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May 14, 1970


The opinion of the court was delivered by: Austin, District Judge.


On November 22, 1968 this court entered an order denying plaintiff's motion for summary judgment on the issue of liability. See Berman v. Thomson, 45 F.R.D. 342 (N.D.Ill. 1968). Because decisions which could be controlling on the issues involved in this case have subsequently been handed down, the court has taken under advisement plaintiff's motion to vacate the prior order and to enter summary judgment in her favor on the issue of liability on Count I.

The facts and plaintiff's contentions relative thereto were set forth in the court's prior opinion:

"Plaintiff sues derivatively on behalf of The Susquehanna Corporation and on behalf of herself and all shareholders of Susquehanna similarly situated to obtain relief against defendants, The Susquehanna Corporation, American Gypsum Company and Herbert F. Korholz, a director of both corporations. Plaintiff alleges that defendants violated Rule 14a-9, promulgated by the SEC under the authority of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a). Because Susquehanna was registered pursuant to Section 12(g) of the Act, the corporation and directors were subject to Rule 14a-9. Rule 14a-9 reads:

  No solicitation * * * shall be made by means of any
  proxy statement * * containing any statement which,
  at the time and in light of the circumstances under
  which it is made, is false or misleading with respect
  to any material fact, or which omits to state any
  material fact necessary in order to make the
  statements therein not false or misleading * * *

A claim for relief in favor of a private plaintiff maybe granted under Rule 14a-9. J.I. Case v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). Although other violations of Rule 14a-9 are alleged in her complaint, on this motion for summary judgment on the issue of liability plaintiff relies solely on the following undisputed facts.

By late 1965 Susquehanna had liquidated substantial railroad properties and was attempting to acquire operating companies which had earnings to offset an accumulated tax loss. On December 7, 1965, the shareholders of Susquehanna approved the merger of defendant American Gypsum Company into Susquehanna by a vote of 1,866,870 shares out of 2,487,613 shares entitled to vote; this majority exceeded the two-thirds vote of outstanding shares required by state law and represented 93% of all shares actually voting. Roughly, 1,200,000 shares were obtained by use of a proxy statement soliciting votes on behalf of Susquehanna's management which statement was mailed on November 12, 1965. Included in the proxy statement was a balance sheet as of June 30, 1965 (unaudited), which stated `Marketable securities at cost * * * $1,429,428.' A footnote entitled `11. Events Subsequent to June 30, 1965' stated, `The company has invested, since June 30, 1965, approximately 6 million dollars in marketable securities of listed domestic corporations. None of the holdings is representative of a 10% or more interest.' The 6 million dollar investment in fact consisted of 289,500 shares of General Refractories Company (8 1/2% of the total outstanding shares) which had been acquired shortly prior to October 21, 1965, and the Susquehanna Board of Directors had authorized the purchase of $1,850,000 more of Refractories stock to be deferred until the completion of the merger of Susquehanna and Gypsum. The shares already purchased represented about 22% of the total assets of Susquehanna (based on book values) and about 23% of assets minus liabilities. Plaintiff contends that defendants omitted to state the material fact that the 6 million dollar investment was all in Refractories, that the omission was misleading to shareholders in making their decision on the Gypsum merger, that Rule 14a-9 was therefore violated, and that summary judgment on the issue of liability should be entered." Berman v. Thomson, supra, 45 F.R.D. at 344.

In denying plaintiff's motion for summary judgment, this court specified three issues on which the parties were in dispute and which required a trial to resolve: (1) the financial injury sustained by plaintiff, and the class and corporation she represents, as a result of the merger; (2) the causal relationship between the proxy statement and the merger; and (3) the materiality of the admitted omission. The court will now examine each of these grounds in light of Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), Mills v. Electric Auto-Lite Company, 403 F.2d 429 (7th Cir. 1968) and Swanson v. American Consumer Industries, Inc., 415 F.2d 1326 (7th Cir. 1969).

Financial Injury.

The Supreme Court in Mills v. Electric Auto-Lite, supra, has indicated that a judgment against one who has violated § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), vindicates the statutory policy of full disclosure and furnishes an important means of enforcement of the statute. Therefore, a plaintiff who can prove a violation of the proxy statute is entitled to a judgment regardless of financial injury.


In its prior opinion, the court felt that even if the omission was held to be material, there would still be an issue of fact as to whether or not the shareholders would have still approved the merger had they known of the omission. See the Court of Appeals decision in Mills, supra. This requirement of reliance was rejected by the Supreme Court in Mills; "There is no need to supplement this requirement (of materiality) * * * with a requirement of proof of whether the defect actually had a decisive effect on the voting." 396 U.S. at 384-385, 90 S.Ct. at 622.


The sole ground remaining on which to sustain the court's prior ruling is that of materiality. The plaintiff contends that the Supreme Court in Mills declared a new test of materiality by its statement "that determination (of materiality) itself indubitably embodies a conclusion that the defect was of such a character that it might have been considered important by a reasonable shareholder in the process of deciding how to vote." 396 U.S. at 394, 90 S.Ct. at 621. If this was the court's intention, the test so declared would seem to be indistinguishable from other tests developed; "material in the sense that an average prudent investor ought to be informed." Mills v. Electric Auto-Lite Company, supra, 403 F.2d 433 (apparently adopting District Court's definition); Johns Hopkins University v. Hutton, 422 F.2d 1124 (4th Cir. 1970); or "whether `a reasonable man would attach importance [to the fact not disclosed] in determining his choice of action in the transaction in question'." Rogen v. Ilikon Corporation, 361 F.2d 260, 266 ...

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