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July 10, 1972


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


This cause comes on cross-motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The motions were filed in the case of Stickler v. International Industries, Inc., 71 C 2384.

Three mutual funds are involved in the instant litigation: Selected American Shares, Inc. (hereinafter referred to as "Selected American"); Selected Special Shares, Inc. (hereinafter referred to as "Selected Special"); and Selected Opportunity Fund, Inc. (hereinafter referred to as "Selected Opportunity"). All three are open-end mutual funds organized pursuant to the laws of the State of Delaware having their principal place of business in the State of Illinois. All three are investment companies registered pursuant to the Investment Company Act of 1940, 15 U.S.C. § 80a-1 to 80a-52 (hereinafter referred to as "the Act"). Plaintiff Stickler is the record and beneficial owner of approximately 2,476 shares of common stock of Selected American and has continuously so held such shares since prior to September, 1966.

Security Supervisors, Inc. (hereinafter referred to as "Supervisors"), an Illinois corporation, is the investment adviser for these three funds. Thus, pursuant to a management agreement between the fund and Supervisors, Supervisors furnishes investment advice and management services to each fund.*fn1 For these services, Supervisors receives a monthly fee calculated on the net value of the fund's assets.

Supervisors also acts as principal underwriter for each fund pursuant to an underwriting agreement between the fund and Supervisors. As principal underwriter, Supervisors acts as agent of the funds in selling their shares, at a discount from the public offering price, to dealers who in turn sell the shares to the public at the applicable public offering price.

Investors buy shares in the funds at the applicable public offering price, which is net asset value per share,*fn2 plus a specified sales charge. A shareholder may at any time require the fund to redeem his shares for cash at net asset value per share.

General supervision of the affairs of each fund is entrusted to its board of directors. Until 1970, the Act, which regulates the internal affairs of registered investment companies, required that a majority of the directors of a fund not be affiliated with the principal underwriter and at least forty percent not be affiliated with the investment adviser. In 1970, the Act was amended to broaden the group of persons who would be excluded from serving as mutual fund directors by substituting the term "interested person" in section 10, 15 U.S.C. § 80a-10, for the term "affiliated person". In the instant case, the stricter requirements of the 1970 amendments were fulfilled at all times.

Count I of the complaint, the only Count at issue in the instant motion, seeks to recover for the three funds a large portion of the purchase prices paid to stockholders of Supervisors in two transactions: (1) the sale in 1969 by certain stockholders of Supervisors of 80% of its stock to defendant International Industries, Inc. (hereinafter referred to as "International"); and (2) the resale in 1971 by International of that 80% of the stock of Supervisors and the sale by the other stockholders of the remaining 20% of the stock to defendant Lincoln National Corporation (hereinafter referred to as "Lincoln"). To effectively understand the gravamen of the complaint, it is necessary to examine these transactions in detail.

In early 1969, slightly less than 80% of the stock of Supervisors was owned by defendants Alvin H. Baum, Edward P. Rubin, Carl Holzheimer and Harry L. Sebel. Each of these men had been associated with Supervisors or Supervisors' predecessors for many years*fn3 and they constituted the senior management team of Supervisors.*fn4 They adopted a policy of building an expanded management group for Supervisors and, as a result, they developed a group of eight younger executives who assumed increasing responsibilities for rendering management and advisory services to American Selected and the investment portfolios managed by Supervisors.*fn5

Sometime in early 1969, when Baum, Rubin, Holzheimer and Sebel were all close to or over 65 years of age and nearing retirement, negotiations were conducted for the sale of the stock interest of these four seniors to International. The essentials of the sale were as follows:

    1. The approximately 80% stock interest in
  Supervisors owned by Baum, Rubin, Holzheimer and
  Sebel was sold to International for an aggregate
  purchase price of approximately $8,852,000 in cash
  and $1,550,000 in International's 5 7/8 %
  subordinated promissory notes, convertible into
  shares of common stock of International at $62.97 per
    2. Baum, Rubin, Holzheimer and Sebel each remained
  as advisers to Supervisors.
    3. Baum, Rubin, Holzheimer and Sebel each executed
  a three-year covenant not to compete with Supervisors
  for a consideration of $5,000 to each.
    4. The remaining 20% stock interest in Supervisors
  was retained by the eight younger executives under
  option agreements with International which prohibited
  sale or disposition of their shares for three years,
  subject to certain specified exceptions. After three
  years, each executive had an option to sell his
  shares to International, and after six years,
  International had an option to buy the executive's
    5. Four of the younger executives (Horwich,
  Neisser, Peckenpaugh and Vaicek) executed three-year
  employment agreements with Supervisors.
    6. Supervisors and International signed a statement
  of intention to govern the conduct of the affairs of
  Supervisors after the stock sale. The essential
  points of the statement were:
      (a) Supervisors would continue to operate its
    business autonomously and as a separate
      (b) a majority of the directors of Supervisors
    would be comprised of its active full-time officers
    and employees;
      (c) no change was contemplated in the investment
    policies or operating management of the mutual
    funds managed by Supervisors;
      (d) the final responsibility for all investment
    decisions would rest with Supervisors, acting in
    conjunction with the directors of the funds; and
      (e) the transaction would complete the transition
    of full responsibility for operations of
    Supervisors to the younger management group, with
    assistance from the senior management whose stock
    was sold and who would remain as advisers.
  Since under sections 2(a)(4) and 15 of the Act, 15 U.S.C. § 80a-2 (a)(4) and 80a-15, the sale of shares of Supervisors would be treated as an assignment resulting in termination of the management and underwriting agreements between Supervisors and the funds, shareholder approval of the new agreements was necessary. Accordingly, completion of the transaction was conditioned upon approval of new management and underwriting agreements by the shareholders of the funds.

In May of 1969, the board of directors of Selected American and Selected Special*fn7 were identical and consisted of seven individuals only one of which, Rubin, was either "affiliated" or "interested" in Supervisors.*fn8

The proposed transaction with International was discussed with the funds' directors at meetings held on May 9, 1969, and May 14, 1969. Information about the proposed transaction and arrangements for preserving management continuity was presented to the directors. At the meetings on May 14, 1969, the directors discussed proposed new management and underwriting agreements with Supervisors. The directors decided that the agreements should provide for an initial term of one year and that, in all other respects, the agreements were to be identical with the agreements then in effect. In their resolutions calling for meetings of shareholders to consider the new agreements, the directors specified that the management proxy statements were to have prior board approval. They required that preliminary proxy material be sent to each director for his study and stated that they would hold a future meeting to review in detail and make any changes in the proxy material they considered appropriate. The agreements between International and the shareholders of Supervisors were signed on May 14, 1969, after the directors' meetings.

On June 2, 1969, the directors held meetings to review the draft proxy material previously sent to them. After a general discussion, the proxy material of each fund, including the proposed letter to shareholders, was carefully reviewed by the directors. Suggested changes were discussed in detail, and a final version was agreed upon by the directors. The directors thereupon adopted resolutions recommending to the shareholders the continuation of Supervisors as investment adviser and principal underwriter under new management and underwriting agreements and approving the proxy material which had been considered and amended by the boards.

At special meetings held on August 20, 1969, the shareholders of Selected American and Selected Special approved the new management and underwriting agreements. On September 10, 1969, the sale to International of 80% of the stock of Supervisors was closed and the new management and underwriting agreements became effective.

As a result of this transaction, Plaintiff alleges, the sellers of the Supervisors stock received in the form of cash and promissory notes an excess over book value of ...

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