The opinion of the court was delivered by: GURFEIN
This is a motion by the defendants for an order (a) dismissing the complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted, or declining jurisdiction, or in the alternative (b) staying the action; or (c) transferring it to the Central District of California. They also move to require a more definite complaint.
THE COMPLAINT AND THE COMPANION STATE ACTION
Plaintiff is a shareholder of Yardney Electric Corporation (Yardney) and brings this action derivatively on behalf of Yardney against Whittaker Corporation (Whittaker), William R. Whittaker (W. R. Whittaker), who is Whittaker's Chairman and controlling stockholder as well as a director of Yardney, and the other individual defendants who are all directors of Yardney.
The operative facts alleged in the complaint are as follows: In May 1970 Whittaker owned 1,315,834 shares or approximately 56% of Yardney's outstanding common stock. On May 28, 1970 Yardney was caused by the other defendants to enter into an agreement with Whittaker whereby Yardney was obligated to deliver to Whittaker 3,020,831 theretofore unissued shares of Yardney common stock, which would give Whittaker 80% of the company, in exchange for certain net assets of Whittaker Power Systems Corporation (WPSC), a wholly owned subsidiary of Whittaker. It is alleged that the market value of the Yardney shares to be issued was in excess of $14,700,000 on May 28, 1970 and that the net assets of WPSC had a book value of only $3,285,000, a far lesser going concern value, and produced either very low earnings or a loss in the accounting periods immediately preceding the agreement. The complaint alleges that the issuance of the Yardney stock was for a grossly inadequate consideration and was the result of a scheme or plan designed for the advantage of Whittaker and W. R. Whittaker with the knowledge, consent, acquiescence and participation of the other individual defendants at the expense of Yardney and its shareholders other than Whittaker.
To accomplish the purpose of this scheme and plan, the defendants caused Yardney to issue to its shareholders a proxy statement which plaintiff alleges to be false and misleading in certain material respects, including, among others: (1) the true purpose of "unloading" an ailing subsidiary upon Yardney at a grossly inflated price in a tax-free transfer was concealed; (2) the statement that it would be efficient and in the best interests of Yardney to acquire the business of WPSC was false; (3) there was failure to disclose (a) that the interests of Yardney were of "no moment" in the discussions; (b) that Whittaker and the individual defendants were aware that certain internal reports respecting WPSC indicated that its losses were due to fundamental and continuing problems and deficiencies which would cause its losses to continue; (c) that the cost of the assets transferred was substantially less than the value of the Yardney shares given in exchange; (d) that the value of these assets was declining in value; and (e) that tax considerations of Whittaker were determinative in reaching the agreement.
Another aspect of the concealment in the proxy statement alleged was disclosure of the provision in the agreement that the votes of the Yardney family, the former owners of Yardney who still owned 9.4% of its outstanding shares, would not be counted, without a further disclosure that the Yardney family were being disenfranchised because it was known they would vote against the agreement.
The complaint discloses that the issuance of Yardney stock was conditioned upon "the affirmative vote of the holders of a majority of the shares voted at the special meeting of stockholders, other than the 1,315,834 shares owned by Whittaker (representing approximately 56% of the outstanding shares) and the 220,320 shares owned by Michael N. Yardney and members of his immediate family (representing approximately 9.4% of the outstanding shares). The required approval cannot be waived by either party to the agreement."
The exchange of assets for Yardney stock was approved by a vote of 1,714,327 to 255,006; eliminating Whittaker's shares the vote was 398,493 "for" and 255,006 "against"; and eliminating both Whittaker's and the Yardney family's shares the vote was 398,493 "for" and 34,686 "against."
The complaint alleges that Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 as well as the rules and regulations promulgated there-under have been violated. Plaintiff prays for damages approximating $11,000,000 and for the establishment of a trust of the Yardney shares in the hands of Whittaker and an accounting therefor.
In September 1970, approximately seven months before this action, plaintiff brought a derivative action in the Supreme Court of New York based upon the same transactions. The State action alleges corporate waste, conversion and breach of fiduciary duty.
THE MOTIONS TO DISMISS AND TO DECLINE JURISDICTION
The defendants contend that no claim for relief is stated under the Securities Laws. They concede, however, that Section 10(b) of the 1934 Act (and Rule 10b-5 thereunder) covers alleged misrepresentations in a proxy statement; and that presumably such misrepresentations also may give rise to a claim under Section 14(a), the proxy statement section. This concession is, of course, compelled by the decision of the Supreme Court in Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453, 468, 89 S. Ct. 564, 21 L. Ed. 2d 668 (1969). It is not easy to see what different elements of proof would be required to show a violation of Section 10(b) rather than of Section 14(a), cf. Gould v. American Hawaiian S.S. Co., 319 F. Supp. 795, 801-802 (D. Del. 1970). But cf. Swanson v. American Consumer Industries, 415 F.2d 1326, 1331-1332 (7 Cir. 1969). But plaintiff is entitled to claim under both sections. The defendants concentrate their fire, however, on two propositions, the first alleged to be applicable to both the Section 10(b) and the Section 14(a) claim, the second only to the 14(a) claim. These ...