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January 28, 1982

William BOLTON, Commonwealth Holding Co., and Oliver R. Grace, Jr., suing individually and derivatively in the right and for the benefit of Terrydale Realty Trust, and BCG Associates, Plaintiffs,
John J. GRAMLICH, J. Russell Gramlich, Michael J. Gramlich, James A. Kostoryz, Terrydale Management Corporation, John D. O'Flaherty, J. Harlan Stamper, Thomas J. Murphy, Morris, Larson, King, Stamper and Bold, P.C., San Francisco Real Estate Investors, Lincoln Tower Building Co., and Subdale Corp., Defendants, and Terrydale Realty Trust, Nominal Defendant; William BOLTON, Commonwealth Holding Co., and Oliver R. Grace, Jr., suing individually and derivatively in the right and for the benefit of Terrydale Realty Trust, Plaintiffs, v. John J. GRAMLICH, Michael J. Gramlich, James A. Kostoryz, Terrydale Management Corporation, J. Russell Gramlich, Paul D. Ambrose, John D. O'Flaherty, J. Harlan Stamper, and Thomas J. Murphy, Defendants, and Terrydale Realty Trust, Defendant and Nominal Defendant

The opinion of the court was delivered by: SAND

In the two actions now before the Court on motions to dismiss, the plaintiffs are disappointed tender offerors who strain to find protection in federal law. The defendants, who perceive the plaintiffs' pleading as an invalid attempt to invoke a federal forum, allege that the plaintiffs have impermissibly grafted federal claims onto what are essentially state law claims for breach of fiduciary duty. The transactions giving rise to this litigation are complex but may be somewhat simplified for the purposes of this motion to dismiss in which the plaintiffs' allegations are taken as true. Cruz v. Beto, 405 U.S. 319, 322, 92 S. Ct. 1079, 1081, 31 L. Ed. 2d 263 (1972).



 The events in question involve the control of Terrydale Realty Trust ("the Trust"), a Missouri real estate investment trust. The extensive cast of characters will unfold in the following chronological account.

 On December 18, 1980, prior to the annual meeting of its shareholders, the trustees issued a proxy statement proposing amendments to the Declaration of Trust which would impose the requirement of a supermajority two-thirds vote on transactions such as merger, consolidation, reorganization, liquidation, termination and dissolution. The proxy statement disclosed that management's desire to ward off takeover attempts motivated the proposal. On December 30, 1980, the plaintiffs, William Bolton, Commonwealth Holding Co. (a partnership consisting of Robert A. and Rosalind Posner), and Oliver R. Grace, Jr., whose collective holdings at that time constituted approximately 11.7% of the outstanding securities of the Trust, sued to enjoin the annual meeting, alleging that inadequacies in the proxy statement undermined the validity of the proxies solicited. This Court denied the preliminary injunction on January 9, 1981 on the ground of failure to prove likelihood of success on the merits. This action, 80 Civ. 7410 (LBS) ("Bolton I"), comprises a federal cause of action under § 14 of the Securities Exchange Act of 1934 ("1934 Act") and two state law claims raised derivatively on behalf of the Trust. This action survives despite the fact that the proposal failed, which was the result urged by the plaintiffs in their proxy statement. The labyrinth of events producing this ironic effect and leading to a second litigation, 81 Civ. 2806 (LBS) ("Bolton II"), grew out of a tender offer by the plaintiffs.

 Before dealing with the events surrounding the tender offer, however, in order to avoid confusion with the contentions in Bolton II, the plaintiffs' theories of recovery in Bolton I should be stated. First, the plaintiffs claim that various acts of the defendants violated state law fiduciary duties and misappropriated Trust opportunities. The defendants' motions do not contest the substance of these claims. *fn1" They seek dismissal of these claims now for lack of personal jurisdiction. Both plaintiffs and defendants agree that the state claims are not pendent on the federal claims because they do not share a common nucleus of operative fact. See United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966). The defendants argue that the existence of a basis for personal jurisdiction over the federal claims will not provide jurisdiction over the state law claims where there is no pendent jurisdiction. *fn2"

