The opinion of the court was delivered by: LEVAL
Brascan Ltd. ("Brascan") is a Canadian publicly held company whose 26,100,000 common shares are held by some 50,000 stockholders and are traded on the Toronto, Montreal, London and American Stock Exchanges.
In late 1978 Brascan announced the sale of its principal subsidiary, an electric utility in Brazil, for $ 380 million (U.S.) cash. Shortly thereafter Edper Investments Ltd. ("Edper Investments"), a privately held Canadian venture capital company, became interested in acquiring Brascan shares. Edper Investments made some purchases in late 1978 and early 1979. In March, 1979 Edper Investments joined with Patino, N.V. ("Patino"), a privately held Netherlands company, to create Edper Equities Ltd. ("Edper"), a corporate entity formed for the purpose of attempting to obtain either control, or a major portion, of Brascan shares. Edper is the principal defendant in this action. At the end of March, 1979 Edper owned approximately 5% Of the outstanding Brascan shares.
Edper approached Brascan on April 5 with a proposal for a friendly acquisition. The next day the Brascan board resolved to make a tender offer for all the outstanding shares of F. W. Woolworth Co. ("Woolworth"). Edper's overtures were rebuffed.
In the days which followed, Edper embarked on an intensive examination of Brascan's position. Edper concluded that an acquisition of Woolworth by Brascan would be detrimental to Brascan's interests. Several courses of action were considered by Edper with a view to acquiring a dominant stake in Brascan. Among these were an offer on the Toronto Stock Exchange for a controlling interest in Brascan shares, conditioned on Brascan's abandoning its offer for Woolworth stock and purchases of Brascan's shares on the American Stock Exchange (the "AMEX"). Edper also considered disposing of its interest in Brascan in view of the Woolworth offer. Edper's Toronto conditional offer was abandoned April 20 when the Ontario Securities Commission ("O.S.C.") denied permission to proceed. A few days after the O.S.C.'s decision, Edper began to give more serious consideration to purchases over the AMEX. At a meeting on April 29 a tentative decision was made to proceed in this fashion. Edper's initial objective was to increase its holding to 10%, for three reasons. First, a 10% Holder is entitled under Section 103(1) of the Canada Corporations Act to cause a stockholders meeting to be summoned. Second, Edper believed that with a position of this size it might induce Brascan's management to take its opposition seriously and drop the Woolworth offer. Third, Edper thought it needed more stock in order to carry more weight in expressing its views at a hearing which the New York Attorney General had set for May 10 on the Brascan Woolworth offering. However, no firm decision to purchase Brascan shares on the AMEX was made until the early morning of April 30.
During the period already discussed, nothing which Edper had stated or done was false, misleading, manipulative or violative of any law.
On April 30, Edper, through, Balfour Securities Co. ("Balfour" or "Balfour Securities"), a New York broker, purchased in excess of three million Brascan shares on the AMEX. That evening, in response to requests from the O.S.C. and the Toronto Stock Exchange, Edper issued a press release identifying itself as the purchaser. Answering a press inquiry on that release, an Edper representative said that Edper did not then plan to buy more Brascan shares. The statement was accurate when made and reflected a decision made by Edper's management after trading closed on April 30. This statement was published the morning of May 1 in the Wall Street Journal.
On the morning of May 1 Edper's management reconsidered their decision, recognizing that additional purchases of Brascan stock were necessary to protect their investment. Observing that Brascan's management was undeterred by Edper's April 30 acquisitions and hearing that more stock was available at prices comparable to those of the prior day, Edper decided to resume purchasing. Without issuing a further public statement, Edper reentered the market and on May 1 again acquired more than three million shares of Brascan on the AMEX.
During April, Edper had occasionally consulted with James Connacher, a Canadian broker who was knowledgeable about Brascan shares, about the possibility of Edper's acquiring a major position in Brascan shares. On April 29 at Edper's request, Connacher accompanied Price, an Edper man who was sent to New York to execute Edper's purchasing strategy, and gave Price help and advice concerning the selection of a broker, negotiating commissions and the hedging of foreign exchange in order to make payment.
