Appeal by defendant Fairleigh S. Dickinson, Jr., from a judgment and order of the United States District Court for the Southern District of New York (Hon. Robert L. Carter, Judge), holding that Dickinson violated Section 13(d) of the Securities Exchange Act of 1934. Cross-appeal by class plaintiffs from the judgment of that court, denying their claims against Dickinson for monetary relief and dismissing their claims for breach of fiduciary duty.
Lumbard, Moore and Van Graafeiland, Circuit Judges. Van Graafeiland, Circuit Judge, concurring in part and dissenting in part.
This appeal arises from seven separate actions brought against defendant-appellant, Fairleigh S. Dickinson, Jr., and eleven other defendants, for alleged violations of the federal securities laws, New Jersey state law, and the rules of the New York Stock Exchange. These seven actions include an enforcement action brought by the Securities and Exchange Commission ("SEC"), a private action filed by Becton, Dickinson & Company ("Becton") and certain of its officers, and five class actions brought on behalf of certain Becton shareholders. All seven actions stem from the acquisition by Sun Company, Inc. of approximately 34% of the outstanding stock of Becton, a New Jersey corporation engaged in the manufacture of health care products and medical testing and research equipment. The actions were consolidated for a bench trial before the Honorable Robert L. Carter, District Judge of the Southern District of New York. By agreement of the parties, the consolidated trial was bifurcated on the issues of liability and damages.
On the issue of liability, Judge Carter held, inter alia, that Dickinson, in an effort to induce a third-party takeover or partial takeover of Becton, had violated Section 13(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(d) (1976),*fn1 when he joined a group to sell more than 5% of the company's common stock without making the requisite filings with the SEC, Becton, and the exchange on which the securities were traded.*fn2 Wellman v. Dickinson, 475 F. Supp. 783, 837 (S.D.N.Y. 1979). Before the trial on damages commenced, the SEC withdrew its request for relief from Dickinson other than a judicial declaration that Dickinson had violated Section 13(d). Accordingly, by order entered on February 19, 1980, Judge Carter adhered to the court's findings concerning Dickinson's liability and, with the SEC's consent, terminated with prejudice its enforcement action against Dickinson.*fn3
On July 31, 1980, Judge Carter issued a final opinion addressing, inter alia, the class plaintiffs' claims for damages or disgorgement of profits against Dickinson and other members of the group found to have violated Section 13(d). Wellman v. Dickinson, 497 F. Supp. 824, 834-36 (S.D.N.Y. 1980). Judge Carter held that these plaintiffs had no right to monetary relief against Dickinson for a number of reasons, including their failure to demonstrate that the Section 13(d) violations directly caused any injury to the class. Thus, the district court entered a final judgment on September 29, 1980, denying the class plaintiffs' claims for disgorgement and other monetary relief against Dickinson for his violation of Section 13(d).
Dickinson appeals from this final judgment and all prior orders in this case finding that he violated Section 13(d) of the Securities Exchange Act of 1934. Dickinson contends that plaintiffs have failed to prove either that the purported members of the Section 13(d) group had beneficial ownership of sufficient Becton stock to form a group with him, or that he had entered an agreement with anyone to dispose of Becton stock either directly or indirectly through agents. The class plaintiffs cross-appeal from those portions of the September 29, 1980 judgment denying their claims for disgorgement and other monetary relief against Dickinson and from the dismissal of their claims for breach of fiduciary duty against Dickinson. On appeal, the class plaintiffs renew their argument that Dickinson breached his fiduciary duty to the shareholders of Becton, and that he must disgorge a portion of the profits he obtained as a result of his actions in violation of Section 13(d) and in breach of his fiduciary duty.
We reject the claims raised by both parties, and hold that Judge Carter did not err in finding that Dickinson violated Section 13(d) of the Securities Exchange Act of 1934 and in denying the claims of the class plaintiffs for damages or disgorgement from Dickinson. For the reasons set forth below, we affirm the district court's judgment and orders in all respects.
Since the facts underlying this appeal are described in detail in the two opinions of the district court, Wellman v. Dickinson, 497 F. Supp. 824 (S.D.N.Y. 1980); Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979), we shall only summarize them briefly.
As Judge Carter observed: "The background and governing facts in this complex drama embrace personality conflicts, animosity, distrust, and corporate politics, as well as a display of ingenuity and sophistication by brokers, investment bankers and corporate counsel". Wellman v. Dickinson, supra, 475 F. Supp. at 797-98.
