Levinson v. Basic Inc.
| Citation | 786 F.2d 741 |
| Decision Date | 19 June 1986 |
| Docket Number | 84-3775 and 84-3776,Nos. 84-3730,s. 84-3730 |
| Parties | , Fed. Sec. L. Rep. P 92,529, 5 Fed.R.Serv.3d 118 Max L. LEVINSON; Karl Zuckerman; Ronald M. Newman, Plaintiffs-Appellants (84- 3730), Plaintiffs-Appellees (84-3775/76), v. BASIC INCORPORATED, Defendant-Appellee (84-3730), Defendant-Appellant (84- 3775), Anthony M. Caito; Samuel Eels, Jr.; John A. Gelbach; Harley C. Lee; Matthew J. Ludwig; Max Muller; H. Chapman Rose; Edmund G. Sylvester and John C. Wilson, Jr., Defendants-Appellees (84-3730), Defendants-Appellants (84-3776). |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
Joel W. Sternman (argued), Arnold I. Roth, Rosenman, Colin, Freund, Lewis & Cohen, New York City, Katherine Blakeley, William D. Ginn, Thompson, Hine & Flory, Cleveland, Ohio, for Basic Inc.
Wayne A. Cross (argued), Reboul, MacMurray, Hewitt, Maynard & Kristol, New York City, David S. Elkind, for plaintiffs.
Securities & Exchange Com'n, Jacob H. Stillman, Eric Summergrad, Washington, D.C., for amicus curiae.
Norman S. Jeavons, H. Stephen Madsen, Sandra J. Brantley, Baker & Hostetler, Cleveland, Ohio, for Anthony M. Caito et al.
Before MARTIN, JONES and WELLFORD, Circuit Judges.
This securities case presents two large legal questions which must be decided in the context of a multitude of small facts. The facts tell the story of contacts and discussions between officials of Basic Incorporated and Combustion Engineering, Incorporated, which eventually led to the merger of these two publicly traded corporations. In this setting, we are called upon to analyze the propriety of a summary judgment given to the defendants upon a finding that section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 were not violated by representatives of Basic when they made certain public statements. We also must examine the class certification made by the district court.
The named plaintiffs are Max L. Levinson, Karl Zuckerman and Ronald M. Newman, representing all other shareholders who sold Basic Incorporated common stock between October 21, 1977, and December 15, 1978. They claim that they relied, to their detriment, on three statements issued Two rulings of the district court have been appealed upon a voluminous and rather detailed record. First, the district court granted summary judgment for the defendants based upon a finding that the statements, as a matter of law, were not material and therefore not false and misleading and that, as a matter of law, the defendants did not act with scienter. Second, the district court applied a presumption of reliance so that a class consisting of all parties who sold Basic stock during the merger negotiations could be certified as required by Rule 23 of the Federal Rules of Civil Procedure. With the presumption, reliance became a question common to all the class members rather than an individual question for each plaintiff. Therefore, the district court found that common questions of the class of stockholders predominated over individual questions as required by Rule 23. Having satisfied Rule 23, the class could be certified. The defendants claim that the class should not have been certified because use of this presumption was improper.
by Basic during that time which denied that any merger discussions were occurring. They claim that these statements were false and misleading because merger discussions were in fact occurring; and thus, the defendants violated section 10(b) and Rule 10b-5. The plaintiffs claim that they sustained substantial losses because they relied on the statements and sold their shares of Basic at an artificially low price. They seek recovery of their losses from Basic as well as from Anthony M. Caito, Samuel Eels, Jr., John A. Gelbach, Harley C. Lee, Matthew J. Ludwig, Max Muller, H. Chapman Rose, Edmund G. Sylvester and John C. Wilson, Jr.--all officers or directors of Basic.
Until December 20, 1978, Basic primarily manufactured chemical refractories. Basic's stock was traded on the New York Stock Exchange. Combustion Engineering, the potential acquirer, engaged in a wide range of businesses, including the manufacture of alumina or acid-based refractories. Combustion's stock was also traded on the New York Stock Exchange. Combustion had been interested in acquiring Basic since 1965 or 1966. However, it was not until 1976, in the Kaiser-Lovino proceeding, that the Federal Trade Commission considered eliminating antitrust barriers to a merger of Basic and Combustion. 1 Included as a part of the "Strategic Plan" of Combustion's Industrial Products Group, dated October 25, 1976, was the statement "[a]cquire Basic, Inc. $30 million."
