Appendix — Mills v. Electric Auto-Lite Co.
Supreme Court brief1977
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Supreme Court, U. &.
— FILED
1 1977 l
In Tue
Supreme Court of the United
Ocroser Team, 1977
ICHAEL RODAK, JR., CLERK
No. 77 331 (
ELMER E. MILLS,
Petitioner,
vs.
THE ELECTRIC AUTO-LITE COMPANY,
MERGENTHALER LINOTYPE CoO.
and AMERICAN MANUFACTURING Co., NO.,
Respondents..
APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
BARNABAS F. SEARS BARNABAS F. SEARS
THOMAS L. BREJCHA, JR. AARON S. WOLFF
Boodell, Sears, Sugrue. HARRY B. REESE
Giambalvo 4 Crowley, ALEX ELSON
One IBM Plaza - Suite 2650 ARNOLD I. SHURE
Chicago, Illinois 60611 THOMAS L. BREJCHA, JR.
WILLARD J. LASSERS
ALEX ELSON 8
WILLARD J. LASSERS Attorneys for Petitioner
AARON S. WOLFF
Elson, Lassers and Wolff
11 South LaSalle Street
Chicago, Illinois 60603
HARRY B. REESE
357 East Chicago Avenue
Chicago, Illinois 60611
ARNOLD |. SHURE
10 South LaSalle Street
Chicago, Illinois 60603
aa a a Ne I I ELL
Midwest Law Printing Co., Chicago 60601, Financial 63988
—
TABLE OF CONTENTS
APPENDIX A
Opinion of the United States Court of Appeals for
the Seventh Circuit Filed April 7, 1977
APPENDIX B
Order Entered June 3, 1977 by the Court of Ap-
peals Denying Rehearing
APPENDIX C
Opinion of the United States District Court for
the Northern District of Illinois Entered April 11,
1975 : ä *
APPENDIX D
Statutes and Rules Involved
PAGE
—la—
APPENDIX A
In the
Anited States Court of Appeals
For the Seventh Circuit
Nos. 75-1558, 75-1559
ELMER E. MILLS and Louis SUSMAN,
Plaintiffs-A ppellants,
ross-Appellees,
Vv.
THE ELECTRIC AUTO-LITE COMPANY, MERGENTHALER
. COMPANY, and AMERICAN MANUFACTURING
MPANY,
Cross-A ppellants.
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 63 C 1138—James B. Parsons, Judge.
ARGUED APRIL 6, 1976—DECIDED APRIL 7, 1977
Before SWYGERT and CUMMINGS, Circuit Judges, and
JAMESON, Senior District Judge.'
SWYGERT, Circuit Judge. The principal issue in this
appeal is whether the terms of a merger between
ergenthaler Linotype Company (“Mergenthaler”) and
the Electric Auto-Lite Company (“Auto-Lite”) were fair
to Auto-Lite’s minority shareholders. We hold that the
merger terms were fair and reverse the judgment of the
district court.
1 The Honorable William J. Jameson, United States Senior
District Judge for the District of Montana, is sitting by
designation. r
*
This is the second time that this case has come before
us. In order to place this appeal in its proper perspec-
tive, we will briefly review the case's history.
Prior to 1960 Auto-Lite primarily manufactured
automotive parts and equipment. Because of changes in
the automobile industry in the late 1950’s, the continua-
tion of its traditional business was threatened and it
began a program of diversification into other industries.
Nonetheless, in 1963 a substantial percentage of its sales
remained tied to the automobile industry.
Mergenthaler 82 and distributed ting
equipment. It began to purchase Auto-Lite stock in 1957
and by March 1962 acquired 54.2 percent of Auto-
Lite. At that point Auto-Lite became a subsidi of
Mergenthaler and Mergenthaler obtained control of the
Auto-Lite Board of Directors.
In early 1963 Mergenthaler decided to attempt a
merger of itself and Auto-Lite into a new com to be
called “Eltra Corporation.” The Auto-Lite voted
to accept the proposed merger on May 28, 1963 and on
May 29 a request for proxies was sent to shareholders
accompanied by a statement in which the Board en-
dorsed the merger. The holders of approximately thir-
teen percent of the — 2— had to approve the
merger in order to secure two-thirds vote necessary
for ratification. The merger was approved at a
shareholders’ meeting on June 27, 1963 and became
effective on June 28, 1963.
Plaintiffs, who were Auto-Lite shareholders repre-
senting themselves and all other minority Auto-Lite
— filed suit on June 26, 1963 in the distriet
court for the Northern Distriet of Minos, T —
to set aside the merger on the ground
statement was deceptive because it — 1 the 1—
without clearly disclosing that the Auto-Lite Board was
controlled b Mergenthaler. The district court agreed
with plaintiffs’ theory and held that the pray statement
violated section 14(a) of the Securities Exchange Act of
1934. It also held that the plaintiffs had shown a causal
ow
relationship between the proxy statement and the con-
— of the merger. 281 F. Supp. 826 (N. D. III.
0
ve been approved even if the proxy statement had not
been deceptive. 403 F.2d 429, 436 (7th Cir. 1968).
The Supreme Court reversed and reinstated the judg-
ment of the district court. It held that “[w ——
been a finding of materiality, a has made a
sufficient showing of causal relationship between the
violation and the injury for which he seeks redress if, as
here, he proves that proxy solicitation itself, rather
than the particular defect in the solicitation materials,
was an essential link in the accomplishment of the tran-
saction.” 396 U.S. 375, 385 (1970).
The Court went on to consider the relief to which
plaintiffs were entitled. It noted that the merger did not
need to be set aside because of the deception in the
proxy statement, though a court could order such action
if it were warranted by equitable considerations. It then
discussed the possibility of monetary relief and stated:
ng
[Wjhere, as here, the misleadi
solicitation did not relate to terms of the merger,
monetar — relief might be afforded to
rs only if the merger resulted in a reduc-
tion of the earnings or earnings tial of their
holdings. In short, damages be recoverable
only to the extent that they can be shown. If com-
— 1 out of some 1 the ibilities is not in-
tended to exclude others. U.S. at 388-89.
—4a—
Finally, the Court held that the plaintiffs were entitled
to be reimbursed by the corporation for litigation ex-
penses and reasonable attorneys’ fees.
The case then moved back to the district court for a
determination of the riate relief. The court first
held that the merger s not be rescinded. It then
determined that the merger terms were unfair to plain-
tiffs and awarded the class they represent $1,233,918.35,
as well as approximately $740,000 in prejudgment in-
terest. It further held that plaintiffs’ attorneys should be
compensated out of this award.
Both parties now appeal from the district court’s judg-
ment. Plaintiffs contend that the amount of damages
was too low and that their attorneys’ fees should be
assessed against defendants rather than against the
dam awarded. Defendants assert that no d
should have been awarded because the terms of the
merger were fair.
II
The distriet court considered two possible theories of
damages in attempting to follow the Supreme Court's
mandate: (1) to compensate plaintiffs for the reduction
of the earni potential of their holdings in Auto-Lite
as a result of the merger; or (2) an award based on a
determination of the fairness of the terms of the merger
117 It rejected the use of the
first theory under circumstances of this case and
adopted the second. We shall evaluate both whether the
district court was erroneous in its choice of remedies
and whether it correctly applied the second theory.
In order to perform this evaluation, it is first
necessary to describe the merger terms. They called for
the minority Auto-Lite shareholders to receive 1.88
preferred shares of Eltra for each share of Auto-Lite
common that they held and the M thaler
shareholders to receive one common share of Eltra for
—
for the next three years.2 At the time of the merger
Mergenthaler common paid a dividend of $1 per share
and Auto-Lite common paid a dividend of $2.40 per
share. Under the merger terms Eltra common was to
pay a dividend of $1 per share and Eltra preferred a
dividend of $1.40 per share. The dividend received by
the Auto-Lite minority shareholders was therefore in-
creased as a result of the merger by twenty-three cents
for each share of Auto-Lite that they had held, because
1.88 x $1.40 = $2.63.
The preferred Eltra stock was clearly worth more
than Eltra common because it paid a higher dividend
and represented a more secure investment if the new
corporation encountered financial difficulties, yet was
convertible into common stock. During the month
following the merger, the average market value of Eltra
referred was $31.06 per share. Consequently the Auto-
Lite minority shareholders received stock worth 858.39
on the market for each share of Auto-Lite that they had
previously held, because 1.88 x $31.06 = $58.39. The
ave market value of Eltra common for this month
was 25 per share. Since the Mergenthaler share-
holders received one share of Eltra common for each
share of Mergenthaler common, the Auto-Lite
shareholders received stock for each share of Auto-Lite
that they held worth $58.39/$25.25 = 2.31 times as much
on the market as the stock that the Mergenthaler share-
holders received for each share of Mergenthaler that
they held. We therefore hold that the exchange ratio for
the merger was effectively 2.31 to 1.
2 In the third, fourth, and fifth years following the merge q
one share of Eltra preferred was convertible into .955, .910,
and .865 shares respectively of Eltra common.
The district court, after considering the factors we have
just reviewed, found the effective exchange ratio to be 2.25 to
1. Although the court never explained precisely how it arrived
at this figure, the difference of .06 between the two ratios will
not prove to be significant in subsequent calculations.
—6ba—
III
A theory of damages based on the “reduction of the
earnings or earnings potential” of the Auto-Lite minori-
ty shareholders caused by the merger is an attempt to
discern, by looking at the postmerger performance and
activities of the Auto-Lite subsidiary in comparison to
the other components of Eltra, whether the value placed
on the Auto-Lite shares at the time the merger took
place was fair to those shareholders. Plaintiffs contend
that the postmerger record of Eltra demonstrates the
unfairness of the merger in two significant ways: first,
by showing that Eltra appropriated for use in its other
divisions liquid assets held by Auto-Lite prior to the
merger; and second, by showing that Eltra continually
siphoned off Auto-Lite’s postmerger earnings.
Even if plaintiffs’ assertions are true, they cannot
form the basis for an award of damages. Plaintiffs
assume that it would be unfair to the former minority
Auto-Lite shareholders if, after the merger, the Eltra
management “weakened” the Auto-Lite divisions by
shifting liquid assets or earnings to other divisions. This
assumption is incorrect. After the merger the former
Auto-Lite shareholders had become Eltra shareholders
and had no more interest in the Auto-Lite divisions than
any other Eltra shareholder. Therefore, “7 could not
be awe by intra-corporate transfers assets de-
signed to strengthen the corporation as a whole. The in-
terests of the former Auto-Lite shareholders and former
Mergenthaler shareholders coincided after the merger,
and the Eltra management could not possibly take ac-
tions that benefitted “its” shareholders at the expense of
the Auto-Lite shareholders.
Plaintiffs rely heavily on Affiliated Ute Citizens v.
United States, 406 U.S. 128 (1975); Gerstle v. Gamble-
~~: Inc., 478 F.2d 1281 (2d Cir. 1973); and Janigan
5 a 344 F.2d . Oe 4 r 382 U.S.
, to suppo ir theo postmerger
dam . They contend that under * decisions the
defendants must be compelled to disgorge any profits“
realized as a consequence of the deceptive proxy state-
ment and that those profits should be measured by the
—Ta—
sum of assets which moved from Auto-Lite to the other
divisions of Eltra following the merger. However, plain-
tiffs misconceive the holdings of these cases. The cases
all involved situations where defendants had realized
demonstrable profits, at the expense of plaintiffs,
through misrepresentation. Under such circumstances
all three courts permitted a postmerger valuation of
property which plaintiffs had been fraudulently induced
to sell. But whether the exch of Auto-Lite stock for
Eltra stock profited Mergenthaler at the expense of the
Auto-Lite minority shareholders is precisely the issue we
are trying to resolve. Damages must be based on
evidence that the Auto-Lite minority shareholders were
not paid a fair price and the fact that Eltra shifted
assets away from Auto-Lite following the merger is not
satisfactory evidence of unfairness at the time the
merger was consummated.
Plaintiffs ignored the only theory on which relief
based on the postmerger performance of Eltra might be
granted. If the ratio of the postmerger. earnings of the
Auto-Lite subsidiary of Eltra to the postmerger earn-
ings of the Mergenthaler subsidiary were unusually
high given the terms of the merger, it would be evidence
that those terms were unfair to the Auto-Lite minority
shareholders. This is true not because the former Auto-
Lite minority shareholders are entitled to any percen-
tage of the earnings of the Auto-Lite subsidiary r the
merger, but because a high ratio would indicate that in
retrospect the merger terms underestimated Auto-Lite’s
value as an enterprise.
Eltra’s financial records show that for the ten year
— beginning in 1963 and ending in 1972 the Auto-
ite divisions earned $122,501,632 while the
Mergenthaler divisions earned $58,827,595. Before the
merger Auto-Lite had 1,159,265 shares outstanding
while Mergenthaler had 2,698,822 shares outstanding.
Arguably, therefore, Auto-Lite would have had average
yearly earnings per share of $10.57 between 1963 and
1972 if there had been no merger because its ave
yearly earnings would be $122,501,632/10 = $12,250,1
and $12,250,163/1,159,265 = $10.57. By the same reason-
ing, Mergenthaler’s average yearly earnings per share
—
for the same period would be $2.18 because $58,827,-
595/10 = $5,882,759 and $5,882,759/2,698,822 = $2.18.
The ratio of $10.57 to $2.18 is 4.85, indicating that the
actual effective exchange ratio of 2.31 underestimated
the value of Auto-Lite in comparison to Mergenthaler.
An award of ee a based on the comparative post-
merger earnings of Auto-Lite and ergenthaler,
however, depends upon the assumption that the two sub-
sidiaries continued to function independently after the
merger was consummated. If the assets or operations of
the two subsidiaries were commingled, it would be im-
proper to utilize the postmerger performance of either
one as evidence that at the time of the merger Auto-Lite
was a stronger company than the merger terms in-
dicated, because Auto-Lite’s increase in earnings follow-
ing the merger might have been the result of input from
Mergenthaler that it would not have received without
the merger.
The district court held that there was substantial com-
mingling of the assets and operations of Auto-Lite and
Mergenthaler during the period following the merger. It
found that the plaintiffs’ statistics failed to measure the
change in the quality of management that flowed to the
Auto-Lite divisions of Eltra as a consequence of the
merger or the economies of scale that the merger
5 uced. It also found the statistics to be misleading
ecause the postmerger Eltra statements un-
derestimated the expenses of the Auto-Lite divisions,
making the earnings of those divisions appear higher
than they really were. These findings are suppo by
substantial evidence and we affirm them.
Given the fact that significant commingling occurred,
the postmerger earnings of Auto-Lite and Mergenthaler
cannot supply a reliable guide to whether the merger
terms were fair to the Auto-Lite minority shareholders.
Even in the absence of commingling, postmerger
evidence can only create a rebuttable inference of un-
fairness because it is impossible to know with certainty
whether the increase in earnings of one partner to a
merger should have been predictable at the time the
merger took place. In this case the ratio of the earnings
per share of the two companies for the four 3. prior
to and including 1963 were all at or below effective
—
exchange ratio of 2.31 to 1.“ Plaintiffs have not shown
that the management of Mergenthaler should have
known in 1963 that Auto-Lite’s earnings were going to
increase faster than Mergenthaler’s during the next
decade. The more plausible inference is that, insofar as
Auto-Lite’s business became more productive because of
factors unrelated to commingling, they were un-
foreseeable at the time the merger was consummated.
Accordingly, we hold that the district court did not abuse
its discretion in refusing to award damages based on
postmerger data. N
IV
A
The district court based its award of damages on an
assessment of the fairness of the merger terms at the
time the merger took place. It evaluated five criteria in
making this assessment: (1) the market value of each
corporation’s stock; (2) each corporation’s earnings; (3)
the book value of each corporation’s assets; (4) the
dividends that each corporation paid on its stock; and (5)
other “qualitative factors” indicating the strength of
each corporation. The court found market value to be an
unreliable criterion and discounted the importance of
dividends. It found that the comparative earnings and
book values of each corporation were significant and
demonstrated that the merger terms were unfair to the
Auto-Lite minority. The court did not indicate what
significance it was attributing to “qualitative factors.”
Based on these findings the court held that the merger
would have been fair if the Auto-Lite minority
shareholders had received the equivalent of 2.35 shares
of Eltra common for each share of Auto-Lite that they
held and Mergenthaler shareholders had received one
share of Eltra common for each share of Mergenthaler
‘ Plaintiffs assert that the ratio of Auto-Lite’s earnings per
share to Mergenthaler’s earnings per share was 2.2 in 1960,
1.0 in 1961, 1.5 in 1962, and 2.33 in 1963. Defendants assert
that the ratio was 1.0 in 1961, 1.27 in 1962, 1.79 in the fiscal
year 1963, and 1.90 in the calendar year 1963. They do not
provide figures for 1960.
—10a—
that they held. It also found that the effective exchange
ratio for the actual merger, where the Auto-Lite minori-
ty shareholders received 1.88 shares of Eltra preferred
for each share of Auto-Lite common that they held, was
2.25 to 1 in terms of Eltra common. It then awarded
damages of $1,233,918.35 to plaintiffs based on the
differential of .10 between the effective exchange ratio
of 2.25 to 1 and the fair exchange ratio of 2.35 to 1.®
Set note 3 supra.
The district court used the following method of reaching
the figure of $1,233,918.35:
(1) Since each share of Auto-Lite was exchanged for the
equivalent of 2.25 shares of Eltra common while each share of
ergenthaler was exchanged for one share of Eltra common,
the holder of one share of Auto-Lite received 67.38 percent of
the interest in Eltra distributed for one share of Auto-Lite
1 one share of Mergenthaler, because 2.25/ 2.25 + 1) =
(2) If a fair quchange ratio of 2.35 had been employed, the
holder of one share of Auto-Lite would have received 70.15
percent of the interest in Eltra distributed for one share of
site| fee one share of Mergenthaler, because 2.35/(2.35
+ =. >
(3) Since 70.15-67.38 = 2.77, the Auto-Lite minority
shareholders were unfairly deprived of 2.77 percent of the
combined value of an Auto-Lite share and a Mergenthaler
share for each share of Auto-Lite that they held.
