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December 19, 1968

Electronic Specialty Co., William H. Burgess and John B. Fitzpatrick, Plaintiffs
International Controls Corp., Defendant

Lasker, District Judge.

The opinion of the court was delivered by: LASKER

LASKER, District Judge:

In this action alleging violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and the new Sections 14(d) (1) and 14(e) of the 1934 Act *fn1" and Rule 14d-1 thereunder, plaintiffs move for a preliminary injunction to bar the defendant from voting the controlling stock of plaintiffs acquired by a tender offer, and defendant moves for summary judgment on the ground that none of the plaintiffs has standing to sue.

 Plaintiff Electronic Specialty Co. (ELS) is a California corporation manufacturing electronic and aerospace components and systems. Its common stock (1,800,000 shares outstanding) is listed on the New York Stock Exchange.

 Plaintiff William H. Burgess (Burgess) is Chairman of the Board of Directors of ELS. When this action was commenced he owned approximately 129,000 shares of ELS stock, of which he tendered all but 1,000 shares on September 11, 1968. He brings this action as representative of the class of present holders of common stock and debentures of ELS, i.e., the non-tenderers.

 Plaintiff John B. Fitzpatrick (Fitzpatrick) tendered 100 of his 10,100 shares of ELS stock, and the tender was accepted by defendant. Fitzpatrick sues as representative of the class of former common stock and debenture holders of ELS who tendered their stock pursuant to defendant's tender offer.

 Defendant International Controls Corp. (ICC) is a Florida corporation with its principal office in Fairfield, New Jersey. It manufactures parts for computers and aircraft, valves and controls, and it also runs certain airports providing charter plane service. Its stock is listed on the American Stock Exchange.

 On August 19, 1968, ICC published in the Wall Street Journal, the New York Times, the Los Angeles Times and the San Francisco Chronicle its tender offer for 500,000 shares of the common stock and convertible debentures of ELS. *fn2" Pursuant to that offer, 1,038,946 shares of common stock and $5,210,000 in face amount of convertible debentures of ELS were tendered to ICC and purchased by it for a total of approximately $48,000,000. As a result, ICC is the owner of approximately 55% of the voting stock of ELS.

 On August 27, 1968, plaintiffs instituted this action by order to show cause, requesting a temporary restraining order barring the defendant from proceeding with what was then the unconsummated tender offer. On assurances of defendant that it would not consummate the offer before a hearing on a preliminary injunction took place, the application for a temporary restraining order was denied. Plaintiffs then moved for a preliminary injunction against the consummation of the tender offer, and an evidentiary hearing on the motion was held by Judge McLean. After three days of hearings, Judge McLean held: (1) that the written tender offer was misleading within the meaning of Section 10(b), Rule 10b-5, and Section 14(e) in that it contained a false statement relating to ICC's actual intentions to merge ELS with itself or its subsidiary; (2) that there was a reasonable probability that the plaintiffs would succeed at trial in establishing a violation of the statute and rule as to the allegations that defendant had engaged in manipulative practices aside from the language of the tender offer; and (3) that the corporate plaintiff had standing to sue. *fn3"

 In spite of these findings, Judge McLean believed that the balance of equities required that no injunction should issue, since an injunction would prevent those ELS stockholders who wished to tender from doing so at what they might consider a favorable price. He pointed out that should ICC nevertheless proceed with a tender offer, ELS could, under the authority of Symington Wayne Corp. v. Dresser Industries, Inc., 383 F.2d 840 (2d Cir. 1967), apply for an injunction against ICC's voting the ELS stock so acquired.

 On September 9th (three days before Judge McLean's decision was rendered) ICC announced that it was opening its previously restricted tender offer to accept all shares tendered. It contends that it did so in order to facilitate the tendering of shares which were not then being tendered at a rate sufficient to enable it to purchase 500,000 shares (i.e., to acquire control).

 Up to September 11th Burgess and the management of ELS had formally advised the stockholders of ELS that management would not tender its stock. However, on September 11th, after it had been announced that more than 500,000 shares (which would give working control) had been tendered to ICC, and because ICC had amended its tender offer to accept all shares tendered, Burgess and his colleagues advised stockholders that management would tender their shares and withdrew their "former recommendation that you not tender your shares."

 As heretofore indicated, the result of the various actions, unanticipated on both sides, was that ICC acquired 1,038,946 shares of ELS stock and $5,200,000 of its convertible debentures. *fn4" Although management's telegram to ELS stockholders indicated that Burgess would tender his shares, he actually tendered only 128,000 of the 129,000 shares he owned, and continues to own 1,000 shares.

