ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, D.C. Civil No. 81-4398
Before: GIBBONS, Chief Judge, WEIS, Circuit Judge, and ZIEGLER, District Judge*fn*
Former minority shareholders of GREIT Realty Trust (GREIT), a Pennsylvania real estate investment trust, appeal from a final judgment in favor of Unicorp American Corporation (UAC), Delaware corporation, Unicorp Financial Corporation (Canadian), a Canadian corporation, and certain trustees of GREIT. The minority shareholders' suit charges the defendants with various violations of the federal securities laws and the common law of Pennsylvania in connection with the merger of GREIT and UAC. The district court directed a verdict in favor of the defendants at the end of the shareholders' case. The minority shareholders contend that the court erred both on the Pennsylvania law and the federal law claims. They also claim that the court erred in excluding certain evidence. We affirm.
The challenged merger between GREIT and UAC, pursuant to a merger agreement dated April 20, 1981, was approved by GREIT shareholders at a meeting on October 29, 1981. Prior to the merger, GREIT owned office buildings, shopping centers, and land in several states. It also owned 404,000 shares, a 15 per cent interest, of San Francisco Real Estate Investors (SFI), another real estate investment trust. Canadian, prior to the merger, owned all the outstanding shares of UAC, 50 per cent of the shares of GREIT, and 700,000 shares, a 26 per cent interest, of SFI. Canadian had begun acquiring GREIT shares in 1978, and by 1981 had become its majority shareholder. Two representatives of Canadian, defendants Mann and Weisberg, held seats on GREIT's board of trustees. The remaining sex seats on the GREIT board were held by trustees who, though they had no interest in Canadian, sat as trustees of UAC as well.
GREIT's acquisition of SFI shares began in mid-1980, during which time Canadian agreed to refrain from purchasing or selling SFI shares, and from other acts which would affect the market of SFI shares. By October 1980, GREIT had acquired its 15 per cent interest in SFI. In an agreement signed on October 21, 1980, GREIT released Canadian from its earlier restriction on trading SFI stock. In return, Canadian granted GREIT a call option, under which GREIT could purchase from Canadian all SFI shares acquired by Canadian between October 21, 1980 and December 31, 1980. The option date was later extended to April 30, 1981. The call option was not assignable without Canadian's written consent, and the option price was "acquisition cost . . . including brokerage commissions, and applicable interest costs." See Letter from Unicorp Financial Corp. to GREIT Realty Trust (October 21, 1980).
During the period covered by the call option, Canadian acquired 554,480 shares of SFI. Had GREIT exercised the call option, its interest in SFI would have increased to 958,480 shares, or approximately 36 per cent. GREIT, however, never exercised the call option. Instead, Canadian retained its SFI shares, and on April 6, 1981, prior to the expiration of the call option, gave its interest in SFI to UAC, in exchange for 100 per cent of UAC's outstanding common and convertible preferred stock.
The merger agreement between GREIT and UAC was executed on April 20, 1981, ten days prior to the extended expiration date of the call option. The agreement provided for a share-for-share exchange of GREIT common stock for UAC common stock, with the surviving entity being a business corporation rather than a real estate investment trust. Combining Canadian's pre-merger interest in UAC with the UAC stock it would receive for its holdings in GREIT, the proposed merger resulted in Canadian owning 1,300,000 shares of UAC common stock, and 2,000,000 shares of UAC preferred stock, giving it 87 per cent of the total voting power of UAC.
Drexel Burnham Lambert, Inc., a financial adviser retained by GREIT, issued an opinion that the terms of the merger were fair to the minority shareholders. The merger was approved at a special meeting of GREIT shareholders on October 29, 1981. On that date, there were 997,500 shares of GREIT outstanding, of which 500,000 shares were owned by Canadian. Pursuant to the merger agreement, Canadian undertook not to vote its shares unless a majority of the balance of the 497,500 shares of GREIT owned by others voted in favor of the merger. Of these shares, 251,217 voted at the special meeting, with 202,906 voting in favor of the merger and 48,311 against it. Of the 202,906 favorable votes, 186,021 were cast by GREIT shareholders other than any defendant, or affiliate or family member of any defendant. Thus, 74 percent of the unaffiliated voting minority shareholders of GREIT approved the merger, with the total favorable vote representing over 93 per cent of the shares actually voted.
The minority shareholders contend that they established a prima facie case of unfairness of the merger. Fairness of the merger to minority shareholders of a Pennsylvania real estate investment trust is significant; all parties agree that Pennsylvania law makers no provision for appraisal rights of minority shareholders in such a trust. Cf. Equity Corporation v. Brickley, 237 F.2d 839 (1st Cir. 1956), cert. denied, 352 U.S. 989, 77 S. Ct. 387, 1 L. Ed. 2d 368 (1957) (no appraisal rights in reorganization of a Massachusetts business trust absent provision in trust indenture). But cf. 15 Pa. Cons. Stat. Ann. § 805 (Purdon 1967) (appraisal rights of minority shareholders in Pennsylvania business corporations). Thus, once the merger was approved, the minority shareholders had no option, in liquidating their holding, other than sale of their shares in the market.
The unfairness on which the minority shareholders rely is the fact that the merger agreement, in fixing the ratio of the exchanges involved, attributed no value to GREIT's call option on Canadian's SFI shares. The failure to attribute some value to the call option, they contend, resulted in an overvaluation of Canadian's contribution to the merger enterprise, and an undervaluation of their contribution to UAC. The defendants, on the other hand, contend that the call option was of no value to GREIT, since the trust lacked the resources to exercise the option, and the option had expired by its terms long before the GREIT shareholders approved the merger.
Since the district court granted a directed verdict, our review is plenary. Finkle v. Gulf & Western, 744 F.2d 1015, 1021 (3d Cir. 1984). The minority shareholders urge that we should reverse for two reason -- one legal and one factual. The legal argument is that the district court misapplied the burdens of proof on the issue of fairness to the minority interests. The factual argument is that assuming plaintiffs had the burden of coming forward on the fairness issue, they satisfied it.
The minority shareholders contend, and the district court appears to have assumed, that their evidence would permit a finding that fiduciaries participated on both sides of the merger negotiations. Since UAC's trustees appear to have owned a fiduciary obligation both to GREIT and Canadian, we will proceed on the same assumption. The minority shareholders argue that with fiduciaries on both sides of the transaction, Pennsylvania law permits objecting shareholders to "offer the prospectus, [prove the transaction], and rest." They urge that the burden of coming forward with ...