Petition — Abbey v. Control Data Corp.

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1979

No.?9=-716

ARTHUR N. ABBEY, on behalf of himself and on behalf of all

shareholders of Control Data Corporation, derivatively,

Petitioner,

VS.

CONTROL DATA CorPORATION, a nominal defendant herein, and

Norbert R. Berg, Thomas G. Kamp, William R. Keye, Robert

M. Price, Robert D. Schmidt, William C. Norris, Marvin G.

Rogers, and the present and former officers and employees of

Control Data Corporation and its subsidiaries who were granted

stock options which have been or may be exercised by them pur-

suant to the Executive Performance and Retention Plan and

Control Data Corporation’s Employees’ NonQualified Stock

Option Plan,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

EIGHTH CIRCUIT

(Signatures Appear on Inside Cover)

St. Louis Law Printing Co., Inc., 411 No. Tenth Street 63101 314-231-4477

a oad

TABLE OF CONTENTS

Opinions Below .........-.. eee e eee eect eee trees

GENE MESH ee oy CAC b ws see ceva vessceceee

GENE MESH Co., L.P.A. —— d

2005 Central Trust Tower Questions Presented ..........-:eeseee rere eee reees

Cincinnati, Ohio 45202 I kv ca aac n cc scseescessccvces

(513) 241-9100

Of Counsel:

FLOYD E. BOLINE

CHESTNUT, BROOKS & BURKARD

900 Midland Bank Building

Minneapolis, Minnesota 55401

JAMES W. SCHLUETER

1553 Cedar Avenue

Cincinnati, Ohio 45224

Attorney for Petitioner

Statement of the Case ........... cece ccc ceccccceees

Reasons for Granting the Writ ...........5-ee eee eee

The Decision Below is in Conflict With and

Inconsistent With the Principles Recently Enun-

ciated in Burks v. Lasker __ U.S. __ , 60 L.Ed. 2d

404, as to the Authority of Independent Corporate

Directors to Discontinue Shareholders’ Litigation .

The Decision Below is in Conflict With and

Inconsistent With the Principles Enunciated By

This Court in J. I. Case Co., v. Borak, 377 U.S.

426, 12 L.Ed. 2 423, 84 S.Ct. 1555, as to the Pre-

emption by Federal Law of Rules Relating to the

Accuracy of Proxy Statements ........---+.++5:

The Decision Below is in Conflict With the

Legislative Policies and Intent of the Act.........

The Court of Appeals Decision Conflicts With

Case Law as Enunciated By Other Circuit Courts

of Appeal and the Eighth Circuit Itself as to the

Federal Pre-emption of Rules Relating to Full

Disclosure in Proxy Statements ..........-+++5+5

Transactional Causation Has Been Pleaded and

is Present By Operation of Law......------++++>

Conclusion

eben ok SA ara ale EAR weer ie ea ee ar oe cites 21

Appendix:

Appendix A: Opinion of Court of Appeals ....... A-l

Appendix B: Memorandum and Order of District

PE Eta prea en packs oa kee ek A-15

Appendix C: Verified Complaint ............... A-22

Appendix D: Letter of Charles Lister to Gene

Mesh and Letter of Gene Mesh to Charles Lister A-31

TABLE OF AUTHORITIES

Cases Cited:

Burks v. Lasker, 60 L.Ed. 2d 404 (May 14, 1979) ...... 10,11

Case v. Borak, 377 U.S. 426, 12 L.Ed. 2d 423, 845

Me BOE iv kb hes as oie e ede cecaetvewe ce 10,12,15,17

In Re Tenneco Securities Litigation, 449 F. Sup. 528

Gs WU WOE 0s ee esrhals Ke buwes db kek ikucn 8,18

Lewis v. Elam, [1977-78 Transfer Binder] Fed. Sec. L.

Rep. (CCH) $96,013 (S.D.N.Y. 1977) ........... 8,18

T.S.C. Industries, Inc. v. Northway, Inc., 426 U.S. 438,

96 S.Ct. 2126, 48 L.Ed. 2d 757 (1976)............ 19

Reserve Life Insurance Co. v. Provident Life Insurance

Co., 499 F.2d 715 (8th Cir. 1974) ............... 16,20

Greater Iowa Corp. v. McLendon, 378 F.2d 783 (8th

RaW uss os en cd BAb eo iphues evden di ade nk 16,17,20

Sola Electric Co. v. Jefferson Electric Co., 317 U.S.

173, 87 L.Ed. 165, 63 S.Ct. 172 (1942)

iil

Statutes and Rules Cited

, IR Ra > |) rr rrre rr eee tee ee 2

ee SS S&S ee er ere er eee eee ere a3

LT Saat | Saar eer ne eee ee ee eee 2

ED , fax edb i sinus ee XA ese esa a eene 4 2

his 7 oh | Gaerne reas Sore a 2,3,4,5,10

ye 2 Oe ee eer ee 2,3,5,10,13,15,17,18

Other Authorities

73 Cong. Rec. 7925 (1935)... 6... eee eee eee eee eee 15

H. R. Rep. No. 1383, 73d Cong., 2d Sess. (1934) ...... 14,15

S. Rep. No. 792, 73d Cong., 2d Sess. (1934)........--. 14,15

Hanna & Turlington, Protection of the Public under the

Securities Exchange Act, 21 Va. L. Rev. 251 (1935) 15

Legislation, Federal Regulation of Securities: Some

Problems of Civil Liability, 43 Harv. L. Rev. 107

|, erence. ewe tire ere ee oe. 15

Tracy & MacChesney, The Securities Exchange Act of

1934, 32 Mich. L. Rev. 1025 (1934)..........-.-: 15

Causation and Liability in Private Actions for Proxy

Violations, Yale Law Journal Vol. 80, pg. 107 at :

PIII a5 ch x canine ce cwecis car cemasesensss

IN THE

Supreme Court of the United States

OCTOBER TERM, 1979

No.

ARTHUR N. ABBEY, on behalf of himself and on behalf of all

shareholders of Control Data Corporation, derivatively,

Petitioner,

VS.

ConTROL DATA CORPORATION, a nominal defendant herein, and

Norbert R. Berg, Thomas G. Kamp, William R. Keye, Robert

M. Price, Robert D. Schmidt, William C. Norris, Marvin G.

Rogers, and the present and former officers and employees of

Control Data Corporation and its subsidiaries who were granted

stock options which have been or may be exercised by them pur-

suant to the Executive Performance and Retention Plan and

Control Data Corporation’s Employees’ NonQualified Stock

Option Plan,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

EIGHTH CIRCUIT

The petitioner, Arthur N. Abbey, et al., prays that a writ of cer-

tiorari issue to review the opinion and judgment of the United

States Court of Appeals for the Eighth Circuit rendered in these

procedings on August 6, 1979.

OPINIONS BELOW

The opinion of this Court of Appeals is reported at CCH

Current Volume, 496,949, p. 95,964, August 6, 1979 and ap-

pears at 603 F.2d 724 (8th Cir. 1979), and also appears at Ap-

pendix A, infra, pp. A-1. The opinion of the United States

District Court appears at 460 F.Supp. 1242 (D.Minn. 1978) and

at Appendix B, infra, pp. A-15.

JURISDICTION

The Court of Appeals opinion affirming the Judgment of the

District Court was filed on August 6, 1979. See Appendix A,

pp. A-1, infra. This petition for certiorari was filed less than 90

days from the date aforesaid. The jurisdiction of this Court is

invoked under 28 U.S.C. §1254 (1).

QUESTIONS PRESENTED

Petitioner Abbey brought this private derivative stockholders

action pursuant to Rule 23.1 of the Federal Rules of Civil Pro-

cedure to compel repayment of civil and criminal penalties

levied on Control Data Corporation (hereinafter CDC) as a

result of guilty pleas to criminal violations of 18 U.S.C. §1343

and 31 U.S.C. §1059, which statutes prohibited fraudulent

transfer of monies to agents of foreign governments for bribes

or other illegal purposes. The amount of penalties levied against

CDC was $1,381,000. Petitioner also sought cancellation of ex-

ecutive stock options (hereinafter the ‘‘plans’’) benefiting the

respondents and approved by CDC stockholders pursuant to

faulty proxy statements containing material misrepresentations

and ommissions issued by CDC during the period of the illegal

payments. Petitioner alleged violation of §14(a) of the Securities

Exchange Act of 1934, (the ‘‘Act’’) 15 U.S.C. §78n(a) and the

rules promulgated [Rule 14 a 9a), 17 C.F.R. §240.14a-9]

thereunder which prohibit, inter alia, corporations and manage-

ment from issuing false and/or misleading proxy statements

while soliciting shareholder votes for any transaction seeking

shareholder approval.

The respondents sought Summary Judgment dismissal of

Petitioner’s claims because of the opinion of an autonomous

‘Special Litigation Committee’ which found that Petitioner’s

lawsuit was not in the best interest of CDC and recommended

that CDC move for Summary Judgment. The Directors of CDC

then exercised their ‘‘Business Judgment’’ pursuant to state law

and decided not to proceed in any fashion against the

respondents, neither on common law counts nor on claims

asserted under the Act. The Summary Judgment Motion was

granted in the District Court without any discovery by Peti-

tioner and affirmed below. The Question Presented relates to

the summary dismissal of the claims as follows:

Does a state rule of law known as the ‘‘Business

Judgment”’ rule relating to the power of a board of direc-

tors of a corporation to operate and manage the business

affairs of a corporation preempt and preclude the right of

a shareholder to maintain a non-frivolous derivative

shareholders’ action pursuant to Rule 23.1 of the Federal

Rules of Civil Procedure under the Federal proxy and

reporting rules and the federal policies and interest thereby

articulated which require full and honest disclosure in

proxy solicitations mandated by Section 14(a) of the Act,

15 U.S.C. Sec. 78n(a) and Rule 14a9(a), 17 C.F.R.

§240.14A-9, promulgated thereunder (set out in pertinent

part after this paragraph), when such shareholders’ action

seeks to void the substantial executive compensation and

benefit plans approved by shareholders pursuant to false

proxy statements which did not disclose criminal acts com-

mitted by the very individuals who approved and issued the

faulty proxy statements and who benefitted from the

faulty solicitation of the shareholders’ votes in favor of

such executive compensation and benefits, thereby causing

both the transaction and the damage sought to be challeng-

ed by the complaining shareholders.

STATUTES INVOLVED

SECURITIES EXCHANGE ACT OF 1934

SECTION 14(a)

15 USC §78n(a)

§78n. Proxies; tender offers

(a) It shall be unlawful for any person, by the use of the mails

or by any means or instrumentality of interstate commerce or of

any facility of a national securities exchange or otherwise, 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, to solicit or to permit the use

of his name to solicit any proxy or consent or authorization in

respect of any security (other than an exempted security)

registered pursuant to section 12 of this title.

ese eee HE

SECURITIES EXCHANGE RULE 14a(9)(a)

17 C.F.R. §240.14a-9

Rule 14a-9(a) False or Misleading Statements.

