The opinion of the court was delivered by: CANNELLA
This action arises out of a tender offer by Tesoro Petroleum Corporation ("Tesoro") for 5.5 million shares of the publicly-held common stock of Commonwealth Oil Refining Company, Inc. ("Commonwealth" or "Corco"). On Wednesday, April 23, 1975, Corco, the target company, commenced the instant action which alleges numerous violations of the provisions of the Federal Securities Laws and the margin requirements of the Federal Reserve Board. Concurrently, Corco sought the issuance of a temporary restraining order or a preliminary injunction pursuant to the provisions of Fed.R.Civ.P. 65, preventing Tesoro and the other named defendants from proceeding forward with, effecting or otherwise consummating the involved tender offer for Corco shares. In light of the fact that the offer was scheduled to terminate on Wednesday, April 30, 1975, this Court commenced its hearing of the matter on Thursday, April 24, 1975. Both sides were afforded a full opportunity to call any witnesses and produce any documentary evidence bearing upon the issues and allegations advanced by Corco. The hearing continued throughout the day on Friday, April 25th, and did not conclude until late in the afternoon of Saturday, April 26th. Upon its conclusion, and after the parties had been afforded an opportunity to agree upon the language to be contained in the appendix thereto, the Court issued the following order:
In view of the time factors involved in this case, the decretal paragraphs set out below precede our findings of fact and conclusions of law:
1) Plaintiff's application for a preliminary injunction is GRANTED to the extent indicated below and is otherwise denied.
2) The defendants are hereby enjoined from proceeding, effecting or consummating the involved tender offer unless and until the shareholders are provided with the material information recited in the appendix hereto [Appendix A to this Opinion], in the language there contained, by means of a supplemental offering statement issued in compliance with the provisions of the Williams Act.
3) That said tender offer shall not expire prior to 10:30 A.M. New York City Time on the 10th day after the date of public dissemination of the supplemental offer. All Shareholders of Commonwealth who have heretofore tendered or will hereafter tender their shares of Commonwealth pursuant to said Offer shall be allowed to withdraw such tendered shares until 10:30 A.M. New York City Time on the 7th day after public dissemination. Any shares tendered up to and including 10:30 A.M. New York City Time on the 10th day after public dissemination shall be accepted by the offeror on a pro rata basis as provided for in the Williams Act.
4) Security as provided for in Fed.R.Civ.P. 65(c) has been waived by defendants.
In order to best satisfy the exigencies of the matter before us, the foregoing Order has been entered. What follows will amplify the conclusions contained therein and shall stand as the Court's findings and conclusions pursuant to Fed.R.Civ.P. 52(a).
Corco, the target company and the plaintiff herein, is a publicly-held corporation engaged in the business of refining petroleum products and the production of petrochemicals. It is incorporated under the Laws of Puerto Rico and maintains its principal place of business and production facility in that Commonwealth. The common stock of plaintiff is registered pursuant to § 12 of the Securities Exchange Act of 1934 and its shares are traded on both the New York and Pacific Stock Exchanges.
The offeror, Tesoro, a Delaware corporation with its principal place of business in Texas, is engaged in the exploration, development, and production of oil and gas reserves, as well as in the refining, transporting and marketing of crude oil and petroleum products. In addition, Tesoro is engaged in the manufacturing and leasing of oil field service equipment. As with Corco, its shares are registered pursuant to the terms of the 1934 Act and are traded on the New York and Pacific Stock Exchanges. Defendant West is the Chairman of the Board of Directors and Chief Executive Officer of Tesoro and defendant Phelps is its President.
Defendant E. F. Hutton & Co., Inc. ("Hutton") is a stock broker and investment banker which serves as the dealer-manager of the subject tender offer. Defendant Detwiler is Vice-Chairman of Hutton's Board and serves as the principal liaison between Hutton and the offeror. Detwiler is also a member of Tesoro's Board of Directors.
Defendant J. F. Nick & Co. ("Nick") is a limited partnership engaged in the business of trading securities and is the sole New York Stock Exchange specialist trading in Corco common stock. Defendant Wohlstetter is a general partner of Nick who served as a member of the Tesoro Board of Directors until April 17, 1975.
