LACEY, District Judge:
This matter is before the court on the parties' cross motions for interim injunctive and other relief, as hereinafter detailed. Implicated by the pleadings and the motions are certain provisions of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a et seq., as amended by the Williams Act of 1968.
Plaintiffs' complaint charges defendants with violating §§ 13(d) and 14(a) of the Exchange Act, 15 U.S.C. § 78m(d), 15 U.S.C. § 78n(a), and relevant rules and regulations of the Securities and Exchange Commission (Commission) promulgated thereunder, including Rule 13d-1, 17 C.F.R. § 240.13d-1 (1974), and Rule 14a-9, 17 C.F.R. § 240.14a-9 (1974); and the statutes and common law of the State of New Jersey. Defendants' answer not only denies these charges but counterclaims with charges of §§ 13(d) and 14(a) violations by plaintiffs.
Jurisdiction and venue are in this court under § 27 of the Exchange Act, 15 U.S.C. § 78aa, as to the Exchange Act claims, and under pendent jurisdiction principles on plaintiffs' state-created claim.
In their complaint, plaintiffs, who sue in their own right and derivatively, Fed.R.Civ.P. 23.1; N.J.S.A. 14A:3-6, in the right of Multi-Amp Corporation (M-A), defendant herein, seek preliminary and permanent injunctive relief which would enjoin the defendants Lerner, Saltzman, Redlhammer and Esquivel from utilizing as soliciting material management's Proxy Statement dated August 16, 1974, from soliciting proxies from M-A shareholders, from voting or otherwise exercising any rights in connection with proxies heretofore solicited or obtained, from committing any violations of the Exchange Act, from voting at the annual meeting, now set for October 30, 1974, any shares of M-A stock owned by them or by L & S Investment Company (L & S), and from implementing or consummating the proposed sale of assets, by M-A to the defendant MUL Company (MUL), which is at the core of this proceeding. While challenging the named plaintiffs' capacity to sue derivatively, defendants do not challenge their standing to sue individually, as stockholders, for §§ 13(d) and 14(a) violations. Cf. GAF Corporation v. Milstein, 453 F.2d 709, 719 n.21 (2d Cir. 1971), cert. denied, 406 U.S. 910, 31 L. Ed. 2d 821, 92 S. Ct. 1610 (1972); Committee for New Man. of Butler Aviation v. Widmark, 335 F. Supp. 146, 154 n.9 (E.D.N.Y. 1971); but see Washburn v. Madison Square Garden Corp., 340 F. Supp. 504 (S.D.N.Y. 1972). In this regard, it is noted that given the liberal application of the standing doctrine in the area of securities law by this Circuit, Landy v. Federal Deposit Ins. Corp., 486 F.2d 139 (3d Cir. 1973), this court expressly finds that plaintiffs do have standing to sue to vindicate §§ 13(d) and 14(a) violations.
The defendants have counterclaimed for preliminary and permanent injunctive relief to bar plaintiffs from utilizing their proxy material, and to enjoin them from voting their own shares, and the shares of others, at the annual meeting.
This court signed an Order to Show Cause with temporary restraints on September 6, 1974, later modified by its order of September 13, 1974.
On the applications for interim relief, the parties put before the court the pleadings, various affidavits, the several depositions taken to date, and lengthy briefs. Following these submissions, oral argument was heard on October 9, 1974. The parties have agreed to waive an evidentiary hearing on plaintiffs' claims.
Defendants, on the other hand, request an evidentiary hearing on their § 13(d)-based counterclaim, which has been held.
Before addressing the principal issues involved, it is to be noted that plaintiffs, having been given the list of stockholders of M-A after commencing suit, moved thereafter for the disclosure of (a) the names of all persons whose M-A stock is held in street-name, and (b) the names of those persons whose stock is with Cede & Co., a certain stock depository. At oral argument on October 9, 1970, I denied application (a) but granted (b), staying the latter ruling, however, to allow defendants to make a written submission in opposition thereto. That submission having been made, and found unpersuasive, the stay is now lifted, and an appropriate order is to be submitted forthwith. The court's determination is founded upon what it stated at oral argument on October 9, 1970, and the reasons immediately hereinafter expressed.
The New Jersey Business Corporation Act, N.J.S.A. 14A:5-28(1), provides in relevant part:
The corporation shall make available for inspection . . . a record or records containing the names and addresses of all shareholders, the number, class and series of shares held by each and the dates when they respectively became the owners of record thereof. . . .
Defendants would argue that this statute, literally applied, would require only that a list of all shareholders of record on the corporate books be made available for inspection. As previously stated, M-A has already furnished a list of shareholders of record to plaintiffs.
