Filed by CBOT Holdings, Inc. Subject Company--CBOT Holdings, Inc. Pursuant to Rule 425 under the Securities Act of 1933 File No. 333-72184 The following letter was distributed to CBOT members and made available on the CBOT's intranet site, MemberNet, on August 9, 2002. August 9, 2002 Dear Members: Yesterday, the Court granted summary judgment in favor of the defendants, CBOT Full Members, ending the lawsuit filed in Circuit Court in August 2000 by certain Associate Members and membership interest holders in connection with the proposed allocation of shares in a restructured Chicago Board of Trade. After an exhaustive analysis of the facts, the Court held that CBOT Full Members do not owe fiduciary duties to Associate Members and membership interest holders. The Court also held that there was absolutely no evidence that CBOT Full Members influenced the Independent Allocation Committee of the Board of Directors or its recommendation. Since the outset of this litigation, we have been confident that the Court would ultimately hold that the 1,402 CBOT Full Members do not owe fiduciary duties to other members. The decision removes one of the last impediments to going forward with our restructuring transactions. We will keep you informed of future developments as we move forward. A copy of the Court's decision will be available shortly, and can be obtained by contacting the Legal Department at 312-435-3613. Sincerely, /s/ Nickolas J. Neubauer Nickolas J. Neubauer While CBOT Holdings, Inc. ("CBOT Holdings") has filed with the SEC a Registration Statement on Form S-4, including a preliminary proxy statement and prospectus, relating to the restructuring of the Board of Trade of The City of Chicago, Inc. ("CBOT"), it has not yet become effective, which means it is not yet final. CBOT members are urged to read the final Registration Statement on Form S-4, including the final proxy statement and prospectus, relating to the restructuring of the CBOT referred to above, when it is finalized and distributed to CBOT members, as well as other documents which CBOT Holdings or the CBOT has filed or will file with the SEC, because they contain or will contain important information for making an informed investment decision. CBOT members may obtain a free copy of the final prospectus, when it becomes available, and other documents filed by CBOT Holdings or the CBOT at the SEC's web site at www.sec.gov. This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of securities in any state in which offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. * * * *
The following document was made available to CBOT members on August 13, 2002 via the CBOT's intranet site, MemberNet. 1 1 STATE OF ILLINOIS ) ) SS. 2 COUNTY OF C O O K ) 3 IN THE CIRCUIT COURT OF COOK COUNTY COUNTY DEPARTMENT - CHANCERY DIVISION 4 TIMOTHY FELDHEIM, STEVE FANADY, ) 5 LEONARD GOLDSTEIN, RICK OLSWANGER, ) DAVE BARTELSTEIN, JOHN ZAWASKI, ) 6 VIRGINIA MCGATHEY, AND ) JOHN SCHMIDT, ) 7 ) ON BEHALF OF THEMSELVES AND ) 8 ALL OTHERS SIMILARLY SITUATED, ) ) 9 PLAINTIFFS, ) ) 10 vs. ) No. 00 CH 11791 ) 11 FRANK L. SIMS, MICHAEL B. ALEXANDER,) JERRY R. STEINBORN, TRUIT E. TROGDON) 12 AND BURNELL D. KRAFT, ) ) 13 ON BEHALF OF THEMSELVES AND ) ALL OTHERS SIMILARLY SITUATED, ) 14 AND THE CHICAGO BOARD OF TRADE, ) ) 15 DEFENDANTS. ) 16 17 REPORT OF PROCEEDINGS at the hearing 18 of the above-entitled cause before the Honorable 19 PATRICK E. McGANN, Judge of the said Court, taken 20 before Margaret M. Kruse, Certified Shorthand 21 Reporter and Notary Public, at Suite 2508, Daley 22 Center, on the 8th day of August A.D., 2002, 23 commencing at 2:00 p.m. 24
2 1 A P P E A R A N C E S: 2 SACHNOFF & WEAVER, LTD., By MR. BARRY S. ROSEN 3 MR. MICHAEL D. RICHMAN 30 South Wacker Drive, Suite 2900 4 Chicago, Illinois 60606-7484 (312) 207-1000 5 appeared on behalf of Plaintiffs; 6 KIRKLAND & ELLIS, By 7 MR. GARRETT B. JOHNSON MS. DONNA M. WELCH 8 200 East Randolph Drive, Suite 5400 Chicago, Illinois 60601 9 (312) 861-2000 10 appeared on behalf of Defendants. 11 12 13 14 15 16 17 18 19 20 21 22 23 24
3 1 THE CLERK: Feldheim vs. Sims. 2 THE COURT: Good afternoon, everyone. 3 First of all, I want to apologize for any 4 inconvenience I caused by not being prepared to 5 announce my decision yesterday. 6 Summary judgment motions permit the trial 7 court to determine whether any genuine issue of 8 material fact exists in the action, and if not, to 9 provide an expedient means of resolution. Greenberg 10 vs. Orthosport, 282 Ill.App.3d, page 830. The 11 underlying policy is to facilitate litigation, to 12 avoid congestion of trial calendars, and to reduce 13 unnecessary trials. Brown vs. Murphy, 278 Ill.App.3d 14 981. The court's task on such a motion is only to 15 determine whether there is a genuine issue of fact 16 and not to resolve a disputed factual question. 17 Hanson vs. Demarakis, 259 Ill.App.3d 166. 18 Summary judgment is appropriate only when 19 there is no genuine issue of fact and the movant is 20 entitled to judgment as a matter of law. Groce vs. 21 South Chicago Community Hospital, 282 Ill.App.3d 22 1004. To aid in this determination, the trial court 23 must consider the affidavits, depositions, 24 admissions, exhibits and pleadings on file and
