The opinion of the court was delivered by: CROAKE
This is a shareholder's derivative action wherein relief is sought for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10B-5, 17 C.F.R. § 240.10b-5, promulgated thereunder by the Securities Exchange Commission. Jurisdiction of this court is predicated upon Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. No diversity of citizenship is asserted.
In its complaint, Globus, Inc. (hereafter GLOBUS) alleges that it is the owner and holder of 8,750 shares of stock of the defendant Techmation Corp. (hereafter TECHMATION), and brings this action on its behalf. Both GLOBUS and TECHMATION are corporations organized under the laws of the State of New York, with their principal place of business in New York. The individual defendants Jaroff and Darer are, respectively, the president and secretary of TECHMATION who, together with the defendant Silver, now comprise the board of directors.
The transaction with which this action is concerned is a stock option agreement entered into between TECHMATION and its president, the defendant David B. Jaroff. The agreement involved 100,000 shares of the corporation, approximately 40% of the then issued and outstanding 249,057 shares. The agreement, entered into on January 5, 1965, would not become effective until authorized by the holders of a majority of the outstanding shares of stock of the corporation. New York Business Corporation Law, McKinney's Consol.Laws, c. 4, § 505(d). On June 10, 1966, a notice was sent to the shareholders of the corporation, informing them of a meeting to be held on July 2, 1966, for the purpose, among others, of approving and ratifying the stock option agreement with Jaroff. This notice was accompanied by a proxy form providing for approval and ratification of the agreement which the shareholders were asked to sign and return.
The plaintiff contends that the acquisition of the proxies in the foregoing manner was unlawful in that the notice contained untrue statements of material facts, and omitted to state material facts which, under the circumstances, were necessary to make the statements made not misleading, all amounting to fraud and deceit; and that the approval and ratification of the option agreement was made possible only by virtue of the proxies so solicited, in that, without such proxies, it would have been impossible to obtain at said meeting a vote of the holders of a majority of the issued and outstanding shares of stock of TECHMATION in favor of approving and ratifying the stock option agreement. The plaintiff alleges that the proxies would not have been obtained had the facts which it characterizes as material not been omitted, and has set forth, in eight separate paragraphs of its complaint, the particular omissions to which it refers, all relating to the terms of the agreement or the circumstances under which it was made.
The defendants bring this motion for an order pursuant to Rules 12(b) (1), 12(b) (6), and 23.1, Fed. R. Civ. P., dismissing this action on the grounds that:
a) this court lacks jurisdiction over the subject matter thereof;
b) the complaint fails to state a claim under the Securities Exchange Act of 1934, or the Rules or Regulations promulgated thereunder, upon which relief may be granted;
c) the plaintiff does not fairly and adequately represent the interests of the stockholders similarly situated.
Jurisdiction Over the Subject Matter
The defendants' first ground, i.e., lack of jurisdiction over the subject matter of the action, is, essentially, an attack upon the plaintiff's assertion that Section 27 of the Securities Exchange Act is applicable in this case.
The defendants point out that jurisdiction is absent unless the plaintiff has brought, in the language of the statute, a "suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder." It stresses that there must be "a Federal question, not in mere form, but in substance, and not in mere assertion, but in essence and effect."
The defendants contend that the complaint is nothing more than a common law action for breach of fiduciary duty, neither covered by, nor within the intended reach of the federal statutes and rules upon which the plaintiff relies. They conclude that the jurisdiction which Section 27 of the Securities Exchange Act would otherwise confer is, in the absence of an appropriate federal claim, unavailable here.
It seems clear from the foregoing that the defendants' "first" ground for dismissal, i.e., lack of jurisdiction, is not a wholly independent ground, but rather depends upon the disposition of the "second" asserted ground for dismissal, i.e., failure to state a claim under Section 10(b) of the Securities Exchange Act and Rule 10B-5, promulgated thereunder.
If the complaint fails to state a claim under the Act, the court may dismiss either upon that ground, or upon the ground of lack of jurisdiction. On the other hand, if a good claim is stated, then the court has ...