Opinion ID: 385725
Heading Depth: 1
Heading Rank: 3

Heading: Request for a Preliminary Injunction

Text: 24 Although the scope of appellate review of the action of a district court in entertaining a motion for preliminary injunctive relief is narrow, reversal is warranted if the trial court abuses its discretion or commits error in applying the law. Continental Group, Inc. v. Amoco Chem. Corp., 614 F.2d 351, 357 (3d Cir. 1980); A. O. Smith Corp. v. FTC, 530 F.2d 515, 525 (3d Cir. 1976). 25 To obtain a preliminary injunction, the moving party must show (1) a reasonable probability of eventual success in the litigation, and (2) that irreparable injury will ensue if relief is not granted. In addition, the court may consider (3) the possibility of harm to other interested persons from the grant or denial of relief, and (4) the public interest. Constructors Ass'n of Western Penna. v. Kreps, 573 F.2d 811, 815 (3d Cir. 1978); Delaware River Port Auth. v. Transamerica Trailer Transp., Inc., 501 F.2d 917, 919-20 (3d Cir. 1974).
26 Kennecott has demonstrated a reasonable likelihood of eventual success on the merits. Several courts of appeals have already found provisions in state takeover laws virtually identical to the one challenged here to be preempted by the Williams Act. See MITE Corp. v. Dixon, 633 F.2d 486 (current) Fed.Sec.L.Rep. (CCH) P 97,660 (7th Cir. 1980); Great Western United Corp. v. Kidwell, 577 F.2d 1256 (5th Cir. 1978), rev'd on venue grounds sub. nom. Leroy v. Great Western United Corp., 443 U.S. 173, 99 S.Ct. 2710, 61 L.Ed.2d 464 (1979); Hi-Shear Indus. v. Campbell, C.A.No. 80-2211-9, (D.S.C., Dec. 4, 1980), stay pending appeal denied, Nos. 80-1825, 80-1826 (4th Cir., Dec. 8, 1980). 7 Kennecott has shown that it pursued a course authorized under federal law, that this course conflicted with state law, and that it was not possible to comply with both schemes. It has also demonstrated that the effect of the state law has been to prevent prompt disclosure of crucial information to the shareholders, and, through delay, to shift the advantage in this struggle to incumbent management. Both these effects appear to be inimical to the purposes of the federal law. A primary purpose of the Williams Act, as well as the regulations adopted under it 8 is to ensure that full information is conveyed to the shareholders of a target company as soon as possible, so that they may exercise a knowledgeable and an unfettered choice. The Act is also designed to preserve a balance between incumbent management and challenging groups, so that neither has an undue advantage. See Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 95 S.Ct. 2069, 45 L.Ed.2d 12 (1975). MITE, supra; Kidwell, supra; S.Rep.No. 550, 90th Cong., 1st Sess. 3 (1967); 113 Cong. Rec. 854 (1967) (statement of Senator Williams). 27 Defendants argue that Kennecott has not shown a reasonable probability of success because it could have complied with both laws if it had utilized the safe harbor provision of the New Jersey rules by not announcing the price and number of shares sought. N.J.Admin. Code 13:47A-25.3(b). Under federal law, a public announcement that does not contain this information does not trigger the five-day commence or withdraw period. SEC Rule 14d-2(d), 17 C.F.R. § 240.14d-2(d). This SEC rule, however, envisions that the price and amount information will not reach the market by any indirect route. While an offeror could issue a public announcement limited in this manner under New Jersey law, the offeror must still furnish price and amount information to the management of the target corporation. The target company in turn may be obliged to disseminate this information to its shareholders and to the securities markets in general under federal law, the rules of the New York Stock Exchange, and state law. N.J.Stat. Ann. § 49:5-3a; NYSE Company Manual at A-18; SEC Release No. 34-16623, 45 Fed.Reg. 15521 (1980). Taken as a whole, therefore, it appears that the filing requirements of New Jersey law result in disclosure to the market by means inconsistent with those contemplated by the safe harbor provision of the federal regulations. 28 Thus, the safe harbor provision does not obviate the constitutional problem posed here. The issue in this preemption case is whether the impact of the New Jersey law on the course actually pursued by Kennecott an action it was entitled to take under federal law conflicted with the Williams Act and SEC regulations. Preemption analysis focuses on whether the state law serves as an obstacle to the operation of federal law in the circumstances of this particular case, rather than in all cases or in a hypothetical case. Jones v. Rath Packing Co., 430 U.S. 519, 525-26, 97 S.Ct. 1305, 1309, 51 L.Ed.2d 604 (1977). Moreover, even if employing the safe harbor provision might have reconciled the facial conflict presented here, that would not dissipate Kennecott's reasonable probability of success on the merits. A court would still have to examine the effect of the state scheme on the objectives of the federal law. It appears here that even if Kennecott had chosen a course other than the one they were authorized to take under federal law, the delay in full disclosure engendered by even the safe harbor provision might well undermine the Williams Act policies discussed above.
