McLaughlin, Freedman, and Adams, Circuit Judges. On Rehearing: Present Hastie, Chief Judge, and McLaughlin, Freedman, Seitz, Van Dusen, Aldisert, Adams, and Gibbons, Circuit Judges.
This is an appeal from the order of the District Court for the District of Delaware dismissing the petition of plaintiff, Alexander Kahan, for counsel fees and expenses arising out of his individual and representative actions against defendants for violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5*fn1 promulgated thereunder and for a breach of defendants' common law fiduciary duties. These suits were based on alleged misrepresentations, manipulations and nondisclosures in connection with a tender offer. Although the underlying suit which generated the bulk of the legal expenses has been rendered moot by the action of certain of the defendants, plaintiff contends that his efforts in instituting legal proceedings against the defendants benefited the class he represented and deterred the defendants' "fraudulent scheme".
The District Court dismissed plaintiff's petition for counsel fees on the grounds that: plaintiff had not filed a meritorious damage action which could survive a motion to dismiss, because he was not a purchaser or seller and because he failed to allege reliance on the deception; plaintiff failed to establish a proper class action, or benefit to the class; and plaintiff sought counsel fees from the defendants rather than from a fund created by his efforts. [Kahan v. Rosenstiel, 300 F. Supp. 447 (D.Del.1969)]
Because the District Court disposed of the matter on a motion to dismiss, the facts alleged in plaintiff's petition for counsel fees and his amended complaint in the underlying suit must be accepted as true. See e.g. Walker Process Equipment, Inc. v. Food Machinery and Chemical Corp., 382 U.S. 172, 175, 86 S. Ct. 347, 15 L. Ed. 2d 247 (1965); Frank Mashuda Co. v. Allegheny County, 256 F.2d 241, 242 (3d Cir. 1958), aff'd 360 U.S. 185, 79 S. Ct. 1060, 3 L. Ed. 2d 1163; 2J Moore Federal Practice para. 12.08 (2d ed.1966). The essential allegations are as follows:
Plaintiff is a minority shareholder (owner of 750 shares) in Schenley Industries, a Delaware corporation. Defendants, in this proceeding and in the underlying suit, are the directors of Schenley at the time of the transaction alleged, including Lewis S. Rosenstiel, the controlling shareholder, the Dorothy H. & Lewis S. Rosenstiel Foundations, alleged to be dominated and controlled by Rosenstiel and to be his "alter ego", Glen Alden Corporation, the tender offeror, and Meshulam Riklis, the controlling shareholder of Glen Alden.
In March 1967, Schenley and P. Lorillard Company were engaged in negotiations for a merger between the two companies. As a condition of the merger Rosenstiel, Schenley's chairman and chief executive officer, demanded a premium for his stock and the stock he controlled. Because Lorillard refused to pay the premium, negotiations terminated with Lorillard, and commenced with Glen Alden which was willing to meet Rosenstiel's terms. In March, 1968, as a result of these talks and as part of a plan by Glen Alden to acquire control of or merge with Schenley, Rosenstiel sold 945,126 shares of Schenley common stock to Glen Alden for $80 per share, making Glen Alden the controlling shareholder of Schenley. This occurred although Lorillard's proposed overall offer to every shareholder of Schenley common stock was better than the offer to be made by Glen Alden to the other Schenley shareholders, and despite the fact that other corporations were ready and willing to make better overall offers to Schenley common stockholders.
Contemporaneously with Glen Alden's purchase of Rosenstiel's shares, it was publicly announced through various financial and news media that a tender offer by Glen Alden would be made to Schenley shareholders which would be equivalent to the $80 per share paid to Rosenstiel. This offer was to consist of $20 in cash, a six percent twenty-year subordinated debenture in the principal amount of $60, and three warrants to purchase Glen Alden's common stock at $15 per share for each share of Schenley common stock.
Plaintiff concluded that the value of this proposed offer had been misrepresented in that it was not equal to the sum paid to Rosenstiel for the shares controlled by him. He filed a class action in the District Court of Delaware on behalf of all Schenley common shareholders at the time of the alleged transaction except for those involved in it, and also filed a suit in the Delaware Court of Chancery. These actions charged defendants with violating § 10(b) of the 1934 Securities Exchange Act and Rule 10b-5, and with a breach of fiduciary duties.*fn2 The principal charges in the suit filed in the Delaware District Court were:
(1) Defendants' representations that the originally announced offer was equal or comparable to the $80 per share paid Rosenstiel were materially false and misleading; and
(2) Defendants' representations omitted the material fact that plaintiff and each member of his class had been deprived of the opportunity to effect a more favorable disposition of their shares to Lorillard or to other corporations.