Since management now receives from Cede & Co. a monthly list of "participants", see letter of defendants' counsel dated October 11, 1974, fairness compels that management should make available to plaintiffs the same information so that this proxy solicitation campaign can be waged on equal terms by both sides.
Regarding shareholders who have shares in street-name, the court is not inclined to give the restrictive construction to N.J.S.A. 14A:5-28 defendants urge. Cf. Rule 14a-7, 17 C.F.R. § 240.14a-7 (1974); and see § 14(c) of Exchange Act, 15 U.S.C. § 78n(c), which was added in 1964 and requires issuers subject to the proxy rules to canvass the registered owners of the securities known to be held in street-name. Instead, its refusal to require that the names of shareholders holding shares in street-name be determined and divulged is based not only upon policy considerations, namely, that such owners should have their desire for privacy protected, but also because management, unlike the Cede situation, is also without the information plaintiffs seek. See Cary, Corporations 311-12 (4th ed. 1969). Although not relevant to the issue raised, it should be noted that the court recognizes that derivative suits can be brought by shareholders who are equitable holders, and not of record. N.J.S.A. 14A:3-6 (Commissioners' Comments); Drachman v. Harvey, 453 F.2d 722 (2d Cir. 1972) (en banc).
Plaintiffs Scott and Puttkammer are stockholders of defendant M-A, a New Jersey corporation, with its principal place of business in Texas, which, with its subsidiaries, is engaged in various aspects of the electrical testing industry.
MUL is a recently organized Delaware corporation, the stock of which is entirely owned by defendants Lerner, Saltzman, Redlhammer and Esquivel, formed by them to acquire M-A's assets. Lerner (M-A's Board Chairman and Chief Executive Officer) and Saltzman each own beneficially 81,798 shares (8.99%) of M-A's common stock (totalling in excess of 900,000 shares), acquired on April 15, 1970, and registered in the name of L & S, a partnership owned fifty-percent by Lerner, with the other fifty-percent owned by Saltzman and a corporation (Lodar, Inc.) he controls. Redlhammer (M-A's President) and Esquivel (M-A's Vice President for Finance) own respectively 28,471 (3.13%) and 196 (.02%) shares of M-A common stock, and are, with Lerner and Saltzman, directors of M-A, as is Baker (who was elected on July 10, 1974). Berick is also an M-A director and a partner in the Cleveland, Ohio law firm of Burke, Hahn & Berick, which has served as M-A's general counsel; he owns 500 shares (.05%) of M-A's common stock. Other M-A directors were, until recently, Glenn Golenberg, whose place was taken by Baker, and James Hellmuth, an outside director whose principal occupation is as a vice president of Bankers Trust Company. Their resignations were filed and accepted on July 10 and August 1, 1974, respectively.
Generally, plaintiffs charge that at a time prior to July 26, 1974, defendants Lerner, Saltzman, Redlhammer and Esquivel, in addition to violating certain securities laws, conspired to acquire M-A's assets "at a grossly inadequate price [$5,494,965 or $6.04 per share of M-A stock] and to liquidate . . . [M-A], to the detriment of the stockholders . . . and, pursuant to said conspiracy, formed defendant MUL for the purpose of acquiring the assets of Multi-Amp." Complaint, para. 11. More specifically, plaintiffs charge defendants have acted illegally in the particulars hereinafter set forth.
Plaintiffs' § 13(d) Claims
Plaintiffs contend, first, that L & S, Lerner and Saltzman, having acquired on April 15, 1970 18% of M-A's stock [registered pursuant to § 12 of the Exchange Act, 15 U.S.C. § 78l] from the Gross family, then M-A's principal shareholders, were by April 25, 1970 required to, but did not, comply with the filing requirements of § 13(d).
Plaintiffs further assert that the § 13(d) filing requirement was triggered again when, on or about July 10, 1974, Lerner and Saltzman, then in control of M-A, were joined "in concert" by Redlhammer and Esquivel, M-A stockholders and Board members, with the resultant "group" (i.e., Lerner, Saltzman, Redlhammer and Esquivel), see § 13(d)(3), 15 U.S.C. § 78m(d)(3), having as its new objective the sale of M-A's assets to MUL, and the subsequent liquidation of M-A. Pffs. Br. at 14; Pffs. Reply Br. at 27.
It is undisputed that defendants made no § 13(d) filing whatever until August 5, 1974.
Pursuant to § 13(d)(1), the Commission by Rule 13d-1, promulgated Schedule 13D, 17 C.F.R. § 240.13d-101 (1974), for those required to file thereunder. This Schedule must be filed with the Commission and the issuer's listing exchanges (here the American Stock Exchange), and served upon the issuer, within ten days after the acquisition of more than five-percent of the issuer's stock.
