Petition for Writ of Certiorari — Great Commonwealth Life Insurance v. Branch Bank & Trust Co.
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Supreme Court, U.S.
86-1073 | "itr?
DEC 24 1986
JOSEPH F. SPANIOL, JR.
IN THE CLERK
Supreme Court of the United States
OCTOBER TERM, 1986
GREAT COMMONWEALTH LIFE
INSURANCE COMPANY, e7 ai.,
Petitioners,
v.
BRANCH BANK & TRUST COMPANY, et al.,
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
MOORE & PETERSON, P.C.
2800 First City Center
Dallas, Texas 75201
(214) 754-4800
George R. Poehner
William F. LePage
WOMBLE, CARLYLE,
SANDRIDGE & RICE
Suites 2400 and 2500
301 N. Main Street
Winston-Salem, North
Carolina 27102
(919) 721-3600
Jimmy H. Barnhill
Attorneys for Petitioners
QUESTIONS PRESENTED FOR REVIEW
1. Whether a person violates Securities and Exchange
Commission Rule 10b-13 by entering into a contract to pur-
chase stock in the target corporation before commencing the
tender offer when the parties to the contract do not fully
perform their obligations before the tender offer is commenced.
2. Whether the Seventh Amendment to the United States
Constitution requires a United States District Judge receiving a
special verdict to review apparently conflicting answers to
special interrogatories in light of the instructions as a whole in
an attempt to resolve the apparent conflict and, if that attempt
is successful, to enter judgment in accordance with the answers
as reconciled.
3. Whether the Trial Court erred in permitting a judgment
against the defendants for common law fraud to stand in the
face of overwhelming evidence in favor of the defendants on
the element of full disclosure of material facts.
4. Whether the Trial Court erred in awarding a class of
minority shareholders damages based upon the price paid per
share for control of the target corporation.
i
PARTIES TO THE PROCEEDING
Plaintiffs
Branch Bank & Trust Company, formerly known as City
National Bank, executor of the estate of John S. Cansler,
deceased; Nell V. Bates; Anne Pender Griffith; Virginia T.
Johnson; Lacy D. Keesler; S. Dewey Keesler; A. H. Kimball; H.
Brown Kimball; Ann Dupree King; Rose Dupree King, de-
ceased; John D. King; Marie Dowd Latimer; T. F. Morgan;
Grace E. Morgan; Mary Rogers Pender Murphy; Ludie B.
Parker; John Robert Pender, III; John Robert Pender, IV; Mary
D. Pender; Deborah Grace Speece; Oliver Brown Thomas;
Charles Nixon White; Doris Haire White; and Rogers Pender
Williams, individually and as representatives of a class of
persons who sold stock of All American Assurance Company to
Great Commonwealth Life Insurance Company in a tender
offer in December 1979 and January 1980.
Defendants
American Commonwealth Financial Corporation; Great
Commonwealth Life Insurance Company; I.C.H. Corporation;
and Robert T. Shaw.
The list of parties to the proceedings below is identical to
the list of parties to this proceeding.
Affiliates
The following corporations are direct or indirect partially
owned subsidiaries of petitioner I.C.H. Corporation: Integrity
National Life Insurance Company, Western Assurance Corpo-
ration, The Western Life Assurance Company, and Constitution
Life Insurance Company.
ill
TABLE OF CONTENTS
=
Questions Presented for Review ...................cccccceseeeeceeeeees i
ac nisnubendtipscaneneeen il
it seiiebiissisbtiiniloaes vi
ELSES UN a l
Constitutional Provision and Regulation Involved .......... 2
ET a 2
Reasons for Granting the WTit...................ccccccccceeseeeeeeeeeee 4
I. The decision below conflicts with decisions of
other courts of appeals regarding when a
stock purchase transaction occurs under the
Uniform Commercial Code and federal
law and will, if not reversed, severely im-
pair the ability of prospective tender offer-
ors to make private purchases prior to
commencing a tender offer, contrary to the
intent of Congress and the Securities and
Exchange Commniission..................c:.ssscsse00- 4
Il. The decision below deprives the petitioners of
their right to judgment upon the verdict of
the jury in violation of the Seventh Amend-
ment to the United States Constitution, and
conflicts with this Court’s decision in Atlan-
tic and Gulf Stevedores, Inc. v. Ellerman
Lines, Ltd., and with decisions of other
ERTS eae seren Nel 12
Re a ceunsbiiomaineaciaxtus 20
aia i eras eeieninengn A-1 to A-22
I. Opinion of the United States District Court
for the Western District of North Carolina.. A-1
II. Opinion of the United States Court of Ap-
peals for the Fourth Circuit .......................... A-12
Ill. Seventh Amendment to the Constitution......... A-21
IV. Rule 10b-13 of the Securities and Exchange
Commission, 17 C.F.R. § 240.10b-13 .......... A-21
iV
TABLE OF AUTHORITIES
sd
Cases:
Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977),
cert. denied, 436 U.S. 913 (1978) .........ccccceccceceeeeeeeeneees 10
Abrams v. Oppenheimer Government Securities, Inc.,
TE cee See CPU: FOOD nsctecctncccssnctescntnnsennsessonanne 9
Affiliated Ute Citizens of Utah v. United States, 406
CG FO ee eaten tticentcmsiccctesnnentintennicniqunenenseasaniane 14
Atlantic & Gulf Stevedores, Inc. v. Ellerman Lines, Ltd.,
DE UE, Bee CE Pcecsteescnsitseninscanenscccneneannnsinsianedanuiasin 13,14,20
Breur v. Industrial Steel Container Co., 599 F.2d 115
(Delle. Sem. Ce; FGFS) nncceccrcnesccencresnescorsecsentsensconsascoceense 8
Fugitt v. Jones, 549 F.2d 1001 (Sth Cir. 1977) ............0- 14,20
Gallick v. Baltimore & Ohio Ry. Co., 372 US. 109
BOD) nnccentenicnsinsacinitntnnsesiinmninsensnnenetnctnimtanbiinsennenscsaccsors 15,17,19,20
Great Commonwealth Life Insurance Co. v. Branch
Bank & Trust Co., 801 F.2d 714 (4th Cir. 1986) ......... 6,18,vi
Griffin v. Matherne, 471 F.2d 911 (Sth Cir. 1973)........... 15,18
Hayden Stone, Inc. v. Brode, 508 F.2d 895 (7th Cir.
FO PED sc ccierctnincascetnniounennesnteettimesohsnsiienionenatntatashininenepsnatantnnte 7,8,12
Heine v. The Signal Companies, {1976-77 Transfer
Binder} Fed. Sec. L. Rep. (CCH) {495,898
CEs Oo BPE Pectnieccnscencennenniennesanenmnmonnninsnanenecsionsanazones 12
Hewitt v. Paine, Webber, Jackson & Curtis, 6 U.C.C.
Rep. 388 (N.Y. Sup. Ct. 1969) ...........cceeeeeeeeeneeeesees 8
International Central Corp. v. Vesco, 490 F.2d 1334 (2d
Ce FE iicisetinstnshdsschinaininninniatiniatiinviiitibiabsainigepejnanimnainencens 10
Jones v. Central States Inv. Co., 654 P.2d 727 (Wyo.
Dama, Ce, BER) sei castcsepneacesascncnemsecesscacccsneassemoennsnssconsases 8
Klaxon Co. v. Staton Electric Mfg. Co., 313 U.S. 487
Oh I esesicneersinnsceccenynnscccentoratnssinansitinasinngietinninmninesanpaciene 6
McVey v. Phillips Petroleum Co., 288 F.2d 53 (Sth Cir.
EE Phetisnctaiies iene penhgseishneninsininiandpncmtinannnicinenbinnsenisatebocmanee 15,19,20
Mashpee Tribe v. New Seabury Corp., 592 F.2d 575 (Ist
I SEE csnccscotsssbicepncsiukaenaisitvenpsiasemmasignepennbbdeitmsetinbaingbtsnonnate 14,20
Miller v. Royal Netherlands Steamship ‘o., 508 F.2d
Le Ts ec eT 15,17
In re Paragon Securities Co., 599 F.2d 551 (3d Cir.
BN coisas dnnctasieasnkcinnasiindbonnenntiadnaistniuitbanptbbonpsinitensistivbinant 8,12
Phillips v. Zimmering, 285 So. 2d 233 (Fla. App. 1973). 8
Ragsdale v. Kennedy, 209 S.E.2d 494 (1974)... eS 17 i
Rathborne v. Rathborne, 683 F.2d 914 ( Sth Cir. 1982)...
Shores v. Sklar, 647 F.2d 462 (Sth Cir.) (en banc),
cert. denied, 459 U.S. 1102 (1981) 2.2.00... ee eeeeeeeeeeeees 14
Sunshine Mining Co. v. Great Western United Corp.,
A fan Transfer Binder] Fed. Sec. L. Rep. (CCH)
TE ee BOUT Dincic sceslenichitercncincadbcinhrackscenns 11
Tennessee Carolina Transportation, Inc. v. Stuck, 243
ep EU EG | re 7
Weiss v. Dempsey-Tegelan & Co., 443 S.W.2d 934 ( Tex.
