The opinion of the court was delivered by: KNOX
A. INTRODUCTION AND HISTORY OF CASE.
In the Pittsburgh Terminal case at Civil Action No. 77-1455 filed December 28, 1977, the plaintiff of whom Monroe Guttmann, lead plaintiff in Civil Action No. 79-94 was president, filed a complaint against the Baltimore and Ohio Railroad Company alleging that it was a Pennsylvania corporation and that the defendant Baltimore and Ohio Railroad Company (B & O) was a Maryland corporation with its principal offices in Baltimore. The other defendant, Chesapeake and Ohio Railroad Company (C & O) was a Virginia corporation with its principal place of business in Cleveland, Ohio and so was the defendant Chessie System Inc., (Chessie) a Virginia corporation with its principal offices and place of business in Cleveland. The complaint alleged that plaintiff was the owner of certain B & O convertible 41/2% debentures Series A due January 1, 2010 in an amount in excess of $ 50,000.
It was further alleged that as a result of certain purchases by C & O during the period from 1960 to date, 99.63% of the B & O common stock was now owned or controlled by C & O and that no dividends had been paid on B & O common stock since 1961.
It was further alleged that on December 14, 1977, without any notice to plaintiff or other persons similarly situated, the B & O suddenly announced that it had declared a dividend on its common stock on a share per share basis on the stock of Mid-Allegheny Corporation, a wholly-owned subsidiary, payable to shareholders of record on December 13, 1977. The action had been taken on December 13, 1977, without prior notice to anyone including particularly the convertible debenture-holders of whom plaintiff was one. He claimed that this was a violation of SEC Rule 10b and Section 10(b) of the Securities and Exchange Act and that there had been a conspiracy to defraud, deceive and mislead plaintiff with regard to its right to convert its debentures. By having B & O declare and pay a dividend the value of which was undisclosed on December 13, 1977, plaintiff was thereby deprived of the opportunity to make an intelligent decision whether to convert its debentures into common stock and thus receive the dividend. It was claimed that this was also in violation of Article 5, Section 12 of the Trust Indenture of which more hereafter and asked that the defendants be enjoined from having the dividend of Mid-Allegheny Corporation (hereinafter MAC) paid to B & O shareholders without first affording plaintiff adequate information and opportunity to determine whether to convert its debentures into common stock and receive the dividend. The complaint asked that a preliminary injunction be issued thereafter to become permanent, to restrain defendants from paying any dividends in the future without first affording adequate information and opportunity to decide whether to convert.
A hearing was held on the application for preliminary injunction and on March 7, 1978, the court, 446 F. Supp. 656, issued a preliminary injunction restraining defendants from proceeding with the dividend. On March 14, 1978, the defendants appealed to the Court of Appeals for this Circuit. On August 9, 1978, the granted preliminary injunction was reversed by the Third Circuit.
Since the defendants agreed to hold sufficient shares of B & O and MAC stock in their possession to satisfy plaintiffs' claim in the event that it was ultimately determined that plaintiff was entitled to reasonable notice of the dividend and plaintiffs elected to convert, the appeals court held that no injunction was necessary. The granting of a preliminary injunction was reversed with directions to the district court to take "such other steps, if any, as may be required to implement the assurances of defendant's counsel that sufficient shares of B & O and MAC will be available to satisfy any final judgment in plaintiffs' favor, all in accordance with the opinion of this court". A copy of the certified order was issued in lieu of formal mandate on August 9, 1978 and after various arguments, the court, on March 27, 1979, entered an order allowing the defendants to hold sufficient shares pending the ultimate decision of the plaintiff's case and whether it elected to convert.
On February 15, 1979, an amended complaint was filed by Pittsburgh Terminal adding various other allegations to the complaint and in the prayer for relief there was included a prayer for damages (paragraph 4 of the amended complaint) which the circuit had noticed was lacking in the complaint as before it.
The case then proceeded through many tortuous discovery procedures. Plaintiff's motion for partial summary judgment and motion of defendants for summary judgment were briefed and argued and denied by orders of June 24, and June 25, 1980, respectively except the motion was granted to the extent of dismissing the action as to Stephen Muller, Nicholas T. Camicia, and a short time later Cyrus S. Eaton named as directors or former directors of the B & O and the other defendants. These directors were released because they were not directors at the time the action was taken or as in the case of Mr. Eaton it was not denied that he had no knowledge and no participation in the declaration of the dividend in question.
In the Guttmann case filed January 22, 1979, a suit was brought by Monroe Guttmann in his own right, Loretta Guttmann, Janet Rees and Evelyn Bittner. The complaint alleged that Monroe, Loretta and Janet Rees were residents of Pennsylvania and the holders of $ 723,000 in face value of the 41/2% convertible debentures due January 1, 2010, all of which were acquired prior to December 13, 1977, the date of the dividend and that plaintiff Evelyn Bittner was a resident of Pennsylvania holding debentures in the face amount of $ 10,000 acquired prior to December 13, 1977. The defendants were the same being the B & O, its directors, the C & O and the Chessie System, Inc. The two cases have proceeded together and were tried together.