29 Analysis of the merits and the question of irreparable injury are closely linked in the situation presented by the appeal at hand. The irreparable injury that Kennecott will suffer if it cannot proceed with its tender offer under federal law is precisely the harm sought to be avoided by the Williams Act. Kennecott has demonstrated that delay in distributing the information beyond the time frame of the SEC regulations is occurring, and that this delay is negating any possibility that Kennecott or the Curtiss-Wright shareholders will ever again be in the position they have a right to be in by virtue of federal law. Under the structure of the Williams Act and the SEC regulations, this delay in and of itself constitutes irreparable injury. See MITE, supra, at 495-499; Kidwell, supra, at 1279-80. 30 The other courts of appeals that have considered the conflict between state takeover laws and the Williams Act have discussed at considerable length the detrimental effects of delay. See MITE, supra, 486 F.2d at 495-499; Kidwell, supra, at 1279-90: See also Hi-Shear, supra, slip op. at 9-11. These courts have ascertained that Congress itself has determined that delay is the most potent weapon for incumbent management. See, e. g., MITE, supra, and sources cited therein. The market approach for protecting investors established by the Williams Act contemplates the free flow of information from both sides, so that the shareholders can make an unfettered and knowledgeable choice whether to relinquish their shares for a cash premium. When commencement of the offer, which entails distribution of information, is delayed, the market approach cannot be effectuated, because the choice can no longer be an informed one. While the shareholders have yet to receive the benefit of full knowledge of the merits and terms of the challenger's offer, the target's management can use the period of delay to send materials to the shareholders in order to discourage them from tendering their stock. This is the course apparently pursued by Curtiss-Wright. During the period of delay the management may also resort to defensive maneuvers designed to deprive the shareholders of their free choice. Common defensive tactics include arranging a friendly merger, increasing dividends, or abolishing cumulative voting. 9 While being subjected to these actions, which are designed to influence their decision, the shareholders cannot enjoy their federally protected right to be informed, or their right to make a choice about the governance of their corporation and the disposition of their shares. 31 Delay may also have detrimental effects on the stock market. When announcement of a tender offer is not followed promptly by commencement of the offer, the likely instigation of market activity during the waiting period may drive up the price of the target's stock. Shareholders who are not fully apprised of the offer's terms cannot evaluate whether to sell on the escalating market or to wait and tender their stock for a higher cash premium. 32 The offeror suffers from delay as well. Delay augments the possibility that the offer will not be completed successfully not through adverse action of the shareholders, as Congress contemplates, but through barriers erected by the target management. See MITE, supra, at 497. Moreover, delay deprives the offeror of its right to appeal to the stockholders by divulging the terms of its offer. Delay also causes the offeror to incur substantial financial costs which are not recoverable. When the offeror has borrowed funds to support the offer, it must make interest payments for each day that the offer is extended. See Hi-Shear, supra, at 11. The offeror may also have to forego its right to earn interest on the money that it must hold in reserve, because were it not for the outstanding offer these funds could be invested at the current high interest rates. 