 The plaintiffs' federal claim cites disclosure failures in the proxy statement that preceded the annual shareholders meeting. The plaintiffs argue that the defendants failed to disclose that if the shareholders rejected the amendments, the defendant trustees would vote to terminate the Trust. In other words, if their attempt to thwart the plaintiffs' plans with supermajority provisions failed, they would in turn accomplish the same end by exercising the very power that the defeat of the amendments left in them. The plaintiffs claim that this omission was "highly material" because they, the plaintiffs, would have acted differently had they known; that is, they would not have mounted the takeover attempt described infra. Citing § 14(a) of the 1934 Act, 15 U.S.C. § 78n(a), they seek reimbursement of the $ 225,000 they spent opposing the defendants' proxy solicitation. Bolton I Complaint at P 27.

 The defendants' motions contest this claim on the ground of lack of standing to sue under § 14(a). They argue that case law plainly establishes that there is no private right of action under § 14(a) for a disappointed tender offeror. The plaintiffs contend that they sue not as tender offerors, but as proxy contestants.

 With respect to both the federal and state law claims in Bolton I, the defendants contest the plaintiffs' failure to demand that the board institute the action on the Trust's behalf, as required by Fed.R.Civ.P. 23.1, a requirement the plaintiffs would excuse on the ground of futility.

 The facts giving rise to Bolton II begin in the interim between the filing of the Bolton I complaint and the denial of the preliminary injunction. During this time, the plaintiffs took two actions. First, on January 3, 1981, they issued a proxy statement of their own, urging rejection of the amendments and disclosing their intention to make a tender offer for the Trust's stock conditioned on the rejection of the proposed amendments. And on January 8, 1981, through a limited partnership known as BCG Associates (consisting of William Bolton, Oliver R. Grace, Jr., and Robert A. Posner), the plaintiffs made their conditional tender offer. BCG offered to purchase at least 160,000 of the shares tendered before the February 10, 1981 deadline at $ 33.50 net per share.

 The shareholders meeting took place on January 14, 1981 and, although affirmative votes (213,989) exceeded negative votes (204,989), the amendments failed to garner the needed votes of a majority of outstanding shares (or 230,533 votes).

 On January 21, 1981, the trustees distributed a letter recommending rejection of the tender offer. This letter triggered the plaintiffs' second suit for a preliminary injunction, this time demanding corrections of alleged false or misleading statements or omissions in the recommendation letter. The defendants counterclaimed for a preliminary injunction of the tender offer. In BCG Associates v. Terrydale Realty Trust, 81 Civ. 0582 (RJW) (Feb. 9, 1981), Judge Ward refused to enjoin the tender offer, after he had supervised the process of correcting the inadequacies of both parties' letters to the shareholders.

 Before the deadline for tender of shares and withdrawal of tendered shares, however, the trustees launched a drastic divestment program. On February 6, four days before the expiration date of the offer, the trustees disclosed that they had voted unanimously to terminate the Trust, contracted for and closed the sale of four of its Denver office buildings, *fn3" and voted to declare the first liquidating distribution of $ 24.00 per share, using the proceeds of the sale. The distribution, payable on February 23, 1981, would go to the shareholders of record on February 19, 1981, a date subsequent to the expiration of the tender offer.

 After this disclosure, the plaintiffs extended the tender offer nine days, to February 19, 1981. 65,000 of the shares that had been deposited pursuant to the offer were withdrawn. Ultimately, the plaintiffs acquired 80,884 shares through the tender offer, leaving them with the collective total of 208,629 shares and 37.98% of the outstanding securities of the Trust.

