Schreiber v. Burlington Northern, Inc

• Decision Date: 04 June 1985
• Docket Number: No. 83-2129,83-2129
• Parties: Barbara R. SCHREIBER, Petitioner v. BURLINGTON NORTHERN, INC., et al
• Court: U.S. Supreme Court

472 U.S. 1

105 S.Ct. 2458

86 L.Ed.2d 1

Barbara R. SCHREIBER, Petitioner

v BURLINGTON NORTHERN, INC., et al.

No. 83-2129.

Argued Jan. 9, 1985.

Decided June 4, 1985.

Syllabus

In December 1982, respondent Burlington Northern, Inc., made a hostile tender offer for El Paso Gas Co. to which a majority of El Paso's shareholders ultimately subscribed. Burlington did not accept the tendered shares, and instead, in January 1983, after negotiations with El Paso, announced a new and friendly takeover agreement. Pursuant to this agreement, Burlington undertook to rescind the December tender offer and substitute a new tender offer. The January tender offer was soon oversubscribed. The rescission of the first tender offer caused a diminished payment to those shareholders who had tendered during the first offer, because those shareholders who retendered were subject to substantial proration. Petitioner filed suit in Federal District Court on behalf of herself and similarly situated shareholders, alleging that Burlington, El Paso, and members of El Paso's board of directors had violated § 14(e) of the Securities Exchange Act of 1934, which prohibits "fraudulent, deceptive, or manipulative acts or practices . . . in connection with any tender offer." She claimed that Burlington's withdrawal of the December tender offer, coupled with the substitution of the January tender offer, was a "manipulative" distortion of the market for El Paso stock. The District Court dismissed the suit for failure to state a claim, holding that the alleged manipulation did not involve a misrepresentation, and so did not violate § 14(e). The Court of Appeals affirmed.

Held:

1. "Manipulative" acts under § 14(e) require misrepresentation or nondisclosure. To read the term "manipulative" in § 14(e) to include acts that, although fully disclosed, "artificially" affect the price of the takeover target's stock, conflicts with the normal meaning of the term as connoting conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities. Pp. 5-8.

2. This interpretation of the term "manipulative" as used in § 14(e) is supported by the provision's purpose and legislative history. The purpose of the Williams Act, which added § 14(e) to the Securities Exchange Act, was to ensure that public shareholders who are confronted with a tender offer will not be required to respond without adequate information. Nowhere in the legislative history is there any suggestion that § 14(e) serves any purpose other than disclosure, or that the term "manipulative" should be read as an invitation to the courts to oversee the substantive fairness of tender offers; the quality of any offer is a matter for the marketplace. Pp. 8-12.

3. Applying the above interpretation of the term "manipulative" to this case, respondents' actions were not manipulative. Pp. 12-13.

731 F.2d 163 (CA3 1984), affirmed.

Irving Bizar, New York City, for petitioner.

Marc P. Cherno, New York City, for respondents.

Chief Justice BURGER delivered the opinion of the Court.

We granted certiorari to resolve a conflict in the Circuits over whether misrepresentation or nondisclosure is a necessary element of a violation of § 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e).

I

On December 21, 1982, Burlington Northern, Inc., made a hostile tender offer for El Paso Gas Co. Through a wholly owned subsidiary, Burlington proposed to purchase 25.1 million El Paso shares at $24 per share. Burlington reserved the right to terminate the offer if any of several specified events occurred. El Paso management initially opposed the takeover, but its shareholders responded favorably, fully subscribing the offer by the December 30, 1982, deadline.

Burlington did not accept those tendered shares; instead, after negotiations with El Paso management, Burlington announced on January 10, 1983, the terms of a new and friendly takeover agreement. Pursuant to the new agreement, Burlington undertook, inter alia, to (1) rescind the December tender offer, (2) purchase 4,166,667 shares from El Paso at $24 per share, (3) substitute a new tender offer for only 21 million shares at $24 per share, (4) provide procedural protections against a squeeze-out merger ¹ of the remaining El Paso shareholders, and (5) recognize "golden parachute" ² con- tracts between El Paso and four of its senior officers. By February 8, more than 40 million shares were tendered in response to Burlington's January offer, and the takeover was completed.

