Petition — Shapiro v. Midwest Rubber Reclaiming Co.

: Supreme Court, U. S,

80-625) FILED

No.

BHT 1 7 1980

sala ; MICHAEL RODAK, JR., CLERK

Supreme Court of the United States

OCTOBER TERM, 1980

7

ALVIN J. SHAPIRO, et al.,

Petitioners,

vs.

MIDWEST RUBBER RECLAIMING Petition For A

COMPANY, MIDCON IN- Writ Of Certiorayi To

DUSTRIES, INC., f/k/a GOOD- |} _ The United States

RICH REALTY AND DEVEL- Court of Sen For

OPMENT GROUP, INC., CARL H. The Eighth Circuit

TOTSCH, RICHARD M. COHEN,

MORRIS WEISSMAN, MICHAEL

MILLER AND STANLEY KREIT-

MAN,

Respondents. 4

ee

wa

LOWELL E. SACHNOFF

One IBM Plaza,

Suite 4700

Chicago, Illinois 60611

(312) 644-2400

Counsel for Petitioner

Jack L. BLock

CHARLES R. WATKINS

Sachnoff Schrager Jones

Weaver & Rubenstein, Ltd.

One IBM Plaza,

Suite 4700

Chicago, Illinois 60611

(312) 644-2400

JOHN L. Davipson, Jr.

Greenfield, Davidson, Mandelstamm

& Voorhees

721 Olive Street

St. Louis, Missouri 63101

(314) 241-5735

Of Counsel

October 13, 1980

Pandick Press Midwest, inc. Chicago ¢ 454-7600

QUESTION - PRESENTED

3 Do non-tendering shareholders who

were damaged, but did not trade or rely

upon material misstatements, omissions and

market manipulation by the offeror, have a

cause of action under Section 14(e) of the

Williams Act, 15 U.S.C. §78n(e).

o 44 «

TABLE OF CONTENTS

Page

Question Presented. . ..-«-+-+- ii

Opinions Below . . . « «© «+ «© «© « «

2

Jurisdiction 2 a — . a + e & eo * o 2

Statute Involved. ...++-+«-e«« » 3

4

Statement of the Case ..+-+«s «

Reasons for Granting the Writ. .. 16

Conclusion . « «© «eeeersee @ e@ 32

TABLE OF AUTHORITIES

CASES:

Exchange

Commission, =~ 3s8s..2 100 s§.Cct.

1945 (1980) RS Oa a ee

, 406 v. s. 128

reb. canted. 407 U.S. 916, reh.

denied, 408 U.S. 931

(1972) on oo ww ww cw oo ohbrd5

, 426 U.S. 341

Ie) oe ees + - S

Stores, a U.S. 723 reh.

denied, 423 U.S. 884 (1975) .. 24

409 F.2d 937, (2d Cir. 1969). . 28

425 U.S. 185, reh. denied,

425 U.S. 986 (1976) . . «© « « « 33

- tiie

ev

eo P.2d 220 (8th Cir. 1975),

denied, 423 U.S. 1054

Uy oe

~y¥i—Ri me , 76 F.R.D. 149

(W.D. Mo. 1977) Le See a ee ee

467, F Supp. 227 (W.D. Tex.

RRR de 6 « 38

Iroquois-Industries.-Inc.-v,

Syracuse-China-Corp., 417 F.2d

963 (2d Cir. 1969), sert. denied,

399 U.S. 909 (1970)... - «2

392 a. ie Fe: Op ne C

’ 619 F.2d 192 (2d

Cir. 1980) = a ° 7 = so * 7 om — 29, 30

391 FP Supp. 1279 (£.D. Pa.

1975) + a ee . + w — a . 2 = a yi 29

ef &

588 P. 2d 1189 (Beh Cir. 1978) - 13,19

Inc., 430 U.S. 1, reh. denied, 430

U.S. 976, reh. denied sub nom

Pirst-Boston-Corp,-v,-Chris-

Craft-Industries.-inci, 430 U.S.

976, reh. denied sub nom Bangor

Punta-Corp,-v,-Chris-Craft—

industries;-Inc., 430 U.S. 976

(1977) _ * - . 6 - & - o a a os 30, rp

, 470 FP. oy 173 (E.D.

Mo. 1979) . » » + » +» - +» » 12

Company, 626 F.2d 63 (8th

Cir. 1980) i. Se oe eee ee ee ee -14,15

-~

’

489 F.2d 579 (5th Cir), cert.

denied, 419 U.S. 873 (1974) . eelcade * i

a. a be , 561 F.2d 429

(2d Cir. 1977), cert. ’

434 U.S. 1035 (1978) . - «27,28,29,30

Inc., 426 U.S. 438 (1977) . « 224,25

STATUTES

15 U.S.C. $78n(e). - - « « « © « opassim

MISCELLANEOUS

Congressional Record

113 Cong. Rec. 24666 (1976) .. ~23

113 Cong. Rec. 24662 (1976) . . .22

No.

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1980

ALVIN J. SHAPIRO, et al.,

Petitioners,

Ve ¥

MIDWEST RUBBER RECLAIMING COMPANY, MIDCON

INDUSTRIES, INC., £/k/a GOODRICH REALTY AND

DEVELOPMENT GROUP, INC., CARL H. TOTSCH,

RICHARD M. COHEN, MORRIS WEISSMAN,

MICHAEL MILLER AND STANLEY KREITMAN,

Respondents.

PETITION POR *-WRIT OF CERTIORARI

TO THE UNI‘ | STATES COURT OF

Petitioners, Alvin J. shapico, et

al., om behalf of themselves and all others

Similarly situated, respectfully pray that

a Writ of Certiorari issue to review the

judgment and opinion of the United States

Court of Appeals for the Eighth Circuit

entered in this proceeding on July 25. 1980

which affirmed the District Court's grant

of summary judgment against plaintiffs in

this securities fraud case.

ee ee TR

OPINIONS BELOW

The opinion of the United States

Court of Appeals for the Eighth Circuit wail

rendered on July 25, 1980, and is reported

at 626 F.2d 63 (8th Cir. 1980). (Set forth

as Appendix A hereto). Petitioners’ timely

petition for rehearing or rehearing en banc

was denied without opinion by the Eighth

Circuit on August 19, 1980 (Appendix B

hereto). |

The opinion of the United States

District Court for the Eastern District of

Missouri was rendered on May 2, 1979. and

is reported at 470 F.Supp. 173 (E.D. Mo.

1979). (Appendix C hereto).

JURISDICTION

The judgment of the Court of

Appeals for the Eighth Circuit was entered

on July 25, 1980. Petitioners’ timely

petition for rehearing or rehearing en banc

was filed on August 8, 1980 and denied on

August 19, 1980.

The jurisdiction of this Court is

invoked under 28 U.S.C. §1254.

STATUTE INVOLVED

Section 14(e) of the Williams

Act, 15 U.S.C. §78n(e), provides:

It shall be unlawful for any per-

son to make any untrue statement

of a material fact or omit to

state any material fact necessary

in order to make the statements

made, in the light of the circum

stances under which they are

made, not misleading, or to en-

gage in any fraudulent, decep-

tive, or manipulative acts or

practices, in connection with any

tender offer or request or invi-

tation for tenders, or any soli-

citation of security holders in

opposition to or in favor of any

such offer, request, or invita-

tion. The Commission shall, for

the purposes of this subsection,

by rules and regulations define,

and prescribe means reasonably

designed to prevent, such acts

and practices as are fraudulent,

deceptive, or manipulative.

STATEMENT OF THE CASE

This petition seeks review of a

decision of the United States Court of

Appeals for the Eighth Circuit holding that

under Section 14(e) of the Williams Act,

non-tendering shareholders who are actually

damaged by deception and market manipula-

tions in connection with a tender offer,

suffer no damage as a matter of law and

therefore have no cause of action unless

they can also prove that they traded or

somehow “relied” upon the deception and

market manipulation. The District Court

granted summary judgment to the defendants,

and although the Eighth Circuit found that

the bases for the District Court's ruling

were in error, affirmed its decision on

entirely different grounds. The posture of

the case in this Court, however, remains

the same as on the grant of a motion for

summary judgment; all facts well pleaded

are presumed to be true where, as here, no

contrary proof was ever adduced below.

Bishop vy. Wood, 426 U.S. 341, 347 (1976).

Factual Background

In March of 1975, the petition-

ers, Alvin J. and Jeanne K. Shapiro

("Shapiros" or "“Petitioners") owned 500

shares of stock in defendant Midwest Rubber

Reclaiming Company ("Midwest"), a Delaware

corporation doing business principally in

Illinois. In June of 1975, Petitioners

filed this action on behalf of themselves

and other shareholders similarly situated.

They alleged that Midwest and the other

defendants had violated, inter alia, Sec-

tion 14(e) of the Williams Act, 15 U.S.C.

§$78n(e), in connection with an Exchange

Offer made by Midwest for its own stock

which began in March of 1975 and terminated

a month prior to the filing of this action.

The Exchange Offer at issue was

part of a scheme by Defendants to seize

corporate control of Midwest. The scheme

had its genesis in early 1974, when defen-

dant Goodrich Realty and Development Group,

Inc. (which later changed its name to

Midcon, Inc.) ("Midcon"), a New York based

real estate development company, purchased

approximately a quarter-million shares of

Midwest stock, mostly in private trans-

actions at $15 per share. Midwest stock

was then publicly trading on the American

Exchange for between $7.375 and $13.75 a

share. The principal private sellers were

Ernest Larch and Basil Georges, then Mid-

west directors, and a company owned partly

by J. Baxter Brinkman, another Midwest

director. These stock purchases gave Mid-

con over 51 percent of Midwest's voting

shares. :

After selling their Midwest

stock, directors Larch, Georges and

Brinkman resigned from the board, as did

director Spencer Murcheson. At the April,

1974, Midwest Board of Directors meeting,

two of these four vacancies were filled by ~

the election of defendants Richard Cohen

(Chairman of the Board at Midcon) and

Morris Weissman (Midcon Vice-President and

Secretary). In November of 1974. the Board

amended the Midwest by-laws to reduce the

number of directors from nine to seven, the

majority of whom were now aligned with the

new control figure, Midcon.

