The opinion of the court was delivered by: PIERCE
On October 20, 1975, this Court signed an order directing the defendant, United Technologies Corporation ("United"), to show cause why a preliminary injunction should not issue against the furtherance of United's October 15, 1975 cash tender offer for not less than 2.5 and up to 4.5 million shares of the common stock of plaintiff Otis Elevator Company ("Otis"). The motion for an injunction, brought on by Otis on the basis of its first cause in an action commenced against United, charged that the outstanding tender offer was in violation of § 14(d) & (e) of the Williams Act. A hearing was scheduled for October 23, 1975.
On the morning of the hearing, United published in various newspapers a second Notice to Otis Shareholders, which Notice appeared to make certain changes in the tender offer which will be discussed hereafter. At the hearing, counsel for Otis lodged three additional charges against United on the basis of this second Notice. By the afternoon of October 23, 1975, the parties, at the request of the Court, entered into a stipulation whereby United agreed to extend the Expiration Date of its offer from October 27, 1975 to 10:00 a.m. New York City time on October 30, 1975. United further agreed not to take any steps in consummation of the tender offer until that time, and agreed to extend the pro-rata provisions and to preserve all rights of tendering shareholders in effect as of October 23, 1975 until October 30, 1975. The Court heard argument and received evidence relating to Otis' Williams Act charges on October 23rd and 24th.
On the morning of October 24, 1975, United published a third Notice to Otis Shareholders, which Notice reflected the terms of the stipulation and appeared to make still further changes in the offer.
During the two-day hearing, the Court received into evidence two depositions and forty-three exhibits presented by plaintiff. These documents, along with defendant's exhibits, the affidavits, and the transcript of the hearing, comprise the record in this matter. At the conclusion of the hearing the Court then reserved decision.
The following shall constitute the Court's findings of fact and conclusions of law pursuant to Rule 52(a) F.R. Civ. P.
The Parties and the Issues
Plaintiff Otis Elevator Company is a publicly-held company incorporated under the laws of the State of New Jersey; its principal executive offices are in the City of New York. The common stock of Otis is registered under the Securities Exchange Act (15 U.S.C. § 78 l (b)), and is listed for trading on the New York Stock Exchange ("NYSE"). There are approximately 8,100,000 shares of Otis common issued and outstanding, held by approximately 24,000 owners of record. As revealed by its 1974 Annual Report, Otis has assets in excess of $700,000,000 and total revenues in excess of one billion dollars. A significant portion of its sales and operations are related to overseas ventures. Otis manufactures and services elevators and escalators.
Defendant United Technologies Corporation ("United"), until recently known as United Aircraft Corporation, is a publicly-held company incorporated under the laws of the State of Delaware; its principal executive offices are in Hartford, Connecticut. There are in excess of 11,880,000 shares of United outstanding, registered under the Exchange Act and listed for trading on the NYSE. According to United's 1974 Annual Report, United has assets in excess of 1.8 billion dollars and total revenues in excess of 3.3 billion dollars. United designs and manufactures a variety of products for aerospace, electrical and other industries.
The principal actors in this case related to these two corporations are as follows: Ralph A. Weller is Chairman of the Board of Directors of Otis Elevator Company; Harry J. Gray is Chairman of the Board, President, and Chief Executive Officer of United; Edward L. Hennessey, Jr., is United's Senior Vice President for Finance and Administration and a member of the Board of Directors; Felix Rohatyn is a general partner of Lazard Freres & Co., an investment banking house, and dealer-manager for United's cash tender offer.
Pursuant to the provisions of Section 13(d) of the Williams Act, United filed a Schedule 13D statement with the Securities and Exchange Commission relative to the instant cash tender offer on October 14, 1975. Said filing occurred following a meeting of United's Board of Directors held that morning, at which meeting the tender offer was approved. On October 15, 1975, the offer appeared in the Wall Street Journal, the New York Times, and in a number of other publications across the United States. The offer was set to expire at 10:00 a.m., New York City time, on Monday, October 27, 1975, unless extended. The United offer provided that United would purchase an amount of shares up to 4,500,000 shares of Otis at $42.00 per share as long as at least 2,500,000 shares were tendered. United reserved to itself the option to purchase more than 4,500,000 shares if more than 4,500,000 were tendered. If Otis shareholders tendered, and United purchased, 4,500,000 shares, United would own approximately 55% of Otis, and thus achieve working control.