(4) In July 1963, the month following the merger, the
average market value of the Eltra stock that was distributed
for one share of Mergenthaler was $25.25 and the average
market value of the Eltra stock that was distributed for one
share of Auto-Lite was $58.39. Accordingly, the combined
value of one share of Mergenthaler and one share of Auto-Lite
was $25.25 + $58.39 = $83.64.
(5) 2.77 percent of $83.64 is $2.317. Since there were 532,
500 minority shares of Auto-Lite, the total damages were
532,500 x $2.317 = $1,233,918.35.
The district court’s method of calculation was
mathematically unsound. First, there was an arithmetic error
in step one because 2.25/(2.25 + 1) is .6923 rather than .6738.
The more fundamental error, however, lies in the court's
—- in * 3, 4, and 5 that the 2.77 percent figure could
multiplied by the combined market value of one share of
Auto-Lite and one share of Mergenthaler te calculate the per
(Footnote continued on following page)
—lla—
B
The district court discounted the significance of the
comparative market values of Auto-Lite and
Mergenthaler stock during the five year period
preceding the merger because it found that purchases of
Auto-Lite stock by Auto-Lite itself and by Mergenthaler,
and of Mergenthaler stock by the American Manufac-
turing Company,“ made market value an unreliable in-
dicator during that period of the true worth of the two
continued
share dollar loss which the Auto-Lite shareholders had suf-
fered. It is circular reasoning to use the market value
enerated by the actual merger. If a different exchange ratio
ad been employed, the market value of Eltra stock un-
doubtedly would have been different. Moreover, the
mathematical significance of the 2.77 percent figure is
questionable. *
What the court should have done, if its differential of .1
were correct, was = aw the differential by the
number of minority Auto-Lite shares to calculate the number
of additional Eltra common shares that should have been dis-
tributed to plaintiffs to make the merger terms fair.
Auto-Lite purchased 579,883 of its own shares in 1960-61,
31,500 shares in 1962, and 4,900 shares in 1963 before May
24. — — purchased 212,600 shares of Auto-Lite
between February 1957 and the end of 1958, and an ad-
ditional 167,350 shares in 1959. It owned 408,950 shares by
May 24, 1960. After Auto-Lite purchased some of its own
shares in August 1961, Mergenthaler’s holdings constituted
oN em thirty-four percent of Auto-Lite. In March
1962 Mergenthaler purchased an additional 219,065 shares of
Auto-Lite, increasing its holdings to approximately fifty-four
percent of Auto-Lite’s stock.
American had 43,100 shares of Mergenthaler prior to 1958.
By December 1960 it had increased its holdings to 190,834
shares, which became 763,336 shares after a 4 for 1 stock split
in March 1961. It purchased an additional 108,073 shares in
1962 and 12,700 shares in 1963 before May 24. its holdings in
Mergenthaler at the time of the merger constituted a
proximately thirty-three percent of Mergenthaler’s stock.
American also pure an additional 2,800 shares of
Mergenthaler between May 27 and June 14, 1963. However
these purchases are irrelevant because the final comparison of
the market value of Auto-Lite and Mergenthaler stock used in
setting the merger terms was made on May 24, 1963.
3
parties to the merger. Defendants challenge the district
court’s assessment while plaintiffs contend that it was
correct, at least for the period after 1960. We agree with
defendants.
The district court’s holding depends upon the validity
of two premises: first, that the inter- and intra-
company purchases substantially affected the market
value of either corporation’s stock immediately prior to
the merger and second, that any effect which these
purchases did have caused the price of Auto-Lite stock
to fall relative to the price of Mergenthaler stock.“ We
find neither premise to be supported by the evidence.
The great portion of the inter- and intra-company
purchases took place before the six month period im-
mediately preceding the merger, and the effect of those
purchases during that period was — There was
no manipulation of stock prices immediately before the
merger by any of the companies involved in an effort to
secure more favorable merger terms. Moreover, the
price ratio of the two stocks was the same during 1961
and 1962, when there were substantial purchases by
Auto-Lite, Mergenthaler, and American, and the first
Since defendants contend that market value should be used
to measure the fairness of the merger terms, we need not be
concerned with whether the purchases in question adversely
— the price of Mergenthaler stock relative to Auto-Lite
stock.
" See note 7 supra. Auto-Lite’s purchases of 4,900 shares of
its own stock in 1963 up to May 24 constituted 8.2 percent of
the 59.900 shares of Auto-Lite traded on the New York Stock
Exchange during that period, and .42 percent of the 1,160,565
shares of Auto-Lite outstanding. American’s purchases of 12,-
700 shares of Mergenthaler stock in 1963 up to May 24 con-
stituted 6.3 percent of the 201 shares of Mergenthaler
traded on the New York Stock Exchange during that period
and .47 percent of the 2,698,822 shares of Mergenthaler out-
standing. Mergenthaler acquired no Auto-Lite stock between
March 1962 and the time of the merger.
—13a—
half of 1963, when there were not.! This is a strong in-
dication that the price of both corporations’. stock was
responding to factors other than these transactions.
Even if we assume that the purchases had an effect, it
is difficult to see how it could be detrimental to the
— of Auto-Lite relative to the price of Mergenthaler.
ince all of the transactions at issue were purchases,
they would have tended to raise rather than lower the
price of the stock that was traded. But mere was a
eater volume of Auto-Lite stock purchases by Auto-
ite itself and by Mergenthaler than of Mergenthaler
purchases by American. Second, during the eighteen
months prior to the merger the ratio of the inter- and
„ purchases of Auto-Lite to the total
amount of Auto-Lite stock traded was greater than the
ratio of American's purchases of Mergenthaler to the
total amount of Mergenthaler stock traded. “2 th age a
greater proportion of the Auto-Lite purchases took place
The ratio of the average price of Auto-Lite stock to the
average price of Mergenthaler stock was 2.0 in 1961, 2.1 in
1962, and 2.1 in 1963 up to May 24, the last date on which the
prices were compared for purposes of the merger.
The best evidence of this is the simple statistic that at the
time of the merger Mergenthaler held approximately fifty-
four percent of Auto-Lite’s stock while American held a
roximately thirty-three percent of Mergenthaler’s stock.
ergenthaler purchased all of its Auto-Lite shares after
February 1957 while American purchased all but 2,000 of its
Mergenthaler shares after June 1956. Therefore,
1 acquired its interest in Auto-Lite during rough-
ly the same period that American acquired its interest in
Mergenthaler, indicating that during this period the inter-
and intra-company purchases of Auto-Lite stock constituted a
greater percentage of the total amount of trading in that stock
than did the inter-company purchases of Mergenthaler stock.
2 In 1962 Mergenthaler acquired 219,065 shares of Auto-
Lite through a tender offer to Auto-Lite shareholders and
Auto-Lite itself purchased 31,500 shares out of the 171,300
shares traded on the New York Stock Exchange. In 1963 up
to May 24 Auto-Lite purchased 4,900 of its shares out of the
59,900 shares traded on the New York Stock Exchange.
Therefore, the inter- and intra-company transactions in Auto-
Lite represented 56.7 percent of the total transactions in Auto-
Lite during this period.
(Footnote continued on following page)
—l4a—
in the period between 1961 and 1963, when they were
likely to have a more substantial effect on price than
earlier purchases.'? The combination of these three fac-
tors indicates that the inter- and _ intra-company
purchases pushed the price of Auto-Lite stock upward
relative to Mergenthaler stock rather than producing
the opposite effect.
We therefore hold that the inter- and intra-company
transactions did not unfairly distort the relative market
prices of Auto-Lite and Mergenthaler for purposes of
determining the fairness of the merger. We must now
decide what period of time should be used in calculating
a price ratio between each corporation’s stock. Since
prices from the period imm Y preceding the
merger are the most likely to refleet the actual value of
each corporation at the time the merger was consum-
mated, we begin with a presumption that a short period
is appropriate. Accordingly, we hold that the average
market value for approximately the six month period
preceding the merger should be used unless there are
special factors indicating that this period is unreliable.
Six months is long enough so that very short term price
fluctuations will not play an unfairly important role and
1 continued
In 1962 American purchased 103,073 shares of
Mergenthaler out of the 522,900 shares traded on the New
York Stock Exchange. In 1963 American purchased 12,700
shares of Mergenthaler out of 201,200 shares traded on the
New York Stock Exchange. Therefore, American purchased
16.0 1 of the Mergenthaler stock sold during this
period.
Auto-Lite purchased 270,355 of its own shares in 1958-60
and 345,793 of its own shares in 1961-63. Mergenthaler
purchased 282,550 shares of Auto-Lite in 1958-60 and 219,065
additional shares in 1961-63. Thus, the distribution of inter-
and intra-company transactions in Auto-Lite between these
two periods was roughiy equal.
American 1— 147,734 shares of Mergenthaler in
1958-60 which became 590,936 shares after a 4 for 1 stock
split. It purchased 139,766 shares of Mergenthaler in 1961-63.
hus, the great proportion of the inter-company trading in
Mergenthaler was prior to 1961.
—1l5a—
short enough so that the calculated ratio does not reflect
business conditions that have substantially changed as of
the time of the merger.
In this case the ratio between the average price of
Auto-Lite and the average price of Mergenthaler during
1963 prior to the formulation of the merger terms in
late May was 2.1. Our confidence that this figure ac-
curately reflects the relative worth of the two cor-
porations is bolstered by the fact that the ratio for 1962
was also 2.1 and was 2.0 for 1961. The similarity of
these numbers is evidence that the ratio immediately
preceding the merger was not the result of a short term
omy caused either by the merger itself or by other
actors.
Plaintiffs argue, however, that market prices were an
unreliable indicator of the true worth of Auto-Lite and
—— between 1961 and 1963 but did provide a
valid measure of each corporation’s value between 1958
and 1960. We find these ments to be unpersuasive.
Plaintiffs first assert that Mergenthaler used its control
over Auto-Lite in 1961-63 to compel it to pay unusually
high dividends, with the effect of „ the price of
Auto-Lite stock by draining Auto-Lite capital and
raising the price of Mergenthaler stock by giving
Mergenthaler funds with which to 1 higher dividends.
This reasoning is inconsistent. If the ent of higher
dividends by Mergenthaler ine the value of
Mergenthaler stock, it would follow that the payment of
high dividends by Auto-Lite increased the attractiveness
of Auto-Lite stock on the market. There is no reason to
believe that a reduction in the Auto-Lite dividend would
have resulted in raising the price of Auto-Lite stock. It
is more likely that such a dividend reduction would have
decreased the value of each corporation’s stock. Accor-
dingly, we hold that Auto-Lite’s high dividends between
1961 and 1963 did not unfairly distort the relative
market values of Auto-Lite and Mergenthaler.
Plaintiffs also urge that market prices between 1958
and 1960 provided a more accurate picture of each cor-
poration’s actual value than prices during the later
period because a substantial change in the nature of
—16a—
Auto-Lite’s business — 1960 temporarily de-
pressed the price of its stock. We find this to be an -
ment for using the later prices rather than the earlier
ones. The fact that Auto-Lite’s traditional business was
eroding by 1961 renders unreliable market values based
on that business. In 1961 the market to reflect the
uncertainty in Auto-Lite’s future which most observers
perceived. That uncertainty remained at the time of the
merger and should properly have been a factor in deter-
mining the merger terms.“
C
After finding that market value provided an inac-
curate measure of the true worth of Auto-Lite and
Mergenthaler, the distriet court determined whether the
merger terms were fair on the basis of comparative
earnings and book value. Given our conclusion that
market prices were an accurate gauge of actual value,
we must decide whether the other eriteria on which the
distriet court relied should properly be considered in
evaluating whether the merger was fair.
We hold that when market value is available and
reliable, other factors should not be utilized in deter-
mining whether the terms of a merger were fair.
Although criteria such as earnings and value are
an indication of actual worth, are only secondary
indicia. In a market economy, market value will always
be the primary of an enterprises worth. In this
case thousands of shares of Auto-Lite and Mergenthaler
were traded on the New Vork Stock Exchange duri
the first part of 1963 by outside investors'® who
access to the full gamut of financial information about
both corporations, including earnings and book value. If
we were to independently assess criteria other than
market value in our effort to determine whether the
merger terms were fair, we would be substituting our
Another reason why we cannot accept plaintiffs’ assertion
that the 1958-60 prices were reliable while the 1961-63 prices
were not is that there were more inter- and intra-company
transactions during the earlier period than during the latter.
See note 9 supra.
—17a—
abstract judgment for that of the market. Aside from
the prob that would arise in deciding how much
weight to give each criterion, such a method would be
economically unsound.
D.
We turn now to a determination of whether the
merger terms were fair, based on the comparative
market price of each corporation’s stock during the first
part of 1963. The simplest method of resolving this issue
would be to compare the price ratio, in this case 2.1, to
the effective exc ratio, which we have previously
established as 2.31. Under this framework the merger
would be fair since the effective ex ratio gave the
Auto-Lite minority shareholders more Eltra stock than
they were enti to in the judgment of the market.
This method of calculation, however, assumes that the
new corporation that results from a merger is worth ex-
actly as much as the sum of what its two ——
LN. L r. As Professors
rudney and Chirelstein have cogently pointed out, this
assumption is usually false because a merger produces a
synergistic effect resulting in the merged corporation
being worth more than sum of the two old cor-
porations. Brudney & Chirelstein, Fair Shares in Cor-
porate Mergers and Takeovers, 88 Harv. L. Rev. 297,
308-09 (1974). They demonstrate that fairness requires
that minority shareholders be compensated not only for
the market value of their shares in the old corporation
but also for the share of the synergism generated by the
merger that is proportionate to interest that those
shares represented in the combined premerger value of
the two old corporations. Jd. at 313-25.
We adopt the approach formulated by Professors
Brudney and Chirelstein and will attempt to apply it to
this case. At the time of the merger there were 532,550
minority shares of Auto-Lite and 2,698,822 shares of
Mergenthaler outstanding. During the first part of 1963
the av market price of Auto-Lite was $52.25 per
share and the average market price of Mergenthaler
*
was 324.875 A a share. Thus, the premerger value of the
minority holdi in Auto-Lite was 532,550 x $52.25 =
827.825.737 the prem r value of Mergenthaler
was 2,698,822 x 824.875 = $67,133,197. The combined
premerger value of the two corporations was 527,825.
737 + $67,133,197 = $94,958,934.'*
In the month following the merger, Eltra common
stock had an average market value of $25.25 per share.
Eltra preferred stock had an ave market value of
$58.39 per 1.88 shares, the amount of stock which Auto-
Lite shareholders had received for each share of Auto-
Lite that they had held. The erger value of Eltra
was therefore (2,698,822 x .25) + (532,550 x $58.39) =
$68,145,255 + $31,095,594 = $99,240,849. The difference
between the combined premerger value of Auto-Lite and
Mergenthaler and the postmerger value of Eltra, which
was $99,240,849 - $94,958,934 = $4,281,915, can be at-
tributed to the synergism generated by the merger.
According to the fairness formula devised by
Professors Brudney and Chirelstein, the minority
shareholders of Auto-Lite should have received Eltra
stock worth at least as much as the premerger market
value of their holdi in Auto-Lite and as of the
synergism produced by the merger proportionate to the
1 of the combined premerger value of Auto-
ite and Mergenthaler which their hoidings
represented. The premerger value of the Auto-Lite
minority shares was $27,825,737, which represented 29.3
percent of $94,958,934, the combined premerger value of
Auto-Lite and Mergenthaler. Thus, to satisfy the con-
straints of fairness, the Auto-Lite minority shareholders
should have received stock worth at least $27,825,737 +
(.293 x $4,281,915) = $29,080,338. This would be
equivalent to 1,151,696.5 shares of Eltra common at
$25.25 per share. Had this many shares been distributed
Although Mergenthaler owned more than half of the Auto-
Lite stock, this holding should not be independently counted
as part of the combined value of the two corporations because
it was already reflected in the value of Mergenthaler stock.
—
to the Auto-Lite minority shareholders, the exchange
ratio would have been 1,151, 696.5 / 532,550 = 2.16 to 1.“
The Auto-Lite minority shareholders actually received
preferred stock worth 39 on the market for each
share of Auto-Lite that they had held. As a group, their
Eltra holdings were worth 532,550 x $58.39 = $31,095.,-
594. This was $31,095,594 - $29,080,338 = $2,015,256
more than fairness uired. This result can be ex-
pressed in terms of Eltra common shares. Since the
effective py ratio of the merger was 2.31 to 1, the
roperty given the Auto-Lite minority was worth 2.31 -
ple = 18 shares of Eltra common per share of Auto-
Lite more than what a fair amount would have been.
We therefore hold that the terms of the merger were
fair and that plaintiffs should recover no damages. A
numerical example may help to show the justice of this
result. In early 1963, an Auto-Lite shareholder with one
hundred shares and a Mergenthaler shareholder with
210 shares each owned stock worth approximately
After the merger, the former Auto-Lite
shareholder had 188 shares of Eltra preferred worth ap-
proximately $5839 while the former Mergenthaler
shareholder had 210 shares of Eltra common worth ap-
proximately $5302. Both individuals benefitted from the
merger, but the former Auto-Lite minority shareholder
benefitted more.
V
The distriet court held that plaintiffs should recover
their attorneys’ fees and other litigation expenses out of
the damages which the court awarded them. Since we
We note that the price of Eltra common depended in
on the exch ratio actuall . For example, if we
assume that Eltra stock was distributed at an effective ex-
change ratio of 2.16 to 1, there would have been the
equivalent of 2,698,822 + (2.16 x 532,550) = 3,849,130 Eltra
common shares outstanding. Since the total r value
of Eltra was $99,240,849, rice of one share of Eltra com-
mon would rise to $99,340,849/3,849 130 = $25.78. However,
the figures in the text give a good approximation of the
number of Eltra common shares or their equivalent that the
Auto-Lite minority shareholders should have received.
—
—20a—
have found that plaintiffs were treated fairly in the
merger and are not entitled to damages, we must face
the question of whether and how much they nonetheless
should be compensated by Eltra for their fees and ex-
penses.
