Full opinion text
MURRAY M. SCHWARTZ, District Judge. The instant case involves a challenge by several shareholders of E. I. Du Pont de Nemours and Company (“Du Pont”) to a contemplated merger between Du Pont and Christiana Securities Company (“Christiana”), a closed-end non-diversified management investment company registered under the Investment Company Act of 1940. 15 U.S.C. § 80a-l et seq. The plaintiffs, suing derivatively on Du Pont’s behalf seek, on three grounds, to enjoin the merger. They argue that the proposed merger will, when consummated, violate Delaware law because it is unfair to public shareholders of Du Pont. In addition, plaintiffs urge that the merger is violative of Rule lob-5, 17 C.F.R. § 240.10b-5 in two respects: first, the defendants have engaged in a scheme to defraud Du Pont’s public shareholders and second, that defendants have made material misstatements and non-disclosures with respect to the merger. The defendants in this matter, Du Pont, Christiana and various individual directors and officers of Du Pont have countered plaintiffs’ claims, maintaining that the merger is fair under both Delaware and federal law and that Rule 10b-5 has not been violated. This matter having come on for trial this opinion will constitute the Court’s findings of fact and conclusions of law under Fed.R. Civ.Proc. 52(a). The legal arguments advanced by the parties will be considered below but it is first necessary to fully develop the factual background of the Du Pont-Christiana merger. I. FACTS A. The Merger Parties Christiana is a closed-end non-diversified management investment company registered with the Securities Exchange Commission under the Investment Company Act of 1940. As of July 17, 1972, the date on which the respective Boards of Directors of Du Pont and Christiana approved the proposed merger terms, Christiana’s portfolio consisted of the following: Christiana was organized in 1915 as a device both to guarantee the retention of control over Du Pont within the Du Pont family and to ensure that the family’s massive Du Pont holdings would be voted as a single unit. Although the original number of such stockholders was quite limited, by 1940 the number of such stockholders had risen in an amount sufficient to trigger the Investment Company Act registration requirement of 100 or more shareholders. However, 75% of Christiana’s outstanding securities are held by “affiliated persons” within the meaning of the ’40 Act and the Securities Exchange Act of 1934. Moreover, 95.5% of Christiana’s common stock is held by 338 persons and the Du Pont family itself still owns, albeit beneficially, three-quarters of the outstanding common stock. Therefore, despite the fact that Christiana’s securities are publicly traded in the over-the-counter market it has retained its character as a device for holding the Du Pont family’s block of Du Pont common stock. Although both Christiana and Du Pont have consistently maintained that in actual fact Du Pont is not controlled by Christiana, the federal securities laws require a different statutory conclusion. By virtue of Christiana’s 28.3% holdings of Du Pont’s outstanding common stock Christiana is deemed to control Du Pont under Section 2(a)(9) of the Investment Company Act of 1940. 15 U.S.C. § 80a-2(a)(9). Similarly, under the Securities Exchange Act of 1934, Christiana’s Du Pont holdings, when added to the fact that the two companies have five common directors, require a presumption of control by Christiana. Du Pont is far less a stranger to the public eye than its affiliated person Christiana. Its common and preferred stock are traded on the New York Stock Exchange and in 1971, the last full year preceding the merger negotiations, Du Pont had a net income of $356,500,-000 on net sales of approximately 3.85 billion dollars. This produced earnings per share of $7.33 of which $5.00 per share was distributed to shareholders in the form of dividends. B. Market History of Christiana and Du Pont Although a share of Christiana is, in essence, a share of Du Pont because over 98% of Christiana’s investment portfolio is Du Pont common, see, In the Matter of Christiana Securities Company — E. I. Du Pont de Nemours and Company at 9, Investment Company Act of 1940 Rel. No. 8615 (12/13/74), Christiana common has generally traded at a substantial discount from its net asset value. Over the two years preceding the April 28,1972 announcement that merger negotiations were to be undertaken by Du Pont and Christiana, Christiana common generally sold at a discount from net asset value ranging between 20 and 25%. The discount is probably attributable to two significant factors. First, all dividend income received by Christiana as a result of its ownership of Du Pont common is subject to federal corporate income tax. The effective rate at which such dividend income is taxed is 7.2%. Thus, were Christiana removed as an intermediary between Du Pont and the current Christiana stockholders, the gross amount of dividends distributed directly to those shareholders would be increased by 7.2%. Secondly, Christiana common, which is traded over-the-counter in a fairly thin market, is relatively illiquid compared to the trading volume of Du Pont common. See, In the Matter of Christiana Securities, supra at 22, n. 51. The thinness of the market for Christiana despite the fact that some 11,-710,103 shares of Christiana are currently issued and outstanding seems attributable to two other phenomena: the extremely low or, in some cases, zero, tax basis of individual holders of Christiana which means that sales of Christiana would trigger huge capital gains tax liabilities on the part of selling shareholders and the historical control purpose of Christiana, a goal that would be ill-served by sales of stock belonging to Christiana’s control group. Other less significant factors may also have had some effect upon the rate at which the market has chosen to discount Christiana’s net asset value. Christiana obviously costs something to operate and while it has consistently followed a practice of declaring dividends on its common stock in an amount nearly equal to its net earnings per share, whatever minimal operating expenses are incurred must be accounted for by further reducing Christiana’s gross after-tax dividend income. Moreover, Christiana’s historical procedure of distributing virtually all of its dividend income to its shareholders is not writ in stone and thus a further part of the market’s discount from net asset value may be attributable to the risk that Christiana one day might seek to retain some of its dividend income. Finally, it should be noted that the closed-end discount phenomenon is neither a recent development nor applicable solely to Christiana. C. Merger Negotiations Merger negotiations between Du Pont and Christiana were initiated in late April of 1972 when Christiana’s President, Irenée du Pont, Jr., sent a letter dated April 20, 1972, to C. B. McCoy (“McCoy”), then President and Board Chairman of Du Pont, suggesting that a merger between the two entities would be advantageous to both parties. As a result Du Pont agreed to consider such a merger. Prior to the start of negotiations the Christiana and Du Pont boards took two basic steps prompted by the extremely close historical relationship and interlocking directorates of the two companies: The appointment of special negotiating committees composed of persons