Court Opinion

ID: 2997614
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:37:47.997191+00
Date Added: 2024-06-11T15:02:48.120633
License: Public Domain

In the
    United States Court of Appeals
                For the Seventh Circuit
                           ____________

No. 04-1299
HARRY EDELSON,
                                                   Plaintiff-Appellant,
                                   v.

RAYMOND K.F. CH’IEN, PETER Y.H.
YUNG, ASIA PACIFIC ONLINE, and
CHINADOTCOM CORPORATION,
                                                Defendants-Appellees.

                           ____________
            Appeal from the United States District Court for
           the Northern District of Illinois, Eastern Division.
                No. 03 C 7320—Amy J. St. Eve, Judge.
                           ____________
         ARGUED JUNE 3, 2004—DECIDED APRIL 25, 2005
                           ____________

    Before BAUER, RIPPLE and MANION, Circuit Judges.
  RIPPLE, Circuit Judge. Harry Edelson brought the present
                                                         1
action against chinadotcom corporation (“Chinadotcom”),
Raymond K.F. Ch’ien, Peter Yip Hak Yung and Asia Pacific

1
  Although both parties refer to Chinadotcom without an initial
capital, we employ the capital for ease of reading.
2                                                   No. 04-1299

Online for an alleged violation of § 13(d) of the Securities
and Exchange Act (“Exchange Act”), 15 U.S.C. § 78m(d),
and other claims. Mr. Edelson sought preliminary and
permanent injunctive relief as well as damages. The district
court determined that Mr. Edelson could not sustain a
private cause of action under § 13(d), denied Mr. Edelson
injunctive relief and dismissed his § 13(d) claim. For the
reasons set forth below, we affirm the judgment of the
district court.

                                I
                      BACKGROUND
A. Facts
    1. Changes in Chinadotcom’s Board
  Mr. Edelson served as an outside, non-management
director on Chinadotcom’s Board of Directors (“Board”)
                     2
from 1999 until 2003. Chinadotcom is a Cayman Islands
company, headquartered in Hong Kong; its stock trades on
the NASDAQ exchange. Mr. Yip is Vice-Chairman of the
Board and Chinadotcom’s Chief Executive Officer (“CEO”);
Mr. Ch’ien is Chinadotcom’s Chairman of the Board. All
three men, Mr. Edelson, Mr. Yip and Mr. Ch’ien, hold stock
                3
in Chinadotcom.

2
  Because the case comes to us as an appeal from the grant of a
motion to dismiss, all well-pleaded facts in the complaint are
deemed true and all reasonable inferences from the facts are
drawn in Mr. Edelson’s favor. See First Ins. Funding Corp. v. Fed.
Ins. Co., 284 F.3d 799, 804 (7th Cir. 2002).
3
  Asia Pacific Online Ltd. (“APOL”) is record owner of 16,135,686
shares of Chinadotcom stock. APOL is owned by Mr. Yip’s spouse
                                                  (continued...)
No. 04-1299                                                 3

  Beginning in early 2003, Mr. Edelson began having serious
disagreements with Chinadotcom’s management, especially
Mr. Yip and Mr. Ch’ien, regarding various governance
issues. A major source of contention was the propriety of a
company-sponsored stock buy-back program. Mr. Yip was
in favor of the program according to which Chinadotcom
would repurchase issued shares at $3.75 per share. Mr. Yip
and Mr. Ch’ien would have benefitted personally from this
buy-back because they recently had acquired additional
Chinadotcom shares at less than $3.75 per share. Mr.
                                                          4
Edelson and another board member, J. Carter Beese,
questioned the propriety and legality of the buy-back.
Consequently, the Board requested that attorney Steven
Chan determine if there were any legal or ethical obstacles
to the plan.
  This dispute remained unresolved at the March 18, 2003
Board meeting. It also prompted an April 16, 2003 e-mail
from Mr. Edelson to Mr. Ch’ien in which Mr. Edelson
alleged that the independent directors on the Board were
being bulldozed in violation of the Sarbanes-Oxley Act, 15
U.S.C. § 7201 et seq., with the result that good corporate
governance was being disregarded.
  About the same time of the e-mail, the Board was in the
process of nominating a new slate of directors. The terms of
all three directors who served on the audit committee— Mr.

3
  (...continued)
and a trust established for the benefit of Mr. Yip’s children.
Mr. Yip’s wife owns an additional 442,219 shares. According to
the complaint, Mr. Yip is the beneficial owner of all of these
shares.
4
  Beese is a former member of the Securities and Exchange
Commission (“SEC”) and sat with Mr. Edelson on Chinadotcom’s
audit committee.
4                                                 No. 04-1299

Edelson, Beese and Thomas Britt—were set to expire. The
annual meeting notice to Chinadotcom stockholders
recommended the re-election of all three of these members
of the Board; specifically, Mr. Edelson was recommended
for a two-year directorship, Beese for a three-year director-
ship and Britt for a one-year directorship. The nominations
were unopposed, and the election was uncontested. “Neither
Yip nor Ch’ien asserted any outward or overt objection to
Edelson’s nomination for re-election to the Board, and they
purported to concur in the Board’s recommendation that
Edelson and the other candidates be elected.” R.1 ¶ 24.
  At the June 17, 2003 Annual Meeting, Mr. Edelson and
Beese were defeated in an election in which only forty-eight
percent of the shares were voted. Of the votes cast,
18,766,947 shares were voted in favor of Mr. Edelson’s re-
election, 28,264,956 were voted against Mr. Edelson’s re-
election, and 800 abstained. The votes for Beese were closer
in number: 18,800,491 votes were cast in favor of Beese’s re-
election, 19,945,905 against his re-election, and 8,285,307 ab-
stained. Britt, on the other hand, received 46,910,753; only
121,150 shares voted against him, and there were 800
abstentions. The shares beneficially owned by Mr. Yip were
voted against both Mr. Edelson and Beese; these shares con-
stituted “more than two-thirds” of the votes cast against Mr.
Edelson. R.1, ¶ 28.

