Petition — Mize v. Darrow

Supreme Coit, hE

‘< ee - rte }

| SEP 28 1978

C_MISHARE RODAK, JR., CLERK’

moi

In THE

Supreme Court of the United States

OctosperR TERM, 1978

“%

No. moh B =H YO

D. Doyte Mize anp Tue Appis CorpoRATIon,

Petitioners,

v.

Steita Darrow, ET AL,

Respondents,

SourHpown, Inc., A CORPORATION, ET AL,

Respondents,

D. Doyte Mize anp Tue Appis CorporaTION,

Petitioners,

v.

Cuarues I’, SPALDING, ET AL,

Respondents,

SoutHpbown, Inc., A CORPORATION, ET AL,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Ropert A, Hann

Rocer R. Wricut, Jr.

Counsel for Petitioners

Wooparp, Hatt & Primm

300 Esperson Building

Houston, Texas 77002

(713) 224-5171

FIDELITY PRINTING COMPANY, HOUSTON

INDEX

PAGE

os scscspebndsvenendedecvsceconcecsees 1

as saccneesuniensseouseensesecesovosoes 2

as actnenasnvcnoveconcosccesecoeece 3

as Sa sd on cnahevernstvecévcnzsecsovesecess 3

Ns a scnseusenescovnencscnevensceese 3

dees pessenenovonsevecssvocececcees 6

ASL can chcublecsvcvssseorccconeossovsee cess 13

Appendix “A” (Final Judgment, District Court) .............. 16

Appendix “B” (Final Judgment, District Court) ............ 18

Appendix “C” (Opinion, Court of Appeals) .............cce 20

Appendix “D” (On Petition for Rehearing, Court of

Edi cncnsnssscustvestvortenovcnesnessonessyscacsesecece 28

Appendix “E” (§ 10-b of the 1934 Securities and Exchange

aa csuisscevsossseevssesvcoccosevessveseceoseees 29

Appendix “F” (§ 27 of the 1934 Securities and Exchange

Nee err cscsencseessrsccescovescescsevcscosesens 30

Appendix “G” (Securities and Exchange Commission Rule

OID | Sc scccesovevsssessvvssensccevovesevessvecooesers 30

Appendix “H” (Rule 23.1, Federal Rules of Civil

Ne oo ssccscncnsesnnsoveosecccoveoecesenes 31

In THE

Supreme Court of the United States

Octroser Term, 1978

D. Doyte Mize axyp Tue Appis Corporation,

Petitioners,

Ve

SreLLta Darrow, ET AL,

Respondents,

Soutupown, Inc., A CorpoRATION, ET AL,

Respondents,

D. Doyte Mize axp Tue Appis Corporation,

Petitioners,

v.

CHarLes I’, SPALDING, ET AL,

Respondents,

Soutuvown, Inc., A Corporarion, ET AL,

Respondents,

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

OPINIONS BELOW

The decision of the Court of the Appeals for the Fifth

Cireuit, included in the Appendix to this Petition, at 20

has not yet been reported. The denial of the Motion for

Rehearing is set out in the Appendix at 28,

2

The Judgments of Judges Seals and Hannay of the Dis-

trict Court for the Southern District of Texas, Houston,

Division, made the basis for the appeal to the Court of Ap-

peals resulting in the decision above, are likewise included

in the Appendix at 16 and 18 and have not been reported.

JURISDICTION

The jurisdiction of this Court is proper under 28 U.S.C.

§ 1254(1). This Petition is timely filed under the terms of

28 U.S.C. § 2101(¢), since the Court of Appeals denied Peti-

tioners’ Motion for Rehearing on August 2, 1978, having

issued its opinion in the case on June 15, 1978.

Furthermore, this case is a proper one for review by this

Court on writ of centiorari under Rule 19(b) of the Rules

of this Court, since:

(1.) the decision rendered by the Fifth Circuit below

conflicts with the decisions of three other circuit courts

of appeals on the same matter —i.e., In re; Pittsburgh

& Lake Erie R. Co. Securities and Antitrust Litigation,

543 F.2d 1058 (3d Cir. 1976); Tryforos v. Icarian De-

velopment Co., 518 F.2d 1258 (7th Cir. 1975), cert.

denied 423 U.S. 1091 (1976); and Colen v, Young, 127

F.2d 721 (6th Cir. 1972); and

(2.) the opinion below decides an important question

of federal law which has not been, but should be, set-

tled by this Court.

Jurisdiction over the original action made the basis of

this Petition was founded upon a federal question within

the meaning of 28 U.S.C. § 1331, arising from §§ 10-b and 27

of the Securities and Exchange Act of 1934, and Rule 10b-5

of the Securities and Exchange Commission; diversity of

citizenship within the meaning of 28 U.S.C. § 1332; and

principles of pendant jurisdiction. Appeal from the district

3

court to the court of appeals was proper under 28 U.S.C.

§ 1291. :

QUESTION PRESENTED

May a holder of securities in a corporation be denied

standing to object to a settlement agreement in a share-

holders’ class action derivative suit unless such security

holder demonstrates that he would have had standing to

initiate and prosecute such class action/derivative suit?

STATUTES AND RULES

The pertinent provisions of the Statutes and Rules in

point are set out in full in the Appendix. These include

$$ 10-b and 27 of the 1934 Act, SEC Rule 10b-5, and Rule

23.1, Fed. R. Civ. Proe.

STATEMENT OF THE CASE

Civil action number 75-H-728 (the Darrow case) was filed

on May 9, 1975, and was assigned to the court unit of Judge

Woodrow Seals. Civil action number 75-H-764 (the Spald-

ing case) was filed on May 15, 1975, and was also assigned

to the court unit of Judge Woodrow Seals. Both the Spald-

ing and the Darrow eases were brought as class actions on

behalf of certain classes of security holders of Southdown,

Ine. Plaintiffs also sought to maintain such actions deriva-

tively on behalf of Southdown, Inc. Plaintiffs in the Darrow

ease also sued a Class of defendants comprised of all of the

common shareholders of Southdown, Ine.

