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Swanson v. American Consumer Industries Inc.

August 13, 1969


Swygert, Cummings and Kerner, Circuit Judges. Swygert, Circuit Judge (dissenting).

Author: Cummings

CUMMINGS, Circuit Judge.

Plaintiff, an Illinois resident, is a stockholder of defendant Peoria Service Company ("Peoria"), a dissolved Illinois corporation that formerly operated two cold storage warehouse facilities in Peoria, Illinois. His June 1965 complaint purports to be brought derivatively on behalf of Peoria and also on behalf of himself and all other similarly situated stockholders. In addition to the nominal defendant, Peoria, the complaint names as a defendant United States Cold Storage Corporation ("U.S. Cold"), a Delaware corporation owning 87% of Peoria's stock and operating cold storage warehouses elsewhere and also conducting an ice and fuel oil business. The third defendant is American Consumer Industries, Inc. ("ACI"), a diversified New Jersey corporation owning 90% of U.S. Cold stock and operating cold storage warehouses, manufacturing ice and selling a wide variety of consumer goods.

Alleging diversity of citizenship and asserting jurisdiction under the Securities Exchange Act of 1934, plaintiff sought to enjoin the sale of substantially all of Peoria's assets to ACI and to rescind a reorganization agreement between those companies for violations of federal law and Illinois common law. Plaintiff also sought to recover "all damage sustained by Peoria." The complaint asserted that the reorganization plan and related activities involved manipulative and deceptive devices and that the proxy materials were misleading and omitted to state material facts, in violation of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5).

The district court held that the action could not be maintained as a class action because the claims of the plaintiff were not "typical of the claims or defenses of the class" and because the class was not so numerous that joinder of all members was impracticable within the meaning of Rule 23 of the Federal Rules of Civil Procedure. Subsequently summary judgment was rendered for defendants on the Securities Exchange Act cause of action without passing upon the merits of plaintiff's common law action or upon defendants' motion to dismiss the derivative action.

The pertinent facts are disclosed in the district court's opinion which is reported in 288 F. Supp. 60. It appears that Peoria had 81,500 shares outstanding and had paid no dividends in recent years. Beginning in 1961, ACI acquired an 87% interest in Peoria through exchanging one share of ACI stock for each nine shares of Peoria stock and through purchasing additional shares at $3.00 per share. A year later, ACI sold its Peoria shares to U.S. Cold for the same price. After 1961, ACI elected a majority of the boards of directors of U.S. Cold and Peoria. Joseph S. Robinson was the chief executive officer of the three companies.

The district court found that from 1961 through 1964, Peoria unsuccessfully attempted to obtain financing for a new cold storage warehouse facility. On March 11, 1965, ACI and Peoria entered into a reorganization plan providing for the transfer of substantially all of the assets of Peoria to ACI in return for 16,319 shares of ACI stock, stated to be worth "not less than $285,582.50," and assumption of Peoria's liabilities. This exchange ratio was one share of ACI for five shares of Peoria, and the reorganization plan was of course subject to the approval of Peoria stockholders.

A few days later, a notice of a special stockholders' meeting was sent to Peoria's stockholders, calling for a March 31 meeting to consider the reorganization plan and the liquidation of Peoria thereunder.*fn1 A copy of the reorganization plan was enclosed with the notice, along with a letter from Peoria's president. This letter outlined the proposed stock exchange ratio and mentioned that Peoria would be dissolved. The letter stated that Peoria's board recommended a favorable vote because:

(1) ACI stock is readily marketable, whereas Peoria stock is of a "relatively marketless nature";

(2) ACI has been paying regular dividends, whereas Peoria "is unable to declare or pay a dividend";

(3) Peoria's stockholders would become stockholders in a larger, more diversified corporation and would continue to participate in earnings attributable to Peoria's assets which, through ACI's greater financial resources, might be "modernized or rebuilt."

The letter stated that a two-thirds vote was needed and that U.S. Cold owned 87% of Peoria's stock and would cast its stock in favor of approval. Peoria stockholders were also told that dissenting stockholders had appraisal rights under Section 73 of the Illinois Business Corporation Act (Ill.Rev.Stats.1967, ch. 32, § 157.73).

At the stockholders' meeting, plaintiff, with 3.3% interest in Peoria, orally voted his 2,703 shares against the reorganization plan and the dissolution of Peoria.*fn2 However, U.S. Cold's 70,539 shares, together with 783 other shares, were voted in favor of both propositions, which were therefore declared adopted.

Peoria's assets were thereafter transferred to ACI and Peoria was dissolved on August 23, 1965. ACI sold Peoria's assets for a total of $254,231.50, and in September 1966 completed the building of a new cold storage warehouse in East Peoria, Illinois, for $1,318,581 (including land). ACI sold this ...

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