Civ. App. — Amarillo 1969) oo... ..cccccccceccecccsecseeseeees 7
CONSTITUTION:
Fees Ms MINNIE? TIED chesciesccdscDnininexocsutssbseanicondesasansianicsindenas 2,A-21
STATUTES AND REGULATIONS:
EIR aes EDTA TTR RANE 3
SF Car ans I MRI I is ct. cnds acnsrestilanissiioadebbsdeancsbctinemiiacs 2,A-21
SF Cai FEED D asccncccossncocininsicccnsemssnnnisiaanies 9
SF Scere We EUR ne cscitsnternentininduscvanssiishniendacsileine 9
SN fae Ce eS SRN TONE P 18
North Carolina Unfair and Deceptive Trade Acts or
Practices Act, N.C. Gen. Stat. Chap. 75.0..0......cccccceccese. 3
Bs Sg ERA Le SOE eR ee Pe TOM MLL irr a 3
Rte 6 ob pF SSAA Reena mann AS ane, 8
RT ef ts ; TERN LAO eT 9
ae Ge Oe RITE P aitisccich Aosersshernasionesitidietinictdakenneac aiscah l
4 Tex. Bus. & Comm. Code § 8.301( a) oocccccccccccccccceceeceeees 7
4 Tex. Bus. & Comm. Code § 8.302(4) .oo..cccccccccccccecceceeeee 7
4am: Gan. GC: SOD a 7
MISCELLANEOUS:
Aranow, Einhorn, & Bernstein; Developments in Tender
Offers for Corporate Counsel .....0......0cccccecceceecesseesesseeeeee 12
W. T. Grimm & Co., Mergerstat Review 1985 ( 1986)..... 10,11
W. Prosser, The Law of Torts § 180 (Sth ed. 1984) ........ 14
Restatement (Second ) of Torts § 548 (1977) ..0..0000.00.0.. 14
SEC Release No. 34-8712 {1969-70 Transfer Binder]
Fed. Sec. L. Rep. (CCH) ¥ 77,745 at 83,709............... 11
vi
OFFICIAL REPORTS BELOW
The opinion of the United States District Court for the
Western District of North Carolina is not reported, but ts
reprinted in the appendix hereto, p. A-| infra. The opinion of
the United States Court of Appeals for the Fourth Circuit is
reported at 801 F.2d 714 (4th Cir. 1986), and is reprinted in
the appendix hereto, p. A-12 infra.
|
No.
IN THE
Supreme Court of the United States
OctToper Term, 1986
GREAT COMMONWEALTH LIFE
INSURANCE COMPANY, et al,
Petitioners,
y.
BRANCH BANK & TRUST COMPANY, et ai.
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
The petitioners Great Commonwealth Life Insurance
Company, American Commonwealth Financial Corporation,
L.C.H. Corporation, and Robert T. Shaw respectfully pray that
a writ of certiorari issue to review the judgment and opinion of
the United States Court of Appeals for the Fourth Circuit,
entered in the above-styled proceeding on September 25, 1986.
GROUNDS ON WHICH JURISDICTION IS INVOKED
The judgment of the United States Court of Appeals for
the Fourth Circuit was entered on September 25, 1986. The
petitioners did not seek a rehearing of the decision of the Court
of Appeals. The jurisdiction of this Court is invoked under 28
U.S.C. § 1254(1).
2
CONSTITUTIONAL PROVISION AND
REGULATIONS INVOLVED
The Constitutional provision and regulations involved are
the Seventh Amendment to the United States Constitution and
Rule 10b-13 of the Securities and Exchange Commission, !7
C.F.R. §240.10b-13. They are reprinted in the appendix
hereto, at pp. A-21-22, respectively.
STATEMENT OF THE CASE
The petitioners are corporations and an individual in-
volved in the life insurance business. Over the years they have
also been involved in acquiring life insurance companies. This
action arises out of a part of one such acquisition.
On September 13, 1978, American Commonwealth Finan-
cial Corporation (“ACFC”) entered into a contract for the
purchase of 1,011,610 shares of All American Assurance Com-
pany (“AAA”) stock from American Bank & Trust Company
(“ABT”) and providing for the settlement of certain litigation
between ACFC and ABT. The transaction closed on January 5,
1979. As of February |, 1979, ACFC transferred all of its AAA
stock to its wholly-owned subsidiary, Great Commonwealth
Life Insurance Company (“GCL”).
In early December 1979, management of GCL determined
that, if GCL increased its holdings in AAA to 80% or more by
January 5, 1980 (the first anniversary of ACFC’s first acquisi-
tion of AAA stock), certain tax advantages might be available
% to GCL. In December 1979, AAA had outstanding 1,506,795
shares, of which GCL’s 1,011,610 shares represented approxi-
mately 70%. To increase its ownership of AAA stock to 80%,
GCL had to acquire approximately 194,000 shares. .
GCL initially purchased 57,782 shares of AAA stock for
$5.00 per share in privately negotiated transactions. Of the
57.782 shares, GCL purchased 18,500 from three trusts, the
a TT
3
Judy Post Trust No. 3, the John Post Trust No. 3, and the Jane
Post Pfeffer Trust No. 4 (the “Post Trusts”). The stock
purchase contract called for delivery of endorsed stock cértifi-
cates to GCL and payment by GCL to the Post Trusts of five
percent of the purchase price on December 12, 1979, with the
balance of the purchase price payable on January 2, 1980. The
transaction closed on December 12, 1979, with the Post Trusts
delivering the endorsed certificates to GCL. Two days later, on
December 14, 1979, GCL publicly announced and mailed
materials for its offer to purchase, at $5.00 cash per share, up to
175,000 shares of AAA stock. The tender offer expired on
January 4, 1980, with 171,900 shares having been tendered.
The respondents and the class they represent sold their
AAA stock to GCL in the tender offer and, on August 18, 1982,
sued the petitioners for alleged improprieties in connection with
the tender offer. The respondents asserted federal jurisdiction
under 15 U.S.C. § 78aa. Specifically, the respondents con-
tended that the purchase of AAA stock from the Post Trusts
violated Rule 10b-13 and that the tender offer materials
violated Rule 10b-5, 17 C.F.R. § 240.10b-5, North Carolina
common law, and the North Carolina Unfair and Deceptive
Trade Acts or Practices Act, N.C. Gen. Stat. Chap. 75, by
misrepresenting certain facts concerning AAA and failing to
disclose others. The jury found in favor of the petitioners on
the respondents’ Rule 10b-5 claim, but against the petitioners
on the claims under Rule 10b-13 and North Carolina common
law. The District Court held the North Carolina Unfair and
Deceptive Trade Acts or Practices Act inapplicable to the
transactions involved in this case, entered judgment on the
jury’s findings, and subsequently overruled the petitioners’
motion for judgment notwithstanding the verdict. The Court of
Appeals affirmed the District Court’s rulings.
4
REASONS FOR GRANTING THE WRIT
I. The decision below conflicts with decisions of
other courts of appeals regarding when a
stock purchase transaction occurs under the
Uniform Commercial Code and federal law
and will, if not reversed, severely impair the
ability of prospective tender offerors to make
private purchases prior to commencing a ten-
der offer, contrary to the intent of Congress
and the Securities and Exchange Commis-
sion.
The Court of Appeals affirmed a jury finding of a violation
of Rule 10b-13, resulting from a private purchase that was
clearly negotiated before the commencement of the tender
offer, at the same price as offered in the tender offer, but for
which all or part of the purchase price was not paid until after
the commencement of the tender offer. That decision conflicts
with decisions of other courts of appeals, controlling Texas law,
the Uniform Commercial Code as enacted by all the States, is
inconsistent with federal law prescribing when a purchase of
stock occurs under Section 10(b) of the Securities Exchange
Act, and, if not reversed, would expand the effect of Rule 10b-
13 far beyond that intended by Congress or the Securities and
Exchange Commission.
The evidence is uncontradicted that the Post Trusts deliv-
ered endorsed stock certificates to GCL on December 12, 1979.
The evidence is in conflict regarding when payment for the
shares was made and when the tender offer was mailed to the
minority shareholders. There is, however, no evidence that the
mailing occurred before December 12.
The District Court viewed the petitioners’ argument in
favor of their motion for judgment notwithstanding the verdict .
respecting the respondents’ Rule 10b-13 claim as raising the
question whether there was substantial evidence to support the
jury’s conclusion. The District Court completely ignored the
petitioners’ argument that, under contro!ting federal and Texas
5
law, the timing of the delivery of the endorsed certificates
determines when the purchase of the stock occurred, and that
accordingly, as a matter of law, the petitioners did not violate
Rule 10b-13.
The District Court responded to the substantial evidence
question by pointing to circumstantial evidence as the potential
basis for the jury’s apparent discrediting of the testimony of one
witness, Richard P. Catalano, the investment advisor to the
Post Trusts, who testified that the endorsed stock certificates
were delivered to GCL on December 12. That circumstantial
evidence only suggested the possibilities that (1) the down
payment of five percent of the purchase price was paid on or
after December 17 rather than on December 12, as provided in
the stock purchase agreement between the Post Trusts and
GCL, and (2) the tender offer materials were mailed to the
minority shareholders perhaps as early as December 12. Even
if the jury chose to disregard entirely Mr. Catalano’s testimony
and to read the circumstantial evidence in the light most
favorable to the respondents, the earliest date it could have
concluded, based on the evidence, that the tender offer mate-
rials were mailed was December 12. In addition to Mr.
Catalano’s testimony, Mr. C. Fred Rice, the president of GCL,
testified that the stock certificates were delivered to GCL on
December 12, 1979. (App. 655-656). There was no evidence,
direct or circumstantial, of later delivery.
The Court of Appeals relied upon the circumstantial
evidence that the District Court cited in affirming the judgment
on the Rule 10b-13 issue. It responded to the petitioners’
argument that delivery of the endorsed certificates, under
controlling federal and Texas law, determined when the pur-
chase occurred by noting that the five percent down payment
was possibly delayed until three or more days after the
commencement of the tender offer and speculating that the
reason for the possible delay was that the endorsed certificates
were not actually delivered at the time provided by the stock
6
purchase agreement between the Post Trusts and GCL. There
was no evidence whatever to support that speculation. '
The petitioners also argued to the Court of Appeals that
the purchase of the Post Trust stock did not violate Rule 10b-13
because, under federal securities law, GCL became the benefi-
cial owner of the stock on the date the stock purchase agree-
ment was executed, December 11, 1979. The Court of Appeals
rejected that argument, saying “[i]t is the purchase of stock
that Rule 10b-13 regulates, not the claim to beneficial own-
ership.” 801 F.2d 717. GCL’s claim to beneficial ownership of
the AAA stock, however, arose only as a result of GCL’s status
as a purchaser.
The Court of Appeals also said that the possible delay in
making the down payment “raised the issue whether the parties
intended to transfer ownership of the stock on December 12 or
at the time Great Commonwealth made the initial payment”
801 F.2d at 717, and ruled that the District Court properly
submitted that issue to the jury,2 id. In so ruling the Court of
Appeals improperly focused upon when GCL gave consid-
eration to its seller, the Post Trusts. to determine when the
purchase occurred, rather than upon tixe transfer of the certifi-
cates, as it was required to do.
