Mobil Corp. v. Marathon Oil Co.
| Decision Date | 23 December 1981 |
| Docket Number | No. 81-3711,81-3711 |
| Citation | 669 F.2d 366 |
| Parties | Fed. Sec. L. Rep. P 98,399 MOBIL CORPORATION, Plaintiff-Appellant, v. MARATHON OIL COMPANY, Harold D. Hoopman, Neil A. Armstrong, Charles H. Barre, Victor G. Beghini, James A. D. Geier, Elmer A. Graham, Jack H. Herring, W. E. Swales, Raymond C. Tower, Robert G. Wingerter and USS, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
John C. Elam and Thomas B. Ridgley, Vorys, Sater, Seymour & Pease, Columbus, Ohio, Walter L. Stratton, Thomas R. Trowbridge, III, Donovan, Leisure, Newton & Irvine, Marc P. Cherno, Sheldon Raab, P. C., Fried, Frank, Harris, Shriver & Jacobson, New York City, for plaintiff-appellant.
John J. Chester, John W. Zeiger, Jones, Day, Reavis & Pogue, James L. Graham, Graham, Dutro & Nemeth, William D. Ginn, Thompson, Hine & Flory, Columbus, Ohio, for defendants-appellees.
Before EDWARDS, Chief Judge and ENGEL and MERRITT, Circuit Judges.
On October 30, 1981, Mobil Corporation ("Mobil") announced its intention to purchase up to 40 million outstanding common shares of stock in Marathon Oil Company ("Marathon") for $85 per share in cash. Mobil conditioned that purchase upon receipt of at least 30 million shares, just over one-half of the outstanding shares. It further stated its intention to acquire the balance of Marathon by merger following its purchase of those shares.
Marathon directors were concerned about the effects of a merger with Mobil, and they immediately held a board meeting. The directors determined that, together with consideration of other alternatives, they would seek a "white knight"-a more attractive candidate for merger.
On November 1, 1981, Marathon filed an antitrust suit against Mobil in the United States District Court for the Northern District of Ohio, claiming that a merger between Marathon and Mobil would violate section 7 of the Clayton Act, 15 U.S.C. § 18. Marathon Oil Co. v. Mobil Corporation, 530 F.Supp. 315 (N.D.Ohio). The district court initially granted Marathon's request for a temporary restraining order, which allowed Mobil to receive tenders but precluded it from purchasing shares pending resolution of Marathon's application for a preliminary injunction. The court invited Marathon to continue its search for a white knight.
Negotiations developed between Marathon and several companies. Allied Industries sought to offer to purchase shares on the condition that Marathon buy certain Allied property to finance Allied's subsequent tender offer. Gulf Oil considered making an offer conditioned on a stock option for ten million shares. United States Steel Corporation ("U.S. Steel") indicated its interest, and on November 18, 1981, offered what it termed a "final proposal" to be acted upon that day. By that proposal U.S. Steel offered $125 per share for 30 million shares of Marathon stock, with a plan for a follow-up merger with its subsidiary, U.S.S. Corporation ("USS").
The Marathon directors voted to recommend the U.S. Steel offer to the shareholders on November 18, 1981. Marathon, U. S. Steel and USS executed a formal merger agreement on that day. USS made its tender offer on November 19, 1981. Both USS and Marathon filed the appropriate documents with the Securities Exchange Commission. 1
The USS offer, and subsequently the merger agreement, had two significant conditions. First, they required a present, irrevocable option to purchase ten million authorized but unissued shares of Marathon common stock for $90 per share ("stock option"). These shares equalled approximately 17% of Marathon's outstanding shares. Next, they required an option to purchase Marathon's 48% interest in oil and mineral rights in the Yates Field for $2.8 billion. ("Yates Field option"). The latter option could be exercised only if USS's offer did not succeed and if a third party gained control of Marathon. Thus, in effect, a potential competing tender offeror could not acquire Yates Field upon a merger with Marathon.
The value of Yates Field to Marathon and to potential buyers is significant; Marathon has referred to the field as its "crown jewel." As Judge Kinneary has indicated, it is viewed as an enormous resource:
One of the world's most remarkable oil fields is the Yates field in Pecos County (of the Permian basin province of West Texas). Producing from an unusually prolific and highly permeable reservoir rock, under natural hydraulic pressure, the potential production of 313 wells distributed over 17,000 acres in this field was in 1929 estimated to be in excess of 5 million bbl. per day. This was more than the total daily production of all United States fields; however, production has been drastically curtailed. (Footnote omitted.)
