The opinion of the court was delivered by: TROUTMAN
Plaintiffs Harry A. Dower (Dower), Robert F. Hunsicker and Harry A. Dower, trustees of a trust (the Trust) and Donald K. Hagar (Hagar) bring this action solely on their own behalf, against defendants Mosser Industries, Inc. (Mosser) and Ecolaire, Inc. (Ecolaire). The essence of their complaint, as amended, is that defendants violated § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (the 1934 Act) and breached fiduciary duties owed plaintiffs under Pennsylvania law in connection with a merger by which Ecolaire became the sole shareholder of Mosser and that plaintiffs, who were minority shareholders, were "squeezed out". The case was tried by the Court without a jury.
The Court has jurisdiction over the federal law claims pursuant to 28 U.S.C. § 1331 and § 10(b) of the 1934 Act. The Court assumes pendant jurisdiction over the related state law claims. United Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966); Tully v. Mott Supermarkets, Inc., 540 F.2d 187 (3d Cir. 1976).
Mosser is a Pennsylvania corporation which manufactures and markets lines of butterfly valves and industrial dampers. In late 1977 Mosser had outstanding common stock and warrants to purchase common stock which were due to expire on December 31, 1977. Upon the payment of $ 4.00 each warrant was convertible into one share of common stock. As of November 3, 1977, plaintiffs and Ecolaire owned the following Mosser securities:
The remaining 16,250 shares and 3,500 warrants were owned by a small number of other minority equity holders who are not parties to this litigation. Ecolaire's ownership represented approximately 93.1% of the outstanding stock and 97.1% of the outstanding warrants. During the relevant period, Ecolaire was in effective control of Mosser.
Late in the spring of 1977 Mosser realized it was outgrowing its manufacturing facilities. After considering the problem, Mosser's Board of Directors, in September of 1977, preliminarily approved plans for the construction of a new facility expected to cost in the neighborhood of $ 6,300,000.00. Mosser entered into an agreement to purchase land for the facility.
Mosser required financing for a substantial portion of the anticipated cost of the project. Preliminary discussions with a local Allentown bank indicated that for Mosser to be able to obtain the financing, Ecolaire would have to guarantee all or a significant portion of the debt to be incurred. During an Ecolaire board meeting held on November 10, 1977 Ecolaire's directors considered the magnitude of its anticipated guarantee and decided that Ecolaire should not be expected to share the benefits of the proposed expansion with Mosser's minority shareholders who would not share in the risk of the financing guarantee. Ecolaire's senior executives then were directed to prepare a plan to liquidate the minority interest prior to pursuing the Mosser project further.
In the meantime, on November 3, 1977, Mosser sent out to its warrantholders (including plaintiffs) a package of documents designed to assist them with their decision whether or not to exercise their warrants (the November disclosures). The following is a summary of the included documents:
(a) An information statement concerning the company which included detailed facts about:
(i) Mosser's history and its business;
(ii) Mosser's products and its markets;
(iii) its technical staff, warranties and the amount, the duration of, and the reasons for backlogs in orders;
(iv) the company's existing facilities and an explanation of the proposed new facility as it was then contemplated;
(v) Mosser's directors and officers and the remuneration of officers, including incentive compensation;
(vi) its transactions with Ecolaire and its subsidiaries including the management and administrative services it obtained from Ecolaire;
(vii) its outstanding common stock and warrants to purchase common stock;
(viii) the book value of its common stock ($ 6.59 per share assuming exercise of all warrants, which in fact occurred);
(ix) litigation with Damper Designs, Inc., a competitor owned by a former officer of Mosser (plaintiff Hagar);
(x) restrictions on the resale of Mosser securities.
(b) a copy of Mosser's certified financial statements for 1974, 1975, and 1976;
(c) a copy of Mosser's balance sheet as of September 30, 1977;
(d) comparative statements of income and of changes in financial position for the nine months ending September 30, 1976 and September 30, 1977.
In early December of 1977 Ecolaire's president, Robert E. Delaney, presented to Mosser's board a Plan of Merger which provided for the merger of NMI, Inc. (NMI) into Mosser. NMI was a shell corporation owned by Ecolaire which was created to effectuate the Plan of Merger. The Plan provided that upon the effective date of the merger, Ecolaire would become the sole shareholder of Mosser and all outstanding shares owned by shareholders other than Ecolaire would be converted into the right to receive $ 8.00 in cash per share. After detailed discussion by Mosser's board of the terms of the merger and how the $ 8.00 per share price was derived, the Plan was approved.
On December 8, 1977, Mosser sent to all of its shareholders and warrantholders, including plaintiffs, a package of documents concerning the proposed Plan of Merger (the December disclosures). Included were the following documents:
(a) Notice of Special Meeting to be held January 4, 1978 to vote on the proposed Plan of Merger;
(b) a letter stating that Ecolaire would become Mosser's sole shareholder and describing, inter alia, the reasons for the proposed merger, how the price of $ 8.00 per share was determined, the details of the agreement to purchase land for Mosser's proposed expansion, dissenter's rights under Pennsylvania law, and the exercise of outstanding warrants;
(c) a copy of the Plan of Merger;
(d) a copy of §§ 908 A and 515 of the Pennsylvania Business Corporation Law which, as stated in the Notice of Special Meeting, set forth the rights of dissenting shareholders and procedures to be followed by holders of the common stock of the Company, and warrantholders who exercise their warrants, who wished to exercise such dissenter's rights;
(e) a copy of the shareholder resolutions to be adopted.
Over roughly a three-month period prior to the filing of this lawsuit on December 27, 1977, plaintiff Dower, on behalf of all the plaintiffs, demanded ...