Opinion ID: 483599
Heading Depth: 1
Heading Rank: 4

Heading: THE EXISTENCE OF A SALE UNDERER Sec. 16(b)

Text: 33 Even were the court to assume that Eaton and Koppers secretly agreed to defer the merger on August 23, 1978, this agreement would not constitute a sale under Sec. 16(b). The Seventh Circuit's recent opinion in Portnoy v. Revlon, Inc., 650 F.2d 895 (7th Cir.1981), makes this clear. 34 In Revlon, the Seventh Circuit addressed the exact question before this court, whether there was a sale of stock within the meaning of Sec. 16(b). In that case, plaintiff Portnoy sued on behalf of Revlon, the surviving corporation in the merger of Revlon and Barnes-Hind Pharmaceuticals, Inc. Portnoy contended that Cooper Laboratories, Inc. realized short-swing profits upon the purchase and exchange of Barnes-Hind stock in 1976. Cooper began purchasing Barnes-Hind common stock in 1972. In 1974, Barnes-Hind concluded that a combination with Cooper would not be in the best interests of Barnes-Hind or its shareholders. Cooper continued to purchase Barnes-Hind stock through May, 1976. On May 26, 1976, Barnes-Hind sued Cooper in federal court to enjoin Cooper from making any further purchases of Barnes-Hind stock. The court denied Barnes-Hind's request for a temporary restraining order, and shortly thereafter, Barnes-Hind and Revlon executed a Letter of Intent to merge which set forth the procedure for, and prerequisites to, the execution of a formal merger agreement. At that time, Cooper agreed to support the merger. 19 On July 29, 1976, Barnes-Hind and Revlon executed the Merger Agreement which set forth the conditions precedent to the merger. The conditions were satisfied, the merger closed, and the shares exchanged on December 31, 1976. 35 In his complaint, Portnoy alleged that either the Letter of Intent or the Merger Agreement constituted a Sec. 16(b) sale. According to Portnoy, because Cooper pledged its stock in support of the Revlon merger, and because the conditions precedent to the closing of the merger were beyond the control of Cooper and required no action on the part of Cooper, Cooper was irrevocably bound to exchange its Barnes-Hind stock for Revlon stock no later than July 29, 1976. Therefore, a Sec. 16(b) sale occurred no later than July 29, 1976, well within six months of Cooper's May, 1976 purchases of Barnes-Hind stock. 36 The Seventh Circuit held that neither the Letter of Intent nor the Merger Agreement constituted a contract to sell shares within the scope of Sec. 16(b). In so holding, the court reasoned that a sale occurs when an insider becomes so irrevocably bound to dispose of his securities so that his rights and obligations [become] fixed and the opportunity for speculative abuse [is] removed. Revlon, 650 F.2d at 898. The court found that the Letter of Intent and the Merger Agreement did not irrevocably bind Cooper to exchange its Barnes-Hind stock because (1) Cooper retained the right to unilaterally dispose of its Barnes-Hind shares to unrelated third parties, continuing the potential for speculative trading by an insider, until the merger closed; and (2) the significant conditions precedent to the merger set out in the Merger Agreement were not fulfilled until December, 1976, and nonfulfillment of any of the conditions could have blocked the consummation of the merger. 37 As in Revlon, assuming there was a secret agreement, this agreement did not constitute a sale by Koppers of its Cutler-Hammer shares, in the sense of an irrevocable commitment and a fixing of Kopper's rights and obligations. Until January 2, 1979, the date the merger closed, despite the alleged secret agreement, Koppers retained the right to dispose of its Cutler-Hammer stock to unrelated third parties. Also, the significant conditions precedent to the closing were not fulfilled until long after August 23, 1978. 38 Koppers retained its speculative position as a Cutler-Hammer insider despite the alleged secret agreement to sell its Cutler-Hammer stock to Eaton at the merger closing. In all relevant respects, the alleged secret agreement can be equated with a formal option agreement, which, until exercised, does not constitute a sale, unless the option carries with it rights of ownership. Colan v. Monumental Corp., 713 F.2d 330, 334 (7th Cir.1983); Revlon, 650 F.2d at 901; Bershad v. McDonough, 428 F.2d 693 (7th Cir.1970), cert. denied, 400 U.S. 992, 91 S.Ct. 458, 27 L.Ed.2d 440 (1971). Unlike the alleged insider in Bershad, Koppers did not agree to place the stock in escrow pending the closing of the merger, or grant Eaton an