Lerro v. Quaker Oats Co.

• Decision Date: 17 May 1996
• Docket Number: Nos. 95-3495,95-3496,s. 95-3495
• Citation: 84 F.3d 239
• Parties: , Fed. Sec. L. Rep. P 99,239, 34 Fed.R.Serv.3d 974 Joseph LERRO and John Duty, Plaintiffs-Appellants, v. The QUAKER OATS COMPANY, Snapple Beverage Corporation, and Thomas H. Lee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 239

84 F.3d 239

64 USLW 2764, Fed. Sec. L. Rep. P 99,239,

34 Fed.R.Serv.3d 974

Joseph LERRO and John Duty, Plaintiffs-Appellants, v. The QUAKER OATS COMPANY, Snapple Beverage Corporation, and Thomas H. Lee, Defendants-Appellees.

Nos. 95-3495, 95-3496.

United States Court of Appeals Seventh Circuit.

Argued March 29, 1996.

Decided May 17, 1996.

Mark C. Gardy, Arthur N. Abbey (argued), Abbey & Ellis, New York City, Richard S Schiffrin, Michael D. Craig, Schiffrin & Craig, Buffalo Grove, IL, for John Duty, Joseph Lerro.

Jerold S. Solovy, Douglas A. Graham, Jenner & Block, Chicago, IL, Dennis J. Block (argued), Paul J. Collins, Weil, Gotshal & Manges, New York City, for Quaker Oats Co., Loop Acquisition Corp.

Before EASTERBROOK, ROVNER, and DIANE P. WOOD, Circuit Judges.

EASTERBROOK, Circuit Judge.

The Quaker Oats Company acquired Snapple Beverage Corporation for $1.7 billion in 1994. A merger agreement was signed on November 1, 1994, and a tender offer was announced to the public on November 4. Quaker Oats offered $14 in cash for each share of Snapple stock; the merger agreement contemplated the same payment per share. Investors who thought $14 too low could refuse to tender, vote against the merger, and demand appraisal under § 262 of the Delaware Corporation Law. Nonetheless, the success of the transaction was assured by the support of Thomas H. Lee, who controlled at least 35 percent of Snapple's shares (this is plaintiffs' figure; the tender offer documents say that he controlled 47 percent). Lee not only promised to tender his shares but also gave Quaker Oats an option to purchase them even if the tender offer failed. When the offer closed, 96.5 percent of Snapple's stock had been tendered. Quaker Oats immediately effected a short-form merger under Delaware law between Snapple and LOOP Acquisition Corporation, which had been created for this purpose. Later LOOP changed its name to Snapple Beverage Corporation, which is today a wholly-owned subsidiary of Quaker Oats.

I

One part of the offering document intrigued investors Joseph Lerro and John Duty:

At the insistence of Parent [Quaker Oats] and to induce Parent to enter into the Merger Agreement, a number of agreements relating to employment, noncompetition, consulting and other matters were entered into and are described in the Schedule 14D-9. Additionally, the Company [Snapple] and Stokley-Van Camp, Inc., a subsidiary of Parent entered into a new Distribution Agreement (the "Distributor Agreement") with Select Beverages, Inc. ("Select") for the distribution of their respective products. A majority of the common stock of Select is held by affiliates of THL [Thomas H. Lee Company] and 20 percent of such common stock is held by the Company. The Distributor Agreement grants to Select the exclusive right to distribute in certain areas of Indiana, Illinois (including Chicago) and Wisconsin, certain sizes of Snapple and Gatorade in certain channels. The Agreement commences upon consummation of the Offer and is perpetual, and is subject to termination if Select fails to satisfy certain tests for increasing distribution penetration and available visicoolers. The effect of the Distribution Agreement will be to cause Select to lose some Snapple sales and to gain some Gatorade sales.

Lerro and Duty filed separate actions under § 14(d) of the Securities Exchange Act of 1934, as added by the Williams Act of 1968, 15 U.S.C. § 78n(d), contending that the Distributor Agreement provided Lee with extra compensation for his shares, in violation of § 14(d)(7) and the SEC's Rule 14d-10(a)(2), 17 C.F.R. § 240.14d-10(a)(2). Section 14(d)(7) provides that when a bidder "varies the terms of a tender offer ... before the expiration thereof by increasing the consideration offered to holders of such securities," it must apply the increase to all shares acquired under the offer. The Distributor Agreement, which was in place from the start, is hard to characterize as an "increase" in compensation. Rule 14d-10(a)(2), adopted in 1986, is broader. It forbids any tender offer that does not satisfy this condition:

The consideration paid to any security holder pursuant to the tender offer is the highest consideration paid to any other security holder during such tender offer.

