defendants' motion to dismiss, or in the alternative, for summary judgment is denied. Our reasons follows:
I. STATEMENT OF THE FACTS :
Plaintiff, Elizabeth McCloskey, is a citizen of Pennsylvania, and former wife of defendant Thomas McCloskey. Prior to August 10, 1965, plaintiff owned 1,386 shares of common stock of McCloskey & Company, a Delaware corporation. On August 10, 1965, the shareholders of McCloskey & Company approved a merger between that corporation and defendant McCloskey & Company, Inc., under which defendant McCloskey & Company, Inc. became the surviving corporation. Pursuant to the merger, and a shareholder's agreement executed on August 10, 1965, certain shareholders of McCloskey & Company, including plaintiff and defendant Thomas McCloskey, exchanged their shares of common stock in McCloskey & Company for an equal number of shares in the surviving corporation, defendant McCloskey & Company, Inc. The remaining shareholders of McCloskey & Company sold their shares of common stock to defendant McCloskey & Company, Inc. for cash and notes payable over a period of ten years.
Under the terms of the shareholder agreement of August 10, 1965, all shareholders of defendant McCloskey & Company, Inc. were required to execute a voting trust agreement effective for ten years (effective until August 10, 1975), unless terminated earlier by reason of satisfaction of the notes held by the selling shareholders of McCloskey & Company. On August 10, 1965, all shareholders of defendant McCloskey & Company, Inc. executed the voting trust agreement, pursuant to which they exchanged their common stock for voting trust certificates that reflected the number of shares held in trust. The voting trust agreement provided that Matthew McCloskey and defendant Thomas McCloskey would act as voting trustees. On October 10, 1972, Matthew McCloskey resigned as a voting trustee, leaving defendant Thomas McCloskey as the sole voting trustee.
On April 7, 1973, a special meeting of the shareholders of defendant McCloskey & Company, Inc. was held which plaintiff did not attend; its purposes, as stated in the Waiver of Notice, were: (1) to amend the by-laws to increase the number of directors; and (2) to elect five directors. Defendant Thomas McCloskey presided at the meeting and announced that on March 15, 1973, the voting trust created pursuant to the voting trust agreement of August 10, 1965, had terminated. Accordingly, the shares of common stock in defendant McCloskey & Company, Inc. were distributed to all holders of the voting trust certificates, with the exception of plaintiff and defendant Thomas McCloskey. Stock was not distributed to plaintiff and defendant Thomas McCloskey because they had allegedly executed a second voting trust agreement on March 16, 1973; under that agreement the shares of stock to which plaintiff and defendant Thomas McCloskey would have otherwise been entitled, were exchanged for voting trust certificates in a second voting trust. Under this voting trust, which included a majority of the outstanding shares of defendant McCloskey & Company, Inc., defendant Thomas McCloskey was designated as sole voting trustee; it was effective for ten years (until March 16, 1983), unless terminated earlier by the death of the voting trustee.
At the April 7, 1973, special meeting of stockholders, defendant Thomas McCloskey proposed a stockholder's agreement for adoption. Under the proposed agreement, defendant corporation acquired the right of first refusal with respect to: (1) all stock currently outstanding; and (2) any subsequently issued stock. If the corporation elected not to exercise its option, the other shareholders were granted the right to buy the stock. This agreement was signed by each shareholder in attendance at the meeting. Defendant Thomas McCloskey signed the agreement, purportedly on behalf of plaintiff while acting in his capacity as voting trustee under the terms of the March 16, 1973, voting trust agreement.
In her amended complaint, plaintiff alleges that she relied upon material misrepresentations and omissions made by defendant Thomas McCloskey, without knowledge of their falsity; she avers that she was induced to sign the voting trust agreement of March 16, 1973, on the basis of these deliberate fraudulent maneuverings, and further claims that but for such fraudulent misrepresentations and omissions, she would not have signed the voting trust agreement. Plaintiff asserts claims arising under the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the S.E.C. pursuant thereto, as well as pendent state claims based on the Pennsylvania Securities Act of 1972, 70 P.S. § 1-401, and Pennsylvania common law relating to fraud and the partition of property.
