The opinion of the court was delivered by: WEINFELD
This is yet another lawsuit arising from the 1969 contest between General Host Corporation ("General Host") and a wholly-owned subsidiary of the Greyhound Corporation ("Greyhound") for control of Armour & Co. ("Armour").
Plaintiff Alan L. Spielman brings this class action on behalf of holders of Armour common stock or convertible debentures
against General Host, certain of its directors at the time of the exchange offer, and Allen & Co., Inc., one of the dealer-managers of the exchange offer.
Plaintiff contends that Armour security holders were materially misinformed during the battle for control of Armour because the General Host prospectus of January 30, 1969 was misleading in failing to set forth relevant facts concerning (1) General Host's ability to meet its cash needs from internally generated funds and (2) its ability to secure effective operating control of Armour upon successful completion of its exchange offer. Thus, plaintiff contends defendants violated section 14(e) of the Williams Act
and the antifraud provisions of the Securities Act of 1933
and the Securities Exchange Act of 1934.
On December 12, 1968, having already acquired 16 1/2% of the then outstanding Armour common stock, General Host filed a Schedule 13D with the Securities and Exchange Commission reporting that it was considering the possibility of obtaining control of Armour based upon an exchange offer for additional Armour securities. On December 23, 1968, after consultation with its dealer-managers, Allen & Co., Inc. and Kleiner, Bell & Co., General Host announced that it would offer to exchange for Armour securities its 7% subordinated debentures in the principal amount of $347,040,000 due February 1, 1994, and warrants to purchase General Host common stock. On December 30 it filed a registration statement and prospectus with the Securities and Exchange Commission. The proposed exchange offer specified that General Host would not accept any Armour securities unless a sufficient number of Armour shares or convertible debentures were tendered so that General Host would own, together with its previously acquired shares, more than 50% of the outstanding Armour common stock, assuming conversion of all Armour debentures tendered. The final ratio of exchange was $60 principal amount of General Host debentures and 2 1/2 warrants for each Armour share or for Armour debentures in the principal amount required upon conversion to obtain a share of Armour common stock. The Commissioners of the SEC declared the prospectus effective on January 30, 1969. The exchange offer expired on February 14, 1969.
General Host's offer met with hostility from Armour management. Armour's opposition was manifested even before the formal offer was advanced. Its counsel urged the SEC to investigate alleged securities law violations by General Host and sent the Commission several letters and memoranda in December and January pointing out purported defects in General Host's prospectus. Armour unsuccessfully sought a preliminary injunction in this Court, contending that the General Host registration statement was deficient, among other matters, in not indicating "the unlikelihood that General Host would be able to pay principal and interest as due, based on (1) the projected cash flow of General Host after the exchange offer; (2) the net tangible assets of General Host after the exchange offer; [and] the terms of the debentures . . . ."
The evidence at this trial again demonstrated that:
"Armour's opposition was not limited to representations before official bodies. Through the month of January, 1969, while the registration was being processed, Armour publicly attacked the General Host proposal, and its views were widely disseminated. The news media, based on press releases issued by the Armour group, published the specific claims that it was very unlikely General Host would be able to pay principal and interest on the subordinated debentures; that the value of the warrants was illusory, and that the tax consequences to Armour stockholders would be adverse. A full-page advertisement addressed to Armour stockholders by the Chairman of the Armour board, published in the Wall Street Journal, The New York Times and other news media throughout the country, denigrated the General Host securities and went into considerable detail as to the undesirability of the exchange. His statement raised questions whether General Host would have the cash flow necessary to service its greatly increased debt and touched upon other claimed deficiencies."
Before the General Host registration statement became effective, a Greyhound subsidiary made a competing offer to Armour shareholders, a cash tender for Armour stock that was later increased to $72 per share of Armour common stock.
As a result of its exchange offer, General Host acquired about 55% of the outstanding Armour common stock, assuming conversion of the Armour debentures. Greyhound received approximately 32% of Armour common as a result of its cash offer and other purchases.
While the amended complaint contains many free-wheeling allegations of conspiracy and fraudulent conduct, at the trial the claims were narrowed to the two basic issues indicated: the adequacy of disclosure in the General Host prospectus disseminated to Armour shareholders concerning General Host's ability to meet its debt obligations from internal cash flow and impediments to its ability to obtain effective operating control of Armour.
The antifraud provisions of the securities laws prohibit the making of any untrue statement of a material fact or any omission to state a material fact "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."
"Materiality" in the abstract is, of course, a meaningless concept. Materiality centers about the significance of the misstatement or omission of the fact under consideration to a reasonable investor's judgment in deciding to buy or sell. Thus, it can be given content only by considering all the circumstances surrounding the transaction.
The determination of materiality is to be made upon all the facts as of the time of the transaction and not upon a 20-20 hindsight view long after the event.
The ultimate issue is whether "any of the stockholders who tendered their shares would probably not have tendered their shares" had the alleged violation not occurred.
The fact that the alleged violation occurred in the context of a hotly contested battle for control of a target company is a circumstance to be considered in determining whether there has been an actionable failure to disclose material facts.
