UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 5)*
TECHNICAL COMMUNICATIONS CORPORATION
(Name of Issuer)
Common Stock, $0.10 par value per share
(Title of Class of Securities)
878 409 101
(CUSIP Number)
M. Mahmud Awan, Ph.D. Paul Bork, Esq.
TechMan International Corporation Hinckley, Allen & Snyder
240 Sturbridge Road 28 State Street
Charlton City, Massachusetts 01506 Boston, Massachusetts 02109
(508) 248-3211 (617) 345-9000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications)
June 18, 1998
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box / /.
NOTE: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7(b) for other
parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior coverage page.
The information required on the remainder of this cover page shall not be deemed
to be Tfiled" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
1. Name of Reporting Person: M. Mahmud Awan
SS or IRS Identification Number of the Above Person:
2. Check the Appropriate Box if a Member of a Group: (a) [X]
(b) [ ]
3. SEC Use Only
4. Source of Funds: PF
5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items
2(d) or 2(e): [ ]
6. Citizenship or Place of Organization: USA
7. Sole Voting Power: 138,378 shares
8. Shared Voting Power: 0 shares
9. Sole Dispositive Power: 138,378 shares
10. Shared Dispositive Power: 0 shares
11. Aggregate Amount Beneficially Owned by Each Reporting Person: 138,378
shares
12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: [ ]
13. Percent of Class Represented by Amount in Row (11): 10.8%
14. Type of Reporting Person: IN
<PAGE>
1. Name of Reporting Person: Philip A. Phalon
SS or IRS Identification Number of the Above Person:
2. Check the Appropriate Box if a Member of a Group: (a) [X]
(b) [ ]
3. SEC Use Only
4. Source of Funds: PF
5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items
2(d) or 2(e): [ ]
6. Citizenship or Place of Organization: USA
7. Sole Voting Power: 2,250 shares
8. Shared Voting Power: 0 shares
9. Sole Dispositive Power: 2,250 shares
10. Shared Dispositive Power: 0 shares
11. Aggregate Amount Beneficially Owned by Each Reporting Person: 2,250 shares
12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: [ ]
13. Percent of Class Represented by Amount in Row (11): 0.2%
14. Type of Reporting Person: IN
<PAGE>
1. Name of Reporting Person: Robert B. Bregman
SS or IRS Identification Number of the Above Person:
2. Check the Appropriate Box if a Member of a Group: (a) [X]
(b) [ ]
3. SEC Use Only
4. Source of Funds: PF
5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items
2(d) or 2(e): [ ]
6. Citizenship or Place of Organization: USA
7. Sole Voting Power: 2,700 shares
8. Shared Voting Power: 0 shares
9. Sole Dispositive Power: 2,700 shares
10. Shared Dispositive Power: 0 shares
11. Aggregate Amount Beneficially Owned by Each Reporting Person: 2,700 shares
12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: [ ]
13. Percent of Class Represented by Amount in Row (11): 0.2%
14. Type of Reporting Person: IN
<PAGE>
1. Name of Reporting Person: William C. Martindale, Jr.
SS or IRS Identification Number of the Above Person:
2. Check the Appropriate Box if a Member of a Group: (a) [X]
(b) [ ]
3. SEC Use Only
4. Source of Funds: PF
5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items
2(d) or 2(e): [ ]
6. Citizenship or Place of Organization: USA
7. Sole Voting Power: 10,000 shares
8. Shared Voting Power: 67,000 shares
9. Sole Dispositive Power: 10,000 shares
10. Shared Dispositive Power: 67,000 shares
11. Aggregate Amount Beneficially Owned by Each Reporting Person: 77,000 shares
12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: [X]
13. Percent of Class Represented by Amount in Row (11): 6.0%
14. Type of Reporting Person: IN
<PAGE>
Item 1. Security and Issuer
The Statement of M. Mahmud Awan, Philip A. Phalon, Robert B. Bregman and
William C. Martindale, Jr. (the "Purchasing Group") on Schedule 13D dated April
3, 1998, as amended and supplemented by Amendment No. 1 dated May 15, 1998,
Amendment No. 2 dated May 22, 1998, Amendment No. 3 dated June 9, 1998, and
Amendment No. 4 dated June 15, 1998 in respect of the common stock, $0.10 par
value ("Common Stock"), of Technical Communications Corporation (the "Issuer")
whose principal executive offices are located at 100 Domino Drive, Concord,
Massachusetts 01742, is hereby amended and supplemented as follows:
Item 4. Purpose of Transaction
Item 4(d) is hereby amended and supplemented by the addition of the following
paragraph:
"On June 18, 1998, following a hearing, the Massachusetts Appeals
Court issued an Order denying the Issuer's appeal of the June 10, 1998
Order of the Massachusetts Superior Court, Middlesex County. The Order
of the Massachusetts Appeals Court is included in its entirety as an
exhibit to this statement and is incorporated herein by reference."
Item 7. Material to be Filed as Exhibits
Item 7 is hereby amended and supplemented by the addition of the following
schedule of exhibits attached hereto and incorporated herein with respect to the
lawsuit initiated by Purchasing Group members Mr. Phalon and Dr. Awan against
the Issuer and its directors (other than Philip A. Phalon) in the Massachusetts
Superior Court, Middlesex County, entitled Philip A. Phalon, and M. Mahmud Awan
v. Technical Communications Corporation, Arnold McCalmont, Herbert A. Lerner,
Robert T. Lessard, Carl H. Guild, Mitchell B. Briskin, Donald Lake and Thomas B.
Peoples, Civil Action No. 98-2553:
"Schedule of Exhibits
Exhibit 1........................Verified Complaint
Exhibit 2........................Memorandum of Decision and Order
Exhibit 3........................Order denying Issuer's appeal of
the Order of the Superior Court"
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: June 19, 1998 /s/ M. Mahmud Awan
________________________________
M. Mahmud Awan
/s/ *
________________________________
Philip A. Phalon
/s/ *
________________________________
Robert B. Bregman
/s/ *
________________________________
William C. Martindale, Jr.
*/s/ M. Mahmud Awan
________________________
M. Mahmud Awan
Attorney - in - Fact
<PAGE>
EXHIBIT 1
COMMONWEALTH OF MASSACHUSETTS
MIDDLESEX, ss. Superior Court
Civil Action No. 98-2553
____________________________________
)
PHILIP A. PHALON, and )
M. MAHMUD AWAN, )
)
Plaintiffs, )
)
v. )
)
TECHNICAL COMMUNICATIONS )
CORPORATION, ARNOLD MCCALMONT, )
HERBERT A. LERNER, ROBERT T. )
LESSARD, CARL H. GUILD, )
MITCHELL B. BRISKIN, DONALD )
LAKE, and THOMAS B. PEOPLES, )
)
Defendants. )
____________________________________)
VERIFIED COMPLAINT
Introduction
This is an action to enjoin the unlawful conduct of Defendants, Arnold
McCalmont, Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Mitchell B.
Briskin, Donald Lake, and Thomas B. Peoples in (i) breaching their fiduciary
duties to the stockholders of the Defendant, Technical Communications
Corporation ("TCC") by engaging in self-dealing transactions; (ii) engaging in a
cover up of wrongful and possibly fraudulent or criminal conduct by certain TCC
officers and directors; (iii) intentionally obstructing the Plaintiffs' efforts
to communicate with other TCC stockholders regarding the affairs of TCC; and
(iv) illegally acting to entrench themselves as TCC's Board of Directors. The
Plaintiffs seek mandatory injunctive relief under Massachusetts and federal law
requiring the Defendants to provide them with a list of all stockholders of TCC.
