The opinion of the court was delivered by: POLLACK
The defendants move to dismiss this "10b-5" derivative suit and class action for lack of federal jurisdiction, F.R.Civ. P. 12(b) (1), and for insufficiency of the claim, F.R.Civ.P. 12(b) (6). Plaintiffs are shareholders of and sue on behalf of Brown Company, a Delaware corporation listed on the New York Stock Exchange, and on behalf of other shareholders of Brown.
Defendants are Fasco, Inc., formerly the owner of a controlling block of 23% of Brown's common stock; Gulf & Western, which in January, 1968, purchased Fasco's shares; individual directors of Brown; and, nominally, Brown, itself.
The claim is asserted solely under federal law, Section 10(b) of the Securities Exchange Act of 1934, (15 U.S.C. § 78j) and Rule 10b-5 promulgated thereunder.
Briefly, the plaintiffs allege that Gulf & Western, with the acquiescence of the other defendants, purchased Fasco's stockholdings in Brown at a premium, with the plan to acquire the remaining outstanding common shares of Brown at a price considerably less than current market price and less than the price paid to Fasco; that Gulf & Western has taken advantage of its position in control of Brown to secure the agreement of Brown's board of directors to the presentation of the offer and plan of acquisition; that since the offer was made, prospective purchasers of Brown have been dissuaded from seeking to purchase its assets; and that since the announcement of the plan, the price of Brown common stock has dropped on the New York Stock Exchange.
The complaint alleges that if the plaintiffs and other shareholders sell their shares to Gulf & Western they will be injured in that they will receive a price lower than that paid to Fasco for its shares in Brown and lower than the price they would have received but for the purchase of Fasco's holdings at a premium; plaintiffs also attack the form of the proposed payment, viz. Gulf & Western debentures lacking intrinsic value and payable in part from the assets and earnings of Brown.
The complaint further alleges that the defendants have breached their respective fiduciary obligations to Brown Company, either as controlling shareholders or as directors. The plaintiffs seek an injunction against any steps to consummate the acquisition plan and an accounting of profits obtained by Fasco from the sale of Brown stock.
The complaint does not allege that the plaintiffs have purchased or sold Brown stock since Gulf & Western formed its plan of acquisition. There is no charge in the complaint of fraud, deceit or manipulation. There is no claim that Gulf & Western paid Fasco more than the market price or its equivalent for Brown shares.
The crux of the action is plaintiffs' assumption that because there was a pre-existing plan to acquire all of Brown's stock, the plaintiffs and other shareholders are entitled to participate in the initial private sale of Fasco's controlling block of stock.
Even assuming that Fasco realized a premium for its controlling block, that alone would not entitle plaintiffs to relief. Essex Universal Corp. v. Yates, 305 F.2d 572, 576, 13 A.L.R.3d 346 (2d Cir. 1962); Manacher v. Reynolds, 39 Del.Ch. 401, 165 A.2d 741 (Del.Ch. 1960); see, 3 Fletcher, Cyclopedia Corporations, § 900, p. 325. These cases hold that a majority or controlling stockholder is under no duty to other stockholders to refrain from receiving a premium upon the sale of his stock which reflects merely the control potential of that stock. There is no obligation under such circumstances, to 'share and share alike'. But cf. Ferraioli v. Cantor, 281 F. Supp. 354 (S.D.N.Y.1967). Control is not a corporate asset, but is rather an attribute of stock ownership.
Similarly, a purchaser is free to offer a premium for a block of control stock. This is so, even though control stock is purchased pursuant to a plan to acquire the remainder of the shares at a lower price, if, by private purchase or the normal economics of the marketplace, this can be achieved. It is only where fraud, deceit or manipulation enter that a violation of state law or of Rule 10b-5 occurs. Cf. Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir. 1967); Cochran v. Channing Corp., 211 F. Supp. 239 (S.D.N.Y.1962).
Further, even if it were assumed that the directors of Brown had violated their fiduciary management duties by approving the plan of acquisition, the complaint would fail to state a claim for relief under 10b-5.
"* * * where the duty allegedly breached is only the general duty existing among corporate officers, directors and shareholders, no cause of action is stated under Rule 10b-5 unless there is an allegation of facts amounting to deception." O'Neill v. Maytag, 339 F.2d 764, 767-768 (2d Cir. 1964).
Cf. Perlman v. Feldmann, 219 F.2d 173, 50 A.L.R.2d 1134 (2d Cir. 1955), distinguishing breach of a director's fiduciary duty and fraud.