Court Opinion

ID: 8924316
Source: CourtListenerOpinion
Date Created: 2022-11-27 06:33:01.401957+00
Date Added: 2024-06-11T17:09:21.853728
License: Public Domain

A. LEON HIGGINBOTHAM, Jr., Circuit Judge,
dissenting.
I dissent from the majority opinion because I believe that Heublein’s July 14 statement was false or misleading. In my view, it is false or misleading for a corporation to voluntarily issue a statement that it is aware of no reason to explain increased trading in its stock when the corporation “clearly knew of information that might have accounted for the increase in trading.” (Majority Opinion at 759).
I agree with the majority that a corporation is under no legal obligation to make disclosures concerning its merger activities until an agreement in principle is reached. I also agree that on July 14, when the NYSE sought a no corporate development statement from Heublein, no agreement in principle had yet been reached between Heublein and Reynolds. Moreover, I do not believe that a NYSE inquiry concerning corporate activity creates a duty to disclose. Thus, on July 14, Heublein was under no legal obligation to issue any statement in response to the NYSE inquiry concerning the unusually high trading activity in Heublein’s stock on that day. Even though, as the majority concedes, Heublein clearly knew of information that could have accounted for the increased trading of its stock, Heublein could have remained silent in the face of the NYSE inquiry or answered “no comment.”1
My disagreement with the majority opinion involves Heublein’s breach of its duty not to mislead. This duty applies to any corporate statement reasonably calculated to influence the investing public whether or not a duty to disclose exists.2 Once *761Heublein opted, however, to issue a statement that was reasonably calculated to influence the public, the July 14 statement, Heublein was obligated to ensure that its statement was not “false or misleading or ... so incomplete as to mislead.” SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir.1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). In addition, Heublein had a duty to update the July 14 statement if it became materially misleading in light of subsequent events. See Sharp v. Coopers & Lybrand, 83 F.R.D. 343, 346-47 (E.D.Pa.1979).
In this case the majority and dissent agree that at the time Heublein issued its July 14 statement, it “clearly knew of information that might have accounted for the increase in trading” (Majority Opinion at 759) of its stock. Having established this clear knowledge on the part of Heublein, the question becomes whether Heublein misled the investing public by issuing the following voluntary response to an NYSE inquiry concerning the increased trading in Heublein’s stock on July 14.
A spokesman for Heublein, Inc. said that the Company “was aware of no reason that would explain the activity in its stock” in trading on the NYSE that day. Majority Opinion at 759. I believe that Heublein’s July 14 statement was false or misleading when issued and remained so throughout the merger discussions involving Heublein, Reynolds and General Cinema. In my view, the July 14 statement must be considered false or misleading because, as the majority concedes, at the time the statement was made Heublein clearly knew of information that could have accounted for the increased trading of its stock on that day.
It is not clear why the majority refuses-to consider Heublein’s July 14 statement misleading. Perhaps the majority wishes to prevent the NYSE from dictating by its inquiries when corporate disclosures are made.3 If, however, the majority’s concern is to protect the corporation from being forced to make premature disclosures and thereby to protect a corporation from possibly having to upset sensitive negotiations, this concern, while legitimate, appears misguided. There is nothing in the record of this case to suggest that a corporation, when faced with a “no corporate development” inquiry from the NYSE is faced with the all or nothing proposition of either completely spilling the beans or claiming (even at the expense of total forthrightness) that it has no knowledge whatsoever of any information that might explain the stock activity of concern to the NYSE.
The majority states in footnote 6 of its opinion that my dissent imposes a duty to disclose privileged information before an agreement in principle has been reached. Presumably, the majority reads my dissent as allowing an NYSE inquiry, or even the mere knowledge of privileged information possibly relevant to market activity if leaked, to trigger the duty to disclose. However, footnote 6 of the Majority Opinion clearly demonstrates how the majority fails to distinguish between the duty to disclose and the duty not to mislead. The majority does not appreciate that this dissent stands for the simple proposition that in the face of a NYSE inquiry, Heublein could have remained silent or answered “no comment,” but, by virtue of voluntarily issuing its July 14 statement, Heublein assumed responsibility for honoring another duty — the duty not to mislead. Thus, if the majority’s concern is preventing the NYSE from dictating when corporate disclosures must be made, that concern is not implicated in this case.
