Taussig v. Wellington Fund, Inc.

• Decision Date: 11 August 1960
• Docket Number: Civ. A. No. 2047.
• Citation: 187 F. Supp. 179
• Parties: Ralph J. TAUSSIG and Sally G. Taussig, his wife, as Tenants by the Entireties, Plaintiffs, v. WELLINGTON FUND, INC., a Delaware corporation; Wellington Equity Fund, Inc., a Delaware corporation; The Wellington Company, a Delaware corporation; and Wellington Company, Ltd., a Delaware corporation, Defendants.
• Court: U.S. District Court — District of Delaware

187 F. Supp. 179

Ralph J. TAUSSIG and Sally G. Taussig, his wife, as Tenants by the Entireties, Plaintiffs, v. WELLINGTON FUND, INC., a Delaware corporation; Wellington Equity Fund, Inc., a Delaware corporation; The Wellington Company, a Delaware corporation; and Wellington Company, Ltd., a Delaware corporation, Defendants.

Civ. A. No. 2047.

United States District Court D. Delaware.

August 11, 1960.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

William E. Taylor, Jr., Wilmington, Del., Edwin P. Rome and Morris L. Weisberg of Blank, Rudenko, Klaus & Rome, Philadelphia, Pa., Floyd H. Crews and Harvey W. Mortimer of Darby & Darby, New York City, of counsel, for plaintiffs.

Richard F. Corroon of Berl, Potter & Anderson, Wilmington, Del., Henry N. Paul, Jr., of Paul & Paul, Philadelphia, Pa., and Daniel Mungall, Jr., of Stradley, Ronon, Stevens & Young, Philadelphia, Pa., of counsel, for defendants.

CALEB M. WRIGHT, Chief Judge.

In this declaratory judgment action filed pursuant to 28 U.S.C. § 2201 certain minority shareholders of Wellington Fund, Inc., seek a determination of the ownership of the name "Wellington" in the investment company industry.¹

The following Stipulation of Facts has been entered of record:²

1. Plaintiffs are citizens of the Commonwealth of Pennsylvania. All of the defendants are corporations incorporated under the laws of the State of Delaware. The amount in controversy exceeds, exclusive of interest and costs, the sum of $10,000.

2. Plaintiffs are now and were at the time of the transactions herein complained of stockholders of defendant Wellington Fund, Inc., holding 211.482 shares of common stock, par value $1 per share.

3. Plaintiffs bring this action in the attempt to enforce secondary rights claimed to be held by themselves and all other stockholders similarly situated in Wellington Fund, Inc., and assertedly on behalf of Wellington Fund, Inc. for the benefit of Wellington Fund, Inc., because Wellington Fund, Inc., refused after demand to enforce alleged rights which should, plaintiffs claim, properly be asserted by it.

4. This action is not a collusive one to confer on a Court of the United States jurisdiction of a cause of which it would not otherwise have cognizance.

5. Defendant Wellington Fund, Inc. (hereinafter called "Wellington Fund") is an open-end, diversified management investment company incorporated on December 26, 1928, which is registered under the Investment Company Act of 1940, which at September 1, 1958, had an authorized capitalization of 100,000,000 shares $1 par value common stock with equal voting rights and no preferences as to conversion, exchange, dividends, retirement, or any other feature; and had at September 1, 1958, 57,706,791 shares outstanding of a net asset value of $750,709,451 with approximately 248,000 shareholders located in every state of the United States and in many parts of the world. No shareholder owns beneficially as much as 5 per cent of the outstanding shares. Wellington Fund's objectives are conservation of principal, reasonable income return, and profits without undue risk with fundamental investment policies to achieve these objectives of careful selection of individual securities, continuous conservative management supervision, and balanced investing in bonds, preferred and common stocks of many separate companies in different industries. At December 31, 1958, Wellington Fund had 262,000 shareholders and net assets of $857,964,256.

When originally incorporated this company was called Industrial and Power Securities Co. but by amendment to its Certificate of Incorporation filed July 11, 1935, changed its name to Wellington Fund, Inc.

6. Defendant The Wellington Company (hereinafter called "Wellington Company") is a corporation incorporated on January 21, 1931, which acts as both investment adviser and, up to the date of the complaint in this case, principal underwriter of Wellington Fund only. When originally incorporated this company was called W. L. Morgan & Co. but by Amendment to its Certificate of Incorporation filed April 10, 1952, it changed its name to The Wellington Company.

