Granada Investments, Inc. v. DWG Corp. (823 F. Supp. 448, 1993)

MEMORANDUM OPINION

LAMBROS, Chief Judge.

Corporate governance, the principles of fiduciary responsibility, fiduciary duty and ethical corporate management, are the essence of this case and opinion. This opinion states the rationale for approval and dismissal of the claims in these actions for class, derivative, and declaratory relief and for equitable enforcement of the February 12,1991 consent decree between Victor Posner, DWG Corporation, and its shareholders.

The 1991 consent decree mandated a democratic process of corporate governance within DWG. The paramount feature of the 1991 consent decree, was the establishment of a control mechanism providing for the presence of court-appointed directors as five year members of DWG’s board. This mechanism was established in order to facilitate immediate judicial intervention, in the event Victor Posner engaged, among other things, in self-dealing, waste, or the siphoning of DWG assets for his personal use. The dismissal of claims that since approval of the 1991 decree, Victor Posner has violated both the terms of the decree and his fiduciary responsibilities, brings to a close a long and arduous saga of litigation against Victor Posner by DWG shareholders and others for corporate mismanagement, waste and self-dealing, while at the helm of DWG. The dismissals also usher in a new and promising beginning for this embattled corporation. This new beginning is marked by what promises to be cooperation between shareholders and management, a massive infusion of capital, and a talented and dynamic new management team with a vision and a plan for growth and development that is committed to maximization of DWG shareholder value.

DWG Corporation is an important component of the national economy. DWG is a holding company; it is at the apex of an intricate web of nearly 150 subsidiaries and several hundred affiliates. DWG provides jobs to 17,000 individuals. One of DWG’s subsidiaries, Arby’s, has over two thousand franchises and 44,000 employees. Another of its subsidiaries produces RC Cola, Nehi, and other popular soft drinks. DWG’s common shares are held by 5,000 investors. The company’s stock, roughly 25,000,000 shares, is traded on the American Exchange.

DWG has been engaged in a series of disputes that charge that the corporation is run for the sole personal benefit of Victor Posner, his family, and close associates. See, e.g. In re. Sharon Steel, 871 F.2d 1217 (3d Cir.1989) and Joseph, E. Kovacs, et al. v. NVF Co., et al., (Delaware Court of Chancery, Civil Action No. 8466), 1987 WL 17042.

By reason of a previous settlement of claims, a court-designated corporate oversight apparatus was established in 1991, to assure discontinuation of a pattern of behavior that had prompted earlier actions against Victor Posner. By reason of that strategic oversight system and court enforcement protocol, the company survived the onslaught of Victor Posner’s plunder. The judicial enforcement proceedings staved off the company’s demise and provided an opportunity for the company to hold on long enough for this welcomed changing of the guard.

Since November 14, 1991, the officials designated to serve on DWG’s board, have filed DWG Corporation Special Directors’ Reports and Recommendations No. 1, 2, and 3, together with a Supplemental Affidavit to Report and Recommendation No. 2, that allege violations of the terms and conditions of the 1991 consent decree. By reason of these reports, proceedings to enforce compliance ■with the 1991 decree were commenced by the plaintiff Granada Investments, Inc. Company shareholders Irving and Benice Brilliant also filed an “Intervenor Plaintiffs Complaint (Verified)” in the Granada enforcement action. As a further result of the Reports of the court-designated directors, Irving Ca-meon filed a Class Action and Shareholder Derivative Complaint against Victor Posner and the Company’s current Board of Directors (other than the court-designated directors). The defendants and Victor Posner commenced an action for declaratory relief with respect to the terms of the 1991 consent decree.

Aggressive confrontations in relation to the issues raised by the parties’ claims have been waged by all of the litigants. A detailed procedural history of the evolution of this litigation is summarized as Attachment A to this opinion. The pleadings, memoran-da, and documentation mentioned in Attachment A have been considered extensively in connection with the disposition of the parties’ requests for settlement approval. See, Attachment B, Part 1 for the Order approving the settlement, Part 2 for Judgment and Part 3 for the Order Establishing A Timeline For The Closing Of DWG Corporate Acquisition.

Looking at the Settlement with a sense of proportionality, objectivity and reality against the backdrop of the costs of continued litigation and the rapidly deteriorating economic condition of DWG, it was apparent that the company under the continued direction of Victor Posner would wind up in bankruptcy and its crown jewels, RC Cola and Arby’s, would be lost to creditors. Acquisition of control position by the DWG Acquisition Group, L.P., a Delaware limited partnership in which the general partners are Messrs. Nelson Peltz and Peter May was a better option than stripping control from Victor Posner and installing an interim governing body that would have been distracted by the delay of appeals and continued litigation. The change of control contemplated by the transaction proposed by Messrs. Peltz and May, constitutes a remedial equivalent to the relief sought by Plaintiffs in these actions. Accordingly, given the practical effect this change of control will have upon DWG’s corporate governance, approval of the settlement was granted and the claims advanced by the parties have been dismissed.

The settlement in this action requires approval of a proposed Modification to the Stipulation of Settlement and Final Order entered in the Granada case on February 12, 1991. Under this Modification in return for the dismissal of claims against Victor Posner, he has agreed to relinquish and give up forever, service as Chairman of the DWG Board, as a director, or as an officer of DWG, and is not permitted to exercise any voting control whatsoever over any DWG common stock. Victor Posner has also agreed in return for the dismissal of claims, to accept an 8.9 million dollar reduction in rent that he has alleged is owed to Victor Posner Trust No. 6 by DWG. The Common Cost Center, a vehicle that Plaintiffs alleged Victor Posner used to shift debt from DWG to failing Pos-ner entities, will be terminated under the Modification. Victor Posner has also agreed to refrain from competition with DWG and from the purchase of its stock.

