McCormick v. Fund American Companies, Inc., 92-16750

Decision Date20 May 1994
Docket NumberNo. 92-16750,92-16750
Citation26 F.3d 869
PartiesFed. Sec. L. Rep. P 98,222 William M. McCORMICK, Plaintiff-Appellant, v. The FUND AMERICAN COMPANIES, INC., a Delaware corporation, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

John Van Der Tuin (argued), J. Robert Horton, Stults & Balber, P.C., New York City, and Marc B. Scott, Law Offices of Mark B. Scott, Sausalito, CA, on the brief, for plaintiff-appellant.

Philip P. Berelson, Brown & Bain, Palo Alto, CA, for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before: FLETCHER, KOZINSKI and TROTT, Circuit Judges.

Opinion by Judge FLETCHER.

FLETCHER, Circuit Judge:

Plaintiff William M. McCormick appeals the dismissal of his claims on summary judgment. Between 1983 and 1989, McCormick was CEO of the Fireman's Fund Insurance Company (FFIC), a wholly-owned subsidiary of defendant Fund American Companies (FAC). When McCormick resigned from FFIC, he owned approximately 500,000 performance shares and option shares in FAC. The vesting period for these securities ran through the end of 1991. McCormick sold all of his securities back to FAC in May 1990. At that time, FAC was involved in negotiations for the sale of FFIC to a large foreign insurer. Those discussions were ultimately fruitful, and as a result of the sale of FFIC, the market value of FAC shares nearly doubled.

Before the buyout of McCormick's securities was completed, company officials told McCormick about the pending discussions with the foreign insurer, and about the likely increase in the value of FAC stock if the sale were made. After the sale, McCormick claimed that the officials had misrepresented or omitted many material facts. He brought suit against FAC under Sec. 10(b) of the Securities Exchange Act of 1934, and also alleged various related state statutory and common-law claims. The district court granted summary judgment in favor of FAC on all claims. We affirm.

FACTS
1. FAC's initial discussion with investment banker

On January 4, 1990, John J. Byrne, CEO and chairman of the board of FAC, and Robert Marto, FAC's executive vice president and chief financial officer, met in New York with Robert Lusardi, a senior vice president at Lehman Brothers, investment bankers for FFIC. The three men discussed a possible sale of a minority interest in FFIC. Lusardi told the FAC executives that he thought the sale of a minority interest was not a good idea. McCormick contends that Lusardi also told Byrne and Marto that the best strategy would be to sell FFIC outright, but Marto denied in his deposition that Lusardi had made such a statement, and nothing in the testimony cited by McCormick indicates otherwise.

The parties disagree about whether, later in January 1990, Lusardi was retained to find a buyer for FFIC. Byrne and Marto both denied in their depositions that any retainer arrangement was entered into until July 1990. McCormick, however, cites to FAC's November 1990 proxy statement, in which it is stated that "FAC engaged Lehman Brothers as of January 15, 1990, to act as FAC's agent for the purpose of identifying opportunities for the sale of FAC and/or FFIC and its subsidiaries." Proxy Statement at 23.

2. Lusardi's February meeting and subsequent activity

On February 8, 1990, Lusardi went to Germany and met with representatives of Allianz, a large German insurance company, to inquire whether Allianz was interested in purchasing either a minority stake in FFIC or the whole company. Lusardi testified that he had not been "authorized per se" to do this, but that it is in the nature of investment banking to test the waters without such specific authorization. Lusardi also testified that he had missed a similar opportunity for FAC on an earlier occasion, and that he was anxious not to repeat his mistake.

On February 21, 1990, Lusardi wrote a letter to Alexander Hoyos of Allianz, stating in pertinent part that

To demonstrate that the transaction [discussed on February 8] would indeed be contemplated by the company, and that we were "authorized" to discuss it, the company's senior management has agreed to be available for a preliminary meeting at our offices in New York. Depending on whom Allianz sends to the meeting, the Chief Financial Officer and/or the Chairman and Chief Executive Officer would attend. Their schedules are such that they are available to meet during March 13 to 16th.

Lusardi testified that he had learned that the FAC executives would be available on those days through a conversation with Marto. No meeting took place in March. Apparently, Lusardi continued to provide Allianz with information about FFIC through April of 1990.

