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MORALES v. NEW VALLEY CORP.

July 30, 1996

RICHARD MORALES, Plaintiff, against NEW VALLEY CORPORATION, HARRY I. FREUND and JAY S. GOLDSMITH, Defendants.


The opinion of the court was delivered by: HAIGHT

 HAIGHT, Senior District Judge:

 Plaintiff Richard Morales brings this action pursuant to section 16(b) of the Securities Exchange Act of 1934 (hereinafter the "1934 Act"), 15 U.S.C. § 78p(b), seeking disgorgement of alleged short-swing profits earned in transactions involving Class B cumulative convertible preferred stock ("B convertible") of New Valley Corporation ("New Valley"). Defendants Harry Freund and Jay Goldsmith (the "moving defendants") move jointly to dismiss under Rule 12(b)(6), Fed. R. Civ. P., arguing that they are not "beneficial owners" as that phrase is used in section 16(b). To be a "beneficial owner" and thus subject to liability under that provision, the individual must own at least 10% of "any class of any equity security." 15 U.S.C. § 78p(a). The instant motion raises a single, discrete issue deriving from this definition: whether a specific type of preferred stock, which is in many ways different from other nominal classes of stock in the corporation but which votes with the other classes on matters of general corporate concern, constitutes a separate "class" for the purposes of section 16(b). On the facts of the present case, I answer the question in the affirmative and therefore deny the motion to dismiss.

 I.

 On a motion to dismiss under Rule 12(b)(6), the trial court's function "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980); see Ricciuti v. N.Y.C. Transit Authority, 941 F.2d 119, 124 (2d Cir. 1991). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). The district court should grant a Rule 12(b)(6) motion "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).

 Except in certain circumstances, consideration of a motion to dismiss the complaint must focus on the allegations contained on the face of the complaint. See Cortec Industries, Inc. v. Sum Holding, L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, 112 S. Ct. 1561 (1992); Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991). On a motion to dismiss, a district court must accept plaintiff's well-pleaded factual allegations as true, Papasan v. Allain, 478 U.S. 265, 283, 92 L. Ed. 2d 209, 106 S. Ct. 2932 (1986), and the allegations must be "construed favorably to the plaintiff." LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991). "[A] Rule 12(b)(6) motion to dismiss need not be granted nor denied in toto but may be granted as to part of a complaint and denied as to the remainder." Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982).

 The parties to this motion have submitted a number of documents extraneous to the pleadings. Generally, on a motion to dismiss under Rule 12(b)(6), the Court may only consider the complaint, documents attached to it or incorporated by reference, and matters of which judicial notice may be taken. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993). However, the law of this Circuit also allows courts to consider documents filed with the SEC and relied upon by plaintiff in composing the complaint. See Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991); I. Meyer Pincus & Assoc. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991). Thus, the facts outlined below are derived from allegations in the complaint and New Valley's various filings with the SEC, primarily its Form S-1 Registration Statement and its certificate of incorporation contained therein.

 Only certain facts alleged in the complaint and discussed in plaintiff's brief are relevant to the present dispute. For present purposes, it is sufficient to describe New Valley's capital structure, and the general nature of the allegations levied against the individual defendants.

 New Valley's capital structure consists of three issues of equity securities: common stock, senior A preferred stock (the "A preferred), and B convertible. At all times relevant to this action, there were 189 million shares of common stock outstanding, 1.5 million shares of A preferred outstanding, and 2.8 million shares of B convertible outstanding.

 The A preferred ranks senior to both the B convertible and the common stock with respect to the payment of dividends and the distribution of corporate assets upon liquidation. The B convertible ranks senior to the common stock in these respects. The precise dividend rate payable to the holders of A preferred and B convertible is for present purposes irrelevant: suffice it to say that the two classes are entitled to payments of different sizes and subject to different conditions. Holders of common stock are entitled to dividends only if there is enough to go around after the specified amounts have been paid to holders of A preferred and B convertible, and the Board of Directors decides that such a distribution is warranted.

 The certificate of incorporation subjects A preferred to both mandatory and optional redemption provisions and the B convertible to an optional redemption provision. The optional redemption provisions are different for the two classes of stock. There is no provision in the certificate for redemption of common stock.

 As far as voting rights are concerned, holders of both the A preferred and the B convertible are entitled to vote on "all matters upon which holders of Common Shares are entitled to vote," New Valley's Form S-1 at 12, that is, elections of directors and most matters of general corporate concern. Holders of A preferred receive 9.29 votes per share, while holders of common stock and B convertible receive only one vote per share. If the board fails to pay dividends for six consecutive quarters, the A preferred and the B convertible are entitled to vote together to elect two directors to the board, with the A preferred and B convertible again receiving 9.29 votes and 1 vote per share respectively. Finally, holders of A preferred and B convertible are entitled to vote separately as a class on matters which affect each class uniquely. So, for example, should the corporation want to issue more A preferred shares, it would have to obtain the approval of a majority of the A preferred stock. In this way, the A preferred and B convertible shareholders can control the outcome of any decision which will impact upon the value of their security alone.

 As its name indicates, the B convertible also has a conversion feature which is unique to that class. Subject to certain conditions which are not relevant for present purposes, holders of B convertible may convert their shares to common stock at any time. The conversion rate varies depending on the average market price of the common stock for the 30 days prior to conversion. However, there is a maximum conversion ratio of 8.33:1. Thus, under no circumstances, can a holder of B convertible receive more than 8.33 shares of common stock for each share of B convertible. The holder of converted shares votes together with the other common ...


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