LEWIS A. KAPLAN, District Judge.
Plaintiffs Capital Realty Investors Tax Exempt Fund Limited Partnership ("CRITEF") and Capital Realty Investors Tax Exempt Fund III Limited Partnership ("CRITEF III") (collectively, the "Funds") are publicly traded real estate limited partnerships managed by entities controlled by William Dockser and H. William Willoughby. The Funds are the subjects of proposed mergers with affiliates of Apollo Real Estate Acquisition Corporation ("Apollo"). Defendant Martin C. Schwartzberg, formerly a close associate of Dockser and Willoughby, seeks to block the mergers and replace the Dockser-Willoughby interests as general partners of the Funds.
The Dockser-Willoughby entities contend that two press releases issued by Schwartzberg, which questioned their integrity and criticized the proposed mergers, constituted proxy solicitations which were unlawful in consequence of Schwartzberg's failure to file proxy statements with the Securities and Exchange Commission ("SEC") and disseminate them to security holders in violation of Rules 14a-3 and 14a-6 under the Securities Exchange Act of 1934 (the "Exchange Act"), 17 C.F.R. §§ 240.14a-3, 14a-6 (1995). They claim also that the press releases were materially false and misleading and thus violated Exchange Act Rule 14a-9, 17 C.F.R. § 240.14a-9. They move for a preliminary injunction. Schwartzberg responds that the press releases were neither proxy solicitations nor materially false and misleading. The motion raises novel issues under Rule 14a-1, as amended by the SEC in 1992,
17 C.F.R. § 240.14a-1, to provide a "safe harbor" for certain press releases which announce the way in which a security holder intends to vote and the reasons therefor.
Dockser, Willoughby and Schwartzberg at one time were equal participants in a series of real estate investments and ventures that involved a variety of business entities including those involved in this case, particularly C.R.I., Inc. ("CRI"). The CRI Business, a term the Court will use to refer generally to the array of ventures with which Dockser and Willoughby now have connections, today includes publicly held real estate funds including CRITEF and CRITEF III, private real estate partnerships, CRI and, it appears, other entities involved in activities such as property management.
The CRITEF Funds
The Funds are creatures of the boom of the late 1980s just as this dispute is an indirect outgrowth of its end. Both were formed for the purpose of acquiring portfolios of tax exempt bonds which were collateralized by non-recourse participating first mortgage loans on multifamily residential real estate developments. (Proxy
19) Their stated objectives were to provide tax exempt distributions and preservation of capital. (Id.) Both no doubt reflected also a desire on the part of Dockser, Willoughby and Schwartzberg to expand the CRI Business by raising capital publicly.
The structures of the Funds are somewhat complex. Each is organized as a Delaware limited partnership with a single general partner that has a 1.01 percent interest in the fund. (Id. 5, 9) The general partner in each case is another limited partnership -- CRITEF Associates LP ("CRITEF Associates") in the case of CRITEF and CRITEF III Associates LP ("CRITEF III Associates") in the case of CRITEF III. CRI is the sole general partner of CRITEF III Associates and the managing general partner of CRITEF Associates. The other general partners of CRITEF Associates are Dockser, Willoughby and Schwartzberg. (Id. 5; Schwartzberg Decl. P 1 & nn. 1, 2)
Each of the funds has an "assignor limited partner" which has assigned beneficial interests in its limited partnership interest in the Fund to holders of Beneficial Assignee Certificates, or BACs. Holders of the BACs in effect have all of the rights of limited partners, including the right to vote on certain partnership matters.
