Plaine v. McCabe

• Decision Date: 22 August 1986
• Docket Number: No. 83-6552,83-6552
• Citation: 797 F.2d 713
• Parties: Carol PLAINE, Plaintiff-Appellant, v. B.C. McCABE, Joseph W. Aidlin, Thomas C. Hinrichs, Frank M. Swirles, Andrew W. Hoch, B.C. McCabe, Jr., Magma Power Company, Natomas Company, Natomas Energy Company, NEC Acquisition Co., and Magma Geysers, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 713

797 F.2d 713

Carol PLAINE, Plaintiff-Appellant, v. B.C. McCABE, Joseph W. Aidlin, Thomas C. Hinrichs, Frank M Swirles, Andrew W. Hoch, B.C. McCabe, Jr., Magma Power Company, Natomas Company, Natomas Energy Company, NEC Acquisition Co., and Magma Geysers, Inc., Defendants-Appellees.

No. 83-6552.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 6, 1985.

Decided May 27, 1986.

As Amended on Granting of Rehearing

Aug. 22, 1986.

Marc M. Seltzer, (argued), Corniblit & Seltzer, Los Angeles, Cal., Robert A. Skirnick

and Stephen D. Oestreich, Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiff-appellant.

Alan E. Friedman, (argued), Tuttle & Taylor, Inc., Lorraine L. Loder and Jeffrey Z.B. Springer (argued), Demetriou, Del Guercio & Lovejoy, Los Angeles, Cal., for defendants-appellees.

An Appeal from United States District Court for the Central District of California.

Before GOODWIN, FLETCHER, and PREGERSON, Circuit Judges.

PREGERSON, Circuit Judge:

Appellant Carol Plaine, a former shareholder of Magma Power Company ("Magma"), brought suit against Natomas Company ("Natomas"), Magma, and various individual officers of both companies alleging violations of section 14(e) of the Securities and Exchange Act of 1934, as amended, 15 U.S.C. Sec. 78n(e) (1982) ("the Act"), and state securities laws in connection with Natomas' tender offer to, and eventual merger with, Magma. The district court granted summary judgment to defendants, ruling that a decision of the California Corporations Commissioner ("Commissioner") that found the merger price fair collaterally estopped Plaine from proving injury, an essential element of her section 14(e) claim. We agree that collateral estoppel precludes Plaine from challenging the Commissioner's fairness finding, but conclude that such a finding does not foreclose Plaine from proving actual damages going beyond a fair merger price in her section 14(e) claim. Therefore, we affirm in part, reverse in part and remand for further proceedings consistent with this opinion.

FACTS

Natomas acquired Magma, a geothermal energy company, in a two-step transaction. The first step was a tender offer, after which Natomas held 83 per cent of Magma's outstanding shares. The second step was a freeze-out merger of the remaining Magma shareholders. Appellant Plaine was forced to give up her shares in the second part of this two-step transaction.

On March 30, 1981, Natomas, through a subsidiary, NEC Acquisition Co., made a cash tender offer for all of Magma's stock at $42 per share. Natomas issued an Offer to Purchase to all Magma shareholders in connection with the proposed tender offer. Magma's management initially opposed the offer, and Magma's chairman, B.C. McCabe, characterized the offer to reporters as "wholly inadequate." McCabe claimed that because of the substantial energy assets of the company, in particular its 25% interest in the Geysers Project (the Geysers), ¹ the shares were worth at least $80 per share or perhaps as much as $200. ² At that time, Magma retained the investment firm of Smith Barney which rendered an opinion that $42 per share was "inadequate from a financial point of view." Magma also contacted several potential "white knights" ³ but was unsuccessful in obtaining a counteroffer.

On April 16, 1981, Natomas and Magma began negotiations on the terms of the When the amended tender offer expired on May 5, 1981, Natomas owned a total of 8,289,197 shares, or 83 per cent of the total. At a meeting on February 5, 1982, the shareholders approved the merger by a vote of 99.26 per cent of the shares represented. Although the Agreement structured the vote so that Natomas' 83 per cent of the total shares guaranteed the outcome, a majority of the minority shares (93.78 per cent) were voted in favor of the merger. Following the vote, on March 1-3, 1982, the California Corporations Commissioner held a fairness hearing as required by Cal.Corp.Code Sec. 1101.1 (West Supp.1985). ⁵ Plaine and two other shareholders opposed the merger at the hearing, but the hearing officer granted a permit for the merger.

