The opinion of the court was delivered by: JOHNSON
This matter is before the Court upon the motion of the plaintiff, Riggs National Bank of Washington, D.C., ("Riggs") for a preliminary injunction, enjoining defendants Joe L. Allbritton, Pierce National Life Insurance Company ("Pierce"), University Bancshares, Inc. ("University") and Perpetual Corporation ("Perpetual") from continuing with or effectuating the cash tender offer for shares of Riggs stock heretofore commenced by defendant Allbritton, acquiring or attempting to acquire in any manner any shares of Riggs stock, and other actions related to the acquisition and use of shares of such stock.
Upon the application of the plaintiff and after oral argument by counsel for the parties, on February 26, 1981, the Court issued a Temporary Restraining Order enjoining defendants from continuing with or effectuating the tender offer of Riggs stock commenced by defendant Allbritton, and certain related acts, pending a hearing on the motion for preliminary injunction.
Upon consideration of the plaintiff's motion for a preliminary injunction, the memoranda of points and authorities in support thereof and in opposition thereto, the evidence adduced at the hearing on this matter, the oral arguments of counsel for the parties, the record before the Court, and for the reasons more fully set forth below, the Court will grant the motion of the plaintiff, the Riggs National Bank of Washington, D.C. for a preliminary injunction enjoining defendants from proceeding with the tender offer.
BACKGROUND OF THE LITIGATION
The plaintiff Riggs is a national banking association, conducting general commercial banking and trust business in the District of Columbia. The record establishes that there are 2,992,131 shares of Riggs common stock outstanding, and that the stock is publicly traded in the over-the-counter market. Defendant Allbritton is Chairman of the Board and a director of defendant Pierce, a California corporation with its principal place of business in Los Angeles, California; defendant University, a Texas corporation with its principal place of business in Houston, Texas; and defendant Perpetual, a Delaware corporation with its principal place of business in Houston, Texas. Perpetual owns all of the capital stock of Pierce and both University and Perpetual are wholly-owned by defendant Allbritton. At the time the complaint was filed, Allbritton owned 237,645 shares of Riggs common stock, representing approximately 7.9% of the outstanding shares, and University and Pierce owned 149,000 shares (5.0%) and 63,770 shares (2.1%), respectively. Pierce acquired its shares in open market transactions during late 1979 and early 1980, while Allbritton and University acquired their 386,645 shares pursuant to an agreement executed on December 3, 1980, between them and certain shareholders affiliated with Jorge E. Carnicero ("Carnicero Purchase"), a director of Riggs. The purchase of these shares was completed on January 22, 1981. However, the record reflects that on or about February 27, 1981, Allbritton purchased all of the shares owned by University. Together, the defendants Allbritton and Pierce now own 450,415 shares of Riggs stock or approximately 15% of the outstanding shares as of December 1980.
On February 9, 1981, Allbritton publicly announced a cash tender offer ("Offer") for 600,000 shares of Riggs common stock at a price of $ 67.50 per share. The Offer to Purchase indicates an expiration date of March 10, 1981, at 10:00 a.m., New York City time, unless extended,
and that the Offer is not conditioned upon any minimum number of shares being tendered. The Offer provides that the Purchaser reserves the right to elect to purchase more than 600,000 shares and contains provisions for the purchase of shares on a pro rata basis under certain circumstances. Under the terms of the Offer, all tenders are irrevocable, except that shares tendered may be withdrawn prior to the date the Purchaser intends to commence purchasing, which was to have been March 3, 1981,
and after April 9, 1981. The Offer states as its purpose the acquisition of a substantial equity interest in the Bank with the power to control or to influence control over the Bank. It is undisputed that if the 600,000 shares are purchased, the Purchaser and his affiliates will own approximately 35% of the outstanding shares of Riggs and that this percentage of shares may constitute effective control of the Bank by the Purchaser.
CONTENTIONS OF THE PLAINTIFF
In the complaint in this action filed on February 24, 1981, the plaintiff Riggs National Bank contends that the Offer fails to disclose material information in violation of Section 14(e) of the Securities Exchange Act of 1934 ("1934 Act"),
and in particular, the anti-fraud provision of the Williams Act, 15 U.S.C. § 78n(e) which 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 light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative 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.
