Before Smith, Mansfield and Mulligan, Circuit Judges.
Tiger International, Inc. (Tiger) is the holding company of a subsidiary, The Flying Tiger Line, Inc., (Flying Tiger) which is the nation's largest all-cargo air carrier, maintaining routes throughout the United States and across the Pacific Ocean. Tiger is a Delaware Corporation with its principal place of business in Los Angeles, California. Seaboard World Airlines, Inc. (Seaboard) is the nation's second largest all-cargo airline and the leading air-cargo carrier over the North Atlantic. Seaboard is a Delaware Corporation with its principal place of business at John F. Kennedy International Airport, Jamaica, New York.
In January and February of 1978, Tiger acquired some 600,000 shares (slightly less than 10%) of the common stock of Seaboard through purchases on the open market at an average price of $6.47 per share. In accordance with the provisions of the Williams Act, 15 U.S.C. § 78m et seq., when Tiger had purchased 5% Of the Seaboard stock it filed a Schedule 13D Statement, 17 C.F.R. § 240.13d-101, dated February 16, 1978 which, Inter alia, recited its willingness to explore with Seaboard the possibility of a merger or other business combination. Tiger further represented that it had no present plans, were it to gain control of Seaboard, to liquidate that company or to sell its assets.
A meeting was held on March 9, 1978 between the principal executives of the two companies. During follow-up negotiations Seaboard suggested that a starting point for discussion of a business combination would be an offer of approximately $120 million dollars $20 per share based upon Seaboard's pre-tax asset liquidation value.
The response of Tiger's chief executive by letter dated March 16, 1978 was as follows:
During our meeting on March 9th you indicated that your Board of Directors would like to have a price from us. In our telephone conversation on March 13th you indicated that a starting point for discussions would be approximately $120 million, based upon Seaboard's stated book value of $57 million plus the value of aircraft and other items not reflected on the balance sheet. Applying the same type of analysis to our own company would produce a theoretical value of over $1.028 billion, more than four and one-half times the total market value of our shares. (Such a value is comprised of a book value of $261 million, $530 million for added value of railcars and $237 million for aircraft.) We do not regard such a figure as a useful valuation of our own business, and we are not in a position to assay the value of Seaboard on such a basis.
Following these abortive discussions, on April 19, 1978 Tiger amended item 4 of its Schedule 13D form to provide in part: "Tiger regards Seaboard's suggested price ($20 per share) as unrealistic and notes that Seaboard stock traded at $4 a share as recently as December 1977, before Tiger purchased its 9.9% Interest."
In October, 1978, Tiger acquired an additional 362,200 shares of Seaboard on the open market at an average price of $14 per share, thereby increasing its ownership to about 15.6% Of the total shares outstanding. Since both Seaboard and Flying Tiger are certificated air carriers, approval by the Civil Aeronautics Board (CAB) of the acquisition of over 10% Of Seaboard's stock (a percentage giving Tiger presumptive control of Seaboard under the Federal Aviation Act, 49 U.S.C. § 1378(f)) was required. To help gain CAB approval of this purchase as well as Tiger's proposed future purchases of up to 25% Of Seaboard's shares, Tiger had deposited in a blind trust with the Bank of California, N.A. all the Seaboard shares it had acquired on the open market. Before the CAB, Seaboard contended that Tiger had violated sections 408 and 411 of the Federal Aviation Act, 49 U.S.C. §§ 1378(f), 1381, by acquiring presumptive control of Seaboard prior to Board approval. Seaboard also charged a violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, because such control might substantially lessen competition, tend to create a monopoly and constitute an act of unfair competition.
On December 14, 1978 the CAB issued an order (No. 78-12-173) in which it determined that pending a final decision on the application Tiger could purchase up to 25% Of the Seaboard shares, to be held in the blind trust pursuant to agreement with the Bank of California, N.A.*fn1 The presumption of control predicated upon ownership of 10% Of the stock, 49 U.S.C. § 1378(f), was found rebutted by the use of the voting trust. The CAB order further indicated that any decision on the merits would be premature. "No party has convincingly demonstrated that mere ownership of this particular amount of stock (25%) would irreparably harm Seaboard or endanger the public interest in the orderly adjudication of the underlying competitive issues in this case." Order No. 78-12-173 at 8. The CAB instituted a proceeding to investigate the allegations raised by Seaboard, especially the competitive significance of the proposed acquisition. This proceeding is still pending. Seaboard's petition for a stay of the order of the CAB was denied by the United States Court of Appeals for the District of Columbia Circuit on January 12, 1979.
On January 18, 1979 Tiger made its tender offer to purchase for cash 638,000 shares of Seaboard common stock or about 9.4% Of the total outstanding. Together with those shares already acquired on the open market a successful offer would raise Tiger's holdings of Seaboard common to the maximum 25% Permitted by the CAB order. The offer was at the price of $12.30 per share.*fn2 Initially scheduled to expire on February 8, 1979, the offer was later extended to February 15 and, ultimately, to March 12, 1979.
