Full opinion text
MEMORANDUM OPINION DOWD, District Judge. By this action the plaintiff prosecutes a derivative shareholder’s action against a number of the directors of Coastal Industries, Inc. on behalf of Coastal Industries. At issue is the motion for summary judgment filed by Coastal Industries, Inc., whereby the plaintiffs complaint would be dismissed. For the reasons which follow, the motion for summary judgment is denied. The motion for summary judgment prosecuted by the nominal defendant Coastal Industries, Inc. is predicated upon the report of the Litigation Oversight Committee appointed by the Board of Directors of Coastal Industries following the commencement of this action by the plaintiff. The plaintiffs complaint focuses upon the majority decision of a divided Board of Directors of Coastal Industries to purchase a substantial portion of its own stock at approximately 100% premium. The stock purchased was held by a subsidiary of Coastal Industries, Cascade Industries, Inc., which, as alleged by the plaintiff, was threatening to take control of Coastal’s Board. According to the position of the plaintiff, the purchase of Cascade Industries stock at the 100% premium had a two fold purpose, first to perpetuate the control by Coastal’s management and secondly to serve the interest of defendant director James Pedler, now deceased, who, at the time of the purchase, was a major Coastal shareholder, and who had previously guaranteed a Cascade loan which was in default. The proceeds .realized by Cascade from the purchase by Coastal of its stock were used by Cascade to pay off the loan personally guaranteed by Pedler. Hence, Pedler received a benefit by the transaction and, according to the plaintiff, was motivated by that self interest to vote for the challenged transaction. The purchase of the shares of Coastal, held by Cascade, was approved by a minority of the Board of Directors, consisting of nine directors. The action to purchase the stock was approved by four members of the Board, two members of the Board voted no and two abstained. The ninth member was absent. Following the commencement of the lawsuit, new members were elected to the Board of Directors. Those members, i.e., J. Robert Wilson, Robert J. Himelright, Jr., and Morris B. Jobe, were designated to serve as the Litigation Oversight Committee (LOC) to review the question of whether it was in the best interest of Coastal Industries to have plaintiff’s litigation pursued or terminated. The concept of the litigation oversight committee flows from the business judgment rule which, in short, constitutes judicial recognition of the fact that a private corporation should, generally speaking, have the right to control its destiny respecting the prosecution of claims held by the corporation. The LOC hired independent counsel, then conducted an investigation and concluded that it was in the best interests of Coastal Industries, Inc., to terminate the instant litigation. Hence, the motion of the defendant, Coastal Industries, Inc., for summary judgment. Nearly every analysis of the application of the business judgment rule in the context of derivative suits by corporate shareholders begins with reference to the decision in United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 37 S.Ct. 509, 61 L.Ed. 1119 (1917), where Justice Brandéis, in considering the question of whether the business judgement rule could be employed to insulate the conclusions of management regarding corporate prosecution of a derivative suit from judicial scrutiny declared: Whether or not a corporation shall seek to enforce in the courts a cause of action for damages is, like other business questions, ordinarily a matter of internal management and is left to the discretion of the directors, in the absence of instruction by vote of the stockholders. Courts interfere seldom to control such discretion intra vires the corporation, except where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relation which prevents an unprejudiced exercise of judgment. With the proliferation of shareholder derivative actions, the use and reliance upon the litigation oversight committee composed of independent directors has developed. Frequently, the courts have granted the dismissal of derivative shareholders’ lawsuits when the independent or disinterested directors have recommended against a continuation of the litigation brought by the derivative shareholder, e.g. Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979); Clark v. Lomas and Nettleton Financial Corp., 625 F.2d 49 (5th Cir.1980); Lewis v. Anderson, 615 F.2d 778 (9th Cir.1979); Abbey v. Control Data Corp., 603 F.2d 724 (8th Cir.1979); Genzer v. Cunningham, 498 F.Supp. 682 (E.D.Mich.1980); Maldonado v. Flynn, 485 F.Supp. 274 (S.D.N.Y.1980); Rosengarten v. International Telephone Telegraph Corp., 466 F.Supp, 817 (S.D.N.Y.1979). As an additional application of the business judgment rule in the setting of a recommendation to dismiss made by a litigation oversight committee composed of independent directors, the courts have chosen to abide by the recommendation of the special litigation committee that the action be dismissed when the committee is composed of independent or disinterested directors and their recommendation is the product of a good faith and a thorough study of the issues regarding it is in the best interest of the corporation to pursue or to terminate the litigation. A component of the traditional view has been that the court should not assess independently the merits of the derivative suit as to do so would defeat the purpose of the business judgment rule which is premised on the expertise of the directors to render important business decisions without interference by the courts or shareholders. See Joy v. North, 519 F.Supp. 1312 (Conn.1981). However, in recent years, some courts have begun to draw back from the traditional view and have begun to re-examine the idea that the judgment of the litigation oversight committee should prevail as long as it is comprised of disinterested directors and their recommendation has been reached as the result of a good faith, thorough effort in examining the issues from the perspective of the best interests of the corporation. The decision of the Delaware Supreme Court in Zapata Corp. v. Maldonado, 430 A.2d 779, (Del.S.Ct.1981), signaled the re-examination of the traditional view. The decision of the Zapata court is designed to steer a middle course between those decisions which yield to the independent judgment of a board committee and those which permit unbridled plaintiff stock-holder control over derivative actions. In steering the so-called middle course, the Zapata court decision is premised on the judicial declaration that the Court should apply its own business judgment in determining whether a motion for summary judgment should be granted because of a committee decision. In effect, the Zapata court decision calls for independent judicial review of the merits of the independent litigation committee’s decision and requires a judicial assessment of: 1) the procedural propriety of a complaining shareholder’s initiation of suit, 2) whether the board committee is endowed with the requisite corporate power to seek the dismissal of the derivative suit, 3) whether the movants have adequately demonstrated the disinterest, independence and good faith of committee members, the basis’ for the conclusions of such members, and