On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil No. 79-2038.
Seitz, Sloviter and Hutchinson, Circuit Judges.
This appeal and cross-appeal arise out of litigation over a close corporation's tender offer to minority shareholders. Following a jury trial, the district court denied plaintiffs' motion for a judgment n.o.v. on the jury's determination of share value and granted plaintiffs a new trial on the question of share value. The parties agree that if we affirm the district court's decisions in these respects, a stipulation that they reached will obviate any need to consider the other issues presented on appeal, including the district court's ruling on the unconstitutionality of the Pennsylvania Takeover Disclosure Law and the court's instructions on the securities claims.
When the chain of events leading to this suit began in August, 1977, eighty-five percent of the stock of Magee Carpet Company (MCC), a closely held corporation, was held by Magee Industrial Enterprises (MIE). Both entities were Pennsylvania corporations. James Magee (Magee) was president and a director of both corporations, which were controlled by the Magee family. Most of the remaining shares had been issued to employees or past employees of MCC. (MIE, MCC and Magee shall be collectively referred to as the defendants.)
On August 29, 1977, Magee wrote a letter to shareholders who had previously expressed a desire to sell their stock announcing MIE's offer to purchase the outstanding common stock at $20 per share. Shares were to be tendered by September 30. Magee included no written financial information with his letter, but offered "to arrange to make financial information concerning Magee Carpet Company available to you and to meet with you to answer your questions concerning the company at the offices of the company" in Bloomsburg, Pa. App. at 76. A similar offer dated September 29, with an October 30 deadline, was extended to all other stockholders. The plaintiffs represent a certified class of minority shareholders who tendered shares in response to these offers.
Plaintiffs' claim was that defendants failed to disclose to the minority shareholders that they initiated the tender offer with a settled intention to merge MCC into MIE and with full knowledge that the price offered to the minority shareholders was considerably lower than the true value of the shares. Plaintiffs' evidence included the testimony of defendants' accountant and attorney that merger and/or liquidation were discussed by Magee both before the first tender offer and thereafter at a meeting on September 29, 1977; the admission of defendants' chief financial officer that MCC had recently sold $6 million in assets which added approximately $3 million to the company's cash reserves, a transaction that was not disclosed to the minority stockholders; and the same witness' further testimony, corroborated by its expert, that after several years of significant losses the company had achieved a modest return to profitability. Plaintiffs also introduced letters in which Magee told minority shareholders who inquired about the possibility of merger that "there is nothing to be acquired," App. at 81, and that "from a business standpoint there is no advantage to us [ i.e., the defendants] to buy this stock," App. at 82.
Defendants portrayed their offer as an altruistic gesture towards old friends of the company who had no market for their shares and no prospect of a dividend. They pointed to Magee's numerous expressions of concern for the outside shareholders, and to the fact that MIE spent $860,000 buying stock expecting no more than $135,000 in direct tax savings and a one-time, one year deferral of $600,000 in taxes. Although defendants did not dispute that merger and/or liquidation was discussed in various contexts before and during the tender period, Magee and his attorney testified that no decision was made to merge until late November, 1977. Magee testified that he tried hard to keep the business going to preserve jobs in the community and because he was too young to retire.
MIE's offer was successful. By the end of October, 1977, MIE had acquired approximately 97 % of the outside shares. Sometime before the end of November the companies made a "final" decision to merge. The merger was formally announced on November 20, ...