Colan v. Mesa Petroleum Co.
| Citation | 941 F.2d 933 |
| Decision Date | 08 August 1991 |
| Docket Number | 90-55643,Nos. 90-55641,s. 90-55641 |
| Parties | , Fed. Sec. L. Rep. P 96,164 David COLAN, Plaintiff, and Unocal Corporation, Plaintiff-Appellant, v. MESA PETROLEUM CO., et al., Defendants-Appellees. David COLAN, Plaintiff-Appellant, and Unocal Corporation, Plaintiff, v. MESA PETROLEUM CO., et al., Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Darryl Snider, Brobeck, Phleger & Harrison, Los Angeles, Cal., for plaintiff-appellant Unocal.
William Lerach, Milberg, Weiss, Bershad, Specthrie & Lerach, San Diego, Cal., for plaintiff-appellant David Colan.
James Edward Maloney, Baker & Botts, Houston, Tex., for defendants-appellees.
Appeal from the United States District Court for the Central District of California.
Before GOODWIN, PREGERSON and ALARCON, Circuit Judges.
In this action for recovery of short-swing profits brought pursuant to section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), Unocal Corporation appeals from the denial of its cross motion for summary judgment, and the order granting a motion for summary judgment in favor of Mesa Petroleum Company, Mesa Southern Company, Mesa Asset Company, CY-41, Inc., and Jack-41, Inc. (Mesa Defendants). We must decide whether an exchange by a beneficial owner of its common stock for non-convertible debt securities, in response to a self-tender offer, is a "sale" within the meaning of section 16(b) of the Securities Exchange Act of 1934. We reverse because we have concluded that an exchange of common stock for a negotiable debt security pursuant to a self-tender offer is a "sale" within section 16(b).
Unocal's contentions on appeal can be summarized as follows:
One. The district court erroneously weighed the evidence and made credibility determinations on ruling on cross motions for a summary judgment.
Two. The district court erred in concluding that Mesa's exchange of Unocal common stock for negotiable debt securities in response to its self-tender offer
was an "unorthodox transaction," and not a "sale" requiring a disgorgement by the Mesa Defendants of any profits that may have been realized as a result of this transaction.
In October of 1984, Mesa Partners II was formed and began accumulating stock in Unocal. The general partners in Mesa Partners II were: (1) Mesa Asset Company, a wholly owned subsidiary of Mesa Southern Company, which is a wholly owned subsidiary of Mesa Petroleum Company; (2) Cy-41, Inc., wholly owned by Cyril Wagner, Jr.; and (3) Jack-41, Inc., wholly owned by Jack E. Brown.
Cyril Wagner, Jr., and Jack E. Brown are the sole partners of Wagner & Brown, and Brown & Wagner. Cyril Wagner, Jr., and Jack E. Brown, along with Brown & Wagner, are also the partners of Wagner & Brown II. T. Boone Pickens was the President and Chairman of the Board of Directors of Mesa Petroleum Company, President of Mesa Assets Company, and President of Mesa Southern Company. This joint venture shall be referred to as Mesa Partners II in this opinion.
On February 14, 1985, Mesa Partners II filed a Schedule 13D statement 1 with the Securities and Exchange Commission (SEC), in which it reported that it had acquired 7.3 percent of Unocal's common stock for investment purposes. By February 22, 1985, Mesa Partners II owned 17 million shares of Unocal's common stock, representing 9.7 percent of the outstanding shares.
Unocal initiated defensive measures in order to discourage a perceived takeover threat by Mesa Partners II. On February 25, 1985, Unocal amended its bylaws concerning the procedures for nominating directors and making shareholder proposals. Unocal also filed an action in the Superior Court of the State of California for the County of Los Angeles against Security Pacific National Bank on March 12, 1985, for breach of fiduciary duty, breach of contract, and deceit and misrepresentation in connection with loans it made to Mesa Partners II. Mesa Partners II used the money obtained from these loans to purchase Unocal common stock. Mesa Petroleum Company and Mesa Asset Company responded by filing an action in the same court against Unocal on March 21, 1985, alleging wrongful interference with their banking relationships.
On March 27, 1985, Mesa Partners II acquired a total of 6.7 million shares of Unocal common stock at $48.10 per share. This transaction increased Mesa Partners II's shares to 23.7 million and its ownership interest to 13.6 percent of Unocal's common stock.
On March 28, 1985, Mesa Partners II amended its Schedule 13D statement. Mesa Partners II reported to the SEC that it "may seek to obtain control of the company or to participate in the formulation, determination or direction of the basic business decisions of the Company." Mesa Partners II also indicated that it intended to solicit proxies to gain postponement of the annual Unocal shareholders meeting then scheduled for April 29, 1985.
