Rehearing and Rehearing En Banc Denied October 27, 1977.
ROSS, Circuit Judge.
This appeal raises substantial questions concerning the validity of an option held by Merrill Lynch, Pierce, Fenner & Smith, Inc. (hereinafter Merrill Lynch) to repurchase its own stock from a deceased shareholder's executors. The district court found violations of the securities fraud provisions of § 10(b) of the Securities Exchange Act of 1934
The plaintiffs are the executors of the Estate of Kenneth H. Bitting, a former officer, employee and stockholder of Merrill Lynch. The defendants are Merrill Lynch and three of its senior executives, Donald T. Regan, Ned B. Ball and George L. Shinn.
In 1947, Kenneth Bitting operated a stock brokerage partnership known as Bitting, Jones & Company in St. Louis, Missouri. In that year, the Bitting partnership merged into Merrill Lynch, which was then a national stock brokerage partnership, and became the St. Louis office of Merrill Lynch. Between 1947 and 1951, Bitting was an employee of the Merrill Lynch partnership. In 1951, he became a general partner of the firm.
In 1959, the Merrill Lynch partnership was dissolved and the business was incorporated. In return for their interests in the partnership, each partner, including Kenneth Bitting, received shares of common stock in Merrill Lynch. Bitting received 9,100 shares of voting stock and a $58,000 debenture in exchange for his partnership capital. In October 1959, Merrill Lynch split its stock on a three for one basis and Bitting became the owner of 27,300 shares of voting stock. Bitting had acquired all of his stock at a cost based on book value.
Under Merrill Lynch's original Certificate of Incorporation, all common stock, including that issued to Kenneth Bitting, was restricted against transfer. Under the terms of the Charter, Merrill Lynch was granted an option to purchase the holder's stock at an adjusted net book value price upon the occurrence of several specified contingencies, including the death of the holder. This transfer restriction was conspicuously noted on each stock certificate. Likewise the stockholder or his executors were given a right to "put" the stock to Merrill Lynch and it was then required to purchase that stock at book value.
On October 8, 1970, Kenneth Bitting died. Pursuant to its Charter, Merrill Lynch exercised its option to purchase the 40,000 shares at a price of $26.597 per share, the net book value as of October 30, 1970. The option was exercised by the company on November 18, 1970.
Between 1959 and 1971, Merrill Lynch was a privately held company. On April 12, 1971, the company publicly announced that it was "going public"—that it was going to make its shares available to the public. On June 23, 1971, following registration with the SEC and a three for one stock split, four million shares of the company's stock were offered to the public at a price of $28 per share. The offering price per share was approximately three times the price which was paid to the Bitting executors in accordance with the terms of the stock restriction contained in Merrill Lynch's Certificate of Incorporation.
The plaintiffs' complaint is grounded on allegations that the decision to go public in the spring of 1971 was made by a tightly knit group of insiders within the company's management hierarchy before the company purchased the Bitting stock.
After a nonjury trial, the court substantially adopted the plaintiffs' theory of the case. The court held that the option was unenforceable under Delaware law and was fraudulently exercised by the defendants to the detriment of the plaintiffs in order to increase the per share earnings of Merrill Lynch stock prior to the public offering and to maintain management control.
I. The Enforceability of the Stock Restriction.
We first address the issue of whether the stock restriction was enforceable under Delaware law
Article VI, Section 1(a) of the Merrill Lynch Certificate of Incorporation, the provision under which Kenneth Bitting's stock was called, provides in pertinent part as follows:
This restriction was noted conspicuously on each Merrill Lynch stock certificate and was indisputably assented to by Bitting when the stock was issued to him. There has been no contention, nor could there be on this record, that Bitting's assent was induced by fraud, deceit or any other improper motive.
The enforceability of the restriction rests on our construction of Section 202 of the Delaware General Corporation Law, which was in existence in November 1970 when the restriction was enforced. Section 202(a) carries the label "Restriction on transfer of securities" and reads as follows:
Section 202(c) declares four types of restrictions valid without inquiry into the existence vel non of a lawful or reasonable purpose. Section 202(c)(1), the pertinent provision for our purposes, provides as follows:
This statute on its face validates the stock restriction at issue. The statute declares the enforceability of any restriction which "[o]bligates the holder of the restricted securities to offer to the corporation * * * a prior opportunity * * * to acquire the restricted securities * * *." That is precisely what Merrill Lynch's Charter required of Kenneth Bitting's estate in this case.