The BACs are registered with the SEC pursuant to Section 12 of the Exchange Act, were sold to the public in offerings conducted in the late 1980s, and are traded on the American Stock Exchange. (Proxy S000341, 19) The public offerings raised over $ 269.5 million, divided approximately evenly between CRITEF and CRITEF III. (Id. 5)
The 1990 Schwartzberg Transaction
For reasons that are not clear on this record, Schwartzberg and his erstwhile partners began to disengage from one another in 1989. As of January 1, 1990, Schwartzberg withdrew from CRI and sold his interests in CRI and associated companies for $ 4.7 million and other consideration. The divorce, however, was not absolute. Schwartzberg remained a general partner in CRITEF Associates and retained limited partnership interests in both CRITEF Associates and CRITEF III Associates. CRI and related entities entered into a consulting agreement with Schwartzberg, the performance of which Schwartzberg subcontracted to his company, Capital Management Strategies, Inc. ("CMS"). But CRI indemnified him broadly for liabilities arising from CRI and the related entities. (Willoughby Decl. PP 5-6)
The Genesis of the Present Dispute
The Funds have been less than a success. Most of the mortgage loans on the properties securing the mortgage revenue bonds held by them are in default, and the underlying properties were assigned or transferred in the late 1980s or early 1990s
to so-called Owner Partnerships, nominees of the Funds, by deeds in lieu of foreclosure or otherwise. (See Proxy 20; Carter Decl. Ex. 4, at 15, 16; id. Ex. 5, at 20) Affiliates of CRI took over the management of all or most of these properties pursuant to management contracts that presumably require the payment of management fees.
In late 1993, CRI explored the possibility of putting all or part of its management operations as well as certain properties into a real estate investment trust ("REIT") and conducting a public offering of the REIT. The effort, however, was a failure. (Schwartzberg Dep. 32-34, 41-42) Perhaps as a consequence, on February 1, 1994, CRI and affiliates transferred management contracts on a number of properties, including thirteen of the eighteen multifamily properties securing the bonds held by the Funds, to an Apollo affiliate, Capital Apartment Properties, Inc. ("CAPREIT") in exchange for limited partnership interests aggregating a maximum of 22 percent (assuming certain hurdle rates were met) in CAPREIT's immediate parent entity, AP CAPREIT Partners L.P. ("AP CAPREIT").
The relationship between CRI and CAPREIT is significant because the transaction in which the CRI Business' interests in AP CAPREIT were extinguished figures in the analysis of the claims against Schwartzberg.
The Initial Merger Overture
According to the draft proxy statement, CAPREIT approached Dockser and Willoughby in January 1995 to discuss a possible tender offer by CAPREIT for the BACs. In March 1995, however, CAPREIT proposed mergers of the Funds into subsidiaries of CAPREIT. But on April 3, 1995, Dockser and Willoughby are said to have indicated that they would not proceed with discussions regarding the mergers until CAPREIT had financing in place. (Proxy 20) CAPREIT thereupon sought financing. But discussions regarding a subject other than the mergers evidently proceeded.
The AP CAPREIT Redemption
On June 30, 1995, the CRI Business' limited partnership interests in CAPREIT were redeemed by AP CAPREIT in exchange for $ 4.75 million. (Proxy 23-24; Carter Decl. Ex. 9) Pursuant to the terms of the Redemption Agreement, however, CRI and its affiliates agreed to pay to CAPREIT in certain circumstances as much as $ 3.55 million if certain management contracts, including contracts relating to certain properties securing the mortgage revenue bonds held by the Funds, are terminated other than a termination following acquisition of the property by CAPREIT or its affiliates. (Proxy 24; Redemption Agreement, Carter Decl. Ex. 9, P 5a) Thus, although merger discussions allegedly were "on hold" as of the date of the redemption agreement, the prospect of mergers of the Funds into CAPREIT subsidiaries was very much in view.
The Merger Agreements and their Consequences
Merger plans proceeded during the summer. On September 11, 1995, the parties entered into agreements to merge CRITEF and CRITEF III into subsidiaries of CAPREIT for $ 150 million in cash. The salient terms included the following:
(a) BAC holders were to receive cash as follows: CRITEF Series I - $ 13.761 per BAC; CRITEF Series II - $ 13.313 per BAC; and CRITEF III - $ 14.36 per BAC.
(b) The general partners of each Fund would sell their general partnership interests to CAPREIT or its designee for $ 500,000 each.
(c) On the closing date, CAPREIT or its designee would acquire allegedly accrued mortgage servicing fees payable to (i) CRI through June 30, 1995 and (ii) CRIIMI MAE, Inc. ("CRIIMI MAE"), another CRI affiliate,
after June 30, 1995. The total accrued fees, assuming a timely closing, were $ 4.55 million of which, plaintiffs said at oral argument, CRI would receive approximately $ 4 million and CRIIMI MAE approximately $ 550,000.
