Appendix — Epstein v. Matsushita Electric Industrial Co.

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No. 99-417

IN THE

Supreme Court of the United States

LAWRENCE EPSTEIN, et al.,

Petitioners,

MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD.

and MATSUSHITA HOLDING CORPORATION,

Respondents.

On PETITION FOR A WRit OF CERTIORARI TO THE

Unirep STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

APPENDIX

BARRY R. OSTRAGER

Counsel of Record

Mary Kay VySskoclil

PauL C. CURNIN

JosepH M. MCLAUGHLIN

SIMPSON THACHER & BARTLETT

Attorneys for Respondents

425 Lexington Avenue

New York, New York 10017-3954

(212) 455-2000

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FORMERLY LUTZ APPELLATE SERVICES

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TABLE OF APPENDICES

Appendix A — Opinion Of The Supreme Court Of

The United States Dated And Decided February

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Appendix B — Order And Final Judgment Of The

Court Of Chancery Of The State Of Delaware In

And For New Castle County Dated February 22,

1993 And Filed February 23, 1993 ...........

Appendix C — Excerpts From Transcript Of

Argument On Plaintiffs’ Application For

Approval Of A Settlement And Attorneys’ Fees

Of The Court Of Chancery Of The State Of

Delaware In And For New Castle County Dated

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Appendix D — Amended Stockholders’ Class

Action Complaint Dated And Filed December 14,

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APPENDIX A — OPINION OF THE SUPREME

COURT OF THE UNITED STATES DATED AND

DECIDED FEBRUARY 27, 1996

MATSUSHITA ELECTRIC INDUSTRIAL

CO., LTD., et al., Petitioners,

Lawrence EPSTEIN et al.

No. 94-1809.

Supreme Court of the United States

Argued Nov. 27, 1995.

Decided Feb. 27, 1996.

* * x

Justice THOMAS delivered the opinion of the Court.

This case presents the question whether a federal court

may withhold full faith and credit from a state-court judgment

approving a class-action settlement simply because the

settlement releases claims within the exclusive jurisdiction

of the federal courts. The answer is no. Absent a partial repeal

of the Full Faith and Credit Act, 28 U.S.C. § 1738, by another

federal statute, a federal court must give the judgment the

same effect that it would have in the courts of the State in

which it was rendered.

In 1990, petitioner Matsushita Electric Industrial Co.

made a tender offer for the common stock of MCA, Inc., a

Appendix A

Delaware corporation. The tender offer not only resulted in

Matsushita’s acquisition of MCA, but also precipitated two

lawsuits on behalf of the holders of MCA’s common stock.

First, a class action was filed in the Delaware Court of

Chancery against MCA and its directors for breach of

fiduciary duty in failing to maximize shareholder value. The

complaint was later amended to state additional claims

against MCA’s directors for, inter alia, waste of corporate

assets by exposing MCA to liability under the federal

securities laws. In addition, Matsushita was added as a

defendant and was accused of conspiring with MCA’s

directors to violate Delaware law. The Delaware suit was

based purely on state-law claims.

While the state class action was pending, the instant suit

was filed in Federal District Court in California. The

complaint named Matsushita as a defendant and alleged that

Matsushita’s tender offer violated Securities Exchange

Commission (SEC) Rules 10b-13 and 14d-10.' These Rules

were created by the SEC pursuant to the 1968 Williams Act

Amendments to the Securities Exchange Act of 1934

(Exchange Act), 48 Stat. 881, as amended, 15 U.S.C. § 78a

et seq. Section 27 of the Exchange Act confers exclusive

jurisdiction upon the federal courts for suits brought to

enforce the Act or rules and regulations promulgated

thereunder. See 15 U.S.C. § 78aa. The District Court declined

to certify the class, entered summary judgment for

Matsushita, and dismissed the case. The plaintiffs appealed

to the Court of Appeals for the Ninth Circuit.

1. We express no opinion in this case on the existence of a

private cause of action under §§ 14(d)(6) and (7) of the Securities

Exchange Act of 1934, 15 U.S.C. §§ 78n(d)(6) and (7), the statutory

authority for Rule 14d-10.

Appendix A

After the federal plaintiffs filed their notice of appeal

but before the Ninth Circuit handed down a decision, the

parties to the Delaware suit negotiated a settlement.’ In

exchange for a global release of all claims arising out of the

Matsushita-MCA acquisition, the defendants would deposit

$2 million into a settlement fund to be distributed pro rata to

the members of the class. As required by Delaware Chancery

Rule 23, which is modeled on Federal Rule of Civil!

Procedure 23, the Chancery Court certified the class for

purposes of settlement and approved a notice of the proposed

settlement. The notice informed the class members of their

right to request exclusion from the settlement class and to

appear and present argument at a scheduled hearing to

determine the fairness of the settlement. In particular, the

notice stated that “[b]y filing a valid Request for Exclusion,

a member of the Settlement Class will not be precluded by

the Settlement from individually seeking to pursue the claims

alleged in the. . . California Federal Actions, . . . or any other

claim relating to the events at issue in the Delaware Actions.”

App. to Pet. for Cert. 96a. Two such notices were mailed to

the class members and the notice was also published in the

national edition of the Wall Street Journal. The Chancery

Court then held a hearing. After argument from several

objectors, the Court found the class representation adequate

and the settlement fair.

The order and final judgment of the Chancery Court

incorporated the terms of the settlement agreement,

providing:

2. A previous settlement was rejected by the Court of Chancery

as unfair to the class. See Jn re MCA, Inc. Shareholders Litigation,

598 A.2d 687 (1991).

Appendix A

“All claims, rights and causes of action (state or

federal, including but not limited to claims arising

under the federal securities law, any rules

or regulations promulgated thereunder, or

otherwise), whether known or unknown that are,

could have been or might in the future be asserted

by any of the plaintiffs or any member of the

Settlement Class (other than those who have

validly requested exclusion therefrom), ... in

connection with or that arise now or hereafter out

of the Merger Agreement, the Tender Offer, the

Distribution Agreement, the Capital Contribution

Agreement, the employee compensation

arrangements, the Tender Agreements, the Initial

Proposed Settlement, this Settlement ... and

including without limitation the claims asserted

in the California Federal Actions .. . are hereby

compromised, settled, released and discharged

with prejudice by virtue of the proceedings herein

and this Order and Final Judgment.” /n re MCA,

Inc. Shareholders Litigation, C.A. No. 11740

(Feb. 22, 1993), reprinted in App. to Pet. for Cert.

74a-75a (emphasis added).

The judgment also stated that the notice met all the

requirements of due process. The Delaware Supreme Court

affirmed. Jn re MCA, Inc., Shareholders Litigation, 633 A.2d

370 (1993) (judgt. order).

Respondents were members of both the state and federal

plaintiff classes. Following issuance of the notice of proposed

settlement of the Delaware litigation, respondents neither

Appendix A

opted out of the settlement class nor appeared at the hearing

to contest the settlement or the representation of the class.

On appeal in the Ninth Circuit, petitioner Matsushita invoked

the Delaware judgment as a bar to further prosecution of

that action under the Full Faith and Credit Act, 28 U.S.C.

§ 1738.

The Ninth Circuit rejected petitioner’s argument, ruling

that § 1738 did not apply. Epstein v. MCA, Inc., 50 F.3d

644, 661-666 (1995). Instead, the Court of Appeals fashioned

a test under which the preclusive force of a state-court

settlement judgment is limited to those claims that “could

... have been extinguished by the issue preclusive effect of

an adjudication of the state claims.” /d., at 665. The lower

courts have taken varying approaches to determining the

preclusive effect of a state-court judgment, entered in a class

or derivative action, that provides for the release of

exclusively federal claims.’ We granted certiorari to clarify

this important area of federal law. 515 U.S. 1187 (1995).

The Full Faith and Credit Act mandates that the “judicial

proceedings” of any State “shall have the same full faith and

credit in every court within the United States ... as they

have by law or usage in the courts of such State ... from

which they are taken.” 28 U.S.C. § 1738. The Act thus directs

3. Compare the decision below with Grimes v. Vitalink

Communications Corp., 17 F.3d 1553 (CA3), cert. denied, 513 U.S.

986 (1994); Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29

(CAI 1991); and Abramson v. Pennwood Investment C. orp., 392

F.2d 759 (CA2 1968).

Appendix A

all courts to treat a state-court judgment with the same respect

that it would receive in the courts of the rendering State.

Federal courts may not “employ their own rules ... in

determining the effect of state judgments,” but must “accept

the rules chosen by the State from which the judgment 1s

taken.” Kremer v. Chemical Constr. Corp., 456 U.S. 461,

481-482 (1982). Because the Court of Appeals failed to

follow the dictates of the Act, we reverse.

The state court judgment in this case differs in two

respects from the judgments that we have previously

considered in our cases under the Full Faith and Credit Act.

As respondents and the Court of Appeals stressed, the

judgment was the product of a class action and incorporated

a settlement agreement releasing claims within the exclusive

jurisdiction of the federal courts. Though respondents urge

“the irrelevance of section 1738 to this litigation,” Brief for

Respondents 25, we do not think that either of these features

exempts the judgment from the operation of § 1738.

That the judgment at issue is the result of a class action,

rather than a suit brought by an individual, does not

undermine the initial applicability of § 1738. The judgment

of a state court in a class action is plainly the product of a

“judicial proceeding” within the meaning of § 1738. Cf.

McDonald v. West Branch, 466 U.S. 284, 287-288 (1984)

(holding that § 1738 does not apply to arbitration awards

because arbitration is not a “judicial proceeding”). Therefore,

a judgment entered in a class action, like any other judgment

entered in a state judicial proceeding, is presumptively

eee

Appendix A

entitled to full faith and credit under the express terms of

the Act.

Further, § 1738 is not irrelevant simply because the

judgment in question might work to bar the litigation of

exclusively federal claims. Our decision in Marrese v.

American Academy of Orthopaedic Surgeons, 470 U.S. 373

(1985), made clear that where § 1738 is raised as a defense

in a subsequent suit, the fact that an allegedly precluded

“claim is within the exclusive jurisdiction of the federal

courts does not necessarily make § 1738 inapplicable.” Id.,

at 380 (emphasis added). In so holding, we relied primarily

on Kremer v. Chemical Constr. Corp., supra, which held,

without deciding whether claims under Title VII are

exclusively federal, that state court proceedings may be issue

preclusive in Title VII suits in federal court. Kremer, we

said, “implies that absent an exception to § 1738, state law

determines at least the .. . preclusive effect of a prior state

judgment in a subsequent action involving a claim within

the exclusive jurisdiction of the federal courts.” Marrese,

470 U.S., at 381. Accordingly, we decided that “‘a state court

judgment may in some circumstances have preclusive effect

in a subsequent action within the exclusive jurisdiction of

the federal courts.” Jd., at 380.

In Marrese, we discussed Nash County Bd. of Ed. v.

Biltmore Co., 640 F.2d 484 (CA4), cert. denied, 454 U.S.

878 (1981), a case that concerned a state court settlement

judgment. In Nash, the question was whether the judgment,

which approved the settlement of state antitrust claims,

prevented the litigation of exclusively federal antitrust

claims. See 470 U.S., at 382, n. 2. We suggested that the

Appendix A

approach outlined in Marrese would also apply in cases like

‘ash that involve judgments upon settlement: that is, § 1738

would control at the outset. See 470 U.S., at 382, n. 2. In

accord with these precedents, we conclude that § 1738 is

generally applicable in cases in which the state-court

judgment at issue incorporates a class-action settlement

releasing claims solely within the jurisdiction of the federal

courts.

Marrese provides the analytical framework for deciding

whether the Delaware court’s judgment precludes this

exclusively federal action. When faced with a state-court

judgment relating to an exclusively federal claim, a federal

court must first look to the law of the rendering State to

ascertain the effect of the judgment. See id., at 381-382. If

state law indicates that the particular claim or issue would

be barred from litigation in a court of that State, then the

federal court must next decide whether, “as an exception to

§ 1738,” it “should refuse to give preclusive effect to [the]

state court judgment.” /d., at 383. See also Migra v. Warren

City School Dist. Bd. of Ed., 465 U.S. 75, 81 (1984) (“[I]n

the absence of federal law modifying the operation of § 1738,

the preclusive effect in federal court of [a] state-court

judgment is determined by [state] law”).

]

We observed in Marrese that the inquiry into state law

would not always yield a direct answer. Usually, “a state

court will not have occasion to address the specific question

Appendix A

whether a state judgment has issue or claim preclusive effect

in a later action that can be brought only in federal court.”

470 U.S., at 381-382. Where a judicially approved settlement

is under consideration, a federal court may consequently find

guidance from general state law on the preclusive force of

settlement judgments. See, e.g., id., at 382-383, n. 2

(observing in connection with Nash that “[North Carolina]

law gives preclusive effect to consent judgment[s]”). Here,

in addition to providing rules regarding the preclusive force

of class-action settlement judgments in subsequent suits in

state court, the Delaware courts have also spoken to the

particular effect of such judgments in federal court.

Delaware has traditionally treated the impact of

settlement judgments on subsequent litigation in state court

as a question of claim preclusion. Early cases suggested that

Delaware courts would not afford claim preclusive effect to

a settlement releasing claims that could not have been

presented in the trial court. See Ezzes v. Ackerman, 234 A.2d

444, 445-446 (Del.1967) (“[A] judgment entered either after

trial on the merits or upon an approved settlement is res

judicata and bars subsequent suit on the same claim... .

[T]he defense of res judicata . . . is available if the pleadings

framing the issues in the first action would have permitted

the raising of the issue sought to be raised in the second

action, and if the facts were known, or could have been

known to the plaintiff in the second action at the time of the

first action”). As the Court of Chancery has perceived,

however, “the Ezzes inquiry [was] modified in regard to class

actions,” /n re Union Square Associates Securities Litigation,

C.A. No. 11028, 1993 WL 220528, *3 (June 16, 1993), by

the Delaware Supreme Court’s decision in Nottingham

Partners v. Dana, 564 A.2d 1089 (1989).

