Full opinion text
advisable to set forth chronologically certain facts concerning the several stockholders’ derivative actions affected by our decision of the main question before this court. On February 9, 1948, James F. Master-son of Philadelphia, Pa., started a stockholders’ derivative suit in the Circuit Court for Wayne County, Michigan, against Kaiser-Frazer Corporation and Otis & Co., et al., including certain of their officers and directors. Otis. & Co. was made a defendant because plaintiff sought to enjoin carrying out of a proposed sale of 1,500,000 shares of Kaiser-Frazer stock that Otis & Co. was supposed to take over that very day. Plaintiff also sought an accounting from certain defendants. The case was removed to this court May 21, 1948 and the complaint was twice amended to cover many of the same issues set forth in the other actions. Mr. Masterson owns 300 shares of Kaiser-Frazer stock. On February 13, 1948, Kaiser-Frazer Corporation commenced suit against Otis & Co. in the Southern District of New York, seeking damages based on the alleged breach of contract by Otis & Co. in refusing to fulfill the above agreement. On May 10, 1948 Michael Stella began a stockholders’ derivative suit in New York against Kaiser-Frazer Corporation and its directors and officers charging illegal manipulation of its stock. Stella owns 20 shares of Kaiser-Frazer. May 14, 1948, the Pergament and London action was started in this court against Kaiser-Frazer, et al. Originally it involved only the Graham-Paige and stabilization features, but was later amended to include the Trentwood plant (Permanente) and other transactions. Pregament has 300 shares and Dr. London 8 shares. June 30, 1948 Eva Lefker (25 shares) began a stockholders’ derivative suit against Kaiser-Frazer, et al., including officers and directors, in a Delaware U. S. District Court, based chiefly on transfer of the letter of intent by Kaiser-Frazer to Permanente coveringthe Trentwood, Washington, aluminum plant. July 2, 1948 Otis & Co a Cleveland brokerage house, started a similar action in Delaware against Kaiser-Frazer Corporation and certain officers and directors thereof. Otis & Co. owns or controls 10,763 shares of Kaiser-Frazer stock. Another suit was started against most of these defendants July 9, 1948 in the state court of California by Hazel C. Fleming, who held 40 shares (amended August 6, 1948 to include Joseph W. Piantanida who owns 80 shares). It attacked the stabilization and Permanente transactions. All suits, in general, charge breach of trust, fraud, collusion, etc., against these defendants. On or about September 21, or 25, 1949, Pergament and London, plaintiffs in this action, began conferences with defendants through their attorneys, having as their objective settlement of this and all derivative suits begun by stockholders. A settlement agreement was arrived at October 25, 1949. That proposed compromise is now before this court and if approved will serve to dismiss not only the Pergament-London action but will eliminate all other stockholders’ derivative suits heretofore started. It does not affect the Kaiser-Frazer Corp. v. Otis & Co. suit in New York. 8 F.R.D. 364. Notices to Stockholders. The first question presented relates to the sufficiency, legality and fairness of the notices sent to stockholders of Kaiser-Frazer informing them of the hearings on the proposed settlement agreement and the requested approval thereof by this court under Rule 23 (c) of the Rules of Civil Procedure for the District Court of the United States, 28 U.S.C.A. The notice was in the form of an order to show cause why the agreed settlement should not be approved, and set forth in better than general terms conditions of the agreement. The hearing was fixed by this court for the 6th day of December, 1949 at ten o’clock in the forenoon. The order was signed by us November 9, 1949 and the two weeks between December 6th and December 20th were devoted chiefly to clarifying the issues and recording ■ opening statements of the several parties present. The hearing was then adjourned to January 17, 1950 at ten o’clock in the forenoon. Because of the contentions, both factual and legal, advanced by those who appeared on behalf of certain stockholders objecting to the proposed settlement and who urged that the original notice of November 9, 1949 was misleading, untrue and legally ineffective, this court sought consent of all parties to the wording of a new notice aimed at eliminating claimed error in the original. During those two weeks of. argument this court also considered the advisibility of appointing counsel of its own but after having had an opportunity to evaluate the opposition, as demonstrated by counsel for objecting stockholders Lefker, Stella, Masterson and Otis & Co., this court was convinced that any. and all pertinent facts that could possibly be ferreted out, and all possible reasons legal or factual, pro and con, that could eventually be placed before this or any court, would be available to us. We were certain that the interests of the stockholders would not be jeopardized nor the battle lost “for want of a horseshoe nail”. In short the court was completely satisfied that any objections that might be advanced against the advisibility of approving this agreement would have a complete airing since the very talented battery of attorneys for objecting stockholders proved to us early in the hearings that they were able, resourceful, efficient, experienced and devoted to their clients’ respective claims, to such an extent as to be almost enthusiastically hostile to any person or thing that might at any time have come under the influence of Henry Kaiser or any of the “Kaiser Empire”. As for proponents, they had also secured counsel of equal ability and integrity. No testimony was taken during the December hearings and by December 20, 1949 our efforts to have all parties join in an amended notice to the stockholders had failed. In fact, it appeared to this court that certain objecting stockholders, through their counsel, were satisfied and anxious to prevent curing of any error there might have been in the original notice. However, over their objection but having in mind the object of Rule 23(c) we prepared a new notice and caused the same to be sent to all stockholders of defendant Kaiser-Frazer. We did not by such action intend to imply that any second notice was necessary or that there existed any defect or error in the original information given stockholders on the order to show cause. It was simply our intention to clarify what the objecting stockholders had criticized, to-wit, that the original notice was inadequate, unfair, fraudulent, misleading and had lulled stockholders into a feeling of security by asserting that the agreement covered certain considerations which objecting stockholders maintained it did not. Mullane, Special Guardian v. Central Hanover Bank & Trust Co., Trustee, 339 U.S. 306, 70 S.Ct. 652; In re Hansen’s Guardianship, 229 Iowa 914, 295 N.W. 429. The court believes that not only was the original notice ample, complete, sufficient and. fair, but that if there was any defect or error in that notice it was cured through the second notice wherein the stockholders were informed by overemphasis on the matters challenged by the objectors. Validity of Conferences, etc., by Which the Settlement Agreement Was Reached. Another issue which we must necessarily settle before proceeding