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April 12, 1985


The opinion of the court was delivered by: SWEET


Plaintiffs Hecco Ventures ("Hecco") and Paul O. Koether ("Koether") (collectively "Hecco") brought this action on March 29, 1985 charging defendants Avalon Energy Corp. ("Avalon"), Tri-South Investments Inc. ("Tri-South") and Deltec Panamerica S.A. ("Deltec") with violations of the Securities Exchange Act of 1934 in connection with the solicitation of proxies by the boards of directors of Avalon and Tri-South for approval of the merger of Tri-South with and into Avalon, as well as certain other violations of state law. By order to show cause, Hecco moved this court for a preliminary injunction enjoining the April 15, 1985 meeting of the shareholders of Avalon and Tri-South to vote on; the proposed merger. Expedited discovery was conducted and a hearing on the motion was held on April 10, 1985. For the reasons set forth below, Hecco's motion for a preliminary injunction is denied.

The Parties

 Hecco is a California limited partnership whose general partners are Cinerama, Inc., a New York corporation, and James J. Cotter, Ltd., a limited partnership whose sole general partner is James J. Cotter. It presently owns approximately 187,400 shares of Tri-South common stock. Koether is a resident of Far Hills, New Jersey. He presently owns approximately 50,000 shares of Tri-South common stock.

 Avalon was incorporated in Maryland in 1984, and is a successor to CMT Investment Company, a California corporation incorporated in 1980. Avalon's principal executive offices are located in New York. Avalon owns mortgages and equity interests in real properties and is in the process of redeploying certain of its assets into the domestic energy business.

 Tri-South, incorporated in Georgia in 1980, is the successor to Tri-South Mortgage Investors, a massachusetts business trust. Tri-South's principal executive offices are located in Atlanta, Georgia. Tri-South is engaged in the acquisition, ownership, management, development and sale of real properties and the administration of its mortgage loan portfolio.

 Deltec is a corporation organized under the laws of Panama with its principal office in Nassau, Bahamas. As of March 12, 1985, Deltec was the beneficial owner of 33.6% of Avalon's common stock, 60.2% of Avalon's preferred stock, and 41.4% of Tri-South's common stock. The president of its wholly-owned subsidiary, Deltec Securities Corporation ( a New York based securities brokerage firm), Arthur E. Byrnes ("Byrnes") is chairman of the board of Avalon and has been a director of Tri-South since October 1983. Although Deltec is named as a defendant, it has not been served.

 As of March 12, 1985, four of Avalon's eight directors, including its chairman of the board, Byrnes, and its president Howard A. Knight ("Knight") were directors of Deltec. This includes Joseph G. Cacioppo ("Cacioppo") who is also executive vice president of Deltec and president of the Deltec Banking Corporation Limited, a wholly-owned subsidiary of Deltec. As of March 12, 1985, three of Tri-South's ten directors, Byrnes, Cacioppo and Knight, were directors of Avalon and Deltec.

 The Facts

 In 1983 Tri-South filed a complaint against Deltec alleging certain securities act violations. The dispute was resolved shortly thereafter and the complaint withdrawn. In August 1984 Avalon initiated discussions with Tri-South concerning a potential merger between Avalon and Tri-South. On October 18, 1984, after negotiation, the boards of directors of Tri-South and Avalon unanimously approved a merger in principle, subject tot he preparation of a definitive agreement, the receipt of fairness opinions from independent investment banking firms and various other conditions. The terms of the proposed merger were that Tri-South would be merged with an into Avalon which would be the surviving corporation, and that holders of outstanding Tri-South shares (other than Avalon) would be entitled to receive 1.18 shares of Avalon for each share of Tri-South held by them.

 On January 11, 1985, the definitive merger agreement was unanimously approved by Avalon's board of directors, and on January 18 Tri-South's board also unanimously approved the agreement, immediately following which it was executed and delivered. Each company was advised by its investment banker (Kidder, Peabody & Co. Incorporated for Avalon and Robinson Humphrey/American Express, Inc. for Tri-South) that the merger agreement was fair tot he respective shareholders of each company from a financial point of view. The fairness advice given by the independent investment banking firms, initially oral, was later confirmed by their written opinions.

 Commencing March 15, Avalon and Tri-South distributed a joint proxy statement to their shareholders, which Hecco now charge s constitutes a violation of the securities laws (the "Proxy Statement"). Included as exhibits are the text of the merger agreement, the fairness opinions of the investment bankers, and the text of the proposed amended and restated Avalon Articles of Incorporation which its shareholders are being asked to approve as a predicate to their acting on the merger proposal. The Proxy Statement advises that each company will hold a shareholder's meeting on April 15 to vote on these matters.

 The Proxy Statement also states that the Avalon directors and seven other Avalon shareholders own 20.1% of Avalon's common and preferred stock which they intend to vote in favor of the merger. When added to Deltec's Avalon ownership, 63.3% of the shares are committed to the merger, and the affirmative votes of only an additional 3.4% of Avalon's outstanding common and preferred stock will be needed. Taking into account the 41.4% of Tri-South's outstanding shares owned or controlled by Deltec, the affirmative votes of an additional 8.6% of the common stock of Tri-South will be necessary.

 According to the defendants, on January 4, 1985 plaintiff Koether met, at his request, with Knight and Byrnes, each of whom serves as a director of Avalon, Tri-South and Deltec. At that meeting, the defendants claim Koether stated that he and an unidentified group of Tri-South stockholders for whom he professed to speak, and who collectively held nearly 5% of the outstanding Tri-South shares, were opposed to the proposed merger. He offered to purchase all Tri-South shares held by Avalon and Deltec, at $7.25 per share. In the alternative, he demanded that he and his group be bought out for $7.25 per share. ...

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