# Appendix — Epstein v. Matsushita Electric Industrial Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1999
- **Citation:** 528 U.S. 1004

## Text

No. 99-417

IN THE

Supreme Court of the United States

LAWRENCE EPSTEIN, et al.,

Petitioners,
v.

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

1SS443 @J Counsel Press LLC
FORMERLY LUTZ APPELLATE SERVICES
(800) 274-3321 + (800) 359-6859

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TABLE OF APPENDICES

Appendix A — Opinion Of The Supreme Court Of
The United States Dated And Decided February
Bes SE AAcae Ran ead eater ete a

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,
Vv

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.

I

In 1990, petitioner Matsushita Electric Industrial Co.
made a tender offer for the common stock of MCA, Inc., a

2a
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.

3a

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).

4a

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

Sa

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).

I]

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).

6a
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.

A

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

7a

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

8a
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.

B

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

9a

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.

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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
2

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.

C

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.

I]
A

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
B

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).

a

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.

r

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 Individua

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_0004%3A4. Public record. Not legal advice.