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February 18, 1964


The opinion of the court was delivered by: Julius J. Hoffman, District Judge.

  This action is the judicial culmination of a struggle between two of the nation's major railroads, the Union Pacific and the North Western, competing in their efforts to take over a third, the Rock Island. The contest in this phase concerns the efforts of these competitors to win the support of the Rock Island stockholders. Each has claimed a foul by the other in the solicitation of proxies for these stockholders' votes in a meeting scheduled for November 15, 1963, called for the purpose of approving a proposal for merger of the Rock Island with the Union Pacific.

The proceeding was commenced by the Union Pacific Railroad Company (Union Pacific), a Utah corporation with its principal place of business in Omaha, Nebraska, and by two individuals who jointly own 700 shares of the common stock of the Rock Island. The principal defendant is the Chicago and North Western Railway Company (North Western), a Wisconsin corporation with its principal place of business in Chicago. Jointly named as defendants are five individuals, citizens and residents of Illinois, who own stock of the Rock Island and are said to be members of the "Chicago, Rock Island & Pacific Railroad Company's Stockholders' Committee for North Western's Exchange Offer and Against Rock Island-U. P. Merger", hereafter referred to as the Committee. Two other members of this so-called Committee, not served with process, have been dismissed from the action. Because its interests are at stake in the controversy, the Chicago, Rock Island & Pacific Railroad Company (Rock Island), a Delaware corporation with its principal place of business in Chicago, has also been brought into the proceeding as a defendant.

The relief sought by the plaintiffs at this stage, as demanded in its motion for a preliminary injunction as amended and as altered in oral argument to the court, is an order in effect restraining the Rock Island from reconvening the meeting of its stockholders called for November 15, 1963, and requiring that a new meeting be called, with a new solicitation of proxies, to consider the proposed merger.


The background of the controversy has been developed at length in the evidence and briefs. A summary will suffice for the disposition of this motion. In the spring of 1963 the directors of the Rock Island had before them competing proposals for union with either the Union Pacific or the North Western The Union Pacific offer contemplated a merger of the Rock Island into the Union Pacific, with Rock Island shareholders receiving 0.718 of a share of Union Pacific common stock for each share of Rock Island common. The North Western proposal, proceeding along different lines, took the form of an Exchange Offer to Rock Island stockholders through which the North Western sought to acquire control of the Rock Island and thereafter to effect a unification by merger or consolidation. The terms of this Exchange Offer tendered a so-called package to the Rock Island shareholders for each share of their common, consisting of (1) one thirty dollar ($30.00) principal amount North Western 6% Collateral Trust Income Bond, a new security to be issued to effect the acquisition; (2) 0.2778 of a share of North Western common stock; and (3) five dollars ($5.00) in cash. The offer was subject to approval by the Interstate Commerce Commission and conditioned on the offer by Rock Island stockholders of at least 51% of the Rock Island common stock outstanding, subject to a reservation by the North Western of the right to accept a lower percentage.

The directors of the Rock Island, agreeing with its management, concluded that the Union Pacific offer was preferable and accepted its proposal. A formal Plan of Agreement and Merger was thereupon approved by the boards of directors of both the Rock Island and the Union Pacific on June 27, 1963. The proposed merger required the approval of the ICC and of the stockholders of the two corporations. For the Rock Island, the applicable Delaware corporation law and its articles of incorporation required approval of the merger by the affirmative vote of two-thirds of its outstanding shares. On October 1, 1963, therefore, the Rock Island directors called a special meeting of the stockholders to be held on November 15, 1963, for the purpose of considering and taking action on the proposed merger. The call fixed October 4, 1963, as the record date for the determination of stockholders entitled to vote at the meeting. On that date nearly three million, precisely 2,916,711, shares of the Rock Island common stock were outstanding and thereby entitled to vote at the scheduled meeting.

During the summer of 1963, before formal proxy solicitation began, a number of news stories were carried in the public press concerning the negotiations, the actions taken, and the offers made. Public announcements in the form of press releases were issued by the railroads, and the president of the North Western met with security analysts to explain the Exchange Offer. The North Western also made application to the ICC for approval of the plan embodied in its offer, and the Union Pacific and Rock Island petitioned in opposition. These actions occasioned further announcements and press releases. Since as a practical matter the Union Pacific plan of merger and the North Western offer to acquire the Rock Island shares were alternatives facing the Rock Island stockholders, these communications were susceptible to use as means to influence the Rock Island stockholders in their projected vote on the Union Pacific merger plan, even though they would not be called upon to vote directly on the North Western offer. An advertisement by the Union Pacific, published on July 26, 1963, in some forty-five metropolitan newspapers, prompted the staff of the Securities and Exchange Commission (SEC) to warn the Union Pacific that the advertisement constituted, in the staff's view, the solicitation of proxies subject to the SEC's regulations, and to admonish that such advertisements must comply with those regulations. The advertisement gave rise to a private suit, collateral to the action here, brought by a Rock Island stockholder seeking to require the Union Pacific to retract or correct the statements made. The United States Court of Appeals for the Seventh Circuit affirmed the dismissal of the suit by the District Court on the ground that the advertisement did not constitute a solicitation of proxies within the meaning of the applicable rules. Brown v. Chicago, Rock Island & Pacific Railroad Co., ___ F.2d ___ (7 Cir., 1964).