10a

Appendix A

In Nottingham, a class action, the Delaware Supreme

Court approved a settlement that released claims then

pending in federal court. In approving that settlement, the

Nottingham Court appears to have eliminated the Ezzes

requirement that the claims could have been raised in the

suit that produced the settlement, at least with respect to class

actions:

“<“(I]n order to achieve a comprehensive

settlement that would prevent relitigation of

settled questions at the core of a class action, a

court may permit the release of a claim based on

the identical factual predicate as that underlying

the claims in the settled class action even though

the claim was not presented and might not have

been presentable in the class action.’ ” 564 A.2d,

at 1106 (quoting TBK Partners, Ltd. v. Western

Union Corp., 675 F.2d 456, 460 (CA2 1982)).

See Union Square, supra, at *3 (relying directly on

Nottingham to hold that a Delaware court judgment settling

a class action was res judicata and barred arbitration of

dup cative claims that could not have been brought in the

first suit). These cases indicate that even if, as here, a claim

could not have been raised in the court that rendered the

settlement judgment in a class action, a Delaware court would

still find that the judgment bars subsequent pursuit of the

claim.

The Delaware Supreme Court has further manifested its

understanding that when the Court of Chancery approves a

global release of claims, its settlement judgment should

Om.

lla

Appendix A

preclude ongoing or future federal-court litigation of any

released claims. In Nottingham, the Court stated that “{t}he

validity of executing a general release in conjunction with

the termination of litigation has long been recognized by

the Delaware courts. More specifically, the Court of

Chancery has a history of approving settlements that have

implicitly or explicitly included a general release, which

would also release federal claims.” 564 A.2d, at 1105

(citation omitted). Though the Delaware Supreme Court

correctly recognized in Nottingham that it lacked actual

authority to order the dismissal of any case pending in federal

court, it asserted that state-court approval of the settlement

would have the collateral effect of preventing class members

from prosecuting their claims in federal court. Perhaps the

clearest statement of the Delaware Chancery Court’s view

on this matter was articulated in the suit preceding this one: —

“When a state court settlement of a class action releases all

claims which arise out of the challenged transaction and is

determined to be fair and to have met all due process

requirements, the class members are bound by the release or

the doctrine of issue preclusion. Class members cannot

subsequently relitigate the claims barred by the settlement

in a federal court.” Jn re MCA, Inc. Shareholders Litigation,

598 A.2d 687, 691 (1991).* We are aware of no Delaware

case that suggests otherwise.

4. In fact, the Chancery Court rejected the first settlement,

which contained no opt-out provision, as unfair to the class precisely

because it believed that the settlement would preclude the class from

pursuing their exclusively federal claims in federal court. See Jn re

MCA Inc. Shareholders Litigation, 598 A.2d, at 692 (“[I]f this Court

provides for the release of all the claims arising out of the challenged

transaction, the claims which the Objectors have asserted in the

federal suit will likely be forever barred”).

12a

Appendix A

Given these statements of Delaware law, we think that a

Delaware court would afford preclusive effect to the

settlement judgment in this case, notwithstanding the fact

that respondents could not have pressed their Exchange Act

claims in the Court of Chancery. The claims are clearly

within the scope of the release in the judgment, since the

judgment specifically refers to this lawsuit. As required by

Delaware Court of Chancery Rule 23, see Prezant v. De

Angelis, 636 A.2d 915, 920 (1994), the Court of Chancery

found, and the Delaware Supreme Court affirmed, that the

settlement was “fair, reasonable and adequate and in the best

interests of the ... Settlement class” and that notice to the

class was “in full compliance with ... the requirements of

due process.” Jn re MCA, Inc. Shareholders Litigation, C.A.

No. 11740 (Feb. 22, 1993), reprinted in App. to Pet. for Cert.

73a, 74a. Cf. Phillips Petroleum Co. v. Shutts, 472 U.S. 797,

812 (1985) (due process for class action plaintiffs requires

“notice plus an opportunity to be heard and participate in

the litigation”). The Court of Chancery “further determined

that the plaintiffs[,] . . . as representatives of the Settlement

Class, have fairly and adequately protected the interests of

the Settlement Class.” Jn re MCA, Inc. Shareholders

Litigation, supra, reprinted in App. to Pet. for Cert. 73a. Cf.

Phillips Petroleum Co., supra, at 812 (due process requires

“that the named plaintiff at all times adequately represent

the interests of the absent class members’’).° Under Delaware

5. Apart from any discussion of Delaware law, respondents

contend that the settlement proceedings did not satisfy due process

because the class was inadequately represented. See Brief for

Respondents 34-45. Respondents make this claim in spite of the

Chancery Court’s express ruling, following argument on the issue,

(Cont’d)

13a

Appendix A

Rule 23, as under Federal Rule of Civil Procedure 23, “{alll

members of the class, whether of a plaintiff or a defendant

class, are bound by the judgment entered in the action unless,

in a Rule 23(b)(3) action, they make a timely election for

exclusion.” 2 H. Newberg, Class Actions § 2755, p. 1224

(1977). See also Cooper v. Federal Reserve Bank of

Richmond, 467 U.S. 867, 874 (1984) (“There is of course no

dispute that under elementary principles of prior adjudication

a judgment in a properly entertained class action is binding

on class members in any subsequent litigation”).

Respondents do not deny that, as shareholders of MCA’s

common stock, they were part of the plaintiff class and that

they never opted out; they are bound, then, by the judgment.°

(Cont'd)

that the class representatives fairly and adequately protected the

interests of the class. Cf. Prezant v. De Angelis, 636 A.2d 915, 923

(Del.1994) (“[The] constitutional requirement [of adequacy of

representation] is embodied in [Delaware] Rule 23(a)(4), which

requires that the named plaintiff ‘fairly and adequately protect the

interests of the class’ ”). We need not address the due process claim,

however, because it is cutside the scope of the question presented

in this Court. See Yee v. Escondido, 503 U.S. 519, 533 (1992). While

it is true that a respondent may defend a judgment on alternative

grounds, we generally do not address arguments that were not the

basis for the decision below. See Peralta v. Heights Medical Center,

Inc., 485 U.S. 80, 86 (1988).

6. Respondents argue that their failure to opt out of the

settlement class does not constitute consent to the terms of the

settlement under traditional contract principles. Brief for

Respondents 16-25. Again, the issue raised by respondents —

whether the settlement could bar this suit as a matter of contract

(Cont’d)

l4a

Appendix A

Because it appears that the settlement judgment would

be res judicata under Delaware law, we proceed to the second

step of the Marrese analysis and ask whether § 27 of the

Exchange Act, which confers exclusive jurisdiction upon the

federal courts for suits arising under the Act, partially

repealed § 1738. Section 27 contains no express language

regarding its relationship with § 1738 or the preclusive effect

of related state-court proceedings. Thus, any modification

of § 1738 by § 27 must be implied. In deciding whether § 27

impliedly created an exception to § 1738, the “general

question is whether the concerns underlying a particular grant

of exclusive jurisdiction justify a finding of an implied partial

repeal of § 1738.” Marrese, 470 U.S., at 386. “Resolution

of this question will depend on the particular federal statute

as well as the nature of the claim or issue involved in the

subsequent federal action. . . . [T]he primary consideration

must be the intent of Congress.” Jbid.

As an historical matter, we have seldom, if ever, held

that a federal statute impliedly repealed § 1738. See Parsons

Steel, Inc. v. First Alabama Bank, 474 U.S. 518, 523-525

(1986) (Anti-Injunction Act does not limit § 1738); Migra

(Cont'd)

law, as distinguished from § 1738 law — is outside the scope of the

question on which we granted certiorari. We note, however, that if

a State chooses to approach the preclusive effect of a judgment

embodying the terms of a settlement agreement as a question of

pure contract law, a federal court must adhere to that approach under

§ 1738. Kremer v. Chemical Constr. Corp., 456 U.S. 461, 481-482

(1982).

15a

Appendix A

v. Warren City School Dist. Bd. of Ed., 465 U.S., at 83-85

(§ 1983 does not limit claim preclusion under § 1738);

Kremer v. Chemical Constr. Corp., 456 U.S., at 468-476

(Title VII of the Civil Rights Act of 1964 does not limit

§ 1738); Allen v. McCurry, 449 U.S. 90, 96-105 (1980)

(§ 1983 does not limit issue preclusion under § 1738). But

cf. Brown v. Felsen, 442 U.S. 127, 138-139 (1979) (declining

to give claim preclusive effect to prior state-court debt

collection proceeding in federal bankruptcy suit, without

discussing § 1738, state law, or implied repeals). The rarity

with which we have discovered implied repeals is due to the

relatively stringent standard for such findings, namely, that

there be an “ ‘irreconcilable conflict’ ” between the two

federal statutes at issue. Kremer v. Chemical Constr. Corp.,

supra, at 468 (quoting Radzanower v. Touche Ross & Co.,

426 U.S. 148, 154 (1976)).

Section 27 provides that “{t]he district courts of the

United States . . . shall have exclusive jurisdiction . . . of all

suits in equity and actions at law brought to enforce any

liability or duty created by this chapter or the rules and

regulations thereunder.” 15 U.S.C. § 78aa. There is no

suggestion in § 27 that Congress meant for plaintiffs with

Exchange Act claims to have more than one day in court to

challenge the legality of a securities transaction. Though the

statute plainly mandates that suits alleging violations of the

Exchange Act may be maintained only in federal court,

nothing in the language of § 27 “remotely expresses any

congressional intent to contravene the common-law rules of

preclusion or to repeal the express statutory requirements of

... 28 U.S.C. § 1738.” Allen v. McCurry, supra, at 97-98.

16a

Appendix A

Nor does § 27 evince any intent to prevent litigants in

state court — whether suing as individuals or as part of a

class — from voluntarily releasing Exchange Act claims in

judicially approved settlements. While § 27 prohibits state

courts from adjudicating claims arising under the Exchange

Act, it does not prohibit state courts from approving the

release of Exchange Act claims in the settlement of suits

over which they have properly exercised jurisdiction, i.e.,

suits arising under state law or under federal law for which

there is concurrent jurisdiction. In this case, for example,

the Delaware action was not “brought to enforce” any rights

or obligations under the Act. The Delaware court asserted

judicial power over a complaint asserting purely state-law

causes of action’ and, after the parties agreed to settle,

certified the class and approved the settlement pursuant to

the requirements of Delaware Rule of Chancery 23 and the

Due Process Clause. Thus, the Delaware court never

trespassed upon the exclusive territory of the federal courts,

but merely approved the settlement of a common-law suit

pursuant to state and nonexclusive federal law. See Abramson

v. Pennwood Investment Corp., 392 F.2d 759, 762 (CA2

1968) (“Although the state court could not adjudicate the

federal claim, it was within its powers over the corporation

and the parties to approve the release of that claim as a

condition of settlement of the state action”). While it is true

that the state court assessed the general worth of the federal

claims in determining the fairness of the settlement, such

7. Though the plaintiff class premised one of its claims of

fiduciary breach on the allegation that MCA wasted corporate assets

by exposing the corporation to liability under the federal securities

laws, the cause pleaded was nonetheless a state common-iaw action

for breach of fiduciary duty.

17a

Appendix A

assessment does not amount to a judgment on the merits of

the claims. See TBK Partners, Ltd. v. Western Union Corp.,

675 F.2d 456, 461 (CA2 1982) (“ ‘Approval of a settlement

does not call for findings of fact regarding the claims to be

compromised. The court is concerned only with the

likelihood of success or failure; the actual merits of the

controversy are not to be determined’ ”) (quoting Haudek,

The Settlement and Dismissal of Stockholders’ Actions-Part

II: The Settlement, 23 Sw.L.J. 765, 809 (1969) (footnotes

omitted)). The Delaware court never purported to resolve

the merits of the Exchange Act claims in the course of

appraising the settlement; indeed, it expressly disavowed that

purpose. See /n re MCA, Inc. Shareholders Litigation, C.A.

No. 11740 (Feb. 16, 1993), reprinted in App. to Pet. for Cert.

68a (“In determining whether a settlement should be

approved, a court should not try the merits of the underlying

claims. This principle would seem to be especially

appropriate where the underlying claims, like the federal

claims here, are outside the jurisdiction of this Court”

(citation omitted)).

The legislative history of the Exchange Act elucidates

no specific purpose on the part of Congress in enacting

§ 27. See Murphy v. Gallagher, 761 F.2d 878, 885 (CA2

1985) (noting that the legislative history of the Exchange

Act provides no readily apparent explanation for the

provision of exclusive jurisdiction in § 27) (citing 2 & 3 L.

Loss, Securities Regulation 997, 2005 (2d ed.1961)). We may

presume, however, that Congress intended § 27 to serve at

least the general purposes underlying most grants of

exclusive jurisdiction: “to achieve greater uniformity of

construction and more effective and expert application of

that law.” Murphy v. Gallagher, supra, at 885. When a state

18a

Appendix A

court upholds a settlement that releases claims under the

Exchange Act, it threatens neither of these policies. There is

no danger that state-court judges who are not fully expert in

federal securities law will say definitively what the Exchange

Act means and enforce legal liabilities and duties thereunder.

And the uniform construction of the Act is unaffected by a

state court’s approval of a proposed settlement because the

State court does not adjudicate the Exchange Act claims but

only evaluates the overall fairness of the settlement, generally

by applying its own business judgment to the facts of the

case. See, e.g., Polk v. Good, 507 A.2d 531, 535 (Del. 1986).

Furthermore, other provisions of the Exchange Act

suggest that Congress did not intend to create an exception

to § 1738 for suits alleging violations of the Act. Congress

plainly contemplated the possibility of dual litigation in state

and federal courts relating to securities transactions. See 15

U.S.C. § 78bb(a) (preserving “all other rights and remedies

that may exist at law or in equity”). And all that Congress

chose to say about the consequences of such litigation is

that plaintiffs ought not obtain double recovery. See ibid.

Congress said nothing to modify the background rule that

where a state-court judgment precedes that of a federal court,

the federal court must give full faith and credit to the state-

court judgment. See Murphy v. Gallagher, supra, ai 884.