In compliance with the provisions of the Williams Act, the subject cash tender offer was filed with the Securities and Exchange Commission on Friday, April 18, 1975 at about 5:30 P.M. Thereafter, on Saturday, April 19, 1975, the terms of the offer appeared in The New York Times. The offer was scheduled to expire on April 30, 1975, at 10:30 A.M. New York City time (11 days after its announcement) and provided that Tesoro would purchase all shares of Corco tendered to it, up to 5.5 million, at a price of $11.50 per share. (Additional shares could be purchased at Tesoro's option and in conformity with the pro rata rule of the Act.) If the 5.5 million shares sought by Tesoro are tendered by Corco stockholders, Tesoro will own approximately 38% of the outstanding common shares of Corco and will thereby gain working control of the company. The offer further stated that all shareholders of Corco who had tendered their shares on or before April 28, 1975 at 10:30 A.M. New York City time would be afforded an opportunity to withdraw their tenders, but provided that all shares not so withdrawn or shares thereafter tendered would be irrevocably offered to Tesoro until June 15, 1975.
In attempting to secure the entry of preliminary injunctive relief preventing the consummation of the subject tender offer, Corco has raised and attempted to substantiate, by proof at the hearing, the following issues:
(1) That the pre-tender price of Corco stock was artificially depressed as the result of illegal manipulation on the part of defendant Wohlstetter, who contemporaneously served as a member of Tesoro's Board of Directors and as a general partner in Nick (or through the actions of a conspiracy which included Wohlstetter and the other defendants). In addition, it was alleged that defendant Hutton "procured a suspension of trading in the stock, thus creating an artificial ceiling on its price. . . ." (Affidavit of Norman C. Keith (as chief executive officer) in support of the Motion at para. 3(a)).
(2) That Tesoro's offer failed to disclose material information in the form of precise dollar figures regarding the possible loss of Commonwealth's tax exemption under Puerto Rican law because of a transfer of control resulting from the tender offer.
(3) That Tesoro's tender offer failed to disclose material information in the form of precise dollar figures regarding the possible impact of a successful tender offer upon Commonwealth's substantial benefits under the Federal Energy Administration's crude oil equalization program.
(4) That the secrecy which surrounded the offer, as well as the short time frame in which it was advanced, are illegal.
(5) That the offer was planned and prepared with the aid of illegal industrial espionage.
(6) That Tesoro violated the Williams Act by failing to reveal the names of the financial institutions advancing funds for the purchase of tendered stock and that any funds so advanced would be in violation of regulations promulgated by the Federal Reserve Board.
(7) That Tesoro had "cornered the market" in competent proxy solicitation firms, thereby depriving Commonwealth of an adequate opportunity to rebut Tesoro's "lightninglike" takeover attempt.
(8) That Tesoro violated § 13(d) of the Act in that either it or a group of which it was a part controlled more than 5% of Corco stock without making the requisite public disclosure of this fact.
For the reasons stated infra, we find that Corco has sustained its burden only with regard to the allegations recited in paragraphs 2 and 3 above and, accordingly, we have fashioned our relief in an endeavor to rectify those material omissions.
GENERAL PRINCIPLES OF LAW
It is well settled in this Circuit, that a preliminary injunction will 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 decidedly toward the party requesting preliminary relief." Sonesta Int'l Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2 Cir. 1973). Accord, Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 866 (2 Cir.), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974); Gulf & Western Industries, Inc. v. The Great Atlantic & Pacific Tea Co., 476 F.2d 687, 692-93 (2 Cir. 1973); Broder v. Dane, 384 F. Supp. 1312, 1317 (S.D.N.Y. 1974); General Host Corp. v. Triumph American, Inc., 359 F. Supp. 749, 753 (S.D.N.Y. 1973).
In evaluating the propriety of preliminary injunctive relief in cases of the instant sort, the Court's attention must be directed towards the underlying purposes of the Williams Act. As we recently stated in Broder v. Dane, 384 F. Supp. at 1318:
In enacting this legislation, Congress was responding to the fact that the tender offer mechanism, the use of which had burgeoned in the 1960's, was substantially unregulated by the securities laws as they existed prior to 1968. As a result, shareholders to whom a tender offer was directed, often found themselves making a decision as to whether or not to tender without the benefit of an adequate factual foundation upon which to ground that decision.