We have not found, and the parties have not cited to us, any reported Delaware decision construing § 202(c)(1). However, in DeVries v. Westgren, 119 Pittsburgh L.J. 61 and 109 (C.P. Allegheny County 1970), aff'd as modified, 446 Pa. 205, 287 A.2d 437 (1971), the court enforced a stock restriction requiring a shareholder to offer all of his common stock to the corporation upon the voluntary or involuntary termination of his employment under a Pennsylvania statute identical to § 202(c)(1).
Id., 287 A.2d at 438.
The plaintiffs advance the argument, embraced by the district court, that § 202(c)(1) was intended to permit only the exercise of a right of first refusal and not the exercise of an automatic option to purchase triggered by the contingency of death or other circumstance. In accepting this argument, the district court couched the distinction in terms of voluntary transfers, permitted by § 202(c)(1), and transfers by operation of law, not permitted by § 202(c)(1). 412 F.Supp. at 57.
The construction urged by the plaintiffs would amount to nothing less than a judicial rewriting of the statute, and we reject it. Section 202(a), which modifies each subsection of the statute including § 202(c)(1), provides that a transfer restriction permitted by the section is enforceable against " * * * any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder." (Emphasis added.) We perceive this to be at least implicit recognition that repurchase options which become operable on the happening of a specified contingency—including an "involuntary" contingency such as death or incompetency—are permitted under § 202(c)(1). Furthermore, Professor Folk, the Reporter for the Delaware revision commission which prepared the law for adoption, has stated that § 202(c)(1) was intended to validate options to purchase as well as mere rights of first refusal:
Folk, The Delaware General Corporation Law, 198 (1972) (emphasis added); cf. Ketchum v. Green, 415 F.Supp. 1367, 1372 (W.D.Pa.1976); DeVries v. Westgren, supra, 446 Pa. 205, 287 A.2d at 438. Had the Delaware legislature intended to exclude commonly used and accepted repurchase options such as the transfer restriction before us,
The plaintiffs' construction would also violate the purpose of § 202(c)(1). That purpose was to broaden, not limit, the circumstances in which such restrictions would be enforced in order to clear up the preexisting uncertain contours of the common law. See Arsht & Stapleton, Analysis of the 1967 Delaware Corporation Law, 2 P-H Corp.—Delaware 311, 333 (1967); Folk, The Delaware General Corporation Law, 197-199 (1972). Before § 202(c) was adopted in 1967, the Delaware courts required that a stock restriction be supported by specific justification, e. g., a reasonable or lawful purpose, to be enforceable. See, e. g., Greene v. E. H. Rollins & Sons, Inc.,
In holding that § 202(c)(1) does not permit "transfers by operation of law," the district court relied on two cases. Globe Slicing Co. v. Hasner, 333 F.2d 413, 415 (2d Cir. 1964), cert. denied, 379 U.S. 969, 85 S.Ct. 666, 13 L.Ed.2d 562 (1965); Matter of Estate of Riggs, 36 Colo.App. 302, 540 P.2d 361, 363 (1975). These cases are wholly inapposite. In both cases the courts held that death would not be presumed to trigger the operation of a repurchase option which did not mention death as a specified contingency. In this case the death contingency was expressly provided in the company's corporate charter and was conspicuously noted on the stock certificates themselves. Neither Globe Slicing nor Riggs involved the construction of a statute such as § 202(c)(1). Accordingly, we hold that the stock restriction was enforceable under Delaware law.
II. The Federal Securities Claim.
Having determined that the stock restriction was enforceable under the appropriate state law, we now turn to the merits of the § 10(b) and Rule 10b-5 claim. Section 10(b) of the Securities Exchange Act of 1934 provides in pertinent part:
The SEC has prescribed Rule 10b-5 to enforce the provisions of § 10(b). Rule 10b-5 provides:
In connection with the purchase or sale of any security.
