The opinion of the court was delivered by: WEINFELD
WEINFELD, District Judge:
This action involves another "target" in the securities market, Armour and Company (Armour), whose control is sought by two contenders. The action is brought by Armour and one of its stockholders on behalf of themselves and other common stockholders (other than defendants) to enjoin the exchange of securities offered by the defendant General Host Corporation (General Host), one of the two contenders for the favor of Armour stockholders; also named as defendants with General Host are its principal officers and dealer-managers, who are charged with various violations of the Securities laws.
The thrust of the charges levelled against the defendants is a conspiracy to gain control of Armour, said to be ten times larger than General Host, through means of manipulative, misleading and deceptive practices to be effected by an exchange of Armour common stock for General Host securities, which plaintiffs contend are highly speculative.
On December 30, 1968, General Host filed with the Securities and Exchange Commission its registration statement (Form S-1) for the General Host debentures and warrants it proposed to offer to the shareholders of the Armour common stock. After the filing of amendments, the registration became effective on January 30, 1969. Under the prospectus General Host offered for each tendered share of Armour common stock, $60 principal amount of 7% subordinated debentures of General Host due 1994 and 2 1/2 warrants expiring in 1979 to purchase one share of General Host common stock at $40 per share. Under a change announced January 31, the debentures at principal amount may be used to pay the purchase price upon the exercise of the warrants for the General Host stock regardless of the debentures' market value at the time. General Host will not accept any tendered Armour securities unless, upon acceptance of such securities, together with its presently owned 16.5% shares, it would own more than 50% of all the outstanding shares of Armour common stock. The offer of General Host expires on February 14.
Realistically, although not a party to this litigation, but very much involved in it, is a wholly owned subsidiary of Greyhound Corporation (Greyhound), the other suitor for the favor of Armour stockholders. On January 28, 1969, Greyhound offered to purchase for cash 2 1/2 million shares of Armour, originally at $65 a share, increased to $70 a share following the General Host offer. The Greyhound cash offer expires on February 10, 1969. Armour's Chairman of the Board and his family have sold 500,000 shares of Armour to Greyhound, and he has notified all Armour shareholders to this effect and espoused the Greyhound proposal. That he and the Armour management, as well as its investment advisor, are opposed to the General Host offer and have resisted the efforts of that group to acquire control of Armour is stating a fact. The burden of their complaint, no matter how variously stated, is that the intrinsic investment value of the General Host securities being offered is substantially less than the value of the securities which the Armour stockholders are asked to exchange for their stock and that the prospectus fails to disclose information to that effect.
At immediate issue is an application for a temporary restraining order and for a preliminary injunction which would prohibit the defendants from taking any action to effect the exchange. A prior application for a temporary restraining order was denied by Judge Bryan on January 27, 1969, following which plaintiffs were given leave to take depositions with respect to the motion for a preliminary injunction. The deposition testimony resulted in a second application by plaintiffs for a temporary restraining order based on alleged violations of Rule 10b-6, which was heard by this Court together with the motion for the preliminary injunction. As is not unusual in matters of this kind, the motions were heard and the testimony of witnesses taken before the Court under trip hammer pressure -- with voluminous affidavits and hundreds of pages of depositions for the Court to consider in reaching a determination.
(1) The motion for a preliminary injunction:
The origin of the controversy goes back to August, 1968, when General Host purchased 150,000 shares of Armour common stock. Subsequently it made substantial purchases of the stock, the funds for which were obtained principally by the private placement of $47,900,000 of General Host 5% convertible subordinate notes, which were duly authorized at a special meeting of stockholders and in connection with which a proxy statement was previously issued. General Host filed with the Securities and Exchange Commission a Schedule 13D
as to its interest in Armour, and as it acquired additional stock, filed amendments to the schedule through to December 2, 1968. On November 25, 1968, Armour's counsel urged the SEC to investigate to determine whether General Host should be registered as an investment company. In early December, 1968, as a result of private and open market purchases, General Host owned 1,002,500 shares of the outstanding Armour common stock, approximately 16.5%, and became its largest stockholder. Also early in December, Armour's counsel conferred with SEC officials relative to General Host stock acquisitions, followed by a letter to the Commission's General Counsel in which the Armour counsel stated their belief that the 5% convertible note issue by General Host and the purchase of the Armour stock with the proceeds of the notes were the first step in a program to take over control of Armour. Counsel for Armour also charged General Host, admittedly upon hearsay, with violations of the Securities Exchange Act of 1934 and urged an investigation and action by the Commission.