The counter proposals gave rise to another lawsuit during the summer of 1963 when, on July 17, eight shareholders of the Rock Island filed a petition for a writ of mandamus against their corporation in the Superior Court of Cook County, Illinois, demanding access to the corporate records of shareholders so that copies of the North Western Exchange Offer might be mailed to the Rock Island shareholders of record. The controversy was resolved by affording the plaintiffs the opportunity to mail the Exchange Offer to the shareholders contemporaneously with the first mailing by the Rock Island of proxy material for the scheduled meeting, and the plaintiffs were supplied with the Rock Island stockholder list.

After the disposition of that suit, counsel for the eight shareholder-plaintiffs wrote to them, advising that it might be desirable for them to oppose the proposed Union Pacific merger and in that event that they might form a committee, with the North Western requested to assume its expenses. Four of these eight responded by returning a form supplied with the letter, by which each "consented to the use of his name as a member of a Committee" to oppose the Union Pacific merger and authorized the attorney to act for the so-called Committee and to contact the North Western concerning financial support.

A week after his letter to the shareholders, the attorney wrote to the North Western, stating that the plaintiffs in the state court suit intended to form a committee to oppose the Union Pacific merger plan, and requesting that the North Western finance the reasonable expenses of the so-called Committee. The North Western replied on September 17, 1963, undertaking to "extend our financial assistance in the role of a participant in your proxy solicitation, subject to the applicable rules of the Securities and Exchange Commission." The North Western also agreed to indemnify the members against any liability that might result from the use of information or material supplied by the North Western.

Three other Rock Island stockholders were thereafter added to the so-called Committee through the recommendation and referral of the brokers for the remaining two shareholders who had been plaintiffs in the state court proceeding and are defendants here. Of the five so-called Committee members who are parties here, several had not even met the attorney until the midst of this trial. The so-called members had not met or deliberated or been consulted concerning their views, nor were they acquainted with the other couples or members of the Committee until during the course of this suit. There is no evidence that any of them has borne or will bear any expenses or costs with respect to any activities of the so-called Committee since its creation.


On October 1, 1963, formal proxy solicitation began with the mailing of proxy statements, forms, and supporting materials to Rock Island shareholders by both the Rock Island management and the so-called Committee, designating itself in full as the Chicago, Rock Island & Pacific Railroad Company's Stockholders' Committee for North Western's Exchange Offer and Against Rock Island-U. P. Merger. In the following six weeks a number of mailings were made by the Rock Island management to the Rock Island shareholders, seeking support for and approval of the plan of merger with the Union Pacific to be voted on at the meeting scheduled for November 15. In opposition, the so-called Committee and the North Western, acting in its own behalf, separately sent out a number of mailings to the Rock Island stockholders. All three railroads made use of their employees as proxy solicitors, telephoning or calling personally upon the shareholders and seeking their proxies.

Since the Rock Island stock is registered on the New York Stock Exchange, all solicitation activities were subject to the Securities Exchange Act of 1934 and to the regulations promulgated by the Securities and Exchange Commission under that authority. The staff of the SEC, in considering materials filed with it by the Committee and the North Western prior to distribution, made a number of comments, requests, and objections to the proposed materials. The North Western and the Committee acquiesced to some of these positions so taken by the SEC and made changes, deletions, or withdrawals. In other instances these defendants proceeded in spite of the staff positions. Objections and protests on behalf of the Union Pacific were repeatedly made to the SEC concerning the materials sent out by the so-called Committee and the North Western. Finally the Union Pacific requested that the Commission take judicial action to adjourn the scheduled meeting for a period of 60 days to permit resolicitation. The Commission replied on November 13 that it declined to take action as requested. On November 14, the following day and the very eve of the November 15 meeting, this action was filed.

On the basis of the complaint and the affidavit of its vice president and general counsel, the plaintiff Union Pacific moved immediately and ex parte for a temporary restraining order to prohibit the holding of the scheduled meeting. On the court's motion, notice was given to the defendants and they were heard, through their counsel, in arguments held the same day. An order was thereupon entered restraining the conduct of any business at the scheduled shareholders' meeting beyond an adjournment until such future date as might be fixed pursuant to subsequent order of the court, and in the interim restraining all parties from further solicitation of proxies or purchase of Rock Island common stock.

Hearings on the plaintiff's motion for a preliminary injunction began shortly and occupied more than two full weeks of trial. Since the temporary restraining order as entered was limited by its terms and by the Federal Rules of Civil Procedure to a period of ten days, the order was extended by stipulation of the parties until the determination of the motion for a preliminary injunction. Full briefs and extensive proposed findings of fact and conclusions of law were submitted by all parties and two days were devoted to oral argument. With the filing of supplemental briefs and proposed findings, the matter was submitted for decision.


The controversy is governed by the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., enacted for the protection of the investing public in securities transactions. The Securities and Exchange Commission, generally charged with the administration and enforcement of this law, is specifically authorized to commence judicial proceedings for equitable relief against practices unlawful under the Act. Securities Exchange Act of 1934, Sec. 21(e), 15 U.S.C. § 78u(e). Despite doubts expressed in earlier decisions, there is today no serious dispute to question the proposition that the Act also authorizes suits brought by private persons, like the plaintiffs here, who claim injury from some violation of that law. See Borak v. J. I. Case Company, 317 F.2d 838 (7 Cir. 1963), cert. granted 375 U.S. 901, 84 S.Ct. 195, ...

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