SCHREIBER v. BURLINGTON NORTHERN, INC., ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
Argued January 9, 1985
Decided June 4, 1985
In December 1982, respondent Burlington Northern, Inc., made a hostile tender offer for El Paso Gas Co. to which a majority of El Paso's shareholders ultimately subscribed. Burlington did not accept the tendered shares, and instead, in January 1983, after negotiations with El Paso, announced a new and friendly takeover agreement. Pursuant to this agreement, Burlington undertook to rescind the December tender offer and substitute a new tender offer. The January tender offer was soon oversubscribed. The rescission of the first tender offer caused a diminished payment to those shareholders who had tendered during the first offer, because those shareholders who retendered were subject to substantial proration. Petitioner filed suit in Federal District Court on behalf of herself and similarly situated shareholders, alleging that Burlington, El Paso, and members of El Paso's board of directors had violated 14(e) of the Securities Exchange Act of 1934, which prohibits "fraudulent, deceptive, or manipulative acts or practices . . . in connection with any tender offer." She claimed that Burlington's withdrawal of the December tender offer, coupled with the substitution of the January tender offer, was a "manipulative" distortion of the market for El Paso stock. The District Court dismissed the suit for failure to state a claim, holding that the alleged manipulation did not involve a misrepresentation, and so did not violate 14(e). The Court of Appeals affirmed. [472 U.S. 1, 2]
BURGER, C. J., delivered the opinion of the Court, in which all other Members joined, except POWELL, J., who took no part in the decision of the case, and O'CONNOR, J., who took no part in the consideration or decision of the case.
Irving Bizar argued the cause and filed briefs for petitioner.
Marc P. Cherno argued the cause for respondents. With him on the brief were Robert K. Payson, Harvey L. Pitt, Stephen D. Alexander, A. Gilchrist Sparks III, and Howard W. Goldstein.
CHIEF JUSTICE BURGER delivered the opinion of the Court.
We granted certiorari to resolve a conflict in the Circuits over whether misrepresentation or nondisclosure is a necessary element of a violation of 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. 78n(e).
On December 21, 1982, Burlington Northern, Inc., made a hostile tender offer for El Paso Gas Co. Through a wholly [472 U.S. 1, 3] owned subsidiary, Burlington proposed to purchase 25.1 million El Paso shares at $24 per share. Burlington reserved the right to terminate the offer if any of several specified events occurred. El Paso management initially opposed the takeover, but its shareholders responded favorably, fully subscribing the offer by the December 30, 1982, deadline.
Burlington did not accept those tendered shares; instead, after negotiations with El Paso management, Burlington announced on January 10, 1983, the terms of a new and friendly takeover agreement. Pursuant to the new agreement, Burlington undertook, inter alia, to (1) rescind the December tender offer, (2) purchase 4,166,667 shares from El Paso at $24 per share, (3) substitute a new tender offer for only 21 million shares at $24 per share, (4) provide procedural protections against a squeeze-out merger 1 of the remaining El Paso shareholders, and (5) recognize "golden parachute" 2 contracts [472 U.S. 1, 4] between El Paso and four of its senior officers. By February 8, more than 40 million shares were tendered in response to Burlington's January offer, and the takeover was completed.
The rescission of the first tender offer caused a diminished payment to those shareholders who had tendered during the first offer. The January offer was greatly oversubscribed and consequently those shareholders who retendered were subject to substantial proration. Petitioner Barbara Schreiber filed suit on behalf of herself and similarly situated shareholders, alleging that Burlington, El Paso, and members of El Paso's board of directors violated 14(e)'s prohibition of "fraudulent, deceptive, or manipulative acts or practices . . . in connection with any tender offer." 15 U.S.C. 78n(e). She claimed that Burlington's withdrawal of the December tender offer coupled with the substitution of the January tender offer was a "manipulative" distortion of the market for El Paso stock. Schreiber also alleged that Burlington violated 14(e) by failing in the January offer to disclose the "golden parachutes" offered to four of El Paso's managers. She claims that this January nondisclosure was a deceptive act forbidden by 14(e).
The District Court dismissed the suit for failure to state a claim. 568 F. Supp. 197 (Del. 1983). The District Court reasoned that the alleged manipulation did not involve a misrepresentation, and so did not violate 14(e). The District Court relied on the fact that in cases involving alleged violations of 10(b) of the Securities Exchange Act, 15 U.S.C. 78j(b), this Court has required misrepresentation for there to be a "manipulative" violation of the section. 568 F. Supp., at 202.
The Court of Appeals for the Third Circuit affirmed. 731 F.2d 163 (1984). The Court of Appeals held that the acts [472 U.S. 1, 5] alleged did not violate the Williams Act, because " 14(e) was not intended to create a federal cause of action for all harms suffered because of the proffering or the withdrawal of tender offers." Id., at 165. The Court of Appeals reasoned that 14(e) was "enacted principally as a disclosure statute, designed to insure that fully-informed investors could intelligently decide how to respond to a tender offer." Id., at 165-166. It concluded that the "arguable breach of contract" alleged by petitioner was not a "manipulative act" under 14(e).
