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SUSMAN v. LINCOLN AMERICAN CORP.

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


January 9, 1984

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

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

  FINDINGS OF FACT AND CONCLUSIONS OF LAW*fn*

In 1973 Michael Susman ("Susman") brought this suit as a derivative action on behalf of Consumers National Corporation ("Consumers") and as a class action on behalf of Consumers' minority shareholders (the "Class," termed simply "plaintiffs" where there is no need to distinguish between the Class and Susman).*fn1 Susman asserted various violations of the Securities and Exchange Act of 1934 (the "Act") and of state law in connection with Consumers' 1973 "going private" merger into its majority shareholder Lincoln American Life Insurance Co. ("Lincoln Life"), a whollyowned subsidiary of Lincoln American Company of New York ("Lincoln American"). Ten years of motions and appeals*fn2 narrowed the scope of the action considerably. Then this Court's bench trial earlier this year gave the Class — but not Susman individually*fn3 — its hearing on the two remaining claims:

    1. Material misrepresentations in and omissions from
  Consumers' April 1973 proxy statement (the "1973 Proxy,"
  Pl.Ex. 12) violated Act § 10(b) and Rule 10b-5 promulgated
  thereunder.

    2. In controlling Consumers' transactions and disclosures in
  1972 and 1973, defendants breached their fiduciary duties to
  Consumers' shareholders under Delaware law.

In accordance with Fed.R.Civ.P. 52(a) this Court finds the facts specially as set forth in the following Findings of Fact ("Findings") and states the following Conclusions of Law ("Conclusions"). To the extent if any the Findings as stated reflect legal conclusions, they shall be deemed Conclusions; to the extent if any the Conclusions as stated reflect factual findings, they shall be deemed Findings.

Findings of Fact

Parties and Relevant Transactions

1. Until August 1, 1972 Consumers National Life Insurance Co. ("Consumers Life") was a small life insurance company based in Evansville, Indiana. It was a publicly-held corporation until February 1, 1972, when it became a wholly-owned subsidiary of Consumers in a transaction in which Consumers Life shareholders became shareholders of Consumers instead. On August 1, 1972 Consumers and Consumers Life headquarters were moved to Memphis, Tennessee, where both companies continued their existence until Consumers was merged into Lincoln Life April 30, 1973. That merger of Consumers into Lincoln Life is the subject of this litigation.

2. At all relevant times Lincoln Life was a Tennessee life insurance company based in Memphis. On April 1, 1969 Lincoln Life had become a wholly-owned subsidiary of Lincoln American Co. of Tennessee ("Lincoln Tennessee") in a transaction in which Lincoln Life shareholders became shareholders of Lincoln Tennessee. Based on an agreement tentatively reached in October 1971, Lincoln Tennessee merged with Coburn Corporation of America ("Coburn") on May 1, 1972 to become Lincoln American.

3. In early 1969 Consumers Life management had asked defendant Richard Keathley ("Keathley"), President of Lincoln Life, to cause Lincoln Life to serve as a "white knight" by taking a controlling stock position in Consumers Life.*fn4 Lincoln Life offered to purchase a substantial block but the proposed deal was not consummated. Then in 1970 Consumers Life had given D.P.C., Inc. ("DPC") the capacity to control Consumers Life so that control could be marketed to a suitable third party. DPC was owned by Richard Davoust ("Davoust"), chief executive officer of Consumers Life and later Consumers, but Consumers Life retained the right to approve transfer of DPC's Consumers stock and stock option rights to a third party. DPC owned 124,190 shares of Consumers Life and an option (expiring February 24, 1972) to purchase 200,000 authorized but unissued Consumers Life shares at $7 per share.*fn5 Based on 742,826 shares outstanding (after giving effect to the assumed exercise of the 200,000-share option), DPC therefore was capable of owning 43.6% of Consumers Life stock. On September 28, 1971 Lincoln Tennessee acquired an option from DPC, good through February 1, 1972 (the "DPC Option"), to acquire its position in Consumers Life at a cost to Lincoln Tennessee (including the $1.4 million needed to purchase the 200,000-share block at $7 per share) of $11.10 for each of the 324,190 Consumers Life shares. Rather than exercise the DPC Option on the even of its proposed merger with Coburn, Lincoln Tennessee assigned that Option to Coburn, which exercised it (subject to the approval of the Indiana Insurance Commissioner) January 31, 1972.

4. Coburn obtained the approval of the Indiana Insurance Commissioner, and on May 3, 1972 Lincoln American (as successor to Coburn) closed its purchase of 43.6% of Consumers (as successor to Consumers Life). Five days later Davoust resigned and was replaced by Keathley as President of both Consumers and Consumers Life. Lincoln American and its subsidiaries began acquiring Consumers' shares on the open market, and by June 8, 1972, the same month as the 1972 Consumers shareholders' meeting, Lincoln American effectively owned 50.2% of Consumers' shares. As announced in the June 1972 proxy statement (the "1972 Proxy," Pl.Ex. 6), at the shareholders' meeting Lincoln American elected four members of its own board of directors to Consumers' new five-member board of directors*fn6: individual defendants Irving Bernstein ("Bernstein"), who was Lincoln American's President, Consumers' Chairman and Consumers Life's Chairman and also became Consumers' President; Keathley, who was Lincoln Life's President and remained as Consumers Life's President; Seymour Rosenberg ("Rosenberg"); and Jack Wilder ("Wilder"), who was Lincoln American's Chairman. As the fifth member of the Consumers board, Lincoln American elected incumbent Consumers' and Consumers Life's director Robert Kelly ("Kelly"), also an individual defendant. Lincoln American elected an identical board to direct Consumers Life. Kelly meanwhile took a position as Vice President of Lincoln Life.

5. It is not seriously contested that from the time Lincoln Tennessee obtained the DPC Option, Lincoln Tennessee and its successors Coburn and Lincoln American possessed at least an abstract intent to merge Consumers Life and Lincoln Life.*fn7 Moreover on July 7, 1972 Lincoln Life obtained permission from Tennessee's Insurance Commissioner to buy Consumers' shares from Lincoln American (Pl.Ex. 28) subject to the condition that Keathley "plot a course of merger in the very near future." Lincoln American moved Consumers' administrative operations to Memphis and consolidated them with those of Lincoln Life on August 1, 1972, thus realizing substantial savings. Lincoln American and its subsidiaries continued to make open market purchases, so that by March 29, 1973 Lincoln American effectively owned 63.7% of Consumers' outstanding shares.

