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Norlin Corp. v. Rooney, Pace Inc, 744 F.2d 255 | Casetext
Norlin Corp. v. Rooney, Pace Inc.
744 F.2d 255 (2d Cir. 1984)
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Norlin Corp.v.Rooney, Pace Inc.
United States Court of Appeals, Second CircuitJun 27, 1984
To obtain a preliminary injunction, Hanson faces the formidable task of showing: (a) irreparable harm and…
Where business trustees have acted in good faith and have exercised honest judgment in lawful and legitimate…
holding that under New York law, a board member has a duty of care to a corporation and its shareholders
holding that “the business judgment rule governs only where the directors are not shown to have a self-interest in the transaction at issue,” and that “[o]nce self-dealing ... is demonstrated, the duty of loyalty supersedes the duty of care, and the burden shifts to the directors to prove that the transaction was fair and reasonable to the corporation”
Summary of this case from Brooks v. Horner
rejecting use of internal affairs doctrine in matter of corporate governance of Panamanian corporation where public policy of New York weighed in favor of application of New York law
Summary of this case from Lyman Commerce Solutions, Inc. v. Lung
John Logan O'Donnell, Olwine, Connelly, Chase, O'Donnell Weyher, New York City, for counterclaim defendants-appellants Norlin Corp., Andean Enterprises, Inc., and Norlin Industries, Inc.
Gregory P. Joseph, Fried, Frank, Harris, Shriver Jacobson, William G. McGuinness (on the brief), New York City, for counterclaim defendants-appellants Norton Stevens, Gilbert A. Simpkins, Zachary Marantis, James McGuiness, Harold Krensky, Katharine T. O'Neil, Edward R. McPherson, Jr., and James K. Baker.
Jonathan J. Lerner, Skadden, Arps, Slate, Meagher Flom, New York City, for counterclaimant-appellee Piezo Elec. Products, Inc.
The efforts of targeted management to resist acquisitive moves, and the means they employ, have been alternatively praised and damned. Proponents of corporate "free trade" argue that defensive techniques permit managers to entrench themselves and thus avoid accountability for their performance, at the expense of shareholders who are denied the opportunity to maximize their investment in sought-after corporations. Opponents contend that takeover struggles squander enormous capital resources which could better be spent to improve industrial productivity and to develop and commercialize new technologies.
See, e.g., Easterbrook and Fischel, "The Proper Role of a Target's Management in Responding to a Tender Offer," 94 Harv.L.Rev. 1161 (1981); Gelfond and Sebastian, "Reevaluating the Duties of Target Management in a Hostile Tender Offer," 60 B.U.L.Rev. 403 (1980).
See, e.g., Lipton, "Takeover Bids in the Target's Boardroom," 35 Bus.Law. 101 (1979); Stein-brink, "Management's response to the Takeover Attempt," 28 Case W.L.Rev. 882 (1978).
The instant case involves defensive action taken by a company that feared it might soon be the target of a takeover attempt. The first salvo in this battle was fired by appellee Piezo Electric Products, Inc., which in conjunction with Rooney, Pace Inc., began buying up large blocks of stock of appellant Norlin Corporation. In response, the board of directors of Norlin issued new common and voting preferred stock to a wholly-owned subsidiary and a newly-created employee stock option plan. Since Norlin would control the voting of the newly-issued stock, the effect of the transactions was to concentrate greater voting control in the hands of its board of directors, and thus to ward off any acquisitive moves that might be made against the company. Piezo sought and the district court granted a preliminary injunction barring the board from voting the stock in question. The judge found that any vote resulting from these transfers would likely be illegal, and that a possible consequence of the stock transfer — delisting from the New York Stock Exchange — would cause irreparable injury to Norlin's shareholders. We hold that the district court's findings were not erroneous, and therefore affirm. Before analyzing the legal issues presented, we shall describe the events that gave rise to the present dispute.
