The opinion of the court was delivered by: LUONGO
Plaintiffs in this securities class action contend that a tender offer and a subsequent merger, both effected by defendant Bass Brothers Enterprises, Inc., violated federal securities law and Delaware corporation law. In particular, plaintiffs urge that these activities violated sections 10(b) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(e) (1976), Rule 10b-5, 17 C.F.R. § 240.10b-5 (1977), and Delaware common law. Jurisdiction is conferred by 15 U.S.C. § 78aa (1976) and by the doctrine of pendent jurisdiction. Plaintiffs seek partial summary judgment in their favor, and defendant Bass Brothers, although it has filed no formal motion, argues in its briefs that it is entitled to summary judgment in its favor. See generally 6 Moore's Federal Practice P 56.12 at 56-331 to 56-334 (2d ed. 1948) (cross-motion for summary judgment is not a prerequisite to the entry of judgment in favor of the non-moving party). For the reasons hereafter stated, I conclude that neither plaintiffs nor defendant are entitled to summary judgment at this time.
The essential facts here are undisputed. Defendant Bass Brothers Enterprises, Inc. (hereinafter Bass Brothers) is a closely-held Texas corporation with its principal offices in Fort Worth, Texas. Complaint P 6(a). In March of 1976, at the time of the disputed tender offer, "the principal business of Bass Brothers was oil exploration and the production of hydrocarbons through a wholly-owned subsidiary." Bass Affidavit P 2, App. (Document No. 53) 202a. Bass Brothers was also involved, either directly or through subsidiaries, in "radio and television stations operation, ranching and cattle-raising interests, and other businesses." Complaint P 6(a). The eight individual defendants who remain in the case are all directors of Bass Brothers. Defendant National Alfalfa Dehydrating and Milling Company (hereinafter National Alfalfa), the target of Bass Brothers' tender offer, is a Delaware corporation with its principal offices in Kansas City, Missouri. Id. P 7. By early 1975, nearly half of National Alfalfa's income was derived from the processing and sale of alfalfa for animal feed; most of the balance was derived from National Alfalfa's farming and farm supply operations. App. (Document No. 53) 12a-13a.
Prochemco, Inc. (hereinafter Prochemco) is a Texas corporation with its executive offices in Amarillo, Texas. Spangler Affidavit P 2, App. (Document No. 53) 199a. By early 1974, Prochemco "was engaged almost exclusively in cattle feeding and ranching." Id. In mid-1974, Prochemco's president, desirous of purchasing a large block of National Alfalfa stock, approached Bass Brothers as a possible source of financing for such a purchase. Although Bass Brothers declined to finance such a purchase by Prochemco, it did "indicate to ProChemco that it Might be interested if it could proceed as the principal in the transaction." Bass Affidavit P 4, App. (Document No. 53) 203a (emphasis in original). In December of 1975, Prochemco informed Bass Brothers that it had failed to obtain financing from any source, and that the large block of National Alfalfa stock was still available. Id. P 6. On December 29, 1975, Bass Brothers entered into an option agreement with Charles R. Peterson, a former officer of National Alfalfa and the holder of some 52% Of the outstanding National Alfalfa common stock. Id. P 7. On January 7, 1976, Bass Brothers exercised its option and purchased approximately 1.3 million shares of National Alfalfa from Peterson, for a total price of $ 8.44 million, or approximately $ 6.47 per share. App. (Document No. 53) 108a, 119a. Bass Brothers thus became the majority shareholder in National Alfalfa.
To place the events that followed in their proper perspective, it will be helpful to backtrack for a moment. I have already noted that Prochemco itself initially sought to acquire the Peterson stock, and that it approached Bass Brothers as a possible source of financing for such a purchase. In presenting its case to Bass Brothers, Prochemco relied in part upon two documents that are of overriding importance in the present litigation. The first document, dated October of 1974, spanned some two hundred pages. App. (Document No. 54). It described Prochemco's proposed acquisition of the Peterson stock, and it contained various public reports and documents that pertained to either Prochemco or National Alfalfa. Interwoven with these materials were analyses, prepared by Prochemco, of National Alfalfa's history, operations, and assets. Of particular importance here is a three-tiered valuation of National Alfalfa's assets, also prepared by Prochemco. This chart reflected overall values Per share of National Alfalfa as follows:
$ 6.40 could be realized through "liquidation under stress conditions"
$ 12.04 could be realized through "liquidation in an orderly fashion over a reasonable period of time"
$ 16.40 represented National Alfalfa's value "as (an) ongoing venture"
In addition, Prochemco subsequently presented Bass Brothers with a second report on the proposed acquisition. This report, dated September of 1975, was similar in format to the first one, although somewhat more abbreviated. It, too, contained a chart reflecting Prochemco's valuation of National Alfalfa's assets, but this chart was not in the three-tiered format used previously. Rather, this chart gave only two figures: "Value per Peterson" and "Value per Prochemco." As presented in the chart, the former value was $ 17.28 per share, and the latter was $ 7.60 per share. Two explanatory footnotes revealed the source of part, but not all, of the discrepancy in the two valuations; Peterson and Prochemco used sharply disparate prices in determining the value of National Alfalfa's land holdings, which accounted for more than half the total value of all National Alfalfa assets.
