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August 15, 1985

EDWARD P. JOHNSON, SR., et al., Plaintiffs,
E. C. ERNST, INC., et al., Defendants

The opinion of the court was delivered by: PARKER

 This matter is before the Court on plaintiffs' motion for summary judgment. Plaintiffs, Edward P. Johnson, Sr. and Edward P. Johnson, Jr., are shareholders of defendant E. C. Ernst, Inc. ("Ernst"). They are suing Ernst, its board of directors and The Philadelphia Bourse, Inc. ("Bourse"). The Bourse is a majority shareholder of Ernst.

 The plaintiffs bring their complaint under the Securities and Exchange Act of 1934 ("the Act"). They allege that Ernst, its directors and the Bourse, as aiders and abettors of those defendants, violated Section 14(a) of the Act and Securities and Exchange Commission ("SEC") Rule 14a-9, promulgated thereunder. They charge the defendants with issuing a Proxy Statement and Solicitation ("Proxy Statement") to Ernst shareholders containing materially false and misleading statements. The plaintiffs, as Ernst shareholders, seek a declaratory judgment and an injunction preventing the defendants from implementing the proxy proposals until the allegedly false and misleading statements are corrected through a resolicitation of the proxy.

 The matter has been fully briefed by the parties. Because there are essential material facts in dispute, the Court concludes that summary judgment is inappropriate and the plaintiffs' motion should be denied. The reasons for that conclusion are set out in the discussion which follows.



 This action arises out of a Proxy Statement and Solicitation mailed to Ernst's shareholders on October 11, 1983 and supplemented November 9, 1983. The Proxy Statement notified those shareholders of a special meeting to be held on November 22, 1983 *fn1" and solicited their votes on a proposal to amend Ernst's Articles of Incorporation to authorize additional shares of common stock at decreased par value and to approve the so-called Bourse Agreement providing for the issuance of newly authorized common stock to Bourse. If the proposal was adopted, the equity interests of the present shareholders would be markedly decreased and Bourse's equity interests in Ernst would be substantial.

 Ernst is an electrical construction and contracting firm. The plaintiffs were officers of Ernst until removed from their positions in 1978. On December 1, 1978, Ernst filed a petition for Chapter XI bankruptcy with the Bankruptcy Court in the Southern District of New York. Since that date, it has been operating as a debtor-in-possession. Ernst is currently attempting to obtain that Court's approval of a Plan of Arrangement ("the Plan") which would allow it to emerge from bankruptcy.

 One continuing financial problem for Ernst had been the refusal of its surety, the Travelers Indemnity Co. ("Travelers"), to provide performance and payment bonds for Ernst. That refusal had the adverse effect of preventing Ernst from obtaining new contracts. As a result, in 1979, Ernst and Travelers entered into an agreement whereby, among other things, Travelers agreed to issue surety bonds for new contracts and to guarantee a line of credit, secured by an interest in all of Ernst's assets. Ernst also granted Travelers an option ("the Option") to purchase all of its authorized but unissued stock at a specified price level. In 1981, a Plan of Arrangement was approved by Ernst's creditors subject to approval by the Bankruptcy Court.

 The Plan required financing and the Bourse became its source of financing. Travelers was necessarily involved in the discussions because it was both Ernst's surety and also a significant creditor. In August, 1983, Bourse, Ernst and Travelers entered into several agreements relative to the financing of the Plan. In one agreement Travelers assigned the Option and $832,112.40 in indebtedness to the Bourse in exchange for Bourse's indemnification of Ernst's surety bonds. Another agreement related to the issuance of bonds after emergence from bankruptcy and the settlement of Ernst's post-petition indebtedness to Travelers.

 A third agreement was made between Ernst and the Bourse ("the Bourse Agreement"). Under the agreement, Bourse would purchase 32 million shares of newly authorized common stock with a par value of $.01 for $1 million and 15,000 shares of cumulative, convertible preferred stock for $1.5 million. Bourse also agreed to arrange a $3 million line of credit for Ernst. In order to effectuate the Bourse Agreement, Ernst shareholders were required to approve an amendment of the Articles of Incorporation to authorize the issuance of up to 100 million shares of common stock and to decrease the par value of the stock from $.40 per share to $.01 per share. The Proxy Statement sought shareholder approval of the amendment to the Articles of Incorporation and of the Bourse Agreement.

 On October 4, 1983, the Bourse exercised the option to purchase all of the authorized and the unissued common stock of Ernst. *fn2" The Option was exercised at the par value of stock, $.40 per share by Ernst agreeing to cancel the $832,112.40 in debt assigned to Bourse by Travelers. Prior to the exercise of the Option, plaintiffs owned approximately 20 percent of the outstanding stock of Ernst. After the exercise of the Option, Bourse owned approximately 52 percent of Ernst's stock and the plaintiffs' equity was correspondingly reduced to less than 10 percent. If the Bourse Agreement is implemented, Bourse will own approximately 93 percent of the outstanding shares of Ernst stock and plaintiffs will own approximately two percent of Ernst shares.

 Since the Amendment to the Articles and the Bourse Agreement were approved in the special shareholders' meeting, the Plan needs only to be confirmed by the Bankruptcy Court. A confirmation hearing was scheduled for July 10, 1985. However, a favorable disposition of the pending motion for summary judgment in the instant case would invalidate the Proxy Statement, which is the partial basis for the financing of the Plan. The Bankruptcy Court proceedings have been postponed pending a ruling on the plaintiffs' motion for summary judgment.



 Plaintiffs contend that the Proxy Statement violated SEC Rule 14a-9. *fn3" ...

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