The opinion of the court was delivered by: STEWART
"Federal Courts," we noted last year, "have become a common arena in which tender offer battles are waged." Missouri Portland Cement Corp. v. Cargill, Inc., 375 F. Supp. 249, 251 (S.D.N.Y. 1974) (Stewart, J.), aff'd in part and rev'd in part, 498 F.2d 851 (2d Cir.), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974). These actions bring to the federal judicial arena a pre-tender offer battle involving alleged violations of the federal securities laws. Basically, they involve a claim by Lafayette Radio Electronics Corporation ("Lafayette") that Jewelcor, Incorporated ("Jewelcor") and its officers have commenced a plan to acquire control of Lafayette by illegal and improper means, and a counter allegation by Jewelcor against various Lafayette directors and officers ("Lafayette directors") that they improperly and unlawfully engaged in a scheme or "battle plan" to thwart any attempt by Jewelcor to obtain control of Lafayette.
Lafayette's action against Jewelcor is brought pursuant to Section 27 of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78aa, to enjoin alleged violations of Sections 13(d) and 14(a) of that Act, 15 U.S.C. §§ 78m(d) and 78n(a), and the rules and regulations of the Securities and Exchange Commission ("SEC") promulgated thereunder, in connection with Jewelcor's purchase of approximately 9.8 percent of the shares of Lafayette's common stock and the solicitation by Jewelcor of Lafayette's shareholders in connection with Lafayette's adjourned annual meeting of shareholders. More specifically, Lafayette alleges that Jewelcor and its officers violated the federal securities laws by misrepresenting their actual purpose in purchasing Lafayette stock -- to strengthen Jewelcor's position in merger discussions with Lafayette's management -- by stating that the shares were purchased "for the purpose of investment;" by misrepresenting the source of the funds used for the purchase of the Lafayette stock -- borrowed funds -- by asserting that Jewelcor's "general assets and working capital" were expended; and by misrepresenting the outcome of a proxy solicitation by stating that a certain proposal was defeated when in fact it had not been voted on.
In this action, Lafayette seeks to enjoin preliminarily defendants Jewelcor, its president Seymour Holtzman, and its vice presidents Frank P. Cuscela and Leonard M. Shendell, and all persons acting on their behalf from: (a) acquiring or attempting to acquire in any manner any shares of stock of Lafayette; (b) voting any stock or proxies or consents of Lafayette held or acquired after the initiation of the alleged plan, combination, or conspiracy of the defendants, other than in favor of the pending second proposal at Lafayette's adjourned annual stockholders meeting; and (c) soliciting any proxies or consents from any shareholders of Lafayette or utilizing in any fashion whatsoever any proxies or consents heretofore acquired other than in favor of the pending second proposal.
Jewelcor and its officers, opposing this motion for a preliminary injunction, have themselves moved for summary judgment pursuant to Rule 56(c) of the Federal Rules of Civil Procedure ("F.R. Civ. P.") on the ground that since there are no issues of material fact, they are entitled to judgment as a matter of law. Jewelcor and its officers also have filed a counterclaim similar to the separate action Jewelcor filed against the Lafayette directors. Jewelcor's counter-claim and its separate action against the Lafayette directors are brought pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, to enjoin, inter alia, alleged violations of §§ 9(a), 13(d), and 14(a) of that Act, 15 U.S.C. §§ 78i(a), 78m(d), and 78n(a), and the rules and regulations of the SEC promulgated thereunder, in connection with the Lafayette directors' purported conspiracy to prevent a takeover of Lafayette by Jewelcor. Specifically, Jewelcor seeks to enjoin preliminarily the Lafayette directors from: (a) purchasing stock of Lafayette until the "group" purportedly formed by defendants files a Schedule 13D with the SEC and the American Stock Exchange ("Amex"); (b) voting any proxies obtained by them based on Lafayette's allegedly false and misleading proxy materials at Lafayette's adjourned annual shareholders meeting and making a tender offer for Lafayette stock; and (c) continuing to allegedly manipulate the price of Lafayette stock. Jewelcor further seeks an order overturning the vote of Lafayette's shareholders at the November 21, 1974 annual meeting (the nonadjourned part) on the ground that such vote allegedly was obtained as a result of false and misleading proxy materials.
