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Merino Vinas v. Merino-Calenti, 93-1759 (1994)

Court: Court of Appeals for the First Circuit Number: 93-1759 Visitors: 19
Filed: May 23, 1994
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals United States Court of Appeals For the First Circuit For the First Circuit ____________________ No. 93-1759 VICTOR MERINO CALENTI, Plaintiff, Appellee, v. ALFONSO BOTO, ET AL. Merino's fellow directors did not favor redemption of the preferred shares.
USCA1 Opinion












United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
____________________

No. 93-1759

VICTOR MERINO CALENTI,

Plaintiff, Appellee,

v.

ALFONSO BOTO, ET AL.,

Defendants, Appellees,

____________________

RAFAEL MERINO VINAS, ET AL.,

Plaintiffs, Appellants.
____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Hector M. Laffitte, U.S. District Judge]
___________________
____________________

Before

Selya, Circuit Judge,
_____________
Bownes, Senior Circuit Judge,
____________________
and Stahl, Circuit Judge.
_____________
____________________

Patrick D. O'Neill with whom Anabelle Rodriguez and Martinez,
___________________ __________________ _________
Odell & Calabria were on brief for appellants.
________________
Guillermo J. Bobonis with whom Bobonis, Bobonis & Rodriguez
______________________ _______________________________
Poventud and Roberto Corretjer Piquer were on brief for appellees.
________ ________________________

____________________

May 23, 1994
____________________




















STAHL, Circuit Judge. Plaintiffs-appellants,
______________

shareholders in a closely-held and largely family-dominated

Puerto Rico corporation, brought this claim against certain

directors of the corporation, challenging the legality of a

proposed amendment to the corporation's articles of

incorporation. The amendment abrogated the corporation's

right to redeem preferred shares at par value, and plaintiffs

argued that the amendment violated federal securities law and

Puerto Rico corporations law. The district court, finding no

violation of either federal or Puerto Rico law, granted

summary judgment in favor of defendants. We remand the state

law claims, with the admonition that the district court

should consider dismissal without prejudice to plaintiffs'

right to bring those claims in state court. As to all other

issues, we affirm.

I.
I.
__

FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
________________________________________

Ferreteria Merino, Inc. (hereinafter "FMI" or "the

corporation") is a closely held Puerto Rico corporation which

sells hardware and home improvement products in Puerto Rico.

FMI's certificate and articles of incorporation (hereinafter

"the articles") establish two types of stock: common and

preferred.

The articles provide, inter alia, that preferred
_____ ____

shares shall have preference with respect to payment of



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dividends, but that such shares shall not be accompanied by a

right to vote in, be notified of, or participate in the

general meetings of the corporation. In addition, the

articles, which were drafted in 1939, establish a par value

of $100 per share for preferred shares. The articles go on

to provide that preferred shares are subject to redemption by

FMI upon payment of $100 per share.

Common stock, on the other hand, receives dividend

payment only after preferred stock dividends have been paid,

and does carry a right to vote in and be notified of general

meetings. While common stock was also assigned a par value

of $100 per share, there is no right of redemption for the

common stock. Historically, both common and preferred shares

have been sold at equivalent values. The market for shares

of common and preferred stock has always been largely, if not

wholly, among existing shareholders. Recent estimates value

both types of stock at between $800 and $1,200 per share.

In 1988, there was talk of selling the corporation.

Plaintiff Victor Merino Calenti (hereinafter "Merino"),1 who

was both a board member and a common stockholder of FMI,

suggested at a board of directors meeting that, prior to a

sale of the corporation, FMI should exercise its right to



____________________

1. Original plaintiffs consisted of a group including Victor
Merino Calenti, now deceased, and several other individuals.
For the sake of convenience, we refer to all plaintiffs-
appellants as "Merino."

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redeem all outstanding preferred stock for $100 per share, as

allowed in the articles. Merino's fellow directors did not

favor redemption of the preferred shares. This difference of

opinion between Merino and his fellow directors stemmed, as

both parties agree, from simple mathematics. Both parties

recognized that the $100 redemption price would allow the

corporation to repurchase preferred shares at a price far

below their apparent market value, and that, upon liquidation

or sale, the value of FMI common shares would benefit greatly

from such a purchase.2 Needless to say, Merino owned more

shares of common stock than preferred, and stood to benefit

from the purchase of preferred shares at a price that the

others considered to be artificially low, while the directors






____________________

2. Roughly speaking, the parties agree that the corporation
would be obtaining shares apparently worth $800 each for only
$100 each. A subsequent sale of the entire corporation at
full market value would reflect the $800 value, and holders
of common stock could pocket the $700 per share difference.
Nonetheless, many holders of common stock are also
____
holders of preferred stock. Shareholders so situated would
lose money in the initial buy-back of preferred shares, only
to regain it upon sale of the entire corporation. Thus, only
shareholders who own a preponderance of common stock would
truly benefit from the buy-back of preferred shares at $100
per share.
Moreover, we note sua sponte that stock prices
___ ______
fluctuate; that the current value of the corporate shares is
_______
not definitively known; that no sale of the corporation is
imminent; and that, depending on a wide range of variables,
redemption of preferred shares at $100 per share might not,
in the future, prove to be the bargain that the parties seem
to think it is.

