The opinion of the court was delivered by: BRYAN
Plaintiff United Gas Corporation (United) moves for a preliminary injunction restraining defendant Pennzoil Company (Pennzoil) from acquiring ten percent or more of the outstanding common stock of United or, in the alternative, from voting such shares if acquired. The complaint seeks a permanent injunction of the same nature.
United is a Delaware corporation with its principal place of business in Louisiana. Pennzoil is a Pennsylvania corporation with its principal place of business in that state. Defendant White Weld & Co. (White Weld) is an investment banking partnership with its principal offices in New York. It is named as a defendant because it is the designated dealer manager in the purchase program by which Pennzoil seeks to acquire United stock.
Jurisdiction is asserted both under § 25 of the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79y and, by reason of diversity, under 28 U.S.C. § 1332.
The basic facts, virtually undisputed, are as follows:
United and its subsidiaries are engaged in the production, transportation and sale of oil and natural gas in the southern United States, including the sale of natural gas at retail to consumers in Texas and other southern states. Its gas distribution system, supplied by its producing and pipeline subsidiaries, is a "gas utility company" within the meaning of the Public Utility Holding Company Act, 15 U.S.C. § 79b(a) (4). Among other subsidiaries are U.G.C. Instruments, a manufacturer of electronic devices used primarily in the gas and oil industry; Atlas Processing, a refiner of petroleum products; and Duval Corporation,
which is engaged in mining and milling copper, potash, sulphur and other minerals. United has outstanding 12,686,000 shares of common stock traded on the New York Stock Exchange.
Pennzoil is engaged in the production and refining of crude oil, the marketing of motor oils, lubricants and other petroleum products, and the exploration for and production of oil and natural gas in the United States and foreign countries.
In October 1965 Pennzoil owned 275,000 shares of United common stock which it had acquired under an investment program initiated in May of 1965. On November 22, 1965 Pennzoil made a public offer to the United common stockholders to purchase a minimum of one million shares of United common at $41 per share. As of that date United was selling at 35 3/4 on the open market. The offer was to expire on December 14, 1965 but could be extended by Pennzoil to December 27, 1965 or any intermediate date.
Under the terms of the offer Pennzoil agrees to purchase one million shares if that number or more are tendered and, at its election, may purchase any or all shares tendered in excess of one million. Purchases are to be made in order of tender. If less than one million shares are tendered Pennzoil may buy all but not less than all of these shares but is not obligated to do so. Pennzoil is required to designate the number of shares it elects to purchase and make such purchases by December 30, 1965.
The response to the Pennzoil offer was much greater than anticipated. By December 7, 1965, 4,982,096 out of the 12,868,982 shares outstanding had been tendered to Pennzoil. Additional shares were being tendered thereafter.
Pennzoil has arranged bank financing for funds sufficient to purchase some 3,000,000 shares and anticipates additional financing for any shares it may desire to purchase in excess of that amount. If all shares thus far tendered are acquired the total purchase price will amount to some two hundred million dollars.
Under § 2(a) (7) of the Public Utility Holding Company Act, 15 U.S.C. § 79b(a) (7), by the purchase of at least 10% of the stock of United, Pennzoil would in all likelihood become a holding company required to register with the S.E.C., 15 U.S.C. § 79e. Pennzoil and United would then be subject to regulation under the Act with a variety of possible consequences, including the possible divestiture of some or all of United's non-utility subsidiaries. A purchase by Pennzoil of one million shares of United would give it holdings of 9.9% of the outstanding shares, just under the minimum 10% figure bringing it under the Act. If all of the shares tendered by December 7, 1965 were purchased Pennzoil would have a 39% stock interest in United. For all practical purposes this would be a controlling interest.
On December 1, 1965 United commenced this action to restrain Pennzoil from acquiring 10% or more of its stock and by order to show cause brought on this motion for a temporary injunction for the same relief pending the determination of the action. At the hearing of the motion before me on December 10 Pennzoil, at my suggestion, agreed, as it had the election to do, to extend its offer to December 17, 1965 and not to exercise its option to purchase any of the tendered United shares until after that date.
United urges, as I understand its argument, that it is entitled to injunctive relief against the Pennzoil acquisition on the following interrelated grounds:
(1) The projected acquisition of 10% or more of United stock by Pennzoil would create a public utility holding company structure which is contrary to declared Congressional policy.
(2) If United through the Pennzoil stock acquisition were brought under the Public Utility Holding Company Act, its present corporate structure would be in violation of specific provisions of the Act and thus the acquisition would necessarily have an illegal result.
(3) If United were brought under the Act, it would be required to divest itself of valuable non-utility subsidiaries and would be subjected to other regulatory supervision by the S.E.C. to the irreparable damage of the corporation and its stockholders.
(4) If United were brought under the Act and thus subjected to damage and loss through the divestiture of its subsidiaries and otherwise, the proposed acquisition would be a violation of the fiduciary obligations which would be owed to United and its remaining stockholders by Pennzoil in its position as controlling shareholder.
Pennzoil urges that each of these contentions and, indeed, the entire action, is devoid of merit. It contends in substance that it has the absolute right to make the purchase of United stock which it contemplates; that the acquisition will result in no violations of law; that United has made no showing of irreparable damage resulting from the acquisition, and that none of the prerequisites for issuance of a preliminary injunction have been established.
United's first contention is that the court should enjoin the Pennzoil acquisition because it would create a corporate structure contrary to public policy as announced by Congress in § 1 of the Public Utility Holding Company Act.