Opinion ID: 389315
Heading Depth: 3
Heading Rank: 2

Heading: Misrepresentations and Omissions of Material Fact.

Text: 82 The plaintiffs here, however, do not seek to recover solely on the basis of the existence of or failure to disclose a secret policy of independence. They also allege that pursuant to that policy the defendants issued a stream of deceptive or misleading statements, and engaged in conduct which acted as a deception. These allegations cluster around four factual occurrences: (a) CHH's $36.00 offer of December 12, 1977; (b) Field's filing of the antitrust suit against CHH on December 12, 1977; (c) the acquisitions Field's made and announced between December 12, 1977 and February 22, 1978; and (d) the use of earnings figures for the nine months ending in September, 1977 in communications to Field's shareholders. 83 In analyzing these claims, we keep in mind the post-Santa Fe rule that if 84 the central thrust of a claim or series of claims arises from acts of corporate mismanagement, the claims are not cognizable under federal law. To hold otherwise would be to eviscerate the obvious purpose of the Santa Fe decision, and to permit evasion of that decision by artful legal draftsmanship. 85 Hundahl v. United Benefit Life Insurance Co., 465 F.Supp. 1349, 1365-66 (N.D.Tex.1979); Altman v. Knight, 431 F.Supp. 309 (S.D.N.Y.1977) (claim that directors made a wasteful defensive acquisition and falsely stated a legitimate business purpose, barred by Santa Fe). But cf. Royal Industries, Inc. v. Monogram Industries, Inc., (1976-77 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 95,863 (C.D.Cal.1976) (defensive acquisition breached 10b-5; pre-Santa Fe case). 86 Furthermore, in order to prevail, the alleged misrepresentation or omission must be of a material fact. A material fact is one substantially likely to have assumed actual significance in the deliberations of the reasonable shareholder. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). 87
88 The plaintiffs allege one omission of material fact and two misrepresentations in relation to Field's response to the CHH letter of December 12, proposing a merger of the two companies at $36.00 per share. The plaintiffs assert that the defendants' press release of December 12, 1977, omitted a material fact when it failed to disclose that the $36.00 offer was merely the basis for negotiations. That the offer, however, was only a basis for negotiations was clearly indicated in CHH's press release announcing the $36.00 proposal. (The) plaintiffs cannot complain merely because (Field's) did not re-emphasize facts that might have been helpful to (CHH) in its tender offer 'although such facts would have been known to the ordinary investor through papers of general circulation.'  Berman v. Gerber Products Co., 454 F.Supp. 1310, 1327 (W.D.Mich.1978), quoting Gulf & Western Industries, Inc. v. Great A & P Tea Co., 356 F.Supp. 1066, 1071 (S.D.N.Y.), aff'd 476 F.2d 687 (2d Cir. 1973). We therefore hold that this omission fails to meet the standard of materiality set forth in TSC Industries, supra. 89 The plaintiffs also contend that although the Field's press release of December 14, 1977, called the $36.00 proposal inadequate, no one had ever analyzed the offer as inadequate, and that the defendants therefore misrepresented the attractiveness of the $36.00 offer. In light of the evidence that Field's investment bankers clearly indicated at the board meeting their belief (subsequently vindicated by the $42.00 offer) that a higher price could be obtained, and the board's knowledge of Carter's statement that a $60.00 offer might be forthcoming from a foreign company at any time, it was reasonable for the board to find that the $36.00 price was inadequate. We therefore hold that no reasonable juror could find Field's statements as to the adequacy of the $36.00 offer deceptive. 90 Finally the plaintiffs contend that in the December 20, 1977, press release, Field's misrepresented the nature of the consideration it had given the CHH proposal of December 12, when it stated that the board had rejected the offer only after careful consideration. The plaintiffs first point to the board minutes of October 13, 1977, which reflect the board's decision that any merger with CHH should not be considered. It is disingenuous of the plaintiffs to point to this statement, which reflects the board's reaction to preliminary informal contacts (one of which was made to the ninety-three year old father of one of the board members) made only days after the unexpected death of Burnham, Field's Chairman and Chief Executive Officer. Particularly in light of the uncontroverted evidence that on December 13, prior to the issuance of this press release, the Field's board met for several hours solely to consider the CHH approach, and to receive the analysis and advice of counsel, management, and investment bankers to aid that consideration, no reasonable juror could find that Field's management did not sufficiently carefully consider the CHH December 12, 1977 proposal. See Northwest Industries, Inc. v. B. F. Goodrich Co., 301 F.Supp. 706, 709 (N.D.Ill.1969) (board consideration of multimillion dollar defensive acquisition during first hour of luncheon meeting sufficient to render its decision conclusive). Furthermore, even if the defendants did reject the proposal without the careful consideration the evidence unquestionably establishes they did, this decision would be insulated from federal securities law scrutiny by the rule of Santa Fe Industries. 91
