(2) Plaintiff alleges that defendants falsely represented that a major motivation for the proposal was the volatile financial experience of IU's Shipping Group, which defendants attributed to the cyclicality of the international shipping business.
Sections 10(b) and 14(a) are aimed at the complete disclosure of facts: They do not mandate the disclosure of purposes or motives. Biesenbach v. Guenther, 588 F.2d 400 (3d Cir. 1978). But where the management chooses to disclose a purpose for a transaction, it is consistent with the purposes of the securities laws to require that such disclosure be honestly made. It seems extremely unlikely on the present record, which includes depositions of three officers of IU, that plaintiff will be able to establish the falsity of the statement made in the proxy materials. This does, however, present a contested issue of fact, so summary judgment would not be warranted.
(3) Plaintiff alleges that the proxy materials failed to state that "a purpose of the distribution was to enable some of the officers and directors of IU to conduct a business away from the scrutiny and surveillance of the regulatory agencies of the U.S. government."
The securities laws do not require the disclosure of motives and purposes. Biesenbach v. Guenther, supra. The proxy materials emphasize that GLSC would be an off-shore corporation, and that this would have the effect of insulating the GLSC management from the regulatory jurisdiction of the United States. This allegation does not appear, therefore, to ground a federal cause of action.
(4) Plaintiff notes that the proxy materials state that, right after the special meeting of shareholders on November 27, the IU directors would go over the spin-off proposal once again and, if such review so dictated, defer or even abandon its implementation whereas, in fact, the ten directors rushed to a judgment of approval immediately following the special meeting pursuant to only the most cursory discussion. Plaintiff therefore alleges that the representation that the directors would review the proposal after the special meeting was cosmetic disingenuity.
There is no doubt that the directors acted with great rapidity following the meeting. Defendants point out, however, that the materials indicated that the directors expected to act "promptly." And defendants further assert that the review procedure was meant as a fail-safe device, which was to result in non-approval only if the directors perceived a substantial change in circumstances.
That plaintiff can, at a plenary hearing, persuasively establish his claim of disingenuity seems unlikely. Nonetheless, it cannot be said that there is no issue of fact to be explored, so summary judgment as to this claim would seem inappropriate.
(5) Finally, a careful scrutiny of the complaint reveals several other allegations of non-disclosure or misrepresentation. Defendants are entitled to summary judgment on all of these allegations on the ground that the relevant facts were fully and honestly disclosed: they are (1) inadequate disclosure of the curtailment of the shareholders' franchise; (2) inadequate disclosure of the foreign situs of incorporation of GLSC; (3) the alleged lack of viability of GLSC (the proxy materials contained full disclosure of the financial reports of GLSC the only factual disclosure required on this point); (4) the failure to disclose the "expected deleterious impact" of the spin-off; such judgments need not be disclosed. Alabama Farm Bureau Mut. Cas. Co., Inc. v. American Fidelity Life Ins. Co., 606 F.2d 602, 610 (5th Cir. 1979), cert. denied, 446 U.S. 933, 100 S. Ct. 2149, 64 L. Ed. 2d 785 (1980).
Thus assuming plaintiff's claims to be in other respects viable summary judgment would appear appropriate as to all the allegations of non-disclosure and misrepresentation except for (1) the alleged misrepresentation as to the cyclicality of IU's Ocean Shipping Group, and (2) the alleged misrepresentation as to the expected review of the spin-off proposed by the IU board after the special meeting.
Defendants also seek summary judgment on plaintiff's 14(a) and 10(b) claims on the ground that plaintiff has not suffered "actual damages", 15 U.S.C. § 78bb.
Plaintiff argues that he needs more discovery to develop a "definitive damage theory"; he premises this argument on two possible theories:
(1) Plaintiff argues that actual damages under either 14(a) or 10(b) may include more than the difference in market value between the pre-spin-off IU stock and the post-spin-off combined holding of IU and GLSC stock.
(a) Plaintiff's 14(a) claim.
