The opinion of the court was delivered by: PIERCE
In an action filed in this Court on March 19, 1973, General Host Corp. (hereinafter Host) alleged various violations of federal law in connection with a cash tender offer for Host common stocks announced on March 16, 1973 by Triumph American, Inc. (hereinafter Triumph). By order to show cause dated March 19, 1973, Host sought a preliminary injunction restraining Triumph from further solicitation of Host shares, and from consummating the tender offer, and from voting or utilizing in any way Host shares previously acquired by Triumph.
For the reasons set forth below, this Court has determined that Host has met its burden of showing probable success on the merits of at least two of the alleged violations of Section 14(e) of the Securities Exchange Act of 1934 (15 U.S.C. § 78n(e)). The Court further finds that the balance of the equities favors Host; and enjoins Triumph from consummating the tender offer pending final determination of the issues at trial.
The plaintiff Host is a New York corporation whose stock is listed on the New York Stock Exchange and is registered pursuant to Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. § 78 l). Through its various divisions and subsidiaries Host manufactures and sells baked goods, convenience foods, and owns and operates convenience food stores, inns, lodges, vessels, restaurants and recreational facilities in two national parks. Host's sales for the year ending December 31, 1972, totalled $555,484,000; its total assets exceed $213,000,000, including about $35,000,000 in cash and marketable securities.
Defendant Triumph is a Delaware corporation organized in November of 1970. In December of 1970 it acquired 95% of the outstanding common stock of Resolute Insurance Company (hereinafter Resolute), its major asset. Triumph's revenues for the year ending March 31, 1972, were $25,795,905; its total assets at that time were $39,455,625.
Eighty-two percent of Triumph's outstanding common stock is owned by defendant Triumph Investment Trust Ltd. (hereinafter Triumph Investment), an English corporation principally engaged in merchant banking, insurance underwriting, investments and securities, international metal trading and real estate investment.
On March 14, 1973, Triumph borrowed $20,000,000 from defendant Lloyds-Bolsa International Bank, Ltd. (hereinafter Lloyds-Bolsa), an English corporation, for the purpose of financing a tender offer for Host shares; and on March 14, 1973, Triumph Investment, having received permission from the United Kingdom Treasury, guaranteed the loan. On March 15, 1973, Triumph filed with the Securities and Exchange Commission (hereinafter SEC) a Schedule 13D with respect to its proposal to purchase 1,075,000 shares of Host common stock at $18.50 per share. The public announcement of the cash tender offer was made the following day, March 16, 1973, in several publications including The New York Times and The Wall Street Journal. The offer stated that it would expire at 5 p.m., March 30, 1973, with Triumph reserving the option to extend it from time to time. Triumph reserved the right to purchase less than 1,075,000 shares, if less were tendered, and the right to purchase more, if more were tendered. Coupled with its prior holdings of Host stock,
acquisition of the 1,075,000 shares would give Triumph fifty-one percent of Host's outstanding common stock. Triumph stated in its tender offer that its intention was to gain control of Host.
As noted above, Host then filed this action against Triumph's tender offer on the following Monday, March 19, 1973. This Court granted Host's motion for accelerated discovery and scheduled a hearing on the motion for a preliminary injunction to commence Friday, March 23, 1973.
The Court continued to hear testimony and receive evidence on Saturday, March 24 and Monday, March 26 and Tuesday, March 27. The hearing was thereafter adjourned and continued from day to day at the parties' request, while settlement discussions took place. On Thursday, March 29, 1973, the day before the tender offer period was due to expire unless extended by Triumph, the Court was informed that resolution of the issues could not be reached by the parties. The Court, then for the first time, took the matter under advisement. At the Court's instance, counsel for defendants represented that consummation of the tender offer would not occur pending entry of a decision by the Court before 11 a.m. the following Monday, April 2, 1973.
Host's allegations regarding Triumph's tender offer can be divided into three categories:
1) Claimed violations of the federal shipping and communications laws.
Among Host's holdings are two wholly owned subsidiaries, Yellowstone Park Co. and Everglades Park Co., Inc., which operate concessions in the named parks pursuant to U.S. Department of Interior contracts. Among the assets owned by Everglades are two tourist vessels, the Bald Eagle and the Pelican, which ply the waters of that park. Host asserts that the transfer of fifty-one percent of its outstanding common stock to a foreign controlled company such as Triumph, without prior permission of the U.S. Secretary of Commerce, will result in violations of the Shipping Act, 46 U.S.C. §§ 808 and 835, and could lead to forfeiture of the boats and forfeiture of Triumph's acquired interest in Host to the U.S. Government.
Similarly, Host asserts that the transfer of fifty-one percent of its shares may result in revocation by the Federal Communications Commission of the licenses for its radio stations which are used in both parks for communications from ship to shore, and in Yellowstone, from snow coaches to base. Host cites the Communications Act (47 U.S.C. § 310) which states that any transfer of an FCC license must be first approved by that Commission.
Host claims that loss of the two vessels and the radio licenses would result in substantial impairment of these park operations and cause uncertainty among Host shareholders as to the viability of these two subsidiaries. The gross sales of these two companies combined represented about two percent of Host's total gross revenue in 1972.
2) Claimed violation of the margin requirements of securities law.
Host asserts that Triumph Investment's guarantee of the $20,000,000 loan to Triumph from Lloyds-Bolsa to finance the tender offer is an indirect extension of credit which far exceeds the maximum allowed by Section 7 of the Securities Exchange Act of 1934 (15 U.S.C. § 78g), thereby subjecting Host and its shareholders to participation in an illegal transaction which is contrary to the intent of Congress and the public interest.
3) Claimed violations of the disclosure requirements of securities law.
Finally, Host asserts several misrepresentations and omissions of material fact in Triumph's tender offer which, it is alleged, violate Section 14(e) of the Securities Exchange Act of 1934 (15 U.S.C. § 78n(e)):
a) Failure to disclose the possibility that the tender offer violates the Shipping Act, the Communications Act, and the margin requirements of the Securities Exchange Act of 1934; and failure to disclose the possible consequences of such violations.
b) Failure to disclose Triumph's alleged Investment Company status, or potential Investment Company status, and the fact that Triumph has not registered as an Investment Company pursuant to 15 U.S.C. §§ 80a-1 to 80a-52; and failure to disclose the possible consequences of such violation.
c) Failure to disclose foreign government controls.
d) Failure to disclose intentions with regard to Host's liquid assets.
e) Failure to disclose the adverse consequences under Office of Foreign Direct Investment rules if, through Triumph's acquisition of Triumph Insurance Company, an English corporation, Host becomes a direct foreign investor and is forced to repatriate approximately $28,000,000 in liquid assets currently invested abroad, where it obtains a higher return.
f) Failure to disclose that there is a group behind the tender offer, consisting of Triumph, Triumph Investment, possibly Lloyds-Bolsa, and others unknown; and failure to file a Schedule 13D as a group.
The preliminary injunction
At this juncture in this action, this Court is required only to decide if the plaintiff Host has carried its burden of demonstrating either a combination of probable success on the merits and the possibility of irreparable injury, or that it has raised serious questions going to the merits and that the balance of hardship is tipped sharply in its favor. See Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Company, Inc., 476 F.2d ...