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October 12, 1999


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


In March 1997, Johnson & Higgins ("J & H"), a well known and closely held insurance firm, was sold to Marsh & McLennan Companies, Inc. ("Marsh") for aggregate consideration valued at $1.8 billion. Plaintiffs, former J & H director-shareholders who retired prior to the Marsh deal and, upon retirement, sold their J & H shares back to the company for certificates entitling them to receive for ten years payments equivalent to dividends on the shares they sold, were paid nearly $300 million for their certificates as part of the transaction. They claim, however, that the J & H directors — who owned all of its shares at the time of the Marsh deal, approved the sale, and received at least $36 million each — took too great a share of the sale proceeds for themselves and did so by manipulating J & H's corporate machinery improperly and otherwise betraying duties they owed to the plaintiffs. The matter now is before the Court on defendants' motions for judgment on the pleadings dismissing the first amended complaint in Aiena and the complaint in Sempier.*fn1


Although these are motions addressed to the face of the pleadings, defendants have submitted a number of other documents in support of their motions. In view of the complexity of the matter and the fact that plaintiffs' discovery has been limited at best, the Court declines to convert the motions into motions for summary judgment.*fn2 Nevertheless, certain documents submitted by defendants effectively are incorporated by reference in the complaints and therefore properly are considered on this motion.*fn3 Accordingly, the well pleaded factual allegations of the complaints, as supplemented by these documents, are deemed true for purposes of the motions. J & H Stock Ownership, Director Retirement Policy and Ten Year Certificates

J & H required all directors who had served for at least 15 years to retire at the age of 60. Those whose service at their 60th birthdays fell short of 15 years were required to retire at age 62.*fn5

Under the terms of the Certificate of Incorporation, each retiring J & H director was given the option, upon retirement, either to sell his or her stock back to J & H in exchange for an amount equal to one year's dividend or, upon execution of an agreement containing a covenant not to compete for five years, to exchange his or her stock for a Ten Year Certificate. Each certificate entitled the retired director to continue to receive, for the remainder of the fiscal year in which it was issued and for each of the ten ensuing fiscal years, an amount equal to the dividends that would have been payable to the retired director if he or she still held the shares of J & H common stock exchanged for the certificate.*fn6 As the latter course was more favorable to the retiring director, all retirees chose that option.*fn7 The shares of J & H common stock surrendered by retired directors in exchange for Ten Year Certificates, over time, were allocated to and made available for purchase at a nominal cost by the active directors. Those shares, however, did not pay dividends until the expiration of the Ten Year Certificates that had been issued in exchange for them.*fn8

In addition to retaining the substantial equivalent of the right to receive dividends on the common stock exchanged upon their retirements for Ten Year Certificates, the certificate holders retained certain voting rights in connection with a sale of J & H. As previously noted, the transferability restrictions in the Certificate of Incorporation and By-laws rendered it impossible for shareholders to sell their shares to a third party such as Marsh. In consequence, the only means of transferring ownership and control of J & H's business was by a sale of all or substantially all of its assets. Under the terms of the Certificate of Incorporation, however, any sale of "all the property of" J & H required the approval of the holders of at least two-thirds of the outstanding Ten Year Certificates, measured by share equivalent. In the event such a sale were approved, the sale proceeds were to be distributed as a dividend on the common stock and the Ten Year Certificates. In consequence, given the dividend allocation between the retired director plaintiffs and the incumbent directors that existed prior to the Marsh transaction, approximately 75 percent of any such liquidating dividend would have been payable to the Ten Year Certificate holders absent their agreement to the contrary.*fn9

Non-Shareholder Directors

Until 1994, J & H's Certificate of Incorporation and By-laws required that all directors own at least 500 shares of J & H common stock. As a result of J & H's global expansion, however, it amended those instruments in December 1994 to permit the election of three non-shareholder directors who were executives of foreign affiliates of J & H.*fn10

The Marsh Transaction

Amendment of the Charter and By-laws to Permit Stock Transfer

In March 1997, J & H's incumbent directors negotiated a sale of all of the stock of J & H to Marsh for a combination of cash and Marsh securities.*fn11 In order to effect the transaction, they amended the charter and by-laws to delete the provisions restricting ownership of J & H shares to J & H directors. Moreover, they structured the transaction as a sale of stock, rather than of assets, for the purpose of circumventing the requirement that sale of all of J & H's property be approved by two-thirds in interest of the Ten Year Certificate Holders.*fn12

The Tax Deal

There was also a tax motive for the transaction structure that plaintiffs claim is relevant here. By reason of the restriction on the transferability of J & H stock, the stock was subject to Section 83 of the Internal Revenue Code*fn13 prior to the Marsh transaction. In consequence, the dividends were taxed as ordinary income to the stockholder-employee recipients and were deductible by J & H as ordinary and necessary business expenses for compensation paid.*fn14 The elimination of the transferability restrictions in the Certificate of Incorporation and By-laws, however, allegedly triggered compensation income to the J & H stockholders in the amount by which the market value of J & H shares exceeded the de minimis cost of the stock to the shareholders, which was most of the $1.8 billion purchase price that March agreed to pay. The act of amending these instruments thus created an enormous ordinary income tax liability for the incumbent directors while at the same time raising the possibility that J & H or, more accurately, Marsh, could claim the same $1.8 billion as a business expense deduction for 1997.*fn15