In an effort to remedy this situation and to protect the shareholder to the fullest extent possible, the Act demands "full and fair disclosure for the benefit of investors."
Concomitantly, the often adverse interests represented by the offering company, and management of the target company, were duly considered.
Thus, as the Report of the Senate Committee on Banking and Currency stated,
[the] committee has taken extreme care to avoid tipping the balance of regulation either in favor of management or in favor of the person making the takeover bid. The bill is designed to require full and fair disclosure for the benefit of investors while at the same time providing the offeror and management equal opportunity to fairly present their case.
These views well comport with those expressed by Judge Friendly in Butler Aviation Int'l, Inc. v. Comprehensive Designers, Inc., 425 F.2d 842, 845 (2 Cir. 1970), as well as the later comments thereon by Judge Timbers in Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co., Inc. 476 F.2d 687, 698 (2 Cir. 1973):
"While courts should vigorously enforce the policy of honesty and fair dealing prescribed by federal securities legislation, they must guard against the risk that, at the instance of incumbent management, they may be frustrating informed stockholders from doing what the latter want."
We have given careful attention to that consideration here. What we said in Butler Aviation, however, clearly presupposes that the shareholders are indeed informed -- a premise which we have indicated above has been drawn into serious doubt in this case.
Id. quoting from Butler Aviation, 425 F.2d at 845.
Thus, while it is undeniably true that Corco has standing to proceed in the manner it now does (see, e.g., Gulf & Western, supra, 476 F.2d at 695-96 n. 14), the Court must not allow itself to lose perspective of the underlying rationale of the Act. As one commentator has put it, "[management's] action does not always reflect an attempt to protect the shareholder's freedom of decision but rather may reflect a desire to prevent the takeover and to preserve its control. Thus, the courts must carefully scrutinize management's claims of illegality and nondisclosure." Note, The Courts and The Williams Act: Try A Little Tenderness, 48 N.Y.U.L. Rev. 991, 1011 (1973). In addition, it must always be remembered that the protections of the Williams Act extend to all shareholders of the target company -- both those who intend to divest themselves of ownership and those who do not. Both groups must be assured full, fair and adequate disclosure so that their decision to tender or retain their shares will be predicated upon a knowledgeable and informed evaluation of the alternatives. Cf., Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 941 (2 Cir. 1969). See also, Note, Judicial Control of Cash Tender Offers -- A Few Practical Recommendations, 50 Indiana L.J. 114, 115-16, 122-23 (1974). In the final analysis, when injunctive relief against an unfriendly tender offer is sought by entrenched management the Court does well to reflect upon the thoughts expressed by Judge Friendly in the Electronic Specialty case, "district judges must be vigilant against resort to the courts on trumped-up or trivial grounds as a means for delaying and thereby defeating legitimate tender offers" and must carefully scrutinize the claims raised in order to reach a resolution which best advances the legitimate goals of the Williams Act. We must guard against the attainment of a result which violates the concept of neutrality embraced in the law by acceding to a position which benefits the dilatory or otherwise tactically calculated approach of either one or both of the competing corporate powers.
The principle statutory predicate for the injunctive relief sought by Corco is found in § 14(e) of the Act. This provision, which requires analysis in terms of the legal precepts adopted in connection with claims advanced under Rule 10b-5 (see, Broder v. Dane, 384 F. Supp. at 1319-20), makes it
unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation.
(15 U.S.C. § 78n(e).) Hence, our analysis of the issues presented by the instant case can be categorized in terms of (1) misstatements, false statements and omissions; and (2) fraudulent, deceptive or manipulative practices. In addition, several of the matters which have been raised do not come within the scope of § 14(e); they will be discussed separately.
1. Misstatements, false statements and omissions
Falling within this category of potential § 14(e) violations are Corco's claims that Tesoro's offering statement failed to adequately disclose material facts regarding the potential impact of the success of the offer upon Corco's tax exemption under the Puerto Rican Industrial Incentive Act and upon the Company's receipt of benefits under the Federal Energy Administration's crude oil cost equalization program. In our view, Judge Mansfield's decision in Sonesta Int'l Hotels Corp. v. Wellington Associates, 483 F.2d 247, 251-53 (2 Cir. 1973), dispositively establishes the validity of these claims.
