The opinion of the court was delivered by: SAND
Plaintiff, Transcon, Inc., seeks an order enjoining defendants from, Inter alia, purchasing any additional shares of Transcon stock and compelling defendants to divest themselves of the shares they have already purchased. Plaintiff alleges that defendants have failed to comply with the following statutes and regulations: § 13(d) of the Securities and Exchange Act, 15 U.S.C. § 78m(d) and Schedule 13D promulgated pursuant thereto, 17 C.F.R. § 240.13d-101, § 7 of that Act and the margin regulations promulgated pursuant thereto, 12 C.F.R. §§ 220.1 Et seq. and 224.1 Et seq.; and § 5 of the Interstate Commerce Act, 49 U.S.C. § 5.
On the basis of the findings of fact and conclusions of law set forth herein, we fail to find any of the violations alleged and deny plaintiff's claims for relief.
Plaintiff commenced this action on November 15, 1978, two days after the Schedule 13D was filed. Following expedited discovery, application was made for a temporary restraining order and a preliminary injunction enjoining defendants from, Inter alia, purchasing any shares of Transcon stock. The parties reached an agreement with respect to certain procedures to be followed pending a determination of this action and, after argument on the motion for a preliminary injunction held on January 8, 1979, the parties accepted the Court's suggestion that trial of the action on the merits be consolidated with the hearing on the preliminary injunction. Trial was held on February 1 and 2, 1979.
In connection with its claims concerning § 13(d), plaintiff alleges that defendants failed to adequately disclose the full membership of a "group". This claim presents novel questions of law, as to which the parties have submitted extensive and very helpful briefs. It also involves difficult questions of fact concerning long-standing relationships among the parties and the nature of their meetings and interactions over a course of time. We therefore find it necessary to recount these relationships and interactions in somewhat greater detail than we might otherwise undertake.
Plaintiff is incorporated in California, and conducts its trucking operations in or through forty states. Its stock is registered and is listed and traded on the New York and Pacific Stock Exchanges. As of September 30, 1978, there were 3.1 million shares outstanding.
Defendants may be grouped as follows: A. G. Becker, Incorporated ("Becker"), A. G. Becker Holdings, Incorporated, AGB-WPB Incorporated, the Becker Warburg Paribas Group Incorporated ("BWP"), Warburg-Paribas, Inc., S. G. Warburg & Co., Ltd.,
and Paribas International, may be termed the "Becker defendants". All of the Becker defendants are Delaware corporations, with the exception of S. G. Warburg & Co., Ltd., a United Kingdom corporation, and Paribas International, a French societe anonyme. BWP is the ultimate holding company for Becker, and both Becker and BWP (as well as AGB-WPB and Becker Holdings) have offices at 55 Water Street, New York City.
Becker is, Inter alia, a registered broker dealer in securities. Its principal activities include brokerage, specialist and equity trading, clearing and performance measurement services, the trading of credit securities and money market instruments, including corporate and municipal bonds, commercial paper, bankers' acceptances, certificates of deposit and government securities, and the underwriting of municipal bonds.
Clinique Laboratories, Inc. ("Clinique"), EJL Corporation, Estee Lauder, Joseph H. Lauder, Ronald S. Lauder, and Leonard A. Lauder are the "Clinique defendants". Clinique is a New York corporation engaged in the business of manufacturing and distributing allergy-tested cosmetics. EJL Corporation is a Delaware corporation which is a "control person" of Clinique within the meaning of § 20 of the Securities and Exchange Act. The four individual Lauders are also control persons of Clinique.
The "Rubenstein defendants" include Jerry G. Rubenstein ("Rubenstein"), the Redstone Corporation ("Redstone"), Alamo Express, Inc. ("Alamo Express"), and Alamo Cartage Co., Inc. ("Alamo Cartage").
Rubenstein controls Redstone, Alamo Express and Alamo Cartage (collectively referred to as "Alamo"); he owns all of the voting stock of Redstone, which in turn wholly owns Alamo Express and Alamo Cartage. All three companies are incorporated in Texas. Alamo Express is an interstate trucking company. Alamo Cartage is a common carrier of freight.
Rubenstein has interests not only in the above-described trucking companies, but in a number of management companies as well. He owns all of the voting stock of Vanguard Enterprises, Inc. ("Vanguard"); he owns 85% Of Omni Management, Inc. ("Omni"); he owns approximately 57% Of Synectics Management, Inc. ("Synectics"); and he controls 60% Of The Halcyon Company ("Halcyon"), a partnership of which Synectics owns 40% And Omni owns 20%.
