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LAVIN v. DATA SYS. ANALYSTS

September 29, 1977

Aaron M. LAVIN
v.
DATA SYSTEMS ANALYSTS, INC., et al.



The opinion of the court was delivered by: HIGGINBOTHAM, JR.

 A. LEON HIGGINBOTHAM, Jr., District Judge.

 I.

 On February 24, 1975 the Board of Directors of Data Systems Analysts, Inc. (hereinafter Data Systems), a Delaware corporation, adopted an employee bonus program under which up to 40% of the corporation's pre-tax profits would be distributed each year as bonuses ". . . to such key personnel as shall be determined by a committee established by the Board of Directors . . . ." Pursuant to Rule 23.1 of the Federal Rules of Civil Procedure, Aaron Lavin, a holder of Data Systems securities, has brought this derivative action against several of the corporation's executives and directors, *fn1" alleging that by enacting the employee bonus program these defendants violated Section 10(b) and Rule 10b-5, of the 1934 Securities Act *fn2" and Title 8, Section 144 of the Delaware Corporation Law. Additionally, plaintiff claims that the defendants have breached their fiduciary duty and have committed common law fraud. Jurisdiction is alleged under Section 27 of the 1934 Securities Act. *fn3"

 Presently before this Court are defendants' joint motions to dismiss the complaint under Fed.R.Civ.P. 12(b) and (c) and for a Protective Order under Fed.R.Civ.P. 26(c)(2). For the reasons herein stated, defendants' motion to dismiss is GRANTED; as the complaint has been dismissed there is no need to rule on the Motion for Protective Order.

 The details of the challenged employee bonus program can be briefly stated. Under the program, the Board of Directors appoints a committee to annually select those key personnel who would receive some portion of Data Systems pre-tax profits. The Board was authorized to distribute up to 40% of the corporation's profits each year. The actual percentage of the pre-tax profits to be distributed is determined each year by the Board. The purpose of the program, as stated by Donald J. Bezahler, Secretary of Data Systems, in the April 23, 1975 notice of the Annual Stockholders Meeting, is to ". . . attract and retain the service of key personnel . . .", in an effort to expand and develop Data Systems' business operations. Approximately twenty employees, including officers, were found eligible for the bonus as of April 23, 1975. [Complaint, Exhibit C, pp. 4, 5]. *fn4"

 During the annual meeting of May 15, 1975 the program was submitted to and approved by the stockholders. [Complaint, pp. 4-5].

 Plaintiff contends that the Board of Directors (defendants herein) owned or controlled a majority of Data Systems' common stock at the time of the May 16, 1976 annual meeting *fn5" and continue to hold such a majority. *fn6" Plaintiff argues that the sole purpose of the employee bonus plan was to benefit the individual defendants, and, therefore, the program constitutes "a fraud or deceit upon Data [Systems] and its shareholders." [Complaint, p. 5].

 It is further alleged that defendants failed to disclose to stockholders that the program involved what, in plaintiff's view, is self-dealing, conflict of interest and utilization of corporate funds for strictly personal benefit. Such alleged nondisclosures form the gravamen of the ยง 10(b) claim.

 I find that plaintiff has failed to state a cause of action under Section 10(b) and Rule 10b-5. It is therefore unnecessary to discuss defendants' other contentions.

 Defendants have submitted the affidavit of Donald J. Bezahler in support of their argument that venue in the Eastern District of Pennsylvania is improper and have moved for dismissal of the complaint under Rule 12(c).

 For purposes of this motion, however, I will exclude this affidavit from the record, and will treat this motion as one to dismiss under Rule 12(b)(6). I will therefore consider only the pleadings and memoranda in support thereto.

 II.

 It is axiomatic that a court, in considering a motion to dismiss for failure to state a cause of action under Rule 12(b)(6), ". . . will consider as admitted, viewing the same in the light most favorable to plaintiff, all facts contained in the complaint and every inference fairly deductible therefrom," Melo-Sonics Corporation v. Cropp, 342 F.2d 856, 858-859 (3d Cir. 1965). Accord Husbands v. Commonwealth of Pennsylvania, 359 F. Supp. 925, 929 (E.D.Pa. 1973). A motion to dismiss must be granted, however, if it appears to a certainty that the plaintiff would not be entitled to relief under any set of facts which could be proved in support of his claim. Jenkins v. McKeithen, 395 U.S. 411, 421-422, ...


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