    2. Mr. Yip Files Disclosures
  Mr. Yip, as beneficial owner of more than five percent of
the issued and outstanding shares of a class of Chinadotcom
stock, is required to file certain disclosures under § 13(d) of
the Exchange Act, 15 U.S.C. § 78m(d). By rule, a shareholder
may file a less-onerous disclosure form, Schedule 13G, if the
individual submitting the filing “[h]as not acquired the
No. 04-1299                                                  5

securities with any purpose, or with the effect of, changing
or influencing the control of the issuer.” 17 C.F.R. § 240.13d-
1(c)(1).
  On January 8, 2003, Mr. Yip filed a Schedule 13G disclo-
sure. The following certification appears on the Schedule
13G form, which was signed by Mr. Yip:
    By signing below I certify that, to the best of my knowl-
    edge and belief, the securities referred to above were
    not acquired and are not held for the purpose of or with
    the effect of changing or influencing the control of the
    issuer of the securities and were not acquired and are
    not held in connection with or as a participant in any
    transaction having that purpose or effect.
R.1, Ex.A at 4. No subsequent schedule was filed prior to
Mr. Yip’s voting of his shares against Mr. Edelson and Beese
at the 2003 shareholder meeting.

B. District Court Proceedings
  On October 15, 2003, Mr. Edelson filed the present action.
His two-count complaint alleged violations of § 13(d) as
well as tortious interference with prospective economic
advantage. Mr. Edelson sought damages as well as prelimi-
nary and permanent injunctive relief. “The intent of the
requested injunction,” Mr. Edelson stated in his separate
motion for a preliminary injunction, “is simply to prevent
chinadotcom from conducting a stockholders meeting that
would deprive Edelson, a former chinadotcom Director, of
the opportunity to campaign to regain his chinadotcom
Board seat.” R.36, Ex.A at 1.
  Chinadotcom opposed Mr. Edelson’s motion for a pre-
liminary injunction and also moved to dismiss Mr. Edelson’s
6                                                    No. 04-1299
            5
complaint. With respect to the preliminary injunction,
Chinadotcom argued first that Mr. Edelson could not show
a likelihood of prevailing on the merits because he had not
alleged any wrongdoing by Chinadotcom. Additionally, the
company argued that Mr. Edelson lacked standing to bring
a § 13(d) action because Congress did not intend § 13(d) to
be a mechanism for ex-directors to settle old feuds.
Chinadotcom also maintained that the premise underlying
Mr. Edelson’s argument—that Mr. Yip’s action in voting
against the recommended slate of directors evidenced an
intent to control Chinadotcom—was faulty. According to
Chinadotcom, Mr. “Edelson’s construction of Rule 13d-
1(e)(1), taken to its logical conclusion, would mean that no
Schedule 13G filer would ever be able [to] vote its securities
in a board election or any other proposal at a shareholder
meeting without first filing a Schedule 13D because the
mere voting of securities is . . . equivalent to ‘changing or
influencing control of the issuer.’ ” R.4 at 10. Finally,
Chinadotcom posited that Mr. Edelson could not establish
irreparable harm if the injunction did not issue.
Chinadotcom pointed to the fact that the election that had
ousted Mr. Edelson already had occurred—any harm al-
ready had taken place. Therefore, Mr. Edelson did not
establish the need for urgency that typically accompanies a
preliminary injunction.
  In addition to opposing the motion for preliminary in-
junctive relief, Chinadotcom also moved to dismiss the
complaint. In its motion, Chinadotcom reiterated its argu-
ment that Mr. Edelson had failed to allege any wrongdoing

5
  Chinadotcom was the only defendant that had been served at
the time of the briefing described above and the disposition of the
motion to dismiss. Consequently, Chinadotcom is the only
defendant before this court on appeal.
No. 04-1299                                                    7

on its part—a necessity to sustain the complaint: “Though
chinadotcom is included as a defendant, the Complaint fails
to allege any act or omission by chinadotcom which would
constitute a violation of Section 13(d). Indeed, Edelson has
not even alleged that chinadotcom is subject to the reporting
requirements of Section 13(d).” R.16 at 5. Chinadotcom also
renewed its claim that Mr. Edelson lacked standing to
pursue a § 13(d) private cause of action. According to
Chinadotcom, a § 13(d) cause of action was not open to ex-
directors seeking “to get back at their previous co-fiducia-
ries for disagreements or squabbles lost along the way.” Id.
at 12 (internal quotation marks and citations omitted).
  By order of January 28, 2004, the district court denied
Mr. Edelson’s request for injunctive relief and dismissed
                                       6
Count I of Mr. Edelson’s complaint. After outlining the
standards for a preliminary injunction, the district court
held that a preliminary injunction was not warranted in this
case because Mr. Edelson “cannot show a likelihood of
success on the merits of his claim.” R.27 at 4. Indeed, the
court determined Chinadotcom’s motion to dismiss should
be granted because Mr. Edelson was not entitled to the
protections—including the implied cause of action—of
§ 13(d). The district court noted that, in Indiana National
Corp. v. Rich, 712 F.2d 1180 (7th Cir. 1983), this court had
recognized the existence of an implied cause of action for
prospective relief for issuers such as Chinadotcom to
remedy violations of § 13(d). However, the district court