During April 30 and May 1, Connacher and his firm, Gordon Securities, acting independently of Edper, contacted between 30 and 50 large (mostly institutional) shareholders of Brascan and, as broker for these holders, brought to the market a large percentage of the stock purchased by Edper on those two days. Gordon Securities also purchased Brascan shares for its own account in Canada and resold them to Edper on the floor of the AMEX.
On the evening of May 1 Brascan obtained an Ex parte temporary restraining order in Part I of this court, barring Edper, Inter alia, from exercising stockholders' rights with respect to any of its shares and from making any further purchases. A hearing was held on May 16, 17 and 18 on Brascan's motion for a preliminary injunction. Briefs were filed on May 21 and argument was held May 22.
Jurisdiction, Venue and Relief Sought.
Brascan alleges violations of Sections 10(b), 13(d), 14(d), and 14(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78m(d), 78n(d), and 78n(e), and moves for a preliminary injunction barring all defendants, other than Balfour Securities, Gordon Securities Inc., Gordon Securities Limited and James Connacher, from acquiring any further Brascan shares; soliciting any proxy or other authorization or agreement to vote Brascan shares; voting any Brascan stock which they now own; or exercising any incidents of ownership with respect to the Brascan stock they own as a means of affecting Brascan's management. Brascan also seeks an order directing Edper to divest itself of all Brascan stock which it has purchased on April 30 and May 1, 1979.
Jurisdiction of this action and venue in this District lie under Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
The Parties and Others Involved.
Plaintiff Brascan is a publicly held corporation organized and existing under the laws of Canada with its principal place of business located in Toronto, Province of Ontario, Canada. Plaintiffs Brascan Holdings Inc. ("Brascan Holdings") and Brascan U.S.A. Inc. ("Brascan U.S.A.") are organized and existing under the laws of Delaware, with their principal places of business located in New York, New York. Brascan Holdings is a wholly-owned subsidiary of Brascan and Brascan U.S.A. is a wholly-owned subsidiary of Brascan Holdings. Both were formed for the purpose of facilitating the making of a tender offer by Brascan for all the outstanding shares of common stock of Woolworth.
Defendant Edper is a Canadian corporation with its principal place of business in Toronto, Canada. Edper was formed in late March, 1979, for the purpose of acquiring effective control of Brascan. Defendant Edper Investments Ltd. and defendant Patino, N.V. are privately held venture capital companies, and are the sole shareholders of Edper. Defendants Peter and Edward Bronfman are directors and shareholders of Edper Investments. Defendant J. Trevor Eyton is a director of and legal counsel to Edper. Jack Cockwell is treasurer of Edper Equities and executive vice president of Edper Investments. Timothy Price is vice president of both Edper Equities and Edper Investments. Jaime Ortiz-Patino is a director of Edper Equities. He is also a director of Patino. Patrick Keenan is president of Edper. He is also president, chief executive and a director of a Patino company. Frederick McCutcheon is a Toronto stockbroker. He is also a director of both Patino and Edper.
Defendant Balfour Securities is a securities dealer which transacts business on the American Stock Exchange. Jay Goldsmith is the president of Balfour. A. G. Becker & Co. ("Becker") is a clearing broker for Balfour.
Defendant Gordon Securities Ltd. ("Gordon Securities" or "Gordon") is a brokerage firm with its main office in Toronto, Canada. It also maintains branch offices in Montreal and Calgary. Its wholly-owned subsidiary, defendant Gordon Securities, Inc., has an office in New York City and transacts business on the AMEX. Defendant James Connacher is President of Gordon Securities Ltd.
Detailed Findings of Fact.
Edper Investment's initial purchase of 50,000 Brascan shares was made in late December, 1978, after Brascan had announced the sale of its principal subsidiary, an electric utility in Brazil ("Light"), to the Government of Brazil for $ 380 million (U.S.). The purchases were made for investment and in anticipation of either a cash distribution by Brascan of the proceeds of the sale of Light or an offer by a third party, attracted by the cash, to purchase Brascan shares at a premium over the market.