On December 24, 1968, General Host issued a public release of its intended offer to acquire Armour stock, which was publicized in various newspapers. On December 27 General Host cleared with the SEC and mailed to its stockholders a proxy statement relative to a special meeting for the purpose of increasing the authorized capital stock of General Host and for approval of the exchange offer of 7% subordinated debentures and warrants for the exchange of the Armour common stock to be made to the Armour stockholders. And on December 30, 1968, as already noted, General Host filed with the SEC the registration statement covering the exchange offer. The prospectus included verbatim the material in the proxy statement to General Host stockholders.
Soon after the filing of the registration statement, Armour's counsel, on January 3, 1969, again conferred with SEC officials, following which they sent the Commission a detailed memorandum "in order that the Staff may consider carefully why we consider the proxy statement and the registration statement to be misleading both to the stockholders of General Host and to the offeree Armour stockholders." The memorandum contains specifications of alleged deficiencies, material misrepresentations and omissions which parallel the charges now made, as well as others.
In addition, it voices the opinion of counsel that General Host is now an investment company and that the proposed issuance of the 7% subordinated debentures and warrants would be illegal -- a charge also made here.
Armour counsel continued to press vigorously before the SEC what they termed the "gross inadequacies in the registration statement" and brought their contentions to the notice of the Commission's Chairman, "so that the staff review of the registration statement will not be carried out under any summary or accelerated procedure, and so that members of the Commission itself are aware of the material deficiencies in the registration statement."
The Chairman responded that the staff would undertake "to process the registration statement in a manner consistent with our responsibilities under the Act."
The deficiencies urged upon the Commission by Armour in opposition to the registration included: alleged misstatements or omissions as to the inadequacies of the offer; the subordinated and long term nature of the debentures; the lack of protective covenants restricting debt loans to others; investments in others and minimum working capital. Armour pressed that the debentures and warrants are unsound. It charged the unlikelihood that General Host would be able to pay principal and interest as due, based on (1) the projected cash flow of General Host after the exchange offer; (2) the net tangible assets of General Host after the exchange offer; (3) the terms of the debentures; and (4) the implications of the 1920 Packers' consent decree.
Every conceivable shortcoming of the offer or alleged fraudulent conduct, or claimed violations of the Securities acts, some claims going beyond those here presented, were advanced to the Commission in opposition to the registration. The charges were also submitted to State Blue Sky official bodies by memoranda similar to those presented to the Commission.
General Host, during the processing of the registration, either upon request of the Commission or upon its own initiative, submitted data, supplements, amendments and other matters as to questioned items and in support of the registration of the securities.
On January 23, following authorization by General Host stockholders for the exchange program, plaintiffs commenced this action and promptly sent a copy of the complaint to the SEC. Their resistance to the registration continued to the very day it became effective, January 30. Armour's opposition was not limited to representations before official bodies. Through the month of January, 1969, while the registration was being processed, Armour publicly attacked the General Host proposal, and its views were widely disseminated. The news media, based on press releases issued by the Armour group, published the specific claims that it was very unlikely General Host would be able to pay principal and interest on the subordinated debentures; that the value of the warrants was illusory, and that the tax consequences to Armour stockholders would be adverse. A full-page advertisement addressed to Armour stockholders by the Chairman of the Armour board, published in the Wall Street Journal, the New York Times and other news media throughout the country, denigrated the ...