Opinion ID: 692992
Heading Depth: 2
Heading Rank: 3

Heading: The Substantial Step and Materiality Challenges

Text: 68 Maio and Ladavac advance two other arguments in their effort to avoid liability. First, they argue that Anacomp did not take a substantial step toward commencing its tender offer until June 14, 1988, when Anacomp and Xidex signed a confidentiality agreement. If so, any trading before that date would not violate Rule 14e-3 which only bars trading after an offeror has taken a substantial step to commence its tender offer. For the same reason, they argue that any information they received before June 14, 1988 was not material so that trading before that date does not violate Rules 10b-5 or 14e-3 which only prohibit trading on the basis of material non-public information. 69
70 Rule 14e-3 only bars trading after an offeror has taken a substantial step towards commencing its tender offer. See 17 C.F.R. Sec. 240.14e-3; Chestman, 947 F.2d at 557. The few cases addressing Rule 14e-3's substantial step requirement indicate that this determination, like the materiality inquiry, is to be made on the facts of each case. See SEC v. Musella, 578 F.Supp. 425, 443-44 (S.D.N.Y.1984) (retaining a law firm shortly before proposed tender offer is a substantial step); see also Camelot Industries Corp. v. Vista Resources, Inc., 535 F.Supp. 1174, 1183 (S.D.N.Y.1982) (meeting between officers of prospective tender offeror and target corporation was a substantial step in tender offer where prospective offeror stated intent to takeover). 71 Maio and Ladavac argue that Anacomp did not take a substantial step towards commencing its tender offer for Xidex until June 14, 1988, when the parties signed a confidentiality agreement. Any trading before that date would not violate Rule 14e-3. But the district court found that the June 6-7 meeting in Las Vegas between Ferrero and Zaccaria was a substantial step by Anacomp towards commencing its tender offer for Xidex, and that finding is supported by substantial evidence. While it is true that the companies had talked about some form of merger for years, the record shows that the June 6-7, 1988 meeting was much more serious than any previous discussion between the parties. For example, Ferrero was totally unprepared for Xidex's solicitation of some form of buyout by Anacomp in February of 1988, which indicates that this proposal was markedly different from prior and more general discussions concerning some form of affiliation or joint venture. Nonetheless, by March 1988, Ferrero was very interested in acquiring Xidex, and to this end Zaccaria and Ferrero conducted discussions throughout late May. By that time, Xidex officers knew they urgently needed to find a buyer and that a deal with Anacomp was the best possible resolution of their problems. For this reason, Xidex specifically authorized Zaccaria to see if Ferrero was interested in acquiring Xidex and, if so, whether Anacomp could secure financing. Ferrero responded to this request for a definite statement of Anacomp's intent by arranging the June 6-7 meeting in Las Vegas. 72 Thus the June 6-7 meeting was arranged after Xidex had actually solicited Anacomp's tender offer as early February, 1988. The parties had engaged in a series of progressively more serious discussions through late May, and after Xidex had specifically requested that Anacomp determine whether it would make a tender offer and could secure the requisite financing. See Camelot Industries Corp., 535 F.Supp. at 1183 (meeting between prospective offeror and officers of target corporation was a substantial step in tender offer where prospective offeror stated intent to take over target). Further, Anacomp began the due diligence process the day after Ferrero returned from his meeting with Zaccaria. This closeness in time between the meeting in Las Vegas and the beginning of the due diligence process is critically important evidence which confirms that the June 6-7 meeting was more significant than any preceding negotiations. Under these circumstances, we agree with the district court that Anacomp took a substantial step towards commencing its tender offer for Xidex when Ferrero met with Zaccaria in Las Vegas on June 6-7, 1988. The district court's substantial step determination was not clearly erroneous. 16 73
74 Rules 10b-5 and 14e-3 only prohibit trading on the basis of material non-public information that is not disclosed before trading. 17 C.F.R. Secs. 240.10b-5 and 240.14e-3. Information is material if a substantial likelihood exists that a reasonable investor would find [it] significant in deciding whether to buy or sell a security, and on what terms to buy or sell. See Rowe v. Maremont Corp., 850 F.2d 1226, 1232-33 (7th Cir.1988), citing Basic, Inc. v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 983, 99 L.Ed.2d 194 (1988). In Basic, Inc., supra, the Supreme Court noted that the materiality of information with respect to contingent or speculative information or events depended at any given time upon a balancing of both the indicated probability that the [acquisition] will occur and the magnitude of the [acquisition] in light of the totality of company activity. Basic, Inc., 485 U.S. at 238, 108 S.Ct. at 987 (internal quotations and citations omitted). Describing evidence which tended to indicate that merger discussions were significant where information about those discussion would be material, the Court wrote: 75 a factfinder will need to look to indicia of interest in the transaction at the highest corporate levels.... We note by way of example that board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries may serve as indicia of interest. 76 Id. at 239, 108 S.Ct. at 987. 17 With these principles in mind, we review the district court's materiality determination for clear error. Ambrosino v. Rodman & Renshaw, Inc., 972 F.2d 776, 785 (7th Cir.1992). 77 Maio and Ladavac argue that Anacomp did not take a substantial step towards commencing its tender offer until June 14, 1988, so that information received from Ferrero prior to that date was not material within the meaning of Rules 10b-5 and 14e-3. But the district court found that information about the June 6-7 meeting between Ferrero and Zaccaria was material. For the same reasons that meeting is properly considered a substantial step by Anacomp towards commencing its tender offer for Xidex, that materiality finding is supported by substantial evidence. Further, there is evidence that Anacomp's acquisition of Xidex, a much larger corporation, was an acquisition of considerable magnitude in light of the totality of Anacomp's corporate activity. See Basic, Inc., 485 U.S. at 238, 108 S.Ct. at 986-87. Also, the trading of Maio and Ladavac tends to show that information about the June 6-7 meeting was material. See Basic, Inc., 485 U.S. at 240 n. 18, 108 S.Ct. at 988 n. 18 (recognizing that trading of this kind is an indication of materiality); SEC v. Shapiro, 494 F.2d 1301, 1307 (2d Cir.1974) (immediate trading upon receipt of inside information provides evidence of materiality); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 851 (2d Cir.1968) (evidence of such trading is highly relevant). For these reasons, the district court's materiality determination was not clearly erroneous.