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GALL v. EXXON CORP.

July 30, 1976

Joan Levine Gall
v.
Exxon Corporation, et al.


Carter, District Judge.


The opinion of the court was delivered by: CARTER

CARTER, District Judge:

Defendants have moved, pursuant to Rule 56, F.R. Civ. P., for summary judgment dismissing plaintiff's complaint on the grounds that the Special Committee on Litigation ("Special Committee"), acting as the Board of Directors of Exxon Corporation ("Exxon"), has determined in the good faith exercise of its sound business judgment that it is contrary to the interests of Exxon to institute suit on the basis of any matters raised in plaintiff's complaint. Defendants' motion is hereby denied without prejudice to its renewal after plaintiff has conducted relevant discovery.

 I

 Facts

 Plaintiff's complaint arises out of the alleged payment by Exxon Corporation of some $59 million in corporate funds as bribes or political payments, which were improperly contributed to Italian political parties and others during the period 1963-1974, in order to secure special political favors as well as other allegedly illegal commitments.

 Plaintiff sues derivatively on behalf of Exxon and its shareholders. See Amended Complaint, para. 4. Her complaint is in four counts. Count I charges that the individual defendants filed or caused to be filed with the SEC financial statements or other reports which were false and misleading in that they failed to disclose the allegedly illegal political contributions, in violation of Section 13(a) of the Securities Act of 1934 and Rule 13a-1 promulgated thereunder. Count II charges that the individual defendants used the mails and other instrumentalities of interstate commerce in order to file or cause to be filed false and misleading proxy statements, and solicited proxies from Exxon shareholders pursuant to such false statements in violation of Section 14(a) of the Securities Exchange Act of 1934 and Rule 142-9 promulgated thereunder, in that such statements omitted reference to the allegedly illegal political contributions. Count III charges the individual defendants with waste, spoliation and misuse of corporate assets. Count IV charges the individual defendants with breach of their fiduciary duties to Exxon.

 The complaint demands that the individual defendants be held jointly and severally liable for damages, including loss of goodwill, allegedly suffered by Exxon. It further demands, among other things, the commencement of an investigation through independent auditors in conjunction with plaintiff's counsel, the immediate election of four new members of the Board of Directors proposed by plaintiff and, within 12 months, the election of a new Chairman of the Board and President, and reconstituting the composition of the membership of the Board of Directors and Executive Committee, such that at least 55% of the Board and the Executive Committee be made up of independent outside directors.

 II

 On September 24, 1975, Exxon's Board of Directors unanimously resolved, pursuant to Article III, Section 1, of Exxon's By-Laws *fn1" to establish a Special Committee on Litigation, composed of Exxon directors Jack F. Bennett, Richard P. Dobson and Edward G. Harness, *fn2" and refer to the Special Committee for the determination of Exxon's action the matters raised in this and several other pending actions relating to the Italian expenditures. With respect to the matters within its mandate, the Special Committee acts as the Board of Directors of Exxon. The Resolution establishing the Special Committee reads as follows:

 
"RESOLVED, That, pursuant to Article III of the By-Laws of the Corporation, there is hereby established a Special Committee on Litigation which shall consist of the following members of the Board: Messrs. J. F. Bennett, R. P. Dobson and E. G. Harness, each of whom has orally confirmed at this meeting that he has not been in any way connected or involved with matters referred to in the demand made on behalf of Stephen W. Lane and the claims made by Abraham Wechsler, Joan Levine Gall and Kathleen E. Shaw relating to payments made by or on behalf of Esso Italiana S. p. A. and is not aware of any reason which might disqualify him from serving on the Committee. Two members of the Committee shall constitute a quorum thereof. The Committee shall designate its Chairman and Vice-Chairman and its Secretariat, fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Committee. The Committee shall act only on the affirmative vote of a majority of the members present at a meeting.

 The Committee shall

 
(1) conduct or cause to be conducted such review, analysis and further investigation of the circumstances surrounding all matters referred to in the aforesaid demand and claims relating to payments by or on behalf of Esso Italiana S. p. A. as the Committee deems necessary or desirable to determine whether or not the Corporation shall undertake any litigation against any one or more of the present or former Directors or present or former officers of the Corporation in respect of such matters;
 
(2) make the determination contemplated in (1) above; and
 
(3) undertake and supervise any action necessary or appropriate to implement any such determination."

