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June 3, 1985


The opinion of the court was delivered by: Prentice H. Marshall, District Judge.


Plaintiffs, in their Revised Third Amended Complaint, charge defendants in five counts with alleged violations of the securities laws and regulations. Defendants have moved for summary judgment on two separate grounds. We will begin with the motion for summary judgment filed by Texasgulf, Inc. (Texasgulf).


Plaintiffs charge Texasgulf with making four statements which were misleading and deliberately and/or recklessly made, so that the statements operated as a fraud and deceit upon the investing public. Revised Third Amended Complaint (Complaint), ¶ 25. Central to plaintiffs' theory of recovery are the allegations that defendant H. Anthony Hampson (Hampson) was acting as a Texasgulf director during the negotiations which led to a tender offer for Texasgulf common stock. Specifically, plaintiffs allege that in February, 1981, representatives of Canada Development Corporation (Canada Development), including Hampson, began negotiations with Societe Nationale Elf Aquitaine (Societe) concerning the ultimate takeover of Texasgulf by a Societe subsidiary. Complaint, ¶ 11. During the negotiations, Hampson had access to non-public Texasgulf information by virtue of his position as a Texasgulf director. Id., ¶ 14. This non-public information, supplied by Hampson to Canada Development, was a significant factor in the negotiations. Id., ¶¶ 15-17. Hampson, in providing the non-public information for use in the negotiations, is alleged to have acted both as a Texasgulf director and as a Canada Development officer. Id., ¶ 18. Plaintiffs assert that because of the knowledge of Hampson, Texasgulf knew or with the exercise of reasonable diligence could or should have known that negotiations were underway concerning a tender offer for Texasgulf shares. Id., ¶ 19.

Texasgulf's knowledge of the negotiations is crucial to plaintiffs' claim that its press releases and statements in June, 1981 were in violation of the securities laws. There was unusual trading activity in Texasgulf stock. On June 5, 1981 the New York Stock Exchange (NYSE) suspended trading of the stock and inquired of Texasgulf whether it knew of any reason for the unusual trading activity. Texasgulf issued a press release in response to this inquiry which stated that it knew of no reason for that trading activity. Complaint, ¶¶ 20, 21. Additional inquiries were made by the NYSE, and further statements were issued by Texasgulf on June 19 and 23. Id., ¶¶ 23, 24. Plaintiffs also charge Texasgulf with responsibility for a newswire statement which appeared on or about June 18, 1981. Id., ¶ 22.

Prior to issuing the alleged misleading statements, Texasgulf inquired of Hampson and Canada Development whether Canada Development was negotiating to sell its shares in Texasgulf or whether they knew of any reason for the unusual trading activity. Complaint, ¶ 27. Plaintiffs acknowledge that Hampson and Canada Development "repeatedly denied" that Canada Development was negotiating the sale of its Texasgulf shares and that they gave Texasgulf reason to believe that Texasgulf would be advised if negotiations were undertaken. Id., ¶ 28.

Finally, plaintiffs charge Texasgulf with failing to investigate reasonably to ascertain the accuracy of its statements. Complaint, ¶ 37. In our memorandum opinion of August 28, 1984, we struck this allegation as to Texasgulf. Etshokin v. Texasgulf, Inc., 106 F.R.D. 320, 321 (N.D.Ill. 1984).

Texasgulf has renewed its motion for summary judgment, arguing that it lacked the mental state or scienter necessary for either a Rule 10b-5 or § 14(e) violation of the securities laws.*fn1 It asserts that as a matter of law Hampson's knowledge may not be imputed to Texasgulf. We have previously discussed whether the knowledge of an interlocking director may be attributed to Texasgulf. Etshokin v. Texasgulf, Inc., 612 F. Supp. 1212, 1217-1219 (N.D.Ill. 1984). We need not repeat that entire discussion here. The threshold question in this inquiry is whether Hampson acquired knowledge of the proposed tender offer for Texasgulf shares while acting in the course of his employment with that corporation within the scope of his authority. Plaintiffs maintain that a genuine issue of material fact exists as to whether Hampson was acting in the capacity of a Texasgulf director, which issue precludes entry of summary judgment in Texasgulf's favor.

Plaintiffs emphasize the fact that Hampson supplied certain non-public Texasgulf information which was crucial to the negotiations between Canada Development and Societe. We recognize that Hampson had access to this non-public information by virtue of his position as a director of Texasgulf. But the mere fact of access to and disclosure of this information does not establish that Hampson was acting in his capacity as a Texasgulf director. Plaintiffs have not argued that Hampson's disclosure was made at the behest of Texasgulf. Nothing in the record suggests that Texasgulf knew or approved of Hampson's disclosure of this non-public information in connection with the negotiations for the proposed tender offer. Assuming that his disclosure was unauthorized and therefore a breach of Hampson's fiduciary duties to Texasgulf, it would be a strange result indeed to base the corporation's liability on an unauthorized disclosure by one of its directors. Plaintiffs have cited no cases which would support such a result.

