City Capital Associates Ltd. Partnership v. Interco Inc.

OPINION OF THE COURT STAPLETON, Circuit Judge: This suit was instituted by City Capital Associates Limited Partnership (City Capital) seeking preliminary and permanent in-junctive relief against Interco Incorporated (Interco), and certain Delaware officials to foreclose application of Section 203 of the General Corporation Law of Delaware, Del. Code Ann.Tit. 8, § 203 (1987), to City Capital’s tender offer for Interco stock. Inter-co counterclaimed alleging violations of the Williams Act. The district court denied Interco’s motion for a preliminary injunction on its counterclaim, 696 F.Supp. 1551, and this appeal followed. The appeal raises only a single Williams Act issue. I. Interco, formerly known as International Shoe Company, is a St. Louis business with total assets of approximately $2 billion and a shareholder’s equity of $1.2 billion dollars. The company is listed on the New York and Midwest Stock Exchanges and has 36 million shares outstanding. City Capital is a partnership owned by two limited partners who each have a one (1%) percent interest and two general partners, City GP I, Inc. (City GP I) and City GP II, Inc. (City GP II) which each own forty-nine (49%) percent. Steven M. Rales is the sole stockholder of City GP I and his brother, Mitchell P. Rales, is the sole stockholder in City GP II. City Capital owns 100% of Cardinal Holdings Corporation (Holdings) which in turn owns 100% of Cardinal Acquisition Corp. (Acquisition), the entity that is making the tender offer for Interco stock. Acquisition was organized by City Capital as a vehicle for the acquisition of Interco stock. On July 18, 1988, City Capital, City GP I, City GP II, Steven Rales and Mitchell Rales filed a Schedule 13D with the Securities and Exchange Commission advising that City Capital had acquired 8.10 percent of Interco stock. On July 27, 1988, City Capital proposed a friendly merger with Interco at $64 per share and on August 8, 1988, increased the offer to $70 per share. Inter-co’s Board of Directors, maintaining that the company’s shares were fairly valued at $76 each, rejected the merger offer. On August 15, 1988, Acquisition, Holdings, City Capital, City GP I, City GP II, Steven [62] Rales and Mitchell Rales filed a Schedule 13D and a Schedule 14D-1 notifying the SEC of a hostile takeover bid for Interco shares to be made by Acquisition as the “bidder,” at $70. This tender offer commenced on August 15, 1988. The bid price has since been increased to $72. The tender materials disclose that $2.6 billion in financing will be required to consummate the tender offer. It is expected that $1,225 billion will be borrowed from a syndicate of banks led by Chase National Bank (Chase). Drexel Burnham Lambert, Inc. (Drexel) has been engaged to raise the remaining $1,375 billion through the sale of preferred securities of Acquisition. Acquisition’s obligation to purchase tendered shares is conditioned, among other things, upon the tender of a sufficient number of shares which, when added to the Interco shares owned by City Capital, will constitute 75% of the outstanding Interco stock. If the tender is successful it is expected that Interco will be combined with Acquisition or one of its affiliates in a merger in which each share of Interco, other than shares owned by Acquisition or its affiliates or by Interco stockholders who have perfected their appraisal rights, will be cashed out for an amount equal to the price paid in the tender offer. While preferred and common stock of Acquisition will be issued in connection with the financing of the offer, City Capital will retain a minimum of 63% of the common stock of Acquisition, through Holdings or otherwise, and thus will remain in control of Acquisition. The tender offer materials also disclose the consideration to be received by Drexel for its services as financial adviser and dealer manager. City Capital agreed to make available to Drexel or its designees between 29% and 36% of the common equity of Acquisition, depending upon the amount of preferred stock Drexel is asked to sell. The right to place the common equity was sought by Drexel so that it could offer common equity as a “sweetener” to prospective purchasers in order to encourage them to purchase the preferred securities that Drexel has undertaken to place. However, Drexel has the right to keep for itself up to one-half of the 36%. Drexel is under no obligation to purchase any equity interest in Acquisition.1 In connection with the placement of the preferred stock, Drexel is also entitled to a $12 million fee if the takeover is successful and a $6 million fee if it is not. Further, Drexel is promised a 1.125% fee for funds for which it secures written commitments, and 3 percent to 5.25 percent of the total gross proceeds from the sale of debt or equity securities it underwrites. In addition, Drexel is to receive a $2 million fee for performing exclusive financial adviser services and is to receive $1 million for acting as dealer manager. Finally, Drexel has the right to 15% of profits the Rales brothers make in the event that acquired shares are sold following an unsuccessful takeover. The tender offer materials further disclosed that Drexel has received subpoenas from a grand jury investigation in New York and is the subject of an impending SEC civil enforcement action. On September 9, 1988, Interco filed a counterclaim alleging that the tender offer violated the Williams Act and the regulations thereunder in that (1) the tender materials failed to disclose that the proposed transaction would violate the margin requirements because the “preferred” stock is in reality debt, (2) those materials also failed to disclose that the transaction would violate the Hart-Scott Act, and (3) both Drexel and Chase were “bidders”, as that concept is employed in the Williams Act regulations, and both had failed to make the filings and disclosures required of “bidders” under those regulations. Interco stockholders were advised of the filing of this counterclaim and of these contentions in supplemental tender offer materials. [63] Discovery concerning the tender offer, including depositions of the Drexel personnel involved in the tender, was conducted prior to the September 16, 1988 presentation of Interco’s motion for a preliminary injunction to the district court and numerous affidavits, documentary exhibits and deposition excerpts were submitted supporting and opposing that motion. On September 23, 1988, the district court filed its opinion finding that Interco had failed to show a likelihood of success on any of its contentions. In particular, the district court concluded that neither Drexel nor Chase was a “bidder.” On October 3, 1988, Interco appealed from the order denying its motion for a preliminary injunction. We expedited consideration of the appeal and heard argument October 11, 1988. Before us, Interco contends only that Drexel is a “bidder” and that, accordingly, the tender offer has been made in violation of the applicable Williams Act regulations. 