Lumbard, Chief Judge, and Smith and Kaufman, Circuit Judges.
J. JOSEPH SMITH, Circuit Judge:
This is an appeal by Crane Company from a decision of the United States District Court for the Southern District of New York, Sylvester J. Ryan, Judge, entered June 5, 1968, dismissing, after trial on the merits, Crane's consolidated complaint which was brought to prevent the consummation of the proposed merger of Westinghouse Air Brake Company ("Air Brake") into American Standard, Inc. ("Standard"). We find error in part and reverse and remand for further proceedings consistent with this opinion.
In the first action of the two later consolidated, Crane sought to enjoin appellees from giving effect to proxies solicited by Air Brake from its shareholders in support of a proposed merger of Air Brake into Standard. The suit was founded on claimed misrepresentation of Standard's earnings, and on allegedly false and misleading statements of other facts in violation of sections 10*fn1 and 14*fn2 of the Securities Exchange Act of 1934 and Rules 14a-9*fn3 and 10b-5.*fn4
Crane's second action, which was consolidated with the first action for all purposes, was instituted against Standard and Blyth & Company, Inc. ("Blyth") under sections 9,*fn5 10 and 14 of the Exchange Act and Rules 10b-6*fn6 and 10b-5 and Regulation 14A,*fn7 the proxy rules, alleging that Blyth on Standard's behalf manipulated and rigged the price of Air Brake stock on the New York Stock Exchange at the expense of the merged entity for the purpose of deterring tenders of Air Brake stock under a Crane exchange offer.
Crane first proposed a merger of Crane and Air Brake to the Air Brake management on May 15, 1967. Crane thereafter first began substantial purchases of Air Brake stock on June 15, 1967. This was noticed by Air Brake's management.
On September 27, 1967, Air Brake received from A. T. Kearney & Company, Inc., independent management consultants, a report which concluded that there was no material compatibility of products between the Air Brake and Crane product lines. On November 3, 1967, Air Brake informed Crane that it did not wish to pursue any merger discussion with Crane.
By that time a beneficial owner of nearly 10 percent of Air Brake's outstanding stock, Crane embarked on a systematic program of purchasing Air Brake shares, despite the November 3 rebuff. Air Brake's management, desiring to prevent Crane from obtaining representation on Air Brake's board of directors, on December 7, 1967, changed the Air Brake by-laws to increase the minimum cumulative vote necessary to obtain representation on the board from 9.1 percent to 25 percent.
In mid-December, 1967, Air Brake requested Kearney & Company to analyze Crane's performance. Shortly thereafter, Mr. Devlin, chairman of Blyth & Company, investment bankers and representative of Standard, proposed to A. King McCord, chairman of Air Brake, that Standard would be interested in helping Air Brake resist the Crane takeover attempt. The Kearney report of January 15, 1968, analyzed the profits of both Crane and its largest competitor, Standard, and concluded that the trend of their earnings and profits was similar, and that the plumbing industry was less dynamic than the industry participated in by Air Brake.
On February 20, 1968, Crane filed its 14-B statements with the SEC declaring its intention to solicit proxies to elect directors to the Air Brake board. Air Brake immediately learned of this. On the same day McCord met with several of the Air Brake directors, and discussed the February 19 proposal of Blyth & Company to merge Air Brake into Standard by exchanging Air Brake stock for a Standard security worth approximately $50 per share. Air Brake's stock was then quoted at about $36 per share.
On March 4, 1968, seven of the ten Air Brake directors met in special session and agreed on the merger of Air Brake into Standard, substantially on the terms which McCord had reached in negotiations with representatives of Standard on March 1, 1968. On March 5 Air Brake informed its shareholders of the terms of the agreement and its approval thereof. Air Brake stock rose to $44 on the New York Stock Exchange.