The Plaintiffs also seek an order rescinding and invalidating certain actions
taken by the Defendants McCalmont, Guild, Lessard, and Lerner, a majority of
TCC's Board of Directors, at a meeting held on April 30, 1998, and a declaration
that the amendments to TCC's By-Laws adopted at that meeting are null and void.
Parties
1. The Plaintiff, Philip A. Phalon ("Phalon"), is an individual whose
business address is 40 Salem Street, Lynnfield, Essex County, Massachusetts. He
is a director of TCC and the holder of approximately 500 shares of common stock,
par value $.10 per share, of TCC ("TCC Shares") and options to purchase an
additional 1,750 TCC shares.
2. The Plaintiff, M. Mahmud Awan ("Awan"), is an individual whose business
address is 240 Sturbridge Road, Charlton City, Worcester County, Massachusetts.
He owns directly and indirectly through a wholly owned corporation approximately
132,000 TCC Shares.
3. The Defendant, TCC, is a Massachusetts corporation with a principal
place of business at 100 Domino Drive, Concord, Middlesex County, Massachusetts.
TCC is in the business of providing secure telecommunications and encryption
systems. TCC is a public company whose shares are traded on the Nasdaq Stock
Market. At September 27, 1997 the end of TCC's most recent fiscal year,
approximately 1,283,000 TCC Shares were outstanding. Upon information and
belief, TCC's stockholders are resident in several states.
4. Defendant, Arnold McCalmont, whose business address is 100 Domino Drive,
Concord, Massachusetts, is a Director and stockholder of TCC.
5. Defendant, Herbert A. Lerner, whose business address is 100 Domino
Drive, Concord, Massachusetts, is a Director, Chief Financial Officer, the
Treasurer and a stockholder of TCC.
6. Defendant, Robert T. Lessard, whose business address is 100 Domino
Drive, Concord, Massachusetts, is a Director of TCC.
7. Defendant, Carl H. Guild, whose business address is 100 Domino Drive,
Concord, Massachusetts, is a Director of TCC, Chairman of the Board, and TCC's
Chief Executive Officer.
8. Defendant, Mitchell B. Briskin, whose business address is 100 Domino
Drive, Concord, Massachusetts, is a Director of TCC.
9. Defendant, Donald Lake, whose business address is 100 Domino Drive,
Concord, Massachusetts, is a Director of TCC.
10. Defendant, Thomas E. Peoples, whose business address is 100 Domino
Drive, Concord, Massachusetts, is a Director of TCC.
Jurisdiction and Venue
11. This court has jurisdiction over the dispute between the parties
pursuant to M.G.L. c. 212 ss.4, c. 214 ss.1, c. 231A ss.1, and c. 156B ss. 32.
12. This court is the proper venue for this action pursuant to M.G.L. c.
223 ss.1.
Background Facts
13. At least since the time TCC became a public company, Arnold McCalmont,
the company's founder, has effectively controlled TCC's board. His control has
been so pervasive that he was able to secure for his son, James McCalmont, a
position as a TCC director and senior officer. He was also able to secure for
his son, Marc McCalmont, a position at TCC, and to arrange for TCC to make
substantial cash investments in Net2Net Corporation, a business founded by
Stephen A. McCalmont, another of his sons. Arnold McCalmont has seen to it that
TCC's directors, other than Phalon, are beholden to him, willing and able to
acquiesce to his preferences in connection with the management of TCC's business
affairs, thus assuring his control.
14. TCC's Board of Directors, controlled by Arnold McCalmont, is currently
attempting to continue to pilfer from TCC's treasury at the expense of TCC's
stockholders, by entering into certain contracts with themselves and a wasteful
severance agreement with James McCalmont, whose resignation came under a cloud
of legal scrutiny of his actions as an officer of TCC. These actions constitute
such egregious waste as to be a breach of the duty of loyalty owed by McCalmont,
Guild, Lessard, and Lerner to TCC and its stockholders.
15. In 1997, Phalon became aware that the law firm of Gadsby & Hannah
("G&H") had been retained by TCC to investigate whether certain individual
officers, directors, and employees of TCC had engaged in conduct violative of
federal law, in connection with certain international sales projects.
16. Upon information and belief, G&H conducted a lengthy investigation
during November and December of 1997 and compiled a report (the "Slavitt
Report") on its investigation which included recommendation of actions to be
taken by or on behalf of TCC. This report was made available to the Board of
Directors and discussed in detail with representatives of G&H at a board meeting
held on January 8, 1998 at G&H, at which Phalon was present. Some of the
findings and recommendations contained in the Slavitt Report are more fully
described in the Affidavit of Phalon, attached hereto as Exhibit A (hereinafter
the "Phalon Affidavit"). Neither the Slavitt Report nor its contents were made
available to TCC's stockholders.
17. The information contained in the Slavitt Report raised serious concerns
regarding possible illegal and otherwise wrongful conduct by certain TCC
officers and directors, particularly James McCalmont, who resigned as a
Director, Officer and employee following the January 8, 1998 meeting, Defendant
Arnold McCalmont, and Defendant Herbert Lerner.
18. The Slavitt Report contained the recommendations of G&H that the
Defendants take certain actions to address the wrongful conduct uncovered by the
investigation, and obtain restitution from James McCalmont and Arnold McCalmont
for the benefit of TCC and its stockholders.
19. Phalon reviewed the Slavitt Report. At the conclusion of the meeting,
G&H collected from the TCC directors and officers all copies of the Slavitt
Report for purpose of shredding them. Evan M. Slavitt, the G&H lawyer who
authored the Slavitt Report, advised the directors that all paper copies would
be destroyed and that the document would only be retrievable from G&H's computer
system.
20. Upon information and belief, the Defendants McCalmont, Guild, Lessard,
and Lerner (hereinafter referred to as the "McCalmont Group") declined to
implement the recommendations contained in the Slavitt Report.
21. Subsequently, as more fully described in the Phalon Affidavit, the
individual Defendants have intentionally endeavored to conceal the results of
the investigation conducted by G&H and the Slavitt Report from the Plaintiffs
and TCC's stockholders, in derogation of the recommendations of the Slavitt
Report. The McCalmont Group at Arnold McCalmont's insistence have also
authorized and directed TCC to enter into illegal transactions with James
McCalmont and Carl Guild, having the effect of transferring assets from TCC by
submitting to James McCalmont's demand for an improper indemnity agreement, and
also by providing Carl Guild with a lucrative employment arrangement involving
excessive stock options and salary.
22. The McCalmont Group terminated the employment of TCC's Chief Financial
Officer, Graham Briggs, on January 14, 1998, for refusing to execute a
confidentiality agreement regarding the Slavitt Report and for refusing to
participate in the effort to cover up self-dealing sponsored by Defendants
McCalmont, Guild, Lessard, and Lerner.
23. Following the January 14, 1998 board meeting, Mr. Phalon informed the
McCalmont Group that he would not stand for reelection with them, and that he
would consider supporting an opposition slate for election as directors.
24. The McCalmont Group terminated the employment of TCC's President,
Roland S. Gerard, on February 13, 1998, for refusing to participate in the
effort to cover up the wrongful conduct described in the Slavitt Report and the
self-dealing transactions sponsored by the Defendants McCalmont, Guild, Lessard,
and Lerner.
