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BIESENBACH v. GUENTHER

February 15, 1978

GINN BIESENBACH, JOSEPH LEVIN, HENRY SHARMAN, LISA B. WHITE
v.
JOHN H. GUENTHER, JR., A. T. CONSOLI, RICHARD E. HUNTER, FRED PARQUETTE, LEON PRINCE, HEIDELBERG, INC.



The opinion of the court was delivered by: BRODERICK

 BRODERICK, J.

 This case presents a question concerning the reach of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Before the Court is defendants' motion to dismiss plaintiff's amended complaint pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons hereinafter set forth, defendants' motion will be granted.

 Plaintiffs' allegations, which for the purposes of this motion must be accepted as true and considered in a light most favorable to the plaintiffs, are summarized as follows:

 Plaintiffs are minority shareholders and at or about the times relevant to this litigation were on the Board of Directors of Heidelberg, Inc. ("Heidelberg"), a Pennsylvania corporation. The individual defendants constituted a majority of the Board of Directors of Heidelberg at or about the times the events hereinafter described took place.

 On August 18, 1972, a loan agreement was reached between the individual defendants and Heidelberg, whereby $500,000 was lent to Heidelberg, and the individual defendants received a second lien on Heidelberg's property. Over the objections of various shareholders, the individual defendants, by use of their control of the Board of Directors, arranged the terms of the loan so that the individual defendants received interest at a rate of 10% in cash, land or shares of Heidelberg, and received in repayment 10% of the principal amount of the loan in shares of Heidelberg. In May, 1973, by use of their control of the Board of Directors (and over the objections of various shareholders), the individual defendants increased the interest on the loan to a rate of 4% over the prime interest rate. On August 28, 1974, the individual defendants caused the number of members of the Board of Directors of Heidelberg to be reduced from 19 to 7 in order to further consolidate their control of the corporation and eliminate opposition to their plans and transactions.

 In December, 1975, a second loan agreement was reached between the individual defendants (except Hunter) and Heidelberg, whereby $266,760 was lent to Heidelberg in return for which (and over the objections of various shareholders of Heidelberg) the individual defendants, by use of their control of the Board of Directors, arranged the terms of the loan so that they received interest at the rate of 15% in cash, land or shares of Heidelberg, and received in repayment of the principal 15% of the loan in shares of Heidelberg.

 In November, 1976, the Board of Directors called the annual shareholder meeting at which a plan to authorize an additional 500,000 shares of $.50 par value common stock was to be considered. At the meeting, held on November 22, 1976, it was announced to the shareholders, for the first time, that Heidelberg was planning to authorize 1,000,000 additional shares. The plan was approved by a majority of the shares voting at the shareholders' meeting.

 Plaintiffs bring this action derivatively. They allege that the foregoing activities were part of an unlawful combination and conspiracy, pursuant to which the individual defendants, who were directors of Heidelberg, engaged in acts, transactions, practices and a course of business which constituted a fraud and deceit upon plaintiffs and Heidelberg in violation of § 10(b) of the Act, in that the individual defendants at all times represented to the shareholders that the transactions were in the best interests of the shareholders and Heidelberg. Plaintiffs contend that such representations were false and misleading in that the transactions were not in the best interests of the shareholders or Heidelberg. The plaintiffs also contend that the individual defendants, by use of their control of the Board of Directors, caused additional shares of Heidelberg to be issued at the fraudulently low price of $.50 per share for the purpose of enabling the individual defendants to gain complete control of Heidelberg.

 Plaintiffs neither bought nor sold any securities within the meaning of the Act in connection with the alleged fraudulent transactions. We conclude, therefore, that the plaintiffs lack standing to assert a claim on their own behalf, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). It appears, however, that since the plaintiffs allege that they bring this action on behalf of Heidelberg, the corporation, they do have standing to assert a cause of action on a derivative basis, assuming that there has been a purchase or sale of securities within the meaning of the Act. Wright v. Heizer Corp., 560 F.2d 236, 246-47 (7th Cir. 1977); Pappas v. Moss, 393 F.2d 865, 870 (3d Cir. 1968); Harriman v. E. I. DuPont de Nemours & Co., 411 F. Supp. 133, 156 (D. Del. 1975); cf. Blue Chip Stamps, 421 U.S. at 738; Kuzmickey v. Dunmore Corp., 420 F. Supp. 226, 229 (E.D. Pa. 1976). As stated by the court in Goldberg v. Meridor, 567 F.2d 209 at 215 (2d Cir. 1977):

 
[there] can be no doubt that the Securities Exchange Act "protects corporations as well as individuals who are sellers of a security" and that it is irrelevant that "the transaction is not conducted through a securities exchange or an organized over-the-counter market."

 Section 10(b) of the Act prohibits the use of "any manipulative or deceptive device or contrivance" in contravention of the rules of the Securities and Exchange Commission. In Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977), the Court recently held that a cause of action under Rule 10b-5 exists "only if the conduct alleged can be fairly viewed as 'manipulative or deceptive' within the meaning of the statute." Id. at 1301. The Court defined what it meant by the term "manipulation":

 
Manipulation is "virtually a term of art when used in connection with securities markets." . . . The term refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity. . . . [We] do not think [Congress] would have chosen this "term of art" if it had meant to bring within the scope of § 10(b) instances of corporate mismanagement such as this, in which the essence of the complaint is that shareholders were treated unfairly by a fiduciary.

 Id. at 1302. Plaintiffs' complaint contains no allegations which can be construed as being within the above quoted definition of manipulation. See Lavin v. Data Systems ...


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