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November 6, 1985


The opinion of the court was delivered by: LASKER


This litigation arises out of the April 8, 1982 merger of Associated Madison Companies, Inc. ("Associated") into AC Financial Services, Inc., a wholly-owned subsidiary of American Can Company ("American Can" or "American"). Before the merger, American Can, a New Jersey corporation, was engaged in a variety of enterprises, including the manufacture of cans and different paper products. Through its "Fingerhut Corporation" unit American Can also was involved in direct-mail marketing. Associated, a New York corporation prior to the merger, was a holding company engaged in the life insurance business. The stocks of both American Can and Associated were listed and traded on the New York Stock Exchange ("NYSE").

 On April 8, 1981 Gerald Tsai, Jr., then Chairman of Associated, wrote a letter to William S. Woodside, Jr., then Chairman of American Can. Tsai's letter complimented Woodside on the "bold, but highly intelligent" diversification plans for American Can that were announced in the April 2, 1981 edition of the New York Times. See Affidavit of Mordecai Rosenfeld and Bertram Bronzaft, Exhibit 3 (Mar. 7, 1984). *fn1" Tsai suggested that Associated and American Can's Fingerhut division shared a mutuality of business interests and requested a meeting with Woodside to "enjoy a brief exchange of ideas." Id. Subsequent to Woodside's receipt of Tsai's letter, Tsai met several times with members of American Can's management. Shortly after mid-September, 1981, Kenneth Yarnell, Jr., an American Can senior vice president, telephoned Tsai and proposed that American acquire 100% of Associated.

 On October 27, 1981 American Can and Associated reached an agreement in principle with respect to a proposed merger. On that date the companies signed a Memorandum of Intent which included, inter alia, a provision stating that

holders of up to 49% of [Associated's] common stock, par value $.40 per share ("Company Common Stock"), will receive per such share $15 in cash, and the balance of such holders will receive per such share the number of shares of [American Can's] common stock, par value $12.50 per share ("Purchaser Common Stock"), determined by dividing $15 by the average closing price per share of Purchaser Common Stock as reported on the New York Stock Exchange Composite Tape during a period to be agreed upon, provided that no share of Company Common Stock shall be converted into less than .4110 or more than .5085 of a share of Purchaser Common Stock.

 Rosenfeld Aff., Exh. 4 at 1-2 (emphasis in the original). In addition, the memorandum of Intent embodied the parties' acknowledgement that

it may be desirable in facilitating the Merger that [American Can] acquire certain outstanding shares of Company Common Stock or Company Preferred Stock prior to the effective date of the Merger by open market purchase, tender offer or otherwise, and [Associated] agrees to corporate with and support [American Can] with any such acquisition.

 Id. at 2-3.

 The merger ultimately was effected by a common multistep transaction, *fn2" which, in this case, involved (1) American's purchase of 34% of Associated's stock from five institutions; (2) a tender offer by American Can for its own common stock; and (3) the merger transaction itself.

 Before American engaged in any of the above transactions, Frederick Kanner, a partner at Dewey, Ballantine, Bushby, Palmer and Wood, outside counsel for American Can, wrote to the Securities Exchange Commission ("the SEC" or "the Commission") on behalf of the company. Kanner's November 13, 1981 letter requested an exemption from Rule 10b-6, 17 C.F.R. § 240.10b-6, *fn3" a rule issued under the Securities Exchange Act of 1934, 15 U.S.C. § 77(b) et seq (1982) ("the Exchange Act"), which prohibits a corporation from making certain stock purchases when the corporation is in the course of a distribution of its own stock. Kanner's letter first summarized the salient points of the proposed Associated/American Can merger and then explained the contemplated private stock purchases:

American [Can] or [its wholly-owned subsidiary] may wish to enter into stock purchase agreements in the very near future with the three institutions referred to above providing for the purchase for cash of some or all of the convertible preferred stock of Associated held by them, as well as for the purchase for cash of the common stock of Associated held by one of such institutions. Alternatively, American [Can] or [its wholly-owned subsidiary] may wish to purchase in the very near future options to acquire for cash some or all of such convertible preferred stock or common stock. Assuming full conversion by the three institutions of the convertible preferred stock of Associated held by them, and no other issuance of Associated's common stock, the Associated stock held by them would constitute approximately 37% of Associated's common stock which would be outstanding.

 Rosenfeld Aff., Exh. 6.

 As set forth in Kanner's letter, the reason for the requested 10b-6 exemption was as follows:

American [Can] understands it is the position of the Staff that as a consequence of having entered into the agreement in principle, American may be deemed to be engaged in a distribution of its common stock, subject to Rule 10b-6, and that the Associated common stock may be deemed to be a "right to purchase" the American common stock to be distributed in the Merger. Accordingly, it could be argued that, absent an exemption, the proposed pre-merger purchase described above by American [Can] or [its wholly-owned subsidiary] of Associated's stock would be prohibited by Rule 10b-6.

