The opinion of the court was delivered by: MANSFIELD
MANSFIELD, District Judge.
This derivative and representative stockholders' action on behalf of Gulton Industries, Inc. ("Gulton"), seeks to enjoin consummation of an agreement between Gulton and Nytronics, Inc. whereby Gulton is to acquire 650,000 shares, or 20.4% of its own common stock from Nytronics in exchange for $5 million and certain assets of Gulton. Plaintiff, the owner of 100 Gulton shares, moves for a preliminary injunction barring the holding of a meeting of Gulton stockholders for the purpose of approving the Gulton-Nytronics agreement.
The underlying suit, apart from a common law claim against Gulton's directors for breach of fiduciary duties and corporate waste, is based upon alleged false and misleading statements contained in proxy materials distributed by Gulton to its shareholders, which are claimed to violate §§ 10 and 14 of the Securities Exchange Act and SEC Rules 14a-9 and 10b-5.
On April 29, 1969, after some six months of intermittent discussions between Gulton and Nytronics about the possibility of a merger of the two companies, Nytronics agreed to purchase a block of 650,000 shares of Gulton common stock from Leslie K. Gulton, then Chairman of the Board and chief executive officer of Gulton, his wife, Edith Gulton, a Gulton director, and the Gulton family foundation. Nytronics agreed to pay $35 per share, or an aggregate of $22,750,000, plus a warrant to purchase one-third share of Nytronics common stock at a price of $30 per full share for each share of Gulton stock. The sale to Nytronics was completed on May 29, 1969.
Following its purchase of the 650,000 shares, Nytronics informed the Gulton board of directors that it wanted to designate six of the eleven seats on the board. Gulton refused, and instead proposed that Nytronics designate three representatives for election at the June 30 stockholders' meeting. Three Nytronics representatives were accordingly elected to the Gulton board.
At the time of the April 29 agreement, and on several occasions thereafter, Nytronics publicly announced its intention to make a comparable exchange offer to the remaining Gulton shareholders. On May 5, Gulton authorized Lehman Brothers to investigate the advisability of a merger of Gulton and Nytronics. Lehman Brothers advised against the proposal in a report with which all of Gulton's directors later concurred.
Because of the attitude of Gulton's directors and a substantial drop in the market price of Nytronics' stock, Nytronics decided in late July or early August not to make an exchange offer for the remaining Gulton shares. After the possibility of a cash tender offer was considered and discarded because of the high cost of financing, Nytronics made unsuccessful attempts over a period of four to six weeks to sell its block of Gulton shares.
During the late summer discussions between representatives of Gulton and Nytronics turned to the possibility of Gulton's purchasing the block of 650,000 of its shares held by Nytronics. It appears that the members of the Gulton board of directors, other than the three Nytronics representatives, were unaware of attempts made by Nytronics to sell the shares elsewhere. Negotiation proceeded on the basis that Gulton would give operating assets in exchange for the stock, and that approximately 20% of Gulton's earnings potential should be given as consideration for the 20% block of stock in question.
At least five operating divisions of Gulton were considered for inclusion in an asset package to be exchanged for the Gulton shares. After a number of combinations proposed by Nytronics had been rejected by Gulton, it was finally agreed, on October 14, 1969, that the consideration to be given for the shares would be two Gulton divisions - Continental Wire & Cable Corp. and Sage Electronics Corp. - plus $5,000,000 in cash. The formal agreement incorporating this understanding was approved by Gulton's Executive Committee on November 10, and executed on November 12, 1969. Although the management of Gulton is not obligated to recommend approval of the agreement to Gulton's shareholders, the latter must approve the transaction at a special meeting called for the purpose before the agreement can take effect. Gulton accordingly issued and mailed to its stockholders a 52-page proxy statement with a notice of special meeting of stockholders to be held on February 18, 1970, for the purpose of securing stockholder approval of the proposed repurchase and retirement of the 650,000 Gulton shares.
