The opinion of the court was delivered by: MOTLEY
FINDINGS OF FACT AND CONCLUSIONS OF LAW
CONSTANCE BAKER MOTLEY, D.J.
These consolidated cases are shareholder derivative suits on behalf of Twentieth Century-Fox Film Corporation (Fox). The complaints contain allegations of, inter alia, violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as breach of fiduciary duty and waste and mismanagement of corporate assets by David Merrick and certain present and former officers and directors (defendant-directors) of Fox. The suspect actions of the defendant-directors included 1) Fox's tender offer for at least 2,000,000 shares in 1974; 2) the filing of a lawsuit by Fox in this court in 1974; and 3) the 1974 purchase by Fox from Merrick of 747,900 shares of Fox stock for the sum of $2,400,000 above the then market price of the stock.
Plaintiffs alleged that the purpose of these three transactions was to protect the positions and personal interests of the defendant-directors. These actions were set for trial on February 14, 1977.
On February 10, 1977 the parties in these consolidated actions signed a Stipulation of Settlement (Stipulation) (attached hereto as Appendix A) which would have terminated the actions if approved by the court. Notice of the proposed settlement was duly mailed to the shareholders of Fox. Rule 23.1, Fed. R. Civ. P.
The terms of the Stipulation which are at issue are essentially the following: The defendant-directors are to pay $1,138,500 to Fox. Upon receipt of $1,062,500 of this sum, Fox is to issue 425,000 "rights" to the defendant-directors to divide among themselves as they choose. Each of these rights may be converted into one share of Fox stock and may be exercised at a price of $13.25. There are numerous restrictions and provisions regarding the rights. The most important are that the rights cannot be exercised for one year after the settlement is approved by the court but can be exercised for a period of three years after the one year hiatus. There is also a provision restricting the sale of the underlying stock after the exercise of the rights.
The settlement, of course, provides for the termination of the instant lawsuits, but also provides for the settlement of related state court actions and a claim by David Merrick against Fox.
On May 13, 1977 a Fox shareholder, Muriel Koby, filed a "Notice of Intention to Object to Proposed Compromise and Settlement". A preliminary hearing on the fairness of the settlement was held on May 23, 1977. At a subsequent hearing on June 27, 1977 the issues to be tried regarding the settlement were formulated. The questions of fact to be tried were: 1) the value as of February 10, 1977 of the stock rights to be transferred to the defendant-directors under the settlement; 2) whether there would be any compensation going to Fox for these rights, or whether the purported compensation is, in fact, illusory; and 3) whether there was any fraud with respect to the valuation of the rights and the compensation going to the corporation in that certain information regarding the spectacular success of the motion picture Star Wars or other matters was withheld from the shareholders at the time the settlement agreement was entered into.
The legal issues to be decided by the court were: 1) whether the use of Fox's treasury stock to satisfy the exercise of the stock rights violated the preemptive rights of Fox's shareholders; 2) whether the "Notice of Settlement Hearing" to the Fox shareholders was adequate; and 3) what effect Green v. Santa Fe Industries, Inc., 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977) would have had on the merits of these actions. These issues were litigated on October 11, 12, 13, and 14.
The court now makes the following findings of fact and conclusions of law based on the documents related to the settlement submitted by all parties (including affidavits attached to the proponents' and objector's papers and all attached exhibits) and based upon the evidence elicited at the October hearing.
1. Fox has conceded, and this concession has not been challenged by any other proponent of the settlement, that the Stipulation would not be fair to Fox if viewed from the point of view of the present time since the value of the Fox stock has more than doubled from its February 10th price of 11 and 3/8.
2. All the proponents argue that as of February 10, 1977, the day the Stipulation was signed, it was a fair and reasonable settlement of the lawsuits.
3. Although the directors purported to pay $.80 as the predetermined value for each stock right to be received under the settlement (with the remaining $1.70 per right going to the cost of the settlement itself),
the court, relying on the testimony of the objector's expert, Colman Abbe, finds that each right was worth approximately $3.50 as of February 10, 1977 based on information then available to the public.
A fundamental difference between the valuation theory of Abbe and the valuation theory of the proponents' expert, Stanley S. Shuman, is that they measured the value of these rights from different points of view. Abbe ascribed $3.50 as the value of these rights to the actual recipients, mainly John L. Vogelstein who was to receive 376,800 of the 425,000 rights. Schuman said the open market value of the rights was approximately $.80. Thus the court is called upon to decide which is the correct valuation theory as a matter of law. A large part of the disparity in the valuations may be explained by the fact that restrictions in the free transfer of the rights would lower their value in the eyes of the buyer in a free market, whereas the restrictions would mean little to Vogelstein since the evidence shows that he had been interested in accumulating shares of Fox stock for a period of time prior to February 10, 1977 and would, presumably, not be interested in transferring his rights anyway.
The court finds that the value should be the actual value to the actual recipients, not the value in a theoretical open market for such rights. The stock rights transaction is a "closed" one in the sense that none of these rights has or apparently ever will be offered to the public or other shareholders of Fox. Furthermore, from the point of view of the benefits to Fox, the value of the rights should be the value to the actual recipients since, in fairness to Fox and its shareholders, Fox should be receiving as much for these rights as it can legitimately get from the actual buyers. The directors could not buy these rights from anyone in an open market, only from Fox. There is thus no reason why the rights should be based on a theoretical "open market" value when such an open market does not exist.
4. Thus, the defendant-directors received 425,000 stock rights valued at approximately $3.50 each for a total value of $1,487,500 (425,000 X $3.50). In return, the corporation was to receive a total cash payment of $1,138,500. The substance of the settlement was that Fox would therefore be receiving nothing for settling the lawsuits but would, realistically, be paying the defendant-directors $349,000 ($1,487,500 less $1,138,500) to settle the actions.
