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August 26, 1971

Dudley FEIT, Plaintiff,

Weinstein, District Judge.

The opinion of the court was delivered by: WEINSTEIN


WEINSTEIN, District Judge.

 This case raises the question of the degree of candor required of issuers of securities who offer their shares in exchange for those of other companies in take-over operations. Defendants' registration statement was, we find, misleading in a material way. While disclosing masses of facts and figures, it failed to reveal one critical consideration that weighed heavily with those responsible for the issue -- the substantial possibility of being able to gain control of some hundred million dollars of assets not required for operating the business being acquired.

 Using a statement to obscure, rather than reveal, in plain English, the critical elements of a proposed business deal cannot be countenanced under the securities regulation acts. The defense that no one could be certain of precisely how much was involved in the way of releasible assets is not acceptable. The prospective purchaser of a new issue of securities is entitled to know what the deal is all about. Given an honest and open statement, adequately warning of the possibilities of error and miscalculation and not designed for puffing, the outsider and the insider are placed on more equal grounds for arms length dealing. Such equalization of bargaining power through sharing of knowledge in the securities market is a basic national policy underlying the federal securities laws.


 In this class action plaintiff seeks damages resulting from alleged misrepresentations and omissions in a registration statement prepared in conjunction with a 1968 offering of a "package" of preferred shares and warrants of Leasco Data Processing Equipment Corporation (Leasco) in exchange for the common stock of Reliance Insurance Company (Reliance). He is a former shareholder of Reliance who exchanged his shares for the Leasco package. Suit was commenced in October 1969 on behalf of all Reliance shareholders who accepted the exchange offer between August 19, and November 1, 1968.

 It is alleged that Leasco (1) failed to disclose an approximate amount of "surplus surplus" held by Reliance and (2) failed to fully and accurately disclose its intentions with regard to reorganizing Reliance or using other techniques for removing surplus surplus after it had acquired control. These failures, it is claimed, represented material misrepresentations or omissions in violation of Sections 11, 12(2), and 17(a) of the Securities Act of 1933 (15 U.S.C. §§ 77k, 77l(2), and 77q(a)), Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78j(b), 78n(e)), and Securities and Exchange Commission Rule X-10B-5 (17 C.F.R. § 240.10b-5).

 Defendants are Leasco, the issuer; Saul P. Steinberg, Leasco's chief executive officer; Bernard L. Schwartz, Leasco's President; Robert B. Hodes, Leasco's general counsel and a director; and White, Weld & Co. and Lehman Brothers, the dealer-managers. In addition to denials, the answers raise a number of defenses.


 During the period August 19, through November 1, 1969 Leasco offered one share of convertible preferred stock and one-half warrant of Leasco in exchange for each share of Reliance common stock tendered. The preferred shares offered carried a $2.20 annual dividend and a conversion value of $55 if converted into common stock. The warrants permitted the holder to purchase Leasco common stock for $87 per share at any time up to June 4, 1978.

 Reliance common shares had a market value of approximately $30 in December of 1967. As word of an impending takeover attempt spread, the price rose gradually to a high of $99 7/8 during the tender offer period. The price of Leasco common shares was also rising during this period. On August 16, 1968, the last trading day before the exchange offer was effective, Leasco common stock closed at $87 5/8 while its warrants were listed at a high bid of $43. Reliance shares were then selling at $66 1/4.

 By September 13, 1968, 3,994,042 shares of Reliance, amounting to 72% of those outstanding, had been tendered and Leasco had obtained control of Reliance. Leasco ultimately acquired 97% of Reliance's common stock by the termination of the tender offer on November 1, 1968.


 A. Definition of Surplus Surplus

 Reliance's surplus surplus is the central element in this litigation. Leasco's desire to acquire it provided much of the original impetus for the exchange offer. Lack of disclosure of facts relating to the amount of surplus surplus and Leasco's intentions concerning its use, as well as the materiality of those omissions provide the basis of plaintiff's complaint. Finally, the method and difficulty of ascertaining its amount is critical to the defendants' affirmative defense. We cannot proceed without examining the concept.

