Abrams v. Occidental Petroleum Corporation

Decision Date13 October 1971
Docket NumberDockets 71-1273 to 71-1276.,No. 69-72,69-72
Citation450 F.2d 157
PartiesStephen ABRAMS, Plaintiff, v. OCCIDENTAL PETROLEUM CORPORATION, Defendant-Appellant, and Kern County Land Company, a Delaware Corporation, et al., Defendants to Counterclaims-Appellees. Isaac MUKAMAL, Plaintiff, v. OCCIDENTAL PETROLEUM CORPORATION, Defendant-Appellant, and Dwight M. Cochran et al., Defendants to Counterclaims-Appellees. KERN COUNTY LAND COMPANY, a Delaware Corporation, Plaintiff-Appellee, and Stephen Abrams, Plaintiff-Intervenor, v. OCCIDENTAL PETROLEUM CORPORATION, a California Corporation, Defendant-Appellant, and Tenneco Inc., a Delaware Corporation, et al., Defendants to Counterclaims-Appellees. COLONIAL REALTY CORPORATION, Plaintiff, v. OCCIDENTAL PETROLEUM CORPORATION, Defendant-Appellant, and Kern County Land Company, a Delaware Corporation, et al., Defendants to Cross-Claims-Appellees.
CourtU.S. Court of Appeals — Second Circuit

David R. Hyde, New York City (Cahill, Gordon, Sonnett, Reindel & Ohl, F. Arnold Daum, New York City, of counsel), for appellees Kern County Land Co. and others.

Whitney North Seymour, New York City (Simpson, Thacher & Bartlett, Bernhardt K. Wruble, Paul M. Stein, Kathryn Gabler, New York City, of counsel), and Phillips, Nizer, Benjamin, Krim & Ballon, New York City (Louis Nizer, Paul Martinson, Simon Rose, Neil A. Pollio, New York City, of counsel), for appellant Occidental Petroleum Corp.

Before FRIENDLY, Chief Judge, and MOORE and TIMBERS, Circuit Judges.

FRIENDLY, Chief Judge:

I.

This appeal by Occidental Petroleum Corporation from a summary judgment of $23,511,337.94, rendered against it in the District Court for the Southern District of New York, raises important questions with respect to the problems under § 16(b) of the Securities Exchange Act that may be encountered by the maker of a tender offer who finds himself outflanked by a "defensive merger," arranged by the target company, which is even more advantageous to the latter's stockholders.

Since the facts are stated in detail in the opinion of the district court, 323 F. Supp. 570 (1971), a summary will suffice:

Kern County Land Company (Old Kern) was a California corporation with 4,328,140 common shares outstanding. Between January 1, 1966 and May 8, 1967, the stock, traded on the New York and Pacific Coast Stock Exchanges, had generally been selling in the 50's and 60's, although it had sold as high as $76.25 per share. It had been paying an annual dividend of $2.60 per share. After unsuccessful efforts to induce the management of Old Kern to discuss a merger, Occidental, on May 8, 1967, announced and on May 9 widely published an offer to purchase shares of Old Kern. The offer, which was to expire June 8, 1967, committed Occidental to purchase all shares properly tendered, on a first-come first-served basis, up to 500,000, at $83.50 per share and to pay an additional $1.50 per share commission for all shares tendered through a broker. Occidental reserved the right to purchase stock tendered in excess of 500,000 shares. On the last trading day before announcement of the offer, Old Kern stock had closed on the New York Stock Exchange at $63.625 per share.

As might have been anticipated, the offer was widely accepted. By May 10 more than 500,000 Old Kern shares had been tendered, so that Occidental had become the beneficial owner of more than 10% of the common stock of Old Kern and thus subject to the requirements of § 16(a) and (b) of the Securities Exchange Act. On May 11 Occidental extended the offer to include an additional 500,000 shares. By May 31 its stock ownership in Old Kern had attained 883,381 shares; by June 8, when the offer expired, the figure had grown to 887,549.1

As is frequently the case, Occidental's offer was vigorously resisted by the management of Old Kern. On May 10 it advised stockholders not to accept Occidental's offer, indicating that this might not be the best available since the Old Kern management was then carrying on merger discussions with several other companies. When Occidental extended its tender offer, Old Kern sent telegrams to all stockholders requesting them not to tender.

