Amboy Bancorporation v. Bank Advisory Group, Inc.

432 F. App'x 102
CourtCourt of Appeals for the Third Circuit
DecidedApril 25, 2011
Docket10-1870, 10-1638
StatusUnpublished
Cited by7 cases

This text of 432 F. App'x 102 (Amboy Bancorporation v. Bank Advisory Group, Inc.) is published on Counsel Stack Legal Research, covering Court of Appeals for the Third Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Amboy Bancorporation v. Bank Advisory Group, Inc., 432 F. App'x 102 (3d Cir. 2011).

Opinion

OPINION

VANASKIE, Circuit Judge.

At issue on this appeal is whether misrepresentations in a proxy statement attributable to a law firm (Appellee Jenkens & Gilchrist (“Jenkens”)) and a consultant (Appellee The Bank Advisory Group, Inc. (“BAG”)) can be regarded as a proximate cause of the damages incurred by their client, Appellant Amboy Bancorporation (“Amboy”), as a result of a successful minority shareholder action in which it was determined that Amboy’s minority shareholders received substantially less than fair value for their shares in a cash-out corporate reorganization. The District Court interpreted the opinion of the Appellate Division of the New Jersey Superi- or Court in the minority shareholder action, Casey v. Brennan, 344 N.J.Super. 83, 780 A.2d 553 (N.J.Super.Ct.App.Div.2001), as holding that the misleading proxy statement was not material to the determination that minority shareholders were entitled to an award of damages measured by the difference between the price offered for their shares and the actual fair value of those shares. Based upon this interpretation, the District Court concluded that the misleading proxy statement could not have been a proximate cause of the damages Amboy incurred in the minority shareholder action. Contrary to the District Court’s interpretation, we find that the existence of misrepresentations in the proxy statement was regarded by the New Jersey state court as a material factor in its liability determination. Accordingly, we will vacate, in part, the District Court’s judgment in favor of Amboy and remand for further proceedings.

I.

As we write only for the parties, who are familiar with the facts and procedural history of this case, we relate only the information essential to our analysis.

In 1997, Amboy retained Jenkens and BAG to assist Amboy with its reorganiza *105 tion into a Subchapter S corporation under the Internal Revenue Code. To qualify for Subchapter S status, Amboy had to reduce the number of its shareholders from 420 to no more than 75. See 26 U.S.C. § 1361(b)(1)(A) (1996). To that end, Am-boy’s board of directors, who were also majority shareholders of Amboy, planned a cash-out merger of the minority shareholders. Amboy retained Jenkens to advise it in connection with the merger plan and retained BAG to render an opinion as to the “fair market value” of Amboy’s common stock. BAG determined that the “cash fair market value” of Amboy stock was $69.50 per share. BAG’S valuation included marketability and minority discounts. Amboy’s board of directors voted to pursue a Subchapter S election and, relying on BAG’s valuation, approved an offer price of $73 per share.

Jenkens prepared the proxy statement issued in connection with the merger. The proxy statement explained that if the merger plan is approved, shareholders who own 15,000 shares of Amboy or who purchase Amboy shares to increase their holdings to 15,000 shares would continue to be shareholders. All other shareholders, except for those who “perfect then-dissenters’ rights” in accordance with the provisions of the New Jersey Business Corporation Act, would receive $73 per share. (J.A. 418.) The proxy statement further provided that shareholders who receive cash for their shares pursuant to the merger would have no right to dissent from the merger. Additionally, the proxy statement related the board’s belief that the $73 per share price “represents a fair value.” (J.A. 407.) The proxy statement referenced BAG’S fairness opinion, which concluded that the $73 per share price was “fair, from a financial standpoint,” to the shareholders. (J.A. 408-10, 493.)

The directors who had initiated the transaction controlled sufficient shares to guarantee the merger’s approval, and on November 19, 1997, the merger was approved by the affirmative vote of more than the required two-thirds majority of the votes cast. The merger was completed on December 2,1997, and the shareholders received their checks on or about January 7, 1998. All shareholders except six accepted the $73 per share consideration.

Three separate actions were subsequently initiated against Amboy and its board of directors in New Jersey state court alleging that the defendants failed to offer the selling shareholders a price that represented the fair value for their shares. The actions were consolidated for trial in the Superior Court of New Jersey, Chancery Division, Union County, under the caption Casey v. Brennan. A class was certified consisting of all persons owning less than 15,000 shares of Amboy on November 19, 1997, whose shares were cashed out under the approved merger plan. Although Jenkens initially represented Amboy in the action, because the shareholders’ allegations concerning inadequate proxy statement disclosures necessarily implicated Jenkens as the preparer of the proxy statement, it withdrew as counsel to avoid a conflict of interest.

The trial judge rendered an oral opinion in April 1999. He found that the proxy statement “contained ... misleading statements of material facts and failed to disclose all material facts ... regarding the true fair value and future prospects of Amboy and the trae fair value of Amboy’s common stock.” (J.A. 603-04.) In finding the proxy statement materially deficient, the trial judge particularly relied on the fact that the proxy statement failed to disclose that the $73 per share offer price was derived first with the application of a 25% minority discount and then a 15% *106 marketability discount. The trial judge, however, refused to impose liability on the individual directors because he found that they relied in good faith on BAG and Jenkens in arriving at the $73 share price.

Concluding that the fair value was $90 per share, the trial court entered judgment in favor of all plaintiffs, with the exception of the shareholders who voted against the plan but then surrendered their shares in exchange for the offer price. 1 According to the trial court, those shareholders who voted against the plan were fully informed as to all material facts relating to the merger and, thus, acquiesced in the merger by accepting the merger consideration.

On appeal, the Superior Court of New Jersey, Appellate Division, affirmed the trial court’s finding that the proxy statement was materially misleading and inaccurate. The Appellate Division, however, reversed the trial court’s ruling that shareholders who voted against the plan but then cashed in their shares were estopped from recovery. Accordingly, all shareholders were found to be entitled to recovery. The Appellate Division also reversed the trial court’s determination of fair value and remanded the matter.

Ultimately, following a second remand, the Appellate Division affirmed the trial court’s determination that the fair value of Amboy stock was $114 per share. As a result of this finding, Amboy was required to pay approximately $33 million to its minority shareholders.

In 2002, Amboy initiated this action in the Superior Court of New Jersey, Law Division, against Jenkens and BAG asserting claims for professional negligence, breach of fiduciary duty, and breach of contract.

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432 F. App'x 102, Counsel Stack Legal Research, https://law.counselstack.com/opinion/amboy-bancorporation-v-bank-advisory-group-inc-ca3-2011.