Dillon v. Berg

• Decision Date: 06 May 1971
• Docket Number: Civ. A. No. 3967.
• Parties: Len J. DILLON, Harold Gray and Fred R. Davis, Plaintiffs, v. F. Steven BERG et al., Defendants.
• Court: U.S. District Court — District of Delaware

326 F. Supp. 1214

Len J. DILLON, Harold Gray and Fred R. Davis, Plaintiffs, v. F. Steven BERG et al., Defendants.

Civ. A. No. 3967.

United States District Court, D. Delaware.

May 6, 1971.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

David T. Dana, III, of Richards, Layton & Finger, Wilmington, Del. and Andrew N. Grass, Jr., Francis E. Koch and James P. Conroy of Windels, Merritt & Ingraham, New York City, of counsel, for plaintiffs.

Richard F. Corroon and Charles S. Crompton, Jr., of Potter Anderson & Corroon, Wilmington, Del., for defendants.

OPINION

LATCHUM, District Judge.

This is a stockholders derivative suit brought by three of the directors of the Scotten, Dillon Company ("Scotten, Dillon"), Len J. Dillon ("Dillon"), Harold Gray ("Gray"), and Fred R. Davis ("Davis") against four of the directors or purported directors of the company, F. Steven Berg ("Berg"), William Lerner ("Lerner"), George K. Bissell ("Bissell"), and Ernest Summers ("Summers"), with Scotten, Dillon, a Delaware corporation, as a nominal defendant. Jurisdiction exists by virtue of Section 27 of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78aa, and venue is not contested.¹

The plaintiffs allege that the proxy materials sent to all Scotten, Dillon shareholders in connection with the solicitation of proxies for the 1970 Annual Shareholders Meeting, held on August 21, 1970 in Wilmington, Delaware, (1) contained false and misleading statements and omitted material facts, in violation of Section 14(a) of the Act, 15 U.S.C. § 78n(a), and Rule 14a-9, 17 CFR § 240.14a-9, promulgated thereunder, and (2) failed to contain information prescribed by the Securities and Exchange Commission ("S.E.C.") in Schedule 14A, 17 CFR § 240.14a-101, in violation of Section 14(a) of the Act and Rule 14a-3, 17 CFR § 240.14a-3, promulgated thereunder. For relief, the plaintiffs request that the 1970 Annual Shareholders Meeting be declared illegal and void, that the election of defendants Bissell and Summers to the Board of Directors ("the Board") be set aside, that Scotten, Dillon be ordered and directed to convene a meeting of shareholders as soon as possible for the purpose of acting on the matters which were or should have been considered by the 1970 Annual Shareholders Meeting, that defendant Lerner, as well as Bissell and Summers, be required to stand for election to the Board at such meeting, that defendants Bissell, Summers, and Lerner be enjoined from acting as directors of Scotten, Dillon until such time as they have been duly elected by the shareholders at such meeting, that Scotten, Dillon, its officers, agents, employees, attorneys, and assigns be enjoined from acting upon, effectuating, or enforcing any actions taken by the Board while defendants Bissell, Summers, and Lerner participated as members thereof, and that such further relief as necessary, just and proper be granted by the Court.

The defendants, in their answer to the original complaint, admit that Dillon is the beneficial owner of 3,100 shares of Scotten, Dillon stock, Gray is the beneficial owner of 10,100 shares, and Davis is the beneficial owner of 3,100 shares, and that all three have been shareholders during the period of time relevant to this suit.

It is now well established that a private party may bring suit for a violation of Section 14(a), J. I. Case Co. v. Borak, 377 U.S. 426, 430-431, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), and that a shareholder may bring a derivative suit on behalf of the corporation for a violation of Section 14(a). Boothe v. Baker Industries, Inc., 262 F.Supp. 168, 174 (D.Del.1966); Greater Iowa Corp. v. McLendon, 378 F.2d 783, 794 (C.A.8, 1967); Bound Brook Water Co. v. Jaffe, 284 F.Supp. 702, 705 (D.N.J.1968).² The plaintiffs' standing to bring this suit is thus clear.³

A non-jury trial was held on December 29, 1970. Davis appeared as the sole witness for the plaintiffs and Berg appeared as the sole witness for the defendants. Almost fifty documentary exhibits were put in evidence by the plaintiffs, as well as a two volume deposition of defendant Lerner and certain answers to interrogatories propounded to the defendants. The defendants put into evidence fourteen documentary exhibits and a deposition of plaintiff Dillon. Post-trial briefing having been completed the case is now ripe for decision.