Finally, precedent supports the conclusion that the

concerns underlying the grant of exclusive jurisdiction in

§ 27 are not undermined by state-court approval of

settlements releasing Exchange Act claims. We have held

that state court proceedings may, in various ways,

subsequently affect the litigation of exclusively federal

claims without running afoul of the federal jurisdictional

19a

Appendix A

grant in question. In Becher v. Contoure Laboratories, Inc.,

279 U.S. 388 (1929) (cited in Marrese, 470 U.S., at 381),

we held that state court findings of fact were issue preclusive

in federal patent suits. We did so with full recognition that

“the logical conclusion from the establishing of [the state

law j claim is that Becher’s patent is void.” 279 U.S., at 391.

Becher reasoned that although “decrees validating or

invalidating patents belong to the Courts of the United

States,” that “does not give sacrosanctity to facts that may

be conclusive upon the question in issue.” Jbid. Similarly,

while binding legal determinations of rights and liabilities

under the Exchange Act are for federal courts only, there is

nothing sacred about the approval of settlements of suits

arising under state law, even where the parties agree to release

exclusively federal claims. See also Brown v. Felsen, 442

U.S., at 139, n. 10 (noting that “[i]f, in the course of

adjudicating a state-law question, a state court should

determine factual issues using standards identical to those

of § 17, then collateral estoppel, in the absence of

countervailing statutory policy, would bar relitigation of

those issues in the bankruptcy court”); Pratt v. Paris Gaslight

& Coke Co., 168 U.S. 255, 258 (1897) (when a state court

has jurisdiction of the parties and the subject matter of the

complaint, the state court may decide the validity of a patent

when that issue is raised as a defense).

We have also held that Exchange Act claims may be

resolved by arbitration rather than 'itigation in federal court.

In Shearson/American Express Inc. v. McMahon, 482 U.S.

220 (1987), we found that parties to an arbitration agreement

could waive the right to have their Exchange Act claims tried

in federal court and agree to arbitrate the claims. /d., at 227-

228. It follows that state-court litigants ought also to be able

20a

Appendix A

to waive, or “release,” the right to litigate Exchange Act

claims in a federal forum as part of a settlement agreement.

As Shearson/American Express Inc. demonstrates, a statute

conferring exclusive federal jurisdiction for a certain class

of claims does not necessarily require resolution of those

claims in a federal court.

Taken together, these cases stand for the general

proposition that even when exclusivel’ federal claims are at

stake, there is no “universal right to litigate a federal claim

in a federal district court.” Allen v. McCurry, 449 U.S., at

105. If class action plaintiffs wish to preserve absolutely their

right to litigate exclusively federal claims in federal court,

they should either opt out of the settlement class or object to

the release of any exclusively federal claims. In fact, some

of the plaintiffs in the Delaware class action requested

exclusion from the settlement class. They are now proceeding

in federal court with their federal claims, unimpeded by the

Delaware judgment.

In the end, §§ 27 and 1738 “do not pose an either-or

proposition.”’ Connecticut Nat. Bank v. Germain, 503 U.S.

249, 253 (1992). They can be reconciled by reading § 1738

to mandate full faith and credit of state-court judgments

incorporating global settlements, provided the rendering

court had jurisdiction over the underlying suit itself, and by

reading § 27 to prohibit state courts from exercising

jurisdiction over suits arising under the Exchange Act. Cf.

18 C. Wright, A. Miller, & E. Cooper, Federal Practice and

Procedure § 4470, pp. 688-689 (1981) (“[S]ettlement of state

court litigation has been held to defeat a subsequent federal

action if the settlement was intended to apply to claims in

exclusive federal jurisdiction as well as other claims... .

rae? toe

21a

Appendix A

These rulings are surely correct”). Congress’ intent to provide

an exclusive federal forum for adjudication of suits to enforce

the Exchange Act is clear enough. But we can find no

suggestion in § 27 that Congress meant to override the

“principles of comity and repose embodied in § 1738,”

Kremer v. Chemical Constr. Corp., 456 U.S.., at 463, by

allowing plaintiffs with Exchange Act claims to release those

claims in state court and then litigate them in federal court.

We conclude that the Delaware courts would give the

settlement judgment preclusive effect in a subsequent

proceeding and, further, that § 27 did not effect a partial

repeal of § 1738.

The Court of Appeals did not engage in any analysis of

Delaware law pursuant to § 1738. Rather, the Court of

Appeals declined to apply § 1738 on the ground that where

the rendering forum lacked jurisdiction over the subject

matter or the parties, full faith and credit is not required. 50

F.3d, at 661, 666. See Underwriters Nat. Assurance Co. v.

North Carolina Life & Accident & Health Ins. Guaranty

Assn., 455 U.S. 691, 704-705 (1982) (“ ‘[A] judgment of a

court in one State is conclusive upon the merits in a court in

another State only if the court in the first State had power to

pass on the merits — had jurisdiction, that is, to render the

judgment’ ”) (quoting Durfee v. Duke, 375 U.S. 106, 110

(:963)). The Court of Appeals decided that the subject-matter

jurisdiction exception to full faith and credit applies to this

case because the Delaware court acted outside the bounds of

its own jurisdiction in approving the settlement, since the

settiement released exclusively federal claims. See 50 F.3d,

at 661-662, and n. 25.

22a

Appendix A

As explained above, the state court in this case clearly

possessed jurisdiction over the subject matter of the

underlying suit and over the defendants. Only if this were

not so — for instance, if the complaint alleged violations of

the Exchange Act and the Delaware court rendered a

judgment on the merits of those claims — would the

exception to § 1738 for lack of subject-matter jurisdiction

apply. Where, as here, the rendering court in fact had subject-

matter jurisdiction, the subject-matter jurisdiction exception

to full faith and credit is simply inapposite. In such a case,

the relevance of a federal statute that provides for exclusive

federal jurisdiction is not to the state court’s possession of

jurisdiction per se, but to the existence of a partial repeal of

§ 1738.°

The judgment of the Court of Appeals is reversed, and

remanded for proceedings consistent with this opinion.

It is so ordered.

8. Kalb v. Feuerstein, 308 U.S. 433 (1940), is not to the

contrary. In that case, the federal statute at issue expressly prohibited

certain common-law actions from being either instituted or

maintained in state court. Jd., at 440-441. Thus, by merely

entertaining a common-law foreclosure suit, over which it otherwise

would have had jurisdiction, the state court violated the terms of

the Act. That is not the situation here, where there is no contention

that just by entertaining the class action the Delaware court acted in

violation of federal law.

23a

Appendix A

Justice STEVENS, concurring in part and dissenting in

part.

While I join Parts I, I-A, and II-C of the Court’s opinion,

and while I also agree with the Court’s reasons for concluding

that § 27 of the Securities Exchange Act of 1934 does not

create an implied partial repeal of the Full Faith and Credit

Act, I join neither Part II-B nor the Court’s judgment because

I agree with Justice GINSBURG that the question of

Delaware law should be addressed by the Court of Appeals

in the first instance, and that the Ninth Circuit remains free

to consider whether Delaware courts fully and fairly litigated

the adequacy of class representation.

Justice GINSBURG, with whom Justice STEVENS

joins, and with whom Justice SOUTER joins as to Part II-B,

concurring in part and dissenting in part.

I join the Court’s judgment to the extent that it remands

the case to the Ninth Circuit. I agree that a remand is in

order because the Court of Appeals did not attend to this

Court’s reading of 28 U.S.C. § 1738 ina controlling decision,

Kremer v. Chemical Constr. Corp., 456 U.S. 461 (1982).

But I would not endeavor, as the Court does, to speak the

first word on the content of Delaware preclusion law. Instead,

I would follow our standard practice of remitting that issue

for decision, in the first instance, by the lower federal courts.

See, e.g., Marrese v. American Academy of Orthopaedic

Surgeons, 470 U.S. 373, 387 (1985).

I write separately to emphasize a point key to the

application of § 1738: A state-court judgment generally is

24a

Appendix A

not entitled to full faith and credit unless it satisfies the

requirements of the Fourteenth Amendment’s Due Process

Clause. See Kremer, 456 U.S., at 482-483. In the class-action

setting, adequate representation is among the due process

ingredients that must be supplied if the judgment is to bind

absent class members. See Phillips Petroleum Co. v. Shutts,

472 U.S. 797, 808, 812 (1985); Prezant v. De Angelis, 636

A.2d 915, 923-924 (Del. 1994).

Suitors in this action (called the “Epstein plaintiffs” in

this opinion), respondents here, argued before the Ninth

Circuit, and again before this Court, that they cannot be

bound by the Delaware settlement because they were not

adequately represented by the Delaware class representatives.

They contend that the Delaware representatives’ willingness

to release federal securities claims within the exclusive

jurisdiction of the federal courts for a meager return to the

class members, but a solid fee to the Delaware class attorneys,

disserved the interests of the class, particularly, the absentees.

The inadequacy of representation was apparent, the Epstein

plaintiffs maintained, for at the time of the settlement, the

federal claims were sub judice in the proper forum for those

claims — the federal judiciary. Although the Ninth Circuit

decided the case without reaching the due process check on

the full faith and credit obligation, that inquiry remains open

for consideration on remand. See ante, at 379, n. 5 (due

process “‘w[as] not the basis for the decision below,” so the

Court “need not address [it]’’).

Matsushita’s acquisition of MCA prompted litigation in

state and federal courts. A brief account of that litigation

SER EN

25a

Appendix A

will facilitate comprehension of the Epstein plaintiffs’

position. On September 26, 1990, in response to reports in

the financial press that Matsushita was negotiating to buy

MCA, a suit was filed in the Court of Chancery of Delaware,

a purported class action on behalf of the stockholders of

MCA. Naming MCA and its directors (but not Matsushita)

as defendants, the complaint invoked state law only. It

alleged that MCA’s directors had failed to Carry out a market

check to maximize shareholder value upon a change in

corporate control, a check required by Revion, Inc. v.

MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182

(Del.1986). For this alleged breach of fiduciary duty, the

complaint sought, inter alia, an injunction against

Matsushita’s proposed acquisition of MCA.

Matsushita announced its tender offer on November 26,

1990. It offered holders of MCA common stock $71 per

share, if they tendered their shares before December 29, 1990.

The owners of 91% of MCA’s common stock tendered their

shares and, on January 3, 1991, for a price of $6.1 billion,

Matsushita acquired MCA.

On December 3, 1990, a few days after the required

Securities and Exchange Commission (SEC) filings disclosed

the terms of the tender offer, several MCA shareholders filed

suit in the United States District Court for the Central District

of California.' Based solely on federal law, their complaints

1. Two sets of plaintiffs filed complaints in the Central District

of California: the Epstein plaintiffs (including Lawrence Epstein,

John Linder, Jane Rockford, Maurice Karlin, Ruth Karlin, Beth

Karlin, and Bert Karlin) sued both individually and on behalf of all

(Cont’d)

26a

Appendix A

alleged that Matsushita, first named defendant, violated SEC

Rules 14d-10, 17 CFR § 240.14d-10 (1994), ana 10b-13,

id., § 240.10b-13, by offering preferential treatment in the

tender offer to MCA principals Lew Wasserman and Sidney

Sheinberg. As stated in the complaint, the public tender offer

included a special tax-driven stock swap arrangement for

Wasserman, then MCA’s chairman and chief executive

officer, and a $21 million bonus for Sheinberg, then MCA’s

chief operating officer and owner of 1,170,000 shares of

MCA common stock. These « rrangements allegedly violated,

inter alia, the SEC’s “all-holder best-price” rule (Rule 1 4d-

10), which requires bidders to treat all shareholders on equal

terms. The claims of federal securities law violations fell

within the exclusive jurisdiction of the federal court. See 15

U.S.C. § 78aa. The Epstein plaintiffs also sought class

certification to represent all MCA shareholders at the time

of the tender offer.

Two days later, counsel in the Delaware action advised

MCA’s counsel that the Delaware plaintiffs intended to

amend their complaint to include additional claims against

MCA and its directors and to add Matsushita as a defendant.

The additional claims alleged that MCA wasted corporate

(Cont'd)

MCA shareholders at the time of the tender offer; Walter Minton

brought suit in his individual capacity. All had tendered their shares

for the $71 tender price. The District Court consolidated the two

cases. Minton and, it appears, Rockford opted out of the Delaware

class-action settlement. Matsushita does not contest the qualification

of Minton and Rockford, as individuals, to pursue federal claims

unimpeded by the settlement in Delaware. See Brief for Petitioners

11. Matsushita does contest any class-action initiative in federal court.

27a

Appendix A

assets by increasing the corporation’s exposure to liability

for violation of Rules 10b-13 and 14d-10, that MCA failed

to make full disclosure of the benefits MCA insiders would

receive from the takeover, and that directors Wasserman and

Sheinberg breached their fiduciary duties by negotiating

preferential deals with Matsushita. Matsushita, the amended

complaint alleged, had conspired with and aided and abetted

MCA directors in violation of Delaware law.

Within days, the Delaware parties agreed to a settlement

and, on December 17, 1990, submitted their proposal to the

Delaware Vice Chancellor. The agreement provided for a

modification of a “poison pill” in the corporate charter of an

MCA subsidiary,’ and for a fees payment of $1 million to

the class counsel. The settlement agreement required the

release of all claims, state and federal, arising out of the

tender offer.

The Vice Chancellor rejected the settlement agreement

on April 22, 1991, for two reasons: the absence of any

monetary benefit to the class members; and the potential

value of the federal claims that the agreement proposed to

release. The “generous payment” of $1 million in counsel

fees, the Vice Chancellor observed, “confer[red] no benefit

on the members of the Class.” Jn re MCA, Inc. Shareholders

Litigation, 598 A.2d 687, 695 (Del. Ch.1991 ). And the value

of the revised poison pill to the class, the Vice Chancellor

said, was “‘illusionary[,].. . apparently . . . proposed merely

2. The subsidiary in question was spun off from MCA during

the merger because it owned a television station that federal law

prohibited Matsushita from acquiring. The $71 tender offer price

included $5 worth of stock in this new corporation.

28a

Appendix A

to justify a settlement which offers no real monetary benefit

to the Class.” /d., at 696. The Vice Chancellor described the

state-law claims as “at best, extremely weak and, therefore,

[of] little or no value.” /d., at 694. “[T]he only claims which

have any substantial merit,” he said, “are the claims .. . in

the California federal suit that were not asserted in this

Delaware action.” /d., at 696. After the rejection of the

settlement, the Delaware lawsuit lay dormant for more than

a year.

