Feit v. Leasco Data Processing Equipment Corporation

Leasco Data Processing Equipment Corporation (Leasco) (defendant) sought to acquire Reliance Insurance Company (Reliance) via an exchange offer of Leasco securities to Reliance’s shareholders. A primary reason why Leasco pursued the acquisition was to gain access to Reliance’s so-called “surplus surplus” (i.e., Reliance’s approximately $100 million in cash or cash equivalents that it was not required to keep for regulatory purposes). Reliance—through its president, A. Addison Roberts—initially opposed Leasco’s offer, but Roberts eventually changed his mind and was willing to cooperate with Leasco. A Reliance shareholder, Dudley Feit (plaintiff) brought a class-action suit against Leasco; Leasco directors Saul Steinberg, Bernard Schwartz, and Robert Hodes; and the offering’s underwriters (defendants), alleging that the offering’s registration statement and prospectus (collectively, offering documents) were false and misleading for two reasons. First, they did not clearly disclose Leasco’s plan to obtain Reliance’s surplus surplus, instead only citing it in vague terms via, for example, references to “opportunities for more profitable utilization of financial resources,” among other inscrutable statements. Second, the offering documents provided no estimate of the surplus surplus amount. The directors and underwriters responded that (1) the offering documents sufficiently disclosed Leasco’s intent regarding the surplus surplus and (2) they were not liable for not estimating the surplus surplus because they qualified for the affirmative defense of due diligence. Steinberg was Leasco’s CEO. Schwartz was Leasco’s president. Hodes was a partner in Leasco’s law firm; participated extensively in discussions and meetings about the exchange offer; and was directly involved in preparing the offering documents, including regarding the surplus surplus. With respect to their decision not to include an estimate of the surplus surplus in the offering documents, the directors claimed they could not obtain a reliable estimate due to Roberts’s hostility to the deal. However, Leasco never tried to generate its own estimate, Nor did the officers seek Roberts’s help after he decided to support the transaction, and Roberts testified that he could have quickly generated an estimate. For their part, the underwriters thoroughly reviewed all available financial information and paid particular attention to the surplus-surplus issue. Although the underwriters did not contact Roberts, they were told he was hostile to the deal and were never advised that Roberts changed his position.