The Courts below were required to apply North Carolina
choice of law rules in determining when the purchase from the
Post Trusts occurred. Klaxon Co. v. Staton Electric Mfg. Co.,
1 The Court of Appeals said that in the absence of an explanation for the
possible delay in payment, “the jury could draw the reasonable inference that
a prudent lawyer would not direct his client to pay for stock until the shares
were in hand.” 801 F.2d at 717. That inference does not, however, lead to the
further conclusion that the shares were delivered late. It leads only to the
conclusion that the shares were delivered sometime before December 17.
2 The District Court did not submit any issue of the parties’ intent
concerning when the transfer of ownership was to occur to the jury. The
special interrogatories do not mention the parties’ intent (App., 39-43); nor
do the instructions concerning the Rule 10b-13 claim (App., 888-892).
——SS eee
313 U.S. 487, 496-97 (1940). North Carolina courts would
look to Texas substantive law.3 Tennessee Carolina Trans-
portation, Inc. v. Stuck, 243 N.C. 423, 196 S.E.2d 711 (1973).
Texas law provides that upon transfer of the AAA stock to
GCL, GCL acquired whatever rights the Post Trusts had to the
stock.4 4 Tex. Bus. & Comm. Code § 8.301(a) (Vernon Supp.
1986). Transfer of the security to GCL occurred when GCL
acquired possession of the endorsed certificates. 4 Tex. Bus. &
Comm. Code § 8.313(a) (Vernon Supp. 1986). The date that
GCL made its down payment is irrevelant to the question when
the purchase of the stock occurred. The purchase occurred
when GCL acquired the Post Trusts’ rights in the stock, and
that occurred when GCL received the endorsed certificates, on
December 12. Weiss v. Dempsey-Tegelan & Co., 443 S.W.2d
934 (Tex. Civ. App. — Amarillo 1969).
The focus of Texas law on when the certificates were
transferred for the answer to the question when a purchase of
stock is made, is similarly required by the law of all 50 of the
states, as well as the District of Columbia and the Virgin
Islands. Sections 8.301 and 8.313 of the Texas Business and
Commerce Code are part of chapter eight of the Uniform
Commercial Code, which has been adopted, virtually un-
changed, by all of those jurisdictions. The state and federal
courts, with the exception of the Court of Appeals below, that
have considered the question when stock was purchased have,
since the adoption of the Uniform Commercial Code, focused
upon the act of transferring the certificates, and have not
referred to the timing of payment for the securities. E.g.,
Hayden Stone, Inc. v. Brode, 508 F.2d 895 (7th Cir. 1974);
3GCL was a Texas corporation with its principal place of business in
Texas. The Post Trusts were Texas trusts, the contract was performed in
Texas (P. Ex. 20, § 3.A; App., p. 970), and the parties agreed that Texas law
governed the transaction (P. Ex. 20, § 3.B; App., p. 971).
4 Except for fraud or illegality to which GCL was a party or adverse
claims of which it had notice, 4 Tex. Bus. & Comm. Code § 8.302(4) (Vernon
Supp. 1986), matters that are not at issue here.
8
Phillips v. Zimmering, 284 So.2d 233 (Fla. App. 1973); Breuer
v. Industrial Steel Container Co., 228 N.W.2d 115 (Minn. Sup.
Ct. 1975); In re Paragon Securities Co., 599 F.2d 551 (3d Cir.
1979); Hewitt v. Paine, Webber, Jackson & Curtis, 6 U.C.C.
Rep. 388 (N.Y. Sup. Ct. 1969); Jones v. Central States Inv.
Co., 654 P.2d 727 (Wyo. Sup. Ct. 1982). In particular, two
cases demonstrate that whether consideration has passed from
the buyer to the seller is irrelevant and that occurrence of
“transfer” or “delivery”5 is determinative of whether and when
a purchase occurred. In Hayden Stone, Inc. v. Brode, 508 F.2d
895 (7th Cir. 1974), the United States Court of Appeals for the
Seventh Circuit held, under the Illinois version of section 8-313
of the Uniform Commercial Code (which is identical to Texas’
version), that a purchase had occurred upon transfer of the
certificates even though the buyer had not paid the purchase
price. Id. at 896-97. In In re Paragon Securities Co., 599 F.2d
551 (3d Cir. 1979), the United States Court of Appeals for the
Third Circuit held, under the New Jersey version of section
8-313 of the Uniform Commercial Code (also identical to
Texas’ version ), that a purchase had not occurred because there
was no transfer of the certificates, even though the buyer had
paid the entire purchase price. Jd. at 554-56. Under the views
of both the Court of Appeals for the Third and Seventh
Circuits, the dispositive issue in determining whether and when
a purchase has occurred is whether and when “transfer” or
“delivery” was made. If transfer or delivery was made, there
was a purchase even if the buyer did not pay. If there was no
transfer or delivery, there was no purchase even if the buyer did
pay. The decision of the Court of Appeals below conflicts with
those decisions.
The decision of the Court of Appeals also conflicts with the
provisions of the Securities Exchange Act, 15 U.S.C. §§ 78a et
seq., and with decisions of other Courts of Appeals interpreting
5 “Delivery” was the term used in the pre-1977 version of section 8-313
of the Uniform Commercial Code; “Transfer” replaced it in the 1977
amendments. For purposes of this litigation, the terms are equivalents.
that Act as to the scope of the anti-fraud provisions. The
Securities Exchange Act provides in its definitional section that:
The terms ‘buy’ and ‘purchase’ each include any contract
to buy, purchase or otherwise acquire.
15 U.S.C. § 78c(a)(13) (1981). The regulations regarding the
reporting requirements of § 13 of the Act are consistent with
this definition, providing that a person becomes a beneficial
owner of a security through entering into a contract which
includes “the power to dispose, or to direct the disposition of,
such security.” 17 C.F.R. § 240.13d-3(a)(2) (1986). GCL
clearly had the right to dispose of, or to direct the disposition of,
the Post Trusts’ AAA stock from and after December 11, 1979,
when the stock purchase agreement was executed. GCL
therefore purchased the stock on that date.
Further, GCL became the beneficial owner of the Post
Trusts’ AAA stock when the stock purchase contract was
executed, and was deemed to have acquired those securities on
that date for the purposes of section 13 of the Act. Jd.
§ 240.13d-5(a). Therefore, the Court of Appeals’ focus of the
date of payment as the determinative factor under Rule 10b-13
is in direct conflict with the language of the statute under which
the Rule was promulgated and with other regulations promul-
gated under that Act.
In addition, the focus of the Court of Appeals upon the
transfer of consideration conflicts with decisions from other
Courts of Appeal. For example:
It is well established that a contract to purchase and sell
securities constitutes a purchase or sale of the securities for
the purposes of the securities laws.
Abrams v. Oppenheimer Government Securities, Inc., 737 F.2d
582, 587 (7th Cir. 1984) (neither delivery nor the passing of
title to the contracted for securities is required for the transac-
tion to be considered a “sale”). In determining when a
“purchase” has occurred for the purposes of the anti-fraud
10
provisions, the courts generally focus upon whether there has
been a significant change in the nature of the purchaser’s
investment or in the investment risk. Abrahamson v. Fleschner,
568 F.2d 862, 868 (2d Cir. 1977), cert. denied, 436 U.S. 913
(1978). The purchaser’s investment is complete, and a signifi-
cant change has occurred, when a binding agreement to
purchase the shares is made. Two separate Courts of Appeal
have therefore stated that the payment of the consideration is
not a necessary element of a statutory purchase under Rule
10b-5. Rathborne v. Rathborne, 683 F.2d 914, 920 (Sth Cir.
1982); International Control Corp. v. Vesco, 490 F.2d 1334,
1346 (2d Cir. 1974). The narrow focus of the Court below
upon the passing of consideration conflicts in principle with this
otherwise pervasive concept under the Securities Exchange Act
that a purchase of securities occurs when a party first has the
right to direct the transfer or acquire the possession of those
securities.
Finally, permitting the decision of the Court of Appeals
below to stand would place an unwarranted restriction upon the
ability of prospective tender offerors to make either open
market or private purchases before commencing the tender
offer. For example, if the determination of when the purported
pre-tender offer purchase occurred is dependent upon when the
purchase price was paid, no prudent tender offeror would make
a private purchase on an installment basis unless the last
installment payment was paid prior to the commencement of
the tender offer, lest he find himself in violation of Rule 10b-13.
That this concern is significant is indicated by the increas-
ing importance of tender offers as a device for acquiring
corporate control. In the 12-year period, 1974 through 1985,
there were 865 attempts to acquire control of publicly traded
corporations in the United States through tender offers. W. T.
Grimm & Co., Mergerstat Review 1985, 108 (1986). In 1985
alone, there were 84 such attempts, of which 32 were contested
or “hostile” Jd. Those 32 hostile tender offers in 1985 involved
1]
an aggregate purchase price offer of more than 40 billion
dollars. Id. at 112-14. Indeed, if the rule adopted by the Court
of Appeals below remains the law, it causes a heretofore
legitimate pre-tender private purchase to violate Rule 10b-13.
In Sunshine Mining Co. v. Great Western United Corp., { 1977-
78 Transfer Binder] Fed. Sec. L. Rep. (CCH) 4 96,049 (D.
Idaho 1977), the tender offeror made a private purchase before
commencing the tender offer but made payment with unsecured
promissory notes payable more than three years later. Jd. at
91,718. If the date of payment controls when the purchase
occurred for Rule 10b-13 purposes, the Sunshine Mining trans-
action would not pass scrutiny.
Using Rule 10b-13 to outlaw transactions such as those
involved in this case or in Sunshine Mining, supra, is not
necessary, would not effectuate the purpose of the Securities
and Exchange Commission in adopting Rule 10b-13, and
would expand the preclusive effect of Rule 10b-13 far beyond
its intended boundaries. The use of Rule 10b-13 to invalidate
pre-tender purchases that are devices to mislead tendering
shareholders into believing that the offering price is fair is
unnecessary because the shareholders have recourse to the anti-
fraud and anti-manipulation rules promulgated by the Secu-
rities and Exchange Commission, such as Rule 10b-5. SEC
Release No. 34-8712 [1969-70 Transfer Binder] Fed. Sec. L.
Rep. (CCH) 977,745 (1970) at 83,709. The respondents
availed themselves of those rules and lost.
