Appendix — Foltz v. U. S. News & World Report, Inc.

Supreme Court brief1989

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What actually matters in this document.

Text

No.

Supreme Court, U.S,

FILE:

IN THE

OCTOBER TERM, 1988

CHARLES S. FOLTZ, et al.,

NEWS & WORLD REPORT, INC., et al.,

U.S.

Petitioners,

Respondents.

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

Alan Raywid

Counsel Of Record

Margaret E. Haering

John D. Seiver

Susan Paradise Baxter

COLE, RAYWID & BRAVERMAN

1919 Pennsylvania Avenue, N.W.

Second Floor

Washington, D.C. 20006

(202) 659-9750

Attorneys for Foltz

Petitioners

May 1, 1989

George A. Bangs

Joseph M. Butler

BANGS, MecCULLEN, BUTLER,

FOYE & SIMMONS

P.O. Box 2670

Rapid City, South Dakota 57709

(605) 340-1040

Jerome K. Walsh, Jr.

LANE & MITTENDORF

99 Park Avenue

New York, New York 10016

(212) 972-3000

Atiorneys for Richardson

and Kirby Petitioners

PRESS OF BYRON 8. ADAMS, WASHINGTON, D.C. (202) 347-8203

TABLE OF CONTENTS

APPENDIX A

Opinion Of The Court Of Appeals

1. Foltz, et al. v. U.S. News & World Re-

port, Inc. et al., 865 F.2d 364 (D.C. Cir.

WE decd sti aand dees oer adeatentd Ace Diente cite

APPENDIX B

Opinions And Orders Of The District Court

A. Memorandum Opinion And Final Order

of Judgment

1. Foltz, et al. v. U.S. News & World Re-

port, Inc., et al., 663 F. Supp. 1494

FRc SENET becinnniencoanseceetaereaaaieeancaies

2. Foltz, et al. v. U.S. News & World Re-

port, Inc., et al., Final Order of Judg-

Wee, PSE ZO; TOE cccisricaceseisspesecss

3. Foltz, et al. v. U.S. News & World Re-

port, Inc., et al., Amended Final Order

of Judgment, September 4, 1987 ........

B. Interlocutory Orders And Opinions

1. Foltz, et al. v. U.S. News & World Re-

port, Inc., et al., 627 F. Supp. 11438

(D. D.C. 1986) (granting in part and de-

nying in part Motions for Summary

PID pcasocinrcacissdcnceri ieee

2. Richardson, et al. v. U.S. News & World

Report, Inc., et al., Order of March 4,

1986 (dismissing certain claims) ..........

3. Richardson, et al. v. U.S. News & World

Report, Inc., et al., 639 F. Supp. 595

(D.D.C. 1986) (granting in part and de-

nying in part Motions for Summary

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Page

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cod

115a

117a

190a

Foltz, et al. v. U.S. News & World Re-

port, Inc., et al., Order of January 12,

1987 (Dismissing Claims Against Cer-

tain Defendant Directors in Foltz and

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APPENDIX C

Orders Of The Court Of Appeals On Rehearing

Foltz, et al. v. U.S. News & World Re-

port, Inc., et al., February 14, 1989 (De-

nying Petition for Rehearing) ..............

Foltz, et al. v. U.S. News & World Re-

port, Inc., et al., Februrary 14, 1989

(Denying Suggestion for Rehearing En

BODO) nc netisccsraccaaceasanscuneeeeneuareeaea

APPENDIX D

Statutory And Regulatory Provisions Involved

£.

Employee Retirement Income Security

Act Of 1974

29 USL.

29 U.S.C.

U.S.C.

29 U.S.C.

29 U.S.C. § 1108 Vcc

29 U.S.C. § TURD viscera

cor

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—_—

—

Treasury Regulations

26 C.F.R. § 1.410) ncaa.

26 C.F.R. § 2020818 Gansta

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226a

229a

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232a

233a

236a

237a

238a

239a

240a

248a

250a

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252a

3. PBGC Regulations

29 C.F.R. § 2620

inicieh aucena penuh bsucodeuekies 253a

4. Revenue Rulings

Rev. Rul. 59-60, 1959-1 C.B. 287 ......... 254a

Rev. Rul. 70-125, 1970-1 C.B. 87 ......... 258a

Rev. Rul. 80-155, 1980-1 C.B. 84 260a

APPENDIX A

United States Court of Appeals

For The District of Columbia Circuit

Nos. 87-7151 to 87-7153.

Charles S. FOLTZ, et al.,

Appellants,

U.S. NEWS & WORLD REPORT, INC., et al.

Charles S. FOLTZ, et al..,

John KIRBY,

Appellant,

U.S. NEWS & WORLD REPORT, INC., et al.

David B. RICHARDSON, et al.,

Appellants,

U.S. NEWS & WORLD REPORT, INC., et al.

Argued Oct. 3, 1988.

Decided Jan. 13, 1989.

Appeals from the United States District Court

for the District of Columbia

(Civil Actions No. 84-00447 and 85-02195)

Before EDWARDS, BUCKLEY and

WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

STEPHEN F. WILLIAMS, Circuit Judge:

Appellants are former employees of U.S. News & World

Report, Inc. All retired between 1974 and 1982. At their

retirements, U.S. News exercised its option to purchase

the shares in the company that each had received as part

of a stock bonus program. In addition, the U.S. News

Profit-Sharing Plan issued retirement benefits to each of

them, computed on the basis of their proportional interests

in U.S. News stock held by the Plan (virtually its sole

asset). The stock was not publicly traded, and in valuing

the relevant stock interests for both purposes, the

defendants treated them as minority interests, rather than

including a “‘control’’ premium.

The gap between minority and majority valuation proved

great because U.S. News, through a subsidiary (Madana

~ Realty), owned a 3.8-acre parcel of real estate in a rapidly

developing office district in Washington, D.C., known as

the West End. The company used more than half of this

land for employee parking, III Joint Appendix (‘‘J.A.”)

1044, and carried it on its books at a fraction of its market

value. Foltz v. U.S. News & World Report, Inc., 663

F.Supp. 1494, 1503 (D.D.C.1987).

U.S. News annually engaged American Appraisal to

value the company’s stock for purposes of exercising its

option to buy the holdings of retiring employees. American

Appraisal almost entirely discounted the potential value of

the real estate, at least until 1981, because its talks with

the company’s management convinced it that development

plans remained remote and speculative. 663 F.Supp. at

1502-03.

The Plan in turn used American Appraisal’s share val-

uation in calculating the severance benefit to be paid to

employees who retired, died, or separated from U.S. News

in each year.

The sale of all of U.S. News’s stock in 1984 revealed

the significance of these valuation decisions, exposing an

immense gulf between the per share realizations of the

plaintiff retirees and the beneficiaries of the company’s

sale. The total sale price was $176 million, or $2,842 per

share. Employees who were in active service at the date

of the sale, and who held U.S. News stock interests either

directly or through the Plan, benefited accordingly. So did

company directors, through what the litigants call “‘phan-

tom stock” holdings'—in essence, bonuses in the form of

promises by the company to pay the recipient at retire-

ment the per share value of the company’s stock at that

date, multiplied by the number of “‘phantom”’ shares issued

to the director.2 By contrast, valuations for the plaintiff

retirees ranged from $65 per share in 1973 to $470 in

1981.

In the district court the plaintiff retirees claimed that

_the defendants’ valuation decisions (along with related

statements or omissions) breached fiduciary duties imposed

by the Employee Retirement Income Security Act of 1974,

29 U.S.C. §§ 1001, et seg. (1982) (““ERISA’’), and violated

' Officers as such may also have received phantom shares. The record

is unclear. Though phantom shares were evidently conceived as a device

for rewarding and encouraging persons who could not hold stock, the

record is confusing as to who fell into this category. Compare III J.A.

953 (directors may not buy stock); Appellee’s Br. at 5 n. 4 (only di-

rectors got phantom shares); and 663 F.Supp. at 1508 (neither directors

nor officers may buy, giving no citation for proposition), with U.S.

News Certificate of Incorporation, Article Fifth, ¢ 1 (employees may

buy stock), and id. at Article Fifth (a) (employee defined to include

directors and officers).

* The phantom share program had a ceiling of 2400 shares per di-

rector. In 1981, part of the period in which share prices increased

rapidly, the directors accelerated the award rate in a manner which

had the effect of ensuring that every director, including the new Pres-

ident and Treasurer, who had two and one years of service respectively,

reached the 2400-share cap before the sale. This put each director in

line to receive about $7 million at the sale price of $2,842 per share.

In fact, however, the directors ultimately redeemed their phantom shares

at a “price considerably less than” that paid for ordinary stock. See

663 F.Supp. at 1508.

the securities laws.’ They brought claims against the Plan,

the company, Madana Realty, and American Appraisal and

also against several former directors of U.S. News (as

directors and as Plan fiduciaries). See 663 F.Supp. at 1498

n. 3 (listing. individual defendants). The trial court ruled

for defendants on each count of the complaints. We affirm.

Our analysis proceeds through these steps:

1. U.S. News’s purchase of stock from retiring employ-

ees were clearly purchases of minority interests and, under

Article Fifth (e) of its Certificate of Incorporation, could

not have been valued otherwise.

2. For the Plan’s computation of retiring employees’

interests in the Plan’s U.S. News stock, the governing

Plan document directed the Plan to use “‘the fair market

value established’ under Article Fifth (e). That valuation

technique, further, accorded with one of the key purposes

of the Plan—to perpetuate employee ownership of the com-

pany. Thus minority valuation complied with the explicit

directive of the Plan document and also tended to fulfill

its general purposes.

3. As ERISA instructs fiduciaries to carry out the aims

of the Plan that they administer, it did not prohibit the

fiduciaries’ action. Nothing in ERISA contradicts the di-

rective of the Plan document or the congruence of minority

valuation with its purposes.‘

I. U.S. NEWS’S EXERCISES OF ITS PURCHASE

OPTION

A 1962 reorganization of U.S. News created two classes

of shares, Common and Class A. All shares of both classes

* The securities_claims are based on alleged nondisclosure by the

defendants of the basis on which the valuation was made. We find no

error in the trial court’s rejection of this claim on the facts. See below

at p. 20.

‘Our holding on these issues makes it unnecessary for us to reach

the statute of limitations defenses.

had equa: voting rights. The only difference was that Class

A shares had a non-cumulative dividend preference of $2.00

per share per year and could be held only by the U.S.

News Profit-Sharing Plan. III J.A. 936. Class A shares

were designed to convert automatically to Common if they

were acquired by anyone other than the Plan. U.S. News

Certificate of Incorporation, Article Fourth (d\Xii).

As part of the 1962 reorganization, those employees who

owned shares in the predecessor corporation were issued

a total of 108,000 shares in the new company. About two-

thirds of the shares in the predecessor company had be-

longed to the company’s founder, David Lawrence, and to

his family; the company purchased these shares for cash

and for notes that it repaid by 1967.

After the reorganization, employees could acquire ad-

ditional direct ownership of shares only through U.S.

News’s stock bonus plan. All employees were eligible to

participate. I J.A. 168. U.S. News gave bonus shares to

employees in the fifth year of their employment, and every

five years thereafter. It calculated the dollar value of the

shares to be awarded according to a consistent formula:

the longer an employee’s length of service, and the greater

his salary, the larger the dollar value of the quinquennial

bonus. U.S. News then divided this dollar figure by the

current appraised value of a share to arrive at the number

of bonus shares it would award the employee that year.

In order to keep the beneficial ownership of the com-

pany lodged among its active employees, Article Fifth of

the U.S. News Certificate of Incorporation required em-

ployees to offer to sell their shares back to the company

if the employee left for any reason, including retirement.

The option price was to be established by an independent

appraiser, according to a procedure spelled out in Article

Fifth, paragraph (e):

(e) Option Price. The option price of stock shall be

its fair market value as of the date of exercise of the

option. ...

Fair market value as of any date shall be the fair

market value agreed upon by the parties, or in the

absence of such agreement, determined as follows:

The board of directors of the corporation shail select

each year a qualified appraiser of national standing,

who shall, as soon after the close of each fiscal year

of the corporation as complete financial statements

are available, determine the fair market value of the

| stock of the corporation as of the close of such fiscal

year. Such fair market value shall be determined with-

out regard to the restrictions on transfer of stock con-

tained in this Article. In making such appraisal the

- appraiser shall use methods and standards recognized

by the regulations of the United States Internal Rev-

enue Service as appropriate for determining fair mar-

ket value of corporate stock.... The market value per

share so determined shall be the option price

Article Fifth (e), III J.A. 918-19 (emphasis added). Article

Fifth (e) also included a procedure by which aggrieved

employees could contest the appraisal, but the parties agree

that no employee invoked it during the period over which

plaintiffs retired. Appellants’ Joint Br. at 8, Appellees’

Joint Br. at 25. Between 1962 and the retirement of the

last retiring plaintiff, U.S. News always exercised its Ar-

ticle Fifth (e) purchase option. 663 F.Supp. at 1500-01.

Although plaintiffs make a game try, it seems quite plain

that U.S. News acted properly in adopting a minority val-

uation for the small lots of bonus stock that it purchased

from employees. Article Fifth (e) gives the appraiser two

instructions on the subject. The appraiser is to assume

that the stock could trade freely (i.e., ignore the fact that

the Certificate of Incorporation limited stockholders’ power

of alienation), and to ‘‘use methods and standards recog-

nized by the regulations of the United States Internal Rev-

enue Service as appropriate for determining fair market

value of corporate stock.’’ Neither point provides any basis

for valuing on a majority basis lots that were obviously

minority.

The parties and the trial court all agreed that whatever

enlightenment is available from the IRS was embodied in

Rev.Rul. 59-60, 1959-1 Cum.Bul. 287, and in the cases

interpreting this pronouncement on the valuation of stock

for estate tax purpeses. We shall revisit Rev.Rul. 59-60

and those cases shortly, but for present purposes it is

enough to say that no one here even argues that it could

require assignment of a control premium to non-control

stock.

Plaintiffs argue that because Article Fifth (a) defines

‘‘stock’” as comprising both Class A and Common stock,

it follows that the phrase ‘“‘stock of the corporation,’ as

used in Article Fifth (e), must refer to all the company’s

stock and that the entirety of its stock would necessarily

entail control. Support for the notion that the valuation

is to encompass all of the company’s stock lies in the fact

that Class A stock could be held only by the Plan, not by

an individual, so that the phrase in Article Fifth (e) seems

to encompass stock that in the nature of things would

never be directly covered by the purchase option. We think

the reading very strained. Plaintiffs suggest no reason

whatsoever why the framers of the clause could possibly

want minority shares valued on a majority basis.

Other circumstances also cut against such a reading. It

is clear from the Certificate of Incorporation and is con-

ceded by plaintiffs that the framers of the arrangement

sought to perpetuate employee ownership and control. Val-

uation on a majority basis would be inconsistent with the

implicit assumption that the company would not be sold,

as a control premium is in the nature of things realized

only at the moment of sale. In addition, the liquidity prob-

lems that plaintiffs’ reading might engender for the com-

pany could imperil continued employee ownership.

Rejecting plaintiffs’ strained reading of Article Fifth,

we conclude that U.S. News quite properly valued the

stock bonus shares on a minority basis.

The plaintiffs further argue that even if valuation of the

shares on a minority basis was proper, the huge discount

that American Appraisal applied to the potential value of

U.S. News’s West End real estate was unreasonable. After

reviewing the testimony of the expert witnesses, the dis-

trict court found that American Appraisal’s decision to

give some, but very limited, weight to the value of the

real estate ‘‘adequately took account of the Company’s

underlying assets.”’ 663 F.Supp. at 1531. We find no error

here. In view of U.S. News’s often-stated unwillingness to

develop the West End real estate, a purchaser of a mi-

nority interest in the company would likely have drastically

discounted the possibility of a change of mind. And only

a decision to develop the real estate in the fairly near

future would enable it to contribute very substantially to

the discounted present value of the expected returns on

a minority share of U.S. News stock. See Citizens Bank

& Trust Co. v. Commissioner of Internal Revenue, 839 F.2d

1249, 1251, 1254 (7th Cir.1988) (discussing propensity of

investors to heavily discount future returns, especially

those beyond their control). Cf. Estate of Watts v. Com-

missioner of IRS, 823 F.2d 483 (11th Cir.1987) (arms-length

transaction would value interest in partnership at ‘‘going

concern value’ not higher “‘liquidation value’”’ when liq-

uidation was unlikely and interest transferred did not carry

power to force liquidation).

Il. VALUATION OF PROFIT-SHARING

PLAN SHARES:

The Plan’s Mandate

All employees with one or more years of service par-

ticipated in the Profit-Sharing Plan and thereby enjoyed

a derivative interest in the Plan’s U.S. News stock. Their

interests vested fully after ten years’ employment. 663

F.Supp. at 1501. Although each Member had an individual

‘“‘account”’ representing his or her share of the Fund, the

Plan Document clearly defined each participant’s interest

as “‘the value of his undivided share’ of the Fund. III

J.A. 926 (emphasis added).

The Plan purchased 30,000 Class A shares in 1962 on

the cecasion of its creation and U.S. News’s reorganiza-

tion. At the time that amounted to about a 23 percent

interest in the company. 663 F.Supp. at 1500. Although

U.S. News continued to issue stock bonuses thereafter,

repurchases evidently exceeded issuances; in any event,

the Plan’s percentage of outstanding stock gradually in-

creased. In 1966 it bought 20,000 more Class A shares (at

$80 a share), bringing its holdings to 50,000 shares, or 45

percent of the 110,574 shares then outstanding. Jd. at

1501. In 1971 the Plan’s 50,000 share block became a

majority of U.S. News’s outstanding shares. Jd. The rel-

ative size of the Plan’s block continued to grow. By April

1975, for example, employees’ direct holdings were only

17,444 shares. III J.A. 935.

