814 F.2d 1169 (7th Cir. 1987), 86-1754, Flamm v. Eberstadt
|Citation:||814 F.2d 1169|
|Party Name:||Ann FLAMM and Arnold M. Flamm, on behalf of a class, Plaintiffs-Appellants, v. Rudolph EBERSTADT, Jr., and Microdot, Inc., Defendants-Appellees.|
|Case Date:||March 09, 1987|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued Jan. 16, 1987.
As Amended March 11, 1987.
Rehearing and Rehearing En Banc Denied April 30, 1987.
As Amended May 1, 1987.
Michael M. Mulder, Meites, Frackman & Mulder, Chicago, Ill., for plaintiffs-appellants.
Andrew R. Laidlaw, Seyfarth, Shaw, Fairweather & Geraldon, Chicago, Ill., for defendants-appellees.
Before BAUER, Chief Judge, and CUDAHY and EASTERBROOK, Circuit Judges.
EASTERBROOK, Circuit Judge.
The stock of Microdot, Inc., was traded on the New York Stock Exchange when
General Cable Corp. announced, on December 2, 1975, an intention to make a tender offer to holders of Microdot's shares. Microdot's stock had been trading for $11 3/4 per share; General Cable planned to offer $17; the price available on the Exchange almost immediately topped $17, reaching $18 3/8 on December 8, 1975. The price retreated toward $17 through December, however, as Microdot opposed the offer. On December 5 Microdot issued a press release (published as an advertisement in the Wall Street Journal on December 8) stating that the offer of $17 was unacceptable to Microdot's board of directors. It stated: "After careful consideration of the proposed offer and consulting with Goldman, Sachs & Co., our investment bankers, we have concluded that the General Cable offer is totally inadequate. We will employ all resources at our disposal to defeat the offer."
Other communications from Microdot advised the shareholders not to sell their stock, either on the market or to General Cable. Rudolph Eberstadt, Jr., the president and CEO of Microdot, bewailed the fate of medium-sized, high-tech companies in a world of takeovers, complaining that if hostile takeovers continued American industry would be less inventive. One of Microdot's ads, published in the Wall Street Journal on December 15, stated:
If no successful growth company of medium size is able to resist the raids of large outsiders, there will be no way for American stockholders to realize the potential these growth companies represent. Then there will be no future IBM, no Xerox, no Polaroid. They will be choked off and smothered as soon as they start to show their real growth potential.
Perhaps appreciating, however, that the "growth potential" in which the investors were interested was growth from $11 3/4 to a higher price, Microdot also decided to see whether more than $17 could be obtained. The search for a "White Knight" was on. As it turned out, other than trying to turn up a better bid and publishing peevish advertisements, Microdot did nothing to hinder General Cable's bid. It did not have many "resources at [its] disposal to defeat the offer."
Microdot authorized Goldman, Sachs to approach other firms that might be interested. Goldman, Sachs tried its hand with more than 100 firms; not a one showed interest through December 1975. Five were persuaded to meet with Microdot's management between December 12 and 20; all five told Microdot on the spot that they were not interested in further discussions. Northwest Industries, with which Goldman, Sachs spoke on December 12, was one of the early nay-sayers, declining to meet with Microdot's managers. Between December 20 and December 30, Goldman, Sachs could not even induce another firm to attend an exploratory meeting with Microdot's management. It is therefore no surprise that the price of the stock fell toward $17. Goldman's activity and its lack of success could not have been a secret on Wall Street; no one contacts 100 firms and escapes notice of arbitrageurs who invest millions in the stock of targets.
Goldman, Sachs kept trying, however, and after receiving more information Northwest let Microdot know that it had a lingering interest in discussing matters. Managers of the firms met on January 19. Ben W. Heineman, the president of Northwest, told Eberstadt on January 19 that Northwest was prepared to offer $21 per share in a tender offer but would not pursue the matter unless Microdot made an advance commitment to take Northwest's offer. Microdot's board made that commitment on January 24. On January 26 Northwest's board approved the offer, and the two firms made a public announcement on the same day. General Cable dropped out of the picture; Northwest acquired the stock for $21. Like many another marriage, this ended in divorce. Northwest later spun off Microdot, which is once more an independent firm traded on the New York Stock Exchange.