unconnected with the opposing negotiating party and the retention of three investment banking firms to provide financial advice with respect to valuations to be employed during negotiations and the fairness of any proposed merger terms. The Du Pont board named McCoy and Irving S. Shapiro (“Shapiro”), then Senior Vice-President and a Director of Du Pont as its negotiating committee. Christiana similarly designated a two-man board composed of A. Felix du Pont, Jr., a Christiana Vice-President and Director, and E. B. du Pont, its Assistant Treasurer and also a Director. Du Pont and Christiana jointly retained Morgan Stanley & Co. (“Morgan Stanley”), an investment banking firm, as a financial advisor in connection with the merger. Morgan Stanley had previously assisted both of the merger parties. Christiana and Du Pont each then retained separate financial advisors, choosing Kidder, Peabody & Co., Incorporated (“Kidder Peabody”) and the First Boston Corporation (“First Boston”) respectively. Neither Kidder Peabody nor First Boston had any prior significant relationship with either of the merger parties. The three financial advisors were asked to prepare reports for the special negotiating committees providing a financial analysis and evaluation of all factors believed relevant to the transaction. Moreover, they were requested to make recommendations as to a range of exchange ratios of Du Pont and Christiana common they considered to be fair, reasonable and consistent with the statutory standards rendered applicable by the Investment Company Act of 1940. All three investment advisors considered the relative advantages and disadvantages of a merger to both parties and concluded that a merger involving exchange ratios within a certain range would provide advantages to both parties. Further, the investment advisors adopted the view that the proposed transaction essentially involved an exchange of Du Pont stock for Du Pont stock, placing emphasis both upon the extremely heavy weighting of Christiana’s portfolio towards Du Pont common, as well as the historical purposes of Christiana. Despite the fact that Christiana had usually traded at a substantial discount 1from its underlying net asset value, neither Du Pont’s financial advisor nor Morgan-Stanley assigned any weight to that factor in calculating their recommended exchange ratios. Moreover, all three financial advisors took the position that market value was irrelevant when considering the merger of a non-diversified closed-end investment company into its operating affiliate. As an alternative to market value, Morgan Stanley and Kidder Peabody each employed Christiana’s net asset value as a device for assigning a valuation to Christiana in order to determine an appropriate range of potential exchange ratios. First Boston did not utilize net asset value, but instead approached the transaction from an earnings per share perspective. However, First Boston’s recommendations with respect to exchange ratios that would result in increments to Du Pont’s per share earnings were readily transformable into net asset value terms. In late June of 1972 the three financial advisors prepared reports advising their respective clients on the range of exchange ratios they deemed fair, as well as articulating the bases both for their conclusions and their modes of analyzing the prospective transaction. On the evening of June 29, 1972 First Boston met with Du Pont’s special negotiating committee and discussed the issues covered in its report. The following morning both negotiating committees met jointly with all three financial advisors in order to more fully develop their understanding of the advisors’ recommendations and conclusions with respect to the proposed merger. In the reports proffered up to this point by the financial advisors they posed the following recommended merger terms: Kidder Peabody (Christiana’s advisor) — an exchange of Du Pont shares valued at market equal to Christiana’s adjusted net asset value or a range covering a 1.7% premium over Christiana’s net asset value to a 1.7% discount from the adjusted net asset value; Morgan Stanley — a range of discounts from Christiana’s adjusted net asset value of .5% to 2.0%; First Boston — a range of exchange terms resulting in a 2<p to 8<p increase in the pro forma earnings per share of Du Pont common which translates into adjusted net asset value terms as a 1.5% to 3.8% discount. The range of merger terms initially recommended by Morgan Stanley and Kidder Peabody was heavily influenced by the theoretical availability of a “one-month” liquidation under Section 333 of the Internal Revenue Code, 26 U.S.C. § 333, as a supposedly viable alternative to the proposed merger for Christiana in which Christiana’s shareholders could realize a return approximating a small discount from net asset value and thereby similarly eliminate much of the market value disparity attaching to Christiana common. Under such a liquidation Christiana could, assuming an election by 80% of its corporate and non-corporate shareholders, liquidate and distribute its assets directly to its stockholders within any one calendar month. 26 U.S.C. § 333(a)(2). The sole costs involved in this method, aside from the relatively minor transaction costs attaching to procedural steps, would be that the shareholders receiving the distributed assets would be taxed on their pro rata shares of Christiana’s accumulated earnings and profits. 26 U.S.C. § 333(e) and (f). The main benefit of this procedure from the viewpoint of Christiana’s shareholders is that it would have achieved the same end result of the merger, namely distributing Du Pont common directly to them at a relatively minimal cost. The availability of the Section 333 alternative was apparently initially suggested by Du Pont in an interdepartmental memorandum drafted on May 12, 1972. This memo indicated that the probable tax costs of a Section 333 liquidation would fall somewhere between 40 and 68 million dollars. Subsequently, Christiana’s counsel prepared a document estimating the minimum and maximum tax costs as $38 million and $85.8 million respectively. As a result of these documents, copies of which were provided to all the financial advisors, Kidder Peabody and Morgan Stanley approached their evaluation of the proposed merger with the assumption that Christiana had another method of achieving its desired result. Both of these two advisors utilized the estimated costs of a Section 333 liquidation and translated these tax costs into net asset value discount terms. Kidder Peabody employed a discount from net asset value of 1.7% as the cost of a Section 333 liquidation and therefore set that figure as a negotiated discount ceiling. Morgan Stanley, utilizing a somewhat different set of figures calculated the discount as 2.84% and indicated the significance of that figure in determining a proper range within which negotiations could properly be conducted. In contrast, First Boston gave no effect to the supposed existence of a Section 333 liquidation alternative in deriving their recommended range of terms. Almost immediately at the outset of formal negotiations the Section 333 liquidation ceased to exist as a viable alternative for Christiana. During the weekend following the June 30th meeting of both special committees and their financial advisors, counsel for both negotiating parties met and discussed the applicability of Section 333 to