When this case was before the Supreme Court, the
Court held “that petitioners, who have established a
violation of the securities laws by their corporation and
its officials, should be reimbursed by the corporation or
its survivor for the costs of — 4 the violation.”
396 U.S. at 389 (footnote omitted). The Court later
stated that “[wJhether petitioners are successful in show-
ing a need for significant relief may be a factor in deter-
mining whether a further award should later be made.
But regardless of the relief granted, private stock-
holders’ actions of this sort ‘involve corporate
therapeutics,’ and furnish a benefit to all shareholders
by providing an important means of enforcement of the
proxy statute.” Jd. at 396 (footnotes omitted).
We interpret this ae to mean that plaintiffs
should recover from Eltra fees and expenses related
to the establishment of a violation of the federal
securities laws. This would encompass the litigation
through the decision in the Supreme Court. The Court
has indicated that the award is not contingent upon the
existence of a fund created from any damages eventual-
ly awarded the plaintiffs."
The Court left open the question of whether plaintiffs
should also be compensated for fees and expenses in-
curred in a trial and su uent appeals on the issue of
— implying that whether or not plaintiffs ob-
tained damages should be a factor in resolving that
question. We hold that plaintiffs are not entitled to be
compensated for fees and expenses they have incurred
since the Supreme Court’s decision in this case. In
Alyeska Pipeline Co. v. Wilderness ety, 421 U.S. 240
(1975), the Supreme Court held that, nt statutory
In its most recent decision dealing with the issue of fee-
shifting, the Court by implication approved its earlier reason-
ing in Mills. See Al Pipeline Co. v. Wilderness Society,
421 U.S. 240, 257-58 (1975).
—2la—
authority, the only exceptions to the general American
rule that a litigant must pay his own fees and expenses
are in situations where the litigant confers a common
benefit on the class that he represents or where a losing
party acts in bad faith. Since the Securities Exchange
Act provides no authorization for fee-shifting in this.
type of case and the bad faith exception is inapposite
here, plaintiffs cannot recover fees and expenses unless
they demonstrate that their work on the issue of
dam produced a common benefit for the former
Auto-Lite minority shareholders. Plaintiffs cannot meet
this burden. They have conferred no benefit upon the
class — represent beyond the corporate therapeutics”
produ by their showing that the proxy statute was
violated, and they must pay their own fees and expenses
for their unsuccessful attempt to obtain damages for
that violation.
The judgment of the district court is reversed and the
cause is remanded for further proceedings consistent
with this opinion. :
A true Copy:
Teste:
Clerk of the United States Court of
Appeals for the Seventh Circuit
—22a—
APPENDIX B
United States Court of Appeals
For the Seventh Circuit
— * & 1927.
Before
Hon. LUTHER M. SWYGERT. Circuir Judge
Hon. WALTER J. CUMMINGS, Circuit Judge
Hon. ‘WILLIAM J. JAMESON, Senior District Judge“
ELMER E. MILLS and LOUIS SUSMAN, ;
Plaintiffs-Appellants,
Cross-Appellees,
Nos. 75-1558 and 75-1559 ys.
THE ELECTRIC AUTO-LITE COMPANY,
MERGENTHALER LINOTYPE CO. and ANERICAN
MANUFACTURING CO., INC.,
Defendants-Appellees,
Cross-Appellants.
Appeals from the United
States District Court for
. the Northern District of
Illinois, Eastern Division
No. 63 C 1138
James B. Parsons, Judge
On consideration of the petition for rehearing and suggestion
for rehearing in banc filed in the above-entitled cause by counsel
for the plaintiffs, no judge in active service has requested a vote
thereon, and all of the judges on che original panel have voted to
deny a rehearing. Accordingly,
IT IS ORDERED that che aforesaid petition for rehearing be,
and the same is hereby, DENIED.
F The Honorable William J. Jameson, United States Senior District
Judge for che District of Montana, is sitting by designation.
Note: Circuit Judges Robert A. Sprecher and Philip W. Tone did
not participate in any consideration of the petition.
—23a—
APPENDIX C
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
No. 63 C 1138
ELMER E. MILLS, et al.,
Plaintiffs,
U.
THE ELECTRIC AUTO-LITE COMPANY, et al.,
Defendants.
MEMORANDUM OPINION AND ORDER
This case arises from the merger of the defendant,
The Electric Auto-Lite Company (hereafter “Auto-Lite”),
with the defendant, Mergenthaler Linotype Company
(hereafter “Mergenthaler”), which merger resulted in
the formation of the Eltra Corporation (hereafter
“Eltra”). This case involves the takeover of a large but
uncertain corporation by a corporation one-third its size,
but stable and certain. Auto-Lite’s net sales during the
five calendar years before the merger were, in millions
of dollars, 184, 220, 221, 167 and. 180; and its net income
during those years was, in millions of dollars, 3, 8, 6, 3
and 3. On the other hand, the net sales of Mergenthaler
during the four fiscal years prior to the merger were, in
millions of dollars, 41, 39, 47 and 54; and its net income
during those years was, in millions of dollars, 8, 3, 4 and
5.
Plaintiffs filed this lawsuit on June 26, 1963, the day
before a scheduled special meeting of Auto-Lite
shareholders at which the merger was to be considered.
In their yo complaint, plaintiffs complained, inter
alia, that a tice and Pra Statement, dated May 29,
1963, was sent by Auto-Lite to its shareholders which
was inadequate and illegal in that it failed to disclose
the interrelationship between Auto-Lite and the
defendants, Mergenthaler and the American Manufac-
turing Company (hereafter “American”). Plaintiffs
asked that the merger agreement be declared void.
Each of the plaintiffs claimed to own shares of Auto-Lite
common stock and to be acting on their own behalf and
on behalf of all other Auto-Lite shareholders similarly
situated. They also claimed to be acting derivatively on
behalf of Auto-Lite itself.
Shortly after the filing of this lawsuit, several
important events occurred. On June 27, 1963, a vote in
favor of the Auto-Lite and Mergenthaler merger was
had at the Auto-Lite shareholders’ meeting; on June 28,
1963, that merger became effective; and on February 4,
1964, the plaintiffs filed an amended and supplemental
complaint which took into account these latest events.
The amended and supplemental complaint contained
three counts. Count I charged common law fraud, and
specifically alleged that prior to 1963 American and
Mergenthaler devised a plan fraudulently to acquire all
of Auto-Lite’s assets and business at a grossly low price.
Count II charged federal securities violations in that
Mergenthaler caused Auto-Lite to send through the
mails an intentionally misleading proxy statement.
Count III charged the defendants with violations of the
laws of Ohio in that the actions of Auto-Lite, an Ohio
corporation, were ultra vires. All material allegations in
each of the three counts were denied by the defendants
in an answer filed on October 15, 1964.
On November 15, 1965, I granted plaintiffs’ motion for
partial summary judgment on Count II, holding that the
merger proxy statement did not describe sufficiently the
interrelationship between the Auto-Lite Board of
Directors and Mergenthaler and American. On April 15
and June 8, 1966, I conducted hearings on the issue of
causal connection between the improper proxy
statement and the merger of Auto-Lite into Mergen-
thaler; thereafter, plaintiffs moved for a further order of
—25a—
summary judgment on Count II, contending that the
necessary causal connection had been shown. On
September 26, 1967, I filed a memorandum opinion and
order finding that the plaintiffs had established the
defendants’ liability on that Count and directing the
parties to go forward on the issue of appropriate relief.
This opinion is reported in Mills v. Electric Auto-Lite,
281 F.Supp. 826 (N.D. Ill. 1967). I concluded that the
“proxy material, as a matter of law and fact, was a
direct and ultimate cause of the merger of Auto-Lite
and Mergenthaler.” Two days later, I further stated that
the merger, though effectuated by conduct in violation
of § 14 of the Securities Exchange Act of 1934, was not
automatically void. On October 4, 1967, I entered an
order amending my earlier order to include a finding
pursuant to 28 U.S.C. § 1292(b) that the granting of
partial summary judgment on Count II in favor of the
plaintiffs involved a controlling question of law.
Defendants and plaintiffs appealed.
The Seventh Circuit Court of * — on November
25, 1968, reversed in part this Court's judgment of
September 26, 1967 in Mills v. Electrie Autolite
Company, 403 F.2d 429 (7th Cir. 1968) and remanded
the case. However, this decision was reviewed by the
Supreme Court of the United States which vacated the
judgment of the Court of Appeals for the Seventh
Circuit and returned the case to proceed on with the
matter of appropriate relief and related issues. Mills v.
Electric Auto-Lite, 396 U.S. 375 (1970). The Supreme
Court also found, on an issue that had not been raised
before me, that the plaintiffs should be reimbursed by
either Mergenthaler or Eltra for the costs of
establishing the Section 14(a) violation; such costs
include attorneys’ fees and the reasonable expenses of
litigation other than statutory costs incurred by the
plaintiffs up to and including the date of the Supreme
Court’s decision. Mills, supra, at 389-397.
Since the 1970 Supreme Court decision, I have ruled
on numerous matters, on some of which appeal has been
sought, and I have conducted a trial in conformity with
—26a—
the directions of the high court. The trial commenced on
November 12, 1973 and concluded on February 19, 1974.
Since then, each of the parties has submitted extensive
post-trial briefs and reply briefs and each has pursued
at least one new motion.
When the case was back before me, I proceeded to
hear the issue of the form of relief, and on January 10,
1972, entered findings of fact and conclusions of law
finding that rescission of the merger would not be
an appropriate remedy. My opinion appears in CCH
Fed. Sec. L. Rep. 1 93,354 (N. D. III. 1972). I then went
into the class issue under Count II and on May 22, 1972,
by memorandum opinion, established the class of
potential plaintiffs to be those persons who had been
Auto-Lite shareholders at the time of the merger and
who have continuously retained stock interests in the
Eltra Corporation arising from their stock in Auto-Lite
since the merger. Specifically excluded from the class
were persons who purchased shares in Eltra subsequent
to the merger which purchases were independent of the
stock transfers called for in the terms of the merger.
Subsequently, notice forms were approved and mailed to
potential class members. Plaintiffs sought to overturn
various rulings on the class issue by mandamus, but
these attempts failed. The plaintiffs have renewed
motions seeking rescission of the merger and
redefinition of the class, and these motions remain for
final determination at this time.
The central issue at trial and in the roe briefs
has been the nature and amount of relief, if any, for the
defendants’ violation of § 14(a), 15 U.S.C. § 78n(a). The
violation was, as originally I had stated, that the proxy
statement “. . . contained material omissions and partial
disclosures which would mislead the shareholders of
Auto-Lite.” Mills, supra, 281 F.Supp. at 827. In
approving this Court’s finding of liability based upon the
violation of § 14(a), the Supreme Court recognized that
the question of relief was left open. It did, however,
single out certain possible forms that relief might take,
including equitable relief, such as the setting aside of
—227a—
the merger, monetary relief based upon a reduction of
earnings or earnings potential, and monetary relief
predicated on a determination of the fairness of the
merger terms at the time of approval. Mills, supra, at
386 and 389.
At trial, the plantiffs offered evidence on the two
alternative measures of monetary relief specifically
noted by the Supreme Court. Plaintiffs’ expert, Dr.
George H. Sorter of the University of Chicago, testified
that from his examination of the defendants’ own
financial documents, he traced a direct injury of over
$69,000,000 to all the former Auto-Lite minority
shareholders (i.e., those who owned 46-47% of the Auto-
Lite common stock at the time of the merger) based
upon a reduction of their earnings or earnings potential
as a result of the merger. Plaintiffs’ expert, Dr. Erwin
E. Nemmers of Northwestern University, testified that
the merger terms were unfair as of the time of their
approval and that the Auto-Lite minority shareholders
suffered actual damages of over $52,000,000.
The defendants called the following witnesses on their
behalf:
Gurdon W. Wattles, Chairman of Eltra; J. A. Keller,
President of Eltra; Glenn E. Taylor, Eltra’s Executive
Vice President, Finance; Lawrence L. Garber, Vice
Chairman of Eltra’s Board and President of Prestolite at
the time of the merger; James B. Barry, Eltra’s Director
of Planning; John F. Rittenhouse, President of C & D
Battery Division of Eltra; Leo J. Flury, Manager of the
Prestolite Division’s Accounting Department; and James
J. Petlow, and attorney in Eltra’s Legal Department.
Defendants also called the following expert witnesses:
George V. Carracio, a Certified Public Accountant with
Arthur Young & Robert Emmett, Executive Vice
President of Standard Research Consultants; Professor
James H. Lorie of the University of Chicago; and
Michael J. Quinn, a Certified Public Accountant with
Price Waterhouse & Co. In rebuttal plaintiffs presented
the testimony of an attorney, Robert J. Peters.
—28a—
At the trial’s conclusion, defendants maintained that
the Auto-Lite minority shareholders were treated fairly
in the merger exchange and accordingly are entitled to
no damages—notwithstanding the §14(a) violation.
Plaintiffs renewed their motions for rescission, and
asked for the assessment of punitive damages. Besides
recognizing possible forms of relief, the Supreme Court
in Mills, supra at 369, also implicitly indicated that
— may be unavailable if actual injury could not be
shown.
I shall address myself to not only the issue of
damages, but as well to all other issues raised by the
amended complaint and the various pending motions.
In analyzing the factual data with respect to relief,
three matters require consideration. These are (1) the
degree of control and/or ownership exercised by some of
the parties to this dispute over others, (2) the relative
position of the merging parties with respect to their
industries as a whole and with respect to their past
histories, and (3) the terms of the merger. My recitation
of the facts reflects those uncontested facts which I find
competent and material, and those I determine when
cones the concept of “greater weight of the
evidence.”
(1) Control
The evidence shows that the defendant American
began to acquire shares of stock in Mergenthaler in
June, 1954, and had acquired 903,102 shares of
Mergenthaler for an amount approaching $12 million by
the time of the merger. The table below illustrates the
cumulative number of Mergenthaler shares held by
American during various times prior to the merger and
the cumulative amount paid for such shares.
—29a—
Month Cumulative Shares Cumulative Amount
June 1954 2,000 67,735.51
June 1956 43,100 2,010,587.97
June 1958 61,903 2.666,659.63
September 1958 65.103 2.788.637. 01
June 1959 90.620 3.927.016.27
December 1960 190,834 8,694,362.66
March 1961 (4 for 1 (190,834 x 4)
stock split) 763,336 8,694 ,362.66
January 1962 774,970 8,821,853.23
May 1962 852,570 11,021,989.81
September 1962 865,729 11,121,637.43
January 1963 891,102 11,685,362.55
March 1963 893,102 11,735,050.40
April 22, 1963 903,102 11,984,067.49
No purchases of Mergenthaler stock were made by
American after April 22, 1963. On April 22, 1963, Mr.
Gurdon W. Wattles personally owned 560 shares of
Mergenthaler. At that time he was also in control of
American by his ownership of approximately 34% of
American voting stock.
In February, 1957 Mergenthaler began acquiring
common stock of Auto-Lite with an initial purchase of
20,000 shares. By the end of that year, Mergentl.aler
owned 126,400 shares of Auto-Lite common stock. By the
end of 1958, Mergenthaler owned 212,600 shares of
Auto-Lite common stock. By the. end of 1959,
Mergenthaler owned 379,950 shares of Auto-Lite
common stock. And by May 24, 1960, Mergenthaler
owned 408,950 shares of Auto-Lite common stock. These
purchases of Auto-Lite stock by Mergenthaler were all
for cash in the open market, and were chiefly made over
the New York Stock Exchange. At the end of 1960 and
at a cost of over $16 million, Mergenthaler’s 408,950
shares constituted ~ yw rry 27% of the outstanding
stock of Auto-Lite. By August of 1961, Mergenthaler
effectively controlled the Auto-Lite Board of Directors.
1 *
From May 24, 1960 until March of 1962, Mergen-
thaler made no purchases of Auto-Lite shares. However,
by July of 1961, Auto-Lite had purchased back 476,619
shares of its own common stock from its shareholders.
Thus, by August, 1961, Mergenthaler’s 408,950 shares
constituted approximately 34% of the outstanding Auto-
Lite stock. In March, 1962, Mergenthaler acquired an
additional 219,065 shares of Auto-Lite by means of a
tender offer to Auto-Lite shareholders under which
Mergenthaler common stock and debentures were
exchanged for Auto-Lite stock. As a result of these
March 1962 acquisitions, Mergenthaler achieved
ownership of between 53 and 54% of outstanding Auto-
Lite common stock. Mergenthaler acquired no further
Auto-Lite shares after March, 1962.
(2) Pre-Merger History
From its inception until the time of the merger, The
Electric Auto-Lite Company was engaged in the
manufacture of automotive products, including
batteries, spark plugs, and basic electrical parts. Auto-
Lite sold these products to automobile and truck
companies for use as original equipment in the
manufacture of new vehicles. It also sold these products
as replacement parts to automobile manufacturers and
to independent distributors.
Until the death of Auto-Lite’s president, Royce
Martin, in 1954, Auto-Lite had been chiefly identified
with Chrysler, its principal customer under a long-
standing relationship. Auto-Lite supplied Chrysler with
automotive products which were manufactured on a
long-run, high-volume assembly line basis, with an
assured margin of profit. Until 1957, Chrysler remained
the heart of Auto-Lite’s business—its sales to Chrysler in
that year were $134 million or 51% of its total sales.
In 1957, Chrysler informed Auto-Lite that it intended
to manufacture certain basic electrical parts, i.e.,
starters, generators, distributors and regulators, which
Auto-Lite was then manufacturing for it. Chrysler
—3la—
expressed no intention as to certain other parts, i.e.,
batteries and spark plugs, which Auto-Lite was also
manufacturing. Immediately after this announcement,
Auto-Lite attempted to sell at least some of its
manufacturing facilities to Chrysler. Chrysler declined,
but that while it was preparing its own plant,
Auto-Lite could continue to supply electrical to it.
At the expiration of the agreement, Chrysler ceased
1 these parts from Auto-Lite. By 1962, Auto-
ite’s sales to Chrysler declined from their 1957 high of
$134 million to $21.6 million.
The decision of Chrysler to manufacture its own
electrical parts reflected a change which was taking
place throughout the automotive industry: Ford and
Chrysler were “integrating” their businesses by
— automotive parts which traditionally had
n supplied by Auto-Lite and other companies.
