Court Opinion

ID: 9455645
Source: CourtListenerOpinion
Date Created: 2023-08-04 19:28:25.444352+00
Date Added: 2024-06-11T17:34:40.490347
License: Public Domain

WATERMAN, Circuit Judge:
Plaintiff-appellant, Chris-Craft Industries, Inc., appeals from the denial of an order entered below in the United States District Court for the Southern District of New York denying appellant’s motion for a preliminary injunction to restrain Bangor Punta Corporation from gaining and exercising control of Piper Aircraft Corporation pending a trial on the merits of whether certain shares of Piper were acquired by Bangor Punta in violation of governing Rules of the Securities and Exchange Commission. We affirm the denial of the preliminary injunction but remand the case to the district court for further proceedings there not inconsistent with the within opinion.
This litigation comes at the end of a hard fought battle between Chris-Craft *571Industries and Bangor Punta Corporation for control of Piper Aircraft Corporation. The contest opened in January 1969 when Chris-Craft began to acquire Piper shares on the open market. At that time Piper had 5,000,000 authorized shares of $1.00 par common stock of which 1,641,890 shares were issued and outstanding. In January 1969 Chris-Craft made a public exchange offer for 300,000 Piper shares, and by February these efforts had gained Chris-Craft 34 per cent of the then outstanding Piper stock. On February 27, 1969. Chris-Craft filed with the Securities and Exchange Commission a registration statement and proposed prospectus for an exchange offer for an additional 300,-000 shares. Still another exchange offer was announced by Chris-Craft on May 7 and became effective July 24.
Chris-Craft’s bid for control met strong resistance from the Piper family and Piper management, who owned 501,-090 shares (31 per cent of the outstanding shares), and considered Chris-Craft to be a corporate raider. The management advised other Piper shareholders that Chris-Craft’s tender offer was inadequate but offered 300,000 of Piper’s authorized but unissued shares to Grumman Aircraft Corporation at the same price that Chris-Craft had offered. Although this transaction was never consummated, Piper initially advertised that Grumman had agreed to purchase the Piper shares and the court below noted that Chris-Craft’s tender offer was adversely affected by this publicity.
Subsequently, on March 22, the Piper management issued 469,199 shares of authorized but unissued stock to acquire control of two subsidiary corporations, United States Concrete Pipe Company of Florida and Southply, Inc. Piper failed to seek the approval of the New York Stock Exchange and of its own shareholders as its listing agreement with the Exchange provided it should before issuing a significant new block of stock. Therefore, the Exchange refused to approve Piper’s listing application. When the Exchange shortly afterward suspended trading in Piper shares and authorized proceedings before the SEC to delist Piper, Piper rescinded both transactions and trading in its shares was resumed.
At this juncture, in April 1969, the Piper family resumed talks which had begun as early as .January with Bangor Punta Corporation. These negotiations bore fruit on May 8, when the two groups agreed that the family would exchange its 501,090 shares for specified Bangor Punta securities. Bangor Punta agreed in addition to use its best efforts to acquire enough additional Piper shares to make it the holder of more than 50% of the shares outstanding. As part of these best efforts, Bangor Punta agreed to make an exchange offer to all Piper shareholders “under which such holders will be entitled to exchange each share of Piper common stock held by them for Bangor Punta securities and/or cash having a value, in the written opinion of The First Boston Corporation, of $80 or more.” If Bangor Punta succeeded in acquiring 50% or more of the stock, the consideration paid by Bangor Punta would be increased to make up to the Piper family the difference, if any difference there were, between the value of the package specified in the agreement and $80 per share.
The two occurrences which form the basis of Chris-Craft’s complaint followed the negotiation of this contract. The first of these occurrences was the issuance by Bangor Punta and the Piper management of press releases announcing the transaction on May 8, the day the contract was signed and the day after Chris-Craft announced the terms of its second exchange offer. After stating that the Piper family would receive Bangor Punta securities for their shares, the Bangor Punta press release continued as follows:
Bangor Punta has agreed to file a registration statement with the SEC covering a proposed exchange offer for any and all of the remaining outstanding shares of Piper Aircraft for a package of Bangor Punta securities *572to be valued in the judgment of The First Boston Corporation at not less than $80 per Piper share. The registration statement covering all securities to be issued will be filed as soon as possible and a meeting of the shareholders of Bangor Punta Corporation will be called for approval.
Mr. Piper said that in view of Bangor Punta’s long-standing policy of maintaining autonomy in the management of its operating companies, and the similarity of operating philosophies between the two companies, he and the Piper family would strongly support the merger and would recommend it to all shareholders.
Mr. Wallace said Bangor Punta welcomed the association with Piper Aircraft, its world-wide distribution, and its prestigious product name. He said the consolidation would align the Piper Aircraft name with other leading Bangor Punta companies, including Smith & Wesson, Starcraft Company, and Waukesha Motor Company.
Bangor Punta manufactures a wide variety of recreational vehicles including sailboats, houseboats, snowmobiles, campers, trailers and motor homes. A merger of Bangor Punta and Piper Aircraft would bring Bangor Punta into the light aircraft manufacturing business.
Sales of the combined companies would reach $450,000,000 in fiscal 1969, with approximately $180,000,000, or 40%, in the aircraft, recreational and leisure time fields.
Piper Aircraft Corporation simultaneously issued a similar press release.
These announcements attracted an immediate response from the Securities and Exchange Commission, which felt that the release constituted an offer to sell securities before any registration statement had been filed. Accordingly the SEC instituted an action against Bangor Punta and Piper in the United States District Court for the District of Columbia on May 26, and on the same day the defendants consented to the entry of judgment and the issuance of an injunction prohibiting further releases of a similar nature before Bangor Punta’s registration statement and. prospectus were filed.
The second occurrence or set of occurrences of which Chris-Craft complains took place between May 14 and May 23, when Bangor Punta purchased 120,200 shares of Piper stock for cash in private transactions. Chris-Craft alleges that on April 7, 1969, the staff of the SEC warned Chris-Craft’s top executives that continued cash purchases of Piper stock while Chris-Craft’s own exchange offer was outstanding, as the first one then was, would be regarded by the SEC as a violation of Rule 10b-6, which prohibits an issuer from purchasing securities while still participating in their distribution. Chris-Craft did refrain from further purchases during the remainder of its first tender offer and all of its second. Bangor Punta’s purchases of stock between May 14 and May 23 occurred while its exchange offer was outstanding if one assumes that the May 8 press release constituted an offer to sell, as the SEC charged that it did. Bangor Punta states that although the SEC knew of its cash purchases at the time the consent decree was discussed, May 23 to May 26, the SEC nonetheless failed to challenge these purchases or ask for their rescission. However, it is undisputed that the SEC announced publicly its position on such purchases in a press release issued May 5.
Bangor Punta’s exchange offer closed on July 29, and Chris-Craft’s second offer ended August 4. At that time Bangor Punta held 45% of Piper’s stock, and Chris-Craft held 40%. By the time this case came to argument on appeal, Chris-Craft had increased its holdings to 46.2% of Piper’s common stock, while Bangor Punta had finally acquired a majority with 52.7%.
Chris-Craft commenced the present lawsuit on July 22, 1969, seeking a preliminary injunction which would order Bangor Punta (1) to offer the right to rescind to all persons who had tendered *573Piper shares to Bangor Punta pursuant to its exchange offer, (2) to refrain from acquiring further Piper shares, (.3) to refrain from effecting a merger of Piper and Bangor Punta, and (4) to refrain from voting the 120,200 Piper shares acquired for cash between May 16 and May 23, 1969. The district court denied Chris-Craft’s motion for a preliminary injunction, citing both the lack of any irreparable injury to Chris-Craft if the motion were denied and the lack of any illegal behavior on the part of Bangor Punta. Chris-Craft then sought and received an expedited appeal to this court.

