The opinion of the court was delivered by: KEENAN
JOHN F. KEENAN, United States District Judge:
This action arises out of an alleged scheme on the part of the chief executive officer and members of the board of directors of Western Pacific Railroad Company ("WesPac") to allow the Union Pacific Corporation ("Union Pacific") to acquire WesPac for a price far below its actual worth. The plaintiff alleges that, in furtherance of this scheme, the directors of WesPac refused to declare dividends despite prior representations of a contrary policy and participated with WesPac and Union Pacific in the issuance of a false and misleading tender offer document inducing WesPac shareholders to tender their shares to Union Pacific. In reliance upon this document, according to the allegations of the complaint, shareholders of WesPac tendered their shares to Union Pacific at a price far below their actual worth. The complaint further alleges that in return for recommending that the shareholders accept the tender, the chief executive officer of WesPac was awarded a top management position in Union Pacific.
Plaintiff, a former shareholder of WesPac, brought this action against Robert G. Flannery, the chief executive officer of WesPac; Robert C. Marquis, Richard W. Stumbo, Jr., Walter Treanor, John G. Bannister, Wayne T. Donnels, John G. McDonald, Justin Roach, Jr. and Joseph Rosenblatt, all former directors of WesPac (the "director defendants"); WesPac and Union Pacific alleging violations of sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and rule 10b-5 promulgated thereunder and breach of common law fiduciary duties to plaintiff and others allegedly injured when they tendered their stock for less than its actual worth.
WesPac is a rail carrier that provides freight and carrying services in Northern California, Nevada and Utah. In addition to its rail operations, WesPac operates a trucking business and owns substantial amounts of real property, including thousands of acres of land not used in its railroad operations.
Prior to 1979, WesPac's predecessor was a wholly owned subsidiary of Western Pacific Industries, Inc. ("WPI"). WPI formed WesPac to acquire the railroad, trucking and real estate properties of the wholly owned subsidiary. To fund the acquisition of these assets, Wespac, the newly formed company, issued 1,400,000 shares of class A common stock which it sold to the public at $10 per share. Ten thousand shares of class B stock were also issued. Under the offering plan, class B stockholders were entitled to elect a majority of the board of directors. Flannery, who had been president and chief executive officer of WesPac's predecessor purchased a majority of the class B stock, and thereby obtained control of the new company.
On or about January 30, 1980, Union Pacific offered to purchase any and all of the shares of WesPac for $20 per share. WesPac shareholders received a document from Union Pacific that solicited tender of their shares, described the business assets and value of WesPac, stated the purpose of the tender offer and contained a unanimous recommendation of the WesPac board that the shareholders accept the offer because the board regarded the price as fair. The tender offer document calculated the book value of WesPac's stock at $12.79 per share.
The tender offer document, issued by Union Pacific, referred the offerees to WesPac's Prospectus included as part of its Registration Statement dated March 28, 1979 and other public filings for further information concerning WesPac. The Prospectus revealed that WesPac owned approximately 5,000 acres of land unreleated to its railroad operations with a cost basis of $2,300,000 and a tax appraisal value of $9,000,000. It also reported that some of the land had been sold recently for an aggregate sale price that was substantially greater than cost basis. Although an agreement had been reached to sell another parcel of land at a similar price, the prospectus reported that there was no assurance that comparable profits would be realized on future land sales.
In May, 1983, WesPac issued a proxy statement disclosing that certain of WesPac's land holdings had been sold for an amount far in excess of book value and that appraisals of its remaining land holdings revealed that those holdings had a market value substantially greater than book value.
Plaintiff then brought this suit, claiming that the tender offer document was misleading because it failed to disclose that (1) included among the assets of WesPac were real estate assets worth far more than suggested by the $12.79 book value per share reported, which was based on historical costs rather than market values, (2) defendants planned for Flannery to acquire a management position with Union Pacific and (3) the failure to pay dividends on WesPac's shares was due to a scheme among the defendants to depress the market price of the stock. Plaintiff also claims that the recommendation of the WesPac board that the shareholders accept the tender because the board regarded the price as fair was false and misleading because the directors were aware of the manner in which the real estate assets were valued and, thus, that the shares were worth far more than the price offered.
Defendants have moved to dismiss the federal securities law claims on the ground that the fraud allegations are not pleased with the particularity required by rule 9(b) of the Federal Rules of Civil Procedure and, therefore, that they fail to state a cause of action. Defendants urge that dismissal of the securities claims mandates dismissal of the common law fraud claims for ...