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May 30, 1984

BERNARD HAHN, Plaintiff,

The opinion of the court was delivered by: WEINFELD


This class action was commenced by plaintiff, Bernard Hahn, a shareholder of Enterprise Development Group ("EDG"), a business trust organized under the laws of Massachusetts ("the Trust"), to rescind a merger whereby the Trust was merged with and became an indirect and wholly owned subsidiary of Apex Oil Company ("Apex") on August 10, 1982.

 This is the plaintiff's second lawsuit attacking the merger. Plaintiff, who owned 100 shares of EDG, previously filed a class action in the New York State Supreme Court in August 1982 to enjoin the merger or set it aside on the ground that the merger price was unfair and that the trustee defendants had breached their fiduciary duty to the EDG shareholders by entering into the merger.

 This class action was instituted in December 1982 after defendants had moved to dismiss plaintiff's state complaint. The defendants include the six former trustees of EDG, the merged company, Apex, various Apex subsidiaries, and individuals who are beneficial owners of shares in one or more Apex companys. (For convenience, the various Apex companies will be referred to as "Apex"). The complain alleges three causes of action. First, that the defendants violated section 14(a) of the Securities Exchange Act of 1934 ("The Act") *fn1" and Rule 14(a)-9 promulgated thereunder, *fn2" based on alleged misstatements in or omissions from the proxy statement sent to shareholders to consider the merger proposal; second, that the omissions from and misrepresentations contained in the proxy statement also violated section 10(b) of the Act *fn3" and its implementing Rule 10b-5; *fn4" and third, that the defendants breached their fiduciary duties to the public shareholders, in violation of state common law as pendent to the federal claims under counts 1 and 2. Plaintiff seeks judgment voiding the merger; compensatory damages; and an order directing that David Fain Brown, who was Chairman of the Trust's Board of Trustees, pay to the class any monies he received from Apex pursuant to a Consulting Agreement. Jurisdiction is grounded upon section 27 of the Act *fn5" and pendent jurisdiction.

 The defendants move for an order pursuant to Rule 12(b)(1), 12(b)(6) and (9)(b) of the Federal Rules of Civil Procedure dismissing the complaint for lack of subject matter jurisdiction, failure to state a claim for relief and failure to plead fraud with particularity. Alternatively, they move pursuant to Rule 56 of the Federal Rules of Civil Procedure for summary judgment in their favor, in support of which they have submitted a Rule 3(g) statement of material facts as to which they assert there is no genuine issue of fact to be tried. *fn6" The plaintiff, in his response to the Rule 3(g) statement, has submitted a diffuse and argumentative statement which obscures rather than clarifies whether these are genuine issues of fact; finally, he argues that he has had no discovery to date to substantiate his allegations, which, he alleges, forecloses the granting of summary judgment at this time. With respect to this contention, it should be noted that the motion is based upon the proxy statement and other documentary matter, the contents of which are not in dispute. *fn6"

 EDG, organized in 1969, originally operated as a Real Estate Investment Trust ("REIT") *fn7" that primarily granted first mortgage loans to real estate developers. Upon its organization, it was known as the C.I. Mortgage Group, but in May 1981, the name was changed to EDG. In the mid-1970's, faced with serious financial losses due to developers defaulting on their loans, the Trust ceased to qualify as a REIT and ceased operating as a mortgage lender. Instead, its principal focus became the acquisition and then the management of properties secured by loans in default and became essentially a real estate development and operating company. By late 1979, EDG regained a healthy financial position through the restructuring of its debt and selling a substantial portion of its real estate assets.

 As a result of its direct purchases of shares and those by corporations in which it owned stock in 1980 and 1981, Apex, by March 1982, owned 49.7% of the outstanding shares of the Trust. It then proposed to EDG's Board of Trustees that Apex Holding acquire the entire remaining equity interest in the Trust for cash. Upon receipt of the proposal, EDG's Board of Trustees appointed a Committee of the Board, the Ownership Planning Committee, to discuss and negotiate with Apex the terms of the proposed acquisition. The Committee consisted of N. Preston Breed, David Fain Brown and John Michael Brown. The Committee retained The First Boston Company ("First Boston"), an investment banking firm, to advise it in connection with the determination of a price in a merger or similar transaction that would be fair to the public shareholders. *fn8" After an analysis of the business operations and financial condition of the Trust, First Boston advised the Committee that a cash price of $10.50 per share was fair to the public shareholders from a financial point of view.

