p. 219[624 NE2d 160, 604 NYS2d 32]Lindner Fund, Inc., Appellant, v Waldbaum, Inc., et al., Respondents.decided November 16, 1993
p. 220POINTS OF COUNSEL
Bader and Bader, White Plains (I. Walton Bader and Benedict Bader of counsel), for appellant.
I. The Court below erred in holding that defendants-respondents did not violate their fiduciary duties owed to plaintiff-appellant by failing to disclose the existence of an "agreement in principle” (set forth in the complaint as a "done deal”) which provided for the payment to defendants-respondents Ira Waldbaum and Aaron Malinsky of their controlling stock in Waldbaum, Inc. at a price of approximately double the public market value of their stock with a further agreement to make a "tender offer” to the public stockholders of Waldbaum, Inc. at the same price.
(Kavanaugh v Kavanaugh Knitting Co., 226 NY 185 ;
Alpert v 28 Williams St. Corp., 63 NY2d 557 ;
Matter of Kemp & Beatley [Gardstein], 64 NY2d 63 ;
Matter of Cohen v Cocoline Prods., 309 NY 119 ;
Schwartz v Marien, 37 NY2d 487 ;
Giblin v Murphy, 73 NY2d 769 ;
Bender v Ferro, 86 AD2d 12 ;
Quasha v American Natural Beverage Corp., 171 AD2d 537 ;
Goldberg v Goldberg, 139 AD2d 695 ;
Demas v 325 W. End Ave. Corp., 127 AD2d 476 .) II. The Court below further erred in holding that no violation of State fiduciary law principles occurred, and no violation of Federal securities law principles occurred, by reason of the failure of defendants-respondents to disclose the prior existence of an "agreement in principle”.
(Staffin v Greenberg, 672 F2d 1196 ;
Kronfeld v Trans World Airlines, 832 F2d 726 ;
Greenfield v Heublein, Inc., 742 F2d 751 ;
Fry v Trump, 681 F Supp 252 ;
Basic Inc. v Levinson, 485 US 224 ;
Roeder v Alpha Indus., 814 F2d 22 ;
Glazer v Formica Corp., 964 F2d 149 .) III. Where there is a statutory duty to file a document with the United States Department of Justice and with the Federal Trade Commission 30 days prior to the date of consummation of any acquisition of defendant corporation by defendant third party, but where the contents of such document are confidential under the applicable law there is, nevertheless, a requirement to notify present stockholders of the acquired corporation of the fact of the filing of such a notice even though the contents of the notice itself are confidential to the general public and, where such notice was not in fact filed, the court can determine the issues as if the notice was in fact filed.
(Bean v Walker, 95 AD2d 70 ;
Matter of
p. 221Parkview Holding Corp. v Joy, 58 AD2d 865 ;
Sweedler v Oboler, 65 Misc 2d 789 , 37 AD2d 1049 .) IV. The Great Atlantic and Pacific Tea Company, who normally would have no fiduciary duty to plaintiff-appellant, becomes liable to plaintiff-appellant on fiduciary duty principles when it participates in a plan and scheme with those parties having fiduciary duties to plaintiff-appellant to violate such fiduciary duties.
(Wechsler v Bowman, 285 NY 284 ;
Laub v Genway Corp., 60 FRD 462 ;
A. S. Rampell, Inc. v Hyster Co., 3 NY2d 369 ;
Green v Davies, 182 NY 499 .) VI. The former decisional law of the State of New York, holding that there is no direct fiduciary duty by a corporation to its stockholders, is believed to be presently outmoded and should be overruled, or, alternatively, Waldbaum, Inc. should be held liable under "respondeat superior” theories or under the theory set forth in point IV herein-above as applied to defendant Great Atlantic & Pacific Tea Company.
(Jordan v Global Natural Resources, 564 F Supp 59 .) VI. The actual formal agreements transferring control of defendant corporation and providing for a "tender offer” to the public stockholders of defendant corporation were signed early in the day involved, but were not publicly disclosed until the stock market closed for the day, so that plaintiff-appellant who sold a substantial quantity of Waldbaum stock after the formal agreements were signed would not have done so had the information been promptly disclosed. This fact alone is sufficient to bottom liability on defendant. VII. In the event that an amplification of the allegations of the complaint is required to make the complaint sufficient, leave to amend the complaint should be granted by the court.