 Reliance is a fire and casualty insurance company subject to stringent regulation by the Insurance Commissioner of Pennsylvania. Such a company is required by the regulatory scheme to maintain sufficient surplus to guarantee the integrity of its insurance operations. Such "required surplus" cannot be separated from the insurance business of the company. That portion of surplus not required in insurance operations has been referred to as surplus surplus. In a widely relied upon report to the New York Insurance Department, the matter was summed up as follows:

"The 'required surplus' is one that will be adequate to cover for a reasonable period of time any losses and expenses larger than those predicted and any declines in asset values, including all chance variations in the crucial factors of the operation. Any surplus beyond this cover is 'surplus surplus' which, by definition, is unneeded; it may be treated quite differently in the process of regulation." State of New York Insurance Department, Report of the Special Committee on Insurance Holding Companies at 43 (Feb. 15, 1968) (hereinafter referred to as Insurance Department Report).

 Simply put, surplus surplus is the highly liquid assets of an insurance company which can be utilized in non-regulated enterprises. While the importance of the concept has only recently received full recognition the idea is not new; it was previously referred to as "redundant capital."

 Insurance companies are not generally permitted to engage in non-insurance business activities. If, therefore, surplus surplus is to be of any practical use it must be separated from the insurance operation with its concomitant regulatory restrictions.

 In 1967 Carter, Berlind & Weill undertook a study of fire and casualty companies. The result was a report by Edward Netter submitted in August 1967. It develops the concept of "The Financial Services Holding Company," envisioning modification of the corporate structure of the typical fire and casualty company to permit more flexible utilization of its resources -- particularly surplus surplus. Netter postulated a one-stop, comprehensive financial institution servicing virtually all of the consumer's financial needs. Aggressive use of capital redundancy (surplus surplus) was a critical element in Netter's analysis. He estimated Reliance's capital redundancy at $80,000,000 as of December 31, 1966.

 Leasco's interest was aroused by the Netter Report. Michael Gibbs, Leasco's Vice President for Corporate Planning, subsequently prepared a "Confidential Analysis Of A Fire And Casualty Company" based "to a large extent" on Reliance. He worked from the Netter Report to illustrate the specific benefits to Leasco of increased earnings per share and leverage potential in acquiring and reorganizing a fire and casualty company with large surplus surplus. His initial idea was to establish a parent holding company to which the fire and casualty company (Reliance) could transfer its surplus surplus -- freeing it from regulatory restriction -- while continuing to operate as an insurance subsidiary. In his opinion such an acquisition was potentially extremely valuable to Leasco. As he noted:

If Leasco could acquire control of an F & C * * * (3) large sums of capital for computer leasing would be available, (4) an aggressive acquisition and investment company (the holding company) would initially have a large sum of available capital in addition to potential debt leverage. * * (6) Leasco can create a true financial services company."

 Gibbs estimated Reliance's surplus surplus at $125,000,000 as of June 30, 1967 or $100,000,000 as of the end of 1967.

 These two documents, along with the Insurance Department Report, provided the impetus for Leasco's take-over bid. Steinberg considered surplus surplus "important to Leasco" and A. Addison Roberts, Reliance's President, came away from negotiations with the impression that "one important aspect of Reliance that commended itself to Leasco was Reliance's surplus surplus." Leasco protected its interest in the surplus surplus by including a provision in an August 1, 1968 agreement with Reliance requiring its management to provide the maximum amount then available to the holding company Leasco would form.

 B. Disclosures Concerning Surplus Surplus

 The only statements in the prospectus with regard to surplus surplus appears on page five. It neither mentions the amounts that Leasco's management had in mind nor suggests the importance of Reliance's possible surplus surplus. It reads:

"The Company [Leasco] believes that this Exchange Offer is consistent with the announced intention of the Reliance management to form a holding company to become the parent of Reliance. That intention was communicated to Reliance stockholders on May 15, 1968 by A. Addison Roberts, the president of Reliance, who wrote that the holding company concept would serve the interests of Reliance and all its stockholders 'by providing more flexible operations, freedom of diversification and opportunities for more profitable utilization of financial resources.' The Company supports those objectives and intends to do all it can to promote their realization as soon as practicable. * * * Reliance will diligently pursue its previously announced intention to form a holding company which Reliance will provide with the maximum amount of funds legally available which is consistent with Reliance's present level of net premium volume. * * *"

 C. Parties' Contentions With Regard To Surplus Surplus

 Plaintiff contends that anything as important to the overall transaction as the amount of surplus surplus should have been disclosed by some sort of approximation. He asserts that such a computation could, in fact, have been made by the techniques used by Netter and Gibbs with information in Leasco's possession or that sufficient additional data could have been obtained to arrive at a reliable estimate. He further claims that while Leasco disclosed its intention to form a holding company to make use of Reliance's resources, it should also have disclosed that Leasco was considering other plans for separating surplus surplus from the insurance operation by reorganization and liquidation of Reliance or by declaration of a special dividend.

