Opinion ID: 389315
Heading Depth: 2
Heading Rank: 1

Heading: The Williams Act Claims.

Text: 42 Section 14(e) of the Williams Act is a broad antifraud provision modeled after SEC Rule 10b-5, and is designed to insure that shareholders confronted with a tender offer have adequate and accurate information on which to base the decision whether or not to tender their shares. 2 Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 35, 97 S.Ct. 926, 946, 51 L.Ed.2d 124 (1977); Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58 (1975); Lewis v. McGraw, 619 F.2d 192 (2d Cir.), cert. denied, -- U.S. --, 101 S.Ct. 354, 66 L.Ed.2d 214 (1980); see S.Rep.No.550, 90th Cong., 1st Sess. 3 (1967); H.R.Rep.No.1711, 90th Cong., 2d Sess. 3 (1968), reprinted in (1968) U.S.Code Cong. & Ad.News 2811, 2813. 43 Upon the announcement of a tender offer proposal a target company shareholder is presented with three options: he may retain his shares; he may tender them to the tender offeror if the offer becomes effective; or he may dispose of them in the securities market for his shares, which generally rises on the announcement of a tender offer. The plaintiffs have alleged that the defendants violated § 14(e) both by depriving them of their opportunity to tender their shares to CHH, the tender offeror, and by deceiving them as to the attractiveness of disposing of their shares in the rising market. 44
45 By denying the plaintiffs the opportunity to tender their shares to CHH, the plaintiffs claim the defendants deprived them of the difference between $42.00, the amount of the CHH offer, and $19.76, the amount at which Field's shares traded in the market after withdrawal of the CHH proposal. Total damages under this theory would exceed $200,000,000.00. 46 Because § 14(e) is intended to protect shareholders from making a tender offer decision on inaccurate or inadequate information, among the elements of § 14(e) plaintiff must establish is that there was a misrepresentation upon which the target corporation shareholders relied  Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 373 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973). Because the CHH tender offer was withdrawn before the plaintiffs had the opportunity to decide whether or not to tender their shares, it was impossible for the plaintiffs to rely on any alleged deception in making the decision to tender or not. Because the plaintiffs were never presented with that critical decision and therefore never relied on the defendants' alleged misrepresentations, they fail to establish a vital element of a § 14(e) claim as regards the CHH $42.00 offer. 47 In the recent case of Lewis v. McGraw, 619 F.2d 192 (2d Cir.), cert. denied, -- U.S. --, 101 S.Ct. 354, 66 L.Ed.2d 214 (1980), the Second Circuit similarly held that when a proposed tender offer fails to become effective, shareholders of the target company cannot state a cause of action for alleged misstatements under § 14(e) because of the absence of this crucial element of reliance. Id. at 195-96. 48 It is difficult indeed to imagine a case more directly to the point here than the Lewis decision. In that case the American Express Company proposed a friendly business combination with McGraw-Hill. McGraw-Hill's directors rejected the offer in a public letter as reckless, illegal, and improper. American Express then filed a proposed tender offer with the SEC, revealing its intention to make a second offer for the McGraw-Hill stock. The offer would not become effective unless McGraw-Hill agreed not to oppose it. McGraw-Hill's directors rejected the second offer, however, which therefore expired before becoming effective. McGraw-Hill shareholders sued for damages under § 14(e) of the Williams Act. In affirming the district court's dismissal for failure to state a cause of action, the court noted that (i)n the instant case, the target's shareholders simply could not have relied upon McGraw-Hill's statements, whether true or false, since they were never given an opportunity to tender their shares. Id. at 195. The plaintiffs here seek to distinguish Lewis on its unique facts. The two cases, however, are the same in all material aspects: both involve shareholders' allegations that incumbent management and directors prevented the plaintiffs from accepting a tender offer by issuing false and misleading statements or by breaching the fiduciary duties owed to the shareholders. In both cases the requisite element of reliance is absent. 49 The plaintiffs seek to establish that reliance is presumed from materiality in a case involving primarily a failure to disclose, relying on a line of cases culminating in Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972). As the court pointed out, however, in Lewis, neither Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), nor Affiliated Ute abolished the reliance requirement, but (r)ather held that in cases in which reliance is possible, and even likely, but is unduly burdensome to prove, the resulting doubt would be resolved in favor of the class the statute was designed to protect. Lewis at 195; cf. Titan Group, Inc. v. Faggen, 513 F.2d 234, 238-39 (2d Cir.), cert. denied, 423 U.S. 840, 96 S.Ct. 70, 46 L.Ed.2d 59 (1975) (reliance element in 10b-5 suit not eliminated by Ute.) 50 The Mills-Ute presumption is essentially a rule of judicial economy