The opinion of the court was delivered by: MCLEAN
This is an action to enjoin defendant from carrying out a tender offer which it made on August 19, 1968 to purchase 500,000 shares of the common stock of plaintiff Electronic Specialty Co. (ELS) at a price of $39 per share. The offer was to expire on September 3, 1968, but has been twice extended, first to September 9 and then to September 12. By now at least 500,000 shares have been tendered.
Plaintiffs are ELS itself and two of its stockholders, one of whom tendered his stock to defendant and the other of whom did not. Each purports to sue on behalf of all stockholders in his respective class.
Plaintiffs claim that in making the tender offer, defendant has violated Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), Rule 10b-5 thereunder, and also the new Section 14(e) of the Act (37 U.S.L. Week 9 (1968)), which became effective on July 29, 1968 and which in substance makes the provisions of Section 10(b) and Rule 10b-5 applicable to tender offers.
Plaintiffs have moved for a preliminary injunction. The court held an evidentiary hearing at which plaintiffs called as witnesses Burgess, ELS's president; Beek, its attorney; and Heller, its investment banker. Defendant's president, Vesco, also testified, first as a witness called by plaintiffs, and later called by defendant. The testimony related primarily to the negotiations between the parties between July 26, 1968 and the making of the tender offer on August 19. Although the testimony is conflicting as to some details, the general course of these dealings is not disputed. The facts are as follows.
ELS is an established company with its principal place of business in Los Angeles, California. It manufactures electronic and aerospace components and systems. Its net earnings in 1967 were approximately $2,630,000, amounting to $1.42 per share.
The common stock of ELS is listed on the New York Stock Exchange. There are approximately 2,000,000 shares outstanding. Plaintiff Burgess, who was one of the founders of the company and is now its president, owns approximately 125,000 shares.
Defendant International Controls Corp. (ICC) is a much newer and smaller company. It was formed in 1966 by the merger of two small companies. Since then, it has acquired several other small companies. It manufactures parts for computers and aircraft, valves, controls, etc., and it also operates certain airports which provide charter plane service. Its earnings in 1967 were approximately $678,000, constituting 31 cents per share.
Defendant's office is in Fairfield, New Jersey. Its stock is listed on the American Stock Exchange. Vesco, its president, owns approximately 900,000 shares, constituting approximately 25 per cent of the total stock outstanding.
In early 1968 defendant raised some $40,000,000 by selling stock and by selling bonds of a wholly owned subsidiary incorporated in the Dutch Antilles. The bonds were sold outside the United States.
Having acquired this substantial amount of cash, ICC determined to employ much of it in acquiring other companies. It selected ELS as one of its first targets.
In July 1968, Vesco made preliminary arrangements for a tender offer, i.e., he caused a dealer-manager agreement to be drafted and he talked to the Bank of America about becoming a depositary. These arrangements were still incomplete when, on July 26, 1968, he opened his campaign by meeting with Burgess in Los Angeles. The meeting was arranged by an intermediary who told Burgess that if he refused to meet Vesco, Burgess would soon read some adverse news.
At this meeting Vesco suggested an immediate merger between ICC and ELS on a share for share basis. He asked Burgess to request ELS's investment bankers in New York to fly to California at once for an immediate discussion over the weekend with ICC's investment bankers, one of whom, a representative of Smith, Barney & Co., was present at the meeting. As an alternative to a merger, Vesco expressed a willingness to buy Burgess' own stock in ELS at the market price which on that day was approximately $39.
Burgess was unwilling to sell his own stock and he declined to ask his investment bankers to come to California at once. He did express willingness, however, to have them meet during the following week with Smith, Barney in New York.
On July 31, 1968, an article appeared in the Wall Street Journal. It reported rumors of a " take-over attempt" by ICC against ELS. The article stated that ICC's "position" in ELS's stock was "said to be about 5% of Electronic Specialty's roughly 2 million shares outstanding," (i.e., 100,000 shares). This statement was untrue. According to the evidence, between July 23 and July 25, 1968, ICC purchased in the market 43,500 shares of ELS. It sold 5,400 on August 6, leaving it with 38,100 which is all the ELS stock it owned during the period relevant here.
Vesco knew that this report was untrue. Nevertheless, he telephoned Burgess and called Burgess' attention to the article. He did not tell Burgess that it was inaccurate. Allegedly on the advice of his counsel, Vesco made no attempt to correct the mis-statement in the article.
It is fair to say on the evidence that throughout his negotiations with Burgess, Vesco intentionally gave Burgess a false impression of the magnitude of ICC's holdings in ELS stock. He implied, without literally saying so in so many words, that ICC owned over 100,000 shares.
On August 1 the board of directors of ICC met to discuss the negotiations with ELS. According to the unsigned draft of the minutes of this meeting, which Vesco testified is accurate, one director expressed concern that a tender offer by ICC against the wishes of ELS's management would "tarnish the image" of ICC. The directors adopted a resolution authorizing Vesco to continue to negotiate with ELS for a merger of the two companies or, in the alternative, to make a tender offer, provided, however, that ELS's management did not oppose such an offer. If neither a merger nor an unopposed tender offer could be arranged, then Vesco was to do his best to sell ICC's holdings of ELS stock.
ICC's investment advisor, Smith, Barney & Co., was also opposed to making a tender offer without the acquiescence of ELS's management. Vesco testified that Smith, Barney strongly advised him against doing so.
Conferences between the investment bankers of the respective companies continued in New York throughout the week of July 29-August 3. It is unnecessary to recount them in detail. Suffice to say that ELS's representatives insisted on obtaining data on ICC's sales and earnings, and ...