During the week of April 8, 1968, Crane mailed to Air Brake stockholders its offer to exchange Crane stock and debentures totalling $50 in face amount for each share of Air Brake stock, the offer to expire on April 19 at 5:00 p.m., unless extended. During the same week, Air Brake mailed its proxy statement dated April 8 soliciting proxies in favor of the proposed Standard merger. On April 10, Air Brake stock was selling at about $49. During this week, Standard's purchases of Air Brake shares were substantial. On April 19, the day Crane's tender offer was to expire, Standard purchased 170,000 shares of Air Brake on the New York Stock Exchange at an average cost of $49.50 per share, and sold 100,000 shares off the market to Investors Diversified Services ("IDS") and 20,000 shares on the market at a negotiated price to Dillon Read at an average price of $44.50 per share, taking an apparent loss of more than $500,000 on its purchases and sales for the day.
Crane continued to accumulate Air Brake stock. By mid-April, Crane held about 15 percent of Air Brake's stock, 25 percent by the time of trial, and had increased its holdings to about 32 percent by the end of May, 1968.
The special meeting of Air Brake stockholders was convened on May 16, 1968. The proxy count ran heavily in favor of the Air Brake-Standard merger, 2,903,869 to 1,180,298, very few shares of Air Brake not owned by Crane itself being voted against the merger.
The trial in the District Court began on May 21, 1968, and continued for two weeks until June 3. Judge Ryan read his opinion into the record, and the court entered judgment dismissing the consolidated complaint on the merits on June 5, 1968. The merger became effective on June 7, 1968, upon which the former Air Brake stock was converted into shares of a new issue of Standard convertible preferred. Crane's 32 percent stock interest was converted into 740,311 shares of this preferred stock. On June 13, 1968, under threat of a divestiture action to be brought by Standard under the antitrust laws, Crane sold all but 10,000 of its shares of Standard, at a profit of several million dollars, and later disposed of all but 1,000 of the remaining shares.
STANDARD'S STOCK TRANSACTIONS
Crane attacked Standard's transactions in Air Brake stock on two grounds, one as illegal purchases of votes or proxies, the other as market manipulation and fraud in connection with the purchase and sale of securities. The first attack was pressed most vigorously below but was properly disposed of as unsupported in the evidence and is no longer pressed here.
Perhaps because of the pressure of circumstances and the heavy emphasis on the vote buying claim, the court denied relief with no extensive treatment of the market manipulation and fraud claims involving sections 9(a) (2) and 10(b) of the Act. Consideration of these claims in the light of undisputed evidence in the case leads us to a result contrary to that reached by the District Court.
MARKET MANIPULATION AND DECEPTION
While the main thrust of Crane's case below was in support of the claims of deceptive proxy statement and illegal vote buying, it also vigorously attacked Standard's market activities as forbidden manipulation and fraud in connection with the purchase and sale of securities. The record plainly supports this claim that Standard violated sections 9(a) (2) and 10(b) of the Exchange Act.
In the District Court, Crane maintained that Standard had been buying or selling Air Brake stock conditioned upon the granting or reservation of voting rights. The court found this claim unsupported.*fn8 Although Crane also alleged that Standard manipulated and inflated the market price of Air Brake with a view to frustrating the Crane tender offer, the District Court summarily rejected this claim.*fn9
The facts surrounding the manipulation of Air Brake stock by Standard are substantially free from dispute. The critical day in the take-over battle was April 19, the day Crane's tender offer for Air Brake stock was to expire. The holders of Air Brake stock could be expected to delay until the last moment in order to make a decision based on the latest market information, i.e., to compare the value of the tender offer, here not more than $50, with the market price on the day the offer was to expire. In fact, 85 percent of the shares tendered to Crane by the 19th were offered on that day. See Schmultz and Kelley, Cash Take-Over Bids -- Defense Tactics, 23 Bus.Lawyer 115, 124 (1967). On April 19, Air Brake opened at 45 1/4 on the New York Stock Exchange, giving Crane's tender offer a good prospect of success. The surest way to defeat the Crane offer ...