 On April 19, 1982, the Ownership Planning Committee and EDG's Board of Trustees approved a merger proposal under which Apex Holding Company would acquire the entire equity interest in EDG. Each public shareholder would become entitled to receive $10.50 in cash for each share held, or under an amendment which was part of the merger plan, in lieu of receiving $10.50 per share in cash, a shareholder would be entitled to be paid in cash the fair value of his shares as determined in an appraisal proceeding. In order to become effective, the merger required the affirmative vote of (1) two-thirds of the outstanding shares, and (2) a majority of the votes cast for and against the merger by the public shares. Thus, in effect, the public shareholders had a veto power over the merger proposal. The proposed merger was approved at the meeting held on August 10, 1982. Apart from the shares owned by EDG and its affiliates that were voted in favor of the merger, 94.7% (public shareholders) were voted for the merger, and 5.3% were voted against it.The price of $10.50 per share exceeded the market price of shares on the date the merger was announced ($7.50 per share) and exceeded the highest market price of the shares during the preceding seven years.

 Against that background we consider the plaintiff's claims in this action. Plaintiff's complaint alleges various misstatements *fn9" or omissions in the proxy material. The essence of his charges, in the main, center principally about EDG's substantial tax loss carryforwards and their utilization by Apex soon after the merger; the employment or affiliation of members of the Ownership Planning Committee; and an agreement whereby David Fain Brown, following the merger, was to receive $1 million for consultation services over a five-year period.

 The defendants, on the other hand, urge that the matters allegedly omitted were in fact disclosed or were not necessary in order to render any of the statements in the proxy materials not false or misleading; that the alleged misstatements or omissions are not material in the light of the facts disclosed. In substance, they urge that the proxy statement met the standard of materiality as stated by the Supreme Court in TSC Industries, Inc. v. Northway, Inc.;10 that it fully and fairly set out such relevant and material facts to enable a reasonably prudent stockholder to vote in an informed manner on the proposed merger.

 We consider each claim of alleged omissions or misstatements separately.


 Plaintiff alleges that the proxy statement contained a false statement with respect to members of the Ownership Planning Committee, which had recommended approval of the merger. The covering letter to the proxy statement stated:

 As a result of its 49.7% ownership and its representation on the Board of Trustees, Apex may be deemed in control of the Trust. Therefore, in order to assure that the merger would be fair to public shareholders, the Board of Trustees established a Committee comprised of Trustees who are not employed by, or affiliated with, Apex, to evaluate the proposed merger again.

 The clause "Trustees who are not employed by, or affiliated with, Apex Oil" is repeated in a section entitled "Summary of Proxy Statement." The complaint alleges that the foregoing statement was "intentionally false" in that David Fain Brown was a person closely affiliated with Apex Oil. The charge appears to be limited to Brown. However, plaintiff has isolated the above references from other portions of the proxy statement which, on their face, negate his allegation. The relationship between Brown and Apex is set forth at three separate places in the proxy statement. *fn11" One of these, headed "Conflicts of Interest," is given equal emphasis with the Board's recommendation of the merger (it directly follows the recommendation) and is cross-referenced with other sections in the statement. The "Conflicts of Interest" section discloses matters with respect to various conflicts of interest and, among other matters, states that Brown, "Chairman of the Board and of the Ownership Planning Committee, has accepted a five-year Consulting Agreement with Apex worth in the aggregate $1 million commencing after the merger" and contains other references to the Consulting Agreement and its terms. This Consulting Agreement for future services, by itself, did not render Brown a person "affiliated with Apex." *fn12" ...

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