At an earlier stage in his career, indeed for most of his working life, Rubenstein occupied various executive positions in large trucking concerns. By 1974, he was president of IU International, the parent corporation of a number of utilities and transportation companies, including two of the major interstate carriers, Ryder and PIE. He was also a member of its board of directors. Rubenstein left IU International in November of 1974, having decided that the large corporate business world no longer suited him and that he preferred "to do some things on my own."
In March, 1975, he was approached by the Sun Oil Company ("Sun") (now the Sun Company) to assist it in diversifying into the transportation and distribution fields. Vanguard was formed in June, 1975, to facilitate Rubenstein's dealings with Sun. Shortly after that, Rubenstein formed Synectics, in which he has a 57% Interest. The other shareholders of Synectics are Ira T. Wender, now the President of BWP, and three of Rubenstein's business associates. Wender and the other three associates received their stock as compensation for services rendered in developing the business relationship with Sun. The Sun-Vanguard contract was renegotiated and Synectics is now also a party to it.
Pursuant to the Sun contract, Rubenstein (through Vanguard) agreed to locate suitable acquisition candidates for Sun. In return, Synectics has a percentage interest in the profits of any companies acquired through its recommendations for a five-year period. Sun has in fact acquired a number of companies through Synectics introductions.
In June, 1976, Rubenstein submitted to Sun (through Vanguard) a report on Transcon, recommending it is an acquisition candidate. The recommendation was not taken. He submitted a similar report to Alco Standard Corporation in March, 1977, which also rejected his recommendation.
On February 1, 1978, Wender became the President of BWP, as noted above. He also became the chief executive officer of Becker. Wender and Rubenstein have known one another since the late 1960's. In 1974, Wender was a director of IU International and Rubenstein was the corporation's president.
A short time prior to Wender's move to BWP, he and Rubenstein agreed to form a joint venture, between Rubenstein and BWP, for the purpose of acquiring operating companies in the distribution and transportation fields. Halcyon was subsequently formed as the mechanism for acquiring the companies, and Omni was formed to provide management services for the companies to be acquired.
Shortly after the commencement of Wender's employment at BWP, Rubenstein submitted a new version of the earlier Synectics report on Transcon to BWP, again recommending Transcon as a possible acquisition.
BWP was interested in acquiring Transcon. Wender circulated the Synectics report on Transcon within BWP, with a covering memorandum. Wender at that point anticipated an investment of $ 1.5 million by the BWP-Rubenstein partnership, with the remainder of the funding to be provided by a number of other investors, including possibly the Lauders, some shipping interests with whom Rubenstein was acquainted, and other Becker entities. The acquisition was at that time conceived of as a cash merger; Wender proposed to acquire 4.9% Of the stock during the period March 15 to April 15, and then to begin negotiations for a cash merger by the end of April. He also, however, understood that there might be a "war" with the Transcon management. In any event, he had arranged for Rubenstein to speak with BWP's management and Executive Committees on March 2 and 3. Wender was one of the ten members of the Executive Committee, whose approval was required for an investment of the size contemplated.
Throughout February, March and April, Rubenstein and Becker continued to meet and discuss the Transcon deal. On February 23, Rubenstein met with Wender and David O. Wicks of BWP; On March 13, he attended a meeting at the offices of Skadden, Arps, Slate, Meagher & Flom, the law firm representing the Becker and Clinique defendants in this litigation, which firm Becker was to retain with respect to the acquisition of Transcon.
On April 3 and 5, Rubenstein met Sir Siegmund Warburg at the Becker offices. The subject of investing in Transcon was discussed at these meetings. Sir Siegmund Warburg is the founder of S. G. Warburg & Co., Ltd.; while he is not a shareholder or director of BWP or Becker, he does maintain an interest in the activities of those entities.
