The opinion of the court was delivered by: LAWRENCE M. MCKENNA
Plaintiff Lawrence N. Powers filed this action on May 21, 1993, invoking the jurisdiction of this Court based on diversity jurisdiction, 28 U.S.C. § 1332, and, with regard to Count II of the Complaint, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq. Pursuant to notice of motion filed on August 31, 1993, Defendants British Vita, P.L.C. ("BV"), Rodney H. Sellers, and Francis C. Eaton, move this Court to dismiss Plaintiff's Complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, and further move this Court to impose sanctions on Plaintiff for filing a frivolous Complaint pursuant to Rule 11. For the reasons set forth below, Defendants' motion to dismiss pursuant to Rule 12(b)(6) is granted and their motion for Rule 11 sanctions is denied.
Taking the material facts alleged in the Complaint as true, see Frasier v. General Elec. Co., 930 F.2d 1004, 1007 (2d Cir. 1991), the facts are as follows. Plaintiff Lawrence M. Powers is an attorney and a citizen and resident of New Jersey. At all times relevant to this action, Plaintiff was a director, shareholder, and holder of options to purchase additional shares of common stock of Spartech, a publicly held Delaware corporation whose stock and debentures are listed on the American Stock Exchange. Plaintiff became Spartech's Chairman of the Board in 1977 and became Chief Executive Officer as well in 1983. BV is a publicly held United Kingdom corporation listed on the London Stock Exchange with its principal place of business in the United Kingdom. Defendant Rodney H. Sellers, a citizen and resident of the United Kingdom, is Chief Executive of BV, a member of BV's board of directors, and also a member of Spartech's board of directors. Defendant Francis C. Eaton, a citizen and resident of the United Kingdom, is Deputy Chief Executive of BV, a member of BV's board of directors, and also a member of Spartech's board of directors.
Spartech is in the plastics processing business. In 1968, when Spartech first went public, Plaintiff became its counsel, a shareholder, and a member of its board of directors. As noted, he eventually became both Chairman of Spartech's board of directors and its Chief Executive Officer, and, in addition, he owned, by 1989, 22% of Spartech's outstanding securities. In late 1985, Plaintiff contacted a friend, Thomas L. Cassidy, for advice regarding Spartech's capitalization needs. Cassidy, on behalf of a group of California limited partnerships affiliated with Trust Company of the West ("TCW"), invested in Spartech. In a series of transactions from 1985 to 1989, TCW purchased over 27% of Spartech's common stock on a net investment of $ 22 million; the common stock was in a form known as "quasi-equity" with anti-dilution provisions to protect TCW's percentage interest in the event of the issuance of new equity securities. TCW and Plaintiff formulated a shareholders' voting agreement whereby Plaintiff designated four, and TCW was authorized to designate two, members of Spartech's six-person board of directors. In addition, both Plaintiff and TCW retained the right to veto any new financing transactions, acquisitions, or sales of securities, with the dual purposes of ensuring that Plaintiff retained control of the company and TCW remained in a position to protect its investment. In 1985, at the time of TCW's initial investment, Plaintiff entered into an employment agreement that granted him 200,000 options on shares of common stock annually and a deferred payment arrangement on additional shares owned outright. The agreement also contained a "change of control" severance pay commitment. In 1988 and 1989, updated versions of the employment agreement were approved. Under Plaintiff's stewardship, Spartech's sales and operating earnings grew from 1983 to 1989; the company expanded into a number of different aspects of the plastics business, including the building of a six-plant, rigid plastic sheet extrusion division.
In late 1988, Spartech sought capital to begin paying down debt and distributing funds to its shareholders.
Spartech disseminated a brochure offering to sell its rigid plastic sheet division for $ 80 to $ 100 million. Plaintiff, along with the entire Spartech board of directors, had no intention, at the time this offering was distributed, of selling Spartech itself or any of its other divisions. Defendant BV learned of the competitive bidding process initiated through the offering brochure and began negotiations with plaintiff. BV's intent, however, was to obtain control of Spartech. Plaintiff subsequently informed BV that he would entertain an offer for Spartech in its entirety reflecting its market value -- approximately $ 130 million -- but that he would not
permit BV to position itself to take control of Spartech with a small investment that would leave plaintiff without an investment vehicle and as a subordinate employee and minority investor with unmarketable shares in a thinly traded company.
