Warner Communications, Inc. v. Murdoch, Civ. A. No. 84-13 CMW.

CourtUnited States District Courts. 3th Circuit. United States District Court (Delaware)
Citation581 F. Supp. 1482
Docket NumberCiv. A. No. 84-13 CMW.
PartiesWARNER COMMUNICATIONS, INC., Plaintiff, v. Keith Rupert MURDOCH, et al., Defendants. NEWS INTERNATIONAL PLC, Counterclaim and Third-Party Plaintiff, v. WARNER COMMUNICATIONS, INC., Counterclaim-Defendant, Steven J. Ross, et al., Third-Party Defendants.
Decision Date16 March 1984

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Rodman Ward, Jr., and Thomas J. Allingham, II, Wilmington, Del. of Skadden, Arps, Slate, Meagher & Flom, New York City, for plaintiff-counterclaim defendant, Warner Communications, Inc.; Robert E. Zimet, Douglas M. Kraus, and Jeremy A. Berman, New York City, of counsel.

Martin P. Tully, and Thomas R. Hunt, Jr. of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for defendant-counterclaim and third-party plaintiff, News Intern. plc.; Arnold Bauman, W. Foster Wollen, and Jeremy G. Epstein of Shearman & Sterling, Howard M. Squadron, and Neal M. Goldman of Squadron, Ellenoff, Plesent & Lehrer, New York City, Frederick P. Furth, and Daniel S. Mason of Furth, Fahrner, Bluemle & Mason, San Francisco, Cal., of counsel.

Charles S. Crompton, Jr., James F. Burnett, and Donald J. Wolfe, Jr. of Potter, Anderson & Corroon, Wilmington, Del., for third-party defendants, Chris-Craft Industries, Inc. and BHC, Inc.

R. Franklin Balotti, and Jesse A. Finkelstein, of Richards, Layton & Finger, Wilmington, Del., for defendant, Stanley S. Shuman; James C. McMillin, and Jerome H. Powell of Werbel, Grossman & McMillin, New York City, of counsel.

OPINION

CALEB M. WRIGHT, Senior District Judge.

The conduct of corporate affairs often produces highly charged, hostile battles for corporate control; battles which often resemble a corporate form of feudal warfare. Invariably, these battles are taken out of the marketplace and brought into court, whereby courts are asked to serve as arbiters between the warring factions. This case arises out of such an instance.

BACKGROUND

Commencing in August, 1983, The News Corporation, Ltd. ("News Corporation") and its wholly-owned subsidiary, News International plc ("News International"), began making substantial open market purchases of common stock in Warner Communications, Inc. ("Warner"). News Corporation and News International are companies which are principally controlled and managed by Keith Rupert Murdoch. Forty-six percent of the common stock of News Corporation is owned by Cruden Investments Pty. Limited ("Cruden"), whose stock is wholly owned by various trusts for the benefit of Murdoch and members of his family. Murdoch is Managing Director and Chief Executive Officer of News Corporation, and is Chairman of the Board and Managing Director of News International.

On December 1, 1983, News Corporation and News International jointly filed a Schedule 13D Statement with the SEC pursuant to § 13(d) of the Securities Exchange Act of 1934,1 disclosing their acquisition of 6.7% of Warner's outstanding common stock. On December 13, 1983, News Corporation and News International filed an Amendment to their 13D Statement, disclosing additional purchases of Warner stock that increased their ownership to 7% of Warner's outstanding common stock.

Shortly after News Corporation and News International announced their foothold position in Warner, Warner commenced negotiations with Chris-Craft Industries, Inc. ("Chris-Craft") regarding an exchange of stock between the two companies. On December 29, 1983, the two companies announced, in a press release, that they had reached a binding agreement (the "Exchange Agreement") on an exchange of stock.

The Exchange Agreement provided that Warner would issue to BHC, Inc. ("BHC"), a subsidiary of Chris-Craft, 15,200,000 shares of non-convertible cumulative preferred stock. The stock would carry voting rights, representing approximately 19% of the total voting power of all outstanding Warner stock, as well as antidilution provisions protecting against the diminution of this voting power. In addition, the stock would carry a "put" provision under which BHC could resell the stock to Warner if any shareholder unaffiliated with Chris-Craft acquired 33.3% or more of Warner's outstanding common stock. The repurchase price would be equal to the highest price paid by the 33.3% shareholder for any shares purchased within the preceding six month period.