the appropriateness and sufficiency of their investigative techniques, and 4) whether in the court’s view, exercising its own independent business judgment, dismissal of the derivative action is warranted. Ohio Courts have long recognized the business judgment rule. Wadsworth v. Davis, 13 Ohio St. 123 (1862); Goff v. Emde, 32 Ohio App. 216, 167 N.E. 699 (1928); McDonald v. Medical Mutual of Cleveland, 41 Ohio Misc. 158, 324 N.E.2d 785 (1974); Rice v. Wheeling Dollar Savings and Trust Co., 71 Ohio Law Ab. 205, 130 N.E.2d 442 (1954), aff'd in part and rev’d in part on other grounds, 163 Ohio St. 606, 128 N.E.2d 16 (1955); Gruber v. Chesapeake & Ohio Ry. Co., 158 F.Supp. 593 (N.D. Ohio 1957). However, no reported Ohio decision addresses the nature of the scrutiny a court should give to a recommendation of a litigation oversight committee which recommends that the corporation move to dismiss a derivative shareholder’s action which is directed to claims of corporate directors’ mismanagement or self dealing to the alleged detriment of the best interests of the shareholders. Ohio courts have held that the corporation’s directors should decide questions of corporate policy as long as they are not acting ultra vires and they had no involvement in the acts which form the basis of the complaint. Rice, supra, 71 Ohio Law Ab. at 211-13, 130 N.E.2d 442. “In the absence of usurpation, fraud or gross negligence, courts of equity will not interfere at the suit of a dissatisfied minority of shareholders merely to overrule and control the discretion of the directors on questions of corporate management, policy or business.” Gruber, supra, 158 F.Supp. 603. A business judgment of the corporate directors will not be set aside absent a showing of “fraud, abuse of discretion or bad faith.” McDonald, supra at 41 Ohio Misc. 162, 324 N.E.2d 785. In its opposition to the motion for summary judgment, plaintiff advances the following arguments: 1. Coastal has not demonstrated the Litigation Oversight Committee’s good faith nor the reasonableness of its conclusions. 2. The Court should make its own inquiry into the merits of the plaintiff’s suit. 3. Plaintiff’s claims are meritorious. It is apparent that the second and third assertions are anchored in the plaintiff’s argument that this Court should take the view that either the Ohio case law already impliedly endorses, as a part of the judicial scrutiny of the recommendation of a Litigation Oversight Committee, the exercise of its own independent business judgment or alternatively, consistent with Zapata, this Court should so act, applying the latitude given federal courts in interpreting state law where silence exists as set forth in Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). In the Court’s view, a study of Ohio case law in conjunction with the statutory law of Ohio indicates a traditional approach to the business judgment rule of long standing. In this Court’s view, the business judgment rule has stood the test of time and this Court is not prepared to modify it given that conclusion. Consequently, the focus of the Court’s inquiry is necessarily limited to the plaintiff’s claim that Coastal has not demonstrated the LOC’s good faith nor the reasonableness of its conclusions. In support of the argument regarding the lack of the LOC’s good faith in recommending the dismissal of this action, the plaintiff makes the following points: 1. The burden of proof is on Coastal to demonstrate good faith on the part of the LOC. Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 929, 393 N.E.2d 994 (1979). 2. The dissents of the independent directors, Henderson and Jackson, are not described or addressed by the report and recommendation of the LOC. 3. The independence of the committee members is suspect. 4. The conduct of the investigation suggests a concerted effort to avoid scrutiny of the challenged transaction. 5. The report and recommendation contains no facts supportive of the Committee’s conclusions so that the court is unable to determine from the report whether the conclusions are reasonable or arbitrary. The report and recommendation of the LOC is attached as appendix A. It is 23 pages in length. The first seven pages constitute an introduction stating the mandate given the LOC and identifying the members and the LOC’s independent counsel. The next five pages describe the investigation undertaken by the LOC including the fact that several of the principal directors, i.e. Howard Ryder, James Pedler and Frank B. Reid, were interviewed, questionnaires were mailed to ten persons, plaintiff’s counsel was interviewed, and the products of discovery were examined. Pages 13 through 16 repeat the allegations contained in paragraphs 15 through 29 of the plaintiff’s amended complaint. The findings of the LOC begin at page 17. It is those findings which draw the fire of the plaintiff in his opposition to the motion for summary judgment with the criticism that the findings are unsupported by any factual findings. The findings of the LOC address the allegations of paragraphs 15 through 29 of the amended complaint. The allegations and the LOC’s response are as follows: “[allegation] “15. In 1976, defendant Champion conveyed to Coastal its wholly-owned subsidiary P.B. Mutrie Transportation Corp. (“Mutrie”) in exchange for 230,000 shares of Coastal common stock, 800 shares of Coastal 6% cumulative $1,000.00 par preferred stock and 700 shares of Coastal $1,000.00 par senior preferred stock. Coastal had operated Mutrie for several years prior thereto. At the time of the 1976 transaction, the Coastal common stock had a market value of approximately $2.00 per share. “[response] “Paragraph 15 deals with the Coastal acquisition of P.B. Mutrie Transportation Corp., which acquisition was consummated in 1976. Special counsel advised the Committee that the Mutrie transaction is beyond the scope of subjects which may be properly challenged by plaintiff Holmstrom because of the time period in which the transaction was effected. It appears to the Committee that the allegations in paragraph 15 are made in order to create the impression of joint business ventures among certain of the defendants. Such joint business activities will be addressed below. “[allegation] “16. By virtue of ownership of 20% of Coastal stock, and the cumulative voting provisions which governed that stock, defendant Champion, and its parent corporation Cascade, controlled several seats on the Coastal Board of Directors. “[response] “Paragraph 16 concerns the control of directorships on the company’s board of directors by Cascade Industries, Inc. The Committee finds that, at the time of the transactions challenged in the Holmstrom Complaint, Cascade Industries, through cumulative voting, could control two seats on the Coastal board of directors. “[allegation] “17. In 1978, Coastal redeemed from defendant Champion 700 shares of senior preferred stock at par value. “[response] “The Committee finds the statement in paragraph 17 of the Holmstrom Complaint to be accurate. “[allegation] “18. Some time prior to November 1979, the management of Coastal, including defendant Ryder, perceived defendant Reid, through his control of defendants Champion and Cascade, as a threat to their control of the Board of Directors of Coastal. Management of Coastal believed that if defendant Reid did assume control of Coastal, the salaries, fees, bonuses and other remuneration which they were receiving