Appeal from the United States District Court for the Northern District of California. D.C. No. CV-91-01765-VRW. Vaughn R. Walker, District Judge, Presiding.
Before: Cecil F. Poole, Robert R. Beezer and Thomas G. Nelson, Circuit Judges. Opinion by Judge Poole.
Plaintiffs James Jacobson and Arthur Fury (Jacobson and Fury), shareholders of Siliconix, Inc., appeal the district court's dismissal of their securities fraud action which alleged that AEG Capital Corporation (AEG) and two AEG directors had violated section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)). Jacobson and Fury allege that AEG used Siliconix's Chapter 11 reorganization to fraudulently divest the ownership interests of non-AEG shareholders of Siliconix. We affirm the district court's dismissal as a valid entry of summary judgment in favor of AEG and its directors.
I. FACTUAL AND PROCEDURAL BACKGROUND
Siliconix manufactures semiconductors. In the late 1980s a burdensome combination of large capital expenditures, increased competition, and decreasing government contracts narrowed Siliconix's profit margins. In 1989 Siliconix suffered a $28 million loss.
One of Siliconix's large capital expenditures was an expansion in 1984 into the production of circuits known as Power MOSFETs. Power MOSFETs became an important part of Siliconix's product line. In 1986 International Rectifier Corporation (IR) sued Siliconix for willful patent infringement, alleging that Siliconix's manufacture of Power MOSFETs violated IR's patents. An adverse judgment had the potential of eliminating $30-40 million of Siliconix's annual sales.
On April 9, 1990, at the close of the patent infringement trial, but before entering judgment, the federal trial Judge advised the parties orally that he was prepared to rule against Siliconix.
The following day, April 10, 1990, Siliconix filed a reorganization petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California. This petition appears to have been filed in order to gain the protection of a bankruptcy stay against an imminent adverse judgment in the patent infringement litigation. See 11 U.S.C. § 362.
At the time that Siliconix sought bankruptcy protection, AEG owned approximately 40% of Siliconix's common stock. Plaintiffs Jacobson and Fury, along with approximately two thousand others, also owned common stock in Siliconix.
The United States Trustee for the Northern District of California appointed the Official Unsecured Creditors' Committee (Creditors' Committee) on May 1, 1990. The bankruptcy court directed the appointment of an Official Committee of Equity Security Holders (Equity Committee) on July 25, 1990. The United States Trustee appointed members of the Equity Committee on August 6, 1990. Jacobson and Fury were members of the Equity Committee. AEG was not.
AEG, with the help of its parent company AEG AG, approached Siliconix on July 24, 1990 with a proposal to infuse Siliconix with the cash it needed in order to emerge from Chapter 11 and help Siliconix craft a plan of reorganization. In return, as part of the plan of reorganization, AEG would receive 80.1% of Siliconix stock.
The final plan of reorganization, jointly proposed by Siliconix, AEG, and AEG AG, provided for a settlement of the IR litigation mentioned above, cash and notes equal to about 80% of claims by bank and trade creditors, and newly issued subordinated notes and stock (750,000 shares, or 7.5%) to debenture holders. All Siliconix stock would be cancelled. Non-AEG shareholders could redeem their stock on a pro-rata basis, for 1,240,000 (or 12.4%) shares of the new Siliconix common stock. To finance the reorganization, AEG agreed to contribute $13 million in cash, AEG AG agreed to forgive a $2 million secured claim against Siliconix, and AEG AG agreed to guarantee payment of certain promissory notes. In return, AEG would receive 8,010,000 (or 80.1%) of the new Siliconix common stock.
After notice and hearing the bankruptcy court approved the plan's disclosure statement on November 9, 1990. Parties in interest were given until December 7, 1990 to accept or reject the plan by vote. The disclosure sent to shareholders was accompanied by the Equity Committee's recommendation to vote in favor of the plan. Following acceptance, and without objection, Bankruptcy Judge Lloyd King confirmed the plan on December 10, 1990.
Six months after confirmation, on June 10, 1991, Jacobson and Fury filed a complaint in federal district court alleging that AEG had engaged in a fraudulent scheme which used the bankruptcy process as a way to divest them, and similarly situated non-AEG Siliconix shareholders, of their securities in violation of federal securities laws. The suit was never certified as a class action. On November 15, 1991 defendants moved to dismiss. They later made a motion for summary judgment. Following a hearing on January 17, 1992, Judge Walker ordered further briefing on the forced sale issue. On August 12, 1992, Judge Walker granted defendant's motion to dismiss for failure to state a claim. Jacobson and Fury made a timely appeal.
We review a motion for dismissal for failure to state a claim de novo. Oscar v. University Students Coop. Ass'n, 965 F.2d 783, 785 (9th Cir.) (en banc), cert. denied, 121 L. Ed. 2d 581, 113 S. Ct. 655 (1992). If matters outside the pleadings are submitted, the motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is treated as one for summary judgment under Federal Rule of Civil Procedure 56. See Fed.R.Civ.P. 12(b); Del Monte Dunes at Monterey, Ltd. v. City of Monterey, 920 F.2d 1496, 1507-8 (9th Cir. 1990). In considering AEG's motion to dismiss, the district court took judicial notice of the extensive records and transcripts from the prior ...