4 1 construe them strictly against the movant and 2 liberally in favor of the nonmovant. Douglass vs. 3 Dolan, 675 N.E.2d 1012. Documents submitted in 4 response to the motion by a nonmovant must be 5 construed liberally in their favor, while documents 6 submitted by the movant in support of summary 7 judgment must be construed strictly against the 8 movant. Zoeller vs. Augustine, 271 Ill.App.3d, 370. 9 Although a plaintiff is not required to 10 prove his or her case at the summary judgment stage, 11 he or she must present some evidentiary facts to 12 support the element of their claim. Davis vs. John 13 Crane, Inc., 261 Ill.App.3d 419. The opponent cannot 14 simply rely upon their complaint or answer to raise 15 an issue of fact when the movant has supplied facts 16 which, if not contradicted, entitle them to judgment 17 as a matter of law. Jackson Jordan, Inc. vs. 18 Letydig, Voit & Mayer, 158 Ill.2d 240. 19 Our Supreme Court has warned that while the 20 use of summary judgment procedure is to be encouraged 21 in the interest of the prompt disposition of 22 lawsuits, they are a drastic measure. Consequently, 23 trial courts should grant such judgment only when the 24 movant's right to judgment is clear and free from
5 1 doubt, again citing the Greenberg vs. Orthosport 2 case. 3 Summary judgment is a remedy that must be 4 awarded with caution in order to avoid preempting a 5 litigant's right to trial or his right to fully 6 present the factual basis of a case where a material 7 dispute may exist. Cozzi vs. North Palos Elementary 8 School District 117, 232 Ill.App.3d 379. 9 A triable issue precludes summary judgment 10 where the material facts are disputed or where the 11 material facts being undisputed, reasonable persons 12 might draw different inferences from the undisputed 13 facts. Espinoza vs. Elgin Joliet & Eastern Railway 14 Company, 165 Ill.2d 107. In construing a motion for 15 summary judgment, the trial court may draw inferences 16 from the undisputed facts. If reasonable people 17 could draw divergent inferences, the issues should be 18 decided by the trier of fact and the motion should be 19 denied. Dowd & Dowd vs. Gleason, 284 Ill.App.3d 915. 20 And I would recognize on different grounds that case 21 was reversed by the Illinois Supreme Court 22 subsequently. Where doubt exists as to the right to 23 summary judgment, the wiser judicial policy is to 24 permit resolution of the dispute by trial, citing
6 1 again the Jackson Jordan case at page 249. 2 The first observation that I believe is 3 important and necessary is the context of this 4 litigation. It is a class action. Pursuant to 735 5 Illinois Compiled Statutes 5/8-101, et seq, a class 6 action affords the court with a procedural device to 7 efficiently adjudicate claims involving common 8 questions of law or fact. 9 It envisions from its historical roots 10 controversies involving either or both plaintiffs and 11 defendants too numerous to practically join in one 12 proceeding. It confers no additional rights on any 13 party nor does it ascribe any unity of purpose or 14 action as a result of mere membership in the 15 representative class. The only commonality is the 16 mutual interest in the determination of the legal 17 and/or factual issues that will resolve the 18 controversy between the plaintiffs and defendants who 19 make up the respective classes in this case. 20 The controversy herein surrounds the 21 allocation of equity among members of the Chicago 22 Board of Trade as they progress to a new era in their 23 history. A decision, as one witness noted during his 24 deposition, the most important thing to happen at the
7 1 Board in 100 years. While Mr. Rosenthal and others 2 would certainly disagree with that assessment and 3 point to the expansion of the markets and adding of 4 members as a more significant development in the 5 advancement of the Exchange, this question of fact is 6 not material to the issue before the Court. 7 The parties have developed and I find the 8 following undisputed facts: 9 In 1848, a group of Chicago business leaders 10 founded the Chicago Board of Trade as an Illinois 11 charter corporation. While the number of original 12 members has never been disclosed in the evidence, 13 each member had one vote. This governance forum and 14 format existed until approximately 1997. 15 The parties discussed in great detail what 16 the Board of Trade actually does. The Chicago Board 17 of Trade began as a market to set the price of grain 18 and other similar commodities. Persons in the 19 business of growing, selling, financing, 20 manufacturing or otherwise bringing these raw 21 products to the marketplace need a device or system 22 to transfer the financial risk of their portion of 23 the enterprise. This would be done through 24 broker/agents who would trade various contracts among
8 1 themselves for the benefit of their customers. These 2 broker/agents became members of the original Chicago 3 Board of Trade. 4 Originally, the members paid the cost of 5 establishing the marketplace for their activity. 6 They purchased or leased a facility to conduct their 7 business, employed persons to record their activities 8 and transactions. In other words, they paid to 9 provide all of the support necessary to carry on 10 their activity as traders. This created a fairness 11 and accountability in the market, as well as 12 confidence in those people who came to the market to 13 engage in spreading the risk. 14 These members, by law, received no 15 distribution of the profits of the charter 16 corporation, but they did receive the most important 17 benefit of their membership, the right to trade in 18 the open outcry pits of the Chicago Board of Trade, 19 in other words, the right to earn an income. Here 20 they were free to use all of their skills to maximize 21 and retain all profits from their trading. 22 As the years went by, other exchanges 23 opened, the government changed or expanded the rules 24 concerning the types of commodities that could be
