Wright v. Heizer Corp.

503 F. Supp. 802
CourtDistrict Court, N.D. Illinois
DecidedOctober 28, 1980
Docket72 C 2536
StatusPublished
Cited by5 cases

This text of 503 F. Supp. 802 (Wright v. Heizer Corp.) is published on Counsel Stack Legal Research, covering District Court, N.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Wright v. Heizer Corp., 503 F. Supp. 802 (N.D. Ill. 1980).

Opinion

MEMORANDUM DECISION

MARSHALL, District Judge.

We have four issues to resolve in this shareholder derivative suit brought on behalf of International Digisonics Corporation (IDC) against defendant Heizer Corporation (Heizer). Plaintiffs alleged that Heizer defrauded IDC in a series of five transactions in which Heizer purchased IDC preferred stock and made loans in exchange for both demand notes and stock warrants. After we rendered our decision, 411 F.Supp. 23 (D.C.Ill.), the Court of Appeals affirmed in part and vacated in part, with directions to modify. Wright v. Heizer Corp., 560 F.2d 236 (7th Cir. 1977). The issues now awaiting resolution are (1) the adjustment of the maturities of the demand notes held by Heizer, (2) the amount of attorney’s fees, if any, to be awarded to plaintiffs, (3) whether those fees should be assessed against Heizer and (4) whether IDC should be compelled to redeem the preferred stock held by Heizer.

FACTS

The facts underlying plaintiffs’ complaint were set forth in great detail in our original memorandum decision and in the Court of Appeals decision. Thus we will limit our description of the facts to those necessary to provide an understanding of the remaining issues.

In a series of five transactions beginning in November, 1969, Heizer invested in IDC through the purchase of IDC preferred stock and the exchange of demand loans in return for stock warrants. In the first transaction, in November, 1969, Heizer purchased 100,000 shares of newly created Class A common stock at $10 per share. In addition, IDC gave Heizer a warrant to purchase 155,000 shares of IDC common stock at $8.50 per share. The warrant contained an antidilution clause which reduced the price to Heizer in the event IDC issued or sold common stock at less than $8.50. Heizer agreed to lend IDC up to $500,000 with interest at 2% over prime. This $500,-000 sum was loaned to IDC in May, 1970.

In September, 1970, IDC and Heizer consummated the second transaction. IDC amended its certificate of incorporation to authorize 350,000 shares of a new class of preferred, stock, carrying a weighted vote of 4.4 votes per share on all shareholder votes. Heizer exchanged the 100,000 shares of Class A common issued in the first transaction for 100,000 shares of the new preferred and purchased 200,000 additional shares at $10 per share in two takedowns of $1,000,-000 each. After the second takedown, IDC issued an additional warrant to purchase 400,000 shares of IDC common at $6 per share, with an antidilution clause identical to the one employed in the first transaction.

The third transaction occurred in May, 1971. IDC amended its certificate of incorporation to increase the authorized common stock to 3,000,000 shares. IDC sold Heizer a twenty-year senior note in the principal amount of $1.7 million and issued additional warrants to purchase 472,222 shares of IDC common at $3.60 per share. The purchase price in the warrants issued in the first two transactions was adjusted to $3.60 per share and the number of shares purchasable under the warrants was increased to 276,223 for the first transaction and 555,555 for the second transaction. Thus by the conclusion of the third transaction Heizer could purchase 1,304,000 shares of common stock at $3.60 per share.

The fourth transaction, consummated in November, 1971, provided for loans of up to $600,000 by Heizer to IDC through sale of a note by IDC to Heizer payable on demand after March 31,1972. If the entire $600,000 was loaned but not timely paid, Heizer could convert it into common stock at $1.00 per share. If the note became convertible, then the prices on the warrants from the first three transactions would be decreased from $3.60 per share to $1.00 per share and the number of shares purchasable would increase from 1,304,000 to 4,694,400. IDC amended its certificate of incorporation in *806 creasing the number of authorized common shares from 3,000,000 to 7,000,000.

On March 13, 1972, the November, 1971 agreement was amended to provide for an additional loan from Heizer to IDC of an amount up to $250,000. On March 13, Heizer loaned $105,000 of this amount to IDC. In addition, IDC issued a demand note in the amount of $114,508 to cover management services Heizer had performed for IDC. IDC was unable to repay any of the fourth transaction loans by March 31, 1972 and thus all warrants held by Heizer became exercisable at $1.00 per share. This gave Heizer the right to purchase 5,513,000 shares of IDC common stock, representing 87% of IDC’s pro forma common stock equity. Between April 14, 1972 and April 19, 1973, Heizer loaned IDC an additional $2,015,000 in demand loans.

On October 11, 1972 the plaintiffs brought this action seeking to enjoin Heizer’s exercise of the stock warrants and to obtain rescission of the first four transactions. Then on June 8, 1973, in the fifth transaction, Heizer agreed to refrain from demanding payment on the notes totalling $819,508 issued pursuant to the fourth transaction and demand notes totalling $2,015,000 issued between April 14, 1972 and April 19, 1973. In addition, Heizer agreed to make further demand loans to IDC in the maximum amount of $1,181,700 and a minimum of $460,400. IDC pledged all of the stock of its wholly owned subsidiary Talent and Residuals, Inc. (TR) to Heizer as security for the demand note loans made after April 14, 1972. Plaintiffs amended their complaint to challenge the fifth transaction as well as the first four.

In our memorandum decision of December 3,1975, following a bench trial, we held that plaintiffs, as shareholders of IDC, could maintain the action derivatively on behalf of IDC, but not on their own behalf. We then held that plaintiffs had not proved a 10b-5 violation with respect to the first three transactions. We concluded that although Heizer had driven a hard bargain, IDC was badly in need of cash, and IDC’s directors, counsel, and shareholders had been fully informed and that the directors were independent of Heizer’s control.

We held, however, that Heizer had violated Rule 10b-5 in the fourth and fifth transactions. Because by the fourth transaction Heizer’s agents were on IDC’s board and held votes essential to the consummation of these transactions, we held that Heizer had a heavy burden of proving the fairness of these transactions. We noted that in the fourth transaction, Heizer, for an additional investment of only $600,000, had increased its claim on IDC’s common equity from 1,304,000 shares at $3.60 per share to 4,694,-000 (and after additional demand loans 5,513,000) shares at $1.00 per share. We also found that Heizer’s valuation of IDC stock at $1.00 per share was inadequate and that Heizer had dealt unfairly with IDC. We held that the fifth transaction was also unfair. After the fourth transaction, Heizer could, through the warrants and convertible notes, capture 87% of IDC’s equity and the profitable TR. Thus Heizer, by obtaining the pledge of TR stock in the fifth transaction, was attempting to protect itself from the outcome of this litigation. We noted that “[i]t is difficult to conjure a more blatant breach of trust.” Wright v. Heizer Corp., 411 F.Supp. at 37.

We ordered the notes from the fourth and fifth transactions declared nonconvertible, and we voided any provision in the fourth transaction which permitted an increase of issuable common shares of IDC in excess of 1,304,000 or which permitted the exercise of a warrant at a price less than $3.60 per share.

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Bluebook (online)
503 F. Supp. 802, Counsel Stack Legal Research, https://law.counselstack.com/opinion/wright-v-heizer-corp-ilnd-1980.