Appellant Norlin Corporation ("Norlin") is a diversified company whose principal lines of business are the manufacture of musical instruments and financial printing. Norlin is incorporated in the Republic of Panama, but has no significant operations in that country. The company's principal place of business and executive offices are located in White Plains, New York, and its shareholder and directors' meetings take place in New York as well.
Appellee Piezo Electric Products, Inc. ("Piezo") is primarily engaged in the research, development, manufacture and sale of piezo-electric and thermistor products. It is a Delaware corporation with its principal place of business in Cambridge, Massachusetts. On the two trading days of January 6 and 12, 1984, and in conjunction with the investment banking firm Rooney, Pace Inc., Piezo purchased some 32% of Norlin's common stock in a number of separate transactions. Fearful that a take-over attempt was imminent, Norlin filed suit on January 13, alleging various violations of the federal securities laws. The company sought to enjoin appellees from acquiring any additional Norlin stock, to force divestiture of stock already purchased, and to bar voting of Norlin stock owned by them. After hearing oral argument, Judge Edelstein denied Norlin's motions for a temporary restraining order and expedited discovery, finding that the company had not demonstrated irreparable harm stemming from the stock purchases.
Having failed to secure protection in the courts, Norlin immediately took defensive measures on its own. On January 20, 1984, the same day the judge ruled on its motions, Norlin's board transferred 28,395 shares of common stock to Andean Enterprises, Inc. ("Andean"), a wholly-owned subsidiary of Norlin also incorporated in Panama. The transfer was purportedly made in consideration for Andean's cancellation of a Norlin promissory note in the amount of $965,454. Three days later, on January 23, Norlin announced it had "retained the investment banking firm of Dillon, Read Co., Inc. to explore various opportunities which may be available to Norlin, including the merger or sale of Norlin, the repurchase of shares of Norlin Common Stock or the sale or issuance of shares or other securities of Norlin."
Norlin's directors concede that prior to taking the steps described above, they were warned by their financial advisers that absent shareholder approval, the stock transactions violated the rules of the New York State Exchange ("NYSE") and might result in the delisting of Norlin common stock. On March 15, the NYSE did in fact suspend trading in Norlin common, and indicated its intention to delist the stock.
A release announcing the move explained:
In addition Norlin is presently below the Big Board's continued listing criteria relating to the number of publicly held shares — at least 600,000 shares — and the number of holders of 100 shares or more — at least 1,200 — the Exchange said.
Piezo subsequently moved for preliminary relief, and Judge Edelstein heard argument on the motion. In a written order entered April 16, the judge granted Piezo's application for a preliminary injunction. He stated that Panamanian law barred Norlin from voting the shares transferred to its wholly-owned subsidiary, and that the issuance of the ESOP shares was "clearly part of the same management scheme to entrench itself in power. . . ." His order also concluded that Piezo had met its burden of demonstrating irreparable harm, "because the delisting of the common stock together with the inability of purchasers generally to acquire over-the-counter shares on margin seriously limits the liquidity of such shares; and further, the delisting of securities generally is a serious loss of prestige and has a chilling effect on prospective buyers. . . ." Based upon these determinations, the judge barred Norlin from voting the contested shares pending further proceedings, and ordered Norlin to take "all reasonable steps necessary and desirable" to prevent delisting from the NYSE.
We begin by delineating the scope of our review. In this Circuit, a preliminary injunction will not issue without a showing of irreparable harm. See Jackson Dairy, Inc. v. H.P. Hood Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979). In addition, the moving party must demonstrate either a likelihood of success on the merits, or sufficiently serious questions going to the merits and a balance of hardships tipping decidedly in favor of equitable relief. See Arthur Guinness Sons, PLC v. Sterling Publishing Co., Inc., 732 F.2d 1095, 1099 (2d Cir. 1984). The injunction granted by the district court was predicated upon the first of these alternative grounds.