92 The plaintiffs contend that the defendants made four omissions of material fact in public statements about the antitrust suit it filed against CHH on December 12, 1977. First, the plaintiffs cite three omissions in the Field's press release of December 12, 1977, which announced the filing of the suit; failure to disclose that Field's antitrust counsel was not present at the meeting when the defendants decided to file the suit; failure to mention CHH's offer to attempt to cure perceived antitrust violations; and failure to mention Field's motive in filing the suit, which the plaintiffs allege was to further the secret policy of independence. Second, the plaintiffs contend that Field's press release of December 22, 1978, again omitted to disclose CHH's willingness to cure any perceived antitrust problems. In light of our finding that the decision to bring the antitrust action falls, again, within the scope of directors' acts insulated from our scrutiny by the doctrine of Santa Fe Industries v. Green, supra, we pass over the materiality of these omissions, which is called into question by the opinion of Field's experienced antitrust counsel that such curative attempts would be futile. As appellants concede in their brief to this court, the 'antitrust issue' is relevant to plaintiffs' case only to the extent that the initiation of antitrust litigation (was) an additional circumstance from which defendants' improper intent could be inferred. As we discussed above in the matter of the alleged policy of independence, the decision to resist a takeover is within the scope of directors' state law fiduciary duties, and there is no federal securities law duty to disclose one's motives in undertaking such resistance. In re Sunshine Mining, supra, at 96,635-36; Berman v. Gerber Products Co., 454 F.Supp. at 1318, 1323; Altman v. Knight, 431 F.Supp. at 314. See Chemetron Corp. v. Crane Co., 1977-2 Trade Cas. P 61,717 (N.D.Ill.1977). Therefore even assuming the antitrust suit was filed with the impure intent to preserve the directors' position at the expense of the shareholders' best interests, no federal securities claim can lie for failure to disclose that intent. 93
94 The plaintiffs also allege that Field's issued a series of misrepresentative or misleading statements in regard to the acquisitions Field's undertook in the months following the CHH approach. Of course, after Santa Fe, the decision to make acquisitions is shielded from federal scrutiny, as is inquiry into what motivated the acquisitions. 95 Specifically, the plaintiffs claim that in press releases of January 5, and February 8, 1978, the defendants announced that the acquisitions were taking place in accordance with their longstanding programs and expansion plans. The plaintiffs claim that the failure to disclose that such plans were historically undertaken only in response to perceived takeover threats made Field's announcements misleading. Once again, the plaintiffs have done no more than attempt to dress up a claim for breach of fiduciary duty by alleging a failure to disclose a motive to act contrary to shareholders' interests. Furthermore, there is no evidence upon which a reasonable jury could base a finding that Field's misrepresented its acquisition plans. There was substantial uncontroverted evidence, including testimony of the plaintiff's own expert witness, that Field's had prior intent to expand into the Pacific Northwest and Texas areas, and that such expansion was natural and logical. 96 The plaintiffs also complain of the failure to disclose in the January 20, 1978, press release announcing the acquisition of the Liberty House stores that the defendants considered two of the five Liberty House stores to be dogs. This claim is no more than an attempt to probe the business judgment of the directors, and cannot create a federal claim. Cf. Goldberger v. Baker, 442 F.Supp. 659, 664 (S.D.N.Y.1977) (Even under the most narrow reading of Green, an allegation of deception must allege more than a mere failure to disclose the 'unfairness' of a transaction.). 97 The plaintiffs also claim that the defendants' press release announcing Field's plans to enter the Galleria in Houston, Texas, and to expand through the south, starting in Dallas, omitted material facts when it failed to disclose the presence of CHH Neiman-Marcus stores in the Galleria and in Dallas. Under the standard of materiality set out in TSC Industries, supra, and as interpreted in Berman and Gulf & Western v. A. & P., supra, it is difficult to perceive how the omission of this information, which was readily available to anyone looking at CHH's annual report, or indeed to anyone at all familiar with the department store business, could be deceptive. In addition, the plaintiffs could never establish the requisite element of causation, for it was not the failure to disclose Neiman-Marcus' presence which caused the withdrawal of the offer, but rather Field's actual entry into the Galleria which caused the withdrawal of the offer. Altman v. Knight, 431 F.Supp. at 314. 98
