Moore, Friendly and Feinberg, Circuit Judges. Feinberg, Circuit Judge (concurring and dissenting).
This the first case in which we or, so far as we are aware, any court of appeals has had to consider the amendment adding to § 14 of the Securities Exchange Act new subsections (d), (e) and (f) dealing with tender offers. Public Law 90-439, § 3, 82 Stat. 455 (1968). The amendment, which should be read in conjunction with the concurrent addition of § 13(d) and (e), proceeds along two general lines. The first is embodied in § 14(d) and (f). Broadly speaking, these provide that if on consummation the offeror will own more than 10% of the securities for which the offer is made, it must file an initial statement with the SEC and subsequent solicitations in favor of or against the offer must also be filed. If a majority of the board of directors are to be replaced without a shareholders' meeting, the issuer of the securities must file the information required by the Proxy Rules. Tenderers are given a brief period within which to change their minds, and the offeror must complete the purchase within a given time or allow tenderers to withdraw. Other provisions, not here relevant, deal with offers for less than all the outstanding securities and with changes in the offer. The second prong of the amendment is § 14(e). In effect this applies Rule 10b-5 both to the offeror and to the opposition -- very likely, except perhaps for any bearing it may have on the issue of standing, only a codification of existing case law. See Jennings and Marsh, Securities Regulation: Cases and Materials 912 (2d ed. 1968). The SEC moved promptly to implement the amendment by regulations, see SEC Regulations 13D and 14D.
The facts are extensively set forth in the opinion of Judge Lasker in the District Court for the Southern District of New York, 295 F. Supp. 1063, announcing the judgment here under appeal and in an earlier opinion by Judge McLean of that court, 296 F. Supp. 462. We shall confine ourselves at this point to those essential as background and leave others to be related when we discuss points raised on the appeals taken by both sides.
Plaintiff Electronic Specialty Company (ELS) is a California corporation, manufacturing electronic and aerospace components and systems. Its 1,800,000 outstanding shares of common stock are listed on the New York Stock Exchange. Defendant International Controls Corporation (ICC) is a Florida corporation, with its principal office in Fairfield, New Jersey, manufacturing valves, controls, and computer and aircraft parts, and operating airports. Its stock is listed on the American Stock Exchange.
In the first part of 1968 ICC had engaged in a large financing program designed to produce excess cash that could be used for acquisitions. By July 22, 1968, it had some $39,000,000 available for this purpose. It also had discussed with Bank of America the obtaining of a line of credit to facilitate such purchases. ELS was ultimately selected as the most desirable initial prospect. Smith, Barney & Co., whom ICC had consulted, advised Vesco, ICC's president, to acquire something less than 10% of ELS' stock prior to initiating merger negotiations.*fn1 On July 23 Vesco authorized Butlers Bank of Nassau, The Bahamas, to purchase 100,000 shares at prices less than $40 per share. It had bought 43,500 shares by July 25 when Vesco instructed it to stop buying, since he was meeting plaintiff Burgess, chairman of ELS, in Los Angeles the next day. Meanwhile Bank of America extended a $15 million line of credit and agreed to act as agent in a tender offer.
Meetings of officers of the two companies and their investment advisers were held first in Los Angeles and then in New York over the next few days. ICC's board of directors met on the afternoon of August 1. Reiterating earlier opposition to a tender offer that management would oppose, it authorized Vesco to negotiate with Burgess for a merger on a basis reflecting past market prices or, in the alternative, to negotiate for a tender offer that ELS' management would not oppose; failing either of these solutions, Vesco was to attempt to sell ICC's 43,500 shares to ELS. On Friday, August 2, apparently responding to a report in the Wall Street Journal of July 31, of which more hereafter, ELS stock reached an all-time high of 42 7/8 on a volume of 117,600 shares. Smith, Barney advised against proceeding with a tender offer since they thought the price had gone too high. Vesco agreed, believing that ELS' management would not endorse an offer and, indeed, that it had been instrumental in driving the price of the stock up to a prohibitive level.
On August 3, Burgess told Vesco for the first time that ELS had been engaged in talks with another corporation and that these were expected to culminate in a merger to be announced that week. As a result of discussions on August 3 and 4, an oral agreement was made whereby ELS would purchase from ICC up to 50,000 shares of ELS stock at $42 per share.