The Challenged Proxy Statement and Exchange

Offer

In September of 1974, the Midcon-

dominated Midwest board decided to increase

Midcon's ownership of Midwest's stock from

51 per cent to more than 80 percent. To

achieve 80 percent ownership for Midcon,

the Midwest board approved the challenged

plan to acquire at least 80 percent (and up

to all) of the outstanding Midwest common

stock through an offer to Midwest's share-

holders to exchange their stock for a $12

principal amount subordinated debenture

bearing 12 percent annual interest.1

On March 20, 1975, the Exchange

Offer commenced and after one extension,

terminated on May 30, 1975. The offering

circular sent to Midwest's shareholders as

the basis for the Exchange Offer was chal-

lenged by the Shapiros in their complaint

under Williams Act Section 14(e) as being

false and misleading in several respects,

1. Throughout tLis case, Petitioners have

alleged, and not only does no contrary

proof exist, but these facts are presumed

to be true, that the $12 debenture was

worth only $7 to $9, the value ascribed to

it in an appraisal by Midwest's own invest-

ment tankers made shortly after the Peti-

tioners and others complained to the SEC or

filed suits. This was far below the $15

per share price paid to Midwest's former

directors for their stock and below the

value of the Midwest stock at the relevant

time measured either by net current asset

= ($13.14) or book value ($23.29) per

share.

primarily by falsely stating that share-

holder participation was “completely volun-

tary" when in fact Defendants forced the

shareholders to make the non-choice of

either accepting $12 debentures of lesser

value than their stock or retaining their

stock in a delisted company saddled with

huge debts, no longer subject to SEC

disclosure requirements, without dividend

peoapects and which could be merged at any

time into Midcon.2 Petitioners did not

tender their stock in response to the

Exchange Offer; however, 127,000 shares

2. Petitioners further alleged, and again

on the granting of a motion for summary

judgment, these facts are presumed to be

true, that the Exchange Offer was deceptive

for failing to obtain an independent

appraisal of the fairness of the offer,

failing to disclose the $12 debenture was

not worth $12 and would trade at a discount

(which it did), failing to disclose Mid-

con's intention to make a cash tender offer

if the Exchange Offer resulted in its hold-

ing less than 80 percent of Midwest's com-

mon stock, failing to state a legitimate

business purpose for the Exchange Offer and

misstating Midcon's intention to not merge

with Midwest despite contrary representa-

tions in Midcon's Schedule 13D filed with

the S.E.C.

were tendered, increasing Midcon's owner

ship of Midwest to 73 percent.

Unchallenged. Post-Praud- Occurrences

In December of 1975, Midwest con-

tinued in its efforts to increase Midcon's

percentage ownership to more than 80 per

cent by making a cash tender offer to its

shareholders at $9 per share. This was

accepted by a sufficient number of share-

holders to boost Midcon's ownership of

Midwest to 82 percent. Again, Petitioners

did not tender.

The final step was taken and

Midwest ceased to exist as a publicly held

company when in March of 1978 the Midwest

Board approved a freeze-out merger of

Midwest into Newco, Inc., a Midcon sub-

sidiary, by an involuntary exchange of all

remaining outstanding Midwest common stock

for $45 principal amount subordinated

- 10 -

debentures with 10 percent annual inter-

est.3 This freeze-out was approved at the

March 15, 1978, Midwest shareholders’

meeting and thereafter accomplished.

Neither the 1978 freeze-out merger nor the

earlier December, 1975, cash tender offer

is challenged in this lawsuit. Indeed,

Petitioners exchanged some of their Midwest

stock for the $45 debentures tendered to

them in the 1978 merger.

DISTRICT COURT PROCEEDINGS

The District Court initially cer-

tified a plaintiff class of all persons who

were Midwest shareholders as of March 20,

1975 (the effective date of the challenged

Exchange Offer) who did not sell or

exchange their stock during the March 20

Exchange Offer. The class was iaccer nar-

rowed to exclude shareholders who exchanged

3. The $45 debenture has been valued at

approximately $40, which Petitioners do not

contest.

oe |

shares pursuant to the December, 1975, cash

tender offer.

In February of 1979, the Defend-

ants jointly moved for dismissal or summary

judgment, arguing, inter alia, that the

March, 1978, merger mooted the Shapiros'

damage claims. The District Court granted

the motion on May 2, 1979, Shapiro v,

Midwest Rubber Reclaiming Co.,470 F. Supp.

173 (E.D. Mo. 1979), reasoning that because

in the March 1978 freeze-out merger the

Shapiros could receive a $45 debenture for

each share, whose value exceeded the value

the Petitioners claimed for their stock,

they could not, as a matter of law, have

been "damaged" by the fraudulent conduct of

the defendants occurring three years ear-

lier in the March 1975 Exchange Offer.

The Petitioners appealed the

District Court's summary judgment ruling

that Petitioners could prove "no damages,"

- 12 -

as well as its refusal to certify a share-

holder class consisting of all Midwest

shareholders as of March 20, 1975 (instead

of only those who did not tender in

response to the March 20, 1975, Exchange

Offer and the December, 1975, tender

offer).

The Eighth Circuit agreed with

the Petitioners that the District Court had

plainly erred in holding that the 1978

freeze-out merger eliminated Petitioners’

1975 damages, reasoning that if culpable

conduct exists, damages are measured at the

time of either the misconduct or its rea-

sonable discovery. The Eighth Circuit cor-

rectly applied the “second investment deci-

sion" rule developed in Harris vy. American.

Inveatment.Co., 523 F.2d 220 (8th Cir.

1975), cert. denied, 423 U.S. 1054 (1976)

and Nye y. Blyth-Eastman Dillon-& Co., 588

P.2d 1189 (8th Cir. 1978), “that damages

for securities fraud are fixed at the time

that the fraud is committed or discovered,

and that after fraud events (such as a

subsequent merger) are irrelevant."

Shapiro-v. Midwest Rubber Reclaiming Co.,

626 F.2d 63, 69 (8th Cir. 1980); (Appendix

A, at 20) However, instead of reversing

the District Court because of its erroneous

reliance upon after-fraud events, the Court

of Appeals affirmed the District Court's

judgment on entirely new and different

grounds. The Eighth Circuit concluded that

as a matter of law the Shapiros could have

suffered no damage from the defendants'

omissions, misstatements and market

manipulation because the defendants’

illegal conduct did not actually harm the

plaintiffs

either directly (through actual

reliance) or indirectly (by

affecting the market upon which

the party traded.) [citation

omitted] In this case, the

Shapiros neither relied nor

traded and so they were never

harmed as a result. [footnote

omitted]

Id. (Appendix A, at 21) “Because [peti-

tioners] were never adversely affected by

= 14 «

the fraudulent conduct of which they com-

Plain ... in this case, the Shapiros

neither relied nor traded ... they were

never harmed as a result." Id.; (Appendix

A, at 22)4

The question raised in this

petition, whether a non-tendering share-

holder has standing to bring an action

under Section 14(e), was not briefed prior

to the Eighth Circuit's decision because

the controversy there focused on whether

the subsequent, unrelated 1978 freeze-out

merger could, as a matter of law, eliminate

damages sustained by Petitioners in 1975.

4. As a consequence of its "no damage”

holding, the Eighth Circuit likewise

affirmed the District Court's class certi-

fication order, stating that because the

Petitioners suffered no injury themselves

they could not properly represent any

Class, let alone one composed of tendering

and non-tendering shareholders. JId., at

71; (Appendix A, at 32). Petitioners do

not raise this issue in their petition

because prevailing on the Section 14(e)

question will necessarily require

reconsideration of the class certification

issue.

- 1§ -

REASONS FOR GRANTING THE WRIT

The reasons for granting the writ

are: (i) the issue of whether non-tendering

shareholders have a cause of action under

15 U.S.C. 78n(e) raises an important,

recurring question of federal securities

law which has not been, but should be,

settled by the Court and (ii) there is a

conflict among the Courts of Appeals with

respect to the issue of whether non-tender-

ing shareholders may sue under 15 U.S.C.

78n(e).

1. THE EIGHTH CIRCUIT'S HOLDING

UNDER 15 U.S.C. 78n(e) RAISES

IMPORTANT QUESTIONS OF FEDERAL LAW

WHICH HAVE NOT BEEN, BUT SHOULD BE,

meee SETTLED BY THIS COURT,

Petitioners recognize that simply

showing that the Eighth Circuit's opinion

is wrong does not satisfy the prerequisites

of certiorari jurisdiction, which was con-

ferred upon the Court "to decide issues,

‘the settlement of which is of importance

to the public as distinguished from...the

parties.'" Jones v. Alfred H, Mayer Co.,

392 U.S. 409, 479 (1968) (Harlan, J., dis-

senting). However, the error in the Eighth

Circuit's decision has caused a serious

encrozchment of important, federally pro-

tected rights. By fashioning a new rule

which provides that although there is

deception and manipulation in connection

with a tender offer subject to Section

14(e) of the 1934 Act, non-tendering share-

holders have no cause of action unless they

"trade or rely," the Eighth Circuit has left

a significant class of shareholders

unprotected by the federal securities law.

Reliance or Trading

Shareholders of a corporation

such as Midwest, when faced with an ex-

change or tender offer for their shares,

have only 3 choices: (1) they can tender

their chares, (2) they can sell their

shares or (3) they can hold their shares.

Where, as here, the exchange offer, is

deceptive and manipulates the market for

» i727 -

the shares, there is no justification for

holding that shareholders who tender or

trade have a cause of action whereas

Shareholders who refuse to tender or trade

do not. Both are equally damaged.5

The damages sustained by the

non-tenderers in this case arise from their

inability to realize a fair value for their

stock in March through May of 1975, which

is unrelated to whether they tendered or

relied in any manner on the fraudulent

5. The capriciousness of the Eighth

Circuit's distinction between traders and

non-traders is manifest if applied to two

hypothetical Midwest shareholders faced in

March of 1975 with the same defective

Exchange Offer: A who sells his shares in

the market for $7 and immediately

repurchases the same number of shares for

the same $7 price and B, who faced with the

Same non-choice does not tender or sell his

Shares. A and B end up identically

Situated in every respect, except that

under the Eighth Circuit's rule A would

have a cause of action but B would not.

The Eighth Circuit's holding denies relief

to non-tendering shareholders simply

because, in the face of a deceptive and

manipulative exchange offer, then decide to

hold rather than sell or tender their

shares,

- 18 -

offering circular. At that time, they were

forced to sell their shares to the offeror

or on the market at a depressed price or to

retain them at a depressed value. Under

the admittedly controlling Harris-Nye rule

of the time for damage calculation, the

Petitioners' damages were fixed in March of

1975 as the difference between the $7 to $9

debenture value forced on them whether they

tendered or not, and the true value of

their shares at the time of the fraud or

its reasonable discovery. At that time,

tenderers held debentures worth less than

their stock and non-tenderers held stock

whose value had been manipulated to an

artificially low level; both were equally

damaged. As the Eighth Circuit recognized,

the subsequent fortuitous escalation in the

value of the Petitioners' stock is irrel-

evant.

