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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,
v.
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.

      OPINION

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.

Background

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 Technology.

Following the formation of ERP, ERP entered into three agreements:

1. A Development Agreement with Emerson under which ERP agreed to reimburse Emerson for certain costs of research of TWACS;

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 partners.

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.

CLASS CERTIFICATION

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).

A. Rule 23(a)

Rule 23(a) provides:

  [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
  class.

1. Numerosity

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 numerosity requirement.

We conclude that the numerosity requirement has been met.

2. Commonality

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).

Plaintiffs maintain that there are questions of law and fact common to the putative class that arose when the investors were allegedly duped into parting with valuable limited partnership shares for substantially less than fair market value by defendants. Plaintiffs claim that the main issues relate to whether the proxy statement contained false and misleading information and whether the defendants entered into a criminal conspiracy, committed securities and common law fraud, and breached their fiduciary duties. Defendants do not contest the commonality element.

We conclude that the commonality element has been established.

3. Typicality

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 representation. Id.

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 ...


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