S. Ct. 2126, 48 L. Ed. 2d 757 (1976). In the case at hand, the Court is asked to decide a 12(b)(6) motion, rather than one for summary judgment. While this court agrees with defendant that it need not engage in "self-flagellation," omissions concerning shared office space and personnel as well as the disclosure of relationship information may be material and plaintiff should be allowed the opportunity to further develop his § 20 allegations.
III. Lack of Standing
Plaintiff seeks injunctive relief under § 10(b) which bars fraud in connection with the purchase or sale of any security. Defendants move to dismiss the claim for lack of standing based upon plaintiffs failure to allege that he purchased or sold any FKL stock in reliance on material misrepresentations or omissions. Defendants motion is denied in light of well-established Second Circuit precedent holding that, in seeking injunctive relief under a § 10(b) claim, a plaintiff does not have to show damages in connection with the purchase or sale of any security. Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540 (2d Cir. 1967); see also, Packer v. Yampol, 630 F. Supp. 1237 (S.D.N.Y. 1986).
As enunciated by this court in Fuchs v. Swanton Corp., 482 F. Supp. 83, 90 (S.D.N.Y. 1979), the plaintiff requesting injunctive relief must demonstrate "that the continuation of past and present practices will in fact injure him. " Plaintiff alleges a failure to disclose in its 1994 Annual Report: (1) the facts upon which the directors' $ 8.3 million valuation of Excelsior/WRKA is based, (2) that SLB shares office space and personnel with FKL without payment, (3) that professional fees were falsely described, and (4) that income from controlled affiliates results from a management agreement entered into between Excelsior and FKL.
Addressing the first contention, the SEC has stated that misleading disclosures involving the valuation of assets implicate § 10(b). SEC Accounting Series Release No. 113, Investment Company Act Release No. 5847 [1937-1982 Transfer Binder Accounting Series Releases] Fed. Sec. L. Rep. (CCH) P 72,135 at 62, 288. In the 1994 annual report, FKL valued WRKA and Excelsior at $ 8,361,440. This figure represented a 91% increase over the reported cost of the station in August 1994 ($ 4,386,000). Given that WRKA represents more than 50% of the total assets of FKL, the omission may be material. This is especially true in light of the fact that defendants used the appreciation of WRKA as the basis of their claim that net asset value has increased over the past four years. Similarly, allegations that WRKA's operating income of $ 800,000 is insufficient to provide FKL with a profit further buttresses plaintiff's § 10(b) claim that FKL's past and present valuation practices may in fact injure the plaintiff. In light of the foregoing, plaintiff's § 10(b) claim survives the 12(b)(6) motion.
This court abstains from exercising jurisdiction over plaintiff's dissolution claim for a variety of reasons. First, a dissolution claim for a Delaware corporation is governed by Delaware law. Second, the Delaware statute governing dissolution, Subchapter X of the Delaware General Corporation Law, specifically delegates jurisdiction over dissolution claims to the Delaware Court of Chancery. Third, even if the federal court had jurisdiction over dissolution claims, Second Circuit law dictates that abstention is an appropriate course of action.
It is well established that as a matter of law, corporate governance issues are normally controlled by the law of the state of incorporation. Kamen v. Kemper, 500 U.S. 90, 114 L. Ed. 2d 152, 111 S. Ct. 1711 (1991). Given this rule, as FKL is a Delaware corporation, Delaware law should apply. Yet, plaintiff challenges the state of incorporation approach. Rather, plaintiff asserts that a "grouping of contacts" approach should apply. Arguing that FKL's principal place of business is in New York and its books and records are in New York, plaintiff seeks the dissolution of FKL under the common law and corporate law of New York. However, there is ample law stating that the law of the state of incorporation applies.
As FKL is a Delaware corporation, Delaware law controls.
An investigation of Delaware law reveals that the state has statutorily codified its strong interest in the systematic creation and dissolution of its companies. The statute concerning dissolution, Subchapter X of the Delaware General Corporation Law, specifically ascribes jurisdiction over dissolution claims to the Delaware Court of Chancery. This delegation of jurisdiction to one tribunal is meant to ensure the uniform application and development of regulatory laws.
In light of this well-proscribed administrative plan, the Court believes that abstention over plaintiff's dissolution claim avoids needless interference with Delaware's regulatory scheme. The Second Circuit held in Friedman v. Revenue Management of New York, 38 F.3d 668, 671 (2d Cir. 1994), that "every federal court that has addressed the issue of dissolving state corporations has either abstained or noted that abstention would be appropriate, assuming jurisdiction exists." In Friedman, the court abstained from hearing a claim for dissolution of a New York corporation; in this case, the court is asked to entertain a dissolution claim of a Delaware corporation. Thus even if this federal court had jurisdiction over the dissolution claim, Second Circuit law dictates that abstention is an appropriate course of action. As the Northern District of New York found in Harrison v. CBCH Realty, it is "difficult to conceive of an issue more important to the state than the continuation or dissolution of a corporation that was created and exists through the operation of its laws." 1992 U.S. Dist. LEXIS 21798, *10, 1992 WL 205839, at *4 (N.D.N.Y. 1992). Cuddle Wit, Inc. v. Chan, 1990 U.S. Dist. LEXIS 10202, *4, 1990 WL 115620, at *2 (S.D.N.Y. 1990). Accordingly, we abstain from reviewing the dissolution claim.
In summation, the Court grants defendants' motion to dismiss in part and denies in part. Plaintiff's derivative claims are dismissed for failure to make demand. However, plaintiff's claims under the 1940 Investment Company Act survive the 12(b)(6) motion to dismiss. Finally, the Court abstains from entertaining plaintiff's dissolution claim.
New York, New York
January 30, 1996
Leonard B. Sand