Appeal from a judgment of the United States District Court for the Southern District of New York (Gerard L. Goettel, Judge) dismissing, under Fed.R.Civ.P. 12(b)(1) and 12(b)(6), plaintiff's amended class-action complaint. The district court dismissed plaintiff's claim brought under Section 14(d)(7) of the Securities Exchange Act of 1934 holding that a purported withdrawal of a tender offer was effective even though the withdrawal was followed within a few hours by acquisition of an option to purchase a large block of the stock subject to the tender offer, and thereafter by an announcement of a purportedly new tender offer. The district court also held that plaintiff had failed to state claims under RICO or under Sections 10(b), 14(a) and 14(e) of the '34 Act, and Rules 10b-5, 10b-13 and 14a-9 thereunder. We reverse the dismissal of plaintiff's claim under Section 14(d)(7) but affirm the dismissal of the remaining federal claims.
Van Graafeiland, Winter and Altimari, Circuit Judges.
The legal issues in this appeal concern the meaning of the so-called "best-price rule" of Section 14(d)(7) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(d)(7) (1982), and the disclosure obligations of a publicly held company under that Act.
Accepting the allegations of the complaint as true, this dispute arises from a leveraged buy-out in which defendants Julius and Eddie Trump, through corporations they owned and controlled, commenced a tender offer at a price of $22.50 per share for shares of defendant Pay'n Save Corporation, a Washington state corporation. Shortly after the market closed on the fourth business day after the announcement of the tender offer, the Trumps "withdrew" the offer in order to arrange a purchase of a bloc of shares from certain dissident directors. Later that night, after acquiring an option to purchase the dissidents' shares, the Trumps announced a "new" tender offer at $23.50 per share. When the price of the option and a side payment for "fees and expenses" is taken into account, the dissidents received $25.00 per share, a $1.50 premium over the price paid to the tendering shareholders.
Bertram Field subsequently brought this class action in the Southern District against the Trumps, their firms, Pay'n Save and its officers and directors. The amended complaint alleged that the agreement between the Trumps and the dissident directors violated Section 14(d)(7), commonly known as the "best-price" provision of the Williams Act, and SEC Rule 10b-13. 17 C.F.R. § 240.10b-13 (1987). In addition, the complaint alleged that various documents relating to the tender offer, and an earlier Pay'n Save proxy statement, contained material omissions, in violation of Sections 10(b), 14(a) and 14(e) of the '34 Act, 15 U.S.C. §§ 78j(b), 78n(a), (e) (1982), Rules 10b-5 and 14a-9 thereunder, 17 C.F.R. §§ 240.10b-5, 14a-9 (1987), and, of course, by extension, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), (d) (1982). Field alleged pendent state-law claims as well.
Judge Goettel dismissed the amended complaint under Fed. R. Civ. P. 12(b)(1) and 12(b)(6). Field v. Trump, 661 F. Supp. 529 (S.D.N.Y. 1987). The district court held that plaintiff did not state a claim under Section 14(d)(7) because the Trumps had announced an effective withdrawal of their tender offer before they struck their deal with the dissident directors, id. at 532, and that plaintiff was not a proper party to invoke Rule 10b-13. Id. at 533. The district court also dismissed the nondisclosure counts on the ground that they were attempts to bootstrap state-law fiduciary-duty claims into a federal securities-law action. Finally, Judge Goettel found that the complaint failed to allege a "pattern of racketeering activity" under RICO. We reverse the dismissal of the Section 14(d)(7) claim and the pendent state claims but otherwise affirm.
According to the amended complaint, the allegations of which we must accept as true, this dispute originates in Pay'n Save's acquisition of Schuck's Auto Supply, Inc. in January 1984. That transaction left the former owners of Schuck's, defendants Samuel N. Stroum and Stuart M. Sloan and members of their families ("Stroums" or "Stroum Group"), holding 18.4% of Pay'n Save's outstanding common stock. The Stroums were not happy shareholders, however, and had their own ideas about how to run Pay'n Save. Looking for ways to pacify the Stroums, Pay'n Save management sought and obtained a standstill agreement dated March 30, 1984. The Stroums agreed not to sell or otherwise dispose of their shares, or to offer to purchase Pay'n Save. In return, Stroum and Sloan received seats on the company's board.
