The opinion of the court was delivered by: GERRY
Defendants Curtiss-Wright Corporation and T. Roland Berner, Charles E. Ehinger, and Richard P. Sprigle have brought a motion for summary judgment against plaintiffs Arnold I. Laven, Andrew H. Sharpe, John A. Pimm, Clayton P. Spitz, Fred Kornick, and Friedrich E. Neumann, representatives of classes of persons who purchased some of the 5,000,000 depository preferred shares in Western Union Corp., pursuant to a registration statement and prospectus effective April 16, 1984, and two prospectus supplements effective April 17 and April 27, 1984. One class ("Class I") purchased these shares during the period extending from April 16, 1984 to November 27, 1984. This class has alleged violations of section 11 and section 15 of the Securities Act against defendants based upon the contention that Western Union's prospectus contained untruths and omissions on matters of material fact and that defendants were controlling persons of Western Union. A second class ("Class II") consisting of those who bought their shares from Merrill Lynch, who underwrote the offering, allege that defendants have violated section 12(2) of the Securities Act by aiding and abetting Merrill Lynch's violations of the same section. Finally, plaintiff David Jaroslawicz, on behalf of himself and that class of persons who purchased Western Union common stock from March 19, 1984 to July 13, 1984 alleges that defendants both aided and abetted, and are primarily liable for, violations of section 10(b) and section 20 of the Securities Exchange Act, as well as Rule 10b-5 promulgated under the Act. These allegations, like the others, are based upon Western Union's 1984 registration statement and prospectus. Defendants have moved for summary judgment on all claims against them. Their motion is granted.
These complaints were filed on August 25, 1986. Both sides have enjoyed extensive discovery and have filed numerous affidavits and exhibits in favor of and opposing this motion.
At all times relevant to this action, defendant Berner was Chairman and President of Curtiss-Wright Corporation. Defendants Ehinger and Sprigle were Executive Vice Presidents of Curtiss-Wright. From July 1981 to August of 1982, Curtiss-Wright purchased 20.5 % of the total Western Union voting shares. Curtiss-Wright's purchases were preceded by thorough inquiries that convinced the Curtiss-Wright board that Western Union was "the most undervalued telecommunications company in the market." (Berner Aff. para. 10) Time would tell just how wrong this estimate was.
Curtiss-Wright claims to have been interested in Western Union solely as an investment. Whatever their motive, the possibility of their obtaining a majority of Western Union shares was hampered when Western Union acquired the E.F. Johnson company in the fall of 1982 over the objection of Curtiss-Wright. This transaction diluted Curtiss-Wright's interest to 17.5% of the Western Union voting stock. Curtiss-Wright's interest would remain at this level for the remainder of the period relevant to this action. Even at 17.5 %, Curtiss-Wright remained the largest shareholder in Western Union.
In the fall of 1983, Western Union negotiated a "standstill" agreement with Curtiss-Wright. The agreement permitted Curtiss-Wright to name three directors to the 16-person Western Union board. The Western Union board was still free to act without Curtiss-Wright approval. Curtiss-Wright was required to vote for Western Union's 13 nominations to the board. Curtiss-Wright was also precluded from acquiring more than 25 % of Western Union stock.
On November 22, 1983, defendants Berner, Sprigle, and Ehinger of Curtiss-Wright took their place on the Western Union board pursuant to the standstill agreement. At a meeting on this date, the Western Union board was informed of the adoption of Generally Accepted Accounting Principles, which had become effective on November 1, 1983. Also discussed was the proposed strategy of shifting marketing emphasis from Western Union's established telex service to its new EasyLink service. The board also approved the budget for 1984.
In early December 1983, Western Union announced a multi-million dollar writedown of its plant and equipment. Berner, Sprigle, and Ehinger had little to do with the writedown, since it had been proposed before their election to the Western Union board, and none of them served on the Audit Committee when the particulars of the writedown were discussed. The board was assured by both management and the Price Waterhouse accounting firm that the writedown was proper and would insure an accurate statement of Western Union's assets. Nevertheless, it was a first indication that Western Union's assets were not undervalued, but overvalued. However, Berner, Sprigle and Ehinger continued to believe that the company's asset figures were understated. (Berner aff. para. 62, Ehinger aff. para. 37).
On February 28, 1984, the Western Union board approved increased expenditures for the marketing of its EasyLink service at management's recommendation. The board also learned that the company's new Airfone air-to-ground telephone service was ready to commence in the second quarter of the year.