On April 26, 1978, David O. Wicks, of BWP, and Rubenstein met with representatives of two banks Citibank and Continental Illinois National Bank to discuss the possibility of bank loans to BWP for an acquisition of Transcon, including the possibility of either a cash merger or a tender offer. It was understood by the bank representatives that Rubenstein would play a role in the future management of Transcon, but the specifics of that role were not "spelled out". Rubenstein did mention certain management changes he would introduce. It was also understood that Rubenstein would have an equity interest in Transcon. At that point, Wicks and Rubenstein did not know whether the proposed acquisition of Transcon would be friendly or unfriendly, and the meeting ended with the understanding that BWP would approach Transcon management to ascertain its position. On April 27, Fradkin of Citibank phoned Wicks with the advice that Citibank would not participate in the financing if the Transcon acquisition were unfriendly. Subsequent to Wender's meeting with Transcon in May to be discussed below Wicks informed Fradkin that the acquisition would in fact be an unfriendly one.
Bruen, of Continental Illinois, inquired of Wicks on a number of subsequent occasions as to whether "there was anything further for us to do with regard to our discussion of April 26" and, receiving only negative replies, stopped inquiring.
Since the April 26 meeting, there have been no substantive discussions with Continental regarding Transcon.
Throughout these meetings, Rubenstein made sure that all participants in the discussions understood that he would be unable to join in the Transcon acquisition unless he first either divested himself of Alamo or obtained ICC approval for the transaction. As the owner of an ICC-regulated carrier, he was required by the provisions of the Interstate Commerce Act to do either of those things. This fact was raised at the meeting at Skadden, Arps' offices, and at the April 26 meeting with the bank representatives. Becker also understood this; Wender "anticipated" that Rubenstein would participate in the Transcon investment, but knew that unless Rubenstein sold Alamo he would be precluded from doing so because of "ICC problems". Wender did expect, based on his involvement in some of the negotiations for the sale, that Rubenstein would sell Alamo. In many internal Becker documents written during this stage of the transaction, however, it was stated that "Rubenstein-BWP", I. e., a partnership involving Rubenstein, would be involved in the Transcon acquisition.
On May 11, 1978, Wender met with Stephen Ackerman, Vice-President and Treasurer of Transcon. He proposed a negotiated acquisition of Transcon, at a non-specific price substantially above market and an incentive plan for existing management. Ackerman responded that he did not believe that Transcon would be interested in the proposal, but that he would advise Wender if there were any interest in further discussion.
On May 22, Ackerman phoned Wender and stated that Transcon had no interest in the proposal. In light of this circumstance, Becker considered the alternatives which included an unfriendly tender offer for 51% Of the stock, and the making of a minority investment. Becker believed that Rubenstein would be involved in whichever of these alternatives was followed; Wender expected that Rubenstein would "dispose of Alamo".
During the following month, Becker decided not to go ahead with an unfriendly tender offer but, rather, to acquire a minority interest in Transcon.
(Over the past 17 years, over 50% Of BWP's profits have been derived from private investment activities, I. e., those in which the firm acted as a principal, using its own funds for its own account. In most of those investments, BWP held a minority position; in some, it has had a majority interest. BWP's minority interests have ranged from 7.5% To 30-40%, and have been in a variety of industries. It also has a 60% Investment in a book distribution company. In the past year, BWP has acquired minority positions in two other companies besides Transcon.)
With respect to Transcon, draft investment brochures dated June 9, 1978 describe a 100% Acquisition. New drafts prepared on June 16, however, delete the discussions of financial structure and bank financing, suggesting that Becker no longer planned a 100% Acquisition. The second drafts also delete the original discussion of Wender's and Rubenstein's projected roles in the management of Transcon, which had been described in the June 9 draft as follows:
While BWP and its associates have not established a management strategy in terms of identifying changes in current Transcon management and possible new key personnel, two members of BWP and its associates have extensive experience in the trucking industry from operations, managerial and corporate director points of view. Ira T. Wender, President of BWP is a director of IU International
which has a trucking division consisting of . (sic) Jerry Rubenstein, formerly President of IU International owns a successful truck line in Texas and has had broad experience in Trucking as well as other industries (see Exhibit ). (sic)"
"Messrs. Wender and Rubenstein would be intimately involved in Transcon as the management and operational changes are examined and implemented. However, their exact role as management and directors will depend on (1) in the case of Mr. Rubenstein the sale of his current truck line and (2) in the case of Mr. Wender, his resignation from the Board of IU, to comply with ICC regulations concerning ownership.
Further, it is anticipated that senior officers of BWP with extensive investment management skills and associates of Mr. Rubenstein with Trucking background will be actively involved in the future planning of Transcon."
