In Re Transocean Tender Offer Securities Lit.

• Decision Date: 24 January 1977
• Docket Number: No. MDL-223 and 74 C 2985.,MDL-223 and 74 C 2985.
• Citation: 427 F. Supp. 1211
• Parties: In re TRANSOCEAN TENDER OFFER SECURITIES LITIGATION. Lillian H. McNALLY et al., Plaintiffs, v. ESMARK, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

427 F. Supp. 1211

In re TRANSOCEAN TENDER OFFER SECURITIES LITIGATION Lillian H. McNALLY et al., Plaintiffs, v. ESMARK, INC., et al., Defendants.

Nos. MDL-223 and 74 C 2985.

United States District Court, N. D. Illinois, E. D.

January 24, 1977.

COPYRIGHT MATERIAL OMITTED

Arthur T. Susman, Richard H. Prins, Arnold M. Flamm, Robert D. Allison, Prins, Flamm & Susman, Ltd., Alex Elson, Willard J. Lassers, Aaron S. Wolff, Elson, Lassers & Wolff, Chicago, Ill., for plaintiffs.

Robert L. Stern, Leo Herzel, Susan Getzendanner, Robert K. Hagan, Mayer, Brown & Platt, Chicago, Ill., for Esmark, Inc., Vickers Energy Corp., the directors of Esmark, Inc. and certain directors of TransOcean Oil, Inc.

William Key Wilde, Bracewell & Patterson, Houston, Tex., for defendants Stormy F. Smith, Edward J. Hudson and William A. Alexander.

John B. Holstead, Vinson, Elkins, Searls, Connally & Smith, Houston, Tex., for defendant TransOcean Oil, Inc.

MEMORANDUM AND ORDER

ROBSON, Senior District Judge.

This cause is before the court on the plaintiffs' motion for summary judgment as to liability on Count I of their complaint and on defendants' motion for summary judgment on Counts I and III of the plaintiffs' complaint. For the reasons hereinafter stated, the plaintiffs' motion for summary judgment as to liability on Count I is denied in part, and stricken in part with leave to renew at a later date, and the defendants' motion for summary judgment on Counts I and III is granted in part, denied in part, and stricken in part with leave to renew at a later date.¹

Background

This litigation arises out of a tender offer made by Vickers Energy Corporation ("Vickers"), a wholly-owned subsidiary of Esmark, Inc. ("Esmark"), for the minority shares of TransOcean Oil, Inc. ("Trans-Ocean"). At the time of the tender offer, Vickers was the majority shareholder of TransOcean. The gravamen of the complaint is that (1) the tender offer price was below fair value; (2) defendants coerced offers through varied illegal conduct; and (3) defendants entered into self-dealing agreements concerning the sale of TransOcean's oil and gas on terms less favorable to TransOcean than could be achieved by arm's length negotiations.

Count I of the complaint is a class action² brought on behalf of the minority shareholders of TransOcean at the time of the tender offer against Esmark, Vickers, TransOcean, the directors of Esmark, except Richard D. Arney, and the directors of TransOcean, at the time of the tender offer. It alleges violations of Sections 14(d)(4) and 14(e) of the Securities Exchange Act of 1934, as amended 15 U.S.C. § 78n(d)(4) and § 78n(e). Count II is a derivative claim brought on behalf of TransOcean. It charges that certain transactions, unrelated to the tender offer, between TransOcean and affiliates of Esmark were unfair to TransOcean.³ Count III is brought derivatively on behalf of TransOcean and also on behalf of all minority shareholders of TransOcean situated similarly to plaintiffs. It alleges that the defendants breached common law fiduciary duties owed to TransOcean and its minority shareholders in connection with the tender offer. As to Counts I and II, the jurisdiction of this court is invoked under Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and Section 1337 of the Judicial Code, 28 U.S.C. § 1337. As to Count III, plaintiffs assert pendent jurisdiction. The complaint seeks declaratory, injunctive, and monetary relief.

On September 24, 1975, based upon alleged misstatements and omissions of material fact in the tender offer circular, plaintiffs filed a motion for summary judgment as to liability on Count I. Between September 1975 and February 1976, the parties extensively briefed the motion. Before and during the briefing there was, pending in Delaware state court, class litigation arising out of the tender offer involving similar plaintiffs and similar claims.⁴ On January 22, 1976, the Delaware Chancery Court handed down an opinion deciding the case in favor of defendants. Lynch v. Vickers Energy Corporation, 351 A.2d 570 (Del.Ch. 1976) ("Lynch"). Judgment was entered on February 26, 1976, and on March 4, 1976, defendants filed their motion for summary judgment in this case. That motion has likewise been extensively briefed. As the defendants contend that under the principles of res judicata, Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), and collateral estoppel Lynch precludes relitigation of all the common law and § 14(e) claims and issues in this action, the court must decide a part of defendants' motion for summary judgment before reaching plaintiffs' motion.

