Irving and Charlotte Radol, A. James Ibold, Dwight C. Baum, the Crossett Charitable Foundation, Reuben B. Fishbein, Trustee for Teri Fishbein Hecht, Beneficiary, and Robert C. Utley, on Behalf of Themselves and All Others Similarly Situated v. W. Bruce Thomas, William R. Roesch, David M. Roderick, United States Steel Corporation, Uss Inc., Uss Holdings Company, Uss Merger Sub, Inc., Goldman, Sachs & Co., Marathon Oil Company, Harold D. Hoopman, Charles H. Barre, Elmer H. Graham, W.E. Swales, Jack H. Herring, Victor G. Beghini, Neil A. Armstrong, James A.D. Geier, J.C. Haley, J.N. Land, Jr., Raymond C. Tower, Robert G. Wingerter, and the First Boston Corporation

Citations: 772 F.2d 244; 1985 U.S. App. LEXIS 23067Docket: 83-3598

Court: Court of Appeals for the First Circuit; September 13, 1985; Federal Appellate Court

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A class action lawsuit was filed in connection with the 1981 acquisition of Marathon Oil Company by United States Steel Corporation, involving a two-stage merger. The first stage consisted of a tender offer by Steel for 51% of Marathon's shares at $125 per share, followed by a 'freezeout merger' where remaining shareholders received bonds valued at approximately $76 per share. The case consolidates 13 actions alleging violations of federal securities laws and common law fiduciary duties. Key claims included the failure to disclose certain asset appraisals during the tender offer, the coercive nature of the two-tiered transaction with a lower second-stage price, and breaches of fiduciary duty by Marathon's directors aimed at maintaining their control. The Southern District of Ohio, presided over by Judge Rubin, ruled in favor of the defendants on summary judgment and after a jury trial. On appeal, the plaintiffs presented numerous legal challenges, all of which were rejected, affirming the lower court's decision in its entirety.

In October 1981, Marathon was a publicly traded Ohio corporation with over 58 million shares held by more than 35,000 stockholders, engaged in all facets of the oil and gas industry. After experiencing significant revenue and profit growth from 1976 to 1980, Marathon's performance declined in early 1981 due to decreased oil demand and a stronger dollar, resulting in earnings per share dropping from $4.08 to $2.64. The company's stock price fell from $81 in November 1980 to $45 by June 1981, while its refineries operated at only 58% capacity during the June quarter.

Despite the stock price decline, Marathon possessed substantial long-term oil and gas reserves, including the highly productive Yates Field in West Texas, making it a target for a hostile takeover. In response, Marathon's management, led by President Harold Hoopman, initiated preparations to defend against potential bids. They compiled the 'Strong Report,' an internal asset evaluation that estimated the value of Marathon's assets and reserves based on optimistic, speculative future price assumptions. This report valued Marathon's net assets between $16 billion and $19 billion, suggesting a per share value of $276 to $323.

An external report by the investment banking firm First Boston, prepared around the same time, estimated Marathon's net asset value at $188 to $225 per share using publicly available data. Nevertheless, Marathon's actual market value was significantly lower, closing at $63.75 per share on October 29, 1981. The following day, Mobil Oil Company announced a tender offer to acquire approximately 68% of Marathon's outstanding stock for $85 per share, followed by a proposed merger that would offer remaining shareholders sinking fund debentures valued at approximately $85 per share.

On October 31, 1981, Marathon's board of directors convened to address Mobil's hostile tender offer, comprising twelve members equally divided between inside and outside directors. Legal counsel informed the board about potential antitrust issues related to the Mobil offer and the board's duty to act in the shareholders' best interests. First Boston provided a comparative analysis of Mobil's premium offer, indicating it was modest relative to recent oil sector takeovers, and cautioned that appraised asset values were often unrealistic compared to market values. They recommended that the board quickly pursue alternative merger partners given the likelihood of Mobil's offer succeeding despite antitrust concerns.

Following this, John Strong, assistant to inside director Hoopman, presented an executive summary of the Strong Report, which aimed to facilitate the sale of the company to another bidder, noting a disconnect between theoretical asset valuations and actual market value. The outside directors unanimously recommended rejecting Mobil's offer due to its potential illegality and perceived unfairness to shareholders. The full board subsequently agreed to reject the offer, authorized the search for alternative bidders, and directed legal counsel to file an antitrust suit against Mobil.