 The terms of the Declaration of Trust restricted the trustees to cash transactions if they were to avoid the need for a shareholder vote. The trustees' vote to sell the buildings required a majority vote, and the vote to terminate the Trust required a unanimous vote. Although all five trustees voted in favor of the sale and termination, the plaintiffs argue that the actions were not valid because three of the trustees had a personal interest in defeating the tender offer. *fn4"

 The plaintiffs theorize that the desire to avoid personal loss led the defendants to take actions that would influence shareholders not to tender or to withdraw tendered shares. The plaintiffs argue that in serving their own interests rather than those of the shareholders, the defendants violated their state law fiduciary duty. Because of the restriction to a cash only sale and because of the time pressure imposed by the February 10 deadline on the tender offer, the plaintiffs contend, the Trust realized only $ 17,098,000 in the sale of the buildings, whereas otherwise the Trust could have realized "at least $ 38,000,000." Bolton II Complaint at P 17. *fn5"

 The real estate transactions described above require some elaboration to explain the roles of San Francisco Real Estate Investors ("SFREI"), Lincoln Tower Building Corporation ("Lincoln"), and Subdale Corporation ("Subdale") in Bolton II. SFREI purchased all four buildings at the February 6 closing. The plaintiffs allege that an SFREI director stated that SFREI viewed the transaction as "an opportunity that was made in heaven" given the circumstances that SFREI was "sitting with $ 32 million in cash" and that the trustees wanted to divest the Trust of its assets in the face of the takeover bid. Bolton II Complaint at P 18.

 A right of first refusal to purchase the Lincoln Tower Building initially blocked this transaction. Lincoln, a New York partnership, owned the land the building was situated upon and, under the terms of the ground lease, had sixty days to determine whether it would purchase the building at the same price and under the same terms as SFREI. To preserve this right and still close the sale on February 6, SFREI and the Trust agreed to extend the right of first refusal beyond the time of the actual transfer to SFREI. Allegedly, Lincoln accepted this modification of its right and the trustees agreed to indemnify Lincoln against any damages or legal fees arising from these transactions. On March 9, 1981, after Lincoln had refused to waive its right, the plaintiffs informed Lincoln by letter of the impending litigation challenging the validity of the trustees' actions. Thereafter, Lincoln formed Subdale, a New York corporation, for the purpose of exercising the right of first refusal, which it did on April 22, 1981.

 Bolton II comprises a series of federal securities law claims and a series of state law claims.

 First, the plaintiffs cite numerous sections of the 1934 Act allegedly violated by the defendants' actions surrounding the sale. *fn6" In this regard, they note the defendants' proxy statement preceding the annual meeting and that the defendants' annual report espoused an investment policy of long-term investment, reinvestment, and equity build-up, and explicitly renounced short-term profit-taking and liquidation. Bolton II Complaint at P 20. For example, the 1980 Annual Report praised the Trust's acquisition of the Century Bank Building, one of the four buildings sold on February 6, as an "excellent long term hedge against inflation," boasting of upcoming lease renewals and of the 91/2% mortgage it had assumed. Id. The plaintiffs contend that the trustees concealed certain details of the lease agreements *fn7" that would have brought the inequities of the February 6 sale to light. The absence of these details allegedly prevented the plaintiffs from seeking to enjoin the sale at the time. *fn8" Further, they assert that the failure of the proxy statements to disclose the defendants' intent to terminate the Trust in the event that the shareholders did not accept the anti-takeover amendments was materially misleading because it caused the plaintiffs to go ahead with their tender offer. They allege that the Schedule 14D-9 statement filed by the defendant failed to disclose the conflict of interest of the trustees John J. Gramlich, J. Russell Gramlich, and J. Harlan Stamper. Bolton II Complaint at P 20.

 They also allege that the January 21, 1981 letter of the trustees which recommended that the shareholders reject the plaintiffs' tender offer contained materially false or misleading statements. Bolton II Complaint at P 31. *fn9"

 The plaintiffs round out their series of federal claims with a theory that would bring the defendants within the range of the § 16(b) proscriptions. Section 16(b) of the 1934 Act, 15 U.S.C. § 78p(b) provides that an issuer's insiders must return to the issuer any profits gained whenever any purchase and sale of the issuer's stock occur within a single six month period. This theory holds that a sale occurred either when the partial liquidating distribution was made on February 23, 1981 or when the trustees voted to terminate the Trust on February 6, 1981. *fn10" Less than six months before the first liquidating distribution, several of the defendants purchased a total of 37,737 shares in the Trust. *fn11" Since these defendants were insiders or were members of a family *fn12" owning more than 10% of the Trust's stock, the plaintiffs contend the provisions of § 16(b) require them to disgorge their profits to the Trust. Bolton II Complaint at P 39-40.

