The opinion of the court was delivered by: BONSAL
Plaintiff moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.
Plaintiff, a registered broker-dealer incorporated under the laws of New York, is and, during the period complained of, was the owner of 8,750 shares of Techmation Corporation (Techmation). Plaintiff sues derivatively on behalf of Techmation alleging that the directors of Techmation, who are the individual defendants in this action, violated Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act) and Rule 10b-5 promulgated pursuant thereto in obtaining shareholder approval of a restricted stock option granted to the defendant Jaroff by means of misleading proxy material.
Techmation, a New York corporation, is engaged in producing automated and semi-automated machinery for the manufacture of specialty items. Since its shares are not listed on any national exchange, it is not subject to the proxy rules under the 1934 Act. Its board of directors consists of defendant Jaroff, its president and chief executive officer; defendant Darer, Jaroff's sister; and defendant Silver, Jaroff's nominee.
In a memorandum dated March 16, 1967, Judge CROAKE of this court denied defendants' motion to dismiss pursuant to Rules 12(b) and 23.1 of the Federal Rules of Civil Procedure. Globus, Inc. v. Jaroff, 266 F. Supp. 524 (S.D.N.Y. 1967). Judge CROAKE held that the question as to plaintiff's right to maintain a derivative action on behalf of Techmation as the issuer of its own stock had been "definitively answered in the affirmative" in Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964); that the complaint herein "set forth with sufficient clarity and particularity a claim of deception"; and that causation was "a matter to be developed and proved at trial."
As to plaintiff's claim of deception, the following facts appear to be without substantial controversy and are specified by the court pursuant to Rule 56(d) of the Federal Rules of Civil Procedure:
On January 5, 1965 Techmation's board of directors voted to grant to the defendant Jaroff a restricted stock option which provided in pertinent part that:
1. The Company hereby grants to David Jaroff the option to purchase at 110% of the fair market value of its shares, to wit, at 82 1/2 cents per share, 10,000 shares per year of its capital stock, par value 1 cents per share, for a period of ten years from the date hereof, and cumulative up to 100,000 shares that is to say that if in any one year 10,000 shares are not purchased by Mr. Jaroff that he may purchase such shares in any subsequent year but prior to January 5, 1974, or such later date which shall be ten years from the effective date hereof.
5. When the Company next registers any shares for issuance to the public either under the Securities Act of 1933 or any exemption available under any regulation thereof, the Company at its own cost, will include for registration or exemption the shares covered by the within option in order to make them equally available for sale or distribution to the public.
8. This option shall become effective and the ten year period shall begin to run only after it has been authorized at a meeting of shareholders by the holders of a majority of all outstanding shares entitled to vote thereon as provided by law.
No shareholders' action was sought pursuant to paragraph 8 of the option agreement for some eighteen months. On June 10, 1966, on which date Techmation stock was quoted in the over-the-counter market at $1.125 bid, $1.375 ask, Techmation mailed a "Notice of Special Meeting" to its shareholders stating that a special meeting of stockholders would be held on Saturday, July 2, 1966 for the purpose, among others, of:
2. Approving and ratifying the acts of the Board of Directors and officers of the Corporation including the ratification of the grant of a restricted stock option to David B. Jaroff, President of the Corporation to purchase shares of the Corporation at 110% of the then quoted market price at the time of the grant over a ten year ...