On April 1, 1985, Unocal filed a complaint alleging violations of section 13(d) of the Securities and Exchange Act of 1934 against T. Boone Pickens, Jr., Cyril Wagner, Jr., Jack E. Brown, Mesa Partnership, the Partners and certain affiliates of the Partners in the United States District Court for the Central District of California. Unocal claimed that the named defendants or their agents made false and misleading representations in Mesa Partners II's original Schedule 13D statement by indicating that it acquired Unocal common stock for investment purposes. The defendants filed a counterclaim on April 12, 1985, alleging that Unocal violated proxy solicitation rules.
On April 8, 1985, Mesa Partners II made a tender offer to purchase 64 million shares of Unocal common stock at $54 per share. 2 Unocal's Board of Directors recommended that Unocal's shareholders reject Mesa Partners II's tender offer as inadequate and not in their best interests.
On April 16, 1985, Unocal offered to exchange "a package of its debt securities with an aggregate principal amount of $72 ... consisting of (i) $20 principal amount of 14% Senior Secured Notes Due 1990, (ii) $32 principal amount of Floating Rate Senior Secured Notes Due 1991 and (iii) $20 principal amount of Senior Secured Extendible Notes Due 1997" for up to 87.2 million shares (approximately one-half) of Unocal's outstanding common stock. This offer was originally conditioned upon Mesa Partners II's "acceptance for payment of 64,000,000 Shares pursuant to the Mesa Offer." Unocal modified its offer on April 23, 1985, to provide for the purchase of "up to 50 million shares of its common stock in exchange for $72 per share in senior secured notes, whether or not Mesa purchased the 64 million shares it was seeking through its tender offer."
Unocal stated in its offer that one of its express purposes was "to make it more difficult for Mesa Bidders to complete the Mesa Offer." Unocal expressly excluded Mesa Partners II from participating in its exchange offer. Unocal's exchange offer provided that
[t]he Company [Unocal] will not accept for exchange, or issue Securities in exchange for, any Shares tendered by or on behalf of Mesa Petroleum, Mesa Partnership, Mesa Sub or any person controlling, controlled by or under common control with any of the foregoing (collectively, the "Mesa Group"), nor any Shares tendered by or on behalf of any other person that were transferred, directly or indirectly, after the date of this Offer to Purchase to such person by any member of the Mesa Group.
On April 22, 1985, Mesa Partners II challenged its exclusion from Unocal's tender offer in Delaware state court. On April 29, 1985, the Court of Chancery temporarily restrained Unocal from proceeding with its offer unless it included Mesa Partners II.
On May 14, 1985, representatives of Unocal and Mesa Partners II, including T. Boone Pickens, met in an attempt to negotiate a settlement. These discussions broke off without resolution. On May 17, 1985, the Delaware Supreme Court reversed the Court of Chancery and held that Unocal was not prohibited by law from excluding Mesa Partners II from its tender offer.
Following the Delaware Supreme Court's decision, representatives of Mesa Partners II contacted Unocal and sought to reopen negotiations. After several rounds of negotiations, an agreement was reached on May 20, 1985.
Pursuant to the agreement, the "Mesa Entities" were allowed to participate in Unocal's self-tender offer. 3 Mesa Partners II agreed to terminate its tender offer. In addition, Mesa Partners II agreed that it would not participate in any proxy solicitation and would not acquire any additional Unocal shares for a period of twenty-five years. Mesa Partners II also agreed that, for a period of ten years, it would vote its Unocal stock on all matters in the same way and "in the same proportion as the votes cast by holders of Shares other than the Mesa Entities." In addition, Mesa Partners II agreed to strict controls on its ability to sell its Unocal common stock.
On the same date, Mesa Partners II exchanged approximately 7.8 million shares of Unocal common stock for negotiable debt securities. 4 Each of these securities had a stated maturity date and provided for periodic interest payments. Mesa Asset
Company sold these debt securities on July 3, 1985, for approximately $589 million.
On June 3, 1986, David Colan, a shareholder in Unocal, filed a derivative action on behalf of Unocal, alleging violations of section 16(b) by the Mesa Defendants. The action sought recovery of short-swing profits realized by Mesa. Unocal was originally named as a defendant in this action, but was realigned as a real party plaintiff on August 3, 1989.
On September 25, 1989, the Mesa Defendants filed a motion for summary judgment, in which they argued that the exchange of their common stock for Unocal's debt securities was not a sale within section 16(b). The Mesa Def...
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