The Plan document explicitly provided that, for purposes

of computing a departing employee’s retirement benefit,

the Plan Trustee should use ‘‘the fair market value es-

tablished under Article Fifth, Paragraph (e)” of U.S.

News’s Certificate of Incorporation:

For all purposes of the Plan, the market value of

shares of stock of the Employer, which are held by

the Trustee as a part of the Fund, shall be the fair

market value established under Article Fifth, Para-

graph (e), of the Certificate of Incorporation of U.S.

News & World Report, Inc. ... The Committee shall

be fully justified and exonerated in relying on the

figures so provided by the Board of Directors and/or

the appropriate financial or accounting officer of the

10a

Employer, and the Trustee shall be fully justified and

exonerated in relying on the figures so provided by

the Committee, as to the accuracy of the figures and

as to the compliance with the aforesaid provisions of

the Certificate of Incorporation.

Profit-Sharing Plan, Art. VI, § 6.3, III J.A. 924-26 (em-

phasis added).

Each year the Plan in fact used the per share dollar

value that American Appraisal had computed for U.S.

News under Article Fifth (e). The plaintiffs agree that the

Plan cross-referenced the Certificate of Incorporation, and

that therefore as a matter of trust and contract law the

fiduciaries were right to adopt the company’s valuation;

as we have seen, however, they thought that the latter

should have been on a majority basis. Our rejection of the

latter view of course dooms their claim that the Plan doc-

ument required valuation on a majority basis. It is true

that the Plan’s reference to each participant’s ‘‘undivided”’

share in the whole suggests that the Plan’s assets could

have been totalled up—on a majority basis—and then ap-

portioned to each employee in pro rata shares. But the

Plan’s express direction to accept the valuation made by

the company for purchase of bonus stock—a direction not

merely conceded but embraced by plaintiffs—clearly con-

trols over any emanations from the choice of these terms

for description. As a matter of contract and trust law,

therefore, the Plan correctly used a figure computed on

a minority basis.

Ill. THE EFFECT OF ERISA

We turn now to the plaintiffs’ argument that if the Plan

be construed to permit valuation on a minority basis, it

violates ERISA. The parties agree that the Plan is subject

to ERISA, which preempts state law governing employee

benefit plans (with limited exceptions not relevant here).

See ERISA § 514, 29 U.S.C. § 1144 (1982); Pilot Life

lla

Insurance Co. v. Dedeaux, 481 U.S. 41, 54, 107 S.Ct. 1549,

1556, 95 L.Ed.2d 39 (1987) (ERISA’s civil enforcement

remedies in § 502(a), 29 U.S.C. § 1182, are exclusive).

Thus ERISA frames the duties that the Plan’s manage-

ment owned participants. ERISA creates a cause of action

for benefits due, whether under the terms of the Plan

itself or because some term of the Plan conflicts with

ERISA. Pilot Life, supra.

While trust documents cannot excuse trustees from ER-

ISA duties, Central States, SE & SW Areas Pension Fund

v. Central Transport, Inc., 472 U.S. 559, 568, 105 S.Ct.

2833, 2839, 86 L.Ed.2d 447 (1985), rights under ERISA

are largely defined by the plan document, Alessi v. Ray-

bestos-Manhattan, Inc., 451 U.S. 504, 511, 401 S.Ct. 1895,

1900, 68 L.Ed.2d 402 (1981). Plaintiffs claim to find in

ERISA, however, three sources of a duty to use a majority

valuation, strong enough in their view to overcome the

terms of the U.S. News Plan: (1) an implied incorporation

of IRS valuation techniques, which in their view compelled

valuation on a majority basis; (2) ERISA’s mandate that

a plan fiduciary “discharge his duties ... solely in the

interest of the participants and beneficiaries,’ ERISA §

404(aX1), 29 U.S.C. § 1104(aX1); and (3) ERISA’s require-

ment that it file an annual report containing a statement

of its assets and liabilities ‘‘valued at their current value,”’

ERISA § 103(b), 29 U.S.C. § 1023(bX3\A) (1982). We work

through them in that order.

Internal Revenue Service rules. Although ERISA at no

point relevant here incorporates the Internal Revenue Code

or IRS regulations, courts have on occasion found the reg-

ulations of useful guidance in addressing problems under

ERISA that parallel issues under the Code. See, e.g., Tul-

ley v. Ethyl Corp., 861 F.2d 120, __ (5th Cir.1988); Rose

v. Long Island R.R. Pension Plan, 828 F.2d 910, 917-18

(2nd Cir.1987) (adopting IRS definitions of ‘“‘agency’”’ and

“instrumentality” into ERISA); see also Alessi, 451 U.S.

at 517-21, 101 S.Ct. at 1903-05 (interpreting ERISA pro-

12a

vision against discrimination in pension plans as endorsing

view taken in Treasury regulations and IRS rulings ap-

plying Internal Revenue Code’s parallel non-discrimination

requirement for plans to qualify for favorable tax treat-

ment). We will assume potential relevance here and con-

sider the possible import of Rev.Rul. 59-60.

The ruling unquestionably suggests that control] may jus-

tify higher valuations for a specific block of shares:

The size of the block of stock itself is a relevant factor

to be considered. Although it is true that a minority

interest in an unlisted corporation’s stock is more dif-

ficult to sell than a similar block of listed stock, it is

equally true that control of a corporation, either actual

or in effect, representing as it does an added element

of value, may justify a higher value for a specific block

of stock.

Rev.Rul. 59-60 at § 4.02(g), 1959-1 Cum. Bul. 237, 238-

39.

In the estate tax context for which Rev. Rul. 59-60 was

drafted, the courts have taken the view that valuation of

a decedent’s control block of shares should include a con-

trol premium. This applies even though the will itself may

split the control block among legatees. See Estate of Curry

v. United States, 706 F.2d 1424, 1428 (7th Cir.1983) (ap-

plying control valuation to decedent’s non-voting shares

because of his ability to sell them as a block with voting

shares). It thus represents a decision that for estate tax

purposes control at the moment before death calls for im-

putation of a control premium even if death and the will

or intestacy will destroy control. In that context, as Curry

pointed out, any other rule would enable decedents to ar-

tificially reduce estate taxes by splitting interests in an-

ticipation of the legatees’ reassembling them. Jd.; see also

Citizens Bank & Trust Co. v. Commissioner of Internal

Revenue, 839 F.2d 1249 (7th Cir.1988); Ahmanson Foun-

dation v. United States, 674 F.2d 761, 767-69 (9th

13a

Cir.1981). Moreover, the estate tax is ordinarily conceived

as falling on the decedent’s passage of property, not upon

the legatees’ receipt. See, e.g., Ahmanson Foundation, 674

F.2d at 768.

Here the reigning conception is quite different. As we

noted in our original consideration of Article Fifth (e) of

the Articles of Incorporation, the architects of U.S. News’s

1962 reorganization, which included the Plan, saw as a

major objective the establishment and perpetuation of em-

ployee ownership. Foltz, 663 F.Supp. at 1500; see also U.S.

News’s Articles of Incorporation, Article Fifth at 7-12, III

J.A. 916-21. A control premium is realized by sale of a

controlling block of stock; the trial court found that the

Plan fiduciaries believed that they were not going to make

such a sale, and that finding is supported by ample evi-

dence. So long as they expected to carry out the Plan’s

employee-ownership purpose, it seems clear that the con-

text underlying valuation of the Plan’s shares was dia-

metrically opposed to that of the estate tax.

We pause to note some tension between this conclusion

and some of the explanations for the very existence of

control premiums. A leading analysis argues that bidders

offer a premium for control because it will enable them

to eliminate or reduce ‘‘agency costs’’—the costs associated

with the managers’ failure to realize the maximum value

of the firm’s assets. See, e.g., Michael C. Jensen and Wil-

liam H. Meckling, Theory of the Firm: Managerial Behav-

ior, Agency Costs and Ownership Structure, 3 J.Fin.Econ.

305, 308-10, 329, 351-52 (1976); see also Saul X. Levmore,

A Primer on the Sale of Corporate Control, 65 Tex.L.Rev.

1061 (1987). There is some irony in allowing plan fiduci-

aries—who here overlap largely with corporate manage-

ment—to deny retiring employees the benefit of firm assets

that could have been realized by management’s pursuing a

course of conduct that was clearly available—and the avail-

ability of which induced the ultimate purchaser to pay a

control premium for all the company’s stock.

l4a

Ultimately, however, we are not persuaded that this

view of control premiums undermines our conclusion. In

the first place, the existence of a control premium should

not be conceived as necessarily proving the incumbent

managers delinquent: the winning bidder’s readiness to

offer a premium may stem from its possession of special

assets or skills that are uniquely able to enhance the firm’s

value, and the costs of identifying the synergistic oppor-

tunity may have been lower for the winning bidder than

for anyone else. Second, even if the control premium is

due to incumbent management’s lack of acumen, the law

provides a remedy for extreme cases—albeit only extreme

cases, as the business judgment rule allows the firm’s man-

agers great leeway.

Most important, however, is that where the controlling

instruments contemplate employee ownership, all partici-

pants are on notice that maximization of the firm’s pe-

cuniary value is not to serve as an exclusive goal. The

market for corporate control provides incumbent manage-

ment a critical incentive to perform well: inadequate per-

formance will induce outsiders to bid for control of the

company and to oust them. See Edgar v. MITE Corp.,

457 U.S. 624, 633, 102 S.Ct. 2629, 2636, 73 L.Ed.2d 269

(1982) (noting congressional finding that ‘“‘takeover bids

. serve a useful purpose in providing a check on en-

trenched but inefficient management’’); see also id. at 643-

44, 102 S.Ct. at 2641-42 (recognizing that tender offer

mechanism gives management incentive to perform well).

To the extent that the investor-workers establish a pref-

erence for employee ownership, they blunt the operation

of the market for corporate control and diminish the force

of its incentive effects.

Accordingly, we see no reason why the courts’ quite

appropriate use of Rev.Rul. 59-60 for estate tax valuations

should preclude a plan’s use of minority valuation where

the Plan document so provides and where the controlling

instruments effect a clear preference for employee own-

15a

ership. The Fifth Circuit has observed that plan fiduciaries

do not breach their ERISA duties merely because they

fail to follow Rev.Rul. 59-60 ‘“‘jot and tittle,’’ Donovan v.

Cunningham, 716 F.2d 1455, 1473 (5th Cir.1983), cert.

denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839

(1984), and we think the point entirely apt here.

Thus we find no error in the district court’s conclusion

that, as applied to this Plan, Rev.Rul. 59-60 does not re-

quire a majority valuation. See 663 F.Supp. at 1525-29.

The fiduciaries’ “exclusive” duty to provide benefits: The

retirees rely heavily on ERISA § 404(aX1), 29 U.S.C. §

1104(aX1) (1982), which requires a plan fiduciary to:

discharge his duties with respect to a plan solely in

the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing _— to participants and their be-

neficiaries; and .

(B) with the care, skill, prudence, and diligence un-

der the circumstances then prevailing that a prudent

man acting in a like capacity and familiar with such

matters would use in the conduct of an enterprise of

a like character and with like aims;

(D) in accordance with the documents and instru-

ments governing the plan insofar as such documents

and instruments are consistent with the provisions of

[ERISA].

29 U.S.C. § 1104(aX1) (1982) (emphasis added).

The retirees read the italicized phrase as meaning that

the Plan fiduciaries had a duty to maximize pecuniary

benefits; moreover, they believe that such a duty would

invalidate Plan decisions that, effectively, favored later dis-

16a

tributees over earlier ones such as themselves. Both steps

of the argument fail.

Section 404 creates no exclusive duty of maximizing

pecuniary benefits. Under ERISA the fiduciaries’ duties

are found largely in the terms of the plan itself. See Alessi,

451 U.S. at 511, 101 S.Ct. at 1900; see also Edwards v.

Wilkes-Barre Pub. Co. Pension Trust, 757 F.2d 52, 56-57

(3d Cir.1985). In using a minority basis for stock valuation,

the fiduciaries here sought to pursue the Plan’s goal of

continued employee ownership. As we have already noted,

the control premium is normally realized by sale, an event

that would obviously thwart one of the Plan’s purposes—

perpetuation of employee ownership. Moreover, while ob-

viously evaluation on the basis of a hypothetical sale could

co-exist with employee ownership, it could create liquidity

problems that would jeopardize that purpose. ERISA, far

from manifesting any intention to discourage long-term

employee ownership, specifically favors that pattern by ex-

empting Employee Stock Ownership Plans from ERISA’s

10 percent cap on plans’ holdings of ‘‘employer securities.”

See 29 U.S.C. § 1107(bX1) (1982) (exempting any “eligible

individual account plan,”’ which is defined in id. § 1107(dX3)

as including ESOPs). See also Donovan v. Cunningham,

716 F.2d 1455, 1465-67 (5th Cir.1983). While U.S. News’s

Plan was not an ESOP, see 663 F.Supp. at 1518 n. 33,°

ERISA’s evident approval of ESOPs precludes any claim

that it forbids employee ownership as a legitimate plan

objective.

Further, even if we supposed that § 404 called for ex-

clusive pursuit of pecuniary advantages for plan benefici-

aries, the disputed valuation decisions are consistent with

such an aim. The plaintiffs were not the only beneficiaries

of the Plan. Plan wealth that was not distributed to them

* U.S. News’s Plan itself was apparently exempt from the 10 percent

cap by virtue of 29 U.S.C. § 1107(dK3XA\ii), including profit-sharing

plans as eligible individual account pians.

17a

was available for distribution to other Plan beneficiaries.

Indeed, the worst that can be said of the Plan is that it

was administered to favor a rolling class of future bene-

ficiaries over those present and past. Nothing in § 404

requires that one set of beneficiaries be favored over an-

other. See, e.g., Edwards, 757 F.2d at 56-57.

Plaintiffs would also infer from § 404(aX1\B)’s require-

ment that plan fiduciaries exercise the ‘‘care, skill, prud-

ence and diligence”’ of a ‘‘prudent man’’ that we owe their

valuation decision no deference, since, they say, the fi-

duciary standard exacted is “‘the highest known to law.”

In support of this view they cite Donovan v. Cunningham,

716 F.2d 1455 (5th Cir.1983), cert. denied, 467 U.S. 1251,

104 S.Ct. 3533, 82 L.Ed.2d 839 (1984), and Donovan v.

Bierwirth, 680 F.2d 263 (2d Cir.), cert. denied, 459 U.S.

1069, 103 S.Ct. 488, 74 L.Ed.2d 631 (1982). In fact, how-

ever, courts have reviewed ERISA fiduciaries’ decisions

as to the allocation of benefits among beneficiaries by an

“arbitrary or capricious” standard so iong as the decisions

involved no conflict of interest. See, e.g., Bruch v. Fire-

stone Tire & Rubber Co., 828 F.2d 134 (3d Cir.1987), cert.

granted, _.. 17.8. __., 108 S.Ct. 1288, 99 L.Ed.2d 498

(1988); Edwards, 757 F.2d at 56; Struble v. New Jersey

Brewery Employees’ Welfare Trust Fund, 732 F.2d 325,

333-34 (3d Cir.1984).

Plaintiffs appear to recognize that principle as governing

application of the “arbitrary or capricious” standard, but

argue that the fiduciaries were subject to a conflict because

they sought to continue ownership of U.S. News by its

employees. But that interest was not some ‘“‘outside”’ con-

cern; rather, by the terms of the Plan, it was an interest

that Plan beneficiaries shared, inseparable from their in-

terests in the Plan itself. This contrasts sharply with Cun-

ningham, where the plan fiduciaries (identical with the

firm’s board of directors) used plan assets to buy stock

from one of their number (chairman of the board of di-

rectors and until the purchase the firm’s sole shareholder),

18a

allegedly at inflated prices, and with Bierwirth, where the

fiduciaries and firm insiders acted to defeat a tender offer

for the firm’s shares that, if successful, would have mark-

edly increased the value of the plan’s assets but have

jeopardized their personal positions. It is also clearly dis-

tinct from the facts of Pilon v. Retirement Plan for Sa-

laried Employees of Great Northern Nekoosa Corp., 861

F.2d 217 (9th Cir.1988), where the court, apparently as-

suming that more generous payments to a particular re-

tiree might ultimately come from the corporate treasury,

see id. at 219, noted that ‘“‘divided loyalty’’ increased the

likelihood that a decision would be found arbitrary and

capricious, id. at 219.

In any event, as we regard the fiduciaries’ reading of

the Plan document as correct and as not countermanded

by anything in ERISA, application of even the severest

type of scrutiny would not lead us to overturn it.

Plaintiffs further invoke Maggard v. O'Connell, 671 F.2d

568, 571 (D.C.Cir.1982), for the proposition that to satisfy

even the ‘“‘arbitrary or capricious” test an ERISA trustee

must have taken a “hard look’ at salient problems and

engaged in “‘reasoned decisionmaking.’’ We have some hes-

itation about a wholesale incorporation of administrative

law doctrine into judicial review of fiduciary decisions, and

note that the issue at stake in Maggard was a factual

one—whether an applicant for benefits had worked in coal

mines for the requisite number of years. In any event,

while it is true here that the Plan fiduciaries here never

recorded any deliberations and appear to have pursued the

minority-basis valuation more on the basis of inertia than

explicit decisionmaking, that is no basis for overturning a

decision that is entirely consistent with the Plan document

and with ERISA’s substantive requirements.

