The opinion of the court was delivered by: SAND
The plaintiffs in this suit seek to rescind a buy-out agreement between a public corporation and a group of its former stockholders that was entered into after those stockholders waged a closely contested proxy fight for control of the company. The plaintiffs, four current stockholders, bring the action both as representatives of a class of shareholders and derivatively on behalf of Clarostat Manufacturing Company, an electronics concern traded publicly on the American Stock Exchange. They allege violations of Sections 14(a) and 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78n(a), 78j(b), and Rules 14a-9 and 10b-5 promulgated thereunder, 17 C.F.R. §§ 240.14a-9, 240-10b-5. Jurisdiction is based on Section 27 of the Exchange Act, 15 U.S.C. § 78aa. Plaintiffs also bring a number of state law claims under the court's pendent jurisdiction.
The defendants seek to dismiss the action pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) for failure to state a claim upon which relief can be granted and for failure to plead with particularity. Defendants also move to dismiss plaintiffs' state claims pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction. For the reasons stated below, we find that plaintiffs have failed to allege properly a claim under the federal securities laws and therefore dismiss those claims. We also find that because plaintiffs have failed to state a federal claim, their pendent state claims should be dismissed as well.
The plaintiffs are four shareholders of Clarostat Manufacturing Company ("Clarostat" or "the Company") who seek to challenge an agreement whereby Clarostat agreed to repurchase at a premium its shares held by a dissident shareholder group after an extremely closely contested proxy fight for control of the Company. The action is brought derivatively on behalf of Clarostat, the nominal defendant, against both the officers and directors of the Company (the "Management Group") and the dissident shareholders who were bought out subsequent to the proxy fight (the "Ostrau Group"). The complaint also alleges a class claim on behalf of certain shareholders against the Management Group.
The second amended complaint alleges the following relevant facts and events, which we must accept as true on this motion to dismiss. Conley v. Gibson, 355 U.S. 41, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). In March of 1982, the Ostrau Group defendants, beneficial owners of approximately 14.1% of the outstanding Clarostat shares, filed an amendment to their joint Schedule 13D with the SEC stating their intention to seek representation on Clarostat's Board of Directors. In early April, the Management Group sent to all Clarostat shareholders a notice of the annual meeting at which the company's directors would be elected and a proxy statement soliciting shareholder votes on behalf of the Management Group's nominees.
The proxy statement also advised shareholders that the Ostrau Group had announced its intention to seek election to the Board.
Several days later, on April 13, the Ostrau Group sent to all record shareholders a proxy statement advising of its intention to solicit proxies on behalf of its slate of candidates for election to the Board. The statement also revealed that Bertram Ostrau, one of the Ostrau Group's candidates, had been censured, suspended, and fined by the American Stock Exchange in 1967 and had been barred by the SEC in 1969 from being associated with any securities broker or dealer as a result of violations of the federal securities laws.
A week later, the Management Group sent an "important message" to Clarostat shareholders urging reelection of its candidates and opposition to the Ostrau Group's attempt to assume control of the Company. The message referred to Bertram Ostrau's past violations of the securities laws and the sanctions imposed by the SEC and the American Stock Exchange. On April 28, the Ostrau Group sent an "important additional message" to the Clarostat shareholders urging the election of the Ostrau Group candidates. This message highlighted the non-disclosure, prior to the Management Group's initial April 8 proxy statement, of a 1970 agreement between two of the Management Group defendants, Glen E. Swanson and Arthur Richenthal, granting to each a "right of first refusal" during that person's lifetime to purchase the other's Clarostat shares should that person decide to sell, as well as an option to buy such shares upon the other's death. The message urged that after 67 aggregated years of Management Group control of the Company, it was "time for a change," that the Company had failed to pay a dividend over the last 20 years, and that the Company was guided by absentee directors who resided in California while the Company's principal offices were in New Hampshire.
The annual meeting and vote of Clarostat stockholders took place in New York on May 20, 1982. On May 24, the Ostrau Group announced that a preliminary count of the proxies showed its candidates with an extremely narrow lead of less than 1% of all the outstanding shares. On the same day, the Management Group, acting in their capacity as officers of Clarostat, filed an action in the United States District Court for the District of New Hampshire alleging violations of the federal securities laws on the part of the Ostrau Group in connection with the proxy contest. The complaint sought a temporary restraining order and preliminary injunction enjoining certification of the vote and barring the Ostrau Group candidates from taking office. The Hon. Martin R. Loughlin, United States District Judge for the District of New Hampshire, issued a written opinion two days later finding that Clarostat had shown a likelihood of success on the merits and granting the requested injunctive relief until June 4.
On June 3, one day before Judge Loughlin's order was to have expired, the Management Group announced that Clarostat had agreed to purchase all the shares held by the Ostrau Group for $22.75 per share, a premium of roughly 8 3/8 dollars above the 14 3/8 closing price of Clarostat on June 1, 1982.
The Ostrau Group agreed in return to drop the proxy fight and withdraw its candidates from consideration for election to the Clarostat Board. The agreement provided further that Clarostat would reimburse the Ostrau Group for approximately $201,000 in expenses related to the proxy fight and the subsequent litigation.
The price of Clarostat stock fell 2 3/8 points, from 14 3/8 to 12, the day of the announcement of the repurchase agreement and traded at between 10 and 12 up to the time of the filing of this action.
Plaintiffs filed their original complaint on June 22, 1982 and their second amended complaint, pursuant to stipulation of the parties and order of the Court, on October 12, 1982. The second amended complaint contains four federal and four state claims for relief;
two of the federal claims are directed to the Ostrau Group and two are directed to the Management Group.
Simply stated, plaintiffs' claim with respect to the Ostrau Group defendants is that they gave the false impression during the course of the proxy contest that they intended to take control of the Company for the best interests of the shareholders when in fact they intended to use the proxies they obtained to coerce a buy-out of their shares at a premium. Count I is brought derivatively on behalf of Clarostat and alleges that the Ostrau Group defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 by falsely indicating in their proxy materials that they were pursuing control of the company in the best interests of the shareholders and by failing to disclose that their real purpose was to coerce a buy-out of their Clarostat shares at a premium. Count III is a derivative claim under Section 10(b) of the Exchange Act and Rule 10b-5 alleging that the Ostrau Group's actions in connection with the sale of their stock to Clarostat constituted fraudulent and deceitful behavior in violation of the Act.
Count IV is a class claim brought against the Management Group under Section 14(a) of the Exchange Act and Rule 14a-9 on behalf of all those who held Clarostat stock between March 25, 1982 and June 3, 1982. The plaintiffs allege that the Management Group failed to reveal in their proxy solicitations that they had been approached by and had received proposals and serious expressions of interest from prospective purchasers with regard to the purchase of a controlling interest of Clarostat at a premium, had refused to consider and discuss such proposals, and had adopted a policy of refusing to discuss or consider such proposals, all in violation of the proxy disclosure provisions of the Act. The second count charged against the Management Group, Count V, is brought derivatively under Section 10(b) of the Act and Rule 10b-5. It alleges that the Management Group engaged in fraudulent and deceitful acts and transactions with respect to the repurchase of the Ostrau Groups' shares by failing to disclose in its proxy materials its policy of independence and its refusal to consider or discuss offers to purchase Clarostat stock.
The plaintiffs' pendent state claims, Counts VIII-XI, allege that the defendants sold proxies in violation of New York Business Corporation Law and violated their fiduciary duties under state common law by engaging in the ...