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In re Phillips Petroleum Securities Litigation. C.A. 85-14 Hudson

argued: March 13, 1989.

IN RE PHILLIPS PETROLEUM SECURITIES LITIGATION. C.A. 85-14 HUDSON, ET AL.
v.
PHILLIPS PETROLEUM COMPANY, ET AL. C.A. 85-45 HUDSON, ET AL. V. PHILLIPS PETROLEUM COMPANY, ET AL. C.A. 85-281 IRWIN, ET AL. V. DOUCE, ET AL. C.A. 85-401 KELLY, ET AL. V. PICKENS, ET AL. C.A. 85-477 LAWRENCE, ET AL. V. PICKENS, ET AL. C.A. 85-537 COHEN V. MESA PETROLEUM, CO., ET AL.; FLORENCE HUDSON (CIVIL ACTION NO. 85-14 MMS), HARRY W. VOEGE; S. PAUL POSNER & CO., A PARTNERSHIP; OMINSKY, JOSEPH & WELSH, P.C. DEFINED BENEFIT PLAN U/A DATED DDT JULY 1, 1976, ALBERT OMINSKY, TRUSTEE; BARNETT STEPAK; INITIO, INC.; ALFRED D. WHITMAN; CONNECTICUT MEDICAL LABORATORY, INC.; MURRAY BELL; PIERRE HABER AND LEONARD BRAWER (CIVIL ACTION NO. 85-45 MMS), CHRISTOPHER P. KELLY AND BRYNN KELLY, TRUSTEES FOR THE KELLY FAMILY TRUST UNDER TRUST AGREEMENT DATED AS OF OCTOBER 1, 1977, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED (CIVIL ACTION NO. 85-401 LON), JOHN S. LAWRENCE, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED (CIVIL ACTION NO. 85-447), JERRY C. COHEN (CIVIL ACTION NO. 85-537 MMS), APPELLANTS IN 88-3719; JOHN S. LAWRENCE, APPELLANT IN 88-3755



On Appeal from the United States District Court for the District of Delaware, D.C. Miscellaneous No. 85-75.

Author: Scirica

Opinion OF THE COURT

SCIRICA, Circuit Judge

This is an appeal from a grant of summary judgment against a consolidated plaintiffs class, comprised of individuals who purchased stock in the Phillips Petroleum Company ("Phillips") from December 5, 1984 through December 21, 1984. The named defendants in the class action include Phillips and the Phillips Board of Directors (the "Phillips defendants"), the Mesa Partnership ("the Partnership") which attempted to acquire control of Phillips by a hostile takeover in December 1984, and individual members of the Partnership, including Mesa Petroleum Company ("Mesa") and Mesa's Chief Executive Officer, T. Boone Pickens, Jr.*fn1 After a complex procedural history, the plaintiffs had outstanding claims alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1988); a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68 (1982 & Supp. III 1985); and claims arising under Delaware state law. After a settlement that removed the Phillips defendants from the litigation, plaintiffs moved for summary judgment on liability and the Mesa defendants cross-moved for summary judgment. The district court granted the Mesa defendants' motion, dismissing with prejudice all outstanding claims against them. In re Phillips Petroleum Securities Litigation, 697 F. Supp. 1344 (D.Del. 1988).

While this appeal presents several issues, the principal matter confronting us is whether a genuine issue of material fact exists with regard to the securities fraud claims. If so, we must determine whether the record contains any evidence from which a jury could reasonably find scienter on the part of the Partnership, a necessary element of the plaintiffs' claims under the federal securities laws and RICO -- and, thus, whether the district court erred as a matter of law in granting summary judgment on those claims. Because we believe there is sufficient evidence for a jury to so conclude, we will vacate the district court's judgment dismissing the claims under § 10(b) and Rule 10b-5, and remand for further proceedings on those claims. Additionally, as violations of the federal securities laws can constitute predicate acts under the RICO statute, we will vacate the district court's judgment and remand for further proceedings on the RICO claim. We will, however, affirm the district court's dismissal of all claims brought under Delaware state law.

I.

