Weiner v. Quaker Oats Co.

• Decision Date: 06 November 1997
• Docket Number: No. 94-5418,No. 96-5404,No. 94-5417,94-5417,94-5418,96-5404
• Citation: 129 F.3d 310
• Parties: Fed. Sec. L. Rep. P 99,563, 39 Fed.R.Serv.3d 464 Myron WEINER; Nicholas Sitnycky, on behalf of themselves and all others similarly situated v. The QUAKER OATS COMPANY; William D. Smithburg (D.C. Civil). Ronald ANDERSON; Robert Furman, on behalf of themselves and all others similarly situated v. The QUAKER OATS COMPANY; William D. Smithburg (D.C. Civil). Myron Weiner, Nicholas Sitnycky, Ronald Anderson and Robert Furman, Appellants
• Court: U.S. Court of Appeals — Third Circuit

Page 310

129 F.3d 310

Fed. Sec. L. Rep. P 99,563, 39 Fed.R.Serv.3d 464

Myron WEINER; Nicholas Sitnycky, on behalf of themselves and all others similarly situated v. The QUAKER OATS COMPANY; William D. Smithburg (D.C. Civil

No. 94-5417).

Ronald ANDERSON; Robert Furman, on behalf of themselves and all others similarly situated v. The QUAKER OATS COMPANY; William D. Smithburg (D.C. Civil

No. 94-5418).

Myron Weiner, Nicholas Sitnycky, Ronald Anderson and Robert

Furman, Appellants

No. 96-5404.

United States Court of Appeals Third Circuit.

Argued Feb. 4, 1997.

Decided Nov. 6, 1997.

M. Richard Komins (argued), Leonard Barrack, Barrack, Rodos & Bacine, Philadelphia, PA; Joseph R. Sahid, Barrack, Rodos & Bacine, New York City; David J. Bershad, Robert A. Wallner, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, for Appellants.

Frederic K. Becker, Wilentz, Goldman & Spitzer, Woodbridge, NJ; Dennis J. Block (argued), Weil, Gotshal & Manges, New York City, for Appellees.

Before: STAPLETON and MANSMANN, Circuit Judges, and POLLAK, District Judge. ^*

OPINION OF THE COURT

LOUIS H. POLLAK, District Judge.

This case raises the question whether and in what circumstances a corporation and its officers have an obligation to investors to update, or at least not to repeat, particular projections regarding the corporation's financial situation. Plaintiffs in this securities-fraud action are purchasers of stock in The Quaker Oats Company ("Quaker") who contend that defendants, Quaker and its chief executive officer, William D. Smithburg, disseminated false or misleading information to the investment community. Plaintiffs assert that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and the Securities and Exchange Commission's Rule 10b-5, by continuing to announce or let stand certain projected figures for earnings growth and debt-to-equity ratio which defendants allegedly knew had become inaccurate in light of Quaker's planned, highly leveraged, acquisition of Snapple Beverage Corp. ("Snapple").

The district court, on motion by defendants, dismissed the case for failure to state a claim under Fed.R.Civ.P. 12(b)(6). For the reasons given below, the judgment of the district court will be reversed.

I.

In reviewing a judgment dismissing a complaint for failure to state a claim, all well-pleaded allegations are taken to be true. Lorenz v. CSX Corp., 1 F.3d 1406, 1411 (3d Cir.1993). The following recitation of the facts of this case is therefore drawn from the "Second Amended Class Action Complaint." ¹

This action was brought "on behalf of a class of persons who purchased the common stock of Quaker during the period from August 4, 1994 through and including November 1, 1994." Complaint at p 4. Plaintiffs Myron Weiner, Nicholas Sitnycky, Ronald Anderson and Robert Furman all purchased Quaker stock during the proposed class period.

Defendant Quaker is a New Jersey corporation which produces and markets a variety of consumer food products and beverages, including Gatorade soft drink. Defendant William D. Smithburg is Quaker's chairman and chief executive. The complaint asserts that, in 1994, Quaker was widely considered vulnerable to takeover. Allegedly in order to make Quaker a less attractive candidate for takeover and thereby to protect their own positions, Quaker's management resolved to increase the company's debt by acquiring Snapple, a manufacturer of bottled juices and flavored tea products. On November 2, 1994, the two companies announced that they would combine in a $1.7 billion tender offer and merger transaction. The deal was financed entirely with new debt, significantly increasing Quaker's debt-load and making the company a far less appealing takeover prospect. ²

A. Factual Background

Negotiations between Quaker and Snapple apparently began in the spring of 1994. As Smithburg later told Bloomberg Business News, "[R]ight after some discussions started, it was so obvious that [Snapple] had an interest and we had an interest and these two great brands, Gatorade and Snapple, [would] benefit from a put-together, and it just snowballed from then...." Complaint at p 29. By early August 1994, Quaker had advised Snapple that it was interested in pursuing a merger of the two companies and had commenced a due diligence investigation. Id. The deal was consummated in November of that year.