 Id. at 4.

 On November 20, 1981 Kanner again wrote to the SEC, this time explaining that subsequent to November 13 American Can had made two additional decisions with respect to the proposed merger. The letter related to the SEC that American had decided:

(i) subject to market conditions, to commence a tender offer (the "Offer") as soon as practicable for its own common stock in an amount estimated to be sufficient to provide for the shares that would be deliverable to stockholders of Associated who become entitled to receive shares of American's common stock in the Merger and (ii) to permit stockholders of Associated to elect, during the period in which proxies are solicited for the Associated special stockholders' meeting to vote on the Merger, to receive in the Merger $15 in cash per share of Associated's common stock (or $37.50 in cash per share of Associated's preferred stock) in lieu of American's common stock (a "Cash Election"). The Cash Elections will be available for a minimum of 49% of Associated's shares of common stock and preferred stock, respectively, reduced by the number of shares thereof purchased in advance of the Merger by American . . . and the number of such shares as to which dissenters' rights are duly exercised prior to the vote of Associated stockholders on the Merger.

 Rosenfeld Aff., Exh. 7 at 3-4.

 Based upon these considerations American Can sought an additional Rule 10b-6 exemption from the SEC since, arguably, "absent an exemption purchases of American's common stock pursuant to the Offer and purchases of Associated's stock pursuant to the Cash Elections would be prohibited until the distinction of American's common stock pursuant to the Merger has been completed or the Merger has been abandoned." Id. at 5. In addition, American Can requested the Commission to take a "no-action" position under Rule 10b-13, *fn4" 17 C.F.R. § 240.10b-13 (which prohibits stock purchases other than pursuant to the terms of the tender offer during the pendency of such tender offer), because it was their belief "that the grant of the Cash Elections should not be considered a discrete transaction constituting a tender offer, separate from the Merger, and, accordingly, should not be deemed to be within the contemplation of Rule 10b-13." Id. at 6.

 On December 1, 1981 the SEC responded to both of Kanner's letters and granted American Can's requests. See Rosenfeld Aff., Exh. 8. Further, by letter of December 24, 1981 the Commission took a "no-action" position under Rule 10b-13 with respect to the purchase of Associated stock from the institutional shareholders, although American Can apparently did not solicit a "no-action" letter with respect to those particular stock purchases. Rosenfeld Aff., Exh. 9. The December 24th letter states:

On the basis of your representations and the facts presented, the Commission has granted an exemption from Rule 10b-6 to permit the Company to make Pre-Merger Purchases of Associated's common stock and convertible preferred stock. In addition, on the basis of those facts and representations, in particular that (i) the institutions will not receive a price higher than the other shareholders of Associated will receive in the Merger and (ii) that full disclosure of the Purchase Agreements will be made to shareholders of Associated prior to their vote on the Merger, this Division will not recommend that the Commission take enforcement action under Rule 10b-13 with respect to the Pre-Merger Purchases.

 Id. at 2.

 Both of the December SEC letters contained a summary of Kanner's description of the proposed merger. Both also stated that the positions of the Commission were based solely on the facts and representations presented. American was instructed that in the event of any material change in the facts presented to the SEC, American Can should discontinue the proposed transactions with which the exemptions and "no-action" positions were concerned "pending presentation of the facts for [SEC] consideration." See, e.g., id. at 3.

 In January of the following year American Can issued a number of press releases concerning three steps that were taken by American Can in relation to the proposed merger. On January 7, 1982 the Company announced that it had

entered into agreements with five institutional investors to purchase a total of 1,754,320 shares of common stock and 490,000 shares of convertible preferred stock of Associated Madison Companies, Inc.

 Holmes Affidavit, Exhibit D (Apr. 20, 1984). *fn5" The release further stated that once the purchases were completed, and assuming conversion of all of Associated's preferred stock into common stock, American Can would own approximately 34% of Associated's outstanding common stock. According to the press release, the terms of the agreements were that

American would pay $ 13 per share of common stock, or $ 32.50 per share of convertible preferred stock, at the time of completing the stock purchases. The purchase price would total $ 38,731,160. In addition, if the merger with Associated were completed as contemplated, American would pay the institutions a supplemental purchase price equal to the amount by which the merger price exceeds $ 13 per share of common stock (or underlying common stock in the case of the convertible preferred stock).


 Two additional press releases were issued on January 12, 1982. One of them, *fn6" issued jointly by Associated and American Can, stated that the companies had modified the terms by which Associated would become a wholly-owned subsidiary of American.

Under the revised proposal, holders of up to 49% of Associated's common stock would receive $15 per share in cash and the remaining holders of Associated's common stock would receive for each such share .4545 of a share of American's common stock. Associated's convertible preferred stock would be exchanged on a basis proportionate to the value of the underlying common stock.