While this lawsuit concerns the Partnership's efforts to acquire control of Phillips, the germane facts begin with an earlier attempt by Mesa Petroleum to acquire Great American Oil Company of Texas ("GAO"). In December 1982, Mesa launched a hostile tender offer for GAO. In order to thwart Mesa's takeover, GAO negotiated a friendly "white knight" merger with Phillips. A key to consummation of the deal, however, was a settlement with Mesa in early January 1983. That settlement included Mesa selling its block of stock back to GAO, being compensated for its expenses and, most importantly, signing a Standstill Agreement whereby Mesa and its affiliates agreed in essence not to attempt to acquire any of the voting securities of GAO for a period of five years. The Standstill Agreement made no reference to any attempt by Mesa or its affiliates to acquire voting shares in Phillips.

The Partnership began to purchase Phillips common stock on October 22, 1984. On December 4, 1984, the Partnership issued a press release stating it had acquired approximately 5.7% of Phillips's outstanding shares and that it was commencing a tender offer for 15 million shares of Phillips common stock at $60 per share. The press release stated explicitly that the Partnership would "not sell any Phillips shares owned by it back to Phillips except on an equal basis with all other shareholders."

The Partnership filed its Schedule 13-D on December 5, 1984, as required under Section 13(d) of the Williams Act, 15 U.S.C. § 78m(d)(1).*fn2 The Schedule 13-D stated that the proposed tender offer was designed ultimately to obtain control of Phillips. Furthermore, the Schedule 13-D reiterated the statement from the previous day's press release that the Partnership did not intend to sell its shares to Phillips except on an equal basis with all shareholders.

The next day, December 6, 1984, T. Boone Pickens appeared on the nationally televised MacNeil/Lehrer News Hour representing the Partnership. In response to questioning by Mr. MacNeil, Pickens stated unequivocally that "[the] only way we would consider selling back [to Phillips] is if they make the same offer to all shareholders."

Phillips responded to the Partnership's actions by attempting to block the takeover attempt in court. From the initial announcement of the takeover, both the Partnership and Phillips filed a succession of suits in an attempt to block or pre-empt the other's actions. In order of filing, these included the following; (1) an action by the Partnership in the United States District Court for the District of Delaware on December 4, 1984, to enjoin enforcement of the Delaware Tender Offer Act (8 Del.C. § 203) and to determine, under pendent jurisdiction, the applicability of the GAO Standstill agreement to the Partnership's takeover of Phillips; (2) a declaratory action in Delaware Chancery Court to declare the GAO Standstill agreement inapplicable to the Phillips takeover attempt; (3) the ex parte procurement of a temporary restraining order by Phillips in Oklahoma state court preventing the Partnership from moving against Phillips based upon the GAO Standstill Agreement; (4) further action by the Partnership in Delaware Chancery Court to restrain Phillips from pursuing its Oklahoma action; (5) further action by the Partnership in the Delaware Federal District Court to prevent Phillips from initiating action in any other federal court; and (6) an action by Phillips in Louisiana state court to prevent the Partnership from acquiring interest in certain Phillips assets in Louisiana, through control of Phillips itself, without the prior approval of that state's regulatory agencies. The Louisiana action does not appear to have had any impact on the takeover contest and, indeed, no party to this lawsuit mentions it as having been a factor. The other actions all turned on the applicability of the GAO Standstill Agreement to the Partnership's attempt to take over Phillips. Both the United States District Court and the Oklahoma state court ultimately deferred to the Delaware Chancery Court for determination of the applicability issue.

At the same time the parties were jousting in court, however, Phillips was pursuing private negotiations with the Partnership. Settlement efforts were conducted by a neutral intermediary, Joseph Flom, Esq. On December 7, 1984, Phillips made its first offer, through Flom, to buy out the Partnership's interest in Phillips. Pickens, representing the Partnership, declined the offer -- allegedly because it did not treat all shareholders equally. Phillips made repeated offers over the course of the next two weeks, all of which were refused, according to the defendants, because they did not treat all shareholders equally.

The turning point in the takeover fight came on December 20, 1984. On that day, the Delaware Chancery Court ruled that the GAO Standstill Agreement did not apply and, thus, did not bar a takeover of Phillips by the Partnership. Mesa Partners v. Phillips Petroleum Co., C.A. No. 7871, slip op. (Del.Ch. December 20, 1984).