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who opposed Merino's suggestion owned more preferred stock

than common.3

In response to Merino's proposal, the board first

sought the advice of a lawyer, one Matos, on the possibility

of converting all preferred shares to common shares. Matos

counseled against such a conversion. Instead of converting

the preferred shares to common shares, the board considered

and approved a resolution to amend the articles so that the

corporation no longer had a right to redeem preferred

shares.4 Nonetheless, in keeping with the articles, such an

amendment still had to be approved by a shareholder vote. On

June 13, 1990, notice was sent to all shareholders that there

would be a shareholders' meeting on July 28, 1990, to vote on

the resolution which the board had approved.

Before the meeting could be held, Merino filed this

action against his fellow board members, alleging, inter
_____

alia, that the proposal amounted to the issuance of a new
____

class of stock, and that the board's actions violated section

10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.

78j(b), (hereinafter "section 10(b)"), 17 C.F.R. 240.10b-5

(hereinafter "Rule 10b-5"), and Puerto Rico corporations law.


____________________

3. Initially, all shareholders held common and preferred
shares in equal proportions. It was only over time that
Merino came to hold a preponderance of common shares.

4. The articles expressly state, "The Corporation reserves
the right to partially amend or alter these articles of
incorporation in accordance with the current laws."

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Merino sought injunctive relief as well as a declaratory

judgment that the proposed amendment was illegal. After

settlement negotiations failed, defendants moved for summary

judgment.

The district court reasoned that there was no sale

of stock for purposes of section 10(b), and that no violation

of Puerto Rico law had occurred. It granted summary judgment

in favor of defendants, and this appeal followed.

II.
II.
___

DISCUSSION
DISCUSSION
__________

A. Standard of Review
______________________

A district court's grant of summary judgment is

subject to plenary review. Alan Corp. v. International
___________ _____________

Surplus Lines Ins. Co., No. 93-1697, slip op. at 6 (1st Cir.
______________________

April 22, 1994). We read the record indulging all inferences

in favor of the non-moving party. Id. Summary judgment is
___

appropriate only if there is no genuine issue as to any

material fact and the moving party is entitled to judgment as

a matter of law. Id.
___

B. Merino's Federal Securities Claims
______________________________________

The basis of Merino's claims under section 10(b)

and Rule 10b-5 is that the notice of the meeting which was

sent to shareholders failed to disclose material information,

such as the existence of the Matos opinion and the directors'





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relative ownership of preferred and common shares.5 Merino

argues that this inadequate notice amounted to a breach of

fiduciary duty.

We begin by noting that the Supreme Court has

expressly declined to extend the reach of federal securities

laws into the realm of substantive state corporations law.

Rather, it has noted that "[c]orporations are creatures of

state law, and investors commit their funds to corporate

directors on the understanding that, except where federal law

expressly requires certain responsibilities of directors with

respect to stockholders, state law will govern the internal

affairs of the corporation." Cort v. Ash, 422 U.S. 66, 84
____ ___

(1975). More specifically, the Court has expressly refused

to extend section 10(b) to causes of action based on breaches

of state law corporate fiduciary duties. See Sante Fe
___ _________

Indus., Inc. v. Green, 430 U.S. 462, 477-80 (1977). See also
____________ _____ ___ ____

Biesenbach v. Guenther, 588 F.2d 400, 402 (3d Cir. 1978)
__________ ________

(declining to apply section 10(b) to breach of fiduciary

duty); Golub v. PPD Corp., 576 F.2d 759, 764 (8th Cir. 1978)
_____ __________

(similar).




____________________

5. Since commencement of this action, the proposed amendment
has been approved at a shareholder meeting. Practically
speaking, the record shows that most, if not all,
shareholders were aware, or could easily have been made
aware, of the ramifications of the proposed amendment.
Merino continues to challenge the notice sent to shareholders
with regard to the meeting.

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Because shareholder meetings in general are an

issue governed by state law, see, e.g., Chapter 107, P.R.
___ ____

Laws Ann. tit. 14 1701-1717 (1989) (entitled "Meetings,

Elections, Voting and Notice"), and because Congress has

expressed no intent to extend federal securities laws into

the realm of fiduciary duties with regard to such meetings or

notices thereof, Merino presents no basis for a claim under

section 10(b) and Rule 10b-5.