- 19 -

7%

ey

Additionally, all non-tenderers

were damaged by their demonstrable inabil-

ity to pledge their depressed stock at true

value as loan collateral or list it as such

on financial statements for other credit

availability purposes. The Petitioners

have never been allowed to adduce any proof

on this aspect of their manipulation-

related danages, though they have always

stood ready to do so.

Thus, the Eighth Circuit has

summarily misapplied its own damage rules,

denied petitioners the right to show

damages unrelated even to its erroneous

reliance rule and completely undermined the

ability of non-tenderers to prove a cause

of action under Section 14(e) .6

6. Indeed, the Eighth Circuit's requirement

of reliance by non-tenderers is a

contradiction in terms. In the usual case,

reliers tender. Although it is conceivable

that reliers could reject the inducement to

tender, in the vast majority of cases this

is not so. To deny protection to the vast

majority of non-tenderers works a serious

injustice and contravenes Congress' stated

(Footnote continued)

- 20 -

Not only does the Eighth Circuit

deny recovery to substantiai shareholder

classes, its rule undermines the careful

congressional plan to protect all share-

holders faced with a tender offer from

deceptive or manipulative conduct. When

the offeror deceives and manipulates the

market for the subject shares,’ all share-

holder-offerees are damaged irrespective of

whether they tender, trade or hold. Decep-

tive information coupled with a manipula-

tive scheme destroys the integrity of the

securities markets which the Williams Act

was designed to protect. Senator Williams,

the Act's principal sponsor, made this goal

clear:

6. (continued)

intention to protect them from fraud and

deception.

7. In this case, the artificial depression

of the market price for Midwest's shares to

the admitted $7-9 range resulting from the

Exchange Offer for debentures with that

limited value.

= 21 -

113 Cong.

Today, the public stockholder in

deciding whether to reject or

accept a tender offer possesses

limited information. No matter

what he does, he acts without

adequate knowledge to enable him

to decide rationally what is the

best course of action. This is

precisely the dilemma which our

securities laws are designed to

prevent. The competence and

integrity of a company's manage-

ment, and of the persons who seek

management positions, are of

vital importance to stockholders.

Secrecy in this area is inconsis-

tent with the expectations of in-

vestors and impairs public confi-

dence in our Nation's securities

markets....

Rec. 24662 (1976).

The Eighth Circuit's ruling

improperly carves out from the protection

of the Williams Act all those shareholders

who, when faced with an unlawful exchange

offer, decide not to tender their shares.

As a result of this holding, target share-

holders are forced to tender their shares

(or sell them to others who may tender) in

Order not to be frozen out of a damage

- 22 <-

recovery from a defective exchange or

tender offer.

Such a result works an impermis-

sible shift in the delicate balance

Congress intended to maintain between

offerors and target companies. Senator

Williams stated:

We have taken extreme care to

avoid tipping the scales either

in favor of management or in

favor of the person making the

takeover bids. S. 510 is

designed solely to require full

and fair disclosure for the

benefit of investors.

113 Cong. Rec. 24664 (1976).

The Eighth Circuit's ruling is

thus inimical to both of the crucial policy

considerations which underlie the Williams

Act: first, to protect from deception and

manipulation all shareholders -- not just

some -~ faced with an exchange or tender

offer, and second, to maintain a fair

balance between target and offeror. The

ruling arbitrarily excludes large numbers

of shareholders who choose not to tender

- 33 -

(or sell) their shares and tips the scales

substantially in favor of offerors by

requiring shareholders to tender if they

desire to protect their rights to recover

for damages.

Unsolvable-Proof-Problems into-14/(e)-

The mischief caused by the Eighth

Circuit's ruling is nowhere more apparent

than when analyzed in terms of its inflex-

ible reliance requirement. To require

subjective proof of reliance by non-ten-

derers presents the same unsolvable proof

problems rejected by this Court in favor of

objective tests of materiality and causa-

tion in TsC- Industries Inc.-v, Northway

Inc., 426 U.S. 438, (1977) and Affiliated

Ute Citizens-v,-United-States, 406 U.S. 128

(1972). A non-reliance rule, however, com

ports with the emphasis on objectivity

stressed in Blue Chip-Stamps-y,-Manor-Drug

Stores, 421 U.S. 723 (1975). There, the

- 24<-

Court ruled that under Section 10(b) a

plaintiff must have purchased or sold a

security during the relevant period because

any other rule would allow potentially

indefinite plaintiff classes of persons

Claiming they "would have" purchased or

sold had the true facts been known. Under

Section 14(e), the shareholder requirement

appropriately limits the potential plain-

tiff class and no such indefinite class

problems exist.

The decision of the Eighth Circuit

introduces exactly the element of uncer-

tainty resulting from mainly oral proof of

subjective mental states which Klue-Chip

sought to avoid. Allowing non-tenderers to

sue without respect to subjective reliance

and on the basis of the objective tests of

materiality and causation established by

TSC Industries and Affiliated-Ute assures

properly delimited classes and obviates

= 38 «

;

os

subjective state-of-mind proof difficul-

ties.

2. THERE IS A CONFLICT AMONG THE COURTS OF

APPEALS .-__-_-_: sthn O@M@O@e rc edcaceae ° +s wow @e see

In Smallwood-v, Pearl Brewing

Company, 489 F.2d 579 (Sth Cir.), cert.

denied, 419 U.S. 873 (1974), the Pifth Cir-

cuit ruled that a non-tendering shareholder

who was frustrated in his attempt to tender

his stock by missing the tender deadline

could maintain an action under Section

14(e) and could do so even though he could

not possibly have relied on the defendants’

fraudulent misrepresentations. Pocusing on

the existence of an injury caused by fradu-

lent conduct, the court stated:

eee under Section 14(e) a plain-

tiff may gain standing if he has

been injured by fraudulent

activities of others perpetrated

in connection with a tender

offer, whether or not he has

tendered his shares.

489 F.2d at 596.8 By ruling that

8. The court went on to affirm the district

court's grant of summary judgment to the

defendants finding that no illegal conduct

had occurred.

= 26 -

non<tendering shareholders cannot sue (and

that reliance must be proved), the Eighth

Circuit contradicts the Fifth Circuit's

Smallwood decision.

The Eighth Circuit's holding also

runs counter to the Second Circuit's deci-

sion in Stull vy. Bayard, 561 F.2d 429 (2d

Cir. 1977), cert. denied, 434 U.S. 1035

(1978). There, the Second Circuit stated

that a see-benbeiun shareholder could

recover damages under 14(e) regardless of

his decision not to tender, based on the

fact that his non-tendered stock could be

diminished in value due to misrepresenta-

tions made by the offeror. Likewise, here

petitioners were damaged because their

shares, whether tendered, sold, or held,

were diminished in value by defendants’

unlawful conduct. In Stull, plaintiffs'

damages would be unrelated to reliance,

(indeed, they would be based on a failure

to rely), and the Second Circuit's recog-

- 27 «

nition in Stul] of the non-tendering (and

non-relying) shareholder's right to sue

under Section 14(e) is in direct conflict

with the pronouncement of the Eighth

Circuit here.9 Petitioners submit that had

their appeal come before either the Fifth

Circuit, or the Second Circuit panel which

decided Stull, the result would clearly

have been different; the district court

would have been reversed and the case

remanded for trial.10

9. See also McCloskey vy. Epko Shoes. Inc.,

391 F.Supp. 1279, 1282 (E.D. Pa. 1975).

(Earlier opinion from a Third Circuit

jurisdiction expressly allowing a non~-ten~

Gering shareholder to sue, and rejecting

reliance as an element of damages under

14(e)).

10. Not only does the Eighth Circuit's

opinion conflict directly with Smallwood

and Stull], but it conflicts in principle

with a host of lower court decisions stat-

ing that non-tenderers have an action under

14(e). E.Ger 4 m e

v.Syracuse-China-Corp., 417 F.2d 963, 969

(2d Cir. 1969), cert. denied. 399 U.S. 909

(1970);

national Controls Corp., 409 F.2d 937,

940-941 (2d Cir. 1969); |

OQil/Tesoro Petroleum Corp, Secur..

Litigation, 467 F.Supp. 227 (W. D. Tex.

(Pootnote continued)

- 28 -

Not only is there an inter-

circuit conflict requiring this Court's

intervention, but there is a manifest need

for a coherent policy pronouncement from

this Court to resolve current dissonance in

the lower courts. The discrepancy among the

circuits over the role of reliance in 14(e)

litigation has also led to confusion within

the Second Circuit, itself, as reflected by

the recent decision in Lewis-v. McGraw, 619

F.2d 192 (2d Cir.), cert. pending, 49

U.S.L.W. 3066 (August 19, 1980). There,

the court ignored its prior pronouncement

in Stull] and stated it is "indisputable"

that reliance is "one element of a cause of

10. (continued)

1979); McCloskey v,-Epko Shoes, Inc., 391

F. Supp. 1279 (E.D.Pa. 1975); Hurwitz

(W.D.Mo. 1977). The conflict is evident by

observing that the additional requirement

of personal reliance by non-tenderers in

effect reinstates the purchaser-seller rule

because, in the usual case, the only way to

prove reliance when there is deception is

to accept the tender offer and sell or ex-

change stock.

= 29 -

action under 14(e)" 619 F.2d at 195. But

the proposition considered so well settled

by the Second Circuit in Lewis stands in

conflict with the panels of the Second and

Fifth Circuits which ruled to the contrary

in Stull and Smallwood.

3. THE ISSUE AT BAR, EXPLICITLY LEFT OPEN

BY THE COURT'S DECISION IN PIPER V. CHRIS-

CRAFT INDUSTRIES, INC. 1S RIPE FOR RESOLU-

EE re en en erie Ge Ca ese ree

This Court's landmark decision in

Piper vy. Chris-Craft-Industries,-Inc., 430

U.S. 1 (1977) held that a takeover bidder

lacks standing to sue for damages under

Section 14(e), but explicitly left open the

issue presented here of non-tenderer stand-

ing. The Court stated:

It may well be that [in 14(e)]

Congress desired to protect...

shareholder-offerees who decided

not to tender their stock due to

fraudulent misrepresentations by

persons opposed to a takeover

attempt. [citation omitted].