3. May 4 meeting between Allianz and FAC and subsequent events

On April 26, 1990, Lusardi scheduled a meeting for May 4 between Allianz representatives and Marto and Jay Brown, president and CEO of FFIC. At some point before Marto and Brown attended the meeting, which was held at Allianz's offices in Munich, they asked Byrne for permission to attend. It is unclear when this occurred. Brown remembered Byrne asking him in March when it would be convenient for him, Brown, to meet with Allianz. Byrne, however, said that the conversation took place "on or about May 1." Byrne also testified that at the time he believed that all Allianz was interested in buying was a 20% share in FFIC.

At the May 4 meeting, Brown gave an overview of FFIC and its insurance business; Marto talked about FAC's other assets. Marto also discussed various ways in which to structure a possible sale: Allianz might buy either FAC or FFIC; if FFIC were purchased, FAC would be willing to reinsure up to half of FFIC's reserves, and/or to buy back any non-insurance assets at book value. Marto also mentioned a firm selling price--$3.4 or $3.5 billion.

Brown testified that he was unable to determine whether or not Allianz had any interest at all in the transaction. Byrne testified that both Brown and Marto reported back to him that the Allianz representatives had sat poker-faced during FAC's presentation. Subsequently, after Allianz had expressed an interest in further negotiations, Brown told Lusardi that the Allianz representatives showed more respect for FFIC at the May 4 meeting than they had shown five years earlier, when they had offered a very low bid. Brown also told Lusardi that the meeting had gone "fairly well."

On May 9, Marto sent Allianz confidential information, along with a confidentiality agreement which Allianz was to execute. Marto had previously disclosed some nonpublic information at the May 4 meeting. Also on May 9, Marto wrote a letter to Allianz confirming that FAC was willing to buy back at book value any of FFIC's non-insurance assets, and to reinsure up to 50% of FFIC's reserves. On May 14, Lusardi told Byrne and Marto that Allianz was interested in further discussions in early June. Around this time, Byrne began to realize that "more had been going on than [he] had realized," and he planned to get to the bottom of it with Marto and Lusardi after finishing his work for the shareholders' and directors' meeting scheduled for May 16.

4. The buyout of McCormick's securities

On April 27, Byrne proposed to McCormick that FAC repurchase his securities for $6 million. On May 14, Byrne raised the offer to $8 million; this amounted to a per-share price of $38 at a time when the shares were trading for $31 per share. 1 Byrne stated that this was the last offer FAC would make to McCormick that year. McCormick signed a buyout agreement and release on May 15 so that Byrne could present it for approval at the directors' meeting scheduled for May 16. At the time he signed the agreement, McCormick had been told nothing about FAC's discussions with Allianz.

On the morning of May 16, however, Byrne was approached by George Gillespie, a member of FAC's board of directors and a partner at the law firm of Cravath, Swain & Moore, general counsel for FAC. Gillespie had learned about the Allianz developments from another Cravath partner, who had drafted the May 9 confidentiality agreement at Marto's request. Gillespie told Byrne that he was very concerned about allowing McCormick to go through with the buyout without first being told about the Allianz developments. Byrne agreed that disclosure should be made, and told Marto to brief McCormick on the Allianz discussions.

That briefing was memorialized in the following acknowledgment, dated May 16, 1990 and signed by McCormick and Marto (the Acknowledgment):

On this date, while the Human Resources Committee of the Board of Directors of Fund American was meeting, among other things to consider the proposed buy-out of William McCormick's employment contract interests, including his almost 500,000 shares of Fund American stock, in various forms, Mr. McCormick and Robert Marto met. Mr. Marto advised Mr. McCormick that preliminary discussions were about to commence with a possible foreign buyer of Fireman's Fund Insurance Company (FFIC) and that a confidentiality letter had been sent to such possible foreign buyer. If a transaction were to eventuate, after presumably extensive due diligence, the price might well exceed $50 per Fund American share--a price well above the approximately $38 per Fund American share/option called for by Mr. McCormick's buy-out proposal before the Human Resources Committee. The Committee is concerned that Mr. McCormick understand the foregoing and, if the buyout goes forward in the terms discussed, that Mr. McCormick acknowledge that he has been fully and adequately informed of the foregoing facts and circumstances.

McCormick's briefing was largely confined to the items specified in the Acknowledgment. McCormick asked Marto for the name of the foreign buyer, but was told that this was confidential. McCormick also asked Byrne about the transaction. In particular, McCormick asked Byrne...

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