Causation in fact is an essential element of a private cause of action for securities fraud under § 10(b) and Rule 10b-5. Affiliated Ute Citizens v. United States, 406 U.S. 128, 154, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, 495 F.2d 228, 238 (2d Cir. 1974); Harris v. American Investment Co., 523 F.2d 220, 229 n. 7 (8th Cir. 1975), cert. denied, 423 U.S. 1054, 96 S.Ct. 784, 46 L.Ed.2d 643 (1976); Fridrich v. Bradford, 542 F.2d 307, 318 (6th Cir. 1976), cert. denied, 429 U.S. 1053, 97 S.Ct. 767, 50 L.Ed.2d 769 (1977). See generally, A. Bromberg, Securities Law, Fraud-SEC Rule 10b-5, § 8.7(1) at 213-214 (1967). In order to prevail in an action for securities fraud under § 10(b) and Rule 10b-5, a plaintiff must show some causal nexus between the defendant's wrongful conduct and his (the plaintiff's) loss.
The roots of the causation in fact requirement have been the subject of much disharmony. Causation has been most often analyzed in terms of the Rule 10b-5 elements of materiality or reliance. See, e. g., Affiliated Ute Citizens v. United States, supra, 406 U.S. at 153-154, 92 S.Ct. 1456 (materiality); List v. Fashion Park, Inc., supra, 340 F.2d at 462 (reliance). The materiality element requires the plaintiff to show that the misrepresentation or omission would likely have influenced in reasonable or objective contemplation the seller's decision to sell. Cf. TSC Industries v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). The element of reliance traditionally required proof that the misrepresentation or omission actually induced the plaintiff to act differently than he would have acted in his investment decision. See Myzel v. Fields, 386 F.2d 718, 735 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968). However, in Affiliated Ute Citizens v. United States, supra, 406 U.S. at 153-154, 92 S.Ct. 1456, the Supreme Court held that when a Rule 10b-5 violation involves a failure to disclose, positive proof of reliance is not a prerequisite to recovery. The Court said:
See also Carras v. Burns, supra, 516 F.2d at 257; Chelsea Associates v. Rapanos, supra, 527 F.2d at 1271-1272. See generally, Note, The Reliance Requirement in Private Actions under SEC Rule 10b-5, 88 Harv.L.Rev. 584, 606 (1975); Note, The Nature and Scope of the Reliance Requirement under SEC Rule 10b-5, 24 Case Western Reserve L.Rev. 363, 388 (1973). But see Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380-381 (2d Cir. 1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975).
Whether we analyze the causation issue before us in terms of materiality, reliance or both, the result is the same: causation in fact does not exist as a matter of law under § 10(b) and Rule 10b-5. Any "loss" which was occasioned by the sale of the Bitting stock to the corporation was not caused by any material omission, fraudulent or otherwise, on the part of the defendants. The purported "loss" was caused by two events unrelated to the alleged fraud: 1) the execution of the stock restriction, which was enforceable under Delaware law,
The decided cases support our conclusion. In Ryan v. J. Walter Thompson Co., 453 F.2d 444, 447 (2d Cir. 1971), cert. denied, 406 U.S. 907, 92 S.Ct. 1611, 31 L.Ed.2d 817 (1972), the defendant company enforced a stock restriction enabling it to repurchase its stock from holders who either desired to sell or ceased to be officers or employees of the company. Ryan, a vice-president and director of the company, retired on January 31, 1966. On January 14, 1969, several months after the company had undertaken preparations to offer some of its stock to the public, but several months before the public offering took place, the company enforced the stock restriction. Ryan sued, claiming that the company's failure to disclose its contemplated public offering in connection with the sale constituted a violation of § 10(b) and Rule 10b-5. In affirming the district court's dismissal of the securities fraud claim, the Second Circuit said:
Id. at 447.
In Fershtman v. Schechtman, 450 F.2d 1357 (2d Cir. 1971), cert. denied, 405 U.S. 405
Id. at 1360.
