The opinion of the court was delivered by: WARD
This is an action for monetary and injunctive relief brought on behalf of a class of holders of convertible subordinated debentures for alleged violations of the federal securities laws and for breach of the trust indenture under which the debentures originally were issued. Jurisdiction is alleged under § 322 of the Trust Indenture Act of 1939 ("Trust Indenture Act"), 15 U.S.C. § 77vvv, § 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78aa, and § 22 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77v. Plaintiffs moved pursuant to Rule 65, Fed. R. Civ. P., for a preliminary injunction staying a tender offer by Enertec Corporation to exchange shares of its preferred stock for certain convertible subordinated debentures issued by Energy Resources Corporation. Plaintiffs alleged that documents issued by Energy Resources Corporation. Plaintiffs alleged that documents relevant to the instant exchange offer fail to disclose material facts in violation of § 14(e) of the Exchange Act, 15 U.S.C. § 78n(e).
On October 29, 1984, the Court held a hearing on the instant motion, after which the Court accepted additional submissions from the parties. Inasmuch as the exchange offer at issue was then due to expire on November 26, 1984, the Court determined it advisable to dispose of plaintiffs' motion by Summary Decision before the expiration of the exchange offer. On November 21, 1984, the Court issued a Summary Decision and Order, which is reproduced in part below, denying plaintiffs' motion for a preliminary injunction. The Opinion that follows sets forth in full the facts relevant to plaintiffs' motion and elaborates upon the Court's reasons for denying that motion.
To persuade the Court that preliminary injunctive relief is appropriate in this case, plaintiffs must demonstrate "(a) irreparable harm and (b) either (1) likelihood of 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." Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979); see also Buffalo Co. v. Ampco-Pittsburgh Corp., 638 F.2d 568, 569 (2d Cir. 1981); Condec Corp. v. Farley, 573 F. Supp. 1382, 1385 (S.D.N.Y. 1983). However, plaintiffs have failed to show irreparable harm; moreover, plaintiffs have not established that the balance of hardships tips decidedly in their favor or that it is likely that plaintiffs would succeed on the merits of their § 14(e) claim.
Plaintiffs have not substantiated their contention that a finding of a material misstatement or omission in a tender offer prospectus itself establishes irreparable harm. In addition, the Court finds that injunctive relief is not necessary in the instant action because there exist adequate remedies at law for the specific injuries that plaintiffs do allege. Included among such legal remedies are damages in tort or in contract against one or more of the defendants; plaintiffs may also seek rescission of the exchange offer. Stated simply, the exchange offer at issue here will result in neither the liquidation nor merger of any of the corporate entities involved, and therefore this case does not present a situation that will be impossible to "unscramble" or "unravel" once the exchange offer has expired. Cf. Grumman Corp. v. LTV Corp., 527 F. Supp. 86 (E.D.N.Y.), aff'd, 665 F.2d 10 (2d Cir. 1981) (preliminary injunction granted where tender offer involved takeover of offeree and possible liquidation of segments of offeree's business). Thus, there is no need for preliminary relief to preserve the status quo.
Even if plaintiffs could demonstrate injury for which monetary damages would not adequately compensate them, however, the Court would hesitate to enjoin the instant exchange offer, for it appears likely that even greater harm would result from the Court's intervention. There is evidence in the record to suggest that, faced with an injunction requiring Enertec to disclose certain representations it purportedly made to the trustee, Enertec might well withdraw its exchange offer rather than make such disclosures. As a result, debentureholders would lose the opportunity to exchange their debentures for Enertec preferred stock; debentureholders' rights under the indenture to convert their debentures into common stock would once again be in limbo; and debentureholders' prospects of realizing any interest on their investment would be left in serious doubt.
The Court's conclusion that substantially greater harm would result from the issuance of a preliminary injunction in this case, and that therefore the balance of hardships tips against plaintiffs, the moving parties here, is buttressed by the fact that the disclosures plaintiffs would have Enertec make are themselves inaccurate and misleading, or, at best, unnecessary. Plaintiffs would have Enertec disclose that the trustee has "agreed" to refrain from enforcing the indebenture for the duration of the exchange offer, but there is no evidence that any such agreement was ever reached between the trustee and Enertec. Plaintiffs would further have disclosed Enertec's purported representation to the trustee concerning the right of debentureholders to convert nontendered debentures into Enertec common stock, but the substance of this disclosure is already contained in the exchange offer prospectus. Finally, plaintiffs would have Enertec disclose that Enertec represented to the trustee that, assuming at least sixty-five percent of the debentures were tendered, Enertec would "guarantee payment" of the nontendered debentures. Such a disclosure would be ambiguous, if not inaccurate and misleading, for it could be interpreted as a guarantee of payment of all interest and principal due on the debentures. However, even the trustee has testified that Enertec represented only that it would have sufficient funds to cure the existing default on the nontendered debentures if sixty-five percent of those debentures were exchanged.
