Merino Vinas v. Merino-Calenti, 1st Cir. (1994)

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 Martin

___________________
__________________
______
Odell & Calabria were on brief for appellants.
________________
Guillermo J. Bobonis with whom Bobonis, Bobonis & Rodrig
______________________
____________________________
Poventud and Roberto Corretjer Piquer were on brief for appellees.
________
________________________
____________________
May 23, 1994
____________________
STAHL,
shareholders
Puerto Rico
in a closely-held
claim against certain
the corporation, challenging the
amendment
incorporation.
Plaintiffs-appellants,
and largely family-dominated
corporation, brought this
directors of
proposed
Circuit Judge.
______________
The
to
the
amendment
corporation's
abrogated the
legality of a
articles
of
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
the district
claims,
should
with the
admonition
consider dismissal
right to
that
without prejudice
bring those claims in state court.
court
to plaintiffs'
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
FMI's certificate and
"the
improvement products in Puerto Rico.

articles of incorporation (hereinafter
articles") establish
two types of
stock:
common and
preferred.
The
shares
shall
articles provide,
have preference
-22
inter alia,
_____ ____
with
respect
that preferred
to payment
of
dividends, but that such shares shall not be accompanied by a

right
to
general
vote in,
meetings
articles, which
be notified
of
the
of,
or participate
corporation.
In
addition,
were drafted in 1939, establish
of $100 per share for preferred
shares.
in the
the
a par value
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
payment only after preferred
hand, receives dividend
stock dividends have been paid,
and does carry a right to vote in and be

meetings.
of $100
While common
per share, there
common stock.
notified of general
stock was also assigned a

is no right of
par value
redemption for the
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
was
both a
suggested
sale
Victor Merino Calenti (hereinafter "Merino"),1 who

board member
at a board of
of the
and a
common stockholder
directors meeting that,
corporation, FMI should
exercise its
of FMI,
prior to a
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."
-33
redeem all outstanding preferred stock for $100 per share, as

allowed in the
articles.
Merino's fellow directors
favor redemption of the preferred shares.

opinion between
both parties
recognized
corporation
Merino and his fellow
agree, from
that the
to repurchase
This difference of
directors stemmed, as
simple mathematics.
$100 redemption
did not
Both parties
price would
preferred shares
at a
allow the
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
shares of common
from the purchase
Needless to say,
Merino owned more
stock than preferred, and stood

of preferred
shares at a
to benefit
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.
-44
who opposed Merino's
suggestion owned
more preferred
stock
than common.3
In response
sought
to Merino's proposal,
the board first
the advice of a lawyer, one Matos, on the possibility
of converting all
preferred shares to common
counseled against
such a conversion.
the preferred
shares to common shares,
and approved a resolution
shares.
Matos
Instead of converting
the board considered
to amend the articles so
that the
corporation
shares.4
no
longer
had
right
Nonetheless, in keeping with
to
redeem
preferred
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
alia, that the

____
proposal amounted
members,
alleging,
to the issuance
of a
inter
_____
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."
-55
Merino
sought injunctive
judgment
that the
relief
proposed
as well
amendment was
settlement negotiations failed,
as a
declaratory
illegal.
After
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
______________________
subject
district court's
to
plenary review.
grant of
Alan Corp. v.
___________
Surplus Lines Ins. Co., No. 93-1697,

______________________
April 22, 1994).
summary
judgment is
International
_____________
slip op. at 6 (1st Cir.
We read the record indulging all inferences
in favor of the non-moving party.
Id.
___
appropriate
genuine
only
if there
is no
Summary judgment
issue as
is
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'
-66
relative ownership
argues
of preferred and common
that this inadequate
shares.5
notice amounted to
Merino
a breach of
fiduciary duty.
We
begin
by noting
expressly declined to extend

laws into
Rather, it
state
the realm
has noted
law, and
that
the
Supreme Court
the reach of federal securities
of substantive state
corporations law.
that "[c]orporations are
investors
has
commit their
creatures of
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
affairs of
the corporation."
(1975).
govern the internal
Cort v. Ash, 422

____
___
More specifically, the Court
U.S. 66, 84
has expressly refused
to extend section 10(b) to causes of action based on breaches

of state
law
corporate
fiduciary
duties.
See
___
Indus., Inc. v. Green, 430 U.S. 462, 477-80 (1977).

____________
_____
Biesenbach v.
__________
(declining
Guenther,
________
to apply
588 F.2d
section
400, 402
10(b) to
Sante Fe
_________
See also
___ ____
(3d Cir.
breach of
1978)
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.
-77
Because
issue governed
Laws Ann.
shareholder meetings
by state
tit. 14
law, see, e.g.,

___ ____
1701-1717 (1989)
in
general
are
Chapter 107,
an
P.R.
(entitled "Meetings,
Elections,
Voting
expressed no
and Notice"),
intent to
and
because Congress
extend federal securities
has
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
that the proposal of
issues.
has persisted in
his argument
the amendment raised federal securities
He has argued, both
below and on appeal,
corporation's elimination of its
own $100 redemption
creates a new type of stock, and that notice of

