Appeal from a judgment granted in favor of appellees following a non-jury trial in the United States District Court for the Northern District of New York, McCurn, J., finding that the issuance of a proxy statement prepared by appellees in conjunction with a corporate merger did not violate federal securities law.
Lumbard, Cardamone, Circuit Judges, and Leisure, District Judge.*fn*
Plaintiffs, former minority shareholders of Chenango Industries, Inc., brought suit in the Northern District against Great American Industries, Inc. (GAI), Chenango, and various officers and directors of those corporations challenging the legality of a joint proxy/prospectus issued by GAI and Chenango in connection with Chenango's 1979 merger into GAI. The plaintiffs alleged that the proxy statement misrepresented and failed to disclose material facts regarding the financial condition of GAI and Chenango, and the integrity of, and the relationships between, the officers and directors of the two companies.
Following a non-jury trial, Judge McCurn granted judgment in favor of defendants, finding that all but one of the alleged omissions or misrepresentations were not material, and that the defendants did not act with the requisite culpability to be liable for the one material omission. Wilson v. Great American Industries, 661 F. Supp. 1555, 1573-74 (N.D.N.Y. 1987). The court also determined that even if a securities law violation had occurred, the plaintiffs suffered no damages. Id. at 1576-78.
We find that the omissions from and misrepresentations in the proxy statement were material and were in violation of the securities laws. We also disagree with the district court's conclusion that the plaintiffs have suffered no damages. Accordingly, we reverse and remand for further proceedings to assess damages.
The facts are not in dispute. In such a case, we are in as good a position as the district court to draw inferences and conclusions from the facts. In re Hygrade Envelope Corp., 366 F.2d 584, 588 (2d Cir. 1966).
GAI is a Delaware corporation based in Binghamton, New York. In 1979, its common stock was publicly held and traded on the American Stock Exchange. At that time, GAI's principal products were rubber goods, corrugated boxes and various recreational products, all of which were manufactured and/or marketed through subsidiaries.
At relevant times, Burton Koffman was President of GAI and Chairman of its board of directors. His brother, Richard Koffman, was a GAI board member as well. Their uncle, Milton Koffman, was Treasurer and Secretary of GAI and a member of its board of directors. He also served as a director of Chenango. The Koffmans owned approximately 28% of the common stock of GAI and 28% of the common stock of Chenango. They have since taken GAI private, purchasing all of its outstanding common stock in 1985.
Before its merger into GAI, Chenango was a New York corporation based in the Binghamton area. The company was founded in 1967 by Joseph Stack, and its shares were traded over the counter. Chenango is an assembly and service company, supplying manufacturing services to electronic equipment manufacturers who subcontract all or part of their manufacturing needs. Most of its business comes from large corporate customers; at the time of the merger, IBM accounted for almost one-half of Chenango's sales. In addition, Chenango owns and operates Lancaster Towers, a federally subsidized housing project for the elderly near Buffalo, New York from which it derives substantial tax benefits. After becoming a wholly-owned subsidiary of GAI, Chenango remained intact and autonomous.
At the time of the merger, Stack was President, Chairman of the Board and the controlling shareholder of Chenango. Gary Crounse, William Starner, Anthony Mincolla, Milton Koffman, and the late David Dyer were the remaining directors and they are all defendants here, Dyer through the executors of his estate. Crounse was Vice-President and General Manager of Chenango and Starner was its Sales Manager. Dyer, a partner in the Binghamton law firm of Levene, Gouldin and Thompson, was Secretary of, and General Counsel to, Chenango. Dyer and his firm also represented the Koffmans and some of the interests they controlled other than GAI.
The defendants began to plan the merger in 1978. Stack testified that in order for Chenango to grow, it needed to become part of a larger company with greater resources. Stack had known the Koffmans for many years both in business and socially. Milton Koffman was a director of Chenango and GAI. Richard and Burton Koffman had invested in a Florida real estate venture with Stack and Mincolla, another Chenango director. Stack and Mincolla were lifetime friends of the Koffmans.