Moreover, the Security and Exchange Commission’s pur-
poses in adopting Rule 10b-13 were: (1) to protect tendering
shareholders from discrimination as a result of their being
unable to withdraw their shares to take advantage of higher
prices being made available to other sellers by the tender
offeror outside the tender offer; (2) to protect tendering share-
holders from having the number of shares they sell in the
tender offer reduced as a result of the tender offeror being able
to negotiate private purchases at prices lower than that offered
in the tender offer; and (3) to protect the tender offeror from
12
pressure by large shareholders hoping to secure a premium
price. Heine v. The Signal Companies, {1976-77 Transfer
Binder] Fed. Sec. L. Rep. (CCH) § 95,898 (S.D.N.Y. 1977).
None of those objectives would be promoted by the lower
Court’s expansion of Rule 10b-13’s preclusive effect: the price
paid to the Post Trusts was exactly the same as was offered in
the tender offer, all shares tendered were purchased, and the
Post Trust’s holdings were not large.
The action of the Court below effectively integrates what
was clearly a completely negotiated pre-tender private purchase
into the subsequent tender offer merely because an infinitesimal
portion of the purchase price was not paid before the tender
offer commenced. Such integration is the appropriate province
of Congress, not of the courts or the Securities and Exchange
Commission, and Congress has not yet expressed or even
indicated its support for it. Aranow, Einhorn & Bernstein;
Developments in Tender Offers for Corporate Control, p 20
(1977).
The decision below respecting the respondents’ Rule 10b-
13 claim conflicts with decisions of the United States Courts of
Appeals for the Third and Seventh Circuits in Jn re Paragon
Securities Co., 559 F.2d 551 (3d Cir. 1979), and Hayden Stone,
Inc. v. Brode, 508 F.2d 895, conflicts with the decisions of the
highest courts of the states that have had occasion to consider
section 8-313 of the Uniform Commercial Code, which has
been adopted by all fifty states, the District of Columbia, and
the Virgin Islands, conflicts with federal law concerning when a
purchase of stock is made for purposes of section 10(b) of the
Securities Exchange Act, and unwarrantedly expands the effect
of Rule 10b-13 far beyond that intended by Congress or the
Securities and Exchange Commission. A writ of certiorari
should issue to review and correct the decision of the court —
below.
II. The decision below deprives the peti-
tioners of their right to judgment upon
the verdict of the jury in violation of the
13
Seventh Amendment to the United
States Constitution, and conflicts with
this Court’s decision in Atlantic and
Gulf Stevedores, Inc. v. Ellerman Lines,
Lid., and with the decisions of other
Courts of Appeals.
The decision of the Court of Appeals, in not requiring an
attempt to resolve apparently conflicting answers by the jury to
special interrogatories and, if the attempt is successful, entry of
judgment for the petitioners in accordance with the verdict as _
thereby resolved, wrongfully deprived the petitioners of their
right to judgment upon the verdict of the jury in violation of the
Seventh Amendment to the United States Constitution.
The jury concluded that the petitioners did not violate Rule
10b-5 because disclosure of the material facts found to have
been omitted from the tender offer materials would not have
had actual significance to a reasonable shareholder in deciding
whether to tender his shares of AAA stock. Read in the light of
the District Court’s instructions and the placement of the
burden of proof in an omissions case, that conclusion means
that the petitioners established that the respondents did not rely
upon the tender offer materials in deciding to tender their
shares.
The jury also concluded that the petitioners “defrauded
and deceived” the respondents when there was a relationship of
trust and confidence between the petitioners and the respond-
ents. This conclusion was the basis for the District Court’s
judgment that the respondents had committed an act of con-
structive fraud in violation of North Carolina common law.
The jury’s findings apparently conflict with one another.
Thirteen special interrogatories were submitted to the jury. The
first five related to the respondents’ claim under Rule 10b-5, the
second three related to the claim under Rule 10b-13, the third
three related to the claim of constructive fraud under North
Carolina common law, and the last two related to the amount
14
of damages. In their answers to the first five special inter-
rogatories the jury found that the petitioners did not violate
Rule 10b-5 because the respondents did not rely on the tender
offer materials in deciding to sell their stock. Reliance is, of
course, an essential element of a fraud case, whether the claim
for relief is created by statute and regulation, Shores v. Sklar,
647 F.2d 462, 468 ( Sth Cir.) (en banc), cert. denied, 459 US.
1102 (1981), or it is created by the common law, Restatement
(Second ) of Torts § 548 (1977); W. Prosser, The Law of Torts
§ 108 (Sth ed. 1984). Indeed, the North Carolina Supreme
Court has consistently held that reliance is an essential element
in a constructive fraud case arising under that state’s common
law. Ragsdale v. Kennedy, 209 S.E.2d 494 (1974). Never-
theless, the jury, in spite of its finding of a lack of reliance,
found that the petitioners “defrauded” the respondents in
connection with the tender offer, in violation of North Carolina
common law. The apparent conflict is obvious: if there was no
reliance by the respondents, there was no violation of either
Rule 10b-5 or North Carolina law.
In the face of such an apparent conflict the Seventh
Amendment requires the Court of Appeals to search for an
interpretation of the jury’s answers that will resolve the conflict
and, if the search is successful, to order entry of judgment in
accordance with the jury’s resolved answers. Atlantic & Gulf
Stevedores, Inc. v. Ellerman Lines, Ltd., 369 U.S. 355 (1962);
Fugitt v. Jones, 549 F.2d 1001 (Sth Cir. 1977); Mashpee Tribe
v. New Seabury Corp., 592 F.2d 575 (ist Cir. 1979). When an
apparent conflict exists, the Court of Appeals, with due regard
for the importance of the constitutional imperative it is fulfil-
ling, must look to the evidence adduced at trial, the District
Court’s charge to the jury, and the arguments of counsel to
ascertain the meaning of the jury’s answers and to reconcile
6 The petitioners had the burden of proof on the issue of reliance because
the Rule 10b-5 case was submitted as an omissions case and, under this
Court's ruling in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128
(1972), the defendants have the burden of proving a lack of reliance in an
omissions case.
15
them, if possible. McVey v. Phillips Petroleum Co., 288 F.2d 53
(Sth Cir. 1961); Griffin v. Matherne, 471 F.2d 911 (Sth Cir.
1973); Miller v. Royal Netherlands Steamship Co., 508 F.2d
1103 (Sth Cir. 1975). The United States Court of Appeals for
the Fifth Circuit states its obligation under these circumstances
to view the jury’s apparently conflicting answers in light of the
“totality of circumstances,” Miller v. Royal Netherlands Steam-
ship Co., 508 F.2d 1103, 1107 (Sth Cir. 1975), to determine
“whether the answers may fairly be said to represent a logical
and probable decision on the relevant issues as submitted.”
Griffin v. Matherne, 47\ F.2d 911, 915 (Sth Cir. 1973). The
Fifth Circuit’s view of its duty is directly responsive to this
Court’s mandate in its statement that when an appellate court
faces apparently conflicting answers to special interrogatories, it
“must attempt to reconcile the jury’s findings, by exegesis if
necessary ...,” before remanding for a new trial. Gallick v.
Baltimore & Ohio Ry. Co., 372 U.S. 108, 119 (1963).
Resort to the District Court’s instructions concerning the
special interrogatories reveals that, in fact, the jury’s answers do
not conflict, but that they require entry of judgment for the
petitioners rather than for the respondents. Special inter-
rogatory 3 asked the jury whether
... disclosure of the omitted material facts under the
circumstances of this case [would] have had actual signifi-
cance in the deliberations of a reasonable shareholder as to
whether to sell his interest in All American Assurance
Company? (App., 40)
The jury answered that interrogatory “No.” /d.
The instructions to the jury concerning special inter-
rogatory 3 reveal that it was the “reliance” interrogatory and,
moreover, that the District Court placed the burden upon the
petitioners, as the defendants, to prove the lack of reliance:
The third element of the plaintiffs’ claim under Rule 10b-5
is a requirement of truth (sic) by a preponderance of the
evidence that the plaintiffs relied upon the alleged omis-
sions, and that they were justified in doing so. Now. in the
16
case of omissions or non-disclosures of material facts, if
such an omission is proved by the plaintiffs by a pre-
ponderance of the evidence... then the element of re-
liance on the part of the plaintiffs may be presumed. The
law infers that the plaintiffs would have relied upon facts
which are shown to be material and intentionally withheld.
The defendants, however, may rebut this presumption if
they are able to produce evidence that even if the material
facts had been disclosed, the plaintiffs’ decision as to the
transactions would not have been any different than what
it was.” (App., 886)
The jury’s negative response to special interrogatory 3
could not have been the result of its conclusion that the
plaintiffs failed to prove the omission of material facts or that
such failure was intentional, because the jury found omission of
material facts and intent by its affirmative responses to special
interrogatories | and 2. Thus, it is clear that the jury’s negative
answer to special interrogatory 3 is a finding that the petitioners
proved that the respondents did not rely upon the tender offer
materials in deciding to tender their All American stock.
Special interrogatory 10 asked the jury whether “in con-
nection with the purchase of the Plaintiffs’ shares, was there any
fraud or deceit upon the Plaintiffs by:
(a) Robert T. Shaw?
(b) GCL, ACFC, or ICH?” (App., 42)
The jury answered both subparts “Yes.” (/d).
The Instructions to the jury concerning special inter-
rogatory 10 make it clear that, although the interrogatory
contains the words “fraud” and “deceit,” it was not asking
about “fraud” or “deceit” in either the legal or the lay sense.
Rather, in light of the instruction, the jury's affirmative answers
to the interrogatory only mean that the petitioners did an act or
omitted or concealed material facts and are not an affirmative
finding of any of the other elements of common law construc-
tive fraud under North Carolina law. The instruction con-
cerning special interrogatory 10 first quotes the interrogatory,
and then says: “Now, we’ve been over the definition of fraud
17
and deceit in connection with the Rule 10b-5 claim.” (App.,
893). The definition of “fraud” given the jury in connection
with the Rule 10b-5S claim was:
Fraud embraces the taking of undue or unconscionable
advantage of another through breach of legal or equitable
duty by acts, omissions or concealment of material facts.