from Coastal, totaling $681,715.00 in the fiscal year ended September 30, 1979, would be in jeopardy. “[response] “Paragraph 18 raises the subject of self-interest on the part of the company directors who subsequently voted in favor of the resolution authorizing the challenged transactions. The Committee finds that Frank Reid intended to undertake certain actions which would have had the likely result of Mr. Reid or Cascade Industries, Inc., being in a position to control a majority of the board of directors of the company. The Committee finds no evidence in support of the allegation that the votes of the directors who approved the Resolution which authorized the challenged transactions were influenced by self-interest or personal motivations. “[allegation] “19. Moreover, certain of the defendants, and particularly Reid and Pedler, had or had had certain overlapping business interests which sometime prior to November, 1979 they wished to disentangle. Among these overlapping interests were: “a. At various times both defendants Reid and Pedler had been officers and directors of defendants Champion and Cascade. “b. Defendant 44/40, of which defendant Pedler was Secretary and a director, owned approximately 16% of the outstanding common stock of defendant Cascade, of which at that time Reid was a director and officer. “c. Defendant Pedler had personally guaranteed a loan in the amount of $2,300,-000 by Freuhauf [sic] Corporation (“Freuhauf”) [sic] to defendant Champion. The Freuhauf [sic] loan was also, secured by the pledge of the 230,000 shares of Coastal common stock and 800 shares of Coastal 6% preferred stock owned by Champion. As of December 1, 1979, the balance of the Freuhauf [sic] loan, in the amount of $1,700,000, was in default. On December 5, 1979 Freuhauf [sic] gave formal notice of its intention to hold a public auction of the pledged Coastal shares. “[response] “In paragraph 19, the subject of the relations between Messrs. Pedler and Reid is addressed. The Committee finds that Messrs. Pedler and Reid had indeed engaged in a number of business activities over the course of many years prior to 1979. The Committee concludes that any motivations of Mr. Pedler or Mr. Reid to discontinue mutual business affairs were independent of the decision of Coastal to acquire its stock via the challenged transactions. “[allegation] “20. As a result of the events and circumstances described in paragraphs 15-19 above, the defendants devised a plan and scheme whereby Coastal would purchase at an exorbitant price its common shares owned by Champion and defendants would otherwise use the assets of Coastal for their own personal benefit, much to Coastal’s disadvantage, but greatly to the benefit of defendants other than Coastal. “[response] “Paragraph 20 appears to state the gravamen of the Holmstrom Complaint, that the defendants created a scheme which was intended to confer benefits upon the defendants other than the company at the expense of the company. The Committee finds no evidence that the defendants “devised a plan and scheme” which was ultimately evidenced by the challenged transactions. The Committee further finds that the directors who voted in favor of the resolution which authorized the challenged transactions were not motivated by personal interests. Other defendants either were not in a position to vote for or against the Resolution in question, voted against the Resolution or abstained from voting on the Resolution. “[allegation] “21. Pursuant to said unlawful plan and scheme, on November 27, 1979, Coastal's Board of Directors purposed to authorize: “a) The acquisition by Coastal of the 390,000 shares of Coastal common stock then owned by defendant 44/40 and defendant Champion at $12.00 a share despite the fact that the common stock was selling only at $5-% in the over-the-counter market. Also authorized was the acquisition of the 6% preferred stock then owned by Champion at par, although such preferred stock had a market value substantially below par. Four directors voted in favor of the acquisitions including defendants Ryder, Kelley, Reese and Siff. Two directors abstained, including defendant Nelson and Mr. D.E. Daggett [sic]. Two independent directors, Messrs. Jackson and Henderson, voted against. “b) A recommendation to the stockholders to reduce Coastal’s board from nine members to seven members. “c) A recommendation to the shareholders for an amendment to Coastal’s articles of incorporation rendering it more difficult for a tender offer to be made for Coastal’s stock. “d) A resolution permitting Coastal’s Profit Sharing Trust to invest up to 100%, rather than the previously authorized 75%, of its assets in Coastal securities. “[response] “Paragraph 21 sets forth the measures which were approved by the board of directors of the company at its November 27, 1979, meeting. The directors authorized the company to acquire 390,000 shares of its common stock at up to $12.00 per share and all 800 shares of its 6% cumulative preferred stock at par value. The directors further authorized Resolutions recommending to the stockholders that the company’s board of directors be reduced from nine to seven members, that a recommendation be made to the shareholders for an amendment of the company’s articles of incorporation intended to protect the company’s minority shareholders from unfavorable tender offers and that Coastal’s Profit Sharing Plan and Trust investment limitations be modified to permit 100% investment in Coastal securities. The Committee finds the Resolutions adopted by the company’s board of directors as set forth above were properly authorized by a majority vote of the directors present and voting. “[allegation] “22. Subsequent to the Coastal Board of Directors meeting of November 27, 1979, and in further pursuance of their unlawful plan and scheme, defendants arranged for defendant 44/40, acting as a conduit for Coastal, to acquire 230,000 shares of Coastal common stock and 800 shares of Coastal 6% preferred stock from defendant Champion. They further agreed that upon acquisition of those shares by defendant 44/40 from defendant Champion, Coastal would acquire 240,000 shares of its own common stock from defendant 44/40 at a price of $12.00 per share and would obligate itself to purchase up to all of the 800 shares of preferred stock at the par value thereof in three substantially equal annual installments commencing in February 1981. As part of this agreement, defendants also agreed that 44/40 would sell all of its Cascade stock to defendant Cascade. “[response] “The Committee finds no evidence to support the allegation in paragraph 22 that the defendants “arranged” the series of transactions as stated in paragraph 22. The Committee finds that the transaction between 44/40 Inc. and Cascade Industries, Inc., was negotiated and concluded independently of the challenged transaction between Coastal and 44/40 Inc. “[allegation] “23. On December 18,1979, pursuant to the unlawful plan and scheme among the defendants, defendant 44/40 purchased from defendant Champion the 230,000 common shares and 800 6% preferred shares of Coastal then owned by defendant Champion and conveyed to defendant Champion all of the common stock of the defendant Cascade then owned by defendant 44/40. A portion of these proceeds were used to pay off the debt owed by defendant Champion to Freuhauf [sic] Corp., referred to in paragraph 19(c) above, thereby relieving