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FRY v. UAL CORP.

August 11, 1995

WILLIAM R. FRY, ANTHONY J. MARRA, SIDNEY MISHKIN, THOMAS J. DWYER, KATHLEEN B. DWYER, PROGRESSIVE CORPORATION, and MERIDIAN STRATEGIC INVESTMENTS, L.P., Plaintiffs,
v.
UAL CORPORATION, a Delaware Corporation, Defendant.



The opinion of the court was delivered by: RUBEN CASTILLO

 This is a class action securities fraud suit brought by the plaintiffs on behalf of all persons who sold Allegis *fn1" common stock or puts in Allegis common stock between October 29, 1987 and December 8, 1987. *fn2" The suit arises out of defendant UAL Corporation's ("UAL") public announcement on October 29, 1987, that it would distribute the proceeds of the divestiture of certain of its non-core businesses *fn3" as a special dividend. No such dividend was declared. Instead, defendant's Board subsequently announced that it would repurchase outstanding shares of its stock with the proceeds. The essence of plaintiffs' complaint is that UAL committed fraud when it made its dividend announcement by failing to disclose (i) that its largest shareholder had demanded that the divestiture proceeds be distributed in the form of a stock repurchase (also referred to herein as a "self-tender" or "buy back") and that it was engaged in negotiations with that shareholder relating to the stock repurchase, and (ii) that it had not yet completed its analysis of the preferred method of distributing the proceeds (particularly, through a special dividend or a stock repurchase). Counts I and II of plaintiffs' first amended complaint each assert claims under Section 10(b) of the Securities and Exchange Act of 1934 ("SEA"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder ("Rule 10b-5"), 17 C.F.R. § 240.10b-5. Counts III - VI invoke the Court's supplemental jurisdiction and assert state-law claims of common law fraud (counts III and IV) and violation of Illinois' Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq., (counts V and VI) based on the same underlying conduct. Defendant's motion for summary judgment is presently before the Court. For the following reasons, the motion is granted.

 FACTUAL HISTORY

 Our recitation of the facts begins with a discussion of the (relatively) undisputed facts that provide an overview of the dispute; then, we turn to a consideration of the evidence surrounding the more hotly disputed facts. *fn4" The plaintiffs in this class action consist of persons selling Allegis common stock and or put options *fn5" on Allegis common stock between October 29 and December 8, 1987.

 In May of 1987, Coniston Partners ("Coniston") acquired a substantial interest in Allegis. Specifically, Coniston purchased approximately 7.7 million shares (over 13%) of Allegis common stock, making Coniston Allegis' largest shareholder. Def.'s Facts P 16. Coniston announced that it would solicit shareholder consents in order to obtain majority representation on Allegis' board with an eye toward divesting Allegis of, among other things, its non-core businesses. Id. PP 18-21. Defendant hired the First Boston Corporation to advise the Board of Directors on issues raised by Coniston's consent solicitation, and, later, to carry out the divestiture program; the law firm of Davis, Polk & Wardwell ("Davis Polk") was retained to serve as principal legal advisor. Id. PP 11, 12.

 At a special meeting of the Allegis Board on June 9, 1987, Allegis' Board requested and accepted the resignation of its Chairman and CEO, Richard Ferris, and elected Frank Olson to replace Ferris. Id. PP 7, 20. At that same meeting, Olson suggested that the company's financial advisors, First Boston and Morgan Stanley, reconsider proposals to restructure the company, presuming that such a plan would include the sale of Hertz, Westin, and Hilton. Id. P 21; Def.'s Facts, Special Meeting Minutes at 12. UAL intimates that this action was not forced by Coniston's hand but instead merely reflected a sound business decision of the Board. This position is belied by the record. Allegis' General Counsel Ed Hoenicke testified that in deciding not to move forward with a debt capitalization plan that was under consideration but instead to sell off the non-airline assets,

 
the board decided that they would essentially accede to the demands of the Coniston partners and the shareholders because they had been advised that an informal poll of the shareholders indicated that there was no way that United or Allegis would win any consent vote and, therefore, they accepted the inevitable and were very reluctantly willing to sell off the non-airline assets with the purpose of retaining as strong an airline company as possible.

 Hoenicke Dep. at 30. In elaborating on the Board's reluctance to sell off some of Allegis' non-airline assets, Hoenicke observed,

 
this board had previously approved the diversification plan, the purchase of Hertz, and the purchase of Hilton International. They were very enamored of the hotel business having been associated with Westin for a long period of time. Some of the directors were the chief executives of these subsidiaries, so that selling them off was like cutting off . . . their right arms.

