The opinion of the court was delivered by: MUNSON
On September 18, 1978, United Technologies Corporation (United) announced its intention to make a tender offer for 49% Of the shares of Carrier Corporation (Carrier) stock. The Government commenced the present action, on November 13, 1978, to enjoin United from proceeding with its tender offer and from taking any other action to acquire the stock or assets of Carrier. Relying upon the theories of entrenchment and reciprocity, the Government alleged that the proposed acquisition would violate § 7 of the Clayton Act. 15 U.S.C. § 18.
On the same day that it filed its Complaint, the Government moved for a preliminary injunction. The motion was denied by this Court by an Order, dated November 30, 1978, followed by a Memorandum-Decision, dated December 6, 1978. This Court's Order was affirmed by the United States Court of Appeals for the Second Circuit on December 18, 1978, and shortly thereafter, United consummated its tender offer.
The Government has now moved
for a comprehensive Hold Separate Order.
The principal provisions of the Government's proposed Order would (1) bar United from acquiring additional shares of Carrier stock, (2) require United to maintain Carrier as a separate corporate entity, (3) permit United to vote its Carrier stock only in the same ratio as the remaining stock of Carrier is voted by the shareholders other than United, (4) prevent United from securing representation on Carrier's board of directors and from otherwise participating in or influencing the management of Carrier's business, (5) prohibit United from obtaining confidential information from Carrier and from providing similar information concerning its own business to Carrier, and (6) require United to provide the Government with ongoing discovery in certain areas.
Oral arguments on the Government's motion were held on January 22, 1979, and the Court entered an Order, on January 31, 1979, requiring United to maintain Carrier as a separate corporate entity, but denying the more restrictive provisions requested by the Government. This Memorandum-Decision is being issued in accordance with that Order.
This Court's earlier ruling that the Government has failed to show a probability of ultimately prevailing on the merits of this lawsuit would not necessarily preclude the issuance of a Hold Separate Order here since such an Order can be granted even when the plaintiff has failed to satisfy the standards for a preliminary injunction. United States v. Hughes Tool Co., 415 F. Supp. 637, 638 (C.D.Cal.1976); United States v. Wachovia Corp., 313 F. Supp. 632, 640 (W.D.N.C.1970); United States v. Northwest Industries, Inc., 301 F. Supp. 1066, 1096-97 (N.D.Ill.1969).
The Court's inherent equitable powers gives it the authority to grant a Hold Separate Order. United States v. International Telephone & Telegraph Corp., 306 F. Supp. 766, 797 (D.Conn.1969).
The purpose of entering such an Order is to maintain the status quo and thereby aid the Court in effectuating appropriate relief if the plaintiff should ultimately prevail after a trial on the merits. United States v. Culbro Corp., 436 F. Supp. 746, 756-57 (S.D.N.Y.1977); United States v. Simmonds Precision Products, Inc., 319 F. Supp. 620, 620-21 (S.D.N.Y.1970); United States v. International Telephone & Telegraph Corp., supra, 306 F. Supp. at 798.
When a violation of § 7 of the Clayton Act is found, the appropriate relief to grant is divestiture, United States v. E. I. du Pont de Nemours & Co., 366 U.S. 316, 328-31, 333-34, 81 S. Ct. 1243, 6 L. Ed. 2d 318 (1961); Elzinga, The Antimerger Law: Pyrrhic Victories?, 12 J.L. & Econ. 43, 45 (1969), and the goal of divestiture should be the restoration of competition to the marketplace. Pfunder, Plaine & Whittemore, Compliance with Divestiture Orders Under Section 7 of the Clayton Act: An Analysis of the Relief Obtained, 17 Antitrust Bulletin 19, 24 (1972).
The Government argues that the provisions of its proposed Hold Separate Order are necessary to insure successful divestiture if a violation of § 7 is found after a trial on the merits. United, on the other hand, disputes this contention and argues that the provisions sought by the Government would freeze and sterilize its investment. United argues that if any Hold Separate Order is entered, it should be an alternative proposal it has advanced which would obligate United to maintain Carrier as a separate corporate entity.
