As to the failure to disclose the existence of litigation, plaintiffs, curiously enough, complain in part that the proxy statement was silent as to the "pending litigation." If by this plaintiffs meant the instant lawsuit, the problems are immediately obvious; the proxy statement was filed and mailed on or about March 18, 1977 while the present complaint was filed on April 18, 1977, the day immediately prior to the shareholder meeting. It would be an interesting legal theory indeed to impose upon a corporation the duty to disclose in its proxy material not-yet-existent litigation.
As to the state-court action pending at the time at the dissemination of the proxy statement, it is conceivable that in certain circumstances there could exist a duty to disclose in a proxy statement the pendency of lawsuits against the corporation or its officers or directors. See Chris-Craft Indus., Inc. v. Independent Stock Comm., 354 F. Supp. 895 (D. Del. 1973); Robinson v. Penn Central Co., 336 F. Supp. 655 (E.D. Pa. 1971); Beatty v. Bright, 318 F. Supp. 169 (S.D. Iowa 1970). Although it is not clear from the record, apparently certain Belmont shareholders sued in state court seeking to obtain access to corporate documents including Belmont's by-laws.
Though the Belmont Proxy statement made mention of certain tender offer litigation involving Raymond Perelman, no mention as to the state-court action was made. In the context of materiality as defined by the Supreme Court in TSC Industries, it is always perplexing for a court ex post facto to determine whether there is a substantial likelihood that certain omitted facts would have been considered important by a reasonable shareholder in deciding how to vote on matters presented for shareholder approval. As the only matter to be voted upon at the Belmont shareholder meeting of April 19, 1977 was the election of two Class A directors, the absence of any information concerning the state-court litigation appears to be immaterial, particularly in light of the fact that these other matters were unrelated to the candidacies of certain individuals for directorships. Those cases such as Chris-Craft, Robinson and Beatty, supra, are distinguishable in that they each involved a failure to disclose pending lawsuits involving the competence or integrity of corporate officers and directors who were either nominees for election or participants in a corporate transaction subject to shareholder approval. Such is not the case here. The state-court litigation pending at the time of the mailing of the Belmont proxy material, though perhaps not routine litigation in the strict sense of that word, is certainly not unusual or abnormal in the corporate world, and in any event is immaterial to the election of two directors neither of whom are Belmont management personnel involved in the alleged wrongful refusal to turn over corporate documents to shareholders. See Ash v. Baker, 392 F. Supp. 368 (E.D. Pa. 1975), aff'd, 530 F.2d 963 (3d Cir. 1976); Lyman v. Standard Brands Inc., 364 F. Supp. 794 (E.D. Pa. 1973).
The information which the proxy statement failed to disclose not being material, there is no violation of rule 14a-9 as to this allegation.
F. Allegation as to the failure to disclose that the reduction and reclassification of the Board of Directors violates Pennsylvania statutory corporate law and Belmont's corporate by-laws.
The provision of Pennsylvania's corporation laws concerning classified boards of directors has been set out in the margin, note 5 supra. Pa. Stat. Ann. tit. 15, § 1403. As pertinent to this lawsuit, that provision requires that where a Pennsylvania corporation maintains a classified board of directors, each class of directors "shall be as nearly equal in number as possible." Section 3.1 of Belmont's corporate by-laws tracks this statutory provision in that it states "[the] Directors of the Corporation shall be classified into three classes which shall be as nearly equal in number as possible . . . ."
Plaintiffs here argue that the reduction of Class A directors from four to two and the consequent restructuring of the Belmont Board to a four-four-two configuration of classes violates the "as nearly equal as possible" requirements of § 1403 and by-law 3.1, and that the failure to disclose such in the proxy statement constitutes a violation of rule 14a-9. It has already been established that both Messrs. Waspe and Pfeiffer withdrew their nominations for re-election to directorships for valid reasons and for the very reasons stated in the proxy material. There is also evidence in the record which reveals that these withdrawals took place approximately a week before the proxy statement was mailed to the SEC and to Belmont shareholders, and about five to six weeks before the annual shareholder meeting. Certain deposition testimony suggests that Belmont management felt it either impractical or inconvenient at that late stage to search for replacement candidates and it was decided instead to restructure the Board and elect two Class A directors. There is no question, as plaintiffs argue, that mathematically a division of ten directorships into classes of four, four and two is not "as nearly equal in number as possible." However, it is uncertain whether a strict mathematical standard was intended by the framers of § 1403, or for that matter, the authors of the Belmont by-laws. The words "as possible" may also be glossed with notions of pragmatics so as to be construed as meaning "as is practical under the circumstances." Neither of the parties has cited a single Pennsylvania decision definitively interpreting § 1403 and our research likewise uncovers no such cases. Fortunately, whether the reduction and reclassification of the Belmont Board violated Pennsylvania business corporation law need not be decided, because it is determined that at the time of the proxy solicitation this unsettled and speculative question of state corporate law need not have been disclosed to Belmont shareholders by virtue of rule 14a-9. Independently, and on the basis of appellate court precedent, I find that the failure to so disclose is not a violation of rule 14a-9. In Ash v. LFE Corp., 525 F.2d 215 (3d Cir. 1975), our court of appeals faced the issue of whether the failure to disclose that a proposed management pension plan might violate Delaware corporate law (because it was ultra vires) was a material omission and violative of rule 14a-9. The court initially pointed out that the corporation did not agree with the plaintiff's legal theory, a theory which had not even been called to its attention prior to the issuance of the proxy statement. Further the court stated:
The facts are disclosed. If a shareholder concludes from those facts that the pension plan is a subterfuge for a gift, he can take appropriate action both at the stockholder meeting and thereafter. No case has been called to our attention requiring disclosure of speculative issues of state corporation law in a proxy solicitation.
