by a $ 16 million loan from Chase. The loan was secured by Old Fuller's assets. (It was a substantial portion of this unsatisfied debt which was later cancelled by Chase in 1971 in return for Fuller common stock in connection with the 1971 recapitalization and sale to Northrop.) BCLM changed its name to the George A. Fuller Company, Inc. (Fuller). It sold all of its authorized common stock for $ 1 million, 2,500 shares to each of the four principals including Box. Thirty thousand shares of Fuller preferred stock were also sold at this time for $ 3 million. Box's total investment in Fuller was the $ 250,000 which he paid for his 2,500 shares of common stock. At this time, Box became chief executive officer of Fuller.
Fuller did not fare well between 1966 and 1968. Due to various factors, including a chronic cash flow problem, increased overhead, and unprofitable jobs, Fuller lost approximately $ 18 million during that period. In January 1969, in an attempt to remedy these problems, especially the cash flow situation, Fuller's three shareholders other than Box sold all their common stock (75% Of the outstanding common stock) to 140 Associates, a group controlled by Commonwealth United Corporation (CUC). CUC, itself, bought the 30,000 shares of Fuller preferred stock.
Since 80% Of the common stock was needed to control Fuller,
140 Associates bought an additional 500 shares of common stock from Box. CUC paid Box $ 350,000 for these shares, or $ 100,000 more than Box's investment in the full 2,500 shares in 1965. The result was that 140 Associates then owned 8,000 shares and Box owned 2,000 shares of the total 10,000 shares of outstanding common stock.
Fuller continued to lose money in 1969. After its purchase of the Fuller stock, CUC loaned an additional.$ 2.7 million to Fuller to protect CUC's investment. The situation did not improve, and in July 1969 CUC installed Francis G. Lyon to try to reverse Fuller's deteriorating position. Box voluntarily withdrew from active management of Fuller. He remained a director, however, until March 1971.
No less concerned than CUC with Fuller's financial condition were Chase and Aetna. By 1969 Chase was still owed $ 9 million of its original $ 16 million investment. Aetna was surety for Fuller on Fuller's performance and payment bonds in 1969 and had been for many years prior thereto. Aetna continued to be liable on such bonds after CUC's stock purchase. By late 1969, Aetna was potentially liable for over $ 70 million in performance and payment bonds. Consequently, a Fuller bankruptcy would have meant a substantial loss for Chase but it would have been disastrous for Aetna.
On October 14, 1969, Fuller advised Aetna that without additional financial assistance, all of Fuller's work including work bonded by Aetna would halt within 48 hours. Since traditional lines of credit were understandably closed to Fuller, Aetna, after analyzing the financial situation, agreed to assist Fuller. The assistance took the form of guaranteeing a $ 5 million line of credit from Chase in order to maintain a facade of normalcy so that Fuller could obtain the volume of future work needed to keep it afloat.
Aetna's decision to finance Fuller was conditioned upon the forbearance of other creditors
(in order to forestall bankruptcy) and, among other things, the execution of voting trust agreements by all of Fuller's shareholders. The purpose of the voting trust agreements was to assure that Fuller had a responsible management which would protect and repay Chase's line of credit which was guaranteed by Aetna. The voting trust agreement with Box provided that the three trustees, to be appointed by Aetna and consented to by Box (which consent could not be unreasonably withheld) would have the sole power to vote Box's stock. Box's voting trust agreement would last for the shorter of ten years or until the line of credit from Chase, which was guaranteed by Aetna, was repaid.
Although Box maintains that he was coerced into signing the voting trust agreement, the court finds that Box signed the agreement willingly, albeit unhappily, knowing that execution of the agreement was a necessary condition of Aetna's financial assistance and any hope of recovery for Fuller. The voting trust agreements with Box, CUC, and 140 Associates and the loan agreements among Chase, Aetna and Fuller were executed in November and December 1969.
Aetna appointed as voting trustees two independent attorneys as representatives of Aetna, Max E. Greenberg and David A. Trager. Thomas D. Hill was appointed as representative of Chase. Hill was later replaced by Louis Zircher (Zircher). Greenberg, Trager and Zircher remain the only individual defendants in this action in connection with the recapitalization of Fuller in 1971.
From December 1969 to December 1970, Fuller's financial condition continued to deteriorate. Fuller still could not make ends meet, having lost over $ 8 million in 1969 and.$ 2.5 million in 1970. Fuller was unable to obtain enough business in 1970 through 1971 to stay solvent. In 1970 it had obtained only half the amount of work needed to generate a net profit sufficient to cover its overhead. By the time of its acquisition in December 1971, Fuller anticipated suffering a loss on its $ 74 million backlog of uncompleted work after already suffering losses over the past six years aggregating in excess of $ 30 million. In sum, by December 1971 Fuller did not have sufficient cash to meet its current obligations and was faced with imminent bankruptcy unless it received additional cash infusions.
