Petition — Dickinson v. Securities & Exchange Commission
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8 = wad 0 rd 9g Office - Supreme Court, U.S. ‘
FILED
DEC 22 1982
Supreme Court of the Uniteh Sister |
October Term, 1982
IN THE
FAIRLEIGH S. DICKINSON, JR.,
Petitioner,
against
SECURITIES AND EXCHANGE COMMISSION,
ARNOLD S. WELLMAN, MORTON PUPKO,
RUBIN POLNE, MORDECAI ROSENFELD,
JAY-GRO FABRICS, INC. PENSION TRUST,
BECTON, DICKINSON & CO.,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Suetpon H. Exsen
Attorney for Petitioner
One Rockefeller Plaza
New York, New York 10020
(212) 586-2211
Of Counsel:
Orans, Exsen & Luperr
Lesure A, Lupert
Sytvia WzRTHEIMER
One Rockefeller Plaza
New York, New York 10020
December 22, 1982
Questions Presented
1. Under Section 13(d) of the Securities Exchange Act
(‘‘the Williams Act’’), wiich requires a filing with the
S.E.C. and company management by certain groups which
are beneficial owners of more than five percent of a public
company’s stock, should the test of beneficial ownership be
objective, i.e., voting control and economic interest (the
Seventh Circuit test), or should the test be subjective and
deem such persons as an investment advisor to be a bene-
ficial owner if he has influence over stockhoiders he advises
(the test handed down in this case by a sharply divided
Second Circuit) ?
2. Can a person violate Section 13(d) unknowingly, or
is the filing requirement triggered only by an agreement,
made with knowledge that a group has been formed which
has beneficial ownership of more than five percent of the
company’s stock?
3. Must a group of stockholders who seek to sell blocks
deemed to aggregate five percent or more of the stock in
a public company make a filing under the Williams Act
when they are only selling but not acquiring stock in the
public company, as the Second Circuit has held, despite a
contrary holding by the Seventh Circuit and the statutory
language which states that a filing must be made ‘“‘after
acquiring’’ securities ?*
* The lower court consolidated seven actions for trial. The only
laintiffs-respondents not mentioned in the caption are the co-plaintiffs
in the action commenced by plaintiff-respondent Becton, Dickinson &
Co.: Marvin S. Asnes, Theodore J. Bauer, Henry P. Becton, Su-
zanne B. Chapman, Benedict T. Harter, Wesley J. Howe, William S.
Little, Foxhall A. Parker, Foxhall A. Parker and R. Milton Boyce
as Trustees of The Morgan Parker 1967 Trust, C. Albert Rollenhagen,
Harry Roth, Fred R. Sullivan, and Raymond S. Troubh.
Ii!
TABLE OF CONTENTS
PAGE
Questions Presented 0.0... eae I
A 1
a Beles 2
Statutes and Regulations Involved ............. 2
Statement of the Case .
| re
Reasons for Granting the Writ 00.0.0... ees 9
Point I—The Ambiguous Concept of a ‘‘ Power to
Commit’’ Shares Undercuts Congressional Pol-
icy and Provides an Inadequate Basis to Deter-
mine ‘‘ Beneficial Ownership’? Within the Mean-
ing of Section 13(d) (1) ; . 10
Point Ii—The Second Cireuit’s Finding of an
Agreement Deepens the 13(d) Quagmire 16
Point I1I—Section 13(d) Does Not Require Fil-
ing by ‘‘Selling Groups’’, at Least Not Without
Additional ~~ camel of Stock ed hie
Members ...... 3 2 esas 18
ne ccseshucnvavens ee. a
Iv
PAGE
‘ppendix :
Opinion of the United States Court of Appeals for
Pb Se RIE Co bid anneetisonenones la
Opinion of the United States District Court for the
Southern District of New York .. heat
Opinion of the United States District Court for the
Southern District of New York—Damages .... 155a
Order of the United States Court of Appeals for the
Second Circuit Denying Petition for Rehearing
En Banc, September 23, 1982 ........... itis ae
Section 13(d), Securities Exchange Act of 1934,
Be CEUs IID prssiitaneeiecbasocoontudeaen 190a
Investment ~ gual Act, Section 3(0)9, 15 U.S.C.
§80a-2(9) . meee ay - 194a
Section 16(a) of the Securities ely Act, 15
Sh CD ii stetetroccnacmcnnavntnenceon 195a
SEC Rule 13d-3, 17 C.F.R. 240.13d-3 ..... orcipivive rea
v
TABLE OF AUTHORITIES
PAGE
Cases:
Bath Industries, Ine. v. Blot, 427 F.2d 97 (7th Cir.
1970) : 8,5, 16, 18, 19
Corenco Corp. v. Schiavone & Sons, Inc., 488 F.2d 207
(2d Cir. 1973) 16
Donovan v. Miller, 112 A. 926, 137 Md. 555 (Ct. of inl
Md. 1921) ions 8
Edgar v. Mite Corp. —— U.S. ——, 102 S.Ct. 2629
(1982) . Se Hy
Electronic Speciality Co. v. ‘International Controls
Corp., 409 F.2d 937 (2d Cir. 1979) a Se
GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971),
cert. denied, 406 U.S. 910 (1972) ........... ......16, 19, 20, 21
Mathias v. Segaloff, 51 A.2d 654, 187 Md. 690 2 Ct. of
App. Md, 1947) . . 8
Montclair v. Ramsdell, 107 US. 147 (1883) . Sst Cae
Nicholson File Co. v. H.K. Porter Co., 341 F.Supp. 508
(D.R.1. 1972), aff’d on other arounds, 482 F.2d
421 (1st Cir. 1973) .......... eo ; 16
Platt v. Union Pac. R.R., 99 U.S. 48 (1879) ete
Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975) 4,9
Susquehanna Corp. v. Pan American Sulphur Co.,
423 F.2d 1075 (5th Cir. 1970) 0.0000. 16
Tannenhaum v. Zeller, 552 F.2d 402 (2d Cir.), cert.
denied sub nom. F’. Eberstadt Co. v. Tannenbaum,
434 U.S. 934 (1977) ooo... 22 1 12
United States v. Menasche, 348 U.S. 528 (1955) ........ . 20
vI
PAGE
Authorities:
Aranow, Einhorn, & Berlstein, Developments in Ten-
der Offers for Corporate Control 41 (1971) . 17
Scott on Trusts §194 ee 8
Statutes and Rules:
Securities Exchange Act of 1934:
EN RIN 5. cc scacvnsecscenccerssunsstainstopistnranheraeaene 6
MMO MIEN oii sc ves spsis accocnevasns catacsssacdivaantiSceecctcats eee
MII MENON ssassscisdscipaseneneiecens sucess ak Gee eee 6
Section 16(a) ........... apnea -f eS
Investment Company Act of 1940:
FN NI cscdsiccdciccccsvecassoptseesriccseiomenceri 2, 8,13
Law Reviews:
Young, Section 13(D)—a New Element in the Battles
for Control of Corporate Managements: The
Implications of GAF Corporation vy. Milstein, 27
The Business Lawyer 1137, 1144 (1972) .............14, 22
Legislative History:
S. Rep. No. 550, 90th Cong., 1st Sess. (1967) We 21
H.R. Rep. No. 1711, 90th Cong., 2d Sess. (1968), re-
printed in 1968 U.S. Code Congress. & Admin.
BIO cits erin tssckncictassaacsoicisdanntaeene nana 21
Hearings on Full Disclosure of Corporate Equity
Ownership and in Corporate Takeover Bids, 113
Cama Te, GG COD oesincecsses states cepevscececcnencensernaecen 21
No. —_—“-_-“-
IN THE
Supreme Court of the United States
October Term, 1982
Farrteicn §. Dickinson, JR.,
Petitioner,
against
Securities anp Excnance Commission, Arnotp S. WEtLL-
MAN, Morton Pupxo, Rustin Poune, Morpecat Rosenre.p,
Jay-Gro Fasrics, Inc. Pension Trust, Becton, Dickinson
& Co.,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Petitioner, Fairleigh S. Dickinson, Jr., respectfully
requests that this Court issue a writ of certiorari to the
United States Court of Appeals for the Second Circuit.
Opinions Below
The opinion of the United States District Court for the
Southern District of New York is reported at 475 F.Supp.
783.* The opinion of the United States Court of Appeals
for the Second Circuit is reported at 682 F.2d 355.
* That opinion dealt only with questions of liability. The District
Court rendered a subsequent opinion, contained in the Appendi~, deal-
ing with the question of damages which is reported at 497 «Supp.
824. That opinion is not relevant to the issues raised herein.
Jurisdiction
The judgment of the 'ourt of Appeals for the Second
Circuit was entered on June 24, 1982. Petitioner received
an extension of time in which to file a petition for rehearing.
That petition was denied on September 23, 1982.
The jurisdiction of this Court is invoked pursuant to
28 U.S.C. § 1254(1).
Statutes and Regulations Involved
The basic statute involved is Section 13(d) of the
Securities Exchange Act of 1934, 15 U.S.C. §78m(d).
Other statutes involved are Section 2(a)(9) of the Invest-
ment Company Act, 15 U.S.C. § 80a-2(a)(9), and Section
16(a) of the Securities Exchange Act, 15 U.S.C. § 78p(a).
The S.E.C. has promulgated Rule 13d-3, 17 C.F.R.
§ 240.13d-3, which also bears on the issues raised herein.
These statutes and rules are printed in the Appendix hereto.
Statement of the Case
Section 13(d)(1) of the Securities Exchange Act of
1934, enacted in 1968 as one of the Williams Act amend-
ments, P.L. 90-439, requires ‘‘any person who, after acquir-
ing directly or indirectly the beneficial ownership of any
equity security [of certain designated classes], is directly
or indirectly the beneficial owner of more than 5 per centum
of such class”’ to file a disclosure statement (Schedule 13D)
with the S.E.C. and with the company in question within ten
days after such acquisition. 15 U.S.C. § 78m(d) (1).
3
Section 13(d)(3), enacted at the same time, provides:
‘‘When two or more persons act as a partnership,
limited partnership, syndicate, or other group for the
purpose of acquiring, holding, or disposing of securi-
ties of an issuer, such syndicate or group shall be
deemed a ‘person’ for the purposes of this subsection.’’
Id. § 78m(d)(3). Thus, a ‘‘group’’ becomes a ‘‘person”’
and, as such, is subject to the filing requirements of Section
13(d)(1) after it acquires beneficial ownership of more
than five percent of an issuer’s securities.
The Second Circuit, over a vigorous dissent, and in
conflict with the decision of the Seventh Circuit in Bath
Industries, Inc. v. Blot, 427 F.2d 97 (7th Cir. 1970), as well
as all other decisional law in the past fourteen years, has
created in this case a new test for determining beneficial
ownership of stock, which focuses on subjective criteria
such as an investment advisor’s influence over stockholders.
Under the new test, a shareholder with less than five
percent of the stock who hires an investment banker which
owns no stock nevertheless must file under Section 13(d)
if the banker has influence over other stockholders, such as
mutual funds, when the aggregate stock held by the share-
holder in question and the funds exceeds five percent.
This new test departs from previously relied upon ob-
jective tests such as voting control of or economic interest
in stock. The test thus becomes vague and persons who
do not know about all the business relations of those
with whom they deal, or simply misjudge them, may
inadvertently violate the law. As Judge Van Graafeiland
stated in dissent:
‘¢‘When reputable and honest businessmen, advised
by able and ethical lawyers, are held to have violated
4
a federal statute, the likelihood is that there is some-
thing faulty in the statute, the manner in which it is
administered, or both. In this case, I believe the fault
lies with both.’’
682 F.2d at 368.
Those who are uncertain about what the statute requires
under the new Second Circuit test may of course file as a
precaution, but such filings will create confusion as to
when a real group under the Williams Act has been formed.
Indeed, they may well subject persons filing to a lawsuit
which claims that an overinclusive filing is a false filing,
as the dissent indicated.
Significantly, the new test will favor incumbent man-
agement, in conflict with the Williams Act policies as con-
strued by this Court in Edgar v. Mite Corp., —— U.S. —,
102 S.Ct. 2629 (1982), and Rondeau v. Mosinee Paper Corp.,
422 U.S. 49 (1975), and an abundant legislative history.
It is not only that management will be alerted by additional
filings, but also the need for precautionary filings will
hamper dissidents in seeking allies and helpers. In many
situations the effect will be to deprive persons outside
management of aid from investment bankers and advisors
who influence other stockholders, such as mutual funds,
but who do not own the stock and who will often not want
to join in a filing which management may deem hostile. As
Judge Van Graafeiland perceptively noted in his dissent,
the filing can lead to a lawsuit which management would
bring against the investment advisor and the funds it
advises. Under those circumstances, a dissident group will
increasingly be told by investment bankers and advisors to
turn elsewhere for help. Though Congress did not intend
to deprive dissidents of such valuable and often essential
services, that will be the result of the Second Circuit’s
vague new test.
In addition, the new test undercuts the requirement of
an agreement before a filing must be made by a group, as
established by prior law. Engagement of an influential
investment banker or other person is now enough to require
filing even though the real owners of the stock have made
no decision about the use of their shares. The seller who
engages advisors will not know of their other business re-
lations or be able to judge their influence over others. A
statute with substantial penalties thus comes to bear on
persons who may have acted unknowingly.
Finally, the Second Circuit, in rejecting the Seventh
Circuit’s requirement that the group must acquire addi-
tional stock before a filing is necessary, Bath Industries,
Inc. v. Blot, supra, has burdened many efforts to sell large
blocks of stock, without support in the Williams Act’s
language, policy or history.
The Facts
Petitioner Fairleigh S. Dickinson, Jr. (‘‘Dickinson’’)
was the son of the co-founder of Becton, Dickinson & Co.
(‘‘Becton’’), and for many years served as the com-
pany’s president, chief executive officer and chairman of
the board. On April 20, 1977, he was ousted by a manage-
ment faction. Dickinson then retained Salomon Brothers
(‘*Salomon’’) and F.. Eberstadt & Co. (‘‘Eberstadt’’), two
investment bankers, to seek offers for his stock, which
totaled about 4.2% of the outstanding common shares. 682
| ¥.2d at 358-59, 475 F.Supp. at 799-800. In January 1978,
Sun Company, Inc. (‘‘Sun’’) purchased Dickinson’s shares,
6
as part of its acquisition of 34% of the stock of Becton.
Actions were then commenced by the S.E.C., Becton and
certain shareholders alleging, inter alia, that Sun’s pur-
chases violated Section 14(d) of the Williams Act, and that
Dickinson and others had violated Section 13(d) of that
Act.* Because the actions raised claims under the federal
securities laws, the District Court’s jurisdiction was in-
voked pursuant to 28 U.S.C, § 1331.
The District Court found, and a divided Second Cireuit
affirmed, that a ‘‘group’’ had formed in April 1977, nine
months before the sales to Sun, composed of (a) Mr. Dick-
inson, (b) the investment banker Eberstadt and one of its
subsidiaries, Eberstadt Managers and Distributors, Inc.
(‘*M & D’’), which advised two mutual funds that owned
Becton stock, (c) Fitzgerald Dunning (‘‘Dunning’’), a
Becton director whose family owned Becton stock in three
trusts, each of which had an independent trustee, and (d)
Daniel W. Lufkin (‘‘Lufkin’’), a well-known investment
banker, one of whose partners advised three individuals
who owned Becton stock.
All persons with direct knowledge denied they had
agreed to form a group. It was also undisputed that
together these persons and entities did not own outright,
or have voting control over, or have any economic interest
in five percent of the stock of Becton. These objective
criteria are the indicia of beneficial ownership to which the
* Allegations of violations by Dickinson of Sections 10(b) and
14(d) of the Securities Exchange Act and of breach of fiduciary duty
were dismissed after trial. No remedy was 7 by the trial court
inst Dickinson for violating Section 13(d), a ruling which the
class plaintiffs appealed. The latter finding, which is reported at 497
F.Supp. 824, was affirmed by unanimous vote of the Second Circuit.
Sun and the other defendants settled with plaintiffs after trial.
The Section 14(d) issue was not raised on appeal.
7
courts and the S.E.C. had always locked. The Second
Circuit majority here fashioned a new subjective test of
beneficial ownership, however, which asks whether members
of the alleged group have the ‘‘power to commit’’ shares
owned by others. See 682 F.2d at 365-66, 475 F.Supp. at
829-30. This in turn is to be determined by the influence
advisors have over other shareholders.
Thus, in the case of the investment banker Eberstadt,
and its subsidiary M & D, the Second Circuit held that,
though they had neither voting control nor an economic
interest, they had ‘‘ beneficial ownership”’ of stock owned by
Chemical Fund and Surveyor Fund, because these two mu-
tual funds were advised by M & D. This holding was made
despite legal requirements that only the independent
directors of those Funds could sell their Becton stock, or
join a group with M & D or anyone else. It was undisputed
that the directors of the Funds never delegated or were
asked to delegate authority to Eberstadt or M & D to join
a group, and that no one even discussed with those directors
a possible sale of Becton stock untii Sun’s offer in January,
1978, nine months after the Funds’ stock allegedly became
part of the group with Mr. Dickinson. The Circuit, how-
ever, found that because M & D could influence the Funds’
lirectors, it had beneficial ownership of the Funds’ Becton
stock. 682 F.2d at 366. Thus, according to the Second
Cireuit majority, when Mr. Dickinson engaged Eberstadt
as an investment banker to help sell his stock, he formed
a group because of the influence which the banker’s invest-
ment advisor subsidiary was deemed to have over the
Funds.
