The opinion of the court was delivered by: CROAKE
The plaintiff has brought a shareholder's derivative suit on behalf of Bond Stores, Inc. (Hereafter " BOND.") Jurisdiction is said to exist by reason of Section 27 of the Securities Exchange Act, 15 U.S.C. § 78aa.
Defendants have moved (a) for an order dismissing the complaint on the ground that jurisdiction over the subject matter is lacking or, alternatively, on the ground that the complaint fails to state a cause of action, and (b) for an order granting them summary judgment.
The plaintiff, in her amended complaint, contends that on or about March 11, 1966, the board of directors of BOND approved the issuance by BOND of a tender offer to buy up to 500,000 of its shares at $30 per share, with a proviso that if more than that number of shares was tendered, the purchases would be pro-rated among all tendering shareholders. It is one of plaintiff's contentions that the said price was excessive and constituted corporate waste.
The amended complaint further alleges that the majority of the directors of the corporation, in securing approval of the tender offer by the minority of directors wilfully concealed the fact that the purpose of the tender offer was their perpetuation in office. Plaintiff also contends that an agreement between the majority directors and the co-defendant Cantor, Fitzgerald & Co., Inc. and B. Gerald Cantor (hereafter the " CANTOR GROUP"), pursuant to which the CANTOR GROUP agreed to tender at least 200,000 shares of BOND stock owned by them was not revealed to the minority of directors.
It is claimed that this agreement, together with the tender offer, was designed to eliminate an alleged threat to control, represented by the CANTOR GROUP's holdings of BOND stock.
Plaintiff urges that the concealment of the tender offer and of the agreement with the CANTOR GROUP constitutes a violation of Section 10(b) and Rule 10B-5 thereunder, of the Securities Exchange Act and confers jurisdiction over the matter in this court.
In support of their motion to dismiss, defendants contend that no actionable fraud under Rule 10B-5 has been committed by the nondisclosure of the illegal purpose to the other members of the board; that the Cantor agreement was fully revealed; and that there is no causal relationship between the concealment, if any, and the loss suffered.
On a motion to dismiss for failure to state a cause of action, the court must assume allegations raised in the pleadings to be true. It must construe the complaint in the light most favorable to the party against whom dismissal is sought. Dismissal should not be granted if "there is any possibility that the plaintiff will ultimately prevail." 1A Barron & Holtzoff, Federal Practice, p. 360 (1960); Conley v. Gibson, 355 U.S. 41, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1960).
Defendants place much emphasis on O'Neill v. Maytag, 339 F.2d 764 (2d Cir. 1964), where the court dismissed an action brought under Section 10(b) based upon the alleged wrongful purchase by directors of National Airlines to acquire shares of its stock from Pan American in order to strengthen their control of National. However, in that case, Chief Judge Lumbard, speaking for the court, stated at page 767:
"There can be no serious claim of deceit, withheld information, or misstatement of material fact in this case. Decision thus depends on whether the statute and rule impose duties beyond that of honest disclosure."
Plaintiff herein does allege concealment of material information and fraud. Furthermore, in Ruckle v. Roto American Corporation, 339 F.2d 24 (2d Cir. 1964), another action commenced pursuant to Section 10(b) of the Securities Exchange Act involving efforts by directors to perpetuate their control, the court of appeals reversed the dismissal of the action by the district court. At page 29, the court said:
"If . . . the board defrauded the corporation into issuing shares either to its members or others, we can think of no reason to say that redress under Rule 10B-5 is precluded, though it would have been available had anyone else committed the fraud. There can be no more effective way to emasculate the policies of the federal securities laws than to deny relief solely because a fraud was committed by a director rather than by an outsider. . . ."
Defendants, however, contend that the nondisclosure could not be the proximate cause of any harm which might result since even if the minority had been fully informed, they could not have prevented the majority from approving the tender offer. On grounds of public policy, this argument should be rejected. A director is in a fiduciary position and should disclose any possible conflicts of interest. Furthermore, this argument was rejected in Ruckle v. Roto American, supra, the court stating at page 27:
"The failure or refusal of a majority of a board of directors to disclose to the remaining directors information pertinent to a proposed stock issuance [constitutes] a 'fraud' upon the corporation ...