Source: http://openjurist.org/510/f2d/1043
Timestamp: 2014-11-26 23:15:11
Document Index: 740222682

Matched Legal Cases: ['§ 1292', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16']

510 F2d 1043 American Standard Inc v. Crane Co | OpenJurist
510 F. 2d 1043 - American Standard Inc v. Crane Co	Home510 f2d 1043 american standard inc v. crane co
510 F2d 1043 American Standard Inc v. Crane Co 510 F.2d 1043
Fed. Sec. L. Rep. P 94,924AMERICAN STANDARD, INC., Plaintiff-Appellee,v.CRANE CO., Defendant-Appellant and Third-Party Plaintiff,v.Edward J. HANLEY et al., Third-Party Defendants.
No. 97, Docket 74--1233.
Argued Oct. 23, 1974.Decided Dec. 20, 1974.Certiorari Denied June 2, 1975.See 95 S.Ct. 2397.
Abraham L. Pomerantz, New York City (Pomerantz Levy Haudek & Block, William E. Haudek, and Lord, Day & Lord, John W. Castles 3rd and Michael J. Murphy, New York City, of counsel), for defendant-appellant Crane Co.
David W. Peck, New York City (Sullivan & Cromwell, Edward W. Keane, Robert M. Osgood and Marcia B. Paul, New York City, of counsel), for plaintiff-appellee American Standard, Inc.
Herbert L. Scharf, New York City (Bobroff, Olonoff & Scharf, Alfred Olonoff, New York City, of counsel), for plaintiff-appellee Kritzler.
Wolf, Popper, Ross, Wolf & Jones, New York City (Donald N. Ruby and Robert M. Kornreich, New York City, of counsel), for plaintiff-appellee Abrams.
This is the third in a trilogy of appeals to come before this court in the continuing litigation between American Standard, Inc. ('Standard') and Crane Co. ('Crane') arising out of the contest for control of Westinghouse Air Brake Company ('Air Brake') which Standard has won, succeeding in effecting a merger of Air Brake into Standard. In Crane Company v. Westinghouse Air Brake Company et al., 419 F.2d 787 (2 Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970) (Crane I) this court held, inter alia, that Standard had violated both Section 9(a)(2) and Rule 10b--5 of the Securities Exchange Act by a market manipulation which artificially raised the price of Air Brake stock on the last day of Crane's tender offer for the stock, and remanded that cause for appropriate remedies.1 In Crane Co. v. American Standard, Inc., 490 F.2d 332 (2 Cir. 1973), we held that the fraud action mentioned above should be tried to the court without a jury (Crane II).
The present appeal concerns a separate action brought against Crane for alleged violation of Section 16(b) of the Securities Exchange Act ('the Act') by Standard, as well as by two stockholders of Air Brake, Kritzler and Abrams, and a stockholder of Standard, to recover alleged short-swing profits of Crane.2 The short-swing profits are alleged to have arisen through trading by Crane in equity securities of Air Brake up to the date of Air Brake's merger with Standard and of the merged company thereafter.3
The District Court, Lasker, J., denied Crane's motion for summary judgment and granted partial summary judgment to Standard on the issue of Crane's liability. 346 F.Supp. 1153. Crane appeals from this decision by permission of this Court pursuant to 28 U.S.C. § 1292(b) and F.R.A.P. 5.
Though the background of this controversy has been set forth in previous opinions, it is necessary to repeat it to some extent. Crane first proposed a merger of Crane and Air Brake to the Air Brake management on May 15, 1967. 419 F.2d at 790. In June 1967 Crane began to acquire large quantities of Air Brake shares in the open market for the purpose of acquiring control. It continued its purchases into 1968. On December 7, 1967 Air Brake changed its bylaws to raise the minimum cumulative vote needed to obtain representation on the board from 9.1 to 25 per cent. 419 F.2d at 790. On December 13, 1967 Air Brake declined the proposal for merger.
Although Crane then briefly discontinued its open market purchases of Air Brake common stock, it resumed them in January becoming a more than 10% owner on January 26, 1968, thereby achieving the status of a 'beneficial owner' for § 16(b) purposes.
Air Brake responded by arranging a 'defensive' merger with Standard. On February 20, 1968 A. King McCord, President of Air Brake, met with several of his directors to consider a proposal which had been submitted by Blyth & Company the day before, to merge Air Brake into Standard by exchanging Air Brake common stock for a Standard security to be valued at about $50 per share. Air Brake common was then quoted at about $36 per share. 419 F.2d at 791.