is objecting stockholders’ contention that the proposed settlement agreement should not be approved because, first, it is not the valid act of Kaiser-Frazer or anybody competent to act for Kaiser-Frazer; second, it was not arrived at by arms-length bargaining in good faith; third, failure to include attorneys for objecting stockholders; and, fourth, there was collusion. This agreement is the result of several conferences between attorneys for certain plaintiffs, Pergament, et al., and defendants, either personally or by their attor ncys. Quite naturally we believe defendants were trying to get as favorable an agreement as they could. On the other hand the plaintiffs were trying to drive as good a bargain as they thought they could. Therefore, in considering these objections we examined Rule 23(c) which provides for the approval by this court of any such agreement. It states: “A class action shall not be dismissed or compromised without the approval of the court.” A settlement is a compromise and in order to acquaint ourselves with details of the agreement and the scope of approval we began hearing arguments. This court was interested only in the stockholders of Kaiser-Frazer and in our opinion these several lawsuits were a big detriment to future progress of this company. Technicalities were not to be permitted to erase or delay a fair settlement if one had been reached. Further hearings on the merits were to begin the l'7th day of January, 1950 and we instructed both sides that the intervening period should be utilized by the taking of depositions — this court going to the extent of compelling defendants to assure the presence of witnesses, who weie seemingly under their control, for cross-examination. The hearings reopened January 17, 1950 and we took testimony until the 10th day of March, compiling a record of over 7,000 pages. It is well to note here that this court did not hew to the line on the strict rules governing the admission of evidence. We permitted objectors, and to a limited extent, proponents, to put in practically every bit of testimony they could find, some of which was technically inadmissible, chiefly because we felt that objecting stockholders might be at a disadvantage if we adhered too strictly to the rules of evidence. Again, on March 10, after seven weeks of testimony, we adjourned the hearing to April 11, 1950 to permit the parties to take further depositions or even present further witnesses if they so desired. From the length of time consumed, the number of witnesses and exhibits, the depositions and the size of the record, it must be axiomatic that if the knowledge of all the attorneys representing the stockholders could have been added together, previous to or after negotiating this agreement, it could not have equalled or approached the facts that are now before this court. Each attorney may have known his own case but today we are all more enlightened and as we understand the duty of this court, it is — quoting from Winkelman v. General Motors Corporation, D.C., 48 F.Supp. 490, 493, “To see that the compromise is fair and reasonable under the circumstances and that no collusion or fraud has been practiced in the consummation of the settlement.” Our concern now is the contract that is presented to us for approval in the light of the information we have at present, not what we might have had when the agreement was reached. On that basis, we decide this case. Let us then make further inquiry. To begin with, counsel for objecting stockholders placed great stress on the fact that they were excluded from participating in the conferences leading to the agreement. Well — was that unexpected? It always has been the contention of defendants that these suits were engineered and instigated by outside forces, not for the purpose of helping Kaiser-Frazer or its stockholders but for the sole purpose of embarrassing the Kaisers as much as they could, even if it meant downfall of the corporation. While we do not inquire into plaintiffs’ motives in bringing their actions or whether they are the real parties in interest, Johnson et al. v. King-Richardson Co., 1 Cir., 36 F.2d 675, 67 A.L.R. 1465; Blum et al. v. Fleishhacker et al., D.C., 21 F.Supp. 527; Pollitz v. Wabash R. Co., 150 App.Div. 715, 135 N.Y.S. 789; Eshleman v. Keenan, 21 Del.Ch. 116, 181 A. 655, we may properly use the admitted facts to determine whether there existed a legitimate reason for the open ignoring of the parties and attorneys of the other stockholders’ derivative suits. The Masterson suit, the evidence shows, was brought at ten o’clock in the morning of the very day that Otis & Co. allegedly reneged on its stock sale agreement with Kaiser-Frazer. In fact it was Otis & Co.’s reason for not going on with its purchase. In addition, there was open association and exchange of information and legal conclusions by their respective counsel, one of whom was the attorney for two of the objecting stockholders including Otis & Co., which is defendant in the Kaiser-Frazer v. Otis suit. All of this obviously created more than an “air of suspicion” about these stockholders’ suits and much of the evidence tended to at least indicate that there might be some understanding or connection between Otis & Co. and the other objectors, more specifically Masterson, a former attorney for Otis & Co., and Eva Lefker. These facts do enter into the reasoning of defendants arid why they desired to do business with Pergament attorneys alone excluding those whom they believed were hostile to them and not particularly friendly to the great majority of Kaiser-Frazer stockholders. Furthermore, Henry Kaiser stated under oath that Mr. Eaton of Otis & Co. had at one time threatened a deluge of lawsuits following which testimony this court suggested that Mr. Eaton be brought in as a witness, or his deposition taken. Mr. Eaton has never denied — either as a witness in this court or by deposition — that he made this threat. So if defendants, Kaiser-Frazer’sdirectors and officers, and the Kaiser interests wanted to get these lawsuits out of the way, as evidence proved they did, certainly they would have been “babes in the woods” to have sought to negotiate with those who seemingly didn’t want a settlement except one they could dictate and therein exact admissions from defendants that they had been guilty of every abuse of trust, fraud, collusion and concealment known to business or law. In fact all through these hearings before this court attorneys for objecting stockholders continually belittled the Kaisers and the Kaiser-Frazer automobile which, in a competitive market, will have trouble enough without entering the economic battle scarred beyond recognition. We see no merit to objecting stockholders’ contention that they should have been consulted. Any intelligent group of defendants would have acted likewise. There is claim also by objecting stockholders that attorneys for plaintiff (Pergament) were in collusion with defendants. We saw no evidence of any such collusion. In all cases after attorneys have arrived at an agreement and it is desired to protect the several parties, it is usual for them to collaborate and make certain that nothing has been overlooked. Plaintiffs’ attorneys said that they thought they had driven a good bargain, utilizing to the extreme the knowledge that defendants, particularly the Kaisers, wanted all these lawsuits out of the way before going on the guaranties of the hoped for loan