Court Opinion

ID: 8903466
Source: CourtListenerOpinion
Date Created: 2022-11-27 01:28:56.242525+00
Date Added: 2024-06-11T17:07:58.973266
License: Public Domain

HEANEY, Circuit Judge,
dissenting.
I respectfully dissent. I cannot agree with the majority’s holding that no breach of a fiduciary duty under Delaware law occurred. The defendants exercised the repurchased options of deceased shareholders for no justifiable business reason. By arbitrarily inflicting injury on a class of shareholders, the defendants failed to exercise that good faith and fair dealing required by Delaware law.1 See, e. g., Petty v. Penntech Papers, Inc., 347 A.2d 140 (Del.Ch. 1975); Speed v. Transamerica Corp., 99 F.Supp. 808 (D.Del.1951), aff’d, 235 F.2d 369 (3rd Cir. 1956); Condec Corporation v. Lunkenheimer Company, 43 Del.Ch. 353, 230 A.2d 769 (1967).
The majority correctly states that § 202(c)(1) of the Delaware General Corpo*1056ration Law permits repurchase options as well as rights of first refusal. Such options are not uncommon, especially in close corporations, and serve legitimate business purposes. It also appears that § 202(c) was designed to broaden the circumstances in which transfer restrictions would be allowed. On its face, this transfer restriction was enforceable under Delaware law.
However, the majority’s apparent holding, that a repurchase option may be exercised in all circumstances or for any purpose because it no longer must be supported by a specific justification, cannot be supported.
Section 202(c)(1) may limit a court’s inquiry into the reasonableness of the transfer restriction, but it does not foreclose further inquiry into the circumstances of its exercise. Such circumstances may be examined even though the articles or by-laws specifically authorize the transaction. Petty v. Pennteeh Papers, Inc., supra; Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del.1971); Condec Corporation v. Lunkenheimer Company, supra. The defendants may not merely take refuge in strict compliance with the provisions of Article VI as “inequitable action does not become permissible simply because it is legally possible.” Schnell v. Chris-Craft Industries, Inc., supra at 439. When dealing with shareholders as a class, control persons have a fiduciary obligation to them, “especially where [the shareholders’] individual interests are concerned.” Petty v. Pennteeh Papers, Inc., supra at 143. And see Kors v. Carey, 39 Del.Ch. 47, 158 A.2d 136 (1960); Lofland v. Cahall, 13 Del.Ch. 384, 118 A. 1 (1922). This fiduciary duty requires control persons to exercise good faith and fair dealing. Here, the defendants breached that duty.
Central to the argument that defendants breached their fiduciary duty is the fact that defendants were firmly committed to going public no later than November 18, 1970, the date the option on Bitting’s stock was exercised. The trial court fixed the date when the defendants decided to go public as July 14, 1970. While I feel this finding is not clearly erroneous, strong additional evidence exists to indicate that the decision became more entrenched by November 18, 1970. The following facts tend to support this conclusion:
In March and June, 1970, the New York Stock Exchange took action to permit public ownership of member firms and to eliminate the limitations on nonvoting stockholders in member firms. This action coincided with the demonstrated need of Merrill Lynch for additional capital thus establishing the legal basis and economic justification for going public.
On July 14, 1970, a meeting of the defendants was held and a decision to go public was made.
In late July, 1970, the “going public” Task Force was created. It prepared a preliminary timetable calling for the filing of a registration statement with the Securities and Exchange Commission prior to March 31, 1971.
On August 26, 1970, the defendants engaged the accounting firm of Haskins and Sells to perform a ten-year audit of the company and to prepare the financial statements necessary for the registration statement. This audit, which cost Merrill Lynch $400,000 and involved 15,000 accountant hours, is of a type that would not have been made absent a firm intention to go public.
Prior to October, 1970, a legal audit committee was established. On October 7, 1970, a mid-point report on the legal audit was submitted to the Task Force. The report stated: “We are now slightly more than half through the Corporation Accounting and Legal Audit Timetable.” The report set forth a timetable that fixed a March 1, 1971, date for filing a registration statement with the S.E.C. This was a full month earlier than that fixed in the preliminary timetable.
On November 18, 1970, a meeting was held with the S.E.C. to discuss the presentation of the Goodbody financial statements in the prospectus.2 By classifying Good-*1057body as a nonsignificant subsidiary, separate financial statements of that company were not required in the Merrill Lynch prospectus.
Other significant actions were taken within a few months of Mr. Bitting’s death. These are important to the extent they lend support to the finding that a decision to go public had been made prior to November 18. Included in these actions are the following:
On December 30, 1970, the defendants determined the size of the offering and decided on a three-for-one stock split prior to the offering. They also concluded that necessary amendlnents to the articles would be submitted to the Board in March and voted on at the annual stockholders meeting in April.
By January 5,1971, the first draft of the registration statement was completed. It contained a proposed filing date of March, 1971.
The defendants minimize the importance of the actions listed above and argue that they do not support a finding of a firm intent to go public. They argue that since the registration process could be halted at any time before the registration statement became effective, no final decision was made until the registration process could not be aborted. I find little merit in this argument. The possibility that the defendants could abort the process if later events demanded it does not negate a present intent to go public.
Moreover, it would have been simple and fair to have suspended the exercise of options during any period of uncertainty.3
The gravamen of defendants’ breach is utilizing a corporate power to seriously injure a shareholder class4 without a business justification.5 See Petty v. Penntech Papers, Inc., supra; Schnell v. Chris-Craft Industries, Inc., supra; Condec Corporation v. Lunkenheimer Company, supra; Voege v. American Sumatra Tobacco Corporation, 241 F.Supp. 369 (D.Del.1965); Speed v. Transamerica Corp., supra.6 The plaintiffs are within the injured class of shareholders and should be allowed recovery.7
The seriousness of the injury to the deceased shareholder class is best illustrated *1058by the plaintiffs’ situation. The plaintiffs’ stock was redeemed at $26.597 per share. Thereafter, Merrill Lynch split its stock three-for-one and sold it for $28.00 per share.
The trial court determined that at the time the option was exercised, the pre-split value of plaintiffs’ stock was $75.00 per share for a loss of $48.403 per share. As plaintiffs owned 30,000 shares, actual damages were computed of $1,452,090.8 If the plaintiffs had retained the stock until June 23, 1971, when Merrill Lynch went public, the pre-split value would have been $84.00 per share and the loss in excess of $1.7 million.
The defendants’ breach of their fiduciary duty is sufficient to sustain the award of actual damages by the trial court. This being the case, it is unnecessary for me to decide whether the plaintiffs established a violation of § 10(b) and Rule 10b-5. I would only note that, in my judgment, Ryan v. J. Walter Thompson Co., 453 F.2d 444 (2d Cir. 1971), cert. denied, 406 U.S. 907, 92 S.Ct. 1611, 31 L.Ed.2d 817 (1972), was improperly decided.
The trial court should not have awarded punitive damages. The defendants’ actions were not the willful, wanton and malicious type of conduct that punitive damages were designed to punish and deter. See, e. g., Genie Machine Products, Inc. v. Midwestern Machinery Co., 367 F.Supp. 897 (W.D.Mo. 1974).
Neither should the trial court have awarded prejudgment interest. Although equitable principles may be considered, generally Missouri law does not allow prejudgment interest on an unliquidated sum. General Insurance Co. of America v. Hercules Construction Co., 385 F.2d 13 (8th Cir. 1967). See V.A.M.S. §§ 408.020 and 408.-040.
In all other respects, the judgment should be affirmed.