6
   Mr. Edelson had moved to amend his complaint to add
Chinadotcom as a defendant in Count II. As part of its order, the
district court granted Mr. Edelson leave to file an amended
complaint addressed only to this count. The propriety of the dis-
trict court’s order granting Mr. Edelson leave to amend his
complaint is not before the court.
8                                                  No. 04-1299

believed that Indiana National must be read in conjunction
with more recent district court opinions which held that a
disappointed former director of a corporation could not
pursue an implied cause of action under § 13(d). See Mates
v. N. American Vaccine, Inc., 53 F. Supp. 2d 814 (D. Md.
1999); Nowling v. Aero Serv. Int’l, Inc., 752 F. Supp. 1304 (E.D.
La. 1990). The court explained:
    This Court declines to extend the ruling of the Seventh
    Circuit and create a new cause of action under Section
    13(d) for former directors whom management has
    ousted. If there is a spectrum of shareholder sophisti-
    cation, with “unsuspecting investors” on one end, and
    “well-informed members of management who can
    adequately protect their own interests” on the other,
    then Edelson certainly lies closer to management than
    to the common shareholder.
R.27 at 12. The court concluded that Congress “did not
intend former directors to wield Section 13(d) on their own
behalf” and, therefore, dismissed Count I of the complaint.
                              7
Mr. Edelson timely appealed.

                               II
                        DISCUSSION
  The gravamen of Mr. Edelson’s complaint is that Mr. Yip’s
intent to vote against Mr. Edelson amounted to an intent to
influence the governance of Chinadotcom. Because Mr. Yip
failed to disclose this intent and to file the required Sched-

7
   After oral argument, at the request of this court, the SEC
submitted a brief addressing some of the issues presented in this
litigation. We express our appreciation to the SEC for its sub-
mission.
No. 04-1299                                                 9

ule 13D, Mr. Edelson contends that Mr. Yip’s votes against
him should not have been counted, and a new election for
directors must be held.
  Mr. Edelson’s action raises fundamental issues regarding
§ 13(d) and the contours of the implied right of action
thereunder. First, the present action raises the issue of the
scope of the private right of action under § 13(d)—specifi-
cally, whether Mr. Yip’s failure to disclose his intent, under
the circumstances presented here, is sufficient to state a
cause of action. The second issue raised by Mr. Edelson’s
appeal is who may bring a cause of action under § 13(d):
Does Mr. Edelson’s status as a former director preclude him
from invoking the protections guaranteed general sharehold-
ers by § 13(d)? Finally, this action also poses the question
whether an issuer—as opposed to an individual share-
holder—can be a proper defendant to a § 13(d) cause of
action, here Chinadotcom. Because we hold that, under the
circumstances of this case, a shareholder may not institute a
private cause of action pursuant to § 13(d), we have no
occasion to address whether Mr. Edelson is a proper plaintiff
or whether Chinadotcom is a proper defendant.

A. The Evolution of Private Causes of Action Under
   § 13(d)
   Our first task is to discern whether the allegations con-
tained in Mr. Edelson’s complaint, specifically, Mr. Yip’s
failure to disclose his intent to vote his shares against a
sitting director, states a claim under § 13(d). Although we
have not had an occasion to address the specific question
presented to us, we do not write on a clean slate with respect
to the nature and contours of the § 13(d) private right of
action. Almost thirty years ago, this court explicitly recog-
nized that § 13(d) created a private cause of action. See
10                                                 No. 04-1299

Indiana Nat’l, 712 F.3d at 1185. Even before that time, this
court and the Supreme Court had discussed the scope of
§ 13(d) and the parameters of an implied right of action
based on that provision, as well as on other provisions of the
Williams Act, Pub. L. No. 90-439, 82 Stat. 454 (1968). We turn
first to these cases to guide our inquiry.
  Our review begins with the decision of this court in Bath
Industries, Inc. v. Blot, 427 F.2d 97 (7th Cir. 1970). Before the
court was an order by the district court enjoining the
appellant stockholders from “proceeding with their plan
(including, but not limited to removing the chief executive
officer of (plaintiff) Bath and calling for a special sharehold-
ers meeting) until they have complied with Section 13(d).”
Id. at 101 (internal quotation marks omitted). None of the
named defendants owned, individually, ten percent or more
                                   8
of the stock of Bath Industries. Thus, this court first had to
determine whether the individual defendants constituted a
“group” acting “for the purpose of acquiring, holding, or
disposing of securities of an issuer,” such that, collectively,
they were subject to the Act’s disclosure requirements. Id. at
108. In order to answer this question, we stated, it was
necessary to “honor the whole Congressional intent” of the
Williams Act, not just the specific passages relied upon by
the parties. To assess this intent, we turned to the legislative
history of the Williams Act which
     convince[d] us that the overriding purpose of Congress
     in enacting this legislation was to protect the individual
     investor when substantial shareholders or management
     undertake to acquire shares in a corporation for the

