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TBK Partners v. Western Union Corp.

decided: March 18, 1982.


Appeal from a judgment of the United States District Court for the Southern District of New York (Milton Pollack, Judge ), approving a settlement of a consolidated shareholder class and derivative action. Judgment affirmed.

Before Mansfield and Newman, Circuit Judges.*fn*

Author: Newman

This is an appeal from a judgment of the District Court for the Southern District of New York (Milton Pollack, Judge), approving the settlement of a consolidated shareholder class and derivative action involving a dispute over a century-old lease. In 1882, the Gold and Stock Telegraph Company ("Gold & Stock") leased its entire private telegraph business to the Western Union Telegraph Company ("Western Union") for a period of 99 years in return for annual payments to Gold & Stock's shareholders. Over the years, Western Union acquired 95.3% of Gold & Stock's 50,000 shares. Those minority shareholders who object to the settlement and who are appellants here contend that upon the expiration of the lease, Gold & Stock shareholders were entitled to Western Union's 1981 business, worth $17,000 per share of Gold & Stock. Pursuant to a proposed short-form merger between Western Union and Gold & Stock, Western Union had valued Gold & Stock shares at $256.97. The settlement increased this value by $126.53 to $383.50 per share. The objectors contend that the District Court erred in approving the settlement because (1) it enjoins class members from prosecuting claims that were not part of the class action and (2) the opposition of more than half of the class of minority shareholders to the settlement demonstrates its unfairness. We find neither reason persuasive and affirm the District Court's approval of the settlement.

Under the lease, Western Union acceded to 1881-vintage poles, wires, insulation, printers, transmitters, battery cells, magnets, call bells, registers, switches, and the like, as well as the rights to Gold & Stock's franchises, easements, patents, and shares of stock of other telegraph companies. Over the years, the operating assets outlived their usefulness, and the business lost its separate identity as Western Union's modern telecommunications business developed. The lease made no provision as to what interest, if any, was to revert to Gold & Stock upon its expiration. Under appellants' view of the lease, in light of Western Union's failure to preserve the operating identity of Gold & Stock, the proper result upon expiration of the lease should have been distribution of all the assets of Western Union among the Gold & Stock shareholders as a reversionary interest.

In July 1980, a class action suit was commenced by TBK Partners Ltd. ("TBK Partners") on behalf of a class of all Gold & Stock minority shareholders. The complaint alleged that Gold & Stock was an investment company under the Investment Company Act of 1940, 15 U.S.C. § 80a (1976), and that Western Union had violated the Act by not registering it as such and by causing it to engage in transactions prohibited by the Act without the approval of the SEC. The complaint further alleged in a pendent state law claim that Western Union had breached fiduciary duties owed to the minority shareholders by wrongfully commingling Gold & Stock's assets with Western Union's. The complaint requested, among other things, an injunction against any merger between Western Union and Gold & Stock.

In late 1980, after the District Court as well as a New York state court had denied requests for preliminary injunctive relief, Western Union, as the owner of more than 95% of Gold & Stock's shares, proposed to effect a short-form merger of Gold & Stock into Western Union pursuant to N.Y.Bus.Corp.Law § 905 (McKinney 1963). Western Union determined that the fair value per share payable in the merger would be $256.97, calculated as follows:

(1) $423,203 or $8.46/share for the aggregate value of assets transferred to Western Union;

(2) $12,200,246 or $244.01/share for net proceeds from the disposition of stock assets transferred to Western Union under the lease;

(3) $150,000 or $3.00/share for the stock assets still in the possession of Western Union; and

(4) $1.50/share for the final quarterly payment due Gold & Stock under the lease.

Plaintiff TBK Partners was granted leave to assert additional claims related to the proposed merger. The new claims included allegations that (1) the Information Statement sent to Gold & Stock shareholders at the time of the proposed merger misstated or omitted material facts regarding the value of the reversionary interest under the lease in violation of the federal securities laws, (2) Western Union would violate a fiduciary duty owed to Gold & Stock by effecting the merger while undervaluing Gold & Stock's reversionary interest, and (3) the merger would violate the lease by depriving Gold & Stock shareholders of their right to the full value of the reversionary interest.*fn1 The District Court certified the action as a class action pursuant to Fed.R.Civ.P. 23(a), 23(b)(1)(A), 23(b)(1)(B), and 23(b)(2) "on behalf of a class consisting of all owners of Capital Stock of (Gold & Stock other than Western Union) as of July 3, 1980." The Notice of Pendency of the class action informed all owners of Gold & Stock capital stock that:

All persons who fall within the definition of the class are automatically members of the class. Any judgment or other disposition of the Action will include and be binding upon all members of the class, whether or not favorable to the class. If there is a decision adverse to the class, members of the class ... would be subject to the contention that they are barred from asserting any claim arising out of or connected with the claims asserted in the Action.

Upon the approval of the New York Public Service Commission, the merger took effect on December 30, 1980.

As provided for by New York law, many of the objectors chose to dissent from the merger price offered by Western Union and they accordingly commenced an appraisal proceeding in state court to determine the fair value of their Gold & Stock shares. N.Y.Bus.Corp.Law § 623 (McKinney 1963). That action was dismissed without prejudice by the ...

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