Court Opinion

ID: 8916512
Source: CourtListenerOpinion
Date Created: 2022-11-27 05:18:49.134946+00
Date Added: 2024-06-11T17:09:02.527957
License: Public Domain

BUTZNER, Senior Circuit Judge,
dissenting:
I

Likelihood of Success

I cannot accept Icahn’s1 defense that its failure to disclose Icahn Capital’s contingent liability of $5,000,000 is immaterial. I base my conclusion on the following propositions:
1. The Williams Act requires full disclosure for the protection of shareholders who do not tender, as well as those who do. S.Rep. No. 550, 90th Cong., 1st Sess. 2-3 (1967). See Piper v. Chris-Craft, 430 U.S. 1, 22-23, 97 S.Ct. 926, 939-40, 51 L.Ed.2d 124 (1977).
2. In its tender offer, Icahn represented that it intended to merge Dan River with Icahn Capital through an exchange of the merged company’s debentures for Dan River stock. Therefore, information about the financial status of Icahn Capital is material to Dan River shareholders who did not tender their stock.
3. The $5,000,000 contingent liability represents approximately 39% of Icahn Capital’s $12,742,219 net worth.
4. Regulations promulgated by the SEC pursuant to 15 U.S.C. § 78n(d)(l) required Icahn Capital to file a financial statement in accordance with generally accepted accounting principles. See 17 C.F.R. § 240.14d — 100, Item 9, and § 210.4r-01(a)(l).
5. Under generally accepted accounting principles, substantial contingent liabilities, such as guarantees of indebtedness, must be *293disclosed. See Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 5 (1975), reprinted in Financial Accounting Standards: Original Pronouncements 732-35 (1979).
6. By the terms of the regulations, Ieahn’s failure to report its contingent liability in accordance with generally accepted accounting principles means its disclosure statement is “presumed to be misleading or inaccurate.” See 17 C.F.R. § 210.4-01(a)(1); cf. In Matter of Ford, [1978-1979 Transfer Binder] Fed.Sec.L.Rep. (CCH) 172,274, at 62,743 (August 24, 1978).
7. Because Carl C. Icahn controls both the debtor and the guarantor, the contingent liability can readily be converted into an actual liability to protect the debtor at the expense of the guarantor, Icahn Capital. Icahn has given no assurances that the $5,000,000 contingent liability will be subordinated to the debentures Icahn Capital proposes to issue to Dan River shareholders. Under these circumstances, the guaranty should have been disclosed pursuant to 17 C.F.R. § 210.4-08(1) (related party transactions).
Title 15 U.S.C. § 78n(e) proscribes the omission of any material fact in connection with a tender offer. I conclude that Dan River is likely to be able to prove that Icahn violated this statute by failing to disclose Icahn Capital’s contingent liability and by failing to explain that the guaranty was a transaction with a related company that might not be subordinated to the proposed debentures.
Dan River introduced evidence that Icahn knew that the conditions mentioned in its $15-$18 tender offer would never be satisfied. The vice of this dual price offer is Icahn’s representation that it was making an $18 offer which it knew it would never have to pay. Unless Icahn can successfully rebut Dan River’s proof, Icahn will be shown to have induced shareholders to tender stock at $15 by creating the impression that the $18 offer was bona fide when in fact it was wholly illusory. Icahn’s defense that the $15-$18 offer was cured by substitution of a $16.50 offer goes merely to the question of causation and harm. The answer will require the analysis of evidence that is not yet available.
Title 15 U.S.C. § 78n(e) makes it unlawful for a person to engage in any fraudulent, deceptive, or manipulative acts in connection with a tender offer. Although the circumstances of this dual price offer present an issue of first impression, I conclude on the basis of the present record that Dan River is likely to be able to establish that Icahn violated § 78n(e). Cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976).
On the basis of the present record, I am unable to decide whether Dan River is likely to recover treble damages on the ground that Icahn violated the Racketeer Influenced and Corrupt Organizations Act. In the short time this action has been pending, Dan River was able to discover that Icahn engaged in a number of questionable transactions, but proof of willful mail or wire fraud that produced funds for this tender offer is inconclusive. The record does not yet disclose the underlying facts on which Icahn predicates its defense of advice of counsel. Certainly, however, Dan River has standing to assert this claim. See 18 U.S.C. § 1964(c). It should not be forestalled by Icahn’s avowed intention to dismiss this action if it gains control of the company. Finally, in agreement with a recent commentator, I cannot subscribe to the notion that it is the function of the courts to exclude white-collar, corporate crime from the liability imposed by § 1964(c). Complaints about the scope of the Act should be addressed to Congress. See Civil RICO: The Temptation and Impropriety of Judicial Restriction, 95 Harv.L.Rev. 1101, 1115-21 (1982).
Reliance on Piper v. Chris-Craft Industries, 430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1927), to defeat Dan River’s claim for injunctive relief for violation of 15 U.S.C. § 78n(e) is misplaced. Piper held that the statute did not confer on a tender offeror a right of action for damages. The Court was not dealing with injunctive relief. See 430 U.S. at 47 n. 1, 97 S.Ct. at 952 n. 1. The *294distinction between damages and injunctive relief is critical. See Mobil Corp. v. Marathon Oil Co., 669 F.2d 366, 370-73 (6th Cir.1981).
In sum, I conclude that Dan River has standing to sue for equitable relief under 15 U.S.C. § 78n(e) and for monetary relief under 18 U.S.C. § 1964(c). Although the probability of recovery of damages under § 1964(c) is inconclusive, I believe that Dan River’s proof of likelihood of success on the other issues I have discussed satisfies this aspect of the requirements for interlocutory relief.
II

