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FRANKEL v. SLOTKIN

June 2, 1992

ELI FRANKEL, Plaintiff, against DONALD SLOTKIN, CARL H. LINDNER, LOUIS A. GUZZETTI, KEITH E. LINDNER, S. CRAIG LINDNER, DAVID H. LUBETZKY, JEAN H. SISCO, RONALD F. WALKER, JAY WELLS, AMERICAN FINANCIAL CORPORATION, FMI FINANCIAL CORPORATION and UNITED BRANDS COMPANY, Defendants.

Nickerson


The opinion of the court was delivered by: EUGENE H. NICKERSON

NICKERSON, District Judge:

 This shareholders derivative action was originally assigned to the late Judge Costantino and was reassigned to this Judge in May 1990. The court assumes familiarity with Judge Costantino's opinions of August 16, 1986, and January 12, 1989, as well as this court's Memorandum and Order of December 27, 1990.

 I

 Plaintiff, record owner of convertible preferred shares of United Brands Corporation ("United Brands"), brought this derivative action on behalf of United Brands alleging that defendants, who include Carl H. Lindner ("Lindner"), members of his family, and corporate entities controlled by him, violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10(b)-5 promulgated thereunder, as well as their state law fiduciary duties, by failing to disclose material information in connection with the purchase of securities.

 At all relevant times Lindner indirectly or directly owned controlling interests in United Brands, American Financial Corporation ("American Financial") and FMI Financial Corporation ("FMI"). Lindner and his family owned 100% of the stock of American Financial, which in turn owned approximately 65% of FMI stock. American Financial and FMI also owned stock in United Brands in the amounts of 54% and 7.3%, respectively.

 Plaintiff alleges a unitary plan or scheme to increase from 61.3% to 85.8% the percentage of United Brands' common stock owned by American Financial and FMI and thus by the Lindners.

 On March 4, 1985 United Brands announced a temporary reduction in the conversion price of its convertible debentures from $ 55 to $ 21.50 per share. A debentureholder was then able to receive for each $ 1000 principal amount of the debentures approximately 46 shares of United Brands common stock having a total market value of approximately $ 605 to $ 650, an amount corresponding roughly to the price at which the debentures traded.

 American Financial, the principal debenture holder, converted all of its debentures and acquired over 1.3 million shares of United Brands stock. Approximately one third of the debentures held by the public were converted. Public debentureholders thus acquired approximately 1.1 million shares of common stock.

 On May 21, 1985 FMI purchased on the open market 1.1 million shares of United Brands stock at $ 15.18 per share.

 On July 5, 1985, FMI announced its intention to make a cash tender offer for up to 4 million shares of United Brands common stock at a price of $ 20 per share. The United Brands Board of Directors, with the four American Financial directors abstaining, informed its stockholders that it expressed no opinion as to the tender offer. About 3.8 million shares of United Brands stock were ultimately sold to FMI pursuant to the tender offer.

 Plaintiff claims that defendants knew in March that FMI would later make a tender offer that would be "friendly and unopposed," inside information upon which defendants traded without disclosure when they converted their United Brands debentures and bought the stock on the open market.

 In its December 27, 1990 Memorandum and Order this court denied defendants' first motion for summary judgment, finding it a material issue of fact whether defendants intended in March to make the subsequent tender offer.

 Defendants move again for summary judgment, claiming that even if American Financial and FMI had such an intent, the pre-trial discovery showed that neither American Financial nor FMI nor their directors possessed the inside information that United Brands would express no ...


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