162 F.2d 36 (3d Cir. 1947)
Zahn, a holder of Class A common stock of Axton-Fisher Tobacco Company, sued Transamerica Corporation in the District Court of the United States for the District of Delaware on his own behalf and on behalf of all stockholders similarly situated.1 His amended complaint asserted that Transamerica caused Axton-Fisher to redeem its Class A stock at $80.80 per share on July 1, 1943, rather than permitting participation in the assets upon liquidation of the company in June 1944.2 He alleged that participation in liquidation would have yielded $240 per share instead.3 Zahn presented two separate causes of action, one for Class A shares not turned back for redemption and another for those that were redeemed.4 He sought payment of liquidation value to non-surrendering shareholders and the difference for those who surrendered.5
Prior to April 30, 1943, Axton-Fisher had authorized and outstanding preferred stock, Class A stock, and Class B stock.6 The Class A stock was entitled to an annual cumulative dividend of $3.20 per share and, upon liquidation after preferred, to share with Class B in remaining assets at a two-to-one ratio.7 Each share of Class A was convertible into one share of Class B at the shareholder's option.8 All or any Class A stock was callable by the corporation at any quarterly dividend date upon sixty days’ notice at $60 per share with accrued dividends.9 Voting rights were vested in Class B stock, but Class A gained equal voting rights after four successive defaults in dividends, which had occurred since January 1, 1937.10
On May 16, 1941, Transamerica purchased 80,160 shares of Class B stock, about 71.5% of outstanding Class B and 46.7% of total voting stock.11 By March 31, 1943, Transamerica owned 30,168 shares of Class A, about 66% of that class, and 90,768 shares of Class B, about 80% of that class.12 Transamerica had control of and dominated the management, directorate, financial policies, business, and affairs of Axton-Fisher, having elected a majority of the board consisting largely of its own officers or agents.13
In the fall of 1942 and spring of 1943, Axton-Fisher's principal asset was leaf tobacco carried on books at $6,361,981 but with a market value of about $20,000,000 in March and April 1943, a fact known to Transamerica but not to public holders of Class A stock.14 Transamerica conceived a plan to redeem the Class A stock at $60 per share plus accrued dividends to appropriate the tobacco value to itself, followed by liquidation of Axton-Fisher.15 On April 30, 1943, the board of directors of Axton-Fisher, controlled by Transamerica, resolved to call the Class A stock.16 A large part of the tobacco and substantially all other assets were sold to Phillip-Morris Company, Ltd., Inc., after which Axton-Fisher was liquidated, preferred stock paid off, and the balance distributed to Class B stockholders, with warehouse receipts for remaining tobacco going to them.17
Zahn purchased 235 shares of Class A stock on four occasions between July 23 and August 10, 1943.18 Between August 2 and August 20, 1943, he surrendered 215 shares for redemption and retained 20 shares.19 The district court granted Transamerica's motion to dismiss the amended complaint for failure to state a cause of action.20 Zahn appealed to the United States Court of Appeals for the Third Circuit.21
Whether Transamerica owed fiduciary duties to Axton-Fisher's Class A stockholders when it directed the board to redeem their shares?22
The law of Kentucky imposes upon the directors of a corporation or upon those who are in charge of its affairs by virtue of majority stock ownership or otherwise the same fiduciary relationship in respect to the corporation and to its stockholders as is imposed generally by the laws of Kentucky's sister States.23 A director is a fiduciary.24 So is a dominant or controlling stockholder or group of stockholders.25 Their powers are powers in trust.26 Their dealings with the corporation are subjected to rigorous scrutiny.27 Where any of their contracts or engagements with the corporation is challenged, the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.28
Yes. Transamerica as the dominant stockholder elected and controlled the Axton-Fisher board through its own officers and agents.29 The board, acting at Transamerica's direction, called the Class A stock for redemption at the charter price while possessing exclusive knowledge of the tobacco's $20,000,000 market value.30 The call was followed immediately by sale of the tobacco and liquidation that channeled nearly all remaining value to Transamerica's Class B holdings.31
Because the redemption power was vested exclusively in the directors as fiduciaries and not in the stockholders, and because the directors acted as Transamerica's instruments rather than exercising independent judgment, the transaction was voidable in equity at the instance of injured Class A stockholders.32
Transamerica owed fiduciary duties to the Class A stockholders and breached those duties by directing the redemption for its own benefit.33
Whether Zahn may maintain an action to recover the difference between redemption proceeds and liquidation value for both redeemed and unredeemed shares?34
If the allegations of the complaint be proved, Zahn may maintain his cause of action to recover from Transamerica the value of the stock retained by him as that shall be represented by its aliquot share of the proceeds of Axton-Fisher on dissolution.35 It is also our opinion that he may maintain a cause of action to recover the difference between the amount received by him for the shares already surrendered and the amount which he would have received on liquidation of Axton-Fisher if he had not surrendered his stock.36
Yes. Zahn retained twenty shares after the redemption and surrendered two hundred fifteen shares.37 Under the fiduciary breach established above, the retained shares entitle him to their proportional share of the liquidation proceeds that would have been realized absent the improper call.38 The surrendered shares support recovery of the difference between the $80.80 redemption price actually received and the $240 per share liquidation value that would have been distributed had the call not occurred.39
The two asserted causes of action therefore merge into a single equitable claim for the full measure of harm caused by Transamerica's self-dealing.40
Zahn may maintain an action to recover the difference between redemption proceeds and liquidation value for both redeemed and unredeemed shares.41
Whether a purchaser of Class A stock after the April 30, 1943 redemption resolution may sue individually or in a representative capacity?42
We can find no Kentucky case, and none has been cited to us, which holds that the stockholder of a corporation, who seeks to maintain an action based on circumstances like those alleged in the instant case, must have owned his stock at the time of the happening of the events complained of.43 The Kentucky law in this regard seems to correspond with that of the other States of the United States.44 The suit at bar is not a derivative one.45 Zahn is not suing for the benefit of Axton-Fisher but on his own behalf and on that of the other Class A stockholders.46
Yes. Zahn acquired his two hundred thirty-five shares after the April 30 resolution yet without knowledge of the facts alleged to have been fraudulently committed by Transamerica.47 Because the action is direct rather than derivative, seeking recovery from Transamerica for harm to the Class A class rather than on behalf of the corporation, the contemporaneous-ownership requirement applicable to derivative suits does not apply.48 Kentucky precedent imposes no bar to post-transaction purchasers asserting direct claims of this character.49
A purchaser of Class A stock after the April 30, 1943 redemption resolution may sue individually or in a representative capacity.50
Whether the suit qualifies as a class action under Rule 23 of the Federal Rules of Civil Procedure?51
It appears from the pleading therefore that the suit at bar is a spurious class suit of the sort authorized by Rule 23(a)(3) of the Federal Rules of Civil Procedure. Zahn will insure adequate representation of the entire class of persons holding Class A stock of Axton-Fisher on and after April 30, 1943.52 Some 6,000 shares of Class A stock, at the time of the commencement of the instant suit, had not been delivered for redemption and these shares are presently outstanding.53 As regards both groups of Class A stockholders the shareholders are so numerous and so scattered in residence throughout the country and their average holdings are so small that it is impractical to bring them all before the court.54
Yes. Thousands of Class A shares remained outstanding at suit commencement.55 Holders were scattered nationwide with small average positions.56 Zahn's holdings and lack of conflict permit adequate representation of both the redeemed and unredeemed subgroups.57 These circumstances satisfy the requirements for a spurious class action under Rule 23(a)(3).
The suit qualifies as a class action under Rule 23 of the Federal Rules of Civil Procedure.58