Gerber v. Computer Associates Intern., Inc.
| Decision Date | 04 September 2002 |
| Docket Number | Docket No. 00-9557. |
| Parties | Joel GERBER, on his own behalf and on behalf of all others similarly situated, Plaintiff-Appellee, v. COMPUTER ASSOCIATES INTERNATIONAL, INC. and LWB Merge, Inc., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Second Circuit |
Wayne N. Elliott (James L. Holzman, Paul M. Lukoff, on the brief), Prickett, Jones & Elliott, Wilmington, DE, for Defendants-Appellants Computer Associates International, Inc. and LWB Merge, Inc.
Roger W. Kirby (Joanne M. Cicala, on the brief), Kirby McInerney & Squire, LLP, New York, NY, for Plaintiff-Appellee Joel Gerber.
Before FEINBERG, KEARSE, and B.D. PARKER, Circuit Judges.
This appeal concerns a transaction in which defendant Computer Associates International, Inc. ("CA"), a computer software company, acquired On-Line Software International, Inc. ("On-Line"), another computer software company, by means of a tender offer and follow-up merger. Plaintiff Joel Gerber, an On Line shareholder, commenced a class action in 1991 on behalf of On-Line shareholders who tendered their stock in CA's tender offer. Gerber alleged that, in acquiring On-Line, CA paid more money per share to Jack Berdy, On-Line's chairman and chief executive officer, than it paid to other On-Line shareholders, in violation of various provisions of the Williams Act, 15 U.S.C. §§ 78l(i), 78m(d)-(e), and 78n(d)-(f), and regulations promulgated thereunder, 17 C.F.R. § 240.14d-10.
Johnson, Jr., Judge) denied defendants' motion to dismiss and granted in part and denied in part their motion for summary judgment. Following trial, a jury returned a $5.7 million verdict for the plaintiff class. Judgment was entered on the verdict, and the District Court (Charles R. Wolle, Judge, Southern District of Iowa, sitting by designation) denied CA's motion for judgment as a matter of law or, in the alternative, for a new trial. CA and its wholly-owned subsidiary, LWB Merge, Inc. ("LWB"), appeal, and we affirm.
CA is in the business of designing and marketing computer software products. In July 1991, CA's chairman, Charles Wang, approached the chairman and chief executive officer of On-Line, Jack Berdy, to discuss the possibility of CA's acquiring On Line. On-Line, which Berdy founded in 1969, was also in the software business. Berdy owned 1.5 million shares of On-Line stock, representing approximately 25% of the company's outstanding shares. Berdy and Wang, as well as Sanjay Kumar, the chief operating officer of CA, negotiated extensively over the price that CA would pay for On-Line's stock.
Negotiations over the terms of a non-compete agreement proceeded concurrently with negotiations over the purchase price. CA insisted that Berdy and other On-Line executives, who would be leaving the company following the acquisition, agree not to compete with CA for a specified period of time, but Berdy initially resisted entering into a non-compete agreement. At one point in the negotiations, CA offered to purchase On-Line's stock (which was then trading at approximately $10 per share on the New York Stock Exchange (the "NYSE")) for $14 per share and to pay Berdy $9 million for a seven-year non-compete agreement. On-Line's Board of Directors felt that CA's offer of $14 per share was too low and that the $9 million offered to Berdy for his agreement not to compete was too high. The On-Line Board sought $16 per share, and the negotiations continued. Negotiations stalled when CA offered $15.50 per share and On-Line insisted on $16. CA and On-Line ultimately agreed that CA would offer to purchase On-Line's stock for $15.75 per share, and that CA would pay Berdy $5 million for a five-year non-compete agreement. The central issue in this litigation is whether the $5 million was compensation for Berdy's non-compete agreement or unlawful additional compensation for his On-Line stock.
On August 15 and 16, 1991, there was an unusually large amount of trading in On-Line stock. On August 15, the stock price rose $1, and the NYSE asked On-Line about the unusual trading activity. On the morning of August 16, when the stock price rose another dollar, On-Line told the NYSE that it was in discussions with CA and that a press release might be issued shortly. Berdy told CA that On-Line was under pressure from the NYSE to issue a press release. Around noon on August 16, On Line and CA reached their agreement at $15.75 per share, On-Line told the NYSE that it would issue a press release, and trading in On-Line stock was halted. Later that day, each company issued a press release announcing that it had reached an agreement with the other. CA's press release stated in relevant part that CA
has reached an agreement in principle with the management of [On-Line] whereby CA will acquire all of the outstanding common stock of On-Line for $15-3/4 per share in cash. The transaction is subject to the approval of the Boards of Directors of On-Line and CA the execution of definitive agreements and regulatory approval.
