UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
August 9, 1973
Corenco Corp., Plaintiff,
Schiavone & Sons, Inc., Michael Schiavone & Sons, Inc., Joel Schiavone, Reed Rubin, Singer & Mackie, Inc., Samuel Rubin, Bear, Stearns & Co., and D.F. King & Co., Inc., Defendants, and Chester K. Twiss, Charles K. Leveck, Robert A. Firth, Milton A. Ward, Louis K. Adler, Robert M. Malloy, Paul I. Wren, Edward H. Learnard, Dwight H. Walker and Richard F. O'Neill, Additional Defendants to Counterclaim
Ward, District Judge
The opinion of the court was delivered by: WARD
WARD, District Judge:
Plaintiff Corenco Corporation ("Corenco") instituted this action on July 25, 1973, in an attempt to block a cash tender offer for Corenco stock announced by defendant Schiavone & Sons, Inc. ("Schiavone") on July 17, 1973. Corenco seeks to enjoin Schiavone, its parent, Michael Schiavone and Sons, Incorporated ("Michael Schiavone"), and Joel Schiavone (together "the Schiavone defendants") and anyone acting on their behalf from soliciting the tender of any Corenco shares; acquiring any Corenco shares as a result of the tender offer; further soliciting proxies of Corenco common stock stockholders; voting any shares of Corenco common stock or proxies; and otherwise utilizing such stock as a means of gaining control of Corenco. Corenco alleges violations of §§ 13(d), 14(a), 14(d), and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(d) and 78n(a), (d), and (e) and Rules promulgated pursuant thereto. Corenco also alleges violations of § 7 of the Clayton Act, 15 U.S.C. § 18, and §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2.
By order to show cause dated July 26, 1973, Corenco moved for a preliminary injunction and for expedited discovery.
The Schiavone defendants in their amended answer and counterclaims seek judgment, inter alia, dismissing the complaint; enjoining Corenco and its officers and directors (named as additional defendants in the counterclaim and called "Corenco's management" herein) from making false and misleading statements to Corenco's shareholders in an attempt to defeat the tender offer; and directing them as a group to file a Schedule 13D with the Securities and Exchange Commission (the "SEC"). By order to show cause dated August 2nd, the Schiavone defendants moved for a preliminary injunction on their claims.
On August 3rd, pursuant to agreement among the parties, the Court ordered an accelerated trial on the merits. The evidence introduced at the trial on August 3rd and 4th consisted of live testimony, as well as deposition testimony and documentary evidence. The parties have also extensively briefed the factual and legal issues involved.
Plaintiff Corenco is a publicly-held corporation organized and existing by virtue of the laws of Maine. Its principal place of business is Tewksbury, Massachusetts. Corenco has 378,567 shares of common stock issued and outstanding. Its stock is traded over-the-counter. Corenco's principal business is the rendering of fats resulting in the production of tallow. Seventy-five to 80 percent of this production is exported. Within the last few years the plaintiff has also entered the fertilizer business and more recently has begun the production of shortening and of industrial oils.
Defendant Schiavone, a subsidiary of Michael Schiavone, is a closely-held corporation organized and existing by virtue of the laws of Massachusetts and has its principal place of business in Boston, Massachusetts. Schiavone's shares are neither registered pursuant to § 12 of the Securities Exchange Act of 1934, 15 U.S.C. § 78 l, nor publicly traded. Schiavone's business is processing and merchandising scrap metals. Schiavone exported between 55 and 60 percent of its production in 1972 and between 80 and 85 percent in 1973.
Michael Schiavone is a Connecticut corporation with its principal place of business in that state. It is the parent corporation of defendant Schiavone & Sons, Inc. The parent is also a closely-held corporation engaged in the scrap metal business.
Joel Schiavone is vice president and a shareholder of Michael Schiavone and president, chief operating officer, and a director of Schiavone, the subsidiary.
Reed Rubin is engaged in the brokerage business. He arranged the introduction of Corenco management to Schiavone management in the hope that some form of merger or acquisition could be consummated between the two corporations. This, in turn, would result in his earning a finder's fee. Plaintiff also alleges that Rubin with Schiavone formed a "group" within the meaning of § 13(d) (1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m (d) (1).