On the very day McCord was meeting on the Standard merger proposal, Crane, now a 10% stockholder, filed a 14B statement with the Securities and Exchange Commission declaring its intention to solicit proxies for the Air Brake Board election.
On March 1, 1968 McCord reached an agreement on the terms of the merger with representatives of Standard, and on March 4 the Air Brake Board voted its approval. On March 5 Air Brake informed its shareholders of the terms of the agreement and of the Board's approval. Air Brake stock rose to $44. (ibid.)
In the proposed merger, every two shares of the outstanding Air Brake stock were to be converted into one share of a new class of Standard $4.75 cumulative convertible preference stock. Each Standard preference share was to be convertible into 2 2/3 shares of Standard common. Upon consummation of the merger Air Brake's existence was to end.
In the face of this previously announced merger agreement by Air Brake and Standard managements, Crane on April 6, 1968 publicly announced a registered tender offer to exchange $50 face value of its debentures for each Air Brake share.4 The offer was to expire April 19 unless renewed. At this time, as has been noted, Crane was already a 10% holder of Air Brake common. Air Brake reacted quickly. On April 8, 1968, Air Brake called a meeting of its stockholders for May 16 to vote on the proposed merger with Standard. The Crane offer was set to expire unless renewed, as noted, about a month before that stockholders' meeting.
On the last day of Crane's tender offer, April 19, as this Court held, 419 F.2d 787, Standard fraudulently manipulated the market through a series of concealed wash sales with the intended result that the market price of Air Brake rose to $50. Crane's initial offer failed. Crane extended its offer three times to April 29, May 14 and May 24, 1968, but failed to gain a majority.5 On April 17, 1968 Crane brought a federal court action against Air Brake charging a violation of the proxy rules. On May 6, 1968, Crane brought suit against Standard and its underwriter, Blyth and Company, under the fraud provisions of the Act and Rule 10b--5 to enjoin the merger. The District Court ultimately dismissed the action.6
On or about May 16, 1968, the Air Brake stockholders voted to approve the merger with Standard. On June 7 the merger became effective and the Standard convertible preference stock became available for exchange for Air Brake common. By this time, Crane owned 32% of Air Brake common. Between June 7 and June 13, Crane actually exchanged its then holdings of 1,408,623 Air Brake shares for 740,311 of Standard. Standard was Crane's largest competitor in the plumbing industry. 419 F.2d at 791. Crane also became by virtue of the merger, the largest, or one of the largest stockholders of Standard.
On June 13, Crane sold 730,311 shares of Standard convertible preference stock on the New York Stock Exchange for $76,134,921.75 at a profit estimated at over $10,000,000. Four days thereafter, on June 17, 1968, Standard commenced its present 16(b) action. Shortly after that Crane sold 9,000 of its remaining 10,000 shares.
Crane had acquired its Air Brake stock as follows:
Air Brake Shares
6/15/67-1/26/68 (market) ............................ 469,200
1/31/68-4/2/68 (market) ............................. 202,900
4/19/68 (tender offer) .............................. 316,662
4/29/68 (first extension of tender offer) ........... 212,883
5/14/68 (second extension of
tender offer) ................................ 98,594
5/24/68 (third extension of
tender offer) ............................... 180,384
1,480,623
Standard contends in this court that Crane, through its Chairman, Thomas Mellon Evans, had the possibility of acquiring inside information and that it actually did acquire such information. Crane denies the fact but urges us not to consider this argument, in any event, because the facts now urged in support had not been called to the attention of the District Court on the motion for summary judgment.7 These alleged facts deal largely with the activities of Evans.
The facts relevant to Evans' activities as they appear in the affidavit of George C. Kern, Jr., annexed to the motion papers on the summary judgment motion, were given as follows:
In June 1967 the Crane Board authorized Evans to buy Air Brake stock as he thought it advisable. In the latter part of 1967, Crane revealed its substantial ownership to the Air Brake management and proposed that Air Brake be merged into Crane. On December 13, 1967 Evans was told by Air Brake that it was not interested in any kind of merger with Crane. The Chairman of Crane 'came to the conclusion that there was no way we could deal with them or that they would deal with us.' By January, 1968 Crane had 'dropped' its plans to merge with Air Brake. It bought no stock between January 5 and January 24. In the early part of 1968 Crane had heard 'from various sources' that Air Brake was negotiating with other companies. On March 4, 1968, the President of American Standard, W. D. Eberle, met with Evans and told him that Air Brake and Standard had agreed to merge and that a press release to that effect would be issued later in the day.