6. In the 1973 Proxy, Consumers' board of directors (elected by Lincoln American in June 1972) recommended for shareholders' adoption a merger agreement providing for a mandatory cash-out merger, with all minority shareholders to receive $8.50 per share and with Lincoln Life to be the surviving corporation. It announced a special April 27, 1973 Consumers shareholders' meeting to vote on the merger, and it further announced the intention of Lincoln Life and its subsidiaries to vote in favor of the merger. Because Lincoln American controlled 63.7% of the vote, more than was required by Delaware law and Consumers' Articles of Incorporation, no degree of opposition by the minority shareholders could have defeated the merger. In fact 38.7% of all minority shares were voted on the merger, and of those shares 86.7% were voted in favor of and 13.3% were voted against the merger.

7. Susman brought this suit on behalf of minority shareholders April 26, 1973, the day before the special shareholders' meeting, seeking damages and injunctive relief. None of the defendants was served until after the merger was consummated, and no motion for a preliminary injunction was ever made. Claims remaining for disposition at the time of trial require factual determinations of (a) the actual value of minority shares at the time of the merger, (b) the existence and extent of any misrepresentations or omissions in the 1973 Proxy and whether Susman relied upon them to his detriment and (c) whether defendants breached state law duties to the minority shareholders between their acquisition of control of Consumers and the consummation of the merger.

Value of Consumers Shares

8. On March 19, 1969, shortly after Consumers Life had sought out Lincoln Life to act as a "white knight" (Finding 3), actuary John Frucella ("Frucella") had determined Consumers Life was worth about $6.8 million as of December 31, 1968, or $12.57 per share based on the 542,914 shares outstanding before exercise of the DPC Option. Frucella. then an actuary for American General Insurance Co. ("American General"), prepared the valuation ("1969 Frucella valuation") at the request of Andrew Delaney ("Delaney"), a director of Lincoln Tennessee who was also a Vice President of American General.*fn8 Frucella had been trained in valuation by Delaney, who in turn was widely regarded as an expert in life insurance valuation. Frucella's valuation had as its principal component his finding that Consumers Life's $150.6 million face value in outstanding ordinary (as opposed to group) life insurance policies were worth about $4.3 million as an asset of the company. That finding in turn was based on a 1967 gross premium valuation by the actuarial firm of Nelson & Warren, Inc. Frucella found (Pl.Ex. 4A) Nelson & Warren's valuation, although high, was realistic because "approximately 20 percent of the company's business was written at exceptionally high premium rates."

9. In 1971, when Lincoln Tennessee was negotiating the DPC Option (Finding 3), Delaney had told Keathley Consumers Life was worth $11 per share. After Lincoln Tennessee acquired the DPC Option, Delaney assured Coburn's top management (including Wilder and Bernstein) that was a fair price. In addition on January 6, 1972 Frucella sent Keathley a second valuation of Consumers Life ("1972 Frucella valuation"), this time reporting the company was worth about $6.8 million, or $12.50 per share based on 542,914 shares and $11.02 per share if an additional 200,000 shares were issued as contemplated by the DPC Option agreement. That second valuation was expressed as of December 31, 1970, by which time Consumers Life's insurance in force had dropped to $139 million face value. Frucella found Consumers Life's ordinary life insurance policies were worth about $4.4 million, this time basing his finding on the 1970 Nelson & Warren report and his own calculation of future profits discounted at 12% to present value.*fn9 Frucella stated his valuation was conservative for a number of reasons.*fn10 Based on the advice of Delaney and Frucella, Coburn accepted an assignment from Lincoln Tennessee of the DPC Option.

10. Because DPC controlled a substantial portion of Consumers Life's stock, Coburn's acquisition of the DPC Option required the approval of the Indiana Insurance Commissioner (Finding 4). At an April 1972 hearing by the Indiana Insurance Commissioner, Bernstein testified the terms of that acquisition were fair and reasonable to Consumers' shareholders (formerly Consumers Life's shareholders). On the basis of documents filed before the Indiana Insurance Commissioner and admissions in depositions by Bernstein (Dep. 59) and Wilder (Dep. 61-62), this Court cannot affirmatively find the defendants perceived the $11.10 figure as including any "control premium" that might destroy the relevance of that figure to the real value of Consumers stock. Nonetheless the market value of Consumers stock at the time was only $7.50, a figure that cannot be ignored in investigating the significance of the $11.10 price.*fn11

11. Once Lincoln American acquired its control block of Consumers stock and began to acquire additional shares on the open market, accountant Julius Glassman ("Glassman"), Lincoln American's Treasurer, from time to time worked with the accounting consequences of the proposed Lincoln Life-Consumers merger. For instance, shortly after the DPC Option was exercised Glassman was calculating what portion of Consumers' acquisition would be carried as good will, and in making notes on a scratch pad at one point (Pl.Ex. 86(b)) wrote: "We will pay . . . $8,000,000 For company." Similarly one page of Glassman's note pad written on October 26, 1972 (Pl.Ex. 86(c)) included the words "Cost . . . 8000 [M]." Plaintiffs seek to use these nearly-illegible notations as evidence that at any point in the acquisition process the minority shares were equal in value to $8 million minus the cost of the shares acquired by Lincoln American to that date. This Court rejects the notion that kind of rough calculation by an accountant, necessarily based on speculation about what future events might bring and obviously intended to reflect a working hypothesis for accounting treatment rather than a definitive valuation, has the probative force plaintiffs urge.

12. At trial plaintiffs called Milton Meigs ("Meigs"), financial analyst at the firm of Duff & Phelps, as an expert witness on the value of the Class' shares at the time of the merger. Defendants countered Meigs' testimony with that of William Buchanan ("Buchanan"), a Fellow of the Society of Actuaries. Both estimated the value of Consumers by predicting the amount of income it could produce and discounting that prospective income stream to its present value. As the table in the Appendix (the "Chart") indicates, Meigs testified Consumers was worth $10.16 per share at the time of the merger, while Buchanan testified it was worth $6.61 per share. Meigs based his entire analysis on Consumers' 1972 earnings, rejecting all prior years as non-representative because of pre-fiscal 1972 changes he viewed as fundamental.*fn12 After adjusting for certain extraordinary events in 1972 Meigs predicted Consumers would grow at 3% per year indefinitely and based his present value calculations on that prediction. By contrast Buchanan found one year too short a time period on which to base his calculations. Instead he used the average annual earnings of 4 1/4 years ending March 31, 1973, thereby including the first quarter of Consumers' fiscal 1973 as well as fiscal years 1969-72. Buchanan adjusted the 4 1/4 year earnings history by the same extraordinary factors Meigs considered, but he rejected Meigs' 3% growth prediction and based his present value calculations on the prediction Consumers' earnings would neither grow nor decline.*fn13 For Findings 13-19 it is useful to refer on a continuing basis to the Chart's tabular comparison of the two witnesses' valuations.

