Opinion ID: 557198
Heading Depth: 2
Heading Rank: 2

Heading: The Sale to AEA and the Proxy Statement

Text: 9 Stafford's intention to sell the family's holdings was disclosed in a Schedule 13D filing made with the SEC in May 1980. When AEA learned from Drexel that the Loehmann family was interested in selling, AEA entered into negotiations to purchase the entire company. No other offers surfaced. On September 25, 1980 a merger agreement in principle was approved by Loehmann's Board of Directors and the December 9 proxy statement expressing the Board's approval of the merger and recommending it to the stockholders of Loehmann's described its terms. 10 Mendell's appeal concerns alleged misstatements and omissions in the proxy statement. He alleges that the proxy statement failed to inform the shareholders of the Loehmann family's large estate tax liability, and that Stafford's purpose in recommending the merger which, Mendell charges, offered shareholders a price for their stock well below its true value was to discharge this debt. Mendell asserts that a shareholder could reasonably have inferred from these facts that Loehmann's was being sold because the Loehmann family needed to raise cash rather than because it was in the shareholders' best interests. 11 Mendell's second contention is somewhat connected to the first one. He states that the Loehmann family expected to realize a substantial savings in the amount of estate taxes due the Internal Revenue Service if it were able to pay the taxes immediately rather than on the deferred basis provided in Sec. 6166 of the Internal Revenue Code. He asserts that had the family elected to pay the estate taxes on a deferred basis it would have obtained only an 8.1 percent blockage discount on the value of its stock, but if the taxes were paid in full immediately, a blockage discount of about 30 percent was available. According to Mendell, the higher discount amounted to a net after-tax savings of $1,135,000 or $2.46 per share of the estate's stock. Such a substantial benefit accruing to the major shareholder of the company--one that did not accrue to any of the smaller shareholders--Mendell believes should have been disclosed in the proxy statement, particularly since Stafford's recommendation to approve the merger may have influenced the decisions of the other shareholders. 12 Mendell's last two challenges involve post-merger arrangements between AEA and defendant George Greenberg, Loehmann's Chief Executive Officer. The proxy statement expressly stated that [u]pon consummation of the Merger, Mr. Greenberg will continue as the President, Chief Executive Officer and a Director of the Company. Mendell asserts that certain incentive arrangements given to Greenberg and other remaining managers of the company after the merger were part of a secret handshake agreement made between Greenberg and AEA prior to the merger and were not disclosed in the proxy statement. He avers that Greenberg's post-merger purchase of stock in AEA's subsidiary, LH Investors, Inc. (LH Investors), was also arranged prior to the merger and was contrary to an indication in the proxy statement that [n]either Mr. Greenberg nor any other present director or officer of the Company owns beneficially or will acquire an equity or debt interest in AEA, LHI, Holdings or [LH] Investors.