The federal litigation proceeded. In various rulings, the

District Court denied the federal plaintiffs’ motion for partial

summary judgment, denied the Epstein plaintiffs’ motion for

class certification, and granted Matsushita’s motion for

summary judgment dismissing the claims. On April 15, 1992,

the District Court entered its final judgment, which the

Epstein plaintiffs appealed to the Ninth Circuit.

On October 22, 1992, after the federal plaintiffs had filed

their notice of appeal, the Delaware parties reached a second

settlement agreement. Matsushita agreed to create a

$2 million settlement fund that would afford shareholders

2 to 3 cents per share before payment of fees and costs. The

Delaware class counsel requested $691,000 in fees. In return

for this relief, the Delaware plaintiffs agreed to release “all

claims, rights and causes of action (state or federal, including

but not limited to claims arising under the federal securities

laws, and any rules or regulations promulgated thereunder,

or otherwise) ... in connection with or that arise now or

hereafter out of the [tender offer] ... including without

limitation the claims asserted in the California Federal

Actions....” App. 187-188. Unlike the first settlement

29a

Appendix A

proposal, the second agreement included an opt-out

provision.

This time the Vice Chancellor approved the settlement.

He stated: “[i]t is in the best interests of the class to settle

this litigation and the terms of the settlement are fair and

reasonable — although the value of the benefit to the class

is meager.” /n re MCA, Inc. Shareholders Litigation, C.A.

No. 11740, 1993 WL 43024, *1 (Del. Ch., Feb.16, 1993).

He found the class members’ recovery of 2 to 3 cents per

share “adequate (if only barely so) to support the proposed

settlement.” /d., at *4. The federal claims, he reasoned,

having been dismissed by the District Court, “now have

minimal economic value.” /bid. And he gave weight to the

presence in the second settlement agreement of an opt-out

provision. /bid.

Addressing the objectors’ contention that the proposed

settlement was “collusive,” the Vice Chancellor recalled that

“the settling parties ha[d] previously proposed a patently

inadequate settlement,” and he agreed that “suspicions

abound.” /d., at *5. Nevertheless, he noted, the “[o]bjectors

have offered no evidence of any collusion,” so he declined

to reject the settlement on that ground. /bid. Reducing the

counsel fees from the requested $691,000 to $250,000, the

Vice Chancellor offered this observation: “(T]he defendants’

willingness to create the settlement fund seems likely to have

been motivated as much by their concern as to their potential

liability under the federal claims as by their concern for

liability under the state law claims which this Court

characterized as ‘extremely weak.’ ” /d., at *6. In a brief

order, the Delaware Supreme Court affirmed “on the basis

30a

Appendix A

of and for the reasons assigned by the Court of

Chancery... .” /n re MCA, Inc. Shareholders Litigation, C.A.

No. 126,1993, 1993 WL 385041, *1 (Sept. 21, 1993), judgt.

order reported at 633 A.2d 370.

Before the Ninth Circuit, Matsushita argued that the

Delaware class-action settlement barred litigation of the

federal claims raised in the Epstein action. The Ninth Circuit

disagreed. Relying on federal circuit court decisions,’ the

Court of Appeals held that state courts lack plenary power

to approve settlements that effectively extinguish exclusively

federal claims. Only if federal and state claims rest on the

“identical factual predicate,” the Ninth Circuit concluded,

could a state-court settlement subsume an exclusively federal

claim. It was not enough, in the Ninth Circuit’s view, that

the discrete federal and state claims stem from the “same

transaction,” the test Matsushita urged. 50 F.3d, at 661-665.

The federal securities claims did not turn on the same

operative facts as the state claims pleaded in Delaware, the

Ninth Circuit found; accordingly, the federal claims could

not have been extinguished by the issue-preclusive effect of

an adjudication of the state claims. This analysis led the Ninth

Circuit to declare that the Delaware decree “exceed[ed] the

jurisdiction of the state court and, therefore, is not entitled

to full faith and credit.” /d., at 666.

On the merits, the Ninth Circuit held, first, that a private

right of action could be maintained to redress Rule 14d-10

3. Closest in point, the court said, were Grimes v. Vitalink

Communications Corp., 17 F.3d 1553 (CA3 1994), and Nottingham

Partners v. Trans-Lux Corp., 925 F.2d 29 (CA1 1991). See Epstein

v. MCA, Inc., 50 F.3d 644, 662 (CA9 1995).

lanes «ki ibd

31a

Appendix A

violations. /d., at 652. The court next held that Matsushita

violated Rule 14d-10 by paying Wasserman consideration

not offered to other shareholders, id., at 657; reversing the

District Court’s disposition of this matter, the Ninth Circuit

held that plaintiffs were entitled to summary judgment on

liability and remanded for a determination of damages, ibid.

Regarding plaintiffs’ claim that the $21 million payment to

Sheinberg violated Rule 14d-10, the Ninth Circuit vacated

the summary judgment for Matsushita and remanded for a

determination whether the payment was in fact made to

encourage Sheinberg to tender his shares. Id., at 659.

Section i738’s full faith and credit instruction, as the

Court indicates, requires the forum asked to recognize a

judgment first to determine the preclusive effect the judgment

would have in the rendering court. See Kremer, 456 U.S., at

466; Marrese, 470 U.S., at 381. Because the Ninth Circuit

did not evaluate the preclusive effect of the Delaware

judgment through the lens of that State’s preclusion law, |

would remand for that determination. See id., at 386-387;

Migra v. Warren City School Dist. Bd. of Ed., 465 U.S. 75,

87 (1984) (“Prudence . . . dictates that it is the District Court,

in the first instance, not this Court, that should interpret Ohio

preclusion law and apply it.”).4

4. In its endeavor to forecast Delaware preclusion law, the

Court appears to have blended the “identical factual predicate” test

applied by the Delaware Supreme Court in Nottingham Partners y.

Dana, 564 A.2d 1089, 1106-1107 (1989), with the broader “same

transaction” test advanced by Matsushita. See ante, at 879-880.

32a

Appendix A

Every State’s law on the preclusiveness of judgments is

pervasively affected by the supreme law of the land. To be

valid in the rendition forum, and entitled to recognition

nationally, a state court’s judgment must measure up to the

requirements of the Fourteenth Amendment’s Due Process

Clause. Kremer, 456 U.S., at 482-483. “A State may not grant

preclusive effect in its own courts to a constitutionally infirm

judgment, and other state and federal courts are not required

to accord full faith and credit to such a judgment.” /d., at

482 (footnote omitted).

In Phillips Petroleum Co. v. Shutts, this Court listed

minimal procedural due process requirements a class-action

money judgment must meet if it is to bind absentees; those

requirements include notice, an opportunity to be heard, a

right to opt out, and adequate representation. 472 U.S., at

812. “{T]he Due Process Clause of course requires that the

named plaintiff at all times adequately represent the interests

of the absent class members.” /bid. (citing Hansberry v. Lee,

311 U.S. 32, 42-43, 45 (1940)). As the Court’s phrase “at all

times” indicates, the class representative's duty to represent

absent class members adequately is a continuing one. 472

U.S., at 812; see also Gonzales v. Cassidy, 474 F.2d 67, 75

(CAS 1973) (representative's failure to pursue an appeal

rendered initially adequate class representation inadequate,

so that judgment did not bind the class).

Although emphasizing the constitutional significance of

the adequate representation requirement, this Court has

33a

Appendix A

recognized the first line responsibility of the States

themselves for assuring that the constitutional essentials are

met. See Hansberry, 311 U.S. at 42. Final judgments,

however, remain vulnerable to collateral attack for failure

to satisfy the adequate representation requirement. See id.,

at 40, 42; see also Restatement (Second) of Judgments

§§ 42(d) and (e), Comments e and /, pp. 406, 410-412 (1982)

(noting, inter alia, that judgment is not binding on

purportedly represented person where, to the knowledge of

the opposing party, the representative seeks to advance his

own interest at the expense of the represented person); see

also id., § 41, Comment a, p. 394 (if § 42 circumstances

exist, “the represented person may avoid being bound either

by appearing in the action before rendition of the judgment

or by attacking the judgment by subsequent proceedings”).

(Emphasis added.) A court conducting an action cannot

predetermine the res judicata effect of the judgment; that

effect can be tested only in a subsequent action. See 7B C.

5. Many States, including Delaware, have class-action rules

corresponding to Federal Rule of Civil Procedure 23, a rule ranking

adequacy of representation as a prerequisite to maintaining a class

action. See 3 H. Newberg & A. Conte, Newberg on Class Actions,

App. 13-1 (3d ed.1992) (listing 39 States and the District of

Columbia with rules comparable to the amended Federal Rule of

Civil Procedure 23); Fed. Rule Civ. Proc. 23(a)(4) (representatives

may sue on behalf of the class only if “the representative parties

will fairly and adequately protect the interests of the class”); see

also General Telephone Co. of Southwest v. Falcon, 457 U.S. 147,

157-158, n. 13 (1982) (Federal Rule of Civil Procedure 23(a)(4)'s

adequate representation requirement “raises concerns about the

competency of class counsel and conflicts of interest,” in addition

to the question whether the representative shares the interests of the

class members).

34a

Appendix A

Wright, A. Miller, & M. Kane, Federal Practice and

Procedure § 1789, p. 245 (2d ed.1986).

In Delaware, the constitutional due process requirement

of adequate representation is embodied in Delaware Court

of Chancery’s Rule 23, a class-action rule modeled on its

federal counterpart. Prezant, 636 A.2d, at 923, 920. Delaware

requires, aS a prerequisite to class certification, that the

named plaintiffs “fairly and adequately protect the interests

of the class.” Del. Ch. Rule 23(a)(4). In Prezant, the

Delaware Supreme Court considered whether adequate class

representation was “a sine qua non for approval of a class

action settlement,” and concluded that it was. Prezant, 636

A.2d, at 920, 926. The state high court overturned a judgment

and remanded a settlement because the Court of Chancery

had failed to make an explicit finding of adequate

representation. /d., at 926.

The Delaware Supreme Court underscored that due

process demands more than notice and an opportunity to opt-

out; adequate representation, too, that court emphasized, is

an essential ingredient. /d., at 924 (citing Phillips Petroleum

Co. v. Shutts, 472 U.S., at 812, 105 S.Ct., at 2974). Notice,

the Delaware Supreme Court reasoned, cannot substitute for

the thorough examination and informed negotiation an

adequate representative would pursue Prezant, 636 A.2d,

at 924. The court also recognized that opt-out rights “are

infrequently utilized and usually economically

impracticable.” /bid.

The Vice Chancellor’s evaluation of the merits of the

settlement could not bridge the gap, the Delaware Supreme

35a

Appendix A

Court said, because an inadequate representative “taint[s]”

the entire settlement process. /d., at 925.° “[A]n adequate

representative,” the Delaware Supreme Court explained,

“vigorously prosecuting an action without conflict and

bargaining at arms-length, may present different facts and a

different settlement proposal to the court than would an

inadequate representative.” [hid Consequently, the Delaware

Supreme Court held, “in every class action settlement, the

Court of Chancery is required to make an explicit

determination on the record of the propriety of the class

action according to the requisites of Rule 23(a)

and (b).” Jhid.

in the instant case, the Epstein plaintiffs challenge the

preclusive effect of the Delaware settlement, arguing that

the Vice Chancellor never in fact made the constitutionally

required determination of adequate representation. See id.,

at 923.’ They contend that the State court left unresolved

6. In both Prezant and the instant Case, a temporary settlement

Class device was used, telescoping the inquiry of adequate

representation into the examination of the fairness of the settlement.

According to the Delaware Supreme Court, however, this near

simultaneity does not relieve the representative of her duty to

demonstrate, nor the court of its duty to determine, the adequacy of

representation. Prezant, 636 A.2d, at 923. In a comprehensive

opinion, the Third Circuit reached the same conclusion after

examining the temporary class settlement device in the context of

Federal Rule of Civil Procedure 23. See /n re General Motors Corp.

Pick-Up Truck Fuel Tank Products Liability Litigation, 55 F.3d 768.

794-800 (1995).

7. The Vice Chancellor did not have the benefit of the Delaware

Supreme Court’s clear Statement in Prezant, decided one year after

(Cont'd)

36a

Appendix A

key questions: notably, did the class representatives share

substantial common interests with the absent class members,

and did counsel in Delaware vigorously press the interests

of the class in negotiating the settlement.* In particular, the

Epstein plaintiffs question whether the Delaware class

representatives — who filed the state lawsuit on September

26, 1990, two months before the November 26 tender offer

announcement -— actually tendered shares in December,

thereby enabling them to litigate a Rule 14d-10 claim in

federal court. They also suggest that the Delaware

representatives undervalued the federal claims — claims

they could only settle, but never litigate, in a Delaware court.

Finally, the Epstein plaintiffs contend that the Vice

Chancellor improperly shifted the burden of proof;° he

(Cont'd)

this settlement was approved. In Prezant, however, the Delaware

Supreme Court largely reiterated and applied what this Court had

stated almost a decade earlier in Phillips Petroleum Co. v. Shutts,

472 U.S. 797, 808, 812 (1985). See also 2 R. Balotti & J. Finkelstein,

Delaware Law of Corporations and Business Organization § 13.22,

p. 13-131, and n. 578 (2d ed. 1996 Supp.).

8. The order approving the class for settlement purposes, the

Epstein plaintiffs urge, contains no discussion of the adequacy of

the representatives, see App. 198, and the order and final judgment

approving the settlement contains only boilerplate language referring

to the adequacy of representation, see id., at 204-205. The Delaware

Supreme Court approved the Court of Chancery’s judgment in a

one paragraph order. See Jn re MCA, Inc. Shareholders Litigation,

633 A.2d 370 (1993) (judgt. order).

9. Delaware law appears to place the burden of proof on the

class representatives. See 2 Balotti & Finkelstein, supra, at 11, n. 7,

(Cont’d)

eer poutine hel

37a

Appendix A

rejected the Delaware objectors’ charges of “collusion” for

want of evidence while acknowledging that “suspicions [of

collusion] abound.” Jn re MCA, Inc. Shareholders Litigation,

1993 WL 43024, at *5,!°

Mindful that this is a court of final review and not first

view, I do not address the merits of the Epstein plaintiffs’

contentions, or Matsushita’s counterargument that the issue

of adequate representation was resolved by full and fair

litigation in the Delaware Court of Chancery.'' These

(Cont'd) i

§ 13-17, p. 13- 121 (class representative must prove satisfaction of

Del. Ch. Rule 23(a) requirements, including adequacy of

representation); see also 7A C. Wright, A. Miller, & M. Kane,

Federal Practice and Procedure § 1765, pp. 273-274, and n. 29 (2d

ed.1986); 3B J. Moore, Moore’s Federal Practice § 23.02-2 (2d

ed.1995).