from RFC. It is no great wonder, and we don’t believe subject to the charge of collusion, that when the several attorneys had arrived at this point it was insisted by defendants that amendments be made to plaintiffs’ bill of complaint to include the other actions. Defendants would have settled on no other basis. They wanted — and rightly so — to put an end to what they then termed, these bickerings, snipings, and nuisance lawsuits that were interfering with the progress and success of the Kaiser-Frazer Corporation. And why shouldn’t they? Counsel for objecting stockholders also claim that in negotiating the settlement there was evidence that defendants and their counsel concealed very material facts that were developed at the hearings before the court; We can only say that that charge could be made in every lawsuit of this magnitude unless each particular action was tried to a conclusion before the settlement was reached. The important point is that this court — while not admitting that there was any such concealment— now has the facts. Objecting stockholders also contend that there was no arms-length bargaining; that the Kaiser-Frazer attorneys only gave plaintiffs’ counsel whatever facts they desired to give; that the proposed settlement was dominated by interests hostile to the stockholders and that the stockholders were not adequately represented, citing many cases in support of their position. May we not impress this observation, that if this were a plan that involved the setting aside of a transaction which had already been completely consummated and liad been found tainted with collusion, fraud, etc., and not in the best interests of the corporation, there would be merit to the objectors’ position. American United Mutual Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 61 S.Ct. 157, 85 L.Ed. 91; Twin-Lick Oil Co. v. Marbury, 91 U.S. 587, 23 L.Ed. 328; Strong v. Repide, 213 U.S. 419, 420, 29 S.Ct. 521, 53 L.Ed, 853; Roberts v. Michigan Trust Co., 273 Mich. 91, 262 N.W. 744; Baxter v. Union Industrial Trust & Savings Bank, 273 Mich. 642, 263 N.W. 762; Maas v. Lonstorf, 6 Cir., 194 F. 577. In fact most of the cases cited by objecting stockholders are distinguishable from the present case in that they involved suits to recoup losses resulting from a past transaction where the parties participating therein were acting in a fiduciary, representative or dual capacity and their good faith was challenged. In those cases the transactions had been consummated without full disclosure of all material facts; fraud was present or the fiduciary had an interest in the transaction resulting in profit to himself. . That directors and controlling stockholders or groups of controlling stockholders have a fiduciary responsibility to other smaller stockholders is unquestioned. Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281; Epstein v. U. S., 6 Cir., 174 F.2d 754; Wentz v. Scott, 6 Cir., 10 F.2d 426; Young Spring & Wire Corp. v. Falls, 307 Mich. 69, 11 N.W.2d 329; Mayflower Hotel Stockholders Protective Committee v. Mayflower Hotel Corp., 84 U.S.App.D.C. 275, 173 F.2d 416. If they have not acted in good faith or fraudulently and are found to have been in collusion with others the courts will not hesitate to set aside contracts or agreements so made. But those are cases where the proposed settlements were not in futuro. The deed had been done. However, some cases cited by the objectors are admittedly not in the above category. For example Feldman v. Pennroad Corporation, 3 Cir., 155 F.2d 733; Karasik v. Pacific Eastern Corporation, 21 Del.Ch. 81, 180 A. 604; Goodwin v. Castleton, 19 Wash.2d 748, 144 P.2d 725, 150 A.L.R. 859; Perrine v. Pennroad Corporation, Del.Sup., 47 A.2d 479; and Winkelman v. General Motors Corporation, supra. These cases are in point and are authority for the legal conclusion that if there’s fraud, collusion or unfair dealings on the part of the directors of the corporation in arriving at the settlement the court will set it aside. We have no quarrel with those decisions. But here we do not find any collusion, fraud, concealment or unfair dealing in arriving at the compromise and we hold there was “arms-length bargaining.” Incidentally, in those above cases the court also found that good faith had been exercised and then proceeded to approve the settlement as presented or on condition that certain changes be made. In Piccard v. Sperry Corporation, D.C., 36 F.Supp. 1006, 1009, application to approve of a compromise was denied because all the necessary facts in the determination of the cause were not before the court at the time the court was asked for its approval. It said: “The test is what is in the best interests of the corporation.” And Cohen v. Young decided in this circuit, 127 F.2d 721, indicates that it is the duty of this court to consider all available evidence and, if the settlement in light of this evidence is in the best interest of the corporation, to approve the plan. And while counsel for some of the other objecting stockholders might have been better informed of their own particular suits than counsel for Pergament who negotiated the settlement, we are basing our opinion on the agreement as we see it today, having advantage of the combined wisdom of all the attorneys — with all the facts — not only the information of any group or individual back in September, 1949, — bearing in mind that in a compromise neither side expects to get what it might win if successful. Usually a compromise agreement is not" a complete’ victory for one side or the other. The Applicable Law. It is for this court, therefore, to determine whether the terms and consideration of the proposed settlement agreement fairly approach the logical probabilities of returns on the several stockholders’ derivative actions hereinbefore enumerated. But the court must, of course, first decide what law is applicable. We do not follow the legal conclusions of objecting stockholders that all transactions between corporations having interlocking or common directorates or management are void because of a conclusive presumption of fraud, regardless of whether the transactions, when made, were fair or unfair. McKay v. Swenson, 232 Mich. 505, 205 N.W. 583; Patrons’ Mutual Fire Ins. Co. of Michigan v. Holden, 245 Mich. 493, 222 N.W. 754; People ex rel. Plugger v. Township Board of Overyssel, 11 Mich. 222; Miner v. Belle Isle Ice Co. et al., 93 Mich. 97, 53 N.W. 218, 17 L.R.A. 412; Veeser v. Robinson Hotel Co., 275 Mich. 133, 266 N.W. 54. Nor, on the other hand, do we accept defendants’ contentions that where there is such an interlocking directorate and a transaction between the corporations is attacked, the burden is on the complaining stockholder to prove that the transaction is fraudulent. Buck v. Tuxedo Land Co., 109 Cal.App. 453, 293 P. 122; Pauly v. Pauly, 107 Cal. 8, 40 P. 29, 48 Am.St.Rep. 98; Ewen v. Peoria & E. Ry. Co., D.C., 78 F. Supp. 312; Spiegel v. Beacon Participations, 297 Mass. 398, 8 N.E.2d 895; Everett v. Phillips, 288 N.Y. 227, 43 N.E.2d 18; Helfman v. American Light & Traction Co., 121 N.J.Eq. 1, 187 A. 540. But we do hold that where there exist common or interlocking directorates (as herein, between the several Kaiser corporations and Kaiser-Frazer) which have elected to do business with each other, and such contracts or exchanges are questioned by any stockholder, then the directors of the challenged corporation have the burden of proving that the transactions were fair, the result of good faith, and the exercise of their best business judgment. Most or practically all of these contracts were made in Michigan and to some extent both sides quote Michigan law and each claims that the law and the decisions favor its particular side. It is -apparently agreed that Michigan law governs. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487; Guaranty Trust Co. of New York v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079, 160 A.L.R. 1231; Klaxton Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477. And in the absence of any definitive Nevada law as to the obligations of a corporation’s officers and directors, Michigan law will be followed and is covered by Michigan Act No. 327, P.L.1931, Sec. 13(5), Mich.Comp.Laws 1948, Sec. 450.13, Subd. 5, Mich.Stat.Ann. 21.13(5) which reads: “No contract of any corporation made with any director of such corporation or with a partnership or other group or association of which any such director shall be a member or with any other corporation of which such director may be a member or director and wo contract between corporations having comnion directors shall be invalid because of such respective facts-alone. When the validity of any such contract is questioned, the burden of proving-the fairness to the contracting parties of any such contract shall be upon such director, partnership-, other group or association,, or corporation who shall be asserting the validity of such contract.” (Emphasis, ours.) It is the contention of objecting stockholders that the above statute has been interpreted as limited to those cases where-the corporation is represented by a quorum of disinterested directors or other independent officers or agents authorized to contract: for it; that in those instances where the directors have transacted business with the corporation and disinterested directors have not passed on the transaction, it is void,. citing Veeser v. Robinson Hotel Co., supra, and Patrons’ Mutual Fire Ins. Co. of Michigan v. Holden, supra, which appear to be in point. But other cases cited in objectors’ briefs are not in point because they involve transactions between directors and officers with their own corporations. Such contracts are usually held to be not void but voidable at the election of the party attacking them. The case at bar is one of interlocking directorates and the rule undoubtedly is that such transactions between corporations are voidable, but, fortunately for defendants, interpretation of the Michigan statute did not cease with the Veeser case, supra. In Wiseman v. United Dairies, Inc., 1949, 324 Mich. 473, 37 N.W.2d 174, 182, wherein the above statute was concerned, the court stated: “We conclude from all the testimony in this case that United acting through its directors, who were also directors of Belrose, purposely brought about a situation where Belrose was unable to protect itself against the demands of its creditors, to insure itself credit or to continue for itself the conduct of its business, all for the purpose on the part of United of acquiring the property of Belrose at forced sale figures and defrauding the creditors of Belrose. The directors of United could also lawfully act as directors of Belrose. The burden is on the directors of Belrose to prove that they acted fairly in the interests of Belrose.” (Emphasis ours.) It would thus appear that transactions between corporations having even identical boards of directors are sanctioned by the Michigan courts. See also Voight v. Remick, 260 Mich. 198, 244 N.W. 446; Stowe v. Fair Grounds Ass’n, 249 Mich. 107, 227 N.W. 702; Turner v. Calumet & Hecla Mining Co., 187 Mich. 238, 153 N.W. 718; and Aldine Manufacturing Co. v. Phillips, 129 Mich. 240, 88 N.W. 632. Here the burden under the Michigan law is on the defendants to prove the fairness of the contracts questioned, which entails good faith, good judgment, and an adequate consideration. It is doubtful whether the Michigan courts would even recognize the principle of the Veeser case today in view of the Supreme Court’s 1949 decision in Wiseman v. United Dairies, Inc., supra. See also Wise-man v. Musgrave, 309 Mich. 523, 16 N.W. 2d 60. The rule of the Sixth Circuit Court of Appeals appears to be the same. Epstein v. U. S., supra; Wentz v. Scott, supra. Also see Caldwell v. Dean, 5 Cir., 10 F.2d 299; Irving Bank-Columbia Trust Co. v. Stoddard et al., 1 Cir., 292 F. 815; Geddes v. Anaconda Copper Mining Co. et al., 254 U.S. 590, 41 S.Ct. 209, 65 L.Ed. 425. As to those cases where the directors are charged with acting negligently or in bad faith and the directors have no personal interest in the transaction, 19 C.J.S., Corporations, § 832, page 244 states: “The burden rests on a suing stockholder to prove his case generally, as by establishing claims of the officers’ and directors’ misconduct, mismanagement, waste, or receipt of excessive compensation * The burden of proof in the manipulation and Long Beach suits would then he on the objectors. See Nahikian v. Mattingly, 265 Mich. 128, 251 N.W. 421. We also hold that we should apply the law and view the transactions in the light of the facts existing at that time; not what happened later. In other words, we do not believe that hindsight (which is usually better) should be a yardstick of measurement against good intentions or what then appeared to be honest business judgment. Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503; Irving Bank-Columbia Trust Co. v. Stoddard et al., supra; Cleveland-Cliffs Iron Co. v. Arctic Iron Co., 6 Cir., 261 F. 15; Caldwell v. Dean, supra. And so having determined the law, we must take up each charge to learn whether or not plaintiffs in those cases have reasonable grounds for expecting that they would recover damages against these defendants or any of them, either in toto or of a sufficient amount so that the consideration provided in the agreement does not warrant our approval of the same. In this opinion, we, of course, do not aim to decide the several suits, nor do we intend to recite herein all the facts or law in dispute. Our aim is merely to cover the main questions and briefly to summarize them for higher court review so that this opinion can be held within some reasonable length. Doubtless appealing parties will be able to point out some fact omitted in some or all of these issues and claim much for the omission; but we must look at the over-all picture and reach a decision as to whether this proposed agreement should be approved even if there is a fair probability that there exists some merit to one or more of the claims of the suing stockholders. We have considered each individual action, and our reasons for the findings of fact and some conclusions of law concerning each will be found in full in the appendix hereto attached and made a part of this opinion. On the Merits Briefly, however, we state here that in our opinion there would in all probability be no recovery by the objecting stockholder plaintiffs in the following transactions: (a) the Trentwood; (b) Manipulation-Stabilization; (c) Kaiser Steel; (d) Kaiser Engineers; and (e) Long Beach-Rototiller. There might be a recovery of a comparatively small amount on the stock transfer valuation part of the Graham-Paige exchange; also on the Muntz car 'deal from Joseph Frazer, and possibly a small additional sum from Fleetwings. The Consideration This brings us to the final questions for this court to