Anderson, McGowan*fn* and Timbers, Circuit Judges.
This appeal relates to a further chapter in the extraordinarily litigious history of Alleghany Corporation. Appellant is an Alleghany stockholder who asserts derivatively in its right certain claims against former officers and directors for damages payable to the corporation. Only three of the named defendants (apart from the nominal Alleghany) were served with process, i.e., John D. Murchison and Clint W. Murchison, Jr., individually and as a partnership, and Donald D. Harrington. They have prevailed in the District Court, where the merits of an amended complaint were adjudicated on cross-motions for summary judgment. Haberman v. Murchison, 331 F. Supp. 180, aff'd on rehearing, 335 F. Supp. 286 (S.D.N.Y.1971). The evidentiary record for this purpose consisted, by agreement of the parties, solely of the testimony and exhibits in a Securities and Exchange Commission proceeding. Jurisdiction in the District Court was asserted to rest upon (1) diversity of citizenship, which was unchallenged, and (2) federal causes of action allegedly arising under the Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq., a contention which was attacked by appellees.
The core issue, to which the other claims are mainly incidental, relates to whether appellees realized, upon the sale by them of shares of Alleghany, a premium attributable to a transfer of management control. The SEC, considering the control issue on the same evidence as was later before the District Court, determined that there was no transfer of control; and that decision was sustained upon direct review in this court. Phillips v. SEC, 388 F.2d 964 (2d Cir. 1968). Although the issue arises in this litigation in a common law and differing statutory context, the District Court reached the same conclusion. We find no warrant for disturbing its judgment in this or any other of its aspects; and, for the reasons hereinafter appearing, we affirm the District Court's dismissal of appellant's action.
This suit has its source in a series of events following a proxy contest in 1961 in which the Murchisons and their associates successfully wrested control of Alleghany from Allan P. Kirby. Although the Murchisons were able on that occasion to elect a board of directors of their own choice, Kirby retained control of the largest single block of shares in the Corporation -- more than 3,300,000 shares, or 33 percent of the outstanding common stock. Kirby, moreover, continued to exert every effort to regain control, and succeeded in largely frustrating the Murchisons' program for Alleghany.*fn1
Prior to the annual stockholders meeting on April 9, 1962, the management solicited proxies for the reelection of the board of directors. Although appellee Harrington, one of the nominees, had previously expressed to John Murchison, who had become president of Alleghany the preceding year, his desire to retire from the board, he consented to the placement of his name in nomination for an additional term, and in due course was elected with the rest of the Murchison nominees. Neither Harrington's desire to step down from the board, nor the difficulty the Murchison group was having with Kirby, were referred to in the proxy statement.
Following the May, 1962 break in the stock market, the value of Alleghany common stock dropped precipitously. From a high in March of $12 1/4 the stock fell to a low of $6 7/8 in June. Thereafter, the price fluctuated considerably, rising gradually to $7 7/8 on August 14, to $9 3/8 on October 5, and finally to $13 in January, 1963. In May and June, 1962 the Murchison board of directors authorized the purchase by Alleghany of some $2,000,000 of its own outstanding common stock and the stock of two subsidiaries, Investors Diversified Services, Inc., and New York Central. In a letter to the stockholders dated August 13, 1962, John Murchison characterized this purchase as an attractive investment in light of the fact that market price was well below net asset value.
In July of 1962, the Murchisons were approached by one Bertin Gamble for the sale of some part of their holdings in Alleghany. The idea for the purchase of Alleghany stock was first suggested to Gamble by an investment banker, Charles Allen, who thought that Gamble, on acquiring a significant Alleghany interest, might, as Allen testified, "perhaps act as a balance wheel . . . thinking that he could get along with Kirby and solve this whole situation." Allen estimated that a fair price for the stock, based on net asset value, would be in a range of from $10 to $12 a share.
On August 14 the parties entered into preliminary agreements calling for the immediate sale to Gamble of 1,500,000 shares at $10 per share, a right in the buyer to "call" (or buy) an additional 1,500,000 to 2,000,000 shares at the same price any time before May 31, 1963, and, in the event the call was not exercised, a right in the sellers to "put" (or sell) 1,500,000 to 2,000,000 shares at the same price between June 1 and June 30, 1963.*fn2 These terms were finally agreed to and the contract executed on October 5, 1962, at which time its terms were made known to the public. The put and call agreement was later extended, and Gamble exercised his call for an additional 1,834,755 shares on October 31, 1963. Although this agreement was negotiated by the Murchisons alone, thirty-seven of their associates also participated in either the initial sale or the put and call agreement.
Several days prior to October 5, 1962, John Murchison approached Harrington with an offer to buy 170,000 of Harrington's 186,000 shares in Alleghany. Harrington was receptive, and the price negotiated between them was $12.19 per share, a price approximating Harrington's original investment. According to Harrington, he was at that time ignorant of the agreement between the Murchisons and Gamble. On October 9, having sold substantially all of his interest, Harrington resigned from the board.
On October 9, 1962 Gamble and his attorney were elected to the board to replace Harrington and Dan Kimball, a named but unserved defendant in this action, who had also resigned. The remaining eight seats continued to be held by the Murchison group until the next stockholders meeting. Because neither of the parties had yet exercised their rights under the put and call agreement -- thus leaving uncertain the ultimate ownership of a substantial portion of the voting stock -- that meeting was postponed by the board from April to December, 1963.
In December, 1962, John Murchison resigned as president of Alleghany and Gamble was elected to replace him.*fn3 Later that month, an application was filed with the SEC by Randolph Phillips, requesting a determination that the foregoing transactions resulted in the vesting of control of Alleghany in Gamble.*fn4 From January to September, 1963, hearings were held before the SEC, on the basis of which the Commission ultimately concluded that, for purposes of Section 2(a)(9) of the Investment Company Act, 15 U.S.C. § 80a-2(a)(9), control had not vested in Gamble or his associates. As noted above, this court affirmed the Commission's determination in Phillips v. SEC, 388 F.2d 964 (2d Cir. 1968).
During this period, Gamble's efforts to mediate between Kirby and the incumbent board, and to establish an amicable working arrangement with Kirby, either for himself or for the Murchisons, met with failure. Finally, on October 31, 1963, the same day that Gamble exercised his call against the Murchisons, Gamble sold 1,600,000 shares at $10.50 a share to Kirby and two companies allied with him. At the December, 1963, shareholders meeting, Kirby and his associates, now firmly in control, installed a new board of directors with Kirby as chairman.
The foregoing events form the basis of this action, which was originally filed as a one-count complaint by a plaintiff named Smith who was not a resident of New York. That complaint charged appellees principally with
(1) receiving a premium for their sale of stock in exchange for their corporate offices and ...