 On September 16th, ICC mailed to all tenderers, in the same envelope as the checks in payment for their stock, a "withdrawal offer" by which it gave to the tenderers the option of returning the checks and unconditionally recovering their stock. The withdrawal offer included as exhibits the full text of the complaint in this action and the full text of Judge McLean's opinion, stating in reference to the litigation:

"Specialty, William H. Burgess, its chief executive officer, and another stockholder have brought a lawsuit against International in the United States District Court for the Southern District of New York, seeking an injunction against International's Offer for the shares of Common Stock and debentures of Specialty. A copy of the Complaint in that suit is annexed hereto as Exhibit A. International believes that this suit is without merit and that it will prevail at the trial of the action as it has in the two prior court actions brought by Specialty to restrain International from accepting and purchasing the tendered shares and debentures. However, in the interest of full disclosure and fairness to the tendering stockholders and debenture holders, International has concluded that it should offer them an opportunity to withdraw their tendered shares and debentures, and urges them in this connection to study the Complaint and consider the possibility that any or all of the charges made therein might be sustained in a trial of the action. It also calls their attention to the opinion of Judge Edward C. McLean, annexed hereto as Exhibit B, rendered on September 12, 1968, denying the plaintiff's request for a preliminary injunction in connection with the lawsuit."

 On September 20th, defendant noticed its motion for summary judgment pursuant to Rule 56(b) on the ground that none of the plaintiffs had standing to sue, claiming (1) that ELS itself had not purchased, sold or retained any securities as a result of any representations or admissions of the defendant; (2) that, on deposition taken subsequent to the hearing before Judge McLean, Fitzpatrick testified that he tendered shares of ELS to defendant solely as a result of a request by Burgess, and admitted that in doing so he did not rely in any way upon any statements made in the tender offer; and (3) that Burgess, in tendering 128,000 shares and retaining 1,000 shares on September 11th, did so with full knowledge of all the facts (since his acts were subsequent to the evidentiary hearing before Judge McLean) and without reliance on any of the acts or statements of the defendant.

 On October 14th, plaintiffs moved for a preliminary injunction herein, requesting that the defendant be enjoined from "(a) requiring that a special meeting of the shareholders of Electronic Specialty Co. be held; (b) voting the shares of stock of Electronic Specialty Co. held by defendant at any such meeting; and (c) proceeding any further with an action commenced by the defendant in the Superior Court of the State of California in which the instant defendant seeks to obtain a list of Electronic Specialty Co. shareholders and also seeks to compel the holding of a special meeting of the stockholders of plaintiff Electronic Specialty Co."

 Between October 17th and the events listed below, the Superior Court of California granted defendant's application for mandamus under California law and ordered ELS to convene a stockholders' meeting, which is presently scheduled for December 30th.

 On November 12th, this court commenced an evidentiary hearing on defendant's motion for summary judgment and plaintiffs' current motion for a preliminary injunction. The hearings lasted eleven days. During the course of the hearings, on November 21st, plaintiffs' motion to amend its complaint was granted. The amended complaint sought new relief: (1) permanently enjoining defendant from voting its ELS stock, and (2) permanently divesting defendant of its common stock and debentures of ELS pursuant to an appropriate order of this court.

 On November 27th, defendant served its answer to the amended complaint, adding as a fifth affirmative defense that plaintiffs ELS and Burgess had violated Section 10(b) and Section 14(e) of the Securities Exchange Act of 1934 and Rule 10b-5. Defendant contends that the alleged violations caused plaintiffs ELS and Burgess to be guilty of "unclean hands" such as to bar them from equitable relief.

 At the request of the court, the Securities and Exchange Commission has submitted a most helpful brief as to the question, heretofore undetermined, as to the standing of the corporate plaintiff to sue under the new Sections 14(d) (1) and 14(e) of the Act.



 A. The Corporate Plaintiff.

 ICC claims that the corporate plaintiff has no standing to sue because it "has not purchased, sold, or retained any securities as a result of any representations or admissions of the defendant."

