Maher v. Zapata Corp.

Citation714 F.2d 436
Decision Date12 September 1983
Docket NumberNo. 81-2261,81-2261
PartiesFed. Sec. L. Rep. P 99,484 John F. MAHER, et al., Plaintiffs-Appellees, v. ZAPATA CORPORATION, et al., Defendants-Appellees, v. William MALDONADO, Objector-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Bruce E. Gerstein, New York City, for objector-appellant.

Jess Homer Hall, Jr., Houston, Tex., for Maher, et al.

John L. McConn, Jr., Richard A. Sheehy, Houston, Tex., Thomas F. Curnin, Thomas J. Kavaler, New York City, for Zapata.

Robert A. Hall, Houston, Tex., for First City Nat. Bk. of Houston.

John Held, Michael Paul Graham, Houston, Tex., for Gueymard, Israel, Lassiter, Mackin, Shiels & Wall.

Appeal from the United States District Court for the Southern District of Texas.

Before GOLDBERG, WILLIAMS and GARWOOD, Circuit Judges.

GARWOOD, Circuit Judge:

This is an appeal by William Maldonado, a Zapata Corporation stockholder, from a judgment approving settlement of a shareholders' derivative action brought by other shareholders on behalf of Zapata Corporation against several of its past and present officers and directors based upon their alleged violations of the federal securities laws and state corporate law.

The principal questions are whether the district court abused its discretion in approving the settlement where the preclusive effect of the settlement agreement and the judgment rendered thereon could possibly bar the further prosecution of certain claims pending in related derivative actions brought by Maldonado; and whether the notice of the settlement agreement sent to Zapata shareholders was defective because it did not expressly state that the proposed settlement agreement and judgment might preclude the continuation of the claims being asserted in the two related derivative actions. We hold that, in the context of this case, the notice was adequate and sufficiently informed the shareholders of the possible preclusive effects of the proposed settlement, and that the district court's approval of the settlement, with regard to its fairness, was not an abuse of discretion, notwithstanding the possible preclusion. We accordingly affirm.


A somewhat detailed recitation of the complex facts of this case is necessary for an understanding of it and our rulings herein. Our recitation has been made more difficult because three derivative actions, which arise, at least in part, out of a common factual situation, have been proceeding at the same time in three different courts, and various rulings, described below, made by the three courts have affected the progress of each action. 1


Appellee Zapata Corporation ("Zapata" or the "Corporation") was organized in 1954. Although Zapata is incorporated under the laws of Delaware, it is licensed to do business in Texas and has its home office in Houston, Texas. Until 1966, Zapata was engaged primarily in providing drilling services to offshore oil and gas operators. In the late 1960's, however, under the influence of William H. Flynn ("Flynn"), who became a director in 1966 and chief executive officer in 1969, Zapata began to expand and diversify its interests. By September 1978, Zapata had over 100 direct and indirect subsidiaries, the great majority of which were wholly owned by Zapata, over 7,000 employees, 520 million dollars in annual gross revenues, and approximately one billion dollars in assets. As of September 1980, there were about 10,000 Zapata shareholders owning a total of approximately 10,600,000 outstanding shares of Zapata common stock, which was (and is) traded on the New York Stock Exchange and registered under section 12 of the Securities Exchange Act of 1934, 15 U.S.C. § 781 (the "Exchange Act").


On June 13, 1970, Zapata's board of directors established a "nonqualified" stock option plan for senior officers of Zapata and its subsidiaries. The plan provided only for options that were not qualified under the Internal Revenue Code, with the result that when employees exercised their options they would incur taxable income in the amount by which the then fair market value In late June 1974, Flynn, who was at that time chairman of the board, chief executive officer, and president of Zapata, consulted with representatives of Lehman Brothers, Zapata's investment bankers, about the possibility of Zapata making a cash tender offer for shares of its own common stock. Based on these consultations, which lasted from about June 28 to July 1, 1974, Flynn decided that Zapata would proceed with a tender offer in the open market for its own common stock at a price of $25 to $30 per share. On the morning of July 2, 1974, at the request of Zapata's management, trading in Zapata stock on the New York Stock Exchange was suspended, pending the future announcement of the tender offer. When trading was suspended, Zapata stock was selling for approximately $18.50 per share.

