Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 80 C 3965-- Hubert L. Will, Senior District Judge
Flaum and Easterbrook, Circuit Judges, and Dumbauld, Senior District Judge.*fn1
EASTERBROOK, Circuit Judge.
Judicial approval of a settlement involving the valuation of securities is a discretionary act, and an application to revisit that approval asks a court a question about its own discretionary processes. If the judge who approved the settlement concludes that misstatements in the hearings leading to the approval did not affect his earlier decision, that brings the litigation to an end. We affirm the district judge's decision not to reopen his approval of the settlement in this case.
In 1974 Esmark, Inc., which owned 53.5% of ;the stock of TransOcean Oil, Inc., decided to acquire the rest. TransOcean's stock was selling for about $7 per share. On September 30, 1974, Esmark made a tender offer through its subsidiary Vickers Energy Corp., at $12 per share, for all of the outstanding stock. The offer fetched more than four million shares, raising Esmark's ownership to 87.5%. Three groups of shareholders brought class action suits, contending that the tender offer circular withheld information tending to show that Esmark believed TransOcean to be worth a good deal more than $12 per share. A large institutional holder brought a fourth suit.
The suit filed in the Chancery Court of Delaware moved forward while the others languished. The Supreme Court of Delaware concluded that Esmark had violated its duty to disclose its internal valuations showing that TransOcean was worth more than $12 per share. Lynch v. Vickers Energy Corp., 383 A.2d 278 (Del. 1977). In proceedings on remand in Delaware, the Chancellor determined that TransOcean's stock was worth less than $12 in 1974 and less than $15 in 1978. The Chancellor therefore held that there should be no remedy. While an appeal from this decision was pending, Esmark and the class representatives in the action filed in the Northern District of Illinois reached a settlement. The terms of the settlement, as finally amended, called for Esmark to pay an additional $2.80 for each of the shares it obtained in the tender offer and for TransOcean to be merged into Esmark, with 0.90 shares of Esmark's stock replacing each outstanding share of TransOcean's stock. TransOcean's board approved the merger (over one dissent) on condition that the Illinois court find the price "fair" within the meaning of Delaware law.
Investors who had tendered their stock to Vickers in 1974 were free to opt out of this settlement; those who did so ultimately received $8.50 per share in litigation that followed a second decision of the Supreme Court of Delaware. Lynch v. Vickers Energy Corp., 429 A.2d 497 (Del. 1981) (damages formula based on rescissionary measures), overruled in part by Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). But those who still held shares of TransOcean at the time of the settlement could not opt out. The settlement called for a merger, which would convert all shares of TransOcean to shares of Esmark by operation of Delaware law. Thus investors who thought they could obtain more than the value of 0.90 Esmark shares by litigation (or simply by holding the stock) could do this only by persuading the district court in Illinois to reject the settlement. Investors holding approximately half of the 1.5 million outstanding shares objected, and the district court held a hearing in August 1979 on the fairness of the settlement. (This procedure gave the objectors an automatic prior review they would not have had under Delaware law. Esmark, holding 87.5% of the stock, could have rammed through a merger by force of its own votes. The dissatisfied investors could have stopped the merger only by convincing the Chancery Court of Delaware that the merger lacked "entire fairness" and a "business purpose," the legal standards before Weinberger abolished the "business purpose" requirement and made the appraisal remedy exclusive in the absence of fraud.)
The proponents of the settlement introduced three kinds of testimony. A professor of financial economics testified that the price of TransOcean in the stock market represented the collective wisdom of informed investors about the value of the stock, and that the price offered in the settlement (the value of 0.90 Esmark shares in August 1979 was about $25) was well in excess of the value as measured by the market. See Mills v. Electric Auto-Lite Co., 552 F.2d 1239, 1244-48 (7th Cir.), cert. denied, 434 U.S. 922, 54 L. Ed. 2d 279, 98 S. Ct. 398 (1977) (endorsing this method of determining value for stocks of corporations trading in liquid public markets).*fn1 An investment banker testified that TransOcean should be valued by capitalizing its average annual earnings over the past five years; the value derived in this way also was less than the one offered in the settlement. Irwin L. Levy, an oil and gas consultant, offered a third method: he computed the value of TransOcean's oil and gas reserves and its costs of production on existing and projected fields; he predicted changes in the price of oil and gas, and derived TransOcean's after-tax profits for future years. Then he discounted these future profits to present value at a rate of 18% per year. Levy came up with a value of $23.90 per share, again less than the settlement.