On November 1, 1981, Marathon initiated the antitrust lawsuit, Marathon Oil Co. v. Mobil Corp., securing a temporary restraining order against Mobil's acquisition of additional shares. Marathon's management proactively reached out to 30-40 potential merger candidates while advising shareholders to reject Mobil's "grossly inadequate" bid, presenting both the Strong and First Boston reports to stimulate interest.

Representatives from Steel and Marathon initiated discussions on November 10, 1981, during which Hoopman provided Steel president David Roderick with asset valuation reports. By November 12, Marathon's vice president for finance, Elmer Graham, shared financial data, including five-year earnings and cash flow projections. Negotiations culminated in Steel's offer on November 17 to acquire up to 30 million shares (approximately 51%) of Marathon stock at $125 per share in cash, followed by a merger proposal where remaining shareholders would receive a $100 face value, 12-year, 12.5% guaranteed note per share.

On November 18, Marathon's board convened to evaluate Steel's offer against less certain proposals from Allied Corporation and Gulf Oil Corporation. Allied's offer was deemed questionable due to its reliance on an inflated acquisition of an Allied subsidiary to finance a bid for Marathon shares. Gulf's offer included purchasing 50% of Marathon shares for $130-140 each and proposed a merger with securities valued at $100-110 per share; however, Marathon's counsel warned of significant antitrust issues.

First Boston analyzed Steel's offer, noting that the second-stage notes would likely sell for about $86 per share, making the average effective price approximately $106, with a 76.6% premium over market value, significantly higher than recent takeover premiums. First Boston recommended that the board accept Steel's bid. Roderick conveyed Steel's take-it-or-leave-it offer to the Marathon board via conference call, which resulted in a unanimous recommendation to shareholders to accept the proposal.

Steel's formal tender offer was mailed on November 19, 1981, alongside a Schedule 14D-1 filing with the SEC, detailing the acquisition plan and bond exchange terms. Hoopman sent a letter to Marathon shareholders the same day, advocating for the acceptance of Steel's offer and informing them of Gulf's competing proposal, which was not pursued due to anticipated antitrust issues. Notably, neither Steel's tender offer nor Hoopman's communications disclosed the Strong and First Boston reports or Marathon's net appraised value, although they did mention Steel's access to non-public net income and cash flow projections.

Following the announcement of Steel's tender offer, Marathon stock prices increased, fluctuating between $100 and $105 from November 19 to December 7. In response to Steel's bid, Mobil adjusted its offer to acquire 30 million shares at $126 per share, with additional securities valued at approximately $90 per share. However, Mobil's offer was enjoined on November 30 due to potential antitrust violations. The court later ruled against the manipulative devices associated with Steel’s offer under Section 14(e) of the Williams Act, leading to a new withdrawal date for Steel’s tender offer of January 6, 1982. During the interim, Marathon stock traded between $88 and $82, with over 53 million shares (91.18% of outstanding shares) tendered by January 6, and Steel purchasing 30 million shares on a pro rata basis on January 7.

On February 8, 1982, a proxy statement was sent to Marathon shareholders, announcing a March 11 shareholder meeting to approve the merger with Steel, requiring a two-thirds majority as per Ohio law. The statement included discussions of Strong and First Boston appraisals but cautioned that the First Boston Report should not be seen as an independent valuation of Marathon’s assets. By the time of the meeting, Marathon stock had traded between $76 and $73, indicating that the market valued the merger bonds lower than predicted by First Boston.

The current class action suit consolidates thirteen actions by former Marathon shareholders against Marathon, Steel, their directors, and investment bankers. It includes two subclasses: shareholders who owned stock on November 19, 1981, without tendering it to Steel, and those who did tender. Plaintiffs allege violations of federal securities laws, as well as state common law fraud and breach of fiduciary duty, with five substantive issues highlighted for appeal.