defendant Pedler of his personal obligation on said loan. “[response] “The Committee finds, in accordance with the allegation in paragraph 23, that on December 18, 1979, 44/40 acquired from defendant Champion 230,000 shares of common stock of the company and 800 shares of the company’s 6% cumulative preferred stock. As discussed in the comments above regarding paragraph 22, however, the Committee finds no evidence to support the allegation that the 44/40— Champion transaction was part of an unlawful plan and scheme among the defendants. The Committee does find that a portion of the proceeds paid by 44/40 to Champion was used by Champion to satisfy the obligation it owed to Fruehauf Corporation. The Committee finds no evidence to support the suggestion by the plaintiff that the personal guarantee made by defendant Pedler on the obligation owed by Champion to Fruehauf played any role in the ultimate decision to authorize the challenged transactions. “[allegation] “24. On the same day, December 18, 1979, defendant 44/40 conveyed to Coastal 240,000 shares of Coastal common stock at a price of $12.00 per share and received Coastal’s contractual commitment to purchase the 800 shares of 6% preferred stock at par in three equal annual installments. “[response] “The Committee finds paragraph 24 to contain an accurate statement of the substance of the challenged transactions. “[allegation] “25. In order to finance the purchase of the aforesaid stock, a subsidiary of Coastal was required to, and did, borrow a substantial sum of money at high rates of interest to the detriment of Coastal and its subsidiaries. Furthermore, the terms of Coastal’s Pension Trust were amended so that it could increase its holdings of Coastal stock above the previous 75% limitation and a portion of the Coastal stock acquired from defendant Champion was then conveyed to the Pension Trust. “[response] “With respect to paragraph 25, the Committee finds that the manner of financing the challenged transactions selected by the company was not improper. The Committee further finds the modifications of the Coastal Profit Sharing Plan and Trust not to have been improper. “[allegation] “26. On January 4,1980, Coastal mailed a proxy statement to its shareholders with respect to a meeting of shareholders to. be held on February 13,1980. At the meeting of shareholders directors were to be elected and the amendment to Coastal’s articles of incorporation relating to tender offers was to be voted upon. “[response] “Based upon advice of counsel, the Committee finds the allegation in paragraph 26 of the Amended Complaint to be beyond the scope of relevant inquiry. However, the Committee finds the statements in paragraph 26 to be accurate. “[allegation] “27. On February 5, 1980, Coastal filed suit against defendant Reid and two of his associates in the United States District Court for the Northern District of Ohio alleging that the defendants therein were seeking to seize control of Coastal and in so doing were violating the provisions of federal and state law. On February 6, 1980, that suit was dismissed upon the agreement of defendant Reid that he would not propose any nominees for Coastal's Board at the February 13 meeting, would not stand for election himself at that meeting, and would not vote for any one other than the management slate. “[response] “Based upon the advice of counsel, the Committee finds the allegations in paragraph 27 of the Amended Complaint to be beyond the scope of relevant inquiry. The Committee finds, however, that the statements in paragraph 27 are accurate. “[allegation] “28. At the meeting of Coastal stockholders on February 13, 1980, the membership of the Board of Directors was reduced from nine to seven members, management’s slate was elected to office, and the amendment to the articles of incorporation relating to tender offers was adopted. “[response] “The Committee finds the statements of paragraph 28 to be accurate. “[allegation] “29. As a result of the events described herein: “a. The threat posed by defendant Reid to control of Coastal’s Board of Directors was eliminated through the improper use of Coastal’s assets, and management enhanced its ability to remain in office and to receive continued compensation and other remuneration. . “b. Defendant Pedler, by improper use of Coastal’s assets, was relieved of his guarantee of the Freuhauf [sic] loan to defendant Champion. “c. Defendants, and particularly defendants Reid and Pedler, by the improper use of Coastal’s assets, were able to disentangle their overlapping business interests. “d. The price which Coastal had paid to defendant Champion for Mutrie was retroactively substantially increased, unnecessarily and to the detriment of Coastal. “e. Without any legitimate business purpose and for the private benefit of defendant herein, Coastal expended substantial sums of money and undertook substantial and unnecessary debt. “[response] “Paragraph 29 states the conclusions the plaintiff would have the Court reach in support of his claim. With respect to sub-paragraph (a), the Committee finds that defendant Reid intended to directly or indirectly attempt to assume control of the board of directors of the company and that the management of the company was justified in taking steps to eliminate such an attempt to assume control of the board. The Committee finds no evidence to support the allegation that Coastal’s assets were improperly used to effect such purposes. Further, the Committee finds that, while the ability of management to remain in office may have been enhanced because of the challenged transactions, the directors who voted in favor of the Resolution authorizing the transactions were not improperly motivated in doing so. Their potentially enhanced ability to remain in office was an effect rather than a goal of the transactions. “With respect to subparagraph (b) of paragraph 29, the Committee finds that the personal guarantee of defendant Pedler on the obligation of Champion to Fruehauf Corporation played no material role in the development of the challenged transactions. “With respect to subparagraph (c) of paragraph 29, the Committee finds no evidence to support the allegation that defendants Reid and Pedler improperly used Coastal’s assets as alleged therein. “With respect to subparagraph (d) of paragraph 29, upon advice of counsel, the Committee finds the allegation therein to be beyond the scope of relevant inquiry. However, the Committee further finds there is no evidence to substantiate the allegation that the price Coastal paid Champion for P.B. Mutrie Transportation Corp. was “retroactively substantially increased.” “With respect to subparagraph (e) of paragraph 29, the Committee finds no evidence to support the allegation that the challenged transactions were without legitimate business purposes and were intended to serve the private interests of the defendants in the Holmstrom litigation. “Additional Findings “The Committee further finds that the price paid by Coastal for its common stock in the challenged transactions fell within the range of acceptable business alternatives available to the directors at the time of the adoption of the Resolution authorizing the transactions. The Committee further finds that the price paid and to be paid by the company for its 6% cumulative preferred stock fell within the range of acceptable business alternatives available to the directors at the time of the