One of the principal personalities was Fairleigh S. Dickinson, Jr., the son of a founder of Becton and a major stockholder of the company. He individually held 802,138 shares of Becton stock (4.2% of the outstanding shares). In addition, Dickinson held 140,794 shares (.64%) as a co-trustee and at least 198,922 shares (1%) as a member of the Dickinson family.
Dickinson personally managed Becton for over twenty-five years. In 1974, Dickinson relinquished his management responsibilities and became Chairman of the Board. In late 1976, however, differences between the new management and Dickinson emerged. On April 20, 1977, after a bitter internal power struggle over the course of several months, the new management team prevailed, and the board of directors voted to remove Dickinson as its chairman.*fn4
The day following his removal as chairman, Dickinson met with representatives of Salomon Brothers ("Salomon"),*fn5 a New York limited partnership engaged in the investment banking and brokerage business, to obtain advice on how to regain control of Becton. In attendance were Jerome Lipper, who was Dickinson's attorney, Kenneth Lipper, brother of Jerome Lipper and a partner of Salomon, Richard Rosenthal and John Gutfreund of Salomon, Martin Lipton, who was Salomon's attorney, and two directors of Becton who were sympathetic to Dickinson. These men discussed several possible strategies. Dickinson ultimately agreed to a plan to vote with outside directors as a means of bringing pressure on Becton's management and selling a block of the company's shares, including his own, to a corporation interested in taking over Becton. Dickinson hired Salomon to assist him in locating a corporation that would be interested in purchasing his substantial holdings in Becton and those of his friends as the springboard for a complete or partial takeover of the company. Dickinson's friends included Dr. J. H. Fitzgerald Dunning, a director of Becton, who personally owned 3,200 shares and served as one of two co-trustees for one of three family trusts which held 344,849 shares (1.8%). Each of his two brothers served as a co-trustee for one of the other two trusts, and Dunning's personal lawyer served as the other trustee for all three trusts.
Shortly thereafter, Salomon was also contacted by Dan W. Lufkin who was concerned about his investment in Becton stock in light of Dickinson's removal from the company's chairmanship. Lufkin was a member of a partnership together with Edward L. Scarff which owned 93,000 shares of Becton stock. The partnership and three other individuals, Richard Drake, Charles Willock, and Robert Smith, were the principals of a kidney dialysis company acquired by Becton in 1977. As a result of that transaction, the partnership received 93,000 shares of Becton stock, Willock received 46,248 shares, and the two other men each received 140,148 shares (total 2.2%). After the acquisition of the dialysis company, Drake, Willock, and Smith continued to rely heavily on Lufkin's partnership for investment advice.
Dickinson subsequently contacted Robert Zeller, chief executive officer of F. Eberstadt & Company, Inc. ("Eberstadt"), a Delaware corporation engaged in investment banking, institutional stock brokerage, and the management of pension funds and advisory accounts. Eberstadt had acted for many years as Becton's investment banker. Zeller had also advised Dickinson on the handling of some of his personal affairs. Moreover, an Eberstadt subsidiary, F. Eberstadt & Company Managers & Distributors Inc. ("Eberstadt M & D"),*fn6 served as investment advisor to two mutual funds (the "Funds"), the Chemical Fund and the Surveyor Fund, which along with a number of Eberstadt-managed discretionary brokerage accounts held 496,075 shares of Becton stock (2.6%). Dickinson informed Zeller that he was asking Salomon to involve Eberstadt in the effort to encourage a corporation to undertake a complete or partial takeover of Becton. Initially, Dickinson and Salomon and Zeller entered into merely an oral understanding. However, after Becton's counsel threatened to sue if Dickinson continued to seek a buyer for a large percentage of Becton stock, Martin Lipton, Salomon's attorney, advised Salomon to obtain written indemnification from Dickinson. By letter dated October 12, 1977, Dickinson confirmed his engagement of Salomon and agreed to indemnify the firm against all claims arising out of its representation of Dickinson in securing a buyer for his stock.
Beginning in the spring of 1977, Salomon and Eberstadt worked earnestly to interest a major corporation in acquiring a minority interest or in effecting a complete takeover of Becton. During the next eight months, Salomon and Eberstadt arranged meetings with several major corporations, including Avon, American Home Products Corp., and Squibb Corp., in an effort to induce these companies to acquire shares in Becton. Dickinson himself participated in these activities until late December, when he was hospitalized for approximately one month.
