The opinion of the court was delivered by: BONSAL
Plaintiff Fidelis Corporation (Fidelis) and plaintiffs Lovelace, Burnap, Fryer, and Hearsh Bros., on behalf of themselves and the other beneficial owners of Fidelis common stock (the individual plaintiffs) instituted this action against defendant Litton Industries, Inc. (Litton). The complaint alleges that Litton violated
(a) Sections 5 and 12(1) of the Securities Act of 1933 (the 1933 Act), (15 U.S.C. §§ 77e, 77l(1));
(b) Sections 12(2) and 17(a) of the 1933 Act (15 U.S.C. §§ 77l(2), 77q(a));
(c) Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated pursuant thereto (17 C.F.R. § 240.10b-5);
(d) contractual obligations and fiduciary duties; and
(e) the common law of fraud and deceit,
with respect to a transaction, described more fully below, by which Litton acquired in 1964 substantially all the assets of Fidelis in exchange for shares of Litton common stock (Litton stock).
In January 1964, Litton and Fidelis, then known as Advance Data Systems Corporation, entered into negotiations with respect to Litton's acquisition of substantially all the assets of Fidelis in exchange for Litton stock. Under an agreement signed on January 31, 1964 (the Acquisition Agreement), Litton acquired substantially all the assets of Fidelis and in exchange therefor agreed to issue Litton stock up to the value of $360,000 (Initial Consideration) and thereafter an additional amount of Litton stock (Additional Consideration) dependent upon the earnings of the Fidelis assets for the five years following the acquisition, such Additional Consideration, together with Initial Consideration, not to exceed $20,000,000 in value of Litton stock. The amount of Litton stock to be issued as Initial Consideration and Additional Consideration depended upon an election by each Fidelis shareholder as to whether he would prefer to receive a portion of the Initial Consideration or only a portion of the Additional Consideration.
On January 23, 1964, Fidelis' Board of Directors approved a Plan of Liquidation and Dissolution (the Plan) which incorporated the principal features of the Acquisition Agreement.
On January 28, 1964, Fidelis' Board of Directors submitted to each of the Fidelis shareholders (1) the Plan; (2) the Acquisition Agreement; (3) a Consent Form to be signed if the shareholder approved the Plan and the Acquisition Agreement; (4) a form on which the shareholder could elect whether and the extent to which he desired to receive a portion of the Initial Consideration; and (5) a copy of Schedule J to the Acquisition Agreement which described the manner in which Litton proposed to operate the Fidelis assets.
The holders of about 97% of the common stock of Fidelis approved the Plan and Agreement. By January 31, 1964, the Fidelis shareholders had elected as to whether they wished to receive Initial Consideration.
The memorandum of the closing which took place on February 17, 1964, indicates that Litton stock having a value of $324,000 was issued to Fidelis as the Initial Consideration and was distributed by Fidelis to the shareholders electing to receive Initial Consideration. According to the affidavit of the Secretary of Fidelis, Fidelis shareholders owning approximately one-third of its outstanding shares elected not to receive Litton shares issued as Initial Consideration, and no Additional Consideration has been issued by Litton. From the papers, it appears that on April 19, 1967, Litton addressed a letter to the Fidelis Shareholders Protective Committee stating that the financial performance of the Fidelis assets under the Litton management did not warrant any Additional Consideration under the Acquisition Agreement.
Litton moves (1) for an order, pursuant to Rule 56, F.R. Civ. P., (a) dismissing all claims based upon a violation of sections 5 and 12(1) of the 1933 Act; and (b) dismissing all claims alleged on behalf of the individual plaintiffs and the class they purport to represent; and (2) for an order pursuant to Rule 23, F.R. Civ. P., directing that the individual plaintiffs' action is not maintainable as a class action.
MOTION TO DISMISS CLAIMS UNDER SECTIONS 5 ...