The opinion of the court was delivered by: ZAGEL
JAMES B. ZAGEL, UNITED STATES DISTRICT JUDGE
This is the second time we confront the legal issues arising from the United Air Lines pilots' efforts to purchase United Air Lines.
The Air Line Pilots Association, International (ALPA) and Jeffrey Buckley Cockrell, a pilot for United, an ALPA member and a United shareholder, sue UAL Corporation, United's parent company, and certain current or past Directors of UAL.
Plaintiffs complain that section C,
a provision adopted in the collective bargaining agreement between United and the International Association of Machinists & Aerospace Workers (IAM) violates both the Railway Labor Act and Delaware corporate law, and that section B(1)(b) of that labor agreement
violates Delaware law.
In a previous opinion we found that section C violated the RLA, but we did not decide the Delaware law issues, as we believed that federal law preempted state takeover law. 699 F. Supp. 1309 (N.D. Ill. 1988). The court of appeals found that section C did violate the RLA, but remanded the case for us to decide the Delaware law issues. 874 F.2d 439 (7th Cir. 1989). The findings of fact in this case are thoroughly detailed in this court's prior opinion. Airline Pilots Ass'n Int'l v. UAL Corp., 699 F. Supp. 1309 (N.D. Ill. 1988). We refer to these facts in the discussion that follows, as is necessary to explicate our views.
United offers several arguments to dissuade this court from evaluating the validity of sections B(1)(b) and C under Delaware law.
United insists that Cockrell is not a fair and adequate representative of the shareholders, and therefore, lacks standing to challenge the Directors' conduct on behalf of the corporation.
We consider this claim under Delaware law. When a federal court exercises its pendant jurisdiction over claims arising from state law, state substantive law must be applied to resolve the claims. Marathon Petroleum Co. v. LoBosco, 623 F. Supp. 129, 134 (N.D. Ill. 1985), citing United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966). See also Wright, Miller, & Cooper, Federal Practice & Procedure : Jurisdiction sec. 4515, at 276 (1982).
Derivative suits under Delaware law are governed by Del. Code sec. 327 and Ch. Ct. Rule 23.1. Implicit in these rules is that the plaintiff must adequately and fairly represent the interests of the shareholders. See E. Folk, R. Ward & E. Welch, Delaware General Corporation Law, sec. 327.3.3, at 359 (1988). See also Youngman v. Tahmoush, 457 A.2d 376, 379 (Del. Ch. 1983). A plaintiff is not automatically disqualified from bringing a derivative suit simply because that shareholder is also the potential acquiror. MacAndrews & Forbes Holding, Inc. v. Revlon, C.A. No. 8126, slip op. (Del. Ch. Oct. 9, 1985). See also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (suit brought by minority shareholder on behalf of corporation challenging decision by Board to effect a self-tender offer). To be disqualified defendant must show that the plaintiff-representative's interests are intrinsically at variance with those of the other shareholders. Youngman, 457 A.2d at 381.
The court may look to extrinsic factors to determine the adequacy of representation; the most important consideration being antagonistic economic interests. Owen v. Modern Diversified Industries, Inc., 643 F.2d 441, 443 (6th Cir. 1981). Cockrell owns a substantial interest in United, he like the other shareholders is interested in maximizing the value of his shares and ensuring that management does not block potentially profitable offers in breach of their fiduciary duty. In this respect defendant has not shown a substantial likelihood that the derivative suit is not being used as a device for the benefit of all stockholders. Youngman, 457 A.2d at 381 (citing Owen v. Modern Diversified Industries, Inc., 643 F.2d 441 (6th Cir. 1981)). We cannot say that Cockrell's economic interest and that of the shareholders is incompatible. Generally economic interests conflict because the acquiror seeks the lowest possible price and the shareholders desire the highest price for their shares. Baron v. Strawbridge & Clothier, 646 F. Supp. 690, 695 (E.D. Pa. 1986). Here, plaintiff merely asks us to remove the obstacles to one takeover proposal and this does not foreclose the opportunity for the shareholders to accept an offer at a better price.
A potential conflict is more apparent because of Cockrell's status as an employee of United, an airline pilot and member of ALPA, and his representational duties. This concern, however, is alleviated by the relief plaintiffs request. Cockrell seeks to enjoin the anti-takeover provisions, and in this, his and the shareholders' interests are aligned. They seek to ensure that the Board has followed proper decision-making procedures and that the Directors have not breached any duty to the corporation.
Cockrell is not an inadequate representative "merely because of the existence of interests beyond those of the class he seeks to represent, so long as he shares a common interest in the subject matter of the suit." G.A. Enterprises, Inc. v. Leisure Living Communities, Inc., 517 F.2d 24, 27 (1st Cir. 1975). United has not met its burden of showing that a serious conflict exists where Cockrell could not fully represent his interests in this litigation without disregarding those of the other shareholders.
