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.
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).
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
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 ...