irrevocable proxy to vote the stock effective immediately. Instead, Koppers retained all the rights of stock ownership until the January 2, 1979 merger closing. Therefore, Koppers retained its right to sell the stock to third parties, and its alleged agreement to sell its Cutler-Hammer stock to Eaton at the merger closing did not constitute a Sec. 16(b) sale. 20 39 In addition, it is clear that the significant conditions precedent to the merger did not become definitely eliminated until long after August 23, 1978. Colan v. Brunswick Corp., 550 F.Supp. 49, 51-52 (N.D.Ill.1982). Colan bears the burden of establishing that all significant conditions precedent to the merger were fulfilled within six months of Koppers' purchase of Cutler-Hammer stock. Revlon, 650 F.2d at 898. The court now finds that Colan has failed to meet this burden. 40 The Merger Agreement of June 26, 1978 states that the consummation of the merger was subject to the following significant conditions: (1) lack of litigation with regard to the merger; (2) Cutler-Hammer shareholders' approval of the Merger Agreement at a meeting, the date of which was to be set under Section II of the Merger Agreement; (3) an S.E.C. order declaring effective the necessary Eaton Registration Statement; (4) F.T.C. antitrust clearance of the merger; and (5) the certificate and opinion of Cutler-Hammer's President and Counsel, respectively, to be issued after the shareholders' meeting. 21 41 Colan asserts that the requirement that there be no litigation with regard to the merger may not be considered a significant condition precedent to the merger because of Magistrate Lefkow's discovery ruling of September 22, 1983. 22 In that order, Magistrate Lefkow determined the applicability of the attorney-client and work product privileges to a large number of documents. Colan argued that Koppers had waived the attorney-client privilege with respect to certain documents by placing attorney advice at issue. Koppers placed attorney advice at issue, Colan contended, by raising the defense that the threat of litigation was a significant condition precedent to the consummation of the merger. Magistrate Lefkow upheld Koppers' assertion that it had not waived the attorney-client privilege with respect to these documents, because it had not made the advice of counsel the critical issue in the suit. Magistrate Lefkow found that, because Koppers did not raise the threat of litigation as an affirmative defense in its answer, Koppers had not put advice of counsel in issue. Magistrate Lefkow concluded, however, that, by upholding the privilege, the court considered Koppers barred from asserting the threat of litigation as a defense. 42 Koppers asserts in its motion for summary judgment that the alleged secret agreement was not a Sec. 16(b) sale because, inter alia, the significant conditions precedent to the merger, including the lack of litigation, were not fulfilled within six months of the purchase of stock. However, Koppers is not thereby raising the threat of litigation as an affirmative defense, which Koppers would then have the burden of proving. Rather, Cutler-Hammer and Eaton made lack of litigation concerning the merger a condition precedent to the merger; thus, under Sec. 16(b), Colan has the burden of establishing that this condition was met within six months of Koppers' purchase of stock. 43 Colan has not met its burden of establishing that the threat of litigation was not a significant condition precedent to the closing of the merger. Colan asserts that [a] review of the testimony of the principal negotiators for the investment banking firms confirms the litigation issue was resolved between the parties long before August 23, 1978. Colan refers to notes of Robert Brown allegedly evidencing an agreement between Lehman Brothers and First Boston under which neither would sue the other without notifying the other in advance. 44 Koppers concedes that Lehman Brothers and First Boston did agree to notify each other before initiating litigation. 23 However, Koppers contends, and the court now finds, that this was the extent of the agreement; Eaton and Lehman Brothers recognized that Koppers could initiate litigation through December of 1978. 24 Moreover, third parties could have also initiated litigation that could have prevented or delayed the merger. 