The controversies made the basis of the litigation arose

from the efforts of the Board of Directors and management

of Southdown, Inc. to divide the company into two (2) sepa-

rate and distinct entities owning and operating generally

different types of assets and having different cash and in-

come producing characteristics, capita! requirements and

4

operating features. Following such separation, Southdown,

Ine. would continue to engage in the production and market-

ing of cement, sugar, malt and soft drink beverages, table

wines, and candy and in oil and gas operations. The sepa-

rated entity ie., Valhi, Inc. would engage in the type of

large seale agricultural operations which had formerly

been conducted through a wholly owned subsidiary of

Southdown. It was the belief of Southdown’s Board of Di-

rectors that the capital requirements, substantial invest-

ment risk and potentially substantial, but speculative, fu-

ture profits had caused investors to attribute little, if any,

value to such agricultural operations. Thus, the Board of

Directors of Southdown believed that it would be in the

best interest of both companies and of all security holders

of Southdown to effect such a separation. Efforts to accom-

plish same had begun as early as April of 1973.

To accomplish such separation, the Board of Directors

of Southdown in March, 1975 announced a plan whereby all

of the common stock of Valhi, Inc. would be distributed as

a stock dividend to the common shareholders of Southdown,

Inc. The lawsuits were filed shortly thereafter, alleging vio-

lations of the securities laws, that the distribution of such

dividend constituted a partial liquidation of Southdown in

contravention of certain contract rights of holders of South-

down’s preferred convertible stock and convertible notes

and that the payment of said dividend was otherwise illegal

and improper. Thereafter, a hearing was held in the Spald-

ing case on the Plaintiffs’ Application for a Temporary In-

junction, numerous depositions were taken and the court

conducted a number of pre-trial conferences. Amended

Complaints and Answers thereto were filed, and in late

1975, the court was advised that serious discussions for

settlement were being conducted with certain of the de-

fendants. On June 25, 1976, the plaintiffs filed a motion to

5

maintain their class action, and a motion seeking the Court’s

approval to send notices to all security holders of South-

down, informing them of the terms of a proposed partial

settlement. A hearing was held before U.S. District Judge

Woodrow Seals on July 1, 1976, prior to the time said

notice was approved or sent to the security holders of

Southdown, Ine., at which time counsel appeared and

stated their objections to the breadth of the certification

sought, and to the form of the notice of the proposed

partial settlement. No evidence was introduced during the

July 1, 1976 hearing. Judge Seals approved the form of

notice to the security holders and said notice was there-

after sent to the Southdown security holders. On July 20

and July 22, 1976, oppositions to the proposed settlement

were filed, including a memorandum in opposition filed by

Petitioners. On July 30, 1976, the court entered Judgment

in this cause approving the proposed partial settlement.

D. Doyle Mize and The Addis Corporation, two security

holders of Southdown, Ine., duly perfected their appeal.

Mize and Addis appealed from the Judgment entered be-

low not as defendants aggrieved by the Judgment, but as

security holders of Southdown, Inc. Their objections to the

merits of the settlement agreement concern the improper

approval of the payment of the Plaintiffs’ attorneys’ fees,

and the error which resulted from the Court’s approval of

the waste of corporate assets and the sale of corporate

office. Their major objection and concern relates to certain

procedural irregularities which negate the validity of the

settlement and destroy the res judicata benefits of the

Judgment.

Although Mize and Addis were not owners of com-

mon shares in Southdown at the eommencement of the

suit, they were holders of debentures convertible into com-

mon shares. Such status has been held sufficient to satisfy

6

Rule 23.1, Federal Rules of Civil Procedure. Hoff v. Spray-

regan, 52 F.R.D. 243 (S.D.N.Y. 1971). See Dorfman v.

Chemical Bank, 56 ¥.R.D. 363 (S.D.N.Y. 1972). Such de-

bentures have now been converted into shares of common

stock. As will appear more fully below, Petitioners are not

arguing that Mize and Addis would have been proper plain-

tiffs in the original action, but rather that they had stand-

ing to object to the settlement.

The Cummings suit (75-H-1043) had a parallel history.

It was originally filed on June 19, 1975, and assigned to

Judge Hannay’s court unit. It culminated in Judge

Hannay’s Judgment of September 7, 1976, approving the

same settlement proposal as in Spalding and Darrow. The

Fifth Circuit consolidated all of the cases on appeal.

In an opinion issued on June 15, 1978, the Fifth Cireuit,

per Judge Brown, affirmed the judgments of the lower

courts on the rationale that Petitioners lacked standing to

prosecute the appeal. The standing issue had not been

briefed or argued in the Court of Appeals. Following is-

suance of the opinion, a motion for rehearing was timely

perfected, but was denied on August 2, 1978.

In this posture, this Petition for Certiorari is presented

to this Court.

ARGUMENT

Petitioners respectfully request this Court to resolve the

conflict among the cireuit courts of appeal created by the

opinion of the Fifth Circuit in the case at bar. The Fifth

Cireuit’s opinion stands squarely contrary to prior unani-

mous holdings of every Circuit that has considered the

question at issue (the Third, Sixth, and Seventh Circuits).

Moreover, this conflict of decisions arises over a question

of law to which this Court has never addressed itself. Since

7

the issue concerns shareholders’ class action/derivative

suits, forms of action that are becoming increasingly more

frequent and widespread, Petitioners contend that the issue

is an important enough one to merit this Court’s attention.