(a) No solicitation subject to this regulation shall be made by

means of any proxy statement, form of proxy, notice of meeting

or other communication, written or oral, containing any state-

ment which, at the time and in the light of the circumstances

under which it is made, is false or misleading with respect to any

material fact, or which omits to state any material fact necessary

in order to make the statements therein not false or misleading

or necessary to correct any statement in any earlier communica-

tion with respect to the solicitation of a proxy for the same

meeting or subject matter which has become false or misleading.

STATEMENT OF THE CASE

Petitioner filed a derivative action pursuant to Rule 23.1 of

the Federal Rules of Civil Procedure on behalf of all

shareholders of CDC seeking damages and injunctive relief

against seven officers and directors of CDC (Respondents) for

violation of the proxy rules set out in Section 14(a) of the 1934

Securities Exhange Act (Act), the rules promulgated thereunder

[Rule 14a-9(a), 17 C.F.R. §240.14a-9] and for waste of cor-

porate assets. Petitioner alleged in the Complaint that

Respondents, from 1967 to 1976, had violated the proxy re-

quirements of Section 14(a) of the Act (15 U.S.C, Sec. 78n), the

proxy rules promulgated thereunder, prohibiting misleading

statements, [Rule 14a-9, 17 C.F.R. §240.14a-9] and breached

their fiduciary duties to Petitioner in derogation of state law.

(Complaint, pars. 17 to 30, Appendix C. infra, pp. A-25 -

A-29.

The violation of the Act consisted, inter alia, that

Respondents had failed to report in any report, proxy state-

ment, registration statement, or any annual report that the

Company had made illegal payments from 1967 to 1976 to

foreign nations; nevertheless, the defendants benefitted from

their own illegal acts by granting of stock options and benefits,

which benefits and options were sought to be set aside by Peti-

tioner. (Complaint, pages 4-7, App. C, infra, p. ). On April 26,

1978, CDC voluntarily pleaded guilty to various felony charges

under federal law in connection with those illegal payments.

CDC paid fines in excess of 1.3 million dollars in civil and

criminal fraud penalties. (Complaint, page 3, App. C, infra,

p. .) The paragraphs of the Complaint relating to the ‘‘Plans”’

which inter alia Petitioner claims supports transactional causa-

tion of the defendants’ acts and which underly a cause of action

under §14a of the Act are paras. 14-16 20-25, pgs. 3-5, App. C,

infra pp. A-25 - A-29, which state v batim as follows:

14. During the period of November, 1967 to May, 1976,

the defendants had knowledge that such acts violated the

law and that CDC would be exposed to substantial

criminal and civil fraud penalties and fines.

15. The defendants held options to purchase substantial

amounts of shares of CDC’s common stock at exercise

prices far below the presently prevailing market price of

such shares and that the defendants actually exercised cer-

tain stock options at exercise prices which personally pro-

fitted the defendants, all done while having the knowledge

referred to in numerical paragraphs 13 and 14, above.

16. The defendants caused CDC to plead guilty to

certain federal criminal charges arising out of the facts

alleged above and the CDC was fined and has paid

$1,381,000 in criminal and fraud penalties when in fact the

defendants are personally responsible for such fines and

penalties.

see eee

20. As a result of the facts hereinabove alleged, the

individual defendants herein have violated the provisions

of Sections 13(a) and 14(a) of the 1934 Act and the Com-

mission’s rules and regulations promulgated thereunder.

21. During the relevant period, the Board of Directors

of CDC passed a Resolution which they caused to be sub-

mitted for approval to and which thereafter was approved

by the shareholders of CDC at various shareholders

meetings adopting an Executive Performance and Reten-

tion Plan and a 1970 Qualified-Non-Qualified Stock Op-

tion Plan, sometimes referred to herein as the ‘‘Plans’’.

22. Among the major provisions of the Plans were the

following:

(a) Officers and key employees of CDC and its

subsidiaries are eligible to receive options under the

Plan.

(b) The total number of common shares in respect

to which options may be granted shall not exceed

1,446,000 shares.

Option and Executive Compensation Committee of

the Board of Directors.

(d) The price at which an optionee may exercise his

option for the common shares of CDC shall not be

less than the market value of such shares on the date

the option was granted.

23. In connection with several of CDC’s annual

shareholders meetings which sought the shareholders’ ap-

proval of the Plans, those defendants who were then

men.vers of the Board of Directors of CDC, acting in con-

cert with the other defendant-officers and/or employees of

CDC and it subsidiaries, by use of the mails and other in-

strumentalities of interstate commerce, solicited proxies

from the shareholders of CDC pursuant to the Proxy

Statements mailed to them and filed with the Securities and

Exchange Commission. Such Proxy Statements were false

and misleading because they concealed and failed to

disclose material information concerning the willful, im-

proper and illegal misappropriation of corporate funds as

herein set forth and the possible civil and criminal penalties

applicable thereto.

24. The members of the Board of Directors of CDC did

conspire to conceal the illegal and improper conduct as set

forth above in an attempt to maintain the market price of

CDC shares at an artifically inflated level.

25. The approval by the shareholders of CDC of the

Plans was and is null and void and should be set aside.

(Complaint, paras. 14-16, 20-25, pgs. 3-5, App. C,

infra pp. A-25 - A-29.)

Petitioner requested an opportunity to review the same

documents that the ‘‘Special Committee’’, who recommended

the application of the ‘‘Business Judgment’”’ rule, had reviewed.

This request was not answered. (Appendix D, infra, pp. A-29 -

A-33.)

Respondent CDC is a Delaware Corporation having its prin-

cipal place of business in Minnesota. There are no proxy rules

promulgated by the States of Delaware or Minnesota, but only

under the Act.

Respondent’s Motion for Summary Judgment was granted

and Affirmed on the basis of a State Business Judgment Rule,

while the Court below—in disposing of the federal proxy claim

under the Act—misapprehended the law and stated the

following:

But he (Petitioner) has made no showing that the details

of those payments were relevant and material facts which a

reasonably prudent stockholder would have considered in

voting on the questions presented for stockholder ap-

proval.

Court of Appeals, Opinion and Order, p. 16; App. A,

p. A-13.

And:

Several courts have refused to find a federal remedy

under §14(a) for secret, illegal corporate payments. They

have required ‘‘transactional causation’’ as an essential

element of a §14(a) cause of action: the harm to plaintiff-

shareholders must have resulted from the corporate trans-

actions which were authorized as a result of the false or

misleading proxy solicitations. See Jn re Tenneco Securities

Litigation, supra, 449 F.Supp. at 531; Lewis v. Elam,

supra, Fed. Sec. L. Rep. (CCH) at 496, 103. Any injury to

CDC shareholders from the corporation’s illegal foreign

payments stems directly from the corporate waste and

mismanagement involved in authorizing those payments

and not from allegedly misleading proxy solicitations deal-

ing with unrelated corporate business matters.

Court of Appeals, supra, pg. 17, App A, pp. A-13 - A-14.

It must be said that the ‘‘no showing”’ did not result from

petitioner’s temerity, but from the refusal of the District Court

to permit discovery and the lack of ‘‘transactional causation’’

does not comport with this Court’s pronouncements. See post,

pp. 18 to 20. These misapprehensions are treated more fully

hereinafter.

—

REASONS FOR GRANTING THE WRIT

The decision below, permitting a State Business Judgment

Rule to terminate a federally created remedy where there are no

state remedies, directly conflicts with the underlying federal

policy and attendant remedies as pronounced by this Court in

Burks v. Lasker, US , 60 L. Ed 2d 404 (May 14, 1979)

and Case v. Borak, 377 US 426, 12 L.ed 2d 423, 845 S.Ct. 1555,

which policy has totally preempted state law as to remedies for

the abuses of proxy solicitations by management in contraven-

tion of §14(a) of the 1934 Act, 15 U.S.C. §78n, and Rule

14a(9)(a), 17 C.F.R. §240.14a-9, promulgated thereunder. Ad-

ditionally, the decision now being appealed raises issues of

substantial p “blic importance relating to the proper exercise of

corporate suffrage.

THE DECISION BELOW IS IN CONFLICT WITH

AND INCONSISTENT WITH THE PRINCIPLES

RECENTLY ENUNCIATED IN BURKS V.

LASKER, US , 60 L.ED.2D 404. AS TO THE

AUTHORITY OF INDEPENDENT CORPORATE

DIRECTORS TO DISCONTINUE SHAREHOLDERS

LITIGATION.

In Burks, Decided May 14, 1979, this Court held that:

‘ . . . federal courts should apply state law governing the

authority of independent directors to discontinue

derivative suits to the extent such law is consistent with the

policies of the Investment Company and Investment Ad-

visors act... ”’

60 L.Ed2d 417.

However, in Burks, there was an existing body of state law

dealing with the duties of fiduciaries which was compatible with

additional federal law and the policies embodied within the In-

vestment Advisors Act. At bar, there is no body of state law

policies which support or supplement federal policy dealing with

the control and regulation of proxy statements. Shareholders

would be without any remedy were directors permitted to

discontinue this litigation by a majority vote. Such a result

would simply terminate, nullify, and prohibit a federal statute

serving important purposes in today’s securities markets and in

support of corporate suffrage. To permit the decision below to

stand would permit corporate directors as a matter of law to

vitiate a Section 14(a) of the Act claim brought derivatively no

matter how egregious the conduct. Proxy regulation is solely ad-

dressed by the Act, Section 14(a) thereof and Rules pro-

mulgated thereunder, and any state law to the contrary is wholly

inconsistent therewith.

A state rule of law cannot displace or terminate a federal right

under a well articulated and identifiable federal policy when

there are no state remedies covering proxy solicitations available

to the persons seeking relief. This Court in Burks, supra at 60

L.Ed 2d, 413-414, stated:

‘Although ‘‘(a) state statute cannot be considered ‘inconsis-

tent’ with federal law merely because the statute causes the

plaintiff to lose the litigation.’’ Robertson v. Wegmann,

supra, at 593, 56 L.Ed.2d 554, 98 S.Ct. 1991, federal

courts must be ever vigilant to insure that application of

state law poses “‘no significant threat to any identifiable

federal policy or interest ...’’ Wallis v. Pan American

Petroleum Corp., 384 U.S. 63, 68, 16 L.Ed.2d 369, 86

S.Ct. 1301 (1966). See Auto Workers v. Hoosier Corp.,

383 U.S. at 702, 16 L.Ed.2d 192, 86 S.Ct. 1107. Cf. Brown

v. Western R. of Alabama, 338 US 294, 298, 94 L.Ed 100,

70 S.Ct. 105 (1949). And, of course, this means that

‘‘unreasonable Wallis v. Pan-American Petroleum Corp.

supra, at 70, 16 L.Ed2d 369, 86 S.Ct. 1301 or specific aber-

rant or hostile state rules,’’ United States v. Little Lake

Misere Land Co., 412 US 580, 596, 37 L.Ed2d 187, 93

S.Ct. 2389 (1973), will not be applied. See, e.g., Levitt v.