Friction between the Stroums and management nevertheless continued. As a result, management retained Kidder Peabody and later Merrill Lynch Capital Markets to find a purchaser for the company. To the same end, defendant Calvin Hendricks, Pay'n Save's Chief Financial Officer and Vice-Chairman of its board, undertook discussions with Eddie Trump, President of the Trump Group, Ltd., about acquiring Pay'n Save. According to its subsequent Offer to Purchase, the Trump Group took the position that it "would only consider an acquisition of the company if management would participate in the equity of the resulting entity." Offer to Purchase at 4. Management agreed, and on August 31 the Trumps proposed to the Pay'n Save board a cash tender offer at $22.00 per share for two-thirds of the company's outstanding shares, to be followed by a cash-out merger at the same price. One week later, in the early morning hours of a late-night Pay'n Save board meeting, the Trumps raised their offer to $22.50 but warned that it would be withdrawn if it were not approved. Merrill Lynch opined that $22.50 was a fair price, and a majority of Pay'n Save's board approved it. Stroum and Sloan dissented. That morning, September 7, 1984, Pay'n Save issued a press release announcing that it had reached a merger agreement with the Trumps and that the Trumps were initiating a tender offer at $22.50. In a statement of their own, the Stroums called the Trump offer "skimpy" and accused management of acting in "unseemly haste."
During the next few days, according to the Offer to Purchase, "Eddie Trump contacted Messrs. Stroum and Sloan and the parties had several conversations concerning the possibility of settling the objections of Messrs. Stroum and Sloan to the Transactions." Offer to Purchase at 6. At 5:10 p.m. on September 12, after a meeting between the Trumps, Stroum and Sloan, the Trumps told Pay'n Save's board that they were withdrawing their previously announced tender offer in order "to facilitate the negotiations with Messrs. Stroum and Sloan." Id. The Trumps also issued a press release announcing both the withdrawal of their tender offer and their negotiations with the Stroums. These negotiations quickly bore fruit. Later that night, the Trumps and the Stroums entered into a Settlement Agreement under which the Trumps paid the Stroums $3,300,000 for an option to purchase the Stroums' shares at $23.50 per share. In addition, the Trumps paid the Stroums $900,000 for the Stroums' "fees and expenses." The Settlement Agreement was subject to the Pay'n Save board's approval of an amendment to the September 7 merger agreement that would provide for an increased price of $23.50 per share for the tender offer and merger. The $4,200,000 payment (option price plus "fees and expenses"), when added to the $23.50 per share purchase price, amounted to a price of $25.00 per share for the Stroums.
The next day, September 13, the Pay'n Save board approved the amendment to the merger agreement, and Pay'n Save issued a press release announcing that the Trumps would soon proceed with a tender offer at the new $23.50 price. According to the complaint, the press release announcing the new price and the September 12 press release announcing the "withdrawal" reached the public simultaneously.
Claiming to have been a Pay'n Save shareholder who tendered shares for $23.50, a $1.50 less than the price paid to the Stroums, plaintiff brought this putative class action against Pay'n Save, its officers (M. Lamont Bean, Chairman of the Board and Chief Executive Officer; E. Ronald Erickson, President and Chief Operating Officer; and Calvin Hendricks, Vice Chairman of the Board and Chief Financial Officer), its pro-management directors (Fenwick Crane, Raymond C. Swanson, Robert B. Hutchinson and Earl W. Smith), the dissident directors (Stroum and Sloan), and the Trumps and their affiliated entities (Eddie Trump, Julius Trump, the Trump Group, Ltd., NLAC Corp., Acquicorp, Inc., Mergicorp, Inc., TGAC Corp. and TG Limited).
Count I of the complaint alleged that the $4,200,000 received by the Stroums constituted a premium of $1.50 per share above the price received by other shareholders, in violation of Section 14(d)(7) and Rule 10b-13. Count II alleged that the Trumps' Offer to Purchase and an earlier Pay'n Save proxy statement contained various omissions of material facts, in violation of Sections 10(b) and 14(e) of the '34 Act and Wash. Rev. Code § 21.20.010 (1978). Count III alleged that Pay'n Save's officers and directors had conducted, and had conspired to conduct, the affairs of Pay'n Save through a pattern of racketeering activity, in violation of RICO, 18 U.S.C. § 1962(c) and (d). Finally, Count IV alleged that, under the common law of the State of Washington, Pay'n Save's officers and directors had committed various breaches of their fiduciary duties of loyalty and care in connection with the sale of Pay'n Save.
1. The Section 14(d)(7) Claim
Plaintiff's principal claim arises under Section 14(d)(7) of the Williams Act, the so-called "best-price" provision, which states that:
Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for pursuant to tender offer or request or invitation for tenders whether or not such securities have been taken up by such person before the variation of the tender offer or request or invitation.
15 U.S.C. § 78n(d)(7). The purpose of this provision is to prevent a tender offeror from discriminating in price among tendering shareholders. The position taken by the SEC thus is that:
(i) a tender offer must be extended to all holders of the class of securities which is the subject of the offer (the "all-holders requirement"); and (ii) all such holders must be paid the highest consideration offered under the tender offer (the "best-price rule").
Proposed Amendments to Tender Offer Rules, Securities Act Release No. 6595 [1984-1985 Transfer Binder] Fed. Sec. L. Rep. (CCH) para. 83,797 (July 1, 1985). To codify the "all-holders requirement" and "best-price rule," the SEC has adopted Rule 14d-10, ...