Swanson v. American Consumers Industries, Inc.

• Decision Date: 06 March 1973
• Docket Number: No. 71-1639.,71-1639.
• Citation: 475 F.2d 516
• Parties: Knute SWANSON, on behalf of Peoria Service Company, and on behalf of all shareholders of Peoria Service Company similarly situated, Plaintiff-Appellant, v. AMERICAN CONSUMERS INDUSTRIES, INC., a New Jersey corporation, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

475 F.2d 516 (1973)

Knute SWANSON, on behalf of Peoria Service Company, and on behalf of all shareholders of Peoria Service Company similarly situated, Plaintiff-Appellant, v. AMERICAN CONSUMERS INDUSTRIES, INC., a New Jersey corporation, et al., Defendants-Appellees.

No. 71-1639.

United States Court of Appeals, Seventh Circuit.

Argued October 24, 1972.

Decided March 6, 1973.

Rehearing Denied April 16, 1973.

Richard Orlikoff, Arthur T. Susman, Thomas D. Hanson, Chicago, Ill., Thomas V. Cassidy, Peoria, Ill., for plaintiff-appellant; Orlikoff, Prins, Flamm & Susman, Chicago, Ill., of counsel.

Frank O. Wetmore, II, Edward J. Wendrow, John W. Stack, Chicago, Ill., Eugene L. White, Peoria, Ill., for defendants-appellees.

Before CUMMINGS and SPRECHER, Circuit Judges, and KILKENNY, Senior Circuit Judge.¹

CUMMINGS, Circuit Judge.

Plaintiff is a stockholder of defendant Peoria Service Company (Peoria), a dissolved Illinois corporation that formerly operated two cold storage warehouse facilities in Peoria, Illinois. The complaint was brought derivatively on behalf of Peoria and also on behalf of plaintiff and all other similarly situated stockholders. In addition to the nominal defendant, Peoria, the complaint named as defendants United States Cold Storage Corporation (U.S. Cold), which owns 87 per cent of Peoria stock, and American Consumer Industries, Inc. (ACI), which owns 90 per cent of U.S. Cold stock. Plaintiff sought to rescind a 1965 reorganization agreement between Peoria and ACI which provided for the transfer of substantially all of Peoria's assets to ACI which provided for the transfer of substantially all of Peoria's assets to ACI, an exchange of Peoria stock for ACI stock, and the liquidation of Peoria and to recover damages allegedly sustained by Peoria. The complaint asserted that the reorganization plan and related activities involved manipulative and deceptive devices and that the proxy materials were misleading and omitted to state material facts, in violation of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j (b)) and Rule 10b-5 thereunder (17 C.F.R. § 240.-10b-5). Liability was also asserted under Illinois common law.

In August 1968, the trial court entered summary judgment for defendants. 288 F.Supp. 60. We reversed and remanded for trial, Judge Swygert dissenting. 415 F.2d 1326. After trial, the district court again rendered judgment for defendants. 328 F.Supp. 797. After setting forth 52 findings of fact, the court held that plaintiff must prove a causal relationship between the deceptive material and the Peoria sale, or that there was reliance upon the deceptive material and that the corporation or its shareholders were injured as a proximate result of the material. The court concluded that plaintiff had failed "to prove the fact of reliance by anyone, any causal relationship between any defects in the proxy material and the Peoria sale, or that either Peoria or its shareholders sustained any injury." 328 F.Supp. at 807.

In urging reversal, plaintiff first asserts that proof of a materially defective proxy statement used in connection with a transaction is sufficient to show a causal relationship between the violation and the transaction. Plaintiff also urges that he is entitled to relief under the common law of Illinois. Accordingly, plaintiff insists upon rescission, restitution, or other suitable relief, plus an award of attorneys' fees. Since the facts are fully stated in our prior opinion and in the two opinions below, they will not be restated herein.

Subsequent to our first opinion in the case, the Supreme Court rendered its opinion in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed. 2d 593, reversing 403 F.2d 429 (7th Cir. 1968). In that case the plaintiffs complained that the wrong accomplished through the use of a materially false or misleading proxy statement was the effectuation of a corporation merger. The Court held that if the proxy solicitation was an essential link in the accomplishment of the transaction, a showing of materiality in the misstatement or omission of that proxy was sufficient to establish a causal relationship between the proxy statement and the merger. 396 U.S. at 384-385, 90 S.Ct. 616. However, in Mills approval of a substantial number of minority shareholders was essential to the accomplishment of the merger. 396 U.S. at 379, 90 S.Ct. 616. In this case, ACI through U.S. Cold controlled a sufficient number of shares to approve the transaction without any votes from the minority. It was precisely in such a case that the Supreme Court refrained from deciding whether merely by demonstrating materiality, causation would be shown between the false or misleading proxy statement and the accomplishment of the merger. 396 U.S. at 385 n. 7, 90 S.Ct. 616.