 Id. at 30-31. In a related vein, plaintiffs also note that Allegis had just closed on its purchase of the Hilton subsidiary less than three months before its announcement that it would sell Hilton. See Pls.' Facts P 22.

 In view of what Coniston perceived to be Allegis' commitment to this restructuring program, Coniston, in turn, announced that it would terminate its planned solicitation of consents for replacement of the existing Allegis Board. Def.'s Facts P 23. Defendants seize on the use of the word "terminate" in Coniston's announcement to suggest that thereafter the specter of a Coniston proxy solicitation was absent. Plaintiffs contend that the threat of a solicitation was always present and available in the event that Coniston did not get its way.

 Robert Calhoun and Harry Pinson were the First Boston team members with principal responsibility for devising a plan for the divestiture and distribution of Allegis' non-airline assets and discussing related issues with the Allegis Board. Pinson Dep. at 16, 19. At an Allegis Board meeting on June 25, 1987, Calhoun presented a plan to sell Hertz, Westin, and Hilton and distribute the proceeds to shareholders. In its presentation, First Boston referred to the potential distributions as "dividends" and did not refer to any other possible distribution method. Id. P 24. Following the June 25, 1987 Board meeting, Olson distributed a letter to Allegis' shareholders announcing that Allegis would sell its non-airline businesses and distribute the proceeds to shareholders. Id. P 26. Olson's letter states, in pertinent part: "We have determined to proceed immediately with the sale of all of our non-airline businesses -- Hertz, Westin and Hilton International -- and to distribute the net proceeds from those sales to stockholders." Def.'s Facts, Ex. 13. Allegis subsequently entered into agreements for the sale of its non-airline businesses. The sales closed between October 1987 and January 1988. Id. P 27.

 On October 19, 1987, the stock market dropped almost 500 points, the greatest daily drop since the Great Depression. Id. 40. The price of Allegis common stock dropped from $ 93.875 to $ 66 per share. Id. In response, the Allegis Executive Committee met twice and the Allegis Board met once during the period from October 20 through October 29, 1987, to discuss, among other things, the impact of the crash, the decline in Allegis stock prices, and the status of the sales of Allegis' non-airline businesses. Id. P 41. On October 20, 1987, the Executive Committee authorized a stock repurchase plan to stabilize the market for Allegis shares and take advantage of the low price at which Allegis stock was then trading. Def.'s Facts P 42.

 The Board's Executive Committee met on October 28, 1987. The minutes of that meeting state, in pertinent part:

 
Messrs. Pinson and Calhoun outlined First Boston's recommendations and timetable on the distribution to shareholders of net proceeds from the sale of the Corporation's non-airline assets. After discussion, the Executive Committee recommended that the Board of Directors make an announcement of the Board's intention to declare a dividend of the net proceeds of the sale of Hilton International in several weeks, and to declare dividends of the net proceeds of the sales of Hertz and Westin as these sales close.

 Def.'s Facts, Ex. 2, Oct. 28, 1987 Exec. Comm. Minutes at 4. The minutes of the full Board meeting on October 29, 1987 reflect that Chairman Olson reported on the Executive Committee meeting, including the discussion of the "special dividend distribution to shareholders." Id., Ex. 4, Oct. 29 Board Minutes at 3. The minutes further state:

 Id. at 5. Following the October 29, 1987 Board meeting, the Board released the following public announcement:

 
The Board of Directors of Allegis Corporation today reaffirmed the previously announced plan to distribute to shareholders the net proceeds from the sales primarily of its non-airline assets. . . . The Board of Allegis elected to declare distributions after the closing of each transaction and after completion of necessary refinancing arrangements. The first dividend declaration is expected in early December. Subsequent declarations will follow. . . .

 Id. P 46.

 At a meeting on December 7, 1987, the Executive Committee reviewed and approved a recommendation made by First Boston that the Board consider a tender offer as an alternative to the dividend distribution. Id. P 56. First Boston's Robert Calhoun reviewed with the Executive Committee two basic advantages of a tender offer over a dividend: (1) a tender offer would have less adverse tax consequences to most stockholders because their gain would be capital gain, rather than ordinary income, and the gain would be partially offset by their basis in the stock; and (2) a tender offer would result in less pressure on the value of Allegis stock, because a dividend declaration would likely result in much tax selling of the stock and could force the price of the stock down. See Def.'s Facts, Ex. 6, Exec. Comm. Minutes at 2.

