Before GOODRICH, STALEY and FORMAN, Circuit Judges.
FORMAN, Circuit Judge.: This is a stockholder's derivative action brought by Alexander Rogers, as plaintiff in the United States District Court for the District of New Jersey for himself and other similarly situated stockholders of Metal & Thermit Corporation (M & T), a New Jersey corporation, on behalf of that corporation against American Can Company (Canco), likewise a New Jersey corporation, eight individuals,*fn1 Charles J. Beasley, Robert G. Fuller, H.E. Martin, Cornelius W. Middleton, William F. Palmer, Walton S. Smith, William C. Stolk and Russell C. Taylor, who, with four others, constituted the Board of Directors of M & T, and M & T itself.
The suit was instituted under §§ 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15 and 26, for violations of §§ 1 and 2 of the Sherman Act and §§ 7 and 8 of the Clayton Act, 15 U.S.C. §§ 1, 2, 18 and 19.*fn2
It came before the District Court on motions addressed to the amended complaint, which alleges, among other things, the following: that plaintiff holds 4200 shares of the common stock of M & T; that Canco and the individual defendants above named have effective control of M & T "by virtue of their stock ownership, control of proxy material, and control of the management and operations of Metal & Thermit Corporation, and they have, in effect, caused a merger of these two corporations."; that in February 1957 the Board of Directors of M & T were unable to agree upon the selection of candidates for a board of twelve directors to be presented at the annual stockholders' meeting held in April 1957; that Canco and the individual defendants organized a proxy contest committee and commenced the solicitation of proxies; that thereafter plaintiff organized a proxy contest committee, which resulted in the election of eight of the nominees on the Canco slate and four nominees on the slate of the plaintiff's committee; that Canco financed the campaign of its slate while plaintiff helped to finance the campaign of his slate; that a similar contest ensued for the election of directors at the annual meeting of M & T on April 10, 1958; that at the request of the plaintiff the following proposed statement was included in the management proxy statement:
"RESOLVED: That the stockholders of Metal & Thermit Corporation, hereby demand that the Board of Directors take necessary steps to institute an action against the American Can Company and its principal officers and directors, and against certain of the directors of Metal & Thermit Corporation, namely, H.E. Martin, Charles J. Beasley, Robert G. Fuller, Cornelius W. Middleton, William P. Palmer, Walton S. Smith, William C. Stolk and Russell C. Taylor, for the actions of the American Can Company and its agents and the above-named directors of Metal & Thermit Corporation which are in violation of the antitrust laws of the United States, more particularly the Sherman Act, Sections 1 and 2; the Clayton Act, Sections 7 and 8, and the Corporation Law of the State of New Jersey, and seek to restrain the continuance of such violations, and for the recovery of damages for the benefit of Metal & Thermit Corporation, as the Court may find just and proper.
"Last year, American Can Company financed a proxy fight to elect a Metal & Thermit Corporation Board which would retain H.E. Martin in office as President of your Company. Mr. Martin negotiates your Company's contracts with American Can Company for the purchase of tin plate scrap, which are not submitted to your Board of Directors for Approval. Therefore, American Can Company is in a position to control the prices paid for tinplate scrap. In the opinion of Counsel for Mr. Rogers, this is in violation of the Antitrust Laws.";
that the said resolution and statement were also circulated to the stockholders as part of the proxy form and ballot by the plaintiff's proxy contest committee; that at the 1958 meeting 579,945 shares voted against the proposal and 185,731 shares voted for the proposal; that the stockholders also reelected the eight individual defendants as directors.
