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.
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
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
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
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.,