Given the payments to the general partners, CRI and CRIIMI MAE, it appears that the initial merger agreement contemplated that the BAC holders would receive about $ 145 million in exchange for interests initially offered to the public for nearly $ 269.5 million.
The general partners of the Funds issued a press release on the day the merger agreements were signed which, it fairly may be said, touted the deal. It pointed out that the offers represent substantial premiums of approximately 20 percent over recent market prices" for the BACs, that the general partners had agreed to sell their own interests and had concluded that the offers were "in the best interests of the BAC holders," and that CAPREIT already managed most of the properties securing the bonds held by the Funds. (Schwartzberg Decl. Ex. 1)
By September 28, 1995, the Funds had prepared a draft proxy statement. It was shown to Schwartzberg at or about that time, but it never has been publicly disclosed other than as an exhibit to the plaintiffs' reply papers on this motion. In some respects, the draft was overtaken by events.
The announcement of the proposed mergers spawned class actions suits brought in the Delaware Court of Chancery in late September and early October. Allegedly filed on behalf of BAC holders, the actions contended that the mergers were the product of self-dealing, that the prices were inadequate, and so on. The complaints sought to enjoin the mergers, to require arms-length negotiations to increase the prices, and to require evaluation of alternatives.
(Carter Decl. Ex. 4, at 39)
The merger announcement seems also to have coincided, at least roughly, with the start of the battle, of which this lawsuit is but a part, between Dockser and Willoughby, on one side, and Schwartzberg, on the other.
On October 3, 1995, Schwartzberg's counsel, who are well known for representing parties in, inter alia, corporate control contests, announced by letter to Dockser and Willoughby that they had been "retained as special securities and corporate litigation counsel." They asserted that their "preliminary investigation" supported Schwartzberg's belief that he had claims against Dockser, Willoughby, CRI and affiliates "in connection with an asset management agreement and other agreements, the Capital Housing Partnerships ('CHP') and the four public limited partnerships (CRI Ltd. I-IV), the CRIIMI-Mae proxy statement dated April 28, 1995, and the recently announced CRITEF disposition." They demanded production within ten days of a vast quantity of documents dating back for years. (Schwartzberg Decl. Ex. 3)
In about the same time frame, CRI questioned the level of CMS's compensation under Schwartzberg's 1990 consulting contract. When the parties failed to resolve their differences, CRI sued Schwartzberg in November 1995 in a Maryland state court for a declaratory judgment. (Willoughby Decl. PP 9-10)
The proposed mergers did not advance quickly. On December 13, 1995, the general partners of the Funds issued a press release stating that "material conditions to the mergers" -- including settlement of the class actions -- had "not yet been satisfied." They added, however, that they were in discussions with CAPREIT with a view to obtaining a new offer that would improve the terms for the BAC holders. (Schwartzberg Decl. Ex. 4)
These discussions culminated on January 31, 1996 in amended merger agreements that improved the terms of the of the proposed transactions by increasing the amount of cash to be received by BAC holders to $ 158.5 million (subject to certain adjustments), among other changes. (Willoughby Decl. P 17) The revised deal was announced in a press release the following day, which noted also that the improved terms were the basis of an agreement in principle to settle the class action suits. (Schwartzberg Decl. Ex. 5)
The Fight With Schwartzberg Heats Up
In the meantime, matters were developing on the Schwartzberg front.
In December 1995, Schwartzberg tried to negotiate a global settlement of his differences with Dockser and Willoughby. (Schwartzberg Dep. 234-35) The initial meeting allegedly ended with Willoughby getting red in the face and telling Schwartzberg that Willoughby is "richer, . . . smarter, . . . meaner, . . . [and] tougher" than Schwartzberg and that if Schwartzberg did "anything to tamper with CRI or any of our deals," Willoughby would kill him. (Id. 235) Nevertheless, discussions continued between Dockser and Schwartzberg for a few days. (Id. 235-49)
At some point in December, the talks broke down, and Schwartzberg soon thereafter began turning up the heat on Dockser and Willoughby. On January 17, 1996, he began soliciting consents from limited partners of the Capital Housing Partnerships ("CHPs"), a series of 125 real estate limited partnerships, to replace CRI as the managing general partner of the CHPs with himself. (See Schwartzberg Decl. Ex. 7; Cpt. Ex. A) On the following day, he sued Dockser, Willoughby and CRI in Maryland with respect both to the mergers and the dispute over the 1990 agreement. (Willoughby Decl. P 11) And these were only opening shots.