Ketchum v. Green, 415 F.Supp. 1367 (W.D.Pa.1976) involved the enforcement of a duly executed stock restriction against the plaintiffs, who were squeezed out of their managerial positions by a majority of the board of directors. After the plaintiffs' employment was terminated, they were required to sell to the company all of their stock pursuant to the stock restriction which required such a sale "on [the employee's] termination of employment for any reason or on his death." The plaintiffs sued under § 10(b) and Rule 10b-5, alleging damages resulting from the fraudulent forced sale of their stock at less than market value. Judge Teitelbaum dismissed the claim, reasoning as follows:
In Blackett v. Clinton E. Frank, Inc., 379 F.Supp. 941 (N.D.Ill.1974), a former employee of the defendant corporation brought a § 10(b) and Rule 10b-5 action against the company and its chief executive officer in connection with the enforcement of a duly executed stock purchase agreement which, like the stock restriction in this case, was enforceable under Delaware law. The stock purchase agreement required the corporation to purchase, and the stockholder or his personal representatives to sell, the stockholder's shares in the event of death or termination of his employment. The plaintiff's employment was terminated and the company enforced the restriction. The plaintiff alleged that the defendants had fraudulently failed to disclose, inter alia, the prospect of a public offering of the company's stock in enforcing the restriction. Judge Bauer dismissed the complaint because the sale of the plaintiff's stock was in no way induced or caused by any misrepresentations on the part of the defendants. He said:
Id. at 947.
Stripped of all its rhetoric, the plaintiffs' claim under § 10(b) and Rule 10b-5 boils down to the following: 1) the stock restriction served no valid corporate purpose in November 1970 and was thus unenforceable; 2) the defendants owed to the plaintiffs a supervening (between the execution and enforcement of the stock restriction) fiduciary duty of fair dealing; and 3) the defendants breached this duty by fraudulently enforcing the stock restriction without disclosing their preparations to take the company public. The plaintiffs cite numerous cases to support their theory. See, e. g., Schoenbaum v. Firstbrook, 405 F.2d 215, 218-220 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Drachman v. Harvey, 453 F.2d 722, 736 (2d Cir. 1972) (en banc); Travis v. Anthes Imperial Limited, 473 F.2d 515, 521-522 (8th Cir. 1973); Coffee v. Permian Corp., 474 F.2d 1040, 1043-1044 (5th Cir.), cert. denied, 412 U.S. 920, 93 S.Ct. 2736, 37 L.Ed.2d 146 (1973); Bryan v. Brock & Blevins Co., Inc., 490 F.2d 563, 569-571 (5th Cir.), cert. denied, 419 U.S. 844, 95 S.Ct. 77, 42 L.Ed.2d 72 (1974); Green v. Santa Fe Industries, Inc., 533 F.2d 1283, 1289-1291 (2d Cir. 1976), rev'd, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977); Bailey v. Meister Brau, Inc., 535 F.2d 982, 993 (7th Cir. 1976); Speed v. Transamerica Corp., 99 F.Supp. 808, 828-829 (D.Del.1951), aff'd, 235 F.2d 369 (3d Cir. 1956); Voege v. American Sumatra Corp., 241 F.Supp. 369, 375 (D.Del.1965).
With respect to the first contention, we have previously noted that the stock restriction was enforceable under § 202(c)(1) of the Delaware General Corporation Law without regard for the existence of a "valid" or "lawful" corporate purpose. To the extent the plaintiffs take the position that such a requirement should be superimposed on § 10(b) and Rule 10b-5, we reject it. In Santa Fe Industries, Inc. v. Green, supra, 430 U.S. at 478, 97 S.Ct. 1292, the Supreme Court stated that § 10(b) and Rule 10b-5 should not be extended to cover a cause of action which has been traditionally relegated to state law. The Court emphasized that requirements of state corporation law, such as the existence of a "valid corporate purpose" for the elimination of the minority interest in a short form merger, should not be transposed on a § 10(b) and Rule 10b-5 action because of the danger of vexatious litigation and the potential for interference with state corporate law. Id. at 479 & n. 16, 97 S.Ct. 1292. The Court also said:
Id. at 479, 97 S.Ct. at 1303 (emphasis in original). To require a "justifiable corporate purpose" in this case would impose a more stringent federal fiduciary standard on the defendants than the State of Delaware has itself imposed. As we noted previously, § 202(c)(1) of the Delaware General Corporation Law declares that transfer restrictions such as the one involved in this case are enforceable without inquiry into the existence of a "valid" or "lawful" corporate purpose. The purpose of § 202(c)(1) was to clear up the murky state of Delaware common law concerning transfer restrictions by validating such restrictions without necessitating specific justification. See Folk, The Delaware General Corporation Law, at 198 (1972). We decline to override the Delaware statute, as well as
With respect to the second and third contentions, whatever fiduciary duty of fair dealing the defendants might have owed to the plaintiffs in November 1970 was not breached by the enforcement of the stock restriction. The sale was triggered by Kenneth Bitting's death and the corporation's legal entitlement to call the plaintiffs' shares on the happening of that contingency, not by any supervening bad faith on the part of the defendants. In each of the cases cited by the plaintiffs, an improper motive of the control group or a responsible person caused the corporation or the affected shareholder to suffer a loss in a transaction it would not otherwise have undertaken. This causation element is not present in this case.