8
  The Williams Act’s disclosure requirements originally applied
to individuals who owned ten percent, as opposed to five per-
cent, of a specific class of stock.
No. 04-1299                                                    11

    purpose of solidifying their own position in a contest
    over how or by whom the corporation should be man-
    aged.
Id. With this intent in mind, we concluded that “the Act
should be interpreted to require compliance with its dis-
closure provisions when, but only when, any group of stock-
holders owning more than 10% of the outstanding shares of
a corporation agree to act in concert to acquire additional
                               9
shares.” Id. (emphasis added).
  The Supreme Court provided additional insight into the
scope of private causes of action under § 13(d) in Rondeau v.
Mosinee Paper Corp., 422 U.S. 49 (1975). In Rondeau, the Court
addressed the issue “whether a showing of irreparable harm

9
  The Second Circuit in GAF Corp. v. Milstein, 453 F.2d 709 (2d
Cir. 1971), reached a different result with respect to when the
disclosure requirements come into play for investors that agree
to use their shares as a block:
    In light of the statutory purpose as we view it, we find
    ourselves in disagreement with the interpretation of Bath
    Industries . . . . The history and language of section 13(d)
    make it clear that the statute was primarily concerned with
    disclosure of potential changes in control resulting from new
    aggregations of stockholdings and was not intended to be
    restricted to only individual stockholders who made future
    purchases and whose actions were, therefore, more appar-
    ent. . . . It hardly can be questioned that a group holding
    sufficient shares can effect a takeover without purchasing a
    single additional share of stock.
Id. at 718 (citations and footnote omitted; emphasis in original).
As will be discussed in greater detail below, the distinction
drawn by the Second Circuit—between new acquisitions and new
aggregations of stock—does not affect the outcome in the present
action.
12                                                 No. 04-1299

[wa]s necessary for a private litigant to obtain injunctive
relief in a suit under § 13(d).” Id. at 50-51. In that case,
petitioner Rondeau, over time, had accumulated a large
quantity of Mosinee stock. When Rondeau had acquired the
threshold amount of five percent of the stock, he failed to
make the disclosures required by § 13(d). Rondeau eventu-
ally accumulated 60,000 shares of stock. At that time,
Mosinee’s president advised Rondeau that his purchases
may have created problems under the federal securities laws.
After receiving this warning, Rondeau ceased purchases,
consulted an attorney and subsequently filed a § 13(d)
disclosure which stated:
     “Francis A. Rondeau determined during [the] early part
     of 1971 that the common stock of the Issuer (respondent)
     was undervalued in the over-the-counter market and
     represented a good investment vehicle for future income
     and appreciation. Francis A. Rondeau and his associates
     presently propose to seek to acquire additional common
     stock of the Issuer in order to obtain effective control of
     the Issuer, but such investments as originally determined
     were and are not necessarily made with this objective in
     mind. Consideration is currently being given to making
     a public cash tender offer to the shareholders of the
     Issuer at a price which will reflect current quoted prices
     for such stock with some premium added.”
       Petitioner also stated that, in the event that he did ob-
     tain control of respondent, he would consider making
     changes in management “in an effort to provide a Board
     of Directors which is more representative of all of the
     shareholders, particularly those outside of present
     management . . . .” One month later petitioner amended
     the form to reflect more accurately the allocation of
     shares between himself and his companies.
No. 04-1299                                                 13

Id. at 53-54. After receiving the disclosure, Mosinee informed
its stockholders of the information provided by Rondeau
and also responded to Rondeau’s plans to seek control of the
company and effect changes in the management structure.
Mosinee then filed an action in district court seeking “an
injunction prohibiting the petitioner and his codefendants
from voting or pledging their stock and from acquiring
additional shares, requiring them to divest themselves of
stock which they already owned.” Id. at 55.
  The Supreme Court held that the traditional requirements
for injunctive relief apply to implied causes of action under
§ 13(d). The Court then rejected Mosinee’s claim that it had
suffered the harm necessary to obtain injunctive relief. The
Court explained that
    [t]he purpose of the Williams Act is to insure that public
    shareholders who are confronted by a cash tender offer
    for their stock will not be required to respond without
    adequate information regarding the qualifications and
    intentions of the offering party. By requiring disclosure
    of information to the target corporation as well as the
    Securities Exchange Commission, Congress intended to
    do no more than give incumbent management an op-
    portunity to express and explain its position. The
    Congress expressly disclaimed an intention to provide a
    weapon for management to discourage takeover bids or
    prevent large accumulations of stock which would create
    the potential for such attempts.
Id. at 58 (footnote omitted). Additionally, the Court noted
that “none of the evils to which the Williams Act was di-
rected ha[d] occurred or [wa]s threatened in this case,” id. at
59; Rondeau had not attempted to control the issuer, either
by cash tender offer or other device. Finally, the Court also
made clear that both the focus of the Williams Act and the
private remedies available under the Act were limited:
14                                                       No. 04-1299

