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September 22, 1998

In re GENERAL INSTRUMENT CORPORATION SECURITIES LITIGATION; This Document Relates To: Derivative Action BKP Partners, L.P., et al.

The opinion of the court was delivered by: MAROVICH


 This is the second coming of a consolidated securities action the Court dismissed with leave to amend on September 24, 1997, holding that Plaintiffs' amended complaints failed to plead fraud with the particularity required by Fed. R. Civ. P. 9(b). Now before the Court are two motions to dismiss filed by Defendant General Instrument Corporation ("GIC") and other named Defendants (collectively "Defendants"). Defendants' motions seek to dismiss a direct claim brought under the Securities Exchange Act of 1934 ("Exchange Act") and all derivative claims brought under the laws of California and Delaware.

 The controversy concerns three separate but unquestionably related civil actions that were transferred to the Court, via an Order from the Judicial Panel on Multi-District Litigation, for coordinated and consolidated pretrial proceedings. See In re. Gen. Instrument Corp. Sec. Litig., Master File No. 96 C 1129. This phase of the proceedings, however, only concerns two of the three actions, namely the derivative and the BKP Partners, L.P., et al. suits. Because Defendants' motions to dismiss were filed together and involve almost identical factual allegations, the Court will rule on both of them in this "consolidated" Memorandum Opinion and Order.


 A detailed restatement of the alleged misrepresentations and omissions is not necessary for the disposition of these motions. *fn1" What is necessary, though, is a brief synopsis of the facts that precipitated the Next Level Communications ("Next Level") and the GIC derivative suits.

 On October 24, 1995, Plaintiff Seymour Lazar ("Lazar"), a shareholder of GIC, instituted a derivative action against T. Forstmann, N. Forstmann, Klinsky, Akerson, Brown, Strauss, O'Rourke, Friedland, Drendel, Stern, Meyerson, Rohatyn, Forester (collectively "Directors"), Forstmann Little & Co. ("FLC"), MBO-IV, Instrument Partners, and other named executive officers of GIC. During the week of April 20, 1995, Brown, Strauss, Rourke, MBO-IV, and Instrument Partners sold more than 15.5 million shares of GIC, the aggregate proceeds from which exceeded $ 516,000,000. *fn2" T. Forstmann, N. Forstmann, Klinsky, and Akerson are general partners of the MBO-IV and/or Instrument Partners partnerships.

 According to the Complaint, the Directors breached their fiduciary duties when they concealed certain adverse financial information and otherwise failed to properly manage GIC's affairs. Specifically, Lazar alleges that the Directors omitted and misrepresented certain material facts concerning the progress and profitability of two new telecommunications products GIC was in the process of developing. This artificially inflated the price of GIC's stock from March 21, 1995 to October 18, 1995, and thereby enabled a majority of the Directors to sell their GIC shares before this adverse information was publicly disclosed and reflected in the stock price.

 On August 30, 1995, GIC, Next Level, and NLC Acquisition (a wholly owned GIC subsidiary, hereafter "NLC") executed a stock for stock merger agreement, whereby Next Level's shares were exchanged for newly issued GIC shares, and then NLC was merged into Next Level. As a result, the former shareholders of Next Level ("BKP") are now shareholders of GIC, and GIC is now the sole shareholder of Next Level. *fn3" The exchange value of the GIC shares was based on its average trading price on the New York Stock Exchange over a ten day period. Next Level's shares, however, were not registered, so the parties agreed to a value of $ 7 per share. Next Level and NLC were incorporated in California, and GIC is a Delaware corporation. BKP also claims that GIC inflated the value of its stock by purposely failing to disclose certain damaging financial information both before and during this ten day averaging period. Thus, BKP contends that it was duped into exchanging its shares in Next Level for fewer shares in GIC than would have otherwise been the case.


 I. Standards for Motions to Dismiss

 When considering a motion to dismiss, the Court examines the sufficiency of the Complaint, not the merits of the lawsuit. See Triad Assocs. V. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir. 1989). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). A motion to dismiss will be granted only if the Court finds that the plaintiff can prove no set of facts that would entitle her to relief. See Venture Assoc. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 432 (7th Cir. 1993); Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). On a motion to dismiss, the Court draws all inferences and resolves all ambiguities in the plaintiff's favor and assumes that all well-pleaded facts are true. See Dimmig v. Wahl, 983 F.2d 86, 86 (7th Cir. 1993).

 II. § 14(a) Violation

 Count I of BKP's Complaint claims that Defendants' solicitation of BKP's shares in Next Level violated § 14(a) of the Exchange Act. Section 14(a) provides that:

It shall be unlawful for any person . . . to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered on any national securities exchange in contravention of such rules and regulations as the (Securities and Exchange) Commission may prescribe.

 15 U.S.C. § 78n(a).

 Whether GIC actually contravened such rules and regulations is of no consequence, since Defendants argue that § 14(a) is only triggered when the solicited stock is registered under § 12 of the Exchange Act. Because Next Level's stock was not registered under § 12, Defendants conclude that BKP can not state a claim for relief under § 14(a). Thus, the sole contested issue is whether § 14(a) only applies to the solicitation of registered securities -- i.e., must the solicitee be registered, or is it sufficient that the solicitor is registered.

 BKP urges the Court to adopt a "flexible" interpretation of the phrase "in respect of any security," so that an implied right of action will exist under § 14(a) if the challenged solicitation involves any registered security. In light of the ample authority to the contrary, however, BKP's position is simply untenable. For example, in Borak v. J.I. Case Co., 317 F.2d 838, 848 (7th Cir. 1963), the Seventh Circuit took a narrower view than BKP proposes and explained that "Section 14(a) prohibits the solicitation of proxies of securities listed on a national exchange in violation of SEC Rules promulgated thereunder." On appeal the Supreme Court echoed the court's reading and noted: "the section [14(a)] stemmed from the congressional belief that 'fair corporate suffrage is an important right that should ...

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