Opinion ID: 678811
Heading Depth: 2
Heading Rank: 1

Heading: The $220 Million Differential

Text: 17 FMC seeks to recover the $220 million difference in the amounts it paid out to shareholders under the plan originally proposed and the one eventually accomplished. It claims that Judge Pollack erred in granting summary judgment because [t]he jury could ... reasonably conclude that Boesky's trading was a substantial factor in the rise of the price of FMC stock, and that the rise in the price of the stock forced FMC to abandon its original recapitalization plan. In seeking to recover the additional amounts paid to its shareholders, FMC overlooks one important circumstance: because the excess amounts inured to the benefit of FMC's shareholders, FMC cannot claim that it was injured thereby. 18 FMC's restructuring involved, on the one hand, a pro rata distribution of corporate assets to the public shareholders in return for their surrender of a portion of the publicly held equity. The management shareholders, in contrast, would maintain their current equity holdings with the result being, of course, that management would end up with a larger proportionate share of the reduced total equity investment in FMC. FMC, 825 F.Supp. at 633. Aside from the purpose of discouraging takeover bidders by simultaneously increasing the percentage of shares held by management and FMC's debt-to-equity ratio, the economic effect of the transaction essentially was a wash--a zero sum transaction in which there were no special preferences afforded or profits to be made. By design every shareholder was supposed to receive identical consideration for each share given up in an amount equal to the value of each share. 19 To illustrate this point, it is useful to contrast FMC's going private transaction with the public tender offer presented in Litton Industries, Inc. v. Lehman Brothers Kuhn Loeb Inc., 967 F.2d 742 (2d Cir.1992). In Litton, plaintiff Litton Industries, Inc. made a tender offer for the stock of an external target company. Like FMC, Litton alleged that employees of its investment banker drove the target's stock price up by trading on material nonpublic information, and that the price it paid to acquire the target was artificially inflated as a result of insider trading in [the target's] common stock. Id. at 744. Although the tender offer ultimately was successful, Litton sought to recover the overpayment from the investment banker. We held that under certain circumstances an acquiring corporation may maintain a Rule 10b-5 cause of action against its investment banker where it could prove the investment banker's premature trading caused an increase in the stock price and forced the acquirer to pay more for the target company than it otherwise would have. See id. at 749. 20 While the key issue in Litton was whether the insider trading caused the increase in the deal price, the basis for the holding is instructive. The underlying assumption in Litton was that the plaintiff, as the purchaser of an external target company, had a duty to maximize its own shareholders' value by minimizing the cost of the transaction. To this end, Litton disclosed confidential business information so its investment banker could estimate the minimum premium required to induce a sufficient percentage of the target's shareholders to tender their shares. Id. at 749. 21 A necessary element of the Litton decision, though one not discussed explicitly, is that Litton had no duty to disclose its internal analyses to the target company's shareholders. It is in the absence of such a duty that the acquirer can seek to pay the minimum premium as opposed to making its highest offer, or even an offer reflecting what the acquirer believes to be the fair value of the target. If Litton's investment banker did not disclose the information, it could have remained secret indefinitely, and Litton would have been the ultimate beneficiary of any value that information had in the transaction. Disclosure in the absence of a duty to disclose caused the benefit of the information to pass instead to the investment banker and ultimately to the target's shareholders as opposed to the acquirer's shareholders who were its rightful owners. 22 In contrast with Litton, FMC's duty was to provide FMC public shareholders with consideration equal in value to that received by the management shareholders, and to disclose fully all information relevant to the public shareholders' evaluation of the deal. As Judge Pollack put it, FMC had no legitimate interest in short-changing the public shareholders in the restructure and achieving a windfall profit for themselves, by maintaining in confidence business information pertinent to the fair value of the stock.... FMC, 825 F.Supp. at 633; see Chiarella v. United States, 445 U.S. 222, 227-35, 100 S.Ct. 1108, 1114-18, 63 L.Ed.2d 348 (1980) (holding that duty to disclose under Rule 10b-5 arises from fiduciary relationship); Stroud v. Grace, 606 A.2d 75, 84 (Del.1992) (holding that board of directors has duty of full disclosure when it seeks shareholder action); Bruce A. Hiler, The SEC and the Courts' Approach to Disclosure of Earnings Projections, Asset Appraisals, and Other Soft Information: Old Problems, Changing Views, 46 Md.L.Rev. 1114, 1169 (1987) (noting common-law notion that it is fraudulent for a fiduciary to have an informational advantage over the beneficiary with whom the fiduciary trades) (citing Chiarella). 23 FMC's claim that Boesky's insider trading caused the deal to be revised therefore misses the point. Because FMC's duties included making complete disclosure and fully compensating its shareholders, beyond showing that the transaction became more expensive, FMC must at least show that it paid more for the stock than it was worth. FMC could not seek the minimum premium, but rather was obligated to offer a fair price. Because the shareholders were the equitable owners of the information, no claim of injury can lie where premature disclosure of that information benefitted them in their dealings with the FMC. See FMC, 825 F.Supp. at 633. 