Petition — Unitex Ltd. v. Dan River, Inc.
Supreme Court brief1980
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80-293
AUG26 1980
No. MICHAEL RUWAK, JR., CLERK
In THE
Supreme Court of the United States
October Term, 1980
©
UNITEX LIMITED, et al.,
Petitioners,
versus
DAN RIVER, INC.,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
MICHAEL W. SCHWARTZ
299 Park Avenue
New York, New York 10171
(212) 371-9200
Counsel for Petitioners
WACHTELL, LIPTON,
ROSEN & KATZ
Of Counsel
August 26, 1980
Petitioners Unitex Limited, Mannip Limited, Cheng Fur She,
Cheng Lee Kit-Yiu, Philip Y. S. Cheng, Lee Chen Che, Liu
Han Tang, Yang Yuan Loong and Dora Yang respectfully
pray that a writ of certiorari issue to review the judgment and
opinion of the United States Court of Appeals for the Fourth
Circuit entered in this proceeding on May 29, 1980.
Questions Presented
1. Whether it is permissible consistently with this Court's
recent decisions refusing to imply private rights of action under
the securities laws to imply a private right of action in favor of
a target company under Section 13(d) of the Securities Ex-
change Act of 1934 so as to enable the target company to seek
injunctive or other equitable relief against the acquisition of
its shares.
2. Whether, even assuming such a Section 13(d) cause of
action can properly be implied in the target company’s favor,
the opinion of the Court of Appeals in this case is consistent with
this Court’s opinion in Rondeau v. Mosinee Paper Corp., 422
U.S. 49 (1975), with respect to the availability of equitable
relief to the target company in such a Section 13(d) case.
Parties Below
In the Court below, the petitioners were defendants-appellees.
The other defendants-appellees in that Court were Wardley Lim-
ited (named in the Court below as The “Doe” Finance Company
of Hong Kong and “XYZ” Company) and The Chartered Bank
(named in the Court below as The “Roe” Bank of Hong Kong);
the opinion of the Court below directed the District Court on
remand to dismiss those two parties from the action. Respondent
in this Court was plaintiff-appellant in the Court below.
TABLE OF CONTENTS
PAGE
SE SIMEON RUDI Siic.tin oo 0c wieisis 00 0d cls taeie eed i
re anh ee an Sk ka) a erese 0.0.90 Oh ods i
OPINIONS AND JUDGMENT BELOW ...............55: 1
BC aida st ses cesses 1
STATUTORY PROVISIONS INVOLVED ...............05: 1
STATEMENT se a a aes ave 2
REASONS FOR GRANTING THE WRIT ...............-.- 7
1. The Court of Appeals for the Fourth Circuit has
decided an important question of federal law which
has not been, but should be, settled by this Court: the
standing of a “target” company to assert an implied
right of action under section 13(d) ............ 7
2. The decision below conflicts with the decisions
of this Court as to the availability of injunctive relief
in the absence of irreparable harm .............. 14
ee hh ae bd bh Aa Netnn np 0.08 .0,0 010-0 0.09 9 16
APPENDIX A—Court of Appeals Decision ............ la
APPENDIX B—Transcript of District Court’s Decision... 24a
APPENDIX C—Judgment of Court of Appeals.......... 32a
APPENDIX D—Statutes Involved ...............0000- 33a
TABLE OF AUTHORITIES
Cases:
Bath Industries, Inc. v. Blot, 427 F. 2d 97 (7th Cir. 1970) 7
Beacon Theatres, Inc. v. Westover, 359 U.S. 500 (1975) 14
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723
ae ae aa Oa 6 bea dbs Nae Rae Dee ee 11
iii
Burks v. Lasker, 441 U.S. 471 (1979) ............05- 11
Chromalloy American Corp. v. Sun Chemical Corp., 611
io RE EE MS IPE id's. o') o Sikes Winds o Gas Ge 7
Re ee Be a Re ys) Sane 13
GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971),
cert. denied, 406 U.S. 910 (1972) .............. 7
Gateway Industries, Inc. v. Agency Rent A Car, Inc. [Cur-
rent] Fed. Sec. L. Rep. (CCH) { 97,540 (N.D. Il
PU TG BOO) eo S.ais s Sets CMAs eeceee 7, i263
General Aircraft Corp. v. Lampert, 556 F. 2d 90 (lst
Rls EEE Be iis'h seh Wie ie bk Deh kas Oa tee ees 7 Ge
Hecht Co. v. Bowles, 321 U.S. 321 (1944) .......... 14
International Brotherhcod of Teamsters v. Daniel, 439 U.S.
PORTED. 40 EU Ras HERA Hees oe oa ae ee 11
J. I. Case Co. v. Borak, 377 U.S. 426 (1964)...... 10, 11
Missouri Portland Cement Co. v. H.K. Porter Co., 535 F.
ee Ee TOD ok bn. wh de wa a ode nalkiw cia 15
Piper v. Chris-Craft Industries, Inc., 430 U.S. 1
CERFT). 6baerhakaan dn tatie cs ew 8, 9, 10, 13, 15
Rondeau v. Mosinee Paper Corp., 422 U.S. 49
CROVOd 5c theese rcdedace uae ., 3... oe bas Be he
Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) - 11
S-G Securities, Inc. v. Fuqua Investment Co., 466 F. Supp.
ERG GER BO ROTO) 6k obs Chk ow tae cee dee 15
Sta-Rite Industries, Inc. v. Nortek, Inc., Civil Action No.
80-C-471 (E.D. Wis. Aug. 1, 1980) ............. 7
Touche Ross & Co. v. Redington, 442 U.S. 560
ER Ae prin gy i 5 pt NN 7, 10, 11, 12
Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis,
GEG Bis SEZIGIO) Sos van adie pie ckhes 7, 10, 11, 12
Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979) 7
iv
Statutes:
Investment Advisers Act:
Section 206, 15. U.S.C. §60-B-6 0... cece cceects 12
Securities Act of 1933:
Gets S25, 35 UGS Fick kei s Costtete 8
Section 12,15 USC. § TM ic ces ccwccecaccoes 8
Section: 15,15: USC. SF7O. evisvscstecvs severe 8
Securities Exchange Act of 1934:
Soctinn By. ES TBR STG sok kc cccie se Cee ae 8
Section 13(d), 15 U.S.C. § 78m(d) ...... passim, 33a
Section 14(a), 15 U.S.C. § 78n(a) .........46-. 10
Section 14(e), 15 U.S.C. § 78n(e) ..........06- 9
Sects 1G TF WG-8 TG i oiice oc eed ceca ccc 8
Section 17(a), 15 U.S.C. § 78q(a) ...........4.- 12
Section 18(a), 15 U.S.C. § 78r(a).... 1, 8, 12, 15, 36a
DE DA, EP TE Wes ct etecaseaus te 8
Section 21(a), (d), 15 U.S.C. § 78u(a), (d)..... 12
Section 27, 15 US. STGOR ow svc secanecsver 3
S. Rep. No. 550, 90th Cong., Ist Sess. 3 (1967)...... 13
£13 Cong. Rec. 24664 (1967) .....cccccccccccoeess 10
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
Opinions and Judgment Below
The opinion of the Court of Appeals, not yet officially re-
ported, appears unofficially at [Current] Fed. Sec. L. Rep.
(CCH) § 97,515 and is set forth as Appendix A hereto.* The
Court of Appeals reversed and remanded with instructions an
order and judgment of the United States District Court of Vir-
ginia, Honorable D. Dortch Warriner, United States District
Judge, dated March 30, 1979. dismissing respondent’s amended
complaint for mootness and, therefore, lack of subject matter
jurisdiction. The unreported decision of the District Court is set
forth as Appendix B hereto. The judgment of the Court of
Appeals is set forth as Appendix C hereto.
Jurisdiction
The judgment of the Court of Appeals was entered on May
29, 1980. The jurisdiction of this Court is invoked under 28
U.S.C. § 1254(1).
Statutory Provisions Involved
Fhe principal statutory provision involved in this case is Sec-
tion 13(d) of the Securities Exchange Act of 1934 (the “Ex-
change Act”), 15 U.S.C. § 78m(d). Section 18(a) of the Ex-
*After the opinion of the Court of Appeals was filed on May 29, 1980,
the defendants-appellees in that Court filed motions to correct and modify
the opinion in certain respects. By order filed August 12, 1980, and
amended August 18, 1980, the Court of Appeals granted the motions
to the extent of modifying its opinion to add a paragraph expressly di-
recting the District Court to dismiss from the action defendants-appellees
Wardley Limited and The Chartered Bank, and to amend or delete
several sentences in its opinion to correct certain errors not relevant to
this petition. The opinion set forth in Appendix A hereto has been modi-
fied in accordance with the Court of Appeals’ order.
’%
i
2
change Act, 15 U.S.C. § 78r(a), is also involved here. The text
of both provisions is set forth as Appendix D hereto.
Statement of the Case
Respondent Dan River, Inc. (“Dan River”) is a Virginia
corporation primarily involved in the manufacture of textiles.
Petitioner Unitex Limited (“Unitex”), a Hong Kong corpora-
tion, is a manufacturer of men’s and women’s apparel, pri-
marily for the United States and European markets. Beginning
in November 1978, Unitex began purchasing shares of Dan
River common stock on the New York Stock Exchange. In late
1978, Unitex organized a wholly-owned subsidiary, petitioner
Mannip Limited (“Mannip”), a British Virgin Islands corpora-
tion, for the sole purposes of acquiring Dan River stock and
holding all Dan River stock then owned or later acquired on
behalf of Unitex. Unitex thereafter obtained a definitive line of
credit from Wardley Limited (“Wardley”) and The Chartered
Bank (“Chartered”), two Hong Kong-based banking corpora-
tions, to finance future purchases.
On January 29, 1979, Unitex transferred all its Dan River
stock to Mannip and all future purchases were made in Man-
nip’s name with funds advanced by Unitex. Mannip’s holdings
of Dan River stock first exceeded 5 percent of the issued and
outstanding shares on January 31, 1979. Consequently, on
February 9, 1979, Mannip filed with the Securities and Exchange
Commision (the “SEC”) and mailed to Dan River a Schedule
13D, in accordance with Section 13(d) of the Exchange Act
which requires such disclosure within ten days after a purchaser
~ acquires more than 5 percent of the outstanding shares of a
security registered under Section 12 of the Exchange Act. Man-
nip thereafter continued to purchase Dan River common stock
on the New \ ork Stock Exchange and filed amended Schedules
13D to report these additional purchases.
On February 22, 1979, two weeks after Mannip first filed
its Schedule 13D, Dan River commenced this action in the
3
United States District Court for the Eastern District of Virginia.
Suing solely under Section 13(d) and asserting an implied pri-
vate right of action in its favor under that statute, Dan River
alleged five claims charging Unitex, several of its directors and
their spouses* (the “individual defendants”), Mannip, Wardley
and Chartered with a variety of Section 13(d) violations.** The
complaint sought injunctive and other equitable remedies, spe-
cifically:
(1) a mandatory order requiring all defendants to file
full and complete Schedules 13D;
(2) an injunction preventing the defendants from mak-
ing further purchases of Dan River stock, or voting the
shares they owned, until they filed the Schedules 13D and
offered rescission to those Dan River shareholders from
whom they had purchased shares; and
(3) a prospective injunction restraining the defendants
from “further” violations of Section 13(d). |
The complaint did not seek damages or any other legal rem-
edy.***
Contemporaneously with the filing of its complaint, and prior
to service of process on any of the defendants, Dan River filed
a motion for a temporary restraining order and a preliminary
*Petitioners Cheng Fur She, Philip Y. S. Cheng, Lee Chen Che, Liu
Han Tang and Yang Yuan Loong are directors of Unitex. Petitioner
Cheng Lee Kit-Yiu, the wife of Cheng Fur She and the mother of Philip
Y. S. Cheng, is a housewife. Petitioner Dora Yang, the wife of Yang
Yuan Loong, is also a housewife.
**The first claim, pleaded only against Unitex, Mannip, and several
Unitex directors, charged that Mannip’s Schedule 13D omitted or mis-
stated various material facts.