 On December 9, 1987, the Board formally considered the self-tender alternative. Id. P 57. Following its meeting of December 9, 1987, the Board issued a press release announcing that:

 
as a result of recent changes in stock market conditions and in consultation with its financial advisor, The First Boston Corporation, it is considering a tender offer for a substantial number of shares as an alternative to the previously announced intention to declare a dividend . . . [with] a final decision . . . expected to be made in January.

 Id. P 58. Following the Board's announcement on October 29, and prior to the December 9 announcement, plaintiffs sold shares of Allegis common stock and/or put options on Allegis common stock.

 At a meeting on January 28, 1988, the Allegis Board rejected the dividend option and authorized a self-tender offer for 35.5 million shares. On February 17, 1988, Allegis filed, and formally issued, an offer to purchase the shares at $ 80 per share. Id. P 59.

 The foregoing is generally not materially disputed by the parties. What is disputed -- sharply -- is the extent, if any, to which Coniston "demanded," prior to October 29, 1987, that Allegis distribute the divestiture proceeds in a form other than a dividend and whether Coniston was engaged in negotiations with Allegis over such a demand on that date -- when the Allegis Board announced that it would distribute the proceeds in the form of a special dividend. Plaintiffs contend that Coniston had made such a demand and that Allegis and Coniston were negotiating this demand; UAL contests both that such a demand was made and that any negotiations were ongoing. The parties also dispute whether any analysis of distribution methods by Allegis was ongoing as of October 29, 1987. Plaintiffs contend that such analysis was ongoing. UAL denies this, maintaining that by September 1987, it had concluded that nondividend distribution methods were not viable. UAL further contends that this issue was not reconsidered until after the stock market crash. We now consider the evidence relied upon by the parties in support of their respective positions.

 As an initial matter, UAL disputes plaintiffs' contention that Coniston demanded a self-tender offer prior to the October 29, 1987 divestiture announcement. At most, UAL contends, Coniston expressed a preference for, or suggested, a self-tender offer as a means of distributing the divestiture proceeds; however, such a preference or suggestion did not rise to the level of a demand and UAL was not negotiating with Coniston over this suggestion at the time of the October 29, 1987 announcement. UAL offers the following evidence.

 First, during his deposition, one of Coniston's principals, Augustus (Gus) Oliver, questioned the proposition that Coniston "suggested" a nondividend type of distribution:

 
Q. Sometime in 1987 Coniston suggested a nondividend transaction; is that right?
 
A. I am not sure I would use the word "suggest." A capital gains type of transaction was certainly discussed.

 Oliver Dep. at 50. Also, when asked directly whether Coniston had requested that Allegis utilize a self-tender prior to the crash, Oliver responded that he could not recall "any specific discussions about this issue prior to some time after the crash." Id. at 40. In a related vein, discussing Coniston's preference for a self-tender prior to the October 19, 1987 stock market crash, Oliver stated:

 
My recollection is that until the crash, the form of the distribution, while of some interest to us, was not really a critical question, and that there was some discussion of that question prior to that time, but that it wasn't until some time after the crash that the issue became significantly more important to us.

 Id. at 38; see also id. at 42 (Oliver's testimony that prior to the crash, the form of the distribution "really wasn't that big an issue for us"); id. at 52 (Oliver's testimony that prior to the crash, "the issue of being forced to sell in the market [to avoid the tax consequences of a dividend and achieve capital gains treatment], if it arose at all, was not a very consequential issue" and if the issue was considered "we didn't consider it to be a matter of great consequence"). Similarly, Keith Gollust, another Coniston principal, testified that during June, July and August Coniston was "relatively indifferent between a cash tender offer or a dividend." Gollust Dep. at 116. Elaborating on this point, Gollust noted that after Allegis announced that it would sell off the non-airline assets and distribute the proceeds to shareholders, the stock responded very favorably and Coniston had a big gain in position, therefore:

 
If the company chose to pay a dividend, we could have easily sold our stock in the market. I mean . . . in light of the fact that this plan was underway, the stock was way up, there was huge trade in volume in the stock, it would have been very simple for us to sell our stock in the market and take a capital gain. Conversely, if they made a cash tender offer, we could either sell our stock in the market or participate in the cash tender offer. In either event, the tax treatment would have been the same.

 Gollust Dep. at 117; see also Oliver Dep. at 56, 58-59 (testifying that the resulting taxable income for Coniston would have been the same for either type of distribution). Later in his deposition, Gollust reiterated this view but noted that the crash altered things:

 
although [capital gains treatment] was an issue which had relevance to us before the crash, before the crash, we felt that while it was always the case that we preferred a share repurchase program, we had the flexibility of selling our stock in the open market in the event the company declared a dividend. After the crash, the circumstances differed. So we had a strong preference for a share repurchase program after the crash.