In early January, Price of Edper Investments indicated to Connacher of Gordon Securities that Edper Investments was seriously looking at Brascan as a possible acquisition candidate. On or about January 15, 1979, Gordon purchased 100,000 shares of Brascan stock for an Edper company. On or about February 15, 1979, Connacher and a research analyst from Gordon Securities, David Dorian, met with Cockwell and Price of Edper Investments. The principal focus of the meeting was a discussion between Cockwell and Dorian concerning their respective analyses of the value of Brascan shares. Connacher also told Cockwell who were some of the large Brascan shareholders. Toward the end of February, Connacher's firm purchased 650,000 Brascan shares for Edper Investments.
In January, 1979, Eyton and Keenan had brief discussions relating to the possibility of Edper Investments and Patino investing jointly in Brascan shares. These initial contacts resulted in a meeting between representatives of Edper Investments and Patino on February 20, 1979, at which time Edper Investments proposed that the two groups participate together in a bid for control of Brascan. Another meeting at which this subject was discussed was held on February 27, 1979. On that date Patino also commenced purchasing Brascan shares. On March 26, 1979, an arrangement between Edper Investments and Patino was formalized and Edper was created as a jointly owned vehicle, owned 2/3 by Edper Investments and 1/3 by Patino, for carrying out acquisitions. By that date, Edper Investments owned 800,000, and Patino 460,000 Brascan shares. This amounted to approximately 5% Of Brascan's outstanding common stock, which was contributed to Edper.
On March 30, 1979, at Eyton's request, Brascan's investment banker in Canada arranged for Edper representatives to meet with Moore, Chairman of the Brascan Board, on April 5, 1979.
At the April 5 secret meeting, the Edper representatives informed Moore of Edper's holdings in Brascan and that Edper was considering making a bid for effective control of Brascan. At that time, Edper was contemplating making a bid through the facilities of the Toronto Stock Exchange, and was hoping for Brascan's endorsement.
Edper offered Brascan assurances with respect to managerial continuity and the like. Moore noted that it was not the board's policy to recommend to shareholders offers for less than all of the outstanding shares, but stated that his Board was to meet the next day. Edper requested a response after the Board meeting and was told it might expect response in the afternoon of April 6.
The Brascan Board convened on April 6. At that meeting, it resolved to make a tender offer for all the outstanding shares of Woolworth's common stock.
That afternoon, Eyton delivered a letter on behalf of Edper to the Brascan Board Meeting (Exhibit 5). The letter confirmed Edper's interest in Brascan, stating that Edper was considering making a bid for 45% Of the outstanding Brascan shares at $ 27 Cdn. per share.
On April 9, 1979, having received no response from Brascan, Eyton contacted Brascan's Canadian counsel at 7:45 a.m. to read him the text of a release which Edper proposed to issue concerning its contemplated offer to purchase in Canada 11.7 million shares of Brascan stock. Immediately thereafter, the press release was made available to the financial press. The press release, in part, stated:
"Edper Equities Ltd. . . . announced today it is considering making an offer to purchase 11.7 million Class A common shares of Brascan Limited at the price of Cdn. $ 28 per share. Edper noted that it presently holds approximately 1.3 million Class A common shares so that, on completion of a successful offer, the aggregate holding would amount to approximately 13 million Class A common shares representing approximately 50% Of the outstanding voting shares." (Exhibit 6A).
It further announced that any bid by Edper would be conditioned upon no action being taken by Brascan management which would effect a material change in the affairs of Brascan.
Later that morning, Brascan publicly announced its proposed tender offer for all the outstanding common stock of Woolworth. At about noon that day, Brascan's Canadian counsel called Eyton to advise that Brascan's management did not consider Edper's offer to be in the best interests of Brascan or its shareholders.
