The opinion of the court was delivered by: NEWCOMER
Newcomer, District Judge.
The present motions presented by the defendants request dismissal of plaintiffs' amended complaint for failure to state a claim upon which relief can be granted. Plaintiffs, in this derivative action on behalf of Leeds & Northrup Company (Leeds), filed an amended complaint alleging that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 15 C.F.R. 240.10b-5, Sections 401 and 501 of the Pennsylvania Securities Act of 1972, P.L. 1280, 70 P.S. §§ 1-401 and 1-501, and the Pennsylvania Business Corporation Law, as amended, 1968 P.L. 459, especially 15 P.S. § 1409. As to defendants Johnson, Lubin, Petritz, Selby and Skinner their motions to dismiss the federal claims against them will be granted. The other motions to dismiss will be denied.
The plaintiffs, who are bringing this suit on behalf of Leeds, are two Massachusetts corporations owning stock in Leeds; plaintiff AMBG is a wholly owned subsidiary of plaintiff Tyco Laboratories. Leeds, a named defendant in this suit, is a Pennsylvania corporation whose common stock, which is registered pursuant to Section 12(b) of the Exchange Act, 15 U.S.C. § 78l(b), is listed on the New York Stock Exchange. Defendants Kimball, Loidl, Johnson, Lubin, Petritz, Selby and Skinner are directors of Leeds and held such positions at the time material to the matters raised in this complaint. All of these defendants are citizens of states other than Massachusetts. It should be stated that defendant Kimball is President and Chief Executive Officer of Leeds and defendant Loidl is Leeds' Vice President for Finance and Treasurer. Defendant Cutler-Hammer, Inc., is a Delaware corporation with its principal place of business in Wisconsin.
The basic factual picture painted by the plaintiffs' complaint is as follows. Defendants Kimball and Loidl conspired to and did cause Leeds to sell shares of its preferred stock to Cutler-Hammer for an amount that was less than the plaintiffs would have been willing to pay for these shares and that was less than its fair market value. These defendants engaged in this transaction knowing that the plaintiffs were willing and able to purchase these shares for a greater consideration than Leeds received from Cutler-Hammer and that the reason for making the sale to Cutler-Hammer was to maintain the control of these defendants over Leeds. Apparently, Loidl and Kimball feared losing control of Leeds due to the fact that prior to the sale to Cutler-Hammer plaintiffs purchased a substantial amount of Leeds' stock and these defendants feared that the plaintiffs would mount a takeover effort and usurp Kimball's and Loidl's control in the corporation. In fact, after the plaintiffs obtained 13% of Leeds' outstanding common stock, the defendant directors caused Leeds to institute a suit in this court against the plaintiffs seeking to enjoin them from making further purchases of Leeds' stock and to require them to return those shares already purchased. That suit was resolved pursuant to a settlement agreement, whereby the plaintiffs, inter alia, agreed not to make further purchases of Leeds' stock except through the tender offer procedures prescribed under the federal statutes and regulations. On the day that the settlement agreement was executed, but prior to its execution, the Leeds' Board of Directors authorized the sale to Cutler-Hammer; this sale did not have to be approved by Leeds' shareholders. The quid pro quo for allowing Cutler-Hammer to purchase Leeds' shares at a discounted price was Cutler-Hammer's implicit agreement that it would not act in a manner contrary to the wishes of Kimball and Loidl. Thus, the sale to Cutler-Hammer, though at less than the price that could have been obtained if Leeds had sold the shares to the plaintiffs, insured Loidl and Kimball continuity in their control over the corporation. Plaintiffs also allege that upon learning about the sale to Cutler-Hammer, they offered to purchase the same shares for a greater price but their offer was refused by Leeds' Board of Directors. Besides Loidl and Kimball, plaintiffs claim that the other director defendants either conspired with or acquiesced in all or some of the above events.
In connection with this securities transaction, plaintiffs allege that defendants Kimball and Loidl failed to disclose to the other defendant directors, Leeds as a corporate entity and to the stockholders of Leeds, or in the alternative, all the defendant directors failed to disclose to Leeds as a corporate entity and to the stockholders of Leeds the known willingness of plaintiffs to purchase a substantial number of shares of Leeds' stock at a price which was materially higher than the price actually paid by Cutler-Hammer for the preferred shares and the fact that the shares were being sold for this lesser price as a tactic to maintain Kimball and Loidl as the incumbent management of Leeds. The plaintiffs also claim that defendants Kimball and Loidl made certain affirmative misstatements of fact to the other directors, Leeds as a corporate entity, and to the shareholders of Leeds, or in the alternative, all the defendant directors made to Leeds as a corporate entity and to the shareholders of Leeds certain affirmative misstatements of fact including the affirmative misstatements that the transaction was to fulfill a need to raise equity capital to reduce domestic bank loans.