24 Judge Pollack determined, and we agree, that FMC presented no evidence that the stock was not worth the $97 per share price ultimately paid, or that the $85 per share originally contemplated was adequate to compensate the public shareholders. See id. at 634. Unlike Litton, FMC cannot claim that Boesky stole a premium the company was entitled to, since FMC had no legitimate interest in realizing a gain at its public shareholders' expense. Therefore, even if Boesky's trades caused the stock price to rise prematurely, because the transaction was approved by both the shareholders and the board of directors, FMC cannot claim injury unless it shows, at a minimum, that the price increase also was artificial. Cf. City Capital Assocs. Ltd. Partnership v. Interco, Inc., 551 A.2d 787, 801 (Del.Ch.) (expressing doubt as to whether pro rata distribution of cash to shareholders could ever constitute an unreasonable response by the board of directors to a bid perceived to be inadequate), appeal dismissed as moot, 556 A.2d 1070 (Del.1988). 25 That the $97 per share figure was warranted based on all available information is evident from the fact that FMC's board of directors voted to increase the cash payout and to continue to recommend the deal to the shareholders. See Viacom Int'l Inc. v. Icahn, 946 F.2d 998, 1001 (2d Cir.1991) (finding directors' valuation to be relevant in establishing fair price higher than market price), cert. denied, --- U.S. ----, 112 S.Ct. 1244, 117 L.Ed.2d 477 (1992). In addition, on April 25, 1986, three weeks after FMC fully disclosed the projections and well after Boesky divested his interest in the company, FMC stock was still trading around $97 per share. Furthermore, the stub share which was valued by FMC at about $17 per share, actually opened at $19.25 per share, indicating that the stock probably was still slightly undervalued in the transaction despite the increased cash payout. See FMC, 825 F.Supp. at 634. In the face of this proof that the $97 per share figure was fair, FMC produced no evidence to the contrary. The absence of evidence that the $220 million increased payout constituted something other than FMC giving its public shareholders full consideration for their stock is fatal to FMC's recovery of these amounts. Judge Pollack therefore properly granted summary judgment to Goldman on this theory. 26 In a related claim, FMC asserts that regardless of whether it can recover the $220 million, Goldman should be liable for the increased interest and other costs of the additional debt required to fund the revised plan. However, if the $220 million is not a consequential injury flowing from Goldman's conduct but rather a necessary additional payment to achieve fairness, it follows a fortiori that the cost of funding that additional expenditure cannot be recovered. 27 Because FMC is unable to prove any damages, it will not be able to recover on its RICO claims under 18 U.S.C. Secs. 1962(c)-(d). We therefore do not reach the question decided in the negative by Judge Williams of whether the doctrine of respondeat superior applies in civil RICO actions, see Boesky, 727 F.Supp. at 1199.II. Misappropriation of Confidential Information 28 FMC next contends that it is entitled to recover the cost of creating the confidential information disclosed to Boesky prematurely. Our conclusion in Part I, supra, that FMC had no legitimate interest in keeping its financial projections confidential to the public shareholders' detriment, and that there is no evidence that the transaction as consummated was unfair, also precludes a finding that FMC was injured by Goldman's alleged premature disclosure of that information to Boesky. As Judge Pollack noted, [t]his is not a case where valuable corporate secrets were destroyed by misappropriation or unauthorized disclosure, which otherwise could and would have been kept confidential indefinitely, and of which any potential unrealized value was thus destroyed. FMC, 825 F.Supp. at 636; see Chiarella, 445 U.S. at 227-35, 100 S.Ct. at 1114-18. FMC's obligation in the restructuring was to exploit the information for the benefit of the public shareholders; therefore, the company's claim that it lost exclusive use of the information is misplaced. 29 As was true with respect to FMC's claim for the additional $220 million payment, FMC's misappropriation claim assumes that there was some legitimate corporate purpose for the information beyond providing the public shareholders their due. In the context of this case, the information had no secrecy value to FMC that was not ultimately realized by the company. The premature disclosure to Boesky injured the public shareholders because the tip enabled Boesky to trade with them while in possession of undisclosed information. However, the only parties injured would be those who bought or sold securities with Boesky directly, or even indirectly through the market, not FMC, whose recapitalization was neither executed on the market nor approved by FMC's shareholders until May 22, 1986, well after the non-public information had been publicly disclosed by FMC itself.... FMC, 825 F.Supp. at 634 (footnote omitted). 30 The harm from the premature disclosure in this case was that Boesky, as opposed to the public shareholders, got to cash in on any value of the information, not that FMC was unable to close its recapitalization at what evidently was an inadequate price. Absent some legitimate purpose for keeping the information secret or some tangible harm from the early disclosure, FMC suffered no legally cognizable injury.