The second through fifth claims consisted of varying assertions that
persons other than Mannip were required to file Schedules 13D as mem-
bers of Section 13(d) “groups” or as “beneficial owners” of the Dan
River shares held by Mannip.
***Subject matter jurisdiction in the District Court was founded on
Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
4
injunction seeking injunctive and rescissional relief substantially
identical to that sought in its complaint. Dan River also moved
for extensive, expedited discovery, including very substantial
document production and an intensive deposition schedule.
A hearing on Dan River’s motions was held on February 23,
1979, the day following commencement of the action. Because
of the extremely short notice that Dan River had chosen to
give, no defendant was able to submit either affidavits or a brief
for the hearing. The District Court heard oral testimony from
a single Dan River witness; no witness for any defendant tes-
tified. At the conclusion of the hearing, the District Court, ren-
dering its decision orally, found that Mannip’s Schedule 13D
appeared “to be deficient in some several particulars.” Although
the District Court expressed doubt as to whether the apparent
deficiencies provided a basis for granting equitable relief, it
nevertheless entered a temporary restraining order barring the
defendants from acquiring any additional Dan River stock until
the earlier of March 30, 1979, or twenty-four hours after the
filing of an amended Schedule 13D setting forth various facts.
On March 1, 1979, in prompt compliance with the District
Court’s order, Unitex and Mannip filed an amended Schedule
13D, setting forth in detail all the information called for by the
order. That same day, petitioners filed motions to dismiss the
complaint for lack of subject matter jurisdiction in that the
prompt filing of the amended Schedule 13D rendered moot the
only one of Dan River’s Section 13(d) claims which stated a le-
gally sufficient claim. Petitioners also argued that Dan River
lacked standing to assert an implied right of action under Sec-
tion 13(d). On March 2— just 24 hours after the new Schedule
13D was filed—Dan River amended its complaint to challenge
the new Schedule 13D. In addition to repeating and realleging
the allegations of its original complaint, Dan River added a
sixth claim for relief charging Unitex, Mannip and several Unitex
directors with violating Section 13(d) in that—‘on information
and belief’—the amended Schedule 13D filed just the day be-
fore was “materially false and misleading.” The amended com-
5
plaint prayed for the same equitable relief requested in the orig-
inal complaint.
When Dan River appeared before the District Court on March
2 to ask for a continuation of the restraining order, the Court
rejected the request, finding “that the defendants [hud] complied
with the substance of the Court’s injunction” in the amended
Schedule 13D. Moreover, the District Court expressed concern
about the existence of subject matter jurisdiction and directed
the parties to submit memoranda addressed thereto.* Although
Dan River renewed its application for discovery, the Court or-
dered discovery stayed until resolution of the potentially dis-
positive jurisdictional issues.
On March 30, 1979, after full written submissions and oral
argument, the District Court dismissed the amended complaint
for lack of subject matter jurisdiction (see Appendix B). The
Court held that, even if the amended Schedule 13D were false,
as Dan River alleged, Dan River would not be entitled under
this Court’s decision in Rondeau v. Mosinee Paper Corp., supra,
to the equitable relief it sought:
I recognize that [the Amended Schedule 13D] may be
false and misleading. If it is false and misleading the pro-
tected parties under the Williams Act have an adequate
remedy at law. If that is so, and I cannot imagine that it
is not so, then there’s no grounds for equitable relief.
—Appendix B, p. 27a.
The District Court thus concluded that there was no longer any
live “case or controversy” before it:
*The District Court also directed the parties to address the issue of
personal jurisdiction to which all defendants except Unitex and Mannip
had objected. No ruling was made on this ground by the District Court
in light of its eventual ruling on the issue of subject matter jurisdiction.
Similarly, although Unitex, Mannip, the individual defendants and
Wardley briefed the issue of Dan River’s standing to assert the Section
13(d) claim, the District Court had no occasion to decide this issue.
6
I do not believe that there is any basis for equitable
relief remaining in this case. That is the only relief that
was properly sought and under those circumstances I can’t
enter a judgment which would affect the actions of any-
one. Accordingly, I am going to direct that a docket entry
be made dismissing the action for mootness.
—Appendix B, p. 31a.
Dan River appealed to the United States Court of Appeals
for the Fourth Circuit which, on May 29, 1980, reversed the
District Court. As a threshold matter, the Court of Appeals
rejected the appellees’ contention that Dan River lacked stand-
ing to sue under Section 13(d). Although it acknowledged that
“Section 13(d) was enacted for the sole benefit of stockholders
and not to provide ‘armament’ to management in resisting take-
overs or accumulations of the stock of corporations,” the Court
of Appeals nonetheless found standing on behalf of Dan River
to assert alleged violations of Section 13(d) in an action for
equitable relief.
The Court of Appeals then considered the District Court’s
holding that Dan River’s action for injunctive relief was rendered
moot by the filing of the amended Schedule 13D and that Dan
River’s shareholders had an adequate remedy at law if, as al-
leged, the amended Schedule was false or misleading. Although
it recognized the existence of a legal remedy for Dan River’s
shareholders (see Appendix A hereto, p. 16a), the Court of
Appeals held that:
should Dan River establish that there is a reasonable basis
for concluding that the Schedule 13D filed by the defend-
ants is inaccurate, incomplete, or misleading in its state-
ment of any of the matters expressly demanded by section
13(d), the district court may and should grant appropriate
injunctive relief. . .. (Emphasis added).
—TId., p. 15a.
The Court of Appeals undertook its own review of the ade-
quacy of the amended Schedule 13D and concluded that:
Dan River has raised sufficient questions about the de-
fendants’ compliance with the law to require further ex-
ploration by the district court and the parties into the de-
fendants’ purpose in purchasing large amounts of Dan
River stock.
—Id., p. 20a.
REASONS FOR GRANTING THE WRIT
1. The Court of Appeals for the Fourth Circuit has
decided an important question of federal law which
has not been, but should be, settled by this Court: the
standing of a “target” company to assert an implied
right of action under section 13(d).
When the incumbent management of a public company at-
tempts to discourage purchases of its stock, it frequently resorts
to litigation. Among the foremost weapons in management’s
arsenal has been an action for injunctive relief under Section
13(d) of the Exchange Act, which has been implied by several
Courts of Appeals, including the Court below.*
However, this Court has never held that any such cause of
*E.g., Chromalloy American Corp. v. Sun Chemical Corp., 611 F. 2d
240 (8th Cir. 1979); General Aircraft Corp. v. Lampert, 556 F.2d 90,
94 n. 5 (1st Cir. 1977); GAF Corp. v. Milstein, 453 F.2d 709, 721-22
(2d Cir. 1971), cert. denied, 406 U.S. 910 (1972); Bath Industries, Inc.
v. Blot, 427 F.2d 97 (7ih Cir. 1970).
Although a number of district courts have also found Section 13(d)
standing for the target company, ¢.g., Wellman v. Dickinson, 475 F. Supp.
783, 817 (S.D.N.Y. 1979), two recent District Court decisions have held
that no such standing exists in light of this Court’s decisions in Trans-
america Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 US. 11 (1979)
and Touche Ross & Co. v. Redington, 442 U.S. 560 (1979). See Gate-
way Industries, Inc. v. Agency Rent A Car, Inc., [Current] Fed. Sec.
L. Rep. (CCH) {97,540 (N.D. Ill. June 10, 1980); Sta-Rite Industries,
Inc. v. Nortek, Inc., Civil Action No. 80-C-471 (E.D. Wis. Aug. 1, 1980).
8
action should be implied from Section 13(d) and there is grave
doubt that such an action actually exists in light of several re-
cent decisions of this Court restricting the scope of implied pri-
vate rights of action under the securities laws. Certiorari should
be granted so that this Court can definitively rule whether or
not it does. Petitioners submit that it does not.
Section 13(d), enacted as part of the Williams Act, requires
persons who acquire over five percent of any class of stock reg-
istered pursuant to the Exchange Act to file a statement with the
SEC and the target corporation indicating, inter alia, the “back-
ground and identity” of the purchaser, the source and amount
of funds used in making the purchases, the extent of the pur-
chaser’s holdings in the target corporation, and the purchaser’s
plan with respect to the target’s business or corporate struc-
ture. 15 U.S.C. § 78m(d)(1). The purpose of the Act is to in-
sure that public shareholders who are confronted by a takeover
bid will have adequate information with which to respond. See
Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 35 (1977);
Rondeau vy. Mosinee Paper Co., supra, 422 U.S. at 58.
Unlike other provisions of the federal securities laws,* Sec-
tion 13(d) makes no provision for a private right of action for
its violation. Thus, target corporations, like Dan River, are
constrained to argue for the judicial implication of a private in-
junctive remedy.
In Rondeau v. Mosinee Paper Co., supra, the sole case de-
cided by this Court directly involving Section 13(d), there was
no occasion to decide this issue of standing. The target corpora-
tion there sought injunctive relief against a purchaser of its stock
for failure to file a timely Schedule 13D. Finding no evidence
that the corporation or its shareholders had suffered “irreparable
harm,” the Court reversed the issuance of a permanent injunc-
tion. 422 U.S. at 57. As the Court viewed the case, the “narrow
“*See e.g., Sections 11, 12 and 15 of the Securities Act of 1933, 15
U.S.C. §§ 77k, 771, 770, and Sections 9, 16, 18(a) and 20 of the Ex-
change Act, 15 U.S.C. §$ 78i, 78p, 78r(a), 78t.
9
issue” before it was whether the record supported the grant of
injunctive relief. 422 U.S. at 57. Nevertheless, the Court ex-
pressly noted that:
Although neither the availability of a private suit under
the Williams Act nor [the target corporation’s] standing
to bring it has been questioned here, this cause of action
is not expressly authorized by the statute or its legislative
history.
—422 USS. at 62.
Moreover, the Court rejected the notion that Congress enacted
Section 13(d) in order to provide target management with the
means to deter takeover bids:
By requiring disclosure of information to the target cor-
poration as well as the Securities and Exchange Commis-
sion, Congress intended to do no more than give incum-
bent management an opportunity to express and explain
its position. The Congress expressly disclaimed an inten-
tion 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.
Subsequently, in Piper v. Chris-Craft Industries, Inc., supra,
an action brought by a defeated tender offeror against the target
company, its investment banker and a successful competitor for
control, the Court declined to imply a private damage action
under Section 14(e) of the Exchange Act, added by tie same
“Williams Act” amendments as added Section 13(d). After an
extensive review of the legislative history, the Court concluded
that “the sole purpose of the Williams Act was the protection
of investors who are confronted with a tender offer,” 430 U.S.
at 35, and that creating a damage action in favor of a defeated
tender offeror was “unnecessary to ensure the fulfillment of
Congress’ purposes in adopting the Williams Act.” Jd. at 41.
Although the Court did note that the target corporation’s stand-
ing to sue was not at issue in the case, id. at 42 n. 28, the Court’s
r%
7%
10
analysis of the legislative history of the Williams Act suggests
that the target’s standing is open to serious question.* As the
Piper Court concluded:
This express policy of neutrality scarcely suggests an in-
tent to confer highly important, new rights upon the class
of participants whose activities prompted the legislation
in the first instance.
—430 US. at 30.
Notwithstanding the foregoing, the Court of Appeals in this
case held that respondent does have standing under Section
13(d), following the lower court decisions in which it has been
held or assumed that a target corporation has such standing.
The Court of Appeals, like several of these other decisions, re-
lied upon the authority of J.J. Case Co. v. Borak, 377 U.S. 426,
432 (1964), in which this Court, citing the broad remedial pur-
pose of Section 14(a) of the Exchange Act, concluded that pri-
vate enforcement of the proxy rules was a “necessary supple-
ment” to their administrative enforcement by the SEC.