The Lafayette directors oppose this motion, and have brought a motion to dismiss five of the seven causes of action in the Jewelcor amended complaint pursuant to Rule 12(b)(6), F.R. Civ. P.
These actions and the four pending motions come before us some four months after Lafayette filed its original complaint on December 17, 1974, and less than two months after Jewelcor commenced its counter action on February 1, 1974. During that period of time, extensive discovery has been had by both sides, involving more than 40 depositions in at least eight cities of the principal officers and directors of Lafayette and Jewelcor, and others; and scores of documents have been produced by both sides. Jewelcor's counter action against the Lafayette directors was filed as a result of information obtained during this discovery. Additionally, believing that continued violations of the federal securities laws were taking place, Jewelcor brought on by order to show cause a motion for a temporary restraining order ("TRO") to enjoin preliminarily the Lafayette directors and those in active concert or participation with them from purchasing additional shares of Lafayette stock as part of their alleged plan to prevent a takeover of Lafayette by Jewelcor, and conducting the adjourned annual meeting of Lafayette shareholders, then scheduled for March 25. This Court issued a TRO on March 24th enjoining further purchases of Lafayette stock by the Lafayette directors (and at the same time prohibited purchases of Lafayette stock by Jewelcor and its officers and directors). This Court did not grant temporary injunctive relief with respect to the adjourned annual meeting of Lafayette, however, since counsel for Lafayette represented to this Court that the meeting would be adjourned until April 22. Awaiting a determination from this Court of the motions pending before it, counsel for Lafayette agreed to further adjourn the stockholders meeting until April 29.
Lafayette is a New York corporation with its principal place of business in Syosset, New York. It is engaged in selling electronic equipment by mail order catalogue, at wholesale and at retail prices, through more than 100 company-owned stores and approximately 375 associate (franchise) stores located throughout the country. Lafayette has in excess of 2,300,000 shares of common stock outstanding, which are listed and traded on the Amex and are held by approximately 2,800 record shareholders and by approximately 6,000 beneficial shareholders. The common stock of Lafayette has been traded at prices ranging from $3.00 to $5.50 per share during the period discussed herein.
Jewelcor is a Pennsylvania corporation whose three principal lines of business are: (1) the sale of jewelry and general merchandise, including merchandise sold by Lafayette, at catalogue showrooms, (2) the distribution of popular-priced name brand watches and the manufacture and sale of precious jewelry; and (3) high-speed commercial printing, including the printing of catalogues.
As of September 30, 1974, Jewelcor had more than 2,800,000 shares of common stock outstanding, held by approximately 2,800 record shareholders. Jewelcor's shares are listed and traded on the New York Stock Exchange.
Between May 31, 1974 and August 30, 1974, Jewelcor accumulated approximately six percent of Lafayette's outstanding stock in some 70 separate transactions. On the latter date, Jewelcor filed a Schedule 13D statement pursuant to § 13(d)(1) of the Securities Exchange Act of 1934,
stating that it had purchased 145,300 shares of the common stock of Lafayette at prices ranging from $3.87 to $4.25 per share. The Schedule 13D further stated:
Item 3: "The funds used in making the purchases described in this statement, aggregating approximately $640,000, were derived from the general assets and working capital of Jewelcor;"
Item 4: "The Common Stock of Lafayette to which this statement relates was purchased by Jewelcor for the purpose of investment. Although Jewelcor has considered the possibility of a future acquisition of control of the business of Lafayette, whether by means of a tender offer, merger or other business combination, open market purchases, private transactions, or otherwise, Jewelcor has not made any definitive plans to attempt to acquire control of Lafayette, nor has Jewelcor entered into any contracts, arrangements or understandings with Lafayette or its affiliates for this purpose. Moreover, any future decision by Jewelcor to acquire control of Lafayette by means of cash purchases of shares might also be dependent upon Jewelcor's ability to obtain necessary bank or other financing on terms satisfactory to Jewelcor."
Between August 30 and November 15, Jewelcor filed two amendments to its Schedule 13D statement to reflect additional purchases of Lafayette stock, which had increased its share to approximately 9.8 percent of Lafayette's stock, as noted above.