Singer & Mackie, Inc. is the brokerage firm employing defendant Rubin and for whom, plaintiff alleges, he carried out the attempt to bring Corenco and Schiavone together.
Bear, Stearns & Co. is dealer-manager for the tender offer. D.F. King and Co., Inc. has been stipulated out of the case.
The defendants on the counterclaim are all officers and/or directors of Corenco.
The Facts Surrounding the Tender Offer and Counterclaim
On July 17, 1973, Schiavone announced a tender offer to purchase shares of Corenco common stock for cash at a price of $33 net per share. The bid price of Corenco stock was reported as $26 1/2 per share and the asked price as $28 per share on July 16, 1973. Immediately prior to the announcement, Schiavone filed with the SEC, pursuant to Section 14(d) of the Securities Exchange Act of 1934, a Statement on Schedule 13D and an Offer to Purchase dated July 17, 1973. An announcement of the tender offer appeared in The Wall Street Journal on July 18th and in other newspapers subsequently. The announcement stated, among other things, that the announcement itself did not constitute an offer and that the tender offer was being made only by Schiavone's July 17th Offer to Purchase and the related Letter of Tender.
Schiavone's July 17th Offer to Purchase stated that Schiavone would not be obligated to purchase fewer than 90,000 nor more than 130,000 Corenco shares -- although Schiavone reserved the right to purchase fewer than 90,000 shares if less were tendered or more than 130,000 shares if more were tendered. Schiavone's Offer was to expire on August 2, 1973, unless extended by Schiavone. Shares tendered could be withdrawn prior to July 25th, or, unless previously purchased by Schiavone, after September 15th. Shares tendered prior to August 2nd and purchased by Schiavone were to be purchased on a pro rata basis.
Schiavone's July 17th Offer also disclosed that Michael Schiavone owned 18,300 Corenco shares, approximately 4.8% of the 378,567 outstanding shares of Corenco common stock, and that Michael Schiavone and Schiavone together would own approximately 28.6% of the outstanding Corenco shares if 90,000 shares were purchased pursuant to the Offer or approximately 39.2% of the outstanding Corenco shares if 130,000 shares were purchased. The July 17th Offer also contained disclosures concerning the terms and conditions of Schiavone's Offer; Schiavone's purpose in making the Offer, i.e., to obtain control of Corenco was a view to a possible merger or other combination of the two companies; the market prices for Corenco's common stock during the period from January 1, 1971 through July 16, 1973, the day prior to the announcement of the Offer; financial and other information concerning Corenco, including per share earnings and book value figures; the officers and directors of Schiavone and Michael Schiavone; the financing arrangements relating to the source of the funds required by Schiavone to purchase Corenco shares pursuant to the Offer; and other matters. The July 17th Offer did not contain any financial information about Schiavone and Michael Schiavone.
Shortly after the announcement of Schiavone's tender offer, the directors of Corenco unanimously voted to oppose the tender offer.
On July 19, 1973, Corenco's management sent a letter to all Corenco stockholders urging them to take no action with respect to Schiavone's Offer pending a "thorough study" and a further report by management.
On July 20th, Corenco's management sent to all Corenco stockholders a second letter stating, among other things, that the Schiavone Offer is "inadequate"; that management did not intend to tender to Schiavone "even a single share"; that the $33 price being offered by Schiavone is only "slightly above the current market price"; and that Schiavone is offering $33 per share because it believes Corenco is worth more.
On July 23rd, Corenco's Board of Directors declared a regular quarterly dividend of 30 cents per Corenco share and an extra cash dividend of 25 cents per share, payable August 13th to stockholders of record on August 3rd, and a 10% stock dividend, payable August 31st to stockholders of record on August 21st, and issued a press release disclosing the dividend declarations.
On July 24th, a story appeared in The Wall Street Journal under the headline "Corenco Urges Holders to Reject Tender Offer by Schiavone & Sons, Inc." In addition, on July 24th, Corenco issued a press release summarizing the results of Corenco's operations for the second quarter of 1973.