On February 1, 1996, the same day that management announced the renegotiated deal with CAPREIT, Schwartzberg threw down another gauntlet. Already engaged in the solicitation of consents to remove CRI as managing general partner of the CHPs, he demanded lists of the registered holders of the BACs "to permit [him] to communicate with them . . . in connection with the replacement of [the relevant CRITEF Associates entity] as managing general partner . . ." of the Funds. (Willoughby Decl. Exs. F, G)
The effort to replace CRI affiliates as managing general partners of the Funds implicitly signaled Schwartzberg's opposition to the proposed mergers, as the consummation of the mergers would terminate the existence of the Funds and transfer ownership and control of their assets to CAPREIT. And the implicit rapidly became explicit.
Schwartzberg's Press Releases
February 6, 1996
On February 6, 1996, Schwartzberg issued a press release, the bulk of which reported on the status of his efforts to oust CRI as managing general partner of the CHP partnerships, complained of CRI's attempted termination of his asset management contract, and characterized the actions of Dockser and Willoughby as "the worst kind of insider abuse," as well as "self-dealing." The release went on, however, to note that CRI had engaged in self-dealing in connection with the Funds and that Schwartzberg therefore had filed litigation and requested shareholder lists. In the passage central to plaintiffs' allegations, he stated:
"Because the CRI principals stand to personally receive $ 9.3 million if the CRITEF-CAPREIT transaction is consummated, they have not conducted a public auction for the CRITEF properties or disclosed CRITEF's financial statements in order to prevent investors from determining the properties' true value and third parties from offering a higher price." (Cpt Ex. A)
The alleged $ 9.3 million benefit was not explained further.
February 14, 1996
On February 14, 1996, perhaps prompted by a litigation reverse
as well as the increased CAPREIT offer for the Funds, Schwartzberg issued another release. (Cpt Ex. B) He charged again that CRI would receive $ 9.3 million in the transaction, stated that Schwartzberg was opposing the mergers "until CRI makes CRITEF's financial statements, and financial statements for each of the 18 properties, available to him," and urged "investors not to vote for the transaction until such time that the real values can be assessed." The release went on:
"Mr. Schwartzberg said, 'While there appear to be many improprieties surrounding this transaction, I believe two continue to cry out for immediate correction: CRI, by its own admission, is attempting to 'cram down' this merger because its principals stand to benefit by an additional $ 4.55 million, on top of the $ 4.75 million they have already received from Apollo, if the CRITEF-CAPREIT transaction is consummated. Why hasn't CRI conducted a public auction for the CRITEF properties or disclosed CRITEF's financial statements? Is this an attempt to prevent investors from determining the properties' true value and third parties from offering a higher price? * * * I believe that CRI's principals want nothing else but to do a deal with CAPREIT so that they benefit by $ 9.3 million, even if it means that BAC holders do not get a fair price for their investment.'"
The Factual Accuracy of the Press Releases
Plaintiffs charge that the press releases are materially false and misleading in three respects. They contend first that plaintiffs, contrary to the press releases, have disclosed the Funds' financial statements and financial information. Second, they charge that Schwartzberg's assertion that CRI will receive or benefit by the $ 4.75 million redemption price if the mergers are consummated is false. Finally, they maintain that CRI, contrary to Schwartzberg's February 14 press release, will not receive the entire $ 4.55 million in accrued mortgage servicing fees. Of course, to the extent that plaintiffs prevail on the second and third points, they necessarily would establish the inaccuracy of the bald assertion that the CRI principals would receive a benefit of $ 9.3 million as a result of consummation of the mergers.