Fuller's debt position was as bleak as its negative cash flow situation. Fuller was in excess of $ 25 million in debt. This included a $ 3 million debt to a judgment creditor, McNamara Corporation Ltd. and a $ 9.3 million debt to Chase which represented the unpaid principal on the original $ 16 million loan to Fuller in 1965. However, by this time, Fuller was deepest in debt to Aetna. Under the guaranteed loan agreement entered into among Chase, Aetna and Fuller in 1969, Aetna had paid over $ 11 million in principal and interest to Chase to cover Chase loans to Fuller between 1969 and 1971. Aetna had directly loaned to Fuller an additional.$ 1.4 million when Chase had eventually refused to advance any further sums to Fuller.
Given Fuller's negative cash flow position, its history of sustained losses and its enormous debt, the only alternatives open to Fuller at this time were either bankruptcy or the sale of the company.
Northrop's Purchase of Fuller
Prior to February 1971, Fuller had approached numerous companies as potential purchasers of Fuller. Negotiations with Northrop began around February 1971. The possibility of the sale of Fuller to Northrop was announced to the Fuller shareholders in May 1971, although Northrop continued its financial investigation of Fuller through that summer. During this time, Box was neither invited nor allowed to participate in the negotiations among Fuller, Chase, Aetna and Northrop, although he was generally advised as to the progress of these negotiations.
In June 1971 a non-binding agreement was reached among Northrop, Chase and Aetna concerning the sale of Fuller. A major concern of Northrop was that Fuller be delivered with a "clean balance sheet". That is, the negative shareholders' equity of approximately $ 25 million was to be converted to a positive shareholders' equity of approximately $ 800,000.
In addition, Northrop was determined to limit its contingent liabilities in connection with claims on Fuller jobs in progress. Aetna was to assume the major responsibility of satisfying those claims. The mechanism for the creation of this clean balance sheet would be that Chase and Aetna would cancel their claims against Fuller in return for Fuller stock. Northrop would then purchase 100% Of the Fuller stock in return for certain fixed and contingent payments to Chase and Aetna.
In October, Box was approached by Fuller and asked what price he would accept for his 2,000 shares of common stock. Box replied that he wished to deal directly with Northrop. On October 21 a meeting was held which Fuller, Northrop, Chase, Aetna, Exeter International Corporation (Exeter) (the beneficial owner of 8,000 shares of Fuller common of which 140 Associates was record holder) and Box's attorney attended. Box declined to appear personally. At that meeting, Exeter agreed to sell its 8,000 shares for $ 250,000, or $ 31.25 per share. The sale was not consummated at this time, but only after the recapitalization on December 15, 1971.
No agreement was reached with Box's attorney with respect to Box's stock.
Anxious to acquire the remaining 20% Of the Fuller common stock in order to expedite the sale of Fuller, the defendants put pressure on Box to sell his shares. First, Chase threatened to call Box's personal loan with Chase if Box continued to refuse to sell his stock. Box resisted this pressure. The defendants and Box, this time personally, then met twice in Dallas, Texas. Box again refused to sell his Fuller common stock. The defendants again attempted to exert pressure on Box. They met with officers of the First National Bank of Dallas and suggested that the bank call Box's personal loan with that bank which was collateralized by the 2,000 shares of Fuller common stock. The Dallas bank refused, noting that Box's loan was not in default.
The main sticking point in the negotiations among Box and the defendants was the price to be paid for the stock. The amount demanded by Box equalled the outstanding principal on the Dallas loan, $ 250,000, which had initially been utilized by Box to purchase the 2,500 shares of Fuller common stock in 1965, plus $ 62,500, the potential tax liability on the sale of Box's stock. Defendants believed the stock to be essentially worthless and refused to pay the sum demanded. Defendants offered to pay Box $ 62,500 for his shares, or $ 31.25 per share, the same price paid for Exeter's stock.
Northrop decided to close the Fuller deal despite the fact that it could not buy 100% Of the Fuller stock. On December 15, 1971, at a special meeting of shareholders, and after approval by the Fuller Board of Directors, Exeter voted 80% Of the Fuller common stock in favor of the recapitalization. The voting trustees also voted unanimously in favor of the recapitalization. The number of shares of Fuller common stock was increased from 10,000 shares of $ 100 par value to 1,500,000 shares of $ 1 par value. The par value of the 10,000 outstanding shares was reduced to $ 1.
The major elements of the recapitalization were as follows:
Chase received 291,156 shares of common stock in exchange for the cancellation of its entire debt of $ 9,317,000. An exchange at the rate of $ 32 per share.
Chase received 93,750 shares of common stock in exchange for 30,000 shares of preferred stock. An exchange at the rate of $ 32 per share for the preferred stock which had a par value of $ 100 per share.
Aetna received 349,365 shares of common stock in exchange for the cancellation of its debt incurred in connection with the guaranteed line of credit with Chase, or $ 11,179,670. An exchange at the rate of $ 32 per share.
Aetna bought 4,000 shares of common stock from Exeter for $ 125,000, or $ 31.25 per share.
Northrop bought 31,250 shares of common stock directly from Fuller for $ 1 million cash, or $ 32 per share, in order to increase Fuller's working capital.
Northrop bought 4,000 shares of common stock from Exeter for $ 125,000 or $ 31.25 per share.
This recapitalization reduced Box's ownership of Fuller from 20% To .258%. This is the ...