ERISA’s reporting requirements: § 103(b) of ERISA re-

quires all ERISA plans to publish an annual report con-

taining a statement of the plan’s assets and liabilities

Once

—..

19a

“valued at their current value.”’ 29 U.S.C. § 1023(b\38\A)

(1982). Section 3(26) of ERISA in turn defines “current

value”’ as

[1] fair market value where available and [2] other-

wise the fair value as determined in good faith by a

trustee or a named fiduciary ... pursuant to the terms

of the plan and in accordance with the regulations of

the Secretary, assuming an orderly liquidation at the

time of such determination.

29 U.S.C. § 1002(26) (1982). The Plan, of course, valued

itself on a minority basis, while the liquidation value, ar-

guably, would be computed on a majority basis.

Since the terms of the Plan by no means contemplated

a liquidation, § 103(b)’s directive to ‘“‘assum[e] an orderly

liquidation” is to a degree inconsistent with the require-

ment of valuation “‘pursuant to the terms of the plan.”

Moreover, as § 103(b) is a reporting requirement, we are

far from clear that it applies at all to benefit calculations.

In any event, assuming the defendants’ benefit calculation

method deviates from that of § 103(b), we think such a

deviation permissible so long as the fiduciaries have not

concealed from the beneficiaries the critical facts that ex-

pose the possible deviation. Here there was no conceal-

ment. The evidence introduced below demonstrates beyond

doubt that all employees were aware, or at the very least

were on inquiry notice, as to the great gap between the

book value of U.S. News’s West End real estate and its

true value. To take just one example, this disparity was

often discussed—though not always at great length—at the

annual employee lunch. Written transcripts of these dis-

cussions between employees and management were avail-

able on request to all employees who were unable to attend.

663 F.Supp. at 1510. As there was no concealment, and

as the Plan in good faith reported one measure of its “‘fair

value,’’ we were unable to find an ERISA violation in any

20a

possible deviation of the Plan’s benefit calculation from

the methods appropriate to § 103’s reporting requirements.

* = *

The filings below are reputed to be the largest in any

civil case in the history of the district court for the District

of Columbia. The district court threaded its way through

the maze with patience and skill. We affirm on all counts.

SO ORDERED.

2la

APPENDIX B

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civ. A. Nos. 84-0447, 85-2195.

Charles S. FOLTZ, et al.,

Plaintiffs,

U.S. NEWS & WORLD REPORT INC., et al.,

Defendants.

David B. RICHARDSON, et al.,

Plaintiffs,

U.S. NEWS & WORLD REPORT, !NC., et al.,

Defendants.

June 22, 1987.

MEMORANDUM OPINION

BARRINGTON D. PARKER, Senior District Judge:

This memorandum opinion sets forth the Court’s final

ruling on the claims of former employee shareholders of

U.S. News and World Report, Inc. (‘‘U.S. News”’ or ‘“‘Com-

pany’’) to proceeds from the sale of the corporation. The

Company was purchased in 1984 by Mortimer Zuckerman,

a Boston real estate developer, for a price of $176 million.

Plaintiffs contend that during the period prior to the sale,

when they were entitled to and did receive their share of

the value of the Company’s stock, the true worth of the

stock was wrongfully concealed, that its appraised value

was otherwise manipulated and _ miscalculated by

defendants, and that they were deprived of the stock ben-

22a

efits and profit-sharing interests to which they were en-

titled. The litigation has been hotly contested. Serious and

unsettled questions arising under the Employee Retire-

ment Income Security Act of 1974 (““ERISA”’), 29 U.S.C.

§§ 1001 et seg., are involved in this proceeding. While other

legal issues are also presented under federal securities law,

and the common law of fraud, breach of fiduciary duty,

unjust enrichment and negligence, the questions arising

under ERISA clearly predominate.

Throughout the course of the proceeding, counsel have

ably briefed -a din both their written memoranda

and oral presenations the factual and legal issues involved.

The questions presented for resolution have been fully con-

sidered. For the reasons set forth below in its factual

findings and conclusions of law, entered pursuant to

Fed.R.Civ.P. 52(a), the Court determines that plaintiffs

have failed to support their claims, that judgment should

be granted defendants on all counts, and the consolidated

complaints dismissed.

I. INTRODUCTION

Course of the Litigation

The Complaints. and Pretrial Motions

This litigation involves two consolidated complaints

brought against U.S. News and several other defendants.

Charles S. Foltz and others are plaintiffs in the first; David

B. Richardson and others are plaintiffs in the second. At

all relevant times, the Company produced and published

the weekly news magazine, U.S. News and World Report.

The Company also operated book and newsletter divisions;

they were not particularly profitable and are of no great

consequence to these proceedings.

Foltz, conditionally certified as a class action, presents

the claims of some 230 former U.S. News employees. See

Foltz v. U.S. News & World Report, Inc., 106 F.R.D. 338

23a

(D.D.C.1984). The class includes all persons who retired

or were otherwise separated from employment with the

Company during the eight-year period from 1974 through

1981, other than several former directors who have been

specifically excluded upon a finding that their interests

were not typical of the class. Mr. Foltz and seven other

named plaintiffs are the designated representatives for the

class period. The Richardson action is brought by former

employees who retired or separated from U.S. News in

1982.1 During their employment, the plaintiffs in both ac-

tions participated in the U.S. News Profit-Sharing Plan

(‘‘Plan’’). They were also beneficial owners of stock in the

Company under its stock bonus plan. Upon retirement or

separation, they liquidated their Plan accounts and re-

deemed their stock interests. In both actions, plaintiffs

seek recovery of benefits they claim are owned them by

virtue of an alleged undervaluation of the Company’s stock

during the class period.

Defendant U.S. News, organized at all relevant times

under the corporate laws of the State of Delaware.” is

headquartered in the District of Columbia. Other named

defendants are certain former directors of U.S. News: the

‘Unless otherwise noted, the phrase “‘class period’’ shall be deemed

to cover the period included in both the Foltz and Richardson com-

plaints.

*On September 30, 1985, a plan of reorganization was compieted

that transformed the Company into a limited partnership. The plan was

carried out in the aftermath of the Company’s 1984 sale to Mr. Zuck-

erman and has been the subject of a supplemental complaint brought

in this proceeding. See 640 F.Supp. 1184 (D.D.C.1986).

‘The director-defendants are John Sweet, Samuel Keker, Marvin

Stone, William Dunn, Wester Tanzer, John Tuohey, Raymond Naimoli

and James Mclihenny. Mr. Sweet succeeded U.S. News founder David

Lawrence as Chairman of the Board and served in that capacity

throughout the class period.

U.S. News and its former directors are collectively referred to as

the U.S. News defendants.

24a

Madana Realty Company (‘‘Madana’’), a wholly-owned U.S.

News subsidiary; the U.S. News Profit-Sharing Plan, an

employee benefit plan as defined by ERISA § 3(34), 29

U.S.C. § 1002(34); and American Appraisal Associates, Inc.

(‘American Appraisal’’), an appraisal firm transacting busi-

ness in the District and organized under the laws of the

State of Delaware. American Appraisal performed the year-

end appraisals of the U.S. News stock that are at issue

here. A group designated as Save the Fund was allowed

to intervene as defendants. The group includes currently

employed or recently separated or retired U.S. News em-

ployees- interested in preserving and eventually receiving

that portion of the sale proceeds held back from distri-

bution from the Plan by order of this Court.‘

Over the three-year period during which these consoli-

dated proceedings have been pending, discovery efforts

have been thorough and extensive. Even so, many of the

factual and legal issues originally presented were signifi-

cantly narrowed by pretrial proceedings and motions for

summary judgment.’ By agreement and consent of all

counsel, issues of liability and damages were bifurcated for

separate trial.

‘The Foltz plaintiffs moved for a preliminary injunction against dis-

tribution of the sale proceeds in August 1984, which relief was denied

upon receipt of assurances from defendants that plaintiffs and the Court

would be given notice in advance of any intended distribution. Such

notice was given in January 1985 and was followed in February by a

renewed motion for preliminary injunction. The Court again denied the

motion initially, 608 F.Supp. 1332 (D.D.C.1985), but upon review the

Court of Appeals, 760 F.2d 1300 (D.C.Cir.1985), ordered a partial hold-

back of funds. 613 F.Supp. 634 (D.C.C.1985). Upon motion of the Rich-

ardson plaintiffs, the Court held back an additional sum. Order of July

15, 1985. The funds subject to the two injunctions together total ap-

proximately $47.5 million, exclusive of accrued interest.

‘Prior decisions of this Court granted defendants partial summary

judgment as to a number of the claims originally brought by plaintiffs.

See 639 F.Supp. 595 (D.D.C.1986) (Richardson) and 627 F.Supp. 1143

(D.D.C.1986) (Foltz).

25a

The claims remaining after entry of partial summary

judgment in each case were considered in an extended

bench trial. The matters remaining in Foltz included: (1)

claims for benefits due and owing from the Plan, under

ERISA § 502(aX1XB), 29 U.S.C. § 1132(aX1\B);* (2) claims

for breach of fiduciary duty against U.S. News, the di-

rector-defendants and American Appraisal, under ERISA

§ 502(aX3), 29 U.S.C. § 1132(aX3);’ (3) claims against U.S.

News, the director-defendants, and American Appraisal for

violation of Section 10(b) of the Securities Exchange Act

of 1934, 15 U.S.C. § 78}(b), and Rule 10b-5 of the Secu-

rities and Exchange Commission, 17 C.F.R. § 240.10b-5;°

(4) claims for common-law fraud against U.S. News, the

director-defendants, and American Appraisal; and (5) claims

for common-law breach of fiduciary duty, unjust enrich-

ment, negligence and negligent misrepresentation against

U.S. News and the director-defendants.

The matters remaining in Richardson included: (1) claims

for benefits due against the Plan under ERISA §

* Section 502(aX1\B) provides that a participant or beneficiary of a

plan may bring an action ‘‘to recover benefits due to him under the

terms of his plan, to enforce his rights under the terms of the plan,

or to clarify his rights to future benefits under the terms of the plan{.]”’

’ Section 502(aX3) allows a plan participant, beneficiary or fiduciary

to bring an action for equitable relief to enforce the terms of the plan

in question and of the statute, to enjoin violations thereof, and to obtain

redress for such violations.

* Section 10(b) of the 1934 Act makes it unlawful for anyone

{tlo use or employ, in connection with the purchase or sale of any

security ..., any manipulative or deceptive device or contrivance

in contravention of such rules and regulations as the [Securities

and Exchange] Commission may prescribe... .

Commission Rule 10b-5 makes it unlawful for persons to engage in

deceptive, fraudulent, or misleading practices in connection with the

purchase or sale of securities. Subsection (b) prohibits persons from

making false or misleading statements, or from omitting to state certain

facts ‘‘necessary in order to make the statements made, in the light

of the circumstances under which they were made, not misleading. .. .”’

26a

502(aX1\B); and (2) claims against U.S. News and the

director-defendants for negligence and negligent misrepre-

sentation.

At the conclusion of plaintiffs’ case-in-chief on the issue

of liability, defendants filed motions for dismissal and judg-

ment, pursuant to Fed.R.Civ.P. 41(b). In addition to op-

posing those motions, plaintiffs in the two actions filed

motions to amend their complaints, under Fed.R.Civ.P.

15(b), on the theory that the facts actually litigated tended

to support additional causes of action. The motion to amend

the Foltz complaint was denied. The Richardson plaintiffs

were granted leave to add section 502(aX3) ERISA claims

against the U.S. News defendants for their alleged failure

to have the Plan’s holdings of U.S. News Class A stock

properly appraised.’ In an oral bench ruling, the Court

granted in part defendants’ motions, thus limiting the

claims in both proceedings to those against the Plan for

benefits due under ERISA § 502(aX1\B) and against U.S.

News and the director-defendants for breach of fiduciary

duty under section 502(aX3) and for negligence. See Tran-

script of Proceedings, vol. 54 at 10,316-36.!° All claims

against American Appraisal were dismissed. An extended

discussion of the ruling is presented infra pp. 25 ff.

As discussed above, plaintiffs in the consolidated actions

seek to recover retirement benefits allegedly owed them

under the Company’s profit-sharing and stock bonus plans.

Because ERISA affords an aggrieved plaintiff a right of

*The motion of the Richardson plaintiffs was prompted by an invi-

tation, extended by the Court in its summary judgment decision, to

seek leave to add such a claim at trial. See 639 F.Supp. at 608. The

Court’s subsequent bench ruling also reinstated a number of claims that

had been previously ruled time-barred on summary judgment.

10 All subsequent references to the transcript of trial proceedings are

cited in the following form: (vol). Tr. (page(s)). Plaintiffs’ and defendants’

exhibits are referred to as PX—and DX-, respectively. Defense exhibits

used only in Richardson are designated RDX—.

action against a covered plan, plaintiffs brought an action

for unpaid benefits directly against the Plan. With respect

to their bonus stock interests, however, they must and

they do seek recovery of monies allegedly owed them from

U.S. News itself.

In addition, plaintiffs charge that the director-

defendants, in concert with American Appraisal, acted both

deliberately and negligently to cause their retirement ben-

efits to be undervalued. Accordingly, plaintiffs seek re-

covery in the alternative from those defendants.

In the discussion that follows, the Court presents, pur-

suant to Rule 52(a), Fed.R.Civ.P., the basic and controlling

facts developed during the liability phase of the trial, in-

cluding the relevant history and operation of U.S. News.

In then turns to a legal analysis of the claims and con-

tentions advanced by the parties.

II. FACTUAL FINDINGS

History of U.S. News and World Report, Inc.

A. Events Occurring Before the Class Period

U.S. News & World Report, Inc. was formed on June

1, 1962 from the reorganization of the U.S. News Pub-

lishing Corporation (“‘U.S. News Publishing’’), a Company

established in 1933 by David Lawrence. Prior to the 1962

reorganization, all voting stock of U.S. News Publishing

was held by Lawrence’s three adult children, subject, how-

ever, to a voting trust, controlled by Mr. Lawrence as sole

voting trustee. The non-voting stock was: held in part by

two trusts established for the benefit of Lawrence family

members, and in part by certain employees who had been

afforded an opportunity to buy stock. By 1962, 28 em-

ployees or members of their families owned 34 percent of

the outstanding shares of the 1933 corporation.

The 1962 reorganization was undertaken with the intent

and purpose that U.S. News would be owned entirely by

28a

its employees. Mr. Lawrence and_the Cempany’s Wash-

ington, D.C. counsel, the firm of Covington & Burling,”

took the necessary steps to achieve that end, including an

independent appraisal of the fair market value of the cor-

porate shares and the submission of a request to the In-

ternal Revenue Service that the proposed reorganization

would not result in the loss of the tax-qualified status of

the Plan, which Mr. Lawrence had established prior to

1962. The U.S. News Certificate and Articles of Incor-

poration (‘Articles of Incorporation’’) also assured that the

Company would remain employee-owned. Article Fifth, PX

2 at 7-12. Under the reorganization plan, U.S. News pur-

chased the shares of U.S. News Publishing held by mem-

bers of the Lawrence family at a price of $50 per share,

determined by an appraisal performed by American Ap-

praisal as of May 31, 1962. Consideration was paid partly

in cash and partly in notes. Employees who individually

held stock, in U.S. News Publishing exchanged their stock

for shares in U.S. News equivalent in value to what they

had previously owned. The value of the U.S. News shares

received by the employee stockholders was also determined

to be $50 per share by the May 31 appraisal. U.S. News

then sold to the Plan 30,000 shares of stock, again at a

price of $50 per share.

After the reorganization, U.S. News had two classes of

stock, ‘“‘Class A’’ and ‘‘common.”’ Each class had the same

voting and liquidation rights. All Class A stock was owned

by the Profit-Sharing Plan, and the stock would automat-

ically be converted to common stock if it passed into the

hands of anyone other than the Plan.

Mr. Don Harris, a Covington & Burling partner, was immediately

involved in developing the reorganization plan and the necessary papers

and documentation. Lamentably, he is the only person who, at this late

date, is able to testify as to events surrounding the reorganization. His

testimony was not opinion or expert in nature, but rather he offered

historical testimony on matters of objective fact. He did not construe

any documents in a legal sense.

_———

| ee

Immediately following the reorganization, 130,800 shares

of U.S. News stock were outstanding: 30,000 shares of

Class A stock were held by the Profit-Sharing Plan, and

100,800 shares were held directly by the employees who

had previously owned stock in U.S. News Publishing. The

30,000 shares purchased by the Plan constituted approx-

imately a 23 percent interest in U.S. News. It was con-

templated, however, that the Plan would own a larger

percentage with the passage of time and that it would

eventually own nearly all the outstanding stock. This was

so because shares owned by the 28 key employees would

be redeemed as they reached the retirement age of 65,

with each redemption increasing the Plan’s percentage of

the reduced amount outstanding, until ultimately the Plan

would own all but the relatively small number of common

shares.

In 1966, the Plan purchased an additional 20,000 shares

of Class A stock at a value of $80.00 per share, again

determined by American Appraisal. This gave the Plan

approximately 45 percent of the 110,574 shares then out-

standing. During 1971, the 50,000 shares came to consti-

tute a majority of the outstanding stock of the company,

due to the repurchase by the company of outstanding com-

mon stock from employees who retired, died, or otherwise

terminated their employment.