Contrary to plaintiffs' assertions, we fail to see how any dispute as to the role played by the non-public Texasgulf information in the Canada Development-Societe negotiations raises a question as to whether Hampson was acting as a Texasgulf director. It is Hampson's knowledge of the proposed tender offer — rather than his disclosure of non-public information — which plaintiffs seek to impute to Texasgulf.

Plaintiffs argue that no clear line of demarcation can be drawn between Hampson's role as a Canada Development officer and his role as a Texasgulf director. From his own testimony, it is clear that Hampson had no trouble in drawing this line. First, he has stated that he carried on the negotiations with Societe "in my capacity as President and Chief Executive Officer of CDC [Canada Development], not in my capacity as Director of Texasgulf." Deposition of H. Anthony Hampson, taken in Weintraub v. Texasgulf, Inc., 564 F. Supp. 1466 (S.D.N.Y. 1983) (Hampson Dep. Tr.) at 47. Although the negotiations with Societe began in February, 1981, Hampson did not discuss the on-going negotiations with the Texasgulf Board of Directors at the meetings he attended in March and April, 1981. Hampson Dep. Tr. at 41. The fact that Hampson kept the negotiations with Societe a secret from the Texasgulf management is confirmed by the Minutes of the meeting of the Canada Development Board of Directors for June 25, 1981 — the day that board approved the proposed tender offer and the day before the public announcement.

  [T]he directors were strongly in favour of the
  concept of acquiring the Canadian assets of
  Texasgulf. Some directors expressed concern about the
  consequences of not having informed Texasgulf
  management beforehand of the proposed transactions.

Minutes at 6, Plaintiffs' Exhibit B.

It is also clear that the interests of Canada Development were foremost in Hampson's mind. With regard to offers to buy that corporation's shares in Texasgulf, Hampson testified that he would refer the matter first to the Canada Development Board and upon its consideration of the matter he would advise Texasgulf. Hampson Dep. Tr. at 55. That the interests of Canada Development came first is also reflected in his testimony concerning his telephone conversation with Mollison, Texasgulf's president, following the public announcement of the tender offer.

  We had received an offer from Elf Aquitaine [Societe]
  that we thought was particularly attractive to us
  [Canada Development], and particularly attractive to
  all the shareholders, and that we intended to accept
  it. I sketched out the nature of the offer and the
  nature of the agreement. . . . I offered to explain
  in full to him and anybody else, the reasons for our
  thinking so.

Id. at 98. In concluding that conversation, Hampson remarked that he was sure "this was an unpleasant surprise." Id. at 99.

There is also evidence that Hampson was aware of the conflict between the interests of the two corporations. John P. Gallagher, one of the three individuals who sat on the boards of both Texasgulf and Canada Development, testified as to his reasons for not attending the Canada Development board meetings between February and June, 1981. "[W]henever there was going to be something else came [sic] up that might be a conflict of interest, I was advised by Tony Hampson that was the major item, and then I did not attend." Gallagher Dep. Tr. at 16.

Plaintiffs do not seriously seek to establish that Hampson learned of the proposed tender offer while acting as a Texasgulf director. As defendant points out, there is no evidence that Texasgulf appointed Hampson as its agent to solicit or receive tender offers for the shares of Texasgulf. Plaintiffs' reference to Hampson's "after-the-fact" statement on June 26, 1981 that he thought the proposed tender offer was "particularly attractive to all the shareholders," Hampson Dep. Tr. at 98, is inadequate support for the argument that Hampson was acting on Texasgulf's behalf during his negotiations with Societe.

Plaintiffs now assert that even if he obtained this knowledge solely while acting within the scope of his authority as an officer of Canada Development, Hampson's knowledge may still be attributed to Texasgulf. Plaintiffs cite Scientific Holding Co., Ltd. v. Plessey, Inc., 510 F.2d 15 (2d Cir. 1974) as supporting the general rule that knowledge acquired by the officer or agent in his private capacity is not imputable to the corporation, unless it is present in his mind while acting in an official capacity with that corporation. They then argue that while the knowledge of the proposed tender offer was present in his mind, Hampson had conversations with Mollison and attended Texasgulf board meetings, thereby acting in an official capacity as a Texasgulf director.

Scientific Holding is readily distinguishable from the situation before us. The controversy there related to certain amendments to a contract for the purchase of the assets of International Scientific, Ltd. (ISL) — the predecessor to Scientific Holding. Scientific Holding sought to have the amendments approved at the closing declared invalid in part because of want of authority on the part of Kovar, ISL's president, or ratification by the ISL board. At the closing Kovar made certain statements questioning his authority to approve the amendments. Kovar's knowledge was relevant to the issue of whether Scientific Holding's failure to repudiate the amendments until some four months later estopped it from challenging the amendments. Although it noted that Kovar did not fulfill his obligation of notifying his principal as to these doubts, the court nevertheless imputed his knowledge of the amendment to the corporation.