9 1 traded at such exchanges. The institution also 2 changed. It moved into a large downtown skyscraper 3 in 1930 and purchased significant interests in real 4 estate. It expanded its facilities to accommodate 5 these newly deregulated products and markets. It 6 expanded and modernized the marketplace. It adapted 7 to the new technology by creating an options exchange 8 permitting overnight electronic trading and other 9 changes to increase the viability of the Chicago 10 Board of Trade. 11 As it evolved through the period of the late 12 '70s, there were at that time 1402 full members. 13 Their leadership realized that they would have to 14 attract additional traders in order to create a 15 market for the new products that were coming on line. 16 While many of the members had an interest in these 17 new initiatives, it was generally understood and 18 agreed there were insufficient members to make a 19 viable market for all of the new products and to 20 attract and maintain the customers who were seeking a 21 large marketplace for the various commodities and 22 interest that they wished to trade in or had interest 23 in. Thus the Board decided and agreed to create 24 additional memberships.
10 1 Here a question of fact exists. Some 2 current or former members, for example Mr. Rosenthal, 3 believed these changes added value to the Exchange by 4 increasing the volume of trades. While others, and I 5 would point to Messrs. Odom and Neubauer, disagreed. 6 This dispute again, I believe, is not material to the 7 issues before this court. 8 The first group was the financial instrument 9 membership group. There were 100 of these created in 10 1977. In 1979 this group became what is now known as 11 the associate members. During this process, the 12 members each retained one vote per membership, the 13 full members did, and granted one-sixth vote as well 14 as one-sixth of one interest in any liquidation of 15 the Board of Trade assets. This was done as was the 16 future to make these individuals owners of the Board 17 and to avoid any income tax consequences to the Board 18 from selling these memberships. 19 Each financial interest member which 20 replaced the GNMA licensees received an associate 21 membership as well as one-fourth of an additional 22 associate membership in 1979. Each full member also 23 received a one-fourth associate membership interest 24 at that time.
11 1 In 1982, the Board of Trade again expanded 2 its membership by creating the government interest 3 members, or GIMs, who had no vote but received a 4 liquidation interest of .111 of a full interest; a 5 commodity option member, or COM, who received no vote 6 but a liquidation right of .005 of a full membership; 7 and an index debt and equity member, or IDEM, who 8 received the same rights as the COM membership 9 classification. These new memberships were 10 distributed to the full members, each receiving a 11 one-fourth interest in each category and the 12 associate members each receiving a half interest in 13 both the COM and IDEM memberships. 14 The market then allowed these recipients to 15 trade their interest, respective interests, in order 16 to create a full GIM, COM or IDEM membership which 17 then could be sold or leased. The memberships also 18 have different trading rights. Full members can 19 trade in any commodity and in any portion of the 20 Board and have the exercise right to also trade on 21 the Chicago Board of Options Exchange. The other 22 member categories have restricted trading rights. As 23 indicated the Chicago Board of Trade corporation 24 exists to provide a marketplace for its member
12 1 traders. The physical plant, staff and 2 administration are financed in part by the dues, 3 transaction fees and various other charges assessed 4 against the members and those customers who do 5 business on the Board of Trade. 6 From time to time, the amount of some of 7 these charges, with the exception of the current 8 dues, were higher for member interests other than 9 full. There have also been caps on such fees 10 limiting the liability of the full members while 11 those caps did not apply to the other membership 12 categories. 13 The Board of Trade is governed by a board of 14 directors elected by the members. There are 1402 15 full members, each with one vote. There are 791 16 associate members, each with one-sixth of a vote. 17 Those vote totals aggregate 132. Thus the total 18 possible number of votes on any issue is, according 19 to my math, 1534. However, when you deduct the 20 associate memberships that are also owned by full 21 members, their vote shrinks to 94 votes or, I believe 22 the parties have indicated, 6 percent of the eligible 23 votes on any issue. 24 There is a quorum requirement of 300 votes
13 1 before a measure can pass. Hence, the associate 2 members can never control an election by the strength 3 of their sole vote. In order to effect change, they 4 must either form a coalition with certain full 5 members to pass their proposal. 6 The plaintiffs have indicated that only the 7 board can decide what issues reach the ballot for 8 vote by the full members. That is actually 9 incorrect. By rule -- and I want to say Rule 220, 10 but I don't think it is -- 25 members regardless of 11 their position can petition the board of directors 12 for a special meeting to discuss an issue. If the 13 board refuses, 100 members can then sign a petition 14 that calls a special meeting to consider an issue and 15 require a vote. 16 The 18-member board consists of full 17 members, two associate members and outside directors. 18 The associate member group which can only be two of 19 the 18 members can also be fulls, thus again further 20 diluting, the inferences are, the membership and 21 participation of associates in the decision-making 22 policies of the Board of Trade. 23 There is a chair elected by the members who 24 can only be a full member. It's who occupies the