       Nor are we impressed by respondent’s argument that an
       injunction is necessary to protect the interests of its
       shareholders who either sold their stock to petitioner at
       predisclosure prices or would not have invested had
       they known that a takeover bid was imminent. As ob-
       served, the principal object of the Williams Act is to solve
       the dilemma of shareholders desiring to respond to a cash
       tender offer, and it is not at all clear that the type of
       “harm” identified by respondent is redressable under its
       provisions.
Id. at 59-60 (citations omitted; emphasis added).
  Soon thereafter, the Supreme Court confronted an action
instituted under another provision of the Williams Act. In
Piper v. Chris-Craft Industries, Inc., 430 U.S. 1 (1977), the Court
addressed whether a tender offeror could institute a cause of
action under the Williams Act’s anti-fraud provision, U.S.C.
          10
§ 78n(e). The Court reviewed the legislative history and
underlying purpose of the Act. The Court concluded that
“[t]he legislative history . . . shows that the sole purpose of
the Williams Act was the protection for investors who are

10
     15 U.S.C. § 78n(e) provides:
       It shall be unlawful for any person to make any untrue
       statement of a material fact or omit to state any material fact
       necessary in order to make the statements made, in the light
       of the circumstances under which they are made, not mis-
       leading, or to engage in any fraudulent, deceptive, or mani-
       pulative acts or practices, in connection with any tender offer
       or request or invitation for tenders, or any solicitation of
       security holders in opposition to or in favor of any such offer,
       request, or invitation. The Commission shall, for the pur-
       poses of this subsection, by rules and regulations define, and
       prescribe means reasonably designed to prevent, such acts
       and practices as are fraudulent, deceptive, or manipulative.
No. 04-1299                                                   15

confronted with a tender offer.” Piper, 430 U.S. at 35. The
Court then concluded that, given this legislative purpose,
Chris-Craft, a tender offeror competing for control of Piper,
could not claim the protections of the anti-fraud provisions
of the Act. The Court explained:
    It is clear, therefore, that Chris-Craft has not asserted
    standing under § 14(e) as a Piper shareholder. The rea-
    son is not hard to divine. As a tender offeror actively
    engaged in competing for Piper stock, Chris-Craft was
    not in the posture of a target shareholder confronted
    with the decision of whether to tender or retain its stock.
    Consequently, Chris-Craft could scarcely have alleged a
    need for the disclosures mandated by the Williams Act.
Id. The Court concluded that “[a]s a party whose previously
unregulated conduct was purposefully brought under fed-
eral control by the statute, Chris-Craft can scarcely lay claim
to the status of ‘beneficiary’ whom Congress considered in
need of protection.” Id. at 37. Although the Piper case
concerns private causes of action under § 14(e), as opposed
to § 13(d), it is instructive for two reasons. First, Piper shows
the emphasis that courts should place on discerning congres-
sional intent before recognizing an implied cause of action
under the circumstances of a given case. Second, Piper
reveals the Supreme Court’s determination of congressional
intent in enacting the Williams Act—to provide stockholders
with information when they are “confronted with the
decision of whether to tender or retain [their] stock.” Id. at
35.
  Slightly more recently, this court has considered, and
explicitly recognized, a private cause of action under § 13(d)
in Indiana National Corp. v. Rich, 712 F.2d 1180 (7th Cir. 1983).
The issue before the court in Indiana National was “whether
there is an implied private right of action for an issuer
16                                                    No. 04-1299

corporation to seek injunctive relief [on behalf of its share-
holders] under Section 13(d).” Id. at 1181. The defendants in
that case were a group of investors who had acquired more
than five percent of Indiana National stock and had filed a
§ 13(d) disclosure, as well as several amendments. Despite
these disclosures, an action was initiated by Indiana Na-
tional, alleging that the disclosures were false and mislead-
ing because they failed to reveal the defendants’ intention to
acquire control. Indiana National sought an order compel-
ling the defendants to file an amended Schedule 13D,
enjoining the defendants from acquiring more shares of the
company, and compelling the defendants to divest them-
selves of the shares which had been unlawfully acquired.
  To determine whether an implied cause of action should
be recognized under these circumstances, we took our cue
from the methodology employed by the Supreme Court in
Williams Act cases and looked to the legislative history of
the Williams Act. We noted that “[t]he purpose of the
Williams Act was to insure that public shareholders facing a
tender offer or the acquisition by a third party of a large block of
shares possibly involving a contest for control be armed with
adequate information about the qualifications and intentions
of the party making the offer or acquiring the shares.” Id. at
1183 (emphasis added). We also addressed the question of
whether the issuer could enforce the provisions on behalf of
shareholders. Congress, we noted, did not intend the
Williams Act “to protect incumbent management or to
discourage takeover bids”; “[i]ts sole purpose was the pro-
tection of shareholders.” Id. at 1185. However, we observed
that
     the shareholders have neither the knowledge nor the
     capacity to ensure that Section 13(d) is enforced and a
     “fair fight” thus provided. In this respect and for this
     limited purpose, therefore, the issuer corporation acts on
No. 04-1299                                                    17