Formation of Shareholder Response
25. On April 3, 1998, the Plaintiffs, together with two other TCC
stockholders, Robert B. Bregman, and William C. Martindale, Jr., filed a Joint
Statement on Schedule 13D with the Securities Exchange Commission ("SEC") in
which they disclosed beneficial ownership in excess of 5% of TCC's then
outstanding shares and that they had formed a "group" (the "Group") within the
meaning of Section 13(d)(3) of the Securities and Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C., ss.78(d)(3). At that time, the Group disclosed that
it was considering the costs and benefits of conducting a proxy contest to
replace a majority of TCC's Board of Directors with nominees selected by the
Group, in response to certain business and financial problems plaguing TCC.
26. At the time it filed the Joint Statement on Schedule 13D, the Group, in
the aggregate, beneficially owned 197,228 TCC Shares representing approximately
15.4% of the outstanding TCC Shares.
Stockholder List Demand
27. Pursuant to M.G.L. c. 156B ss.32 and Article V(6) of TCC's By-Laws, TCC
is required to maintain and to make available for inspection for any proper
purpose its stock and transfer records, including the names, record address, and
amount of stock held by each stockholder.
28. In furtherance of his objective to communicate with other TCC
stockholders in connection with evaluating the costs and benefits of conducting
a proxy contest to elect the Group's nominees as directors at the 1998 Annual
Meeting, Mr. Phalon made a written demand (the "Demand Letter") to TCC on April
8, 1998, pursuant to M.G.L. c. l56B, ss.32 and principles of equity and common
law, to inspect TCC's stock and transfer records. A true and accurate copy of
the Demand Letter is attached hereto as Exhibit B. As set forth in the Demand
Letter, its purpose "is to enable [Mr. Phalon] to identify and communicate with
[his] fellow stockholders on matters relating to their investment in the Company
and the affairs of the Company."
29. Among the items requested by Mr. Phalon in the Demand Letter was a list
of TCC's stockholders (the "Stockholder List"), and a list of non-objecting
beneficial owners (the "NOBO List") which is available to TCC from brokers and
dealers and from banks pursuant to Rules 14b-1 and 14b-2 promulgated under the
Exchange Act. The NOBO List would include the names of those beneficial owners
of TCC stock, whose stock is held in "street" name by a broker, financial
institution or other fiduciary, and who do not object to their names being
disclosed. Mr. Phalon also requested that he be permitted to inspect the
following: (i) a complete list of TCC's stockholders as of the close of business
on April 1, 1998, and any later record date established for the next Annual
Meeting of Stockholders; (ii) a magnetic computer tape list of the holders of
TCC's Shares as of April 1, 1998 and such Record Date; (iii) all daily transfer
sheets showing changes in the list of TCC's stockholders from April 1, 1998 and
such Record Date to and including the date of the next Annual Meeting; (iv) all
information in TCC's possession concerning the number and identity of the actual
beneficial owners of TCC's Shares; and (v) a listing as of April 1, 1998 and
such Record Date of all stockholders owning 1,000 or more TCC Shares arranged in
descending order (collectively items (ii)-(v) are hereinafter referred to as the
"Related Materials").
30. Mr. Phalon's purpose in obtaining the Stockholder List, the NOBO List,
and the Related Materials is to permit him to communicate directly, more
expeditiously and more effectively with fellow TCC stockholders. Mr. Phalon does
not seek to secure this stockholder list information for the purpose of selling
the information or for any reason other than in his interest as a stockholder
with respect to the affairs of TCC.
31. On April 13, 1998, TCC's clerk replied to Mr. Phalon, stating only that
TCC was "considering how to best accommodate the scope and purpose of [Phalon's]
request under both federal and Massachusetts law and will respond shortly."
32. On April 24, 1998, more than two weeks after Mr. Phalon first demanded
access to the Stockholder List, the NOBO List, and the Related Materials, G&H
forwarded to Plaintiffs' counsel, a proposed Confidentiality and Nondisclosure
Agreement (the "Confidentiality Agreement"). Neither the Confidentiality
Agreement nor the accompanying letter from TCC's counsel responded to Mr.
Phalon's requests for the Stockholder List, the NOBO List, or the Related
Materials. A true and accurate copy of this Confidentiality and Nondisclosure
Agreement and the cover letter from G&H is attached hereto as Exhibit C.
33. The Confidentiality Agreement represented an improper restriction on
Mr. Phalon's access to the Stockholder List, well beyond the statutory
confidentiality and nondisclosure requirements imposed upon stockholders. In
particular, TCC insisted that Mr. Phalon not transfer or disseminate such list,
even to other TCC stockholders, unless the Confidentiality Agreement was signed
by the party to whom the list would be disclosed, and the signature page first
returned to G&H, notwithstanding that Mr. Phalon agreed to use the list solely
in the interest of himself as a stockholder, relative to the possible
solicitation of written proxies. The Confidentiality Agreement also sought to
impose upon Mr. Phalon liability for any and all costs, expenses, and attorneys
fees incurred by TCC in connection with any dispute with Mr. Phalon relative to
the Stockholder List.
34. On April 29, 1998, Mr. Phalon's counsel responded to G&H, indicating
that while Mr. Phalon was fully prepared to honor all lawful requirements with
respect to his use of the Stockholder List and Related Materials, Mr. Phalon
would not agree to otherwise restrict his use of the list as proposed by TCC.
35. The Defendants have not provided the Plaintiffs with access to the
Stockholder List, the NOBO List, or the Related Materials or made the
appropriate acknowledgments required under Rule 14a-7, promulgated under the
Exchange Act.
36. Upon information and belief, TCC caused the Confidentiality Agreement
to be forwarded to Plaintiffs' counsel for the purpose of delaying production of
the Stockholder List, the NOBO List, and the Related Materials, and in order to
illegally interfere with the Plaintiffs' ability to communicate with other TCC
stockholders regarding the affairs of TCC in violation of Massachusetts and
federal law.
Demand For Annual Meeting
37. Pursuant to Article I(1) of TCC's By-Laws, the annual meeting of
stockholders (the "Annual Meeting") must be held on the second Monday in
February of each year, making February 9, 1998 the Annual Meeting date for this
year. Article IV(4) of TCC's By-Laws requires the Board of Directors to fix in
advance a time, not more than sixty days preceding the date of any stockholder
meeting, as the record date for determining voting eligibility at any upcoming
stockholder meeting (a "Record Date").
38. Pursuant to M.G.L. c. 156B ss.33, TCC's Annual Meeting must occur
within six months of the end of its fiscal year. TCC's fiscal year ended on
September 27, 1997. Thus, TCC was required by statute to schedule the Annual
Meeting no later than March 26, 1998.
39. TCC failed to hold the Annual Meeting within the time required by
Section 33 of Chapter 156B, and also failed to hold the Annual Meeting as
required by TCC's By-Laws. As of April 29, 1998, no Record Date had been set,
the Annual Meeting had not been held, nor had any notice of same been
transmitted by TCC's clerk to stockholders entitled to vote thereat, as required
by Article I(3) of TCC's By-Laws and M.G.L. c. 156B, ss. 36.
40. On April 29, 1998, and in anticipation of a meeting of TCC's Board of
Directors scheduled for April 30, 1998, Plaintiffs made a written demand to TCC,
pursuant to Chapter 156B of the Massachusetts General Laws and principles of
equity and common law, that TCC's Board of Directors immediately act to
establish a Record Date for the 1998 Annual Meeting and establish a date for the
1998 Annual meeting (the "Second Demand Letter"). A true and accurate copy of
the Second Demand Letter is attached hereto as Exhibit D. The Second Demand
Letter also placed TCC and the McCalmont Group on notice that the Board's
failure to establish a Record Date in a timely fashion, as required by law,
constituted a breach of fiduciary duty owed to all TCC stockholders, and a
further act of entrenchment.