At the outset, we recognize that the omission of certain material from an offering statement is not alone sufficient to demonstrate that a probable violation of § 14(e) has occurred. The misstated or omitted matter must also be material. The concept of materiality is well stated in the following words of Judge Mansfield: "[the] materiality of facts allegedly misstated or omitted depends, in turn, upon whether a reasonable investor might have considered them to be important in deciding whether to accept the tender offer." Sonesta, supra, 483 F.2d at 251 (emphasis added). While other courts have substituted "would" for "might" in the above formulation and thus have caused us to engage in extended discussion of which alternative formulation is properly invoked in a § 14(e) case, Broder v. Dane, 384 F. Supp. at 1320-21 (and see the recent Seventh Circuit decision in Northway, Inc. v. TSC Industries, Inc., [Current] CCH Fed. Sec. L. Rep. para. 95,007 at 97,486-88 (7 Cir. 1975)), the distinction between these standards has no impact in the instant case. The precise dollar amounts involved with both the tax exemption and the FEA benefits are clearly material and important matters which, under any standard, should have been disclosed to the Corco stockholders.
That these omissions rise to the requisite level of materiality is amply evidenced by simply comparing the disclosure made by Tesoro in the original offering statement with that contained in the supplemental statement issued pursuant to this Court's Order of this past Saturday. In regard to the tax exemption and FEA benefits, the original offering statement made the following disclosure:
The Company and its subsidiaries and affiliates are the holders of various tax exemptions granted by the Commonwealth of Puerto Rico under the Puerto Rico Industrial Incentive Act. Under that Act, the tax exemption of a corporation is subject to forfeiture if shares of the corporation's stock are transferred without the prior written approval of the Governor of Puerto Rico, except in certain specified cases. That Act further provides that the Governor in his discretion may approve transfers retroactively in cases where a prior approval was required and not obtained and where retroactive approval would serve the best interest of Puerto Rico and the purposes of the industrial development program. Tesoro has been advised by Puerto Rico counsel that the purchase of less than a majority of the outstanding Shares will not require approval by the Governor. In the event that any such approval should prove to be necessary, Tesoro would promptly apply therefor. If any such required approval were not obtained, any resulting forfeiture of tax exemptions could have a material adverse effect on the Company.
As indicated in the Company's Annual Report on Form 10-K for 1974 and in its 1974 Annual Report to Stockholders, the Company receives substantial benefits under the crude oil cost equalization program adopted in November 1974 by the Federal Energy Administration. On the other hand, the program has increased the cost to Tesoro of the crude oil that Tesoro refines. As a result of this Offer, it is possible that the benefits received by the Company under the program may be reduced and that the cost to Tesoro of the program may be reduced. In that event, Tesoro may be required to compensate the Company for part or all of such benefits lost by the Company. Because of uncertainties involved in the application of the program and because of possible changes in the program, Tesoro is unable to predict the effect of this Offer on the Company's position under the program. It is possible, however, that the effect may be materially adverse.
In comparison, the supplemental offering statement discusses these matters in the following terms:
4. Additional Information Regarding Possible Loss of Tax Exemption. Commonwealth and its subsidiaries and affiliates are the holders of various tax exemptions granted by Puerto Rico under the Puerto Rico Industrial Incentive Act.
According to Commonwealth's Annual Report on Form 10-K for 1974, if the earnings of various subsidiaries and affiliates of Commonwealth had not been exempt from Puerto Rico income taxes an additional $29,220,501 in Puerto Rico income taxes would have been paid in 1974.
Under the Puerto Rico Industrial Incentive Act, the tax exemption of a corporation is subject to forfeiture if shares of the corporation's stock are transferred without the prior written approval of the Governor of Puerto Rico, except in certain specified cases. That Act further provides that the Governor in his discretion may approve transfers retroactively in cases where a prior approval was required and not obtained and where retroactive approval would serve the best interest of Puerto Rico and the purposes of the industrial development program. Tesoro has been advised by Puerto Rico counsel that the purchase of less than a majority of the outstanding Shares will not require approval by the Governor. Commonwealth has been advised by its counsel that the purchase of less than a majority of the outstanding shares, if such purchase directly, or indirectly results in a change in control, will require the approval of the Governor of Puerto Rico and that in such counsel's opinion such approval is a discretionary matter and there can be no assurance that such approval will actually be forthcoming. If any such approval by the Governor should be required, then Tesoro intends to apply promptly therefor. If any such required approval is not obtained, the forfeiture of tax exemption would have a material adverse effect on Commonwealth.
