United States District Court, S.D. New York
September 7, 2005.
TELENOR EAST INVEST AS, Plaintiff,
ECO TELECOM LIMITED, ALFA TELECOM LIMITED, CTF HOLDINGS LIMITED, and CROWN FINANCE FOUNDATIONS Defendants.
The opinion of the court was delivered by: GERARD E. LYNCH, District Judge
OPINION AND ORDER
This matter began with an order to show cause filed on August
26, 2005. Both parties are minority shareholders of a Russian
corporation OAO Vimpel-Communications ("VimpelCom"). The
plaintiff, Telenor East Invest AS ("Telenor"), owns 26.6% of the
voting stock of VimpelCom, while the defendant, Eco Telecom
Limited ("Eco Telecom"), owns 32.9%. Eco Telecom is related to
the other defendants in this action through a series of
parent-subsidiary relationships that do not bear on the current
As minority stockholders of VimpelCom, Telenor and Eco Telecom
have engaged in a proxy fight in connection with the proposed
acquisition by VimpelCom of Ukrainian Radiosystems ("WellCom"), a Ukrainian telecommunications company.
In connection with the proposed transaction, Eco Telecom has made
various representations both via the internet and through a
Schedule 13D and various amendments thereto filed with the SEC.
These representations give rise to Telenor's complaint.
As is common in fast-moving proxy fights, the factual
situation, and the plaintiff's demands for relief, have evolved
even in the short time the matter has been pending. At a hearing
on September 6, 2005, and in a Proposed Order, Telenor has
requested the following relief: (1) that Eco Telecom remove a
website (the "Website") that contains statements and
representations encouraging VimpelCom shareholders to vote in
favor of the WellCom transaction; (2) that Eco Telecom remove an
advertisement supporting the WellCom transaction from the Yahoo!
Finance website; (3) that all proxies submitted through the
Website be enjoined from voting in connection with the WellCom
transaction; and (4) that Eco Telecom be enjoined from voting its
shares in connection with the WellCom transaction unless and
until certain additional disclosures are made through further
amendments to Eco Telecom's Schedule 13D, namely (a) that Alexei
Reznikovich, the CEO of defendant Alfa Telecom Limited, has a
business relationship with a prospective seller in the WellCom
transaction, (b) that Reznikovich had previously valued WellCom
at $145,000,000, an amount much lower than Eco Telecom's current
stated valuation of WellCom, $296,000,000, and (c) the identities
of any persons who will receive any payment if the WellCom
transaction is completed. For the following reasons the
plaintiff's requests for injunctive relief are denied.
To obtain a preliminary injunction the plaintiff must make two
showings: "(1) that the injunction is necessary to prevent
irreparable harm, and (2) there is a `clear' or `substantial' likelihood that it will prevail on the merits." Sunward
Electronics, Inc. v. McDonald, 362 F.3d 17, 24-25 (2d Cir.
2004). For purposes of this Opinion and Order it will be assumed
that Telenor has satisfied the "irreparable harm" requirement,
since if the WellCom transaction is approved on September 14,
2005, then the horse is out of the barn and any negative impact
on plaintiff's investment in VimpelCom could not be easily
remedied. Nevertheless, plaintiff's motion must be denied because
it has not shown a likelihood that it would prevail on the merits
in any of its claims.
Section 13(d) of the Securities Exchange Act of 1934 requires
that specified parties make certain disclosures in connection
with certain purchases of stock.*fn1 Among the required
disclosures are (a) the identity of and information about the
purchasers; (b) the source of the funds used in connection with
the purchase; (c) whether or not the purpose of the purchase is
to take control of the issuing corporation; (d) the number of
shares to be owned by the purchasers; and (e) information
regarding "contracts, arrangements, or understandings with any
person with respect to any securities of the issuer."
