Petition for Writ of Certiorari — Milstein v. GAF Corp.

Supreme Court brief1972

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Ik THE. -

anes Court of the Hnited States SEN =

; OcrosEer TERM, 1971 . :

os ae ~ T- 1744.

PAUL MILSTEIN, SEYMOUR MILSTEIN, GLORIA |

MILSTEIN FLANZER, and MORRIS MILSTEIN,

: Petitioners,

GAF CORPORATION

- PETITION FOR A WRIT OF CERTIORARI TO THE.

“UNITED STATES COURT OF APPEALS :

"FOR THE SECOND CIRCUIT :

~ Louis Loss |

Attorney for Petitioners

Langdell Hall

‘ Cambridge, Massachusetts 02138

Of Cc ounsel:

Srroock & STRoocK & LAVAN

- 61 Broadway

New York, New “York 10006

Davin LuBartT

CHARLES G. MOERDLER | “4

Gary J. GREENBERG’ ‘ aa | :

STEPHEN A. BLOCK sits Tae” rene

RosBert P, STEIN

Berean yey, srt PR Arte, Py ee

TABLE OF CONTENTS

Opinions BELow ane iG hee AEE ge eee ee oe

i Sa ees UNAS Roma eae : ee re Peta eg: 1

QUESTION PRESENTED Tie Ong One ner eee as . pee ee

STATUTE INVOLVED . i : Lape? Ses reece eno

| STATEMENT OF THE CASE 2.10... eecccceeveceeees 2

A, The Williams Act ......... at aeaenetgtay a

B,. The Complaint Pease ‘ Poms tis wees we

_ C. Petitioners’,GAF Holdings. Ge Aro iia Oe

| _D. The Filings Non RG ped RR a TO

E. The Decisions Below ........... Zauaee ating 5

REASONS FOR GRANTING WEE a co teaen eee 5

one Te SE aoc Olena oes Re ee Ree mi 15

| APPENDIXES:

-A—Opinion of the Court of Appeals............ : la

-B—Opinion of the District Court .... . ay wf ay . Ib

C—Statutory Provisions Involved ............. eae

ii °

_ TABLE OF AUTHORITIES

ar PAGE

CASES: .

Bath nha. Inc. v. Blot, 427 F. 2d 97 (7th

: Cir.), aff'g 305 F. Supp.. 526 (E. D. Wis.) . 2 S67,

| 8, 12

J. I. Case Co. v."Borak, 377 U. S. 426 pone ec : a

Ozark Air Lines v. Cox, 326 ¥. sips 1113 (E. D.

PERE eet rE eh Ce eae rat us 6

BOE RE GH ee ae “as

‘Sisak v. Wings & Wheels E caeg Inc., CCH Fed.

Sec..L: Reg. 92,991 (S. D Pos fe en eee eat A

Superintendent of Insurance of the State of New

4 ork v. Bankers Life & Casualty oe. 404.U. 2.

United — v. American Trucking Assns., Inc.,

DO a ee oe ie eee ceo be 10-11 |

United age Dickerson, 310 U. S. Sr 10

STATUTES:

: : Securities Act of 1933: . ay

Cha So by. \ a ree cia we

Ve es ees pray F

re ihe ke, eee prota enon 14

SOS ARS case ita

Ee A is et Se ice Oe

Securities Exchange Act of 1934: :

15 U: S. C. §78m(d) meet is A Re ee passim

1S 45-S°0 See)... ee

$062 SA) cis

meer i

15 U;

15 U.

15 U..

SU,

15 U-

Es,

1s.

15°U.

15 U.

-15 U.

Cr LOLee Remy eter cmee eg uer cas”

~ § 78m(d) (1) (B)

——

§ 78m(d) (1) (C)

Fic onl t se e

§ 78m(d)(3): «v.22... ee

ENON EY 055.28 oe

§78m(d)(5)(B) ....... eepey *

POE) one enw mangas 42

§ 78n(d) 2. ...:01.... CL.

WOMB 2c. - wcccciese iO

§78n(d)(8) ....... epee a: a

SPOMA(D) 64-0 8S

§ bcs a SORE EEEE Wing DES be ee

§ 78n(f) ...... Sharer ate beccax

Yes eae ta he ~.. £8

S788 (a) . us. es eats 11,13.

$e Be greet Siege peu ws

P. L. 91-567, 84 Stat- 1497 ..4...c.0.000- ve 2

' - -RULEs:

Pursuant to the Securities Exchange Act of 1934:

oe Ee BS 55. peor 4, 5,13

i ee ess 5 ki ciccst 3

7 Ee ees) Ss a Se

17 C.F. R. §240.14a-11(c) .........- a eye 5

7 CFR §200144-1 ...:....... 0; apes

SE cece tate ad

REERIENY FLOM GATE IM ie ob a

OE RSI

. > .

SSF AR Maar rT rR AS Ho rN

R RE Noe t On rik Jee Were ts

iv:

* PAGE

‘LEGISLATIVE MATERIALS: =

113 Cong. Rec. 24664. (1967)... 0.50.05 05 eee 2,12.

113 Cong. ie 20069 CPOGT) 3-0 ones Ssaeenss 12

' Full Disclosure of Corporate Equity Ow cae and ©

in Corporate Takeover Bids, Hearings before Sub-

com. on Securities, S. Com. on Banking & Cur-

' rency, 90th Cong., Ist Sess. . See eeeetes oie ite 10, 12

H. R. Rep. No. 1711, 90th Cong., 2d Sess. ..2..... LO

'S. Rep. No. 550, 90th Cong, 2d Sess... 0.2... 00: 410

TREATISES AND OTHER SECONDARY SOURCES:

Brudney; A Note ci “Vil: lug Tendir Offers, 21 .

meters 1. Mev, BOO fa acest vse e's ae 2

Fleischer and Mundheim, Corporate Acquisitions 7

by Tender Offer, 15 U..Pa. L. Rev. 317 . 12

Hayes and Taussig, Tactics of Cash Paboovier Bids, oat

45 Harv. Bus. Kev. 135 (Mar.-Apr. 1967) ..... 12

6 Loss, Securities Regulation 5664 (1969 Supp.) . i 10

Symposium—Controlling Corporate Takeover Bids:

State Regulation and the Ohio Appr oach, a Case |

- W. Res, L. Rev. 605 ... SMe We hee ea eed ss 12

IN THE

‘Supreme Court uf the Mnited States

OcToBER TERM, 1971

No.

Paut Mitstemn, SEYMOUR MILSTEIN,

FLANZER, and Morris Mitstery,

Petitioners,

'GAF CorpPorRATION -

2 a

: Ei

% By

‘, _ PETITION FOR A: WRIT OF CERTIORARI TO THE

biggles STATES’ COURT OF APPEALS

FOR THE SECOND CIRCUIT -

The petitioners pray that-a writ of certiorari ay issued

to review a judgment of the United States Court of Appeals

for the Second:'Circuit that reversed a judgment of the

' United States District a. for the Southern District of. .°:

New York.

