at a stockholders' meeting, violates the Certificate of Incorporation by granting preemptive rights to the plaintiffs. This contention is easily disposed of. The continuing right of first refusal which plaintiffs allege they possess cannot be considered in terms of preemptive rights. A right of preemption only has relevance where there are new shares or new issues. Treasury stock does not fall within either of those categories. Thus, the right of first refusal in the Treasury stock cannot conceivably violate the Certificate of Incorporation. 11 W. Fletcher, Fletcher Cyclopedia Corporations, § 5136.2 (Perm. Ed. 1971).
The fourth contention raised by defendants is that the right of first refusal is somehow an unlawful restraint on alienation. Agreements such as the one in question are clearly legal and enforceable by statute in New Jersey. N.J.S. 14A:7-12.
While there is a general public policy against restraints on the transfer of personal property, a right of first refusal does not prevent a transfer but merely delays it. Such first options are likewise valid under both New Jersey and Federal case law. Baumohl v. Goldstein, 95 N.J. Eq. 597, 124 A. 118 (Ch. 1924); Palmer v. Chamberlin, 191 F.2d 532 (5th Cir. 1951); Ryan v. J. Walter Thompson Company, 322 F. Supp. 307 (S.D.N.Y. 1971); Sankin v. 5410 Connecticut Avenue Corporation, 281 F. Supp. 524 (D.C. 1968); aff'd, 133 U.S. App. D.C. 361, 410 F.2d 1060 (D.C. Cir. 1969), cert. denied, 396 U.S. 1041, 90 S. Ct. 681, 24 L. Ed. 2d 685 (1970).
The final point raised by defendants is that the sale of the A stock to Wakefern in 1967 without plaintiffs exercising their right of first refusal constituted a waiver. Defendants have not pressed this point in their brief or on oral argument. This Court will, nevertheless, consider it.
Plaintiffs contend that when the A stock went into the Wakefern Treasury they believed that it remained subject to their right of first refusal. If this were the case, and defendants have not otherwise alleged, it cannot amount to "an intentional relinquishment of a known right." Deerhurst Estates v. Meadow Homes, Inc., 64 N.J. Super. 134, 145, 165 A. 2d 543, 549 (App. Div. 1960), certif. denied, 34 N.J. 66, 167 A. 2d 55 (1966). Indeed, since the agreement specifically bound Wakefern to comply with plaintiffs' right of first refusal, plaintiffs had no obligation or reason to believe that the had to protect their right by exercising it. Under such circumstances a waiver cannot be found. See, First National Bank of Canton v. Shanks, 34 Ohio Op. 359, 73 N.E. 2d 93.
In light of the foregoing this Court finds that plaintiffs have a strong probability of proving at trial that the 1966 agreement gives to them a valid contractual right of first refusal in the Class A Treasury stock.
PLAINTIFFS' PROBABILITY OF ULTIMATE SUCCESS
It is an established principle that as a prerequisite to the issuance of a preliminary injunction the movant must show that there is a clear probability of ultimate success. Ikirt v. Lee National Corporation, 358 F.2d 726, 727 (3d Cir. 1966); Swartz v. Chrysler Motors Corp., 297 F. Supp. 834, 835 (D.N.J. 1969). If, however, other elements for issuing a preliminary injunction exist then plaintiffs' probability of ultimate success need not be absolutely certain or wholly free from doubt. This proposition was recognized and applied in a case similar to the one at bar. Vanadium Corp. of America v. Susquehanna Corp., 203 F. Supp. 686, 697 (D. Del. 1962); see particularly, Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738 (2d Cir. 1953). Although this Court finds the probability of ultimate success to be clear, plaintiffs' burden of proof is somewhat lessened because, as will be discussed hereafter, the irreparable harm and balance of hardships clearly preponderate in their favor.
Breach of Fiduciary Duties
The first of two alternate theories upon which plaintiffs have a probability of ultimate success is that defendants, as directors, breached their fiduciary duties owed to plaintiffs, as stockholders, by purchasing the control Treasury stock. Hill Dredging Corp v. Risley, 18 N.J. 501, 530-31, 114 A. 2d 697, 712 (1955); Daloisio v. Peninsula Land Co., 43 N.J. Super. 79, 88-91, 127 A. 2d 885, 890 (App. Div. 1956); Eliasberg v. Standard Oil Co., 23 N.J. Super. 431, 441, 92 A. 2d 862, 867 (Ch. Div. 1952), certif. denied, 12 N.J. 467, 97 A. 2d 437 (1953); Pilat v. Broach Systems, Inc., 108 N.J. Super. 88, 94, 260 A. 2d 13, 16 (L. Div. 1969).
The defendant-directors purchased the control stock without having obtained prior stockholder approval nor have the stockholders formally ratified the purchase. Under such circumstances the ramifications of a director's duty are pervasively scrutinized. Indeed, at trial the burden of justifying this transaction as being for a valid corporate purpose must be shouldered by the director-defendants. In construing New Jersey law this Circuit observed in Pappas v. Moss, 393 F.2d 865, 868 (3d Cir. 1968):
"There having been no effective ratification, the stock sales must be evaluated as though there had been no stockholder action. In that posture, the New Jersey law, as we find it, required the defendants to establish by clear and convincing proof that the transaction was honest, fair and reasonable."
At trial, therefore, the defendants must prove by clear and convincing proof that they did not use their fiduciary position for their personal benefit and without a valid corporate purpose in mind. If that burden is not met the transaction can be voided by the plaintiffs. Daloisio v. Peninsula Land Co., supra, at 88-91, 127 A. 2d 885. In terms of obtaining a preliminary injunction, evidence at this time indicating defendants' inability to meet their burden at trial proportionately increases plaintiffs' probability of ultimate success. There is ample evidence of such inability.