As a general rule, a preliminary injunction will be sustained on appeal absent an abuse of discretion by the lower court. Jack Kahn Music Co., Inc. v. Baldwin Piano Organ Co., 604 F.2d 755, 758 (2d Cir. 1979). The propriety of this principle stems from our recognition that a trial court is in a better position to assess the credibility of testimony and make factual findings than an appellate court. The rule is, however, bounded by its own rationale. Where there has been no evidentiary hearing, and the decision below is based entirely upon legal arguments and papers submitted to the court, we may undertake our own review of the pleadings, affidavits and depositions to ascertain the correctness of the district judge's ruling. See Dopp v. Franklin National Bank, 461 F.2d 873, 879 (2d Cir. 1972). In particular, when the granting of an injunction rests upon an error of law, that in itself constitutes a ground for reversal. See Buffalo Courier-Express, Inc., v. Buffalo Evening News, Inc., 601 F.2d 48, 59 (2d Cir. 1979).
We need not discuss the fidelity of New York courts to the internal affairs rule at this juncture, although we shall return to that issue infra. We find it unnecessary to adopt the choice of law ruling Norlin urges, because the New York legislature has expressly decided to apply certain provisions of the state's business law to any corporation doing business in the state, regardless of its domicile. Thus, under New York Business Corporation Law ("NYBCL") § 1319, a foreign corporation operating within New York is subject, inter alia, to the provisions of the state's own substantive law that control shareholder actions to vindicate the rights of the corporation. NYBCL § 626, made applicable to foreign corporations by § 1319, permits a shareholder to bring an action to redress harm to the corporation, including injury wrought by the directors themselves. See Barr v. Wackman, 36 N.Y.2d 371, 368 N.Y.S.2d 497, 329 N.E.2d 180 (1975).
NYBCL § 1319 provides in pertinent part:
(a) . . . the following provisions, to the extent provided therein, shall apply to a foreign corporation doing business in this state, its directors, officers and shareholders:
NYBCL § 626 provides in part:
Both New York and Panamanian law expressly prohibit a subsidiary that is controlled by its parent corporation from voting shares of the parent's stock. NYBCL § 612(b) provides:
Both statutes seek to safeguard minority shareholders from management attempts at self-perpetuation. If cross-ownership and cross-voting of stock between parents and subsidiaries were unregulated, officers and directors could easily entrench themselves by exchanging a sufficient number of shares to block any challenge to their autonomy. See Hornstein, Corporate Law and Practice § 311, at 410 (1959).
The district judge appears to have accepted the argument that Panama law is controlling. He found, based upon an affidavit offered by Piezo, that a purchase of Norlin stock had been made through a branch office of Merrill, Lynch, Pierce, Fenner Smith located in Panama City. Thus, while Norlin shares concededly are not registered at the Securities Commission, the judge determined that they were "sold in the market," and so governed by Article 35. On appeal, however, appellants have brought to our attention a recent opinion by the General Attorney of Panama, dated May 2, 1984, which interprets the requirement that shares be "sold in the market," the alternative predicate to the application of Article 35. The opinion states that a company's shares are not deemed to be "sold in the market" if it "sell[s] shares in a private manner to a number of persons of no mre [sic] than 10 per year." Because Piezo has only documented a single sale of Norlin stock, Norlin urges, Piezo has not demonstrated that Panama law should govern the voting of shares owned by Andean.