First, Petitioners would like to direct this Court’s atten-

tion to the procedural history of this case. When the settle-

ment orders of the district courts reached the Fifth Circuit

for review on their merits, that court, adopting an errone-

ous standard that standing to object to the proposed settle-

ment depends on whether the objecting party would have

had standing to bring the action originally, did not reach

the merits but held instead that Petitioners lacked standing

to press their objections under the above, erroneous rule.

The standing issue had not been briefed or argued by any

of the numerous parties who filed briefs and were heard on

appeal; it was the common consensus among them all that

Petitioners had the requisite standing to voice their objee-

tions, so the briefs and arguments of all the parties were

directed at the merits of the settlement orders of the district

courts. Petitioners are prepared to establish to this Court,

beyond any dispute, that Petitioners fulfill every conceiva-

ble requirement for standing. With the case being in such

a posture, the procedural relief sought by Petitioners, upon

this Court’s reversal of the Fifth Cireuit’s holding on the

standing issue, is a remand to that court for it to consider

and pass upon the merits of Petitioners timely-filed objee-

tions to the proposed settlement.

Petitioners are prepared to show through full briefing

and argument of the issue presented that the decision of the

Fifth Cireuit in the case at bar is fundamentally unsound

and unfair to the interests not only of objecting security

holders but indeed to all corporate security holders in gen-

eral. For present purposes, however, Petitioners would like

8

to focus on the conflict between the Fifth Cireuit’s opinion

and the clear holdings of the three other Circuits that have

confronted the issue.

Although the case of In re: Pittsburgh & Lake Erie R. Co.

Securities and Antitrust Litigation, 543 F.2d 1058 (3rd Cir.

1976), was the cornerstone of Judge Brown’s holding in

the instant case, that case in fact supports Petitioners’

position. The Fifth Cireuit opinion cited it as authority

for the holding that for one to have standing to object to

a proposed settlement of a class action/derivative suit, the

objector must meet the requirements of Rule 23.1, Fed, R.

Civ. P., for bringing a derivative action. However, that

ease is in fact one which expands the categories of persons

having standing both to institute a derivative action and to

object to a proposed settlement of that claim. Nowhere in

the Pittsburgh & Lake Erie opinion is there any remote sug-

gestion that unless the one seeking to object to the settle-

ment of the derivative/class action suit had standing to

bring it in the first instance, he has no standing to object.

Indeed, the Third Cireuit indicated, by implication, that the

test for standing to object is not tied to the requirements

of Rule 23.1:

[That the pledgee in the case sub judice is an in-

denture trustee with fiduciary obligations to numerous

public bond holders reinforces our conviction that the

only sound federal rule is that a pledgee of stock has

standing both to assert a Rule 23.1 derivative claim

and to object to a settlement of that claim. (Emphasis

supplied) 543 F.2d at 1067.

Additionally, Judge Brown’s opinion conflicts with an

eurlier, often-cited Sixth Cireuit case, Cohen v. Young, 127

F.2d 721 (6th Cir. 1942), followed, e.g., in Greenfiield v.

Villager Industries, Iic., 483 F.2d 824, 833 (3d Cir. 1973) ;

United States vy. American Society of Composers, Authors,

9

and Pwblishers, 442 F.2d 601, 605-06 (2d. Cir. 1971); Birn-

baum v. Birrett, 17 F.R.D. 409, 412 (S.D.N.Y. 1955). Sig-

nificantly, the Fifth Circuit opinion makes no mention what-

ever of Cohen. That is not surprising, since Cohen holds,

just as Petitioners argue here, that a shareholder is not

precluded from being heard to object to a proposed settle-

ment even though he could not have heen among the plaintiff

elass in the original action. Indeed, the appellate court

in Cohen went on to hear the merits of his objections to

the settlement and reversed the judgment of the district

court approving it.

In a more recent case, the Seventh Circuit has also

held — again, squarely opposite the Fifth Circuit’s holding

below — that one may have standing to object to the set-

tlement of a derivative action, despite a lack of standing to

have initiated such an action. Tryforos vy. Icarian Devel-

opment Co., 518 F.2d 1258 (7th Cir. 1975), cert. denied, 423

U.S. 1091 (1976). Petitioners urge the approach by the

Tryforos court as a far better reasoned one than that

evidenced in the Fifth Cireuit opinion in this case, which

erroneously equated standing to sue under Rule 23.1 with

standing to object to a settlement.

Review by this Court is appropriate on the further

ground that the Fifth Circuit erred in its preception of a

conflict of interest as to Mr. Mize as a shareholder, a per-

ception fundamental to its holding of no standing. The

1The Cohen appellant had ae quired his shares in the corporation

after the occurence of much of the wrongdoing made the basis

of the shareholders’ derivative complaint. 127 F.2d at 724. Still,

the court recognized his standing to object to the settlement

proposal, even though he had not and could not have been a

member of the plaintiff class in the derivative suit, anologizing

his posture as objector to that of a defendant stunmoned by

process, since he came into court to object after having been

notified, as a shareholder but not as a plaintiff, of the proposed

settlement. Id.

10

court completely overlooked the faet that Mr. Mize had

not sought to intervene in the original derivative action. In

no way was he seeking standing to litigate the same issues

made the basis of that action; to do so clearly would have

involved a conflict of interest. However, that hypothetical

conflict of interest, so erucial to Judge Brown's opinion,

is simply irrelevant; the issues on appeal are not the

issues raised by the original complaints, Indeed, the opin-

ion below makes a halting recognition of this at Appendix

“('" 23, where it states Mize and his Addis Corporation

appeal the trial court's judgment “not as defendants ag-

erieved by the judgment, but rather as security holders of

Southdown.”