- 30 -

tender their-securities. 25

feopbants sadedt

430 U.S. at 38-39. In note 25, the Court

stated: "This.case, of course, does not

present that issue, and we express no view

on it." 430 U.S. at 38. Indeed, the

Court's Chris-Craft dictum left open not

only the question of non-tenderer standing

under 14(e), but defined precisely the more

narrow sub-issue here: is proof of reliance

an essential element of a cause of action

under 14(e). This fact is evident in the

Court's reference to those who may be pro-

tected by Section 14(e) as those "who de-

cided not to tender their stock due to

[e.g., in reliance on] fraudulent misrepre-

sentations." The issue of non-tenderer

standing having been left open in Chris-

Craft, along with the reliance question,

the time is ripe for resolution.

Present resolution of the con-

flict in the lower courts over the question

«232

whether non-tendering shareholders may sue

under Section 14(e) would comport with this

Court's long-standing policy of building

decisional securities law carefully, step-

by-step, addressing for its holding only

the narrow issue presented in important

federal securities law cases, leaving for

another day questions imminent but not

squarely presented.1l Litigation under

Section 14(e) is increasing at a rapid rate

and settlement by this Court of the issue

presented here will give necessary guidance

to the lower courts.

CONCLUSION

For the foregoing reasons, Peti-

tioners pray that a writ of certiorari

issue from this Court to the United States

ll. Most recently exemplifying this policy

is the decision in Aaron v,-S,.E.C.,

U.S. _, 100 S.Ct. 1945 (1980) where t the

Court resolved in the defendant's favor the

issue of whether scienter was required in

an S.E.C. injunction action, which had been

left unresolved by the Court's decision in

(Footnote continued)

= 32 -

-_

Court of Appeals for the Eighth Circuit to

review its judgment affirming the District

Court's grant of summary judgment to the

Defendants herein.

Respectfully submitted,

Of Counsel:

Jack L. Block Lowell E. Sachnoff

Charles R. Watkins One IBM Plaza,

Sachnoff Schrager Suite 4700

Jones Weaver & Chicago, Illinois

Rubenstein, Ltd. 60611

One IBM Plaza, (312) 644-2400

Suite 4700

Chicago, Illinois

60611

(312) 644-2400

Counsel for

Petitioner

John L. Davidson, Jr.

Greenfield, Davidson,

Mandelstamm & Voorhees

721 Olive Street

St. Louis, Missouri 63101

(314) 241-5735

October 13, 1980

ll. (continued)

194 n.12 (1976).

, 425 U.S. 185,

@ 33 «

SERVICE-LIST

Mr. John L. Davidson, Jr.

Greenfield, Davidson, Madelstamm

& Voorhees

1516 Chemical Building

721 Olive Street

St. Louis, Missouri 63101

Mr. Jerome I. Kaskowitz

Sidel, Sandweiss & Kaskowiitz

Suite 1510

611 Olive Street

St. Louis, Missouri 63101

Messrs. Thomas L. Croft

and Kenneth W. Bean

Coburn, Croft & Putzell

One Mercantile Center

St. Louis, Missouri 63101

Mr. Melvyn 1. Cantor

Simpson, Thacher & Bartlect

One Battery Park Plaza

New York, New York 10004

Messrs. Jim J. Shoemake

and Michael A. Fisher

Guilfoil, Symington,

Petzall & Shoemake

100 North Broadway

St. Louis, Missouri 63102

CERTIFICATE OF SERVICE

I, Lowell %. Sachnoff, counsel

for Petitioners, hereby certify that on

October 15, 1980, true and correct copies

of the foregoing Petition for Writ of

Certiorari were served on all parties

required to be served by mailing copies to

counsel for all parties as listed on the

attached Service List via first class mail,

postage fully prepaid.

Dated: October 15, 1980

LOWELL E. SACHNOFF

APPENDIX A

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

No.

Alvin J. Shapiro, and )

Jeanne K. Shapiro, as )

Joint Tenants on behalf )

of themselves and all )

others similarly )

Situated and derivatively)

on behalf of Midwest )

Rubber Reclaiming )

Company, )

)

)

)

)

)

Appellants,

Ve

Midwest Rubber Reclaiming

Company, Midcon )

Industries, Inc., f/k/a )

Goodrich Realty and )

Development Group, Inc., )

Carl H. Totsch, Richard )

M. Cohen, Morris )

Weissman, Michael Miller )

and Stanley Kreitman,

)

Appellees.

Appeal from the

United States

District Court

for the Eastern

District of

Missouri

Submitted: December 4, 1979

Filed: July 25, 1980

Before HEANEY, BRIGHT, AND ROSS, Circuit

Judges.

BRIGHT, Circuit Judge.

Alvin J. Shapiro and Jeanne K.

Shapiro, former shareholders of Midwest

Rubber Reclaiming Company (Midwest),

brought this action against Midwest, Midcon

Industries, Inc. (Midcon), and certain of

their officers and directors, alleging

numerous violations of the federal securi-

ties statutes and state and common law.

Having already dismissed several of these

Claims, the district court! granted summary

judgment as to the remainder on May 2,

1979, holding that the Shapiros had

suffered no damages as a result of the

defendants' alleged unlawful activities.

Shapiro v. Midwest Rubber Reclaiming Co.,

470 F. Supp. 173 (E.D. Mo. 1979). The

Shapiros now appeal from this judgment and

the district court's partial denial of

1. The Honorable James H. Meredith, United

States Senior District Judge for the

Eastern District of Missouri.

-2-

their requested class certification. For

the reasons set forth below, we affirm.

I. Background.

Midwest is a Delaware corporation

with its principal place of business in

East St. Louis, Illinois. The Shapiros

became Midwest shareholders in 1973, when

Midwest stock was listed and traded on the

American Stock Exchange. In January and

Pebruary of that year, Alvin Shapiro

purchased 500 shares of Midwest common

Stock at an average price of $12.656 per

share. In December of 1973, the Shapiros

jointly purchased 300 more shares of Mid-

west common stock at an average purchase

price of $9.387 per share.

In April of 1974, Midcon, then

known as Goodrich Realty and Development

Group, Inc., began acquiring Midwest common

stock. Between April 9 and September 30,

1974, Midcon acquired 226,076 shares or

51.72 percent of the outstanding common

stock of Midwest. Midcon purchased 220,776

of these shares in private transactions for

$15 per share. It acquired the remaining

5,300 shares in the open market, at prices

ranging from $12.125 to $13 per share.

Of the shares that Midcon ac-

guired in private transactions, 49,393 were

purchased from two Midwest directors, Basil

Georges and Ernest Lorch.2 Another 22,900

shares were purchased from Computer

Graphics, Inc., a company in which another

Midwest director, J. Baxter Brinkman, had a

25 percent stock ownership interest.3

Georges and Brinkman resigned as directors

shortly after selling their stock;

2. Basil Georges was originally joined as a

defendant in this action, but on October 3,

1977, the Shapiros volunta*ily dismissed

their claims against him. Ernest Lorch has

never been named as a defendant.

3. The Shapiros ori aap 4 named J. Baxter

Brinkman as a defendant, but he has since

been dismissed.

Lorch waited some two months to resign.

Midcon paid a preniun for these shares of

$1.25 to $2.75 over the then-prevailing

market price. Midcon also paid a premium on

other privately purchased shares, ranging

from $1.25 to $7.625 per share over the

market price. us

At the April 16, 1974, meeting of

the Midwest Board of Directors, appellees

Richard Cohen and Morris Weissman were

elected to fill the vacancies created by

the resignations of Mr. Brinkman and Mr.

Georges. On June 3, 1974, appellee Michael

Miller was elected by the board to serve as

a director for the unexpired term of

Spencer Murchison, who had resigned. On

November 25, 1974, the Midwest Board of

Directors unanimously approved an amendment

to the corporate bylaws which reduced from

nine to seven the number of directors of

Midwest.

In September of 1974, the Midwest

Board of Directors approved a plan to offer

Midwest's minority shareholders the oppor-

tunity to exchange their common stock for a

$12 principal amount subordinated debenture

bearing interest at the rate of 12 percent

per year. The purpose of this exchange

offer was to increase Midcon's proportion-

ate ownership of Midwest common stock to 80

percent or more, thus enabling Midcon and

Midwest to file consolidated federal income

tax returns.

On February 7, 1975, Midwest

mailed a proxy statement to all of its

common shareholders announcing the annual

meeting scheduled for February 24, 1975.

The proxy statement disclosed how Midcon

had gained control of Midwest and the

details of the proposed exchange offer. The

Shapiros allege, however, that the prexy

statement was false and misleading, in

violation of section 14(a) of the

Securities Exchange Act of 1934 (1934 Act),

15 U.S.C. 78n(a) (1976), in that it failed

to disclose that (a) Midcon had consented

to Midwest's entering date employment con-

tracts with its officers on May l, 1974;

and (b) the object of the exchange offer

was to permit Midcon to take advantage of

certain tax benefits. At the February 24,

1975, Midwest shareholder meeting, four of

Midcon's nominees were elected to the

seven-man board of directors, giving Midcon

formal control of that board.

On March 20, 1975, Midwest mailed

to its shareholders an offering circular

describing the suber dinated debenture ex-

change offer. The subordinated debentures

offered to the minority shareholders were

later appraised to have had a fair market

value as of the date of the exchange offer

of $9.24 apiece. The closing price of Mid-

west's common stock on the American Stock

Exchange on May 19, 1975, however, was

$7.375 per share.4

The Shapiros allege that the

offering circular sent to Midwest share-

holders on March 20, 1975, contained untrue

Statements and omissions of material

facts.5 More specifically, they allege

that the circular falsely stated that

participation

4. The Shapiros contend that the true value

of the debentures is reflected in the

market price for Midwest common stock at

the time the exchange offer was

outstanding. Appellees respond that the

contingent nature of the exchange offer

destroys any assumption of equivalent

value. Appellees suggest further that the

difference in value between the debentures

and Midwest common stock reflects a premium

roughly equivalent to that received by the

former Midwest directors who sold out

privately to Midcon.

5. These misstatements and omissions, it is

alleged, violated 14(e) of the 1934 Act (as

amended), 15 U.S.C. 78n(e) (1976). In

addition, the Shapiros have asserted as a

derivative claim that the offering circular

violated the antifraud provisions of the

securities laws, i,e., 17(a) of the

Securities Act of 1933, 15 U.S.C.

