The opinion of the court was delivered by: POLLAK
Plaintiff has brought this action to recover money damages for injuries allegedly suffered by him as a consequence of (1) defendants' alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission; (2) defendants' alleged violations of section 14(a) of the Act, 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder by the Securities and Exchange Commission; and (3) the alleged breach by the defendant directors of IU International Corporation ("IU") of fiduciary duties owed by them to the plaintiff under state law. The jurisdiction of this court is based, as to the first two claims, on section 27 of the Act, 15 U.S.C. § 78aa, as amended, 28 U.S.C. § 1337, and, as to the state law claim, upon the doctrine of pendent jurisdiction.
Plaintiff, J. G. Rubinstein, a former president of defendant IU International Corporation ("IU"), owned approximately 22,700 shares, preferred and common, in defendant IU in November 1979. Early in that month, Rubinstein received by mail a notice of a special meeting of IU's stockholders to be held on November 27: The business to be considered at this meeting was a proposal, unanimously recommended by IU's directors, to authorize the IU directors to spin-off IU's wholly-owned subsidiary, Gotaas-Larsen Shipping Corporation ("GLSC"). GLSC was, at the time, a Liberian corporation with its principal place of business in Bermuda, with assets which constituted approximately 40% of the total assets held by IU. Under the proposed plan, which was described at length in a prospectus and proxy statement accompanying the notice of the special meeting, each shareholder of IU common stock would receive one share of GLSC stock for every three shares of IU common stock which s/he held as of the record date. As a part of the reorganization, the proposal called for the amendment of the articles of incorporation of GLSC in such a manner as substantially to limit the voting rights of GLSC shareholders: Under the amended articles, it would require 90% of the GLSC shareholders scaled down over a period of some years to 65% to adopt corporate policies or to elect directors not favored by the incumbent board.
Rubinstein found the spin-off proposal and in particular the curtailment of GLSC shareholder voting rights so disturbing that he consulted his attorneys. On November 21, six days before the date of the special meeting, IU received a letter from Rubinstein's attorneys challenging the proposal and indicating that litigation would ensue unless the special meeting were delayed. The special meeting was held as scheduled and the spin-off proposal was approved by a favorable vote of 97% of the votes cast, with about two-thirds of the shares voting. A meeting of IU directors promptly followed, and the directors gave their final approval of the proposal. By noon of the same day, the IU directors who were to be directors of the reorganized GLSC flew to Bermuda and held the first meeting of the GLSC board of directors. By the end of that day, everything had been accomplished to complete the spin-off except for (1) the distribution of GLSC shares to IU shareholders and (2) the draw-down of a $ 30,000,000 line of credit which IU was to grant GLSC.
Now before the court is defendants' motion to dismiss the complaint, or, in the alternative, for summary judgment a motion putting squarely in issue the viability of Rubinstein's claims:
Rubinstein alleges that (1) the proxy materials contained various material omissions and misrepresentations, and (2) as a result of the spin-off and in particular because of the limited shareholder rights in GLSC and the fact that GLSC is an off-shore corporation the value of his combined holdings of IU and GLSC stock was materially less than the value of his old IU stock. Defendants argue that they are entitled to summary judgment because (1) there was complete disclosure of all material facts, and (2) plaintiff has failed to show that he suffered any actual damages as a result of the spin-off.
The Alleged Misrepresentations and Omissions
Plaintiff's 10(b) and 14(a) claims are based on alleged omissions and misrepresentations in the proxy materials. As the test of whether proxy materials are materially deceptive within the meaning of 10(b) is congruent with the test for materiality within 14(a), Kohn v. American Metal Climax, Inc., 458 F.2d 255, 269 (3d Cir. 1972); Allen v. Penn Central Company, 350 F. Supp. 697, 706 (E.D.Pa.1972), the following discussion of the alleged deficiencies in the proxy materials will be directed toward both plaintiff's 10(b) and 14(a) claims.
Plaintiff alleges that the proxy materials were deficient in several respects: These will be considered in turn.
(1) Plaintiff alleges that defendants used the term "dividend" to describe the distribution of GLSC stock, whereas the transaction would in fact diminish the value of the shareholders' investment.
The proxy materials consistently refer to the transaction in terms of a "distribution" by IU to its shareholders of the stock of GLSC. The plan is described in detail in several places, including twice in the first two pages of the materials. In none of these descriptions do the materials suggest that the shareholders would receive anything other than shares already owned by IU, and hence by the shareholders themselves. To be sure the materials do not suggest that the combined holdings of GLSC and IU stock would be worth less than an equivalent holding of the old IU stock: But such a statement would be a prediction as to future value. As the disclosure of facts was complete and accurate, defendants would appear to be entitled to summary judgment on this issue. Ash v. LFE Corporation, 525 F.2d 215 (3d Cir. 1975).