: Opinions Below

The opinions of the Court of Appeals, not yet officially

repofted, and of the District Court, 324 F. edt 1062, § are

set out ‘in Appendixes A and B. * fe

oJ urisdiction

The judgment of the Court of Appeals » was entered on

~” December 13, 1971. The jurisdiction of this Court is

invoked under § 1254 of the Judicial Code, - v. SA,

4 1254, °

° F i .

° et 3 . Wes

LORIA Mister Ra

: ses a ee

- Question’ Presented

~ Does the mere ‘formation of a group ‘whose members

‘collectively own moré than 10% of the outstanding shares

of a given class of ngreares stock require a filing under’

034,15 U.S.C.

‘ame neé " xChange Act 6

§ 78a)? S

‘Statute: Involved |

.. The relevant provisions of the Securities a Act

"> of 1934 enacted by the Williams Act of 1968 and applicable _

in. this case are set out in Appendix C. The amendments

of December 22, 1970, -84 Stat. 1497, which (inter alia)

reduced the 10% figure to 5%, do not affect the question

here presented (except, of course, to aggravate the impact _

of the caciajon below on Ron-anagement groups).

Sa oR RR I

* +A. The Williams Act. The Williams Act, in the wake

of a rash of takeover bids, added §$ 13(d), 13(e) and

14(d)-(f) to the Exchange Act in 1968. 82 Stat. 454,

15 U. S. C. §§ 78m(d), 78m(e), 78n(d)-(f).

Section 14(d)—which was added to $14, the proxy

séction, and is not involved in this case—was desigried to

regulate takeover bids (“tender offers” in statutory ter-

minology) more or less like proxy contests. That section,

however, afforded no information to investors before the

making of a tender offer, of-when one sought to “acquire

_ a substantial block of equity securities * * * through the

open market or privately negotiated purchases.” 113 Cong.

Rec. 24664 (1967) (Sen. Williams). To fill the gap some-

what, Congress added’§ 13(d) to § 13, the réporting section.

Section 13(d)(1) provided that “Any person who, ‘after

—

_ acquiring directly or indirectly the beneficial ownership of

any equity°security of a class which jis registered * * *, is

directly or indirectly the beneficial owner of more than 10

per centum of such class” should within ten days file certain

information: with the Commission and send it to the i issuer.

and every exchange where the security was traded. (Italics

supplied. ‘) And § 13(d)(2) required the filing of an amend-

ment to reflect “any material change’ ’ in the facts previously

reported. ;

In Rules 14d-1 and 13d-1, 17 GK Fe §5 240, 14d- 1,

_ 240.13d- 1, the Commission prescribed Schedule 13D for

the initial Gling. under both sections. That schedule requires,

among other things, a statement of “the purpose or purposes ~

of the purchase or proposed purchase” and, if one of the

purposes is to acquire control; a description of any plans to

merge or make any other major changes in the company’s

business or corporate structure. Item 4. .

The two sections are also parallel i in two other respects —

here significant : .

(1) Sections 13(d)(3) and 14(4)(2) provide in

identical language : : :

When two or more persons act as a partnership,

limited partnership, syndicate, or other group for the

purpose of acquiring, holding, or disposing of securities

of an issuer, such syndicate or group shall be deemed a

“person” for the purposes of this subsection.

(2) In terms of the section designations i in effect before

the Williams Act amendments of December 22, 1970,

§§ 13(d}(5) and 14(d)(8) contained a series of similar

exemptions, including one (as phrased in § 13(d)(5)(B), ~

although § 14(d)(8)(B) was to the same effect)’ for. |

any acquisition of the beneficial ownership of a security”

‘which, together with all other Seen: by the same

¢ 4

_person of securities of the same class during the preced-

ing twelve months, om not exceed 2 per centum of-that —

class.

en: eR ‘omplaint. The complaint charged the peti-

tioners with (1) failure to file timely Schedules 13D in

_ violation of § 13(d), and (2) the filing of false and mis-

leading Schedules 13D in violation also of Rule 10b-5, 17 .

a § 240. 10b-5. The GAF management sought to

enjoin the petitioners from (a) acquiring or attempting to

acquire any GAF shares ( preferred or common), (b)

soliciting prone, or (c) we any of their GAF shares.

ca > Petitioners’ ‘GAF Holdings. Since 1967 the peti-

tioners, a father and his three adult children, have owned

some 10.25% of the GAF preferred shares ‘outstanding.

They received virtually all of those shares as a result of

GAF’s acquisition of The Ruberoid Company iri May, 1967.

- Just before that event they owned about 8% of the Ruberoid

common and GAF owned about 26%. The petitioners’

holdings rose from 8% of Ruberoid common to 10.25% of

GAF preferred solely as a result of GAF’s cancellation of

its own Ruberoid holdings in connection with the merger.

Since July, 1968, the effective date of §13(d), no

petitioner has acquired a single share of GAF preferred.

Two of the petitioners, Paul and Seymour Milstein, have

purchased 237,600 shares of GAF common, about 1.7% of

the 13,612,827 shares-of common stock outstanding. But

-§ 13(d) speaks of acquisitions of the same “class.”

D. The Filings. On September 24, 1970, almost three

months before the institution of this action, the petitioners .

voluntarily filed a Schedule 13D and sent copies to various

- stock exchanges, GAF and others. That schedule disclosed,

inter alia, the extent of their holdings in GAF and their

" Current position with respect to both future acquisitions and.

—_

fo ae

the possibility of a takeover -aitempt. On‘ November 10,

. 1970, the petitioners brought their original filing current.

Andon January 27, 1971, upon the formation of the GAF . ,

- Stockholders Protective Committee, they filed an additional.

Schedule 13D, as well as.Schedules 14B pursuant to Rule

14a-11(c), 17 C. F. R. § 240.14a-11(c), in connection with —

the proxy contest on which they had by then decided: (and

which they ultimately lost). That Schedule 13D was

amended on February 23, 1971. The January and February

' filings updated the previous filings, disclosed the petitioners’

participation in the committee, and outlined the aims and

plans of the committee in the proxy contest. —-

All these filings were made under specific, disclaimers

of the applicability of § 13(d) and without any demand

from the SEC, which has not appeared in these proceedings.

E. The Decisions Below. The District Court dismissed

the complaint for (1) failure to state a claim on which

relief could be granted under -§ 13(d) and (2) lack: of

standing under Rule 10b-5. The Court.of Appeals affirmed

with respect to Rule 10b-5.. But it reversed with respect to

the late filing claim under §.13(d). In addition, the court

sustained against dismissal under § 13(d) the claim -of

false filings that it refused. to entertain under Rule 10b-5.

REASONS FOR GRANTING THE WRIT

First: The decision below, as the court explicitly rec-

ognized (p. 14a infra), is. “in disagreement with the inter-

pretation” of the Seventh Circuit in Bath Industries, Inc.