Riggs argues the Offer to Purchase contains no information concerning the financial condition of defendant Allbritton, the other named-defendants, or any other of his affiliated corporations, including financial statements, and cash flow and capitalization statements. This failure, it is argued, deprives the shareholders of material information concerning the consequences of the offer and the defendants' ability to repay the loans to be incurred for the purchase.
The plaintiff reasons that since all Riggs stock acquired by Allbritton will be used as security for his loans for the purchase, his ability to repay the loans and the manner in which it is feasible for him to do so may well be of major consequence to the future of Riggs. Thus, information concerning the personal finances of Allbritton are indeed material to a shareholder's investment decision. Plaintiff urges that defendants are required to disclose and to file financial statements, preferably audited, on some combining or consolidating basis which would reflect the intricate relationships between Allbritton and his affiliate corporations. The plaintiff further submits the Offer fails to reveal the fact that the formation of a bank holding company ("Holding Company Transaction"), which is the subject of a proxy solicitation filed on February 6, 1981, and a matter to be voted upon at the April 22, 1981, shareholder's meeting, will cause the default of the loans to be incurred by Allbritton in the purchase of the offered shares. Such default could result in grievous harm to Riggs shareholders by the rapid decline in the market value of Riggs stock which would be occasioned by a forced sale of Allbritton's shares. Plaintiff advances that this information is material to a shareholder who must decide whether to sell, hold, or tender his shares of Riggs stock.
Plaintiff alleges in its complaint that while the Offer states that Allbritton is opposed to the Holding Company Transaction initiated by the present management of Riggs, the materials fail to state the reasons for such opposition or to set forth any information with respect to the proposed transaction. Plaintiff asserts that while the Offer reflects that Allbritton might favor a different form of holding company transaction and that he has considered and will continue to consider various alternative structures with regard to a holding company for Riggs, it fails to disclose any further information concerning these considerations or the factors that will influence Allbritton's contemplation of a holding company transaction or other plans he would propose for Riggs. Plaintiff points to the above as violative of two provisions of the 1934 Act. First, arguing that Allbritton has formulated a series of plans and projections based on a holding company as a vehicle for the repayment of the debt to be incurred by the tender offer purchases, plaintiff urges the Offer fails to disclose adequately the magnitude of these plans and their adverse consequences for Riggs. This failure to disclose plans to change the bank's business structure is asserted by plaintiff to be violative of the Williams Act. Additionally, the plaintiff contends the Offer may be viewed by shareholders as an alternative to the proposed Holding Company Transaction, or as an initial step in influencing their decision whether to submit proxies to approve the Transaction. Plaintiff submits the Offer thus constitutes a proxy solicitation and defendant's failure to comply with certain filing and disclosure requirements related to proxy solicitations, violates Section 14(a) of the 1934 Act, 15 U.S.C. § 78n(a) and the Comptroller's Rules thereunder. The plaintiff also alleges violations of Sections 14(d) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78n(d) and 78n(e), maintaining that defendants Allbritton, University, and Pierce have acted as a group to make the stock purchases, but that the Offer fails to identify University and Pierce along with Allbritton as the true bidders, and fails to disclose information about these corporate bidders. Thus, plaintiff argues that shareholders are deprived of material information necessary for them to make informed investment decisions. Other violations of the 1934 Act as claimed by the plaintiff include the violation of Section 13(d), 15 U.S.C. § 78m(d), by the defendants' failure to notify the Comptroller of the Currency at the time of the filing of the required forms and amendments in connection with the Carnicero Purchase, of their intention to acquire control of Riggs. Arguing that defendants had formulated the intent to make a tender offer and to acquire control of the bank well in advance of the date the Offer was announced, plaintiff submits defendants were obligated to amend their filings with the Comptroller in a timely fashion to reflect these intentions, as well as to disclose loan arrangements with third parties in connection with the tender offer. Further, plaintiff alleges that defendant Allbritton was obligated, under the Change in Bank Control Act of 1978, 12 U.S.C. § 1817(j) and as part of his Notice of Change in Bank Control filed December 8, 1980, to furnish the Comptroller with a description of his borrowing arrangements for the tender offer, an identification of persons to be retained to make solicitations to stockholders, and copies of all invitations or tenders or advertisements to be used in connection with the proposed acquisition. Thus, plaintiff attempts to raise a question as to whether the Office of the Comptroller has in fact approved
the tender offer, or if it has, whether it had sufficient information before it at the time of such approval.
