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BUCHER v. SHUMWAY

June 14, 1978;

DOROTHY S. BUCHER, HERBERT KLION, as Trustees of KLION EMPLOYEES' PENSION FUND, and BERTHA WECHSLER, Plaintiffs,
v.
FORREST N. SHUMWAY, et al., Defendants



The opinion of the court was delivered by: TENNEY

MEMORANDUM

 TENNEY, J.

 The plaintiffs are shareholders and former shareholders of The Signal Companies, Inc. ("Signal"), one of the named defendants in this action which alleges violations of federal securities and antitrust laws and breach of fiduciary duty. The case concerns what is commonly referred to as a "friendly" tender offer for a certain number of the outstanding shares of Signal; more properly the reference to the tender offer should be in the plural since Signal itself and Gulf & Western Industries, Inc. ("Gulf & Western"), another named defendant, made simultaneous offers in a single document for a combined total of 6,400,000 shares of Signal's common stock at $ 20 per share. Plaintiffs charge, inter alia, that by agreeing between themselves to fix the offering price and to allocate the shares thus tendered, Signal, Gulf & Western and the other named defendants who are, variously, officers and directors of the two defendant corporations, conspired in illegal restraint of trade to acquire approximately one-third of Signal's shares "at a non-competitive price, below its fair value, and to protect the control of Signal by Signal Management." Complaint para. 9. They reason that this agreement deprived all Signal shareholders of a rise in the price of their shares which would otherwise have been generated if Gulf & Western and Signal had bid individually and competitively against each other and against Dresser Corporation ("Dresser"), another company which had an interest in acquiring control of Signal. They also argue that the agreement foreclosed a possibly beneficial change in Signal management. The alleged antitrust and securities law offenses cannot easily be parsed: the theory is that by agreeing to fix the price of the tender offer defendants committed a per se violation of the Sherman Act, 15 U.S.C. §§ 1 et seq., and, a fortiori, omitted to state the material fact that Gulf & Western would have been a potential competitor for Signal stock at a higher price had the agreement not been made.

 There are two motions presently before the Court. Plaintiffs have moved for class action certification pursuant to Rule 23 of the Federal Rules of Civil Procedure ("Rules"); for reasons discussed below that motion is denied with leave to renew. Defendants have moved under Rule 12(c) for partial judgment on the Sherman Act claims, urging alternatively that the complaint fails to state a claim upon which relief can be granted and/or that plaintiffs lack standing to assert the antitrust claim. For the following reasons, defendants' motion for partial judgment on the pleadings is granted on the first ground.

 The Antitrust Claim

 Defendants have marshaled a number of arguments against plaintiffs' attempt to introduce onto the battleground for corporate control antitrust considerations beyond those expressed in Section 7 of the Clayton Act, 15 U.S.C. § 18 (proscribing acquisition of one corporation by another where the effect upon the consumer marketplace would be to diminish competition in a particular line of commerce pursued in a particular geographic market. See Brown Shoe Co. v. United States, 370 U.S. 294, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962)). In opposing what they regard as an unwarranted extension of antitrust law, defendants urge several variations on two basic themes: (1) the commercial dynamics of a tender offer are simply outside the compass of Sherman Act concerns and (2) the Williams Act, 15 U.S.C. §§ 78n(d)-(f) (an amendment to the Securities Exchange Act of 1934 which treats tender offers) specifically contemplates combinations of purchasers like these defendants and evinces, when read with the entire '34 Act, congressional intent to immunize such concerted activity from the intrusion of the Sherman Act and to address any transgressions via securities law alone.

 Plaintiffs have responded by trumpeting the sweeping interdictions of the Sherman Act against all forms of price fixing, see United States v. McKesson & Robbins, Inc., 351 U.S. 305, 100 L. Ed. 1209, 76 S. Ct. 937 (1956), and by pointing to recent Supreme Court application of antitrust analysis to certain practices of the securities industry. E.g., Gordon v. New York Stock Exchange, 422 U.S. 659, 45 L. Ed. 2d 463, 95 S. Ct. 2598 (1975); United States v. National Ass'n of Securities Dealers, 422 U.S. 694, 45 L. Ed. 2d 486, 95 S. Ct. 2427 (1975). Plaintiffs argue that these cases demonstrate the interface between securities and antitrust law and that the "fixed price" offers in this case at least require scrutiny for possible antitrust violations. This Court disagrees.

 Plaintiffs are able to gain their tenuous antitrust foothold because the Sherman Act in bold strokes forbids "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States." 15 U.S.C. § 1. Tracing the legislative history and purpose of the Sherman Act, the Supreme Court explained that

 
the end sought was the prevention of restraints to free competition in business and commercial transactions which tended to restrict production, raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services. . . .