10. In this regard, it is noteworthy that Matsushita did not move

to dismiss the Delaware action after the Vice Chancellor, in rejecting

the first proposed settlement, surveyed the state-law claims and found

them insubstantial. See Jn re MCA, Inc. Shareholders Litigation,

598 A.2d 687, 694 (Del. Ch. 1991) (Vice Chancellor described “the

asserted state law claims” as “‘at best, extremely weak” and of “little

or no value’’).

11. Counsel for Matsushita acknowledged that relief from a

judgment may be sought in Delaware pursuant to that State’s

counterpart to Federal Rule of Civil Procedure 60(b). See Tr. of

Oral Arg. 51-52; Del. Ch. Rule 60: see also 2 Newberg & Conte,

supra, at 9, n. 5, §§ 11.27, 11.63 (Federal Rule of Civil Procedure

60(b) provides an avenue to challenge the adequacy of representation

in a class settlement).

38a

Appendix A

arguments remain open for airing on remand. | stress,

however, the centrality of the procedural due process

protection of adequate representation in class-action lawsuits,

emphatically including those resolved by settlement. See

generally J. Coffee, Suspect Settlements in Securities

Litigation, N.Y.L.J., March 28, 1991, p. 5, col. 1.

Th a ame Meh ts ale ne

39a

APPENDIX B— ORDER AND FINAL JUDGMENT OF

THE COURT OF CHANCERY OF THE STATE OF

DELAWARE IN AND FOR NEW CASTLE COUNTY

DATED FEBRUARY 22, 1993 AND

FILED FEBRUARY 23, 1993

IN THE COURT OF CHANCERY OF THE

STATE OF DELAWARE IN AND FOR

NEW CASTLE COUNTY

CONSOLIDATED

C.A. NO. 11740

IN RE MCA INC.

SHAREHOLDERS LITIGATION

ORDER AND FINAL JUDGMENT

On this 22 day of February, 1993, a hearing having been

held before this Court to determine whether the terms of the

Stipulation of Settlement dated October 22, 1992 (the

Stipulation”), and the terms and conditions of the settlement

proposed in the Stipulation (the “Settlement”), and all

transactions referred to therein or preparatory or incident

thereto, are fair, reasonable and adequate for the settlement

of all claims asserted herein: and whether judgment should

be entered in these civil actions (the “Actions”) dismissing

the Actions on the merits with prejudice as against all of the

plaintiffs and all members of the Settlement Class certified

in this Court’s Order dated October 27, 1992: and the Court

having considered all matters submitted to it at the hearing

and otherwise and the Court having rendered its

Memorandum Opinion dated February 12, 1993 approving

the Settlement and awarding attorneys’ fees and expenses:

40a

Appendix B

NOW, THEREFORE, IT IS HEREBY ORDERED

THAT:

1. The Notice and Summary Notice (as defined in 4 4(b)

of the Stipulation), is hereby determined to have been the

best practicable notice under the circumstances and in full

compliance with Rule 23 of the Court of Chancery and the

requirements of due process and it is hereby further

determined that the plaintiffs in the Actions, as

representatives of the Settlement Class, have fairly and

adequately protected the interests of the Settlement Class

and that the maintenance of this action as a class action meets

all the requirements of Rule 23(a) and (b)(3) of the Court of

Chancery.

2. The Stipulation and the Settlement are approved as

fair, reasonable and adequate and in the best interests of the

plaintiffs and the Settlement Class, and the parties are

directed to consummate the Settlement in accordance with

the terms and provisions of the Stipulation, provided that

any additional Requests for Exclusion received after the

deadline set in paragraph 6 of the Hearing Order dated

October 27, 1992 but prior to February 12, 1993 will be

effective.

3. (a) The Actions are hereby dismissed with prejudice

on the merits as to all defendants in the Actions (regardless

of whether any such defendant has been served or entered

an appearance in any of the Actions) and their respective

present and former officers, directors, employees, agents,

attorneys, financial advisors, commercial bank lenders,

investment bankers, representatives, trustees, affiliates,

iia

4la

Appendix B

associates, parents, subsidiaries, general and limited partners

and partnerships, heirs, executors, administrators, successors

and assigns (including Lazard Freres & Co. (financial advisor

to MCA), Allen & Co. Inc. (financial advisor to Matsushita)

and Creative Artists Agency Inc. (advisor to Matsushita))

(collectively, the “Released Persons”), as against plaintiffs

and all members of the Settlement Class (other than those

who have validly requested exclusion therefrom) and their

successors and assigns, whether known or unknown, whether

directly or in any other Capacity, without costs except as

provided in the Stipulation, such dismissal to be subject only

to compliance by the parties with the terms and conditions

of the Stipulation and any Order of this Court with reference

to the Stipulation.

(b) All claims, rights and causes of action (state or

federal, including but not limited to claims arising under

the federal securities laws, any rules or regulations

promulgated thereunder, or otherwise), whether known

or unknown that are, could have been or might in the

future be asserted by any of the plaintiffs or any member

of the Settlement Class (other than those who have

validly requested exclusion therefrom), whether directly,

derivatively, representatively or in any other Capacity,

against any of the Released Persons or against anyone

else in connection with or that arise now or hereafter

out of the Merger Agreement, the Tender Offer, the

Distribution Agreement, the Capital Contribution

Agreement, the employee compensation arrangements,

the Tender Agreements, the Initial Proposed Settlement,

this Settlement (except for compliance with the

Settlement), or any matters, transactions or occurrences

42a

Appendix B

referred to in the December 4, 1990 Claim Letter and

the Amended Complaint in the Action, or the fiduciary

or disclosure obligations of any of the Released Persons

with respect to any of the foregoing, and including

without limitation the claims asserted in the California

Federal Actions, the Second Minton Action and the

Second Epstein Action (all as defined in the Stipulation)

(all of which are hereinafter collectively referred to as

the “Settled Claims”) are hereby compromised, settled,

released and discharged with prejudice by virtue of the

proceedings herein and this Order and Final Judgment.

4. The plaintiffs and all members of the Settlement Class

(other than those who have validly requested exclusion

therefrom), their successors and assigns, whether acting

directly, derivatively, representatively or in any other

capacity, are hereby permanently barred and enjoined from

instituting or prosecuting any other action in any court of

this or any other jurisdiction based upon, relating to, or for

the purpose of enforcing any of the Settled Claims.

5. Plaintiffs’ attorneys of record herein are hereby

awarded the sum of $250,000 in fees and reimbursement of

expenses in connection with the Actions, which sum the

Court finds to be fair and reasonable and which shall be paid

to plaintiffs’ attorneys according to the terms set forth in the

Stipulation. Said sum shall accrue interest and be paid in

accordance with paragraph 8 of the Stipulation.

s/ [illegible]

Vice Chancellor

43a

APPENDIX C — EXCERPTS FROM TRANSCRIPT OF

ARGUMENT ON PLAINTIFFS’ APPLICATION FOR

APPROVAL OF A SETTLEMENT AND ATTORNEYS’

FEES OF THE COURT OF CHANCERY OF THE

STATE OF DELAWARE IN AND FOR NEW CASTLE

COUNTY DATED JANUARY 21, 1993

IN THE COURT OF CHANCERY OF THE

STATE OF DELAWARE IN AND FOR

NEW CASTLE COUNTY

C.A. No. 11740

IN RE MCA INC.

SHAREHOLDERS LITIGATION

Courtroom No. 106

Public Building

Wilmington, Delaware

Thursday, Jan. 21, 1993

12:04 p.m.

BEFORE: HON. MAURICE A. HARTNETT, III,

Vice Chancellor.

ARGUMENT ON PLAINTIFFS’ APPLICATION

FOR APPROVAL OF A SETTLEMENT

AND ATTORNEYS’ FEES

* * *

[49] MR. ALLYN: May it please the Court: My name

is James Allyn. I represent the objector, William Krupman.

44a

Appendix C

Vice Chancellor, this settlement is not fair and it should

not be approved. In explaining why, I will first describe how

Mr. Krupman and I came to be here today, since you have

heard allegations that he and I are pawns or straw men of the

Kaufman Malchman firm.

I am a solo general practitioner in New York City. It is

an honor for me to be here in this courtroom witl. these

distinguished lawyers today. I am not an expert in securities

litigation. Does that buttress their claim that he and | are

pawns of Kaufman Malchman? No. In fact, it rebuts that

claim, as I will explain.

Mr. Krupman is my father-in-law. We have an excellent

relationship. That also means that my expected

reimbursement for fees and expenses in this matter is about

$691,000 less than what the plaintiffs’ attorneys seek.

How did Mr. Krupman come to be an objector here? In

November he asked me to review a proposed settlement that

was submitted to him. [50] At the end of November at a

family dinner he asked me what | thought about it. I did

some calculations and came up with the number that he was

being offered $2 a share. Fortunately, another relative who

is an accountant was there, and he came up with the correct

figure of two cents a share. | told him that the attorneys were

going to submit an application to get $600,000 in fees.

Mr. Krupman was extremely upset. He believes that

MCA was worth more than it was sold for. The deal happened

at the price due to an extremely generous compensation

package which was received by the directors. He felt the

tender offer was inadequate and now he was being presented

45a

Appendix C

with a settlement that was inadequate. He asked me to find

Out how to register his displeasure.

A few days later he gave me the name of a gentleman

named Ernest Kaufman in Los Angeles, and asked me to

call him for information. I called Mr. Kaufman at the

beginning of December. I left a message that I wanted to

talk about the MCA case. He never called me back.

Being busy with other matters such as making a living,

I did not call Mr. Kaufman again, [51] which is a

demonstration of inertia that occurs even among those who

wish to object to a settlement.

In mid-December a friend called me up. He asked me to

initiate a class action against National Health Laboratories,

whose stock had plummeted after they pled guilty to

defrauding the government. | explained to my friend that |

was not qualified to handle such litigation, given the size of

my practice and the level of my experience. I requested that

that person send me a copy of the complaint in the matter.

Returning to my office after Christmas, on my desk was

a letter from Mr. Jeffrey Squire of the Kaufman Malchman

firm. It turned out that his firm had handled the National

Health Laboratories matter. He enclosed a copy of the

complaint, along with a cover letter stating that I should feel

free to call him if I had any questions about the complaint or

if I wanted to discuss securities litigation in general.

I called and left a message for him to thank him for

sending me the materials. I also noticed that he was from

the Kaufman Malchman firm, the same firm as Ernest

Kaufman in Los Angeles.

46a

Appendix C

[52] Mr. Squire was on vacation. However, | left a

message. He returned my call nonetheless. | thanked him. |

then asked him if he knew anything about MCA. I told him

that Mr. Krupman was very displeased and if there was

anything he could do, I asked him for ideas and advice on

how to contest the settlement. We discussed the case, and

Mr. Squire offered to provide materials to use in drawing up

an objection. He sent me the Exhibits B through K, which

are mainly the federal appeals briefs, which are attached to

Mr. Krupman’s affidavit, plus a draft objection.

1 reviewed these and then called Peter Linden at the

Kaufman firm to further discuss them. I edited the draft, typed

it into my computer. | then discarded the draft that Kaufman

Malchman had provided to me. | printed my own draft, and

went through this process a number of times, revising my

drafts each time. I do not have a copy of what Kaufman

Malchman gave me. | have since stated that in a document

request which was made to Mr. Krupman. | asked Kaufman

Malchman to provide me with a copy, but they are unable to

do so.

I then showed the draft affidavit to [53] Mr. Krupman. I

discussed the case with him. He revised the affidavit. | made

those changes, and we submitted the affidavit.

The settlement proponents now say that we are a pawn

of Kaufman Malchman. That is very ironic to me. We

serendipitously came into contact with them after Mr.

Kaufman in Los Angeles did not return my initial phone call.

> tal * 7.

47a

APPENDIX D — AMENDED STOCKHOLDERS’

CLASS ACTION COMPLAINT DATED AND

FILED DECEMBER 14, 1990

IN THE COURT OF CHANCERY OF THE

STATE OF DELAWARE IN AND FOR

NEW CASTLE COUNTY

CONSOLIDATED CIVIL

ACTION NO. 11740

IN RE:

MCA INC. SHAREHOLDERS LITIGATION

AMENDED STOCKHOLDERS’

CLASS ACTION COMPLAINT

Plaintiffs allege upon information and belief. except for

paragraph 5 which is alleged upon knowledge, as follows:

NATURE OF THE ACTION

1. This is a stockholders’ class action on behalf of the

- public stockholders of MCA Inc. (“MCA” or the “Company”)

who are being deprived of the opportunity to maximize the

value of their MCA common stock in the sale of the

Company. This Amended Stockholders’ Class Action

Complaint (the “Amended Complaint”) is being filed

pursuant to the Stipulation and Order governing scheduling

in this action. The Amended Complaint incorporates

plaintiffs’ allegations against defendants as set forth in a

letter dated December 4, 1990, from Steven Schulman,

Esquire, to Herbert M. Wachtell, Esquire.

48a

Appendix D

2. As more fully described herein, on November 26,

1990, defendants Lew R. Wasserman (““Wasserman’’) and

Sidney Jay Sheinberg (“Sheinberg”), together with other

members of MCA senior management and their advisors,

entered into a merger agreement which provides for the sale

of MCA to Matsushita Electric Industrial Co. (““Matsushita’’),

a Japanese corporation and one of the world’s largest

consumer electronic manufacturers (the “Merger’”). As part

of the Merger, Matsushita commenced a tender offer to

MCA’s stockholders on November 30, 1990, for all of

MCA’s common stock at a price of $66 per share plus a

purportedly pro rata distribution of the stock of one of MCA’s

businesses, WWOR-TV (the “Tender Offer’). The Tender

Offer expires by its terms on December 29, 1990.