Mobil Corporation v. Marathon Oil Company, et al., C-2-81-1402 at 27 (S.D.Ohio December 7, 1981), quoting L.C. Uren, Petroleum Production Engineering (1950) quoted at p.5 of the First Boston Corporation, Yates Field: Another Look (August 14, 1980). Judge Kinneary observed the unique characteristics of the Yates Field:
(E)ven though the Yates Field has been producing oil for more than fifty years, petroleum engineers consider the field to be in the intermediate state of depletion, that is, they expect the field to continue producing oil for ninety years; in that there are between 3 and 3.5 billion barrels of oil still in place, the Yates Field holds the promise of providing additional reserves of oil that could be recovered; and cumulative production, as of the date of the report, accounted for only 39 percent of the conservatively estimated recoverable reserves of 2.0 billion barrels.
(One expert) estimated total recoverable reserves of 565 million barrels ... (although 150 million barrels) were potential reserves and their recovery might not occur.
Mobil Corp. v. Marathon Co., C-2-81-1402 at 27-28.
The importance of Yates to a potential tender offeror is illustrated by the fact that both Gulf Oil and Allied indicated that they would propose a tender offer only upon assurances that they would have an option to buy Marathon's interest in the Yates Field. Such requests are a recent but recurring phenomenon in connection with tender offers. See, e.g., Conoco, Inc. v. Mobil Oil Corp., No. 81-4787 (S.D.N.Y. Aug. 4, 1981).
Following this agreement, Mobil filed suit in the United States District Court for the Southern District of Ohio, seeking to enjoin the exercise of the options and any purchase of shares in accordance with the tender offer. Named as defendants were Marathon, its directors, and USS. Mobil alleged that the options granted to USS served as a "lock-up" arrangement to defeat any competitive offers of Mobil or third parties, thereby constituting a "manipulative" practice "in connection with a tender offer," in violation of section 14(e) of the Williams Act, 15 U.S.C. § 78n(e). It claimed further that Marathon failed to disclose material information regarding the purpose of the options to its shareholders, also in violation of section 14(e). It also complained of various violations of state law: Marathon acted in breach of its fiduciary duties; it violated Ohio Rev. Code § 1701.76 by selling "all or substantially all" of its assets without shareholder approval; 2 and it effected transactions outside the scope of any legitimate corporate purpose.
On November 24, 1981, Judge Kinneary granted in part Mobil's motion for a temporary restraining order, prohibiting Marathon and USS from taking any action in connection with the tender offer or the Yates Field option agreement. Mobil announced a new tender offer on November 25, 1981, offering to purchase at least 30 million common shares of Marathon at $126 per share in cash. This offer was conditioned on a finding that the USS stock option and the Yates Field option were invalid. Mobil reserved a right to waive these conditions and thereafter limit its purchase to less than fifty percent of the shares outstanding. Mobil again indicated its intention to merge with Marathon if the tender offer were successful, proposing to purchase remaining shares with Mobil debentures having a value of $90 in cash.
Following that offer, Judge Kinneary considered Mobil's application for a preliminary injunction. In an opinion dated December 7, 1981, he denied a preliminary injunction on the grounds that the test enunciated in Mason County Medical Ass'n v. Knebel, 563 F.2d 256 (6th Cir. 1977), had not been satisfied. This appeal followed. Because there appears to be a substantial likelihood that Mobil will succeed on its claim that execution of the Yates Field and stock options are "manipulative acts or practices, in connection with (a) tender offer" in violation of section 14(e), 15 U.S.C. § 78n(e) 3, we conclude that a consideration of the Mason County criteria required the grant of preliminary injunctive relief, and accordingly, we reverse.
As Judge Kinneary stated, the factors to consider in evaluating whether a preliminary injunction will issue have been outlined in Mason County Medical Ass'n v. Knebel, 563 F.2d 256, 261 (6th Cir. 1977):
1. Whether the plaintiff has shown a strong or substantial likelihood or probability of success on the merits;
2. Whether the plaintiff has shown irreparable injury;
3. Whether the issuance of a preliminary injunction would cause substantial harm to others;
4. Whether the public interest would be served by issuing the preliminary injunction.
Judge Kinneary found that Mobil made a showing with regard to the last three factors. He stated:
Mobil has made a sufficient showing that irreparable harm may be incurred if preliminary injunctive relief is denied. Even should Mobil be successful in acquiring more than 50 percent of the equity interest of Marathon through direct competitive bidding against USS, Inc., the Yates Field option agreement between USS, Inc. and Marathon could be exercised by USS, Inc., thereby effectively destroying...
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