The objectors cross-examined Levy vigorously about his assumptions and methods. They also attacked Levy's approach through the testimony of other participants in the industry who thought that Levy had overstated TransOcean's costs, understated the potential of its fields, and used an excessive rate of discount, which substantially reduced the present value of the future cash flows. They challenged him to name a transaction in which the 18% rate had been used; he did not. Other witnesses for the objectors-including the dissenting director of TransOcean and a financial analyst who established value by looking at prices paid in recent transactions concerning other oil and gas company stocks-maintained that TransOcean was worth between $30 and $48 per share.
The district court approved the settlement. TransOcean was merged into Esmark. In June 1980 Esmark put TransOcean back on the market. It received bids ranging from $381 million (or approximately $31 per former share of TransOcean) to some $740 million ($60 per share). It accepted the high bid, from Mobil Corp., in August 1980. Several of the objectors at the 1979 hearing (the appellants here), who held about 450,000 shares, immediately sought to reopen the judgment under Fed. R. Civ. P. 60(b), arguing that Esmark had withheld from the court the fact that it planned to resell TransOcean at a profit. The objectors later added the contention that Levy had lied to the court about his experience in oil and gas transactions and had made numerous errors in his assumptions and calculations, thus undercutting his testimony, on which, the objectors maintained, the court had relied in approving the settlement. Moreover, they contended, counsel for Esmark knew or should have know of these problems and concealed them from the court. (Though Rule 60(b)(3) limits to one year the time within which to make a motion based on misrepresentation or fraud, no one has made anything of the fact that the objectors took more than one year after the 1979 judgment to raise the contention that Levy testified falsely, which is now the central issue in the case. We shall be similarly silent, though without implying that this would not have been worthy of attention had the parties raised it.)
The district court held another hearing in 1982, this time concentrating on Levy's experience and computations, on counsel's knowledge of these, and on Esmark's intentions in August 1979. The court concluded that Levy had exaggerated his experience in oil and gas transactions, representing that he was involved in "deals" in which the parties had used cash flow calculations and an 18% rate of discount. The court found this untrue; Levy had not been involved in sales of assets ("deals") involving such calculations, though his firm may have used the same methodology to give advice about deals that fell through and about lending transactions. The judge stated, however, that Levy's misrepresentation had not affected the judge's decision to approve the settlement. He concluded that Levy's experience in sales of oil and gas assets had been challenged in 1979; "he was unable [when challenged in 1979] to name a single, completed transfer in which the 18% rate was applied, a fact of which we then made careful note." The objectors attacked Levy vigorously and introduced evidence that 13% was a more realistic rate. The evidence produced in 1982 did not shed harsher light on Levy's computations than the evidence in 1979. As a result, the court concluded, "we were not misled into relying on Levy's testimony for more than it was worth."
The court also stated: "We have found no evidence of fraud or deliberate deceit in this testimony. There is evidence that Levy's evaluation of TransOcean's net asset worth was conservative. There is also evidence that some of Levy's statements were not well supported. Finally, there is some evidence that Levy misstated or exaggerated the extent of his experience in actual transaction . . .To the extent Levy made positive misstatements about his experience, he was challenged in 1979." The court observed that Esmark's managers may have thought that TransOcean was worth more than $25 per share but that they were entitled to present an expert with a "conservative" assessment. The process of valuation is inexact and people will be found at both ends of a range. Esmark presented the facts necessary to compute value; the court thought this enough. Finally, the court rejected the assertion that Esmark harbored a secret intention to resell TransOcean. The objectors had presented no more than a chain of inferences based on Esmark's need for cash and its ultimate sale of TransOcean. This was not enough, the court concluded, to show "even more probably than not" that Esmark had concealed in August 1979 a current intention to resell.
The objectors launch a fusillade of charges against the district court's failure to reopen the judgment. They maintain that the court misunderstood the depth of Levy's deceit, that Esmark's lawyers recklessly vouched for Levy's expertise, that Esmark withheld an internal valuation exceeding Levy's and hid from the court its intent to resell TransOcean, and that Levy erred in his calculations. We first consider the standard under which ...