The Second Circuit’s new test means that Mr. Dickinson
and the other alleged group members were required to pre-
dict nine months before the issue of selling the Funds’
Becton stock arose that, when confronted with an offer,
the Funds’ independent directors would follow M & D’s
advice, Mr. Dickinson and the others no longer could rely,
in determining whether those they dealt with had ‘beneficial
ownership’’ of enough stock to require a filing, on objective
standards such as voting control, economic interest, or, in
the case of mutual funds, the statutory presumption con-
tained in Section 2(a)(9) of the Investment Company Act
that directors who are labeled independent truly are so.
Dr. Dunning, another alleged group member, was held
by the Second Circuit to have the ‘power to commit’’ stock
held by three trusts, of which he was a co-trustee of only
one. Each trust had two trustees, and an independent
lawyer was a co-trustee of all three. Again, the Second
Circuit ignored the objective criteria of ownership such as
voting control and the law of trusts generally and in par-
ticular that of Maryland, the situs of the trusts, which
requires that co-trustees must act jointly before any dis-
position of trust property may occur, Scott on Trusts,
§ 194; Mathias v. Segaloff, 51 A.2d 654, 187 Md, 690 (Ct,
of App. Md. 1947); Donovan v. Miller, 112 A, 926, 137 Md.
555 (Ct. of App. Md, 1921). Instead, the Cireuit held that
because Dr. Dunning could influence the other trustees, he
could commit the trusts’ stock, despite uncontradicted
testimony by the other trustees that they were independent,
and the undisputed evidence that no one, including Dr.
Dunning, contacted any of the other trustees until Sun’s
offer in January, 1978, some nine months after the trusts’
stock was attributed to the group.*
*The Second Circuit appeared to rely heavily on the mere fact
that the co-trustees tactaded Dr. Dunning’s brothers and their family
attorney, without any evidence that any of them had ever delegated
any authority to Dr, Dunning with respect to any matter whatsoever.
682 F.2d at 367.
Daniel Lufkin, the last group member, was held to be the
‘*beneficial owner’’ of stock owned by three individuals who
had acquired their Becton stock at the same time as Mr.
Lufkin, as consideration for the sale of a company to Bee-
ton. The individuals had all legal indicia of ownership,
but because they looked to Mr. Lufkin’s partner for advice
on whether to sell to Sun, Mr. Lufkin was deemed to be the
beneficial owner of all their stock. As with the Funds and
the trusts, those persons dealing with Mr. Lufkin and Mr.
Lufkin himself, under the Second Circuit’s new test, were
required to predict in April, 1977 what influence Mr. Luf-
kin’s partner would have over the three individuals in Jan-
uary, 1978.
Reasons for Granting the Writ
As the 8.E.C, acknowledged in its appellate brief to the
Second Circuit, this case raises ‘‘many important ques-
tions’’ concerning the meaning and application of Section
13(d) of the Exchange Act, which have very real and sig-
nificant practical implications for shareholders and others
in the securities industry, including persons and firms en-
gaged in takeovers, mergers and acquisitions. 8.E.C. App.
Br., p. 6.
The new test, which divided the Second Circuit and con-
flicts with the Seventh Circuit test, undercuts significant
congressional policies, recognized by this Court in Edgar v.
Mite Corp., supra, and Rondeau vy. Mosinee Paper Corp.,
supra, to maintain neutrality between management and dis-
sidents. It burdens dissidents significantly and threatens
to deprive them in many cases of critical help from invest-
ment bankers and investment advisors. It leads to unneces-
sary and potentially confusing 13(d) filings. It is unfair,
10
since serious consequences can be visited on persons who
lack knowledge of, or misjudge, the business relationships
of those with whom they work in efforts to sell stock.
Finally, it burdens block sales by requiring Williams Act
filings even though no stock is acquired, and it does so with-
out support in either the language o, policy of that statute,
The new test will have major impact on the economy
and on the regulation of takeovers, mergers and acquisi-
tions, as the S.B.C. has acknowledged. There are splits
between the circuits and within the Second Circuit, The
decision below, if allowed to stand, will have pernicious
effects, will be unfair and will undereut important congres-
sional policies that have been recognized by this Court. For
all these reasons, the writ should be granted,
POINT I!
The Ambiguous Concept of a “Power to Commit”
Shares Undercuts Congressional Policy and Provides
an Inadequate Basis to Determine “Beneficial Owner-
ship” Within the Meaning of Section 13(d) (1).
The first fundamental problem with the new concept
introduced by the Second Circuit is that it is virtually im-
possible for someone dealing with an individual or institu-
tion which advises some other shareholder to determine
whether the relationship is such that it will be deemed to
incorporate the ‘‘power to commit’’ shares, The new test
is based on a subjective, after the fact evaluation of invest-
ment influence which furnishes no guidance to shareholders
and others who must make their 13(d) filing decisions at
the outset of, and not after, particular discussions or a
11
particular course of action. Even from the perspective of
hindsight, the subjectivity and ambiguity of the ‘‘power to
commit’’ concept leave the determination of ‘beneficial
ownership’’ to decisions by each individual trial court and
can produce no broad principles of general applicability.
Section 13(d) is a statute which must be looked to for
guidance in deciding whether to file a Schedule 13D with
the 8S.E.C. Vagueness in its application means that filings
may well subject properly intentioned filing parties to
sanctions for submitting incorrect information and may
also misinform the public. How indeed in the usual cor-
porate struggle can one reliably say which investment
advisors or family members have sufficient influence over
others to make them ‘‘beneficial owners’’ within the new
test?
The difficulties and uncertainties generated by the new
‘*nower to commit’? concept become particularly acute, as
this case illustrates, when shareholders retain the services
of investment bankers. Eberstadt, the investment banking
firm whose role was critical to the instant decision, is but
one of many major houses with the dual capacity of invest-
ment banker and advisor to mutual funds. A partial list
includes Prudential-Bache Securities Inc., Dean Witter
Reynolds Organization, Inc., Lehman Brothers, Kuhn,
Loeb, Ine., Merrill Lynch & Co., Ine., Oppenheimer & Co.,
Ine., Paine Webber, Inc. and Smith Barney Harris Upham
& Co., Ine. In 1981, the combined revenues from invest-
ment banking of just these houses was nearly $1 billion;
their advisory fees were many millions of dollars. The
number of shareholders they advise in both capacities is
enormous,
12
How, pursuant to the Second Circuit majority’s opinion,
is a shareholder, entity or institution which contacts an
investment banker that also advises mutual funds to deter-
mine the degree of influence the banker has over the funds?
In the case at bar, it was undisputed that in April 1977,
Mr. Dickinson through counsel did investigate the rela-
tionship of Eberstadt and M & D to the Funds and, as the
lower court found, concluded that Eberstadt and M & D
did not control the Funds’ decision whether to sell or join
a 13(d) group. 475 F.Supp. at 801.
One of the ironies of this case is that the lawyer who
conducted the investigation, Martin Lipton, a senior part-
ner of the New York City firm of Wachtell Lipton Rosen
& Katz, based his conclusion in large part on the Second
Circuit’s decision in Tannenbaum v. Zeller, 552 F.2d 402
(2d Cir.), cert. denied sub nom. F. Eberstadt Co. v. Tan-
nenbaum, 434 U.S. 934 (1977), which emphasized the inde-
pendence of the Chemical Fund board of directors from
M&D:
‘This was a well-qualified board and its determina-
tions did not merely rubber-stamp the recommenda-
tions of M & D. We conclude that the independent
directors were not dominated or unduly influenced by
the investment adviser.’’
552 F.2d at 427. The Tannenbaum vy. Zeller decision was
handed down in March 1977, just one month before Mr.
Lipton investigated the same issue. In April, seven of the
eleven board members of Chemical Fund were the same as
during the time period focused on in the Tannenbaum case.
The majority opinion in the instant case never explained
why Mr. Lipton and Mr. Dickinson should have ignored
the Circuit’s own prior decision, as well as the other ob-
jective indicia of the respective Fund directors’ inde-
13
pendence, including the directors’ voting contro] of the
stock and the statutory presumption of their independence
set forth in Section 2(a)(9) of the Investment Company
Act. Nor did it say how they should have predicted that
nine months later the Fund directors would rely on M & D
in deciding whether to sell the Funds’ Becton stock.
It is not a satisfactory answer to the difficulties and
uncertainties generated by the Second Circuit’s new defini-
tion of ‘‘heneficial ownership’’ to say that a 13(d) filing
should simply be made as a matter of course. In practice,
the Circuit’s opinion will generate more frequent and over-
inclusive 13(d) filings to minimize the risk of litigation and
sanctions for not filing. Such filings may confuse the pub-
lic; they may also bring lawsuits by management which
claim that the overinclusive filing is false, as Judge Van
Graafeiland suggested below. Indeed, in the instant case, a
filing by Dickinson and M & D might well have been deemed
false by the Funds’ directors, who could then have sued.
The second fundamental problem with the Second Cir-
cuit’s opinion is that the frequent and overinclusive filings,
which will result from the new test of ‘‘beneficial owner-
ship’’, give an enormous advantage to incumbent manage-
ment in dealing with any shareholder dissension. Such an
advantage is directly contrary to express and repeated
statements of congressional intent not to tip the balance in
corporate struggles in favor of either management or
dissidents.
Recognizing the congressional intent, this Court held
recently that the Williams Act must be neutral between
management and dissidents:
‘Congress became convinced ‘that takeover bids
should not be discouraged because they serve a useful
purpose in providing a check on entrenched but ineffi-
14
cient management.’ Senate Report at 3. It also
became apparent that entrenched management was
often successful in defeating takeover attempts. As
the legislation evolved, therefore, Congress disclaimed
any ‘intention to provide a weapon for management to
discourage takeover bids... .’ Rondeau v. Mosinee
Paper Corp., supra, at 58, and expressly embraced a
policy of neutrality.’’
Edgar v. Mite Corp., supra, 102 S.Ct. at 2636.
Under the new test, management will receive many
more early warnings which they can use to attack potential
dissidents.* In addition, as pointed out above, investment
bankers in the future will be reluctant to put themselves in
the position of Eberstadt and M & D, who became the
targets of a lawsuit. Funds advised by them or their
affiliates can now easily be brought into a lawsuit as defend-
ants, as they were here, with potentially unsettling effects
on the advisors’ relations to the funds. Management has
a powerful new weapon to frighten such advisors away
from dissidents. Indeed, the mere prospect of a 13(d)
filing which can incur the wrath of management may well
remove the incentive to act from bankers and advisors
already inclined by numerous economic incentives to ally
themselves more with management than with dissidents.**
i Early notice to incumbent management often results in manage-
ment’s institution of a lawsuit to prevent a takeover, as Judge Van
Graafeiland stated. 682 F.2d at 369, 370. Other favored tactics of
management include issuing shares to ~ ony, re persons, arranging
other mergers and purchasing stock . See, Young, Section 13(D)—A
New Element in the Battles for Control of Corporate Managements:
The Implications of GAF Corporation v. Milstein, 27 The Business
Lawyer 1137, 1138 and n.11 (1972).
** The District Court found the Funds not liable, but held against
their advisors. That position was sustained on — against a plea
that, since Dickinson was no more liable than the Funds, the solechiey
decision against him was inconsistent. The Second Circuit did not
discuss that point in its opinion.
15
The difficulties in applying the ‘‘power to commit’’
concept extend beyond the investment banking context, as
this case also illustrates. Pursuant to the Second Circuit
majority opinion, whenever one shareholder contacts
another to discuss shareholder concerns, such as Lufkin’s
one conversation with Dickinson, that first shareholder
must inquire into and analyze the latter’s relationship with
yet other shareholders in an attempt to determine whether
at some future time a court might find that the second
shareholder had influence over the investment decisions of
others. And in making such inquiries and analysis, accord-
ing to the Second Circuit, the first shareholder again cannot
rely on previously available objective criteria, such as
voting control and economic interest, or established prin-
ciples of trust law and of partnerships.
Moreover, the nature of the 13(d) filings that can be
made by shareholders in situations similar to that of Dick-
inson in April 1977, will, of necessity, be so vague and
speculative that the filings will not promote the avowed
purpose of Section 13(d) to provide necessary and import-
ant information to the investing public. The filings will
reveal only a tenuous association by shareholders (such as
Dickinson and Chemical Fund) who have each retained
the individual right to sell. Such filings will only fuel
speculation about whether sales will actually occur, and
will be disruptive of the market in the relevant security.
As the Fifth Circuit said in a similar context:
‘“‘The securities market is delicately arranged and
needs only slight impetus to upset it.’’
16
Susquehanna Corp. v. Pan American Sulphur Co., 423 F.2d
1075, 1085 (5th Cir. 1970).*
Until this decision, the courts had uniformly held that
objective criteria such as voting control or some other form
of economic interest were required to prove ‘‘ beneficial own-
ership’’ under Section 13(d). Bath Industries, Inc. v. Blot,
supra, 427 F.2d at 112; GAF Corp. v. Milstein, 453 F.2d
709, 716 (2d Cir. 1971), cert. denied, 406 U.S. 910 (1972).**
This lent clarity in an area where it is sorely needed. This
Court should, therefore, grant certiorari to restore that
clarity, and to remove the newly created burdens on dissi-
dent activity.
POINT II
The Second Circuit’s Finding of an Agreement
Deepens the 13(d) Quagmire.
The Second Cirenit majority also rendered amorphous
the notion of a 13(d)(3) ‘‘group’’ and the concept of
‘‘agreement’’ which the courts had unanimously held to be
essential to such a ‘‘group’’. See, e.g., Corenco Corp. v.
* See also, Electronic Speciality Co. v. International Controls
Corp., 409 F.2d 937, 948 (2d Cir. 1969) ; Nicholson File Co. v. H.K,
Porter Co., 341 F.Supp. 508, 519 (D.R.I. 1972), aff'd on other
grounds, 482 F.2d 421 (1st Cir, 1973).
** The S.E.C. has promulgated Rule 13d-3, effective after the events
. this case, which includes the following tests of “beneficial owner-
ship”.
“(1) beg power which includes the power to vote, or to direct
the voting of, such security; and/or (2) Investment power which
includes the power to dispose, or to direct the disposition of, such
securities,”
The Court will note that even though the S.E.C. is a party to this
action its own new rule is more concrete and objective than the rule
which the Second Circuit majority has created.
17
Schiavone & Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973)
(‘‘absent an agreement ... a ‘group’ would not exist’’);
Aranow, Einhorn & Berlstein, Developments in Tender
Offers for Corporate Control 41 (1977) (‘‘Before 13(d) (3)
may apply, there must be an actual agreement of the par-
ties to act together.’’) (Emphasis in original.) Again, the
panel majority vastly reduced the ability of shareholders
and others to regulate the consequences of their actions and
to know in advance what compliance +h the federal securi-
ties laws requires them to do.
It is undisputed that Dickinson had no personal know)-
edge of the degree of influence Eberstadt and M & D were
held to have over the Funds’ directors. Martin Lipton, a
distinguished securities lawyer, had investigated that rela-
tionship and had advised Dickinson’s lawyer that the Fund
directors were independent. 475 F.Supp. at 801. It is
undisputed also that Dickinson himself had no contacts
with the Fund directors. He could, therefore, not have
made an agreement with them. Yet the Second Circuit in-
ferentially found the requisite ‘‘agreement’’ from Dickin-
son’s engagement of Eberstadt as an investment banker.
The Second Circuit thus further compounded the un-
certainties and difficulties confronted by those seeking to
comply with Section 13(d). ‘‘Beneficial ownership’’ and
‘‘agreement”’ are distinct and very different concepts. Ac-
cording to the Sccond Circuit in this case, ‘‘agreements’’
may be found to exist even though the alleged parties to
those ‘‘agreements’’ thought there were none and were
18
advised by counsel after extensive investigation that there
were none, Added to the amorphous new concept of ‘‘bene-
ficial ownership’’ the problems of complying with Section
13(d) will become nightmarish. The only beneficiaries of
the resulting chaos will be incumbent management, in viola-
tion of the neutral policy aims of the Williams Act. Ldgar
v. Mite Corp., supra."
POINT III
Section 13(d) Does Not Require Filing by “Selling
Groups”, at Least Not Without Additional Acquisi-
tions of Stock by Group Members.
This case is the first one in which a court has actually
invoked Section 13(d) against an alleged selling group.