and convenience, designed to avoid the impracticality of requiring that each plaintiff shareholder testify concerning the reliance element. Auto-Lite, 396 U.S. at 385, 90 S.Ct. at 622; see Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 375 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973) (These impracticalities are avoided by establishing a presumption of reliance where it is logical to presume that such reliance in fact existed ); Kohn v. American Metal Climax, Inc., 458 F.2d 255, 290 (3d Cir.), cert. denied, 409 U.S. 874, 93 S.Ct. 120, 34 L.Ed.2d 126 (1972) (Adams, J., concurring in part, dissenting in part) (10b-5 action). However, when the logical basis on which the presumption rests is absent, it would be highly inappropriate to apply the Mills-Ute presumption. (W)here no reliance (is) possible under any imaginable set of facts, such a presumption would be illogical in the extreme. Lewis at 195. 51 The plaintiffs here pose two additional arguments to application of the Lewis holding; first, that it allows a target company management to profit by their own wrong if they are successful in driving off a tender offeror with misrepresentations or omissions otherwise violative of the Act, and second, that unless the pre-effective period is covered by the Act, violative statements could be made with impunity and later affect any future decision shareholders make after the offer becomes effective. 52 The claim that the defendants are allowed to profit by their own wrong is irrelevant to this case. Such an argument would require proof of a causal link between the defendants' wrongful acts or omissions and the withdrawal of the tender offer. Here there is uncontroverted evidence that it was Field's recent acquisitions and plans for expansion that caused the withdrawal of the CHH tender offer. The decision to make acquisitions is one governed by the state law of directors' fiduciary duty. Altman v. Knight, 431 F.Supp. 309 (S.D.N.Y.1977). Therefore even if such conduct were a breach of the defendant directors' fiduciary duty, the plaintiffs would be relegated to their remedy at state law. See Section 10(b) and Rule 10b-5 Claims, infra. This argument, therefore, cannot create a federal securities law claim when the alleged wrong the defendant committed is barred from federal scrutiny by the rule of Santa Fe Industries, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977); see Lewis at 195. 3 53 The plaintiffs' second argument, that statements made in the pre-effective period might have repercussions after the offer becomes effective, see Applied Digital Data Systems, Inc. v. Milgo Electronic Corp., 425 F.Supp. 1145, 1154 (S.D.N.Y.1977), is plainly inapt in the situation we address, where by hypothesis that future offer never materializes. 54 In sum, we find the reasoning of Lewis persuasive, if not compelling, and therefore affirm the district court's grant of the defendants' motion for directed verdict on the § 14(e) claims as to the lost tender offer opportunity. 55
56 The plaintiffs also contend that defendants' misrepresentations or omissions of material fact caused the plaintiffs not to dispose of their shares in the market, which was rising on the news of CHH's takeover attempt. Because we hold that a damages remedy for investors who determine not to sell in the marketplace when no tender offer ever takes place was not intended to be covered by § 14(e) of the statute, we are not swayed by the surface appeal of this argument. 57 The Supreme Court teaches that the starting point in ascertaining Congressional intent is always the language of the statute itself. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 1935, 44 L.Ed.2d 539 (1975) (Powell, J.) (concurring opinion). Section 14(e) is applicable by its terms to conduct in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request or invitation. 15 U.S.C. § 78n(e) (1976) (emphasis added). The language is not unambiguous, but it does seem to contemplate the existence of an effective offer capable of acceptance by the shareholders. The legislative history of the Act is replete with indications that Congress intended to protect an investor faced with the pressures generated by the exigencies of the tender offer context, and that the sole purpose of § 14(e) is protection of the investor faced with the decision to tender or retain his shares: In the rather common situation where existing management or third parties contest a tender offer, shareholders may be exposed to a bewildering variety of conflicting appeals and arguments designed to persuade them either to accept or to reject the tender offer. 113 Cong.Rec. 855-56 (1967) (remarks of Senator Williams). See Hearings on S.510 Before the Subcomm. on Securities of the Senate Comm. on Banking and Currency, 90th Cong., 1st Sess. 33 (1967) (statement of Manuel F. Cohen, Chairman, SEC) ((T)he bill is designed first, to provide those who receive a tender offer with information adequate to an informed decision whether or not to accept ); id. at 203, 205 (bill's purpose is to assure that public shareholders will be given information adequate for an informed decision when a tender offer is made for the shares of their company; disclosure needed so shareholder can make an intelligent decision whether or not to tender his shares). 