13. As the Chart reveals, there are only a few serious points of disagreement between Meigs and Buchanan. After meeting Buchanan more than halfway on the question of Consumers' 1972 adjusted earnings,*fn14 Meigs nonetheless found each share worth $3.50 more than Buchanan because of differences in methodology represented by the lines of the Chart containing its footnotes 2 and 3. Meigs' removal of investment earnings from his general present value calculations increased his conclusion as to Consumers' value by about $800,000, more than $1 per share. His use of a 3% annual growth rate instead of a flat earning stream increased his conclusion as to Consumers' value by about $1.4 million, almost $2 per share. Meanwhile Buchanan's use of 1969-73 average adjusted earnings, rather than 1972 adjusted earnings alone, reduced his conclusion as to Consumers' value by about $1.2 million, more than $1.50 per share.*fn15 Those substantial differences may be translated into two issues of fact:

    (a) Should Consumers' investment earnings be separated from
  and capitalized independently of its life insurance premium
  earnings, as Meigs did and Buchanan did not?

    (b) Whose view of Consumers' prospects is more accurate:
  Meigs' view that it would grow from its 1972 adjusted
  earnings at 3% annually in perpetuity, or Buchanan's view
  that it would return to its average adjusted earnings of the
  prior 4 1/4 years and remain at that level?

14. On the evidence the first issue must be and is resolved in defendants' favor. Buchanan testified (Tr. II 60-61) the company as a whole, not just its life insurance branch, creates an earnings stream. Thus he concluded (id. at 62-63) given the information available it is best to capitalize the entire earnings stream at a single rate. On the other hand Meigs testified (Tr. I 47-48) only that he in fact excluded the company's investment income on its capital and surplus; he did not defend that approach. Meigs assumed Consumers obtained about a 7% return on its investment capital.*fn16 Both sides agree small life insurance companies such as Consumers should be capitalized at a 12% rate. By capitalizing Consumers' life insurance business at 12% and its investment holdings at 7%, Meigs effectively capitalized Consumers as a whole at a rate well below 12%, thus subverting both sides' testimony as to the propriety of the 12% capitalization rate. It is especially inappropriate for Meigs thus to bifurcate Consumers to a premium-collecting company and an investment company, for his prediction of 3% growth assumes Consumers would have invested as much as possible in expansion of its own agency force rather than in low-risk investments. Obviously the same capital cannot be used for two different purposes.

15. On the more generalized issue of the nature of Consumers' growth prospects, the analysis is necessarily more complex, but once again defendants must and do ultimately prevail. True enough the evidence supports plaintiffs' contention Consumers was in a turning posture, but the question is which way it was turning. Consumers made a profit in 1972 after posting losses in both 1970 and 1971. However its insurance in force declined in every year (including 1972) for which evidence was provided,*fn17 as did its ordinary premium income.*fn18 Plaintiffs' Post-Trial Br. 59-60 n. 47 explains that alarming and continuing statistical fact "merely reflects the fact that terminations still exceeded new business (albeit by a modest amount)." Thus plaintiffs assumed — without any factual support — that a slowing rate of decline can be extrapolated into a positive growth rate of indefinite duration.*fn19 This Court rejects that assumption.

16. Meigs defended his growth scenario by citing various changes in Consumers' position in 1971 and early 1972. Those changes are summarized in the text of Davoust's April 28, 1972 oral report to the board of directors (Pl.Ex. 46).*fn20 Plaintiffs' Post-Trial Br. 55 summarized Meigs' testimony:

  [Meigs] noted that in prior years. Consumers Life had been
  plagued by a difficult and debilitating litigation for control
  (the United Founders litigation), which was not settled until
  1971. (Tr. I, 13.) He then noted that in 1971 new management,
  headed by a long time director Richard Davoust, assumed control
  of the company from Hornsby Mims, who had previously been the
  chief executive officer. (Tr. I, 253.) Mr. Meigs testified that
  on the basis of his examination of the results for 1971 and the
  first portion of 1972, he concluded that the Davoust management
  had reversed the momentum of the company. (Meigs, Tr. [I] 253,
  13, 33.) He also found in his analysis of 1971 and 1972 that
  expenses appeared to

  be coming under control, the worst of the termination problem
  was behind the company, as was the United Founders litigation,
  and other old problems (such as writing off $150,000 of old
  agent balances in 1971) had been solved. (Meigs, Tr. [I]
  31-34.)

But a reading of Davoust's statement on which Meigs' testimony is based does not support the conclusion Consumers was on the brink of an extended period of growth. On page 1 Davoust (whose principal business experience had been in the oil industry, not insurance) outlined a laundry list of woes Consumers faced in mid-1971 cutting to the heart of its continued existence.*fn21 Although maintaining a positive tone as a chief executive officer should, Davoust emphasized (Pl.Ex. 46 at 2) if Consumers could not defeat its problems by increasing sales "the company will stifle and die by the weight of its own overhead and loss of existing business through attrition." Davoust vowed (id. at 6) to "rebuild the agency force with higher quality agents who will produce better business and profits in the future," a plan abandoned upon Lincoln American's acquisition of a majority of Consumers shares.*fn22 Meigs' "supporting" evidence is thus questionable at best, a weakness amplified by Meigs' own equivocation on the witness stand. In rebuttal Meigs testified only (Tr. II 240) "There is grounds for saying that yes, there was a potential to stabilize this business," and (id. at 241) the investment climate "would provide a basis for making some projection that assumed that the company, indeed could show a positive earnings growth."*fn23

17. While Meigs' perpetual growth prediction is hard to swallow (and this Court does not buy it), it is of course also recognized that Buchanan is unlikely to have hit the mark precisely in predicting Consumers' earnings would have dropped to their 4 1/4 year average, then remained stable for 20 years. Understandably neither expert purported to opine with certainty. Both predictions sought to identify the average of a universe of potential possibilities. It is only remotely possible Consumers would have grown at 3% for a long time. In contrast Buchanan's no-growth prediction has greater appeal because it factored in the possibility — supported by the objective evidence — Consumers was a declining company. In reaching his $6.61 per share valuation, Buchanan testified (Tr. II 60) his analysis of Consumers `found "no pattern of growth," but in his opinion future contraction was more likely than growth. That opinion was a probable and persuasive one, given (a) Consumers' constantly shrinking pool of insurance in force and (b) the defeat of Lincoln Life's expectations as to the quality of Consumers' agency force (a fact learned after the merger, when a full investigation was possible). Buchanan's crosscheck calculations, based on industry averages, produced slightly higher valuations than his primary analysis because Consumers generally performed lower than average in the industry.*fn24

18. Fair value calculations require the consideration of more data than can easily be assimilated by a single analyst, even a well-informed one. Instead the ideal tool in such a calculation would be one that employs all relevant information and channels it through the decision making processes of people most likely to have a stake in the outcome of the calculation. Of course such a tool exists: It is the market. On that score, according to defendants' expert Thomas Meakin ("Meakin"), insurance stock analyst with Shelby, Cullom, Davis & Co., the market sides with defendants on the fair value question. Together with Buchanan's actuarial analysis, Meakin's testimony establishes Lincoln American offered a fair price to minority shareholders in the merger. Meakin's analysis of National Quotation Service "pink sheets" revealed (Tr. II 16-18) Consumers Life and later Consumers stock was traded on most days during the 16-month period he examined, constituting an active market for the stock. Meakin found (id. at 21) about 90 percent of the transactions were for approximately $7.50 per share, well below the $8.50 offered by Lincoln American.

