The opinion of the court was delivered by: GURFEIN
Plaintiff Quirke and the defendants jointly moved pursuant to Rule 23 and 23.1 for confirmation of a stipulation of settlement. The court ordered a hearing to be held November 29, 1973 with appropriate notice to all Baltimore and Ohio Railroad Company (B&O) shareholders as a class. The hearing has been held. Objections raised will be discussed below.
Plaintiff is a shareholder of the B&O. Defendant Chesapeake & Ohio Railway Company ("C&O") with a wholly-owned subsidiary owns 94.35 percent of B&O's outstanding common stock and 92.35 percent of the outstanding preferred stock. Other defendants are two wholly-owned subsidiaries of C&O, a bank, Mercantile Safe Deposit & Trust Co. of Maryland ("Mercantile") and certain officers and directors of one or more corporate defendants.
The complaint, filed on August 24, 1972, alleges in Count I as a class action on behalf of all minority shareholders of B&O (common and preferred) that the defendants have pursued a plan to depress the market price of B&O stock in breach of § 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 and of common law fiduciary duty.
As part of the plan it is alleged that C&O caused B&O not to pay dividends on B&O stock, misused B&O's assets for its own benefit, and failed to merge with B&O pursuant to an "agreement" of which the B&O shareholders were third party beneficiaries.
Count II, brought derivatively on behalf of B&O, alleges that certain intercompany transactions were in violation of Section 10 of the Clayton Act (15 U.S.C. § 20) because of interlocking directors and the lack of competitive bidding.
Count III, brought derivatively on behalf of B&O alleges that B&O entered into equipment trusts and conditional sale agreements with Mercantile, which had two common directors with B&O and that since these dealings were undertaken without competitive bidding, they violated the Clayton Act § 10.
Before we describe the prayers for relief, we must review the history that led to the complaint.
The action is an outgrowth of C&O's acquisition of control of B&O over ten years ago. The Interstate Commerce Commission ("I.C.C."), by order dated December 7, 1962, authorized C&O to acquire a controlling block of B&O stock at a fixed ratio of exchange. The I.C.C. order was entered after extensive hearings. Its opinion is reported as Chesapeake & Ohio Control Baltimore & Ohio, 317 I.C.C. 261 (1962); Brotherhood of Maintenance of Way Employees v. United States, 221 F. Supp. 19 (E.D. Mich. 1963), aff'd, 375 U.S. 216, 11 L. Ed. 2d 270, 84 S. Ct. 341 (1963).
In 1960, the C&O had made an offer to B&O's shareholders to exchange C&O stock for B&O stock at the ratio of one share of C&O common for one share of B&O preferred; and one share of C&O common for 1.75 shares of B&O common. This offer was amended to include a payment of $1.69 per B&O common share exchanged to compensate for the balance of the 1960 common dividend which had been omitted by B&O. (B&O preferred stock had been paid their full $4.00 per share dividend in 1960, and there was nothing to add.) It was this offer and the subsequent acquisition of control by C&O that was approved by the I.C.C. By 1964, C&O held about 90% of the B&O common and preferred. From 1964 to 1972, C&O increased its holdings of B&O stock by about 5% (to 95%) by purchases.
The plaintiff here, and the class, are the B&O shareholders, common and preferred, who did not accept the C&O offer of exchange, but elected to keep their B&O stock.
For more than 10 years, the B&O minority received no dividends and found their stock delisted with only a thin market. C&O took charge of the affairs of the B&O, sold and leased its equipment, but never actually merged the two companies, as C&O had allegedly promised the Maryland Port Authority before the I.C.C. "control" decision. Although the minority had refused the exchange offer, they were unhappy at the turn of events -- no dividends and no merger.
Almost inevitably a shareholder of B&O arose to champion the cause of the locked-in minority. Four derivative actions were brought in this Court on behalf of B&O and against C&O. One of them also named directors of both railroad companies. See Schleiff v. Chesapeake & Ohio Ry. Co., 43 F.R.D. 175 (S.D.N.Y. 1967). The actions involved alleged a breach of fiduciary duty in the sale of certain B&O assets which does not concern us here. In one of the actions (Schleiff v. Biggers, Action IV), there was an added complaint that various transactions between B&O and C&O violated Section 10 of the Clayton Act, because there was no competitive bidding. These involved "leasing of cars, exchange of cars, sale of cars, agreements to finance and the like," see 43 F.R.D. at 180. Judge Wyatt approved a settlement of all the claims. The most serious objections to the settlement were made by Edward F. Quirke, now our plaintiff in this action.
His present complaint seeks the following relief. In Count I, aside from the injunctive relief sought which would be rendered moot by the settlement, plaintiff asks the Court to compel C&O to pay dividends to the class on their B&O common stock for the period from 1961; to offer C&O stock to the class at the same ratio as was contained in the 1960 exchange offer; and to merge with B&O. He also seeks punitive damages for B&O and the class, as well as an accounting.
In Count II and in Count III, plaintiff seeks treble damages for B&O for the acts allegedly in ...