Count III

As noted above, the plaintiffs allege in Count III that the defendants breached common law fiduciary duties owed to both TransOcean and the minority shareholders in connection with the tender offer. The plaintiffs in this case and in Lynch are substantially identical. Both cases have been brought on behalf of a class representing the minority shareholders in TransOcean. However, there are some 187 TransOcean shareholders before this court who opted out of Lynch.

The defendants' argument with reference to Count III is two-fold. They contend that the plaintiffs who did not opt out are barred by Lynch and the principles of res judicata, as both cases involve defendants' alleged breach of common law fiduciary duties in connection with the tender offer. In addition, defendants make the novel argument that all class members, including those who opted out of the class in Lynch, are barred in this cause by Lynch and Erie Railroad Co. v. Tompkins, supra, as a matter of Delaware substantive law, not res judicata.

Plaintiffs agree that their state law claims raised in Count III would be barred by Lynch and res judicata in the usual situation. They argue that preclusion is inappropriate here because the Lynch judgment is not final and because the Lynch class notice was constitutionally defective. In addition, plaintiffs argue that preclusion will deny their right to trial by jury. Finally, they contend that the opt outs cannot be barred from asserting their state law claims here as they were not parties in Lynch. For the reasons hereinafter stated, the court concludes that the principles of res judicata bar the state law claims raised in Count III by those members of the class of plaintiffs who did not opt out of Lynch. The court further concludes that Lynch does not bar the state law claims of the opt outs.

The principles of res judicata, a doctrine judicial in origin, are well settled. The doctrine was developed to avoid repetitious suits involving the same cause of action, to foster judicial economy, and to establish certainty in legal relations. Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948). The general rule of res judicata is that when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are bound as to matters which were litigated or which might have been litigated. Id. See also Cromwell v. County of Sac, 94 U.S. 351, 352-53, 24 L.Ed. 195 (1877). Delaware law is in accord with these principles. Rumsey Electric Co. v. University of Delaware, 334 A.2d 226 (Del. Super. 1975) aff'd 358 A.2d 712 (Del.Supr. 1976); Epstein v. Chatham Park, Inc., 2 Storey 56, 52 Del. 56, 153 A.2d 180 (Del.Super.1959).

The parties do not dispute that the Delaware court had jurisdiction to entertain the state claims in Lynch. They also do not dispute that the same cause of action — common law breach of fiduciary duty — is involved in this and the Lynch litigation. Moreover, the parties in Lynch and this case are substantially the same.⁵ The parties, however, do disagree on whether the decision in Lynch is a final judgment. As indicated, the plaintiffs take the position that, having been appealed,⁶ the decision cannot be regarded as final. Defendants contend that the pendency of an appeal is irrelevant.

It is agreed that this court must look to the law of Delaware to determine whether the Lynch judgment is final. Ray v. Hasley, 214 F.2d 366 (5th Cir. 1954). See also Oklahoma Packing Co. v. Oklahoma Gas & Electric Co., 309 U.S. 4, 60 S.Ct. 215, 84 L.Ed. 537 (1940). It is further agreed that there is no controlling Delaware law on point. In the absence of such authority, this court should "choose the rule that it believes the state court, from all that is known about its methods of reaching decisions, is likely in the future to adopt." Wright, Law of Federal Courts 271 (1976).

Delaware courts have often followed the Restatement of the Law of Judgments (1942) ("Restatement"). See e. g., Hughes v. Trans World Airlines, Inc., 336 A.2d 572 (Del.Supr.), cert. denied sub nom. Summa Corp. et al. v. Trans World Airlines, Inc., 423 U.S. 841, 96 S.Ct. 72, 46 L.Ed.2d 61 (1975); Epstein v. Chatham Park, Inc., supra; Petrucci v. Landon, 9 Terry 491, 48 Del. 491, 107 A.2d 236 (Del.Super.1954). Both the Restatement and the Restatement of the Law Second, Judgments (Tent. Draft No. 1, 1973) ("Restatement Second"), in effect follow the general rule that the pendency of an appeal does not suspend the operation of a final judgment for purposes of res judicata.⁷ The court believes that Delaware courts would likewise follow this rule. Moreover, this court may also give weight to "`the majority rule.'" Wright, supra, at 270-71. The federal rule and the rule followed by a majority of the states is to the same effect as the Restatement. 1B Moore's Federal Practice, ¶ 0.4163. Accordingly, as the Supreme Court of Delaware is not conducting a trial de novo, Levitt v. Bouvier, 287 A.2d 671 (Del.Supr. 1972), and as plaintiffs have not even suggested that the Lynch decision has been vacated,⁸ the Lynch judgment is final.

Plaintiffs contend that the Lynch notice was constitutionally defective. They assert that the notice to...