The Preliminary Injunction

We agree with the district court that a preliminary injunction is not warranted. A preliminary injunction should issue only when it is needed “as an equitable policing measure to prevent the parties from harming one another during the litigation,” Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 742 (2 Cir. 1953). It is apparent that here there is no threat that unless an injunction issues before trial “the plaintiff will suffer harm which cannot be repaired.” Studebaker Corp. v. Gittlin, 360 F.2d 692, 698 (2 Cir. 1966). Counsel for Bangor Punta has orally stipulated at argument that no merger between that company and Piper will be effected before the end of this litigation, so that no injunction restraining a merger is needed. We do not see, and Chris-Craft does not suggest, what other irreparable harm might result from Bangor Punta’s voting the 120,200 shares acquired for cash in May.
Absent any such prejudice from the voting of the stock we do not see how harm to plaintiff can result from refusing to order before the merits of the case are adjudicated after a trial a divestiture or rescission of stock acquired by Bangor Punta during its exchange offer. Indeed, to “give to a plaintiff all the actual advantage which could be obtained by the plaintiff as a result of a final adjudication of the controversy in favor of the plaintiff” would be clearly inequitable under such circumstances. Selchow & Richter Co. v. Western Printing & Lith. Co., 112 F.2d 430, 431 (7 Cir. 1940). We also understand counsel for Chris-Craft to admit on oral argument that because of its complexity an order for rescission or divestiture should be worked out only at trial.
Finally, we conclude that the district court did not err in refusing to enjoin the continued solicitation of stock by Bangor Punta. At that time Chris-Craft was free to compete equally with Bangor Punta for the remaining Piper shares, and it did so. We do not understand Chris-Craft to allege that prior misdeeds of Bangor Punta so determined the course of the competition for shares after the date of the decision below that Chris-Craft was placed at any real disadvantage. Consequently, we affirm the denial of the preliminary injunction.
However, we also feel compelled to pass on the district court’s alternative holding that Bangor Punta did not violate the securities laws, for it is clear that this ruling below would determine the outcome of the trial on the merits. On this issue we disagree with the district court.