19. Plaintiffs' Post-Trial Br. 76 attacks Meakin's testimony only by claiming the misrepresentations discussed below constituted a "fraud on the market." Plaintiffs take a narrow view of what information enters the market, seemingly arguing the market incorporates no information unless it has been revealed formally to the shareholders in a proxy statement. Such a position would be difficult to accept even if it were supported by evidence, which it was not. Of the misrepresentations and omissions claimed by plaintiffs, nearly all concerned public information omitted from the 1973 Proxy but not withheld from the market as a whole.*fn25 Indeed the market transactions covered an extended period preceding the 1973 Proxy, a period during which the information (assertedly later misrepresented in and omitted from the 1973 Proxy) was available. After all, any "fraud on the market" perpetrated by the 1973 Proxy would have impacted market transactions only during April 1973. Meakin's testimony covered a period well before that month, a period during which the information was already before the public. Thus the market protected the interests of the minority shareholders. In fact the only distortion in the market supported by evidence was established by Meakin himself (Tr. II 25): Because Lincoln American bought 150,000 shares over the time period he analyzed, Lincoln American artificially maintained the price of the Class' shares above what it would otherwise have been.

20. None of the informal valuations of Consumers Life and Consumers stock described at Findings 8-11, either individually or collectively, is sufficiently probative to overcome the combined weight of the testimony of Buchanan and Meakin:

    (a) Frucella's 1969 valuation was based on a 1967 study by
  Nelson & Warren, Inc., which in turn relied on a basic
  valuation factor ($28.50 per $1,000 face value of insurance
  in force) developed in 1964. Although Frucella defended that
  factor, it was apparent from his treatment

  of it he believed at the time it was quite a high figure.
  Buchanan persuasively testified (Tr. II 106) the valuation
  was too stale to be the basis of any sound actuarial
  judgment.

    (b) Frucella`s 1972 valuation also suffered from a staleness
  problem though because it was based on 1970 data that problem
  was not as severe as it was for the 1969 Frucella valuation.
  In his deposition Frucella disavowed the accuracy of his 1972
  valuation, for instance (Dep. 85-86) saying he should have
  used a higher discount rate and (Dep. 97) calling both
  valuations "very crude." Even considering the problem of
  Frucella's credibility (he probably perceived his interest at
  the time of his deposition as being aligned with that of the
  defendants), what appears to have been happening in 1972 was
  that Frucella sought to place a stamp of approval on the
  upcoming purchase of Consumers stock in order to "sell" it to
  Coburn.

    (c) Of course the DPC Option price of $11.10 is probative,
  for it reflects an arms-length transaction between Lincoln
  Tennessee and DPC. Yet the price was $3.60 over market. Even
  assuming there was no control premium (Finding 10; but see n.
  11), the only explanation for the disparity between the
  option price and the $8.50 figure is that the $11.10 price
  was too high. This Court so finds. This is not the first time
  a party has made a bad deal. Kelly testified (Tr. V 35)
  Davoust was a skillful negotiator and Keathley testified (Tr.
  III 9) the $11.10 offer was on a take-it-or-leave-it basis.
  Lincoln American made the deal without the kind of evaluation
  of what it was buying (largely intangibles) that prudence
  would have indicated. As a practical matter the necessary
  investigation would have jeopardized the value of the
  acquired assets if they were really there, for the
  uncertainty would have produced likely defections in what
  Lincoln American thought was a good agency force. It took a
  calculated risk and went ahead. Once Lincoln American
  acquired control and investigated the quality of the agency
  force, home office staff and insurance in force, Keathley
  testified (id. at 61) he discovered Lincoln American had
  paid too much. It had.

    (d) As already indicated (Finding 11), Glassman's notes have
  almost no probative value. There is no evidence (nor can it
  reasonably be inferred) Glassman's figures represent a
  valuation of Consumers at all, much less a careful and
  studied valuation. By the nature of mathematical calculations
  Glassman's analysis would not have differed greatly if he
  used different numbers. For the process in which he was
  engaged, Glassman needed only a working number to use as the
  projected cost of Consumers, and it would be wrong to let the
  major economic result in this action rest on the assumed
  accuracy of the number he used.

Alleged Misrepresentations in the 1973 Proxy

21. What the 1973 Proxy presented was a 25-page description of Consumers, Lincoln Life and the proposed merger. Two exhibits were attached: a copy of the merger agreement and a copy of Delaware General Corporation Law § 262, which sets forth appraisal rights for dissenting minority shareholders in mergers or consolidations. Plaintiffs argue the 1973 Proxy contained various material misrepresentations or omissions (see Findings 22-26), known to and intended by defendants, on which Susman and the Class relied to their detriment.*fn26

22. 1973 Proxy at 1 said that because Lincoln American and its subsidiaries owned 64% of Consumers stock "the merger may be considered a controlled transaction." 1973 Proxy at 2 stated the positions with Lincoln American and Lincoln Life held by each member of Consumers' board. Plaintiffs maintain those statements contained material omissions: the first because it did not say (as an earlier draft did) "the merger cannot be considered an independent, arms-length transaction," and the second because it did not say four of five Consumers' board members were members of Lincoln American's board before they joined Consumers. Plaintiffs' Post-Trial Br. 30 asks that a duty be imposed on defendants to have said the board members had an "overriding loyalty to LA/NY."

23. Plaintiffs claim material omissions in the failure to disclose the lack of a current independent valuation of Consumers and the existence and amount of the 1972 Frucella valuation. 1973 Proxy at 1 did state:

  The proposed exchange price of $8.50 in cash for each share of
  Consumers common stock is considered by the Board of Directors
  of both companies to be fair and equitable. In its assessment
  Lincoln Life's Board considered the present assets of
  Consumers, the scope of Consumers' business, the opportunity to
  expand Consumers' operations to other areas, and many other
  factors, including the market prices, book value per share,
  prospects, and effect of the merger on the income of Lincoln
  Life. Consumers' Board considered similar factors including the
  past history of Consumers, its earning record and the market
  price of Consumers stock.

That statement is accurate as far as it goes. Whether the omissions are material is a legal question.

