Lerro v. Quaker Oats Co.

The Quaker Oats Company (Quaker) (defendant) signed a merger agreement with Snapple Beverage Corporation (Snapple) on November 1, 1994, and announced a tender offer to the public on November 4, 1994. In the tender offer, Quaker offered $14 per share of Snapple stock. Snapple shareholders who disputed the $14 price could refuse the offer, object to the merger, and demand appraisal of the fair value of their shares. Even if shareholders dissented, however, the merger was still essentially guaranteed to succeed because Snapple shareholder Thomas H. Lee—who controlled over 35 percent of Snapple’s shares—had promised to tender his shares and also to allow Quaker to buy the shares even if the tender offer failed. The offering document for the tender offer included a section announcing that Snapple and a Quaker subsidiary had entered into a distributor agreement with Select Beverages, Inc. (Select), a Lee-controlled company. The distributor agreement, signed before the tender offer was announced, gave Select exclusive rights to distribute some Snapple and Gatorade products in certain geographic areas. The tender offer ultimately succeeded, and the merger was effected. Snapple shareholders Joseph Lerro and John Duty (plaintiffs) subsequently sued Quaker in federal district court, alleging violations of § 14(d) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 14d-10(a)(2), under which every tendering shareholder must be paid “the highest consideration paid to any other [shareholder] during such tender offer.” Lerro and Duty asserted that the anticipated profits from the distributor agreement constituted higher consideration for Lee’s Snapple shares than other shareholders had been offered and, therefore, that those anticipated profits must be paid to every other shareholder who accepted the tender offer. The district court dismissed the action. The court concluded that even though the distributor agreement compensated Lee for Lee’s Snapple shares, the distributor agreement did not fall within Rule 14d-10(a)(2) because the agreement had been signed before the tender offer and thus did not constitute consideration offered “during” the tender offer. Lerro and Duty appealed.