The opinion of the court was delivered by: CARTER
This case involves a controversy as to the legal validity under federal securities laws of an exchange offer made by the defendant, Wells, Rich, Greene, Inc. (WRG) to holders of its common stock. Plaintiff, a holder of 100 shares, brings this action as a class action on behalf of himself and all other holders of WRG common stock, excluding such holders who are directors and officers and the members of their immediate family. Plaintiff is seeking to enjoin consummation of the exchange offer, to require withdrawal of the offer and a return of all shares of common stock tendered thereunder. Plaintiff invokes as the bases for his claims Sections 10(b) and 14(e) (15 U.S.C. §§ 78j(b) and 78(e)) of the Securities Exchange Act of 1934 and Rule 10b-5 (17 C.F.R. 240.10b-5) of the Securities Exchange Commission and common law principles. Jurisdiction exists pursuant to Section 27 (15 U.S.C. § 78aa) of the Securities Exchange Act.
As is usual in matters of this kind, the action was brought at the eleventh hour, and pressure for hurried determination was heavy.
The complaint was filed on Tuesday, November 19, 1974. Plaintiff's motion for preliminary injunction was filed on Thursday, November 21, 1974, and an evidentiary hearing was held on the motion on Monday, November 25, 1974.
At the close of the evidentiary hearing, since the exchange offer was scheduled to expire at 5 p.m. on that day, at which time the disputed transaction was to have been fully consummated, an order was issued restraining the completion and conclusion of the matter pending determination of the pending motion for preliminary injunctive relief.
WRG, a full-service advertising agency, is a New York corporation with principal offices in New York City. It proposes advertising programs for its clients, writes and produces television and radio commercials, contracts for advertising terms and space, and arranges for distribution of advertising materials. The individual defendants are directors and officers of the company. Defendant Mary Wells Lawrence was the founder of the company and is its chief executive officer.
The company was organized in 1966. Between approximately April, 1966, and June, 1968, the officers and directors acquired 1,450,600 shares of common stock of the company at an aggregate cost to them of $548,600. Thereafter, in 1968, a public offering of WRG common stock was made for the first time, consisting of a total of 409,900 shares at $17.50 per share. Of these 409,900 shares offered, 359,900 shares belonged to officers and directors of the company. In 1968, through this offering, the public invested $7,173,250 in the company. The officers and directors netted some $5,866,370 from this investment of funds from the public. Defendant Lawrence, who had brought founders' shares in 1966 for $30,100, realized some $1,266,575 as a result of this 1968 sale of stock to the public.
As of August 31, 1974, the issuance of 5,000,000 shares of WRG common stock was authorized; 1,631,588 shares had been issued, of which 265,052 shares were held by WRG officers, directors and employees.
WRG stock was listed and traded on the American Stock Exchange beginning in 1970, and in connection with the second public offering in 1971, the stock was transferred for listing and trading to the New York Stock Exchange. In 1971, some 333,739 shares, all owned by WRG directors, officers and employees, were sold to the public at $21.75 per share. The public invested some $7,258,823.25 in the company in the purchase of WRG shares in the 1971 offering. The aggregate net amount realized from this second public sale was $6,841,649, of which defendant Lawrence received $2,272,425.
The corporation has prospered. Its gross billings grew from $77 million in the fiscal year ended October 31, 1969, to $115 million in fiscal year ended October 31, 1973. Earnings per share rose from $1.02 in fiscal 1969 to $2.04 in the fiscal year ended October 31, 1973. The company was described by plaintiff's expert at the November 25th hearing, as having developed a fine reputation, being noted for creativity in advertising, the possession of excellent business management and first-rate clients. Its common stock rose to a high of 27 7/8 in 1972, but was selling at 5 1/2 immediately prior to the exchange offer which is the subject of this controversy.
The idea of buying back the public stock was planted in the winter of 1973. Apparently what helped further the idea of removing the company from the public realm was an abortive attempt to buy out another company. These were sensitive negotiations, and we are advised that because the nature of the negotiations had to be fully disclosed to the SEC, they had to be terminated.
The decision to pursue going "private" further was made in August, 1974. Just prior to the September 4, 1974, WRG Board meeting, the advice of Paul Hallingby, Jr., President and chief Executive Officer of White, Weld & Co., Inc., was sought about the wisdom, fairness and advisability of the proposed exchange offer. White, Weld & Co., Inc. had acted as managing underwriter for the 1968 and 1971 public offerings, and since 1968 had been WRG's investment banking advisor and consultant. Hallingby in a letter dated September 4, 1974, advised Mrs. Lawrence that the exchange offer would be attractive and that the offering price of $3 in cash and $8 principal amount of 10% subordinated sinking fund debentures constituted fair value for the company's stock in the light of current market conditions. The transaction as finally approved by the Board at the September 4, 1974, meeting and offered to the public, was an offer to purchase from holders of its common stock, up to 1,405,008 shares of common stock, representing all of the issued outstanding shares except approximately 226,850 shares owned by members of the Board of Directors. The Board had agreed not to participate in this exchange offer. A holder would receive for each share tendered $3 in cash and $8 principal amount of a newly created 10% subordinated sinking fund debenture maturing on November 1, 1984, and bearing interest at 10% per annum. The debentures are unsecured obligations of the company limited to an aggregate principal amount of $11,240,064. Payment of the principal and interest is subordinated to all prior debt, and payment in any case is contingent upon the company being solvent and having a surplus at the time of payment. The debentures are redeemable at WRG's option. WRG is to pay into the sinking fund, on or before November 1, of each year from 1975 to 1983 in cash 10% of the aggregate principal amount of the originally outstanding debentures. WRG has the right to reduce its cash payments to the sinking fund by filing debentures with the Trustee which the company had acquired. The package is estimated to have a current value of $9 per share, but is actually selling at roughly a 30% discount. White, Weld & Co., Inc. has agreed to guarantee an over-the-counter market for any shares not tendered, and at the November 25th hearing, one of its officers, Brian Little, testified that a market could be made with as few as 50,000 shares.
The offer expired at 5 p.m. on November 25, and all tenders became irrevocable after November 12th. White, Weld & Co. is dealer-manager of the offer and Chase Manhattan Bank is the exchange agent. The prospectus bears the statement " Participation in the Exchange Offer is completely voluntary and the Company makes no recommendations with respect thereto " (italics in the original). The Prospectus further states that neither ...