When a corporation is wheeling and dealing to save its life -- fending off unwanted suitors and trying to work out a deal with a "white knight" -- just how much do stockholders have to be told? Less than they might think, according to a pair of rulings handed down last month by the U.S. Court of Appeals in Cincinnati. In both cases, Marathon Oil stockholders who thought they should have had more information about the company's 1981 battle to rebuff Mobil Oil and Marathon's subsequent friendly merger with U.S. Steel were themselves rebuffed by the appellate judges.
Companies cannot withhold "hard, solid" information from stockholders, the rulings suggest.
But predictions and projections -- the kind of data managers assemble to try to convince a company that their stock is undervalued and that it pays to wage a takeover battle with another bidder -- are too "soft" to be considered the type of information to which stockholders are entitled.
In fact, at one time the Securities & Exhange Commission forbade companies from disclosing any data unless its accuracy would stand up to the most rigorous scrutiny.
The enforcement agency has been moving away from that ban as its officials have become convinced that investors can understand the speculative nature of such material as "future cash-flow potentials." But the SEC still has a rule against supplying certain kinds of "soft information," such as estimates of probable oil and natural gas reserves.
That history worked against the plaintiff in Starkman v. Marathon Oil, one of the two cases decided Sept. 13. The plaintiff had sold his Marathon shares for $78. on the open market just one day before U.S. Steel announced its $125 tender offer.
But the precedents in the Cincinnati circuit had been established during an era when the SEC was more hostile to disclosure of soft information than it is now, and those precedents held that only data that is "virtually as certain as hard facts" need to be disclosed.
Of course, predictions about the future can never meet that standard, and the material in the Marathon case -- in particular, two reports put together to persuade potential friendly bidders for the company that Marathon's assets were worth upwards of $200 a share -- were clearly salesmen's documents that took an optimistic view of the company's real value.
The judges did not say that Marathon had to keep the soft data secret, only that the company had no legal obligation to disclose it.
Similarly, in the other case the judges gave management the option of being stingy with financial details. That case involved, not the information mailed to stockholders before the U.S. Steel offer, but details of that offer itself.
U.S. Steel promised to buy 51 percent of Marathon for $125 a share, with a much less lucrative offer for the rest of the stock; the steel company then planned to merge with the oild company. The issue was whether the tender offer had to include all the details that later would have to be disclosed to stockholders before they could consent to the merger. No, said the judges in Radol v. Thomas: even though the merger would be a fait accompli once U.S. Steel got 51 percent of Marathon, the two transactions were separate and the rules for the second did not bind the first.
In other cases, courts ruled that:
Goodwill is a very real part of the value of a professional practice. The California state Court of Appeals had to rule on the issue as part of a divorce dispute over how much property should be divided between the former husband and wife.
The trial court reasoned that since a medical practice hinged on the personal fame of the doctor, it could not be sold as a going entity, and therefore it had no goodwill; its value should be based entirely on the market value of the equipment.
The Court of Appeals said that the ability to sell the practice is an irrelevance. The judges instructed the trial court to take the earnings from the practice and calculate how much capital should produce that much income; when the value of the equipment is subtracted from that capitalization, the difference is goodwill, and the doctor's former spouse has a claim on a portion of it.
(In re Watts, Aug. 21)
*A company cannot be sued in a state just because its product is sold there. The U.S. District Court in Boston threw out an antitrust case against the Italian sporting goods manufacturer Fila and its U.S. distribution subsidiary because the judge found the two were not "transacting business there." Fila products were sold in a number of Massachusetts department stores, but they were sold by independent sales reps, and that did not add up to "systematic, continuous, or substantial" business contact, the court ruled.
Had either the manufacturer or its U.S. subsidiary maintained offices or a bank account in Massachusetts, the suit would have been allowed to go forward, the court suggested.
(Buckeye Associates v. Fila, Sept. 5)
*A warranty disclaimer won't get a seller of faulty goods off the hook. The South Dakota Supreme Court just repeated that warning to business by upholding a damage award of $26,253 to a farmer to cover a crop loss that the jurors were convinced resulted from defective seed corn.
The producer sold the seeds with a warning that its liability was limited to the purchase price, but the state justices called that loophole "unconscionable" and refused to recognize it. The major problem: the liability disclaimer was one-sided, slapped on by the company as a condition of sale rather than developed between buyer and seller in a true negotiation.
(Hanson v. Funk Seeds, Sept. 4
*Local governments can refuse to promote union activists to supervisory roles. Governments as employers face more restrictions than private employers, because they must live up to Bill of Rights guarantees.
That means, for instance, that they are limited in their ability to punish workers for joining questionable organizations: A public employer probably could not refuse an applicant a promotion because he or she was active in the Socialist party, while a private business probably could.
But the U.S. Court of Appeals in Richmond has decided that those limitations do not mean that a public employer also must ignore an applicant's union activities. It is reasonable to wonder if a union representative could represent management effectively as a supervisor, the court ruled. And the concerns are even more valid when job discipline is vital, as in the case at hand: whether to promote sergeants to lieutenants on the guard staff at the Baltimore city jail.
(Wilton v. Mayor, Sept. 18)