The reorganization plan did not contemplate any change

in the actual control and management of the company,

since all the common stock was placed in a voting trust

with Lawrence as sole voting trustee. Thus, as sole voting

trustee, he had the legal] authority to elect the directors,

both before and after reorganization. Mr. Lawrence served

in that position until his death in 1973, at which time

substitute trustees were named, in accordance with the

voting trust instrument. In 1967, the Plan’s Class A hold-

ings were placed in the voting trust as well.

30a

The persons responsible for the reorganization antici-

pated that employee ownership of U.S. News would take

several forms: (1) the 28 employees who had been stock-

holders of U.S. News Publishing would hold shares of U.S.

News & World Report (“‘key employee stock’’); (2) since

more widespread ownership by employees was desired, the

Plan, in which most of the employees participated, would

hold all the Class A stock; (3) the Company would institute

a “‘stock bonus’’ program, issuing shares to employees

every fifth year.

The U.S. News Profit-Sharing Plan provided income to

employees upon their retirement, death, or separation from

U.S. News.'? Each employee who had attained the age of

25 and who had served for at least one year was entitled

to participate. An employee became fully vested in the

Plan after 10 years’ service. The Plan was the primary

means through which each employee secured an ownership

interest in the Company. The employees could not, without

the financial resources of the Plan, purchase all of the

stock of U.S. News Publishing previously held by members

of the Lawrence family. Thus the Plan’s purchase of U.S.

News stock permitted all employees to participate in the

beneficial or economic ownership of the Company even

though they did not have legal title to any shares indi-

vidually. The Plan was always regarded as a conduit

through which employees generally could participate in the

growth of the Company. Benefits statements instructed

Plan participants how to calculate the number of shares

equivalent to their undivided interests in the Plan. See,

e.g., DX 94, 95. In addition to the Class A stock, the assets

of the Plan also included other investments made with

funds received in the form of cash contributions from U.S.

News. The value of those investments is not at issue here.

2 An employee could normally elect either to receive a lump-sum

payment, to have an annuity purchased on his behalf, or to leave his

account to ride with the future investment fortunes of the Plan.

3la

Under the stock bonus program, common stock was is-

sued to employees at five-year intervals beginning after

the fifth anniversary of employment, and in amounts based

on salary and length of service and on the appraised value

of the Company’s stock. The stock bonus program was

thought to have psychological advantages over indirect

ownership through the Plan, although each employee’s bo-

nus stock holdings were of a much lesser value than his

Plan account.

In 1968, Mr. Lawrence instituted a deferred compen-

sation program under which a specified number cf shares

of “phantom stock”’ were awarded to certain senior Com-

pany executives. The program was designed to give senior

managers a greater incentive for superior performance.

That program is discussed further, infra pp. 1508-09.

Because the stock of U.S. News was not publicly traded,

it was necessary to determine the value of the stock—for

the purpose of awarding and redeeming the bonus shares—

by appraisal. In addition, because the Plan’s major asset

was a 50,000 share block of Class A stock, such appraisals

were necessary to determine the value of the Plan’s assets

each year, in which value separating employees shared

ratably when they settled their account balances.'* The

bonus and Class A shares were always valued equally.

B. Events Occurring During the Class Period

1. Real Estate Acquisitions

At the time of the 1962 reorganization, Madana had

acquired three to four acres of partially developed real

estate in the West End of Washington. Madana owned

the land until late 1981, and approximately 75-80 percent

of the holdings were used for U.S. News business oper-

‘* An employee settling his Pian account or redeeming his bonus stock

in a given year would do so on the basis of the stock’s value as of

the close of the previous year.

32a

ations, including a headquarters building, an employee caf-

eteria, and employee parking facilities. 26 Tr. 5089 (Sweet);

31 Tr. 6272-73 (Naimoli). The remaining portion was sub-

ject to commercial leases to third parties.

Before 1973, development of the real estate was not

feasible because of zoning uncertainties, the character of

the neighborhood, and the pendency of various proposals

that would have required public use of portions of the land.

See, e.g., DX 118 at 2; PX 371 at 2. During the early

1970s, U.S. News and other West End property owners

actively participated in proposing to local government of-

ficials a coherent development plan. In December 1974,

the District of Columbia Zoning Commission promulgated

zoning law revisions, changing a substantial portion of the

Company’s holdings from commercial to commercial-resi-

dential, while increasing the permissible ‘‘floor area ratio

(““FAR’’).\4 The remainder of its property continued to be

zoned residential. U.S. News was not wholly satisfied with

some aspects of the Commission’s decision, for example,

height restrictions on certain residential real estate adja-

cent to Rock Creek Park. Challenges to the rezoning de-

cisions generally, including the height restriction, and

lawsuits by other dissatisfied landowners continued for

years after the decision was rendered, through late 1977.

In any event, during 1974 and immediately thereafter,

the Company had no definite development plans for the

real estate. While its directors and management were

aware of the potential value of the real estate, they had

no intention of selling those assets at that point in time.

The appraiser who performed the year-end valuation for

1974, Mr. C.E.O. Walker, called as a witness by the Foltz

“Floor area ratio’ is the figure which expresses the total gross

floor area as a multiple of the area of the building lot (or parcel). This

figure is determined by dividing the gross floor area of all buildings

on a lot by the area of that lot. In other words, a greater permissible

FAR allows the owner to build more densely on his property.

33a

plaintiffs, offered convincing testimony and cautioned, as

an experienced professional, that any realizable value

should be attributed to the real estate only “if it was

evident that the controlling interest had a firm and clear

intent to dispose of the real estate within a very short or

reasonable period of time[, that is,] absolute evi-

dence. .. .not mere development plans.’”’ 23 Tr. 4524. See

also 23 Tr. 4505-12. Mr. Walker was highly qualified to

give this opinion. He had previously served as international

president of the American Society of Appraisers and was

also a member of the College of Fellows of that organi-

zation. 23 Tr. 4493-95.

In February 1976, the Oliver T. Carr Company, a rep-

utable real estate development firm, responded to a re-

quest to provide advice on the development potential of

the U.S. News’ real estate and the construction of a new

headquarters facility. The Carr report and study noted that

there were many possibilities for development of the prop-

erty, but at the same time commented that the ultimate

choice as to the character and timing of any project would

depend on such unpredictable factors as market conditions

and the Company’s corporate objectives. The Carr Com-

pany completed construction documents for a proposed

headquarters building, following which U.S. News con-

sulted with architectural planning and space design firms

in anticipation of building. Nevertheless, no firm construc-

tion commitments materialized under the project devel-

opment agreement with Carr.

In 1977, U.S. News management further explored with

officers in the mortgage and trusts department of Riggs

National Bank the financial feasibility of developing its real

estate. Riggs advised that the Company’s financial con-

dition was not sufficiently strong and cautioned against

undertaking any significant real estate developments at the

time. On the strength of that advice, the Company de-

ferred further consideration of building a new corporate

headquarters and of pursuing any other development plans.

34a

Management discussed its hesitancy about immediate de-

velopment with the employees, explaining further that if

such developments were undertaken, they wanted to be

certain that they would protect the Company from uncer-

tain swings in its publishing-related business and assure

source of profits from which contributions could be made

to the Plan. See, e.g., PX 11 at 23, Question and Answer

Session (““Q & A”) at 2.

In early 1978, U.S. News again discussed real estate

development plans with Carr Company representatives.

Several alternatives were considered including develop-

ment of part of the land, a partnership arrangement with

a developer, and relocation of U.S. News headquarters

elsewhere. These alternatives did not materialize into bind-

ing development plans.

During the class period the U.S. News directors kept

American Appraisal fully informed of all real estate ac-

quisitions and their considerations regarding development

of the property. American Appraisal representatives were

familiar with the location, size and use of the property;

knew that the property had great potential and unrealized

value; and discussed in their annual interviews with U.S.

News officers the plans and considerations regarding pos-

sible development.

The working papers of the appraisers referenced con-

templated developments of the property as presented in

the 1976 Carr report. Their subsequent work papers and

annual reports leading up to the 1981 joint partnership

agreement with Boston Properties, Inc. likewise reflected

full knowledge and awareness of those important events.

However, until the development plans matured into a

firm and clear intent to build within a reasonably certain

‘* The question and answer session referred to was one of many that

took place at the annual shareholder luncheons held throughout the

class period. PX 11 is the transcript of the 1978 meeting.

35a

time frame, the realizable value of the real estate was not

reflected in American Appraisal’s annual reports or the

Company’s financial statements. This approach was sup-

ported by credible testimony of representatives from

American Appraisal. See, e.g., 23 Tr. 4505-12, 4524 (tes-

timony of C.E.O. Walker). When more precise decisions

were reached and it became certain that plans and dis-

cussions had ripened and definite goals and timetables were

set, these facts were reflected in the annual valuations

performed by American Appraisal in the last several years

of the class period. In interviews with the appraisers who

performed the 1979 valuation, U.S. News announced that

it expected to make a decision on developing its real estate

within the next year. PX 77. Indeed, the appraisers were

told that there was a strong likelihood that the Company

would participate in some type of venture and that real

estate prospects were very promising. Jd. The 1979 Amer-

ican Appraisal report reflected these discussions, noting

that

management has recently begun studying various al-

ternatives in the development of the company-owned

real estate. There is a good possibility that after de-

velopment, U.S. News will have a significant income

producing property(s). While the development oi the

real estate, and income therefrom, may be several

years away, some weight must be given to this po-

tential income source in valuing the common stock

shares of U.S. News.

PX 19 at 10.

In preparing the 1979 report, American Appraisal under-

stood that U.S. News might decide to develop its real

estate, and it considered the realizable value of the real

estate not currently needed in U.S. News’ publishing busi-

ness to be a reasonable ‘“‘proxy”’ for estimating the effect

that possible future development might have on an inves-

36a

tor’s assessment of the value of U.S. News stock. Jd. at

15-16.

Throughout this litigation, plaintiffs have challenged the

uses to which the West End real estate was put. They

charge that the U.S. News defendants should have re-

garded the property as an excess asset—beyond the Com-

pany’s reasonable needs—and that instead they purposely

decided and otherwise failed to utilize the land at its high-

est and best economic use. All of this, plaintiffs assert,

was accomplished to their detriment and financial loss.

Defendants have responded that the original real estate

purchases were made ‘‘to protect [the Company’s] right

to grow.” See, e.g., PX 38, Q & A at 4. Several of plaintiffs’

experts offered testimony as to what they regarded as

excess real estate, which in their view the Company could

have developed without interfering with its publishing busi-

ness. Their testimony and analysis, however, was incom-

plete and flawed; they failed to consider fully the problems

and uncertainties encountered by U.S. News before 1973

and continuing in lesser degree until the mid-70’s, as dis-

cussed supra, pp. 1502-03. Those problems precluded any

type of realistic development plans. Much more important

and significant was the fact that their testimony presup-

posed that the interests of the plaintiffs and other share-

holders similarly situated should have been valued on a

control basis. See infra pp. 1514-30.

One of the plaintiffs’ several contentions is that the

defendant-directors, as fiduciaries, were derelict in failing

to discharge their duties in determining and deciding U.S.

News policy and keeping abreast of and knowledgeable

about corporate affairs. This, they assert, was particularly

true with respect to the annual appraisals performed by

American Appraisal. The Court finds that such a claim is

not supported by the record. The directors as a whole

possessed varied abilities, training, and experience. Ac-

cordingly, they appropriately relied upon each other and,

37a

where necessary, on each other’s particular expertise. This

was true in many areas of the Company’s business affairs.

Other than John Sweet, two other members of the board

of directors were particularly knowledgeable, important and

active participants in the day-to-day operating and long-

range development of corporate affairs. Bert Padrutt and

his successor, Raymond Naimoli, played central roles dur-

ing the class period in their position as treasurer and chief

financial officer. Their fellow board members recognized

the training, experience, intelligence and expertise that

they brought to their office. The other directors who tes-

tified at trial all asserted that they relied upon Padrutt’s,

and then Naimoli’s, judgment and advice in matters re-

lating to the requirements of the assignments undertaken

by American Appraisal, major decisions relating to use of

the real estate, corporate finances, and other matters in-

volving business decisions as they related to and impacted

on the employee shareholders and Plan beneficiaries.

Padrutt was a certified public accountant with more than

15 years experience when he entered on duty as controller

and later treasurer. Before joining U.S. News, he had

worked with the Ernst & Ernst accounting firm (now Ernst

& Whinney) and had been involved in their annual audits

of U.S. News. During his tenure as chief financial officer,

he regularly conferred with representatives of American

Appraisal when they undertook their assignments, and he

made the department heads and other directors available

for conferences with the appraisers. He also reviewed and

discussed with the appraisers their final reports to ensure

that he understood their basic assumptions, that they were

appropriate and well documented and that the final report

could be supported and defended.

The Court was left with the impression that Mr. Padrutt

was a methodical, thorough and knowledgeable executive

who knew what was required as chief financial officer

under the circumstances. He understood he methodology

38a

employed by the appraisers and believed that their ap-

proach was appropriate. When it was required and dictated

by the circumstances, he consulted with outside counsel,

Don Harris of Covington & Burling, on matters relating

to the Profit-Sharing Plan and employees’ stock interests.

Naimoli was hired as chief financial officer in mid-1980.

Like Mr. Padrutt. he possessed academic credentials and

prior professional experience which equipped him for the

position. As an accredited public accountant he had a pre-

vious and widening work experience with a major account-

ing firm, the Arthur Young Company. He also served for

approximately 10 years as corporate controller for Scho-

lastic Magazine, a reputable publication. Because U.S.

News was experiencing unusual changes when he entered

on duty and because of his recent introduction to U:S.

News and to the appraisal of its closely held stock, he

proceeded cautiously but with a recognition of immediacy.

As did his predecessor, Naimoli consulted with Don Harris

about the facts surrounding the 1962 reorganization, par-

ticularly the methodology to be employed in valuing U.S.

News’ stock.'®

As a first assignment he reviewed prior efforts of the

Company to develop its real estate with the hope of placing

such efforts on a firmer track. See 30 Tr. 5982-84. In this

connection U.S. News retained the law firm of Arnold &

Porter in late 1980 to study development possibilities. In

turn, Arnold & Porter hired the Julien Studley Company,

a marketing consultant group, to assist in planning and

to estimate current and projected values from development

‘© In addition, members of the Board, throughout the class period,

relied upon the audits of the Plan’s financial statements by the ac-

counting firm of Ernst & Whinney. Two of the auditors testified at

trial that Ernst & Whinney’s review of the appraisal methodology used

to calculate the value of the Class A shares was appropriate and rea-

sonable. See 59 Tr. 11,398-99, 11,448-49 (McMahon); 60 Tr. 11,607-10

(Dietrich). i

39a

of the real estate. In January 1981, Arnold & Porter sub-

mitted an analysis of possible avenues for development,

together with an optimistic report from Studley. Two al-

ternatives were advanced for consideration: an immediate

all-cash sale or a joint venture. On April 9, 1981, U.S.

News distributed a prospectus developed by Arnold & Por-

ter and Studley, soliciting a joint venture partner to de-

velop its real estate. The Carr Company did not consider

the proposal particularly attractive and did not submit a

bid. Even so, on August 11, 1981, U.S. News signed a

letter agreement with Boston Properties, Inc., providing

for a series of limited partnerships to develop all of U.S.

News’ real estate parcels in the West End.

In December of 1983, an unsolicited offer was made to

purchase the Company for $1,000 per share. The highest

value at which the U.S. News stock had been appraised

up to that point was only $470 per share. The employee-

shareholders were advised and made aware of these de-

velopments. Accordingly, with the consent of a majority

of the beneficial owners of its stock, U.S. News solicited

bids for sale of the corporation during the following spring.

The winning bid was that of Mr. Zuckerman, a principal

of Boston Properties. The magazine was subsequently sold

in October of 1984 for $176 million, or roughly $2,800 per

share.

2. Acquisition of Other Assets

In addition to is real estate holdings, U.S. News ac-

quired in 1975 and 1976 a minority stock interest in Atex,

a supplier of photocomposition equipment to the magazine

industry. While that stock was carried on the books at

cost throughout the class period, when it was exchanged

in 1981 at a significant profit for stock in the Eastman

Kodak Company, the transaction was in part reflected in

the 1981 annual appraisal. In 1978, U.S. News acquired

a minority block of stock in Publishers Phototype, Inc.,

another photocomposition company. In 1981, U.S. News

40a

made other investments and acquisitions, primarily in the

phototypesetting field. American Appraisal’s treatment of

these assets is considered infra, pp. 1530-33.

The Foltz complaint was filed in February 1984, when

previously retired employees learned from newspaper ac-

counts that the December 1983 offer of $1,000 per share

had been made. See 2 Tr. 216-18, 274-75 (Folz). The Rich-

ardson suit followed and was filed in July of 1985. It was

consolidated with Foltz in March of 1986 for pretrial pro-

ceedings and trial.’

III. ANALYSIS

While sometimes lost sight of, the central issue requiring

resolution in this litigation has always been the propriety

of the methodology employed in appraising the U.S. News

stock. Plaintiffs maintain that the annual stock valuations,

performed for U.S. News by American Appraisal, were

‘7 The 1984 sale of U.S. News occasioned a number of other lawsuits.

Two of the directors who had been excluded from the class, see supra

p. 1497, filed independent actions, John H. Adams v. U.S. News &

World Report, Inc., C.A. No. 85-4038, and Estate of Ben Grant v. U.S.

News & World Report, Inc., C.A. No. 86-0156. Adams was dismissed

by stipulation of the parties, Order of March 13, 1986, while Grant

was dismissed upon summary judgment. 639 F.Supp. 342 (D.D.C.1986).

