Bolton v. Tesoro Petroleum Corp.
| Decision Date | 24 April 1989 |
| Docket Number | 88-5512 and 88-5534,Nos. 87-5617,s. 87-5617 |
| Citation | 871 F.2d 1266 |
| Parties | Fed. Sec. L. Rep. P 94,412, 13 Fed.R.Serv.3d 590, 27 Fed. R. Evid. Serv. 1377 Robert J. BOLTON, et al., Plaintiffs-Appellants, v. TESORO PETROLEUM CORP., et al., Defendants-Appellees. Robert J. BOLTON, etc., et al., Plaintiffs-Appellants, v. Robert V. WEST, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Paul R. Rosen (argued), Daniel J. Dugan, Philadelphia, Pa., Joel H. Pullen, Michele Petty, San Antonio, Tex., for Bolten, et al.
Steven B. Rosenfeld (argued), Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Michael M. Wilson, B. Daryl Bristow, Richard B. Miller, Miller, Keeton, Bristow & Brown, Suzanne B. Baker, Houston, Tex., William Hall, Jr., Tesoro Petroleum Corp., Roy Barrera, Nicholas & Barrera, R. Laurence Macon, Cox & Smith, San Antonio, Tex., for Tesoro, et al.
A.W. Worthy, Gresham, Davis, Gregory Worthy & Moore, San Antonio, Tex., for Frost.
Roger L. Waldman, Charles Fournier, Webster & Sheffield, New York City, for Detwiler.
Barry Fertel, Bell Kalnick Beckman Klee & Green, New York City, for Spitzer.
John J. Sheehy, Rogers & Wells, New York City, for Richard E. Deems.
Robert Hearon, Jr., Graves, Dougherty, Hearon & Moody, Austin, Tex., for McKetta.
John E. Clark, Thomas Thurmond, Thurmond & Thurman, John E. Clark, Sawtelle, Goode, Davidson & Troolo, San Antonio, Tex., for Tesoro.
Appeals from the United States District Court for the Western District of Texas.
Before GEE, REAVLEY and HIGGINBOTHAM, Circuit Judges.
After more than five months of trial, including nearly three weeks of deliberations, a jury returned a defense verdict on all claims in this combined class action and derivative suit brought by disgruntled investors in Tesoro Petroleum Corporation. Appellants, asserting a variety of arguments, seek a second trial. We reject the request, affirming on all substantive issues, modifying only the district court's award of costs.
The record comes to us in eighteen boxes, including a 156 volume trial transcript. The relevant events, however, sort to three factual contexts, broadly stated.
Before the Foreign Corrupt Practices Act of 1977, 1 Tesoro Petroleum Corporation made "sensitive payments" designed to influence officials of foreign governments on matters of interest to the company. Tesoro's payments to foreign officials first came to light during an Internal Revenue Service investigation. The Securities and Exchange Commission also began an investigation, and Tesoro elected to participate in the SEC's "voluntary disclosure" program. In 1977, Tesoro's Board of Directors created a special committee of independent, outside directors responsible for investigating the sensitive payments, recommending actions to be taken, and reporting to the SEC. The committee hired two Houston law firms as counsel, Fulbright & Jaworski and Vinson & Elkins, and the Fulbright firm conducted an extensive investigation concluded by its final report. The report discussed evidence of payments to officials or other questionable activities in six foreign countries. Acting on legal advice, the special committee disclosed certain payments in a Form 8-K filed with the SEC. The SEC then began a formal investigation, ending with a consent judgment requiring Tesoro to file a supplemental Form 8-K and enjoining future violations. The SEC referred the sensitive payments matter to the Justice Department, and a grand jury began an investigation in 1978. The grand jury also investigated whether Tesoro or any of its officers had defrauded the government or obstructed justice in connection with the various investigations. 2
In 1981, Tesoro's Board of Directors created another special committee, composed of four independent, outside directors. That committee hired Kirkland & Ellis as independent counsel and set about to discharge its responsibility to monitor the grand jury investigation and make any required disclosures. Tesoro had disclosed the pendency of the grand jury investigation when it began. In a January 25, 1982 proxy statement, the 1981 Special Committee, after referring to the Fulbright & Jaworski investigation, SEC investigation, and the Forms 8-K describing the investigations, disclosed the following:
A Federal Grand Jury sitting in Washington D.C. is currently conducting an inquiry into certain aspects of the matters involved in the Special Committee's and the SEC's investigations. The Grand Jury inquiry is continuing, and the Company is unable to predict at this time what the effect of such investigation, or the findings resulting therefrom, will be. The Company is cooperating fully in an effort to expedite the disposition of this matter.