Johnson, 334 F2d 815, 819-820 (CAI, 1964.) The ‘‘con-

sistency’ test guarantees that ‘‘nothing that the state can

do will be allowed to destroy the federal right.’’ Board of

Commissioners v. United States, 308 US, at 350, 84 L.Ed

313, 60 S.Ct. 285, and yet relieves federal courts of the

necessity to fashion an entire body of federal corporate law

out of whole cloth.

Further, in a footnote this Court stated in Burks, supra, 60 L.

Ed 2d, 413:

But as long as private causes of action are available in

federal courts for violation of the federal statutes, this en-

forcement problem is obviated. The real concern,

therefore, is not that state laws be uniform, but rather that

the laws applied in suits brought to enforce federal rights

meet the standards necessary to insure that the ‘‘prohibi-

tion of (the) federal statute... not be set at naught,’’

Sola Electric Co. v. Jefferson Co., 317 US 173, 176, 87

L.Ed 165, 63 S.Ct. 172 (1942). The ‘‘consistency’’ require-

ment described in text guarantees that state laws failing to

meet these standards will be precluded.

THE DECISION BELOW IS IN CONFLICT WITH

AND INCONSISTENT WITH THE PRINCIPLES

ENUNCIATED BY THIS COURT IN J. J. CASE CO V.

BORAK, 377 US 426, 12 L. Ed. 2 423, 84 S.Ct. 1555. AS

TO THE FRE-EMPTION BY FEDERAL LAW OF

RULES RELATING TO THE ACCURACY OF PROXY

STATEMENTS.

This Court in J. J. Case Co. v. Borak, 377 US 426, 12 L.Ed 2d

423, 84 S.Ct. 1555, perhaps the leading case articulating federal

preemption of an area of law which has no counterpart in state

law, held that a claim under §14(a) is a valuable and inalienable

federal right which may be asserted as a private cause of action

in federal courts. The public policy interest is pronounced at 12

L.Ed 2d 427, 428:

The purpose of Sec. 14(a) is to prevent management Or

others from obtaining authorization for corporate action

by means of deceptive or inadequate disclosure in proxy

solicitation. The section stemmed from the congressional

belief that ‘‘(f)air corporate suffrage is an important right

that should attach to every equity security bought on a

public exchange.’’ HR Rep No. 1383, 73rd Cong, 2d Sess,

13. It was intended to ‘‘control the conditions under which

proxies may be solicited with a view to preventing the

recurrence of abuses which . . . (had) frustrated the free

exercise of the voting rights of stockholders.” Id., at 14.

“Too often proxies are solicited without explanation to the

stockholder of the real nature of the questions for which

authority to cast his vote is sought.”’ S. Rep. No. 792, 73rd

Cong, 2d Sess, 12. These broad remedial purposes are

evidenced in the language of the section which makes it

‘unlawful for any person . . . to solicit or to permit the

use of his name to solicit any proxy or consent or

authorization in respect of any security . . . registered on

any national securities exchange 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.’’ While this language makes no

specific reference to a private right of action, among its

chief purposes is ‘‘the protection of investors,’’ which cer-

tainly implies the availability of judicial relief where

necessary to achieve that result.

The injury which a stockholder suffers from corporate

action pursuant to a deceptive proxy solicitation ordinarily

flows from the damage done the corporation, rather than

from the damage inflicted directly upon the stockholder.

The damage suffered results not from the deceit practiced

on him alone, but rather from the deceit practiced on the

stockholders as a group. To hold that derivative actions

are not within the sweep of the section would therefore be

tantamount to a denial of private relief. Private enforce-

ment of the proxy rules provides a necessary supplement to

Commission action.

THE DECISION BELOW IS IN CONFLICT WITH THE

LEGISLATIVE POLICIES AND INTENT OF THE ACT.

The need for truthful proxy statements affect the policy

behind the Act in that corrective actions which could have been

taken were not taken because the shareholders were lulled into

approving transactions improperly set out in the faulty proxies.

At bar, the executive benefits approved by shareholder vote as

late as 1976 are the transactions which suggest self-dealing by

management who hid behind the mask of improper proxy

solicitations. Could any type of transaction be more within the

ambit of the Act and its intented objective of insuring fair cor-

porate suffrage, protecting investors and permitting timely, cor-

rective actions? See H.R. Rep. No 1383, 73d Cong., 2d Sess.

(1934); S. Rep. No. 792, 73d Cong., 2d Sess. (1934). There are

no equivalent debates in the legislatures of Delaware or Min-

nesota or in the legislative history any statute resembling the

Act.

In a nutshell, the policies set out in both the 1933 Securities

Act and the 1934 Securities Exchange Act permitting

shareholders to exercise the full range of their opportunities to

influence corporate decision making can only be secured by

federal enforcement thereof. There are no state counter parts.

The burden of state enforcement, assuming a non-existent state

law re: proxy statements, are exemplified by the recurring re-

quirements of a substantial bond or percentage stock ownership

as a condition of a derivative acticn. These conditions are not

present in a federal action

Yet, we return to the central issue: What is the federal policy

underlying the Act and why is it important to enforce it? After

the stock market crash of 1929, it was clear that there was a

general failure of state regulations of the securities market.

There was a crying need of federal law to prevent misleading or

fraudulent transactions and to give the average shareholder

greater understanding of his investment by insuring fair cor-

porate suffrage as well as assuring this same investor redress

when such suffrage has been adulterated by the lack of

disclosure. See Hanna & Turlington, Protection of the Public

under the Securities Exchange Act, 21 Va. L. Rev. 251 (1935);

Legislation, Federal Regulation of Securities: Some Problems

of Civil Liability, 43 Harv. L. Rev. 107 (1934).

Informed voting based upon the truth produced by accurate

information and full explanations are essential, particularly

when corporate management seeks to benefit themselves. See 73

Cong. Rec. 7925 (1935); Tracy & MacChesney, The Securities

Exchange Act of 1934, 32 Mich. L. Rev. 1025 (1934). Their

policies have been long recognized by this Court. See Mills and

Case, supra.

The Senate Report on the Act noted that ‘‘too often proxies

are solicited without explanation to the stockholder of the real

nature of the questions for which authority to cast his vote is

sought.’’ S. Rep. No. 792, 73d Cong., 2d Sess. (1934). These

rights of fair corporate suffrage should ‘‘attach to every security

bought on a public exchange’’ and should not be applied in-

consistently, depending on the magnitude of loss involved.

H.R. Rep. No. 1383, 73d Cong., 2d Sess. 13 (1934). A fortrair;

when the proxies are used to take votes ‘‘from the stockholders

for their (insiders) own selfish advantages valuable property

rights.’’ H.R. Rep. No. 1383, 73d Cong., 2d Sess. 14 (1934).

The Seventy-Third Congress was prescient as to the instant

litigation.

A further factor is present herein which sustains the right of

plaintiff to assert his 14(a) claims under the Act. As stated

supra, there is no remedy in state law for proxy disclosure viola-

tions. To allow the federal rights to be adjudicated the Peti-

tioner herein must be granted a trial so as to give meaning to the

purposes of the Act, and the ‘‘necessary supplement to Com-

mission action.’’ As this Court in Borak, supra, stated in sup-

porting the federal action:

And if the law of the state happened to attach no respon-

sibility to the use of misleading proxy statements, the

whole purpose of the section might be frustrated.

377 US at 434-435, 84S.Ct. at 1561, 12 L. Ed 2d

at 429.

If the decision of the Eighth Circuit is permitted to be cited as

controlling, hereafter, the basic shareholder rights developed by

this Court in the cited cases and the underlying Congressional

Policies will be for naught. Petitioner respectfully requests the

Court to decide the confliciting issues presented herein.

THE COURT OF APPEALS DECISION CONFLICTS

WITH CASE LAW AS ENUNCIATED BY OTHER CIR-

CUIT COURTS OF APPEALS AND THE EIGHTH CIR-

CUIT ITSELF AS TO THE FEDERAL PRE-EMPTION

OF RULES RELATING TO FULL DISCLOSURE IN

PROXY STATEMENTS.

The Decision below indiscriminately applied the business

judgment rule to a case with facts that the Court clearly did not

understand and to which clearly distinguishable case law was

applied. In dismissing the Petitioner’s Complain, the Court of

Appeals below effectively ended the right of a shareholder to

redress wrongs for which the Act was created, a right which they

had previously upheld.

The Eighth Circuit had previously held that in reference to

§14(a) of the Act:

**“(C)ongress intended to cover the entire field of solicit-

ation for corporate control and all the various solicitation

situations which might arise from time to time, whether

conventional, novel, irregular or unorthodox.’’ Reserve

Life Insurance Co. v. Provident Life Insurance Co., 499

F.2d 715 (8th Cir. 1974), citing Greater Iowa Corporation

v. McLendon 378, F.2d 783, 796 (8th Clr., 1967).

And further, in Greater Iowa, the Eighth Circuit stated:

The purpose of the Section becomes clear, to provide

full and honest disclosure by those who are seeking to

maintain or gain control of a corporation through solicita-

tion of the corporate voting rights of the shareholders.

Corporate suffrage is an important incident of corporate

ownership and is a right deserving of careful protection.

Consequently, standards of conduct have been established

for parties who seek the voting rights of others, and all

contestants for these voting privileges are held to the same

high standard of fair play and open disclosure.

Supra at 795.

The policy expressed by the Eighth Circuit as indicated by this

language is not reflected in the affirmation of the dismissal

below. In conflict with the basic federal policy as enunciated in

Case v. Borak, supra, and its own holdings the Court of Ap-

peals stated that ‘Consequently, we determine that Abbey’s

§14(a) claim is also at best marginally related to the federal

policies underlying that section.’’ Court of Appeals, Decision

and Order, p. 17; App. A, pp. A-13 - A-14. This Decision

blatently conflicts with even that Court’s own case law cited in

supporting the dismissal and fails to define ‘‘marginally’’.

For the proposition that:

Several courts have refused to find a federal remedy

under §14(a) for secret, illegal corporate payments. They

have required ‘‘transactional causation’’ as an essential

element of a §14(a) cause of action: the harm to plaintiff-

shareholders must have resulted from the corporate tran-

sactions which were authorized as a result of the false or

misleading proxy solicitations,

—

the Court of Appeals below cites two cases, neither of which

were Circuit Court decisions and neither of which resembled

their own promulgations: /n re Tenneco Securities Litigation,

449 F.Supp. 528 (S.D.Tex, 1978); and Lewis v. Elam, [1977-78

Transfer Binder] Fed. Sec. L.Rep. (CCH) 496, 013 (S.D.N.Y.,

1977). The factual situations of these cases have little

resemblence to the within facts. In Tenneco the only corporate

transaction involved was the election of directors, 449 F.Supp.

at 531, and further the on/y §14(a) violation alleged was the

failure of the director candidates to include in their proxy

solicitations the statement that they had made the allegedly il-

legal payments, 449 F.Supp., 531. Similarly, in Lewis v. Elam,

the plaintiff did not show ‘‘causation between the alleged proxy

violations and the transaction causing the harm of which plain-

tiff now complains.’’ [1977-78 Transfer Binder] €96, 013, p. 91,

555. There were no allegations of improperly approved ex-

ecutive compensation plans.

