Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 77 C 2837--Susan Getzendanner, Judge.
Ripple and Manion, Circuit Judges, and Eschbach, Senior Circuit Judge.
Herbert J. Rowe, his wife, Ann M. Rowe, and the Continental Illinois National Bank*fn1 sued Maremont Corporation for securities fraud under Section 10 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.*fn2 The suit arose from a face-to-face transaction in July, 1977 in which Maremont purchased 225,986 shares of stock in Pemcor, Inc. from the Rowes. Alter a bench trial, the district court entered judgment for the Rowes for $745,423.80 plus prejudgment interest and costs. Maremont appeals the district court's judgment. The Rowes cross-appeal, claiming that the district court awarded inadequate damages. We reject the contentions made in both the appeal and cross-appeal, and affirm.
In a thorough published opinion, the district court set out detailed findings of fact. Rowe v. Maremont Corp., 650 F. Supp. 1091, 1093-1104 (N.D. Ill. 1986). Therefore, we will only summarize the pertinent facts. We will discuss any other facts necessary to our discussion of the legal issues as we discuss those issues.
In early 1977, Herbert and Ann Rowe owned 8,921 shares of stock in Pemcor, Inc. The Rowes were also co-trustees, with Continental Illinois Bank, of a trust Mrs. Rowe's father had established in his will. The trust owned 216,965 shares of Pemcor stock. Together, the Rowes' and the trust's shares comprised 11 1/2 percent of Pemcor's outstanding stock. (We will refer to the shares collectively as the "Rowe shares" or "Rowe block," as did the district court.)
Although Pemcor was listed on the New York Stock Exchange, the Rowes could not sell their shares on the open market because the shares were not registered. The Rowe shares were also subject to an agreement between the Rowes and Potter-Englewood Corporation (the corporate predecessor to Pemcor) providing that the Rowes would not sell the shares before notifying Pemcor and receiving an opinion from Pemcor's counsel that the sale would not violate the 1933 Securities Act.
By early 1977, the Rowes had decided to sell their Pemcor shares. The Rowes explored selling the shares both by private placement and by a secondary public offering. In a secondary offering, the Rowe shares would have fetched between $5 and $6 1/2 per share. At that time, Pemcor's market price was around $12-$13 per share.
The investment bankers whom the Rowes had contacted concerning a private placement were having no luck finding a buyer. However, at around the same time the Rowes became interested in selling their shares, Maremont had become interested in expanding its operations by acquiring new companies. As part of this expansion program, Maremont retained Skadden, Arps, Slate, Meagher & Flom, a New York law firm active in mergers and acquisitions. In January, 1977, Maremont executed a commission agreement with The Illinois Company, a Chicago brokerage firm. The Illinois Company recommended Pemcor to Maremont as a potential acquisition and arranged meetings between Pemcor's and Maremont's executives. Although the meetings were cordial, Pemcor was not interested in a merger or affiliation at that time.
Around July 13, 1977, The Illinois Company informed Richard Black, Maremont's president, that the Rowe shares might be available. On July 18, pursuant to Black's instructions, Gordon Teach of The Illinois Company offered, on behalf of an undisclosed principal, to purchase the Rowe shares for that day's closing market price, $13 per share. Although Mrs. Rowe agreed the price was good (it was, in fact, an all-time high), she refused to sell the shares without knowing the purchaser's name. Therefore, Mrs. Rowe arranged to fly from her home in Virginia to Chicago the next day to meet Teach.
Over the next three days, the Rowes and their representatives met with Maremont representatives to negotiate the stock sale. On July 19, Mrs. Rowe, the Rowes' attorney, Robert Fuchs, and two Continental Illinois trust department officers, Darryl Hoovel and Gordon Martin, met with Teach in Chicago. After Mrs. Rowe insisted on knowing the purchaser's name, Teach told her that Maremont was the purchaser. Teach asked the Rowes not to disclose Maremont's name to anybody until twenty-four hours after the sale. Teach also told the Rowes that Maremont had recently sold a division, that it wanted the Rowe shares as an investment, that it wanted to protect its investment by electing a director, and that it wanted to purchase up to 20 percent of Pemcor's stock. At the close of the meeting, Mrs. Rowe agreed to sell the Rowes' Pemcor shares to Maremont for $13 per share. Before the Rowes and Maremont could close the deal, however, they needed to agree to and prepare written documents. Therefore, further meetings were necessary.