On February 2, 1983, Judge Rubin granted summary judgment for the defendants on all plaintiffs' federal securities law claims, except for the claim regarding the Marathon and Steel defendants' failure to disclose the Strong and First Boston Reports in the tender offer materials, which was claimed to violate Section 10(b) of the Securities Exchange Act and Section 14(e) of the Williams Act. Plaintiffs argued that this omission constituted a failure to disclose material facts necessary to prevent other statements from being misleading. The court referenced the Radol v. Thomas case, stating that whether these reports were material was a jury question. The jury ultimately found that the omission did not violate federal securities laws.

Additionally, the court granted summary judgment on the plaintiffs' claim that the tender offer materials constituted proxy solicitations under Section 14(a) of the Exchange Act, emphasizing that a tender offer and merger are distinct actions under securities laws and SEC regulations. 

On the issue of market manipulation regarding the two-tier merger, the District Court ruled that it did not violate the Exchange Act or the Williams Act, noting that while the disparity in pricing created pressure on shareholders, it did not manipulate market forces or discourage competing offers.

The court did not grant summary judgment on the state law claim alleging that Marathon's board breached fiduciary duties by structuring a coercive transaction and failing to disclose material information. However, the jury later found that Marathon's directors had not breached their fiduciary duties to shareholders.

The District Court granted summary judgment to Steel regarding the plaintiffs' fiduciary duty claims, determining that Steel acted as a fiduciary solely as Marathon's majority shareholder after the tender offer, specifically concerning the second stage merger. Judge Rubin concluded that under Ohio law, a minority shareholder's exclusive remedy for dissatisfaction with a freezeout merger is a statutory appraisal action per O.R.C. Sec. 1701.85(A), contingent upon statutory authorization of the merger.

In addressing federal securities issues, Rule 13e-3(e) mandates the disclosure of specific information in freezeout merger proxy statements, including summaries of asset appraisals. Steel met this requirement by detailing the Strong and First Boston reports in the second stage merger proxy statement. The plaintiffs argued that these disclosures should also have been included in the tender offer materials, claiming that the omission violated Section 10(b) of the Exchange Act, Rule 10b-5, and Section 14(e) of the Williams Act, as it constituted a failure to disclose material facts necessary to prevent misleading statements.

On appeal, the plaintiffs contested the trial court’s jury instructions on materiality and the duty to disclose. The challenged instructions defined material facts as those that a reasonable person would consider important when deciding whether to tender stock, clarified that only existing material facts must be disclosed, and noted that projections of future earnings do not constitute a violation of Federal Securities law. The court upheld the precedent from Starkman v. Marathon Oil Co., which asserts that tender offer materials are only required to disclose asset appraisals if the underlying predictions are substantially certain. The District Court's jury instructions accurately reflected this materiality standard and the established duty concerning asset appraisal disclosures, leading to a ruling that there was no obligation to disclose the appraisals in question.

An error occurred by allowing the issue of the materiality of asset appraisals to reach the jury, as no precedent exists for sending such an issue to a jury; all prior decisions have determined there was no duty to disclose appraisals. Judge Rubin ruled the asset reports from Strong and First Boston as not immaterial, suggesting a reasonable shareholder might find the valuations significant. However, this interpretation conflicts with the Supreme Court's ruling in TSC Industries v. Northway, which established a stricter 'substantial likelihood' standard for materiality to reduce uncertainty for corporate officials regarding disclosure obligations. Thus, the District Court should have determined the reports were not material, excluding the matter from jury consideration. 

Regarding the failure to comply with proxy rules, plaintiffs argued that since Steel and Marathon represented their tender offer and merger as a single transaction, the tender offer materials should have included all required information under Section 14(a) of the Exchange Act. They claimed the two-tier tender offer misled shareholders into believing that tendering would ensure the merger's success. The only supporting judicial authority cited was SEC v. Okin, which stated that documents preparing for a solicitation are subject to regulation. Judge Rubin, however, correctly concluded that a tender offer and a merger are separate actions under securities law, allowing them to be considered individually. Steel complied with regulatory requirements by filing a Schedule 14D-1, and Marathon met its obligations by sending a shareholder letter recommending acceptance of the offer and filing a Schedule 14D-9, thus both companies fulfilled their disclosure requirements during the tender offer process.

