The opinion of the court was delivered by: NICKERSON
Plaintiff Raybestos-Manhattan, Inc. ("Raybestos") moves under Rule 65 of the Federal Rules of Civil Procedure for a preliminary injunction enjoining until final adjudication of this action the tender offer of defendant Hi-Shear Industries, Inc. ("Hi-Shear") for 900,000 shares of Raybestos common stock and any further acquisition or voting by defendant of Raybestos common stock. Defendant cross-moves under Rules 12(b)(6), 12(c), and 56 for an order dismissing plaintiff's third amended complaint. The court shall at this time only consider plaintiff's motion for a preliminary injunction. The parties may submit within twenty days additional responses on the motion to dismiss.
Plaintiff is a Connecticut corporation engaged primarily in the manufacture of automotive-related products and fasteners. Defendant, a Delaware corporation with its principal place of business in North Hills, Long Island, New York, manufactures aerospace fasteners and separation fasteners. A.V.C. Corporation ("AVC"), a Delaware corporation, holds 164,248 shares of Raybestos common stock (about 7% of the outstanding) and has an option to purchase 328,488 additional shares (about 14% of the outstanding) exercisable at $ 28.17 per share until September 8, 1981.
In the fall of 1979 defendant commenced discussions with AVC regarding a possible acquisition of AVC or of the Raybestos common stock and options owned by AVC. During the late spring and summer of 1980 Frederick J. Ross, President and Chief Executive Officer of plaintiff, spoke with David A. Wingate, President and Chief Executive Officer of defendant, regarding defendant's possible acquisition of the Raybestos common stock and options held by AVC. On September 5, 1980 defendant and AVC entered into a written agreement in principle by which AVC would be merged into a subsidiary of defendant.
On September 15, 1980 defendant filed a Schedule 13D with the Securities and Exchange Commission in accordance with Section 13(d) of the Securities Exchange Act, 15 U.S.C. § 78m(d). Schedule 13D requires any person who is "directly or indirectly the beneficial owner" of more than 5 percent of a registered class of stock to file a Schedule 13D within 10 days of such acquisition. In its Schedule 13D defendant revealed that it would acquire 7 percent of Raybestos outstanding common stock and an option to acquire another 14 percent under its agreement in principle with AVC. Defendant also declared that it had purchased 6,000 shares of Raybestos common stock in the open market. Defendant maintained that it intended to hold its Raybestos share "for the purpose of making an investment", and hoped to hold a minimum of 20 percent of outstanding Raybestos shares in order to avail itself of equity accounting treatment. But defendant also added that it "has considered and intends to continue to consider various courses of action with respect to (Raybestos), including (i) the acquisition by Hi-Shear of a significant interest in (Raybestos) through a tender offer, an exchange offer, or otherwise; (ii) proposing a merger or similar transaction between Hi-Shear and (Raybestos); and (iii) seeking representation on (Raybestos') Board of Directors."
Between September 25 through October 1, 1980 defendant filed three amendments to its Schedule 13D. The amendments disclosed that defendant had bought additional Raybestos shares on the open market such that its aggregate open market purchases totalled 2.57 percent of Raybestos outstanding common stock. The amendments also revealed that plaintiff had proposed a "standstill agreement" to defendant under which plaintiff would not oppose defendant's acquisition of AVC or its purchase of additional Raybestos shares provided defendant agreed not to obtain more than 22 percent of the outstanding voting securities of plaintiff, not to make an offer to acquire plaintiff by merger or otherwise, and not to participate in any proxy contest relating to the election of plaintiff's directors.
The Schedule 13D amendments also included defendant's response to plaintiff's "standstill agreement" a counter proposal that would bar defendant from owning more than 30 percent of plaintiff's outstanding voting securities in return for plaintiff's promise not to object to any acquisition up to that amount. The counter proposal was also that both parties negotiate in good faith as to the possibility of a merger if either party requested such negotiations. By its terms the counter proposal would terminate if, after defendant acquired 20 percent of Raybestos outstanding common stock, plaintiff failed to ensure the election to the twelve person Board of Directors of four persons designated by plaintiff, four persons designated by defendant, and four persons approved by both parties though independent of both.
On October 2, 1980 plaintiff filed its initial complaint in this case. The substance of this complaint was included in defendant's fourth Schedule 13D amendment.
