The opinion of the court was delivered by: CARTER
On September 20, 1984, the court, in an opinion with which familiarity is assumed, conditionally granted plaintiff's motion for class certification in this private action claiming violations of federal securities laws.
Friedlander v. Barnes, 104 F.R.D. 417 (S.D.N.Y. 1984). The class as certified includes all persons who sold defendant Dorchester GAs Corporation's ("Dorchester") stock between November 15, 1984 and November 30, 1984, inclusive. Defendants Dorchester and its senior management --defendants John Barnes, Preston Peak and George Rooker ("the individual defendants") -- renew their arguments against certification of part of the class, i.e. those plaintiffs who sold their shares between November 25 and November 30, in the form of a motion for partial summary judgment. Plaintiff cross-moves for sanctions pursuant to F.R.Civ.P., Rule 11. Defendant Dorchester moves to dismiss the individual defendants' cross-claims against it for indemnity and contribution, as well as for summary judgment on its own cross-claims for indemnity and contribution from the individual defendants.
The crux of the summary judgment motion against the plaintiffs is the relationship between two statements made by Dorchester. In the first, a proxy statement issued on November 15, 1984, the Board of Directors disclaimed any "knowledge at the present time of any specific effort to accumulate the Company's securities or to obtain control of the company."
The second was issued ten days later. After a day of unusually heavy trading of Dorchester stock,
Dorchester asked the American Stock Exchange to delay trading and issued a news release which read in part (the "November 25 release"):
Dorchester Gas Corporation said today that it has received a number of inquiries relating to unusually active trading and price movement of its stock on the American Stock Exchange on Wednesday, November 23rd. George S. Rooker, Chairman and Chief Executive Officer, said he did not know the reason for the unusual activity, but that over a period of years Dorchester has often been the subject of unconfirmed rumors.
Mr. Rooker said he was aware that a private company was attempting to arrange financing for a possible leveraged buy-out of the company, the terms of which have not been determined. He said that the private company has had discussions with management regarding a participation in such buy-out.
Mr. Rooker said Dorchester has received no offer relating to any acquisition or merger but that it is management's policy that, when and if any firm offer is received, it would be publicly announced.
One week later, Dorchester issued a third release, (the "December 2 release") this time announcing that:
the Board of Directors of Dorchester has unanimously approved an acquisition proposal received from a financial group organized by the investment banking firm of Morgan Lewis Githins & Ahn to acquire Dorchester in a transaction in which the stockholders of Dorchester will receive $22.50 cash per share of Dorchester common stock. The acquisition is to be made by one or more newly formed, privately owned corporations in which the senior management of Dorchester and partners of Morgan Lewis Githins & Ahn will have a significant equity interest.
Plaintiff's complaint alleges that the November 15 proxy statement was "highly misleading, if not an outright falsehood" because management had, as early as August 1983, investigated the possibility of a leveraged buy-out with Morgan Lewis Githins & Ahn ("Morgan Lewis"),
and in early November of 1983 engaged that firm to arrange financing for such a transaction.
The facts submitted present the following scenario. In August, 1984, defendant John Barnes telephoned Sangwoo Ahn of Morgan Lewis to ask about doing a leveraged buy-out as a means of defending Dorchester from hostile takeover attempts. Greiner affidavit, Exhibit 1 at 12; Exhibit 2 at 9; Exhibit 4 at 61. Dorchester's management met with Ahn to discuss a possible buy-out throughout September and October. During these discussions, some degree of management participation in the buy-out was contemplated. Greiner affidavit, Exhibit 1 at 27; Exhibit 2 at 9. In October, 1984, Morgan Lewis prepared an offering memorandum for use in soliciting financing for a buy-out, and sent it to several financial institutions. On November 2, Dorchester executed a "best efforts" letter, in which Morgan Lewis agreed to seek financing for a leveraged buy-out. By October 23, 1984, the offering memorandum had been rejected by some of the financial institutions but was still under consideration by others. On November 28, Drexel Burnham Lambert Inc. and Manufacturers' Hanover Trust Co. agreed to help finance the buy-out, and on December 2, Morgan Lewis and Dorchester signed an acquisition agreement in which it was agreed that Dorchester management would have a substantial --but still unspecified-- equity interest in the buy-out.
Plaintiffs concede that the December 2 release cured whatever was misleading in the prior statements because it revealed management' approval of and significant participation in the buy-out, as well as its pendency. Plaintiff's Reply Memorandum in Support of Motion for Class Certification at 5. The issue to be decided now is whether the November 25 release adequately cured whatever was misleading in the proxy statement.
The issue is nearly identical to that before the court on the previous class certification motion. At that time, defendants unsuccessfully sought to restrict the class to those plaintiffs who had sold Dorchester stock between November 15 and November 23 inclusive. In that opinion, this court stated that "on the record before the court, it cannot be said that plaintiff's contention that the press release did not effect a complete cure raises no substantial questions of fact." 104 F.R.D. at 421. Defendants apparently construed the court's expression of doubts about the effect of the release as an invitation to submit this motion. The court said:
The complaint does allege management's central role in the organization of the buy-out and the press release does not reveal this fully [footnote omitted] The significance of this omission is another question, but whatever doubts the court may have as to the plaintiff's ability to prove a 'fraud on the market' which continued after the November 25 press release, the issue is best resolved after further evidentiary development.
Id. at 421-22. Discovery has been completed at this time, and the evidence submitted to the court fully supports plaintiffs' allegations of management sponsorship of the buy-out.
The only evidentiary development that supports defendants' position is the fact that the extent of management participation was not determined -- indeed, defendants argue that because of the way in which leveraged buy-outs are structured, could not be determined -- as of the November 25 release. Ahn affidavit at 2. Yet plaintiff alleges that the market was misled both as to management's sponsorship and its participation.
Defendants' own evidence indicates that management did sponsor the buy-out attempt. The issue then turns on the materiality of the omission. Materiality is a mixed question of law and fact. TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438, 450, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). Summary judgment is appropriate only where "reasonable minds cannot differ in the question of materiality." Id., citing Johns Hopkins University v. Hutton, 422 F.2d 1124, 1129 (4th Cir. 1970). Plaintiff has produced some evidence that the omission would be relevant to shareholders. See Abbe and Harrison affidavits. Defendants produce no evidence that it would not. As movants here, they bear the burden of showing that the ...