We are asked in this case to interpret 14(e) of the Securities Exchange Act, 82 Stat. 457, as amended, 15 U.S.C. 78n(e). The starting point is the language of the statute. Section 14(e) provides:
Petitioner's reading of the term "manipulative" conflicts with the normal meaning of the term. We have held in the context of an alleged violation of 10(b) of the Securities Exchange Act:
She argues, however, that the term "manipulative" takes on a meaning in 14(e) that is different from the meaning it has in 10(b). Petitioner claims that the use of the disjunctive "or" in 14(e) implies that acts need not be deceptive or fraudulent to be manipulative. But Congress used the phrase "manipulative or deceptive" in 10(b) as well, and we have interpreted "manipulative" in that context to require [472 U.S. 1, 8] misrepresentation. 6 Moreover, it is a "`familiar principle of statutory construction that words grouped in a list should be given related meaning.'" Securities Industry Assn. v. Board of Governors, FRS, 468 U.S. 207, 218 (1984). All three species of misconduct, i. e., "fraudulent, deceptive, or manipulative," listed by Congress are directed at failures to disclose. The use of the term "manipulative" provides emphasis and guidance to those who must determine which types of acts are reached by the statute; it does not suggest a deviation from the section's facial and primary concern with disclosure or congressional concern with disclosure which is the core of the Act.
Our conclusion that "manipulative" acts under 14(e) require misrepresentation or nondisclosure is buttressed by the purpose and legislative history of the provision. Section 14(e) was originally added to the Securities Exchange Act as part of the Williams Act, 82 Stat. 457. "The purpose of the Williams Act is to insure that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information." Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58 (1975). 7
It is clear that Congress relied primarily on disclosure to implement the purpose of the Williams Act. Senator Williams, the bill's Senate sponsor, stated in the debate:
Section 14(e) adds a "broad antifraud prohibition," Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 24 (1977), modeled on the antifraud provisions of 10(b) of the Act and Rule 10b-5, 17 CFR 240.10b-5 (1984). 10 It supplements the [472 U.S. 1, 11] more precise disclosure provisions found elsewhere in the Williams Act, while requiring disclosure more explicitly addressed to the tender offer context than that required by 10(b).
While legislative history specifically concerning 14(e) is sparse, the House and Senate Reports discuss the role of 14(e). Describing 14(e) as regulating "fraudulent transactions," and stating the thrust of the section:
To adopt the reading of the term "manipulative" urged by petitioner would not only be unwarranted in light of the legislative purpose but would be at odds with it. Inviting judges to read the term "manipulative" with their own sense of what constitutes "unfair" or "artificial" conduct would inject uncertainty into the tender offer process. An essential piece of information - whether the court would deem the fully disclosed actions of one side or the other to be "manipulative" - would not be available until after the tender offer had closed. This uncertainty would directly contradict the expressed congressional desire to give investors full information.
Congress' consistent emphasis on disclosure persuades us that it intended takeover contests to be addressed to shareholders. In pursuit of this goal, Congress, consistent with the core mechanism of the Securities Exchange Act, created sweeping disclosure requirements and narrow substantive safeguards. The same Congress that placed such emphasis on shareholder choice would not at the same time have required judges to oversee tender offers for substantive fairness. It is even less likely that a Congress implementing that intention would express it only through the use of a single word placed in the middle of a provision otherwise devoted to disclosure.
We hold that the term "manipulative" as used in 14(e) requires misrepresentation or nondisclosure. It connotes "conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, 425 U.S., at 199 . Without misrepresentation or nondisclosure, 14(e) has not been violated.
Applying that definition to this case, we hold that the actions of respondents were not manipulative. The amended complaint fails to allege that the cancellation of the first [472 U.S. 1, 13] tender offer was accompanied by any misrepresentation, nondisclosure, or deception. The District Court correctly found: "All activity of the defendants that could have conceivably affected the price of El Paso shares was done openly." 568 F. Supp., at 203.
Petitioner also alleges that El Paso management and Burlington entered into certain undisclosed and deceptive agreements during the making of the second tender offer. The substance of the allegations is that, in return for certain undisclosed benefits, El Paso managers agreed to support the second tender offer. But both courts noted that petitioner's complaint seeks only redress for injuries related to the cancellation of the first tender offer. Since the deceptive and misleading acts alleged by petitioner all occurred with reference to the making of the second tender offer - when the injuries suffered by petitioner had already been sustained - these acts bear no possible causal relationship to petitioner's alleged injuries. The Court of Appeals dealt correctly with this claim.
The judgment of the Court of Appeals is
JUSTICE O'CONNOR took no part in the consideration or decision of this case.