Entrenchment Actions
41. On April 30, 1998, a quorum of TCC's board of directors met (the "April
30th Meeting"). This meeting lasted only fifteen minutes, in contrast to typical
TCC board meetings, which usually lasted for hours. At this meeting, the
McCalmont Group without discussion and over the objection of Phalon, purported
to amend the By-Laws of TCC to provide for the creation of three classes of
directors and to create staggered terms for all directors by class, such that a
maximum of three directors would stand for reelection at any one time. Class One
Directors become eligible for reelection at the date of the first annual meeting
following the April 30th Meeting. Class Two Directors become eligible for
reelection at the date of the second annual meeting following the April 30th
Meeting. Class Three Directors become eligible for reelection at the date of the
third annual meeting following the April 30th Meeting. Mr. Phalon was designated
as a Class One Director.
42. At the April 30th Meeting the McCalmont Group purported to fill three
director vacancies with individuals never previously identified to the Board,
who are directly or indirectly personal friends and associates of Arnold
McCalmont and his cronies. Upon information and belief, Defendant Briskin is a
private investor who directly or indirectly has made a large investment in
Net2Net Corporation, a business created by Arnold McCalmont's son, Stephen;
Defendant Lake is a commercial banker who has handled Arnold and James
McCalmont's personal international banking transactions; and Defendant Peoples
was a former subordinate of Defendant Guild when both were at Raytheon Company.
Two of those three director vacancies were designated as Class Three Directors,
with terms which do not expire until the annual meeting of Stockholders to be
held in the year 2000. Only after taking these illegal entrenchment actions was
a Record Date of May 29, 1998 fixed, and the Annual Meeting scheduled for July
17, 1998.
43. As a result of the amendment of TCC's By-Laws at the April 30th
Meeting, TCC's stockholders were unilaterally deprived of the right to
determine, by simple majority as set forth in TCC's By-Laws, whether TCC should
adopt a staggered Board scheme. Any action by TCC's stockholders to return to a
non-staggered Board, and thereby to provide themselves with the power to replace
the existing Board in a single election, must now be decided by a 2/3
"supermajority" of voting eligible stockholders.
44. As a result of the actions taken by the McCalmont Group at the April
30th Meeting, the individual Defendants, with the exception of Defendant
Briskin, have unilaterally provided themselves with terms as directors, longer
than those to which they would otherwise have been entitled prior to the April
30th Meeting by more than doubling said terms, and have unilaterally deprived
TCC's stockholders of the opportunity to elect a new board at the 1998 Annual
Meeting. The McCalmont Group at Arnold McCalmont's direction, has taken these
actions without regard for TCC's stockholders, for the purpose of enabling
McCalmont, his family, and his cronies, including Defendant Guild, to continue
to line their pockets with pelf taken from the treasury of TCC.
45. Upon information and belief, the Defendants McCalmont, Guild, Lessard,
and Lerner have delayed and resisted in providing the Plaintiffs with
stockholder information, in order to prevent the Plaintiffs and TCC's
stockholders from discovering the truth about the wrongful conduct uncovered by
G&H and described in detail in the Slavitt Report, and to prevent the Plaintiffs
from undertaking any meaningful contest to replace the individual Defendants.
Given that the Group owns less than 20% of TCC's voting securities, any
impediments that the Defendants can create to the Plaintiffs' ability to
communicate directly with TCC stockholders will assist the individual Defendants
in ensuring their own entrenchment.
46. In the aggregate, the McCalmont Group has a small economic interest in
TCC which makes their entrenchment actions of April 30, 1998 so outrageous.
According to the TCC Proxy statement for the last meeting of its Stockholders
held in February 1997, Arnold McCalmont beneficially owned less than 12,000 TCC
Shares (less than 1% of the outstanding), excluding 22,727 beneficially owned by
sons James and Marc. Defendant Lerner beneficially owned 2,736 TCC Shares, and
Defendant Lessard owned no TCC Shares. Defendant Guild's ownership is unknown
but in the absence of an appropriate filing under the Exchange Act is assumed to
be less than 5% of the outstanding TCC Shares. Thus, the McCalmont Group, who in
the aggregate own less than 6% of the outstanding equity of TCC, are illegally
controlling the corporation.
COUNT I
(Breach of Fiduciary Duty/Injunctive Relief - Entrenchment)
47. Plaintiffs repeat and reallege paragraphs 1 through 46, above, with the
same force and effect as if set forth in full herein.
48. As Directors, the individual Defendants owed fiduciary duties to TCC's
Stockholders, including the Plaintiffs, not to cause the company to take actions
solely for their personal advantage or to the unique disadvantage of the
Plaintiffs or other TCC' stockholders.
49. By undertaking to entrench themselves in control of the Board of
Directors of TCC, the individual Defendants have violated their fiduciary duties
to the Plaintiffs by:
(a) using corporate processes for the sole purpose of illegally
maintaining their control over the affairs of TCC;
(b) entering into self-dealing transactions with the company for the
sole purpose of financially benefiting themselves;
(c) actively attempting to withhold the results of the investigation
conducted by G&H from the Plaintiffs and TCC's stockholders;
(d) amending TCC's By-Laws so as to deprive the Plaintiffs and TCC's
stockholders of the opportunity to decide by simple majority
whether TCC should have a staggered Board scheme; and
(e) unilaterally amending TCC's By-Laws to provide illegal extensions
of the terms in office of the Individual Defendants.
50. The individual Defendants have further violated their fiduciary duties
to the Plaintiffs and intend to do so in the future by, among other measures,
maintaining themselves and their nominees to TCC's Board of Directors and
establishing without consent of and notice to the stockholders supermajority
requirements in connection with certain stockholder votes.
51. The Plaintiffs have and will continue to suffer irreparable injury in
the absence of immediate injunctive relief in the form of an Order requiring the
individual Defendants to rescind and otherwise invalidate any and all amendments
to TCC's By-Laws which were voted upon at the April 30 Meeting.
52. Absent such an Order, the Plaintiffs and other TCC Stockholders will be
unable to reverse the wrongful and illegal actions of the individual Defendants
absent a supermajority vote by those stockholders entitled to vote at the Annual
Meeting.
53. The Plaintiffs have no adequate remedy at law.
COUNT II
(Breach of Fiduciary Duty/Injunctive Relief -
Production of Stockholder List, Pursuant to M.G.L. c. 156B ss.32)
54. Plaintiffs repeat and reallege paragraphs 1 through 53, above, with the
same force and effect as if set forth in full herein.
55. Pursuant to M.G.L. c. 156B, ss.32 and the common law, the Plaintiffs as
stockholders of TCC are entitled to inspect and copy all stockholder lists
maintained by or reasonably available to TCC, including, without limitation, the
Stockholder List, NOBO List, and the Related Materials.
56. TCC's refusal to make these lists available to the Plaintiffs violates
the Plaintiffs' statutory and common law rights.
57. The Plaintiffs will suffer irreparable injury in the absence of
immediate injunctive relief compelling the Defendants to produce a Stockholder
List and NOBO List to enable the Plaintiffs to communicate directly with their
fellow stockholders prior to the Annual Meeting, as well as the other materials
requested in the Demand Letter.
