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May 17, 1971


The opinion of the court was delivered by: Robson, Chief Judge.



The defendants Walter H. Lenhard, Jr., Teledyne, Inc., and Teledyne Financial Corporation (the Teledyne defendants) move this court to dismiss the First Amended Complaint on the grounds that it fails to state a claim under the federal securities laws, and is devoid of any other basis for federal jurisdiction. For the reasons set forth below, this court is of the opinion the motion should be denied.


This is a class action brought by three minority shareholders of Unicoa Corporation (Unicoa), derivatively on behalf of that corporation, as well as on behalf of all other shareholders of Unicoa similarly situated. Plaintiffs acquired their shares of Unicoa in exchange for an equal number of shares of United Insurance Company of America (United). Unicoa now owns all of the issued and outstanding shares of United. The defendant Teledyne, Inc., through its wholly-owned subsidiary Teledyne Financial Corporation, owns approximately 52 per cent of the issued and outstanding shares of Unicoa.

Count I of the three-count First Amended Complaint charges that the defendants violated Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder, by engaging in fraudulent and manipulative conduct to effect the Teledyne defendants' scheme to purchase control of United, and then to exploit United for the benefit of Teledyne's conglomerate insurance interests. The plaintiffs allege that they were shareholders of United in early June, 1967, when Teledyne instituted its program seeking to purchase the controlling interest of United.*fn1 The defendant O.T. Hogan was chairman of the board of directors and a major shareholder of United. The defendant Almore H. Teschke was a member of the board, as well as vice-president, general counsel, and a major shareholder of United.*fn2 Teledyne's first tender offer, which proved unsuccessful, was actively opposed by United's board of directors who sent letters by mail to shareholders of United, dissuading them from accepting the tender offer. Count I alleges that Teledyne then entered a secret agreement with the defendants Hogan and Teschke for the purpose of inducing United shareholders to accept a contemplated second tender offer. In exchange for their support, Teledyne allegedly promised to purchase from Hogan and Teschke all of their holdings in a third corporation, United Fire Insurance Company (United Fire), at a fixed price.*fn3 The defendants failed to disclose this scheme to the representative plaintiffs or to other minority shareholders of United. The plaintiffs assert that they were led to believe that in supporting Teledyne's tender offer, the defendants Hogan and Teschke were acting in United's best interests and not for reasons of personal gain incompatible with their fiduciary duties. With the support of Hogan and Teschke, Teledyne's alleged scheme was successful and it acquired 52 per cent of United's outstanding shares. Upon acquiring control of United, Teledyne executed the plan of exchange between United and Unicoa approved by United's shareholders in April, 1968, during the period when the alleged scheme was operative.

In Counts II and III, the plaintiffs allege that since September 1, 1968, when the plan of exchange was effected, the board of directors of Unicoa have refused to pay dividends in order to depress the market value of plaintiffs' stock; that the assets of Unicoa have been used to finance, support and maintain the Teledyne conglomerate structure; and that Teledyne has in other enumerated ways "raided" the assets of Unicoa for the benefit of Teledyne. Counts II and III invoke the pendent jurisdiction of this court for redress of these alleged breaches of fiduciary duties owed to Unicoa and its minority shareholders under state law by the various defendants.

The relief sought in Count I includes imposition of a constructive trust upon the United Fire stock belonging to the defendants Hogan and Teschke for the benefit of plaintiffs and all other shareholders of Unicoa except Teledyne; specific enforcement of the secret agreement by Teledyne to purchase these shares at the fixed price alleged; plaintiffs' attorneys fees and costs; disbursement of the remaining proceeds to all shareholders of Unicoa except Teledyne; and "such other Decrees, Judgments, and Orders granting such other and further relief as the Court may deem appropriate, including the disgorging of profits and other moneys, consideration, or benefits made or obtained by the defendants as a result of their unlawful and wrongful activities."*fn4 In Count II, plaintiffs additionally seek to enjoin Teledyne from using United's assets to further its conglomerate structure, and for damages due to the impairment of their equity interest in Unicoa by Teledyne's allegedly fraudulent dividend and investment policies. Count III asks this court to declare that Teledyne has preempted certain corporate opportunities belonging to Unicoa, and seeks to divest Teledyne of those assets. Finally, plaintiffs seek in Count III to enjoin Teledyne from "acquiring other insurance companies."


The Teledyne defendants' principal thrust of attack is directed to the legal sufficiency of Count I, the claim upon which federal jurisdiction over this action must be determined. It is undisputed that none of the class-plaintiffs actually sold their United stock in response to Teledyne's second tender offer or in reliance upon the representations made by Hogan and Teschke that the tender offer was in United's best interests. On that basis, the Teledyne defendants invoke the so-called "Birnbaum Rule," based upon a decision by the United States Court of Appeals for the Second Circuit. Birnbaum v. Newport Steel, 193 F.2d 461, 464 (2nd Cir. 1952), cert. den. 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952). See also Iroquois Industries, Inc. v. Syracuse China Corporation, 417 F.2d 963, 966 (2nd Cir. 1969), cert. den. 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970); Greenstein v. Paul, 400 F.2d 580, 581 (2nd Cir. 1968). The Birnbaum court construed the language of Section 10(b) and Rule 10b-5 prohibiting the use of manipulative and deceptive devices "in connection with the purchase or sale of any security" to require that a plaintiff be an actual purchaser or seller of securities in order to have "standing" to sue under that provision. Fortunately, within the framework of the factual allegations and decisional authority applicable here, this court need not resolve the parties' disputed views with respect to the merits or present vitality of Birnbaum's narrow interpretation of Section 10(b) and Rule 10b-5.*fn6

While indicating its nominal recognition of the Birnbaum rule,*fn7 the United States Court of Appeals for the Seventh Circuit has broadly defined those persons eligible to maintain an action under Section 10(b) and Rule 10b-5. In Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir. 1967), cert. den. sub. nom. Bard v. Dasho, 389 U.S. 977, 88 S.Ct. 480, 19 L.Ed.2d 470 (1967), a statutory merger was ruled to be a purchase and sale of securities within the antifraud provisions of the federal securities laws.

In a well-reasoned concurring opinion, it was observed that:

    "Neat corporate theory would dictate that a
  statutory merger involves no sale of the shares or
  assets of merging corporations, but in the light of
  the purpose of the securities and exchange acts to
  protect the investing public, it seems reasonable
  that the concept of sale in these acts may encompass
  the various modifications in rights which are
  produced by merger." 380 F.2d at 268 (concurring
  opinion of Fairchild and Cummings, JJ.)
    "The argument that the transformation of rights
  occurring upon statutory merger is a distinct
  corporate phenomenon which does not involve purchase
  and sale of securities has some appeal, but in view
  of the objectives of the securities and the exchange
  acts, it seems to me better to recognize, for the
  purpose of the antifraud provisions, that sales and
  purchases are involved. This view does no violence to
  the statutory language, and is the present
  interpretation of the body which is ...

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