Plaintiff argues that under 14(a) actual damages include the loss of a possible profit. Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 781 (3d Cir. 1976). He states that if the proposal had not been approved, the shareholders would have retained their original IU stock, which had a full panoply of shareholder rights. He then argues that the lost profit should be measured by the difference between the value of the GLSC stock as distributed and the value the GLSC stock would have had if it had also possessed a full panoply of rights.
But, if the transaction had not been approved, plaintiff would have had his original IU stock, not the hypothetical GLSC stock. Plaintiff's damages must be measured by the difference in value between the original IU stock he would have retained but for the alleged fraud and the combination of IU and GLSC stock he received in the allegedly fraudulently induced transaction. In addition he may receive the value of lost profits "unless the loss is wholly speculative":
While the Act speaks in terms of "actual" damages the dichotomy is between actual and punitive damages and recovery is not limited to out of pocket loss, a diminution in the value of one's investment, but may include loss of a possible profit or benefit, an addition to the value of one's investment, unless the loss is wholly speculative.
Gould v. American-Hawaiian S.S. Co., supra, at 781. Thus damages based on lost profits have been granted: (1) where some favored shareholders were paid more for their shares than the others without disclosure of the premium (the court reasoning that with disclosure the shareholders could have negotiated to share the premium that had been paid, Gould v. American-Hawaiian S.S. Co., supra); and (2) where there was a failure to disclose assets (the court reasoning that the shareholders could have received an additional amount measured by the value of the hidden assets, Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973)). In contrast, plaintiff can point to no missed opportunity for profit here: He can at best argue that he was entitled to a control premium. This will not support a claim for lost opportunity for profit inasmuch as it is "too speculative." Compare Umbriac v. Kaiser, 467 F. Supp. 548, 556 (D. Nevada 1979). Moreover, it should be noted that here, as against the cases cited above, the loss of control was clearly disclosed in the materials.
(b) Plaintiff's 10(b) claims.
Plaintiff also argues that he is entitled to more than the difference in market price between the old IU stock and the combined IU/GLSC stock in damages for his 10(b) claim. Under 10(b), a seller of stock who is defrauded by the buyer may recover the difference between the fair market value of what he received for his stock and what he would have received had there been no fraud. In this instance, this would be the difference between the fair market value of the combined GLSC/IU stock and the fair market value of the old IU stock.
In addition a defrauded seller of stock may require the buyer to disgorge any additional profit the buyer might have made by a subsequent sale of the same securities. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 155, 92 S. Ct. 1456, 1473, 31 L. Ed. 2d 741 (1972). This result has been justified by a theory of unjust enrichment, Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (3d Cir. 1974), and has no applicability to the facts presented in this case.
As plaintiff has been unable to demonstrate that there is any possibility that he can show either a lost opportunity for profit which is not wholly speculative under 14(a), or that defendants made a profit upon resale of the old IU stock which they can be required to disgorge under 10(b), he is limited, as to a theory of damages, to the difference between the value of his old IU stock and that of the combination of IU and GLSC stock which he received in the spin-off transaction.
(2) Plaintiff argues that even if he is restricted to the difference in value of the two holdings of stock, he would be able to show that he was damaged if he were allowed to use certain dates to measure his damages. He suggests, for example, that if he is allowed to use the record date, October 5, 1979, to value his IU stock, and November 27, 1979, the date of the special meeting, to value the combined GLSC/IU stock, he could show a loss.
The value of stock is best established by averaging its market value during the relevant period: neither party can choose to peg the value to market prices on a particular day with aberrantly high or low prices.
We must now decide what period of time should be used in calculating a price ratio between each corporation's stock. Since prices from the period immediately preceding the merger are the most likely to reflect the actual value of each corporation at the time the merger was consummated, we begin with a presumption that a short period is appropriate. Accordingly, we hold that the average market value for approximately the six month period preceding the merger should be used unless there are special factors indicating that this period is unreliable. Six months is long enough so that very short term price fluctuations will not play an unfairly important role and short enough so that the calculated ratio does not reflect business conditions that have substantially changed as of the time of the merger.