58. Absent these lists, the Plaintiffs are unable to communicate directly
with both record holders and non-objecting beneficial owners of TCC Shares.
Moreover, absent these lists, the Plaintiffs have no assurance that any proxy
solicitation materials or other communications will reach such beneficial
owners, whose shares are held in "street name" in a timely manner, if at all.
59. The Plaintiffs have no adequate remedy at law.
COUNT III
(Violation of SEC Rule 14a-7, 24 C.F.R. ss. 240.14a-7)
60. Plaintiffs repeat and reallege paragraphs 1 through 59, above, with the
same force and effect as if set forth in full herein.
61. Pursuant to Rule 14a-7 promulgated by the SEC under the Exchange Act,
as amended ("Rule 14a-7"), a registrant, such as TCC, intending to make a proxy
solicitation in connection with a stockholder meeting, upon the written request
by any record or beneficial holder of securities entitled to vote at said
meeting, must deliver to the requesting stockholder within five business days of
its receipt of the request notification as to whether the registrant has elected
to mail the stockholder's soliciting materials or provide a security holder
list, and a statement of the approximate number of record holders of the
registrant's securities separated by type of holder and class, and the estimated
cost of mailing a proxy statement, form of proxy, or other communication to the
registrant's stockholders.
62. On April 8, 1998, Mr. Phalon made written request to TCC that it
provide a list of security holders pursuant to Rule 14a-7.
63. At the April 30th Meeting, a Record Date of May 29, 1998 was set for
TCC's 1998 Annual Meeting.
64. Notwithstanding, the Plaintiffs' written request, TCC has failed: (i)
to notify the Plaintiffs as to whether it has elected to mail their soliciting
materials or related communications to its stockholders or provide a list of its
stockholders; (ii) to provide to the Plaintiffs a statement of the approximate
number of record and beneficial holders of TCC securities; and (iii) to provide
the Plaintiffs with the estimated cost of mailing a proxy statement, form of
proxy, or other communication, all as required by Rule 14a-7.
65. TCC's failure to comply with Rule 14a-7 violates the provisions of said
rule.
66. As a result of TCC's violation of Rule 14a-7, the Plaintiffs have been
and are continuing to be damaged.
COUNT IV
(Declaratory Judgment)
67. Plaintiffs repeat and reallege paragraphs 1 through 66, above, with the
same force and effect as if set forth in full herein.
68. The actions taken by a majority of TCC's Board of Directors at the
April 30th Meeting were illegal acts of entrenchment, motivated by the desire of
the McCalmont Group to secure their control of TCC.
69. An actual controversy has arisen between the Plaintiffs and the
Defendants regarding the validity of the actions taken by a majority of TCC's
Board of Directors at the April 30th Meeting.
70. Pursuant to M.G.L. c. 231A, the Plaintiffs are entitled to a
declaration that all amendments to TCC's By-Laws adopted at the April 30th
Meeting, and TCC's Amended and Restated By-Laws, are invalid, null, and void.
<PAGE>
WHEREFORE, Plaintiffs pray as follows:
1. For a preliminary and permanent injunction restraining and enjoining the
individual Defendants from taking or preventing any stockholder action to or by
reason of any amendments to TCC's By-Laws effectuated at the April 30th Meeting;
2. For a preliminary and permanent injunction compelling the individual
Defendants to immediately convene a quorum of TCC's Board of Directors and to
take any and all actions necessary to rescind and revoke all amendments to TCC's
By-Laws enacted at the April 30th Meeting, and to rescind the filling of
director vacancies carried out at the April 30th Meeting;
3. For a preliminary and permanent injunction restraining and enjoining the
individual Defendants from taking any action to fill director vacancies, and/or
amend TCC's By-Laws or Articles of Organization, until the 1998 Annual Meeting
has occurred;
4. For a preliminary and permanent injunction compelling the Defendants to
produce for Plaintiffs' inspection and copying the Stockholder List, the NOBO
List, and the Related Materials, as defined in greater detail in Paragraph 29 of
this Verified Complaint;
5. For a Declaration that all Amendments to TCC's By-Laws adopted by the
vote of the Directors at the April 30th Meeting, are invalid, null, and void;
6. For an order awarding the Plaintiffs their costs; and
<PAGE>
7. For such other and further relief as the Court deems just and proper.
Respectfully submitted,
PHILIP A. PHALON, and M. MAHMUD AWAN,
By their attorneys,
/s/Paul Bork
Paul Bork (BBO #541815)
William Grimm (BBO #212120)
Mark Resnick (BBO #559885)
HINCKLEY, ALLEN & SNYDER
28 State Street
Boston, Massachusetts 02109
(617) 345-9000
<PAGE>
VERIFICATION
I, Philip A. Phalon, state that I am a director and stockholder of
Technical Communications Corporation, that I have read the foregoing verified
complaint and am familiar with the contents thereof, and that the facts set
forth therein are true of my own personal knowledge, except those facts set
forth on information and belief, and as to those, I believe them to be true.
Signed under the penalties of perjury this 18th day of May, 1998.
/s/Philip A. Phalon
Philip A. Phalon
<PAGE>
EXHIBIT 2
COMMONWEALTH OF MASSACHUSETTS
COUNTY OF MIDDLESEX
THE SUPERIOR COURT
CIVIL DOCKET #MICV98-02553
Phalon (IMPOUNDED) et al,
Plaintiff(s)
vs.
Technical Communications Corp. et al,
Defendant(s)
TEMPORARY INJUNCTION
TO:
Agents, Attorneys and Counselors, and each and every of them,
GREETING:
WHEREAS, it has been represented unto us in our SUPERIOR COURT, by Philip
A. Phalon (IMPOUNDED) M. Mahmud Awan (IMPOUNDED) plaintiff(s), that he, said
plaintiff(s), has filed a complaint in our said Court against you, the said
defendant(s) Technical Communications Corp. pray for a Writ of Injunction
against you, to restrain you and the persons before named from doing certain
acts and things in said complaint set forth, and hereinafter particularly
specified and mentioned.
We, therefore, in consideration of the premises, do strictly enjoin and
command you the said defendant(s), and all and every the persons before named,
be and hereby are ordered to mail a copy of the proxy statement submitted by the
plaintiffs to the SEC to each and every stockholder of the corporation on or
before June 17, 1998 and further that it shall not provide the plaintiffs with a
copy of the shareholder list but shall maintain a full and complete list of all
shareholders to whom the proxy statement has been sent and shall file an
affidavit of compliance with this order on or before July 3,1 998 and further
the cost of the mailing and copying shall be born by the plaintiffs; and further
we command you said defendants from implementing the votes taken at the meeting
held on April 30, 1998 adopting the provisions of GL c 156B, ss.50A and
restructing the terms of the Board of Directors to staggered terms and further
this order is continued upon the plaintiffs posting a bond in the amount of Ten
Thousand Dollars or in lieu thereof, depositing the amount with the Clerk of
court, until the further order of our Court, or some Justice thereof.
Witness, Robert A. Mulligan, at Cambridge, this 10th day of June, in the
year of our Lord 1998.
/s/ Clerk
Clerk.
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
MIDDLESEX, ss. CIVIL ACTION
No. 98-2553
PHILIP A. PHALON et al.
Plaintiffs
v.
TECHNICAL COMMUNICATIONS CORPORATION et al.
