Appeal from a judgment of the United States District Court for the Southern District of New York, John F. Keenan, Judge, awarding plaintiff $4,858.50, plus interest, as short-swing profits obtained by defendant APL Corporation, in violation of 15 U.S.C. § 78p(b), and dismissing the complaint against the other defendants. See 698 F. Supp. 52 (1988). Affirmed.
Kearse and Winter, Circuit Judges, and Sweet, District Judge.*fn*
Plaintiff Mary Mayer appeals from a final judgment entered in the United States District Court for the Southern District of New York following a bench trial before John F. Keenan, Judge, awarding $4,858.50, plus interest, against defendant APL Corporation ("APL"), on her claim that APL and the other defendants controlled by defendant Victor Posner (collectively the "Posner companies") had obtained short-swing profits in the common stock of Peabody International Corporation ("Peabody"), in violation of § 16(b) of the Securities Exchange Act of 1934 ("Exchange Act" or "1934 Act"), 15 U.S.C. § 78p(b) (1982), and dismissing the complaint against Posner and his other companies. On appeal, Mayer contends that the district court erred in finding that Posner and the Posner companies other than APL were not beneficial owners of APL's Peabody stock for purposes of § 16(b), and in failing to include in the sales price of that stock the entire amount of a settlement paid to Posner companies by Peabody and The Pullman Company ("Pullman"). For the reasons below, we affirm the judgment.
The historical facts are not in dispute. The pertinent events, as found by the trial court or stipulated by the parties, were as follows.
A. The Parties and the Events
The defendant Posner companies are Chesapeake Insurance Company Limited ("Chesapeake Insurance"), DWG Corporation ("DWG"), NVF Company ("NVF"), National Propane Corporation ("Propane"), Chesapeake Financial Corporation ("Chesapeake Financial"), Southeastern Public Service Company ("Southeastern"), and APL. Posner and his family entities owned or controlled 16.8% of the common stock of DWG, which in turn owned 100% of Propane and 63.6% of Southeastern; Southeastern owned 48% of the common stock of Chesapeake Financial; Chesapeake Financial owned 100% of Chesapeake Insurance. Posner and his family entities also owned or controlled between 35% and 38% of the common stock of NVF, which in turn owned 56.7% of APL. NVF and Propane owned a total of some 24% of Chesapeake Financial; the remaining 28% of Chesapeake Financial was owned by subsidiaries of NVF. DWG, Southeastern, NVF, and APL were publicly traded companies, each listed on one or more stock exchanges. Posner was the chairman, president, and chief executive officer of all seven of these corporations.
Prior to November 1983, DWG, Chesapeake Insurance, and Propane became holders of common stock of Peabody, a corporation registered on the New York Stock Exchange. Chesapeake Insurance purchased a total of 2,305,800 shares between May 4, 1981, and November 7, 1983; DWG purchased 20,900 shares on June 24, 1983; and Propane purchased a total of 266,300 shares between July 12, 1983, and September 19, 1983. Between November 1983 and April 1984, Peabody and Chesapeake Insurance engaged in negotiations looking toward a merger.
After the negotiations ended unsuccessfully, Peabody made a tender offer for 2.3 million shares of its own stock; this offer was withdrawn after Chesapeake Insurance, DWG, and Propane brought a derivative suit in a Florida state court seeking to enjoin the offer. On June 19, 1985, Peabody signed a defensive merger agreement with Pullman and granted Pullman an option to purchase more than 2 million shares of Peabody stock if, inter alia, any group of stockholders holding 20% or more of Peabody's stock increased its holdings by 5% or more. The option effectively gave Pullman the power to block any competing merger proposal.
Just prior to August 7, 1985, Chesapeake Insurance, DWG, and Propane owned a total of about 23% of Peabody common stock, consisting entirely of the shares they had purchased prior to November 8, 1983. APL owned no shares of Peabody prior to August 7, 1985. Between August 7 and September 19, 1985, APL purchased some 1,421,800 shares of Peabody stock at prices ranging from $10 to $11 per share. As of August 23, 1985, APL was the record owner of more than 10% of Peabody's common stock; it purchased an additional 290,100 shares between that date and September 19, 1985.
Each of the Posner companies that owned Peabody stock filed statements with the Securities and Exchange Commission ("SEC" or "Commission") pursuant to § 13(d) of the Exchange Act, 15 U.S.C. § 78m(d) (1982 & Supp. V 1987), and SEC Rule 13d-5, 17 C.F.R. § 240.13d-5 (1988) ("13D Schedules"). The 13D Schedules stated that "[the] reporting persons named [therein] may be deemed to be controlled directly or indirectly by Victor Posner." DWG acknowledged its control of the Peabody shares owned by its wholly owned subsidiary Propane; in all other respects, each Posner company disclaimed beneficial ownership of the Peabody shares owned by any other Posner company.
