agreement with General Cinema aimed at either an "asset swap" or a "standstill," and the acquisition by Heublein of businesses that would serve to block General Cinema's takeover bid by creating antitrust or other problems for General Cinema. The testimony of the members of the Heublein task force clearly indicates that these options were far more palatable to Heublein's management than was the acquisition of Heublein by a "white knight." In fact, prior to July, Waldron and Watson did not permit the subject of a white knight to be discussed at strategy group meetings because they felt that such discussions would distract Heublein's management from ongoing business concerns.
During the spring of 1982, General Cinema continued to purchase Heublein stock. By May of 1982 General Cinema held 18.9% of Heublein's outstanding shares. These purchases were widely covered by the press.
May of 1982 also brought certain developments at Reynolds concerning the General Cinema -- Heublein situation. The increasing pressure placed on Heublein by General Cinema led Reynolds to conduct a detailed study of the possibility of acquiring Heublein. This study was known as "Project Flag," "Flag" being a code name for Heublein. Reynolds had for years been interested in broadening its consumer products base. Heublein was one of the companies that Reynolds considered as a good candidate for acquisition. Reynolds' interest in Heublein was reinforced by the fact that Reynolds' Chairman, J. Paul Sticht, had known Heublein's Chairman, Stuart Watson, for a number of years.
On May 7, 1982, the Project Flag group produced a report on Heublein. After General Cinema's announcement that it had acquired 18.9% of Heublein's stock, the Project Flag group prepared a more comprehensive report. This report included a description of Heublein, an assessment of how Heublein might fit into Reynolds, and a summary of the General Cinema -- Heublein situation. The report was kept secret, and was only available to the members of Reynolds' Management Committee and the Project Flag Group. The report was prepared by the Project Flag group without the assistance of outside advisors. On the basis of these reports, Reynolds' management concluded that Heublein was an attractive acquisition possibility, but that Reynolds should not become embroiled in a bidding contest to gain control of Heublein. Reynolds' Vice-Chairman, Joseph F. Abely, Jr., concluded in a memo to Sticht that Reynolds' best course of action was to wait in the wings and see if Heublein eventually had to resort to a "white knight."
On May 7, 1982, Heublein's President, Hicks Waldron, met with Richard B. Smith, General Cinema's Chairman and President. The purpose of the meeting was to discuss a possible "swap," specifically, an exchange of General Cinema's Heublein stock for a part of Heublein's Wine Division. This meeting did not result in an agreement. Beginning in late May, Heublein and General Cinema entered into negotiations concerning the possibility of a standstill agreement, i.e., an agreement under which General Cinema would stop buying Heublein shares and accept some restrictions on the use of the shares they already owned in exchange for representation on Heublein's board and other concessions. These negotiations, conducted both through investment bankers and directly, continued into early July. By July 7th Waldron felt that he and Smith were nearing an agreement. On July 8, however, Smith called Waldron and made significant changes in General Cinema's negotiating position. Smith made certain "non-negotiable" demands which he knew were unacceptable to Heublein. He also changed course by asserting that General Cinema was primarily interested in a "swap" for Heublein's Grocery Products Division, rather than in reaching a "standstill" agreement. General Cinema's position was a severe blow to Waldron's hopes of negotiating a settlement of the General Cinema situation. These hopes were further shaken when Waldron learned that General Cinema was going to sell a television station it owned in Miami. Waldron feared that General Cinema would be able to use the proceeds of this sale to finance the acquisition of even more Heublein stock on the open market. Negotiations continued, however. Waldron and Edward Bates, a Heublein Director, met with Smith and Abram Collier, a General Cinema director, on July 21st, and Waldron telephoned Smith with a proposal on July 23rd. Smith adhered to his non-negotiable demands, however, and no agreement was ever reached.
During the period of negotiations between Waldron and Smith, there were contacts between Heublein and Reynolds. On June 13th and 14th, Waldron and Sticht met at the Greenbriar Hotel in White Sulfur Springs, West Virginia. Both were there to attend an executive conference of the Grocery Manufacturers of America. At the meeting Sticht informed Waldron that while Reynolds would take no hostile actions against Heublein, Reynolds was interested in getting together with Heublein. Sticht told Waldron that Reynolds had completed a study of Heublein and that he was impressed by the results of that study. Waldron informed Sticht that Heublein was determined to remain independent, and that he believed that they would be able to do so. He added, however, that if this was not possible he would be in touch.