In addition to failing to establish irreparable harm, then, plaintiffs have also failed to demonstrate a likelihood of success on the merits of their § 14(e) claim. Rather than curing alleged defects in the exchange offer prospectus, the discosures plaintiffs would have the Court require might themselves mislead debentureholders. It would therefore be particularly improvident of the Court to grant the preliminary injunctive relief plaintiffs seek.
For the foregoing reasons, plaintiffs' motion for a preliminary injunction is denied. This Summary Decision and Order represents the final disposition of the instant motion by this Court, and therefore constitutes an appealable order within the meaning of Rule 54(a), Fed.R.Civ.P.
The instant action arises from a series of events traceable to a public offering in January 1980 of approximately $8 million of 9% convertible subordinated debentures (the "Debentures"). These Debentures, which are due January 15, 1985, were issued pursuant to an indenture dated January 15, 1980 (the "Indenture") between the issuer, Energy Resources Corporation ("Energy Resources") and the indenture trustee, United States Trust Company of New York (the "Trustee"). Under the terms of the Indenture, the Debentures were to be convertible into Energy Resources common stock; the Debentures are subordinated to certain bank debt of Energy Resources.
Robert C. and Ingrid A. Schmidt, plaintiffs in the instant action, allege that they are holders of nine Debentures: six, plaintiffs allege, they hold as joint tenants, and three are held by Mr. Schmidt individually. Plaintiffs purport to represent two classes: one class consists of all persons who purchased Debentures during the period from July 1, 1982 through November 23, 1983 and were allegedly injured thereby; the othere class comprises all Debentureholders who purportedly have been or will be injured by alleged breaches of the terms of the Indenture and alleged federal securities law violations.
Energy Resources, one of the defendants joined in this action, is a Nevada corporation engaged in oil and gas exploration and production. Another defendant, Enertec Corporation ("Enertec"), formerly Tectonic Energy Corporation ("Tectonic"), is a Delaware corporation involved in acquiring and developing oil and gas properties. Energy Resources is a wholly owned subsidiary of Enertec. Defendants Aikman, Baker and Wanamaker are present or past officers and/or directors of Enertec or Energy Resources.
Also named as a defendant in this action is the Trustee.
Plaintiffs aver that sometime before July 1982, the management of Energy Resources decided to recommend to its stockholders that Energy Resources be liquidated to substantially satisfy its outstanding indebtedness. Under the contemplated plan of liquidation, plaintiffs contend, the Debentures were to be called and paid at a premium over the principal amount or, at the Debentureholders' option, converted into Energy Resources stock at a fixed rate.The plan further provided that all Energy Resources assets other than oil and gas reserves would be sold; the reserves themselves would be placed in a limited partnership, the units of which would be distributed to Energy Resources stockholders. First Amended Complaint ("Amended Complaint") at 7.In January 1983, Energy Resources issued a prospectus and proxy statement that, according to plaintiffs, represented that the limited partnership units Energy Resources stockholders would receive pursuant to the proposed liquidation would have "potentially greater value and rate of distributable income than the common stock [the stockholders then possessed]." Id. at 9. Energy Resources stockholders approved the liquidation plan on February 11, 1983.
Sometime between July 1, 1982 and November 23, 1983, plaintiffs claim that they purchased a total of nine debentures at a discount in reliance on the representations of Energy Resources as to the effect of the liquidation plan on the Debentures. Plaintiffs' averred intent was "to obtain a capital gain upon the liquidation." Id. at 13; see also id. at 2 and 5.In late 1983, however, the Board of Directors of Energy Resources decided to recommend that the liquidation plan be terminated. In February 1984, a second proxy statement was issued to Energy Resources stockholders proposing, according to the Corporate Defendants, "a reverse triangular merger with ENERTEC [sic] (then named Tectonic) and a subsidiary of ENERTEC, which merger would result in Energy Resources becoming the wholly-owned subsidiary of ENERTEC without any change to Energy Resources as a juridical entity." Corporate Defendants' Memorandum in Support of Motion to Dismiss, Transfer or Stay at 5.
On March 30, 1984, Energy Resources stockholders approved the proposed merger with Enertec.
Plaintiffs contend, however, that notice of the proposed merger was not "addressed" to the Debentureholders. Amended Complaint at 13.
