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LOU v. BELZBERG

January 16, 1990

A. JACQUES LOU, PLAINTIFF,
v.
WILLIAM BELZBERG, ET AL., DEFENDANTS, ASHLAND OIL, INC., NOMINAL DEFENDANT. JOAN STAHL, PLAINTIFF, V. ASHLAND OIL, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

  Defendants, William Belzberg, Hyman Belzberg, Samuel Belzberg, Marc Belzberg, First City Financial Corporation Ltd., First City Trust Company, Roxboro Investments 91976) Ltd., Bel-Fran Investments Ltd., Bel-Cal Holdings Ltd. and Bel-Alta Holdings Ltd. (collectively "First City") have moved pursuant to Federal Rule 56(c) for summary judgment, and Federal Rules 9(b) and 12(b)(6) for dismissal (the "First City Motion") of the Consolidated Amended Class Action and Shareholders' Derivative Complaint ("the Complaint"). Defendant Ashland Oil, Inc. ("Ashland"), and defendants John R. Hall, Robert T. McCowan, William R. Seaton, Charles J. Luellen, Samuel C. Butler, Eugene W. Erickson, James B. Ferley, Robert D. Gordon, Jr., Walter W. Hillenmeyer, Jr., Don T. McKone, Harold S. Mohler, Grover E. Murray, Jane C. Pfeiffer, Robert S. Reigeluth, James R. Rinehart, F.H. Ross, Jr., Robert B. Stobaugh, Richard L. Terrell, and James W. Vandeveer (the "Directors") have also moved (the "Ashland Motion") pursuant to Federal Rule 12(b)(6) for dismissal of the derivative claims contained in the Consolidated Amended Complaint. For the reasons set forth below, these motions are granted in part and denied in part as set forth below.

Parties

Plaintiff A. Jacques Lou ("Lou") bought 1,000 shares of Ashland common stock on March 27, 1986. Lou was a shareholder of Ashland at the time the transactions complained of herein took place and continues to hold shares of Ashland common stock.

Plaintiff Joan Stahl ("Stahl") was the owner of Ashland's common stock (in her representative capacity as Custodian for Danielle Stahl) during the time of the challenged transaction and she continues to hold Ashland shares.

The First City defendants, include certain members of the Belzberg family and the companies they control as listed above. First City is an investment corporation with financial, manufacturing, and real estate subsidiaries in the United States and Canada.

The Ashland defendants ("Ashland"), include members of the Board of Directors, listed above, and Ashland, as the nominal defendant in the derivative claims. Ashland is a corporation organized and existing under the laws of the Commonwealth of Kentucky.

Prior Proceedings

Stahl initially filed an action (the "Stahl Action") in the Eastern District of Kentucky on April 14, 1986. On the same date, Lou filed an amended complaint ("Lou Action") in California State Court. After protracted litigation in California bearing on whether the claims were properly in a federal court, on May 12, 1986, First City, Ashland Oil, and Drexel moved to change venue of the Lou Action pursuant to 28 U.S.C. § 1404(a) to the United States District Court for the Southern District of New York. By order of May 14, 1986 the motion to transfer was granted. On May 22, 1986 Ashland moved to transfer the Stahl Action to the United States District Court for the Southern District of New York and by order of August 8, 1986 the motion was granted. On October 18, 1988 the Amended Consolidated Complaint (the "Complaint") combining both the Lou and Stahl Actions was filed. On March 16, 1989 Ashland moved to dismiss the derivative claims in the complaint and on March 17, 1989 First City moved for dismissal and Summary Judgment. Oral Argument on both motions was heard on October 20, 1989, and the motions were considered fully submitted as of that date.

Facts

First City began purchasing Ashland stock in February of 1986. Between February 11, and March 25, First City acquired approximately 1.4 million shares of Ashland common stock as well as options to purchase an additional 1.2 million shares.

On March 24, 1986, First City informed Ashland that First City had accumulated between 8% and 9% of Ashland stock and that First City was filing a Schedule 13D with respect to these purchases. First City proposed a meeting between Samuel Belzberg and Ashland's Chairman, defendant John R. Hall ("Hall"), with respect to a possible transaction involving Ashland. The next day, Ashland issued a press release announcing First City's holdings, resulting in a rise in the market price of Ashland shares.

Also on March 25, Samuel Belzberg sent a letter to Hall stating:

  Based on our study of publicly available
  information concerning Ashland and our analysis of
  its business and prospects, we are prepared today
  to enter into an agreement providing for the
  acquisition of 100% of the stock of Ashland by
  First City at a price of $60.00 per share of
  common stock. If you enter into good faith
  negotiations with us, we believe that working
  together we can negotiate a higher price for
  Ashland's stockholders. If you reject out proposal
  and our offer to negotiate we will consider all
  available alternatives.

