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HOFFMAN ELEC., INC. v. EMERSON ELEC. CO.
January 15, 1991
HOFFMAN ELECTRIC, INC., LAWRENCE R. MUSSELMAN & GEORGIANA R. MUSSELMAN, AS CO-TRUSTEES OF THE LAWRENCE R. MUSSELMAN AND GEORGIANA R. MUSSELMAN TRUST, AND WALTER WINIUS, JR., ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
EMERSON ELECTRIC COMPANY, A FOREIGN CORPORATION, LOAD MANAGEMENT DEVELOPMENT CORPORATION, A FOREIGN CORPORATION AND HAROLD F. FAUGHT, DEFENDANTS.
The opinion of the court was delivered by: Cohill, Chief Judge.
Plaintiffs, investors in a limited partnership known as
Emerson Research Partners L.P. ("ERP"), brought this class
action against Emerson Electric Co. ("Emerson"), Load
Management Development Corporation ("LMDC"), and Harold F.
Faught, arising from Emerson's purchase of the assets of ERP.
The complaint alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b),
and Rule 10b-5 promulgated there under; Section 14(e)
of the Exchange Act, 15 U.S.C. § 78n(e); Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et
seq.; breach of fiduciary duty; and common law fraud. We have
jurisdiction pursuant to 15 U.S.C. § 78aa, 18 U.S.C. § 1964(c),
28 U.S.C. § 1331, and upon principles of pendent jurisdiction.
Presently before us is plaintiffs' Motion for Class
Certification, defendants' Motion to Dismiss, or, in the
alternative, Motion for Partial Summary Judgment.
In 1983, ERP was formed to develop, manufacture, and market
a two-way automatic communication system ("TWACS") to be used
by electric utilities companies in the United States to reduce
peaks in demand for electrical power through remote control.
TWACS was ERP's principal asset. ERP was managed by LMDC, a
wholly-owned subsidiary of Emerson. The president of LMDC is
Harold F. Faught, who is also Emerson's Vice-President of
Following the formation of ERP, ERP entered into three
1. A Development Agreement with Emerson under which ERP
agreed to reimburse Emerson for certain costs of research of
2. A Joint Venture Agreement with Emerson to field test,
manufacture, and market TWACS;
3. A Partnership Purchase Option Agreement which was executed
by ERP, LMDC, Emerson, and ERP's limited partners under which
Emerson was granted the right, for a period of 120 days after
September 30, 1989 under either the "Stock Payment Option" or
the "Revenue Payment Option," to purchase, at its sole option,
the limited partnership interests.
In 1983, through an initial public offering, interests in ERP
were sold to over 200 investors who thus became ERP's limited
In 1988, after years of financial losses, Morgan Guaranty
Trust Company ("Morgan Guaranty") of New York was hired to find
a buyer for ERP. Morgan Guaranty located only one potential
buyer, and that potential buyer was willing to offer only $3
million. After this, the idea of selling ERP was abandoned.
In 1989, Emerson offered to purchase all of the assets of ERP
for $10 million, or approximately $50,505 per limited
partnership unit. This amount was approximately half of the
limited partners' initial investment. The offer was contained
in a proxy statement that was sent to ERP's limited partners on
November 13, 1989. The proxy statement included a statement
that Emerson believed the offered price was fair, but advised
that the deal was not negotiated at arm's length, therefore the
limited partners should consult their own investment advisors.
The proxy statement also contained a statement that neither
LMDC nor Emerson's Board of Directors would make a
recommendation because of conflicts of interest. Furthermore,
an opinion by Oppenheimer & Co., Inc. ("Oppenheimer") opining
that Emerson's offer was fair from a financial point of view
was contained in the proxy statement.
On December 20, 1989, the majority of ERP's limited partners
voted to accept this offer.