Defendant's fifth Schedule 13D amendment revealed that on October 9, 1980 AVC notified defendant that it was considering an alternative offer from another company. It added that on October 13, 1980 AVC agreed to merge into plaintiff. Due to defendant's inability to acquire AVC, it no longer was the beneficial owner of more than 5 percent of Raybestos outstanding common stock. The termination of defendant's agreement in principle with AVC was reiterated in its sixth Schedule 13D amendment.
On November 17, 1980 defendant, in accordance with Section 14(d) of the Securities Exchange Act, 15 U.S.C. § 78n(d), filed a Schedule 14D-1 with the Securities and Exchange Commission (constituting its seventh Schedule 13D amendment). The Schedule 14D-1 recited that a cash tender offer was being made for the purchase of 900,000 shares of Raybestos common stock at $ 30 per share. Defendant recognized that acquisition of the requested shares would give defendant 41.3 percent of the outstanding common stock of plaintiff if the merger with AVC were not consummated and 31.1 percent if it were. However, defendant stated that even this reduction in percentage ownership "would not affect its power to control or influence control over the business of (plaintiff)."
On December 10, 1980 defendant amended its Schedule 14D-1 to include an Amendatory Agreement to its Loan Agreement with the four banks helping to finance the tender offer.
For this court to issue a preliminary injunction "there must be a showing of possible irreparable injury and either (1) probable 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." Caulfield v. Board of Education of City of New York, 583 F.2d 605, 610 (2d Cir. 1978) (emphasis in original). In deciding whether to grant interlocutory relief the court must balance two conflicting considerations. On one hand, "preliminary injunctive relief is a particularly useful remedy for prevention of probable violations of the disclosure requirements of the Act, for the reason that prior to consummation of the offer the court still has a variety of methods available to it for correction of the misstatements or omissions. But once the tender offer has been consummated it becomes difficult, and sometimes virtually impossible, for a court to "unscramble the eggs.' " Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973) (footnotes omitted). But on the other hand, "interlocutory relief should (not) be given lightly. To the contrary, district judges must be vigilant against resort to the courts on trumped-up or trivial grounds as a means for delaying and thereby defeating legitimate tender offers." Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 947 (2d Cir. 1969).
Plaintiff's third amended complaint charges violations of Sections 14(d), 14(e), 13(d), and 10(b) of the Securities Exchange Act (15 U.S.C. §§ 78n(d), 78n(e), 78m(d), and 78j(b)) and Section 7 of the Clayton Act (15 U.S.C. § 18). Allegations relating to each statute will be considered separately.
A. Alleged Violations of Sections 14(d) and 14(e) of the Securities Exchange Act
Section 14(d) of the Securities Exchange Act imposes obligations on tender offers regarding disclosure, withdrawal rights of tendering stockholders, and pro rata acceptance. 15 U.S.C. § 78n(d)(1), (4), (5), (6). Section 14(e) prohibits fraud in connection with tender offers in language similar to that in Rule 10(b)(5). Compare 15 U.S.C. § 78n(e) with 17 C.F.R. § 240.10b-5 (1980). The Securities and Exchange Commission is empowered to formulate rules and regulations prescribing disclosure requirements and means reasonably designed to prevent fraudulent, deceptive or manipulative acts or practices. 15 U.S.C. § 78n(d)(4), (e). Rule 14d-1 and Schedule 14D-1, prescribing the form and contents of the disclosure documents, are the embodiments of this regulatory power. 17 C.F.R. §§ 240.14d-1, 240.14d-100 (1980).
1. Past Violations of Securities Laws
Item 2(f) of Schedule 14D-1 requires the tender offeror to disclose:
Whether or not, during the last 5 years, such person was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws; and, if so, identify and describe such proceeding and summarize the terms of such judgment, decree or final order. 17 C.F.R. § 240.14d-100 (1980).
According to the "Special Instructions For Complying With Schedule 14D-1," if the tender offer is by a corporation the information requested must be provided with respect to each executive officer, director, and controlling person of the corporation. 17 C.F.R. § 240.14D-100 (1980).