Here, the alleged group’s purpose was to sell its stock;
it was undisputed that they had no intention of acquiring
additional shares and that they did not acquire additional
shares. The application of 13(d) filing requirements to
such a group is based upon an incorrect reading of the
statutory language which conflicts with the Seventh Cir-
cuit’s interpretation of the statute in Bath Industries, Inc.
v. Blot, supra, distorts the congressional purpose behind
the Williams Act and compounds further the uncertainties
* The same uncertainties and difficulties inhere in the inferential
finding of “agreement” with respect to the two other members of the
all group. It is undisputed that Dickinson had no contact with
the independent trustee of the Dunning family trusts, or with Dun-
ning’s brothers (his other co-trustees), or with the stockholders ad-
vised by Lufkin or with Lufkin’s partner, and had no knowledge of
these various noo og a “Agreement” was found, as had been
“beneficial ownership”, largely because the investment bankers ex-
= = that those entities and persons would sell their
stock.
‘19
and ambiguities confronted by individuals, entities and
institutions attempting to comply with the federal securi-
ties laws.
Section 13(d) states that a ‘‘person’’ must make a filing
only ‘‘after acquiring’’ enough stock to own five percent
of a particular class, Section 13(d)(3) defines ‘‘person’’
to include groups with combined holdings of five percent
or more, the purpose of which is acquiring, holding or
disposing of stock. Read together, the two sections require
a filing by:
‘*Any person [or two or more persons acting as a
group for the purpose of acquiring, holding, or dis-
posing of securities] who, after acquiring directly or
indirectly the beneficial ownership of any equity se-
curity of a class which is registered pursuant to section
12... is directly or indirectly the beneficial owner of
more than 5 per centum of such class... .’’ (Hmpha-
sis added.)
The Second Circuit, in its earlier decision in GAF' Corp.
v. Milstein, supra, rejected the argument that the statutory
language requires groups to acquire or intend to acquire
additional stock before they must file, a requirement which
the Seventh Circuit in Bath Industries, Inc. v. Blot, supra,
427 F.2d at 109-10, had said was necessary. To overcome
the statutory language, the GAF court created a theory
of ‘‘constructive acquisition’’, i.e, a group, upon its for-
mation, constructively acquires ‘‘beneficial ownership’’ of
the stock of each of the group members. 453 F.2d at 715-16.
But the statute requires a filing when the group itself
acquires stock. GAF treats formation of the group and
acquisition of stock as the same event, while the statutory
language states that these are two separate events. GAF
reads the words ‘‘after acquiring’’ out of the statute en-
tirely, contrary to basic principles of statutory construc-
tion. United States v. Menasche, 348 U.S. 628, 538-39
(1955) ; Montclair v. Ramsdell, 107 U.S. 147, 152 (1883) ;
Platt v. Union Pac. R.R., 99 U.S. 48, 58 (1879). GAF also
creates an unwarranted differentiation between Section
13(d)’s application to groups, where no actual acquisitions
of stock are deemed necessary to invoke the statute, and
its application to individuals who own more than five per-
cent of a stock and who must actually acquire stock to trig-
ger the 13(d) filing requirement.
The Second Circuit’s fictional concept of acquisitions is
not what Congress contemplated when it passed Section
13(d). Congress intended the statute to apply to actual
acquisitions of stock. Three of the five categories of infor-
mation specified by the statute for inclusion in a required
filing specifically refer to ‘‘purchases’’; the other two are
irrelevant to this issue.* The term ‘‘purchase’’ plainly
connotes, and pinpoints as the statute’s focus, the actual
acquiring of stock in exchange for money or some equiva-
lent. Section 13(d)(6)(B)’s exemption from the filing
requirement for acquisitions which do not exceed two per-
cent of a class of securities further indicates that the
statute is designed to apply to real, and not constructive,
acquisitions of stock.
In addition, the legislative history establishes that the
focus of congressional concern in enacting the Williams
* The ific references to “purchases” are set forth in aie
(1) (A), (B) and (C). Subsections (D) and (E) of §13(d)(1
rrelevant to the issue herein discussed
21
Act was the actual acquisition of stock in a cash tender
offer or through open market or privately negotiated pur-
chases of securities. The following excerpt from the Senate
Report is illustrative of the legislative history establishing
that central concern:
‘‘There are, however, some areas still remaining where
full disclosure is necessary for investor protection but
not required by present law. One such area is the pur-
chase of substantial or controlling blocks of the securi-
ties of publicly held companies. 8.510 would amend
the Securities Exchange Act of 1934 by requiring the
disclosure of pertinent information and would afford
other protections to stockholders (1) when a person
or group of persons seeks to acquire a substantial
block of equity securities of a corporation by a cash
tender offer or through open market or privately ne-
gotiated purchases and (2) when a corporation repur-
chases its own equity securities,’’
S. Rep. No. 550, 90th Cong., Ist Sess. 1 (1967). (Emphasis
added.) See also H.R. Rep. No. 1711, 90th Cong., 2d Sess.
1 (1968), reprinted in 1968 U.S. Code Congress & Admin.
News 2811; Hearings on Full Disclosure of Corporate
Equity Ownership and in Corporate Takeover Bids, 113
Cong. Rec. 854 (1967) (remarks of Senator Williams).
The paragraph of the Senate and House Reports relied on
by the Second Circuit in GAF, supra, in support of its
‘constructive acquisition’’ theory, is inconsistent with the
content, tenor and thrust of all of the other legislative
history as well as with the statutory language.
Congress knew how to write a provision which would
impose a filing requirement that would be triggered by
‘beneficial ownership’’ alone regardless of whether stock
was acquired. Congress wrote such a provision when it
enacted Section 16(a) of the Exchange Act which requires
a filing by
‘*fe]very person who is directly or indirectly the bene-
ficial owner of more than 10 per centum of any class
of any equity security... .’’
Section 13(d) differs significantly from Section 16(a) by
its inclusion of the additional requirement that filings be
made by groups or individuals only ‘‘after acquiring’’
stock. The Second Circuit improperly ignored this im-
portant distinction between Section 13(d) and Section
16(a). See Young, supra at 1144,
The Second Circuit’s failure to require actual acquisi-
tions of stock before triggering the filing requirement of
Section 13(d) compounds the considerable uncertainties
and ambiguities engendered by the Circuit’s new test for
‘*beneficial ownership’’ and the prerequisites of a ‘‘group’’.
In rejecting the requirement of actual stock acquisition,
the Second Circuit has rejected yet another objective stand-
ard which could give clear guidance as to when filing is
necessary. In addition, the new test will tend to burden
block sales of stock because of the difficulty in recruiting
investment bankers, investment advisors and others who
do not want to incur the wrath of management. The un-
certainty and problems thus created are, of course, height-
ened by the existing conflict between circuits sitting in the
nation’s two largest cities.
Conclusion
For the foregoing reasons, this petition for a writ of
certiorari should be granted.
Dated: New York, New York
December 22, 1982
Respectfully submitted,
Suevpon H, Eisen
Attorney for Petitioner
One Rockefeller Plaza
New York, New York 10020
(212) 586-2211
Of Counsel:
Orans, Evsen & Lupert
Lesure A, Lupert
Sytvia WERTHEIMER
One Rockereller Plaza
New York, New York 10020
APPENDIX
Opinion of the United States Court of Appeals
for the Second Circuit
UNITED STATES COURT OF APPEALS
Seconp Circuir
Nos. 39, 40, Dockets 80-6213, 80-6357.
rl <> Bee - |
Arnotp 8, Wetiman, et al.,
Plaintiff s-Appellees,
v.
Farmeicu §. Dicxryson, JR.,
Defendant-A ppellant.
Oo
Argued Dee. 9, 1981.
Decided June 24, 1982
Before Lumparp, Moorrt and Van Graareranp, Circuit
Judges.
Leonarp P. Moorsz, Circuit Judge:
This appeal arises from seven separate actions brought
against defendant-appellant, Fairleigh S. Dickinson, Jr.,
and eleven other defendants, for alleged violations of the
federal securities laws, New Jersey state law, and the rules
of the New York Stock Exchange. These seven actions
include an enforcement action brought by the Securities
and Exchange Commission (‘‘SEC’’), a private action filed
by Becton, Dickinson & Company (‘‘Becton’’) and certain
2a
Opinion of the United States Court of Appeals
for the Second Circuit
of its officers, and five class actions brought on behalf of
certain Becton shareholders. All seven actions stem from
the acquisition by Sun Company, Inc. of approximately 34%
of the outstanding stock of Becton, a New Jersey corpora-
tion engaged in the manufacture of health care products and
medical testing and research equipment. The actions were
consolidated for a bench trial before the Honorable Robert
L. Carter, District Judge of the Southern District of New
York. By agreement of the parties, the consolidated trial
was bifurcated on the issues of liability and damages.
On the issue of liability, Judge Carter held, inter alia,
that Dickinson, in an effort to induce a third-party takeover
or partial takeover of Becton, had violated Section 13(d) of
the Securities Exchange Act of 1934, 15 U.S.C. § 78m(d)
(1976),’ when he joined a group to sell more than 5% of the
company’s common stock without making the requisite
filings with the SEC, Becton, and the exchange on which the
1. Section 13(d) of the Securities Exchange Act of 1934, 15
U.S.C. §78m(d) (1976), provides:
“(1) Any person who, after acquiring directly or indirectly
the beneficial ownership of any equity security of a class which
is registered pursuant to section 78/ 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
781(g)(2)(G) of this title, or any equity security issued 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 infor-
mation, as the Commission may by rules and regulations, pre-
scribe as necessary or appropriate in the public interest or for the
protection of investors—”
3a
Opinion of the United States Court of Appeals
for the Second Circuit
securities were traded.? Wellman v. Dickinson, 475 F.Supp.
783, 837 (S.D.N.Y.1979). Before the trial on damages com-
menced, the SEC withdrew its request for relief from Dick-
inson other than a judicial declaration that Dickinson had
violated Section 13(d). Accordingly, by order entered on
February 19, 1980, Judge Carter adhered to the court’s
findings concerning Dickinson’s liability and, with the
SEC’s consent, terminated with prejudice its enforcement
action against Dickinson.’
On July 31, 1980, Judge Carter issued a final opinion
addressing, inter alia, the class plaintiffs’ claims for dam-
ages or disgorgement of profits against Dickinson and other
members of the group found to have violated Section
13(d). Wellman v. Dickinson, 497 F.Supp. 824, 834-36
(S.D.N.Y.1980). Judge Carter held that these plaintiffs
had no right to monetary relief against Dickinson for a
number of reasons, including their failure to demonstrate
that the Section 13(d) violations directly caused any injury
to the class. Thus, the district court entcred a final judg-
ment on September 29, 1980, denying the class plaintiffs’
claims for disgorgement and other monetary relief against
Dickinson for his violation of Section 13(d).
2. Judge Carter dismissed all other claims against Dickinson, in-
cluding those for alleged breaches of fiduciary duty and allenged viola-
tions of Section 10(b), 14(d), and 14(e) of the Securities Exchange
Act of 1934, 15 U.S.C. §§ 78j(b), 78n(d), 78n(e) (1976). Well-
man v. Dickinson, 475 F.Supp. 783, 837 (S.D.N.Y. 1979).
3. The order entered on February 19, 1980 provided in pertinent
part:
“The prior findings and order of this Court shall remain in effect
as to Dickinson and [the SEC’s enforcement action] as to Dick-
inson is otherwise terminated with prejudice,”
4a
Opinion of the United States Court of Appeals
for the Second Circuit
Dickinson appeals from this final judgment and all prior
orders in this case finding that he violated Section 13(d) of
the Securities Exchange Act of 1934. Dickinson contends
that plaintiffs have failed to prove either that the purported
members of the Section 13(d) group had beneficial owner-
ship of sufficient Becton stock to form a group with him, or
that he had entered an agreement with anyone to dispose of
Becton stock either directly or indirectly through agents.
The class plaintiffs cross-appeal from those portions of the
September 29, 1980 judgment denying their claims for dis-
gorgement and other monetary relief against Dickinson and
from the dismissal of their claims for breach of fiduciary
duty against Dickinson. On appeal, the class plaintiffs re-
new their argument that Dickinson breached his fiduciary
duty to the shareholders of Becton, and that he must dis-
gorge a portion of the profits he obtained as a result of his
actions in violation of Section 13(d) and in breach of his
fiduciary duty.
We reject the claims raised by both parties, and hold
that Judge Carter did not err in finding that Dickinson vio-
lated Section 13(d) of the Securities Exchange Act of 1934
and in denying the claims of the class plaintiffs for dam-
ages or disgorgement from Dickinson. For the reasons set
forth below, we affirm the district court’s judgment and
orders in all respects.
Facts
Since the facts underlying this appeal are described in
detail in the two opinions of the district court, Wellman v.
Dickinson, 497 F.Supp. 824 (S.D.N.Y.1989); Wellman »v.
Opinion of the United States Court of Appeals
for the Second Circuit
Dickinson, 475 F.Supp. 783 (S.D.N.Y.1979), we shall only
summarize them briefly.
As Judge Carter observed: ‘‘The background and gov-
erning facts in this complex drama embrace personality
conflicts, animosity, distrust, and corporate politics, as well
as a display of ingenuity and sophistication by brokers, in-
vestment bankers and corporate counsel’’, Wellman v.
Dickinson, supra, 475 F.Supp. at 797-98.
One of the principal personalities was Fairleigh 8. Dick-
inson, Jr., the son of a founder of Becton and a major stock-
holder of the company. He individually held 802,138 shares
of Becton stock (4.2% of the outstanding shares). In addi-
tion, Dickinson held 140,794 shares (.64%) as a co-trustee
and at least 198,922 shares (1%) as a member of the Dickin-
son family.
Dickinson personally managed Becton for over twenty-
five years. In 1974, Dickinson relinquished his management
responsibilities and became Chairman of the Board. In
late 1976, however, differences between the new manage-
ment and Dickinson emerged. On April 20, 1977, after a
bitter internal power struggle over the course of several
months, the new management team prevailed, and the board
of directors voted to remove Dickinson as its chairman.‘
The day following his removal as chairman, Dickinson
met with representatives of Salomon Brothers (‘‘Salo-
mon’’),° a New York limited partnership engaged in the
4. In September, 1977, Dickinson was terminated as a Becton
employee, and in December, 1977, he was dropped from the list of
directors to be elected at the Becton annual meeting in February.
5. Dickinson was a —— friend of William Salomon, a senior
partner of Salomon Brothers.
Opinion of the United States Court of Appeals
for the Second Circuit
investment banking and brokerage business, to obtain ad-
vice on how to regain control of Becton. In attendance were
Jerome Lipper, who was Dickinson’s attorney, Kenneth
Lipper, brother of Jerome Lipper and a partner of Salo-
mon, Richard Rosenthal and John Gutfreund of Salomon,
Martin Lipton, who was Salomon’s attorney, and two di-
rectors of Becton who were sympathetic to Dickinson,
These men discussed several possible strategies. Dickinson
ultimately agreed to a plan to vote with outside directors as
a means of bringing pressure on Becton’s management and
selling a block of the company’s shares, including his own,
to a corporation interested in taking over Becton. Dickin-
son hired Salomon to assist him in locating a corporation
that would be interested in purchasing his substantial hold-
ings in Becton and those of his friends as the springboard
for a complete or partial takeover of the company. Dickin-
son’s friends included Dr, J. H. Fitzgerald Dunning, a di-
rector of Becton, who personally owned 3,200 shares and
served as one of two co-trustees for one of three family
trusts which held 344,849 shares (1.8%). Each of his two
brothers served as a co-trustee for one of the other two
trusts, and Dunning’s personal lawyer served as the other
trustee for all three trusts.
Shortly thereafter, Salomon was also contacted by Dan
W. Lufkin who was concerned about his investment in Bee-
ton stock in light of Dickinson’s removal from the com-
pany’s chairmanship. Lufkin was a member of a partner-
ship together with Edward L. Searff which owned 93,000
shares of Becton stock, The partnership and three other
7a
Opinion of the United States Court of Appeals
for the Second Circuit
individuals, Richard Drake, Charles Willock, and Robert
Smith, were the principals of a kidney dialysis company
acquired by Becton in 1977. Asa result of that transaction,
the partnership received 93,000 shares of Becton stock, Wil-
lock received 46,248 shares, and the two other men each
received 140,148 shares (total 2.2%). After the acquisition
of the dialysis company, Drake, Willock, and Smith con-
tinued to rely heavily on Lufkin’s partnership for invest-
ment advice,
Dickinson subsequently contacted Robert Zeller, chief
executive officer of Ff. Eberstadt & Company, Ine. (‘ Mber-
stadt’’), a Delaware corporation engaged in investment
banking, institutional stock brokerage, and the management
of pension funds and advisory accounts. Eberstadt had
acted for many years as Becton’s investment banker. Zel-
ler had also advised Dickinson on the handling of some of
his personal affairs. Moreover, an Eberstadt subsidiary,
F. Eberstadt & Company Managers & Distributors Ince.
(‘‘Eberstadt M & D’’),° served as investment advisor to two
mutual funds (the ‘‘Funds’’), the Chemical Fund and the
Surveyor Fund, which along with a number of Eberstadt-
managed discretionary brokerage accounts held 496,075
shares of Becton stock (2.6%). Dickinson informed Zeller
that he was asking Salomon to involve Eberstadt in the
effort to encourage a corporation to undertake a complete
or partial takeover of Becton. Initially, Dickinson and
Salomon and Zeller entered into merely an oral understand-
6. At the time of the relevant events, F, Eberstadt & Co. Man-
agers & Distributors, Inc. was 75% owned by Eberstadt and 25%
owned by the estate of Ferdinand Eberstadt. It subsequently became
a wholly-owned Eberstadt company.
