Merino Vinas v. Merino-Calenti

• Court: Court of Appeals for the First Circuit
• Decided: May 23, 1994
• Docket: 93-1759
• Status: Published

Opinion

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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                                          3

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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                                          4

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."

                                         -5-
                                          5

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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                                          6

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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                                          7

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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                                          9

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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                                          10

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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