There is a suggestion in the Court's opinion of June 15,

1978 that Petitioner Mize appeals in an effort to delay a

final resolution of the issues raised by the complaints in

these cases, Nothing could be further from the truth. Noth-

ing in the record supports that suggestion, Petitioner Mize

has diligently pursued discovery in these cases and has

never sought to delay, by a motion for continuance or other-

wise, trial on the merits. Mize is ready for trial and this ap-

peal has not staved or postponed trial on the merits. In its

June 15, 1978 opinion, the Court makes reference in a foot-

note to other litigation involving these issues and Mize,

Appendix at 27 0. 7, Petitioners assume the court has ref-

erence to the action brought by the Securities and Exchange

Conimission, As evidence of the fact that Mize has not

sought to postpone trial on the merits, Petitioners repre-

sent to this Court that at their instance and urging, the SEC

case Was set for trial by the trial court, the case was tried,

all the issues were resolved in favor of Mize, and the SEC

has now appealed the judgment of the trial court, The is-

sues raised by the SEC are the same issues raised in two

of these cases and Mize is just as desirous of a speedy reso-

lution of these cases as he was of the SEC case,

11

The question posed by this case — shareholder standing

to object to a settlement proposal in a derivative/class ac-

tion suit — is one never before passed upon by this Court.

Although this Court has decided several cases concerning

issues of standing in recent vears,® all of them have dealt

with challenges to specific statutory enactments, adminis-

trative regulations, or governmental activities, in the con-

text of public interest-type litigation, Therefore, those cases

delineated principles of standing not applicable to the issue

presented in this private shareholders’ suit. Since this

Court has not yet spoken to the issue and there now exists

a conflict among the circuits by virtue of the Fifth Cireuit’s

opinion in this case, Petitioners contend that the desirabil-

ity of review by this Court has now become a manifest

necessity.

Petitioners submit to this Court that, if the opinion below

is allowed to stand, the numerous district courts in the

Fitth Cireuit will feel themselves constrained by the Fifth

Circuit opinion from following the more equitable and rea-

sonable rule that prevails in the other circuits cited above.

Allowing the decision below to stand is likely to turn the

district courts of the Fifth Cireuit into a forum shoppers’

paradise for litigants in derivative suits. The temptation

for such parties to avail themselves of the extremely re-

strictive standing philosophy adopted in Judge Brown's

opinion can only be averted by reversal in this Court of the

opinion below,

“Simon vy. Eastern Kentucky Welfare Rights Organization, 426

U.S. 26 (1976); Warth v. Seldin, 422 U.S. 490 (1975) ; Sehles-

inger Vv, Reservists Committee to Stop the War, 418 U.S. 208

(1974); United States v. Richardson, 418 U.S. 166 (1974) ;

O'Shea vy. Littleton, 414 U.S. 488 (1974); United States vy.

SCRAP, 412 U.S, 669 (1973); Linda BR. 8S. vy. Riehard D., 410

U.S. 614 (1973); Laird v. Tatum, 408 U.S. 1 (1972); Sierra

Club vy. Morton, 405 U.S, 727 (1972); Association of Data

Processing Service Organizations, Ine. vy. Camp, 397 U.S. 150

(1970); Flast v. Cohen, 392 U.S. 83 (1968).

12

Petitioners have here presented for purposes of this

Petition for Certiorari, in condensed form as required by

Rule 23(3) of this Court, the essence of the legal and pub-

lic policy arguments they are prepared to amplify in full-

fledged briefing and argument, should this Court grant

certiorari, as Petitioner prays. As even this brief synopsis

indicates, there is ample authority, both in case law and

in sound principles of publie policy, for the position urged

in this Petition. Petitioners have found absolutely no case

or statutory authority supporting the novel position adopt-

ed in the Iifth Cireuit opinion.

Wererore, Premises Constperep, Petitioners respect-

fully pray that this Court issue its writ of certiorari to the

Kifth Cireuit Court of Appeals bringing this case up for

review so that it may determine that Petitioners have

standing to prosecute their appeal on the merits before

the said Court of Appeals and then remand the case to that

Court for a decision on the merits,

Respectfully submitted,

A/forneys for Petitioners

D, Doyle Mize and

The Addis Corporation

Of Counsel:

Woovarp, Haun & Prin

300 Hsperson Building

Hlouston, Texas 77002

(713) 224-5171

13

CERTIFICATE OF SERVICE

I hereby certify that on the Ale.. day of «

1978, a true and correct copy of the above and foregoing

Petition for Certiorari of Petitioners D. Doyle Mize and

The Addis Corporation was served upon the individuals

listed below by placing same in the United States mail,

postage prepaid, sent certified mail, return receipt re-

quested, and addressed to the following:

Mr. Kenneth R. Wynne

Bracewell & Patterson

2900 South Tower

Pennzoil Place

Houston, Texas 77002

Mr. Joe H. Reynolds

Reynolds, Allen & Cook

16th Floor

1100 Milam Building

Houston, Texas 77002

Mr. Richard Keeton

Vinson & Elkins

2100 First City National

Bank Building

Houston, Texas 77002

Mr. J. Currie Bechtol

Foreman, Dyess, Prewett,

Rosenberg & Henderson

2900 Entex Building

Houston, Texas 77002

Mr. Larry York

Baker & Botts

3000 One Shell Plaza

Houston, Texas 77002

14

Mr. B. J. Bradshaw

Fulbright & Jaworski

S00 Bank of the Southwest

Building

Houston, Texas 77002

Mr. Richard Caldwell

Butler, Binion, Rice,

Cook & Knapp

Esperson Building

Houston, Texas 77002

Mr. John Held

Baker & Botts

3000 One Shell Plaza

Hlouston, Texas T7002

Mr. Riehard B. Miller

Baker & Botts

8000 One Shell Plaza

ILouston, Texas T7002

Mr. Morton Susman

Susman & Keller

2290 Two Shell Plaza

Houston, Texas T7002

Mr. William Matthews

Sewell, Junell & Riges

701 Capital National Bank

suilding

Houston, Texas 77002

Mr. Fred Barlit

Kirkland & Ellis

200 East Randolph Drive

Chicago, Lllinois HOOHO]

i-

15

Mr. Robert H. Singleton

1608 First City National

Bank Building

Houston, Texas 77002

Mr. Richmond C. Coburn

Coburn, Croft, Shepard & Herzog

411 North Seventh Street

St. Louis, Missouri 63101

Mr. Hugo Walther

Thompson, Walther, Shewmaker

& Gaebe

720 Olive Street

Suite 2807

St. Louis, Missouri 63101

Rospert y Har 7

seen eeaweae

ER R. W Kaha

16

APPENDIX “A”

