Gandal v. Telemundo Group, Inc., s. 92-7036

• Decision Date: 20 July 1993
• Docket Number: 92-7037 and 92-7039,Nos. 92-7036,s. 92-7036
• Citation: 997 F.2d 1561
• Parties: Alvin GANDAL v. TELEMUNDO GROUP, INC., Appellant. ADVO System, Inc., et al. Alvin GANDAL, Appellant v. TELEMUNDO GROUP, INC., et al. Alvin GANDAL v. TELEMUNDO GROUP, INC., et al. Reliance Group Holdings, Inc., et al., Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1561

997 F.2d 1561

302 U.S.App.D.C. 359

Alvin GANDAL v. TELEMUNDO GROUP, INC., Appellant.

ADVO System, Inc., et al.

Alvin GANDAL, Appellant v. TELEMUNDO GROUP, INC., et al.

Alvin GANDAL v. TELEMUNDO GROUP, INC., et al.

Reliance Group Holdings, Inc., et al., Appellants.

Nos. 92-7036, 92-7037 and 92-7039.

United States Court of Appeals District of Columbia Circuit.

Argued April 22, 1993.

Decided July 20, 1993.

Appeals from the United States District Court for the District of Columbia (89cv2563).

Kathleen L. Beggs, with whom Jeremiah C. Collins, John J. Buckley, Jr., and Kevin M. Downey, Washington, DC, were on the brief, for appellants/cross-appellees Telemundo Group, Inc., et al.

Glenn B. Manishin, with whom Jeffrey Blumenfeld, Washington, DC, was on the brief, for appellee/cross-appellant Gandal.

Before: EDWARDS, RUTH BADER GINSBURG, and SILBERMAN, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

Alvin Gandal, a warrantholder of an acquired corporation, appeals the district court's rejection of his tort claims against three of the defendants below as well as his unsuccessful contract claim against the surviving corporation, Telemundo Group, Inc. The warrantholder also challenges the damage remedy for his successful contract claim against Telemundo. Telemundo cross-appeals the ruling against it. The tort defendants also cross-appeal, challenging the district court's assertion of personal jurisdiction over them. Telemundo was placed in bankruptcy after oral argument, which automatically stayed the action against it. At this time, therefore, we deal only with Gandal's tort claims. We reverse the district court's ruling that it had personal jurisdiction over the tort defendants.

I.

Prior to these transactions, John Blair & Company (Blair) was a publicly traded, diversified communications and broadcasting firm incorporated in Delaware. Blair had several wholly owned subsidiaries, including ADVO System, Inc. (ADVO), a direct mail advertising firm. In April 1986, McFadden Acquisition Corporation (McFadden) made an unsolicited, conditional tender offer for all of Blair's common stock. Blair's board of directors consulted with the firm's investment advisers and determined that the offer would not provide Blair's shareholders with adequate compensation. The board, therefore, resolved to find a more appropriate suitor (a "white knight") supposedly to maximize the shareholders' value.

After investigating various alternatives, Blair's investment bankers proposed a transaction involving a subsidiary of Reliance Capital Corporation (Reliance). First, Reliance would make a two-tiered offer for Blair stock. Reliance would agree to purchase up to 60% of Blair's stock through a cash tender offer (the "front-end" of the transaction), and assuming that the tender offer was successful (i.e., if more than 50% of all shares were tendered), Reliance would convert the remaining shares into long-term, high-yield debentures (junk bonds) through a closeout merger (the "back-end" of the transaction). Blair would then spin-off its ADVO subsidiary by issuing a stock dividend of 2.57 shares of ADVO to each Blair shareholder besides Reliance, effectively increasing the back-end compensation. A venture capital firm would then take a substantial equity position in ADVO.