At 9:48 A.M. on Monday, August 5, the Dow Jones tape reported an agreement to merge ELS and Carpenter Steel Co.*fn2 Trading in ELS stock failed to open until 11:30 A.M., apparently because of heavy sell orders. At 10:11 A.M., the tape carried a report that Vesco had said ICC had broken off merger discussions with ELS and had no present plans to use its funds for an ELS tender offer; the report also referred to the Carpenter-ELS announcement. When ELS opened, it was at 38 1/2, off 3 1/2 from the Friday close; Carpenter, on the other hand, traded higher than its previous close. The investment advisers of both ELS and ICC thought the Carpenter deal was worth only $36-$38 to ELS stockholders, and witnesses from Smith, Barney anticipated that the market would discount this by some 10%.
ICC's general attorney told Vesco on Monday that he doubted ICC could compel ELS to go through with the purchase of ICC's shares. On Tuesday Vesco placed a day order to sell up to 10,000 shares at a $35 limit; 5,400 shares were sold. Further discussions took place between ICC and ELS about the latter's acquisition of the former's ELS shares but these were inconclusive, each side charging the other with bad faith. On August 15, in reporting on ICC's acquisition of shares of another company, the Wall Street Journal purported to quote something about ELS said by Vesco early on August 13, which we will discuss below.
ICC's directors met again on the evening of August 13. Vesco reported the facts here outlined, and the views of brokers that, given the market's unfavorable reaction to the ELS-Carpenter merger, a cash tender offer might be well received even though ELS' management opposed it, and his belief that this should be reconsidered by the board. Instructing Vesco to consult with Smith, Barney, the ICC board directed that no tender offer should be made until the following week and until such consultation had been had. He was to call a board meeting later in the week if he concluded that a tender offer should be made.
On August 14, ICC sent a telegram to ELS designed to probe the latter's willingness to go through with the purchase of ICC's shares; there was no response. The volume of ELS stock traded on August 15 and 16 was subnormal, and the stock reached a low of 33 1/8. On August 15, Vesco concluded that it would be advisable to recommend a tender offer to his board. Smith, Barney declined to act as dealer-manager, being fearful of possible implications of the August 15 Wall Street Journal article and ICC's August 6 sale of stock, but another firm agreed to act. On Saturday, August 17, ICC's board of directors approved the making of a tender offer on Monday, August 19. Filing with the SEC under § 14(d) (1) of the Securities Exchange Act having already been made, ICC published an offer on August 19 to buy up to 500,000 shares of ELS at $39 per share.*fn3 The offer was to expire on September 3 unless extended and any tendering stockholder could withdraw at any time before August 26, see § 14(d) (5).
Events took a predictable course. ELS' management first telegraphed and then wrote stockholders and issued a statement to the press advising them against accepting the offer; it also filed charges against ICC with the Securities and Exchange Commission. Discussion centered on the adequacy of a statement in the tender offer and in the SEC filing that "Upon completion of this Offer, the Company will give consideration to a merger between itself or a subsidiary and Specialty." ICC was then considering the publication of a second advertisement and the filing of an amended Schedule 13D. These, which were filed on August 23, added the words "on the basis of the relative market prices of the common stock of the respective companies during a representative period." The amended advertisements were published on August 25 and 26.
This action was brought on August 27. The plaintiffs were ELS; Burgess, owner of a large number of ELS shares, who had then tendered none and sought to sue on behalf of all holders of ELS common stock and convertible debentures; and Fitzpatrick, who had tendered 100 shares of common stock and sought to sue on behalf of all who had tendered common stock or debentures.*fn4 On ICC's representing that it would not accept or pay for stock until the close of business on September 3, a temporary restraining order was denied. On September 3, ICC extended the offer to September 6. By the latter date it had received transmittal letters covering somewhat more than 500,000 shares, but many of these merely guaranteed subsequent delivery of the securities. Pursuant to authorization by its directors on September 6, ICC announced on Monday, September 9, that it would extend the offer to Thursday, September 12, and would accept all shares tendered.
