The opinion of the court was delivered by: NEWCOMER
Before the Court is the defendants' motion for summary judgment as to Counts I and II of the complaint and for dismissal of Counts III and IV of the complaint.
This action has its roots in the attempted takeover of the defendant, Heublein, Inc., by the General Cinema Corporation; a takeover that eventually led to the acquisition of Heublein by a "white knight," the defendant Reynolds Industries, Inc. ("Reynolds").
The plaintiff is a Heublein shareholder who sold his shares shortly before the acquisition of Heublein was made public. He claims that a statement issued by Heublein several weeks before the announcement of the acquisition was materially misleading and thus violated Section 10b of the Securities Exchange Act of 1934 (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). Reynolds is charged with aiding and abetting Heublein's violations of these provisions.
Rule 56 of the Federal Rules of Civil Procedure provides the standard that must be used in ruling on motions for summary judgment. That rule provides, in pertinent part, that:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
The moving party, of course, has the burden of establishing that it is entitled to summary judgment. Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S. Ct. 1598, 26 L. Ed. 2d 142 (1970). Thus, the following summary presents the facts in the light most favorable to the plaintiff:
The plaintiff purchased 400 shares of Heublein common stock in 1977 at a price of $26.625 per share. In early 1982, he learned that the General Cinema Corporation was commencing a hostile takeover of Heublein.
As a result of the General Cinema situation he kept close track of the trading in Heublein stock. On July 14, 1982, the price of Heublein common stock went up $2 3/4 per share in very heavy trading.
On the afternoon of July 14, 1982, Heublein, in response to a query by the New York Stock Exchange, issued a statement which was reported by Dow Jones as follows:
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 NYSE today.
In the days that followed, Heublein stock continued to be traded at a high volume and maintained its price.
Plaintiff decided to sell his stock because he believed that it was fully priced. This decision was made on the basis of the Heublein statement, a statement made by General Cinema in early June that it would not acquire additional stock, and the integrity of the market in Heublein stock. The plaintiff examined the available public information and could see no reason to hold on to his Heublein shares. On July 27, 1982, the plaintiff sold his Heublein stock for $45.25 per share.
On the following afternoon trading was suspended in Heublein stock. At 1:24 p.m. Heublein issued the following press release:
At Heublein's request, the New York Stock Exchange has suspended trading in the company's stock. There is a matter in the mid-stream of development and the company expects to have a statement tomorrow.
On July 29, Heublein and Reynolds announced that their Boards of Directors had agreed to a merger. Under the merger agreement, Reynolds would make a cash tender offer for 11,350,000 Heublein shares (about 52% of Heublein's then outstanding common stock) at a price of $63.00 per share.
The remaining 48% of the Heublein shares would be exchanged for a package of Reynolds common and preferred stock having a combined value of $56.83 per Heublein share. Plaintiff has brought this action on behalf of himself and other Heublein shareholders who sold their shares between July 15 and the suspension of trading on July 28.
The plaintiff seeks to recover the difference between the value he received for his Heublein shares and the value he would have received pursuant to the merger agreement. He alleges that Heublein's statement of July 14th was materially misleading because it did not disclose developments relating to General Cinema and to Reynolds. He further alleges that Heublein had a duty to correct its July 14th statement well before the announcement of July 28th. The defendants contend that there was nothing material to disclose prior to July 28, and that, therefore, they are entitled to summary judgment.
As previously stated the acquisition of Heublein by Reynolds was generated by General Cinema's hostile bid to gain control of Heublein. The facts relating to that bid may be summarized as follows:
Between November, 1981, and February, 1982, General Cinema purchased 2.1 million shares of Heublein common stock, about 9.7% of the shares then outstanding. On February 3, 1982, General Cinema filed a Schedule 13D with the Securities Exchange Commission.
The Schedule claimed that the stock had been purchased for "investment" only. It further stated that General Cinema would increase its level of ownership in Heublein to 15% and would file the notification required under federal antitrust laws to enable it to purchase up to 49.9% of Heublein's stock. Heublein responded by filing suit against General Cinema on February 19, 1982, alleging that General Cinema had violated the 1934 Act by filing a false and misleading Schedule 13D that concealed General Cinema's intention to seek control of Heublein and by making an illegal tender offer. Heublein had also purchased by March, 1982, 3.5% of General Cinema's stock and had filed its own statement under the antitrust laws enabling it to purchase 49.9% of General Cinema's stock.
Heublein further responded to the threat from General Cinema by organizing an internal "task force" of executives to identify and evaluate the options available to Heublein in the face of the threat from General Cinema. This group was composed of Hicks Waldron, President and Chief Executive Officer of Heublein, Stuart D. Watson, Heublein's Chairman, Gwain H. Gillespie, Senior Vice President, Finance and Administration, George J. Caspar, Vice-President, Secretary and General Counsel, Gene R. Ehnen, Vice-President, Finance, Robert W. Pratt, Vice-President, Planning and Research, Jack Chisholm, Director of Development, and William Henn, Director of Strategic Planning. The group was at times joined by its outside advisors, H. Frederick Krimendahl, II of the investment banking firm of Goldman, Sachs & Co., Arthur Fleischer, Jr. of the law firm of Fried, Frank, Harris, Shriver and Jacobson (counsel to Goldman Sachs) and John McNally of the law firm of White & Case (counsel to Heublein).
It was immediately recognized that one of the options open to Heublein was to sell the company to a friendly suitor, or "white knight," in order to avoid a hostile takeover by General Cinema. During March or April of 1982 a list of possible "white knights" was compiled by the group with the aid of Goldman Sachs. Reynolds was one of a number of corporations identified as a possible merger partner.
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 ...