On Appeal from the United States District Court for the District of Delaware.
Adams, Sloviter, Circuit Judges, and Teitelbaum, District Judge.*fn*
Barbara Schreiber, a shareholder of El Paso Gas Company (El Paso), brought this action under § 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (1976) (the Williams Act) after she lost the opportunity to profit from a hostile tender offer by Burlington Northern, Inc. (Burlington)*fn1 when the offer was rescinded and a friendly but less lucrative offer was substituted. The district court dismissed her complaint, holding that she failed to state a claim for violation of § 14(e) because she alleged no injury resulting from deception. Schreiber v. Burlington Northern, Inc., 568 F. Supp. 197, 201-04 (D. Del. 1983). While we are troubled by some of the conduct averred in the complaint, we agree with the district court that Schreiber's alleged injuries are not actionable under the Williams Act. Accordingly, we affirm.
In late 1982, having purchased over one-half million shares of El Paso stock in the open market, Burlington decided to complete its takeover of El Paso by making a tender offer for 25.1 million shares at $24 per share (the December tender offer). Deeming the offer a hostile one, El Paso management countered with numerous defensive measures. But El Paso shareholders reacted favorably, fully subscribing to the offer by the December 30, 1982 deadline.
Burlington, however, never accepted those tendered shares. Instead, after negotiations with El Paso management, Burlington announced on January 10, 1983 the terms of a new and friendly takeover agreement. Pursuant to the new agreement, Burlington undertook to: (1) rescind the December tender offer; (2) substitute a new tender offer for only 21 million shares, at $24 per share; (the January tender offer); and (3) recognize "golden parachute"*fn2 contracts between El Paso and four of its officers. By February 8, more than 40 million shares were tendered in response to Burlington's January offer, and the take-over was completed.
For shareholders like Barbara Schreiber, who tendered in response to the December offer, Burlington's withdrawal of that offer proved costly. The January offer was greatly oversubscribed, and consequently those shareholders who re-tendered were subject to substantial proration. Seeking redress, Schreiber filed suit on behalf of herself and similarly situated shareholders, alleging that Burlington, El Paso, and members of the El Paso board violated § 14(e)'s prohibition of "fraudulent, deceptive, or manipulative acts or practices . . . in connection with any tender offer." She claims that Burlington's willful breach of the December tender offer was a manipulative distortion of the market for El Paso stock. Schreiber also alleges that in the January offer Burlington failed to disclose the golden parachutes and the fact that El Paso management finally approved the takeover because of the favorable arrangements negotiated with Burlington. Plaintiff thus claims that this January nondisclosure was a deceptive act forbidden by § 14(e).
Ruling on defendants' motions under Fed. R. Civ. P. 12(b)(6), the district court held that neither of Schreiber's theories of recovery was legally sufficient and dismissed the suit on June 27, 1983. This appeal followed.
Schreiber's first theory of recovery -- that Burlington engaged in manipulation when it cancelled the December tender offer -- seeks to convert an arguable breach of contract into a violation of the Williams Act. The district court rejected this effort, holding that § 14(e) proscribes only acts that artificially affect market price through deception.
The courts of appeals are divided as to whether deception is a necessary element of the manipulative acts prohibited by § 14(e). In the first appellate decision directly to address this point, the Sixth Circuit held in Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir. 1981), that an option granted by a target company to a friendly bidder in order to block a hostile takeover attempt -- a "lock-up" option -- is a manipulative act within the scope of § 14(e), despite the lack of any deception. Since Mobil, however, the Second Circuit has twice rejected efforts by hostile bidders to use § 14(e) to attack arrangements similar to the lock-up option. Data Probe Acquis'n. Corp. v. Datalab, Inc., 722 F.2d 1 (2d Cir. 1983); Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757 (2d Cir. 1983). Both Data Probe and Buffalo Forge hold that Williams Act manipulation must involve misrepresentation -- that is, the omission or misstatement of material facts.
We believe that the Second Circuit's position, requiring some form of misrepresentation, represents a more accurate view of the Williams Act. As the legislative history and subsequent judicial interpretation of the Williams Act make clear, § 14(e) was not intended to create a federal cause of action for all harms suffered because of the proffering or the withdrawal of tender offers. Rather, § 14(e) was enacted principally as a disclosure statute, designed to insure that fully-informed investors could intelligently decide how to respond to a tender offer.*fn3 Considered in light of this philosophy of disclosure, withdrawal of the December offer did not violate § 14(e) since Burlington disclosed to the shareholders and to the general public the acts that allegedly constitute a breach of contract. In the analogous context of SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (1983), the Supreme Court has restricted the meaning of "manipulative device" to conduct "intended to mislead investors by artificially affecting market activity." Santa Fe Ind. v. Green, 430 U.S. 462, 477, 97 S. Ct. 1292, ...