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GUY v. DUFF & PHELPS

July 12, 1985

DONALD J. GUY, PLAINTIFF,
v.
DUFF & PHELPS, INC. AND CLAIRE V. HANSEN, DEFENDANTS.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Donald Guy ("Guy") charges Duff & Phelps, Inc. ("Duff & Phelps") and its Chairman of the Board and Chief Executive Officer Claire Hansen ("Hansen") violated:

    1. Securities Exchange Act ("1934 Act") § 10(b)
  (15 U.S.C. § 78(j)) and SEC Rule 10b-5 promulgated
  under the 1934 Act (17 C.F.R. § 240.10b-5),
    2. Illinois Securities Law of 1953 ("Blue Sky
  Law") § 13 A (Ill.Rev.Stat. ch. 121 1/2, ¶ 137.13
  A*fn1) and

3. their common-law fiduciary duties to Guy,

as well as committing common-law fraud, when they forced Guy to sell his Duff & Phelps stock back to the company upon termination of his employment. Defendants have now moved under Fed.R.Civ.P. ("Rule") 56 for summary judgment as to all Guy's claims. For the reasons stated in this memorandum opinion and order, the motion is granted.

Facts*fn2

1. Guy's Termination

Duff & Phelps is an Illinois corporation engaged in the business of providing investment research, credit ratings, financial consulting and management services. In 1978 Guy joined Duff & Phelps as a vice president responsible for developing Duff & Phelps' computer capability and for studying, teaching and implementing new methods of quantitative analysis in investment research and management.

Guy operated the business from his home and then from an office in the basement of a friend's home (Guy Dep. 6-7, 292-94). He did some of the work at Duff & Phelps' offices between 7:00 and 7:30 a.m., before Duff & Phelps' regular business hours (id. at 154). Guy used Duff & Phelps' telephones and occasionally its computer in his business (id. at 131, 154, 171-72). By July 1983 Guy had 50 to 60 customers and managed portfolios with total assets of about $4 million (id. at 105-06, 108, 124). Earnings from the business exceeded $95,000 in 1982 and $43,000 during the first 8 1/2 months of 1983.

Duff & Phelps did not learn of Guy's business until late May or early June 1983, when Hansen questioned Guy about the early morning phone calls he received at work (Guy Dep. 148-51; Hansen Dep. 33-34). Guy told Hansen about the business and provided him with documents at his request (Guy Dep. 150-51; Hansen Dep. 35-44). About a month later Hansen told Guy he would have to abandon his own business if he wanted to stay with Duff & Phelps (Guy Dep. 163-64), giving Guy another month to think over his choice (id. at 164). On July 29 Guy met with Hansen again and said he would not give up his own business (Hansen Dep. 61). Hansen then fired him effective December 31, 1983. That date was later advanced to September 15, 1983 by agreement (at least in the sense Guy was given a choice between September 1 and 15) (Guy Dep. 188-89, 245).

2. Guy's Duff & Phelps Stock

As a Duff & Phelps officer, Guy had the right to purchase Duff & Phelps stock through a payroll deduction plan. He bought 200 shares under a Stock Restriction and Purchase Agreement, Paragraph 7 of which required him to sell the shares back to the company at book value on his termination:

    7. Upon the termination of the employment with
  the Corporation of any of the undersigned
  individuals for any reason, including
  resignation, discharge, death, disability or
  retirement, the individual whose employment is
  terminated or his estate shall sell to the
  Corporation, and the Corporation shall buy, all
  shares of the Corporation then owned by such
  individual or his estate. The price to be paid
  for such shares shall be equal to the adjusted
  book value (as hereinabove defined) of the shares
  on the December 31 which coincides with, or
  immediately precedes, the date of termination of
  such individual's employments.

When Guy left his employment he accordingly surrendered his shares and received their book value.

3. Proposed Security Pacific Acquisition

In 1982 Security Pacific Corporation ("Security Pacific") expressed an interest in acquiring Duff & Phelps (Richeson Dep. 9-16, 21, 24-25). After some preliminary meetings, the companies began serious negotiations in May 1983 (Jeffries Dep. 30-31, 36). At least four face-to-face bargaining sessions were held in June (id. at 25-27, 38). Guy and Duff & Phelps differ as to whether an agreement in principle was reached by the end of July (a subject discussed in greater detail under Duty of Disclosure), but in any case the anticipated purchase price of probably $50 million far exceeded the book value of Duff & Phelps' stock. No deal was consummated, and on August 11 Security Pacific cut off discussions altogether (Richeson Dep. 52, 55, 61, 265-66).