Christiana. Despite the fact that the earliest documentary suggestion of Section 333’s utility to Christiana came from Du Pont, the Du Pont negotiators considered it to be merely a tactical ploy on the part of their Christiana counterparts. The principal factors in this belief were the impracticality of getting the required rapid consent from Christiana’s nearly 8,000 shareholders and, more importantly, the significant difficulties that existed in accurately calculating Christiana’s accumulated earnings and profits, since the inability to determine those accumulated earnings and profits precluded making any reliable estimate of the tax costs and therefore made it impractical to seek the necessary authorization to proceed from Christiana shareholders. Christiana and its various representatives proved unable to counter the Du Pont beliefs on this issue by developing any reliable estimates of the accumulated earnings and profits. As a result, Christiana was forced to admit that a liquidation alternative simply did not exist. Although Christiana’s negotiating committees did not formally concede the demise of Section 333 until the first negotiating session on July 3rd, both parties notified their respective financial ad-visors that it had .ceased to exist on Sunday, July 2nd. Morgan Stanley indicated to Du Pont that its recommended maximum range would have to be increased in light of this development, but that the change would be relatively small. First Boston however, opined that the removal of Section 333 would have no effect whatsoever on its previously recommended range of acceptable merger terms. By Sunday the 2nd the Du Pont negotiators were contemplating merger terms involving a 2 to 2V2% discount from Christiana’s adjusted net asset value. Three factors were important in arriving at this negotiating posture. First, they believed some inducement was necessary in order to gain the requisite Du Pont shareholder approval. Since no weight was being attached by that date to the Section 333 alternative they were freed from any constraints occurring by virtue of the initial Morgan Stanley maximum discount recommendation of 2.0%. Second, despite the fact that their other financial advisor, First Boston, had submitted a range encompassing a discount of up to 3.8% the negotiators and their advisors had been unable to discover any prior mergers of either a regulated or unregulated investment company which involved a discount from net asset value exceeding 1.8%. Finally, the necessity of formal SEC approval, when combined with the negotiators’ belief that Christiana would agree to a discount no higher than 2.5%, augered heavily in favor of their chosen negotiation posture. At the first negotiating session on July 3rd Christiana formally conceded that a Section 333 liquidation was not a viable alternative following a challenge by Mr. Shapiro on this issue. Thereafter, the Du Pont negotiators kept pushing, despite formidable opposition on Christiana’s part, for a discount from adjusted net asset value of 2V2%. The basic Christiana position, at this juncture, was for merger terms recognizing Christiana’s full adjusted net asset value, and as a result, this initial negotiating session concluded without any agreement. The demise of the Section 333 alternative gave the Du Pont negotiators what they believed to be a significant bargaining advantage. Although the financial advisors’ reports had, at least in the case of Morgan Stanley and Kidder Peabody, relied upon that possibility in fixing their respective recommendations, the Du Pont negotiators felt that there was no need to suspend formal negotiations until additional written recommendations could be submitted. The primary foundation for this belief was the knowledge that the range which they had settled upon as a negotiating posture was clearly within First Boston’s recommendations, a set of terms which they were advised would be unaffected by the changed circumstances and only slightly higher than Morgan Stanley’s, who had indicated their maximum discount level would be slightly increased. This belief combined with the fact that the Du Pont committee thought delaying negotiations would destroy any bargaining leverage they might then have over Christiana by virtue of the demise of one of their opponent’s strongest counterarguments. The assessment of their tactical position appears, at least from the Court’s current perspective some three years afterwards, to have been correct. On the morning of the second negotiating session, July 6, 1972, the Christiana special committee met with the non-Du Pont Christiana directors and representatives of Kidder Peabody to seek their advice on Du Pont’s demand for a 2V2% discount and were advised that such a discount was acceptable. Later that day, after making more efforts to minimize the extent of the discount sought by Du Pont, Christiana agreed in principle to a merger employing a 2V2% discount from Christiana’s adjusted net asset value. The three financial advisors were contacted that afternoon to determine whether the agreed terms were consistent with their respective views on fairness in the proposed transaction. First Boston had already prepared, but not distributed, a finalized report dated July 6, 1972, recommending a range of exchange ratios from 1.108 to 1.139 shares of Du Pont common for each share, which, when translated into net asset value terms, covered a discount range from 1.5 to 3.8% Only two rather minor changes had occurred from their earlier reports. First, both proffered ratios had increased by four-thousandths (.004) of a point. However, this change had nothing whatsoever to do with the elimination of the Section 333 alternative but was instead due to changes in their method of calculating Du Pont’s rate of return on cash, and assets to be converted into cash, acquired in the merger. Secondly, the explanatory charts accompanying the report no longer included a column calculating liquidation values of Christiana’s assets. This change, which was attributable to Section 333’s disappearance, cannot be considered significant. The First Boston approach and lack of weight assigned to the supposed existence of the liquidation alternative, as well as the lack of effect on the recommended terms of its demise, are sufficient to support a more than fair inference that the original inclusion of the liquidation column was no more than a courtesy induced by the attention their client initially drew to section 333. Similarly, Morgan Stanley had already decided by the 5th of July that the upper limit of their recommended range of terms should be increased to include a discount of 2.5% from adjusted net asset value, but had not yet communicated that advice to either set of negotiators. As a result they were, when contacted, able to inform representatives of both negotiating parties that the agreed terms were consistent with the Morgan Stanley view of the transaction. Finally, Kidder Peabody had already indicated earlier that day that 2.5% would be acceptable in their opinion.. On the following day, all three financial advisors submitted updated versions of their reports. Their respective recommendations were as follows: Morgan Stanley, .5 to 2.5% discount from adjusted net asset value; Kidder Peabody, 2.0% premium over, to 3.0% discount from adjusted net asset value; and First Boston which recommended exchange ratios translating into a 1.5 to 3.8% discount from adjusted