  Even if Kovar had no authority to amend the contract,
  attendance at the closing was surely "within the
  scope of his agency" as the term is used in this
  context, namely, to exclude attribution of facts
  which came to the knowledge of the agent when acting
  in a purely private capacity or adversely to the
  principal, . . . and all knowledge acquired by him at
  the closing thus is imputed to the corporation.

510 F.2d at 26 (citations omitted).

First, Scientific Holding involved knowledge acquired by the corporation's president. Under the New York law the president of a corporation engaged in the ordinary course of the corporation's business is presumed to act with authority. 510 F.2d at 23. Here Hampson was only a Texasgulf director. As a matter of law, an individual director is not the agent of the corporation or its shareholders. "He has no power of his own to act on the corporation's behalf. . . ." 1 Restatement (Second) of Agency § 14C at 66 (1958).*fn2 And since directors have no power to bind the corporation, except when acting collectively and as a board, the great weight of authority supports the rule that "notice of facts casually acquired by individual directors, when they do not communicate their knowledge to the other directors or officers, and do not act officially in the matter, is not notice to the corporation." 3 W. Fletcher, Cyclopedia of the Law of Private Corporations § 808 at 55-56 (Rev. ed. 1975).

A second point distinguishing Scientific Holding is the fact that it was a "one corporation" situation. There the knowledge imputed to Scientific Holding was acquired by its president while acting within the scope of his agency. Here plaintiffs seek to attribute to Texasgulf the knowledge which Hampson acquired while acting as president and chief executive officer of Canada Development. In Scientific Holding, it was clear that Kovar had a duty to disclose the information he acquired at the closing to the corporation. The court commented on this duty: "[I]t is almost beyond belief that [he] did not recognize an imperative obligation to inform [his] principal which [he] must fulfill as soon as practicable." 510 F.2d at 26.

The rule that a corporation is charged with the knowledge which its officer or agent acquires while acting within the scope of his authority is generally based on one of two theories. The first is that the agent is presumed to have done his duty and communicated his knowledge to the corporation. The second basis is the fiction of the identity of principal and agent. 3 W. Fletcher, Cyclopedia of the Law of Private Corporations § 790 (Rev. ed. 1975).

The presumption that Hampson communicated his knowledge of the proposed tender offer to Texasgulf is an untenable one in the absence of a duty to disclose. Relying on Treadway Companies, Inc. v. Care Corp., 638 F.2d 357, 377, 378-79 (2d Cir. 1980), we previously held that the interlocking directors had no duty to inform Texasgulf of Canada Development's negotiations regarding the proposed tender offer. Etshokin v. Texasgulf, Inc., 612 F. Supp. 1212, 1219 (N.D.Ill. 1984).

Absent both a showing of Hampson's authority to seek out tender offers and a duty on his part to disclose any proposed tender offers, the only remaining basis for imputing his knowledge to Texasgulf is that of an identity between principal and agent. As we noted in denying defendant's first motion for summary judgment, plaintiff might be in a position to argue, after additional discovery, that Canada Development and the individual interlocking directors had substantial control of Texasgulf such that their knowledge should be imputed to Texasgulf. Etshokin v. Texasgulf, Inc., 612 F. Supp. 1212 (N.D.Ill. 1984) at 1218. Plaintiffs in their memorandum have abandoned this theory of liability. Plaintiff's Memorandum at 2 n. 2.

The final argument which plaintiffs make is that statements made by Hampson with knowledge of their falsity supply the requisite scienter for a securities violation by Texasgulf. Plaintiffs cite first Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir. 1977). That case does not support plaintiffs' position. In Sundstrand, the defendants were charged with certain misrepresentations in connection with the transfer to Sundstrand of an option held by Huarisa to purchase stock in Standard Kollsman Industries (SKI). SKI merged into Sun Chemical during the pendency of the litigation and Sun Chemical was substituted as a defendant. The district court found that Huarisa had conspired with SKI and other officers in making the misrepresentations. Id. at 1039. Sun Chemical did not contest that it was liable under a conspiracy theory as successor of SKI if Huarisa and other SKI personnel were found to have violated Rule 10b-5. Id. at 1040. That case contained no discussion of attribution of Huarisa's knowledge to the corporation, possibly because the false statements made by Huarisa were the same false statements which constituted the securities law violation. That is clearly not the situation here. While Hampson may have made false statements which could serve as a basis for liability under the securities laws, these false statements are not the same statements with which plaintiffs charge Texasgulf.

Plaintiffs also cite S.E.C. v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972) for the proposition that a mental state can be imputed to a corporate defendant through its directors, officers or agents. Manor Nursing is a case where the court relied on the identity between the agent and his two corporations. 458 F.2d at 1089 n. 3.

We find no factual or legal basis to impute Hampson's knowledge to Texasgulf. As the court noted in Weintraub v. Texasgulf, Inc., 564 ...

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