14 1 chair for two years. That individual, while a member 2 of the board, can only vote when there is a tie in 3 the board determination. There is a vice chair who 4 is also required to be a full member. 5 During the course of discovery, it was 6 disclosed that full members dominate the executive 7 committee, which is the most important committee on 8 the board, the nominating committee, the finance 9 committee, the strategy committee, the human 10 resources committee, and the appellate committee. In 11 addition, over the years public directors which were 12 formerly nominated by the president are now nominated 13 by the full-member dominated nominating committee. 14 During the period of 1988 to 2002, 15 89 percent of all committee members were full 16 members, 89 1/2 of all committee chairs were full 17 members, 96 percent of all executive committee 18 members were full members, 100 percent of the 19 executive committee chairs were full members, 20 89 percent of all nominating committee members are 21 full members, 100 percent of the restructuring task 22 force were full members, and 88 percent of the 23 restructuring implementation committee were full 24 members.
15 1 As the Board has evolved, there has been a 2 constant concern for maintaining the market, as I 3 indicated. That is why products were introduced and 4 expanded, new membership interests were created, 5 overnight trading was instituted. During this 6 process, the Board came to the conclusion that its 7 market was being challenged by technological 8 advances, and the Board's viability and/or continued 9 existence depended on changing its corporate format 10 and having greater access to the equity markets. 11 Thus in 1999, the then chairman, the 12 absentminded Mr. Daniel Brennan, created a committee 13 to study the Board's situation and options. The 14 studies resulted in the appointment of an allocation 15 committee to distribute the Board of Trade assets to 16 members in a new for-profit Chicago Board of Trade. 17 This committee in anticipation the Chicago 18 Board of Trade changed from a charter corporation to 19 its current status as a Delaware not-for-profit 20 corporation. The committee consisted of former 21 Governor James Thompson, former minority leader 22 Robert Michael, Mr. Ralph Weems, a Professor Hamada 23 of the University of Chicago Business School, and 24 Mr. Flip Filipowski an entrepreneur, who left the
16 1 committee shortly after it formed. 2 This subcommittee engaged William Blair & 3 Company to analyze the assets of the Board of Trade 4 and make a recommendation as to its allocation. The 5 committee also hired independent counsel from the law 6 firm of Winston & Strawn to act as its counsel. The 7 subcommittee had the power to accept or reject the 8 allocation and decide whether or not to recommend it 9 to the full board. The full board, however, does 10 have the ultimate power to forward the proposal to 11 the membership for a vote. 12 Currently, the recommendation is as follows: 13 There will be two classes of stock created, class A 14 and class B. These will contain trading rights in 15 one class and equity rights in the other class. 16 These will be bundled or stapled together so that 17 control, it is thought, will be maintained by those 18 who trade on the Board of Trade. No member's trading 19 rights will be affected by this distribution. The 20 trading rights of the full members, the dissolution 21 rights of the full members and the profit 22 distribution of the full members will consist of one 23 membership interest. 24 Associate members will increase their voting
17 1 strength to one-fifth of a vote per membership. They 2 will increase their dissolution rights in a similar 3 manner. The GIM interests will receive one-tenth of 4 a vote per interest and will actually have their 5 dissolution rights decreased by 1/100th of a point 6 but receive a greater distribution of the profit. 7 As I indicated no group as yet has received, 8 but for a couple of allocations in the 1980s, any 9 profit from the former charter corporation. 10 The COM group will receive voting rights, 11 lesser; they'll be .014 votes per member. Their 12 dissolution rights will also increase to the same and 13 they will have the same interest per membership in 14 profit distribution. The IDEM membership will 15 receive .012 votes. They have no vote now. Their 16 dissolution rights will increase to the same amount 17 as well as their profit distribution. I should note, 18 to make the record clear, that the COMS and IDEMS at 19 this point both have dissolution rights and profit 20 distribution rights. 21 As a result, the voting rights of the 22 plaintiff class will increase from its current 8.34 23 percent to 11.9 percent, its dissolution rights and 24 its profit distribution rights will also increase by
