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Dorsey R. Gardner and John Francis O'brien, As Trustees of the Dorsey R. v. the Major Automotive Companies

August 21, 2012


The opinion of the court was delivered by: Block, Senior District Judge:


This case arises out of a reverse stock split through which defendant Bruce Bendell became the sole shareholder of The Major Automotive Companies, Inc. ("Major"). Plaintiffs assert claims for breach of fiduciary duty and violation of § 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 14 U.S.C. 78n(a), and Securities and Exchange Commission ("SEC") Rule 14a--9 promulgated thereunder. The complaint also includes a negligent misrepresentation claim, but plaintiffs abandoned it in open court during oral argument on August 21, 2012. The Court's jurisdiction is founded on both the Exchange Act claim and diversity of citizenship. See 28 U.S.C. §§ 1331, 1332(a).

Defendants move for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c).*fn1 For the reasons stated below, that motion is granted in part and denied in part.


For purposes of this motion, the Court accepts the complaint's allegations as true and draws all inferences in plaintiffs' favor. See Cleveland v. Caplaw Enterprises, 448 F.3d 518, 521 (2d Cir. 2006). The Court may consider "the complaint, the answer, any written documents attached to them, and any matter of which the court can take judicial notice for the factual background of the case." L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011). The complaint is "deemed to include any written instrument attached to it as an exhibit, materials incorporated in it by reference, and documents that, although not incorporated by reference, are 'integral' to the complaint." Sira v. Morton, 380 F.3d 57, 67 (2d Cir.2004) (citations omitted) (quoting Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002)). The following facts are presented accordingly.

Plaintiffs Dorsey R. Gardner and John Francis O'Brien are trustees of the Dorsey R. Gardner 2002 Trust ("the Trust"). At the time of the relevant transaction, the Trust owned common stock in Major, a Nevada corporation with its principal place of business in Long Island City, New York. Major's stock was publicly traded until early 2006, when the company's Board of Directors and shareholders approved a "Going Private" transaction. Bendell -- who owned 50.3% of Major's outstanding common stock -- was Chairman of the Board, Chief Executive Officer, and Acting Chief Financial Officer.*fn2

On December 30, 2010, Major circulated a Notice of Special Meeting of Stockholders to consider a 1-for-3,000,000 reverse stock split which would render Bendell the sole shareholder. All other shareholders would receive $0.44 per pre-split share. The accompanying proxy statement explained that because Bendell intended to vote in favor of the transaction, its approval was assured, but that a vote was in Major's interest "because if a majority of the unaffiliated stockholders . . . were to approve the Transaction, the Company could, in the event that the Transaction is judicially challenged, rely on that vote to show the fairness of the Transaction." Proxy Statement at 5. The proxy statement acknowledged Bendell's conflict of interest, although it failed to disclose his domination of the Board, which recommended a vote in favor of the proposal. Stated reasons for the transaction were to "reduce the number of stockholders to one" and decrease expenses by no longer having to service stockholders with small positions and manage shareholder accounts and relations. Compl. ¶ 17. Information about dissenters' rights and the text of Nevada's dissenters' rights statute were included with the notice and proxy statement.

The crux of plaintiffs' complaint is that Bendell abused his fiduciary authority to obtain and approve an unfairly low price per share. The price was based on a "Fairness Opinion" by Empire Valuation Consultants, LLC ("Empire"), dated April 15, 2010, and annexed to the proxy statement. Empire relied on Major's tax returns for 2005-2008 and financial statements through June 2009. The opinion noted that Empire requested more recent financial information, but "[m]anagement stated that none of this information was available." Fairness opinion, Annex C to Proxy at 4. Plaintiffs allege that Major had recent performance data and financial statements, but chose not to disclose it to Empire. They further allege that Empire assigned an inappropriately steep marketability discount to the share value.


A. The Exchange Act claim

Plaintiffs allege that defendants made false statements regarding the fairness of the transaction in the proxy statement, in violation of § 14(a) of the Exchange Act and its regulations. That section only applies to registered securities. See 15 U.S.C. §§ 78n(a)(1) ("It shall be unlawful for any person . . . in contravention of such rules and regulations as the Commission may prescribe . . . to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security . . . registered pursuant to section 78l of this title."), § 78l (establishing registration requirements); see also Republic Technology Fund, Inc. v. Lionel Corp., 483 F.2d 540, 545 (2d Cir. 1973) ("The claimed violation of the proxy rules must fail because proxies were not solicited 'in respect of any security . . . registered pursuant to section 12' of the Act.").

Plaintiffs do not contest that Major was not a registered security at the time defendants' allegedly violated the proxy solicitation regulations, but they attempt to come within the Exchange Act's purview by arguing that Major's common stock was registered at the time their shares were purchased and that defendants should therefore be held liable as though the stock had never been deregistered. This argument is unconvincing. Neither plaintiffs' brief nor the Court's own research yields any law in support of this interpretation of § 14(a). Moreover, plaintiffs' theory is contrary to the statute's plain language; § 14(a) only governs conduct "in respect of any security . . . registered," 15 U.S.C. §§ 78n(a)(1), suggesting that once a security is deregistered, the statute's protections no longer apply. Thus, there is no liability under the Exchange Act and the claim is dismissed.

B. The breach of fiduciary duty claim

The complaint alleges that Bendell -- as "[C]hairman of the Board, President, CEO and Acting CFO," Compl. ¶ 37 -- and the other members of the Board (1) "breached their fiduciary duty of loyalty by withholding information concerning the financial condition of Major and the true value of Major's common stock in order to secure for Bendell and Major an artificially discounted purchase price," Compl. ¶ 38, and (2) "breached their duty of care by failing to inform themselves of reasonably available information concerning the financial condition of ...

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