there were additional dividend payments in the amount of $0.10 per share in August, 1971 and November, 1971.
Finally, on or before June 23, 1971, Merrill Lynch removed from its owners of common stock all restrictions relating to transferability and acquisition rights of defendant, with the single exception being that the current owners of common stock could not sell, option for sale, or otherwise dispose of the shares for a period of one year from the termination of the public offering held in June, 1971. Plaintiff therefore contends that if Merrill Lynch had not breached its fiduciary duties owed to him by failing to disclose material facts affecting the value of the stock, then he would not have retired on October 1, 1970, and after June 23, 1971, he would have been subject only to the single restriction noted earlier in this paragraph.
In opposition to defendant's motion to stay these proceedings pending arbitration, plaintiff advances several arguments, viz.: (1) This controversy is not subject to arbitration under Rule 347(b) of the NYSE since it did not arise "out of the employment or termination of employment" of plaintiff as a registered representative by the defendant; and (2) he is not a "member" of the Exchange, as defined in § 3(a)(3) of the 1934 Act, 15 U.S.C. § 78c(a)(3) (1970), neither is he bound by § 28(b)(2) of the 1934 Act, 15 U.S.C. § 78bb(b)(2) (1970), and therefore § 29(a) of the 1934 Act, 15 U.S.C. § 78cc(a) (1970), rendering unenforceable prospective agreements to arbitrate, controls rather than the exemption provisions as contained in § 28(b) of the 1934 Act, 15 U.S.C. § 78bb(b) (1970).
Plaintiff and defendant are essentially in agreement on most of the facts as previously recorded, but are at odds pertaining to the characterization of the dispute and the role to be served by the NYSE regarding arbitration. Ayres most vigorously asserts that the obligation owed to him by the defendant arose not from his association with Merrill Lynch as an employee, but instead stemmed from the fiduciary duties existing between a purchaser and seller of securities. In other words, as an owner of stock plaintiff was entitled to know about Merrill Lynch's decision to go public even though, as plaintiff concedes, this same information need not have been disclosed to other employees of the defendant who owned no stock.
As a discussion of the relevant cases will subsequently demonstrate, plaintiff's position is indeed unique in that (1) although Ayres is a registered representative of NYSE, the current controversy does not clearly and squarely relate to the business functions and commercial transactions normally engaged in by a registered representative of the Exchange in the performance of his prescribed duties; and (2) Ayres is not a member of the Exchange as has been true in most of the applicable cases. Notwithstanding the plaintiff's atypical circumstances there is one factor evident in this case which I deem to be particularly compelling and dispositive, and thus dictates the result which I herein reach today. That is, Ayres was initially permitted to purchase the shares of Merrill Lynch only because he was one of its employees. Moreover, Ayres' decision to retire when he did might have precipitated Merrill Lynch's exercising its re-purchase option and hence the Court is further confronted with a dispute which arose not only out of the course of employment of a registered representative, but additionally stemmed from the termination of that employment.
In examining the Stock Subscription Agreement it appears that the defendant's decision to sell stock to Ayres was premised on Ayres' status as an employee. More specifically, the Agreement states:
"Whereas, the Purchaser is an employee of the Corporation or of another corporation controlled directly or indirectly by the Corporation, and the Corporation desires to make available to the Purchaser an opportunity to purchase shares of its Non-voting Common Stock, and the Purchaser desires to purchase such shares, upon the terms and conditions hereinafter set forth:"
Paragraph 6 of the Agreement further stipulates that the Agreement was not assignable by the Purchaser.
Neither plaintiff's complaint nor any of the supporting or opposing papers filed in this case, discloses what other attempts, if any, were undertaken by Merrill Lynch to repurchase stock from other employees during this period (July 1970 through June 23, 1971) and how many employees owning stock of defendant retired during this time.
The facts in this case are remarkably similar to Ryan v. J. Walter Thompson Co., 322 F. Supp. 307 (S.D.N.Y. 1971), aff'd 453 F.2d 444 (2d Cir. 1971), cert. denied 406 U.S. 907, 92 S. Ct. 1611, 31 L. Ed. 2d 817 (1972), though there are factual discrepancies. In Ryan, the plaintiff had purchased stock from the defendant at a time when the stock was sold only to its officers and employees. Whenever the stockholder desired to sell or terminate his employment or vacate his office, the defendant could repurchase the stock. Three years after Ryan had retired from the defendant, the defendant decided to go public and exercised its option to repurchase the plaintiff's shares. Although the defendant there, as in the instant case, did not disclose its intentions of having a public offering prior to the repurchase, the Court of Appeals concluded there were no anti-fraud violations under Rule 10b-5, since the plaintiff was obligated to sell irrespective of what he knew or did not know. 453 F.2d at 447. While the Ryan case does contain comparable facts, it can be distinguished as respects defendant's motion here, because that case did not specifically address itself to the question of arbitration and consequently, it was permitted to proceed to a conclusion on the merits in Court. A reading of Ryan does not reflect whether either party requested arbitration or, if requested, whether arbitration would have been proper under the circumstances, since Ryan was not a member of the Exchange or a registered representative.
Fershtman v. Schectman, 450 F.2d 1357 (2d Cir. 1971) cert. denied, 405 U.S. 1066, 92 S. Ct. 1500, 31 L. Ed. 2d 796 (1972), is again another case, which goes to the merits of the instant dispute rather than to an analysis of the applicability of the arbitration clause provided in Rule 347(b).
Isaacson v. Hayden, Stone, Inc., 319 F. Supp. 929 (S.D.N.Y. 1970) will be examined at this juncture, although later sections of the opinion will more extensively consider plaintiff's contention that he was not a member of the Exchange as defined in § 3(a)(3) of the 1934 Act, neither was he bound by § 28(b)(2) of the 1934 Act. In Isaacson, the Court held that a dispute was arbitrable in accordance with the rules of the NYSE, even though at the time plaintiff therein initiated the action he was no longer a member of the Exchange. In that case, the plaintiff, an allied member of NYSE and an officer of the defendant, purchased shares of stock from Hayden, Stone, also a member of NYSE. The controversy revolved around defendant's obligation to repurchase plaintiff's stock upon the latter's retirement. The Court took notice of the fact that as members of the Exchange they had agreed to arbitrate any controversy arising between them. Furthermore, the Court stated at pages 929-930 of 319 F. Supp:
"The controversy in this suit arises out of and relates directly to defendant's business as a member of the New York Stock Exchange and defendant's obligations to public customers and others in relation to its obligation to plaintiff."