The opinion of the court was delivered by: MUKASEY
MICHAEL B. MUKASEY, U.S.D.J.
This opinion treats defendants' renewed motion in these related cases for a summary judgment, following a hearing pursuant to Federal Rule of Civil Procedure 43(e)
on the issue of whether or not one of plaintiff Department of Economic Development's ("DED") predecessors in interest, the Northern Ireland Development Agency ("NIDA"), made a new investment decision for federal securities law purposes when it agreed on March 12, 1980 to revise the terms of a put it held with respect to preference shares of DeLorean Motor Corporation, Ltd. ("DMCL"), DeLorean Motor Corporation's ("DMC") manufacturing subsidiary in Northern Ireland. If NIDA did make a new investment decision at that time, then DED's securities law claim, the only remaining federal claim in this case, stands; if it did not, then that claim must be dismissed.
The March 12, 1980 revision eliminated NIDA's right to a cash payment after ten years, a payment which, at the time of the revision, was highly unlikely to occur. As explained in Section II below, the elimination of such an unlikely possibility did not constitute "such significant change in the nature of the investment or in the investment risks as to amount to a new investment." Abrahamson v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977), cert. denied, 436 U.S. 913, 56 L. Ed. 2d 414, 98 S. Ct. 2253 (1978). Therefore, the put revision did not cause NIDA to make a purchase or sale of a security within the meaning of the Securities Exchange Act of 1934, and defendants' motion to dismiss the claim arising from the put revision is granted.
Further, and for the reasons set forth in Section III below, there being no surviving federal claim in either of these cases, the state claims in both are dismissed without prejudice.
In separate opinions in these cases filed on April 2, 1996, I granted in part and denied in part the motions of defendants Arthur Andersen & Co. and three of its partners for a summary judgment dismissing the claims against them. Department of Econ. Dev. v. Arthur Andersen & Co., 924 F. Supp. 449 (S.D.N.Y. 1996); Allard v. Arthur Andersen & Co., 924 F. Supp. 488 (S.D.N.Y. 1996). Familiarity with those opinions and the rulings therein is assumed for current purposes, and only so much of the background as is necessary to decide the issue currently before the court will be set forth below. As a result of those rulings, DED's only remaining federal claim is for securities fraud arising from any of four transactions: the September 1978 amendment to the Master Agreement between DED's predecessors, NIDA and the Department of Commerce ("DOC") on the one hand, and various DeLorean entities on the other; the April 12 and October 22, 1979 amendments to the grant letter of assistance from DOC; and the March 12, 1980 modification of a put held by NIDA which, before the revision, permitted NIDA to compel DMC to repurchase on specified terms the DMCL preference stock that NIDA held. Department of Econ. Dev., 924 F. Supp. at 478-79.
If none of those transactions effected such a significant change in the investment risks faced by DED's predecessors as to amount to a new investment, then even if Andersen is hypothesized to have made false statements in connection with those transactions, with the requisite intent, such transactions could not be regarded as purchases or sales of securities and therefore such statements could not provide the basis for a claim under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Abrahamson, supra.
A. The NIDA Put and Its History
No United States company (except established motor companies) has successfully accomplished the manufacture and sale of a new automobile in at least twenty-five (25) years and as far as the Company is aware, no company has sold an automobile priced in excess of $ 12,000 at a volume of 20,000 or more units per year. It is anticipated that the sales price of the Company's car will be higher than $ 12,000 and its initial sales goal is 20,000 units per year.
(DX 11 at 317006) Rather, as reflected in documents quoted in the earlier opinion reported at 924 F. Supp. 449, the British government had a political agenda. That government invested $: 17,757,000 in what it knew to be a high-risk project in order to try to improve employment in West Belfast, where the DMCL plant was located, and thereby counter the IRA's efforts to foment disorder. 924 F. Supp. at 459-60; see also DX 3 at 1 (the Secretary of State for Northern Ireland viewing the project as a chance to strike "a hammer blow to the IRA"); DX 47 (Secretary of State Atkins concluding in December 1981 that, "it would be disastrous, both politically and commercially, to pull the plug out on the company at this stage"); DX 46, Annex A PP 12-13 (outlining political effects of closing the Northern Ireland plant).
