The plaintiffs brought these two class actions alleging violations of the Securities Act of 1933, 15 U.S.C. § 77k. The lawsuits alleged that Alodex issued a false and misleading prospectus in connection with a registration statement approved by the Securities and Exchange Commission on March 31, 1971. It was alleged that the registration statement was false and misleading in that Alodex failed to disclose large costs overruns on a number of its construction contracts. Mr. Paget and Mr. Dykes are named as individual defendants, along with the other directors of Alodex, Alodex itself, W. E. Hutton & Company, the lead underwriter, and Harris, Kerr, Forster & Company, Alodex's accountant at the time of the public offering. Mr. Paget and Mr. Dykes were both "outside" directors at the time that the registration statement was issued and the public offering was made. The other directors of Alodex were "insiders", i.e. both directors and officers or employees of the corporation. When the two suits were filed, all the directors, with the exception of Mr. Paget and Mr. Dykes, were represented by the same counsel, which counsel also represented Alodex itself. However, Mr. Paget and Mr. Dykes obtained their own separate counsel because of their belief that a potential conflict of interest existed on the part of any counsel representing them, Alodex, and the "inside" directors.
Discovery proceeded and eventually both the Goldstein and Clemmer actions were settled. The Court, in a Memorandum and Order dated December 7, 1973, approved the settlement reached by the parties. Pursuant to the agreed upon settlement, neither Mr. Paget nor Mr. Dykes contributed any money to the settlement of the claims and the complaint against them was dismissed with prejudice. The Court approved the payment of attorneys' fees to the plaintiffs' attorneys from the settlement fund in the same Memorandum and Order dated December 7, 1973. Finally, on November 24, 1975, the Court discharged the settlement committee from further duties and ordered the disbursement of the balance of the settlement fund.
During the pendency of this litigation, both Mr. Paget and Mr. Dykes filed cross-claims against Alodex seeking reimbursement from Alodex for reasonable expenses, and attorneys' fees in connection with the defense of the action. These cross-claims were not settled pursuant to the parties' settlement agreement, but were expressly reserved for future determination by the Court's Order of December 7, 1973.
Mr. Paget and Mr. Dykes allege that under the law of Tennessee (the state of incorporation of Alodex) they are entitled to indemnification for all expenses incurred by them in defending the Goldstein and Clemmer actions, as provided in the By-Laws of Alodex. They further contend that indemnification by Alodex will not contravene any public policy of the Securities Act of 1933. The defendant Alodex, while stating that it is not opposed in principle to indemnifying either Mr. Paget or Mr. Dykes, has asked the Court to grant the relief requested only if under the By-Laws and charter of Alodex such indemnification is permitted under the law of Tennessee and is not contrary to the public policy expressed in the Securities Act of 1933.