The opinion of the court was delivered by: WEINFELD
This is an action by plaintiff, a shareholder of Management Assistance Inc. ("MAI") to recover on its behalf, pursuant to § 16(b) of the Securities Exchange Act of 1934,
short swing profits from defendant Continental Telecom Inc. ("Continental"), allegedly derived from the purchase and sale of MAI stock within a six month period. Prior to the commencement of the action, plaintiff demanded that MAI take steps to recover the claimed profits, but it declined upon the ground that no violation of § 16(b) had occurred with respect to the transactions at issue, and accordingly plaintiff asserts further demand would be futile.
While the parties have submitted massive papers, documents and briefs relative to their respective contentions, the basic issue is whether a written option agreement executed on May 24, 1982, is what it purports to be, an option to MAI to purchase the shares owned by Continental or, as plaintiff contends, a guise or a sham to cover up the true nature of the transaction -- an effective transfer equivalent to a sale by Continental of its shares to MAI, which, if such were the fact, was subject to the provisions of § 16(b).
In response to Continental's motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss plaintiff's first amended complaint, he cross moved for summary judgment.
Upon the argument of the motions, it appeared there was so little substance to the plaintiff's motion that it was denied, but the Court reserved decision on Continental's motion, which we now address.
Except for plaintiff's claim that the May 24, 1982 agreement was a sham, the basic facts are not in dispute. MAI has been engaged since 1961 in the business of selling and servicing information processing systems, and since 1971 engaged in the development and manufacture of its own proprietary computers and computer software, for, inter alia, business applications. Its products are marketed in the United States and more than thirty-five other countries and in the fiscal year preceding matters here at issue its revenue was $332,000,000.
Continental is a holding company with substantial interests in the telecommunications field. In recent years Continental has acquired control of several other companies with a view to diversifying its offerings of telecommunications goods and services, including an initial entry into the highly competitive field of data processing and data communications. In pursuit of this program of expansion, Continental, over a period of time, "in steps" purchased in the open market shares of MAI common stock, the last purchase occurring toward the end of April 1982, by which date it was the owner of approximately fifteen percent of all outstanding common stock of MAI and thus a statutory insider of MAI under § 16(a) of the Securities Exchange Act of 1934.
With respect to these various purchases Continental filed with the Securities and Exchange Commission a Schedule 13-D statement that the shares were acquired for investment purposes. An amendment filed in April 1982 stated that it planned to acquire up to 25% of the outstanding shares of MAI common stock.
Not surprisingly, the situation was a matter of concern to MAI, its directors, officers and employees. While Continental stated its acquisitions were for investment purposes, MAI viewed them as an aggressive accumulation of shares "with the apparent intent to take control of MAI."
MAI's Board of Directors considered that acquisition of control by Continental was contrary to the best interests of MAI, its stockholders, its executives and employees, and based upon an investigation of Continental and activities, advised Continental on May 4, 1982 that it was prepared "to do whatever is necessary and in whatever forum is appropriate, the Courts, the financial community, the press and the various regulatory authorities" to prevent a takeover and control of MAI by Continental.
MAI's view that a takeover and control by Continental would be detrimental to MAI's welfare and interests was based essentially on concerns about Continental's lack of experience in the development of computer software and hardware for domestic and foreign markets; an adverse effect upon the morale of its existing staff of employees and officers; diminution of ability to attract new employees to MAI; foreclosure of new business ventures and financing arrangements; discouragement of beneficial investment in MAI by other companies which had manifested such an interest; as well as other adverse consequences that would follow in the wake of a takeover. Continental on its part sought to assure MAI directors that its purpose was well-intentioned and beneficially oriented -- that is actions would result in substantial benefits to MAI shareholders and management, that it had never in more than 700 takeovers over a twenty year period fired any one as a result of an acquisition.
Between June 1981 and May 1982 officials of the two companies sought without success to explore possibilities for mutually beneficial relationships between the two companies. Beginning on or about May 4, 1982, the then strongly held and conflicting views of the parties were aired publicly by press releases and by an exchange of letters to directors and officials of each company in which criminatory and recriminatory charges were made. The dispute attracted the attention of the investment industry and financial news media. Notwithstanding their differences and hostile attitudes, officials of both companies still sought to reach an accommodation to resolve the matter. Continental rejected a proposal for a "standstill agreement" whereby it would be prevented from making purchases beyond twenty percent of MAI's outstanding stock over an eight year period. Similarly, during this period of charged controversy, a proposal whereby MAI offered to buy back all MAI shares owned by Continental was refused. Faced with the prospect of costly litigation and its uncertain outcome, the parties negotiated a settlement which resulted in the May 24, 1982 option agreement here at issue. It was the result of arms length negotiations carried on by the principal executives of the parties and their respective attorneys.
