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MORALES v. LUKENS

September 24, 1984

RICHARD MORALES, Plaintiff, against LUKENS, INC. (As successor to the rights of General Steel Industries, Inc.), and WALCO NATIONAL CORPORATION, Defendants.


The opinion of the court was delivered by: EDELSTEIN

FINDINGS OF FACT AND CONCLUSIONS OF LAW

EDELSTEIN, District Judge:

 Plaintiff Richard Morales is a shareholder of Lukens, Inc. ("Lukens") and brought this derivative action pursuant to Rule 23.1 of the Federal Rules of Civil Procedure *fn1" to recover short-swing profits owing to Lukens to under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (1982). The profits were allegedly made by defendant Walco National Corporation ("Walco") during an attempted takeover of General Steel Industries Inc. ("GSI"), which was eventually acquired by Lukens. Jurisdiction is conferred by Section 27 of the Securities Exchange Act, 15 U.S.C. § 78aa (1982). A trial was held and the parties have submitted post trial briefs and proposed findings of fact and conclusions of law.

 BACKGROUND

 In January 1981, Walco began purchasing GSI common stock on the open market and acquired more than a 10% interest in GSI by April 22, 1981. From June 15, 1981 until December 15, 1981 (the six month short-swing profit period), Walco purchased 182,000 additional shares of GSI on the open market at a total cost of $2,842,190. In October 1981, Walco commenced a tender offer to purchase 750,000 shares of GSI at $19 per share. This offer was opposed by GSI which obtained a preliminary injunction halting the tender offer.

 GSI then found a friendly bidder or "white knight," Lukens, *fn2" to acquire all of GSI's outstanding shares and thwart Walco's takeover attempt. On December 11, 1981, discussions between Lukens, Walco and GSI commenced concerning the acquisition of GSI by Lukens and the resolution of Walco's attempted takeover. The following day, attorneys for GSI and Walco negotiated a price of approximately $22,000,000 for the purchase of all of Walco's GSI stock. *fn3" The terms of the final agreemlent provided that 396,000 shares would be sold to GSI for $7,524,000 ($19 per share) and 934,047 shares would be sold to Lukens for $14,944,752 ($16 per share).The agreement was made in anticipation of Lukens' complete acquisition of GSI.

 To facilitate Lukens' acquisition of GSI, the agreement also provided that Walco was required to proceed with the tender offer for GSI shares at $19 per share. At the completion of the tender offer Walco was to resell these shares to GSI for $19 per share, the tender offer price. GSI was to place these shares in its treasury which would facilitate Lukens' acquisition of a 100% interest in GSI by reducing the number of GSI shares outstanding. The agreement stated that Walco would be paid $800,000 representing its expenses in carrying out the tender offer.

 The parties recognized that § 16(b) liability would be incurred as a result of the transactions outlined in the agreement. Consequently, at the closing Walco paid GSI $565,000 which represented the § 16(b) liability calculated by the parties to the agreement.

 Under the agreement, Lukens agreed to propose a cash merger to GSI shareholders by which Lukens would acquire all outstanding shares of GSI common stock at $16 per share.

 The agreement was completed and signed on December 14, 1981 [hereinafter referred to as the "Agreement"].

 On December 15, 1981, the closing took place for the sale of Walco's 1,330,047 shares for $22,468,752 paid by GSI and Lukens. On January 28, 1982, Lukens and GSI entered into an agreement and plan of merger in which Lukens would acquire all of the outstanding shares of GSI for $16 per share. On February 17, 1982, Walco's tender offer expired with 750,000 GSI shares having been tendered. These shares were turned over to a depositary who paid Walco $19 per share, the price paid by Walco for the shares when tendered. In March 1982, GSI was merged into Lukens.

 I.EVIDENTIARY ISSUES

 A short trial was conducted where two witnesses testified, James M. Lynam, a vice-president of Walco and Arnold J. Jacobs, an attorney who represented Walco in connection with the Agreement. The bulk of the testimony of both witnesses consisted of descriptions of meetings and discussions held on December 11, 12 and 13 in connection with the Agreement. Plaintiff objected to this testimony at trial on grounds of hearsay and violation of the parol evidence rule. Testimony was heard over these objections and ruling was reversed. Both objections are denied.

 The testimony concerned the negotiations between GSI, Lukens and Walco prior to reaching the Agreement. Such testimony is not hearsay."Hearsay" is a statement, other than one made by the decalarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Fed. R. Evid. 801 (emphasis added). Testimony of negotiations preceding an agreement generally is not proffered for the truth of the statements made during negotiations, but rather for "the fact that the words as such were spoken." N.L.R.B. v. Tex-Tan, Inc., 318 F.2d 472, 484 (5th Cir. 1963); accord Creaghe v. Iowa Home Mutual Casualty Co., 323 F.2d 981, 984 (10th Cir. 1963); 4 J. Weinstein & M. Berger, Weinstein's Evidence ...


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