General Motors had already integrated the production of
its principal automotive parts. :
This process of integration had an adverse competitive
effect on Auto-Lite’s business, in both the “original
equipment” and the “replacement” markets. When Auto-
Lite lost original equipment business to a manufacturer
such as Chrysler, it also lost follow-up or replacement
business for these parts. Car manufacturers also began
to compete with Auto-Lite by manufacturing and
distributing replacement parts for makes of cars other
than their own.
As part of the industry-wide integration process, Ford
decided in 1961 to develop its own facilities for the
manufacture and distribution of batteries and spark
plugs. Ford had not been producing these parts, and the
decision had a detrimental impact on Auto-Lite’s spark
plug business with Chrysler. Champion — lug
Company, the then largest spark plug manufacturer in
the United States, had been the exclusive supplier of
spark plugs to Ford. General Motors was 2
its own A. C.“ brand spark plugs. With the impending
loss of the Ford business, Champion made a drive to
become (and actually did become) the supplier of spark
plugs to Chrysler.
—32a—
Having lost Chrysler’s electrical parts business, and
faced with the impending loss of Chrysler’s spark plug
business to Champion, Auto-Lite sold to Ford, in April
of 1961, for $28 million, the “Auto-Lite” trade name, its
entire distribution organization for “Auto-Lite”
replacement parts and its Fostoria spark plug and
Owosso battery plants. This sale divested Auto-Lite of a
significant percent of its assets and its sources of net
sales. As part of the agreement, Ford agreed to
purchase from Auto-Lite until April, 1964 a substantial
volume of electrical and wire products, batteries, and
spark plugs. The volume of these purchases during that
three year period was approximately $16 million per
year.
In the Spring of 1963, Ford informed Auto-Lite that it
would not renew its purchase agreement at the end of
the three-year term. A portion of the wire, electrical
parts and battery business was obtained on a bid-basis
in 1964, but Ford stopped purchasing spark plugs from
Auto-Lite after April, 1964.
The evidence shows that by early 1963, the following
circumstances existed at Auto-Lite with respect to its
business in the automotive industry:
(1) The Chrysler business had decreased from 51% of
Auto-Lite’s total sales in 1957 to 12% in 1962, a drop of
$112 million in volume.
(2) After the sale in 1961 of its trade name to Ford,
Auto-Lite commenced promoting the “Prestolite” trade
name, which at the time of the sale to Ford had
accounted for annual replacement sales of approximate-
ly $1-% million. This increased to approximately $2-%
million by 1963.
(3) In addition to the loss of Chrysler’s spark plug
business in Champion, Auto-Lite lost the Chrysler
battery business in 1961.
(4) As a result of Ford going into the bumper
— Auto-Lite discontinued manufacturing this
product.
—33a—
(5) American Motors had begun purchasing its
starting motors from Ford rather than Auto-Lite.
(6) Studebaker Com „ which had been a
substantial customer Auto-Lite, announced in
December of 1962 that it would discontinue the
produetion of automobiles by September, 1963.
(7) Auto-Lite’s spark plug sales totaled approximately
$21 million in 1959; these sales, including sales to Ford
under the three-year contract, had dropped to
approximately $5 million by 1962.
(8) Sales to Ford, with the benefit of the contract
which was to expire in April, 1964, had increased in
1962 by $5 million over the previous year.
(9) Auto-Lite’s return on sales for its automotive
divisions for 1962 was only 2.5% (wire), 1.5% (electrical),
3.0% (castings) and 3.7% (battery).
(10) Auto-Lite sales and net profits in the first and
second quarters of 1963 increased over those of the
previous year, with the benefit of the best automotive
year in history.
(11) Auto-Lite management forecasted that sales and
earnings would be lower for the third and fourth
quarters of 1963.
(12) Automotive original equipment business for the
electrical products division of Prestolite had declined
from $58 million in 1960 to 818 million in 1962.
As a partial response to the changing nature of its
automotive business, Auto-Lite entered into both a
program of reorientation and diversification. Auto-Lite
had depended on the automotive industry which was
historically cyclical in nature. Thus, in reacting to the
loss of Chrysler’s business, Auto-Lite attempted to
restructure its electrical products division and develop
a new customer base. It moved its manufacturing
facilities for certain electrical products from Toledo to
Bay City, Michigan and the facilities for ignition parts
to a new plant in Decatur, Alabama. These moves
—
permitted Auto-Lite to begin produeing its basie
electrical parts on a “short-run” basis, rather than the
high volume runs which had been utilized for Chrysler.
Auto-Lite also attempted to develop industrial markets
for users such as Caterpillar Tractor Company.
Following the sale of the Auto-Lite trade name to
Ford in 1961, Auto-Lite concentrated major efforts on
producing “private label” products for automotive
merchandisers, containing the users’ brand names, such
as Goodyear and Atlas. It also began to promote its
“Prestolite” brand name.
In addition to these and other efforts to reorient its
automotive operations, Auto-Lite explored new business
areas which are not connected with the automotive
industry. By 1959, Auto-Lite had made its first
acquisition in the program of diversification. It
purchased the C & D Battery Company, a manufacturer
of industrial batteries. In 1960 Auto-Lite purchased the
Marshalltown Manufacturing Company, a producer of
industrial gauges and pressure instruments; the
Equilease Corporation, a New York-based leasing
company; and the Hiller Aircraft Company, a
manufacturer of light helicopters for commercial and
military use. Between its acquisition of Hiller in
November 1960 and the merger in 1963, Auto-Lite made
no other major acquisitions.
The plaintiffs contend that these facts, together with
all else of record, demonstrate that there was an
extensive program of diversification by Auto-Lite and a
successful changeover in Auto-Lite’s operations prior to
the merger. They contend that Auto-Lite was not solely
an automobile parts manufacturer either before or at
the time of the merger. The record demonstrates, they
contend, a bright financial outlook for Auto-Lite at the
time of the merger.
The Mergenthaler Linotype Company, at the time of
the merger, was a world leader in the production and
distribution of linotype machines and parts and of other
*
pe equipment. It — developed a line of highly-
enginee produets and held a favorable position
within the industry. Mergenthaler sold its products
through a world-wide network of approximately 57
distributors, with offices in 111 countries and
territories.
More than 50% of Mergenthaler’s business was
devoted to the sale of replacement parts and matrices.
This substantial replacement market tended to protect it
from adverse business cycles. Mergenthaler manu-
factured basically 1 * products which were of
singular design and covered by patents.
Commencing in 1954, American Manufacturing
Company, a manufacturer of cordage products, acquired
an interest in Mergenthaler and representation on its
board of directors. American’s President, Gurdon W.
a came chairman of the Mergenthaler board in
J. A. Keller, moved up from a consultant to
Mergenthaler to become its vice president in 1955 and
president in 1958. Under his direction, Mergenthaler’s
domestic manufacturing operations were modernized
and expanded.
As early as 1958, Mergenthaler commenced produc-
tion of the Linofilm photocomposition system, which
combined photography and electronics in producing a
made-up page of print on photographic paper, and in
1962 it entered into an agreement with CBS
Laboratories for the development of ultra-high-speed
composing and print-out devices utilizing cathode ray
tubes, capable of being operated directly from
computers and computer magnetic tapes. New
technology and Mergenthaler’s own research also
permitted it to develop the most advanced phototypeset-
ting equipment in the world. A $2,000,000 phototypeset-
ting machine, the US. by Mergenthaler, was con-
tracted for by the Government Printing Office
and the Air Force in the latter part of 1963.
Mergenthaler’s research and development activities have
—36a—
been carried on at an expense of more than $2,000,000
per year. In 1962 and 1963 Mergenthaler sustained
start-up costs in developing its Elektron, and certain
non-reoccurring costs in its production of small office
equipment. But these costs burdens were overcome in a
short time. The evidence shows that the Mergenthaler
business before the merger and subsequently as a part
of Eltra was and continued to be a stable and
substantial enterprise.
(3) Terms of the Merger
As of May 9, 1963, Mergenthaler had authorized the
issuance of 4,000,000 shares of capital stock with a par
value of $0.25 per share, of which 2,702,465 were issued
and outstanding, 105,142 were held in Mergenthaler’s
treasury and 175,513 were reserved for issuance. As of
the same date, Auto-Lite had authorized 3,000,000
common shares with a par value of $5.00 per share, of
which 1,160,565 were issued and outstandi and
131,304 were held in Auto-Lite’s treasury. According to
the merger agreement, the amount of the authorized
capital stock of the Consolidated Corporation, i.e., the
Eltra Corporation, was to total $37,820, nsisting of
5,000,000 Common Shares of par value of $0.25 per
share and 1,060,000 shares of Preferred Stock of par
value of $34.50 per share. The rights and powers of the
preferred shareholders in Eltra were quite different
from those of the Eltra common shareholders, and the
preferred shareholders of Eltra could convert their stock
oad Eltra common stock at any time prior to July 1,
On May 29, 1963, the proposed merger agreement was
sent to all Auto-Lite shareholders. On that same day,
Mergenthaler’s shareholdings in Auto-Lite were
approximately 54% of the total shares outstanding; the
total number of outstanding Auto-Lite shares was
1,160,565, 3,965 of which were owned by various officers
7 directors of American, Mergenthaler and Auto-
ite.
—37a—
This was the picture of the three corporations at the
time of a merger which has been found to have been
brought about in violation of the law, and for which
plaintiffs must be given some relief.
In fashioning a remedy, I must initially consider the
now well known congressional purpose behind § 14(a).
“The purpose * * * is to prevent management or others
from obtaining authorization for corporate action by
My finding that the p statement in question failed to
meet the requirements of Rule 1a) was affirmed by the
Court of Appeals and was ized by the Supreme Court.
Mills, supra, 281 F.Supp. at 827; 403 F.2d at 435; 396 U.S. at
384. The important aspect of this finding was opinion that
the omissions from the proxy statement were terial” for
Rule 14a-9. This opinion would have remained, and even now
remains, unchanged regardless of which standard of material-
ity was, or is, employed. Gerstle v. Gamble- Inc., 478
F.2d 1281, 1301-1302 (2nd Cir. 1973); Small v. Pearl
Brewing Co., 489 F.2d 579, 604 (5th Cir. 1974); Sonesta Int!
Hotels * v. Wellington Associates, 483 F. 2d 247, 251, n. 3
(2nd Cir. 1973). Note, The Reliance Requirement in Private
Aer SEC Rule 10b-5,” 88 Harv. L. Rev. 584, 602, n.
My finding that there was a causal connection between the
omissions from the proxy statement and the merase was also
affirmed by the Supreme Court. This finding remains
unchanged. Even if change were possible at this date there
would be no basis for it, since there has been no rebuttal of
the so-called “Mills „ of causation.” Note, “Causa-
tion and Liability in Private Actions for Proxy Violations,” 80
Yale L. J. 107, 135-138 (1970) and Chris-Craft Industries, Inc.
v. Piper Aircraft Corp., 480 F.2d 341, 375 (2nd Cir. 1973).
Such ac does appear to be precluded by the explicit
language in the Supreme Court’s decision, to wit:
“Where there has been a finding of materiality, a
shareholder has made a sufficient showing of ca
relationship between the violation and the injury for
which he seeks redress if, as here, he proves that the
proxy solicitation itself, rather than the particular defect
in the solicitation materials, was an essential link in the
2 lishment of the transaction.” Mills, supra, 396 U.S.
a 8
. .. the Court of Appeals should have affirmed the
ial summary judgment on the issue of liability.”
Mills, supra, 396 US. at 389.
See also Chris-Craft, supra, at 399-400.
—38a—
means of deceptive or inadequate disclosure in proxy
solicitation.” Congress believed that fair corporate
suffrage was an important right that should attach to all
securities traded on a 1 exchange. Borak, supra,
377 U.S. at 431, citing H. R. Rep. No. 1383, 73d Cong.,
2nd Sess., 13. In enacting § 14(a), Congress clearly
intended to control the conditions under which proxies
could be solicited so that certain abuses which had
frustrated the free exercise of stockholders’ voting rights
in the past would be eliminated or at least reduced. The
purpose is principally a public purpose, and incidentally
and by necessity a private one. The principle beneficiary
of the remedy is the public, and the remedy which the
courts must fashion for the private person must be the
one which, considering all the circumstances, best serves
the public good. Accordingly, although the court’s
remedial powers in violations of § 14(a) are quite broad,
limits on such powers do exist and have been
recognized. For example, only actual damages or
damages which can be shown may be recoverable. 15
U.S.C. § 78bb(a); Mills, supra, 396 U.S. at 389. These
limits have been loosely read, however, so that relief
may be available for a § 14(a) violation even if there is
no link established between the misleading proxy
solicitation and the outcome of the subsequent vote or
even if the possible victims of the misleading proxy
solicitation did not actually rely on that solicitation.
Mills, supra, 396 U.S. at 385, n. 7; Swanson v. American
Consumer Industries, Inc., 475 F.2d 516, 523-524 (7th
Cir. 1973) (J. Sprecher concurring); Herbst v.
International Telephone and Telegraph Corp., 495 F.2d
1308, 1316 (2nd Cir. 1974).
In this case plaintiffs have, ever since filing the
complaint, asked for rescission of the merger, and even
now continue to ask for it. Setting aside the merger
should be granted only when from all the circumstances,
including a consideration of hardships that may attend
upon the defendants and their shareholders, as well as
the length of time that has elapsed, it would be
necessary as a public deterent as well as equitably
necessary to the plaintiffs to break up the new entity
—39a—
and return its parts to their original identities. Mills,
supra, 396 U.S. at 388. Plaintiffs still contend, even
after trial, that equity favors rescission. I ruled that
such a rescission is inappropriate in this case in orders
dated September 28, 1967 and January 10, 1972. (See:
CCH Fed. Sec. L. Rep. 1 93,354 (N. D. III. 1972) ). As
was further stated in Mills, supra, 403 F.2d at 436, “
. . . We do not consider that the policy of the 34 Act
requires the court to unscramble a corporate transaction
merely because a violation occurred
After carefully reconsidering the issue of rescission in
light of all the evidence adduced at trial, I still am of
the opinion that the merger should not be set aside.
Contrary to the plaintiffs’ latest assertions, this opinion
does not give the defendants or others “a naked power of
eminent domain.” It recognizes, among other things: (1)
the professed deterrent effects of the liberal damage
theory which has developed under § 28a) of the 1934
Securities Exchange Act; (2) the effect of the necessary
delay in reaching the question of relief in this case due
to the difficult questions of law and fact with which the
parties and the Courts were presented (though without
such delay rescission may have presented a less
repulsive aspect, Mills, 403 F.2d at 435; (3) the best
interests of all the former minority shareholders of
Auto-Lite as a whole, Mills, supra, 396 U.S. at 388; (4)
the traditional inability of judicially managed restoration
to effectively restore without causing residual injury to
innocent third parties; and (5) the ability of the Court to
fashion an “equitable result” for the plaintiffs without
unduly “punishing” the defendants, Occidental Life Ins.
Co. of N. Carolina v. Pat Ryan & Associates, Inc., 496
F.2d 1255, 1267 (4th Cir. 1974), U.S. Appl. Pndg., No.
74-329 and Baumel v. Rosen, 412 F.2d 571, 576 (4th Cir.
1969).
—40a—
What remains, therefore, and to what the masses of
evidence of the trial were directed is what theory of
measuring damages is best suited in this case for
determining an equitable monetary award to the former
Auto-Lite shareholders. Should it be based upon com-
pensating for “... a reduction of the earnings or
earnings potential . . of their holdings in Auto-Lite as
a result of the merger, (Mills, supra, 396 U.S. at 389); or
should it be based upon general equitable values “ ;
predicated on a determination of the fairness of the
ae of the merger at the time it was approved”
Since evidence had to be presented by either or both
of the parties directed toward both theories, it was
impossible to rule on certain objections to evidence in-
terposed throughout the trial, without letting all evi-
dence in subject to the objections. My decision here will
serve to sustain objections to evidence given in support
of the theory I ultimately reject. (See: Gerstle, supra, 478
F. ad at 1304-1307; Janigan v. Taylor, 344 F. 2d 781, 786-
787 (Ist Cir. 1975), cert. den. 382 U.S. 879 (1965);
Affiliated Ute Citizens v. U. S., 406 U.S. 128, 155 (1972);
Rochez Bros., Inc. v. Rhoades, 353 F. Supp. 795, 804
(W.D. Pa. 1973), vac. and rem. or F.2d 4 02, 417 (3rd
Cir. 1974) ).
While reviewing the testimony on the matter of
monetary relief, an accounting of prior case law on the
subject is in order.
The Fairness Theory
Since the Supreme Court’s decision in this case,
numerous courts have remedied violations of various
provisions of the 1934 Securities Exchange Act by
looking to the fairness of the terms of the transactions
which were tainted by such violations. For violations of
§ 10b and Rule 10b-5, see Affiliated Ute Citizens, supra,
406 U.S. at 155; Rochez Bros., supra, 353 F.Supp. at 804-
807 and 491 F.2d at 411-413; Norte & Company v.
Huffines, 304 F.Supp. 1096, 1108-1111 (S.D. N.Y. 1968);
—4la—
Dasho v. Susquehanna Corp., 461 F.2d 11, 27 (7th Cir.
1972), cert. den. 92 S.Ct. 2496, 2498. For violations of
§ 14, see Norte, supra, 304 F.Supp. at 1108-1111; Dasho,
supra, 461 F.2d at 31. A transaction involving the
purchase or sale of a security is generally deemed to be
unfair when the fair value of what is received by the
defrauded party exceeds the fair value of what would
have been received in absence of violation(s). Affiliated
Ute Citizens, supra, 406 U.S. at 155. Thus, where a
merger is tainted with a federal securities laws
violation, that merger will definitely be unfair if the
exchange ratio employed either undervalued the stock
shares yielded by the defrauded party and/or overvalued
the stock shares yielded by the defrauding party, Dasho,
supra, 461 F.2d at 27, Wolf v. Frank, 477 F. 2d 467, 472
and 476 (5th Cir. 1973) and Norte, supra, 304 F.Supp. at
1108, and where such deflated and/or inflated values
would not have arisen in the absence of fraud.
