In re Gulf Oil/Cities Service Tender Offer Lit.

• Decision Date: 30 October 1989
• Docket Number: Master File No. 82 Civ. 5253 (MBM). 87 Civ. 8982 (MBM).
• Citation: 725 F. Supp. 712
• Parties: In re GULF OIL/CITIES SERVICE TENDER OFFER LITIGATION. W. ALTON JONES FOUNDATION, Wenonah Development Company, Foster and Foster, and Foster Bam and Alma Foster Davis, Both Individually and as Trustees for Four Testamentary Trusts Under the Wills of Fannie Estelle Foster, Millicent F. Foster, Sylvester M. Foster, and Warren W. Foster, Plaintiffs, v. CHEVRON U.S.A. INC., f/k/a Gulf Oil Corporation, Defendant.
• Court: U.S. District Court — Southern District of New York

725 F. Supp. 712

In re GULF OIL/CITIES SERVICE TENDER OFFER LITIGATION W. ALTON JONES FOUNDATION, Wenonah Development Company, Foster and Foster, and Foster Bam and Alma Foster Davis, Both Individually and as Trustees for Four Testamentary Trusts Under the Wills of Fannie Estelle Foster, Millicent F. Foster, Sylvester M. Foster, and Warren W. Foster, Plaintiffs, v. CHEVRON U.S.A. INC., f/k/a Gulf Oil Corporation, Defendant.

Master File No. 82 Civ. 5253 (MBM). 87 Civ. 8982 (MBM).

United States District Court, S.D. New York.

October 30, 1989.

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Stephen D. Oestreich, Wolf, Popper, Ross, Wolf & Jones, New York City, Berger & Montague, Philadelphia, Pa., Bizar D'Alessandro Shustak & Martin, Goodkind, Labaton & Rudoff, Kaufman, Malchman, Kaufman & Kirby, Lowey, Dannenberg & Knapp, P.C., New York City, for class action plaintiffs.

Thomas H. Moreland, Jeffrey S. Trachtman, Ross N. Herman, Paul F. Occhiogrosso, Kramer, Levin, Nessen, Kamin & Frankel, New York City, for Alton Jones plaintiffs.

John W. Castles III, Banks Brown, Frederic W. Parnon, John D. Henderson, Robert A. Becker, Lord Day & Lord, Barrett Smith, New York City, John S. Athens, Conner & Winters, Tulsa, Okl., John E. Bailey, Chevron U.S.A., Inc., Houston, Tex., William P. Casella, Narrowsburg, N.Y., for defendants.

SECOND AMENDED OPINION AND ORDER

MUKASEY, District Judge.

This litigation arises out of an abortive June 1982 tender offer by Gulf Oil Company ("Gulf") for the stock of Cities Service Company ("Cities"). The defendants are Gulf, a Pennsylvania corporation engaged in oil and gas exploration, production and marketing, GOC Acquisition, a wholly-owned Delaware subsidiary of Gulf created to implement the tender offer for Cities, and various individuals, all directors and/or officers of Gulf at the time of the tender offer. In 1984, Chevron Corporation, parent of defendant Chevron U.S.A. Inc., acquired Gulf Corporation, parent of Gulf Oil Corporation. At the time of the tender offer, Cities was a Delaware corporation with its headquarters in Oklahoma. Cities ultimately became a wholly-owned subsidiary of Occidental Petroleum Corp. on December 3, 1982.

In an opinion dated September 23, 1986, as amended in an order providing for notice to the class, Judge Kram certified a class consisting of

All persons or entities who during the period June 17, 1982 to and including August 7, 1982: (1) tendered shares of Cities Service Company ("Cities Service") common stock to ... Gulf Oil Corporation ... pursuant to a tender offer made on June 22, 1982; or (2) purchased Cities Service common stock; or (3) purchased call options on Cities Service stock.

The class complaint includes (1) those who tendered their Cities shares to Gulf, (2) those who purchased Cities' shares from June 17, 1982, when Gulf announced its proposed acquisition of Cities, to August 7, 1982 when Gulf terminated the tender offer and (3) those who purchased call options on Cities' stock from June 17, 1982 to August 7, 1982. For ease of reference, I will refer to this complaint as the Class complaint and to these plaintiffs as the Class plaintiffs. In a complaint filed December 16, 1987, a group of class plaintiffs opted out of the class and filed their own complaint. The opt-out plaintiffs owned beneficially almost 3,800,000 or about 5% of the total common shares of Cities outstanding as of the date of the tender offer. They tendered their shares in response to Gulf's June 22, 1982 offer for over 50% of Cities shares, the first step in its proposed acquisition of Cities. These plaintiffs are W. Alton Jones Foundation, a not-for-profit New York organization, Wenonah Development Company, a Delaware corporation, and Foster & Foster, a Connecticut partnership whose individual partners include plaintiffs Foster Bam, a former Cities director, and his mother, Alma Foster Davis. Bam and Davis are also plaintiffs in their capacity as co-trustees of testamentary trusts under the wills of four deceased member of the Foster family. For ease of reference, I will refer to these plaintiffs as the Jones plaintiffs.

