Appeal from a summary judgment of the United States District Court for the Southern District of New York, Pollack, J., which rejected claims of the trustee in bankruptcy of the W. T. Grant Company alleging federal securities law violations and seeking rescission of certain purchases of stock or, in the alternative, damages representing the purchase price. Affirmed.
Before Smith, Oakes and Van Graafeiland, Circuit Judges.
This lawsuit represents an attempt by the Trustee in Bankruptcy of W. T. Grant Company to undo certain purchases by the Company of its own stock made between 1969 and 1972. The Company was adjudicated a bankrupt in 1976, and its stock is now worthless. The complaint, alleging federal securities law violations, demands rescission of the transactions or, in the alternative, damages representing the full purchase price.*fn1 The district court, in an opinion reported at 460 F. Supp. 1028 (S.D.N.Y.) granted summary judgment in favor of all defendants and plaintiff has appealed.
Appellant's discovery, which resulted in over 9500 pages of sworn testimony and the production of more than 100,000 pages of documents, created a detailed factual setting for defendants' summary judgment motion. For our purposes, however, a review of the salient facts will suffice.
The Company began as a single retail store in 1906. It grew steadily, and by 1968 the Company had over 1,000 stores and $1 billion in sales. It also had a net worth of over $283 million and net earnings for 1968 of over $37 million. At that time, it had 13,854,220 shares of common stock issued and outstanding.
As the company grew, its founder, William T. Grant, became a wealthy man, and he decided at an early date to use his wealth for charitable purposes. In 1936 he organized the Grant Foundation, which funds programs relating to the psychological and behavioral problems of young people. During the years that followed, Mr. Grant also created numerous trusts for the benefit of relatives, friends and employees, with designated charities as remaindermen. In the majority of trusts, the ultimate charitable recipient was the Foundation. Because the Foundation and the trusts were funded with Grant stock, by 1968 the Fund owned 1,294,324 shares of Grant common stock and had remainder interests in some 3,400,000 additional shares.
When Mr. Grant began the above-described program, the Company was still relatively small. It had total assets of approximately $38 million, and there were approximately 1,200,000 shares of common stock outstanding. Because Mr. Grant felt that it would "not take a relatively large investment to gain control of an enterprise of this size", he expressed the hope that the Foundation and the trusts would retain their Grant holdings. With the growth of the Company, Mr. Grant's apprehensions disappeared. In a 1968 letter sent to a trustee, with a copy to the Foundation, Mr. Grant wrote:
Today, the Grant Company has total assets in excess of $400 million. It has annual sales of almost $1 billion, it has over 1,000 stores, it has outstanding almost 13,000,000 shares of common stock with a total market value of over $450 million and it has over 17,500 stockholders. To acquire control of an enterprise of this size would require an investment so large it seems reasonable to believe that, while it is possible, it is unlikely anyone would undertake it.
Thus, under present conditions I believe there no longer is reason for me to fear that, when I am no longer here, outside unknown interests might get control of the Company, and, motivated by selfish considerations, might destroy the organization which during my lifetime I built up, and hurt many people close to me who have come to be dependent upon the continued success of the Company.
Mr. Grant's change of heart coincided with what the Foundation's Board of Trustees felt was prudent investment policy, and in June 1968 the trustees adopted a policy of portfolio diversification. The Foundation sold some of its stock on the open market and some to the Company. This litigation involves the latter sales and several sales to the Company from trustees or remaindermen.
The stock in question was purchased by the Company primarily for use in its Employees Stock Purchase Plan. The Company had had such a plan since 1950, and, by 1968, 4,600 of its employees had purchased or contracted to purchase over 2,000,000 shares. The shares received by these employees were all authorized but previously unissued, and their issuance resulted in an annual dilution of per share earnings of between one percent and one and one-half percent. In November 1968, the Company decided to use treasury rather than unissued shares, and appellee Edward Staley, Chairman of the Company Board of Directors, informed the Foundation that the Company was interested in buying some Foundation-held stock for this purpose. Negotiations that followed led to an agreement dated February 25, 1969, which provided that the Company would buy 250,000 shares on May 1, 1969, and would have the option to buy up to 950,000 additional shares in annual installments of between 200,000 and 300,000 shares. The purchase price was to be the average of the stock's daily closing price on the New York Stock Exchange during the month preceding each purchase, less 3 percent. The agreement was approved by the Foundation's Board of Trustees on February 18, 1969, and by the Company's Board of Directors on February 25, 1969.
Under New York law, the directors could authorize the purchase of Company stock out of surplus without any special authorization from the shareholders.*fn2 Laue v. Bethlehem Steel Corp., 243 App.Div. 57, 59, 276 N.Y.S. 173 (1934). However the agreement with the Foundation provided that the Company would not be obligated to make any purchases thereunder unless the agreement was approved by the shareholders, excluding the Foundation, at the Company's 1969 annual meeting. Accordingly, the Company's proxy statement for its annual meeting described the agreement and solicited shareholder approval, which was given. During the next four years, the Company bought 800,000 shares pursuant to the contract at a total price of $34,800,000. The Company exercised its option to terminate the contract on February 15, 1973, at which time Grant's stock was selling at 371/8.
On October 28, 1969, the Company entered into an agreement with appellees Connecticut Bank and Trust Company and Richard W. Mayer as trustees under one of the Grant trusts to purchase 246,664 shares of Company stock at a price 3 percent less than the average closing prices on the New York Exchange during November 1969. This agreement also provided for shareholder approval and a special meeting, preceded by a second proxy statement, was held. Following shareholder approval, the transaction was consummated.
Between 1969 and 1972, the Grant Board authorized or ratified three other purchases of Company stock without seeking shareholder approval. On June 2, 1969, the Company purchased 20,000 shares of common stock from Connecticut Bank and Trust Company as trustee under a Grant trust at a price 3 percent less than the average New York Stock Exchange price on May 29, 1969, and this purchase was ratified by the Board on June 24, 1969. In June 1970 the Company purchased 11,929 shares of its preferred stock from the Foundation at $51.75 per share, the average price that the Company had paid for its preferred shares during 1970. These shares, together with 6,600 preferred shares purchased elsewhere in 1970, were retired by the Board on January 26, 1971. In September 1972 the Company purchased 34,140 shares of common stock at an average price of $39 per share from New York University and Sloan-Kettering Institute for Cancer Research, remaindermen-distributees under several Grant trusts.
Appellant has challenged all of the above transactions in actions against the Company's directors, the Foundation, and Connecticut Bank and Trust Company, brought contemporaneously in the New York State Supreme Court and the United States District Court for the Southern District of New York. In the State Court action, which is presently pending, appellant charges defendants with self-dealing, fraud, breach of fiduciary duty, and waste of corporate assets. In his district court complaint, appellant added to these charges alleged violations of sections 12(2) and 17(a) of the Securities Act of 1933 (15 U.S.C. §§ ...