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Kronfeld v. Trans World Airlines Inc.

decided: November 2, 1987.


In an action under the securities laws alleging that a prospectus issued in connection with a public offering contained material omissions, plaintiff appeals from a judgment of the United States District Court for the Southern District of New York, Edward Weinfeld, Judge, granting defendants' motion for summary judgment and dismissing plaintiff's complaint. Reversed and Remanded.

Oakes, Miner and Mahoney, Circuit Judges.

Author: Mahoney

MAHONEY, Circuit Judges:

This appeal brings up for review a judgment of the United States District Court for the Southern District of New York (Edward Weinfeld, Judge) granting defendants' motion for summary judgment and dismissing plaintiff's complaint. The district court's decision is reported at 631 F. Supp. 1259 (S.D.N.Y. 1986). Plaintiff Kronfeld, suing on behalf of a class of purchasers of cumulative convertible preferred stock offered by defendant Trans World Airlines, Inc. ("TWA") on July 29, 1983, alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act");*fn1 Rule 10b-5 promulgated thereunder;*fn2 and Section 11 of the Securities Act of 1933 (the "1933 Act").*fn3 We find merit in plaintiff's contentions on appeal, and accordingly reverse the judgment appealed from and remand for further proceedings.


TWA became a wholly-owned subsidiary of defendant Transworld Corporation ("TWC") on January 1, 1979 pursuant to a plan of reorganization.*fn4 By late 1982, TWC had five major subsidiaries: TWA, Canteen Corp., Century 21 Real Estate Corp., Hilton International Co. and Spartan Food Systems, Inc. At that time, TWA was a poor financial performer, having suffered large losses in previous years. Future losses were predicted.

In late 1982 and early 1983, Odyssey Partners ("Odyssey"), an investment partnership with substantial holdings in TWC, proposed to TWC's management a "disaggregation " of TWC's subsidiaries. Odyssey contended that the securities of the separated subsidiaries would trade at a premium over the then-trading value of the parent's securities, largely because, in Odyssey's opinion, the poor financial health of TWA was tarnishing the market performance of TWC securities.

Odyssey's discussions with TWC's management were not fruitful; Odyssey therefore took its case to TWC's stockholders by soliciting proxies in favor of a proposal requesting TWC's board of directors to develop and implement a program whereby TWC's primary subsidiaries would be spun off to form independently traded public corporations.*fn5

TWC retained Goldman, Sachs & Co. ("Goldman Sachs") to aid in meeting Odyssey's challenge. Goldman Sachs's ultimate criticism of Odyssey's financial projections was used by TWC in its opposition to Odyssey's proposal. At that time, TWC also asked Goldman Sachs to review the "structural and financial alternatives" available to TWC and to report its findings to the latter's board of directors "well ahead of the August 31 date specified in the Odyssey Proposal." TWC Proxy Statement dated March 24, 1983, p. 19. The retention and assignment of Goldman Sachs were disclosed in a proxy statement issued to TWC shareholders on March 24, 1983, as well as in full-page advertisements in the Wall Street Journal (April 14, 1983) and New York Times (April 15, 1983), and articles in Newsweek (May 2, 1983) and Fortune (June 13, 1983) magazines.

The Odyssey proposal was rejected by TWC's shareholders at their annual meeting on April 27, 1983 following a bitter, well publicized proxy fight, although 23 % of the vote favored the proposal, and substantial institutional holders of TWA's common stock, while supporting management, were sympathetic to or perceived merit in the Odyssey proposal. Goldman Sachs continued its review of TWC's structural and financial options. At the May 25, 1983 meeting of TWC's board of directors, Frank L. Salizonni, senior vice president for finance and administration of TWC, stated that a report from Goldman Sacks "would likely be ready for submission to the Board in July."*fn6 According to defense witnesses, however, Goldman Sachs's progress as of late June indicated that an adequate presentation would not be ready for the July meeting. A special meeting of TWC's Board was therefore scheduled for September 6, 1983, at which time Goldman Sachs was to present the results of its review.