 Defendants, in contrast, maintain that such omissions were not material because

"* * * the stockholders who exchanged Reliance shares for the Leasco package would not have been deterred from doing so by an estimate of surplus surplus, but rather would have been made all the more anxious to tender."

 This belief stems from their perception that a large block of liquid assets in the hands of an aggressive acquisition-oriented company like Leasco would have made the Leasco package even more attractive than Reliance shares. They also assert that such an inclusion would have been "bullish" in violation of SEC standards -- it would have made the prospectus a selling document.

 Defendants' second principal argument is that surplus surplus could not have been calculated by Leasco because an accurate estimate required (1) access to Reliance's financial data, (2) the judgment of its management, and (3) the opinion of the insurance commissioner, all of which were denied Leasco by the hostility of Reliance's management and its attempts to obstruct the take-over bid.

 Finally, defendants contend that any other proposals for removing surplus surplus from Reliance were simply matters being considered by counsel. They never reached the level of a specific plan by Leasco during the pendency of the exchange offer.

 D. Computation of Surplus Surplus

 The problem and the variety of methods of determining surplus surplus were discussed in the New York Insurance Department Report in the context of how an insurance department should determine what is "required surplus." A variety of techniques were set out:

"The 'required surplus', which should be assured by regulation, is easy to state in the abstract, but difficult to implement in practice. It calls for analysis of the variables that the surplus to policyholders is expected to cover. Essentially they are three. First the surplus must absorb any basic insurance costs (losses and expenses) which are in excess of the premiums charged. Second, the surplus must absorb any under-valuation of loss or claim reserves. Third, the surplus must absorb any declines in asset values. To this should be added any surplus required to finance necessary growth.
* * *
"Well-known rules-of-thumb for making approximations have been developed. The so-called 'two-to-one' rule constitutes an approximation to the specification of required surplus, and can be applied in the absence of anything better. Under most circumstances it is surely too stringent when used as a test of solidity. The rule is based on a theory developed by a former New York Insurance Department Chief Examiner and was utilized in the first draft of the 1939 Recodification of the Insurance Law as a yardstick for payment of dividends.
"A similarly rough, but probably much too liberal, approximation is found in the English statutes. A non-life insurer must have a surplus of at least $: 50,000 if the general premium income of the company in the previous year did not exceed $: 250,000, a fifth of that income if it exceeded $: 250,000 but not $: 2,500,000, or the aggregate of $: 500,000 and a tenth of the amount by which that income exceeded $: 2,500,000.
"The insurance regulatory personnel of some states have concluded that premium writings of three times policyholders' surplus is safe but that four times is risky. Sometimes this is made a little more sophisticated by adding common stock investments to premium writings, in recognition of the fact that surplus must cover not only bad operational experience but also a stock market decline. In actual administration in a department as competent as New York's actual application can be still more refined and discriminating, though New York, like the others, relies more on judgment than on precise quantitative standards."

 The difficulties set out by the New York Insurance Department Report were also perceived as realistic problems by the insurance industry. Roberts, President of Reliance, and a cooperative witness of defendants was of the opinion that what needed consideration was: (1) the relationship of premium writings to surplus; (2) underwriting results; (3) investment policy of the company; (4) its re-insurance arrangements or treaties; (5) exposure to catastrophies; (6) adequacy of loss and premium reserves; (7) quality and characteristics of the agency plan or company; and (8) the quality of management. He indicated that some of the data pertaining to these criteria were not matters of public record.

 He concluded that the evaluation of these factors was largely a matter of judgment and nearly impossible without full access to company data.