8a
Opinion of the United States Court of Appeals
for the Second Circuit
ing. However, after Becton’s counsel threatened to sue if
Dickinson continued to seek a buyer for a large percentage
of Becton stock, Martin Lipton, Salomon’s attorney, ad-
vised Salomon to obtain written indemnification from Dick-
inson. By letter dated October 12, 1977, Dickinson con-
firmed his engagement of Salomon and agreed to indemnify
the firm against all claims arising out of its representation
of Dickinson in securing a buyer for his stock.
Beginning in the spring of 1977, Salomon and Eberstadt
worked earnestly to interest a major corporation in acquir-
ing a minority interest or in effecting a complete takeover
of Becton. During the next eight months, Salomon and
Eberstadt arranged meetings with several major corpora-
tions, including Avon, American Home Products Corp., and
Squibb Corp., in an effort to induce these companies to ac-
quire shares in Becton. Dickinson himself participated in
these activities until late December, when he was hospital-
ized for approximately one month.
The presentations by Salomon and Eberstadt to the cor-
porations potentially interested in purchasing Becton stock
were virtually identical. A representative from one of the
two brokerage houses would inform the corporation that
Salomon and Eberstadt were representing Dickinson. They
would then describe Dickinson’s animosity toward Becton’s
management and his desire to dispose of his stock in the
company. They would also disclose that other stockholders
shared Dickinson’s ill feelings and were interested in selling
their shares. In each case, the corporation was advised that
Dickinson’s stock and a block of stock that the brokerage
houses represented were available if the corporation was
9a
Opinion of the United States Court of Appeals
for the Second Circuit
interested in a takeover of Becton. This block of shares
included those beneficially owned by the Eberstadt-managed
funds and by Dickinson’s friends, Dunning and Lufkin.
The representative would then outline a takeover plan, plac-
ing special emphasis on the number and availability of the
shares controlled by Dickinson, the Funds, Dunning, and
Lufkin’s partnership. They asserted that Dickinson and
his family held approximately 1,200,000 shares and that the
remaining three members of the group held approximately
1,300,000 shares. Although a portion of these shares were
held in trust, the representative assured the potential pur-
chaser that the approximately 2,500,000 shares (13%) were
readily available.’ Moreover, the corporation was usually
told that the group’s shares of Becton stock would provide
a sufficient base from which to launch a more extensive ac-
quisition program for additional shares and a complete
takeover of the company.
The labors of the two brokerage houses eventually bore
fruit when Sun Company, Inc. (‘‘Sun’’), a Pennsylvania
corporation whose principal business involves oil and gas,
entered the picture. On November 28, 1977, Kenneth Lip-
per of Salomon approached Horace Kephart, a senior vice
president of Sun in charge of the company’s corporate de-
velopment and diversification program, and suggested that
Sun might want to consider Becton as a possible acquisition.
7. The district court indicated that 2.5 million shares represented
approximately 16-17% of the total outstanding shares of Becton com-
mon stock, Wellman v. Dickinson, supra, 475 F.Supp. at 802. Since
the total number of outstanding shares of common stock was 19 mil-
lion, 2.5 million shares represent approximately 13% of the total
shares.
10a
Opinion of the United States Court of Appeals
for the Second Circuit
Lipper informed Kephart that 15% of Becton’s stock was
available and that this initial block included 1,200,000 shares
owned by Dickinson, 300-400,000 shares owned by Dunning,
400,000 shares owned by Lufkin, and 500,000 shares owned
by the Chemical Fund, one of the Eberstadt-managed mu-
tual funds. Lipper also advised Kephart that Sun would
be able to acquire quickly an additional 10-20% of Becton
stock. Kephart was aware of the rift between Dickinson
and Becton’s management and learned of Becton’s public
announcement in June of its desire to remain independent.
At a meeting of Sun’s senior executives held in early
December, Kephart mentioned Becton as a possible acquisi-
tion opportunity. A study of Becton and the health care
industry in general was undertaken to determine the de-
sirability of an investment in the company. After review-
ing the results of this in-house study, Sun’s senior execu-
tives decided that the possibility of acquiring Becton should
be explored more fully. Accordingly, a number of meetings
were held between Dickinson’s and Sun’s representatives in
late December 1977 and early January 1978 to discuss alter-
native strategies for acquiring Becton. Kephart was given
a list of available holdings, including those of Dickinson,
Dunning, and Lufkin. Kephart was already aware that a
large percentage of Becton’s shares was held by institu-
tions, and he was assured that the 500,000 shares of Becton
stock held by the Funds and the Eberstadt-managed dis-
cretionary accounts were readily available to Sun. Four
possible strategies were considered: (1) to seek shares
sequentially, first from individuals, then from institutions;
(2) to seek shares simultaneously from these two groups;
lla
Opinion of the United States Court of Appeals
for the Second Circuit
(3) to tender immediately ;* and (4) to contact management
directly. The consensus was that simultaneous purchases
from large individual and institutional shareholders, under-
taken with as much secrecy as possible, would be the best
strategy. Sun would purchase the block held by Dickinson,
Dunning, Lufkin and the Funds, and then would conduct a
limited solicitation of Becton’s institutional holders to reach
its target of acquiring 34% of the outstanding shares.’ This
strategy would enable the acquisition to be carried out
quickly and would permit Sun to acquire physical posses-
sion of the shares in the shortest possible time.
Presentations made to Sun’s board of directors on Jan-
uary 5 indicated that a 15% block of the Becton’s shares
held by four non-management persons were available and
additional shares representing 10-20% of the outstanding
stock could be readily acquired. Sun executives understood
that the block of shares in question belonged to Dickinson,
the Funds, Dunning, and Lufkin. On January 11, recom-
mendations concerning an acquisition strategy were pre-
sented to Sun’s senior officials.
On January 13, Sun’s Executive Committee approved
the strategy of limited solicitation of large individual and
institutional shareholders and authorized the purchase of
approximately 34% of Becton’s outstanding shares, pro-
8. In the face of hostile management, a conventional tender offer
was not considered attractive and was eliminated immediately. It was
felt that this strategy would lead to competitive bidding which would
make the acquisition more expensive and would result in time con-
suming legal maneuvering.
9. At this level of stock ownership, Sun would be able to utilize
equity accounting and would have sufficient holdings to have a sig-
nificant voice in Becton’s future direction.
12a
Opinion of the United States Court of Appeals
for the Second Circuit
vided that the total expenditure not exceed $350 million.
The transaction was contingent, however, upon Sun’s ob-
taining at least 25% (subsequently lowered to 20%) of the
outstanding shares of Becton stock. Sun further agreed to
a $700,000 fee to be divided equally between Eberstadt and
Salomon, plus indemnification for all their out-of-pocket ex-
penses, including attorneys’ fees, due and payable upon the
acquisition of 20% of the shares.
The offer proposed a two tier price structure—a higher
price of $45 per share with no recourse and a lower figure
of $40 per share with a right to receive the highest price
paid to any subsequent solicitee.
To complete the first step in effecting the acquisition, on
January 14, 1978, Lipper and Zeller went to Dickinson’s
hospital room and formally presented Sun’s proposal to
him. Lipper’s brother, Jerome Lipper, was also present.
Dickinson was told that the matter must be kept confidential
and that Sun was the purchaser. After the price options
were outlined, Dickinson indicated that he was ready to
accept the $45 price but only on the condition that the pro-
posal would be presented to Dunning as well. After guar-
anteeing Dunning’s discretion, Dickinson called Dunning in
Baltimore and informed him that Salomon and Eberstadt
had presented him with an attractive proposal for the sale
of his Becton stock and that he was conditioning his accept-
ance on the extension of the same offer to Dunning. Dick-
inson arranged for Dunning to meet with Zeller and Lipper
in Baltimore on the following day. Kenneth Lipper then
made the same offer given to Dickinson to Dickinson’s
daughter, Ann Dickinson Turner, who was visiting her
13a
Opinion of the United States Court of Appeals
for the Second Circuit
father in the hospital. At the request of Jerome Lipper,
Turner subsequently delivered her shares and those sold by
her father to Sun in New York.
On January 15, Kenneth Lipper and Zeller met with
Dunning in Baltimore and extended to him the same offer
that they presented to Dickinson. Dunning responded fav-
orably to the proposal and promised to advise them after
he conferred with his two brothers and their co-trustee.
Sun later purchased about 110,000 shares from each of the
three Dunning trusts, for a total of 329,849 shares (1.7%).
On January 16, Kenneth Lipper and another representa-
tive of Salomon, met with Lufkin and made him the same
offer extended to both Dickinson and Dunning. Although
the identity of the purchaser was not disclosed, he was told
that Dickinson favored the transaction and that the pur-
chaser was an appropriate company. Lufkin soon learned,
however, that Sun was the purchaser. Lufkin indicated
that he preferred the $45 price and was confident that he
could commit the 93,000 shares of Becton stock that he and
his partner, Edward L. Scarff, received after Becton ac-
quired the partnership’s interest in a kidney dialysis com-
pany. Morover, Lufkin stated that while he ‘‘could not
speak for’’ Richard Drake, Charles Willock, and Robert
Smith, the other three principals of the dialysis company
who received Becton stock as a result of the takeover, he
expected that they would tender their shares. Lufkin im-
mediately telephoned Scarff, who promptly agreed that
the partnership shares should be sold at the $45 price. In
addition, Scarff promised to contact Richard Drake, Charles
Willock, and Robert Smith, and inform them that they had
l4a
Opinion of the United States Court of Appeals
for the Second Circuit
the opportunity to sell their Becton stock at $45 per share
to Sun. On January 17, Searff collected the shares of the
three other individuals, receiving their signatures on pur-
chase agreement contracts and on their voting proxies.
Scarff then flew to New York to deliver these shares, those
of the partnership, and the executed contracts to Sun.
Eberstadt M & D was also offered the same proposal ex-
tended to Dickinson, Dunning, and Lufkin. On January 16,
a representative of Kberstadt M & D recommended the $45
price to the director of the Funds and of the Kberstadt-
managed discretionary accounts. Both groups of directors
accepted this offer.
With the favorable response from Dickinson, Dunning,
Lufkin, and the Funds, the time was ripe for Sun to com-
mence the second stage of its plan for acquiring 34% of the
outstanding stock of Becton. At 4:00 P.M. on January 16,
the Sun solicitation team met in the trading room at Salo-
mon’s New York offices and began telephone solicitations of
additional tenders from institutional investors holding
large blocks of Becton stock. The team worked in pairs of
one caller and one lawyer, who monitored the ealler’s side
of the conversation. The caller solicited offers to sell Bee-
ton stock to an anonymous purchaser from at least 20 in-
dividuals representing 30 institutions, offering the same
two tier price structure as was extended to Dickinson, Dun-
ning, Lufkin, and Eberstadt M & D. Each solicitee was told
. that a non-disclosed purchaser was looking for 20% of Bee-
ton’s stock; that no transaction would be final unless 20% of
the shares were acquired; that the $40 option could be ac-
cepted without fear of losing the opportunity to obtain a
l5a
Opinion of the United States Court of Appeals
for the Second Circuit
higher price in the event shares were later bought at a
higher figure ; and that the purchases necessary to reach the
desired 20% goal were rapidly being made and that a hur-
ried response was therefore essential. Each solicitee was
asked to respond within one hour or less, although some
were allowed to wait until the next day. Sun was identified
as the purchaser to a few institutions, but in most cases, the
purchaser’s specific identity was not revealed,
By 5:35 P.M., Kephart of Sun was advised that verbal
commitments reached 20%, and Kephart was given authori-
zation to seal the bargain with the institutions that had
agreed to tender their shares. The closing price on the
New York Stock Exchange for Becton shares on January
16 was $32% per share. Thus, Sun paid a premium of $124%
per share over market price to those stockholders which
accepted the $45 option. Before the end of the evening,
Sun officials had realized their objective of obtaining at
least 34% of Becton’s outstanding shares. On January 17
and 18, couriers were dispatched throughout the country
to pay for the stock, to obtain signatures or collect pre-
pared purchase agreements, to take physical possession of
the stock certificates, and to have solicitees sign powers of
attorney to allow Sun to vote their proxies.
On January 17, Salomon representatives contacted offi-
cials of the New York Stock Exchange and convinced them
to halt trading in Becton stock on the ground that an un-
identified client would be filing a statement pursuant to
Section 13(d) filing two days later, on January 19. Dickin-
son and Turner, his daughter, also filed separate Section
13(d) statements on January 19. On January 24, the day
16a
Opinion of the United States Court of Appeals
for the Second Circuit
after the trading ban on Becton stock was finally lifted, the
Dunning trusts filed Schedule 13(d) statements.
Sun’s lightning strike triggered litigation starting on
January 23, 1978. In his first opinion, Judge Carter ruled
that Sun had made a tender offer without the requisite
filings in violation of Section 14(d), 15 U.S.C. § 78n(d)
(1976). Sun agreed to divest itself of its stake in Becton
by issuing debentures of 10-25 years maturity which will
be exchanged or redeemed for Sun’s Becton shares. This
agreement, along with the settlement of various class action
claims, was approved by Judge Carter on July 31, 1980,
and upheld by this court in an unpublished order, Wellman
v. Dickinson, 647 F.2d 163 (2d Cir. 1981). Sun’s liability
under Section 14(d) is not at issue in this appeal.
Discussion
Section 13(d) of the Securities Exchange Act of 1934
requires a group that has acquired, directly or indirectly,
beneficial ownership of more than 5% of a class of a regis-
tered equity security, to file a statement with the SEC,'°
disclosing, inter alia, the identity of its members and the
purpose of its acquisition. The central question on appeal
is whether the district court erred in finding that Dickinson
joined a group holding beneficial ownership of approxi-
mately 13% of the outstanding shares of Becton, and in
finding that the members of this group agreed to dispose
of the Becton stock under their control but failed to disclose
this fact pursuant to Section 13(d). A group, under See-
10. This statement must also be transmitted to the issuer of the
security and to each exchange where the security is traded.
17a
Opinion of the United States Court of Appeals
for the Second Circuit
tion 13(d)(3), 15 U.S.C. § 78m(d)(3) (1976), is defined as
an aggregation of persons or entities who ‘‘act ... for the
purpose of acquiring, holding or disposing of securities.
..’ The statute contains no requirement, however, that
the members be committed to acquisition, holding, or dis-
position on any specific set of terms. Instead, the touch-
stone of a group within the meaning of Section 13(d) is
that the members combined in furtherance of a common
objective. Bath Industries, Inc. v. Blot, 427 ¥'.2d 97, 111
(7th Cir. 1970). See also Corenco Corp. v. Schiavone &
Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973) ; Texasgulf Inc.,
v. Canada Development Corp., 366 F.Supp. 374, 403 (S.D.
Tex.1973). Of course, the concerted action of the group’s
members need not be expressly memorialized in writing.
Securities and Exchange Commission v. Savoy Indus., Inc.,
587 F.2d 1149, 1163 (D.C.Cir.1978), cert. denied, 440 U.S.
913, 99 S.Ct. 1227, 59 L.Ed.2d 462 (1979).
Dickinson contends that plaintiffs have not demon-
strated that he entered into a formal or informal agree-
ment with any other person to dispose of his Becton stock,
or that the purported members of the Section 13(d) group
had beneficial ownership of sufficient Becton stock to form
a Section 13(d) group with him.
In evaluating Dickinson’s contentions, we must sift
through the record to determine whether there is sufficient
direct or circumstantial evidence to support the inference
of a formal or informal understanding between Dickinson
and others holding beneficial ownership of more than 5%
of Becton stock for the purpose of disposing of the shares
under their control. See id. The evidence in this case
18a
Opinion of the United States Court of Appeals
for the Second Circuit
supports the district court’s determination that as part
of an effort to effectuate a shift in the corporate control
of Becton, Dickinson and others holding beneficial owner-
ship of approximately 13% of the company’s outstanding
stock, reached an understanding to act in concert in dispos-
ing of their shares, but failed to disclose this fact as re-
quired by Section 13(d).
Ample evidence supports the district court’s finding
that Dickinson, EMberstadt, Eberstadt M & D, Lufkin, and
Dunning ‘‘were all part of a group formed to dispose
of their shares to aid a third party acquisition of a con-
trolling interest in [Becton].’’ Wellman v. Dickinson,
supra, 475 F.Supp. at 880. In reaching its conclusion that
an express or implied understanding existed between the
group members, the district court relied to a great extent
on the representations made by Dickinson and his repre-
sentatives from Salomon and Eberstadt to potential pur-
chasers concerning the availability of the shares controlled
by Dickinson, Dunning, Lufkin, Mberstadt, and Eberstadt
M&D.
