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March 25, 1981

Ida ABRAMOWITZ, derivatively as a shareholder of NVF Company, a Delaware corporation, Plaintiff,
Victor POSNER, Bernard Krakower, Steven Posner, Walter E. Gregg, Gail Posner Cohen and NVF Company, Defendants

The opinion of the court was delivered by: HAIGHT


This is a stockholder derivative suit brought on behalf of NVF Company ("NVF"), a Delaware corporation, against five of its directors. Claims are asserted under section 10(b) of the Securities and Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78a et seq. and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and under the common law. Jurisdiction is founded upon section 27 of the Act, 15 U.S.C. § 78aa and upon diversity of citizenship. 28 U.S.C. § 1332.

In an Opinion and Order entered June 21, 1979 ("Posner I "), disposing of motions in five separate but factually related actions, this Court dismissed the original complaint in this action for failure to satisfy the demand requirement of F.R.Civ.P. 23.1, set forth in full in the margin. *fn1" Plaintiff at that time had not made any demand on the NVF board of directors (the "Board"), alleging that such a demand was presumptively futile in this case because "the directors and controlling shareholders (were) antagonistic, adversely interested, or involved in the transaction attacked." Elfenbein v. Gulf & Western Industries, Inc., 590 F.2d 445, 450 (2d Cir. 1978). Although the Court held that plaintiff had correctly stated the legal principles involved, it found that the presumption had been rebutted. Accordingly, the Court dismissed the original complaint, but plaintiff was given leave to replead her complaint within sixty days. At 122-125.

 Plaintiff subsequently filed an amended complaint reciting claims on behalf of NVF identical to those set forth in the original complaint. The first two counts allege that the individual defendants engaged in various acts of fraud, corporate waste and conversion of NVF assets. Specifically, the complaint charges defendants Victor Posner, Steven Posner and Gail Posner Cohen (the "Posner defendants") with directly or indirectly using corporate funds to pay personal expenses, and further alleges that all of the defendants concealed these transactions and filed false and misleading reports with the SEC, the Internal Revenue Service and the New York Stock Exchange. The third count asserts violations of section 10(b) of the Act and Rule 10b-5, based on allegedly misleading disclosures concerning the transfer of stock from NVF to the defendants. The conduct complained of is alleged to have damaged NVF directly through the loss of corporate assets and indirectly by exposing NVF to unnecessary tax liabilities, to liability resulting from the SEC complaint and private shareholder actions, and to loss of corporate good will. In addition, plaintiff alleges that a demand has been made on the NVF board of directors and rejected.

 Defendants now move to dismiss the amended complaint, again relying on the demand requirement of F.R.Civ.P. 23.1. The instant motion, however, unlike defendants' prior motion to dismiss, does not challenge the sufficiency of the demand itself; rather, defendants argue that the Board's rejection of plaintiff's demand reflects a business judgment determination that maintenance of this action is contrary to the best interests of NVF and as such bars continuation of the action as a matter of law. For the reasons stated, the motion is granted.


 Related Proceedings

 The amended complaint overlaps substantially with claims set forth in a civil complaint filed by the Securities and Exchange Commission ("SEC") in the United States District Court for the District of Columbia. SEC v. Sharon Steel Corp., et al, No. 77-1631 (filed September 20, 1977). The circumstances surrounding the SEC action are described more fully in the prior opinion of this Court. It is sufficient to note herein that the SEC complaint exposed grave improprieties on the part of the defendants to that action, among whose ranks are included all of the defendants named in the amended complaint in this action; that on the same date the SEC complaint was filed, all defendants therein filed stipulations consenting to a final judgment granting permanent injunctive and other ancillary relief; that, in so consenting, the defendants neither admitted nor denied the charges; and that the Posner defendants agreed to reimburse NVF and other companies in which they held a controlling position the sum of $ 600,000 to pay for items alleged to have been improperly received by them.

 Pursuant to the terms of the judgment entered in the SEC action, NVF appointed two independent directors, satisfactory to the SEC, to its board of directors. They are James J. Needham, a former member of the SEC and a former Chairman and Chief Executive Officer of the New York Stock Exchange, and Mark A. White, Esq., a former Vice President and General Counsel of the National Association of Securities Dealers. In addition, the two independent directors became a majority of the newly created Audit Committee, whose responsibilities, as set forth in Paragraph VIII of the final judgment, included:

"(e) to examine the matters alleged in the Commission's Complaint, and such other similar matters as each Audit Committee may deem appropriate, in order to recommend whether, in the best interests of the corporation, any action should be undertaken against any person, including the institution of any action permitted by Paragraph VI hereof, and to make recommendations with respect thereto to the Board of Directors of the respective corporations; provided that no person who is a subject of any such recommendation by an Audit Committee who serves on the Board of Directors of any such corporation shall vote upon any such recommendation; (f) within 120 days from the appointment of the Audit Committee, or such additional time as the Commission may reasonably agree, to submit to the Board of Directors and to file with the Commission in the public files of the corporation, a report or reports of its findings and recommendations pursuant to Subparagraphs (a) through (e) above, including a description of the scope of their investigation." *fn2"

 The third member of the Audit Committee, Armer E. White, *fn3" was nonindependent as that term was defined by the SEC judgment, in that he had been a member of the NVF Board since 1969; he was, however, an outside director who was not named as a defendant either in the SEC action or in the case at bar.

