decided as amended february 20 1969.: February 5, 1969.
Ganey, Freedman and Seitz, Circuit Judges.
Plaintiff, Jane Levin, the holder of 1100 shares of the common stock of the Great Western Sugar Company (Sugar), commenced this action in the district court to enjoin the merger of Sugar and the Colorado Milling and Elevator Company (Milling) into a subsidiary of Milling, the Great Western United Corporation (United). Sugar, Milling, and United and the directors of Sugar and Milling were named as defendants*fn1 (defendants). Additional holders of 4100 shares of Sugar's common stock and one holder of preferred stock of Sugar, who filed his own complaint, intervened. After final hearing the district court rendered judgment for the defendants. This appeal is taken by plaintiff on behalf of herself and the other Sugar common stockholders only.
Plaintiff's complaint stated three claims. The first arose under § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and its implementing Rule 10b-5 (17 C.F.R. 240.10b-5) and provided the primary basis for federal jurisdiction. It alleged that the proposed merger by itself and in connection with certain activities on the part of defendants amounting to a scheme or conspiracy constituted an unlawful device, scheme, and artifice to defraud and were acts, practices, and courses of business which operated as a fraud and deceit upon plaintiff. The second claim alleged a New Jersey state law cause of action and rested on the pendent jurisdiction of the district court. It asserted common law fraud*fn2 and the unfairness of the terms of the merger as grounds for relief. The third claim again alleged the state law claim that the terms of the merger were unfair, but jurisdiction was based solely on diversity of citizenship and it was brought only against the corporate defendants (Sugar, Milling and United).
The heart of plaintiff's complaint is that the terms of the merger were unfair to the common stockholders of Sugar, giving rise to equitable relief under state law and resulting in a fraud upon the Sugar common stockholders in violation of federal law. With this in mind, we turn to the pertinent background information. We note, preliminarily, that the dispute is not as to the basic facts found in the district court opinion but as to the inferences to be drawn therefrom.
Sugar was engaged in the production of sugar and its by-products from sugar beets and was the largest sugar beet producer in the country, accounting for about 25% of the beet sugar marketed in this country and having a net worth of approximately $93,000,000 as of February 28, 1967. Milling was principally engaged in the manufacture and sale of wheat, flour, and mixes, and animal feeds. It also bought and sold grains, beans, seeds and fertilizers, and stored grains for the public in company-owned elevators. Milling's net worth was approximately $24,000,000 as of May 31, 1967.
The Sugar-Milling merger was the brainchild of William White, Jr. In December of 1964, White became a director of Milling at the unanimous request of the directors of that company. In September of 1965, he became chairman of the Milling executive committee and, in April of 1966, chairman of the Board of Directors. In August of 1965, he began to purchase substantial quantities of Milling stock so that, by April of 1967, he held approximately 18% of that company's outstanding stock. The purchases were financed to a large extent by bank loans, which were secured in part by a pledge of the stock.
White first conceived of Milling making a public tender offer for Sugar stock in February of 1966, and, in April of that year, when the Sugar directors decided not to oppose it, Milling made the tender offer. It was financed by a loan, which was conditional on the successful completion of a merger between Sugar and Milling. The tender offer was aimed primarily at Sugar's preferred stock, since, by virtue of its unusual voting structure, each of the 150,000 preferred shares had one vote, while each of the 1,800,000 shares of common had only 1/12 of a vote, thereby giving the aggregate preferred holders 50% of the voting power.
As a result of the purchases of the Sugar stock tendered it, Milling obtained virtual voting control of Sugar in electing directors. Concommitant with its new voting control, six of the eleven directorships were filled by Milling. A seventh director was William White's father, who had served on its board previously. He and the other four remained from the old administration.
White thereafter arranged for Milling to employ Standard Research Consultants, Inc. (SRC) to recommend one or more plans for a merger of Sugar and Milling. After two early draft plans involving the exchange of only common stock had been discarded, SRC finally came up with a plan which Milling was prepared to submit to Sugar and its financial advisers, Dillon, Read & Co. (Dillon Read). The plan called for Milling stockholders to receive one share of common of United for each of their Milling shares, and for Sugar common stockholders to receive for each of their shares 3/10 of a share of common and one share of non-convertible preferred paying $1.75 per annum of the merged company.
Dillon Read studied the plan and concluded that, although "it was in the ball park" and with some improvements might be acceptable, the plan was not fair or equitable to Sugar's common stockholders as it was then drawn, because it did not provide them with sufficient equity participation, earnings growth, and other values. Negotiations followed among White, the Sugar directors, and representatives from SRC and Dillon Read without success. Dillon Read suggested making more common stock available to Sugar common stockholders and using a convertible preferred. White proposed giving Sugar common stockholders an alternative of either all common or all preferred of United. Nothing came of these suggestions.
SRC then revised its suggested plan of merger as to Sugar common stockholders giving them 1/3 instead of 3/10 of a share of United common for each of their shares and $1.80 per annum instead of $1.75 on the preferred, thereby increasing the Sugar common stockholders' equity participation in United by 10% and the dividend on their preferred by five cents. Apparently dissatisfied with the inability of Dillon Read to come to an agreement on the merger terms and in order to get a fresh look, Sugar suspended Dillon Read as its financial advisers and hired Kidder, Peabody & Company (Kidder Peabody) to appraise the revised plan of merger.
Kidder Peabody approved the plan with some modifications, one of which was a further increase in the preferred dividend rate from $1.80 to $1.87 per annum. After hearing a presentation of the Kidder Peabody report, the directors of Sugar on January 20, 1967, adopted the Kidder Peabody modifications and unanimously approved the merger in principle. Shortly thereafter three of the four independent, non-Milling directors, who had voted for the merger, resigned. Their places were taken by members of the White group.
The plan was again submitted to Dillon Read to see whether it would now approve the plan as modified. After a brief review, Dillon Read gave an oral opinion that it could not withdraw its objections or express an opinion as to the fairness of the plan without a new analysis, taking into account various developments which had taken place since its original study. Without authorizing Dillon Read to pursue the matter further, the Sugar board of directors approved the plan with the Kidder Peabody modifications and with a further increment in the United preferred dividend rate from $1.87 to $1.88 on April 12, 1967. The approval was made by a board consisting, except for one member, entirely of Milling designees. This civil action was commenced on June 27 of that year.
A stockholders meeting was called by Sugar for September 15, 1967, to vote on the merger. New Jersey law requires that the merger be approved by the votes of the holders of 2/3 of all the capital stock of each of the merging corporations. 14 N.J.Stat.Ann. 12-3. Thus, Milling's 47% voting control of Sugar, which consisted mainly of preferred stock, was reduced for the purpose of approving the merger to only 22%. The vote resulted in an overwhelming approval of the merger, with some 92% of the shares being voted in favor of the merger plan. Even without the ...