Gandal v. Telemundo Group, Inc.

Citations: 302 U.S. App. D.C. 359; 997 F.2d 1561; 1993 WL 264482Docket: Nos. 92-7036, 92-7037 and 92-7039

Court: Court of Appeals for the D.C. Circuit; July 20, 1993; Federal Appellate Court

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Alvin Gandal, a warrantholder of a corporation, appeals the district court's dismissal of his tort claims against three defendants and a contract claim against Telemundo Group, Inc., whose damage remedy Gandal also contests. Telemundo and the tort defendants cross-appeal, with the tort defendants challenging the district court's personal jurisdiction over them. Following Telemundo’s bankruptcy, the court focuses solely on Gandal's tort claims, ultimately reversing the district court's jurisdiction ruling. 

Prior to the events, John Blair Company was a Delaware-incorporated public firm with subsidiaries, including ADVO System, Inc. In April 1986, MeFadden Acquisition Corporation made a conditional tender offer for Blair’s stock, which Blair’s board rejected as inadequate. The board sought a better proposal, leading to Reliance Capital Corporation's two-tiered offer: cash for 60% of shares and a merger to convert remaining shares into high-yield debentures, along with a spin-off of ADVO shares. Following Reliance's public offer, both it and MeFadden increased their bids. On June 19, 1986, Reliance proposed $31.00 cash for 60% of shares, with the remaining shares exchanged for a bond, accruing interest over time. The offer required pro rata purchase of tendered shares, effectively valuing them at a blended rate. On July 3, the day Reliance's offer was to close, Blair announced a $1.50 cash dividend, increasing the tender offer's value.

Reliance's tender offer succeeded, leading Blair's board to declare a cash dividend and a stock dividend of 2.57 ADVO shares on August 19, 1986, with a record date set for September 5, 1986. On September 15, 1986, Blair shareholders, except Reliance—which owned 60% of Blair shares—received their dividends. The formal merger occurred on December 24, 1986, resulting in the remaining Blair shares converting to junk bonds and Blair ceasing to exist.

Restricted shares held by certain Blair employees did not vest until a change in control occurred, which meant they wouldn't vest under Reliance’s offer until after the tender offer was successful. Consequently, these shareholders would only receive junk bonds and dividends, facing significant federal tax implications since vesting would require them to recognize the full share value as ordinary income. To mitigate this, the board decided to buy back the restricted shares for $20.75 in cash, 2.57 shares of ADVO, and a $1.50 cash dividend, totaling $22.25 plus 2.57 ADVO shares for the restricted shareholders. This offer was well-received, with over 100,000 restricted shares purchased by Blair on September 4, 1986.

Additionally, Blair had issued warrants in September 1984, allowing holders to purchase shares at $36.75 until September 15, 1989, with anti-dilution clauses in case of a merger or stock dividend. Warrantholders were entitled to the same merger consideration as shareholders but not to cash dividends declared before exercising their options. Alvin Gandal purchased 13,000 warrants before the merger announcement and over 100,000 after Reliance's tender offer was publicized. Following the merger agreement, Blair stated that warrant holders would receive ADVO shares and junk bonds upon exercising their warrants but denied them the cash dividend based on the warrant agreement's clauses. Gandal contested this, leading to a class action lawsuit, which resulted in a settlement of $8.75 per warrant, though Gandal opted out except for certain warrants due to a broker error. As of the settlement, ADVO shares traded at $12.75, but by October 1987, both ADVO and the warrants' prices plummeted, and Gandal held his warrants until expiration.

One month prior to the expiration of warrants, Gandal proposed to exercise them if Blair compensated him with the full amount he believed he was owed, which included ADVO shares, a cash dividend, and insider compensation. This offer was rejected by Blair's agent. On the warrants' expiration date, Gandal filed a lawsuit in district court, asserting contract and tort claims against multiple defendants. He argued that the warrant agreement entitled him to both a $1.50 cash dividend and $20.75, which Blair paid for restricted shares. Gandal alleged that Blair's chairman, Jack Fritz, and executive vice president, Hugh Beath, breached their fiduciary duties by making that payment. He also claimed that Reliance interfered with his contractual relations with Blair. The district court initially denied a motion to dismiss for lack of personal jurisdiction against Reliance, Fritz, and Beath. After discovery, Gandal sought partial summary judgment regarding Telemundo's liability under the warrant agreement. The defendants moved for summary judgment against all of Gandal's claims, resulting in the dismissal of all claims except for the $1.50 cash dividend claim, on which Gandal was granted summary judgment, with Telemundo held liable for damages of $1.50 per warrant. The court determined that the cash dividend was part of the merger consideration for Blair stockholders, making it payable to warrantholders. The judge emphasized the need for Gandal to mitigate damages, stating that if the total value of alternative assets was ever greater than the option price of $36.75, Gandal should have exercised the option despite the corporation’s denial of the dividend. Gandal appealed the dismissal of his tort claims and the rejection of equal compensation with restricted shareholders, also seeking specific performance. Conversely, Reliance, Fritz, and Beath appealed the jurisdiction ruling, while Telemundo contested the liability and damages decisions. Involuntary bankruptcy proceedings were initiated against Telemundo, automatically staying proceedings against it, but not affecting the other defendants.

The opinion addresses Gandal’s tort claims against three defendants, excluding any issues related to Telemundo. Gandal alleges injury due to Reliance’s tortious interference with his contract with Blair and Fritz and Beath’s breach of fiduciary duty. The resolution of these claims hinges on complex legal questions, such as the applicable law (Delaware or New York), whether board members owe fiduciary duties to warrantholders, and if such duties were breached. However, the court finds it unnecessary to address the merits of these claims, as it determines the district court lacked personal jurisdiction over the defendants.

Gandal argues that personal jurisdiction exists under the District of Columbia’s long-arm statute, which permits jurisdiction for tortious injuries caused by acts outside the District if the defendant has sufficient contacts there. The statute requires that an injury must occur within the District, which Gandal claims happened due to his residence there. His residence began on December 1, 1986, and he asserts his injury is related to a merger finalized on December 24, 1986. 

The court notes that Gandal's contract rights were not interfered with by the shareholder vote, as it was merely procedural; Reliance had already secured a majority of shares by July 3, 1986. Thus, any tortious interference occurred prior to December 1, 1986, during the summer of 1986 when merger terms were established. Gandal bears the burden of proving personal jurisdiction, but he has not identified any events post-December 1, 1986 that demonstrate jurisdiction based on his claims.

Gandal claims that Fritz and Beath breached their fiduciary duty to warrantholders by approving advantageous treatment of restricted shares. However, the board addressed this treatment in the summer of 1986, prior to the completion of the tender offer. The alleged breach ceased when Blair purchased the restricted shares on September 4, 1986. Consequently, even if Gandal's allegations are valid, he experienced his injuries before December 1, 1986, and thus lacked injury in the District. Legal precedent stipulates that a plaintiff cannot establish jurisdiction in the District merely by relocating there post-injury (citing Leaks v. Ex-Lax, Inc.). As a result, the district court lacked personal jurisdiction over the three tort defendants and erred in not dismissing the claims against them. Gandal contends that the tort defendants contributed to this error by not opposing a co-defendant's motion to transfer the case to New York. However, the tort defendants did not object to either the motion to transfer or its subsequent withdrawal, and their previous motion to dismiss for lack of personal jurisdiction renders their silence inconsequential.