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SUSMAN v. LINCOLN AMERICAN CORP.
June 3, 1981
MICHAEL SUSMAN, PLAINTIFF,
LINCOLN AMERICAN CORPORATION, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
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
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 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
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.
2. Susman was "lulled into inaction" and thus did
not pursue injunctive relief with the vigor that
would have been possible had ...
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