. The defendants would escape responsibility for their actions on the theory that they did not personally exercise any options. I am not persuaded by that defense. The defendants by failing to disclose the decision to go public to those who were responsible for exercising the options made the exercise inevitable. The defendants were well aware of the substantial harm that would occur to shareholders who had their stock redeemed after the decision to go public was made but before the registration was made effective. St. Louis U. Tr. Co. v. Merrill Lynch, Pierce, Etc., 412 F.Supp. 45, 50 (E.D.Mo.1976).

. Goodbody, the fifth largest brokerage firm in the country, was rescued from financial collapse by Merrill Lynch at the urgent request of the New York Stock Exchange in November, 1970.

. The defendants could have alleviated any problems with the running of the ninety-day option period by explaining their intentions to the plaintiffs and working out an agreement extending the option period.

. The shareholder class is composed of those shareholders who died between July 14, 1970 and April 9, 1971. The latter is the date when defendants discontinued the policy of exercising options to repurchase stock.

. Neither can the defendants claim a business justification. The business reasons set forth as a justification in n. 17 of the majority opinion did not suddenly disappear on April 9, 1971, when the decision was made to discontinue exercising options.

. Arguably, some improper purpose or self-dealing must be present to find liability. But fraud and self-dealing are not the sole methods of breaching a fiduciary duty. Penn Mart Realty Company v. Becker, 298 A.2d 349 (Del.Ch. 1972). A fiduciary need not personally benefit from a transaction constituting a breach. See, e. g., G. Bogert, Trusts and Trustees § 543 (2d ed. 1960).
The trial court found that the defendants’ actions were part of a scheme to maintain management control and to increase earnings per share so as to increase the public offering price of Merrill Lynch shares. Maintenance of control is an improper purpose under Delaware law. See, e. g., Bennett v. Propp, 41 Del.Ch. 14, 187 A.2d 405 (1962). Although unnecessary to this decision, substantial evidence exists to support the trial court’s findings.
Moreover, when all transactions, including those of stockholders who retired in the interim period when the stock was repurchased are considered, the direct gain to the defendants was substantial.

. This case presents only the issues relating to deceased shareholders and not to those shareholders who voluntarily retired. In Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532 (3rd Cir. 1976), cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976), the Court accurately observes that the decision to retire was, in effect, a voluntary decision to sell as the shareholder could have retained the stock if he had not elected to retire. In my judgment, Ayres was properly decided.

. Kenneth Bitting owned 40,000 nonvoting shares at the time of his death, but his widow was allowed to repurchase 10,000 at the redemption price from Merrill Lynch.