Both press releases accused the plaintiffs of refusing to disclose the Funds' financial statements. Both of the Funds are reporting companies under the Exchange Act. Both filed Quarterly Reports on Form 10-Q, which contain consolidated balance sheets and statements of operations, with the SEC for the quarter ended September 30, 1995 (E.g., Carter Decl. Exs. 4-5) Hence, that assertion simply is false.
On the other hand, the assertion in the February 14 press release that plaintiffs have not publicly disclosed financial statements for each of the Funds' eighteen properties is literally correct. While the Funds' financial statements in their Form 10-Qs contain some information regarding individual properties,
plaintiffs acknowledged at oral argument that this summary data is less extensive than would be contained in statements for the properties. They offered no evidence that the information in the 10-Qs was their substantial equivalent.
(See generally Tr., Mar. 5, 1996, at 14-23)
Accordingly, the press releases were factually incorrect in charging that the plaintiffs had not disclosed the financial statements of the Funds, but factually accurate in stating that they had not disclosed the financial statements of the eighteen properties held by the Funds. There is, however, another consideration bearing on the assertions regarding financial statements.
One general thrust of the press releases was that the Dockser-Willoughby interests were seeking to obtain approval of the mergers without disclosing to the BAC holders the information needed to evaluate the fairness of the proposed consideration. While it is true that the Dockser-Willoughby releases touted the mergers, particularly by emphasizing that the prices offered represented a premium over recent trading prices of the BACs, they have not yet actually solicited proxies in favor of the mergers. In order to do so, as Schwartzberg well knows, they will have to comply with the proxy rules, and thus to distribute to the BAC holders considerably more extensive financial information that has made been available to date. Hence, the Schwartzberg releases took advantage of the timing to charge management with withholding information that it was not yet obliged to disclose. In consequence, the releases were somewhat misleading in this broader sense, quite apart from their literal truth or falsity.
The Alleged $ 9.3 Million Benefit
The February 6 release said, without elaboration, that CRI's principals stood to receive $ 9.3 million if the mergers were consummated. The February 14 release stated that this figure was the sum of $ 4.75 million already received from Apollo and $ 4.55 million that would be received, although it did not further explain these items. It now is clear, however, that Schwartzberg was referring to the $ 4.75 million the CRI Business received upon the redemption of its interests in CAPREIT and $ 4.55 million in payments contemplated by the original merger agreements for accrued mortgage servicing fees.
It is important at the outset to note that the basis for both of Schwartzberg's press releases was the September 28, 1995 draft proxy statement, which was a preliminary description of the initial deal. By the time Schwartzberg issued the press releases, however, the merger terms had been changed. Schwartzberg knew they had changed, although he did not know the details of the changes. Yet he went ahead with his releases, knowing that he did not fully know the terms of the revised proposals.
The $ 4.75 Million Redemption Price
As noted, the CRI Business transferred property management contracts on a number of properties, including thirteen of the eighteen securing the mortgages underlying the bonds owned by the Funds, to AP CAPREIT in February 1994 in exchange for limited partnership interests in CAPREIT. Those interests were redeemed on June 30, 1995 for $ 4.75 million, subject to the obligation of CRI to repay up to $ 3.55 million in the event some or all of those management contracts were terminated. The agreement provided also that the repayment obligation would be extinguished if the proposed mergers were consummated.
Schwartzberg contends that this arrangement gives CRI and its two stockholders, Willoughby and Dockser, a personal financial interest in the consummation of the mergers because that event would eliminate their contingent repayment liability. That appears to be correct. But Schwartzberg may have gone beyond the facts and significantly exaggerated the extent of the personal benefit.
The redemption transaction was not limited to the Fund properties. The amount of the contingent liability attributable to the Fund properties was only $ 1,313,864. (Carter Decl. Ex. 9, P 5 & Ex. A) Hence, if one views the extent of the self-interest of Dockser and Willoughby in the mergers as the amount of the contingent liability that would be extinguished by consummation of the mergers, the $ 4.75 million figure used by Schwartzberg was a substantial exaggeration.
Schwartzberg has two responses to this argument. He views the entire redemption as part and parcel of an integrated transaction of which both the redemption and the mergers are a part. Put another way, he regards the whole $ 4.75 million redemption as a financial inducement to Dockser and Willoughby to push the mergers. He sought also at his deposition to make the case that, on the basis of the information available to him at the time, he reasonably viewed substantially all of the repayment obligation as attributable to the Fund properties.