determine which are centered about the one word “consideration”, i. e. just what is the consideration, if any, to Ibe paid by defendants according to the proposed agreement and is it sufficient as a compromise to satisfy the probable value of these several stockholders’ derivative suits ? It is the contention of objecting stockholders that all the Kaiser-Frazer Corporation really receives is the sum of $500,000; that this is grossly inadequate and for this reason should not be accepted; furthermore it is objectionable because even the $500,000 is to be paid by only one of the defendants. On the other hand, proponents insist that in addition to the $500,000, the Henry J. Kaiser Company, and Kaiser Company, Inc., agree by this settlement to give the RFC a guaranty of $15,000,000 on a $44,-400.000 loan by RFC to Kaiser-Frazer (of which $10,000,000 is a revolving fund to the Kaiser-Frazer Sales Corporation) and that these guaranteeing corporations are obliged to actually pledge $10,000,000 in collateral. The giving of these guaranties alone— proponents claim — is worth between $3,-500.000 and $20,000,000 to Kaiser-Frazer. In addition and as further consideration certain presses long since owned by KaiserFrazer and loaned to the Fleetwings plant at Bristol, Pa., would' — according to this agreement — be purchased outright and paid for by Fleetwings at present book value, to-wit, $879,503.30. Let us examine this point, removing ourselves as far as possible from the somewhat exaggerated claims of both parties. This court is of the opinion that throughout this entire hearing too much emphasis was placed by the objecting stockholders on how the Kaiser interests would fare if this agreement were approved rather than considering and appraising whether the agreement helped the stockholders and was fair and reasonable to them. And we have been unable to find any rule in law or equity that requires that this court shall not approve a compromise agreement under Rule 23(c) unless by the terms of that compromise one of the parties thereto is financially annihilated. So this court has attempted to evaluate the consideration. In September of 1949 the Kaiser-Frazer financial situation was desperate. Its plant was shut down. Ten thousand men who had been employed were out of jobs. The result of their efforts, financial and physical, of building a sales organization was fast disintegrating. The dealers were stocked' with cars they couldn’t sell because while you could trade in almost any car and be sure that you would get a new model of the same make you couldn’t do this with a Kaiser or a Frazer. They weren’t being made. There were no new model Kaiser-Frazer automobiles on the floors of the dealers. The lush days were gone. The big companies were now making automobiles and the “waiting lists” for automobiles were gradually disappearing. Kaiser-Frazer needed money for new models, for new tools, dies, etc., because it was now beginning to face stiff competition. And to get that money an attempt had been made in February of 1948 to sell 1,500,000 new shares of Kaiser-Frazer stock at $11.50 per share but that deal fell through, due, as claimed by defendants in this suit, to the wrongful action of Otis & Co., the same company that is interested in one of the stockholders’ suits against these defendants and whose president, Cyrus Eaton, has allegedly sworn a vendetta against Henry Kaiser. So as matters progressed in September and it appeared that an RFC loan was possible (providing certain guaranties by the Kaisers were forthcoming) defendants evidently decided that this would be the propitious moment to get rid of these several lawsuits which threatened Kaiser-Frazer’s very existence. What appeared to be the final blow came when this court October 12, 1949, 93 F.Supp. 9 (written opinion filed) denied defendants’ motion for dismissal of the Pergament action and ruled that this (the Pergament) suit must be tried. It is not surprising that at this time also Mr. Henry Kaiser stated in no uncertain language that he would not attach his name, or give the backing of any company he controlled, on any guaranties to anybody unless these suits were settled and out of the way. This court once voiced the opinion that Mr. Kaiser might have gone on the guaranties anyway but the evidence shows that he said he would not and he might not have plunged a large part of his entire assets in protecting a company some of whose stockholders were seemingly trying to achieve his financial eclipse. Accordingly, the conferences with the RFC and the conferences between attorneys for plaintiffs in this case and the defendants, were carried on at practically the same time covering almost the same period; but, although the RFC loan was successfully negotiated before the settlement agreement was signed, sealed and delivered, this fact stands out; no commitment and no guaranties were ever given by the Kaisers to the RFC until November 9,1949, and this was after the settlement agreement had ■been signed by all parties, October 25, 1949. Let us again revert to previous days. On December 28, 1948, the Mellon and Giannini interests had extended credit to the Kaiser-Frazer Corporation to the extent of $20,000,000 on which the company had borrowed $16,000,000 but couldn’t get the other $4,000,000 without “upping” its current assets position. It was a short term loan due in less than 16 months — but it was then already in default. Now, the Kaiser interests had guaranteed that loan and had to maintain a net current asset position of $7,500,000 with the KaiserFrazer stock taken at market or cost, whichever was less, and the Permanente Metals stock at 50 per cent of the market. There were other restrictions against the Kaisers. Under the bank guaranties they could not sell any property in excess of $2,000,000 during the entire loan nor could they give any other guaranty, mortgage, pledge or hypothecate any other stock they owned. Furthermore the Henry J. Kaiser Company and Kaiser Company were restricted in the dividends they could issue while Kaiser Engineers couldn’t declare any dividends at all. That was a heavy stricture upon the Kaiser interests. No doubt of that. But the short loan was likewise a heavy stricture upon Kaiser-Frazer and there was this fact to be remembered, that Kaiser-Frazer at that time had plenty of assets to pay off its bank loan even if it were forced to do so by liquidation. If Kaiser-Frazer had been driven to failure because it had no money to continue the fight then the Kaiser interests, according to the record, would not have lost one cent by their bank guaranties because they were subrogated to the rights of the banks in the event of foreclosure. And, incidentally, the stockholders would have received very little, if anything. Not even objecting stockholders contend that KaiserFrazer should have been liquidated at that time. Ignoring for the moment the other objections raised concerning the consideration and guaranties and holding ourselves strictly to the guaranties being presented to the court as an act in futuro, let us analyze what happens by the new guaranties. Instead of a $16,000,000 indebtedness and liquidation Kaiser-Frazer now has a $44,-400,000 debt — but it has money to proceed in the manufacture of its new automobiles. Admittedly it needed that money either by loan or sale of stock and so it is again rising to the challenge and instead of being obligated to pay off the entire $16,000,000 