## Facts

- Strawbridge & Clothier was a publicly held Pennsylvania department-store company historically controlled by founding families.
- Ronald Baron, a shareholder, opposed management’s strategy of remaining independent and organized entities (including Berry Acquisition Co.) to pursue a possible hostile acquisition.
- The board proposed a stock reclassification and related measures intended to deter hostile takeovers and maintain the existing control structure.
- The reclassification proposal was set for a shareholder vote at the annual meeting scheduled for July 23, 1986.
- Plaintiffs filed suit asserting individual and derivative claims under the Securities Exchange Act of 1934, civil RICO, and Pennsylvania corporate and fiduciary-duty law, alleging the plan was an entrenchment device and that disclosures were deficient.
- Plaintiffs sought a preliminary injunction to stop the vote and implementation; defendants moved to dismiss the derivative claims under Fed. R. Civ. P. 23.1 for lack of adequate representation.

## Issues

1. Whether plaintiffs satisfied the standards for a preliminary injunction to halt the shareholder vote and implementation of the reclassification plan.
2. Whether a shareholder actively pursuing control of the corporation through a hostile bid can fairly and adequately represent other shareholders in a derivative action under Rule 23.1.

## Decision

- The court denied the preliminary injunction and allowed the shareholder meeting and vote to proceed.
- The court granted defendants’ motion to dismiss all derivative claims under Rule 23.1 because Baron was not an adequate representative.
- Plaintiffs’ individual claims were not dismissed on the Rule 23.1 ground.

## Legal Principles

- Preliminary injunctive relief requires a sufficient showing of likelihood of success on the merits, irreparable harm, balance of hardships, and consistency with the public interest.
- In challenges to proxy-related conduct under the federal securities laws, injunctive relief generally requires a prima facie showing of materially false or misleading statements or omissions.
- Courts may decline to interfere with scheduled shareholder voting absent a strong showing of illegality or materially misleading disclosures.
- Under Fed. R. Civ. P. 23.1, a derivative plaintiff must fairly and adequately represent shareholders similarly situated; material conflicts of interest require dismissal of derivative claims.
- A shareholder acting as a hostile bidder may be inadequate as a derivative representative where the bidder’s objectives (including acquisition-related incentives) are antagonistic to other shareholders’ interests.

## Conclusion

The court refused to enjoin a contested anti-takeover reclassification vote because plaintiffs did not make the required preliminary showing of likely illegality or irreparable harm, and it dismissed derivative claims because the lead plaintiff’s status as a hostile acquirer created a disabling conflict under Rule 23.1.


Baron v. Strawbridge & Clothier, 646 F. Supp. 690 (E.D. Pa. 1986)