Dillon v. Berg, Civ. A. No. 3967.

• Decision Date: 29 August 1972
• Docket Number: Civ. A. No. 3967.
• Parties: Len J. DILLON et al., Plaintiffs, v. F. Steven BERG et al., Defendants.
• Court: U.S. District Court — District of Delaware

347 F. Supp. 517

Len J. DILLON et al., Plaintiffs, v. F. Steven BERG et al., Defendants.

Civ. A. No. 3967.

United States District Court, D. Delaware.

August 29, 1972.

David T. Dana, III, of Richards, Layton & Finger, Wilmington, Del., Francis

E. Koch and Andrew N. Grass, Jr., of Windels, Merritt & Ingraham, New York City, of counsel, for plaintiffs.

Bruce M. Stargatt and Jack B. Jacobs, of Young, Conaway, Stargatt & Taylor, Wilmington, Del., for defendants.

OPINION AND ORDER

LATCHUM, District Judge.

This civil action is before the Court on the defendants' motion to strike the plaintiffs' motion for an injunction for want of federal subject matter jurisdiction. In this suit originally brought pursuant to Section 14(a) of the Securities Exchange Act of 1934¹ (the "Act"), this Court held that the action taken during the 1970 annual shareholders' meeting of Scotten, Dillon Company, including the election of several directors to a staggered board, was void on the ground that the results were obtained by the use of false and misleading proxy statements. Dillon v. Berg, 326 F.Supp. 1214 (D.Del.1971).

Pursuant to that finding, on June 10, 1971 the Court ordered the corporation as soon as practicable to resolicit proxies and reconvene the 1970 annual shareholders' meeting to elect directors in the places of those found to have been invalidly elected. The Court retained jurisdiction of the action and the parties for further proceedings not inconsistent with its opinion and order. Pursuant to that order new elections to the board of directors were held at the reconvened meeting on October 27, 1971. Subsequently, at a directors' meeting held on December 13, 1971, the board allegedly voted to remove the defendant Berg as Chief Executive Officer and Summers as Executive Vice President of the corporation and installed new officers. The plaintiffs allege that, despite the board's action, Berg and Summers have continued operating as corporate officers and have refused to allow the newly elected officers access to the corporate books and records and in addition have resisted the efforts of the board and the executive committee to call a 1972 annual meeting.

The plaintiffs maintain that these actions by the defendants Berg and Summers contravene and frustrate the effect of this Court's June 10, 1971 order entered in Dillon v. Berg, supra, requiring new elections, and that this Court has continuing jurisdiction (a) to enjoin Berg and Summers from interfering with the orders of the board and the executive committee, and (b) to require them to deliver the corporate books and records to the newly installed officers.

The plaintiffs contend that this Court has ancillary jurisdiction and hence power to grant the relief sought, citing J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). In Borak, the Supreme Court stated: "It is for federal courts `to adjust their remedies so as to grant the necessary relief' where federally secured rights are invaded. `And . . . where legal rights have been invaded, and a federal statute provides for a general right to sue for such invasion, federal courts may use any available remedy to make good the wrong done.'" Id. at 433, 84 S.Ct. at 1560.

That federal courts have broad powers to effectuate their judgments in enforcing federal rights in corporate matters has long been recognized. See Deckert v. Independence Shares Corp., 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189 (1940). This includes the exercise of equitable powers as well. Porter v. Warner Holding Co., 328 U.S. 395, 66 S. Ct. 1086, 90 L.Ed. 1332 (1946).

However, this Court is of the opinion that the relief presently sought goes far beyond even the broad standards of Borak. In Dillon v. Berg, supra, this Court ordered a reconvened 1970 annual shareholders' meeting and the election of certain board members. The elections were held and the directors were installed. The Court's jurisdiction to hear complaints of deceptive proxy materials was grounded on Section 14(a) of the Act. Upon finding that the disseminated materials violated Section 14(a), the Court had broad remedial powers to purge the effects of that violation which it undertook to do by its June 10th order. Once the reconvened 1970 annual meeting and the elections were held, the Court's order was fully effectuated. When the Court retained jurisdiction in that case, it was only for the purpose of insuring that the meeting and actions were held according to the tenor of that order. The Court did not intend to keep a continuous hand in all subsequent internal operations of the corporation. To do so would be tantamount to appointing this Court as a super-member of the board of directors. While such action might be appropriate if the corporation were in receivership, such is not the case here.

A court will assert ancillary jurisdiction for two purposes: first, to ensure that its judgments are given full effect; and second, as a matter of judicial economy. In Wilgus v. Peterson, 335 F.Supp. 1385, 1389 (D.Del.1972), the Court set forth four criteria consistent with these purposes which must be met before ancillary jurisdiction will lie: (1) the ancillary matter must arise from the same transaction which was the basis of the main proceeding, or arise during the course of the main matter, or is an integral part of the main matter; (2) the ancillary matter can be determined without a substantial new fact-finding proceeding; (3) determination of the ancillary matter through an ancillary order would not deprive a party of a substantial procedural or substantive right; and (4) the ancillary matter must be settled to protect the integrity of the main proceeding or to insure that the disposition in the main proceeding will not be frustrated. Applying the first, second and fourth criteria to the instant situation will demonstrate that ancillary jurisdiction is improper here.

First, if the plaintiffs were alleging that the defendants were preventing the directors elected pursuant to the Court's order from serving in that capacity, then this matter would arise from the same transaction as the main proceeding, namely, election of directors representing the informed and intelligent choice of a majority of the shareholders. Here, however, that is not alleged. The victors of the October 27, 1971 elections are now serving as directors. What is presently transpiring is a later developed,...