Defendant declared in its Schedule 14D-1 that the only person it knew to be enjoined from future violations of the securities laws or to be found in violation of such laws was George S. Wing, a director of defendant. The pertinent portion of its Schedule 14D-1 reads:
On November 25, 1975, in an action entitled Securities and Exchange Commission v. Hi-Shear Corporation and George S. Wing (USDC, Central District of California No. 74-3717-WPG), Mr. Wing, a director of the Purchaser, without admitting or denying the charging allegations of the complaint, consented to entry of a judgment permanently enjoining him from violation of the proxy rules under the Exchange Act. Hi-Shear Corporation, a California corporation, was merged into the Purchaser in 1977.
However, defendant failed to disclose that Hi-Shear Corporation also consented to the entry of this permanent injunction. Since it is conceded that defendant is bound by this injunction as a successor to Hi-Shear Corporation, this constitutes an omission under the disclosure requirements of Schedule 14D-1. It is not a material omission.
The test of materiality under Section 14 formulated by the Supreme Court in TSC Industries, Inc. v. Northway, Inc., is whether "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote... It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder." 426 U.S. 438, 449, 48 L. Ed 2d 757, 96 S. Ct. 2126 (1976); Seaboard World Airlines, Inc. v. Tiger International, Inc., 600 F.2d 355, 360-61 (2d Cir. 1979).
The existence of past securities violations and injunctions may be important to stockholders in deciding whether to tender their shares for two reasons. First, it may put into question the integrity of offeror's management and indirectly raise doubts about the honesty and fairness of the tender offer itself. Second, if the offeror corporation or a corporate official is subject to an injunction, offeror's management may be barred from engaging in certain securities activities that might benefit the target corporation. Target stockholders are unlikely to consider Hi-Shear Corporation's injunction important for either reason.
The acts leading up to Hi-Shear Corporation's injunction occurred six years ago. See Klaus v. Hi-Shear Corporation, 528 F.2d 225, 228-29 (9th Cir. 1975). The permanent injunction, dated November 25, 1975, is five years old. Indeed, if defendant had commenced its tender offer nine days later, it would not have been required to disclose the injunction in its Schedule 14D-1. Furthermore, apart from Mr. Wing, the only Hi-Shear Corporation official involved in the questionable securities activities who is currently important in defendant's management is Perry A. Luth, a director. Defendant's current President and Chief Executive Officer, David Wingate, was not affiliated with Hi-Shear Corporation at that time. Given the age of the injunction and the change in management that has occurred since that time, disclosure of the omitted fact is unlikely to affect significantly shareholders' appraisal of the integrity of offeror management.
Nor do the terms of the injunction seriously constrain the activities of defendant. The injunction enjoins George Wing and Hi-Shear Corporation from "engaging in acts and practices which constitute and will constitute violations of Section 14(a) of the Securities and Exchange Act of 1934... and Rules 14a-3, 14a-6, and 14a-9 thereunder...." It adds no obligations to those already imposed by the proxy laws. Consequently, this court finds no substantial likelihood that disclosure of the injunction against Hi-Shear Corporation would have assumed actual significance in the tendering decision of the reasonable shareholder.
Defendant also failed to disclose that in 1976 the Court of Appeals for the Second Circuit held that Frank Bloom Executive Vice President, Chief Financial Officer, and a director of defendant had violated Rule 10b-5 in 1974. Securities and Exchange Commission v. Geon Industries, Inc., 531 F.2d 39, 50 (2d Cir. 1976). This holding resulted from a Securities and Exchange Commission proceeding against Geon Industries, Inc. a corporation unrelated to defendant and certain of its officers, including Bloom.
On February 22, 1974 officials at the American Stock Exchange noticed unusual pre-market activity in Geon. The opening of trading in Geon was delayed, and Randy Gromet, a senior Amex listing representative, telephoned Bloom to ask whether anything had happened concerning a merger deal that would account for the peculiar activity. The District Court held that Bloom's negative answer was not negligent or in violation of the securities laws. Securities and Exchange Commission v. Geon Industries, Inc., 381 F. Supp. 1063, 1069 (S.D.N.Y.1974). It found that "as of the morning of February 22, Geon had only raw, unverified information, which might have been misleading had it been made public." Id. at 1069. The Second Circuit reversed the finding of no violation. Securities and Exchange Commission v. Geon Industries, Inc., 531 F.2d 39, 50 (2d Cir. 1976). Though recognizing that Bloom "was in a difficult position," Id. at 50, it found that his response to the Amex ...