The next meeting between the top management of Heublein and Reynolds occurred on July 9th. This meeting was prompted by the sudden deterioration of negotiations between Heublein and General Cinema, precipitated by the telephone call from Smith to Waldron on July 8th.
The sudden change in General Cinema's negotiating posture alarmed Waldron. He suggested to Watson that they meet with Sticht because they should make some preparation for resorting to a "white knight," a move for which they were totally unprepared at that time. Waldron called Sticht and told him about General Cinema's ultimatums and suggested that they meet to discuss the possibility of a merger. Sticht agreed to meet with Watson and Waldron on the afternoon of July 9 at the Hartford airport.
On Friday afternoon, July 9th, Waldron called a meeting attended by the task force, Heublein's investment banker, and outside counsel. While the possibility of Reynolds acting as a white knight was raised at the meeting, Waldron did not inform the group at large of the planned meeting with Sticht later that day. The group did discuss, however, other possible responses to the new developments in the General Cinema situation. These included the pursuit of a possible blocking acquisition by Heublein as well as the possibility of acceding to some of Smith's demands. At the end of the meeting, Waldron asked all members of the strategy group except Heublein's senior executives to leave the room so that there could be a private session with Heublein's outside advisors. At that session Krimendahl, Fleischer, and McNally were told that Waldron felt it was time to explore the "white knight" solution in case the General Cinema situation could not otherwise be resolved. Waldron explained that he and Watson were meeting with Sticht that afternoon. He stated that the meeting was for the purpose of getting acquainted, and not for negotiations. Waldron explained that the meeting should not be discussed with anyone not present in the room, with the exception of George Caspar, Heublein's General Counsel.
At the meeting, Waldron told Sticht that Heublein intended to remain independent if at all possible. He explained that he had asked for the meeting in order to learn more about Reynolds, but not to negotiate a possible combination. The rest of the meeting was generally taken up by Sticht's description of Reynolds and the possible synergies that would exist if Heublein and Reynolds were combined. Sticht also discussed Reynolds' management philosophy as well as the role that Waldron and other Heublein executives would play in the combined companies.
At the end of the meeting Waldron and Watson reiterated their resolve to maintain Heublein's independence. They also expressed, however, the feeling that a merger with Reynolds "would be okay." Sticht told Watson and Waldron that Reynolds was prepared to go ahead with the merger, and that he hoped they would be in touch.
On July 14, Sticht reported the substance of the July 9th meeting to the Reynolds Management Committee. It was agreed that Reynolds should continue to monitor trading in Heublein stock and be prepared to pursue Heublein should it appear that Heublein would not be able to maintain its independence. Waldron reported the substance of the meeting to Krimendahl and expressed his satisfaction with what he had heard from Sticht. Waldron asked Krimendahl to pass the information along to McNally at White & Case.
On July 14th, Waldron received a call from Smith confirming the rumor that General Cinema was going to sell its Miami television station. While Smith told Waldron not to be upset by the news, Waldron was alarmed because the proceeds of the sale would enable General Cinema to resume their purchases of Heublein shares on the open market. Waldron felt that Heublein could not protect itself from such continued large block acquisitions.
At 3:55 in the afternoon on July 14th, George Caspar, Heublein's General Counsel, received a call from the New York Stock Exchange. Caspar was informed that Heublein's stock was up 3 7/8 to $44.00 on a trading volume of 235,200 shares, and that the stock had hit a high of $44 1/2 dollars that day.
Caspar was asked if Heublein was aware of anything that could have caused the increased activity in Heublein stock. Caspar was aware that Salomon Brothers had made a 100,000 share institutional trade early in the day.
He also knew that only 153,800 shares had been traded by 2:00 p.m., without a significant price increase. The price had only climbed 2/8 by 3:00 o'clock, with the volume at 209,300 shares. By the time the New York Stock Exchange called Caspar, an additional 27,000 shares had been traded with a rise in price from 41 1/8 to 44. The stock closed at 43 on a volume of 242,500.
Caspar stated that he was not aware of anything that could account for the increased trading. He was asked to issue a press release stating that there were no "corporate developments." After consulting with Gillespie and McNally,
Caspar issued the following statement on behalf of Heublein:
A spokesman for Heublein, Inc. said the company was aware of no reason that would explain the activity in its stock in trading on the New York Stock Exchange today.
