Mayer v. Development Corporation of America

• Decision Date: 21 March 1975
• Docket Number: 74-98 and 74-106.,Civ. A. No. 74-73
• Parties: Henry D. MAYER, Plaintiff, v. DEVELOPMENT CORPORATION OF AMERICA, Defendant. Henry D. MAYER et al., Plaintiffs, v. DEVELOPMENT CORPORATION OF AMERICA, Defendant. Henry D. MAYER, Plaintiff, v. DEVELOPMENT CORPORATION OF AMERICA et al., Defendants.
• Court: U.S. District Court — District of Delaware

396 F. Supp. 917

Henry D. MAYER, Plaintiff, v. DEVELOPMENT CORPORATION OF AMERICA, Defendant.

Henry D. MAYER et al., Plaintiffs, v. DEVELOPMENT CORPORATION OF AMERICA, Defendant.

Henry D. MAYER, Plaintiff, v. DEVELOPMENT CORPORATION OF AMERICA et al., Defendants.

Civ. A. Nos. 74-73, 74-98 and 74-106.

United States District Court, D. Delaware.

March 21, 1975.

COPYRIGHT MATERIAL OMITTED

Frank O'Donnell, O'Donnell & Hughes, P. A., Wilmington, Del., Edward C. German, LaBrum & Doak, Philadelphia, Pa., for plaintiffs.

Henry N. Herndon, Jr., Charles M. Oberly, III, and Morris L. Stoltz, II, Morris, James, Hitchens & Williams, Wilmington, Del., Richard B. Dannenberg, Lipper, Lowey & Dannenberg, New York City, for defendants.

OPINION AND ORDER

MURRAY M. SCHWARTZ, District Judge.

I. FACTUAL BACKGROUND

Plaintiffs, both shareholders and one of whom was a former director of the defendant corporation, have filed in this Court three actions alleging breach of various contracts existing between themselves and the corporation as well as concomitant violations by the corporation and its directors of Section 14 of the Securities Exchange Act of 1934 and the rules promulgated thereunder. 15 U.S.C. § 78n, 17 C.F.R. § 240.14a-9. Defendants have filed certain preliminary motions directed at each of plaintiffs' actions; at the Court's request, these motions were consolidated for purposes of briefing, oral argument, and disposition here.

The interrelation of the three actions and the facts which gave rise to them are somewhat complex and merit a comprehensive recitation.

From 1958 through September 1969, Henry D. Mayer (Mayer) and his wife were the principal shareholders of three corporations (the Mayer Family Corporations) which were engaged in the acquisition and residential development of real estate in Ocean County, New Jersey. The Development Corporation of America (DCA) is a Delaware corporation principally engaged in residential construction and community development in Florida; its shares are traded on the American Stock Exchange.

Pursuant to an acquisition agreement dated September 5, 1969 (Plan of Acquisition), the Mayer Family Corporations were combined to form the Mayer Corporation, the assets of which were subsequently transferred to DCA. As partial consideration, the shareholders of the Mayer Family Corporations received 85,000 shares of DCA stock; an equal number of shares were placed in escrow to be released to the former shareholders of the Mayer Family Corporations if the Mayer Corporation earned a certain level of profits over a 3-year period following the acquisition. The agreement further provided that any time between October 6, 1972, and October 6, 1974, any shareholders who owned more than 50 percent of the shares issued pursuant to the agreement should have the right to request the registration with the Securities and Exchange Commission (SEC) of up to 50 percent of the shares due to the respective shareholders; DCA would then duly file a registration statement and use its best efforts to secure approval thereof.

Two ancillary agreements were executed pursuant to the Plan of Acquisition. The first, between Mayer and the newly-formed Mayer Corporation, specified that Mayer would remain in the employ of the Mayer Corporation as its President and chief operating officer for a period of 4 years, supervising its day-to-day operations and discharging such other duties as the Board of Directors might direct. In return, Mayer was to receive a specified annual salary together with fringe benefits enjoyed by other principal executive employees of the Mayer Corporation. The effectiveness of this employment agreement was expressly conditioned upon the consummation of Plan of Acquisition.

In the second ancillary agreement, three DCA directors, Sherman, Fishman, and Lempka, agreed to vote their shares at all meetings held for the election of members of the DCA Board of Directors in such a way as to assure the election of at least one member nominated by Mayer. In return, Mayer agreed to vote his shares of DCA for the election of such nominees as Alvin Sherman might designate.

In April 1973, pursuant to the Plan of Acquisition, the DCA shares placed in escrow pending the Mayer Corporation's achievement of certain profit levels during its first 3 years of operation were released to Mayer and his wife. These shares, as well as the balance of the shares Mayer had initially received from DCA, had not been registered with the SEC.