                tender offer.  Magma retained the firm of Drexel Burnham to render financial advice in connection with the offer.  The discussions culminated in an Agreement in which Natomas amended its tender offer to $45 per share, and Magma management recommended acceptance of the tender offer and agreed to hold a shareholders' meeting for the purpose of approving a merger of the two companies.  The Agreement provided that shareholders who did not tender their shares during the period of the tender offer would be entitled to receive $45 per share in the eventual merger. 4   The companies jointly sent all Magma shareholders a Supplement to the Offer to Purchase outlining the terms of the Agreement
                

Plaine filed this action in federal court on October 27, 1982. She alleged Natomas and Magma had violated section 14(e) of the Act in omitting and misstating certain material information in the Offer to Purchase sent with the initial tender offer and in the Supplement issued in connection with the amended offer. Specifically, she alleged that certain information regarding projections of future revenues from the Geysers, the financial opinions rendered by Smith Barney and Drexel Burnham, and a possible conflict of interest of Magma's management because of the creation of the new Magma Development Company should have been disclosed to the Magma shareholders.

The district court converted the defendants' motion to dismiss to a motion for summary judgment under Fed.R.Civ.P. 12(c), and ordered judgment for defendants on the grounds that the Commissioner's "fairness" decision collaterally estopped Plaine from proving the injury element of her section 14(e) claim. Plaine timely appealed.

ISSUES

I. Whether Plaine has standing to assert a violation of section 14(e).

II. Whether an issue decided in a state administrative proceeding may properly be given collateral estoppel effect in a later federal suit.

III. Whether the district court properly granted summary judgment for defendant on the ground that giving collateral estoppel effect to the state Corporations Commissioner's "fairness" decision prevents Plaine from proving a section 14(e) cause of action.

IV. Whether Plaine's claim may properly be dismissed on the alternative grounds raised by defendants in their 12(b)(6) motion to dismiss.

STANDARD OF REVIEW

We review de novo the district court's grant of summary judgment for the defendants.

                Grigsby v. CMI Corp., 765 F.2d 1369, 1373 (9th Cir.1985).  We apply the same standard as that employed by the trial court under Rule 56(c) and will affirm a grant of summary judgment only if the record, read in the light most favorable to the non-moving party, establishes that the moving party is entitled to judgment as a matter of law.   Twentieth Century-Fox Film Corp. v. MCA, Inc., 715 F.2d 1327, 1328-29 (9th Cir.1983)
                

DISCUSSION

I. Standing

Initially, we address the defendants' argument that Plaine lacks standing to bring a section 14(e) claim. The defendants allege that because Plaine did not voluntarily tender her shares pursuant to the amended tender offer, she must not have relied on the alleged misstatements and was not injured by them. Although she did not tender her shares, Plaine alleges that the false information and omissions in the proxy materials led other shareholders to tender their shares. The success of the tender offer gave Natomas the 83 per cent share in Magma that eventually allowed Natomas to accomplish the merger. While Plaine does not contest the information distributed in connection with the merger vote itself, she alleges she received an inadequate price in the freeze-out merger because of the previous wrongdoings of the defendants.

Section 14(e) ⁶ is one of the 1968 Williams Act amendments to the Securities and Exchange Act of 1934. "The purpose of the Williams Act is to insure that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information...." Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 95 S.Ct. 2069, 2075, 45 L.Ed.2d 12 (1975); see also Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 35, 97 S.Ct. 926, 946, 51 L.Ed.2d 124 (1977); Klaus v. Hi-Shear Corp., 528 F.2d 225, 232 (9th Cir.1975). To state a violation of section 14(e), a shareholder need not be a purchaser or seller of any securities as is required under other anti-fraud provisions of the Act. ⁷ In Piper, the Supreme Court, while expressly reserving opinion on the subject of standing in this context, nevertheless pointed out the importance of the difference between section 14(e) and section 10(b):

It may well be that Congress desired to protect, among others, shareholder-offerees who decided not to tender their stock due to fraudulent misrepresentations by persons opposed to a takeover attempt.... These shareholders, who might not enjoy the protection of Sec. 10(b) ..., could perhaps state a claim under Sec. 14(e), even though they did not tender their securities.

Id. 430 U.S. at 38-39, 97 S.Ct. at 947-48 (footnote omitted).

The Fifth Circuit has expressly held that a shareholder may bring a section 14(e) action "if [s]he has been injured by fraudulent activities of others perpetrated in connection with a tender offer, whether or not [s]he has tendered h[er]shares." ⁸ Smallwood v. Pearl Brewing Co., 489 F.2d 579, 596 (5th Cir.) (emphasis added), cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113 (1974); accord Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 946 (2d Cir.1969). Although Plaine did not tender her shares, she alleged injury occurring as a result of fraudulent activity in connection with a tender offer. In light of the Act's goal of protecting investors and the specific harm Plaine alleges, we follow the lead of the Fifth and Second Circuits and hold...