Valente v. Pepsico, Inc., Civ. A. No. 4537.

• Citation: 454 F. Supp. 1228
• Decision Date: 12 July 1978
• Docket Number: Civ. A. No. 4537.
• Parties: Elizabeth J. VALENTE et al., Plaintiffs, v. PEPSICO, INC., et al., Defendants.
• Court: U.S. District Court — District of Delaware

454 F. Supp. 1228

Elizabeth J. VALENTE et al., Plaintiffs, v. PEPSICO, INC., et al., Defendants.

Civ. A. No. 4537.

United States District Court, D. Delaware.

July 12, 1978.

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Rodman Ward, Jr., and James L. Holzman, of Prickett, Ward, Burt & Sanders, Wilmington, Del., of counsel; Herbert E. Milstein and Glen DeValerio, of Kohn, Milstein & Cohen, Washington, D. C., Harold E. Kohn, of Kohn, Savett, Marion & Graf, Philadelphia, Pa., for plaintiffs.

Richard J. Abrams of Richards, Layton & Finger, Wilmington, Del., for intervening plaintiff, James G. Ryan.

Alfred M. Isaacs of Flanzer & Isaacs, Wilmington, Del., for intervening plaintiffs, George Pope and Andrew Dimitriou.

Hugh L. Corroon of Potter, Anderson & Corroon, Wilmington, Del., for defendants.

OPINION

CALEB M. WRIGHT, Senior District Judge.

This securities class action is presently before the Court on cross-motions for summary judgment. The plaintiffs, minority holders of common shares, warrants, and debentures of Wilson Sporting Goods ("Wilson"), filed the action on December 13, 1972.¹ The defendants in the suit are PepsiCo, Inc. ("PepsiCo"), Wilson, and twelve individuals who were PepsiCo directors and/or officers in July 1972.² The allegations of the complaint relate to a series of events which followed PepsiCo's acquisition of a majority interest in Wilson in February, 1970. These events culminated in tender offers by PepsiCo and Wilson for Wilson securities in July 1972 and the merger of Wilson into PepsiCo under the Delaware short form merger statute, 8 Del.C. § 253, in December, 1972.

In their complaint, the plaintiffs allege that the defendants violated various provisions of the Securities Exchange Act of 1934, including §§ 7(d), 9(a), 10(b), 13(a), 13(d), 14(d), and 20(a), 15 U.S.C. §§ 78g(d), 78i(a), 78j(b), 78m(a), 78m(d), 78n(d) and 78t(a); and rules 10b-5, 13d and 14d and regulation 13A of the Securities and Exchange Commission, 17 C.F.R. §§ 240.10b-5, 240.13d, 240.14d, and 240.13a.³ Plaintiffs further allege that defendants breached their fiduciary duty to the minority shareholders⁴ of Wilson under state law. The complaint requests both injunctive relief and damages. However, the plaintiffs did not pursue the claim for injunctive relief, and the merger was accomplished on December 22, 1972. Plaintiffs have requested a jury trial.

In October, 1976, the plaintiffs filed a motion for summary judgment against the corporate defendants, PepsiCo and Wilson, based on the section 10(b) claims. This motion was addressed only to certain omissions from the tender offer materials. In December, 1976, in an attempt to clarify the facts and issues in this case, the Court ordered the parties to submit statements of facts and legal contentions and authorities. The parties completed the filing of these submissions in May, 1977. At that time, the defendants filed a motion for summary judgment, apparently addressed to all claims contained in the complaint.

I. FACTUAL BACKGROUND

At the time of its incorporation in April, 1967, Wilson was a wholly-owned subsidiary of Ling-Temco-Vought, Inc. ("LTV"). In August, 1967, Wilson offered for public sale 600,000 shares of common stock, leaving LTV with approximately 75% of the equity in Wilson. In October, 1968, Wilson issued for public sale $35 million of 6?% subordinated debentures due in 1988 and warrants to purchase 875,000 shares of Wilson common stock at an exercise price of $20.25 per Wilson common share. The issue was made in "units", each consisting of one debenture in the principal amount of $1,000, and warrants to purchase 25 shares of common stock. The offer provided that until October 15, 1973, the debentures could be used as payment for common shares at the time the warrants were exercised.

During 1969, PepsiCo became interested in acquisition in the leisure-time industry field. In early 1970, PepsiCo conducted negotiations with LTV concerning acquisition of the majority ownership in Wilson. After approximately ten days of negotiation, PepsiCo and LTV agreed on a price of $63 million, which was equivalent to about $17.50 per share of Wilson common stock.⁵ On February 24, 1970, PepsiCo issued a press release which announced the agreement in principle and disclosed its intention eventually to acquire the remaining 25% publicly held interest in Wilson at a price per share equivalent to what would be paid to LTV. The press release stated that PepsiCo had not determined the specific form and timing of the acquisition of the remaining shares.