 Similarly, Steinberg, Chief Executive Officer of Leasco, considered the rules of thumb method discussed by the Insurance Department Report and used in both the Netter and Gibbs memoranda to be "unreliable" methods of determining surplus surplus given the lack of access to Reliance management. Consequently, he considered the estimates contained in these documents to be inaccurate and undependable. He testified that he himself had never arrived at an estimate he considered accurate with any degree of certainty throughout the preliminary stages and even through the exchange offer period. Thus, he stated, when the question of including such an estimate in the prospectus arose it was decided on the advice of counsel not to include one.

 According to defendants, the result of this pervasive feeling of uncertainty about the accuracy of the estimates put forward by Netter and Gibbs, or any estimate, was that none of the principals in the exchange offer ever calculated surplus surplus, commissioned anyone to compute it, or even attempted to estimate it. Nor did the underwriters attempt at any time to obtain an estimate from Reliance. In fact, they did not even communicate with Reliance.

 This is not to suggest that no estimate of surplus surplus was available to Leasco during the negotiations and exchange offer period -- the Netter Report had estimated it at $80 million and Gibbs had indicated $100 and $125 million as his approximations. A range of $50-$125 million was discussed at meetings between Reliance and Leasco in October 1968. Leasco simply, according to defendants' testimony, considered these estimates speculative in light of their then state of knowledge of Reliance.

 Nor should it be inferred that an estimate could not have been obtained at least by Roberts, who was, of course, privy to Reliance's data. He stated bluntly that he could have made such a calculation "damn quickly" if given a reason to do it. He had not calculated it because he was never presented with a specific need to do so. No one from either Leasco or the underwriters ever asked him to calculate surplus surplus during the pendency of the exchange offer, but he could have done so if asked. Whether he might or would have is one of the subsidiary issues in this litigation.


 A. January to August 1, 1968.

 Following the submission of the Gibbs memorandum on January 11, 1968, Leasco developed an active interest in acquiring Reliance. By April 3rd of that year it had taken a substantial position in Reliance stock -- 132,000 shares, roughly 3%, worth over four million dollars.

 As early as February 9, 1968 Roberts received word from a partner in a Philadelphia brokerage firm that Leasco was interested in buying Reliance. Accordingly, he sent a letter to his stockholders on May 15, 1968 indicating that Reliance intended to form a holding company to become the parent company of Reliance. This would benefit Reliance and its stockholders "* * * by providing more flexible operations, freedom of diversification and opportunities for more profitable utilization of financial resources through the Holding Company concept." While this document implies recognition of surplus surplus and indicates an intention to aggressively utilize it, the term itself was not used nor did Roberts calculate it because "[this] was more or less a public relations maneuver" to demonstrate Reliance's progressive attitude and forestall a takeover bid. This letter was subsequently referred to by Leasco on page five of its prospectus, quoted above.

 Representatives of Leasco and Reliance met in early June, 1968 to discuss the possibility of a merger between the two companies. Steinberg tried to convince Roberts of the potential for creating new opportunities in the financial service company area. He believed that a merger of a sound insurance company with a company like Leasco which had a strong technological base "would make an exciting combination." Reliance was not particularly interested in the prospect, but Roberts said he would present any specific proposal to his board; none was suggested at that time. Because of the general nature of these discussions, surplus surplus was never specifically discussed and apparently no calculations were made.

 Leasco announced a tender offer for Reliance shares on June 22, 1968. At that time it offered one convertible debenture having a principal amount of $110 and paying annual interest of $4.00 and one warrant for every two Reliance shares tendered. The Reliance management wrote to its shareholders on June 24, advising them not to act in haste with regard to the offer.

 Hodes, a member of Leasco's board and a partner in its counsel's law firm, by telegram dated June 24, 1968 requested Reliance's cooperation in the preparation of a registration statement on SEC Form S-1 in conjunction with the registration of the Leasco shares into which the debentures were convertible and promised to promptly furnish Reliance with proofs of the registration statement for its comments. Roberts replied, by telegram dated July 1, 1968, that:

"* * * the Reliance Executive and Finance Committee is studying Leasco's proposal. Reliance cannot incur the expense and potential liability of preparing and supplying the information requested until the Board of Directors has determined whether the Leasco proposal is in the best interests of Reliance and its stockholders."