The plaintiffs also rely on Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532 (3d Cir.), cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976), in which the plaintiff Ayres, a former employee-shareholder of Merrill Lynch who had voluntarily retired from the company, claimed that the company had violated § 10(b) and Rule 10b-5 by exercising an option to purchase his stock without informing him of its plans to go public. The Third Circuit rejected Merrill Lynch's claim that the nondisclosure was not material as a matter of law. The court distinguished Ryan v. J. Walter Thompson, supra, on the ground, inter alia, that Ayres' decision to retire amounted to a voluntary decision to sell and that he could and would have elected not to retire and not to sell his stock had he known of the company's plans to go public. Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 538 F.2d at 537.
Even if we assume the correctness of the Ayres decision,
III. The State Law Claims.
A. Common Law Fraud.
We also reject the district court's holding that defendants were liable under the theory of common law fraud. 412 F.Supp. at 60-61. Under Missouri Law,
Ackmann v. Keeney-Toelle Real Estate Co., 401 S.W.2d 483, 488 (Mo.1966). See also Wilburn v. Pepsi Cola, 410 F.Supp. 348, 351 (E.D.Mo.1976) (applying Missouri law); Wood v. Robertson, 245 S.W.2d 80, 82 (Mo.1952). It is clear beyond any doubt that causation in fact is an essential element of an action for common law fraud under Missouri law. See Jones & Laughlin Steel Corp. v. Sedalia Industrial Loan and Investment Co., 315 F.2d 58, 61-62 (8th Cir. 1963) (applying Missouri law); Bales v. Lamberton, 322 S.W.2d 136, 138 (Mo.1959) ("Where a party has not sustained any damages as a result of the fraud charged, it is the general rule that no action for damages may be maintained."); Mills v. Keasler, 395 S.W.2d 111, 118 (Mo.1965). Accordingly, since no causation in fact existed as a matter of law in this case for the reasons expressed in Part II of this opinion, the plaintiffs' common law fraud claim must fail.
B. Breach of Fiduciary Duty.
We lastly consider the merits of the plaintiffs' claim that the defendants breached their fiduciary duty of good faith in enforcing the stock restriction. Again, we accept the district court's choice of law—Delaware law controls the disposition of
Although directors generally do not occupy a fiduciary position with respect to stockholders in face to face dealings, Delaware law does create such a duty in special circumstances where advantage is taken of inside information by a corporate insider who deliberately misleads an ignorant stockholder. See Kors v. Carey, 39 Del.Ch. 47, 158 A.2d 136, 143 (1960); Lank v. Steiner, 43 Del.Ch. 262, 224 A.2d 242, 245 (1966). Implicit in this formulation of the rule is the element of causation: the stockholder must rely on the misleading representation or omission in order to establish a cause of action for breach of fiduciary duty. Id.
As we have previously noted, any information concerning the public offering could not have subjectively influenced the plaintiffs to act differently than they did act in selling the shares to the corporation pursuant to the terms of the stock restriction. The parties were "influenced" only by 1) the lawful execution of the stock restriction, which contractually bound them to sell the stock on the contingency of death, and 2) the death of Kenneth Bitting. The defendants thus had no duty to disclose any information concerning the public offering, since such information was irrelevant to the plaintiffs' investment decision.
The judgment is reversed and the case is remanded with directions to dismiss the complaint.
HEANEY, Circuit Judge, dissenting.
I respectfully dissent. I cannot agree with the majority's holding that no breach of a fiduciary duty under Delaware law occurred. The defendants exercised the repurchased options of deceased shareholders for no justifiable business reason. By arbitrarily inflicting injury on a class of shareholders, the defendants failed to exercise that good faith and fair dealing required by Delaware law.
The majority correctly states that § 202(c)(1) of the Delaware General Corporation
However, the majority's apparent holding, that a repurchase option may be exercised in all circumstances or for any purpose because it no longer must be supported by a specific justification, cannot be supported.
