The opinion of the court was delivered by: TYLER
Plaintiffs, the owners of both common and preferred stock of Reading Company ("Reading"), a common carrier, have brought this derivative action on behalf of Reading seeking treble damages from the Baltimore and Ohio Railroad Company ("B&O"), another common carrier, and from ten individual defendants who were directors of Reading at the time of the alleged misconduct. None of the individual defendants have been served. The suit is brought under Sections 4
of the Clayton Act. The defendants B&O and Reading
jointly move for summary judgment dismissing the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Most of the facts have been stipulated by the parties. The transaction which is the basis of this action was the April, 1963 termination of Reading's interest in the Philadelphia Perishable Products Terminal Company ("Terminal"), a corporation created by the two railroads in 1927 to hold a joint terminal facility in Philadelphia. In 1927, Reading and B&O were each issued 250 shares of the common stock of Terminal, and in 1936 each was issued $2,000,000 of 4% negotiable demand notes by the company.
In the early 1960's Reading sought to terminate its interest in Terminal, and in April, 1963 sold its common stock and notes to B&O for $225,250 cash and $900,000 payable in 5 annual installments at 3% interest. On April 30, 1964, B&O paid the first installment with interest and pre-paid the balance of $720,000 discounted at 5% per year.
In connection with this transaction neither Reading nor B&O ever attempted to solicit bids pursuant to Section 10 and the rules of the Interstate Commerce Commission ("I.C.C.") promulgated thereunder.
At the time of this transaction Reading and B&O had several directors in common. E. Paul Gangewere was president and director of Reading and a director of B&O, Jervis Langdon, Jr. was director of Reading and president of B&O (and part of its governing body), and Howard E. Simpson was a director of both railroads. Permission had been received by each of these individuals from the I.C.C. pursuant to Section 20(a)(12) of the Interstate Commerce Act, 49 U.S.C. § 20(a)(12), to hold the respective interlocking directorships. At that time B&O owned 42% of the outstanding common stock of Reading. Reading was represented in the negotiations leading to the sale by John F. Kerslake, who was then an employee of the Chesapeake & Ohio Railway Company, B&O's parent.
The complaint alleges that Reading received for its interest in Terminal consideration that was inadequate by $765,000, and that this loss was a result of the failure of the Reading board of directors to obtain public bids as required by Section 10. The complaint also asserts that this failure by the board of directors was a direct result of the domination of the board by B&O and the acquiescence of the individual defendants in the sale to B&O.
The primary basis for the joint motion for summary judgment by B&O and Reading is that Section 10 is not applicable to this transaction. The defendants make four arguments based on their interpretation of the legislative history of Section 10.
1. Defendants' first argument is based upon the word "securities" in the first paragraph of Section 10. Defendants correctly point out that nowhere is the word defined for purposes of the Clayton Act and that the meaning of the word in statutes varies.
Defendants then describe certain parts of the legislative history which indicate that Congress' primary reason for inserting the word "securities" in Section 10 was to cover the gross abuses of interlocks between investment bankers and the railroads.
Defendants take great pains to characterize this sale of stock and notes as a mere paper transaction - the termination of a joint venture. Their conclusion is that this sale, which could have been accomplished by dissolving Terminal and selling to B&O Reading's share of the assets, did not constitute "dealing in securities" within the meaning of Section 10.
The answer to this argument lies in the statute itself. Section 10 prescribes public bidding on certain " . . . dealings in securities, supplies, or other articles of commerce." The notes and stock in question fall within any normal meaning of the word "securities". Moreover, they are "articles of commerce" in the sense that they were apparently transferrable to third parties. Presumably defendants would not contend that if these notes and shares of common stock had been sold by Reading to a third party with which Reading had an interlock, they would not be "securities" for purposes of Section 10. The transaction under consideration here was not different merely because the sale was made to the owner of the other half of Terminal.
Defendants' argument that if Reading had accomplished the sale by another method Section 10 surely would not have applied begs the question. I assume that the parties had good and sufficient reasons for accomplishing the result in the manner they chose, a transfer of stock and notes. I have no occasion to consider whether the defendants could have avoided the operation of Section 10 by using a different form.
2. Defendants' second argument, also based primarily upon an interpretation of legislative history, is that Section 10 does not apply to an interlock between two railroads. It is said that Section 10 applies only to so-called "vertical" interlocks, e.g., those in which a common carrier has directors in common with a supplier or an investment banker.
The statute, of course, does not except "horizontal" interlocks. Furthermore, the authorities to which defendants have cited have concentrated on the nature of the interlock rather than the nature of the transaction. The draftsmen of Section 10 as it now reads decided in favor of prohibiting certain tainted transactions rather than prohibiting interlocks outright.
As the defense memoranda point out, the present wording of Section 10 indicates that the Congress was concerned with vertical transactions rather than horizontal anti-competitive relationships which are covered in other parts of the statute. But the transaction in issue can be viewed as a vertical transaction, the nature of which is not changed by the fact that the purchaser was a competing railroad. Reading, in financial difficulties, sought through this sale to divest itself of properties not necessary for its current railroad operations and to enhance its precarious cash position. The mere fact that the buyer of the securities was a railroad rather than an investment banker does not obviate the abuse which Congress sought to remedy. On the contrary, if there was in fact damage to the Reading as a result of this sale, this is precisely the type of transaction which Section 10 was designed to cover. This contention, then, is rejected.
It is suggested by counsel that the result of so deciding this point makes it practically impossible for two railroads to engage in this type of transaction because each would be required to get competitive bids, the seller being forced to accept the highest bid and the buyer the lowest. Two suggestions can be made on this point. First, where one of the two carriers dominates the other to the extent of holding 42% of its common stock, as here, the purposes of Section 10 are fulfilled if the dominated carrier alone obtains public bids. Second, if it be assumed that this and no other solution is available to substantially comply with the competitive bidding ...