As these events unfolded, TWA's financial losses continued. My May or early June, 1983, TWA considered the possibility of a public offering, having been advised that market conditions were favorable for an issuance of stock.*fn7 On July 7, 1983, the TWA board of directors authorized the stock offering which is the subject of this litigation. On July 29, 1983, TWA filed a registration statement with the Securities and Exchange Commission and issued a prospectus for the offering of four million shares of cumulative convertible preferred stock at an initial price of $25 per share.

The prospectus included a section set off by the heading "RELATIONSHIP BETWEEN TWA AND [TWC]," which contained the following statement:

There may in the future be other arrangements between TWA and [TWC] (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 [TWC] will continue to provide TWA with the same level of support for TWA's financing and other needs as it has in the past.

631 F. Supp. at 1261. This section of the prospectus went on to detail various relationships between TWA and TWC under the headings Financial Relationships, Guarantees, Benefit Plans, Corporate Expenses and Federal Taxes.

The immediately preceding section of the prospectus, headed "CONTROL BY [TWC]," included the following statement:

As TWA must obtain the consent of its lenders to set aside Common Stock into which the Convertible Preferred Stock can be converted, consents have been obtained to allow the creation of up to a 40 % public holding in Common Stock. TWA and [TWC] may from time to time issue or sell or otherwise dispose of shares of Common Stock as a result of which the outside ownership of Common Stock could be increased to an amount in excess of 40 %, assuming any required consent of lenders and stockholders of the two companies is obtained.

The prospectus made no mention of the ongoing Goldman Sachs study.

At a meeting on July 7, 1987 between representatives of TWC and Goldman Sachs respecting the Goldman Sachs study, Mary Ann Casati, a Goldman Sachs associate, took notes which included, under a heading "2 AIRLINE SALE/SPINOFF," the statement " primary -goal-build liquidity in airline & cut cord w/TWC so they can walk away" (emphasis in original); and in the margin on the same page, "TILL DEATH DO US PART."

As planned, Goldman Sachs presented the results of its study to TWC's Board of Directors on September 6, 1983. Seven alternatives were submitted to the Board for its consideration: (1) liquidation of TWC through a sale of each of its subsidiaries to the highest bidder with a spinoff to shareholders of subsidiaries that could not be sold for a premium over public market values; (2) sale of TWC; (3) partial liquidation, through sale of TWA or other subsidiaries; (4) additional public sales of TWA shares; (5) public sale of 20 % of a "hospitality company" composed of non-airline subsidiaries; (6) separation of TWC and TWA by a spinoff of the airline or a rights offering to TWA shareholders; and (7) maintenance of the status quo. Goldman Sachs did not recommend adoption of any particular alternative.

Following the September 6, 1983 presentation, TWC's board of directors referred the matter to its finance committee. The Committee met twice, with other board members attending; on September 27, 1983, it unanimously recommended that the board of directors authorize development of a "detailed program for a possible separation of TWA from TWC." TWC's Board adopted the proposal on September 28, 1983. At the same time, public announcement was made that TWC was "considering the possible separation of TWA," and had "instructed management to develop a detailed program under which [TWC's] 81 percent common stock holdings in [TWA] would be distributed to [TWC's] common stock holders, establishing TWA as a separate, publicly owned company." The announcement added that TWC's board of directors was giving this proposal "its most careful consideration," and would seek stockholder approval "if it votes to proceed with a separation plan . . ." TWC's Board formally adopted a plan of separation on October 26, 1983. The plan received shareholder approval on December 28, 1983 and was effectuated on February 1, 1984.

Following TWC's September 28, 1983 announcement that it was "considering" the separation of TWA, the market price of the stock purchased by plaintiff dropped markedly. The Joint Appendix submitted by the parties shows a 23.8 % decline between September 20, 1983 and October 3, 1983.

In his complaint dated November 29, 1983, Kronfeld alleged that the registration statement and prospectus issued in connection with the July 29 offering were misleading in that they allegedly failed to disclose material "information regarding [TWC's] consideration of a plan to completely spin-off its TWA subsidiary." Plaintiff further alleged that the offering documents failed to mention the impending Goldman Sachs report, even ...

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