We accept the initial premise of Norlin's argument — that a federal court adjudicating a state law claim must apply the choice of law principles of the forum state. Klaxon Co. v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). We are not so certain, however, that a New York court would apply the internal affairs rule and decide this case by reference to Panama law. In Greenspun v. Lindley, 36 N.Y.2d 473, 369 N.Y.S.2d 123, 330 N.E.2d 79 (1975), the Court of Appeals confronted the question whether New York or Massachusetts law should govern a shareholder's derivative action brought in a New York court against the trustees of a business trust organized under laws of Massachusetts. Although holding that Massachusetts law controlled, the court rejected "any automatic application of the so-called `internal affairs' choice-of-law rule. . . ." 36 N.Y.2d at 478, 369 N.Y.S.2d at 126, 330 N.E.2d at 81. In accepting the application of Massachusetts law as expressly provided in the declaration of trust, the court noted:
The court expressly left open the question of what law would be applied in a case in which some or all of these factors dictated the application of New York law. See, e.g., Skolnik v. Rose, 55 N.Y.2d 964, 449 N.Y.S.2d 182, 434 N.E.2d 251 (1982); Rottenberg v. Pfeiffer, 86 Misc.2d 556, 383 N.Y.S.2d 189 (Sup.Ct. 1976), aff'd, 59 A.D.2d 756, 398 N.Y.S.2d 703 (1977); cf. Restatement (Second) of Conflicts of Laws § 309, comment c (law of state other than state of incorporation may apply "where the corporation does all, or nearly all, of its business and has most of its shareholders in this other state and has little contact, apart from the fact of its incorporation, with the state of incorporation").
Norlin's contacts with the State of New York are far from insubstantial. The company's principal place of business is located within the state, and its board of directors meets here. The resolution approving the contested stock issuances were adopted in this state, and the company stock has been traded on the NYSE. Whether these contacts are sufficient for a New York court to apply New York law is, in our view, a question that does not lend itself to a simple answer. We need not, however, grapple with it to resolve the present inquiry. The principles compelling a forum state to apply foreign law come into play only when a legitimate and substantial interest of another state would thereby be served. See Intercontinental Planning, Ltd. v. Daystrom, Inc., 24 N.Y.2d 372, 385-86, 300 N.Y.S.2d 817, 828, 248 N.E.2d 576 (1969); Traynor, Is This Conflict Really Necessary?, 37 Tex.L.Rev. 657, 667-70 (1959). Conversely, when the interests of only one state are truly involved, the purported conflict is purely illusory. Thus, there is no reason why the law of the forum state should not control. See Krauss v. Manhattan Life Insurance Co., 643 F.2d 98, 100-101 (2d Cir. 1981).
Moreover, it is of interest to note that the relevant rules of law in New York and Panama are identical on this point: A wholly-owned subsidiary may not vote shares of its parent's stock. In these circumstances, it would be an absurd result indeed if neither jurisdiction could apply its law, and the public policy of both should be frustrated. See Leflar, American Conflicts Law § 93, at 188 (3d ed. 1977). We therefore conclude that whatever choice of law principles would be applied, Piezo has made an adequate showing on these facts that the voting of Andean's shares would be unlawful.
We now turn to the district court's conclusion that appellee had demonstrated probable illegality stemming from the voting of Norlin shares held by the ESOP. This is a somewhat more difficult problem, for we have little statutory authority to guide us in our quest. We must look instead to those fiduciary principles of state common law which constrain the actions of corporate officers and directors.
In issues involving the fiduciary duty of a corporate board of directors, a federal court must look to state rather than federal common law. See Burks v. Lasker, 441 U.S. 471, 478, 99 S.Ct. 1831, 1837, 60 L.Ed.2d 404 (1979).
A board member's obligation to a corporation and its shareholders has two prongs, generally characterized as the duty of care and the duty of loyalty. The duty of care refers to the responsibility of a corporate fiduciary to exercise, in the performance of his tasks, the care that a reasonably prudent person in a similar position would use under similar circumstances. See NYBCL § 717. In evaluating a manager's compliance with the duty of care, New York courts adhere to the business judgment rule, which "bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 926, 393 N.E.2d 994 (1979).