 The position is not sound. Aside from the fact that Judge McLean has already in his earlier opinion held, on the authority of Symington Wayne Corp. v. Dresser Industries, Inc., 383 F.2d 840 (2d Cir. 1967), that the corporate plaintiff in this case does have standing to sue, the authorities clearly establish that in the factual context of this case the corporation is a proper plaintiff. It is true that, in view of the novelty of the legislation here construed, no authorities have ruled that a corporate plaintiff has standing to sue for an injunction specifically under Section 14(d) (1) and (e). However, prior decisions as to the standing of a corporate plaintiff to sue for an injunction under Section 10(b) and, more particularly, Section 14(a) (proxy regulation) are apposite.

 As the Supreme Court said in J.I. Case Co. v. Borak, 377 U.S. 426, 12 L. Ed. 2d 423, 84 S. Ct. 1555, in holding, in a stockholders' derivative suit, that the District Court had jurisdiction to grant relief under Section 14(a) of the Act (at p. 432):

"The injury which a stockholder suffers from corporate action pursuant to a deceptive proxy solicitation ordinarily flows from the damage done the corporation, rather than from the damage inflicted directly upon the stockholder. The damage suffered results not from the deceit practiced on him alone but rather from the deceit practiced on the stockholders as a group."

 By necessity, if a stockholder has standing in a derivative suit to sue for violations of the statute (and, in particular, Section 14(a), which is the section of the Act most nearly analogous to Sections 14(d) (1) and 14(e)), the corporation from which the stockholder derives his rights must also have standing to sue.

 In referring to the Borak case, the Court of Appeals for this Circuit held in Studebaker Corporation v. Gittlin, 360 F.2d 692 (also a proxy suit), at p. 695:

"If § 27 of the Securities Exchange Act authorizes a stockholder to assert such a claim on the corporation's behalf, as held in Borak, it must also authorize the corporation to do so on its own."

 In construing the purpose of Section 14(a), whose objectives are without question substantially similar to those of Sections 14(d) (1) and 14(e), *fn5" the Court of Appeals stated (p. 695):

"But the legislative history shows that Congress anticipated protection from 'irresponsible outsiders seeking to wrest control of a corporation away from honest and conscientious corporation officials,' S. Rep. No. 1455, 73d Cong., 2d Sess. 77 (1934), quoted in 2 Loss, supra at 950, and the Proxy Rules are shot through with provisions recognizing that in contests for control the management has a role to play as such and not merely insofar as the managers are stockholders."

 Nothing could be a more appropriate description of the state of facts that exists in this case.

 The appropriateness of analogizing the proxy provisions (Section 14(a)) of the Act with the new tender offer provisions (Sections 14(d) (1) and 14(e)) of the Act is supported by the brief amicus curiae of the Securities and Exchange Commission in this case, in which it is observed (commencing at p. 10):

"The Gittlin holding recognized that the legislative history behind the proxy rules demonstrates an intent to extend their scope of protection to the corporate participants in a contest for control without requiring a showing that any particular transaction was damaging to the corporation. This same scope of protection appears to be clearly provided by the new tender offer provisions and the same rationale regarding standing should therefore apply to a target corporation like plaintiff ELS."

 Reference to these authorities makes it clear that the corporate plaintiff in this case has standing under the new Sections 14(d) (1) and 14(e). Since the sole relief sought by plaintiffs is an injunction, and since that relief is, by virtue of the provisions of Section 27 of the Act, equally available under Sections 14(d) (1) and 14(e) or Section 10(b), there is no need for us to decide at this time whether the corporate plaintiff also has standing to sue under Section 10(b). It may be observed, however, that rulings and dicta of the Court of Appeals in this Circuit in Symington Wayne Corp. v. Dresser Industries, Inc., supra, and General Time Corp. v. Talley Industries, Inc., et al., 403 F.2d 159 (1968), by no means foreclose the possibility that the corporate plaintiff has standing to sue for an injunction under Section 10(b) as well as under Section 14.

 In support of its position, defendant relies upon Pacific Ins. Co. v. Blot, 267 F. Supp. 956 (S.D.N.Y. 1967), in which, in a 10b-5 action, Judge Herlands held that a target corporation had no standing to sue for an injunction. In Pacific, as here, the Securities and Exchange Commission, at the request of the court, submitted a brief amicus curiae, to which Judge Herlands referred with approval. The Commission there supported the view that the corporate plaintiff did not have standing to sue for an alleged Section 10(b) violation. In sharp contrast, the SEC's brief in this case states (p. 11):

