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HELFANT v. LOUISIANA & SOUTHERN LIFE INS. CO.

October 16, 1978

Sidney HELFANT, Plaintiff,
v.
LOUISIANA & SOUTHERN LIFE INSURANCE COMPANY et al., Defendants



The opinion of the court was delivered by: NEAHER

MEMORANDUM AND ORDER

This action was brought by a former holder of 100 shares of Louisiana & Southern Insurance Company (L&S) stock, who seeks to maintain the action on his own behalf and on behalf of a class of public shareholders of L&S, other than defendants, between August 19, 1977 and October 3, 1977. The defendants are L&S; The Charter Company (Charter); New Charter Holding Company (Charter Holding), Charter's wholly-owned subsidiary; New Charter Life Insurance Company (NEWCO), the wholly-owned subsidiary of Charter Holding; and Alex. Brown & Company, an investment banking firm. The complaint also names as defendants certain officers, directors and shareholders of Charter and L&S, who with the corporate defendants have allegedly violated Sections 10(b), 14(a) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(a), 78n(e), the rules and regulations of the Securities Exchange Commission promulgated thereunder, and common law fiduciary principles in connection with a merger of L&S into NEWCO.

 Jurisdiction is premised on Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and on principles of pendent jurisdiction. Thus, this court's jurisdiction is predicated upon the existence of a claim cognizable under the federal securities laws.

 Defendants move pursuant to Rules 9(b), 12(b)(1) and 12(b)(6), F.R.Civ.P., for an order dismissing the complaint for failure to state the circumstances constituting fraud with adequate particularity, for lack of subject matter jurisdiction, and for failure to state a claim upon which relief may be granted. In the alternative, defendants move, pursuant to Title 28, U.S.C. § 1441(a), for an order transferring the action to the United States District Court for the Middle District of Florida.

 The allegations of the complaint, which must of course be accepted as true at this stage of the proceedings, Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957), are based on actions taken by defendants to acquire 100% Of the issued and outstanding shares of L&S stock. It is alleged that in August 1975 Charter became owner of approximately 51% Of the shares of L&S. Between May and December 1976, an unidentified "affiliate" of Charter purchased approximately 20,000 shares of L&S on the open market and subsequently transferred those shares to Charter's wholly-owned subsidiary, Charter Holding. On March 16, 1977, Charter transferred all its shares of L&S to Charter Holding, thereby consolidating the L&S shares in Charter Holding.

 The complaint further alleges that in 1977, the defendants caused NEWCO to be incorporated for the sole purpose of effecting a merger of NEWCO with L&S. The written merger agreement provided, among other things

 
"that the directors of L&S at the effective time of the Merger will be directors of the surviving corporation; that on consummation of the Merger the holders of all of the shares of L&S stock except CHARTER HOLDING and L&S OPTION SHARE CORPORATION shall receive payment in cash of $ 6.00 per share; that the shares of NEWCO's common stock then issued and outstanding will be converted into an equal number of shares of L&S common stock and that CHARTER HOLDING will make available to NEWCO sufficient funds to cover the required payment prior to the effective time of the Merger." (Complaint P 28.)

 In addition, defendants Denegre, a director and shareholder of L&S, and Ingram, a shareholder of L&S, entered into a "Purchase Agreement" with L&S on August 29, 1977, pursuant to which Denegre exchanged 19,316 shares of L&S common stock for debentures to be issued by L&S in the principal sum of $ 212,476, and Ingram exchanged 50,000 shares for debentures in the principal sum of $ 550,000. *fn1" On or about September 1, 1977, L&S issued to stockholders including plaintiff a proxy statement setting forth the terms and conditions of the merger and the transactions with defendants Denegre and Ingram.

 The complaint alleges that the foregoing actions were taken in furtherance of a "combination, conspiracy, device and scheme to acquire sole control of L&S at a price which would be highly advantageous to the defendants but unfair and damaging to the shareholders of L&S other than defendants" (Complaint P 26); that the sole purpose of effecting a merger of NEWCO with L&S was to "freeze out" the shareholders of L&S, other than the defendants; and that the proxy statement itself contained misstatements and omissions that made it misleading and fraudulent, namely statements that the price of $ 6.00 per share to L&S shareholders was fair and equal in value to the debentures given certain defendants, and an omission in failing to disclose that there was no valid business purpose for the merger. Without specifying which conduct is purported to support a claim under Section 10(b) and which is to support the claims under Sections 14(a) and (e), plaintiff alleges that this course of conduct violated the federal securities laws.

 The Section 10(b) Claim

 Count I of the complaint alleging violations of this section and Rule 10b-5 promulgated thereunder will state a claim only if it satisfies the spirit of and principles enunciated in Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977). Defendants argue that Santa Fe mandates dismissal of the complaint. While conceding its applicability, plaintiff contends that his complaint fully satisfies the requirements set forth by the Court. In Santa Fe, plaintiff alleged, in the context of a short-form merger pursuant to Delaware law, that defendants fraudulently undervalued plaintiff's stock and lacked a justifiable business purpose for "freezing out" the minority shareholders. 97 S. Ct. at 1297. The plaintiff did not allege, however, any material misrepresentation or omission of fact. The Court concluded, relying on Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976), that a cause of action is stated under Rule 10b-5 "only if the conduct alleged can be fairly viewed as "manipulative' or "deceptive' within the meaning of the statute," Id. at 1301, and held that plaintiff's allegations failed to state a claim under the federal securities law. The Court found that

 
"on the basis of the information offered, minority shareholders could either accept the price offered or reject it and seek appraisal in the Delaware Court of Chancery. Their choice was fairly presented, and they were furnished with all the relevant information on which to base their decision." 97 S. Ct. at 1301.

 Thus, it is now beyond question that a claim of fraud or breach of fiduciary duty will only state a cause of action under Rule 10b-5 where the acts alleged are violative of the philosophy of full disclosure underlying the 1934 Act. Allegations questioning the fairness of a transaction or suggesting breach of duty by a fiduciary, while perhaps stating valid claims under State law, are insufficient after Santa Fe. See Cole v. Schenley Industries, Inc., 563 F.2d 35, 43-44 (2 Cir. 1977); Goldberg v. Meridor, 567 F.2d 209, 218 (2 Cir. 1977); Goldberger v. Baker, 442 F. Supp. 659 (S.D.N.Y.1977).

 In Cole v. Schenley, supra, a minority shareholder of Schenley brought suit under Sections 10(b) and 14(a), challenging the terms of a merger. With respect to plaintiff's 10(b) claim, the Court of Appeals for this circuit dismissed the complaint holding that in the absence of a "material misrepresentation or a failure to disclose material facts," the claim must fail. 563 F.2d at 44. In Goldberg v. Meridor, a derivative action was brought challenging a transaction in which a subsidiary corporation had issued shares of its stock to its parent in exchange for assumption of all the parent's assets and liabilities, at terms allegedly unfair to the shareholders of the subsidiary. A different panel of the Court of Appeals found that disclosure was inadequate and that a proposed amended complaint would have alleged misrepresentation "at least in the sense of failure to state Material facts " necessary in order to make the statements made, in light of the circumstances, not misleading. ...


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