On Appeal from the United States District Court for the Eastern District of Pennsylvania.
Weis, Higginbotham and Sloviter, Circuit Judges.
A. LEON HIGGINBOTHAM, JR., Circuit Judge
Appellants/plaintiffs appeal from two separate orders of the district court dismissing this derivative action. The district court's interlocutory order of October 18, 1982 dismissed Oliver DeGray Vanderbilt's and Vanderbilt & Company's complaint because the district court found that these plaintiffs were not fair and adequate representatives of the shareholder class. This same order also granted C. Clay Noah's motion to intervene as a derivative plaintiff. In a subsequent order of February 8, 1983 the district court dismissed Noah's complaint for the same reason it had dismissed Vanderbilt's complaint; it concluded that Noah also was not a fair and adequate representative. On appeal, plaintiffs contend that the district court abused its discretion in finding Vanderbilt and Noah inadequate representatives of the shareholder class. We agree and will reverse the district court's orders accordingly.
Oliver DeGray Vanderbilt and Vanderbilt & Company commenced this suit as a derivative action*fn1 on behalf of Geothermal Resources International, Inc. ("GRI"). Oliver DeGray Vanderbilt, along with the other original individual plaintiffs, is a partner of Vanderbilt & Company, a Pennsylvania partnership that owns stock in GRI. Vanderbilt is also an individual shareholder. Together, Oliver DeGray Vanderbilt ("Vanderbilt") Vanderbilt & Company own 50,000 shares, or approximately one-and-one-half percent of GRI's total outstanding common stock.
In his complaint Vanderbilt charged that GRI's Board of Directors and its two parent corporations engaged in a scheme of self-dealing in GRI's assets to the detriment of GRI and its minority shareholders. Vanderbilt named five members of GRI's seven-member Board of Directors as defendants. Vanderbilt also named Geo-Energy Limited ("GEL") and E.J. Lavino and Company ("EJL") as corporate defendants. GEL owns about 80% of GRI's common stock, and GEL is wholly owned by EJL.
There are several interlocking relationships among the various officers and directors of GRI, GEL and EJL. Four of the five individual defendants who are officers and directors of GRI also serve as officers and/or directors of GEL or EJL. GRI's President and Chairman of the Board is EJL's President, Chairman of the Board and principal stockholder. GRI's Chief Executive Officer and Vice Chairman of the Board is GEL's President and EJL's Vice President. GRI's Secretary and Board member is EJL's Vice President and General Counsel. GRI's Board member Twiford also serves as EJL's Vice President and Treasurer.
Vanderbilt's complaint alleges that the defendants conspired to acquire 80% control of GRI in order to use GRI's assets for their personal gain, but to GRI's detriment. Defendants allegedly effectuated their scheme by causing GRI to issue and to sell 1.2 million shares of common stock to GEL at an inadequate price. Defendants thus acquired over 80% control of GRI. Vanderbilt also alleges that defendants caused GRI to sell its coal properties to GEL at a grossly inadequate price and that defendants misappropriated tax benefits flowing from GRI's coal and geothermal operations for their own personal benefit.
Vanderbilt further alleges in his complaint that, prior to filing this action, he made repeated requests to GRI's board to investigate his charges and to take remedial action but that these efforts were unavailing. Consequently, Vanderbilt initiated this derivative action claiming that these and other acts evince a scheme to defraud GRI and its minority stockholders in violation of §§ 10(b) and 14 of the 1934 Securities Exchange Act, 15 U.S.C. §§ 78j(b) and 78n, § 901(c) of the Organized Crime Control Act of 1970, 18 U.S.C. § 1962(c) and § 501 of the Pennsylvania Securities Act of 1972, 70 Pa. Cons. Stat. Ann. §§ 1-101 (Purdon 1983).
Defendants deny these allegations and insist instead that Vanderbilt's suit is merely an attempt to force GRI to buy out his interests in GRI at a price substantially above market value. Vanderbilt denies this buy out charge and, in turn, claims that defendants tried to persuade him to sell his stock to them at less than its true value. He refused to do so. Vanderbilt also informed GRI that it was in default under aircraft leases GRI had with Cambridge Leasing Company, a partnership in which Vanderbilt is a general partner. Vanderbilt threatened to cancel the leases. Defendants deny that GRI is in default of its aircraft leases and claim that Vanderbilt's threats to cancel these leases is yet another attempt to coerce them into a buy out. Approximately two months prior to plaintiffs' initiating this action, defendants filed a separate lawsuit against Vanderbilt in the Philadelphia Court of Common Pleas to determine the parties' respective rights under the leases. GRI, Inc. v. Vanderbilt, No. 3892, February Term, 1982 (Philadelphia Court of Common Pleas).
Defendants took the following action after Vanderbilt filed his parallel complaints in the United States District Court for the Eastern District of Pennsylvania and the Delaware Court of Chancery. First, the GRI board appointed an independent litigation committee. The committee consisted of two GRI board members who were not involved in the matters to be investigated and who were not named as defendants in either Vanderbilt's or Noah's complaint. It was authorized to investigate Vanderbilt's charges and empowered to bind GRI in deciding whether it should bring an action against the defendants. The committee retained outside counsel and began its investigation while this action was pending before the district court. However, it did not conclude its investigation until after the district court had rendered its decisions in this litigation, and the defendants filed a motion to supplement the record in this appeal with the committee's report. We will deny this motion for the reason stated below.
Second, defendants moved to dismiss Vanderbilt's complaint alleging that he failed to make a good faith demand upon GRI's Board of Directors to investigate his charges and to take requisite remedial action as required by Fed. R. Civ. P. 23.1. Additionally, they alleged that he did not adequately represent GRI's shareholders.
Because of this challenge to his complaint, Vanderbilt asked C. Clay Noah, who owned 5000 GRI shares, to join him as a derivative plaintiff. Vanderbilt promised to indemnify Noah against any liability that might arise from the derivative action. Vanderbilt also promised to compensate Noah for any expenses, including attorneys' fees, he might incur in the litigation. Noah ...