United States Court of Appeals
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.
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
-2-
2
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."
-3-
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.
-4-
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.
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'
-6-
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.
-7-
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
-8-
8
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.
-9-
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
-10-
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.
-11-
11
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.
-12-
12