Judge Lasker's attention was not called to any specific incident in which Evans purportedly received inside information.
Standard now urges us to consider additional facts not directly called to Judge Lasker's attention but which it argues could have been found by combing the record. It notes that, between the acquisition of beneficial owner status on January 26, 1968 and the public announcement of the Air Brake-Standard merger on March 4, 1968, Evans met with Air Brake Director Mayer and separately with Director Shoemaker on February 23rd, and had a telephone conversation with Mayer on February 16 and with Chairman McCord and Director Hanley on February 23. Mayer, who was also Chairman of the Mellon Bank, which was one of Crane's banks, argued against the Standard merger and discussed favorably with Evans putting some Crane representatives on the Air Brake Board. In pursuit of that objective, Evans telephoned Mayer on February 23rd to ask if he would not arrange a meeting with the directors of Air Brake to consider his request for three directors on the Air Brake Board. During the conversation Mayer told Evans that he thought Air Brake was going to get an offer of $50 in cash. He did not mention the name of the offeror. Nor did he mention an acquisition of Air Brake for a certain number of convertible preference shares nor any ratio of exchange. Evans replied that they had not bought the stock for 'stock speculation,' that he would like to hear more about it 'but I don't think that is what we want.'8
Before becoming a 10% holder, Evans had heard through a proxy solicitor, who was under retainer to Crane, that Air Brake management intended to peddle the company, apparently to thwart Crane's attempt to take over. Having become aware of this classic defensive maneuver to defeat an unwanted suitor Crane apparently decided to become a 10% holder, to continue buying beyond that point and not to give up the fight.
After the February 23rd conversation with Mayer the schedule of stock purchases indicates that Crane did nothing about the 'information' either immediately or on a large scale. Crane bought no shares whatever until March 1 when it picked up 1200 shares to add to the 500,000 shares it already owned. By March 4 when the merger was publicly announced, Crane had acquired an additional 1600 shares of Air Brake.
As we have seen, on March 4, the Air Brake people informed Evans that they would announce a merger with Standard later that day, which they did. After the terms of the Standard merger had been announced and had become public property, Crane engaged in large purchases of Air Brake, culminating in its own tender offer of April 6 described above.9 There is no clear evidence tendered to us of the likelihood that Crane had received any other information that could be classified as 'inside information' after becoming a 10% holder which was not also public knowledge.10
The claim that Crane is liable to Standard for its profit embraces the following alternative theories of 'purchase' and 'sale': Claim (1) The purchase of Air Brake shares on January 26, 1968 which put Crane in the position of a 10% holder was the initial 'purchase', and the exchange of that stock pursuant to the merger terms for Standard convertible preference stock was the 'sale'; Claim (2) The 'purchase' was the exchange of Air Brake stock for Standard convertible preference shares under the merger terms, and the 'sale' was the sale for cash of those shares within six months; Claim (3) The purchase of the Air Brake stock as in Claim (1) was the 'purchase', and the matching 'sale' was the sale of the Standard convertible preference stock received on the merger.
The District Court rendered its decision granting summary judgment to Standard on liability under § 16(b). 346 F.Supp. 1153 (Oct. 12, 1971), a day before this Court decided Abrams v. Occidental Petroleum Corp., 450 F.2d 157 (2 Cir. 1971). The District Court had noted that 'Abrams had many elements in common with the instant action' and it had followed the reasoning of the District Court in that case, 323 F.Supp. 570, the reversal of which was announced by the Court on the following day.11
Following the reversal of Occidental, Judge Lasker withdrew his opinion to consider its effect. After consideration, the District Court adhered to its earlier decision in a supplemental opinion. 346 F.Supp. 1165. This appeal is from that decision.
In its first decision the District Court had held that Crane was liable under 16(b) for its profits on the basis of what we have called Claim (1); that is, that the exchange of Air Brake common stock for Standard convertible preference stock was a 'sale' for 16(b) purposes. The District Court reasoned that a company seeking to acquire a target company must know that there was a likelihood of a defensive merger which, upon its consummation, would give it a handsome profit even if it failed to succeed in the takeover. This was thought to create a 'heads I win, tails you lose' situation which required the imposition of liability under 16(b).
