The opinion of the court was delivered by: LASKER
This is a stockholder's derivative action brought under The Securities Exchange Act of 1934 ("the Act"). Plaintiff alleges that defendants procured shareholder approval at a special meeting of the stockholders for various corporate acts through the use of a proxy statement that was materially false and misleading, in violation of § 14(a) of the Act
and S.E.C. Rules 14a-9
17 C.F.R. § 240.14a-9 and § 240.14a-3.
Plaintiff Harry Lewis owned Class A stock of Investors Funding Corporation of New York ("IFC") at the time of the alleged wrongs. The defendants, other than the corporate defendant, are alleged to have been officers and directors of IFC during the period complained of. Defendants Jerome, Norman and Raphael Dansker ("the Danskers") were the principal officers and directors, owning 90% of IFC's Class B stock. Defendant IFC is a New York corporation, which invests in, purchases and sells real estate.
The complaint charges that the defendants, by means of a materially false and misleading proxy statement, procured stockholder approval for three corporate acts:
(1) an employee stock option plan of which the Danskers would be principal beneficiaries; (Complaint Par. 12);
(2) issuance of a total of 30,000 stock warrants of Class A stock to the Danskers at $15. per share;
(3) sale of 15,000 Class A shares to the Danskers at $15. per share, payable by them over twenty quarters by non-interest bearing notes.
Plaintiff claims the proxy statement was false and misleading in (1) failing to disclose the market price of IFC stock at the latest practicable date preceding the stockholder solicitation (Complaint Par. 13(a)) and (2) significantly understating the benefits the Danskers received from their real estate transactions with IFC (Complaint Par. 3(d)).
In addition, as a pendent claim, plaintiff contends that the issuance and sale of 15,000 IFC shares to the Danskers for their promissory notes violated § 504 of the New York Business Corporation Law, McKinney's Consol. Laws c. 4. (Complaint Par. 16.)
Plaintiff seeks to require the individual defendants to account to IFC for all profits or losses resulting from the violations; cancellation of all warrants and options granted under the plans proposed in the proxy statement and rescission of the Danskers' purchase of 15,000 Class A shares.
Plaintiff has now moved for partial summary judgment on liability on the ground that § 14(a) of the Act and Rules 14a-3 and 14a-9 promulgated thereunder have been violated as a matter of law because the proxy statement failed to provide a current market price for IFC stock and because it falsely and insufficiently described the tax deductions that the Dansker defendants might gain (through the use of various partnerships) as a result of the approved transactions. Defendants cross-move for summary judgment on the grounds that none of the allegations state a claim under § 14(a) or the S.E.C. rules. Alternatively, defendants, on the authority of Rosenfeld v. Black, 445 F.2d 1337, 1341 fn. 5 (2d Cir. 1971) seek to stay this action pending disposition of a similar action between the parties in New York Supreme Court.
As a threshold matter, it is necessary to determine whether the court should stay this action until the New York suit brought by plaintiff against the same defendants in the New York Courts is determined. Chief Judge Friendly in Rosenfeld, supra, "unreservedly [condemned]" the practice utilized in stockholder suits of commencing simultaneous actions in both the state and federal courts. A comparison of the state and federal pleadings here reveals that the complaints are substantially similar so that under ordinary circumstances the rationale of Rosenfeld would apply.
However, in determining whether a stay is appropriate an important factor to be considered is the relative postures of the two actions. In Rosenfeld, a substantial burden was placed on the New York courts because they were required to pass upon a considerable number of motions "to no effect whatsoever." Here, in contrast, no action has been taken in the state court, beyond serving of the complaint and answer, (see letter of Reginald Duff, dated December 15, 1972), while the record to date in this action has burgeoned due, in large part, to the motions for summary judgment.
Since many of the issues presented on these motions are solely questions of law, and since the state action has remained inert, it is proper for us to decide these motions, the rationale of Rosenfeld notwithstanding. Were plaintiffs to now reactivate the state action, we hope, in the words of Chief Judge Friendly, the "state judges would feel . . . free to take appropriate action to avoid this sort of imposition." Rosenfeld at p. 1341, fn. 5.
THE MOTIONS FOR SUMMARY JUDGMENT
The Non-Disclosure of the Current Market Price of IFC.
Plaintiff contends that as a matter of law § 14(a) of the Act was violated because the proxy statement omitted to state the current market price of IFC as required by Item 11(a) of Schedule 14a, under S.E.C. Rule 14a-3, which reads:
"If action is to be taken with respect to the granting or extension of any options, warrants or rights to purchase securities of the issuer or any subsidiary, furnish the following information:
"* * * (iv) the market value of the securities called for or to be called for by the options, warrants or rights, as of ...