Epstein v. MCA, Inc.
| Decision Date | 27 February 1995 |
| Docket Number | Nos. 92-55632,92-55675,s. 92-55632 |
| Citation | 50 F.3d 644 |
| Parties | , Fed. Sec. L. Rep. P 98,618, 31 Fed.R.Serv.3d 611 Lawrence EPSTEIN, et al., Plaintiffs, and Walter Minton, Plaintiff-Appellant, v. MCA, INC.; Matsushita Acquisition Corporation; Matsushita Electric Industrial Co., Ltd.; Matsushita Holding Corporation; Lew Wasserman; Sidney J. Sheinberg, Defendants-Appellees. Lawrence EPSTEIN; John Linder; Jane Rockford, as trustee of the Michael J. Rockford Trust; Maurice Karlin; Ruth Karlin; Beth Ann Karlin; Bert P. Karlin, Plaintiffs-Appellants, v. MCA, INC.; Matsushita Acquisition Corporation; Matsushita Electric Industrial Co., Ltd.; Matsushita Holding Corporation; Lew Wasserman; Sidney J. Sheinberg, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Peter R. Dion-Kindem and Laurence M. Berman, Berman, Blanchard, Mausner & Kindem, Los Angeles, CA, for Minton, plaintiff-appellant.
Henry Paul Monaghan; Irving Malchman and Roger W. Kirby, Kaufman, Malchman, Kirby & Squire, New York City, for Epstein, plaintiffs-appellants.
Herbert M. Wachtell, Wachtell, Lipton, Rosen & Katz, New York City, for Wasserman and Sheinberg, defendants-appellees.
Barry R. Ostrager and Mary Kay Vyskocil, Simpson, Thacher & Bartlett, New York City, for Matsushita and MCA, defendants-appellees.
Appeals from the United States District Court for the Central District of California.
Before: NORRIS, WIGGINS, and O'SCANNLAIN, Circuit Judges.
TABLE OF CONTENTS
I. Private Right of Action under Section 14(d)(7) 649
II. The Wasserman Transaction 652
III. The Sheinberg Payment 657
IV. The Preclusive Effect of the Settlement of the Delaware Class 659
Action
A. The Delaware Settlement 659
B. The Full Faith and Credit Question 661
1. The Jurisdiction of State Courts to Release Exclusively 661
Federal Claims in a Class Settlement
2. The Disparity Between the State and Federal Claims 665
C. The Contract Bar Argument 666
D. Conclusion 668
V. Class Certification 668
VI. The Motion to Amend the Complaint 669
VII. Conclusion 669
In 1990, Matsushita Electrical Co. Ltd. ("Matsushita") acquired MCA, Inc. ("MCA") for $6.1 billion. The acquisition was accomplished through a tender offer of $71 per share of MCA common stock. 1
Lew Wasserman, MCA's chairman and chief executive officer at the time, owned 4,953,927 shares of MCA common stock worth $351,728,817 at the tender price of $71 per share. His cost basis was 3cents per share. Rather than tender his shares at the tender offer price, Wasserman entered into a separate agreement with Matsushita, known as the "Capital Contribution and Loan Agreement," pursuant to which Wasserman exchanged his shares for preferred stock in a wholly-owned Matsushita subsidiary called "MEA Holdings." 2 Matsushita agreed to fund MEA Holdings by contributing 106% of the tender price multiplied by the number of MCA shares Wasserman exchanged. The MEA Holdings preferred stock Wasserman received pays a dividend of 8.75% annually, is secured by letters of credit, and is redeemable upon the death of either Wasserman or his wife, but in no event earlier than five years from the date of the exchange. Wasserman was 77 at the time. It is not disputed that the transaction was designed to be a tax-free exchange of Wasserman's MCA stock under Internal Revenue Code Sec. 351(a), 26 U.S.C. Sec. 351(a) (1994). 3
Sidney Sheinberg, MCA's chief operating officer at the time of Matsushita's tender offer, owned approximately 1,179,635 shares of MCA common stock. He tendered these shares pursuant to Matsushita's $71 per share offer and received in exchange consideration worth approximately $83,754,085. Two days after Matsushita accepted all tendered shares, Sheinberg received an additional $21 million in cash, ostensibly in exchange for unexercised MCA stock options.
These consolidated appeals arise out of actions brought in the United States District Court for the Central District of California by former MCA shareholders 4 who tendered their shares for the $71 tender price. They claim that Matsushita violated SEC Rule 14d-10, 17 C.F.R. Sec. 240.14d-10 (1994), by treating Wasserman and Sheinberg differently from other shareholders in the tender offer. Rule 14d-10, known as the "all-holder, best-price" rule, requires bidders to treat all shareholders on equal terms. 5
The district court denied plaintiffs' motion for summary judgment on their claim that Matsushita's agreement to pay Wasserman consideration that was different from the $71 per share tender offer violated Rule 14d-10, and later granted Matsushita's motion for summary judgment on this claim. 6 We reverse, instruct the district court to grant plaintiffs' motion for partial summary judgment, and remand for further proceedings to determine the amount of damages, if any, that plaintiffs are entitled to recover as a result of the Wasserman transaction.