(O’Henry’s Film Works v Nabisco, Inc., 112 AD2d 825 ;
De Pan v First Natl. Bank, 98 AD2d 885 ;
Collison Plan Unlimited v Bankers Trust Co., 63 NY2d 827 ;
Brylgrove Ltd. v Tompkins, PLC, 172 AD2d 452 ;
Krouner v Koplovitz, 175 AD2d 531 ;
Blitman Constr. Corp. v Kent Vil. Hous. Co., 91 AD2d 173 .)
Skadden, Arps, Slate, Meagher & Flom, New York City (Peter S. Julian and Stephen M. Axinn of counsel), for respondents.
I. New York State fiduciary duty law does not impose a duty of immediate public disclosure. (Penzell v Ekblom, 283 App Div 243 , 308 NY 987 ; Zetlin v Hanson Holdings, 48 NY2d 684 ; Wellman v Dickinson, 682 F2d 355 , cert denied sub nom. Dickinson v Securities Exch. Commn., 460 US 1069 ; Securities Exch. Commn. v Texas Gulf Sulphur Co., 401 F2d 833 , cert denied sub nom. Kline v Securities Exch. Commn., 394 US
p. 222976 .) II. The Federal securities laws do not impose a duty of public disclosure in the absence of three prerequisite conditions, none of which was alleged below. (Taylor v First Union Corp., 857 F2d 240 , 489 US 1080 ; Basic Inc. v Levinson, 485 US 224 ; Staffin v Greenberg, 672 F2d 1196 ; Glazer v Formica Corp., 964 F2d 149 ; Boeder v Alpha Indus., 814 F2d 22 ; Securities Exch. Commn. v Rogers, 790 F2d 1450 ; Levine v NL Indus., 717 F Supp 252 ; Jackvony v RIHT Fin. Corp., 873 F2d 411 ; Laventhall v General Dynamics Corp., 704 F2d 407 , 464 US 846 .) III. The existence of an "agreement in principle”, by itself, does not impose a duty of public disclosure. (Staffin v Greenberg, 672 F2d 1196 ; Kronfeld Trans World Airlines, 832 F2d 726 , 485 US 1007 ; Greenfield v Heublein, Inc., 742 F2d 751 , 469 US 1215 ; Fry v Trump, 681 F Supp 252 ; Basic Inc. v Levinson, 485 US 224 .) IV. The Hart-Scott-Rodino Act does not impose a duty of public disclosure. V. The law of conspiracy, by itself, does not impose a duty of public disclosure. VI. The doctrine of respondeat superior, by itself, does not impose a duty of public disclosure. (Matthews v New York Racing Assn., 193 F Supp 293 .) VII. The common law does not impose a duty of public disclosure. (Jordon v Global Natural Resources, 564 F Supp 59 .) VIII. This Court should deny Lindner’s request for leave to amend its complaint. (Bardere v Zafir, 63 NY2d 850 ; Hickey v National League of Professional Baseball Clubs, 169 AD2d 685 .)OPINION OF THE COURT
The issue on this appeal by leave of this Court is whether a publicly traded corporation has a fiduciary duty to immediately disclose to its shareholders an agreement in principle for a corporate takeover by stock tender offer. The Appellate Division, reversing an order of Supreme Court which denied a motion to dismiss pursuant to CPLR 3211 (a) (7), dismissed the complaint for failure to state a cause of action. We now affirm.
Between November 14, 1986 and November 26, 1986, Lindner, a public mutual fund, sold 49,500 shares of Waldbaum, Inc., a New York Stock Exchange publicly traded company, at a price that ranged between $24 and $26 per share. After the close of the market on November 26, 1986, the Great Atlantic & Pacific Tea Company, Inc. announced a plan to acquire Waldbaum’s outstanding shares at a tender price offer of $50 per share.
p. 223Lindner’s complaint and theory of the case is that the defendants owed Lindner and other Waldbaum shareholders a duty of public disclosure once an agreement in principle on the acquisition had been reached. Lindner alleges that the failure to disclose the agreement before the market closed on November 26, 1986 caused it to lose $1,248,625 in potential profits on the sale of its Waldbaum shares at the tender offer price compared to the much lower market price at which it sold the shares prior to the public announcement.
New York and Federal authorities do not support plaintiff-appellant Lindner’s assertion of an unqualified duty to disclose. On the contrary, it is well settled that a duty to disclose arises in only a limited set of circumstances and this case does not fit any of those situations.
