The opinion of the court was delivered by: Robert D. Morgan, District Judge.
This cause is before the court upon the motions of the several
defendants to dismiss the complaint. Because of evidence received
on application for preliminary injunction and various affidavits
which have been filed, these motions have been treated as for
summary judgment under Rule 12(b) of the Federal Rules of Civil
Plaintiffs are minority stockholders of the defendant, Regency
Life Insurance Company, an Illinois Insurance Corporation. Coyn
Richardson and Thomas Faller are sued individually and as
officers and directors of Regency. Other individuals named as
defendants in the suit are sued as directors of Regency.*fn1
The original complaint contained three counts, jurisdictionally
based upon Section 10(b) of the Securities Exchange Act of 1934,
as amended, 15 U.S.C. § 78j (b), and Rule 10(b)-5 promulgated by
the Securities Exchange Commission thereunder.
17 C.F.R. § 240.10b-5. A fourth count alleges a breach by Richardson and
Faller of fiduciary duties owed to the corporation under the
provisions of the Illinois Business Corporation Act, I.R.S. 1965,
c. 32, § 157.86, and the Illinois Insurance Code, I.R.S. 1965, c.
73, §§ 736.1, 736.2.
The complaint prays injunctive relief, damages and the
nullification of certain transactions therein alleged.
On September 25, 1967, by an amendment to the complaint, a
fifth count, jurisdictionally based upon Section 10(b) of the
federal act and Rule 10(b)-5, was added.
The defendants have moved to dismiss the complaint on the
ground that it does not state a cause of action under Section
10(b) and Rule 10b-5. The court is now concerned only with that
question, whether a cause of action cognizable by a federal court
under the federal statute is stated in the complaint.*fn2
This suit is brought as a class action on behalf of the
plaintiffs and all other Regency shareholders who are similarly
situated, and as a derivative suit on behalf of the corporate
defendant. In support of the derivative suit thereof, the
complaint alleges that the individual defendants, Richardson and
Faller, who are directors and the chief executive officers of
Regency, completely control and dominate a majority of the board
of directors of Regency. Under those circumstances, it is alleged
that a suit by Regency for the protection of its own interests is
Allegations of the complaint which are material to all counts
are as follows:
In August, 1965, a resolution was adopted by a majority of the
Regency board of directors removing Richardson and Faller as
officers of the corporation. They remained removed until
December, 1965, at which time, at the annual meeting of Regency
shareholders, they succeeded in electing their own slate of
directors. They then resumed their positions as executive
officers of Regency.
Shortly thereafter, Richardson and Faller purchased the some
32,000 shares of Regency held by six directors of the corporation
at a price alleged to be less than the $5.00 price of original
Richardson and Faller have maintained a dominant position in
the control of the corporation since December, 1965.
Under date of August 8, 1967, the plaintiffs presented a
written demand and request to the board of directors of Regency
that the board take action to remove Richardson and Faller from
their executive positions with the corporation. They also
demanded that a special shareholders meeting be called to
facilitate the action demanded of the board. Specific attention
was directed to "matters involving this Company's relationship
with Great Heritage Life Insurance Company, American Security
Life Insurance Company and Investors Unlimited, which are the
companies that "Richardson and Faller had been dealing with
individually and against the best interest of Regency Life
Insurance Company." The instrument further stated that failure of
the board to take favorable action upon the demand within five
days would be deemed a refusal by the board to comply with the
On August 12, 1967, the demand was submitted to the regular
meeting of the board by board chairman, Herman Dammerman. The
board then took the following action, by majority vote: Removed
Dammerman as chairman and elected defendant, Coyn Mateer, to
replace him; rejected a motion by Dammerman to take immediate
action upon plaintiffs' demands; and appointed a committee to
investigate the charges contained in the demand and to report
back to the board at its next "monthly" meeting.
Plaintiffs made no further effort to obtain action by the
corporation, for the reason, as they allege, that Richardson and
Faller completely control and dominate the board and ...