On July 25th, Corenco's management instituted this action. Corenco issued a press release summarizing its claims of defendants' violations of the federal antitrust and securities laws, and on July 27th The Wall Street Journal published a story under the headline "Corenco Seeks Order Barring Schiavone Bid for Block of Its Stock" and the sub-caption "Suit Alleges Antitrust Violations -- Schiavone to Extend Proposal Till After Hearing Set Aug. 6."
On July 26th, Corenco's management distributed a third letter to the Corenco shareholders repeating, in abbreviated form, the statements made in the July 20th letter; discussing Corenco's charges of antitrust and securities law violations by Schiavone; summarizing the results of Corenco's operations for the second quarter of 1973; stating that the second quarter results were not adversely affected by an embargo placed by the federal government on the export of certain Corenco products during the second quarter; and announcing the dividend declarations and stating that, under the terms of Schiavone's Offer, the dividends would have the effect of reducing the $33 price offered by Schiavone.
In addition, Corenco's officers and employees have telephoned "hundreds of Corenco shareholders" to urge them to reject Schiavone's Offer.
At the same time that Corenco's management was waging this publicity campaign against Schiavone's Offer, they were resisting efforts by Schiavone in the Superior Court of Maine to obtain a list of Corenco shareholders.
On July 30, 1973, Schiavone announced an extension of its Offer to August 9th and, immediately prior to the announcement, filed with the SEC an amendment to its Schedule 13D and an Extension and Amendment of Offer.
Schiavone's July 30th Extension and Amendment of Offer extended the period during which tendered shares might be withdrawn from August 1st through August 6th; and provided that shares tendered prior to August 9th and purchased by Schiavone would be purchased on a pro rata basis.
The July 30th amendment set forth Corenco's claims in this action, and also set forth some of the information which Corenco alleges should have been contained in Schiavone's July 17th Offer to Purchase. It did not contain financial information about the Schiavone defendants.
Burden of Proof
At a trial on the merits for a permanent injunction, the party seeking relief is required to prove by a preponderance of the evidence that a threatened violation of some legal right will result in irreparable injury to him. C. Tennant & Sons, Inc. v. New York Terminal Conference, 299 F. Supp. 796, 799 (S.D.N.Y. 1969). It is not sufficient, as it is on a motion for a preliminary injunction, for the party requesting relief merely to show "probable success on the merits and possible irreparable injury," or to raise questions going to the merits so serious as "to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Sonesta International Hotels Corp. v. Wellington Associates, CCH FEDERAL SECURITIES LAW REPORTER P 94,041 at p. 94,190 (2d Cir. 1973). (Emphasis in original.) As set forth below, the Court has concluded that Corenco has proved by a preponderance of the evidence that Schiavone's tender offer violates Section 14(e) and, if not enjoined, will result in irreparable injury to it and its shareholders.
Violations of the Antitrust Laws
In order to prove a violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, on the theory that an acquisition would prevent a potential entrant from competing in a market, it is necessary to establish that entry by the potential competitor is probable. Allis-Chalmers Mfg. Co. v. White Consolidated Indus., Inc., 294 F. Supp. 1263 (D. Del.), rev'd and remanded on other grounds, 414 F.2d 506 (3d Cir. 1969), cert. denied, 396 U.S. 1009, 90 S. Ct. 567, 24 L. Ed. 2d 501 (1970); cf. United States v. Penn-Olin Co., 378 U.S. 158, 173-74, 12 L. Ed. 2d 775, 84 S. Ct. 1710 (1964). This requires more than self-serving statements by management of the alleged potential entrant. There must be objective evidence which shows that the alleged entrant intends to enter or is objectively capable of entering the market. Allis-Chalmers Mfg. Co. v. White Consolidated Indus., Inc., 414 F.2d 506, 532 n. 11 (dissenting opinion).
Thus, in Allis-Chalmers, supra, the District Court found that Allis-Chalmers could not be considered a likely entrant into the electrical appliance market where the evidence consisted "entirely of statements by key members of Allis-Chalmers management"; there was no evidence that Allis-Chalmers had made "cost or competition studies" of the industry; and Allis-Chalmers had made no public mention of an intention to enter the industry prior to suing to block White's tender offer. 294 F. Supp. at 1267.