Section 202(c)(1) may limit a court's inquiry into the reasonableness of the transfer restriction, but it does not foreclose further inquiry into the circumstances of its exercise. Such circumstances may be examined even though the articles or by-laws specifically authorize the transaction. Petty v. Penntech Papers, Inc., supra; Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del.1971); Condec Corporation v. Lunkenheimer Company, supra. The defendants may not merely take refuge in strict compliance with the provisions of Article VI as "inequitable action does not become permissible simply because it is legally possible." Schnell v. Chris-Craft Industries, Inc., supra at 439. When dealing with shareholders as a class, control persons have a fiduciary obligation to them, "especially where [the shareholders'] individual interests are concerned." Petty v. Penntech Papers, Inc., supra at 143. And see Kors v. Carey, 39 Del.Ch. 47, 158 A.2d 136 (1960); Lofland v. Cahall, 13 Del.Ch. 384, 118 A. 1 (1922). This fiduciary duty requires control persons to exercise good faith and fair dealing. Here, the defendants breached that duty.
Central to the argument that defendants breached their fiduciary duty is the fact that defendants were firmly committed to going public no later than November 18, 1970, the date the option on Bitting's stock was exercised. The trial court fixed the date when the defendants decided to go public as July 14, 1970. While I feel this finding is not clearly erroneous, strong additional evidence exists to indicate that the decision became more entrenched by November 18, 1970. The following facts tend to support this conclusion:
In March and June, 1970, the New York Stock Exchange took action to permit public ownership of member firms and to eliminate the limitations on nonvoting stockholders in member firms. This action coincided with the demonstrated need of Merrill Lynch for additional capital thus establishing the legal basis and economic justification for going public.
On July 14, 1970, a meeting of the defendants was held and a decision to go public was made.
In late July, 1970, the "going public" Task Force was created. It prepared a preliminary timetable calling for the filing of a registration statement with the Securities and Exchange Commission prior to March 31, 1971.
On August 26, 1970, the defendants engaged the accounting firm of Haskins and Sells to perform a ten-year audit of the company and to prepare the financial statements necessary for the registration statement. This audit, which cost Merrill Lynch $400,000 and involved 15,000 accountant hours, is of a type that would not have been made absent a firm intention to go public.
Prior to October, 1970, a legal audit committee was established. On October 7, 1970, a mid-point report on the legal audit was submitted to the Task Force. The report stated: "We are now slightly more than half through the Corporation Accounting and Legal Audit Timetable." The report set forth a timetable that fixed a March 1, 1971, date for filing a registration statement with the S.E.C. This was a full month earlier than that fixed in the preliminary timetable.
On November 18, 1970, a meeting was held with the S.E.C. to discuss the presentation of the Goodbody financial statements in the prospectus.
Other significant actions were taken within a few months of Mr. Bitting's death. These are important to the extent they lend support to the finding that a decision to go public had been made prior to November 18. Included in these actions are the following:
On December 30, 1970, the defendants determined the size of the offering and decided on a three-for-one stock split prior to the offering. They also concluded that necessary amendments to the articles would be submitted to the Board in March and voted on at the annual stockholders meeting in April.
By January 5, 1971, the first draft of the registration statement was completed. It contained a proposed filing date of March, 1971.
The defendants minimize the importance of the actions listed above and argue that they do not support a finding of a firm intent to go public. They argue that since the registration process could be halted at any time before the registration statement became effective, no final decision was made until the registration process could not be aborted. I find little merit in this argument. The possibility that the defendants could abort the process if later events demanded it does not negate a present intent to go public.
Moreover, it would have been simple and fair to have suspended the exercise of options during any period of uncertainty.
The gravamen of defendants' breach is utilizing a corporate power to seriously injure a shareholder class
The seriousness of the injury to the deceased shareholder class is best illustrated
The trial court determined that at the time the option was exercised, the pre-split value of plaintiffs' stock was $75.00 per share for a loss of $48.403 per share. As plaintiffs owned 30,000 shares, actual damages were computed of $1,452,090.