On February 7, 1979 Seaboard filed its complaint in the United States District Court, Southern District of New York, alleging that Tiger's offer to purchase contained untrue statements of material facts in violation of section 14(e) of the Williams Act, 15 U.S.C. § 78n(e), section 10(b) of the Securities Exchange Act,*fn3 and the rules and regulations promulgated thereunder. Specifically Seaboard argued that paragraph 12 of the offer was materially misleading in that it failed to disclose the "enormous true value" placed upon the Seaboard stock by Tiger. Paragraph 12 of the tender offer recited Tiger's prior statement made in item 4 of its amended Schedule 13D, filed with the Securities and Exchange Commission on April 19, 1978, that Seaboard's suggested price of $20 per share was "unrealistic." Also in that paragraph Tiger noted that Seaboard's stock traded at $4 per share as recently as December 1977.*fn4 The Seaboard complaint alleged that its stock was of "unique and high value," particularly because its DC-8F and Boeing 747 jet freighter aircraft were in high demand, and were both enormously costly and difficult to obtain. Tiger was charged in the complaint with knowledge of the increased value of Seaboard's stock by reason of the growth of Seaboard's business and the company's profitability, reflected in its recent dividends. The complaint concluded that in view of this Tiger was attempting to acquire Seaboard at an unfairly low price. Seaboard sought preliminary and permanent injunctive relief against Tiger's acquisition of any common shares of stock until Tiger had made "full disclosure of material information to the shareholders of Seaboard."
Seaboard further sought a temporary restraining order preventing Tiger from proceeding with its tender offer, and expedited discovery of certain documents filed by Tiger in the proceedings before the CAB. On February 7, 1979, Judge Motley denied the temporary restraining order because Seaboard had failed to show irreparable harm and denied the application for expedited discovery on the ground that the plaintiff had not shown any need for the documents. On February 8, 1979 this court dismissed for lack of appellate jurisdiction Seaboard's appeal from the denial of its motions for discovery and a temporary restraining order. The parties were directed to return to Judge Motley for an immediate hearing on the application for preliminary injunctive relief. On the afternoon of February 8, Judge Motley instructed Tiger to produce documents filed with the CAB and these were produced early that evening. The preliminary injunction hearing was held on February 9.
At that hearing Seaboard produced two witnesses, including its senior vice president, Samuel Fondiler. Fondiler testified that the liquidation value of Seaboard's assets had been estimated by him to be $20 per share in March, 1978. Two principal factors accounted for this valuation. First, according to Fondiler's calculations Seaboard's Boeing 747 and DC-8F aircraft were then worth $30 million more than the amount listed on Seaboard's books. Second, the witness estimated that additional aircraft leased by Seaboard were worth $30 million above their long-term fixed rental. Fondiler also testified over objection to his interpretation of some of the documents discovered in the CAB hearing which indicated that Tiger had been made aware of the value of the Seaboard aircraft.
Tiger conceded that the liquidation value of Seaboard's assets did approximate $20 a share but argued below and on this appeal that such a valuation is not a useful norm for the purpose of merger or acquisition discussions where the merged or acquired company is to be maintained as a going concern. Tiger introduced three documents into evidence. The most pertinent was the above-mentioned March 16, 1978 letter from the President and Chairman of Tiger to the President and Chairman of Seaboard indicating Tiger's reaction to the $20 per share valuation. Tiger produced no witnesses, did not request time to obtain any, and rested.
In the oral opinion given by Judge Motley on February 9 the District Judge found that Seaboard had made a clear showing of (1) probable success on the merits and possible irreparable injury to itself and its stockholders, and (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward Seaboard and its stockholders. A preliminary injunction was issued pending a full trial on the merits which was scheduled to commence March 14, 1979. On February 13 the district court denied Tiger's motion to vacate the preliminary injunction or, in the alternative, to reopen the hearing. This appeal followed and was argued on March 8, 1979. Since time was of the essence and both parties wished a speedy determination on the merits this court on March 9, 1979 entered an order dissolving the preliminary injunction as improvidently granted. Judge Mansfield dissented. The order indicated that a formal opinion would follow.*fn5
The question before us is whether the district court properly issued preliminary injunctive relief banning Tiger from purchasing Seaboard common stock pursuant to its tender offer of January 18, 1979. The complaint in substance charged that paragraph 12 of the tender offer violated section 14(e) of the Williams Act. Preliminary injunctive relief in this Circuit calls for a showing of "(a) irreparable harm and (b) either (1) likelihood of success on the merits 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." Jackson Dairy Inc. v. H. P. Hood & Sons, Inc., 596 F.2d 70 at 72, (2d Cir. 1979); accord, Caulfield v. Board of Education, 583 F.2d 605, 610 (2d Cir. 1978); Triebwasser & Katz v. American Telephone & Telegraph Co., 535 F.2d 1356, 1358-59 (2d Cir. 1976); see Mulligan, Foreword Preliminary Injunction in the Second Circuit, 43 Brooklyn L.Rev. 831 (1977).
On appeal from the granting of a preliminary injunction we disturb the relief afforded by the district court only upon a showing of either abuse of the district court's discretion or a clear mistake of law below. New York v. Nuclear Regulatory Commission, 550 F.2d 745, 750-51 (2d Cir. 1977); Triebwasser & Katz v. American Telephone & Telegraph Co., supra, 535 F.2d at 1358. We find here clear legal error necessitating reversal of the district court's order.
1. Likelihood of Success on the Merits
As set forth above, the second prong of the test for preliminary injunctive relief is addressed to the plaintiff's probability of success on the merits or the presence of sufficiently serious questions to create a fair basis for litigation. To resolve these issues we must first consider section 14(e) of the Williams Act, which Seaboard claims was ...