This derivative action by Harry Lewis, a stockholder of Continental Oil Company (“Continental”), charges defendants, present and former directors, officers and employees of Continental, with violations of the Securities Exchange Act of 1934 (“the Act”) and with breach of fiduciary duties owed to Continental. The complaint alleges that the defendants made at least $250,000 in secret, unauthorized and illegal payments as foreign and domestic bribes, payoffs and political contributions and failed to disclose such payments in a proxy statement issued in 1975 which, among other things, sought stockholder approval for certain amendments to Continental’s 1971 Non-Qualified Stock Option Plan for Officers and Other Key Employees (“the Plan”). These acts
After extensive discovery and negotiations, counsel reached a settlement, incorporated in a Stipulation of Settlement, which they believe fairly and adequately serves the interests of Continental. They now seek an order pursuant to Rule 23.1, Fed.R. Civ.P.: (a) approving the Stipulation of Settlement, (b) adjudging the terms thereof to be fair, reasonable and adequate, and (e) directing entry of a final judgment terminating this action on the terms set forth in the Stipulation. For the reasons hereinafter stated, the Court approves the settlement as fair, reasonable and adequate.
Under the terms of the settlement, Continental and its directors and officers agree to maintain, adhere to, and enforce the policies and procedures contained in the Continental Policy Guide Concerning Compliance With Laws, Political Contributions and Questionable Corporate Payments (hereinafter “Policy Guide”) “to ensure that Continental’s longstanding policy of conducting business in accordance with applicable laws of the United States and the foreign countries in which it does business and in accordance with high moral and ethical standards is followed to the fullest extent.” These procedures and policies are to be maintained for a period of at least three years. In addition, Continental’s Board of Directors will adopt a change in its Incentive Compensation Plan (“ICP”) for 1978. The ICP, adopted by Continental with the approval of its shareholders has, since 1965, attempted to attract and keep in the employ of Continental persons of experience and ability by providing additional incentives to such employees. Under the terms of the settlement, the maximum amount creditable to the Incentive Compensation Reserve of the ICP for the year 1978 will be reduced by $2 million. Continental further agrees that it will not oppose the application of plaintiff’s counsel for their attorneys fees, to be paid by Continental, in an amount of up to $200,000 and expenses in an amount not in excess of $1,000.
Before approving the settlement of a derivative action, the Court must be satisfied that the compromise “fairly and adequately serves the interests of the corporation on whose behalf the derivative action was instituted.” Republic National Life Ins. Co. v. Beasley,
All parties are of the view that Continental will be benefited by the proposed settlement. The alleged benefits which have been cited to the Court are: (1) Continental’s agreement to reduce the Incentive Compensation Reserve for 1978 by $2 million; (2) its agreement to enforce the poli
The Court finds the last of these purported benefits to Continental to be the most persuasive. The avoidance of further expense is an important reason for settlement. See Newman v. Stein,
The other suggested benefits are less readily apparent to the Court. It is, however, possible that Continental will receive some benefit from these additional factors. For example, in recent years, the amount actually distributed to key employees pursuant to the ICE has been substantially less than the amount held in reserve for this purpose.
It is more difficult to find that Continental derived a substantial benefit from its agreement to comply for three years with its own guidelines and with the law relating to illegal payments. Before this action was commenced, Continental had apparently made an extensive investigation into the payments in question and had taken action to halt any illegal or unethical practices and to inform the public and its shareholders of the results of its investigation and of the corrective action being taken.
Although the Court does not find the benefits which Continental will derive from approval of the settlement particularly compelling, it does find the benefits adequate to warrant approval of the settlement in light of plaintiff’s prospects for success on the merits should this litigation be continued.