We have a suit filed by Ann and Arnold Flamm as representatives of the class of
investors who sold Microdot stock between December 5, 1975, and January 23, 1976. They maintain that Microdot's search for a White Knight was material information that had been withheld, making Microdot liable under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. Sec. 240.10b-5. The district court certified the class, and the case was tried to a jury. The facts we have narrated are undisputed. The parties locked horns, however, about whether the search for the White Knight was material and whether Arnold Flamm sold his stock in reliance on a belief that Microdot was determined to remain independent. The parties and the district judge treated other members of the class as clones of Arnold Flamm, so that if he loses the whole class loses. We shall do likewise without suggesting that this is the proper approach.
Flamm, a veteran investor, sold his stock on December 29, 1975. He acknowledged at trial that he knew that White Knights frequently ride to the rescue of managers determined to resist the initial bid but unable to remain independent. He acknowledged as well that he appreciated the significance of the price of $18 3/8--professional investors were staking their own wealth behind a belief that a higher bid would come along. And although Flamm stated that he concluded after the December 15 advertisement that Microdot was determined to stay independent, he acknowledged that it was "quite possible" that he had held the stock for another two weeks on the off chance that a White Knight would gallop into view.
The district court told the jury that unless Flamm showed that the failure to disclose the search was material, and unless Flamm "justifiably relied" to his detriment on Microdot's statements and omissions, the class could not recover. The instruction stated:
In the case of misrepresentations it must be proved that [Flamm] in fact relied upon the false statements. In other words, if you find that [Flamm] would have engaged in the transaction anyway, and that the misrepresentation or omission had no effect upon [his] decision, then there was no reliance and there can be no recovery. Further, [Flamm] must prove that [his] reliance was justified; that [he] did not intentionally close [his] eyes and refuse to investigate, concerning the circumstances in disregard of a risk known to [him], or so obvious that [he] must be taken to have been aware of it, and so great as to make it highly probable that harm would follow.
In the case of omissions or non-disclosure of material facts, if such an omission is proved, then the element of reliance ... may be presumed. The law infers that [Flamm] would have relied upon facts which are shown to be material and intentionally withheld. The Defendants, however, may rebut this presumption if they are able to prove, by a preponderance of the evidence, that even if the material facts had been disclosed, [Flamm's] decision as to the transaction would not have been different from what it was.
Flamm directs a barrage against this instruction. The two-tier burden was beyond the jury's ability to comprehend, he maintains, because misleading statements (half-truths) and material omissions (the rest of the truth) really are the same thing. Confusion was compounded by the phrase "misrepresentation or omission" in the first paragraph, which assigns the burden to Flamm, while the second paragraph assigns the burden on omissions to defendants. The first paragraph also states that reliance must be "justified", which means both that the investor may not "refuse to investigate" and may not act "in disregard of a risk known ... or so obvious that [the investor] must be taken to have been aware of it". Flamm contends that both parts of this definition of "justified reliance" are wrong.
The district judge used as his model the Fifth Circuit's pattern jury instructions. These pattern jury instructions are based roughly on Dupuy v. Dupuy, 551 F.2d 1005 (5th Cir.1977), a case involving a family corporation rather than trading in public markets. We disagreed with the holding
of Dupuy in Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522 (7th Cir.1985), decided almost eleven months before the trial of this case. Angelos reviews the extent to which "justified reliance" is an element of an action under Rule 10b-5 and holds both that investors do not have a "duty to investigate" and that "reliance" means only materiality and causation in conjunction. 762 F.2d at 527-30. See also Robert Charles Clark, Corporate Law Sec. 8.10.5 (1986) ("reliance" became anachronistic in securities law when the Supreme Court made liability under Rule 10b-5 depend on scienter). Defendants concede that the instruction is erroneous under Angelos to the extent it mentions a "duty to investigate" but insist that the error is harmless because "investigation" did not play a role in the case. They defend the "known risk" portion...
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