The second restriction traditionally imposed, the duty of loyalty, derives from the prohibition against self-dealing that inheres in the fiduciary relationship. See Pepper v. Litton, 308 U.S. 295, 306-07, 60 S.Ct. 238, 245-46, 84 L.Ed. 281 (1939). Once a prima facie showing is made that directors have a self-interest in a particular corporate transaction, the burden shifts to them to demonstrate that the transaction is fair and serves the best interests of the corporation and its shareholders. See NYBCL § 713(a)(3); Schwartz v. Marien, 37 N.Y.2d 487, 493, 373 N.Y.S.2d 122, 127, 335 N.E.2d 334 (1975); Limmer v. Medallion Group, Inc., 75 A.D.2d 299, 428 N.Y.S.2d 961, 963 (1980); see also Marsh, Are Directors Trustees?, 22 Bus.Law. 35, 43-48 (1966).
In applying these principles in the context of battles for corporate control, we begin with the business judgment rule, which affords directors wide latitude in devising strategies to resist unfriendly advances. See, e.g., Treadway Companies, Inc. v. Care Corp., 638 F.2d 357, 380-84 (2d Cir. 1980); Crouse-Hinds Co. v. Internorth, Inc., 634 F.2d 690, 701-04 (2d Cir. 1980). As Judge Kearse made clear in those cases, however, the business judgment rule governs only where the directors are not shown to have a self-interest in the transaction at issue. Treadway, 638 F.2d at 382. Once self-dealing or bad faith is demonstrated, the duty of loyalty supersedes the duty of care, and the burden shifts to the directors to "prove that the transaction was fair and reasonable to the corporation." Id.; Crouse-Hinds, 634 F.2d at 702; Panter v. Marshall Field Co., 646 F.2d 271, 301 (7th Cir. 1981) (Cudahy, J., concurring and dissenting), cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631 (1981); Johnson v. Trueblood, 629 F.2d 287, 300 (3d Cir. 1980) (Rosenn, J., concurring and dissenting), cert. denied, 450 U.S. 999, 101 S.Ct. 1704, 68 L.Ed.2d 200 (1981); see Klaus v. Hi-Shear Corp., 528 F.2d 225, 233-34 (9th Cir. 1975); Mobil Corp. v. Marathon Oil Co., [1981 Transfer Binder] Fed. Sec.L.Rep. (CCH) ¶ 98,375 (S.D.Ohio), rev'd on other grounds, 669 F.2d 366 (6th Cir. 1981); cf. Bennett v. Propp, 41 Del.Ch. 14, 187 A.2d 405, 409 (1962).
In this case, the evidence adduced was more than adequate to constitute a prima facie showing of self-interest on the board's part. All of the stock transferred to Andean and the ESOP was to be voted by the directors; indeed, members of the board were appointed trustees of the ESOP. The precipitous timing of the share issuances, and the fact that the ESOP was created the very same day that stock was issued to it, give rise to a strong inference that the purpose of the transaction was not to benefit the employees but rather to solidify management's control of the company. This is buttressed by the fact that the board offered its shareholders no rationale for the transfers other than its determination to oppose, at all costs, the threat to the company that Piezo's acquisitions ostensibly represented. Where, as here, directors amass voting control of close to a majority of a corporation's shares in their own hands by complex, convoluted and deliberate maneuvers, it strains credulity to suggest that the retention of control over corporate affairs played no part in their plans.
While a conflict of interest does not necessarily arise when directors serve simultaneously as trustees of an ESOP established by their corporation, the possibilities for such conflicts are rampant. See, e.g., Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982).
We do not think our conclusion on this point is inconsistent with the findings in Treadway and Crouse-Hinds that no prima facie showing of conflict of interest had been made. The facts in this case differ in significant respects. Treadway involved the sale of 230,000 shares of Treadway Companies, Inc. stock to Fair Lanes, Inc., preparatory to a merger between the two companies. The agreement to sell the shares was reached sometime after a third party, Care Corporation, had acquired a large block of Treadway stock. Care claimed that Treadway's board had approved the sale to Fair Lanes for the improper purpose of perpetuating its control over the corporation. Judge Kearse, writing for this court, found that Care had failed to establish a conflict of interest on the part of Treadway's board. Her opinion specifically noted evidence that Fair Lanes had been interested in merging with Treadway for a number of years, that all of Treadway's directors but one anticipated losing their positions if the merger with Fair Lanes were consummated, and that the merger was not merely a "sham or a pretext," but rather a viable business proposition. Treadway, 638 F.2d at 383. No analogous facts are present here.
