The opinion of the court was delivered by: WEINER
In this action claiming violation of sections 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, § 78n, the jurisdiction of this Court has been challenged via the defendant's motion for summary judgment. As there is no disputed question of fact, the issues are ones of law and relate specifically to, first, whether or not the plaintiff may be considered a purchaser or seller of the shares of stock in order to provide jurisdiction for him to bring this action under section 10(b) of the Act, and secondly, whether or not the prerequisites for the maintenance of a § 14(a) action have been established.
The plaintiff's claim is predicated upon an allegation that prior to August 14, 1970, the City Bank of Philadelphia ("City Bank") had sustained large unrealized losses on improvident loans made by the City Bank to one or more of its directors and to others. It is also charged that these losses were not disclosed in the Proxy Statement dated August 14, 1970, or the Annual Statement of Condition, dated April 30, 1970, both of which accompanied the Notice of Annual City Bank Stockholder's Meeting of September 4, 1970, which was mailed out to City Bank stockholders on or about August 14, 1970. On September 3, 1970, the Secretary of Banking of the Commonwealth of Pennsylvania took possession of City Bank's business and assets. The stockholders' meeting which had been scheduled for September 4, 1970 never took place.
On the basis of the above facts, plaintiff instituted this action on behalf of herself and all others similarly situated, alleging violations of Rule 10B-5 and sections 10(b) and 14(a) of the Securities and Exchange Act and two pendent counts. Thus, for this Court to have jurisdiction of the controversy, a cause of action must be made out under the Securities Act.
It is admitted that the plaintiff purchased her shares in February, 1970, considerably before the August 14 proxy, and still retains her shares. We note that the uncontradicted affidavit of Ralph E. Cades, who was President of the Bank and Chairman of its Board of Directors, states that there were no purchasers of City Bank shares whatsoever between August 14, 1970 and September 3, 1970. A subsequent affidavit of Cades stated that the total number of City Bank's stockholders was always less than 500, and that the list of stockholders as of August 14, 1970, indicated 384 stockholders.
The issues presented by the defendants in their challenge to the jurisdiction of this court may be characterized as follows:
(a) The plaintiff is neither a buyer nor a seller of securities and therefore has no standing to invoke the provisions of § 10(b), and
(b) The provisions of § 14(a) are not applicable because the number of shareholders of City Bank was less than 500.
We shall deal with the issues in the order set out above.
ALLEGED SECTION 10(b) VIOLATIONS
Rule 10B-5, 17 C.F.R. 240.10b-5, promulgated under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, makes unlawful the employment of "manipulative and deceptive devices in connection with the purchase and sale of any security". In Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952) cert. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L. Ed. 1356 (1952), the Court construed the language "in connection with the purchase or sale of any security" as limiting standing to sue to purchasers or sellers of securities. In Birnbaum, defendant, C. Russell Feldmann, who was president of Newport Steel Corporation and owned forty percent of the common stock (which was sufficient for voting control), broke off merger negotiations with Follansbee Steel Corporation, which merger, on the terms offered by Follansbee, would have been highly profitable to all the stockholders of Newport. Feldmann then sold his stock to Wilport Company at a price of approximately $22 per share, which was twice the then market value of the stock. Wilport Company was formed by a group of manufacturers, each of whom used substantial quantities of steel in their businesses, for the purpose of purchasing Newport and using its steel productive capacity as a "captive" source of supply during a market shortage of steel. This fact accounted for the premium paid to Feldmann for voting control of Newport. The complaint alleges that defendant Feldmann and others made certain misrepresentations to the stockholders of Newport in letters which stated that the negotiations with Follansbee had been suspended because of the "uncertain international situation" and which later reported the sale of Feldmann's stock but failed to state the selling price or that Newport was to become a "captive" subsidiary of Wilport.
Upon the above facts, the Court held that the plaintiffs, who were shareholders of Newport, had no standing to assert a cause of action under section 10(b) of the Securities Exchange Act because that section is "directed solely at that type of misrepresentation or fraudulent practice usually associated with the sale or purchase of securities rather than at fraudulent mismanagement of corporate affairs, and that Rule X-10B-5 extended protection only to the defrauded purchaser or seller." 193 F.2d at 464. As no member of the plaintiff's class had either purchased or sold securities, the Court granted the defendant's motion to dismiss. Thus, the rationale of Birnbaum was that the case involved fraudulent mismanagement of corporate affairs rather than fraudulent practices in connection with the purchase and sale of securities.
The plaintiff in the case at bar contends that the strict purchaser-seller requirement has been relaxed by recent decisions, and does not act to bar a suit under § 10(b) by one who was induced by misrepresentations to keep his shares. Plaintiff cites two cases in support of his contention, but ...