"We do not believe that the question of standing under the new tender offer provisions is, in any way, related to prior treatment under Section 10(b) or Rule 10b-5 of the Act. Defendant ICC cites the Commission's amicus curiae brief in Pacific Insurance Co. v. Blot, 267 F. Supp. 956 (S.D.N.Y. 1967) where we intimated that a target corporation in a tender offer could not maintain an injunctive action under 10b-5 absent a more definite allegation that it was damaged by the tender offer. We consider our views therein to be inapplicable to the present situation. In Blot we distinguished the protection afforded by 10b-5 from that by the proxy rules, and Judge Herlands' opinion, supra 267 F. Supp. at 957, also recognized the 'substantive distinction' of the case from one within the rationale of Borak and Gittlin.
"We believe therefore that the target corporation in a tender offer is within that class of persons that Congress sought to protect in enacting the tender offer amendments to Sections 13 and 14 of the Act. The Commission is responsible for enforcing these laws but, as in proxy contests, we may not be fully informed of the facts which should be publicly disclosed, particularly in view of our limited opportunity to review solicitous material. We believe that private action here is 'a necessary supplement to Commission action,' and the fact that the plaintiff did not tender its shares in reliance upon an alleged violation should be no ground for failure to apply the general rule that persons for whose benefit the statute was enacted may maintain an action for damages caused them by its violation." *fn6"

 The court concurs in these views of the Securities and Exchange Commission and, as stated above, holds that ELS has standing under Sections 14(d) (1) and 14(e) of the Act.

 B. Burgess.

 It is not disputed that, except for the fact that Burgess tendered 128,000 of his 129,000 shares, he would have standing, under the facts alleged here, to sue for an injunction under Sections 14(d) (1) and (e), although a non-tenderer. Even before the enactment of Sections 14(d) (1) and (e), which conferred specific protection on persons to whom a tender offer was addressed, it was held in Moore v. Greatamerica Corp., 274 F. Supp. 490 (N.D. Ohio 1967) (cited with apparent approval in Mutual Shares Corporation v. Genesco, Inc., 384 F.2d 540 (2d Cir.) at 545) that non-tenderers had standing, along with tenderers and the corporate issuer, to sue to enjoin consummation of a tender offer. Further persuasive authority for the validity of this position is found in Dann v. Studebaker-Packard Corp., 288 F.2d 201 (6th Cir. Mich. 1961), which sustained the standing to sue of a stockholder to whom a proxy solicitation was addressed, but who had not given his proxy. There the Court of Appeals for the 6th Circuit stated (at p. 209):

"But does a stockholder who has not himself given a proxy pursuant to false and misleading solicitation have standing to assert such a right of action? . . . As we have noted above, the right sought to be protected by federal law is the right to full and fair disclosure in corporate elections. Therefore, it is not important whether or not the complaining stockholders were deceived -- they could suffer equally damaging injury to their corporate interests merely because other shareholders were deceived in violation of federal law."

 In support of its position, the court quoted from Professor Loss's "excellent article entitled The SEC Proxy Rules in the Courts" (pp. 1058-1059) to the effect that:

"The remedy is based not on any concept of the proxy attorney's violation of a fiduciary obligation to his principal, but on the premises that either side in a contested solicitation has a legitimate interest, in view of the statutory purpose, to cry 'foul' against the other."

 This view appears in accord with the "trend of recent decisions in the securities area which have favored a broad and liberal interpretation of the Act in order to eliminate any undesirable practices." Moore v. Greatamerica Corp., supra 274 F. Supp. at p. 492.

 It is apparent that the new sections of the Act were intended to protect both tenderers and non-tenderers. It is therefore clear that Burgess, except for the tendering by him of 128,000 shares, would fall within the class of persons intended to be protected by the Act.

 However, defendant claims that a chemical change occurred in Burgess' standing as a non-tenderer because his non-tendering continued after he became fully aware of the facts as presented in the evidentiary hearing before Judge McLean. The court does not agree. Burgess acquired his 1,000 shares innocently and cannot be deprived of his standing by virtue of the defendant's acts in revealing the facts of its behavior to him during the course of a lawsuit. To hold otherwise would be to leave in the control of violators the right to disqualify non-tendering stockholders from bringing suits against the violators for past deceptions merely by revealing the true facts thereafter. This is especially true where the revelations, as here, were not made voluntarily but in the course of litigation.

 The court therefore holds that Burgess has not lost his standing to sue under Sections 14(d) (1) and (e). Since, as in the case of the corporate plaintiff, he seeks injunctive relief only, and this is available to him under Section 14, it is unnecessary at this time to ...

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