15 U.S.C. § 78m(d) (2005). As is evident from the text of the statute, rather
than requiring the disclosure of all material information,
section 13(d) only requires that specified information be
disclosed to shareholders. But the statute's requirements do not
sit in isolation. Rather, they are informed by regulations such
as 17 C.F.R. § 240.12b-20 (2005), which states that "[i]n
addition to the information expressly required to be included [by
section 13(d)], there shall be added such further material
information, if any, as may be necessary to make the required statements, in the light of the
circumstances under which they are made, not misleading."
Rule 12b-20, while certainly expanding on the disclosure
requirements of section 13(d), has sensibly not been interpreted
to swallow section 13(d)'s limited disclosure obligations. As
this court stated in Kaufman & Broad, Inc. v. Belzberg,
522 F. Supp. 35, 42 (S.D.N.Y. 1981), "By its plain language, Rule 12b-20
requires the disclosure of additional material information
necessary to make the required Section 13(d) disclosures not
misleading. The rule does not . . . convert Section 13(d) into a
mandate to disclose any and all material information. . . ."
Despite Kaufman, plaintiff attempts to support its claim for
additional disclosure by relying on a more recent decision of
this court, Horsehead Resource Development Co. v. B.U.S.
Environmental Services, Inc., 916 F. Supp. 305 (S.D.N.Y. 1996).
In Horsehead a corporation was required to disclose information
relating to the existence of criminal charges that directly
related to the acquisition there at issue, even though pending
criminal matters are not specified as a required disclosure under
section 13(d). However, the Horsehead Court took care to limit
its holding, stating that "shareholders of an environmental waste
control company would find material the knowledge that the
company's largest shareholders are being tried for environmental
law violations. For this reason, and this reason only, such
information is considered `material.'" Id. at 313 (emphasis
added). Plaintiff has not alleged that there exist relevant
criminal charges against any party or shareholder related to this
matter, so Horsehead is not applicable. Therefore, the general
rule of Kaufman applies, and this Court must determine whether
Telenor has established that it is likely to succeed in showing
that Eco Telecom's Schedule 13D disclosures are materially misleading, either because they are inaccurate in
themselves or because they omit information necessary to prevent
the statements made from being misleading.
Plaintiff's requests for injunctive relief with respect to the
Website must be denied. Telenor's principal objection to the
Website is the claim that Eco Telecom grossly exaggerates the
value of WellCom, and suppresses facts that would undermine its
valuation. But as discussed more fully below, ascribing value to
a proposed corporate acquisition is largely a matter of opinion.
Telenor has not identified significant factual inaccuracies on
the Website regarding objective facts about WellCom, and this
Court cannot conclude, on the limited record before it, that a
factfinder at trial would likely find Eco Telecom's alleged
misrepresentations material. In any event, since Telenor itself
has vigorously disputed Eco Telecom's claims with its own
communications to VimpelCom's shareholders, there can be no claim
that the shareholders are not fully informed about the facts
relevant to the valuation dispute. Moreover, the information on
the Website regarding valuation with which the plaintiff takes
issue has already been removed.
Plaintiff also claims that the Website is, or at one time was,
designed to appear to be a VimpelCom website instead of what it
actually is, a website owned and operated by defendants. However,
it has since been made clear that the Website is operated by
defendants, and any confusion brought about by previous versions
of the Website can hardly be material. A shareholder who
mistakenly believed that the Website was put up by VimpelCom
would get the impression that VimpelCom management supports the
WellCom transaction. But any confusion would not be materially
misleading; plaintiff concedes that VimpelCom management does in
fact support the transaction. Therefore, plaintiff's requests
that defendants be enjoined from operating the Website, that all proxies submitted through the
website be enjoined from voting, and that the Yahoo! Finance
advertisement that links to the Website be removed are all
Plaintiff's requests for corrected or additional disclosure in
an amendment to their Schedule 13D must also be denied. Plaintiff
has essentially two complaints with regard to the Schedule 13D:
The valuation of WellCom is inflated, and the possibility of
self-dealing is not adequately disclosed. The valuation of a
corporation is not a fact, but rather is a debatable matter
subject to different opinions and interpretations. When a matter
such as the valuation of a corporation is in dispute, "the law
requires only that the disputed facts . . . be disclosed."
