Appeal from a final judgment of the United States District Court for the Southern District of New York, Vincent J. Broderick, Judge, granting defendant Pan American World Airways, Inc.'s motion for summary judgment and dismissing plaintiff's class action complaint alleging violations of section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), 17 C.F.R. 240.10b-5 (1982).
Lumbard, Winter and Pratt, Circuit Judges.
Irving Reiss appeals from a judgment granting defendant Pan American World Airways, Inc.'s ("Pan Am") motion for summary judgment dismissing his class action complaint. The complaint alleged violations of section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 ("Act"), 15 U.S.C. § 78j(b) (1976), and 17 C.F.R. 240.10b-5 (1982). Plaintiffs, holders of Pan Am convertible debentures which were being called, sold the debentures rather than convert them into capital stock. They allege that if they had known at the time that Pan Am was attempting to negotiate a merger with National Airlines, Inc. ("National"), they would have converted the debentures into stock rather than selling them. In granting summary judgment upon a detailed stipulation of facts, Judge Broderick held alternatively that Pan Am was not obligated to disclose the existence of the negotiations in question and also that the failure to disclose was not knowingly misleading.
Pan Am had been interested in acquiring National since May, 1977. By January, 1978, it had secured a $50,000,000 loan commitment from Citibank, N.A. and Pan Am's Chairman, William T. Seawell, and Executive Vice President for Finance and Development, James H. Maloon, had met with National's Chairman, L. B. Maytag. However, Maytag advised Seawell that National was not interested and Pan Am allowed the Citibank loan commitment to expire. Throughout these negotiations confidentiality was preserved.
During the next few months, Seawell and Maloon made other fruitless overtures to National. Meanwhile, Texas International Airlines, Inc. began purchasing National stock and petitioned the Civil Aeronautics Board for permission to acquire control. In response, Pan Am began purchasing National shares on its own, acquiring .4% of National's stock by August 15.
On August 8, 1978, Pan Am's investment banker, Lehman Brothers Kuhn Loeb Inc., submitted a report to Pan Am recommending a call of debentures prior to September, 1978. One objective of the proposed call was to induce holders to convert debentures into capital stock, since at that time the stock was trading in excess of the so-called "effective conversion price" -- that stock price equal to the amount due debentureholders upon redemption. Other objectives of the call included savings on interest payments, tax savings due to loss-taking, simplification of the company's capital structure, and a strengthening of its equity base.
On August 15, 1978, Pan Am's Executive Committee adopted two resolutions. The first authorized acquisition of up to 10% of National's stock and further negotiations for the acquisition of National. The second authorized the call of $25,000,000 of 10 1/2% convertible debentures for redemption on September 29, 1978, at 110% of face value plus accrued interest from August 14 to September 29. The particular debentures called were to be determined randomly and were redeemable either in cash or through conversion to capital stock. On August 15, a press release announced the redemption but did not mention Pan Am's intentions toward National. On the same day, Pan Am secured a second loan commitment from Citibank. Between August 15 and August 23, Pan Am negotiated with National, while increasing its share of stock holdings in National to 4.8%. No public announcement of the negotiations was made.
On August 23, both National and Pan Am issued press releases reporting that a firm merger offer was under consideration. Subsequent press releases on the merger negotiations were also issued and, on September 7, the merger was announced at $41.00/share.
On August 29, Pan Am announced that it was expanding the call to all debentures. At all relevant times, Pan Am common shares were traded at prices exceeding the conversion price of the debentures. However, the price of Pan Am stock rose even higher after the August 23 announcements.
Plaintiff Reiss and the other members of the class sold their debentures between August 15 and August 22. They claim that Pan Am's failure to disclose the merger negotiations with National between those dates amounted to an intentional withholding of material information in violation of section 10(b) and Rule 10b-5 of the Act.
We affirm Judge Broderick's ...