    the shareholders’ behalf in bringing a suit for injunctive
    relief until an accurate Schedule 13(d) is filed.
Id. Having determined that the issuer could institute the
action on behalf of its shareholders, we remanded the action
to the district court to consider the propriety of injunctive
relief.
  Our review of these cases provides significant guidance in
the interpretive task before us. In exploring the contours of
a private cause of action under § 13(d), or other sections of
the Williams Act, both this court and the Supreme Court
have been guided by congressional intent in enacting the
Williams Act: “to insure that public shareholders who are
confronted by a cash tender offer for their stock will not be
required to respond without adequate information regarding
the qualifications and intentions of the offering party.”
Rondeau, 422 U.S. at 58 (citing S. Rep. No. 550, at 2 (1967)); see
also Piper, 430 U.S. at 28 (“Congress was intent upon regulat-
ing takeover bidders, theretofore operating covertly, in order
to protect the shareholders of target companies.”); Indiana
Nat’l, 712 F.2d at 1183 (“The purpose of the Williams Act
was to insure that public shareholders facing a tender offer
or the acquisition by a third party of a large block of shares
possibly involving a contest for control be armed with
adequate information about the qualifications and intentions
of the party making the offer or acquiring the shares.”); Bath
Indus., 427 F.2d at 109 (“[T]he overriding purpose of Con-
gress in enacting this legislation was to protect the individ-
ual investor when substantial shareholders or management
undertake to acquire shares in a corporation for the purpose
of solidifying their own position in a contest over how or by
whom the corporation should be managed.”).
  This purpose not only has informed our general discussion
of § 13(d), it has been employed to fashion the scope of the
18                                                  No. 04-1299

implied cause of action recognized under § 13(d) and under
other sections of the Williams Act. By way of example, the
Act’s emphasis on acquisition of shares prevented us from
recognizing that a “group” could be liable under § 13(d)
absent a showing that it had “acquire[d]” additional shares
towards an undisclosed purpose. See Bath Indus., 427 F.2d at
109-10. Relying on the Act’s purpose of providing informa-
tion to investors—as opposed to providing management
with a weapon to combat takeover bids— the Court held
that the traditional standards for gaining injunctive relief
applied to a cause of action brought pursuant to § 13(d). See
Rondeau, 422 U.S. at 58-59. Similarly, it was the purpose of
the Williams Act that prevented the Supreme Court from
expanding the class of plaintiffs in Williams Act cases to
include a competing tender offeror. Piper, 430 U.S. at 35.
  Finally, we note that, to this point, our Williams Act
jurisprudence has been limited to those situations which
involved acquisitions or accumulations of stock for the
alleged (or actual) purpose of gaining control of the issuer.
We have not confronted the question before us today—
whether a plaintiff may maintain a cause of action for a
violation of § 13(d) absent a tender offer or accumulation of
stock for the purpose of controlling the issuer. We turn,
therefore, to the question of whether we should recognize a
§ 13(d) cause of action under the circumstances of this case.

B. The Scope of § 13(d) Private Rights of Action
                               1.
  The circumstances under which courts can recognize
implied rights of action have changed over time. Histori-
cally, courts looked to the four factors set forth in Cort v. Ash,
422 U.S. 66 (1975), to inform the decision; those factors are:
No. 04-1299                                                  19

    (1) whether the plaintiff is a member of the class for
    whose benefit the statute was enacted; (2) whether there
    is any indication of legislative intent to create or deny
    such a remedy; (3) whether an implied remedy is
    consistent with the underlying purposes of the statutory
    scheme; and (4) whether the cause of action is one
    traditionally relegated to the states so that it would be
    inappropriate to infer a federal remedy.
Mallett v. Wisconsin Div. of Vocational Rehab., 130 F.3d 1245
(7th Cir. 1997). However, not long after its decision in Cort,
the Court made it clear that not all of these factors were of
equal value:
    It is true that in Cort v. Ash, the Court set forth four
    factors that it considered “relevant” in determining
    whether a private remedy is implicit in a statute not
    expressly providing one. But the Court did not decide
    that each of these factors is entitled to equal weight. The
    central inquiry remains whether Congress intended to
    create, either expressly or by implication, a private cause
    of action. Indeed, the first three factors discussed in
    Cort—the language and focus of the statute, its legisla-
    tive history, and its purpose—are ones traditionally
    relied upon in determining legislative intent.
Touche Ross & Co. v. Redington, 442 U.S. 560, 575-76 (1979).
Although “the Supreme Court has refused to overrule the
Cort v. Ash test explicitly, the Court has retreated from it and
has focused primarily on legislative intent, the second
factor.” Mallett, 130 F.3d at 1249. Consequently, in determin-
ing whether to recognize an implied cause of action under a
specific act of Congress, we have identified our inquiry as
“whether Congress intended an implied right of action . . . in
light of the statute’s language, structure, and legislative
history. If such inferences of intent are not present, we must
20                                                No. 04-1299

conclude that the essential predicate for implication of a
private remedy does not exist.” Id. (internal quotation marks
and citations omitted).
  The emphasis on congressional intent as manifested in
statutory language is not limited to the initial recognition of
an implied right of action. This methodology applies with
equal force to expanding the scope of an implied right of
action. The Supreme Court has explained that
     [a]ssessing the legitimacy of . . . extension or expansion
     calls for the application of some fundamental principles
     governing recognition of a right of action implied by a
     federal statute, the first of which was not, in fact, the
     considered focus of the Borak opinion. The rule that has
     emerged in the years since Borak . . . came down is that
     recognition of any private right of action for violating a
     federal statute must ultimately rest on congressional
     intent to provide a private remedy, Touche Ross & Co. v.
     Redington, 442 U.S. 560, 575 (1979). From this the corol-
     lary follows that the breadth of the right once recognized
     should not, as a general matter, grow beyond the scope
     congressionally intended.
Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1102
(1991) (parallel citations omitted). Applying the Court’s
admonition to the issue presented here, we must ask
whether Congress intended the private cause of action for
alleged violations of § 13(d) to extend to individual investors
who are not faced with a tender offer or some other aggrega-
tion of stock for the purpose of controlling the issuer.