II. STATEMENT OF THE LEGAL ISSUES:
A. THE VOTING TRUST ISSUE :
Defendants have moved for dismissal (F.R.Civ.P. 12 (b) (6)) or, in the alternative, for summary judgment (F.R.Civ.P. 56) with respect to Count I of the amended complaint. In support of their motion, they argue that plaintiff was neither a "purchaser" nor "seller" within the meaning of Section 10 (b) and Rule 10b-5, and, hence, lacks standing to sue. Plaintiff, on the other hand, claims that her exchange of stock for voting trust certificates on March 16, 1973, constitutes a sale. After careful consideration of both positions, we have determined that plaintiff is not a seller under the Act or the Rule by virtue of having deposited her shares into a voting trust.
In Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. den., 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952), the court held that only actual purchasers and sellers had standing to bring a suit under Section 10(b) and Rule 10b-5. Although this holding was substantially eroded by a myriad of subsequent cases creating exceptions to its application, the doctrine was recently revitalized by the Supreme Court's decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917, reh. den., 423 U.S. 884, 96 S. Ct. 157, 46 L. Ed. 2d 114 (1975). In that case the Court held that nonparties to an antitrust consent decree lacked the requisite standing under the 1934 Act to enforce the terms of the decree against corporate officers who allegedly breached their fiduciary duties. In reaching its decision, the Court stated:
Were we to agree with the Court of Appeals in this case, we would leave the Birnbaum rule open to endless case-by-case erosion depending on whether a particular group of plaintiffs were thought by the court in which the issue was being litigated to be sufficiently more discrete than the world of potential purchasers at large to justify an exception. We do not believe that such a shifting and highly fact-oriented disposition of the issue of who may bring a damages claim for violation of Rule 10b-5 is a satisfactory basis for a rule of liability imposed on the conduct of business transactions. Nor is it as consistent as a straightforward application of the Birnbaum rule with the other factors which support the retention of that rule.
Although Birnbaum, supra, and Blue Chip, supra, firmly establish the purchase or sale requirement, they do not purport to create an exclusive definition of these terms. Therefore, in resolving this matter, we will follow the two step analysis which courts employed prior to Blue Chip :
1) A focus upon the economic reality of the transaction, see, e.g., United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 848, 95 S. Ct. 2051, 44 L. Ed. 2d 621, reh. den., 423 U.S. 884, 96 S. Ct. 157, 46 L. Ed. 2d 115 (1975); and
2) A further economic determination as to whether in reality the transaction constitutes a ". . . transformation of a securityholder's investment from an interest in a going enterprise into a right solely to receive payment in exchange for such interest." Murphey v. Hillwood Villa Assoc., 411 F. Supp. 287, 292 (S.D.N.Y. 1976). (Emphasis added.) Applying this test, we find that in the instant case, plaintiff is not a seller under the provisions of the 1934 Act because she allegedly executed the voting trust agreement of March 16, 1973.
Under the voting trust agreement, plaintiff retained the following economic rights normally associated with stock ownership :
1) The right to prompt receipt of any dividends upon their issuance to the voting trustee;
2) The right to subscribe to any class of stock or securities offered to shareholders; and
3) The right to receive a pro rata distribution of corporate assets in the event of liquidation.
Thus, the economic realities of the situation establish that plaintiff retained every right normally held by a shareholder with the exception of the right to vote, one which was only temporarily suspended. Therefore, it is clear that plaintiff's interest was not terminated or transformed in any real sense and, as such, her case is distinguishable from the forced seller cases. (See note 5 supra.)
It should be noted that defendant McCloskey & Company, Inc. is a family owned closed corporation. Thus, the creation of a voting trust was a practical method of vesting the authority to make everyday management decisions in one person who presumably was best equipped to operate the business profitably. Viewed in this context, the creation of a voting trust does not in any way resemble a purchase or sale. To the contrary, the voting trust agreement reflects an internal management decision to provide plaintiff with a continuing interest in a corporation run temporarily by her husband, defendant Thomas McCloskey. As such, it is not the type of transaction for which Congress intended to fashion a remedy under the provisions of this statute. As the Supreme Court stated in Supt. of Insurance v. Bankers Life and Casualty Co. :
We agree that Congress by § 10(b) did not seek to regulate transactions which constitute no more than internal corporate mismanagement. (Emphasis added.)