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03/11/88 David Rosenstein Et Al., v. Cmc Real Estate

March 11, 1988

DAVID ROSENSTEIN ET AL., INDI

v.

AND AS REPRESENTATIVES OF THE CLASS OF HOLDERS OF COMMON SHARES OF CMC REAL

ESTATE CORPORATION, ET AL., PLAINTIFFS-APPELLANTS

v.

CMC REAL ESTATE CORPORATION ET AL., DEFENDANTS-APPELLEES



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FIFTH DIVISION

522 N.E.2d 221, 168 Ill. App. 3d 92, 118 Ill. Dec. 766 1988.IL.348

Appeal from the Circuit Court of Cook County; the Hon. Arthur L. Dunne, Judge, presiding.

APPELLATE Judges:

JUSTICE SULLIVAN delivered the opinion of the court. LORENZ, P.J., and MURRAY, J., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SULLIVAN

Plaintiffs, David Rosenstein and Beverly Rosenstein, appeal from an order dismissing their complaint against defendants, CMC Real Estate Corporation, Chicago Milwaukee Corporation and CMCRE Merger Corporation, for breach of fiduciary duty. Plaintiffs contend that the court erred in dismissing their complaint.

CMC Real Estate Corporation , formerly the Chicago, Milwaukee, St. Paul and Pacific Railroad Company, recently emerged from reorganization in bankruptcy. Chicago Milwaukee Corporation , a Delaware corporation, owned 2,092,720 shares of CMCREC's common stock, approximately 96% of all common shares outstanding; 483 other shareholders owned 87,172 shares, approximately 4% of the outstanding 2,179,892 shares. No other class of stock was outstanding. The directors of Chicago Milwaukee Corporation are also directors of CMC Real Estate Corporation.

To achieve various financial, legal and tax objectives, CMCREC and CMC decided that it would be in the best interests of both corporations for CMCREC to become a wholly owned subsidiary of CMC. CMCREC and CMC proposed this change to simplify their corporate structure, to increase their flexibility to plan for the future and to avoid the costs and filing requirements that resulted from the minority ownership in CMCREC.

To attain these objectives, CMCREC and CMC created CMCRE Merger Corporation , a wholly owned subsidiary of CMC. Pursuant to an "Agreement and Plan of Merger" (Agreement), CMCRE was merged with CMCREC. Following the merger, the surviving corporation, CMCREC, was solely owned by CMC and the minority shareholders in CMCREC exchanged their shares for certain consideration.

Under the Agreement, the minority shareholders were offered $120 in cash, plus a "deferred cash consideration right" for each share they owned, which entitled them to a proportional share of income, net of related taxes and expenses, from property the Regional Transportation Authority had condemned in an eminent domain proceeding. *fn1 Bear, Stearns & Co., Inc. (Bear Stearns), an independent financial advisor, evaluated the transaction and issued an opinion that the consideration paid to minority shareholders was fair. The Agreement advised minority shareholders of their right to a court appraisal of the fair value of their shares under the appraisal provision of the Wisconsin Business Corporation Law (Wis. Stat. Ann. § 180.72 (West Supp. 1987)).

CMC's board of directors approved the Agreement after determining that the terms of the merger were fair to minority shareholders. In making that determination, the Board emphasized that Bear Stearns had found that the consideration was fair, that minority shareholders would receive a deferred cash consideration right from the property the RTA had condemned and that the merger would give the minority shareholders the opportunity to take advantage of lower Federal income tax rates on long-term capital gains applicable in 1986.

CMCREC scheduled a special shareholders' meeting for December 29, 1986, to consider the proposed merger. Because CMC favored the Agreement, approval of the merger was assured. Prior to the shareholders' meeting, CMCREC prepared and mailed to the shareholders a proxy statement describing past appraisals of the relevant properties and containing several financial statements. The proxy statement repeatedly advised minority shareholders of their appraisal rights under Wisconsin law.

On December 22, 1986, plaintiffs, owners of five shares of common stock in CMCREC, filed a class action in the circuit court of Cook County challenging the merger. Plaintiffs alleged that CMC, as a majority shareholder, owed a fiduciary duty to the minority shareholders not to benefit itself or take unfair advantage of the minority shareholders. Plaintiffs alleged further that CMC's approval of the merger constituted a breach of this duty because it was "unfair" to prevent their continued participation in CMCREC as shareholders, the consideration offered for each share was "grossly inadequate," and the right to a judicial determination of the fair value of their shares in a statutory appraisal proceeding was an inadequate remedy in that it was "virtually impossible" to value their shares.

Plaintiffs asked the court to certify the case as a class action and to modify the Agreement to give minority shareholders the right to retain their shares of stock in CMCREC. In the alternative, plaintiffs asked that the payment for each share be increased, that a constructive trust be placed on CMCREC's real estate, that shareholders receive any profits from real estate sales that exceeded the value used in setting the ...


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