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DIAMOND v. AREND

November 17, 1986

DOE DIAMOND, Plaintiff,
v.
MARK L. AREND, GEORGE BARRIE, RICHARD BARRIE, LEONARD deKARR, ROBERT FAYFIELD STANLEY FREDERICK, CARY GRANT, MATTHEW J. LEVITT, ROBERT OKIN, JACK RACHLEEF, ALEXANDER YUELYS, NORMAN J. WATERMAN, GIBBONS GREEN VAN AMERONGEN, INC., FABERGE, INC. and McGREGOR CORPORATION, Defendants



The opinion of the court was delivered by: KRAM

MEMORANDUM OPINION AND ORDER

SHIRLEY WOHL KRAM, U.S.D.J.

 Plaintiff, a former shareholder of Faberge, Inc. ("Faberge"), alleges a variety of claims against the disparate defendants: Faberge; the officers and directors of Faberge; Gibbons Green Van Amerongen, Inc. ("Gibbons Green"), an investment banking firm which unsuccessfully attempted a leverage buyout of Faberge in January, 1984; and McGregor Corporation ("McGregor"), which acquired Faberge in August, 1984. Plaintiff alleges primarily state law causes of action against Faberge and its officers and directors, sounding in corporate waste and breach of fiduciary duty. The single federal claim advanced by plaintiff is violation of Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n (e) (commonly referred to, together with Sections 13(d) and (e) and 14(d) and (f), as the Williams Act). *fn1" Plaintiff asserts that federal jurisdiction is appropriate over this claim pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and over her state law claims pursuant to the principles of pendant jurisdiction.

 Defendants disagree. Before this Court is a motion by Faberge and McGregor for judgment on the pleadings or, alternatively, for summary judgment, asking the Court to dismiss plaintiff's Section 14(e) allegations for failure to state a claim, and to dismiss plaintiff's state law claims for lack of subject matter jurisdiction. This motion has been joined in by defendants former officers and directors of Faberge. *fn2" Both plaintiff and defendants have submitted numerous affidavits and exhibits which the Court considered along with the pleadings.

 The Court will treat this motion as a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure. Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 2552-53, 91 L. Ed. 2d 265 (1986). The Court's role is not to try issues of fact; it is to "determine whether there are issues to be tried." Schering Corp. v. Home Insur. Co., 712 F.2d 4, 9 (2d Cir. 1983), quoting Heyman v. Commerce & Indus. Insur. co., 524 F.2d 1317, 1319-20 (2d Cir. 1975). See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).

 While the burden is on the moving party to show that no issues of fact exist, Adickes v. Kress & Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970), the entry to summary judgment is appropriate "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, supra, 106 S. Ct. at 2553. Speculation, conclusory allegations and mere denials by the nonmoving party are not enough to raise genuine issues of fact. See Gatling v. Atlantic Richfield Co., 577 F.2d 185, 187-88 (2d Cir.), cert. denied, 439 U.S. 861, 58 L. Ed. 2d 169, 99 S. Ct. 181 (1978); Clayton v. City of New York, 596 F. Supp. 355, 360 (S.D.N.Y. 1984).

 For the reasons stated below, the Court finds that there is no dispute of material fact, and therefore defendants are entitled to summary judgment as a matter of law.

 BACKGROUND

 As a basis for plaintiff's corporate waste and mismanagement claims, plaintiff alleges that the defendants officers and directors of Faberge had used their positions to unlawfully profit at the expense of the shareholders. In particular, plaintiff alleges that in 1981, defendants officers and directors amended their employment contracts with Faberge so as to substantially increase their earnings without any commensurate benefit accruing to Faberge.

 The following events, alleged in plaintiff's complaint and significant to the present action, are undisputed by the parties:

 On June 2, 1983, a purported derivative suit was filed in New York State Court against Faberge and certain officers and directors, attacking the employment compensation agreements as a breach of fiduciary duty. Estate of Joseph Harris v. Mark L. Arend, et al., Index No. 24309/83 N.Y.S. Ct., N.Y. Co.) (the "Harris litigation"). That litigation was still pending at the time the present motions were filed.