(App., 916)
This instruction, and thus the jury’s answer to special
interrogatory 10, does not deal with several of the elements of
common law constructive fraud as established by the North
Carolina Supreme Court. In Ragsdale, v. Kennedy, 209 S.E.2d
494 (1974), the North Carolina Supreme Court articulated the
elements of a constructive fraud case when there is a relation-
ship of trust and confidence between the parties to a transac-
tion. Those elements are: (1) the defendant made a mis-
representation or concealment of a material fact; (2) the
misrepresentation or concealment was reasonably calculated to
deceive; (3) the defendant knew the misrepresentation was
false, or that the concealed information was of significance, or
acted recklessly; (4) the defendant intended for the plaintiffs to
rely upon the misrepresentations or concealments; (5) the
plaintiff reasonably relied and acted upon the mis-
representations or concealments; and (6) the plaintiff was
damaged as a result.
Reliance, the fifth element prescribed by the North Caro-
lina Supreme Court for constructive fraud in a_ fiduciary
relationship context, is not embraced by the District Court’s
definition of “fraud” or “deceit.” Thus, the jury’s affirmative
answer to special interrogatory 10 does not mean that the jury
found all of the factual elements of constructive fraud that are
required for entry of judgment against the petitioners.
Rule 49(a) of the Federal Rules of Civil Procedure,
Gallick v. Baltimore & Ohio Ry. Co., 372 U.S. 108 (1963), and
Miller v. Royal Netherlands Steamship Co., 508 F.2d 1003 (Sth
Cir. 1975), provide the procedure to be followed in cases such
as this. The jury’s answers to other special interrogatories must
ener eerie
18
be reviewed, in light of the District Court’s instructions, coun-
sel’s argument, and the evidentiary record, to determine wheth-
er there is a “logical and probable decision” on each factual
element of common law constructive fraud. Griffin v. Mat-
herne, 471 F.2d 911, 915 (Sth Cir. 1973). If there is not, and
no special interrogatory concerning any such issue was re-
quested, Rule 49(a) provides that the Court “shall be deemed
to have made a finding in accord with the judgment on the
special verdict.” Rule 49(a), F.R.C.P.
As to the element of reliance, there is, however, a specific
jury finding, so that the deemed finding Rule 49(a) provides
does not come into being. The jury found a lack of reliance in
response to special interrogatory 3. That finding alone is
sufficient to require entry of judgment in favor of the petitioners
on the respondents’ common law constructive fraud claim.
The Court below attempted to avoid this result by dis-
tinguishing between the respondents’ claim under Rule 10b-5
and their common law constructive fraud claim. The attempted
distinction focused upon the foundational acts specified in the
special interrogatories. According to the Court below, the
foundational acts for the Rule 10b-5 claim were alleged
omissions in the tender offer materials. The Court of Appeals
further speculated that the foundational act for the common
law claim was “the purchase of the Post stock with the intent to
create the false impression that $5 was a reasonable price.” 801
F.2d at 718. The District Court’s reasoning was similar. Infra
at A-6. Both the District Court and the Court of Appeals
missed a very fundamental point, however, and that point
renders their distinction meaningless. The purchase of the Post
stock could not have created the false impression the Court of
Appeals says was intended. The tender offer materials coniain-
ed a description of the privately negotiated pre-tender pur- ©
chases, which included the purchase of the Post stock, and those
materials were the respondents’ only source of information
concerning those purchases. The jury, however, found that the
19
respondents did not rely upon the information disclosed in the
tender offer materials in deciding to tender their stock. Not
having relied upon the information in the tender offer materials
to decide whether to tender their stock, the respondents, of
necessity, did not rely upon the information those materials
contained concerning the Post stock purchases, and could not
have been under the impression, as a result of the description of
those purchases, that five dollars per share was a desirable
price. Therefore, the distinction drawn by the courts below is
illusory. Judgment should have been entered for the petitioners
on the petitioners’ common law constructive fraud claim.
The jury’s affirmative answers to special interrogatories 8
and 11, the proximate cause interrogatories, and its assessment
of damages do not suggest that the jury reached a “logical and
probable decision” against the petitioners on the liability issues
respecting the North Carolina common law claim. It is
elementary that absent findings for the plaintiff on all the
liability elements, the plaintiff is not entitled to an award of
damages. McVey v. Phillips Petroleum Co., 288 F.2d 53, 59
(5th Cir. 1961). As in the McVey case, the jury’s answers to the
liability interrogatories, when read in light of the District
Court’s instructions, are “plain and unambiguous,” id. and
require entry of judgment in the petitioner’s favor.
Nor is the solution to the apparent conflict between the
jury’s answers a remand for retrial. “It is the duty of the court
to reconcile or harmonize the answers with each other, if that
can reasonably be done.” Jd. As this Court noted, remanding
for a new trial because of an irreconcilable conflict in the jury’s
findings necessarily entails disregarding the jury’s special ver-
dict, an act the Seventh Amendment prohibits the courts from
doing if the answers can be harmonized. Gallick v. Baltimore &
Ohio Ry. Co., 372 U.S. 108, 119 (1963). Since the jury’s
answers can be harmonized and, as harmonized, they are
findings that the petitioners are not liable on the respondents’
claims under either Rule 10b-5 or North Carolina common law,
the proper remedy is remand for entry of judgment on those
claims in the petitioners’ favor.
20
The decision below deprived the petitioners of their right
to a jury trial as guaranteed by the Seventh Amendment, was
contrary to this Court’s decisions in Atlantic & Gulf Stevedores,
Inc. v. Ellerman Lines, Ltd., 369 U.S. 355 (1966), and Gallick
v. Baltimore & Ohio Ry. Co., 372 U.S. 108 (1963), and conflicts,
both directly and in principle, with decisions of the United
States Courts of Appeals for the First and Fifth Circuits in
Mashpee Tribe v. New Seabury Corp, 592 F.2d 575 (Ist Cir.
1979), Fugitt v. Jones, 549 F.2d 1001 (Sth Cir. 1977), and
McVey v. Phillips Petroleum Co., 288 F.2d 53 (Sth Cir. 1961).
A writ of certiorari should issue to review and correct the
decision below.
CONCLUSION
For these various reasons, this petition for a writ of
certiorari should be granted.
Respectfully submitted,
MOORE & PETERSON
A Professional Corporation
2800 First City Center
Dallas, Texas 75201-4621
(214) 754-4800
G. R. Poehner
William F. LePage
WOMBLE, CARLYLE,
SANDRIDGE & RICE
Jimmy H. Barnhill
Suites 2400 and 2500
Wachovia Building,
301 N. Main Street
Winston Salem, North Carolina
27102
(919) 721-3600
Attorneys For Petitioners
APPENDIX
A-|
IN THE DISTRICT COURT OF THE UNITED STATES
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
C-C-82-482-P
CITY NATIONAL BANK, as Executor |
of the Estate and Trustee under the Will
of JOHN S. CANSLER, Deceased, et.
al.,
Plaintiffs,
VS.
AMERICAN COMMONWEALTH
FINANCIAL CORPORATION,
GREAT COMMONWEALTH LIFE
INSURANCE COMPANY and
ROBERT T. SHAW,
Defendants.
+ MEMORANDUM
A
Judgment for Plaintiffs having been entered by this Court,
the Defendants have now moved for Judgment Notwithstand-
ing the Verdict, or alternatively, for New Trial:
(1) To the jury’s finding of liability under Securities
Exchange Commission Rule 10b-13, on the ground that
there was no substantial evidence of a purchase outside the
tender offer after the time that offer was publicly an-
nounced or otherwise made known to the minority share-
holders of All American Assurance Company. (“All
American”’)
(2) On the jury’s finding of a breach of fiduciary
duties, on the grounds that there was no substantial
evidence of trust and confidence in the Defendants and for
the reason that the jury’s finding of fraud and deceit in
Issue No. 10 is inconsistent with its finding in Issue No. 3
that the average shareholder could not have reasonably
A-2
relied upon the omissions contained in the tender offer
materials.
(3) With regard to both the Plaintiffs’ Rule 10b-13
and fiduciary duties claims based upon the additional
ground that there is no substantial evidence to support the
jury’s finding of damages.
RULE 10b-13
The Defendants’ first contention is in essence that the
purchase of the Post Stock did not violate the provisions of Rule
10b-13 because at the time of the purchase the tender offer was
not “... publicly announced or otherwise made known by such
persons to holders of the security to be acquired....” The
Defendants’ argument is premised on the fact that the Post
Trust stock purchase occurred one or two days prior to the
announcement of the tender offer.
The Court agrees with the Defendants that as a matter of
law pre-tender private purchases are not covered by Rule 10b-
13 although they are stili subject to the general anti-fraud
provisions of the Securities Act. Heine v. The Signal Com-
panies, [1976-77 Transfer Binder] Fed. Sec. L. Rep. (CCH)
{ 95,898 (S.D.N.Y. 1977); SEC Release No. 8717 (the prohi-
bition begins with the public announcement or other com-
mencement of the offering, whichever is earlier. )
The Court in Heine elaborated upon the scope of events
intended to be covered by Rule 10b-13 as follows:
Apparently because of the rule’s focus on events taking
place after a tender offer is actually announced the SEC
explicitly exempted “[p]urchases made prior to the in-
ception [of the offer],” though such purchases would still
be subject to the general anti-fraud provisions of the
Securities Act. See SEC Release No. 37-8712, supra.
Id. at 91,319 (brackets in original).
A-3
To hold that a pre-tender private purchase should be
subject to Rule 10b-13 would be inconsistent with the various
securities regulations. For instance, tender offerors are required
to disclose their purchase of the subject security made within a
specific period prior to the tender offer. See, e.g., §§ 13(b) and
14(e) of the Securities Exchange Act. Requiring disclosure at
the time a tender offer is sent to the public is also inconsistent
with the contention that once a party decides it will make such
an offer, any private purchase marks the inception of that
tender offer. Further, to hold that disclosure of intent to make a
tender offer triggers the Rule 10b-13 prohibitions against
market purchases
... probably would cause the termination of all market
purchases by a tender offeror as soon as the decision to
make a tender offer had been reached. Because Congress
certainly does not appear to have intended to affect market
purchases in this manner, the Courts and the SEC should
refrain from taking action to integrate market purchases of
securities with related tender offers until Congress ex-
presses its intent to support such integration.