99 The plaintiffs also claim they were deceived by the rosy projections for future growth expressed by Field's management. Specifically they allege misrepresentations in press releases of December 14 and 15, 1977, which recounted how confident about the future of the company management was, and that momentum within the company was excellent. The plaintiffs allege that these misrepresentations culminated in a public letter dated December 20, 1977. 5 The plaintiffs claim that this letter, which cited a thirteen percent increase in consolidated net income before ventures and taxes, was fatally misleading in that it failed to disclose that the defendants' five-year plan, a projective document generated for internal management use only, showed at that time an anticipated decline of seven percent in consolidated net income for the year. 100 While it is true that there is no duty upon management or directors to disclose financial projections, see, e. g., Freeman v. Decio, 584 F.2d 186, 199-200 (7th Cir. 1978), it is also axiomatic that once a company undertakes partial disclosure of such information there is a duty to make the full disclosure of known facts necessary to avoid making such statements misleading. Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 225, 54 L.Ed.2d 155 (1977) (release of nine months earnings figures showing $1.16 earnings per share were made misleading by the failure to release existing accounting reports which defendants knew would require year-end write-offs resulting in a $0.15 loss per share); see Marx v. Computer Sciences Corp., 507 F.2d 485, 489-92 (9th Cir. 1974). 101 However, projections, estimates, and other information must be reasonably certain before management may release them to the public. Thus in the recent case of Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir. 1980), the Ninth Circuit rejected a claim that defendants had a duty to disclose internal projections during the course of a tender offer for its own shares. The court held (i)t is just good general business practice to make such projections for internal corporate use. There is no evidence, however, that the estimates were made with such reasonable certainty even to allow them to be disclosed to the public. Id.; see Berman v. Gerber Products, Inc., 454 F.Supp. at 1328; cf. First Virginia Bankshares v. Benson, 559 F.2d 1307, 1318 (5th Cir. 1977), cert. denied, 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d 802 (1979) (a lender's duty to disclose known irregularities in his debtor's accounts resemble a recital of raw fact more than they resemble a prediction of future stock prices). 102 The earnings projections the plaintiffs allege should have been disclosed were contained in a five-year plan which had been hastily updated only the very day of the board meeting to consider the CHH first proposal. It was one of a series of five-year plans which were continually updated and used internally by Field's management to explore planning and development. That the projections it contained were highly tentative seems the compelling inference from the evidence that Field's projections varied from those of its own investment bankers, were considered merely valid to use for the present purpose, of evaluating the Carter Hawley offer, and that they ended up varying substantially from Field's performance as revealed by the actual year-end earnings which finally came in a full twenty-five percent down from the prior year. We therefore find that because the projections of the five-year plan were tentative estimates prepared for the enlightenment of management with no expectation that they be made public, there was no duty to reveal them. Indeed, in light of the degree by which they failed to project the extent of the decline in earnings, release of the seven percent estimate might have subjected the defendants to securities law liability. Cf. SEC v. Texas Gulf Sulphur, 312 F.Supp. 77, 83-84 (S.D.N.Y.1970), aff'd in part, rev'd in part, 446 F.2d 1301 (2d Cir.), cert. denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1971) (optimistic press release misleading because not optimistic enough). 103 We therefore affirm the ruling of the district court that the plaintiffs failed to present sufficient evidence to support a reasonable jury finding of the element of deception required by Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.