Vv. Blot, 427 F. 2d 97, aff’g 305 F. Supp. 526 (E. D. Wis.).

Indeed, in the less than four years since the enactment of

§ 13(d),; the lower courts havé expressed three disparate :

views on the precise question here at issue:

(1) Judge Pollack’s decision ‘here aside, two ather dis-

trict judges (one in another circuit) have held—and we

% p

submit this is the correct construction—that, since (a)

~ §13(d)(1) requires a report within ten days of a person’s

becoming the beneficial owner of more than 10% of a class

“after acquiring” the beneficial ownership of a security of

the class, and (b) § 13(4) (3) says simply that “a group

shall be deemed—a—‘person,”’—-and—{e)—-§$ 134} 45) {B)-

(now § 13(d)(6)(B)) exempts acquisitions of not more

than 2% of the class’ in twelve months, the filing require-

‘ ments (in Judge Webster’s words) “are nat triggered by

the mere formation of a group having the 10% interest in

the -aggregate, with a view to guineg control, absent | -

further acquisitions by the group.” Ozark Air Lines, Inc.

v. Cox, 326 F. Supp. 1113, 1118 (E. D. Mo.) (italics in

original) ; Sisak v. Wings & Wheels Express, Inc., CCH

Fed. Sec. L. Rep. § 92,991 (S. D. N. Y.). The fact that

the two cases reached opposite results on the separate ques-

tion whether § 13(d) covers an estate’s acquisition by oper-

ation of law serves only to emphasize their agreement on

the question here at issue.

(2) In Bath the’ Seventh Cireuit concluded that the

mere formation of a group did not activate § 13(d), but

__ that, “once the group agrees to. act in concert to, acquire

shares, its members must comply with the Act’s disclosure

requirements whether or not any one of them has at that

time acquired stock in furtherance of the underlying plan:”

427 F. 2d at 110 (italics in original). The opinion is not

clear just how soon after such an agreement the filing must

be made. For the court concluded that “once jit is shown

that such'a group has agreed to pursue a common objective,

and once it is further shown that.a member of the group

has thereafter purchased additional shares of the corpora-

tion’s stock, then a rebuttable presumption arises that such

purchase was made pursuant to an agreement of ‘the group

as of that date to acquire shares in furtherance of its objec-

aise: eel

tives’ —which apparently looks to a due date ten days after

the agreement—but in the very next sentence said: “Com-

Pliance with the Act’s disclosure provisions would be re-

quired within ten days of such purchase.” Ibid. (italics

‘in original). In either event, the court | specifically _recog- ‘_§

nized the 2%. éxemption. 427 F. 2d at 111, n> 7: And,.

‘whatever the due. date under the Seventh Circuit’ s view, _

_ the present -petitioners would never have had to file. For,

unlike the insurgent group in Bath, which acquired much

-more than 2%, to the point of holding more than 50%

of the voting: power, here the petitioners did not acquire

a single share of preferred, let alone 2% of that class, and

in the aggregate their total voting power amounts to only

4% of both common and preferred stock.

(3) The Second Circuit here—by focusing on a pas-

_ Sage in the legislative reports that (as we shall show) is

irrecoricilable with the legislative history as a whole, not

‘to mention the language of the statute itself and compelling

factors of public policy—concluded, on the theory of a

group’s “acquisition” from its members, that the filing re-

quirement was triggered by the formation of a more-than-

10% group simpliciter.

There are a number of considerations, we respectfully

urge, that make the conflict the more deserving of the

Court’s. attention:

(a). Unless reversed, the erroneous reading of the

“group” concept—especially since the decision below quite

properly charges management with primary. enforcement

of § 13(d) [cf. J. J. Case Co. v. Borak, 377 U. S. 426]—

will play into the hands of entrenched management, which

will use § 13(d) as a sword to hobble shareholder democ- |

racy. Thus, the decision will impair the neutrality that

Congress was careful to preserve.

FLERE. & JPEG RAMEE ENE NOE AIDES ERY SEL ACLS AA AOE SON GEE NE AA SESE AS CARBS RG SHAS

(b) The Seventh Circuit in Bath properly recognized

that §13(d) “does not proscribe informal discussion ~

among existing shareholders concerning the performance —

of current management,” and held that even “legitimate

cooperation among existing shareholders to assert their

determination to take over-contrel- ef- management, absent—

an intention to acquire additional shares for the further-

ance of such a purpose,” was not forbidden. 427 F. 2d

at 110 (italics in original). By contrast, the Second Circuit |

—by holding that the formation of a group without more

is a reportable event but failing at the same time to lay

down guidelines as to what activities constitute that for-—

mation—has raised the specter of a classic “prior re-

straint.”

financial life of the country, the Second Circuit has always |

played a dominant role in litigation under the SEC statutes |

generally, deciding over the years perhaps as many: cases

as all the other Courts of Appeals combined. On this very

a ground, other courts outside the.Seventh. Circuit (and the |

Eastern District of Missouri) are likely to defer to the

expertise of the Second Circuit despite its erroneous con-—

struction in this burgeoning area of securities law.

Second: The court below has erroneously decided an

important question of federal law that should be settled

_-by this.Court. Indeed, the court went out of its way to

recognize that it was interpreting a new federal statutory |

provision having a potentially broad impact on the securities

market, stating that its decision was “on a relatively tabula

rasa” (p. 2a, infra). .

(1) Text of the Statute: (a) In marked contrast to |

the insider trading provision, § 16(a), 15 U. S. Cc

§ 78p(a), which has provided since its enactment.in 1934 ~

‘ \

ee | 9 BRERA TRS OER

_ * * * the beneficial ownership of any equity security * * *,

never be able to take advantage of the 2% exemption.

f —

> OS OE TN

that every person “who is * * * the beneficial owner of

more than 10 per centum * * * shall file,” the later enacted - |

§ 13(d) (1) provides that “Any person wha, after acquiring

is * * * the beneficial owner of more than 10 per centum”

shall file. (Italics supplied. ) The opinion below, by. in-

venting the fiction that a group’s members have ‘ ‘acquired”

each other interests, simply ignores this contrast.” tie ees ee

_ (b) When § 13(d) (3) provides that a “group for the ©

purpose of acquiring, holding, or disposing of securities ~

of an issuer * * * shall be deemed a ‘person,’”’ this is

simply and obviously a device to prevent evasion through

the use of joint ventures. There is no.warrant for reading . f

§ 13(d) (3) as_imposing more stringent requirements on —

a group than on an individual. Section 13(d) (3); essen-.

tially a definitional provision, must not be-read as if it = =

were the operative section. The operative provision is

§ 13(d)(1)—which does not: contain the “holding? or

“disposing” language of § 13(d)(3)—and the only effect

of § 13¢d)(3) when incorporated into § 13(d)(1) is to

make that section read:: “Any person or group that, after

acquiring * * * the beneficial ownership of any equity

security * * *, is * * * the beneficial owner of more than

10 per centum” shall file.

as contemplating the “acquisition” by-a group from its

individual members, a group, unlike an individual, would

(d) That construction of “acquisition” also ignores the

language of Clauses (A)-(C) of § 13(d)(1), which, in -

specifying the kinds of information to be required by the

Commission, refer repeatedly and consistently to “pur-

chases.”