During the evidentiary proceedings in these actions, Victor Posner appeared as a witness. Following over ninety assertions by Posner of his Fifth Amendment privilege against self-incrimination, proceedings were recessed to determine whether the public interest in obtaining testimony from the CEO of a Fortune 500 company, concerning self-dealing, was sufficiently compelling to warrant dismissal of the criminal contempt charges upon which Posner predicated his blanket Fifth Amendment assertion. During this deferral of trial proceedings, Victor Pos-ner indicated that he had an interest in discontinuing enforcement litigation. It was suggested that Victor Posner would relinquish control of DWG, divest himself of substantial interest in DWG and cease service in any capacity with the company. Once Victor Posner complied with these terms and conditions, this litigation would then be dismissed. The undersigned questioned Posner to confirm that he desired a suspension in proceedings to engage in negotiations with Messrs. Nelson Peltz and Peter May, for the sale of his DWG common stock. Victor Posner indicated that he understood that as a condition of dismissal, he would never again be permitted to serve as a DWG officer or director. Given Posner’s affirmation that he understood these terms, proceedings were suspended to permit negotiations with Messrs. Peltz and May for the purchase of Victor Posner’s controlling stake in DWG.

The negotiation with Messrs. Peltz and May for Victor Posner’s interest led to definitive agreements. It has been represented by the parties that these agreements obviate any necessity for further litigation. Accordingly, this change of control transaction, constitutes the basis for the settlement and dismissals of these actions.

Since execution of the definitive agreements to effectuate a change of control in DWG, the market value of the company has soared from 50 million dollars to over 500 million dollars. On April 19, 1993, Fortune Magazine, a respected periodical that documents the performance of major companies, rated DWG as providing the “Highest Total Return to Investors” in 1992. According to Fortune the value of a DWG share has increased 358.8%. The financial community has responded to the proposed change of control by making 400 million dollars in financing available to DWG at competitive rates. These indicators, which are a direct product of the proposed change of control transaction, should be contrasted to findings by Arthur Andersen & Co., DWG’s independent auditor, in a report on the consolidated financial statements of DWG for the fiscal year ended April 30, 1992. According to Arthur Andersen, by reason among other things, of litigation expenses and high interest payments, DWG’s continuation as a going concern beyond April, 1993, was questionable. The Fortune rating and financing that has been obtained to effectuate a change of DWG control, are excellent barometers of the value of this change to DWG shareholders. .

The change of control is conditioned on the dismissal of Rule 23 and 23.1 claims against Victor Posner. Clear standards exist for evaluation of the compromise of class and derivative claims.

In evaluating a compromise under Rule 23, the compromise proposal must be 1) fair, 2) reasonable, and 3) in the best interests of all those who will be affected by it. See, Williams v. Vukovich, 720 F.2d 909 (6th Cir.1983). In this connection, the basic test for fairness involves weighing the probability and consequences of success on the merits against the terms of the settlement. See, Dole, The Settlement of Class Actions, 71 Col.L.Rev. 971, 1981. A fairness evaluation turns on the facts and circumstances in each case.

A variety of factors may be taken into account in the evaluation of a Civil Rule 23 settlement. For instance, the class’ likelihood of success in the litigation, the points of law on which settlement is based, the amount proposed in settlement compared to what might be recovered during litigation less litigation costs if the action went forward, the sufficiency of notice to class members, and whether the settlement waives other viable claims. Due deference should also be given to the recommendation of class counsel and the nature of objections if any.

A similar, but somewhat different standard applies to Rule 23.1 settlements.

In the case of a Rule 23.1 settlement, as I outlined in my February 12,1991 Order:

Rule 23.1 of the Federal Rules of Civil Procedure provides that the authority to approve a settlement of a derivative action is committed to the sound discretion of the trial court. Jones v. Nuclear Pharmacy, Inc., 741 F.2d 322, 324 (10th Cir.1984); West Virginia v. Chas Pfizer & Co., 314 F.Supp. 710, 740 (S.D.N.Y.1970), aff'd 440 F.2d 1079, 1085 (2d Cir.), cert. denied, 404 U.S. 871, 92 S.Ct. 81, 30 L.Ed.2d 115 (1971). In exercising its discretion, a Court should not decide the merits of an action or attempt to substitute its own judgment for that of the parties. Maher v. Zapata Corp., 714 F.2d 436, 455 (5th Cir.1983); Lewis v. Newman, 59 F.R.D. 525, 527 (S.D.N.Y.1973). Rather a Court must determine that the settlement agreement is fair, reasonable, and adequate. Williams [v. Vukovich], 720 F.2d at 909 [ (6th Cir.1983) ]; Bronson v. Board of Education of City School District of the City of Cincinnati, 604 F.Supp. 68, 73 (S.D.Ohio 1984); Maher, 714 F.2d at 455.

In deciding whether a settlement is fair, reasonable, and adequate, a Court should consider the following factors:

(1) whether the proposed settlement was fairly and honestly negotiated;

(2) whether serious questions of law and fact exist, placing the ultimate outcome of the litigation in doubt;

(3) whether the value of an immediate recovery outweighs the mere possibility of future relief after protracted and expensive litigation;

(4) the complexity, expense, and likely duration of the litigation;

(5) when significant discovery has been completed, the Court must consider and should defer to the judgment of experienced trial counsel who competently evaluated the strength of his proofs;

(6) the judgment of the parties that the settlement is fair and reasonable;

(7) the objections raised by shareholders of the defendant corporation, but not to withhold approval merely because some shareholders object to it; and

(8) the number of objectors to the settlement.

Williams, 720 F.2d at 921-24; In Re General Tire & Rubber Co. Securities Litigation, 726 F.2d 1075, 1080 (6th Cir.1984); Thompson v. Midwest Foundation Independent Physicians Association, 124 F.R.D. 154, 157 (S.D.Ohio 1988); Bronson, 604 F.Supp. at 73-74; Jones, 741 F.2d at 324.

The proponents of the settlement have the burden of persuading the Court that the compromise is fair, reasonable and adequate. In re General Tire, 726 F.2d at 1080. With the Court’s preliminary approval of the stipulation, the proponents satisfy this burden and the settlement is presumptively reasonable. Williams, 720 F.2d at 921; Stotts v. Memphis Fire Department, 679 F.2d 541, 551 (6th Cir.1982), cert. granted, 462 U.S. 1105, 103 S.Ct. 2451, 77 L.Ed.2d 1331 (1983); Metropolitan Housing Development Corp. v. Village of Arlington Heights, 616 F.2d 1006, 1013 (7th Cir.1980); United States v. City of Miami 614 F.2d 1322, 1333 (5th Cir.1980). The burden then shifts to the objecting shareholders who have a heavy burden of demonstrating that the decree is unreasonable. See Williams, 720 F.2d at 921; Stotts, 679 F.2d at 551; Village of Arlington Heights, 616 F.2d at 1014.

