Appeals from the United States District Court for the Northern District of Illinois, Eastern Division - Nos. 71 C 2349, and 71 C 2141 Hubert L. Will, Judge.
Tom C. Clark, Associate Justice,*fn* Pell and Sprecher, Circuit Judges.
Jordan Jay King and Dorothy King, shareholders in Technology Funds, Inc., appeal orders denying them class action status and approving a settlement of all claims arising from the merger of Supervised Investors Services, Inc. and Kemperco, Inc. The Kings with Melvin Stoller (the Kings) brought this action as representatives of four mutual funds (the Funds); Technology Fund, Inc. (Technology), Balanced Income Fund, Inc. (Balanced), Supervised Investors Summit Fund, Inc. (Summit), and Supervised Investors Growth Fund, Inc. (Growth). Their complaint named as defendants Kansas City Southern Industries, Inc. (KCSI) and the principal shareholders and officers of Supervised Investors Services, Inc. (SIS), John Hawkinson, Russell Matthias, Courtenay Davis, John Porter, Jr., J. Milburn Smith and Chester Tripp.
The Kings claimed defendants violated Sections 15*fn1 and 20(a)*fn2 of the Investment Company Act of 1940, Sections 10(b)*fn3 and 14(a)*fn4 of the Securities Exchange Act of 1934, Rule 10b-5*fn5 of the rules and regulations of the Securities and Exchange Commission, and their common law fiduciary obligations to the Funds and their shareholders. The plaintiffs sought $18 million in damages and injunctive relief.
The Funds are open-end diversified investment companies registered and regulated under the Investment Company Act of 1940.*fn6 Virtually all their assets are invested in securities listed and traded on national securities exchanges. By 1971 Summit held securities worth $52 million, Balanced, $14 million, Growth, $197 million, and Technology, $715 million. As is the case with mutual funds, the Funds merely held title to these securities. SIS, the Funds' creator, principal underwriter and investment advisor, controlled all trading in them. In return for this service SIS received an annual management fee based on the total of the Funds assets. In 1969, SIS's advisory fees were $3.5 million and their underwriting commission $1.2 million. SIS's net assets amounted to approximately $1.5 million. Finally, SIS was controlled in turn by KCSI which owned 54 percent of outstanding SIS common stock.
During 1969 and 1970 the individual defendants staffed the Funds, SIS and KCSI. John Hawkinson was president and Russell Matthias the secretary-treasurer of all four Funds as well as SIS. Both were directors and shareholders in the Funds and SIS, and Hawkinson was a director of KCSI. Chester Tripp was a director of each of the Funds and a director and stockholder of SIS. Courtenay Davis, John Porter and Milburn Smith were the remaining directors and shareholders of SIS.
On November 6, 1969, SIS entered into a merger agreement with Kemperco. SIS agreed to transfer its business, assets and liabilities to a subsidiary of Kemperco bearing the same name, Supervised Investors Services, Inc. Kemperco in return agreed to issue to SIS's shareholders for each share of SIS stock 0.8 shares of Kemperco common stock and 0.2 warrants to purchase Kemperco common stock. During the period the merger agreement was negotiated, Kemperco stock was trading from a low of $19.50 to a high of $27.50. Since such a merger, however, would by operation of law (15 U.S.C. § 80a-15(a)(4)) automatically terminate the advisory and underwriting contracts between SIS and the Funds, SIS promised further to recommend to Funds shareholders approval of new advisory and underwriting contracts between the Funds and the new SIS. Clearly, gaining shareholders' approval was a crucial preliminary to merger. Meetings were called for Balanced and Technology shareholders for January 15 and for Summit and Growth shareholders for February 19, 1970, and proxy materials were mailed to them.
In a covering letter Hawkinson, citing the recommendations of the SIS management and the Boards of Directors of the four Funds, urged acceptance of the proposed service contracts. Hawkinson's signed letter reads in part:
With this letter you will find a notice and proxy statement with regard to the annual meeting of shareholders. . . . Before you read the proxy statement, I would like to inform you of a major new development affecting the manager of your fund. Supervised Investors Services, Inc., the Fund's investment adviser and underwriter, and Kemperco, Inc., a Chicago based insurance and financial services holding company, have jointly announced a proposed merger of Supervised Investors Services, Inc. into Kemperco, Inc. and the operation of Supervised Investors Services, Inc. as a wholly owned subsidiary of Kemperco, Inc.
The proposed merger, which is described in detail in the attached proxy statement, is subject to certain conditions, including approval by the shareholders of the Fund of new investment advisory and underwriting agreements with Supervised Investors Services, Inc.
Before going further, I want to emphasize that:
1. The proposed merger does not contemplate any changes in your Fund. Your Fund will not be merged. It will retain its separate identity.
2. The name, investment policies and objectives of your Fund will not be changed.
3. Supervised Investors Services, Inc., as a subsidiary of Kemperco, Inc., will continue to operate as an autonomous corporation; and there will be no ...