After Blair made Reliance's proposal public, something of an auction for Blair followed--both McFadden and Reliance increased their offers. On June 19, 1986, Reliance made what was styled as its final offer. It proposed to pay $31.00 cash for 60% of the shares. The remaining shares would be exchanged for a 12%, 15-year bond with a face value of $20.75. The bond was to accrue interest without payment in the first five years, and then pay out the interest from all 15 years in the final 10 years. This proposal continued to assume that ADVO would be spun-off after the tender offer was successfully completed. Reliance's offer to pay cash for 60% of all shares was in practical effect an offer to buy 60% of each stockholder's shares because section 14(d)(6) of the Williams Act, 15 U.S.C. § 78n(d)(6), required Reliance to purchase tendered shares on a pro rata basis. Reliance's offer to each stockholder, then, was worth a blended value of 60% of the cash payment plus 40% of the value of the back-end compensation (the ADVO shares and the junk bond). Following the announcement of Reliance's "final offer," McFadden increased its bid for Blair by a dollar a share. In response, on July 3, the day that Reliance's tender offer was scheduled to close, Blair announced that if the offer were successful, Blair would declare a $1.50 cash dividend on the remaining shares. The effect of the announced dividend, therefore, was to increase the blended value of the tender offer by 60 cents (40% of $1.50).

In the event, Reliance's tender offer was successful, and Blair's board of directors formally declared the cash dividend on August 19, 1986. At the same board meeting, a stock dividend consisting of 2.57 shares of ADVO was declared as contemplated by the merger agreement. The board set September 5, 1986, as the record date for both dividends. On September 15, 1986, all owners of Blair stock as of the record date (except Reliance, which now owned 60% of the Blair shares) received their dividends. The merger was not formally consummated, however, until a special shareholder meeting on December 24, 1986. At that point, the remaining Blair shares were converted into junk bonds and Blair was effectively merged out of existence.

Some Blair employees held "restricted" shares of common stock which they had received pursuant to a stock option plan. These shares did not vest unless, inter alia, there was a change in Blair's control. The shares would not vest under Reliance's offer, then, until after the tender offer had been successful, which meant that the restricted shares effectively would be excluded from the front-end of the offer. The restricted shareholders would receive only the junk bond and dividends, yet would suffer particularly onerous federal tax consequences (we are told that vesting would force the employees to recognize the full value of shares as income, and as ordinary income rather than capital gains at that).

The board, allegedly to avoid this result, resolved to have Blair purchase the restricted shares (including those held by board members) in exchange for $20.75 in cash, 2.57 shares of ADVO, and the $1.50 cash dividend. On a before tax basis, therefore, the restricted shareholders were to receive $22.25 plus 2.57 shares of ADVO. Blair's offer to purchase the restricted shares was well-received--Blair bought over 100,000 restricted shares on September 4, 1986.

Blair had issued warrants (stock options issued by the corporation for purchase by the general public) in September of 1984 in connection with a public bond offering. The warrants gave the holder an option to purchase a share of Blair common stock for $36.75 up until the expiration date, September 15, 1989. The warrant agreement, defining the warrantholders' rights, contained an anti-dilution clause which, in the event of a merger, gave warrantholders (upon payment of the exercise price) a right to the same "kind and amount" of merger consideration that the shareholders had received. In case of a stock dividend, a similar clause entitled the warrantholder to the same number of shares that the common shareholders had received at the time of the dividend. But the agreement provided that a warrantholder had no right to any cash dividends with a record date before the date on which the warrantholder exercised his option. Prior to the announcement of the merger, Alvin Gandal bought 13,000 of Blair's common stock purchase warrants. Gandal also purchased over 100,000 additional Blair warrants after Reliance's successful tender offer had been publicly announced on July 7, 1986.

Blair and Reliance announced in a June 2, 1986 merger agreement that warrantholders would be entitled to receive the ADVO shares and the junk bond upon exercise of their warrants. As noted, Blair later offered shareholders a $1.50 cash dividend but has insisted that, by the terms of the warrant agreement's "no cash dividends clause," warrantholders were not entitled to participate in the cash dividend. One warrantholder contested this interpretation and brought a class action suit for additional compensation. Blair agreed to pay $8.75 per warrant to settle this suit. Gandal, however, opted out of the settlement with the exception of certain warrants that were included due to broker error. At the time of the settlement, ADVO shares were trading as high as 12.75 per share, but in October 1987, ADVO's share price (and the Blair warrant's price) collapsed along with the rest of the market. Gandal ended up holding his warrants until they expired. One month before their expiration, he offered to exercise the warrants if Blair would give him the full compensation to which he thought he was entitled, which included the ADVO shares, the cash dividend, and the insider's cash compensation. Blair's agent rejected this offer. On the date the warrants expired, Gandal filed suit in district court.

Gandal brought contract and tort claims against various defendan...