However, the recent decisions of this Court in Transamerica
Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11 (1979)
and Touche Ross & Co. v. Redington, 442 U.S. 560 (1979),
although not arising under the Williams Act, strongly suggest
that the Court of Appeals in this case has adopted an outdated
and now discredited mode of analysis of this issue. In Transamer-
ica and Touche Ross, this Court substantially recast the law re-
ee
*Thus, the Piper Court noted that, in enacting the Williams Act, “Con-
gress was intent upon establishing a policy of even-handedness in takeover
regulation.” Id. at 29. Sensitive to “strong criticisms that the proposed
legislation would unduly inhibit tender offers” and cognizant that “en-
trenched management, equipped with considerable weapons in battles for
control, tended to be successful in fending off possibly beneficial take-
over attempts,” id. at 30, Congress sought to “ ‘avoid tipping the scales
either in favor of management or in favor of the person making the
takeover bids.’” Id. at 31, quoting 113 Cong. Rec. 24664 (1967) (state-
ment of Senator H. Williams).
11
specting the implication of private rights of action.* These cases
hold that the judicial task in determining whether to imply a
private remedy “is limited solely to determining whether Con-
gress intended to create the private right of action asserted. . . .”
Touche Ross & Co. v. Redington, supra, 442 U.S. at 568 (em-
phasis added). Accord, Transamerica Mortgage Advisors,
Inc. v. Lewis, supra, 444 U.S. at 15-16, 24. Unless the language
of a provision, its place in the statutory schcme or its legislative
history convincingly demonstrates that Congress intended to
create or alter civil liabilities, no private right of action may be
implied.** After Touche Ross and Transamerica, therefore, it is
clear that implying a right of action for target companies under
Section 13(d) cannot be justified solely on the basis of the reme-
*Thus, in Touche Ross, while declining to overturn its previous deci-
sion in Borak, this Court clearly limited its precedential authority:
We do not now question the actual holding of that case, but we
decline to read the opinion so broadly that virtually every provision
of the securities Acts gives rise to an implied private cause of
action... .
. . . To the extent our analysis in today’s decision differs from
that of the Court in Borak, it suffices to say that in a series of cases
since Borak we have adhered to a stricter standard for the implica-
tion of private causes of action, and we follow that stricter standard
today... .
—442 USS. at 577-78.
**Transamerica and Touche Ross are entirely consistent with the serics
of cases decided by this Court in recent years narrowing the scope of the
federal securities laws, often in the context of private actions under the
Exchange Act. See, e.g., Burks v. Lasker, 441 U.S. 471 (1979) (Invest-
ment Company Act and Investment Advisers Acts); International Broth-
erhood of Teamsters v. Daniel, 439 U.S. 551 (1979); Santa Fe Indus-
tries, Inc. v. Green, 430 U.S. 462 (1977); Blue Chip Stamps v. Manor
Drug Stores, 421 U.S. 723 (1975).
Although these cases have involved, for the most part, issues of
statutory construction, they also reflect this Court’s recognition that
“(t]he potential for possible abuse of the liberal discovery provisions
of the Federal Rules of Civil Procedure may . . . exist in this type of
case to a greater extent then they do in other litigation.” Blue Chip Stamps
v. Manor Drug Stores, supra, 421 U.S. at 741. While the present lawsuit
is an action for injunctive relief rather than damages, the in terrorem
effect of litigation of this nature upon a program of stock purchases
such as was involved here is akin to the effect of liberal discovery rules
upon a defendant in a 10b-5 damage suit.
i
12
dial purposes of Section 13(d) and the “necessity” of implying
a private remedy.
Analyzing the language of Section 13(d) in light of Trans-
america and Touche Ross, there is nothing to suggest the exis-
tence of a private right of action on behalf of target companies.
Section 13(d) “does not in terms create or alter any civil liabil-
ities,” Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis,
supra, 444 U.S. at 19; it simply requires that certain disclosures
be made. Section 13(d) thus no more purports to create liabil-
ities enforceable in a private suit than do Section 17(a) of the
Exchange Act, 15 U.S.C. § 78q(a), from which the Court in
Touche Ross declined to imply a private right of action, or Sec-
tion 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6,
from which the Transamerica Court likewise refused to imply a
private right of action. For a full judicial analysis of the applica-
tion of Touche Ross and Transamerica to Section 13(d), see
Gateway Industries, Inc. v. Agency Rent A Car, Inc., [Current]
Fed. Sec. L. Rep. (CCH) 97,540 (N.D. Ill. June 10, 1980).
The place of Section 13(d) in the statutory scheme of en-
forcement under the Exchange Act further belies any Congres-
sional intent to create a private remedy on behalf of target cor-
porations. See Transamerica, supra, 444 U.S. at 19-20; Touche
Ross, supra, 442 U.S. at 571-73. Congress has granted the SEC
the power to investigate and to sue to enjoin violations of Section
13(d) and to refer evidence of Section 13(d) violations to the
Attorney General for the institution of criminal proceedings.
See 15 U.S.C. § 78u(a), (d). Moreover, Congress has pro-
vided for several express private remedies under other sections
of the Exchange Act, including one pursuant to Section 18(a)
on behalf of persons who purchase or sell stock in reliance upon
false or misleading statements made in documents, like Sched-
ules 13D, which are filed with the SEC. 15 U.S.C. § 78r(a);
see Appendix D hereto. “There is evidence to support the view
that § 18(a) was intended to provide the exclusive remedy for
misstatements contained in any reports filed with the Commis-
13
sion. . . .” Touche Ross, supra, 442 U.S. at 573 (emphasis
added). Accord, Gateway Industries, Inc. v. Agency Rent A
Car, Inc., supra, [Current] Fed. Sec. L. Rep. (CCH) $97,540,
at 97,818-20.
Finally, the legislative history of Section 13(d) does not sup-
port a finding of Congressional intent to confer upon target com-
panies a private action for injunctive relief and, indeed, is to
precisely the contrary effect. As this Court noted in both
Rondeau, supra, 422 U.S. at 58-60, and Piper, supra, 430 U.S.
at 26-36, the shareholders of the target company—and not the
target itselfi—are the intended beneficiaries of the Williams Act.
Indeed, the conduct of target companies in resisting takeover
attempts was one of the factors prompting the enactment of the
Williams Act. See p. 10 n.*, supra. Since the requirement that
the Schedule 13D be sent to the target was “intended to do no
more than give incumbent management an opportunity to ex-
press and explain its position,” Rondeau, supra, 422 U.S. at 58,
the target company is not an intended beneficiary of the Wil-
liams Act, let alone “ ‘one of the class for whose especial ben-
efit the statute was enacted,’ ” Piper, supra, 430 U.S. at 37, quot-
ing Cort v. Ash, 422 U.S. 66, 78 (1975). In light of Congress’
express disclaimer of any intention to provide a weapon for
target management to ward off takeover bids and the “ ‘extreme
care’ ” it took “ ‘to avoid tipping the balance of regulation either
in favor of management or in favor of the person making the
takeover bid,’ ” Rondeau, supra, 422 U.S. at 58, quoting S. Rep.
No. 550, 90th Cong., Ist Sess. 3 (1967), the implication of a
Section 13(d) right of action on behalf of the target company
not only does not further, but contravenes Congressional intent.
The significance of the question of federal law presented in
this case, its recurrent nature in the course of corporate litiga-
tion and the apparent inconsistency of the decision of the Court
of Appeals with the recent decisions of this Court concerning
the implication of private rights of action under the securities
laws all justify the issuance of a writ of certiorari to review the
decision below.
14
2. The decision below conflicts with the decisions of
this Court as to the availability of injunctive relief in
the absence of irreparable harm.
In Rondeau v. Mosinee Paper Co., supra, this Court reaf-
firmed that “the questions of liability and relief are separate in
private actions under the securities laws, and that the latter is
to be determined according to traditional principles.” 422 U.S.
at 64. The Court thus rejected the contention that the “bare
fact” that a party violates the Williams Act justifies the entry of
an injunction against him. /d. at 60. The basis of any grant of
injunctive relief in the federal courts “has always been irreparable
harm and inadequacy of legal remedies.” Id. at 57, quoting
Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506-07
(1975). Since injunctive relief is “historically ‘designed to
deter, not to punish,’” 422 U.S. at 62, quoting Hecht Co. v.
Bowles, 321 U.S. 321, 329 (1944), its issuance rests in the
“sound judicial discretion” of the federal District Court, sitting
as a court of equity. 422 U.S. at 61.
The Fourth Circuit’s decision clearly conflicts with these
strictures of this Court’s decision in Rondeau. The District Court
in this case had determined as a matter of its equitable discre-
tion that Dan River was not entitled to the equitable relief it
requested. In its opinion (Appendix B hereto, pp. 24a-31a)—
which is not adequately summarized in the Court of Appeals’
decision—the District Court carefully balanced a variety of fac-
tors in exercising the equitable discretion recognized in Rondeau
(see pp. 24a-25a, 27a-28a), carefully considered this Court’s
warnings against discovery abuses in securities laws litigation
(see pp. 25a-27a, 29a-30a), and concluded: “I do not believe
that there is any basis for equitable relief remaining in this case”
(p. 31a). Under Rondeau, this was the District Court’s deci-
sion to make.
Yet in remanding the case to the District Court for further
proceedings, the Fourth Circuit concluded:
[S]hould Dan River establish that there is a reasonable
basis for concluding that the Schedule 13D filed by the
15
defendants is inaccurate, .. . the district court may and
should grant appropriate injunctive relief... . (Emphasis
added)
—Appendix A, p. 15a.
The Fourth Circuit’s conclusion that the District Court on re-
mand “should” grant injunctive relief in the event it finds a vio-
lation cannot be squared with Rondeau’s holding that the pro-
priety of granting injunctive relief is a matter for the District
Court's “sound judicial discretion.” Thus, even if Dan River
were able to prove a violation of Section 13(d), the District
Court’s determination not to issue injunctive relief would be re-
viewable only as an “abuse of discretion”—-which the Court
of Appeals here did not find.
Petitioners submit, moreover, that the Fourth Circuit’s deci-
sion was erroneous because there was in fact no abuse of discre-
tion by the District Court and, indeed, no basis for the issuance
of injunctive relief in this case. As the District Court correctly
recognized, if, as Dan River alleges, the amended Schedule 13D
is false, any shareholder harmed thereby has an adequate
remedy at law for damages.* Rondeau, supra, 422 U.S. at 60
(“[T]hose persons who allegedly sold at an unfairly depressed
price have an adequate remedy by way of an action for damages,
thus negating the basis for equitable relief”); General Aircraft
Corp. v. Lampert, 556 F. 2d 90, 97 (1st Cir. 1977); Missouri
Portland Cement Co. v. H.K. Porter Co., 535 F. 2d 388, 399
(8th Cir. 1976); S-G Securities, Inc. v. Fuqua Investment Co.,
466 F. Supp. 1114 (D. Mass. 1978). Since Dan River simply
could not satisfy this traditional prerequisite of extraordinary
relief, the decision of the Court of Appeals conflicts with
Rondeau.
*See Section 18(a) of the Exchange Act, 15 U.S.C. § 78r(a), dis-
cussed at pp. 12-13, supra, which provides an express remedy for false
or misleading statements made in SEC filings. Since “the sole purpose
of the Williams Act [is] the protection of investors who are confronted
with a tender offer,” Piper v. Chris-Craft Industries, Inc., supra, 430
U.S. at 35, the irreparability of the harm to Dan River’s shareholders—
not Dan River itself or its incumbent management—is the proper sub-
ject of inquiry.
16
CONCLUSION
For the foregoing reasons, the petition for a writ of
certiorari should be granted.
Respectfully submitted,
MICHAEL W. SCHWARTZ
299 Park Avenue
New York, New York 10171
(212) 371-9200
Counsel for Petitioners
WACHTELL, LIPTON,
ROSEN & KATZ
Of Counsel
August 26, 1980
APPENDIX A—Court of Appeals Decision.
UNITED STATES COURT OF APPEALS
FoR THE FOURTH CIRCUIT
No. 79-1267
DAN RIVER, INC.
Appellant,
versus
UNITEX LIMITED; MANNIP LIMITED; CHENG FuR SHE; CHENG
Lee Kit-Y1u; Puitip Y. S. CHENG; LEE CHEN CHE; LIu
HAN TANG; YANG YUAN LOONG; DorRA YANG; THE “ROE”
BANK OF HONG KONG; THE “DOE” FINANCE COMPANY OF
Honc Kona; “XYZ” COMPANY,
Appellees.
Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond. D. Dortch Warriner,
District Judge.
Argued: January 9, 1980. Decided: May 29, 1980
Before RUSSELL, Circuit Judge, FIELD, Senior Circuit Judge,
and SPROUSE, Circuit Judge.
Max GITTER (ARTHUR L. LIMAN, JACK HAssID, COLLEEN
McMAHON, ANDREW J. PECK, PAUL, WEISS, RIFKIND,
WHARTON & GARRISON; LEWIS T. BOOKER, GREGORY N.
STILLMAN, HUNTON and WILLIAMS on brief) for Appellant;
MICHAEL SCHWARTZ, BALDWIN TUTTLE, EDMUND KERR
(WACHTELL, LIPTON, ROSEN & KATZ; CHRISTIAN, BARTON,
Epps, BRENT & CHAPPELL; KUTAK, Rock & HUIE; WICK-
WIRE, PETERSON & GAVIN; CLEARY, GOTTLIEB, STEEN and
HAMILTON on brief) for Appellees.
la
2a
Appendix A—Court of Appeals Decision
RUSSELL, CIRCUIT JUDGE:
This is an action by the plaintiff Dan River for injunctive
relief under the Williams Act’ against the defendants, Unitex
Limited, a Hong Kong corporation, its subsidiary Mannip
Limited, a British Virgin Islands corporation, Unitex’s control-
ling directors and stockholders, and two Hong Kong banks.
The district court at first granted the plaintiff a temporary re-
straining order pending further clarification of the defendants’
13D Schedule as required under the Williams Act, but, after the
defendants amended their earlier filing, it dismissed the action
on jurisdictional grounds. The plaintiff has appealed. We reverse.
I
The plaintiff is a large textile manufacturing corporation
chartered under the laws of Virginia with its headquarters in
Danville, Virginia. Its capital stock at times appropriate to this
action consisted of 5,595,035 shares of common stock. The
defendant Unitex Limited is a corporation engaged in the manu-
facture in Hong Kong of textiles which it offers for sale in Europe
and the United States. The individual defendants, all residents of
Hong Kong, own over two-thirds of the capital stock of Unitex
and are its controlling directors.
Sometime in the fall of 1978, Unitex, on the recommendation
of its retained investment advisor, Lazard Freres & Company,
an internationally known investment firm, determined to acquire
a substantial equity position in Dan River stock. In order to
finance such purchases, it began negotiations with the executive
director of the defendant Wardley Limited, a Hong Kong finan-
cial institution, for a loan to finance its purchase of Dan River
stock. Wardley expressed a willingness to consider such fi-
nancing, “provided that Wardley’s could be assured of the
fundamental financial soundness of Unitex’s plan.” (Italics
115 U.S.C. §§78m(d)-78m(e).
3a
Appendix A—Court of Appeals Decision
added) Apparently, Wardley received sufficient assurances of
“the fundamental financial soundness of Unitex’s plan” for ac-
quiring an equity interest in Dan River, for Wardley advanced
Unitex initially what is described as bridge financing in the
amount of $2,700,000 for the purpose of initiating the purchase
of Dan River stock.
By December 1, 1978 Unitex, or individuals affiliated with
it in its plan for acquiring a substantial equity position in Dan
River stock, had accumulated at least 62,700 Dan River shares.
Of these, 47,800 shares were purchased by two of the individual
defendants, or members of their immediate families. Between
December 1 and December 12, Unitex itself acquired 216,900
shares of Dan River stock by purchase made on the New York
Stock Exchange. If these purchases were combined with the
earlier purchases, the plaintiff contends, though the defend-
ants deny, that Unitex or persons within its controlling group
would have owned 279,600 Dan River shares or just over 5 per-
cent of Dan River’s outstanding stock. Under the provisions of
§ 13(d) of the William Act, any person, upon acquiring more
than 5 percent of the stock of any corporation, is required to
file with the Securities and Exchange Commission within ten
days after acquiring such stock ownership, and to mail to the
target corporation, a Schedule 13D disclosing (a) the identities
and background of the purchasers, (b) their purposes in ac-
quiring the stock, (c) the sources of their financing, (d) the
extent of their acquisitions, (e) any arrangement or contracts
with other persons concerning the stock and (f) any other ma-
terial information. This statute was supplemented by more spe-
cific regulations issued by the Securities and Exchange Com-
mission. 17 C.F.R. § 240.13d-1, et seq. (1978). The parties,
however, did not file the required 13D Schedule and, on De-
cember 14, the individual defendants sold 47,800 shares in
block trades on the Stock Exchange. Of these, forty thousand
appear to have been sold back to Unitex but 7,800 shares were
disposed of to another party. It is the plaintiff's contention that
these sales were made for the purpose of avoiding any possible
7%
4a
Appendix A-——Court of Appeals Decision
obligation to file a 13D Schedule. The defendants, however,
deny the necessity to sell such stock in order to avoid any obliga-
tion to file a 13D Schedule and assert that these sales were made
because the purchases by the individuals, made allegedly with-
out the knowledge of Lazard, violated a Lazard policy that
“whenever it is advising a client (here, Unitex) with respect to
a program of stock purchases, its client must see to it that no
purchases of the stock in question are made by related firms or
individuals at the same time.”?
Whatever the purpose of the sale of 47,800 shares previously
purchased, Unitex discontinued after December 14 any further
purchases of Dan River stock until (1) it had established a cor-
porate subsidiary, the defendant Mannip Limited, in the British
Virgin Islands, whose sole purpose was to acquire all future pur-
chases of Dan River stock on Unitex’s behalf and to hold all
Dan River stock then owned or later acquired on behalf of
Unitex, and (2) untii it had completed its final financing ar-
rangements with Wardley and its associated bank, the defend-
ant Chartered Bank. Sometime in January, 1979, it, however,
had completed both the incorporation of Mannip Limited and
finalized its financing arrangements with Wardley and the Char-
tered Bank.
Under its agreement with the two financial institutions,
Unitex was granted a line of credit in the amount of $13,300,000
in order to purchase Dan River stock. However, under the loan
agreement, the price at which Unitex purchased stock required
approval of the banks. To secure this loan, Unitex pledged its
interests in Mannip (that is, it pledged all the Dan River stock
acquired by it) and the worth of Unitex itself. In addition, four
Unitex directors personally agreed to advance approximately
$1,000,000 against the loan and to guarantee individually the
remainder of the loan should Unitex default.
*Lazard justified this policy. as a “matter both of good financial prac-
tice and of practical prudence (i.e., to avoid to the extent possible,
involvement in just the kind of litigation which has eventuated here) .”
5a
Appendix A—Court of Appeals Decision
On January 29, 1979, Unitex resumed purchasing Dan River
stock, quickly acquiring sufficient shares to bring Unitex within
the filing requirements of § 13(d). At this point it transferred
all its Dan River stock to its nominee, the corporate subsidiary
Mannip, and all future purchases were made in Mannip’s name
but with funds advanced by Unitex. Because its holdings had
by the end of January gone over the 5% level, thereby trigger-
ing the requirement of a § 13(d) filing, a 13D Schedule was
filed with the Securities and Exchange Commission by Mannip
on February 9, 1979, and mailed to Dan River on the same
date.
This 13D Schedule, as filed only by Mannip, fixed Mannip’s
ownership of Dan River stock at that time as 333,700 shares,
described the relationship between Unitex and Mannip, and
included some information about Unitex’s directors and their
transactions in Dan River stock. It stated the purpose of the
Dan River stock purchases as follows:
“While Mannip is not solely a passive investor in the
Company, neither Mannip nor Unitex has any present in-
tention to seek control of the Company or to propose a
merger or similar transaction with the Company. Mannip
may seek to acquire a significant equity interest in the
Company with a view toward establishing a long term re-
lationship with the Company. Mannip is continuing to pur-
chase Shares in open market transactions, and, depending
on market and other conditions, Mannip may continue in
the future to purchase Shares from time to time in open
market or private transactions.”
Dan River filed on February 22 its action against the de-
fendants alleging various omissions and misleading statements
in Mannip’s filing and improper failure by other defendants
either to join in Mannip’s filing or to make their own filing. It
sought declaratory, injunctive, and other equitable relief. In
connection with the commencement of its action, Dan River
y >
6a
Appendix A—Court of Appeals Decision
also moved for a preliminary injunction and applied for a tem-
porary restraining order pending the hearing on the motion for
an injunction. After a hearing on the application for a tem-
porary restraining order held on February 23, 1979, the district
court ruled that “plaintiff's right to [additional] disclosure [was]
clear” and restrained the defendants from making any additional
purchases of stock until they had filed “an amended or new
Schedule 13D which makes the appropriate disclosures.” The
district court proceeded to specify the additional material to be
included in the “amended new Schedule 13D”:
“a. The identities and backgrounds of PAS, Ltd. and
CMS, Ltd.;
“b. The extent of the non-pasive position and objec-
tives that defendants propose to be able to effect from their
holdings of plaintiff's stock;
“c. The entities which defendants propose for the es-
tablishment of long-term relationships with plaintiff.
“d. The identities of the foreign lending institutions and
the agent referred to in the exhibits annexed to defendant
Mannip Ltd.’s Schedule 13D filed on February 9, 1979;
“e. Whether the individual defendants have arranged
for financing for the acquisition of plaintiff's shares and,
if so, the sources of the funds; and
“f. The background information required by Section
13(d) of the Williams Act for each of the individual de-
fendants;”
The district court also set a hearing on the motion for a pre-
liminary injunction and directed the parties to engage in dis-
covery on an expedited basis prior to that hearing.
Mannip and Unitex filed a new Schedule 13D on March 1,
Ta
Appendix A—Court of Appeals Decision
1979. This new filing supplied a number of the omissions noted
by the court at the earlier hearing on the application for a pre-
liminary restraining order and added a new statement of the
purpose of the stock accumulations. This new statement of pur-
pose was:
“The purpose of Mannip’s purchasing Shares is to ac-
quire an equity investment in the Company. The Filing
persons intend continuously to evaluate Mannip’s position
in the Company and the Company’s business and industry.
The Filing Persons presently intend for Mannip to make
additional purchases of Shares in open-market or private
transactions, the extent of which will depend upon such
evaluation and upon prevailing market and other condi-
tions. Neither Mannip nor Unitex presently intends to seek
to acquire control of the Company, to seek representation
on the Company’s Board of Directors, to seek joint ven-
tures or other business relationships with the Company
or to propose a merger or similar transaction with the Com-
pany. In addition, depending upon the results of such evalu-
ation and upon prevailing market and other conditions,
Mannip may dispose of all or a portion of its Shares.
Since the Filing Persons could determine to seek to ac-
quire control of the Company, seek representation on the
Company’s Board of Directors, seek joint ventures or other
business relationships with the Company or propose a
merger or similar transaction with the Company, Mannip
should not be considered solely as a passive investor. How-
ever, it should not be assumed that a plan will in fact be
formulated to do any of the foregoing.
Except as set forth above, there are no present plans or
proposals which relate to or would result in a merger, re-
organization or liquidation involving the Company, the
sale or transfer of a material amount of the Company’s
assets, any change in the Company’s Board of Directors
8a
Appendix A—Court of Appeals Decision
or management or any other material change in the Com-
pany’s business or corporate structure.”
With the filing of this new or amended Schedule 13D, the de-
fendants moved to dismiss the complaint for lack of subject-
matter jurisdiction. They predicated such motion on the claim
that they had fully complied with the earlier order of the dis-
trict court and had met the requirements of § 13(d), thereby
rendering plaintiff's action moot.
The next day after the defendants made their filing the plain-
tiff amended its complaint, charging omissions, inconsistencies,
and contradictions in the amended 13D Schedule. It particu-
ularly found the purpose clause flawed in these respects:
“a) On information and belief, defendants fail to dis-
close that they are buying Dan River stock as alter egos
for Textile Alliance Limited (“TAL”), a major Hong
Kong textile enterprise founded and operated by defend-
ants Lee and Yang, two of the Controlling Directors of
Unitex. On information and belief, defendants fail to dis-
close that one of defendants’ and TAL’s purposes in spon-
soring defendants’ acquisition of Dan River is to seek a
position of sufficient control or influence in Dan River to
enable TAL or defendants to obtain on unduly favorable
terms textiles made by Dan River that are in short supply
in the world market, thereby misappropriating a valuable
commercial asset of Dan River and its stockholders.