On January 30, 1970, plaintiff commenced this action, moving on February 16 by order to show cause for a preliminary injunction preventing the holding of the meeting scheduled for the 18th. Upon argument of the motion on February 17, defendants agreed to adjourn the meeting to March 24 and to issue supplemental proxy material which they believed would meet the objections to the original proxy statement raised in plaintiff's complaint. Further argument on plaintiff's request for a preliminary injunction was held in abeyance pending the issuance of such material.
Defendant Gulton had already, on February 9, sent a one-page letter to its shareholders describing and briefly rebutting the major allegations of the January 30 complaint and enclosing a new proxy. Following plaintiff's amendment of his complaint on February 20, Gulton sent to each of its stockholders an eight-page letter, dated March 10, setting forth certain financial information not contained in the original proxy material. In addition, five pages of the letter were devoted to quoting plaintiff's contentions as to the false and misleading character of the original proxy statement and furnishing information and reasons in rebuttal. Again a superseding proxy card was enclosed. Plaintiff, however, was not satisfied, and the motion for a preliminary injunction was accordingly argued on March 17. We deny the motion for the reasons detailed below.
Plaintiff's fundamental objection to the proposed purchase of Gulton shares is that the consideration to be given therefor is grossly excessive, particularly in light of a substantial decline in the market value of the shares since the date of the agreement for their purchase. On October 14, 1969, the day on which the agreement in principle was reached between Gulton and Nytronics, the market value of the 650,000 shares to be acquired was $14,706,250. By February 9 this figure had dropped to $8,612,500, and is now at approximately $8,450,000. Plaintiff contends that if the agreement is consummated Gulton will pay $5 million plus assets valued between $18 million and $23 million for these shares, which are now worth only about $8.5 million on the market. The true motive for the purchase, plaintiff alleges, is fear on the part of the Gulton board that the 650,000 shares, constituting at least the nucleus of a controlling interest in the company, may fall into unfriendly hands and result in their ouster from comfortable and lucrative positions in control of Gulton.
The complaint also sets forth a variety of allegedly false and misleading statements and omissions in the proxy material distributed to the Gulton shareholders which are claimed to violate §§ 10 and 14 of the Securities and Exchange Act and SEC Rules 10b-5 and 14a-9. In addition to a § 10 and Rule 10b-5 claim arising out of the sale for allegedly inadequate consideration, a further common law claim of corporate waste and breach of fiduciary duty on the part of the Gulton directors is attached on the theory of "pendent jurisdiction."
Before a preliminary injunction will issue, the moving party must demonstrate the likelihood that he will ultimately prevail upon the merits, and that he will suffer greater irreparable injury from denial of injunctive relief than any hardship to the opposing party from the granting of such relief. Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323 (2d Cir.), cert. denied, 394 U.S. 999, 89 S. Ct. 1595, 22 L. Ed. 2d 777 (1969); Clairol, Inc. v. Gillette Co., 389 F.2d 264 (2d Cir. 1968); Unicon Management Corp. v. Koppers Co., 366 F.2d 199, 204 (2d Cir. 1966); Dino deLaurentiis Cinematografica, S.p.A. v. D-150, Inc., 366 F.2d 373 (2d Cir. 1966). However, the burden of showing probable success is less where the balance of hardship tips decidedly toward the party requesting temporary relief. Checker Motors Corp. v. Chrysler Corp., supra at 323. In the instant case plaintiff has failed to show that Gulton or its stockholders will suffer any irreparable injury if injunctive relief is denied, let alone a balance of hardship in plaintiff's favor. Continental and Sage are both self-contained business entities, and will apparently continue to be operated as such should the Gulton shareholders approve their transfer to Nytronics. The difficulties and expense that would be entailed in a return to the status quo ante, should the acquisition be set aside after trial, would thus be minimal. Were we to grant the injunction requested, on the other hand, the defendants would be prejudiced in a number of respects. The November 12 Gulton-Nytronics agreement requires that the closing take place by May 12, 1970, and obligates Gulton to continue making ...