On-Line's press release was very similar to CA's, except it also noted that "no assurance can be given that a transaction between On-Line and Computer Associates of any sort will occur."
After issuing their August 16 press releases, CA and On-Line continued to negotiate the terms and conditions of their agreement. They agreed that the transaction would take the form of a tender offer and a follow-up merger. On August 20, CA's Board of Directors approved a Merger Agreement, a Stock Purchase and Non-Competition Agreement (the "Berdy Agreement"), and several related agreements. The CA Board also authorized the requisite Securities and Exchange Commission ("SEC") filings and the dissemination to On-Line shareholders of an Offer to Purchase. On August 21, On-Line's Board unanimously approved the Merger Agreement, recommended the transaction to On-Line shareholders, and authorized the necessary filings with the SEC.
Pursuant to the Berdy Agreement, which was executed by CA, LWB, and Berdy, LWB purchased Berdy's On-Line stock for $15.75 per share, the same price that CA offered to all other On-Line shareholders. The Berdy Agreement also provided that he could not tender his shares in the tender offer, and that, if another bidder made a better offer, LWB retained an option to purchase Berdy's shares for $15.75 per share. The Berdy Agreement contained a provision prohibiting him from "engag[ing] in any business activities which are competitive with the computer software business activities of CA, [LWB, or On-Line]" for a period of five years, in consideration for which CA agreed to pay Berdy $5 million. Berdy, who in addition to being On-Line's Chairman had been a medical student since 1989, was not restricted from "engag[ing] in the design, development, marketing, licensing or sale of computer software designed for use in the medical industry, in the biological sciences or as a teaching aid for educational purposes." Gerber argues that, because Berdy was disengaging from the business to pursue his medical studies, CA was not genuinely concerned about the possibility of his competing and that the $5 million payment to him — or part of it — was actually additional compensation to ensure that CA acquired Berdy's large block of On-Line shares. CA, on the other hand, insists that it genuinely feared potential competition from Berdy and that the entire $5 million was consideration for Berdy's agreement not to compete.
On August 21, 1991, CA and On-Line executed the Merger Agreement, obligating CA to commence the tender offer "as promptly as practicable," and CA, LWB, and Berdy executed the Berdy Agreement. On August 22, CA and On-Line issued a joint press release announcing that the two companies had entered into an agreement and that CA "will make a tender offer today" and conduct a follow-up merger. The same day, August 22, CA filed with the SEC and disseminated to On-Line shareholders the Offer to Purchase, offering to purchase all shares of On-Line stock not owned by Berdy for $15.75 per share. The Offer to Purchase stated that it would remain open until September 20, 1991. A majority of On-Line shareholders tendered their shares to CA, and CA and LWB completed the acquisition of On-Line with the follow-up merger.
Gerber is an On-Line shareholder who tendered his stock in response to CA's tender offer. He brought this action individually and on behalf of a class of On-Line shareholders (excluding the defendants, their directors, certain On-Line employees, and their immediate families) who tendered On-Line stock to CA in the tender offer. The complaint alleged that several defendants (including CA, Wang, Kumar, and Berdy) had violated Section 14(d)(7) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(d)(7), and SEC Rule 14d-10, 17 C.F.R. § 240.14d-10 (collectively, the "Williams Act claims"), as well as various other provisions of the federal securities laws, by offering and paying more consideration to Berdy for his On-Line shares than it offered or paid to other On-Line shareholders.1
The gravamen of Gerber's Williams Act claims is that the $5 million that CA paid to Berdy, while nominally consideration for Berdy's five-year non-compete agreement, was actually additional consideration for Berdy's On-Line stock. The defendants moved to dismiss the Williams Act claims, arguing that the tender offer did not begin until August 22, 1991 and that the Berdy Agreement, which was executed on August 21, preceded the tender offer. The District Court denied the motion, concluding as a matter of law that the tender offer commenced on August 16, 1991, when CA issued its first press release. Gerber v. Computer Assocs. Int'l, Inc., 812 F.Supp. 361, 366 (E.D.N.Y.1993). The court subsequently certified a class under Fed....
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