 On January 23, 1976, after an investigation of approximately four months, including interviews with over 100 witnesses, the Special Committee issued the "Determination and Report of the Special Committee on Litigation" ("Report"), an 82-page document summarizing the Committee's findings and recommendations. The facts as uncovered by the Special Committee may be briefly summarized as follows.

 The matters complained of by plaintiff center around the activities of Dr. Vincenzo Cazzaniga who was President and Managing Director of Esso Italiana, a wholly-owned subsidiary of Exxon Corporation. Exxon's investigation revealed that in 1964 and 1965, and again in 1971, Cazzaniga secretly (and apparently without authorization by Exxon) entered into certain side agreements in the name of Esso Italiana in connection with a transaction between Esso International (another Exxon subsidiary) and SNAM, a gas pipeline subsidiary of the Italian State petroleum company, ENI. In 1971, presumably pursuant to these side agreements, Cazzaniga made several unauthorized payments out of the funds of Esso Italiana to SNAM. The payments were in excess of $10 million.

 Exxon's investigation further revealed the during the period 1963-72, Cazzaniga had made other unauthorized payments of approximately $19 million. The $10 million of unauthorized payments to SNAM and approximately $19 million of other unauthorized payments were largely made from approximately forty secret bank accounts not recorded on the books of Esso Italiana, and known only to Cazzaniga and, in part, his personal assistants. There also flowed through these secret bank accounts approximately $13.5 million purportedly expended with respect to authorized political contributions but which the investigation revealed had been recycled into the secret accounts. The forty bank accounts were also funded by rebates and bank overdrafts. The overdrafts totalled approximately $19 million outstanding at the time of their discovery in 1972. The total amount that flowed through the secret accounts was approximately $39 million, including bank interest and commission charges of approximately $3 million. The investigation also revealed that political contributions by Esso Italiana to various Italian political parties during the nine-year period from 1963 through 1971 totalled $27.9 million. The amounts per year were as follows: YEAR CONTRIBUTIONS 1963 0.8 1964 1.1 1965 1.0 1966 2.5 1967 3.8 1968 5.8 1969 5.7 1970 3.5 1971 3.7 $27.9

 Of this amount, $13.5 million were recycled into one or more of the 40 secret bank accounts. *fn3" All political contributions by Esso Italiana were ended in 1972.

 It is clear that several of the Exxon directors named as defendants in this suit were aware of the existence of the political payments in Italy prior to their termination in 1972.

 N. J. Campbell became President of Esso Europe in 1966, and an Exxon director in January, 1971. He is currently a director. According to the Report, Campbell claims that he first heard of political contributions in July or August, 1968, when M. W. Johnson, who was about to retire as Senior Vice-President of Esso Europe, briefed him with respect to the subject, explaining that the contributions were destined for political parties, and that the conduits for the payments were the newspapers and public relations firms controlled by the parties. Campbell was surprised by the amounts. Johnson explained that the political parties had very large budgets and that all industries had to contribute to them. Johnson assured Campbell that the contributions were legal, and further, that he and Stott, the Exxon Contact Director for Esso Europe, had been urging Cazzaniga to reduce the contributions, though in fact they had been growing each year.

 Campbell gave instructions that the payments be promptly phased down and ordered the controller of Esso Europe, D.J. Thompson, to set up a system to keep track of the amounts being spent. Thompson thereafter established a special budget format by which Cazzaniga reported to him and he in turn reported to H. T. Cruikshank, who succeeded Johnson as Senior Vice President of Esso Europe with contact responsibilities for Italy. These reports provided both an annual total and an allocation of the total into approximately a dozen objectives of the industry and of Esso Italian. As such the budget contained references to specific problems as matters of concern, coupled with monetary figures allocated to each. This special budget format prompted the Special Committee to inquire as to whether the figures represented sums which were to be paid as an agreed consideration for official action, or inaction, with respect to specific matters, and hence be thought to constitute bribery. The Special Committee concluded that they did not.

 Campbell did not learn of the breakdown of the budget totals into components until the 1972 investigation. He knew only of the single figure for each year, though Cazzaniga on the occasion of a general meeting in Baden Baden in October, 1969, mentioned to him one of the specific objectives which Cazzaniga argued would require a continuation of ...


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