Compliance with proxy rules, specifically Rule 14a-9 and Rule 13e-3, during the tender offer phase of a two-tier transaction is deemed unfair as it exposes both the tender offeror and target to potential liability under Section 5 of the Securities Act of 1933 for making an 'offer to sell' securities without a filed registration statement. The SEC, in Securities Act Release No. 33-5927, clarified that the Section 5 prohibition does not apply to disclosing a proposed second-stage merger in tender offer materials as outlined in Schedule 14D-1, emphasizing that such disclosure is necessary for investor transparency. However, the SEC cautioned that any additional disclosures beyond those mandated by the Williams Act could constitute an 'offer to sell' and violate Section 5 if a registration statement is not filed. The plaintiffs' suggestion to impose comprehensive proxy statement disclosure standards during the tender offer phase could create conflicting liabilities under both proxy rules and the Securities Act. Furthermore, the SEC has established distinct disclosure requirements for tender offers, highlighting the need for different treatment compared to proxy statements, supported by sound policy reasons.

An individual shareholder's decision to tender shares in the first stage of a merger does not guarantee the success of the second stage; the merger's success depends on the overall response to the tender offer, which is influenced by shareholders' valuations of the offered premium against competing offers. The market provides crucial information about the target firm's value, while target management is incentivized to negotiate favorable deals and share optimistic information with bidders. This dynamic is particularly relevant in freezeout mergers, where majority shareholders may withhold critical information from minority shareholders, necessitating stricter legal disclosure requirements to ensure transparency regarding appraisals and earnings projections.

Neither Steel nor Marathon were obligated to comply with proxy rules in their tender offer statements. The plaintiffs alleged that the two-tier acquisition by Steel was coercive and manipulated, violating federal securities laws, specifically Section 14(e) of the Williams Act and Section 10(b) of the Exchange Act, but did not claim that the transaction was inadequately disclosed or that shareholders were misled. The Supreme Court's decisions in Santa Fe Industries v. Green and Schreiber v. Burlington Northern emphasize that claims of deception or nondisclosure are essential for violations under these statutes. Since the plaintiffs did not allege any misrepresentation or nondisclosure, but rather criticized the transaction's structure, their claims under Sections 10(b) and 14(e) were insufficient, leading to the affirmation of summary judgment for the defendants.

Plaintiffs argue that the District Court improperly granted summary judgment on their claim that Marathon's directors breached their fiduciary duty during a coercive two-tier acquisition by structuring an unfair second stage price. The jury was instructed that the breach involved the negotiation and approval of terms perceived as unfair to non-tendering shareholders. Judge Rubin emphasized that corporate officers and directors hold a fiduciary relationship, requiring utmost good faith, undivided loyalty, and full disclosure of material facts to shareholders. However, the jury was told that a breach occurs only if directors commit fraud or intentionally act against the corporation's best interests. On appeal, plaintiffs contend that the directors had a conflict of interest due to assurances from U.S. Steel regarding the board's continuity and the cashing out of stock options for upper management. The applicable law in Ohio establishes that directors owe a duty of loyalty and a duty of care to the corporation, codified in O.R.C. Sec. 1701.59(B). The duty of care is guided by the "business judgment rule," which protects directors from scrutiny over their decisions absent fraud, bad faith, or abuse of discretion.

In Ohio National Life Insurance Co. v. Struble, the court addressed the liability of corporate directors under Ohio law, specifically referencing O.R.C. Sec. 1701.59(C), which protects directors from liability when they perform their duties in good faith. The business judgment rule is acknowledged as a legal principle that shields directors from liability based on hindsight, thereby reducing litigation related to corporate decisions made under uncertainty. Plaintiffs argued that the trial court's instructions were flawed because they did not clearly convey that good faith and full disclosure do not protect directors from liability if they have conflicting loyalties. However, the court found no inconsistency between the trial court's instructions and relevant case law, emphasizing that directors owe a duty of loyalty to the corporation and lack discretion under the business judgment rule when involved in transactions affecting their control. The court affirmed that the trial court's message on fiduciary loyalty was consistent with established legal standards. Additionally, it rejected the plaintiffs' assertion that the burden of proof should shift to directors in corporate control transactions, noting that such a view has been consistently dismissed in other jurisdictions. The court highlighted that tender offers typically create potential conflicts of interest but maintained that the mere existence of stock option agreements or employment assurances does not automatically create conflicting loyalties that would alter the burden of proof in favor of the plaintiffs.

