Joseph Lerro and John Duty v. The Quaker Oats Company, Snapple Beverage Corporation, and Thomas H. Lee
Docket: 95-3495, 95-3496
Court: Court of Appeals for the Seventh Circuit; May 17, 1996; Federal Appellate Court
Joseph Lerro and John Duty, plaintiffs-appellants, brought actions against The Quaker Oats Company, Snapple Beverage Corporation, and Thomas H. Lee, defendants-appellees, following Quaker Oats' $1.7 billion acquisition of Snapple in 1994. The merger agreement was signed on November 1, 1994, with a public tender offer of $14 per Snapple share announced shortly thereafter. Thomas H. Lee, who controlled a significant portion of Snapple shares, supported the merger, leading to 96.5% of shares being tendered.
A key aspect that raised concerns for the plaintiffs was a Distribution Agreement between Snapple and Select Beverages, Inc., which involved THL affiliates. This agreement granted Select exclusive distribution rights for certain Snapple and Gatorade products in specific regions and was designed to commence upon the consummation of the merger. Lerro and Duty argued that the Distribution Agreement constituted extra compensation for Lee, violating § 14(d)(7) of the Securities Exchange Act, which requires equal treatment for all shareholders when terms of a tender offer change. They also referenced SEC Rule 14d-10(a)(2), which prohibits offers that do not ensure all security holders receive the highest consideration paid during the tender offer. The court noted the difficulty in categorizing the Distributor Agreement as an "increase" in compensation under the law.
Profits anticipated from the Distributor Agreement are considered compensation received by Lee as a security holder, mandating that similar payments be made to all tendering parties per Rule 14d-10(a)(2). Quaker Oats argues that this agreement replaces Select's prior perpetual distribution rights rather than serving as compensation for shares. Valuing the contract as of November 1994 is deemed highly challenging due to the variable nature of Select's profits, which hinged on sales growth and maintaining distribution rights. The Internal Revenue Code does not require Lee to treat the present value of future profits as a capital gain from stock sales, raising doubts about the viability of capitalizing those profits.
There is ambiguity regarding whether Rule 14d-10(a)(2) provides a private right of action for damages, as illustrated by contrasting case law. The district judge did not delve into these complex issues but assumed the Distributor Agreement compensated Lee for his shares, ultimately dismissing the suit under Fed. R.Civ. P. 12(b)(6). The judge reasoned that since the Distributor Agreement was executed before the tender offer commenced, it fell outside the scope of Rule 14d-10(a)(2), which requires equal payment to all tendering investors during the offer. The judge posited that if Quaker Oats had purchased Lee's shares for $20 each, it could still offer $14 to other investors, equating the agreement to a premium akin to a higher cash price. The court found that Delaware law allows for unequal gains in corporate control transactions, thus rejecting any state law claims related to the Distributor Agreement's value.
Additionally, the district court noted that plaintiffs forfeited their arguments by failing to timely object to a magistrate judge's dismissal recommendation. The judge ruled that the plaintiffs' objections were late, as they were due by August 15, while the objections were filed on August 18. The court addressed the procedural complexities surrounding the timing of objections, although it ultimately resolved the case on its merits, emphasizing that the time limit is not jurisdictional.
A party has 10 days to file written objections after receiving a recommended disposition, as stated in Fed. R. Civ. P. 72(b). If the recommendation is served by mail, Fed. R. Civ. P. 6(e) adds 3 days to this period. In contrast, when judicial action is complete upon filing, Rule 6(e) does not apply, as established in Lorenz v. Valley Forge Insurance Co. The magistrate judge's report was mailed, triggering both Rules 6(e) and 6(a), the latter of which excludes weekends and holidays when the prescribed period is less than 11 days.
The district judge interpreted the rules by first applying Rule 72(b) (10 days) and then adding 3 days for mail service, totaling 13 days and concluding that Rule 6(a) does not apply. An alternative interpretation applies Rule 6(a) first, which excludes weekends and holidays, extending the 10 days to 14 days. After adding 3 days for mail service, this results in 17 calendar days. Given that service occurred on August 2, 1995, objections would be due by August 19 (a Saturday), with the next filing opportunity on August 21 (the following Monday). Plaintiffs filed on August 18, which is timely under this method.
The rules do not clarify whether Rule 6(a) should be applied before or after Rule 6(e). The district judge viewed "the period of time" as the total allowable under the rules, while an alternative view suggests it refers to the original 10 days under Rule 72(b). The intent of Rule 6(e) is to provide similar effective response times regardless of service method. If service were made in person, plaintiffs would have 14 days to object, but applying Rule 6(e) first would reduce the time to 13 days for mail service, counteracting the purpose of compensating for mail delays. Therefore, to preserve the efficacy of Rule 6(e), Rule 6(a) should be applied first, making the objection to the magistrate judge's report timely.
