Fry v. UAL Corp., 90 C 0999.

• Decision Date: 11 August 1995
• Docket Number: No. 90 C 0999.,90 C 0999.
• Citation: 895 F. Supp. 1018
• Parties: 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.
• Court: U.S. District Court — Northern District of Illinois

895 F. Supp. 1018

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.

No. 90 C 0999.

United States District Court, N.D. Illinois, Eastern Division.

August 11, 1995.

COPYRIGHT MATERIAL OMITTED

Charles J. Barnhill, Davies, Barnhill & Galland, P.C., Madison, WI, David Barry Kahn, Mark E. King, David B. Kahn & Associates, Ltd., Northfield, IL, for plaintiffs.

Susan Getzendanner, Donna L. McDevitt, Charles F. Smith, Jr., John Kevin Lyons, Addison D. Braendel, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for defendant.

MEMORANDUM OPINION AND ORDER

CASTILLO, District Judge.

This is a class action securities fraud suit brought by the plaintiffs on behalf of all persons who sold Allegis¹ common stock or puts in Allegis common stock between October 29, 1987 and December 8, 1987.² 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 businesses³ 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 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.⁴ The plaintiffs in this class action consist of persons selling Allegis common stock and or put options⁵ 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 ¶ 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. ¶¶ 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. ¶¶ 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. ¶¶ 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. ¶ 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 ¶ 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 ¶ 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. ¶ 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. ¶ 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. ¶ 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. ¶ 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 ¶ 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:

At the invitation of the Chairman, Messrs. Pinson and Calhoun of The First Boston Corporation reviewed the possibility of a special dividend distribution or distributions to shareholders resulting from the sales of Hilton International, Hertz and Westin.... After discussion, the Board of Directors unanimously approved the issuance of a press release by the Corporation concerning the Board's intention to distribute to stockholders the net proceeds of the sales of the Corporation's subsidiaries.

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

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