Panter v. Marshall Field & Co.
646 F.2d 271 (1981)
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Rule of Law:
Under the business judgment rule, directors are presumed to have acted in good faith and will not be held liable for defensive actions against a takeover, such as making acquisitions or filing lawsuits, so long as the actions can be attributed to a rational business purpose. Additionally, a securities fraud claim under § 14(e) for a lost tender offer opportunity fails if the offer is withdrawn before shareholders can rely on alleged misstatements to make a decision.
Facts:
- For several years leading up to 1977, Marshall Field & Company (Field's) was approached by multiple potential merger partners.
- On the advice of specialized legal counsel, Field's board adopted a long-term strategy of remaining independent, which included making acquisitions that could create antitrust obstacles for potential suitors.
- In December 1977, Carter Hawley Hale (CHH) proposed a stock-exchange merger valued at a substantial premium over Field's market price.
- Field's board of directors rejected CHH's proposal, stating it was 'illegal, inadequate, and not in the best interests of Marshall Field & Company,' and simultaneously filed an antitrust lawsuit against CHH.
- Following the rejection, Field's board approved two rapid expansion projects: the acquisition of five Liberty House stores and an agreement to open a new store in Houston's Galleria mall, which already housed a store from a CHH division.
- In February 1978, CHH announced a formal tender offer at an even higher price of $42 per share, but conditioned it on several factors.
- Shortly after, CHH publicly withdrew its offer, citing the 'expansion program announced by Marshall Field' as creating too much uncertainty about the company's future earnings.
- Following the withdrawal of CHH's offer, the market price of Field's stock fell to below its pre-offer level.
Procedural Posture:
- Shareholders of Marshall Field & Company (plaintiffs) filed class-action lawsuits in the U.S. District Court for the Northern District of Illinois against Field's and its directors (defendants).
- The complaints alleged violations of federal securities laws (§ 10(b) and § 14(e)) and state law claims for breach of fiduciary duty and tortious interference with prospective economic advantage.
- The case proceeded to a jury trial.
- At the conclusion of the plaintiffs' case, the district court granted the defendants' motion for a directed verdict, ruling that the evidence was insufficient to support a jury verdict for the plaintiffs on any of their claims.
- The plaintiff shareholders (appellants) appealed the district court's directed verdict to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Under Delaware's business judgment rule, do corporate directors breach their fiduciary duty to shareholders by taking defensive actions, such as making acquisitions and filing lawsuits, to resist a hostile takeover when those actions can be attributed to a rational business purpose and are not motivated solely or primarily by a desire to entrench themselves?
Opinions:
Majority - Pell, Circuit Judge.
No. The directors' actions are protected by the business judgment rule, which presumes that corporate directors act in good faith and on an informed basis. Courts will not disturb directors' decisions if any rational business purpose can be attributed to them, and plaintiffs failed to provide sufficient evidence that the directors' sole or primary motive was entrenchment. The defensive acquisitions were consistent with long-held expansion goals, and the antitrust suit was filed in good-faith reliance on the advice of experienced counsel. Furthermore, the federal securities law claims under § 14(e) fail because the tender offer was withdrawn before it became effective, making it impossible for shareholders to have relied on any alleged misrepresentations in deciding whether or not to tender their shares.
Concurring-in-part-and-dissenting-in-part - Cudahy, Circuit Judge,
Yes. The majority applies the business judgment rule too deferentially, virtually immunizing directors who have an inherent conflict of interest in preserving their own control during a takeover battle. There was abundant evidence of the directors' fixed policy of resistance, their hasty and questionable defensive acquisitions, and their precipitous filing of an antitrust suit from which a jury could infer that the primary motive was entrenchment, not shareholder welfare. When a director's self-interest is implicated, the burden should shift to the director to prove the fairness of the transaction. Additionally, misrepresentations that cause a tender offer to be withdrawn should be actionable under § 14(e) to prevent management from defeating offers through deception with impunity.
Analysis:
This case significantly strengthened the protections afforded to corporate directors under the business judgment rule in the context of hostile takeovers. It established a high bar for shareholders challenging defensive tactics, requiring them to prove that entrenchment was the directors' sole or primary motive, rather than just one of several motives. The ruling makes it difficult to challenge defensive maneuvers, such as acquisitions or litigation, as long as a plausible, rational business purpose can be articulated. The decision also narrowed the scope of securities fraud claims under § 14(e) by holding that reliance is a necessary element, effectively precluding claims where a tender offer is withdrawn before shareholders can act.
