that Bally and Trump had reached an agreement (the "Repurchase" or "Greenmail" agreement, depending to which side one talks) which was approved by Bally's Board of Directors on Saturday, February 21. Under the terms of that agreement, Bally paid Trump $ 62.4 million in full payment for 2.6 million shares of Bally common stock. According to plaintiffs, this price constituted a profit of $ 31.7 million for Trump, since Bally paid Trump a premium of more than $ 4 per share (over 20%) for 2.6 million of his shares, plus a guarantee of $ 33 per share within one year for Trump's remaining 457,000 shares. In return, Trump agreed to drop his legal claims against Bally and enter into a ten year "standstill agreement" not to purchase Bally stock.
It is the repurchase agreement which is at the core of the action now before the court. In their consolidated complaint, plaintiffs derivatively charge the Bally defendants with breach of their duties of care and loyalty to the corporation and waste of corporate assets for the sole or primary purpose of protecting their positions with the company. As examples of this alleged malfeasance, plaintiffs note the poison pill and restructuring plans, filing of the lawsuit against Trump, purchase of the Golden Nugget, and purchase of Trump's Bally stock at prices said to be far in excess of its actual market value. Plaintiffs further allege that this payment to Trump constituted illegal "greenmail."
In addition, plaintiffs contend that Trump, by reason of his substantial holdings of Bally stocks and the position he assumed by asserting (counter) claims on behalf of Bally shareholders, assumed a fiduciary relationship to the company and its shareholders which he breached by accepting the payment for his stock. Furthermore, Trump is alleged to have aided and abetted the wrongful conduct of the director defendants in order to get this illegal payment.
Violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 are also charged, based on a number of public statements Trump made intended (it is claimed) to assure plaintiffs and other Bally shareholders that Trump was looking out for their interests. In a related light, misstatements or omissions of material fact are alleged under Section 17(a) of the Securities Act of 1933.
Plaintiffs also contend that defendant directors failed to describe certain pending legal actions in a proxy statement dated March 24, 1987, as required by Section 14(a) of the 1934 Act.
Two counts couched as class actions, and similar to claims described above, have also been advanced by the plaintiffs. A wide variety of relief is sought.
All defendants now move the court to dismiss plaintiffs' consolidated complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure.
II. LEGAL ANALYSIS
A. The Applicable Standard of Review
The scrutiny employed when deciding a motion to dismiss a complaint for failure to state a claim upon which relief can be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure is significantly circumscribed. The complaint must be liberally construed in favor of the plaintiffs, and it should not be dismissed unless plaintiffs could prove no set of facts in support of their claim which would entitle them to relief. Jenkins v. McKeithen, 395 U.S. 411, 421-22, 23 L. Ed. 2d 404, 89 S. Ct. 1843 (1969). All facts pleaded by plaintiffs must be taken as true and all reasonable inferences must be drawn in their favor. Altemose Construction v. Atlantic etc., et al., 493 F. Supp. 1181, 1183 (D.N.J. 1980), citing McKnight v. Southeastern Pennsylvania Transportation Authority, 583 F.2d 1229, 1235-36 (3d Cir. 1978). Furthermore, the complaint will not be dismissed unless some insuperable bar to relief is apparent on its face. Id.
Insofar as our analysis of the claims in plaintiffs' consolidated complaint implicates state law based issues of the law of corporations, Delaware law will be treated as controlling. Claims involving the "internal affairs" of corporations, such as breach of fiduciary duty and the like, are subject to the laws of the state of incorporation. Davis & Cox v. Summa Corp., 751 F.2d 1507, 1527 (9th Cir. 1985), see also, First National City Bank v. Banco Para El Comercio Exterior De Cuba, 462 U.S. 611, 621, 77 L. Ed. 2d 46, 103 S. Ct. 2591 (1983). Defendant Bally is a Delaware corporation. (Complaint, para. 2g).
B. Claims against Defendant Donald J. Trump
1. Count III: Breach of Fiduciary Duty and Aiding and Abetting Breach
For the sake of convenience, we will deal with moving defendants' arguments in order of presentation in their papers, starting with those filed by defendant Trump.
In Count III of their consolidated complaint, plaintiffs charge Trump with breaching his alleged fiduciary duty to Bally and its shareholders by accepting "greenmail," which constituted a waste of corporate assets. Trump is further charged with aiding and abetting the wrongful conduct of the Bally defendants in order to gain a profit of over $ 30 million from the "'greenmail' transaction."
In addressing the sufficiency of the allegations of breach of fiduciary duty, we must first pass on the question of whether Trump can have a fiduciary duty imposed upon him under the law. "Generally, a shareholder who owns less than 50% of a corporation's outstanding stock does not, without more, become a controlling shareholder of that corporation, with a concomitant fiduciary status." Gilbert v. El Paso, 490 A.2d 1050, 1055 (Del. Ch. 1984). Plaintiffs' complaint never alleges that Trump owned more than 9.9% of Bally's outstanding stock. (Complaint, para. 32, 53). For Trump to be considered a controlling shareholder for the purposes of a fiduciary relationship, without ownership of a numerical majority of Bally's stock, he must exercise domination over the corporation "through actual exercise of direction over corporate conduct." Id., citing Kaplan v. Centex, 284 A.2d 119 (Del. Ch. 1971). "Control" or "domination" imply at a minimum "a direction of corporate conduct in such a way as to comport with the wishes or interests of the [person] doing the controlling." Kaplan, 284 A.2d at 123. Plaintiffs allege no facts, however, which could support claims that Trump directed Bally's day-to-day conduct in accordance with his wishes. Lacking such allegations, a claim does not exist for breach of fiduciary duty based on Trump's status as a controlling shareholder.