On June 19, a meeting was held at the offices of Skadden, Arps, attended by Wender, Randy Harris, (Becker's General Counsel), Wicks, Marie McMahon (Wicks' assistant), Rubenstein, and three attorneys from the law firm. The various alternatives under consideration were discussed at the meeting, along with the legal ramifications and requirements pertinent to each. With respect to the acquisition of a minority interest, a proposal was discussed of first making open market purchases and then acquiring large blocks of stock from institutional holders.
The subject of Rubenstein's role in the proposed transaction was also discussed at the June 19 meeting. Again, Rubenstein stated that he could not participate unless he divested himself of Alamo. Rubenstein expressed some doubt at the meeting as to whether he would in fact be able to sell Alamo, given the progress of the negotiations. He did, however, believe that he could legally be a consultant to the investors, even if he could not himself invest.
On June 20, Wender, Wicks, and William Cockrun (Vice Chairman of BWP) had further discussions regarding the form of the Transcon investment or acquisition, and it was decided not to make an unfriendly tender offer, whether for 100% Or 51% Of the shares.
On June 21, Wender met with Leonard Lauder, senior vice-president of Clinique Laboratories, Inc. and president of EJL Corporation. At that meeting, he gave Lauder a copy of the Synectics Report, the 1977 Annual Report of Transcon, and a cover memorandum which detailed a proposed acquisition of approximately 20% Of Transcon's outstanding stock, with an investment of $ 7.5 million. It was estimated that 20% Of the stock could be acquired for approximately $ 6.2 million. The memorandum also stated that BWP would invest.$ 2.5 million, with the remaining $ 5 million to come from a single private investor. Finally, it was noted that the 20% Figure was not definite, and that the actual amount to be purchased would be "sufficient stock to enable XYZ (the proposed investment vehicle) to discuss changing current business practices with present management of Transcon." It was anticipated that bank debt could be used to increase XYZ's stock ownership above the 20% Range. BWP's investment would be made through Halcyon the Synectics-Omni-BWP partnership that had been formed on July 1, as of February 1. It was thus contemplated at that time that Rubenstein would have an equity interest in the "XYZ" investment; this was Lauder's understanding, although he did not specifically understand that Rubenstein's participation was to be made through Halcyon.
At the end of the meeting, Lauder indicated that he would consider the investment while on vacation and would advise Wender upon his return in late July. He understood that any participation by Rubenstein was contingent on his disposing of Alamo.
Between the time of the Wender-Lauder meeting on June 21 and Lauder's return from vacation, Rubenstein's negotiations for the sale of Alamo did terminate, and he was definitely unable to participate in the Transcon investment. These negotiations had been in progress throughout late 1977 and 1978. In large part, they were carried out by Jeffrey J. Collinson, senior vice president of J. Henry Schroder Corporation, a shareholder of Redstone and as will be discussed below for a time a participant in the Transcon investment.
In some cases, the negotiations during this period for the sale of Alamo were a renewal of previous discussions on that subject. In the early 1970's, Ronald E. Burbank of Consolidated Freightways had been in contact with Rubenstein, with respect to a purchase by Consolidated of Alamo's operating authority in certain parts of Texas; there had, in fact, been such contacts with Alamo's principals before its sale to Rubenstein. Discussions with Yellow Freight began in the late summer or fall of 1977. McLean Trucking Company had been interested in a possible acquisition of Alamo in late 1976 or early 1977.
During 1978, there was a short period which terminated in February, during which negotiations took place with Roadways Express, Inc. The principal negotiations were with Consolidated Freightways and Yellow Freight Systems, Inc. The negotiations with Consolidated began in May, 1977 and continued in a somewhat sporadic fashion until July of 1978.
Negotiations with Yellow Freight began in the late summer or fall of 1977, as noted above, and continued until May, 1978.
As of August 4, it became clear to Rubenstein that there was no prospect for future negotiations for the sale of Alamo, as the NLRB on that date ordered a collective bargaining union recognition election to be held at Alamo in October. The Teamster's Union subsequently won the October election. With one minor exception, there have been no negotiations for the sale of Alamo since late June of 1978, when Burbank of Consolidated Freight sent a letter to Collinson. The exception is an inquiry made to Banner Industries in November 1978; Banner was not interested in acquiring Alamo.
Lauder returned from vacation in late July or early August. During the first week in August, Wender was informed by Rubenstein that negotiations for the sale of Alamo had terminated, and that the union election had been ordered. At some point in early August, Lauder advised Wender that Clinique would go forward with the $ 5 million investment in Transcon.
