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SWANSON v. WABASH
December 16, 1983
ROBERTA SWANSON, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
WABASH, INC.; KEARNEY-NATIONAL, INC.; THE DYSON-KISSNER-MORAN CORPORATION; K-N HOLDINGS, INC.; JOHN MORAN; BUSHROD BURNS, JR.; RICHARD DONOVAN; WILLIAM BOYD; JACK HOSLER AND E. ROBERT THOMAS, JR., DEFENDANTS.
The opinion of the court was delivered by: Aspen, District Judge:
MEMORANDUM OPINION AND ORDER
In January of 1981, Kearney-National, Inc. ("Kearney") acquired
control of Wabash, Inc. ("Wabash") through a tender offer to
Wabash shareholders.*fn1 Roberta Swanson ("Swanson"), a
Louisiana citizen, was one of the shareholders who sold her stock
pursuant to the tender offer. Swanson has brought this class
action on behalf of herself and the other Wabash shareholders who
she claims suffered damages from the defendants' fraud and
self-dealing in connection with the tender offer. In particular,
Swanson alleges that the defendants violated various federal and
state securities laws and the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. § 1961-1968.*fn2
Presently before the Court are three motions: the First Motion
of All Defendants to Dismiss, the Second Motion of Certain
Defendants to Dismiss and the Plaintiff's Motion for Class
I. First Motion of All Defendants to Dismiss
The defendants first join in a motion to dismiss all but Count
IV of the complaint for failure to state a claim upon which
relief can be granted. Fed.R.Civ.P. 12(b)(6). When confronted by
a motion to dismiss, a court must view the allegations of the
complaint in the light most favorable to the plaintiff. Conley v.
Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957);
Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40
L.Ed.2d 90 (1974). Therefore, unless a plaintiff cannot prove any
set of facts in support of his claim that would entitle him to
relief, the complaint should not be dismissed under Rule
12(b)(6). Conley, 355 U.S. at 45-46, 78 S.Ct. at 102.
Count I of Swanson's complaint alleges that the defendants
violated Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, by
failing to disclose and by misstating certain material facts in
connection with the Wabash tender offer. These alleged omissions
and misstatements relate to such matters as the nature and
duration of the negotiations leading to the tender offer, a plan
to restructure Wabash and dispose of certain of its assets and
operations, and an agreement to delay the post-tender merger to
provide tax advantages to certain shareholders. The defendants
argue that even if these matters have been omitted or misstated
in the tender offer materials, they are immaterial as a matter of
The defendants discuss at considerable length the standard of
materiality set forth by the United States Supreme Court. The
Court has stated:
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96
S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976) (footnote omitted).*fn3
Although they have accurately described the relevant standard
of materiality in securities cases, defendants have ignored
important aspects of this issue: materiality is "a mixed question
of law and fact," and summary judgment on the question of
materiality is ordinarily precluded.
[T]he underlying objective facts, which will often be
free from dispute, are merely the starting point for
the ultimate determination of materiality. The
determination requires delicate assessments of the
inferences a "reasonable shareholder" would draw from
a given set of facts and the significance of those
inferences to him, and these assessments are
peculiarly ones for the trier of fact.
TSC Industries, 426 U.S. at 450, 96 S.Ct. at 2133 (emphasis added
and footnote omitted).*fn4
Thus, a court should rarely usurp the role of the trier of fact
by determining the issue of materiality as a matter of law.
Assuming — as we must for the purposes of this motion — that the
alleged omissions and misstatements exist, we decline to hold
that no jury or court could ever find that the undisclosed
information "would have assumed actual significance in the
deliberations of the reasonable shareholder." TSC Industries, 426
U.S. at 449, 96 S.Ct. at 2132.*fn5 Accordingly, the defendants'
motion to dismiss Count I of the complaint is denied.*fn6
Count III of the complaint alleges an additional instance of
nondisclosure of material facts in the tender offer. In November
of 1980, Wabash granted Kearney an option to purchase 325,000
shares of Wabash treasury stock. Swanson claims that the purpose
of this option — to help Kearney obtain a majority of Wabash's
stock and to deter a competing tender offer — was not disclosed,
in violation of Sections 10(b) and 14(e) of the Securities
Exchange Act. 15 U.S.C. § 78j(b) and § 78n(e). The defendants
argue that the purpose underlying the option need not be
disclosed, and that, in any event, the purpose of the offer was
We agree. Where the nature and scope of a stock transaction are
adequately disclosed to the shareholders, corporate officials
need not explain their precise motive or purpose. Vaughn v.
Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir. 1980). In two
recent cases in the Seventh Circuit, our Court of Appeals has
followed this principle.