Furthermore, plaintiffs state, the merger proposal provided for the exchange of all outstanding common stock of Energy Resources for Enertec stock without a parallel provision for converting the Debentures into Enertec stock. Id. at 13-14. Then, according to plaintiff's, an anouncement was made on or about June 21, 1984, that: (1) the Debentures had been delisted for trading on the American Stock Exchange; (2) neither the interest payment due July 15, 1984 nor future payments due on the Debentures would be made; and (3) the principal on the Debentures would not be repaid. Instead, Enertec would make an exchange offer of unspecified securities for the Debentures. Id. at 14.
Enertec subsequently issued a prospectus dated September 6, 1984 (the "Exchange Offer Prospectus" or "Prospectus") offering to exchange seventy-five shares of Enertec Series C preferred stock for each $1,000 principal amount of the Debentures tendered (the "Exchange Offer" or "Offer"). The Introduction to the Prospectus summarizes the terms of the Offer:
Energy Resources is presented in default under its July 15, 1984 obligation to pay interest on the Debentures. Accrued and unpaid interest per $1,000 principal amount of each Debenture is $52 as of August 14, 1984, including $45 which was payable July 15, 1984. Holders of Debentures who tender for exchange will forfeit all rights to accrued but unpaid interest. If less than 65% of the Debentures are tendered for exchange, ENERTEC reserves the right to completely withdraw its offer. While not assuming the obligation of Energy Resources with respect to Debentures not tendered, upon consummation of the Exchange Offer, ENERTEC will permit remaining holders of Debentures to convert such Debentures into ENERTEC common stock at a conversion price of $29.21. Such price is based upon the conversion price of the Debentures into common stock of Energy Resources as increased in order to reflect the number of shares of ENERTEC common stock to which olders of Debentures would have been entitled if they had converted their Debentures immediately prior to ENERTEC's acquisition of Energy Resources.
A subsequent section of the Prospectus, setting forth the purposes and effects of the Offer, states in part:
The principal purposes of the Exchange Offer are to reduce Energy Resources' semi-annual cash interest obligations and to reduce its current liability for accrued and unpaid interest due under the Debentures. ENERGY RESOURCES IS PRESENTLY IN DEFAULT UNDER ITS OBLIGATION TO PAY INTEREST ON THE DEBENTURES AND, IF LESS THAN 65% OF THE DEBENTURES ARE EXCHANGED, UNDER PRESENT CIRCUMSTANCES, ENERTEC'S WHOLLY-OWNED SUBSIDIARY, ENERGY RESOURCES, WILL NOT HAVE SUFFICIENT CASH FLOW AVAILABLE TO MEET ITS FUTURE OBLIGATIONS UNDER THE DEBENTURES AND OTHER OBLIGATIONS.IN SUCH EVENT, MANAGEMENT OF ENERTEC AND ENERGY RESOURCES BELIEVE THAT THE CHANCES OF ENERGY RESOURCES CONTINUING AS A GOING CONCERN ARE LIMITED.
Id. at 7. Later in the Prospectus, there is discussion of the implications of acceptance of the Exchange Offer by holders of less than sixty-five percent of the Debentures:
If this Exchange Offer is not timely accepted by holders of at least 65% of the Debentures, ENERTEC will have the right to withdraw its offer. The effect of such a withdrawal would be that the Debentures would continue to be outstanding and Energy Resources would continue to be in default in its obligation to pay interest thereon. Such default would entitle the holders of the Debentures to accelerate Energy Resoucres' obligation to pay the principal thereof and would constitute a cross-default under Energy Resources' agreements with its lenders.SUCH EVENTS MAY REQUIRE ENERGY RESOURCES TO RECONSIDER THE ADVISABILITY OF ATTEMPTING TO CONTINUE ITS EXISTENCE AS A GOING CONCERN WITHOUT PROTECTION OF APPLICABLE BANKRUPTCY LAWS. UPON FORCED LIQUIDATION OF ENERGY RESOURCES, UNDER CURRENT ECONOMIC CONDITIONS, MANAGEMENT OF BOTH ENERTEC AND ENERGY RESOURCES BELIEVE THAT LITTLE, IF ANY, PROCEEDS OF FORCED LIQUIDATION AFTER SATISFACTION OF BANK DEBT, WHICH IS SENIOR TO THE DEBENTURES, WOULD BE AVAILABLE TO THE HOLDERS OF DEBENTURES OR OTHER CREDITORS OF ENERGY RESOURCES.
