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Lonergan v. Crucible Steel Co.





APPEAL from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County; the Hon. CORNELIUS J. HARRINGTON, Judge, presiding.


Rehearing denied September 27, 1967.

This is a derivative action brought in the circuit court of Cook County by four shareholders of Crucible Steel Company of America on behalf of themselves and other shareholders of the corporation similarly situated. The defendants are Crucible, Wheeling Steel Corporation, Hunt Foods and Industries, Inc., and 46 persons who are, or were, officers or directors of the corporate defendants.

The plaintiffs, who own 107,900 shares of Crucible's 3,879,180 shares of outstanding common stock, are members of a shareholder's committee which has solicited proxies in an effort to acquire control of Crucible through the election of directors proposed by the committee. Morris J. Rubin, who owns 10,000 shares, lives in Skokie, and Dr. Harold M. Kass, who owns 400 shares, lives in Oak Park. Arthur J. Lonergan, who owns 41,500 shares and whose wife owns 3,000 shares, lives in Phoenix, Arizona. Dr. William H. Rosenbaum, who along with his wife own 56,000 shares, lives in Scottsdale, Arizona.

Crucible is a New Jersey corporation which is licensed to do business and does business in Illinois. It is known as a specialty steel manufacturer because it produces various alloyed steels. In 1965 its sales amounted to 313 million dollars of which over 10 million was in Illinois, the fifth largest State by quantity of sales out of 42 States in which it does business. Its principal offices and manufacturing facilities are in Pennsylvania, but it has two offices in Illinois and a registered agent here. At the end of 1965 it had assets of $423,073,000 of which $2,749,000 were located in Illinois, and 13,133 employees, 84 of whom are employed in Illinois.

The State of incorporation of Wheeling Steel and Hunt Foods does not appear of record, but both are licensed to do business in Illinois. Hunt Foods has operating divisions which engage in the food, paint, can and glass business. It also has investments in various corporations and owns 11 or 12 per cent of the stock of Wheeling. Wheeling is engaged in the manufacture of steel.

The gist of plaintiffs' complaint, which covers some 46 pages of the abstract, is that the defendant officers and directors of Crucible were aware of plaintiffs' recent purchases of Crucible stock and their substantial ownership of the stock and also were aware of plaintiffs' dissatisfaction with the manner in which these defendants were conducting the business affairs of the company. In order to retain control of his position as president and director of Crucible, Joel Hunter entered into a conspiracy with Norton Simon, director and chairman of the Hunt Foods finance committee and chairman of the board of directors of Wheeling Steel. It is alleged that the quid pro quo of the conspiracy was the perpetuation of Hunter as president of Crucible at an increased salary for the merger of Crucible with Wheeling Steel which has been operating at a substantial loss. To carry out the conspiracy it is alleged that Hunt Foods has purchased Crucible stock and now owns in excess of 618,000 shares of its common stock. About this same time four vacancies on Crucible's board of directors (3 by resignation) were filled by Simon, Robert Morris, who is president of Wheeling Steel, Jack Clumeck, who is a director of Hunt Foods and Wheeling Steel, and Raymond Rich, who is a director of Hunt Foods. It alleges defendants are responsible for misleading, deceptive and incomplete statements in communications mailed to shareholders of Crucible, particularly in that the communications failed to disclose assurances alleged to have been given to Joel Hunter that he would remain as President at an increased salary in consideration for supporting the merger between Crucible and Wheeling and failed to state that the real reason Simon and his associates joined the board of directors was to gain control for Wheeling Steel and Hunt Foods and effectuate the merger of Wheeling Steel and Crucible.

The complaint prayed: (1) for the issuance of temporary and permanent injunctions restraining the defendants from using the notice and proxy statement with respect to the shareholders' meeting of April 27, 1966, from calling an annual meeting of shareholders and submitting a slate of directors until the final determination of the issues set forth in the complaint, and a declaration that the call for the April 27 annual shareholders' meeting of Crucible Steel was void, (2) for the issuance of temporary and permanent injunctions restraining the defendants from voting for directors of Crucible, from acquiring additional shares of Crucible stock, from soliciting proxies from Crucible shareholders, and from acquiring further representation on Crucible's board of directors, and (3) for the issuance of temporary and permanent injunctions restraining the defendant Simon, and the other three persons described as his nominees, from acting as members of the board of directors of Crucible and directing them to resign as directors. It also prayed that Crucible recover from the defendants $100,000,000 compensatory damages, "together with punitive damages in at least the same amount."