FINAL JUDGMENT

Ix THe

UNITED STATES DISTRICT COURT

For THe Sovrners Disrrict or Texas

Houston Division

Civin Action No, 75-H-728

STELLA Darkow, BT AL,

Vv.

SoutTupown Inc. BT AL

Civin Action No, 75-11-764

CnarLtes F. SpALDING ET AL,

Vv,

SourHpown Inc. er AL.

(Filed July 80, 1976)

An application having been presented to the Court for

leave to settle and compromise portions of the causes of

action stated in the verified Complaints herein as to some

of the Defendants herein; and notice of such proposed set-

tlement, together with a copy of the Settlement Agreement,

having been mailed to eaeh stockholder and convertible

noteholder of Southdown, Inc., and an opportunity ex-

tended to each to present to the Court any objection to the

proposed settlement, and due deliberation having been had

With respect to the fairness, reasonableness and adequacy

of the proposed Settlement Agreement, it is

ORDERED that the Settlement Agreement, a copy of

which is annexed hereto as Exhibit “A", is approved, that

the parties thereto be and they hereby are authorized and

empowered to settle and compromise the specified portions

17

of the causes of action and claims set forth in the respec-

tive Complaints on file herein in accordance with the terms

of the Settlement Agreement; and it is further

ORDERED, ADJUDGED and DECREED that in ae-

cordance with the terms of the Settlement Agreement De-

fendants W. S. Chadwick, Frank P. Horlock, Jr, D. H.

Houston, F, T. Sheets, Jr., Jack Guenther, J. B. Storey,

E. F. Florian, Peter C. Sundt and Robert H. Gow be and

they are hereby dismissed with prejudice from each of these

actions without costs and this Judgment be and it hereby is

in full and final discharge of any and all claim or claims or

cause or causes of action or part or parts thereof, against

any of such Defendants, which are or might be asserted with

respect to the matters alleged in the respective Complaints

in these actions; and it is further

ORDERED, ADJUDGED and DECREED that the

claims made or which could have been made by Plaintitfs

in these actions against Southdown, Inc., for recovery of

money damages and for payment of liquidation preferences

with respect to cumulative convertible preferred stock of

Southdown, Inc., be and they are hereby dismissed with

prejudice,

This is a Final Judgment, despite disposing of fewer

than all the claims and parties herein, the Court having

determined in accordance with Rule 54b, Federal Rules of

Civil Procedure, that there is no just reason for delay and

having expressly directed entry of Judgment.

Dated: July 30th, 1976.

WOODROW SEALS

United States District Judye

18

APPENDIX “B”

In THe

UNITED STATES DISTRICT COURT

For Tue Soutnern Districr or Texas

Houston Division

Civin Action No, 75-H-1048

Ray W. CUMMINGS, ET AL.

v.

Sournpown Inec., ET AL.

FINAL JUDGMENT

An application having been presented to the Court for

leave to settle and compromise portions of the causes of

action in the verified Complaint herein as to some of the

Defendants herein; and notice of such proposed settlement,

together with a copy of the Settlement Agreement, having

been mailed to each stockholder and convertible noteholder

of Southdown, Ine., and an opportunity extended to each

to present to the Court any objection to the proposed settle-

ment, and due deliberation having been had with respect

to the fairness, reasonableness and adequacy of the pro-

posed Settlement Agreement, it is

ORDERED that the Settlement Agreement, a copy of

which is attached to Plaintiffs’ Motion for Approval of

Compromise of Derivative Suit, is approved, save and

except this Court makes no determination and renders no

award as to attorneys’ fees or court costs herein, and that

otherwise the parties thereto be and they hereby are au-

thorized and empowered to settle and compromise the speci-

fied portions of the cause of action and claims set forth

in the Complaint on file herein in accordance with the terms

19

of the Settlement Agreement save and except as qualified

by this Court’s aforesaid non-determination and non-award

as to attorneys’ fees and court costs in this case and it is

further

ORDERED, ADJUDGED and DECREED that in ae-

cordance with the terms of the Settlement Agreement De-

fendants W. S. Chadwick, Frank P. Horlock, Jr., D. H.

Houston, F. T. Sheets, Jr., Jack Guenther and J. B. Storey,

he and they are hereby dismissed with prejudice from this

action without costs and this Judgment be and it hereby

is in full and final discharge of any and all claim or claims

or cause or causes of action or part or parts thereof,

against any of such Defendants, which are or might be

asserted by the Plaintiffs with respect to the matters alleged

in the Complaint in this action.

This is a Final Judgment, despite disposing of fewer

than all the claims and parties herein, the Court having

determined in accordance with Rule 54b, Federal Rules of

Civil Procedure, that there is no just reason for delay

and having expressly directed entry of Judgment.

Dated in Houston, Texas, on this the 7th day of Septem-

her, 1976.

ALLEN B, HANNAY

United States District Judge

20

APPENDIX “O”

StreL.La Darrow, ET AL,

Plaintiffs-A ppellees,

v.