Turning first to plaintiff’s § 14(a) claim, it would appear that plaintiff would not have been able to prove the causation requirements of that statute. For example, in Lewis v. Elam, [1977-1978 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 96,013 (S.D. N.Y.1977), Judge Pierce of this Court granted summary judgment to defendants on plaintiff’s claim that the failure to disclose questionable foreign payments and illegal campaign contributions in proxy statements, dealing, among other matters, with the adoption of certain stock option plans, violated § 14(a). The Court explained:
*440 [T]he transaction of which plaintiff complains is the alleged payment of foreign bribes and illegal campaign contributions. The alleged proxy violations are said to be contained in proxies solicited by the management . . . for election of directors . . . and in connection with certain other corporate actions including . . . the adoption of certain stock option plans . . . . Even assuming the materiality of the alleged omissions, plaintiff has not shown causation between the alleged proxy violation and the transaction causing the harm of which plaintiff now complains. The proxy solicitation was not a link in the accomplishment of the alleged improper payments. See Mills v. Electric Auto-Lite Co.,396 U.S. 375 ,90 S.Ct. 616 ,24 L.Ed.2d 593 (1970). “[These payments were made] by virtue of the defendant’s position in the corporation and not through an authorization obtained through alleged false proxy statements.” Epic Enterprises, Inc. v. Brothers et al.,395 F.Supp. 773 , at 776 (N.D.Okl.1975).
Id. ¶ 96,013 at 91,555; accord, United States v. Fields, [1977-1978 Transfer Binder] Fed. Sec.L.Rep. (CCH) ¶ 96,074 at 91,855 (S.D.N. Y.1977), rev’d in part on other grounds,
Turning next to plaintiff’s claim that Continental’s failure to disclose the illegal payments in any report, proxy statement, registration statement or other document filed with the S.E.C. violated section 13(a) of the Act, at least one circuit court opinion as well as a number of persuasive district court decisions in this Circuit have held that section 13(a) does not give rise to a private right of action and that section 18(a) of the Act, 15 U.S.C. § 78r(a), provides the exclusive remedy for section 13(a) violations. See In re Penn. Central Securities Litigation,
The Court is equally skeptical as to plaintiff’s likelihood of success on his claim under § 10(b) of the Act and Rule 10b-5. Although the complaint alludes to a purchase or sale with regard to this claim, it does not indicate any of the specifics of such transaction. The Court can only surmise that plaintiff intends to challenge the issuance of options or “sale” of Continental’s common stock by Continental through the exercise and surrender of options pursu
Plaintiff also alleged that the acceptance by Continental of surrenders of options pursuant to these amendments, coupled with payment to the optionees, in effect constituted simultaneous purchases and sales of a security in violation of § 16(b) of the Act. Two well-reasoned district court opinions in this Circuit have flatly rejected the characterization urged by plaintiff. See Freedman v. Barrow,
As to plaintiff’s pendent state claims regarding the alleged breach of fiduciary duties, defendants have made substantial arguments that plaintiff would not prevail on these claims at trial. Regardless, however, of the merits of the pendent state claims, continuation of this litigation presents the risk that a disposition unfavorable to plaintiff on the federal claims discussed above would result in dismissal of the pendent claims. See United Mine Workers of America v. Gibbs,
On the basis of its review of all of plaintiff’s claims, the' Court is of the view that the benefits to Continental of settlement of this suit outweigh the likelihood that, if the settlement had not been reached, plaintiff would have been successful on the merits.
The Court has also considered and given weight to the fact that the parties and their attorneys support the proposed settlement which was reached after extensive discovery and arms-length négotiations. Stull v. Baker, supra,
For the foregoing reasons, the Court concludes that the proposed settlement is fair, reasonable and adequate and should be approved.
Order and final judgment signed.
On Application For Counsel Fees
Plaintiff’s attorneys apply for counsel fees in the amount of $200,000.00 and disbursements of $967.47 in a shareholder’s derivative action settled with the approval of the Court on December 22, 1978. In accordance with the terms of the settlement, defendants have interposed no objection to this application. For the reasons hereinafter stated, the application of plaintiff’s attorneys for fees is granted in the amount of $5,000.00 plus disbursements of $967.47.
This derivative action, brought on behalf of Continental Oil Company (“Continental”), charged defendants, present and former directors, officers and employees of continental, with violations of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(a), 78n(a), and 78p(b), and with breach of fiduciary duties owed to Continental.