TRANSACTIONAL CAUSATION HAS BEEN PLEADED

AND IS PRESENT BY OPERATION OF LAW

Petitioner’s claims as appear in the Complaint, paras. 14-16,

20-25, pgs. 3-5, Appendix C, infra. pp. A-25 - A-29, relate to be

sure, to the fact that the defendants did not disclose material

facts relating to illegal foreign payments but, primarily, the

claims under the Act relate to the fact that those same defen-

dants who solicited shareholder proxies directly benefited from

their misrepresentations since shareholders were not told facts

which a reasonable shareholder would consider important in

considering the merits of approving the executive stock option

plans as requested by Respondents. Petitioner claims that such

approval of the Plans was null and void due to proxy violations

of §14(a) of the Act. Complaint, para. 25; p. 5, App. C, infra.

p. A-27. These issues while formed by the pleadings were not

decided or controlled by the cases cited by the Court of Appeals

below. However, the required ‘‘transaction causation’’ is pre-

sent even though ignored by the Court below.

—

Petitioner has alleged that the transaction sought to be ac-

complished was approved pursuant to solicitation of proxies

from shareholders. The essential link in accomplishing this goal

was the illegal solicitation by proxy of shareholder votes to com-

summate that transaction. Complaint, App. C, pars. 20-25, in-

fra. pp. A-25 - A-27.

What this Court did in Mills was to elimate ‘‘the need for pro-

of of any causal relationship and in effect substitute a presump-

tion of causation in favor of a plaintiff when both a material

misstatement or ommission and the need for non-management

votes had been established. This presumption may be stated as

follows: if the proxy statement contains a ‘material’ defect and

if at least some votes must be obtained from minority

shareholders for a transaction to be approved, then a ‘sufficient

showing’ has been made of a causal relation between the defec-

tive proxy statement and the effected transaction to entitle the

plaintiff to some relief . . . ’? Causation and Liability in Private

Actions for Proxy Violations, Yale Law Journal, Vol. 80, pg.

107 at 110 (1970); Mills, 396 US 385.

There is no question that the materiality test has been met

since this Court has stated that a fact is material if ‘‘there is a

substantial likelihood that a reasonable shareholder would con-

sider it important in deciding how to vote.’’ TSC Industries,

Inc. v. Northway, Inc., 426 US 438 at 449, 96 S.Ct. 2126, 48

L.Ed. 2d 757 (1976). It is doubtful that knowledge of improper

corporate payments would not be material to the average

shareholder, particularly when that shareholder is approving the

issuance of stock options to corporate directors and officers.

The Court of Appeals below, in dismissing Petitioner’s claims

stated that:

Any injury to CDC shareholders from the corporation’s

illegal foreign payments stems directly from the corporate

mismanagement involved in authorizing these payments

and not from allegedly misleading proxy solicitations deal-

ing with unrelated corporate business matters.

Court of Appeals Decision, pg. 17, App. A, pp. 13-14.

The conclusion of the lower Court is not at all what Petitioner

claimed and respresents a complete misunderstanding of a basic

issue set forth in the Complaint. The claim under §14(a) of the

Act deals exclusively with the loss visitied upon shareholders

since Respondents used proxy votes to approve the benefits ac-

corded the respondents out of corporate assets by permitting

them to avail themselves of stock options and bonuses out of

corporate assets.

The Eighth Circuit Court of Appeals seems to have reversed

their earlier decisions in Reserve Life Insurance Co. v. Provi-

dent Life Insurance Co. and Greater Iowa Corp. v. McLendon,

supra. .

If the decision of the Eighth Circuit in this matter is permitted

to be cited as controlling law it will effectively terminate

shareholder proxy rights. Petitioner asserts that the same ra-

tional for supporting the private cause of action in J. J. Case v.

Borak is present here. The Court therein stated:

We therefore, believe that under the circumstances here

it is the duty of the courts to be alert to provide such

remedies as are necessary to make effective the congres-

sional purpose. As was said in Sola Electric Co. v. Jeffer-

son Electric Co., 317 US 173, 176, 87 L.Ed. 165, 168, 63

S.Ct. 172 (1942):

‘*When a federal statute condems an act as unlawful,

the extent and nature of the legal consequences of the

consequences of th condemnation, though left by the

statute to judicial determination, are nevertheless

federal questions, the answers to which are to be

derived from the statute and the federal policy which

it has adopted.”’

id. at 428.

CONCLUSION

For these reasons a writ of certiorari should be issued to

review the judgment and opinion of the United States Court of

Appeals for the Eighth Circuit.

Respectfully submitted,

By GENE MESH

GENE MESH CO, L.P.A.

2005 Central Trust Tower

Cincinnati, Ohio 45202

(513) 241-9100

OF COUNSEL:

FLOYD E. BOLINE

CHESTNUT, BROOKS & BURKARD

900 Midland Bank Building

Minneapolis, Minnesota 55401

JAMES W. SCHLUETER

1553 Cedar Avenue

Cincinnati, Ohio 45224

Attorneys for Petitioner

APPENDIX

— . ee

APPENDIX A

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

No. 79-1058

Arthur N. Abbey, on behalf of

himself and on behalf of all share-

holders of Control Data Corpora-

tion, Derivatively,

Appellant,

wis

Control Data Corporation, a

nominal defendant herein, and Appeal from the

Norbert R. Berg, Thomas G. Kamp, United States

William R. Keye, Robert M. Price, _ District Court for

Robert D. Schmidt, William C. ( the District of

Norris, Marvin G. Rogers, and the Minnesota.

present and former officers and

employees of Control Data Corpora-

tion, and its subsidiaries who were

granted stock options which have

been or may be exercised by them

pursuant to the Executive perfor-

mance and Retention Plan and Con-

trol Data Corporation’s Employees’

Non-Qualified Stock Option Plan, 7

hereinafter called the ‘‘Plans’’,

Appellees.

Submitted: May 18, 1979

Filed: August 6, 1979

Before LAY, BRIGHT and HENLEY, Circuit Judges.

HENLEY, CIRCUIT JUDGE.

Arthur N. Abbey appeals the judgment of the district court!

dismissing his stockholders’ derivative suit against Control Data

Corporation (CDC). Abbey v. Control Data Corp., 460

F.Supp. 1242 (D. Minn. 1978). We affirm.

Abbey brought this class action pursuant to Fed. R. Civ. P.

23.1 to compel seven senior officers and directors of CDC to

repay $1,381,000 in civil and criminal penalties levied on CDC

as a result of the corporation’s guilty plea to criminal charges.

Those charges stemmed from illegal payments admittedly made

by the corporation to certain foreign entities.’ Abbey also

sought the cancellation of several executive stock options ap-

proved by CDC stockholders during the period in which the

payments were made, as well as renumeration for attorneys’

fees he incurred in litigating these claims on behalf of himself

and all other CDC stockholders.

' The United States District Court for the District of Minnesota,

The Honorable Edward J. Devitt, Chief District Judge, presiding.

* CDC management initiated an internal investigation of the illegal

payments in 1976. The corporation voluntarily disclosed its findings

to CDC stockholders through proxy materials and reports filed with

the Securities and Exchange Commission. The Justice Department

subsequently conducted a criminal investigation into CDC’s foreign

business activities and filed charges against it. CDC pleaded guilty to

violating 18 U.S.C. § 1343 and 31 U.S.C. § 1059, and judgment was

entered against it before the United States District Court for the

District of Columbia. United States v. Control Data Corp., Criminal

No. 78-00210 (D. D.C. 1978). No director or officer of CDC was a

named defendant in the criminal action, and the Justice Department

agreed not to disclose publicly the details of CDC’s illegal payments so

as to ensure the safety of CDC employees involved in those payments.

CDC submitted uncontested affidavits to the district court stating that

none of the named defendants here were directly involved in the illegal

payments charged in the criminal action.

—

Abbey asserted that by secretly diverting corporate funds to

make illegal foreign payments, CDC and the named defendants

had violated the federal securities laws and various common law

corporate fiduciary principles which create stockholder

remedies for corporate waste and mismanagement. The

securities law claims charged violations of §§ 13(a) and 14(a) of

the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78(m)

and (n), which prohibit corporations from including false and

misleading statements in proxy solicitations and in registration

documents filed with the Securities and Exchange Commission.

The alleged ‘‘false and misleading statements’’ obviously relate

to CDC’s failure to give its stockholders notice of the foreign

payments in the proxy and registration materials released during

the payment period.

CDC’s board of directors responded to Abbey’s suit by

creating an autonomous ‘‘Special Litigation Committee’’ to in-

vestigate the charges. The committee was composed of seven of

CDC’s ‘‘outside’’ directors—persons holding responsible posi-

tions in government and business. No committee member had

been named as a defendant, and there is no indication that any

member was involved in or had contemporaneous knowledge of

the foreign payments. The committee elected to retain indepen-

dant counsel and conducted a plenary investigation of Abbey’s

charges. The named defendants were interviewed, and Abbey

was invited to present his grievances in detail. He declined this

invitation.

The committee determined that legal action by CDC against

the defendants was not in the best interest of the corporation

because: (1) the defendants had not been directly involved in

the payments, nor had they personally profited from them;

(2) the defendants had fully cooperated with the Justice

Department and the committee; (3) legal action against the

defendants could significantly impair their ability to manage

corporate affairs; (4) the foreign payments were a customary

business practice at the time they were made and were intended

a: as

to serve the business interest of CDC; and (5) disclosure of the

details of the payments might endanger certain CDC employees

and would nullify the Justice Department’s agreement with

CDC to treat the results of its criminal investigation as con-

fidential, see n.2, supra. At the close of its investigation, the

committee directed its counsel to move for summary judgment

of behalf of CDC. The motion was supported by affidavits

detailing the above findings and conclusions. Abbey filed no

opposing affidavits and rested on his pleadings. The district

court entered summary judgment against him.

The district court based its decision on the ‘‘business judg-

ment rule’’ which, in general, vests responsibility for decision-

making in the corporation’s board of directors and precludes

stockholders from disrupting board decisions through

derivative actions where the board has determined the actions

are not in the corporations’s best interests. As the district court

noted, however, an exception applies where the board’s decision

to bar the derivative action is made in bad faith or where the

directors, themselves, are subject to personal liability in the ac-

tion and cannot be expected to determine impartially whether it

is warranted. 460 F.Supp. at 1244, citing United Copper

Securities Co. v. Amalgamated Copper Co., 244 U.S. 261

(1917). The district court did not invoke that exception since

CDC’s independent litigation committee provided the ‘‘unpre-

judiced exercise of judgment’’ contemplated by the business

judgement rule. 244 U.S. at 264.