The Court is of the opinion that the provision in the Government's proposed Hold Separate Order barring United from acquiring additional Carrier stock is not necessary to insure effective divestiture. The Court rejects the Government's position that it would be extremely difficult to fashion a divestiture remedy if United were permitted to double its present $ 1/2 billion investment in Carrier.
It appears that divestiture could still be accomplished by means of a sale to another large company, a public offering, or a spin-off.
The Court is unable to conclude, on the basis of the present record, that an acceptable corporate purchaser one which has adequate financial resources and one which would not pose antitrust problems could not be found. In fact, it would probably be easier to accomplish this means of divestiture sale to another large company if United were permitted to obtain complete ownership of Carrier since the prospect of purchasing the entire business would likely be more attractive to a potential buyer than the prospect of purchasing United's present interest. Rohatyn affidavit P 4. Cf. Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 869 (2d Cir.), Cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974).
The other alternatives mentioned above public offerings and spin-offs have not been frequently used in the past as means of divestiture, but in cases where they have been used, the remedy has proved to be effective. Pfunder, Plaine & Whittemore, Supra, n. 38 at 50-54.
The Court does not believe that overwhelming problems would be presented by the use of a public offering in this case. Large public offerings have been made in prior years, Mancuso affidavit, and an offering of the size that would be required here does not appear unrealistic. The fact that Carrier shares would not have been publicly traded for the period of time that United had complete ownership would not necessarily preclude use of a public offering since potential investors could base their investment decisions upon the sales and earnings of Carrier. Likewise, the Court does not feel that insurmountable problems would be presented by the use of a spin-off. The utilization of this technique would be facilitated by the fact that there are a relatively large number of shareholders in the potential divesting company (United) to whom the shares of the potential divested company (Carrier) could be spun-off. See Pfunder, Plaine & Whittemore, Supra, n. 38 at 50-51; Watkiss, Testimony Before the National Commission for the Review of Antitrust Laws and Procedures 79-80 (September 12, 1978 afternoon session). One set of commentators have said:
The varieties of public offerings and spin-offs that financial experts can devise are infinite, and it seems that many of the divestitures surveyed in this study could have used one of them.
What are the obstacles to setting up an independent company out of the divested assets by using a spin-off or public offering? The greatest obstacle in practical terms seems to be that it has rarely been done in the past. The technique has, however, been used effectively in divestiture cases.
Pfunder, Plaine & Whittemore, Supra, n. 38 at 51.
Furthermore, in a case where a motion for a preliminary injunction has already been denied, the Court questions the propriety of including a ban on the acquisition of additional stock in a Hold Separate Order. The attention of the Court and the parties on the preliminary injunction motion was focused on United's tender offer, but everyone involved in the proceedings realized that United's intention was to make a total acquisition and that the tender offer for 49% Of Carrier's stock was merely the first step in that process. No doubt, this Court's decision on the preliminary injunction motion would have been the same if United's tender offer had been for 100% Of Carrier's shares. The fact that United has decided to complete the acquisition by means of a tax-free exchange of securities is not a basis for reaching a different conclusion.
A prohibition on further stock purchases was included in the Hold Separate Order entered by the court in United States v. Culbro Corp., supra, but that case is distinguishable from the present one.
First of all, in that action, Culbro Corporation did not plan to acquire more than 25% Of the outstanding shares of the target company, 436 F. Supp. at 748, and so the provision of the Hold Separate Order restricting stock purchases did not upset its expectations. In the present suit, on the other hand, United has repeatedly stated its intention to make a total acquisition of Carrier. Secondly, the court in Culbro did not specifically determine whether there was a probability of ultimate success on the merits by the Government, but instead ruled that a preliminary injunction was not needed since the Government had failed to establish a reasonable probability of harm occurring to the public in the relatively short period of time that would pass before the case could be tried on the merits and that even ...