The Court need not and, in view of the limited record, cannot definitively resolve these questions at this time. The most that can be said at this point is that there is a fair ground for litigation as to whether the press releases were accurate in all material respects with regard to the redemption payment and any interest that may have given Dockser, Willoughby and CRI in the consummation of the mergers.
The Mortgage Servicing Fees
The balance of the $ 9.3 million figure mentioned in the press releases is the $ 4.55 million in allegedly accrued mortgage servicing fees payable on consummation of the mergers. As indicated above, the initial merger agreements contemplated the payment of approximately $ 4 million to CRI and approximately $ 550,000 to CRIIMI MAE, assuming a timely closing, in respect of allegedly accrued mortgage servicing fees.
The revised merger terms involve a payment of only $ 2 million in this regard to CRI. Plaintiff implied, but not stated, that no such payment is to be made to CRIIMI MAE.
(Willoughby Decl. P 28) Those facts, however, were not disclosed in the plaintiffs' February 1, 1996 press release. (Schwartzberg Decl. Ex. 5)
Schwartzberg was well within the bounds of accuracy in suggesting that Dockser, Willoughby and CRI have individual financial interests in the consummation of the mergers by virtue of the proposed payments for accrued mortgage servicing fees.
His press releases in this regard, however, were not entirely accurate. First, Schwartzberg ignored the fact that part of the $ 4.55 million contemplated by the original agreements was payable to CRIIMI MAE, despite the fact that the draft proxy statement he reviewed so indicated.
Far more important, he simply assumed -- incorrectly -- that the revision in the deal terms announced on February 1 made no change in this regard. Hence, although the plaintiffs' papers leave some uncertainty, it appears that Schwartzberg overstated the extent of the proposed payment in respect of the accrued fees by $ 2.55 million. If he did overstate it, he did so quite recklessly.
Plaintiffs seek to enjoin defendant from conducting further solicitations without complying with Rules 14a-3 and 14a-6 and from making any further false and misleading statements in violation of Rule 14a-9. In order to obtain a preliminary injunction, they must show (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 plus a balance of hardships tipping decidedly toward the party requesting the preliminary relief. E.g., Acquaire v. Canada Dry Bottling Co. of New York, Inc., 24 F.3d 401, 409 (2d Cir. 1994); ICN Pharmaceuticals, Inc. v. Khan, 2 F.3d 484, 490 (2d Cir. 1993); Holford USA Ltd . v. Cherokee, Inc., 864 F. Supp. 364, 371 (S.D.N.Y. 1994). Moreover, a clear showing of a threat of irreparable harm is essential. E.g., Triebwasser & Katz v. American Tel. & Tel. Co., 535 F.2d 1356, 1359 (2d Cir. 1976).
The Press Releases Were Solicitations
Section 14(a) of the Exchange Act provides in relevant part that:
"It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce . . . or otherwise, in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe . . . to solicit . . . any proxy or consent or authorization in respect of any security . . . registered pursuant to section 78l of this title." 15 U.S.C. § 78n(a).
Rules 14a-3 and 14a-6 thereunder provide in substance that no solicitation subject to Regulation 14A shall be made unless a preliminary or definitive proxy statement is filed with the Commission and each person solicited is provided with a copy concurrently with or in advance of the solicitation. Schwartzberg acknowledges that he neither filed nor disseminated a proxy statement. In consequence, the question whether Schwartzberg violated Section 14(a) and Rules 14a-3 and 14a-6 turns on whether the press releases were solicitations subject to Regulation 14A, 17 C.F.R. §§ 240.14a-1 et seq.