 The remainder of the Bolton II claims arise under state law. First, the plaintiffs contend that the sale was ultra vires because the Declaration of Trust required a unanimous vote and three of the trustees were personally interested and therefore disqualified. Bolton II Complaint P 21-22. Second, they contend that in selling the properties for an inadequate price the trustees, aided and abetted by SFREI, breached their fiduciary duty to the shareholders. Bolton II Complaint at P 23-24. Third, the plaintiffs charge the defendants with gross negligence. Bolton II Complaint at P 27-29. And finally, the plaintiffs allege that the trustees, aided and abetted by SFREI, tortiously interfered with the plaintiffs' business opportunities in thwarting their acquisition of control of the Trust.

 In Bolton II, the plaintiffs seek the restoration of the status quo ante, an accounting for the Trust's losses, damages (including punitive damages), and a disgorging of the § 16(b) profits. In addition, they seek to bar the defendants from sharing in any recovery in this action which might otherwise accrue to them by virtue of their stock ownership. Bolton II Complaint at P A-F. The plaintiffs argued before the Court on October 5, 1981 that restoration of the status quo ante would not require the return of the $ 24.00 per share distributed to the shareholders. They state that available refinancing of the buildings, taking into account their true market value, would cover the refund of the purchase price to SFREI and Subdale, rendering joinder of the shareholders unnecessary.

 The defendants again base their attack on the pleadings on the inappropriateness of this forum. They argue that the federal claims all fail either for want of standing or for failure to state a claim and that once the federal claims are removed from the case, the state claims must fail for want of subject matter jurisdiction. The plaintiffs and defendants disagree as to whether there is complete diversity in Bolton II, the controversy centering on the presence of two New York defendants, Lincoln and Subdale. *fn13"

 Finally, in both Bolton I and Bolton II, many of the defendants, including the Trust, which is a nominal defendant, make motions to transfer these actions to the Western District of Missouri.



 A. Bolton I

 1. The Sufficiency of the Federal Claim

 The survival of the federal securities law claim based on § 14(a) of the 1934 Act and Rule 14a-9 in Bolton I depends on finding that the plaintiffs are among the class of persons for whose "especial benefit the statute was enacted," and that the remedy sought is "consistent with the underlying purpose of the legislation." Cort v. Ash, 422 U.S. 66, 78, 95 S. Ct. 2080, 2087, 45 L. Ed. 2d 26 (1975). The Supreme Court has identified two other factors in its analysis of whether a statute implies a private cause of action: whether the legislature has indicated its intent to create a private cause of action and whether the matter has "traditionally (been) relegated to state law." Id. at 78, 95 S. Ct. at 2087. In J. I. Case Co. v. Borak, 377 U.S. 426, 84 S. Ct. 1555, 12 L. Ed. 2d 423 (1964), when faced with the question whether shareholders could maintain a direct action or a derivative action on behalf of a corporation, the Court analyzed the latter two factors with respect to § 14(a) and Rule 14a-9 and found both factors pointed to the existence of a private cause of action. The finding in Borak that shareholders could maintain these actions also dealt with the questions of the status of the plaintiffs and the effectiveness of the relief in serving the statutory purpose, but the facts of individual cases will necessarily affect the application of these two factors. In each case, the court must determine whether the plaintiffs are within the protected class and whether the requested relief will further the statute's purpose.

 The parties to this action differ in their analysis of the plaintiffs' status.