Certainly, corporate officers and directors have a fiduciary relationship with the shareholders of their corporation (Giblin v Murphy, 73 NY2d 769 ). Thus, there are specific instances where a duty to disclose a major transaction of the kind involved in this case will spring into being. Three principal categories for such a disclosure duty have been recognized: (1) insider trading, (2) a statute or regulation requiring disclosure, or (3) inaccurate, incomplete, or misleading prior disclosures (Roeder v Alpha Indus., 814 F2d 22 [1st Cir]; Glazer v Formica Corp., 964 F2d 149 [2d Cir]; see also, Penzell v Ekblom, 283 App Div 243 , affd no opn 308 NY 987 ).
This prudently circumscribed approach to disclosure is put in useful context by the observation that merger negotiations
" 'are inherently fluid and the eventual outcome is shrouded in uncertainty. Disclosure may in fact be more misleading than secrecy so far as investment decisions are concerned. * * * [Merger negotiations involve] complex bargaining between two (and often more) parties which may fail as well as succeed, or may succeed on terms which vary greatly from those under consideration at the suggested time of disclosure’ ” (Kronfeld v Trans World Airlines, 832 F2d 726 , 734 [2d Cir 1987], cert denied 485 US 1007 , quoting Reiss v Pan Am. World Airways, 711 F2d 11 , 14 [2d Cir 1983]).
To be sure, the Second Circuit was examining materiality, not "a pure question of a duty to disclose” (id., at 732), when it noted the authorities holding that "preliminary merger negotiations [are] immaterial as a matter of law” (Kronfeld v
p. 224Trans World Airlines, 832 F2d, at 732-734 ,
supra). The
Kronfeld analysis and rationale, however, provide insights for addressing the situation at hand where an agreement in principle was reached but not effectuated or actuated into a formally binding agreement as of the time appellant would require disclosure.
Lindner acknowledges that none of the recognized qualifying circumstances for disclosure are present in the instant case and that it has no special circumstances of its own to offer. Instead, it urges that we adopt a new, across-the-board duty of disclosure triggered at that magic moment when the parties reach an "agreement in principle.” We are satisfied that Lindner’s generalized disclosure approach finds no support in Federal principles or New York substantive law, is not prudent and is likely to lead to uncertainty and inappropriate market risks and losses. Since the extant authorities also support the more limited view, the Appellate Division was correct to dismiss the complaint for failure to state a cause of action (CPLR 3211 [a] [7]).
Moreover, New York’s business judgment rule (Business Corporation Law § 715 [h]; § 717 [a]) adds some weight to our analysis and conclusion. That rule requires corporate officers to perform their duties "in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances.” It provides a measure of protection to a corporation’s officers and directors when they act in the over-all best interests of all the shareholders and maintain the confidentiality of merger negotiations to avoid speculative or premature market fluctuations. The cautious approach also avoids uneven notice to sophisticated minute-by-minute market tape watchers, as compared to ordinary nonprofessional shareholders who may read their stock quotes in the following day’s newspapers, if at all. Thus, Atlantic & Pacific’s and Waldbaum’s decision to wait until the close of markets on November 26, 1986, when their negotiations were complete and the agreement was final, to publicly announce that a major new deal had been struck, falls within the business judgment rule, absent allegations or a showing of some countervailing misconduct or manipulation. There is none of that in the complaint at issue.
Finally, the alleged failure of Waldbaum to file a "premerger notification” with the Federal Trade Commission (15 USC § 18a) is irrelevant to the issue before us. That regulatory
p. 225filing is a confidential, nonpublic communication to a Federal securities watchdog entity. It should in no way be converted into a general fiduciary duty of public disclosure — a contradiction in terms. Moreover, the violation of that statutory confidentiality could, in itself, constitute a breach of a fiduciary obligation because disclosure in such circumstances may be susceptible to and generate the kind of manipulation or speculation that the confidentiality rules and business judgment principles are designed to preclude or at least retard.
Accordingly, plaintiffs complaint and theory were rightly rejected by the Appellate Division, and the order of that Court reversing and dismissing the complaint should be affirmed, with costs.
Chief Judge Kaye and Judges Simons, Titone, Hancock, Jr., Smith and Levine concur.
Order affirmed, with costs.