Compl. P 25. In the face of this obstacle to its real intent, and after having a number of its offers rejected, BV
Id. P 26. In order to effectuate their scheme, Defendants courted Plaintiff for a year, and eventually agreed with Plaintiff on a plan to purchase a stake in Spartech.
In September 1989, BV and Spartech executed three interrelated agreements (together the "Original Agreements"), detailed infra, whereby BV agreed to acquire a 29% ownership stake (ultimately convertible to 34%) in Spartech for an investment of $ 23.6 million. The Original Agreements became operative upon approval by Spartech's shareholders in December 1989. According to Plaintiff, however, Defendants never intended to honor the Original Agreements. This bad faith was evinced, Plaintiff maintains, by Defendants' request, acquiesced in by Spartech, that the following paragraph be deleted from a September 5, 1989, draft of a press release announcing the transaction:
The British Vita investment is occurring without any change in control at Spartech. They will take two board seats and be subject to the management-key investors voting trust [the Voting Agreement] structure in existence since 1985. This system will ensure that Spartech grows and develops as an independent public company in the U.S.
Pursuant to BV's proposed investment in Spartech, BV, TCW, and Plaintiff negotiated a new voting agreement, dated September 7, 1989 ("Voting Agreement"), granting Plaintiff the right to designate four of the seats on Spartech's newly expanded eight-person board of directors, and giving BV and TCW each the right to designate two board members.
The Voting Agreement maintained Plaintiff's veto right over major investments in Spartech by providing that Plaintiff had to approve any sale, merger, or takeover, or any issuance of more stock to BV. In addition, provisions of the Voting Agreement guaranteed that, as long as it was in effect, Plaintiff could solicit competing offers for any attempt by BV to purchase large blocks of Spartech stock or any other BV offer that would effect a change in control of Spartech.
Spartech and BV entered into an Investment Agreement on September 8, 1989. BV promised to forego purchasing, for three years, any additional Spartech securities contrary to Plaintiff's veto rights. BV also pledged that, for a period of three years, it would not convert into common stock any preferred Spartech stock it held if that would result in BV owning more than 40% of the outstanding common stock of Spartech. This provision was meant to prevent BV from executing a "creeping takeover" of Spartech. In addition, BV agreed that, for the same three-year period, it would not attempt, over Plaintiff's objections, to consummate a takeover of Spartech.
at all times, all parties will deal with each other in an evenhanded, fair and reasonable manner, with the objective of maximizing Spartech's shareholder value.
Id. (quoting Memorandum of Understanding).
Immediately upon the execution of the Original Agreements, Defendants began to implement their secret scheme to obtain control of Spartech. Sellers and Eaton convinced Buechler to work with them to undermine Plaintiff's authority. Defendants advised senior executive officers that Buechler would replace Plaintiff at the conclusion of Plaintiff's Employment Agreement. Defendants criticized Plaintiff to his subordinates and other board members, and encouraged Buechler to ignore Plaintiff's direction and to run the company as Buechler saw fit. Potential acquisition targets identified by Plaintiff were roundly criticized by Defendants. Only months after the "working partnership" was undertaken, Defendants suggested that Plaintiff step down from running the most important aspects of Spartech's business in favor of Buechler -- in effect, asking him to relinquish control of Spartech's operations. In response to these circumstances, Plaintiff suggested that, pursuant to the separation provision in the Memorandum of Understanding, the "partnership" with BV be dissolved. BV informally agreed to withdraw from Spartech and purchase the rigid plastics division (as had originally been proposed in Spartech's offering brochure). Months of negotiations followed, during which BV repeatedly expressed its willingness to execute this transaction. At the eleventh hour, BV changed its mind. Plaintiff contends that Defendants fraudulently encouraged this transaction -- with no intention of actually executing it -- for the purpose of damaging Plaintiff's standing with board members and Spartech's bankers.