Over the course of the year prior to its acquisition of Snapple, Quaker had announced in several public documents and public statements the company's expectations for earnings growth and its guideline for debt-to-equity ratio. It is these announcements, and the numbers contained therein, which form the basis for the instant action.

On October 4, 1993, in its Annual Report for the fiscal year ended June 30, 1993, Quaker included the following statement: One way to measure debt is to compute the ratio of [total] debt as a percent of total debt plus preferred and common shareholders' equity. Total debt includes both short-term and long-term borrowing. Our debt-to-total capitalization ratio at June 30, 1993 was 59 percent, up from 49 percent in fiscal 1992. Quaker's total debt remained essentially even. Therefore, this increase was primarily due to the decrease in the book value of common shareholders' equity which resulted from our share repurchases and the $116 million charge for adopting new accounting principles. For the future, our guideline will be in the upper-60 percent range.

Complaint at p 22.

Smithburg reiterated this "guideline" in a letter contained in the same Annual Report:

[O]ur Board of Directors [has] authorized an increase in our leverage guideline, along with a share repurchase program of up to 5 million shares. Our guideline for leverage in the future will be to maintain a total debt-to-total capitalization ratio in the upper-60 percent range.

Complaint at p 23.

Quaker's Form 10-Q for the quarter ended September 30, 1993, which was filed with the SEC in November 1993, repeated the total debt-to-total capitalization ratio guideline:

Short-term and long-term debt (total debt) as of September 30, 1993, increased $98.6 million from June 30, 1993. The total-debt-to-total capitalization ratio ... was 63.5 percent and 59.0 percent as of September 30, 1993 and June 30, 1993, respectively.... One of the Company's financial objectives is to generate economic value through the use of leverage, while maintaining a solid financial position through strong operating cash flows. The Company has decided to increase its guideline for leverage in the future to the upper-60 percent range.

Complaint at p 24.

Quaker did not, at any time before the November 1994 announcement of the acquisition of Snapple, make any public statement or public filing that amended or qualified the above quoted recitals from the 1993 Annual Report and the Form 10-Q.

On August 4, 1994, Quaker announced its financial results for the fourth quarter and the fiscal year that had ended June 30, 1994. In a published report and a public meeting, Quaker announced a growth in earnings of 5% over earnings for fiscal 1993. The Dow Jones News Wire reported that at the August 4 meeting Smithburg had stated Quaker was " 'confident' of achieving at least 7% real earnings growth" in fiscal 1995. Complaint at p 27.

On September 23, 1994, Quaker disseminated its Annual Report for fiscal 1994. The report, which was incorporated into Quaker's Form 10-K filed the same day with the SEC, stated that "we are committed to achieving a real earnings growth of at least 7 percent over time." Complaint at p 33.

The 1994 Annual Report also contained a statement regarding the company's total debt-to-total capitalization ratio. Quaker noted that

[a]t the end of fiscal 1994, our total debt-to-total capitalization ratio was 68.8 percent on a book-value basis, in line with our guideline in the upper-60 percent range.

Complaint at p 32.

On November 2, 1994, Quaker and Snapple announced that Quaker would acquire Snapple in a tender offer and merger transaction for $1.7 billion in cash. Subsequent to this announcement, the price of Quaker stock fell $7.375 per share--approximately 10% of the stock's value. Complaint at p 34.

To finance the acquisition, Quaker had obtained a $2.4 billion credit from a banking group led by NationsBank Corp. The Snapple acquisition nearly tripled Quaker's debt, from approximately $1 billion to approximately $2.7 billion. The acquisition also increased Quaker's total debt-to-total capitalization ratio to approximately 80%. Complaint at p 35.

Securities analysts suggested that the merger would make Quaker less attractive as a takeover target. One noted that "[Quaker's] takeover potential seems quite low," another that "[i]t was a do-or-die deal. Quaker had to buy something or they were going to be taken out." A third asserted that "[i]t is clearly a defensive move. They're paying a fair amount for Snapple. Suddenly someone can't swoop in and buy up Quaker. Even a leveraged buyout investor can't break things up because of a huge gorilla like Snapple." Complaint at p 35.

B. Procedural History

On November 10, 1994, purchasers of Quaker stock in the period before the Snapple acquisition filed two actions, which were later consolidated, in federal court in New Jersey. In each action, plaintiff stock purchasers alleged that defendants Quaker and Smithburg had violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, ³ 15 U.S.C. §§ 78j(b) and 78t, and the Securities and Exchange Commission's Rule 10b-5, ⁴ 17 C.F.R. § 240.10b-5. Plaintiffs maintained that defendants had known that the impending purchase of Snapple would drive Quaker's total debt-to-total capitalization ratio up and earnings growth down, but had nonetheless failed to adjust their public projections for those figures. This failure, plaintiffs claimed, had artificially inflated the price of Quaker's stock in the period from August 4 to ...