If the majority is truly concerned about protecting the public from misleading corporate information, it is difficult to under*762stand how the majority could condone Heublein’s July 14 statement. In that statement Heublein said: “the Company was aware of no reason that would explain the activity in its stock in trading on the NYSE today.” Majority Opinion at 754. In effect, Heublein stated that it had no knowledge of any corporate activity that would affect trading in its stock. How can the majority consider .Heublein’s July 14 statement not to be false or misleading or so incomplete as to mislead when the majority recognizes that Heublein “clearly knew of information that might have accounted for the increase in trading [in Heublein’s stock]” on July 14? Majority Opinion at 759.
The majority itself recognizes that a statement issued prior to July 27, the day the agreement in principle was reached, could mislead the investing public. The majority stated,
[a]ny disclosure up to this point would have been based on facts that were subject to change at any time. As the situation evolved, successive, possibly cancel-ling, announcements might have been required. This would have tended to confuse and mislead, rather than enlighten, the investing public.
Majority Opinion at 757. Notwithstanding its recognition that a statement issued before July 27 would have tended to mislead, the majority holds the July 14 statement to be not misleading.
Not only does the majority allow Heublein’s July 14 statement to stand as not misleading on that date, the majority misinterprets the law in avoiding appellant’s alternative contention that even assuming the July 14 statement was correct when given, subsequent events made it materially inaccurate and Heublein breached its duty to correct it.
The majority states,
even presuming that the July 14 statement survived the date of issuance, as a matter of law, it never became materially misleading on the basis of subsequent events and, therefore, no duty to correct ever arose. This conclusion inescapably follows because, as previously shown, Heublein was never under a duty to disclose any of the substantive details of its discussions with either Reynolds or General Cinema prior to July 28.
Majority Opinion at 759 (emphasis added).
The majority, in my view, cannot avoid this issue. As stated earlier, this case concerns two separate duties: (1) the duty to disclose an agreement in principle, and (2) the duty not to make a statement that is “false or misleading or ... so incomplete as to mislead” the investing public, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir.1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). This second duty also requires the updating of statements which become misleading because of subsequent events. See Majority Opinion at 758.
The first duty is engaged only when an agreement in principle has been reached. The second duty is engaged whenever a corporation issues a statement reasonably calculated to influence the investing public; thus, this duty can be engaged irrespective of whether an agreement in principle has been reached. The majority recognized this second duty when it said,
if a corporation voluntarily makes a public statement that is correct when issued, it has a duty to update that statement if it becomes materially misleading in light of subsequent events. Sharp v. Coopers & Lybrand, 83 F.R.D. 343, 346-47 (E.D. Pa.1979).
Majority Opinion at 758. Thus, the majority’s conclusion that “no duty to correct ever arose ... because ... Heublein was never under a duty to disclose any of the substantive details of its discussions with either Reynolds or General Cinema prior to July 28” (Majority Opinion at 760) is erroneous. Heublein had a duty to update irrespective of whether it had a duty to disclose at the time of the NYSE inquiry. These are two separate duties. The majority is wrong to use the absence of a duty to disclose to avoid the presence of the duty to update where a statement already has been made.
*763I fear that today’s decision will have serious repercussions for the investing public caught in the middle of battles for and against mergers, acquisitions and corporate control. The majority states,
because of the confidential nature of [Heublein’s discussions with Reynolds and General Cinema], there was no basis for Caspar to believe, and appellant alerted the district court to no evidence which might tend to prove that any of the details of these discussions, not previously known to the public, had been recently leaked. Majority Opinion at 759.
The majority suggests that Heublein’s July 14 statement would be false or misleading only if Heublein knew that information was leaked. Majority Opinion at 759. I believe that Heublein’s July 14 statement is misleading because Heublein knew of information that if leaked would have explained the increase in trading of Heublein’s stock on that day. Statements such as Heublein’s July 14 statement should be permitted only when Heublein itself knows of no information that could have accounted for the increase in trading of its stock. Because then and only then would the impression conveyed to the investing public that business is proceeding as usual be true.
