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July 2, 1979

HARRY LEWIS, Plaintiff, against F. WAYNE VALLEY et al., Defendants.

The opinion of the court was delivered by: LEVAL

This action is brought by a shareholder, Harry Lewis, in "derivative" and "representative" capacity against the Singer Company and present and former directors. The first four counts seek to set aside four different executive compensation and stock option plans *fn1" on the grounds that the proxy material which solicited approval of the plans violated Section 14 of the Securities Exchange Act, 15 U.S.C. § 78n by failing to disclose alleged "secret, unauthorized and illegal payments in sums in excess of $4,400,000 consisting of illegal discounts, rebates, payoffs and political contributions to secure domestic and foreign business and special political favors" during the period between January 1, 1967 and December 31, 1976. The complaint does not describe the alleged undisclosed payments with any greater specificity.

The Fifth Count alleges a violation of Section 10b of the Exchange Act and asks damages against the directors who approved the issuance of stock or other compensation under the above-named compensation plans. The Sixth Count is a pendent state claim against "individual directors" based on the theory of breach of fiduciary duty and seeking damages in excess of $4.4 million.

 The defendants move to dismiss under Rules 12(b)(1), 12(b)(6), 9(b), 11 and 23.1, F.R.Civ.P.

 I find that for a number of reasons the complaint must be dismissed.

 First, insofar as the complaint proceeds as a derivative action, it is fatally defective under Rule 23.1, F.R.Civ.P. This rule requires a plaintiff in a derivative action to allege "with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, as well as the reasons for his failure to obtain the action or for not making the effort." The rule has been read to embody a substantive policy favoring the intra-corporate exhaustion of remedies. See 3B. J. MOORE, MOORE'S FEDERAL PRACTICE, P23.1.19 at 23.1-90 (1978), discussing In Re Kaufmann, 479 F.2d 257 (1st Cir), cert. denied, 418 U.S. 857 (1973).

 Plaintiff here alleges no such efforts and conceded at argument that none have been made. The complaint alleges no reasons for failure or for not having made the effort, except the conclusory allegation that "all members of the Board of Directors who are officers or key employees of SINGER are and have been participants under [the various plans attacked] and have been granted stock options and stock and cash awards pursuant to such Plans." Complaint P14(a). Plaintiff argues that for this reason it is against the interests of the officer-directors to bring an action to avoid the plans. But plaintiff does not allege the number of directors who currently constitute the Board, nor how many of them are 'officers or key employees of SINGER' *fn2" , nor why a demand on disinterested board members would be futile, if interested Board members were disqualified from voting on this question.

 Directors' mere status as defendants to the action is not enough to excuse demand. Nor does the mere involvement of Board members in the transaction or transactions attacked mean that demand need not be made. See Brooks v. American Export Industries, Inc., 68 F.R.D. 506 (S.D.N.Y. 1975).

 I find no justification for failure to follow the procedures required by Rule 23.1. See Elfenbein v. Gulf & Western Industries, Inc., 590 F.2d 445 (2d Cir. 1978).The complaint is therefore "procedurally" defective and must be dismissed to the extent it alleges a derivative action.

 The complaint also must be dismissed by reason of the insufficiency of its substantive allegations.

 As an action to set aside the four compensation plans, the complaint first of all is defective for lack of specificity in its allegations of fraud. Rule 9(b), F.R.Civ.P. requires "the circumstances constituting fraud [to] be stated with particularity." See Lowenschuss v. Kane, 520 F.2d 255, 262 (2d Cir. 1975). Paragraph eleven, which purportedly sets forth the substantive allegations, is little more than an attempt to acquire a fishing license into the corporate defendant's affairs over a ten year period. See Segan v. Dreyfus Corp., 513 F.2d 695 (2 Cir. 1975). The complaint certainly does not "identify... the misrepresentations which were allegedly made..." Schlansky v. United Merchants and Manufacturers, Inc., 443 F.Supp. 1054 (S.D.N.Y. 1977). *fn3" Furthermore, the complaint's averments of fraud are defectively vague in another respect. The complaint does not allege with specificity that those responsible for writing and approving the proxy solicitations complained of knew, or had reason to know, of the "questionable payments" alleged. And see Ross v. A.H. Robins Co. Inc. [1978 Transfer Binder] FED. SEC. L. REP. (CCH) P96,388, 465 F.Supp. 904 (S.D.N.Y. 1978) (Role of each defendant insufficiently alleged).

 Apart from the fatal lack of particularity, the complaint also fails more fundamentally to allege a violation of Section 14 of the Exchange Act and the Proxy Rules authorized thereunder. Rule 14a-9(a) prohibits the use of a proxy statement

 which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact or which omits to state any material fact necessary in order to make the statements therein not false or misleading....

 Under this rule an omission will not vitiate the proxy materials unless it relates to a material fact. The test for materiality under § 14 has been considered and stated by the Supreme Court in TSC Industries, Inc. v. Northrop, Inc., 426 U.S. 438 (1976). The Court there held that "an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Id. at 449.

 The vague conclusory contentions of the complaint fail completely to demonstrate that the information allegedly omitted might so have influenced the reasonable shareholder in his vote. Even if the complaint be read to incorporate the matter set forth in Singer's 1977 8-K Report (See footnote 3) I find it fails to meet the materiality standard ...

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