Defendants
MEMORANDUM OF DECISION AND ORDER ON
PLAINTIFF'S APPLICATION FOR A PRELIMINARY INJUNCTION
In this action, the plaintiffs Philip A. Phalon and M. Mahmud Awan are
seeking injunctive and declaratory relief. The plaintiff Phalon is a stockholder
and director of the defendant Technical Communications Corporation (TCC), a
publicly held Massachusetts corporation; the plaintiff Awan is a stockholder.
The defendants Arnold McCalmont, Herbert A. Lerner, Robert T. Lessard, Carl H.
Guild, Mitchell B. Briskin, Donald Lake and Thomas B. Peoples are directors of
TCC.
In their complaint, the plaintiffs allege in Count I a breach of fiduciary
duty resulting from By-Law changes alleged to entrench themselves in control of
TCC; in Count II breach of fiduciary duty in refusing to provide a stockholder
list; in Count III violation of Securities & Exchange Commission (SEC) Rule
14a-7, 24 CFR ss.240.14a-7 and in Count IV seeking a declaration invalidating
actions of a majority of the Board of Directors on April 30, 1998. The
plaintiffs are seeking a preliminary injunction 1) restraining the defendants
from implementing By-Law changes voted at the April 30th meeting, 2) directing
the defendant to reconvene and rescind the By-Law changes votes at the April
30th meeting, 3) restraining the defendants from filling any vacancies on the
board and/or from taking any action to amend the By-Laws or Articles of
Organization prior to the stockholders meeting, and 4) directing the defendants
to produce the stockholder list to the plaintiff.
The defendants TCC, Arnold McCalmont, Herbert A. Lerner, Carl H. Guild,
Mitchell B. Briskin, and Donald Lake1 strenuously oppose issuance of a
preliminary injunction on the grounds that 1) they have "so delayed coming to
this Court that it would be inappropriate to grant interim relief'" and 2) that
substantively, the plaintiffs cannot demonstrate a likelihood of success on the
merits with respect to their request for shareholder information and with
respect to their claims relating to staggered terms, 3) the plaintiff's have
failed to articulate any harm and 4) the harm to the defendants outweighs any
harm to the plaintiffs. The defendants further assert that "[i]t is
fundamentally unfair and unlawful for Mr. Phalon, a current director of TCC with
a clear fiduciary duty and duty of loyalty to TCC, to be seeking to attack it in
this way." The defendants noted that "Mr. Phalon has flouted his duty under
federal securities laws to maintain the confidentiality of this non-public
information."2
The plaintiff's Allegations
According to the verified complaint, TCC was founded by the defendant
Arnold McCalmont. The plaintiff Phalon asserts that McCalmont has maintained
pervasive control of TCC's board of directors and that he, Phalon, is the lone
dissenting director. According to the complaint, McCalmont's control over TCC is
reflected by the fact that McCalmont's sons James and Marc were employed by TCC
and, until recently, James had been a director. According to the complaint,
McCalmont arranged for TCC to invest in Net2Net Corporation, a business founded
by his son Stephen.3
In late 1997, Gadsby & Hannah was retained by the board of directors of TCC
to investigate certain individual officers, directors and employees of TCC
relating to matters occurring in 1988. As a result of that investigation, a
report was submitted to the directors at its meetings on December 11, 1997 and
on January 8, 1998. A written report known as the Slavitt report was made
available to the directors at the January 11th meeting. However, individual
directors were not permitted to retain a copy. According to Phalon, the Slavitt
report included findings of improprieties and recommendations which included
seeking restitution from James and/or Arnold McCalmont for the cost of the
investigation, removal of Arnold McCalmont as a director, removal of James
McCalmont as a director, and disclosure of the results of the investigation as
legally required.
At the January 8th meeting, a majority of the board voted to approve
granting a release to Arnold McCalmont conditioned upon his agreement not to
stand for re-election as a director. Arnold McCalmont was one of the directors
voting in favor of the release. The plaintiff Phalon and one other board member
voted against it. At a board meeting on January 9, 1998, a majority of the board
voted to accept the resignation of James McCalmont as an officer and director
upon terms and conditions which included the condition that TCC give James
McCalmont a limited release from liability covering the matters referred to in
the Slavitt report. The defendant Arnold McCalmont voted in favor of accepting
the resignation and its terms and conditions. The plaintiff Phalon and one other
board member voted against it.
According to the Phalon affidavit, a draft 1997 annual report on Form 10-K
was prepared and circulated. TCC's President and Chief Financial Officer refused
to sign the Form 10-K because it did not adequately disclose findings and
recommendations included in the Slavitt report. The Chief Financial Officer
stated he would not sign the Form 10-K unless he was afforded an opportunity to
review the Slavitt report. His review of the Slavitt report was conditioned upon
his signing a confidentiality agreement. The Chief Financial Officer refused to
sign the agreement. On January 14, 1998, a majority of the board voted to
terminate the employment of the Chief Financial Officer.4 The plaintiff Phalon
and one board member voted against the termination. On January 26, 1998, the
plaintiff refused to sign the Form 10-K. After some discussion, the president
did sign the Form 10-K.5 At a meeting on February 13, 1998, a majority of the
board voted to terminate the president. The plaintiff Phalon voted against this
termination as well.
At the meeting on January 26, 1998, the plaintiff Phalon after advising the
board of his objection to actions taken by the board informed the board members
that he would not stand for re-election with the incumbent board.
On April 3, 1998, the plaintiffs Phalon and Awan and two others filed a
joint statement with the Securities & Exchange Commission (SEC) disclosing that
they had formed a group to consider the costs and benefits of a proxy contest to
replace at least a majority of the board with nominees selected by the group. On
April 8, 1998, the plaintiff Phalon wrote to TCC, attention of Edward E. Hicks,
Clerk, demanding pursuant to G.L. c. 156B, ss. 32, to inspect and copy TCC's
stock and transfer records including its most recent list of stockholders.
According to his letter, "[t]he purpose of this demand is to enable me to
identify and communicate with my fellow stockholders on matters relating to
their investment in the Company and the affairs of the Company, including the
solicitation of written proxies from stockholders pursuant to Rule 14a-11 under
the 1934 Act6." By letter dated April 13, 1998, Edward E. Hicks, as clerk,
requested clarification of Phalon's request as to the capacity in which he was
requesting the list, i.e. as a stockholder or director. Phalon was also reminded
"as a director of the Corporation [you] have broad ranging fiduciary duties that
include duties of care, loyalty, and in significant respects, confidentiality."
Hicks continued, "We would expect that any information provided to you would be
delivered in confidence and would be utilized by you in your fiduciary capacity,
keeping in mind your duties to stockholders generally rather than to a separate
group with its own interests and agenda." Hicks stated that the Corporation
would probably require a confidentiality agreement be executed. Hicks concluded,
"Of course, in this instance, you and we also would want to consider whether
your actions in a non-fiduciary capacity are consistent with your continuing
fiduciary obligations to the corporation." Under cover of letter dated April 24,
1998, a proposed confidentiality agreement was sent to Phalon's counsel.
Phalon's counsel notified TCC's counsel that although Phalon acknowledged that
he would only use the list for a proper purpose, the proposed agreement was
objected to and regarded as interference with Phalon's "absolute" right of
access to the stockholder list. Phalon did not execute the confidentiality
agreement. The stockholder list has not been provided.