“b) The statements in Item 4 of Amendment No. 2 con-
tradict statements made in Item 4 of Mannip’s Schedule
13(D) filed February 9, 1979 even though defendants
state in the Amendment that the original Schedule 13(D)
fully and adequately disclosed defendants’ true purposes.
“c) Item 4 fails to disclose fully the ‘non-passive’ role
defendants intend to play in Dan River, or to identify the
9a
Appendix A—Court of Appeals Decision
‘long-term relationship’ that defendants may seek to es-
tablish with Dan River although this Court has specifically
instructed defendants to make such disclosures.
“d) Amendment No. 2 fails to disclose the purposes
for which the Controlling Directors are involved in this
transaction.”
The plaintiff thon moved to continue the restraining order the
district court had earlier granted. The district court, however,
refused the motion and vacated the restraining order previously
allowed. It also reversed its earlier provision for discovery.
Sometime later, it heard the motion for a preliminary injunc-
tion. At the hearing both parties submitted various affidavits.
At the conclusion of the hearing, spread over a period of sev-
eral days, the district court denied the motion and granted the
motion to dismiss the action on jurisdictional grounds.
I
In dismissing the action, the district court declared that
§ 13(d) of the Williams Act “was intended [simply as a dis-
closure act] . . . for the benefit of investors and not manage-
ment” and was not to be used “as a tool for management to
preserve their offices.” It added that “management [had] no
rights under the Williams Act,” only a role to act as “the con-
duit by which the disclosed information [was to be] transmitted
to the [stockholders].” It seemed to assume, though it did not
say so explicitly, that, in discharging its role of a “conduit,” the
target corporation may require the defendant in an equitable
action to file a Schedule 13D which would facially meet the re-
quirements of the statute but that, when that had been done,
the target corporation—and, for that matter, the district court
itself—has no right to question the accuracy, truthfulness, or
completeness of such Schedule or to complain that in any ma-
terial instance the Schedule was “false or misleading,” but that
such right was exclusively the right of a stockholder to be ex-
10a
Appendix A—Court of Appeals Decision
ercised in an action for damages.’ It had earlier, in dissolving
the restraining order previously granted by it, stated that, while
a “question of the truth or falsity of the 13D” was “grave,” the
court could not “entertain a notion [sic] at this time that [any]
material statement in the 13D Schedule [was] false.” It appeared
from this statement to hold that, in a 13(d) action by a target
corporation, the district court was to accept as “true” the state-
ments by the purchasers since they were “under oath”* and
that, even if there were reasonable inferences in the record
“casting doubt upon the veracity of the affiant” who swore to
the Schedule 13D, the falsity or incompleteness or misleading
character of the Schedule was not cognizable in an equitable
action by the target corporation so long as the Schedule facially
met the requirements of the statute.
Il
The threshold question raised by the defendants addresses
the standing of the plaintiff to maintain this action. The district
court found, and the defendants press the point on this appeal,
that section 13(d) was enacted for the sole benefit of stock-
holders and not to provide “armament” to management in re-
sisting takeovers or accumulations of the stock of corporations.
Since the plaintiff corporation is not thus “within” the particular
class intended to be protected by the statute, “it has no stand-
ing to maintain an action” under the statute. For this proposi-
tion, the defendants rely, as did the district court, on Rondeau
v. Mosinee Paper Corp., (1975) 422 U.S. 49, and Piper vy.
Chris-Craft Industries, (1977) 430 U.S. 1. Neither case is, in
*It is of interest that the district court stated in its oral order of dismissal
that it had inquired during argument of defendants’ counsel what juris-
diction the court might have in this case if the 13D Schedule were “false
and misleading” in some substantial respect but that counsel “didn’t want
to answer that question and didn’t answer it.”
*The language of the district court was:
“I know that there has been a 13D filed which on its face complies
with the law and it’s under oath, therefore, I expect it’s true.”
lla
Appendix A—Court of Appeals Decision
our opinion, in point. Piper was an action at law by a disap-
pointed tender offeror to recover damages for an alleged viola-
tion of § 14(e) of the Securities and Exchange Act of 1934.
And, in denying a right of action in favor of the plaintiff, the
court carefully cautioned, “[nJor is the target corporation’s
standing to sue in issue in this case.” Jd. at 42 n. 28, 47 n. 33.
It cannot, therefore, be reasonably argued that Piper is authority
against the right of Dan River to maintain this action.
In Rondeau, the sole claim raised by the target corporation
in the district court was its right to injunctive relief because the
defendant had been tardy in filing its Schedule 13D. 422 US.
at 57. It was not until the case reached the Supreme Court that
the corporation raised the question whether the statements in
the Schedule were accurate and truthful and sought to litigate
that issue. Because of the failure of the plaintiff to raise the
point either in the district or circuit courts, the Supreme Court
refused to consider the issue. /d. at 61 n. 11. But, the Supreme
Court did emphasize in note 9, p. 59, that the case before it
“involve[d] only the availability of injunctive relief to remedy
a § 13(d) violation following compliance” and cautioned that
it was not a decision on “whether or under what circumstances
a corporation could obtain a decree enjoining a shareholder who
is currently in violation of §13(d) from acquiring further
shares, exercising voting rights, or launching a takeover bid,
pending compliance with the reporting requirements.”
‘These two comments, it seems to us, add up to a suggestion that the
target corporation has a right to injunctive relief prior to compliance
and, as we later indicate, compliance contemplates not simply the formal
filing of a Schedule 13D but the filing of an accurate, truthful Schedule
13D, free of any misleading statements. And that certainly has been the
construction of the Supreme Court's language by all the Circurt and
District Courts which have been confronted with the question of the
target corporation’s right to maintain an action when there is a reasonable
basis for assailing the accuracy or truthfulness of the essential statements
mandated by the statute for inclusion in the 13D Schedule. E.g., GAF
Corporation v. Milstein, 453 F.2d 709, 721-22 (2d Cir. 1971), cert.
(Footnote continued on following page)
12a
Appendix A—Court of Appeals Decision
The district court, however, construed Rondeau as requiring
the purchaser merely to file a Schedule 13D which facially met
the requirements of the statute and as holding that, when there
had been such facial compliance, the target corporation there-
after lacked any right to contest, and the Court any jurisdiction
to consider, the accuracy or truthfulness of the essential matters
stated in the Schedule 13D, irrespective of the basis for the cor-
poration’s objections. This conclusion is in direct contradiction
of the decision reached in GAF Corporation v. Milstein, 453
F. 2d at 721-22, which has long been regarded as the landmark
authority on the point. In that case, the court stated the issue:
“The more difficult question is whether GAF [the target
corporation] has standing under section 13(d) to seek an
injunction against allegedly false and misleading filings.
The Milsteins in their brief argue that ‘the short answer’
is that false filing does not violate the section that requires
the filing—i.e., section 13(d)—but rather the penal provi-
sion on false filings, section 32(a), or one of the anti-fraud
provisions, for example, section 10(b).” Id. at 720.
It is manifest that the position of the defendants in that case
was based on the very same circumstances which the district
court in this case assigned as a reason for finding want of star 1-
ing in favor of the plaintiff and lack of jurisdiction on the part
of the court. The court in Milstein, however, in resolving the
issue, reached a contrary conclusion to the district court in this
case. It said:
“With this teaching in mind, we conclude that the obliga-
(Footnote continued from previous page)
denied, 406 U.S. 910 (1972); Wellman v. Dickinson, 475 F. Supp. 783,
817 (S.D.N.Y. 1979); SEC v. GSC Enterprises, Inc., 469 F. Supp. 907,
913 (N.D. Ill. 1979); W. A. Krueger Co. v. Kirkpatrick, Pettis, Smith,
Pollan, Inc., 466 F. Supp. 800, (D. Neb. 1979) Scott v. Multi-Amp
Corp., 386 F. Supp. 44, 50 (D.N.J. 1974); Brown, Changes in Offeror
Strategy in Response to New Laws and Regulations, 28 Case W. Res. L.
Rev. 843, 858 (1978).
13a
Appendix A—Court of Appeals Decision
tion to file truthful statements is implicit in the obligation
to file with the issuer, and a fortiori, the issuer has standing
under section 13(d) to seek relief in the event of a false
filing.” (Italics in opinion) Jd. at 720.
And it proceeded at some length to justify its conclusion to
sustain standing in the target corporation to raise, by appro-
priate allegations and proof, and jurisdiction in the district court
to resolve, the issue of the accuracy and truthfulness of the
filing.
This oft-cited case, it would appear, should be conclusive
on the issue both of standing and of jurisdiction. The district
court apparently dismissed it, though, because it preceded in
time Rondeau. However, as we have already noticed, there is
nothing in Rondeau which touched or weakened the decision
in Milstein. And this has been the view of the courts which have
been called upon to consider the standing and jurisdictional
issues in the context of a claim of lack of a full and fair dis-
closure in the 13D Schedule, for, without exception, they have
cited and relied on Milstein for their own contrary conclusion.
A recent example of such reliance is Securities and Exchange
Com’n. v. Savoy Industries, (D.C. Cir. 1978) 587 F. 2d 1149
and 1165, cert. denied, 440 U.S. 913 (1979) where the Court
said:
“Sections 13 (d)(1) and 13 (d)(3) and the rules pro-
mulgated thereunder undoubtedly create the duty to file
truthfully and completely. To the extent that the violation
of sections 13(d)(1) and 13(d)(3) inheres in the Sched-
ule 13D that was filed, it was this duty that was breached.
Because section 13(d) was designed, in part, to allow in-
vestors an opportunity to know of potential changes in
corporate control and to evaluate the situation, and be-
cause disclosure that is not accurate subverts this purpose,
it is plain that section 13(d) requires the making of a com-
pletely truthful statement. GAF Corp. v. Milstein, 453 F.
7%
14a
Appendix A—Court of Appeals Decision
2d at 720. ‘The reporting provisions of the Exchange Act
are clear and unequivocal, and they are satisfied only by
the filing of complete, accurate, and timely reports” (cit-
ing cases). (Italics added)
Again, in General Aircraft Corp. v. Lampert, (1st Cir. 1977)
556 F. 2d 90, a case the district court professed to follow and
which involved the adequacy of a 13D Schedule, the defend-
ant challenged “[n]either the availability of a private suit under
section 13(d) nor GAC’s standing to bring such suit... .” Id.
at 94, n. 5. In noting that conclusion, the court cited both
Rondeau and Milstein. Undoubtedly it cited these cases at this
point because, whether raised or not, jurisdictional standing is
an issue to be considered sua sponte by the court, and, by its
citation of these authorities, indicated it had done so, and the
relief it later granted supports this conclusion. After discussing
the record made in this target corporation’s presentation, the
court held on the target corporation’s claim for relief “that the
District Court did not err in finding, for purposes of preliminary
relief, that appellants’ Schedule 13D was inaccurate and mis-
leading in stating that the purchase of shares was for the pur-
pose of investment rather than acquisition of control.” Jd. at
95-6. In reaching that conclusion it began by approving as a
definition of control within the contemplation of section 13(d)
the definition set forth in § 12b-2(f), 17 C.F.R., Regulations
of the Exchange Commission.* After finding the Schedule 13D
in that case “a false one,” the court next proceeded to consider
the remedy available to the corporation. It ended by holding
that, when there is a finding that a 13D Schedule is incomplete,
inaccurate or false, the corporation has a right to injunctive re-
lief “until the Schedule 13D is amended to reflect accurately
their [the officers’] intentions.” Jd. at 97.