The defendants' breach of their fiduciary duty is sufficient to sustain the award of actual damages by the trial court. This being the case, it is unnecessary for me to decide whether the plaintiffs established a violation of § 10(b) and Rule 10b-5. I would only note that, in my judgment, Ryan v. J. Walter Thompson Co., 453 F.2d 444 (2d Cir. 1971), cert. denied, 406 U.S. 907, 92 S.Ct. 1611, 31 L.Ed.2d 817 (1972), was improperly decided.
The trial court should not have awarded punitive damages. The defendants' actions were not the willful, wanton and malicious type of conduct that punitive damages were designed to punish and deter. See, e. g., Genie Machine Products, Inc. v. Midwestern Machinery Co., 367 F.Supp. 897 (W.D.Mo.1974).
Neither should the trial court have awarded prejudgment interest. Although equitable principles may be considered, generally Missouri law does not allow prejudgment interest on an unliquidated sum. General Insurance Co. of America v. Hercules Construction Co., 385 F.2d 13 (8th Cir. 1967). See V.A.M.S. §§ 408.020 and 408.040.
In all other respects, the judgment should be affirmed.
The district court relied heavily on what it perceived to be favoritism in the administration of the Charles E. Merrill Trust. The facts belie any finding of favoritism. The Merrill Trust had nothing to do with the enforcement of a stock option at the death of a shareholder. The Trust itself was a shareholder—indeed had been since Merrill Lynch was incorporated—of the corporation. It is true that the Trust and the corporation entered into a contract permitting 10% of the stock of the Trust to be sold each year over a period of ten years, the last year being 1976. The purpose for the contract was completely innocent however. Merrill Lynch was fearful that it would be unable to redeem all of the stock held by the Trust at any one time as it could have been forced to do under the Certificate of Incorporation. The corporation therefore opted for gradual assimilation of the stock into the company. It is also true that the 1969 sale of shares was deferred pursuant to the terms of the contract until 1971. However, this decision was not motivated by any inside information relating to the public offering. Indeed, the decision to defer the 1969 sale took place on June 19, 1969, more than a year before the alleged secret management decision to go public.
Assuming, arguendo, that a lawful or valid business purpose was required, we note that the transfer restriction was justified by a number of lawful and reasonable business purposes. Rule 313.21 of the New York Stock Exchange, of which Merrill Lynch was a member, required the company to repurchase the shares of any stockholder who died, so long as the stock was not freely transferable. It is true that on March 26, 1970, the Exchange amended its rules to permit member firms to hold freely transferable securities. However, Rule 313.21 continued to apply to Merrill Lynch until the company had freely transferable stock outstanding. This occurred on June 23, 1971, the date of the public offering, after the Bitting stock was purchased. Additionally, in 1959, the company obtained an exemption from the registration requirements of the Securities Act of 1933 on the representation to the SEC, inter alia, that the Exchange required the company to have an option to purchase the shares on the happening of certain contingencies. In 1967, Merrill Lynch obtained an exemption from the registration and reporting requirements of § 12(g) of the Securities Exchange Act of 1934 on the basis of its representation that it would remain a privately held company by enforcing its stock restrictions. At the time the Bitting stock was purchased, the company could have reasonably believed that the removal of the stock restrictions would have created a public market for the company's stock and, in view of the unavailability of the registration materials, resulted in a violation of the securities laws. Finally, the corporation had a legitimate interest in limiting stock ownership to those persons active in the business.
We have no quarrel with these propositions in the contexts in which they were invoked. However, none of the cases cited by the plaintiffs involved nor control the enforceability of a stock option lawfully executed under Delaware law and legally enforceable under § 202(c)(1) irrespective of specific justification. Cf. Singer v. Magnavox Co., 367 A.2d 1349, 1353-1358 (Del.Ch.1976). None of these cases even remotely impugns the company's right to exercise a repurchase option which was specifically assented to by the stockholder, consistently exercised by the company and supported by lawful business purposes.
The trial court found that the defendants' actions were part of a scheme to maintain management control and to increase earnings per share so as to increase the public offering price of Merrill Lynch shares. Maintenance of control is an improper purpose under Delaware law. See, e. g., Bennett v. Propp, 41 Del.Ch. 14, 187 A.2d 405 (1962). Although unnecessary to this decision, substantial evidence exists to support the trial court's findings.
Moreover, when all transactions, including those of stockholders who retired in the interim period when the stock was repurchased are considered, the direct gain to the defendants was substantial.