 Apex Hosiery Co. v. Leader, 310 U.S. 469, 493, 84 L. Ed. 1311, 60 S. Ct. 982 (1940). The Sherman Act may be applied where necessary to relieve sellers who, through conditions peculiar to the trades they ply, are exposed to predatory practices of purchasers who control the outlets for their goods or services. Mandeville Island Farms, Inc. v. American Crystal Sugar Co., 334 U.S. 219, 68 S. Ct. 996, 92 L. Ed. 1328 (1948). No matter who the victim, however, the thrust of the law is to prevent impermissible diminution of business competition in a relevant market segment of the general trade or business of the nation. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391, 76 S. Ct. 994, 100 L. Ed. 1264 (1956). The Sherman Act is not applied except to "restraint upon commercial competition in the marketing of goods or services." Apex Hosiery Co. v. Leader, supra, 310 U.S. at 495.

 The purchase and sale of shares by an investor does not fit comfortably within this definition. Much less does the mere offer to purchase. A seller of the shares of a particular issuer is not engaged in the business of selling such shares as an ongoing trade, and the offeror or consortium of offerors is not the only market for the shares. Cf. Rothberg v. National Banner Corp., 259 F. Supp. 414 (E.D. Pa. 1966) (good antitrust claim stated where market for shares completely controlled by defendants allegedly conspiring to prevent shareowner from selling to anyone). Furthermore, despite the fact that the Congress has chosen through the securities law to monitor the passage of funds attendant on many investments, the common understanding is that a share of stock is not an item of goods the competitive pricing of which is deemed essential to the free market economy protected under the Sherman Act. Indeed, except for those occasions when, for reasons of their own, tender offerors and the like are willing to pay a premium over the "going price," a share of stock is not priced competitively, either with shares of other issuers (to which it has no relevant relationship) or with a like share of the same class and issuer at the same given moment.

 The conceptual difficulty which plaintiffs seek to exploit in this case inheres in the fact that while shares of stock are not conceived of as "goods," their mode of distribution is a form of "service," the business of an industry that is part of a trade or commerce susceptible of antitrust analysis and sanction. Thus the Supreme Court has looked at antitrust implications in a New York Stock Exchange mandate which arbitrarily deprived independent securities dealers of essential telephone links with the central market, Silver v. New York Stock Exchange, 373 U.S. 341, 10 L. Ed. 2d 389, 83 S. Ct. 1246 (1963); in an exchange and member-firm practice of fixing commission rates for smaller transactions, Gordon v. New York Stock Exchange, 422 U.S. 659, 45 L. Ed. 2d 463, 95 S. Ct. 2598 (1975); and in restricted sales and distribution of mutual funds pursuant to an agreement among investment companies and associations of broker-dealers. United States v. National Association of Securities Dealers, Inc., 422 U.S. 694, 45 L. Ed. 2d 486, 95 S. Ct. 2427 (1975). In none of these cases was the pricing of an individual issuer's shares the subject of antitrust scrutiny; all pertained to industry-wide practices affecting some aspect of the general distribution of shares or to some unfair restraint of a business organization engaged in the brokering of shares to the public.

 Although plaintiffs correctly cite the continued vitality of the principle enunciated in Silver, supra, 373 U.S. at 357, that the "Securities Exchange Act contains no express exemption from the antitrust laws" and that "repeal is to be regarded as implied only if necessary to make the Securities Exchange Act work, and even then only to the minimum extent necessary," they cannot likewise cite any case where the principle is applied other than to offending practices of the securities industry as such. There has been no antitrust application to deception or overreaching between the potential purchasers and sellers of publicly traded shares of a particular issuer, for as Judge Conner of this district observed: "The antitrust statute was framed to preserve normal competitive forces in interstate markets against unreasonable inhibition . . . not . . . to police the performance of private contracts." Madison Fund, Inc. v. Charter Co., 406 F. Supp. 749, 751 (S.D.N.Y. 1975). In the purchase and sale of listed shares of an individual issuer, supervising the formation and execution of those contracts is a matter of securities and not antitrust law.

 This Court cannot find that antitrust considerations are germane to facts such as these, just as other courts have been unable to find a Sherman Act infraction -- and concomitant treble damage relief -- lurking among allegations of conspiracy to manipulate or fix the price of a securities purchase. For example, in Norman v. Vickers Energy Corp., 427 F. Supp. 1208 (N.D. Ill. 1977), plaintiffs were minority shareholders of TransOcean Oil, Inc. They brought suit against the corporate majority shareholder after it had made a tender offer for all of the outstanding common shares of TransOcean. Alleging both securities and antitrust violations, plaintiffs contended that the defendant sought an impermissible monopoly in TransOcean shares and argued that securities law did not reach this allegedly improper diminution of "competition" in the shares. The antitrust claim was barred, the court stating that the mere offer to purchase could not violate the Sherman Act unless it were construed ...


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