In *Treadway Cos. v. Care Corp.*, the Second Circuit established that directors must demonstrate the fairness of a transaction only after a plaintiff makes a prima facie case of bad faith or lack of objectivity. The business judgment rule protects directors unless challenged by evidence of bad faith, lack of disinterest, or inadequate information regarding their decisions. Certain corporate actions, like greenmail payments, may shift the burden of proof and invoke stricter judicial scrutiny. However, in this case, the transaction involved cashing out long-term stock options held by upper management without severance payments or golden parachutes, and the decision was ultimately made by shareholders through their votes on the merger, affirming shareholders' control over corporate governance.

Regarding Marathon's liability, plaintiffs argued that the District Court incorrectly instructed the jury that Marathon had no fiduciary duty to its shareholders, claiming that such duty arises from the roles of its officers and directors. Plaintiffs contended that this relationship created a fiduciary duty for the corporation itself. The court clarified that a corporation is a distinct legal entity, and its obligations are defined by statutes, with directors exercising authority in the corporation's best interests. Under Ohio Revised Code Sections 1701.59(A) and (B), unless otherwise specified, all corporate authority is vested in the directors.

Directors of a corporation act as trustees for shareholders, managing the corporation's affairs in their interest. Liability for breaches of fiduciary duties by directors cannot be attributed to the corporation itself, as this would unjustly shift responsibility onto the shareholders. Corporations do not hold fiduciary duties to shareholders, as established in case law. While corporations can be vicariously liable for directors' actions toward third parties, this does not extend to liability for breaches of fiduciary duty to shareholders. Plaintiffs argued that the jury verdict form incorrectly treated all directors as jointly liable without allowing for distinctions based on individual conduct, particularly concerning the knowledge and conflicts of interest of certain directors, including notable outside director Neil Armstrong. The board's unanimous decisions regarding mergers and offers were undisputed, and the law states that directors can be held jointly liable if they participate in or conceal breaches. There is no legal basis in Ohio for treating outside directors differently in joint board decisions. Plaintiffs also claimed that Steel could be jointly liable for breaches by Marathon's directors, but this claim was deemed moot as the jury found no breach. Other arguments by the plaintiffs regarding the trial court's rulings were rejected. The District Court's judgment was affirmed.

The document outlines key legal proceedings and legislative references related to a tender offer involving Marathon Oil, U.S. Steel, and Mobil. It specifies that Marathon granted U.S. Steel options to purchase shares and an interest in the Yates oil field contingent upon the outcome of a tender offer. Mobil initiated a lawsuit against Marathon and U.S. Steel to block this tender offer, which led to the court's ruling on December 23, 1981, that deemed the options as "manipulative devices" under the Securities Exchange Act, thus invalidating them and requiring the U.S. Steel offer to remain open longer than initially planned. The excerpt references relevant legal codes, including Ohio Revised Code 1701.78(F), which dictates voting requirements for corporate mergers, and sections of the 1934 Exchange Act (Sections 10(b) and 14(e)) that prohibit manipulative practices in securities transactions. Additionally, Rule 10b-5 is cited, outlining unlawful acts in connection with security sales, including fraud, misstatements, and deceptive practices.

Section 14(a) prohibits any person from soliciting proxies, consents, or authorizations regarding securities registered under section 781 through mail or any interstate commerce means, unless compliant with Commission rules aimed at protecting investors and serving the public interest. The legality of two-tier tender offers, where a second stage merger occurs at a lower price than the initial tender offer, is questioned in referenced works by Brudney and Chirelstein, who argue these offers are coercive and should be banned. The securities in question involve bonds exchanged for remaining Marathon shares in a second stage merger. Additionally, cited cases illustrate that a corporation's fiduciary duty typically arises in contexts where it is a majority shareholder to minority shareholders of another corporation, as seen in Southern Pacific Co. v. Bogert and Zahn v. Transamerica Corp.