Lynch v. Vickers Energy Corp.

• Decision Date: 03 February 1978
• Citation: 383 A.2d 278
• Parties: Libby G. LYNCH, Plaintiff Below, Appellant, v. VICKERS ENERGY CORPORATION et al., Defendants Below, Appellees.
• Court: Supreme Court of Delaware

Page 278

383 A.2d 278

Libby G. LYNCH, Plaintiff Below, Appellant, v. VICKERS ENERGY CORPORATION et al., Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted April 19, 1977.

Decided Oct. 18, 1977.

Rehearing Denied Feb. 3, 1978.

Upon appeal from the Court of Chancery. Reversed and remanded.

Joseph A. Rosenthal of Morris & Rosenthal, Wilmington, and Sidney B. Silverman, Joan T. Harnes and Martin H. Olesh of Silverman & Harnes, New York City, of counsel, for plaintiff-appellant.

Louis J. Finger of Richards, Layton & Finger, Wilmington, and Robert L. Stern, Leo Herzel, Susan Getzendanner and John R. Schmidt of Mayer, Brown & Platt, Chicago David A. Drexler of Morris, Nichols, Arsht & Tunnell, Wilmington, and William Key Wilde of Bracewell & Patterson, Houston, Tex., of counsel, for defendants-appellees William A. Alexander, Edward J. Hudson and Stormy F. Smith.

Ill., of counsel, for defendants-appellees Vickers Energy Corp., Esmark Inc., Richard J. Boushka, Donald P. Kelly, Robert D. Phillips and Jack A. Vickers.

Before HERRMANN, C. J., and DUFFY and McNEILLY, JJ.

DUFFY, Justice:

In this tender offer case, plaintiff, a former shareholder of TransOcean Oil, Inc. (TransOcean), filed a class action in the Court of Chancery seeking damages from defendants, Vickers Energy Corporation (Vickers), Esmark Inc. (Esmark), and the directors of TransOcean. Both corporate defendants are chartered in Delaware. After trial, judgment was entered for defendants and this appeal followed.

I

Briefly, the relevant facts are these: ¹

On September 30, 1974, Vickers, a wholly-owned subsidiary of Esmark, made an offer to purchase all outstanding TransOcean common stock at a price of $12 per share. At the time of the tender offer, Vickers held 53.5% Of TransOcean's issued and outstanding common shares.

As a result of the offer, Vickers acquired 4,228,141 of the 5,888,999 shares held by others, thus elevating its interest in TransOcean to some 87%. Plaintiff tendered her 100 shares in response to the offer.

Thereafter, plaintiff filed this action for herself and other TransOcean minority shareholders of her class charging defendants with violation of their fiduciary duties in that they: (1) made less than a full and frank disclosure in the tender offer of the value of TransOcean's net assets; and (2) coerced the minority shareholders, through use of their superior bargaining position and control over the corporate assets and processes, to sell their respective shares for a grossly inadequate price. Plaintiff seeks damages based on the difference between the tender offer price and the fair value of a share.

After trial on the merits, the Court entered judgment for defendants, ruling that plaintiff had failed to prove either actionable coercion or fraudulent misrepresentation; the Court concluded, in essence, that plaintiff was asking for appraisal rights in the context of a tender offer, a form of relief "not provided for in the Delaware Corporation Law or cognizable under general equitable principles." 351 A.2d at 576. The plaintiffs appeal.

We find it necessary to discuss only the first contention made by plaintiff.

