Appeal from the United States District Court for the Eastern District of Pennsylvania
Before: ALDISERT, Chief Judge, HIGGINBOTHAM and ROSENN, Circuit Judges.
This appeal presents two principal questions for our consideration: (1) when does a corporation, the target of both friendly and hostile takeover activity, have a duty to disclose publicly the substance of its discussions with the suitor corporations; and (2) if the target makes a public statement, when is that statement materially misleading and under what circumstances must such a statement, if correct when issued, be updated? Here, Bruce H. Greenfield, both individually and as representative of a class of similarly situated investors, sued Heublein, Inc. (hereinafter referred to as "Heublein"), R.J. Reynolds Industries, Inc., and R.J. Reynolds Tobacco Company (hereinafter referred to jointly as "Reynolds") claiming that they violated the federal securities laws by failing to disclose properly information related to certain merger and anti-takeover negotiations. The district court granted defendants' motion for summary judgment, and we affirm.
Beginning in the mid-1981, Heublein, Inc. came to be regarded as an attractive target for a corporate takeover. One suitor, the General Cinema Corporation, pursued an aggressive approach to acquisition. It began making large, open market purchases of Heublein stock and by February 1982 owned 2.1 million shares, or about 10% of the then outstanding shares. By the end of May 1982, General Cinema's stake in Heublein had increased to 18.9%. At this point, General Cinema suspended open market purchases of Heublein stock. Although GeneralCinema, in its Schedule 13D filing with the Securities and Exchange Commission, described these purchases as "for investment only," Heublein regarded this activity as part of a hostile takeover attempt and responded accordingly. Early in 1982, Heublein established a high level executive strategy group to look into ways of defusing the General Cinema moves. The members of the group included Heublein President and Chief Executive Officer, Hicks Waldron, Chairman, Stuart Watson, and General Counsel, George Caspar.
By early 1982, Reynolds also became interested in acquiring Heublein. After observing the increased open market purchases by General Cinema, Reynolds began to investigate Heublein's corporate position more seriously and decided that, while Heublein was an attractive target, Reynolds could not afford to get into a bidding war and did not want to take any action that Heublein might consider hostile. Reynolds, thus, assumed the position of the white knight, waiting in the wings, ready to rescue fair Heublein from the clutches of General Cinema.
July 1982 became the decisive month. For several months Heublein had been trying to reach an agreement with General Cinema to avert an open market buy-out. Although some progress had been made, on July 8 General Cinema altered its bargaining position and issued Heublein a series of "non-negotiable" demands. Waldron and Watson of Heublein considered the demands unacceptable and responded by setting up a confidential meeting with J. Paul Sticht, Chairman of Reynolds, for July 9. At this meeting, Waldron and Watson described their problems with General Cinema, stated their desire to have Heublein remain an independent company, and inquired whether they might expect any hostile action by Reynolds. Sticht confirmed that Reynolds would make no adverse moves against Heublein and went on to describe in some detail both Reynolds' management philosophy and corporate structure. The parties also discussed how the two companies could be combined and how Heublein's upper management personnel could be integrated into Reynolds' organization. This meeting can be fairly described as a preliminary merger discussion and no formal understanding or agreement was reached.
On July 14 General Cinema told Heublein that it was considering selling one of its assets, a Florida television station, valued at approximately $150,000,000. Heublein, recognizing that a large influx of capital would give General Cinema the opportunity to resume large scale open market purchases of its stock, did not view this as good news. Also, on July 14, there was a dramatic increase in trading activity in Heublein's stock on the New York Stock Exchange (NYSE) as well as a moderate rise in price.*fn1 Because of the volume/price increase, Patrick Conneally of the NYSE contacted Caspar at Heublein and asked for a "no corporate development" statement. It is standard procedure for the NYSE to request such statements when the activity of a listed stock changes significantly indicating that some investors may be buying or selling large numbers of shares based on information not generally known to the public at large. After consulting with several other Heublein executives, Caspar issued the following statement, which was reported by Dow Jones after the close of trading on July 14th:
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.
Because of their increased concern over the actions of General Cinema, Waldron and Watson quickly organized another meeting with Sticht for the evening of July 15. Although this meeting covered much of the same territory as the July 9 meeting, the parties also discussed the July 14 public statement and the recent developments in the General Cinema situation.
Heublein still believed that it could still negotiate an amicable agreement with General Cinema. On July 23, however, General Cinema, impatient with the progress of the Heublein talks, reiterated its "non-negotiable" demands for what would constitute an acceptable agreement and openly threatened to resume its open market purchases. Heublein considered this turn of events fatal to the discussions and, sensing the seriousness of the threat, called upon its white knight for rescue. While many merger details had been discussed with Reynolds, price had never been mentioned. Therefore, at the direction of the respective corporate executives, the investment bankers for Reynolds and Heublein met on July 26 to discuss the per share purchase price. No agreement was reached. On the 27th, disappointed at the failure of the previous day's bankers meeting, Waldron and Watson met directly with Sticht and Joseph Albey, Reynolds' Vice Chairman. Late in the afternoon they agreed on a sale price of $60.00 per share.