Under the Master Agreement dated July 28, 1978, NIDA agreed, inter alia, to purchase from DMC all of the 17,757,000 preference shares of DMCL, at a price of 1 per share. ( DX 4 P 1.1) DMC also issued a put to NIDA. Under the terms of the put, between four and ten years from the date NIDA paid for the preference shares (the "Subscription Date"), NIDA could force DMC to buy NIDA's DMCL preference shares for the cash value of 6.5 million shares of DMC stock. After ten years, NIDA could force DMC to repurchase the DMCL preference shares for $: 1 per share plus a premium of 10p per year for each year after the third year following the Subscription Date less royalties previously paid on automobile sales. DMC was required to offer for sale 6.5 million shares of its common stock "to the extent necessary" to finance the exercise of the put. (DX 4 P9.2) In March 1980, NIDA estimated that it would receive $ 50 million for the DMCL preference shares when it exercised the put in the tenth year. (E.g., DX 35 at 2)
The documentary evidence reflects that the NIDA put came into being as an accommodation when the British government's desire to invest directly in DMC, a U.S. company, proved impossible to realize due to then existing U.K. exchange control restrictions. Instead, the Northern Ireland subsidiary, DMCL, was created, and NIDA took preference shares in that entity. Moreover, the same exchange control restrictions made it problematic to provide for conversion of the DMCL preference shares into DMC common shares at a later date because that step would have required Bank of England approval at the time of the conversion. (DX 50 at 27, 33; DX 29 at 2; DX 52 at 35)
In March 1980, the parties renegotiated the NIDA put. Under the new arrangement, after four years, NIDA would have the right to convert its DMCL preference shares into 7 million shares of DMC common stock.
However, NIDA surrendered the right to compel DMC to buy the DMCL preference shares for cash after ten years. This revision did not affect DMC's right to call the preference shares during the first four years.
This renegotiation resulted from the Securities and Exchange Commission's July 1979 ruling that changed the accounting treatment of the NIDA put on DMC's books. That ruling, called Accounting Securities Release 268 ("Release 268"), required that DMC carry its redemption obligation under the NIDA put in the tenth year following the Subscription Date, as debt rather than as equity on its balance sheet. (DX 13)
As of November 30, 1979, DMC's consolidated balance sheet showed stockholders' equity of $ 20,924,602. (DX 21 at 3) The effect of the accounting change and the insertion of a new long-term liability on DMC's consolidated balance sheet would have been to convert that into a deficit of about $ 8 million (DX 36 at 1), with the result that DMC would have encountered added difficulty raising additional capital or obtaining short-term credit from suppliers.
(DX 28 at 1)
Various proposals were put forward, including one from Robin Bailie, DMCL's solicitor, that NIDA give up the cash redemption feature after ten years and instead take an option to convert its preference shares after ten years into 6.5 million shares of DMC common stock. Anthony Hopkins, one of NIDA's nominee directors on the DMCL board, wrote "No" in the margin next to that proposal (DX 24 at 2), and wrote in a memorandum dated January 22, 1980, as follows:
You will see from Mr. Bailie's letter that he has suggested a clause which the Company has asked him to put to us to supercede [sic ] our rights to sell the shares both in the 4-10 year period and after 10 years. I have told Mr. Bailie that I have no intention of renegotiating the 4 year option which is in the Agency's favour (I also told him that I was most surprised that the Company should even venture to suggest such an idea). We will consider a trade off from the 10 year option which allows us redemption in cash on a par plus 10% per annum cumulative basis, minus 50% royalties in exchange for a conversion right into common stock if equal. The basis of that arrangement would have to be that the conversion would give us a total value of common stock equivalent to the value obtainable under present arrangements. In other words, we cannot commit, (at this stage) to an agreement to convert into a fixed number of units of common stock which might be worth little.
However, Hopkins also wrote in the same memorandum: "The 10 year option [for NIDA to put its DMCL preference shares to DMC for cash] is very much a fall back position anyway since (a) DMC are very likely to take us out on their option * or (b) we will exercise our option between years 4 and 10." The words in bold appear in the margin next to an asterisk corresponding to the asterisk inserted at that point in the main text, and were plainly meant to be inserted at that point. The reference to DMC taking NIDA out refers to DMC exercising its call rights in the first four years should the project prove successful and the value of DMC stock rise as a result.
