Chevron Corp. v. Pennzoil Co.

Decision Date09 September 1992
Docket NumberNo. 90-16833,90-16833
Citation974 F.2d 1156
PartiesFed. Sec. L. Rep. P 97,004, 36 Fed. R. Evid. Serv. 761 CHEVRON CORPORATION, Plaintiff-Appellant, v. PENNZOIL COMPANY, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

William I. Edlund, C. Douglas Floyd, and Walter J. Robinson, Pillsbury, Madison & Sutro, San Francisco, Cal., for plaintiff-appellant.

Stephen V. Bomse, Jonathan P. Hayden, David C. Brownstein, and Mary Ann Yarbrough, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before: SCHROEDER, REINHARDT, and KLEINFELD, Circuit Judges.

SCHROEDER, Circuit Judge:

I. Introduction

The Chevron Corporation appeals from the district court's order granting summary judgment in favor of the Pennzoil Company in Chevron's action seeking injunctive relief to halt Pennzoil's purchase of Chevron stock. Chevron's complaint alleged that Pennzoil's Schedule 13D, filed pursuant to Section 13(d) of the Williams Act, 15 U.S.C. § 78m(d), was materially misleading. Chevron also appeals the district court's partial denial of Chevron's motion to compel discovery of Pennzoil's communications with its tax counsel. Chevron contends that there exist genuine issues of material fact concerning Pennzoil's true purposes in acquiring Chevron stock, and that Pennzoil waived the attorney-client privilege with respect to the communications Chevron sought. We reverse on both issues.

This case arises out of the three billion dollar settlement of Pennzoil's earlier suit against Texaco over Pennzoil's claim that Texaco wrongfully interfered with Pennzoil's contractual agreement to invest in the Getty Oil Company. Pennzoil began reinvesting the proceeds of that settlement in Chevron stock. One of Pennzoil's stated purposes was to defer taxes owed on the settlement proceeds by making a similar reinvestment pursuant to section 1033 of the Internal Revenue Code. 26 U.S.C. § 1033. Chevron filed this suit to enjoin the investment, challenging the adequacy of Pennzoil's statement required under the Williams Act, 15 U.S.C. § 78m(d)-(e). In a nutshell, Chevron claims that Pennzoil's disclaimer in that statement of any intent to exert control over Chevron by election of board members or otherwise was not made in good faith because Pennzoil did intend to attain a control position.

The district court granted summary judgment for Pennzoil on the ground that the affidavits of Pennzoil's directors established that at the time of the Williams Act filing, Pennzoil did not intend to exert control over Chevron management, and that Pennzoil relied in good faith on its counsel's belief that management control was not absolutely necessary to obtain the tax deferral allowed under section 1033. 26 U.S.C. § 1033. The district court ruled that the evidence submitted by Chevron concerning discussions by Pennzoil officials of the possibility of exercising control over Chevron, and Chevron's proffer of expert testimony that Pennzoil could not adequately protect its tax position without regaining the same control position in Chevron that it had sought in Getty, were insufficient to create a genuine issue of material fact as to the good faith of Pennzoil's disclosure.

On appeal, Chevron contends that the district court erroneously granted summary judgment because there are triable issues of fact concerning whether Pennzoil's true but undisclosed purpose was to obtain representation on the board and exercise influence over Chevron management, thereby making Pennzoil's Schedule 13D materially misleading. In addition, Chevron challenges the district court's ruling upholding Pennzoil's claim of attorney-client privilege with respect to communications on which Pennzoil rested its claim that its Schedule 13D was in accordance with attorney advice.

II. Background

The Williams Act, 15 U.S.C. §§ 78l-n, was adopted in 1968 to extend the advance disclosure requirements of the federal securities laws to investors using cash tender offers to effect corporate takeovers. See S.Rep. No. 550, 90th Cong., 1st Sess. 2-4 (1967); H.R.Rep. No. 1711, 90th Cong., 2d Sess. 2-4 (1968); U.S.Code Cong. & Admin.News 1968, 2811-2814; see also Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 22, 97 S.Ct. 926, 939-40, 51 L.Ed.2d 124 (1977). The Act amended Section 13 of the Securities and Exchange Act of 1934 to provide for such disclosures. The purpose of the Act is to insure that, through adequate disclosure, public shareholders confronted by a tender offer or the purchase of a large block of shares by a third party, will be informed about the intentions and qualifications of the third party. See Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 95 S.Ct. 2069, 2075-76, 45 L.Ed.2d 12 (1975); Indiana Nat'l Corp. v. Rich, 712 F.2d 1180, 1183 (9th Cir.1983); S.Rep. No. 550, 90th Cong., 1st Sess. 2 (1967). Thus, the Act is designed to get essential information to investors enabling them to make informed investment decisions. Piper, 430 U.S. at 31, 97 S.Ct. at 944. The Act is not intended "to provide a weapon for management to discourage takeover bids or prevent large accumulations of stock which would create the potential for such attempts." Rondeau, 422 U.S. at 58, 95 S.Ct. at 2076.