STANDARD FOR DETERMINING WHETHER TO GRANT THE MOTION TO DISMISS
The Supreme Court has instructed that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41 at 45, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). In actions under the federal securities laws the courts are especially cautious in granting motions for dismissal, judgments on the pleadings and summary judgments. Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968); Miller v. Bargain City U.S.A., Inc., 229 F. Supp. 33 (E.D. Pa. 1964). The judicial reluctance to grant these pretrial motions arises from the recognition that discovery is often necessary for the shareholder to obtain the specific facts from insiders in the corporation required to fully develop its claim. Therefore, this Court, if it is to dismiss plaintiffs' claims, must be certain that there are no set of facts that the plaintiffs can prove to support a legally sufficient claim and when making this determination must accept the allegations of the plaintiffs' complaint as true and view them "liberally, giving plaintiffs the benefit of all inferences which fairly may be drawn therefrom." Bogosian v. Gulf Oil Corp., 561 F.2d 434, 444 (3d Cir. 1977).
PLAINTIFFS' FEDERAL CLAIMS
Plaintiffs claim that the acts of the defendants in selling preferred shares of Leeds' corporation to defendant Cutler-Hammer for less than its market value and less than the plaintiffs would have paid for such shares and the making of material misrepresentations and non-disclosures in connection with this transaction constituted an unlawful device, scheme and artifice to defraud and were acts, practices and courses of business which operated as a fraud and deceit upon Leeds and its shareholders all of which violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder. Defendants assert that under the recent Supreme Court decision in Santa Fe Industries v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977), plaintiffs fail to state a claim upon which relief can be granted.
While the defendants admit that the plaintiffs allege that misrepresentations were made, the defendants claim that the necessary causal connection between these misstatements and the securities transaction involved was lacking to state a cause of action under Section 10(b). Defendants assert that the plaintiffs fail to claim that these misrepresentations led Leeds to enter the securities transaction with Cutler-Hammer; the defendants' position is that for the purposes of these securities transactions, Leeds' corporate entity was represented by its Board of Directors as it authorized the sale to Cutler-Hammer and since the plaintiffs claim that the directors possessed the correct information when they approved the sale, the directors, and therefore the corporation, were not deceived. While it may be true that all the directors of Leeds knew the true purpose behind the sale to Cutler-Hammer and that Leeds would receive less consideration for its shares than if it sold them to the plaintiffs, this is not what the plaintiffs allege. In their amended complaint, the plaintiffs claim that either Kimball and Loidl misrepresented and withheld the true facts from the other directors or that, in the alternative, all the directors withheld the true information from the corporation and its shareholders. If the Court accepts the veracity of the first allegation, which it is required to do when ruling upon a motion to dismiss, then clearly the plaintiffs have alleged that those in the position to authorize the transaction were deceived and have stated a cause of action under the Green decision.
Of course, this Court recognizes the apparent inconsistency in the plaintiffs' amended complaint in that the other directors who are alleged to have been deceived by Loidl's and Kimball's misrepresentations and nondisclosures of fact are joined as defendants in this action. The plaintiffs allege that these directors conspired with Kimball and Loidl to defraud the corporation. It is not, therefore, unreasonable to question the logic of the plaintiffs' claim that the defrauders were somehow deceived by Kimball and Loidl and that this constitutes a securities violation. However, plaintiffs' allegations concerning these other directors' participation in the conspiracy to defraud are unclear. While in paragraph 20 of the plaintiffs' amended complaint, it is asserted that these other directors entered into the conspiracy with Kimball and Loidl to defraud the corporation, the plaintiffs fail to state in that paragraph when these directors agreed to the plan to defraud Leeds. And it is not until paragraph 42 of the amended complaint that the plaintiffs allege when these directors entered in the conspiracy and in that paragraph the plaintiffs assert that by voting to reject the plaintiffs' offer to purchase the preferred stock for more than Cutler-Hammer paid to Leeds for the same, these other director defendants defrauded the corporation. The vote to reject the plaintiffs' offer occurred two months after the Leeds' Board approved the sale to Cutler-Hammer; if this was when the directors commenced ...