On May 12, 1986, a former employee who had retired in 1983 filed

suit and hoped to have his case consolidated for trial with Foltz and

Richardson, James E. Sacra v. U.S. News & World Report, Inc., C.A.

No. 86-1297. That very ambitious request was denied by Order of Au-

gust 17, 1986. Sacra is currently awaiting the outcome of Foltz and

Richardson.

Finally, on January 29, 1987, after trial of Foltz and Richardson,

two additional former employees filed suit, represented by the Rich-

ardson counsel, Russell W. Fritz v. U.S. News & World Report, Inc.,

C.A. No. 87-0207 and Gaynelle L. Mallard v. U.S. News & World

Report, Inc., C.A. No. 87-0208. Mr. Fritz retired in 1982 and Ms.

Mallard in 1983. Those cases are again awaiting a ruling on the claims

in these consolidated proceedings.

4la

not only grossly inaccurate throughout the class period,

but were the result of collusion between those two

defendants. Their basic quarrel with the appraisals is that

they did not value the Plan’s stock holdings, which con-

stituted a majority of the Company’s outstanding stock,

on a control basis. This alleged failure, in turn, resulted

in the minimization or exclusion from the appraisals of the

value of the Company’s non-operating assets, primarily the

real estate.

As analyzed by the Court in its summary judgment opin-

ion entered in Richardson, plaintiffs’ claims in both actions

fall more or less neatly into two categories. See 639 F.Supp.

at 599. The first comprises claims premised upon inten-

tional or fraudulent conduct and includes claims for breach

of the fiduciary duty of loyalty under ERISA § 502(aX3),

securities and common-law fraud, common-law breach of

fiduciary duty, and unjust enrichment. The second encom-

passes claims based upon negligent, imprudent, arbitrary

or capricious conduct and includes claims for benefits due

under ERISA § 502(aX1XB), for breach of the fiduciary

duty of care under ERISA § 502(aX3), and for negligence

and negligent misrepresentation. The effect of the Court’s

summary judgment decision in Richardson and of its ruling

on defendants’ Rule 41(b) motions in Foltz was to dismiss

all those claims premised upon intentional or fraudulent

conduct, on the grounds that there was no evidence in the

record that any of the defendants engaged in any course

of conduct designed deliberately to undervalue the Com-

pany’s stock. See 639 F.Supp. at 603-10; 54 Tr. 10,326-

27, 10,328-33.

What remains are plaintiffs’ allegations that U.S. News,

the director-defendants, and the Plan acted negligently or

unreasonably in accepting American Appraisal’s valuations

for each of the class years. The second portion of the trial

as to liability, commencing with the beginning of

defendants’ case-in-chief, dealt extensively and exclusively

with whether the appraised values were reasonable in light

42a

of the circumstances. In this connection, plaintiffs and

defendants presented several expert witnesses each. Their

testimony addressed the issue of whether what was done

during the class period conformed to acceptable and rec-

ognized procedures and standards and was otherwise ap-

propriate and, if not, what should have been done.

Defendants also presented an additional expert, Mr. Ches-

ter Gougis, who had undertaken an independent, ‘‘blind’’

appraisal of the Company’s stock during each of the class

years. His testimony was proffered to corroborate Amer-

ican Appraisal’s valuations.

After consideration of the expert testimony presented,

the Court is not persuaded that the appraisal methodology

was improper or flawed, or that the per-share price arrived

at each year by American Appraisal did not fall within a

reasonable range of acceptable values. Having decided that

the appraised values were reasonable, the Court must and

does conclude that their acceptance and use by U.S. News

was reasonable and thus cannot form the subject of any

cause of action. Accordingly, the Court determines that

plaintiffs have simply suffered no redressable injury, initial

appearances aside. The Court also concludes that, because

the Plan stock was reasonably valued on a minority-inter-

est basis, the common or bonus stock was necessarily prop-

erly so valued.

The Court now presents its findings of fact and conclu-

sions of law with respect to defendants’ motions under

Fed.R.Civ.P. 41(b), which dealt solely with the issue of

intentional or fraudulent conduct. It then addresses the

controversial and central] issue dealing with the appropriate

appraisal methodology.

A. Defendants’ Motions to Dismiss and for Judgment

Under Rule 41(b), Fed.R.Civ.P.

The Court’s bench ruling on defendants’ Rule 41(b) mo-

tions served to narrow further the issues remaining to be

considered following plaintiffs’ case-in-chief. The initial

43a

findings announced from the bench were not detailed. It

is thus necessary to flesh out the findings of fact and

conclusions of law in greater depth as contemplated under

Fed.R.Civ.P. 52(a). In expanding upon its previous oral

ruling, the Court again notes that, ‘‘[i]n a case tried with-

out a jury, the trial court is not required to consider the

evidence in the light most favorable to the plaintiff in

determining whether to grant a motion to dismiss under

Rule 41 made at the completion of the plaintiff's case.”’

Woods v. North American Rockwell Corp., 480 F.2d 644,

645-46 (10th Cir.1973). ‘‘Rather, the court is required t

weigh all the evidence, resolve any conflicts and .. . decide

itself where the preponderance lies.”’ Albright v. United

States, 558 F.Supp. 260, 264 (D.D.C.1982), affd, 732 F.2d

181 (D.C.Cir.1984).

The bench ruling eliminated from Foltz all claims prem-

ised upon intentional or fraudulent conduct—that is, claims

for securities and common-law fraud, common-law breach

of fiduciary duty and unjust enrichment, as well as claims

for breach of the fiduciary duty of loyalty under ERISA

§ 502(aX3). All such claims had previously been considered

and eliminated from Richardson on summary judgment, so

that the bench ruling in Foltz placed both cases on equal

footing.

As originally pleaded, plaintiffs’ claims of intentional or

fraudulent conduct on the part of the several defendants

appeared at first blush to be superficially plausible. Their

seeming vitality and strength sprang from an initial per-

ception that the class plaintiffs had been treated unfairly

compared with those U.S. News employees who had ben-

efited from the 1984 multimillion dollar sale of the Com-

pany. As the trial unfolded,** however, it became

** While in Richardson defendants challenged the substance of

plaintiffs’ claims of fraud or other intentional wrongdoing on summary

judgment, resulting in their dismissal, the Foltz summary judgment

motions for the most part only dealt with certain threshold legal ques-

A Ae

increasingly apparent that the claims were not supported

py reliable and credible evidence. Indeed, with the benefit

fa considerable record of discovery and trial testimony,

it is clear that the various claims to some degree are

mutually contradictory. Plaintiffs charge both that U.S

News conspired with American Appraisal to undervalue

the Company’s stock and withheld information from the

ppraisers. In this way, plaintiffs portray the appraisers

both as active wrongdoers and as unwitting dupes. While

such a contradiction might have been tolerable at the

pleading and discovery stage, its continued existence at

trial indicates that plaintiffs simply failed to develop a

reasonable and plausible theory of their case in this re-

spect. Accordingly, those defendants accused of intentional

or fraudulent conduct—that is, U.S. News, the director-

iefendants, and American Appraisal—moved to dismiss all

claims against them premised on such conduct.

1. Claims Against the U.S. News Defendants

jaintiffs have failed to carry their burden of demon-

strating that U.S. News conspired with American Ap-

praisa] in any way to manipulate the appraisal process and

to undervalue the Company’s stock. The same is true of

their claim that the U.S. News defendants withheld in-

formation from American Appraisal concerning the Com-

pany’s real estate development plans, or that the Company

and its directors withheld information from the employees

concerning those plans and concerning the appraisal meth-

odology employed generally. None of these claims finds

support in the testimony presented by plaintiffs.

a. Conspiracy with American Appraisal

To demonstrate a conspiracy between U.S. News and

American Appraisal, plaintiffs succeeded in pointing to only

two instances of alleged wrongdoing, arising from the year-

end 1978 and 1980 appraisals, from which they urge the

tions. Therefore, as of the commencement of trial, many claims of fraud

or other intentional wrongdoing remained for resolution in Foltz.

45a

Court to draw an inference of fraudulent conduct. Such

an inference would be completely unwarranted, as is dis-

cussed in connection with the claims against American

Appraisal, infra.

In addition to the absence of any conspiratorial conduct

on the part of the U.S. News directors, defendants have

pointed to the absence of any motive on their part for

undervaluing the Company’s stock. They argue instead

that, like any managers, they had every reason to maxi-

mize the value of the Company’s stock in each year.

Plaintiffs insist, however, that the operation of the de-

ferred compensation structure set up for the benefit of

the directors supplied a motive for undervaluing the stock.

Subsequent to the 1962 reorganization, U.S. News di-

rectors and officers were no longer able to purchase shares

in the Company.'* Instead, a deferred compensation plan

was instituted, briefly noted supra, whereby directors and

other key employees were awarded blocks of ‘phantom

stock,’’ redeemable upon retirement at the appraised price

of the Company’s Class A and common shares. The phan-

tom stock shares could not be voted and were subject to

forfeiture if the awardee left the Company before normal

retirement. ;

While such shares were awarded at periodic intervals

until each holder received a maximum of 2,400 shares, in

1982, for various reasons that have been fully explored

and dealt with elsewhere, see 639 F.Supp. at 604-05, and

which with benefit of later trial testimony need not be

further discussed, awards to several eligible persons were

accelerated by the Board. When the Company was sold in

1984, the phantom stockholders received payment for their

shares from Mr. Zuckerman, but at a price considerably

less than that paid for the Class A and common stock.

'* Neither were they eligible to participate in the stock bonus plan

They were eligible to participate in the Profit-Sharing Plan.

46a

Throughout this litigation, plaintiffs have maintained that

there was something wrongful about the phantom stock

awards. Unfortunately, they have failed to articulate ex-

actly what it is that the Court should be concerned with.

See 627 F.Supp. at 1174. Presently, they argue that the

awards created in the director-defendants some perverse

incentive for undervaluing the Company’s stock during the

class period. Specifically, they have attempted to show that

the directors were concerned that a rapid rise in the

amount of benefits to be paid separating employees, trig-

gered by a “full” valuation of the Company’s stock, would

have forced the Company to be prematurely liquidated

before they could ‘‘cash in” their phantom stock interests.

If anything, however, the natural incentive on the part of

the directors would have been to ensure that the Com-

pany’s stock be fully valued on whatever date their phan-

tom stock obligations were to be redeemed. Defendant

Keker, for instance, was concerned that, upon his reaching

retirement age in 1982, his key employee shares*’ should

not be redeemed until sometime later. 4 Tr. 793-800. If

it were only a question of manipulating the appraisal proc-

ess, he would have been interested in ‘‘manipulating”’ the

1981 valuation upward, knowing that he faced his normal

retirement date in 1982. Similarly, other directors re-

deemed stock during the class period and thus would have

made unlikely participants in a conspiracy to undervalue

the Company’s stock during that time. See Estate of Grant

v. U.S. News & World Report, Inc., 639 F.Supp. 342, 345-

46 (D.D.C.1986) (Ben Grant); 25 Tr. 4996 (Howard Flie-

ger); PX 1 (Robert Osmond, John Adams).*! Not only does

2 Mr. Keker held 2,400 shares of key employee stock, which he ac-

quired before the reorganization. 3 Tr. 428-30. Yet whether he held

phantom stock or key employee shares, his incentive not to have those

shares undervalued would have been the same.

21 Indeed, former directors Grant, Adams, Osmond, Flieger and Kirby

were originally members of the plaintiff class, but were later excluded.

See supra pp. 1497-98; see also Estate of Grant, 639 F.Supp. at 344.

47a

plaintiffs’ theory appear fanciful and illogical, but more

importantly it is contradicted by the only credible testi-

mony and documentation in the record.

Accordingly, the Court lays to rest, and with finality,

any concern that the deferred compensation rights awarded

to individuals at U.S. News were somehow wrongful.

b. Nondisclosure of Information to American

Appraisal

It is undisputable that U.S. News gave American Ap-

praisal all relevant information regarding the 1981 joint

venture agreements. Richardson, 639 F.Supp. at 603-04.

While plaintiffs might quarrel with the manner in which

American Appraisal treated this information in the 1981

valuation, certainly nothing that was done or not done is

in any way reflective of fraud or intentional misconduct.

It is true, however, that American Appraisal’s treatment

of the U.S. News real estate in 1981 was more involved

than usual. But if the appraisers gave less attention to

the real estate in prior appraisals, it was not because U.S.

News had withheld information from them.

In 1981, when the year-end 1980 appraisal was con-

ducted, U.S. News had received the Julien Studley report,

analyzing the development potential of the Company’s real

estate. When chief financial officer Ray Naimoli offered

the report to the appraiser, David Marshall, Mr. Marshall

indicated that, in the absence of a firm commitment by a

developer, such a study would not be relevant to an ap-

praisal of the Company’s stock. 31 Tr. 6245, 6247-48 (Nai-

moli). Nevertheless, Naimoli told Marshall that Studley had

arrived at a FAR value of $53.”

The only other real estate plans of note were contained

in the 1976 proposal of the Oliver T. Carr Company to

* With a FAR of 6, the $53 value works out to $320 per square

foot.

48a

construct a new headquarters building. The notes of the

appraisers who performed the 1975, 1976 and 1977 ap-

praisals knew of the Carr plans. PX 782 at 10,875; PX

294. Mr. Marshall, who did the appraisals for 1978 through

1981, contacted the Carr Company himself with regard to

the 1978 report and was directed to the Carr Company

by U.S. News with respect to the 1979 report. PX 67, 77,

85.

Not only did U.S. News not withhold information rel-

evant to its real estate development plans, but by the

admission of plaintiff's own rea] estate expert, Mr. William

Harps, such proposals in the absence of a finalized plan

for development would not even be relevant to a real

estate appraisal, much less to a stock appraisal. See 33

Tr. 6599; 34 Tr. 6766-69. For that same reason, Marshall's

lack of interest in the 1980 real estate analysis offered

him by Naimoli was not unjustified.

c. Nondisclosure of Information to U.S. News

Employees

Plaintiffs contend that the U.S. News defendants wrong-

fully concealed information about the Company and its

appraised value that would have been relevant to them.

In its summary judgment ruling, the Court recognized that,

if plaintiffs could show that they would have altered their

retirement plans upon receipt of information that had been

withheld, information indicating that the Company was un-

dervalued, they could make out a claim for securities fraud

and, by extension, common-law fraud. See 627 F.Supp. at

1159-61. On the present record, however, it is clear not

only that there was nothing to conceal—the Company's

stock had not been undervalued—but that U.S. News did

disclose information relevant to the areas of concern here.

First, U.S. News made no attempt to conceal the fact

that American Appraisal valued the Company every year

on a minority-interest basis. At the annual spring share-

holder luncheons beginning in 1974, and at more informal

49a

gatherings, Chairman John Sweet and other members of

the Board freely disclosed that the Company could be sold

for several times the value that one would obtain if one

were to multiply the appraised price per share by the

number of outstanding shares. Even if this information,

spelled out specifically at the 1978 annual shareholder

luncheon, see PX 11, Q & A at 11, did not make the

matter plain enough, certainly such a revelation would be

inconsistent with an attempt to keep the information se-

cret. See Richardson, 639 F.Supp. at 603 n. 16.

As a general matter, the annual shareholder luncheons

afforded employees an opportunity to obtain a fair amount

of information about the financial circumstances of the

Company. While Mr. Lawrence met with his employees on

a regular basis, he tended to be relatively tight-lipped about

Company affairs, fearing the leak of information that might

prove helpful to competitors. Mr. Sweet, on the other hand,

was more forthcoming in answering employees’ queries

about their Company. See 2 Tr. 333-35 (Foltz). Beginning

with those for year-end 1976, Sweet distributed written

summaries of the Company’s financial statements, in ad-

vance of the annual luncheons. PX 144-48. At the meetings

Sweet would cover the Company’s financial developments

during the previous year in some detail. Employees were

invited to ask questions at the conclusion of his remarks.

There were no limits on the questions that could be asked,”

and no one was made to feel inhibited. See 2 Tr. 251

(Foltz). Transcripts were made available for all those who

could not attend the meetings, including those persons

assigned to stations outside the Washington area.

With respect to the treatment of the real estate in the

annual appraisals, the absence of any attempt to conceal

relevant information is even more striking. At the 1974

** Mr. Sweet, as a matter of policy, declined to answer employees’

questions concerning the compensation of persons working for the Com-

pany.

50a

shareholder luncheon, for instance, Mr. Sweet, recently

elected Chairman of the Board, told those present that

the Company’s real estate was carried on the books at

only one-third of its full value. PX 37, Q & A at 12. While

in ruling on the Foltz motions for summary judgment, the

Court declined to find that that revelation removed any

material issue of fact as to notice on the part of plaintiffs,

627 F.Supp. at 1151, the situation is somewhat different

in the present posture of this case. First, whether or not

Chairman Sweet’s remarks were sufficient to impute notice

to the class is a question that must be answered only upon

finding that defendants engaged in a course of conduct

designed to conceal some alleged wrongdoing. On the pres-

ent record, however, it is clear that no such concealment

was attempted. Rather, Sweet’s remarks at the 1974

luncheon are merely illustrative of management’s lack of

interest in keeping things secret. Second, at the summary

judgment stage, the Court was concerned that plaintiffs’

knowledge of how the real estate was treated on the books

might shed too little light on their understanding of how

it was treated in the appraisals. See 627 F.Supp. at 1151.