loan — then in default — (due in less than 16 months) the new loan is spread over a period of ten years, the first payment not to be made until July 1, 1951. Kaiser-Frazer breathes again. It has the possibility of new life because part of the loan, perhaps $18,000,000, was earmarked for experimental purposes, tools, etc., for the next new model — Michigan people know the importance of the ever-anticipated “new model”. And so Kaiser-Frazer again cleared the decks by using the first $12,000,000 of its loan from RFC, and $4,000,000 of its own to repay the bank loans. In rebuttal the objecting stockholders point out that instead of the Kaiser interests being guarantors of $16,000,000 now they only guarantee $15,000,000. This must be admitted. But we do not follow the reasoning of objecting stockholders that this long time loan was in any sense a great advantage to the Kaiser interests but none to the Kaiser-Frazer Corporation. Anything may happen in the next ten years (including a world war that looms' large on the horizon as this opinion is being written) and certainly if the Kaiser-Frazer automobiles are not sold there will be at least a $34,000,000 indebtedness (omitting the $10,000,000 revolving fund) to be paid off out of the dwindling assets of Kaiser-Frazer as well as $13,000,000 which Kaiser-Frazer must pay to the War Assets Administration for the Willow Run plant for which the government bureau is also given priority by the Kaisers through the guaranties at the RFC. It doesn’t take an economist, a certified public accountant or business relations ad-visor to figure out that it is better to be endorser on the note of a man who can pay with his own assets than to be endorser on the note of the same man who is rapidly putting himself in a position where, if his business is not a success, you’ll have to pay at least part of his note. A further condition of the RFC guaranties is that the Kaiser interests pledge $10,000,000 in collateral actually taken out of their assets. Of course certain restric-tions existing in the previous agreement were removed and it may be that the change may prove to have been a good move on Kaiser’s part but there can be no denying that these new guaranties place at least $10,000,000 of Kaiser assets in jeopardy. Objecting stockholders also minimize the importance of the payment by Fleetwings to Kaiser-Frazer for the presses that KaiserFrazer originally purchased and left with Fleetwings to make certain parts of KaiserFrazer cars. Objecting stockholders say that Fleetwings had wanted to buy these assets right along because under the terms of the Metropolitan Life Insurance grant to it of $4,500,000 these presses were required as part of their assets. The practice of corporations furnishing equipment and financing suppliers into business is not unusual. It may look foolish to do such things but when you are a manufacturer afflicted with the “can’t get material” or “can’t get equipment” or “can’t get parts” disease you’ll do almost anything to assure yourself a source of supply. Kaiser-Frazer entered into this deal with Fleetwings. It paid the money for these presses, left them with Fleetwings to use. It may not have proven a profitable deal to Kaiser-Frazer but now Fleetwings finds that it needs some of this equipment to carry out its contract with Sears-Roebuck. It has to have something it doesn’t own. If it hadn’t been for the interlocking directorate so condemned by objecting stockholders, chances are that the needs of Fleetwings might never have become known to Kaiser-Frazer. Anyway, Kaiser-Frazer directors were under fire in a lawsuit involving these presses and we believe that helped in boosting the price to Fleetwings. If Fleetwings had gone bankrupt then the presses would be back in KaiserFrazer’s yard but because Fleetwings isn’t bankrupt and can use them almost $900,000 goes into the Kaiser-Frazer treasury. Objecting stockholders say this consideration doesn’t amount to anything. This court says it does. It must also be remembered that the Fleetwings deal was not completed until November 18 of last year after the first notice had gone out to the stockholders. In December 1949 Fleetwings paid KaiserFrazer $870,000 and although Fleetwings now owns these presses it is under agreement to Kaiser-Frazer to furnish certain parts if and when the occasion arises. This may become very important in the future. Another argument used by objecting stockholders as to why this agreement should not be approved is that Permanente is paying the entire $500,000 and that all other defendants get off “scot free”, citing Winkelman v. General Motors Corporation, supra, as authority. For three reasons this objection is of no value. First, we do not acquiesce in the reasoning that the $500,000 to be paid is the only consideration; second, those who signed the agreements did so as “individual defendants and corporate defendants” — and they agreed to see that the consideration was forthcoming; and, third, the case is not in point. We see no merit to this argument. We come then to the final objection raised by the objecting stockholders — that part of this consideration had already been paid when the first notices went out to the stockholders which makes it a “fait accompli” and cannot be accepted as consideration of an agreement “in futuro”. Here objecting stockholders forget recent history. They evidently do not remember that when it was announced that RFC was going to loan Kaiser-Frazer $44,400,000 a number of articles appeared in the public press indicating that a Congressional investigation to stop issuing of the loan was contemplated. This would have delayed matters. Objectors refuse to appreciate that this company was fighting for its life, and we anticipate that if the Kaiser interests had waited even until this day before giving these guaranties and before taking the risk that this court would not approve the settlement agreement some of these very stockholders would be suing the Kaisers on the theory that it was their duty to do the very thing which they now criticize them for doing. The Kaisers were caught between two fires and as soon as they knew the agreement was signed they quickly gave the guaranties and Kaiser- . Frazer got the money from RFC. The Kaisers seemingly have great confidence in the future success of Kaiser-Frazer’s product; a confidence, incidentally, that is evidently not shared by those who in this court profess to be acting solely on behalf of the best interests of the stockholders. While the Kaisers, in September 1949, were not in an enviably position so far as business reputation or pride might go if they had permitted the Kaiser-Frazer Corporation to sink they were probably not going to lose any money on their guaranties. Now, if Kaiser-Frazer fails they may lose all three — business reputation, pride and $15,-000,000. But we do not understand that the purpose of Rule 23(c) is properly construed by objecting stockholders as applying only to agreements that are entirely executory. As a matter of fact, we believe that those who were responsible for this rule had no such limitation in mind. But whether they did or did not, this Court is not going to lay down the rule that directors of corporations who may in the future be charged with breach of trust or fraud and who may be confronted with a situation that requires immediate action must not under any circumstances do what they honestly believe to be the proper