One vivid example of testimony concerning the assur-
ances made by Dickinson’s representatives to potential
purchasers is that of William LaPorte, chairman of the
board of directors of American Home Products Corpora-
tion, one of the companies approached with the Becton
takeover proposal, LaPorte testified at trial that Kenneth
Lipper of Salomon called to inform him that Dickinson
was seeking a company interested in merging with Becton
and that 16-17% of the outstanding shares were readily
available for sale. Specifically, Lipper indicated, accord-
19a
Opinion of the United States Court of Appeals
for the Second Circuit
ing to LaPorte, that Eberstadt controlled 500,000 shares
of Becton and that the shares controlled by Dickinson and
Dunning were available and would ‘‘go with [the] deal’’.
John Whitehead, an investment banker for Monsanto
Company, another corporation offered the Becton takeover
proposal, also testified that Dickinson and his representa-
tives provided assurances concerning the availability of
outstanding shares of Becton. Whitehead testified at trial
that he was asked ‘‘whether Monsanto was interested in
buying around 3,000,000 shares [of Becton]’’ and that the
3,000,000 figure was composed in part of 1,200,000 shares
controlled by Dickinson and his family and 1,300,000 shares
controlled by Dickinson’s friends and associates. More-
over, Whitehead testified that Dunning was named as a
principal owner of the latter group of shares.
Dickinson contends that the representations made by
him and his representatives to potential purchasers are not
probative of an understanding among the group members
because the statements were simply ‘‘predictions’’ as to
which Becton shareholders would sell. We reject Dickin-
son’s claim and conclude that, in light of all the facts, the
district court could reasonably infer from the evidence
that assurances, not mere predictions, were made by the
group. See Securities and Exchange Commission v. Park-
lane Hosiery Co., Inc., 558 F.2d 1083, 1086 (2d Cir. 1977).
Additional direct and circumstantial evidence supports
the district court’s finding of an agreement between Dickin-
son, Eberstadt, Eberstadt M & D, Dunning, and Lufkin. The
record clearly demonstrates that Dickinson aggregated his
family’s holdings of 1,200,000-1,300,000 shares of Becton
20a
Opinion of the United States Court of Appeals
for the Second Circuit
stock and contacted Eberstadt and Salomon for the pur-
pose of finding a corporation acceptable to him that would
be interested in buying his substantial Becton holdings.
Dickinson solicited Eberstadt to assist in his search for a
buyer, aware that the Eberstadt-controlled discretionary
accounts held 52,175 of Becton stock (.27%) and that the
Funds managed by Eberstadt M & D held 443,200 shares
(2.33%).™
It is conclusively established that Eberstadt agreed to
join Dickinson’s effort to interest a corporate purchaser in
a takeover or partial takeover of Becton. Executives of
Eberstadt were apprised that the brokerage house’s fee of
$350,000 was contingent on its successful delivery of 20% of
the Becton stock to Sun. In an effort to reach this goal,
representations concerning the number of group shares
attributable to Eberstadt and Eberstadt M & D repeatedly
included the discretionary account shares. Moreover, ac-
tions taken in connection with Sun negotiations indicate
that prior to the receipt of Sun’s offer, a determination had
already been made to sell the shares held by the discretion-
ary accounts as part of the total shares of the group.
With respect to Eberstadt M & D, substantial evidence
supports the district court’s finding that it also committed
itself to the endeavor of effectuating a shilt in the corporate
control of Becton. Robert Zeller served as both chief execu-
tive officer of Eberstadt and vice-chairman of Eberstadt
M & D. Moreover, Eberstadt owned 75% of Eberstadt
M & D. Dickinson contends that this finding is erroneous
11. The Chemical Fund owned 413,200 shares (2.17%) and the
Surveyor Fund owned 30,000 shares (.16% ).
21a
Opinion of the United States Court of Appeals
for the Second Circuit
because the court refused to credit the testimony of exeeu-
tives of Sun who stated that Zeller of Eberstadt had dis-
claimed authority to direct the disposition of shares held
by the Funds and that the executives had believed these
disclaimers. The court properly discredited this testimony
in light of the fact that the notes of these executives taken
during their meetings with Dickinson’s representatives re-
flect the executives’ understanding that the Funds’ shares
managed by Eberstadt M & D were available for purchase.
Moreover, the individuals who met with Zeller and Lipper,
despite Zeller’s silence or disclaimer, departed from the
meeting convinced that the shares held by the Funds were
available with those of Dickinson, Dunning, and Lufkin.
‘*Indeed, Lipper would tell the prospective acquisition
clients that Chemical Fund was the bellweather of the insti-
tutions holding large blocks of [Becton] stock and that it
would sell for the right price, implying that the others
would follow suit. Zeller would agree to this statement.’’
Wellman v. Dickinson, supra, 475 F.Supp. at 828.
The evidence also supports the inference drawn by the
district court that from the beginning, Dunning was a mem-
ber of the undisclosed group formed to dispose of its shares
of Becton. Dickinson kept Dunning abreast of any progress
made in the search for a corporation interested in taking
over Becton. Moreover, Dunning’s name was mentioned as
one of the prospective sellers of Becton stock to nearly
every company solicited by Dickinson’s representatives.
In addition, when Lipper and Zeller formally presented
Sun’s offer to Dickinson in his hospital room on January 14,
Dickinson said that he would be interested only if the same
22a
Opinion of the United States Court of Appeals
for the Second Circuit
offer were extended to Dunning. Dickinson contacted Dun-
ning from his hospital room and arranged for Zeller and
Lipper to meet with Dunning on the following day.
Finally, the evidence as to Lufkin’s participation with
Dickinson supports the conclusion that Lufkin was a full
participant in the search for a purchaser to (ake over Bee-
ton. On November 10, 1977, Lufkin met with Dickinson,
Kenneth Lipper of Salomon, and Jerome Lipper. Lufkin,
according to Dickinson, informed them that ‘‘he repre-
sented a stock holding in [Becton] that grew out of the
acquisition by [Becton] of a company on the West Coast”’,
and that he was concerned over the recent internal difficul-
ties at Becton. Lufkin stated that he was ‘very much in
[Dickinson’s] corner’’. Thereafter, Dickinson’s representa-
tives always included the approximately 400,000 shares
held by the Lufkin partnership and Drake, Willock, and
Smith among those who could be counted on as willing
sellers. In addition, like Dickinson, his daughter, Dunning,
and Kberstadt, the Lufkin partnership and the three other
individuals received their offers prior to the extension of
formal offers to other solicitees, and Lufkin appears to have
been told the identity of the purchaser,
Dickinson, Dunning, Eberstadt, Eberstadt M & D, and
Lufkin were linked by a desire to profit from a shift in the
corporate control of Becton. The evidence clearly supports
the district court’s finding that in an effort to achieve their
common objective, Dickinson, Eberstadt, Dunning, Eber-
stadt M & D and Lufkin formed a group to dispose of the
Becton shares under their control,
28a
Opinion of the United States Court of Appeals
for the Second Circuit
Dickinson also contends that the district court erred in
finding that Eberstadt, Eberstadt M & D, Dunning and Luf-
kin held beneficial ownership of sufficient Becton stock to
form a Section 13(d) group with him because they possessed
‘the power to commit | Becton] shares to the group purpose
of effectuating a shift in corporate control’, Wellman v.
Dickinson, supra, 475 F.Supp. at 829 (emphasis supplied).
Dickinson contends that control over present voting power
should be the sole determinant of beneficial ownership and
that the power to dispose of stock is not a relevant con-
sideration,
We reject Dickinson’s argument, Although voting con-
trol is alone sufficient to support a finding of beneficial
ownership, it need not be the only indicium, See Rule 13d-
8,17 C.F.R, 240,13d-3 (1981)."* A rule that beneficial owner-
ship can be established only by proof of voting control
would exclude from the coverage of Section 13(d) a range
of conduct that Congress clearly intended should be cov-
ered, Section 13(d) was designed to alert investors in
securities markets to potential changes in corporate control
and to provide them with an opportunity to evaluate the
effect of these potential changes. GAF Corp, v. Milstein,
12. Rule 13d-3, 17 C.F.R. 240,13d-3 (1981), includes within the
term beneficial owner any person “who, directly or indirectly, through
any contract, arrangement, understanding, relationship, or otherwise
has or shares: (1) Voting power which includes the power to vote,
or to direct the voting of, such security; and/or, (2) Investment
power which includes the power to dispose, or to direct the disposi-
tion of, such securities.” The SEC adopted Rule 13d-3 in February,
1977 but postponed its effective date until April 30, 1978, subsequent
to the events involved in this case. Although Rule 13d-3 is not con-
trolling, it serves as further evidence that the Commission had not
intended beneficial ownership to be defined solely as present voting
power.
24a
Opinion of the United States Court of Appeals
for the Second Circuit
453 F.2d 709, 717 (2d Cir, 1971), cert. denied, 406 U.S, 910,
92 S.Ct. 1610, 31 L.Md.2d 821 (1972). The power to dispose
of a block of securities represents a means for effecting
changes in corporate control in addition to the possession
of voting control. Moreover, Congress intended beneficial
ownership to mean more than voting control when it specifi-
eally included within the definition of ‘‘person[s]’’ subjeet
to Section 13(d), a ‘‘group”’ acting in concert for the ‘pur-
pose of... disposing of securities of an issuer’’, 15 U.S.C,
§ 78m(d)(3) (1976), In addition, the narrow construction
of the term ‘beneficial ownership’? requested by Dickinson
conflicts with the legislative history of Section 13(d)(3),
Both the Senate and [louse Reports state:
‘This provision would prevent a group of persons
who seek to pool their voting or olher interests in the
securities of an issuer from evading the provisions of
the statute because no one individual owns more than
... 15] percent of a class of securities at the time they
agreed to aet in concert ,... This provision is designed
to obtain full disclosure of the identity of any person
or group obtaining the benefits of ownership by reason
of any contract, understanding, relationship, agree-
ment or other arrangement.’’ S.Rep.No, 550, 90th
Cong., 1st Sess. 8 (1967); TLR.Rep.No. 1711, 90th
Cong., 2d Sees, 8-9 (1968), reprinted in [1968] U.S.
Code Cong. & Admin.News 2811, 2818 (emphasis sup-
plied).
The evidence clearly supports the district court’s find-
ings thet the members of the group possessed the power to
commit sufficient shares of Becton stock to satisfy the 5%
holding requirement of Section 13(d).
25u
Opinion of the Unitud States Court of Appeals
for the Sccond Circuit
With respect to the discretionary accounts managed
by Eberstadt M & D, the facts support the conclusion that
Eberstadt controlled the disposition of the Becton shares
held in these accounts. Although Zeller, chief executive
officer of Eberstadt and vice chairman of Eberstadt M & D,
did not personally handle the discretionary accounts, his
subordinate, Schiefferdecker, managed these accounts.
Schiefferdecker was informed of the nature of Zeller’s
activities on behalf of Dickinson and the fact that Eber-
stadt’s fee for the Sun transaction was contingent on its
successful delivery of 20% of Becton’s stock to Sun, More-
over, at trial counsel for Dickinson never objected to the
propriety of counting these shares toward the 5% holding
requirement of Section 13(d),
Similarly, Eberstadt was always in a position to direct
the disposition of the 443,200 shares of Becton stock held
by the Funds. As the district court stated, ‘It would be
blinking reality to find that Zeller, as chief executive of
Kberstadt of which [Eberstadt] M & D was a subsidiary,
was unable to make a binding commitment of [the Funds’]
shares as a part of the Dickinson, Lipper, Zeller package.
. 2? Wellman v, Dickinson, supra, 475 F.Supp. at 830.
The testimony of John Martin, an unaffiliated director of
the Chemical Fund demonstrates that the directors of the
Funds followed Eberstadt M & D’s recommendations as a
matter of course. Martin stated, ‘‘T relied heavily on the
M & D organization. They are professionals, They have
the highest integrity. I have never had reason to doubt
their judgment. They do a thorough job of analysis and
research, They do not enter into recommendations lightly.
26a
Opinion of the United States Court of Appeals
for the Second Circuit
Under the circumstances, I have the highest regard for
Mr. Nilsen [vice president of Eberstadt and Eberstadt
M & D, vice president for investments of the Chemical
Fund, and an inside director of the Surveyor Fund] and his
judgment, and I rely heavily on his considered judgment,
analysis and assurance on which to base my decision, which
was really a concurrence of his judgment’’. Jd. at 814.
Moreover, the pr.cedures followed in the Sun transac-
tion support the inference that Eberstadt M & D and thus,
in turn, Eberstadt, controlled the sales decision of the
Funds. Although all the outside directors of the Funds
were polled, Zeller had instructed his subordinates at Eber-
stadt not to disclose the identity of either the purchaser or
the portfolio security offered for sale wien polling the
directors. These orders were followed. In addition, Eber-
stadt M & D failed to disclose that a director of Eberstadt
had been working with Dickinson to sell his steck as part
of a takeover of Becton. Accordingly, we are convinced
that the directors routinely followed Eberstadt M & D’s
recommendation in directing the disposition of the Becton
stock, which permitted Eberstadt M & D to control the
shares held by the Funds from the outset.’
The record also supports the findings of the district
court that Lufkin had the power to commit the 93,000 shares
that he held with his partner, Scarff, and the 326,545 shares
held by Drake, Willock, and Smith, the three Becton share-
13. Although, as we have indicated in footnote 12, Rule 13d-3,
17 C.F.R. 240.13d-3 (1981), became effective subsequent to the rele-
vant events involved in this case, we find it incisive that this Rule
includes within the term beneficial owner any person “who . . . has or
shares . . . [i]nvestment power which includes the power to dispose,
or to direct the disposition of such securities.”
2ia
Opinion of the United States Court of Appeals
for the Second Circuit
holders who relied heavily on Lufkin’s partnership for
investment advice."* Lufkin testified that when he was
formally presented with Sun’s offer, he felt confident he
would be able to commit the Becton shares held by the
partnership and that the three other shareholders would
tender their Becton stock as well. Lufkin contacted Scarff,
indicating that he was in favor of accepting Sun’s proposal.
Searff promptly relayed the offer to the three other share-
holders, who immediately accepted.
Finally, the inference drawn by the district court that
Dunning had effective control over the disposition of the
344,849 shares of Becton stock held by the three Dunning
trusts is properly supported by the record. Although Dun-
ning served as one of the two co-trustees for one of the
three trusts, each of his two brothers served as a co-trustee
for one of the other two trusts. Dunning’s personal lawyer
served as the other trustee for all three trusts. Moreover,
numerous references in the record to those shares as
‘‘Dunning’s shares’’ reveal that even the persons most
familiar with the facts believed that Dunning had the
authority to dispose of the trusts’ shares.
The final issue which we consider is the claim raised
by class plaintiffs that Dickinson should be required to
disgorge the over-the-market premium he received from the
sale of his stock to Sun.” Class plaintiffs argue that
14. Lufkin’s control of Drake’s, Willock’s, and Smith’s shares
does not, however, make them members of the Section 13(d) group.
15. Class plaintiffs are stockholders who, as of the close of busi-
ness on January 16, 1978, owned shares of Becton common stock not
sold to Sun, and debenture holders who owned 44%% convertible
debentures due in 1988. The class consists of approximately 13,000
Becton shareholders who hold 12,706,845 shares and 889 debenture
holders who, if their bonds were converted to stock, would hold
225,840 shares.
28a
Opinion of the United States Court of Appeals
for the Second Circuit
Dickinson violated his fiduciary obligation to Becton share-
holders by his failure to advise the company’s manage-
ment that he was searching for a corporation to purchase
his Becton holdings, and by his acceptance of a premium
for his shares from Sun without offering other shareholders
an opportunity to participate. Accordingly, the class
plaintiffs continue, Dickinson should not be permitted to
retain any profits realized from the transaction. Similarly,
class plaintiffs contend that they were deprived of the
opportunity to share in the premium which Dickinson
obtained as a result of his conduct in violation of Section
13(d), and that this provides an independent basis for
ordering the remedy of disgorgment. We conclude that the
district court properly rejected both of class plaintiffs’
grounds for damages.
Although Dickinson violated Section 13(d), there is no
evidence that Dickinson had breached any statutory or
common law obligation he owed Becton’s stockholders.
At the time he sold his stock to Sun, Dickinson was a
director of Becton. This position, however, placed him
under no fiduciary duty to reveal to the company’s manage-
ment his intention to use his Becton holdings to effectuate
a third-party takeover of the company, see Rochez Bros.,
Inc. v. Rhoades, 527 F.2d 880, 889 (3d Cir. 1975), or to
refrain from promoting a takeover by a third-party.