17 C.F.R. § 240.14d-l to § 240.14d-101 (1987). II. We agree with Interco that the Williams Act was intended to require one making a tender offer of the requisite size to disclose all information material to decisions about the tender offer. However, there is no dispute that in connection with the tender offer giving rise to this case, Acquisition, Holdings, City Capital, City GP I, City GP II, Steven M. Rales and Mitchell P. Rales filed a timely and complete Schedule 14D-1 as “reporting persons.”2 Despite Interco’s access to the documents, employees, and agents of both these entities and Drexel, it has been unable to point to any material misrepresentation or material omission in these filings.3 In particular, Interco can point to no material misrepresentation or omission about the role of Drexel in the proposed transaction. As a result, it is forced to argue that Drexel is a “bidder” as that term is used in the regulations adopted under Section 14D and that the Schedule 14D filing is deficient because it includes no Drexel financials. In support of this contention, Interco cites the evidence indicating that Drexel will be paid very substantial fees for services rendered in connection with the tender offer and will receive for itself and its designees the right to purchase between 29% and 36% of the common equity of the corporation that will purchase the tendered stock. In our view, the former evidence is irrelevant to the “bidder” issue and the latter is insufficient to make Drexel a “bidder.” The undisputed facts of record indicate that the Rales brothers decided to make a tender for Interco stock and, in fact, made an offer at $64 per share before engaging the services of Drexel.4 While the Raleses subsequently enlisted Drexel’s assistance and agreed to pay its substantial fees and grant it the above-referenced option, there is no indication that the Raleses relinquished to Drexel any control over the tender offer. Moreover, it is undisputed that City Capital will retain at least 63% of the common stock of the purchaser of the tendered shares and there is no evidence that Drexel is to have any role with respect to the purchaser other than that of an investor.5 Accordingly, the legal issue presented is whether the filing by the Ra64 les brothers and their related entities of a Schedule 14D, both complete and accurate from their perspective, satisfied the disclosure requirements of the Act or whether a person who will hold a minority investment position in the surviving entity must also file a similar schedule, viewing itself as an additional “bidder.” Before turning to this issue it is important to stress two considerations that must guide our analysis. First, the Securities and Exchange Commission has been entrusted by Congress with the interpretation, administration, and enforcement of the Securities Acts. As a result, we must defer to its interpretation of the Williams Act and the regulations thereunder unless we are prepared to say there is a conflict between those interpretations and the Congressional mandate. Securities & Exchange Commission v. Chenery Corporation, 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947); Chevron, U.S.A. v. Natural Res. Def. Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Second, this is an area of the law in which predictability is of crucial importance. The regulations are provided for the guidance of those seeking to comply with the law and it would be a serious mistake to reach a result in this case of which the regulations do not give fair notice. Thus, we must be constrained by a fair reading of the text of the regulations even if we might reach a different result were we charged with the responsibility of promulgating regulations to implement the Williams Act. The Williams Act mandates that persons intending to make certain tender offers disclose such information as the SEC directs. Under the regulations that implement this mandate, the required information is specified in the Schedule that constitutes a part of the regulations. 17 C.F.R. §§ 240.14d-6(e); 240.14d-100. In spelling out the extent of the required disclosure, both the regulations and the Schedule use the word “bidder,” a term not found in the Act itself. The regulations define “bidder” to mean “any person who makes a tender offer or on whose behalf a tender offer is made.” § 240.14d-l. Schedule 14D defines “bidder” to mean simply “any person on whose behalf a tender offer is made.” § 240.14d-100 General Instruction G. ' We acknowledge that either of these definitions could be interpreted, depending on its context, to include the stockholders of a corporation making an offer to buy securities of the “subject” or target company. In the context of the regulations and the Schedule, however, “bidder” is consistently ■used to describe the person or entity that will purchase the securities tendered. This is nowhere more apparent than in the part of Schedule 14D that imposes the disclosure requirement relied upon by Interco. Item 9 of Schedule 14D provides: Where the bidder is other than a natural person and the bidder’s financial condition is material to a decision by a security holder of the subject company whether to sell, tender or hold securities being sought