Schreiber v. Burlington Northern, Inc.
| Decision Date | 27 June 1983 |
| Docket Number | Civ. A. No. 83-13. |
| Citation | 568 F. Supp. 197 |
| Parties | Barbara SCHREIBER, Plaintiff, v. BURLINGTON NORTHERN, INC., R-H Holdings Corporation, the El Paso Company, Travis Hubert Petty, William V. Holik, Jr., M.R. Engler, Jr., W.G. Henderson, R.S. Morris, M.A. Ehrlich, A.M. Derrick, Richard L. McConn, D.J. MacIver, Jr., and L.M. Varen Kamp, Defendants. |
| Court | U.S. District Court — District of Delaware |
Thomas D. Whittington, Jr., and Judith N. Renzulli of Wilson, Whittington & Aulgur, Wilmington, Del., Irving Bizar of Pincus Ohrenstein Bizar D'Alessandro & Solomon, New York City, of counsel, for plaintiff.
A. Gilchrist Sparks, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., Marc P. Cherno and Stephen D. Alexander of Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel, for defendants Burlington Northern, Inc. and R-H Holdings Corp.
Robert K. Payson and James F. Burnett of Potter, Anderson & Corroon, Wilmington, Del., Mudge, Rose, Guthrie & Alexander, Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for defendants The El Paso Co. and the El Paso Directors.
The term "manipulation" as used in Section 14(e) of the Williams Act, 15 U.S.C. § 78n(e), has defied precise definition. The Act itself does not delineate its scope nor has the Securities and Exchange Commission ("SEC") prescribed its exact meaning in its rules and regulations. Thus, the federal courts have been left to give meaning to the term on a case-by-case basis. A number of decisions, in an effort to explain its meaning within the context of the statute, have focused on the particular fact situations to which plaintiffs have sought to apply the Act. This Court must similarly approach the problem in the limited context of determining whether the alleged breach and withdrawal of a proposed tender offer constitutes a Section 14(e) manipulative violation.
Presently before the Court are defendants' motions to dismiss the amended complaint brought under Section 14(e) by the plaintiff, Barbara Schreiber, an El Paso Gas Company ("El Paso") stockholder. Plaintiff brings this action seeking damages on her own behalf and on behalf of all other El Paso shareholders similarly situated against El Paso, El Paso's directors, Burlington Northern, Inc. ("Burlington"), and R-H Holdings Corporation ("R-H"), a wholly owned Burlington subsidiary.
For the purposes of the present motions to dismiss, the Court must accept the allegations of the amended complaint as true. The allegations of the complaint may be summarized as follows: By December, 1982, R-H had acquired 537,800 of El Paso's shares in the open market. R-H then decided to make a tender offer for 25.1 million shares of El Paso, which constituted 51% of El Paso's common stock. On December 20, 1982, Burlington's chief executive officer informed El Paso's directors of its impending tender offer.
On December 21, 1982, R-H made its tender offer (the "December tender offer") for 25.1 million shares at $24 per share. The offer provided certain "outs" for R-H by which it could terminate the offer:
Notwithstanding any other provision of the Offer, the Purchaser shall not be required to accept for payment or pay for tendered Shares, or may terminate or amend the Offer ... if, at any time on or after December 17, 1982 and prior to the acceptance for payment of any such Shares ..., any of the following shall occur: ... if, in the sole judgment of the Purchaser, in any such case, regardless of the circumstances (including any action or inaction by the Purchaser) giving rise to any such condition, such condition makes it inadvisable to proceed with the Offer and/or with such purchase or payment.
(Docket Item "D.I." 24, at 4-5.)
On December 29, 1982, the plaintiff tendered her El Paso shares in response to the December offer and later that tender offer was fully subscribed. At first, El Paso's management decided to resist the December tender offer and began a number of defensive moves: it sued Burlington in the Delaware Court of Chancery and in the U.S. District Court for the Northern District of Texas; it filed a Schedule 14D-9 with the SEC in which it threatened to dispose of its assets; it also announced the issuance of a new class of preferred stock1 and amended its by-laws.
Thereafter, El Paso and Burlington entered into negotiations. As part of the negotiations, plaintiff alleges that the defendant directors of El Paso entered into special agreements with El Paso to provide them with "golden parachutes" in the form of extended employee benefits, allegedly worth millions of dollars, in the event El Paso should be taken over.
On January 10, 1983, the parties resolved this dispute and agreed to the following:
(D.I. 5, at 7-8.) The following day R-H commenced its second or January tender offer which sought only 21 million shares at the same $24 per share price. On February 8, 1983, R-H accepted 21 million shares for payment after more than 40 million shares had been tendered.
Thereafter, the plaintiff commenced this action alleging that defendants' conduct violated Section 14(e) of the Williams Act in the following manner:
(D.I. 5, at 8-9.)2
Thus, plaintiff alleges that as a result of this activity she and the class members were damaged because they were deprived of the December tender offer price of $24 per share. Moreover, plaintiff contends that since she and the class members are required to retender their shares along with all other El Paso shareholders in the January offer, their shares which had been fully tendered in the December offer are now subject to extensive proration. Plaintiff therefore seeks damages for the alleged Section 14(e) violations and has moved the Court to certify this litigation as a class action encompassing all El Paso shareholders who tendered their shares in response to the December offer.
As previously indicated, all of the defendants have moved to dismiss the amended complaint under Fed.R.Civ.P. 12(b)(6). Specifically, defendants contend that the amended complaint fails to state a claim upon which relief can be granted because the willful breach of a tender offer contract or a tortious interference with such a contract are not violations of Section 14(e). In addition, defendants argue that the failure to disclose that El Paso granted "golden parachutes" to its directors and that these directors breached their fiduciary duties by causing the termination of the December tender offer are also not Section 14(e) violations because the failure to disclose a breach of fiduciary duty in tender offer materials is not a Williams Act violation.
The plaintiff counters by arguing that defendants' activity in terminating the December tender offer and initiating the January tender offer constituted a manipulative practice in violation of Section 14(e) and relies upon the Sixth Circuit's recent decision in Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981), in support of that argument. The nondisclosure claims, plaintiff contends, are sufficiently pled to withstand a dismissal motion.
The first question is whether the termination of the December tender offer and the initiation of the January tender offer amounted to manipulation within the meaning of that term in Section 14(e). We begin the analysis with the understanding that the basic purpose of the federal securities laws is to require "adequate disclosure." This concept had its origin in the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., which was passed in response to the abuses that led to the 1929 stock market crash. As envisaged by Congress, the purpose of the securities laws was to ensure that potential investors would have available to them sufficient information to enable them to make a reasoned decision as to whether or not to engage in a particular securities transaction. Indeed, President Roosevelt wrote Congress during consideration of the Securities Exchange Act of 1934:
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Schreiber v. Burlington Northern, Inc
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