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