Dickinson also had no fiduciary obligation to other Becton
stockholders to refuse the premium offered by Sun or to
advise them that he was receiving a premium. Accordingly,
Dickinson did not breach any fiduciary obligation owed to
the class plaintiffs. See Haberman v. Murchison, 331
29a
Opinion of the United States Court of Appeals
for the Second Circuit
F.Supp. 180 (S.D.N.Y.1971), aff’d, 468 F.2d 1305 (2d Cir.
1972).
With respect to class plaintiffs’ claim that Dickinson
should be required to disgorge the over-the-market pre-
mium he received from the Sun purchases because of his
failure to file a Section 13(d) statement, we find that plain-
tiffs have not demonstrated that their alleged injury was
directly caused by the Section 13(d) violation or that there
Was any injury in fact. To recover damages for violation
of the Securities Exchange Act, ‘‘the loss complained of
must proceed directly and proximately from the violation
claimed and not be attributable to some supervening
eause’’, Marbury Mangament, Inc. v. Kohn, 629 F.2d 705,
719 (2d Cir.) (emphasis in original), cert. denied sub. nom.,
Wood Walker & Co. v. Marbury Management, Inc., 449
U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980). Although
Dickinson profited from the sale of his Becton shares, his
profit was not derived from his failure to file a Section
13(d) statement. Moreover, Dickinson’s failure to file
such a statement did not cause Sun to purchase his shares.
Instead, Sun was interested in purchasing Dickinson’s
shares for the reason that such a transaction enabled it to
acquire a large block of Becton stock expeditiously by deal-
ing with a limited number of individuals and institutions.
Similarly, Dickinson’s failure to file a Section 13(d) state-
ment did not prevent class plaintiffs from being afforded
the opportunity to share in the premium offered by Sun.
Since class plaintiffs have not demonstrated that their
alleged injury was directly caused by the Section 13(d)
violation, the district court properly denied their claims
for damages against Dickinson.
Affirmed.
30a
Opinion of the United States Court of Appeals
for the Second Circuit
Van GraareiLanp, Circuit Judge, concurring in part and
dissenting in part:
When reputable and honest businessmen, advised by
able and ethical lawyers, are held to have violated a federal
statute, the likelihood is that there is something faulty
in the statute, the manner in which it is administered, or
both. In this case, I believe the fault lies with both. Under
the Williams Act, Congress and the SEC have attempted
to regulate both purchases and sales of stock with the same
set of rules and with an inadequate definition of terms.
The result has been less than admirable.
Section 13(d)(1) of the Williams Act, 15 U.S.C.
§78(m)(d)(1), provides that a person who acquires
directly or indirectly the beneficial ownership of securities
in a class, and thus becomes directly or indirectly the bene-
ficial owner of more than 5% of such class, must file a
Schedule 13D statement within ten days of the acquisition.
It does not define the term ‘‘beneficial owner’’. Section
13(d)(3) provides that, when two or more persons act as
a group for the purpose of ‘‘acquiring, holding, or dispos-
ing’’ of such securities, the group shall be deemed to be a
‘‘person’’. The group, says Congress, is deemed to have
become the beneficial owner of the securities at the time
they agree to act in concert. S.Rep.No. 550, 90th Cong., 1st
Sess. (1967); H.R.Rep.No. 1711, 90th Cong., 2d Sess.
(1968), reprinted in 1968 U.S.Code Cong. & Ad.News 2811,
2818.
3la
Opinion of the United States Court of Appeals
for the Second Circuit
The Commission has codified this expressed congres-
sional intent at 17 C.F.R. § 240.13d-5(b) (1):
When two or more persons agree to act together for
the purpose of acquiring, holding, voting or disposing
of equity securities of an issuer, the group formed
thereby shall be deemed to have acquired beneficial
ownership, for purposes of sections 13(d) and 13(g)
of the Act, as of the date of such agreement, of all
equity securities of that issuer beneficially owned by
any such persons.
The Commission's definition of beneficial ownership,
which postdates the events at issue herein, incorporates
‘*the power to dispose, or to direct the disposition of,’’ a
security. 17 C.F.R. ¢ 240.13d-3(a)(2). However, neither
Congress nor the Commission has enlightened us as to how,
in the absence of controlling contractual provisions, this in-
cident of beneficial ownership is ‘‘deemed’’ to be exercisable
by a group. The record in the instant case does not disclose
whether the alleged group was to act by majority vote,
unanimous vote, or in some other manner. If there was
an agreement for the formation of the group, such as we
have held to be necessary, Corenco Corp. v. Schiavone &
Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973), we are left
completely in the dark as to its pertinent provisions.
My own reading of the record does not satisfy me that
Dickinson, Eberstadt, Dunning, and Lufkin had the powers
of disposition over stock owned by others which the district
court found to exist. For example, the district court’s
finding that Eberstadt had the power to make a “binding
commitment’ to sell the Fund shares is, in my opinion,
32a
Opinion of the United States Court of Appeals
for the Second Circuit
clearly erroneous. That finding treats the Fund directors
as automatons, which they were not, and disregards Eber-
stadt’s specific disavowal of the power to assure a sale. In
short, if Eberstadt had been sued because it found itself
unable to carry out its ‘‘binding commitment’’, | would
have been delighted to be the lawyer handling its defense.
Iam also troubled by the absence of evidence concerning:
1. The alleged power of Dickinson and Dunning to
control the disposition of stock held in trust where
there were co-trustees whose assent was required, see
90 C.J.S. Trusts § 298, at 449;
2. Dickinson’s alleged control over the disposition
of stock owned by other members of his family, see
Texasgulf, Inc. v. Canada Development Corp., 366 F.
Supp. 374, 403 (S.D.'Tex. 1973) ;
3. Dunning’s alleged power to dispose of stock held
in two trusts of which he was not even a trustee;
4. Lufkin’s alleged control over the investment de-
cisions of a parinership’s managing partner and the
sale of stock owned by three shareholders whom Luf-
kin had never even met.
Despite this flimsy showing of individual power and con-
trol, the district court concluded that all the group members
became beneficial owners of the stock involved.
According to the district court, a group was formed, as
an entity separate and distinct from its members, many
months before the sale of Becton stock to The Sun Co.
33a
Opinion of the United States Court of Appeals
for the Second Circuit
Within ten days after its formation, the group or its in-
dividual members had to file 13D Schedules. 17 C.F.R.
§§ 240.13d-1(a), 240.13d-1(f). These Schedules had to be
truthful. GAF Corp. v. Milstein, 453 F.2d 709, 720 (2d Cir.
1971), cert. denied, 406 U.S. 1910, 92 S.Ct. 1610, 31 L.Ed.2d
821 (1972). Both overstatement and understatement had
to be avoided. Electronic Specialty Co. v. International
Controls Corp., 409 F.2d 937, 948 (2d Cir. 1969). Lack of
candor might have resulted in civil or criminal liability on
the part of group members. 17 C.F.R. § 240.13d-101; see
United States v. Newman, 664 F.2d 12, 16 (2d Cir. 1981).
More significantly, a misstep in the preparation of a Sched-
ule might have opened the door to the favorite delaying
tactic of entrenched management, an application for a
temporary injunction. See, ¢.g., Electronic Specialty Co.
v. International Controls Corp., supra, 409 F.2d at 947;
Transcon Lines v. A. G. Becker, Inc., 470 F.Supp. 356
(S.D.N.Y.1979) ; Nicholson File Co. v. HI. K. Porter Co.,
341 F.Supp. 508, 520 (D.R.I. 1972).
The filing requirement was designed to identify the
group ‘‘obtaining the benefits of ownersbip ... by reason
of any contract, understanding, relationship, agreement or
other arrangement.’’ S.Rep.No. 550, supra, at 8. Unlike
my colleagues, I am at a loss to know how, in April 1977,
the group members could have disclosed the group’s method
of acquiring ownership (17 C.F.R. § 240.13d-101, Item 3) so
that the disclosure would not have been simply an invitation
to litigation. I wonder, for example, how the shareholders
of Chemical Fund would have reacted to a pronouncement
by Mr. Lufkin that, as a group member, he had become one
34a
Opinion of the United States Court of Appeals
for the Second Circuit
of the beneficial owners of the Fund’s 413,200 shares of
Becton stock. Texasgulf, Inc. v. Canada Development
Corp., supra, 366 F.Supp. at 403. I wonder what would
have happened had Dr. Dunning stated that, although
neither he nor Mr. Lufkin was acquainted with Robert
Smith, Dr. Dunning nonetheless had become a beneficial
owner of Mr. Smith’s Becton stock. I wonder if Becton
management would have sat idle in the face of a group
claim that it was the beneficial owner of stock held in trust
by trustees having no association whatever with the group.
I think management’s reaction would have been one of
amazement and would have prompted it to head happily
for the nearest court of equity.
The Williams Act was not designed to the tip balance of
regulation in favor of management. Rondeau v. Mosinee
Paper Corp., 422 U.S. 49, 58-59, 95 S.Ct. 2069, 2075-76, 45
L.Ed.2d 12 (1975). Neither was it designed to provide the
SEC with an amorphous regulatory power, the boundaries
of which preclude definition by the most skilled of attorneys.
The SEC’s bland statement in its brief that, even though
Eberstadt represented the Fund as well as Mr. Dickinson,
there was no ‘‘need’’ to hold the Fund liable, is a prime
example of such unfathomable regulation.
With all due respect to my learned colleagues, I cannot
join them in affirming a decision that unjustifiably has
besmirched an honorable name. I would reverse the district
court’s holding that appellant Dickinson violated section
13(d) of the Securities Exchange Act. I agree with my
colleagues that the balance of the district court’s judgment
should be affirmed,
35a
Opinion of the United States District Court
for the Southern District of New York
UNITED STATES DISTRICT COURT
S. D. New York
Nos. 78 Civ. 284, 78 Civ. 291, 78 Civ. 345, 78 Civ. 539,
78 Civ. 1025, 78 Civ. 1055 and 78 Civ. 1156 (RLC).
July 9, 1979.
OO
Becton, Dickinson anp Company, et al.,
Plaintiffs,
v.
Sun Company, Inc., et al.,
Defendants.
Morton Pvupxo,
Plaintiff,
v.
Far.eicnu S. Dickinson, Jr., et al.,
Defendants.
Securities anp Excuance Commission,
Plaintiff,
v.
Sun Company, Inc., et al.,
Defendants.
Rustin Powne,
Plaintiff,
v
Sun Company, Inc., et al.,
Defendants.
36a
Opinion of the United States District Court
for the Southern District of New York
OPINION
Rosexr L, Canren, District Judge.
I
Status of the Proceedings
This litigation stems from the acquisition by Sun Com-
pany, Ine. (‘‘Sun’’), a Pennsylvania corporation whose
principal business is oil and gas, of roughly 34% of the
stock of Becton, Dickinson & Company (‘‘BD’’), a New
Jersey corporation which manufactures health care prod-
ucts and medical testing and research equipment. Sun’s
brilliantly designed, lightning strike took place in January,
1978, and gave rise to seven separate actions which were
consolidated for trial. In 78 Civ. 1055, the Securities and
Exchange Commission (‘‘Commission’’) brings an enforce-
ment action against Sun, L.H.1.W., Ine. (an acronym for
Lets Hope It Works), the corporation Sun formed to re-
ceive the BD shares; Salomon Brothers (‘‘Salomon’’), a
New York limited partnership engaged in the investment
banking and brokerage business; I’, Eberstadt & Co., Inc.,
(‘*Eberstadt’’), a Delaware corporation engaged in invest-
ment banking, institutional stock brokerage and the man-
agement of pension funds and advisory accounts and which,
along with Salomon, handled the Sun acquisition; F’, Eber-
stadt & Co. Managers & Distributors, Inc. (‘‘M & D’’), a
Delaware company 75% owned by Eberstadt and 25%
owned by the estate of Ferdinand Eberstadt,’ which man-
1. Sometime after the events which concern us, M & D became a
wholly-owned Eberstadt company.
87a
Opinion of the United States District Court
for the Southern District of New York
ages the two Eberstadt mutual funds involved in this pro-
ceeding; Robert Zeller, chief executive officer of Eberstadt
and vice chairman of M & D; Fairleigh S. Dickinson, Jr.,
former chairman of BD and one of its principal stock-
holders; J.H. Fitzgerald Dunning, a former director and
large stockholder in BD; and Kenneth Lipper, a partner
in Salomon. The Commission charges the defendants with
violating or aiding and abetting the violation of Sections
10(b), 13(d), 14(d) and 14(e) of the Securities Exchange
Act of 1934, as amended (15 U.S.C. §§78j(b),? 78m(d),"
2. 15 U.S.C. § 78j(b) provides:
“It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce or
of the mails, or of any facility of any national securities ex-
change—
+ * *
(b) To use or employ, in connection with the purchase or sale
of any security registered on a national securities exchange or any
security not so registered, any manipulative or deceptive device
or contrivance in contravention of such rules and regulations as
the Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.”
3. 15 U.S.C. §78m(d) provides:
“(1) Any person who, after acquiring directly or indirect!
the beneficial ownership of any equity security of a class which is
registered pursuant to section 78/ 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
78I(g) (2) (G) of this title, or any =e | — issued 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 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 infor-
(footnote continued on next page)
38a
Opinion of the United States District Court
for the Southern District of New York
Note 3—Continued
mation, and such additional information, as the Commission may
by rules and regulations, prescribe as necessary or appropriate
in tne public interest or for the protection of investors—
(A) the background, and identity, residence, and citizen-
ship 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 consider-
ation used or to be used in making the purchases, and if any
ag of the purchase price is represented or is to be represented
y 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 names 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
78c(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 ;
(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 bene-
ficially owned, and the number of shares concerning which
there is a right to acquire, directly or indirectly, by (i) such
ca. and (ii) by each associate of such person, giving the
kground, identity, residence, and citizenship of each such
associate ; and
(E) information as to any contracts, arrangements, or un-
derstandings with any person with respect to any securities of
the issuer, including but not limited to transfer of any of the
securities, joint ventures, loan or option arrangements, puts or
calls, guaranties of loans, guaranties against loss or guaranties
of profits, division of losses or profits, or the giving or with-
holding of proxies, naming the persons with whom such con-
tracts, 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-
(footnote continued on next page)
89a.
Opinion of the United States District Court
for the Southern District of New York
Note 3—Continued
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 acquir-
ing, holding, or disposing of securities of an issuer, such syndicate
or group shall be deemed a “person” for the purposes of this
subsection,
(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 account
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 number
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 business and were not acquired for
the purpose of and do not have the effect of changing or influenc-
ing 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 statement
under the Securities Act of 1933;
(B) -_ acquisition of the beneficial ownership of 9 se-
curity which, together with all other acquisitions by the same
person of securities of the same class during the preceding
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 security
which the Commission, by rules or regulations or by order,
shall exempt from the provisions of this subsection 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.”
40a
Opinion of the United States District Court
for the Southern District of New York
78n(d)* and 78n(e)°); Rules 10b-5 (17 C.F.R. § 240.10b-5)*
4. 15 U.S.C. § 78n(d) provides:
“(1) It shali be unlawful for any person, directly or indi-
rectly, by use of the mails or by any means or instrumentality of
interstate commerce or of any facility of a national securities ex-
change or otherwise, to make a tender offer for, or a request or
invitation for tenders of, any class of any equity security which is
registered pursuant to section 78/ of this title, or any equity
security of an insurance company which would have been re-
quired to be so registered except for the exemption contained in
section 781(¢)(2)(G) of this title, or any equity security issued
by a closed-end investment company registered under the Invest-
ment Company Act of 1940, if, after consummation thereof, such
person would, directly or indirectly, be the beneficial owner of
more than 5 per centum of such class, unless at the times copies
of the offer or request or invitation are first published or sent
or given to security holders such person has filed with the Com-
mission a statement containing such of the information specified
in section 78m(d) of this title, and such additional information
as the Commission may by rules and regulations prescribe as
necessary or appropriate in the public interest or for the protec-
tion of investors. All requests or invitations for tenders or
advertisements making a tender offer or requesting or inviting
tenders of such a security shall be filed as a part of such state-
ment and shall contain such of the information contained in such
statement as the Commission may by rules and regulations pre-
scribe. Copies of any additional material soliciting or requesting
such tender offers subsequent to the initial solicitation or request
shall contain such information as the Commission may by rules
and regulations prescribe as necessary or appropriate in the pub-
lic interest or for the protection of investors, and shall be filed
with the Commission not later than the time copies of such
material are first published or sent or given to security holders.
Copies of all statements, in the form in which such material is
furnished to security holders and the Commission, shall be sent
to the issuer not later than the date such material is first published
or sent or given to any security holders.
(2) When two or more persons act as a partnership, limited
ership, syndicate, or other group for the purpose of acquir-
ing, holding, or disposing of securities of an issuer, such syndicate
(footnote continued on next page)
5. See note 5 on page 42a.
6. See note 6 on page 42a.
4la
Opinion of the United States District Court
for the Southern District of New York
Note 4—Continued
or group shall be deemed a “person” for purposes of this sub-
section.
(3) 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
account of the issuer or a subsidiary of the issuer.
(4) Any solicitation or recommendation to the holders of
such a security to accept or reject a tender offer or request or
invitation for tenders shall be made 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.
