In re Phillips Petroleum Securities Litigation

• Decision Date: 13 October 1988
• Docket Number: Civ. A. No. Misc. 85-75 MMS.
• Citation: 697 F. Supp. 1344
• Parties: In re PHILLIPS PETROLEUM SECURITIES LITIGATION.
• Court: U.S. District Court — District of Delaware

697 F. Supp. 1344

In re PHILLIPS PETROLEUM SECURITIES LITIGATION.

Civ. A. No. Misc. 85-75 MMS.

United States District Court, D. Delaware.

October 13, 1988.

COPYRIGHT MATERIAL OMITTED

Joseph A. Rosenthal, of Morris, Rosenthal, Monhait & Gross, Wilmington, Del., William Prickett, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., of counsel; Stephen D. Oestrich, of Wolf Popper Ross Wolf & Jones, New York City, Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa., Robert W. Wallner, of Milberg Weiss Bershad Specthrie & Lerach, New York City, Gayle S. Sanders, of Bizar D'Allesandro Shustak & Martin, New York City, for plaintiffs.

Charles F. Richards, Jr., William J. Wade, and Thomas A. Beck, of Richards, Layton & Finger, Wilmington, Del., for Mesa defendants.

William S. Gee, of Saul, Ewing, Remick & Saul, Wilmington, Del., of counsel, Patterson, Belknap, Webb & Tyler, New York City, for John S. Lawrence.

MURRAY M. SCHWARTZ, Chief Judge.

OPINION

This opinion resolves summary judgment motions arising out of announcement of a proposed hostile tender offer for Phillips Petroleum ("Phillips") led by the Mesa Partners (the "Partnership"). The issues involve alleged violations of the federal securities laws, questions of state contract law, and alleged violations of the Racketeer and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982 & Supp. III 1985).

The cross motions for summary judgment raise three primary issues: 1) whether the Mesa defendants (hereinafter defined) violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) (hereinafter Section 10(b)) and Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5 (hereinafter Rule 10b-5) in its attempted takeover of Phillips; 2) whether the Mesa defendants are liable to plaintiffs under the doctrine of promissory estoppel or for breach of contract; or whether the Mesa defendants are liable to plaintiffs under a quasi contract theory. In addition, the Mesa defendants have moved for summary judgment on Count VII which charges them with having violated provisions of RICO.

Summary judgment will be granted in favor of defendants on all the issues raised in the summary judgment motions. Thus, the remaining counts in this action — Counts I, II, III and VII — will be dismissed.

FACTUAL BACKGROUND

Two stockholder derivative and class action complaints were filed with this Court and were subsequently consolidated under the caption Hudson v. Phillips Petroleum Co., C.A. Nos. 85-14/85-45 (Dkt. 12, C.A. 85-14).¹ The same consolidation order provided that all further related actions transferred to this district in this matter would be consolidated automatically with the above-mentioned action. Three stockholder class actions were subsequently transferred to this district and consolidated.² The individual actions named several defendants, including Phillips and Phillips' Board of Directors ("Phillips defendants"), the Partnership, and those individuals that comprise the Partnership.³ The individual actions and another class action not involving the Mesa defendants⁴ were consolidated into the action now present before this Court.

In response to a motion for approval of a settlement between plaintiffs and the Phillips defendants, this Court approved the settlement over the objections of the plaintiff from the Lawrence action. On June 3, 1986 the Court dismissed with prejudice Counts IV, V, VI, VIII, IX, X, and XI of the Complaint, and parts of Count VII that required proof of wrongful conduct or participation by the Phillips defendants.

A consent order issued by this Court, inter alia, consolidated all the above-mentioned individual actions for all purposes, dismissed all claims with prejudice except Counts I, II, III and VII, certified a class of purchasers of Phillips stock from December 5, 1984 through December 21, 1984, and dismissed with prejudice all plaintiffs not a part of the certified class. Both parties cross-moved for summary judgment on the count involving alleged violations of the federal securities laws (Count I) and the counts involving state contract law issues (Counts II, III). The Mesa defendants moved for summary judgment on the remaining count, the alleged RICO violation (Count VII).