However, after the conclusion of plaintiffs’ case-in-chief, it

became evident that plaintiffs were under no misappre-

hension as to whether the Company’s potential real estate

bonanza was fully reflected in their appraised value of its

stock. In fact, several of the class plaintiffs testified freely

at trial that, during the class period, they believed that

the real estate was undervalued and not adequately ac-

counted for in the annual appraisals. See 2 Tr. 406-08

(Foltz); 24 Tr. 4850 (Edward Castens). In view of such

sentiments among its employees, the Company’s disclosure

that its real estate was carried at only one-third of value

is certainly inconsistent with any plan of concealment.

Neither did management attempt to conceal the status

of the Company’s plans for the development of its land.

See, e.g., 2 Tr. 354-59 (Mr. Foltz was generally aware of

the Company’s development plans). Employees were told

5la

when plans toward the construction of a new headquarters

building were suspended; they were notified when pro-

spective joint venture partners were solicited in 1981 and,

again, when the joint venture agreements were signed with

Boston Properties later that year. At the same time that

they were told of the joint venture solicitations, plaintiffs

were pointedly advised that they might want to consider

leaving their account balances in the Plan so that they

might share in and secure the benefits of the anticipated

increase in the value of the Company’s stock. PX 50.

Plaintiffs point to two instances, however, where man-

agement was in their view less than forthright in keeping

them advised of relevant information. First, they adduce

a December 1980 memorandum to Company department

heads from Mr. Sweet, PX 319, which enclosed a second

memorandum to be circulated to employees, notifying them

of potential development plans. In the cover memorandum,

Sweet instructs the department managers not to go be-

yond the contents of the enclosed memorandum in their

discussions with employees. When the Foltz summary judg-

ment motions were considered, it seemed at least plausible

that the cover memorandum suggested a secretive attitude

on the part of management, consistent with a pattern of

concealment. 627 F.Supp. at 1158. After considering the

relevant trial testimony, however, the Court has little doubt

that Mr. Sweet’s real concern was that employees not be

provided with overly optimistic assessments of future de-

velopments, which might have led them to act hastily in

making their retirement plans. See 25 Tr. 4941 (Sweet).

Plaintiffs similarly point to an October 21, 1980 letter

from Treasurer Bert Padrutt to outside counsel Don Har-

ris, PX 317, in which Padrutt questions Harris about po-

tential liability to employees who might retire between the

announcement of development plans and the next ap-

praisal. Padrutt was concerned that such employees, who

would receive benefits based on the value of the Compa-

ny’s stock as of the close of the last calendar year, would _

52a

fee] deprived in not benefiting from any increase in the

value of the Company’s stock during the current year. In

fact, to avoid precisely this contingency, the directors voted

subsequent to the signing of the joint venture agreements

in 1981 to award benefits to employees retiring between

that date and December 31, 1981 based upon the value of

the stock as of the latter date. See 42 Tr. 8255-57 (Pad-

rutt).

2. Claims Against American Appraisal

Upon entry of partial summary judgment for defendants

in Foltz, the claims against American Appraisal for in-

tentional wrongdoing were reduced to claims for securities

and common-law fraud arising out of the conduct of the

year-end 1978 and 1980 appraisals and for participation

with the U.S. News defendants in a breach of fiduciary

duty under ERISA § 502(aX3) with respect to the ap-

praisals for 1977 through 1980. On closer inspection, how-

ever, the record reveals no such conduct either on the part

of U.S. News and the director-defendants or American

Appraisal.

With respect to the 1978 and 1980 appraisals, plaintiffs

point to certain apparent irregularities that they claim in-

dicate a deliberate undervaluation of the Company’s stock.

In ruling upon defendants’ motions for summary judgment,

the Court believed that further inquiry into these matters

was merited and, consequently, declined to grant

defendants summary judgment as to claims arising out of

these instances of apparent misconduct. See 627 F.Supp.

at 1152-53, 1156, 1163, 1179-81. With benefit of relevant

testimony and a full trial record now before the Court, it

is clear that these challenges are lacking in merit.

Pointing to the 1978 appraisals, plaintiffs complain that

the final value of $105 per share was arrived at after a

senior appraiser, not otherwise involved with the valuation

* On summary judgment in Richardson, all claims against American

Appraisal were dismissed.

53a

for that year but who had done appraisals in prior years,

provided U.S. News with that figure in advance of the

completion of the final report. The two appraisers assigned

to the valuation for that year had arrived at a somewhat

higher preliminary figure of $117-118, but acquiesced in

the $105 value. The more senior of the two appraisers

testified that he was actually more comfortable with the

second approach and that, in any event, any figure within

the range of $105 to $118 would have been reasonable.

28 Tr. 5571-87; 29 Tr. 5913-16, 5950-51 (John Russell). It

is undisputed that U.S. News knew only of the $105 num-

ber and was not privy to any discussions among the ap-

praisers of any other figures. Hence, the final value of

$105 could not have been the product of any collusion

between U.S. News and American Appraisal and was not

the result of a vena] desire to keep the value per share

as low as possible. Moreover, because the testimony dem-

onstrates, and the Court finds, that the appraised price of

$105 per share was within a range of reasonable values,

the publication of that value by American Appraisal cannot

be seen as the result of any deliberate misconduct, nor its

acceptance by U.S. News as unreasonable.

With respect to the 1980 appraisal, plaintiffs charge that

the appraiser might have been improperly influenced by a

remark, made by Mr. Naimoli during a standard interview,

that a certain range of values had been given to the Com-

pany’s auditors for use in performing some unrelated cal-

culations. See 627 F.Supp. at 1153 & n. 12. The

uncontroverted testimony is that there was no such influ-

ence and that the remark was perfectly innocent. Hence,

no possible liability could attach to its utterance.

Plaintiffs’ ERISA claims against American Appraisal

fare no better. In ruling on that defendant’s motion for

summary judgment in Foltz, the Court held that, with

respect to claims falling within the statute of limitations

period (1.e., those arising out of the 1977 through 1980

appraisals), American Appraisal might be liable for par-

54a

ticipating in or furthering a fiduciary breach on the part

of U.S. News and the director-defendants. See 627 F.Supp.

at 1156, 1168. Yet, as is now apparent, there was no

breach of fiduciary duty on the party of U.S. News or its

directors. Such a breach would have occurred, under

plaintiffs’ theory of the case, if those defendants had sought

intentionally to undervalue the Company’s stock to the

detriment of the employee participants in the Plan. How-

ever, the Court finds that there is no evidence in the

record to support a finding that defendants engaged in

any sort of deliberate misconduct. Moreover, as discussed

infra, the Court further finds that the Company’s stock

was not undervalued at all.

In sum, plaintiffs have failed to support their claims by

a preponderance of the evidence. After months of testi-

mony, the record clearly shows that neither U.S. News,

its directors, nor American Appraisal engaged in any

scheme of deliberate misconduct designed to defraud or

otherwise injure plaintiffs in any way.

B. The Nature of the Court’s Inquiry—Valuation

Issues

This litigation is concerned not with fraud, but with the

proper apportionment of the proceeds or benefits from the

sale of an employee-owned business. As the law stands

now, such proceeds will not be distributed to former em-

ployees who left the business prior to the sale, unless it

can be shown that they would have been entitled to a

greater portion of benefits at the time they separated. In

other words, the approach to be used is not retrospective,

but prospective. One must look at the situation as of the

time that each employee separated from the Company.

Therefore, the appropriate inquiry is whether the Company

was properly valued during the class period, not whether

former employees become eligible for a greater share of

benefits upon the contingency of a subsequent sale.

55a

Employee benefits plans, like the one at issue here, are

governed by two spheres of regulation, the private and

the public.» Such plans are established by private parties—

either by the employer acting alone, or by agreement be-

tween the employee and employees—and generally operate

according to the terms established by the controlling doc-

uments. If, however, one or more of such terms conflicts

with any provision of federal regulation, in this case ER-

ISA, then those terms are rendered invalid. Hence, in

examining whether plaintiffs are owed additional benefits,

one must answer two questions. First, under the terms of

the documents governing the Profit-Sharing Plan, are

plaintiffs owed greater benefits than they received? Sec-

ond, if not, are there supervening provisions of federal

law that render the relevant Plan provisions invalid and

that entitle plaintiffs to greater benefits? Finally, if neither

the Plan provisions nor the requirements of ERISA speak

directly to the issue here raised—the proper amount of

plaintiffs’ benefits—then the Court must satisfy itself that

what was done falls within a range of conduct permitted

by both spheres of governance.

1. Standard and Scope of Review

In the Foltz summary judgment decision, it was unnec-

essary to define exactly the appropriate standard against

which the conduct of plan fiduciaries should be judged,

since it was found that plaintiffs were not entitled to sum-

mary judgment on their ERISA claims under even the

least deferential standard. 627 F.Supp. at 1169-70. The

Court did note that a determination of pension eligibility

or of the appropriate level of benefits to be paid appeared

to be governed by the ‘‘arbitrary and capricious’ standard

*s While state courts are granted concurrent jurisdiction to hear ac-

tions for benefits due under ERISA § 502(aX1\B), id. § 502(eX1), 29

U.S.C. § 1132(eX1), with limited exceptions ERISA preempts all state

laws governing employee benefit plans. Id. § 514(a}(c), 29 U.S.C. §

1144(a}{c).

56a

of review, id. at 1169 & n. 55, even-_though that standard

might be applied with a ‘‘stern hand and flinty eye,” id.

at 1170 (quoting Maggard v. O'Connell, 671 F.2d 568, 572

(D.C.Cir.1982)).

Plaintiffs continue to urge the Court to adopt a stricter

“prudent man’”’ standard, found in section 404(aX1\B) of

ERISA, 29 U.S.C. § 1104 (aX1\B). That section requires

a fiduciary to discharge his duties ‘‘with the care, skill,

prudence, and diligence under the circumstances ... that

a prudent man ... would use....’’ While that provision

does appear, at least superficially, to demand application

of a ‘prudent man” standard, the relevant case law makes

it fairly clear that it has no application to the present

situation.

A useful gloss is placed on the requirements of section

404(a) by Struble v. New Jersey Brewery Employees’ Wel-

Jare Trust Fund, 732 F.2d 325 (3d Cir.1984). Struble ac-

knowledged that courts have generally adopted an

‘arbitrary and capricious’ standard in assessing the denial

of personal claims for benefits. Jd. at 333. The court then

contrasted such a situation with those presented in Don-

ovan v. Cunningham, 716 F.2d 1455 (5th Cir.1983), cert.

denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839

(1984) and Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.),

cert. denied, 459 U.S. 1069, 103 S.Ct. 488, 74 L.Ed.2d

631 (1982). In both Cunningham and Birerwirth, the fi-

duciary charged with improper conduct could be said to

have either subordinated the interests of the plan bene-

ficiaries to those of a third party, or to have wasted plan

assets. The Struble court concluded that in such situations

the appropriate standard of review was that contained in

section 404(a) and not the “arbitrary and capricious’”’

standard. 732 F.2d at 333-34; see also Fink v. Natwonal

Savings and Trust Company, 772 F.2d 951, 955-56

(D.C.Cir.1985). The ‘‘arbitrary and capricious’ standard

does apply, however, where the issue is whether the plan

fiduciaries have properly balanced the interests of different

57a

classes of beneficiaries. Fiduciaries thus have broad dis-

cretion to resolve the often competing concerns of present

and future claimants in order to preserve the financial

stability of funds while allocating assets to the advantage

of all beneficiaries. Jd.

A number of courts have followed Struble in its analysis

of the proper scope of review, or have otherwise found

that the ‘‘arbitrary and capricious” standard is appropriate

in assessing a fiduciary’s interpretation or implementation

of plan terms, when no outside interests press on the

balance. See, e.g., Holland v. Burlington Industries, Inc.,

772 F.2d 1140, 1148-49 (4th Cir.1985), cert. denied, —__

U.S. __ , 106 S.Ct. 3271, 91 L.Ed.2d 562 (1986); Edwards

v. Wilkes-Barre Pub. Co. Pension Trust, 757 F.2d 52, 55-

57 (3d Cir.1985), cert. denied, 474 U.S. 848, 106 S.Ct. 130,

88 L.Ed.2d 107 (1986); Ganze v. Dart Industries, Inc., 741

F.2d 790, 792-93 (5th Cir.1984).

Without discussing the dichotomy posited in Strubdle, our

Circuit Court has nevertheless recently held that, where

trustees face a choice between reasonable alternatives in

interpreting or implementing the terms of a plan ‘‘[cJourts

will substitute their judgment for that of trustees only if

the trustees’ actions are not grounded on any reasonable

basis. Choices between reasonable alternatives, it follows,

are for the trustees, not the courts.’ Stewart v. National

Shopmen Pension Fund, 795 F.2d 1079, 1088 (D.C.

Cir.1986). In Stewart a change in pension calculation, inter

alia, reduced monthly pension benefits to a 74-year-old

retiree from $80 to $9. Even so, the trustees’ action was

reviewed under the arbitrary and capricious standard.

In determining whether a fiduciary’s interpretation of

the terms of a plan document is arbitrary or capricious,

four factors should be considered: (1) whether the inter-

pretation is contrary to the language of the plan; (2)

whether it is consistent with the purposes of the plan; (3)

whether it is consistent with the purposes of the particular

58a

provision itself; and (4) whether it is consistent with prior

interpretations and whether beneficiaries were on notice

of the interpretation. Donovan v. Carlough, 576 F.Supp.

245, 249 (D.D.C.1983), affd mem., 753 F.2d 166

(D.C.Cir.1985). With these factors in mind, the Court now

turns to a consideration of the controlling documents under

which the Plan was operated: the U.S. News Profit-Shar-

ing Plan Document, PX 6, (‘‘Plan Document’’) and the

Articles of Incorporation, PX 2.

2. The Controlling Documents

The U.S. News Profit-Sharing Plan was established as

‘‘a defined contribution plan,’ into which the Company

paid contributions on behalf of its employees, based upon

their compensation, up to a maximum limit. While each

member of the Plan had his own account, Plan Document

€ 6.2,° the accounts together constituted ‘‘a [single] fund

{to] be invested and administered as a unit.” Jd. | 6.3.

Those investments included a modest portfolio of market-

able securities and, most importantly, the 50,000 shares

of U.S. News Class A stock. The net value of a member’s

account was stated to be his ‘‘undivided share of the cash,

securities and other property in the Fund,” including the

Class A stock. Id. ¢ 6.4. No member was deemed to have

title to any specific assets of the Plan. Jd. ¢ 6.11.

The Plan Document in paragraph 6.3 further provided

that the value of the Class A stock was to be determined

each year in accordance with Article Fifth (e) of the Ar-

ticles of Incorporation. Article Fifth established the mech-

anism by which the beneficial ownership of the Company

was to vest in its employees, “directly or through the

corporation’s profit-sharing trust.” Its provisions thus gov-

erned both the Class A and common stock. Under Article

Fifth (b), a holder of stock could not sell, transfer or

*6 While the original Plan Document was amended from time to time,

none of the changes made are material to this litigation.

59a

otherwise encumber his shares; if he attempted to do so,

the Company at its option could call the shares under

Article Fifth (c). That latter provision also gave the Com-

pany an option to call the stock in the event that an

employee retired, died, or otherwise ceased employment

with U.S. News. The value of the stock—both Class A and

common—for purposes of Article Fifth was to be its “fair

market value’ ‘“‘agreed upon by the parties,”’ or as de-

termined by an appraiser to be selected annually by the

Board of Directors. Id. ¢ (e).27 The appraiser was to render

his annual valuations ‘‘without regard to the restrictions

on transfer of stock contained in [the] Article[,]’’ using the

‘“‘methods and standards recognized by the regulations of

the United States Internal Revenue Service as appropriate

for determining fair market value of corporate stock.” Jd.

Article Fifth (g) further provided that the option price was

payable in cash or in notes of up to 15 years’ maturity,

bearing 5 percent simple interest, and subordinated to

other debts of the corporation.

As is readily apparent, the two controlling documents

are not particularly illuminating on the question of whether

the Company’s stock—either Class A or common—was to

be valued on a majority- or minority-interest basis. All that

one learns upon reading the relevant provisions of the

documents is that it was assumed that the Class A and

common stock would be valued equally. If that fact had

any significance in 1962, at the time the Company was

reorganized, it was that the drafters of the documents

contemplated that both classes of stock would be valued

on a minority-interest basis. This appears to be so in view

of the fact that, as of 1962, no shareholder, including the

2 Throughout the history of the Company, it was the practice always

to retain an appraiser, rather than to seek an agreement on the proper

price. Article Fifth(e) did, however, afford employees the right, under

certain conditions, to seek reappraisal of the stock. That provision was

reprinted on the reverse side of the voting trust certificates issued to

employee-shareholders in lieu of stock.

60a

Plan, held more than a minority interest in the Company.

Hence, had the Plan sold its holdings back to the Company

at any time before 1971, when it became the majority

shareholder, it would have been appropriate for it to have

done so for a minority price.*

Finally, the fact that the fiduciaries charged with ad-

ministering the Plan interpreted paragraph 6.3 of the Plan

Document and Article Fifth (e) to require that the Class

A stock be accorded the same minority value as the com-

mon stock was certainly not unknown to the Company’s

employees. Account statements and other documents given

periodically to the employees made it reasonably clear that

the annual appraisals ordered each year yielded a single

per-share value, which was then used with respect to both

the bonus and Class A stock. Indeed, no plaintiff testified

that he was led to believe that there were in fact two

such values. In short, the fiduciaries’ interpretation of the

relevant documents was not only consistent with the lan-

guage of the Plan and its purposes,”* but was consistently

used and was understood by the Plan beneficiaries. Car-

lough, 576 F.Supp. at 249.

