Opinion ID: 302778
Heading Depth: 2
Heading Rank: 1

Heading: the background of the controversy

Text: 96 In order to gain the full perspective of this case, it is necessary to explore in some further detail the factual setting, beginning a number of years prior to the events which culminated in this lawsuit. 97 Rhodesian Selection Trust (RST), a British company, began mining operations in Northern Rhodesia in 1927. It was reincorporated as a Northern Rhodesian company in 1953. Over the years RST became one of the two major producers of refined copper in the area. In 1961, Rhodesia imposed currency exchange control regulations which greatly restricted RST from seeking and exploiting foreign opportunities except in Botswanna, a neighboring country. 1 98 Throughout the 1960's the political situation in Africa became increasingly tumultuous. In 1964, the Rhodesian Federation was dissolved, and Northern Rhodesia became the Republic of Zambia. 2 This Government, by the Mulinguishi Declaration of 1968, further circumscribed RST's business mobility by limiting the dividends which could be paid to shareholders outside Zambia to 50% of accrued profits. 99 RST's largest shareholder was American Metal Climax, Inc. (AMAX), a large American mining company. From 1933 to 1962, AMAX held 51% of RST's stock, but by 1969, its holdings had decreased to 42.3%. Although AMAX held approximately 42% of RST's stock, and was represented on RST's board of directors, RST maintained its business independence. The record in this case demonstrates that despite the substantial ownership of RST by AMAX, control of RST was vested in RST's management, and not in AMAX. RST's management was almost entirely British, and its headquarters was located in Zambia. By 1969, AMAX's investment in RST was worth approximately $100,000,000. 100 Because of the political ferment in Africa, AMAX decided as a matter of policy to decrease its exposure on that continent. In 1966, AMAX asked RST to file a registration statement with the SEC so that AMAX could sell its RST holdings on the open market. RST declined for two reasons: it was reluctant to incur the risks of registration for the primary benefit of one shareholder, and the necessary disclosures would have jeopardized its position with the Zambian government. 3 Thereafter, AMAX began selling its RST stock to the limited extent permissible under the American securities laws. 101 Still desiring to get out of Africa, AMAX in 1968 and 1969 attempted to sell half of its interest in RST to Megallgesellschaft Aktiengesellschaft, a large German metals company, for $5.38 per share. At the time, RST was selling on the open market for between 5 3/8 and 7 1/8 per share. However, the German company was not willing to pay more than $3.00 per share, and even this offer was conditioned upon insurance by the West German government against the risks of nationalization by Zambia. The sale was never consummated. 102 Despite public and private assurances that Zambia had no intention of nationalizing the copper industry, the Government steadily acquired a number of the country's industrial and commercial companies. Then, in 1969, by the Matero Declaration, the President of Zambia announced his Government's desire to acquire control of all the operating copper properties in Zambia for fair value represented by book value. 4 It immediately became clear that the Zambian Government was desirous of having this nationalization appear to be voluntary. Thus, the management of RST was able to negotiate and to extract, in addition to the sale price for 51% of RST's operating assets, two important concessions as the quid pro quo for the appearance of voluntariness: the authorization for RST to externalize its remaining assets so that they would be free from Zambian exchange controls, 5 and the right to defer nationalization until its terms were approved by the RST shareholders. This last provision provided time in which RST could arrange to implement the externalization of its assets. Externalization was of vital importance for tax reasons and because the Zambian dividend ceiling and exchange controls meant that large sums would otherwise have to be retained in Zambia and would not therefore be utilized to develop non-Zambian mining enterprises. 103 After the agreement with Zambia was reached, RST began to formulate its reorganization plan, keeping in mind that it would be imperative to externalize as promptly as possible after nationalization. Concern immediately developed whether a conflict of interest and possible antitrust law violations would result if RST attempted to become an international mining company. These problems might arise because RST would then be competing against AMAX, although AMAX would still hold 42% of RST. The only feasible methods of avoiding this conflict were for AMAX to sell its RST holdings or to buy the remainder of RST after the distribution of RST's other assets. 