Soutupown, INc,, BT AL,

Defendants,

D. DoyLe Mize anp Ture Apprs Corporation,

Defendants-Appellants,

Carnes |’, SPALDING, ET AL,

Plaintiffs-A ppellees,

Sourupown, INc., ET AL,

Defendants,

D. Doyte Mize anp Tur Appts Corporation,

Defendants-Appellants,

Roy W. CuMMINGS, ET AL,

Plaintiff s-A ppellees,

Soutupown, Inc., A Corporation, ET AL,

Defendants-Appellees,

D. Doyte Mize,

Defendant-A ppellant,

Nos. 76-3782, 76-3915,

Unrrep Sratres Courr or APppEALs,

Fiera Crreurr,

June 15, 1978.

Appeals from the United States District Court for the

Southern Distriet of Texas.

21

Before BROWN, Chief Judge, AINSWORTH and

VANCE, Cireuit Judges.

JOHN R. BROWN, Chief Judge:

We have before us two appeals taken from one settlement

agreement approved by two District Court Judges in par-

tial resolution of three class action-shareholders’ derivative

suits. The defendants-appellants, D. Doyle Mize (Mize),

and his wholly owned company, the Addis Corporation

(Addis), claim that the District Court Judges approved the

settlement agreement without holding the requisite hear-

ings, Without sufficiently evaluating its terms, and without

explaining why it was found “fair and reasonable,” For the

reasons given below, we affirm the judgments of approval

without reaching the merits of these issues,

The cast of characters and the basie plot of this corporate

drama can be briefly described. The appellees are South-

down, Ine., (Southdown), the corporation on whose behalf

the derivative suits were brought and a nominal defendant

in the litigation, the plaintiffs in the three derivative-class

action suits, and those defendants in all three suits who ap-

proved the partial settlement agreement. Appellant D.

Doyle Mize, a defendant in all three cases, was Chairman

and Chief Executive Officer of Southdown until Mareh 1975,

when he beeame Chairman and Chief Executive Officer of

Southdown’s then wholly owned subsidiary, Valhi, Ine,

(Valhi). Mize is the principal target of all three suits, The

gist of the complaints is that Mize engineered several trans-

actions designed to enrich himself and his colleagues at the

expense of Southdown and its stockholders,

The plaintiffs in the Darrow suit included claims on be-

half of a class of Southdown’s preferred shareholders with

their derivative complaint; the plaintiffs in the Spalding

suit linked the derivative claim with a class allegation on

behalf of the holders of Southdown’'s convertible deben-

tures, The suits, consolidated by District Judge Seals, al-

22

leged violations of state and federal law in Southdown’s

March 1975 spin-off of Valhi by a distribution of 100% of

Valhi’s common stock to the common shareholders of South-

down. The suits named Mize and other directors of South-

down and Valhi as the principal defendants; the Darrow

suit also named a defendant class of Southdown’s common

shareholders. The Cwnmings ease, filed before District

Judge Hannay, is also a derivative suit brought by South-

down’s preferred shareholders. These plaintiffs sought to

rescind the transfer of certain assets by Southdown to Valhi

accomplished before the spin-off, and to recover wrongful

profits allegedly made by Mize and other members of the

Southdown Board of Directors from transactions involving

another Southdown subsidiary, the Pelto Oil Company.

In 1976, the plaintiffs and some of the defendants began

negotiations towards a partial compromise and dismissal.

After the notice of the proposed settlement was approved

by the District Judges and sent to the approximately 12,000

security holders of Southdown, three parties objected, in-

eluding Mize.' In July 1976, Judges Seals and Hannay en-

tered final judgments approving the partial settlement

agreement, The agreement dismissed most of the individual

directors named as defendants, dismissed the defendant

class of common shareholders, eliminated certain claims

against Southdown, established a procedure whereby nomi-

nees of the Protective Committee for the Responsible Man-

agement of Southdown would assume full control of the

' One of the objectors, Jean Appleman, who owned 50 shares of

preferred stock, did not press her objection further before the

Distriet Court and we consider it abandoned, The other pro-

testing party, Richard and Leland MeCarthy, adopted Mize’s

objections, The MeCarthy brothers are alleged to have engi-

neered the Southdown-Valhi spin-off with Mize and are also

continuing defendants in the Darrow and Spalding suits. They

do not appeal from the judgment approving the settlement,

7.

corporation, and provided for the reimbursement of plain-

tiffs’ attorneys’ fees, The settlement expressly preserves

the principal claims for equitable and monetary relief

against Mize, his corporation, and those alleged to have

collaborated in the transactions under attack.

Out of the welter of defendants involved in this liti-

gation and the 12,000 stockholders who were notified of

the settlement, Mize and Addis alone appeal from the

judgments approving the settlement. They do so not as

defendants aggrieved by the judgment, but rather as secur-

ity holders of Southdown.’ We hold that on principles akin

to standing, Mize and Addis cannot object to the settle-

ment, and therefore affirm the judgments below,

Mize and Addis claim that the judgments approving

the settlement agreement are tainted by the District Courts’

