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Crane Co. v. American Standard Inc.

decided: April 4, 1979.

CRANE COMPANY, PLAINTIFF-APPELLANT,
v.
AMERICAN STANDARD, INC. AND BLYTH & CO., INC., DEFENDANTS-APPELLEES.



Appeal from dismissal by the United States District Court for the Southern District of New York, Robert J. Ward, Judge (439 F. Supp. 945 (S.D.N.Y. 1977)), of securities fraud action. Affirmed as to dismissal of claims under §§ 9(e) and 10(b) of the Securities Exchange Act of 1934; remanded for further consideration of dismissal of pendent state law claims.

Before Kaufman, Chief Judge, and Smith and Van Graafeiland, Circuit Judges.

Author: Smith

This is an appeal from a judgment entered in the United States District Court for the Southern District of New York, Robert J. Ward, Judge (439 F. Supp. 945 (S.D.N.Y.1977)), in favor of defendants American Standard, Inc. ("Standard") and Blyth & Company ("Blyth"), in a securities action brought by Crane Company ("Crane") more than ten years ago. We affirm in part, reverse in part and remand.

This appeal, nine years after our decision in Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir. 1969), Cert. denied, 400 U.S. 822, 91 S. Ct. 41, 27 L. Ed. 2d 50 (1970) ("Crane I"), and five years after our decision in Crane Co. v. American Standard, Inc., 490 F.2d 332 (2d Cir. 1973) ("Crane II"), follows the second trial on the merits in this action. Although the "Brobdingnagian procedural imbroglio," Crane II, supra, 490 F.2d at 334, which delayed this case for so long has been resolved, we are again confronted with the issue which faced us in Crane I, whether Crane has standing to bring this action under §§ 9(e) and 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. §§ 78i(e) and 78j(b). The district court held, contrary to our decision in Crane I, that Crane lacks standing. The district court further held that, assuming Crane does have standing, it failed to prove that the conduct of Standard and Blyth caused it any damage. It also held that it lacked jurisdiction of any pendent state law claims. Crane vigorously contests all aspects of the district court's decision. We find no error in the result on the claims based on federal securities law, but remand for further consideration of dismissal of the state law claims.

The Takeover Battle

Although we shall assume familiarity with this court's opinions in Crane I and Crane II, exposition of the issues before us requires some restatement of the facts which brought this action to its present posture.

The controversy arose from a battle between Crane and Standard for control of Westinghouse Air Brake Company ("Air Brake"). Crane began making substantial purchases of Air Brake stock in 1967. Air Brake's management informed Crane that their company was not interested in the possibility of merger with Crane. Crane, however, continued to purchase stock on the open market. Air Brake responded by raising the cumulative vote necessary to obtain representation on its board of directors. In late 1967, Blyth, Standard's investment banker, offered Standard's assistance to Air Brake in fending off Crane's takeover efforts.

On February 20, 1978, when Air brake stock was selling on the New York Stock Exchange ("NYSE") at about $36 per share, Crane filed its 14-B statements with the SEC declaring its intention to solicit proxies for the election of Air Brake directors. Shortly thereafter, Air Brake's directors approved a merger of Air Brake into Standard on the basis of an exchange of one share of Standard convertible preferred stock worth about $100 for every two shares of Air Brake stock. The merger required approval of a majority of the outstanding Air Brake shares in order to be effected. Air Brake stock rose to $44 on the NYSE after announcement of the merger agreement.

Crane countered by making a tender offer of subordinated debentures with face value of $50 for each share of Air Brake stock. This offer was to expire at 5:00 p. m. on April 19, 1968. Air Brake stock rose to about $49 on April 10, shortly after the tender offer was announced. By April 18, however, the stock price had fallen to about $45.

On April 19, the final day of Crane's original offer, Air Brake stock opened at $45.25. During the course of that day, Standard, acting through Blyth, purchased 82,400 shares*fn1 on the open market in cash transactions*fn2 at increasing prices up to $50, with an average price of $49.08 per share. But on that same day, Standard made an undisclosed, off-the-market sale of 100,000 shares to Investors Diversified Services, Inc. at $44.50 and a sale of 20,000 shares on the NYSE to Dillon, Read & Co., Inc. at $44.875.