The amended complaint further alleges that M & T is the largest producer of tin chemicals in the United States and makes 50 percent of all the detinned scrap and tin derived from the detinning of tinplate scrap; that it has plants in Carteret, New Jersey; East Chicago, Indiana; Piscatawaytown, New Jersey; South San Francisco, California; Beaver Dam, Hanover County, Virginia; Carrollton, Kentucky; and research laboratories in Rahway, New Jersey, and Detroit, Michigan; that it was organized in 1908 and as of December 31, 1957 had total assets of over $24,000,000 and gross sales of over $42,000,000; that the sale of products resulting from the detinning of tinplate scrap accounted for approximately 40 percent of the total gross sales and approximately 66 percent of the total net profits of M & T for the year 1957; that the principal supplier of tinplate scrap to M & T is Canco in the amount of approximately 150,000 tons of tinplate annually, having an approximate value of $7,000,000; that most purchases of tinplate scrap by M & T are made on a contract basis in the following market areas in the United States and Canada: The Eastern Market (Philadelphia); The Mid-Western Market (East Chicago); and West Coast Market (San Francisco) and Canada.
The amended complaint also alleges that:
"The purchase contracts entered into with contract suppliers of tinplate scrap by Metal & Thermit Corporation provide for a fixed differential to be paid to Metal & Thermit Corporation, which differential covers the cost of detinning and the profit to be realized by Metal & Thermit Corporation for its services, subject to adjustment for freight charges which are a material part of these contracts. The said differential is premised upon a price for detinned scrap and tin which is referred to as the market price. In the event that the average for the month of tinplate scrap and tin fluctuates, Metal & Thermit Corporation is required to pay an additional amount as the price increases and is entitled to a credit in the event that the price decreases.Therefore, in a rising market, Metal & Thermit Corporation is required to pay to the supplier of tinplate scrap the additional amount realized over and above the base price of purchased tinplate scrap and tin as specified in the contract.";
that the only competition presently existing for the purchase of tinplate scrap is among M & T, Vulcan Materials Company, and a few local processors in the eastern and midwestern markets; that M & T and its subsidiary and affiliated companies purchased tinplate scrap for detinning purposes in the following approximate percentages of all purchases of tinplate scrap in the several geographical areas during the year 1957:
"Eastern Market Area (Philadelphia) 40%
Mid-Western Market Area (East Chicago) 54%
West Coast Market Area (San Francisco) 100%
Total of United States Market Areas 50%";
and that in view of Canco's fiduciary relationship. as a dominant stockholder of M & T, Canco cannot enter the detinning business and utilize the process of M & T unless it merges with M & T.
It is further alleged that Canco acquired a portion of the common stock of M & T at the time of its organization in 1908 and that M & T operated as an independent company with representatives of Canco serving as directors until 1954 when the defendant H. E. Martin was elected President of M & T; that beginning in 1955 the defendants have been and are engaged in a continuing combination, conspiracy and agreement to lessen competition substantially and monopolize interstate trade and commerce in the purchase and sale of tinplate scrap, the substantial terms of which are:
"a. The American Can Company would acquire the common stock of Metal & Thermit Corporation and thereafter operate the Metal & Thermit Corporation either as a wholly owned subsidiary of the American Can Company or as a division of the American Can Company.
"b. The American Can Company with and through the individual defendants would seek to control and does control the Board of Directors of Metal & Thermit Corporation.
"c. The individual defendants would, as directors and/or officers of Metal & Thermit Corporation, insure to the American Can Company its further entrenchment as the principal supplier of tinplate scrap to Metal & Thermit Corporation.
"d. The American Can Company and the individual defendants would use and do use Metal & Thermit Corporation and its major position in the several market areas to fix the price of tinplate scrap in the several market areas in the United States.
". . . By virtue of the aforesaid concert of action and its execution by all of the defendants, there has been brought about in essence, a merger of Metal & Thermit Corporation into the American Can Company for the benefit of the American Can Company in contravention of the antitrust laws."
