
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  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.                                          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  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.                                         II.                                         ___                                      DISCUSSION                                      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.                                         III.                                         ____                                         -11-                                          11                                      CONCLUSION                                      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