Plaintiff further alleged that as a result of this legal action and the efforts of his counsel, Glen Alden publicly announced in April, 1968, it would increase its offer. The new offer included $10 in cash and a six percent twenty-year subordinated debenture in the principal amount of $100. Although this represented a $17 increase over the original offer, plaintiff contended it was still not equal to the $80 per share paid to Rosenstiel and filed an amended complaint. In August, 1968, the offer was raised to include $13 in cash and a six percent sinking fund, twenty-year subordinated debenture in the principal amount of $100 for each 1.5 shares of Schenley common stock,*fn3 -- admittedly, three dollars more than the previous offer. The package included in the second revision was comparable to the $80 paid to Rosenstiel and to the offer made by Lorillard. Because defendant, Glen Alden, made these offers directly to the individual stockholders, plaintiff alleges that Glen Alden violated the provision of Rule 23(e) of the Federal Rules of Civil Procedure providing for formal class settlements. Plaintiff also alleges that through his efforts a fund of approximately $83,000,000 was created for the benefit of the class he represented. This sum is the difference between the value of the original offer and the final tender offer.*fn4
On February 20, 1969, plaintiff filed a petition for counsel fees, costs and expenses. The defendants promptly moved to dismiss both the complaint and the petition. Hearing was held on April 25, 1969, and on June 10th, Chief Judge Wright filed an opinion in support of his order dismissing plaintiff's petition. An order dismissing the complaint as moot was entered on July 8, 1969. Plaintiff then appealed the dismissal of his petition.
Counsel fees and expenses incurred in litigation are not ordinarily recoverable in the absence of a statute or contract authorizing them. Fleischmann Distilling Corp. v. Maier Brewing Company, 386 U.S. 714, 87 S. Ct. 1404, 18 L. Ed. 2d 475 (1967). There is, however, a well established exception in situations where a party has by his own effort and expense created or preserved a fund which benefits others. Mills v. Electric Auto-Lite Company, 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (January 20, 1970); Sprague v. Ticonic National Bank, 307 U.S. 161, 59 S. Ct. 777, 83 L. Ed. 1184 (1939); Trustees v. Greenough, 105 U.S. 527, 26 L. Ed. 1157 (1881); 6J Moore Federal Practice para. 54.77  (2d ed. 1966). In such circumstances, it would be unjust to require one party to bear the entire expense which necessarily results in a benefit to a large class of persons. Although the type of cases contemplated under this doctrine are ordinarily class actions or shareholders' derivative suits establishing a fund in which others can participate, such actions are not essential for recovery if "a fund is for all practical purposes created for the benefit of others." Sprague v. Ticonic National Bank, 307 U.S. at 165, 59 S. Ct. at 780.
In Mills v. Electric Auto-Lite Company, supra, decided on January 20, 1970, the Supreme Court agreed with the decision of the Second Circuit in Smolowe v. Delendo Corp., 136 F.2d 231, 148 A.L.R. 300 (2d Cir. 1943) cert. denied, 320 U.S. 751, 64 S. Ct. 56, 88 L. Ed. 446 (1943) that attorney's fees could be awarded in private suits brought to enforce the Securities Exchange Act.*fn5 Justice Harlan writing the opinion of the Court said that he could not "infer from the Securities Exchange Act of 1934 a purpose to circumscribe the courts' power to grant appropriate remedies" including attorney's fees. 396 U.S. at 391, 90 S. Ct. at 625.
Mills was a suit brought by minority shareholders, both derivatively on behalf of the corporation and as representatives of the class of minority shareholders, to set aside a merger. The plaintiffs alleged that a proxy statement sent to the shareholders by the Auto Lite management to solicit votes in favor of a merger with Mergenthaler Linotype Company was misleading and in violation of § 14(a) of the Securities Exchange Act and Rule 14a-9 thereunder. The Court held inter alia that the officers of Auto Lite violated § 14(a) by issuing proxy solicitations which failed to disclose that the directors of Auto Lite who recommended approval of the merger were "under the control and domination" of Mergenthaler. Since the nondisclosed information was material to the shareholders, there was a violation of 14(a) even if the terms of the merger were fair. The Court said that the question of fairness was relevant to the relief plaintiffs could obtain on remand, but that the determination of fairness alone could not negate a finding of liability.
In Part IV of his opinion, Justice Harlan discussed the question of awarding counsel fees to the plaintiffs. He stated that "petitioners, who have established a violation of the securities laws by their corporation and its officials, should be reimbursed by the corporation or its survivor for the costs of establishing the violation." 396 U.S. at 389, 90 S. Ct. at 624. In the Mills opinion, Justice Harlan noted that the plaintiffs' suit conferred a benefit on all the shareholders although the ultimate question of relief was not yet decided. "Regardless of the relief granted, private stockholders' actions of this sort 'involve corporate therapeutics,' ...