This court has held that an issuer corporation has a private right of action for injunctive relief under Section 13(d) of the Act. See Indiana Nat'l Corp., 712 F.2d at 1184. Because the sole purpose of Section 13(d) is to protect shareholders, however, the issuer corporation is deemed to act on the shareholders' behalf in seeking injunctive relief until an accurate Schedule 13D is filed. Id. at 1185.

The Williams Act requires that within ten days after acquiring more than five percent of the outstanding shares of an issuer's stock, the purchaser of such stock must file a Schedule 13D with the issuer, the exchange where the stock is traded, and the Securities and Exchange Commission. 15 U.S.C. § 78m(d)(1). Section 13(d)(1) requires that the Schedule 13D contain, among other things: (1) the "background, and identity" of the purchaser; (2) "the source and amount of the funds or other consideration used or to be used in making the purchases;" (3) "if the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which [the purchaser] may have to liquidate such issuer, to sell its assets to or merge it with any other persons, or to make any other major change in its business or corporate structure;" and (4) the extent of the purchaser's holdings in the issuer company. 15 U.S.C. § 78m(d)(1). Once a purchaser of securities becomes the beneficial owner of more than five percent of any equity security interest in a single corporation, that purchaser has ten days within which to file a Schedule 13D. The regulations implementing the statute expressly require the statement of purpose to include any plans for any change in the Board of Directors. 1

In April 1988, Pennzoil received three billion dollars in settlement proceeds from Texaco. In October 1989, Pennzoil began purchasing Chevron's outstanding common stock using the proceeds from the Texaco settlement. By November 27, 1989, Pennzoil had acquired 5% of Chevron stock, and ten days later Pennzoil filed a Schedule 13D with the Securities and Exchange Commission pursuant to the Williams Act. For purposes of this appeal, the relevant portion of the Schedule 13D filing is Item 4, which addresses Pennzoil's purpose in purchasing Chevron stock, and provides in its entirety:

Item 4 Purpose of Transaction.

The Shares owned by Pennzoil have been acquired as a long-term investment. See the accompanying letter to Pennzoil shareholders filed as Exhibit 1 hereto. In addition to the expected benefits from ownership of the Shares, including potential appreciation in the value of the Shares and the potential receipt of dividends and distributions payable or made on the Shares. Pennzoil believes that its investment in the Shares may provide Pennzoil the opportunity to defer for an indefinite period a portion of the federal income taxes that would otherwise be payable currently on the litigation settlement proceeds which Pennzoil received from Texaco in 1988.

Pennzoil may decide to continue to expend up to an amount equal to the original Texaco settlement net proceeds (approximately $2.6 billion) to purchase additional shares for investment from time to time. Such additional purchases, if any, will be dependent upon, among other factors, prevailing market prices for the Shares and prevailing market and economic conditions generally.

Pennzoil will monitor on a regular basis its investment in the Shares and the Issuer's business affairs and financial position, as well as the market value of the Shares, conditions in the securities markets and general economic and industry conditions. Depending on the results of Pennzoil's ongoing review, Pennzoil may in the future take such actions in respect of its investment in the Shares it deems appropriate in light of circumstances existing from time to time.

Although Pennzoil has for analytical purposes considered the hypothetical effect of higher percentage levels of investment up to as much as 18% and the effect of accounting for such an investment using the cost method and the equity method of accounting, Pennzoil has no current plans or proposals other than those set forth above in the second paragraph of this Item 4 which relate to or would result in (i) the acquisition by any person of additional securities of the Issuer, or the disposition of securities of the Issuer, (ii) an extraordinary corporate transaction such as a merger, reorganization or liquidation, involving the Issuer or any of its subsidiaries, (iii) a sale or transfer of a material amount of assets of the Issuer...

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