Insofar as plaintiff claims the merger itself was the injury, it may be that since ACI controlled a sufficient amount of shares to approve the merger regardless of the minority vote, causation between the deception and the injury has not been established. Laufer v. Stranahan, Jr., CCH Fed.Sec.L.Rep. ¶ 92,617 (S.D.N.Y.1970).² Nevertheless, assuming (without deciding) causation is ipso facto established by a showing of materiality even in this situation, unscrambling the merger would be an inappropriate remedy in this case.

The Supreme Court expressly reiterated this Court's statement in our decision in Mills that "nothing in the statutory policy `requires the court to unscramble a corporate transaction merely because a violation occurred.'" 396 U.S. at 386, 90 S.Ct. at 622, quoting from 403 F.2d at 436. Further, the Supreme Court directed that in fashioning retrospective relief, "the federal courts should consider the same factors that would govern the relief granted for any similar illegality or fraud" and that "one important factor may be the fairness of the terms of the merger." 396 U.S. at 386, 90 S.Ct. at 622. Here the lower court found that "the exchange ratio of five shares of Peoria stock for one share of ACI stock, which was established in the plan, was fair and reasonable to Peoria, to ACI, and to the shareholders of both." 328 F.Supp. at 807. We cannot say that this finding, supported by particularized factual findings largely based on credibility determinations, was "clearly erroneous" within the meaning of Rule 52(a) of the Federal Rules of Civil Procedure. Moreover, the lower court concluded that to require unscrambling "would be a grave injustice to the other shareholders of ACI." Id. Insofar as plaintiff shareholders seek relief in their derivative status, "while they do have a derivative right to invoke Peoria's status as a party to the agreement, a determination of what relief should be granted in Peoria's name must hinge on whether setting aside the merger would be in the best interests of the shareholders as a whole." Mills, supra, 396 U.S. at 388, 90 S.Ct. at 623. The district court, exercising "the sound discretion which guides the determinations of courts of equity," (id. at 386, 90 S.Ct. at 622), made the foregoing finding that setting aside the merger would not be in the best interests of all shareholders, and we are not inclined to find an abuse of that discretion.

With respect to any monetary recovery to the plaintiff shareholders predicated on the terms of the merger, we will again assume that a causal connection is established between the false or misleading proxy statements and accomplishment of the merger. But as in Dasho v. Susquehanna Corp., 461 F.2d 11, 30 (7th Cir.), certiorari denied, 408 U.S. 925, 92 S.Ct. 2496, 33 L.Ed.2d 336 (1972), although this "would seem to require a finding of `legal injury' caused by the violation, in this case that injury may not include any pecuniary loss."

Applying the analysis of Dasho, approval of the sale of assets and reorganization caused plaintiff shareholders "monetary injury only if (a) Peoria would have been better off with no merger at all; or (b) a more favorable exchange ratio would have been available if there had been full disclosure." Id. at 31. The district court found that "Peoria, during and prior to ACI control, was not a viable entity; that Peoria was unable, financially, to exploit the market available to it and unable to obtain such financing as was necessary for conversion of the corporation into a viable entity." 328 F.Supp. at 806. This finding is supported by ample evidence, and hence it is clear Peoria would not have been better off with no merger at all. As to the availability of a more favorable exchange ratio upon full disclosure, there was simply a failure of evidence to support a monetary recovery. What suffices to show causation of a legal injury—the merger—does not automatically show plaintiffs suffered compensable monetary injury. "Damages should be recoverable only to the extent that they can be shown." Mills, supra, 396 U.S. at 389, 90 S.Ct. at 624.

When this case was before us previously, the defendants contended that no injury could be shown because any corporate opportunities or going concern value of which Peoria shareholders might have been deprived are retained by them by virtue of their continuing equity position in ACI. We responded that "if the allegations of the complaint are proved, the Peoria shareholders were entitled to a more favorable exchange ratio than they were granted and may have had their equity position unfairly diluted." 415 F.2d at 1332. But the allegations of unfairness in the complaint were not proved. The district court found that ACI paid full reasonable value for Peoria's assets and that the exchange ratio of five shares of Peoria stock for one share of ACI stock was fair and reasonable to Peoria and its shareholders. 328 F.Supp. at 807. This is a case where monetary relief is appropriately "predicated on a determination of the fairness of the terms of the merger at the time it was approved." Mills, supra, 396 U.S. at 389, 90 S.Ct. at...