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ASH v. IBM

November 25, 1964

Richard ASH, Sperry Rand Corp., Ginn & Company, Harper & Row, Inc. and Science Research Associates
v.
INTERNATIONAL BUSINESS MACHINES, INC.



The opinion of the court was delivered by: DUSEN

This case is before the court on defendant's motion to dismiss, as amended (Documents 4 and 5).

Richard Ash, hereinafter called plaintiff, purports to bring this action on behalf of himself and of four corporations which have declined to bring it (Document 1). The sole relief requested is a permanent injunction preventing International Business Machines, Inc. (IBM) from the acquisition of substantially all of the assets of Science Research Associates, Inc. (Old SRA). No motion for preliminary injunction was filed and the transfer of substantially all of the assets to New SRA (a wholly owned subsidiary of IBM) has been completed.

 Plaintiff was a stockholder in Old SRA *fn1" and is presently a stockholder in Sperry Rand Corp., Ginn & Company and Harper & Row, Inc., in whose behalf he seeks to sue. The Complaint does not allege and breach of trust or negligence on the part of the officers of directors of the above-named corporations.

 Plaintiff bases his cause of action on 16 of the Clayton Act, 15 U.S.C. § 26. The pertinent language of that section states:

 'Any person, firm, corporation, or association shall be entitled to sue for and have injunctive relief, in any court of the United States having jurisdiction over the parties, against threatened loss or damage by a violation of the antitrust laws, including sections 13, 14, 18 and 19 of this title, * * *'

 Plaintiff alleges a violation of § 7 of the Clayton Act, 15 U.S.C. § 18, as a result of the purchase by IBM of the assets of Old SRA.

 The closing of the acquisition was held on February 28, 1964. Plaintiff's Complaint was served upon the manager of the IBM sales office in Philadelphia on February 27, 1964, two days after the stockholders' meeting of Old SRA, voting approval of the acquisition, *fn2" and one day before the closing of the transaction.

 Ash's stock holdings in these corporations, for whom he is suing derivatively, is considerably less than 1%. *fn3" By bringing a derivative suit, Ash is essentially representing and standing in the shoes of these corporations. In instituting a suit on their behalf, he has undertaken to vindicate in the courts some right which these corporations for some reason have not felt it necessary to enforce. Ash, by letter, warned these three corporations of the impending purchase by IBM of Old SRA and these corporations decided not to sue.

 Ash, as a stockholder in these corporations, votes his stock in the manner that he, as the owner, feels is in his best interests. When the management, which a stockholder elects, makes business decisions, it does so in what it determines to be the best interest of the company. A stockholder must abide by management decisions, *fn4" unless the management is guilty of a breach of trust or is negligent in the operation of the corporation. To allow stockholders, no matter how large or small their holdings, to dictate management decisions of large corporations would be to permit interference with the internal management of these corporations. Mr. Justice Brandeis stated, in United Copper Sec. Co. v. Amalgamated Copper Co., 244 U.S. 261, 263, 37 S. Ct. 509, 510, 61 L. Ed. 1119 (1917):

 'Whether or not a corporation shall seek to enforce in the courts a cause of action for damages is, like other business questions, ordinarily a matter of internal management, * * *'

 In Swanson v. Traer, 249 F.2d 854, 859 (7th Cir. 1957), it was stated:

 'A corporation's right not to sue is correlative to its right to sue. * * * an individual stockholder has no more right to challenge by a derivative suit a decision by the board of directors not to sue than to so challenge any other decision by the board.'

 This is known as the sound business judgment rule. It is based on the presumption that the directors of corporations have a financial and fiduciary interest in their corporations and, therefore, have no reason to protect an outside wrongdoer at the corporation's expense.

 Plaintiff attempts to distinguish the sound business judgment rule elicited above from the instant case by contending, first, that it is grounded on state law and, second, that it has only been applied to derivative suits for money damages. However, the rationale behind the rule is applicable to all derivative suits. Unless the management of a corporation has done an unreasonable act or breached their fiduciary duty, there is no basis for the institution of a derivative suit. In fact, it § arguable that a refusal by the Board of Directors, however unreasonable, should always prevent a derivative suit against a third-party wrongdoer. *fn5" This would leave plaintiff only a derivative suit ...


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