[S]ince a shareholder cannot recover under 10b-5 for
a breach of fiduciary duty, neither can he
"bootstrap" such a claim into a federal securities
action by alleging that the disclosure philosophy of
the statute obligates defendants to reveal either the
culpability of their activities, or their impure
motives for entering the allegedly improper
Panter v. Marshall Field & Co., 646 F.2d 271, 288 (7th Cir.
1981), cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631
(1981). See also Atchley v. Qonaar, 704 F.2d 355, 358 (7th Cir.
1983). The only nondisclosure Swanson alleges regarding the stock
option is the defendants' motive underlying the transaction; this
is insufficient to state a Section 10(b) or 14(e) claim.*fn7
Swanson also alleges in Count III that the stock option granted
to Kearney constitutes a manipulative practice which violates
Sections 10(b) and 14(e).*fn8 In support of her claim, Swanson
relies primarily on the Sixth Circuit's decision in Mobil Corp.
v. Marathon Oil Co., 669 F.2d 366 (6th Cir. 1981). Marathon was
the first Court of Appeals case to confront the question of
whether "lock up" stock options granted to a tender offeror might
be manipulative within the meaning of Section 14(e). The Sixth
Circuit held that the stock option in Marathon was in fact
manipulative. The defendants argue that Marathon can be
distinguished factually from the present case, and that Marathon
incorrectly broadened the scope of Section 14(e). As explained
below, we are constrained by various Supreme Court and Seventh
Circuit decisions to hold that the stock option in this case
cannot be deemed manipulative under Section 10(b) or 14(e).*fn9
In Marathon, Mobil Corporation announced a tender offer to
purchase up to 40 million shares of stock of Marathon Oil
Company. Marathon's directors wanted to avoid a merger with
Mobil, so they searched for a "white knight" — a more attractive
candidate for merger. Marathon found U.S. Steel, who offered to
purchase 30 million shares of Marathon stock and to merge
Marathon with a U.S. Steel subsidiary. U.S. Steel's offer and
merger agreement was subject to two conditions: (1) an
irrevocable option for the purchase of 10 million authorized but
unissued shares of Marathon stock (approximately 17%, of
Marathon's outstanding shares); and (2) an option for U.S. Steel
to purchase Marathon's interest in a valuable oil field, to be
exercised only if U.S. Steel's offer failed and a third party
gained control of Marathon. Marathon, 669 F.2d at 367. Mobil sued
to enjoin these two options, claiming, inter alia, that the offer
was a manipulative
device in violation of Section 14(e) of the Williams Act. Id. at
The Sixth Circuit held that each of the two options violated
Section 14(e)'s prohibition of manipulative acts. Because
"manipulative" is defined in neither the Securities Exchange Act
nor the Williams Act, the Sixth Circuit looked to the Supreme
Court's description of the term: "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) (footnote omitted). The Court of
Appeals also considered the statement of the Supreme Court that
"No doubt Congress meant to prohibit the full range of ingenious
devices that might be used to manipulate securities prices."
Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477, 97 S.Ct.
1292, 1302, 51 L.Ed.2d 480 (1977) (Section 10(b)). The Sixth
Circuit thus concluded that
In our view, it is difficult to conceive of a more
effective and manipulative device than the "lock-up"
options employed here, options which not only
artificially affect, but for all practical purposes
completely block, normal healthy market activity and,
in fact, could be construed as expressly designed
solely for that purpose.
Marathon, 669 F.2d at 374.
The Marathon Court decided that nondisclosure was not the only
basis for a 10(b) or 14(e) claim, and that manipulation could
exist independent of any misstatement or omission of material
facts. Id. at 375-76. Such a holding, however, flies in the face
of the established interpretation of these statutory provisions.
Various Supreme Court and lower federal court decisions have
unequivocally stated that Sections 10(b) and 14(e) are intended
solely to require full and fair disclosure to investors.
For example, in Piper v. Chris-Craft Industries, Inc.,
430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977), the Supreme Court closely
analyzed the legislative history of Section 14(e). Although the
Court was not faced with the precise question before us
today,*fn10 it discussed at length the congressional purpose
underlying the statute. The Court observed that "the bill as
finally enacted by Congress was styled as a disclosure provision:
`A bill to provide for full disclosure of corporate equity
ownership of securities under the Securities Exchange Act of
1934'" Id. at 27, 97 S.Ct. at 942 (citation omitted). Moreover,
the statute's sponsors "made it clear that the legislation was
designed solely to get needed information to the investor." Id.
at 30-31, 97 S.Ct. at 944.
The Supreme Court discussed the specific meaning of
"manipulative" in Santa Fe Industries, Inc. v. Green,
430 U.S. 462, 97 ...