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November 19, 1970

William C. McCONNELL, Jr., S. Paul Jones, Robert M. Miller, Dillman A. Rash, William D. Miller, Talbot Allen, Paul G. Counihan, C. Eugene Farnam, Richard O. Kearns and Ralph C. Fox, Plaintiffs,
Allan P. LUCHT et al., Defendants

Edward Weinfeld, District Judge.

The opinion of the court was delivered by: WEINFELD

EDWARD WEINFELD, District Judge.

An annual meeting of defendant Servomation Corp. is scheduled to be held on November 20, 1970, pursuant to a notice sent to stockholders on October 22. Plaintiff stockholders commenced this action only four days before the scheduled meeting, and now seek a preliminary injunction adjourning the voting of proxies obtained by the Management of Servomation. More specifically, plaintiffs seek to enjoin the closing of balloting or the transaction of any business other than the establishment of a quorum at the meeting; ordering that it be adjourned to December 15, 1970; enjoining the voting of any proxies obtained pursuant to the proxy statement of Management dated October 20, 1970, or pursuant to Management's "Message" to stockholders dated November 12, 1970, and ordering that the voting at said Annual Meeting be by secret ballot.

 As may be suspected, the action involves a proxy contest -- or, as plaintiffs allege, a "power struggle," between dissident forces and the existing Management. The action centers about a proposal by Management to be voted upon at the Annual Meeting for the elimination of cumulative voting. The plaintiffs constitute a committee which styles itself "Stockholders Committee to Retain Cumulative Voting" (hereafter "the Committee"), and has been soliciting proxies in opposition to Management.

 The challenge to Management is spearheaded by two plaintiffs, Committee members McConnell and Jones, long identified with Servomation, who in past years served as directors, one recently elected by cumulative voting, and whose reelection as directors will be threatened if cumulative voting is eliminated. There are the usual charges and countercharges between contending groups. Jones and McConnell, two of the eleven founders of the company, allege that since 1968, when a new President was installed, each has been relieved of positions formerly held. Various allegations as to the conduct of corporate activities are levelled against Management. In turn, Management attributes shortcomings to the individuals while in the service of the company.

 The Board of Directors of Servomation, at a regular meeting held on September 16, 1970, recommended to the stockholders that at the annual meeting to be held on November 20, 1970, approval of a proposed amendment to Servomation's Certificate of Incorporation to eliminate cumulative voting. The Board at that meeting nominated eleven directors for reelection, but did not, as already noted, renominate plaintiffs McConnell and Jones, both of whom were present.

 On October 22 Servomation mailed to its stockholders the Notice of Annual Meeting and proxy statement dated October 20. Plaintiffs, who were then in the process of organizing their proxy soliciting committee, mailed proxy material dated November 5, 1970, soliciting proxies (a) against defendants' proposal to eliminate cumulative voting, and (b) for the election of five directors nominated by plaintiffs. In this statement in opposition to management, in addition to inveighing against elimination of cumulative voting, the Committee also set forth at length its criticisms of Management in the conduct of corporate affairs. Thereafter, Management, on November 13, after filing with the Commission preliminary copies of supplementary material, responded to plaintiffs' attack by a "Message" to stockholders dated November 12.

 Plaintiffs, as noted, commenced this action on the afternoon of November 16. The basis of their claim for relief is that Management's proxy statement and its supplementary material or "Message" were misleading, in violation of Section 14 of the Securities Exchange Act and Rule 14a-9(a). *fn1" The attack is directed both to Management's proxy statement and the Message, and in particular to statements or alleged omissions with reference to the proposal to eliminate cumulative voting. The complaint alleges that Management, in urging elimination of cumulative voting, stressed only its disadvantages, stating that such voting leads to a "factional" Board of Directors, a Board split by "conflict" and "disharmony," and that Management failed to mention the extensive use of cumulative voting in corporate life or its advantages which, in plaintiffs' view, were that "cumulative voting is vital to afford representation on the Board of Directors to minority stockholders whose interests and point of view may differ from those of Management." It is claimed that this latter omission, as well as the failure of Management to state specifically that its purpose in proposing the amendment was to eliminate the plaintiff directors, made Management's proxy statement and the Message false and misleading.

 There is a serious doubt of the substance of plaintiffs' position, since the controversy over cumulative voting was thoroughly aired. *fn2" Management expressed its opinion of the disadvantages of cumulative voting and its impact upon the corporation. Thus, the statement reads:

"In the opinion of the Board of Directors, the elimination of cumulative voting will serve the best interests of the Corporation. Cumulative voting enables a minority stockholder or group of minority stockholders acting in concert to obtain representation on the Board of Directors by cumulating their votes for a particular candidate or candidates. The continuation of cumulative voting would enable the holder or holders of less than 10% of the shares entitled to vote at the forth-coming meeting (or a smaller percentage, depending upon the number of shares represented and voting at the meeting) to elect a director. The Board believes that no director should represent or favor the interests of any particular stockholder or group of stockholders. On the contrary, it is the duty of each director to administer the business and affairs of the Corporation for the benefit of all the stockholders.
"Approximately 69% of the corporations listed on the New York Stock Exchange do not have cumulative voting. In the case of corporations without cumulative voting, the votes of the holders of more than 50% of the shares can elect all of the directors, in which event the votes of the holders of the remaining shares (to the extent cast for other nominees) would not result in the election of any directors. The Board of Directors presently includes one individual, S. Paul Jones, who was elected at the last Annual Meeting of Stockholders through exercise of cumulative voting rights by holders of approximately 8 1/2% of the outstanding shares, and who is not a management nominee for reelection."

 The Committee, in turn, in soliciting proxies "In Opposition to Management," expressed its contrary opinion as to the merits of cumulative voting. Thus, it stated:

"Cumulative voting is permitted under the laws of 49 of the 50 States and is mandatory under the laws of approximately one-third of the States.
" Management is asking the stockholders to approve a proposal which would deprive the stockholders of their right to elect directors by cumulative voting. The Committee believes that the preservation of cumulative voting is vital to afford representation on the Board of Directors to minority stockholders whose interests and point of view may differ from those of management. Accordingly, we urge a vote 'AGAINST' the proposal to ...

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