The opinion of the court was delivered by: SAND
Plaintiff Condec, a corporation whose shares are traded on the American Stock Exchange, moves for a preliminary injunction against defendant William Farley and other named defendants claimed to be under his control based on alleged violations of Sections 13(d), 14(d), and 14(e) of the Securities Exchange Act, 15 U.S.C. §§ 78m(d), 78n(d), and 78(n)(e).
Plaintiff requests, inter alia, various corrective disclosures, a ban on future purchases of Condec by defendants, and "sterilization," for the purposes of an upcoming proxy contests, of the shares defendants have already acquired. Defendant The Northern Trust Company, by way of interpleader, requests a limitation of its liability with respect to its purchases of Condec stock in its capacity as trustee for defendant Employee Benefit Master Trust ("Master Trust").
On October 12, 1983, this Court in the related action, 83 Civ. 7223 (LBS), denied with leave to renew by October 17, 1983 Condec's application for a temporary restraining order and preliminary injunction, against these defendants, based on alleged violations of New York's Takeover Disclosure Act, N.Y.Bus.Corp. §§ 1600-14 (McKinney 1982 Supp.). That opinion, familiarity with which is assumed, details the relationship between the state and federal bases of plaintiff's applications for injunctive relief. Plaintiff has not renewed its application for injunctive relief predicated on state law grounds.
Plaintiff's basic contentions are that William Farley determined to seek control of Condec, that this determination was made prior to any acquisition of Condec stock, that Farley's plan was furthered by stock purchases which he caused employee benefit plans to make in breach of fiduciary obligations owed to the beneficiaries of such plans and that all of the foregoing was omitted or inadequately disclosed in defendants' filings under 15 U.S.C. § 78m(d).
Plaintiff's allegations center on purchases of Condec stock made by William Farley personally and by the Master Trust, which funds and manages the assets of the ERISA plans of Farley Metals, Inc., a corporation wholly owned by defendant William Farley. Pursuant to an arrangement with defendant The Northern Trust Company, the trustees of the Master Trust, William Farley and defendant William Vrba, Vice-President of Farley Industries, have the authority to make investment decisions regarding securities and other property held by the Master Trust. It is not disputed that, beginning in March of 1983, defendants Farley and Vrba used this authority to cause the Master Trust to purchase a substantial amount of Condec common stock. Farley explained to Vrba, "I want to buy 4.8% of Condec through various of our pension fund accounts." See deposition of William Farley (quoted at Plaintiff's Memorandum of Law, page 8). Plaintiff contends that this statement illustrates Farley's intent "to obtain a foothold in Condec of slightly under 5% from which he could launch an effort to control Condec while avoiding the disclosure requirements of Section 13(d)." Plaintiff's Memorandum at pp. 7-8. Defendants dispute this characterization, claiming that thte 4.8% figure corrolates with a planned three million dollar initial investment in Condec. (Three million dollars would have purchased approximately 4.8% of Condec at the time Farley made the above quoted statement.) Defendants' position is supported by the fact that the Master Trust's stock purchases stopped in July, 1983, well before the 4.8% figure was reached, but at about the time its investment in Condec stock amounted to three million dollars. Currently the Master Trust owns approximately 3.8% of Condec's common stock, acquired at a cost of $3,052,518. The Condec stock purchases represent the only common stock investments ever made by the Master Trust; the stock holdings account for between seven and nine percent of the Master Trust's investment portfolio.
In addition to directing purchases of Condec's common stock for the Master Trust, Farley also made personal investments in Condec. According to defendants, 95% of Farley's personal purchases occurred after July 25, 1983, the date of the Master Trust's final purchase of Condec stock. Even during the period when Farley and the Master Trust were both purchasing Condec, defendants claim, Farley carefully timed his purchases to avoid competing with the Master Trust for the same blocks of Condec stock.
By September 7, 1983, the Condec stock owned by the Master Trust and by Farley personally comprised in excess of five percent of Condec's outstanding shares, triggering a Schedule 13D filing, under 15 U.S.C. § 78m(d). The filing took place on September 16th. By this time, Farley held 167,900 shares of Condec stock (3.9% of shares outstanding); and the Master Trust held 162,500 shares (3.8%), over which Farley and Vrba had dispositive and voting powers. The Schedule 13D stated that Farley's personal holdings were acquired with the purpose of "investment," but there was currently a possibility that he would seek a position or positions on Condec's Board of Directors and/or control of Condec, through means of open market or privately negotiated purchases, tender offer, merger, a going private leveraged buy out, "or otherwise." The Schedule 13D further stated that the Master Trust's purchases were made with an "investment" purpose.
A first amended Schedule 13D was filed on September 28th to reflect additional personal purchases of Condec stock by Farley (his holdings had increased to 209,700 shares) and the fact that this lawsuit was commenced by plaintiffs. The amended 13D described in some detail plaintiff's allegations, and included, as an exhibit, a copy of plaintiff's complaint. The September 28th filing also revealed Farley's intentions with respect to his holdings in somewhat greater detail than the original filing:
At present, Farley does not intend to purchase in excess of 200,000 additional Shares or to make a tender offer for Shares; but he is considering whether to seek a position or positions on the board of directors of the Company and the possibility of determining to seek control of the Company, by means of a proxy solicitation or otherwise, though he has at present not concluded whether to pursue such courses of action.
First Amended 13D, page 5.
On October 14, 1983, Farley filed a second amended 13D, which indicated that by that time he had decided to pursue a proxy solicitation:
At present, Farley does not intend to purchase in excess of 189,500 additional Shares (including Shares purchased by FMI [Farley Metals, Inc.]) or to make a tender offer for Shares; but he has decided to seek election of himself or other persons to be nominted by him to the board of directors of the Company at its forthcoming annual meeting of shareholders to be held on November 16, 1983 ("Meeting") and to solicit proxies for that purpose. It is Farley's understanding that five of eleven directors will be elected at the Meeting.
Second Amended 13D, page 8.
At the time of this filing, Farley held 214,700 Condec shares individually; the Master Trust held 162,500 shares; and Farley Metals, Inc. 5,500. Farley, thus, has sole or shared dispositive and voting powers over 382,700 shares of Condec, ...