According to Lerro and Duty, profits anticipated under the Distributor Agreement are consideration Lee received in his role as a security holder, which per Rule 14d-10(a)(2) must be paid to everyone else who tendered into the offer.

Quaker Oats believes that the Distributor Agreement is a substitute for Select's existing contractual rights (it had perpetual distribution rights for some Snapple products) rather than compensation for anyone's shares. Moreover, Quaker Oats submits, the valuation of such a contract as of November 1994 would be next to impossible, because Select's profits depended on how fast it could increase beverage sales--indeed, on whether it could avoid termination under the "tests for increasing distribution penetration and available visicoolers". Lee was not required by the Internal Revenue Code to treat the present value of the flow of future profits as a capital gain realized in November 1994 from the sale of stock, and one may doubt whether it would be sound to try to capitalize those profits for other purposes. There is also some question whether Rule 14d-10(a)(2) creates a private right of action for damages. Compare Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977), with Epstein v. MCA, Inc., 50 F.3d 644, 649-52 (9th Cir.1995), reversed on other grounds under the name Matsushita Electric Industrial Co. v. Epstein, --- U.S. ----, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996).

Instead of deciding the case on any of these grounds-some of which might have required factual development-the district judge assumed that the Distributor Agreement compensated Lee for his shares in Snapple but dismissed the suit anyway under Fed.R.Civ.P. 12(b)(6). Plaintiffs could not state a claim, the judge concluded, because the Distributor Agreement had been signed before the tender offer began and therefore fell outside Rule 14d-10(a)(2), which requires only that the bidder pay every tendering investor the "highest consideration paid to any other security holder during such tender offer" (emphasis added). If Quaker Oats had purchased all of Lee's shares for $20 apiece on November 1, the district judge believed, it still could have offered $14 to the remaining investors. Treating the Distributor Agreement as a premium for each of Lee's shares is the same as a higher cash price in advance, the court thought. A holding that the offer did not "commence" until after November 1 polished off the case. (Delaware law permits unequal division of the gains from transactions in corporate control, and plaintiffs therefore did not present any state-law ground for laying claim to a portion of the value of the Distributor Agreement. See Weinberger v. UOP, Inc., 457 A.2d 701 (Del.1983); Fins v. Pearlman, 424 A.2d 305 (Del.1980).)

II

Before we tackle the securities-law issues, we address the district court's alternative ground of decision: that plaintiffs forfeited all of their arguments by failing to object within 10 days after a magistrate judge recommended dismissal of the complaint. See Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985); Video Views, Inc. v. Studio 21, Ltd., 797 F.2d 538 (7th Cir.1986). The magistrate judge filed his report and recommendation on August 2, 1995, and served it on the parties the same day. Plaintiffs filed their objections on August 18. The district judge held that plaintiffs had only until August 15. The dispositive question is whether the additional time when service is by mail (as the magistrate judge's report was served), see Fed.R.Civ.P. 6(d), is added before or after the application of Fed.R.Civ.P. 6(a). Perhaps we could duck this question, because, in addition to finding the plaintiffs' objections untimely, the district judge decided the case on the merits--as he had every right to do, for this time limit is not jurisdictional. Hunger v. Leininger, 15 F.3d 664, 668 (7th Cir.1994). But because the question has divided the judges of the district court and has a potential to trip up lawyers in other cases--where district judges may not be so forgiving--we think it prudent to address the question now.

"Within 10 days after being served with a copy of the recommended disposition, a party may serve and file specific, written objections to the proposed findings and recommendations." Fed.R.Civ.P. 72(b). Because Rule 72(b) requires the magistrate judge to "serve," rather than just to "file," the recommendation Fed.R.Civ.P. 6(e) comes into play: "Whenever a party has the right or is required to do some act or take some proceedings within a prescribed period after the service of a notice or other paper upon the party and the notice or paper is served upon the party by mail, 3 days shall be added to the prescribed period." Contrast Lorenz v. Valley Forge Insurance Co., 23 F.3d 1259 (7th Cir.1994) (when judicial action is complete on filing, Rule 6(e) does not apply). The magistrate judge's report was served by mail. Then there is Fed.R.Civ.P. 6(a), part of which says: "When the period of time prescribed or allowed is less than 11 days, intermediate Saturdays, Sundays, and legal holidays shall be excluded in the computation." How do these three rules fit together?

The district judge began with the 10 days provided by Rule 72(b) and added 3 days under Rule 6(e). Because the total is 13, the judge concluded that Rule 6(a) does not apply. A competing way to count applies Rule 6(a) before Rule 6(e). The 10 days provided by Rule 72(b) are fewer than 11, so Rule 6(a) excludes weekends and holidays. That turns 10 days into 14 (two weekends and no holidays during the period in question), plus 3 for service by mail, for a total of 17 calendar...