On July 28 the NYSE again called Caspar to request that Heublein issue a "no corporate development" statement. Caspar responded that Heublein could not issue the statement, explained why, and requested that trading on Heublein stock be suspended. With the issuance of a public statement by Heublein at 1:24 p.m., trading on its stock was halted.*fn2 On July 29 the merger was approved by the boards of both Heublein and Reynolds and was publicly announced.
Bruce Greenfield owned some 400 shares of Heublein stock since 1977. He was generally aware of the hostile takeover action by General Cinema and watched closely the increased activity, and rises in price, of Heublein stock during July 1982.He was aware of the "no corporate development" statement issued on July 14 and, on the basis of this information and his own knowledge, believed that Heublein's stock would be fully priced at $45.25. On July 26 he placed a "good till cancelled" order to sell his Heublein stock should it reach this price. On July 27 it reached $45.25 and Greenfield's stock was sold. On the next day, trading was suspended and on the 29th the merger was approved and announced.
Greenfield filed suit claiming that in issuing and in failing to update the July 14 statement Heublein had illegally withheld material information concerning its takeover discussions with Both General Cinema and Reynolds.*fn3 The complaint alleged violations of §§ 10(b) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78n(e), Rule 10b-5, 17 C.F.R. § 240.10b-5(1983),*fn4 as well as several provisions of state law. Following discovery, the district court denied plaintiff's motion to amend his complaint, and, taking into account all of the arguments raised therein, granted defendants summary judgment on all federal counts and dismissed the pendent state law claims.*fn5 Greenfield appealed.
We will affirm the grant of summary judgment if there are no disputed issues of material fact and if the movant is entitled to judgment as a matter of law. Coastal States Gas Corp. v. Department of Energy, 644 F.2d 969, 978-79 (3d Cir. 1981).Greenfield argues that summary judgment was error here because the district court used the wrong legal standard to determine whether an agreement in principle to merge had been reached and, if the correct principle were applied, a factual dispute as to the intent of the parties would be present. Greenfield also argues that, as a matter of law, the July 14 statement was either materially misleading when issued or became so thereafter and Heublein failed to correct it. Therefore, the resolution of this appeal turns on the scope and character of a corporation's duty to disclose information to the investing public. Our analysis will follow two steps: (1) when does a duty to disclose arise in the context of merger/anti-takeover discussions, see Staffin v. Greenberg, 672 F.2d 1196 (3d Cir. 1982); and (2) when a voluntary public statement is made, under what circumstances will it be materially misleading when issued or become so on the basis of subsequent events, see Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969).
Rule 10b-5 and § 10(b) of the Act make it unlawful to fail to disclose material information in connection with the purchase or sale of securities. Chiarella v. United States, 445 U.S. 222, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980); Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969). Similarly, § 14(e) of the Act requires that statements made in connection with proxy solicitations and tender offers set forth all material facts. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 51 L. Ed. 2d 124, 97 S. Ct. 926 (1977). Such disclosures are required to insure that all investors have similar relevant information upon which to base investment decisions and to protect the basic integrity and fairness of the exchange markets. Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523 (9th Cir. 1976). If a corporation is not trading in its securities and is not otherwise under a duty to disclose material corporate information, but it voluntarily chooses to make a public statement, if that statement is "reasonably calculated to influence the investing public . . ." the corporation has a duty to disclose sufficient information so that the statement made is not "false or misleading or . . . so incomplete as to mislead. . . ." Texas Gulf Sulphur Co., 401 F.2d at 862.
With specific reference to merger discussions, we have held that, so long as they are preliminary, no duty to disclose arises. Staffin, 672 F.2d at 1205-07. We reasoned that because disclosure of such tentative discussions may itself be misleading to shareholders, preliminary merger discussions are immaterial as a matter of law. Id. at 1206; see also Susquehanna Corp. v. Pan American Sulphur Corp., 423 F.2d 1075, 1084-85 (5th Cir. 1970). We recognized, however, that as merger discussions progress, the need to protect shareholders from the potentially misleading disclosure gives way to the right of the shareholders to have notice of corporate developments important to their investment decisions. Thus, we further held that "where an agreement in principle [to merge] has been reached a duty to disclose does exist." Staffin, 672 F.2d at 1207.
With respect to the Reynolds negotiations, the court below held, as a matter of law, that no agreement in principle to merge was reached, and thus no duty to disclose arose, until sometime after Greenfield sold his stock on July 27. The court stated that:
While an "agreement in principle" may exist before all of the details of a merger have been negotiated . . . is clear that agreement on the fundamental terms of the merger must be reached before the merger negotiations become a material corporate development that must be disclosed to the investing public. Without fundamental agreement on the price and structure on a merger, the merger is simply too tentative to give rise to a duty of disclosure.
Memorandum opinion at 25, reprinted in app. at 1489a (emphasis added). As we read the district court's opinion, it stated that an agreement in principle requires agreement on the fundamental terms of the merger. The court then applied this formulation and determined that, in the case before it, an agreement in principle had not been reached until July 27 because the parties had not yet agreed on the price and ...