The opinion of the court was delivered by: POLLACK
The defendants have moved for a dismissal of the complaint pursuant to Fed. R. Civ. P. 12(b)(6)
on the ground that the first and second counts set forth in the complaint fail to state a claim upon which relief can be granted.
The two counts in the complaint respectively charge that the defendants constitute a group in violation of Sections 13(d) and 10(b) of the Securities and Exchange Act of 1934, as amended,
for failing timely to file a Schedule 13D
required by Section 13(d) and for making material misstatements and omissions in the Schedule 13D that they did eventually file.
The four defendants are related, three of them children of the fourth. They hold approximately 324,166 shares of GAF Corporation convertible preferred stock,
constituting 10.25% of the outstanding shares of that class. These shares were acquired as an outgrowth of the acquisition by GAF of the Ruberoid Company in 1967. At the time of the GAF-Ruberoid merger, defendants owned about 8% of Ruberoid's common stock while GAF owned 26%. As part of the merger, the GAF holdings in Ruberoid were cancelled and defendants' holdings automatically rose from approximately 8% (in Ruberoid) to slightly more than 10% (of GAF preferred) solely by reason of GAF's cancellation of its own holdings. Since obtaining their preferred shares in the merger proceedings, the defendants have not acquired any additional shares of GAF preferred.
The only securities of GAF purchased by defendants since the merger are approximately 209,300 shares of common stock, a different class, or 1.6% of the total number of outstanding shares of that class. The total voting power of defendants in GAF (preferred and common vote together) approximates 4%.
Plaintiff alleges that defendants, acting in conspiracy, determined to take over GAF sometime after July 29, 1968, the effective date of the Williams Bill. The plaintiff claims that Section 13(d)
obligated defendants to file Schedule 13D within ten days after this group was formed. Instead, says plaintiff, the defendants failed to file Schedule 13D until September 24, 1970, which plaintiff says was untimely filing. (The defendants contend that they are not subject to Section 13(d) and that their filing of a Schedule 13D was purely voluntary). GAF additionally claims that the Schedule 13D that was filed, as well as amendments, contained inter alia deliberately false and misleading statements to conceal the take-over conspiracy and plans of the group.
The plaintiff contends that the violations have caused and continue to cause irreparable injury to GAF's shareholders and the investing public and such irreparable harm will continue unless defendants and others allegedly conspiring with them are enjoined from their unlawful activities.
In its prayer for relief, the plaintiff seeks both a preliminary and permanent injunction against the defendants preventing them from acquiring any shares of any class of GAF stock; soliciting any proxies to vote GAF stock; voting any shares of GAF stock acquired during the conspiracy; and otherwise acting in furtherance of the alleged conspiracy. This relief is requested to be operative until the effects of the alleged conspiracy have been fully dissipated and the alleged unlawful acts fully corrected.
The ultimate issue presented by the defendants' motion to dismiss the first count is whether, organizing a group of stockholders owning more than 10% of a class of equity securities with a view to seeking control is, without more, a reportable event under Section 13(d) of the Exchange Act; and as to the second count, whether in the absence of a connected purchase or sale of securities, the target corporation claiming violation of Section 10 and Rule 10b(5),
has standing to seek an injunction against a control contestant for falsity in a Schedule 13D filing.
At the threshold, it is well to note that the congressional purpose of the Exchange Act was "to provide for regulation and control" of "transactions in securities" and "to insure the maintenance of fair and honest markets in such transactions." § 2.
The Williams Bill was added to the Exchange Act on July 28, 1968. It had its genesis in the wave of cash tender offers that had become increasingly popular in the years immediately preceding enactment. There was an increasing use of the cash tender offer to acquire control of corporations. Existing legislation did not require disclosure to investors of facts concerning the offeror, and a need was felt to enact legislation which would require disclosure to shareholders not only by those making cash tender offers but also by substantial holders entering into the securities markets to acquire stock of a target company. Means were sought by Congress to help maintain honest securities markets and to insure that public investors have truthful information on which to make investment decisions.
Accordingly, the Williams Bill, effective July 29, 1968, required the filing of public information in response to prescribed questions, if, a tender offer for an equity security of a publicly held company would result in beneficial ownership of more than 10 percent
of the securities of that class. § 14(d)(1). In addition, with an exemption to be mentioned later, the Williams Bill required a similar report -- even if no tender offer is made -- by any person who after acquiring securities of the class is the beneficial owner of more than 10% of the class. § 13(d)(1). The public report must be made "within ten days after such acquisition." This requirement applies to persons who beneficially have owned more than 10% of a class before the acquisition of additional stock as well as to persons who become the beneficial owners of more than 10% of the class as a result of the acquisition. See SEC Release of August 30, 1968, CCH Fed. Sec. L. Rep. P 77,597; Release of January 18, 1971, CCH Fed. Sec. L. Rep. P 77,946. When the purpose of such a person's "prospective purchases" is to gain control, he must disclose his "plans" to liquidate, merge, or make any other major change in the target company's business or structure. § 13(d)(1)(C). Moreover, under Schedule 13D, such a person must disclose, in any event, just what the "purpose or purposes of the purchase or proposed purchase of securities of the issuer" is.
The schedule covers past, prospective and proposed purchases.
The relevant provisions of the statutes involved are:
(d)(1) Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is registered pursuant to section 12 of this title * * *, is directly or indirectly the beneficial owner of more than 10 per centum of such class shall, within ten days after such acquisition, send to the issuer of the security at its principal executive office, by registered mail, send to each exchange where the security is traded, and file with the Commission, a statement containing such of the following information, and such additional information, as the Commission may by rules and regulations prescribe * *.
(2) If any material change occurs in the facts set forth in the statements to the issuer and the exchange, and in the statement filed with the Commission, an amendment shall be transmitted to the issuer and the exchange and shall be filed with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
(3) When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a "person" for the purposes of this subsection.
(5) The provisions of this subsection shall not apply to --
(B) any acquisition of the beneficial ownership of a security which, together with all other acquisitions by the same person of securities of the same class during the preceding twelve months, does not exceed 2 per centum of that class.
The statute is clearly designed to treat persons acting in concert as if the group were an individual. The sponsor, Senator Williams, explained the reason for this in introducing the bill:
This definition would successfully close the loophole that now exists which allows a syndicate, where no member owns more than 10 percent, to escape the reporting requirements of the Securities Exchange Act. 113 Cong. Rec. S445 (daily ed. Jan. 18, 1967).
On its face Section 13(d)(1) clearly does not apply, in respect of an individual, in the absence of an acquisition of securities subsequent to the enactment of that law. The statute says that "any person who, after acquiring * * * ownership of any equity security of a class * * * is * * * the * * * owner of more than 10 per centum of such class shall, * *" (emphasis added). However, if the purchases are of less than 2% of the ...