For reversal, Abbey asserts that the business judgment rule is

inapplicable where the defendant-directors in a derivative suit

are charged with criminal misconduct or violations of the

federal securities laws. The district court rejected this conten-

tion, relying in part on a series of decisions from the Southern

District of New York which appear to hold that the rule applies

to any reasonable, good faith determination by an autonomous

board of directors that the action is not in the best interests of

the corporation 460 F.Supp. at 1245, citing Gall v. Exxon

Corp., 418 F.Supp. 508 (S.D. N.Y. 1976); Bernstein v.

Mediobanca Bancadi Credito, 69 F.R.D. 592 (S.D. N.Y. 1974).

See also Rosengarten v. Int’! Tel. & Tel. Corp., 466 F.Supp. 817

(S.D. N.Y. 1979). As in the case at bar, the district courts in-

Rosengarten and Gall invoked the business judgement rule to

terminate derivative actions brought under the federal securities

laws to recover illegal foreign payments.

Both before the district court and in his appellate brief, Ab-

bey relied heavily on Lasker v. Burks, 567 F.2d 1208 (2d Cir.

1978), in arguing that Rosengarten and Gall were wrongly

decided. In Lasker the Second Circuit restricted the scope of the

business judgment rule by holding that ‘‘disinterested directors

of an investment company do not have the power to foreclose

the continuation of nonfrivolous litigation brought by

shareholders against majority directors for breach of their

fiduciary duties.’’ 567 F.2d at 1212. That decision was based

upon the court’s understanding of the congressional intent and

public policies underlying the federal Investment Company and

Investment Advisors Acts of 1940 and the ‘‘unique nature of the

investment company and its symbiotic relationship with its in-

vestment advisors.’’ 567 F.2d at 1212 n. 14.’

Just prior to oral argument before this court in the present

case, however, the Lasker decision was reversed on appeal by

the Supreme Court. Burks v. Lasker, 99 S.Ct. 1831 (1979). The

Court apparently did not go so far as to hold that corporations

in all circumstances may exercise their good faith, independent

business judgment to terminate derivative actions alleging viola-

The district court distinguished Lasker, reasoning that the public

policies underlying the investment company acts could not properly be

compared to those underlying the securities registration act involved

here. 460 F.Supp. at 1245. Also, the Second Circuit had limited its

decision to derivative actions brought against investment companies

and did not reach ‘‘questions of the exercise of similar power by direc-

tors of other types of corporations.’’ 567 F.2d 1212 n. 14.

= ae

tions of federal law.‘ But it did stress that ‘‘federal courts

should apply state law governing the authority of independent

directors to discontinue derivative suits to the extent such law is

consistent with [the federal statutes involved.]’? 99 S.Ct. at

1841. Thus, federal statutes such as the Investment Company

Act or the Securities and Exchange Act ‘‘do not require that

federal law displace state laws governing the powers of directors

unless the state laws permit action prohibited by the Acts, or

unless ‘their application would be inconsistent with the federal

policy underlying the cause of action.’ ’’ 99 S.Ct. at 1837, citing

Johnson v. Rwy. Express Agency, 421 U.S. 454, 465 (1975).

The Supreme Court’s opinion in Lasker is particularly helpful

here in that it sets forth a two-stage analysis which guides us in

our present task.* We first determine whether state law permit-

ted CDC’s committee of outside directors to terminate Abbey’s

derivative action. And, if so, we then determine whether that

termination impinged upon the federal policies underlying Ab-

bey’s securities law claims. 99 S.Ct. at 1838.

‘The majority opinion in Lasker indicates that federal premption

considerations, such as the strength of the federal policy involved and

the relationship of that policy to the plaintiff’s cause of action, are

controlling factors in determining the extent to which state law may

operate to terminate plaintiff’s federal claims. 99 S.Ct. at 1835-37.

This reading is relected in the concurring opinion of Mr. Justice

Blackmun. 99 S.Ct. at 1841. Justices Stewart and Powell, however,

could not agree with ‘‘implications’’ in the majority opinion that there

was “‘any danger that state law will conflict with federal policy’’; and

they found ‘‘no possible conflict between this generally accepted prin-

ciple of state law [i.e., the business judgment rule] and the federal

Statutes in issue.’’ Consequently, they view the issue on remand in

Lasker as a narrow one: ‘‘whether the state law here applicable

recognizes this generally accepted principle and thereby empowers the

directors to terminate this stockholder suit.’’ 99 S.Ct. at 1842 (Powell,

J., concurring).

‘In addition, Lasker is dispositive of Abbey’s claim that the district

court erred by failing to give notice of the dismissal of the derivative

action to other CDC stockholders. The notice provisions of Fed. R.

Civ. P. 23.1 do not apply to involuntary dismissals of such actions. 99

S.Ct. at 1841 n. 16.

—

The parties agree that since CDC is a Delaware corporation,

we should look to the laws of that state to determine whether

the corporation’s committee of outside directors had the

authority to terminate Abbey’s derivative action. See Beard v.

Elster, 160 A.2d 731, 735 (Del. 1960) (the internal affairs of

Delaware corporations are controlled by the laws of that state).

The procedure followed by CDC’s board of directors in

delegating its decision making authority to that committee was

clearly an attempt to insulate the corporation from shareholder

interference by meeting the requirements of the business judg-

ment rule.* That longstanding rule is found in the common law

of many states, and was early stated by Mr. Justice Brandeis in

United Copper Securities Co. v. Amalgamated Copper Co.,

supra, 244 U.S. at 263-64.

Whether or not a corporation shall seek to enforce in the

courts a cause of action for damages is, like other business

questions, ordinarily a matter of internal management and

is left to the discretion of the directors, in the absence of

instruction by vote of the stockholders. Courts interfere

seldom to control such discretion intra vires the corpora-

tion, except where the directors are guilty of misconduct

equivalent to a breach of trust, or where they stand in a

dual relation which prevents an unprejudiced exercise of

judgment....

*CDC was authorized to establish an independent committee of out-

side directors by 8 Del. C. § 141(c) which provides in pertinent part:

Any such committee, to the extent provided in the resolution of

the board of directors, or in the bylaws of the corporation, shall

have and may exercise all the powers and authority of the board

of directors in the management of the business and affairs of the

corporation, and may authorize the seal of the corporation to be

affixed to all papers which requrie it... .

See Michelson v. Duncan, 386 A.2d 1144, 1155 (Del. Ch. 1978).

See also Polin v. Conductron Corp., 552 F.2d 797, 809 (8th

Cir.), cert. denied, 434 U.S. 857 (1977); Stadin v. Union Electric

Co., 309 F.2d 912 (8th Cir. 1962), cert. denied, 373 U.S. 915

(1963).

The courts of Delaware have often had occasion to apply the

business judgment rule. For example, in Puma v. Marriott, 283

A.2d 693, 695 (Del. Ch. 1971), the plaintiff-shareholder

brought a derivative action challenging the decision of the cor-

poration’s board of outside directors to acquire all of the stock

of six smaller companies owned in part by several of the cor-

poration’s inside directors. Noting that plaintiffs had not charg-

ed bad faith or fraud on the part of the outside directors in ap-

proving this acquisition, the Delaware court dismissed the ac-

tion.

[Since the transaction complained of was accomplished as

a result of the exercise of independent business judgment

of the outside, independent directors whose sole interest

was the furtherance of the corporate enterprise, the court

is precluded from substituting its uninformed opinion for

that of the experienced, independent board members... .

283 A.2d at 696. The Puma decision is consistent with the earlier

pronouncement of the Delaware Supreme Court in Beard v.

Elster, supra, 160 A.2d at 738, where it is stated:

We think the fact that a disinterested Board of Directors

reached [its decision to grant certain stock options] by the

exercise of its business judgment is entitled to the upmost

consideration by the courts in passing upon the results of

that decision. Such has long been the law of this State.

age a

Blish v. Thompson Automatic Arms, 30 Del. ch. 538, 64

A.2d 581.’

Abbey has cited no Delaware cases holding that the ap-

plicability of the business judgement rule hinges on the nature

of the plaintiff-shareholder’s cause of action. And we find no

merit to his argument that the rule is inapplicable where the

defendant-directors are charged with criminal misconduct. As a

matter of Delaware law, we agree with the district court that the

rule apparently applies to any reasonable good faith determina-

tion by an independent board of directors that the derivative ac-

tion is not in the best interests of the corporation. 460 F.Supp.

at 1245. Contrary to Abbey’s assertions, the committee’s deci-

sion not to pursue his claims was not tantamount to a ratifica-

tion by the committee of the underlying criminal acts alleged in

his complaint.

The decision not to bring suit with regard to past conduct

which may have been illegal is not itself a violation of law

and does not result in the continuation of the alleged viola-

tion of law. Rather, it is a decision by the directors of the

corporation that pursuit of a cause of action absed on acts

already consummated is not in the best interest of the cor-

poration. Such a determination, like any other business

decision, must be made by the corporate directors in the

exercise of their sound business judgment. The conclusive

effect of such a judgment cannot be affected by the

allegedly illegal nature of the initial action which pur-

portedly gives rise to the cause of action.

"We are unpersuaded by Abbey’s argument that Mayer v.

Adams, 141 A.2d 458 (Del. 1958), holds to the contrary. That

case did not involve the business judgment rule but dealt with a

question of procedure under the Delaware code. The issue

presented was whether a cause of action for fraud allegedly com-

mitted by a corporation’s board of directors may be maintained

by a minority shareholder without demand upon the corpora-

tions’ stockholders collectively pursuant to rule 23(b) of the

Delaware Courts of Chancery Rules.

— A-10 —

Gall v. Exxon, supra, 418 F.Supp. at 518.

Since we determine that Delaware law authorized CDC’s out-

side directors to terminate Abbey’s derivative action, we turn

now to the question whether termination of the litigation imp-

inged upon the public policies underlying Abbey’s federal

securities law claims. He alleges that CDC violated §§ 13(a) and

14(a) of the 1934 Act by failing to disclose contemporaneously

to its shareholders the illegal foreign payments which it now ad-

mits having made. Section 13(a) requires the issuers of

registered securities to file with the SEC such reports as

are*‘necessary and appropriate for the proper protection of in-

vestors and to insure fair dealing in the security.’’ 15 U.S.C. §

78m. Section 14(a) governs proxy solicitations by the issuers of

registered securities. 15 U.S.C. § 78n. The SEC’s rules and

regulations enacted pursuant to that section prohibit the use of

false and misleading statements in such solicitations. Securities

Exchange Rule 14a(9)(a); 17 C.F.R. § 240.14a-9.

The Section 13(a) Claim.

While § 13(a) requires the issuers of registered securities to file

certain reports with the SEC, it does not expressly confer rights

on private parties not proscribe any conduct as illegal. Thus,

there is a serious question as to whether § 13(a) gives rise to an

implied private cause of action. See Touche Ross & Co. v.