77q(a) (1976), 10(b) of the 1934 Act, 15

U.S.C. 783(b), and the rules promulgated

thereunder.

in the exchange offer was "completely

voluntary,” when the alternative was to

retain holdings in a delisted and sub-

servient corporation. They allege in

addition that the circular failed to obtain

an opinion of counsel or an independent

appraisal as to the fairness of the trans-

action. Nor did it disclose that the deben-

tures were to be traded at a substantial

discount. Finally, the circular failed to

set forth a legitimate business purpose and

failed to disclose Midcon's commitment to

pursue a subsequent cash tender offer if it

did not receive at least 80 percent of

Midwest's common stock. The appellees argue

that, to the contrary, the offering cir-

cular disclosed all of the relevant infor-

mation about the exchange offer.

This exchange offer, after one

extension, terminated on May 30, 1975.

Approximately 127,000 shares of Midwest

common stock were exchanged during this

period, increasing Midcon's ownership

interest in Midwest's common stock to

approximately 73 percent. The Shapiros did

not tender their shares pursuant to this

exchange offer.6

On November 13, 1975, in an

effort to increase Midcon's ownership

interest to the 80 percent required for

filing consolidated federal income tax

‘returns, the Midwest Board of Directors

approved a cash tender offer whereby Mid-

west would offer to repurchase 30,000

shares of its outstanding common stock at

$9.25 per share. Midwest made its tender

offer in December 1975, and approximately

6. Because the Shapiros were neither buyers

nor sellers, the district court on August

31, 1976, dismissed their individual and

Class claims alleging violations of 17(a)

of the Securities Act of 1933 and 10(b) of

the 1934 Act. See

BeLendan - 378 F.2d 783, 789 (8th Cir.

); Blue Chip Stamps v. Manor Drug.

Stores, 421 U.S. 723 (1975). Although the

Shapiros noted this order for appeal, they

do not challenge it in their brief. Accord-

ingly, we consider the issue abandoned on

appeal.

36,000 shares were tendered in response. As

a result of this tender, Midcon's propor-

tionate ownership of outstanding Midwest

common stock rose to approximately 82

percent. The Shapiros did not participate

in the cash tender offer, and they do not

Challenge it here.

In fiscal 1976 and 1977, Midcon

and Midwest filed consolidated federal

income tax returns, which resulted in tax

savings to both firms. In late 1977, the

Midwest Board of Directors approved a

merger between Midwest and Newco, Inc., a

wholly owned subsidiary of Midcon. The

proposed merger called for the surrender of

all outstanding Midwest common stock in

exchange for a $45 principal amount sub-

Oordinated debenture, bearing interest at

the rate of 10 percent and due in 1998. On

Pebruary 20, 1978, Midwest mailed to all of

its outstanding common shareholders a proxy

Statement together with a cover letter set-

ting forth the terms of the proposed merger

and announcing that the proposal would be

voted upon at the annual shareholders’

meeting. The proxy statement noted that the

$45 subordinated debentures to be exchanged

in the proposed merger had been appraised

at approximately $40 apiece. The merger was

approved at the shareholders' meeting on

March 15, 1978, and the Shapiros thereafter

exchanged or became entitled to exchange

their common stock for the subordinated de-

bentures. The Shapiros have not challenged

this merger. Having invested $9,144.10 in

Midwest common stock in 1973, they now hold

debentures with a face value of $36,000.

The Shapiros filed this action on

June 24, 1975, in the Northern District of

Illinois. Their complaint charged the

appellees with having violated the law by

devising a stock exchange scheme to appro-

priate the assets of Midwest, causing

economic detriment to Midwest's minority

Shareholders. On October 17, 1975, the

action was transferred to the Eastern

District of Missouri. The Shapiros there-

after twice amended their complaint in

response to district court rulings. The

first amended complaint asserted a number

of claims derivatively on behalf of Mid-

west,’ and the second omitted pendent state

law claims.8 The Shapiros' second amended

complaint requested several forms of

relief, but according to their appellate

brief, the Shapiros principally seek

monetary damages equal to the difference.

between the $15 per share paid privately by

Midcon and $7.375, the market price for

?. The district court interpreted the

Shapiro's initial complaint as alleging

derivatively only state and common law

violations of fiduciary duty. In their

first amended complaint, the Shapiros added

derivative allegations that the appellees’

conduct violated both the antifraud pro-

visions of the federal securities laws, see

note 5 supra, and 13(d) of the 1934 Act, 15

U.S.C. 78m (d) (1976), which required Midcon

to file certain information with the SEC

when it purchased Midwest stock.

8. In an order dated September 27, 1977,

(Footnote continued)

13

.

Midwest stock at the time of the exchange

offer.

On June 8, 1978, the district

court partially granted the Shapiros'

motion for class certification. The dis-

trict court certified a class to consist of

all persons who owned shares of Midwest

common stock on March 20, 1975, and who did

not sell or exchange their stock during the

period that the March 20, 1975, exchange

offer was outstanding. The district court

later amended its order to exclude also

those shareholders who did not sell their

8. (continued)

the district court declined to exercise

pendent jurisdiction in this case, and

accordingly it dismissed the Shapiros'

State law claims without prejudice. On

October 18, 1977, the Shapiros filed their

second amended complaint, alleging viola-

tions solely of the federal securities

laws. At the same time, the Shapiros filed

suit in the Circuit Court for the City of

St. Louis, asserting class and derivative

Claims against the appellees for alleged

violations of state and common law duties.

-14-

stock pursuant to the December 8, 1975,

cash tender offer. On February 1, 1979, the

appellees filed a joint motion for summary

judgment, arguing, among other things, that

by virtue of the March 15, 1978, merger,

the Shapiros suffered no damages due to the

alleged unlawful activities of Midcon and

the other appellees in 1975. The district

court granted this motion on May 2, 1979.'

In its memorandum opinion, the

district court reasoned that the Shapiros

were, in the end, sellers of securities,

whose damages were to be measured by the

difference between the fair market value of

their shares when sold and the amount

actually received. Shapiro v. Midwest

Rubber Reclaiming Co., supra, 470 F. Supp.

at 178. Because the Shapiros were to

receive a subordinated debenture worth $40

for each share of their stock, while they

Claimed that their shares were “worth" only

$15, the court held that they could estab-

-15-

lish no damages. The court distinguished

Harris v, American Investment Co., 523 F.2d

220 (8th Cir. 1975), cert. denied, 423 U.S.

1054 (1976), as applicable only to buyers

of securities. The court also dismissed the

Shapiros' derivative claims because, it

found, “no damages can be shown to the

corporation.” Shapiro v,. Midwest Rubber

Reclaiming Co., supra, 470 F. Supp. at 179.

The Shapiros do not challenge this finding

on appeal.? Thus, only the individual and

Class action claims remain for our

consideraticn.

9. To be sure, in their reply brief the

Shapiros suggest that their arguments

seoery ee damages. apply to the district

court's dismissal of their derivative as

well as their class action allegations. The

district court made separate findings with

respect to these claims, however, and the

Shapiros' arguments are restricted to the

proper measure of damages for holders of

securities. The Shapiros do not suggest

that the district court's finding of no

harm to Midwest was clearly erroneous, and

indeed the record before us would not

Support such an argument.

-16-

II. Analysis.

The Shapiros argue strenuously

that the district court mischaracterized

them as “sellers” and that, in any event,

the rule in Harris v, American Investment

Co., Supra, applies to buyers and sellers

alike. We agree that, in an appropriate

case, a defrauded seller may claim damages

under the Harris doctrine. Nonetheless, we

hold in this case that Harris is not rele-

vant to the Shapiros' asserted damages.

In Harris, supra, the plaintiff

had purchased shares in a corporation at a

time when, he alleged, the filing of false

and misleading information had artificially

inflated the market price. The district

court found that Harris had suffered no

damages, because he could have recovered

his investment by selling either just after

-l7<

he had made his investment, or after filing

his lawsuit. This court reversed, holding

that Harris could show damages either by

proving that the actual value of his

securities on the date of purchase was less

than what he paid for them, or by comparing

the latter sum with the market value of the

securities after the fraud was publicly

discovered. Harris v, American Investment

Co., Supra, 523 F.2d at 227. This court

also held that a defrauded buyer of securi-

ties may maintain an action for damages,

even though he continues to hold the

securities. The court noted that such a

buyer has, in effect, made a second invest-

ment decision at the time he discovers the

fraud, one unrelated to his initial de-

cision to purchase the stock. Damages for

fraud in the initial transaction are not

affected by events after this second de-

cision. Id. at 228.

These damage rules are equally

applicable to a defrauded seller. Such a

person may prove his damages by the

difference between the fair market value of

his securities when sold and the amount

actually received, as noted in Ehrler v._

Kellwood Co., 391 F. Supp. 927, 930 (E.D.

Mo.), aff'd on other grounds, 521 F.2d 1347

(8th Cir. 1975). If the "fair" market value

of the securities when sold is unascertain-

able because of the widespread impact of

false and misleading information, then the

seller may employ either of the methods of

proof outlined in Harris to establish his

damages.

This court has specifically

applied the "second investment decision"

rule of Harris to the damage claims of

plaintiffs who were both buyers and

sellers. In Nye v, Blyth Eastman Dillon 5

Cose Inc.» 588 F.2d 1189 (8th Cir. 1978),

the plaintiffs proved that their broker had

made unauthorized purchases and sales of

securities. In a number of instances, how-

ever, the plaintiffs had in effect ratified

the broker's actions. This court held that

the plaintiffs' damages did not extend be-

yond the period in which they relied on the

broker's misrepresentations, plus a reason-

able time thereafter that would allow them

to take corrective action by selling or re-

purchasing the securities in question. Id.

at 1198-1200.

The Shapiros derive from these

cases the rule that damages for securities

fraud are fixed at the time that the fraud

is committed or discovered, and that after-

fraud events (such as a subsequent merger)

are irrelevant. This is true enough in a

securities fraud case, but such is not

really the nature of the Shapiros' claim.