 A copy of the preliminary registration statement filed with the SEC on July 8, 1968 was sent to Roberts on July 9, along with a request for advice as to its accuracy. Similarly, a copy of an actuarial consultant's report on Reliance was forwarded to Reliance with a request for comments on July 12. Roberts responded on July 15 that "[we] are studying the requests made in your letter of July 9th and will advise you in due course." Reliance apparently never complied with these requests for information.

 During the greater part of July the posture of the Reliance officers toward the exchange offer and Leasco was one of hostility, apparently motivated by the conviction that the offer was not in the best interests of Reliance and its shareholders and further by its concern with regard to Leasco's intentions toward them personally should the offer succeed.

 Speaking of the first meeting between Leasco and Reliance in June, Roberts testified: "I was less than friendly about it because I was not interested, and they were pursuing it rather vigorously." He similarly characterized a subsequent meeting held in Philadelphia in late July:

"* * * [The] discussion was about whether we can make an amicable arrangement, an affiliate [sic] or merger, and discussion was rather abrasive. I guess I was the leading character in that respect." (emphasis added).

 Perhaps the best expression of this relationship was provided at trial by Saul Steinberg:

"It is somewhat hard for me to characterize it, but, I think that Mr. Roberts viewed -- he constantly has characterized this as he was a king and we were about to make him a baron, and the relationship was always on a personal basis, cordial, but I think that I certainly had a lot of respect for him and I still do * * * -- but it was cold. It * * * wasn't friendly, we were taking over his company." (emphasis added).

 Reliance filed a lawsuit against Leasco in mid-July, the purpose being "to inhibit the tender offer." Subsequently, on July 23, 1968, Roberts wrote a strong letter to his shareholders expressing opposition to the proposed exchange offer:

"Your Board of Directors has very carefully weighed the pros and cons of the Leasco offer in the preliminary prospectus and strongly recommends that you reject the proposed exchange of Leasco Debentures and Warrants for your Reliance Stock." (emphasis in original).

 He listed the following as the reasons for not tendering: (1) the exchange was a taxable transaction; (2) Leasco was small and was spending large fees on the exchange offer itself; (3) the debentures would be subordinated to other debts; (4) Reliance stockholders would be contributing a disproportionate share of earnings and assets in the combined company; (5) Leasco common stock had never paid a dividend; (6) the debentures and warrants had no voting power; (7) any tender was irrevocable and eliminated the Reliance shareholder's ability to take advantage of favorable market changes during the exchange period; and (8) if earnings were to drop off the highly leveraged capitalization of Leasco might cause "financial stringencies."

 Indicating that the Board of Directors did not believe Leasco's long term prospects were as good as its high priceearnings ratio would suggest, he summed up management's position:

"[We] are recommending that you do not accept the Leasco paper. The other alternatives presently available are that you hold your investment or sell your shares on the open market."

 This document is particularly significant because of the insight it provides regarding the depth of opposition to the exchange offer as late as July 23. Viewed in conjunction with the failure to provide information and the filing of the law suit, it is clear that Roberts' group was prepared to employ a full panoply of defensive techniques in an attempt to bust the exchange offer. Such resolve in late July becomes crucial in light of conduct on and after August 1, 1968.

 The final paragraph of the July 23 letter relates directly to the problem of the alleged omissions to state an amount of surplus surplus. Reliance management informed its shareholders that Leasco might not be the only possible tenderor and impliedly suggested that they not accept the first offer made.

"In considering these alternatives you should know that in the last several weeks Reliance management has negotiated with several other companies and has received a number of offers. In the judgment of your Board, all of these were, like Leasco's proposal, not sufficiently attractive to warrant recommendation to you at this time. We are continuing to have talks with several other interested companies and your management promises to take all possible steps to consummate an affiliation with an investment quality company and insure that your long term investment remains sound, secure and profitable."

 In short, they implied a better deal if the tender offer were frustrated.

 This promise to actively seek an alliance was made more credible by the fact that the Netter report had been distributed on Wall Street so that the attractiveness of fire and casualty companies was known to security analysts. Roberts' testimony was that many of his shareholders believed that the company was "going to be raided"; he was aware as early as May, 1968 that "many mutual funds were buying this stock" in anticipation of takeover bids.

