Before Feinberg, Chief Judge, and Newman and Kearse, Circuit Judges.
Treadway Companies, Inc. ("Treadway") and five of its directors appeal from judgments of the United States District Court for the Southern District of New York, Gerald L. Goettel, Judge, entered in favor of Care Corporation ("Care"), two of its directors, and Daniel Cowin, in this action arising out of a struggle for control of Treadway. The complaint, filed by Treadway after Care had acquired nearly 31% of Treadway's common stock, including a large block purchased from Cowin, alleged that Cowin had conspired with Care and others to seize control of Treadway by unlawful means. Treadway sought an order requiring Care to divest itself of its stock and requiring all defendants to account to Treadway for their profits. Care filed counterclaims seeking to enjoin the issuance and sale of 230,000 Treadway shares to a third company, Fair Lanes, Inc. ("Fair Lanes"), on the ground that Treadway's board had approved the sale for the improper purpose of perpetuating its control over the corporation. Care's motion for a preliminary injunction against this sale was denied and the sale was consummated.
After a bench trial of the claims and counterclaims, but while the case was still sub judice, Care waged a proxy fight with Treadway's incumbent management for the election of six of Treadway's eleven directors. Fair Lanes' 230,000 shares were voted in favor of management's nominees for the board, with the result that management's nominees were elected by a margin of 105,000 votes. Shortly thereafter, the district court issued its opinion, ruling in favor of Care and Cowin on all claims. The court ordered that the 230,000 votes cast by Fair Lanes not be counted toward the election of directors, and declared Care's nominees to be the new directors of Treadway.
Treadway filed this appeal, and on May 1, 1980, this Court stayed the judgment of the district court and ordered that the appeal proceed on an expedited schedule. We now affirm so much of the district court's judgment as held that Care and Cowin had not violated any duty to Treadway, but reverse the determination that the issuance of shares to Fair Lanes was improper.
The sequence of events is largely undisputed on this appeal. The principal factual controversies center on the purposes for which each side took certain actions, and the information possessed by each at the time the actions were taken.
Treadway is a New Jersey corporation engaged principally in the operation and management of bowling alleys and motor inns. Daniel Parke Lieblich is Treadway's chairman and president. Murray Cole is Treadway's Secretary, General Counsel and a member of its board of directors. John R. McDonnell, Simon Gluckman and Norman Brassler are directors of Treadway. Treadway and these five directors are the appellants here.*fn1
Daniel Cowin is an investment banker who was a director of, and financial consultant to, Treadway from September 1974 until December 1978. By late 1977, Cowin had become Treadway's largest shareholder, controlling (in conjunction with his wife, and with a partner) 176,000 shares, or 14%, of the outstanding Treadway common stock.
Care is a Delaware corporation engaged in the operation of health care and recreational facilities, including bowling alleys. Robert W. Browne is Care's chairman. Philip deJourno was Care's president until April 1979, when he became Care's vice chairman. During a part of the time pertinent herein Browne and deJourno have also been directors of Treadway.
A. Care meets Cowin, acquires a position in Treadway
In January 1978, Care had a large amount of cash on hand and started looking for ways to invest it. Browne asked Chauncey Leake, an investment banker and securities analyst, to prepare a study of companies, including Treadway, involved in the bowling industry. As it happened, Leake had known Cowin professionally for many years, and knew that Cowin was a director of Treadway. With Browne's approval, Leake contacted Cowin and told him about Browne and Care, and stated that Care was considering buying Treadway stock. Leake then arranged for Cowin to meet with Leake, Browne and John Bouwer, president of Care's bowling subsidiary, Concordia Corporation, on March 21, 1978.
At this meeting, Browne told Cowin, among other things, that Care had a "considerable amount" of cash on hand, and that it intended to buy a "reasonable amount" of Treadway stock. Browne asked for Cowin's opinion whether Care should continue to purchase stock on the open market or whether a tender offer would be "a more proper way to do it." Cowin responded (according to Browne's testimony at trial) that Care "could acquire a limited amount of stock . . . in a tender offer at a reasonable premium over the market, but that (Care) probably could acquire in the open market as well."*fn2
At about this time, in late March 1978, Leake's brokerage firm started to buy Treadway stock for the account of Care. Initially, Leake bought in small amounts, and near the bid side, so as to avoid putting upward pressure on the price of the stock. Leake met again with Cowin in early April 1978, and once more discussed the purchases of Treadway stock. Also during the month of April, Bouwer visited most of Treadway's motor inns and bowling alleys, and wrote a detailed report on each.