On April 12, 1952, Wellington Company entered into a management and investment advisory agreement with Wellington Fund, under which Wellington Company has furnished Wellington Fund with statistical research, analytical and general management services, including research and administrative personnel and services, with annual fee to Wellington Company of:

(a) One half per cent on the first Seventy Million Dollars ($70,000,000.00) of average net assets of Wellington Fund as of the end of each month;

(b) Three eighths per cent on the next Fifty Million Dollars ($50,000,000.00) of average net assets of Wellington Fund; and

(c) One fourth per cent on average net assets of Wellington Fund over One Hundred Twenty Million Dollars ($120,000,000.00).

The total management fee paid by Wellington Fund to Wellington Company for these services in 1957, was $1,757,404.79. In 1958, the total management fee paid by Wellington Fund to Wellington Company was $2,040,474.96.

Walter L. Morgan, president and director of Wellington Fund, is the president, director and beneficial and record holder of the common stock and substantially all of the preferred stock in Wellington Company. At the date of the complaint five officers of Wellington Fund were officers or directors of Wellington Company and three other officers of Wellington Fund were also employees of Wellington Company.

Wellington Company, acting as principal underwriter only for Wellington Fund has not actively up to the date of the complaint in this case, distributed the securities of any other investment company, and receives from the total sales commission from the sales of Wellington Fund shares 2 per cent of the offering price on single transactions less than $25,000; 1? per cent on single transactions of $25,000 but under $50,000; 1 per cent on single transactions of $50,000 but under $100,000; and 0.6875 per cent on single transactions of $100,000 and over.

In 1957, net commissions of Wellington Company, as principal underwriter and national distributor of Wellington Fund, were $757,716 on distribution of Wellington Fund shares, after payment of $4,476,057 to dealers and sales representatives. In 1958, Wellington Company reported net commissions of $861,364.32 on distribution of Wellington Fund shares, after payment of $5,511,532.75 to dealers and sales representatives.

Wellington Company, following the completion of the initial offering of Wellington Equity Fund shares, was intended to and did in fact become principal underwriter of Wellington Equity Fund shares whose shares it continuously offers at a price which is equal to the net asset value per share, plus a sales commission, retaining for itself as principal underwriter a commission in the amounts described above for underwriting Wellington Fund shares.

Wellington Company ceased acting as management adviser of Wellington Fund as of April 13, 1959, at which time the duties of investment adviser for Wellington Fund were undertaken by Wellington Management Company.

7. Defendant Wellington Equity Fund, Inc. (hereinafter called "Wellington Equity Fund") is a diversified management investment company incorporated on August 26, 1958, which is registered under the Investment Company Act of 1940. As of the filing of the complaint in this case, Wellington Equity Fund was a closed-end investment company but became an open-end investment company with redeemable shares upon completion of the initial public offering of 3,000,000 of its 50,000,000 authorized shares of common stock of one class of a par value of $1 per share. Wellington Equity Fund had no stock outstanding at the date of the complaint but upon issuance of its shares of common stock, each share became entitled to one vote and participates equally in dividends, distributions, and net assets. Said shares are fully paid and non-assessable and with no preference on conversion, exchange, retirement, or any other feature. Its shares are redeemable at a redemption price to be ordinarily the net asset value per share.

The purpose and objectives of Wellington Equity Fund are to achieve growth of capital and increased income over the years by investments composed largely of common stock but which may also include securities such as bonds and preferred stocks which are convertible into common stocks, utilizing in the achievement of its objectives experienced investment management and diversifying its investments over a carefully chosen list of securities in a broad number of industries. All but one of the officers and/or directors of Wellington Equity Fund are officers and/or directors of Wellington Fund.

Paragraph Fifteenth (g) of the Certificate of Incorporation of Wellington Equity Fund provides:

"The Corporation (Wellington Equity Fund) acknowledges that it has obtained its corporate name by consent of The Wellington Company and agrees that if at any time the said The Wellington Company and/or an affiliate or a successor to the interests thereof (whether such succession be by merger, consolidation, purchase of assets, or otherwise) ceases to be the investment advisor of the Corporation (Wellington Equity Fund) and national distributor of its shares, it shall at the written request of said The Wellington Company and/or such affiliate or successor change its name so that no reference therein shall be contained to "Wellington", "Morgan", "Claymont" or "Locust Street".

8. Defendant Wellington Company, Ltd. (hereinafter called "Wellington, Ltd.") is a Delaware corporation incorporated on December 30, 1957, whose only present business is to serve as an investment advisor of Wellington Equity Fund under a management agreement pursuant to which Wellington, Ltd. is to furnish general management, investment...