The opinion of the court was delivered by: TENNEY
Metro-Goldwyn-Mayer, Inc. (hereinafter referred to as "MGM"), a Delaware corporation having its principal place of business in New York, has moved herein for leave to file a supplemental complaint, pursuant to Rule 15(d) of the Federal Rules of Civil Procedure, directed against Tracy Investment Company and Kleiner-Bell & Co., Inc., to reflect the most recent developments in its controversy with defendant Tracy Investment Company and others growing out of the efforts by Tracy Investment Company (hereinafter referred to as "Tracy"), a Nevada corporation having its principal place of business in Las Vegas, to acquire working control of MGM through a cash tender of $35 per share to MGM stockholders. The shares of MGM involved herein are listed on the New York Stock Exchange. MGM has brought action to enjoin the tender offers and, based on its supplemental complaint, now seeks the equitable relief of a preliminary injunction enjoining the above-mentioned defendants from proceeding with such offers. MGM further seeks discovery with respect to matters set forth in its amended complaint. Before consideration of the merits and applicable law, a brief resume of this short but eventful controversy would appear to be in order.
On July 23, 1969, defendant Tracy published in The New York Times and the Wall Street Journal a tender offer to purchase 1,000,000 shares of the common stock of MGM. The financing for this tender offer was to be supplied in major part by a loan of $30,000,000 from defendant Transamerica Financial Corporation (hereinafter referred to as "Transamerica Financial"). The offer provided that the last day upon which the shares could be tendered was to be August 4, 1969, and the final day for withdrawal July 29th, but on July 26, 1969 the invitation was extended to August 8th with the last day for withdrawal August 6, 1969. Thereafter, MGM moved in this court for a temporary restraining order and preliminary injunction on the ground that Transamerica Financial was affiliated with United Artists Corporation, a major competitor of MGM, and that the loan arrangement would therefore violate Section 7 of the Clayton Act because Transamerica Financial would thereby obtain substantial influence or control over MGM.
On July 28, 1969, Judge Mansfield of this court granted a temporary restraining order, which order was extended on July 30th, and on August 2, 1969, at 303 F. Supp. 1344, he granted a preliminary injunction enjoining the transaction as then financed, placing certain restrictions upon any refinancing by Transamerica Financial and directing that if Tracy had any present plans for the financing of purchases of the common stock of MGM in excess of the 1,000,000 shares to which it was committed under the tender offer, it disclose such plans to the MGM stockholders, including a statement as to whether or not financing had been obtained to carry them out. Reference is made to the opinion of Judge Mansfield of August 2, 1969 for a more complete recital of the facts leading to the issuance of his order.
As a result of Judge Mansfield's order of August 2, 1969, on August 4, 1969 Tracy filed with the Securities and Exchange Commission Amendment No. 4 relating to its original tender, the tender offer was refinanced and the new arrangements were announced in the newspapers on August 5, 1969. Under these arrangements, Tracy was to obtain $20,000,000 in Eurodollars from Burkhardt & Co. (hereinafter referred to as "Burkhardt"), a German banking institution, and $12,000,000 in Eurodollars from Burston & Texas Commerce Bank Limited (hereinafter referred to as "Burston"), an English banking institution. These loans were both to be secured by pledges of securities in the amount of 150 per cent of the loan principal, with the further provision that part of the collateral might include the shares of MGM purchased pursuant to the tender offer. Furthermore, not more than one-half of the value of the collateral for the Burkhardt loan might consist of shares of an affiliate of Tracy, i.e., International Leisure Corporation (hereinafter referred to as "ILC"), a non-listed security. The amended tender as published on August 5th did not change the provisions regarding the date for withdrawal of shares, i.e., August 6, 1969. On the following day, August 6, 1969, Tracy announced that it would propose to seek an additional 740,000 shares of MGM stock, and in connection therewith Tracy filed an amendment to its previous tender offer, dated August 6, 1969, which revealed that a source of funds for the additional 740,000 shares would be a $30,000,000 Eurodollar loan from Burkhardt & Co. ("second Burkhardt loan"). An advertisement containing the terms of this latest offer appeared in the Wall Street Journal on August 7, 1969.
MGM contends that these offers as announced on August 5 and 6, 1969, violate Regulations G and T promulgated under Section 7 of the Securities Exchange Act of 1934, 12 C.F.R. §§ 220 et seq. and 207 et seq., and that as a result the plan of financing for the tender offers is illegal. It further alleges that the shareholders of MGM who tender their shares in reliance upon these said offers have been and will be misled as to a most material fact - the legality and reliability of the plan to raise the money with which to pay them and that such omission and misrepresentation violates Sections 14(d) and 14(e) of the Securities Exchange Act of 1934, the so-called "Williams Act." In addition, as heretofore noted, MGM seeks discovery to learn by the use of depositions and records whether defendants Tracy and Kleiner-Bell & Co., Inc., the Dealer-Manager (hereinafter referred to as "Kleiner-Bell") by virtue of their participation in the creation of this illegal financing arrangement have themselves violated Regulation T.
It seems quite clear that MGM has standing to maintain this action and to seek the injunctive relief requested herein. Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937 (2d Cir. 1969); Moscarelli v. Stamm, 288 F. Supp. 453 (E.D.N.Y. 1968); Serzysko v. Chase Manhattan Bank, 290 F. Supp. 74 (S.D.N.Y. 1968); Glickman v. Schweickart & Co., 242 F. Supp. 670 (S.D.N.Y. 1965). Moreover, the provisions of Rule 15(d) of the Federal Rules of Civil Procedure would appear to have been designed for such a case as this, involving a far from static situation and, accordingly, MGM's motion to file a supplemental complaint is granted in the exercise of the Court's discretion and without objection by defendants.
As heretofore stated, it is MGM's contention that the loans to finance the purchase under the tender offer are subject to and violate the provisions of Regulations G and T promulgated under Section 7 of the Securities Exchange Act of 1934, and that as a result the plan of financing for the tender offers is illegal.
The basis for the assertion of illegality is that security loans subject to Regulations T and G, the proceeds of which are to be used to purchase stock, must be secured by collateral five times the value of the loan. Regulation G provides that a lender may not loan for "purpose credit" in excess of the "loan value" of the collateral as prescribed for "margin securities."
" . . . extend or arrange for the extension of any purpose credit in an amount exceeding the maximum loan value of the collateral, as prescribed from time to time for margin securities in § 207.5 . . . or as determined by the lender in good faith for any collateral other than margin securities . . . ." 12 C.F.R. 207.1(c).
"Purpose credit" is defined as:
"Credit which is for the purpose, whether immediate, incidental or ultimate, purchasing or carrying a registered equity security is 'purpose credit', despite any temporary application of funds otherwise." 12 C.F.R. § 207.2(c) (1).
" Margin securities" include, inter alia, "any equity security which is registered on a national securities exchange." ...