741 F.2d 1555 (9th Cir. 1984), 82-4382, Jewel Companies, Inc. v. Pay Less Drug Stores Northwest, Inc.
|Citation:||741 F.2d 1555|
|Party Name:||JEWEL COMPANIES, INC., a New York corporation, and Jewel Acquisition Corporation, a California corporation, Plaintiffs-Appellants, v. PAY LESS DRUG STORES NORTHWEST, INC., a Maryland corporation; W.B. Armitage; Claude Bekins; Noel Flynn; Eugene W. Guinn; Edward B. Hart; Peyton Hawes, et al., Defendants-Appellees.|
|Case Date:||September 05, 1984|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted July 11, 1983.
Stephen V. Bomse, Daniel E. Titelbaum, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for plaintiffs-appellants.
Richard W. Canady, Robert E. Gooding, Jr., H. Mathew Moore, Howard, Rice, Nemerovski, Canady, Robertson & Falk, San Francisco, Cal., Geoffrey M. Kalmus, Alan R. Friedman, Kramer, Levin, Nessen, Kamin & Frankel, New York City, for defendants-appellees.
Appeal from the United States District Court for the Northern District of California.
Before TANG and REINHARDT, Circuit Judges, and BURNS, [*] District Judge.
REINHARDT, Circuit Judge:
This case arises out of a takeover battle for the acquisition of a publicly traded company, the Pay Less Drug Stores ("Pay Less"). Plaintiff, the Jewel Companies, Inc. ("Jewel") appeals an order granting summary judgment for the defendant, Pay Less Drug Stores Northwest, Inc., ("Northwest"). 1 Jewel alleges that Northwest's actions constitute tortious interference with a merger agreement between Pay Less and Jewel. In granting summary judgment, the district court held as a matter of law that an executed and board-approved merger agreement between Pay Less and Jewel does not constitute a valid and binding contract because 1) completion of the contemplated merger required shareholder approval and 2) the Pay Less directors' fiduciary obligations prohibited them from entering into a binding merger agreement. The court further held that defendant Northwest's interference with the merger agreement between Pay Less and Jewel would in any event have been legally justified by society's interest in encouraging "free competition" in the market for corporate acquisitions. We reverse the district court's grant of summary judgment for the defendant and remand for further proceedings on the issues presented.
Most of the facts material to this appeal are not in dispute. In September 1979, Pay Less retained the investment banking firm of Goldman, Sachs & Co. to locate a merger partner. Jewel, a Chicago-based company engaged primarily in the retail grocery business, was among the companies contacted. On November 9, 1979, Jewel and Pay Less agreed to a tax-free merger in which each outstanding share of Pay Less stock would be exchanged, for .652 shares of Jewel stock. The merger agreement was executed in writing, formally approved by both boards of directors, signed on behalf of each corporation by its respective president, and made public in a press release on November 9, 1979. 2
The merger agreement included several covenants the meaning of which is in dispute and is central to the issues before us on appeal. Articles 9.9 and 10.5 of the Jewel-Pay Less merger agreement obligated the board of directors of each firm to "use its best efforts to fulfill those conditions ... over which it has control or influence and to consummate the Merger." Pay Less was further obligated under article 9 of the agreement to forbear from the sale or transfer of any of its properties or assets, and from entering into or terminating any contract other than in the ordinary course of business. The merger agreement further provided that Pay Less could not "agree to, or make any commitment to" effect any sale, transfer, or extraordinary action prohibited in Article 9. Article 7 of the Jewel-Pay Less merger agreement incorporated
several prerequisites to closing the transaction. The obligations of both firms to consummate the merger were conditioned upon Pay Less obtaining the affirmative vote of a majority of the outstanding shares of Pay Less stock. The obligation of each firm to close the transaction was also contingent upon Jewel obtaining the required governmental consents.
Northwest had discussed the possibility of a merger with Pay Less several times in the 1970s. When the Jewel-Pay Less merger agreement was publicly announced, Northwest's management considered making a competing bid to acquire Pay Less. Between December 14 and December 28 Northwest purchased approximately 269,000 shares (over 12% of the outstanding shares) of Pay Less stock in open market transactions. Northwest then filed a schedule 13D, as required by the Williams Act, 15 U.S.C. Secs. 78m(d)-(e), 78n(d)-(e). Northwest made public its intention to make a competing bid in a press release issued December 31, 1979. At that time Northwest offered $22.50 per share for Pay Less stock. The press release further stated that Northwest intended "to condition its obligation to purchase tendered shares on Pay Less's Board of Directors abandoning the previously announced proposal to merge with a subsidiary of Jewel Companies, Inc."
