The opinion of the court was delivered by: KAUFMAN
This is a motion for approval by the Court, pursuant to Rule 23(c) of the Federal Rules of Civil Procedure, 28 U.S.C.A., of a proposed settlement of a stockholders' derivative suit brought on behalf of Ogden Corporation.
The matter was referred to Thomas F. Boyle, Esq., as Special Master, to inquire into the fairness, reasonableness and adequacy of the proposed settlement, to take evidence and to report to the Court his opinion as to the advisability of the settlement. Pending the submission of the Special Master's report, the motion for approval was held in abeyance. The Special Master held hearings and filed a report in which he recommended that the settlement be approved.
Thereafter, the Court directed the mailing of notice to all the stockholders of Ogden of a hearing to be held before the Court upon the motion for approval of the settlement, the confirmation of the Special Master's report, and judgment in accordance with the terms of the settlement stipulation.
The hearing has now been held. At the hearing several stockholders appeared by attorneys and objected to the proposed settlement.
Affidavits and documentary and oral evidence with respect to the fairness of the proposed settlement were received.
The action was instituted on December 24, 1948. All attorneys who had participated in the suit prior to the settlement proposal were in favor of the settlement. The objectants took no part in the action until after the Special Master's report was filed.
The action is a stockholders' derivative suit brought by stockholders of Ogden Corporation, on behalf of that corporation, against certain present and former officers and directors of Ogden Corporation, the firm of Allen and Company (hereinafter sometimes referred to as 'Allen'), Jacob Holtzmann and other persons who either purchased certain securities directly from Ogden or subsequently became owners of a portion of those securities.
The action arises out of the sale in December, 1945 by Ogden to defendant Holtzmann of all of the stock of Litchfield & Madison Railway Company (hereinafter referred to as 'Litchfield'), both common and preferred, all of the stock of Mt. Olive & Staunton Coal Company (hereinafter referred to as 'Mt. Olive') and an indebtedness of Mt. Olive to Ogden in the amount of $ 1,162,844, all for a consideration of $ 1,758,883, plus the payment by Litchfield to Ogden of a $ 300,000 dividend. (Thus, the proponents of the settlement contend that the purchase price was really $ 2,050,000, after certain adjustments.)
Holtzmann immediately resold 5,000 shares of Litchfield preferred stock to an insurance company for $ 490,000.
Within a short time after his purchase Holtzmann agreed to sell to Allen and Company 95% (later changed to 70%) of the remaining package of securities and indebtedness which he purchased from Ogden.
Approval of the Interstate Commerce Commission was necessary for the sale of the Litchfield stock to Allen. The Commission thereafter approved the sale of the Litchfield stock to Allen and found the terms and conditions just and reasonable, and the sale to Allen was consummated on July 10, 1946.
During the following month Holtzmann sold to various individuals another 25% of the package of securities in various percentages, but at the same proportionate price as the sale to Allen.
Ten (10%) per cent was divided among Mr. Grand, counsel for Litchfield, Mr. Leahy who was elected president of Litchfield and various local people who it was thought could be helpful to management. None of these was in any way connected with the management of Ogden.
The largest purchaser from Holtzmann (out of the 25%) was the Baird Foundation, a charitable trust, to the extent of 15% of the package. Mr. Baird, who founded the trust, had been a director of Ogden but had ceased to be such as early as 1941. He was also the holder of one-tenth of one per cent of the outstanding stock of Atlas Corporation (which, in turn, owned 80% of the stock of Ogden).
Some time in 1947 Baird apparently felt that the accelerated decline in earnings of Litchfield made it an imprudent investment for the trust to hold. Accordingly, he sold 4% of the package to Mr. Sindeband and his wife, and 4% to Mr. Fogg and his wife.
Mr. Sindeband was a director and vice-president of Ogden at the time of the sale from Ogden to Holtzmann. He did not act in the negotiations for that sale. Mr. Fogg was secretary of Ogden at the time of that sale. There is no evidence that he participated in the negotiations for that sale. At the time of that sale from Ogden to Holtzmann, Messrs. Sindeband and Fogg were both directors of Mt. Olive; Fogg was secretary of Mt. Olive; Sindeband was director and Fogg was secretary and assistant treasurer of Litchfield.
After that sale Sindeband continued as a director and Fogg continued as vice-president and secretary of Litchfield. In addition, Fogg was appointed director of Litchfield. Fogg and Sindeband continued on as directors of Mt. Olive and Fogg became vice-president and secretary of Mt. Olive.
The complaint contains two causes of action. The first cause of action attacks the sale from Ogden to Holtzmann on the ground that the consideration was grossly inadequate; that the transaction was contrary to the interests of Ogden; and that it was accomplished pursuant to a wrongful conspiracy with Ogden's officers and directors.
The second cause of action is confined to the sale of the stock of Litchfield; it alleges that the sale of that stock from Ogden to Holtzmann was consummated in violation of the Transportation Act of 1920, 49 U.S.C.A. 1 et seq., in that Holtzmann was in reality acting as agent and dummy for Allen and Company; that the latter, at the time of the transaction, controlled another carrier; that, therefore, approval of the Interstate Commerce Commission was required for the sale; that in the proceedings for such approval the Commission would inquire into the adequacy of consideration, in view of the fact that there were minority stockholders of Ogden; that although the later sale from Holtzmann to Allen also required Commission approval, and such approval was obtained, the Commission did not inquire into the question of adequacy of consideration in view of the fact that there were no minority interests involved.
After answering the complaint, Ogden moved for an order requiring plaintiffs to furnish security pursuant to New York General Corporation Law, Consol. Laws, c. 23, Sec. 61-b. The District Court directed the furnishing of such security and further directed that if such security was not furnished both causes of action should be dismissed. On appeal to the Court of Appeals for this Circuit, that Court reversed the decision of the District Court as to the second cause of action, holding that security was unnecessary as to that cause of action, and sent the case back to the District Court for further proceedings, including consideration of the question whether the first cause of action, as to which security was ...