In Chromalloy American Corp. v. Sun Chemical Corp., (8th
Cir. 1979) 611 F.2d 240, the court similarly sustained the
617 C.F.R. §240-12b-1.
15a
Appendix A—Court of Appeals Decision
target corporation’s standing to maintain, and the court’s power
to decide, an equitable action halting all purchases of Cromalloy
stock by Sun and prohibiting Sun’s use of already acquired stock
to influence Chromalloy management until the completeness and
truthfulness of a 13D Schedule could be adjudicated. The court
found, after an evidentiary hearing, that Sun’s statement of pur-
pose in its 13D Schedule was inaccurate in that it “intended
[through its acquisitions] to exert considerable influence” over
the actions of Chromalloy’s Directors, thereby securing what
was for purposes of § 13(d) control of Chromalloy. Jd. at 243.
It proceeded, “[p]ursuant to 15 U.S.C. § 78m(d) [to enjoin]
further acquisition of Chromalloy stock until Sun’s Schedule
13D was amended to reflect this intention.” Sun appealed this
action and Chromalloy in turn appealed the failure of the dis-
trict court to grant further disclosure. The circuit court sus-
tained the district court in both rulings, thus sustaining the right
of the target corporation to secure equitable relief requiring the
purchaser to file an accurate, truthful, and complete Schedule
13D in order to make what the court specified as a “full and
fair disclosure.” Jd. at 248 n. C16.
Under the reasoning of these cases, it follows that Dan River
has a right to seek equitable relief enjoining the defendants and
should Dan River establish that there is a reasonable basis for
concluding that the Schedule 13D filed by the defendants is in-
accurate, incomplete, or misleading in its statement of any of
the matters expressly demanded by section 13(d), the district
court may and should grant appropriate injunctive relief and
should require the filing of an amended Schedule 13D comply-
ing with the requirement of a truthful and complete statement
as contemplated under the statute. The real question that the
district court should have addressed, then, was whether the
plaintiff's showing of the alleged inaccurate, untruthful, incom-
plete, or misleading character of the defendant’s Schedule 13D
was sufficient to resist a motion to dismiss or a motion for sum-
mary judgment. That was the crucial issue in the case and the
issue the district court did not address. Generally, this issue pre-
16a
Appendix A—Court of Appeals Decision
sents “a question of fact that cannot be resolved on [a] motion
to dismiss.” Securities Exchange Com’n. v. GSC Enterprises,
(N.D. Ill. 1979) 469 F. Supp. 907, 913.
The two matters in the amended 13D Schedule to which Dan
River takes particular exception and on which it primarily relies
for its claim that the amended Schedule was inaccurate and in-
complete are, first, the failure of the defendants to have filed
an earlier Schedule 13D when at the close of business on De-
cember 12, 1978, as contended by the plaintiff but denied
by the defendants, Unitex and the group affiliated with it first
acquired more than five percent of Dan River’s stock, and, sec-
ond, the statement of purpose of acquisition included by the
defendants in their amended Schedule 13D, a statement which
Dan River contends was incomplete, inaccurate, and misleading.
We need not tarry over Dan River’s first objection. Assuming
that the defendants violated section 13(d) when they failed
within ten days after December 12, 1978, to file a Schedule
13D, we believe that violation was rendered moot when the
defendants later did file their Schedule 13D. As the district
court correctly observed, section 13(d) is a disclosure statute
intended for the benefit of stockholders. We have already noted
that the sole basis of standing in favor of the corporation itself
is to enforce the statutory mandate to file a Schedule 13D, which
is complete, accurate, truthful, and not misleading. When the
defendants in this case filed their original Schedule, even though
tardy, the issue became not the earlier failure to disclose, but
the truthfulness and accuracy of the Schedule as filed.’ This is
not to say that if any stockholder suffered damages as a result
of the tardy filing, he would not be entitled to recover.* What
we are concerned with here, though, is solely the right of the
7See Missouri Portland Cement Co. v. H. K. Porter Co., (8th Cir.
1976) 535 F.2d 388, 396; Corenco Corporation v. Schiavonas & Sons,
Inc., (2d Cir. 1973) 488 F.2d 207, 214-15.
®See, Comment, Private Rights of Action for Damages Under Section
13(d), 32 Stan. L. Rev. 581 (1980).
17a
Appendix A—Court of Appeals Decision
corporation itself, and, to repeat, that right is limited to equi-
table relief, compelling the filing of a full and accurate Sched-
ule 13D.
Dan River’s main attack is upon the accuracy and complete-
ness of both the original Schedule 13D and the amended Sched-
ule filed by the defendants. The particular statement on which
Dan River centers its attack is the statement of purpose of ac-
quisition, as required under the statute. This statement, Dan
River charges, is a model of obfuscation, carefully phrased to
confuse and conceal. It was this statement, the accuracy, com-
pleteness, and misleading character of which the district court
found it lacked power to review. This failure to look beyond
the face of the filing was, we think, error in light of the record
then before the court.
The defendants at no point have declared clearly the pur-
pose of their acquisition. There was unquestionably some pur-
pose on their part quite different from making an “equity in-
vestment.” The defendants in effect concede as much by their
disclaimer of making the purchases as a “passive investor.” Im-
plicit in this disclaimer is the idea that there was some purpose
beyond mere investment for investment sake. And this conclu-
sion seems compelling when it is noted that the defendant
Unitex has pledged all its assets and its major stockholders have
pledged their personal credit in order to finance at interest rates
two and a half percentage points above the standard prime rate
this “equity investment” in another company, located thousands
of miles away from its heaquarters in a foreign country, man-
aged by officials unknown to the principals in Unitex, and pay-
ing dividends which would amount to only a fraction of what
the defendants would be paying in interest in order to carry these
purchases. This logic becomes even more persuasive when it
is noted that, judging by the size of the loan secured to finance
these purchases, the defendants are looking to the purchase of
approximately twenty percent of the outstanding equity stock
in Dan River. Such an accumulation of stock in a publicly held
18a
Appendix A—Court of Appeals Decision
corporation frequently is regarded as control of a corporation.
It is highly unlikely that Unitex would be seeking control of
another corporation at considerable cost to it, if its interest were
solely for investment.
If the defendants’ purpose in making these purchases is ob-
viously not for investment purposes, what is their purpose? Their
statements in their second Schedule 13D seem calculated to
convey the notion that their plans are indefinite and unformed.
In this Schedule they say they may seek control of Dan River
through their purchases, but presently they do not seek control.
Of course, at this point in their purchase program when they
have acquired but some eight percent of Dan River’s stock, they
could not hope to exercise control. But what is their intention
if they successfully acquire the twenty percent of the Dan River
stock they actually seek under their supposed plan of acquisi-
tion? Will they then seek control or at least seek to influ-
ence the decisions and actions of the target corporation?
Is the language of the Schedule to be construed as suggesting
that they have no plan, whether exercisable at present or not,
in connection with the purchases of Dan River stock when they
have made their anticipated purchases? That they have no plan
is inconceivable. There are significant items in the record which
suggest that the purchases are part of a carefully formulated
plan and that, in their extensive purchases, they intend to fa-
cilitate that plan. Thus, when the defendants sought financing
for their purchases from Wardley, their lead banker, they were
told that Wardley would consider the proposed financing, but
only if it was convinced of the “financial soundness of Unitex’s
plan.” Wardley agreed to finance the purchase. Presumably,
then, Unitex disclosed to Wardley its purpose and plan in the
proposed purchase. What was that “plan”? The defendants do
not disclose it in this Schedule 13D. Moreover, when Unitex
engaged the services of Lazard it is unlikely that it engaged the
services of such an international financial firm with a recognized
expertise in corporate mergers and acquisitions, simply to act
as a broker merely to purchase stock. Was Lazard to assist in
19a
Appendix ~—Court of Appeals Decision
the plan disclosed by Unitex to Wardley? We can only conjec-
ture.
The defendants did disclose in their first Schedule 13D what
might have been an indication of their purpose. In this Schedule,
they said that: “Mannip may seek to acquire a significant equity
interest in the Company with a view toward establishing a long
term relationship with the Company.” This is close to a declara-
tion of an intention to seek to control the target corporation
for what the defendants would undoubtedly claim was for the
mutual advantage of both parties.’ But, in its second filing the
defendants omitted this significant admission of purpose. Are
not the stockholders of the target corporation entitled to know
what kind of “long term relationship” with Dan River the de-
fendants sought to acquire by their purchases and would it not
*Although the present requirements for Item 4 of a Schedule 13D do
not use the word “control,” but rather require disclosure of any “plans
or proposals which result in or relate to extraordinary corporate trans-
actions,” SEC Exchange Act Release Nos. 33-5925, 34-14692, IC-10212,
43 Fed. Reg. 18484, 18493 (1978), the Eighth Circuit assumed, and we
think correctly, that “any control purpose is still measurable against the
definition of control appearing in Rule 12b-2(f).” Chromalloy American
Corp. v. Sun Chemical Corp., 611 F.2d at 245-46, 246 n.12. Moreover,
in defining “control” as applicable to a Schedule 13D filing, Chromalloy,
Id. at 246-47, directs us to look to Rule 12b-2(f), which provides:
“The term ‘control’ (including the terms ‘controlling,’ ‘controlled
by’ and ‘under common control with’) means the possession, di-
rectly or indirectly, of the power to direct or cause the direction
of the management and policies of a person, whether through the
ownership of voting securities; by contract, or otherwise.”
17 C.F.R. § 240.12b-2(f) (1979). Under this definition we believe that
section 13(d) requires disclosure of a control purpose whenever “the
securities purchaser has a perceptible desire to influence substantially the
issuer's operations,” 611 F.2d at 246-47 (citing Gulf & Western Indus-
tries, Inc. v. Great Atlantic & Pacific Tea Co., 476 F. 2d 687, 696-97
(2d Cir. 1973)), regardless of proof of a “fixed plan” to acquire control.
611 F. 2d at 247. That is, “Item 4 of Schedule 13 D requires disclosure
of a purpose to acquire control, [a word encompassing even ‘the [indi-
rect] power to . . . cause the direction of . . . policies,"] even though
this intention has not taken shape as a fixed plan.” Id.
y,%
20a
Appendix A—Court of Appeals Decision
be relevant to know why this statement of purpose was omitted
from the second schedule? Are not the two Schedules contra-
dictory, or at least confusing?
We raise these questions, not because we find the answers to
them in the record, but merely to suggest that the pleadings and
the showing of the parties raise relevant questions that require
further inquiry and that “cannot be resolved on [a] motion to
dismiss.” Securities Exchange Com’n. v. GSC Enterprises, 469
F. Supp. at 913. In reviewing the record of this case, we em-
phasize that we are not holding that the defendants’ Schedule
13D is actually false, incomplete, or misleading. Moreover, that
is not our function in this appeal. We simply conclude that Dan
River has raised sufficient questions about the defendants’ com-
pliance with the law to require further exploration by the district
court and the parties into the defendants’ purpose in purchasing
large amounts of Dan River stock. Because, as one court has
stated, “a false filing may be more detrimental to the informed
operation of the securities markets than no filing at all,” GAF
Corporation v. Milstein, 453 F. 2d at 720, a court simply cannot
turn a blind eye to a potentially inaccurate filing when it pos-
sesses the injunctive power to have that filing corrected before
irreparable harm occurs to the investing public.
It is no answer to plaintiff's cause of action that the defend-
ants’ filing is facially sufficient. When a plaintiff raises the num-
ber and kind of doubts about a Schedule 13D that Dan River
raises here, a court is not to take a mechanical approach by
refusing further inquiry into the plaintiff's allegations solely be-
cause the filing is facially adequate. See S.E.C. v. Capital Gains
Research Bureau, 375 U.S. 180, 195 (1963). Nor is it realistic
for a court to rely, as apparently the district court in part did in
this case, on the defendants’ verifications of their amended 13D
Schedule when one considers that the same Unitex officer also
verified the initial Schedule, and that Dan River similarly veri-
fied its allegations. Rather, because Dan River offered sufficient
information to show the very real possibility that the defendants’
2la
Appendix A—Court of Appeals Decision
filings were not totally true or complete, it was justified in seek-
ing the additional discovery necessary for the ultimate deter-
mination of whether the Schedule filed was accurate. See Sun
First Nat. Bank of Orlando v. Miller, 77 F.R.D. 430, 438
(S.D.N.Y. 1978).
