Field v. Trump
| Decision Date | 03 June 1987 |
| Docket Number | No. 84 Civ. 7913 (GLG).,84 Civ. 7913 (GLG). |
| Citation | 661 F. Supp. 529 |
| Parties | Bertram FIELD, Plaintiff, v. Julius TRUMP, Eddie Trump, Stuart M. Sloan, Samuel N. Stroum, M. Lamont Bean, Fenwick Crane, E. Ronald Erickson, Calvin Hendricks, Robert B. Hutchinson, Earl W. Smith, Raymond C. Swanson, Pay 'N Save Corporation, The Trump Group, Ltd., NLAC Corp., Acquicorp, Inc., Mergicorp, Inc., TGAC Corp., and TG Limited, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Tenzer, Greenblatt, Fallon & Kaplan, New York City (William Klein, II, P.C., of counsel), for plaintiff.
Skadden, Arps, Slate, Meagher & Flom, New York City (Thomas J. Schwarz, Thomas R. deRosa and Roselyn R. Bar, of counsel), for Stuart M. Sloan and Samuel N. Stroum.
Fried, Frank, Harris, Shriver & Jacobson, New York City (Michael H. Rauch, Terrence A. Corrigan and Sandra M. Lipsman, of counsel), for Fenwick Crane, Robert B. Hutchinson, Earl W. Smith, Raymond C. Swanson and Pay 'n Save Corp.
Parker Chapin Flattau & Klimpl, New York City (Joel M. Wolosky and Charles W. Stotter, of counsel), for Julius Trump, Eddie Trump, M. Lamont Bean, E. Ronald Erickson, Calvin Hendricks, The Trump Group, Ltd., NLAC Corp., Aquicorp, Inc., Mergicorp, Inc., TGAC Corp., and TG Ltd.
This putative class action1 arises from a leveraged buy-out of Pay 'n Save Corporation (the "Company"). The plaintiff here alleges that in connection with this transaction, the defendants violated various federal securities laws, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 to 1968 (1982 & Supp. III 1985), and the common and statutory law of the State of Washington. All of the defendants except the Company have moved to dismiss the amended complaint, pursuant to Fed.R.Civ.P. 12(b)(6) and 12(b)(1). Defendants Crane, Hutchinson, Smith, and Swanson have moved to dismiss pursuant to these Rules as well as Fed.R. Civ.P. 9(b).
The pertinent facts, as alleged by the plaintiff, are as follows. On or about January 27, 1984, the Company acquired Schuck's Auto Supply from the defendants Stroum and Sloan in exchange for approximately 18.4 percent of the outstanding shares of the Company, worth approximately $70 million.
Thereafter, differences arose between these defendants and the board of directors of the Company, concerning the management of the Company. On March 30, 1984, an agreement was reached between the Company and Stroum and Sloan (the "Standstill Agreement"). Pursuant to this agreement, Stroum and Sloan were made Company directors, and in return agreed, inter alia, that for one year they would not sell or otherwise dispose of their shares, or offer to acquire the Company, except as provided in the agreement. At the same time, however, the defendant directors Bean, Erickson and Hendricks acted to render Stroum's and Sloan's directorships powerless.
During the Spring of 1984, the Company, without the knowledge of Stroum or Sloan, sought a friendly suitor with whom to negotiate the possible sale or merger of the Company.2 On or near August 31, 1984, the "Trump defendants"3 proposed a $22 per share tender-merger-leveraged buy-out with defendants Bean, Erickson and Hendricks, as well as nine other senior officers of the Company. Trading in the Company's shares was thereupon stopped, at which time Sloan and Stroum first learned of the Trump proposal.
Negotiations between the Trumps and the Company were made difficult by the stance of Sloan and Stroum, with whom the Trumps were unable to reach an agreement. Although Sloan and Stroum were willing to support the Trumps if the proposed price per share were increased by several dollars, the offered price was raised only to $22.50 per share. Over the dissent of Stroum and Sloan, the Board approved the proposal at this price, and a merger agreement and option agreement for 4,100,000 shares were executed. On the morning of September 7, 1984, the Company issued a press release announcing the Board's actions and that a tender offer at $22.50 per share was expected to begin in the next few days.4
Thereafter, negotiations continued between the Trumps and Stroum and Sloan. On September 12, 1984, the Trumps informed the Company that to facilitate the negotiations with Stroum and Sloan, they were going to withdraw their previously announced tender offer. Later that day, the Trumps issued a press release announcing both the withdrawal, and the continuing negotiations with Stroum and Sloan.