Granada Investments, Inc. v. DWG Corporation, United States District Court, N.D. Ohio Civil Action 1:89 CV0641, February 12, 1991 at 10, 1991 WL 338233.

The settlement in these actions is the product of arms-length negotiations. Negotiations were monitored by the court-designated directors. If Plaintiffs had succeeded on the merits, the relief sought by Plaintiffs is substantially approximated by the outcome that will result from the change of control transaction.

Notice of the proposed settlement was mailed to all DWG shareholders. In addition, summary notice was published in the national edition of the Wall Street Journal and Cleveland Plain Dealer. A Fairness Hearing was conducted on March 22, 1993. No objections to the settlement were filed and no shareholder appeared at the Fairness Hearing to challenge the Settlement. All parties to the litigation have requested approval.

Settlement here provides a remedial equivalent to the relief sought. This fact coupled with the favorable market and financial community reaction to the underlying transaction, both work in favor of approval, particularly given the fact that the new control group is able to infuse new capital into DWG at very competitive rates, whereas Victor Posner could only obtain financing at exorbitant interest rates. Accordingly, on these bases, the recommendations of counsel for all parties, and the absence of objections, Settlement approval was granted, with the expectation that DWG will be managed fairly.

Corporate management is largely a function of the exercise of business judgment on behalf of shareholders. An implicit aspect of performance of this purely economic duty is denoted by the following corollary: Fair, principled, and honest behavior and the obligation to maximize value for every shareholder, are ethical responsibilities. Depressing shareholder values, the reaping of personal benefits that are the equivalent of dividends without sharing, and the draining of profits that should benefit everyone, is antithetic to the business judgment concept.

The business judgment rule “presumes that in making a business decision, actions have been taken on an informed basis, in good faith, and in the honest belief that the action was taken in the best interests of the company.” Knepper & Bailey, § 1.02 at 4. This rule was intended for those who act reasonably and is not protection against self-dealing and avarice.

There are two primary reasons for the business judgment rule. First, courts employ the business judgment rule because “in order for a corporation to be managed properly and efficiently, latitude must be given in the handling of corporate affairs.” Id., at § 1.13. There are major policy grounds for the granting of this latitude:

a. If management were liable for mere good faith errors in judgment, few capable individuals would be willing to incur the financial and emotional risk of serving as a director or officer. Competent persons should be encouraged rather than deterred from seeking to serve as corporate managers.

b. Courts are generally ill-equipped to evaluate business judgments or to second guess the validity of a business decision.

c. Corporate managers should be encouraged to efficiently manage the corporation by taking reasonable risks and by being allowed wide discretion in the handling of corporate affairs.

Id. See also, Panter v. Marshall Field & Co., 646 F.2d 271, 297 (7th Cir.1981), cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631 (1981); Cramer v. General Telephone & Elec. Corp., 582 F.2d 259, 274 (3d Cir.1978); Knepper & Bailey, § 6.03 at 182-184. This does not mean unbridled nor unrestricted discretion. Integrity and honesty are the bridles and restraints.

The policy behind not permitting courts to review business decisions is best stated in the case of Joy v. North, 692 F.2d 880, 866 (2d Cir.1982), cert. denied, 460 U.S. 1051, 103 S.Ct. 1498, 75 L.Ed.2d 930 (1983) as being:

[Cjourts recognize that after-the-fact litigation is a most imperfect device to evaluate corporate business decisions. The circumstances surrounding a corporate decision are not easily reconstructed in a courtroom years later, since business imperatives often call for quick decisions, inevitably based on less than perfect information. The entrepreneur’s function is to encounter risks and to confront uncertainty, and a reasoned decision at the time made may seem a wild hunch viewed years later against a background of perfect knowledge.

Additionally, the Seventh Circuit has noted that “[mjanagers who make such judgment calls poorly ultimately give way to superior executives; no such mechanism ‘selects out’ judges who try to make business decisions. In the long run firms are better off when business decisions are made by business specialists, even granting the inevitable errors.” Kamen v. Kemper Financial Services, Inc., 1990 Fed.Sec.L.Rep. (CCH) ¶ 95,363, 96,766 (7th Cir.1980).

A second reason for the business judgment rule is the view, that the shareholders voluntarily undertake the risks of bad business judgments and, absent some breach of duties or inherent unfairness, should bear the risk of such decisions. Joy, 692 F.2d at 882. Specifically, the Second Circuit in Joy noted that the profit potential inherent in investment in corporate stocks responds to the potential risk, “so it is in the interests of the shareholder that the law avoids creating incentives for overly cautious corporate decisions.” Id.

In Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530, 537-38, 554 N.Y.S.2d 807, 553 N.E.2d 1317 (1990) (citations omitted), the New York Court of Appeals described the effect of the business judgment rule as follows:

Developed in the context of commercial enterprises, the business judgment rule prohibits judicial inquiry into actions of corporate directors “taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.” So long as the corporation’s directors have not breached their fiduciary obligation to the corporation, “the exercise of [their powers] for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.”

See also, Knepper & Bailey, § 1.13 at 31-33.

A second effect of the business judgment rule is to ensure that the directors, and not the shareholders, manage the corporation, as is required by state statutes.

The power to hold to account is the power to interfere and, ultimately, the power to decide. If stockholders are given too easy access to courts, the effect is to transfer decision making power from the board to the stockholders or, more realistically, to one or a few stockholders whose interests may not coincide with those of the larger body of stockholders. By limiting judicial review of board decisions, the business judgment rule preserves the statutory scheme of centralizing authority in the board of directors. In doing so, it also preserves the value of centralized decision making for the stockholders and protects them against unwarranted interference in that process by one of their number. Although it is customary to think of the business judgment rule as protecting directors from stockholders, it ultimately serves the more important function of protecting stockholders from themselves.