A draft Memorandum of Understandings was prepared dated August 10, 1978.
The Memorandum of Understandings was executed by Clinique and Becker on August 31, 1978. It provides that Becker and Clinique must give one another a right of first refusal should either of them decide to sell their Transcon stock, unless Becker wishes to sell to Rubenstein or an entity affiliated with him. In that event, Becker may transfer up to 50% Of its stock to Rubenstein or an affiliated entity. However, Becker may transfer up to 100% Of its stock to an entity "of which Rubenstein or his affiliated entities owns no more than a 60% Interest and the remaining interest is held, directly or indirectly, by Becker, Clinique, both of them or any affiliate of either of them." The Synectics-Omni-BWP partnership, Halcyon, appears to meet the latter requirement. Becker is under no obligation to transfer any shares to Rubenstein or any other entity, and Rubenstein at the present time (and at the time the Memorandum of Understandings was drafted and executed) is unable to acquire a substantial interest in Transcon, directly or indirectly. Wender has not discussed any term of a future sale, such as price or number of shares, with Rubenstein; it is Wender's understanding that he "couldn't" discuss such matters with Rubenstein, and that Rubenstein has never tried to have such a discussion with him.
Becker and Clinique began purchasing Transcon stock on September 15, 1978. Rubenstein remains in close contact with Wender with respect to Becker's and Clinique's purchases of Transcon stock, and until recently he received copies of the Becker internal reports on the progress of the purchase program including price and cumulative totals of purchases. Rubenstein has also made frequent phone calls to George E. Morris, Jr., the Becker employee in charge of actually making the purchases of Transcon stock. He does not, however, advise Morris regarding those purchases. Rubenstein's calls to Morris were made from the end of September to December.
During May and June, 1978, Wender met several times with Stephen R. Petschek, president of J. Henry Schroder Corporation. Petschek is a former client of Wender's, and a friend of both Wender and Rubenstein.
Wender, Rubenstein and Petschek and their families spent the weekend of September 22-24 in Vermont. During that weekend, or possibly during a weekend in June, Wender described to Petschek the Becker-Clinique investment in Transcon. Wender made it clear to Petschek that Schroder would have to invest at least $ 500,000. which was the maximum Petschek thought Schroder would invest.
On September 29, Petschek and Mark Magid (Petschek's superior at Schroder) met with Wender and Rubenstein at the Knickerbocker Club in New York. Rubenstein was present at Schroder's request. The Transcon investment was explained to Magid, including the fact that Rubenstein could not participate.
It was also explained to Magid at the September 29 meeting that Schroder's investment would be subject to a 20% Management override, I. e., that 20% Of the shares Schroder purchased might at some point be utilized as an incentive device for Transcon management. Becker's shares were subject to the same condition, although Clinique's were not. The reason for this distinction, Wender testified, was that Clinique was to obtain a preferred interest having a limited profit participation.
Magid and Petschek discussed the possible investment in Transcon about 8-10 days following the Knickerbocker Club meeting, at which time Magid decided that Schroder would make the investment. At some point on or before October 16, Petschek called Wender and informed him of the decision. On October 16, Wender sent an interoffice memorandum to Wicks regarding Schroder's participation, which read in pertinent part as follows:
"Steve Petschek of Schroders called me to say they would like to join in the transaction. The plan is for them to put up $ 500,000 or 20% Of our position. They would pay the same 2/3 rd of the New York Stock Exchange commission as we and the Lauders. Their stock is also subject to the Omnicall."
Wender dictated this memorandum, but did not read it before he sent it to Wicks.
The term "Omnicall" may not have been transcribed as Wender intended it. Wender did not read the memorandum he had dictated. The term as dictated, and as Wender intended it, may have been "Omni-type call". Wender intended to refer to the management incentive stock arrangement discussed at the Knickerbocker Club meeting. The term "Omnicall" was not intended to refer to a call held by the Omni corporation on Becker's Transcon stock. Omni does not have a call on such stock, and did not have a call at the time of the October 16 memorandum. Wender used the name "Omni" in his reference to the management incentive plan because a similar arrangement had been used in the formation of Omni as well as several other BWP investments. Thus, 15% Of Omni's stock is held, for nominal consideration, by three of its management personnel (Sullivan, Lenz and Prashker). Wender referred to this arrangement as a "call", although it technically was not a call because the original ...