ESOP's, like other employee benefit plans, may serve a number of legitimate corporate purposes, and their creation is generally upheld in the courts when they do so. Cf. Diamond v. Davis, 62 N.Y.S.2d 181 (Sup.Ct. 1945). By establishing an ESOP, corporate managers may seek to improve employee morale and loyalty, see Herald Co. v. Seawell, 472 F.2d 1081, 1096 (10th Cir. 1972), to raise capital for the corporation, id. at 1095, or to supplement employee compensation or retirement benefits, Weinberg v. Cameron, [1979-80 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 97,377 (D.Hawaii 1980). When an ESOP is set up in the context of a contest for control, however, it devolves upon the board to show that the plan was in fact created to benefit the employees, and not simply to further the aim of managerial entrenchment. In applying that distinction, courts have looked to factors such as the timing of the ESOP's establishment, the financial impact on the company, the identity of the trustees, and the voting control of the ESOP shares. See Note, Employee Stock Ownership Plans and Corporate Takeovers: Restraints on the Use of ESOPs by Corporate Officers and Directors to Avert Hostile Takeovers, 10 Pepperdine L.Rev. 731, 744 (1983).
Employee stock ownership plans meeting designated requirements are authorized under federal law. See 29 U.S.C. § 1107(d)(6); 26 U.S.C. § 401(a).
In this case, an examination of each of these factors indicates that the ESOP was created solely as a tool of management self-perpetuation. It was created a mere five days after the district court refused to enjoin further stock purchases by Piezo, and at a time when Norlin's officers were clearly casting about for strategies to deter a challenge to their control. No real consideration was received from the ESOP for the shares. The three trustees appointed to oversee the ESOP were all members of Norlin's board, and voting control of all of the ESOP shares was retained by the directors. We therefore conclude that the record supports the finding that the transfer of stock to the ESOP was part of a management entrenchment effort.
The New York Court of Appeals has long held that directors may not issue stock for the "primary purpose" of consolidating corporate control. See Dunlay v. Avenue M. Garage Repair Co., 253 N.Y. 274, 279-80, 170 N.E. 917 (1930).
Other courts have noted that the issuance of shares to an ESOP shortly after a challenge to corporate control gives rise to an inference of improper motive. See, e.g., Klaus v. Hi-Shear Corp., supra, 528 F.2d at 231-33; Podesta v. Calumet Industries, Inc., [1978 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 96,433 (N.D.Ill. 1978). Norlin also argues that the ESOP had been under consideration for some time, even though it was not created until a threat to the company emerged. No more support for that assertion exists here than in Hi-Shear Corp., 528 F.2d at 233, or Calumet Industries, ¶ 96,433 at 93,556.
Although a finding that the corporation received a fair price for shares transferred is not essential to establishing that a transaction is in the company's best interest, it is certainly relevant to the inquiry. See, e.g., Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757 (2d Cir. 1983). In this case, Norlin received no cash consideration for any of the shares issued to Andean or to the ESOP.
Norlin argues that "Piezo's burden under the business judgment rule is all the heavier because the Norlin board that approved [the stock issuances] was overwhelmingly composed of independent `outside' directors." We are not persuaded that a different test applies to "independent" as opposed to "inside" directors under the business judgment rule. See, e.g., Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981); Note, "The Misapplication of the Business Judgment Rule in Contests for Corporate Control," 76 Nw. U.L.Rev. 980, 1001-03 (1982) and authorities cited therein. In any event, once a collective conflict of interest underlying the board's action is shown, any such distinction has no bearing on the fairness and reasonableness of the action taken.
