Edward Nathan brought this shareholder's derivative action against officers and directors of Fruehauf Corporation. Nathan alleged that Robert Rowan and William Grace caused Fruehauf to violate the federal excise tax laws and the federal securities fraud laws. Nathan further alleged that all the named defendants breached their fiduciary duties to Fruehauf by permitting the aforementioned violations to transpire. The district court dismissed Nathan's claims accruing prior to the spring of 1973 against all defendants as res judicata because in a prior shareholder's derivative action similar claims were held to be barred by the applicable Michigan statute of limitations. However, the court allowed Nathan's breach of fiduciary duty claims accruing after the spring of 1973 to proceed to trial. We affirm.

In November 1970, Fruehauf, its chairman William Grace, and its president Robert Rowan, were indicted for conspiracy to defraud the United States, to attempt to evade the payment of federal excise taxes, and to aid in preparation of materially false excise tax returns in violation of 26 U.S.C. §§ 7201 and 7206(2) and 18 U.S.C. § 371. The substance of the indictments was disclosed to Fruehauf's shareholders in a footnote in Fruehauf's 1970 Annual Report.1 The footnote revealed that Fruehauf might be liable for over $12 million in past taxes.

In July 1975, Fruehauf, Rowan and Grace were convicted on all counts of the indictment. Shortly thereafter, Rowan sent a letter to Fruehauf's shareholders to inform them that in the opinion of counsel, the convictions were not supported by substantial evidence, and would be appealed. The letter also indicated that Fruehauf might be liable for over $60 million for past taxes, interest and penalties. The convictions were affirmed by this Court.2

Edward Nathan, a shareholder of Fruehauf, requested additional information about Fruehauf's potential liability and the actions of its officers. When he failed to receive an adequate response, Nathan demanded that Fruehauf's board of directors bring an action to recover damages suffered by Fruehauf as a result of its officers' tax fraud. Fruehauf's attorneys met with Nathan and told him that the board refused to file the requested action. They also assured him that he would be informed if any other shareholder's derivative action was brought. Consequently, Nathan deferred the commencement of his shareholder's derivative action.

On October 17, 1975, Benjamin Singer filed a shareholder's derivative action which alleged that Fruehauf, Rowan, Grace and many of the same officers and directors as in the instant case breached their fiduciary duties to Fruehauf by participating in or failing to redress the aforesaid excise tax conspiracy. Singer v. Nichols, et al., Civil No. 75-52039 (E.D.Mich., May 5, 1976). On May 5, 1976, the district court dismissed Singer because it was barred by the applicable statute of limitations. Singer failed to give notice to the other Fruehauf shareholders that his action had been dismissed. Nor did Singer appeal the dismissal.

In April 1976, Nathan was apprised of the pendency of Singer. On May 7, 1976, two days after Singer's action was dismissed, Nathan filed this action in the Southern District of New York which alleged that Rowan and Grace breached their fiduciary duties and violated Sections 10 and 14 of the Securities Exchange Act of 1934.3 The case was removed to the Eastern District of Michigan. On June 19, 1978, the district court held that Nathan's action was barred by the res judicata effect of Singer. Therefore, the court granted the defendants' motion for summary judgment and dismissed Nathan's claims accruing prior to the spring of 1973.

The sole question in this appeal is whether the doctrine of res judicata bars Nathan from relitigating matters already decided in a prior shareholder's derivative action against the same corporation and its directors.

Under the judicially-created doctrine of res judicata, when a court of competent jurisdiction enters a final judgment on the merits in an action, the parties and their privies are barred from relitigating in a subsequent action matters that were actually raised or might have been raised in the prior action. Cromwell v. County of Sac, 94 U.S. 351, 24 L. Ed. 195 (1877); Commissioner v. Sunnen, 333 U.S. 591, 68 S. Ct. 715, 92 L. Ed. 898 (1948); Lawlor v. National Screen Service, 349 U.S. 322, 75 S. Ct. 865, 99 L. Ed. 1122 (1955); See also, Montana v. United States, 440 U.S. 147, 99 S. Ct. 970, 59 L. Ed. 2d 210 (1979). Res judicata is applied if it does not offend public policy or result in manifest injustice. Hansberry v. Lee, 311 U.S. 32, 61 S. Ct. 115, 85 L. Ed. 22 (1940); United States v. LaFatch, 565 F.2d 81 (6th Cir. 1977). We hold that Nathan's claims against Fruehauf, Rowan and Grace were barred by the res judicata effect of Singer.

A. Judgment on the Merits/Parties in Privity/Issues Determined.

Nathan's first contention is that a dismissal based upon the statute of limitations is not a decision on the merits. We disagree. A summary judgment on the basis of the defense of the statute of limitations is a judgment on the merits. Summary dismissal on this basis requires that no genuine issue of material fact exists as to whether the suit was commenced in a timely fashion and whether the plaintiff knew or had reason to know of the facts giving rise to his cause of action. Sperry v. Barggren, 523 F.2d 708 (7th Cir. 1975); Godbold v. Federal Crop. Ins. Corp., 365 F. Supp. 836 (D.Miss.1973).

The district court's summary dismissal of Singer on statute of limitations grounds was a decision on the merits. In Singer, the facts were uncontradicted. The defendants were indicted and convicted. The indictments were disclosed in the 1970 Annual Report. Consequently, Singer had reason to know the facts underlying his complaint as of the dissemination date of the Annual Report. Therefore, there is no issue of material fact concerning the timeliness of Singer's action.

