The opinion of the court was delivered by: MANSFIELD
MANSFIELD, District Judge:
Metro-Goldwyn-Mayer Inc. ("MGM"), a Delaware corporation having its principal place of business in New York, is the target of efforts by Tracy Investment Company ("Tracy"), a Nevada corporation having its principal place of business in Las Vegas, to acquire working control of MGM through a cash tender offer of $35 per share to MGM stockholders for 1,000,000 MGM shares (listed on the New York Stock Exchange) or approximately 17% of MGM's outstanding shares. Purchase of the shares pursuant to tenders would cost Tracy $36,500,000, of which $30,000,000 is to be provided by a loan from Transamerica Financial Corporation ("Financial"), a wholly owned subsidiary of Transamerica Corporation ("Transamerica").
MGM has moved for a preliminary injunction restraining Tracy, Financial, Transamerica, and Kleiner-Bell & Co., Inc. ("Kleiner-Bell"), the dealer-manager, from proceeding with the cash tender offer, accepting tenders, or otherwise acquiring MGM stock.
The root of the controversy lies in the fact that the cash tender offer is being financed by Financial, whose parent, Transamerica, owns 99.6% of United Artists Corporation, a major competitor of MGM. MGM claims that defendants' conduct amounts to a combination and conspiracy in violation of § 1 of the Sherman Act, 15 U.S.C. § 1; that the tender offer, if successful and consummated, would have the effect of restraining trade and commerce in violation of § 7 of the Clayton Act, 15 U.S.C. § 18; that the statement filed by Tracy with the Securities & Exchange Commission and its invitation for tenders violates §§ 14(d) and 14(e) of the Securities Exchange Act and regulations thereunder. 15 U.S.C. §§ 78n(d), (e) (also referred to as the Williams Act); and that the role played by Transamerica and Financial in this transaction constitutes unfair competition.
Following our issuance of a temporary restraining order at 4:55 P.M. on July 28, 1969, affidavits were submitted by the parties and on July 30, 1969 the motion for preliminary relief was brought on for a hearing at which counsel for plaintiff, Tracy and Financial were heard. Neither side sought to offer additional proof, or to cross-examine those subscribing to affidavits introduced by the other. On this record we conclude that preliminary relief, to the limited extent set forth below, is warranted; otherwise the motion is denied.
The essential facts, as revealed in the papers submitted by the parties and upon oral argument, are not in substantial dispute. Transamerica, a conglomerate, is engaged in the business of providing services in various fields, including insurance, financing, motion pictures, television, theatrics, education, real estate, travel and certain manufacturing operations. Its wholly owned subsidiary Financial, as its name suggests, conducts a finance business engaged primarily in consumer lending, financing of retail, automotive and installment sales, plus some commercial financing, the latter of which has accounted for 15% of its gross business.
Tracy is engaged principally in the ownership and operation through affiliates and subsidiaries of the Flamingo Hotel and International Hotel in Las Vegas, Nevada. Its sole stockholder is Kirk Kerkorian, Chairman of its Board.
On July 17, 1969, Financial and Tracy executed a "Memorandum of Intent" whereby Financial agreed to lend up to $30 million to Tracy for a period of nine months for the purpose of enabling Tracy to acquire shares of stock in a company listed on the New York Stock Exchange. At that time neither Transamerica nor Financial knew that Tracy planned to use the proceeds to purchase MGM stock. The finalized loan agreement was executed on July 24, 1969, and although it did not refer specifically to MGM, it was known to Financial by that date that the proceeds were to be used to purchase MGM shares. On July 22, 1969 a statement with respect to the tender offer was filed with the SEC pursuant to § 14(d). Amendments were subsequently filed on July 24, 25 and 28. The invitation for tenders was first published on July 23 and advertisements appeared in the New York Times and Wall Street Journal on that date. It provided that the last day upon which shares could be tendered was to be August 4, 1969 and the final day for withdrawal July 29. On July 28, 1969 the invitation was extended to August 8, with the last day for withdrawal August 6. On July 29 advertisements appeared in the New York Times, the Wall Street Journal, and the Los Angeles Times announcing the extended invitation and incorporating certain information added to Tracy's § 14(d) statement by amendment No. 3.