18 1 different percentages. So they both exist to be 2 11.93 percent, which is an increase over the existing 3 distribution. 4 In Weinberger vs. UOP, the Delaware Supreme 5 Court -- that case was reported at 409 A.2d 1262 -- 6 held that whenever a majority shareholder or group of 7 shareholders combined to form a majority and 8 undertakes to exercise an available statutory power 9 so as to impose the will of the majority upon the 10 minority, such action gives rise to a fiduciary duty 11 on the part of the majority shareholder to deal 12 fairly with the minority whose property interests are 13 thus controlled by the majority. 14 Interestingly in that case, the trial judge 15 dismissed the complaint because the majority 16 shareholder, Signals, did not vote but structured the 17 vote so that the cash-out merger was approved by the 18 minority shareholders who had no duty to the minority 19 shareholders, other than Signal, which was the 20 majority shareholder, who the court held had no duty 21 to the other shareholders. 22 Of perhaps greater interest is that the 23 indefatigable Mr. Weinberger pursued his claim and 24 found out that common directors of Signal, the silent
19 1 majority holder who didn't vote, and UOP, common 2 directors of both corporations that were appointed by 3 Signal, had failed to disclose that a higher 4 valuation than the $21 for the stock that was offered 5 actually had existed and was within the knowledge and 6 control of the fiduciary directors of UOP. That was 7 found to be a breach of fiduciary duty in the later 8 case of Weinberger vs. UOP at 457 A.2d 701. 9 The undisputed facts in this case indicate 10 there is no majority shareholder on the Board of 11 Trade. Thus, we must look to the second basis to 12 determine whether the minority shareholders combined 13 to form a majority in order to exercise control over 14 a matter. This is not a new principle of law. As we 15 shall see, it has roots back to the beginning of the 16 20th century and, in fact, has received much 17 attention in the 1940s and '50s. For example, I 18 would refer you to the article in the 104th volume in 19 the University of Pennsylvania Law Review at page 75 20 written by Mr. Leech entitled, "Transactions and 21 Corporate Control." 22 Under Delaware law, with the exception of 23 one decision, the determination of whether a minority 24 has combined to impose the will on the minority is
20 1 transaction based, Kahn vs. Tremont Corporation, 2 694 A.2d, page 422. This distinction is sensible 3 because it is inherently unfair to call upon a 4 shareholder to defend a transaction they did not 5 dictate, nor it is appropriate in light of the rule 6 that a shareholder is free to vote in his or her own 7 self-interest. 8 A shareholder only becomes a fiduciary when 9 the shareholder crosses the line and becomes the 10 manager by either negotiating or dictating both sides 11 of the transaction. I would cite to you the case of 12 Kahn vs. Lynch Communications at 638 Ill.App.2d 1110. 13 This, by the way, is that aberrant case which I'll 14 discuss in a moment. 15 The fact of control is not sufficient. 16 Control must be exercised. That is the holding of 17 the United States Supreme Court in the case of 18 Southern Pacific Company vs. Bogert, where 19 Justice Brandeis wrote the following: 20 "But the doctrine by which the holders of 21 the majority of the stock of a corporation who 22 dominate its affairs are held to act as trustees for 23 the minority does not rest on such technical 24 distinction. It is the fact of control of the common
21 1 property held and exercised" -- it is a conjunctive 2 sentence, it is not disjunctive -- "not the 3 particular means or manner in which the control is 4 exercised that creates the fiduciary obligation. 5 That's at page 492 of 250 U.S. 6 As I indicated, there are a strong line of 7 cases which hold under Delaware jurisprudence the 8 same result. In Re Wheelabrator Technology, Inc. 9 Shareholders Litigation, 663 A.2d 1194; Kaplan vs. 10 Centex, which was cited by the parties at 284 A.2d 11 119; In Re Sealand Corporation, again cited by the 12 parties, 1988 Del. Ch. LEXIS 65. 13 As I indicated, the Kahn vs. Lynch case is 14 also the only Delaware case that went beyond the 15 transaction analysis, perhaps, in part, because 16 Alcatel, the minority shareholder, had such a 17 pervasive impact on Lynch's managerial decisions. 18 Prior to the cash-out merger, which is a significant 19 issue in that many of these cases, if not most of 20 these fiduciary cases, are based on situations where 21 there are cash-out or forced mergers of parties, 22 which is, as we'll see I hope later, a different 23 situation than we find here. 24 In fact, prior to the decision on the
22 1 cash-out merger, which Alcatel pushed, it fired 2 trusted managers, it vetoed a merger that the board 3 felt was in Lynch's best interest, it attempted to 4 profit by forcing a merger upon Lynch with an 5 undesirable partner that was affiliated with Alcatel, 6 and finally, not obtaining its goal, pushed the 7 cash-out merger, eliminating all the other 8 shareholders. 9 In Ivanhoe Partners vs. Newmont Mining 10 Corporation, at 535 A.2d 1334, the court found no 11 duty to other shareholders when a minority, 12 26 percent shareholders, agreed with management to 13 the sale of assets and declaration of a dividend 14 based on the proceeds of the sale of those assets in 15 order to finance the acquisition of other minority 16 interests to fend off a takeover from a hostile 17 suitor which was greater than the amount of the value 18 of the shares currently on the market. 19 The minority shareholder, Newmont -- 20 actually it wasn't Newmont, I believe it was a gold 21 company, but the name of it is really irrelevant -- 22 had been a minority shareholder for a period of time 23 and had a long and friendly relationship with Newmont 24 where it agreed to stand pat and not to acquire more
