The opinion of the court was delivered by: GOETTEL
The defendants, Horizon Corporation ("Horizon"), MCO Holdings, Inc., and MCO Properties, Inc. (Collectively "MCO"), Charles E. Hurwitz, William C. Leone, and John E. Sommerhalder, move to dismiss Shamrock Associates' "Shamrock") claims arising under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. 78j (1982), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1985) (collectively the "Rule 10b-5 claim"), and under section 13(e) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78m(e) (1982), and Rule 13e-3 promulgated thereunder, 17 C.F.R. § 240.13e-3 (1985) ("the Rule 13e-3 claim"). As discussed below, the defendant's motion is granted inpart, and denied in part.
Shamrock is a New Jersey limited partnership. Horizon is a Delaware corporation with its principal place of business in Arizona. Its common stock is traded on the New York Stock Exchange (the "NYSE"). Horizon is principally engaged in the business of buying, holding, developing, and selling real estate in Arizona, Texas, and New Mexico. MCO Holdings is a Delaware corporation with its principal place of business in California. MCO Properties, a Delaware corporation with its principal place of business in California, is a wholly-owned subsidiary of MCO Holdings. Defendant Charles E. Hurwitz is a director of Horizon and is chairman of the board, chief executive officer, and director of MCO Holdings. Defendant William C. Leone is president, chief executive officer, and a director of Horizon and is president and a director of MCO Holdings. Defendant John E. Sommerhalder is a director of Horizon and an officer of MCO Properties.
Throughout the 1980's, Horizon has experienced financial difficulties. In mid-1984, Horizon faced what its board described as "substantial liquidity problems." In late June 1984, Horizon reached an agreement with MCO that it hoped would alleviate its cash flow problems and provide management assistance. Pursuant to the agreement, MCO paid Horizon $2.8 million for 339, 152 shares of Horizon common stock (priced at $8.27 per share) and MCO acquired an option exercisable at any time between December 29, 1984 and June 29, 1989, to acquire an additional 678,304 shares of Horizon common stock at an option price of $8.27 per share. MCO and Horizon also entered into a management agreement pursuant to which MCO's personnel have provided Horizon with management, office, data processing, and other services. MCO also negotiated on behalf of Horizon a new $25 million revolving credit agreement. The lending bank insisted that MCO commit to guarantee up to $5 million of Horizon debt and to provide Horizon with up to $5 million in additional funds, if needed.
Pursuant to the MCO-Horizon agreement, the Horizon Board of Directors was expanded to ten members, with MCO initially designating three representatives. The Horizon Board currently consists of via MCO representatives and five directors free of ties to MCO. Defendants Hurwitz, Leone, and Sommerhalder are three of the Horizon directors with such ties.
Prior to June 11, 1985, MCO held approximately 17.8% of the shares of Horizon common stock. On June 11, 1985, the Horizon Board unanimously approved issuance of a subordinated convertible promissory note to MCO in the amount of $3 million. MCO loaned Horizon $3 million as partial consideration for the note. The note was convertible to 705,882 shares of MCO stock at a price of $4.25 per share. In exchange, MCO agreed to lend Horizon up to $3 million before December 31, 1985.
At the June 11 meeting, Horizon's counsel informed the board that the issuance of the convertible note without stockholder approval might well precipitate a proceeding by the New York Stock Exchange, on which Horizon stick was trading, to delist Horizon's stock. The directors, nevertheless, authorized the note's issuance without stockholder approval. The NYSE subsequently commenced delisting proceedings; however, those proceedings have been stayed pending a review by the NYSE of its own delisting rules and procedures. Ten days after the Board approved the convertible note transaction, Shamrock issued its first statement pursuant to S.E.C. rule 13d, 17 C.F.R. § 240.13d (1985), disclosing its ownership interest in Horizon's outstanding shares.
On August 9, 1985, Horizon's board authorized it to enter into another transaction with MCO. Under that arrangement, Horizon relinquished its right to borrow the additional $3 million available to it under the convertible note agreement, and instead gave MCO 600,000 shares of voting preferred stock in exchange for $3 million. Shamrock asserts that the preferred stock transaction was designed solely to strengthen and preserve MCO's control of Horizon.
During the same August 9 meeting, the MCO board took two other actions that are now the subject of contention. The by-laws were modified to require advance notice of the composition of dissident director slates and to permit the chairman of the shareholder meeting to disallow nominations that did not comply with the advance notice provisions. The MCO board also adopted a provision requiring 75% of the shareholders to approve any by-law changes not proposed by management. Shamrock charges that the Horizon on board adopted these two by-law amendments with the same haste and absence of forethought that characterized the other changes.
On August 5, 1985, Shamrock commenced this derivative suit alleging that Horizon had breached its fiduciary duty to its shareholders, as well as violated various provisions in the federal and state securities laws. On September 12, 1985, MCO redeemed the convertible note, thereby increasing its ownership interest in Horizon's outstanding stock to 37.2%. On September 18, 1985, Shamrock served an amended complaint, and moved -- unsuccessfully -- for a temporary restraining order enjoining MCO from making any additional purchases of Horizon stock. On September 20, 1985, Shamrock announced a tender offer for up to 51% of Horizon's shares, offering for each share $6.00 plus a certificate of participation in the proceeds to be derived from liquidating Horizon's assets. The amended complaint alleges that between September 5 and October 5, 1986, MCO purchased 450,000 additional Horizon shares in the open market.
The amended complaint contains five claims arising out of the transactions and events detailed above. In its first claim, Shamrock contends that Horizon failed to make certain disclosures that SEC Rule 13e-3 requires. The second claim charges that Horizon's board breached its fiduciary obligations to Horizon's shareholders in approving the above-noted transactions and by-law changes. Shamrock's third cause of action purports to assert the identical claim derivatively on behalf of Horizon's other unaffiliated shareholders. The fourth claim is a derivative and individual claim asserting that MCO purchased Horizon stock between September 5 and October 3, 1985 while in the possession of material, inside information in violation of both Rule 10b-5 and Delaware common law. The fifth cause of action is a claim under section 13(d) Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982);, and rule 13d promulgated thereunder, 17 C.F.R. § 240.138 (1985), alleging that MCO has made false and misleading statements on its schedule 13D and Amendments thereto.
The motions before us seek to dismiss the bulk of these claims. The defendants move pursuant to Fed. R. Civ. P. 23.1 to dismiss the derivative claims because Shamrock is not an adequate shareholder representative and because Shamrock failed to make a demand on the Horizon board before commencing its derivative action. The defendants also move, pursuant to Fed. R. Civ. P. 9(b), to dismiss Shamrock's Rule 10b-5 claim for failure to plead fraud with ...