Following PepsiCo's acquisition of the majority interest in Wilson, its personnel assumed a substantial role in the management of Wilson, receiving detailed reports on Wilson's operations and meeting regularly with Wilson employees. PepsiCo provided management services to Wilson pursuant to a Services and Sales Contract. The majority of the members of the Wilson Board of Directors were affiliated with PepsiCo. Wilson's earnings performance, which had been unimpressive at the time of the PepsiCo acquisition, improved considerably during 1971 and 1972. During the period at issue in this case, the market price of Wilson stock fluctuated.⁶

After its initial acquisition of Wilson stock, PepsiCo considered various methods of acquiring the remainder of the outstanding shares. In December, 1970, PepsiCo received Internal Revenue Service rulings which were unfavorable to its requests concerning the tax consequences of an exchange of PepsiCo stock for Wilson stock. In January, 1971, PepsiCo issued a press release announcing its intention to acquire within two years all the outstanding Wilson common shares at a price of $17.50 per share, either for cash or for the equivalent value in PepsiCo securities, and to acquire the outstanding warrants for cash or for PepsiCo securities. The announcement also stated that PepsiCo would begin to increase its holdings by purchases of Wilson common stock in the open market from time to time at prices then prevailing and acceptable to it.

Following this announcement, PepsiCo proceeded to purchase Wilson common stock in private transactions and on the open market. In February, 1971, PepsiCo purchased a large block of Wilson common shares which raised its ownership of Wilson shares above 80%. Through further purchases in private transactions and on the open market, PepsiCo increased its share in Wilson to 88.2% by July 26, 1972, the date of the tender offers.

In mid-1972, PepsiCo's Treasury Department prepared a technical study entitled "Wilson Preliminary Recommendation".⁷ This document, dated July 11, 1972, recommended that PepsiCo and Wilson make cash tender offers for the outstanding Wilson securities. On July 26, 1972, the PepsiCo Board of Directors, pursuant to recommendations from PepsiCo management, voted to extend a tender offer for Wilson common shares at $17.50 per share and to extend a tender offer for the outstanding warrants for the purchase of Wilson stock at $3.50 per warrant. On the same day, the Wilson Board of Directors voted to extend a tender offer for Wilson's debentures at $920 per debenture. The tender materials had been prepared by Mudge, Rose, Guthrie & Alexander, PepsiCo's outside counsel, and had been reviewed by the PepsiCo legal staff.

As a result of the tender offers, PepsiCo increased its ownership of Wilson voting securities to approximately 97.4%. Following the tender offers, PepsiCo proceeded with its plans to merge Wilson into PepsiCo. Both PepsiCo and Wilson requested the firm of Lionel D. Edie & Company to conduct a valuation of the fairness of the figure of $17.50 per share to be paid in connection with the merger. On September 27, 1972, PepsiCo publicly announced its intention to complete by the end of January, 1973, its acquisition of the outstanding Wilson equity securities by means of a merger in which the remaining minority shareholders would be paid $17.50 cash per share.

On November 3, 1972, Edie & Company issued a report which concluded that the price of $17.50 cash per share was fair and reasonable to the Wilson minority shareholders. On November 16, 1972, PepsiCo and Wilson jointly announced that the merger of Wilson into PepsiCo would take place on December 22, 1972. On December 13, 1972, plaintiffs filed the present suit. The merger took place as announced on December 22, 1972. Following the merger, the minority shareholders were notified by mail of the mechanics of submitting their stock certificates in order to receive $17.50 per share and of their appraisal rights under Delaware law, 8 Del.C. § 262.⁸

II. STANDARD FOR SUMMARY JUDGMENT

The briefs submitted by the parties have focused on the plaintiffs' contentions that there were material nondisclosures in the tender offer materials of July 26, 1972, which constituted violations of section 10(b) and rule 10b-5 and violation of defendants' fiduciary duty to the Wilson minority shareholders under state law. The present opinion will be directed only to these contentions, since the remaining claims of the complaint have not been briefed thoroughly at this time. The motions of the parties will be treated as cross-motions for partial summary judgment.

Fed.R.Civ.P. 56(c) provides that summary judgment may be granted if the material submitted to the Court shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The standard for decision on cross-motions for summary judgment has been stated by the Third Circuit:

"It is well settled that cross-motions for summary judgment do not warrant the court in granting summary judgment unless one of the moving parties is entitled to judgment as a matter of law upon facts that are not genuinely disputed. Rains v. Cascade Industries, Inc., 402 F.2d 241, 245 (3d Cir. 1968); F. A. R. Liquidating Corp. v. Brownell, 209 F.2d 375, 380 (3d Cir. 1954). .

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