 Gollust Dep. at 182.

 Also, it is undisputed that the Allegis Board met four times between June 25 and October 29, 1987, and that none of the minutes of any of those meetings even mentions a distribution method other than dividends. Def.'s Facts P 45. *fn6" And, every Board member who was asked denied having any recollection that Allegis' advisors (the law firm of Davis Polk and the First Boston investment firm) ever mentioned Coniston's proposal or preference for capital gains treatment on or before October 29, 1987. See Olson Dep. at 49, 63, 67, 76, 89, 91, 141 (testifying that from "early on" the Board was advised that the distribution would be in the form of a dividend and that it was not until December 1987 that a tender-offer alternative was raised to the Board); DeWindt Dep. at 57-58 (testifying that, with respect to any time in 1987, he had no recollection that Coniston had raised a question as to how the divestiture proceeds would be distributed and that, to his knowledge, as of August 19, 1987, Allegis was not considering any distribution method other than a dividend); McGillicuddy Dep. at 45-46 (testifying that to the best of his recollection the Allegis Board was not informed that Coniston had raised a question, in August of 1987, as to the form of the divestiture distribution); O'Connor Dep. at 66-67, 70-71 (testifying that with respect to the period between June and October 1987, he had no recollection of First Boston informing the Board as to the pros and cons of various distribution methods nor did the Board review any studies or recommendations regarding distribution methods; also testifying that he had no recollection of the Board ever being advised, in or about August 1987, that Coniston had taken a position of preferring capital gains treatment, or receiving the divestiture proceeds by means other than a dividend); Armstrong Dep. at 45-46 (not recalling any discussion in July and August or late summer and fall about the form of the distribution; not recalling seeing any documents from Allegis' advisors discussing the manner of distribution).

 In a related vein, Allegis' General Counsel Hoenicke testified that he did not think he ever discussed the "issue of a dividend versus a tender offer or ordinary income versus capital gains income" with any member of the Board prior to December of 1987. Hoenicke Dep. at 131-32. And, First Boston's Harry Pinson testified that prior to October 1987, he never discussed the different tax consequences of a self-tender versus a dividend with the Board because First Boston had "thought that in general, the tax consequences would be either the same for broad classes of shareholders or . . . they could employ trading strategies to get the tax consequences that they wanted." Pinson Dep. at 98. Robert Calhoun, also of First Boston, similarly testified:

 
Prior to October 19th, which is the date of the stock market crash, I don't believe there was any specific attention paid to their--to the tax consequences to Coniston other than the discussion earlier about put rights. *fn7"
 
Q. What do you mean by that, do you mean you had other plans?
 
A. We listened to them but we didn't pay too much attention to them.
 
Q. And why is that?
 
A. The Board was much more comfortable with the dividend scheme, it was simple, it was fair, at least from their vantage point. We didn't believe that, aside from Coniston, there was much attention being paid one way or the other to the form of distribution. And when the stock was selling at a hundred or over, the tax consequences, as far as we were concerned, was very mixed, one method was not compelling over another.

 Calhoun Dep. at 57-58. Finally, with respect to whether Coniston had ever made a demand regarding the form of distribution, Calhoun testified as follows:

 
Q. Did Coniston ever suggest that unless capital gains treatment were accorded the distribution, that they would take certain actions against the companies?
 
Mr. Silver [counsel for First Boston]: What time period?
 
Mr. Barnhill [plaintiffs' counsel]: November, October -- September, October, November.
 
A. No.

 Calhoun Dep. at 98.

 UAL management also denied knowledge of Coniston's inquiries before October 29, 1987. Allegis' General Counsel Ed Hoenicke testified that although attorneys from Davis Polk reported to him quite regularly about any contact they had with Coniston and although Davis Polk kept him very well informed, he had no recollection of discussing with Davis Polk in August or September of 1987 that Coniston was looking for a capital gains transaction. Hoenicke Dep. at 58-59 *fn8" ; see also Kane Dep. at 59 (testimony of Allegis Vice President and Secretary that he was never aware at any time prior to December 1987 that Coniston had proposed a method of distribution other than a dividend); Hobor Dep. at 41, 72 (testimony of Allegis Director of Investor Relations that the Board began to consider alternative methods of distribution in December 1987 and she was not aware that the Board considered such alternatives prior to that time; also testifying that she was not aware in August of 1987 that Coniston was requesting distribution by self-tender or put options). Finally, UAL notes that Davis Polk attorney Diane Kerr testified that "in the fall or late summer [of 1987], they [Coniston] were on a program of a dividend. . . . It was later that, you know, late fall, winter, where they became very interested in a tender offer." Kerr Dep. at 32. Davis Polk attorney Richard Spizzirri (who was supervising Kerr's work) testified that he was not aware of Davis Polk conducting any research subsequent to August 19, 1987 (the date of Kerr's initial memorandum) and before October 29, 1987 to determine whether a self-tender option was viable. Spizzirri Dep. at 35. Spizzirri also testified that he was not aware of any negotiations or discussions in late October between Coniston and any lawyers at Davis Polk concerning the method of distributing the divestiture proceeds. Id. at 49.

