The opinion of the court was delivered by: LOWE
MEMORANDUM OPINION AND ORDER
This is an action to enjoin various defensive measures taken by defendants to thwart plaintiff's tender offer and to force curative disclosure on AMF's 14-d(9) statement. Presently before the Court is plaintiff's motion for a preliminary injunction. For the reasons stated below we grant the injunction.
The recent years have seen a massive proliferation of corporate takeover battles. The manner in which these contests are waged has undergone dramatic changes. The case at bar asks the Court to determine the propriety of various actions taken by the target corporation to thwart a hostile tender offer.
This case has a tortured procedural history. The plaintiffs in the instant action are Minstar Inc. and Minstar Acquiring Corporation (hereinafter collectively referred to as "Minstar" or "plaintiff"). Minstar Inc. is a Minnesota Corporation which is engaged in various lines of business, including boat manufacture and the moving industry. Minstar Acquiring Corporation is a New Jersey Corporation which is wholly owned and controlled by Minstar Inc. Apparently, the only purpose for the existence of Minstar Acquiring is to purchase other companies. Both companies are controlled by a group headed by Minstar Chairman Irwin Jacobs ("Jacobs" or "Jacobs group").
The defendants are AMF incorporated ("AMF"), its Chairman W. Thomas York ("York") and various other officers and directors of AMF. AMF is also a New Jersey corporation, therefore it is undisputed that the New Jersey Corporation Law provides the rule of decision in this case. AMF is also engaged in several lines of business, most of which center around the production of sporting goods, including yachts.
On April 26, 1985 Minstar commenced a tender offer by making the appropriate filings with the Securities Exchange Commission ("SEC"). The tender offer was preceded by a so-called "running start" whereby Minstar beneficially acquired about 7.5% of the outstanding AMF stock. The tender offer was for 12 million shares of AMF at $23 per share. AMF is currently trading on the market at about $19 per share. If the offer succeeds Minstar will beneficially control about 50.5% of AMF stock.
At the same time Minstar began its tender offer it filed Minstar v. Abrams, Civil Action 85-3173 (MJL), in an attempt to have a New York anti-takeover statute declared constitutionally invalid. The Attorney General and AMF stipulated to effective non-enforcement of the statute, thus mooting the question, however AMF counterclaimed alleging that Minstar's SEC disclosure was defective. After Minstar agreed to some curative disclosure, we denied expedited discovery since the exigency had been removed.
Minstar then filed the instant action which we accepted as a related case. This complaint contains three major groups of claims. First Minstar claims that AMF's 14d(9) statement contains false and misleading statements or omissions and thus violates Section 14 of the Williams Act, 15 U.S.C. § 78n(d) ("Williams Act"). Minstar's second claim is that various AMF defensive tactics were illegal as a matter of state law or were ultra vires under the corporate charter. Finally, Minstar contends that the defense tactics constitute a breach of AMF's directors' fiduciary duty as a matter of State law.
As an initial observation we note that this entire action resembles somewhat "the tail wagging the dog." The basis of federal jurisdiction is predicated on the violation of the Williams Act, yet most of plaintiff's claims and the relief which it seeks sound in state law. While we believe that determination of the state law causes of action is a proper exercise of our pendent jurisdiction, in the future, we may, in an appropriate case refrain from hearing such claims. See Federman v. Empire Fire and Marine Insurance Co., 597 F.2d 798, 809 (2d Cir.1979). In this case the extent of the plaintiff's state law causes of action was not clear until the eve of the hearing and the closing of the tender offer. Under these circumstances, the interest of justice required that we retain jurisdiction. However, we believe that matters of state law are best left to the sound judgment of the state courts.
None of this should be read to say that the plaintiff's Williams Act claims are improper. We note that the SEC has in the past recommended legislation to bring control of defensive tactics within the ambit of federal regulation. That the Congress has chosen not to adopt such legislation is of course wholly within its discretion. It must be remembered, however, that the Williams Act in no way creates any substantive right to challenge the actions of boards of directors; rather it is simply a disclosure statute. Buffalo Forge v. Ogden, 717 F.2d 757 (2d Cir.1983), cert. denied, 464 U.S. 1018, 104 S. Ct. 550, 78 L. Ed. 2d 724.
