APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil Action No. 77-4396)
Before Weis and Higginbotham, Circuit Judges and McCUNE, District Judge.*fn*
In this appeal, minority stockholders challenge a corporate merger forcing them to accept the company's cash offer for their shares or the value established in a statutory appraisal proceeding. Rejecting plaintiffs' contentions that the company misrepresented the value of the stock and the purpose of the merger, the district court entered judgment for the defendants. We agree that the plaintiffs failed to establish a violation of either federal or state law and, accordingly, affirm.
The plaintiffs' complaint in the district court alleged violations of section 10(b) of the Securities Exchange Act of 1934 and also asserted pendent claims under Pennsylvania law. The court denied the motion for a preliminary injunction barring the merger which eliminated plaintiffs as minority stockholders, and after a bench trial, entered judgment for the defendants.*fn1
In 1977 the plaintiffs held approximately 3% of the outstanding common stock of Mosser Industries, Inc., a Pennsylvania corporation, and approximately the same percentage of warrants convertible into equivalent numbers of common shares. All warrants were due to expire on December 31, 1977.*fn2 Another group of minority stockholders owned approximately 3% of the stock and the remainder, 93.10%, was held by Ecolaire, Inc., which also owned some 97% of the outstanding warrants.
In September 1977 Mosser's Board of Directors approved plans for a $6,300,000 expansion program. When Mosser approached a local bank for financing, the company was told that in order to obtain a loan, Ecolaire would have to guarantee all, or a significant portion, of the debt. At a meeting on November 10, 1977, Ecolaire's board decided that it would provide such guarantees only if it were sole owner of Mosser. Ecolaire reasoned that it need not share the benefits of expansion with minority stockholders who did not assume any risk in the financing arrangement. Ecolaire also saw the merger as a means of eliminating administrative and financial burdens incurred because of minority ownership.
A month later, Ecolaire's president presented a plan to the Mosser Board providing for the merger of Mosser and a shell corporation, NMI, Inc., a wholly owned subsidiary of Ecolaire. As a result of the plan, Ecolaire would acquire all of Mosser's stock, and the minority stockholders would receive $8 per share.
After its Board approved the proposal, Mosser sent its shareholders a notice dated December 8 setting a special meeting for January 4, 1978 to vote on the merger. Included in the mailing were copies of the plan and pertinent portions of the Pennsylvania Business Corporation Law setting out the rights of dissenting stockholders. An accompanying letter explained the reasons for the merger, details of the expansion proposal, the method used to determine the $8 per share price for the stock, and directions for exercising the stock purchase warrants.
While the merger was proceeding, Mosser also prepared to process the conversion of warrants due to expire on December 31, 1977. To assist the holders in deciding whether to exercise their warrants at a price of $4 per share, the company sent them a number of documents on November 3. These included financial statements for the previous three years. The package also contained an information statement with details of the company's history, products, markets, backlog of orders, executive salaries, plans for expansion, transactions with Ecolaire, book value of the stock, and pending antitrust litigation against the company by Damper Design, Inc., whose principal shareholder was plaintiff Hagar.
During the same period of time, plaintiff Dower, on behalf of himself and co-parties, asked for additional disclosures. He requested all the financial data given to Ecolaire and a five-year plan prepared by Mosser, which included projections of sales and profits. Moreover, Dower asked what new products the company intended to develop and what additional markets it planned to enter.
After the company refused Dower's request, he filed the present suit on December 27, 1977. The district court issued a temporary restraining order that delayed the Mosser shareholder meeting and provided that the warrants would not expire on December 31. After a hearing, the court denied plaintiffs' request for a preliminary injunction and permitted the shareholder meeting to be held on January 19, 1978, adding that the warrants could expire on the same day. Before that date, all warrantholders, including the plaintiffs, purchased stock at $4 per share.
Some of the minority stockholders, including the trustees who are plaintiffs in this case, elected to sell at $8 per share in the merger proceedings, but the individual plaintiffs did not. Mosser then filed an appraisal suit, which is still pending in the Court of Common Pleas of Lehigh County.
The district court concluded that the plaintiffs had stated claims under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), but that the evidence did not substantiate their contentions. Specifically, the court found the plaintiffs had failed to establish that the alleged omissions and misrepresentations would have been relevant to ...