24. 1973 Proxy at 2 disclosed Lincoln American paid about $3.6 million total for DPC's 324,190 shares ($11.10 per share), then stated Lincoln American and its subsidiaries purchased about 150,000 shares on the open market at prices ranging from $7.25 to $9. Plaintiffs claim the 1973 Proxy's failure to say the $11.10 figure did not include a control premium was a material omission, and they contend the 1973 Proxy omitted material facts about Lincoln Life's open market acquisition of Consumers stock and misled Consumers shareholders about Lincoln Life's total investment in Consumers stock. In that respect plaintiffs charge the average price of $8.10 was omitted,*fn27 asserting at Post-Trial Br. 27 that omission is material because $8.10 was "only 5% less than the merger price." Plaintiffs also object to the statement (1973 Proxy 12) that Lincoln Life's investments as of December 31, 1972 included about $2.7 million "value in" Consumers stock, when in fact it had paid almost $4.9 million for that stock. Defendants retort that the $2.7 million figure was disclosed as the actual value of the stock pursuant to statutory accounting requirements then in force.*fn28 Plaintiffs argue the use of the $2.7 million figure was a misrepresentation, not because it was inconsistent with statutory accounting requirements*fn29 but instead because it further clouded the shareholders' perception of what Lincoln Life actually paid for its Consumers stock (but see n. 28). Yet even if all the matters referred to in this Finding 24 were resolved in plaintiffs' favor (a dubious proposition), they could not overcome the significance of the market's valuation of Consumers stock. All the items (except the fact Lincoln American did not perceive it paid a "control premium") were information made public in the Annual Statements of Consumers Life or Lincoln Life or both. And to the extent plaintiffs rely on documents submitted to the Indiana Insurance Commissioner in support of their claim the $11.10 price did not include a "control premium," that too was in the public domain and available to the market.*fn30

25. In anticipation of SEC requirements that insurance companies state their 1973 financial statements in accordance with GAAP (instead of statutory accounting principles then in effect), 1973 Proxy at 23 stated:

  In February 1973, the American Institute of Certified Public
  Accountants issued an audit guide for stock life insurance
  companies establishing generally accepted accounting principles
  for stock life insurance companies which are required to be
  applied to 1973 reports. The Company has just commenced the
  work necessary to apply these principles which may have a
  material effect on the financial position and operations
  included in the consolidated financial statements.

In plaintiffs' view the statement the changeover "may have a material effect" was misleading because Bernstein, as well as perhaps Wilder, Keathley and Kelly,*fn31 had rough figures on hand indicating a substantial increase in book value of Consumers under GAAP from about $4 million to $6-6.5 million.*fn32 Plaintiffs argue at the very least defendants should not have used the word "may" in reference to the likelihood the GAAP changeover would have a material effect.

26. There was an error in the life insurance operations summary (1973 Proxy at 9, the "Table"), which provided basic financial data on Consumers Life for each year from 1968 to 1972. Throughout that period premium income, new business, terminations and insurance in force all showed a downward trend until 1972, when all four increased substantially. 1972 figures for premium income and new business were asterisked to a statement that large amounts ($249,198 in premium income and $17,994,666 in new business) in that year were attributable to a "modified co-insurance agreement." Under that agreement Consumers Life took over (or reinsured) a block of life insurance originally marketed by another company. In fact terminations and insurance in force were also increased by the reinsurance agreement, but there was no asterisked statement to that effect. Interestingly enough, the Table's failure to footnote the insurance in force to reflect the reinsurance figure obscured the fact that figure had also continued its consistently downward trend (this omission of course tends to negate any notion the omissions were intentionally slanted to put Consumers Life in a poor light). Nonetheless the Table created the erroneous impression new business exclusive of the reinsurance agreement was up slightly from 1971 (from about $15.5 million to about $16.4 million) while loss of business was up substantially (from about $17.6 million to about $21.4 million). Actually the reinsurance had a relatively high lapse rate of 22 percent and accounted for about $4 million of terminations, more than the apparent increase in terminations from 1971 to 1972.*fn33 Plaintiffs also argue the failure to indicate there were no other reinsurance transactions in Consumers Life's history was a material omission.

27. In sum, most of plaintiffs' claimed deficiencies in the 1973 Proxy vanish on examination, and those that remain do not rise to the level of materiality in relation to the "total mix" of information (see Conclusions 3-10). Yet even if it were assumed some of the claimed misrepresentations or omissions were materially false or misleading, plaintiffs have totally failed to show Susman (or any other Class member) relied or would have relied on any of those matters to his detriment. Totally apart from the legal question discussed below whether he could have succeeded in state court even armed with additional facts, there is no proof whatever Susman acted or would have acted any differently because of the alleged misrepresentations. In fact plaintiffs' own evidence establishes precisely the opposite. Susman's original lawyer, his brother Arthur Susman, testified at trial to establish Susman did not know various facts claimed to have been omitted from or misstated in the 1973 Proxy. On cross examination, though, Arthur Susman specifically said any plaintiff who would have gone to Delaware state court in 1973 to enjoin a cash-out merger between a parent and its majority-owned subsidiary must have had "a death wish." Plaintiffs persist in speculating Susman might have sought an appraisal, convinced others to seek an appraisal, brought pressure to bear on defendants, obtained a state court damages verdict or sought to block the merger before the Indiana or Tennessee Insurance Commissioner. But they fail to recognize reliance has a factual component. They made no affirmative showing whatsoever supporting, or reasonably establishing the likelihood of, Susman's reliance to his detriment.

28. Because Lincoln Life was assured of the success of the merger (given its pre-existing 63.7% ownership of Consumers stock) and because then-existing state law appeared to provide only an appraisal (and not an injunctive remedy) to dissident minority shareholders (see n. 46), Lincoln Life had no motive for lack of full disclosure in the 1973 Proxy. Plaintiffs have wholly failed to prove defendants had any intention to deceive, manipulate or defraud, and this Court affirmatively finds no such intention existed.

Breach of Duty by the Consumers Board

29. There were a number of alleged breaches of fiduciary duty under Delaware law, expressed in the Class' Proposed Findings of Fact and Conclusions of Law, that disappeared from plaintiffs' presentation of their case in post-trial arguments. That evaporation of issues was apparently a tactical decision by plaintiffs. Going into the trial it appeared to plaintiffs that unless they prevailed in contending breaches of fiduciary duty caused a decline in the value of Consumers stock, they could not prevail on the proposition that the claimed loss in value should be added back to the total value of Consumers. At trial however Buchanan testified for defendants, yet found Consumers' "augmented" earnings were even higher than those found by plaintiffs' expert Meigs. Buchanan reached such a high level of "augmented" earnings (see Finding 13) by reversing the challenged reinsurance transaction and by assuming Consumers' efficiency-promoting moves would put Consumers' operating expenses on a par with giants of the industry. Thus by Buchanan's testimony plaintiffs achieved what they had sought to prove by showing the Consumers board had breached its fiduciary duties. As a result plaintiffs no longer assert (and they ignore defendants' lengthy treatment of) three propositions:

    (a) Consumers Life's loan to Lincoln American and its
  purchase of TCF Notes constituted impermissible
  self-dealing.*fn34

    (b) Consumers' 1972 reinsurance transaction constituted
  impermissible self-dealing.*fn35

    (c) Lincoln Life impermissibly diverted business from
  Consumers Life after acquiring control.*fn36

If plaintiffs' failure to brief those issues were not enough to constitute their waiver, their later statement (Post-Trial R.Br. 8) that defendants' "claim that their efforts after assuming control increased Consumers' value . . . support the class' argument" certainly is. In any case, though, plaintiffs' position on all those items is singularly unpersuasive.