On the same day, the Trumps, and Stroum and Sloan, entered into an agreement (the "Settlement Agreement"), pursuant to which the Trumps agreed to amend the merger agreement to provide for an increased tender price of $23.50 per share, and Stroum and Sloan agreed to grant the Trumps an option to purchase their shares. The agreement further provided that the Trumps would pay Stroum and Sloan $3.3 million for the option, and $900,000 for fees and expenses.5
The following day the Board approved the amendment to the merger agreement, and the Company and the Trumps promptly announced that fact and that a new tender offer would commence by September 19, 1984.
Based on these allegations, the plaintiff claims, in Count I, that the $4.2 million received by Stroum and Sloan, denominated as the option price plus expenses, in fact constituted a $1.50 per share premium above the price received by other shareholders, in violation of Section 14(d)(7), 15 U.S.C. § 78n(d)(7) (1982) and Rule 10b-13, 17 C.F.R. § 240.10b-13 (1986). Consequently, the amended complaint seeks the same premium for the approximately 6,000 class members who tendered a total of 11,866,834 shares, or a total of $17,800,251.
Section 14(d)(7) provides that any person who varies the terms of a tender offer before its expiration, by increasing the consideration offered to security holders, shall pay such increased consideration to each security holder whose securities are taken up pursuant to the tender offer, whether or not such securities have been taken up before the variation.
Defendants argue that there was no tender offer in effect at the time of the Settlement Agreement pursuant to which Stroum and Sloan received the $4.2 million in question, and therefore no violation of Section 14(d)(7). Defendants' reasoning is as follows. Under Rule 14d-2(b), 17 C.F.R. § 240.14d-2(b) (1986), the public announcement of certain material terms of a cash tender offer may be deemed to commence a tender offer. However, a tender offer will not be deemed to have commenced on the date of the announcement of the offer if, within five business days thereof, the offeror issues another public announcement stating that it is discontinuing the offer. Id. Therefore, because the offer announced on September 7, 1984 was withdrawn within five business days by public announcement on September 12, there was no tender offer in place at the time of the Settlement Agreement, and thus, as a matter of law, no violation of either Section 14(d)(7) or Rule 10b-13.
The plaintiff responds by arguing that the withdrawal was a "sham," concocted to skirt the strictures of the Williams Act and allow Stroum and Sloan to secure a higher price than other shareholders. In keeping with the invective tenor of his complaint, the plaintiff uses the word "sham" somewhat indiscriminately. Although he derides the parties' motives, he does not explain on what basis we may properly characterize the withdrawal as a "sham" for purposes of Section 14 or Rule 10b-13, and we see none.
First, the plaintiff does not allege that anything in the first announcement on September 7 in any way prohibited the termination of the announced offer, nor that the Trumps were otherwise restricted from withdrawing their offer.6 This lack attenuates the plaintiff's claim that the withdrawal was a sham. See Brill v. Burlington Northern, Inc., 590 F.Supp. 893 (D.Del. 1984). In Brill, supra, the plaintiff based her allegations of Section 14 violations on a similar argument that the "new" tender offer was merely a "guise." However, because the original offer was terminable, the Brill court found that there were two separate offers, notwithstanding that, inter alia, the second offer was made the day after the first was withdrawn, the price of the two offers was the same, and the new offer was made before the tendering shareholders had received back their tendered shares. Brill, supra, 590 F.Supp. at 898-99.
Moreover, there is no legal justification for labelling the withdrawal a "sham" merely because the Settlement Agreement was reached shortly after the withdrawal. "Neither the Williams Act nor any SEC rule promulgated thereunder prohibits a former tender offeror from purchasing stock of a target through privately negotiated transactions immediately after a tender offer has been terminated." Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 60 (2d Cir.1985).
17 C.F.R. § 240.10b-13 (1986).
The defendants argue that there is no violation of Rule 10b-13, for several reasons. First, they apply the same analysis by which they argued that there was no Section 14(d)(7) violation, i.e., because they withdrew the offer by public announcement within the statutory period, no tender offer was in effect at the time of the Settlement Agreement. Although this argument has some appeal, ...
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