Rule 14a-1 defines "solicitation," with an exception to which the Court will turn below, to include, among other things, "the furnishing of a . . . communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy." 17 C.F.R. § 240.14a-1(l)(1)(iii). The Rule is declarative of the long established law of this Circuit, which holds that "solicitation" comprehends not only direct requests to furnish, revoke, or withhold proxies, but also "communications which may indirectly accomplish such a result or constitute a step in the chain of communications ultimately designed to accomplish such a result." Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d Cir. 1985); accord, e.g., Securities and Exchange Commission v. Okin, 132 F.2d 784, 786 (2d Cir. 1943); see generally IV L. LOSS & J. SELIGMAN, SECURITIES REGULATION 1945-51 (3d ed. 1990)(hereinafter "Loss"); Adopting Release at 48282 (apart from specific exceptions, general definition of solicitation remains unchanged).
These press releases easily meet the basic definition of solicitation. The sharp criticism of the CRI principals, the allegations of self-dealing, and the suggestion that CRI principals improperly sought to conceal important information relating to the mergers, along with the explicit urging that BAC holders "not vote for the transaction" until further information was provided, patently were designed to influence BAC holders to vote against the proposed merger. See Kaufman v. Cooper Companies, Inc., 719 F. Supp. 174, 185 (S.D.N.Y. 1989) (press release that spoke critically of incumbent management and gave reasons for formation of opposition, taken in context, was a step in a chain of communications that ultimately would seek proxies for upcoming annual meeting); Canadian Javelin Ltd . v. Brooks, 462 F. Supp. 190 (S.D.N.Y. 1978) (mailings including articles unfavorable to management made during proxy fight constituted solicitations). Moreover, these press releases were parts of a broader campaign to supplant CRI and its affiliates as managing general partners not only of the CHPs, but of the Funds as well (see Schwartzberg Dep. 465) -- the latter being a goal that, as a practical matter, can not usefully be accomplished unless the mergers are defeated.
Schwartzberg nevertheless argues that the press releases were not solicitations, relying on Smallwood v. Pearl Brewing Co., 489 F.2d 579 (5th Cir.), cert. denied, 419 U.S. 873, 42 L. Ed. 2d 113, 95 S. Ct. 134 (1974), and Brown v. Chicago, Rock Island & Pacific R.R., 328 F.2d 122 (7th Cir. 1964). Neither case, however, lends much support to his argument.
Smallwood held that a letter issued by management on the heels of a merger agreement, in advance of the filing of a proxy statement and well before the making of actual requests for proxies, did not constitute a "solicitation." 489 F.2d at 600-01. The case, however, involved the disclosure by the corporation of a material event and thus reflected the importance of "prompt disclosure . . . to ensure not only that all investors, insiders and outsiders, have at all times equal access to market information . . ." Id. at 600. It relied heavily on the fact that the letter merely described the merger proposal and stated that the boards believed the merger to be in the best interests of the shareholders, which the court took "to say only that the directors did their fiduciary duty." Id. at 601. Here, in contrast, Schwartzberg's press releases were not announcements by an issuer of material corporate events. The releases followed the announcement of the proposed mergers by months, not days. And they were issued only after settlement negotiations regarding an unrelated dispute between Schwartzberg and CRI interests broke down and Schwartzberg decided to seek consents to remove the CRI affiliates as the Funds' managing general partners. Smallwood therefore is of no help to Schwartzberg.
Brown is of no more aid. The Seventh Circuit there held only that a newspaper advertisement by one of two competing bidders to acquire a railroad was intended to generate opposition to an Interstate Commerce Commission application filed by the rival suitor and not to solicit proxies. See IV Loss at 1951 n. 80. The facts of the case bear no similarity to those at bar.
Schwartzberg's next and final line of defense to the Rule 14a-3 and 14a-6 claim focuses on the 1992 amendments to the proxy rules, which adopted a safe harbor provision that, in some circumstances, exempts press releases by security holders from the Rule 14a-1 definition of "solicitation" and, in consequence, from the proxy rules in general. The relevant language provides that the term "solicitation" does not apply to:
"A communication by a security holder who does not otherwise engage in a proxy solicitation (other than a solicitation exempt under § 240.14a-2) stating how the security holder intends to vote and the reasons therefor, provided that the communication:
"(A) Is made by means of . . . press releases . . . [or]
"(B) Is directed to persons to whom the security holder owes a fiduciary duty in connection with the voting of securities of a registrant held by the security holder . . ." 17 C.F.R. § 240.14a-1(l)(2)(iv).