II

Relying on Allied Chemical & Dye Corporation v. Steel & Tube Co., Del.Ch., 14 Del.Ch. 64, 120 A. 486 (1923), and Epstein v. Celotex Corporation, Del.Ch., 43 Del.Ch. 504, 238 A.2d 843 (1968), the Chancellor determined that Vickers, as the majority shareholder of TransOcean, owed a fiduciary duty to plaintiff which required "complete candor" in disclosing fully "all of the facts and circumstances surrounding the" tender offer. 351 A.2d at 573. We agree with that statement of the law. Compare Singer v. The Magnavox Company, et al., Del.Supr., 380 A.2d 969 (1977); Lank v. Steiner, Del.Supr., 43 Del.Ch. 262, 224 A.2d 242, 244 (1966), applying the " special circumstance rule" to a director possessed of special knowledge withheld from a stockholder with whom he is negotiating for purchase of his stock; and Iroquois Industries, Inc. v. Lewis, Del.Supr., 318 A.2d 134 (1974). We disagree, however, with the Trial Court's application of such law to the undisputed facts of this case.

In our view, the tender offer failed to disclose fully two critical facts: (1) that a "highly qualified" petroleum engineer (351 A.2d at 574), who was a member of TransOcean's management, had calculated the net asset value to be worth significantly more than the minimum amount disclosed in the offer; and (2) that Vickers' management had authorized open market purchases of TransOcean's stock during the period immediately preceding the $12 per share tender offer for bids up to $15 per share.

A.

We turn first to the net asset value disclosures. The Tender Offer Circular contained the following statement concerning TransOcean's net asset value:

"Management of the Company (TransOcean) has informed the Offeror (Vickers) that, based on a calculation of discounted present value of the Company's reserves and values attributable by the Company's management to the Company's undeveloped acreage and other assets, management of the Company estimates that at this date the Company's net asset value adjusted for such factors is not less than $200,000,000 (approximately $16.00 per share) and could be substantially greater. While the foregoing evaluation is based on the current judgment of the management of the Company, it should be recognized that because of the highly uncertain conditions affecting oil and gas values and because of the many assumptions it was necessary for the management of the Company to make in its evaluation, the evaluation is necessarily arbitrary and there can be no assurance that the values ultimately realized from such assets will be consistent with the estimate of the management of the Company. See 'Reserves', 'Valuation of Assets' and 'Earnings'." (Original emphasis.)

Later in the Circular, in the section entitled "Valuation of Assets," similar language was repeated:

"The Company's (i. e., TransOcean's) management estimates that as of this date the aggregate net discounted value of the Company's proved developed, proved undeveloped, probable and possible reserves, its undeveloped acreage and its other assets is not less than $200,000,000 (approximately $16.00 per share) and could be substantially greater. In making its evaluation of assets, management made many assumptions, including, among other things, various assumptions relating to production costs, increasing oil and gas price levels, taxes, depletion allowances, government regulations and controls, intangible drilling costs and investment tax credits, and utilized an appropriate discount factor. While management believes that such assumptions are reasonable in light of current circumstances, there is no assurance that these assumptions will prove correct." (Original emphasis.)

However, at the time of the offer, defendants were in possession of another estimate, prepared by Forrest Harrell, a petroleum engineer and a vice-president of TransOcean, fixing the net asset value at $250.8 million, which computes to approximately $20 per share, and from which one could conclude that the value could be as high as $300 million. Both of these estimates were, of course, substantially higher than the minimum amount stated in the tender offer.

The Trial Court closely examined the Harrell report and concluded that nondisclosure thereof was not fatal; the Court reasoned that the " 'not less than $200,000,000 . . .' phrase used in the offering circular qualified by the phrase . . . 'and could be substantially greater . . . ' furnished the TransOcean stockholders with adequate facts on which to make an educated choice, . . . ." 351 A.2d at 575.

This approach to the controversy was, in our view, mistaken in two respects: First, to reach such a conclusion it was necessary for the Court to weigh the merits of the Harrell report and, in the context of this case, that was error. The Court's function was not to go through Harrell's estimates of oil reserves and recoveries, for The Court's duty was to examine what information defendants had and to measure it against what they gave to the minority stockholders, in a context in which "complete candor" is required. In other words, the limited function of the Court was to determine whether defendants had disclosed all information in their possession germane to the transaction in issue. And by "germane" we mean, for present purposes, information such as a reasonable shareholder would consider important...