thing until the court has had an opportunity to determine whether the agreement of compromise they may ■have entered into is good or bad. As stated in Illinois Pneumatic Gas Co. v. Berry, 113 U.S. 322, at page 327, 5 S.Ct. 525, at page 528: “ * * * Complaints that its own directors exceeded their authority come with ill grace when the acts complained of alone preserved its existence.” To this court it is an accepted principle of law that we may sanction an act Which we would have authorized in advance of its performance. Furthermore, it has been the rule for years that if a settlement is worthy of approval it is immaterial whether some or all of the benefits may already have been conferred pursuant to the agreement. Goodwin v. Castleton, 19 Wash.2d 748, 144 P.2d 725, 150 A.L.R. 859; Ashley v. Keith Oil Corporation, D.C., 73 F.Supp. 37; Brendle v. Smith, D.C., 7 F.R.D. 119; Denicke v. Angle California Nat. Bank, 9 Cir., 141 F.2d 285. Even an unauthorized act of the guardian ad litem may be later approved by the court. Metzner v. Newman, 224 Mich. 324, 194 N.W. 1008, 33 A.L.R. 98. This court’s position is unequivocal and we believe that if we were to consider it wrong for the Kaiser interests to have given the guaranties and thus saved this company, we would certainly be putting a premium on fear as against courage; and we would promote inequity instead of equity. We have no hesitancy in holding to the contrary. Conclusion on Consideration It is our opinion that the consideration here is divided into three phases — all of which are good — the guaranties, the Fleet-wings payment, and the $500,000 which add up to a formidable sum of money, and that we should not penalize those who, to aid this corporation, assumed the possibility of this court’s nonapproval of the compromise settlement agreed upon. In Summary and Conclusion In arriving at our final conclusion in this case after analysis of what we believe to be the important issues presented, we are convinced that because of the development of our economic system certain restrictions formerly surrounding transactions between interlocking directorates are no longer applicable. Our courts have narrowed the rule. And as we have examined these questions we have come to the conclusion and hold that in none of the transactions has there been any fraud, collusion or attempt on the part of the so-called Kaiser interests to benefit at the expense of KaiserFrazer. On the contrary Henry Kaiser has time and time again, according to the undisputed facts, come to the rescue whenever the Kaiser-Frazer Corporation appeared to be headed for financial disaster. He began early by endorsing bank loans and rather than ,be condemned in the Permanente case, he and his family should be commended because they took a plunge into the aluminum business that might have proved fatal — partly to be of service to KaiserFrazer in the future. We believe his interest in Kaiser-Frazer is more than financial — at times it is almost paternal— and it’s the paternalism that has gotten him into trouble. He wants Kaiser-Frazer to succeed. Everybody seemed satisfied to trust in Henry Kaiser until February 9, 1948 when the break came between the Kaiser interests and those of Otis & Co. No suit had been filed against these defendants until that day. And there is this to be remembered. These suits were not started because these stockholders had just become aware of the several interlocking deals. The evidence shows that Otis & -Co., the holder of the biggest block of stock in the suits pending, knew all about these transactions long before and acquiesced therein. It knew of the Graham-Paige and Permanente matters and yet it raised no objection. Other suits followed by objecting stockholders total-ling 465 shares with some additional from one Milton Lacks who appeared at the hearings and whose position, sometimes for —sometimes against — was uncertain until we received his brief. He now envisions the Kaiser-Frazer Corporation being unjustly enriched through the success of Permanente. As stated in the above some of these actions might prove partially successful but in a much lesser amount than claimed. Still we hold that were all of these probable recoveries added together they are more than met by the consideration set forth in the agreement. We hold that the $44,400,000 loan was of tremendous value to Kaiser-Frazer. It was the turning point from sure liquidation to a position that at least gives it a fighting chance to exist in a highly competitive business. We further hold that if, in addition to the total damages we believe might be recovered, stockholders were also successful in the Permanente suit, it should be based on the worth and value of the letter of intent given Kaiser-Frazer as of March 1946 which amount would also be amply covered under our interpretation of the value of the consideration in the proposed agreement. The stockholders of this corporation who favor the settlement agreement far outnumber those who are against it and while the motives of those who have brought stockholders’ suits cannot be considered this court has no desire to promote the destruction of a corporation by contentious litigations which will cover a period of years, just so a few may experience tremendous satisfaction therefrom. By the time those suits would be terminated probably all chance of the successful survival of Kaiser-Frazer will have long passed by the board; even though the result be a sweeping victory for defendants, which this court believes would happen. None of those objecting has shown a disposition to assume the burden that the Kaiser interests have undertaken and we anticipate that none of them will step forward in the near future. For the reasons stated we hold that the settlement agreement is fair, equitable and for the best interests of all the stockholders. It has our approval, and an order in conformity with this opinion may be submitted for our signature. The Appendix Graham-Paige Transaction One of the causes of action underlying the proposed settlement agreement involves Kaiser-Frazer’s purchase in December, 1946 of Graham-Paige’s automotive assets, including cash. After formation of Kaiser-Frazer in August, 1945, Graham-Paige and Kaiser-Frazer entered into a joint operating arrangement, September 20, 1945 in which it was agreed that Kaiser-Frazer would lease the Willow Run plant from the government for their joint use in the proportion of two-thirds for Kaiser-Frazer and one-third for Graham-Paige. Kaiser-Frazer received its lease November 1, 1945. It was contemplated that Graham-Paige would finance one-third the cost of equipping the plant and pre-production expenses incident to getting into the automobile business. The arrangement provided for in this Joint Operating Agreement did not prove satisfactory. As early as May of 1946, discussions were started between directors of both companies looking toward possible consolidation and Kaiser-Frazer postponed its plans to produce front wheel drive automobiles. It decided to manufacture the Frazer car with some changes and call it the “Kaiser Special”; entering into an agreement to that effect with Graham-Paige on June 21, 1946. September 1946 commercial production of the Kaiser Special got under way, the new arrangement providing that KaiserFrazer was to reimburse Graham-Paige for two-thirds of the engineering development and special tooling costs; purchase all special tooling thereafter required, to