Jewelcor began purchasing Lafayette stock on May 31 following a meeting at its offices of its president, Seymour Holtzman, and its officers Shendell and Cuscela, and Thomas Unterberg and A. Robert Towbin, partners in Jewelcor's investment banking firm of C. E. Unterberg, Towbin & Co. ("Unterberg, Towbin"). During the May 31, 1974 meeting, a Jewelcor official suggested that Lafayette should not be told that Jewelcor was buying Lafayette stock until after a block had been accumulated (Towbin, 43). To maintain secrecy, Jewelcor immediately proceeded to set up a special numbered brokerage account through which all its Lafayette purchases were made. (Shendell, 114-15).
Those present at the meeting also explored the possibility of a relationship between Jewelcor and Lafayette. Holtzman or perhaps someone else suggested that Jewelcor buy some Lafayette stock to induce Lafayette to meet with Jewelcor to discuss a merger (Unterberg, 36-37, 39).
On June 26, 1974, Holtzman reported to Jewelcor's board of directors that 25,000 shares of Lafayette stock had been acquired and that Jewelcor management was "considering the possibility of a 'friendly' tender offer for a controlling interest in Lafayette [stock]."
(Jewelcor Brief in Opposition to Preliminary Injunction, at 16). The board of directors then passed a resolution permitting the purchase of additional Lafayette stock provided that such purchases not exceed $600,000 or 100,000 shares, whichever first occurred.
The next day, Towbin decided to prepare a financial report on Lafayette after a meeting with Lafayette's president, Leonard Pearlman. A copy of this report, dated July 25, 1974, was sent to Jewelcor shortly thereafter. The report noted that profitability and earnings per share had declined since the previous year, but, on an optimistic note, stated that Lafayette is a "strongly financed" company with products which enjoy a "high quality" image. (Holtzman Ex. 5, at 2).
A majority of the Jewelcor board of directors participated in a conference call on August 5, 1974, during which the board informally approved the purchase of a block of Lafayette stock in excess of the amount previously authorized by the Jewelcor board of directors on June 26, subject to subsequent formal ratification. The purchase of this block would have increased Jewelcor's holdings of Lafayette to more than five percent of outstanding shares, thus necessitating the filing of a Schedule 13D. The participants later discussed that the purchase of this stock "would be a good investment and would enhance the value of the overall block of stock of Lafayette Radio and it would place the company in a strong position in its discussion with Mr. Pearlman." (Cuscela, 26). About a week later, on August 13, Towbin and Unterberg lunched with Pearlman to discuss Jewelcor's possible interest in a merger with Lafayette, at Holtzman's request. This was the first time that Pearlman became aware that Jewelcor had been buying Lafayette stock. (Pearlman, 151). This meeting is described in the minutes of Jewelcor's board of directors' meeting of August 26, on the basis of Unterberg's report to the Jewelcor directors. According to the minutes:
Mr. Unterberg reported that approximately two weeks ago he and his partner, Mr. Robert Towbin, met with Mr. Leonard Pearlman, president of Lafayette Radio, and informed the latter that the Company had made market purchases of the stock of Lafayette Radio, that perhaps a friendly tender or merger between [the] Company and Lafayette Radio could be explored and that, in any event, based upon the Company's stock ownership in Lafayette Radio, he, Mr. Pearlman ought to meet with the principals of the Company. Mr. Unterberg further reported that Mr. Pearlman did not think such a meeting was timely but indicated that he would be in contact with Mr. Holtzman within the week . . . . (Mr. Holtzman Ex. 3, at 1).
The minutes also indicate that Holtzman then contacted Pearlman and set up a meeting for September 15. According to the minutes, Holtzman stated that "at least until his meeting with Mr. Pearlman, management could not recommend that the Board definitely determine whether or not to seek control of Lafayette Radio." (Id. at 2).
At the August 26th board meeting, the directors approved a resolution authorizing the purchase of up to 9.8 percent Lafayette stock provided that no more than an additional $300,000 be expended. The board also resolved that pending further resolution, "no definitive acts be undertaken whereby the Company seeks control of Lafayette Radio Electronics Corporation."
Four days after the meeting, Jewelcor filed its Schedule 13D statement with the SEC and sent a copy to Lafayette.
