The opinion of the court was delivered by: Robert D. Morgan, District Judge.
Plaintiff, a shareholder of defendant, Peoria Service Company,
filed this suit on behalf of Peoria and all Peoria shareholders
who are similarly situated, praying injunctive and other relief
based upon allegations that violation of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and fraud
affected a plan of corporate reorganization which led to the sale
of Peoria's assets to the defendant, American Consumer
Industries, Inc. (hereinafter ACI), and the dissolution of
The case was established as a class action under Rule 23,
Federal Rules of Civil Procedure, through Notice proceedings
leading to order of this court, dated April 7, 1970, through
which it was decided that the notice was sufficient to bind those
of the class who did not elect to be excluded. Thirty-one
persons, holding over 73,000 of 81,594 shares outstanding, did
formally elect to be excluded. This court hereby readopts the
findings and conclusions stated in that prior order.
Prefatorily, the format of litigation arises from facts which
are stipulated as follows. In and prior to March, 1965, ACI owned
90% of the outstanding shares of the defendant, United States
Cold Storage Corporation (hereinafter USC). U.S.C. owned slightly
more than 86% of the outstanding shares of Peoria. As a result of
that dominant ownership, at all material times, ACI elected all
of the board of directors of U.S.C. and U.S.C. elected all of the board
of directors of Peoria. At all material times, Peoria's board of
directors was comprised wholly of persons who were officers or
directors, or both, of ACI.
About March 11, 1965, Peoria and ACI entered into an agreement
and plan of reorganization for Peoria, which provided, in
pertinent part, for the sale of Peoria's assets to ACI, the
consideration to be paid in ACI stock, followed by the
dissolution of Peoria and distribution of the ACI shares as a
liquidation dividend on dissolution to Peoria's shareholders.
That plan was approved by Peoria's shareholders at a special
meeting held March 31, 1965. Peoria's assets were transferred to
ACI as of April 1, 1965. Peoria was dissolved August 23, 1965.
The charge of defendants' violation of Section 10(b) rests upon
allegations that proxy information submitted to Peoria's
shareholders with the notice of the special meeting was deceptive
in that it failed to disclose material information and thus
caused damage to that corporation and its minority shareholders.
In summary, that information, contained in a letter from Joseph
S. Robinson, as Peoria's president, stated that the Peoria board
of directors recommended approval of the reorganization plan for
the stated reasons that ACI shares were readily marketable
securities compared with the "relative marketless nature" of
Peoria's shares; that ACI had paid dividends annually for 20
consecutive years, compared with Peoria's inability to pay
dividends; and that the plan would give Peoria's shareholders an
interest in a diversified industry not dependent upon local
conditions. The letter also advised the Peoria shareholders that
U.S.C. owned about 87% of Peoria's outstanding shares and that U.S.C.
had indicated that it would vote its shares in favor of the plan
of reorganization and in favor of the dissolution of Peoria. That
letter further advised the Peoria shareholders that U.S.C. was a
subsidiary of ACI, but it did not expressly advise them that
Peoria, ACI and U.S.C. had interlocking boards of directors or some
other factual matter noted below.
Summary judgment was entered for the defendants in this court
on August 20, 1968. Swanson v. American Consumer Industries,
Inc., 288 F. Supp. 60 (S.D.Ill. 1968). That judgment was reversed
and the cause was remanded to this court for trial. Swanson v.
American Consumer Industries, Inc., 415 F.2d 1326 (7 Cir. 1969).
The Court of Appeals held "that these proxy statements were
misleading in material respects and were deceptive as a matter of
law." 415 F.2d at 1331. Deception was noted in failure of the
letter to disclose that all of Peoria's directors were ACI
officers and directors, in failure to state the valuation of
Peoria's assets with justification, and in failure to disclose
ACI's intention to dispose of Peoria's physical plant and to
construct new facilities to serve the Peoria, Illinois, area,
which Peoria theretofore had served.*fn1 415 F.2d at 1330-1331.
The cause was remanded for trial of factual issues to determine
whether there is a causal relationship between that deceptive
material and the Peoria-ACI transaction, and whether by such
deception or any fraud Peoria or its minority shareholders, or
both, were injured. 415 F.2d at 1332.
After a trial, as well as additional briefing and proposed
findings and conclusions by the parties, the court, on the basis
of the evidence and stipulations in the record before it, makes
1. Any facts stated above which may not be fully covered below.
2. Plaintiff, an Illinois resident, has been a shareholder of
Peoria since at least 1956, and on March 31, 1965 he was the
owner of 2,703 shares of Peoria common stock.