be reimbursed in the amount of one-third thereof by Graham-Paige; purchase all Graham-Paige’s automotive inventory and thereafter to assume the responsibility of buying all material and manufacturing supplies required for production. Graham-Paige agreed to reimburse Kaiser-Frazer for all expenses incurred by Kaiser-Frazer pursuant to production of the Frazer car and by the end of the year 1946, 3,933 Frazers and 7,471 Kaisers had been produced. Soon after the second agreement started it appeared that Graham-Paige might not be in a position to finance its share of the Willow Run production •, and by December this possibility had become definite. Merger of the two corporations was rejected as impracticable because of the variance between the relative market values of KaiserFrazer and Graham-Paige stock and their respective book values. Under these circumstances directors and representatives of their respective corporations undertook negotiations which resulted in an agreement whereby Kaiser-Frazer acquired all automotive assets of GrahanTPaige, including its interests in machinery and equipment at the Willow Run plant, its inventories, trademarks, good will, and the like, $1,250,000 in working capital and $3,000,000 in cash, in consideration of Kaiser-Frazer assuming certain Graham-Paige liabilities, paying the principal and interest on $&,- 524,000 of debentures, and transferring to Graham-Paige 750,000 shares of its common stock. In setting up this transaction on its books, Kaiser-Frazer entered the value of the 750,000 shares of -stock issued as $4,875,000 or $6.50 a share. After deducting' liabilities assumed, the net value of the tangible assets, consisting of machinery and equipment, cash and accounts receivable was entered on the books at $10,684,396 or $2,714,603 less than the consideration given as so calculated. Of this transaction the objectors complain bitterly. They contend it was a fraudulent deal, formulated, discussed and consummated over a weekend, without adequate records, without verifications of dollar values; and without an appraisal of the physical assets; that Kaiser-Frazer paid $2,714,000 for intangible assets without any effort by its board of directors to determine the value, if any, thereof, and that KaiserFrazer transferred 750,000 shares of stock at $1.62y2 less than the market and $3 below the book value, at a further cost to Kais’er-Frazer of $2,625,000 making the total overpayment to Graham-Paige the sum of $5,-339,000. They point out that Graham-Paige had no $3,000,000 cash to turn over to Kaiser-Frazer and that in order to get this sum it was necessary for Henry Kaiser and Joe Frazer to guarantee a bank loan to Graham-Paige for which the 750,000 shares of Kaiser-Frazer transferred to Graham-Paige was security with the right to vote this stock in the hands of Henry Kaiser and Joseph Frazer. They assert that as a result of this deal Henry J. Kaiser, without any expenditure on his part, secured voting control over an additional 9 per cent of Kaiser-Frazer stock, sufficient to insure . his control of that company. The record indicates that the plan was recommended to the Board of Kaiser-Frazer by Judge Samuel Roseman, Carl Owen and Arthur Ballantine, well-known and experienced lawyers, as well as George Bailey, Detroit partner of Ernst & Ernst, certified public accountants, who were intimately acquainted with the operation of Graham-Paige and Kaiser-Frazer and who, with the accounting firm of Haskins & Sells, had the responsibility of allocating costs under the joint operating agreement. It is.apparent that consummation of this plan was not a weekend affair. The facts clearly indicate that much discussion and negotiation was given to its formulation for several months prior thereto, that Bailey was well acquainted with the Graham-Paige finances, operations and the value of its property under the joint operating agreement. Further, practically all the fixed assets of Graham-Paige consisted of machinery and equipment in the Willow Run plant which had been purchased jointly with Kaiser-Frazer within one year of the date of the contract, making it possible for Kaiser-Frazer to have first-hand knowledge of the value of the assets received. It cannot .be said that Kaiser-Frazer did not fairly evaluate the tangible assets which were transferred nor can it be said that the plan was formulated without full discussion and negotiation on the part of Kaiser-Frazer. As to the intangibles the testimony was that this included (a) entire ownership and control of the automobile business theretofore operated on a joint basis with Graham-Paige; (b) entire benefit of the dealer organization theretofore jointly used by Kaiser-Frazer and Graham-Paige; (c) acquisition oí the patents, trademarks and trade names of Graham-Paige including the name “Frazer”, the Frazer car, and the good will and going concern value of Graham-Paige’s automobile business; (d) acquisition of the Graham-Paige distributor organization; (e) elimination of the legal problems and troubles arising out of the joint operation; (f) avoidance of difficult legal questions in the event of any insolvency proceedings resulting in -an operation of the Graham-Paige automobile business by a receiver; and (g) avoidance of the disastrous effect upon the business and credit of Kaiser-Frazer that a failure of Graham-Paige would necessarily entail. It also appears that Graham-Paige had spent over $8,000,000 for advertising, engineering, pre-product'ion expenses and the like, which was not reflected in the tangible assets. It is extremely difficult, if not impossible, to place a value on these intangibles. In the face of the assertions made by the objectors, it is our conclusion that these tangibles and intangibles were of sufficient value to Kaiser-Frazer that it was reasonable for the directors to assign that value to the assets which the consideration paid indicates, except possibly as reflected in the following: In support of its position that overpayment was made by Kaiser-Frazer, the objectors point out that the value of $6.50 per share assigned to the 750,000 shares of stock would give Graham-Paige approximately 20 per cent of the future income of Kaiser-Frazer, and that it was approximately $1.62i/4 below the market price at that time. Although the value of the stock subsequently rose, we must examine this transaction as of the time it occurred. Justification for this figure is based on the cost to Kaiser-Frazer if this stock had been sold through underwriters, which cost might closely approximate $1.50 per share. Further justification is based on the fact that this figure was suggested by Bailey. We find it difficult to justify defendant directors’ imposing an underwriting discount in the exchange of assets for stock between corporations having common directors. There seems to be no basis for comparison and the directors cannot excuse their actions by reliance on the opinion of Mr. Bailey. Here there is some evidence that the directors failed to prove that the deal was fair and equitable. We appreciate the fact that Graham-Paige had Kaiser-Frazer in a hole and knew it. This was an indirect result of the initial agreement. We also realize that Kaiser-Frazer was anxious to cancel this undesirable contract; but the burden is upon proponents, and particularly defendant directors, to prove the fairness of the exchange. The position of-Henry Kaiser in viewing the transaction not in terms of