The parties urged that the settlement contained three benefits to the corporation: “(1) Continental’s agreement to reduce the Incentive Compensation Reserve for 1978 by $2 million; (2) its agreement to enforce the policies and procedures contained in the [Continental Policy Guide Concerning Compliance With Laws, Political Contributions and Questionable Corporate Payments]; and (3) the termination of this litigation, which will prevent further expense and diversion of management from Continental’s operations and which will remove any doubts about the validity of the [Incentive Compensation] Plan”. (Decision, December 22, 1978,
Keeping in mind that attorneys’ fees in a shareholder derivative suit should be awarded “with an eye to moderation,” City of Detroit v. Grinnell Corp.,
there should be some check on derivative actions lest they be purely strike suits of great nuisance and no affirmative good, and hence it is ruled that the benefit to the corporation and the general body of shareholders must be substantial.
Schechtman v. Wolfson,
This Court, in its decision approving the settlement, found “most persuasive”
“3. Nothing in this stipulation, or any order of this Court with respect thereto, shall be deemed to restrict the right of Continental to adopt any new, or revised, compensation, employee benefit, or incentive plan which in each case is, in the opinion of the Board of Directors, in the best interests of Continental.”
Hence, though the Incentive Compensation Reserve was, by virtue of the settlement, reduced by $2 million for 1978, the Board of Directors expressly retained the right to invest the very funds in question in a similar, new compensation, employee benefit, or incentive plan. These factors belie the assertion of plaintiff’s counsel that the corporation “will be benefited in cash to the extent of at least $2,000,000,” Affidavit In Support of Application for an Award of Counsel Fee and Disbursements to Plaintiff’s Attorneys, June 22, 1978, p. 3.
In its decision approving the settlement, this court also stated that “[i]t is more difficult to find that Continental derived a substantial benefit from its agreement to comply for three years with its own guidelines and with the law relating to illegal payments. Before this action was commenced, Continental had apparently made an extensive investigation into the payments in question and had taken action to halt any illegal or unethical practices and to inform the public and its shareholders of the results of its investigation and of the corrective action being taken.”
An additional factor to be taken into consideration in awarding counsel fees is the nature of the work performed. In this case, as in Grinnell I, supra, “[i]t is conceivable that large amounts of time could have been spent on comparatively routine matters or in ministerial duties.”
In summary, plaintiff’s suit created no tangible fund and produced only a limited, minimal benefit to the corporation. Accordingly, the Court awards counsel fees in the amount of $5,000.00, plus disbursements of $967.47.
Notes
. The proposed settlement also reserves to Continental the right to pursue any claims arising out of the acts and transactions alleged in the complaint which it may have against defendants Willard H. Burnap and Wayne E. Glenn, whose positions as directors and officers of Continental were terminated as a result of acts alleged in the complaint. See footnote, 3, infra. The settlement likewise preserves the rights of these two defendants with regard to any such claims they may have against Continental or each other.
. For example, in 1977, $7,154,000 was held in reserve and only $3,041,500 was distributed; in 1976, $6,048,000 was held in reserve and only $3,552,000 was distributed.
. Continental had, of its own accord, (1) discharged defendants Willard H. Burnap and Wayne E. Glenn, who were allegedly responsible for the payments, (2) issued a press release announcing their removal, (3) filed an 8-K report with the Securities and Exchange Commission disclosing the results of the investigation and the actions taken to correct the situation, and (4) mailed a copy of the portion of the 8-K report describing the results of the investigation to all Continental shareholders.
. In reviewing a settlement, a court should not attempt to try the disputed issues, Stull v. Baker, 410 F.Supp. 1326, 1333 (S.D.N.Y.1976), quoting Schleiff v. Chesapeake & O. Ry.,
. Pursuant to this Court’s order of May 22, 1978, Continental mailed notice by first class mail on or prior to May 26, 1978 to each record holder. Brokers and/or nominees were requested to forward the notice promptly to beneficial holders. Continental offered to supply additional copies of the Notice and to pay for the reasonable costs of mailing such copies to beneficial holders. In addition, based upon Continental’s recent experience in mailing proxies to stockholders in April, 1978, it estimated the number of additional copies of the Notice which would be required by various brokers and/or nominees. Accordingly, without waiting to receive requests for additional copies of the Notice, Continental arranged to have a total of 27,745 copies of the Notice delivered in bulk to brokers and/or nominees, simultaneously with the mailing of notice to all record holders.
In In re Franklin National Bank Securities Litigation,