The opinion of the court was delivered by: VANARTSDALEN
Plaintiffs are seven minority shareholders of the corporate defendant Belmont Industries, Inc. (Belmont), collectively owning or controlling approximately 30 percent of Belmont's outstanding voting stock. The defendants, in addition to Belmont, include certain past and present Belmont directors some of whom are also Belmont officers and/or shareholders. The issues focus upon management's proxy solicitation statement dated and mailed to Belmont shareholders March 18, 1977 and certain events preceding such proxy statement. The complaint was filed April 18, 1977 and on the same day the court denied plaintiffs' application for a temporary restraining order to enjoin the annual meeting of Belmont shareholders scheduled for April 19, 1977. Expedited discovery and further hearings having taken place, the parties have submitted the case to the court for final disposition on the present record. To the extent I am required by Fed. R. Civ. P. 52(b) to make written Findings of Fact and Conclusions of Law, convenience and ease of understanding suggest these Findings and Conclusions be styled in narrative form.
Belmont is a Pennsylvania corporation with its principal place of business in Philadelphia. The corporation itself engages in no manufacturing, distributing, or service-related activity, but rather operates through certain owned or controlled subsidiary corporations. Belmont is a publicly-owned company having more than 300 shareholders and as such is a "reporting company" required to make filings with the Securities and Exchange Commission (SEC), including the filing of any proxy solicitation statement. 15 U.S.C. §§ 78m, o(d). The plaintiffs are individual shareholders who collectively own or control about 30 per cent of Belmont's outstanding voting stock. The individually named defendants are present or former directors of Belmont, some of whom are also officers and/or shareholders themselves. Prior to March, 1977, the Board of Directors of Belmont (Board, or Board of Directors) consisted of 12 directors composed of three separate classes: Class A, whose four members' terms expired in 1977; Class B, whose four members' terms expire in 1978; and Class C, whose four members' terms expire in 1979. On February 22, 1977, the Board of Directors held a meeting at Belmont's executive offices in Philadelphia, at which a quorum of the directors was present. At the meeting, the Board unanimously resolved that the annual shareholders meeting be held April 19, 1977, for the purpose, inter alia, of electing four Class A directors for three year terms. Further resolved was that Belmont's management would nominate for those Class A directorships the incumbent individuals whose Class A directorships were then expiring; in other words the Class A directors currently serving would be renominated to serve another term. By letter dated March 8, 1977, and addressed to Raymond G. Perelman (Ray Perelman), Chairman of the Board, Otto Pfeiffer (Pfeiffer), one of the incumbent Class A directors, requested that his name be withdrawn from nomination, citing health and family reasons. On March 11, 1977, Marvin Waspe (Waspe), also an incumbent Class A director to be renominated, telephoned Bernard S. Bergman (Bergman), Belmont's Secretary and General Counsel and also a director, and requested that his name be withdrawn from nomination, citing personal reasons. At that point in time, in connection with his normal duties as Secretary and General Counsel, Bergman was nearing the completion of the formal proxy statement required to be submitted to the SEC. Bergman, in conjunction with Ray Perelman and/or Ronald O. Perelman (Ron Perelman), Executive Vice-President of Belmont, or by himself, determined that there should be no replacement nominees for the Waspe and Pfeiffer directorships. Bergman prepared a Unanimous Consent dated March 11, 1977, which was circulated to and signed by each individual member of Belmont's Board. This action by unanimous consent of the Board
amended the Board's resolution of February 22, 1977, and reset the number of directors for the forthcoming year at ten. On or about March 18, 1977, a proxy solicitation statement was filed with the SEC and mailed to Belmont shareholders including the plaintiffs. This proxy statement was "furnished in connection with the solicitation by the management of Belmont . .. of proxies to be used at the Annual Meeting . . . to be held . . . on April 19, 1977." The proxy statement set forth, inter alia :
Pursuant to the By-Laws of the Corporation, there are three classes of Directors. At present there are twelve directors of the Corporation. The Board of Directors, by resolution of February 22, 1977, fixed the number of directors for the coming year at twelve. The terms for the existing Class "A" Directors expire in 1977. Messrs. Marvin E. Waspe, Leon J. Perelman, Otto Pfeiffer and Laurence R. Wiggins were nominated as Class "A" Directors for a three-year term expiring in 1980 at the Board of Directors meeting on February 22, 1977. However, on March 8, 1977 Mr. Otto Pfeiffer, citing health and family reasons, requested that his name be withdrawn from nomination and on March 11, 1977 Mr. Marvin E. Waspe, citing personal reasons, requested that his name also be withdrawn from nomination. Management recommended to the Board of Directors that in view of the short time period between these notices and the April 19, 1977 Stockholders' Meeting there be no replacement nominees requested or designated; and by Unanimous Consent dated March 11, 1977 the Board of Directors reset the number of directors for the forthcoming year at ten. Both Messrs. Pfeiffer and Waspe indicated that they had no intention of resigning their other positions with the Company at this time.
Thus, through the retirement of Pfeiffer and Waspe, the Belmont Board had in effect reduced the number of total directorships to ten, and the number of Class A directorships up for election at the 1977 annual meeting of shareholders to two.
On April 18, 1977, plaintiffs' complaint was filed concurrently with an application for an order restraining the convocation of Belmont's annual meeting of shareholders to be held the next day. After discussion with all counsel in chambers and arguments made in open court of record, the court denied issuance of a temporary restraining order. However, the court did allow for a program of expedited discovery and set May 11, 1977 as the date for a hearing for preliminary injunctive relief. On April 19, 1977, the annual meeting of shareholders was held at which the two nominees of Belmont's management were elected to serve three year terms as Class A directors. Before the voting was officially tabulated and recorded, a representative of certain of the plaintiffs proposed a resolution that the meeting be adjourned pending the outcome of the present litigation. This request was put to a shareholder vote and defeated.
A hearing before the court was held on May 11, 1977, and through agreement of counsel, the case was thereupon submitted to the court for disposition upon the record as finally supplemented.
Plaintiffs' complaint contains two counts, the allegations of which are fairly summarized as follows:
I. The March 18, 1977, proxy statement is false and misleading with respect to certain material facts and therefore violates § 14(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78n(a)
and SEC Rule 14a-9.
The proxy statement is alleged to be false and misleading in the following ways:
a) it misrepresents the reasons for the resignations of Waspe and Pfeiffer;
b) it misrepresents the reasons for management's recommendation and the Board decision to reduce the number of directors for the forthcoming year;
c) it is misleading in that it fails to disclose that the reduction and reclassification of the Board violates Pa. Stat. Ann. tit. 15, § 1403;
d) it is misleading in that it fails to disclose that the reduction and reclassification of the Board violates § 3.1 of Belmont's corporate by-laws;
e) it is misleading in that it fails to disclose the pending and other litigation and certain allegations of corporate mismanagement against present management;
f) it is misleading in that it fails to adequately inform the voting shareholders how directors resigning for health or other personal reasons can be expected to adequately discharge the management duties which the proxy statement indicates they intend to continue and/or the consequences to plaintiffs, other shareholder, or Belmont, should they attempt to continue.
In addition, by reason of the expedited discovery process, it appears that at least one of the above charges of falsity has been abandoned while at least one new charge has been asserted by way of plaintiffs' briefs. Plaintiffs additionally assert that the proxy statement was false and misleading in that
g) it fails to disclose that the reduction and reclassification of directors would effectively frustrate any attempt by non-management shareholders to elect a director in a two-member class of directors; i.e., plaintiffs' rights under state law to ...