Aranow, Einhorn & Berlstein, Developments in Tender Offers
for Corporate Control, p. 20 (1977). In light of the above, the
Court is of the opinion that Rule 10b-13 prohibits tender
offerors from purchasing shares of stock outside the tender offer
after, and not before, the tender offer is publicly announced or
commenced. See, Heine v. The Signal Companies, supra, at p.
91,319; SEC Release No. 8717.
In determining what constitutes the “public announce-
ment” or “commencement” of the tender offer as those terms
are utilized in Rule 10b-13 the Securities and Exchange Com-
mission stated
As used in the rule an offer could be publicly announced or
otherwise made known it [sic] the holders of the target
security through a published advertisement, a news release
or other communication by or for the persons making the
offer to holders of the security being sought for cash tender
or exchange.
SEC Release No. 8712.
A-4
Although the Court agrees with the legal premise that a
pre-tender offer purchase is not subject to the prohibitions of
Rule 10b-13, a disputed factual issue existed at the trial as to
whether the Post Trust stock purchase occurred prior to, or
after, the commencement of the tender offer. The jury was
instructed that in order to find a violation of Rule 10b-13 the
Plaintiffs needed to prove that the tender offer was outstanding
(not anticipated) at the time the Post Trust stock was sold to
the Defendants. The instructions provided:
No person who makes a cash tender offer or exchange
offer — which we’re not involved with — for any equity
security — that is, stock — shall, directly or indirectly,
purchase, or make any arrangement to purchase, any such
security otherwise than pursuant to such tender offer or
exchange offer, from the time such tender offer is publicly
announced or otherwise made known by such person to
holders of the security to be acquired until the expiration of
the period, including any extensions thereof, during which
the securities tendered pursuant to such tender offer or
exchange offer may by the terms of such offer be accepted
or rejected.
Now, there’s a great deal of discussion about whether
it was the twelfth or thirteen, [sic] I believe. Again, I’m
speaking from my recollection. It’s your recollection that
counts. There was a great deal of discussion about when
Mr. Catalano — and I’ve probably got that name wrong; I
haven’t pronounced it right yet — sold the stock. That’s for
you to determine.
So, if you feel that the tender offer was outstanding at
the time the stock was sold or arrangements were made for
the sale of the stock to Mr. Catalano — I’m not going to
worry about the pronounciation of his name; you know
who we’re talking about — if you feel that was made to him
during that period — then, of course, you answer that issue,
Yes; if you feel that it wasn’t, you have to answer that issue,
No. Again, the burden is on the plaintiffs on all of these
issues to persuade you by a preponderance of the evidence
that these violations occurred. (Emphasis supplied. )
A eC
A-5
The jury answered the issue “Yes”.
In that the jury was instructed to determine whether or not
the Post Trust stock was a pre-tender offer purchase, the issue
raised by the Defendants’ motion is whether there is substantial
evidence to properly support the jury’s finding. See, Brady v.
Allstate Ins. Co., 683 F.2d 86, 89 (4th Cir. 1982); Ralston
Purina Co. v. Edmunds, 241 F.2d 164 (4th Cir.) cert. denied,
353 U.S. 974 (1957); Payne v. Blue Bell, Inc., 550 F.Supp.
1324, 1325 (M.D.N.C. 1982). The Court, after carefully
considering the matter is of the opinion that there was sufficient
evidence for the jury to find that the Post Trust stock purchase
actually occurred after the tender offer had commenced.
The evidence as to when the tender offer commenced arid
when the Post Trust stock was sold to the Defendants consisted
of various documents, circumstantial evidence, and the testi-
mony of Richard P. Catalano at the trial and at his deposition.
Mr. Catalano testified in substance that he was aware that
a tender offer to the shareholders would be made by Great
Commonwealth Life Insurance Company (“GCL”), but that
he never saw the tender offer until after he had transferred the
Post Trust shares to GCL on December 12, 1979, when he
received four or five thousand dollars, and a note from which
he received eighty three thousand dollars on January 2, 1980.
Mr. Catalano also testified that he sold in a private purchase
instead of through the tender offer in order to expedite the
receipt of the funds. The minority shareholders were also paid
on January 2, 1980. He further testified that he thought he had
asked one of the brokers he dealt with to procure a copy of the
tender offer sometime after the tender offer was announced.
The jury evidently chose to discredit Mr. Catalano’s testi-
mony that the purchase occurred prior to the commencement of
the tender offer. The fact that, according to Mr. Catalano’s own
testimony, he was aware GCL was going to make a tender offer
A-6
and he did not receive 95% of the purchase money until
January 2, 1980, although he sold in order to expedite the
receipt of the funds may be one of the reasons, known only to
the jury, for discrediting his testimony. Further, a letter to GCL
from its attorney indicates that even as of December 17, 1979
GCL had not paid any of the 5% allegedly paid at the time of
the transfer. ( Plaintiffs’ Exhibit 22). These facts coupled with
the existing business relationship between Mr. Shaw and Mr.
Post, and Mr. Shaw’s initiation of the purchase of the Post Trust
Stock in the midst of preparation of the tender offer’ is
circumstantial evidence on which the jury could reasonably rely
on to reject Mr. Catalano’s testimony that the stock was
transferred prior to the tender offer.
Furthermore, there was the pivotal unanswered question of
“Why?” Why would the Defendants solicit the Post Trust stock
from Mr. Catalano, allegedly one or two days before the tender
offer? Why would the Defendants solicit the stock if it were not
for the purpose of manipulating the price of the shares being
purchased under the tender offer by establishing a recent
purchase of 1% of the outstanding shares at a price of $5.00 per
share and including that purchase at that price on page 14 of
the tender offer? Mr. Shaw never appeared or testified at the
trial, and the Defendants never really addressed the question
and an explanation was never offered. The only evidence was
that Mr. Shaw sought out Mr. Catalano, a resident of the same
town, Dallas, Texas and asked him to sell the Post Trust stock
to the Defendants. The jury determined that this was in order
to influence the Plaintiffs to sell their shares under the tender
offer also at $5.00 per share. This was a question of fact which
the jury answered in the Plaintiff's favor.
In addition, the jury had before it the contradiction of the
dates in the documentary evidence surrounding the tender
‘ According to the Defendants the Post Trust stock purchase occurred
two days before the tender offer was announced.
A-7
offer, which documents were prepared for or by the Defend-
ants. To recapitulate the documentary evidence as to the
publication of the tender offer, it appears from the minutes of
the special meeting of the Board of Directors of GCL held on
December 11, 1979 that “[t]he Chairman displayed a copy of a
proposed letter from Great Commonwealth to All American
Assurance Company to be dated December 12, 1979 advising
the Board of Directors of All American Assurance Company of
Great Commonwealth’s intention to make a public offer to
purchase up to 175,000 shares of the issued and outstanding
common stock of All American Assurance Company for $5.00
net cash per share to the Sellers . . . . ” ( Plaintiffs’ Exhibit 148).
The dates in the documents, however, are inconsistent.
There was a letter to the All American shareholders dated
December 12, 1979 from Robert T. Shaw as President of All
American. In the Deeember 12, 1979 letter the shareholders
are advised that “[b]y letter dated December /3, 1979, the
Board of Directors of All American were advised by Great
Commonwealth Life Insurance Company (“GCL”) of its in-
tention to make an offer to purchase up to 175,000 shares of All
American Common Stock (the “Shares”) for $5.00 per
share ....” ( Plaintiffs’ Exhibit 5).
According to the Plaintiffs’ Exhibit 5 the meeting of the
Board of Directors of All American was held on December 13,
1979 at the Sheraton Inn in Charlotte, North Carolina. The
minutes reflect that the Directors were presented with a copy of
a letter from GCL dated December 2/, 1979 advising the Board
of Directors of All American of GCL’s intention to make a
public offer to purchase 175,000 shares of All American’s
common stock for $5.00 net cash per share. According to the
minutes, the entire letter was read to the Directors of All
American, and attached to the minutes as Exhibit “A”. The
letter attached to the minutes as Exhibit “A” is in fact dated
December 12, 1979. The December 2/, 1979 referred to in the
minutes is obviously a transposition of numbers. Further,
A-8
although the minutes of the meeting of the Board of Directors
of All American indicate the meeting was held on December
13, 1979, the Directors authorized the letter dated December
12, 1979 attached as Exhibit “B” to the minutes. The dates in
these various documents prepared by the Defendants disclose
obvious discrepencies.
Thus, the jury had before it conflicting testimony and
documents, and the absence of any legitimate business reason
for the Post Trust stock purchase allegedly immediately prior to
the tender offer. The jury resolved the conflict as to the facts in
favor of the Plaintiffs, and the Court finds there was substantial
evidence for the jury to so find.
FRAUD
The next contention of the Defendants is that there was no
substantial evidence of trust and confidence by the Plaintiffs in
the Defendants and the jury’s finding of fraud and deceit in
Issue No. 10 is inconsistent with its finding in Issue No. 3 that a
reasonable shareholder could not have reasonably relied upon
the omissions contained in the tender offer materials.
The Defendants argue that under North Carolina law
there is no fiduciary relationship between the controlling share-
holders on the one hand and the minority shareholders on the
other. Granted, that although there is a fiduciary relationship
between the directors and the shareholders in the operation of
the corporation, it is doubtful that under North Carolina law
there is a fiduciary relationship between the majority share-
holders and the minority shareholders in a transaction involving
purchase by the majority or controlling shareholders of the
minority shareholders’ stock, except under “special circum-
stances.” Lazenby v. Goodwin, 40 N.C. App. 487, 253 S.E.2d
489 (1979), aff'd in part, new trial on damages, 60 N.C. App.
504, 299 S.E.2d 288 (1983).
In accordance with the law of North Carolina the Court
instructed the jury that they could find a fiduciary relationship
A-9
existed in this tender offer, if they found the existence of special
circumstances. Further, the specific issue answered by the jury
was: “Was there a relationship of trust and confidence existing
between the Plaintiffs and the Defendants in connection with
the tender offer?”
