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JONES v. NATIONAL DISTILLERS & CHEM. CORP.

October 10, 1979

BEATRICE JONES, on behalf of herself and all others similarly situated, Plaintiff,
v.
NATIONAL DISTILLERS AND CHEMICAL CORPORATION, ALMADEN VINEYARDS, INC., DRUMMOND C. BELL, FREDERICK H. BRUENNER and UNITED STATES TRUST COMPANY OF NEW YORK as Executors of the Estate of JOHN E. BIERWIRTH, WILLIAM A. DIEPPE, JOHN P. McCLELLAN, RAMSEY E. JOSLIN, THOMAS J. GRADY, JOHN F. SALISBURY, ATHERTON PHLEGER and EMMETT G. SOLOMON, Defendants



The opinion of the court was delivered by: MOTLEY

MEMORANDUM OPINION

Plaintiff in this action challenges the fairness of the terms of the merger whereby Almaden Vineyards, Inc. ("Almaden") became a wholly owned subsidiary of National Distillers and Chemical Corporation ("National"), with the Almaden public shareholders receiving $ 12.25 per share for their stock. Plaintiff's second amended complaint alleges violations by defendants of Section 14(a) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated by the Securities and Exchange Commission (SEC), 17 C.F.R. § 240.14a-9; violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated by the SEC, 17 C.F.R. § 240.10b-5; and breaches of fiduciary duty which are before the court on principles of pendent jurisdiction. Defendant has filed a motion challenging the legal and factual sufficiency of the complaint, moving to dismiss the Section 14(a) and Section 10(b) claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Fed.R.Civ.Proc."), to grant a summary judgment dismissing the Section 14(a) and Section 10(b) claims pursuant to Fed.R.Civ.Proc. Rule 56, and to dismiss the breach of fiduciary duty claims pursuant to Fed.R.Civ.Proc. Rule 12(b)(1). For the reasons stated below, defendants' motion is denied in all respects.

Factual Background

 In the spring of 1977, a merger was proposed between National and Almaden, whereby Almaden would become a wholly owned subsidiary of National, with public shareholders of Almaden receiving cash for their shares. At that time, National already owned 80% of the common stock of Almaden. The merger price was then negotiated between representatives of National and a special negotiating committee representing the 20% minority shareholders. The special negotiating committee consisted of two Almaden directors who were not officers or employees of Almaden or National. The committee retained two investment banking firms to assist them in the negotiations. The National representatives and the special negotiating committee representing the minority shareholders agreed on a price of $ 12.25 per share. During that general time, Almaden common stock was being traded at prices between $ 51/4 and $ 75/8 on the Pacific Stock Exchange.

 Almaden sent to its stockholders a proxy statement for a special stockholders' meeting to vote on the proposed merger. At this meeting, more than a majority of the public stockholders voted to approve the merger.

 Materiality

 SEC Rule 14a-9, promulgated pursuant to Section 14(a) of the Exchange Act, proscribes in proxy materials any statement which "is false or misleading with respect to any material facts, or which omits to state any material fact necessary in order to make the statements therein not false or misleading." In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 (1976), the Supreme Court defined a material fact: "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Accord, Seaboard World Airlines, Inc. v. Tiger International, Inc., 600 F.2d 355, 360-61 (2d Cir. 1979). The Court in TSC Industries explained that this standard

 
does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information available. 426 U.S. at 449, 96 S. Ct. at 2132 (footnote omitted).

 In the case at hand, defendants have moved for summary judgment, arguing that the plaintiff's claims under Sections 14(a) and 10(b) should be dismissed since, on the undisputed facts, "reasonable minds could not differ as to the immateriality of the omissions" alleged by plaintiff. Seibert v. Sperry Rand Corp., (1978 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 96,589, at p. 94,522 (2d Cir. 1978) (footnote omitted). Contrary to defendants' arguments, the court finds that there are indeed numerous disputed issues of fact concerning the materiality of certain omissions in the proxy statement in question, and that accordingly defendants' motion for summary judgment should be denied. The major disputed issues of material fact include the following:

 1) Whether the proxy statement's failure to disclose Almaden's switch from half-gallon to magnum bottles or the switch's forecasted effect on Almaden's earnings was a materially misleading omission. The proxy statement did not disclose that Almaden was switching from 64 oz. half-gallon bottles to 51.4 oz. magnum bottles in marketing certain of its wines. Nor did the statement disclose that an increase in annual net income of.$ 390,000 had been projected from the switch. Plaintiff argues that the switch to magnum bottles and its projected effect on earnings were material facts which should have been in the proxy statement. Moreover, plaintiff argues, to the extent that the effect of the switch was taken into account in overall net projections, the projections rested on unreasonable assumptions which remained undisclosed. Defendants argue, that the omission of these facts is immaterial as a matter of law, since the proxy materials contained an accurate forecast of overall net income, a forecast which purportedly took into account the switch to magnums. Moreover, defendants argue, there was no need to disclose the assumptions underlying the effect of the switch upon net income projections, since the net income forecast was in fact accurate. This court is of the opinion that it is a disputed issue of material fact whether a reasonable shareholder would consider the switch to magnum bottles and its effect on earnings important, regardless of whether the overall forecast was accurate. This court is unwilling to find that reasonable minds could not differ as to the immateriality of information such as the switch to magnum bottles, even where proxy statements included an accurate overall forecast.

 2) Whether the failure to disclose that investment bankers had derived values of $ 13.90 and $ 13.00 per share for Almaden shares was a materially misleading omission. The proxy statement in question did not disclose that investment bankers, in preparing arguments for the special negotiating committee representing minority shareholders, had derived values of $ 13.90 and $ 13.00 per share for Almaden stock. Nor did the proxy statement disclose that these figures had been advanced by the negotiators. Plaintiff argues that these figures were not unreasonable, and shareholders were entitled to know of these figures. Defendant argues that the figures were based on unreasonable assumptions and were mere stalking horses developed as negotiating ploys. This court is of the opinion that it is a disputed issue of material fact whether a reasonable shareholder would consider the figures derived by the investment bankers as important. This court is unwilling to find that reasonable minds could not differ as to the immateriality of the figures, in particular as to whether the figures were based upon unreasonable assumptions or were mere negotiating ploys.

 In summary, this court finds that there are disputed issues of material fact concerning the materiality of certain omissions in the proxy statement. Under these circumstances, defendants' motion for summary judgment must be denied.

 Damages

 In Seaboard World Airlines, Inc. v. Tiger International, Inc., supra, the Second Circuit recently stated that " "when market value (of stock) is available and reliable, other factors should not be utilized in determining whether the terms of a merger (are) fair.' " Id. at 361 (bracketed material in original) (quoting Mills v. Electric Auto-Lite Co., 552 F.2d 1239, 1247 (7th Cir.), cert. denied, 434 U.S. 922, 98 S. Ct. 398, 54 L. Ed. 2d 279 (1977)). The court in Seaboard explained that "(underlying)such an approach is the "efficient market theory,' which, briefly stated, is that in a free and actively traded market, absent compelling reasons to believe otherwise, the market price is held to take account of asset value as well as the other economic, political, and financial factors that determine "value.' " Seaboard World Airlines, Inc. v. Tiger International, Inc., supra, at 361-62. Defendants argue ...


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