Opinion ID: 389315
Heading Depth: 3
Heading Rank: 1

Heading: The Lost Tender Offer Opportunity.

Text: 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 Because the CHH tender offer was withdrawn before the plaintiffs had the opportunity to decide whether or not to tender their shares, it was impossible for the plaintiffs to rely on any alleged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