30. Plaintiffs still urge defendants violated their Delaware law duties of fairness and candor in connection with the merger. These findings have already discussed the fairness of the cash-out price and defendants' candor in the 1973 Proxy. In addition, the course of dealing between Lincoln American and Consumers was generally fair. It is true that the boards of Consumers and Lincoln American did not engage in give-and-take negotiations, but to the extent Lincoln American had acquired access to information material to the merger, Consumers directors also had access to that information. In its overall treatment the 1973 Proxy was complete and objective, and it contained financial statements prepared by independent parties.

Conclusions of Law

1. This Court has subject matter jurisdiction over plaintiffs' federal claims, for the merger involved the purchase or sale of a security within the meaning of the Act. Judge Aspen stated in Issen v. GSC Enterprises, Inc., 508 F. Supp. 1278, 1285 (N.D.Ill. 1981):

  It appears to be settled that a minority shareholder forced to
  exchange shares in a corporation pursuant to a merger or going
  private transaction is a "seller" within the meaning of the
  securities laws.

Defendants point to plaintiffs' own claim that defendants intended all along to merge Lincoln Life and Consumers. On that premise, defendants say the acquisition of the minority shares was not an investment transaction but was merely the completion of the purchase of the entire business of Consumers. Though it has some surface attractiveness, that proposition fails:

    (a) Even if Lincoln American's initial motivation were that
  of an ultimate total acquisition, there is no room to find a
  "step transaction." Accordingly, once Lincoln American had
  acquired control of Consumers its "entrepreneurial" interest
  was fulfilled. Its acquisition at a later date of the
  remainder of the Consumers shares, at issue in this
  litigation, was only as an "investment." Thus Lincoln
  American's objective in purchasing the stock from plaintiffs
  brings that purchase within the Act as set forth in Sutter
  v. Groen, 687 F.2d 197, 203 (7th Cir. 1982).

    (b) In any case the minority shares clearly constituted
  investment securities in plaintiffs' hands. That is
  sufficient according to the dictum in McGrath v. Zenith
  Radio Corp., 651 F.2d 458, 467-68 n. 5 (7th Cir. 1981),
  cert. denied, 454 U.S. 835, 102 S.Ct. 136, 70 L.Ed.2d 114
  (1981). True enough it would seem anomalous to find stock
  was not a security

  from the buyer's perspective (see Sutter, Canfield v. Rapp &
  Son, Inc., 654 F.2d 459, 464-65 (7th Cir. 1981) and
  Frederiksen v. Poloway, 637 F.2d 1147 (7th Cir. 1981),
  cert. denied, 451 U.S. 1017, 101 S.Ct. 3006, 69 L.Ed.2d 389
  (1981)), yet was still a security from the sellers'. That
  issue has not been discussed in the cases to this Court's
  knowledge, but McGrath appears sufficient for current
  purposes.

This Court asserts its subject matter jurisdiction over the state law claims as pendent to the federal claims under the Act.

Federal Law Claims

2. To prevail on their claims under Act § 10(b) and Rule 10b-5 plaintiffs must show (a) the 1973 Proxy contained material misrepresentations omissions or deception, (b) defendants had "scienter" (that is, they intended to deceive, manipulate or defraud the Class), (c) the plaintiff (here Susman) relied on the material misrepresentations or omissions and (d) the misrepresentations or omissions caused injury to plaintiffs. See Issen, 508 F. Supp. at 1287 and cases cited. Each of those questions will be examined in turn.

A. Materiality

3. Most materiality cases, following the lead of TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976), speak in the abstract of whether the correct information would alter the "total mix" of data such that "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." This is not a typical case, because mere changes in minority shareholders' voting decisions could not have made any difference in the outcome of the vote. Such finer points however are left to discussion under the reliance element. In terms of materiality what is relevant is that the merger was one requiring shareholder approval. Thus the materiality issue is whether defendants had a duty to disclose the particular information in question to the shareholders, including of course the minority shareholders. That duty-to-disclose issue is applied to each of the claimed misrepresentations in the following Conclusions.*fn37

1. "Controlled Transaction" (Finding 22)

4. If the 1973 Proxy actually failed to reveal Consumers was being merged into its parent in a controlled transaction, that would undeniably be material. Here however the statements hardly "obscured" (Pl. Post-Trial Br. 30) the nature of the companies' relationship at all, much less in a material way. On the contrary, the change in language between the draft and the final statement merely altered a negative statement ("not . . . an independent, arms-length transaction") to an affirmative one ("a controlled transaction"). Thus the final statement was stylistically better and in fact more descriptive: It said what the merger was, not just what it was not. Meanwhile, the board members' pre-existing connection to Lincoln American could have been gleaned from the 1972 Proxy — a document all Class members received.*fn38 As to plaintiffs' claim that defendants' overriding loyalty to Lincoln American should have been disclosed, that position begs the question whether they were in fact disloyal to Consumers.

        2. The 1972 Frucella Valuation and the Lack of an
               Independent Appraisal (Finding 23)

5. As Finding 20(b) determined, the 1972 Frucella valuation was outdated and result-oriented. That valuation falls squarely within the holding of Panter v. Marshall Field & Co., 646 F.2d 271, 293 (7th Cir. 1981),cert denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631 (1981) that there is no duty to reveal "tentative estimates prepared for the enlightenment of management with no expectation that they be made public." Moreover, the omission of an express statement Consumers did not obtain an independent appraisal also has not been shown to be material. While plaintiffs have shown such appraisals are common, they have not shown the failure to obtain one was so remarkable that reasonable shareholders would assume one had been obtained if there were no express statement to the contrary. Indeed it would not do to impose today's merger practices (in which an independent appraisal is more frequently obtained) as essential ingredients of a transaction of a decade ago.