Edper then proceeded to obtain as much information as it could secure in an effort to evaluate the Woolworth offer. Keenan was knowledgeable about Woolworth, and was in a position to give immediate advice about what the Woolworth acquisition would mean to Brascan. By April 10, Edper had in its possession a report on Woolworth prepared by The Wertheim Group, as well as information found in financial publications and other sources available from the financial community concerning Woolworth. In addition, Edper discussed Woolworth with individuals who were knowledgeable about the retail industry. Cockwell of Edper prepared a cash flow analysis in order to establish the effect of the proposed Woolworth transaction on the cash flow of the combined enterprises. Edper concluded that the Woolworth acquisition would reduce the intrinsic value of Brascan shares by an amount in excess of $ 10.00 per share and produce a negative combined cash flow.
On April 10, 1979, Edper published two press releases. The first, issued at noon (Exhibit 7) stated that Edper was considering whether or not to proceed with its contemplated offer to purchase 11.7 million shares in view of Brascan's announcement of the proposed Woolworth tender offer. The release stated that such an acquisition involving borrowings of $ 800 million would effect a "material change" in the affairs of Brascan, "particularly so when the Brascan offer for Woolworth was apparently going to be vigorously resisted." The release concluded that a decision whether to proceed would be made later that day.
At 9:00 p.m. Edper issued a second press release announcing that it would not be proceeding with its offer in view of the Woolworth offer (Exhibit 8). The release stated that Edper was "now assessing its position as one of Brascan's major shareholders holding something over 5% Of its outstanding common shares", that a successful Woolworth bid "would convert Brascan from a highly liquid company . . . to a debt-burdened company" and that "the acquisition of Woolworth by Brascan would have an immediate negative impact on Brascan's consolidated cash flows. . . . On this basis, Edper considered that the Woolworth transaction was not in the best interest of Brascan or its shareholders." The release also indicated that a number of major Brascan shareholders had expressed their concerns and that Brascan's management was giving little consideration to the interests of its shareholders. Edper noted that Brascan management had not sought shareholder approval of either the sale of Light or the Woolworth acquisition. Edper commented that Brascan shareholders felt that the Woolworth transaction "would have the effect of precluding Edper or any other person from making a bid for the outstanding Brascan shares at a premium over their market price." This release also concluded by stating Edper's view that the Brascan offer for Woolworth would be vigorously resisted.
During the week of April 9, following Brascan's announcement of its offer for Woolworth stock, the Edper group held several meetings to discuss the various alternatives available to them.
The agendas for the meetings held by the Edper group the weeks of April 9 and 16 listed, as topics of discussion and as tasks to be allocated, contact with Brascan shareholders. Edper's contacts with the shareholders of Brascan was confined in large part to an exchange of views on the advisability of the Woolworth offer. There is no evidence that at any point prior to April 30 Edper discussed with Brascan shareholders the availability of their Brascan stock for possible sale.
During the week of April 16, Edper began to consider seriously, from among the alternatives available to it, the making of a "conditional" offer for 11.7 million shares of Brascan stock over the facilities of the Toronto Stock Exchange, such an offer to be conditioned upon the abandonment or failure of the Woolworth offer. Under Ontario law, the making of such an offer, required specific approval of the Ontario Securities Commission, to which Edper applied on April 17.
On April 19, a hearing was held before the Ontario Securities Commission. Edper's application was opposed by Brascan management and one other Brascan shareholder. The following day, April 20, the Commission denied Edper's application because of its conditional nature, and Edper issued a press release announcing that fact. In the release Edper "stressed it would continue to pursue other avenues to have the Woolworth acquisition abandoned" (Exhibit 17).
On April 20 and 23, key members of the Edper group met to consider what course of action Edper should then take. Numerous alternatives were discussed, including: the making of an unconditional offer; the making of a conditional offer in the United States, Great Britain or in the provinces of Canada (where regulatory approval was not required); the making of an unconditional offer with paper or other securities (that would have the same effect as a "Woolworth condition"); a stock exchange block offer in Canada, and private arrangements with Brascan shareholders. Purchases over the AMEX were briefly discussed but this alternative was not given prominence at that time. The group discussed the number and price of shares that would be involved in the possible courses of action open to it, various opinions were expressed, but no conclusions were reached. Also ...