The May 8 Press Releases

Section 5(c) of the Securities Exchange Act of 1933, as amended, states in part that:
(c) It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, * * *.
Section 5(b) of the Act provides that offers to sell may be made after the registration statement is filed, but before it becomes effective, provided the offers are made by specified means which in-*574elude the use of a prospectus meeting the requirements of Section 10.
The Securities and Exchange Commission has promulgated Rule 135 to exempt certain disclosures of forthcoming issuances from the definition of an “offer to sell” prohibited by Section 5(c). This Rule reads in relevant part as follows:
(a) For the purposes only of section 5 of the Act, the following notices sent by an issuer in accordance with the terms and conditions of this rule shall not be deemed to offer any security for sale:
(2) A notice to any class of security holders of such issuer or of another issuer advising them that it proposes to offer its securities to them in exchange for other securities presently held by such security holders;
(b) Such notice shall be sent not more than 60 days prior to the proposed record date for determining the security holders entitled to subscribe to the securities or, if there is no such record date, not more than 60 days prior to the proposed date of the initial offering of the securities.
(c) The notice shall state that the offering will be made only by means of a prospectus which will be furnished to such security holders or employees, as the case may be, and shall contain no more than the following additional information:
(1) The name of the issuer;
(2) The title of the securities proposed to be offered;
(4) In the case of an exchange offering, the name of the issuer and the title of the securities to be surrendered in exchange for the securities to be offered, the basis upon which the exchange is proposed to be made and the period during which the exchange may be made, or any of the foregoing;
(6) Any statement or legend required by State law or administrative authority.
Chris-Craft argues, and the argument is supported by the SEC, both in its action filed May 26 against Bangor Punta and in its amicus curiae brief in this court, that the categories of information privileged under the Rule are exclusive. In view of this exclusivity they contend that as the rule does not mention disclosure of the value of the securities to be offered, Bangor Punta’s and Piper’s announcements that the package of securities offered by Bangor Punta would be valued at $80 oversteps the exemption and makes the press release an offer to sell.
We agree with this contention. When it is announced that securities will be sold at some date in the future and, in addition, an attractive description of these securities and of the issuer is furnished, it seems clear that such an announcement provides much the same kind of information as that contained in a prospectus. See SEC v. Arvida Corp., 169 F.Supp. 211 (S.D.N.Y.1958). Doubtless the line drawn between an announcement containing sufficient information to constitute an offer and one which does not must be to some extent arbitrary. A checklist of features that may be included in an announcement which does not also constitute an offer to sell serves to guide the financial community and the courts far better than any judicially formulated “rule of reason” as to what is or is not an offer. Rule 135 provides just such a checklist, and if the Rule is not construed as setting forth an exclusive list, then much of its value as a guide is lost.
Moreover, it is reasonable to conclude that the assigning of a value .to offered shares constitutes an offer to sell. One of the evils of a premature offer is its tendency to encourage the formation by the offeree of an opinion of the value of the securities before a registration statement and prospectus are filed. *575There is then no information on file at the SEC by which the Commission can cheek the accuracy of the information which forms the basis of the offeror’s estimate of value, and any offeree, such as the reader of a press release, is encouraged to form a premature opinion of value without benefit of the full set of facts contained in a prospectus.
Here a statement of the value of the securities Bangor Punta offered was made directly in the announcement. It is true that the value which the reader of the May 8 press releases could be expected to accept is a value based upon the opinion of a reputable financial corporation and not upon general and necessarily speculative facts about the nature of the offeror’s business, as in Arvida, supra. However, the true significance of the $80 value which Bangor Punta claimed for its securities package was nonetheless unclear. Chris-Craft charges that the figure constituted an outright misrepresentation inasmuch as most readers would construe the figure as representing the market value of the package. In fact, Chris-Craft charges, some of the securities in the package had not previously been sold on the market at all, and the market value of Piper shares never reached $80 in response to the Bangor Punta exchange offer, so that the Bangor Punta securities did not have an $80 market value and could not honestly have been thought to have such a value. We need not reach the question whether prudent investors would have so construed the $80 value or whether it would have been assumed, as was apparently the case, that the value referred to was based on such considerations as Bangor Punta’s earnings and asset value as well as upon the sales price of the securities. It is enough to point out that under either construction the SEC had no way of checking the honesty of the figure, and that the public did not receive the detailed information it would have received from a prospectus issued after a registration statement had been filed. Such information would have eliminated the possibility, perhaps the probability, that some persons would have construed the $80 figure as referring to market value when that value was neither accurate nor intended.1
Bangor Punta and Piper argue that even prior to the filing of a registration statement an immediate disclosure of market value is compelled in cases such as this both by SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2 Cir. 1968), cert. denied as to issues not pertinent here, sub nom. Coates v. SEC, Kline v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), and by the rules of the New York Stock Exchange. We do not agree. The only material fact in this case within the meaning of Texas Gulf Sulphur was Bangor Punta’s commitment to offer its securities for Piper Aircraft shares. Rule 135 provides adequately for the announcement of a material fact such as this; further disclosure would, as stated above, thwart other policies of the securities laws. Had Bangor Punta observed Rule 135 by revealing immediately its intention to make an exchange offer and by later revealing the titles of the securities it proposed to offer and the basis or ratio on which the exchange was proposed to be made as soon as these matters were decided, adequate information concerning the proposed transaction would have been placed before the public and the potentially misleading estimate of value would have been avoided.2 Even if we assume that knowledge of the value figure involved here might conceivably have conferred some benefit on insiders had it not been revealed, we feel that this risk of unfair advantage is outweighed by the danger that substantial numbers of investors were misled by the figure’s publication. The fact that a few additional sophis*576ticated investors could have discovered the $80 value guarantee in the description of the transaction which Bangor Punta filed with the SEC pursuant to Section 13(d) of the 1934 Act is of no moment. Such investors would almost certainly be small in number, and any arguable danger of permitting them an unfair advantage is outweighed by the stronger probability that the press release misled a large number of unsophisticated investors.
The same principles apply to the New York Stock Exchange’s requirement 3 that insiders disclose information likely to affect the market unless such information can be restricted to a small group of top management officials. In any event, a policy of the New York Stock Exchange, although entitled to considerable respect, cannot bind the Commission or the courts. Silver v. New York Stock Exchange, 373 U.S. 341, 357, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963). To hold that disclosure would be privileged here because the $80 value could not be kept secret and might affect the market would mean that many other companies could offer to sell securities before their registration by claiming that the terms of the proposed offer could not be kept totally secret and must therefore be disclosed in full. Consequently we hold that the May 8 press release by Bangor Punta violated Section 5(c) and therefore we remand the action to the district court for it to consider in light of this opinion and with the benefit of any further evidence which the parties may present at trial what the most suitable remedy for the violation might be.