3. ACI is a New Jersey corporation with its principal offices
in New York, New York. It is primarily a holding company,
engaged, both directly and through its subsidiaries, in the
marketing of diversified consumer commodities and services. At
all material times, ACI has engaged, directly or through
subsidiaries, in the business of cold storage warehousing and in
the manufacture and sale of ice.
4. At all material times, ACI's shares were listed and traded
on the New York Stock Exchange.
5. U.S.C. is a Delaware corporation, with its principal place of
business in New York City. It is a subsidiary of ACI, and ACI
owns 90% of its outstanding capital stock. On and prior to March
31, 1965, U.S.C. was engaged primarily in the operation of a number
of cold storage warehouses in various cities other than Peoria,
Illinois. Since September, 1966, it has also operated a cold
storage warehouse at East Peoria, Illinois.
6. Prior to its dissolution, Peoria was an Illinois
corporation, which had for many years engaged in the manufacture
and sale of ice and the operation of cold storage warehouses in
Peoria, Illinois, operating from two warehouses, hereinafter
referred to as plant number one and plant number two. Plant
number one, consisting of cold storage and garage facilities, was
located on Washington Street in Peoria. Plant number two,
comprised of warehouse facilities, embraced two parcels of real
estate on Adams Street in Peoria.
7. As of March 31, 1965, Peoria had 81,594 shares of its common
stock outstanding; its shares were traded in the over-the-counter
market; and on that date U.S.C. was the owner of 70,539 of Peoria's
shares, or slightly in excess of 86% of its total shares
8. In the Spring of 1961, ACI had been approached by a broker
who offered about 80% of Peoria's outstanding shares for sale.
That contact culminated in a contract between ACI and Peoria's
controlling shareholder for the transfer to ACI of 69,206 shares
of Peoria stock in exchange for ACI shares at an exchange ratio
of nine shares of Peoria for one share of ACI. That exchange
attributed a value of about $2.75 per share for the Peoria stock,
based upon the then price range of ACI on the Stock Exchange. The
agreement also provided that ACI would tender an offer to other
Peoria shareholders for the purchase of their stock at a price of
$3.00 per share. Additional shares were acquired by ACI as a
result of that tender offer.
9. In 1962, ACI sold its Peoria shares to U.S.C. at ACI's cost
thereof. U.S.C. increased its Peoria holdings from time to time
until it owned about 86% of Peoria in March, 1965.
10. At all material times, Joseph S. Robinson was the chief
executive officer of ACI, U.S.C. and Peoria.
11. By the early 1960's Peoria's cold storage plants were
antiquated and not adaptable to modern warehousing practices.
They were multi-story buildings of limited capacity. Truck
docking space was inadequate, doors were too small to permit the
use of lift trucks, and operation was largely a matter of hand
labor. Walls and floors had cracked in some areas, roofs and
insulation were in poor condition, and the elevators upon which a
multi-story operation depended frequently broke down. Except for
some automated equipment in its plant number one, its
refrigeration equipment was obsolete, requiring constant
engineering attention to keep it operating. Its operations were
hampered by cumbersome and costly labor union contracts. It
employed 32 persons in 1961, a number reduced to 25 employees by
12. By 1960 Peoria had not paid any dividends in recent years.
Its prior operations were marginal, in some years resulting in
net losses. Its operational position was affected by its
over-reliance for profit on the ice manufacturing business.
13. ACI's management was aware of the existing marginal
situation when ACI acquired a controlling interest in Peoria.
Robinson was then of the opinion that successful operation of
Peoria would require substantial remodelling or replacement of
its obsolete facilities. For that reason, he required, as a
condition to the control acquisition agreement, that Peoria
exercise an option which it then held to purchase the Wilton
Mortuary property, situated adjacent to Peoria's Adams Street
plant, and the Wilton property was purchased by Peoria at a cost
14. Immediately after its acquisition of control of Peoria, ACI
transferred Sidney McCausland to Peoria as its vice president and
general manager. McCausland then had twenty years' experience in
the cold storage business. Just prior to his transfer to Peoria,
he had been the manager of USC's cold storage plant at Stockton,
15. Upon assuming the management function at Peoria in 1961,
McCausland undertook to change the business emphasis from ice
manufacturing to cold storage warehousing. He sought and acquired
additional storage business from national accounts, and he
determined that there was more storage business potential in the
area than Peoria's facilities could accommodate.
16. Peoria's operating costs were excessive due to the
obsolescence of its facilities, the difficulty of keeping its
equipment operable, and the labor costs. Though there was no cold
storage competition in Peoria, McCausland encountered competition
in national frozen food accounts from other areas, principally
from Chicago. Price competition prevented increased charges to
customers to offset increases in already excessive costs. During
his first year at Peoria, ...