104 AMAX had no desire to contravene its policy of disengagement from Africa in view of the political instability there, and yet it had to protect its $100,000,000 investment in RST. Although RST wished to transform itself into an international mining company, because of the restrictions of prior years, this course of action was not feasible. 6 In order for RST to buy out AMAX's holdings to avoid the conflict of having AMAX in effect compete against itself, RST would have to denude itself of cash. In addition, a bail-out by AMAX at this time would have undermined the confidence of investors and personnel in RST's stability, and would have shifted to RST shareholders the full risk of further nationalization. This would also seriously depreciate further the value of the substantial amount of INDECO bonds to be owned by AMAX as a result of Zambia's nationalization. 105 Accordingly, RST and AMAX began to negotiate the various alternatives for RST's future. The discussions commenced in November, 1969, in London, between RST's and AMAX's banking and legal advisors. 7 There is nothing in the record to show that these discussions occurred at other than arm's length. By the middle of February, 1970, the parties were so far from agreement that AMAX proposed a complete pro rata liquidation of all RST assets not necessary for the performance of the contracts with the Zambian government. Under AMAX's recommendation, each shareholder, both AMAX and non-AMAX, would receive a proportionate share of RST's assets. Put another way, RST's liabilities would be discharged and every shareholder would receive his proportion of the remaining assets on the basis of his holdings in the company. RST's management rejected this proposal, because under it, RST would for all practical purposes cease to exist. 106 During this period, the concept of RST's is becoming an international mining company, domiciled outside of Zambia, was explored further. Counsel quickly realized that such a reorganization would have disastrous tax consequences for the American-public shareholders of RST. The only solution to this problem, other than amalgamation 8 with AMAX, 9 was to twin the corporation. Under the twinning concept, RST would remain a Zambian corporation, holding some assets; a non-Zambian corporation would be formed to hold the externalized assets; and shareholders would receive twinned share certificates representing inseparable shareholders in both companies. Twinning was rejected as unrealistic for a variety of reasons, including, inter alia, the fear that Zambia would not tolerate the delay that implementation of this arrangement would cause. 107 By the end of February, 1970, RST's management concluded that the best interests of RST's shareholders lay in an amalgamation with AMAX. Two factors provided the incentives for AMAX's agreement to amalgamate. First, AMAX wanted to obtain liquid assets that RST owned because such assets would be exempt from American foreign investment restrictions. Second, in order to protect its $100,000,000 investment in RST, AMAX had to guard against RST's failure to succeed as an independent international mining company, for if RST had difficulties, its assets, and therefore AMAX's holdings, would depreciate in value. Similarly, payment of the INDECO bonds-and AMAX would own in excess of $50,000,000 of them-depended upon the profitable operation of the mines and refineries in Zambia. 108 The amalgamation agreement reached between AMAX and RST on March 5, 1970, provided for AMAX's acquisition of the public shareholders' interest in RST's liquid assets, worth about $33,800,000, and the entire interest in RST's residual properties. In return, the public shareholders of RST would receive $76,200,000 of 8% subordinated AMAX debentures with warrants attached for the purchase of AMAX common stock. RST's public shareholders would also receive slightly more than their pro rata share of the Zambian bonds, their pro rata share of RST's interest in the Botswana venture, slightly less than their pro rata share of RCM stock, 10 and 25cents per share in cash. 109 On March 5, 1970, the date of the agreement between RST and AMAX, RST traded on the New York Stock Exchange at $6.25 per share. Kuhn, Loeb & Co. valued the package of securities which RST shareholders would receive as a result of the proposed amalgamation at $7.13 per share, AMAX valued it at $6.62 per share and plaintiff's witnesses valued the package at between $6.95 and $12.20 per share. 11 110 The structure of the amalgamation was devised to preserve to the maximum extent possible the tax credit for RST's public shareholders and to permit capital gains tax treatment of the distribution. 