The Exchange Agreement, however, provided Warner with the option of exchanging the non-convertible cumulative preferred stock for an equal number of convertible cumulative preferred shares. The 15,200,000 preferred shares would be convertible into 12,001,920 common shares, amounting to approximately 15% of Warner's outstanding common stock. The convertible preferred stock, like the non-convertible preferred stock, would carry voting rights and antidilution provisions protecting against the diminution of the stock's voting power. However, in contrast to the non-convertible preferred stock, the convertible preferred shares would not possess a put provision triggered by another shareholder's accumulation of Warner stock.

Under the Exchange Agreement, BHC would issue to Warner 143,750 shares of convertible cumulative preferred stock. The preferred stock would carry voting rights, representing approximately 20% of the total voting power of all outstanding BHC stock. The preferred shares would be convertible into 425,000 shares of BHC common stock after September 15, 1984. The 425,000 shares would represent approximately 42.5% of the total voting power of all outstanding BHC stock.

In response to Warner's and Chris-Craft's December 29, 1983 announcement of their Exchange Agreement, News Corporation and News International, on December 30, 1983, filed a Notification and Report under the Hart-Scott-Rodino Antitrust Improvement Act of 1976,2 seeking regulatory clearance to purchase up to 49.9% of Warner's outstanding voting securities. On January 5, 1984, News Corporation and News International filed a second Amendment to their 13D Statement, disclosing their possible intention to acquire up to 49.9% of Warner's outstanding voting securities. Since the expiration, on January 18, 1984, of the waiting period applicable to News Corporation and News International under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the companies have resumed their purchases of Warner stock on the open market, increasing their holdings to over 8.5% of Warner's outstanding common stock.

On January 6, 1984, News International filed suit in the Delaware Court of Chancery against Warner, Chris-Craft, BHC and inside directors of the companies, claiming, inter alia, that the terms of the Exchange Agreement are unfair to Warner and its shareholders, and that the Agreement was entered into for the primary purpose of entrenching Warner's management. On January 12, 1984, Chancellor Brown denied News International's motion for a temporary restraining order enjoining the consummation of the exchange of stock between Warner and Chris-Craft. News International plc v. Warner Communications, et al., C.A. No. 7420 (Del.Ch., January 12, 1984). Chancellor Brown based his ruling, in part, upon Warner's assurances that Warner's non-convertible preferred stock, with its put provision, would be used only as a bridge security in the transaction and that Warner would exercise its option to exchange the non-convertible preferred shares for the convertible preferred shares, upon securing the New York Stock Exchange's approval of the listing of the common stock underlying the convertible preferred stock. Id., at 2-3.

On January 18, 1984, Warner and Chris-Craft consummated their exchange of stock (the "W-CC Transaction"). Warner initially issued its non-convertible preferred stock to BHC in exchange for BHC's convertible preferred stock. However, on January 19, 1984, the New York Stock Exchange approved the listing of the common stock underlying Warner's convertible preferred stock. Thus, on January 19, 1984, Warner exercised its option to exchange the non-convertible preferred shares issued to BHC for the convertible preferred stock.

On January 29, 1984, Chris-Craft, BHC, and United Television, Inc. ("UTV"), a subsidiary of BHC, jointly filed a 13D Statement with the SEC, disclosing their holdings of Warner stock and their possible intention of acquiring additional shares in the future. As a result of the W-CC Transaction and open market purchases of Warner common stock, the Chris-Craft group presently owns in excess of 20% of Warner's outstanding voting securities.

THE LAWSUIT

On January 10, 1984, Warner filed the present suit against Murdoch; News Corporation; News International; Cruden; and Stanley Shuman, a director of News Corporation and an investment advisor to Murdoch (the "Murdoch Group"). Warner claims that the 13D Statements of News Corporation and News International are false and misleading in various respects, and that the Murdoch Group's acquisition of Warner stock threatens to create regulatory and contractual problems for Warner, resulting in tortious interference with Warner's conduct of business.

News International,3 in turn, has filed counterclaims and third-party claims against Warner; Warner's directors; Chris-Craft; BHC; and Chris-Craft's directors. News International claims that the W-CC Transaction is the end-product of a long-planned, clandestine entrenchment scheme by Warner's management. News International alleges that, by concealing the entrenchment plan and by engaging in the W-CC Transaction, Warner and its directors have violated § 10(b) of the Securities Exchange Act of 19344 and Rule 10b-55 promulgated thereunder, and § 17(a) of the Securities Act of 1933.6 In addition, News International claims that, by participating in, and aiding and abetting these violations, Chris-Craft, BHC, and Chris-Craft's directors have violated § 10(b) and § 207 of the Exchange Act, and § 17(a) of the Securities Act. Furthermore, News...

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