The opinion of the court was delivered by: WEINFELD
Plaintiff, suing on behalf of a class of purchasers of securities of Trans World Airlines ("TWA" or "the Airline"), alleges violations of § 10(b) of the Securities Exchange Act of 1934
and § 11 of the Securities Act of 1933.
Plaintiff alleges that the July 29, 1983 prospectus by which TWA offered a new issue of convertible preferred stock failed to disclose that TWA's parent company, defendant Trans World Corporation ("TWC" or "Trans World"), was considering a "spinoff" transaction in which TWA would be separated from TWC. Defendants move for summary judgment. The motion must be considered against the background of events which preceded and led to the spinoff of TWA from TWC.
In late 1982 and early 1983 Odyssey Partners ("Odyssey"), a private investment partnership with holdings in TWC securities, approached TWC's management with a proposal to "disaggregate" TWC's corporate holdings, which included, along with TWA, Hilton International Hotels, Century 21 Real Estate, Spartan Corporation, and Canteen Corporation. After initial private discussions between the Odyssey group and TWC management, Odyssey solicited shareholder proxies for a proposal requesting TWC's Board to study and report to the shareholders on the possibility of establishing TWC's subsidiaries as independent corporations.
In support of its proxy solicitation, Odyssey argued that the securities of the disaggregated subsidiaries would trade at a net premium over the trading value of TWC stock, in large part because, in Odyssey's view, the poor financial performance of TWA was adversely affecting the market in TWC securities.
In late 1982, TWC engaged the services of the investment banking firm of Goldman, Sachs & Co. to assist it in opposing the Odyssey proxy proposal. Goldman, Sachs prepared an analysis of the Odyssey proposal which criticized Odyssey's financial projections for TWC and its subsidiaries, and which formed the basis for TWC's communications to its shareholders in opposition to the Odyssey solicitation. In addition, Goldman, Sachs was charged by TWC's management with the conduct of an independent review of the financial and structural alternatives available to TWC, including the spin-off of one or more of the subsidiaries. The fact that Goldman, Sachs was conducting such a study was announced by TWC in its proxy materials, and was offered as an additional reason why shareholders should vote against the Odyssey proposal:
The Company several months ago retained a leading investment banking firm -- Goldman, Sachs & Co. -- which is providing independent advice with respect to the relative merits of the diversification of Trans World, including the structural and financial alternatives available to the Company. Goldman, Sachs & Co. will report their findings to the Board well ahead of the August 31 date specified in the Odyssey Proposal. In addition, their advice and assistance will continue to be provided on an ongoing basis, in the light of changing conditions, both current and prospective.
After an undisputedly heated proxy contest, involving extensive publicity by Odyssey and TWC's management, the Odyssey shareholder proposition was defeated at the annual meeting held on April 27, 1983.
Despite the defeat of the Odyssey proposal, Goldman, Sachs continued its review of alternatives with respect to TWA and the four other TWC subsidiaries. Although it was originally intended that the Goldman, Sachs study would be ready for consideration by TWC's Board at its July meeting, Goldman, Sachs had not completed it by that time, and the presentation was therefore scheduled for a special meeting of the Board on September 6, 1983.
During this period, TWA continued its loss record with little prospect of improvement. The TWA and TWC Boards were considering the possibility of a public offering of TWA securities to meet TWA's capital requirements. Despite the airline's substantial operating losses in the preceding quarters, the TWA and TWC Boards believed that the market climate was favorable for an issuance of stock. TWA had, beginning in January 1983, offered some of its own securities on the public market, as a result of which TWC's share of TWA's outstanding stock had been reduced from 100% to approximately 80%, and TWA and TWC had sought and obtained approval from their major lenders for sale to the public of up to 40% of TWA.
On July 29, 1983, TWA filed a registration statement with the SEC, and issued a prospectus for the sale of 4,000,000 shares of convertible preferred stock at an initial price of $25 per share. Among the subject headings in the prospectus was one labeled "RELATIONSHIP BETWEEN TWA AND TRANS WORLD." Preceding the description of the existing financial and other relationships between the parent and subsidiary was the following statement:
There may in the future be other arrangements between TWA and Trans World (or other of its subsidiaries). It is intended that the terms of these arrangements will be determined on an arms-length basis. There can be no assurance, however, that these terms will be favorable to TWA or that Trans World will continue to provide TWA with the same level of support for TWA's financing and other needs as it has in the past.
Subsequent to the publication of the prospectus, on September 6, 1983, the results of the Goldman, Sachs study were presented to the TWC Board of Directors. The presentation outlined seven options for the consideration of the Board: Liquidation of TWC through sale of all the subsidiaries; sale of TWC as a single entity; sale of TWA or other subsidiaries individually; continuation of offers of TWA stock to the public; separation of TWC into two entities consisting of TWA and all the other subsidiaries taken together; and retention of the established corporate structure.
The Goldman, Sachs presentation was limited to the review of these options "from a financial and market perspective only,"
and did not recommend adoption of any particular option.
After the presentation by Goldman, Sachs on September 6, TWC's Board referred the matter to its Finance Committee for further consideration. The Finance Committee met on two occasions, with other members of the Board present and participating. On September 27, the Finance Committee unanimously recommended "that the Board authorize management to develop a detailed program for a possible separation of TWA from TWC, and to proceed with related preparations." This "spinoff" proposal was considered by the full Board on September 28, at which time it was publicly announced that TWC was considering a plan of separation. Such a plan was formally adopted by the Board on October 26, approved by the shareholders on December 28, and became effective on February 1, 1984. At the time of first announcement that the Board was considering separation, TWA's stock dropped sharply in the market from the $25 per share offering price which plaintiff paid when he purchased shares of the newly-issued preferred stock offering on July 29.
Although the spinoff took place some five months after his purchase, plaintiff charges the defendants with fraudulent conduct in the omission of material facts from the prospectus issued on July 29. Plaintiff contends that TWA and TWC misled potential purchasers by failing to disclose in the prospectus that TWC was considering a spinoff of TWA, and that "Goldman Sachs was preparing to recommend to [TWC] the spinoff of TWA."
Plaintiff contends that this information was material because TWA was dependent upon the financial guarantees and other assistance provided by TWC, and that these disclosures were required in order to make other statements in the prospectus not misleading. Accordingly, plaintiff argues, he and the other members of the class, who purchased shares of the newly-issued preferred ...