Irreparable Harm

Icahn’s tender offer states:
Prior to the completion of this offer, the Purchasers intend to call a shareholders meeting to be held subsequent to the purchase of the shares in order to elect their designees to the Company’s Board ... so that Purchasers’ designees constitute a majority of such directors.
Carl C. Icahn testified that upon assuming control of the company, he would dismiss this action. He proposes to do this, of course, before judgment can be entered.
Unlike management in some takeover litigation, Dan River has supported its allegations of wrongdoing with evidence that, at this stage of the proceedings, appears to be sufficient to withstand a motion for summary judgment. Consequently, I conclude that Icahn’s dismissal of this action before the legality of its assumption of control can be litigated will irreparably harm Dan River and its shareholders.
In contrast, Icahn’s harm is not irreparable. The court’s order would delay Icahn’s assumption of control of the company. Icahn does not claim that this delay will divest it of financing or cause the withdrawal of any of its joint venturers. The argument that the order would thwart Dan River’s shareholders who wished to tender stock, or otherwise depress the tender of shares, lacks evidentiary proof; it is speculative. The protest that the order unduly favors Dan River’s management ignores the severe restrictions that the order places on the company’s officers and directors as a condition to the continued existence of the injunction.2
I therefore conclude that Dan River satisfies the balance of hardship test for interlocutory relief.
III

The Public Interest

In a paper soliciting partners for C.C.I., a member of the Icahn group seeking control of Dan River, Icahn & Co. stated:
It is our contention that sizable profits can be earned by taking large positions in “under valued” stocks and then attempting to control the destinies of the companies in question by:
a) trying to convince management to liquidate or sell the company to a “white knight”;
b) waging a proxy contest, or;
c) making a tender offer and/or;
d) selling back our position to the company.

We are now forming a partnership for the purpose of acquiring large positions in a limited number of companies and, once this is accomplished, attempt to use the methods described above to realize the large potential profits that exist.
Icahn & Co. then cited returns on equity of 250% and 200% in two of its recent ventures.
The district court was aware of Icahn’s method of operation and its intention to liquidate the company by sale of its assets, *295if a “white knight” did not appear to buy its stock at a premium price. After noting that Dan River had raised substantial questions of law and fact, the court said:
I also see that we have an employee force of something like twelve thousand people, I think forty-five thousand stockholders, fifty percent of which are under hundred share owners. We’ve got a lot of small people out there that need to be protected, and from the public policy standpoint, I think that is a major consideration.
There are two aspects to the question of public interest raised by the district judge. The first is whether Icahn’s goals are in the public interest. Congress has answered this question, for neither the Williams Act nor other regulatory statutes proscribe them.
The second aspect of public interest concerns the means Icahn has employed to advance its goals. The Williams Act. and other regulatory laws set forth explicitly what means may be lawfully used in a tender offer. It is in the public interest to determine whether Icahn has violated these laws. Icahn should not be permitted to thwart this inquiry by assuming control and dismissing this action. I conclude, therefore, that the public interest is served by the preservation of the status quo until the question of the legality of Icahn’s conduct can be definitively resolved. While I agree with the suggestion that a shareholders’ suit might ultimately prevent Icahn from dismissing this action, I am not persuaded that the district court abused its discretion by maintaining the status quo rather than by relying on an action which has yet to be filed.
IV

The Remedy

The district court was concerned about both Icahn’s freedom to pursue its tender offer and Dan River’s existence pending resolution of the issues presented by this case. Therefore, it fashioned its decree to maintain the status quo. There can be no question about the effectiveness of the decree. It temporarily restricts Icahn and Dan River from taking steps that will irreparably harm the other. The decree should not be faulted as premature. Maintenance of the status quo is always prophylactic; it is designed to forestall future acts that can be more equitably prevented than remedied. The district court’s exercise of discretion fully comports with the Supreme Court’s description of proper equity practice:
The historic injunctive process was designed to deter, not to punish. The essence of equity jurisdiction has been the power of the Chancellor to do equity and to mould each decree to the necessities of the particular case. Flexibility rather than rigidity has distinguished it. The qualities of mercy and practicality have made equity the instrument for nice adjustment and reconciliation between the public interest and private needs as well as between competing private claims. Hecht Co. v. Bowles, 321 U.S. 321, 329 [64 S.Ct. 587, 591, 88 L.Ed. 754] (1944).
I would affirm the district court.

. Unless the context otherwise indicates, appellants are identified collectively as “Icahn.”

. The order states:
Provided, however, that during the existence of this Preliminary Injunction Dan River, its Board of Directors and officers shall conduct business as usual; will make no disposition of assets out of the ordinary course of business; will pay only regular dividends and will make no new issues of stock. A violation of the provision shall be grounds for dissolution of this Injunction and subject Dan River to darn-ages under its bond.