3. Lack of "Control Premium" (Finding 24)

6. Plaintiffs urge a duty on defendants to disclose that the DPC Option price included no "control premium." Minority shareholders could infer from such a statement only that their stock was worth $11.10 per share — an inference this Court has already found would be erroneous. As Finding 20(c) determined, the cost of the DPC block was in excess of its value if it did not include a control premium. Moreover it is difficult to regard information as material if it would not even have changed the stock's market price.*fn39 In this case the cost of the DPC block was public information revealed at the Indiana Insurance Commissioner hearing (Finding 11), in Lincoln American's Annual Statement (Pl. Ex. 68(a) at 31A) and in the 1973 Proxy. Arguably defendants' perception that they had not paid a control premium was also known to the market (see Finding 24). Thus the market rate incorporated whatever significance was implied by the fact. Lincoln American paid $11.10 per share, yet the market still remained below the $8.50 cashout price. In view of (a) the unreliability of the DPC Option as a value figure and (b) the market's failure to react to the DPC sale by bringing up the value of Consumers stock, any failure to present the DPC Option price as a "valuation" by saying it did not include a control premium was not material.

4.Lincoln American's Cost of Market Purchases (Finding 24)

7. No significance can be attached to the 1973 Proxy's statement of a $7.25 to $9 range of prices paid by Lincoln American for Consumers stock, rather than an average. First, such difference in expression was not material because the range was fairly representative of the $8.10 average price — that figure is almost exactly halfway between $7.25 and $9 (it is just 2 1/2 cents below the average of those numbers). In fact disclosure of the range revealed (as the average alone would not) that some minority shareholders had received more than the merger price for their stock. Second, any failure to disclose Lincoln Life's historical cost of acquiring other shares would be material only to the extent relevant to current value, and (like informal appraisals) that cost may well be an inaccurate measure of the value. In any case the average price Lincoln American paid was publicly available from its Annual Statement and thus was incorporated in the market price.*fn40

   5. Disclosure of Lincoln Life's Consumers Stock Holdings at
                      "Value" (Finding 24)

8. Plaintiffs challenge the description of Lincoln Life as a company with $2.7 million of "value in" Consumers stock as a material misrepresentation because it made it difficult for Class members to tell what Lincoln Life actually paid for the stock. As n. 28 reflects, the $2.7 million figure (buried on page 12 of the 1973 Proxy in a description of Lincoln Life's business) was not a "misrepresentation." Any shareholder interested in determining what Lincoln American had paid for its Consumers shares would already have found on page 2 that Lincoln American paid $3.6 million for its first 324,190 shares, and $7.25 to $9 for each of its next 149,214 shares, for a total of somewhere between $4,681,000 and $4,943,000.

6. Changeover to GAAP (Finding 25)

9. Failure to disclose Bernstein's rough calculation of the probable results of a changeover to GAAP was also not a misrepresentation. Those figures were educated guesses (if that) at best, and there is no duty to disclose such guesses. Freeman v. Decio, 584 F.2d 186, 200 (7th Cir. 1978). Anyone who has drafted a proxy statement or practiced in this area of the law knows that inclusion of such unsupported preliminary guesstimates would be vulnerable to a charge of "materially misleading" (although this is of course not controlling in Rule 10b-5 terms, it would never get past SEC review). It should also be emphasized that GAAP changes affect book value, not real value. Findings 8-20 have already determined on all the evidence that Consumers was worth less than $8.50 per share at the time of the merger. Changing the numbers in a set of books in Memphis cannot create additional value in the company as a whole.*fn41 Studies show "accounting changes affecting the manner in which profitability is reported but not affecting real earnings do not cause investors to re-evaluate the prospects of the firm." Fischel. 38 Bus.Law. at 6 n. 19. As for the claim defendants should have stated the GAAP changeover "will" (not "may") have a material effect, defendants respond correctly that so vouching for the materiality of the GAAP conversion would have obliged them to do needless additional work (leading to expense and delay). Finally, because value cannot be created out of thin air it is not at all certain the GAAP changeover did have a material effect on Consumers' "financial position and operations."

7. The Reinsurance Lapse Rate (Finding 26)

10. This item is truly a detail relevant to a minority shareholder only if he or she intended to sit down with the 1973 Proxy and calculator in hand and conduct his or her own appraisal of Consumers.*fn42 That degree of specificity is not required of proxy statements. See Cole v. Schenley Industries, Inc., 563 F.2d 35, 43 (2d Cir. 1977). Such a hypothetical researcher among the shareholders could have obtained a copy of Consumers Life's public 1972 Annual Statement. Plaintiffs' PostTrial Br. 22 (footnote omitted) posits:

  This information, not provided in the proxy materials, would
  have painted a significantly different picture for the
  reasonable investor, indicating that Consumers had, indeed,
  "turned the corner."

Like so many of plaintiffs' assertions, that is manufactured from whole cloth. After all the reinsurance lapse rate had been publicly available, yet the market failed to conclude Consumers "had, indeed, `turned the corner.'" As for the 1973 Proxy's asserted failure to indicate there were no other reinsurance transactions in Consumers Life's history, the Table conveyed the clear (and accurate) impression the 1972 reinsurance agreement was the only one during the several (and most recent, hence most relevant) years shown.

B. Scienter

11. Plaintiffs also strike out on the second necessary element of their claim under the Act: a showing of scienter. As Finding 28 and the numerous prior Findings that underpin it demonstrate conclusively, the requisite deceptive, manipulative or fraudulent intent (Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194-97, 96 S.Ct. 1375, 1381-1382-1383. 47 L.Ed.2d 668 (1976)) was totally lacking from defendants' complained-of conduct in this case.

C. Reliance

12. To establish the reliance element, a plaintiff must show he or she would have acted differently in some significant way if not for defendants' misstatements and omissions. Reliance is unique to each individual, so Susman himself must be shown to have relied on defendants' "fraud.*fn43 In a cash-out merger, reliance has a double aspect: Plaintiffs must show Susman would have acted somehow differently than he did if all facts were known, and that change in action must be relevant in light of the inevitability of the approval of the merger. Plaintiffs have proved neither element.*fn44

    (a) Ordinarily a plaintiff must come forth with evidence of
  reliance. However, where an omission rather than a
  misrepresentation is the basis of a Rule 10b-5 action,
  Affiliated Ute Citizens v. United States, 406 U.S. 128,
  153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972) holds
  reliance can be inferred from materiality. But this is not an
  area for an irrebuttable presumption — like most inferences
  it is subject to rebuttal. Finding 27 not only has found an
  absence of evidence Susman would have acted or presented his
  case any differently if more facts were known, but also has
  found affirmatively to the contrary — based on the statement
  by Susman's own lawyer Arthur Susman that he would not have
  pursued an injunction in Delaware in 1973 unless he had "a
  death wish." That and the other components of Finding 27
  squarely rebut the presumption of reliance.