Defendants maintain that we need not even reach the issue of sections B(1)(b) and C's validity under Delaware law because as a practical matter this case is moot. The case was mooted once UAL's stock price rose above the $ 110 per share offered in the pilots' May 1988 proposal. The fact that the pilots' proposal may have to be re-struck neither moots this litigation nor makes the plaintiffs' challenge to the provisions disappear. Plaintiffs do not seek to force the Directors to accept their proposal at $ 110, rather they seek to have the anti-takeover provisions which bar their initiative invalidated. Furthermore, the stock market is highly sensitive to external factors, the current rise in United stock is not a guarantee that the stock price will remain over $ 110 for any length of time.
The current status of the stock market likely has bearing on the adequacy of the pilots' proposal, but does not affect the viability of the controversy before us. Cf. Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, slip op. at 3 (7th Cir. 1989) (court found that an increase in share value after the district court's opinion, but before a decision on appeal did not make the case moot "the parties remained locked in combat" and the price had no bearing on the operation of Wisconsin's takeover statute at issue). Nor is it proven that the pilots cannot submit a new proposal to the Board of Directors under the current economic conditions.
With respect to section B(1)(b) United says it is no longer at issue because, regardless of the provision, as of October 1, 1989, IAM can serve a Section 6 notice, thus, devoiding B(1)(b) of any potency. This argument ignores the fact that section B(1)(b) is in effect now and currently presents an obstacle to the pilots' efforts. We have no reason to believe that the pilots cannot strike a deal in the three months remaining before October 1. For this reason alone the validity of B(1)(b) is not moot. The justiciability of a suit remains intact even where there exists a strong probability that a mooting event will soon occur. Wright, Miller & Cooper, Federal Practice and Procedure : Civil sec. 3533.1, at 220-21 (2d ed. 1984). See also Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 100 S. Ct. 2009, 2023-24 & n.15, 64 L. Ed. 2d 702 (1980) (Court rejected mootness challenge in favor of ruling on constitutionality of state statutes despite the fact they were due to expire in less than a month).
Section C had been found invalid under the Railway Labor Act and defendants contend this precludes an adjudication of the provision's validity under Delaware law. Defendants state that they will seek no further review of the finding that section C is invalid under the Railway Labor Act. They offer the colorable argument that adjudication of its validity under Delaware law is unnecessary. We reject the argument. It is not outside the realm of possibility that United management will attempt to redraft a slightly altered ESOP provision in an attempt to comply with the RLA and include it in the current labor agreement or a new one. Indeed, under the current IAM contract the parties are permitted to amend in the event a provision is found unlawful. Further, defendants say but cannot guarantee, that if a new provision is adopted, it will occur in a different context and present different legal questions. Their prediction of the legal consequences of their future conduct may or may not be correct. In any event, Cockrell is entitled to a determination with respect to whether the anti-takeover defense devices adopted under the circumstances here, pass muster under Delaware law.
Defendants say that section B(1)(b) is not an issue as the alleged anti-takeover effects of the reopener clause are contrived. According to United the provision does no more than repeat the machinists' statutory rights under Section 6 of the RLA to serve notice at any time. 45 U.S.C. sec. 156. However, plaintiffs argue, and United does not dispute, that it is the generally accepted practice between parties to a collective bargaining agreement in the airline industry to waive the statutory right to serve Section 6 notices until an agreed upon date, specified in the contract. Indeed, in the 1987 United-IAM contract at issue here, absent section B(1)(b), the contract imposes a moratorium on serving Section 6 notices until October 1, 1989. As explained above, the fact that the contract expires in three months does not affect our view of the justiciability of the controversy. Section B(1)(b) accelerates the machinists' right to strike if the pilots were to acquire the airline, which, evidence shows, had impeded the pilots' takeover efforts.
Defendants argue that B(1)(b) has an anti-takeover defense effect only because Chemical Bank refuses to finance the pilots' initiative while the reopener clause remains valid. On this assumption defendants contend that because the United Board was unaware that Chemical Bank would adopt this view, the Directors could not possibly have considered B(1)(b) a defense device. It is difficult to believe that the business-wise members of the United Board did not foresee any lender's refusal to finance a proposal where the possibility of a labor strike was facilitated by the highly predictable consequence of section B(1)(b).
Even if B(1)(b) were an ineffective anti-takeover device, we are not relieved of the obligation to review the validity of the provision under Delaware law. The provision was adopted with the intent to deter the pilots' efforts and Chemical Bank refused to provide financing because of the increased potential for a strike caused by the provision.
It is conceivable that not every anti-takeover device invented functions according to plan. This does not relieve directors from observing the law when they create these devices. We are not aware of case law that requires an anti-takeover device to have "bite" before it can be invalidated. The lack of such ...