Bastian v. Lakefront Realty Corp., s. 77-2065

• Citation: 581 F.2d 685
• Decision Date: 09 August 1978
• Docket Number: Nos. 77-2065,77-2066,s. 77-2065
• Parties: Fed. Sec. L. Rep. P 96,531 Robert L. BASTIAN, on behalf of himself and all others similarly situated, and as a derivative action on behalf of the shareholders of Lakefront Realty Corporation, Plaintiff-Appellant, v. LAKEFRONT REALTY CORPORATION, an Illinois Corporation, and Joseph N. Scanlan, an Individual, Defendants-Appellees, and Northwestern University, Intervening Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 685

581 F.2d 685

Fed. Sec. L. Rep. P 96,531

Robert L. BASTIAN, on behalf of himself and all others

similarly situated, and as a derivative action on

behalf of the shareholders of Lakefront

Realty Corporation, Plaintiff-Appellant, v. LAKEFRONT REALTY CORPORATION, an Illinois Corporation, and Joseph N. Scanlan, an Individual, Defendants-Appellees, and Northwestern University, Intervening Defendant-Appellee.

Nos. 77-2065, 77-2066.

United States Court of Appeals,

Seventh Circuit.

Argued Feb. 27, 1978.

Decided Aug. 9, 1978.

Richard T. Zwirner, Chicago, Ill., for plaintiff-appellant.

Robert A. Downing, Sidney Z. Karasik, Chicago, Ill., for defendants-appellees.

Before FAIRCHILD, Chief Judge, and PELL and WOOD, Circuit Judges.

PELL, Circuit Judge.

The Lake Shore Club of Chicago (the Club) is a private social and athletic organization which, at the time this case was filed, occupied the land and the 18-story building known as 850 Lake Shore Drive in Chicago. Lakefront Realty Corporation (Lakefront) was formed by the Club in 1947 as a separate corporation to hold and maintain the 850 property and to lease it to the Club. Only Club members were eligible to own Lakefront stock. Lakefront was given the right, which it exercised, to name an Executive Director of the Club, who had significant veto powers over Club affairs. Appellant Bastian owns 20 shares of the stock of Lakefront. Appellee Scanlan is President, Executive Director under the lease, and principal shareholder (22%) of Lakefront.

On March 31, 1977, Lakefront entered into a contract to sell the 850 property to intervening appellee Northwestern University (Northwestern) for $7,500,000. That same day, Scanlan dispatched a three-page letter to Lakefront shareholders on behalf of the Board of Directors. The letter recited unsuccessful negotiations between Lakefront and the Club on a lease of the 850 property after June 30, 1977, when the prior lease expired. The efforts of Lakefront officers to pursue several prospects for the purchase of the property were mentioned. The Northwestern offer was described as an "extremely good" one, and Scanlan conveyed the Board's recommendation that the shareholders vote to accept the offer at a specially called May 10 meeting. A single page was attached to the letter, containing a notice of the meeting and a proxy.

The affirmative votes of 131,080 of the outstanding 196,620 shares were required to approve the sale. 135,000 affirmative votes were cast. Per the March 31 contract, the sale was to be consummated on July 1, 1977.

On May 9, Bastian filed the complaint in this action. Count I, which is most directly pertinent on this appeal, alleged violations of the proxy solicitation requirements of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), ¹ and the rules promulgated thereunder and by the Securities and Exchange Commission. Count II alleged a failure to register the stock of Lakefront with the Commission, as required by Section 12(g)(1) of the Act, 15 U.S.C. § 78L (g)(1). Counts III and IV complained of the failure to file reports on corporate finances and insider stockholdings required by Section 13(a), 15 U.S.C. § 78m(a), and Section 16(a), 15 U.S.C. § 78p(a). Counts V through VII invoked pendent state claims, sounding in fraud and breach of fiduciary duty.

The district court obtained the agreement of the parties that the sale of the 850 property would not be closed before July 15, 1977, so the Club could have a last chance to match Northwestern's offer and exercise a right of first refusal given by the lease. On June 24, the court announced its view that the May 10 stockholders' meeting was not subject to the proxy requirements of the Act. Because this conclusion indicated little likelihood of success on the merits, and Lakefront stockholders Qua stockholders would not suffer irreparable injury if the property was sold, the court denied Bastian's motion for preliminary injunction against the closing. ² After the Club failed to meet Northwestern's offer, the ruling was formally entered on July 1. Thereafter, the court dismissed Count I, certifying the dismissal as a final judgment and that there was no just reason for delay of the appeal therefrom. See Fed.R.Civ.P. 54(b).