The United offer also provided that tendering shareholders would be allowed to withdraw shares up until October 22, 1975, at 10:00 a.m., New York time.
If shares remained tendered, but not purchased by United, a right of withdrawal would be revived after December 14, 1975. Further, the offer apparently stated that if United elected to purchase fewer than all of the shares tendered, such shares as would be purchased would be selected on a pro-rata basis.
Paragraph 12 of the offer set forth the purpose of the cash tender offer as follows:
12. Purpose of Offer; Interest in Securities of the Company. The purpose of the offer is to acquire for United a substantial interest in the Company, possibly constituting control. Depending on the number of Shares purchased, United might seek representation on the Board of Directors of the Company which would put it in control of such Board of Directors.
Shortly before deciding to make this Offer, United had preliminary discussions with the management of the Company with respect to the possibility of a merger or similar combination of the businesses of the Company and United. These discussions were terminated when United was advised that the Board of Directors of the Company did not wish at that time to entertain a proposal by United with respect to such a combination. There is no agreement or understanding between United and the Company to the effect that any proposal will be made with respect to such a combination or that any such transaction will be consummated and United has not formulated any plan or proposal to merge the Company with United or with any other person or to cause the Company to sell its assets or liquidate or to make any other major change in the Company's business or corporate structure. United intends, however, if it purchases Shares pursuant to the Offer to continue to study the Company and its business and, if it determines that such a transaction is advisable, to propose the terms thereof to the Company and to seek to have the Company consummate such transaction.
In support of its motion for a preliminary injunction, Otis initially pressed a number of charges, including claims (1) that the above-quoted paragraph 12 of the offer was false and misleading in that it failed to reveal that United did indeed have a plan to merge Otis into United, and was required to disclose the details of said plan via Schedule 13D (2) that United had manipulated the market in Otis shares on the eve of the tender offer by stating to a reporter for Barron's magazine that any rumor of intention by United to acquire Otis was "news" to United, an alleged violation of § 14(e);
(3) that Item 4 of the offer allowed United arbitrarily to accept or reject shares tendered by way of broker guarantees, thus allowing United to circumvent the pro-ration requirements of § 14(d)(6); (4) that United failed to reveal that it would purchase even if only 1.6 million shares were tendered, that true intent making the published minimum of 2.5 million a false and misleading statement in violation of § 14(e); (5) that United had failed to reveal that Felix Rohatyn of Lazard's had advised United that United would have to offer $45 to $50 in order to effect a merger with Otis; (6) that Item 7 of the offer, providing that broker-dealers would receive a 75 cent solicitation fee regardless of whether the shares tendered were actually solicited or merely tendered from the broker-dealer's own account, established an unlawful two-tier price structure; (7) that United had failed to reveal that its tender offer, if very successful, could result in delisting of Otis or refusal to list new Otis paper under NYSE policy;
and (8) that United had failed to reveal the antitrust implications of a combination with Otis.
All the above-said charges were detailed in the moving affidavit of Otis' counsel with affidavits of Otis officers submitted in support of the order to show cause.
After the Court signed the order to show cause on October 20, 1975, and after the expiration of shareholder withdrawal rights on October 22, 1975 (see Plaintiff Exhibit 1, P 2), United, on October 23, 1975, published its second Notice to Shareholders. This Notice specifically stated that it "modified" the initial Offer. It made no provision for the reinstitution of withdrawal rights. The second Notice in effect dropped the minimum purchase level, stating that United would now purchase "ANY" shares duly tendered up to 4.5 million. The second Notice also apparently eliminated the challenged provision relating to the method of acceptance of broker guarantees. Apparently the second Notice further obligated United to purchase "ALL" shares up to 4.5 million and to pro-rate the purchases if more than 4.5 million shares were purchased.