in the tender offer, furnish current, adequate financial information concerning the bidder; Provided, That if the bidder is controlled by another entity which is not a natural person and has been formed for the purpose of making the tender offer, furnish current, adequate financial information concerning such parent. The “proviso” of this Item makes it clear that the SEC does not understand “bidder” to include the stockholder of a corporation making a tender offer even when that corporation has been formed for the sole purpose of making the offer. Moreover, Item 9 reveals that the Commission has focused on precisely the issue we here confront, i.e., when should financials of someone other than the one making the bid and intending to purchase the securities be required. The answer provided by the Commission for a situation of the kind before us is that the entity controlling the “bidder” must provide financial information whenever that information would be “material to a decision by a security holder of the subject company.” The Schedule addresses similar issues with respect to other information, makes similar distinctions between the “bidder” and others associated with the “bidder,” and provides similar answers. Item 10, for [65] example, requires disclosure not only of any material “contracts, arrangements or understandings” between the “bidder” and the subject company, but also of any such relationship between persons “controlling” the “bidder” and the subject company. Indeed, General Instruction C of Schedule 14D requires that, unless otherwise specified, information relating to each “controlling person” must be provided in response to all Items. The regulations and the Schedule simply do not communicate to any lawyer or layman attempting to comply with the law that financials are required from an entity that ultimately will be a minority stockholder in a corporation making a tender offer. Indeed, the regulations and the Schedule fairly read send exactly the opposite message and the message they do send is precisely the message one reading them would expect. Where a stockholder of a corporation making a tender offer is in a position to have a significant impact on the future of that corporation, information about the stockholder may well be material to a decision of stockholders of the target whether to take the offer or hang on with the hope of a greater return. See Prudent Real Estate Trust v. Johncamp Realty, Inc., 599 F.2d 1140, 1147 (2d Cir.1979). The same is not true, however, when one is speaking of a stockholder that has not been shown to possess the potential for significantly affecting the future of the corporation making the tender. This brings us to a final point. Under Item 9, financials are not required even from a “bidder” unless they would be “material to a decision by a security holder of the subject company whether to sell, tender or hold securities being sought in the tender offer.” Thus, even if Interco were legally correct in contending that Drexel is a “bidder,” the failure to provide Drexel’s financials would be a ground for enjoining consummation of the tender offer only if Interco had shown some basis for believing that those financials would provide information that Interco’s stockholders would find of interest in responding to the tender offer. During discovery Interco had access to Drexel’s financials and we see no reason why we should presume that those documents would be of interest without any record basis for so concluding. Where the financials at issue are those of a controlling entity, such a presumption might well be appropriate, but not here.6 III. Since Interco has failed to show a likelihood of success on its contention that disclosure of Drexel’s financials were required by the regulations, the order of the district court denying a preliminary injunction will be affirmed and this court’s injunction pending further order of the court will be vacated. The mandate will issue forthwith. Footnotes [1] We decide this appeal on the record before the district court. Interco supplemented that record with an affidavit in support of its motion for a stay pending appeal. That affidavit asserts that, as of October 4, 1988, Drexel had committed itself to purchase an aggregate of $609,685 million of the preferred securities. We leave it for the district court to determine in the first instance the significance, if any, of this fact. [2] In their filing, these entities acknowledged being members of a "group.” The "bidder,” however, was identified as Acquisition. [3] We, of course, accept the unappealed rulings of the district court rejecting Interco’s claim that the tender materials contained two material omissions. [4] Drexel was retained on July 29, 1988. By that date City Capital had already devised its offer strategy; made a $64 merger proposal to Inter-co; publicly announced the proposal; accumulated over 3 million Interco shares at a cost of over $117 million; filed a Schedule 13D with the Securities and Exchange Commission disclosing its plans to seek to merge with Interco; and filed two lawsuits against Interco and its Board of Directors. [5] This fact distinguishes this case from Koppers Company, Inc. v. American Express Company, 689 F.Supp. 1371 (W.D.Pa.1988), upon which Interco primarily relies. In that case the equity securities held by the Shearson Lehman interests entitled them to representation on the board of the surviving company and the court viewed the Shearson Lehman interests as sharing control of the board with others. [6] The dissent suggests that the concept of "bidder" as utilized in the regulations is intended to be synonymous with the statutory concept of a “group”. See 15 U.S.C. § 78n(d)(2) (1981). While the regulations do implement the statutory provisions regarding “groups,” see, e.g., 17 C.F.R. § 240.14d-100 General Instruction C, they do not do so through the concept of a "bidder." At oral argument counsel for Interco expressly disavowed any contention that Drexel was a member of the Rales “group” and no such argument was presented to the district court. Accordingly, we have no occasion to express an opinion on that issue.