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LEWIS v. MCGRAW

November 30, 1979

HARRY LEWIS, ALFRED B. REISS, CAROLA GRUEN, as Executrix of the estate of her late husband, Theodore Gruen, IRA BARMAK and COLONIAL SECURITIES CORPORATION, Plaintiffs, against HAROLD W. McGRAW, JR., JOHN L. McGRAW, DANIEL F. CROWLEY, PETER O. LAWSON-JOHNSTON, KAY K. MAZUY, WILLIAM J. McGILL, GORDON W. McKINLEY, ALAN J. PIFER, LOUIS PUTZE, HOWARD S. TUTHILL, JAMES E. WEBB, VERNON R. ALDEN, GEORGE R. WEBSTER and McGRAW-HILL, INC., Defendants.


The opinion of the court was delivered by: MOTLEY

CONSTANCE BAKER MOTLEY, D. J.

MEMORANDUM OPINION

 Defendants in this action have moved for an order, pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, dismissing the complaining for lack of jurisdiction over the subject matter and/or for failure of the federal claims alleged to state a claim upon which relief can be granted. Defendants also have moved, in the alternative, for an order staying the action pending disposition of parallel state-court actions.

 The five named plaintiffs originally commenced separate class actions against the defendants. Following defendants' motion to dismiss each of the five complaints, plaintiffs served and filed a consolidated amended complaint. By stipulation among all parties, defendants' motion to dismiss was deemed addressed to the new complaint.

 Plaintiffs, shareholders of defendant McCraw-Hill, Inc. (McGraw-Hill), allege in their consolidated amended complaint that defendants violated Section 14(e) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78n(e), in connection with a proposed tender offer by the American Express Company (AMEXCO) for the common stock of McGraw-Hill. The individual defendants in this action are directors of McGraw-Hill. The series of events leading to the alleged violation of Section 14(e) began of January 8, 1979, when AMEXCO publicly proposed to McGraw-Hill a friendly business combination on the basis of AMEXCO's acquisition of 49% of McGraw-Hill's outstanding securities at $34 per share. Plaintiffs allege that the price per share initially offered by AMEXCO was a substantial premium over $26, the market price of the common stock prior to the proposed AMEXCO offered. Soon thereafter AMEXCO increased its proposed offer to $40 per share for all of McGraw-Hill's shares. In connection with these proposed offers, AMEXCO filed a Schedule 14D-1 with the Securities and Exchange Commission.

 Plaintiffs allege that defendants refused to negotiate with AMEXCO and "embarked on an unlawful, improper and illegal plan, scheme and conspiracy to obstruct, delay and defeat the proposed AMEXCO offer." In particular, plaintiffs allege that defendants made untrue statements of material facts and omitted to state material facts, and engaged in fraudulent and deceptive acts and practices, as follows:

 1) Defendants announced that the proposed tender offer price of $40 per share was inadequate, although they allegedly knew that the price was fair. Plaintiffs allege that defendants had no genuine basis for believing that the McGraw-Hill stock was worth more than $40 per share.

 2) Plaintiffs allege that defendants challenged the integrity and honesty of AMEXCO, publicly challenged the legality of the proposed tender offer, and publicly stated that the proposed tender offer somehow threatened freedom of expression. Plaintiffs maintain that these statements were false and misleading, especially since defendants omitted to advise its shareholders that McGraw-Hill had earlier advised AMEXCO that McGarw-Hill considered AMEXCO to be a proper and desirable merger partner.

 3) Plaintiffs allege that defendants circulated a letter which McGraw-Hill had sent to AMEXCO, characterizing the proposed merger as "reckless," "illegal," and "improper."

 4) Plaintiffs allege that defendants denied the plaintiff class the opportunity to sell their McGraw-Hill stock at a large premium.

 Plaintiffs allege that the tender offer would have been consummated had defendants provided its shareholders and the public with complete and truthful information about AMEXCO and its proposed tender offer. Instead, defendants rejected the AMEXCO $40 per share proposed offer on January 31, 1979, Plaintiffs allege that defendants violated their statutory and common law fiduciary duties by thwarting the proposed AMEXCO tender offer improperly and illegally.

 Conduct "In Connection With" A Tender Offer

 Section 14(e) provides:

 It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any ...


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