Dooley & Veasey, “The Role of the Board in Derivative Litigation: Delaware Law and the Current ALI Proposals Compared,” 44 Bus. Law. 503, 522 (1989).

However, while the presumption is that directors are entitled to the shield of the business judgment rule, there are preconditions to its use. If a shareholder establishes one or more of these preconditions are lacking, the director may not avail him or herself of the benefit of the rule. These preconditions are:

d. a business decision;

e. the absence of a personal interest in the transaction and an absence of self-dealing;

f. the exercise of due care in making the business decision, or evidence of an informed decision with a reasonable effort to become familiar with the relevant and available facts;

g. no evidence of abuse of discretion, or a reasonable belief that the best interests of the corporation and shareholders will be served by the business decision; and

h. good faith.

Knepper & Bailey, § 1.13 at 31-33.

Where there is evidence that a director has a personal interest in the transaction, the director will be required to show that the transaction was fair and reasonable to the corporation notwithstanding his or her personal interest. Id. When directors lose the protection of the business judgment rule, a court may inquire into the fairness of the decision and whether the directors discharged their fiduciary duties to the shareholders in making the challenged decision.

A director who believes the business judgment rule provides unlimited and unfettered discretion to pillage the investment of others for personal gain, places false hope in this concept.

Claims by DWG shareholders with regard to the abuses wrought by Victor Posner, are a result of the classic situation that, other than Victor Posner and his affiliates, the common stock of DWG is dispersed among numerous minority shareholders who are completely separated from DWG management. Without significant coordination, financing, and effort, these shareholders are unable to exert control over the management of the funds they have invested in DWG.

The potential for abuse by reason of the separation of share ownership and control in large, public corporations has led one commentator to note:

[Management, not shareholders, controls the modern large corporation: the dispersal of share ownership has allowed management to exploit its control of information about the corporation and the corporations’ operations, including the proxy mechanism, to elect themselves or sympathetic outsiders to the board of directors. Naturally reluctant to share its authority, management has minimized the board’s participation in corporate governance, and the board of directors has [the potential to be] reduced to an ‘impotent ceremonial and legal fiction.’

Solomon, “Restructuring the Corporate Board of Directors: Fond Hope—Faint Promise?” 76 Mich.L.Rev. 581 (March 1978). The separation of control from share ownership coupled with a board that will not assert itself, was the gravamen of this action.

Concerns regarding the detrimental effect to shareholders’ rights and the securities markets resulting from this separation of share ownership and control, have spawned many efforts in the state legislatures, Congress and in courts to regulate corporate governance.

The important law shaping factors in recent decades have in fact been dispersion of ownership among great masses of stockholders—who clearly do not control regardless of who does—and the size of modern corporate entities.

Loss & Seligman, Securities Regulation, Vol. 1 at 23.

This issue, identified as early as 1932 by Berle & Means in their landmark work entitled The Modem Corporation and Private Property, was one of the factors underlying the enactment of the federal securities acts.

The extent of the problem, however, has not lessened but, instead, has grown in recent decades due to the increase in the number of persons holding shares in public companies. Studies conducted for the New York Stock Exchange (“NYSE”) estimated that in 1990, 51.44 million persons, or one in every five persons, in the United States held stock in American public corporations, either directly or through mutual funds. Id., at 13-14. Additionally, NYSE estimates from 1980 indicate that at least 133 million persons directly owned stock in public corporations through pension plans, life insurance or other intermediaries. Id.

As a result, the drive on the part of state and federal governments and on the courts to ensure the proper balance in corporate governance has not subsided, there has been a consistent effort, particularly in recent decades, to adopt additional laws to regulate corporate governance. See, e.g., Goldstein, “Future Articulation of Corporation Law,” 39 Bus.Law. 1541 (Aug.1984); Matheson & Olson, “Corporate Law and the Long Term Shareholder Model of Corporate Governance,” 76 Minn.L.Rev. 1313 (June 1992); Andre, “The Corporate Governance Reform Act of 1995,” 17 J.Corp.L. 87 (Fall 1991).

At several points, most recently in the 1970’s, Congress has conducted investigations into corporate governance. The result of investigations in the 1970’s into wrongdoing by corporate managers of questionable payments for foreign government officials, of which the directors were ignorant, was the Foreign Corrupt Practices Act of 1977 and in the addition of NYSE rule requiring that all listed companies maintain an audit committee of the board of directors. Loss & Seligman, at 24-25. Currently, the American Law Institute is involved in the Principles of Corporate Governance and Analysis Recommendation Project. Id. Moreover, legislation, although not yet acted upon, has been submitted to Congress setting forth certain minimum requirements for corporate governance. See Protection of Shareholders Rights Act of 1980, S.R. No. 2567, 96th Cong., 2d Sess. (1980); Corporate Democracy Act of 1980, H.R. 7010, 96th Cong., 2d Sess. (1980).

Given the historical development and importance of corporations and the potential for abuse of shareholder trust, the assurance of effective corporate governance is essential to settlement of shareholder class and derivative claims. The settlement proposed here, by virtue of its various Victor Posner preclu-sions and continued role for court-designated directors, provides safeguards for DWG shareholders against a recurrence of the claims at issue.

The Reports filed in these actions by the court-designated directors, state that Victor Posner’s judgment on behalf of shareholders, resulted in the demise of Sharon Steel Corporation, Pennsylvania Engineering Corporation, and others, and has brought NVF Company and APL to the brink of financial ruin. The trends depicted in the Reports of the court-designated directors and Arthur Andersen’s 1992 Audit, indicate that, but for the intervention of these actions, DWG was destined for a similar fate. The imposition of a corporate governance protocol and the thrusting of a watchdog committee upon the management of DWG, interrupted an alleged otherwise uninhibited disregard for ethical corporate governance and shareholder interests. The settlement embodied within the Modification, will eliminate Victor Posner’s control over DWG management decisions, and will thus satisfy the objectives of plaintiffs’ actions.

To fully appreciate the contemporary posture of proper corporate governance, one needs to review the treatment of this topic in American jurisprudence. The idea of free incorporation did not become established in America until the United States Supreme Court articulated the doctrine that a corporation, instead of having the right to do all things that a natural person could do, had such powers only as were expressly granted to it by its enabling act. See Head v. Providence Ins. Co., 6 U.S. (2 Cranch) 127, 2 L.Ed. 229 (1804). With this principle established, a vast territory opened for commercial development. Private business corporations multiplied rapidly in number and importance. 1 Fletcher Cyclopedia Corporations § 2, at 7.