Judge McLean conducted a hearing on plaintiffs' application for a temporary injunction on September 6, 9 and 10. The next afternoon ELS sent out a communication to stockholders that if the court should deny plaintiffs' motion, it appeared probable that ICC would obtain working control; that accordingly it was the intention of Burgess, Harmon (President of ELS), and other key officers "to immediately tender their shares and to resign, when and if International Controls Corp. exercises control"; and that management must now withdraw its "former recommendation that you not tender your shares" since it was "unable to predict what will happen if the company is taken over by International Controls Corp." The Dow Jones tape on the afternoon of September 11 and the Wall Street Journal of September 12 characterized this as a declaration of Burgess' and Harmon's intention to resign if the district court denied the injunction.
On the morning of September 12 it did. Judge McLean found no merit in plaintiffs' contentions that the tender offer was materially misleading in allegedly failing to state that ICC and persons acting in concert with it sold a substantial number of ELS shares and did other acts to lower the market price in order to make the $39 offer more attractive, in failing to disclose ICC's agreement to sell 50,000 shares to ELS and its alleged repudiation of this, and in stating ICC had no arrangements with any person with respect to any security of ELS except as stated in the offer. He faulted ICC for the bareness of the statement with respect to merger in the initial offer, see SEC Reg. 14D, Rule 14d-1(c), on the ground that "ICC did have a definite plan to merge ICC and ELS on a share for share basis," which, if viewed from the standpoint of past earnings rather than market prices, would have been disadvantageous to ELS stockholders. He thought also there was a reasonable probability that plaintiffs might ultimately prevail under § 14(e) with respect to Vesco's statement of August 13 to the Wall Street Journal. However, balancing the hardships to ICC and to ELS stockholders who had tendered or wished to tender against the lack of injury to plaintiffs in view of the availability of other relief, such as a later injunction against the voting of the stock, see Symington Wayne Corp. v. Dresser Industries, Inc., 383 F.2d 840, 843 (2 Cir. 1967), he denied a temporary injunction on condition that the action be tried at the October term of the court.
Some 570,642 shares of ELS stock and $1,191,000 of convertible debentures were tendered during the day. The former included 129,810 of Burgess' 130,810 shares and 27,765 owned by Harmon. The result of this unexpected burst of tenders, undoubtedly prompted in no small part by management's communication to ELS security holders and the slightly exaggerated account of it in the financial media, was that at the end of the offer the equivalent of some 1,200,000 shares of ELS stock had been tendered -- considerably more than ICC expected or wished.
On September 16 ICC forwarded checks aggregating some $48,000,000 in payment for the tendered shares and debentures. These were accompanied by an offer permitting any tenderer (other than Burgess and Harmon) to withdraw before September 24. Appended to the withdrawal offer were copies of the complaint in this action and of Judge McLean's opinion. Only some 1,100 shares were withdrawn. The small amount of withdrawals may have been due in part to ELS' release, on September 20, of figures showing a drop in earnings for the first half of the year from $2.1 million to $1.4 million or, on a per share basis, from $1.11 to $.74.*fn5
The action was tried before Judge Lasker for 12 days. He upheld the standing of ELS and of Burgess but granted ICC's motion for summary judgment with respect to Fitzpatrick on the ground that ICC's withdrawal offer barred any claims of tendering stockholders. He held the Schedules filed with the SEC could not be faulted for denying any arrangements with other persons with respect to ELS shares or for failing to disclose an intention to use ELS' cash or credit to enable ICC to repay Bank of America -- claims not pressed by plaintiffs on this appeal. He disagreed with Judge McLean's criticism of the statements with respect to merger. He concluded that ICC had violated both Rule 10b-5 and § 14(e) in that it had misled ELS and the public about its intention to make a tender offer, had made misleading statements about its intention to sell or not to sell its ELS holdings, and had "at the very least allowed the financial media to publish and republish what it knew to be a false statement as to the actual number of shares which it held in ELS." On the other hand, he declined either to order divestiture or to enjoin voting, and held there was no occasion for directing an offer of rescission since the withdrawal offer had afforded equivalent relief. But he issued an injunction to provide against further violations and for the continued prosecution of the action by present counsel for ELS and Burgess, and directed under F.R.Civ.P. 23(c) that the action be maintained by Burgess as a class action on behalf of ELS' stockholders and debenture holders, reserving questions with respect to the definition of the class, the form of notice, and so forth.
Having been informed of this appeal, the judge, at plaintiffs' request, adjourned the ELS stockholders' meeting that had been scheduled for December 30, 1968, to January 28, 1969. We expedited the appeal. Plaintiffs complain that, having found the issues in their favor, the district court failed to afford them ...