Ruth San Pedro (ALS B 2015)

Securities Regulations Atty. Francis Lim

WEINER V. QUAKER OATS CO. (1997)

Hint: total debt-to-total capitalization ratio guideline
Facts:
In 1993 Quaker had announced in several public documents and public statements the
company's expectations for earnings growth and its guideline for debt-to-equity ratio
The Annual Report for the fiscal year ending June 30, 1993, Quaker included the
following statement:
One way to measure debt is to compute the ratio of [total] debt as a percent of total
debt plus preferred and common shareholders' equity. Our debt-to-total capitalization
ratio was 59 percent, up from 49 percent in fiscal 1992. Quaker's total debt remained
essentially even. Therefore, this increase was primarily due to the decrease in the
book value of common shareholders' equity which resulted from our share
repurchases and the $116 million charge for adopting new accounting principles. For
the future, our guideline will be in the upper 60 percent range. This was reiterated in
another letter and again in Quaker's Form 10Q.
On August 4, 1994, Quaker announced a growth in earnings of 5% over earnings for
fiscal 1993 and reported that it is confident of achieving at least 7% real earnings
growth in fiscal 1995.
On September 23, 1994, Annual Report for fiscal 1994 stated that we are committed
to achieving a real earnings growth of at least 7 percent over time. A statement
regarding the company's total debt- to-total capitalization ratio stated that our total
debt- to-total capitalization ratio was 68.8 percent on a book-value basis, in line with
our guideline in the upper60 percent range.
In 1994, Quaker and Snapple began negotiations for possible merger. On November
2, 1994 it was consummated for $1.7B in cash, which resulted in a plunge of Quakers
stock for approx. 10% of its value or $7.375 per share. For this, Quaker obtained a
$2.4B-credit which tripled its debt and increased Quaker's total debt- to-total
capitalization ratio to approximately 80%.
On November 10, 1994, purchasers of Quaker stock before the Snapple acquisition
filed two actions, later consolidated. They alleged that Quaker and Smithburg violated
sections 10(b) and 20(a) of the Securities Exchange Act because they already knew
that the merger would increase the total debt-to-total capitalization ratio and decrease
earnings growth, but didnt adjust their public projections. In effect they artificially
inflated the stocks price from Aug4 to Nov1, 1994 and the purchasers suffered 10%
stock price decrease.
Issue: WON such public documents can be a basis of claim of fraud under Sec.
10(b)?
Held: No!
Ratio:

Ruth San Pedro (ALS B 2015)

Securities Regulations Atty. Francis Lim

Rule 10b5 provides: It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange, ... (b) To make any untrue statement of a
material fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made, not
misleading ..., in connection with the purchase or sale of any security.
The case was dismissed for failure to state a claim since it was found immaterial as a
matter of law Quaker's statements concerning the company's guideline for the ratio
of total debt-to-total capitalization that it would maintain in 1995 and the projection of
7% earnings growth in 1995. It further found it was per se reasonable because for the
past 5yrs it had exceeded 7%. District court ruled that there was no violation of
Section 10(b).
The fundamental purpose of Act was to substitute a policy of full disclosure for the
philosophy of caveat emptor. To establish a valid claim of securities fraud under
Rule 10b5, plaintiffs must prove that the defendant[s] (1) made mis- statements or
omissions of material fact; (2) with scienter; (3) in connection with the purchase or
sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was
the proximate cause of their injury. The purchasers claim that their purchase was
based on reliance on said public statements.
A. The Total DebttoTotal Capitalization Ratio Guideline
The claim was non-disclosure but When an allegation of fraud under section 10(b) is
based upon a nondisclosure, there can be no fraud absent a duty to speak. General
rule is no duty to correct prior statements if true when made. Except if it would
mislead if left unrevised. Here, the court held that no reasonable investor would have
depended on the guideline.
On the issue of materiality, the court cited the Basic case where it was held that for
cases involving undisclosed merger plans, the principle that an omitted fact is
material if there is a substantial likelihood that a reasonable shareholder would
consider it important in deciding how to proceed. Materiality is a mixed question of
law and fact A fact-specific determination of materiality militates against a
dismissal on the pleadings.
The evidences were the 3 documents: 1993 Annual Report, Form 10-Q, and 1994
Annual Report. All of them were straight facts and correct at the time. However, since
it was made in 3 reliable documents it may have induced a reasonable investor to
expect either that the ratio guideline would remain in the upper 60 percent range, or
that Quaker would announce any anticipated significant change. In this case, a
reasonable investor wont anticipate.
The district court held that to require Quaker to disclose the possibility it might seek
loans to finance an acquisition is tantamount to requiring the disclosure of the
acquisition negotiations. It is not the role of the courts to interfere with the policy of
disclosure chosen and recognized in the securities laws.
In all averments of fraud or mistake, the circumstances constituting fraud or malice
shall be stated with particularity. The proffered list of publicly available

Ruth San Pedro (ALS B 2015)

Securities Regulations Atty. Francis Lim

information is expansive, records should be not limited to publicly available

information. Rule 9(b) isnt a viable alternative to dismiss.
B. The Earnings Growth Projections
The claim of total debt-to-total capitalization guideline ratio should not have been
dismissed. The statement in the meeting that Quakers confident of achieving at least
7% real earnings growth in fiscal 1995 mightif left unmodified until the
announcement of the mergerhave supported an action for high-ranking corporate
officials. There were no explicit cautionary language. The bespeaks caution doctrine
provides that when forecasts, opinions or projections are accompanied by
meaningful cautionary statements, the forward-looking statements will not form the
basis for a securities fraud claim if those statements did not affect the total mix of
information ... provided investors. In other words, cautionary language, if sufficient,
renders the alleged omissions or misrepresentations immaterial.
Plaintiffs allege that the price decline occurred only after Nov.2 , if public statements
were made then the effects may have been neutralized. The phrase over time
absolves Quaker from any claims of fraud that point to a decline in earnings growth as
no reasonable investor would conclude based on projections. Any misleading effect
the August 4 statement might have had was cured by the qualifier over time. Thus,
it cant be a basis for fraud action under 10(b), 20(a), and Rule 10b5.
The case could still continue but in a limited class period and the dismissalofthe
earningsgrowthclaimisaffirmed.SC reversed and remanded.