 Shortly after this letter was sent to Reliance shareholders, its management once again met with Leasco to discuss a possible affiliation or merger. It was this meeting which was described as "abrasive" by Roberts. It accomplished nothing and the relationship between the two apparently did not improve until later in July when representatives of Leasco and Reliance met. They worked out the substance of an agreement which modified the offer somewhat and gave Reliance management very substantial personal benefits in exchange for withdrawal of active opposition to the exchange offer and assurances of cooperation in setting up a holding company. The results of these discussions were confirmed in a contract executed August 1, 1968.

 B. August 1 to August 19, 1968.

 The August 1st agreement represents the end of open hostility, tacit acceptance of a Leasco takeover, and at least the beginning of a rapprochement between the two management groups. Thereafter, an effective working relationship commenced between what was to be parent and subsidiary. While the personal relationships may not have warmed immediately, the business associations improved considerably to the point that Reliance's management "co-operated with them within reason" after around mid-September and actively after October 18, 1968.

 The avowed purpose of entering into the August 1st agreement was that "Reliance has heretofore expressed opposition to Leasco's proposed Exchange Offer, and * * * Leasco desires that Reliance withdraw such opposition ". Leasco agreed that if it should acquire a majority of Reliance shares it would nevertheless vote its shares for at least five years to maintain a majority of the existing Reliance Board of Directors. It bound itself not to elect more than one-third plus one of the directors of Reliance. In effect it reposed a voting trust in the old management.

 Roberts was guaranteed his position as director and chief executive officer of Reliance. His associates covenanted to cooperate in setting up a holding company to release from insurance operations "the maximum amount of funds available" -- i.e., Reliance's surplus surplus.

 As is apparent, a primary function of the agreement was to protect Leasco's interest in Reliance's surplus surplus. Because the voting trust arrangement denied Leasco day-to-day control of Reliance for five years, it required that Roberts and his associates do nothing to diminish profitability and thus limit its financial resources and that they form a holding company to make the maximum amount of surplus surplus available to the Leasco controlled holding company.

 The contract protected Reliance management from liability arising from the tender offer itself:

"Nothing contained herein shall be deemed to require Reliance or its management or the stockholders to recommend to the stockholders of Reliance that they accept the Exchange Offer or to oblige Reliance to cooperate in the preparation of any Registration Statement in connection therewith or to assume or take any liabilities or responsibility in connection therewith."

 While Roberts was willing to withdraw his opposition and even cooperate, he clearly did not wish to incur any liability for a registration statement which he was not preparing. He thus avoided any affirmative duty to formally involve himself in the registration process and denied Leasco the use of his name on the registration statement.

 The critical significance of this document arises from the assurances it provided the Reliance management that (1) the ordinary insurance business of the company would not be interfered with by non-insurance interests and (2) there would be no major disruption of the prerogatives of Reliance's management team as a result of a successful exchange offer. Thus, the two principal reasons for anxiety and opposition by Reliance officials were resolved favorably.

 In addition to the security guaranteed by the August 1, 1968 contract, Roberts reaped a number of substantial personal benefits. His salary was increased from $80,000 to $100,000 a year shortly thereafter. He was granted an option to purchase 5,000 shares of Leasco at 30% of the market price when granted -- $27.15 -- which he exercised on October 23, 1968 when Leasco shares were selling at $114.25. Thus, during the pendency of the exchange offer Roberts was the recipient of an $87.10 per share discount, or a bonus of approximately $435,000. He also received a future option on 10,000 additional shares. Finally, he was accorded a position on the Leasco Board of Directors. Roberts took further pains to protect and preserve his own financial well being. He kept his substantial holdings of Reliance shares without tendering. Whatever happened to Reliance shareholders, he was to be well taken care of.

 Immediately after the August 1st reconciliation, Reliance withdrew the lawsuit it had filed against Leasco. It mailed its shareholders a letter stating that whether to exchange was a decision they would have to make and indicating that Leasco had increased the offer and granted management a voting trust. Roberts apparently also furnished Leasco with a stockholders list enabling it to transmit the prospectus and formal tender offer.

 Prior to the withdrawal of Reliance's opposition Leasco had offered one debenture and one warrant for each two Reliance shares tendered. Leasco finally offered one preferred share and one-half warrant for each share tendered. Whether the final package was in fact more advantageous than the original offer is not clear. What is clear, however, is that while the original package was taxable to the tenderor on an installment basis only as he realized gain, the final offer was taxable immediately.