Avnet, Inc. v. Scope Indus., 499 F. Supp. 1121, 1125 (S.D.N.Y.
1980). Defendants have obtained a valuation of WellCom; plaintiff
disputes that valuation. As this Court stated in Avnet, the
remedy for this disagreement is simply that the disputed facts be
disclosed to the shareholders. That is exactly what has happened
here. In response to Telenor's complaint, Eco Telecom included
the substance of the complaint in an amendment to its Schedule
13D, and appended a copy of the complaint itself, which details
at length plaintiff's objections to the defendants' valuation.
(Rolfe Decl. Ex. B at 7, 15). Additionally, plaintiff seeks a
specific disclosure in connection with a previous and allegedly
inconsistent valuation made by defendant Alfa Telecom Limited's
CEO Alexei Reznikovich. It is unclear what relevance this
disclosure would have. The previous valuation was made in June of
2004 and it would not be surprising if the Ukrainian
telecommunications market had experienced some changes since that
time. Regardless of possible market changes, Reznikovich was not
defendant's CEO at the time of the previous transaction, and
there are numerous possible reasons for why individuals in
different roles would come to different valuations for the same
company. In any case, the failure of Eco Telecom to disclose Mr. Reznikovich's previous valuation of WellCom does not
rise to the level of a violation of section 13(d). Eco Telecom
disclosed its valuation and fully disclosed Telenor's complaint
regarding that valuation. With claims by both sides before the
shareholders, Eco Telecom's disclosure is not misleading.
Finally, with regard to the valuation claims, this Court's
discussion in Condec Corp. v. Farley, 573 F. Supp. 1382
(S.D.N.Y. 1983) would seem to apply here with equal force. The
Condec Court stated, in rejecting a request for additional
disclosure, "Central to our holding is the fact that we believe
the additional information which would be furnished by the
requested `corrective disclosures' would add little to the fund
of information available to the stockholders and the
marketplace. . . . [T]he net consequences of the filings in fact
made, which include a full recitation of the issues raised by
plaintiff in this litigation, is that all interested parties now
have access to all of the facts." Id. at 1386.
Turning finally to the plaintiff's complaint regarding the
possibility of undisclosed self-dealing, here too Telenor's claim
falls short. In an amendment to its Schedule 13D in response to
Telenor's initial complaint, Eco Telecom states, "For the
avoidance of doubt, the Reporting Persons hereby confirm that no
Reporting Person, nor any of their officers, directors,
subsidiaries, shareholders, beneficial owners or affiliates
. . ., nor, to the best knowledge of the Reporting Persons, any
employee of the Reporting Persons, their subsidiaries or
affiliates, has any financial interest in the sellers of
WellCom." (Rolfe Decl. Ex. B at 7). Plaintiff notes that the
broad language in Eco Telecom's disclosure nevertheless does not
disclaim the possibility that someone related to the defendants
could have some sort of fee agreement under which he or she,
while not having a financial interest in the sellers of WellCom,
would still have a financial interest in the transaction itself.
However, the mere logical possibility of such an arrangement cannot, by itself, be the basis for an order requiring the
defendants to deny that such an arrangement exists. Section 13(d)
and Rule 12b-20 serve to prohibit misleading statements, but
without evidence to the contrary there is nothing to suggest that
Eco Telecom's statement is misleading in any way. The statement
would arguably be misleading if a fee agreement of the type
plaintiff suggests did in fact exist, but plaintiff candidly
acknowledges that it has produced no such evidence. Without
evidence of a misleading statement there is nothing to correct,
and therefore corrective disclosure cannot be ordered.
For the foregoing reasons plaintiff has not shown a likelihood
of success on the merits of any of its claims for injunctive
relief. Accordingly, plaintiff's motion for preliminary
injunction is DENIED.
© 1992-2005 VersusLaw Inc.