During the early part of 1978, while Care was investigating Treadway and was beginning to acquire its stock, Treadway was actively considering the possibility of a spin-off of its unprofitable Inns Division. Treadway had Helmsley-Spear, Inc., prepare a report on the liquidation value of Treadway's motor inns. Cowin and Lieblich discussed this report with representatives of Helmsley-Spear; it was also discussed at Treadway's March 8, 1978, board of directors meeting. On April 7, 1978, Lieblich sent to all of Treadway's directors, including Cowin, a letter marked "Confidential" in which Lieblich stated that the liquidation value of the Inns Division greatly exceeded its going concern value, although its earnings were improving. On May 26, 1978, Treadway announced publicly that it was considering a spin-off of that division.*fn3 On June 6, Cowin met with Leake and discussed the likelihood that the spin-off would actually be carried out.
Care's ownership interest in Treadway soon approached 5% of the outstanding shares. When its holdings reached that point Care would be required to file a Schedule 13D with the Securities and Exchange Commission ("SEC") pursuant to § 13(d) of the Securities Exchange Act of 1934 ("1934 Act"),*fn4 stating, among other things, its purpose in acquiring Treadway stock. On June 30, 1978, at Leake's suggestion, Browne met with Lieblich to introduce himself and to explain, prior to the filing, Care's intentions regarding Treadway. Browne told Lieblich that Care had bought the stock for investment purposes only. Lieblich asked whether Browne was interested in becoming a Treadway director, but Browne said that he was not. Lieblich also raised the possibilities of a Care-Treadway merger and of a sale to Treadway of Care's bowling interests. Browne responded that Care was not interested. No mention was made, at this meeting, of Care's prior contacts with Cowin. On July 17, 1978, Care filed its Schedule 13D with the SEC, reporting that Care then owned 7.16% of Treadway's common stock, and stating that Care's current purpose in obtaining the stock was as an investment.
B. Cowin sells his Treadway stock to Care
Late in the summer of 1978, Cowin began to consider selling his Treadway stock. He discussed the possibility of such a sale with his lawyer, Fred Gerard, but took no further steps toward carrying it out. Cowin did not inform Treadway that he was considering selling. Indeed, at the Treadway board meeting of August 24, 1978, in a discussion of an application for a tax ruling on the Inns Division spin-off, Cowin stated that he had no present intention of selling his shares.*fn5
On September 11, 1978, in response to an invitation extended by Browne at their first meeting on March 21, Cowin went to Grand Rapids, Michigan with Leake to visit Care's headquarters. Cowin informed Lieblich of the trip before he left. Lieblich was quite upset to have been excluded from what he assumed were conversations about Treadway, and telephoned immediately upon Cowin's return to ask about the trip. Cowin reported that Care's purchases of Treadway stock had been for investment purposes only, and that Care was satisfied with Treadway's current management. At trial, those who had attended the Grand Rapids meeting testified that the only Treadway matter discussed at any length was the proposed Inns Division spin-off.
In October, Cowin decided to sell virtually all of his Treadway stock. He called Leake and said that he had 175,000 shares for sale. Leake relayed this information to Browne, who expressed interest. Leake then met with Cowin, who stated that he would sell at $9 per share, if paid over a period of time, or at some lower price if paid in cash.
Cowin did not inform Treadway of these discussions with Care. However, at approximately the same time, in mid-October, Cowin was asked, in connection with the proposed Inns Division spin-off, to sign a letter stating that he had no present intention of selling his shares. Cowin refused to sign the letter. Lieblich, believing that Cowin's refusal jeopardized the proposed spin-off, met with Cowin on October 18 to discuss the situation. Lieblich told Cowin that if he was unhappy with Treadway's management and wished to sell his stock, he should consider selling his shares back to the corporation. Cowin replied that he did not think Treadway could afford such a purchase and that it might be legally questionable for a director, who was also the largest stockholder, to make such a sale.*fn6 Cowin did not reveal that he had already discussed a sale with Care. The meeting ended without the parties having resolved their differences.
Cowin attended meetings with all of the Treadway directors on October 25 and 26. On these occasions, as before, he remained silent on the fact that he was negotiating the sale of his stock to Care. However, he did state that he no longer favored the Inns Division spin-off, as he thought it was no longer a sound economic proposition. The Treadway board eventually determined that the proposed spin-off was not in the best interests of the corporation, and decided not to carry it out. At the formal board meeting on October 26, Cowin was renominated as a director.
The Cowin-Care stock sale was closed on November 9, 1978. Retaining 1,000 shares, Cowin sold 175,000 shares (including the shares held by his wife and by his partner) at $9 per share, to be paid over the next three years. The district court calculated the present value of the price to Cowin to be $8 per share, representing a premium of 35% over the then market price of the stock of $5 7/8 .