    (b) Even if a plaintiff would have acted differently in the
  absence of Rule 10b-5 violations he must also show he could
  have acted in a way that would affect the outcome of the
  merger. Wright v. Heizer Corp., 560 F.2d 236, 249-51 (7th
  Cir. 1977), cert. denied, 434 U.S. 1066, 98 S.Ct. 1243, 55
  L.Ed.2d 767 (1978), implies such a showing can be made by
  demonstrating in light of all the facts plaintiff has a valid
  cause of action

  under state law.*fn45 As determined below at Conclusions
  14-16, however, the Class has no Delaware law cause of
  action; thus this element of reliance is also absent.*fn46

D. Causation

13. Plaintiffs have already sustained three strikes, though any one was enough to eliminate them from recovery on their federal claim. As the final clincher the element of causation of injury is also not present.*fn47 As Findings 8-20 establish, plaintiffs simply were not harmed by the 1973 Proxy because they received a fair price. In this area Mills v. Electric AutoLite Co., 552 F.2d 1239, 1247-48 (7th Cir. 1977), cert. denied, 434 U.S. 922, 98 S.Ct. 398, 54 L.Ed.2d 279 (1977) urges reliance on market figures rather than appraisals to avoid "substituting our abstract judgment for that of the market. . . . [S]uch a method would be economically unsound."

State Law Claims

14. Both parties rely on Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) to support their positions regarding plaintiffs' state law claims. Weinberger, id. at 703 requires the plaintiff in a suit challenging a cash-out merger to come forward first with allegations of fraud and some basis for invoking the majority shareholders' fairness obligation. Defendants then have two choices:

    (a) They may show by a preponderance of the evidence the
  transaction was entirely fair to the minority shareholders.

    (b) If a majority of the minority shareholders have approved
  the merger, defendants may show the majority completely
  disclosed all material facts regarding the transaction,
  thereby shifting the entire burden to the plaintiff to show
  the merger was unfair to the minority.

As to the second alternative, when Weinberger spoke of "an informed vote of a majority of the minority shareholders," it did not specify (nor did the earlier case it cited in that respect) whether it required an absolute majority of the minority shares outstanding, or only a majority of the shares voted. But this Court has current guidance on that Delaware law question — the decision in Bershad v. Curtiss-Wright Corp., Civ. No. 5827 (Del.Ch. New Castle County Mar. 21, 1983), like this case a class action challenging a mandatory cash-out merger. There as here the controlling majority shareholder relied on (slip op. at 2. emphasis added) "a majority vote of all voting minority shares." Finding that merger structure "afford[ed] the minority stockholders a complete veto power" (id.) and "[t]he minority stockholder vote was an informed one" (id. at 14), Vice Chancellor Longobardi (citing Weinberger) shifted the burden of showing unfairness to the plaintiff. This case really does not turn on burdens of proof, for both parties have met their burden of production and the evidence is far from dead even. As the following Conclusions demonstrate, defendants prevail by either route — by assuming the burden of showing fairness or by proving the vote in their favor by the vast majority of the minority shares voted was an informed one.*fn48

15. Under Delaware law defendants owed a fiduciary duty of fairness to the Class. Fairness comprises fair dealing and fair price, and fair dealing involves the duty of candor and the duty to conduct the cash-out merger in a way that protects the interests of minority shareholders. Weinberger, 457 A.2d at 710-11. Concededly the merger was completely unlike an arms-length transaction. There were no real negotiations. But unlike the Weinberger situation there were no appraisals kept secret from the Consumers board and there were no current appraisals showing more than the amount tendered could profitably be paid for each share. Here there was no violation of the duty of fair dealing for three reasons:

    (a) Defendants fulfilled their duty of candor, which under
  Delaware law is very similar to the duty of disclosure under
  Rule 10b-5.*fn49 For example in Lynch v. Vickers Energy
  Corp., 383 A.2d 278, 281 (Del. 1977) the Delaware Supreme
  Court defined the duty as one of disclosing "information such
  as a reasonable shareholder would consider important in
  deciding whether to sell or retain stock." Accordingly on the
  basis of the discussion in Conclusions 3-10 this Court
  concludes the disclosures in the 1973 Proxy were adequate and
  there was no breach of the duty of candor.

    (b) There is no duty under Delaware law to have the
  subsidiary in a cash-out merger independently appraised
  before the merger. Tanzer v. International General
  Industries, Inc., 402 A.2d 382, 391 (Del.Ch. 1979).

    (c) Weinberger, 457 A.2d at 711 pointed out "in a
  non-fraudulent transaction we recognize that price may be the
  preponderant consideration outweighing other features of the
  merger." This transaction was indeed non-fraudulent. And as
  to the issue of price, see Conclusion 16.

16. Defendants have also fulfilled their duty as to fair price. Weinberger, 457 A.2d at 713 requires "consideration of all relevant factors involving the value of a company." In Findings 8-20 this Court has done just that and determined on all the evidence the price was fair. Notably the court in Francis I. du Pont & Co. v. Universal City Studios, Inc., 312 A.2d 344, 346-49 (Del.Ch. 1973), aff'd, 334 A.2d 216 (Del. 1975) approved a valuation method much like that used by defendants' expert Buchanan. In du Pont the appraiser (like Buchanan) had averaged the company's earnings for the five years preceding the merger, then discounted that predicted earning stream to present value by adopting a multiplier. Shareholders there argued earnings before the most recent year should not be considered, but the court found (312 A.2d at 349) a heavy presumption in favor of averaging, and it stated earnings trends may affect the choice of discount rate but not the choice of base figure.*fn50 Meanwhile, Gibbons v. Schenley Industries, Inc., 339 A.2d 460, 467, 474 (Del.Ch. 1975) urged greater reliance on market value when there is an active market for the tendered stock, thus approving the valuation method used by defendants' expert Meakin*fn51.

To be successful on either their federal or their state claim, plaintiffs had to prevail on a number of issues, failure on any one of which would be fatal to the claim. Instead plaintiffs have proved none of the elements of their causes of action. Accordingly the Clerk of this District Court is directed to enter judgment against plaintiff's and in favor of defendants on plaintiffs' Complaint. This action is dismissed with prejudice.

APPENDIX

Consumers National Corporation

Income Stream Valuation*fn1

(000 omitted, except for "Value per Share")

                                        Expert      Witnesses
                                        Meigs       Buchanan

1972 Statutory Declared Earnings          $263           $263
Reversal of Reinsurance Transaction       ힾ           �
Predicted Future Efficiencies             ퟞ           �
Deduction of Investment
  Income*fn2                             -160
                                        ------         ------
"Normalized" 1972 Earnings                $473           $848
"Normalized" 1972 Earnings                $473           $848
Adjustment for Other Years'
  Earnings*fn3                                          -222
Adjustment for Estimation Error             -3
                                        ------         ------
Final Income Stream Base Figure           $470           $626
Discount of Base Figure to Present
  Value at 12%*fn3                     $4,003         $3,507
Reinsertion of Investment
  Assets*fn2                           ,149
Assets of Parent Company                ,398         ,401
                                        ------         ------
Total Present Value of Income
  Stream                                $7,551         $4,908
Value per Share                         $10.16          $6.61


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