adoption of the Resolution authorizing the transactions.” The Court has carefully examined the report and recommendation of the LOC. The Court has also conducted oral arguments with respect to the issue of whether the report and recommendation of the LOC constitutes an acceptable basis for granting summary judgment and dismissing the plaintiffs complaint. In the Court’s view, the report and recommendation of the LOC is insufficient to justify granting summary judgment in favor of the defendants. The report and recommendation is devoid of factual findings to support the conclusions reached. The summary treatment of the issue of self dealing and use of the power as directors to perpetuate their self control negates the possibility of judicial approval of the work of the LOC. The Court is unable to declare on the issue of whether the LOC acted reasonably and in good faith. While the Court recognizes that the traditional business judgment rule is a deferential approach to judicial review of a business decision to terminate litigation, application of the rule does not require the Court to grant rubber stamp approval to the LOC. Accordingly, the motion for summary judgment is denied. IT IS SO ORDERED. APPENDIX A FINAL REPORT OF THE LITIGATION OVERSIGHT COMMITTEE OF COASTAL INDUSTRIES, INC. J. ROBERT WILSON, Chairman MORRIS B. JOBE ROBERT J. HIMMELRIGHT, JR. RICHARD E. GUSTER Special Counsel ROETZEL & ANDRESS 20th Floor One Cascade Plaza Akron, Ohio 44308 DATED: December 9, 1981 I. INTRODUCTION A. Proceedings Leading to the Appointment of the Committee On May 1, 1980, Peter G. Holmstrom, an individual who owned 500 shares of common stock in Coastal Industries, Inc. (“Coastal”) commenced a stockholder’s derivative suit in the United States District Court for the Northern District of Ohio, naming as defendants Coastal, Howard W. Ryder, Frank B. Reid, Michael T. Jackson, Llewellyn Reese, Alan L. Siff, Richard B. Nelson, Clarence A. Kelley, James S. Pedler, Jr., Champion Investments, Inc., Cascade Industries, Inc. and Forty-Four Forty, Inc. The gravamen of the Complaint (and the tendered Amended Complaint which plaintiff has sought leave to file) is that the individual defendants perpetrated various transactions which involved self-dealing and/or self-interest and which greatly benefited all defendants other than Coastal at the expense of Coastal. As a stockholder’s derivative suit, the real party in interest is Coastal; any recovery by plaintiff would inure to the direct benefit of Coastal. Following the commencement of the action, on May 29, 1980, the board of directors of Coastal appointed director J. Robert Wilson to serve as conservator and protector of Coastal’s interests in the litigation. Mr. Wilson, who had not been formally affiliated with Coastal at the time of the challenged activities, had been elected to the Coastal board by the shareholders at their annual meeting on February 13, 1980. In furtherance of his role as corporate conservator, Mr. Wilson employed counsel to represent Coastal. The Answer of Coastal Industries, Inc., was prepared and served on June 24, 1980. Coastal responded to Plaintiff’s Interrogatories and filed its Written Response to Plaintiff’s Request to Produce (First Set) on November 17, 1980. Mr. Wilson was active in collecting the information necessary to finalize the preparation of the foregoing documents. On January 16, 1981, Mr. Wilson, in his capacity as conservator and protector of Coastal’s interests, recommended to the board of directors of Coastal that a special committee, to be known as the Litigation Oversight Committee (“Committee”), be formed. Mr. Wilson suggested that the Committee be composed of himself, as chairman, and Messrs. Morris B. Jobe and Robert J. Himmelright, Jr., then standing for election to Coastal’s board of directors. The proposal was scheduled for consideration at the January 21, 1981, organizational meeting of Coastal’s directors, immediately following the annual meeting of shareholders. Messrs. Jobe and Himmelright were duly elected to serve as directors by the shareholders on January 21, 1981, and the board of directors thereafter adopted the resolution proposed by Mr. Wilson, creating the Litigation Oversight Committee. B. The Committee’s Responsibilities, Composition and Resources 1. Responsibilities Delegated to the Committee Pursuant to Resolution of the board .of directors of Coastal, the Committee was authorized to investigate all claims arising from the Holmstrom litigation. The board of directors delegated to the Committee authority to exercise the business judgment of the company with respect to formulating a position to be taken in regard to the litigation. The Committee was specifically empowered to determine whether to join with plaintiff in active prosecution of the case, or to defend the actions of its directors by opposing plaintiff’s claims or to remain neutral. The Committee was also empowered to commence separate proceedings against any person(s) regarding matters under investigation. Finally, the Committee was given authority to determine the bases, if any, upon which claims within the scope of the Committee’s authority could be settled and/or released. 2. Sources of Committee Responsibilities and Resources The Resolution of the company’s board of directors was passed by unanimous vote at the January 21, 1981, organizational meeting. The Committee was specifically composed of director J. Robert Wilson and newly elected directors Morris B. Jobe and Robert J. Himmelright, Jr. All members of the Committee commenced service as directors after November 27,1979 (the date upon which the company’s board of directors authorized the transactions which are the subject of the Holmstrom litigation). Mr. Wilson was appointed chairman of the Committee. As indicated above, the Committee was directed to investigate all claims arising out of the Holmstrom litigation. The Committee was further directed to commence its activities immediately following the meeting of the board at which the enabling Resolution was passed. The Committee was instructed to meet as frequently as it deemed appropriate and to report to the board of directors on at least a quarterly basis. The continued retention of Richard E. Guster and Roetzel & Andress as the Committee’s independent special counsel was approved. The Committee was expressly invited to utilize the staff and resources of the company as it deemed desirable. 