On April 29, 1998, the plaintiffs wrote to TCC demanding that a date be set
for the annual stockholders meeting. TCC's By-Laws provide that the annual
meeting of stockholders be held on the second Monday in February. The meeting
had not been held and an annual meeting had not been scheduled as of the date of
the plaintiffs' demand. On April 30, 1998, at a regular meeting of the board,
the board voted to hold the annual meeting on July 17, 19987 with notice to
stockholders of record as of May 29, 1998. At the same meeting, a majority of
the board voted to adopt By-Law amendments adopting a classified Board of
Directors with three classes of Directors whose staggered three year terms would
expire in 1998, 1999 and 2000 respectively.8 The plaintiff Phalon voted against
these By-Law changes. As a result of that vote, Phalon's term expires in 1998
and McCalmont's expires in 1999. The board also voted to adopt a By-Law "opting
into" GL. c. 156B, ss. 50A requiring a vote of 40% of the outstanding shares to
hold a special meeting. Three director vacancies were filled with the election
of the defendants Briskin, Lake and Peoples, all of whom, according to Phalon,
have business relationships with the defendant McCalmont.
Following filing of this action, the plaintiff's submitted a proxy
statement pursuant to Section 14(a) of the Securities & Exchange Act of 1934, a
copy of which was filed with the court.
<PAGE>
The Defendants' Response
The defendants respond that the events dating back to 1988 are irrelevant
to the demand for injunctive relief, the new directors are "truly independent"
and the plaintiffs' attempt to portray them otherwise is based on hearsay and
unsubstantiated rumor and should be disregarded. Furthermore, TCC has reported
all evidence of possible wrongdoing to the SEC and the plaintiff has committed
"serious acts of indiscretion by revealing confidential, non-public information
he obtained as a Director."
Discussion
"[W]hen asked to grant a preliminary injunction, the judge initially
evaluates in combination the moving party's claim of injury and chance of
success on the merits. If the judge is convinced that failure to issue the
injunction would subject the moving party to a substantial risk of irreparable
harm, the judge must then balance this risk against any similar risk of
irreparable harm which granting the injunction would create for the opposing
party. What matters as to each party is not the raw amount of irreparable harm
the party might conceivably suffer, but rather the risk of such harm in light of
the party's chance of success on the merits. Only where the balance between
these risks cuts in favor of the moving party may a preliminary injunction
properly issue." Packaging Indus. Group, Inc. v. Cheney, 380 Mass. 609, 617
(1980). Accord Planned Parenthood League of Mass., Inc. v. Operatzon Resctie,
406 Mass. 701, 710 (1990)." Ashford v. Massachusetts Bay Transp. Authority, 421
Mass. 563, 564 n.3 (1995).
Stockholder List
General Laws c. 156B, ss. 32, as inserted by St.1964, c. 723, Sec. 1,
provides, in pertinent part:
If any officer or agent of a corporation having charge of ... [the
corporation's stock and transfer records] refuses or neglects to . . .
produce for examination a list of stockholders with the record address
and amount of stock owned by each, he or the corporation shall be
liable to any stockholder for all actual damages sustained by reason of
such refusal or neglect, but in an action for damages or a proceeding
in equity under this section for neglect or refusal to exhibit for
inspection the stock and transfer records, it shall be a defen[s]e that
the actual purpose and reason for the inspection sought are to secure a
list of stockholders or other information for the purpose of selling
said list or information or copies thereof or of using the same for a
purpose other than in the interest of the applicant, as a stockholder,
relative to the affairs of the corporation.
The plaintiff Phalon's right to a stockholder list is not "absolute" under
GL. c. 156B, ss.32 but rather is limited to the interest of the stockholder
"relative to the affairs of the corporation." Shabshelowitz v. Fall River Gas
Co., 412 Mass. 259, 265 (1992) affirming Shabshelowitz v. Fall River Gas Co., 30
Mass.App.Ct. 769, 771 (1991). In Shabshelowitz, the stockholder sought access to
the stockholder list solely for private investment concerns, i.e. to solicit
other shareholders to sell their stock. In this instance, the plaintiffs have
demonstrated that the demand for access to stockholder information was related
to their dispute with the control and governance of the corporation and for the
purpose of soliciting proxies.
Similarly, Rule 14a-7 does not confer an "absolute" right to stockholder
information. As noted at pages 10-l l of TCC's opposition, Rule 14a-7(a)
requires that certain pre-requisites are met. Two of those requirements are
acknowledged to have been met in this case (i.e the company is in the process of
a proxy solicitation and Phalon owns a class of shares which can vote at the
upcoming meeting). The third is more problematic to the plaintiff since
materials to be sent to shareholders were not made available to TCC. Recognizing
the deficiency, the plaintiff has sought to cure the same by filing a proxy
statement with the SEC.
The plaintiffs have demonstrated a reasonable likelihood of success on
their demand for access to the list of current stockholders. Delay in granting
relief would foreclose the plaintiffs from communication with stockholders
concerning solicitations for their proxies and for consideration as an alternate
recipient of stockholder proxies. Any remedy at law would be unable to redress
such a loss. See Modern Continental Const. Co., Inc. v. Braintree Housing
Authority, 391 Mass. 829 (1984); E.R. Holdings, Inc. v. Norton Co., 735 F.Supp.
1094, 1100 (D. Mass. 1990). Potential harm to the defendant TCC from the
disclosure of the list of stockholders can be obviated by requiring that proxy
materials submitted by the plaintiff be mailed to stockholders by TCC.
By-Law Amendments
As disputed the facts and motivations may be, there are significant facts
which are not disputed. There was an investigation. There were improprieties
involving the son of the defendant McCalmont. As a director, McCalmont voted for
measures directly affecting himself and his son. The plaintiff Phalon refused to
vote in favor of the measures in dispute. Phalon refused to sign the Form 10-K.
The Chief Financial Officer who refused to sign the Form 10-Kwas terminated. The
Form 10-K includes disclosure of the review contained in the Slavitt report
which is minimal at best. Phalon, together with other dissatisfied stockholders,
is challenging the present control and governance of TCC. It was in this context
that the board voted to reverse the 1990 vote opting out of GL. c. 156B, ss.50A
and to reconstitute TCC's board. Significantly, under the reconstituted board,
Phalon's term expires in 1998 while McCalmont's does not expire until 1999.
Section 50A clearly expresses a preference for staggered boards. Equally as
clear and undisputed is the fact that the TCC board voted on May 24, 1990 not to
have a board with staggered terms, a decision authorized expressly in ss. 50A.
Faced with a dissenting director and rumblings of a shareholder proxy challenge,
the majority of the board sought refuge in a staggered board as voted on April
29, 1998. The context compromises the validity of the vote particularly since
there are a series of votes in which at least one director voted concerning
matters directly affecting himself and his son. That context does not disappear
because the statute authorized the vote taken.
"Under Massachusetts law, officers and directors owe a fiduciary duty to
protect the interests of the corporation they serve. Cecconi v. Cecco, Inc., 739
F.Supp. 41, 45 (D.Mass.1990). Senior executives are considered to be corporate
fiduciaries and to owe their company a duty of loyalty. Chelsea Indus. v.
Gaffney, 389 Mass. 1, 11 - 12 (1983). Corporate fiduciaries are required to be
loyal to the corporation and to refrain from promoting their own interests in a
manner injurious to the corporation. Seder v. Gibbs, 333 Mass. 445, 453 (1956).