Redington, 47 U.S.L.W. 4732 (U.S. June 18, 1979).* For pre-

‘Several courts have held that §13(a) does not give rise to a private

right to damages for injuries caused by its violation. See Jn re Penn

Central Securities Litigation, 494 F.2d 528, 539-41 (sr. Cir. 1974);

McLaughlin v. Campbell, 410 F.Supp. 1321 (D. Mass. 1976); du Pont

v. Wyly, 61 F.R.D. 615 (D. Del. 1973); Smith v. Murchison, 310

F.Supp. 1079 (S.D. N.Y. 1970) (dictum). Cf. Myers v. American

Leisure Time Enterprises, Inc., 402 F.Supp. 213 (S.D. N.Y. 1975),

aff'd, 538 F.2d 312 (2d Cir. 1976) (no private cause of action under

§13(d) through identical reasoning). The rationale of these decisions is

that the sole private remedy for violations of § 13(a) is afforded by §

18(a) of the Act which creates a private cause of action only in favor

of persons who have purchased or sold securities in reliance on false or

misleading statements contained in § 13 reports. This rationale gains

— A-ll —

sent purposes we may assume without deciding that in some cir-

cumstances such a cause of action exists.” Even so, the extent to

which the § 13(a) reporting provisions provide a federal remedy

for ultra vires corporate actions such as illegal foreign payments

remains uncertain.

In general, the anti-fraud provisions of the federal securities

laws were designed to protect investors engaged in the purchase

and sale of securities by implementing a policy of full

disclosure. SEC v. Capital Gains Bureau, 375 U.S. 180, 186

(1963). Not all instances of corporate fraud or mismanagement

fall within the scope of that protection. Indeed, derivative

causes of action under state law for breach of fiduciary duties

traditionally have provided the principal remedy whereby

stockholders can recover damages on behalf of the corporation

for corporate waste and mismanagement. As we noted in Golub

v. PPD Corp., 576 F.2d 759, 764 (8th Cir. 1978):

[It] was not the purpose of the federal security laws to pro-

vide a federal cause of action for stockholders who have

been damaged by mere corporate mismanagement or

breach of fiduciary duty by those in charge of the affairs of

the corporation. Controversies in those areas have tradi-

tionally been the subject of litigation in the state courts,

and federal legislation in the field of securities regulation

was not designed to draw such controversies into the

federal courts in the absence of diversity of citizenship and

the requisite amount in controversy.

collateral support from the recent Supreme court decision in Touche

Ross & Co. v. Redington, supra, which found no implied private

cause of action under the §17(a) reporting provisions of the 34 Act in

part because of the limited private remedy created by § 18(a)

*The question whether a cause of action exists is not a question of

jurisdiction, and therefore may be assumed without being decided.

Burks v. Lasker, supra, 99 S.Ct. at 1836 n. 5.

— A-12 —

See also Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 474-77

(1977); Cort v. Ash, 422 U.S. 66, 84 (1975); Superintendent of

Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971); St. Louis

Union Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 562 F.2d 1040, 1048 (8th Cir. 1977), cert. denied, 435 U.S.

925 (1978).

We have carefully considered Abbey’s § 13(a) claim and agree

with the district court that it is at best weak. Illegal foreign

payments cases clearly involve state law questions of breach of

fiduciary duties. They should not be dealt with under the

general disclosure provisions of the federal securities laws where

it is apparent, as here, that the nondisclosure of such payments

had little, if any, impact on the plaintiff’s dealings in the cor-

poration’s stock. Several recent cases involving illegal foreign

payments have adopted this rationale in dismissing the

plaintiff’s cause of action for failure to state a claim under §

13(a) or § 14(a). See In re Tenneco Securities Litigation, 449

F.Supp. 528 (S.D. Tex. 1978); Lewis v. Elam [1977-78 Transfer

Binder] Fed.Sec.L.Rep. (CCH) ¢ 96,013 (S.D. N.Y. 1977); Lim-

mer v. Gen Tel. & Elect, Co. [1977-78 Transfer Binder]

Fed.Sec.L.Rep. (CCH) { 96,111 (S.D. N.Y. 1977); Levy v.

Johnson {1976-77 Transfer Binder] Fed.Sec.L.Rep. (CCH) 4

95,899 (S.D. N.Y. 1977).

The weakness of Abbey’s § 13(a) claim obviously under cuts

his argument that the federal policies underlying that section

preclude the decision of the district court to dismiss his com-

plaint. In the words of the district court, ‘‘it seems incongruous

for plaintiff to argue based on the strong underlying public

policy of the 1934 Act when that Act is only marginally ap-

plicable, if applicable at all, to this case.’’ 460 F.Supp. at 1242.

Thus, we determine that Abbey’s § 13(a) claim was properly

dismissed.

— A-13 —

The Section 14(a) Claim.

The purpose of § 14(a) is to ‘‘prevent management or others

from obtaining authorization for corporate action by means of

deceptive or inadequate disclosure in proxy solicitation.’’ J. J.

Case Co. v. Borak, 377 U.S. 426, 431 (1964). And the Supreme

Court has recognized an implied private cause of action under

that section in favor of stockholders who have been injured as a

result of false or misleading proxy solicitations. 377 U.S. at

430-31. Abbey argues that § 14(a) has been violated here

because CDC stockholders would not have voted to elect certain

officers or to grant certain stock options had the fact of the il-

legal foreign payments been disclosed in the proxy solicitations

relative to those decisions. But he has made no showing that the

details of those payments were relevant and material facts which

a reasonably prudent stockholder would have considered in

voting on the questions presented for stockholder approval.

Golub v. PPD Corp., supra 576 F.2d at 764. See also Selk v. St.

Paul Ammonia Products, Inc., 78-1644 (8th Cir. April 27,

1979). The corporation’s uncontroverted affidavits outlining

the results of its internai investigation indicate that none of the

CDC officers or employees who benefitted from the challenged

proxy solicitations were directly involved in the illegal

payments. See n. 2, supra.

Several courts have refused to find a federal remedy under §

14(a) for secret, illegal corporate payments. They have required

‘*transactional causation’’ as an essential element of a § 14(a)

cause of action: the harm to plaintiff-shareholders must have

resulted from the corporate transactions which were authorized

as a result of the false or misleading proxy solicitations. See Jn

re Tenneco Securities Litigation, supra, 449 F.Supp. at 531;

Lewis v. Elam, supra, Fed.Sec.L.Rep. (CCH) at $ 96,013. Any

injury to CDC shareholders from the corporation’s illegal

foreign payments stems directly from the corporate waste and

mismanagement involved in authorizing those payments and

— =

not from allegedly misleading proxy solicitations dealing with

unrelated corporate business matters. Consequently, we deter-

mine that Abbey’s § 14(a) claim is also at best marginally related

to the federal policies underlying that section. The district court

did not err in dismissing his complaint under the business judg-

ment rule.

Affirmed.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH

CIRCUIT.

—A-1$ —

APPENDIX B

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

FOURTH DIVISION

ARTHUR N. ABBEY, on behalf of _)

himself and on behalf of all

shareholders of Control Data

Corporation, derivatively,

Plaintiff, Civ. 4-78-187

‘

vs. ' MEMORANDUM

& ORDER

CONTROL DATA

(Filed Dec. 8, 1978)

CORPORATION, et al

Defendants

Floyd E. Boline, Chestnut, Brooks & Burkard, Minneapolis,

Minnesota, and Gene Mesh, Gene Mesh Co. L.P.A., Cincin-

nati, Ohio, attorneys for plaintiff.

Richard G. Lareau, Oppenheimer, Wolff, Foster, Shepard &

Donnelly, Minneapolis, and Daniel M. Gribbon and Charles

Lister, Covington & Burling, Washington, D. C., attorneys for

defendant Control Data Corporation.

Gerald E. Magnuson, Lindquist & Vennum, Minneapolis, Min-

nesota, attorney for individual defendants.

This shareholders’ derivative action stems from illegal

payments admittedly made by the Control Data Corporation

(CDC) to foreign governments during the period of 1967 to

1976. On April 26, 1978, CDC pled guilty to criminal charges

brought by the United States as a result of the illegal payments,

and $1,381,000.00 in criminal and civil penalties were levied

— A-16 —

against, and paid by, CDC. No individual directors or

employees of CDC were charged in the criminal action. This ac-

tion was commenced on May 4, 1978, and it seeks to compel

seven directors of CDC to repay the amounts of the penalties to

CDC. Cancellation of certain executive stock option plans ap-

proved by CDC stockholders during the period of the illegal

payments also is sought. Plaintiff’s claims are based on alleged

violations of Sections 13(a) and 14(a) of the Securiuties Ex-

change Act of 1934 and common law corporate fiduciary prin-

ciples. A ‘‘Special Litigation Committee’’ of the CDC Board of

Directors has determined that this action is not in the best in-

terests of CDC; relying on this determination, CDC and the

seven individual defendants now move for summary judgment.

That motion is granted.

The motion for summary judgment is based on the so-called

‘‘Business Judgment Rule.’’ This rule stands for the basic pro-

position that most important corporate decisions are to be made

by the corporation’s board of directors, and a shareholder,

through a court action, normally cannot disrupt those deci-

sions. When applied to derivative actions, the business judg-

ment rule operates to bar a shareholder action on behalf of the

corporation when the board of directors determines that the ac-

tion is not in the corporation’s best interests. The rationale

underlying the rule is obvious and sound; management of the

corporation is vested in the board of directors, and shareholders

who disagree with board decisions normally must seek change

through the intracorporate structure, not through the courts.

An exception to the rule applies, however, where the board’s

decision to bar the derivative action is made in bad faith, or

where the board stands ‘‘in a dual relation which prevents an

unprejudiced exercise of judgment.’’ United Copper Securities

Co. v. Amalgamated Copper Co., 244 U.S. 261, 264 (1917) (J.

Brandeis). Accord, e.g., Stadin v. Union Electric Co., 309 F. 2d

912, 921 (8th Cir. 1962), cert. denied 373 U.S. 915 (1963). Such

a dual relation, of course, exists in a case, such as the present

— A-17 —

one, where the defendants being sued in the derivative action

also are directors of the corporation. In that situation the direc-

tors, who as defendants are subject to personal liability, cannot

be expected to determine impartially whether the derivative ac-

tion against them is in the best interests of the corporation.

Therefore, the business judgment rule normally does not bar a

derivative action when the directors are defendants in the

action.