The rule in Harris and its prog-

eny is based upon the proposition that

damages for securities fraud are determined

in accordance with the extent to which

false and misleading information actually

harmed the complaining party, either

directly (through actual reliance) or in-

directly (by affecting the market upon

which the party traded). See Vervaecke v,_

Chiles, Heider & Co., Inc., 578 F.2d 713,

715-16 (8th Cir. 1978). In this case, the

Shapiros neither relied nor traded, and so

they were never harmed as a result.19 They

cannot claim the benefit of the "second

10. The Shapiros allege, however, that

false and misleading information in the

proxy statement and exchange offer prompted

some minority shareholders to sell their

stock for less than it was worth. Although

these shareholders may well have a claim

for damages, the Shapiros and others in

their class (as certified) did not act in

reliance upon this information and cannot

be said to have been harmed by it. It is

for this very reason that the district

court dismissed their individual and class

action antifraud claims. See note 6 gupra.

Indeed, if we assume the accuracy of the

Shapiros' charges, both Midwest and those

of its shareholders who did not participate

in the exchange offer but who sold out

later may have been financially advantaged

by the appellees’ fraudulent conduct.

@2l<-

investment decision" rule because they made

no initial investment decision upon which

liability or damages can be predicated.

Because they were never adversely affected

by the fraudulent conduct of which they

complain, the Shapiros cannot claim the

rule in Harris as a basis for showing

damages to themselves or other members of

their class.

This conclusion does not end our

inguiry, of course. We must examine the

pleadings in this case to determine if

there is some other theory under which the

Shapiros might recover damages. That is to

say, we must examine the grounds asserted

for individual and class relief: alleged

violations of the proxy and tender offer

provisions of the 1934 Act, 15 U.S.C.

78n(a) and (e) (1976) .11

ll. We note in passing that there may be

some question whether the Shapiros have

ea to advance their claim under 15

U.S.C. 78n(e) (1976). C£.

(Footnote continued)

~22<

The Shapiros allege that material

omissions as well as false and misleading

information infected the 1975 proxy state-

ment and exchange offer, both of which con-

tributed materially to Midcon's takeover of

Midwest.12 The Shapiros no longer claim

that this takeover harmed Midwest; rather,

they argue simply that they should receive

the same price per share for their stock as

was paid privately to other Midwest share-

holders. In other words, they claim damages

premised on some notion of fairness. C£.

Holt Civic Club vy, Tuscaloosa, 439 U.S. 60,

66 (1978)

ll. (continued)

Benefit Life Ins. Co., 465 F. Supp. 1349,

1369 (N.D. Tex. 1979) (denying standing to

plaintiffs who clearly did not rely on

alleged misrepresentations in the tender

offer materials). Nonetheless, the district

court did not consider this issue and it is

not before us on appeal.

i2. For present purposes we assume, as we

must, the truthfulness of these allega-

tions. The ailegations suggest that the

Shapiros may have suffered harm despite

their own inaction because the appellees

unlawfully induced other minority

shareholders to exchange their shares.

-23@

(prayer for relief may be examined to

illuminate the substantive theory under

which a plaintiff is proceeding) .13

Undoubtedly, a takeover such as

this (assuming that the eventual merger was

planned from the outset) raises basic fair~-

ness problems in the division of the

purchase price among former shareholders.

See Brudney and Chirelstein, Fair Shares

in Corporate Mergers and Takeovers, 88

Harv. L. Rev. 297, 330-36 (1974); Brudney

and Chirelstein, A Restatement of Corpo-

rate Freezeouts, 87 Yale L.J. 1354, 1361-62

(1978) .14 Moreover, while fairness claims

per se are not cognizable under the federal

13. The Shapiros' complaint also contains

Suggestions that former Midwest directors

acted faithlessly in selling their shares

privately to Midcon. Although in some

circumstances premiums paid to controlling

stockholders can be recovered, see Perlman.

ve. Feldmann, 219 F.2d 173 (2d Cir.), Gert.

denied, 349 U.S. 952 (1955), these circum-

stances are not present here and, in any

event, the selling directors are no longer

parties defendant in this case.

14. Brudney and Chirelstein analogize the

two-step takeover (tender offer or private

(Footnote continued)

-24-

securities laws, see Santa Fe Industries.

inc. v. Green, 430 U.S. 462 (1977), a court

may inquire into the fairness of che terms

of a transaction or a change in corporate

structure to determine the appropriate

relief for procedural irregularities, such

as proxy violations. See Mills v. Electric

14. (continued)

purchase, followed by merger) to a unitary

sale of the firm's assets. Where the firm

itself is sold, all stockholders share pro

rata in the proceeds; Brudney and Chirel-

stein argue that the same rule of pro rata

distribution should be applied where that

result is achieved in successive trans-

actions. That is to say, they would pro-

hibit an acquiring firm from making differ-

ential payments to the shareholders of the

acquired firm. Brudney and Chirelstein also

suggest, however, that payment of a premium

for control is less objectionable if the

acquiring firm proposes to operate the

acquired firm for a substantial period as a

partly owned subsidiary, for then it is

reasonably likely that the minority share-

holders will benefit from the new manage-

ment. Brudney and Chirelstein, gupra, 88

Harv. L. Rev. at 332 n.70. (But gee note 13

Supra.) In such a case the parent firm

assumes a fiduciary duty with respect to

these shareholders. See note 15 infra.

-25-

r%

v

Auto-Lite Co., 396 U.S. 375 (1970) .15

If we assume that the conditions

for such an inquiry are met in this case,

however, we must focus on the fairness of

the entire takeover procedure. Clearly the

Shapiros were harmed, if at all, only when.

the takeover was consummated -- 1,¢., when

they were frozen out in 1978. They do not,

15. In Mills, minority Auto-Lite

shareholders challenged the 1963 merger of

Auto-Lite and Mergenthaler Linotype Co; on

the ground that the Auto-Lite management

had failed to disclose material information

in the proxy statement soliciting approval

for the merger. The Supreme Court held that

the shareholders had established a

sufficient causal relationship between the

omissions in the proxy material and the

merger to justify relief. Id. at 384- 85.

The Court indicated that the fairness of

the terms of the merger would be a relevant

consideration in determining the

appropriate relief. See id. at 386-89.

On remand, the Seventh Circuit

held that the terms of the merger had been

fair to the minority shareholders; accord-

ingly, the court denied them any damages.

Milla v. Electric Auto-Lite Co. $52 F.2d

1239 (7th Cir.), cert. denied, 434 U.S. 922

(1977). The court relied upon Brudney and

Chirelstein, gupra, 88 Harv. L. Rev. at

307-25, in analyzing the fairness require-

ments of the fiduciary duty which a parent

corporation owes to minority shareholders

of its long-held subsidiary.

-26-

however, challenge the terms of the freeze-

out merger or allege that they were harmed

by it.16 Consequently, they cannot show

damages due to alleged unfairness.

We conclude that summary judgment

in this case was appropriate, because the

Shapiros' allegations provide no basis on

any legal theory for granting relief to

them or the other members of their class,

as certified. The Shapiros have simply

failed to establish through their pleadings

that they were personally harmed by the

acts of which they complain. Cf. 15 U.S.C.

78bb(a) (1976) (limiting a person's recovery

under the 1934 Act to “his actual damages

16. The fact that the Shapiros eventually

received a $45 debenture for each share of

their Midwest stock suggests the reasonable

inference that they can advance no personal

Claims of unfair treatment in the takeover

process. Those members of the Shapiros'

Class who sold out before the final merger

can likewise claim unfairness only with

respect to the prices at which they sold.

No such claim is made here.

=27<

3

on account of the act complained of"). We

turn now to consider whether the district

court correctly excluded from the plaintiff

class those Midwest shareholders who

earlier exchanged or tendered their shares.

B. The Class Certification Clain.

The Shapiros argue that, regard-

less of the merits of their individual and

Class claims, the district court erred in

refusing to certify a class of all persons

(except the appellees and their families)

who owned Midwest common stock on March 20,

1975.17 The proposed class would have

included all those who exchanged their

Shares for subordinated debentures

17. [T]he denial of class certification

[is] an example of a procedural

ruling, collateral to the merits of a

litigation, that is a cera after

the entry of final judgment. [Deposit

’

100 S.Ct. 1166, 1172 (1980) (footnote

omitted) .]

pursuant to the March 20, 1975, exchange

offer, or participated in the subsequent

cash tender offer.

Initially, we note that a trial

court has broad discretion in determining

whether a class action may be maintained,

and its determination will not be over-

turned absent a showing that it abused that

Giscretion. Wright v,. Stone Container

Corp., 524 F.2d 1058, 1061 (8th Cir. 1975);

Polin vy. Conductron Corp., 552 F.2d 797,

802 (8th Cir.), cert. denied, 434 U.S. 857

(1977); Bule v. Intern, Ass'n of Bridge,

Etc... Workers, 568 F.2d 558, 563 (8th Cir.

1977). This discretion extends to defining

the scope of the class. After reviewing the

record in this case, we are unpersuaded

that the court abused its discretion in

refusing to certify the class requested by

the Shapiros.

|

Fed. R. Civ. P. 23(a) sets forth

four prerequisites to a class action: 1)

numerosity of the class, 2) common ques-

tions of law or fact,3) typicality of the

repsentatives’ claims or defenses, and 4)

adequacy of representation. The district

court found that, while the Shapiros' pro-

posed class satisfied the requirements of

numerosity and common questions, the fact

that the Shapiros had not exchanged their

stock in response to the allegedly unlawful

exchange offer rendered their claims atypi-

cal and their representation suspect. The

district court relied upon the following

language in 3B Moore's Federal Practice

23 .07 [3]:

In order for a party adequately

to represent a class or a sub-

Class, his interests must be

wholly compatible with and not

antagonistic to those whom he

would represent. (Footnote

omitted.)

Accordingly, the court restricted the

plaintiff class to those Midwest share-

holders who did not exchange their shares

in response to the 1975 exchange offer,

later amended to exclude also those who did

not participate in the later cash tender

offer .18

As we held above, the Shapiros

have failed to establish that they were

harmed by any of the acts of which they

complain. In East Texas Motor Freight v._

Rodriguez, 431 U.S. 395 (1977), the Supreme

Court held that "a class representative

must be part of the class and ‘possess the

same interests and suffer the same injury'

as the class members." Id. at 403

(citations omitted). In that case, as here

the named plaintiffs "could have suffered

no injury as a result of the alleged [{un-

18. The district court.offered no

explanation for this latter restriction,

which turns on an event unchallenged by any

party. Although we do not understand how

the concerns that underlay the court's

initial order required its subsequent

amendment, our disposition of the

Certification issue renders this action of

no consequence.

lawful] practices, and they were, there-

fore, simply not eligible to represent a

Class of persons who did allegedly suffer

injury.” Id. at 403-04. It follows that the

district court acted properly in refusing

to certify the Shapiros as representatives

of a class including participants in the

1975 exchange offer.19

19. Like the Court in Rodriguez, we decide

this issue upon the record before us. See

id. at 406 n.12. We do not, however, rely

simply on the Shapiros' eventual receipt of

$45 subordinated debentures in return for

their stock, for it seems to us a necessary

implication of

Bank vy. Roper, gupra, and 0.5, Parole

. : 100 §.Ct. 1202 (1980),

that the issue of proper class certifica~-

tion survives and must be considered apart

from receipt of relief by named plaintiffs.