The record suffices to make the truthfulness and completeness
of the defendants’ Schedule a justiciable issue into which the
district court should have inquired. The uses of discovery and
hearings are the usual judicial devices employed to resolve such
justiciable disputes over the correctness of Schedules 13D. See,
e.g., Chromalloy American Corp. v. Sun Chemical Corp., 611
F. 2d 240 at 247; General Aircraft Corp. v. Lampert, 556 F.
2d at 96-97; GAF Corporation v. Milstein, 453 F. 2d at 720-21;
Susquehanna Corp. v. Pan American Sulphur Co., 423 F. 2d
1075, 1084-1086, (Sth Cir. 1970); Transcon Lines v. A. G.
Becker, Inc., 470 F. Supp. 356, 378-79 (S.D.N.Y. 1979); Fi-
nancial General Bankshares, Inc. v. Lance, 80 F.R.D. 22, 23,
(D.D.C. 1978); Securities and Exchange Com’n. v. Zimmer-
man, 407 F. Supp. 623, 630-31, (D.D.C. 1976), aff'd in part,
vacated and remanded in part sub. nom. Securities and Exchange
Com’n. v. Savoy Industries, 587 F.2d 1149 (D.C. Cir. 1978),
cert. denied sub. nom. Zimmerman v. Securities and Exchange
Commission, 440 U.S. 913 (1979). The plaintiff has made a
sufficient showing to support that right here. This does not mean
that the plaintiff may use the discovery processes to harass the
defendants or needlessly delay the resolution of this controversy.
The district court is, however, perfectly competent to keep the
discovery within the range of relevancy and to prevent the use
of the court’s processes for delay.
In reaching this conclusion we subscribe to the “[a]ccepted
judicial philosophy [which] is to refrain from dismissing secu-
rities claims where it is possible that plaintiff can establish a
jurisdictional basis for its claims upon completion of additional
discovery.” Sun First Nat. Bank of Orlando v. Miller, 77 F.R.D.
at 435. This predisposition against summary dismissal of secu-
22a
Appendix A—Court of Appeals Decision
rities claims without discovery comports with a similar judicial
sentiment held for all actions arising from complicated factual
patterns. E.g., Greenville Publishing Co., Inc. v. Daily Reflector,
Inc., 496 F. 2d 391, 398 (4th Cir. 1974) (antitrust); Umden-
stock v. American Mtge. & Inv. Co. of Oklahoma City, 495
F. 2d 589, 592 (10th Cir. 1974) (antitrust). A “sparing” use
of summary procedures is particularly appropriate in litigation
“where motive and intent play leading roles, the proof is largely
in the hands of the alleged conspirators, and hostile witnesses
thicken the plot.” Poller v. Columbia Broadcasting, 368 U.S.
464, 473 (1962) (antitrust); see Robinson v. Penn Central
Company, 58 F.R.D. 436, 440-41 (S.D.N.Y. 1973) (securities
laws).
The key issue in this case is the defendants’ motive and intent
in buying Dan River stock. Dan River wants to know this, and
the investing public has a right to know it as well. Yet only the
defendants can clarify the confusion they have created on this
point; the proof is in their hands. If Dan River is not allowed to
obtain from the defendants through discovery the facts vital to
prosecuting this action, the defendants are effectively freed from
the obligation of filing a complete and accurate Schedule 13D
for only they can publish their motives and intent—as the law
requires them to do. We believe that since the information
crucial to this case is concentrated in the hands of the defend-
ants, this is precisely the kind of litigation the Supreme Court
said is inappropriate for the summary dismissal procedure it
received. The defendants have shown no “adequate justification
for denying plaintiff the opportunity to question [them] about
the accuracy of the Scheduie 13D” they filed, Financial Gen-
eral Bankshares, Inc. v. Lance, 80 F.R.D. 22, 22 (D.C. 1978);
cf. Robinson v. Penn Central Company, 58 F.R.D. at 440 (ap-
propriateness of discovering a defendant’s knowledge prior to
dismissal of a 10b-5 action).
Accordingly, we reverse the district court’s dismissal of this
action and remand the case to the district court for further pro-
23a
Appendix A—Court of Appeals Decision
ceedings not inconsistent with the foregoing. On remand the
parties should be permitted to offer additional proof and to en-
gage in any meaningful discovery, within the court’s discretion.
The issue on remand, however, should be restricted to the ac-
curacy and completeness of the defendants’ statement of pur-
pose. On the present record, no cause of action is stated against
the appellees Wardley Limited and The Chartered Bank, and
on remand the district court is directed to dismiss from this
action the appellees Wardley Limited and The Chartered Bank.
REMANDED WITH INSTRUCTIONS
24a
APPENDIX B—Transcript of District Court’s Decision.
EXCERPT FROM PROCEEDINGS IN THE UNITED STATES DIs-
TRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, Hon. D.
DorTCcH WARRINER, U.S.D.J., in Crvit ACTION No. 79-0217-R,
Marcu 30, 1979.
THE COURT: Ladies and gentlemen, I have enjoyed your
presentation of the issue and though your briefs were lengthy,
rather than brief, I think that the subject matter was not inap-
propriately dealt with.
I start off with the premise that the Williams Act is an Act
which was intended to require disclosure and that that was all
that was intended by the Williams Act. It specifically was not
intended as a tool for management to preserve their offices. It
was intended for the benefit of investors and not management.
Management necessarily plays a part in the Williams Act dis-
closure because the selfish interests, which are perfectly legiti-
mate selfish interests, the selfish interests of management and
their actual presence on the firing line puts them in contact with
those who are attempting to gain control or invest heavily. Thus
management is expected to be and properly is the conduit by
which the disclosed information is transmitted to the investors.
But, so far as I can see in the language of the Act, and in the
legislative history of the Act, and in the Supreme Court's dis-
cussion of the Act that is the only role that management plays;
that [of] a conduit.
Insofar as the Act is concerned and—of course, management
has an absolute right to do whatever it can to try to hang onto
its job, and I would certainly not do anything to denigrate from
that right or from the propriety of the exercise of that right.
But, under the Williams Act there is no provision there that is
intended for the benefit of management. To a certain extent,
management has no rights under the Williams Act and yet it is
clear that management has a role under the Williams Act and
management in this case has exercised that role to see to it that
25a
Appendix B—Transcript of District Court’s Decision
disclosure is made so that they are in a position to carry out
their role, that is, transmitting the information required by the
Williams Act to its stockholders.
My view in this regard is supported—not supported—it is
based upon Rondeau, 422 US at Page 58, where it says, “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. That’s the initial premise that I have.
I look also to what rights do the shareholders have? If one
takes a closeup view and says management has no rights, only
a role, is one myopically forgetting the fact that that role is an
extremely important role for the protection of the shareholders?
The First Circuit in 1977 in General Aircraft Corporation ©
v. Lampert, I think, answers that question when it says at Page—
it’s 556 F. 2d, 90, at Page 97 it says in effect that “any share-
holder has an adequate remedy at law for damages and it is
the shareholder, not management, that the Williams Act was
intended to protect.” I don’t think that’s disputed. I think,
Rondeau makes that clear.
It’s also pointed out by the Ninth Circuit in Klaus v. Hi-Shear
Corporation, 528 F. 2d, 225, at Pages 231 and 232.
Now with that framework in mind, let’s bear in mind that any
suit based upon the Williams Act is a suit that seeks and only
can seek, because of the confines of the Act, the purpose of the
Act, the limits of the Act, that suit only can seek disclosure.
The end of the suit would be disclosure. It would be the Alpha
and the Omega, too. You start seeking disclosure, you end ob-
taining disclosure. There are no other rights under the Williams
Act than that there be disclosure.
Another word for disclosure is discovery. If the contentions
made by the plaintiff in this case are correct, then one way or
7%
26a
Appendix B—Transcript of District Court’s Decision
another a plaintiff which files a Williams Act complaint will win.
There would never be any question about the case from the very
beginning. If they are entitled to discovery in order to determine
whether or not the facts are present which entitles them to dis-
covery then the means is the end, and they win merely by ex-
ercising the means.
Now there’s nothing evil in a plaintiff winning, nor is there
anything evil in the defendant winning. Whoever is entitled to
prevail in a law suit ought to win, but I do not believe that the
rules of discovery, nor the rules of the entitlement to discovery
prior to dismissal, are properly being interpreted when the result
is that by the impact of those rules plaintiff inevitably and in
every case prevails on the very essence, the very gravamen of
the case. Discovery. Disclosure.
If plaintiff is correct, no matter how facially adequate a Form
13-D may be, if plaintiff management can in good faith ques-
tion by affidavit or otherwise that that facially adequate 13-D
is not completely accurate or not absolutely complete then
merely by that act, merely by filing such an affidavit, according
to plaintiff's contentions, plaintiff then has not only crossed the
threshold, they have gone all the way through the hall and out
the back door because they are entitled then to disclosure.
They’re entitled not only to learn, according to plaintiff's con-
tention, not only to learn that which Congress says they were
entitled to learn, but everything else that discovery in modern
practice has led us to expect.
We have all seen it in litigation, hogsheads full of documents,
wheelbarrow loads of depositions. The expenditure of time and
money and effort that sometimes actually dwarfs the subject
matter of the suit. Congress never intended that. Congress after
careful consideration enacted legislation which said exactly what
you are entitled to know and the form itself with all of its ap-
pendages is bulky enough. That which Congress said you are
entitled to know is quite a bit, but they never said that a plaintiff
27a
Appendix B—Transcript of District Court's Decision
was entitled to know all of those things that one learns through
modern discovery.
If plaintiff is entitled to prevail in this case in the face of a
facially adequate 13-D then I know of no limits upon 13-D
plaintiff complaints.
I have probably had the same experience that all other lawyers
have. If you read over a document prepared by someone else
you can find something wrong with it—in good faith find some-
thing wrong with it. If you read over an affidavit, no matter how
adequate an effort may have been made to make it complete
and accurate, questions can arise and according to plaintiff
that’s all it takes. They’re then entitled to wide ranging discovery
without any particular limit.
Now if that’s what Congress had intended, I think that the
law would read thusly. “Whenever a person or a group of persons
acquires more than five per cent of a stock of a publicly traded
corporation they shall disclose that fact and they shall thereupon
be subjected to discovery under the Federal Rules of Discovery,”
because in essence that’s all we have here. That’s all the excuse
we have here, I should say.
Now I asked Mr. Schwartz a question. Suppose his 13-D is
false and misleading, and Mr. Schwartz didn’t want to answer
that question and didn’t answer it, but I have to answer it. I
have to indulge that supposition. I recognize that it may be false
and misleading. If it is false and misleading the protected parties
under the Williams Act have an adequate remedy at law. If
that is so, and I cannot imagine that it is not so, then there’s no
grounds for equitable relief. I have compared the verified com-
plaint that plaintiff has filed, the amended complaint, and I have
prepared the telltale signs set forth on Pages 9 and 10 of plain-
tiff’s brief filed on the 8th of March, with the amended 13-D,
and I am satisfied that facially the 13-D meets the letter and
the spirit of the Williams Act. I’m also satisfied that any falsity
28a
Appendix B—Transcript of District Court's Decision
or misleading portion of the 13-D will reveal itself in due time
if it exists and that if it exists, when it reveals itself it will subject
the defendants to severe and proper damages, recision, and pos-
sibly other punishments and that that’s what the law intends.
Plaintiff in its brief stated that facts are the ultimate issue in
this case and as I have stated I agree with that. A right to know
facts is the ultimate issue and the facts that the plaintiff has a
right to know are the facts that Congress said should be disclosed
under the Williams Act. If plaintiff is entitled to substantial ad-
ditional facts—that is to say, if plaintiff is entitled to win because
it has posited in a verified form suspicions, then 13-D cases will
be won or lost on the willingness of a plaintiff to say under
oath, “I honestly question the accuracy and completeness of that
13-D” and as I have said, I can’t imagine an affidavit or a 13-D
when subjected to careful scrutiny by a learned and able coun-
sel which couldn’t be questioned in some way, honestly ques-
tioned, in good faith questioned.
