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KATZ v. PELS

July 22, 1991

MOISE KATZ, BERNICE BERGER, BARNETT STEPAK, GARY GOLDBERG, JOEL BLAKE, STEVEN VERKOUTEREN, BRUCE DONIGER, DIVERSIFIED IMAGING SUPPLY CORPORATION, JOSEPH E. KOVACS, PHYLLIS FREIMAN, MARIA FIGUEROA, LARRY NEUMAN, AND OLGA FRIED, PLAINTIFFS,
v.
DONALD A. PELS, LELAND S. BROWN, WILLIAM G. HERBSTER, WILMA H. JORDAN, RICHARD W. KISLIK, THOS. H. LAW, AND DAVID M. NASEMAN, DEFENDANTS, AND LIN BROADCASTING CORP., NOMINAL DEFENDANT.



The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:

MEMORANDUM & ORDER

STATEMENT OF FACTS

On August 10, 1988, LIN's Board of Directors unanimously adopted amendments to LIN's 1966 and 1969 Stock Option Plans (the "Amendments"). Amended Complaint ¶ 14. The Amendments provided, inter alia that in the event of a "Change in Control" (as defined in the Amendments), officers of the Company who held stock options would be entitled to surrender them to the Company to the extent that they were then exercisable and vested for cancellation at the higher of two specified prices. In exchange for surrendering an option, an officer would be entitled to

  a cash payment equal the product of (x) the difference between
  the purchase price of such shares under the portion of the
  option so surrendered and the fair market value of such shares,
  which will be the greater of (i) the highest selling price of
  the Common Stock on the National Market System of NASDAQ (or
  any other principal market on which the Common Stock is then
  traded) during the 90-day period prior to the date of surrender
  of such option, and (ii) the highest price paid to any holder
  of Common Stock in the transaction or group of transactions
  resulting in such Change in Control, times (y) the number of
  such shares.

Amendments to 1966 and 1969 Stock Option Plans, at A-1.*fn2

A "change in control" occurred when on April 13, 1988, it was announced that McCaw Cellular Communications, Inc. ("McCaw"), a rival telecommunications company, had acquired approximately 5.46 percent of LIN's common shares. On August 10, 1988, LIN's Board of Directors adopted certain amendments to the Old Stock Option Plans which were purportedly aimed at ensuring that LIN insiders would be treated equitably in the event of a change in control. The Amendments were subject to shareholder approval. LIN's directors submitted the Amendments for such approval by means of the Proxy Statement dated April 7, 1989, at a stockholder's meeting held on May 25, 1989. Amended Complaint ¶¶ 15, 16. By a vote of 37,708,455 in favor and 3,181,675 opposed, the shareholders approved the Amendments. Amended Complaint ¶ 16.

Amended Complaint ¶ 15.

On June 7, 1989, McCaw commenced a tender offer for LIN. Amended Complaint ¶ 17. Initially, McCaw offered to purchase all the LIN shares that it did not own at $120 per share, but subsequently reduced that price to $110 per share. Amended complaint ¶ 17. When that offer was rejected, McCaw eventually, inter alia, offered to purchase approximately 47 percent of the outstanding shares at a price of $154.11 per share, thus triggering the Amendments' provisions such that certain of LIN's option holders redeemed their options for the difference between the exercise price of the options and $154.11, which constituted the "highest price paid to any holder of Common Stock" in the tender offer. Amended Complaint ¶¶ 21, 21.

DISCUSSION

Federal proxy rules apply to all companies with securities registered under § 12 of the 1934 Act.*fn3 The solicitation of proxies by corporate management constitutes an effective means of establishing or maintaining control over large public corporations. Section 14(a) of the Federal proxy rules was enacted to prevent abuses in the proxy solicitation process. J.I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423 (1964). Its objectives are essentially to encourage full disclosure and prevent fraud. See § 14(a) of the 1934 Act, § 78n(a), and rules 14a-8, 14a-9, 17 C.F.R. 240.14a-8, a-9 promulgated thereunder. Under the federal rules, this action may not be dismissed unless it can be shown that it is beyond doubt that plaintiffs can prove no set of facts in support of their contention that LIN's April 7, 1989 proxy statement misrepresented and/or omitted material facts*fn4 regarding certain amendments to LIN's existing stock option plans.

According to the well-pleaded facts in the complaint, the following may be gleaned. Certain older stock option plans existed in LIN, the exercise of which was premised on the fact that the exercise price of the options could not be less than 100 percent of the fair market value of the common stock at the time of the grant. If an insider thereafter exercised his options, his gain would be the difference between the price at which the options had been granted and the price at which the stock was trading on the date of exercise. Thus, if an insider was granted options at an exercise price of $10 per share, and exercised those options when the stock price reached $50 per share, the insider's gain would be $40 per share. This constituted the same benefit that a public shareholder could realize if the public shareholder had purchased shares at the same time the insider was granted the option. Thus, under the old stock option plans, the fortunes of the corporate insiders were tied directly to the fortunes of the public shareholders.

For a situation where a change in control of the corporation was imminent, special rules applied to the exercise of preexisting options. In such event, Pels and ten other top LIN officers had the contractual right up to one year after the change in control to sell shares acquired pursuant to options to the Company at a price equal to the "average market price of the Common Stock for the 30-day period prior to the change of control." 1989 Proxy Statement, at 6. Accordingly, if a change of control were to occur, the top insiders were to receive no more for their stock than the average trading price of LIN common stock for a period of days prior to ...


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