On September 3, 1974, Pearlman met with his attorneys Arthur Borden and John Ball, and with Towbin and Unterberg. Towbin stressed to Pearlman that Jewelcor was not considering an "unfriendly" action against Lafayette (Towbin, 80), and that he and Unterberg did not think Jewelcor had the funds to undertake any "unfriendly" action. Towbin explained that Jewelcor had bought Lafayette stock to encourage Lafayette's management to meet with Jewelcor to discuss the possibility of some form of business combination between them. (Towbin, 80).
Holtzman and Towbin met with Pearlman on September 25, 1974, since the original September 15 date had been postponed. Holtzman described Jewelcor to Pearlman with an eye to persuading him that some form of "friendly" business combination would be mutually beneficial. (Towbin, 92; Misc., Doc. 15). Pearlman replied that he was disturbed by Jewelcor's purchases of Lafayette stock and asked Holtzman not to purchase any more Lafayette stock. Holtzman responded that he would have to consult his board of directors, but that he anticipated that Jewelcor would make further purchases of Lafayette stock to increase its investment, since he felt the stock was undervalued. (Towbin, 92; Holtzman, 104).
On or about October 22, Jewelcor inquired about bidding for the stock held by Lafayette's largest shareholder, the Estate of Abraham Pletman,
by sending letters to the estate's executors, Borden, Ball, and the Chase Manhattan Bank. The estate owned shares constituting some 14 percent of the outstanding Lafayette stock. Shortly after these letters were sent, Pearlman expressed his apprehensions about Jewelcor's actions in conversation with Unterberg, stating that Jewelcor was "certainly not acting in a friendly manner." (Jewelcor Brief in Opposition to Preliminary Injunction, at 36).
Meanwhile, between October 16 and 24, Pearlman, Curwin and Ball met with representatives of Marine Midland Bank, First National City Bank and Goldman, Sachs & Co., the investment banking firm, to plan defensive strategy in the event of a tender offer.
On October 23, Lafayette mailed to its shareholders proxy solicitations for its annual meeting scheduled for November 21, 1974. Shareholders were asked to approve three proposals: (1) an amendment to Lafayette's certificate of incorporation increasing its board of directors to nine, creating three classes of directors to serve for staggered three-year terms, and providing for removal of directors only for cause; (2) an amendment to the certificate of incorporation increasing the shareholder vote required for alteration, change or repeal of the amendments in the first proposal from a majority to two thirds (approval of this proposal itself required a two thirds vote), and (3) the election of four directors.
The October 23 proxy materials, challenged by Jewelcor as false and misleading, stated inter alia, that: "To the best of the Company's knowledge, no other company is presently attempting to acquire control of the company." They also stated that the purpose of the proposed amendments was to:
moderate the pace of any change in control of the Company, and better enable the Board of Directors to protect the interests of remaining shareholders in the event that another company should seek to acquire a controlling stock interest in the company.
The annual shareholders meeting was held as scheduled on November 21, at which time the first proposal was adopted, despite Jewelcor's opposition, and a nine-person board of directors was elected. The second proposal, requiring a two thirds vote for approval, did not come to a vote, since supporting proxies had only been received from the holders of 61 percent of Lafayette's outstanding shares. Jewelcor would have voted against this proposal. Lafayette thus adjourned the meeting until December 26, believing that it might be approved at a later date, since the holders of only 77 percent of the outstanding shares of Lafayette had returned proxies on the second proposal by November 21.
(Misc. Doc. 17).
To solicit additional proxies in support of the second proposal, Lafayette sent a letter to its shareholders on November 27. The letter stated that "61% of your company's shares have voted FOR adoption of Proposal 2," although no vote had actually been taken. However, the letter also informed the Lafayette shareholders that approval of Proposal No. 2 required affirmative votes of 66 2/3 percent of the outstanding stock of Lafayette.
In anticipation of the adjourned meeting, Jewelcor began soliciting proxies in opposition to Proposal No. 2 on December 6th, after obtaining clearance for its materials from the SEC. Jewelcor's proxy materials echoed its Schedule 13D statement, indicating that it had bought Lafayette stock for investment purposes. Jewelcor's proxy material also informed shareholders that the funds for its purchases of Lafayette stock had come from cash generated from operations and that "no special borrowings" had been employed. (Holtzman Ex. 24, at 3; Complaint, Ex. D). On December 6th, Lafayette also sent out its own proxy materials in support of Proposal No. 2, informing its shareholders that Jewelcor "is now attempting to defeat the adoption of Proposal 2."