net asset value. D. Merger Terms Central to comprehension of the merger terms involving an exchange of Du Pont common for Christiana common which would recognize a 2V2% discount from Christiana’s adjusted net asset value is an understanding of how that net asset value was developed and what adjustments were made to it. The negotiating committees first assigned values to each of the items in Christiana’s securities portfolio. With respect to the 13,-417,120 shares of Du Pont common and 16,256 shares of Du Pont $4.50 preferred, valuation was fairly simple. Since both classes of stock are traded on the New York Stock Exchange the negotiators merely multiplied the number of shares held by the average daily closing price during the week preceding the July 17, 1972 public announcement of the merger. The value assigned to the Wilmington Trust stock was similarly-calculated by utilizing the average daily closing bid price in the over-the-counter (“OTC”) trading market during the same time period. The valuation process for the News-Journal Co. common stock was far more complex. The merger parties jointly retained Vincent Manno, a leading newspaper broker and recognized authority on the valuation of privately-held newspapers to appraise the News-Journal Company. Utilizing the News-Journal’s financial statements for the years 1967 through 1971 and unaudited figures for the first 16 weeks of 1972, as well as trade information generally available in the Wilmington area, Mr. Manno arrived at a valuation exclusive of net quick assets of $23,000,000 for the News-Journal. Mr. Manno considered the gross revenues, expenses and circulation of the two newspapers published by the News-Journal Company in his appraisal and took account of the fact that the News-Journal published the only daily newspapers in the Wilmington area. The $23 million valuation was the product of four separate calculations involving multiples of gross revenues and projected net earnings. The actual earnings during the period examined by Mr. Manno were lower than the estimated earnings he believed could be achieved. However, Mr. Manno concluded that a prospective purchaser would emphasize the potential, rather than actual, earnings and revenues of the News-Journal, particularly in view of operating inefficiencies he deemed readily remediable and the exclusive nature of its newspaper market coverage. Finally, as is customary in the valuation of newspapers, the value of the News-Journal’s net quick assets was added to the $23,000,000 figure, producing an appraised value of $24,260,000. Manno’s appraisal was initially a source of surprise to the negotiators. By contrast, in an internal Du Pont memorandum, a value of only $6,800,000, had been assigned to the News-Journal. However, this figure was based on approximations of the book value of the News-Journal’s net assets, a mode of appraisal bearing little, if any, relationship to the fair market value of those assets. Moreover, this estimate took no account of the News-Journal earnings or the inefficiencies in the areas of circulation, advertising and labor relations, which render it more than plausible to discard the actual earnings as a basis for calculation of an appraised value. Therefore, in order to satisfy themselves as to the soundness of the Manno appraisal, all three financial advisors and representatives of Du Pont and Christiana met with Mr. Manno on June 27, 1972 and questioned him extensively as to the basis for, and derivation of, his valuation of the News-Journal. The above steps resulted in the following values being assigned to the Christiana securities portfolio: Du Pont Common ...............$2,198,730,540 Du Pont $4.50 Preferred ......... 1,124,102 The News-Journal............... 24,260,000 Wilmington Trust Co. Common .... 2.699.424 Total................$2,226,814,066 The total net asset value of Christiana was then developed by adding the cash and cash equivalents held by Christiana minus its current liabilities. This produced the following calculation: Christiana Securities portfolio ......$2,226,814,066 Other assets..................... 5.981.367 Total net asset value ..........$2,232,795,433 Various adjustments to net asset value were then made to reflect expenses of the merger and other items. These adjustments and their effect upon Christiana’s net asset value is as follows: Total Net Asset Value of Christiana ....................$2,232,795,433 Less: Estimated expenses and taxes upon disposal of the News-Journal Co. and Wilmington Trust Stock ................... (7,619,606) Christiana's share of merger expenses .......... ( 750,000) Litigation expenses for Christiana tax claim ......., (1,000,000) Adjusted Net Asset Value of Christiana ....................$2,223,425,827 The negotiated discount of 2V2% from Christiana’s adjusted net asset value resulted in a further reduction of that figure to $2,167,840,181. An additional $12,780,000 reflecting the value of Christiana’s assets attributable to 106,500 shares of its preferred stock at $120 a share was subtracted from that figure resulting in a value of $2,155,060,181 attributable to Christiana’s common stock. The exchange ratio was then calculated by developing the number of shares of Du Pont common, valued at $163,875, equal in value to Christiana’s remaining adjusted net asset value. The resulting figure of 13,150,634 shares of Du Pont common when divided by the outstanding 11,710,103 Christiana common shares produces the exchange ratio of 1:123 shares of Du Pont common for each share of Christiana common. The Christiana 7% preferred stock was treated quite differently, having been totally excepted from the development of the exchange ratio attaching to the two common stocks. Christiana’s Certificate of Incorporation provides that any redemption of this stock should occur at $120 per share. Further, counsel to the financial advisors opined that in any appraisal proceedings brought by a preferred stockholder of Christiana dissenting from the merger a Delaware court would utilize the $120 figure in awarding appropriate compensation to a dissenter. Accordingly, all three advisors indicated that the proper treatment of the 7% preferred stockholders was to exchange $120 worth of Du Pont common for each share of Christiana 7% preferred and no challenge to this contemplated distribution has been raised by plaintiffs. The respective boards of directors approved the merger terms in principle on July 17, 1972. Thereafter both boards executed an Agreement and Plan of Reorganization (“Agreement”) on December 20, 1972. The Agreement established several pre-conditions to consummation of the merger including approval by the shareholders of both parties, the receipt of a favorable tax ruling treating the merger as a non-taxable event and the granting of an exemption by the SEC under section 17(b) of the Investment Company Act of 1940 on the statutory ground that the terms of the proposed transaction “ * * * are reasonable and fair and do not involve overreaching on the part of any person concerned.” 