Although the Third Circuit reversed the District Court's dismissal of Allis-Chalmers' claim of potential entry into the metal rolling mill market, the Third Circuit based its decision on the likelihood of reciprocal dealing that a White takeover of Allis-Chalmers would create. Judge Aldisert, who would have affirmed the District Court's decision in all respects, in a separate dissenting opinion stated:
"[The] instant case is atypical in that the alleged potential entrant is not the acquiring company, as in the usual case, but the acquired company. This presents a more difficult burden of proof problem: the motivation to prove a future intention to enter and thereby block the merger via the anti-trust laws becomes obvious. Because of this, it is of even greater importance that the alleged potential entrant be judged in terms of its objective capabilities. . .. It is one thing for Allis-Chalmers to allege its intention to enter any of a given number of market areas presently occupied by White or one of its subsidiaries, in order to prevent the takeover, but it is quite another to present objective evidence of this intention, and to demonstrate the capability to do so." 414 F.2d at 532, n. 11.
The necessity of objective evidence is apparent in Kennecott Copper Corporation v. F.T.C., 467 F.2d 67 (10th Cir. 1972), petition for cert. denied, 416 U.S. 909, 94 S. Ct. 1617, 40 L. Ed. 2d 114 (1972) (No. 637), where the acquisition of the nation's largest coal producer by Kennecott, the nation's largest copper producer, was held to be a violation of Section 7 of the Clayton Act. There, the Court relied on documentary evidence to establish a potential competition theory, including a long-range study of the coal business by Kennecott, numerous expressions by high-level Kennecott management of a desire to enter the coal business, and Kennecott's actual purchase and operation of a small coal producer in Utah.
Corenco has not demonstrated that it is a probable entrant into the scrap metal business. At most, it presented some evidence that it contemplated such a move and that entry is possible. Corenco's President, Chester K. Twiss, testified that no proposal to enter the scrap metal business has ever been submitted to Corenco's Board of Directors, nor has the Board approved such a course of action. Furthermore, Twiss, who is in charge of acquisitions for Corenco, has made no formal studies of the scrap metal industry whatsoever. The ignorance of the scrap metal business displayed by Twiss is most telling. He was unaware of the amount of return an investment in the scrap metal industry might bring, and he spoke only in vague generalities when talking about this industry.
Corenco is not currently engaged in negotiations with any scrap metal company. In fact, Corenco has only been in contact with one scrap metal company other than Schiavone, and that contact was initiated by a third party. Corenco has only a general plan to diversify. At one time or another Twiss has considered the acquisition of companies in the rendering industry, the fertilizer industry and the food industry, and has even considered acquiring a seaweed company. Twiss has not made an analysis of the amount of capital Corenco could invest in any such acquisition, nor has he considered the return on investment in any specific industry. In short, Corenco has not shown the requisite probability -- that Corenco will enter the scrap metal business.
Moreover, there are no economic factors present here to suggest that Corenco is a likely entrant into the scrap metal industry. Corenco's business is totally unrelated to that of Schiavone. Furthermore, Corenco's raw materials (animal by-products) and Schiavone's raw materials (scrap metals) are not purchased from the same sources; Corenco's products (edible and inedible fats and oils, and fertilizer) and Schiavone's products (processed scrap) are not sold to the same customers; and the manufacturing processes of Corenco and Schiavone are totally dissimilar. Twiss' theory that the companies are both in one industry dealing with the recycling of solid waste is imaginative but totally unpersuasive. No relationship exists between the companies to give weight to Corenco's potential competition theory.
Finally, there is no evidence that Corenco is recognized by scrap metal processors and exporters as a likely entrant into the scrap metal business. Thus, there is no showing that Corenco, a renderer of animal by-products and a producer of fertilizer, is hovering on the periphery of the scrap metal business exerting a straining influence on leading scrap metal companies.
Even if it could be said that Corenco is a probable entrant into the scrap metal industry in the same part of the country where Schiavone is engaged in business, Schiavone's acquisition of control over Corenco could not substantially lessen competition because of the competitive structure of the scrap metal industry.
