Abrams v. Occidental Petroleum Corp.Abrams v. Occidental Petroleum Corp.
- Reporters:
- ,
I.
This appeal by Occidental Petroleum Corporation from a summary judgment of $23,511,337.94, rendered against it in the District Court for the Southern District of New York, raises important questions with respect to the problems under
Since the facts are stated in detail in the opinion of the district court, 323 F.Supp. 570 (1971), a summary will suffice:
Kern County Land Company (Old Kern) was a California corporation with 4,328,140 common shares outstanding. Between January 1, 1966 and May 8, 1967, the stock, traded on the New York and Pacific Coast Stock Exchanges, had generally been selling in the 50‘s and 60‘s, although it had sold as high as $76.25 per share. It had been paying an annual dividend of $2.60 per share. After unsuccessful efforts to induce the management of Old Kern to discuss a merger, Occidental, on May 8, 1967, announced and on May 9 widely published an offer to purchase shares of Old Kern. The offer, which was to expire June 8, 1967, committed Occidental to purchase all shares properly tendered, on a firstcome first-served basis, up to 500,000, at $83.50 per share and to pay an additional $1.50 per share commission for all shares tendered through a broker. Occidental reserved the right to purchase stock tendered in excess of 500,000 shares. On the last trading day before announcement of the offer, Old Kern stock had closed on the New York Stock Exchange at $63.625 per share.
As might have been anticipated, the offer was widely accepted. By May 10 more than 500,000 Old Kern shares had been tendered, so that Occidental had become the beneficial owner of more than 10% of the common stock of Old Kern and thus subject to the requirements of
As is frequently the case, Occidental‘s offer was vigorously resisted by the management of Old Kern. On May 10 it advised stockholders not to accept Occidental‘s offer, indicating that this might not be the best available since the Old Kern management was then carrying on merger discussions with several other companies. When Occidental extended its tender offer, Old Kern sent telegrams to all stockholders requesting them not to tender.
On May 19 Old Kern‘s directors announced their acceptance of an offer by Tenneco, Inc., a Delaware corporation, whereby, in exchange for the transfer of Old Kern‘s assets to a newly organized wholly owned subsidiary (New Kern) of Tenneco Corporation, itself a wholly owned subsidiary of Tenneco, each share of Old Kern would be exchanged for one share of a new $5.50 preference voting stock of Tenneco, convertible into 3.6 shares of common stock.2 The sale of Old Kern‘s assets was governed by California corporation law which required approval only of a majority of Old Kern‘s stockholders and provided no appraisal rights for dissenters. In contrast to Occidental‘s cash offer, the Tenneco exchange was expected to be free of capital gains tax. In a report to its shareholders on May 19, 1967, the president of Occidental estimated that the value of the new Tenneco preferred was $105 per share. The Old Kern-Tenneco plan, executed on June 14, 1967, provided for a closing at a date to be agreed upon between September 30 and December 31, 1967, or at such other time as the parties might agree.
Occidental responded by initiating two mandamus actions in the California courts, seeking extensive inspection of the books and records of Old Kern including stockholder‘s lists.3 Although Old Kern gave some information to Occidental, there is nothing to indicate that this went beyond what was readily available to any stockholder.
While the detailed Tenneco-Old Kern plan was being formulated, Occidental and Tenneco were also in negotiations. These resulted in an option agreement dated June 2, 1967. Reciting that Tenneco Corporation was desirous of obtaining an option to purchase the Tenneco shares that Occidental would receive as a stockholder of Old Kern, it provided that Occidental would grant Tenneco Corporation an assignable option to purchase 886,623 such shares4 at $105 per share. The option could be exercised at any time after December 9, 1967-six months and one day after Occidental‘s last contemplated acquisition of Old Kern shares. If the closing under the Old Kern-Tenneco plan occurred before December 10, the option would expire December 31; if the closing were held between December 10, 1967 and July 1, 1968, the option would expire on the thirtieth day after the closing date. For this option Tenneco paid $10 per share, or $8,886,230. If the option was exercised, this sum was to be credited against the purchase price. On the other hand, it was to be returned to Tenneco if the Tenneco-Old Kern plan was not closed by July 31, 1968. Occidental was to receive dividends on the Old Kern or Tenneco preference stock with respect to the last two quarters of 1967;5 dividends accruing in 1968 would be divided according to the exercise date of the option. At the same time, Tenneco orally assured Occidental that the new Tenneco preference shares would not be listed or registered under the 1934 Act until the option had been exercised or had expired.6 On the basis of this, Occidental discontinued its actions in the California courts.