 The defendants would characterize the plaintiffs as disappointed tender offerors seeking reimbursement for expenses they now view as ill-spent. That is, even though the plaintiffs were able to boost their ownership in the Trust to 37.98%, the value of control has faded in the aftermath of the vote to terminate the Trust. Trustees' Memorandum at 15-18. They argue that the alleged omissions from their proxy statement were not material to the plaintiffs, Trustees' Reply at 8 (citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 426 U.S. 438, 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 (1976)), noting that the plaintiffs' tender offer was designed to defeat the proposed amendments and that the amendments were in fact defeated. The defendants further argue that because § 14(e), 15 U.S.C. § 78n(e), is the section of the securities laws intended to regulate tender offers, it would be improper to permit tender offerors who could not find a remedy in § 14(e) to avail themselves of § 14(a). Trustees' Reply at 8-9.

 The plaintiffs characterize themselves not as tender offerors but as proxy contestant shareholders, who opposed the defendants' amendments because they were misled by the defendants' failure to disclose that if the amendments failed they would terminate the Trust. Plaintiffs' Memorandum at 79-80. Since the relief they seek is reimbursement for their proxy fight expenses, however, they are forced to forgo the argument that they sue derivatively on behalf of the Trust, as they do in some of the Bolton II claims. Id. at 80; see supra at p. 828.

 At the outset, it is important to recognize that the Supreme Court's conclusion in Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S. Ct. 926, 51 L. Ed. 2d 124 (1977), that a disappointed tender offeror cannot sue under § 14(e) did not mean that any time a plaintiff has made a tender offer, it will be barred from suing under § 14(e). In Chris-Craft, the Supreme Court entertained the suggestion that the tender offeror might have been able to sue in its capacity as a Piper shareholder, id. at 35, 97 S. Ct. at 946, a view the dissenting opinion adopted, id. at 53-55, 97 S. Ct. at 955-956. But it rejected the suggestion because it found that Congress intended § 14(e) to protect a shareholder in deciding whether to tender stock and a tender offeror is not in the position of having to decide whether or not to tender. Thus, a tender offeror cannot be a member of the protected class, despite stock ownership. Id. at 35-37, 97 S. Ct. at 946-947.

 It is therefore apparent that the Court should not dismiss the plaintiffs out of hand because they were tender offerors but must analyze their role in the proxy contest in relation to the purpose of § 14(a). The Supreme Court has stated that Congress intended § 14(a) to safeguard the corporate voting process. J. I. Case & Co. v. Borak, 377 U.S. 426, 431, 84 S. Ct. 1555, 1559, 12 L. Ed. 2d 423 (1964). Free exercise of the corporate franchise requires disclosure of the " "real nature of the questions' for which the proxy is sought." Id. (citing S.Rep.No. 792, 73d Cong., 2d Sess., 12).

 In the instant case, the plaintiffs contend that the defendants failed to disclose that termination of the Trust would result from defeat of the amendments. Since they did not seek termination of the Trust, they would not have opposed had they known of this consequence. They necessarily base their argument on this chain of causation rather than on the effect of the nondisclosure on their votes, because of the damages they claim. It was, of course, the dissemination of their own proxy statement and not their vote that incurred the expense for which they now seek reimbursement. *fn14"

 It is not clear that the legislative purpose does not extend to the eradication of rival proxy statements that the management's deceptive proxy statement may induce. The purpose of purifying the flow of information to the shareholder may indeed include information from parties who unwittingly release misleading information after they themselves are deceived.

 But for these plaintiffs to state a cause of action they must be the parties for whose "especial benefit" Congress undertook to regulate proxy statements. It is here that plaintiffs' claim fails. To the extent that the plaintiffs' activities fall within the purpose of § 14(a), their role in the voting process is that of unwitting propounders of deceptive information. Thus, like the tender offerors in Chris-Craft, they are persons Congress intended to regulate, not to protect. See Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 37, 97 S. Ct. 926, 947, 51 L. Ed. 2d 124 (1977).

 Analysis of the second relevant Cort v. Ash factor demonstrates the necessity of this conclusion. The relief sought by the plaintiffs would simply not further the congressional purpose, even when that purpose is stated in broad terms of purifying the flow of information to voters. Reimbursement of proxy expenses incurred in reliance on management's deceptive statement would tend to encourage rival proxy solicitations, that is, to increase the flow of information to voters. This remedy might result in some useful information, but might equally well further cloud the issues. Insofar as it is only by alleging that their own ...

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