Significantly, Bass Brothers does not dispute that it received both reports from Prochemco prior to the time of the disputed tender offer. Bass Affidavit P 3, App. (Document No. 53) 203a.
Shortly after it purchased the Peterson stock, Bass Brothers purchased an additional 226,673 shares, or 9.1% Of the then-outstanding shares of National Alfalfa, for approximately $ 1.46 million, or $ 6.45 per share. App. (Document No. 53) 7a. Thus, on February 10, 1976, Bass Brothers owned a total of 61.2% Of the outstanding shares.
On March 2, 1976, Bass Brothers released its tender offer for "any and all" outstanding shares of National Alfalfa at $ 6.45 per share. App. (Document No. 53) 1a-10a. The appendices to this tender offer contained certain financial data regarding National Alfalfa from which a shareholder could have concluded that National Alfalfa stock was worth less than $ 6.45 per share. See, e.g., Schedule of Capitalization and Stockholders' Equity, App. (Document No. 53) 64a-69a. The tender offer made no reference at all to the Prochemco valuations, which reflected values per share exceeding $ 6.45. However, the tender offer did include certain related information that warrants some discussion here.
Specifically, the tender offer referred repeatedly to a February 27, 1976 letter from the president of National Alfalfa, which was attached as Appendix E to the tender offer. This letter, which was originally sent to Bass Brothers, related certain information pertaining to National Alfalfa's land holdings, in order that Bass Brothers might incorporate that information into its tender offer. Essentially, the letter stated that National Alfalfa's land had appreciated significantly, and that, as a result, "stockholders could receive, upon a liquidation of the Company, an amount per Share significantly higher than the current book value . . . and possibly higher than the . . . $ 6.45 per Share offered by (Bass Brothers)." App. (Document No. 53) 91a. The tender offer itself described this letter as follows:
"Appendix E contains important information with respect to (National Alfalfa's) belief that the aggregate current fair market value of its agricultural land may be substantially higher than its original cost as reflected on the books of (National Alfalfa). Such information was provided by (National Alfalfa) (pursuant to authorization by its Board of Directors) specifically for inclusion herein pursuant to (Bass Brothers') request for additional information to be included in this Offer. (Bass Brothers) has made no independent appraisal of the value of (National Alfalfa's) land and makes no representation with respect thereto." App. (Document No. 53) 6a.
On March 11, 1976, the chairman of the board of National Alfalfa wrote to all National Alfalfa shareholders, stating his view that Bass Brothers' inclusion of the letter in its tender offer was entirely unauthorized. App. (Document No. 53) 95a-97a. Although this letter repeated the underlying facts set out in the original letter (Appendix E), it expressly disavowed any and all conclusions drawn by Bass Brothers from those facts. Finally, it expressed the opinion of the board of directors that the tender offer mistakenly implied that the board approved the terms of the offer, "when the Board has neither approved nor disapproved the adequacy of $ 6.45 per share." Id. 97a.
In response to this second letter, Bass Brothers, on March 15, 1976, issued a "First Supplement" to the tender offer. This supplement advised shareholders to "disregard" Appendix E to the tender offer in determining whether or not to sell their shares. It also reiterated the basic facts indicating that National Alfalfa's land holdings had appreciated in value, as those facts were stated in the March 11 letter from the chairman of the board of National Alfalfa. Finally, it restated the conclusion contained in the original letter (Appendix B) from National Alfalfa's president: "Stockholders could receive, upon liquidation of the Company, an amount per Share significantly higher than the current book value and possibly higher than the price of $ 6.45 per Share offered by (Bass Brothers) in the Offer." App. (Document No. 53) 98a. This time, however, the conclusion was presented as a conclusion drawn by Bass Brothers itself, rather than as a conclusion drawn by National Alfalfa and simply reported by Bass Brothers.
This supplement also extended the duration of the offer by one week, "to afford stockholders an opportunity to evaluate" both the second letter and the clarification contained in the supplement. While the offer was still in effect, the three named plaintiffs tendered their shares of National Alfalfa to Bass Brothers for $ 6.45 per share. At the expiration of the extended offer, Bass Brothers owned more than 92% Of the outstanding shares of National Alfalfa.
Shortly after the expiration of the tender offer, Bass Brothers formed Bass Brothers Farming Company (hereinafter "Bass Farming"), a wholly-owned subsidiary, and incorporated it under Delaware law. Bass Brothers then transferred to Bass Farming more than 90% Of the outstanding common stock of National Alfalfa, and effected a "short-form" merger between the two corporations, with National Alfalfa as the surviving entity. National Alfalfa thus became a wholly-owned subsidiary of Bass Brothers.