After Waldron's July 14th conversation with Smith, Waldron decided that it would be advisable to meet with Sticht again. Waldron called Sticht and set up a meeting for the evening of July 15th in Hartford. Sticht felt that Heublein was desperate after hearing of General Cinema's sale of its Miami TV station, and agreed to fly to Hartford that very night to meet with Waldron and Watson. On the same date, Reynolds completed a merger game plan for "Project Flag." This plan was designed to enable Reynolds to proceed with a Heublein merger as smoothly and quickly as possible.
On the evening of July 15th, Sticht met with Watson and Waldron for about three hours at Watson's house in Hartford. Sticht attempted to convince Waldron and Watson that Heublein and Reynolds should "join forces." Much of the evening was spent discussing the accommodation of Heublein's management team into Reynolds. Also discussed were the General Cinema situation, the level of trading in Heublein stock, and the July 14th press release.
While Sticht expressed his desire to see a Reynolds/Heublein merger, he also stated that Reynolds did not intend to get involved in a bidding war for Heublein. Waldron reaffirmed Heublein's commitment to remain independent, but said that he thought it advisable to get to know Sticht and Reynolds better so that they could move quickly in the event General Cinema forced Heublein to turn to a "white knight."
At the conclusion of the meeting, Sticht suggested that Reynolds and Heublein arrange to have their investment bankers meet. Sticht explained that Reynolds had decided to bring its investment banker, Dillon, Read & Co., into the picture. Waldron agreed to have Dillon Read meet with Goldman Sachs. On July 16th, Sticht told Abely to instruct Dillon Read to meet with Goldman Sachs. Abely did so, and also had the latest Project Flag analysis sent to Dillon Read. This analysis contemplated acquisition prices of $50, $55 and $60 per share.
Heublein instructed Krimendahl of Goldman Sachs to meet with Dillon Read. On Monday, July 19, Goldman Sachs gave Heublein a document which included pro forma merger plans with Reynolds at $50, $55, $60, and $65 per share.
John Mullin of Dillon Read and Krimendahl of Goldman Sachs met on either July 19 or 20. Krimendahl told Mullin that the investment houses really had nothing to discuss, so the conversation was discontinued. Sticht called Waldron and expressed his surprise that more substantive discussions had not occurred.
In the meantime, it was decided that more progress might be made in negotiations with General Cinema if someone other than Smith and Waldron were present at the discussions. Consequently, a meeting was held on July 21st. Present was Smith, Abram Collier, an outside director of General Cinema, Waldron, and Edward Bates, an outside director of Heublein. The meeting resulted in no further progress towards a "standstill" agreement. Smith still adhered to certain "non-negotiable" demands that were unacceptable to Heublein, and expressed his preference for a "swap" involving Heublein's Grocery Products Division.
On Friday, July 23, Waldron called Smith and made some proposals for structuring a Grocery Products swap. Smith then appeared to change course and express a preference for a standstill agreement, including the "non-negotiable" terms he had previously insisted upon. Smith also made several comments about the time pressure on General Cinema, and stated that if the agreement could not be reached in a few days General Cinema would have to go back to the market and resume its purchases of Heublein stock.
After this call, Waldron called Watson and told him of Smith's ultimatum. Both agreed that it was time to approach Reynolds and commence merger negotiations.
Waldron then contacted Sticht, who was in flight to the West Coast. Sticht called Waldron from California that evening. Waldron told Sticht that Heublein could no longer maintain its independence and suggested that the investment bankers meet and initiate negotiation of a possible merger. Sticht agreed and suggested that the principals get together once he had returned to the East Coast.
On July 26, the investment bankers met in New York and for the first time began to negotiate the price that Reynolds would be willing to pay Heublein stockholders for their Heublein stock. No reference to a dollar amount had previously been made either between the investment bankers or between Heublein and Reynolds. Sticht and Waldron had discussed, however, Waldron's future and the future of other Heublein executives, in the event that Heublein and Reynolds merged.
Prior to the meeting, the Heublein strategy group suggested that a price in the range of $60 to $65 per share would be fair. The Reynolds group had independently arrived at a $55 per share figure.
During the meeting, Dillon Read proposed a $50-$53 figure. Krimendahl reported to Waldron and Watson that Dillon Read would not go to $55. Watson told Krimendahl that he would not agree to sell the company for $55. The investment bankers meeting on July 26 ended, therefore, without agreement. That night Sticht called Waldron and suggested that the principals should meet and see if they could succeed where the investment bankers had failed. Waldron agreed.