Support for Plaintiff's stewardship of Spartech continued to wane. As a result of a recession and losses associated with the purchase by Spartech of another plastics concern,
Spartech's common stock fell to $ 1.00 per share on the American Stock Exchange in the summer of 1991. Consequently, in September 1991, Cassidy demanded that Plaintiff resign as Chief Executive Officer. Plaintiff agreed not to contest Spartech's termination of his employment agreement and indicated a willingness to accept Cassidy's offer of a consulting arrangement. In September 1991, BV convened a special meeting of the Board to postpone the annual stockholders meeting, for the purpose, Plaintiff alleges, of preventing the election of Plaintiff to another three-year term on Spartech's board of directors.
BV advised Plaintiff that it intended to terminate the Voting Agreement. BV hoped to accomplish this by invoking a provision of the Voting Agreement whereby that agreement was terminable if the fair market value of Plaintiff's Spartech shares fell below $ 2.5 million. BV expressed its willingness to commence litigation to achieve that end. According to Plaintiff, BV proceeded despite its knowledge that "fair market value" as used in the voting Agreement did not refer to the stock market price on the American Stock Exchange -- the price Defendants used to calculate that the pertinent provision of the Voting Agreement had been triggered. Buechler informed Plaintiff that BV would obstruct payment to Plaintiff of his $ 2 million severance payment -- due upon termination of Plaintiff's employment agreement without cause -- and force Plaintiff to resort to litigation to collect the payment, unless Plaintiff ceded his rights in the Voting Agreement.
In light of the foregoing -- which Plaintiff characterizes as "coercion and duress," Compl. P 77 -- Plaintiff agreed to terminate and cancel the Voting Agreement. A Termination Agreement and a Settlement Agreement were executed between Spartech and Plaintiff in November 1991, wherein Plaintiff formally agreed to terminate the Voting Agreement. Plaintiff also agreed to resign as Spartech's Chief Executive Officer and Chairman of the Board and accept the consulting arrangement first offered to him by Cassidy. The Settlement Agreement deferred payment of Plaintiff's severance. By terms of these agreements, Plaintiff relinquished, inter alia, his veto right, described supra, and his power to designate four members of the board of directors.
Upon Plaintiff's resignation and termination of the Voting Agreement, BV and TCW assumed shared control of Spartech. Given TCW's expressed desire to ultimately liquidate its share in Spartech, and because, according to Plaintiff, BV is now the sole practical purchaser of that share, TCW defers to BV on all Spartech matters (other than the price at which TCW will sell its share of Spartech). BV, therefore, especially given the relationship Defendants have forged with Buechler, has achieved effective control of Spartech -- the result, Plaintiff contends, that BV all along intended.
During the period from September through December 1991, out of a desire to reduce its debt, Spartech formulated, and eventually approved, a plan for recapitalization ("Recapitalization Plan" or "Plan"). Although still a director, Plaintiff was excluded from negotiations concerning the Plan, and did not learn of it until December 1991. Prior to final approval of the Plan, Plaintiff objected on more than one occasion to Spartech's failure to make recapitalization adjustments to minority interests. Spartech's board of directors, including Plaintiff, approved the Plan on May 1, 1992.
The Plan called for, inter alia, BV and TCW to exchange their subordinated debt and existing preferred stock for newly authorized convertible preferred stock and common stock. In addition, BV was permitted to purchase shares of newly authorized preferred stock (convertible into 750,000 shares of common stock later in 1992) for cash. In all, the Plan provided for the issuance of 3,540,000 shares of common stock and four new series of preferred common stock convertible into 15,024,635 common shares. No shareholders or option holders other than BV and TCW, however, participated in or benefited from the Plan.
As a result of the Plan, BV and TCW strengthened their combined control position in Spartech in exchange for far less value than they gave. Spartech's outstanding common stock after conversion or exercise of rights in all convertible securities and options increased from 14,800,000 to 26,000,000. BV's total share upon conversion is nearly 33.5% (from 5,200,000 to approximately 8,700,000 shares). TCW's share upon conversion is approximately 31% (from ...