23 1 than a 33 percent interest in the corporation and 2 allow it to operate its business without attempting 3 to take it over. And once the bid for a greater 4 value came in, they acted in concert and this 5 shareholder felt that it was done to breach their 6 fiduciary duty. The court recognized that the 7 continued existence of the corporation was a valid 8 concern of the board and shareholders and found no 9 fiduciary duty. 10 Similarly, in Citron vs. Fairchild Camera 11 and Instrument Corporation at 569 A.2d page 53, the 12 same court held that in the absence of some 13 controlling stock ownership, a plaintiff must show 14 domination through actual control of corporate 15 conduct. 16 There is simply no evidence in the record of 17 the direct involvement by voting members other than 18 directors in the allocation process. In fact, the 19 deposition testimony of Mr. Lee and Mr. Daniel Stern 20 best illustrate this point. 21 The junior Mr. Stern had no real information 22 about the transaction, he was merely concerned about 23 his trading rights and maintaining those, while the 24 senior Mr. Stern felt the proposal was unfair to the
24 1 full owners because it reduced his equity in the 2 Board of Trade. But feeling this, he took no formal 3 action. 4 The evidence is clear that while there may 5 have been informal discussions, informational 6 meetings concerning the allocation among or between 7 the many members of the Board of Trade, the only 8 input they had was in response to a solicitation by 9 the allocation committee, and only certain members, a 10 few members, responded to that invitation. 11 The Thompson committee was not controlled or 12 directed by any member. Now, there is some comment 13 about testimony from former Governor Thompson where 14 he indicated that he felt he had no duty specifically 15 to the minority shareholders. However, a complete 16 reading of the transcript of his deposition indicates 17 that he perceived his duty as a duty directed toward 18 all members of the Exchange and that it was 19 inappropriate for him to single out the interest of 20 any single membership classification. 21 So there is no evidence that any member had 22 any participation in the deliberations other than 23 perhaps as a board member during the board process, 24 but clearly not through the deliberations of the
25 1 allocation committee or its independent counsel or 2 staff. 3 In the absence of such evidence, the 4 plaintiff asserts that the very corporate structure 5 as contained in its bylaws, rules and regulations and 6 demonstrated by the historical record, create, in my 7 terms, a voting agreement by which the full members 8 combine to exercise the required control over the 9 affairs of the board. 10 The plaintiff has cited no case which 11 supports this position other than Kahn vs. Lynch. 12 Indeed, other decisions such as In Re Daisymart 13 Convenient Stores, 1999 West Law 350473, an 14 unpublished opinion and used by this Court for 15 illustrative purposes only, not for any standing rule 16 of law, appeared to recognize this point where it was 17 clear and undisputed that the defendant shareholder 18 controlled the destiny of the corporation by its 19 shear number of votes, but after reaching that 20 determination continued its analysis of the 21 transaction that gave rise to the claim to determine 22 what role that shareholder played in the actual 23 transaction. 24 In a decision not cited by the parties but
26 1 actually citing to the Southern Pacific vs. Bogert 2 decision, Gottesman vs. General Motors Corporation, 3 279 F.Supp. 361 from the Southern District of 4 New York in 1967, the court, after taking an 5 interesting tour through the relationship between 6 DuPont, a 23 percent shareholder in General Motors, 7 and General Motors, discussing the development of 8 finishes and fabrics in automobiles, noted the 9 distinction between a dominant or majority 10 shareholder who has taken no steps to usurp the 11 corporate decision-making process and one who does. 12 In that case, although finding that 13 DuPont's, because of its holdings, 23 percent, 14 representation on the board, a guaranteed election of 15 six members, more than 50-year relationship with 16 General Motors, including the ability to comment on 17 prospective presidents of the General Motors 18 Corporation as to whether or not they would be able 19 to serve in that position, found that General Motors 20 clearly had the ability to control the 21 decision-making process. But there was no evidence 22 in any way that control impacted on General Motors' 23 decision to purchase products from DuPont Corporation 24 at higher prices that were available on the general
27 1 market, thus breaching its fiduciary duty to the 2 shareholders. 3 Now, this case was decided in the Southern 4 District of New York. DuPont and General Motors were 5 at that time Delaware corporations. The judge found 6 that New York law and Delaware law were exactly the 7 same and cited to the Southern Pacific case and 8 emphasized the dual nature of the requirement, not 9 only the ability to control but the actual exercise 10 of that control on the transaction in question. 11 Although many commentators have felt that Kahn vs. 12 Lynch, or what has become known by them as Lynch I, 13 is an aberrant decision, it is imperative for this 14 Court to analyze this matter in light of that ruling. 15 If there is a question of material fact that 16 show that the full membership interests have 17 exercised dominion and control over the affairs of 18 the Board of Trade, and if so, summary judgment is 19 inappropriate. On the other hand, if no such 20 material question of fact exists, summary judgment is 21 appropriate. 22 Moreover, since the Board of Trade is 23 undergoing what is legally known as an organic 24 change, the Court must be concerned with whether, as
