UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF NEW YORK
February 12, 1979
UNITED STATES of America
UNITED TECHNOLOGIES CORPORATION
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 if there were a reasonable probability of interim harm to the public, a Hold Separate Order would obviate such interim effects. However, in the case at bar, this Court previously determined that it is not likely that the Government will ultimately prevail on the merits.
While Hold Separate Orders entered in prior cases have rarely included prohibitions on further stock purchases, such Orders have usually required that the acquired company be maintained as a separate corporate entity which will be capable of being divested in the event that such a remedy is decreed by the court. See, e.g., FTC v. PepsiCo, Inc., 477 F.2d 24, 30-31 (2d Cir. 1973); United States v. Black & Decker Manufacturing Co., 430 F. Supp. 729, 733 (D.Md.1976); Missouri Portland Cement Co. v. Cargill, Inc., 73-CV-5464 (Order of July 24, 1974); United States v. Wachovia Corp., supra, 313 F. Supp. at 640. United has proposed such a Hold Separate Order as an alternative to the one suggested by the Government. Under its proposal, United would be required to maintain Carrier "as a separate corporation such that Carrier will be capable of being divested pursuant to any subsequent decree" of the Court. United's proposal specifically provides for the maintenance of Carrier's crucial operating and functional organizations its own research and development, manufacturing, purchasing, marketing and distribution, financial, legal, and personnel organizations. In addition, United's proposed Order provides that Carrier will maintain, separate and apart from United, its own independent vendor and customer relationships and its own financial ledgers and books and records. The Court believes that it is appropriate to include such provisions in a Hold Separate Order to be entered in this case since they will assure that Carrier will retain the structural capability necessary to operate as an independent business enterprise if divestiture should ultimately be decreed.
On the other hand, the Court is of the opinion that the various restrictions which the Government seeks to impose upon United's ability to control Carrier's business and operations are unnecessary to achieve effective divestiture. With the exception of the ITT-Grinnell merger, United States v. International Telephone & Telegraph Corp., supra, restrictions of such a nature have been included in Hold Separate Orders only in cases where horizontal violations were alleged by the Government or other plaintiff. United States v. Culbro Corp., supra, 436 F. Supp. at 749, 756; ICM Realty v. Cabot, Cabot & Forbes Land Trust, 378 F. Supp. 918, 922, 927-28 (S.D.N.Y.1974); United States v. Northwest Industries, Inc., supra, 301 F. Supp. at 1071-78, 1097-1100; Maryland Casualty Co. v. American General Insurance Co., 232 F. Supp. 620, 622 and 1964 Trade Cases P 71,188 at 79,720-21 (D.D.C.1964); United States v. Brown Shoe Co., 1956 Trade Cases P 68,244 at 71,113, 71,117 (D.Mo.1956).
In a horizontal merger, the acquirer might have the incentive to damage the acquired company's ability to compete with the acquirer in the event that divestiture is ultimately ordered. See Brodley, Structural Remedies in Merger Cases Statement Before the National Commission for the Review of Antitrust Laws and Procedures 2 (October 26, 1978).
However, such an incentive would not exist with respect to a conglomerate merger such as that involved in the present action.
The acquirer here United would have no interest other than the promotion of the acquired company's Carrier's welfare. See Missouri Portland Cement Co. v. Cargill, Inc., supra, 498 F.2d at 869.
The acquisition of Grinnell Corporation by ITT is the only conglomerate merger in which restrictions were placed upon the acquirer's ability to control the acquired company. Two of the factors which motivated the court to impose such a Hold Separate Order the defendant's consent and the unavailability of immediate appellate review of the court's decision on the preliminary injunction motion are not present here. The defendant in this action has not consented to the entry of such an Order, and because of the amendment of the Expediting Act, See generally 17 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4039 (1978), appellate review of this Court's decision denying the Government's motion for a preliminary injunction was available.
It appears that the Hold Separate Orders entered in a great many cases did not place any restrictions upon the acquirer's control of the business or operations of the acquired company, but merely required that the acquired company be maintained separate and apart from that of the acquirer. See, e.g., FTC v. PepsiCo, Inc., supra, 477 F.2d at 30-31; United States v. Black & Decker Manufacturing Co., supra, 430 F. Supp. at 733; United States v. Hughes Tool Co., supra, 415 F. Supp. at 638; Missouri Portland Cement Co. v. Cargill, Inc., 73-CV-5464 (Order of July 24, 1974); United States v. Simmonds Precision Products, Inc., supra, 319 F. Supp. at 620-21; United States v. Wachovia Corp., supra, 313 F. Supp. at 640; United States v. Phillips Petroleum Co., 1966 Trade Cases P 71,872 at 83,067 (S.D.Cal.1966); United States v. Aluminium Ltd., 1965 Trade Cases P 71,366 at 80,573 (D.N.J.1965).