Under the loan agreement as consummated on July 24, 1969, Financial agreed to make a fully secured loan to Tracy of up to a maximum amount of $30 million, the proceeds to be used solely for the purchase of securities listed on the New York Stock Exchange and the loan to mature on May 4, 1970. According to a formula set forth in the agreement, the rate of interest was to be about 3 1/2% above the prime interest rate, which would amount, at current prime interest rates, to a total rate of approximately 12% per annum. The agreement contains no restrictions on Tracy's capital, existing or future borrowings, credit arrangements, business or operations. Until default Tracy would retain voting control over shares to be acquired or pledged as collateral. Except for rights given to Financial with respect to collateral in the event of default, the agreement does not give Financial any control of Tracy or any rights with respect to its business or its actions as a stockholder of MGM. The loan was to be personally guaranteed by Kirk Kerkorian, Tracy's Board Chairman and sole shareholder, who swears in an affidavit that he has a present net worth in excess of $250 million.
Turning to the collateral provisions of the loan agreement, which MGM contends to be of particular significance upon this motion, Tracy agreed to pledge and deliver to Financial, as security for repayment of the loan, 4,347,827 shares of the common stock of International Leisure Corporation ("ILC"), a Nevada company whose shares are traded over-the-counter, together with such shares as would be acquired by Tracy through use of the loan proceeds, which of course, would include the MGM shares to be acquired by Tracy pursuant to the proposed tender offer. The agreement further provided that if the bid price of the ILC stock should decline to less than 3 1/3 times the total loan commitment, Tracy would pledge and deliver additional shares of ILC stock or cash sufficient to re-establish the 3 1/3 ratio. It was further agreed that in the event of Tracy's default Financial could look to either Kerkorian personally, the ILC shares, or the MGM shares, and was empowered to purchase the MGM shares for its own account or sell them by way of foreclosure at a private or public sale. Until default Financial was to have no right to vote the collateral, including the MGM stock, prior to default.
ILC, owner of certain resort properties, is a Nevada corporation controlled by Tracy and Kerkorian. The 4,347,827 ILC shares pledged by Tracy with Financial to secure the loan represent 82% of ILC's outstanding stock. The stock is traded over-the-counter to the extent of transactions on the part of the owners of the remaining 18%, and it was on the basis of its quoted over-the-counter price that the 82% pledged with Financial was valued at five times the amount of the $30 million loan. Since the 82% was owned by a control person, registration under the Securities Act would be required as a condition to a foreclosure sale of the collateral by Financial. Apparently with this possibility in mind Tracy agreed in the loan agreement to use its best efforts to prepare and process any registration statements that might be required.
Except for the loan agreement there is no evidence of any present business relationships, agreements or arrangements between the Tracy-Kerkorian interests and Transamerica or any of its subsidiaries or affiliates. For a period of about one year up to approximately six weeks ago, Kerkorian, the chairman and sole stockholder of Tracy, owned approximately 3% of the outstanding stock of Transamerica, worth about $86 million and making him its largest single stockholder. He has never been an officer or director of Transamerica, however, and presently owns no interest in it.
The invitation sent by Tracy to MGM stockholders for tender of 1,000,000 common shares of MGM, as extended, states that Tracy's purpose is to "acquire working control" of MGM and to seek appropriate representation on its Board and in its management. It further discloses that Kerkorian is Tracy's sole stockholder and chairman, and that of the $36,500,000 required for consummation of the stock purchase, $30,000,000 will be obtained by loan from Financial, guaranteed by Kerkorian and secured by pledge of securities including the tendered shares. The invitation does not, however, reveal Transamerica's control of United Artists Corporation or that the latter is a major competitor of MGM.
It is against the foregoing background that we consider the various grounds urged by MGM in support of preliminary injunctive relief, which may be invoked by the target corporation, Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937 (2d Cir. 1969). The function of such relief is to maintain the status quo pending final determination of the merits, Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 742 (2d Cir. 1953), and it should be granted only upon a clear showing of probable success and irreparable injury. Clairol, Inc. v. Gillette Co., 389 F.2d 264, 265 (2d Cir. 1968), or, where the balance of hardships tips sharply toward plaintiff, a showing that serious questions going to the merits are raised that warrant a more deliberate investigation and trial. Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323 (2d Cir. 1969). On the one hand, we must be leary of trumped up or trivial charges; on the other, we must recognize that in the early stages of a dispute varieties of relief may sometimes be fashioned to avoid irrevocable harm that cannot be remedied later for the reason that by that time it has become impossible to "unscramble the eggs." Electronic Specialty Co. v. International Controls Corp., supra at p. 947.
MGM's case, whether asserted in terms of the Sherman, Clayton or Securities Exchange Acts, is founded on the premise that it is wrong for one competitor (the Transamerica-United Artists group
) to finance the acquisition of working control of another (MGM), or even to become a major creditor of a company acquiring such control (Tracy), particularly without full disclosure of these relationships. Such an arrangement, MGM argues, should be restrained for the reason that its effect, regardless of the parties' intent, "may be to substantially lessen competition" in violation of § 7 of the Clayton Act; and, in view of the competitive threat posed, the ...