In addition, the fact that there is a contest for control means that a failure to present information may be rendered harmless by disclosure from others, such as the target company, the competing tenderor or outside sources.
A defendant may not be faulted for failure to repeat material information which has been publicly proclaimed in various way on other occasions. The adequacy of disclosure of material information must be evaluated by a consideration of the "total mix" of all information conveyed or available to investors.
The issue presented by this case, therefore, is not, as plaintiff myopically visualizes it, simply whether the General Host prospectus failed to state material facts, but whether Armour security holders were unable to make an informed investment decision because of alleged deficiencies in the prospectus, defects which, assuming any are found to exist, were never cured by information contained in other communications to Armour shareholders.
Plaintiff now argues that, of the two alleged defects in the prospectus, "the control problem was the most important aspect of the exchange offer."
However, the evidence reveals, and plaintiff's own amended complaint confirms, that the primary issue at the time of the exchange offer was General Host's ability to meet its debt obligations under the debentures to be issued to Armour security holders pursuant to the exchange offer. The control issue -- whether or when General Host could get operating control of Armour -- was subsidiary to this cash flow issue and but a part of it. Accordingly, plaintiff's two claims must be considered in this framework.
Plaintiff argues that Armour security holders lacked material information concerning the exchange offer because the prospectus failed to disclose that General Host was not relying on its historical earnings, but upon management's projection of cash flow from operations, to meet its debt and service payments as they became due. Relative thereto, he further argues that Armour shareholders were inadequately advised of the risks involved in General Host's plan to acquire a majority of Armour's common stock.
The prospectus does not say that General Host intended to rely on its cash flow to meet its obligations. To the contrary, the prospectus refers to alternative methods by which General Host could raise cash to service debt during the period required to obtain control of Armour. It states that if there is no merger or consolidation and if General Host has not acquired more than 80% of Armour's stock, thus allowing it to effect tax saving arrangements, it may find it necessary or desirable to incur new indebtedness or issue additional equity securities. The prospectus also states that upon consummation of the exchange offer General Host may find it desirable to dispose of some of the assets held by it or Armour. Far from representing that General Host could meet its cash flow needs from internally generated funds, the prospectus discloses that it may be necessary or desirable to raise additional cash and sets forth alternative sources available to it.
In analyzing the adequacy of disclosure to Armour concerning General Host's cash flow, it is important to realize that the SEC prohibited the inclusion of earnings projections in a prospectus. Plaintiff concedes that because of this Commission policy, General Host could not disclose its projected earnings. He argues, however, that it was materially misleading for General Host not to disclose that, on the basis of historical rather than projected earnings, it would not have adequate cash flow to meet its obligations under the debentures. This argument is without merit. The evidence refutes the claim that failing to disclose this item constitutes an omission to state a material fact "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."
Plaintiff's contention that General Host was required to state that historical earnings were inadequate for cash flow needs necessarily assumes that General Host had made a representation that it was relying on its cash flow to meet its cash requirements. As indicated, there was no such representation, express or implied, and the prospectus stated that General Host may find it desirable to do a number of things after the exchange offer to generate needed cash. The prospectus contained no statement as to cash flow that a reasonable investor would rely upon to his detriment absent the additional information suggested by plaintiff.
Though plaintiff concedes that General Host could not disclose projected earnings in the prospectus, he inconsistently argues that it should have informed Armour stockholders that it was relying on projected earnings, as opposed to historical results, to service its debt. To repeat, General Host never represented that it was relying on earnings, historical or projected, to meet its cash needs. To have stated, as plaintiff argues it should have, that it was relying on predicted future earnings to meet debt service needs would have been to make a projection that future earnings would be adequate to meet General Host's cash obligations, and this of course it could not do.
The fact was that General Host's internal study dated January 30, 1969, indicated that it would have sufficient cash flow, based on projected earnings and dividends of Armour stock at various levels of ownership, to meet its cash needs for the years 1969 and 1970. Plaintiff responds that this cash flow analysis was defective in that it omitted material items, namely two debt obligations, and that consequently the prospectus was misleading in failing to disclose that General Host could not meet its debt obligations out of internally generated funds. Thus he contends that (1) the analysis did not account for repayments of $9.4 million due to various insurance companies on loans due in August 1969, and (2) it made no provision for capital expenditures which had amounted to $8 million in 1967 and $6 million in 1968. Neither of these arguments is well-founded.
The General Host cash flow study did not include repayment of the $9.4 million insurance company loans for the simple reason that General Host intended to refinance the loans. General Host had an opinion letter from the securities firm of Allen & Co. to the effect that if it had more than 50% of Armour's shares as a result of the exchange offer (which was the minimum level of ownership required for the exchange offer to be effective), there would be no difficulty in refinancing the loan. The prospectus stated that General Host "anticipated that [these loans] will be refinanced at the company's present borrowing rate." The evidence fully supports that statement.
As to the capital expenditure claims, plaintiff's argument that the prospectus did not reveal the impact of General Host's increased cash flow needs for its newly issued debentures on its capital expenditure program is refuted by the language of the prospectus:
The Company proposes to continue its capital expenditures program during 1969 using funds to be derived from retained earnings and accumulated depreciation. There can, however, be no assurance this program will continue because ...