Rather, we have examined the Shapiros'

aliegations to determine the nature of

their interest throughout this litigation

in the conduct and transactions they

challenge. These allegations disclose no

harm to the Shapiros either at the time

that they brought this action or there~

after.

Because we find Rodriguez dis-

positive of the issue before us, we need

not consider the parties’ other arguments

regarding the wy he gd of the Shapiros'

Claims and the adequacy of their proposed

representation.

Accordingly, we affirm.

A true copy.

Attest:

Clerk, U.S. Court of Appeals

Eighth Circuit

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 79-1424

September Term, 1979

Alvin J. Shapiro,

et al.,

Appeal from the

United States

)

)

)

Appellants, ;

vs. ) District Court for

)

)

)

)

)

)

the Eastern District

Midwest Rubber of Missouri

Reclaiming Company,

et al.,

Appellees.

The Court having considered

appellants’ petition for rehearing and

suggestions for rehearing en banc and being

now fully advised in the premises, hereby

orders the petition for rehearing and

Suggestions for rehearing en banc denied.

August 19, 1980

APPENDIX C

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

ALVIN J. SHAPIRO, et al.,)

Plaintiffs,

Cause No. 75-932C

)

)

vs.

)

)

)

MIDWEST RUBBER RECLAIMING)

COMPANY, et al., )

Defendants.

MEMORANDUM

This matter is before the Court

on the motion of defendants Midwest Rubber

Reclaiming Company (Midwest), Midcon

Industries, Inc. £/k/a Goodrich Realty ana

Development Group, Inc. (Midcon), Carl H.

Totsch, Richard M. Cohen, Morris Weissman,

Michael Miller and Stanley Kreitman, for

Summary judgment in their favor against

plaintiffs and the class they represent in

Count I and against plaintiffs in their

i eee

Gerivative suit in Count II. For the

reasons stated below, defendants' motion

will be granted.

Plaintiffs, residents of Cook

County, Illinois, originally brought this

action in the Northern District of Illinois

on June 24, 1975, both directly and deriva-

tively, on behalf of themselves and all

Others similarly situated, to enforce

rights created by the federal securities

laws and also various pendent and diversity

Claims arising under state law. The federal

securities laws relied on include Section

17(a) of the Securities Act of 1933

(hereinafter Securities Act), 15 U.S.C.

77g; Section 10(b) of the Securities

Exchange Act of 1934 (hereinafter Exchange

Act), 15 U.S.C. 783; Section 13(d) of the

Exchange Act, 15 U.S.C. 78m; Sections 14(a)

and (e) of the Exchange Act, 15 U.S.C.

78n(a) and (e), and Rules 10b-5, 14a-3, and

_

14a-9, 17 C.F.R, 240.10b-5, 240.14a-3, and.

240.14a-9, which were promulgated by the

Securities and Exchange Commission (here-

inafter S.E.C.) under the Exchange Act,

On October 17, 1975, the action

was transferred to this Court. On October

19, 1976, the Plaintiffs filed their first

amended complaint. Jurisdiction over thig

matter was asserted under Section 27 of the

Exchange Act, 15 U.S.C. 78aa, and under the

Principle of pendent jurisdiction,

In this Court's order of

September 29, 1977, Plaintiffs' state

common law claims, brought under pendent

jurisdiction, were dismissed. Plaintiffs

filed their second amended complaint on

October 18, 1977,

On June 8, 1978, as modified on

July 12, 1978, this Court certified

plaintiffs' action under Count I as a class

action under Rule 23, Fed. R. Civ. P. The

class was certified to consist of all

persons who owned shares of common stock in

Midwest Rubber Reclaiming Company on March

20, 1975, and who did not sell or exchange

their stock during the period that the

March 20, 1975, tender offer was outstand-

ing (that is, up to and including May 30,

1975) ana who did not sell their stock

pursuant to the December 8, 1975 cash

tender offer which expired on December 28,

1975.

The alleged violations of the

federal securities laws in this case arise

in the context of a series of exchange

offers and merger proposals concerning

defendants Midwest and Midcon. The

following facts and allegations, which for

the purpose of considering the motion for

summary judgment are resolved in favor of

the plaintiffs, regarding the exchange

offers and merger proposal and finally the

actual merger are relevant to the defen-

dants' motion for summary judgment.

Plaintiffs allege that defendant

Midcon is incorporated under and exists by

virtue of the laws of the State of

Delaware, and that at the time of the

exchange offer described herein, Micdcon

owned at least 226,076 shares of common

stock of Midwest, which constituted at

least fifty-one percent of the outstanding

voting shares of Midwest prior to the

exchange offer and which constituted at

least seventy-two percent of the outstand-

ing voting shares of Midwest after the

consummation of the exchange offer. Midcon

after the exchange offer allegedly owned

82.4 percent of the common stock of Mid-

west. Plaintiffs claim that, at all times

relevant herein, defendant Cohen. (whose

interest in the company, aggregated with

his sister's, amounts to owning 70 percent

of the stock of Midcon) was chairman of the

board of both Midwest and Midcon, and

president of Midcon; Weissman was a direct-

or of Midwest, and vice president and sec-

retary cf Midcon; Totsch was a director and

the president of Midwest; Stanley Kreitmeén

was a Girector of Midwest; Miller was a

Girector of Midwest and vice president of

Midcon; and J. Baxter Brinkmann, a former

Girector of Midwest. The earlier claims

against Eugene Williams, Jr., Howard R.

Erwin, and Basil Georges are not included

in the second amended complaint.

Plaintiffs claim that sometime

prior to April 9, 1974, defendants Midcon,

Cohen, Weissman, Miller, and others unknown

to plaintiffs, conspired to gain sufficient

control of Midwest so as to appropriate the

assets of Midwest for the benefit of Mid-

con. Plaintiffs claim that, in furtherance

of this alleged conspiracy, Midcon pur-

chased 226,076 shares of Midwest's common

stock between April 9, 1974, and September

30, 1974.

Of these 226,076 shares, 220,776

Shares were allegedly acquired in private

transactions between April 9, 1974, and

September 30, 1974, at a price stated by

Midwest in the exchange offer to be $15.00

per share. The remaining 5,300 shares were

allegedly acquired by Miccon on the open

market between April 19, 1974, and July 8,

1974, at market prices ranging from $12.125

to $13.00. In connection with these

purchases, Midcon filed with the Securities

and Exchange Commission schedules, pursuant

to Rule 13d-1. The first of these was filed

on April 18, 1974.

- |

It is alleged that during the

period of Midcon's private transaction

purchases, the price of Midwest ranged from

$7.375 to $13.75 per share; thus, the

orivate sallexe of Midwest shares to Midcon

allegedly received premiums ranging from

$1.25 up to $7.625 per share over the then

Current market price. At least two of the

sellers of Midwest shares to Midcon were

allegedly directors of Midwest at the time

of the sales, and a thirc seller was a

company affiliated with Brinkmann. No

Girector transferred a controlling block of

stock of Midwest to Midcon. Brinkmann and

each selling director allegedly resigned

their positions as directors of Midwest in

favor of nominees of Midcon immediately

after the sale of Midwest shares to Midcon.

Plaintiffs claim that the acquisitions of

the Midwest stock were directed by Cohen as

Midcon's controlling stockholder, and were

effected in furtherance of the personal

2

yy

interests of Cohen, rather than the bene-

fits of the minority stockholders of Mid-

con.

Defendants Cohen ana Weissman

were elected to the board Of directors of

Midwest on April 17, 1974, ana defendant

Miller was elected to Midwest's board on

June 3, 1974. These elections were

@llegedly made Possible by the vacancies

Created on the Midwest board by the

"buy-outs" referred to above. Plaintiffs

Claim that on September 10, 1974, Cohen ana

the other individual defendants Caused

Midwest to announce a Pld which provided

for the issuance of Midwest's twelve

Percent subordinated debentures, due 1995,

in the Principal emount of $12.00, in

exchange for each Outstanding share of

Midwest common stock not hele by Midcon.

On September 23, 1974, Midcon

filed an amendment to its schedules,

pursuant to Rule 13d-1, with respect to its

stockholdings of Midwest, wherein Midcon

allegedly noted: (1) the pendency of an

exchange offer by Midwest; (2) that the

effect of the offer would be to increase

Midcon's percentage ownership of the common

stock of Midwest; and (3) that "should all

the shares of the common stock of Midwest

not be tendered pursuant to the exchange

offer, Goodrich Realty [Midcon]) may pur-

chase additional shares of Midwest common

stock or merge Midwest into Goodrich Reélty

Or a subsidiary thereof.”

Plaintiffs allege that in

furtherance of the defendants’ conspiracy

to appropriate the assets of Midwest for

the benefit of Midcon and to the economic

Getriment of members of the class, the

individual defendants caused Midwest to

circulate to members of the alleged class

its 1975 proxy. Plaintiffs claim that the

1975 proxy was false and misleading, and in

violation of Section 14(a) of the Exchange

Act, 15 U.S.C. 78n(a), and Rules 14a-3 and

14a-9 thereunder, 17 C.F.R. 240.14a-3 and

240.14a-9.

On March 20, 1975, Midwest made

the exchange offer to its stockholders

providing for the exchange of each share of

Midwest common stock for a $12.00 principal

amount twelve percent subordinated

Gebenture of Midwest. The offer, after an

extension, was terminated May 30, 1975. The

Closing price of Midwest on the American

Stock Exchange on May 19, 1975, was

allegedly $7.375. Plaintiffs cléim that the

market valued each $12.00 principal amount

twelve percent subordinated debenture at

approximately $7.375, because it was

possible on that date to purchase Midwest

common stock in the market for that price

and tender it for exchange pursuant to the .

exchange offer. The plaintiffs note that

$7.375 is substantially less than: (1) the

net current asset value per common share of

Midwest, which was $13.14 on October 31,

1974; (2) the net book valve per common

Share of Midwest, which was $23.29 on

October 31, 1974; and (3) the price paia

months earlier by Cohen, or Midcon, to the

s€lling directors for their shares, $15.00.