The amended complaint further alleges that the combination and conspiracy were effectuated by means and methods including the following: that in June 1956 defendants William C. Stolk and Russell C. Taylor, and James A. Stewart, respectively, President and Vice Presidents of Canco, met with plaintiff and others, at which time William C. Stolk stated that Canco wished to merge with M & T for the purpose of having Canco enter the detinning business; that he and the co-defendants last named threatened that if the offer were refused Canco would discontinue to supply M & T with tinplate scrap and would enter the detinning business itself; that Canco and the individual defendants, pursuant to the conspiracy to gain control of the Board of Directors of M & T, organized a proxy contest committee and solicited proxies to be used in electing directors at the annual meeting of stockholders of M & T held on April 11, 1957, which committee was financed by Canco at a cost of approximately $50,000; that the defendant William P. Palmer was retained as counsel for the proxy contest committee and his firm was designated as counsel for M & T; that the same law firm is also counsel for Canco; that having gained control of the Board of Directors of M & T in April 1957, the individual defendants, acting as a majority of the board, proceeded forthwith to replace as officers of M & T, and as members of the Executive Committee, those individuals who were opposed to the objectives of the conspiracy with persons sympathetic to Canco's illegal purposes; that William C. Stolk was President and a director of Canco; Russell C. Taylor was Vice President and director in charge of manufacturing of Canco, and they, together with Charles J. Beasley, Robert G. Fuller, H.E. Martin, Cornelius W. Middleton, William P. Palmer and Walton S. Smith, were candidates for the directory of M & T on the management proxy committee slate financed by Canco in 1957, as well as candidates on the management proxy committee slate in 1958 and their primary loyalty to Canco caused conflict of interests which prevented them from acting as independent directors of M & T.
The amended complaint further charged that the contracts entered into by Canco and M & T for the sale of tinplate scrap are employed to effectuate an agreement that M & T would pay no higher price for tinplace scrap to any other container manufacturer who sought to sell tinplate scrap on a term contract basis; that the periodic contract made with Canco is first negotiated and all other purchase contracts follow the price pattern set in the contract with Canco "and the ultimate amount received by Metal & Thermit Company is controlled accordingly"; and that these contracts have not been submitted to the Board of Directors of M & T.
It is also charged in the amended complaint that Canco and the individual defendants in the course of soliciting proxies for the annual meetings of 1957 and 1958 intimidated the stockholders of M & T by threatening to cause the withdrawal of Canco from supplying substantial amounts of tinplate scrap to M & T.*fn3
The amended complaint further states that M & T has been greatly damaged because of the alleged violations of law and has continued to be damaged in the following ways: the effective control of M & T exercised by Canco and the individual defendants has overborne its corporate will and deprived it of its freedom of decision, in effect causing the merger of the two corporations and has caused M & T to participate in the violations of the antitrust laws; that M & T by reason of such control is prevented from developing and expanding into fields most beneficial to it and that it is required to act primarily for the benefit of Canco; that the relationship existing between Canco and M & T prevents M & T from actively competing in the open market for the purchase of tinplate scrap; that Canco and the individual defendants have entrenched Canco as the primary supplier of tinplate scrap to M & T, thereby putting Canco in a position to fix the price that M & T can pay for tinplate scrap; that the conflict of interests of the individual defendants, who owe primary loyalty to Canco, prevents them from acting as independent directors of M & T to the great detriment of M & T; that the public is deprived of the benefits of free competition by the combination and conspiracy in the following ways: that the contract relationship and effective control by Canco over M & T enables Canco to fix the price of tinplate scrap in the aforementioned geographical areas and to foreclose competitors from competing in those market areas; that the sale of tinplate scrap by tin container manufacturers substantially affects the profit or loss resulting from their operations and that the controlling position of Canco allows it to lessen competition substantially in the purchase and sale of tinplate scrap and in the production and sale of tin containers; that Canco's ownership of common stock and its control of M & T and effective merger of it has a tendency to create a monopoly in the sale and production of detinned scrap through the monopoly of tinplate scrap and that the control by Canco of M & T can be used to injure other container manufacturers by depriving them of the means of disposing of their tinplate scrap and of a significant source of income therefrom on a fixed contractual basis.