Additionally, Jewelcor began making oral solicitations of proxies through Georgeson & Co., a proxy-solicitation firm. In at least one telephone conversation conducted by Georgeson, the solicitor informed a Lafayette shareholder that Proposal No. 2 had been defeated on November 21, but that Lafayette's management had scheduled another meeting for December 26 for a second vote on this proposal. The solicitor on that occasion also indicated that the majority had voted against proposal No. 2. It is not clear to what extent other solicitors similarly informed Lafayette shareholders.
Eleven days after the December 6 proxy materials were mailed by both Jewelcor and Lafayette, Lafayette commenced its action against Jewelcor, and sought expedited discovery that same day. This Court originally allowed expedited discovery, but agreed to a modified discovery schedule the next day after Lafayette had offered to postpone the shareholders meeting.
Lafayette sent out another letter to its shareholders on February 10, informing them of its belief that Jewelcor "may be attempting to acquire control." Shortly thereafter, the February 18 meeting was again adjourned, this time to March 25.
During December, January and February, meanwhile, Pearlman had purchased 39,900 shares of Lafayette stock, bringing his ownership of Lafayette stock to more than five percent. Consequently, on March 2, he filed a Schedule 13D with the SEC. According to the Schedule 13D:
The pendency of what Mr. Pearlman believes may be an attempt by Jewelcor to acquire control of the Issuer coupled with the current price of the issuer's stock influenced Mr. Pearlman in purchasing the shares acquired in December, January, and February at those times. Mr. Pearlman also believes that his purchases in December, 1974, January and February, 1975 were desirable in order to insure continuity and stability in leadership and policy for the Issuer. Mr. Pearlman's purchases will have the effect of making a change in the majority of the Board of Directors more difficult and will better enable him to protect the interests of the Issuer's shareholders in the event that Jewelcor or any other person or company should seek to acquire control of the Issuer . . .
Pearlman further indicated in his Schedule 13D statement that he might buy additional shares of Lafayette stock in the future, depending on market prices and his financial resources.
Since March 2, Pearlman has not bought further shares of Lafayette stock, and since March 24, he, Lafayette's officers and directors and Jewelcor's officers and directors, have been enjoined from doing so.
The Summary Judgment Motion
Jewelcor has moved for summary judgment in Lafayette's action against Jewelcor, contending that there are no genuine issues of material fact, and that it is entitled to summary judgment as a matter of law, since its Schedule 13D and its proxy statements are not false and misleading.
Section 13(d) of the Exchange Act, commonly known as the Williams Act, requires disclosure of certain information by persons acquiring five percent or more of the shares of a registered company in order to alert investors in such companies of relatively sudden accumulations of securities by any person or group, and to apprise investors of potential and actual changes in the conduct of the business or structure of ownership.
See GAF Corp. v. Milstein, 453 F.2d 709, 717, 720 (2d Cir. 1971), cert. denied, 406 U.S. 910, 31 L. Ed. 2d 821, 92 S. Ct. 1610 (1972). Regulation 13D consists of a series of specific rules promulgated by the SEC to implement the statute, and requires the filing of a Schedule 13D statement including information concerning the identity and background of the person filing the statement, the source and amount of funds used to purchase the security, and the reasons for the purchase of the security.
Lafayette alleges in its complaint that Jewelcor's Schedule 13D statement is inaccurate because it misstates Jewelcor's reasons for buying Lafayette stock, and because it misstates Jewelcor's source of funds in its stock purchases. Lafayette further alleges that similar information contained in Jewelcor's proxy solicitation materials is also false and misleading in violation of Section 14(a) of the Exchange Act.
Jewelcor argues in support of its motion for summary judgment that its Schedule 13D has accurately stated its purpose for acquiring Lafayette stock as "investment." Lafayette contends, however, that Jewelcor's initial purchases of Lafayette stock were for the principal purpose of strengthening Jewelcor's position in ...