The presentations by Salomon and Eberstadt to the corporations potentially interested in purchasing Becton stock were virtually identical. A representative from one of the two brokerage houses would inform the corporation that Salomon and Eberstadt were representing Dickinson. They would then describe Dickinson's animosity toward Becton's management and his desire to dispose of his stock in the company. They would also disclose that other stockholders shared Dickinson's ill feelings and were interested in selling their shares. In each case, the corporation was advised that Dickinson's stock and a block of stock that the brokerage houses represented were available if the corporation was interested in a takeover of Becton. This block of shares included those beneficially owned by the Eberstadt-managed funds and by Dickinson's friends, Dunning and Lufkin. The representative would then outline a takeover plan, placing special emphasis on the number and availability of the shares controlled by Dickinson, the Funds, Dunning, and Lufkin's partnership. They asserted that Dickinson and his family held approximately 1,200,000 shares and that the remaining three members of the group held approximately 1,300,000 shares. Although a portion of these shares were held in trust, the representative assured the potential purchaser that the approximately 2,500,000 shares (13%) were readily available.*fn7 Moreover, the corporation was usually told that the group's shares of Becton stock would provide a sufficient base from which to launch a more extensive acquisition program for additional shares and a complete takeover of the company.
The labors of the two brokerage houses eventually bore fruit when Sun Company, Inc. ("Sun"), a Pennsylvania corporation whose principal business involves oil and gas, entered the picture. On November 28, 1977, Kenneth Lipper of Salomon approached Horace Kephart, a senior vice president of Sun in charge of the company's corporate development and diversification program, and suggested that Sun might want to consider Becton as a possible acquisition. Lipper informed Kephart that 15% of Becton's stock was available and that this initial block included 1,200,000 shares owned by Dickinson, 300-400,000 shares owned by Dunning, 400,000 shares owned by Lufkin, and 500,000 shares owned by the Chemical Fund, one of the Eberstadt-managed mutual funds. Lipper also advised Kephart that Sun would be able to acquire quickly an additional 10-20% of Becton stock. Kephart was aware of the rift between Dickinson and Becton's management and learned of Becton's public announcement in June of its desire to remain independent.
At a meeting of Sun's senior executives held in early December, Kephart mentioned Becton as a possible acquisition opportunity. A study of Becton and the health care industry in general was undertaken to determine the desirability of an investment in the company. After reviewing the results of this in-house study, Sun's senior executives decided that the possibility of acquiring Becton should be explored more fully. Accordingly, a number of meetings were held between Dickinson's and Sun's representatives in late December 1977 and early January 1978 to discuss alternative strategies for acquiring Becton. Kephart was given a list of available holdings, including those of Dickinson, Dunning, and Lufkin. Kephart was already aware that a large percentage of Becton's shares was held by institutions, and he was assured that the 500,000 shares of Becton stock held by the Funds and the Eberstadt-managed discretionary accounts were readily available to Sun. Four possible strategies were considered: (1) to seek shares sequentially, first from individuals, then from institutions; (2) to seek shares simultaneously from these two groups; (3) to tender immediately;*fn8 and (4) to contact management directly. The consensus was that simultaneous purchases from large individual and institutional shareholders, undertaken with as much secrecy as possible, would be the best strategy. Sun would purchase the block held by Dickinson, Dunning, Lufkin and the Funds, and then would conduct a limited solicitation of Becton's institutional holders to reach its target of acquiring 34% of the outstanding shares.*fn9 This strategy would enable the acquisition to be carried out quickly and would permit Sun to acquire physical possession of the shares in the shortest possible time.
Presentations made to Sun's board of directors on January 5 indicated that a 15% block of the Becton's shares held by four non-management persons were available and additional shares representing 10-20% of the outstanding stock could be readily acquired. Sun executives understood that the block of shares in question belonged to Dickinson, the Funds, Dunning, and Lufkin. On January 11, recommendations concerning an acquisition strategy were presented to Sun's senior officials.
On January 13, Sun's Executive Committee approved the strategy of limited solicitation of large individual and institutional shareholders and authorized the purchase of approximately 34% of Becton's outstanding shares, provided that the total expenditure not exceed $350 million. The transaction was contingent, however, upon Sun's obtaining at least 25% (subsequently lowered to 20%) of the outstanding shares of Becton stock. Sun further agreed to a $700,000 fee to be divided equally between Eberstadt and Salomon, plus indemnification for all their out-of-pocket expenses, including attorneys' fees, due and payable upon the acquisition of 20% of the shares.
The offer proposed a two tier price structure -- a higher price of $45 per share with no recourse and a lower figure of $40 per share with a right to receive the ...