28 1 some commentators indicate, this matter is an 2 ownership claim issue. This means does the 3 transaction relate to the member's role as an owner 4 and not an owner of his or her share in the 5 corporation. That was a concern pointed out by 6 Bayliss Manning in "Reflections in Practical Tips in 7 Life the Boardroom" after Van Gorkon, which is found 8 at 41 Business Law 1, page 5, a 1985 article. 9 Here it clearly does not involve an 10 ownership claim, because the ownership interests, 11 after reorganization, in every member class except 12 for the full member, will be greater than it was 13 before. Every member will retain trading rights. 14 The future market will determine the value of those 15 trading rights, and that seems to be the major 16 concern of the parties. 17 It must be understood that Delaware law 18 recognizes that continued corporate existence, in 19 other words, the continued existence of the Board of 20 Trade, is a legitimate concern of the board of 21 directors. Williams vs. Geier, 671 A.2d 1368. 22 Now, there has been some reference by the 23 plaintiffs and in testimony of some witnesses that 24 this is the ultimate endgame in terms of the Board of
29 1 Trade. I don't know that it is in terms of the 2 corporate literature on this issue. It clearly may 3 become one, as the parties anticipate, but only as a 4 result of the market. Nothing that the board is 5 doing or that the shareholders may or may not approve 6 will result in the end of any rights that the parties 7 have. It may well be that what people predict 8 becomes true. On the other hand, the Board's 9 experience with the financial marketplace and an 10 unanticipated explosion may also be true. 11 However, I must embark upon my analysis. In 12 order to do so, I must commence by defining the 13 relationship between the Chicago Board of Trade and 14 its member interests. It is a basic tenet of 15 corporate governance that such relationship is 16 contractual in nature. That relationship is defined 17 by the articles of incorporation and bylaws of the 18 corporation. 19 Here, the Chicago Board of Trade has five 20 separate classes of members, each with defined rights 21 and equity interests. No argument has been made or 22 case or statute cited to stand for the principle that 23 such a structure is illegal under Delaware law or 24 that was illegal under any preceding corporate form
30 1 or structure under which the Board of Trade operated. 2 Each interest, whether purchased from the Board or 3 another holder was done, I presume, with no evidence 4 to the contrary in the record, with full disclosure 5 of what was being obtained for the consideration 6 paid. 7 A corporation functions in its structure 8 like a democracy. Each member is entitled to 9 exercise what rights they have under the corporate 10 forum which governs the organization, and they may do 11 so in their own self-interest. As corporations act 12 much like democracies, it is a sine qua non that 13 politics will intervene. It is also, in my opinion, 14 a profound statement to suggest that any proposed 15 action to gain approval by the shareholders must have 16 the support of a majority of the voters. The board 17 must know this when they make the proposal. 18 The plaintiff has cited no case nor can the 19 Court find one that invalidates any otherwise 20 legitimate corporate action merely because it 21 benefits a majority of shareholders at the supposed 22 expense of minority shareholders, or even as in 23 Williams vs. Geier, which I cited to previously, the 24 minority shareholders are told at the time of the
31 1 vote the issue would probably pass regardless of what 2 they think because the majority favored the proposal. 3 The plaintiff points to the extremely 4 limited input, almost to the exclusion by the 5 non-full member interest in the board's election, the 6 election of the chair, the domination of the 7 committees, the results of elections. None of these 8 are alleged to be illegal. This has gone on for 9 many, many years. 10 With respect to Mr. Rosenthal's affidavit, 11 much of which is nontestimonial in nature, it merely 12 states the obvious, that because the Board of Trade 13 exists to facilitate its members' trading rights, the 14 board's proposals were ratified by a majority of the 15 voters when they were deemed to be in the best 16 interest of the voters and rejected when not believed 17 to be in their interest. The last election of the 18 chair of the board proves this. 19 More importantly, the plaintiffs seek to 20 impose a duty on members who the evidence shows may 21 own individually a majority of the votes and may from 22 time to time vote similarly for the actions of a duly 23 elected board. 24 I think I would be remiss in not commenting