On January 30, 1979, the GAI board decided that the company would benefit from a merger. Without the aid of an outside appraisal of Chenango, Stack and William Lyons, a GAI director, negotiated the final terms of the merger. In June 1979, the boards of GAI and Chenango approved the merger and prepared a proxy statement for Chenango's minority shareholders.
Meanwhile, Stack was expanding Chenango's operations. In March 1979, Stack submitted on behalf of Chenango an application to the Broome County Industrial Development Authority (IDA) for the issuance of $1.8 million in industrial development bonds. The application made no mention of the proposed merger. One month later, the Authority approved the application. For the loan transaction to be completed, Chenango only needed to procure a purchaser of the bonds. On August 14, 1979, a Binghamton bank agreed to purchase the bonds, and asked GAI, the proposed sole shareholder of Chenango, to provide a guarantee. GAI did not immediately respond to the bank's request. On August 15, 1979, Chenango received state approval for acquisition of state land for the proposed industrial development.
During the same time period, GAI's directors were voicing concern at board meetings over the performance of Great American Corrugated Container Corporation (GACCC), a subsidiary. In the first six months of 1979 GACCC suffered losses totalling $2.1 million, after having lost $2.5 million the previous year.
GAI's directors had also been awaiting a decision in a pending lawsuit brought by a union of a GAI subsidiary against GAI and two other subsidiaries to recover benefits that the employees believed they were owed. On September 20, 1979, Judge Duffy of the Southern District issued a decision in the case of United Rubber, Cork, Linoleum and Plastic Workers of America, AFL-CIO v. Great American Industries, Inc., 479 F. Supp. 216 (S.D.N.Y. 1979), finding GAI liable for "systematically stripping" the assets of the subsidiary in order to avoid paying union obligations. The final damage award was just under $990,000.
The defendants sent the proxy statement to Chenango's shareholders on September 27, 1979. The terms of the merger can be summarized as follows: The aggregate book value of Chenango's common stock was $1.2 million or $4 per share. In exchange for the Chenango common stock, GAI issued a new Series B preferred stock with the aggregate per value of $1.2 million, bearing a 6% dividend and convertible into GAI common stock at the rate of 6 shares of Series B to 5 shares of common. On October 18, 1979, Chenango's shareholders approved the merger and on October 31, 1979, Chenango became a wholly-owned subsidiary of GAI. The dissenters accepted cash settlements.
Alexander Wilson commenced this class action on October 17, 1980 on behalf of himself and other minority shareholders of Chenango. The plaintiffs claim that their sale of Chenango stock and purchase of GAI stock in the merger was caused by a materially false and misleading proxy statement. The proxy is alleged to be deficient in five ways: (1) it did not disclose Judge Duffy's decision in the United Rubber case; (2) it did not reveal that the $1.8 million IDA loan had been applied for and approved; (3) it did not disclose that Chenango's counsel, David Dyer, and his firm had performed legal services for the Koffmans and their companies; (4) it did not adequately represent the value of Lancaster Towers, a Chenango asset; and (5) it did not adequately represent the value of GACCC, a GAI subsidiary. The plaintiffs allege violations of sections 10(b), 14(a) and 18(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), 78n(a) and 78r(a), as implemented by Rules 10b-5 and l4a-9, 17 C.F.R. §§ 240.10b-5 and 14a-9.
Judge McCurn certified the class in 1982, 94 F.R.D. 570 (N.D.N.Y. 1982), and denied cross-motions for summary judgment in 1986, [1986-1987] CCH Fed. Sec. L. Rep. para. 92,890. Following a non-jury trial, the district court, on June 12, 1987, granted judgment in favor of defendants. 661 F. Supp. 1555. The court found that the defendants' failure to disclose the United Rubber decision was a material omission, but refused to find liability, because the defendants did not act negligently in deciding not to disclose. The court found the remaining 12 alleged misrepresentations or omissions, four of which are pursued ...