1990, meeting therefore constitutes
sale" for section 10(b)
purposes.
that the
option
the July 28,
notice of a "purchase or
More specifically, Merino
argues that prior to the proposal of the amendment, preferred

stock did not
share in
the equity of
the corporation,
that
only subsequent
__________
to
the amendment
stock
now "partake[]
of
the attributes
does the
of common
and
preferred
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
-88
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.
omitted).
elsewhere
apply
2d
Corporations
____________
Merino
cites no
which suggests
here.
Nor
authority
that
does
438
the
(1985)
from Puerto
this general
record
(footnotes
Rico or
rule does
support
any
not
other
characterization of FMI's preferred shares.6

We
conclude by
noting
changed ownership
upon the
have
been
any
shares
Moreover, the
that
no preferred
enactment of the
substituted
for
essential elements of the
shares
amendment, nor
existing
shares.7
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 preamendment 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.
-99
continue
to receive
preferred dividends,
and they
gain no
Merino perceives,
namely,
voting rights.
In sum,
the evil which
the participation of
corporation, is
As
preferred shares in
not a by-product of
far as the record indicates,
always shared, and

Merino
cites no
would allow us to
the
the
the proposed amendment.
FMI's preferred shares have
will continue to
authority, nor
the equity of
share in FMI's
any record
conclude otherwise.
equity.
evidence, which
Equally important
is
fact that no "purchase or sale" has occurred for section
10(b)
and Rule
class
of
eliminate
stock
FMI's
10b-5 purposes,
by
proposing
right
to
nor has
to
amend
redeem
FMI created
its
a new
articles
preferred
to
shares.
Accordingly, the
"nondisclosures"
implicate duties under federal

district
court did
not err
complained of
failed
to
securities law, and thus, the

in dismissing
Merino's federal
claims.
C. Merino's State Claims
_________________________
Merino
arguing, inter
_____
also raised
several
state
alia, that the proposed

____
claims
below,
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
-1010
people."
Thus, the court saw
could be said
expense of
not
to benefit
the other.
dispose of
no way in which the amendment
one class of
Unfortunately,
Merino's
state law
shareholders at
the
this observation does

claims.
We
think
it
uncontroversial that
a director's fiduciary duty
is owed to
all stockholders, including minority stockholders.

mere fact that
Thus, the
most of Merino's fellow stockholders also own
preferred
shares does
fiduciary
duty.
not
mean
Needless
that
to say,
he
we
is
not
make no
owed
ruling
a
on
whether such a duty under Puerto Rico law was breached.

On
further.
the record
before us,
The record does
however,
not allow us
we can
go no
to determine either
the nature or the scope of a fiduciary duty under Puerto Rico

law, or the manner in
the facts before
us.
which such a duty would be

Rather, the record
applied to
only permits
the
conclusion that summary judgment was improvidently granted on

this
issue.
district
On
court
remand, we
reconsider
strongly
its
recommend
decision
to
that the
exercise
supplemental jurisdiction over this issue of Puerto Rico law.

To
the
arguments, they
attempt
at
extent
do so in
that
the
See
___
make
a perfunctory manner,
developed argumentation.
deemed waived.
parties
Wilson v.
______
United States,
_____________
slip. op. at 13 (1st Cir. May 4, 1994).

III.
III.
____
-1111
Such
other
without any
issues may
be
No. 93-2025,
CONCLUSION
CONCLUSION
__________
For
district
court
the
foregoing
granting
reasons,
summary
the
judgment
order
of
the
in
favor
of
defendants is
Affirmed in part, reversed in part, and remanded
___________________________________________________
for further proceedings consistent with this opinion.
_______________________________________________________
half costs to appellees.
________________________
One____
-1212

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USCA1 Opinion

United States Court of Appeals

Patrick D. O'Neill with whom Anabelle Rodriguez and Martin

claim against certain

the corporation, challenging the

and largely family-dominated

corporation, brought this

right to redeem preferred shares at par value, and plaintiffs

The district court, finding no

summary judgment in favor of defendants.

We remand the state

bring those claims in state court.

(hereinafter "FMI" or "the

corporation") is a closely held Puerto Rico corporation which

improvement products in Puerto Rico.

dividends, but that such shares shall not be accompanied by a

were drafted in 1939, establish

of $100 per share for preferred

to provide that preferred shares are subject to redemption by

hand, receives dividend

stock dividends have been paid,

and does carry a right to vote in and be

stock was also assigned a

redemption for the

Historically, both common and preferred shares

have been sold at

of common and preferred stock has always been largely, if not

both types of stock at between $800 and $1,200 per share.

Victor Merino Calenti (hereinafter "Merino"),1 who

directors meeting that,

corporation, FMI should

redeem all outstanding preferred stock for $100 per share, as

Merino's fellow directors

favor redemption of the preferred shares.

Merino and his fellow

below their apparent market value, and that, upon liquidation

Merino owned more

stock than preferred, and stood

others considered to be artificially low, while the directors

$100 each. A subsequent sale of the entire corporation at

who opposed Merino's

the board first

the advice of a lawyer, one Matos, on the possibility

preferred shares to common

shares to common shares,

and approved a resolution

to amend the articles so

Nonetheless, in keeping with

the articles, such an

amendment still had to be approved by a shareholder vote.

alia, that the

class of stock, and that the board's actions violated section

(hereinafter "Rule 10b-5"), and Puerto Rico corporations law.

settlement negotiations failed,

defendants moved for summary

that there was no sale

of stock for purposes of section 10(b), and that no violation

It granted summary judgment

in favor of defendants, and this appeal followed.