It is further alleged that M & T is joined in the amended complaint as a defendant only because it is in the effective control of the other defendants and is, therefore, unable to express its independent judgment to join as a plaintiff in this action.
The relief prayed for in the amended complaint is for judgment for the benefit of M & T against Canco and the eight individual defendants declaring that they have violated and have caused M & T to violate the antitrust laws and directing defendants to desist from continuing said violations; for treble damages in the amount of $5,000,000 plus counsel fees and costs; for an injunction directing Canco to divest itself of its stock interest in M & T or in the alternative, an injunction directing Canco to hold its stock in M & T as an "investment" within the meaning of § 7 of the Clayton Act and for other injunctive relief.
The amended complaint contains an affidavit by plaintiff in which he swears that the statements contained therein are true to the best of his knowledge and belief.
The amended complaint was attacked by three motions for dismissal and for entry of summary judgment pursuant to Rules 15 and 56 of the Federal Rules of Civil Procedure; one by Canco, another by the two served defendant directors of M & T, Charles J. Beasley and Walton S. Smith and the third by M & T.
The District Court filed an opinion in which it held that the motions of the defendants should be denied.*fn4 In entering its order to that effect, pursuant to 28 U.S.C. § 1292(b), it certified that a controlling question of law was involved as to which there is substantial ground for different opinion and that an immediate appeal from the order might materially advance the ultimate termination of the litigation. This court granted permission to appeal from the interlocutory order.
Briefs were filed by M & T, by Charles J. Beasley and Walton S. Smith, the two directors of M & T who were served with the complaint and by Canco. Each of the three briefs presents arguments attacking the position of the plaintiff from a somewhat different point of view. In the main, however, they consist of interlocking contentions and will be generally treated herein as if a single brief and argument had been made for all of the defendants.
In the 1958 election, 766,276 shares of stock, constituting 96 percent of those eligible were voted.*fn5 Nine directors named on the slate of the management of M & T were elected and three on the slate of plaintiff's proxy committee.*fn6 The resolution proposed by plaintiff for the institution of litigation was defeated. It received 185,731 in its favor, while 579,945 voted against it.
The issue raised by the appeal is a narrow one, i.e., whether the District Court erred in holding that the plaintiff had standing to maintain this action in the face of the adverse vote of an independent majority of the stockholders of M & T.
We may therefore come immediately to that question. The defendants submit that federal and state decisions firmly support their contentions that they are entitled to summary judgment because there are no genuine issues of material facts bearing upon plaintiff's lack of standing to maintain this suit in the face of the stockholders' disapproval.
They say that the resolution of this question of law turns, among others, upon the following decisions of the Supreme Court: Hawes v. Oakland, 104 U.S. 450 (1882); Corbus v. Gold Mining Co ., 187 U.S. 455 (1903); United Copper Security Co. v. Amalgamated Copper Co ., 244 U.S. 261 (1917) and Ashwander v. Tennessee Valley Authority, 297 U.S. 288 (1936).
In Hawes v. Oakland, supra, the complainant, a citizen of New York, and a stockholder in a California water works company, brought a bill in equity in the Circuit Court of the District of California against the City of Oakland, the water company and its directors, alleging that the company was furnishing water to the City of Oakland free of charge beyond what it was required to do by law and that the company and the complainant thereby suffered great loss and damage.The City of Oakland filed a demurrer which was sustained by the trial court and the bill was dismissed.
On appeal the Supreme Court held that the complainant in such a suit must show some action or threatened action of the directors or trustees which is beyond the authority conferred by the charter, or the law under which the company was organized; or such a fraudulent action, completed or threatened, by them, either among themselves or with some other party, or with shareholders, as will result in serious injury to the company or the other shareholders; or that the directors or a majority of them, are acting for their own interests, in a manner destructive of the company, or of the rights of other shareholders; or that the majority of ...