3. The decision by defendants to sell the Company

imposes upon them fundamental fiduciary duties to disclose

all material facts to the Company’s stockholders with

complete candor and to seek the best possible transaction

for the stockholders through implementation of bidding

mechanisms or the exploration of strategic alternatives

designed to assure the maximization of stockholder value.

MCA’s board of directors (named as defendants in this

action) have been and are breaching their fiduciary duties to

the stockholders of MCA by, inter alia, (1) failing adequately

to disclose to MCA’s stockholders material facts necessary

to make an informed decision about the Tender Offer and

Merger, including substantial conflicts of interest involving

defendants Wasserman and other MCA senior management

and MCA’s Board of Directors, the future status of WWOR-

TV, prior market contacts from other potential purchasers

of MCA, and other material information, (2) giving

49a

Appendix D

preferential treatment to defendant Wasserman by paying

him preferred stock rather than the consideration paid to the

public stockholders, and (3) negotiating and entering the

Merger agreement on a preferential basis with Matsushita

and failing to implement the auction or other bidding

mechanisms or market check procedures necessary to assure

that the stockholders receive the highest possible price in

connection with the change in control.

4. The Merger is designed by the Individual Defendants

and other members of MCA senior management to entrench

the officers and directors of MCA in the management and

control of MCA and to advance their own personal interests

at the expense of MCA’s public stockholders. Indeed, the

Merger represents the culmination of a series of steps which

the Individual Defendants have taken to deter and ultimately

thwart any unsolicited expression of interest to acquire the

Company which they have not initiated Or approved. In

furtherance of these efforts, the Individual Defendants over

the last several years have adopted and utilized an array of

defensive weapons, including (a) a “poison pill” created for

the purpose of discouraging unsolicited takeover attempts

and usurping from MCA’s stockholders the power to accept

or reject any proposal for the purchase of their shares; (b)

lucrative severance agreements (or “golden parachutes”) to

several executive officers of the Company; and (c) a

“staggered” board intended to deter any unsolicited

acquisition efforts.

5. The Individual Defendants and other members of

MCA senior management with whom they are allied are

attempting to transfer the entire ownership and control of

50a

Appendix D

the Company’s outstanding shares at a price substantially

below their fair and intrinsic value, in order to gain valuable

personal benefits from Matsushita in the Merger. As shown

herein, the Merger and Tender Offer are timed to take

advantage of a recent serious decline in the market value of

MCA’s common stock resulting from a temporary and

reversible decline in revenues and net income caused inter

alia, by the Company’s expansion plan and a temporary

market decline due to world events, including the Persian

Gulf crisis. The long-term benefits which will result from

this plan vastly exceed the immediate costs and burdens

involved in developing these business opportunities and

demonstrate that Matsushita in conjunction with the

Individual Defendants is attempting to appropriate for itself

the future growth and profitability of this entertainment giant

without providing adequate disclosure of material

information and obtaining fair and adequate consideration

for the MCA public stockholders.

6. Preliminary and permanent injunctive relief and other

equitable remedies are necessary to protect MCA public

stockholders from the immediately threatened divestiture of

their equity interest in MCA under circumstances

representing a gross deviation from the enhanced fiduciary

responsibilities which Delaware law imposes in connection

with the sale of a company or any other fundamental change

in corporate control.

THE PARTIES

7. Plaintiffs are owners of shares of common stock of

MCA who have been damaged and are threatened with

Sla

Appendix D

further injury by the wrongful actions of the defendants as

set forth below. They bring this action as a class action on

behalf of the public stockholders of MCA.

8. Defendant MCA is a Delaware corporation that

maintains its principal executive offices in Universal City,

California. MCA is an international concern engaged in the

production and distribution of theatrical, non-theatrical,

television and home video products; licensing of

merchandising rights and film property publishing rights;

manufacture and distribution of recorded music and music

publishing; operation of amphitheaters; manufacturing and

licensing of entertainment/sports apparel, non-consumable

concessions for sports/entertainment events and other music

entertainment activities: retailing and mail order of gift

merchandise; book publishing; television broadcasting;

recreation services; and real estate development.

9. At all relevant times herein, each of the following

defendants (collectively, the “Individual Defendants”) were

directors of MCA and/or senior officers of MCA.

a. Lew R. Wasserman is Chairman of the Board,

Chief Executive Officer and a member of the Executive

Committee. Wasserman’s current annual salary is

approximately $900,000. Wasserman also owned as of

January 31, 1990 over 4.9 million shares of MCA

common stock representing approximately 6.7% of the

common shares outstanding. In connection with the

Merger, Wasserman will receive an enhanced salary of

at least $3 million annually, as well as preferred stock

in Holding that will pay him a cash dividend exceeding

$28 million annually.

52a

Appendix D

b. Sidney Jay Sheinberg (“Sheinberg”) 1s a Director,

President and Chief Operating Officer and a member of

the Executive Committee. Sheinberg’s current annual

salary is approximately $900,000. Sheinberg also owned

as of January 31, 1990, approximately 1.3 million shares

of MCA common stock, representing approximately

1.8% of the common shares outstanding. In connection

with the Merger, Sheinberg will receive an enhanced

salary of over $8 million annually, plus a cash bonus of

$21 million.

c. Thomas P. Pollock (“Pollock”) is a Director and

Executive Vice President. Pollock’s current annual

salary is $850,000. Pollock also owned as of January

31, 1990, 144,240 shares of MCA common stock,

representing approximately .02% of the amount of

common shares outstanding. As part Of the Merger,

Pollock will receive $16.7 million in bonuses and

incentives.

d. Thomas Wertheimer (“Wertheimer”) tis a

Director, Executive Vice President and a member of the

Executive Committee. Wertheimer’s current annual

salary is $650,000. Wertheimer also owned as of January

31, 1990, 227,235 shares of MCA common stock,

representing approximately .03% of the amount of

common shares outstanding. In connection with the

Merger, Wertheimer will receive $7.7 million in bonuses

and incentives.

e. Charles S. Paul (“Paul”) is a Director and

President of MCA Enterprises, a subsidiary of MCA. In

53a

Appendix D

connection with the Merger, Paul will receive $12.3

million in bonuses and incentives.

f. Howard H. Baker (“Baker”), a Director, is a

Partner in the law firm of Baker, Worthington, Crossley,

Stansberry & Woolf. Baker’s firm will receive

substantial compensation from MCA for services

purportedly rendered in the Tender Offer and Merger.

g. Robert S. Strauss, a Director, is a Partner in the

law firm of Akin, Gump, Strauss, Hauer & Feld. Strauss’

firm represented both MCA and Matsushita in

connection with the Tender Offer and Merger. His firm

will receive $8 million from MCA for its services

purportedly rendered in connection with the challenged

transaction, and an undisclosed sum for its representation

of Matsushita.

h. Felix G. Rohatyn, a Director, is a General Partner

of Lazard Freres & Co. (“Lazard”) which served as the

principal financial advisor to MCA, and delivered a

“fairness opinion” in connection with the Tender Offer

and Merger, for which Lazard will receive over $16.8

million in the event that a sale of the Company is

accomplished.

i. Defendants Thomas V. Jones, Howard P. Allen,

and Mary Gardiner Jones are each members of MCA’s

Board of Directors. These directors receive annual

directors’ compensation of $18,000, plus $18,000 per

year for each committee on which they serve, and $1,500

for each directors’ and committee meeting they attend.

54a

Appendix D

10. Defendant Matsushita, a company organized under

the laws of Japan, is one of the world’s largest producers of

consumer electronic and electric products with sales in fiscal

1990 of more than $37 billion. Matsushita operates 117

companies in 39 countries. Matsushita’s principal executive

offices are located in Osaka, Japan. Defendant Matsushita

Acquisition Corp. (“Acquisition”), a Delaware corporation

and a wholly-owned subsidiary of defendant Matsushita

Holding Corp. (“Holding”’), also a Delaware corporation, has

been incorporated for the purpose of purchasing all the

common stock of MCA. Under Section 6.17 of the Merger

Agreement, defendants Matsushita, Acquisition and Holding

submit to the personal jurisdiction of this Court.

11. All officers and directors of MCA, as a group,

including the Individual Defendants, beneficially owned over

7 million shares of MCA common stock, or nearly 10% of

MCA’s common stock outstanding as of January 31, 1990.

12. By virtue of their positions as directors and/or

officers of MCA and their exercise of control over the

business and corporate affairs of MCA, the Individual

Defendants have and at all relevant times had the power to

control and influence, and did control and influence and cause

MCA to engage in the practices complained of herein. Each

Individual Defendant owed and owes MCA and its

stockholders fiduciary obligations and were and are required

to: fulfil their duty of candor to the stockholders by making

timely and adequate disclosures in press releases and in the

materials filed with the Securities Exchange Commission

(“S.E.C.”) in connection with the Tender Offer and Merger,

including Schedules 14D-1 and '4D-9; use their ability to

55a

Appendix D

control and manage MCA ina fair, just and equitable manner;

act in furtherance of the best interests of MCA and its

stockholders; act to maximize stockholder value; govern

MCA in such a manner as to heed the expressed views of its

public shareholders; refrain from abusing their positions of

control; and not to favor their own interests at the expense

of MCA and its stockholders. MCA has distributed the Offer

to Purchase to its stockholders together with the Schedule

14D-9 and Matsushita has the ri ght to “review and comment”

upon disclosure materials of MCA in connection with the

Tender Offer and Merger. Therefore, all defendants are

jointly responsible for the inadequate disclosures provided

to MCA stockholders in connection with the challenged

transactions.

13. By virtue of the acts and conduct alleged herein,

the Individual Defendants, who contro] the actions of the

Company, are breaching their fiduciary duties to the public

stockholders of MCA.

14. The Individual Defendants are sued individually as

conspirators and aiders and abettors, as well as in their

Capacity as officers and/or directors of the Company, and

the liability of each arises from the fact that they have

engaged in all or part of the unlawful acts, plans, schemes or

transactions complained of herein.

15. Matsushita, Acquisition and Holding are acting in

concert with the Individual Defendants and are sued as

conspirators and aiders and abettors of the Individual

Defendants.

56a

Appendix D

CLASS ACTION ALLEGATIONS

16. Plaintiffs bring this action pursuant to Rule 23 of

the Rules of the Court of Chancery on behalf of themselves

and all other stockholders of MCA, or their successors in

interest (the “Class”). Excluded from the Class are the

defendants, members of the immediate families of the

Individual Defendants or their representatives, and directors,

officers, subsidiaries, controlled affiliates, and partners of

any of the defendants.

17. The action is properly maintainable as a class action

for the following reasons:

a. The Class is so numerous that joinder of all

members is impracticable. As of January 31, 1990, MCA

had in excess of 73,000,000 shares of common stock

outstanding held by thousands of stockholders of record

and beneficial owners;

b. The members of the Class are scattered

throughout the United States and are so numerous as to

make it impractical to bring all of them before this Court;

c. There are questions of law and fact which are

common to the Class and which predominate over

questions affecting only individual Class members. The

common questions include, inter alia, the following:

i) whether the Individual Defendants have

breached their fiduciary obligations to plaintiffs and

the other members of the Class by failing and

S7a

Appendix D

refusing to attempt in good faith to maximize

stockholder value in the sale of the Company;

ii) whether the Individual Defendants have

breached the fiduciary and other common law duties

including the duty of complete candor owed by them

to plaintiffs and the other members of the Class; and

iil) whether defendants have subjected MCA to

potential liability under S.E.C. Rules 14d-7, 14d-10,

10b-13 and 13e-3, promulgated under the Securities

and Exchange Act of 1934 (the “Exchange Act”),

thereby causing MCA to expend and waste corporate

assets that could have been distributed for the benefit

of MCA’s public stockholders: and

iv) whether plaintiffs and the other members

of the Class are being or will continue to be injured

by the wrongful conduct alleged herein and, if so,

What is the proper remedy and/or measure of

damages.

18. Plaintiffs are committed to prosecuting this action

and have retained competent counsel experienced in litigation

of this nature. The claims of plaintiffs are typical of the

claims of other members of the Class and plaintiffs have the

same interests as the other Class members.

19. A class action is superior to other available methods

for the fair and efficient adjudication of this action, and no

unusual difficulties are likely to be encountered in the %

58a

Appendix D

management of this class action. The likelihood of individual

Class members prosecuting separate claims is remote.

20. Defendants have acted and are about to act on

grounds generally applicable to the Class, thereby making

appropriate final injunctive or corresponding declaratory

relief with respect to the Class as a whole.

BACKGROUND

21. MCA is a recognized leader in the entertainment

industry operating in six major business segments: film

entertainment (51% of 1989 revenues of $3.4 billion); music

entertainment (23%); retail and mail order (8%); book

publishing (6%); broadcasting and cable (5%); and other

operations (7%). MCA has had outstanding financial results

in recent years as evidenced by the growth in sales and

earnings as summarized below:

MCA Five Year Summary

(all figures in thousands except growth rate and EPS)

Year Sales Net Income EPS(S)

1989 3,382,344 191,773 2.62

1988 2,900,339 164,916 2.26

1987 2,479,105 137,254 1.82

1986 2,230,018 150,904 1.97

1985 2,021,078 149,959 2.02

5-Year Growth Rate (%) 13.70 6.30 6.70

59a

Appendix D

22. In June 1989, the Company opened its new

Universal Florida theme park which will operate in direct

competition with the Disney World facility in Orlando,

Florida. MCA also scored a recent coup when it paid the

equivalent of $550 million in preferred stock for Geffen

Records, a leading member of the recording industry. It also

owns WWOR-TV, an independent New York area television

station, and has a 50% stake in the cable USA Network.

23. On July 19, 1990, defendant Wasserman announced

that for both the three and six months ended June 30, 1990,

the Company reported record second quarter and first half

revenues and higher net income than the comparable periods

of 1989. Revenues for the second quarter of 1990 were

$949,942.000 compared to $828,256,000 for 1989. Net

income was $44,781,000 or $0.54 per share compared to

$41,972,000 or $0.58 per share for 1989. The weighted

average number of common and common equivalent shares

used in the determination of earnings per share for the three

months ended June 30, 1990 and 1989 was 83,245,493 and

73,142,872, respectively. The 1990 calculations of earnings

per share include the equivalent common shares for the

Company’s Series B convertible preferred shares issued

during the second quarter of 1990 in connection with the

Geffen acquisition.