Amendments thereto are required when material changes occur in the facts stated therein. § 13(d)(2), 15 U.S.C. § 78m(d) (2).
In GAF Corporation v. Milstein, 453 F.2d 709 (2d Cir. 1971), cert. denied, 406 U.S. 910, 31 L. Ed. 2d 821, 92 S. Ct. 1610 (1972), the purpose of § 13(d) was explicated:
That the purpose of section 13(d) is to alert the marketplace to every large, rapid aggregation or accumulation of securities, regardless of technique employed, which might represent a potential shift in corporate control is amply reflected in the enacted provisions. Section 13(d)(1)(C) requires the person filing to disclose any intention to acquire control. If he has such an intention, he must disclose any plans for liquidating the issuer, selling its assets, merging it with another company or changing substantially its business or corporate structure. It is of some interest, moreover, that section 13(d)(6)(D) empowers the Commission to exempt from the filing requirements "any acquisition . . . as not entered for the purpose of, and not having the effect of, changing or influencing the control of the issuer or otherwise as not comprehended within the purpose of [section 13(d)]."
453 F.2d at 717. See also H.R. Rep. No. 1711, 90th Cong., 2d Sess. 8-9 (1968); Comment, Section 13(d) and Disclosure of Corporate Equity Ownership, 119 U.Pa.L.Rev. 853 (1971).
Addressing the first of plaintiffs' § 13(d) claims, defendants admit they failed to file a Schedule 13D within ten days of April 15, 1970, but argue that they were under no obligation to do so; and, further, that if they were guilty of a statutory violation, it was somehow cured by the several disclosures, both before and after April 15, 1970, of the fact of their control of M-A.
Thus they contend that they were not obliged to file under § 13(d), since their assumption of control, through L & S's acquisition of M-A's shares from the Gross family, was accomplished not covertly but rather with the knowledge and cooperation of the then management, personified by Mr. Isidor Gross.
The evil intended to be cured by § 13(d), non-disclosure to management and the market place of a potential corporate "take-over," did not exist, they say, in the circumstances attending their purchase. Defendants succinctly argue: ". . . there was no failure to alert management of the shift in control since it was management itself from whom the stock was purchased." Defs. Br. at 41.
Next, defendants advance the fact that the April 1970 acquisition was heralded, first, a month in advance of, and then on the day of closing, by widely distributed press releases. Berick Affidavit, paras. 5 and 6.
After acquisition of control, defendants next contend that there was a "continuous stream of public disclosure over the last four and one-half (4-1/2) years" in the 1970-1973 Proxy Statements and in the various filings with the Commission.
Defs.Br. at 41-42.
Plaintiffs' response to the defendants' disclaimers of § 13(d)'s application to the 1970 events is two-pronged. First, plaintiffs argue that no matter how extensive the disclosure, the defendants' non-filing of a Schedule 13D in April 1970 served to conceal from M-A's stockholders and the investing public for over four years one vital fact required to be stated under § 13(d)(1)(B), namely, that Lerner and Saltzman had financed their M-A stock purchase by borrowing $700,000, at the same time granting their lenders an option to purchase 19,000 shares of M-A stock at the price paid by Lerner and Saltzman.
Shielding this information from disclosure, plaintiffs claim, makes defendants' violation not merely technical, but most substantial.
More fundamentally, plaintiffs claim that the mere fact that the replaced management (here Gross) was aware of the new "control" group's presence, does not excuse compliance with the § 13(d) filing requirement.
Plaintiffs have the better of the dispute. First, the disclosure of the "take-over" to the public and the stockholders, while demonstrative of the new owners' openness and candor, and supportive of their claim of ignorantia legis, Defs. Br. at 40, did not relieve the Lerner group of its statutory obligation to file a Schedule 13D. Second, § 13(d) was intended to protect not only the old management, but, as well, stockholders and the investing public. See Bath Industries v. Blot, 305 F. Supp. 526, 538 (E.D.Wisc. 1969), aff'd, 427 F.2d 97 (7th Cir. 1970).
Dealing with the first of plaintiffs' § 13(d) claims, then, the fact that L & S, Lerner and Saltzman should have filed initially under § 13(d) not later than April 25, 1970 is self-evident. It is equally obvious, as already stated, that they did not do so until August 5, 1974, thus violating the statutory mandate, however innocent their oversight. Mosinee Paper Corp. v. Rondeau, 500 F.2d 1011 (7th Cir. 1974).
Given the violation, what is the remedy and what are the sanctions to be applied by this court on plaintiffs' application?
Plaintiffs' position is that, by virtue of the aforesaid violation, they are now entitled to the drastic interim relief sought in their complaint.