Although the case is marshalled around the Williams Act, plaintiff's battle cry is "breach of fiduciary duty," while defendants march to the sound of the business judgment rule. The Williams Act claims, in large part, turn on the validity of the defensive tactics taken by the Board, an issue of corporate governance regulated by state, not federal law. Thus we begin with the state law claims.
The vernacular of tender offers is filled with colorful terms such as "poison pills," "white knights" and "scorched earth." Mr. Jacobs is labeled a "raider." A "raider" is known for his "hostile" takeover attempts. As such AMF generally characterizes him as a bad person. AMF believes that the structure of the present tender offer is especially hostile. It refers to the take-over as a "front-end loaded, two-tier" tender offer. Under an offer such as this, the offeror acquires a bare majority of the stock in the first step. Once in control, the offeror often makes significant changes in the target such as selling the "crown jewel" or stopping dividend payments. The offeror then undertakes a second stage offer in which it buys the remaining shares. It is alleged that the second stage offer price is often below the first stage price. Moreover the second stage is often purchased with so-called "junk bonds."
AMF argues that such two-tiered offers are by their nature always unfair and "irresistibly coercive." It argues that the "freeze-out" of the non-tendering shareholders through suspension of dividends, dries up any market for the non-tendering stock thus depressing the price of such stock far below its "real" value. AMF argues, that the shareholders are placed in what it calls a "prisoner's dilemma."
Under the "prisoner's dilemma," individual dispersed shareholders are forced to tender their shares into a partial offer regardless of whether they think the offer being proposed gives them full and fair value. They act out of fear that other shareholders, with whom they cannot communicate or collaborate, will tender and thus enable the bidder to relegate the non-tendering shareholder to the distinctly less attractive position of minority shareholder in a company controlled by a majority interest.
Minstar counters that a two-tiered offer is not in any way illegal under federal law or the applicable New Jersey state law. Moreover, Congress and the SEC have consistently held the view that tender offers benefit shareholders by "offering them an opportunity to sell their shares at a premium, and act as a guard against the entrenchment of management and thus, it is in the shareholders' interest to allow them the opportunity to consider and act on tender offers." SEC's Brief as Amicus Curiae in the case of Moran v. Household International Inc., attached as Appendix "B" to plaintiff's memorandum. See also, Economic Report of the President, attached as Appendix "A" to the plaintiff's memorandum; Edgar v. MITE Corp., 457 U.S. 624, 632-33, 102 S. Ct. 2629, 2635-36, 73 L. Ed. 2d 269 (1982).
The Williams Act was intended to provide shareholders with full and fair disclosure of material information upon which to make an informed decision. "Congress felt that it was for fully-informed investors to decide whether takeover offers were fair and equitable and that the investors should be free to make their own decisions." Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757, 760 (2d Cir.1983), citing Edgar v. Mite, 457 U.S. 624, 640, 102 S. Ct. 2629, 2639, 73 L. Ed. 2d 269 (1982).
The AMF board met to consider the Minstar offer and unanimously rejected it. The alleged rationale for the rejection was that, taken as a whole, the offer was inadequate and not in the best interest of the corporation or its shareholders. The Board stated that it was concerned with the detrimental effect a two-tiered takeover would have on the non-tendering shareholders. Specifically, it believed that the remaining shareholders would be unable to realize the fair value for their shares. Minstar asserts that the Board of AMF was concerned with entrenching itself in office, or else leaving AMF in ruins if forced out.
At the AMF board meetings between May 2, 1985 and May 9, 1985 the Board considered and discussed the implementation of various defensive tactics designed to thwart the Minstar takeover bid. In its 14d-9 Schedule AMF unveiled a series of defensive tactics designed to prevent the takeover.
These defensive tactics fall into two general categories. One is the so-called "poison pill" or Rights Plan. The other is the ...