Beginning in September of 1976, James Kelly, Vice-President in charge of Combustion Engineering's Industrial Products Group, and other Combustion employees had a number of meetings and telephone conversations with Basic and its officers. One such contact occurred in September of 1976, when James Kelly telephoned Max Muller, the Chairman and Chief Executive Officer of Basic. The admitted purpose of the call was to arrange a meeting with Basic's management to discuss a possible merger. Between September, 1976, and October, 1977, Kelly made numerous telephone contacts as well as trips from Combustion's Connecticut offices to Basic's Cleveland offices. During these visits and in telephone conversations, Kelly talked with Muller, Matthew J. Ludwig, senior vice-president of Basic, and Anthony M. Caito, executive vice-president of Basic. They discussed Combustion's interest in acquiring Basic, "how we [Combustion] operated companies like Basic after acquisition," and that Combustion would consider Basic an independent unit after acquisition. During this period Combustion's lawyers were conducting an antitrust investigation for the acquisition and Muller provided Kelly with confidential, non-public information relating to Basic's sales and operations. In November, 1976, at a special meeting of the Executive Committee of Combustion's Board, Kelly was authorized to "continue to proceed" with "investigations, preparations At Basic, Muller circulated two memoranda to Basic's Board of Directors, both entitled "Recent Interest in Basic," in which Muller informed the Board of the meetings with Combustion's management and Combustion's antitrust study of the acquisition of Basic. At this stage no public statements had been made by either the Board of Basic or the Board of Combustion. In April, 1977, according to a time report of H. Chapman Rose, a Basic director and attorney, Rose met with other Basic lawyers to discuss a "possible bid by Combustion." An analysis was prepared which evaluated a merger with Combustion. Ludwig sent this analysis to Rose with a transmittal letter which stated, "Herewith the C-E 1976 Annual Report and the analysis we usually make in considering mergers or acquisitions which I promised." Other such analyses were prepared in March, 1978, and after September, 1978. In August, 1977, and on October 18, 1977, Basic's Management met with Basic's investment bankers, Kidder, Peabody, to discuss preparation of a valuation of Basic for use in the merger negotiations. Combustion again listed acquisition of Basic in its "Strategic Plan" of September 23, 1977. On October 12, 1977, Kelly met with Muller, Ludwig and Caito at Basic's offices. Kelly stated that they discussed the role Basic would have in Combustion's corporate structure. Throughout 1977 and 1978, there were repeated bouts of trading activity in Basic stock. On October 19 and 20, 1977, the trading volume of Basic soared from an average 6,000 to 8,000 shares per day to 29,000 shares per day. On October 21, 1977, the first public announcement from Basic by Muller, as reported in The Cleveland Plain Dealer, was issued and read in part:
and, as appropriate, negotiations with respect to the possible acquisition of Basic." Kelly told Basic of this authorization. Combustion's management told Combustion's investment bankers, First Boston, of the company's desire to acquire Basic and requested that they prepare analyses for the acquisition of prices of eighteen, twenty and twenty-two dollars per share
President Max Muller said the company knew no reason for the stock's activity and that no negotiations were under way with any company for a merger. He said Flintkote recently denied Wall Street rumors that it would make a tender offer of $25 a share for control of the Cleveland-based maker of refractories for the steel industry.
Muller contends that this statement was issued to deny a rumor that Basic might merge with another company, Flintkote, and that the statement had nothing to do with the rather detailed discussions with Combustion.
Between October, 1977, and September, 1978, contacts continued between Basic and Combustion. Confidential information including very favorable financial forecasts and projections, analyses of the effects of the merger, and information about other companies interested in Basic was exchanged at numerous times. Kelly and Basic, especially through Muller, were often in contact. On June 7, 1978, Kelly met with Muller, Ludwig and Caito and gave them analyses prepared by Combustion. Muller's diary entry for the meeting stated, "Jim Kelly of CE offered $28.00." Muller said that the offer was "too low." Kelly then stated that Combustion would give a better figure but Muller told Kelly to "hold off til we tell you." Muller later stated that he wanted the Kidder, Peabody valuation of Basic to assist him in evaluating the offer. Muller, Ludwig and Caito then met with Rose and discussed the Combustion merger. They decided to ask Combustion for its "best offer." Rose advised the management to "stay out of the market."
On July 10, Muller noted in his diary that he and Kelly agreed...
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