Recognizing that the Plan Document and Articles of

Incorporation were drawn up long before the enactment

of ERISA, and noting too that, by the beginning of the

Class period the Plan attained a majority position in the

Company, it is necessary then to examine whether the

continued valuation of the Plan’s stock on a minority-in-

terest basis violated ERISA as a matter of law.

* Noteworthy, too, is the fact that the Plan Document nowhere states

that Plan members were to share ratably in the value of the Company’s

assets as a whole.

** The extent to which the valuation of the Plan stock on a minority

basis, by reference to Article Fifth, was consistent with the purposes

of the Plan will be discussed further, infra pp. 1524-30.

6la

3. Requirements of ERISA

ERISA, enacted in 1974, became effective as of January

1, 1975. The statute was designed to establish uniform,

comprehensive and consistently applied protections for the

beneficiaries of employee benefit plans. See ERISA § 2,

29 U.S.C. § 1001 (Congressional findings); 120 Cong.Rec.

29933-35 (1974) (remarks of Sen. Javits); id. at 29928,

29933 (remarks of Sen. Williams) (preemption of state law),

reprinted in 1974 U.S. Code Cong. & Ad. News 4639,

5177, 5188-89. Congress’ primary concern was with the

financial soundness of the plans covered, the conduct of

those administering them, and the fair treatment of their

beneficiaries. Accordingly, the statute as enacted requires

plan administrators to report on fund resources and ac-

tivities to the Secretary of Labor and to employee bene-

ficiaries, 29 U.S.C. §§ 1021-31; regulates participation and

vesting requirements, id. §§ 1051-61, as well as plan fund-

ing, 7d. §§ 1081-86; outlines the responsibilities and estab-

lishes a standard of care for plan fiduciaries, id. §§ 1101-

1114; and provides for the administrative, civil and crim-

inal enforcement of its provisions, 2d. §§ 1131-1145.%°

Despite the comprehensiveness of the provisions cited

above, nothing in ERISA speaks to the amount or method

of calculating benefits due plan beneficiaries. Rather, those

determinations are left in the hands of the “‘private parties

creating the plan.”’ Alessi v. Raybestos-Manhattan, Inc.,

451 U.S. 504, 511, 101 S.Ct. 1895, 1900, 68 L.Ed.2d 402

(1981). Nevertheless, plaintiffs claim to have found in the

body of the statute a firm directive that, in a case such

as presented here, where a plan holds a majority block of

employer stock, that stock must be valued on a control

basis. For reasons that shall become apparent—and for

ease of reference—that argument shall be called plaintiffs’

“current value” theory.

% Subsequent sections of the statute govern multiemployer plans and

plan terminations.

62a

It is noted at the outset that plaintiffs’ ‘‘current value’’

theory is entirely a construction of counsel. It draws no

support from any judicial or administrative interpretations

of the provisions in question. The legislative history is

sparse, and what little is found tends to undermine rather

than to bolster plaintiffs’ position. Indeed, as a simple

matter of statutory construction, the theory is not in har-

mony with the legislative scheme as a whole, relying as

it does upon the grafting together of various provisions

and terms taken out of context. It is worth noting, too,

that none of plaintiffs’ several experts saw fit to refer to

or rely upon the theory.

Plaintiffs begin by noting that ERISA § 103(a\1XA), 29

U.S.C. § 1023(aX1\A), requires every covered plan to file

an annual report with the Secretary of Labor and to fur-

nish that report to plan participants. Subsection (B) pro-

vides that the report shall include a financial statement

detailing, among other things, wnat assets the plan holds.

Subsections 103(b\3\A) and (C) require that the plan as-

sets be listed at “current value.’”’ ‘“‘Current value’’ is de-

fined as ‘fair market value where available and otherwise

the fair value as determined in good faith by a trustee or

a named fiduciary ... pursuant to the terms of the plan

..., assuming an orderly liquidation at the time of such

determination.” Jd. § 3(26), 29 U.S.C. § 1002(26). Believing

that the phrase ‘‘orderly liquidation’’ somehow speaks to

the issue of control valuation, plaintiffs seize upon a sup-

posed difference in meaning between “‘fair market value”’

and ‘fair value,”’ the latter implicating an “orderly liq-

uidation.”’

Apparently, in plaintiffs’ view, the ‘‘fair market value’’

of the Plan’s stock would not involve the concept of “‘or-

derly liquidation,” so that if it were acceptable under ER-

ISA to value plan assets at fair market value, as the terms

of the U.S. News plan required, then the notion of an

“orderly liquidation” would never enter into the calculus.

Of course, plaintiffs cannot argue that ERISA proscribes

63a

valuations at “fair market value’; instead, they maintain

that ‘‘fair market value” was not ‘‘available’’ within the

meaning of the statute because the Company’s stock was

not publicly traded and that, hence, ‘‘fair value’? must be

used. As just noted, however, the documents under which

the Plan was operated did prescribe a means of deter-

mining ‘‘fair market value’’—either the parties would agree

upon such a value or it would be arrived at by appraisal.

The latter method, which was consistently used, is cer-

tainly endorsed by the Internal Revenue Service (‘‘IRS’’)

as appropriate for valuing and allocating trust earnings to

a participant’s account. See Rev.Rul. 80-155, 1980—1 C.B.

84, 85; Rev.Rul. 59-60, 1959-1 C.B. 237 (‘‘fair market

value” of closely held stock to be determined by appraisal);

see also Sommers Drug Stores Co. Employee Profit-Sharing

Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456 (5th

Cir.1986) (‘‘fair market value’”’ determined by appraisal for

ERISA purposes), reh. en banc denied, 797 F.2d 977 (5th

Cir.1986).

Other ERISA provisions cast further doubt upon the

proposition that there is some qualitative difference be-

tween “fair market value’ and “‘fair value.’’ When a plan

purchases or sells certain plan assets, it must do so for

no more and no less than ‘‘adequate consideration.” Jd. §

408(eX1), 29 U.S.C. § 1108(eX1). “Adequate consideration”

for this purpose means, where there is no ‘generally rec-

ognized market,” the ‘‘fair market value of the asset as

determined in good faith by the trustee or named fiduciary

pursuant to the terms of the plan....’’ Id. § 3(18XB), 29

U.S.C. § 1002(18\B) (emphasis added). Clearly, the statute

contemplates that ‘‘fair market value’’ may in some in-

stances be determined by appraisal, as was done in the

instant case. The most that can be said for the distinction

that plaintiffs attempt to draw between ‘fair market

value’ and “fair value” is that, if ‘‘fair value’’ means

anything other than ‘‘fair market value,”’ it is ‘‘fair market

value by appraisal.”” And since a determination of ‘‘fair

64a

market value by appraisal” is precisely what was called

for under the documents controlling the Plan, the concept

of ‘‘current value’ adds absolutely nothing to an analysis

of how the Plan assets should have been valued.

Even if ‘fair market value’? were not available or ap-

propriate and if ‘fair value ... assuming an orderly liq-

uidation” had to be determined, plaintiffs would gain

nothing by it. The term “orderly liquidation’’ could mean

either an “orderly liquidation” of a plan’s assets—that is,

the immediate sale of all of its assets in some ‘‘orderly’’

fashion—or it could mean an “orderly liquidation’”’ of a

plan’s assets—that is, the sale of a plan’s assets in what-

ever way is most appropriate, whether all at once or over

a period of time. Hence, in no way can it be said that

the phrase ‘orderly liquidation’”’ requires that the Plan's

stock have been valued on a control basis. If anything, it

should counsel otherwise, for the ‘fair value” language

upon which plaintiffs rely itself states that the value of a

plan’s assets should be arrived at considering the terms

of the plan. All other relevant provisions of ERISA also

make reference to and, in a sense, incorporate the pro-

visions under which a plan is operated.*! And since the

terms of the U.S. News plan did not contemplate anything

other than a series of minority-interest transactions, see

infra pp. 1521-22, 1524-30, the valuation of its stock on

3} ERISA leaves it to the plan to “specify the basis on which pay-

ments are to be made to and from the plan.” Jd. § 402(bx4), 29 U.S.C.

§ 1102(b\X4). If the terms of payment specified in the plan are not

complied with, a beneficiary may bring an action ‘‘to recover benefits

due to him under the terms of his plan.” Jd. § 502(aX1\B), 29 U.S.C.

§ 1132(aX1XB). Similarly, a plan fiduciary is required to discharge his

duties “‘in accordance with the documents and instruments governing

the plan,” to the extent consistent with ERISA. Jd. § 404(aX1XD), 29

U.S.C. § 1104(aX1#D). If he does not, a beneficiary may bring an action

“to enforce ... the terms of [his] plan.’’ Jd. § 502(aX3\BMii), 29 U.S.C.

§ 1132(aX3\BXil).

65a

a minority basis does not offend ERISA even under

plaintiffs’ ‘‘current value’’ theory.

Finally, it should be noted that plaintiffs’ ‘“‘current value’

theory is not consistent with ERISA’s statutory scheme

taken as a whole. First, it is not the purpose of ERISA

to require that plan fiduciaries maximize the benefits paid

to departing employees. See, e.g., Edwards v. Wilkes-Barre

Pub. Co. Pension Trust, 757 F.2d at 56-57. If this were

not the case, one would not expect to find, as one does,

a requirement that an Employee Stock Ownership Plan

(““ESOP’’}* that holds a controlling block of employer stock

nevertheless value that holding on a minority-interest ba-

sis, if the employer’s stock is actively traded. See Dep't

of Labor P/Opinion 76-52 (1976) (applying ERISA §

3(18AXil), 29 U.S.C. § 1002(18XAXii)). Nor would one ex-

pect to find an endorsement of a plan under whose terms

“book value’ was to be utilized in determining benefits.

See Dep’t of Labor P/Opinion 77-35 (1977). Second, the

purpose that section 103 was meant to serve quite clearly

has nothing to do with the calculation of benefits. Section

103 appears in the portion of the statute dealing exclu-

sively with reporting and disclosure requirements. Those

provisions, in turn, were designed to provide a means of

* It should be noted that section 103, which contains the requirement

that assets be listed at ‘‘current value,” applies as well to defined

benefit plans. Yet the terms of a defined benefit plan, as the name

Suggests, provide that a specific amount of benefits be paid out, not

an amount dependent upon a formula that, in turn, must—under

plaintiffs’ theory—incorporate the notion of ‘‘current value.’’ See ERISA

§§ 3(34), (35), 29 U.S.C. §§ 1002(34), (35). Hence, it is far more probable

than not that the term “current value,”’ has nothing whatever to do

with the calculation of plan benefits.

An ESOP is a specific type of employee benefit plan recognized

under the Internal Revenue Code (‘‘IRC’’). While the U.S. News plan

shares many features in common with an ESOP, it does not meet the

statutory definition that would qualify it under the Code. See ERISA

§ 407(d\X6), 29 U.S.C. § 1107(dX6); IRC §§ 401, 409, 26 U.S.C. §§ 401,

409.

66a

overseeing plan administration. See 120 Cong. Rec. 29931-

32 (1974) (remarks of Sen. Williams), reprinted in 1974

U.S.Code Cong. & Ad.News at 5185. The concern was

with plans that, through mismanagement or outright crim-

inal activity, become unable to pay the benefits to which

their participants are entitled. See 120 Cong.Rec. 29934-

35 (1974) (remarks of Sen. Javits); see also Fink v. Na-

tional Savings and Trust Co., 772 F.2d at 956-57. To this

end, it is necessary that a plan not overstate the value of

its assets when it files its annual reports. It is certainly

consistent with that purpose that a plan which pays out

benefits based upon a minority valuation of its holdings

of employer stock should report the value of those holdings

on that same basis. To report a greater value for them

in its annual report would seem more repugnant to the

statute. This would have been especially true for the U.S.

News plan towards the end of the class period, when a

large increase in the value of the Company’s stock caused

the Plan to experience some cash-flow difficulties.

To sum up, plaintiffs’ ‘‘current value” theory not only

lacks support in the text of the statute or in judicial or

administrative glosses thereon, but it also is manifestly at

odds with the entire scheme that Congress had in mind.

The theory must be, and is, rejected outright.

4. Reasonableness of the Appraisal Methodology

Neither ERISA nor the documents under which the Plan

operated provide any affirmative directive as to how the

Class A stock should have been valued. It therefore be-

comes necessary to determine whether, within the rela-

tively loose constraints imposed by the statute and the

operative documents, the assumptions relied upon and the

procedures utilized by the appraisers were reasonable un-

der the circumstances. Plaintiffs of course bear the burden

of proof on the valuation.

Plaintiffs of course bear the burden of proof on the

valuation issue; nevertheless, it is useful first to canvass

67a

the situation briefly from defendants’ perspective. Such an

overview demonstrates the prima facie reasonableness of

defendants’ approach.

(a) Defendants’ Perspective on Methodology

Defendants’ valuation methodology produced a result

that was consistent with the provisions of the operative

documents. The appraisals arrived at a single, minority

value that was reasonable as applied to the minority trans-

actions featured by both the profit-sharing and stock bonus

plans. The redemption of the bonus stock each year clearly

involved the exchange of small amounts of stock, whose

owners had no direct effect on or say in the day-to-day

operations of the Company, either in theory or in practice.

Participation in the Plan afforded its beneficiaries an even

more remote interest in the affairs of the corporation, <o

the extent that the Plan served as a holding device for

snares of stock that the employees themselves did not

directly own. As will be seen, there is no reason to look

beyond the practical realities of how the Plan functioned

and to assume that it could exercise theoretical powers

that would have served to enhance the value of plaintiffs’

minority interests. See infra pp. 1524-30.

Even if a cogent argument could be made to support a

control valuation of the Class A stock, it is impossible to

say that what defendants did was unreasonable. Clearly,

in the absence of any statutory, administrative, or judicial

authority for the proposition that a control value might

have been indicated, defendants cannot be faulted for em-

ploying a minority valuation. As noted, ERISA does not

require plan fiduciaries to maximize the benefits of de-

parting employees, Edwards v. Wilkes-Barre Pub. Co. Pen-

sion Trust, 757 F.2d at 56-57; it only requires them to

make a reasonable choice from among possible alterna-

tives. Stewart v. National Shopmen Pension Fund, 795

F.2d at 1083. Again, as stated at the outset, no principle

68a

of law governing this litigation demands that monies re-

ceived from the 1984 sale be distributed to former em-

ployees without regard to fault on defendants’ part in

valuing the Company’s stock during the class period. And

defendants cannot be faulted for choosing one from at

most two reasonable alternatives.

b. Plaintiffs’ Perspective on Methodology

In addition to ‘‘current value,’’ plaintiffs advance three

theories as to why the Class A stock should have been

valued on a control basis. They first argue that, because

the Class A stock—as well as the common stock—was

placed in the voting trust, they acquired the equivalent of

a controlling interest by operation of law. They then argue

that, because—as they allege—the Plan originally paid a

control price for its stock, principles of consistency require

that Plan beneficiaries be awarded benefits on a control

basis as well. Finally, they maintain that the very fact

that the Plan held a majority of the outstanding stock by

itself dictates that a majority-interest approach should have

been used. The three theories will be discussed in that

order.

i. The “‘voting trust’’ theory

Plaintiffs believe that, although they were not entitled

to vote their shares of stock, those shares should have

been valued on a control basis. The fact that such ‘‘con-

trol’”’ resided in individuals over whom they in turn had

no control, they say, afforded them the benefits of control

by operation of law. Moreover, that theory, if accepted,

would require that plaintiffs’ minority holdings of common

stock, as well as the Plan’s Class A stock, be valued on

a majority-interest basis.

As defendants have been quick to point out, the theory

has no basis in theory or in practice. First, the voting

trust did not, and was not meant to, afford U.S. News

employees a controlling voice in the Company. Indeed, the

————

69a

voting trust instrument states on its face that it was de-

signed only to provide employees with ‘“‘beneficial own-

ership’ of shares of U.S. News stock—that is, with

something less than the full incidents of stock ownership.

Moreover, plaintiffs were under no misapprehension as to

what Mr. Lawrence intended and had accomplished. As he

made clear both when the Company was reorganized in

1962 and subsequently, he still held the reins of control.

Plaintiff Charles Foltz recognized this when he testified

that Lawrence ‘‘took part in virtually everything from top

to bottom.”’ 1 Tr. 161. As Chairman of the Board, Chief

Executive Officer, and ‘‘owner,’’** Lawrence ‘“‘had the final

say on virtually everything that took place in the publi-

cation.” Jd. It is undisputed that he alone voted the stock,

just as he had done prior to the reorganization.

After Lawrence’s death, when the voting trust agree-

ment came up for renewal, his successor, John Sweet, sent

a memorandum to the employees, recommending that they

vote to renew the trust. Sweet made it clear in his mem-

orandum that the purpose of the trust was to ‘‘concen-

trat{e] responsibility, authority, and accountability.”” DX

141 at 4, 7. This was what Lawrence had in mind when

he effected the reorganization of the Company, and it is

certainly the way that business was conducted during the

class period.

Despite the realities of how the voting trust actually

worked and of how corporate control was concentrated,

first in Lawrence and then in his successor trustees,

plaintiffs continue to argue that, because the trustees owed

them fiduciary duties to run the Company in their best

* It is unclear whether Mr. Foltz was describing Lawrence's pre-

reorganization role or using a shorthand to describe his post-reorgan-

ization activities. At neither time was Lawrence actually the ‘“‘owner’’

of the Company, although at both he was the sole voting trustee and

firmly in command. As Don Harris, U.S. News general counsel during

the time, testified, Lawrence was a ‘‘very strong executive.” 57 Tr.

11034-35.