At the time of the execution of the agreement, Continental owned approximately 15.43% of the total issued and outstanding of MAI stock. MAI, in substance, among other matters, was given the right up to November 30, 1982 to purchase all the 1,288,300 shares of MAI common stock owned by Continental. The price paid for the option was $2,500,000 ($1.94 per share). This sum was not to be refunded in the event MAI did not exercise the option. The exercise price of the option was $21,880,000 ($16.98 per share).
Continental agreed not to purchase any more MAI securities, solicit proxies or take any action to acquire control of MAI; to vote its shares in favor of MAI's Board's nominees and to vote upon any other matter in the same proportion as other holders of MAI stock; no proxy was given. Also, Continental agreed that if MAI exercised its option, it would not purchase MAI stock for three years from the closing date. On the last day of its right to exercise the option, November 30, 1982, MAI, pursuant to a provision in the option agreement, exercised its right upon a payment of $583,000, to extend the option period to April 30, 1983. This amount was not to be credited against the price of the stock in the event MAI exercised the option. Following the extension, MAI sought substantial revisions of the option agreement, including a two year extension of its obligation to pay in the event it exercised the option, as well as certain waivers which would give MAI additional time to decide whether or not to exercise its option. Continental refused these proposals and insisted upon adherence to the terms of the option agreement. Finally, on the very last day that the option could be exercised as extended, March 28, 1983, MAI gave notice that it exercised its option and purchased from Continental all its shares of common stock. The acquisition of the shares was well beyond the six month period of the last purchase of MAI stock by Continental in April 1982.
Initially, after MAI declined plaintiff's request that it take action against Continental to recover the profits realized by it on the transacton, [sic] plaintiff instituted an action in the Supreme Court of the State of New York (which was consolidated with other actions) against MAI's directors, wherein derivative and class action claims were asserted. Essentially, the companies charged the directors with breach of fiduciary duty upon allegations that they had acted out of self-interest to perpetuate their control over the corporations; had agreed to an excessive price for the purchase of the shares; had wasted corporate assets; and further alleged that MAI should have offered the same purchase terms to all of its stockholders that it had offered to Continental. The directors defended their action upon the ground that the option agreement was necessary to protect MAI's interest and that the acquisition of the Continental shares served a valid business purpose. The New York State Supreme Court Justice dismissed the actions under New York's business judgment rule, holding that plaintiffs had failed to make any showing that the director-defendants had made any profit at the expense of MAI. The court specifically noted that a purchase of stock can legitimately be made to remove the threat of a corporate raider whose goals would be detrimental to those of the corporation.
Plaintiff then repaired to this Court with the allegations already noted, upon which it seeks recovery from Continental.
This Court, of course, is aware of the stringency with which Rule 56 has been enforced by our Court of Appeals.
However, the Rule should be enforced where justified, otherwise it is a dead letter. Litigants should not have to suffer the burden of extensive and offtimes excessive and abusive pretrial discovery, vast legal fees, and the distraction of corporate officers from their assigned duties unless genuine issues of fact exist that preclude enforcement of the Rule.
This Court is persuaded upon a close and intensive study of this record that other than the argumentative and conclusory matters urged by plaintiff, no genuine issue of fact exists and the defendant is entitled to summary judgment. A party cannot defeat a motion for summary judgment on conjectural allegations, but must set forth facts indicating that there is a genuine issue for trial -- this the plaintiff has failed to do.
It cannot be disputed that the May 24, 1982 option agreement was entered into in a hostile atmosphere and essentially was based upon MAI's concern that its interests as a corporation and those of its shareholders would be adversely affected by Continental's takeover; that Continental's large holdings of MAI stock offered no benefits to MAI because Continental did not offer MAI any products, services, technology or managerial or financing ability needed by MAI or unobtainable elsewhere. So, too, it admits of no challenge that the negotiations were at arms length, with the parties represented by counsel; MAI had, in addition, the independent financial advice of two reputable investment banking firms that the option price was fair, along with the advice of outside legal counsel as to the legal aspects of the proposed transaction. ...