Appeal from a final judgment of the United States District Court for the Southern District of New York, Abraham Sofaer, Judge, enjoining the exercise by CRC Information Systems, Inc. of an option to purchase stock of Datatab, Inc. on the ground that the defendants had violated the federal securities laws.
Kearse, Cardamone and Winter, Circuit Judges.
Plaintiffs Data Probe, Inc. and its wholly owned subsidiary Data Probe Acquisition Corp. (collectively "Data Probe") brought this action to enjoin the merger of defendants CRC Acquisition Corp., a wholly owned subsidiary of defendant CRC Information Systems, Inc. (collectively "CRC"), and Datatab, Inc. ("Datatab"). CRC and Datatab had entered into an Agreement and Plan of Merger (the "Merger Agreement") under which Datatab would become a wholly owned subsidiary of CRC. In its complaint, Data Probe, which itself was attempting to gain control of Datatab through a tender offer, alleged that Datatab and CRC had committed various violations of federal securities laws and regulations. After an expedited trial, the district court, 568 F. Supp. 1538 (1983), found that an option to purchase Datatab stock acquired by CRC was a "manipulative" device proscribed by Section 14(e) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78 n(e) (1976). It also found that a letter written by Datatab to its shareholders failed to satisfy the disclosure requirements established by Section 14(e) of the Act and by Securities and Exchange Commission ("SEC") Rule 14e-2, 17 C.F.R. § 240.14e-2 (1983). For these two reasons the district court enjoined exercise of the option by CRC, thus preventing the merger as well. This expedited appeal followed.
We reverse on both grounds.
In December, 1982, the management of Datatab, a publicly traded New York corporation engaged in the market research business, approached the management of CRC, a privately held New York corporation in the same field, to discuss the possibility of CRC's acquiring Datatab. The decision to approach CRC was prompted by the deteriorating financial condition of Datatab, which had been experiencing mounting losses. Negotiations ensued, and on April 29, 1983, the two companies announced the Merger Agreement, which provided that a wholly owned CRC subsidiary would be merged into Datatab and that holders of Datatab common stock would then receive $1.00 per share in cash, leaving Datatab a wholly owned subsidiary of CRC.
Applicable New York law required the approval of two-thirds of Datatab's shareholders and Datatab's Board scheduled a special meeting of shareholders to be held on June 23, 1983. On May 26, proxy materials announcing the meeting and describing the merger were sent to Datatab shareholders. Among the conditions of the merger described in the proxy materials was an undertaking by CRC to enter into employment agreements with Sanford Adams, Lee Gallaher and John Lobel, who were officers of Datatab or a subsidiary and who comprised Datatab's Board of Directors. Each was to receive a three-year contract. It is undisputed that the proxy materials, including the disclosure of the employment agreements, conformed to the requirements of applicable state and federal law.
On June 21, 1983, two days before the shareholders' meeting, Data Probe, a New York corporation also engaged in the market research business, announced a cash tender offer for any and all shares of Datatab stock at $1.25 per share. The offer, which was apparently not discussed with the management of Datatab or CRC, was contingent on the failure of Datatab shareholders to approve the proposed merger between Datatab and CRC. Its announcement caused Datatab's Board to adjourn the special shareholders' meeting.
On the evening of June 21, Yitzhak Bachana, president and majority shareholder of Data Probe, met over dinner with Sanford Adams of Datatab to discuss Data Probe's interest in Datatab.*fn1 The two men took up the subject of the future of current Datatab employees in the event Data Probe's tender offer was successful. Adams's notes from the meeting indicate that Bachana thought that discussion of the employment contracts of Adams, Lobel, and Gallaher was "premature." Bachana testified at the hearing that he indicated to Adams that "he could not make any promises" with respect to the future of current Datatab management.
Further negotiations between Datatab and CRC were held and, on July 1, the two firms concluded a revised merger agreement (the "July 1 Agreement") under which Datatab shareholders would receive $1.40 per share. As a part of the July 1 Agreement, Datatab granted CRC a one-year irrevocable option to purchase 1,407,674 authorized but unissued Datatab shares at $1.40 per share. Since Datatab had only 703,836 shares of common stock outstanding, the practical effect was to guarantee that CRC could acquire Datatab by exercising the option, no matter how many of the outstanding shares were tendered to Data Probe. It could then vote its resulting two-thirds interest in Datatab for the merger with its subsidiary.
In a letter to its shareholders also dated July 1 (the "July 1 shareholders' letter") the Datatab Board announced its response to the still outstanding Data Probe tender offer. The letter was sent to conform with the duty imposed by SEC Rule 14e-2, 17 C.F.R. § 240.14e-2 (1983), which requires that within ten business days of the making of a tender offer the subject company must inform its shareholders of its position with respect to the offer and of the reasons supporting its position. The letter advised that "in view of the new $1.40 per share merger offer from CRC, the Board recommends that [shareholders] not tender . . . shares for the $1.25 price . . . offered by Data Probe." (Emphasis in the original). The letter described the CRC option to purchase Datatab shares, but it drew no explicit connection between the grant of the option and the likely outcome of the struggle for control of Datatab.
On July 14, Data Probe increased its offer to $1.55 per share, conditioned upon termination of the CRC option or a judicial determination of the option's invalidity. At the same time it commenced this action by filing a complaint that alleged, among other things, that the option was a "manipulative act or practice" committed in connection with a tender offer in violation of Section 14(e) of the Act. The complaint alleged no violations of state law. The relief sought was, nter alia, an injunction barring exercise of the option.
After a hearing, Judge Sofaer announced his findings and conclusions and rendered final judgment in favor of plaintiff Data Probe. He held that Section 14(e), by forbidding "manipulative . . . practices in connection with any tender offer," proscribed acts that "unduly obstruct the exercise of informed shareholder choice." Because CRC's option to purchase the unissued Datatab shares effectively nullified Data Probe's tender offer, Judge Sofaer concluded that the option was proscribed by Section 14(e). He also found that the July 1 shareholders' letter was materially misleading in that it did not state as a reason for the Board's position the fact that, unlike Data Probe, CRC had guaranteed employment to Adams, ...