 Holmes Aff., Exh. E. The news disclosure also contained a short recapitulation of the January 7, 1982 announcement pertaining to the purchase agreements with the institutional shareholders. This release however, contained a statement that "[t]he maximum number of Associated's shares that could be exchanged for cash in the merger would be reduced to the extent of such purchases." Id.

 The stage was set for final consummation of the merger on February 23, 1982 when the parties signed an "Agreement and Plan of Merger." Rosenfeld Aff., Exh. 1 at Annex I. Two days later a Proxy Statement-Prospectus was sent to all Associated shareholders soliciting their votes on the transaction. Rosenfeld Aff., Exh. 1. At a special shareholders' meeting held on March 26, 1982, 83.13% of the outstanding Associated shares (99.4% of the votes cast) were voted in favor of the merger. When the merger was consummated on April 8, 1982, approximately 8% *fn7" of the Associated shareholders received cash at the rate of $15 per share of Associated common stock. The remaining Associated shareholders received American stock valued at $12.61. *fn8"

 This class action *fn9" was commenced on May 28, 1982, on behalf of the former Associated shareholders who received American Can stock instead of cash in the merger. Under a variety of legal theories, plaintiffs seek to recover the difference between the value of American Can stock at the time of the exchange and the $15 per share that the Associated shareholders whose cash preferences were honored received.

 The Second Consolidated Amended Complaint ("the Amended Complaint") alleges five causes of action, namely, (1) that the defendants breached the provisions of the Memorandum of Intent, a purported contract pursuant to which plaintiffs claim they have rights as third party beneficiaries; (2) that the proxy statement omitted material facts and was false and misleading in violation of Exchange Act Section 14(a), 15 U.S.C. § 78n(a) (1982); (3) that the material omissions also constituted a violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b); (4) that the defendants failed to follow the tender offer procedures contained in Williams Act Sections 14(d)-(e), 15 U.S.C. §§ 78n(d)-(e); and (5) that the merger between Associated and American Can violated section 510(c) of New York's Business Corporation Law, N.Y. BUS. CORP. LAW § 501(c) (McKinney 1963).

 The plaintiffs move pursuant to Federal Rule of Civil Procedure 56 for summary judgment as to certain claims. *fn10" Defendants jointly cross-move for summary judgment as to the entire Amended Complaint. For the reasons set forth below plaintiffs' motion for summary judgment as to their federal claims is denied. Defendants' motion for summary judgment as to plaintiffs' third party beneficiary claims is granted and paragraph 20 of the Amended Complaint is dismissed. Decision as to plaintiffs' state law claim is reserved. Defendants' cross-motion for summary judgment on plaintiffs' claims under Section 10(b) and 14(a) is granted as to all of the alleged omissions except for the one contained in paragraph 16(a)(3)(d) of the Amended Complaint. As to that paragraph, defendants' cross-motion will be granted unless plaintiffs submit appropriate affidavits within two weeks. Defendants' cross-motion for summary judgment on Section 14(d)(7) is granted as to the cash election merger. As to the institutional stock purchases defendants' motion will be granted unless within two weeks from the filing of this Memorandum plaintiffs submit affidavits pursuant to Rule 56(f), Fed. R. Civ. P., in accordance with this decision.

 I. Third Party Beneficiary Claims

 Plaintiffs assert in the Amended Complaint that Associated's shareholders are the intended beneficiaries of the October 27, 1981 Memorandum of Intent between Associated and American Can, and that their status as beneficiaries entitled them to enforce what they characterize as the "contractual right to receive American Can stock valued (as of March 26, 1982) at $15 for each share of Associated common stock." Amended Complaint at P20(c). However, plaintiffs appear to have abandoned this position in favor of a different proposition which they argue in their briefs, namely, that the Associated shareholders were the intended beneficiaries of the SEC's December 1st and December 24th letters granting American Can's requests for Rule 10b-6 exemptions and a "no-action" position as to Rule 10b-13. See Plaintiffs' Memorandum at 17-21; Plaintiffs' Reply Memorandum at 11-20. Under this new theory, they assert that as "the proper parties to be benefitted by the SEC letters" they are entitled to enforce American Can's "commitment" not to pay the institutional shareholders a price higher than the other shareholders would receive in the merger, and to recap the benefit of American Can's "binding obligation" to pay all Associated shareholders stock equal to $15 per share.

 The defendants answer that "[s]ince the plaintiffs have proffered no basis for concluding that such correspondence was ever intended to create a contract, much less one for the benefit of a group of Associated shareholders, the argument calls for no further response." Defendants' Memorandum at 3 n*. They then devote a substantial portion of their brief to rebuttal of what they view as the plaintiffs' primary legal theory, which, as the defendants interpret it, is a claim that the defendants violated Rule 10b-6. Finally, the defendants assert that they are entitled to summary judgment on the third party beneficiary claim asserted in the ...

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