Nonetheless, Merino has persisted in his argument

that the proposal of the amendment raised federal securities

issues. He has argued, both below and on appeal, that the

corporation's elimination of its own $100 redemption option

creates a new type of stock, and that notice of the July 28,

1990, meeting therefore constitutes notice of a "purchase or

sale" for section 10(b) purposes. More specifically, Merino

argues that prior to the proposal of the amendment, preferred

stock did not share in the equity of the corporation, and

that only subsequent to the amendment does the preferred
__________

stock now "partake[] of the attributes of common stock."

This line of argument is belied both by general principles of

corporate law and by the record before us.

Under general principles of corporate
law, preferred stock, although it has
privileges different from those of common
stock, is nevertheless a part of the
capital stock and has the characteristics
of capital stock. In other words,
preferred stock is generally understood
to represent an equity interest in the


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issuing corporation. . . . Thus holders
of preferred stock in a corporation
generally occupy, beyond the provisions
of their contract, a position no
different from that of holders of the
common shares, possessing all the rights
and being subject to the general
liabilities of ordinary stockholders.

18A Am. Jur. 2d Corporations 438 (1985) (footnotes
____________

omitted). Merino cites no authority from Puerto Rico or

elsewhere which suggests that this general rule does not

apply here. Nor does the record support any other

characterization of FMI's preferred shares.6

We conclude by noting that no preferred shares

changed ownership upon the enactment of the amendment, nor

have any shares been substituted for existing shares.7

Moreover, the essential elements of the preferred shares in

this case have at all times remained intact. The shares will





____________________

6. It appears from Merino's briefs that he viewed the pre-
amendment preferred shares as not sharing in the equity of
the corporation precisely because they were subject to
redemption at $100 per share. The foregoing authority
convincingly demonstrates that redemption options, as a
general matter, serve no such purpose. Moreover, Merino's
argument overlooks the fact that the redemption option need
never be exercised by the corporation.

7. Merino alludes in his brief to 17 C.F.R. 230.145, which
provides, inter alia, that "reclassifications" involving the
_____ ____
"substitution of one security for another security"
constitute sales of securities. Merino does not argue, nor
could he on the record, that "another security" is being
substituted for preferred shares. Accordingly, this case
presents no reclassification for purposes of 17 C.F.R.
230.145.

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continue to receive preferred dividends, and they gain no

voting rights.

In sum, the evil which Merino perceives, namely,

the participation of preferred shares in the equity of the

corporation, is not a by-product of the proposed amendment.

As far as the record indicates, FMI's preferred shares have

always shared, and will continue to share in FMI's equity.

Merino cites no authority, nor any record evidence, which

would allow us to conclude otherwise. Equally important is

the fact that no "purchase or sale" has occurred for section

10(b) and Rule 10b-5 purposes, nor has FMI created a new

class of stock by proposing to amend its articles to

eliminate FMI's right to redeem preferred shares.

Accordingly, the "nondisclosures" complained of failed to

implicate duties under federal securities law, and thus, the

district court did not err in dismissing Merino's federal

claims.

C. Merino's State Claims
_________________________

Merino also raised several state claims below,

arguing, inter alia, that the proposed amendment benefitted
_____ ____

preferred shareholders at the expense of common shareholders,

and that the directors' approval of the amendment amounted to

a breach of fiduciary duty. The district court disposed of

these claims by noting that common shareholders and preferred

shareholders "are, for the most part, comprised of the same



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people." Thus, the court saw no way in which the amendment

could be said to benefit one class of shareholders at the

expense of the other. Unfortunately, this observation does

not dispose of Merino's state law claims. We think it

uncontroversial that a director's fiduciary duty is owed to

all stockholders, including minority stockholders. Thus, the

mere fact that most of Merino's fellow stockholders also own

preferred shares does not mean that he is not owed a

fiduciary duty. Needless to say, we make no ruling on

whether such a duty under Puerto Rico law was breached.

On the record before us, however, we can go no

further. The record does not allow us to determine either

the nature or the scope of a fiduciary duty under Puerto Rico

law, or the manner in which such a duty would be applied to

the facts before us. Rather, the record only permits the

conclusion that summary judgment was improvidently granted on

this issue. On remand, we strongly recommend that the

district court reconsider its decision to exercise

supplemental jurisdiction over this issue of Puerto Rico law.

To the extent that the parties make other

arguments, they do so in a perfunctory manner, without any

attempt at developed argumentation. Such issues may be

deemed waived. See Wilson v. United States, No. 93-2025,
___ ______ _____________

slip. op. at 13 (1st Cir. May 4, 1994).

III.
III.
____



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CONCLUSION
CONCLUSION
__________

For the foregoing reasons, the order of the

district court granting summary judgment in favor of

defendants is

Affirmed in part, reversed in part, and remanded
___________________________________________________

for further proceedings consistent with this opinion. One-
_______________________________________________________ ____

half costs to appellees.
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Source:  CourtListener

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