(3) ‘Legislative History: The entire case for the plain-

_tiff rests on the following passage from the 1968 committee

reports:

The. group would be deemed to have become the bene- |

ficial owner, directly or indirectly, of more than 10 per-

cent of a class of securities at the time they agreed to

act in concert. Consequently, the group would tbe re-

an arrest a. quired to file “the information called for “in section

13(d)(1) within 10 days after they agreed to act to-

gether, whether or not any member of the group had

acquired any securities at that time.

S. Rep. No. 550 at 8 and H. R. Rep. No. 1711 at 8-9, 90th

Cong., 2d Sess., [1968] U. S. Code Cong. & Ad. News

-2811, 2818.* ‘But this passage does not constitute the

whole legislative history. For one thing, S. 510 was changed

before passage to reflect .a specific objection that filing

should be required “only with respect to acquisitions taking

place after the effective date of the act,” and to reject a

contrary suggestion that then-existing holders as well.as

future holders of 10% blocks should be required to file.

Full Disclosure of Corporate Equity Ownership and in

Corporate Takeover Bids, Hearings before Subcom. an Se-

curities, S. Com. on Banking & Currency, 90th Cong., Ist

Séss., pp. 4, 136, 150. :

_ We have never contended—and we are not so naive as ©

to suggest—that a court should deprive itself of any “rele-'

vant aid to construction,” United States v. Dickerson, 310

_ U.S. 554, 562, among which legislative history is next in

importance only to statutory text. What we do say is that

“There is, of course, no more persuasive evidence of the

purpose of a statute than the words by which the legislature

undertook to give expression to its wishes.” United States

*These* reports were paraphased, without’ more, in 6 Loss, Secu-

rities Regulation 3664 (1969 Supp.).

v. American Trucking Assns., Inc., 310 U. S. 534, 543.

'. And we respectfully-submit that the lower court’s attempt

to reconcile the passage from thé committee reports with

the text by manufacturing the concept of a group acquisi- —

tion from its individual ‘members ‘(a concept nowhere re-

ferred tom the fegisiative history) does too much violence —

to the “after acquiring” language of § 13(d) (1)—not to

—mention the 2% exemption—to be supportable. “Laws, espe- —

cially those with criminal sanctions (§ 32(a)), should not

say one thing and mean another.

(4) Policy Considerations: The lower court’s prefer-

ence for thé language of the committee reports over the

text is the more surprising because policy considerations:

. point to the latter, not the former:

-(a) The task of ascertaining exactly when a group has

been -formed would be (as Judge Pollack aptly put it) -

“akin to an attempt to grasp quicksilver”—particularly in_

the case of a group consisting of close relatives whose

“alleged conspiratorial agreement” may have begun. “as

complaints voiced during a dinner or other family gather-

ings.” 324 F. Supp. at 1068-69: Unless it is absolutely

compelled, a construction that would invite cross-examini-

tion with respect te this kind of speech—conceivably in —

some case after one member of the family had fallen out

with his reiatives, which sometimes happens—is not to be .

relished in-a free society.

(b) Under the construction below it seems safe to

predict that the litigation that-seems inevitably to accom-

pany a proxy. contest will be further complicated in the

future by management allegations of failure to file under

§ 13(d) within ten days after formation of a non-man-

agement group owning (as the statute now reads) more

than 5% of a class. Moreover, the decision below comes

A Reatibe She face Kir sons

close to eliminating’ the exemptionin Rule 14a-2(a) of- the

proxy regulation, 17 C. F. R. -§ 240.14a-2(a), for non-

SEEM te ARE: Np NR RINE —

management solicitations of not more than ten persons.

Thus it not only upsets the harmony with the “clearly

related * * * proxy provisions” that was emphasized both

by the-Bath court(427 F.2d at_110) and by Senator

Williams (113 Cong. Rec. 24665), but also. tears away’

“the right of -existing shareholders to-assess-the- scope of |

available support on matters of legitifnate-concern to them”

» (427 F. 2d at 110):

policy. level is the ‘ ‘extreme care” that was taken by Con-.

-gress “to avoid tipping the scales either in favor of manage-

ment or in favor of the person making the takeover bids.”

Bath Industries, Inc. v. Blot, 427 F. 2d at 109, quoting ©

from Sen. Williams in 113 Cong. Rec. 24664. There is

state legislation that, unhappily, has ignored the truism

that incumbent management has no protected interest in

remaining in power.. See Symposium—Controlling Cor-

porate Takeover Bids: State Regulation and the Ohio

A pproach, 21 Case W. Res. L. Rev. 605. But there is every

reason to believe that Congress took to heart the ample ——

‘warnings that the Williams Bill should not serve merely

to give entrenched management another sword. See Full

Disclosure of Corporate Equity Ownership and in Cor-

porate Takeover Bids, Hearings before Subcom. on Secu-

rities, S. Com. on Banking & Currency, 90th Cong., Ist

_ Séss., p. 135; Fleischer and Mundheim, Corporate Acquisi-

tions by Tender Offer, 115 U. Pa. L. Rev. 317, 321-22,

360-71; Brudney, A Note on Chilling Tender Offers, 21

Rutgers L. Rev. 309. Not-all takeover bidders are raiders,

and not all entrenched managemérits.‘are saints in striped

trousers. See Hayes and Taussig, Tactics of Cash Takeover

Bids, 45 Harv. Bus. Rev. 135, esp. at 139 (Mar.-Apr.

1967). re

-—-

Is the construttion ‘teow to be applied only to pre- ;

sumptuous insurgents—which would make § 13(d) a pro-

management piece of legislation with a vengeance—or must

every management “group” (which jis to say, normally,

every aggregation of directors and officers together with

their wives and at least their minor children) file. a Schedule

13D within ten days after its formation if it holds in the

-aggregate more than 5% of a registered equity security?

The Court below acknowledged this question but did not .

adequately explore its implications, See p. 16a infra.

(d) In the final analysis, it is not even clear that there

would have been any point in specifically requiring (as it

would have been easy enough to do) that a report be filed

wvithin ten days after the formation of a specific group; for,

as Judge Pollack put it: “It,is money and not numbers that

counts here. ” 324 F. Supp. at 1068.