This case stems from a division of the Board of Directors of Scotten, Dillon into two opposing camps. One group consists of the plaintiffs, Dillon, who is the son of one of the company's founders and himself the former president and chairman of the Board, Gray, who is the chairman of the executive committee of the Board and the largest single stockholder in the company, and Davis, who is the vice chairman of the Board. The other group is composed of the defendants, Berg, who is the present chairman of the Board and chief executive officer of the company, Lerner, who is the secretary of the company, Summers, who is the executive vice president of the company, and Bissell, who is the chairman of the Board's stock option committee.

The roots of the present suit reach back to May 1, 1969 when a reorganization of the corporation, following the 1969 Annual Shareholders Meeting resulted in control of the corporation passing from Dillon, who had been Board chairman, to a group led by Terry J. Fox ("Fox"), who, along with Berg, had been instrumental in creating a diversified small conglomerate, Iroquois Industries, Inc. ("Iroquois"). At the Board meeting held on May 1, 1969 the by-laws were amended to make the chairman of the Board the chief executive officer of the corporation, and additional executive positions were created. (PX-23, pp. 2-4). Fox was elected chairman of the Board, Davis was elected vice chairman, and Gray was elected chairman of the newly created executive committee. In addition, Ralph R. Power ("Power"), another director of the company, was reelected president. (PX-23). Power had served as president since August 1968, when he had succeeded Dillon upon Dillon assuming the position of Board chairman. (Docket Item # 58, pp. 12, 26-27).

At the next Board meeting, held on June 19, 1969, the number of directors was increased from seven to nine, Fox resigned as chairman of the Board and as a director because of the demands on his time made by Iroquois, Berg was elected to replace Fox as chairman of the Board and the terms of an employment contract between Berg and the company were approved, Lerner was elected to fill Fox's unexpired term on the Board,⁴ and Bissell was elected to fill one of the two newly created directorships. (PX-24). The second newly created directorship was not filled.

Philip G. Moon ("Moon"), another Scotten, Dillon director, resigned in October 1969. At the October 30, 1969 Board meeting Lerner was elected to fill Moon's unexpired term and Bissell was elected to fill Lerner's unexpired term. (PX-26). After this, the nine-director Board consisted of seven members, Dillon, Gray, Davis, Berg, Lerner, Bissell and Power and two unfilled positions, the directorships created at the June 19, 1969 meeting, one having previously been filled by Bissell and the other having never been filled.⁵

These seven worked together fairly harmoniously until early in 1970. Sometime between the October 30, 1969 directors meeting and the March 9, 1970 meeting dissension arose, apparently over the relocation of the corporation's main manufacturing operations from Detroit to Gallipolis, Ohio, over problems which developed in purchasing from Fox 90,000 shares of Iroquois stock, over difficulties arising from an attempt by Berg to have his employment contract rescinded, and over a personality conflict between Berg and Power. The split widened when a controversy arose between the members of the Board as to whether a purported resignation of Power from the Board in March of 1970 was effective.

By the time of the July 22, 1970 meeting the Board had become sharply divided into two hostile camps, with Dillon, Gray, and Davis on one side and Berg, Lerner, and Bissell on the other. (Tr. 15). The validity of that meeting and the acts done there constitute the major focus of the plaintiffs' claims, particularly since a purported election of Summers to the Board at that meeting gave Berg and his faction firm control of the Board. The exact cause of action asserted by the plaintiffs is that the proxy materials prepared by Berg and his faction and used as soliciting materials for the 1970 Annual Shareholders Meeting violated Federal proxy regulations.

The plaintiffs' claim, that the proxy materials for the 1970 Annual Shareholders Meeting violated Section 14(a) of the Act and Rules 14a-3 and 14a-9 promulgated thereunder, involves the resolution of a number of issues. Among these are the validity of the July 22, 1970 Board meeting, the effect of the purported resignation by Power in March of 1970, the validity of the purported election of Summers to the Board at the July 22, 1970 meeting, the legality of labeling the proxy materials in question "management," the accuracy of statements made about the company's 1969 Qualified Stock Option Plan, the propriety of failing to disclose in the proxy materials information concerning stock warrants issued to Berg but cancelled before their use, the consequences of not updating the 1969 Annual Report of the company, the effect of not notifying stockholders of the existence of the two unfilled directorships, the propriety of not disclosing an increase in Summers' salary for the coming year, the materiality of numerous admitted misstatements in the proxy materials, and several other matters which will be discussed in the course of this opinion. The defendants have denied the principal allegations of the plaintiffs. Each of the major issues will be discussed separately.

Validity of the July 22, 1970 Board Meeting

At the outset, the plaintiffs contend that the election of Summers to the Board,...