                              2.
 The parties have very different views concerning
Congress’ intent in enacting § 13(d). Chinadotcom maintains
No. 04-1299                                                 21

that the legislative history of the Williams Act shows that the
sole purpose of the Act was the protection of investors
confronted by a tender offer. See Piper, 430 U.S. at 28. As
noted above, this characterization has been oft-repeated by
courts that have addressed § 13(d) claims. See, e.g., Bath
Indus., 427 F.2d at 109 (“Our review of the legislative history
convinces us that the overriding purpose of Congress was to
protect the individual investor when substantial sharehold-
ers or management undertake to acquire shares in a corpora-
tion for the purpose of solidifying their own position in a
contest over how or by whom the operation should be
managed.”).
  Mr. Edelson and the Securities and Exchange Commission
(“SEC”) take a broader view of congressional intent with
respect to § 13(d). They acknowledge that the “increase in
cash tender offers was the genesis of the Williams Act.” SEC
Br. at 27. However, they assert that there is nothing in the
language of the statute to suggest that § 13(d) is limited only
to the tender offer context. Mr. Edelson and the SEC point to
the fact that “[t]he statute itself is broadly written and
contains no restriction of its coverage to accumulations of
stock made as part of a tender offer.” SEC Br. at 27. Further-
more, they note that the statute “expressly requires disclo-
sure even where there is no control-purpose or contest for
control.” Id. at 29. They also point to the implementing
regulations in support of their position.
  The question of the existence—and scope—“of a statutory
cause of action is, of course, one of statutory construction.”
Touche Ross, 442 U.S. at 568. We look first, therefore, to the
statutory language of § 13(d) to discern whether Congress
intended a private cause of action to lie outside of the
context of a tender offer or other aggregation of stock. “[I]n
determining congressional intent, we look to the particular
statutory language at issue, as well as the design of the
22                                                No. 04-1299

statute as a whole.” Damato v. Hermanson, 153 F.3d 464, 471
(7th Cir. 1998) (internal quotation marks and citations
omitted).
   Our review of § 13(d) leads us to the conclusion that it was
designed to provide information to the investor when faced
with a tender offer or other accumulation or aggregation of
stock that could affect corporate control. Although Mr.
Edelson and the SEC are correct that Congress did not
employ the term “tender offer” anywhere in § 13(d), the
language of the statute does make clear that its focus is the
acquisition of securities for the purpose of controlling the
issuer. First, the provision’s disclosure requirements are
triggered by an individual “acquiring directly or indirectly
the beneficial ownership” of five percent of any class of
security. 15 U.S.C. § 78m(d)(1) (emphasis added). When a
stockholder reaches the five percent threshold, he must
disclose certain information set forth in § 13(d); among the
disclosures that must be made is whether “the purpose of
the purchases or prospective purchases is to acquire control
of the business of the issuer of the securities.”
§ 78m(d)(1)(C). However, the statute also provides that the
SEC may impose less onerous disclosure requirements if it
appears to the SEC that the securities were acquired by an
investor “in the ordinary course of his business and were not
acquired for the purpose of and do not have the effect of
changing or influencing the control of the issuer.”
§ 78m(d)(5).
  It is clear from this language that Congress was concerned
with bringing to light acquisitions of stock by only a specific
type of investor. First, Congress only subjects investors to the
disclosure requirements if they have acquired a threshold
amount of five percent of a class of the issuer’s stock—an
amount that may allow the stockholder to exert some control
over the issuer’s actions. Second, the provision allows for a
No. 04-1299                                                  23

hierarchy of disclosures—a streamlined version available to
the investor who has acquired the stock in the regular course
of business and without any intention of affecting the
operations of the issuer and a more onerous version applica-
ble to the investor who plans to use his leverage to exert
control over the issuer. The first category of investors
obviously is of less concern to Congress.
  The categories of transactions that Congress excepted from
§ 13(d) disclosures further reveals Congress’ focus on tender
offers or other aggregations of stock that may result in a
change in control of the issuer. For example, 15 U.S.C.
§ 78m(d)(6)(B) states that the disclosure requirements shall
not apply to “any acquisition of the beneficial ownership of a
security which, together with all other acquisitions by the
same person of securities of the same class during the pre-
ceding twelve months, does not exceed 2 per centum of that
class.” (emphasis added). This exception suggests that,
although Congress was directing its efforts at acquisitions of
stock in general, it was more concerned with acquisitions of
large amounts of stock over a short period of time, i.e., a
tender offer or the rapid purchase of stocks on the open
market for the purpose of gaining control of the issuer.
  Congress’ textual focus on acquisitions of stock with a
control purpose is consistent with the legislative history of
§ 13(d). As set forth in some detail above, this court, other
courts of appeals and the Supreme Court have scoured the
legislative history of the Williams Act to discern Congress’
intent in enacting § 13(d). Without fail, the courts that have
examined the legislative history have arrived at the same
conclusion: In enacting § 78m(d), Congress sought to
empower the common investor with adequate information
regarding those seeking control of an issuer through a tender
offer or other method of acquisition so that an individual
investor is able to decide whether to retain or dispose of his
stock. See supra at 17-18. In short, there does not appear to be
24                                                     No. 04-1299