All cases where a violation of Section 7 of the Clayton Act has been based on the removal of a potential competitor have involved leading firms in concentrated industries and other economic factors not present here. As stated in Davidow, Conglomerate Concentration and Section Seven: The Limitations of the Anti-Merger Act, 68 Colum. L. Rev. 1231, 1244-45 (1968):
"In the space of a few years, and a handful of cases, the standards for a merger case involving the issue of elimination of a potential entrant have become relatively clear. The acquired firm must be a 'significant factor' in a market so concentrated that potential competition provides one of the few checks on oligopolistic pricing. The acquiring firm -- when judged in terms of its objective capability, its rational economic interest, and its evidenced interest -- should be a likely direct competitor of the acquired firm at some time in the future. Finally, . . . the consolidation of a significant firm in a concentrated market and a potential competitor is not violative of Section 7 unless it appears that the outside firm was one of the most likely or most important potential entrants, or that there were very few other firms in a similar position."
The general nature of the scrap metal industry was described by Herschel Cutler, Ph.D. (Economics), Executive Director of the Institute of Scrap Iron and Steel. He said that it was "an industry exhibiting intense competitive characteristics." He also testified:
"I think one of the major reasons why you have fragmentation, if you will, or the competitiveness, is the relative ease with which you can get into the scrap metal business or into a segment of the business and obviously this introduces a restraint to any concentrated effort."
Furthermore, there is undisputed testimony in the record by Dr. Cutler and James P. Donovan, President, New England Chapter of the Institute of Scrap Iron and Steel, and by Mr. Schiavone at the trial that it is relatively easy to get into scrap metal processing and exporting. While some of the equipment used by processors can cost several hundred thousand dollars if purchased new, there is "a constant flow of secondhand processing equipment available for sale." Similarly, Mr. Donovan recognized that if one was to enter the scrap processing business, he could do so with leased equipment or secondhand equipment and could use public facilities, which would enable him to enter the business at a substantial saving over the purchase of new equipment. Moreover, Dr. Cutler pointed out that in the scrap metal industry "there are no licenses to acquire, no franchises to acquire; none of those monopolitical, obligopolistical requirements such as franchises or areas or zones . . .."
It has been recognized that where there is ease of entry into a market, there are many potential competitors who will enter the market, and the elimination of only one of them will not substantially lessen competition. See, Beatrice Foods Co. CCH TRADE REGULATION REPORTER P 20,121 (1972). Corenco has not made a sufficient showing that it is one of only a few potential competitors in the scrap metal industry. To the contrary, there is clear evidence that the scrap metal industry exhibits ease of entry by many firms.
Finally, Corenco has failed to prove any relevant markets or Schiavone's share of any relevant market. For example, the evidence would support the conclusion that the scrap export market is a world market, and there is no reliable evidence as to the percentage of the export market held by Schiavone -- Corenco attempts to compare 1971 Schiavone figures from a promotional brochure with 1972 preliminary figures of the Institute of Scrap Iron and Steel. Furthermore, the relevant domestic market could include, in addition to the six New England States, at least New York, New Jersey, Pennsylvania and Ohio. But what Schiavone's share of the domestic market may be remains a matter of conjecture.
In short, Corenco has failed to prove its claim that Schiavone's proposed acquisition of control over Corenco would violate the antitrust laws. There is no evidence that entry by Corenco into the scrap metal business is probable or that Corenco is recognized as a probable entrant. Moreover, even if Corenco were viewed as a probable entrant, the competitive characteristics of the scrap metal industry and the ease of entry into the industry are such that the elimination of Corenco as a potential competitor would not substantially lessen competition. Finally, Corenco has failed to show relevant markets and market shares.
* * *
Accordingly, plaintiff is granted a permanent injunction enjoining the Schiavone defendants, Bear Stearns & Co., and anyone acting on their behalf from soliciting the tender of any Corenco shares; acquiring any Corenco shares as a result of the tender offer; further soliciting proxies of Corenco common stock stockholders; voting any shares of Corenco common stock or proxies; and otherwise utilizing such stock as a means of gaining control of Corenco unless and until the Schiavone defendants make full disclosure of financial information about Schiavone and Michael Schiavone. In all other respects, plaintiff's complaint is dismissed. Defendants' counterclaims are dismissed.
The foregoing constitutes the findings of fact and conclusions of law of the Court for the purposes of Rule 52, Fed. R. Civ. P.
Settle judgment on one day's notice.