The district court granted Matsushita's motion for summary judgment on all of plaintiffs' claims. As noted above, with respect to plaintiffs' claim that the Wasserman transaction violated Rule 14d-10, we reverse. With respect to plaintiffs' claim that the Sheinberg payment violated Rule 14d-10, we vacate and remand for further proceedings to determine whether the $21 million Sheinberg payment was in fact a premium paid to encourage Sheinberg to tender his shares. 7 We also reverse the district court's orders denying the Epstein plaintiffs' motions for class certification and leave to amend their complaint.
During the pendency of these consolidated appeals, the Delaware Court of Chancery entered a judgment approving the settlement of a state class action that released all claims arising out of Matsushita's tender offer for MCA stock, including the Williams Act claims raised in the Epstein class action. Matsushita argues that the settlement of the Delaware class action precludes the federal claims raised in the Epstein action. We disagree and hold that the settlement of the Delaware class action does not preclude the Epstein class action.
The SEC's statutory authority to promulgate Rule 14d-10 derives from sections 14(d)(6) and 14(d)(7) of the 1968 Williams Act Amendments to the Securities Exchange Act of 1934. 15 U.S.C. Sec. 78n(d)(6), (7) (1981). 8 Matsushita 9 makes the threshold argument that it cannot be sued by MCA shareholders for violating Rule 14d-10 because Congress did not intend sections 14(d)(6) and 14(d)(7) to be privately enforceable. 10 In advancing this argument, Matsushita asks us to create a conflict with the Second and Third Circuits, both of which have held that Congress intended to create a private right of action under section 14(d)(7). See Polaroid Corp. v. Disney, 862 F.2d 987, 996 (3d Cir.1988); Field v. Trump, 850 F.2d 938, 946 (2d Cir.1988), cert. denied, 489 U.S. 1012, 109 S.Ct. 1122, 103 L.Ed.2d 185 (1989); cf. Pryor v. United States Steel Corp., 794 F.2d 52, 57-58 (2d Cir.) ( that section 14(d)(6) also contains a private right of action), cert. denied, 479 U.S. 954, 107 S.Ct. 445, 93 L.Ed.2d 393 (1986). We find the reasoning of the Second and Third Circuits to be persuasive.
In Field and Pryor, the Second Circuit applied the traditional four-factor Cort v. Ash test in deciding whether, in enacting sections 14(d)(6) and 14(d)(7), "Congress intended to create ... by implication ... a private cause of action." Pryor, 794 F.2d at 57 (quoting Touche Ross & Co. v. Redington, 442 U.S. 560, 575, 99 S.Ct. 2479, 2488-89, 61 L.Ed.2d 82 (1979)). In holding that Congress did intend to create a private right of action the Second Circuit reasoned, first, that both 14(d)(6) and 14(d)(7) "identif[y] [their] beneficiaries and, unlike the bulk of federal securities regulation, confer[ ] a substantive right on those beneficiaries." Pryor, 794 F.2d at 57 (cited in Field, 850 F.2d at 946). Second, the court found that a private damages remedy was totally consistent with the statutory purpose of protecting injured investors and provided a particularly effective means of enforcing sections 14(d)(6) and 14(d)(7). Field, 850 F.2d at 946; Pryor, 794 F.2d at 56, 58. Finally, the Second Circuit noted that these claims are not those "traditionally relegated to state law." Field, 850 F.2d at 946; Pryor, 794 F.2d at 58.
In Polaroid, the Third Circuit relied on Pryor and Field, but added that the " 'contemporary legal context' informing what Congress perceived itself to be doing when it acted," supported an inference that Congress intended to create a private remedy for violations of section 14(d)(7). Polaroid, 862 F.2d at 995 (quoting Cannon v. Univ. of Chicago, 441 U.S. 677, 698-99, 99 S.Ct. 1946, 1958-59, 60 L.Ed.2d 560 (1979)). In 1968, when the Williams Act was enacted, various lower federal courts had construed section 10(b) of the 1934 Act as providing a private cause of action, and the Supreme Court, in J.I. Case v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), had announced a liberal policy toward inferring private rights of action for securities law violations generally. See Polaroid, 862 F.2d at 995-96. Because Congress enacted the Williams Act in this context, "it is reasonable to conclude that Congress passed...
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