CDC claims this exception to the business judgment rule does

not apply to the present case. After plaintiff filed this suit, the

board of directors of CDC appointed a ‘‘Special Litigation

Committee’ from among its members. The four directors on

that committee are not defendants in this suit and they were

delegated full and unconditional authority to determine whether

plaintiff’s derivative action is in the best interests of CDC. With

the assistance of counsel otherwise unaffiliated with CDC, the

committee conducted an extensive investigation and determined

that the suit was not in CDC’s best interests. This decision was

based on the following considerations: none of the defendant

directors had personal knowledge that the foreign payments

were illegal; none of the defendant directors personally profited

from those payments; the payments were intended to serve

CDC’s business interests; the litigation would seriously disrupt

the effectiveness of a highly successful senior management

team, to CDC’s detriment; full public disclosure of the details

of the foreign payments might prejudice CDC’s present and

future business activities and possibly even endanger the lives of

some CDC employees; the defendant directors fully cooperated

with the committee’s investigation and with the investigations of

the United States; and the United States, following its investiga-

tions, elected not to bring criminal or civil charges against the

defendant directors. Based on these findings the committee

directed CDC counsel to take the necessary steps to obtain

dismissal of this case.

— A-18 —

The issue on this motion therefore is whether the Special

Litigation Committee’s determination as to the best interests of

CDC is sufficient under the business judgment rule to bar plain-

uff’s derivative action. Plaintiff does not contest the good faith

of the committee’s determination or the committee’s in-

dependence from the defendant directors. Indeed, at oral argu-

ment counsel for plaintiff recognized that, given the impeccable

credentials of the committee members and the thoroughness of

their investigation, it would be impossible to establish bad faith

or lack of independence on the part of the committee. Instead,

plaintiff asserts, first, that the public policy underlying the

Securities Exchange Act of 1934 requires that the business judg-

ment rule not apply and, second, that the business judgment

rule is inapplicable when defendant directors are accused of

fraudulent or criminal conduct.

Plaintiff’s first argument, that the public policy underlying

the 1934 Act precludes application of the business judgment

rule, must be rejected. Initially, the court notes that plaintiff’s

claims under Sections 13(a) and 14(a) of the 1934 Act are at best

weak. Several cases of recent origin have dismissed similar il-

legal foreign payments cases for failure to state a claim under

Sections 13(a) and 14(a). See In re Tenneco Securities Litiga-

tion, 449 F. Supp. 528 (S.D. Tex. 1978); Lewis v. Elam,

(1977-1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) € 96,013

(S.D.N.Y. 1977); Levy v. Johnson, [1976-1977 Transfer Binder]

Fed. Sec. L. Rep. (CCH) ¢ 95,899 (S.D.N.Y. 1977); Limmer y.

General Tel. & Elec. Corp., [1977-1978 Transfer Binder] Fed.

Sec L. Rep. (CCH) 4 96,111 (S.D.N.Y. 1977). These cases have

made the valid point that foreign payments cases such as the

present one involve primarily questions of corporate waste and

mismanagement, questions properly dealt with under state law,

not federal securities law. See alsu Sante Fe Industries, Inc. v.

Green, 97 S. Ct. 1292 (1977) (federal securities laws are not

meant to federalize the law of corporations). Thus, it seems in-

congruous for plaintiff to argue based on the strong underlying

public policy of the 1934 Act when that Act is only marginally

applicable, if applicable at all, to this case.

— A-19 —

A second consideration with respect to plaintiff’s first argu-

ment is Eighth Circuit law. The Eighth Circuit has held the

business judgment rule applicable to cases under the federal an-

titrust laws. See Stadin v. Union Electric Co., 309 F.2d 912,

921-22 (8th Circ. 1962), cert denied, 373 U.S. 915 (1963); Cosen-

tino v. Carver-Greenfield Corp., 433 F.2d 1274, 1277 (8th Cir.

1970). Since the public policies underlying the civil liability pro-

visions of the antitrust laws are at least as strong as those

underlying the 1934 Act, this court must assume that the Eighth

Circuit would apply the business judgment rule to 1934 Act

cases as it does to antitrust suits.

Finally, plaintiff has cited no authority, and this court has

found none, for the proposition that the business judgment rule

is not applicable to 1934 Act derivative cases. The one case

relied heavily upon by plaintiff, Lasker v. Burks, 567 F.2d 1208

(2d Cir.), cert. granted, 47 U.S.L.W. 3191 (Oct. 2, 1978), is in-

apposite. That case was a derivative action by a mutual fund

shareholder against the fund’s investment adviser and inside

directors for mismanagement of the fund which resulted in

significant losses to the fund. As in the present case, a special

committee of nondefendant outside directors was appointed by

the board of directors and that committee determined that the

derivative action was not in the fund’s best interest. The Second

Circuit held that this determination did not bar the derivative

action, irrespective of the good faith of the committee. Lasker,

however, dealt with the Investment Company and Investment

Advisors Acts of 1940 and the court’s holding was specifically

limited to cases arising under those Acts. 567 F.2d at 1212 n. 14.

Although it expressed some skepticism as to the ability of such a

committee to make an unbiased and objective decision, the

court was concerned primarily with the ‘‘unique nature of the

investment company and its symbiotic relationship with its in-

vestment adviser.’’ /d. The Lasker court found a strong con-

gressional intent under the 1940 Acts to protect mutual fund in-

vestors and the public from abuses inherent in the mutual fund

industry, an intent that would be frustrated if disinterested

— A-20 —

directors through the business judgment rule could bar

derivative actions against the mutual fund’s majority directors

and investment adviser. The concern of the Lasker court cannot

be carried over to the present case, since the public policy and

congressional intent underlying the 1940 Acts cannot properly

be compared with that underlying the 1934 Act. The 1940 Acts

are detailed regulatory statutes; they differ fundamentally in

purpose and design from the disclosure-oriented 1934 Act. See

generally Motley, Jackson & Barnard, Federal Regulation of In-

vestment Companies Since 1940, 63 Harv. L. Rev. 1134 (1950).

Therefore this court finds plaintiff’s relaince on the Lasker case

to be misplaced.

Plaintiff’s second argument is that the alleged conduct of the

defendant directors was criminal, or at least fraudulent, and

cannot be ratified by CDC or the Special Litigation Committee.

Plaintiff appears to be correct that a corporation is powerless to

ratify criminal acts of its agents. However, a decision by a cor-

poration not to sue an agent who has allegedly committed

criminal acts against the corporation does not constitute

ratification of those acts. The business judgment rule applies to

any reasonable, good faith determination by an independent

board that the derivative action is not in the best interests of the

corporation. See, eg., Gall v. Exxon Corp., 418 F. Supp. 508

(S.D.N.Y. 1976); Bernstein v. Mediobanca Bancadi Credito, 69

F.R.D. 592 (S.D.N.Y. 1974). A board of directors, as in the

present case, may have sound reasons for believing the lawsuit is

not in the corporation’s best interests, even if the corporation

has a valid cause of action even if the alleged misconduct of the

defendants was criminal or fraudulent. See Gal/ v. Exxon,

supra, at 516-18. As Mr. Justice Brandeis once observed:

Mere belief that corporate action, taken or contemplated,

is illegal gives the shareholder no greater right to interfere

than is possessed by any other citizen. Stockholders are not

guardians of the public. The function of guarding the

public against acts deemed illegal rests with public of-

ficials.

— A-21 —

Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 343

(1936) (concurring). Plaintiff’s second argument therefore must

fail.

The court wishes to emphasize that the independence and

good faith of the Special Litigation Committee are not at issue;

plaintiff concedes that the Committee reached its decision in

good faith and independent of any pressures and influence from

the defendant directors. The concern expressed by the Second

Circuit in Lasker, that such a committee would not ‘‘view with

the necessary objectivity the actions of their colleagues in a

situation where an adverse decision would be likely to result in

considerable expense and liability for the individuals

concerned,’’ 567 F.2d at 1212, therefore is not present here.

Defendant’s motion for summary judgment is GRANTED.

Dated: December 7, 1978.

/s/ EDWARD J. DEVITT,

Chief Judge

United States District Court

— A-22 —

APPENDIX C

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

ARTHUR N. ABBEY, on behalf of } VERIFIED

himself and on behalf of all share- ' COMPLAINT

holders of Control Data Corporation,

Derivatively,

Plaintiff,

- against - Plaintiff Demands

Trial By Jury

CONTROL DATA CORPORA-

TION, a nominal defendant herein,

and Norbert R. Berg, Thomas G.

Kamp, Willim R. Keye, Robert M.

Price, Robert D. Schmidt, William C.

Norris, Marvin G. Rogers, and the

present and former officers and

employees of Control Data Corpora-

tion, and its subsidiaries who were

granted stock options which have

been or may be exercised by them pur-

Suant to the Executive Performance

and Retention Plan and Control Data

Corporation’s Employees’ Non-

Qualified Stock Option Plan,

hereinafter called the ‘‘Plans’’,

-_- -—-—~

Defendants

Plaintiff, by his attorneys, GENE MESH CO., L.P.A., com-

plaining of the defendants, alleges upon information and belief

as to all allegations of the Complaint except for paragraphs 6

and 8 hereof, as follows:

— A-23 —

1. Jurisdiction of this action is conferred upon this court and

arises under the provisions of Section 27 of the Securities Ex-

change Act of 1934, (hereinafter ‘‘The 1934 Act’’), U. S.C.,

Sects. 78aa, diversity of citizenship, 28 U.S.C., Sect. 1332(a),

and the principles of pendent jurisdiction.

2. This action is not a collusive one to confer jurisdiction of a

cause upon a Court of the United States of which it would not

otherwise have cognizance.

3. The sum or amount in controversy, exclusive of interest

and costs, exceeds $10,000.

4. This action arises and is predicated upon the defendants’

violations of the provisions of Sections 13(a) and 14(a) of the

1934 Act and the Commission’s rules and regulations pro-

mulgated thereunder, and upon the defendants’ violations of

common law principles.

5. A substantial part of the acts and transactions complained

of herein occurred within the territorial limits of the District of

Minnesota.

6. Plaintiff is a citizen and resident of the State of New York.

7. Each of the defendants is a citizen and resident of a State

other than the State of New York.

8. Plaintiff is the owner of 75 common shares of the defen-

dant, Control Data Corporation (hereinafter referred to as

**CDC’’), and brings this action derivatively on behalf and in

the right of CDC. Plaintiff has owned CDC common stock

since 1964, and was a stockholder of CDC at the times of the

acts complained of herein.

9. At all times hereinafter mentioned, the defendant, CDC

was and still is a corporation organized and existing under the

laws of the State of Delaware having its principal place of

business in Minneapolis, Minnesota.

—

10. At the relevant times hereinafter mentioned the following

defendants were or still are directors and officers of CDC dur-

ing the periods stated and hold or have held the positions set

forth, as follows:

Norbert R. Berg, Director and Senior Vice President

Thomas G. Kamp, President, Peripheral Products

and a Director

William R. Keye, Director and Vice Chairman of the

Board

Robert M. Price, President, Computer Group

and a Director

Robert D. Schmidt, Executive Vice President

and a Director

William C. Norris, Director, Chairman of the Board and

Chief Executive Officer

Marvin G. Rogers, Senior Vice President

11. The defendants, present and former officers and

employees of CDC and its subsidiaries, were granted stock op-

tions which have been or may be exercised by them pursuant to

the Plans.