Under the majority’s approach Heublein could issue the July 14 statement, without updating it, so long as (1) an agreement in principle had not yet been reached and (2) the merger negotiations were confidential. In short, Heublein is free to assume that its confidences are maintained and accorded complete secrecy, even in the face of otherwise inexplicable investor activity. I find that assumption unwarranted.
Where there has been no agreement in principle reached by the parties, a corporation is under no obligation to disclose information that it desires to keep secret. This is true even in the face of a NYSE request for a no corporate development statement. Silence or a simple “no comment” is always an available option for a corporation. Such responses would not require any future updates. Updates are required only of corporate disclosures, and neither of these responses can be considered a disclosure. Moreover, these responses would certainly protect the corporation from disclosing sensitive developments while simultaneously protecting the public from being falsely assured that all is proceeding at a routine, business-as-usual pace when that is not the case.
Although the majority’s approach makes it easier to put together corporate deals and mergers, I do not believe that the holding of the majority protects sellers or purchasers of stock. If anything it subjects the investing public to future voluntary misrepresentations by corporations in the midst of allegedly confidential merger discussions. So long as they remain unaware of leaks, even though there is information to leak, they can falsely assure the public that all is proceeding at a business-as-usual pace. I find it difficult to assume that a corporation’s confidences are accorded more secrecy than the contents of high level discussions held in the oval office which are all too frequently leaked to the press.
Similarly, in the “Pentagon Papers” eases4 the New York Times and the Washington Post obtained access to all or most of a 47-volume super secret Defense Department Study on the “History of United States Decision Making Process on Vietnam Policy.” They also obtained the Defense Department’s Weapons System Evaluation Group’s classified document entitled “The Command and Control Study of the Tonkin Gulf Incident.” If the U.S. Defense establishment could not keep perfectly secret their volumes of classified documents which allegedly affected the “security of the United States,” id. at 718, why should we believe that Heublein can main*764tain total confidentiality as to merger discussions among its diverse executives, staff, secretarial and clerical personnel; its outside investment banker’s staff and its outside counsel’s staff. The facts of life as we know them are that complete confidentiality has. not always been possible at either the White House or the Defense establishment or in the non-clandestine corporate community.
The truth of the matter is that material' nonpublic information is leaked to some “favorites” among the investing public and the success of many investors is not because they have the genius of an Einstein but solely because they have tidbits of information that the general public does not have. Insider trading is the most dramatic, example of the use of material nonpublic information. Although this case does not involve insider trading, the problem of insider trading demonstrates that material nonpublic information is often leaked and used. For example in 1983, the S.E.C. brought 24 cases as compared to 20 commenced during fiscal 1982 and the total number brought since 1949 (121 cases). 1983 S.E.C.Ann.Rep. 5. . These figures for 1982 and 1983 represent 28% of the cases that the S.E.C. has brought in this area since 1949.
The problem of investors trading based on nonpublic information is not restricted to contexts involving violations of law. In Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), the Supreme Court recognized that nonpublic information may even be disclosed by insiders in contexts not involving insider trading or violations of law. Id. at 3262-63. As the Supreme Court noted “only some persons, under some circumstances, will be barred from trading while in possession of material nonpublic information.” Id. at 3262. “[This] exception is based upon Congress’ recognition that [market professionals] contribute to a fair and orderly marketplace at the same time they exploit the informational advantage that comes from their possession of [nonpublic information].” Id. at 3262, quoting United States v. Chiarella, 445 U.S. 222, 233, n. 16, 100 S.Ct. 1108, 1117 n. 16, 63 L.Ed.2d 348.
Thus, it is possible that the increase in trading of Heublein’s stock occurred based on nonpublic information. In light of this, we believe that the majority is in error when it allows Heublein to assume that nonpublic information could not have been leaked knowingly or unknowingly by persons associated with Heublein, its lawyers, its investment bankers, Reynolds or the host of personnel affiliated with these groups.
Yet the majority bases its decision today on an assumption that Heublein and every individual or organization privy to Heublein’s critical information had no leaks. I believe our concern should be whether any information existed to be leaked. The majority expressly conceded that such information exists when it states that Heublein “clearly knew of information that might have accounted for the increase in trading----” Majority Opinion at 759 (emphasis added).