The closing price of Ashland's stock on March 25, 1986 was $52 per share, an increase of $3.75 per share from the previous day.

On the morning of March 26, a representative of Ashland telephoned a representative of First City, stating that, while Ashland was not interested in discussing any transaction with First City, Ashland was mindful of its duties to its stockholders. The Ashland representative further reported that Hall was not interested in meeting the week of March 25, as had been requested and suggested the possibility of a meeting at the end the week of March 31.

On the afternoon of March 26, First City filed its Schedule 13D, disclosing that First City had acquired 9.2% of Ashland's common stock. First City also stated that, had the requested meeting taken place, First City intended to propose, subject to the approval of Ashland's Board of Directors, the acquisition of Ashland by First City at a price of $60 per share. A copy of Samuel Belzberg's letter to Hall was attached as an exhibit to the Schedule 13D.

The Schedule 13D also disclosed that First City was considering a number of available options with respect to its future course of action:

  First City's future course of conduct will depend
  upon the receptivity of the management and Board
  of Directors of the Issuer, the availability of
  other opportunities for the use of the resources
  of First City, market conditions and other
  relevant developments. . . . Pending a
  determination by First City as to its future
  course of conduct with respect to the Issuer, it
  may increase or decrease or continue to hold or to
  dispose of its position in the Issuer and may seek
  to obtain representation on the Issuer's board of
  directors.

On March 27, First City filed a Hart-Scott-Rodino Notification and Report Form with the Federal Trade Commission and the Department of Justice seeking antitrust clearance to acquire more than 50% of Ashland's stock.

Following First City's proposal, Ashland began intensive efforts to encourage passage of and ultimately obtained "anti-takeover" legislation in Kentucky which severely restricted the ability of Kentucky corporations, such as Ashland, to effect mergers or other business combinations by an acquiror for a period of five years when such a combination had not been approved in advance by the company's board of directors. After securing the passage of this legislation Ashland informed First City that Ashland would not, under any circumstances, enter into good faith negotiations with respect to First City's proposal. Ashland also stated that, if required, Ashland would take whatever additional actions were necessary to ensure its independence.

On March 31, 1986, Ashland's financial advisor, First Boston, proposed to First City's financial advisor, Drexel Burnham, that Ashland purchase the shares held by First City. After discussions, First City agreed to sell its stock to Ashland at a price of $51 per share (the "Agreement"). This price was $.50 per share less than the price of Ashland common stock at the close of the market on March 31.

First City agreed to sell its shares to Ashland, and Ashland undertook to provide value to all shareholders. A representative of Ashland stated that management would recommend to the Ashland Board that Ashland purchase, apart from First City's shares, an additional fifteen to twenty percent of Ashland's common stock from other stockholders in the open market. In addition, First City agreed to a standstill arrangement, under which it promised not to acquire any voting shares of Ashland for a period of ten years, and Ashland released First City from any liability arising out of the stock purchase transaction.

The Ashland Board approved the Agreement and stated the following reasons in the minutes of the Board meeting:

  (1) That the Corporation and its shareholders
  would be better served by remaining independent
  than by having the Corporation acquired at a price
  of $60 per share. In reaching this conclusion, the
  Board considered the Corporation's business as a
  whole (including, among other things, management's
  own internal evaluations and outside advice
  indicating that a price of $60 for the
  Corporation's Common Stock did not reflect the
  full value of the Corporation), the Corporation's
  financial position, its borrowing capacity, the
  replacement cost of its fixed asets [sic] and
  inventories, and its future prospects. In
  addition, the Board noted that a $60 price was
  below the value which many investment analysts
  have publicly given to the Corporation's Common
  Stock.
  (2) That this is an imprudent time for the
  Corporation to be acquired. In reaching this
  conclusion, the Board considered factors referred
  to above, as well as general economic conditions
  and current conditions in the petroleum
  exploration, production, marketing and refining
  industries, both in the United States and
  worldwide.
  (3) That in addition to the above factors as well
  as the First City Parties' past record, the Board
  strongly believed that it was in the long-term
  interests of the shareholders to repurchase the
  First City Parties' shares at this time. Any
  continuation of or increase in the First City
  Parties' investment was also felt likely to have a
  disruptive effect on the customers and employees
  of the Corporation.

On April 2, 1986, the Agreement was consummated in New York. The terms of the Agreement, as well as the background of its negotiation, were disclosed in an amendment to First City's Schedule 13D filed with the SEC on April 2, 1986. That same day, Ashland announced a major restructuring pursuant to which it would purchase 7.5 million shares of its stock on the open market and transfer an additional 5.3 million shares to an employee stock ownership plan (ESOP).