Benjamin Franklin once said that "every so often the tree of liberty must be watered by the blood of tyrants." This statement summarizes what defendants have proffered as their corporate purpose for the purchase of the control Treasury stock. Defendants view that purchase as an effort to neutralize plaintiffs' domination and tyrannical rule by guaranteeing to themselves and all others similarly situated, equality, freedom of expression, liberty and a generally democratic corporation structure. The sworn testimony of the director-defendants deposed to date belies such a noble purpose.
According to defendants' testimony they felt that the plaintiffs had the power, by virtue of their voting control, to act unfairly toward all Class B and C stockholders. Yet, each of the four director-defendants deposed to date were unable to recall one instance of a discriminatory exercise of that power. They admitted that in the many years preceding the allegedly illegal seizure the plaintiffs had elected eight exclusively C stockholders to the Board. (433). In 1970 alone the Board consisted of only four A stockholders and sixteen C stockholders. (434). They admitted that their votes at Board or committee meetings were the product of their own free will uninfluenced by any of the plaintiffs. (435). Finally, they testified that the corporate growth was financially rewarding for themselves, their business and Wakefern. The general tenor of the testimony is reflected in a statement by defendant Romano. He said:
"I don't think that we really could have more to say than we had. We were a very democratic group. We were always treated as such." (452).
In light of the many admissions by these director-defendants this Court finds an incongruity between the purportedly corporate justification for the purchase of the Treasury stock and the actual corporate situation. This incongruity enhances plaintiffs' probability of success since defendants appear incapable of proving by clear and convincing proof at trial the fairness and honesty of their purchase. The inability to validly explain the acquisition by interested directors of corporate stock in the absence of stockholder approval or ratification is a breach of fiduciary duty. Pappas v. Moss, 393 F.2d 865 (3d Cir. 1968); Hill Dredging Corp. v. Risley, supra; see, Elliott v. Baker, 194 Mass. 518, 80 N.E. 450 (1907); Johnson v. Duensing, 351 S.W. 2d 27 (Mo. 1961).
There is one additional consideration casting further doubt upon defendants' proffered corporate purpose. On April 19, 1971 plaintiffs went to the Wakefern offices in Elizabeth. On this occasion, pursuant to their alleged right of first refusal, they tendered checks in sufficient amounts to purchase all of the 666 2/3 shares of the Class A Treasury stock. They also demanded the right to inspect the stock books and the Class A share certificates. Both the tender and demand for inspection were denied at the direction of some of the defendant-directors.
When plaintiffs left the premises the A stock certificates were removed from the briefcase of one who had previously denied plaintiffs access to them. The certificates were signed and issued to all defendants at approximately midnight. Plaintiffs allege, an defendants apparently do not controvert, that the stock was issued by individuals who did not have bylaw authority. Such clandestine nocturnal activities certainly are inconsistent with the high duty of fairness and honesty owed by the defendant-directors to the plaintiffs.
Volation of Rule 10b-5
In addition to proving breach of fiduciary duties, plaintiffs also have a probability of ultimate success by proving, in the alternative, a violation of Rule 10b-5.
While Rule 10b-5 does not specifically authorize plaintiffs' request for a civil remedy, courts have unanimously held that a civil cause of action may be prosecuted by a private person to enforce it. Kardon v. National Gypsum Co., 69 F. Supp. 512, 514 (E.D. Pa. 1946); Mills v. Sarjem Corp., 133 F. Supp. 753, 762 (D.N.J. 1955). Accordingly, the civil nature of the remedy sought does not bar application of Rule 10b-5.
Plaintiffs must initially prove that there has been a purchase or sale of securities. This essential has been met by the purchase of Treasury stock which is a purchase of securities within the purview of Rule 10b-5. Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968), cert. denied, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969); Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964); Rekant v. Desser, 425 F.2d 872 (5th Cir. 1970).
Clauses 1 and 3 of Rule 10b-5 are essentially the same.
Both require a showing of some scheme to defraud or fraudulent course of business which are connected with the purchase or sale of securities. Such showing of fraud need not satisfy all of the rigid requirements of the common law. Britt v. Cyril Bath Company, 417 F.2d 433 (6th Cir. 1969); Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961); Cochran v. Channing Corp., 211 F. Supp. 239 (S.D.N.Y. 1962). Plaintiffs have made a showing of 10b-5 fraud leading this Court to believe that a probability of ultimate success is present.
Before detailing the evidence, there is an evidentiary overlap between proof of 10b-5 fraud and proving breach of fiduciary duties. This Court, therefore, incorporates by reference all the factual proofs in the fiduciary duty discussion. Likewise, the facts to be outlined herein are also applicable to the fiduciary duty portion of this opinion.
There is ample testimony by some of the director-defendants which evidences fraud in the purchase of the Treasury stock. On April 8, 1971 a Board meeting was held at which a resolution was adopted offering for purchase to the defendants, as well as plaintiffs, proportionate shares of the control stock. Such interest offered to plaintiffs was drastically less than what they believed, in light of their right of first refusal, they had the right to buy. For approximately six months in advance of this meeting the defendant-directors met secretly, and to the exclusion of all plaintiffs, for the purpose of planning the adoption of the April 8th resolution. Not once during this six month period did defendants ever intimate to plaintiffs the plan they were developing even though some, if not all, of the director-defendants were cognizant of plaintiffs' alleged right of first refusal. The deposition testimony of defendant-director Wolfson is revealing. In explanation of the failure to make plaintiffs part of the planning he stated:
"I don't have a valid reason for that. I can't give you a reason for that. It was never the thing to do at the time. I didn't feel like discussing it with them." (103).