failure formally to articulate the reasons in support of

its approval; by omissions from the notice sent to share-

holders and discrepancies between the notice and the terms

2 The other major defendants are the MeCarthy brothers. See

note 1, supra,

* Because Mize and Addis remain defendants in the suits, they

cannot appeal the judgments as defendants aggrieved by its

terms, The District Courts’ judgments are not final under 2S

U.S.C, § 1291 as to Mize and Addis, Goldstein vo Andersen &

Co, 5 Cir, 1972, 465 F.2d 972, 973, holds that a partial settle-

ment among some plaintiffs and defendants is final “as to the

rights and liabilities of the settling parties (none of whom

secks to appeal) because it effectively terminates the contro-

versy among them.” As to the parties among whom live con-

troversies remain, such order is nonappealable because it does

not end the litigation by finally determining the rights of those

parties,

Mize or Addis may, of course, appeal from any final judg-

ment rendered in the portions of the suits left open for trial,

However, such an appeal will not involve the validity of the

settlement or the procedures followed in its approval,

24

of the agreement; and by the inclusion in the agreement

of a provision requiring Southdown to reimburse the plain-

tiffs’ attorneys’ fees without a separate hearing on either

the question of imposing the fees or the amount. With the

exception of this final item, the appellants make no specifie

allegations that the substance of the settlement agreement

is oppressive or onerous to Southdown or its shareholders.®

Nor do they now urge that, given the abundant knowledge

of the persons and plots each Judge gathered during the

long pendeney of these and related suits, the Courts below

erred in failing to hold full evidentiary hearings before

approving the settlement. The most likely injury to the

company alleged to result from these defeets, and the harm

which we assume this appeal is meant to forestall, is that

the judgments approving the settlement agreement will not

be res judicata.

We measure Mize’s ability to object to the settle-

ment as a stockholder appealing on behalf of Southdown

Se

'The shareholders were sent a four-page notice describing the

proposed settlement, A copy of the settlement agreement itsell

was attached to the notice and sent as an exhibit.

* Appellants claim that the discrepancies and omissions rendered

the notice misleading in two respects. First, the settlement

agreement stated that in the Darrow case, the representatives

of the defendant class of common shareholders would be dis-

missed as settling defendants, but that new named representa-

tives would be substituted, The notice, written subsequently,

stated that the class itself would be dismissed. The class was

dropped from the suit. Even if some stockholders were con-

fused by the discrepaney, or believed that the class would

remain in the case, the appellants can show no harm to the share-

holders’ interests by the dismissal of the defendant class. All

the principal claims for relief remain alive against the non-

settling defendants,

Second, the notice is allewed to be defective in its silence

on the provision for attorneys’ fees. While this objection is

nore troublesome than that raised above, for the reasons given

below we do not attempt to deeide whether any shareholders

were misled by the alleged omission.

and its shareholders by asking whether he could have

brought a derivative action in the first instance. See, e. g.,

In re Pittsburgh & Lake Erie Rr. Co. Securities and Anti-

trust Litigation, 3 Cir., 1976, 543 F.2d 1058, 1064—68, The

first question is whether Mize is a stockholder of South-

down within the meaning of F.R.Civ.P. 23.1.6 Mize holds

subordinated promissory notes in Southdown, some of

which are convertible into common stock. A debenture-

holder, as a contract creditor of the corporation, has no

ownership interest and therefore no derivative standing.

E.g., Dorfman v. Chemical Bank, S.D.N.Y., 1972, 56 F.R.D.

363, 365. Whether a holder of convertible debentures has

standing to assert claims derivatively is not free from

doubt. See generally 3B Moore’s Federal Practice, { 23.1.17,

at 68-69, and cases cited therein, No Fifth Cireuit case has

directly addressed the question. Assuming, without decid-

® Rule 23.1 provides:

“In a derivative action brought by one or more shareholders

or members to enforce a right of a corporation or of an unin-

corporated association, the corporation or association having

failed to enforce a right which may properly be asserted by it,

the complaint shall be verified and shall allege (1) that the

plaintiff was a shareholder or member at the time of the trans-

action of which he complains or that his share or membership

thereafter devolved on him by operation of law, and (2) that

the action is not a collusive one to confer jurisdiction on a

eourt of the United States which it would not otherwise have.

The complaint shall also allege with partieularity the efforts,

if any, made by the plaintiff to obtain the action he desires

from the directors or comparable authority and, if necessary,

from the shareholders or members, and the reasons for his

failure to obtain the action or for not making the effort. The

derivative action may not be maintained if it appears that the

plaintiff does not fairly and adequately represent the interests

of the shareholders or members similarly situated in enforcing

the right of the corporation or association, The action shall not

be dismissed or compromised without the approval of the court,

and notice of the proposed dismissal or compromise shall be

given to shareholders or members in such manner as the court

directs.”

26

ing, that Mize’s holdings give him sufficient interest in

Southdown to assert claims in its behalf and on behalf of

other shareholders, we still conelude that he and Addis ean-

not properly pursue this appeal.

We hold that the tenuousness of the harm to South-

down that Mize asserts on this appeal, in comparison to

his own exposure to substantial personal liability in the

continuing litigation, requires us to affirm the District

Courts’ approval of the settlement agreement. By this

appeal, Mize attempts to occupy simultaneously the posi-

tion of a defendant sued by the corporation and that of

a shareholder seeking to advance the interest of this cor-

poration, The equitable principles that form the basis for

all stockholders’ derivative suits preclude Mize from assuin-

ing this contorted position, The conflict of interest flowing

from his continuing involvement as a defendant and the

obvious inequity of allowing this appeal further to delay

the partial resolution of this complex litigation are readily

apparent. As shareholders speaking on behalf of South-

down, Mize and Addis ean show no injury suffered by the

corporation by reason of the judgments approving the set-

tlement. They can show great harm to their individual

interests in the necessity of continuing to defend the deriva-

tive claims against them and the possibility that they will

do so unsueeessfully. But this anxiety is wholly removed

from their assumed role as apostles for Southdown,

These equity-based considerations are reinforeed by

more technical terms. Mize and Addis do not meet the re-

quirement of Rule 23.1 that the stockholder-plaintiff in a

derivative suit “fairly and adequately represent the inter-

ests of the shareholders ... similarly situated... .” As

this Court has recently held:

27

While a plaintiff is not necessarily disabled to bring

suit simply because some of his interests extend beyond

that of the class, the court may take into account

outside entanglements that render it likely that the

representative may disregard the interests of the other

class members,

Blum v Morgan Guaranty Trust Co., 5 Cir., 1976, 539 F.2d

1388, 1390.7

Because Mize and Addis cannot properly represent

the corporation or its shareholders and can therefore dem-

onstrate no harm to the corporation resulting from the

alleged defects in the settlement or the procedures by which

it was approved, the judgments approving the settlement

agreement remain unchallenged.

