These 31 5,000 shares of Equitable stock owned by American represented 9. 9% of the then outstanding common stock of Equitable. Soon afterwards, Equitable entered into a merger agreement with Gulf life Insurance Company and Gulf United Corporation. According to the terms of the merger agreement, the owners of Equitable stock could elect to receive $ 51. 00 cash per share. American had initially purchased the 31 5,000 shares of Equitable because Equitable was a company that was ripe for a corporate takeover, and as a corporate raider, American’s plan was to eventually purchasing sufficient shares to achieve this goal.
This was of great concern to Equitable management, and they did what they could to prevent this take over. Under Virginia law “No person shall acquire control of any domestic insurer whether by purchase of securities or otherwise, unless such person has previously filed with the [Categorization Commission of Virginia] Commission and the Commission has issued an order approving such application. ” Equitable did what it could to delay the Commission’s approval, while they looked for a white knight in an attempt to arrange a merger that would be more acceptable than American.
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Eventually the delaying tactic worked and American agreed to sell its 31 5,000 to one Mr.. Beverly Launderettes, an investment banker with Allen C. Ewing & Company of Jacksonville, Florida. Allen C. Ewing & Company was indeed fronting for Equitable, but this was not disclosed to American. Mr.. Launderettes was part of a scheme to determine and to set a price on the stock held by American General so that the stock could be purchased by Equitable. American General was willing to sell at that figure given the Equitable.
In response to questions about a pending merger, Equity announced “We are not merger prone. We are not going to actively seek a merger with anyone. We have had some merger discussions in the past but they are all over and done with, ND they were very preliminary and exploratory. ” In fact, at the same time that American agreed to sell its shares in Equitable to Launderettes for $32. 50 per share, Equitable had a merger offer on the table. The mere mention of pending merger negotiations to American General would have been a significant factor in the pricing of their stock.
Thus a failure to mention merger, and the deliberate attempt to hide it, was significant. American filed a complaint asserting claims for relief against Equitable and its individual directors based upon the circumstances surrounding this sale of Equitable shares. American claimed that by failing to disclose to American, prior to the sale of the shares, the negotiations of the merger that were then ongoing, Equitable was in violation of 17 C. F. R. S 240. Bib-5.
American General sought rescission of the contract underestimations the Equitable shares, or, alternatively, damages. The court found that: “the requisite elements of an action under 17 C. F. R. S 240. Bib-5, based upon nondisclosure are, (1) duty to disclose, (2) materiality, (3) sciences, (4) causation, and (5) reliance. ” “… One who fails to disclose real information prior to the consummation f a transaction commits fraud only when he is under a duty to do so.
And the duty to disclose arises when one party has information that the other party is entitled to know because of a fiduciary or similar relation of trust and confidence between them. ” “We, and the courts have consistently held that insiders must disclose material facts which are known to them by virtue of their position but which are not known to persons with whom they deal, and which, if known, would affect their investment Judgment. ” In its analysis of duty to disclose, the court referred to Speed v.
Transoceanic Corp.. , OFF. Sup. 808 (Del. 951), a case in which minority shareholders of a tobacco company brought action against a majority shareholder for fraud in violation of the Securities Exchange Act of 1934, for failure to disclose the true value of stock prior to sale, which resulted in significant losses to plaintiffs. The court in this case ruled that “It is unlawful for an insider .. . To purchase the stock of minority stockholders without disclosing material facts affecting the value of the stock, known … Y virtue of his inside position but not known to the selling minority stockholders, which information would have affected the Judgment of the sellers. The duty of disclosure stems from the necessity of preventing a corporate insider from utilizing his position to take unfair advantage of the uninformed minority stockholders. It is an attempt to provide some degree of equalization of bargaining position in order that the minority may exercise an informed Judgment in any such transaction. In it analysis of the requirement of sciences under the Securities Exchange Act of 1934, the court referred to Ernst & Ernst v. Householder, 425 U. S. 185 (1976), a Supreme Court case in which customers of a brokerage firm invested in a redundant securities scheme perpetrated by the president of the brokerage firm. The Supreme Court found that “Where a plaintiff proceeding under this section proves intentional, fraudulent conduct, the defendant, by the statute’s terms has no defense. ” In light of the courts findings, the court held Equitable, as well as of the Securities Exchange Act of 1934.
The court proceeded to determine what relief is appropriate. American sought damages in an amount that reflected the difference between American’s sale price of $ 32. 50 per share and the eventual cash merger price of $ 51. 00 per share. The court found that the Securities Exchange Act of 1934 renders a contract made in violation of the Act “avoidable at the option of the innocent party. ” American elected to rescind the contract and recover its shares of stock. “Rescission, however, is a remedy which presupposes that the parties can be restored to the status quo ante. The parties admit that superconductivity’s the shares of stock is not possible in this case. Upon the purchase of the Equitable shares, Equitable retired plaintiffs stock as treasury shares. The plaintiff is entitled to “rescission” damages if specific “restitution” is unavailable. Restitution is the amount by which the defendant was unjustly enriched and is based on the defendant’s profit. When a court enters a decree of rescission and specific restitution is impossible rescission damages may be awarded.