On December 1, 1983 Security Pacific rekindled discussions, and on January 10, 1984 the companies announced publicly they had agreed to an acquisition. On March 23 they executed a definitive agreement. However, the agreement was conditioned on approval of the terms by the Federal Reserve Board. After extended delay, such approval was refused. On January 9, 1985 Security Pacific announced the deal was off.

While Guy was deciding whether to stay with Duff & Phelps he was never told of the possible acquisition by Security Pacific (Hansen Dep. 5). Guy first learned of the deal when it was publicly announced January 10, 1984.

In April 1984 Guy filed this action for money damages. On January 17, 1985, just a week after the companies publicly announced they had called it quits, Guy moved for leave to amend his complaint to add an alternative remedy of rescission (for convenience the First Amended Complaint, filed February 25, 1985, will be termed the "Complaint").

Contentions of the Parties

Guy maintains the companies had reached an agreement in principle before Hansen gave him the choice whether to remain with Duff & Phelps or continue his own business. He asserts that agreement was material information that should have been disclosed to him, for he would have opted to stay at Duff & Phelps had he been aware of Security Pacific's lucrative proposal.

Among other grounds for summary judgment defendants urge:

    1. Duff & Phelps had no duty to disclose the
  potential acquisition.
    2. Guy has asserted only speculative damages.
  Failure to show actual damages dooms both the
  federal and state law claims.
    3. Guy's prayer for rescission under the 1934
  Act was not timely filed.
    4. Guy's prayer for rescission under the Blue
  Sky Law is defective both because it is untimely
  and because that statute provides a rescission
  remedy only to stock purchasers, not sellers.

Those contentions will be dealt with in turn.*fn3

Duty of Disclosure

Guy cannot prevail on any count of the Complaint unless Duff & Phelps had a duty to disclose to him the contemplated acquisition by Security Pacific. Duff & Phelps contends it had no such duty because:

    1. Negotiations were terminated and the deal
  was "dead" between August 11 and December 1,
  1983, a period that spanned Guy's termination
  date.
    2. No agreement in principle had been reached
  by Duff & Phelps and Security Pacific at any time
  before Guy's August 15, 1983 termination.

Except to the extent it may bear on the second proposition as an element factually supporting it, the first of those arrows is wide of the mark — for the relevant time period for disclosure was the period during June and July 1983 when Hansen confronted Guy and forced him to make a decision. Though Guy's actual departure postdated the August 11 breakdown of negotiations, he had reached his decision before that date.

But Duff & Phelps' second arrow strikes home. It is clear (and the parties agree) there is no duty to disclose mere negotiations — at least that has been clear until the newly-issued Michaels decision discussed later in this opinion. All the pre-Michaels authority teaches disclosure is mandated only when agreement, or at least an "agreement in principle," has been achieved. Greenfield v. Heublein, Inc., 742 F.2d 751, 756 (3d Cir. 1984), cert. denied, ___ U.S. ___, 105 S.Ct. 1189, 84 L.Ed.2d 336 (1985); Reiss v. Pan American World Airways, 711 F.2d 11, 13-14 (2d Cir. 1983). And Guy Mem. 25 concedes no "agreement in principle" is reached until the parties have at least agreed on both price and the structure of the deal.

Reiss dealt with a situation legally parallel to that posed by Guy: a complaint by a Pan American securities holder that if then-pending merger negotiations had been disclosed he would have reached a different decision about disposition of those securities. It explained why disclosure is not required — why instead it is actually improper in securities law terms — before all the significant components of a deal have been worked out (711 F.2d at 14):

  Such negotiations are inherently fluid and the
  eventual outcome is shrouded in uncertainty.
  Disclosure may in fact be more misleading than
  secrecy so far as investment decisions are
  concerned. We are not confronted here with a
  failure to disclose hard facts which definitely
  affect a company's financial prospects. Rather,
  we deal with complex bargaining between two (and
  often more) parties which may fail as well as
  succeed, or may succeed on terms which vary
  greatly from those under consideration at the
  suggested time of disclosure. We have no doubt
  that had Pan Am disclosed the existence of
  negotiations on August 15 and had those
  negotiations failed, we would have been asked to
  decide a section 10b-5 action challenging that
  disclosure.

As the final sentence indicates, had Duff & Phelps "disclosed the existence of negotiations" to Guy, as the result of which Guy decided to stay with Duff & Phelps and give up his lucrative side business, and had the Duff & Phelps-Security Pacific deal ultimately fallen through, Duff & Phelps would have been vulnerable to ...


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