70a

interests, the voting trust provided a mechanism whereby

employees enjoyed effective control of U.S. News. Such

an argument, however, simply proves too much. It is al-

ways the case that the directors and officers of a corpo-

ration manage the company for the benefit of its

shareholders and that they owe those shareholders fidu-

ciary duties to manage the company in an acceptable man-

ner. See 8 Del.Code Ann.: Gen.Corp.Law § 141(a) (Michie

1983); Smith v. Van Gorkom, 488 A.2d 858, 872 (Del.1985);

Pogostin v. Rice, 480 A.2d 619, 624 (Del.1984); Gottlieb

v. McKee, 34 Del.Ch. 537, 107 A.2d 240, 243 (1954); Harden

v. Eastern States Pub. Serv. Co., 14 Del.Ch. 156, 122 A.

705, 706 (1923); see also Matter of Reading Co., 711 F.2d

509, 517 (3d Cir.1983).%° A voting trust adds nothing to

a shareholder’s rights in this regard, but rather takes away

from him the right to vote his stock on certain issues. As

to certain other issues, such as mergers and other major

corporate changes, the vote of a majority of the beneficial

owners of the Company’s stock was required. In that sit-

uation, then, the voting trust was inoperative. In short,

as to day-to-day matters of corporate management, the

voting trust added nothing to a shareholder’s rights. As

to major corporate undertakings, it only gave him back

rights that he would normally have retained in the absence

of the trust. In no way did the voting trust serve to

enhance the power enjoyed by a minority shareholder of

the Company.

Under the tax authorities made relevant by Article Fifth,

it is well recognized that, not only does the existence of

a voting trust fail to make the underlying stock more

valuable, it most often decreases the value of those shares.

Decisions from the Tax Court amply support the notion

that stock stripped of its voting rights is worth less than

ss Delaware law governs questions concerning the corporate gover-

nance of U.S. News, under applicable conflicts of law principles. See

Restatement (Second) Conflict of Laws §§ 302(b), 304, 306, 309 (1971).

‘la

stock that can be voted. See, e.g., Estate of Zaiger v. Com-

missioner, 64 T.C. 927, 945-46 (1975), acg., 1976-1 C.B.

1; Estate of Reynolds v. Commissioner, 55 T.C. 172, 190-

94 (1970). For that reason, defendants would have been

justified in reducing the value of the Company’s stock to

reflect the impediment that the trust placed against the

full employment of the rights that would ordinarily have

attached to the stock. In conclusion, it is noted that

plaintiffs have produced absolutely no relevant authority

for the contrary proposition that they asked to have the

Court endorse.

It almost goes without saying, then, that there is no

basis for plaintiffs’ assertion that their common stock

should have been valued on a majority-interest basis. They

have put forward no theory to support such a valuation,

under applicable IRS standards,** that does not depend

upon a finding that the Class A stock should have also

been valued on a control basis. Indeed, during closing ar-

guments, the common stock was all but lost sight of. See

74 Tr. 14,124-25.

ili. The “‘consistency’’ theory

Plaintiffs’ ‘‘consistency” theory derives its inspiration

from the testimony of Mr. Paul Much, one of defendants’

experts. Much testified that, where a plan pays for its

holdings of employer stock on a control basis, it should

also pay out benefits on a control basis, even if it no longer

* The Richardson plaintiffs’ expert, Mr. Martin J. Whitman, testified

that he viewed an appropriate appraisal of the Company’s stock as

borrowing from statutory appraisal practices developed under state cor-

poration law, practices which represent a departure from the way in

which minority shares are viewed under the tax authorities. See 43 Tr.

8537; 44 Tr. 8735-45. Yet the valuation clause of Article Fifth points

to IRS regulations and standards, not to something else. To the extent

that that clause is valid—and it is—there is no reason to accept Mr.

Whitman's substitution of his methodology for that followed by Amer-

ican Appraisal.

72a

holds a controlling interest in the employer company. See

54 Tr. 10,418-23, 10,472-75; 55 Tr. 10,718-20. He bases

his position on the notion that, where a plan pays a pre-

mium for stock purchased on behalf of a group of em-

ployees, those employees should get the benefit of that

premium value. After reading Much’s pretrial report, Mr.

John Hempstead, plaintiff's expert, came to the conclusion

that this theory could be useful for plaintiffs if they could

show that the Plan made its purchases of U.S. News stock

in 1962 and 1966 at a control price, based upon the May

1962 and December 1965 appraisals.

A brief discussion of those appraisals best demonstrates

the risk one faces in relying on the theory.

The May 1962 appraisal

In its language, if not in its methodology, the May 1962

appraisal, DX 357, is unfortunately a study in ambiguity,

as Mr. Much testified at trial. See generally 54 Tr. 10,433-

69: 55 Tr. 10,700-18, 10,780-58. The report begins by an-

nouncing that the value determined was of ‘‘the entire

business enterprise of [U.S. News Publishing] as a going

concern... .’’ DX 357 at 3 (emphasis added). Plaintiffs, of

course, focus on the language “entire business enterprise”’

and leap to the conclusion that a control value is being

provided. On the other hand, the greater portion of the

experts who testified at trial associated “going concern”

value with minority value—that is, the value of a business

as it continues in existence, not as it is liquidated. In light

of the report as a whole, the most sense that can be made

out of the quoted phrase is that American Appraisal valued

the entire business on a minority basis. Such a value would

represent the aggregate of all minority interests in the

company, in the same way that one might multiply the

current “bid and asked” price of a publicly traded cor-

poration by the number of outstanding shares.

Other ambiguities in the language of the report crop

up, but all can be similarly resolved. For instance, after

73a

going through a “market comparable’ analysis— whereby

an appraised price is determined by reference to the prices

at which comparable, publicly-owned companies are

traded—the report appears to draw a curious distinction.

It states that while current publicly traded prices are ‘“‘per-

tinent,” ‘“‘day to day fluctuations in the security markets

are not such as to be controlling in the valuation of an

entire business, as such fluctuations are only for minority

stock holdings in the comparatives used.’’ DX 357 at 18-

19. The lesson to be borne in mind, apparently, is that

the ‘‘rather drastic reduction in quoted prices” of the com-

parable companies was to be given less weight in arriving

at the value of the ‘‘entire equity” of U.S. News, whose

recent trends in growth had been positive. Jd. at 20. As

Mr. Much conceded, this language is indeed ambiguous or

seemingly contradictory. Still, a fair reading seems to be

that, in valuing the entire business of a company—albeit,

on a minority basis—one is more concerned with arriving

at a stable value than if one were valuing only an indi-

vidual minority parcel that might be bought or sold on a

day-to-day basis.

The most compelling reason for ignoring the ambiguities

in the language of the report is that the purpose of the

appraisal was quite clear. The determination of a single

value was needed in order to provide a fair price for each

of four related transactions: (1) the exchange of shares

between U.S. News Publishing and U.S. News; (2) the

purchase (from members of the Lawrence family) of U.S.

News Publishing shares by U.S. News: (3) the purchase

of U.S. News Class A stock by the Plan; and (4) the sale

by the Lawrence family of their shares of U.S. News Pub-

lishing to U.S. News. DX 357 at 3; see also PX 1107 at

10 (request for IRS advance determination letter). As Mr.

Much testified, all of these were minority transactions,

including the Plan’s purchase of its 30,00 shares of Class

A stock. Indeed, as U.S. News’ general counsel Don Harris

stated, the purpose of the valuation was to arrive at a

74a

single, minority price that would serve equally well for

each of the four purposes outlined. 57 Tr. 11,096-98. More-

over, because the Plan did not actually acquire control,

Mr. Harris believed it would have been inappropriate under

IRS standards for the Plan to have paid a control premium

for a minority block.*? See 57 Tr. 11,061, 11,065-66. If,

indeed, such a price had been paid, it would have been

an unwanted surprise, for the Plan might have lost its

tax-qualified status.

One final ambiguity is the reference in the May 1962

report to the 1961 sale of a controlling interest in News-

week, Inc. to The Washington Post Company for $50 per

share. Ordin-rily such reference would be meaningful only

in the context of a control valuation. Its inclusion appears

to have been motivated by Mr. Lawrence’s conviction that

his magazine was worth at least as much as Newsweek

and his insistence that some reference be made in the

report to the Newsweek sale. See 59 Tr. 11,338-41 (Harris);

3 Tr. 432 (director-defendant Samuel Keker). In fact, as

the analysis of the Newsweek sale reveals, U.S. News was

apparently worth more—on a control basis—than the $50

per share or $15 million indicated for Newsweek and as

a final conclusion of value for U.S. News.* Finally, Amer-

ican Appraisal did not undertake the kind of analysis of

asset values that one normally expects to accompany a

control valuation, nor did it seek to apply a control pre-

mium to the value that it obtained from the market com-

parable approach. In short, the reference to the Newsweek

sale at most appears designed to support a minimum mi-

* Today, under ERISA, it would be similarly improper for a Plan to

pay more than ‘‘adequate consideration” for a block of employer stock.

Id. § 408(eX1), 29 U.S.C. § 1108(eX1); Donovan v. Cunningham, 716

F.2d 1455 (5th Cir.1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533,

82 L.Ed.2d 839 (1984).

* Mr. Much testified that, if American Appraisal had used the News- |

week data to arrive at a control value for U.S. News, such a value |

would have been more on the order of $24 million.

75a

nority value of $15 million, which was the value finally

determined for U.S. News.**

The December 1965 appraisal

There can be little doubt that the December 1965 ap-

praisal, DX 363, was performed on a minority-interest ba-

sis. The appraisal methodology was the same as that used

during the class period, in that it arrived at a per-share

value by reference to the prices at which the stock of

comparable publicly-owned companies traded. Unlike some

of the later appraisals, however, it gave no consideration

to the value of the Company’s underlying assets, rendering

it an even “‘purer’”’ minority appraisal.

Concentrating on the language of the reports, again,

plaintiffs point out something that they think is in their

favor. The appraisal reports through that of December

1964 state that the valuations arrived at therein gave ‘‘no

consideration .. . to the relative value of minority holdings,

which usually have a lesser Fair Market Value than the

business as a whole.” This means, plaintiffs say, that the

valuations were all done on a control basis. Interestingly

enough, however, the December 1965 report states only

that “‘consideration ... may be given to the relative value

of minority holdings. .. .’”’ DX 363 at 2 (emphasis added).

If the change is significant, it certainly does not cut in

plaintiffs’ favor.

Yet the change in the language, indeed the language

itself, is of little, if any, significance. Every report ren-

dered by American Appraisal was indeed a minority re-

port, as is clear from the methodology employed. While

some reports do state that ‘‘no consideration’”’ is to be

* As noted, the $15 million works out to a per share value of $50.

hat value, in turn, was the same as the December 1962 value and

less than the values in each subsequent year. And since the latter

valuations were quite clearly done on a minority basis, it follows that

the May 1962 pnce of $50 per share was a minority price.

76a

given to the lesser values of minority shares, that

disclaimer apparently meant only that no further discount

from the minority price arrived at through the market

comparable analysis was to be taken to account for the

fact that smaller blocks of stock tend to be less attractive

to investors. Mr. Harris testified that this is what was in

his contemplation from the time of the earliest appraisal.

He stated that what was sought was a “‘basic’’ valuation—

done on a minority basis—with no further adjustment based

upon the size of the individual blocks being valued. In his

mind, ‘minority discount” meant a discount applied to a

minority block of stock to reflect not its lack of control,

but its relative lack of marketability. He understood that

the prices arrived at through a market comparable analysis

were themselves minority prices. See 57 Tr. 11,123-24; 59

Tr. 11,355. In other words, by ‘minority discount’’ he

simply meant ‘“‘marketability discount,” a discount which

was not applied to the U.S. News stock until 1975.*° Al-

though it is unfortunate that he mixes the terminology

somewhat, his understanding of the process is perfectly

accurate. Cf. Fellows & Painter, Valuing Close Corpora-

tions for Federal Wealth Transfer Taxes: A Statutory So-

lution to the Disappearing Wealth Syndrome, 30

Stan.L.Rev. 895, 921 n. 89 (1978) (some confusion exists

over the difference between minority and marketability

discoun‘*s).

Harris went on to testify that the language was changed,

effective with the 1965 report, in order to avoid any ap-

pearance that American Appraisal failed to take into ac-

count any relevant factor. 58 Tr. 11,243. The American

Appraisal representative who did the December 1964 ap-

praisal (and did it on a minority basis), Mr. John E. Hos-

sé

sack, testified that he was confused over the ‘no

« Beginning with the December 1978 report, the language was again

changed to read ‘‘consideration ... 1s given to the relative value of

minority holdings.’’ DX 374 at 2 (emphasis added).

Pic aeaiaiaiee

consideration” language and thought it possibly inappro-

priate. He questioned U.S. News about the matter, which

in turn referred it to Mr. Harris. See 7 Tr. 1254-66: 9 Tr.

1695-96. Harris suggested that the language be changed

to read ‘‘consideration ... may be given,’’ PX 184, and

U.S. News passed the suggested language on to Hossack.

Hossack then used that language in the December 1965

report, which he prepared, as he testified, on a minority-

interest basis. PX 688; 8 Tr. 1600-02: see also 7 Tr. 1435-

36; 8 Tr. 1582.

There is absolutely no reason for this Court to disbelieve

the testimony of Mr. Hossack, who prepared the 1965

report, and to find that, contrary to all appearances, it

was really a control valuation. Indeed, it is most surprising

to find plaintiffs arguing that it was a control report, when

it is substantially similar both in methodology and in

language*! to the reports rendered during the class period.

Finally, as in 1962, the Plan did not acquire a controlling

interest in the Company by virtue of its 1966 purchase of

an additional 20,000 shares of Class A stock. Hence, for

reasons previously stated, it is highly unlikely that it would

have paid a control premium for those shares.

Because the Plan did not, in fact, pay a control price

for any of its 50,000 shares of Class A stock, it is not

necessary to further probe the merits of the ‘‘consistency”’

theory.

“ As noted, the methodology used in the 1965 report was an even

‘‘purer’’ minority-interest methodology than that used in reports per-

formed during the class period. Similarly, as pointed out, supra p. 1522,

it was not until 1978 that the language was changed to read ‘“‘consid-

eration ... is given.” Hence, the language in the reports rendered

during the class period, but prior to 1978, was identical to that in the

1965 report. If that language by itself denotes a control valuation, then

plaintiffs’ claims accruing during the first half of the class period must

fail by plaintiffs’ own admission.

ain

78a

iii. The ‘‘control block’’ theory

Plaintiffs’ ‘‘control block” theory holds, simply, that be-

cause the Plan held a majority of the Company’s outstand-

ing shares, its holdings should have been valued on a

control basis. To some extent, it draws support from

Rev.Rul. 59-60, which indicates that the size of the block

of stock to be valued is one consideration to be weighed

in the balance. Jd. Sec. 4.01(g), 1959:1 C.B. 239. Plaintiffs

go further, however, and appear to argue that it is the

factor to consider and that the number of shares that

happened to have been deposited with the Plan is deter-

minative of how those shares should have been valued.

The parties agree, and the relevant tax authorities hold,

that the ‘‘fair market value’’ of property such as the Plan’s

stock is ‘‘the price at which the property would change

hands between a willing buyer and a willing seller, neither

being under any compulsion to buy or to sell and both

having reasonable knowledge of relevant facts.”’ Treas.Reg.

§ 20.2031-1(b), 26 C.F.R. § 20.2031-1(b). This formula was

recited, or at least paraphrased, in the annual appraisals,

beginning with the May 1962 report. While this formula-

tion has long had wide application to all aspects of federal

taxation, U.S. v. Cartwright, 411 U.S. 546, 551, 93 S.Ct.

17138, 1716, 36 L.Ed.2d 528 (1973), it appears within the

portion of the IRS regulations dealing with the valuation

of property for estate tax purposes. That fact must be

borne in mind in looking to tax authority for guidance in

determining how the Company’s stock should have been

valued. It must also be remembered that, while Article

Fifth establishes that tax authority controls questions of

valuation arising thereunder, this is not a tax case. More-

over, the directive to look to tax law is subject to ERISA’s

mandate that employee benefit plans be operated in such

a way as to effectuate their essential purposes. In short,

while tax principles in general, and estate tax principles

in particular, are implicated in a valuation of the Plan’s

stock, this is not a case in which—at the valuation dates

79a

in question—property was to change hands. Therefore, the

teachings of the relevant authorities must be applied with

some degree of circumspection.

Returning to the “willing buyer/willing seller’ formu-

lation, the important question is how to apply that test to

a situation in which individuals, who are members of an

entity holding a majority block of stock, are paid cash

benefits based upon the appraised value of that stock. The

question becomes ‘‘Who was buying and selling what?”—

and it is not an easy question to answer.

Defendants start from the premise that the Plan was

not a holder of stock, much less of control, but rather was

only a mechanism that enabled employees, who could not

otherwise have afforded to buy out the Lawrence family’s

holdings, to acquire beneficial ownership of the Company.

That view is amply supported by the testimony of Mr.

Harris, who helped devise the plan for reorganization. See

59 Tr. 11,318-19, 11,345-46. It is also supported by the

testimony of Mr. Much, who stated that the economic real-

ity underlying the Plan was that its participants were

something less than minority shareholders, who liquidated

their individual interests in the Plan in a series of minority

transactions. See 54 Tr. 10,416-18, 10,475-77.

Plaintiffs argue, however, that regardless of the manner

in which participants settled their Plan accounts, the Plan

itself held an “asset” in the form of a majority block of

U.S. News stock. Since that block entitled the Plan to

exercise co

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