The opinion of the court was delivered by: FRANKEL
On November 11, 1969, Donald W. Nyrop, President of Northwest Airlines, Inc., and George B. Storer, Chairman of the Board of Northeast Airlines, Inc., were reported in a joint press release to have reached "agreement in principle for a merger of the two airline companies." The release pointed out that Mr. Storer was Chairman of the Board of Storer Broadcasting Company, which owns 86% of the stock of Northeast. It was also stated that the proposed merger would leave Northwest as the surviving company, and that shareholders of Northeast would receive one share of Northwest common stock for each five shares of their Northeast. Finally, it was stated that consummation of the merger "was subject to a number of conditions, including the execution of formal documents and approval of the Civil Aeronautics Board, as well as approval by the Board of Directors of the parties and by the stockholders of Northeast and, if required of Northwest Airlines."
On the following day, another press release gave additional facts about the proposed merger. It was reported, inter alia, that on this day, November 12, the Storer board of directors had "approved the preliminary agreement at its regular quarterly meeting;" that the Northwest stock to be received by Storer for its 86% share of Northeast would not be entitled to dividends for three years after consummation of the merger, but that the minority Northeast shareholders would not be similarly disentitled; that a $10,000,000 indebtedness of Northeast to Storer for loan advances would be repaid with interest by Northwest upon conclusion of the merger, either in cash or in Northwest common, dividend-paying stock at the rate of $35.50 per share, at Northwest's option; and that Northeast losses, if any, "after October 31, 1969 to the date of consummation," would be borne by Storer, to the extent of 75% up to $8,000,000 and 100% above that figure, by a reduction in the number of Northwest shares payable to Storer, again computed on the basis of $35.50 per share.
Superficially at least, the proposed one-to-five exchange ratio was a thought-provoking feature of the announced agreement. On November 11, the day of the first announcement (following stock exchange hours), Northeast stock closed at 13 7/8 while Northwest closed at 35, a ratio of about one to 2 1/2. Upon the basis of these market prices, Northeast stock (both the 86% held by Storer and the 14% held by others) appeared to have twice the relative value assigned to it in the merger deal.
Perhaps not surprisingly, the market price of Northeast stock dropped sharply after the announcement of the proposed merger. A large influx of orders to sell at the opening on November 12 led to a suspension of trading for that day. On November 13, the stock opened at 9 1/4 and closed at 8 7/8, off five dollars from its closing price of November 11.
At the same time the price of Storer Broadcasting stock rose appreciably, from $35 to $45 on November 12, then dropped back to $40 by the end of the trading on November 13.
While the evidentiary materials before the court at this stage are not sufficient for exhaustive or refined analysis, it appears to be essentially undisputed that Storer's 86% interest in Northeast had been a costly burden, and that investors could have viewed the projected surcease as a boon enhancing the value of Storer stock.
Upon the foregoing facts alone, the step leading to the court's present concerns might have been predicted: the plaintiffs herein - Northeast shareholders since, respectively, December 1965 and September 1969 - brought this latest in the increasing roster of suits under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5.
Acknowledging that Storer's 86% share of Northeast stock assures approval of the merger by their company, plaintiffs have proceeded against George B. Storer, Sr., Storer Broadcasting, officers and directors of Storer Broadcasting and Northeast, and both Northeast and Northwest for equitable relief to correct an alleged course of false statements and material omissions said to have occurred in violation of the cited statute and rule. In addition to describing the press releases of November 11 and 12 and the ensuing stock price fluctuations, the complaint charges that defendants George B. Storer, Sr., and Storer Broadcasting "dominate and control" Northeast and the other Northeast directors named as defendants. It is alleged that the defendants have conspired since December 1968 to engage in a course of false statements, omissions and other deceitful actions to the injury of Northeast and its public stockholders. The allegedly unlawful objectives are said [par. 12(i)] to have included market manipulations to compel minority stockholders like the plaintiffs "to sell their Northeast stock to Northwest at prices substantially below the prices which the plaintiffs and other public shareholders would otherwise sell their Northeast stock if certain material facts * * * had been disclosed to them * * *." Also, it is said, id. (ii), that defendants purposed "to force the minority shareholders of Northeast to accept a plan of merger with Northwest on terms which would operate exclusively for the benefit of Storer Broadcasting and Northwest at the expense of the minority shareholders of Northeast." The complaint goes on to allege a number of details in the asserted conspiracy which have either been refuted or forgotten for the time being,
and which are not in any case of special interest now.
Our direct and immediate concern is plaintiffs' motion for a preliminary injunction to restrain defendants
"(a) from making false and misleading statements or omitting to disclose fully and accurately all material facts in violation of Section 10(b) * * * and rules and regulations thereunder, in connection with the sale by Storer Broadcasting * * * of its 86% interest in Northeast * * * to Northwest * * * or otherwise in connection with a proposed merger of Northeast into Northwest;
"(b) from making any public report or statement concerning the proposed merger * * * until there is furnished to all of the minority stockholders of Northeast full and complete information as to specified matters alleged to have been subjects of false statements or material omissions; and
"(c) enjoining Storer Broadcasting and its Chairman and principal stockholder, defendant George B. Storer, Sr., from holding a meeting of the board of directors of Northeast or a meeting of shareholders of Northeast for the purpose of approving the merger pending decision of the instant motion or a trial of the action. "
In addition to the information upon which the action and motion for preliminary relief were instituted, plaintiffs have been permitted, under the court's directions, to obtain discovery to buttress their claim for an injunction pendente lite. Documents have been produced by defendants under Fed. R. Civ. P. 34. Defendant Bill Michaels, President of Storer Broadcasting, gave deposition testimony for two days. Earlier, plaintiff Stedman was deposed by attorneys for Storer Broadcasting. These evidentiary materials, plus the familiar array of affidavits (containing few, if any, factual disputes of consequence) have been treated by both sides as a sufficient evidentiary basis for the court's determination of the preliminary injunction motion.
Upon the factual foundation thus laid, the parties have mounted several levels of legal argument - as to the adequacy of the complaint to state a claim, the standing of plaintiffs, and some old-fashioned notions about equity which nobody yet suggests have gone out of style. Enlightened by all this, the court has found nevertheless that defendants' first line of defense, on the facts, is substantially decisive at this stage. Whatever may happen if the case proceeds through a plenary trial and final decision, the factual showing now tendered as a basis for injunctive relief is entirely insufficient. The claims of falsity and material omission appear to be almost wholly unfounded or beside the point or both. The likelihood of ultimate success in this fundamental area of fact is too thin to justify any measure of the drastic relief plaintiffs seek. When this deficiency is considered with the competing equities - including the lack of any temporal emergency and the narrowly monetary character of plaintiffs' hurt - the court is compelled to deny the motion.
The simplest way to explain the court's critical determination as to the facts is to consider seriatim the eight items plaintiffs present as comprising "the heart" of the case.
In the discussion which now follows, each of ...