Thus, the issue presented to the jury was not whether there
was a fiduciary duty by the majority shareholders to the
minority shareholders as a general proposition but whether
under the special circumstances of this case the shareholders to
whom the offer was made trusted the offer from Defendants as
purchasers who had complete knowledge of the company and
its value would not do any act to mislead the shareholders to
whom the tender offer was addressed. The jury found that
there was this relationship which had been created by the
circumstances surrounding the tender offer. The Court is of the
opinion that in light of the lack of any viable market for the
shares, the lack of any anticipated market for the shares, the
lack of any dividend history, the lack of the Plaintiffs’ financial
experience compared to the financial expertise of the Shaw
Group and the fact that the majority controlling shareholder
initiated the purchase, there was sufficient evidence for the jury
to make such a finding.
The Defendants argue that the jury’s finding of fraud and
deceit in Issue No. 10 is inconsistent with its findings in Issue
No. 3 that disclosure of omitted material facts would not have
had actual significance in the deliberations of a reasonable
shareholder as to whether to sell his interest in All American.
In Issue No. 10, the jury was saying the Defendants purchased
the Post Trust stock with intent to defraud the minority
shareholders which the jury already found in Issue No. 7 was
an affirmative act done with intent to defraud the minority
shareholders. There was sufficient evidence for the jury to
make such a finding.
A-10
Finding in Issue No. 3 that inclusion of specified material
facts which facts were omitted from the tender offer would not
have had any significance to a reasonable tendering share-
holder is clearly different from a violation of a trust and
confidence which the jury found these tendering shareholders
had in the Defendants. The Court, therefore, finds there is not
an irreconcilable conflict between the jury’s answer to Issue No.
3 and the finding of fraud and deceit in answer to Issue No. 10.2
DAMAGE
The Defendants contend that the jury’s finding of $10.28
per share in damages cannot be supported by the evidence.
The essence of the Defendants’ argument is that $10.28 per
share is invalid because it is only the value of a share when a
control premium is obtained.
The value of the stock was a question for the jury. The
Court instructed the jury that the damages would be the
difference between the value received ($5.00) and what the
Plaintiffs proved by a preponderance of the evidence was the
value of the shares at the expiration of the tender offer. The
jury found the difference to be $5.28 per share. The Court is of
the opinion that there was substantial evidence, including Mr.
Shaw’s own testimony in his deposition, from which the jury
could make such a finding.
In light of the above the Court is of the opinion that the
Defendants’ Motion for Judgment Notwithstanding the Verdict
or alternatively for New Trial should be denied.
IT IS, THEREFORE, ORDERED that:
(1) The Defendants’ Motion for Judgment Notwith-
standing the Verdict or alternatively for New Trial is
DENIED;
2As a procedural matter the Court notes for the record that the
Defendants did not object to the instructions or the issues submitted to the
jury concerning the common law fraud claim.
A-11
(2) The Administrator shall proceed with distribution
of Notice of Judgment to class members in accordance with
the Order of May 21, 1985; and
(3) The date to be inserted in the Proof of Claim is
“October 4, 1985”.
This the 21st day of August, 1985.
/s/ Ropert D. POTTER
Robert D. Potter, Chief
United States District Judge
A-12
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 85-2000
City National Bank, as Executor of the
estate of John S. Cansler, deceased; Nell V.
Bates; Anna Pender Griffith; Virginia T.
Johnson; Lacy D. Keesler; S. Dewey Kees-
ler, A. H. Kimball; H. Brown Kimball; Ann
Dupree King; Rose Dupree King, de-
ceased; John D. King; Marie Dowd Lati-
mer; T.F. Morgan; Grace E. Morgan;
Mary Rogers Pender Murphy; Ludie B.
Parker; John Robert Pender, III; John
Robert Pender, IV; Mary D. Pender; W. L.
Pender; Gaylord Myers Pender; Deborah
Grace Speece; Oliver Brown Thomas;
Charles Nixon White; Doris Haire White;
Rogers Pender Williams; All American As-
surance Co.; and William Shecter, Appellees,
versus
American Commonwealth Financial Corp.;
Great Commonwealth Life Insurance Co.;
and Robert T. Shaw, Appellants.
No. 85-2147
City National Bank, as Executor of the
estate of John S. Cansler, deceased; Nell V.
Bates; Anna Pender Griffith; Virginia T.
Johnson; Lacy D. Keesler; S. Dewey Kees-
ler; A. H. Kimball; H. Brown Kimball; Ann
Dupree King; Rose Dupree King, de-
ceased; John D. King; Marie Dowd Lati-
mer; T.F. Morgan; Grace E. Morgan;
Mary Rogers Pender Murphy; Ludie B.
Parker; John Robert Pender, III; John
Robert Pender,IV; Mary D. Pender; W. L.
A-13
Pender; Gaylord Myers Pender; Deborah
Grace Speece; Oliver Brown Thomas;
Charies Nixon White; Doris Haire White;
Rogers Pender Williams; All American As-
surance Co.; and William Shecter, Appellants
versus
American Commonwealth Financial Corp.;
Great Commonwealth Life Insurance Co.;
and Robert T. Shaw, Appellees.
Appeals from the United States District Court for the Western
District of North Carolina, at Charlotte. Robert D. Potter,
Chief Judge. (CA 82-0482-P)
Argued: May 6, 1986 Decided: September 25, 1986
Before HALL and ERVIN, Circuit Judges, and BUTZNER,
Senior Circuit Judge.
G. Richard Poehner (George R. Poehner; William F. LePage;
Moore & Patterson [sic]; Jimmy H. Barnhill; Womble, Carlyle,
Sandridge & Rice on brief) for Appellants/cross-appellees,
Thomas Ashe Lockhart (Bruce M. Simpson; Cansler & Lock-
hart, P.A. on brief) for Appellees/cross-appellants.
A-14
BUTZNER, Senior Circuit Judge:
American Commonwealth Financial Corp., Great Com-
monwealth Life Insurance Co., I.C.H. Corp., and Robert T.
Shaw appeal a judgment entered on the verdict of a jury
awarding damages to minority shareholders of All American
Assurance Co. who sold their shares to Great Commonwealth
Life Insurance Co. in response to a tender offer. The appellants
assert that the evidence was insufficient to find a violation of
Securities Exchange Commission Rule 10b-13 [17 C.F.R.
§ 240.10b-13] or common law fraud. They also protest that the
damages improperly reflected a control premium’ for the
tendered stock.
The minority shareholders assign error to the district
court’s ruling that they cannot recover either treble damages
and attorney fees pursuant to North Carolina’s Unfair Trade
Practices Act, N.C. Gen. Stat. 75-1.1 (1985), or rescissionary
damages based on the value of the shares at the time of
judgment.
The district court addressed all of the contentions raised on
appeal and cross-appeal fully explaining its reasons for rejec-
ting them. We affirm.
I
In January 1979, American Commonwealth Financial
Corp. acquired 67% of All American’s stock from American
Bank and Trust Company. American Commonwealth subse-
quently transferred this stock to its wholly owned subsidiary,
Great Commonwealth Life Insurance Co. Robert T. Shaw was
president of American Commonwealth and a director of Great
Commonwealth. He became president of All American after its
acquisition.
‘(T]he value of a controlling position in a corporation is worth more
on a per share basis than a non-controlling interest.” Alna Capital Associates
v. Wagner, 758 F.2d 562, 566 (11th Cir. 1985). This enhanced value is
termed a control premium.
A-15
On December 14, 1979, Great Commonwealth made a
tender offer for 175,000 shares of All American at $5 a share.
Prior to the tender offer, Great Commonwealth arranged to
purchase 57,782 shares of All American stock at $5 a share,
including 18,500 shares from the Post family trusts. These
private purchases were disclosed in the tender offer. The tender
offer expired on January 4, 1980, and enabled Great Com-
monwealth to increase its holdings in All American to over 80%
of its stock. In November 1982, All American merged with
I.C.H. Corp., and the shareholders of All American exchanged
their stock for shares of I.C.H.
In August 1982, several minority shareholders brought this
class action on behalf of those shareholders who sold their All
American Stock to Great Commonwealth pursuant to the
December 1979 tender offer. They claimed that the defendants
made material misrepresentations and omissions in the tehder
offer in violation of Rule 10b-5. 17 C.F.R. § 240.10b-5 (1986).
They introduced evidence to show that the private purchase
from the Post trusts was made after the commencement of the
tender offer in violation of Rule 10b-13. 17 C.F.R. § 240.10b-
13 (1986). In addition, they claimed that the defendants
committed fraud and breached their fiduciary duties. As a
result, the minority shareholders charged that they were misled
into selling their stock for $5 a share, a price far below its actual
value. They sought compensatory and punitive damages, as
well as treble damages and attorneys fees under North Caro-
lina’s Unfair Trade Practices Act. They also sought to recover
rescissionary damages measured by the value of I.C.H. stock at
the time of judgment.
In response to special interrogatories the jury found no
violation of Rule 10b-5 because any omissions in the tender
offer would not “have had actual significance in the deliber-
ations of a reasonable shareholder.” The jury found that the
purchase of the Post stock violated Rule 10b-13. In addition, it
found that this purchase was made with the “intent to deceive,
A-16
manipulate or defraud” the minority shareholders. The jury
also found that the defendants committed fraud in connection
with the purchase of the minority shareholders’ stock. The jury
determined that a relationship of trust and confidence existed
between the minority shareholders and defendants and that the
defendants were guilty of a breach of fiduciary duties. The jury
awarded $5.28 a share in damages. During the course of the
proceedings the district court denied the minority shareholders
recovery under the Unfair Trade Practices Act and their claim
for rescissionary damages. After denying the defendants’
motions for judgment notwithstanding the verdict and for a
new trial, the district court entered judgment on the verdict in
favor of the minority shareholders.
Il
The defendants contend that evidence is not sufficient to
Support the jury’s finding that the purchase of the Post stock
violated Rule 10b-13, which prohibits private purchases after
the announcement of a tender offer.2
Great Commonwealth entered into a stock purchase agree-
ment on December 11, 1979, for the Post stock. The agreement
required Great Commonwealth to pay 5% of the purchase price
at the closing on December 12, with the balance due on
January 2, 1980. One of the defendants’ witnesses testified that
the stock certificates were transferred to the defendants on
December 12. The defendants contend that this evidence
2 Rule 10b-13, 17 C.F.R. § 240.10b-13 (1986), provides:
No person who makes a cash tender offer or exchange offer for any
equity security shall, directly or indirectly, purchase, or make any
arrangement to purchase, any such security (or any other security which
is immediately convertible into or exchangeable for such security),
otherwise than pursuant to such tender offer or exchange offer, from the
time such tender offer or exchange offer is publicly announced or
otherwise made known by such person to holders of the security to be
acquired until the expiration of the period, including any extensions
thereof, during which securities tendered pursuant to such tender offer or
exchange offer may by the terms of such offer be accepted or rejected.
wisetetnnistetushaieinansbi>
A-17
establishes, as a matter of law, that they acquired ownership of
the Post stock on December 12, two days before the public
announcement of the tender offer.