In an elaborate dissenting opinion in Louis K. Liggett Co. v. Lee (1932), 288 U.S. 517, 53 S.Ct. 481, 77 L.Ed. 929, Justice Brandéis recounted the history of the evolution of state corporation laws and pointed out the many restrictions formerly imposed upon the creation of corporations. These restrictions were due to an attitude of suspicion and fear toward the corporate mechanism. As Justice Brandéis said:

There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So at first the corporate privilege was granted sparingly.... The later enactment of general corporation laws does not signify that the apprehension of corporate domination had been overcome.... The general laws, which long embodied severe restrictions upon size and upon the scope of corporate activity, were, in part, an expression of the desire for equality in opportunity.

Limitation upon the amount of the authorized capital of business corporations was long universal. The maximum limit frequently varied with the kinds of business to be carried on....

Limitations upon the scope of a business corporation’s powers were also long universal. At first, corporations could be formed under the general laws only for a limited number of purposes — usually those which required a relatively large fixed capital, like transportation, banking, and insurance, and mechanical, mining, and manufacturing enterprises. Permission to incorporate for ‘any lawful purpose’ was not common until 1875; and until that time the duration of corporate franchises was generally limited to a period of 20, 30, or 50 years. All, or a majority, of the incorpo-rators or directors, or both, were required to be residents of the incorporating state. The powers which the corporation might exercise in carrying out its purposes were sparingly conferred and strictly construed. Severe limitations were imposed on the amount of indebtedness, bonded or otherwise. The power to hold stock in other corporations was not conferred or implied. The holding company was impossible.

The removal by leading industrial states of the limitations upon the size and powers of business corporations appears to have been due, not to their conviction that maintenance of the restrictions was undesirable in itself, but to the conviction that it was futile to insist upon them; because local restriction would be circumvented by foreign incorporation.

Id. at 549-557, 53 S.Ct. at 490-493.

Justice Brandéis characterized the early purpose of private business corporations as primarily public:

Whether the corporate privilege shall be granted or withheld is always a matter of state policy. If granted, the privilege is conferred in order to achieve an end which the State deems desirable. It may be granted as a means of raising revenue; or in order to procure for the community a public utility, a bank, or a desired industry not otherwise obtainable; or the reason for granting it may be to promote more generally the public welfare by providing an instrumentality of business which will facilitate the establishment and conduct of new and large enterprises deemed of public benefit. Similarly, if the privilege is denied, it is denied because incidents of like corporate enterprise are deemed inimical to the public welfare and it is desired to protect the community from apprehended harm.

Id. at 545, 53 S.Ct. at 488.

Similarly, in his discussion of the early history of business corporations, Professor Williston refers to the public purpose of corporations; he referred to an early commentator who stated that “[t]he general intent and end of all civil incorporations is for better government.” 3 Williston, Select Essays on the Anglo-American Legal History 201 (1909) [hereinafter Williston]; see also W.L. Cary & M.A. Eisenberg, Corporations 117 (6th ed. 1988). Williston points out that the early corporate charters, particularly their recitals, furnish additional support for the notion that the corporate object was the public one of managing and ordering the trade as well as the private one of profit for the members of the corporation. Williston at 201; see also Currie’s Administrators v. The Mutual Assurance Society, 4 Hen. & M. 315, 347 (Va.Sup.Ct.App.1809) (referring to the English corporate charters and expressing the view that acts of incorporation ought never to be passed “but in consideration of services to be rendered to the public”). However, with later economic and social developments, and the free availability of the corporate mechanism for all trades, the end of private profit became generally accepted as the controlling one in all businesses other than those classed broadly as public utilities. Cary & Eisenberg at 117.

One commentator has noted that, at an early stage of development, the corporation became the focus of animosity because of problems encountered by the individual in the free market system. Elliott Goldstein, Future Articulation of Corporation Law, 39 The Business Lawyer 1541,1542 (1984). For instance, farmers felt that low prices for their goods, in contrast to higher prices for manufactured goods, were caused by machinations of business trusts. Goldstein at 1542. Small merchants and laborers opposed the growth of “soulless corporations.” Id. Consequently, as corporations grew in size and influence, the notion that there should be government regulation of corporations was accepted.

As corporations developed and grew, a central principle of corporate law emerged: the sole duty of a corporation’s officers is to maximize shareholder wealth. Daniel H. Pink, The Valdez Principles: Is What’s Good for America Good for General Motors?, 8 Yale L. & Policy Review 180 (1990). As time passed, calls rose for corporations to be more socially responsible, nonetheless, the principle that a corporate officer’s overriding duty is to maximize shareholder wealth remains intact. Id., at 181. Today, this appears to be the dominating goal of corporations in a free market society. Accordingly, where claims have been proved that shareholder rights have been ignored, prospects for court-imposed governance are ripe.

Under Ohio law, where allegations like those in this case have validity, a court should intervene in corporate governance when the facts reveal that the acts of officers or directors of a corporation constitute (1) gross mismanagement of the business of the corporation; or (2) misapplication of corporate assets to the injury of its stockholders or creditors. See, e.g., Phoenix Portland Cement Co. v. Shadrach, 18 Ohio App. 264, 267-69, 2 Abs 124 (Franklin County 1924). A court should also intervene in equity to preserve assets pending litigation. The Phoenix Portland Cement Co. court explained a court’s right to intervene in equity as follows:

It may further be said that this court has never denied power in a chancellor to prevent a scheme of irreparable injury and wrong, merely because movers in that scheme speak and act in a corporate capacity rather than in an individual capacity. That solvent corporations are wrecked for purely selfish and illegal purposes, that minority interests are ‘frozen out,’ that business immorality has run amuck under the assumption that courts are powerless, is too true. But the assumption is wrong. Judicial hesitancy does not mean judicial atrophy or paralysis. The board of directors of a corporation are but trustees of an estate for all stockholders and may not only be amenable to the law, personally, for a breach of trust, but their corporate power under color of office to effectuate a contemplated wrong may be taken from them, when, by fraud, conspiracy, or eovinous conduct, or extreme mismanagement, the rights of minority stockholders are put in imminent peril and the underlying, original, corporate entente cordiale is unfairly destroyed. It would be a sad commentary on the law if, when the trustee of a corporate estate is making an improper disposition of it, or has shown improper partiality towards one of its conflicting parties, or has put the estate in a fix it is liable and likely to be either wasted or destroyed, or mercilessly taken from all and given to a part, a court could not reach out its arm and preserve and administer the estate. We have never so declared the law.