- One final point; A writ of certiorat! should not be with-

held on the ground that the allegations of false filings must

be.assumed to be true for purposes of a motion to dismiss

‘the complaint even if it be assumed that the petitioners had

no duty to file. For the Second Circuit’s use of § 13(d) as

the basis for the standing that it so carefully withheld under . -

Rule 10b-5—far from effectuating this Court’s instruction

that the SEC statutes “should not be construed technically

and restrictively, but ‘flexibly to effectuate [their] remedial

purposes’” [p. 18a infra, quoting from SEC v. Capital

“Gains Research Bureau, Inc., 375 U. S. 180, 195 }—is not

only .unneccessary. but also potentially mischievous in its

implications :

(a) It is unnecessary, becoune: qalbe apart cn the

criminal penalty that § 32(a) of the Securities Exchange

_Act imposes on any person who willfully and knowingly

“

. s

eT REL OT NID NER SF

H -

ETAT ENR CAVIAR IE

SNES LAR E TE EEE RIO PTI LEME IG SS LIL ONT TERR ITE ILS PR A Bs

| a eee

Nk etn at pee

ap ce SET PP eH OY AT

_ makes materially false or misleading statements in any

filing with the Commission, Rule 10b-5 (not to mention

‘ other antifraud provisions) subjects to the_ whole arsenal

of administratfve, injunctive and criminal’ sanctions any

person whose false statements are “in. connection with”

the purchase ‘or sale of a security. See Superintendent of

Insurance of the State of New York v. Bankers Life od

Casualty Co., 404 U.S. 6.

(b) The construction in question may be positively

mischievous when applied, for example, to false regis-

tration statements undef the closely related Securities Act

af 1933. Sections 11 and 12(2) of that statute, 15 U.S. G.,

§§ 77k, 771(2), impose civil liabilities for misstatements

' in selling securities, but subject to various defenses going

to reasonable care and to the plaintiff's knowledge. On-

the other hand, § 12(1), 15.U, S. C. 771(1), imposes an —

absolute liability on any person who (inter alia) sells a

security -in violation ‘of the requirement in §5(b), 15

U. S. C. § 77e(b), that he use a prospectus that meets the

requirements of § 10, 15-U. S. C. §77j. If (inthe lan- —

guage of the court below, infra p. 18a) | “the obligation

to file truthful statements is implicit in the obligation to

file” and deliver a prospectus,.then the use of a false pro-

spectus violates § 5(b) and creates absolute liability under

§ 12(1) without regard to the defenses and other restric-

‘tions in §§ 11 and 12(2)..

This is merely to say (i), that the “remedial purpose”

axiom is apt to be a hazardous solvent rather than a cure-

all when applied to isolated provisions in statutes as. com-

_ plex as these, and (ii) that it is as dangerous as it is

_ needless, in statutes as symmetrically drafted as these, to

- transform filing provisions (which are mala - prohibita)

into fraud-type provisions (which are mala in se).

CONCLUSION °

For the reasons stated, the petition for # writ of

certiorari should be granted. ;

Respectfully sieiesl,

Louis Loss

‘Langdell Hall

Cambridge, Massachusetts 02138

. Attorney for Pétitioners

Of Counsel:

STROOCK & StrRoock & LAVAN -

“61 Broadway |

Ney York, New York 10006

Davip LuBART

CHARLEs G. MOERDLER

Gary J. GREENBERG.

STEPHEN A. BLocK

Rosert P. STEIN

March, 1972

APPENDIXES

APPENDIX A —

UNITED STATES COURT OF APPEALS

For THE SECOND Ciacust

No. ne oe Term, 1971. %

ial November 10,1971 Decided December 13, 197 i. )

Docent No. 71-1503

- GAF CorPorATION,

Plaintiff-A ppellant,

Vv.

Paut Mitstern, SEyMour Mitstern, GLORIA

MILSTEIN * FLANZER and Morris MILsTEIN, ;

¥ Defendants-A ppellees.

“Betere:— -

KAUFMAN and MANSFIELD, Circuit Judges, and

___—__._ ae es fai

Appeal from an order of the United States District

Court for the Southern District of New York, Milton .

Pollack, Judge, 324 F. Supp. 1062 (1971), dismissing under -

Rule 12(b) (6) appellant’s complaint alleging violations of |

sections 13(d) and 10(b) of the Securities Exchange Act

_ for failing to file and then filing false statements required

by section 13(d). : é

Reversed in part; affirmed in part.

*Of the Southern District of New York,. sitting by designation.

——

Appendix A

>. —

I<pwin J. WESELY, New York, New York ( Win-

throp, Stimson, Putnam & Roberts, New

York, New York, Richard A. Horgan,

Eugene G. McGuire, of counsel), for Ap-

pellant.

ours Loss, Cambridge, "Mass. (Stroock &

’ Stroock & Lavan, New York, New York,

David Lubart, Charles G. Moerdler, Stephen

A. Block, Robert P. Stein, of counsel), for

"Appellees. ——

KAUFMAN, Circuit Judge:

This appeal involves the interpretation of section 1 13(d)

of the Securities Exchange Act,’ hitherto a largely un-

noticed provision® added in 1968 by the Williams Act.* We

‘write, therefore, on a relatively tabula rasa, despite the

burgeoning field of securities law. Essentially, section

13(d) requires any person, after acquiring more than

___ 10% (now 5%*) of a class of registered equity security, .

115 U. S.C. § 78m(d).

2We are aware of only four other cases which considered the

section: Bath Industries, Inc. v. Blot, 305 F. Supp. 526 (E. D. Wis.

a d, 427 F. rt? Cir. 1970) ; Ozark Airlines, Inc. v. Cox, -

upp. 1113 (E. D. Mo. 1971); 'Sisak v. Wings and Wheels

Bapvans nc., CCH Fed. Sec. L. Rep. 992, 991 (S. D. N. Y. Sept. 9

1970) ; Grow Chemical Corp. v. Uran, 316 F. Supp. 891 (S. D.

N. Y. 1970). See generally Comment, Section 13(d) el Disclosure

of Corporate Equity Ownership, 119 U. Pa. L. Rev. 853 (1971).

%Act of July 29, 1968, Pub. L. No. 90-439, 82 Stat, 454, amending

Securities Ex e Act §§ 12-14, 15, U. S. C. §§ 781-n.

*As of December 22, 1970, section 13(d)(1) was amended to

require filing after the acquisition of 5%. Act of December 22, 1970,

Pub. L. No: (0. 91-567, § 1; . Stat. 1497, amending Securities Exchange

. Act §13(d)(1),. 15 U.S.C. § 78m(d) (1).

