The opinion of the court was delivered by: LASKER
On October 15, 1979, after acquiring 5.4% of the outstanding shares of common stock of Avnet, Inc., Scope Industries filed a Schedule 13D with the Securities and Exchange Commission pursuant to section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78m(d), and SEC Regulation 13D, 17 C.F.R. § 240.13d-1 et seq., which require the disclosure of specified information by an owner of at least 5% of a class of a corporation's outstanding stock. Scope amended its Schedule 13D on June 2, 1980 to reflect that it had increased its Avnet holdings to 6.42% of the outstanding common stock. In its amended Schedule 13D, Scope stated that it intended to seek representation on Avnet's board.
On August 6, 1980, Avnet filed its complaint in this action alleging (1) that Scope's Schedule 13D was materially false and misleading because it failed to disclose, inter alia, that Scope was an unregistered investment company in violation of the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 et seq., and the consequences of that status.
Scope has not registered as an investment company. It has not done so because it contends that it is in fact and law not an investment company. The complaint also alleges that Scope and its president Meyer Luskin (collectively, Scope), have begun to solicit proxies without complying with section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and the SEC regulations promulgated thereunder, and that these actions violated section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. §§ 240.10b-5.
After Avnet commenced this action, Scope filed a second amendment to its Schedule 13D which reports the filing of the present complaint as follows:
"On July 25 ... Avnet commenced an action in the United States District Court, Southern District of New York, against Scope and Meyer Luskin by filing a complaint, a true copy of which is attached hereto.... In substance, the complaint asserts that defendants are now actively pursuing an unlawful plan to force Avnet to undertake a program of ill-conceived divestitures of major segments of its business and to use the proceeds of such divestitures to repurchase Avnet stock, thereby increasing defendant Scope's percentage ownership of Avnet. The complaint further asserts that defendants have begun an unlawful proxy solicitation in an effort to secure multiple representation on Avnet's board of directors in order to facilitate their divestiture program and exploit non-public inside information regarding Avnet not available to all other shareholders. The complaint alleges that defendants' public filings with the Securities and Exhange (sic ) Commission, which are supposed to provide current information with regard to defendants and their purpose in acquiring Avnet shares and their plans with respect to the business of Avnet, remain deliberately false and misleading in failing to disclose that, as an unregistered investment company, defendant Scope is prohibited from engaging in interstate commerce and acquiring securities of public companies such as Avnet and in failing to disclose defendants' plan to cause Avnet to sell profitable businesses and assets. The complaint further alleges that defendants have failed to make the requisite filings required by the Securities and Exchange Commission by participants in election contests."
The amendment continues by stating that Scope intends to deny the material allegations of the complaint, including, inter alia, the claim that Scope is an investment company. The amendment further states that Scope intends to seek "multiple representation" on Avnet's board and to influence Avnet's policies in specified areas.
Avnet moves, based on its claim that Scope's Schedule 13D is false and misleading, for a preliminary injunction
restraining Scope from acquiring Avnet stock, "exercising any rights in respect of Avnet shares owned by Scope," using Avnet stock to control or affect Avnet management, and taking any action "in furtherance of any plan" to purchase Avnet stock or "to influence the affairs of Avnet," unless Scope files an amended Schedule 13D disclosing that it is an unregistered investment company and the impact of that status on its plans with respect to Avnet. Scope moves for judgment on the pleadings as to Avnet's Schedule 13D claim and for its claim of an alleged violation of section 10(b) and Rule 10b-5.
II. The Section 13(d) Claim
Scope moves to dismiss the claim that the failure to disclose Scope's alleged status as an unregistered investment company rendered its Schedule 13D false and misleading. It argues that the cause of action fails to state a claim upon which relief may be granted and that it has become mooted by the second amendment to the Schedule 13D which was filed after the commencement of this lawsuit and which is quoted at length above.
An investment company is defined by the statute as a company which owns investment securities constituting over 40% of its total assets, 15 U.S.C. § 80a-3(a)(3), or as one which is "engaged primarily ... in the business of investing, reinvesting, or trading in securities," 15 U.S.C. § 80a-3(a)(1).
Avnet claims that Scope is an investment company because it owns investment securities which allegedly constitute 61.5% of its total assets, and because it is in the business of owning or holding securities. Scope's alleged status as an investment company, according to Avnet, prohibits Scope from (1) purchasing additional Avnet shares, (2) actively seeking representation on Avnet's board of directors, (3) influencing policy decisions of Avnet's board, (4) soliciting proxies, and (5) attempting to form a group of Avnet shareholders, all of which Scope states in its Schedule 13D that it intends to do. Avnet argues that for those statements not to be false and misleading Scope must disclose that it is an unregistered investment company, which, as a matter of law is prohibited from taking those actions.
Scope answers that Avnet's claim has become moot because the second amendment to its Schedule 13D informs the reader of Avnet's claim that Scope is an unregistered investment company, and the consequences which flow from that status. Avnet responds that the amended disclosure is insufficient, since in that amendment Scope denies the allegation that it is an investment company. According to Avnet, accurate disclosure requires nothing short of a statement that Scope is in fact in violation of the Investment Company Act.
We agree with Scope that the second amendment is sufficient to cure any alleged omissions in its earlier Schedule 13D and that accordingly, Avnet's first claim is now moot. As indicated above, the Investment Company Act defines an investment company as one which owns investment securities constituting over 40% of its total assets, or is "engaged primarily ... in the business of investing, reinvesting, or trading in securities." 15 U.S.C. §§ 80a-3(a)(3), 80a-3(a)(1). Avnet contends that both because the book value of Scope's respective assets brings Scope within the first definition, and because Scope is in the business of owning or holding securities, it is an investment company. Scope denies that it is an investment company under either definition. As to the ownership of investment securities, Scope denies that the book value is the proper criterion of determination. It asserts that fair market value is the correct standard and that, so valued, less than 40% of its assets are investment securities, and that it is an operating company, with the result that it does not qualify as an investment company. In sum, Scope argues that it has continued to be an operating company even after the recent liquidation of some of its operating assets. Thus, serious questions exist as to whether Scope is an investment company, and until a competent determination is made on that issue, it cannot be stated with certainty that Scope is an investment company.
In Copperweld Corporation v. Imetal, 403 F. Supp. 579, 606 (W.D.Pa.1975), the tender offeror, Imetal, disclosed in its offer the possibility that antitrust violations might result if its offer were successful. Copperweld argued that "Imetal should have described the nature and seriousness of the antitrust implications in its tender offer," and "(admitted) its guilt." The court held that under the circumstances of that case, "only the possibility of an antitrust violation need be disclosed" (emphasis in original).
Similarly, in Ronson Corporation v. Liquifin Aktiengesellschaft, 370 F. Supp. 597, 608 (D.N.J.), aff'd per curiam, 497 F.2d 394 (3d Cir.), cert. denied, 419 U.S. 870, 95 S. Ct. 129, 42 L. Ed. 2d 108 (1974), also involving a tender offer battle, the offeror's 14D statement described the plaintiff's claims against it and the conflicting opinions of counsel for each side on those points. The court held ...