3. Composition of the Committee The Committee is comprised of J. Robert Wilson, Morris B. Jobe and Robert J. Himmelright, Jr., all of whom are members of the company’s board of directors but have never been employed by the company. Mr. Wilson joined the board of directors in 1980; Messrs. Jobe and Himmelright joined the board in 1981. None of the Committee members have had any prior involvement in any of the matters investigated by the Committee. No Committee member has been named a defendant in the Holmstrom litigation. Mr. Wilson is admitted to the bars of the State of Ohio and the Supreme Court of the United States. He received his Ph.B. degree from the University of Wisconsin in 1936 and his J.D. degree from the University of Akron School of Law in 1946. Mr. Wilson has served as a special agent of the Federal Bureau of Investigation of the United States Department of Justice. He has been engaged in the private practice of law and performed independent consulting services. Mr. Wilson became associated with Roadway Express, Inc., in 1951 and served as director and vice-president of employee and labor relations, as executive vice-president, as president for seven years and as vice-chairman of the board of directors. He served as a director of Roadway for nineteen years. He serves or has served as a director of First National Bank of Akron, Trustee of Hiram College, Trustee of Bath Township, Trustee of Akron General Medical Center and as an independent business consultant. Apart from short-term consulting work several years prior to his election to the board of directors, Mr. Wilson has had no prior contact with the company. Morris B. Jobe received his Bachelors degree from the University of Akron in 1938 and his Certificate in Advanced Management from Northwestern University in 1957. Mr. Jobe became associated with the Goodyear Tire & Rubber Company in 1938 and served in various capacities with Goodyear until he accepted a position at Goodyear Aerospace Corporation. He served as president and chief executive officer of Goodyear Aerospace from 1968 until his retirement in June 1980. Other than his directorship with Coastal, Mr. Jobe currently serves as a director of Plastic & Rubber Products, Inc., of Houston, Texas. He has been a professor of engineering at the University of Akron since 1980. Mr. Jobe served as chairman of the board of trustees of the National Industrial Security Association, and served as executive director, member of the board and member of the finance committee of the Aerospace Industrial Association. He also served as Chairman of the United States delegation to the NATO Industrial Advisory Group from 1972 to 1977. Mr. Jobe had no contact with the company until his election to the board of directors in 1981. Robert J. Himmelright, Jr., received his Bachelors degree in English literature from the University of New Mexico in 1951. Mr. Himmelright has been associated with Teledyne Monarch Rubber Company since 1949 and has been president since 1963. Mr. Himmelright currently serves as director of First National City Bank of Alliance, Ohio; of Jaite Packaging Company of Akron, Ohio; of Industrial Tires Limited of Toronto, Ontario; of the Rubber Manufacturers Association of America of Washington, D.C.; and of Coastal Industries, Inc. He also serves as a trustee of Kenyon College in Gambier, Ohio. Mr. Himmelright had no connection with Coastal prior to his election to the board of directors in 1981. 4. The Committee’s Independent Special Counsel J. Robert Wilson, during his tenure as conservator and protector of the interests of Coastal Industries, was authorized by the board of directors of Coastal to retain independent special counsel to represent Coastal in connection with the Holmstrom litigation. Following the formation of the Litigation Oversight Committee, the Committee elected to continue retention of Richard E. Guster and the law firm of Roetzel & Andress as its independent special counsel. Prior to his employment as special counsel, neither Mr. Guster nor his firm had any professional connection to the company. Mr. Guster has been engaged in the private practice of law since his graduation from Western Reserve University School of Law in 1955. He is admitted to practice before the bars of the State of Ohio, the United States District Court for the Northern District of Ohio and the District of Maryland, the United States Court of Claims, the United States Court of Appeals (Sixth Circuit) and the United States Supreme Court. He is a Life Member of the United States Sixth Circuit Judicial Conference and a Fellow of the American College of Trial Lawyers. The Committee entrusted Mr. Guster and his associates with conducting the investigation subject to the Committee’s supervision and direction. In addition to carrying out his factual investigation, Mr. Guster has provided legal advice to the Committee in connection with all areas of its responsibility. II. THE COMMITTEE’S INVESTIGATION A. Scope of the Investigation The Holmstrom Amended Complaint defined the essential scope of the investigation, both as to the substantive areas for consideration and the periods reviewed. Although certain allegations made by plaintiff were in special counsel’s opinion barred by their remoteness in time, those claims were investigated nevertheless in the interest of thoroughness. The Committee examined every issue considered to be pertinent or related to the major areas of consideration. B. Investigative Procedures 1. The Committee The Committee has supervised the conduct of this investigation, and it has in connection therewith (i) approved the investigative procedures, (ii) issued general and specific directives regarding the investigation, and (iii) made recommendations to the company through special counsel in response to findings made in the investigation. The Committee authorized its counsel to handle the daily conduct of the investigation. The Committee held its organizational meeting on January 21, 1981. During the course of that meeting, the Committee devised its preliminary plan for conducting the investigation required by its charge. Following extensive discussions with its counsel, the Committee instructed counsel to file a motion seeking a stay of proceedings in the Holmstrom litigation pending the completion of the Committee’s investigative procedures. Counsel filed such a motion on February 2, 1981, and filed appropriate reply and supplementary memoranda on several occasions thereafter. The Committee’s plan as initiated and developed, encompassed the following identifiable although sometimes overlapping steps: (1) identification of issues involved in the litigation; (2) review of corporate documents and records; (3) assembly and analysis of statistical data; (4) review and consideration of information developed by and from deposition, responses to interrogatories and plaintiff’s requests of certain defendants for documents; (5) development of questionnaires to the defendants and a cross-evaluation of responses received; (6) the personal interview and, in certain instances, the re-interview of selected defendants as well as interviewing plaintiff’s counsel; and (7) the cross-checking and evaluation of the information developed by (5) and (6) above in the light of and giving consideration to information and facts developed during the course of the preceding enumerated steps. The Committee held formal meetings on approximately a monthly basis, other than during the month of February 1981 when counsel was engaged in the gathering and organization of background information. The Committee held a number of informal meetings during the course of its investigation. The chairman of the Committee was in frequent contact with counsel, often consulting several times per week. Innumerable telephone conferences were held among the members of the Committee and special counsel during the course of the investigation. During the course of formal meetings, the Committee reviewed investigative information gathered by counsel and documents pertaining to specific allegations. Special counsel also provided the Committee with legal opinions where necessary and helpful to the Committee’s task. Periodically, after reviewing special counsel’s efforts, the Committee requested that further work be done in a specific area. 2. Consultation with Coastal Personnel Because two of the three members of the Committee had no prior involvement with the company, one of the first steps in the investigation was to become familiar with the company’s organization and identify personnel who could provide information and assistance in the inquiry. The Committee’s inquiry has been supported by management of the company. In particular, Howard W. Ryder devoted substantiál time to assisting the Committee and identifying company personnel and records that were essential to this investigation. Mr. Wilson worked closely with the administrative and staff personnel in gathering and sequestering documents relevant to the inquiry. Counsel received extensive assistance from Mr. Ryder’s executive secretary, Ednamae Polen, in gathering and making available corporate records and similar pertinent information. Counsel and his associates were in frequent telephonic contact with Mr. Ryder and his staff regarding matters in need of clarification that had arisen in regard to documents provided. 