(5) Securities deposited pursuant to a tender offer or request
or invitation for tenders may be withdrawn by or on behalf of
the depositor at any time until the expiration of seven days after
the time definitive copies of the offer or request or invitation are
first published or sent or given to security holders, and at any
time after sixty days from the date of the original tender offer or
request or invitation, except as the Commission may otherwise
prescribe by rules, regulations, or order as necessary or appro-
priate in the public interest or for the protection of investors.
(6) Where any person makes a tender offer, or request or
invitation for tenders, for less than all the outstanding equity
securities of a class, and where a greater number of securities is
deposited pursuant thereto within ten days after copies of the
offer or request or invitation are first published or sent or
given to security holders than such person is bound or willing to
take up and pay for, the securities taken up shall be taken up as
nearly as may be pro rata, disregarding fractions, according to
the number of securities deposited by each depositor. The pro-
visions of this subsection shall also apply to securities deposited
within ten days after notice of an increase in the consideration
offered to security holders, as described in paragraph (7), is first
published or sent or given to security holders.
(7) Where any person varies the terms of a tender offer or
request or invitation for tenders before the expiration thereof by
increasing the consideration offered to holders of such securities,
such person shall pay the increased consideration to each security
holder whose securities are taken up and paid for pursuant to
the tender offer or request or invitation for tenders whether or
(footnote continued on next page)
42a
Opinion of the United States District Court
for the Southern District of New York
Note 4—Continued
not such securities have been taken up by such person before the
variation of the tender offer or request or invitation.
(8) The provisions of this subsection shali not apply to any
offer for, or request or invitation for tenders of, any security—
(A) if the acquisition of such security, together with all
other acquisitions by the same person of securities of the same
class during the preceding twelve months, would not exceed
2 per centum of that class ;
(B) by the issuer of such security ; or
(C) which the Commission, by rules or regulations or by
order, shall exempt from the provisions of this subsection as
not entered into for the purpose of, and not having the effect
of, changing or influencing the control of the issuer or other-
wise as not comprehended within the purposes of this sub-
section,”
5. 15 U.S.C. § 78n(e) provides:
“It shall be unlawful for any person to make any untrue state-
ment of a material fact or omit to state any material fact necessary
in order to make the statements made, in the light of the circum-
stances under which they are made, not misleading, or to engage
in any fraudulent, deceptive, or manipulative acts or practices, in
connection with any tender offer or request or invitation for
tenders, or any solicitation of security holders in opposition to or
in favor of any such offer, request, or invitation. The Commis-
sion shall, for the purposes of this subsection, by rules and regu-
lations define, and prescribe means reasonably designed to pre-
vent, such acts and practices as are fraudulent, deceptive, or
manipulative.”
6. 17 C.F.R. § 240,10b-5 provides:
“Tt shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interestate commerce, or
of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the state-
ments made, in the light of the circumstances under which they
were made, not misleading, or
(c) To engage in any act, practice, or course of business
which ates or would operate as a fraud or deceit upon an
person, in connection with the purchase or sale of any security.”
43a
Opinion of the United States District Court
for the Southern District of New York
and 10b-13 (17 C.F.R. §§ 240,13d-1 and 13d-2),’ and Regu-
7. 17 C.F.LR. § 240.13d-1 provides ;
“(a) Any person who, after acquiring directly or indirectly
the beneficial ownership of any equity security of a class which is
registered pursuant to Section 12 of the Act, 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(¢)(2)(G) of the ‘Act, or any equity security issued by a
closed-end investment company registered under the Investment
Company Act of 1940, is directly or indirectly the beneficial
owner of more than five percent of such class shall, within ten
days after such acquisition, send to the issuer of the security at
its principal executive office, hy registered or certified mail, send
to each exchange where the security is traded, and file with the
Commission, a statement containing the information required by
Schedule 13D (§ 240.13d-101). Eight copies of the statement,
including all exhibits, shall be filed with the Commission, At the
time of filing the statement, the person making the filing shall
pay to the Commission a fee of $100, no part of which shall be
refunded, For the purposes of section 13(d), any person, in
determining the amount of outstanding shares of a class of equity
securities, may rely upon information set forth in the issuer's
most recent quarterly or annual report, and any current report
subsequent thereto, filed with the Commission pursuant to this
Act, unless he knows or has reason to believe hat the informa-
tion contained therein is inaccurate,
(b) Whenever two or more persons are required to file a
statement pursuant to section 13(d) with respect to the same
securities, only one acquisition statement need be filed, Provided,
That:
(1) Each person on whose behalf the acquisition statement is
filed is responsible for the timely filing of such statement and any
amendments thereto, and for the completeness and accuracy of
the information contained therein ; an
(2) Such acquisition statement shall identify all such persons,
shall contain the required information with regard to each such
person, shall indicate that such statement is filed on behalf of all
such persons, and shall include, as an exhibit, their agreement in
writing that such a statement is filed on behalf of each of them.”
(footnote continued on next page)
44a
Opinion of the United States District Court
for the Southern District of New York
lation 14D (17 C.F.R. § 240.14d-1° and § 240.14d-101°),
promulgated thereunder; Sections 17(d) and 17(e) of the
Investment Company Act of 1940, as amended (15 U.S.C.
17 C.F.R. § 240,13d-2 provides:
“If any material change occurs in the facts set forth in the
statement required by § 240,13d-1 (Rule 13d-1), the person or
persons who were required to file such statement shall promptly
file or cause to be filed with the Commission and send or cause
to be sent to the issuer and to each exchange on which the security
is traded an amendment disclosing such change. Eight copies of
each such amendment shall be filed with the Commission. No
additional filing fee shall be required for any such amendment.”
8. 17 C.F.R. § 240.14d-1 provides:
“(a) No person, directly or indirectly, by use of the mails or
by any means or instrumentality of interstate commerce or of
any facility of a national securities exchange or otherwise, shall
make a tender offer for, or a request or invitation for tenders of,
any class of any equity security which is registered pursuant to
section 12 of the Act, 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
the Act, or any equity security issued by the closed-end invest-
ment company registered under the Investment Company Act of
1940, if, after consummation thereof, such person would, directly
or indirectly, be the beneficial owner of more than 5 percentum
of such Class, unless, at the time copies of the offer or request or
invitation are first published or sent or given to security holders,
such person has filed with the Commission a statement containing
the information and exhibits required by Schedule 14D-1,
(b) If any material change occurs in the facts set forth in the
statement required by paragraph (a) of this section, the person
who filed such statement shall promptly file with the Commission
an amendment disclosing such change.
(c) All tender offers for, or requests or invitations for
tenders of, securities published or sent or given to the holders
of such securities | include the following information :
(footnote continued on next page)
9. See note 9 on page 46a.
45a
Opinion of the United States District Court
for the Southern District of New York
Note 8—Continued
(1) The name of the person making the tender offer, request
or invitation ;
(2) The exact dates prior to which, and after which, security
holders who deposit their securities will have the right to with-
draw their securities pursuant to section 14(d) (5) of the Act, or
otherwise ;
(3) If the tender offer or request or invitation for tenders is
for less than all of the outstanding securities of the class and the
person making the offer, request or invitation is not obligated to
purchase all of the securities tendered, the date of expiration of
the period during which the securities will be taken up pro rata
pursuant to section 14(<d)(6) [of the Act], or otherwise; and
(4) The information required by Items 1(c), 2(b), 2(e),
2(f) and 2(g); 3, 4, 5, 6, 7, 8, 9 and 10 of Schedule 14D-1
(§ 240,14d-100), or a fair and adequate summary thereof,
Instructions. 1, Negative responses to any such item or sub-
item of Schedule 14D-1 (§ 240.14d-100) need not be included
in the information published or sent or given to security holders,
2. Although the financial statements necessary to present a
fair and adequate summary of Item 9 of Schedule 14D-1 (§ 240,-
14d-100) may vary depending on the facts and circumstances
involved, summary financial information equivalent to that re-
quired by paragraph ¢ of Guide 59 of the Guides of Preparation
and Filing of Registration Statements will normally be sufficient
summary disclosure of Item 9 for purposes of paragraph (c) (4)
of this section. If the information required 7 Item 9 is sum-
marized, appropriate instructions should be included stating how
more complete financial information can be obtained,
(d) Any additional material soliciting or requesting such
tender offer subsequent to the initial solicitation or request shall
contain the name of the persons making such solicitation or
request and the information required by Items l(c), 2(b), 2(e),
2() and 2(g): 3 4, 5, 6, 7, 8, 9 and 10 of Schedule 14D-1
(§ 240,14d-100), or a fair and adequate summary thereof; Pro-
vided, however, That such material may omit any of such infor-
mation previously furnished to the persons solicited or requested
for tender offers. Copies of such additional material soliciting or
requesting such tender offers shall be filed with the Commission
not later than the time copies of such material are first published
or sent or given to security holders,
(e) Ten copies of the statement required by paragraph (a),
every amendment to such statement, and all other material re-
(footnote continued on next page)
46a
Opinion of the United States District Court
for the Southern District of New York
Note 8—Continued
uired by this rule and such statement shall be filed with the
ommission,
(f) If any securities to be offered in connection with the
tender offer for, or request or invitation for tenders of, securities
with respect to which a statement is required to be filed pursuant
to paragraph (a) of this section have been or are to be registered
under the Securities Act of 1933, a copy of the prospectus con-
taining the information required to be included therein by
§ 240.434b of this chapter shall be filed as an exhibit to the state-
ment required by paragraph (a) of this section, Any informa-
tion contained in such prospectus may be incorporated by ref-
erence in such statement,
(gz) The definition of beneficial owner set forth in Rule 13d-3
(§ 240,13d-3) for purposes of section 13(d)(1) of the Act shall
apply also for purposes of section 14(d) (1) of the Act.”
9, 17 C.F.R. § 240.14d-101 sets forth in pertinent part the follow-
ing filing schedule;
Item 1, Security and Issuer.
(a) State the title of the class of equity securities to which
this statement relates and the name and address of the issuer of
such securities,
(b) Identify the tender offer or request or invitation for
tenders to which this statement relates and state the reasons for
the solicitation or recommendation to security holders to accept
or reject such tender offer, request, or invitation for tenders,
Item 2. Identity and Background,
(a) State the name and business address of the person filing
this statement.
(b) Describe any arrangement or understanding in regard to
the solicitation with (i) the issuer or the management of the
issuer or (ii) the maker of the tender offer or request or invita-
tion for tender of securities of the class to which this statement
relates,
Item 3. Persons Retained, Employed, or To Be Compensated.
Identify any person or class or persons employed, retained or
to be compensated, by the person filing this Schedule 14D, or by
any person on his behalf, to make solicitations or recommenda-
tions to security holders and describe briefly the terms of such
employment, retainer or arrangement for compensation.
Item 4. Material To Be Filed as Exhibits.
Copies of all solicitations or recommendations to accept or
reject a tender offer or request or invitation for tenders of the
securities specified in Item 1 shall be filed as an exhibit.
47a
Opinion of the United States District Court
for the Southern District of New York
§§ 80a-17(d),’° 80a-17(e)"'); and Rule 17d-1 (17 C.F.R.
§ 270.17d-1),'"* promulgated thereunder.
10. 15 U.S.C. § 80a—17(d) provides:
“It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company (other than a
company of the character described in section 80a—12(d) (3) (A)
and (B) of this title), or any affiliated person of such a person
or principal underwriter, acting as principal to effect any transac-
tion in which such registered company, or a company controlled
by such registered company, is a joint or a joint and several
participant with such person, principal underwriter, or affiliated
person, in contravention of such rules and regulations as the
Commission may prescribe for the purpose of limiting or pre-
venting participation by such registered or controlled company
on a basis different from or less advantageous than that of such
other participant. Nothing contained in this subsection shall be
deemed to preclude any affiliated person from acting as manager
of any underwriting syndicate or other group in which such
registered or cenvalied company is a participant and receiving
compensation therefor.”
11. 15 U.S.C. §80a-17(e) provides:
“Tt shall be unlawful for any affiliated person of a registered
investment company, or any affiliated person of such person—
(1) acting as agent, to ccept from any source any com-
pensation (other than a regular salary or wages from such
registered company) for the purchase or sale of any property
to or for such registered company or any controlled company
thereof, except in the course of such person’s business as an
underwriter or broker ; or
(2) acting as broker, in connection with the sale of securi-
ties to or by such registered company or any controlled com-
pany thereof, to receive from any source a commission, fee, or
other remuneration for effecting such transaction which exceeds
(A) the usual and customary broker’s commission if the sale
is effected on a securities exchange, or (B) 2 per centum of the
sales price if the sale is effected in connection with a secondary
distribution of such securities, or (C) 1 per centum of the
purchase or sale price of such securities if the sale is otherwise
effected unless the Commission shall, by rules and regulations
or order in the public interest and consistent with the protec-
tion of investors, permit a larger commission.”
12. 17 C.F.R. §270.17d-1 provides in pertinent part:
“(a) No affiliated person of or principal underwriter for any
registered investment company (other than a company of the
(footnote continued on next page)
48a
Opinion of the United States District Court
for the Southern District of New York
In 78 Civ. 539, BD, its officers and several of its share-
holders individually and derivatively sue Sun, L.H.1.W.,
Dickinson, Dunning, Salomon, Eberstadt, Chemical Fund,
Ine., and Surveyor Fund, Inc., alleging violations of the
Exchange Act similar to those charged in the Commission’s
ease, and in addition, charging Dickinson and Dunning
with violations of their fiduciary obligation to BD and its
shareholders. The Chemical and Surveyor Funds are
open end investment companies managed by M & D and
registered with the Commission under the Investment Com-
pany Act of 1940.
78 Civ. 284, 78 Civ. 291, 78 Civ. 345, 78 Civ. 1025 and 78
Civ. 1156 are class actions against various combinations of
the defendants in the Commission’s and BD cases and Ann
Dickinson Turner, a daughter of Dickinson and a substan-
tial shareholder of BD stock. The class actions allege
violations of Sections 10(b), 13(d), 14(d) and 14(e) of the
Exchange Act, Sections 2(/)(1) and 9(b) of the New Jersey
character described in section 12(d)(3)(A) and (B) of the act)
and no affiliated person of such a person or principal underwriter,
acting as principal, shall participate in, or effect any transaction in
connection with, any joint enterprise or other joint arrangement
or profit-sharing plan in which any such registered company, or
a company controlled by such registered company, is a partici-
pant, and which is entered into, adopted or modified subsequent
to the effective date of this rule, unless an application regarding
such joint enterprise, arrangement or profit-sharing plan has been
filed with the Commission and has been granted he an order
entered prior to the submission of such plan or modification to
security holders for approval, or prior to such adoption or modi-
fication if not so submitted, except that the provisions of this rule
shall not preclude any affiliated person from acting as manager
of any underwritin — or other group in which such
registered or controlled company is a participant and receiving
compensation therefor.”
49a
Opinion of the United States District Court
for the Southern District of New York
Corporation Takeover Bid Disclosure Law, New Jersey
Laws of 1977, Chapter 76," and Rule 390" of the New
13. The pertinent sections of the New Jersey Corporation Take-
over Bid Disclosure Law provide;
“A ‘takeover bid or takeover offer’ is an offer made by an
offeror directly or through an agent by advertisement or any other
written or oral communication to offerees to purchase such num-
ber of shares of any class of equity securities of the target com-
pany that:
(a) Together with the offeror’s presently owned shares of
that class, will in the aggregate exceed 10% of the outstanding
shares of such class; or
(b) Together with an offeror’s presently owned shares of all
classes of equity securities of the target company, will in the
aggregate, after giving effect to all conversion and purchase
rights held and to be acquired by the offeror, exceed 10% of the
number of shares of stock or a similar security of the target com-
pany which will be outstanding.” (49 N.J.Stat.Ann. § 5-2(/)
(1)).
“If an offeror makes a takeover offer for less than all the
outstanding equity securities of any class, and if the number of
securities deposited or tendered pursuant thereto is greater than
the number the offeror has offered to accept and pay for, the
securities shall be accepted pro rata, disregarding fractions, ac-
cording to the number of securities deposited or tendered by each
offeree.” (49 N.J.Stat.Ann. § 5-9(b)).
14. At all times relevant to the instant litigation Rule 390 of the
New York Stock Exchange provided :
“(a) Except as otherwise provided by this Rule, no member,
member organization, or other person who is a nonmember broker
or dealer and who directly or indirectly controls, is controlled by,
or is under common control with, a member or member organiza-
tion (any such other —— being hereinafter referred to as an
affiliated person) shall effect any transaction in any listed stock
in the over-the-counter market, either as principal or agent.
(b) A member, member organization or affiliated person hold-
ing a customer's order for the purchase or sale of a listed stock
(the Order) may execute the Order (or such portion thereof as
may be so executed in accordance with the Rule) in the over-the-
(footnote continued on next page)
50a
Opinion of the United States District Court
for the Southern District of New York
Note 14—Continued
counter market with a third market maker or nonmember block
positioner.