The district court properly ruled that pre-tender private
purchases are not covered by Rule 10b-13 although they are
still subject to the general antifraud provisions of the Securities
Act. See Sunshine Mining Co. v. Great Western United Corp.,
[1977-1978 Transfer Binder] Fed. Sec. L. Rep. (CCH)
{ 96,049 (D. Idaho Apr. 22, 1977); Heine v. Signal Companies,
Inc., [1976-1977 Transfer Binder] Fed. Sec. L. Rep. (CCH)
q 95,898 (S.D.N.Y. Mar. 4, 1977).
The minority shareholders presented evidence that Great
Commonwealth did not pay 5% of the price of the stock on
December 12 as required by the purchase agreement. Instead,
payment was made after December 17. This raised the issue
whether the parties intended to transfer ownership of the stock
on December 12 or at the time Great Commonwealth made the
initial payment. The court properly submitted this issue to the
jury.
In its opinion denying the motion for judgment notwith-
standing the verdict, the district court carefully reviewed the
evidence pertaining to the date of the purchase of the Post
stock. The district court pointed out that ample circumstantial
evidence existed for discrediting the witness’s testimony that the
shares were delivered and the sale closed on December 12. Not
until December 17 did Great Commonwealth’s lawyer direct an
official of the company to pay the initial 5% of the purchase
price. No explanation was given for this delay, and the jury
could draw the reasonable inference that a prudent lawyer
would not direct his client to pay for stock until the shares were
in hand. The district court noted discrepancies in the dates of
pertinent documents and the lack of any valid, credible business
reason for the private purchase of the Post shares. The district
court also pointed to a business relationship between Shaw and
Post. Post owned a substantial amount of I.C.H. stock.
A-18
Through its holdings in Ozark National Life Insurance Co..,
I.C.H. had a substantial interest in American Commonwealth
Financial Corp. which owned 100% of Great Commonwealth,
the purchaser of the Post stock. As the district court observed,
the jury could reasonably find that the purchase from Post of a
large block of stock at $5 a share was made to influence the
minority shareholders to sell to Great Commonwealth at this
price.
We reject Great Commonwealth’s argument that it did not
violate Rule 10b-13 because it became the beneficial owner of
the Post stock upon entering into the stock purchase agreement.
It is the purchase of stock that Rule 10b-13 regulates, not the
claim to benefical ownership. Moreover, the stock purchase
agreement did not purport to convey beneficial ownership of
the stock on December 11, the date of its execution. Instead, it
specifically provided that the stock would be delivered and 5%
payment made at the closing. Therefore, Great Com-
monwealth’s status as a party to an executory contract to
purchase stock in the future does not immunize it from appli-
cation of Rule 10b-13.
We also reject the defendants’ argument that Texas law
establishes that Great Commonwealth became the owner of the
Post stock at the time the stock certificates were delivered.
Reliance on this provision of Texas law does not resolve the
question. The contract provided that delivery and 5% payment
were to be made simultaneously. The date on which this took
place raised a factual question that the jury resolved against the
defendants.
The defendants also contend that the evidence is in-
sufficient to sustain the jury’s finding of common law fraud.
They particularly challenge the jury’s findings that there was a
relationship of trust and confidence between the minority
stockholders and the defendants and that the defendants
practiced fraud and deceit, which was a proximate cause of
A-19
damage to the minority shareholders. The defendants contend
that a finding of common law fraud is inconsistent with the
jury’s answer to interrogatory 3 in which it found that the
disclosure of omitted material facts in the tender offer would
not have had actual significance in the deliberations of a
reasonable shareholder as to whether to sell his stock.
We agree with the district court that under North Carolina
law the evidence was sufficient for the jury to find a relationship
of trust and confidence between the minority shareholders and
the defendants. See Lazenby v Goodwin, 40 N.C. App. 487,
253 S.E.2d 489 (1979), aff'd on retrial remanded for damages,
60 N.C. App. 504, 299 S.E.2d 288 (1983). For reasons
adequately explained by the district court in its opinion denying
the motion notwithstanding the verdict, we conclude that there
is no inconsistency in the jury’s answers to the interrogatories
and that the evidence is sufficient to sustain the jury’s finding of
fraud and deceit. Special interrogatory 3 referred to a number
of alleged omissions in the tender offer. These, however, were
quite distinct from the affirmative acts pertaining to the pur-
chase of the Post stock with the intent to create the false
impression that $5 was a reasonable price.
The defendants contest the amount of damages that the
jury awarded. In computing damages, the jury was required to
determine the value of the plaintiffs’ stock at the time of the
tender offer in December 1979. The jury determined that the
stock was worth $10.28 a share, which is the same price that
American Commonwealth paid when it acquired a controlling
block of All American stock in January 1979. The defendants
contend that the jury’s measure of damages must be set aside
because it awarded the minority shareholders a control pre-
mium for their minority interest in All American.
Shaw stated in his deposition that $10.28 a share was a
bargain price to pay for a controlling block of All American
stock. He testified that he would have paid more. The jury
A-20
could interpret his testimony to mean that a controlling interest
was worth more than $10.28 a share in January 1979. In
addition, the minority shareholders’ expert testified that the
minority interest was worth $14.63 a share in December 1979.
Therefore, the jury could reasonably find that the value of the
stock in December 1979 was $10.28 a share, even though the
shareholders had a minority interest. Accordingly, the jury’s
award of damages is supported by the evidence.
Both a trial court and an appellate court are subject to
stringent limitations when they consider a motion for judgment
notwithstanding the verdict. See 9 Wright & Miller, Federal
Practice and Procedure § 2524 (1971). Measured by these
familiar restrictions, the evidence was sufficient to sustain the
verdict, and the district court did not err by denying the
defendants’ motion.
In their cross-appeal, the minority shareholders assign
error to the district court’s ruling that because the North
Carolina Unfair Trade Practices Act, N.C. Gen. Stat. 75-1.1,
does not apply to securities transactions, they cannot recover
treble damages and attorney fees. They contend that the Act
applies because the jury found common law fraud and breach
of fiduciary duty in addition to a violation of Rule 10b-13.
The district court correctly anticipated the North Carolina
Supreme Court’s. construction of the Act. In a case decided
after the district court’s ruling, the Supreme Court held that the
Act did not apply to securities transactions. Significantly the
plaintiffs in that case alleged fraud, contructive fraud, and
misrepresentation. See Skinner v. E. F. Hutton & Co, 314 N.C.
267, 269, 274-75, 333 S.E.2d 236, 238, 241 (1985).
We also agree with the district court that the minority
shareholders’ undue delay in making a demand and their
A-21
failure to mitigate their damages forecloses their claim for the
rescissionary damages that they sought to compute as of the
date of the judgment. See S.E.C. v. McDonald, 699 F.2d 47, 53
(1st Cir. 1983); Baumel v. Rosen, 412 F.2d 571, 574-76 (4th
Cir. 1969); Miller v. Miller, 273 N.C. 228, 239, 160 S.E.2d 65,
73-74 (1968); Bruton v. Bland, 260 N.C. 429, 430, 132 S.E.2d
910, 911 (1963).
The judgment of the district court is affirmed.
U.S. Const. amend. VII
In Suits at common law, where the value in controversy
shall exceed twenty dollars, the right of trial by jury shall be
preserved, and no fact tried by a jury, shall be otherwise
reexamined in any Court of the United States, than according to
the rules of the common law.
§ 240.10b-13 Prohibiting other purchases
during tender offer or exchange offer.
(a) No person who makes a cash tender offer or exchange
offer for any equity security shall, directly or indirectly, pur-
chase, or make any arrangement to purchase, any such security
(or any other security which is immediately convertible into or
exchangeable for such security), otherwise than pursuant to
such tender offer or exchange offer, from the time such tender
offer or exchange offer is publicly announced or otherwise made
known by such person to holders of the security to be acquired
until the expiration of the period, including any extensions
thereof, during which securities tendered pursuant to such
tender offer or exchange offer may by the terms of such offer be
accepted or rejected: Provided, however, That if such person is
the owner of another security which is immediately convertible
into or exchangeable for the security which is the subject of the
offer, his subsequent exercise of his right of conversion or
A-22
exchange with respect to such other security shall not be
prohibited by this section.
(b) The term “exchange offer” as used in this section shall
include a tender offer for, or request or invitation for tenders of,
any security in exchange for any consideration other than for all
cash.
(c) The provisions of this section shall not apply to a
purchase of a security of the same class as that which is the
subject of a cash tender offer or exchange offer (or of any other
security which is immediately convertible into or exchangeable
for such security) if such purchase is made by the issuer, by
participating employees of the issuer or the employees of its
subsidiaries, or by the trustee or other person acquiring such
security for the account of such employees, pursuant to (1) a
stock option plan involving only “qualified stock options” or
qualifying as an “employee stock purchase plan” as those terms
are defined in sections 422 and 423 of the Internal Revenue
Code of 1954, as amended, or “restricted stock options” as
defined in section 424(b) of the Internal Revenue Code of
1954, as amended: Provided, however, That for the purposes of
this paragraph an option which meets all of the conditions of
that section other than the date of issuance shall be deemed to
be “restricted stock options”; or (2) a savings, investment,
pension or other stock purchase plan providing for both (i)
periodic payments (or payroll deductions) for acquisition of
securities by or on behalf of participating employees and (ii)
periodic purchases of the securities by participating employees,
or the person acquiring them for the account of such employees.
(d) This section shall not prohibit any transaction or
transactions if the Commission, upon written request or upon its
own motion, exempts such transaction or transactions, either
unconditionally or on specified terms or conditions, as not
constituting a manipulative or deceptive device or contrivance
or a fraudulent, or deceptive or manipulative act or practice
comprehended within the purpose of this section.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.