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."