 On January 6, 1984, Faberge entered into a letter of intent with Gibbons Green whereby Faberge would be acquired by Gibbons Green in a leverage buyout for $30 per share. In this letter of intent, Faberge agreed to (a) grant Gibbons Green an option to purchase 500,000 shares of Faberge stock at $30 per share; (b) pay Gibbons Green $4,000,000 if Faberge received a tender offer for its stock; and (c) pay $2,000,000 to Gibbons Green in the event the Faberge board of directors recommended that the Faberge shareholders accept an acquisition offer other than Gibbons Green's.

 McGregor, then a shareholder of Faberge, brought a derivative action in New York Supreme Court on January 9, 1984, against Faberge, its officers and directors, and Gibbons Green, seeking to enjoin the payment of any money or the issuance of any stock by Faberge to Gibbons Green pursuant to the letter of intent signed by those parties. McGregor Corporation v. Faberge, Inc., et al., Index No. 00570/84 (N.Y.S. S. Ct., N.Y. Co.) (the "McGregor action"). Two other purported class actions were brought against Faberge and Gibbons Green almost simultaneous to the filing of the McGregor action, seeking similar relief.

 In addition, plaintiff here, Doe Diamond, sought leave to intervene as a named plaintiff in the Harris litigation and to amend the complaint in that action in order to attack the letter of intent between Faberge and Gibbons Green and to add Gibbons Green as a party-defendant. Leave to intervene and to amend was sought on January 23, 1984, and notice that the motion was granted was sent to Faberge on February 13, 1984.

 On January 13, 1984, McGregor contracted to purchase from Shamrock Holdings, Inc. ("Shamrock") 777,800 shares of Faberge common stock at $32 per share. McGregor then proposed to acquire Faberge in a two-tier transaction: a cash tender offer for 2,200,000 Faberge shares at $32 per share to be followed by a merger of Faberge into McGregor, and the redemption of the remaining outstanding shares of Faberge stock for McGregor securities approximately valued at $32 per share. Faberge announced on January 16, 1984 that it had received McGregor's proposal and, on January 19, 1984, that its board of directors had voted to recommend acceptance of the proposal to the Faberge shareholders. Immediately thereafter, the two companies entered into a merger agreement (the "Merger Agreement"). This Merger Agreement and other relevant information were filed by McGregor with the Securities and Exchange Commission ("SEC"), pursuant to SEC regulations, as part of its Schedule 14D-1.

 McGregor commenced its tender offer on January 23, 1984 and terminated it on February 17, 1984. Out of the 5,619,301 issued and outstanding shares of Faberge common stock, the owners of only 4.1 percent of those shares filed to tender.

 Following the termination of its tender offer, and pursuant to the terms of its offer, McGregor accepted 2,200,000 shares for purchase. Consequently, on March 2, 1984, McGregor owned approximately 61 percent of the outstanding shares of Faberge common stock, and immediately named seven members of its own board to the Faberge board of directors.

 On March 15, 1984, McGregor received, at its request, an order of discontinuance in the McGregor action from the New York Supreme Court, dismissing, without prejudice, McGregor's action against Faberge, its officers and directors, and Gibbons Green.

 On August 23, 1984, a special shareholder's meeting was held to vote on Faberge's proposed merger into McGregor. Of the issued and outstanding shares of Faberge common stock not owned by McGregor, 98.95 percent of those shares (approximately 1,082,693 shares) voted in favor of the merger. Only 8,407 shares, representing 0.385 percent of the shares held by persons other than McGregor, voted against the merger.

 Plaintiff's allegations of securities law violations center on McGregor's tender offer materials. McGregor, at the commencement of its tender offer, had mailed to all Faberge shareholders a 24-page document, its "Officer to Purchase for Cash Up to 2,200,000 Shares of Common Stock of Faberge, Incorporated at $32 Net Per Share by McGregor Corporation" ("Offer to Purchase"). Included in the same envelope with McGregor's Offer to Purchase was Faberge's "Solicitation Recommendation Statement on Schedule 14D-9" ("Recommendation Statement"). Plaintiff alleges that this Offer to ...


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