Such an award should be monetary equivalent of specific restitution which end result should be that the defendant gains nothing and the plaintiff suffers nothing. “The public interest in this case likewise suggests that where a stockholder seller is the victim of deliberate violations of 10(b) the Securities Exchange Act of 1934, and lob-5 promulgated hereunder, the victim should be allowed to avail himself of such remedy as will make violations of the Act unprofitable Since the requisites have been met the restoration of the status quo ante would be instructive to and, hence, beneficial to the general public. “… Where the property which was the subject of the actionable conduct no longer exists, the Court may decree that a money substitute take the place of the specific property which the plaintiff seeks to recover. ” The Court is satisfied that the American would have held onto the shares until presented with an opportunity to sell them at their fair value. This Court, sitting as a court of equity, possesses broad remedial power to award the plaintiff the monetary equivalent of rescission as rescission damages.
Such damages are defined as the difference between the fair value of the securities sold less the fair value of the consideration received. ” Gunman, president of a marine research company, Underwater Leagues, Inc. , buys all the stock in his company that he could get his hands on before he revealed to the public that his company conceived a dramatic new invention that enables one to breathe underwater by merely chewing a special kind of gum. He bought 50,000 shares at $10 per share.
After the announcement of this incredible new invention, the price of the stock soared to $50,000 per share, a fair market price considering the market potential of this amazing novel discovery. Gunman was rewarded with a sensational profit of $2 million on this securities scheme. In the derivative action suit brought by shareholders of Underwater Leagues, plaintiffs claim that Gunman owed the shareholders a fiduciary duty which he violated. Specifically he acted in violation of 17 C.
F. R. SASS. Bib-5 of the Securities and Exchange Commission Act of 1934 by committing securities fraud. In order to succeed on their llama, plaintiffs must show that Gunman’s actions meet the heightened standard of securities fraud required by the SALSA. The complaint must also “state with particular facts giving rise to a strong inference that the defendant acted with the above standards and 5240. 1 Bob-5, Kemp. In order to succeed in a claim of securities fraud under 5240. Bob-5 plaintiffs will have to show that Gunman (1) made omissions of material fact; (2) with sciences; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs’ reliance was the proximate cause of their injury, Lenten. Plaintiffs can show that Gunman acted with the required state of mind required under the Celebrates he deliberately withheld the information until be purchased as many shares as he could. They can specifically show how Gunman’s fraud had all the elements required in a claim of securities fraud underused. B-5. (1) Gunman failed to inform the public about his company’s amazing discovery until after he bought up as many shares as he could get his hands on. (2) He did this deliberately, because he knew, as president of the company, that once the word got out, the price of the stock would soar. (3) He researched shares of stock using the information that he had but did not disclose to the public. (4) He purchased stock from shareholders who relied on the fact that as president he would uphold his fiduciary duties and not deprive them of material information. 5) Because plaintiff shareholders relied on and trusted that Gunman would not be involved in a scheme to deceive them, and because they relied on Gunman to pay fair market value for their shares, they sold their shares to Gunman, and directly because of Gunman’s deceptive actions, they were deprived of the substantial profits that these shares would have afforded them. Because plaintiff have shown that Gunman’s actions included all of the specific elements required to show securities fraud, Gunman will be found guilty of fraud, Kemp.
Shareholders will file a complaint asserting claims for relief against Gunman based upon the circumstances surrounding his purchase of 50,000 shares of Underwater Leagues stock since all the requisite elements of an action under 17 C. F. R. S 240. 1 Bob-5, based upon nondisclosure were shown. (1) duty to disclose, (2) materiality, (3) sciences, (4) causation, and (5) reliance, American. (1) Aqua failed to disclose information about the discovery. 2) This information was material to the case. (3) He did so deliberately. (4) His actions were the direct cause of the shareholders’ loss. 5) Shareholders relied on Gunman’s duty to disclose. The courts will find that Gunman, as an insider, had a duty to disclose information that would affect their investment Judgment, American. Because Gunman’s actions were “intentional” and “fraudulent”, the court will find that Gunman has no defense, Ernst. The court will proceed to determine what relief is appropriate. Shareholders will want a settlement that reflects the difference in the price per share that they sold the stock for and the alee of the stock after the announcement.
Since the Securities Exchange Act of 1934 renders a contract made in violation of the Act avoidable at the option of the innocent party, shareholders may rescind the contract and recover their shares of the stock, thus restoring both parties to the “status quo ante”, American. If that remedy is for some reason not available or if the shareholders choose not to, the court will award rescission damages. Such an award should be monetary equivalent of specific restitution which end result should be that Gunman gains nothing and shareholders suffer nothing.
The shareholders will be awarded the $2,000,000 that Gunman gained in his fraudulent actions, American. If a president of that he deliberately withheld, he has committed security fraud and is in violation of 17 C. F. R. S 240. 1 Bob-5 of the Securities and Exchange Commission Act of 1934, because shareholders rely on his duty to disclose material information and his actions were the direct cause of shareholders loss. He will be held liable to the shareholders for damages in the amount that he caused the shareholders to lose and in the amount that he fraudulently gained.