The next day, July 20, the Rowes' representatives (but not Mrs. Rowe, who had returned to Virginia) met with Maremont representatives to negotiate the sales agreement. Early on, Milton Shapiro, Maremont's treasurer, and William Penner of The Illinois Company repeated Teach's statements that Maremont wanted to invest in Pemcor stock with cash it had from selling its division, that it wanted to elect a director, and that it wanted to acquire 20 percent of Pemcor's stock. Shapiro also stated that the funds for the purchase would be wire-transferred from California. In fact, Maremont paid for the stock with money from its revolving account with Continental Illinois.
During the afternoon of July 20, Robert Pirie and Milton Strom, two Skadden Arps lawyers, arrived to handle the transaction for Maremont. Although Maremont had specifically retained Skadden Arps to work on a possible Pemcor acquisition, Shapiro introduced Pirie and Strom as two New York lawyers in Chicago on other business who were "stopping by" to help Maremont with the Rowe transaction.
Sometime during one of the meetings, on July 20 or 21, Marvin Temple, Fuchs' law partner, asked Shapiro whether Maremont was going to make a tender offer for Pemcor. Shapiro replied, "No."
During the times relevant to this case, an FTC consent order prohibited Maremont from acquiring without FTC approval the stock of any company "engaged in the manufacture or remanufacture or the wholesale distribution of automotive replacement parts, accessories, or equipment." Since Pemcor manufactured automotive stereo speakers, Maremont asked outside counsel whether the FTC order would prevent Maremont from acquiring Pemcor stock. Several attorneys informed Maremont that the order would not apply, although one attorney cautioned Maremont to expect a "challenge" from the FTC. John Mills, Maremont's general counsel, harbored some doubts about the issue but he never expressed those doubts to the Rowes.
During the July 20 meeting, Pirie insisted that Fuchs remove a clause stating that Maremont would "warrant and represent that we are not in competition with Pemcor" from the written documents Fuchs had prepared. This prompted Fuchs to ask whether any antitrust problems existed. Pirie replied that there were none. Based on Pirie's answer, Fuchs agreed to drop the antitrust language from the documents.
By the end of the afternoon on July 21, the Rowes and Maremont had agreed on the final form of the documents necessary to complete the sale. Those documents were: a sale agreement; an escrow agreement; a supplementary indemnification agreement; irrevocable proxies coupled with an interest; and stock powers and certificates. The parties included the escrow agreement because the Rowes could not close the deal until Pemcor's counsel issued its opinion that the sale would not violate the 1933 Securities Act. The escrow agreement was intended to lock in the $13 sales price while delaying the actual "closing" until Pemcor issued its opinion letter. Maremont and the Rowes subsequently executed all the documents.
During the days immediately following the execution of the Rowe contract, Maremont took steps to acquire the rest of Pemcor's stock. Black contacted Edward Anixter, Pemcor's president, to discuss a friendly takeover. Anixter was not receptive to the idea; a hostile tender offer thus seemed the most likely course. Skadden Arps' attorneys drafted "anticipatory tender offer documents" so that Maremont could move quickly. Maremont also arranged financing for its offer. On Friday, July 29, Black sent Anixter a "bear hug" letter advising Anixter that Maremont intended to offer $16.75 per share for all Pemcor shares. Pemcor did not respond to the letter. On August 1, Maremont publicly announced that it intended to make a tender offer. Pemcor opposed the tender offer. On August 2, Pemcor notified the FTC about the acquisition, and the FTC ordered Maremont to explain why the purchase did not violate the 1971 consent order. On August 3, Pemcor sued both Maremont and the Rowes to prevent the Rowes from transferring the shares to Maremont. Pemcor's complaint sought $30 million in damages and injunctive relief.
In the meantime, the Rowes, knowing about neither the FTC order nor Maremont's contemplated tender offer, went about the business of trying to complete the sale of their Pemcor stock. Immediately after the documents were signed, Fuchs phoned Chuck Kaufman, Pemcor's outside counsel, to ask Kaufman to cooperate in obtaining the necessary opinion letter. During that conversation, Kaufman asked Fuchs whether Maremont would make a tender offer. Fuchs replied that Maremont had advised him there would be no tender offer.