On Thursday morning, July 27, Waldron and Watson met with Sticht in New York. By the end of the day the two sides had agreed that they would recommend a price of $60 per share to their boards. The bankers and lawyers were then charged with drafting an agreement that could be taken to the Heublein and Reynolds boards for approval.
A problem surfaced, however, between Heublein and Reynolds at the last minute. The issue, raised initially by Reynolds' outside advisors on Tuesday night, was whether Reynolds would have the right to withdraw from a merger agreement if some other person or group succeeded in acquiring 33 1/3% or more of Heublein's stock before a merger between Heublein and Reynolds was accomplished.
Under Connecticut law (Heublein is a Connecticut corporation), the acquisition of 33 1/3% of Heublein's shares by a third party (such as General Cinema) could block the proposed Reynolds/Heublein merger. Reynolds wanted the withdrawal right in order to protect itself against the possibility of becoming only an equity investor in Heublein. Waldron and Krimendahl, Heublein's investment banker, were adamantly opposed to granting Reynolds such withdrawal rights. Reynolds, on the other hand, made it clear that it would not go forward without the right to withdraw.
This impasse was not broken until Thursday morning, July 29, when Sticht called Waldron and persuaded him to agree to Reynolds' demand despite the fact that Krimendahl remained adamant in his opposition to it. In the meantime, the details of the merger were negotiated; i.e., the number of shares to be acquired by Reynolds through the initial cash tender, the number to be acquired through an exchange for a package of Reynolds common and preferred stock, and the precise nature of the Reynolds equity package.
At 12:45 p.m. on July 28th, Caspar received a call from the New York Stock Exchange. He was informed that Heublein's stock was up 2 1/2 points at 47 3/4 with a high volume of trading. The New York Stock Exchange requested that Heublein issue another "no corporate development" statement. Caspar said he would check and call back.
At 1:05 p.m. Caspar called the exchange and stated that he could not issue a "no corporate development" statement because there was a matter "in the works" about which Heublein was not yet ready to make a statement. Caspar stated that it would be prudent to have trading suspended in Heublein's stock. He was told that Heublein would have to formally request the New York Stock Exchange to stop trading and issue a press release to that effect.
At 1:20 p.m. Caspar again called the New York Stock Exchange and formally requested that the Exchange suspend trading in Heublein stock. This was accomplished at 1:24 p.m. Simultaneously, Heublein issued the following release:
At Heublein's request, the New York Stock Exchange has suspended trading in the company's stock. There is a matter in midstream of development and the company expects to have a statement tomorrow.
That afternoon, Reynolds also requested that trading in its stock be suspended pending an announcement.
On Thursday, July 29th, the merger was approved by the Heublein and Reynolds boards.
As a result of the merger, the General Cinema takeover was averted. Heublein retained a large degree of operational automony, and Heublein's management preserved their positions and their financial security.
Count I of the complaint alleges that Heublein's July 14th statement was materially misleading and that Heublein's subsequent failure to correct the statement was a "material omission," both resulting in a violation of § 10b of the 1934 Act, 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 14(e) of the 1934 Act, 15 U.S.C. § 78n(e).
Count II of the complaint charges Reynolds with aiding and abetting Heublein's violations alleged in Count I. Counts III and IV charge Heublein with breach of fiduciary duty and common law fraud. The defendants have moved for summary judgment on Counts I and II of the complaint. They have also moved for dismissal of the pendent claims contained in Counts III and IV, should this Court enter judgment in favor of the defendants on Counts I and II.
In order to establish Heublein's liability under Count I of the complaint, the plaintiff must show that: (1) Heublein, acting with scienter, (2) misstated or omitted a material fact, (3) that he, the plaintiff, justifiably relied on the misinformation, and (4) that the misinformation caused him to suffer economic injury in the purchase or sale of securities.
The record in this case, and the reasonable inferences drawn from that record, would permit a jury to find that the plaintiff suffered economic harm from selling his stock in reliance on Heublein's July 14th statement. The record does not support a finding in favor of the plaintiff, however, on the issue of whether Heublein misstated or omitted a material fact in violation of the Federal Securities Laws.
The plaintiff alleges four separate violations of § 10b, Rule 10b-5, and § 14(e):
(1) Heublein's failure to disclose material developments in the General Cinema situation;
(2) Heublein's failure to disclose what is claimed to be an agreement in principle to merge with Reynolds;