The rescission of the first tender offer caused a diminished payment to those shareholders who had tendered during the first offer. The January offer was greatly oversubscribed and consequently those shareholders who retendered were subject to substantial proration. Petitioner Barbara Schreiber filed suit on behalf of herself and similarly situated shareholders, alleging that Burlington, El Paso, and members of El Paso's board of directors violated § 14(e)'s prohibition of "fraudulent, deceptive, or manipulative acts or practices . . . in connection with any tender offer." 15 U.S.C. § 78n(e). She claimed that Burlington's withdrawal of the December tender offer coupled with the substitution of the January tender offer was a "manipulative" distortion of the market for El Paso stock. Schreiber also alleged that Burlington violated § 14(e) by failing the January offer Burlington failed to disclose the "golden parachutes" offered to four of El Paso's managers. She claims that this January nondisclosure was a deceptive act forbidden by § 14(e).

The District Court dismissed the suit for failure to state a claim. 568 F.Supp. 197 (Del.1983). The District Court reasoned that the alleged manipulation did not involve a misrepresentation, and so did not violate § 14(e). The District Court relied on the fact that in cases involving alleged violations of § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b)), this Court has required misrepresentation for there to be a "manipulative" violation of the section. 568 F.Supp., at 202.

The Court of Appeals for the Third Circuit affirmed. 731 F.2d 163 (1984). The Court of Appeals held that the acts alleged did not violate the Williams Act, because "§ 14(e) was not intended to create a federal cause of action for all harms suffered because of the proffering or the withdrawal of tender offers." Id., at 165. The Court of Appeals reasoned that § 14(e) was "enacted principally as a disclosure statute, designed to insure that fully-informed investors could intelligently decide how to respond to a tender offer." Id., at 165-166. It concluded that the "arguable breach of contract" alleged by petitioner was not a "manipulative act" under § 14(e).

We granted certiorari to resolve the conflict,³ 469 U.S. 815, 105 S.Ct. 81, 83 L.Ed.2d 29 (1984). We affirm.

II

A.

We are asked in this case to interpret § 14(e) of the Securities Exchange Act, 82 Stat. 457, as amended, 15 U.S.C. § 78n(e). The starting point is the language of the statute. Section 14(e) provides:

"It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative."

Petitioner relies on a construction of the phrase, "fraudulent, deceptive, or manipulative acts or practices." Petitioner reads the phrase "fraudulent, deceptive, or manipulative acts or practices" to include acts which, although fully disclosed, "artificially" affect the price of the takeover target's stock. Petitioner's interpretation relies on the belief that § 14(e) is directed at purposes broader than providing full and true information to investors.

Petitioner's reading of the term "manipulative" conflicts with the normal meaning of the term. We have held in the context of an alleged violation of § 10(b) of the Securities Exchange Act:

"Use of the word 'manipulative' is especially significant. It is and was virtually a term of art when used in connection with the securities markets. It connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976) (emphasis added).

Other cases interpreting the term reflect its use as a general term comprising a range of misleading practices:

"The term refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity. . . . Section 10(b)'s general prohibition of practices deemed by the SEC to be 'manipulative'—in this technical sense of artificially affecting market activity in order to mislead investors—is fully consistent with the fundamental purpose of the 1934 Act ' "to substitute a philosophy of full disclosure for the philosophy of caveat emptor. . . ." ' . . . Indeed, nondisclosure is usually essential to the success of a manipulative scheme. . . . No doubt Congress meant to prohibit the full range of ingenious devices that might be used to manipulate securities prices. But we do not think it would have chosen this 'term of art' if it had meant to bring within the scope of § 10(b) instances of corporate mismanagement such as this, in which the essence of the complaint is that shareholders were treated unfairly by a fiduciary."...