 Plaintiffs maintain that Coniston consistently supported a self-tender beginning in August 1987. We leave aside for the moment discussion of whether "supporting" (or "expressing a preference" for) a form of distribution is equivalent to "demanding" that form of distribution and whether this distinction is material to our 10b-5 analysis. Instead, we turn to consider the actual evidence which supports plaintiffs' position. *fn9"

 First, plaintiffs point to Allegis' Offer to Purchase, issued in February 1988, which states in pertinent part:

 Pls.' Facts P 30(A). *fn10"

 Second, plaintiffs rely on the following testimony of Coniston principal Keith Gollust:

 
I don't have any specific recollection of any . . . communications [between Coniston and the Board or its advisors in the summer of 1987]. . . . I know that our position during the summer of 1987 was that, all things considered, we had a preference for a share repurchase program.

 Gollust Dep. at 160; and:

 
Q. Do you recall ever deciding within Coniston that a dividend was preferable to a tender offer at any time?
 
A. I don't believe that there was ever a time when we believed that, for Coniston, a dividend would be preferable to a transaction that would result in capital gains treatment.
 
Q. Did you . . . always believe, for one reason or another, that a tender offer was preferable to a dividend for Coniston?
 
A. Yes.

 Id. at 163. Gollust also testified that after the Allegis Board announced on October 29, 1987 that it was going to distribute the proceeds of the divestiture through a dividend, Coniston "stepped up our own efforts to lobby on behalf of a self tender offer." Gollust Dep. at 123 (also stating that his reaction to the announcement was that Coniston "ought to work harder on" the issue. Plaintiffs argue that Gollust's statement that Coniston "stepped up" its lobbying efforts implies that lobbying efforts were already underway at the time of the October 29, 1987 announcement. Further, plaintiffs note that Gollust testified that "it wasn't until the press release dated October 29th that there was any hint that the payout might be in the form of a dividend," id. at 182-83, and "even after we saw the press release . . . indicating that the distribution would be in the form of a dividend . . . it was our belief that upon a more thorough consideration, a decision would be made to do a self-tender." Id. at 138.

 Plaintiffs also rely heavily on First Boston President Calhoun's testimony. Calhoun testified that "[Coniston] made it clear that they preferred nondividend treatment from day one until the end of the time period. They talked to us at various points through this nine-month process [the nine-month period ending with the announcement of the self-tender in February 1988] about the distributions." Calhoun Dep. at 201; see also id at 76 ("I don't recall them specifically asking us to explore a tender offer. They made it clear early on they preferred a capital gains treatment."); see also id at 200 (testifying that, at some unspecified point in 1987, Coniston asked Allegis to distribute the divestiture proceeds in such a manner that would result in Coniston receiving capital gains treatment). Calhoun also indicated that in August or September of 1987, Coniston recommended that First Boston consider put rights (another means to obtain capital gains treatment) as a mechanism for distributing the divestiture proceeds. Id. at 47-49.

 When asked what First Boston did in the fall of 1987 in connection with reviewing whether a tender offer should be employed as the means by which to distribute the divestiture proceeds, Calhoun testified:

 
Q. That is the manner of distribution?
 
A. Yes, the timings, the amount.

 Id. at 56. Shortly thereafter, Calhoun was asked whether First Boston had "gone over with the Board the pros and cons of the dividend versus the tender offer prior to mid-October?" Calhoun replied, "I don't recall specifically but I am sure that we generally spoke to them about the subject at every Board meeting that we attended starting in July." Id. at 78. *fn11"

 Regarding Coniston's preference for a nondividend distribution, the following exchange took place:

 
Q. What about Coniston itself . . . would they have been disadvantaged by a dividend versus a tender offer in September to mid-October 1987?
 
A. I don't believe so. . . . Prior to the crash, they weren't terribly concerned with the form of the distribution.
 
Q. Except for the fact, as I understand it, they always asked for capital gains treatment, is that correct?
 
A. Not always. I don't think they always asked for it. I think they made it clear to us that they preferred it but I wouldn't characterize the ...

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