24. Similarly, revenues for the first half of 1990 were

$1,862,888 compared to $1,531,602 for 1989. Net income

was $76,359,000 or $0.96 per share compared to $69,313,000

or $0.95 per share for 1989.

60a

Appendix D

25. MCA’s film entertainment group reported record

revenues and operating incomes in the second quarter of

1990. The music entertainment group also reported record

revenues and operating income for the second quarter of

1990. Broadcasting and cable reported record revenues and

operating incomes in the second quarter of 1990 due to

improved results for WWOR-TV and the USA Network.

Retail and mail order had higher revenues in 1990 due to

higher retail store sales.

26. The fiscal 1989 financial statements show that

MCA’s financial condition is also strong. The current ratio

(current assets: current liabilities) was above 2X as it had

been during the two years previous while the Company's

debt/equity ratio decreased from 0.79 to an even more

conservative 0.65.

27. Recognizing the strength of MCA’s assets and the

quality of its operations, industry financial analysts have

conservatively valued MCA at up to $100 per share.

However, MCA, like other media and entertainment

companies, has recently suffered a serious decline on Wall

Street. Since July, 1990, the market value of the stock has

declined from a high of approximately $64 per share to as

low as $34 per share immediately prior to the announcement

of a prospective transaction with Matsushita. The decline in

the value of the stock was accelerated by reports concerning

problems incident to the opening of the vast new theme park

in Orlando, Florida, the perceived dilution caused by the

issuance of substantial additional shares to the Geffen

interests in connection with the Geffen acquisition, and the

overall market decline attributed to the Persian Gulf crisis.

6la

Appendix D

These factors are temporary and reversible and do not detract

from the impressive long-term strengths of the Company.

28. On September 25, 1990, the Wall Street Journal

reported that Matsushita was negotiating with MCA over an

acquisition transaction involving the entertainment giant.

Both MCA and Matsushita thereafter publicly confirmed that

representatives of the respective companies were involved

in negotiations regarding a prospective change in control

transaction. According to published reports, the widespread

perception among major stock traders and financial analysts

was that an announcement of a sale transaction was

imminent. Reflecting these expectations, the market price

of MCA common stock surged dramatically upward

immediately upon announcement of these events from

$34 1/2 per share to close at $54 per share on September 25,

1990, a net increase of 57%,

29. On September 26, 1990, plaintiffs filed their original

Shareholders’ Class Action Complaint (the “Original

Complaint”). The Original Complaint sought injunctive and

declaratory relief, as well as money damages, against an

improper transaction between MCA and Matsushita.

30. On November 26, 1990, MCA entered into an

Agreement of Merger with Matsushita. Under the Merger

Agreement, Acquisition on November 30, 1990 commenced

the Tender Offer to purchase all of MCA’s common stock at

a price of $66.00 per share in cash. On the same day,

defendants filed Schedules 14D-1 and 14D-9 with the S.E.C.

and distributed to MCA’s stockholders the Offer to Purchase.

The Tender Offer expires on December 29. 1990. The Merger

62a

Appendix D

Agreement also calls for MCA to spin off to its stockholders,

on a purportedly pro rata basis, its interest in the television

station WWOR-TV.

31. In addition, the principals to the transaction have

negotiated and entered into a series of other transactions and

agreements, including the following:

a) The Option Agreement, which provides for MCA

to grant to Matsushita an irrevocable option to purchase

16,880,788 shares of MCA stock at a price of $71 per share

in the event that (1) a third party commences a tender offer

for 50% or more of MCA’s stock, (2) a third party acquires

33% or more of MCA’s stock, or (3) the MCA Board

withdraws or modifies its recommendation or approval of

the Merger;

b) The Capital Contribution Agreement, which

provides for defendant Wasserman to contribute 4,953,927

shares of MCA stock to Holding in exchange for Holding

preferred stock. Under this agreement, Wasserman, unlike

the public stockholders of MCA, will receive consideration

for his MCA stock in a tax-free transaction;

c) The Tender Agreements, which provide for

defendants Sheinberg and Geffen to tender their MCA stock

into the Tender Offer; and

d) The Distribution Agreement, which provides for

MCA to spin off WWOR-TV tc its stockholders. The

Distribution agreement also calls for WWOR-TV to adopt a

63a

Appendix D

“share purchase rights plan,” or poison pill, acceptable to

defendants following the Merger.

32. As detailed in paragraph 9, above, the Merger also

provides for substantial payments and other benefits for

certain of the Individual Defendants that will not be shared

by MCA’s public stockholders. For example, defendant

Sheinberg will receive a $2] million cash bonus, plus a

reported $9.6 million in “incentive awards.” Sheinberg also

will receive an enhanced salary of $8.6 million per year under

the Merger Agreement, up from approximately $900,000

under his prior contract with MCA. Defendant Wasserman

will receive an enhanced salary of at least $3 million per

year under the Merger Agreement, up from less than

$900,000 under his prior contract with MCA.

33. Additionally, defendant Wasserman, unlike the

public stockholders of MC A, also will receive new preferred

stock in Holding in order to reap the substantial, additional

benefits of a tax-free transaction. MCA’s public stockholders

do not have the Opportunity to participate in ariy such tax-

free exchange. Defendant Wasserman’s Holding preferred

stock will pay a dividend of $28.6 million per year, up from

the over $3 million he currently receives annually. Finally,

other senior officers of MCA will receive “bonuses” and

“incentives” totalling almost $55 million in the Merger, as

described above in paragraph 9.

34. The Tender Offer and Merger are timed to take

advantage of a temporary downturn in the price of MCA

common stock. MCA’s stock price has recently declined

primarily due to the initial probleins experienced in opening

64a

Appendix D

the Florida theme park, the dilutive impact of the Geffen

acquisition, and temporary world economic conditions.

Shortly prior to announcement of the Merger discussions in

September, 1990, MCA stock traded at approximately $34

to $35 per share. However, in 1989, the stock traded at prices

considerably above the $66 Tender Offer price. The Tender

Offer and Merger will occur at a time when the Company is

poised to enjoy significantly increased earnings in the future,

as the operations of the Florida theme park are stabilized

and the beneficial impact of the Geffen acquisition is realized.

35. The intrinsic value of the Company materially

exceeds the $66.00 per share and WWOR-TV stock value

which Matsushita will pay in the Tender Offer. Given the

Company’s potential growth and profitability, the underlying

strength of its assets, growth plans, resources and

accessibility to public and private financing, the price to be

paid to the public stockholders is unfair and inadequate.

DEFENDANTS’ BREACHES OF

THEIR DUTY OF CANDOR

36. Defendants have breached and continue to breach

their duties of candor to MCA’s public stockholders by

failing to disclose adequately material information

concerning the Tender Offer and Merger. Under Section 4.06

of the Merger Agreement, MCA has the opportunity to

review and comment upon Matsushita’s Offer to Purchase

and Schedule 14D-1. Moreover, all defendants acted in

concert with and/or aided and abetted one another in filing

and disseminating Matsushita’s Offer to Purchase, Schedule

14D-1 and Schedule 14D-9. Finally, MCA’s 14D-9

65a

Appendix D

disseminated the Offer to Purchase as an exhibit thereto.

Therefore, all defendants are responsible jointly for the

inadequate and misleading disclosures provided to MCA’s

stockholders in connection with the Tender Offer and Merger.

37. Defendants have breached their duties of candor to

MCA’s public stockholders by failing to disclose adequately

the nature and circumstances of the substantial benefits that

the Individual Defendants will receive in the Merger. The

Offer to Purchase and Schedules 14D-1 and 14D-9 give the

misleading impression that Sheinberg’s, Wasserman’s and

certain of the other Individual Defendants’ lucrative

employment and bonus agreements, as described above in

paragraph 9, were imposed “as a condition tc Matsushita’s

willingness to agree to enter the Merger Agreement... .”

and are not substantially greater than they would be if not

for the Merger (See Offer to Purchase; Schedule 14D-9 at

23-26). In fact, Sheinberg’s, Wasserman’s and the other

Individual Defendants’ personal benefits from the Merger

were insisted upon by MCA management as the price of its

willingness to negotiate with Matsushita and are far greater

than the Individual Defendants could have expected to

receive in the ordinary course. Matsushita willingly agreed

to pay, and encouraged the payment of, such compensation

because of its expectation that this would vastly limit the

independence of senior management and the MCA Board in

negotiating with Matsushita and thereby save the purchaser

potentially hundreds of millions or billions of dollars in

acquisition costs that a fully disinterested MCA Board would

have insisted upon. The portrayal of the management benefits

as consistent with ordinary practice and as proceeding from

the wishes of the purchaser to secure the services of the

66a

Appendix D

present MCA officers and directors is materiaily false and

deceptive and calculated to present a neutral or positive

impression of special arrangements, which create serious

conflicts of interest that the defendants have attempted to

conceal.

38. Defendants also have breached their duties of candor

by failing adequately to disclose their intention to retain de

facto control over WWOR-TV following the spinoff of that

entity to MCA’s stockholders in the Merger. The Offer to

Purchase and Schedules 14D-1 and 14D-9 falsely suggests

that WWOR-TV could be put up for sale on the basis of

competitive bidding following the Merger. In fact, the

provision in the Merger for a board of directors following

the spinoff that will be dominated by MCA management and

the planned implementation of a shareholder rights plan, or

“poison pill” have both the purpose and effect of entrenching

in the control of WWOR-TV the MCA designees, and

preventing a sale of the television station on the basis of

effective and competitive bidding.

39. Additionally, defendants have breached their duty

of candor to MCA’s public stockholders by failing adequately

to disclose significant and material information about the

various operating segments of MCA that has been concealed

from the public stockholders but provided exclusively to

Matsushita. The Schedule 14D-9 creates the false impression

that such information would not be “material” to MCA’s

stockholders. In fact, such concealed information would be

of significance to MCA stockholders who must make an

informed election between exchanging their shares in the

Tender Offer or Merger and a statutory appraisal proceeding.

67a

Appendix D

Defendants’ failure to disclose both the material nature of

this information and the information itself constitute breaches

of defendants’ duty of candor.

40. Defendants also have breached their duty of candor

by failing to disclose prior market contacts between MCA

and other potential purchasers which would indicate to

MCA’s stockholders the level of market interest MCA could

attract in an open and effective auction. The Offer to Purchase

and Schedules 14D-1 and 14D-9 falsely indicate that ‘no

party other than Matsushita had made or expressed any

interest in making a proposal to acquire the Company... .”

(See, e.g., Schedule 14D-9 at 40). Defendants have failed to

disclose that interested purchasers were rebuffed by

defendants when such potential purchasers refused to grant

the Individual Defendants the generous personal benefits

granted by Matsushita. Such information would materially

assist MCA’s stockholders in assessing the fairness and

adequacy of the Tender Offer and Merger.

41. Finally, defendant Wasserman’s equity participation

in Holdings following the Merger demonstrates that the

parties are engaged in a form of “going private” transaction

subject to the disclosure requirements of S.E.C. Rule 13e-3,

promulgated under the Exchange Act. However, defendants

have not made the required filings with the S.E.C. which

would be required to be made were they proceeding in

accordance with Rule 13e-3. In particular, the Lazard

investment banker’s “book” has not been made publicly

available as would otherwise be the case were the parties

proceeding in accordance with the requirements of Rule 13e-

3. Material information regarding the fairness and adequacy

68a

Appendix D

of the proposed transaction has thus been withheld from the

investing public. Delaware fiduciary duties of complete

candor incorporate the requirement to make available in a

“going private” transaction the materials required by Rule

13e-3.

DEFENDANTS’ BREACHES OF THEIR FIDUCIARY

DUTIES TO MAXIMIZE STOCKHOLDER VALUES

AND ACT IN THE BEST INTERESTS

OF THE STOCKHOLDERS

42. Defendants owe fundamental fiduciary obligations

of complete candor to the Company’s stockholders in

connection with the Tender Offer and Merger. Defendants

also owe fundamental fiduciary obligations to the Company’s

stockholders to take all necessary and appropriate steps to

maximize the value of their shares in implementing such a

transaction. In addition, the Individual Defendants have the

responsibility to act independently so that the interests of

MCA’s public stockholders will be protected, and to conduct

fair and active bidding procedures or other mechanisms for

checking the market to assure that the highest possible price

is achieved. Further, the directors of the Company must

adequately insure that no conflict of interest exists between

defendants’ own interests and their fiduciary obligations to

maximize stockholder value or, if such conflicts exists, to

insure that all such conflicts will be resolved in the best

interest of the Company’s public stockholders.

43. In breach of their fiduciary duty, a majority of the

MCA Board of Directors have financial or other conflicting

interests in the success of the transaction. Senior management

69a

Appendix D

are eligible to receive bonus and compensation payments

immensely greater than they would otherwise receive under

their present contracts. Mr. Wasserman has negotiated a very

favorable agreement in connection with the Merger which

will insulate him from costly taxes. Defendant Baker faces

a significant conflict of interest because of substantial

payments made to his law firm in connection with the

Merger. Defendant Strauss similarly faces a substantial

conflict of interest because of the dual representation by his

law firm of Matsushita and MCA and in fact participated in

the deliberations of the Board regarding the Tender Offer

and Merger, although abstaining from voting on the Merger.

Defendant Rohatyn cannot claim any objectivity with respect

to his support for the Merger because of the multi-million

dollar fees which Lazard — the principal financial advisor

in the Merger and a firm in which Rohatyn is a General

Partner — will receive in the event that the Merger is

consummated. In addition, Lazard’s “fairness” opinion is

unreliable because of the agreement which Lazard has

arranged, by which Lazard receives multi-million dollar

advisory fees contingent upon the completion of the

acquisition transaction.

44. MCA represents a highly attractive acquisition

candidate which has drawn the interest of such international

business enterprises as General Electric Co., and Capital

Cities/ABC Inc., both of which were reportedly willing to

pay in excess of $90 per share in an acquisition transaction.

