The opinion of the court was delivered by: BONSAL
Plaintiff ICM Realty ("ICM") instituted this action on April 15, 1974 against defendant Cabot, Cabot & Forbes Land Trust ("CCF"), seeking a preliminary and permanent injunction to enjoin CCF from consummating contracts with five commercial banks holding shares of beneficial interest in ICM, under which CCF would acquire approximately 55.7% of the shares of ICM from the banks in exchange for shares of beneficial interest of CCF. ICM's amended complaint, which was filed on May 9, 1974, alleges violations by CCF of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2; section 7 of the Clayton Act, 15 U.S.C. § 18; sections 9(a), 10(b), 14(e), and 29 of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. §§ 78i(a), 78j(b), 78n(e), and 78cc, and the rules and regulations of the Securities and Exchange Commission ("SEC") promulgated thereunder;
and common law. Jurisdiction is alleged pursuant to 28 U.S.C. §§ 1331(a) and 1337, 15 U.S.C. §§ 22 and 26, 15 U.S.C. § 78aa, and pendent jurisdiction.
On May 29, 1974 ICM moved for a preliminary injunction to enjoin CCF from violating the antitrust and securities laws. A hearing was held on the motion on June 5-10 and the Court heard oral argument on June 19, 1974.
Plaintiff ICM is a real estate investment trust ("REIT") organized in 1971 under the laws of Maryland. It is a consolidation of three REITs, the first of which was started in 1968. ICM has its principal office in New York City. Defendant CCF is a REIT organized in 1971 under the laws of Massachusetts as a Massachusetts business trust, and it has its principal office in Boston.
ICM has outstanding 3,011,382 shares of beneficial interest of which approximately two-thirds are held by six commercial banks
and other investors; these shares were issued pursuant to private placements and are restricted from trading. The remaining one-third are unrestricted shares of beneficial interest and are listed for trading on the American Stock Exchange. CCF has outstanding approximately 2,990,054 shares of beneficial interest which are listed for trading on the New York Stock Exchange.
Both ICM and CCF, as REITs, have elected to qualify as such under sections 856 et seq. of the Internal Revenue Code of 1954, as amended. They both primarily invest in real property, income-producing improvements on real property, and various interests secured by real property, and to be qualified as a REIT under the Internal Revenue Code, each must derive at least 75% of its gross income from a combination of rents from real property, interest on obligations secured by mortgages on real property or on interests in real property, gains from the sale or other disposition of real property, dividends or other distributions on and gains from the sale or other disposition of transferable shares in other REITs, or abatements and refunds of taxes on real property.
ICM and CCF have management contracts with Investors Central Management Corporation and CC & F Land Trust Advisers, Inc., respectively, which analyze and recommend investments, subject to approval by their respective Boards of Trustees.
Both ICM and CCF specialize in investing in subordinated land purchase-leasebacks. Under this form of real estate financing, the owner-developer of a shopping center, garden apartment project, office building, or other income-producing real property conveys title to the land to the REIT, but reserving title to the income-producing improvements on the land, and simultaneously leases back the land from the REIT under a longterm net lease. The REIT acquires title to the fee interest in the land subject to the prior rights of persons holding first mortgages and agrees to subordinate its interest in the land to future mortgage indebtedness created by the developer, including refinancing of existing mortgages. The REIT generally receives a fixed annual rental under the lease and a percentage rental based upon increases in gross revenues received by the developer from the use of the property and improvements thereon. The improvements become the property of the REIT on the termination of the lease.
As of November 30, 1973 ICM had invested more than 70% of its total portfolio of $62,187,636 in subordinated land purchase-leasebacks, and as of May 31, 1973 CCF had invested more than 50% of its total portfolio of $137,278,016 in land purchase-leasebacks and related mortgage loans generally subject to prior mortgage indebtedness. According to the testimony of Kenneth Campbell, publisher of Realty Trust Review, only three of the approximately 133 REITs reviewed and classified by Realty Trust Review have more than 35% of their portfolios invested in subordinated land purchase-leasebacks. Those three are ICM, CCF, and Property Capital Trust.
In the spring of 1973, CCF was seeking a way to expand its equity base in order to enable it to borrow more money with which to make new investments. Since ICM, unlike CCF, had little or no debt, CCf's investment staff saw a merger with ICM as a convenient way to expand CCF's equity base. In June of 1973, representatives of CCF met with representatives of ICM to discuss a possible merger. On June 26, 1973, CCF made a written offer to ICM pursuant to which ICM would have been merged into CCF on the basis of an exchange of.80 share of CCF for each share of ICM. This offer was considered by ICM and rejected on August 1, 1973. CCF made a second offer to ICM on October 23, 1973 increasing the ratio from.80 to.85, but this offer was also rejected by ICM on November 6, 1973.
This litigation was precipitated when CCF then embarked on a program to obtain control of ICM by acquiring the privately held shares of ICM held by the six banks in exchange for shares of CCF. Between August 1, 1973 and February 1, 1974 CCF had extensive contacts with the six banks with a view to negotiating a sale of their ICM shares for CCF shares. During this period, Arthur W. Viner (Managing Trustee of ICM and President and Chief Executive Officer of ICM's adviser) also had extensive contacts with the banks, urging them not to sell their ICM shares for CCF shares. CCF made a written offer to the six banks on January 17, 1974, and between January 25 and February 1, 1974 five of the six banks
accepted the offer and entered into contracts with CCF pursuant to which they agreed to exchange their ICM shares for CCF shares at an exchange ratio of.75 CCF share for each share of ICM. Upon consummation, this would give CCF 55.7% of the outstanding shares of ICM.
On February 4, 1974, CCF filed a statement with the SEC pursuant to Rule 13d-1 promulgated under section 13(d) of the Exchange Act, as amended by the Williams Act, which statement contains a brief description of CCF's proposed purchases of ICM stock from the banks and declares that CCF proposes to make a tender offer to the holders of the publicly held shares of ICM to exchange their ICM shares for CCF shares at the same exchange ratio as that accorded to the banks. Such tender offer is to be made subject to a registration statement under the Securities Act of 1933 and by means of a prospectus to be included therewith and the filing of a Schedule 13D with the SEC pursuant to section 14(d) of the Exchange Act and Rule 14d-1 promulgated thereunder. The statement goes on to say that CCF ultimately expects to combine ICM and CCF through a transfer of ICM's assets to CCF and thereafter to liquidate ICM.
ICM contends that CCF's proposed acquisition of the banks' ICM shares would violate the antitrust laws and that during its negotiations with the banks, CCF made false and misleading representations with respect to ICM in violation of the Williams Act.
As the Court of Appeals recently reiterated in Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851 (2d Cir. 1974), quoting from Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973), there are two standards governing the issuance of preliminary injunctions in cases raising issues under the antitrust and securities laws:
"The settled rule is that a preliminary injunction should issue only upon a clear showing of either (1) probable success on the merits and possible irreparable injury, or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidely [sic] toward the party requesting the preliminary relief." (emphasis in original). 498 at 866.
The Court of Appeals also noted in Cargill:
". . . the growing practice of companies that have become the target of tender offers to seek shelter under § 7 of the Clayton Act, 15 U.S.C. § 18. Drawing Excalibur from a scabbard where it would doubtless have remained sheathed in the face of a friendly offer, the target company typically hopes to obtain a temporary injunction which may frustrate the acquisition since the offering company may well decline the expensive gambit of a trial or, if it persists, the long lapse of time could so change conditions that the ...