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August 18, 1958

Louis GAUDIOSI, Charles Schwartz, and Randolph Phillips, individually and on behalf of all other stockholders of the Pennsylvania Railroad Company similarly situated, Plaintiffs,
Walter S. FRANKLIN, Richard K. Mellon, Rebert T. McCracken, C. Jared Ingersoll, James E. Gowen, Philip R. Clarke, James M. Symes, John A. Diemand, John B. Hollister, Lammot du P. Copeland, Donald Danforth, R. George Rincliffe, William L. Day, Otto N. Frenzel, Fred Carip, David C. Bevan, James P. Newell, Directors; Bayard H. Roberts, and The Pennsylvania Railroad Company, a corporation, incorporated under the laws of the Commonwealth of Pennsylvania, Defendants

The opinion of the court was delivered by: KRAFT

The present action seeking equitable relief is the second suit filed by the plaintiffs relating to a proxy contest for the office of director of The Pennsylvania Railroad Company. Six directors were to be elected for four year terms at the 1958 annual meeting and election of stockholders. The company management supported its six nominees and opposed Randolph Phillips, one of the plaintiffs, the seventh nominee. After the election on May 13, 1958 the judges of election determined that the six management candidates received the highest number of votes. This suit in equity was filed May 9, 1958, and, on June 4, this court, to preserve the status quo, entered a temporary order restraining the six apparently successful management candidates from assuming the offices of director until further order.

Count IV of the complaint embodies, inter alia, a class action in which the plaintiffs assert a representative claim that the directors of the defendant company are liable to it for improper expenditures of corporate funds to promote the candidacies of the six management nominees.

 An order has heretofore been entered directing a rehearing in the class action and a trial of the issues therein separate from all other claims asserted in the plaintiffs' complaint. The findings of fact hereinafter made and the conclusions of law hereinafter reached relate to all of the plaintiffs' claims except that representative claim asserted in the class action in count IV of the complaint.

 From the admissions in the pleadings, stipulations of counsel and the evidence, I find the following:


 1. At the time this action was instituted on May 9, 1958 the plaintiffs, Louis Gaudiosi, Charles Schwartz and Randolph Phillips, were citizens of the State of New York and were, respectively, the owners or the beneficial owners of 500, 1,400 and 500 shares of the capital stock to The Pennsylvania Railroad Company, which stock then had a market value of approximately $ 12 per share.

 2. The defendant, The Pennsylvania Railroad Company, is a Pennsylvania corporation, having its principal office in Philadelphia, Pennsylvania.

 3. Defendant, Bayard H. Roberts, is the Secretary of, and each of the other individual defendants is a Director of, The Pennsylvania Railroad Company and a citizen of a state other than New York.

 4. Four of the individual defendants, James M. Symes, C. Jared Ingersoll, R. George Rincliffe and Bayard H. Roberts, are also the proxy holders named in the proxy forms solicited by the management of the defendant company for its d958 Annual Meeting and Election.

 5. At the 1958 annual meeting of the stockholders of the defendant company six directors were to be elected for four years expiring in 1962. For these offices the management nominated and sought the election of Philip R. Clarke, Lammot duP. Copeland, Donald Danforth, Walter S. Franklin, James M. Symes, defendants, and of Dr. Gaylord P. Harnwell, who is not a defendant.

 6. On March 25, 1958 there were approximately 147,344 record owners and 20,300 beneficial owners of the outstanding stock, resident within and outside the United States. The number of record owners and beneficial owners thereof was substantially unchanged on April 3, 1958, the record date for determination of stockholders entitled to vote in the 1958 annual election of directors of the defendant company. On April 3, 1958 there were 13,167,154 outstanding shares of defendant company's stock.

 It was not reasonably to be expected that a substantial majority of the record owners of beneficial owners would attend the 1958 annual meeting and election in person. It was reasonably to be expected that a substantial majority of them would exercise their voting rights by proxy.

 7. The plaintiff, Randolph Phillips, (hereinafter called Phillips) became a candidate for election to the 18 member board of directors of the defendant company at the solicitation of Mr. Lewis D. Gilbert, the extent of whose stock ownership in the defendant company on April 3, 1958 is undisclosed by the evidence.