3a |

bay = Appendix A aeeen

to send to the issuer and the exchanges on which the se- -

curity is traded and file with the Commission the state-

ment required by the Act.® Although the section has not

attracted as much comment ‘as section 14(d), also added

by the Williams Act and requiring disclosure by persons

engaging in tender offers, the section has potential: for

marked impact on holders, sellers, and purchasers of

securities, = nen Se ee |

_ GAF Corporation filed its complaint in the United States

District Court for the Southern District of New York al-

leging that Morris Milstein, his two sons, Seymour and

Paul, and his daughter, Gloria Milstein Flanzer, violated

section 13(d) of the Securities Exchange Act first by fail-

ing to file the required statements and then by filing false

ones. The complaint also alleged violation of section 10(b)

based on the same false statements and, in addition, market

manipulation of GAF stock. The Milsteins moved for dis-

missal under Rule 12(b) (6), F.R.Civ. P., on the ground

that the complaint failed to state a claim on which relief

could be granted or, in the alternative, for summary judg-

ment under Rule 56. Judge Pollack aptly framed the issues

involved: |

The ultimate issue presented by the defendants’ mo- -

tion to dismiss the first count is whether, organizing

-*Section 13(d) (1) empowers the Commission to require disclosure

of information “necessary or appropriate in the. publc interest or for

the protection of investors,” and specifically requires: (A) the back-

ground and identity of the persons filing, (B)*the source and‘amount

of funds for any purchases, (C). any plans the persons have with

’ respect to the issuer if their purpose is to acquire control, (D) the

number of shares owned and (E) information concerning any con-

tracts, arrangements or understandings with any person, with respect

to any securities of the issuer. In accordance with this mandate, the.

Commission pursuant to Rule 13d-1, has prescribed Schedule 13D, 17

C. F. R. § 240.13d-101, for those required to file.

a group of stockholders owning more than 10% of a |

class of equity securities with a view to: seeking. con-

_ trol is, without more, a reportable event under Section

13(d)of the Exchange Act; and as to the second count, -

whether in the absence of a connected purchase or sale

_ of securities, the target corporation claiming violation

of Section 10 and Rule 10b(5), has standing to seek an

_ injunction against a control contestant for falsity in a

Schedule 13D filing. (Footnote omitted.) |

324 F. Supp. 1062, 1064-65 (S. D. N. Y. 1971). Judge Pol-

lack grarited the Milsteins’ motion to dismiss under Rule

12(b) (6), and GAF has appealed. We disagree with Judge

Pollack’s' determination that GAF failed to state a claim

under section 13(d) and Rule 13d-1 promulgated there-

_ under, and thus reverse his order in this respect, but we

~ affirm the ‘dismissal of the second claim of the complaint

on the ground ra GAF, as an’ ‘issuer, has no standing under

section 10(b). |

‘Before iis the merits of the issues involved on

appeal, a statement of the facts as presented in the com-

-plaint and the briefs is in “order.” We note also that in _

this posture of the proceeding we must accept as true all

well pleaded allegations in the complaint. -

The four Milsteins received 324,166 shares of GAF con-

_. vertible perferred stock, approximately 10. 25% of the pre-

- ferred shares outstanding, when The Ruberoid Company,

_in which they had substantial holdings, was merged into

6Although a Rule 12(b) (6) motion is addressed ree to the face

of the complaint, and our determination on this appeal is. based

on whether a claim was stated on its face, both parties have discussed

" the facts extensively in their respective briefs. We make reference to

those facts for the purpose of — forth the nerves of the

dispute.

—

Appendix A

| GAFi in May, 1967. They have not Acquired any additional

preferred shares since the merger.’

The complaint informs us that at some time after July

29, 1968, the effective date of the Williams Act,* the Mil-

_ steins “formed a conspiracy among themselves and other

persons to act as a syndicate or group for the purpose of

acquiring, holding, or disposing of securities of GAF with

the ultimate aim of seizing control of GAF for their own

personal and private purposes.” It is necessary for our

purposes to examine only a few of the nine. overt acts

GAF alleged were taken in furtherance of this conspiracy.

The complaint alleged that initially the Milsteins sought

senior management and board positions for Seymour Mil-

stein with GAF. When this sinecure was not forthcoming,

' the Milsteins allegedly caused Circle Floor Co.,’ Inc., a

company in their control, to reduce its otherwise substan-

tial purchases from GAF-® It also charged that the Mil-

_steins thereafter undertook a concerted effo 9 dispa

its management and depress the price of GAF common

and preferred stock in order to facilitate the i gm

_of additional shares. On May-27, 1970 the Mi

sor w9 ts

a derivative action in the district court, charging the di-

rectors, inter alia, with waste and spoliation | of corpora-.

tion assets. A companion action was filed in the New York

courts. GAF further alleged that these actions were filed

only to disparage management, to depress the price of GAF

‘The 324,166 shares exclude 28,808 trust shares. as to’ which the

Milsteins disclaim beneficial ownership.

-SAlthough the complaint does not allege a specific date for the

initiation of the conspiracy; we accept Judge Poilack’s construction

that “[p]laintiff alle = that defendants, acting in conspiracy, deter-

mined to take over GAF sometime after July 29, .1968, . . .” 324 F.

Supp. at 1064. Thé Milsteins have not challenged this determination.

Mn fact, GAF commenced an antitrust action —_— Circle Floor,

GAF vy. Circle Floor Co., Inc., 71 Civ. 792. (S. D. N. Y.). This

action has been dismissed.

p Brera SRK Oe ee.

‘6a

Appendix A

stock and to use discovery devices to gain valuable infor-

- mation for their takeover conspiracy.

In the meantime, the complaint tells us, Paul and Sey-

mour Milstein purchased respectively 62,000 and 64,000

shares of GAF.common stock. When GAF contended that

the Milsteins were in violation of section 13(d) because

they had not filed a Schedule 13D as required by Rule

3d-1, the Milsteins, although ——— any legal obliga-

\ tid under section 13(d), filed su schedule on September

24, 1X0. In their 13D statement: (appended to the com-

plaint), the Milsteins disclosed their preferred and common

hol

ings and stated they “at some future time [might]

- determine to attempt to acquire control of GAF... .”

They. also stated that they had. “no present intention as to.

whether or not ‘any additional securities of GAF [might]

. be acquired by them in the future. . . .” Indeed, within the

_ next two months, .commencing wath Oisoher 2, Paul and

_Seymour each. purchased an additional 41,650 shares of

. .

aie Pee aphe jada! gail ihe Rid OR Phil tee oe

common. The Milsteins thereafter filed a Restated and

Amended Schedule. 13D on November 10 to reflect these

new purchases.

Then, on. January 27, 1971, the Milsteins filed a third

Schedule 13D, disclosing their intention to wage a proxy

contest at the 1971 annual meeting. Although the statement

again disclaimed any: present intention to acquire addition-

al shares, Paul purchased: 28,300:shares of common stock —

during February, 1971. These last purchases, which brought

the Milsteins’ total common holdings to’ 237,600 shares.

having a value in excess of $2 million and constituting -

1.7% of the common shares outstanding, were reflected in.

a February 23 amendment to the January 27 Schedule 13D.