On or about February 4, 1974, Mayer and his wife allegedly requested that DCA register their shares of DCA stock pursuant to the Plan of Acquisition. On March 8, 1974, DCA advised plaintiffs that it would not register plaintiffs' DCA shares and has allegedly continued to refuse to register the shares since that time.

On March 28, 1974, the DCA Board of Directors held a special meeting at which it voted to terminate the employment of Mayer. Additionally, the Board suspended Mayer as a DCA director and voted to reduce the number of directors from nine to eight. Finally, the Board voted to hold the annual stockholders meeting on June 12, 1974.

On or about April 30, 1974, DCA mailed to its shareholders a notice of the June 12 meeting and a proxy statement. The latter document solicited proxies for the election of a slate of eight nominees for positions on the Board of Directors. These nominees were expressly designated as those of management; they included every individual who had served on the previous DCA Board, minus Mayer. The proxy statement recited, inter alia, the fact that there existed a voting agreement between Mayer and three other DCA directors as well as the fact that Mayer had been suspended and was not a nominee for a seat on the Board of Directors. The proxy statement did not reveal, in express terms, that Messrs. Sherman, Fishman, and Lempka would not vote the proxies in accordance with the voting agreement, viz., to insure the re-election to the Board of Mayer or his nominee.

As a result of the foregoing transactions, four suits were filed. On April 11, 1974, Mayer instituted in this Court Civil Action No. 74-73 (CA-73), seeking damages for DCA's allegedly improper termination of his employment. Approximately one month later, on May 23, Mayer and his wife filed a second suit, Civil Action No. 74-98 (CA-98), seeking specific performance and damages for breach of the stock registration provisions of the Plan of Acquisition. Jurisdiction in both CA-73 and CA-98 is predicated upon diversity of citizenship.

On May 30, a third suit was filed by DCA and the Mayer Corporation in the Southern District of Florida. The Florida complaint includes one count of fraud alleging that Mayer concealed from DCA in connection with its acquisition of the Mayer Corporation certain material facts relating to the latter's financial prospects, all in violation of Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder. Additionally, five common law counts alleging fraud, disloyalty, appropriation of corporate opportunities, and breach of contract were filed. It is the stated intention of DCA and the Mayer Corporation to interpose these counts as affirmative defenses and compulsory counterclaims in the Delaware actions. Defendants' Brief at 24.

The fourth and final suit, Civil Action No. 74-106 (CA-106), was filed in this Court on May 31, 1974; Messrs. Sherman, Lempka, and Fishman (as well as DCA) were named as defendants. In the first two counts, Mayer, both individually and derivatively, sought to enjoin the election of the DCA Board of Directors on grounds that the DCA proxy material contained misleading statements and material omissions in violation of Section 14 of the Exchange Act, 15 U.S.C. § 78n, and Rule 14a-9. Specifically, it was alleged that the proxy statement failed to accurately disclose whether the Board intended to honor the voting agreement between it and Mayer as well as the fact that the Board had been reduced from nine members to eight. In a third count, plaintiffs requested a decree of specific performance of the voting agreement and an award of punitive damages based upon the Court's pendent jurisdiction. On June 5, 1974, this Court denied plaintiff's Motion for a Temporary Restraining Order without prejudice to its right to have the election set aside if plaintiff should subsequently prevail on the merits. On July 22, 1974, plaintiff amended the complaint in CA-106, naming the entire Board of Directors of DCA as defendants. It was agreed that defendants' motions directed to the original complaint in CA-106 should apply as well to the amended complaint.

Five principal questions are raised by defendants' preliminary motions: (1) the existence of jurisdiction in CA-73 given the absence of an allegedly indispensable party whose presence would destroy diversity; (2) the existence of a federal cause of action in CA-106 pursuant to Section 14 of the 1934 Exchange Act and Rule 14a-9 thereunder; (3) the propriety of venue as to the individual defendants in CA-106; (4) the ability of Henry Mayer to maintain CA-106 as a derivative action; and (5) the desirability of transfer of all three actions now pending in this Court to the United States District Court for the Southern District of Florida pursuant to 28 U.S.C. § 1404(a).

II. THE MAYER CORPORATION AS AN INDISPENSABLE PARTY IN CA-73

In CA-73, plaintiff Mayer seeks damages for DCA's alleged breach of the employment contract entered into pursuant to DCA's acquisition of the Mayer Corporation. The complaint discloses that the contract of employment was originally executed by and between Mayer and the Mayer Corporation, both New Jersey residents. DCA was not a signatory, although by the contractual terms, it was rather clearly a third-party beneficiary.¹ According to the complaint, DCA subsequently assumed the obligations of the employment contract and, after January 1, 1974, paid plaintiff's salary directly. On...