 The Reliance management group realized the tax disadvantage to the Reliance shareholders, who might have to pay tax on the exchange before receiving any proceeds with which to pay it. Nevertheless, it dutifully maintained the neutrality bargained and paid for in the August 1st contract. Having accepted the imminent takeover on August 1st, Roberts was no longer concerned with details such as tax consequences to his own shareholders to whom he owed a fiduciary duty.

 Roberts' withdrawal of opposition, acceptance of Leasco's takeover, and subsequent cooperation during the pendency of the exchange offer, when viewed in light of his own poor opinion of the package offered, provides important insight into the state of his mind -- an issue critical to defendants' contention that he would not have cooperated in helping compute surplus surplus. True to his own evaluation of the merits of the Leasco exchange offer, Roberts refused to tender his own shares. It is clear that the neutral posture taken by Roberts after August 1, 1968 was not that of an elected corporate officer who believed that the exchange offer was necessarily in the best interests of his shareholders, but rather the stance of a pragmatic business man who perceived that a tender of shares at a premium over market price was likely to be successful and that it was better to acquiesce -- advancing his personal fortune in the process -- than to incur the displeasure of the raiders.

 Roberts also made it clear that nothing occurred between July 23, and August 1, to change any of the eight specific reasons stated in his letter of opposition dated July 23. The August 1st agreement did not make these factors any less compelling.

 Shortly after the August 1st agreement was consummated, a revealing exchange of letters occurred between the Deputy Insurance Commissioner of Pennsylvania and Roberts. On August 2nd the Deputy Commissioner inquired about the Leasco takeover, the existence and extent of surplus surplus, and the position of Reliance's management on the takeover and its future course of action.

 Roberts' reply on August 6th expressed the belief that the activity in Reliance stock foretold a takeover bid and that "* * * the rumors had turned into reality in that we were receiving calls from companies interested in acquiring Reliance, commencing several months ago." He further stated that in his opinion Reliance did have surplus surplus which could be removed from the insurance operation but that it was very "difficult to measure with exactness" -- a somewhat disingenuous reply in view of his testimony at the trial that he could have computed it quickly. Most revealing, however, is his attitude toward the Leasco exchange offer.

"The Reliance management did not seek the affiliation with Leasco. In fact, our Board of Directors much preferred that our Company not be owned by non-insurance interests; however, in the light of what has taken place we have accepted the fact that Leasco will probably obtain control of the Company. If so, we have agreed * * *
"(b) That Leasco will receive our co-operation in forming a holding company with their having the right to withdraw any surplus funds of Reliance within the framework of satisfying the regulatory authorities that sufficient funds are kept in the business for it to be operated with at least its present premium income.
* * *
"If the answers to these questions are not sufficient for your purpose, will you please advise us as we will be very happy to elaborate on any points or questions you might wish to present to us."

  At this date Roberts still had not expressed in writing a specific opinion regarding surplus surplus. He had, however, indicated his resignation to the Leasco takeover, his intention to cooperate with Leasco, and his willingness to answer any inquiry by the insurance department regarding surplus surplus and its disposition. Roberts' state of mind reflected that of other members of the Reliance board as of August 19, 1968 when the Leasco registration statement became effective and the exchange offer commenced.

  C. The Exchange Offer Period -- August 19, to November 1, 1968.

  The exchange offer was so successful in the early days that by September 13, 72% of the shares had been tendered and Leasco had acquired control. The offer was extended for the second time on September 16, with a supplement to the prospectus indicating the success of the takeover. Between August 1, and mid-September, Roberts had, according to defendants' testimony, not been in direct contact with Leasco as he awaited the outcome of the exchange offer. But as it became certain that Leasco would be his employer, he abandoned his neutral stance.

"Q Now then, Mr. Roberts, during the changeover period, you and other members of Reliance's management team cooperated with Leasco, did you not?
"A Well, let's put it this way, August the first we stopped opposition of keeping the agreement [sic]. The next time I talked to people from Leasco or anyone in the Reliance management to my knowledge, there may have been other talks but I am not aware of them, the first time I did was the middle of December [sic] [September], when Leasco got control of over 80% of the stock. From that time we cooperated with them within reason.
"Q * * * you and the management team cooperated in good faith after ...

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