Primarily because there is no causation problem in
this case since the Auto-Lite minority shareholders’
votes were crucial to the merger, I find that the net
proceeds which the Auto-Lite minority would have
received in the stock exchange in the absence of a
violation would have to have been based upon at least
fair and accurate valuations of Auto-Lite and Mer
thaler stock at the time of the merger. Yet see B
and Chirelstein, “Fair Shares in Corporate Mergers and
Takeovers,” 88 Harv. L. Rev. 297, 313 and 322 (1974).
There is no evidence that a more favorable exchange
ratio would not have been available from Mergenthaler
had there been full disclosure; and there is no reason to
believe that the Auto-Lite minority would not at least
have demanded an exchange ratio based upon accurate
stock valuations at the time of the merger. Dasho, supra,
461 F.2d at 31; Swansun, supra, 475 F. ad at 519. Such a
finding obviates the need of confronting a rather
difficult legal problem involving the appropriateness of
a damage award where a misleading proxy statement is
issued by persons with more control over the actual
stockholders’ vote than that which existed here. Mills,
**
supra, 396 U.S. at 385, n. 7; Dasho, su 461 F.2d at
31; Swanson, supra, 475 F.2d at 521 (J. Cummings on
damages) and at 529 (J. Sprecher on damages).
In attempting accurately to determine the fair value
of the Auto-Lite and Mergenthaler stock at the time of
the merger, I have had the benefit of a wealth of
documentary evidence and the advice of a score of
expert and non-expert witnesses. From these sources, I
must recreate the setting at the time of the merger. I
also have had the benefit of evidence on Eltra’s market
valuation shortly after the merger. Brudney and Chirel-
stein, supra, at 313-325.
While the parties differed as to the reasonable
inferences and the factual basis of some of the
documentary evidence, both sides agree that this Court
must consider the following quantitative factors in
assessing the terms of the merger: (1) market value; (2)
earnings; (3) book value; and (4) dividends. These factors
have long been considered relevant by courts faced with
the task of gauging the value of a business. See, e.g., de
Haas v. Empi ee 834, 837-838
(D.Col. 1969), affd in part and rev'd in part, 435 F.2d
1223 (10th Cir. 1971); v. Inland S. S. Co., 82 F.2d
351, 356 (7th Cir. 1936) and 125 F. 2d 369, 374.375 (7th
Cir. 1942) cert. den. 316 U.S. 675 (1942); MacCrone v.
American Capital Corp., 51 F.Supp. 462, 466-469
(D.Del. 1943); Hottenstein v. York Ice Machinery Corp.,
136 F.2d 944, 952 (8rd Cir. 1953); Bailey v. Tubize, 56
F.Supp. 418, 423-425 (D.Del. 1944). And in considering
these factors, it has been customary to review at least a
five-year period for the purposes of comparison. It
should be noted that the comparison in this case is not
quite exact since Auto-Lite’s yearly reports covered
calendar years while Mergenthaler’s annual reports
covered fiscal years (ending September 30th).
Besides these quantitative factors, both sides agree
that certain qualitative factors also must be considered
in assessing the merger terms’ fairness. Professor
Nemmers testified that such factors include the indus-
tries and life-cycle stages of the companies involved; the
management quality or capacity of each company; the
synergism which may arise from the merger; and the
financial leverage of each company. Within or besides
these factors, the merger terms in this case must be
considered in light of the future prospects or “earnings
potential” of each company as they may have been
reliably projected at the time of the merger. This
appears to be a particularly important consideration
because of the changing nature of Auto-Lite around the
time of the merger. Also see Bailey, supra, 56 F.Supp.
at 424-425.
The Earnings or Earnings Potential Theory
Not all courts have looked to “fairness” as a basis for
remedying Exchange Act violations; some have looked
at the post-fraud activities of the violators in their
search for an award of just relief. The Supreme Court in
Mills directly recognized the propriety of this basis, 396
U.S. at 389, after having implicitly recognized it six
years earlier, Borak, 377 U.S. at 433-435. And since the
Mills decision, the Supreme Court has reaffirmed this
recognition, Affiliated Ute, 406 U.S. at 155, wherein
Janigan is cited with approval. Most courts granting
relief based upon the post-transaction activities of
securities laws violators have not distinguished between
injured securities sellers and injured securities buyers.
See Janigan, 344 F.2d at 786 and Herzfeld v. Laventhol,
et al., 378 F.Supp. 112, 129 n. 30 (S.D. N.Y. 1974). Yet
also see Zeller v. Bogue Electrie Mfg. Corp., 476 F.2d
795, 801-802 (2nd Cir. 1973), cert. den. 414 U.S. 908,
Occidental, 496 F.2d at 1264-1265; Ohio Drill & Tool Co.
v. Johnson, 498 F.2d 186, 191 (6th Cir. 1974); and
Gerstle, 478 F.2d at 1305. Such a distinction, if valid,
would not appear to apply to the case at bar since the
minority Auto-Lite shareholders were sellers as well as
buyers in the merger transaction. Dasho, 461 F.2d at 18
and 27; S. E. C. v. National Securities, Inc., 393 U.S. 453,
467-468 (1969).
—44a—
Defendants have argued that the admission of nearly
all post-merger evidence was improper. As noted
earlier, historically when courts have relied upon the
fairness of merger terms, the earnings potential of each
company viewed as of the time of the merger has been
considered. Thus, the phrase “earnings or earnings
potential” in Mills must refer to something other than
the loss of any earnings potential that existed at the
time of the merger. This phrase has been interpreted to
refer to the foreseeable and unforeseeable or windfall
profits accruing to the injuring party as a direct result
of the securities law violation. Rochez Bros., 491 F.2d at
412; Gerstle, 478 F. ad at 1304 and 1306; Gould v.
American Hawaiian Steamship Co., 362 F.Supp. 771,
776-778 (D.Del. 1973); Zeller, 476 F.2d at 803. And this
interpretation does not conflict with any later Supreme
Court’s statements on damages; for example, in A/ffil-
tated Ute, the Supreme Court stated that recovery under
§ 28 of the 1934 Act could be based upon the profit
received by the injuring party wherein such profit
exceeded the loss measured according to the fairness of
the transaction at the time it was made. It thus appears
that some plaintiffs may recover for the loss of their
potential for earnings which may be determined to have
existed at the time of a tainted securities transaction—
even though such potential never materialized. It
further appears that where the earnings potential at the
time of the tainted transaction later materialized, some
plaintiffs may recover the greater value between the
fair worth of the earnings potential at the time of the
transaction and the actual profit received by the
injuring party as a direct result of the transaction—even
though the potential for such profit was totally unfore-
seeable at the time of the merger. This variety in
approach to the basis of recovery under § 28 can be and
has been justified, in part, by pointing out the need for
effective private enforcement of the federal securities
~ Borak, 377 U.S at 483-435; Mills, 396 U.S. at
— — ́6— —
At first glance, it might seem as though many cases
have rejected this interpretation of the phrase earnings
or earnings potential“ and have thereby rejected it as a
basis of relief. However, upon closer examination, it
appears that most of these cases have not so rejected this
interpretation but simply have not faced it. Dasho, 461
F.2d at 25, n. 33 and 27-28; Wolf, 477 F.2d at 478;
Swanson, 475 F.2d at 519-521. Relief based upon post-
transaction events rather than upon events existing at
the time of the transaction is seldom requested and is
infrequently granted when requested, in part, because:
(1) proof of post-merger events is often more unavailable
to plaintiffs than is proof relating to events preceding
the securities violation(s); (2 “commingling of the
assets and operations” involved in a securities transac-
tion often “makes it impossible” to later establish the
direct injury as measured by post-transaction events;
and (3) often, it is hard to determine the degree to which
the injuring party’s own efforts caused certain post-
transaction events or, otherwise stated, the degree to
which post-transaction events occurred independent of
the injuring party’s actions. Thus, relief based upon
post-transaction events may be granted, when proven,
even if the securities transaction was itself fair at the
time of consummation. Affiliated Ute, 406 U.S. at 155;
Mills, 396 U.S. at 389; Rochez Bros., 491 F. ad at 411 and
416-417.
se eee
In considering the fairness of the merger terms, the
quantitative factors of market value, earnings, book
value and dividends should be examined as of the time of
the merger, as should certain qualitative factors. In
considering the loss to the plaintiffs of earnings or
earnings potential and thus whether relief can be based
on the post-merger activities of Eltra, the post-merger
position of the former Auto-Lite shareholders should be
compared with the post-merger position of the former
Mergenthaler shareholders. Consider first the factors
2 See Mills, 396 U.S. at 389. On (3), see Janigan, 344 F. ad at
787; Rochez Bros., su 353 F.Supp. at 304-804 and 491 F.2d
at 412 and 417; and Gerstle, 478 F.2d at 1306.
important to measuring the fairness of the merger
terms, then the factors important to measuring injury
due to loss of earnings or earnings potential,
Fairness of Merger Terms in This Case
Market Value.
Plaintiffs, in part, contend that the ratios of the prices
of Mergenthaler and Auto-Lite stock prior to the merger
cannot support the ratio of 1.88 to 1 established by the
merger, and rest their contention chiefly on the testimony
of Dr. Nemmers. Nemmers stated that the prices of
Auto-Lite and Mergenthaler stock for the years 1961,
1962 and 1963 were not achieved in a free and reliable
market; he found the market to be an unreliable
indicator of value in those years because of the various
transactions by Auto-Lite, Mergenthaler, American and
Gurdon Wattles involving Auto-Lite and Mergenthaler
stock. While apparently agreeing that the market price
of a stock can reliably indicate only the value of the
stock when the stock is freely and actively traded,
defendants contend that the market values for 1961-1963
are more reliable than those for 1958-1960.
While I am of the opinion that the so-called “inter-
— an transactions between 1961 and 1963 caused the
stock prices in those years to be unreliable indicators, I
also consider the prices for 1958-1960 unreliable.
Between 1958 and 1960, there occurred numerous and
similar intercompany transactions. But regardless of the
reliability of these prices, the nature of the Auto-Lite
business at the time of the merger in 1963 was quite
different from its nature prior to 1960. For this reason,
it would not be responsible to consider the pre-1960
prices of Auto-Lite stock in calculating an exchange
ratio for the merger. Further, the evidence shows only
minor trading by American in Mergenthaler stock after
the early part of 1962, and none by Mergenthaler in
Auto-Lite stock after the early part of 1962. There is no
competent evidence of any major attempt by or oppor-
tunity for either American or Mergenthaler to influence
—47a—
the prices at or near the time of the merger, and the 2.1
to 1 ratio for 1962 and early 1963 may thus indicate
relative market appraisal. Finally, the record does
indicate that the market prices of both Auto-Lite and
Mergenthaler increased generally and performed better
than the average stock prices during the time when the
final merger proposal was being drawn up and circu-
lated. It is impossible to delineate from the evidence the
reasons for this. From the foregoing, it seems to me that
a comparison of the market value of the stock of the two
companies at the time of the merger cannot play an
ee role in determining the fairness of the merger
plan.
Earnings
In determining Mergenthaler’s net income for 1962, I
have considered Mergenthaler’s deferred credit of
$789,000. The deferred credit reflected part of Mergen-
thaler’s excess equity in Auto-Lite after it had gained
over 50% control of Auto-Lite. The parties disagree
about the propriety of recognizing deferred credit, at
least when assessing the amount of income to be used in
determining merger terms. However, the weight of the
evidence makes considering deferred credit necessary.
Even were the deferred credit not considered in
computing the earnings per share of Mergenthaler for
1962 and early 1963, the difference in the resulting
ratios of Auto-Lite to Mergenthaler would be minor.
After weighing all the evidence with respect to the
pre-merger earnings of Auto-Lite and Mergenthaler,
two important observations can be made. First, the
earnings ratio as of the merger date parallels the
merger’s actual exchange ratio (later discussed). Sec-
ond, the trend in the various earnings ratios calculated
for some periods immediately prior to the merger favors
Auto-Lite. Such a trend may reflect both that Auto-Lite
experienced some success in its program of reorienting
and diversifying its operations and that Mergenthaler
had experienced a downward turn in the profitability of
its traditional operations.
—48a—
_ It appears to me that to the extent to which the earn-
ings picture of Auto-Lite and Mergenthaler can be
measured on a common scale, earnings are an important
factor in determining fairness of the merger terms, and
that the actual earnings ratio between the two com-
panies was at the time of the merger more favorable to
Auto-Lite than the merger plan would have to have
taken into account. *
Book Value.
While both parties agree that it is customary to
examine book value when determining fairness of
merger terms, the defendants contend that book value
considerations would be an insignificant factor in this
merger. It is often true that a company’s book value is
simply an indication of the historical cost of its assets
and that it bears relation neither to the value of the
company’s assets nor to the ability of the company’s
assets to earn. Dr. Nemmers properly suggests that book
values can be quite deceiving. The possibility of some of
this deception exists in this case since there has been no
basis for a reliable comparison between the physical
assets and liabilities of Auto-Lite and those of Mergen-
thaler. Nothing in evidence effectively assists us in
determining which company’s assets and liabilities were
stated accurately or were more overstated or less
understated, and by how much.
While recognizing this possibility of “deceit,” Dr.
Nemmers placed great weight on book value in
assessing the terms of the Eltra merger. The evidence
shows that Auto-Lite’s book value on March 31, 1963
was $88.01 a share while Mergenthaler’s was $32.16 on
March 17, 1963. Based upon these values, it would
require about 2.74 shares of Mergenthaler to equal in
book value one share of Auto-Lite in March, 1963. This
ratio is not in dispute, although its relevance to the
question of fairness is. Dr. Nemmer’s higher ratio of 3.4
to 1 is questionable in light of my concern for deferred
credit. ile arguing book value is an insignificant
factor in this case, defendants concede the importance of
—49a—
considering book value compared with other economic
data. For example, they examined book value in its
relation to the market value and earnings of Auto-Lite
and Mergenthaler at the time of the merger.
Given the nature of Auto-Lite’s substantial liquid asset
position at the time of the merger, I am of the opinion
that book value should play a significant role in
assessing the fairness of the Eltra merger.
Dividends.
Plaintiffs, relying chiefly on the testimony of Dr.
Nemmers, contend that the evidence as to the pre-
merger dividend policies of Auto-Lite and Mergenthaler
show that the terms of the merger were unfair and that
an exchange ratio of 3 to 1 would have been reasonable.
This contention is weak since it was made without
reference to or analysis of other factors such as market
value and earnings per share. For example, if a share of
Auto-Lite sold throughout 1962 for $24 and if a share of
Mergenthaler sold throughout 1962 for only $4, then an
investor of $24 in Mergenthaler at the * of 1962
would have received 86 in dividends at the end of 1962
while an investor of $24 in Auto-Lite at the start of 1962
would have received only $2.40 in dividends at the end
of the year. In the example, the Mergenthaler investor
would have received over twice as much in dividends as
the Auto-Lite investor even though the money invest-
ment would have been the same and the actual dividend
ratio would have been in favor of Auto-Lite.
The evidence shows that in 1962 the price of a share of
Auto-Lite stock averaged $55 while the price of a share
of Mergenthaler stock averaged $25.80. Thus in most of
1962, one could have owned two shares of Mergenthaler
for every share of Auto-Lite yet one would have received
$2.00 in dividends from Mergenthaler compared with
$2.40 in dividends from Auto-Lite. In most of 1958 and
1959 one could have owned three shares of Mergenthaler
for every share of Auto-Lite. One possessing three shares
—50a—
of Mergenthaler in 1959 would have received $1.50 in
dividends compared with Auto-Lite’s dividend of $2.50
per share.
Plaintiffs argue that the ultimate return to a stock-
holder has to be either in the form of dividends or
capital gains; that the price of stock is heavily
dependent upon its dividend; that while under Mergen-
thaler’s control Auto-Lite paid out in dividends about
86% of its earnings; and that this depressed the price of
Auto-Lite stock while raising that of Mergenthaler.
Whatever the effect the ratio of dividends to net
earnings may have on the price of stock, the evidence on
dividends and earnings per share, when read together,
shows that Auto-Lite itself paid out high dividends in
relation to its earnings prior to Mergenthaler’s assump-
tion of control. Auto-Lite’s earnings per share in 1958
were $1.78 while its dividend per share was $1.40—the
pay out rate in 1958 was thus about 79%. Auto-Lite’s pay
out rate in 1959 was 56%, in 1960 it was 71%, and in
1961 it was 114%. During several years prior to 1958
Auto-Lite’s pay out rate was similarly quite high. The
evidence shows that Mergenthaler acquired legal control
over Auto-Lite about midway through the 1962 fiscal
year and that Auto-Lite’s 1962 pay out rate was 87% and
its 1 4 rate for the first half of the 1963 fiscal year
was
Prior to the merger, the dividend per share of Auto-
Lite stock had been 52.40. Under the terms of the
merger, former Auto-Lite shareholders were assured for
at least some time of receiving as earni on Eltra
common stock ownership $2.63 equivalent of each share
of former Auto-Lite stock. This $2.63 was cumulative
and was senior to the payment of any dividend on the
new Eltra common stock.
It seems to me that the weight of the evidence with
regard to the factor of dividends does not show an unfair
undervaluation of Auto-Lite stock at the time of the
merger.
—5la—
Qualitative Factors.
Plaintiffs’ expert witness, Professor Nemmers was of
the opinion that a reliable determination of a fair
exchange ratio could be based upon quantitative factors
which would not have to be justed to reflect
qualitative factors. Some bases important to this opinion
are supported by the evidence and are uncontroverted
by the defendants. Other bases run contrary to the
evidence. For example, he testified that “there was no
synergism present.” Defending this position he stated
that Mergenthaler’s claim that it “could do something
overseas with Auto-Lite” carried “no value” since Mer-
genthaler functioned in the industrial market while
Auto-Lite had “quite a different sales operation” serving
the consumer market. But the evidence is that Auto-Lite
at the time of the merger had been moving sales in the
industrial market, particularly with respect to its
development and promotion of industrial batteries.
