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Crucial Step toward Demutualization: CBOT Wins Sum

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CHICAGO (–Judge Patrick E. McGann gave the Chicago Board of Trade an important victory last week, deciding against the plaintiffs in a class-action lawsuit involving its demutualization.

The lawsuit was filed by some of the associate members of the exchange, who had alleged a breach of fiduciary responsibility in the allocation of shares in CBOT’s demutualization plan.

Judge McCann’s decision granted what is known as “summary judgment” to the defendant CBOT. This means that he found that the plaintiffs had not made a preliminary showing sufficient to require a full trial or, in other words, that there was no genuine material issue of fact for a trial to resolve.

On Aug. 9, the day after the decision, Nickolas J. Neubauer, chairman of the CBOT, wrote the membership declaring his satisfaction. “Since the outset of this litigation,” he wrote, “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.”

Counsel for plaintiffs, Barry Rose and Michael D. Richman of Sachnoff & Weaver, Ltd., Chicago, could not be reached for comment on the possibility of plans to appeal.

Donna Welch, of Kirkland & Ellis, one of the attorneys for the defendants, said Tuesday that the plaintiffs have 30 days to appeal. She declined to predict whether they would.

Judge McGann found special significance in the facts that no plaintiffs’ trading rights will be affected by the allocation of shares in the CBOT plan and that the associate members will actually increase their voting strength.

One question at issue was whether the full members owed a fiduciary duty to the associate members. Judge McGann found, as a matter of law, that they do not and that accordingly the members are entitled to vote their own self-interest. “The plaintiffs have cited no case nor can the court find one that invalidates any otherwise legitimate corporate action merely because it benefits a majority of shareholders at the supposed expense of minority shareholders.”

Another question was whether a majority or dominant shareholder or clique had usurped the corporate decision-making process. In this case, that question arose because plaintiffs alleged excessive full-member control of the allocation committee (also known as the Thompson committee because it was chaired by former Illinois Governor James Thompson).

Mr. Thompson had made an observation during his deposition, according to the plaintiffs, that proved that the committee was prejudiced against the interests of the associate members. But the court considered this comment, in context, innocuous.

“The Thompson committee was not controlled or directed by any member,” the court found. “Now, there is some comment about testimony from former Governor Thompson where he indicated that he had no duty specifically to the minority shareholders. However, a complete reading of the transcript of his deposition indicates that he perceived his duty as a duty directed toward all members of the exchange and that it was inappropriate for him to single out the interest of any single membership classification.”

“I think this decision was a straightforward application of Delaware law,” said Ms. Welch.