Bangor Punta’s Purchases of Stock During Its Exchange Offer

Rule 10b-6 forbids “any person * * * (2) who is the issuer or other person on whose behalf * * * a distribution is being made * * * to bid for or purchase for any account in which he has a beneficial interest, any security which is the subject of such distribution * * * or any right to purchase any such security. * * * ”
On May 5, 1969, before the purchases of which Chris-Craft complains, the SEC issued release No. 34-8595, announcing a proposed Rule 10b-13. This Rule, which did not become effective until November 10, 1969, reads in part as follows:
(a) No person who makes a cash tender offer or exchange offer for any equity security shall, directly or indirectly, purchase, or make any arrangement to purchase, any such security (or any other security which is immediately convertible into or exchangeable for such security), otherwise than pursuant to such tender offer or exchange offer, from the time such tender offer or exchange offer is publicly announced or otherwise made known by such person to holders of the security to be acquired until the expiration of the period, including any extensions thereof, during which securities tendered pursuant to such tender offer or exchange offer may by the terms of such offer be accepted or rejected; * * *.
The SEC announced in the same release that Rule 10b-13 served only to restate law which already existed:
This provision is, in effect, a codification of existing interpretations under Rule 10b-6, which among other things, prohibits the person making a distribution from bidding for or purchasing the security being distributed or any right to acquire that security. These interpretations have pointed out that the security to be acquired in the exchange offer is, in substance, either a right to acquire the security being distributed or is brought within the rule under paragraph b thereof; and Rule 10b-6 prohibits the purchase of such security during the distribution except through the exchange offer, unless an exemption is available.
Despite the reference in the Release to “a codification of existing interpretations under Rule 10b-6,” neither the SEC *577nor the parties to this action have cited any such precedents, nor have we found any. However, we do not find this lack of precedent crucial if Rule 10b-6 should independently be found to apply to purchases of stock while exchange offers for such stock are outstanding.
One of the primary purposes of Rule 10b-6 is to prevent an issuer of stock from manipulating the market for that stock. As the court stated in SEC v. Scott Taylor & Co., 183 F.Supp. 904, 907 (S.D.N.Y.1959):
Manipulation was often accomplished by those about to sell securities or already engaged in selling securities bidding on the market for the same securities, thereby creating an unjustifiable impression of market activity which would facilitate the sale at artificially high prices. This was one of the practices which the Securities Exchange Act was designed to eradicate, and it is the practice which is covered by Rule X-10b-6. (Footnote omitted.)
See also, Weitzen v. Kearns, 271 F.Supp. 616, 623 (S.D.N.Y.1967) ; Miller v. Steinbach, 268 F.Supp. 255, 280 (S.D.N.Y. 1967); SEC v. Electronics Security Corp., 217 F.Supp. 831, 836 (D.Minn. 1963).
Bangor Punta argues that its purchase of Piper stock could only serve to drive up the price of Piper stock and thus to make the Bangor Punta shares offered in exchange appear less attractive — the opposite effect from that which Rule 10b-6 would normally seek to prevent. However, this argument overlooks the decided benefits that purchases of target company stock can produce for the initiator of an exchange offer. If the price of the target company’s stock does increase in response to cash purchases by the exchange offer or after the offer has been announced, many shareholders in the target company are likely to assume that the price increase results solely from the bullish effect of the exchange offer on the market. Small investors especially would be likely to assume that the exchange offer was receiving serious attention and approbation from larger, more knowledgeable investors than they. The managements of either the target company or the offeror can compound this impression by announcing the number of shares of target stock acquired by the offeror since the initiation of the exchange offer. Absent some indication to the contrary, the target company shareholders would be likely to assume that the entire increase resulted from the offer, not from cash purchases in addition to the offer.
Prevention of this kind of manipulation seems well within the spirit of Rule 10b-6. It is within the letter of the Rule as well. As quoted above, part (a) of Rule 10b-6 prohibits the issuer of a security not only from purchasing the issued security itself while offering it, but also from purchasing “any right to purchase any such security.” Here the Piper shares carried the right to acquire Bangor Punta securities as a result of Bangor Punta’s exchange offer. Consequently, we hold that Bangor Punta could not lawfully purchase these shares during the tenure of its exchange offer.
It remains open to Bangor Punta to demonstrate at trial that its purchases fall within the exemption provided by Rule 10b-6 for “unsolicited * * * purchases * * * effected neither on a securities exchange nor from or through a broker or dealer * * *.” Moreover, we do not pass any judgment at this time on the question of what remedy is appropriate in regard to Bangor Pun-ta’s unlawful purchases of stock, nor on the significance of the fact that Chris-Craft itself purchased stock during an exchange offer prior to the SEC’s warning.
We remand for further proceedings not inconsistent with this opinion.

. The prospectus which Bangor Punta later issued contained a complete description of the securities it was offering for Piper stock, including the over-the-counter sales price of those securities to which such a price was applicable,

. See, generally, SBC Release No. 33-5009 (Oct. 7, 1969).

. New York Stock Exchange Co. Manual, Section A2.