Professor Nemmers then testified that although Auto-
Lite was in the automotive industry and Mergenthaler
was in the printing machinery industry and though
these industries were both cay — to variations, they
were not significantly different from each other. Yet the
evidence is that Auto-Lite was a part of the automotive
industry which characteristically is cyclical, and Auto-
Lite’s sales and profits up to the time of the merger
reflected this characteristic. At the same time the
printing machinery industry was not similarly cyclical
= Mergenthaler’s profits and sales were far more
stable.
Again, Professor Nemmers taught that both Auto-Lite
and Mergenthaler were mature companies at the time of
the merger and that no adjustment was necessary with
respect to the qualitative factor of the “life cycle stage.”
But the evidence easily shows that at the time of the
merger Auto-Lite was at a life cycle crossroad and faced
serious market risks with respect to some of its
products, while Mergenthaler faced no such risks.
—52a—
Considering further these qualitative factors, in its
statement of income for the fiscal year 1962, Mergen-
thaler showed a net income of $5,522,000. Of this total
$789,000 was for amortization of deferred credit. This
amount was due solely to the acquisition of control in
Auto-Lite. Without the deferred credit, Mergenthaler’s
1962 income of $4,733,000 compares somewhat unfavor-
ably with its earnings of $4,898.000 in 1961. Mergen-
thaler’s stated 1961 income included credit for only the
dividends received from Auto-Lite while the Mergen-
thaler 1962 adjusted income figure of $4,733,000 appar-
ently included credit not only for dividends, but also for
at least some of the excess of Auto-Lite’s profits over its
dividends in 1962. Auto-Lite earned $2,847,000 in 1961
and $3,243,000 in 1962.
As noted earlier, between 1957 and early 1963 the
Electric Auto-Lite Company was involved in several
major transactions which would have had a significant
effect on its future had there been no merger. Although
Auto-Lite was at a crossroads and faced certain risks as
a result of these transactions, the evidence indicates that
its earnings prospect or potential was quite good when
viewed at the time of the merger. Recognizing the
changing character of the automotive business, it had
undertaken several programs of reorientation and diver-
sification—beginning as early as 1959. By early 1963, it
had reversed an earlier decline in sales and profits
which occurred between 1960 and 1961. At that time the
outlook for the remainder of 1963 was good. By early
1963, Auto-Lite’s 2 of diversification had shown
signs of success. C & D Batteries’ income had substan-
tially risen since its acquisition in 1959, despite a
setback in 1961; C & D was quite successful and had an
excellent outlook at the time of the merger. Equilease
Corporation, acquired by Auto-Lite in 1960 and 1961,
was also successful at the time of the merger. Eltra
noted shortly after the merger an anticipated “substan-
tial volume of automobile leasing business.” Marshall-
town Manufacturing Company, acquired in 1960, was
according to the defendants’ own witness, “satisfactorily
—53a—
profitable” at the time of the merger and “gaining
ground and in pretty solid shape.” On the other hand,
Hiller Aircraft Corporation, acquired by Auto-Lite in
1960, proved to be an unsuccessful investment which
Auto-Lite sought to dispose of prior to the merger and
remained a blotch on Auto-Lite’s future at the time of
the merger.
R * „ &
In trying to measure damages by earnings or
earnings potential,“ special difficulties are encountered.
The idea is to establish what happened to the merged
corporation by exposing what happened to its assets
when reemployed or liquidated by the successor corpor-
ation. The approach may include elements of substantial
scienter in the merger plan and entails problems in
tracing assets and in determining the period of *
merger time to be exposed to investigation.
Professor Sorter was the plaintiffs’ primary witness
on the t-merger activities of Eltra. Sorter made a
study of certain Eltra and Auto-Lite corporate records
to determine whether or not it was possible to trace the
post-merger operations of the various Auto-Lite compo-
nents or divisions which had independently existed just
prior to the merger. Having etermined that such
tracing was possible, Sorter then made a study to
ascertain the nature of the direct injury, if any, to the
former Auto-Lite minority shareholders as a result of
the merger. He concluded that there had been direct
injury in excess of $69 million as of October 1, 1972.
Professor Sorter’s conclusion was based upon the
difference between what he determined to be the
earnings actually received by the EAL minority since
the date of the merger, and what he determined to be
the “in fact” earnings of the various former Auto-Lite
components. He used as his base measure a calculation
of the value of the EAL minority’s stock had there been
no merger. His basic assumption was that had there
been no merger the distribution of assets from the Auto-
Lite divisions to other divisions of Eltra could have been
—54a—
made only in the form of dividends. For several reasons,
I am of the opinion that Professor Sorter’s examination
of the post-merger activities of the Eltra Corporation
cannot serve as a basis for granting relief in this
case.
One reason is that Professor Sorter was able to trace
the movements of only a limited number of the assets of
the former Auto-Lite divisions. He worked with only
those assets which were expressly reported in the
consolidated balance sheets and the consolidated income
statements of Eltra’s annual reports and in Eltra’s
Consolidating Balance Sheet and Consolidating State-
ments of Net Income. Defining the term “assets” as
including all items of value held by the former Auto-
Lite divisions at the time of the merger, it is clear to me
that Sorter could not trace the flow of all former Auto-
Lite assets because items such as the quality of
management and the benefits of synergy were not
expressly found in Eltra’s annual reports and state-
ments. When questioned about the possible influx of
managerial talent from the former Mergenthaler divi-
sions into the former Auto-Lite divisions he replied that
such an influx could not be “. . . attributed strictly to
the merger, because Mergenthaler was in control prior
to the merger as they were in control after the merger.”
He presumed without facts to support it, that there was
no difference between the manner of organizing and
managing Mergenthaler personnel and Auto-Lite per-
sonnel prior to the merger and the manner of organizing
and managing Eltra personnel after the merger. The
fact is, as Professor Vancil stated, that beneficial
transfers of personnel between divisions of a new
company occur because of the divisions’ merger, and
there is evidence that the manner of organizing and
managing Auto-Lite division personnel actually changed
after the merger. This is an important consideration.
Gerstle, 478 F.2d at 1306. As to synergism resulting
from the merger, Professor Sorter, was of the opinion
that the merger did not affect economic synergism to
any significant degree. Yet the evidence shows that
*
Mergenthaler's position of control over Auto-Lite prior
to the merger was different from Eltra's after the
merger. For example, numerous operating economies
arose subsequent to the merger. In conclusion then, I am
of the opinion that Professor Sorter’s analysis excluded
certain assets from his picture of the post-merger asset
flow of the former Auto-Lite divisions. Professor Sorter’s
conclusion that there was a direct injury in excess of $69
million is of questionable vitality.
The Eltra consolidating statements relied on by
Professor Sorter inadequately report the actual expenses
incurred by the former Auto-Lite divisions and thus
undervalue the infusion of assets in an independent way.
As Mr. Carracio testified, it is customary for multi-
divisional companies to incur certain expenses on behalf
of some of its divisions, to charge these expenses to a
central account in its consolidating statement, and to not
allocate these expenses back to the various divisions
benefiting from the expenses incurred. Such non-
allocation is not improper when the consolidating
statement is, as were those available to Professor Sorter,
drawn up for internal purposes only and not for public
consumption. At least two witnesses, Keller and Wattles,
testified reliably that Eltra Central, a separate central
service unit in Eltra’s consolidating statement, was
charged, with certain expenses which benefited par-
ticular divisions, which expenses were not allocated
back as part of the liabilities of the respective divisions.
Professor Sorter calculated the distribution of EAL
assets,” i.e., the dollar value of the assets flowing out of
the former Auto-Lite divisions in any one year, by
subtracting the ending equity of all these divisions
from the sum of their beginning equity and their income
for the year. For each of the years between 1963 and
1972, he found there was such a distribution. His form
of calculating damages rests on the assumption that had
there been no merger the Auto-Lite minority share-
holders rather than the non-former Auto-Lite compo-
nents of Eltra would have received a share of this
—56a—
“distribution” and that they would have reinvested these
yearly receipts. This assumption is unrealistic and
cannot reliably serve as a basis for computing injury.“
I find in this case not enough evidence of sufficient
reliability to utilize the earnings and earnings potential
In assuming that there would have been a yearly dividend
equal to the amount of “distribution”, Professor Sorter
assumed that the hypothetical Auto-Lite com would have
made the same decision to distribute assets out of its divisions.
Such an assumption is invalid since it is not known whether
or not the former Auto-Lite divisions’ assets were distributed
by Eltra in any one year because Eltra thought those assets
could no longer be profitably utilized in the former Auto-Lite
divisions. It may well have been that in one year Eltra
distributed the EAL divisions’ assets because it thought that a
former Mergenthaler division could earn with those assets at
a 20% profit rate while any former Auto-Lite division could
earn at no higher than a 15% profit rate; in such an instance,
et without the merger, the assets in question would probably
ve been utilized internally by the hypothetical Auto-Lite
rather than distributed as dividends. In a situation where the
decision by the hypothetical Auto-Lite would have been to
distribute, Professor Sorter made a further assumption that
the distribution which he had calculated could have actually
been transformed into dividends. This further assumption is
also invalid under certain circumstances. For example, |
distribution for 1964 was found to be in excess of $26 million.
Yet this distribution have represented, in e part, a
transfer of certain land from a former Auto-Lite division to a
former Mergenthaler division, which land carried a book
value in excess of $26 million. Without the merger, Auto-Lite
presumedly would have had to sell the land, or lease it, in
order to distribute dividends. If the land was actually worth
only $5 million, or was unleasable, the result would have been
a distribution of $5 million in dividends, at best.
Even without these deficiencies in the methodology and
AN of Professor Sorter's analysis, the figure of
869 million in damages is unrealistie since it was reached only
after several substantially erroneous assumptions were made.
For example, this damage figure rests upon the assumption
that no former EAL minority shareholder has sold his Eltra
stock since the merger, although it does account for the
conversion of Eltra preferred into Eltra common. Yet it is
undisputed that most of the former Auto-Lite shareholders at
— time of the merger no longer own any type of Eltra
stock.
—57a—
concept as a basis for measuring damages. This does not
mean that in the next case the evidence could not be
substantial and convincing.
In light of all the foregoing, I conclude that in this
case the monetary relief that must be made available to
the plaintiffs must be based upon the theory of the
unfairness of the terms of the merger. Before calculat-
ing the amount of damages, however, it is necessary to
determine with finality who shall be the proper
recipients of a monetary award.
Plaintiffs Mills and Sussman brought this suit in
alternative forms; they sued on behalf of themselves and
a similarly-situated class of former Auto-Lite stock-
holders, and they sued derivatively on behalf of Auto-
Lite. This Court long ago recognized that there may
have been injuries to both Auto-Lite and to its
stockholders resulting from the defendants’ actions.
And similar suits involving allegations of improper
proxy solicitation and other types of illegal representa-
tions have elsewhere been instituted, and have been
allowed to proceed on both derivative and class claims.
Kahn v. Kaskel, 367 F.Supp. 784 (S.D. N.Y. 1973);
Ruggerio v. American Bi re, Inc., 56 F. R. D. 93, 96-
97 (S. D. N. V. 1972). To this date, I have refrained from
determining which form would be employed in the
granting of any relief—thinking it wise to make such a
determination only after all the facts had been pre-
sented. Johnson v. American General Ins. Co., 296
F.Supp. 802, 810 (D. D.C. 1969). Several preliminary
findings on these two forms of action have, however,
been made.
On May 22, 1972, I determined that this action could
be maintained as a class action and that the class
included “. . those persons who were Auto-Lite share-
holders at the time of the merger and who have
continuously retained their stock interests since the
merger.” Rule 23(cX1) of the Federal Rules of Civil
_ rs
—58a—
Procedure (hereafter F.R.C.P.). The validity of this
definition formed a partial basis for certain plaintiffs’
motions for reconsideration.
The finding that a cause is maintainable as a class
action and all other orders issued pursuant to such a
finding are interlocutory in nature and may be *
or amended before a final Ne ee Rule 1. f
28d) of F. R. C. P.; Walsh v. & 412
227 (6th Cir. 1969); Fischer 0 tz, 41 * R. D. 377, 386
(S. D. N.Y. 1966); Brennan v. Midwestern United Life
Ins. Co., 259 F.Supp. 673, 683 (N.D. Ind. 1966). The
Seventh Circuit Court of Appeals implicitly recognized
the interlocutory nature of this Court’s class action
— — by —y plaintiffs’ petition for a writ of
amus on February 15, 1973. This Court has also
— flowing d the unfinality of its elass action
rulings by allowing the submission of certain motions
for reconsideration since May 22, 1972.
In defini the class, I held that persons who
purchased Eltra shares subsequent to the merger and
were not —— shareholders at the merger date
acquired no cause of action by such stock purchase.
After reconsideration, I am still of the opinion that such
purchasers have no right to share in recovery in this
case. Schwartzman v. Tenneco Mfg. Co., 319 F.Supp.
1278, 1283 (D. Del. 1970); J Investor Protective
N v. Saunders, 64 F. R. D. 564, 572 (E. D. Pa.
In defining the class, I also held that Auto-Lite’s
shareholders at the merger date who have since sold
their shares in Eltra have voluntarily removed them-
selves from the class and have no right to share in a
possible recovery. I relied, 1 large part, on ew * =
S v. Transamerica ys 99 F. Ned cad affirmed }
Supp. 176 (D.Del. 1955), mod
235 F. 2d 369 (8rd Cir. 1956) in so holding. wp Re
reconsideration, I am now of the opinion that the sale of
Eltra preferred or common stock by the former Auto-
Lite minority shareholders (hereafter “sellers”) should
—59a—
not, in itself, preclude any a by them. Sirota v.
Econo-Car International, Inc., 61 F.R.D. 604, 607 (S.D.
N.Y. 1974); Swanson v. American Consumer Industries,
Inc., 415 F.2d 1326, 1333 (7th Cir. 1969); Herbst v. Able,
47 F.R.D. 11, 15 (S.D. N.Y. 1969); Hilda Herbst v. I. T. T.
Corp., 495 F.2d 1308, 1314 (2nd Cir. 1974); Madonick v.
Denison Mines Limited, 63 F.R.D. 657, 658-659 (S.D.
N.Y. 1974); Hohmann v. Packard Instrument Co., Inc.,
471 F.2d 815, 817 (7th Cir. 1973). I do note that at the
time this particular holding was rendered, the plaintiffs
appeared to me to be still vigorously pursuing their
request for rescission—in spite of my rulings of January
10 and March 24, 1972; thus, plaintiffs’ ability to
adequately represent their alleged class was somewhat
doubtful in May of 1972. See Guttman v. Braemer, 51
F. R. D. 537 (S.D. N.Y. 1970); Weisfeld v. Spartans
Industries, Inc., 58 F.R.D. 570, 582 (S.D. N.Y. 1972);
Ruggerio, supra, 56 F.R.D. at 95; Wood v. Rex Noreco
Co., 61 F.R.D. 669, 674 (S.D. N. V. 1973). It should be
noted that this particular holding had no effect on
the derivative claims which the plaintiffs were also
prosecuting. My position today also is influenced by my
determination that here the fairness of merger terms
theory must be used in assessing a monetary award.
My 8 today the availability of relief to all
Auto-Lite shareholders as of the merger date—
regardless of their present stock interests in either Auto-
Lite or Eltra—does not mean, however, that there must
be a mone relief for all of them or that any
monetary relief for those no longer holding Eltra stock
must equal that awarded to the class of minority Auto-
Lite shareholders initially defined on May 22, 1972.
Sirota, supra, 61 F.R.D. at 607; Swanson, supra, 415
F.2d at 1333: Herbst, supra, 47 F. R. PD. at 15; Hilda
Herbst, supra, 495 F.2d at 1314; Matarazzo v. Friendly
Ice Cream Corp., 62 F.R.D. 65, 70 (E.D. N.Y. 1974).
Related to the issue of class membership are the objec-
tions to my requiring — ur plaintiffs to file proofs
of claims, and my * of certain forms of notice
mailed to potential class members. In light of what is
said below these objections need not be considered.
_—
—60a—
From the outset, this case has included both derivative
and class action claims. All parties have recognized that
both of these claims could, in sum, yield only “actual
— « al It has been said that a derivative suit closely
es a class action suit. Ross v. Bernhard, 396 U.S.
531, 535 n. 5 and 541 (1970); Weiner v. Winters, 50
F.R.D. 306, 309 (S.D. N.Y. 1970). I am of the opinion
that, in this particular case, relief can be upon
either or both the derivative and the class action claims
but that such relief would have to be singularly the
same.
Count II could have been brought as a derivative
cause. Borak, supra, 377 U.S. at 431. It appears that a
derivative action is the preferred private method for
vindicating violations of § 14(a), since the “injury which
a stockholder suffers from corporate action pursuant to
a proxy solicitation ordinarily flows from the damage
done the corporation, rather than from the damage in-
flicted directly upon the stockholder.” Id. at 432. See
also Borak, su — 317 F. ad at 845. Without the vehicle
of the derivative action, private relief and thus private
enforcement (the latter being a necessary supplement“
to S. E. C. action) under § 14a) essentially would be
denied. In their earlier decisions in this very case, both
the Seventh Circuit Court of Appeals and the Supreme
Court observed that this suit was being prosecuted, in
part, as a derivative action, and the Supreme Court in-
dicated several times in its opinion that the plaintiffs
had rendered a substantial service to both Auto-Lite and
its shareholders by instituting the action. Mills, supra,
= F.2d at 431 and 396 U.S. at 378, 388, 392 and 395-
4
‘ izing a suit under 18 14a) to be derivative in nature
rathe N I — I ENS When the
re
Talley Bag eg 53 RAD. 9, Eb. Daye tot, ye yet a
r
Corp 481 461 Feat 11 1 ink
recom O11 See aloo fan org 1 ch
727 (8rd ‘oie 1970) den. 401 U * 3 — and
(Footnote continued on ating 9
—6la—
A review of Rule 23.1 of the F.R.C.P., as well as
former Rule 23(b) (which was in effect at the commence-
ment of this lawsuit) convinces me that it would be
— * in this case to fashion a single relief based upon
claims.