 8. Phillips was aware that the office of director of the defendant company to which he aspired paid no fee, salary or other form of compensation.

 9. Phillips has spent more than $ 3,000 in expenses to advance his candidacy for election to the office of director. In view of Phillips' interest as a litigant and the complete absence of corroboration which should have been susceptible of ready production, I discount, in part, Phillips' testimony that he spent in excess of $ 20,000; that plaintiff, Gaudiosi, spent in excess of $ 2,000 and that Melvin J. Fox, an associate, spent more than $ 2,000.

 10. Article XVII, Section 2 of the Constitution, P.S. of the Commonwealth of Pennsylvania and the Act of June 15, 1874, P.L. 289, 1, 67 P.S. § 62 require the defendant company to maintain certain records relating to the ownership and transfer of the company's stock and give to the company's shareholders the right to inspect those records. The Act of 1874 provides:

 'Every railroad or canal corporation, organized in this state, shall maintain an office therein for the transaction of its business, where transfers of its stock shall be made and books kept for the inspection, by any stock or bondholder or any other person having any pecuniary interest in such corporation, in which shall be recorded the amount of capital stock subscribed or paid in and by whom, the names of the owners of its stock and the amounts owned by them respectively, the transfers of said stock, and the names and places of residence of its officers.'

 11. Before, on and after April 3, 1958 the defendant company kept no books, as such, in which the names of the owners of its stock and the amounts respectively owned by them were recorded. In lieu thereof the names of its stockholders and the amounts of stock owned by them were recorded by a modern system of cards and plates.

 One set of cards (I.B.M. cards) consisted of one card for each stockholder and legibly disclosed the name, address and company account number of the stockholder, the number of shares acquired, the dates of acquisition and the number of shares currently owned. Supplementing this set was a set of addressograph plates on which, for imprinting purposes, were inscribed only the names, addresses and account numbers of the respective stockholders. By way of supplement still another set of I.B.M. cards legibly disclosed the account number and the number of shares therein and by perforations intended to be interpreted by the I.B.M machine also indicated the number of shares owned and other pertinent data other than the stockholder's name.

 12. John B. Prizer, Esq. (Prizer), a Vice-President and General Counsel of defendant company advised Phillips, by letter dated March 14, 1958, that company stockholders of record as of April 3, 1958 would be eligible for solicitation for proxies. He also informed Phillips that as of January 1, 1958 there were 112,949 stockholders who owned 1 to 99 shares; 30,647 who owned 100 to 999 shares; 872 who owned 1,000 or more shares. Prizer also then informed Phillips that brokers held shares for 19,000 beneficial owners and bankers held shares for 1,300 beneficial owners.

 13. Phillips informed the defendant company, by letter dated April 4, 1958, of his proposed delivery to it on April 7, 1958 of 148,000 proxy forms. He requested defendant company to address these cards, or so many of them as were required for the purpose, to all record stockholders holding 100 shares or more; thereafter, to proceed to address the remaining proxy cards to all holders of 1 of 99 shares. Phillips, further instructed defendant company, upon receipt by it of his proxy solicitation material, to mail, pursuant to rule X-14A-7 of the Securities and Exchange Commission one set each of that material, including a letter dated April 9, 1958 and a proxy statement dated April 3, 1958, a business reply envelope and addressed proxy form to each stockholder owning 100 or more shares. Phillips further requested that as soon as the proxy forms for such holders were addressed and the soliciting material received the material be mailed without delay for completion of addressing and mailing to the holders of 1 to 99 shares.

 Phillips instructed Prizer, by telegram dated April 10, 1958, to address two additional sets of proxy forms to all holders of 100 of more shares after completion of addressing the first such set.

 14. Phillips was experienced in proxy contests and thoroughly familiar with all Securities and Exchange rules applicable thereto.

 15. Rule X-14A-7(b)(1) provides: 'Copies of any proxy statement, form of proxy or other communication furnished by the security holder shall be mailed by the issuer to such of the holders of record specified in (a)(1) as the security holder shall designate. The issuer shall also mail to each banker, broker, or other persons specified in (a)(2) above a sufficient number of copies of such proxy statement, form of proxy or other communication as will enable the ...

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