Although the plaintiff class is no longer unified, the two complaints are similar and have been consolidated for all purposes. The Class plaintiffs allege breach of contract and violations of ? 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. ? 78n(e), ? 10(b), 15 U.S.C. ? 78j(b) and Rule 10b-5 thereunder. The Jones plaintiffs allege breach of contract and common law fraud as well as violation of ? 14(e). In early 1988, defendants moved to dismiss the complaints, for failure to plead fraud with particularity as required by Fed.R. Civ.P. 9(b) and for failure to state a claim for contract breach. On September 14, 1988, defendants also moved for summary judgment. At a September 29, 1988 conference I permitted full discovery, while allowing defendants to pursue their motions as discovery continued. Both sides have modified their arguments at various points in the briefing. Therefore, to the extent this opinion presents the parties' positions, it deals only with their final positions, not with the detritus of every argument presented and then abandoned in the 900 or so pages of briefs the parties have inflicted on the court.

The motions are granted in part and denied in part, as set forth below.

I.

A bidding contest for control of Cities was begun on June 1, 1982 when, in response to a proposal for a friendly takeover of Cities for $50 per share made by Mesa Petroleum Corporation ("Mesa"), which had been accumulating Cities stock for two years, Cities commenced its own tender offer for Mesa stock at $17 per share. Mesa countered with a hostile tender offer for 15% of Cities at $45 per share. Fearing that a takeover by Mesa was imminent, Cities sought a "white knight" armed, inter alia, with a higher bid than Mesa's. The white knight was Gulf. Early on the morning of June 17, 1982, the chief executive officers of Gulf and Cities agreed in a telephone conversation that, subject to Board approval, Gulf would tender for 51% of Cities at $63 a share. (Lee Dep. 228) Gulf's offer was to be followed by a merger of the two companies, at which point Cities' then unpurchased 49% stock interest in Gulf would be converted into Gulf debentures at $63 per Cities' share. (Merger Agreement ? 2.1) Later that morning, Gulf's Board unanimously authorized the acquisition. (DX 8)¹

The plan unravelled over the summer, as the Federal Trade Commission ("FTC") objected to the deal, and then sued successfully to block it. Faced with an FTC demand that Gulf forfeit Cities' Lake Charles, Louisiana refinery, Gulf invoked a "litigation out" in the Offer to Purchase plaintiffs' shares which allowed it to terminate the deal if "action taken ... by any United States federal ... governmental authority ... in the sole judgment of the Purchaser ... would require the divestiture ... of a material portion of the business ... of the Cities Company." (Offer to Purchase at ? 15(d)) Plaintiffs argue that Gulf soured on the deal earlier in July, and then negotiated in bad faith with the FTC precisely to force the FTC to seek to enjoin the transaction so that Gulf could take advantage of the "litigation out" in the Offer to Purchase. Then, plaintiffs contend, after the FTC had sued and demanded divestiture of the Lake Charles refinery, Gulf in bad faith refused to agree to the divestiture, even though the Lake Charles refinery was not important to it and thus not "material" within the meaning of ? 15(d) of the Offer to Purchase.

A. The Lake Charles Refinery

According to plaintiffs, Gulf's purpose in acquiring Cities was to obtain Cities' domestic oil and gas reserves, so-called "upstream" assets. Replacing Gulf's depleting domestic reserves had been a management priority for some time. (Mahaffey Dep. 13-14; Murdy Dep. 14-15; PX 43; PX 7) Furthermore, according to plaintiffs, acquisition of Cities' downstream assets (refining, marketing and transportation), including the Lake Charles refinery, was viewed by Gulf as a negative aspect of the merger: as plaintiffs allege Gulf's chairman James E. Lee stated, it was "one of the cons." (Lee Dep. 271) Cities' lawyer Martin Lipton recalls Gulf representatives saying that they ascribed "no value" to the Lake Charles refinery. (Lipton Aff. ? 6) According to plaintiffs, Gulf had severe losses in its own refining and marketing operations and was not pursuing Cities' downstream assets. (Wilder Dep. 18-19, 230-31) In fact, Gulf had decided that "we really needed to reduce refining capacity." (Lee Dep. 50-51); to that end, Gulf in 1981 considered selling or shutting down several of its refineries. (Lee Dep. 48-55; Mahaffey Dep. 234-35)

Defendants do not deny that Gulf wanted Cities' oil and gas reserves. However, defendants claim that Cities' only refinery?€”the Lake Charles refinery ?€” was of interest also because it could process lowcost heavy sour crude, the least expensive crude in the market, into 100 percent unleaded gasoline, a capability in which Gulf found itself wanting. (Lee Dep. 12-17)

Gulf's outside counsel Daniel I. Booker of Reed Smith Shaw & McClay avers that Gulf General Counsel Jesse P. Luton told him on June 18 that Lake Charles could not be divested under any circumstances. (Booker Dep. 91-92) Defendants assert that every Gulf director has supported Lee's view that Lake Charles was crucial. (See Gordon Dep. 24; Singer Dep. 89; Colodny Dep. 94; Goodman Dep. 99; McAfee Dep. 94-95; Dickey Dep. 122-23; Higgins Dep. 65; Scully Dep. 106) At the time, Cities Chairman Charles Waidelich stated that the Lake Charles refinery would fit "very, very nicely to Gulf's needs ... our Cities' refinery is going to be very integrated into theirs Gulf's." (PX 23 at 2-3, Riley Wilson interview of Charles Waidelich, June 22, 1982) Furthermore, Cities, in its response to the FTC's...