AFFIRMED.

7In Blum, as here, the shareholder's stake in the suit filed on

behalf of the corporation and similarly situated stockholders

was substantially less than his stake in the outside, personal

litigation. Like the District Court Judges who overruled Mize’s

objections to the settlement, we are also aware of Mize’s involve-

ment in other lawsuits based on some of the same transactions

challenged by the Darrow, Spalding, and Cummings suits.

28

APPENDIX “D”

In THE

UNITED STATES COURT OF APPEALS

For Tue Firrxe Crircvit

Nos. 76-3782

76-3915

STELLA Darrow, ET AL,

Plaintiffs-A ppellees,

v.

Soutupown, INec., ET AL,

Defendants,

D. DovLe Mize axnp Tue Appis CorporaTION,

Defendants-Appellants,

Cares F, SpaLpING, ET AL,

Plaintiffs-A ppellees,

v.

Sourupown, INc., ET AL,

Defendants,

D. DoyLe Mize ano Tue Appis CorPoRATION,

Defendants-Appellants,

Roy W. CuMMINGS, ET AL,

Plaintiffs-A ppellees,

v.

Soutupown, Inc., A CorpORATION, ET AL,

Defendants-Appellees,

D. Dovie Mize,

Defendant-Appellant.

APPEAL FROM THE Uwnrrep Srates District Court

FoR THE SoutHerN District or Texas

29

ON PETITION FOR REHEARING

(August 2, 1978)

Before BROWN, Chief Judge, AINSWORTH and

VANCE, Circuit Judges.

PER CURIAM:

IT IS ORDERED that the petition for rehearing filed in

the above entitled and numbered cause be and the same is

hereby DENIED.

ENTERED FOR THE COURT:

JOHN R. BROWN

Chief Judge

APPENDIX “E”

§10-b OF THE 1934 SECURITIES AND

EXCHANGE ACT, 15 U.S.C. § 78}

§ 78}. Manipulative and deceptive devices

It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate

commerce or of the mails, or of any facility of any national

securities exchange —

(b) To use or employ, in connection with the purchase or

sale of any security registered on a national securities ex-

change or any security not so registered, any manipulative

or deceptive device or contrivance in contravention of such

rules and regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for the

protection of investors.

.

30

APPENDIX “F”

§ 27 OF THE 1934 SECURITIES AND

EXCHANGE ACT, 15 U.S.C. § 78aa

§78aa. Jurisdiction of offenses and suits

The district courts of the United States, and the United

States courts of any Territory or other place subject to the

jurisdiction of the United States shall have exclusive juris-

diction of violations of this chapter or the rules and regu-

lations thereunder, and of all suits in equity and actions

at law brought to enforce any liability or duty created by

this chapter or the rules and regulations thereunder, Any

criminal proceeding may be brought in the district wherein

any act or transaction constituting the violation occurred.

Any suit or action to enforce any liability or duty created

by this chapter or rules and regulations thereunder, or to

enjoin any violation of such chapter or rules and regula-

tions, may be brought in any such district or in the district

wherein the defendant is found or is an inhabitant or trans-

acts business, and process in such cases may be served in

any other district of which the defendant is an inhabitant

or wherever the defendant may be found. Judgments and

decrees so rendered shall be subjeet to review as provided

in sections 225 and 347 of Title 28. No costs shall be assessed

for or against the Commission in any proceeding under this

chapter brought by or against it in the Supreme Court or

such other courts.

APPENDIX “G”

SECURITIES AND EXCHANGE COMMISSION

RULE 10b-5, 17 C.F.R. § 240.10b-5

§ 240-10b-5. Employment of manipulative and

deceptive devices.

It shall be unlawful for any person, directly or indirectly,

31

by the use of any means or instrumentality of interstate

commerce, or of the mails or of any facility of any national

securities exchange,

(a) To employ any device, scheme, or artifice to de-

fraud,

(b) To make any untrue statement of a material fact

or to omit to state a material fact necessary in order to

make the statements made, in the light of the circumstances

under which they were made, not misleading, or

(c) To engage in any act, practice, or course of busi-

ness which operates or would operate as a fraud or deceit

upon any person,

in connection with the purchase or sale of any security.

APPENDIX “H”

RULE 23.1, FEDERAL RULES OF CIVIL PROCEDURE

Rule 23.1 Derivative actions by shareholders

In a derivative action brought by one or more share-

holders or members to enforce a right of a corporation or

of an unincorporated association, the corporation or associ-

ation having failed to enforce a right which may properly

be asserted by it, the complaint shall be verified and shall

allege (1) that the plainuff was a shareholder or member

at the time of the transaction of which he complains or that

his share or membership thereafter devolved on him by

operation of law, and (2) that the action is not a collusive

one to confer jurisdiction on a court of the United States

which it would not otherwise have. The complaint shall

also allege with particularity the efforts, if any, made by

the plaintiff to obtain the action he desires from the diree-

tors or comparable authority and, if necessary, from the

shareholders or members, and the reasons for his failure

32

to obtain the action or for not making the effort. The deriva-

tive action may not be maintained if it appears that the

plaintiff does not fairly and adequately represent the inter-

ests of the shareholders or members similarly situated in

enforcing the right of the corporation or association. The

action shall not be dismissed or compromised without the

approval of the court, and notice of the proposed dismissal

or compromise shall be given to shareholders or members

in such manner as the court direets.

Added Feb, 28, 1966, eff, July 1, 1966.

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