Being naturally concerned over the possibility of a huge
The parties are in dispute whether there was a “gentlemen‘s agreement” that Tenneco and Old Kern would not close before December 9 if Occidental‘s efforts to secure an exemption were unsuccessful. When it became apparent that they intended to close long before this, a number of injunction suits by Old Kern stockholders, allegedly sponsored by Occidental, began in the state courts of Texas and in federal courts in California and Nebraska. Tenneco and Old and New Kern countered with an action in a Texas court in which they obtained an ex parte order restraining the continued prosecution of these suits. Occidental also urged the California Commissioner of Corporations not to approve the transaction on grounds of unfairness to Occidental. He issued the necessary approval on August 30 and the closing was held that day. As part of the closing Old Kern assigned to New Kern all claims and demands accrued or to accrue by virtue of the Securities Exchange Act. Old Kern informed its stockholders that they were irrevocably entitled to the Tenneco preference shares. These were not to be registered under the 1934 Act until December 31 but could be traded over-the-counter in the meanwhile.
To conform to the ruling of the IRS, Tenneco Corp. sold its option to Loeb, Rhoades & Co., a New York investment banking firm, which later assigned this to LR Fixed Investment Trust. On December 11, 1967, Occidental tendered its Old Kern shares for Tenneco preference stock, LR Fixed Investment Trust exercised the option, and Occidental received $95 per share, or $84,229,185, in addition to the $10 per share, or $8,886,230, already in hand.
New Kern moved swiftly to assert liability of Occidental under
Appellees seek to support the judgment on two grounds. They claim first that Occidental “sold” its Old Kern shares when at the August 30 closing it became irrevocably entitled to Tenneco preference stock. They argue in the alternative that the option agreement of June 2, 1967 constituted a sale by Occidental of the Old Kern shares that had been or would thereafter be acquired. We cannot accept either contention.
II.
It is true enough that, in the case of a garden-variety purchase and sale or sale and purchase within six months, the situations to which Congress’ attention was primarily addressed when it enacted
Defendants did not own the common stock in question before they exercised their option to convert; they did afterward. Therefore they acquired the stock, within the meaning of the Act.
However, that mechanistic view did not long persist even in our own court, see Roberts v. Eaton, 212 F.2d 82 (2 Cir.), cert. denied, 348 U.S. 827, 75 S.Ct. 44, 99 L.Ed. 652 (1954). A revolt against it elsewhere was begun by the opinion of Judge Stewart (as he then was) in Ferraiolo v. Newman, 259 F.2d 342, 346 (6 Cir. 1958), cert. denied, 359 U.S. 927, 79 S.Ct. 606, 3 L.Ed.2d 629 (1959), which was later followed by the Ninth Circuit in Blau v. Max Factor & Co., 342 F.2d 304 (9 Cir.), cert. denied, 382 U.S. 892, 86 S.Ct. 180, 15 L.Ed.2d 150 (1965). See, contra, Heli-Coil Corp. v. Webster, 352 F.2d 156 (3 Cir. 1965). The problem was given thorough consideration in Blau v. Lamb, 363 F.2d 507 (2 Cir. 1966), cert. denied, 385 U.S. 1002, 87 S.Ct. 707, 17 L.Ed.2d 542 (1967). We there made clear that, in determining whether a conversion constituted a “purchase” and started a new six months period running, we would not apply the approach of the Park & Tilford dictum but would look to the question whether the conversion could have lent itself to speculative abuse. We see no reason why this same principle should not apply when the question is whether the receipt of securities of another company, in a transaction which the “insider” did not arrange and in which all stockholders were entitled, indeed here were forced, to participate, constitutes a “sale.”
