Appeal from the United States District Court for the District of New Jersey. D.C. Civil Action No. 835-71
Seitz, Chief Judge, Rosenn and Garth, Circuit Judges.
Plaintiffs, several Class A shareholders of Wakefern Food Corp. ("Wakefern"), brought this action against the defendants, 66 Class C shareholders of Wakefern, charging them with violations of § 10 (b) of Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, in connection with defendants' purchase of Class A treasury stock of Wakefern, allegedly in violation of an agreement requiring the stock to be offered first for sale to plaintiffs. In addition, the complaint charged defendants with fraud, breach of fiduciary duty and tortious interference with contractual relations in violation of New Jersey law. Plaintiffs sought both monetary relief and an order rescinding the sale of stock by Wakefern, which was not named as a party to this action.*fn1
Pursuant to a Pre-Trial Order, the damage issues were reserved for future disposition, and the case was submitted to the district court for resolution without trial, based on all pleadings, depositions, interrogatories and proposed findings submitted by each side. The district court entered judgment in favor of the plaintiffs and ordered, inter alia, that the sale of treasury stock to defendants and others be rescinded.*fn2 The defendants have appealed, raising numerous claims of error.
Wakefern was organized in 1946 by a group of small independent grocers in order to provide purchasing, warehousing, and advertising services to its member shareholders, all of whom individually own grocery markets under the Shop-Rite trade name. Initially, the capital structure consisted of one class of stock which was issued to Wakefern's members in proportion to their volume of purchases. In order to enable Wakefern to obtain credit, several of its larger members agreed to personally guarantee payments to vendors. In exchange for their assumption of personal liability, the loan guarantors were issued 1,000 shares of a newly created class of stock -- Class A stock -- and all members of Wakefern, including the Class A shareholders, received Class B stock in proportion to the volume of their purchases from Wakefern. Traditionally, the Class A shareholders have possessed voting control with respect to Wakefern's board of directors.
In an attempt to remedy the imbalance in voting control, Wakefern's capital structure was altered in 1963. A new class of stock -- Class C -- was created, with the right to elect 6 of the 18 directors. All non-Class A shareholders exchanged their Class B stock for Class C stock. Class A shareholders retained their Class B stock but were prohibited from acquiring Class C shares.
Although the Class A shareholders retained voting control of Wakefern's board, prior to 1966 no one group of these shareholders was able to elect more than 5 directors. In early 1966, however, Wakefern's 2 largest Class A shareholders announced their intention to merge. The new corporation resulting from that merger, Supermarkets General Corporation (SGC) would have possessed sufficient Class A stock to elect 9 members of Wakefern's 18 member board. Alarmed by the threat which such concentration of Class A stock posed to Wakefern's continued ability to operate on a quasi-cooperative basis, the 3 non-SGC Class A directors and the 6 Class C directors adopted a board resolution requiring the withdrawal of SGC and the purchase of its stock by Wakefern.
SGC commenced an action in the New Jersey state court to enjoin implementation of that board resolution. Subsequent negotiations between the parties, however, resulted in a settlement agreement whereby the resolution ousting SGC was to be voluntarily withdrawn. In addition, the proposed settlement provided for the elimination of excessive control by the SGC group by increasing the number of directors from 18 to 20 -- the additional 2 directors to be elected by the Class C shareholders -- and by requiring the affirmative vote of 12 directors before any action by the board could be taken. In contemplation of SGC's possible future withdrawal from Wakefern, the proposed settlement also provided that upon the withdrawal of any shareholder accounting for more than 3% of Wakefern's volume of sales, Wakefern would purchase the withdrawing shareholder's capital stock for a purchase price equal to the higher of $100 or book value.
In conjunction with the planned settlement of the SGC lawsuit, the Class A shareholders executed a restrictive stock agreement on April 16, 1966 which purported to require all Class A shareholders who desired to sell their stock at any future time to offer that stock first to other Class A shareholders at $100 per share. The apparent purpose of this agreement was to ensure that voting control would remain in the hands of the Class A shareholders.
Final approval of the settlement agreement was conditioned upon the approval of Wakefern's board of directors, and since various provisions of the settlement called for the amendment of Wakefern's Certificate of Incorporation and by-laws, shareholder approval was also required. The settlement was first submitted to the board of directors which unanimously approved the proposal in the form presented. While it is unclear the extent to which the Class C directors knew of the restrictive stock agreement previously executed by the Class A shareholders, the board resolution approving the settlement specifically referred to "certain restrictions upon the transfer of such Common A stock ", and authorized the corporate officers "to execute and deliver such agreement" on behalf of the corporation. As a consequence, the restrictive stock agreement was signed by the President of Wakefern in the following manner:
The various amendments to the Certificate of Incorporation and the by-laws which the board had adopted were subsequently ratified at a special meeting of the stockholders. The restrictive right of first refusal agreement among the Class A ...