On the following day, November 10, Cowin called Lieblich and informed him of the sale. Lieblich was displeased, and determined to seek Cowin's removal from the Treadway board. After consulting with the other directors, Lieblich called Browne and asked if he would be willing to fill the prospective vacancy. Browne replied that he wanted Cowin to remain on the Board. Lieblich continued to press for Cowin's ouster, and at a special meeting of the board on December 19, Cowin finally consented to withdraw as a nominee in the impending election. The next day Lieblich formally invited Browne to become a nominee. Browne declined, on the ground that he was too busy, but suggested that deJourno be considered. At the annual meeting held later that day, deJourno was elected a director of Treadway.
Meanwhile, on November 14, Care had filed its fourth amendment to its Schedule 13D, setting forth the details of the purchase from Cowin and stating that Care then owned 24.21% of Treadway's stock. By the end of November, Care's ownership interest had risen to 26%. At a luncheon meeting with Browne and Bouwer on December 19, Lieblich asked whether Care was moving toward a takeover attempt. Browne answered in the negative, saying "I don't even know what a takeover situation is." He reiterated that Care's purchases of Treadway stock had been solely for purposes of investment, and that Care had bought Cowin's block so that Care could start equity accounting. As will be discussed in greater detail below, however, the district court found that by the time it purchased Cowin's stock in November 1978, Care had already determined to seek control of Treadway.
C. Care and Treadway gird for battle
On February 14, 1979, Care filed the fifth amendment to its Schedule 13D, announcing that it intended to seek two more representatives on Treadway's board, and that over the longer range, it was considering five possible alternative courses of action with regard to its stake in Treadway. These alternatives included Care's seeking still more representatives on Treadway's board; a merger or other business combination between Treadway and Care, or between Treadway and Concordia; and Care's seeking control of Treadway either by continued purchases of outstanding Treadway stock, or by a purchase from Treadway of unissued or treasury stock. Care asserted that it had not yet decided whether or not to pursue any of these alternatives. At the time of this filing, Care owned 26.1% of Treadway's common stock.
On the same day, Browne wrote to Lieblich requesting that he and Bouwer be elected to Treadway's board. Lieblich learned of the letter and the new 13D amendment while he was in Florida where a Treadway directors' meeting was to be held on February 23. Concerned about the possibility of a takeover attempt, Lieblich immediately telephoned William Sword ("Sword") of William Sword & Co., Inc. ("Swordco"), to inquire whether Sword was available to act as Treadway's investment banker. Sword stated that he was available. Lieblich discussed the situation at a luncheon on February 22 with several of the directors.*fn7 Later that day, Lieblich met with Browne, and after some discussion it was agreed that Care would have one additional representative, Browne, on the Treadway board. Then Lieblich brought up the recent Schedule 13D amendment, and said that Treadway's board was willing to discuss a merger. Browne replied that Care was not interested in merging with or taking over Treadway, and that Care's holdings in Treadway were for investment purposes only; he said that the alternatives set forth in the Schedule 13D amendment were simply attorneys' "boilerplate." On February 23, Treadway's board met and elected Browne a director. At the board meeting Browne reiterated that Care held its Treadway stock solely as an investment.*fn8
Lieblich apparently disbelieved Browne's assurances about Care's intentions. He went to talk to Sword in March or April 1979, and in June Swordco was formally retained as Treadway's investment bankers by the Treadway board of directors. The board instructed Swordco to investigate Care and Treadway, and to look for other candidates for a possible business combination with Treadway. Prior to the board meeting, Lieblich had told Sword that in his view, a merger with Care would not be in the best interests of Treadway's shareholders.
While Treadway was enlisting the assistance of Swordco, Care continued to consult with Leake, Cowin and Gerard. On June 21, Browne met with Cowin and Leake in New York; among the topics discussed was the possibility of a tender offer by Care for Treadway stock. On June 29, Care resumed its open market purchases, buying stock in relatively small amounts. Around this time, Browne, deJourno and Bouwer met with Gerard to discuss the Care-Treadway situation; Browne and deJourno continued to consult Gerard throughout the summer; Gerard also met with Leake. By late summer Care began to consider putting together a complete slate of nominees for the Treadway board. A list of potential candidates was prepared; included on the list were Browne, Cowin, Leake, Gerard and Cowin's real estate partner David Schuldiner.
At the Treadway board of directors meeting on August 23, 1979, Sword presented a report detailing Care's purchases of Treadway stock, and stated the view that a Treadway-Care combination would not be in Treadway's best interests. Apparently Sword did not report on any other potential merger candidates, although he did present an analysis of a proposed acquisition of Fair Lanes by Penn Central Corporation.