[ Footnote 2 ] Petitioner alleged in her complaint that respondent Burlington failed to disclose that four officers of El Paso had entered into "golden parachute" agreements with El Paso for "extended employment benefits in the event El Paso should be taken over, which benefits would give them millions of dollars of extra compensation." The term "golden parachute" refers generally to agreements between a corporation and its top officers which guarantee those officers continued employment, payment of a lump sum, or other benefits in the event of a change of corporate ownership. As described in the Schedule 14D-9 filed by El Paso with the Securities and Exchange Commission on January 12, 1983, El Paso entered into "employment agreements" with two of its officers for a period of not less than five years, and with two other officers for a period of three years. The Schedule 14D-9 also disclosed that El Paso's Deferred Compensation Plan had [472 U.S. 1, 4] been amended "to provide that for the purposes of such Plan a participant shall be deemed to have retired at the instance of the Company if his duties as a director, officer or employee of the Company have been diminished or curtailed by the Company in any material respect."
[ Footnote 3 ] The Court of Appeals for the Sixth Circuit has held that manipulation does not always require an element of misrepresentation or nondisclosure. Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (1981), cert. denied, 455 U.S. 982 (1982). The Court of Appeals for the Second and Eighth Circuits have applied an analysis consistent with the one we apply today. Feldbaum v. Avon Products, Inc., 741 F.2d 234 (CA8 1984); Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757 (CA2), cert. denied, 464 U.S. 1018 (1983); Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1 (CA2 1983), cert. denied, 465 U.S. 1052 (1984).
[ Footnote 4 ] See generally L. Loss, Securities Regulation 984-989 (3d ed. 1983). For example, the seminal English case of Scott v. Brown, Doering, McNab & Co., 1892. 2 Q. B. 724 (C. A.), which broke new ground in recognizing that manipulation could occur without the dissemination of false statements, nonetheless placed emphasis on the presence of deception. As Lord Lopes stated in that case, "I can see no substantial distinction between false rumours and false and fictitious acts." Id., at 730. See also United States v. Brown, 5 F. Supp. 81, 85 (SDNY 1933) ("[E]ven a speculator is entitled not to have any present fact involving the subject matter of his speculative purchase or the price thereof misrepresented by word or act").
[ Footnote 5 ] See Webster's Third New International Dictionary 1376 (1971) (Manipulation is "management with use of unfair, scheming, or underhanded methods").
[ Footnote 7 ] For a more thorough discussion of the legislative history of the Williams Act, see Piper v. Chris-Craft Industries, Inc., supra, at 24-37.
[ Footnote 8 ] The process through which Congress developed the Williams Act also suggests a calculated reliance on disclosure, rather than court-imposed principles of "fairness" or "artificiality," as the preferred method of market regulation. For example, as the bill progressed through hearings, both Houses of Congress became concerned that corporate stock repurchases could be used to distort the market for corporate control. Congress addressed this problem with 13(e), which imposes specific disclosure duties on corporations purchasing stock and grants broad regulatory power to the Securities and Exchange Commission to regulate such repurchases. Congress stopped short, however, of imposing specific substantive requirements forbidding corporations to trade in their own stock for the purpose of maintaining its price. The specific regulatory scheme set forth in 13(e) would be unnecessary if Congress at the same time had endowed the term "manipulative" in 14(e) with broad substantive significance.
[ Footnote 9 ] Section 13(d) requires those acquiring a certain threshold percentage of a company's stock to file reports disclosing such information as the purchaser's background and identity, the source of the funds to be used in making the purchase, the purpose of the purchase, and the extent of [472 U.S. 1, 10] the purchaser's holdings in the target company. 15 U.S.C. 78m(d). Section 13(e) imposes restrictions on certain repurchases of stock by corporate issuers. 15 U.S.C. 78m(e). Section 14(d) imposes specific disclosure requirements on those making a tender offer. 15 U.S.C. 78n(d) (1). Section 14(d) also imposes specific substantive requirements on those making a tender offer. These requirements include allowing shareholders to withdraw tendered shares at certain times during the bidding process, 15 U.S.C. 78n(d)(5), the proration of share purchases when the number of shares tendered exceeds the number of shares sought, 15 U.S.C. 78n(d)(6), and the payment of the same price to all those whose shares are purchased, 15 U.S.C. 78n(d)(7). Section 14(f) imposes disclosure requirements when new corporate directors are chosen as the result of a tender offer.
[ Footnote 10 ] Section 10(b) provides:
Similar terminology is also found in 15(c) of the Securities Exchange Act, 15 U.S.C. 78o(c), 17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a), and 206 of the Investment Advisers Act of 1940, 15 U.S.C. 80b-6.
[ Footnote 11 ] The Act was amended in 1970, and Congress added to 14(e) the sentence, "The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative." Petitioner argues that this phrase would be pointless if 14(e) was concerned with disclosure only.
We disagree. In adding the 1970 amendment, Congress simply provided a mechanism for defining and guarding against those acts and practices which involve material misrepresentation or nondisclosure. The amendment gives the Securities and Exchange Commission latitude to regulate nondeceptive activities as a "reasonably designed" means of preventing manipulative acts, without suggesting any change in the meaning of the term "manipulative" itself. [472 U.S. 1, 14]