The district court's evaluation hinges on the interpretation of the Williams Act and Rule 14d-10(a)(2), specifically whether Quaker Oats could have purchased Lee's shares at $20 or $50 before initiating the tender offer without facing objections from other investors. The rule stipulates that all investors who tender their shares must receive the highest price paid to any other security holder during the tender offer, meaning the relevant timeframe is "during the tender offer" rather than "before" it. The distinction between these terms is crucial for maintaining market participation around the time of a tender offer.
Bidders are prohibited from trading during an offer, yet they can buy shares before it begins or immediately after it concludes. Several court rulings support the notion that such pre-offer transactions do not set a minimum price for shares during the offer. Additionally, purchases made just before a tender offer can be vital for facilitating transactions beneficial to all investors. Controlling shareholders may demand higher prices due to their non-monetary benefits from retaining control, which can hinder potential bidders from successfully acquiring shares at a price attractive to outside investors.
For example, if a company's stock is priced at $20 but insiders will only sell for $30, a bidder valuing the firm at $25 would struggle to secure the necessary shares. However, if the bidder can pay insiders $30 before the offer while acquiring remaining shares at $22, this creates a favorable average price of $24.40. This arrangement benefits all parties: public investors receive $22 instead of $20, insiders are satisfied, and the bidder gains a profit. Treating the Williams Act as requiring a uniform price for all shares would ultimately harm all investors involved.
Those who sell shares before a tender offer cannot claim the higher prices paid to sellers during the offer period. Rules 10b-13 and 14d-10 outline specific time frames for the application of the Williams Act, ensuring equal pricing for all sellers once the offer is active. The SEC emphasizes the importance of clearly defined blackout periods to prevent exploitation of the rules, even if the division seems arbitrary.
In Field v. Trump, the court integrated two tender offers separated by a day, ruling that purchases made during that gap were part of a single transaction under § 14(d)(7). Conversely, Epstein involved a different scenario where Matsushita structured a deal that allowed major MCA investors to avoid taxes by exchanging stock instead of selling. However, since the exchange occurred after the tender offer was completed, it raised issues under Rule 14d-10. The judgment in Epstein was vacated by the Supreme Court, limiting its precedential value. The case did not effectively address transactions completed prior to the tender offer, except in a way that could benefit Quaker Oats. If an investor had committed to exchange shares before the offer commenced, it would not contravene Rule 14d-10.
The Second and Ninth Circuits would not find any issues with Quaker Oats' acquisition of Snapple, assuming the transaction between Stokley-Van Camp and THL, and consequently between Quaker Oats and Lee, occurred before the tender offer began. The plaintiffs allege the Distributor Agreement was crucial to the acquisition, as Quaker Oats would not have proceeded without Lee's approval of its terms. Although the Distributor Agreement was signed on November 1, its effectiveness was contingent on the merger, which occurred later, indicating that Quaker Oats did not pay Lee more than $14 per share during the tender offer. The agreements were executed prior to the tender offer and not integrated with it, as they are governed by different legal frameworks—federal law for the tender offer and state law for the merger. Treating the tender offer and merger as one transaction could disrupt various ordinary business practices, such as two-tier offers and employment agreements tied to mergers. While there are limits to using a merger for additional compensation, the plaintiffs failed to claim that Lee and Quaker Oats structured a "boot" transaction, which would necessitate legal analysis under Rule 14d-10. Additionally, since the plaintiffs allege that Lee had sufficient shares to ensure the success of Quaker's bid, the conditions in the Distributor Agreement regarding success and merger were merely theoretical.
Determining whether certain transactions occurred before a tender offer involves interpreting Rule 14d-10 and its definition of when a tender offer commences. Rule 14d-2(a) outlines that a tender offer officially begins at 12:01 AM on the date of specific events, including the publication of the tender offer or the sending of definitive copies to security holders. In this case, the Merger Agreement and Distributor Agreement were signed on November 1, 1994, while public knowledge of the bid emerged on November 2 and the formal announcement occurred on November 4, 1994.
Plaintiffs argue that the offer began before November 1, based on communications with Snapple insiders, interpreting 'security holders' broadly to include those involved in negotiations. However, there is no legal basis or administrative interpretation supporting this view. The rule is intended to apply to general public notice rather than private negotiations, aligning with SEC explanations. Recognizing negotiations as the start of a tender offer would undermine the regulatory framework established under the Williams Act, complicate the bidding process, and potentially disadvantage public investors by allowing private negotiations to dictate the timeline for public offers. Additionally, it would conflict with the requirement for tender offers to remain open for a specified duration after public announcements, risking the legality of offers that were not properly disclosed.
The timing for withdrawal and proration rights in a tender offer begins from the public announcement of the offer. If private negotiations were to be considered the commencement, it would undermine the intentions of the Williams Act and SEC regulations, potentially leading to confusion regarding the timing of these rights. The essential function of Rule 14d-2 is to ensure clarity in the start time of the offer. Although the terms of 'tender offer' are not explicitly defined by the Williams Act or SEC regulations, the focus of this case is on the timing of the commencement rather than the definition of the offer itself. The tender offer in question initiated at 12:01 A.M. on November 4, 1994, following a public announcement by the bidder on that date, with no ambiguity left to resolve, leading to the affirmation of the judgment.