The violation of § 13(d), however, does not automatically cause the invocation of the drastic sanctions plaintiffs seek. The unusual circumstances of this case require, in the interest of justice and equitable principles, a careful sifting of the facts before settling upon the appropriate form of relief.
It is evident from the facts heretofore related that L & S, and Lerner and Saltzman did not, in the manner of the feared corporate buccaneer, stealthily creep up upon and dethrone M-A's management in April 1970. Their control was achieved by purchase from the dominant management figure, Isidor Gross, then Chairman of the Board and president of M-A, who, after the purchase, remained as a director (see 1970 Proxy Statement, Exhibit C to Berick Affidavit); and defendants broadcast widely what they were about to do, and what they did do. Furthermore, this court accepts the unchallenged assertions of Lerner, Saltzman and L & S that their counsel failed to advise them of the filing requirement, see Defs. Br. at 40; Berick Affidavit, para. 4, and finds that the failure to file a Schedule 13D in April 1970 was inadvertent and devoid of any intent to violate the law or conceal vital facts from management, M-A's stockholders, or the investing public. Cf. Cary, Corporations 548-49 (4th ed. 1969).
Nor are there any facts involved in the Lerner group's management of the business, after April 15, 1970, which would undercut the conclusion that the 1970 violation of § 13(d) was merely a technical one, harming no significant interests intended by that statute to be protected, and depriving no one of information material to their investment decisions. Certainly plaintiffs, and Gross (who is substantially financing this suit), and, as well, the proxy contest), knew in the post-1970 period that the Lerner group was in control. Scott, since June 8, 1971, has been retained by M-A as a "finder" of acquisitions pursuant to written agreement; and Gross and his wife each has an unexpired consulting agreement with M-A which has 5-1/2 years remaining, representing combined future receipts of about $250,000. It is also noteworthy that the plaintiffs nowhere contend that they, or other stockholders or the investing public, were unaware of the persons who controlled M-A, and they offer no complaint about the company's management after April 1970. Additionally, the record is bare of any issue having been contemporaneously raised concerning the accuracy or adequacy of M-A's Proxy Statements in 1971, 1972 or 1973. Nor do the plaintiffs now complain that the defendants were guilty in or after 1970 of any manipulative practices related to the price of M-A's shares.
Continuing the detailing of the company's affairs, in May 1973 M-A began relocation of its facilities from Cranford, New Jersey to Dallas, Texas, completing this in April 1974. It remains a New Jersey corporation, however, although it no longer has any facilities here.
The New Jersey Business Corporations Act having been amended in 1968, counsel advanced to M-A's management in 1973 the existence, under the law as amended, of the right to change the certificate of incorporation (by a two-thirds vote) to provide for stockholder approval by a majority vote of mergers, consolidations, liquidations, and bulk sales of assets out of the ordinary course of business. Collier Affidavit, para. 3, and Exhibit A thereto. Management submitted this question and others suggested by counsel to the stockholders in its 1973 Proxy Statement (Lerner Affidavit, para. 6), and it was adopted at the September 1973 annual meeting.
As the Proxy Statement for the upcoming meeting states (Complaint, Exhibit A at 17), M-A's management entered into merger discussions with Research-Cottrell, Inc. in November 1973. Discussions were abandoned on February 25, 1974 because of "the steady weakening in the market price and trading volume of Research-Cottrell shares."
It further appears that Combustion Engineering, Inc., through one Kiamie, made a telephonic inquiry in mid-August 1974 of Lerner which, at most, was nothing more than an indication of interest in acquiring M-A. Nothing came of this. Defs. Br. at 34; Lerner Affidavit, paras. 26-27.
It thus can be said that from and after April 1970, into June 1974, the Lerner group's failure to file Schedule 13D when it acquired control had caused no injury to anyone to any substantial degree. As has been stated, the replaced management certainly cannot claim it was thereby damaged. Stockholders and investors, even including plaintiffs herein, do not and cannot claim they were misled or deceived. All were fully apprised of the change in control. None can validly claim he was kept ignorant of the potential for a shift in control which, where it exists, may influence a decision to buy or sell securities. Mosinee Paper Corp. v. Rondreau, supra. No contention is advanced upon any theory, tenuous or otherwise, that the corporation, its stockholders, or the investing public suffered any harm, let alone the irreparable injury requisite to the drastic remedy of the injunctive relief plaintiffs herein seek.
Finally, no explanation is given for delaying over four years before asserting a complaint grounded upon defendants' § 13(d) violation in 1970.
Under the foregoing circumstances the drastic relief of disenfranchisement of Lerner, Saltzman and L & S, or the other interim relief sought by plaintiffs, would be grossly inappropriate. As has been said in a more cheerful environment than securities law:
My object all sublime
I shall achieve in time --