On May 19 Old Kern's directors announced their acceptance of an offer by Tenneco, Inc., a Delaware corporation, whereby, in exchange for the transfer of Old Kern's assets to a newly organized wholly owned subsidiary (New Kern) of Tenneco Corporation, itself a wholly owned subsidiary of Tenneco, each share of Old Kern would be exchanged for one share of a new $5.50 preference voting stock of Tenneco, convertible into 3.6 shares of common stock.2 The sale of Old Kern's assets was governed by California corporation law which required approval only of a majority of Old Kern's stockholders and provided no appraisal rights for dissenters. In contrast to Occidental's cash offer, the Tenneco exchange was expected to be free of capital gains tax. In a report to its shareholders on May 19, 1967, the president of Occidental estimated that the value of the new Tenneco preferred was $105 per share. The Old Kern-Tenneco plan, executed on June 14, 1967, provided for a closing at a date to be agreed upon between September 30 and December 31, 1967, or at such other time as the parties might agree.

Occidental responded by initiating two mandamus actions in the California courts, seeking extensive inspection of the books and records of Old Kern including stockholder's lists.3 Although Old Kern gave some information to Occidental, there is nothing to indicate that this went beyond what was readily available to any stockholder.

While the detailed Tenneco-Old Kern plan was being formulated, Occidental and Tenneco were also in negotiations. These resulted in an option agreement dated June 2, 1967. Reciting that Tenneco Corporation was desirous of obtaining an option to purchase the Tenneco shares that Occidental would receive as a stockholder of Old Kern, it provided that Occidental would grant Tenneco Corporation an assignable option to purchase 886,623 such shares4 at $105 per share. The option could be exercised at any time after December 9, 1967 — six months and one day after Occidental's last contemplated acquisition of Old Kern shares. If the closing under the Old Kern-Tenneco plan occurred before December 10, the option would expire December 31; if the closing were held between December 10, 1967 and July 1, 1968, the option would expire on the thirtieth day after the closing date. For this option Tenneco paid $10 per share, or $8,886,230. If the option was exercised, this sum was to be credited against the purchase price. On the other hand, it was to be returned to Tenneco if the Tenneco-Old Kern plan was not closed by July 31, 1968. Occidental was to receive dividends on the Old Kern or Tenneco preference stock with respect to the last two quarters of 1967;5 dividends accruing in 1968 would be divided according to the exercise date of the option. At the same time, Tenneco orally assured Occidental that the new Tenneco preference shares would not be listed or registered under the 1934 Act until the option had been exercised or had expired.6 On the basis of this, Occidental discontinued its actions in the California courts.

Being naturally concerned over the possibility of a huge § 16(b) liability with respect to the Old Kern shares, Occidental sought to have the SEC promulgate a rule exempting it and other tender offerors who found themselves in the same situation. Despite some initial encouragement, the Commission declined to propose such a rule.7 The Old Kern stockholders met on July 17. Occidental, in a letter dated July 14 which was read at the meeting, stated it had decided, prior to the June 2 option agreement, not to oppose the sale of assets, since it did not regard the terms as unfair or inequitable. It did not vote its stock, but the necessary majority was readily obtained. On August 4 the Internal Revenue Service issued a ruling that the transaction would constitute a tax-free exchange, provided that Tenneco Corporation rid itself of the option. Application for the necessary permits and authorization was then made to the California Commissioner of Corporations.

The parties are in dispute whether there was a "gentlemen's agreement" that Tenneco and Old Kern would not close before December 9 if Occidental's efforts to secure an exemption were unsuccessful. When it became apparent that they intended to close long before this, a number of injunction suits by Old Kern stockholders, allegedly sponsored by Occidental, began in the state courts of Texas and in federal courts in California and Nebraska. Tenneco and Old and New Kern countered with an action in a Texas court in which they obtained an ex parte order restraining the continued prosecution of these suits. Occidental also urged the California Commissioner of Corporations not to approve the transaction on grounds of unfairness to Occidental. He issued the necessary approval on August 30 and the closing was held that day. As part of the closing Old Kern assigned to New Kern all claims and demands accrued or to accrue by virtue of the Securities Exchange Act. Old Kern informed its stockholders that they were irrevocably entitled to the Tenneco preference shares. These were not to be registered under the 1934 Act until December 31 but could be traded over-the-counter in the meanwhile.

To conform to the ruling of the IRS, Tenneco Corp. sold its option to Loeb, Rhoades & Co., a New York investment banking firm, which later assigned this to LR Fixed Investment Trust. On December 11, 1967, Occidental tendered its Old Kern shares for Tenneco preference stock, LR Fixed Investment Trust exercised the option, and Occidental received $95 per share, or $84,229,185, in addition to the $10 per share, or $8,886,230, already in hand.

New Kern moved swiftly to assert liability of Occidental under § 16(b) by bringing an action...

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