In this first decision the District Court held accordingly 'that the conversion of Crane's Air Brake stock into Standard stock constituted a sale of Air Brake to be matched against its cash purchases of that stock within a period of six months prior to the date of conversion.' 346 F.Supp. at 1161. Alternatively, the District Court, treating the Standard stock and the Air Brake stock as the same stock, held that the 'sale' for 16(b) purposes was the cash sale by Crane of the Standard convertible preference stock within six months of its original acquisition of the Air Brake common stock. 346 F.Supp. at 1163.
When the decision of this Court in the Occidental case was called to the attention of the District Court, it recognized that on the question of whether Crane's position offered the opportunity for speculative abuse, this court's ratio decidendi in Occidental might well raise serious doubts whether Standard's motion for summary judgment could be granted on the basis that the exchange of Air Brake stock for Standard stock in the merger was a 'sale' that triggered 16(b) liability. Instead, the Judge wrote a supplementary opinion in which he now relied upon the alternative theory of liability, what we have called Claim (3). The District Court held that, putting the exchange of stock on the merger to one side because of the Occidental decision, there was, nevertheless, a purchase of Air Brake stock and a sale for cash of the Standard stock received on the merger within six months which must be matched for § 16(b) purposes. 346 F.Supp. at 1167--1168. He properly noted that in Occidental the actual sale for cash (through the exercise of an option) took place more than six months from the effective date of purchase for § 16(b) purposes, whereas here the sale for cash was within the six months period.
The appellee, thus, does not come to this court with the benefit of a holding by the District Court in the face of the Occidental reversal that it was the exchange of stock in the merger that was the 'sale' for § 16(b) purposes.12
Nor does it appear from the tenor of Judge Lasker's supplementary opinion that Standard pressed upon him seriously the contention, now pressed upon us, that Occidental is distinguishable because Occidental had no opportunity for access to inside information, while in the instant case there was such opportunity for access.13
The Occidental Opinion
To set the matter in perspective, a review of the Occidental case is in order.
That, too, involved a takeover situation with a contest for control and a defensive merger that defeated the takeover bid. After unsuccessful efforts by Occidental to induce the management of Old Kern to discuss a merger, Occidental on May 8, 1967 published an offer to purchase at $83.50 per share 500,000 shares of Old Kern for cash. Old Kern advised its stockholders not to tender. By May 10 more than 500,000 shares of Old Kern shares had been tendered. On May 11, Occidental, already a beneficial owner of more than 10% of Old Kern stock, extended its offer to encompass an additional 500,000 shares. Old Kern again advised its stockholders not to tender.
On May 19 Old Kern's directors announced their approval of a merger proposal from Tenneco, Inc. ('Tenneco') whereby Tenneco would exchange its own convertible preference shares said to be worth $105 per share for a transfer of Old Kern's assets to New Kern, a wholly-owned subsidiary of Tenneco.
On June 7 Occidental gave up the contest and granted Tenneco an assignable option to purchase 886,623 shares at a fixed price, the option being exercisable at any time after December 9, 1967, six months and a day after Occidental's last contemplated acquisition of Old Kern shares. Tenneco paid $10 per share for the option which it later sold. On December 11, 1967, after the six months period had elapsed Occidental tendered its Old Kern shares for Tenneco preference stock. The assignee of the option then exercised the option, purchasing all the preference shares that Occidental had received on the exchange of stock under the Tenneco-Old Kern plan.
New Kern then sued Occidental for its 'short swing' profits under 16(b) on two theories: (1) that Occidental had 'sold' its Old Kern shares when at the August 30 closing between Old Kern and New Kern it became irrevacably entitled to Tenneco preference stock and (2) that the execution of the option agreement of June 2, 1967 constituted a 'sale' by Occidental of the Old Kern shares.
* This court reversed a summary judgment in favor of New Kern and directed dismissal of the complaint. The holding concerning the option need not concern us here.14 The holding that the exchange of Old Kern common stock for Tenneco convertible preference stock did not constitute a sale for 16(b) purposes is highly relevant, however, to our inquiry. In this regard, the similarity of Occidental to the case at bar is striking.