## Facts

- Matsushita agreed to acquire MCA through a tender offer for MCA common stock at $71 per share.
- MCA chairman and CEO Lew Wasserman held millions of MCA shares and, instead of tendering for cash, entered a separate exchange with Matsushita involving preferred stock of a Matsushita subsidiary.
- Under the Wasserman arrangement, Matsushita committed funding keyed to 106% of the tender price times the number of exchanged shares; the preferred stock paid fixed dividends, had credit support, and was structured as a tax-free exchange.
- MCA president and COO Sidney Sheinberg tendered at $71 per share but also received a separate $21 million payment described as compensation for employment and noncompetition obligations.
- Former MCA public shareholders who tendered their shares sued, alleging the Wasserman and Sheinberg arrangements were economically more favorable than the tender-offer consideration and constituted discriminatory side payments.
- A Delaware class action based on state fiduciary-duty claims arising from the same transaction was settled and approved by the Delaware Chancery Court.
- Plaintiffs brought a federal class action asserting Exchange Act claims, including alleged violations of Rule 14d-10 (and related statutory provisions) and Rule 10b-5, seeking relief for unequal treatment in the tender offer.

## Issues

1. Whether Exchange Act § 14(d)(7) and SEC Rule 14d-10 imply a private right of action for tendering shareholders.
2. Whether the Wasserman exchange and the Sheinberg payment could constitute tender-offer “consideration” whose unequal provision violates Rule 14d-10’s all-holders, best-price requirement.
3. Whether the Delaware class settlement precluded the federal securities claims under full faith and credit and res judicata principles.
4. Whether the district court erred in denying class certification and leave to amend.

## Decision

- The Ninth Circuit reversed in substantial part and remanded.
- It held that tendering shareholders have an implied private right of action under § 14(d)(7)/Rule 14d-10.
- It held the Wasserman and Sheinberg arrangements could qualify as discriminatory consideration connected to the tender offer and thus could support Rule 14d-10 claims.
- It held the Delaware settlement did not bar the federal securities claims because the state proceeding could not extinguish claims within exclusive federal jurisdiction in these circumstances.
- It directed that the matter proceed on a class basis and concluded the denial of leave to amend was an abuse of discretion.

## Legal Principles

- Rule 14d-10’s all-holders, best-price requirement may be enforced through an implied private right of action by tender-offer shareholders.
- Payments or arrangements conferring economically superior value on select holders may constitute tender-offer consideration when they are sufficiently connected to the tender offer, including where the side arrangement is a necessary component of completing the offer.
- A narrow view limiting Rule 14d-10 scrutiny to payments made only within the formal tender-offer period is improper where it would permit evasion through side arrangements structured before or after the offer.
- For preclusion purposes (as the Ninth Circuit ruled here), a state-court class settlement resolving state-law claims does not necessarily bar later federal securities claims subject to exclusive federal jurisdiction.

## Conclusion

The Ninth Circuit allowed tendering shareholders to pursue federal class claims alleging that insider side arrangements in a tender offer provided unequal consideration in violation of Rule 14d-10, and it rejected (on its then-current view of preclusion) the argument that a prior Delaware settlement extinguished those federal claims.


Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir. 1995)