The district court and appellees have pointed to Newmark v. RKO General, Inc., 425 F.2d 348 (2 Cir.), cert. denied, 400 U.S. 854, 91 S.Ct. 64, 27 L.Ed.2d 91 (1970), as requiring us to hold that the exchange of Old Kern for Tenneco shares was a sale, for purposes of
Appellees have failed to demonstrate any counterpart of this with respect to Occidental.12 It is urged that Occidental possessed the “inside information” that Old Kern might well respond by arranging a “defensive merger” and that, if the terms were sufficiently favorable, Occidental would not try to top them. But, in contrast to RKO General where the buyer knew of the imminent announcement of a merger that would enhance the price of the shares and could largely control its course, Occidental had no knowledge what Old Kern would do, and certainly did not know that Old Kern would be able to arrange an exchange offer exceeding Occidental‘s bid by $20 per share, with the added benefit of freedom from capital gains tax. We fail to see the possibility of speculative abuse in a situation where such an offeror simply declines to make a still higher offer or to attempt to block a transaction13 which it regards as advantageous to all the stockholders including itself. In so holding, we are glad to find ourselves in accord with law review comments both before and after this court‘s decision in the RKO case. Note, Stock Exchanges Pursuant to Corporate Consolidation: A Section 16(b) “Purchase or Sale“?, 117 U.Pa.L.Rev. 1034, 1056-57 (1969); Comment, Securities Regulations-Exchange of Stock Pursuant to Merger is Sale by Insider under Section 16(b) of the Securities Exchange Act of 1934, 84 Harv.L.Rev. 1012, 1021-22 (1971).
Indeed, if we considered the question here under discussion to be closer than we do, we would be seriously concerned over the policy implications of ruling in appellees’ favor. Such a holding would mean that the target of a tender offer not only may solicit a better offer, which is admirable, but also may deliver as bait to the offeree14 a substantial Sec. 16 (b) liability on the part of the very offeror whose initiative aroused the target from its seeming torpor and created a large profit for all stockholders, if the parties can force the transaction through within six months from the latter‘s purchases.15 The idea that the person who pointed the company down the road to good fortune should be excluded from the profits realized by all other stockholders is repugnant to our sense of equity. Moreover, any such rule would operate to discourage tender offers for more than 10% of a company‘s stock. If such bids are to have any hope of success, they must be at a figure in excess of current market value. Under appellees’ view, while the offeror will be left with the stock he has acquired if he has equalled or topped its true value, he will be deprived of any benefit if he has underestimated the true value and the target corporation can force him into an exchange within six months. This would discourage the making of such offers, which often operate to the great benefit of stockholders of the target corporation, as appears to have been the case here.
III.
We thus come to appellees’ alternative contention, namely, that the option agreement of June 2, 1967, constituted a sale of the Old Kern shares.
We begin by recognizing that, under the statutory definition,
It is true that, despite Silverman, courts will look through the form of an option to the economic realities. When the down payment is so large in relation to the purchase price that exercise is practically compelled or the price is below any reasonable expectation of the value of the security at the end of the option period, a court might find that in truth and fact a sale had occurred when the “option” was granted. We see no basis for such a finding here, and we do not read the district court‘s opinion as making one, 323 F.Supp. at 572, 576. There was undisputed testimony that the forfeitable down payment, 10.05%, was a reasonable, non-coercive price, a fortiori so in view of the possibility, thin as that might have been, that the option premium might have to be refunded if unforeseen difficulties prevented consummation of the merger. The total price per share was precisely what Lehman Brothers, Occidental‘s investment adviser, had estimated the Tenneco stock to be worth. It was by no means certain that in the interval between June 2 and December 9, 1971 when the option first became exercisable, the market price of the Tenneco preference shares might not drop well below $95.16
Tenneco argues against this that, with a block of such size, market prices would not be determinative, since Tenneco was looking to the long term and did not want Occidental as a large stockholder any more than Occidental wanted to be one. While this is doubtless so, it is likewise true that if the bottom had fallen out of the market, as it has been known to do, so that the Tenneco shares were selling at say 75 at the exercise date, the Tenneco management might have had serious second thoughts-including thoughts of the possibilities of derivative actions for waste-about using more than $84,000,000 in cash to buy its own stock at a $20 per share premium. We thus see no reason for not accepting the truth of what was said in the Old Kern proxy statement: “Tenneco Corporation has not determined whether it will exercise its option. * * * Depending upon future investment market conditions, Tenneco Corporation may sell the option or the Preference Stock covered by the option; its present intention is not to purchase such Preference Stock as an investment.” The mere fact that the option was so designed that Tenneco could not require Occidental to sell the Tenneco preference shares until six months and one day after its last purchase of Old Kern shares, a period obviously chosen with reference to
Appellees rely heavily on Bershad v. McDonough, 428 F.2d 693 (7 Cir. 1970), cert. denied, 400 U.S. 992, 91 S.Ct. 458, 27 L.Ed.2d 440 (1971), as holding the contrary. That case came before the court of appeals on a finding by the district court that, under the circumstances there presented, the stock had in fact been sold within the six months period, although the option was not formally exercised until later. The district court had relied on a number of circumstances, the most significant being that the optionor gave the optionee an irrevocable proxy to vote the shares and that the optionor and one of his associate directors resigned as directors within a few days after the grant of the option and were replaced by officers of the optionee. In other words, the district court found in effect that the “option” was accompanied by a wink of the eye, and the court of appeals sustained this. Here there is no such finding, and no basis for one. There is thus no conflict between the Bershad decision and what we rule here, although we would not be understood as necessarily agreeing with everything said in the court‘s opinion.