The last. essential datum for our purposes is the proxy

contest. On May 10, 1971, it was announced that GAF

Appendix A -

management had prevailed at the April 16 meeting by a

margin of some 2 to 1.” 3 ies

GAF’s complaint in this\action filed on December 16,

1970, requested that. the Milsteins be preliminarily and

permanently enjoined from (1) acquiring or attempting to

acquire ‘additional GAF stock; (2) soliciting:any proxy

from a GAF shareholder to vote GAF stock; (3) voting

any shares of GAF stock held or acquired during the con-

-spiracy; and (4) otherwise-acting in furtherance of the

conspiracy. It asks for this relief “until the effects of the

' conspiracy have bre Poe dissipated and the unlawful

acts committed purstant to the conspiracy fully corrected.

9911 :

The Milsteins unsuccessfully brought an action on March 15 to

enjoin Jesse Werner, Chairman of the Board and President of GAF,

and others from soliciting or voting| proxies. Their motion for a

prelminary injunction was denied, cc Fed. Sec. L. Rep. {| 92,986

~(S. D. N. Y. April 3, 1971), and they|did not appeal. ©

“The Milsteins tontend that this appeal should be dismissed as

. moot. The linchpin of their argument) is that the GAF management

_was victorious in the 1971 proxy-contest and thus, citing Justice

Gray’s 1895 rationale for treating appeals as moot, the district court

- cannot “grant [GAF]. any effectual rete whatever.” Mills v.-Green;

159 U. S. 651, 653 (1895). The Milsteins also rely on a recent brief

per curiam decision of this court where|we held, in an action charging

a violation of section 14(d) (1) and thd Clayton Act, that “more than

an abstract or nebulous plan to possibly commit a wrong sometime in

the future, must be shown before the. broad and potentially. drastic

_ injunctive power of the court will be exercised.” General Fireproof-

ing Co. v. Wyman, 444 F. 2d 391, 393 (2d Cir. 1971). In Wyman,

* we were concerned with a possible future violation of the securities

acts that was “pure speculation.” The complaint here alleges that -

past violations of section 13(d) are continuing and that the con-

' spiracy-to take oyer GAF “continues. unabated.” In the light of these

allegations we cannot say that the litigation has become mooted or

that the cause for complaint has abated. We are compelled ‘to reit-

erate that we are not adjudicating facts, nor was the lower court

called upon to do so, Moreover, the time is not at hand to consider

what injunctive relief, if any, will be necessary to effectuate the

policies of the Act in the event-GAF should be successful on: the

merits. | F Eetare ,

}

en oe ee ae eee

PREF OLE ND SNE I OLEN S EOOLER L SEL PO LEE PLONE CY Oe

ler tis Se 8 SO Sgr

- Appendix A

L |

At the time the conspiracy allegedly was formed, sec-.

tion 13(d) (1) in relevant part provided: :

Any person who, after acquiring directly or indireetly

the beneficial ownership of any: equity security of a

class which is registered pursuant to section 12 of.

this title . . . , is directly or indirectly the beneficial

owner of more than 10 per centum of such class shall,

within ten days after such atquisition, send to the is-

suer. of the security at its principal executive office,

by registered or certified mail, send to each exchange

ae ee ent Gk, ak Se wih Ot Conia:

sion, a statement. .

This section, however, exempts from its filing require-

ments any acquisition which, “together with all other ac-

quisitions by-the same person of securities of the same

class during the preceding twelve months, does not ex-

ceed 2 per of that class.” Section 13(d)(6)(B).

Section 13) Shih is crucial to GAF’s claim, further

' «provides that “[w]hen two or more persons act as a part-

nership, limited partnership, syndicate, or other group ~

for the purpose of acquiring, holding, or disposing: of

securities of an issuer, such syndicate or group shall be

deemed a ‘person’ for the purposes of [section 13(d)].” On

the assumption that the facts alleged in the complaint are

true, we cannot copclude other than that the four Milsteins

. constituted a “group” and thus, as a “persoa,” were sub-

ject to the provisions of section 13(d). We also are aware

of the charge that the Milsteins agreed after July 29,

1968, to hold their GAF preferred shares for the common

purpose of acquiring controkof GAF. Furthermore, the

individuals collectively.or as a “group” held more. than

Appendix A.

10% of the outstanding preferred ines registered

class.of Securities. Since the section requires a “person”

to file only if he acquires more than 2% of the class of

stock in a 12-month period after July 29, 1968,"* the prin-

‘cipal question presented to us is whether the

_ alleges as a matter of law that the Milstein group “ac-

quired” the 324,166 shares of preferred stock owned by

its members after that date. We conclude that it does and

thus that it states a claim under section 13(d).-

The statute refers to “acquiring directly or ‘indirectly

the beneficial ownership of securities.” Thus, at the outset,

we are not confronted with the relatively simple concept

_ of legal title, but rather with the amorphous and occasion-

ally obfuscated concepts of indirect and beneficial owner-

ship which pervade the securities acts.

‘The Act nowhere explicitly defines the concept of “ac-

quisition” as used in section -13(d). Although we are aware

of Learned Hand's warning “not to make a fortress out of

the dictionary,” Cabell v. Markham, 148 F. 2d 737, 739 (2d.

' Cir.), aff'd, 326 U. S. 404 (1945), some light, although

dim, is shed by Webster’s- Third International Dictionary.

It tells us that “to acquire” means “to come into possession

[or] control.” If the allegations in the complaint are true,

then the group, which must be treated as an entity separate

and distinct from its members, could have gained “bene-

ficial control” of the voting rights of the preferred. stock”

The Milsteins concede that their would have been

to file if the individual members acquired additional

shares after the effective date of the Williams Act and a 12

month period which amounted to more than 2% of the outstanding

convertible stock vétes share-for-share with the

common stock. Each of preferred is convertible into 1.25 shares

10a.

Appendix A

only after its formation, which we must assume occurred

after the effective date of the Williams Act. Manifestly,

according to the complaint, the group when formed required

[sic.] a beneficial interest in the individual holdings of its

members. We find ourselves in agreement with the state-

ment of the Court of Appeals for the Seventh Circuit in

Bath Industries, Inc. v. Blot, 427 F. 2d 97, 112 (7th Cir.

1970), that in the context of the Williams Act, where the

principal concern is focused on the. battle for corporate

control, “voting control of stock is the only relevant element

of beneficial ownership.” Thus, we hardly can agree with

Judge Pollack that the language of the statute compels the

conclusion that individual members must acquire shares

before the group can be required to file.

We aré well aware of the first catechism of statutory

of interpretation with “the language of the statute itself,”

see Jones v. Alfred H. Mayer Co., 392 U. S. 409, 420

(1968); that, however, is toto caelo from saying that the

process must end there or that we are required to blind

ourselves to other relevant aids to construction, particularly

when dealing with a statute as complex as the one before

us. The wisdom of Learned Hand guides us again: “it is

one of the surest indexes of a mature and developed juris-

prudence . . . to remember that statutes always have some

purpose or object to accomplish, whose sympathetic and

imaginative discovery is the surest guide to their meaning.”