In the Guttmann case as in the Pittsburgh Terminal case, motions for summary judgment were filed by the parties and both were denied. The case went to trial non-jury for 4 days, July 21-24, 1980. Thereafter, briefs and arguments were held together with a reargument on one matter which the court felt was inadequately presented and the case is now ready for decision.
(1) The Baltimore and Ohio Railroad Company is incorporated under the law of Maryland with the principal office in Baltimore, Maryland.
(2) On December 13, 1977, 99.63% of the common stock of the B & O was owned by the C & O.
(3) The C & O is a wholly-owned subsidiary of Chessie.
(4) The Mid-Allegheny Corporation ("MAC") on December 13, 1977, was a wholly-owned subsidiary of the B & O.
(5) Chessie Resources is a wholly-owned subsidiary of Chessie formed for the purpose of developing non-coal mineral real estate and timber lands of Chessie and its subsidiaries.
(6) Plaintiffs were on December 13, 1977 and are holders of certain B & O Convertible 41/2% debentures, Series A, maturing January 1, 2010.
(7) The plaintiffs are as follows:
A. Pittsburgh Terminal Corporation is a Pennsylvania Corporation and holds $ 94,000 in face value of the B & O Convertible 41/2% debentures Series A, due January 1, 2010 at issue in this case. The $ 94,000 in debentures were acquired prior to December 13, 1977.
B. Monroe Guttmann held on December 13, 1977, debentures in the face amount of $ 446,000 acquired prior to December 13, 1977. Debentures in the face amount of $ 9,000 acquired prior to December 13, 1977 were subsequently converted into B & O common stock.
C. Loretta Guttmann held on December 13, 1977, debentures in the face amount of $ 226,000 acquired prior to December 13, 1977. Debentures in the face amount of $ 2,000 acquired prior to December 13, 1977, were subsequently converted into B & O common stock.
D. Evelyn Bittner held on December 13, 1977, debentures in the face amount of $ 10,000 acquired prior to December 13, 1977.
E. Janet Rees on December 13, 1977, held debentures in the face amount of $ 50,000 acquired prior to December 13, 1977.
(8) Chessie was one of the last of the major railroads in America to segregate its non-rail assets from its rail assets.
(9) The Chessie Corporate Restructuring Committee (the "Committee") was officially formed in January, 1977.
(10) The Committee was composed of a number of officers and employees of the B & O, Chessie and its subsidiaries with various areas of expertise including the law.
(12) The properties selected for transfer by the Committee were those with potential for development.
(13) In deciding the method of transferring the non-rail properties to a non-rail subsidiary, consideration was given to selling the properties.
(14) The sale method of transfer was rejected because it would have required expensive and time-consuming appraisals (as much as two years for the coal properties alone) and would have required the transfer of substantial amounts of cash and the payment by the B & O of substantial transfer taxes with the risk that the price for the sale would be unfair to the minority shareowners.
(15) The method of transfer of the non-rail properties chosen by the Committee was transferral into a wholly-owned subsidiary of the B & O followed by the declaration of a dividend in its shares to the common shareowners of the B & O.
(16) Whenever any properties were transferred that had rail facilities of any nature, the B & O was granted a permanent easement for the use of those rail facilities.
(17) On December 13, 1977, the B & O declared a dividend in the shares of MAC. This dividend was part of the corporate restructuring program of the entire Chessie System which had begun in 1973 with the formation of Chessie.
(18) The effect of the transfer of the non-rail properties by the dividend route was that the B & O shareholders each retained their same proportionate interests in both the rail properties retained by the B & O and the non-rail properties transferred to MAC.
(19) Prior to the B & O dividend of the MAC stock in December, 1977, the B & O had not paid any dividend since 1961.
(20) The B & O had not paid any dividends during the period from 1961 to 1977 in part because of its weak financial condition and the need to replace a substantial amount of its operating equipment, in part because of substantial bond maturities and in part because of a requirement in the convertible income bond indenture that the B & O pay an amount equal to any dividend into the surplus income sinking fund.
(21) During that same period and even before the C & O had acquired a controlling interest in the B & O, the C & O had provided the B & O with a significant infusion of capital, without which the B & O could not have remained in operation.
(22) Because it was difficult, if not impossible, to value the MAC dividend in terms of fair market value, the decision was made to call the convertible income bonds, since without calling the bonds, it would not have been possible to pay the MAC dividend.
(23) The convertible income bonds were called at a price of $ 105 per $ 100 face value during the summer of 1977 at a time when the bonds were being thinly traded at a price of $ 60 per $ 100 face value.
(24) At the time of the call of the convertible income bonds, not all of the properties had been selected for transfer by way of the MAC dividend.
(25) The convertible 41/2% debentures, Series A, due January 1, 2010, held by plaintiffs and involved in this suit were issued in 1956 on an offer of exchange for outstanding B & O convertible 41/2% bonds.
(26) On or about January 1, 1956 the B & O had entered into an indenture with the Chase Manhattan Bank pursuant to which Chase acted as trustee for the debenture issue.
B. Defendants did not advertise notice of the proposed declaration of the dividend in MAC shares on the B & O common stock in a newspaper of general circulation in the Borough of Manhattan, City and ...