12. At all times hereinafter mentioned to the present time,

the common shares of CDC were duly registered with, listed and

traded upon the New York Stock Exchange and various other

national securities Exchanges, and were not exempted securities.

13. During the period between in or about November, 1967

and May, 1976 the defendants, acting in derogation of their

fiduciary duties, did unjustly and illegally obtain and willfully

and intentionally permitted the diversion of co;porate funds

from CDC in order to bribe officials of foreign governments for

no proper corporate purpose through devious, improper and il-

legal methods and did transmit such funds to a certain foreign

nation by means which violated both domestic and foreign law;

that the defendants did falsify the books and records of CDC

and certain subsidiary corporations of CDC for the purpose of

— A-25 —

disguising and concealing the true purpose of such payments;

that the approximate amount of such monies improperly ex-

pended total $380,000.

14. During the period of November, 1967 to May, 1976 the

defendants had knowledge that such acts violated the law and

that CDC would be exposed to substantial criminal and civil

fraud penalties and fines.

15. The defendants held options to purchase substantial

amounts of shares of CDC’s common stock at exercise prices

far below the presently prevailing market price of such shares

and that the defendants actually exercised certain options at ex-

ercise prices which personally profited the defendants, all done

while having the knowledge referred to in numerical paragraphs

13 and 14 above.

16. The defendants caused CDC to plead guilty to certain

federal criminal charges arising out of the facts alleged above

and that CDC was fined and has paid $1,381,000 in criminal

and fraud penalties when in fact the defendants are personally

responsible for such fines and penalties.

AS AND FOR A FIRST CLAIM FOR RELIEF

17. Plaintiff repeats, reiterates and realleges each and every

allegation contained in paragraphs numbered ‘‘1’’ through

‘**16’’ herein with the same force and effect as though such

allegations were fully and at length set forth herein.

18. During the period from 1967 through on or about 1976, by

the use of the mails and other instrumentalities of interstate

commerce the defendant-directors of CDC, acting in concert

with the other directors and officers of CDC, caused CDC to

conceal such secret, unauthorized and illegal payments from its

shareholders by failing to disclose such information in any

Report, Proxy Statement, Registration Statement, Annual

Report or other document which CDC was required to file with

— A-26 —

the Securities and Exchange Commission under the provisions

of Sections 13(a) and 14(a) of the 1934 Act and the

Commission’s rules and regulations promulgated thereunder.

19. Such illegal payments constituted a waste and spoilation

of CDC’s assets.

20. As a result of the facts hereinabove alleged, the in-

dividual defendants herein have violated the provisions of Sec-

tions 13(a) and 14(a) of the 1934 Act and the Commission’s

rules and regulations promulgated thereunder.

21. During the relevant period, the Board of Directors of

CDC passed a Resolution which they caused to be submitted for

approval to and which thereafter was approved by the

shareholders of CDC at various shareholders meetings adopting

an Executive Performance and Retention Plan and a 1970

Qualified-Non-Qualified Stock Option Plan, sometimes refer-

red to herein as the ‘‘Plans’’.

22. Among the major provisions of the Plans were the

following:

(a) Officers and key employees of CDC and its subsidiaries

are eligible to receive options under the Plan.

(b) The total number of common shares in respect to which

options may be granted shall not exceed 1,446,000 shares;

Executive Compensation Committee of the Board of Directors.

(d) The price at which an optionee may exercise his option

for the common shares of CDC shall not be less than the market

value of such shares on the date the option was granted;

23. In connection with several of CDC’s annual shareholders

meetings which sought the shareholders’ approval of the Plans,

those defendants who were then members of the Board of

Directors of CDC, acting in concert with the other defendant-

officers and/or employees of CDC and its subsidiaries, by use

of the mails and other instrumentalities of interstate commerce,

solicited proxies from the shareholders of CDC pursuant to the

Proxy Statements mailed to them and filed with the Securities

and Exchange Commission. Sucy Proxy Statements were false

and misleading because they concealed and failed to disclose

material information concerning the willful, improper and il-

legal misappropriation of corporate funds as herein set forth

and the possible civil and criminal penalties applicable thereto.

24. The members of the Board of Directors of CDC did con-

spire to conceal the illegal and improper conduct as set forth

above in an attempt to maintain the market price of CDC shares

at an artificially inflated level.

25. The approval by the shareholders of CDC of the Plans

was and is null and void and should be set aside.

26. Plaintiff has no adequate remedy at law.

27. Plaintiff has made no demand upon the Board of Direc-

tors of CDC to bring this action because such demand would

have constituted a useless and futile gesture, and is, therefore,

unnecessary for the following reasons:

(a) All of the members of the Board of Directors of CDC

have participated in the wrongs herein alleged and have approv-

ed and acquiesed thereto and are personally liable for the

damages sustained thereby. Any demand upon the Board of

Directors would in effect have required its members to sue

themselves. Moreover, even were the Board of Directors to file

such suit, its prosecuition would be in hostile hands and could

not be expected to be prosecuted diligently.

(b) The members of the Board have caused or ratified the

acts complained of and have had knowledge of such acts but

have taken no action to recover the damages which CDC sus-

tained thereby.

28. Plaintiff has made no demand upon the shareholders of

CDC to bring this action because such demand is unnecessary

and would be futile for the following reasons:

(a) The acts complained of herein are in violation of the

Statute, rules and regulations set forth in paragraph numbered

‘‘4”’ herein and constituted a waste of CDC’s assets which its

shareholders could not legally approve or ratify.

(b) Under the laws of Delaware and the Certificate of Incor-

poration of CDC, the management of its affairs, including any

decisions to bring law suits, is entrusted to the Board of Direc-

tors and not to the shareholders.

throughout the United States and foreign countries, and the ex-

pense in contacting them would place an unconscionable finan-

cial burden on the plaintiff.

AS AND FOR A SECOND CLAIM FOR RELIEF

29. Plaintiff repeats, reiterates and realleges each and every

allegation contained in paragraphs numbered ‘‘1’’ through

‘*28’’ herein with the same force and effect as though such

allegations were fully and at length set forth herein.

30. That as a result of the facts hereinabove alleged the

defendant directors of CDC have breached their fiduciary duties

and have illegally wasted its assets in an amount which can only

be ascertained through this action, such amount not less than

the $1,381,000 paid by CDC in criminal and civil fraud penalties

and fines plus $381,000 in corporate funds spent for improper

purposes and attorneys fees and other costs in relation thereto.

The Amount of which is presently unknown to plaintiff.

WHEREFORE, Plaintiff demands judgment against the

defendants, as follows:

— A-29 —

(a) That CDC’s Plans, approved by its shareholders at

various annual meetings be declared null and void, and that all

transactions effected and options granted thereunder to the in-

dividual defendants pursuant to such Plan be rescinded.

(b) That the individual defendants account to CDC for all

losses and damages sustained by CDC in an amount not less

than $1,381,000 and $381,000 in corporate funds improperly

spent as well as any attorneys fees or other costs in relation

thereto, and for all profits and benefits improperly or illegally

realized by them from the acts and transactions alleged in the

complaint.

this action, including reasonable attorneys’ and accountants’

fees.

(d) That plaintiff have such other, further and different relief

as the Court may deem proper.

GENE MESH CO., L.P.A.

/s/ By Gene Mesh

2005 Central Trust Tower

Cincinnati, Ohio 45202

(513) 241-9100

Attorney for Plaintiff

OF COUNSEL:

Chestnut, Brooks and

Burkard, P.A.

900 Midland Bldg.

Minneapolis, Minn.

55401

— A-30 —

STATE OF OHIO

SS.

COUNTY OF HAMILTON

ARTHUR ABBEY, being duly sworn, deposes and Says:

That deponent is the plaintiff in the within action and has

read the foregoing complaint and knows the contents thereof;

that the same is true to deponent’s knowledge, except as to the

matters therein stated to be alleged on information and belief,

and that as to those matters deponent believes it to be true.

/s/

Arthur Abbey

Sworn to before me this 2 day of May 1978.

/s/

Notary Public

GENE I. MESH,

Attorney at Law

Notary Public, State of Ohio

My commission has no

expiration date.

Section 147.03 R.O.

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APPENDIX D

COVINGTON & BURLING

888 Sixteenth Street, N.W.

Washington, D.C. 20006

July 7, 1978

Gene Mesh, Esquire

Gene Mesh Co., L.P.A.

2005 Central Trust Tower

Cincinnati, Ohio 45202

Re: Abbey v. Control Data Corporation

et al., 4-78 Civ. 187 (D.Minn.)

Dear Mr. Mesh:

As you are undoubtedly aware, the Board of Directors of

Control Data Corporation has created a Special Litigation

Committee of independent outside directors, to which the

Board has delegated all of its power and authority to consider

what course of action should be adopted on behalf of the Cor-

poration with respect to the above-referenced action. None of

the members of the Committee is a defendant in the action. This

firm has been retained by the Committee as its special counsel.

The Committee has instructed me to write to you, as counsel

for the plaintiff, to invite you and/or your client to appear at a

meeting of the Committee in the offices of Control Data in Min-

neapolis at 9 a.m. on July 31, 1978. The Committee invites you

and/or your client to present to the Committee at that time any

information, views, considerations or factors which you or your

client believe should be taken into account by the Committee in

performing its responsibilities. Alternatively, if you prefer I am

prepared to meet with you and/or your client at a mutually con-

venient time and location prior to July 31 to receive on behalf of

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the Committee any such information, views, considerations or

factors. If you prefer this alternative, I will report to the Com-

mittee whatever you or your client may communicate to me at

its meeting on July 31.

Please advise me of your decision with respect to the Commit-

tee’s invitation at your earliest convenience.

Sincerely,

/s/ CHARLES LISTER

CL/s

cc: Messrs. Chestnut, Brooks and Burkard, P.A.

July 12, 1978

Charles Lister, Esq.

Covington & Burling

888 Sixteenth St., N.W.

Washington, D. C. 20006

Re: Abbey v. Control Data Corporation, et al.,

No. 4-78 Civ. 187 (D. Minn.)

Dear Mr. Lister:

Thank you for your letter of July 7 in regard to the above

matter. I find that it would be difficult to be constructive in

regard to a meeting of the Special Litigation Committee without

having our discovery demands to date fully met by the defen-

dants. As you know, this has not occurred and extensions have

been granted by plaintiff at your suggestion which carry us into

late August or September. It seems to me you would be asking

plaintiff’s counsel to make suggestions based upon inadequate

facts, whereas the defendants and the Special Litigation Com-

mittee has complete control and knowledge of what facts are to

——

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be known. Perhaps you can advise me promptly as to whether

or not the writer will have an opportunity to review all data

reviewed by the special litigation committee prior to the meeting

to be held on July 31. If so, I will be happy to accept your invita-

tion to either attend the meeting or meet with you prior thereto.

If not, I suggest postponement of such meeting.

Very truly yours,

GENE MESH CoO., L.P.A.

By GENE MESH

GM/ck

cc: Floyd Boline, Esq.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.