58 Courts seeking to construe the provisions of the Williams Act have also noted that its protections are required by the peculiar nature of a tender offer, which forces a shareholder to decide whether to dispose of his shares at some premium over the market, or retain them with knowledge that the offeror may alter the management of the target company to its detriment. See Piper v. Chris-Craft Industries, Inc., 430 U.S. at 35, 97 S.Ct. at 946; Bucher v. Shumway, 452 F.Supp. 1288, 1294 (S.D.N.Y.1978). 59 In another context, courts seeking to determine whether unconventional means of acquisition of controlling blocks of shares constitute a tender offer within the meaning of the Williams Act (which leaves the term undefined) have determined that the distinguishing characteristic of the activity the Williams Act seeks to regulate is the exertion of pressure on the shareholders to make a hasty, ill-considered decision to sell their shares. See, e. g., Wellman v. Dickinson, 475 F.Supp. 783 (S.D.N.Y.1979) (intensive private solicitation plus premium plus strict time constraints on acceptance created tender offer); S-G Securities, Inc. v. Fuqua Investment Co., 466 F.Supp. 1114 (D.Mass.1978) (widespread publicity campaign plus massive open market purchases created tender offer pressures). Here there was no deadline by which shareholders were forced to tender, and by hypothesis when we are discussing market transactions, no premium over the market. Therefore Field's shareholders were simply not subjected to the proscribed pressures the Williams Act was designed to alleviate. See Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1207 (2d Cir. 1978) (solicitations to sell on national exchange where shareholders were offered no premium over the market and given no deadline by which to make their decision created no pressure on sellers other than the normal pressure of the marketplace, although the purchaser sought to obtain and exercise control of the company). 60 As we noted only last year in O'Brien v. Continental Illinois National Bank & Trust Co., 593 F.2d 54, 62-63 (7th Cir. 1979), the Supreme Court has continually limited the federal remedy in private federal securities actions. It has continued to decline the opportunity to enlarge that jurisdiction, most recently by denying certiorari in the cases of Lewis v. McGraw, supra, and Bucher v. Shumway, (1979-80 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 97,142 (S.D.N.Y.1979), aff'd, 622 F.2d 572 (2d Cir.), cert. denied, -- U.S. --, 101 S.Ct. 120, 66 L.Ed.2d 48 (1980). In light of this trend to avoid unduly expansive interpretations of the securities laws, and our finding that § 14(e) was not intended to remedy the conduct complained of here, we hold that § 14(e) of the Williams Act does not give a damages remedy for alleged misrepresentations or omissions of material fact when the proposed tender offer never becomes effective. 61 The brief filed by the SEC as amicus curiae contends that failure to afford investors a damages remedy under § 14(e) in situations where a tender offer proposal is withdrawn before it becomes effective might lead to abuses. It poses the hypothetical situation where a person announces a proposed tender offer that he never intends to make in order to dispose of securities of the subject company at artificially inflated prices  We note that such conduct would fall within the ambit of the prohibitions of Rule 10b-5, see infra. Cf. Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979) (financial columnist purchased stock knowing he would recommend it in his column and sell on the resulting rise; failure to disclose this scheme violated 10b-5). 62 The SEC also suggests that without such a remedy, persons could announce tender offers, again without intending to make them, to put pressure on management to consider merger proposals. Although the present case does not present such a situation, we believe that preliminary injunctive relief would be the appropriate remedy for such conduct. In Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937 (2d Cir. 1969) (Friendly, J.), the plaintiff, a target of a tender offer mounted by the defendant, sought preliminary injunctive relief under § 14(e), claiming that the defendant had misrepresented its intentions concerning a potential tender offer. The district court denied preliminary relief, but after a trial on the merits found for the plaintiffs. The Second Circuit reversed, finding no misrepresentation by the offeror. In reaching that result, however, it noted: 63 We agree with plaintiffs to the extent of believing that the application for a preliminary injunction is the time when relief can best be given (W)e think that in administering § 14(d) and (e) if a violation has been sufficiently proved on an application for a temporary injunction, the opportunity for doing equity is considerably better then than it will be later on. 64 Id. at 947, quoted with approval in Piper v. Chris-Craft Industries, 430 U.S. 1, 42, 97 S.Ct. 926, 949, 66 L.Ed.2d 214 (1977) (defeated tender offeror does not have damages remedy under § 14(e)). The rule urged by the SEC would only serve to intensify the pressure such spurious offers would exert on incumbent management, by confronting them with the spectre of shareholder damage suits which could result from the withdrawal of even a sham tender offer. 65