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United States District Court, Northern District of Illinois, E.D

June 3, 1981


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


In 1973 Michael Susman ("Susman") filed this class and derivative action on behalf of Consumers National Corporation ("Consumers") and its minority stockholders. Susman asserted 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"). Defendants contend that changes in the law as to Susman's class claims make it appropriate to grant judgment on the pleadings, or in the alternative to dismiss those claims.*fn1 For the reasons stated in this memorandum opinion and order defendants' motion is denied.*fn2

Facts leading to this litigation have been discussed in detail in two prior opinions of this Court*fn3 as well as in the opinions of other Judges who have been called upon to rule on the numerous motions the case has produced. There is no need for extended restatement. Briefly, on April 27, 1973 the stockholders of Consumers voted to merge with Lincoln Life. Under the merger agreement Lincoln Life continued as the surviving corporation and Consumers' minority stockholders received $8.50 for each share of stock they owned (a so-called "cash merger"). At the time of the merger Lincoln American owned some 64% of the Consumers common stock and of course voted in favor of the merger. Susman concedes that under Delaware law Lincoln American's 64% ownership was sufficient to carry the merger vote even if all Consumers minority stockholders had voted in opposition.

On April 26, 1973, one day before the merger vote, Susman (who then owned 200 shares of common stock of Consumers) filed this action charging that defendants were engaged in a freezeout of Consumers' minority stockholders. Susman claims defendants violated Section 10(b) of the Act and Securities and Exchange Commission ("SEC") Rule 10b-5 by issuing false and misleading proxy statements relating to the election of a Lincoln American controlled Board of Directors (the "1972 proxy statement") and to the merger vote (the "1973 proxy statement"). Specifically the Complaint alleges that the proxy statements:

  misrepresented . . . the financial position of
  Consumers by (i) substituting for Generally Accepted
  Accounting Procedures ("GAAP") figures, financial
  statements which were not so prepared, (ii)
  misstating Consumer[s'] . . . assets, (iii) omitting
  financial statements with respect to Lincoln Life and
  Lincoln American, (iv) disguising the dominance of
  the Consumers . . . Board of Directors by Lincoln
  American, (v) omitting appraisals of Consumers . . .
  as [a] going concern . . . [and] (vi) omitting to
  disclose that Lincoln American had paid $11.00 per
  share for 324,000 Consumers . . . shares (and
  control) in 1972, although the acquisition occurred
  less than one year before the tender offer at $8.50.

Defendants' Legal Theory

Defendants urge that Susman has failed to state a cause of action under Section 10(b) of the Act and Rule 10b-5. In their view the alleged omissions and misstatements on which Susman's Rule 10b-5 claim is predicated fail to satisfy the materiality requirement of the Rule.

There is no dispute between the parties as to two general propositions:

    1. Because Lincoln Life controlled 64% of the
  Consumers common stock "no vote of the minority
  shareholders . . . could have altered or affected the
  merger, and under these circumstances, no omission or
  misrepresentation in the proxy could be deemed
  material so far as the merger itself is concerned"
  (this quote is from defendants' memorandum).

    2. Under those circumstances Susman's only possible
  Rule 10b-5 claim would be that the alleged omissions
  and misstatements were "material" to his state
  remedies — that is, due to the omissions and
  misstatements Susman lacked information necessary for
  him to pursue such remedies. Santa Fe Industries,
  Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51
  L.Ed.2d 480 (1977).

But defendants argue that such materiality is belied by Susman's having filed this action, including a claim for injunctive relief, before the merger vote. Defendants reason that if Susman had enough information to file this action, by definition he also had enough information to pursue state remedies. It would then follow that any alleged omissions or misstatements cannot be considered material to his ability to seek state relief.

Susman has responded by claiming he has been disadvantaged by the alleged omissions and misstatements in the following respects, some or all of which give rise to a Rule 10b-5 cause of action under such cases as Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641 (3d Cir. 1980) and Swanson v. American Consumer Industries, Inc., 415 F.2d 1326 (7th Cir. 1969):*fn4

    1. Susman was precluded from effectively bringing
  "objections, arguments, public pressure and lobbying
  efforts" to bear on defendants before the merger
  vote. Faced with such informed opposition

  and "the potentially expensive appraisal rights of
  minority shareholders, [Susman reasons] the
  [defendants] might well have chosen to alter the
  plan . . . or abandon it entirely" (415 F.2d at

    2. Susman was "lulled into inaction" and thus did
  not pursue injunctive relief with the vigor that
  would have been possible had all material facts been

    3. Susman was effectively prevented from obtaining
  a "fairness hearing" to which he would have been
  entitled under Delaware law.

    4. Minority stockholders including Susman would not
  have relinquished their appraisal rights had they
  possessed knowledge of the "material facts."

Defendants do not deny that omissions or misstatements having such effects could be actionable under Rule 10b-5.*fn6 Instead they claim that Susman's filing of this action before the merger vote demonstrates conclusively that he in fact possessed sufficient information (despite the alleged omissions and misstatements) to "avoid" or overcome all of the effects he claims to have resulted from defendants' deception.

Defendants' analysis cannot prevail in the present posture of the case. As bizarre as it might seem in an eight-year-old lawsuit, the case is still at the pleading stage so as to invoke the principle stated in Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957):

  [A] complaint should not be dismissed for failure to
  state a claim unless it appears beyond doubt that
  plaintiff can prove no set of facts in support of his
  claim which would entitle him to relief.*fn7

In essence Susman acknowledges that the state of his knowledge before the merger vote was sufficient to warrant his filing a lawsuit. But because of defendants' alleged omissions and misstatements in the proxy materials, Susman contends that he (and other minority stockholders) were insufficiently informed to pursue injunctive relief or a fairness hearing effectively or to decide to insist on appraisal rather than acquiesce in the sale of their shares.*fn8 Neither side has adduced any authority treating directly with such a "partial knowledge" concept, but it appears arguably maintainable under the Supreme Court's expansive definition of "materiality" for Rule 10b-5 cases in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 439, 96 S.Ct. 2126, 2127, 48 L.Ed.2d 757 (1979):

  An omitted [or misrepresented] fact is material . . .
  if there is a substantial likelihood that, under all
  the circumstances, the omitted fact would have
  assumed actual significance in the deliberations of
  the reasonable shareholder. Put another way, there
  must be a substantial likelihood that the disclosure
  of the omitted

  [or misrepresented] fact would have been viewed by
  the reasonable investor as having significantly
  altered the "total mix" of information made

Merely filing a complaint supports the inference that the plaintiff has some knowledge of or belief in defendants' wrongdoing. Nonetheless it is possible that such a degree of knowledge could also be insufficient to allow the effective immediate pursuit of extraordinary remedies (such as injunctive relief or relief afforded under a fairness hearing) or to make an informed decision about invoking appraisal rights. If, as Susman claims, that situation exists here because of defendants' omissions and misstatements, it can hardly be concluded, consistent with TSC Industries, that such deception is immaterial as a matter of law.

Susman's allegations, and therefore his claim to relief under Rule 10b-5, may prove unfounded. However at this juncture the Court is not permitted to make that determination on the pleadings, for Susman has met his Conley burden.*fn9


Defendants' motion for judgment on the pleadings or alternatively to dismiss is denied.

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