Although the individually named plaintiffs con-
tinuously have urged rescission to be the most ap-
propriate form of relief, since my original finding on the
matter of rescission, and particularly at trial, they also
have directed their arguments and evidence toward the
matter of monetary relief for Auto-Lite and its
shareholders. They have represented adequately all
Auto-Lite shareholders at the time of the merger, in-
cluding those who still hold Auto-Lite stock as well as
those who now hold shares of Eltra preferred stock as a
result of the merger, those who now hold shares of Eltra
common stock as a result of the merger, and those who
no longer hold an interest in either Auto-Lite or Eltra,
erbst, supra, 495 F. ad at 1814; Madonick, supra,
63 F.R.D. at 658-659. The fact that they themselves still
retain certificates of stock ownership in Auto-Lite does
not preclude their prosecution of the derivative cause.
Smallwood, supra, 489 F.2d at 591, n. 11.
Besides requiring the appearance of fair and adequate
representation, the present rule on derivative actions
also provides that the 1 shall allege “. . . with
particularity the efforts, if ig the plaintiff to
obtain the action he desires rom the directors or com-
parable authority . . and the reasons for his failure to
obtain the action or for not making the effort.” Rule 23.1
continued
— Rule 10B-5 2 1 Swanson v. American Consumer
ndustries, Inc., 288 upp. 60 (S.D. III. 2 rev'd a
re 415 F.2d 120 (7th Cir. 1969), 328 Supp.
(SD. Ill. 1971), rev'd and remanded 475 F.2d 516 ( Ge
— 7 — ioe final = decision found damages for
issolved r 1. e., on the
yo — 86 F.2d at 521 an the trial
Court had earlier dismissed the class action claim, 288
F. Supp. at 61, L. which dismissal was not apparently reviewed).
—62a—
of F.R.C.P. Effort to obtain action, however, may be ex-
cused where it would have been futile or simply an emp-
ty formality. Under the circumstances of this case, such
an effort by the plaintiffs is properly excusable—since
Mergenthaler owned 54% of Auto-Lite and controlled its
Board of Directors, de Haas v. ae Petroleum Co.,
286 F.Supp. 809, 813-815 (D.Col. 1969), affd in this part,
rev'd in rt, 485 F.2d 1223, 1228 (10th Cir. 1971);
Wickes v. Belgian Am. Educational Foundation, Inc.,
266 F.Supp. 38 (D.C. N.Y. 1967); Weiss v. Sunasco, Inc.,
316 F.Supp. 1197 (D.C. Pa. 1970); Gottesman v. General
Motors C ion, 268 F. 2d 194 (2nd Cir. 1959); Treves
v. Servel, Inc., 244 F.Supp. 773 (S.D. N.Y. 1965); 48
A.L.R. 3d 595, § 10 at 637-69.°
I further am of the opinion that Ohio law does not
foreclose the awarding of relief under the plaintiffs’
derivative claims, even 1 Auto-Lite has ceased to
exist during the —— this case. The awarding of
relief under the derivative claims would be proper only
if Auto-Lite had the power and capacity to bring this
cause of action on its own behalf. There is no doubt that
such power did exist. Swanson, supra, 415 F. 2d at 1333-
1334. The capacity of Auto-Lite to sue in this Court is
9 by Ohio law. Rule 17(b) of F. R. C. P.; Basch v.
a Industries, Inc., 58 F.R.D. 9, 11-12 (W.D. Okl.
1971).
While the issue of a dissolved Ohio corporation’s
capacity to sue may not be necessary to the final disposi-
tion of this case, I have decided to face it because I
believe some clear direction has previously been given
by the U. S. Supreme Court in federal securities law
cases and by Ohio statutory and case law. Cf.
Smallwood, supra, 489 F.2d at 591, n. 12. In Borak,
where the Supreme Court first held that derivative
causes involving alleged violations of § 14(a) were per-
missible under the 1934 Securities Exc Act, it was
5 Unlike the situation in Claman v. Robertson, 164 Ohio Stat.
61, 128 N.E.2d 429 (Ohio Sup. Ct. 1955), here there was no
effective ratification of the misleading proxy statement by the
disinterested shareholders.
—63a—
stated that certain remedies could be fashioned despite
contrary provisions on the availability of such remedies
— applicable State corporation laws. 377 U.S. at
Both prior to and after the Borak decision, other
federal and state courts have allowed derivative claims,
including some brought under the federal securities
laws, to proceed notwithstanding the dissolution or
abandonment of the nominal corporate defendant on
whose behalf the claims were brought. Miller v. Stein-
bach, 268 F.Supp. 255, 266-269 (S.D. N.Y. 1967); Swan-
son, supra; Coyle v. Skirvin, 124 F.2d 934, 935-936 (10th
Cir. 1942); Pioche Mines Consolidated, Inc. v. Dolman,
333 F.2d 257, 272-273 (9th Cir. 1964); Tennessee Moun-
tain Petroleum and Mining Co. v. Ayers, 43 S.W. 744
(Tennessee 1897); Taylor v. Holmes, 127 U.S. 489 (1888)
(dismissed only for failure to make a demand); Watts v.
Vanderbilt, 45 F.2d 968 (2nd Cir. 1930) (dismissed only
for failure to make a demand). The inequity of not
allowing such proceedings has been recognized. In
Miller, supra, 268 F.Supp. at 267-268, it was stated that
“. . . a grossly inequitable decision would be reached if I
were to hold that a merged corporation and/or its
shareholders are barred from suing where the very
merger itself took place because of the allegedly
wrongful activities of the directors of the old corporation
Of course, it can be said that state corporation laws on
— to sue should not be allowed frustrate the
“overriding federal law.“ Borak, supra, 377 U.S. at 434-435.
Such frustration could easily occur in cases such as this if, for
at 434, quoting from Textile Workers v. n Mills,
8. 1957) As already noted, none of the appellate
courts ing this case questioned plaintiffs’ ability to bring
derivative claims; and the derivative claims were lves
recognized by the appellate courts as peing an important 2
8 supra, 403 F.2d at 431 and 396 U.S. at
. — s ." * wer
—6§4a—
and the management of the surviving corporation
among others., particularly since the suit was
properly brought initially. It would also be inequitable
in light of: (1) the finding by the Seventh Circuit Court
of Appeals that had there been sufficient time between
the filing of this lawsuit and the shareholders’ meeting,
it is unquestionable that corrective measures would have
been appropriate and that the meeting which approved
the merger would not have occurred when it did, Mills,
supra, 403 F.2d at 435; (2) the finding of the Supreme
Court that the effectiveness of that meeting’s approval of
the merger could still be nullified by this Court even
long after the merger had been consummated; and (3)
the apparent necessity of allowing the derivative claims
to proceed in order that this possibility of nullification
would be an available remedy, Basch, supra, 53 F.R.D.
at 12 and Smallwood, supra, 489 F.2d at 591, n. 12.
Even if Ohio law on capacity to sue could foreclose a
derivative action under the federal securities laws, a
review of Ohio law reveals no barrier to the assertion of
derivative claims in this case. Plaintiffs herein filed
their original complaint on June 26, 1963—a day before
the Auto-Lite stockholders’ meeting at which the merger
terms were approved. Thus, it is beyond dispute that un-
der Ohio law Auto-Lite possessed the capacity to sue for
at least some time during the pendency of this case. It
also appears that plaintiffs’ request to set aside the
merger was timely filed under Ohio law, if such law is
applicable. Page’s Ohio Rev. Code § 1701.81(c) (repealed
eff. 7-17-70), § 1701.82(c) (eff. 717-70), and
§ 1701.83(BX3) (repealed eff. 7-17-70).’
7 Ohio corporation law existing at the time of the filing of
this suit was as follows with respect to the — of the
surviving and constituent corporations after the effective date
of the constituents’ merger.
.. any claim existing or action or proceeding pending
by or = any of * arm ry 2 Lng A be
rosecu to ju ent, wi of appeal as in er
— as if 2 — of consolidation had not taken
(Footnote continued on following page)
**
Just as Ohio statutory law epee no bar to plain-
tiffs’ derivative claims, so too Ohio case law presents no
legal barrier. Ohio courts have long recognized the ine-
quity of foreclosing injunctive, as well as other, relief to
minority shareholders of a dissolved or otherwise
changed corporation when the force behind the corpo-
rate change involved fraud or the like. Gottlief v. Mead
Corporation, 137 N. E. 2d 178, 206-207 (Ct. Common
Pleas 1954); Wick, supra, 188 N.E. at 526; Gen. Inv. Co.,
supra, 250 F. at 174; Johnson, supra, 15 N.E. 2d at 132;
Ohio Nat. Life Ins. Co., su 81 N.E. 2d at 625;
Goodison v. North American rities Co., 178 N.E. 29
(Ohio Appls. Ct. 1931).
Defendants assert that the relief available to the plain-
tiffs on their derivative claims in this case is limited to
the setting aside of the merger and that the plaintiffs’
“derivative language” has lost all its significance. I can-
not agree with such assertions. In holding that a party
7 continued
place, or the surviving or new corporation may be
substituted in its place.” Page’s Ohio Rev. Code 1701.81
89 es . 7-17-70), made applicable by § 1701.83
AX3) (repealed eff. 7-17-70).
See also McKinney's Consol. Laws of NV. F. (Ann.), Business
Corporation Law §§ 906(bX3) and 907(i). Since 1963, Ohio
corporation law has been su tially amended; yet it still
provides ‘that Ohio corporations, although dissolved
mergers, may proceed in their own names with claims th
had pending at the time of the merger. Page’s Ohio Rev. C
§ 17 182A (4). Ohio law is thus dissimilar to Delaware law,
where all pending causes of action of constituent corporations
spperently 2 to the — corporation. 8 Code
See Heit v. Tenneco, Inc., 319 F.Supp. 884, 886
(D. Del. 1970); Basch, supra, 53 F. R. D. at 12; and Voege v.
Ackerman, 364 F.Supp. 72, 74 (S. D. N.Y. 1978). The Ohio
statutory provision on the appraisal rights of dissenting
shareholders would also not foreclose the derivative claims in
this suit because of the allegations and the proof of an
illegally misleadi NN statement. Johnson v. Lam
133 Ohio St. 567, N. E. 2d 127, 132 ay Sup. Ct. obey
citing with approval General Inv. Co. v. Lake Shore and M. S.
Co., 250 F. 160, 174 (6th Cir. 1918); Wick v. 11
and Tube Co, 46 Ohio App. 253, 188 N. E. 514, (Ohio
* Ct. 8 Ohio Nat. Life Ins. Co. v. Struble, 81 N. E. 2d
622, 625-626 (Ohio Appls. Ct. 1948).
—
may bring a derivative suit under § 27 of the 1934 Ex-
change Act for violation(s) of § 14(a), the Supreme Court
recognized a wide range of possible remedies, includin
retrospective as well as prospective relief and civi
damages as well as injunctive relief. Borak, supra, 377
U.S. at 432 and 434. In discussing possible remedies in
this particular case, the Supreme Court again recog-
nized such a range; that Court specifically held that this
Court could set aside the merger as a form of relief for
the named plaintiffs suing derivatively on behalf of
Auto-Lite, yet also stated that monetary relief was a
possibility for the Auto-Lite shareholders if rescission
was found to be contrary to their best interests. Mills,
supra, 396 U.S. at 388. Furthermore, in holding that the
named plaintiffs were entitled to an interim award of
litigation expenses against Auto-Lite or its survivor,
regardless of any su uent “monetary recovery,” the
Supreme Court re ly recognized the “substantial
service” which the named plaintiffs had performed for
Auto-Lite and all its stockholders; therefore, the
derivative character of this action was an important, if
not essential, holding of the earlier Supreme deci-
sion. Mills, supra, 396 U.S. at 389-397. Thus, the deci-
sion on whether to proceed with granting relief in this
case based upon the derivative claims or upon the class
action claims should not be made according to the
propriety of rescission, but rather it should be made in
light of the nature of any duties which were breached by
the issuance of the proxy statement and the nature of
any injuries which arose from such breaches. Overfield
v. Pennroad Corp., 146 F.2d 889, 894-895 (3rd Cir.
1944); Johnson, supra, 296 9 808, Ka n,
supra, 434 F.2d 727; Garner v. rson, 374 F.Supp.
580, 585 (M.D. Fla. 1974); In re Fenn Central Securities
itigation, 347 F.Supp. 1324, 1326-1327 (E. D. Pa. 1972);
15 A.L.R. Fed. 954, n. 4 at 956.
Although breaches of fiduciary duties owed to Auto-
Lite stockholders and personal injuries resulting from
such breaches stand as established in this case, the
—67a—
record supports the position that the Auto-Lite board’s
failure to perform certain duties owed to the Auto-Lite
corporation at the time of the merger caused injuries to
Auto-Lite itself as a result of this failure. As earlier
noted, the Supreme Court in Borak, supra, recognized
that deceptive proxy solicitations normally cause only in-
direct damage to a corporation’s stockholders while
causing direct injury to the corporation itself. 377 U.S.
at 432. See also Brudney and Chirelstein, supra, at 314-
315 and 319. The Supreme Court in this very case
recognized that regardless of any reliance and/or injury
to individual shareholders, “corporate therapeutics”
were involved and the plaintiffs’ efforts to insure non-
interference with the effective and appropriate process
of proxy solicitation was of great benefit to the Auto-
Lite corporation. Mills, supra, 396 U.S. at 384, 385 and
396. Since rescission has been ruled out and since a
monetary award granted to Auto-Lite would inure to all.
who were shareholders at the time of the proxy solicita-
tion, including the group of shareholders heretofore
defined under the class action claims, it appears to me
that full recovery for all compensable injuries can be
had in an award under the derivative claims. To award
an additional amount based upon the class action would
cause a total award to exceed the “actual damages suf-
fered.” Some individual class members might receive
more or less under the derivative claims than under the
class claims, but the primary concern must be the total
award fund from which individual awards are made.
Wolf, supra, 477 F.2d at 478; Schaefer v. First National
Bank of Lincolnwood, 326 F.Supp. 1186, 1193 (N.D. III.
1970), appl. dism. 465 F.2d 234 (7th Cir. 1972); Reeder v.
Mastercraft Electronics Corp., 363 F.Supp. 574, 581-582
(S.D. N.Y. 1973).®
8 But see Swanson, supra, 475 F.2d at 519 and 521 (where
the Court apparently awarded relief to plaintiff class
members, irrespective of their subsequent disposition of ACI
shares, as long as the requisite ACI shares were —
Swanson, supra, 475 F.2d at 529 (J. Sprecher pa eae
and Chris-Craft, supra, 480 F.2d at 391. Of note is t
(Footnote continued on following page)
—68a—
se „ „ „ „*
On May 29, 1963 (the mailing date of the proxy state-
ment), the total number of outstanding shares of Auto-
Lite common stock was 1,160,565. This includes 628,015
shares held by Mergenthaler and a total of 3,965 shares
held by various officers and directors of American,
Mergenthaler and Auto-Lite. The number of outstand-
ing “minority” shares in Auto-Lite on that date totaled
532,550. This number includes shares held by aforesaid
officers and directors. They too received the misleading
statement and presumably could have been misled by it.
On June 27, 1963, the entire outstanding stock of
Auto-Lite consisted of 1,160,565 shares of common stock,
and the entire outstanding stock of Mergenthaler con-
sisted of approximately 2,700,688 shares of common
stock. On the next day, Eltra issued 986,170 shares of its
convertible preferred stock (par value of $34.50) to
holders of the then outstanding common shares of Elec-
tric Auto-Lite. This was in accord with the merger
agreement. By June 27, Eltra had approximately 2,700,-
688 shares of common stock outstanding which be-
longed to the former holders of Mergenthaler’s capital
stock. And by September 29, 1963, Eltra had 980,534
shares of preferred stock outstanding and 2,732,794
shares of common stock outstanding.
8 continued
ractical impossibility of awarding damages to each member
of the plaintifis alleged class based upon the date of his or
her disposition of Eltra stock and/or upon the date on which
each member learned of the misleading nature of the pro
statement. Chasins v. Smith, Barney & Co., 438 F.2d 1167,
1170 (2nd Cir. 1 4 Chelsea Associates v. Rapanos, 376
F.Supp. 929, 943, ( D. Mich. 1974); Bawmel v. Rosen, 412
F.2d 671, 576 (4th Cir. 1969). It should also be noted that even
though certain class members in this case may have actually
sold their Eltra stock received in the exchange at a price
higher than the fair market value of the Auto-Lite stock
which they had exchanged for such Eltra stock, these class
members will not be barred from receiving a portion of this
Court’s award under the derivative claims. Wolf, supra.
—69a—
The exchange ratio employed in effectuating the
merger allowed a former Mergenthaler shareholder one
share of Eltra common stock for each share of
Mergenthaler capital stock and allowed a former Auto-
Lite shareholder one and eighty-eight-one-hundredths
(1.88) shares of Eltra preferred stock for each share of
Auto-Lite common stock.
Prior to readjusting this exchange ratio and therein
determining the appropriate damage, this Court must
first determine the relationship in the values at the
merger date of one share of Eltra preferred stock and
one share of Eltra common stock. Dr. Nemmers testified
that the value of the Eltra convertible preferred stock at
the time of the merger was $26.19 per share and that
each share of Auto-Lite common stock thus returned a
value of $49.24 in the exchange. The value of $26.19 was
reached by adding the estimated worth of the Eltra
stock as a straight preferred $25.69) to the estimated
worth of the Eltra stock’s conversion feature ($.50).
Professor Emmett also testified on the value of the
Eltra convertible preferred stock. He estimated that this
stock was worth $29.50 as a straight preferred and that
it had a conversion feature worth at least $2.21. Based
on these and other estimates, Emmett stated that the
low value for the convertible preferred stock at the time
of the merger was $31.71 per share while its highest
value was $33.19 per share. According to Emmett then,
each share of Auto-Lite common stock returned a value
of between $59.61 and $62.50 as a result of the merger.
Because he estimated the maximum value of a share of
Auto-Lite common stock to be worth $55 at the time of
merger, Professor Emmett concluded that the Auto-Lite
shareholders undoubtedly “were paid more than what
they were giving up” in the merger.