32 1 on the statement of board member McDowell, who, at 2 one point of his deposition, I think at page 108, 3 said that it was not an independent board. Again, I 4 believe this statement was taken out of context. 5 Mr. McDowell was in the midst of describing his 6 personal view, which I think was rather candid, that 7 no person, regardless of what occupation or position 8 they take, enters into that occupation without 9 preconceived notions, biases, beliefs that he or she 10 has gained through their life. 11 I would venture to say that no member of the 12 judiciary, including myself, would not suffer from 13 those same infirmities at the time they assumed the 14 position of public trust that they have. I know I 15 have. I think the challenge to the individual and 16 what Mr. McDowell was attempting to say is to 17 acknowledge that you have those infirmities and 18 understand the role you are called upon to play and 19 do your utmost to make the decision that is fair and 20 just and to acknowledge and disregard any input that 21 those predilections or preconceptions may have on 22 you. I think that in that way, and that is the only 23 inference that can be taken from what he said. 24 Delaware law, I believe, wisely holds there
33 1 must be some evidence that in addition to being in 2 the majority, the minority exercises control over the 3 transaction, or in accordance with Kahn vs. Lynch 4 Communications, they exercise control over the 5 affairs of the corporation. It can never be the 6 rule, and it has never, ever been the rule, that 7 where a disparate and disconnected group of 8 shareholders have the potential to control the 9 corporation that they are deemed to have a fiduciary 10 duty to the other members. 11 There must be more evidence that exists in 12 the record, which is merely that a legally organized 13 and operated corporation, acting in accordance with 14 its bylaws and charter, has made decisions. To reach 15 a conclusion other than the one that I have would 16 result in the courts becoming inherently involved in 17 almost all corporate decision-making whenever a 18 majority of block of shareholders vote in a certain 19 pattern, regardless of the weighted vote contained in 20 the bylaws or charter or the unconnected or disparate 21 interest those shareholders have. 22 Indeed, if I were to so hold every decision 23 of the Chicago Board of Trade from this point on, 24 maintained under its current structure, would require
34 1 the imposition of fiduciary duties on each and every 2 member to determine and thus the court would have to 3 conduct a fairness test on almost every decision that 4 would affect members rights, which is not the role of 5 the court. 6 There is no evidence that other than elected 7 chairmen, a portion of the board of directors, the 8 shareholders had any part in the allocation process. 9 Independent directors chose financial advisors who 10 made recommendations and considered other proposals. 11 If the board or any of its members have breached 12 their duties to the plaintiff, certainly the 13 plaintiffs have had a sufficient access to the 14 decision-making process, the allocation system, to 15 make any claim that they may have, and I make no 16 comment on the efficacy of any such claim, but these 17 full members should not be held to answer any further 18 for the actions of people over whom there is no 19 evidence that they have actually controlled or 20 impliedly controlled by any inference from any of the 21 records. 22 There is no question of material fact. It 23 is apparent to me that as a result there is no doubt, 24 there's absolutely no doubt in my mind that the full
35 1 members who coincidentally have a majority number of 2 votes in the board structure that is legal have 3 exercised any domination or control over the affairs 4 of the Chicago Board of Trade since 1977 when the 5 first members, other than full members, were allowed. 6 Therefore, for those reasons I've stated, 7 summary judgment is entered in favor of the defendant 8 class, represented by Frank L. Sims and others, and 9 against the plaintiff class, represented by Timothy 10 Feldheim, and others. The class representatives 11 shall cause a copy of this order to be mailed at 12 their own expense to each member of the class they 13 represent. This order terminates this case. 14 Court's in recess. 15 (Which were all the 16 proceedings had in the 17 above-entitled matter, at the 18 time and place aforesaid.) 19 20 21 22 23 24
36 1 STATE OF ILLINOIS ) ) SS: 2 COUNTY OF C O O K ) 3 MARGARET M. KRUSE, being first duly sworn on 4 oath says that she is a court reporter doing business 5 in the City of Chicago; that she reported in 6 shorthand the proceedings given at the taking of said 7 hearing and that the foregoing is a true and correct 8 transcript of her shorthand notes so taken as 9 aforesaid and contains all the proceedings given at 10 said hearing. 11 12 13 _ Margaret M. Kruse, CSR, RPR 14 SUBSCRIBED AND SWORN TO 15 before me this 8th day of August, A.D., 2002. 16 _ 17 Notary Public 18 19 20 21 22 23 24 While CBOT Holdings, Inc. ("CBOT Holdings") has filed with the SEC a Registration Statement on Form S-4, including a preliminary proxy statement and prospectus, relating to the restructuring of the Board of Trade of The City of Chicago, Inc. ("CBOT"), it has not yet become effective, which means it is not yet final. CBOT members are urged to read the final Registration Statement on Form S-4, including the final proxy statement and prospectus, relating to the restructuring of the CBOT referred to above, when it is finalized and distributed to CBOT members, as well as other documents which CBOT Holdings or the CBOT has filed or will file with the SEC, because they contain or will contain important information for making an informed investment decision. CBOT members may obtain a free copy of the final prospectus, when it becomes available, and other documents filed by CBOT Holdings or the CBOT at the SEC's web site at www.sec.gov. This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of securities in any state in which offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. * * * *