33 In essence, the cumulative impact of the effects flowing from delaying commencement of the offer is to disrupt the neutrality essential to the execution and the proper operation of the market approach for protecting investors embraced by the Williams Act. Hi-Shear, supra, at 11; MITE, supra, at 495; Kidwell, supra, at 1279-90. The district court thus appears to have misjudged the thrust of the Williams Act by concluding that no irreparable harm had been proved because the only harm which may result to the plaintiffs is that harm which is incident to delay. (App. at A32). But this is precisely the harm that federal policy does not tolerate. 34 Curtiss-Wright contends that a court cannot ascertain whether irreparable injury will occur without holding a protracted evidentiary hearing. In this instance, however, a hearing is not necessary, because the Williams Act itself furnishes the basis for a finding of irreparable harm. A traditional testimonial record is not necessary here since Congress has already established the record after extensive hearings Congress determined that delay is detrimental to the interests of the investing public. We are not free to challenge this legislative judgment. See MITE, supra, at 498. Cf. Dennis v. U. S., 341 U.S. 494, 532-42, 71 S.Ct. 857, 879, 95 L.Ed. 1137 (1951) (Frankfurter, J., concurring). Thus, even if defendants were to offer witnesses who would express the view that the tender offer might be able to go forward once the New Jersey proceedings have been concluded, the shareholders would still have been deprived of crucial information and the right at an early opportunity to weigh both sides. Kennecott would still have been denied its right to proceed under the timetable established by federal law. In addition, it would not be possible to recast the balance between incumbent and challenger, because while the New Jersey law is being employed to restrain Kennecott from sending information to Curtiss-Wright shareholders, 10 Curtiss-Wright is campaigning with its stockholders to defeat the offer whose terms the shareholders have not yet been apprised of. We therefore agree with the courts in MITE and Hi-Shear, which did not consider testimony as part of the calculus required to reach their decisions, that irreparable injury may be established by the invocation of the Williams Act itself. The affidavits presented in this case are therefore sufficient basis for decision. 35 As for the public interest factor, Congress has declared what procedure is most salutory in tender offer situations. We are obligated to observe the congressional policy choice. Federal policy also guides our analysis of the final element the weighing of the respective harms. In the view of Congress, shareholders will be disadvantaged by delayed disclosure. Although it may be counter to the interest, in a sense, of the target company, or at least its incumbent management, if the tender offer comes to fruition consistent with federal law, this is not the type of harm that Curtiss-Wright is entitled to be shielded from under the Williams Act. 36 For the foregoing reasons, we conclude that Kennecott established that preliminary injunctive relief is necessary in this case. The district court erred by improperly evaluating Kennecott's likelihood of success on the merits and by incorrectly assessing the factor of irreparable injury. Accordingly, the order of the district court will be reversed, so that Kennecott may commence its tender offer pursuant to the Williams Act and the applicable SEC regulations by having information disseminated to the shareholders of Curtiss-Wright. 37 Our decision here, in the context of a preliminary injunction motion, is a limited one. We have held no more than that the New Jersey provisions delaying commencement of a tender offer beyond the five-day period conflict with the SEC regulations promulgated under the Williams Act. To that extent, we have concluded that there is a reasonable likelihood that Kennecott will prevail in its contention that the Williams Act and the regulations preempt New Jersey's takeover rule. We do not reach or decide the severability issues or the validity of other provisions of the New Jersey takeover statute. These matters are for the district court in the first instance. 38 The matter will be remanded to the district court for proceedings on the merits of the constitutional issues presented by the complaint for permanent injunctive and declaratory relief. 11 39 The mandate shall issue forthwith.