15 U.S.C. § 80a — 17(b)(1). The SEC exemption was granted, following trial before an administrative law judge and consideration by the SEC Commissioners on December 13, 1974. The tax ruling has not yet issued. The third relevant pre-condition of shareholder approval has not yet occurred since the merger parties chose to forego submitting the merger for a stockholder vote during the pendency of this litigation. Due to the relatively long interval which has occurred since the initial negotiation of the merger it has been necessary on three occasions to extend the termination date of the Agreement. The most recent of these extensions was undertaken by the Du Pont Board of Directors on December 26, 1974, thus continuing the Agreement in existence. In sum, the striking factor with respect to the merger is the disparity in post-merger gains accorded to each merger party. Du Pont will reap a benefit of some $55,585,646 stemming from the 2Vfc% discounting of Christiana’s adjusted net asset value. By contrast, the utilization of net asset value, rather than market value for purposes of valuing Christiana will produce a gain, depending on market conditions, of anywhere from 9 times to 4 times the Du Pont gain. Moreover, since 28.3% of Du Pont common is held by Christiana, the effective discount rate in terms of Du Pont’s public stockholders is actually 1.8%. On a pro forma basis the earnings per share of Du Pont common will increase between 4 and 5$ and the total number of outstanding shares will be reduced by approximately 188,000 shares. In addition, Du Pont will no longer have to concern itself with the additional layer of regulatory and transaction-shaping hassles caused by its relationship with Christiana. However, compared to the benefits accorded Christiana, these factors may be considered somewhat minimal. II. Legal Challenges to the Merger A. Fairness Under Delaware Law Plaintiffs argue that the proposed merger is unfair under Delaware law. They contend Delaware law requires greater or equal sharing of the benefits in a merger between related entities and that the utilization of Christiana’s net asset value, rather than its market value, violates Delaware law. 1. Legal Standards to be Applied Prior to resolution of plaintiffs’ argument that Delaware law compels the sharing of post-merger benefits, two preliminary questions must be addressed. First, does Delaware law control, and secondly, if it does, what is the standard to be employed in measuring the fairness of the merger? The applicability of Delaware law is made an issue by virtue of the fact that the instant suit, which is based both upon diversity of citizenship and the jurisdictional provisions of the Securities Exchange Act of 1934, was initially instituted in the Northern District of Illinois and thereafter transferred under 28 U.S.C. § 1404(a) to this District. Lest defendants in such cases seek to forum-shop by a combination of transfer and reliance upon Erie v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), the Supreme Court has asserted, in Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964) that the transferee district must, in a diversity suit, apply the conflicts rule of the state in which the transferor district is located. It is concluded an Illinois court would hold Delaware law governs derivative suits by minority shareholders of Delaware corporations. See Continental-Midwest Corporation v. Hotel Sherman, Inc., 13 Ill.App. 188, 141 N.E.2d 400, 403 (1957). The question of what standard Delaware employs to test the propriety of a merger between related entities is far more troublesome. Plaintiffs have asserted that the intrinsic fairness test, which involves “careful scrutiny by the Court” and shifts the burden of persuasion to the proponents of a merger must be utilized. Defendants instead urge application of the business judgment rule, but as a back-up argument urge that the merger passes muster under either test. In general Delaware courts require the existence of two elements, domination and control, and self-dealing, prior to invoking the intrinsic fairness test. Sinclair Oil Corporation v. Levien, 280 A.2d 717, 720 (Del.1971); David J. Greene & Co. v. Dunhill International, 249 A.2d 427 (Del.Ch.1968); Puma v. Marriott, 283 A.2d 693 (Del.Ch.1971); Liboff v. Allen, Civil Action No. 2669 (Del.Ch. Jan. 14, 1975). Domination and control can be proven either by the existence of a parent-subsidiary relationship, Sterling v. Mayflower Hotel Corp., 33 Del.Ch. 293, 93 A.2d 107 (Del.1952); David J. Greene v. Dunhill International, supra, or, by a minority shareholder demonstrating an “actual exercise of direction over corporate conduct ‘in such a way as to comport with the wishes or interests of the corporation doing the controlling.’ ” Liboff v. Allen, supra at 12 quoting from Kaplan v. Centex Corporation, 284 A.2d 119, 123 (Del.Ch.1971). The other necessary element, self-dealing, has been held to occur when the dominant party in a transaction receives something to the exclusion of, and detriment to, the minority shareholders. See, Sinclair Oil Corporation v. Levien, supra, 280 A.2d at 720. Plaintiffs have argued that Christiana controls Du Pont and thus satisfies the Delaware state law domination and control standard. They point to the federal statutory presumption of control under the 1934 Act and the Investment Company Act of 1940, the interlocking directorates of the two companies, and the fact that no Du Pont director has ever been elected without Christiana support, as support for the conclusion that Christiana’s 28.3% bloc of Du Pont constitutes working control of that corporation. Delaware law is contrary to plaintiffs’ position. First, it is clear that non-majority stock ownership is not sufficient, by itself, to establish domination and control. In Liboff v. Allen, supra and Puma v. Marriott, supra, Delaware courts refused to apply the intrinsic fairness test to measure transactions in situations involving inter-corporate dealings with 28.5 and 46% stockholders respectively on the ground that domination and control had not been demonstrated. See also, Kaplan v. Centex Corporation, supra. Second, whatever the practical effect of Christiana’s holdings may be, Delaware courts have considered such factors irrelevant in the absence of a showing that the specific transaction in question has been engineered in unilateral fashion by a dominant party. Kaplan v. Centex Corporation, supra; Liboff v. Allen, supra at 11. Finally, while a substantial argument can be made that Liboff is distinguishable on the ground that the allegedly dominant stockholder’s 28.5% acquisition was a recent development as opposed to the long-term relationship between Christiana and Du Pont and the avowed historical purpose of Christiana to serve as a device to manage the duPont family’s Du Pont interests, Puma v. Marriott remains as an obstacle in plaintiffs’ path. Not only was the stock ownership of the purportedly subservient entity in that case of long duration but, as in this case, directors neither proven to be aligned with, nor dominated by, the large stockholder present on both sides of the transaction negotiated and voted upon the proposed transaction. Despite the foregoing and without reference to the other intrinsic fairness test requirement, self-dealing, this Court is confident that the Delaware courts would nonetheless apply the intrinsic fairness test as a yardstick in the instant case. The precise question at issue here; namely what standard would be applied to measure a merger between a regulated non-diversified investment company and its affiliated company, has never been presented to a Delaware tribunal. Such a merger necessitates an exemption from the SEC upon satisfaction of the far stricter Investment Company Act standard that “ * * * the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned. Section 17(b)(1), 15 U.S.C. § 80a-17(b)(1). Application of that test implicates the rights of shareholders of both parties to a merger or other transaction between statutory affiliates and not solely the investment company’s stockholders. In the Matter of Christiana Securities Company, - E. I. Du Pont de Nemours and Company (1974), Investment Company Act of 1970 Release No. 8615 (Dec. 3, 1974); In the Matter of Bowser, Inc., 43 S.E.C. 277 (1967). Since the rights of all parties to such a merger must be examined under the rigorous statutory standard, this Court, after utilizing its Erie v. Tompkins divining rod, concludes that a Delaware court would not undertake the hollow intellectual exercise of measuring the merger by a decidedly weaker standard, the business judgment test. Under that standard an objector, who bears the burden of proof, cannot succeed without establishing such a gross disparity in exchanged values as would constitute a conscious abuse of discretion, breach of trust or some other actual or constructive fraud. Liboff v. Allen, supra at 15; Muschel v. Western Union Corp., 310 A.2d 904 (Del.Ch.1973); Cole v. National Cash Credit Ass’n, 18 Del.Ch. 47, 156 A. 183 (1931). Accordingly, for purposes of Delaware law, the proposed merger must be tested under the intrinsic fairness standard, thus shifting the burden of proof to the defendants to demonstrate the intrinsic fairness of this merger. 2. Post-Merger Gain-Sharing Under Delaware Law Plaintiff has argued that intrinsic fairness under Delaware law requires equal sharing of post-merger gains between both parties to a merger. Typically, attacks on mergers under this standard have involved challenges based upon disparity in the values exchanged at the time of the merger or upon a substantial decrease in the degree of equity participation afforded to one merger party. See, e. g., David J. Greene v. Dunhill International, supra (substantial decrease in equity and earnings per share held unfair); Bastian v. Bourns, 256 A.2d 680 (Del.Ch.1969), aff’d 278 A.2d 467 (Del.1970) (substantial decrease in equity and slight loss in earnings per share held fair); David J. Greene & Co. v. Schenley Industries, Inc., 281 A.2d 30 (Del.Ch.1971) (exchange of cash and subordinated debentures for common stock held fair). In fact, it can be said that the prevailing Delaware law on fairness requires only that the consideration paid be equivalent to the premerger value of the exchanged shares and pays no attention whatsoever to any resulting post-merger gains. See, Brudney & Chirelstein, “Fair Shares in Corporate Mergers and Takeovers,” 88 Harv.L.Rev. 297, 322 (1974). Defendants have argued that any requirement of gain-sharing under Delaware law would conflict with the Congressionally-mandated federal scheme of investment company regulation which is designed to protect the intrinsic value of an investment-company-shareholder’s investments. While defendants are correct in their characterization both of the Investment Company Act of 1970 as a comprehensive regulatory scheme and of its purposes, it is not necessary to reach their contention that Section 50 of that Act expressly pre-empts any contrary state law because there is absolutely no authority under Delaware law which would require any post-merger gains to be shared equally or proportionately between closely related entities. Plaintiffs make a lame attempt to argue that Sinclair v. Levien, supra, requires proportionate gain-sharing in a merger between related entities. Sinclair is totally silent on this subject. In fact, on the two occasions Delaware courts have had to delineate the fiduciary responsibilities owed by a parent corporation to its subsidiary with respect to sharing in a non-merger context, they have demonstrated a remarkable degree of hostility to the concept of gain-sharing. See, Meyerson v. El Paso Natural Gas Co., 246 A.2d 789 (Del.Ch.1967); Getty Oil Co. v. Skelly Oil Co., 267 A.2d 883 (Del.1970). In Meyerson the defendant El Paso held in excess of 80% of its subsidiary Northwest’s stock. Under federal law El Paso was therefore allowed to reduce its tax liability through utilization of a consolidated tax return in which its profits were offset by Northwest’s considerable losses. Although Northwest’s minority shareholders argued that a portion of the parent’s tax savings should be shared with the subsidiary, the Chancery Court upheld the entire allocation of the tax savings to the parent. Similarly, in Getty the Delaware Supreme Court refused to order a parent to share any portion of its oil import quota with its 71%-owned subsidiary despite the fact that the subsidiary had lost its own oil allocation solely because of its status as the subsidiary of an entity also receiving an import allocation. Although the Court recognized the parent owed a fiduciary responsibility to its subsidiary, it held that “ * * * the duty does not require self-sacrifice from the parent.” 267 A.2d at 888. 3. Propriety Under Delaware Law of Net Asset Value As a Measure of Christiana’s Value Plaintiffs’ other major challenge under Delaware law is an argument that the use of Christiana’s net asset value as a device to measure Christiana’s side of the exchange ratio violates settled precepts under Delaware law. Plaintiffs’ principal reliance is placed upon two cases, Tri-Continental Corp. v. Battye, 66 A.2d 910 (Del.Ch.1949), rev’d, 74 A.2d 71 (Del.1950) and Sterling v. Mayflower Hotel Corp., 93 A.2d 107 (Del.1952). This reliance is misplaced. Tri-Continental, relied upon so heavily by plaintiffs for the proposition that net asset value cannot alone be used to determine the value of a shareholder’s investment in a closed-end investment company, is plainly distinguishable. Not only was Tri-Continental solely confined to the question of a dissenter’s rights and entitlements under the forerunner of Delaware’s current appraisal statute, a question most assuredly not involved in the instant proceedings, but the court’s reasoning in that case is similarly inapplicable. Although the Delaware Supreme Court recognized that investment companies are generally a medium for long-term investment, it was specifically concerned with the statutory demand of a dissenting stockholder for an immediate cash exchange on the value of his investment. As a result, it felt employing market value as a basic measure of value appropriate because of the short-term focus implicit in utilization of the appraisal remedy, despite the presence of a closed-end discount phenomenon. Similarly, the Sterling case is not authority for the point plaintiffs seek to make. In Sterling minority shareholders of a subsidiary slated to be merged into its parent corporation objected on the ground that the exchange ratio failed to compensate them in an amount equal to the liquidating value of their investment in the subsidiary’s assets. While the Delaware Supreme Court refused to accept that argument on the facts before them, it expressly indicated that in some circumstances net asset value might be quite important in establishing a proper merger exchange ratio. 