Johnson v. Withowski, 30 Mass.App.Ct. 697, 705 (1991). Orsi v. Sunshine Art
Studios, Inc., 874 F.Supp. 471, 475 (D.Mass.1995). See Pepper v. Litton,
308-U.S. 295, 311 (1939). The prohibition against self-dealing on the part of
corporate fiduciaries requires that the corporation receive the full benefit of
transactions in which an officer engages on the corporation's behalf, without
thought to personal gain; this is part of the bargain upon which investors rely
when they purchase a corporation's stock. See Enstar Group, Inc. v. Grassgreen,
812 F.Supp. 1562, 1570-1571 (M.D.Ala.1993). For that reason, a contract for
personal gain which could cause a corporate fiduciary to breach his or her
fiduciary duty of loyalty to the corporation is generally held to be
unenforceable as against public policy. See Colonial Operating Co. v. Poorvu,
306 Mass. 104, 107-108, 27 N.E.2d 704 (1940); Odman v. Oleson, 319 Mass. 24, 26
(1946); Dynan v. Fritz, 400 Mass. 230, 242-243 (1987); Childs v. RIC Group,
Inc., 331 F.Supp. 1078, 1084 (N.D.Ga.1970). See also Restatement (Second) of
Contracts ss. 193 (1981) ("A promise by a fiduciary to violate his fiduciary
duty or a promise that tends to induce such a violation is unenforceable on
grounds of public policy"). Accordingly, Massachusetts courts vigorously
scrutinize self-interested transactions involving corporate fiduciaries. Boston
Children's Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429, 433 (1st
Cir.1996)...." Geller v. Allied-Lyons PLC, 42 Mass.App.Ct. 120, 122-123 (1997).
Directors cannot take advantage of their official position to manipulate the
corporation in order to secure or perpetuate their control. See Andersen v.
Albert & J.M. Anderson Mfg Co., 325 Mass. 343, 347 (1950) (Manipulation of
stock). "Such action constitutes a breach of their fiduciary obligations to the
corporation and a willful disregard of the rights of the other stockholders."
Id. and cases cited.
The plaintiffs have demonstrated a reasonable likelihood of success on
their claim that the By-Law change voted on April 29, 1998 was a "manipulative
device" designed to prevent a meaningful proxy contest by dissenting
shareholders in willful-disregard of the rights of other shareholders.
Allowing the By Law to remain in effect pending a final determination of
the merits of the plaintiffs claim would result in irreparable harm to the
plaintiffs. To allow the By Law to control the proceedings at the next annual
meeting would "substantially chill, if not freeze in its tracks, any continued"
proxy contest or inquiring into the control and governance of TCC by dissenting
shareholders. See San Francisco Real Estate Investors v. Real Estate Investment
Trust, 701 F.2d 1000, 1002 (1S' Cir., 1983). The defendants have failed to
demonstrate that they will suffer comparable or greater harm if implementation
of the By-Law is delayed.
Delay in Seeking Relief
"Unexplained delay in seeking relief for allegedly wrongful conduct may
indicate an absence of irreparable harm and may make an injunction[21
Mass.App.Ct. 495] based upon that conduct inappropriate. See USAchem, Inc. v.
Goldstein, 512 F.2d 163, 168- 169 (2d Cir.1975); KlauberBros. v. Lady Marlene
Brassiere Corp., 285 F.Supp. 806, 808 (S.D.N.Y.1968); 11 Wright & Miller,
Federal Practice & Procedure: Civil Sec. 2948, at 438 (1973)." Alexander &
Alexander, Inc. v. Danahy, 21 Mass.App.Ct. 488, 495 (1986). Phalon's demand for
access to the stockholder list was made on April 8, 1998. Although advised that
TCC would require a confidentiality agreement, that agreement was not forwarded
to the plaintiff until April 24, 1998. "The delay here was not without
justification, however." Id. "[W]hat delay there was not so egregious as to form
the basis for denial of any injunctive relief. Parties to a business dispute
deserve praise, not penalty, for attempting to negotiate their differences
before knocking on the courthouse door." Id.
Order
For the foregoing reasons, the plaintiff's application for a preliminary
injunction is ALLOWED. Pending further order of this court:
1. The defendant Technical Communication Corporation shall mail a
copy of the proxy statement submitted by the plaintiffs to the
SEC to each and every stockholder of the corporation on or before
June 17, 1998;
2. The defendant Technical Communication Corporation shall not
provide the plaintiffs with a copy of the shareholder list but
shall maintain a full and complete list of all shareholders to
whom the proxy statement has been sent and shall file an
affidavit of compliance with this order on or before July 3,
1998;
3. The cost of the mailing and copying shall be born by the
plaintiffs; and
4. The defendants shall be enjoined from implementing the votes
taken at the meeting held on April 30, 1998 adopting the
provisions of GL c. 156B, ss.50A and restructuring the terms of
the Board of Directors to staggered terms.
5. This order is conditioned upon the plaintiffs posting a bond in
the amount of Ten Thousand Dollars or, in lieu thereof,
depositing that amount with the Clerk of Court.
/s/ Regina L. Quinlan
Regina L. Quinlan
Associate Justice of the
Superior Court
Date: June 9, 1998
______________________________
1 The defendants Briskin, Peoples and Lessard were not represented at the
hearing on the plaintiff's application for a preliminary injunction.
2 Documents submitted in this action were, given the nature of the allegations,
impounded. The parties have agreed that the impoundment order should continue.
3 The investment in Net2Net and relationship between its president and the
defendant McCalmont is disclosed at page AR-18 of TCC's Form 10-K.
4 According to the SEC filing Form 8-K of TCC, the Chief Financial Officer was
terminated on January 14, 1998 and the defendant Lerner, a director and TCC's
Treasurer assumed the duties of the Chief Financial Officer until a successor
was chosen.
5 The Form 10-K includes the following disclosure at page 10:
On December 12, 1997, the Board of Directors announced that it has
undertaken an internal review of certain of its historical service
contracts. On January 13, 1998 the Company announced that the results
from its internal review concluded that certain of the Company's
internal approval and control procedures were not followed in
connection with such contracts. However, the Company does not believe
that this will result in a material liability or asset impairment to
the Company or otherwise have any material effect on the financial
position or results of operations of the Company.
The Form 10-K was signed by Roland S. Gerard as President and Chief Executive
Officer and by the defendants McCalmont, Guild, Lessard and Lerner.
6 Securities Exchange Act of 1934.
7 According to the Phalon Affidavit, the meeting was scheduled for July 14th.
Parties agreed the meeting is scheduled for July 17th.
8 According to a corporate vote taken on May 24, 1990, TCC's directors voted to
exempt TCC from the provisions of the then newly enacted GL. c. 156B, ss. 50A.
<PAGE>
EXHIBIT 3
COMMONWEALTH OF MASSACHUSETTS
APPEALS COURT
98-J-436
PHILIP A. PHALON & another
vs.
TECHNICAL COMMUNICATIONS CORPORATION, & others.
ORDER
After reviewing those papers presented which I deemed pertinent and hearing
argument of the parties, I conclude that the petitioners' request for relief
should be denied. The preliminary injunction is not based upon an erroneous
refusal to recognize the petitioners' rights under G. L. c. 156B, ss.50A(a).
Rather, injunctive relief was granted on the basis of a showing of circumstances
which give rise to serious question concerning the validity of the vote by which
the petitioners sought to bring themselves within the provisions of ss.50A(a).
Accordingly, the petition for relief brought under G. L. c.231, ss.118, first
par., is denied.
By the Court (Perretta, J.)
/s/Assistant Clerk
Assistant Clerk
Entered: June 18, 1998