With the issuance of the December 20 opinion, Phillips found itself without a viable litigation defense. Thus, after a meeting with advisers, officials at Phillips decided they had to negotiate with the Partnership. Sometime in the early to midafternoon of December 21, Flom contacted Pickens to arrange a meeting for 5:30 p.m. EDT. The significance of the meeting time lay not just in the time of day, occurring after the stock market would have closed, but also in that December 21, 1984 fell on a Friday. Thus, the parties had an entire weekend to forge an agreement without having to make disclosures for the benefit of the market. From the inception of the tender offer through December 21, the Partnership had made no less than eight amendments to its Schedule 13-D; indeed, the Partnership made the eighth amendment on the afternoon of December 21. In none of those amendments had the Partnership changed its original statement that it would not sell any of its shares back to Phillips except on an equal basis with all other shareholders.

On the face of the record, it would appear that the Partnership should have had every reason to believe that the December 21 meeting would be to negotiate the terms for Phillips's concession to its offer. Instead, claim the defendants, Phillips presented the Partnership with its plans for a defensive recapitalization which all the defendants allege would have effectively blocked the takeover. Reduced to the barest terms, under the recapitalization plan Phillips proposed to exchange 29% of its common stock for debt securities valued at $60 per share (pro rata among all shareholders), and to sell 27.5 million newly issued shares to a new employee stock ownership plan at a market price assumed to be $50 per share while purchasing 27.5 million shares of its stock back in open market transactions. Additionally, the recapitalization included reductions in expenses and capital expenditures, as well as the sale of approximately $2 billion of Phillips's lower-earning assets.

The parties negotiated vigorously through the weekend, proposing and counter-proposing various plans. The specifics of these proposals are not germane to our decision, but two facts are worth noting. First, Phillips insisted that under no circumstances could the Partnership continue as a shareholder of Phillips. Thus, with the exception of the Partnership on Friday night proposing a leveraged buy-out of Phillips, all negotiations for the remainder of the weekend dealt with the Partnership selling its stock back to Phillips as part of the recapitalization. Second, the Partnership maintains it turned down several proposals in the course of the weekend because they did not treat all shareholders on an equal basis.

Nonetheless, on December 23, 1984, Phillips and the Partnership reached an agreement in which all shareholders were not treated on an equal basis. The final agreement provided, first, that Phillips would reclassify 38% of its common stock (pro rata for all shareholders) into preferred stock, which was then to be exchanged for debt in the principal amount of $60 per share. Second, Phillips would create an employee incentive stock ownership plan (an "EISOP"), to which it would sell no more than 32 million newly issued shares at market value. Finally, Phillips was required to purchase at least $1 billion of its common stock on the open market following the exchange. Investment bankers for Phillips placed the value of the blended package -- debt securities plus Phillips stock -- at $53 for shareholders.

The Partnership, however, received a different arrangement. If the recapitalization were approved by the shareholders, it would sell its shares back to Phillips for $53 per share in cash. In the event the shareholders did not approve the recapitalization, the Partnership was given several options: it was given a put whereby it could still sell its shares to Phillips for the same $53 cash per share; it could retain its Phillips shares, subject to a standstill agreement; or it could sell its Phillips shares to a third party. Additionally, Phillips agreed to pay the Partnership's certified expenses in waging the takeover battle, an amount of $25 million. Other shareholders were not compensated for their expenses.

The agreement was announced in a press release, issued on Sunday night, December 23. The following day, Monday, December 24, the Partnership amended its Schedule 13-D yet again, this time to say that the Partnership had agreed not to pursue its attempt to gain control of Phillips and that the Partnership would eventually dispose of its shares; the amendment, however, made no revision in the equal basis statement. The market reacted adversely to announcement of the agreement and, on that same Monday, the price of Phillips stock fell by more than nine points, closing at approximately $45 per share. The value of the blended package available to Phillips shareholders, other than the Partnership, declined accordingly.

On March 3, 1985, the Phillips shareholders rejected the recapitalization plan. On March 6, the Partnership exercised its put under the December 23 agreement and sold its ...


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