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SWANSON v. WABASH

December 16, 1983

ROBERTA SWANSON, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
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 Certification.

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.

A.

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 law.

The defendants discuss at considerable length the standard of materiality set forth by the United States Supreme Court. The Court has stated:

  An omitted fact is material if there is a substantial
  likelihood that a reasonable shareholder would
  consider it important in deciding how to vote. . . .
  It does not require proof of a substantial likelihood
  that disclosure of the omitted fact would have caused
  the reasonable investor to change his vote. What the
  standard does contemplate is a showing of a

  substantial likelihood that, under all the
  circumstances, the omitted fact would have assumed
  actual significance in the deliberations of the
  reasonable shareholder. Put another way, there must
  be a substantial likelihood that the disclosure of
  the omitted fact would have been viewed by the
  reasonable investor as having significantly altered
  the "total mix" of information made available.

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

B.

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 disclosed.

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
  transaction.

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 368.

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 ...


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