Id. 18 Ohio App. at 267-68 (quoting Cantwell v. Columbia Lead Co., 199 Mo. 1, 42, 97 S.W. 167).

Under Ohio law, equitable receivers have been appointed upon a demonstration of gross mismanagement or mismanagement of the assets of a corporation to the detriment of the shareholders, as well as to preserve the assets of a corporation pending litigation. See Phoenix Portland, Cement Co. v. Shadrach, 18 Ohio App. 264 (Franklin County 1924) (preferred non-voting stockholders of a subsidiary corporation, in an action of accounting against the dominant and controlling corporation, are entitled to have a receiver appointed, upon the ground of mismanagement and wasting of assets of the subsidiary corporation, when reasonably necessary to protect the interests of such stockholders, although the corporation is solvent as to creditors); National Salt Co. v. United Salt Co., 11 Ohio Dec. 348 (Cuyahoga Common Pleas 1901) (receiver may be appointed for a corporation to preserve assets pending litigation); Birch v. Stacey, 29 Ohio N.P. (N.S.) 1 (Hamilton Common Pleas 1931) (appointment of a receiver and granting of injunction are appropriate where one corporation controls another and is alleged to be using its control in its own interest); Guardian Financing Co. v. Davidson, 23 Ohio App. 143, 145, 147-49 (Summit County 1924) (not appointing receiver, but recognizing that an Ohio court has authority to appoint a receiver for a corporation in a proper case according to the “usages of equity,” including where there are allegations of misconduct by present directors, past wrongdoing by the president, or the assets and property of the corporation are being dissipated and fraudulently absorbed and it is necessary for the court to preserve and rightly apply the assets of the corporation; even in these1'cases, appointment of a receiver will be a remedy of last resort); see also generally Ohio Jurisprudence 3d Receivers, §§ 24, 26-27, 41.

A receiver may also be appointed to carry a judgment into effect. See State, ex rel. Celebrezze v. Gibbs, 60 Ohio St.3d 69, 573 N.E.2d 62 (1991).

The foregoing review of corporate law and principles that govern the fiduciary responsibilities of those that run corporations, causes me to focus on the facts and circumstances surrounding this case and the applicability of these legal principles to the conditions before us. This review enables me to express the rationale for approval of the Settlement. I am hopeful it will assist others that are concerned to a better understanding of the resolution. This case presents a complex and inextricably interwoven set of circumstances and the blending of corporate law and securities regulations. This blending necessitated judicial management fashioned to coordinate judicial resolution with required securities regulatory clearances.

The federal securities laws of the United States, all administered by the Securities and Exchange Commission (the “SEC”), were enacted as a means to reduce management abuses of the nature alleged in this action. The two acts principally addressing issues of protection of the investing public are the Securities Act of 1933 (the “1933 Act”) and the Securities Exchange Act of 1934 (the “1934 Act”). In general, the 1933 Act deals with original issuance of securities, while the 1934 Act provides protection for investors once the securities are issued.

The authority for Congress to pass the federal securities laws can be found in the “interstate commerce” clause in'’Article 1, § 8 of the United States Constitution. The federal securities laws grew out of, among other things, several decades of attempts by the states to address abuses and problems in the raising of capital and abuses by managements in how they treated their investors. Additional background for the federal securities laws involved the states systems of corporate laws.

While the societal developments giving rise to the problems sought to be addressed by the states are not fully relevant here, suffice it to say that these problems arose with the separation of share ownership-from control. Those who had an equity interest in businesses were not active in their operation, rather the businesses were being run by their managements. It was not the intent of the federal securities laws to reverse this trend. In fact, management control only increased after the enactment of these acts. In addition, the numbers of investors in publicly traded companies has steadily increased, so more and more of the public are investing in businesses and these investors are taking advantage of the protections afforded by the securities laws.

One collateral aspect of the- divorce of ownership from control was the “dummy director” who just showed up for a free meal and a fee. As more and more owners of businesses were not involved in the running of those businesses, those who actually ran the businesses failed to furnish essential information to the owner-shareholders. This disclosure problem is a primary focus of the federal securities laws.

Since, under the American constitutional, statutory and regulatory scheme, corporations are creatures of state law, the federal government has traditionally had only a limited interest in corporate affairs. However, the interstate commerce clause of the U.S. Constitution and federal securities laws have imposed increased responsibility on judges. Several courts have examined the relationship between state and federal law in this area.

Corporations are creatures of state law, and investors commit their funds to corporate directors on the understanding that, except where federal law expressly requires certain responsibilities of directors with respect to stockholders, state law will govern the internal affairs of the corporation. Without a clear indication of Congressional intent, courts have been reluctant to “federalize” the substantive portion of corporate law, especially where settled policies of state law would be nullified.

The proxy rules are the principal means by which the SEC can and does have an effect on corporate governance, typically the province of the law of the state of incorporation. The. language of §. 14(a) of the 1934 Act and the proxy rules promulgated thereunder gives the SEC considerably more general powers than that provided under the specific disclosure philosophy of the 1933 Act. In several situations, the SEC has attempted to step into corporate governance territory, and Congress, too, has considered and enacted some legislation that would or does impinge on the corporation laws of the states. The perceived abuses by corporations have prompted these legislative actions and calls by commentators for further action, even to the point of requiring federal incorporation for certain types of corporations.