Commonwealth's counsel has advised that, in addition to the loss of tax benefits at the corporate level, if Commonwealth's tax exemptions are forfeited, shareholders who are residents of Puerto Rico and would enjoy income tax exemptions on portions of dividends received from Commonwealth and gains derived from a sale of their shares of stock in Commonwealth will lose such exemptions.
5. Additional Information Regarding Possible Loss of FEA Entitlements. As indicated in Commonwealth's Annual Report on Form 10-K for 1974 and in its 1974 Annual Report to Stockholders, Commonwealth receives substantial benefits under the crude oil cost equalization program adopted in November 1974 by the Federal Energy Administration. On the other hand, the program has increased the cost to Tesoro of the crude oil that Tesoro refines. As a result of the Offer, it is possible that the benefits received by Commonwealth under the program may be reduced and that the cost to Tesoro of the program may be reduced. In that event, Tesoro may be required to compensate Commonwealth for part or all of such benefits lost by Commonwealth. Because of uncertainties involved in the application of the program and because of possible changes in the program, Tesoro is unable to predict the effect of the Offer on Commonwealth's position under the program. It is possible, however, that the effect may be materially adverse.
In this connection, it should be noted that, Commonwealth has informed Tesoro that for the months of November and December, 1974, and January and February, 1975, this program resulted in benefits to Commonwealth from the sale of entitlements of $1,613,580, $4,859,825, $2,094,102 and $6,165,187, respectively. If Tesoro were deemed by the FEA as controlling Commonwealth, and as a single refiner with Commonwealth, Commonwealth believes that it could lose benefits at least equivalent to the costs Tesoro incurs under the program. For the same four months, Tesoro's costs for the purchase of entitlements were $755,515, $523,310, $1,620,336 and $2,355,298, respectively. If Tesoro acquires working control of Commonwealth as a result of the Offer, any compensation which Tesoro agrees to pay to Commonwealth for benefits lost by Commonwealth under this program may result from negotiations other than at arm's length.
Plainly, the additional matter contained in the supplemental statement is such that "a reasonable stockholder might . . . [attach] importance" to it and such shareholder could well consider "the information to be of considerable importance in making his decision." Sonesta, supra, 483 F.2d at 252. When told that the success of Tesoro's efforts might have a "materially adverse" effect on Corco, a reasonable shareholder may well ask, "How material is material?" When told that in 1974 the Puerto Rico tax exemption resulted in a saving to Corco of $29,220,501, the shareholder is far better able to understand the consequences of his decision to tender or not and can intelligently choose between the two alternatives. Similar results are obtained when hard dollar figures are provided in connection with the FEA program. As the Court of Appeals well put it in the Sonesta case, 483 F.2d at 252:
Here a simple reference in relevant Arabic numerals to the [value of the tax exemption and FEA benefits] . . . would have alerted [the] stockholders to the potential significance of the possible ["materially adverse" impact a successful Tesoro bid might have on Corco]. The standard of materiality was not whether the non-disclosure was "major," . . . but whether a reasonable stockholder might have attached importance to the omitted facts. If these simple facts had been disclosed in the present case, we have no hesitancy in concluding that a reasonable shareholder, contemplating a sale of all or part of his shares, might well have considered the information to be of considerable importance in making his decision.
The only defense which Tesoro apparently interposes as to this claim is that no reasonable likelihood that "materially adverse" consequences with regard to the taxes and FEA benefits would, in fact, occur as the result of a successful offer. In this regard it is recognized that
To be material a statement [or omission] in a tender offer need not necessarily relate to a past or existing condition or event. It may refer to a prospective event, even though the event may not occur, provided there appears to be a reasonable likelihood of its future occurrence. Gulf & Western Industries, Inc. v. Great Atlantic and Pacific Tea Co., ...