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White v. Investors Management Corp.

decided: November 6, 1989.


Appeal from the United States District Court for the Eastern District of North Carolina, at Raleigh. James C. Fox, District Judge. CA-87-831-5-CIV.

Russell and Hall, Circuit Judges, and Knapp, Senior United States District Judge for the Southern District of West Virginia, sitting by designation.

Author: Russell

RUSSELL, Circuit Judge

The plaintiff Richard M. White (hereafter "White") asserts in his complaint that the defendant Investors Management Corporation (hereafter "IMC") and its directors improperly and fraudulently sought, in redeeming the plaintiff's stock in IMC, to deprive him of the proper amount due under the redemption. The defendants contend this proposed payment in redemption was as authorized under its Articles of Incorporation.*fn1 The Articles of Incorporation of IMC provide two methods of redeeming the Special Common Stock in such corporation owned by the plaintiff. One of such methods contemplates a "complete" redemption and the other a "partial" redemption. The importance of the distinction lies in the formulae separately provided for calculating the amount to be paid a Special Stockholder under the methods of redemption. The formula for payment in the case of a "complete" redemption contemplates a price in reduction more than two times that authorized in the case of a "partial" redemption. The real controversy is that the plaintiff contends he is entitled to the amount payable on the ground that the redemption of his stock was a part of a "complete" stock redemption, whereas the defendants contend the redemption was "partial." The district judge concluded on the defendants' motion for summary judgment that it was clear from the Articles of Incorporation that the redemption was "partial" and that the plaintiff's right of payment for his stock was as provided for such "partial" redemption.

The plaintiff moved under Rule 60(b), Fed.R.Civ.P., to set aside the judgment. In support he relied on the express language of the resolution of the board of directors of IMC under which the redemption was effected. The district judge, however, dismissed the motion on two grounds: (1) that the minutes on which the plaintiff primarily based his motion had been available to plaintiff since August 18, 1987 (the order granting summary judgment was dated January 28, 1988) and was not newly-discovered evidence; and (2) that "the relevant text of the April 3, 1986 resolution by the IMC board of directors [authorizing the redemption] establishes that the directors unquestionably voted to redeem the stock [as] a partial redemption." The plaintiff has appealed the denial of such motion and the judgment entered thereon.

We reverse.


The plaintiff was initially the owner of 500 shares of stock in the corporation Mid-South Holding Company (hereafter "Mid-South"). Mid-South and the defendant IMC were related corporations with similar management and some overlap in ownership. Both had a common interest in the subsidiary Golden Corral Corporation (hereafter "GCC"), which operated a profitable and expanding chain of family steakhouse restaurants. In late 1981 the management of IMC and Mid-South developed a plan for the merger of Mid-South into IMC. The purpose of such merger was to protect the management of the three corporations (IMC, Mid-South and GCC) from possible stockholders' objections to their "innovative compensation programs," and to eliminate on a staggered basis all public stockholders (such as the plaintiff) who might be critical of such "programs." The proponents of the merger (consisting primarily of the management in both instances) sought to accomplish this result through a redemption program which would "enable [the public stockholders] to realize a fair value for their shares" but, at the same time, to provide for the elimination of any public ownership.

Under the proposed merger, the old Mid-South stock would be exchanged for a new class of IMC stock. This new stock was to be designated as "Special Common" stock and was to be subject to redemption by the corporation either by way of a "complete" redemption as provided in subsection 4(a) of the Articles of Incorporation or by way of a "partial" redemption, as provided under 4(b) of such Articles. The two methods of redemption, however, could result in very different payment for the stock redeemed with an advantage to the redeemed stockholder in a "complete" redemption over a "partial" redemption. In addition to this difference in method of redemption, the corporate directors could also affect the price to be paid for the redeemed stock by fixing the time for the redemption (whether in a profitable or depressed quarter). In their proxy statement recommending the merger to the stockholders of the two entities the IMC, under the heading SAFEGUARDS FOR HOLDERS OF SPECIAL COMMON, assured the stockholders of the merged corporation that "Shares of Special Common will be redeemed by using whatever method yields the highest per share price."

The proposed merger was approved in early 1982, and the plaintiff received two shares of Special Common Stock of IMC at that time in exchange for his Mid-South stock.

Unknown to the plaintiff, the management of IMC embarked in late 1985 on a plan to eliminate the entire issue of Special Common Stock. As a step in this plan, the defendants made an offering solely to all "employees, former employees and other insiders and 'quasi-insiders'" of a new Class C Nonvoting Common Stock in exchange for their Special Common Stock. As a result of this and the purchases of certain Special Common Stock, IMC claimed to have reduced the number of outstanding Special Common Stock to 96 shares as of April 4, 1986. By letter dated April 5, 1988, IMC advised the plaintiff that it was redeeming his stock along with all other outstanding Special Common Stock under Article 4(b) of the Articles of Incorporation.

The material attached to IMC's letter of April 5 purported to explain the proposed redemption by identifying the original number of "Special Common" stock as 540 shares, thirty percent (30%) of which was 162 shares. It declared that there were only 96 shares of such stock outstanding, and that, under 4(b), it had the right to redeem the plaintiff's stock at a partial redemption price of $31,877 per share, citing Article 4(b) of the Articles of Incorporation. The notice given plaintiff did not refer to or quote any specific corporate resolution authorizing such redemption.

The plaintiff responded to this notice by demanding payment, claiming the redemption had been a "complete" redemption. Under his contention, the plaintiff would have been entitled to $87,068.47 per share or a total of $174,136.93. When denied such relief by the corporation, ...

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