This information was of great significance. When Heublein issued its July 14 statement that the Company was aware of no reason that would explain the activity in Heublein’s stock in NYSE trading, that day there were in fact significant reasons known to its top executives that could have explained the increased activity of its stock.
On July 9 — five days before Heublein issued its statement — the top executives from Reynolds (Sticht) and Heublein (Watson and Waldron) had met in the VIP room of the Hartford Airport to accommodate Sticht, who flew in from North Carolina on Reynolds’ corporate jet for the meeting. These top executives discussed how the companies would function if merged and discussed the synergies in staff and productivity improvement that would result from the merger. This included Heublein’s ability to improve its marketing program because of the resources available at Reynolds. Heublein would thus be able to do a “more aggressive job of building Kentucky Fried Chicken stores and expanding [its] market presence in that business.” (Ap*765pendix at 1116A-17A, 1120A-21A). They discussed Heublein’s desire to maintain its “independence” and how the food aspect of Reynolds would be combined with Heublein’s into one overall food operation of which Waldron would be the head. They decided that Waldron and Watson would become directors of Reynolds. (1115A-16A; 1124A-26A). The significance of the meeting was recognized. Sticht had asserted that Reynolds was prepared to go ahead (995A), and he considered this meeting a “fairly important turn of events.”
The conference of the presidents of these two major institutions could be considered a corporate summit meeting. Indeed after this meeting Waldron called Heublein’s investment banker — Krimendahl of Goldman Sachs & Company. He advised Krimendahl that Waldron would become the head of the combined foods division once Heublein and Reynolds merged. Waldron asked Krimendahl to pass all of this information along to attorney McNally of White and Case. After July 8th, Waldron held separate meetings with Watson, Heublein’s task force members and their outside advisors, Krimendahl of Goldman Sachs & Company and McNally of White and Case, during which the idea of Reynolds acting as Heublein’s “white knight” was discussed. (Appendix at 1071A-72A; 1074A-75A; 1078A-79A; 1080A; 1083A; 1085A; 1089A; 1095A; 1099A-1102A; 1135A; 1137 A).
During this same period Reynolds had a task force that evaluated Heublein with a view toward acquisition of it within a specific price range. (1053A-54A; 1162A-63A). With several separate groups, executives, investment banking staff, legal staff and probably many other persons working on the details of a possible Heublein merger, it is not surprising that these frantic and secretive activities might be leaked, be ascertained, or be unintentionally brought to the attention of persons buying or selling Heublein stock. Certainly any information that suggests these corporate giants were exploring a possible merger could explain the activity on the stock market.
The majority seems determined to rest its entire case on the belief that corporate executives should be able to suggest that all is proceeding at a routine, business-as-usual pace when that is not the truth so long as an agreement in principle has not been reached at the time the statement is issued. Given the majority’s concession that in this case Heublein knew of information that might have accounted for the increase in the trading of Heublein’s stock and given the possibility that information could have been leaked to or ascertained by some investors, a statement by Heublein that it was aware of no reason to explain the increase in the trading of its stock was false or misleading or so incomplete as to mislead.
I dissent.

. An agreement in principle had not been reached as of July 14; thus, on that date, Heublein was under no legal obligation to disclose its preliminary merger discussions. Where one is not under a legal obligation to disclose, I do not consider a response of "no comment” to be a statement carrying any legal significance. In my view it is the legal equivalent to not making a statement at all.

. This case concerns both the duty to disclose where an agreement in principle has been reached and the duty not to issue corporate statements which are false or misleading. I have absolutely no dispute with the majority’s *761conclusion that Heublein was under no duty to disclose at the time it issued its July 14 statement. Thus, this dissent concerns only the duty relating to a voluntary corporate statement "reasonably calculated to influence the investing public."

. As noted earlier, however, a NYSE request for a no corporate development statement does not oblige the corporation to disclose anything.

. New York Times v. United States, 328 F.Supp. 324 (S.D.N.Y.), rev’d, 444 F.2d 544 (2d Cir.); rev'd, 403 U.S. 713, 714, 91 S.Ct. 2140, 2141, 29 L.Ed.2d 822 (1971). See also United States v. Washington Post, 446 F.2d 1327 (D.C.Cir.) aff’d 403 U.S. 713, 91 S.Ct. 2140, 29 L.Ed.2d 822 (1971).