On Appeal from the United States District Court for the Eastern District of Pennsylvania.
Seitz, Adams and Haynsworth,*fn* Circuit Judges.
This appeal concerns the adequacy under federal and state securities law of disclosure in a tender offer by defendant Bass Brothers Enterprises, Inc. (Bass Brothers) for the outstanding shares of defendant National Alfalfa Dehydrating and Milling Company (National Alfalfa).
Plaintiffs, former minority shareholders of National Alfalfa, charge in a class action that Bass Brothers and the management of National Alfalfa violated sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. §§ 78j, 78n(e) (1982), rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b5 (1983), as well as Delaware common law by failing to disclose material information in conjunction with the tender offer. At the conclusion of plaintiffs' case the district court directed a verdict for defendants. As to the federal claims, the judge ruled that plaintiffs had failed to produce sufficient evidence of fraudulent nondisclosure to raise a question of fact for the jury. Regarding the state claim, the judge found the subsequent merger had a proper business purpose. This appeal followed.
The essential facts of the case are undisputed. Bass Brothers is a closely held Texas corporation. At the time of the tender offer its principal business was oil exploration with subsidiary interests in hydrocarbon production, radio, television, ranching and cattle-raising. In 1974 Bass Brothers was approached by the president of Prochemco, Inc. (Prochemco), a Texas corporation engaged in ranching and cattle-feeding, as a possible source of financing for a purchase by Prochemco of a large block of National Alfalfa's stock. National Alfalfa, a Delaware corporation whose stock was traded on the American Stock Exchange, was engaged in farming, farm supply operations and the sale of animal feed. Its former president, Charles Peterson, was seeking to sell his controlling interest in the company in order to raise sufficient capital to repay a large personal debt. To present its proposal to Bass Brothers and other potential sources of funding, Prochemco prepared to reports on National Alfalfa's history and operations, including an appraisal of its assets based on alternative hypothetical valuations.
Although Bass Brothers declined to finance such a purchase by Prochemco, it indicated that it might consider proceeding as a principal should Prochemco fail to obtain the necessary funding. In late 1975 Prochemco informed Bass Brothers that it had been unable to obtain financing and that Peterson's block of National Alfalfa stock was still available. In return for providing the detailed information about National Alfalfa contained in the Prochemco reports and for assistance in analyzing National Alfalfa's current and potential performance, Bass Brothers agreed to pay Prochemco a $130,000 finders fee.
In December 1975 Bass Brothers entered into an option agreement for the purchase of Peterson's 52% share of National Alfalfa's outstanding common stock. Thereafter, Bass Brothers exercised its option and bought the approximately 1.3 million shares from Peterson for a price of $8.44 million or $6.47 per share. A short time later, in a private sale, Bass Brothers was able to acquire an additional 226,673 shares of National Alfalfa, representing 9.1% of the outstanding shares, at $6.45 per share. This acquisition increased Bass Brothers' holding to 61.2% of the outstanding shares of National Alfalfa.
On March 2, 1976, Bass Brothers made public its tender offer for "any and all" outstanding shares of National Alfalfa at $6.45 per share. The reports prepared by Prochemco for Bass Brothers were not appended to the tender offer, nor did the tender offer refer to Prochemco's appraisal of the overall values per share of National Alfalfa which stated that:
$6.40 could be realized through "liquidation [of National Alfalfa] under stress conditions";
$12.40 could be realized through "liquidation in an orderly fashion over a reasonable period of time"; $16.40 represented National Alfalfa's value "as [an] ongoing venture."
Further, the tender offer did not refer to a second report prepared by Prochemco which gave two additional valuations: $17.28 representing the "Value per Peterson"; $7.60 representing the "Value per Prochemco." App. at 928a. To the contrary, the tender offer stated in bold letters that "Offeror did not receive any material non-public information from [National Alfalfa] with respect to its prior acquisitions of shares nor . . . does it believe it presently possesses any such information. Offeror has not been able to verify independently the accuracy or completeness of the information contained in Appendices A through E [furnished by National Alfalfa] and assumes no responsibility therefor." App. at 617a.
On March 15, 1976, Bass Brothers did, however, issue a supplement to the tender offer describing the book value of "certain land owned or leased by" National Alfalfa and advising the shareholders that:
While the Offeror has made no independent appraisal of the value of the Company's land and makes no representation with respect thereto, in view of the foregoing factors the aggregate current fair market value of the Company's agricultural land may be substantially higher than its original cost as reflected on the books of the Company. Depending upon the respective market values for such land, stockholders could receive, upon liquidation of the Company, an amount per share significantly higher than the current book value and possibly higher than the price of $6.45 per Share offered by Offeror in the Offer. The amount received by stockholders upon liquidation of the Company would also be dependent upon, among other things, the market value of the Company's other assets and the length of time allowed for such liquidation. The Offeror has no reason to believe that the Company's management has any present intention of liquidating the Company. As noted on page 8 of the Offer to Purchase under "Purpose of This Offer: Present Relationship of Company and Offeror", Offeror does not currently intend to liquidate the Company.
The supplement also extended the duration of the offer by one week "to afford stockholders an opportunity to evaluate" the new information. While the offer was in effect, the named plaintiffs tendered their shares to Bass Brothers for $6.45 per share. At the expiration of the extended offer, Bass Brothers owned more than 92% of the outstanding shares of National Alfalfa and took control of the company by removing the board of directors and electing a new board of directors. Shortly thereafter, a Delaware "short-form merger" was effected between National Alfalfa and Bass Brothers Farming Company, a wholly owned subsidiary of Bass Brothers. Emerging as the surviving entity, National Alfalfa became a wholly owned subsidiary of Bass Brothers.
On June 21, 1976, a group of former shareholders of National Alfalfa filed this class action for damages in the district court charging that the information disclosed in the tender offer was insufficient under federal and state securities law. Cross motions for summary judgment were denied. Flynn v. Bass Brothers Enterprises, Inc., 456 F. Supp. 484 (E.D. Pa. 1978).A jury trial commenced on September 13, 1983. On September 15, 1983, at the close of plaintiffs' case, defendants moved for a directed verdict. The district judge concluded that "the information that was provided by the tender offeror was not materially misleading in any way" particularly because "the information that was contained in the Prochemco report is the kind that is not permitted to be disclosed to shareholders because it is not based on sufficient information . . . [T]he people who prepared it were interested in whatever transaction they were preparing it for at the time." With respect to the claim under Delaware law that the merger was improper because it was not in furtherance of a valid business purpose, the district court found that there was adequate "testimony that the merger was made necessary . . . ...