538 F. 2d 39 - Spielman v. General Host Corporation

In this appeal from a judgment denying liability of a tender offeror for a claimed misleading omission in the offer prospectus, we affirm on the opinion below of the United States District Court for the Southern District of New York, Edward Weinfeld, Judge, Spielman v. General Host Corp., 402 F.Supp. 190 (S.D.N.Y.1975). This tender offer case presents the unusual, if not unique, situation where the "total mix" of communications to, and knowledge of, shareholders of the target company renders harmless a potentially misleading omission in the prospectus circulated by the tender offeror.1 See Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 362-63 n. 14, 377 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973); Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90, 103 (10th Cir.), cert. denied, 404 U.S. 1004, 92 S.Ct. 564, 30 L.Ed.2d 558 (1971); Butler Aviation International, Inc. v. Comprehensive Designers, Inc., 425 F.2d 842, 844 (2d Cir. 1970). It is not the typical case where a tender offeror's prospectus fails to disclose material information about itself, the offeror company, to the detriment of the offeree stockholders. The principal omission from the body of the prospectus here2 was that the target company's board of directors was elected for staggered terms of three years and subject to cumulative voting, with the result that these obstacles to the offeror's immediate assumption of operating control after acquisition of a controlling stock interest3 were not prominently set forth for consideration by the prospectus readers.

But appellant's class, stockholders of the target company, were, as Judge Weinfeld makes clear, "presumably" aware of their own company's staggered board and cumulative voting procedures. 402 F.Supp. at 201. The stockholders were also reminded by their own management in materials contesting the tender offer that their board was "classified and elected for three year terms." Within two weeks of the effective date of the prospectus, and again four days before expiration of the tender offer, the target company's management also sent a proxy statement, and supplement thereto, advising the target company stockholders that six three-year directorships on the 17-member board of directors were up for election. As Judge Weinfeld accurately put it, "Far from being misled, (the target company) shareholders were thus inundated with information concerning their own corporation's staggered board and its cumulative voting provision." 402 F.Supp. at 201 (emphasis added).

But this, we make clear, is not a case where the "total mix" of communications alone is relied upon to justify a misleading proxy statement. Generally, the "total mix" would be insufficient to compensate for omissions in the prospectus since an investor is all too apt to look upon those communications as self-serving and to consider the prospectus as a more objective, self-contained statement upon which he may justifiably rely to make an informed investment decision. The "mix" in this instance, however, pertains to a subject the target company's own staggered board and cumulative voting of which its own stockholders were presumably aware, if they were aware of anything. In this light, Judge Weinfeld's decision becomes unassailable. See Chris-Craft Industries, Inc. v. Piper Aircraft Corp., supra, 480 F.2d at 369.

This is not to say that a shareholder will be presumed to know all the by-law provisions of the corporations in which he owns stock so as to relieve an offeror from discussing relevant provisions in its prospectus. In this specific instance, however, proxies for voting for the board of directors and other information concerning the board had been circulated to shareholders shortly before the effective date of the tender offer. The proxy statement was calculated to alert shareholders to the terms of service of directors to be elected and the method of cumulative voting. In taking the affirmative act of voting, shareholders were likely to take special notice of these facts. In these circumstances, it is fair to say that the shareholders can be presumed to have been aware of the provisions at issue or that the shareholders were unlikely to have been misled by the offeror's failure to discuss the provisions more thoroughly.

Affirmed.