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SUSMAN v. LINCOLN AM. CORP.

November 3, 1980

MICHAEL SUSMAN, PLAINTIFF,
v.
LINCOLN AMERICAN CORPORATION ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

This is a putative class and derivative action filed in 1973 by Michael Susman ("Susman") on behalf of Consumers National Corporation ("Consumers") and its minority shareholders, alleging various violations of the Securities and Exchange Act of 1934 (the "Act") in connection with the merger of Consumers into Lincoln American Life Insurance Company ("Lincoln Life"), a wholly-owned subsidiary of Lincoln American Corporation ("Lincoln American"). At issue are three outstanding motions: Susman's Motion for Leave To Amend the Amended Complaint and cross-motions for summary judgment respecting alleged violations of Sections 12(g) and 14 of the Act and rules promulgated thereunder.*fn1 For the reasons stated in this memorandum opinion and order, Susman is granted leave to amend the Amended Complaint, defendants' motion for partial summary judgment is granted and Susman's cross-motion for partial summary judgment is denied.

Facts

On February 1, 1972 defendant Consumers National Life Insurance Company ("Consumers Life") became a wholly owned subsidiary of Consumers, in a transaction in which Consumers Life shareholders became shareholders of Consumers. As a result, Consumers became for the first time a corporation with more than 500 shareholders and over $1,000,000 in assets, thus starting the timetable established by Section 12(g)(1) of the Act:

Every issuer . . . shall

  (B) within one hundred and twenty days
    after the last day of its first fiscal
    year . . . on which the issuer has
    total assets exceeding $1,000,000 and
    a class of equity security (other than
    an exempted security) held of record
    by five hundred or more but less than
    seven hundred and fifty persons,
  register such security by filing with the
  Commission a registration statement (and
  such copies thereof as the Commission
  may require) with respect to such security.
  . . . Each such registration statement
  shall become effective sixty days after
  filing with the Commission or within such
  shorter period as the Commission may
  direct. Until such registration statement
  becomes effective it shall not be deemed
  filed for the purposes of section 78r of
  this title [Section 14 of the Act].

Susman and defendants agree as to the calculations under that timetable. Consumers' fiscal year is the calendar year. Accordingly, the period specified in Section 12(g)(1)(B) ended 120 days after the last day of 1972, or April 30, 1973.*fn2

During the last half of 1972, Lincoln acquired at least 64% of the Consumers common stock, which it transferred to its subsidiary Lincoln Life. Some time thereafter the directors of Consumers and Lincoln Life unanimously approved an agreement of merger, contingent upon shareholder approval. Under the merger plan Consumers' shareholders were to receive $8.50 for each share of Consumers' stock they owned, and Lincoln Life would continue as the surviving corporation (a "cash merger," challenged by Susman as a freezeout of the minority shareholders).

In connection with the proposed merger, proxy materials were mailed to Consumers' shareholders April 2, 1973 (it is the non-submission of those materials for prior SEC approval that poses the legal issue between the parties). On April 27, 1973 the shareholders adopted and approved the agreement of merger, effective as of the date of the necessary filings under applicable (Tennessee and Delaware) law. Those filings were made on April 30, 1973, and on that date Consumers was dissolved.

On April 26, 1973 Susman had filed this action alleging numerous violations of the securities law in connection with the transactions. All defendants were served on various dates after May 1, 1973.

Defendants then filed a Motion for Summary Judgment with respect to claims under Sections 12(g) and 14 of the Act and SEC Rules 14a-3, 14a-6, and 14a-9, asserting that because Consumers was dissolved on April 30, 1973 it never had a duty to comply with the registration and proxy rules those provisions establish. For reasons not explained in any now-pending memoranda before the Court, on January 25, 1974 all parties stipulated to the dismissal without prejudice of claims based on alleged violations of Sections 12(g) and 14 of the Act. Susman filed his Amended Complaint on December 11, 1974, deleting claims under those provisions but alleging that the merger had been timed to avoid their application.

Finally, on April 24, 1975, Susman filed (1) a Motion for Leave To File an Amendment to the Amended Complaint that would reinstate the Sections 12(g) and 14 allegations and (2) a cross-motion for summary judgment on those claims. Defendants contest the propriety of allowing such amendments and, ...


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