3. Document Review An investigation of this magnitude necessarily requires the examination and assimilation of thousands of pages of documents, ranging from board minutes to insignificant corporate papers. Counsel and his associates reviewed minutes of the meetings of the company’s board of directors from the formation of the company through the present, SEC filings and annual reports from the formation of the company through the present and other documents considered to have a bearing upon the matters which were of interest in the investigation. Counsel and his associates also gathered information from the company stock transfer records regarding purchases and sales of company stock during the period from the formation of the company through the present. In addition, an examination was made of the NASDAQ-OTC market quotations for the company’s common stock from the date when such listings were first made public through the present. Documents produced during the course of discovery by other defendants and by Fruehauf Corporation were reviewed. The Committee was provided with documents from certain of the persons contacted for interviews as well. In all, many thousands of pages of documents were reviewed. 4. Interviews The Committee interviewed Howard W. Ryder on March 12 and 13,1981. A followup interview with Mr. Ryder’s counsel to obtain clarification of certain matters was held thereafter. Following the completion of a number of other investigative procedures, the Committee interviewed James S. Pedler, Jr., on September 8, 1981, and special counsel conducted a number of telephonic conferences with Mr. Pedler’s counsel thereafter to obtain clarification of various matters. On September 11, 1981, the Committee interviewed Howard W. Ryder once again. Subsequent to the re-interview of Howard W. Ryder, counsel held a number of telephonic follow-up conferences with Mr. Ryder and his counsel to obtain clarification of various matters raised during the course of the continuing investigation. On September 17, 1981, the Committee interviewed Frank B. Reid and Walter W. Crate. Special counsel conducted a number of telephonic follow-up conferences with Mr. Reid’s counsel in order to obtain clarification of various matters. A number of telephonic conferences were held with various other persons, including counsel for the individual defendants and the independent auditors of Coastal at Ernst & Whinney. In addition, Howard W. Ryder was informally consulted on a number of occasions to provide additional information regarding Coastal and its operations. 5. Questionnaires The Committee submitted questionnaires to D.E. Daggitt, Ronald H. Henderson, Michael T. Jackson, Clarence A. Kelley, Richard B. Nelson, James S. Pedler, Jr., Llewellyn Reese, Frank B. Reid, Howard W. Ryder and Alan L. Siff. All questionnaires were mailed on June 29, 1981, to the proposed respondents. Responses were received from all of those to whom questionnaires were submitted other than Messrs. Henderson and Daggitt. Special counsel obtained information from Mr. Henderson’s counsel regarding his position and regarding documents furnished by Mr. Henderson to plaintiff’s counsel in connection with plaintiff’s counsel’s investigation. Following receipt and analysis of all the questionnaire responses, the Committee conducted the interviews referred to in the preceding segment of this report. Counsel furnished copies of all the questionnaire forms to plaintiff’s counsel following receipt of a request for same. 6. Plaintiffs Counsel The law firm of Pomerantz, Levy, Haudek & Block acts as counsel for the plaintiff shareholder in the Holmstrom litigation. Judah I. Labovitz, formerly a partner in the Pomerantz firm in charge of the prosecution of the Holmstrom litigation, was invited to meet with the Committee and present plaintiff’s position concerning the issues raised by the litigation. The Committee in fact met with Mr. Labovitz on June 26, 1981, at which time he furnished information and viewpoints to the Committee. In addition, correspondence was had between plaintiff’s counsel and special counsel on several occasions regarding certain additional matters for consideration by the Committee. The Committee gratefully acknowledges the cooperation of Mr. Labovitz. 7. Products of Discovery in Pending Proceedings As mentioned above, the Committee examined documents produced during the course of discovery in the Holmstrom litigation. In addition, the Committee analyzed the responses to interrogatories and requests for production of documents filed by the various other defendants. The Committee also reviewed the testimony of Peter G. Holmstrom and Clarence A. Kelley resulting from the depositions of those two men. III. THE ALLEGATIONS OF THE AMENDED COMPLAINT IN HOLM- . STROM V. COASTAL INDUSTRIES, INC., ET AL. The Committee analyzed the actions alleged by plaintiff in paragraphs 15 through 29 of the Amended Complaint. The Committee notes that the Court has not granted plaintiff leave to file the Amended Complaint; however, the Committee based its analysis on that document because of the greater particularity of the allegations contained therein as compared with the initial Complaint. Since the Amended Complaint has not been formally filed in the Holmstrom litigation, the allegations of paragraphs 15 through 29 are set forth below and made a part of this report in order to indicate the framework for the analysis undertaken by the Committee. 15. In 1976, defendant Champion conveyed to Coastal its wholly-owned subsidiary P.B, Mutrie Transportation Corp. (“Mutrie”) in exchange for 230,000 shares of Coastal common stock, 800 shares of Coastal 6% cumulative $1,000.00 par preferred stock and 700 shares of Coastal $1,000.00 par senior preferred stock. Coastal had operated Mutrie for several years prior thereto. At the time of the 1976 transaction, the Coastal common stock had a market value of approximately $2.00 per share. 16. By virtue of ownership of 20% of Coastal stock, and the cumulative voting provisions which governed that stock, defendant Champion, and its parent corporation Cascade, controlled several seats on the Coastal Board of Directors. 17. In 1978, Coastal redeemed from defendant Champion 700 shares of senior preferred stock at par value. 18. Some time prior to November 1979, the management of Coastal, including defendant Ryder, perceived defendant. Reid, through his control of defendants Champion and Cascade, as a threat to their control of the Board of Directors of Coastal. Management of Coastal believed that if defendant Reid did assume control of Coastal, the salaries, fees, bonuses and other remuneration which they were receiving from Coastal, totalling $681,715.00 in the fiscal year ended September 30, 1979, would be in jeopardy. 