Additionally, MGM/Pathe Communications Corp. appears

to have been rebuffed in its efforts to negotiate a higher offer

with defendants. The preferential treatment accorded

Matsushita by the Individual Defendants for their own gain

70a

Appendix D

has deprived and will continue to deprive the MCA public

stockholders of the very substantial premiums which proper

exposure of the Company to the market could have provided.

45. The Individual Defendants have breached their

fiduciary and other common law duties owed to plaintiffs

and the other members of the Class in that they have not and

are not exercising independent business judgment and have

acted and are acting to the detriment of the Class in order to

benefit themselves and other members of MCA senior

management acting 1n concert with Matsushita.

46. As reported in the September 25, 1990 Wall Street

Journal article prior to the merger agreement, “any

transaction would have to have the blessing of Wasserman,”

MCA’s Chairman of the Board. Defendant Wasserman, who

is 77 years old, owns almost 7% of the outstanding common

shares of the Company. In addition, the Wall Street Journal

article reported that Matsushita “wants to keep MCA

management in place” in conjunction with an acquisition

transaction. More importantly, the lucrative salary, bonus

and “incentive” agreements between Matsushita and the

Individual Defendants as well as the preferential treatment

accorded defendant Wasserman have deprived the Individual

Defendants of their ability to judge independently and fairly

the value of MCA. As a result, the Merger is not the product

of arm’s length negotiations and is not based upon any

independent evaluation of the current value of MCA’s

common stock, assets or business. Rather, the Merger and

Tender Offer price is being fixed arbitrarily by Matsushita

in conjunction with MCA senior management as part of their

unlawful plan and scheme to obtain the entire ownership of

71a

Appendix D

the Company’s assets and business at an unfair and

inadequate price.

47. Contrary to normal and established procedures in

implementing such transactions, defendants have apparently

failed to created any “Special Committee” of fully

independent and disinterested directors who will act

objectively and in the sole and ultimate best interests of all

stockholders in effectuating the sale of the Company.

48. Under the terms of the Capital Contribution

Agreement, defendant Wasserman will receive preferred

stock in a subsidiary of Matsushita in exchange for his

holdings of MCA shares. The purpose of this agreement is

to afford defendant Wasserman tax-free treatment not

available to other shareholders, and to save Wasserman

millions of dollars in taxes that would be due if he received

cash. By providing defendant Wasserman with this

preferential treatment in the acquisition, and by assuring that

Wasserman received greater value per share than that

available to other MCA shareholders, the Individual

Defendants have breached their duty of loyalty to MCA and

its stockholders and all defendants have effected illegal and

impermissible discrimination among MCA’s stockholders

and the shares they hold.

49. The Individual Defendants have also failed to

engage in a sufficient “market check” necessary to assure

the fairness and adequacy of the Tender Offer and Merger

terms. Since the commencement of discussions and

negotiations with Matsushita in or about September 1990,

MCA has been prevented from soliciting any competitive

72a

Appendix D

expressions of interest or purchase proposals. In addition,

the parties have clearly rejected any post-agreement “market

check” by virtue of their refusal to extend the Tender Offer

beyond the minimum required under federal regulations, by

their adoption of the Option Agreement which provides

Matsushita with a “lock-up” option, and by agreeing to break-

up fees amounting to $125 million, among other restraints

that prevent any genuine auction from developing. MCA

remains prohibited from soliciting competitive expressions

of interest and, while MCA may respond to any competitive

proposals which are made, the limited time available and

obvious allegiances of management and the Board of

Directors inevitably will discourage genuine competitive bids

from emerging.

50. Certain other aspects of the transaction confirm the

fundamental failure of the MCA directors to obtain the best

possible transaction unaffected by conflicts of interest. In

order to facilitate the transaction with Matsushita, defendants

have arranged to spinoff the WWOR-TV subsidiary to

stockholders rather than investing the additional time and

effort necessary to auction this subsidiary at the highest

possible price and thereby generate maximum proceeds for

the shareholders. In addition, the Distribution Agreement

contemplates that the spun off company will adopt a “poison

pill” in form acceptable to Matsushita and MCA) If this

subsidiary were genuinely to be independent, it would be

unnecessary to incorporate such provision in the agreements.

The implementation of the poison pill under these

circumstances is intended to prevent the emergence of an

open and effective auction for the television station and to

73a

Appendix D

assure that those persons chosen by the principals to manage

the station will confront no challenge to their control.

51. Moreover, the MCA directors have agreed to an

arrangement whereby the Yosemite subsidiary will be

marketed at some later time and its earnings prior to the sale

will be placed in escrow for the benefit of the National Park

Service. The escrowing of the Yosemite profits for an

indeterminate period is clearly calculated to assuage public

sentiment concerning the transaction and allow the

defendants to achieve their personal agenda in consummating

the sale under the agreed terms. A sale to another purchaser

may not engender such public sensitivities and under those

circumstances, the value of the Yosemite subsidiary would

unquestionably be reserved for the shareholders.

52. Defendants also have failed or refused to take those

steps necessary to ensure that the Company’s stockholders

will receive maximum value for their shares of MCA stock.

Defendants failed to announce any active auction or open

bidding procedures best calculated to maximize stockholder

value in selling the Company.

53. In addition, despite the possible interest of several

companies in acquiring MCA, defendants favor an

acquisition of the Company by Matsushita which expressed

a firm desire to maintain the Individual Defendants and other

members of MCA senior management (with whom they are

allied) in their positions of control subsequent to the

consummation of the Merger. As a result, the Individual

Defendants are acting to entrench themselves in their offices

and positions and to receive enhanced and substantial salaries

74a

Appendix D

and perquisites, all at the expense and to the detriment of

the Company’s public stockholders.

54. The Individual Defendants were induced to sell

MCA to Matsushita for a grossly inadequate price by

Matsushita’s payment of the above described substantial

payments and benefits to the Individual Defendants, at a time

when MCA’s common stock was temporarily under-rated

as a result of, inter alia, the Company’s expansion plan and

a temporary decline of the stock market due to world events.

As a result, the Individual Defendants are faced with

substantial conflicts of interest between the best interests of

MCA’s stockholders and their own financial gains and

continued employment.

55. By the acts, transactions and courses of conduct

alleged herein, the Individual Defendants, other than MCA,

individually and as part of a common plan and scheme in

breach of their fiduciary duties and obligations, have and

will unfairly deprive plaintiffs and the other members of the

Class of their investment in MCA and to ensure continuance

of their positions as directors and officers and enhanced

compensation, all to the detriment of the Company and its

stockholders. The Individual Defendants have been engaged

in a wrongful effort to entrench themselves in their offices

and positions of control and prevent the acquisition of the

Company except on terms which would further their own

personal interests. :

56. These events represent the culmination of an entire

plan and scheme by which the Individual Defendants have

sought to isolate themselves from any acquisition of the

75a

Appendix D

Company except under circumstances directly serving their

personal interests at the expense of MCA’s public

stockholders. Previously, in July 1987, MCA implemented

a stockholder rights plan (or “Poison Pill”) designed to deter

unsolicited takeover bids by making any hostile takeover

attempt prohibitively expensive. The Poison Pill was

subsequently modified on March 1, 1988 and December 6,

1988, to lower the trigger points at which the plan is activated

and otherwise intensify its deterrent impact, thus magnifying

the Individual Defendants’ power to resist unwanted third

party offers.

57. The Individual Defendants have also caused or taken

advantage of other entrenchment devices designed to repel

any takeover effort not endorsed by them. Among other

things, MCA’s certificate of incorporation provided for a

staggered Board of Directors. Further, the Company entered

into lucrative severance agreements (“Golden Parachutes’’)

with five executive officers of MCA, including defendants

Wasserman and Sheinberg. The Golden Parachutes provided

for cash payments of million of dollars triggered by, among

other things, any change in control of the Company. These

Golden Parachutes were designed to make an unfriendly

acquisition of the Company economically disadvantageous.

58. In addition, defendant Wasserman exercised voting

and investment power as to approximately 6 million MCA

shares in addition to the approximately 5 million shares

which he personally owned. These additional shares were

held in a series of trusts and charitable associations over

which Wasserman served as a trustee or otherwise exercised

control. Aggregating the shares owned directly by

76a

Appendix D

Wasserman with those over which he exercised voting and

investment powers as a trustee or in similar capacities, the

MCA directors and officers as a group beneficially owned

in excess of 13 million MCA shares, constituting

approximately 18% of the outstanding common stock. Such

aggregate ownership and control reposed in senior

management was deliberately structured to frustrate an

unwanted bidders’ ability to meet the requirements of the

Delaware Anti-Takeover Statute.

59. In this regard, in order to meet the requirements of

the Delaware Anti-Takeover Statute, 8 Del.C. §203 (the

“Delaware Act” or the “Act”) for the prompt completion of

a second-step “business combination”, Section 203(a)

requires that (i) prior to purchasing 15 percent or more of

MCA common stock, any potential acquiror of the Company

obtain approval from the MCA Board of Directors of the

proposed “business combination;” (ii) a third party acquire

in a single transaction a sufficient number of shares of MCA

common stock to go from an ownership position of under

15% to one of over 85% (the “85% Exception”); and (iii)

after obtaining 15%, the potential acquiror obtain the

approval! of the MCA Board and 66-2/3% of the other

stockholders to the subsequent “business combination.”

60. The ownership and control of MCA stock by the

Individual Defendants and senior management therefore

effectively placed under their control in excess of 15% of

the Company’s common stock, thereby preventing a hostile

bidder from satisfying the 85% Exception. This had the

intended and inevitable effect of frustrating an unsolicited

77a

Appendix D

bidders’ efforts to acquire the Company and predictably shifts

corporate power to the hands of entrenched management.

61. By virtue of the acts and conduct alleged herein,

the Individual Defendants, who control the actions of the

Company, have carried out a preconceived plan and scheme

to place their own personal interests ahead of the interests

of MCA’s public stockholders and thereby entrench

themselves in their offices and positions within the Company.

The Individual Defendants have violated their fiduciary

duties owed to plaintiffs and the Class, including their

fiduciary duties of complete candor, in that they have not

and are not exercising independent business judgment and

have acted and are acting to the detriment of MCA’s public

stockholders for their own personal benefit.

62. The Individual Defendants have breached their

fiduciary duties by reason of the acts and transactions

complained of herein, including their decision to effect the

Merger with Matsushita without making any effort to obtain

the best offer possible, by affirmatively attempting to prevent

a better offer, and by failing to disclose material facts to

MCA’s stockholders.

63. As a result of the actions of the Individual

Defendants, plaintiffs and the other members of the Class

have been and will be damaged in that they have not and

will not receive their fair proportion of the value of MCA’s

assets and business and/or have been and will be prevented

from obtaining a fair and adequate price for their shares of

MCA’s common stock.

78a

Appendix D

64. Defendants have subjected MCA to potential

liability under the federal securities laws, thus causing MCA

to expend and waste corporate assets that could otherwise

be utilized for the benefit of MCA’s public stockholders.

65. Plaintiffs seek preliminary and permanent injunctive

relief and declaratory relief preventing defendants from

inequitably and unlawfully depriving plaintiffs and the Class

of their right to realize a full and fair value for their stock at

a substantial premium over the market price, and to compel

defendants to carry out their fiduciary duties of candor and

to maximize shareholder value in selling MCA.

66. Plaintiffs and the Class have no adequate remedy at

law. Only through the exercise of this Court’s equitable

powers can plaintiffs be fully protected from the immediate

and irreparable injury which defendants’ actions threaten to

inflict.

67. Unless enjoined by the Court, defendants will

continue to breach their fiduciary duties owed to plaintiffs

and the other members of the Class, and/or aid and abet and

participate in such breaches of duty, and will consummate

the Tender Offer and the Merger with inadequate disclosure

and at an inadequate and unfair price, or upon inequitable

terms, al] to the irreparable harm of plaintiffs and the other

members of the Class.

68. Plaintiffs and the Class have no adequate remedy at

law.

79a

Appendix D

WHEREFORE, plaintiffs demand judgement as follows:

(a) Declarims i.us to be a proper class action and

certifying plaintif.. s representatives of the Class;

(b) Ordering “he Individual Defendants to carry out

their fiduciary duties to plaintiffs and the other members

of the Class by announcing their intention to:

i) cooperate fully with any person or entity,

having a bona fide interest in proposing any

transaction which would maximize stockholder

value, including, but not limited to, a buyout or

takeover of the Company;

ii) undertake an appropriate evaluation of

MCA’s worth as a merger/acquisition candidate;

ili) take all appropriate steps to enhance MCA’s

value and attractiveness as a merger/acquisition

candidate;

iv) take all appropriate steps to effectively

expose MCA to the marketplace in an effort to create

an active auction for MCA;

v) act independently so that the interests of

MCA’s public stockholders will be protected;

vi) adequately ensure that no conflicts of

interest exist between the Individual Defendants’

own interest and their fiduciary obligation to

80a

Appendix D

maximize stockholder value or, if such conflicts

exist, to ensure that all conflicts are resolved in the

best interests of MCA’s public stockholders; and

vii) adequately disclose the personal interests

of and benefits to the Individual Defendants in the

Merger;

viil) declaring that defendants and each of them

have committed or aided and abetted a gross abuse

of trust and have breached their fiduciary and other

duties to plaintiffs and the other members of the

class;

ix) preliminary and permanently enjoining

defendants and their counsel, agents, employees and

all persons acting under, in concert with, or for them,

from proceeding with, consummating or closing the

proposed transaction which will irreparably harm

plaintiffs and the class;

x) in the event the proposal is consummated,

rescinding it and setting it aside, or awarding

rescissory damages if it cannot be set aside;

severally, to account to plaintiffs and the Class for all

damages suffered and to be suffered by them as a result

of the acts and transactions alleged herein;

(d) Awarding plaintiffs the costs and disbursements

of this action, including a reasonable allowance for

plaintiffs’ attorneys’ and experts’ fees; and

eerie

8la

Appendix D

(e) Granting such other further relief as may be just

and proper under the circumstances.

Dated: December 14, 1990

Morris, Rosenthal, Monhait &

Gross, P.C.

By: s/ [illegible]

One Federal Plaza

Wilmington, Delaware 19889

(302) 656-4433

Attorney for Plaintiffs

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.