111 It was at this point in the negotiations, specifically on March 10, 1970, that plaintiff, who had purchased 2,000 shares of RST less than two months earlier, on January 14, 1970, instituted his action to block the amalgamation. After an evidentiary hearing, the district court on June 8, 1970, denied a preliminary injunction motion without prejudice. 12 Because the hearing by the Zambian court regarding the acquisition by the Government of Zambia of the Zambian assets was scheduled for August, 1970, the time consumed by the injunction proceeding compressed drastically the period for preparation of the necessary, but highly complicated, proxy materials and the Explanatory Statement. 13 In late June, plaintiff moved to enjoin the distribution of the proxy materials which presented the nationalization and reorganization plans for shareholder approval, charging that the materials violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j (1964). After a hearing, the district court enjoined the distribution, but this Court held that the district court's action was void for failure to enter an order under Rule 65. On July 8, 1970, the district court again enjoined distribution of the proxy materials unless a letter from plaintiff was also included with them. Plaintiff, one of the nation's most knowledgeable lawyers, drafted a statement explaining the opposition to the transaction. The proxy materials and plaintiff's statement were then distributed, including a copy of the district court's opinion, findings and order of June 8, 1970. 112 The day before the shareholder vote on the nationalization and reorganization was to be held, August 5, 1970, plaintiff moved to enjoin the vote, charging that the proxy materials were false and misleading. After a telephonic conference call to the trial judge, who was then in Florida, initiated by plaintiff and objected to by defendants, 14 this motion was denied, and the resolution adopting the terms of the reorganization and nationalization was approved by 85.5% of the shares present and voting. The non-AMAX shareholders then approved the resolution by an affirmative vote of 66.3%. They had been separately polled by RST's management to ensure that AMAX would not force the amalgamation upon unwilling shareholders. 113 According to Zambian law, which governs this reorganization because of RST's domicile in Zambia, the next procedure in the reorganization was to obtain the approval of the High Court of Zambia. Nine days prior to the date of the scheduled hearing, RST filed with the High Court all of the details of the plan, including the complete record in the district court. Plaintiff had been specifically informed on prior occasions, and as late as the August 5th conference call, of the date of the hearing, and advised of his right to attend and to object to the plan. He had also been informed that the decree of the Zambian court would be binding on all RST shareholders. 114 On August 12, 1970, plaintiff moved to enjoin the hearing, and an injunction was granted by the district court via another long-distance conference telephone call. This Court stayed the injunction provided that AMAX post a $10,000,000 bond and agree not to transfer any property subject to a final adjudication. 115 After a hearing on August 14, 1970, the High Court of Zambia approved the reorganization, finding it to be fair to all RST shareholders, and on August 15th, the High Court's order was filed with the Zambian Registrar of Companies. Plaintiff did not attend the Zambian hearing, and no appeal was taken from the order of the High Court of Zambia. 116 Trial of the present action began on October 8, 1970, and concluded on November 3, 1970. After a jury was empanelled, at the suggestion of the court the parties agreed to waive jury trial if all issues would be finally determined by [the district court] in a single unitary final hearing. The district court rendered a final judgment on November 25, 1970. Defendants appealed on December 2, 1970. The next day, plaintiff moved to amend and supplement the judgment. On January 8, 1971, this Court, over the objection of the defendants, remanded to the district court to rule on plaintiff's motion. The district court filed three amendatory orders. One directed that supplementary hearings on the question of additional relief be held. Another was entered without notice to defendants and a discussion regarding its formulation took place between plaintiff and the court without participation by the defendants. On January 16, 1971, plaintiff filed a notice of appeal from the original judgment and the amendatory orders. 117 With the facts of the controversy in mind, we now turn to a consideration of the applicable securities laws and regulations.