The second Notice did not address the issue of withdrawal rights, which had expired the previous day, October 22, 1975 as per the original tender offer.
At the hearing, counsel for plaintiff argued that the changes in the offer had been made in an attempt to forestall Otis' motion; counsel for United responded that United had the power to modify its offer, and that the changes had mooted many of plaintiff's claims. Plaintiff's counsel then made three new charges against United, asserting (9) that the new pro-rata provisions of the second Notice were defective;
(10) that United's statement regarding Indiana legal proceedings related to the tender offer was materially false and misleading; and (11) that the failure of United to reinstitute shareholder withdrawal rights upon such a significant change in its offer violated § 14(d)(6).
It was in this context that the Court on October 23, 1975 requested that United extend its tender offer until 10:00 a.m., New York City time on October 30, 1975, or further and that the parties preserve the status quo. The parties agreed upon the terms of an extension, and the following day, October 24, 1975, United published the third Notice to Otis shareholders embodying the terms of the stipulation; this third Notice did not explicitly speak to reinstituting withdrawal rights; however, the Notice did employ the term "Shares which remain" duly tendered.
Further, the third Notice committed United to pro-rate all shares purchased in the event United chose to accept less than all shares tendered.
In order to succeed on its motion, plaintiff must show a probability of success on the merits of at least one of its charges which the Court finds to be material. After careful consideration, the Court has determined that plaintiff's charge that United possessed a merger plan within the meaning of what is required to be disclosed in Schedule 13D is a serious and substantial allegation. The Court proceeds then on the premise that relief should be granted if plaintiff shows a probability of success on this claim and meets the Circuit's additional tests as discussed hereinbelow. See General Host Corp. v. Triumph American, Inc., 359 F. Supp. 749, 753 (S.D.N.Y. 1973). Such an approach is warranted where, as here, the Court is confronted with a series of allegations but has a record which is less than complete. See Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Company, 476 F.2d 687, 696-79 (2nd Cir., 1973). However, the Court will also consider the general condition of this tender offer in light of all the foregoing events.
It is clear in this Circuit that a preliminary injunction will issue against the consummation of an ongoing tender offer "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 the preliminary relief." Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973); accord, Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 866 (2d Cir.), cert. denied, 419 U.S. 883, 42 L. Ed. 2d 123, 95 S. Ct. 150 (1974); Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687, 692-93 (2d Cir. 1973).
In a somewhat different context, the Second Circuit recently has stated that the first prong of the "substantial questions" test is equal to "the presence of complex legal and factual issues." Columbia Pictures Indus. v. ABC, 501 F.2d 894, 897 (2d Cir. 1974).
As Judge Frank stated in the decision which was the origin of the Sonesta test, plaintiff must present "substantial, serious, difficult and doubtful" questions, so "as to make them a fair ground for litigation and thus for more deliberate investigation." Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2d Cir. 1953).
In this case, in light of the lightning legal maneuvers of both Otis and United, the Court considers it appropriate to apply a combination of both Sonesta tests.
Such an approach will serve to properly reflect the intent of the Congress in enacting the Williams Act. Congress clearly intended that the federal courts maintain a position of neutrality in the midst of tender offer battles.
"The committee has taken extreme care to avoid tipping the balance 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." (Report of the Senate Committee on Banking and Currency, S. Rep. No. 550, 90th Cong., 1st Sess. 3 (1967)).
The Second Circuit has repeatedly stressed this need for consideration of all the interests at stake. As Judge Friendly stated in Butler Aviation International, Inc. v. Comprehensive Designers, Inc., 425 F.2d 842 (2d Cir. 1970):
"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 shareholders from doing what the latter want." (Id. at 845, quoted in Gulf & Western Industries, supra, at 698 (Timbers, J.)).
However, as Judge Timbers went on to say, this policy "clearly presupposes that the shareholders are indeed informed . . . ." Gulf & Western, supra, at 698.