After the Agreement was announced the price of Ashland stock on the New York Stock Exchange dipped to $49 3/4 per share on April 1. With the exception of the nine days following the October 1987 stock market crash, Ashland stock has traded for more than $51 per share continuously since late April 1986. Adjusted for a two-to-one stock split effected last July, Ashland stock, at the filing of these motions, was trading for more than $70 per share.

The Motions

Lou's claims, brought individually and on a derivative basis, allege violations of Sections 10(b) and 13(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) & 78m(d) and Rule 10b-5, Sections 1962(a), (c) and (d) of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-1968 ("RICO"), and the common law of fiduciary duty and fraud. Of the four derivative claims asserted by Lou on Ashland's behalf, two — those alleging violations of Section 10(b) of the 1934 Act and RICO — are asserted only against First City. The two remaining derivative claims, for "Breach of Fiduciary Duty" and "Waste and Usurpation of Corporate Assets," are asserted against both First City and Ashland.

Ashland moves to dismiss the derivative claims contained in the Complaint for failure to make a demand on Ashland's Board of Directors pursuant to Fed.R.Civ.P. 23.1.

First City moves pursuant to Federal Rule 56(c), for summary judgment in favor of First City on the derivative and individual claims brought under Section 10(b) and Rule 10b-5 on the ground that First City's disclosures in its Schedule 13D were sufficient as a matter of law and that neither the Ashland Directors nor any reasonable investor could have been misled; pursuant to Federal Rule 9(b), to dismiss the Section 10(b) and Rule 10b-5 claims for failure to plead fraud with particularity; pursuant to Federal Rule 56(c), for summary judgment for First City on the common law fraud claim on the ground that First City's disclosures in its Schedule 13D were sufficient as a matter of law and that no reasonable investor could have been misled; pursuant to Federal Rule 9(b), dismissing the common law fraud claim for failure to plead fraud with particularity; pursuant to Federal Rule 56(c), for summary judgment in favor of First City on the derivative claims as against First City on the ground that the claims are precluded by the release given by Ashland to First City as part of the Agreement; pursuant to Federal Rule 23.1 to dismiss the derivative claims as against First City for failure to make a pre-suit demand on the Ashland Board of Directors; pursuant to Federal Rule 12(b)(6) to dismiss the aiding and abetting breach of fiduciary duty and corporate waste claims for failure to state a claim upon which relief may be granted; pursuant to Federal Rule 12(b)(6) to dismiss the individual and derivative claims brought under RICO for failure to state a claim upon which relief can be granted insofar as the claims are based on predicate acts of Section 13D and Hart-Scott-Rodino reporting violations; pursuant to Federal Rule 56(c) to grant summary judgment to First City on the individual and derivative RICO claims insofar as they are based on violations of Section 10(b) on the ground that there is no genuine issue of fact with respect to whether First City committed the alleged Section 10(b) predicate offenses; pursuant to Federal Rule 9(b) to dismiss the individual and derivative claims for failure to allege fraud with particularity with respect to each of the underlying predicate offenses; pursuant to Federal Rule 12(b)(6) to dismiss the individual and derivative RICO claims for failure to allege certain additional essential elements of a RICO claim.

1. Legal standards governing motions

A. Motion to Dismiss

On a motion to dismiss under Rule 12(b)(6), the factual allegations of the Complaint are construed in the light most favorable to the plaintiff and are presumed to be true. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Meyer v. Oppenheimer Management Corp., 764 F.2d 76, 79 (2d Cir. 1985). The court should not dismiss the complaint unless it appears "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). Accord, Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984), quoted in H.J. Inc. v. Northwestern Bell Tel. Co., ___ U.S. ___, 109 S.Ct. 2893, 2906, 106 L.Ed.2d 195 (1989).

B. Summary Judgment

To grant summary judgment the court must determine that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c). The court's responsibility is not to resolve disputed issues of fact, Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987), but to determine whether there are any factual issues to be tried, while resolving ambiguities and drawing inferences against the moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 1609, 26 L.Ed.2d 142 (1970)). Summary judgment enables the court to dispose of meritless claims before becoming entrenched in a frivolous and costly trial. Donahue, 834 F.2d at 58, (citing Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986) cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987)).

C. Rule 9(b)

Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice intent, knowledge, and other condition of mind of a person may be averred generally." Fed. R.Civ.P. Rule 9(b). Although Rule 9(b) allows intent to be pleaded generally, the complaint must allege facts sufficient to support an inference of fraudulent intent. "[C]ircumstances must be pleaded that provide a factual foundation for otherwise conclusory allegations of scienter." Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1004 (2d Cir. 1988) (reports of ...


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