We thus find that Piezo has succeeded in demonstrating the likelihood of success on the merits, with regard to the share issuances to both Andean and the ESOP. We move on to the other requirement for the issuance of a preliminary injunction: a showing of irreparable harm.
Norlin cites the case of Southeastern Public Service Co. v. Graniteville Co., C.A. No. 83-1028-8 (D.S.C. May 19, 1983), as holding that the creation of an ESOP is an appropriate step to thwart an attempt to acquire control of a corporation. The court there stated: ". . . as I understand the law, there is no breach of fiduciary duty if you oppose a tender offer, which in the best judgment of management, is detrimental to the corporation or its shareholders, and management may take steps they deem appropriate, including issuing stock which does dilute the interest of tender offers [sic] in making self-tender offers." This is, as we have explained, a correct statement of law absent a showing of board self-interest. In this case such a showing has been made, so the Graniteville holding is inapposite.
Judge Edelstein based his finding of irreparable harm upon the probability that Norlin common stock would be delisted from the NYSE if shareholder approval were not obtained for the stock transfers. In prior cases, we have noted the importance of NYSE listing to a corporation and its shareholders. Listing on the "Big Board" protects the liquidity of shares, and reassures shareholders and potential purchasers that the extensive NYSE listing requirements are being met. See Sonesta Int'l Hotels Corp. v. Wellington Associates, 483 F.2d 247, 254 (2d Cir. 1973). Moreover, as we noted in Van Gemert v. Boeing Co., 520 F.2d 1373 (2d Cir. 1975), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975), the investing public places great stock in these protections:
. . . [L]isting on the New York Stock Exchange carries with it implicit guarantees of trustworthiness. The public generally understands that a company must meet certain qualifications of financial stability, prestige, and fair disclosure, in order to be accepted for that listing, which is in turn so helpful to the sale of the company's securities. Similarly it is held out to the investing public that by dealing in securities listed on the New York Stock Exchange the investor will be dealt with fairly and pursuant to law.
Id. at 1381. Cf. United Funds, Inc. v. Carter Products, Inc., [1961-64 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 91,288 (Balt.Cir.Ct. May 16, 1963) (enjoining stock issuance that would lead to loss of NYSE listing, which constituted "valuable corporate asset").
Norlin makes two attacks on the district judge's finding of irreparable harm. First, the company argues that its stock will suffer no loss of liquidity from NYSE delisting, because the shares are and will continue to be traded on NASDAQ, which Norlin asserts is a comparable market in all respects. At best, this undercuts only one of the three reasons for maintaining NYSE listing. It does not respond to the point that investors rely heavily upon the rules of the NYSE to insure fair dealing in corporate matters. Indeed, the fact that Norlin stock continues to be traded on NASDAQ even while it is suspended on the NYSE suggests that this investor confidence may be well placed. In addition, Norlin's assertion does not contradict Judge Edelstein's finding that "delisting of securities generally is a serious loss of prestige and has a chilling effect on prospective buyers. . . ."
Moreover, Norlin's present cavalier attitude towards delisting is belied by the company's previous actions and statements. On February 22, 1984, Norlin's corporate secretary sent an eighteen-page letter to a NYSE official, in an attempt to persuade the Exchange to continue listing its common stock. In the letter, the company suggested that dire consequences might flow from delisting:
It is illuminating to compare Norlin's attitude with that of the board in the Treadway case. Under the original agreement governing the sale of Treadway shares to Fair Lanes, see supra note 5, Fair Lanes was to have had the right to "put" or resell its shares to Treadway. When the American Stock Exchange (AMEX) indicated that it would likely not list the shares in light of the "put" feature, the agreement was "promptly abandoned." 638 F.2d at 366-67.