 Recommendations of the Audit Committee

 The Audit Committee, with the aid of the Washington, D.C. law firm of Arnold & Porter and the national accounting firms of Price Waterhouse & Co. and Arthur Andersen & Co., conducted an exhaustive investigation into the matters raised by the SEC action. *fn4" On November 22, 1978, the Committee filed its report (the "Report"), 213 pages in length, which made various recommendations as to policies and procedures to be implemented to prevent a recurrence of the improprieties alleged in the SEC complaint. With respect to the matters underlying the claims of waste and conversion asserted herein, the Report recommended that the various companies involved *fn5" seek reimbursement from the individual defendants herein totalling $ 1,021,445, such sum to be in addition to the $ 600,000 previously paid to the companies by the Posner defendants in accordance with the SEC judgment.

 The Audit Committee recognized the mandate of Paragraph VIII(e) of the SEC judgment, that the Committee make its own determination whether, in the best interests of NVF, any further action, legal or otherwise, should be taken against any of the defendants in the SEC action. Report at 7; 23-24. Accordingly, a Joint Legal Subcommittee was formed to monitor the examination conducted pursuant to Paragraph VIII(e). Id. at 13. The Audit Committee concluded that legal action was not, as an initial course of action, in the best interests of NVF, and that such action should be resorted to only in the event that the additional reimbursement described above was not received. Id. at 30. In explaining its findings, the Report stated:

"Since Victor Posner acquired control of the companies, they have generally achieved profitability and substantial growth in sales. The Audit Committees believe the business success of the companies represents a significant accomplishment by Mr. Posner and the other officers of the companies responsible for management during this period.
"Nevertheless, the Audit Committees believe that Mr. Posner and certain other officers who are directors of the companies, including those named in Count I of the Commission's Complaint, also bear major responsibility for the matters investigated by the Audit Committees and discussed herein. The Audit Committees believe that these matters occurred because of those persons' failure to act in accordance with their important responsibilities as officers and directors of publicly held companies. However, the Audit Committees further believe that the corrective measures already being taken by the companies, and the policies, procedures and controls adopted by the Audit Committees, should prevent recurrence of these matters." Id. at 20.

 The Audit Committee further:

"concluded that under Paragraph VIII(e) of the Final Judgment, they would recommend only the seeking of reimbursement and recovery of amounts due the companies. In reaching this conclusion, the Audit Committees considered the corrective actions already taken by the management of the companies, the impact of the policies, procedures and controls being adopted pursuant to Paragraphs VIII(a)-(c) of the Final Judgment, the flexibility inherent in the continuing authority of the Committees to maintain and supervise the implementation of those policies, procedures and controls, and the injunctive provisions of the Final Judgment." Id. at 29-30.

 Finally, the Audit Committee recognized that the liability of the various persons involved might be greater if determined through court action, but nevertheless reasserted its conclusion that such recourse was not in the best interests of NVF:

"In recommending the amount of reimbursement to be sought, the Audit Committees sought in each case to ascertain, based on the facts, an amount that is both fair and equitable to the officer or director from whom it was determined that reimbursement should be sought and fair and equitable to the companies and their stockholders. The amounts which the Audit Committees have recommended should be reimbursed may not necessarily be the maximum amounts which the companies could obtain from such officers or directors in an action naming them as defendants, where the full range of judicial procedures for the ascertainment of facts would be available, or if presumptions arising from the absence of appropriate records were utilized to determine the amounts due. Still, the amounts specified in this Report are those which the Audit Committees believe under all the facts and circumstances should be reimbursed to the companies." Id. at 41-42.

 At a meeting held on December 18, 1978, the NVF board of directors, with the defendant-directors named in the Report of the Audit Committee not voting, unanimously agreed to adopt every one of the Committee's recommendations. Subsequent thereto, full reimbursement was made to the companies by the individual defendants herein.

 The Rule 23.1 Demand

 As noted above, this Court in Posner I dismissed the original complaint because of plaintiff's failure to make any demand under F.R.Civ.P. 23.1 on the NVF Board to take over the instant action. Pursuant to the terms of that opinion, plaintiff, through her attorneys, made a demand on the NVF board of directors by letter dated July 12, 1979, the terms of which are set forth in the margin. *fn6" At its regular meeting on July 31, 1979, plaintiff's demand was unanimously rejected by those directors present and voting as not in NVF's or its shareholders' best interests. Messrs. Needham and M. White, the two ...

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