                of the stock so purchased exceeded the option price, and Zapata would be entitled to an income tax deduction in the same amount.   On July 14, 1970, the Stock Option Committee of the board of directors 2 granted options to key officers and employees of Zapata in accordance with the plan. 3  The price per share to exercise the options was $12.15, payable in cash.   The $12.15 per share option price, which exceeded the market value of the Zapata stock at the time the options were granted, was to remain in effect throughout the existence of options.   The options became exercisable in five equal cumulative installments, the dates of the next to last and last of which were, respectively, July 13, 1973 and July 14, 1974, after which latter date all were exercisable. 4  However, no options could be exercised more than ten years after the date on which they were granted.   The plan was adopted subject to subsequent approval by Zapata shareholders, which occurred on January 11, 1971.   Under the terms of the plan, the directors retained the right to make any amendments they chose to it without shareholder approval, except for amendments which either increased the total number of shares subject to option, changed the class of employees eligible to participate, or increased the duration of the option period beyond ten years.   There has been no attack in these proceedings regarding the terms and provisions of the stock option plan, or the mechanics of its approval by the directors and shareholders.   Nor has there been any attack on the grant of options under the plan to Flynn and the other senior officers (see note 3, supra )

Four of Zapata's eight directors, who were senior officers, held options under the stock option plan. 5 By July 1, 1974, these officer-directors were aware of the possibility of a tender offer at a price of between $25 and $30 per share, and each had discussed it informally with Flynn. They realized that if they were to exercise their After trading was suspended on the New York Stock Exchange, a quorum of Zapata's nonoptionee directors 7 held a special meeting at 3:00 p.m. on July 2, 1974, where they adopted resolutions authorizing essentially interest-free loans to six senior Zapata officers (Flynn, Harrison, Shiels, Naess, Lassiter, and Wall) to cover the amount they had or would expend in exercising their stock options and the amount of federal income tax liability they would incur on account of such exercise. These resolutions also modified the stock option plan so that the final twenty percent of the shares covered by each of the options granted in 1970 became exercisable on July 2, 1974, instead of not being exercisable until July 14, 1974. 8 The modifications to the plan did not affect the price paid for the stock, which remained at $12.15 per share. The optionees exercised their options later that day. 9

options after the announcement of the tender offer, they would likely incur a substantial increase in federal income tax liability, but that this additional tax liability could be avoided if the options were exercised before the announcement of the tender offer. 6

On July 3, 1974, the board met and formally authorized the tender offer. On July 8, 1974, after obtaining commitments for the necessary financing, Zapata publicly announced its intention to make a tender offer for 2,300,000 shares of its own common stock at $25 per share. Trading on the New York Stock Exchange resumed, and the closing price for Zapata stock on July 8, 1974, was $24.50 per share. By accelerating the exercise date of the options, Zapata was deprived of a potential increased federal tax deduction, which corresponded with the tax savings of the optionees, in an amount equal to the difference in price per share between July 2 and July 14, 1974, multiplied by the number of shares comprising the final twenty percent installment of option shares which would not have been exercisable until July 14 but for the acceleration of the exercise date (this, of course, assumes the optionees would have exercised their final twenty percent installment on or after July 14 had there been no acceleration). Employing an assumed fifty percent tax bracket for both Zapata and the optionees, this would have amounted to an increase in Zapata's tax liability, and a decrease in that of the optionees collectively, of approximately $115,000. 10

On March 14, 1975, because of problems with the Federal Reserve Board, each of the notes the six officers had given to Zapata in return for the loans made to them to fund the exercise of their options were entirely repaid using sums borrowed by the officers from the First City National Bank of Houston, Texas. Three days later, on March 17, 1975, Zapata's Compensation Committee passed resolutions authorizing new loans to the six officers to fund their tax liability produced by the exercise of their options in July 1974. 11

These 1975 loans were unsecured and interest free, except that if the borrower voluntarily terminated employment with Zapata...

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