I.

The proxy requirements of Section 14(a) apply only to securities registered under the Act. There is no dispute that the proxy requirements were not met here, but appellees insist there was no obligation to meet them.

They argue that there was never an obligation to register the Lakefront stock under Section 12(g)(1), which extended the duty to register to

(e)very issuer which is engaged in interstate commerce, or in a business affecting interstate commerce, or whose securities are traded by use of the mails or any means or instrumentality of interstate commerce . . .

(B) within one hundred and twenty days after the last day of its first fiscal year ended after two years from July 1, 1964, on which the issuer has total assets exceeding $1,000,000 and a class of equity security . . . held of record by five hundred or more but less than seven hundred and fifty persons . . . .

The parties agree that on June 30, 1967, this provision became effective as to Lakefront, in that on said date, Lakefront had assets exceeding $1,000,000 and stock held by slightly more than five hundred persons. Three arguments are nonetheless advanced to avoid the impact of Section 12(g)(1).

Appellees say that Congress "hardly" could have intended to require registration by a corporation engaged in the sole business of owning, maintaining, and leasing a property used only as a private social and athletic club. It may be that such enterprises were far from foremost in the minds of the members of Congress when it enacted the 1964 amendments to Section 12, but the language enacted into law plainly leaves no room for an implied exemption on this ground, and nothing from the legislative history to support one is cited to us.

Appellees urge us to hold that Lakefront did not satisfy the jurisdictional interstate commerce requirement. The district court rejected this argument, as do we. There is ample undisputed evidence in the record that, although stockholders wishing to dispose of stock would indicate this fact with a notice on a bulletin board in the Club, many of the steps in accomplishing the sale would typically be conducted with the use of the mails. Moreover, given Lakefront's extensive powers to control many of the affairs of the Club, and the facts that the Club operated restaurant and bar facilities undoubtedly using the products of interstate commerce, provided hotel-type accommodations for Club members and out-of-state visitors, and rented portions of the premises for conventions attended by out-of-state visitors, we would be unable to say that Lakefront's business had no effect on interstate commerce.

Appellees next assert that since at least October 1968, Lakefront stock has been held by less than 500 persons. The relevance of this fact frankly escapes us. Congress recognized that the shareholders of a Section 12(g) corporation might fall below 500, but it provided that deregistration would not be available until the shareholders numbered less than 300. Section 12(g)(4), 15 U.S.C. § 78L (g)(4). If Lakefront had registered as required its registration status would have remained unchanged by virtue of dropping under the requisite 500.

Appellees prevailed in the district court on the theory that Lakefront, even if it had properly registered its stock, would have been entitled to deregistration under Section 12(g)(4) as of October 1976, when there were less than 300 stockholders in the company. Section 12(g)(4) provides that:

Registration of any class of security pursuant to this subsection (12(g)) shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a certification with the Commission that the number of holders of record of such class of security is reduced to less than three hundred persons. The Commission shall after notice and opportunity for hearing deny termination of registration if it finds that the certification is untrue. Termination of registration shall be deferred pending final determination on the question of denial.

Our research confirms the parties' suggestion that there is a lack of direct authority applying this provision, but its language is plain enough. An issuer is entitled to deregistration if the security in question is held by less than 300 persons. The Commission has no more discretion to deny deregistration if this condition is met than it has to allow it if the condition is not met. ³ Lakefront thus could have obtained deregistration within 90 days of October 1, 1976, ⁴ and the proxy requirements of Section 14(a) would not have applied to the March 31, 1977, letter and solicitation, and the May 10, 1977, meeting.

Bastian argues that the purposes of the Act, and of the registration, reporting, and proxy requirements in particular, were to assure disclosure of all information pertinent to intelligent investment decisions and the exercise of the rights of corporate democracy. That such were the purposes, and that they are commendable, is not disputed. The fact remains that Congress drew a line to effectuate them, under which firms with less than 500 shareholders need never register, report, or comply with the proxy rules, and firms which once did these things may cease doing them once termination is accomplished. ⁵ To argue that Lakefront, despite never having registered its stock, and being clearly entitled to termination of registration (and freedom from the proxy requirements) if it had registered, had to apply for "deregistration" is to call for the doing of an idle and useless act. Nothing in the pertinent statutes suggests that Congress intended an exception to the usual rule that the law does not require such acts. The remedy for...