Appellees argue finally that Occidental took advantage of its position to get something for itself that was not available to other Old Kern stockholders and that we should therefore consider this option as a “sale,” despite the contrary implications of Silverman v. Landa. We need not disagree with the position that, under the approach of Blau v. Lamb, a court may sometimes find a “purchase” or “sale” in a transaction that would not ordinarily be regarded as one. Although we do not decide the point, appellees’ argument might indeed have force if Occidental had acquired a “put,” exercisable six months and one day after its last purchase, rather than having submitted itself to a “call.” But the two situations are quite different, and we cannot see how Occidental took any unfair advantage of its position here. As indicated, the option price was precisely what Occidental‘s investment adviser had estimated the value of the Tenneco stock to be a fortnight before. Indeed, the option might have proved disadvantageous to Occidental if the Tenneco stock had boomed or if someone desiring to make a target of Tenneco had come forward with an offer to Occidental. The option seems to us to have been a straight-forward business arrangement between one company that found itself in the undesired position of becoming “locked in” as a large minority stockholder and a second company that was eager to remove the threat this imposed,17 if economic circumstances permitted.
We therefore reverse the grant of summary judgment for the plaintiffs. Although defendant did not move for summary judgment, it asks us to instruct the district court to enter one in its favor, as we clearly have power to do. First National Bank v. Maryland Casualty Co., 290 F.2d 246, 251 (2 Cir.), cert. denied, 368 U.S. 939, 82 S.Ct. 381, 7 L.Ed.2d 338 (1961); Local 33, Int‘l Hod Carriers v. Mason Tenders, 291 F.2d 496, 505 (2 Cir. 1961); Stein v. Oshinsky, 348 F.2d 999, 1002 (2 Cir.), cert. denied, 382 U.S. 957, 86 S.Ct. 435, 15 L.Ed.2d 361 (1965). Appellees’ brief contains nothing to suggest that we should not follow that course if we should determine to reverse, and inquiry at the argument failed to reveal any new facts that might be adduced by them at an evidentiary hearing. While the affidavits are in conflict on some points, notably on the understanding alleged by Occidental that Old Kern and Tenneco would arrange the closing date to protect Occidental against
The order granting summary judgment against Occidental is reversed, with instructions to enter judgment dismissing the complaint.
Notes
These figures include 1900 shares purchased on the open market on April 24 and April 28, 1967 for which no Sec. 16(b) liability was asserted, by reason of the fact that Occidental did not, by virtue of those purchases, become a more than 10 percent beneficial owner of issued and outstanding stock
As a result of the better Tenneco offer described below, only 3,376 Old Kern shares were tendered between May 19, 1967, the date of public announcement of acceptance by Old Kern of Tenneco‘s offer, and June 8, 1967, the expiration date of Occidental‘s irrevocable tender offer.
Occidental‘s fear was that the acquisition of Tenneco preference shares at the closing of the Kern-Tenneco merger would be characterized for purposes of
Prior to the Securities Acts Amendments of 1964, Pub.L. 467, 88th Cong.2d Sess., Act of August 20, 1964, 78 Stat. 565, only securities listed on the national securities exchanges required registration under the 1934 Act. Section 12(g),