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SEIGAL v. MERRICK

March 11, 1976

David Seigal and Ethel Seigal, et al., Plaintiffs
v.
David Merrick, et al., Defendants; Harry Gehler, Plaintiff v. John P. Edmondson, et al., Defendants


Motley, District Judge.


The opinion of the court was delivered by: MOTLEY

OPINION ON MOTION TO DISMISS AND FOR OTHER RELIEF

MOTLEY, District Judge:

 Defendants have moved to dismiss the complaints in these shareholders' derivative actions on the ground that 1) they fail to state a claim under the Securities Exchange Act of 1934, and 2) they fail to plead the circumstances constituting the alleged fraud with particularity. Rule 12(b)(6), 9(b) Fed. R. Civ. P.

 Alternatively, defendants seek a consolidation and stay of these actions pending the outcome of several derivative actions filed in the Supreme Court of New York County and the Chancery Court of Delaware, New Castle County, by shareholders of Twentieth Century-Fox Film Corporation (Fox). Rule 42(a).

 The Seigal complaint alleges, in essence, that: 1) David Merrick, a defendant, had acquired, by the end of March 1974, 747,900 shares of the common stock of Fox. This acquisition, which amounted to 9% of the outstanding common stock, made him the largest single Fox shareholder; 2) Concerned that Merrick might use his position to acquire control of Fox, to dominate its affairs, and to replace its management, the directors on May 23, 1974 consummated a transaction whereby Fox purchased Merrick's shares for $6,800,000; 3) This represented a purchase price of $9.09 a share at a time when Fox stock was selling for approximately $5.875 per share; 4) Consequently, the directors caused Fox to pay Merrick a premium for his stock of approximately $2,400,000; 5) In effecting this transaction, the directors concealed from the corporation their true motives which supposedly were to eliminate dissension, to protect their personal interests, and to maintain control of Fox, in conflict with, contrary to, and without regard for the best interests of Fox. (Complaint para. 13).

 Merrick is alleged to have conspired with, and aided and abetted the directors of Fox to commit the foregoing acts to the detriment of Fox and the personal benefit of himself and the directors (Complaint para. 15). As a further premium for the purchase of Merrick's stock, it is claimed that the directors terminated or agreed to terminate a lawsuit commenced against Merrick by Fox in April 1974 charging him with wrongful acts allegedly committed by him in the acquisition of Fox shares (Complaint para. 14).

 The complaint then alleges that the foregoing constituted a device, scheme and artifice to defraud; the making of untrue statements of material facts and omissions of material facts necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading; and acts, practices and a course of business which operates as a fraud and deceit; all in connection with the purchase and sale of securities; and by the use of means and instrumentalities of interstate commerce, the mails, and facilities of a national securities exchange; all in violation of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. ┬ž 78j(b)), and Securities and Exchange Commission Rule 10b-5. (Complaint para. 16).

 Finally, the complaint alleges that the foregoing facts constitute a breach of fiduciary duties by the individual defendants and a waste of corporate assets. (Complaint paras. 17, 18).

 The Gehler complaint is essentially the same as the Seigal complaint. In addition, however, it alleges that jurisdiction is based on diversity of citizenship in that Harry Gehler, the plaintiff, is a citizen and resident of Ohio and each defendant is a citizen and resident of some other state. The defendants in both actions are the corporation, Fox, the individual members of its board of directors, and David Merrick.

 In the Gehler complaint there are also some allegations not made in the Seigal complaint. In Gehler, it is also alleged that: 1) Prior to March 1, 1974, David Merrick, a nationally prominent producer and writer of movies and Broadway shows, entered into a plan, scheme and conspiracy to secure working control of Fox by acquiring a substantial number of its shares for the purpose of using his dominant stockholder position to arrange for a noncompetitive contractual agreement with Fox to produce a number of pictures for Fox on terms and conditions which would bring him enormous and unusual profits; 2) In furtherance of such plan, Merrick initiated an illegal tender offer for the shares of Fox whereby, the acquired 663,600 shares of Fox's common stock; 3) As a result of such action, Merrick's holdings in Fox were increased to 747,900 or 9% of the outstanding common stock; 4) Merrick attempted to use his position to compel the Fox Board to enter into an agreement which would be enormously profitable to Merrick; 5) Merrick threatened the management personnel of Fox with loss of their jobs if they refused to negotiate such a contract with him and threatened a proxy fight and/or tender offer for the control of Fox unless five of his nominees were placed on the Board; 6) The Board at first rejected Merrick's demands and on April 25, 1974, filed suit against him in this Court in which the Board sought to enjoin Merrick from acquiring any shares of Fox, from voting his shares or otherwise using the stock he had acquired to control or affect the management of Fox, and requiring him to divest himself of Fox shares and award Fox the damages it sustained by reason of Merrick's illegal conduct; 7) On May 21, 1974, less than a month after suit had been filed, and as a result of private negotiations with Merrick, the Board agreed, in writing, to dismiss the suit with prejudice and without costs and to purchase Merrick's stock for $6,750,000 or $9.03 per share, representing an illegal premium of more than $2,000,000. The agreement also provided that for a period of three years Merrick would not directly or indirectly acquire any Fox shares and would not become a participant directly or indirectly in any contest involving the election of Fox directors.

 The complaint then alleges that the agreements entered into were with the knowledge and consent of the Board members. It further alleges that the individual Board members breached their fiduciary duties to Fox by causing it to pay the illegal premium in order that they could continue to remain in control of Fox and maintain themselves in office and power, and without serving any legitimate business purpose of the corporation. In addition it is alleged that the individual defendants made untrue oral and written statements to the shareholders of Fox regarding the purpose for the acquisition of Merrick's shares and have failed to state that the true purpose of such transactions was to maintain themselves in office through their control of Fox. The complaint finally alleges that the acts of defendants constitute a waste of corporate assets as well as a breach of fiduciary duty to Fox and its shareholders and, further constitutes the employment of a device, scheme, and artifice to defraud Fox and its shareholders, as well as a course of conduct which operated as a fraud upon Fox and its shareholders.

 In support of their motions to dismiss, the defendant directors say: 1) The complaints are devoid of any allegation that any of the Fox directors who voted for the transaction was deceived as to any material fact relating to the transaction; 2) The complaint does not allege that Merrick dominated or controlled Fox's Board of Directors for the purpose of advancing his individual interests at the expense of the minority shareholders.

 Defendants contend that, in the absence of such deception or improper control, the complaint fails to state claims under Section 10(b) and Rule 10b-5. At best, defendants say, the complaints set forth claims for corporate waste and mismanagement which are not cognizable under federal law.

 Defendant Merrick joined in the motions to dismiss made by Fox and the individual defendants. He moved to dismiss on the additional grounds that as to him there is no allegation 1) that he deceived the corporation or anyone else in any manner with respect to the purchase of his stock by the corporation; 2) that he controlled the Board and by such control brought about the transaction in question; 3) that with knowledge of the director's true motives, he participated in and thus aided and abetted the alleged violation of Section 10(b) and Rule 10b-5 or conspired so to do. Moreover, Merrick says, there is no specific conduct alleged on his part, such as, misleading statements or fraudulent financial practices which would constitute a violation of the Securities Act or which ...


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