Id. at 220. The Ash case is instructive and persuasive precedent. To the extent that it holds that a proxy statement need not present a shareholder's unproved and unannounced legal theory as to the consequences of certain corporate action where the underlying facts are either fully presented in the proxy statement or obvious to shareholders, it is here applicable and will be followed. Cf. Allen v. Penn Central Co., 350 F. Supp. 697, 703-04 (E.D. Pa. 1972). In addition, there appears to be no reason not to apply the identical logic and rationale to the claim involving § 3.1 of Belmont's corporate by-laws.
For the above reasons, the allegation as to the failure to disclose violations of state law and corporate by-laws are found to have no legal basis for a rule 14a-9 violation.
G. Allegations as to the failure to disclose that the reduction and reclassification of directors would effectively frustrate any attempt by nonmanagement shareholders to elect a director in a two-member class of directors and that such a course of action denies plaintiffs their rights under state law to cumulative voting.
This claim is quite similar to the claim discussed directly above in part "F" in that it asserts the denial of an alleged right under state corporate law and the failure to so disclose in the proxy material. It is apparent from the record and discussion by the court with counsel, that the inability of the plaintiffs, as a cohesive group, to elect a director at the annual meeting of April 19, 1977, is the real nub of this lawsuit. Though not put in evidence as part of the record, it has been suggested that plaintiffs are deeply concerned with the conduct of the present Belmont management and Board and that by the election of one of their own to the Board they could become privy to the processes of management decision-making and also to certain corporate information and documents.
Again, the court turns to Ash v. LFE Corp., supra, for guidance. Whether the course of action taken by the Belmont Board in reducing the number of Class A directorships up for election is a violation of plaintiffs' state rights to cumulative voting, is an unsettled question of Pennsylvania corporate law. See Stockholders Comm. for Better Management v. Erie Tech. Prod., Inc., 248 F. Supp. 380 (W.D. Pa. 1965). Assuming arguendo the figures provided to the court regarding the number of shares held by the respective parties, it is likely that plaintiffs, had they cumulated and pooled their votes, would have been able to elect one director if there had been four Class A directorships up for election. It is equally clear that where there were only two directorships to be voted upon, plaintiffs were unable to elevate a candidate of their choosing to the Belmont Board.
However, as Stockholders Committee, supra, and the cases discussed therein explain, the mere fact that the effect of cumulative voting has been diminished by the reduction of directorships up for election does not necessarily dictate that a cause of action under state law to void such an election lies. The cases speak of schemes or plans which completely and absolutely deny the effectiveness of cumulative voting, such as a situation where the directorships are divided into classes so that only one may be elected each year. Though it is not here necessary to reach this state law issue, the Supreme Court of Pennsylvania has stated:
As far as the [cumulative voting] provision is concerned, it is absolutely clear and unambiguous in what it provides and what it does not provide: It grants the right of cumulative voting but it does not purport to insure the maximum effectiveness of the exercise of that right to obtain minority representation on the board of directors. All that the [cumulative voting provision] provides is that each stockholder should have the right to concentrate his votes on one or more candidates to be chosen in any given election; that right is undisputed, but as to how many candidates there shall be at the election, whether they must consist of all the directors of the corporation, whether they cannot be classified and their elections staggered, -- as to these and many other factors which necessarily enter into each situation the [cumulative voting provision] is wholly silent; to write into it any such limiting or qualifying provisions as contended for by the plaintiff would be an extreme exercise of judicial legislation.
Janney v. Philadelphia Transp. Co., 387 Pa. 282, 288-89, 128 A.2d 76 (1956). In any event, whether the reduction of Class A directors from four to two violated plaintiffs' rights under state law to effectively cumulate their shareholder votes is a "speculative issue of state corporation law" which is immaterial information and need not have been disclosed in order to make other assertions in the Belmont proxy statement not false or misleading. Therefore, there was no violation of rule 14a-9 as to these allegations.
In summary, having separately examined all the allegations as to violations of § 14(a) and rule 14a-9 in connection with the Belmont proxy statement of March 18, 1977, I conclude there were no such violations.
Having found no violations of the federal securities laws regulating the solicitation of proxies, the question of whether this court should entertain the pendent state claim (Count II of the complaint) must be decided. United Mine Workers v. Gibbs, 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966). In a situation, such as the present case, where the federal claims have been "tried" and fully addressed on the merits, the normal course of action for a federal district court in exercising its discretion would be to entertain and adjudicate pendent state claims; Gibbs impliedly so instructs. See McCurnin v. Kohlmeyer & Co., 477 F.2d 113, 115 n.2 (5th Cir. 1973). The Gibbs decision counsels that the justification for assuming jurisdiction over pendent state claims "lies in considerations of judicial economy, convenience and fairness to litigants." Gibbs, supra at 726. However, in explaining these tripartite considerations, the Gibbs Court went on to say:
Needless decisions of state law should be avoided both as a matter of comity and to promote justice between the parties, by procuring for them a surer-footed reading of applicable law.
. . . Similarly, if it appears that the state issues substantially predominate, whether in terms of proof, of the scope of the issues raised, or of the comprehensiveness of the remedy sought, the state claims may be dismissed without prejudice and left for resolution to state tribunals. . . .