45 Colan also asserts that the requirement that the Cutler-Hammer Board set a date for a shareholders' meeting, and that the shareholders vote to approve or disapprove the Merger Agreement, was fulfilled on August 23, 1978. On that date, the Cutler-Hammer Board set the meeting for October 2, 1978, but gave Fitzgerald the authority to change the date without further Board action. Fitzgerald, on October 20, 1978, set the meeting for December 14, 1978. According to Colan, because Fitzgerald was a Koppers director, on August 23, 1978, when he was given the authority to set the date for the shareholders' meeting, Fitzgerald became bound to protect Koppers' interests and to set the date beyond six months from Koppers' last purchase of Cutler-Hammer stock. 46 However, the court finds that, on August 23, 1978, Fitzgerald was not irrevocably bound to reschedule the date of the shareholders' meeting in order to protect Koppers from Sec. 16(b) liability. Fitzgerald and DeWindt both testified under oath in their depositions that other factors, such as a favorable capital gains tax law change effective January 1, 1979, and the ability of Eaton and Cutler-Hammer to work out financial and legal matters, affected Fitzgerald's decision to postpone the shareholders' meeting, and Eaton's tacit approval of the postponement. 25 In any event, the shareholders' meeting was not scheduled until October 20, 1978, and the shareholders did not approve the Merger Agreement until the December 14, 1978 meeting. Thus, this condition was not fulfilled on August 23, 1978. 47 In addition, Colan argues that the S.E.C. approval of Eaton's Registration Statement and the F.T.C. antitrust clearance were not significant conditions precedent to the merger. Colan contends that the approval of the S.E.C. and F.T.C. clearance were not significant because Eaton was a sophisticated filer, the boiler plate terms and conditions of the merger presented no stumbling block to the consummation of the merger, and, in fact, the F.T.C. and Department of Justice inquiries were mere technicalities. However, the fact remains that the S.E.C. did not declare Eaton's Registration Statement effective until November 3, 1978, and Eaton did not consider that it had F.T.C. approval of the merger until December 14, 1978. Despite Colan's conclusory contention that the S.E.C. and F.T.C. approvals were mere technicalities, under the Merger Agreement, approval from both of these agencies was an actual precondition to the merger and could not be assumed. See supra nn. 4-5. Had Eaton and Cutler-Hammer failed to secure approval from the S.E.C. or F.T.C., either party would have had the right to withdraw from the merger. Therefore, the court finds these conditions significant, and not fulfilled as of August 23, 1978. 48 Finally, Colan argues that the opinion of Cutler-Hammer's counsel and the certificate of its president were not significant conditions precedent to the merger, but merely technical conditions capable of ready completion and without any discernible impediment to their issuance. Also, Colan argues that these conditions are insignificant because Eaton had the ability to waive these conditions, and there is no reason to infer why Eaton would not have readily waived these conditions had they been barriers to a closing. Again, these conclusory statements made with 20/20 hindsight fly in the face of reality. Despite Colan's contention that these conditions were insignificant, it is clear they are not. The Merger Agreement expressly conditioned consummation of the merger upon the fulfillment of these conditions, and Eaton at no time waived these requirements. Therefore, these conditions were significant conditions precedent to the merger, and they were not fulfilled until January 2, 1979. 49 In summary, the court finds that, even if one assumes for the sake of argument that there was a secret agreement between Eaton and Koppers to delay the merger, Koppers retained its speculative position as a Cutler-Hammer insider, and the significant conditions precedent to the merger were not all fulfilled, until the merger closed on January 2, 1979. Koppers was not irrevocably bound to dispose of its Cutler-Hammer shares, with rights and obligations fixed, until that date. Koppers never signed a contract to sell the shares to Eaton, never tendered the shares to Eaton, never pledged its support for the merger or agreed to vote its shares in favor of the merger, and Koppers was not a party to the Eaton/Cutler-Hammer Merger Agreement. In addition, Koppers might have blocked or at least substantially delayed the merger by demanding a class vote of its 10,000 preferred shares. 26 Therefore, even if there were a secret agreement to delay the merger, no Sec. 16(b) sale occurred before January 2, 1978, the date the merger closed.