Plaintiffs allege that none of the advisors involved in the deal believed that Marsh could sustain a $1.8 billion deduction generated by the removal of the transferability restriction as an ordinary and necessary business expense. Accordingly, in negotiating the transaction, the J & H directors sought and obtained Marsh's agreement, in exchange for a $300 million reduction in the purchase price, that Marsh would forego the deduction in order to allow the incumbent directors to bargain with the IRS for better tax treatment of the gains on the sale of their J & H stock.*fn16

Approval by J & H Directors

The complaint suggests that approval from a sufficient number of active J & H directors was not obtained easily by the proponents of the transaction. It alleges that certain incumbent directors arranged transfers of J & H stock among themselves and/or from J & H to other incumbent directors so as to equalize their stock holdings and assure that each incumbent director would receive at least $36 million from Marsh.*fn17 Moreover, they arranged for one of the individual defendants, who had announced his retirement effective January 1, 1997, to be reinstated so that he could participate in the payout made to incumbent directors rather than receive the much smaller payment that would have been made to him as a Ten Year Certificate Holder.*fn18 Finally, plaintiffs claim that the individual defendants deceitfully caused the three non-stockholder directors not to attend the board meeting at which the Marsh deal was approved,*fn19 the inference being that they wished to avoid scrutiny of the transaction or, at least, the treatment of the retirees by the only disinterested directors.

The Deal Is Announced

On March 12, 1997, J & H and Marsh issued a press release announcing the deal. It stated that Marsh had agreed to acquire J & H for $1.8 billion, $600 million of which would be paid in cash and the balance in Marsh stock.*fn20 It disclosed also that defendants Olsen, Nielsen and Barham, all J & H executives and directors, would join the Marsh board and that Olsen would become vice chairman of Marsh upon the closing of the transaction.

Marsh filed a current report on Form 8-K with the Securities and Exchange Commission on or about March 14, 1997 to which were attached the Stock Purchase Agreement among Marsh, J & H, and the selling shareholders ("SPA") and a registration rights agreement among Marsh and the selling shareholders providing for the registration by Marsh, under certain conditions, of the Marsh securities paid to the selling shareholders and the Ten Year Certificate Holders.*fn21 The SPA contained, among other provisions,

  · J & H's representation that the restrictions on the
  transferability of the J & H common stock would be
  removed upon execution of the SPA by persons owning
  more than 75 percent of J & H's shares,*fn22
  · Marsh's commitment to offer to each retired
  director the opportunity to surrender his or her Ten
  Year Certificates in exchange for cash and stock
  aggregating, if all retirees accepted, $99,000,001 in
  cash and $198,000,002 in stock.*fn23

The Offer to the Retired Directors

Following the public disclosure of the Marsh deal, defendants invited the plaintiffs to a meeting on March 19, 1997 at which defendants Olsen, Nielsen, Barham, Roxe, Munday, their advisors, J & H's long time legal counsel ("J & H Counsel"), and others presented Marsh's proposal to acquire their Ten Year Certificates.*fn24 The offer, which by its terms would expire on April 2, 1997 unless previously accepted, was set forth in a form letter distributed to each of the plaintiffs. Its key element was an offer to purchase the Ten Year Certificates at a stated price subject to the certificate holder's agreement to (1) release J & H, Marsh, and their respective insiders from any claims with respect to the Ten Year Certificates, the J & H Certificate of Incorporation and By-Laws, and any ownership interest in J & H, and (2) adopt the non-compete and consulting obligations previously undertaken in connection with the exchange of J & H stock for the Ten Year Certificate.*fn25

At the meeting, the incumbent directors told the plaintiff's that they had formed a Sellers' Committee which, with the assistance of J & H Counsel, had acted for the benefit of the plaintiffs.*fn26 They strongly recommended that plaintiffs accept Marsh's offer to purchase their Ten Year Certificates, an offer they described as generous and highly favorable to plaintiffs.*fn27 They underscored their recommendation by telling those in attendance that Marsh's offer was the only offer Marsh would make and that it would expire on April 2, 1997.*fn28 They allegedly did not disclose to plaintiffs that:

  · The incumbent directors previously had contracted
  with Marsh to induce plaintiffs and other retired
  directors to accept Marsh's offer,*fn29 and
  · The amount of the purchase price offered by Marsh
  for the Ten Year Certificates had been fixed by the
  incumbent directors, who had negotiated an aggregate
  price for Marsh's purchase of J & H and then
  allocated that consideration as between themselves
  and the Ten Year Certificate Holders.*fn30

In due course, plaintiffs and other retired directors accepted the offers, signed the proffered agreements, surrendered their Ten Year Certificates, and received consideration of nearly $300 million.

Plaintiffs' Claims

Plaintiffs have asserted claims arising under federal statutes as well as common ...

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