The opinion of the court was delivered by: BICKS
This contest for control of the Central Foundry Company has been unusually bitter. The contending parties are, on the one side, the present members of the board of Directors, a majority of whom have served the Company in that capacity for upwards of twenty years and, on the other side, an insurgent group organized and spearheaded by one Sidney Gondelman who also financed its expenses. The members of this group first began acquiring stock in the Company approximately eighteen months ago, and from well nigh the beginning have dedicated themselves to the purpose of taking over the Company.
Correct disposition of the issues presented upon the application now before the Court can be made only with a knowledge of the costly, extended and varied litigation engendered by that attempt.
In pursuance of his objective of having himself and his nominees elected to the Board of Directors, Gondelman instituted the first suit in this series seeking an inspection of the books of the Company. This suit was brought in the New York State Courts on behalf of the Company and all its stockholders for the declared purpose of redressing wrongs inflicted by management on the Company. As a preliminary procedural step in that suit the management succeeded in procuring a court order directing Gondelman's examination. The examination was commenced; whether or not it was ever completed does not appear. However, from Gondelman's own mouth as a witness in the proceeding which will next be discussed, it seems that he urged his attorney to abandon the suit, allegedly because the Company was being subjected to undue expense.
In due time and consistent with the by-laws of the Company, the annual meeting of stockholders for the year 1958 was called for May 13, 1958
and in accordance with said by-laws and the rules of the New York Stock Exchange, April 14, 1958, was fixed as the record date for the determination of stockholders entitled to vote at said meeting. Some time prior thereto Gondelman filed a schedule 14-B, as required by the Proxy Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, 15 U.S.C.A. 78a et seq. Thereafter the activities which have given rise to the litigation in this Court and the unusually heavy demands upon the Securities and Exchange Commission commenced.
In the early part of May 1958 the Company and the Management Proxy Committee of the Company brought suit against Gondelman and the other members of his committee alleging substantial violations of the SEC's proxy rules and praying (i) that all proxies obtained by the Gondelman committee be invalidated; and (ii) that the Committee be enjoined from further violations.
Shortly thereafter the SEC instituted suit against the Gondelman Committee alleging violations of its proxy rules. Both suits were consolidated for the purpose of trial. In the suit by the Commission the parties consented to a proposed decree requiring the Committee to supply all stockholders who had furnished proxies to them with material correcting the misstatements which were the subject of the complaint. After extended hearings this Court, on August 15, 1958 rendered its opinion in the consolidated cause finding in substance that all the material allegations of the Management's complaint had been established, and concluding that 'the facts developed upon the hearings before this Court compel a holding that the proxies secured by the committee are void'. The meeting date was postponed to September 26, 1958 and the Committee was directed, inter alia, to furnish stockholders with corrective material. Central foundry Company v. Gondelman, D.C.S.D.N.Y.1958, 166 F.Supp. 429. Reference is made to said opinion for a fuller statement of background material against which the issues presented by this application must be viewed.
In the mid-afternoon of September 25th, less than twenty-four hours before fore the adjourned meeting of stockholders was scheduled to be held, the Securities and Exchange Commission submitted to the Court a proposed temporary restraining order, providing in part for adjournment of the meeting pending the outcome of a suit it had filed that day laying violations of the proxy rules at the feet of both groups. The action was predicated, in part, upon information counsel for the management group had called to its attention. A hearing was had upon said application which was attended by all counsel as well as some of the interested parties.
The Commission's request for further adjournment of the meeting met with opposition from both groups. The Court indicated that absent a compelling demonstration for the need of further adjournment of the meeting none would be granted because, in its view, it would not be in the interest of the large public stockholder body and because it would result in making still further remote the time between the record date and the date of the meeting.
Equally emphatically did the Court express its view to counsel that while it was not inclined to adjourn the meeting neither was it inclined to make summary disposition of the suit instituted by the Securities and Exchange Commission.
In an endeavor to avoid this dilemma and to work out a practical solution to the problems raised at the eleventh hour, the Court evolved part of the program reflected in the order herein, dated September 25, 1958. That order provides, inter alia, that the meeting be convened and that the right of the SEC to proceed with its suit be preserved.
The Court proceeded to dictate on the record, in the presence of counsel, the recitals contained in the order and the first five paragraphs thereof.
At about this juncture counsel for the Commission expressed doubt as to whether voting of the proxies might not frustrate its objective,
as well as the announced view of the Court that the suit not be prejudiced. Paragraph 6 of the order was then dictated to protect the Commission against such possible eventuality. Then followed paragraphs numbered 7 and 8.
The Gondelman group seeks to predicate a right thereon; the management group asks that all parties be relieved therefrom.
At the threshold it should be noted that paragraph 8 starts out: 'the parties having so agreed * * *' This recital is not without significance. All parties were given plainly and unmistakably to understand (i) that the Court entertained serious doubt as to the validity of the provision set out in that paragraph and (ii) that absent agreement, the Court was without authority to impose a covenant not to sue. Unfortunately, a great deal of the discussion was 'off the record' so that the transcribed record of the proceedings of September 25th does not completely reflect all that transpired.
During the interval between the date of the order under discussion, September 25th, and October 20th, the critical date fixed in paragraph 7, each side called to the attention of the SEC numerous alleged violations by the other. The SEC appeared before the Court on October 20th and advised that the Commission elected not to proceed with its suit. Counsel stated that he had been authorized by the Commission to disclose to the Court and counsel the reasons for the Commission's conclusion, the same to be deemed, however, 'off the record'. It will not violate that understanding, to indicate that the Commission's determination did not flow from a finding that both parties had fully complied with the proxy rules since this Court's decree of August 21, 1958. Any attempt, there fore, to equate the decision of the Commission with a finding that the proxy solicitation of either party was lawful or unlawful is unjustified. Counsel for the Commission also stated that it took no position as to the interpretation or the validity of paragraph 8 and that 'we feel that this problem is really a question essentially between the contending parties.'
The charges by management of violations of the proxy rules by the Gondelman group are numerous and some indeed, substantial. On this application the inquiry is not whether management's charges will be established but rather whether sufficient showing has been made to warrant granting of the requested relief. In the light of the Court's prior experience in this case it is satisfied that the truth can only be elicited in an adversary proceeding with fullest opportunity to both sides to examine and cross-examine.
We must be careful to avoid too provincial a view of this case. True, the actual parties to the contest are the two groups vying for control of the Company. At stake, however, are the interests of its approximately 4000 scattered shareholders, the preservation of the integrity of the stockholder electoral system and the maintenance of the proxy rules, consonant with the intent of Congress, as an instrumentality designed to assure dissemination of truth to the end that the stockholders may make informed judgments. If the management can establish its allegations, the ...