93 A.2d at 115. Since the entities involved in that case were not investment companies whose characteristics lend themselves to the use of net asset value as a primary, if not sole, criterion of valuation, Central States Electric Corporation, 30 S.E.C. 680, 700 (1949), Sterling cannot be considered as authority for plaintiffs’ proposition that the utilization of Christiana’s net asset value, as opposed to its market value, is contrary to Delaware law. In addition, in two cases where Delaware courts have dealt with litigation settlements encompassing a merger between an investment company and its operating affiliate, employment of the investment company’s net asset value was expressly accepted as a device for reaching the proposed exchange ratios. Manacher v. Reynolds, supra; Laufer v. Hunt Foods, supra. While both of these cases involved judicial appraisal of the fairness of proposed settlements and thus cannot be considered direct authority, the unquestioning acceptance of net asset value in those contexts is, at least, an indication that Delaware courts are indeed employing net asset value as a valuation yardstick in appropriate contexts. It is concluded the proposed merger terms are fair under Delaware law. B. Plaintiffs’ Claims Under Rule 10b-5 1. The Proposed Merger as a Scheme to Defraud a) Standing as Derivative Plaintiffs The plaintiffs in the instant action have sued in a derivative capacity. Given the Supreme Court’s recent adoption in 10b-5 damage actions of the strict Birnbaum “purchaser-seller” requirement, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), a question arises as to whether these plaintiffs, who are most assuredly not purchasers or sellers, can maintain this action for injunctive relief under Rule 10b-5. The Court answers this question in the affirmative. In Blue Chip the Supreme Court recognized various classes of potential plaintiffs seemingly barred by the Birn baum rule. One of these classes, namely “ * * * shareholders, creditors and perhaps others related to an issuer who suffered loss in the value of their investment due to corporate or insider activities in connection with the purchase or sale of securities * * *” Id. 421 U.S. at 738, 95 S.Ct. at 1926, encompasses the plaintiffs before the Court. However, the Court expressly noted shareholder members of this class have been able to overcome the Birnbaum bar by bringing a derivative suit on behalf of a corporate entity that is itself a purchaser or seller of securities. Id. See, e. g., Schoenbaum v. Firstbrook, 405 F.2d 215, 219 (2d Cir. 1968), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Pappas v. Moss, 393 F.2d 865 (3d Cir. 1968). The inquiry therefore must center upon whether Du Pont, on whose behalf the plaintiffs have brought this suit, is a purchaser or seller of securities. Numerous courts, including the Supreme Court, have held that a merger is a sale or purchase of securities. See, e. g., S.E.C. v. National Sec., Inc., 393 U.S. 453, 464-68, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969); Knauff v. Utah Construction & Mining Co., 408 F.2d 958, 961 (10th Cir.), cert. denied, 396 U.S. 831, 90 S.Ct. 83, 24 L.Ed.2d 81 (1969); Mader v. Armel, 402 F.2d 158, 159-61 (6th Cir. 1968), cert. denied, 394 U.S. 930, 89 S.Ct. 1188, 22 L.Ed.2d 459 (1969); Dasho v. Susquehanna Corp., 380 F.2d 262, 266 (7th Cir.), cert. denied, 389 U.S. 977, 88 S.Ct. 480, 19 L.Ed.2d 470 (1967); Vine v. Beneficial Finance Co., 374 F.2d 627, 635 (2d Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967); Gould v. American Hawaiian SS. Co., 319 F.Supp. 795, 801, n. 11 (D.Del.1970). Although the instant suit involves an as yet uncompleted merger, it too must be held to have conferred “purchaser-seller” status upon Du Pont. This is because the terms “buy” and “purchase” and “sale” and “sell” are statutorily defined in the 1934 Act to include any contract to buy or sell. Sections 3(a)(13) and (14) of the 1934 Act. 15 U.S.C. § 78c(a)(13) and (14) gjnce Du Pont has entered into a contract regarding the merger with Christiana, and has thus acquired a contractual right to “purchase” Christiana’s securities and “sell” its own, the “in connection with the purchase or sale of any security” requirement of Rule 10b-5 is satisfied. Cf. Blue Chip, 421 U.S. 723, at 732, 95 S.Ct. 1917, at 1924, 44 L.Ed.2d 539 (1975); Jacobs, “The Role of Securities Exchange Act Rule 10b-5 in the Regulation Of Corporate Mismanagement,” 59 Corn.L.Rev. 27, 45, n. 114 (1973). Similarly, courts have been content to confer “purchaser-seller” status upon a corporate entity on the basis of a board of directors resolution authorizing a merger, notwithstanding the fact that the requisite shareholder approval had not yet been obtained. See, e. g., Herpich v. Wallace, 430 F.2d 792, 809-10 (5th Cir. 1970). Thus, the July 17, 1972 action by Du Pont’s Board of Directors approving the merger would be sufficient to cloak Du Pont in “purchaser-seller” raiments. Finally, in Blue Chip the Supreme Court was speaking solely to 10b-5 suits seeking damages and did not have occasion to address the Birnbaum rule’s applicability to suits seeking injunctive relief. Therefore, a line of case law not requiring “purchaser-seller” status in injunctive 10b-5 contexts but merely necessitating allegations of a causal connection between the violations alleged and the pleader’s injuries would appear to arguably retain vitality and lend additional support to plaintiffs’ standing in the instant proceeding. See, Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir.), cert. denied, 398 U.S. 950, 90 S.Ct. 1870, 26 L.Ed.2d 290 (1970); Britt v. Cyril Bath Co., 417 F.2d 433, 436 (6th Cir. 1969); Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 546 (3d Cir. 1973). b) The Alleged Scheme to Defraud Plaintiffs have argued the negotiation of the proposed merger constituted a scheme to defraud Du Pont’s public stockholders for the benefit of its controlling persons, namely Christiana and its affiliated persons. In their view, the scheme consists of terms unfair to Du Pont combined with deception in the form of both a material misrepresentation and a failure to disclose material information. Plaintiffs have proposed two standards which they assert are the proper tests of an unfairness claim under Rule 10b-5. First they argue that “a claim of unfairness means simply that the corporation * * * received too little in selling its stock or exchanging it in a merger.” Note, “The Controlling Influence Standard in Rule 10b-5 Corporate Mismanagement Cases,” 86 Harv.L. Rev. 1007, 1033 n. 111. Secondly, they propose what can best be described as the olfactory test, namely “if it smells bad, it is bad.” Although this pungent test would require utilization of judicial processes not normally employed in resolving litigation conflicts, the Court declines to adopt either it or the other standard urged by plaintiffs. Instead, fairness in this context must be tested by examining whether the corporation received either “wholly inadequate consideration,” Schoenbaum v. Firstbrook, 405 F.2d 215, 219 (2d Cir. 1968) (en banc) or a “fraudulently low price.” Pappas v. Moss, 393 F.2d 865, 869 (3d Cir. 1968). However, rather than assess the fairness of the transaction by merely looking with blinders at the relative gains attendant upon consummation of this merger, one must also consider the Investment Company Act of 1940. This is necessary because the Investment Company Act of 1940 and decisions thereunder erect a substantive standard for fairness in dealings between registered investment companies and their affiliates. Before reaching the merits, however, the Court must dispose of two arguments raised by defendants in an attempt to preclude judicial consideration of