The opinion of the court was delivered by: POLLACK
The parties to this stockholder's derivative action against certain officers and directors of Simplicity Pattern Co., Inc. (hereafter "Simplicity") have submitted a proposed settlement to the Court for approval pursuant to Rule 23.1, Fed.R.Civ.p.
Hearings on the settlement, at which only its proponents were represented in person, were held on April 28, 1976, July 1, 1976, and July 23, 1976. A long time stockholder with substantial holdings of Simplicity stock submitted a written objection.
Upon careful examination of the four corners of the proposed settlement and the proponents' written and oral support for it, the Court has concluded that the proponents have failed to carry their burden of showing that the settlement in its present form is fair, reasonable and adequate under all the circumstances complained of in the Complaint and revealed upon the proceedings herein and that it must be disaffirmed in its present (amended) form.
I. The Parties and Pleadings
The Complaint in this derivative stockholder's action, filed July 9, 1975, asserts that violations of Sections 10 and 14 of the Securities Exchange Act of 1934, the Rules and Regulations promulgated pursuant to those sections, and the common law occurred in connection with various forms of compensation awarded to certain Simplicity directors in the last few months of 1974.
Plaintiff, a resident of Arizona, contends that the Court has federal question, diversity and pendent jurisdiction over the claims asserted in the Complaint.
The individual defendants are, or were before their retirement, the directors and senior officers of Simplicity. Defendants Robert Shapiro and Alfred Pilson retired, respectively, in 1974 and 1975. Defendant James Shapiro has already announced his forthcoming retirement this year and defendant Myron Kenzer is also scheduled to retire at the end of this year. The Answer of the defendants denies the principal allegations of the Complaint and asserts affirmative defenses going to the jurisdiction of the Court and the sufficiency of the claims.
II. The Corporate Transactions at Issue1
The Complaint charges that James J. Shapiro has dominated Simplicity's Board and serves as Simplicity's chief executive officer, and that Shapiro and six other directors entered into a plan to enrich themselves unfairly at the expense of the corporation. They allegedly implemented this plan by causing the corporation (1) to enter into employment and post-retirement consulting contracts with them bearing excessive compensation, (2) to amend the Retirement Plan to permit the payment to themselves of lump-sum retirement benefits in advance of actual retirement, and (3) to improperly amend a Stock Option Plan without stockholder approval and procure unwarranted benefits thereby.
The proposed settlement (described infra) purports to remedy only the third of these alleged abuses of fiduciary duty.
The various transactions questioned herein occurred as follows:
At a meeting held November 25, 1974, the Simplicity Board voted to increase the annual remuneration to James Shapiro, the chief executive, under an existing employment contract from $156,000. to $200,000. and increased the annual post-retirement payments to him under an existing consultant's contract from $100,000. to $120,000. guaranteed to him or to his widow or estate for 10 years. The payments so provided would also become due to Shapiro's widow or estate should he not survive to his actual retirement date.
Post-retirement consultant contracts were also voted to Robert Shapiro
and Alfred Pilson;
employment contracts were voted for Messrs. Lund,
and a combination employment and consultant contract was voted for Myron Kenzer.
Each of the above-mentioned contracts was passed by a round robin unanimous vote of all directors at the same meeting omitting the director who was the subject of the contract in each case.
To fulfill the requirements of 17 C.F.R. § 240.14a-101 (which requires that management salaries be disclosed in a proxy statement), the employment and consultant contracts and their amounts were reported to the stockholders under date of May 1, 1975 but no mention was made in the proxy statement that the amounts represented recent increases and compensation benefits voted by the directors to each other seriatim as indicated. A preliminary copy of the statement was submitted to and received no comments from the Securities and Exchange Commission; it gave notice of a June 1, 1975 stockholders' meeting at which directors would be elected.
Also passed at the November 25, 1974 Board meeting was an amendment to the salaried employees' portion of the corporation's retirement plan. That amendment made it possible for the first time for a salaried employee to receive retirement benefits in advance of actually retiring from service.
Since the Plan already had provided the corporation's Retirement Committee with authority to pay out retirement benefits in a single lump-sum,