19. Moreover, certain of the defendants, and particularly Reid and Pedler, had or had had certain overlapping business interests which sometime prior to November, 1979 they wished to disentangle. Among these overlapping interests were: a. At various times both defendants Reid and Pedler had been officers and directors of defendants Champion and Cascade. b. Defendant 44/40, of which defendant Pedler was Secretary and a director, owned approximately 16% of the outstanding common stock of defendant Cascade, of which at that time Reid was a director and officer. c. Defendant Pedler had personally guaranteed a loan in the amount of $2,300,000 by Freuhauf [sic] Corporation (“Freuhauf”) [sic] to defendant Champion. The Freuhauf [sic] loan was also secured by the pledge of the 230,000 shares of Coastal common stock and 800 shares of Coastal 6% preferred stock owned by Champion. As of December 1, 1979, the balance of the Freuhauf [sic] loan, in the amount of $1,700,000, was in default. On December 5, 1979 Freuhauf [sic] gave formal notice of its intention to hold a public auction of the pledged Coastal shares. 20. As a result of the events and circumstances described in paragraphs 15-19 above, the defendants devised a plan and scheme whereby Coastal would purchase at an exorbitant price its common shares owned by Champion and defendants would otherwise use the assets of Coastal for their own personal benefit, much to Coastal’s disadvantage, but greatly to the benefit of defendants other than Coastal. 21. Pursuant to said unlawful plan and scheme, on November 27, 1979, Coastal’s Board of Directors purported to authorize: a) The acquisition by Coastal of the 390.000 shares of Coastal common stock then owned by defendant 44/40 and defendant Champion at $12.00 a share despite the fact that the common stock was selling only at $5-% in the over-the-counter market. Also authorized was the acquisition of the 6% preferred stock then owned by Champion at par, although such preferred stock had a market value substantially below par. Four directors voted in favor of the acquisitions including defendants Ryder, Kelley, Reese and Siff. Two directors abstained, including defendant Nelson and Mr. D.E. Daggett [sic]. Two independent directors, Messrs. Jackson and Henderson, voted against. b) A recommendation to the stockholders to reduce Coastal’s board from nine members to seven members. c) A recommendation to the shareholders for an amendment to Coastal’s articles of incorporation rendering it more difficult for a tender offer to be made for Coastal’s stock. d) A resolution permitting Coastal’s Profit Sharing Trust to invest up to 100%, rather than the previously authorized 75%, of its assets in Coastal securities. 22. Subsequent to the Coastal Board of Directors meeting of November 27, 1979, and in further pursuance of their unlawful plan and scheme, defendants arranged for defendant 44/40, acting as a conduit for Coastal, to acquire 230,000 shares of Coastal common stock and 800 shares of Coastal 6% preferred stock from defendant Champion. They further agreed that upon acquisition of those shares by defendant 44/40 from defendant Champion, Coastal would acquire 240.000 shares of its own common stock from defendant 44/40 at a price of. $12.00 per share and would obligate itself to purchase up to all of the 800 shares of preferred stock at the par value thereof in three substantially equal annual installments commencing in February 1981. As part of this agreement, defendants also agreed that 44/40 would sell all of its Cascade stock to defendant Cascade. 23. On December 18, 1979, pursuant to the unlawful plan and scheme among the defendants, defendant 44/40 purchased from defendant Champion the 230,000 common shares and 800 6% preferred shares of Coastal then owned by defendant Champion and conveyed to defendant Champion all of the common stock of the defendant Cascade then owned by defendant 44/40. A portion of these proceeds were used to pay off the debt owed by defendant Champion to Freuhauf [sic] Corp., referred to in paragraph 19(c) above, thereby relieving defendant Pedler of his personal obligation on said loan. 24. On the same day, December 18, 1979, defendant 44/40 conveyed to Coastal 240,000 shares of Coastal common stock at a price of $12.00 per share and received Coastal’s contractual commitment to purchase the 800 shares of 6% preferred stock at par in three equal annual installments. 25. In order to finance the purchase of the aforesaid stock, a subsidiary of Coastal was required to, and did, borrow a substantial sum of money at high rates of interest to the detriment of Coastal and its subsidiaries. Furthermore, the terms of Coastal’s Pension Trust were amended so that it could increase its holdings of Coastal stock above the previous 75% limitation and a portion of the Coastal stock acquired from defendant Champion was then conveyed to the Pension Trust. 26. On January 4, 1980, Coastal mailed a proxy statement to its shareholders with respect to a meeting of shareholders to be held on February 13, 1980. At the meeting of shareholders directors were to be elected and the amendment to Coastal’s articles of incorporation relating to tender offers was to be voted upon. 27. On February 5,1980, Coastal filed suit against defendant Reid and two of his associates in the United States District Court for the Northern District of Ohio alleging that the defendants therein were seeking to seize control of Coástal and in so doing were violating the provisions of federal and state law. On February 6, 1980, that suit was dismissed upon the agreement of defendant Reid that he would not propose any nominees for Coastal’s Board at the February 13 meeting, would not stand for election himself at that meeting, and would not vote for any one other than the management slate. 28. At the meeting of Coastal stockholders on February 13, 1980, the membership of the Board of Directors was reduced from nine to seven members, management’s slate was elected to office, and the amendment to the articles of incorporation relating to tender offers was adopted. 29. As a result of the events described herein: a. The threat posed by defendant Reid to control of Coastal’s Board of Directors was eliminated through the improper use of Coastal’s assets, and management enhanced its ability to remain in office and to receive continued compensation and other remuneration. b. Defendant Pedler, by improper use of Coastal’s assets, was relieved of his guarantee of the Freuhauf [sic] loan to defendant Champion. c. Defendants, and particularly defendants Reid and Pedler, by the improper use of Coastal’s assets, were able to disentangle their overlapping business interests. d. The price which Coastal had paid to defendant Champion for Mutrie was retroactively substantially increased, unnecessarily and to the detriment of Coastal. e. Without any legitimate business purpose and for the private benefit of defendants herein, Coastal expended substantial sums of money and undertook substantial and unnecessary debt. IV. FINDINGS OF THE COMMITTEE The Committee investigated each of the separate allegations made in the Holmstrom Amended Complaint. These allegations