plaintiffs’ claim. Defendants first urge that under the rule of Kohn v. American Metal Climax, Inc., 458 F.2d 255 (3d Cir. 1972), this Court is not free to examine the fairness of the proposed merger under federal law because of the prior determination in that regard by the SEC. In Kohn, the Court of Appeals indicated that a district court was not free to reexamine an issue involving a Zambian corporation which had previously been determined by a Zambian court. However, Kohn is distinguishable from the instant case. The principle of comity among nations which was the basis for the Kohn holding is clearly inapplicable to the decision of an administrative tribunal. Moreover, res judicata and eoN lateral estoppel do not ordinarily apply to decisions of the SEC under section 17(b) of the Investment Company Act of 1940. Entel v. Allen, 270 F.Supp. 60, 66 (S.D.N.Y.1967). Accordingly, Kohn is no bar in this proceeding. Defendants also urge that Rule 10b-5 does not reach claims of corporate mismanagement. While they rely upon decontextualized dictum in Superintendent of Insurance v. Bankers Life and Casualty Insurance, 404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971) and upon Popkin v. Bishop, 464 F.2d 714, 720 (2d Cir. 1972), they have overlooked two critical factors. First, Bankers Life indicates that the presence of a securities transaction alleged to be fraudulent is sufficient to activate section 10(b) and Rule 10b — 5 in an internal corporate context. See Id. 404 U.S. at 12-13, 92 S.Ct. 165. Second, there can no longer be any question as to whether schemes by insiders or controlling persons are within the scope of protection accorded by Rule 10b-5 where they are alleged to have concealed information or otherwise manipulated a securities transaction so as to improperly deprive a corporate entity or its shareholders. Not only have Courts given affirmative responses to the question in the past, especially where the corporate entity or its representatives have been deceived, see, e. g., Pappas v. Moss, supra; Schoenbaum v. Firstbrook, supra; but one circuit has recently indicated that such a cause of action exists even in the absence of any misrepresentations or failures to disclose. Schlick v. Penn-Dixie Cement Corporation, 507 F.2d 374 (2d Cir. 1974). See also, Bryan v. Brock & Blevins Co., 490 F.2d 563 (5th Cir. 1974). c) Fairness Under the 1940 Act The Investment Company Act of 1940 is a comprehensive federal regulatory scheme designed to protect shareholders of investment companies from a variety of sharp practices that had become widespread during the 1930s. See generally, “Comment, The Investment Company Act of 1940,” 50 Yale L.J. 440, 441-2 (1941); Note, “The Investment Company Act of 1950,” 41 Col.L.Rev. 269 (1941); Brown v. Bullock, 194 F.Supp. 207 (S.D.N.Y.1961). Congress concluded that state regulation of investment companies was “impossible,” 15 U.S.C. § 80a — 1(a), and instead created a pervasive regulatory program aimed at countering specific categories of abuse directed at shareholders of investment companies. See 15 U.S.C. § 80a-1(b). Entel v. Allen, 270 F.Supp. 60 (S.D.N.Y.1967). Among the most egregious of these abuses was an almost institutionalized phenomenon of investment companies and their portfolios being managed in the interest of affiliates, brokerage concerns or dealer interests, as opposed to being operated for the benefit of their shareholders. See 15 U.S.C. § 80a-1(b)(1) and (2); Herpich v. Wallace, supra, 430 F.2d at 801; Entel v. Allen, supra, at 65. See also, “Comment,” supra, 50 Yale L.J. at 441-2. In order to remedy this particular practice, Congress decided to prohibit securities transactions between investment companies and affiliated persons thereof, 15 U.S.C. § 80a — 17(a), except where the SEC had granted an exemption on the grounds, inter alia, that the transaction is fair to all persons concerned, free from overreaching and consistent with the Act’s purposes. 15 U.S.C. § 80a-17(b). It is under these provisions that the SEC exemption in the instant case was granted. The gist of plaintiffs’ 10b-5 fairness arguments is that Christiana and its shareholders are, notwithstanding the fiduciary obligations stemming from their control position, improperly profiting at the expense of Du Pont because the market value of Christiana’s shares was not utilized in developing the exchange ratio. Viewed from another perspective, plaintiffs are simply attacking the use of Christiana’s net asset value since that figure was substantially higher than the market value of Christiana common. In so arguing plaintiffs have overlooked the Investment Company Act of 1940. The 1940 Act, as detailed above, was designed to protect shareholders of investment companies. One mode of guarding those shareholders’ interests was to create various restrictions and prohibitions designed to protect their intrinsic investment in a company’s net assets. Thus, for example, the Act erected stringent restrictions on the issuance of senior debt or securities by requiring asset coverage of 200% or 300% respectively for any senior stock or debt securities issued. 15 U.S.C. § 80a-18(a)(1) and (2). The obvious purpose behind these restrictions was to protect common shareholders against dilution of their intrinsic investment value through a highly leveraged capital structure, 15 U.S.C. § 80a-1(b)(7), which, in a falling market, could dissipate their investment through a corresponding decline in the market value of the company’s securities portfolio. This in turn would leave, after accounting for the prior entitlements of the senior securities, a highly eroded net asset value for the common shareholders. In addition, the Act raised an additional obstacle to highly leveraged capital structures by requiring dividend restrictions in companies with senior debt or stock to preclude avoidance of the aforementioned asset coverage standards. 15 U.S.C. §§ 80a — 18(a)(1)(B) and 80a-18(a)(2)(B). The Act also made net asset value, based upon the market prices of an investment company’s portfolio securities, the fundamental valuation criterion of registered investment companies. 15 U.S.C. § 80a-2(a)(41). Central States Electric Corporation, 30 S.E.C. 680, 700 (1949). Moreover, despite the fact that the closed-end discount phenomenon was well known in 1940, Christiana Securities Company, supra at 23, n. 57, Congress decided to prevent dilution of closed-end stockholders’ intrinsic values by preventing the issuance of any new common stock “at a price below the current net asset value of such stock.” 15 U.S.C. § 80a — 23(b). The Securities Exchange Commission, the agency authorized by Congress to implement the 1940 Act and pass upon otherwise prohibited transactions between investment companies and their affiliates pursuant to section 17(b), 15 U.S.C. § 80a — 17(b), has consistently utilized net asset value as the controlling factor in section 17 proceedings. See, e. g. Central States Electric Corporation, 30 S.E.C. 680, 700, 724-5. This has been true notwithstanding the fact that the market value of the applicant investment company’s stock was significantly lower than its net asset value. See, e. g., Delaware Realty & Investment Company, 40 S.E.C. 469 (1961); Harbor Plywood Corporation, 40 S.E.C. 1002, 1010 (1962); Detroit and Cleveland Navigation Company, ICA Rel. Nos. 3082 and 3099 (July 27, 1960 and August 19, 1960); Townsend Corporation of America; ICA Rel.