As noted, the amendment that was eventually agreed to gave NIDA the right to convert its DMCL preference stock any time after four years from the Subscription Date into 7 million shares of DMC stock, and retained the call feature that permitted DMC to purchase the DMCL preference stock at a specified price before the four-year mark was reached. During the discussions that led to that amendment, NIDA had the benefit of the advice of outside counsel and bankers, personnel affiliated with it and with DOC, and, although Andersen seems to dispute the legal consequences, of Andersen as well. Thus NIDA's Hopkins expressed to Frank McCann of DOC on February 7, 1980 his view,
subject to obtaining legal advice . . . that agreement to the proposed amendment would not diminish the value of our holding now or in the future. Subject to the approval of all the other parties to the original agreement, we would accede to the request that is before us.
(DX 26 at 1) McCann, in turn, sent a memorandum a week later, on February 14, 1980, to representatives of the British government expressing the same view. He first described the effect of Release 268: "The effect of this re-classification on the balance sheet would seriously reduce the strength of the DMC balance sheet and most certainly have an adverse effect both upon the company's ability to raise further capital and to negotiate optimum credit terms with major suppliers." He then described the effect of the proposed change, and suggested why he thought it would not diminish the value of NIDA's holding:
DMC has proposed that the Agreement should be altered so that NIDA may not require DMC (or DMCL) to purchase the Agency's holding but instead require that its shares be converted into DMC common stock. Subject to independent legal advice . . . it seems clear that the proposed amendment will not diminish the value of NIDA's holding or their ability to sell it off, if DMC is successful (which was admittedly a pre-condition to their ability to exercise the original option).
The lawyers described the proposed change to NIDA and its solicitors as "not a variation of substance" and "cosmetic." (DX 29 PP 2, 5) The bankers, speaking through Leo Conway of the Ulster Investment Bank Ltd., saw the amendment as tipping, if at all, in NIDA's favor, a conclusion they reached after a two-step analysis, examining the impact first of Release 268 absent any amendment to the NIDA put, and then of the proposed amendment. Notably, Conway saw the proposed amendment as a benefit to NIDA apart from its benign effect in avoiding the rigors of Release 268, although he certainly considered that effect as well. Absent the proposed modification, he wrote, the effect of Release 268 would have been to "call into question the solvency of the companies." He suggested two possible effects of the release from NIDA's standpoint: (i) the possible tightening of credit from suppliers could lead to an increase in the company's working capital requirements with the demand falling upon NIDA or other government agencies to supply those requirements; and (ii) more broadly, "the prospects of ultimate success in the project could be harmed if publicity was given to the weakness of DMC's balance sheet, with a resulting loss of credibility in the marketplace." (DX 37 at 1-2) He then turned to the effect of the modification:
Against the prospect of a greater financial return, the company has surrendered the prospect of direct access to a cash payment by DMC, but it must be recognized that, if the project is not successful, it would be doubtful if DMC would be in a position to meet that obligation. Accordingly, we feel that the balance of advantage arising from the changes is at least neutral and could be considered, in practical terms, to operate slightly to the Agency's advantage. This is without taking account of the avoidance of the problems which would potentially arise if the Master Agreement was not varied, and in particular the possible call for further financial support to make good the effects of tighter supplier credit terms.
( Id. at 3) (emphasis added)
On March 5, 1980, a week before the transaction was consummated, NIDA's Hopkins and G. Toland of Lovell, White and King, one of the law firms advising NIDA, summarized the advantages and disadvantages of the proposed transaction, and presented their view:
(A) The cash put - the value of this depends on the ability of DMC to provide funds to satisfy it. Which in essence depends upon the success of the business. The late [sic ] [latter] will be reflected in the market value of the DMC shares owned by us (upon exercise of option) under proposed solution.
(B) Fixed price redemption after 10 years - the value of this could be around dolls 50 million (D35M par plus 7 years at 10 per cent P.S. day D 25M minus one half of pounds 45 per car royalty say D 10M).
(A) 500,000 more DMC shares:
(B) Option related to market value indefinitely rather than limited to 4/10 year period. If 7 million DMC common stock achieve market price of more than dolls 7 per share this will show a better return than fixed price redemption (we do not deduct royalty income from ...