The Partnerships began to purchase Phillips common stock on October 22, 1984 ostensibly for investment purposes. The purchases continued through early December. (Plaintiff's Ex. 519, Schedule 4). On December 4, 1984, the Partnership formally announced in a press release its decision to commence a tender offer for 15 million shares of Phillips common stock at $60 per share conditioned upon receiving necessary financing. The press release stated the Partnership had acquired approximately 5.7% of Phillips outstanding shares. Additionally, the Partnership stated explicitly in its press release that it would "not sell any Phillips shares owned by it back to Phillips except on an equal basis with all other stockholders." (Plaintiff's Ex. 510). The Partnership's filing of its Schedule 13-D on December 5, 1984 noted that the proposed tender offer was ultimately designed to obtain control of Phillips. The Schedule 13-D also expressly stated the Partnership did not intend to sell its shares to Phillips except on an equal basis with all shareholders. Pickens affirmed the contents of the Schedule 13-D on a nationally televised newscast by stating the Partnership would only sell its Phillips shares to Phillips if all shareholders received the same offer. (Pickens Deposition at 13-14). The Partnership never amended its Schedule 13-D to indicate it was no longer seeking to ensure all shareholders were treated on an equal basis.

Phillips initially countered by following two separate strategies, namely, settlement discussions with the Partnership and pursuit of a legal defense in the Delaware Court of Chancery. Initial settlement efforts were through a neutral intermediary Joseph Flom, Esquire. On December 7, 1984, Phillips offered, through Flom, to buy out the Partnership's interest in Phillips. Pickens, speaking for the Partnership, refused because the offer did not treat all shareholders equally. (Pickens Deposition at 16 and Batchelder Deposition at 41). Subsequent offers by Phillips and counteroffers by the Partnership were also refused. The Phillips' offers to the Partnership were rejected because all shareholders were not treated equally. (Flom 10/86 Deposition at 22, 25; Batchelder Deposition at 42-43; Reed 1/87 Deposition at 146; Stilwell 10/85 Deposition at 48-49).

The defense asserted in Chancery Court by Phillips was that the Partnership was precluded from acquiring Phillips because of a standstill agreement entered into between Mesa and General American Oil Company of Texas ("GAO") on January 6, 1983. This defense was rejected by opinion and order issued by the Delaware Court of Chancery on Thursday, December 20.

Upon issuance of the December 20 Court of Chancery opinion, officials at Phillips met with advisers and decided to negotiate in earnest with the Partnership. On December 21, 1984, Flom contacted Pickens informing him of Phillips' willingness to negotiate. (Flom 10/86 Deposition at 34-35, 37-39).

A meeting to present Phillips' proposal took place on Friday, December 21 at 5:30 p.m. EDT.⁵ (Pickens Deposition at 30). At the meeting Joseph Fogg of Morgan Stanley presented the Phillips proposal. Phillips proposed to exchange 29% of its common stock for debt securities valued at $60 per share (pro rata among all shareholders), sell 27.5 million newly issued shares to a new employee stock ownership plan at a market price assumed to be $50 per share and purchase 27.5 million shares of its stock in open market transactions. (Plaintiff's Ex. 511 and 512; Batchelder Deposition at 56-57 and 79; Orme Deposition at 92; Fogg 11/86 Deposition at 34-35, Reichstetter Deposition at 71). The proposal also included reductions in expenses and capital expenditures as well as the sale of approximately $2 billion of lower-earning assets (Plaintiff's Ex. 511). Morgan Stanley valued the proposal at $52.88 per share.

At the meeting the Partnership did not negotiate details of the proposal, confining itself to asking questions and proposing a leveraged buy out of Phillips. The Phillips representatives would only discuss the proposed recapitalization. (Batchelder Deposition at 59, 63-66; Reed 1/87 Deposition at 149; Fogg 11/86 Deposition at 36). In the meeting, Martin Lipton, attorney for Phillips, proposed a repurchase of shares held by the Partnership. (Stephenson 11/86 Deposition at 36; Batchelder Deposition at 55-56 and 65). The Partnership refused the offer because all shareholders would not be treated equally. The meeting concluded and a new meeting was not held until Saturday, December 22.

As a consequence of the proposed recapitalization presented by Phillips and its likelihood of success as a defense to the proposed hostile tender offer which had never been commenced, the Partnership determined it should negotiate with Phillips. After the meeting had concluded, and late on Friday night, the Partnership told Phillips it would negotiate. Also, a representative of the Partnership presented to Phillips its demand that the percentage of stock to be exchanged should be 50% and the exchange should include cash along with debt. (Batchelder Deposition at 80-81, 86; Reed 1/87 Deposition at 159-60; Reichstetter Deposition at 73; Orme Deposition at 94-95).

On Saturday, December 22, Phillips first proposed an increase of the exchange offer from 29% to 33 1/3 %. (Plaintiff's Ex. 51A; Batchelder Deposition at 91). The Partnership perceived a problem with the proposal because all shareholders were not treated equally. That is, the Partnership believed it would be better off than other shareholders because it alone could take advantage of favorable long term capital gains treatment as a result of Phillips proposal that the Partnership receive in the exchange...