Id. at 16-17. The Prospectus states, however, that even if the Exchange Offer is consummated by the tendering to Enertec of sixty-five percent or more of the Debentures, "there is no assurance that the liquidity problems of Energy Resources and ENERTEC will diminish in a degree which is necessary to ensure the continued viability of either or both companies." Id. at 17. Thus, under the terms of the Exchange Offer, nontendering Debentureholders will receive accrued interest on the Debentures only "[i]f the Exchange Offer becomes effective and less than 100% of the outstanding Debentures are tendered and accepted, [and] only if and when it has sufficient cash flow." Id. at 91. Debentureholders who tender their Debentures pursuant to the Exchange Offer, on the other hand, will receive no accrued interest on their Debentures. Id.
The Exchange Offer, originally due to expire on October 10, 1984, was subsequently extended to November 26, 1984.In addition, the Offer was modified to propose an exchange of ninety-one shares of Enertec Series C preferred stock for each $1,000 principal amount of Debentures tendered. Letter of Lisa Levey to the Court (dated Oct. 25, 1984).
Plaintiffs allege that on or about June 28, 1984, Mr. Schmidt sent a letter to the Trustee, Energy Resources and Tectonic (now Enertec), demanding prompt cure of any defaults on the Debentures and demanding that the Trustee take action on behalf of the Debentureholders to cure the defaults. The parties do not dispute that the interest on the Debentures due July 15, 1984 was not paid and that to this date the Trustee has not instituted formal legal proceedings against any of the Corporate Defendants.
On July 31, 1984, Schmidt filed suit in this Court against Enertec, Energy Resources, Tectonic, Messrs. Aikman, Baker and Wanamaker, and the Trustee, alleging violations of the Exchange Act and Trust Indenture Act and breach of defendants' obligations under the Indenture. By stipulation filed on October 22, 1984, the complaint was amended to add Ingrid A. Schmidt as a plaintiff, to drop Tectonic as a defendant, and to allege additional violations of the Securities Act and Exchange Act. Both the original and amended complaints seek compensatory damages as well as both preliminary and permanent injunctive relief.
On September 28, 1984, Schmidt filed a motion for partial summary judgment in the instant action. Plaintiff contended in that motion that defendants, by acknowledging in the Exchange Offer Prospectus issued earlier in September that Energy Resources had defaulted on its July 15, 1984 obligation to pay interest to the Debentureholders, had admitted liability under the terms of the Indenture.Malcolm J. Hood, Senior Vice President of the Trustee, responded to plaintiff's motion by filing an affidavit in opposition to plaintiff's motion for partial summary judgment ("Hood Affidavit"). In that affidavit, Hood referred to "several meetings" held between the Trustee and principals of Energy Resources, after Energy Resources' default on the July 15th interest payment, "in an effort to determine an appropriate course of action." Hood Affidavit at 2. Hood explained that
[i]t [had become] apparent during the course of these meetings that Energy Resources did not have the ability to make payment of the interest [to Debentureholders] and that invocation of the default provisions [of the Indenture], including acceleration, would have the anticipated effect of driving the company into a liquidating bankruptcy. Under these conditions the Debentureholders, as subordinated debtors, would most likely receive absolutely nothing for their investment.
Id. at 2-3. Hood continued:
It was also proposed to us during the course of these meetings that Enertec Corporation, the owner of all of Energy Resources' outstanding capital stock by reason of a merger consummated in June, 1984, intended to solve the default situation by offering to exchange shares of its Series C preferred stock for the Debentures pursuant to an exchange offer. It was represented to us that if the exchange offer was accepted by 65% of the principal amount of the outstanding Debentures, that the exchange offer would be consummated and would have the effect, [sic] of, among other things, permitting Energy Resources to have a sufficient cash flow to cure its default and would restore to the Debentureholders the right to convert their respective Debentures into shares of common stock of Enertec, a right which had been granted to them pursuant to the terms of the Indenture.
Shortly after the filing of the Hood Affidavit, plaintiffs filed a motion for a preliminary injunction of the Exchange Offer. In that motion, plaintiffs argued that the Hood Affidavit had disclosed for the first time "material information essential for full consideration by Debentureholders of the tender offer [but not contained in the Prospectus]." Affidavit of Fred Taylor Isquith in Support of Plaintiff's [sic] Motion for a Preliminary Injunction ("Isquith Affidavit") at 4. The alleged omissions of material information from the Exchange Offer Prospectus, according to plaintiffs, constituted violations of § 14(e) of the Exchange Act. Plaintiffs contended that the Exchange Offer should be enjoined until it was disclosed that:
1. If at least 65% of the Debentures are tendered, Energy Resources will have sufficient cash to permit Energy Resources to cure the default in the interest payment and, according to the ...