Each share of Auto-Lite common stock was actually
priced at the time of the merger and for awhile
thereafter in excess of $58—assuming no conversion—
and in excess of $47—assuming there was conversion.
Thus, Professor Emmett’s rather than Professor
=
Nemmer’s testimony was more closely borne out in the
market place. Furthermore, it is clear that very few
shares of preferred were converted during the 1963 and
1963 fiscal years. Finally, it can be gathered from the
foregoing that nearly all former Auto-Lite minority
shareholders actually received as a result of the merger,
stock valued in the market place at the time of its
receipt which was about 225% the market value of the
stock received by the former Mergenthaler shareholders.
I am of the — that after taking into account the
nature of the Eltra stock received by each of the merg-
ing parties, the effective exchange ratio was 2.25 to 1.
Although the effective exchange ratio was 2.25 to 1
rather than 1.88 to 1, I am of the further opinion that
the ratio of 2.35 to 1 represents fairly what was given up
by the holder of one share of Auto-Lite stock as com-
pared with what was given up by a holder of one share
of Mergenthaler stock at the time of the merger. This
opinion is based upon all of the relevant evidence in-
troduced at trial regarding the pre-merger histories of
Auto-Lite and Mergenthaler and tine respective con-
ditions of Auto-Lite and Mergenthaler in the early
months of 1963.
In distributing interests in Eltra based upon a 2.25 to
1 ratio, it can be said that a former Auto-Lite minority
shareholder received for each share of stock ap-
proximately 67.38% of the interest in Eltra received for
one share of Auto-Lite and one share of Mergenthaler
(2.25 + [2.25 + 1}). Had the interests been distributed on
a 2.35 to 1 basis, a former Auto-Lite shareholder would
have received for each stock share approximately 70.15%
of the interest in Eltra received for one share each of
Auto-Lite and Mergenthaler (2.35 + [2.35 + 1]). Thus, by
the utilization of an unfair exchange ratio, each Auto-
Lite shareholder was deprived of approximately 2.77% of
the combined value of an Auto-Lite share and a
Mergenthaler share (70.15-67.38). In July of 1963, the
average value of one former share of Mergenthaler stock
was $25.25 while the average value of one former share
—Tla—
of Auto-Lite stock was $58.39—assuming no conversion.
Based upon these figures, each Auto-Lite minority
shareholder may be said to have lost approximately
82.317 (.0277 x [$58.39 + $25.25]). Since there were 532,
550 outstanding minority shares on May 29, 1963
and since 1 — that many shares were con-
verted into Eltra preferred shares in June, 1963, injury
to the Auto-Lite minoritz shareholders amounts to ap-
— $1,233,918.35 (532,550 x 82.317). This
igure would not appreciably change if the market
values as of June 28, 1963 were employed. Furthermore,
this figure generally conforms to the figures which I
arrived at using alternative methods of calculation and
amounts to what I consider to be an equitable award.
Employing the average market values of Eltra stock
in July, 1963, in computing monetary damages, does not
conflict with my finding that the 1958-1963 market
valuations of Auto-Lite and Mergenthaler stock were un-
reliable. The record contains no credible evidence that
these valuations were influenced so that their reliability
as indicators of value would be brought into doubt.
Further, if the merger generated a value for Eltra
which was larger than the sum of the values for Auto-
Lite and Mergenthaler, the method of computing
damages based upon the post-merger market prices of
Eltra stock allows the Auto-Lite minority to share in
Eltra’s “incremental” value. Brudney and Chirelstein,
supra, at 313-314.
Having found that Auto-Lite and its former minority
shareholders are entitled to a monetary award based
upon the unfairness of the merger terms, several
matters yet remain. One is the source of payment of fees
and costs. As stated above, the Supreme Court held
(Mills, supra, 396 U.S. at 389-390), that the plaintiffs
are entitled to an award for their “litigation expenses
and reasonable attorneys’ fees.” This award was said to
be recoverable from either Auto-Lite or its survivor, and
to cover those expenses incurred up to, and including,
—T2a—
the time of the Supreme Court decision. The decision
made no indication as to the propriety of an award for
fees and costs incurred subsequent to the time of the
Court’s decision. What the Supreme Court stated was
that any future actions before this or any other Court
could not serve to alter the interim award of expenses,
although plaintiffs’ success in future proceedings might
be a factor in determining whether a further award
would be appropriate. (396 U.S. at 396).
It may well be that so much of counsel fees and ex-
penses as were incurred in establishing liability in this
case could be assessed against the defendants, indepen-
dent of the damage award based upon the merger’s un-
fairness. Gerstle, supra, 478 F.2d at 1308-1309 and at
1310-1311 (J. Oaks concurring). Or it may even be that
all of the plaintiffs’ costs can be independently assessed
against the defendants without the traditional showing
of bad faith. Swanson, supra, 475 F. 2d at 521 and at 529
(J. Sprecher dissenting, in part). [But in Swanson there
was only a “modest recovery achieved”, 475 F. 2d at 521).
See also Ojeda v. Hickney, 452 F. 2d 947, 948 (5th Cir.
1972); Oppenlander v. Standard Oil Co. of Indiana, 64
F.R.D. 597 (D.Col. 1974); and Dillon v. Berg, 351
F.Supp. 584 (D.Del. 1972). After carefully reviewing
relevant considerations and case law, I conclude that the
plaintiffs should recover all of their litigation expenses—
including those incurred prior to the finding of
liability—out of the damages awarded to Auto-Lite and
its former shareholders. Gerstle, supra, 478 F.2d at
1311. This ruling runs counter to no applicable federal
statute on mandatory or permissive fee shifting. Mills,
supra, 396 U.S. at 390; “The Allocation of Attorney's
Fees after Mills”, 38 U. Chicago L. Rev. 316, 324
(Winter 1971). It also is supported by my finding that
the defendants have not acted in bad faith, vexatiously,
wantonly or for oppressive reasons. Hall v. Cole, 412
U.S. 1, 5 (1973) and cases cited therein; see also Gerstle,
supra, 478 F. ad at 1309, n.33. Nor have defendants acted
frivolously. Gerstle, supra, 478 F. 2d at 1309, n. 33. The
Supreme Court recognized that the individual plaintiffs
U—ü—ü—
—73a—
should be reimbursed “by the corporation” and that the
costs normally ought to be imposed upon “the party that
has benefited from them and that would have had to pay
them had it brought the suit.” Mills, supra, 396 U.S. at
— . 4 at 1 hy ty gg U.S. at 5-7
an v. itle Ins. Co., 292 F.Supp.
376, 379 (B. Utah 1968). -
The extraction of litigation expenses from the
monetary award made to Auto-Lite would not serve to
hamper any Congressional purpose in its enactment of
the various federal securities laws involved. Gerstle,
supra, 478 F.2d at 1310-1311 (J. Oaks) and Grace v.
Ludwig, 484 F.2d 1262, 1267 (2nd Cir. 1973). For exam-
ple, competent counsel will not be discouraged from
accepting representation in future § 14(a) cases since,
presumedly, all the plaintiffs’ attorneys involved in this
litigation will be fairly compensated. Oppenlander,
supra, 64 F.R.D. at 613. Furthermore, such extraction
conforms with traditional judicial notions on the award-
ing of counsel fees and expenses in derivative suits
where an ample fund has been generated. Gerstle, 478
F.2d at 1309. And such an extraction would eliminate
the “punitive” aspects of the fee shifting, Hall, supra,
412 U.S. at 5, and would not “saddle the unsuccessful
are with the expenses”, Mills, supra, 396 U.S. at 396.
Finally, such an extraction should not serve as a dis-
incentive to future plaintiffs since named plaintiffs in
derivative and/or class action securities cases often ex-
pect and receive only modest recovery, Oppenlander,
supra, 64 F.R.D. at 614.
Accordingly, supplementary proceedings will be
necessary in this case to determine the fair amount of
attorneys’ fees and other expenses incurred by plaintiffs.
A second remaining matter involves plaintiffs’ re-
quest that punitive damages be assessed. Since, as the
rties apparently agree, all counts of the complaint
ave been tried, this request properly is now before me.
—T4a—
it is urged that such a request ought be granted since
the common law claim is found to have merit.’
Count I alleges common law fraud. The elements of a
cause of action for fraud and deceit have been described
in this District as follows: “There must be (1) a false
representation of (2) a material (3) fact; (4) the defen-
dant must know of the falsity (scienter) but make the
statement nevertheless for the purpose of as the
plaintiff to rely on it; (5) the plaintiff must justifiably
rely on it; and (6) the plaintiff must have suffered
damage as a consequence.” Burkhart, supra, 363
F.Supp. at 1291. But — to Burkhart, to recover
punitive damages for common law fraud, plaintiff needs
to 2 that the false representations were wantonly
and designedly made. Ohio courts have required proof of
malice before allowing punitive damages. Burnett v.
Sebel, 150 N. E. 2d 304, 306 (Ohio Ct. A 1 1958);
Wilchins v. Pool, 29 Ohio App. 2d 223, 280 N. E. 2d 396,
399 (Ohio Ct. Appls. 1971).
I am of the opinion that in this case there is no eviden-
tiary nor equitable basis for awarding punitive damges.
No showing of “gross and malicious fraud” has been
made. Wilchins, supra, 280 N.E. 2d at 399. I am par-
See: “Comment: The Reappearance of Punitive Damages in
Private Actions for Securities Fraud”, 5 Tex. Tech L. Rev. 111
Fall 1973); 3 2807) of the Securities Exc Act: Punitive
ameaes and Pendent State Claims”, 46 U. Colorado L. Rev.
59 (Fall 1974); Flaks v. Koegel, 504 F.2d 702, 706-707 1 55
Cir. 1974); Coffee v. Permian Corp., 474 F.2d 1040, 1044-1045
5th Cir. 1 , cert. den. 93 8. Ct. 2736 (1973); Young v.
aylor, 466 F.2d 1329 (10th Cir. 1972); In re Caesars Palace
Securities } F.Supp. 366, 394 (S.D. N.Y. 1973);
Burkhart v. A Trust, 363 F.Supp. 1286, 1290-1292
2 III. 1973). See also de Haas v. Empire Petroleum Co.
F.Supp. 647 Ge 1969), rev'd in this part, 435 F.2d
1223, 1229-1232 (10th Cir. 1970) [where no common law
claims appear to be present) an v. Wolf Corp., 406
F.2d 291, 302-303 (6th Cir. 1969) wy no common_law
claims appear to be present]. But see er v. First
National Bank of Lincolnwood, 326 2 1186, 1192-1193
ND. Ill. 1970), appl dismissed 465 F.2d 234 (7th Cir.
—T5a—
ticularly impressed by evidence presented by the defen-
dants on the issue of good faith during the formation
and adoption of the merger terms, by the lack of any
substantial evidence showing actual malice, and by the
nature of the securities law violation charged in Count
II. My opinion on Count I would remain unchanged even
if Illinois or New york common law, rather than Ohio
7 4 188 NI or Davis FS Aveo Corp., 371
Supp. q D. Ohio 1974); eld, su 378
F.Supp. at 131; Roda v. Berko, 401 115308 349-40, 81
N.E. 2d 912, 914 (1948). Whether punitive damages can
be recovered under Count III is foreclosed by my opin-
ion.
A third remaining matter involves the propriety of
allowing pre-judgment and post-judgment interest on
the monetary award. Section 3 of Chapter 74 of the Il-
linois Revised Statutes provides a statutory ap-
propriate” rate. Cant v. Becker & Co., Inc., 379 F.Supp.
972, 974 (N.D. Ill. 1974); Chicago, R. I. & P. R. Co. v.
Chicago, B. & O. R. Co., 55 F.R.D. 209, 210 (N.D. III.
1972); 28 U.S.C. § 1961.
The law is settled that pre-judgment interest is within
the Court's discretion, since the Exchange Act is silent
on the issue. (Compare 15 U.S.C. § 771 with 15 U.S.C.
§ 78bb. See also Royal Indemnity Co. v. U.S., 313 U.S.
289, 296 (1941); Rodgers v. U.S., 332 U.S. 371, 373-374
(1947); and Speed, supra, 235 F.2d at 374). Even if the
award were based upon charges of common law fraud,
pre-judgment interest is discretionary. Smith v. Dravo
Corp., 208 F.2d 388, 391 (7th Cir. 1953).
Pre-judgment interest is said to be more likely in
§ 10(b) cases than in § 16(b) cases, since § 10(b) involves
a necessary finding of a “manipulative or deceptive
device or contrivance” while § 16(b) involves only a find-
ing of a certain type of profit— rdless of the
profiteer’s intention. Thus, a showing of “good faith” by
a § 16(b) violator may preclude a pre-judgment interest
allowance. Blau v. Lehman, 368 US 403, 414 (1962);
Gold v. Sloan, 486 F. 2d 340, 353 (4th Cir. 1973), reh. den.
2d 729 (4th Cir. 1974); Allis-Chalmers Mfg. Co. v.
Gul "i Western Industries, Inc., 372 F.Supp. 570, 590
(N.D. Ill. 1974); Marquette Cement Mfg. Co. v. Andreas,
239 F.Supp. 962, 968 (S.D. N.Y. 1965). Yet a similar
showing of “good faith” by a § 10(b) violator may not
reclude pre-judgment interest. Her eld, supra, 378
F.Su p. at 129, n. 31; Chasins v. Smith, Ba & Co.,
438 F.2d 1167, 1170 and 1173 (2nd Cir. 1970); Norte,
supra, 304 F.Supp. at 1111; 8 supra, 235 F.2d at
374; Swanson, supra, 475 F.2d at 521 [where the
Seventh Circuit Court of Appeals awarded pre-judgment
interest covering a s seven years, although the
merger terms involved were found to be fair) and at 529
[where a dissenting judge would haye awarded pre-
judgment interest covering a seven year span on an
award based upon unfairness of the merger terms).
I conclude that an award of pre-judgment interest is
appropriate in this case. At most, the inequity of award-
ing a high rate of interest, is found in the following
10 My own crucial distinction between § 1b) and § 16(b)
cases is implicit in the row va * *
* further opinion concept of in
10000 — 4 offends — Since interest ts “the
w of money, (or money measured values L
—3 be treated as such. If one wrongful deprived of
the use of money in which one has a pro t, the
wrongdoer should return it with the wages it
reasonably could have earned & the ported ite
owner could have put it to work. The purchaser of stock
a corporation, issued and outstanding, i not taking from
the corporation itself values which could
itself have put to work. It is conceivable that the diving in
and out a short-swing profiteer can injure the
corporation. I find no support for the idea that — —
the profit to the injury would be measuring com
A ration’s relationship to its issued and ing
stock is fiduciary. When a stockholder transfers his stoc
to another, the 142 relationshi tact.
The corporation itself has been ved of nothing.
Allis-Chalmers, supra, 2 F.Supp. — re
Clearly, plaintiffs here a proprietary
full — 4 Auto-Lite shares at the time r
earlier indicated, that full value was not received since th
exchange ratio overvalued Mergenthaler capital stock in
relation to Auto-Lite common stock.
—774a—
observations. First, the violation of § 14a) to a large ex-
tent involved a failure to provide sufficient emphasis in
the proxy statement on the interrelationship of the Auto-
Lite and Mergenthaler boards; yet, the proxy statement
did contain ... information which would indicate to
those aware of corporate mechanism that Mergenthaler
had the power to select a majority, if not all, the
members of the (Auto-Lite) board and may well have ex-
ercised it, and that a minority, at least, were directors of
both (Auto-Lite and Mergenthaler).” Mills, supra, 403
F. 2d at 433. Second, other misleading aspects of the
proxy solicitation did not relate to the terms of the
merger itself. Mills, supra, 396 U.S. at 389. Third, as
noted earlier with respect to the matter of punitive
damages, there is no significant direct evidence of the
defendants’ malice or bad faith. The violation was not
clearly, and without a doubt, “manipulative or decep-
tive.”
Further, consideration must be given to the conduct of
the defendants during the long history of this case. Very
little, if any, delay in these proceedings was caused by
the defendants. Compare Gerstle, supra, 348 F.Supp. at
981-982, where pre-judgment interest was awarded, 478
F. 2d at 1310. See also Pearlstein v. Scudder & German,
346 F.Supp. 443, 454-455 (S.D. N.Y. 1972) and Shinki
Boeki Co., Ltd. v. SS Pioneer Moon, 378 F.Supp. 418,
419 (S.D. N.Y. 1974). Also worthy of consideration is the
fact that this case “primarily involved an issue of law
which was novel at the time the suit was commenced.”
Hodgson v. American Can Co., 317 F.Supp. 152, 161
(W.D. Ark. 1970), rev'd. 440 F.2d 916 (8th Cir. 1971).
See also Allis-Chalmers, supra, and Speed, supra, 135
F.Supp. at 199.
On the other hand, Auto-Lite and its former share-
holders were deprived of a certain percentage of the
12 in Eltra on the date on which the exchange
ratio effect. Deprivation on this percentage of
ownership is stated in terms a loss of money at the time
of the merger.
—78a—
In this case, I have attempted by an award of
damages to compensate Auto-Lite and its former
shareholders for the value of the interest in Eltra which
they did not receive at the time of the merger. Granting
pre-judgment interest on this award cannot, however, be
equated with compensating for the loss of what the
petitioners would have earned between 1963 and 1975
by themselves putting to work the money value of this
interest in Eltra. Many former Auto-Lite shareholders
continued to hold Eltra stock long after the merger.
Much of this holding would have occurred even if Auto-
Lite and its shareholders had been granted a full and
fair interest in Eltra at the time of the merger.
Determining the loss of earnings from 1963 to this date
on the value of the interest in Eltra which Auto-Lite and
its shareholders did not receive actually depends, in
large part, upon the dividends on the interest in Eltra
which the former Auto-Lite shareholders did not receive
prior to the sale—if sold—of their shares in Eltra, the
difference in the market value of the interest in Eltra
which was actually sold and of the interest in Eltra
which would have been sold by the former Auto-Lite
shareholders had the merger been fair, and the loss of
what the sum of these lost dividends and market value
differences would have earned for each of the former
Auto-Lite shareholders from the date of the sale of their
shares in Eltra to this date of judgment. Although the
former Auto-Lite sh
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