During the summer of 1985, Peabody and Pullman met with Posner several times, seeking to persuade him not to oppose their proposed merger. In one July meeting, Pullman offered to pay $2 million for a standstill agreement whereby Chesapeake Insurance, DWG, and Propane would refrain from increasing their 23% interest in Peabody and would not oppose the merger. At the next meeting, Pullman increased this offer to $4 million. There was no contemplation that Chesapeake Insurance, DWG, and Propane would sell their Peabody stock as part of this agreement; rather, they were urged to vote that stock in favor of the merger. Posner rejected these offers and refused to support the merger.
On August 21, 1985, Peabody commenced a suit in federal court in Connecticut against Chesapeake Insurance, DWG, Propane, APL (collectively the "Posner Group"), and Posner, alleging that they had violated §§ 10(b) and 13(d) of the 1934 Act by filing false 13D Schedules and had manipulated the market by failing to disclose an intention to take over Peabody. Those defendants filed counterclaims and indicated their intention to challenge the option granted to Pullman, as well as Peabody's subsequent issuance to Pullman in August 1985 of 1.5 million shares of preferred stock.
On September 20, 1985, all of these disputes were resolved. Peabody, Posner, and the Posner companies other than NVF entered into a settlement agreement under which, inter alia, the pending suits in Connecticut and Florida were discontinued, in exchange for a payment of $5.6 million from Peabody and Pullman to the Posner Group. Of this sum, $600,000 was paid to the defendants' counsel, and $5 million was distributed as follows: $1,770,000 to APL, $2,870,000 to Chesapeake Insurance, $330,000 to Propane, and $30,000 to DWG. The settlement agreement included standstill provisions in which Posner and his companies agreed to refrain for five years from, inter alia, (1) purchasing Peabody or Pullman stock, (2) taking actions that would lead to their control of Peabody or Pullman, and (3) interfering with the Peabody-Pullman merger. On the day the settlement agreement was executed, Chesapeake Insurance, DWG, Propane, and APL sold their holdings of Peabody stock, through investment bankers, to unidentified institutional investors at a net price of $10.375 per share.
Mayer commenced the present action as a stockholder of Peabody, seeking to recover on its behalf short-swing profits under § 16(b) of the 1934 Act. She contended that because of the relationship between APL and the other members of the Posner Group, APL should be considered to have been a 10% owner of Peabody stock prior to August 7, 1985, and that APL's purchases in August and September 1985 and sales in September 1985 thus resulted in short-swing profits on all 1,421,800 of its shares. She also contended that all of the $5.6 million settlement amount was paid to the Posner Group as a result of the APL stock purchases and thus should be considered part of the sales price of APL's Peabody stock.
In an opinion published at 698 F. Supp. 52 (1988), the trial judge largely rejected Mayer's contentions. He found that each member of the Posner Group received proceeds from the sale of shares in proportion to its ownership of shares; that Posner himself did not receive any direct benefit from the sale of the shares; and that none of Posner's corporations received any financial benefit from the sale of shares it did not own. The district judge concluded that each Posner company's interest and profit should thus be considered individually. He ruled that only the 290,100 shares bought by APL after it became a 10% owner of Peabody common stock were within the purview of § 16(b) and that hence only profits from the sale of those shares should be disgorged.
The court also found that only $1 million of the $5.6 million paid to the Posner Group by Peabody and Pullman represented payment for the sale of stock. The court found that the settlement agreement, which (a) eliminated substantial opposition to the proposed merger, (b) terminated two lawsuits, and (c) ensured that Posner companies would not seek to take over Peabody or Pullman for five years, was not worthless. In light of the summer offer by Pullman of $4 million for a standstill agreement that would not have required any Posner companies to sell their Peabody stock, the court found that the value of the settlement agreement was $4 million. Deducting that $4 million plus the $600,000 for attorneys' fees from the $5.6 million payment, the court found that $1 million should be regarded as consideration for the sale of the Peabody shares.
After (a) calculating APL's share of the $1 million and the percentage of that share that was attributable to the stock purchased after APL became a 10% owner, (b) adding the resulting sum to the amount APL received from the institutional investors who purchased the shares, and (c) subtracting what APL had paid for the shares, the court found that APL's profit on the 290,100 shares subject to § 16(b) was ...