Furthermore, in shareholder derivative actions arising under Fed.R.Civ.P. 23.1, parties and their privies include the corporation and all nonparty shareholders. Dana v. Morgan, 232 F.2d 85, 89 (2d Cir. 1916); Stella v. Kaiser, 218 F.2d 64 (2d Cir. 1954); Ratner v. Paramount Pictures, Inc., 6 F.R.D. 618 (S.D.N.Y.1942). Though Nathan was not a party to the Singer action, nonparty shareholders are bound by judgments if their interests were adequately represented.

The district court necessarily determined all the relevant issues in Singer. The district court construed Singer's complaint to allege a cause of action under former Michigan Statutes Annotated § 21.47 (M.C.L.A. § 450.47).4 This section permitted a shareholder, on behalf of the corporation, to sue a director or officer for breach of his fiduciary duties to the corporation when the corporation "has been or will be injured or damaged" as a result of the director's or officer's delinquency. The section provided a limitations period of six years from the occurrence of the breach or two years from its discovery by the plaintiff, whichever occurs sooner. Under Section 27A.5827 (M.C.L.A. § 600.5827)5 the limitations period commences when the action accrues and the action accrues "at the time the wrong upon which the claim is based was done regardless of the time when the damage results."6

In Singer, the district court held that under Section 21.47 (M.C.L.A. § 450.47), the limitations period expired by late March or early April 1973 (two years from the mailing of the 1970 Annual Report to Fruehauf shareholders). In any event, the court concluded that any shareholder derivative action against defendants Rowan and Grace was barred in 1971 (six years after the occurrence of the misconduct) or in 1973 (two years after its discovery). Detroit Gray Iron & Steel Foundries, Inc. v. Martin, 362 Mich. 205, 106 N.W.2d 793 (1961).7 Because the statute of limitations issue was actually and necessarily decided in Singer, Nathan may not relitigate it.

B. Adequacy of Representation.

To circumscribe the effect of res judicata, Nathan vigorously argues that Singer failed to adequately represent the shareholders' interests in his prior derivative action. Nathan contends that (1) Singer neglected to initiate discovery procedures and (2) Singer failed to seek leave to amend his complaint to include federal securities fraud claims against Fruehauf, failed to notify Fruehauf shareholders of the motion to dismiss Singer's complaint on statute of limitations grounds, and failed to appeal the dismissal of his complaint.

It is well settled that the constitutional requirements of due process and full faith and credit mandate that absent class members are not bound by a judgment in a class action unless the class representative provided adequate and fair representation. Hansberry v. Lee, supra, 311 U.S. at 42-43, 61 S. Ct. at 118-119; Nat'l. Assn. of Regional Medical Programs v. Matthews, 551 F.2d 340, 345 (D.C. Cir. 1976); Wetzel v. Liberty Mutual Insurance Co., 508 F.2d 239, 256-57 (3rd Cir. 1975); Gonzales v. Cassidy, 474 F.2d 67 (5th Cir. 1973); Susman v. Lincoln American Corp., 561 F.2d 86, 89-90 (7th Cir. 1977); EEOC v. General Tel. Co. of Northwest, 599 F.2d 322, 333-34 (9th Cir. 1979).

In the instant case, the district court properly found that Singer "vigorously and very competently" represented the Fruehauf shareholders. The court reached this conclusion after it examined the pleadings, briefs, arguments of counsel and files in the action. This finding is not clearly erroneous. Nathan's argument that Singer failed to initiate discovery procedures has no merit. Singer's failure to seek leave to amend his complaint to allege federal securities fraud claims against Fruehauf is not a basis for inadequate representation in this case. Neither Singer nor Nathan made out a cause of action under Section 10(b) of the Securities Exchange Act of 1934, or the rules promulgated thereto, because neither Singer nor Nathan satisfied the "purchase or sale" requirement of Section 10b.8 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975); Santa Fe Industries v. Green, 430 U.S. 462, 478, 97 S. Ct. 1292, 1303, 51 L. Ed. 2d 480 (1977).

Singer's failure to notify the Fruehauf shareholders of the dismissal of his complaint does not constitute inadequate representation. Nathan admits that he had notice of the pendency of Singer. Moreover, in derivative actions nonparty shareholders are not entitled to notice of dismissal following a hearing on the merits. Papilsky v. Berndt, 466 F.2d 251 (2d Cir.) cert. denied 409 U.S. 1077, 93 S. Ct. 689, 34 L. Ed. 2d 665 (1972). Singer's failure to appeal the judgment of dismissal is not indicative of inadequate representation. Without passing on the merits of such an appeal, it is evident that the application of the proper Michigan statute of limitations and accrual statute precluded Singer's cause of action. Our research discloses no decisions to the contrary.

C. Public Policy Considerations.

Finally, Nathan argues that several representations made to him by Fruehauf's counsel caused him to defer the commencement of his action, and therefore, the application of res judicata principles contravenes public policy. We disagree.

The representations did not affect the disposition of this case because the statute of limitations expired before the representations were made. In Detroit Gray Iron & Steel Foundries, Inc. v. Martin, supra, former M.S.A. § 21.47 (M.C.L.A. § 450.47) was strictly construed to bar a similar suit. We are bound by the construction of the state statute.

Accordingly, the judgment of the district court is AFFIRMED.