Based upon the foregoing, the plaintiff urges that unless defendants are enjoined the shareholders of Riggs stock will be irreparably harmed by being forced to make an important investment decision in the absence of complete and material information regarding the qualifications and intentions of the offering party. Plaintiff submits that this harm will be greater than any injury that may result to defendants by the issuance of an injunction, since the tender offer can be made at a later time. Contending that the public interest will be served and that it has a likelihood of succeeding on the merits of its claim, the plaintiff contends it has demonstrated its entitlement to injunctive relief.
CONTENTIONS OF THE DEFENDANTS
to the complaint and in opposition to the motion for preliminary injunction the defendants vigorously assert that financial information concerning the defendants need not be disclosed. To support this position the defendants first contend there is no per se requirement that an offeror include financial statements in its offering materials, and in particular, there is no specific requirement that financial statements of a bidder who, like Allbritton, is a natural person be disclosed. Arguing that the financial statements of a natural person may be required only under special circumstances making such information "material", defendants maintain the financial condition of Allbritton is not "material" within the meaning of the word as interpreted by case law on the subject. Defendants reason that shareholders who tender their Riggs stock for purchase and whose tenders are accepted, are concerned only with the payment to them of the price per share as offered. Defendants further suggest that, with respect to shareholders who decline the offer, only a poor financial condition of the bidder would be material to a decision, since such condition might be indicative of future corporate difficulties. Maintaining there is no question but that Allbritton is a person of substantial wealth and that his reputation as such is well-established, defendants declare there is no need for disclosure of particulars concerning his wealth.
In further response to plaintiff's claims under the Williams Act, defendants contend there is no need to disclose information concerning debt repayment and cash flow in that there is no genuine question about Allbritton's ability to repay the debt to be incurred for the purchases and further, that the inclusion of such data would only serve to confuse the shareholders. Also, with respect to other alleged nondisclosures as to Allbritton's future plans and the possibility of default, defendants assert that securities laws do not require speculation as to future events, and that such speculation could be misleading.
In opposition to plaintiff's claim that Allbritton failed to disclose to the Comptroller in pre-offering filings his intent to acquire control of Riggs by way of a tender offer, defendants first urge that any nondisclosure was subsequently cured by the filing of the tender offer on February 9, 1981, and the need for an injunction therefore is obviated. However, defendants further state the pre-offering filings were accurate since the evidence demonstrates that Allbritton did not actually decide to make a tender offer before February 8, 1981. Although admittedly some preliminary planning took place before that time, defendants urge it is the timing of the decision that is critical to this issue and the formation of Allbritton's intent to make the tender offer.
Defendants refute plaintiff's assertion that they have engaged improperly in a proxy solicitation, arguing that the Offer is not a solicitation within the meaning of the applicable statute and rules. In any event, they contend the appropriate remedy for a violation of these laws would be for the Court to order a resolicitation of the Offer and/or postponement of the shareholders meeting rather than enjoin the tender offer.
Lastly, defendants submit the plaintiff has brought this action solely for the purpose of thwarting the tender offer. Alleging that plaintiff has violated its fiduciary obligations to its shareholders by refusing to consider seriously the tender offer and to act in the best interest of the shareholders, defendants advance the doctrine of unclean hands as a basis for this Court to deny the plaintiff the equitable relief it seeks.
For the foregoing reasons defendants declare that the plaintiff has failed to demonstrate its entitlement to a preliminary injunction, and in particular, that it has not shown a likelihood of success on the merits, that the irreparable harm asserted is only to Riggs management and not to the shareholders, the real parties in interest, and that on balance, more harm will indeed result to the defendant Allbritton if the injunction is granted than will result to the plaintiff if denied.