Two days later Jewel filed this action in state court, seeking a temporary restraining order against Northwest's tender offer and alleging tortious interference with contract and violations of state unfair competition and antitrust laws. Jewel has subsequently abandoned its antitrust and unfair competition claims.
The Northwest tender offer was formally commenced on January 17 by the filing of a schedule 14D-1 statement with the Securities and Exchange Commission. At this point the battle for control of Pay Less escalated. On January 24, Jewel amended its complaint and added allegations that Northwest's Schedule 14D-1 statement was false and misleading and that its tender offer violated both the federal securities and antitrust laws. These claims, like most of Jewel's earlier claims, have since been dropped. On January 29, as a 10% shareholder of Pay Less, Jewel called a shareholders' meeting to take place on March 4 for the purpose of voting on the Jewel-Pay Less merger agreement, thereby hoping to conclude the balloting before Northwest became record owner of the shares tendered.
Northwest increased its tender offer price to $24 per share on February 1 and Pay Less' Board of Directors unanimously recommended that its shareholders accept the Northwest offer. On this date Northwest and Pay Less, through its Board of Directors, entered into an Indemnity and Record Date Agreement which provided in relevant part that:
(1) Northwest would indemnify Pay Less and its directors for any alleged breach of the Jewel Agreement;
(2) February 23, 1980 would be the record date for determining the shareholders eligible to vote on the Jewel proposal. March 1, 1980, or not less than ten New York Stock Exchange trading days following the expiration date of the tender offer in the event that the tender offer were extended, would be the record date for determining the shareholders entitled to notice of and to vote on the Northwest merger agreement;
(3) if for some reason a majority of the record owners of Pay Less stock did approve the Jewel merger (a theoretical possibility if the mechanics of recording the transfer of shares on the corporate records were not completed by the Jewel record date, set for February 23, 1980), then the Pay Less Board of Directors would nevertheless abandon the Jewel merger pursuant to Cal.Corp. Code Sec. 1105 (West 1977); and, (4) Northwest and Pay Less would issue a joint press release in which Pay Less would make a recommendation to its shareholders in favor of acceptance of the tender offer, including a statement to the effect that the price offered under the tender offer is significantly more favorable to its shareholders
generally than the terms offered under the Jewel Merger Agreement.
Finally, on February 1, the Pay Less Board signed a merger agreement with Northwest. The board sent all of its shareholders a 29-page letter comparing the two merger offers and setting forth the history of the two proposals. Although it unanimously recommended the Northwest offer, Pay Less advised its shareholders that the March 4 meeting to consider the Jewel merger agreement would go forward as scheduled.
By February 25, a majority of Pay Less's shares had been tendered to Northwest and Jewel withdrew its request for a shareholders' meeting. The meeting nevertheless took place as scheduled on March 4. Northwest, by then the majority shareholder, passed a shareholder resolution rejecting the Jewel merger agreement. The Pay Less Board, which had been reconstituted to include a majority of Northwest representatives, terminated the Jewel agreement. On March 7, Jewel tendered the 297,010 shares of Pay Less stock that it had purchased on November 9, 1979 for $15 a share to Northwest for $24 per share.
Northwest removed Jewel's initial suit for a preliminary injunction against Northwest's interference with the Jewel Agreement to federal district court shortly after it was filed. The district court denied Jewel's motion for expedited discovery and a preliminary injunction on February 6, 1980. The practical result of this order by the district court was that the Northwest merger was consummated.
Jewel has dropped all of its claims in this suit except for its claim of tortious interference with contract and prospective commercial advantage for which it now requests damages as its sole relief. 3 On August 17, 1981 Northwest moved for summary judgment on the grounds that (a) the Pay Less-Jewel Agreement did not constitute a valid "contract" and (b) Northwest was privileged to "compete" for the acquisition of Jewel notwithstanding the preexisting Jewel agreement.
Jewel opposed the...
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