Crane extended its tender offer several times, the last extension expiring on May 24, 1968. Its total holding of Air Brake stock, from the tender offer and its open market purchases, amounted to 1,480,623 shares, or 32.2% Of Air Brake's outstanding stock.

Meanwhile, at a May 16 stockholders' meeting, 2,903,869 shares of Air Brake were voted in favor of the merger with Standard and 1,180,298 shares against. The affirmative vote was 602,290 shares more than the 2,301,579 shares which constituted a majority of the outstanding stock and which were needed to approve the merger. The merger became effective on June 7, 1968, at which time Crane's interest in Air Brake was converted into 740,311 shares of Standard convertible preferred stock. On June 13, under threat of an antitrust action to be brought by Standard,*fn3 Crane sold all but 10,000 of these preferred shares.*fn4

Crane I and II

On April 17, 1968, Crane brought suit claiming that Air Brake had made misrepresentations in its proxy statement soliciting votes in favor of the merger. On May 6, Crane filed a second action contending that Standard and Blyth had engaged in fraud and market manipulation in violation of §§ 9, 10 and 14 of the 1934 Act (15 U.S.C. §§ 78i, 78j and 78n), Rules 10b-5 and 10b-6 (17 C.F.R. §§ 240.10b-5 and 240.10b-6) and Regulation 14A (17 C.F.R. § 240.14a-1 Et seq.). These actions, both of which sought equitable relief, were consolidated and tried before Judge Sylvester J. Ryan, who dismissed the consolidated complaint.

This court, in Crane I, affirmed part of Judge Ryan's judgment, but we reversed his dismissal of the fraud and market manipulation claims. We held that (1) Crane had standing to sue under §§ 9 and 10(b) of the 1934 Act; (2) Standard had violated § 9(a)(2)*fn5 by engaging in "massive buying (of Air Brake stock) on April 19, coupled with its concealed sales," 419 F.2d at 795, with the purpose and effect of "deter(ring) Air Brake shareholders from tendering to Crane," Id., thereby "inducing Crane to become a seller," Id., at 794, because of antitrust considerations; and (3) Standard had violated § 10(b)*fn6 and Rule 10b-5*fn7 by its failure to disclose its manipulative activities in connection with its transactions in Air Brake stock. We remanded the action to the district court, stating, "The manipulation May be found to have deprived Crane of success in its tender offer in the free market to which it was entitled . . . ." Id., at 803-04 (emphasis added). We made clear, however, that "(t)he extent of the damage will have to be determined by the District Court, in fashioning an appropriate remedy, and the burden of proof thereon will be on Crane," Id., at 797, and that "Crane must establish that any relief sought is equitably required, considering the effect on other shareholders and the diligence with which Crane sought to prevent consummation of the merger and to obtain delay in its implementation pending expeditious review of the denial of injunctive relief by the trial court." Id., at 804.

On remand, Judge Ryan recused himself and the case was assigned to Judge Mansfield. When Judge Mansfield became a member of this court, the action was reassigned to Judge McLean. Upon his death, it was transferred to Judge Ward. Several orders of the district court, including one requiring Crane to amend its complaint and submit to trial before a jury in order to be entitled to an award of damages, were appealed to this court in 1973. We reversed that order in Crane II, supra, 490 F.2d 332, and reiterated the mandate of Crane I that "the determination of the amount of damages, if any, (was) to be made, as all other decisions in this equity action had been, by a district judge." Id., at 341.

Standing to Sue

A. Decision on Remand

The trial on remand took place before Judge Ward in April and May of 1976. Before the district court had rendered a decision, however, the Supreme Court announced its opinion in Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S. Ct. 926, 51 L. Ed. 2d 124 (1977) ("Piper"), in which it held that "a tender offeror, suing in its capacity as a takeover bidder, does not have standing to sue for damages under § 14(e)." Id., at 42 n. 28, 97 S. Ct. at 949 n. 28. As a result, the district court concluded that the circumstances presented an exception to the general rule that "the lower court simply carries out a mandate as it is received without reexamination." 439 F. Supp. at 949. The district court therefore reconsidered the question of standing, previously decided in Crane I, in addition to the question whether Crane had demonstrated that it was entitled ...


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