The three corporate defendants and Richard A. Aishton, a former director of Crucible, were served with process and filed their answers. Each of these defendants deny the material allegations of the complaint and each raised the affirmative defense "that the plaintiffs by their complaint seek to cause this Court to interfere with the internal affairs and management of defendant Crucible, a foreign corporation, organized under the laws of the State of New Jersey, that this Court is an inappropriate forum to entertain a suit interfering with the internal affairs and management of a foreign corporation; and that for this Court to exercise its jurisdiction as prayed by plaintiffs in this suit would be contrary to the public policy of the State of Illinois."

Plaintiffs moved for a temporary injunction and the trial court heard evidence on the motion for five days. Five witnesses testified in person, six evidence depositions were tendered and received and numerous exhibits were introduced by both sides. The court granted a temporary injunction "directing the defendants and each of them to adjourn the Annual Stockholders meeting heretofore scheduled for April 27, 1966 to August 29, 1966; which will permit sufficient time to correct the allegedly misleading solicitation material transmitted by management and the correction of other charged violations, and to permit solicitation by the plaintiffs of proxies already obtained by management and others held in so called street name."

The Appellate Court held that Illinois courts should refuse jurisdiction of the case and reversed the injunctive order of the trial court. (Lonergan v. Crucible Steel Company of America, 73 Ill. App.2d 292.) This court granted leave to appeal and consolidated the case with plaintiffs' direct appeal in which it is claimed that the appellate court decision deprived them of their constitutional rights. On plaintiffs' motions this court has directed that the 1966 and 1967 annual meetings of Crucible's stockholders may not be held until the final outcome of this case in this court.

The basis of the Appellate Court's holding is "that the relief sought by the plaintiffs would require the courts of this state to make determinations concerning the internal affairs of Crucible." (73 Ill. App.2d 292, 300.) From this it concluded that the Illinois courts should not take jurisdiction of the case.

In early cases the acceptance or denial of jurisdiction of derivative actions against foreign corporations turned on what the courts determined was or was not interference with the internal affairs of the corporation, (See e.g. Babcock v. Farwell, 245 Ill. 14; Voorhees v. Mason, 245 Ill. 256.) We feel that the acceptance or denial of jurisdiction of such actions should be decided under the doctrine of forum non conveniens and that interference with the internal affairs of a foreign corporation is only one factor in determining whether an Illinois court would serve the convenience of the parties and the ends of justice.

This was the approach used by the Supreme Court in Koster v. Lumbermen's Mutual Casualty Co., 330 U.S. 518, 91 L.Ed. 1067, 67 S.Ct. 828. The court first observed, "This case involves the special problems of forum non conveniens which inhere in derivative actions, and which have been little considered by this Court. * * * Rogers v. Guaranty Trust Co., 288 U.S. 123, 77 L.Ed. 652, 53 S.Ct. 295, 89 A.L.R. 720, was a derivative action, but that feature of the case was given almost no attention and the emphasis was entirely on the extent to which it involved inquiry into the `internal affairs of a foreign corporation,' certainly not the most distinguishing feature of these actions." 330 U.S. 518, 521-22, 91 L.Ed. 1067, 1072, 67 S.Ct. 828, 830.

The Court went on to state, "There is no rule of law, moreover, which requires dismissal of a suitor from the forum on a mere showing that the trial will involve issues which relate to the internal affairs of a foreign corporation. That is one, but only one, factor which may show convenience of parties or witnesses, the appropriateness of trial in a forum familiar with the law of the corporation's domicile, and the enforceability of the remedy if one be granted. But the ultimate inquiry is where trial will best serve the convenience of the parties and the ends of justice." 330 U.S. 518, 527, 91 L.Ed. 1067, 1076, 67 S.Ct. 828.

In Cotton v. Louisville and Nashville Railroad Co., 14 Ill.2d 144, we stated at page 159: "The decision as to whether the facts of a particular case warrant dismissal under the doctrine of forum non conveniens lies primarily within the discretion of the trial court. The trial court's discretionary action in retaining or declining jurisdiction is subject to reversal on appeal only where there has been an abuse of ...

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