The remaining shares of Midwest stock

continued to be traded at this depressed

level, and were allegedly quoted on the

Gate of this complaint at a bid of $8.40.

Plaintiffs claim that the purpose of the

exchange offer was to permit Midcon to

Operate Midwest for the primary or sole

benefit of Cohen and Midcon.

Plaintiffs allege that the

exchange offer sought to purchase 211,057

Shares of Midwest, all the outstanding

shares not then owned by Midcon, and by the

terms of the offer, if 155,000 shares were

tendered, Midwest was under an obligation

to accept those shares tendered. The result

of the tender of 155,000 shares of Midwest

would have allegedly left less than 56,000

shares of Midwest in the hands of the

public. Further, plaintiffs claim that

Midwest was listed on the American Stock

Exchange prior to the exchange offer, but

that since an aggregate of 126,692 shares

of Midwest were tendered and acceptec

pursuant to the offer, Midwest fell below

the criterion for listing on the American

Stock Exchange, and its common stock was

delisted on July 28, 1975.

Plaintiffs claim that Midcon and

the individual defendants have threatened

to have Midwest merged into Midcon (see

below), or a subsidiary thereof, unless

Midwest, through a tender offer, buys up

enough shares to give Midcon an eighty

percent interest in the outstandino shares.

The exchange offer allegedly stated that it

was the present intention of Micwest's

boare of directors to increase the

dividends on the common stock after the

completion of the exchange offer. However,

plaintiffs allece Micécon subsequently

Causea Midwest to enter into loan agree-

ments which restricted or eliminated funds

available for the payment of dividends to

Midwest stockholders. Plaintiffs contend

that this conduct constitutes violations of

Sections 14(2) and 14(e) of the Exchange

Act, 15 U.S.C. 78n(a) and 78n(e), and Rules

l4a-3 and 14a-9 thereunder, 17 C.F.R.

240.14a-3 and 240.14a-9.

Plaintiffs allege that defen-

Gants, individually, in concert, and in

aiding and abetting of one another, have

73

made untrue statements of material facts,

and omitted to state material facts neces-

Sary in order to make the statements made,

in light of the circumstances under which

they were made, not misleading; plaintiffs

further allege that defendants have engaged

in fraudulent, deceptive, and manipulative

acts and practices in connection with the

exchange offer and the Subsequent exchange

of the debentures for the common stock pre-

viously held by those receiving the offer-

ing circular. Plaintiffs claim that this

alleged conduct constitutes violations of

Section 14(e) of the Exchange Act, 15

U.S.C. 78n(e).

Plaintiffs further allege that

the offering circular accompanying the

exchange offer stated that participation in

the offer vas "completely voluntary” and

that this was false and misleading, as

shareholders were unwillingly forced to

either give up their equity or remain

stockholders in a delisted company with a

large debt, subject to merger, not subject

to S.E.C. disclosure requirements and being

abusea to the benefit of Midcon, all of

which was allegedly objectively unfair as

forcing a change in the form of the

stockholder's investments, as well as the

valve.

In support of pléintiffs'

Gerivative action brought on behalf of

Midwest, plaintiffs allece that a demand

upon the directors of Midwest to take

remedial steps to rectify plaintiffs'

alleged injury would be futile, since

Midwest is controlled by the defendants ana

has allegedly indicated that it believes

that its conduct violates no lew or

statute. Plaintiff further alleges that

this Court has jurisdiction over this claim

under Section 27 of the Exchange Act, 15

7

U.S.C. 78aa, aS an action to rectify viola-

tions of the Exchange Act and the rules

promulgated thereunder, and under the

Goctrine of pendent jurisdicticn.

Additionally, plaintiffs allege

that the acts of the defendants were taken

at the expense of Midwest and for the

benefit of the individual defendants and

Midcon, and in taking such actions, the

defendants have violated Section 17(a) of

the Securities Act, 15 U.S.C. 78n(a&),

Section 10(b) of the Exchange Act, 15

U.S.C. 783, and the rules promulgated

thereunder.

Plaintiffs also claim that the

Schedule 13(d) statement filed by Midcon

was false and misleading, and contained

mate- rial omissions and, therefore,

amounted to a violetion of Section 13(d) of

-]7-

<

the Exchange Act, aS wel] as the rules

Promulgated thereunder,

Plaintiffs seek monetary damages

for él] the members of the Cléss equivalent

to the $15.00 per share receiveg by the

Selling Girectors, as well as alternative

Gamages and injunctive relief,

Subsequent to the exchange Offer,

Midwest, on December 8, 1975, made a

S€pérate ang Gistinct cash tender offer to

its public Shéreholders to Purchase a

Certain number of Shares of its outstanding

Stock at $9.25 Per share. Those share-

holders who tendered pursuant to this offer

Were €liminated fror. the class action,

Those Plaintiffs who remain as part of the

Cless chose not to tender their Midwest

Stock and do not Challenge the legality of

that tender offer. i

On March 15, 1978, the common

Shareholders of Midwest voted upon and

approved a merger wherein each outstanding

Share of Midwest common stock not owned by

Midcon was converted into a $45.00

Principal amount Midwest 10 percent subor-

dinated debenture due 1998. An investment

banking firm has submitted its Opinion that

this debenture has a present market value

of $40.00. The legality of this merger is

not challenged by the plaintiffs.

Defendants have moved for summary

judgment on Count I on the basis that

Plaintiffs have sustained no damages from

the complained of actions in that they have

already received and are entitled to

receive for their as yet untendered stock a

debenture worth well in excess of the

$15.00 per share that plaintiffs seek for

their stock in the complaint. Defendants

move for summary judgment on Count II on

the basis that as a result of the un-

challenged merger between Midwest and

Newco, Inc., a wholly owned subsidiary of

Midcon, there have been no public share-

holders of Midwest since Merch 15, 1976.

Thus, plaintiffs, no longer being public

Shareholders of Midwest have no interest or

Standing to seek any Gerivative relief on

behalf of Midwest, and the plaintiffs woulc

not benefit from any such relief.

Plaintiffs oppose summary judc-

ment on Count I on the basis that their

Gamages from the alleced fraud shoule be

measured as of 1975, the date the fraud was

made public or when a reasonable plaintiff

Gid or should have discoverec the wronc-

Going. Plaintiffs argue that a 1978

debenture is irrelevant to the measure of

damages and should be disregarded.

Plaintiffs also oppose summary judgment on

Count II on the basis that the forced

exchange of their shares of Midwest

(plaintiffs have not as of yet tendered all

of their shares) for debentures does not

deprive them of standing to pursue a

Gerivative suit on behalf of Midwest.

In order for summary judgment to

be granted, the movant must Clearly

establish that there exists no genuine

issue of material fact and that the movant

is entitled to judgment as a matter of law.

Alcala v. Burns, 545 F.2d 1101, 1106 (8th

Cir. 1976), cert. denied sub non.,

Doe _v. Burns, 431 U.S. 920 (1977).

In order to successfully maintain

an action under the federal securities laws

a party must show damages as a result of

the complained of act. See Affiliated Ute

Citizens v. United States, 406 U.S. 128

(1972); Mills v, Electric Auto-Lite, 396

=2i-

U.S. 375, 389 (1970). Securities Exchange

Act of 1934, lOb, 15 U.S.C.A, 785(b).

Section 28(a) of the Securities

Exchange Act, 15 U.8.C.A,. 78bb (a), provides

that "no person permitted to maintain a

Suit for Gamages under the Provisions of

this chapter shal] recover... a total

amount in excess of his actual Gamages on

account of the act compiéined of." Where

Pleintiffs are Sellers of Securities, as in

this case, the meesure of damages in a case

élleging fraug under the securities laws is

"the difference between the fair market

vélue of their [Sellers') shares at the

time they were sold less the amount they

received for their Shares." Ebrler y,.

Kellwood Company, 39] F. Supp. 927, 930

(E.D. Mo.), aff'd, 52] F.2d 1347 (8th Cir.

1975). Under this formulation of the

measure of damages, Plaintiffs Clearly can

establish no Gamages under Count J Of the

second amended complaint. Plaintiff's claim

of damages, the difference between $15.00

and $7.375 for shares of stock not sold in

1975, is clearly obviated by the amount

they will receive/received at the time of

Sale (a result of the merger), a $45.00

Principal amount 10 percent subordinated

debenture due 1998 which was valued at

approximately $40.00 on the date of the

merger. Accordingly, as a result of the

merger which has come about since plain-

tiffs' filing of their second amended

complaint, the legality of which is not

challenged, the plaintiffs became entitled

to receive a debenture worth more than the

amount they claim they were damaged.

Plaintiffs have set forth no other claimed

damages to raise a question of fact that

they are damaged as a result of the merger

and conversion of their stock into

debentures, Plaintiffs' theory that damages

Should be measured as of 1975--the

difference between the $15.00 offered to

the directors in 1974 and the velue of

Gebentures offered to them in 1975,

$7.375--the date the fraud wes mede public

or when a reasonable plaintiff dic or

Should have discovered the wrongdoing, is

inapplicable, as this is a measure of

damages involving defrauded buyers.

Bérris vy, Americen Investment Company, 523

F.2d 220 (6th Cir. 1975),

As plaintiffs are sellers and not

buyers of Securities, as set out in the

Class action certification, the measure of

damages as set out in Ehrler is applicable,

and under that standard plaintiffs have

Shown no damages. As no Question of fact

remains with respect to Count I, defendants

ére entitted to summary judgment as a

matter of law. Affiliated Ute, supra.

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Count II of Plaintiffs’ second

amended complaint Purports to assert a

derivative action on behalf of Midwest.

Although the Court agrees with plaintiffs

that they are not Geprived of their

Capacity to sue derivatively by reason of

the merger, the Court finds that plaintiffs

are unable to maintain their action under

Count II because no Gamages can be shown to

the corporation. Plaintiffs have not

Challenged the Validity of the merger

between Newco, Inc. and Midwest. As set out

above, the Court finds as a matter of law

that the shareholders Of Midwest have also

Sustained no damages, Accordingly, Summary

judgment for defendants is appropriate as

to Count II as no Gamages can be shown.

Rule 56(b), Fed. R. Civ. P,

Dated this 2nd day of May, 1979

U.S. District Judge

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