Dr. West participated in, or had knowledge of, most of the transactions covered by the Special Committee's and the SEC's investigations. Certain other members of the Board of Directors participated in, or had knowledge of, to varying degrees, some of such transactions.
The grand jury ended its investigation in 1984 without returning any indictments.
In August 1980, Diamond Shamrock Corporation informed Tesoro that it had acquired 4.5 percent of Tesoro's common stock. On August 20, an informal telephonic conference was held for all available Tesoro directors. After hearing advice from attorneys and financial advisors, the Board members unanimously resolved that Tesoro was not for sale and that they would resist offers not deemed to be in the shareholders' best interests. Tesoro communicated its position to Diamond Shamrock that same day.
On August 21, Diamond Shamrock's Board of Directors authorized its Chairman to initiate a tender offer for Tesoro common stock not to exceed $38 per share. A week later, Diamond Shamrock informed Tesoro that it had abandoned plans to acquire more Tesoro stock. In the interim, Tesoro had sued Diamond Shamrock to block the takeover and the government of Trinidad and Tobago, majority partner in a Tesoro-Trinidad joint venture, announced its opposition to any acquisition of the company. The parties agree that this announcement caused Diamond Shamrock to lose interest in the takeover attempt. Appellants asserted at trial that the acts of the Trinidadian government were prompted by Tesoro.
During the Diamond Shamrock episode, speculation carried Tesoro's stock up over $32 per share, but at its end prices dropped, at times falling below half of the previous highs. Tesoro considered reorganization. Lazard Freres & Co. developed the first plan for reorganization, describing it in a January 11, 1982 memorandum. The Lazard Freres plan envisioned that a public company would be spun off to shareholders, its assets consisting primarily of Tesoro's oilfield service businesses. Refinery and marketing assets would be sold for cash to a new private company owned by Lazard, outside investors, and Tesoro's management. Other assets would be liquidated.
In early January, trading in Tesoro stock increased, apparently responding to rumors of a reorganization. On January 25, the same day the proxy statement disclosed the grand jury matter, Tesoro issued the following press release:
In response to the recent market activity in its stock, Tesoro Petroleum Corporation announced today that its management and investment bankers are considering several courses of action to alleviate the undervaluation of the company's stock in the market. Among the steps being considered are the distribution of certain of the company's operations to its shareholders and the sale of other company operations for cash which would be distributed to the shareholders. The announcement emphasized that there is no assurance that any of the actions being studied will be adopted by the company.
At that time, the Lazard Plan had not been presented to the entire Board of Directors.
The Board was informed about the Lazard Plan at its January 27 meeting. Since certain directors would potentially be investors in the new private company, the Board created another special committee of independent, outside directors, identical in membership to the committee reviewing grand jury disclosures. The committee was asked to review the Lazard Plan for fairness to shareholders and to consider other alternatives to increase the value of Tesoro stock. The parties differ over how close the Lazard Plan was to implementation at this point. Appellants point out that Lazard Freres had already found a lender interested in leading a syndicate of banks to finance the plan, as well as certain investors willing to purchase preferred stock in the private company. Appellees argue that financing for the private company was still contingent, and that the Lazard Plan faced other contingencies such as obtaining Board and shareholder approval and finding purchasers for Tesoro assets.
By mid-May, Tesoro decided not to pursue the Lazard Plan further. The parties dispute why. Appellants emphasize testimony that implementing the Lazard Plan would have required the company to make additional disclosures about the grand jury investigation. However, the same witness also identified three other "bullets" which made the plan unfeasible, including a contingent tax liability, claims asserted by the Department of Energy based on alleged overcharges for regulated oil, and a California Public Utility Commission order threatening the abrogation of a profitable contract between Tesoro's Alaskan refinery and San Diego Gas & Electric Company. Two other members of the 1982 Special Committee testified that deterioration in the oil and gas industry contributed to the decision. Appellees emphasize that Lazard Freres determined independently to withdraw the Lazard Plan, and allegedly communicated this decision to Tesoro's CEO before the...
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