Plaintiffs advance another argument in their brief in an attempt to save their fiduciary duty claim under Count III. They argue that when Trump brought counterclaims against the Bally directors in response to their suit against him, he was in essence bringing a derivative suit on behalf of the corporation against its directors. In such a capacity, plaintiffs argue, Trump assumed a fiduciary position on behalf of Bally's other shareholders. (Plaintiffs' Brief at 27-31). Without passing on the substantive merit of plaintiffs' argument, we must reject its applicability to plaintiffs' defense to this Rule 12(b)(6) motion. Plaintiffs have alleged no facts in their complaint which would support an allegation that Trump's counterclaims in the matter of Bally Manufacturing v. Trump, et al., Civil No. 86-4764, were brought derivatively on behalf of all Bally shareholders. The closest plaintiffs come to so doing is in para. 86 of their complaint concerning a different count, where they state that Trump made public statements intended to instill in Bally shareholders "a belief that he was looking out for their welfare[.]" Such language, even when accepted as true, does not rise to the level of a claim that Trump's counterclaims were derivatively brought. Plaintiffs other conclusory statements to this effect are similarly lacking. (See, e.g., Complaint, para. 58). Failing to show that Trump's claims were derivative ones, plaintiffs' complaint states no allegation that Trump had a fiduciary duty to Bally's other shareholders.
In the second part of Count III, plaintiffs allege that Trump aided and abetted the wrongful conduct of the director defendants. (Complaint, para. 82). To set forth a true claim for aiding and abetting a breach of fiduciary duty, plaintiffs must allege three things: (1) the existence of a fiduciary relationship, (2) breach of fiduciary duty, and (3) knowing participation in that breach by the defendant. Penn Mart Realty v. Becker, 298 A.2d 349, 351 (Del. Ch. 1972). Plaintiffs clearly have met the first prong of this test, as the directors of a corporation stand in a fiduciary relationship to the corporation's shareholders. Id. As for the second prong, we find that plaintiffs have here alleged sufficient facts to state a claim that the Bally directors breached their fiduciary duty to the corporation by paying defendant Trump a premium to buy back his shares of Bally stock. It is true, of course, that a Delaware corporation has the power to deal in its own stock, and that it "may acquire a dissident's shares provided the transaction is free from fraud or unfairness." Polk v. Good, 507 A.2d 531, 536 (Del. Supr. 1986). There is, however, at least one restriction placed upon such selective stock repurchases -- the directors may not have acted solely or primarily out of a desire to perpetuate themselves in office. Unocal Corp. v. Mesa Petroleum, 493 A.2d 946, 955 (Del. Supr. 1985), Polk, 507 A.2d at 536. Plaintiffs have certainly alleged such a motive behind the Bally defendants' repurchase of Trump's stock. (Complaint, para. 33, 58). Plaintiffs back this assertion by alleging the following facts: In return for the repurchase, Trump agreed to drop his lawsuit against the Bally directors and entered into a standstill agreement "whereby he agreed not to purchase any voting securities in Bally or seek to influence the company's management or policies for a period of ten years thereafter." (Complaint, para. 56). Such an agreement supports a claim that the defendant directors' motive was one of entrenchment. Furthermore, in light of the directors' inherent conflict of interest, cases such as Unocal, 493 A.2d at 955, hold that directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person's stock ownership when they buy back that person's stock at a premium. Taking all of these factors together, we find that plaintiffs here have alleged sufficient facts to state a claim for a breach of the directors' duty through repurchase of Trump's stock. Inquiring any more deeply into plaintiffs' claims would be inappropriate at this stage.
Finally, plaintiffs must set out a claim that Trump knowingly participated in the above-alleged breach of fiduciary duty. Since Trump's state of mind is necessarily implicated in such a claim, painstaking specificity in pleading cannot be realistically expected. We find that plaintiffs' descriptions of the repurchase agreement between Trump and the Bally directors, especially the standstill agreement, suffice to establish a claim that Trump participated in the directors' attempts to entrench themselves. Having met the three prongs delineated in Penn Mart, supra, plaintiffs have stated a claim of aiding and abetting strong enough to withstand a motion to dismiss under Rule 12(b)(6).
The third count of plaintiffs' complaint will be dismissed insofar as it alleges a breach of fiduciary duty by defendant Trump, but will remain intact as to charges of Trump's aiding and abetting the Bally directors' breach of fiduciary duty.
2. Count IV: Violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
In Count IV, plaintiffs bring claims against the individual defendants pursuant to Section 10(b) of the Securities Exchange Act of 1934 ["the 1934 Act"], 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated under that Act. 17 C.F.R. 240.10b-5. Section 10(b) provides that
it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Rule 10b-5 elaborates on this prohibition as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,