5. The court, therefore, finds that the Stipulation as of February 10, 1977 was not fair and reasonable to Fox.
6. The court finds that none of the parties had access to any inside information of Fox with respect to the relatively unprecedented success of the motion picture Star Wars or any other phase of Fox's business when they entered into the stipulation which would lead them to believe that the rights were worth more than $.80 apiece based on such information. Thus, there was no proof of fraud with respect to the valuation of the rights and the compensation going to the corporation based on such inside information as claimed by the objector.
1. The Stipulation of Settlement signed on February 10, 1977 is not fair and reasonable or in the best interests of Fox and its shareholders. The stipulation must, therefore, be disapproved by this court. Levin v. Mississippi River Corporation, 59 F.R.D. 353, 361 (S.D.N.Y.), aff'd sub nom. Wesson v. Mississippi River Corporation, 486 F.2d 1398 (2d Cir.), cert. denied, 414 U.S. 1112, 94 S. Ct. 843, 38 L. Ed. 2d 739 (1973).
2. Since the court finds that the Stipulation was not fair based on the value of the rights on February 10, 1977, the court finds it unnecessary to rule on the other legal questions with respect to the Stipulation of Settlement.
There will be a pre-trial conference on Friday, November 11, 1977 at 11:30 A.M. in Courtroom 905 for the purpose of rescheduling the trial date for these actions.
Constance Baker Motley U.S.D.J.
STIPULATION OF SETTLEMENT
WHEREAS, the above actions entitled Seigal v. Merrick, et al. (the " Seigal action") and Gehler v. Hearst, et al. (the " Gehler action") are actions brought by plaintiffs as stockholders of Twentieth Century-Fox Film Corporation ("Fox") derivatively for and on behalf of Fox and against certain present and former members of the Board of Directors of Fox (the "defendant-directors") and David Merrick ("Merrick"); and
WHEREAS, by order entered March 12, 1976 the Court determined and ordered that the Seigal and Gehler actions be consolidated for all purposes; and
WHEREAS, the complaints in the Seigal and Gehler actions, have, by order of this Court, been deemed to have been supplemented and amended to conform to plaintiffs' contentions contained in Plaintiffs' Trial Memorandum dated November 12, 1976 and the Pre-Trial Order dated January 19, 1977, and, as so supplemented and amended, contain allegations of, inter alia, violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, breach of fiduciary duty and waste and mismanagement of corporate assets by the defendant-directors and Merrick in connection with (1) Fox's tender offer, announced on February 28, 1974, for at least 2,000,000 shares of its outstanding stock, (2) the authorization and filing on April 24, 1974 of the action entitled Twentieth Century-Fox Film Corp. v. Merrick, et al., 74 Civ. 1823 (S.D.N.Y.), and (3) the May 23, 1974 purchase by Fox from Merrick of 747,900 shares of Fox stock for $6,750,000 (hereinafter the complaints as supplemented and amended are referred to as the "Complaints"); and
WHEREAS, all the individual defendants in the Seigal and Gehler actions have denied all allegations of wrongdoing contained in the Complaints and have demanded judgment on the merits dismissing the Complaints; and
WHEREAS, defendant Fox, the party upon whose behalf the Seigal and Gehler actions have been brought, has denied all allegations of wrongdoing on its part or on the part of the defendant-directors as alleged in the Complaints and has prayed that an appropriate judgment be entered; and
WHEREAS, lead trial counsel for plaintiffs have conducted an extensive investigation relative to plaintiffs' claims and the underlying events and transactions involved in the Complaints, including taking the deposition testimony of John P. Edmondson, Jerome Edwards, Donald N. Frey, William T. Gossett, F. Warren Hellman, H. Blackmer Johnson, John H. Johnson, Ralph F. Lewis, Malcolm A. MacIntyre, Harry J. McIntyre, David Merrick, John T. Pollock, Dennis C. Stanfill, Gordon Stulberg, Gerald A. Trautman, and John L. Vogelstein and questioning the deponents with respect to several hundred documents, and have made a thorough study of the legal principles applicable thereto, and believe that the Seigal and Gehler actions are ready for trial; and
WHEREAS, plaintiffs in the Seigal and Gehler actions desire to settle such actions on the terms and conditions hereinafter set forth and deem such settlement to be fair, reasonable and adequate and in the best interests of Fox and its shareholders; and
WHEREAS, defendants, while continuing to deny all allegations of wrongdoing, nevertheless desire to settle, compromise and terminate the Seigal and Gehler actions so as to avoid further substantial expenses and inconvenience and the distraction of burdensome, protracted litigation and to put to rest all claims which have been, could have been or might in the future be asserted (either directly or derivatively) arising from or in any way related to the matters alleged in the Complaints;
NOW, THEREFORE, IT IS STIPULATED AND AGREED, by and among the undersigned, subject to the approval of the Court, that the Seigal and Gehler actions and all of the claims and causes of action of any nature or description which have been, could have been or might in the future be asserted (either directly or derivatively), arising out of or in any way related to the actions or transactions alleged in the Complaints, are hereby compromised and settled on the terms and conditions hereinafter set forth and that the Seigal and Gehler actions shall be dismissed on the merits with prejudice on the conditions set forth herein:
1. Upon final approval of this Stipulation of Settlement (the "Stipulation"), as defined in paragraph 6 hereof, or within ten (10) days thereafter, the defendant-directors shall pay to Fox, in cash, by certified check, ...