One issue that has been the focus of a significant amount of literature has been voting rights, whether each share of common stock is entitled to one vote. The American Stock Exchange has never required listed common securities to follow the one share/ one vote axiom. The New York Stock Exchange only recently allowed shares with disparate voting rights to be listed. It has been argued that the SEC, with its powers to regulate the securities exchanges under § 19(e) of the 1934 Act, has the power to adopt a rule forbidding firms whose stock is traded on a national securities exchange from issuing common stock with unequal voting rights.

As argued by Seligman, in his 1986 article, the legislative history of the Exchange Act indicates that the SEC’s actions must be “consistent with objectives of the Exchange Act.” Requiring all shares to have equal voting rights would be “consistent with objectives of the Exchange Act” for three reasons. (a) The SEC may designate, under § llA(a)(2) of the 1934 Act, the securities “qualified for trading.” (To qualify, the securities could be required to meet certain voting requirements.) (b) Under the Williams Act, in the tender offer context, the SEC may be empowered to require exchange rules to meet the Williams Act goal of neutrality between contestants, (c) The purpose of the proxy provisions of § 14(a) of the 1934 Act is to protect “the free exercise of the voting rights of stockholders.”

In response to the New York Stock Exchange’s filing of its dual classification rule change, the SEC refused to allow the rule and, instead, promulgated Rule 19c-4. That rule prohibited all exchanges from listing the stock of any corporation that takes any action to nullify, restrict or disparately reduce the per share voting rights of common stockholders. However, the U.S. Court of Appeals for the D.C. Circuit, in The Business Roundtable v. SEC invalidated this rule on the grounds that it was not in furtherance of any purpose of the 1934 Act and impinged severely on the tradition of state regulation of corporate law. Some legislation has been considered, but as a result of the Business Roundtable case, the prospect for federal legislation now appears dim.

Another area of corporate governance where the federal securities laws have played a role, and where commentators and shareholder groups have encouraged the SEC and Congress to do more, relates to anti-takeover legislation. In the past two decades, there has been a wave of state anti-takeover litigation and legislation. In 1977, the SEC announced that it would hold “public hearings concerning shareholder communications, shareholder participation in the corporate electoral process, and more generally, corporate governance.” This arose out of questionable and illegal activities of firms. The focus here was to be possible legislation on federal chartering of corporations, setting minimum standards of conduct, and management accountability, all by revisions to the proxy rules. There was a call for, among other things, more truly independent directors.

The discussion and proposals referred to above, manifest widespread recognition of the importance and need for strong, clear national policies concerning ethical corporate governance and management.

The settlement in this action is expected to produce a dramatic change in the manner in which DWG is governed and in the composition of its Board of Directors. In this connection, the tenure as board members of the court-designated directors, has been extended for five years from the date of closing the underlying financial transaction. Moreover, as a part of the settlement, Messrs. Peltz and May have filed an Undertaking in the Granada action in which they consent, among other things, to continuing jurisdiction to enforce the Modification and to never vote shares they control to elect Victor Posner or members of his family to the DWG board.

Approval of the settlement contained within the Modification is inexorably linked to the voluntary and permanent departure of Victor Posner from control of DWG. The transaction that will lead to Victor Posner’s departure has been described to shareholders in proxy materials reviewed and cleared by the SEC. DWG shareholders have approved the requisite measures to effectuate the transaction. All actions required to be taken by the DWG Board have also taken place.

The litigation in this action had accumulated considerable momentum. Although a strong factual basis had been advanced regarding Victor Posner’s corporate transgressions, it is unknown, following a full and fair evaluation of the evidence, which of the parties would have prevailed. And, although courts should exercise restraint in connection with the ordering of corporate governance related remedies, where a death grip has been secured over the affairs of a corporation by reason of a hand-picked board of directors’ virtual zombie-like obedience to the whims and avarice of a single individual, the availability of a control mechanism, similar to that established by the 1991 consent decree or embodied in the present Modification, is a preferable alternative for shareholders than continued litigation. The change of control, proposed by the parties to secure the dismissal of claims, clearly offers greater benefits to DWG shareholders than continued prosecution of claims against Victor Posner for deficient management and wrongdoing. An apt analogy for this perspective is presented by the comparative ease with which a malignancy may be extricated from an organism and destroyed, only to discover that the process to achieve removal of the malignancy has resulted in the organism’s demise.

Finally, given my sense of proportionality, objectivity, and reality in relation to the financial health of DWG, the costs of continued litigation, and the availability of an attractive remedial equivalent, I have concluded that the interests of DWG shareholders are better served by the approval of the Settlement and the dismissal of all claims, than by costly and protracted efforts toward a court-imposed solution.

IT IS SO ORDERED.

ATTACHMENT A

PROCEDURAL HISTORY

On April 10, 1989, Plaintiff Granada Investments, Inc. (“Granada”), suing individually and derivatively on behalf of and in the right of the shareholders of DWG Corporation (“DWG”), an Ohio corporation, filed a Verified Complaint For Declaratory And In-junctive Relief (the “Complaint”), against DWG and the following Named Defendants: Victor Posner, Steven Posner, Melvin R. Col-vin, Bernard I. Posner, Russell A. Boyle, Jack Coppersmith, Marco B. Loffredo, Jr., William L. Pallot, Leonard H. Roberts, H. Douglas Kingsmore, Martin J. Posner, Thomas A. Prendergast, and Roger D. Stake (hereinafter collectively referred to as “DWG”). Granada, whose main business activity is investing in securities, is a Delaware corporation, with its principal place of business in New York. Granada is the beneficial owner of in excess of 5% of DWG’s issued and outstanding stock. Defendant DWG is a publicly held corporation with its principal place of business in Miami, Florida, and is engaged in a diverse range of businesses through numerous subsidiaries and affiliates. DWG has a long history as a troubled company.

In the Complaint, Granada asserted a claim against all Defendant-directors of DWG for breach of fiduciary duties of care, loyalty, trust and fair dealing, a claim against Victor Posner, as the dominant shareholder, for breach of special fiduciary duties, and a claim against all Defendant-directors of DWG for violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the “Exchange Act”), and the rules and regulations promulgated by the Securities and Exchange Commission (“SEC”) thereunder.

On April 19, 1989, Granada filed a Verified First Amended Complaint For Declaratory and Injunctive Relief (the “First Amended Complaint”) against the same Defendants, except Brenda Nestor Castellano, a director of DWG, was substituted for Jack Coppers-mith who was not a director of DWG. In the First Amended Complaint, Granada real-leged the claims asserted in the original Complaint.