any indication in the language of § 13(d) that Congress
intended a remedy for individual investors who were not
faced with the choice of retaining or disposing of their stock
in the face of an imminent change in control.
  Despite the emphasis in both the language of the statute
and its legislative history on large and rapid acquisitions
that may affect control of the issuer, the SEC and
Mr. Edelson argue strenuously that Congress intended the
private right of action to be available under much broader
circumstances.
  Mr. Edelson and the SEC argue that Congress must have
intended a private cause of action, even in the absence of a
tender offer or contest for control, because the statute re-
quires anyone who owns five percent or more of a class of
stock to make certain disclosures, regardless of his intent in
acquiring the stock. However, the mere fact that Congress
decided to regulate a particular activity does not evidence an
intent to create a private cause of action to enforce every
                                  11
aspect of that regulatory scheme. It is logical that Congress
would want to keep its finger on the pulse of those share-

11
  The Supreme Court made this clear in Touche Ross & Co. v.
Redington, 442 U.S. 560 (1979), when it considered whether a
private cause of action existed under another section of the
Securities Exchange Act that regulated broker-dealers; the Court
stated:
     Section 17(a) is like provisions in countless other statutes that
     simply require certain regulated businesses to keep records
     and file periodic reports to enable the relevant governmental
     authorities to perform their regulatory functions. The reports
     and records provide the regulatory authorities with the
     necessary information to oversee compliance with and
     enforce the various statutes and regulations with which they
     are concerned.
Id. at 569.
No. 04-1299                                                    25

holders who may, at some point in the future, be in a
position to, and actively attempt to, affect the rights of other
shareholders. However, until a large shareholder begins
acquiring shares for the purpose of controlling the issuer, the
rights of other shareholders are not implicated. It is only
when control of the issuer is at stake that fellow stockholders
are faced with decisions concerning their stock, are in need
of the information required by § 13(d) to make those deci-
sions and should have the right to secure that information to
protect their investment.
  Mr. Edelson and the SEC next point to the language of the
implementing regulations on Schedule 13D as authority for
their position. See SEC Br. at 22. However, we cannot look at
the implementing regulations with the same authority as we
do statutory language and legislative history in discerning
whether Congress intended to recognize a private cause of
action under the facts of this case; “the language of the
statute and not the rules must control.” Touche Ross, 442 U.S.
at 577 n.18 (rejecting argument that the rules adopted
pursuant to an act of Congress can “provide the source of an
implied remedy” when the statute itself cannot).
  Finally, we cannot accept the view of the SEC and of Mr.
Edelson that there is case law to support their view of
§ 13(d)’s purpose. Neither Mr. Edelson nor the SEC has
pointed to a single case that has recognized a § 13(d) action
in the absence of some accumulation or aggregation of stock,
                             12
or other contest for control. Thus, Mr. Edelson and the SEC

12
  The SEC cites four cases in support of its argument that § 13(d)
private causes of action should not be limited to tender offers or
other contests for control. None of these cases support its claim.
See Gearhart Indus., Inc. v. Smith Int’l, Inc., 741 F.2d 707, 713
(5th Cir. 1984) (involving rapid acquisition of stock to attain a
                                                    (continued...)
26                                                     No. 04-1299

have not dissuaded us from the conclusion that a private
cause of action pursuant to § 13(d) arises only in the context
of a tender offer or aggregation of shares for the purpose of
controlling the issuer.

C. Application
  Having concluded that Congress intended to recognize a
private cause of action under § 13(d) only in the context of a
tender offer or other contest for control, our disposition of
Mr. Edelson’s claim is straightforward. Mr. Yip’s action in
voting against Mr. Edelson simply is not the type of activity
which Congress intended to regulate through private
enforcement under § 13(d).

                           Conclusion
  For the foregoing reasons, the judgment of the district
court is affirmed.
                                                          AFFIRMED

12
   (...continued)
“blocking position” to any defensive efforts by the issuer);
Treadway Cos., Inc. v. Care Corp., 638 F.2d 357, 365-66 (2d Cir.
1980) (addressing alleged failure to disclose a purpose to control
when shareholder had acquired in excess of one-third of the
outstanding stock of the issuer); Chromalloy American Corp. v. Sun
Chem. Corp., 611 F.2d 240, 243-44 (8th Cir. 1979) (involving acqui-
sition of more than ten percent of the outstanding stock without
disclosing a control purpose); Gen. Aircraft Corp. v. Lampert, 556
F.2d 90, 96 (1st Cir. 1977) (considering § 13(d) liability of group of
shareholders that collectively had acquired nearly fifteen percent
of the outstanding stock of the issuer).
No. 04-1299                                             27

A true Copy:
       Teste:

                       _____________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit

                USCA-02-C-0072—4-25-05