Schreiber v. Burlington Northern, Inc.

Supreme Court of the United States
1985 U.S. LEXIS 124, 472 US 1, 86 L. Ed. 2d 1 (1985)

ELI5:

Rule of Law:

The term "manipulative" as used in § 14(e) of the Securities Exchange Act of 1934 requires misrepresentation or nondisclosure. Fully disclosed conduct that may be considered substantively unfair does not, by itself, constitute a manipulative act under the statute.

Facts:

On December 21, 1982, Burlington Northern, Inc. initiated a hostile tender offer to purchase 25.1 million shares of El Paso Gas Co. at $24 per share.
El Paso shareholders responded favorably, fully subscribing the offer by the December 30, 1982 deadline.
Before accepting the tendered shares, Burlington Northern entered into negotiations with El Paso's management.
On January 10, 1983, Burlington Northern announced it was rescinding the original hostile offer and substituting it with a new, friendly tender offer as part of a new agreement.
The new offer was for only 21 million shares, though still at $24 per share.
The new agreement also recognized "golden parachute" employment contracts for four of El Paso's senior officers.
The second, smaller offer was greatly oversubscribed, forcing shareholders who had tendered to the first offer to have their shares prorated, resulting in a diminished payment for them.

Procedural Posture:

Barbara Schreiber, on behalf of herself and other shareholders, filed suit against Burlington Northern, Inc., El Paso Gas Co., and El Paso's board members in the U.S. District Court for the District of Delaware.
The District Court dismissed the suit for failure to state a claim, reasoning that the alleged conduct did not involve misrepresentation.
Schreiber (appellant) appealed the dismissal to the U.S. Court of Appeals for the Third Circuit.
The Court of Appeals affirmed the District Court's decision, holding that § 14(e) is principally a disclosure statute.
The U.S. Supreme Court granted certiorari to resolve a conflict among the circuit courts on the issue.

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Issue:

Does a fully disclosed action, such as withdrawing a hostile tender offer and substituting a friendly one, constitute a "manipulative" act or practice prohibited by § 14(e) of the Securities Exchange Act of 1934 if the action does not involve any misrepresentation or nondisclosure?

Opinions:

Majority - Chief Justice Burger

No. A challenged action does not constitute a manipulative act under § 14(e) unless it is accompanied by misrepresentation or nondisclosure. The court reasoned that the term "manipulative" is a term of art in securities law that connotes conduct designed to deceive or defraud investors by artificially affecting securities prices. Citing precedent from § 10(b) cases like Ernst & Ernst v. Hochfelder, the Court held this meaning applies equally to § 14(e). The legislative history of the Williams Act, which enacted § 14(e), reveals its central purpose is to ensure investors receive full and fair disclosure, not to empower courts to adjudicate the substantive fairness of tender offers. Allowing challenges to fully disclosed actions as "manipulative" would inject uncertainty into the market, contrary to Congress's intent to provide investors with clear information to make their own decisions.

Analysis:

This decision significantly narrowed the scope of § 14(e) of the Williams Act, establishing that its anti-manipulation provisions are fundamentally about disclosure. By rejecting a broader interpretation that would encompass substantively unfair but fully disclosed tactics, the Court reinforced the principle that federal securities law is primarily concerned with creating a transparent market, not dictating outcomes. This ruling provides greater certainty for bidders and target companies in structuring tender offers, clarifying that they will not be held liable for manipulation so long as their actions are not deceptive, misleading, or accompanied by fraudulent nondisclosure. The decision effectively foreclosed a path for shareholders to challenge the fairness of takeover tactics in federal court under § 14(e).

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