Selby and Skinner. Plaintiffs' federal claims against these defendants are based on two alternative theories. Plaintiffs contend that either these directors were deceived into authorizing the sale to Cutler-Hammer and their first participation in the conspiracy to defraud Leeds was when they rejected the plaintiffs' offer to purchase the preferred shares two months after the sale to Cutler-Hammer, or that these defendants, in addition to Kimball and Loidl, knew of the correct information behind the sale to Cutler-Hammer, misrepresented and failed to disclose the true facts to Leeds and its shareholders and therefore deceived the corporation and its shareholders when they voted to authorize the sale to Cutler-Hammer. Under either theory, plaintiffs fail to state a Section 10(b) cause of action. The first theory, if proved, would require this Court to find that these defendants, when they rejected the plaintiffs' offer to purchase the preferred shares, were fully informed of the true facts behind the transaction and were not deceived when they participated in the conspiracy to defraud the corporation. Similarly, under the second theory, this Court, if plaintiffs establish their case, would determine that the defendants authorized the sale to Cutler-Hammer with full knowledge of the facts behind the transaction and therefore were not deceived. Thus, the only way this Court could under either theory of plaintiffs' case make a finding of the requisite deception that is necessary in a Section 10(b) case, as required by Green, would be to hold that even though those persons authorizing the sale or rejecting the offer to purchase were not deceived, somehow the corporation or its shareholders were deceived by these directors.
Generally, when the Courts are asked to determine whether there has been a deception in connection with a securities transaction under Section 10(b), they look to see whether the body authorizing the sale or purchase of the securities has been deceived. In this case, the Court would be required to determine whether or not the directors were deceived. However, plaintiffs argue that when the directors are authorizing the transaction to maintain their own personal control and dominance of the corporation, this Court must substitute the corporation, as represented by its shareholders, for the directors to determine whether a deception has been practiced. This Court rejects the plaintiffs' argument. Although there are cases decided prior to and after Santa Fe Industries v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d. 480 (1977), which hold that when interested directors authorize a transaction that does not need shareholder approval, the deception determination under Section 10(b) is made by determining whether the corporation as represented by its shareholders, rather than by its Board of Directors, was deceived, see Goldberg v. Meridor, 567 F.2d 109, CCH Fed. Sec. L. Rep. P96,162 (2d Cir., September 8, 1977); Pappas v. Moss, 393 F.2d 865 (2nd Cir. 1968), these cases involve instances when the directors had a pecuniary involvement with the transaction that was to be approved by the Board. In this case, such allegations of financial interest by the directors of Leeds are absent. Here the only allegation of director interest is that the directors wished to retain their control over Leeds, and this Court believes that this fact distinguishes the cited cases from the case before the Court.
After Santa Fe Industries v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977), it is questionable whether a Section 10(b) cause of action is stated when the directors of the corporation, in order to enhance their financial position, take actions to cause the corporation to enter an unfair or unfavorable transaction and fail to disclose or misstate the purpose behind the transaction. In footnote 15 of the Supreme Court's opinion in Green, the Court distinguished such cases from the one that it was presently deciding, but it did not lend its approval to those cases. Since the decision in Green, the courts confronted with this question have split in their opinion as to whether Green foreclosed such actions. See Goldberg v. Meridor, 567 F.2d 109, CCH Fed. Sec. L. Rep. P96,162, (2nd Cir., September 8, 1977) [where a corporation's board of directors is influenced by the controlling shareholder's pecuniary interest to engage in a transaction adverse to the corporation's financial interest and there is non-disclosure or misleading disclosure as to the material facts of the transaction, a cause of action is stated under Section 10(b)]; contra Browning Debenture Holders' Committee v. D.A.S.A. Corp., 560 F.2d 1078, CCH Fed. Sec. L. Rep. P96,131 (2nd Cir. 1977) [it is clear since Santa Fe Industries v. Green, that violation of any state law fiduciary duties, including non-disclosure of conflicts of interests or unfairness of conversion price, will not support a claim of constructive fraud under the securities acts.] This Court is not called upon to take a side in this conflict between the circuits. Rather, the Court must decide whether a cause of action is stated when there is no allegation of pecuniary interest on the part of the directors in the transaction and it is only alleged that the directors acted to retain their control of the corporation and that interest caused them to breach their fiduciary duties. Thus, this Court is required to decide whether the directors' interest in retaining control allows for the corporation, as represented by its shareholders, to be substituted for the board of directors, in the formula for determining whether there has been a deception under Section 10(b).
This Court finds that the directors' interest in retaining control is not a sufficient interest to permit this Court to change the formula. The same issue arose recently in Falkenberg v. Baldwin, CCH Fed. Sec. L. Rep., P 96,086 (S.D. N.Y. June 13, 1977). There the court found that while it may be true that in some instances the directors' conflicts of interest permits a modification in the calculus, the court must still restrict its inquiry to whether the corporation, as represented by the directors and not the shareholders, was deceived in entering a securities transaction when the only interest alleged on the part of the directors was their desire to remain in control. The Falkenberg court reached this result because it found that as the control interest may be attributed universally to directors and officers of corporations, to decide otherwise would allow a wide variety of claims for breach of fiduciary duty to be brought under Section 10(b). This Court finds the reasoning in Falkenberg to be sound and consistent with the Supreme Court's instructions in Santa Fe Industries v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977). The Supreme Court in Part IV of the Green opinion indicated its disapproval of the federal courts assuming jurisdiction in securities cases based on breaches of fiduciary duties when there were ample state law remedies available. In cases where the directors, allegedly in violation of their fiduciary duties, have authorized securities transactions it can always be claimed that the directors did so to maintain their control over the corporation and failed to disclose the same thereby making a material nondisclosure of information. If such allegations stated a securities claim it would permit the federal courts to resolve those fiduciary duty cases which the Supreme Court has instructed should be left to the state courts. Thus, in order not to violate the mandate of the Green decision, this Court will grant the motions to dismiss the federal claims as to defendants Johnson, Lubin, Petritz, Selby and Skinner.
PLAINTIFFS' STATE LAW CLAIMS
Plaintiffs proceeding on diversity jurisdiction also raise in their amended complaint two state law claims. Defendants have asked for a dismissal of these claims on two grounds. First, defendants assert that the plaintiffs, in this derivative action, are not adequate representatives of the interests of Leeds' shareholders under Rule 23.1 of the Federal Rules of Civil Procedure. Rule 23.1 provides that "[the] derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association." However, this Court finds that the plaintiffs do adequately represent the interests of the shareholders. Although plaintiffs may own a substantial interest in Leeds and may have once been placed in an adversary position to the defendants in this action, this Court does not find that these facts disqualify the plaintiffs from representing the Leeds' shareholders in a derivative action. As the court said in G.A. Enterprises, Inc. v. Leisure Living, 517 F.2d 24 (1st Cir. 1975),
A plaintiff is not disqualified under Rule 23.1 merely because of the existence of interests beyond those of the class he seeks to represent, so long as he shares a common interest in the subject matter of the suit. And purely hypothetical, potential or remote conflicts of interest do not disable him . . . Thus, it is sometimes said that the antagonism of interests "must go to the subject matter of the suit" -- meaning that antagonism irrelevant to the proceeding may be disregarded.