Fuchs did not learn about the FTC decree until July 29, when Kaufman called to tell him about it. Upon learning about the FTC decree, Fuchs phoned Shapiro and Mills at Maremont to ask them why nobody had told him about the order before the sale. Shapiro and Mills replied that the FTC order did not apply.
Fuchs and the Rowes learned about Maremont's tender offer on August 2. The Rowes were angry, and told Fuchs they wanted their stock back. Gordon Martin of Continental Illinois complained to Fuchs that the Rowes and the trust had been "taken." Fuchs, however, decided to move cautiously and to keep the Rowes' options open. The Rowes thus moved on a dual track, taking the necessary steps to complete the transaction while at the same time exploring the possibility of rescission.
Between August 4 and August 23, Fuchs contacted Maremont representatives three times. On August 4, Fuchs wrote to Maremont concerning Pemcor's complaint and the FTC order. That letter stated only that "serious legal problems" could occur if the FTC order prevented Maremont from acquiring the Rowe shares. The letter did not mention any representations by Maremont, the tender offer, or any desire to rescind. On August 15, Fuchs spoke by phone with Pirie. Fuchs' notes of the conversation indicate that he asked Pirie why he had not told the Rowes about the FTC order. At trial, Fuchs testified that he also told Pirie that it was "incredible" that Maremont had not disclosed that it was going to make a tender offer, and that the Rowes were entitled to rescission. Fuchs did not, however, formally request rescission at that time. On August 23, Fuchs sent Maremont a letter formally requesting rescission. Although the rescission letter mentioned several alleged misstatements and omissions by Maremont (e.g., the representation that Maremont planned to obtain only up to 20 percent of Pemcor's stock), the letter did not mention Shapiro's statement that Maremont would not make a tender offer.
On August 30, the Rowes filed a counterclaim against Pemcor. Part of the relief the Rowes requested was an order directing Pemcor to transfer the Rowe shares to Maremont. On October 27, 1977, the Rowes filed a cross-claim against Maremont, alleging securities fraud (among other things). The cross-claim, like the rescission letter, did not mention the "No" tender offer representation.
The FTC eventually approved Maremont's purchase of Pemcor stock. On April 8, 1978, the escrow agent (over the Rowes' objections) delivered the Rowe shares to Maremont. Pemcor successfully rebuffed all merger attempts by Maremont until a white knight, Esmark, came to Pemcor's rescue. Pemcor merged into Esmark, and Maremont exchanged the Rowe shares for a block of Esmark shares. In August, 1979, Maremont sold the Esmark shares for $7,039,439. Thus, Maremont made a total profit of $4,056,834 from purchasing the Rowe shares.
At trial, the Rowes presented two liability theories. First, the Rowes contended that Maremont deliberately deceived them about its intent to use the Rowe shares as a springboard for acquiring Pemcor. According to the Rowes, Maremont created the false impression that it only wanted a limited amount (up to 20 percent) of Pemcor's stock as an investment, and that Shapiro, Maremont's treasurer, lied when Temple asked him whether Maremont planned to make a tender offer. The Rowes' second theory was that Maremont misrepresented and knowingly concealed the FTC order.
The district court read to find Maremont liable based on the FTC order. 650 F. Supp. at 1111-12. The district court did find Maremont liable based upon its representations and omissions about its intent to acquire Pemcor. Id. at 1107-11. Specifically, the court found that Maremont falsely stated that it only wanted enough Pemcor stock to elect a director to Pemcor's board, that it intended to acquire only "up to" 20 percent of Pemcor's stock, and that it would not make a tender offer for Pemcor. The court also found that Maremont failed to disclose that 20 percent was merely a "'fall-back' position," and that its true goal was to acquire Pemcor. Id. at 1110. The court found that Pemcor had a duty to disclose its control intentions because absent such disclosure, Maremont's statements about its limited investment intentions were misleading. Id. at 1109; see 17 C.F.R. § 240.10b-5(b) (making it unlawful to omit to state a material fact necessary to make other ...