On March 21, 1984, the board's finance committee considered an offer by Merrill Lynch, Pierce, Fenner & Smith to purchase and underwrite a public offering of $ 50 million in Western Union preferred shares. Berner objected to this sale on the grounds that the 14 % dividend rate and redemption premium granted to Merrill Lynch were too high. Berner proposed that Western Union issue common stock, not preferred, and that Curtiss-Wright would purchase its proportionate share (17.5 %). When the full board met on March 27, 1984, Berner reiterated his objection, asked to be recorded as voting in opposition, and proposed that Curtiss-Wright buy the entire issue of preferred shares without the redemption premium, so as to lower the cost to Western Union. On April 10, the Curtiss-Wright proposal was rejected by the Finance Committee in favor of Merrill Lynch.
Accompanying the offering of preferred shares was a registration statement and a prospectus. The statement was signed by all Western Union directors, including Berner, Sprigle, and Ehinger. For purposes of this motion, the prospectus shall be considered to have constituted a deception of the potential investor, in that it presented a "generally rosy picture of Western Union as a company poised to take a leadership role in the telecommunications industry [while] the truth is that it was on the verge of collapse." (Plaintiff's brief, p.1). The new marketing strategies for 1984 were "high risk" and could succeed only with "large amounts of external financing." The signatures of Berner, Sprigle, and Ehinger appeared on the prospectus with the other 13 directors of Western Union. Nevertheless, the affidavit testimony of Berner, Sprigle, and Ehinger shows that they believed the prospectus to be truthful.
Merrill Lynch proceeded to underwrite the offering of preferred shares and sell them to the public. In June of 1984, two months after the offering, Berner purchased 1,000 shares of Western Union common stock for his own account. In the months before and after the offering, Western Union management continued to issue routine and reassuring press releases to the investment community, and as regular policy the board of directors was never asked to clear such releases.
On August 28, 1984, the Western Union board unanimously voted to discharge Chairman Robert M. Flanagan. Plaintiffs aver that Berner had sought Flanagan's removal, based upon Flanagan's deposition testimony that he had heard from another board member (Harper Sibley) that "Mr. Berner was trying to force me out of the company . . ." (Flanagan deposition p.246-47, Komins Aff., Exhibit P). However, Flanagan also stated that his belief in this was "one of a thousand beliefs I had." (Tyler Aff. Exhibit B p.253) and two non-Curtiss-Wright members of the Western Union board present at the meeting stated that Berner, Sprigle, and Ehinger did not take the lead in ousting Flanagan. (Sibley Aff. para. 8, Kheel Aff. para. 10).
As a replacement for Flanagan, the board offered the chairmanship to several directors, all of whom rejected it. The board finally turned to Berner who took the position on an interim basis, which was to last approximately three months.
In November of 1984, during Berner's brief tenure as chairman, the company's banks cancelled a $ 100 million line of credit that had been approved in September. The resulting cash shortage caused Western Union to cancel payment of dividends. The price of the company's stock began a swift decline. After Berner was replaced as chairman by Robert Leventhal (not Berner's candidate; his was John Pope, who was rejected) in December of 1984, Berner, Sprigle, and Ehinger found themselves increasingly "frozen out" of the management process. Secret "informal" meetings of the board were held without them, and several Western Union officers were directed not to talk to them.
In early December 1985, Curtiss-Wright sold a small portion of its Western Union shares for tax reasons, thus reducing its proportionate share in Western Union to 16 %. The Western Union board immediately demanded the resignation of two out of the three Curtiss-Wright directors, over their objections, because under the terms of the standstill agreement Curtiss-Wright was limited to representation on the board in proportion to its share in the outstanding voting stock. The next month, Curtiss-Wright wrote a sorrowful finis to its Western Union venture by selling all of its remaining shares and incurring a loss of $ 57.3 million. It only remains to be stated that Western Union's subsequent writedowns of its assets in 1986 were done without the advance knowledge of Berner, Sprigle, and Ehinger during their terms as directors of Western Union.
I. STANDARD FOR SUMMARY JUDGMENT
Federal Rule of Civil Procedure 56(c) provides that summary judgment may be granted only when the record shows that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Hersh v. Allen Products Co., 789 F.2d 230, 232 (3d Cir. 1986). The moving party has the initial burden of identifying evidence that, if uncontroverted, would entitle them to a directed verdict at trial. Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 362 (3d Cir. 1987); Equimark Commercial Financial Co. v. C.I.T. Financial Services Corp., 812 F.2d 141, 144 (3d Cir. 1987). The burden then shifts to the adverse party to point to the evidence showing a genuine issue for trial; i.e., the evidence that would allow a reasonable jury to find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986), Matsushita Electric Industrial Co v. Zenith Radio, 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). However, the adverse party must show more than a "metaphysical doubt as to the ...