D. Treadway files suit and lines up a "white knight"
According to Lieblich's testimony, at the August 23 board meeting Sword asked Browne whether Care had purchased any Treadway stock since December 1978, and Browne replied that it had not. By the end of August, however, Lieblich had received Care's sixth Schedule 13D amendment, dated August 24, 1979, reflecting purchases totaling nearly 13,000 shares between July 2 and August 16.*fn9 The amendment revealed that Care now held 27.1% of Treadway's stock. On September 4, Lieblich telephoned Sidney Friedberg, chairman of the board of directors of Fair Lanes. Lieblich explained that Treadway was exploring ways of staving off a takeover by Care, and asked whether Fair Lanes, in light of its own negotiations with Penn Central, would object if Treadway contacted Penn Central to explore the possibility of a Penn Central-Treadway combination. Friedberg requested that Lieblich not contact Penn Central for six weeks, and promised to communicate further with Lieblich after that time.
Care continued to accumulate Treadway stock during the month of September and its interest gradually approached one-third of the outstanding shares, at which point Care would be able, under New Jersey law, to block any proposed merger or consolidation.*fn10 On September 11, Treadway's board retained special counsel to represent Treadway with regard to the Care situation. Two weeks later, on September 25, Treadway filed its complaint in this action, naming Care, Browne, deJourno and Cowin as defendants, and alleging violations of various sections of the 1934 Act and breaches of fiduciary duties under New Jersey law in connection with Cowin's sale of stock to Care, as well as a claimed misuse of confidential information.*fn11 The complaint requested that Care be ordered to divest itself of all Treadway stock, and that Treadway be awarded all profits obtained by the defendants from the activities complained of. Treadway also moved for a preliminary injunction enjoining Care from acquiring further Treadway stock, from soliciting proxies of other Treadway shareholders, and from voting the shares which it already owned. The district court, finding that Treadway had not demonstrated either likelihood of success on the merits or irreparable injury if injunctive relief were not granted, denied Treadway's motion in an opinion dated October 12.*fn12
In early October, Lieblich called Friedberg again to inquire about Penn Central. Shortly thereafter, Fair Lanes' own discussions with Penn Central apparently having ended, Friedberg telephoned Lieblich to raise the possibility of a combination between Treadway and Fair Lanes. Lieblich subsequently met with members of Fair Lanes' management in Baltimore on October 19. At this meeting, the Fair Lanes side expressed interest in a merger, but noted that Care would soon be able to block the needed shareholder approval. One Fair Lanes representative pointed out that if Fair Lanes acquired a large block of Treadway's authorized but unissued stock, it would offset Care's interest, thereby precluding Care from blocking a merger, while also permitting Fair Lanes to influence the election of Treadway directors. Fair Lanes subsequently determined that from its point of view such a purchase was a necessary first step in its dealings with Treadway.
At about the time that he began discussions with Fair Lanes, Lieblich also instructed Swordco to concentrate its efforts on a Fair Lanes-Treadway combination. Consequently, when soon thereafter Penn Central contacted Swordco about opening merger discussions with Treadway, Swordco did not seriously pursue the overture.
Treadway's board met on October 25. Gluckman offered a resolution nominating himself, Samuel Dobrow, Lieblich and Browne for reelection at the next annual shareholders' meeting, scheduled in accordance with Treadway's bylaws to be held on December 20, 1979. Browne proposed an amended slate of nominees, consisting of Browne, Leake, Bouwer and Victor Leslie, a director of Concordia. Browne's amendment was defeated and the resolution nominating the incumbent directors was approved. No mention was made, at this meeting, of Lieblich's discussions with Fair Lanes.
On October 29, Lieblich, Sword and other Treadway representatives met with Fair Lanes' management in Baltimore. Walter Hall, Fair Lanes' chief financial officer, broadly outlined the merger terms which Fair Lanes would seek from Treadway. Under Hall's proposal, Fair Lanes would transfer its bowling assets to Treadway (while retaining other substantial assets),*fn13 in exchange for shares of Treadway common stock, with the result that Fair Lanes would then hold more than 80% of Treadway's outstanding stock. The parties agreed that the first step in the negotiations would be the sale to Fair Lanes, for cash, of a large block of Treadway stock, in order to neutralize the ability of Care to obstruct the proposed merger. Sword proposed that Fair Lanes purchase 240,000 authorized but unissued shares (equal to 19.4% of the Treadway shares then outstanding) at $6.75 or.$7.00 per share. Friedberg ...