Plaintiffs brought this lawsuit, essentially alleging that
defendants entered into a scheme to buy out ERP's assets at an
unfairly low price. Plaintiffs argue that the proxy statement
was false and misleading for several reasons: it did not inform
ERP's limited partners that Emerson's Board of Directors had
actually authorized a buyout price of up to $12 million; it did
not include detailed and reliable internal projections and
financial information which showed that TWACS was on the verge
of becoming highly profitable; it excluded information about
the marketing plans for TWACS; it failed to provide an accurate
appraisal of what an outside buyer would offer for the assets
of ERP; it neglected to disclose the value of other options
that might be available to ERP's limited partners if Emerson
exercised its Purchase Option, which came due the month after
the December 22, 1989 vote; it hid the fact that LMDC and
Emerson were negotiating both sides of the deal, which resulted
in a buy-out price favorable to Emerson and unfavorable to ERP;
and it hid the fact that Harold Faught was both President of
LMDC and Emerson's Vice-President of Technology.
Plaintiffs moved for class certification under Fed.R.Civ.P.
23(b)(3), and defined the class as "all persons who, on or
about December 20, 1990, redeemed or sold limited partnership
interests in Emerson Research Partners L.P."
To be certified as a class action under Rule 23(b)(3),
plaintiffs must satisfy each of the requirements of Rule 23(a)
and the requirements of Rule 23(b)(3). Eisen v. Carlisle &
Jacquelin, 417 U.S. 156, 163, 94 S.Ct. 2140, 2145, 40 L.Ed.2d
732 (1974). The burden of proving that the requirements of Rule
23(b)(3) have been met is on the party seeking to certify the
class action. Davis v. Romney, 490 F.2d 1360, 1366 (3d Cir.
1974). Furthermore, the interests of justice require that in a
doubtful case any error, if there is to be one, should be
committed in favor of allowing the class action. Eisenberg v.
Gagnon, 766 F.2d 770, 785 (3d Cir.), cert. denied,
474 U.S. 946, 106 S.Ct. 342, 88 L.Ed.2d 290 (1985).
[o]ne or more members of a class may sue or be
sued as representative parties on behalf of all
only if (1) the class is so numerous that joinder
of all members is impracticable, (2) there are
questions of law or fact common to the class, (3)
the claims or defenses of the representative
parties are typical of the claims or defenses of
the class, and (4) the representative parties will
fairly and adequately protect the interests of the
To satisfy numerosity, the class must be so numerous that
joinder of all members is impracticable. Weiss v. York Hosp.,
745 F.2d 786, 807-808 (3d Cir. 1984), cert. denied,
470 U.S. 1060, 105 S.Ct. 1777, 84 L.Ed.2d 836 (1985). "Impractical,"
however, does not mean impossible. 7A C. Wright, A. Miller, M.
Kane, Federal Practice and Procedure § 1762 (2d ed., 1986).
Plaintiffs assert that the proposed class, which consists of
over 100 limited partners throughout the United States, is so
numerous and so geographically disbursed that joinder of all
members is impracticable. Defendants do not challenge the
We conclude that the numerosity requirement has been met.
Commonality requires that there be questions of law or fact
common to the class, although not all questions of law and fact
raised need be in common. Weiss v. York Hosp., 745 F.2d 786,
808-809 (3d Cir. 1984), cert. denied, 470 U.S. 1060, 105 S.Ct.
1777, 84 L.Ed.2d 836 (1985).
We conclude that the commonality element has been
Typicality exists when the legal or factual positions of the
class representatives are sufficiently similar to the legal or
factual positions of the other class members. Eisenberg v.
Gagnon, 766 F.2d at 786. "Typical" is not identical. Id. The
typicality requirement overlaps with the commonality
requirement and the requirement of fair and adequate
Plaintiffs assert that their claims are the same as the
claims of the putative class, for they were all investors who
sold their interests in the limited partnership in reliance on
the omissions and false and misleading information contained in
the proxy statement. Furthermore, plaintiffs assert that as a
result of the omissions and false and misleading information
within the proxy statement, defendants entered into an unlawful
conspiracy, committed ...