In view of the facts that United has made a substantial investment in Carrier and has no incentive to harm Carrier's business, it would be inequitable to prevent United from exercising control until after the conclusion of a trial on the merits. In FTC v. PepsiCo, Inc., supra, 477 F.2d at 30-31, the Second Circuit stated:
While we are fully aware of the fact that there may well be a difference between promise and performance, any doubt in our mind is dissipated by PepsiCo's willingness to enter into a hold-separate agreement to preserve and protect the Rheingold concentrate and domestic soft drink bottling assets so that the Commission and this Court, in the event that a violation of Section 7 shall be found, will be able to order effective divestiture relief. To this end PepsiCo has advised that the Flavette subsidiaries and the Mason & Mason root beer concentrate operations will be operated as a separate identifiable business entity, that the presently utilized trademarks and trade names will be preserved and protected by that entity and will be continued to be used by it to identify the products involved. . . . (I)t would appear to us to be totally inequitable to prevent PepsiCo from now guiding and operating this company when long range decisions vitally affecting its stockholders must be made.
In addition, the Court believes that the section of the Government's proposed Hold Separate Order barring United from obtaining confidential information from Carrier and from providing similar information concerning its own business to Carrier is not necessary. The Government contends that if United is allowed access to Carrier's confidential information, potential purchasers will be reluctant to buy the company for fear that such information might be disclosed to Carrier's competitors or other third parties. The Court feels that this problem is adequately dealt with by the less restrictive Protective Order proposed by United, under the terms of which United would be prohibited from disclosing to any third party material confidential information obtained from Carrier, except as may be required by law.
The Government argues that a provision barring the transfer of technology and other confidential information from United to Carrier is needed to prevent Carrier from becoming entrenched in certain submarkets of the heating and air conditioning industry before a final determination of this action is made. The Court disagrees with this contention. It earlier concluded that the Government has not shown a probability of successfully proving entrenchment. Furthermore, post-acquisition evidence is admissible in a § 7 action, FTC v. Consolidated Foods Corp., 380 U.S. 592, 598, 85 S. Ct. 1220, 14 L. Ed. 2d 95 (1965); United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586, 77 S. Ct. 872, 1 L. Ed. 2d 1057 (1957); 3 J. Von Kalinowski, Antitrust Laws and Trade Regulation § 19.01(6) (1978), and the Court feels that it is highly unlikely that United would do anything during the pendency of this lawsuit to prejudice its case upon a trial on the merits.
Finally, the Court is of the opinion that the provisions of the Government's proposed Hold Separate Order requiring United to provide the Government with ongoing discovery in certain areas are inappropriate. The sections seeking to require United to maintain a log of all contacts between employees and agents of United and Carrier appear to be linked to the Government's attempt to limit United's control of Carrier Pendente lite. The Court feels that much of the information that would be contained in such logs would be irrelevant, and it finds that this part of the Government's proposed Order is impractical and unduly burdensome. On the other hand, the information being sought concerning United's magnet wire sales appears to be relevant, but the Court believes that a request for such information should be made pursuant to the Federal Rules of Civil Procedure rather than as part of a motion for a Hold Separate Order.
The Hold Separate Order which the Court has entered in this case is set forth below.
Plaintiff United States of America, having moved for a Hold Separate Order, and the Court having heard all parties in oral argument and having reviewed the papers submitted to it, it is hereby
ORDERED, that pending a trial and a decision on the merits by this Court, United Technologies Corporation (United) shall cause Carrier Corporation (Carrier) to be maintained as a separate corporation such that Carrier will be capable of being divested pursuant to any subsequent decree of this Court and, toward that end, United:
(1) shall cause Carrier to maintain its own research and development, manufacturing, purchasing, marketing and distribution, financial, legal and personnel organizations, and to maintain such other operating and functional organizations as are appropriate to a company of the size and character of Carrier;
(2) shall hold in confidence and, except as may be required by law, shall not disclose to any third party any material confidential information which United may obtain from Carrier during the term of this Order. "Material confidential information" means information not independently known to United from sources other than Carrier, not in the public domain and competitively significant to Carrier, and includes, but is not limited to, such information as supplier and customer lists, trade secrets and manufacturing and other know-how;
(3) shall cause Carrier to maintain its own independent vendor and customer relationships separate and apart from those of United;
(4) shall cause Carrier to maintain its own financial ledgers, books and records separate and apart from those of United; and
(5) shall cause Carrier to continue to use its present name to designate the separate corporate entity referred to in this paragraph; and it is further
ORDERED, that pending a trial and a decision on the merits by this Court, United shall not sell or otherwise dispose of any of its Carrier stock to any third party except on reasonable prior written notice to the plaintiff United States and to this Court, and it is further
ORDERED, that the provisions of this Order applicable to United shall apply to each of its directors, officers and employees, and to each of its subsidiaries, successors and assigns, and to all other persons in active concert or participation with United who shall have received actual notice of this Order by personal service or otherwise, and it is further
ORDERED, that a copy of this Order shall be furnished by United to each of its directors and officers, and it is further
ORDERED, that jurisdiction is retained for the purpose of enabling any of the parties to this Order to apply to this Court at any time for such further orders and directions as may be necessary or appropriate for the construction or carrying out of this Order, for the modification of any provisions thereof, and for the enforcement of compliance therewith and punishment of violations thereof, and it is further
ORDERED, that plaintiff United States' motion for a Hold Separate Order is denied in all other respects.