(c) The provisions of this Rule shall not apply to any of the
following transactions :
(i) any transaction which is part of a primary distribution
by an issuer, or a registered or unregistered secondary distri-
bution, effected off the floor of the Exchange;
ii) any transaction made in reliance on Section 4(2) of
the Securities Act of 1933;
(iii) any trade at a price unrelated to the current market
for the security to correct an error or to enable the seller to
make a gift ;
(iv) any transaction pursuant to a tender offer ;
(v) any purchase or sale of securities effected upon the
exercise of an option pursuant to the terms thereof or the
exercise of any other right to acquire securities a pre-estab-
lished consideration unrelated to the current market for such
securities ;
(vi) any purchase or sale of any security trading in which
has suspended by the Exchange pending review of the
listing status of such security ;
(vii) the acquisition of securities by a member organization
as principal in anticipation of making an immediate special
offering or exchange distribution on the Exchange under Rule
391 or Rule 392;
(viii) any purchase or sale of any of the guaranteed or
preferred stocks included within the listing of such stocks as
may from time to time be issued by the Exchange, provided,
however, that every proposed transaction in any such security
by a member, member organization or affiliated person should
be reviewed in light of the factors involved, including the mar-
ket on the floor of the Exchange, the price, and the size, so
ne whenever possible the transaction may be effected on the
oor ;
(ix) any transaction for less than one unit of trading ; and
(x) any other purchase or sale of any security under
extraordinary or emergency conditions which receives the
prior approval of the Exchange.
(footnote continued on next page)
5la
Opinion of the United States District Court
for the Southern District of New York
York Stock Exchange (‘‘NYSE’’). The class plaintiffs
are all the persons who, as of the close of business January
16, 1978, owned either BD stock or BD 444% convertible
debentures due in 1988 (except, of course, defendants and
those who sold BD stock to Sun).
All defendants have answered by denying the basic
allegations of wrongdoing. All defendants argue that no
cause of action has been stated against them, that all plain-
tiffs except the Commission lack standing and that none
of the plaintiffs have been injured. In addition, Sun,
Dickinson, Salomon, Eberstadt, M & D, Lipper and Zeller
allege that BD and the individual plaintiffs in 78 Civ. 539
(d)(1) The term ‘listed stock’ as used in this Rule shall
mean any security registered on the Exchange (other than sub-
scription rights), the sale prices of transactions in which are
reported on the consolidated tape provided for in the plan filed
by the Exchange and others pursuant to Rule 17a-15 under the
Securities Exchange Act of 1934 (the Act) and declared effective
by the Securities and Exchange Commission ;
(2) The term ‘nonmember broker or dealer’ as used in sub-
paragraph (a) of this Rule shall mean any broker or dealer
registered in accordance with Section 15(b) of the Act, which
acts as a ‘market maker’ as defined in the Act, or whose gross
income is derived substantially from acting as a ‘broker’ as
defined in the Act, or both;
(3) The term ‘third market maker’ as used in this Rule shall
mean a ‘market maker’ as defined in Rule 15c3-1(c)(8) under
the Act, who makes markets over-the-counter in listed stocks and
who maintains the minimum net capital required of a market
maker by Rule 15c3-1 under the Act; and
(4) The term ‘nonmember block positioner’ shall mean a
‘block positioner’ as defined in Rule 17a-17 under the Act which
is not a member of the Exchange.
(e) Notwithstanding the provisions of Rule 104, the specialist
may buy for his own account on a plus or zero plus tick or sell
for his own account on a minus or zero minus tick any or all of
the stock which is to be sold or purchased over-the-counter pur-
suant to subparagraph (b) of this Rule,”
52a
Opinion of the United States District Court
for the Southern District of New York
come into court with unclean hands because they embarked
on a course of untoward conduct designed to bring political
and public pressure and disfavor on defendants. In the
enforcement proceedings, Salomon, Eberstadt, M & D,
Lipper and Zeller charge that the Commission denied
defendants procedural due process in flagrant violation of
its own rules of procedure and that it brought this enforce-
ment proceeding in response to political pressure generated
by BD. Accordingly, all defendants urge dismissal of the
complaints.
The defendants opposed class action certification, but
their contentions were held to be meritless. Class certifica-
tion was granted and defined as stated above. Sce Well-
man v. Dickinson, 79 F.R.D. 341 (S.D.N.Y.1978) (Carter,
J.). The class plaintiffs waived their jury trial demands
and the Commission agreed to have its case consolidated
for trial with those of the private parties. A bifureated
trial dealing only with the issues of liability began on
November 13, 1978 and ended on December 8. During the
trial Dunning reached a settlement with the class plaintiffs.
The parties have made an abundance of pre-trial, trial and
post-trial submissions with the latter continuing as late as
July 1, 1979. Counsel have been scrupulously diligent in
bringing to the court’s attention any newly decided relevant
cases not cited nor discussed in their pre-trial, trial and
post-trial briefs and memoranda, Although all but inun-
dated bv the deluge of exhibits and filings in these proceed-
ings, the court is appreciative of the parties’ diligence in
bringing to the court’s attention every conceivable docu-
ment that might possibly be relevant to the decision,
53a
Opinion of the United States District Court
for the Southern District of New York
II
Findings of Fact
The background and governing facts" in this complex
drama embrace personality conflicts, animosity, distrust,
and corporate polities, as well as a display of ingenuity and
sophistication by brokers, investment bankers and corpo-
rate counsel.
15. Evidentiary Rulings
In the course of the trial the parties filed an overwhelming number
of exhibits including depositions, and at its conclusion, the court re-
quested counsel to consult with the court reporters and the deputy
court clerk to be certain that all exhibits submitted in open court had
been formally recorded as admitted into evidence. Counsel unfor-
tunately assumed that the court was approving a procedure for ad-
mission of exhibits whether submitted in open court or not. Counsel
made a record of this procedure which took place on December 14, a
week after the trial in chief had concluded. It would have been
preferable (and this was the court's intent and understanding) that
all documents tendered on December 14 were those actually submitted
during the course of the trial with a ruling on their admissibility
having been made in open court. However, since all counsel assumed
they were entitled to offer various exhibits on December 14, whether
er not submitted during the trial, and to make their objections, if any,
for post-trial rulings, the court has to assume some responsibility for
such a universal misunderstanding. Accordingly, the procedure is
accepted, albeit relunctantly, and the court will rule on objections.
The objections to the following plaintiff exhibits not ruled on at trial
are sustained: PI.Ex. 6, 9, 27, 55, 75, 76, 77, 79, 85, 87, 196, 201, 208,
210, 219, 220, 232, 239, 240, 241, 242, 243, 252, 253, 287, 309, 302,
309, 310, 315, 338, 352, 355, 358, 372, 379, 408, 410, 411, 412, 413,
414, 415, 416, 417, 418, 419, 420, 421, 422, 423, 424, 425, 426, 427,
428, 429, 430, 431, 433, 437, 438, 439, 440 and 442, These objections
are sustained on the grounds that the exhibits are hearsay, cumulative,
not in point or just unreadable. The remainder are admitted. Some
documents objected to, which have been admitted, could also qualify
as hearsay. However, some, such as Pl.Ex. 382-405 (transcripts of
proceedings before the Commission) are not being admitted for the
truth of what the documents contain but merely to show that the
(footnote continued on next page)
54a
Opinion of the United States District Court
for the Southern District of New York
Fairleigh S. Dickinson, Jr. was the son of one of the
founders of BD. He held the reins of the company from
1948 until 1973. When he became BD chief in 1948, BD was
a private family enterprise with gross sales of 10 million
dollars annually. When he released the reins of the com-
pany in 1973, it was a public company with gross sales of
#300 million annually. Dickinson loosened his hold on the
helm but did not entirely let go. In 1974, he stepped up-
roceedings occurred; others are in keeping with what has already
established on the record, and no purpose is served by keeping
them out.
The objections to PI.Ex. 12, 123-132, 187, 188, 192, 237, 255 and
295 highlight my unhappiness with the procedure used in re the
offering of the exhibits for admission. Had the above exhibits been
submitted in the court’s presence, I would have insisted that counsel
reach agreement on getting the facts set forth in these documents
before the court—the number of accounts involved in the sale to Sun,
whether the accounts were discretionary or non-discretionary, the
number of discretionary accounts not sold and the number of non-
discretionary accounts sold. The solicitees supplying the above exhibits
were deposed, and their depositions were made a part of the record.
The above factual data for the most part merely support the deposi-
tion testimony, and there should be no question concerning their
reliability. In one instance there is a reconstruction, and it is indi-
cated that the result is an approximation. I see no reason, therefore,
why the above exhibits should be excluded insofar as they recite the
factual data set out above. Expressions of opinion or any matter apart
from the indicated factual data are not to be considered a part of the
exhibit admitted into evidence.
The defendants’ exhibits objected to are Def.Ex. 137, 138, 139,
140, 141, 142, but they seem to be the same as Def.Ex. 126-136 which
were not objected to, so they are admitted. Def.Ex. 197-203 are
evidence of BD political activity, 335 halt of trading, 345-361 political
action, 363-371 political action, 373-379 political activity, -396
political — and 400-410, 412 political activity, All are
admitted. While all these documents qualify as hearsay, they do no
more than establish what the 7 ition testimony of BD officials and
employees already concedes. .Ex. 415-421 are toll calls. I do
not understand the relevance of these documents and the objection
is sustained ; 446 does not seem to be in point, nor does 451 or 452.
55a
Opinion of the United States District Court
for the Southern District of New York
stairs to become Chairman of the Board, while Wesley
Howe became Chief Exceutive and Marvin Asnes became
Chief Operating Officer. Differences between the manage-
ment team and the chairman became evident in late 1976
when Dickinson threatened to fire Asnes,
Sometime prior to January, 1977, lowe became inter-
ested in the acquisition by BD of National Medical Care
The objection to 475, the Kerley affidavit, is overruled. Kerley’s
deposition testimony is a part of the record and I see no reason to
keep his affidavit out. Objections to 490-493, 524, 527-531, 533-537,
551-554, 586-593 are sustained on grounds of hearsay or lack of
relevance. 576, 583, 593 and 594 are admitted.
In addition, defendants have filed with their post-trial briefs a
submission designated Appendix A. As finally submitted, this ap-
pendix consists of some 7 boxes of summaries and analyses of 37
stock purchase transactions and related materials. As originally filed
the appendix was a single volume containing excerpted materials
from these 37 transactions. The Commission objected to this sub-
mission on the grounds of selective summarization, and the parties
sought to agree on the compilation of an appendix. Unfortunately,
they were unable to do so. The purpose of this submission is to
demonstrate that all of these 37 acquisitions have some of the features
of the instant transaction and were deemed by a court or the Com-
— not to be tender offers within the meaning of the Williams
ct.
The court cannot accept these documents as part of the evidentiary
proof under present circumstances. They should have been submitted
during the trial when the court could have heard argument pro and
con, asked pertinent questions and been satisfied one way or the other
on their admissibility. Defendants contend the court may take judicial
notice of these filings, but that cannot be so. A document certified
by the Commission is admissible without more, Rule 902, Fed.R.Ev.
as a public record, but these are not Commission executed materials.
Nor can they be admitted under Rule 201, Fed.R.Ev. as facts gener-
ally known in this district. The documents merely constitute matter
filed by third parties with the Commission, and the court cannot rely
on the truth or accuracy of third party documents submitted to the
Commission. See Section 26 of the Exchange Act, 15 U.S.C. § 782.
Indeed, the Commission here is contesting filings made with it in this
very case. Accordingly, the objection to Appendix A is sustained.
56a
Opinion of the United States District Court
for the Southern District of New York
Corp. Negotiations went well, and BD announced a pro-
posed merger with the company in January, 1977. Without
advising the board or management, Dickinson engaged the
services of Salomon and Eberstadt to look into the proposal
and advise him about it. Dickinson was a personal friend
of William Salomon, a senior partner of Salomon, and
Eberstadt had been BD’s investment banker. Robert
Zeller, Eberstadt’s chief executive, had arranged the first
underwriting in 1962 when BD became a pubiie company,
and until 1975 had performed the same function when BD
made additional public offerings. In addition, Zeller had
advised Dickinson on the handling of some of his personal
affairs. Both Salomon and Mberstadt filed negative reports
on the National Medical Care proposal. Dickinson sent the
Salomon report to BD board members in February, and on
March 3 at a meeting of the Executive Committee, the pro-
posal was abandoned.
Intrigue deepened at BD. Howe’s secretary, Dorothy
Matonti, began listening to telephone conversations that
Dickinson’s administrative assistant, Adcle Piela, had with
Jerome Lipper, Dickinson’s attorney, and Board members.
Matonti copied Piela’s shorthand notes and material from
Dickinson’s appointment book, and Viela’s secretary and
Dickinson’s driver kept Matonti informed of Dickinson’s
activities. This surveillance was duly recorded in memo-
randa given to Howe. On March 27, Dickinson held a meet-
ing with Salomon attended by Kenneth Lipper, his brother
Jerome Lipper, Dr. Edwards, an employee of BD, and sev-
eral BD directors. At the meeting the participants dis-
cussed the financial community’s reaction to changes in BD
57a
Opinion of the United States District Court
for the Southern District of New York
that Dickinson was contemplating. Dickinson apparently
felt he had sufficient power in the company to bring about a
change in management. Events, however, were soon to
prove him wrong.
In early April, Dickinson, Howe, and Asnes met, pre-
sumably to bring their differences into the open and to re-
solve them, The meeting settled nothing. Howe and Asnes
then decided on a show of strength. They canvassed the
board, found enough votes to get rid of Dickinson, and on
April 18 sent out notices for an April 20 meeting. Jerome
Lipper knew the purpose of the meeting but Dickinson did
not attend. Whether this was because Dickinson had also
counted the votes, we do not know, At any rate, he spent
part of the day in Washington, and part in Baltimore with
Dunning. Howe prevailed. Dickinson was deposed as
chairman and nudged out the back door with the title of
Honorary Chairman,""
Obviously this must have been a terrible personal blow.
Dickinson was now stripped of all power within what he
must still have regarded as a family enterprise. On April
21, Dickinson had a meeting at Salomon to secure advice on
how to proceed. Richard Rosenthal, John Gutfreund, and
Kenneth Lipper of Salomon, two BD directors, Kane and
Thompkins, Jerome Lipper and Salomon Brothers counsel,
Martin Lipton were in attendance, The meeting centered
on BD’s trouble and the possibility of restoring Dickinson
to power. A lawsuit based on procedural irregularities at
16. In September, 1977, Dickinson was terminated as a BD
employee, and in December, 1977 he was dropped from the list of
directors to be elected at the BD annual meeting in February.
58a
Opinion of the United States District Court
for the Southern District of New York
the board meeting was ruled out. Nor was a proxy fight
considered a viable option when the small percentage of
total BD shares Dickinson held was revealed. Although
Dickinson and members of his family still held the largest
segment of stock in the company, acquisitions, public offer-
ings and the sale of some of their holdings had caused their
aggregate portion to be reduced to approximately 5% of
BD’s outstanding shares. Discussion then turned to more
practical solutions, e.g., for Dickinson to sell his shares on
the open market to BD or to a third party, or to bring
pressure on management through the outside directors.
Dickinson vetoed the idea of selling his stock on the open
market since he felt that that course would leave the share-
holders of BD saddled with bad management. He accepted
two remaining options—to vote with outside directors to
bring pressure on management and to sell his stock to a
company interested in a takeover of BD—and engaged Salo-
mon for the latter purpose.
A few days later, on or about April 25, Dickinson ad-
vised Zeller that he was asking Salomon to involve Eber-
stadt in the effort to interest a company in acquiring his
stock. Zeller confirmed these arrangements with Gut-
freund,
At first, the relationship of Dickinson to Salomon and
Zeller as principal and agent or broker for the sale of Dick-
inson’s stock was merely an oral understanding. Events
during the summer of 1977, however, caused the parties to
alter the arrangement, By that time, there had been merger
discussions with Avon Products Co. (*‘Avon’’) and Ameri-
can Home Products Corp. (‘‘AHP’’), and William LaPorte,
59a
Opinion of the United States District Court
for the Southern District of New York
chairman of the board of AIIP, had met with Howe and
Henry Becton, Dickinson’s successor as chairman of the
board of BD, seeking BD management’s approval of an
AHP acquisition. Howe was thus aware that Dickinson
was seeking a takeover of BD by another company, Joseph
Flom, BD counsel, called Lipton and threatened a lawsuit
if Dickinson continued to try to secure a buyer for a large
percentage of BD stock. Lipton suggested to Salomon that
it secure an indemnification from Dickinson, Lipton drafted
such a document for Dickinson to sign and sent it to Ken-
neth Lipper in July. Jerome Lipper and one of the senior
partners of Salomon were opposed to the idea, but in late
September or October, Flom renewed his threats to Lipton.
Lipton again advised Lipper to have Dickinson sign the in-
demnification. This time Lipper took the document direetly
to Dickinson. He agreed to sign it, and after Jer
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