When plaintiff came into this Court initially and pointed to
deficiencies in the 13-D and this Court examined the 13-D and
saw that on its face those deficiencies existed the Court gave
plaintiff the remedy that the Court thought it was entitled to
and that is because the 13-D on its face appeared deficient. The
13-D on its face no longer appears deficient. The deficiencies,
if any exists, are deficiencies that are made to seem, made to
exist by recourse to inference, rumor, street talk, strained logic;
and I cannot on the basis of such render an Act of Congress
moot and that is what is being suggested here. That I require
the disclosure of far more than Congress requires the disclo-
sure of.
In other words, when defendants’ conduct on its face fails to
comply with the law the Court should issue an injunction and
that’s what this Court did. When on its face the defendant has
complied with the law, then all of the relief which plaintiff is
29a
Appendix B—tTranscript of District Court's Decision
entitled to has been granted. Further recourse is granted by law
to those who are protected by the Act, the shareholders.
Now several cases have been cited to the Court. Of particular
interest to the Court was the Kaye case. I do not read the Kaye
case as being either directly on point or dispositive. The prayer
for relief in this case is, as it had to be, for disclosure, for dis-
covery, for the information that Williams Act directs shall be
filed. The prayer for relief in Kaye case was that the defendant
Equimark relinquish control of FSC. It didn’t seek any informa-
tion. It was not a case seeking information, discovery, disclosure.
It was a case seeking an injunction that the defendant release
control. The defendant Equimark during the pendency of the
suit sold its stock to two other persons and thereupon filed a
motion to dismiss on the ground of mootness. The district court
dismissed on the grounds of mootness and was reversed by the
Second Circuit. The Second Circuit said that the plaintiff was
entitled to have discovery as to whether or not the transfer of
stock was a sham. If it were a sham then Equimark still had
control and could be affected by an injunction which said re-
linquish control. Now that’s not what we have here.
This case is not about control of Dan River, Inc. It’s not about
any act. It is about information and that information has been
given. It having been given then any continuation of the case is
to use the Williams Act as “a weapon for management to dis-
courage takeover bids or prevent large accumulation of stock.”
Now gentlemen, I think that in a good lawyerlike manner that
is what is being attempted here. I was concerned about the Quern
case, but Quern case is not like this case. In Quern case the de-
fendant was engaged in an ongoing program and the question
was: Having renounced his former ways and having adopted a
new program which complied with the law, should the case be
dismissed as moot? The Court said, no, because that program
could be changed a d an illegal procedure could be re-initiated
by the defendant. But, there is no way that the 13-D which was
30a
Appendix B—Transcript of District Court's Decision
filed in this case can be changed and that’s what we’re talking
about.
_ The Williams Act says you're entitled to a 13-D. That 13-D
has been filed. It is on record. The rights that shareholders have
because that 13-D may be false or misleading have accrued and
each share of stock that’s being traded today on the stock mar-
ket is a share of stock that carries with it, possibly, the right to
damages and recision because of the possibility that that 13-D
is false and misleading and nothing can change that. It’s on rec-
ord. It is, I suppose, in indelible ink.
If I were to hold this case on the docket for the purpose of
developing the question of whether or not the 13-D is false and
misleading, I would be holding the case on the docket for the
purpose of rendering an advisory opinion; an opinion to be used
by shareholders, the beneficiaries of the Williams Act, in their
subsequent cases for damages. What management, the plaintiff
here, has a right to do is transmit this information to the share-
holders. I think, management also has a right in the course of
its business operation to learn, not through the processes of the
Draconian processes of discovery, but through the business
world—to learn that the 13-D was false and misleading and
then “sic” the stockholders on the defendants. And if it is false
and misleading I hope that they get every penny that’s coming
to them.
I have heretofore ruled that the initial 13-D was inadequate
on its face. I now rule that the amended 13-D is adequate on its
face and complies with the law and that the countervailing af-
fidavits, evidence, and arguments of plaintiff, even if true, are
insufficient in a case such as this where discovery is the end all
and be all. I cannot pretend a justiciable issue exists when under
the Williams Act none exists.
Plaintiff argued in brief but not before the Court the fact that
the recision issue still exists and pointed to Financial General.
3la
Appendix B—Transcript of District Court’s Decision
The Court in Financial General did not order recision. The Court
in Financial General ordered that if the investors, the takeover
people, intended to continue their activities, that they had to
offer recision to stockholders who had purchased stock without
knowledge of the fact that a takeover was impending. That's
a far cry from ordering recision. Under that order the defend-
ants didn’t have to do anything. They were limited in what they
could do insofar as the takeover is concerned, but not otherwise.
I read Blue Chip Stamps v. Manor Drug Stores, 421 US 723,
at Pages 740 through 742, as a rather clear indication from the
Supreme Court that securities laws governing disclosure should
not be used as a basis for a law suit aimed primarily at discovery.
I believe that defendants’ 13-D discloses all the information that
plaintiff is entitled to under the Williams Act and that if that
information is false then—and I quote from Rondeau at Page
58—“those persons who allegedly sold at an unfairly depressed
price because of the false and misleading 13-D have an ade-
quate remedy by way of an action for damages thus negating
the basis for equitable relief.”
I do not believe that there is any basis for equitable relief
remaining in this case. That is the only relief that was properly
sought and under those circumstances I can’t enter a judgment
which would affect the actions of anyone. Accordingly, I am
going to direct that a docket entry be made dismissing the action
for mootness.
Is there anything further, gentlemen?
(No response. )
(END OF EXCERPT OF REPORT OF PROCEEDINGS.)
APPENDIX C—Judgment of Court of Appeals
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 79-1267
DAN RIVER, INC.,
Appellant,
versus
UNITEX LIMITED; MANNIP LIMITED; CHENG FuR SHE;
CHENG LEE KIT-YIu; PHILIP Y. S. CHENG; LEE CHEN CHE;
Liu HAN TANG; YANG YUAN LOONG; DoRA YANG;
THE “ROE” BANK OF HONG KONG; THE “DoE” FINANCE
COMPANY OF HONG KONG; “XYZ” COMPANY,
Appellees.
Appeal from the United States District Court for the Eastern
District of Virginia.
This cause came on to be heard on the record from the
United States District Court for the Eastern District of Virginia,
and was argued by counsel.
On consideration whereof, It is now here ordered and ad-
judged by this Court that the judgment of the said District Court
appealed from, in this cause, be, and the same is hereby, re-
versed. The case is remanded to the U.S. District Court for the
Eastern District of Virginia, at Richmond, for further proceed-
ings not inconsistent with the opinion of this Court filed herewith.
FILED
May 29 1980
U.S. Court of Appeal
Fourth Circuit
A True Copy, Teste:
William K. Slate, II, Clerk
32a
33a
APPENDIX D—Statutes involved.
TEXT OF SECTION 13(d)
(d)(1) Any person who, after acquiring directly or indi-
rectly the beneficial ownership of any equity security of a class
which is registered pursuant to section 12 of this title, or any
equity security of an insurance company which would have been
required to be so registered except for the exemption contained
in section 12(g)(2)(G) of this title, or any equity security is-
sued by a closed-end investment company registered under the
Investment Company Act of 1940, is directly or indirectly the
beneficial owner of more than 5 per centum of such class shall,
within ten days after such acquisition, send to the issuer of the
security at its principal executive office, by registered or certified
mail, send to each exchange where the security is traded, and
file with the Commission, a statement containing such of the
following information, and such additional information, as the
Commission may by rules and regulations prescribe as necessary
or appropriate in the public interest or for the protection of in-
vestors—
(A) The background, and identity, residence, and cit-
izenship of, and the nature of such beneficial ownership
by, such person and all other persons by whom or on whose
behalf the purchases have been or are to be effected;
(B) the source and amount of the funds or other con-
sideration used or to be used in making the purchases, and
if any part of the purchase price is represented or is to be
represented by funds or other consideration borrowed or
otherwise obtained for the purpose of acquiring, holding,
or trading such security, a description of the transaction
and the name of the parties thereto, except that where a
source of funds is a loan made in the ordinary course of
business by a bank, as defined in section 3(a)(6) of this
title, if the person filing such statement so requests, the
name of the bank shall not be made available to the public;
34a
Appendix D—Statutes involved
(C) if the purpose of the purchases or prospective pur-
chases is to acquire control of the business of the issuer of
the securities, any plans or proposals which such persons
may have to liquidate such issuer, to sell its assets to or
merge it with any other persons, or to make any other major
change in its business or corporate structure;
(D) the number of shares of such security which are
beneficially owned, and the number of shares concerning
which there is a right to acquire, directly or indirectly, by
(i) such person, and (ii) by each associate of such person,
giving the background, identity, residence, and citizenship
of each such associate; and
(E) information as to any contracts, arrangements, or
understandings with any person with respect to any secu-
rities of the issuer, including but not limited to transfer of
any of the securities, joint ventures, loan or option arrange-
ments, puts or calls, guaranties of loans, guaranties against
loss or guaranties of profits, division of losses or profits,
or the giving or withholding of proxies, naming the persons
with whom such contracts, arrangements, or understandings
have been entered into, and giving the details thereof.
(2) If any material change occurs in the facts set forth in
the statements to the issuer and the exchange, and in the state-
ment filed with the Commission, an amendment shall be trans-
mitted to the issuer and the exchange and shall be filed with
the Commission, in accordance with such rules and regulations
as the Commission may prescribe as necessary or appropriate
in the public interest or for the protection of investors.
(3) When two or more persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of ac-
quiring, holding, or disposing of securities of an issuer, such syn-
dicate or group shall be deemed a “person” for the purposes of
this subsection.
35a
Appendix D—Statutes involved
(4) In determining, for purposes of this subsection, any per-
centage of a class of any security, such class shall be deemed to
consist of the amount of the outstanding securities of such class,
exclusive of any securities of such class held by or for the ac-
count of the issuer or a subsidiary of the issuer.
(5) The Commission, by rule or regulation or by order, may
permit any person to file in lieu of the statement required by
paragraph (1) of this subsection or the rules and regulations
thereunder, a notice stating the name of such person, the num-
ber of shares of any equity securities subject to paragraph (1)
which are owned by him, the date of their acquisition and such
other information as the Commission may specify, if it appears
to the Commission that such securities were acquired by such
person in the ordinary course of his busiiess and were not ac-
quired for the purpose of and do not have the effect of changing
or influencing the control of the issuer nor in connection with or
as a participant in any transaction having such purpose or effect.
(6) The provisions of this subsection shall not apply to—
(A) any acquisition or offer to acquire securities made
or proposed to be made by means of a registration state-
ment under the Securities Act of 1933;
(B) 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;
(C) any acquisition of an equity security by the issuer
of such security;
(D) any acquisition or proposed acquisition of a secu-
rity which the Commission, by rules or regulations or by
order, shall exempt from the provisions of this subsection
F%
36a
Appendix D—Statutes involved
as not entered into 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 purposes of
this subsection.
TEXT OF SECTION 18
Sec. 18. (a) Any person who shall make or cause to be made
any statement in any application, report, or document filed pur-
suant to this title or any rule or regulation thereunder or any
undertaking contained in a registration statement as provided
in subsection (d) of section 15 of this title, which statement was
at the time and in the light of the circumstances under which
it was made false or misleading with respect to any material fact,
shall be liable to any person (not knowing that such statement
was false or misleading) who, in reliance upon such statement,
shall have purchased or sold a security at a price which was
affected by such statement, for damages caused by such reliance,
unless the person sued shall prove that he acted in good faith
and had no knowledge that such statement was false or mis-
leading. A person seeking to enforce such liability may sue at
law or in equity in any court of competent jurisdiction. In any
such suit the court may, in its discretion, require an undertaking
for the payment of the costs of such suit, and assess reasonable
costs, including reasonable attorney’s fees, against either party
litigant.
(b) Every person who becomes liable to make payment under
this section may recover contribution as in cases of contract from
any person who, if joined in the original suit, would have been
liable to make the same payment.
(c) No action shall be maintained to enforce any liability
created under this section unless brought within one year after
the discovery of the facts constituting the cause of action and
within three years after such cause of action accrued.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.