REQUIREMENTS FOR A PRELIMINARY INJUNCTION
The four factors to be considered by this Court in determining whether to grant preliminary injunctive relief are (1) the likelihood that plaintiff will prevail on the merits; (2) whether the plaintiff will suffer irreparable harm if injunctive relief is not granted; (3) a balance of the equities whether more harm will result to the plaintiff from the denial of injunctive relief than will result to the defendants from the grant of such relief; and (4) if appropriate, the public interest. Virginia Petroleum Jobbers Association v. Federal Power Commission, 104 U.S.App.D.C. 106, 259 F.2d 921 (1958). The Court of Appeals of this Circuit, in interpreting the first factor enunciated in Virginia Petroleum Jobbers, has held that "a court, when confronted with a case in which the other three factors strongly favor interim relief, may exercise its discretion to grant a stay if the movant has made a substantial case on the merits." Washington Metropolitan Area Transit Commission v. Holiday Tours, Inc. 182 U.S.App.D.C. 220, 222, 559 F.2d 841, 843 (1977) "The necessary "level' or "degree' of possibility of success will vary according to the Court's assessment of the other factors." Id. 559 F.2d at 843. The Court will analyze each factor separately.
Securities Exchange Act of 1934 and Williams Act Claims
Where the bidder is other than a natural person and the bidder's financial condition is material to a decision by a security holder of the subject bank whether to sell, tender or hold securities being sought in the tender offer, furnish current, adequate financial information concerning the bidder.
The Comptroller's rules define the term "bidder" as "any person who makes a tender offer or on whose behalf a tender offer is made" 12 C.F.R. § 11.5(1)(2) (i). The plaintiff construes these and other provisions of the 1934 Act and applicable rules to require that University and Pierce, as well as Allbritton, be described as bidders in the Offer. The plaintiff maintains that since University and Pierce were part of the group that participated in the Carnicero Purchase, and since it is clear the shares held by the group will be voted together to veto the Holding Company Transaction, the defendants' failure to identify fully the group as the bidders on the tender offer violates Sections 14(d) and 14(e) of the 1934 Act, since the Offer is obviously being made on behalf of Allbritton, University, and Pierce. While the Court, at this time, does not find, as urged by defendants, that the decision of the Federal Reserve Board is entitled to a collateral estoppel effect upon the identical issue in this case, the Court must give consideration to the evidence presented herein. The evidence clearly and convincingly establishes that the debt to be incurred for the purchase of the tendered shares is to be assumed solely and personally by Allbritton. There is further evidence that during Allbritton's discussions and negotiations regarding the tender offer, the focus was upon him as sole purchaser. Plaintiff submits that Allbritton is acting with Pierce and University as a "group" in this Offer and presents evidence to support its position. The Court finds, however, that there is no credible evidence direct or circumstantial from which it may find or infer that relative to the instant Offer Allbritton is acting in conjunction with his affiliates. The Court finds, therefore, that defendant Allbritton is the sole bidder in the Offer.
The second issue to be addressed is whether Allbritton, as the sole purchaser and bidder, has failed to adequately disclose material information, in violation of Section 14(e) of the 1934 Act. Both parties concur generally that the purpose of the Williams Act, which was adopted in 1968 in response to the proliferation of cash tender offers as a means for securing corporate control, "is to insure that the public shareholders who are confronted by a cash tender offer for their stock, will not be required to respond without adequate information ...." Piper v. Chris-Craft Industries, 430 U.S. 1, 35, 97 S. Ct. 926, 946, 51 L. Ed. 2d 124 (1977), citing Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 95 S. Ct. 2069, 2076, 45 L. Ed. 2d 12 (1975). The legislation requires takeover bidders to file a statement with the SEC, and in circumstances involving a national bank, with the Comptroller of the Currency, indicating among other things, the background and identity of the offeror, the source and amount of funds or other consideration to be used in making the purchases, the extent of the offeror's holdings in the target corporation, and the offeror's plans with respect to the target corporation's business or corporate structure. 15 U.S.C. § 78m(d)(1). The anti-fraud provision of the Williams Act focuses on the inclusion in a tender offer of "any untrue statement of material fact" and the omission from an offer of "any material fact necessary in order to make the statements made ... not misleading". 15 U.S.C. 78n(e). The operative word is "material" and Congress saw fit to leave the term to judicial interpretation. The general standard of materiality under the federal securities laws is defined by the Supreme Court:
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.... It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 (1976), as applied to Section 14(e) in Seaboard World Airlines, Inc. v. Tiger International, Inc., 600 F.2d 355, 361 (2d Cir. 1979); Flynn ...