On June 9, 1989, Granada filed a Verified Second Amended and Supplemental Complaint for Declaratory and Injunctive Relief (the “Second Amended Complaint”) against the same Named Defendants, after two (2) months of expedited discovery. In the Second Amended Complaint, Granada realleged the claims previously asserted, and, additionally, asserted new claims against Victor Pos-ner seeking the imposition of a constructive trust for the benefit of DWG and its other shareholders, and for violation of the Ohio Control Share Acquisition Act, Ohio Rev. Code § 1701.8313 in connection with his alleged improper acquisition of DWG shares.

On June 29, 1989, DWG filed a Counterclaim and Third-Party Complaint against Granada Investments, Inc., Granada Investments, L.P., Fairview Financial Corp., LBO Associates I, L.P., LBO Associates II, L.P., G.H. Enterprises, Inc., Andrew N. Heine, Trust f/b/o Jonathan Heine, Trust f/b/o Nancy Cedillo Heine, Trust f/b/o Priscilla Majer-ski, Trust f/b/o Adam Heine, Peter F. Pelul-lo, Global Financial Corp., and Leonard Pe-lullo. In the Counterclaim and Third-Party Complaint, DWG asserted claims for violations of Sections 10(b), 13(d), 14(a), 14(d), and 14(e) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(d), 78n(a), 78n(d), and 78n(e), and the SEC rules and regulations promulgated thereunder, and sought injunctive relief and the imposition of a constructive trust in its favor. In addition, a claim was asserted against Leonard Pelullo and Global Financial Corp. for breach of 'fiduciary duties.

On July 17, 1989, Granada filed a Motion For Leave To File Instanter a Verified Third Amended And Supplemental Complaint For Declaratory and Injunctive Relief (the “Third Amended Complaint”). In the Third Amended Complaint, Granada realleged the claims asserted in the previous Complaints and additionally asserted claims against Defendants Victor Posner and Steven Posner individually for alleged violations of the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962.

Evidentiary proceedings on the preliminary injunction motions filed by Granada and DWG were commenced on September 11, 1989. Evidence on Defendants’ alleged breaches of fiduciary duties was also heard. At the parties’ request, the preliminary injunction hearing was adjourned to allow an opportunity for settlement negotiations.

In August 1990, the parties entered into a Stipulation Settlement (“Stipulation”) which provided, among other things, for certain changes in the corporate governance of DWG. A limitation on the voting or disposition of shares of the Common Stock held by Victor Posner and the entities he controls; a relinquishment of certain contractual rent increases under DWG’s Lease with Posner Trust No. 6, the Landlord of the Victorian Plaza Apartments; and the full and final settlement and dismissal, with prejudice, of and release of all claims of all the settling parties. In addition, the Stipulation provided that three persons, not affiliated with any parties to this action, would be appointed by the undersigned to serve on DWG’s thirteen member Board of Directors along with two incumbent members of the DWG Board selected by the current DWG Board (who were not DWG employees or members of the Pos-ner family) would comprise a newly created “Special Committee.” This committee was to remain in place for up to five years from the date of the Final Order and Judgment. Under the Stipulation, the Special Committee could engage independent counsel and other advisors to advise it in connection with the duties set forth within the Stipulation. The Special Committee was required to report any violations of the Stipulation to the undersigned. Jurisdiction was retained over the enforcement of the Stipulation. Under the Stipulation, the Special Committee was empowered to review certain types of transactions between DWG and its subsidiaries, on the one hand, and (x) certain affiliated publicly-held corporations and/or (y) any entity or person controlled, directly or indirectly, by Victor Posner (other than the Company’s subsidiaries), on the other hand. DWG was also expressly required to hold an annual meeting of shareholders each year, unless and until it ceased to be a public company. The failure to hold annual meetings was a leading shareholder claim against Victor Pos-ner.

After reviewing its terms, on September 18, 1990, a preliminary Order was entered approving the Stipulation and the procedures suggested for providing notice to DWG shareholders on November 14, 1990. Pursuant to Federal Rule of Civil Procedure 23.1, a fairness hearing was held to determine the fairness, the reasonableness, and the adequacy of the Stipulation. Notice of the proposed stipulation was sent to all DWG shareholders of record informing them of the Stipulation and their right to be present at the hearing to express their opinions on whether the Stipulation should or should not be approved.

On February 12, 1991, a decree was entered which incorporated and approved the Stipulation. The decree improved corporate governance and imposed restrictions on self-dealing between DWG and Victor Posner, as well as a variety of Posner-related persons and entities. The decree imposed a system of democratic corporate governance at DWG, and named Mr. Daniel R. McCarthy, Mr. Richard M. Kerger, and Mr. Harold E. Kelley as Court-Designated Directors.

From the virtual outset of the settlement, the Courb-Designated Directors reported being subjected to insulting and abusive behavior by Victor Posner. It appeared to the Court-Designated Directors that Posner did not intend to change his alleged business methods. This situation worsened and, in accordance with the decree, a DWG Board of Director’s meeting was called by the Special Committee on November 11, 1991. Victor Posner abruptly aborted this meeting within minutes of its commencement.

On November 14, 1991, in connection with their obligation to report violations of the Stipulation to the Court, the Courb-Designat-ed Directors filed “Special Directors Report and Recommendation No. 1” (“Report No. 1”). In Report No. 1, attention was drawn to Victor Posner’s activities and transactions and occurrences that: (1) threatened to undermine the framework that was essential to the proper functioning of the parties consensual resolution of their dispute; (2) demonstrated an intent to circumvent the authority of the Special Committee to review and approve, in advance, transactions enumerated within the Stipulation; or (3) merely feigned adherence to the high standard of corporate behavior that underlies the Settlement Stipulation.

The Affidavits of Richard M. Kerger and Harold E. Kelley, which were attached as exhibits to Report No. 1, indicated that the disturbing financial and management practices of Victor Posner continued unchecked within DWG notwithstanding the safeguards imposed under the Stipulation. Thus, judicial intervention was deemed necessary for enforcement o