Cabell v. Markham. supra, at 739. See also United States

v. Dickerson, 310 U. S. 554, 562 (1940). We are, there- .

fore, totally puzzled by the experienced trial judge’s con-

" \ qlusion that “the legislative reports should not be resorted

to here since the specific statutory language is clear. . . .”

324 F. Supp. at 1067. Indeed, the statute before us is

| lla

Appendix A

anything but a model of clarity" and the ritualistic approach

to statutory interpretation which the district judge suggests

would close off the only light available to illumine the statute.

The legislative history, as well as thé purpose behind _

__ section 13( d), bear out our interpretation. Any residual

doubt over its soundness is obviated by the following clear .

statement appearing in both the House and Senate reports

accompanying the Williams -Act: ;

“[ Section 13(d)(3)] would ‘sini a group of | per-

_ sons who seek to pool their voting or other interests

in the securites of any issuer from evading the pro-

visions of the statute because no one individual owns

more than 10 percent of the securities. The group

would be deemed to have become the beye ficial owner,

directly or indirectly, of more than 10 percent of a

class of securities at the time they agreed to act in

concert. Consequently, the group would be required

to file the information called for in section 13(d)(1)

within 10 days after they agree to act together,

whether or not any member of the group had ac-

quired any securities at that time.” S. Rep. No. 550,

90th Cong., Ist Sess. 8 (1967); H. R. Rep. No.

- 1711, IG Cong., 2d Sess, 8-9 (1968). (Emphasis

added. ) -

oe Indeed, Professor hon one of the foremost scholars of

securities law, reached the same interpretation in his trea-

tise, eg this passage. 6 L. Loss, Securities Regulation .

3664 (Supp. 1969). |

" “The meaning of * hardly could be considered plain

Pin} — Dy dy SS = On

inheritanee of stock was an “ ” Com Sisak v. Wings

LY Seen 9. OOF “Inc., Fed. Sec. L. . § 92,991 D.

Lda

Appendix A

The Senate and House reports and the Act as finally en-

-acted, contrary to appellees’ contention,” are entirely con-

sistent in our view. This conclusion is buttressed by a con-

sideration of the purpose of the Act. The 1960’s on Wall

‘Street may best be remembered for the pyrotechnics of cor-

porate takeovers and the phenomenon of conglomeration.

Although individuals seeking control through a proxy con-

‘test were required to comply with section 14(a) of the Se-

curities Exchange Act and the proxy rules promulgated by

-- the SEC, and thosé making stock tender offers were re-

quired to comply with the applicable provisions of the

Securities Act, before the enactment of the Williams Act

there were no provisions regulating cash tender offers or

other techrfiques of securing corporate control. According

to the committee reports :

“The [ Williams Act] would correct the current gap

in our securities laws by amending: the Securities

Exchange Act of 1934 to provide for full disclosure

in connection with cash tender offers and other tech-

niques for accumulating large blocks of equity secu-

rities of publicly held companies.” S. Rep. No. ~~

at 4; H.R: Rep. No. 1711 at 4.

Specifically, we were told, “the purpose of section 13(d) is

to require disclosure of information by persons who have

acquired a substantial interest, or “increased their interest

in the equity securities of a. company by a substantial

amount, within a relatively short period of time.” S. Rep.

“Appellees int their brief “concede” that the 1968 committee re-

ports are “against” them. Professor. Loss, co-counsel for the Mil-

steins both in this and the lower court, informed us at the argument

that the view set forth in his treatise was “a mistake” and that this”

passage is “diametrically to the text of the statute” and the

purpose and intent of the illiams Act.

13a Se oe

ee es

No. 550 at 7; H.R. Rep. No. 1711 at 8. Otherwise, investors

cannot assess the potential for changes in corporate con-

trol and adequately evaluate the company’s worth.”* See

’ generally Comment, Section 13(d) and Disclosure of Cor-

porate Equity Ownership, 119-U. Pa. L. Rev. 853, 854-55,

858, 865-66 (1971).

That the purpose of section 13(d) is to alert the market- .

sien to every large, rapid aggregation or accumulation

_ of securities, regardless »f technique employed, which

might represent a potential shift in corporate control is

amply reflected in the enacted provisions. Section 13(d)

(1)(C) requires the person filing to disclose any intention

to acquire control. If he has such an intention, he must

disclose any plans for liquidating the issuer, selling its

assets, merging it with another company or changing sub-

stantially its business or corporate structure. It is of some

interest, moreover, that section 13(d)(6)(D) empowers the

Commission to exempt from the filing requirements “any

acquisition . . . as not entered 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 purpose of [section 13(d)].” (Emphasis added. )

The alleged conspiracy on the part of the Milsteins is

one clearly intended to be encompassed within the reach

of section 13(d). We have before us four shareholders who

together own 10.25% of an outstanding class of securities

and allegedly agreed to pool their holdings to effect a take-

over of GAF. The certainly posed 2 as great a threat to the

sTke dammasltben segeste Seah & dear Ghat Ge iin ens detianed

for the benefit of investors and not to. tip the balance of regulation

either in favor of management or in favor of the person

yaaa See S. Rep. No. 550 at 3-4; H.R. Rep. No. i711

l4a

Appendix A

stability of the corporate structure as the individual share-

holder who buys 10.25% of the equity security in one

transaction.” A shift in the loci of corporate power and

influence is hardly dependent on an actual transfer of.legal

title to shares, and the statute and history are clear: on

this.

In light of the aioe purpose as we view it, we ‘find

ourselves i in disagreement with the interpretation of Bath

Industries, supra, that the group owning more than 10%,

despite its agreement to seize control, in addition, must:

agree to acquire more shares before the filing requirement

of section 13(d) is triggered. The history and language

of section 13(d) make it clear that the statute was primar-

ily concerned with disclosure of potential changes in control

resulting from new aggregations of stockholdingssand was

not intended to be restricted to only individual stockholders’

who made future purchases and whose actions were, there- —

fore, more apparent.” See Comment, Section 13(d) and

Disclosure of Corporate Equity Ownership, 119 U. Pa. L.

Rev. 853, 869-72 (1971). It hardly can be questioned that

a group holding sufficient shares can effect a takeover

without purchasing a single additional share of stock.

The appellees argue that sectien 13(d) was not in--

tended to be =" i a 20 1808, on who held —— —~

— class ore July are not requi to file

eg Be oy an additional 2% after that date. Compare

§ 1e(®) ut, the Milstein group is not a “person” who held its

stock before the effective date of the Williams Act, if the allega-

tions of the complaint are to be accepted. The-crucial event under

section 13(d) was the tormation of the group, which allegedly oc-

curred after the effective date and the purpose of which was to

seize control of GAF.

‘Section 13(d)(3) refers to groups formed “for the pu

of acquiring, , or disposing of securities.” Bath Redinelvtee ;

would r-ad out and “disposing.”

15a

A ppendis A

Two “policy” considerations have been advanced against

’ our interpretation.” - First, the district judge warned that

“[t] he inherent difficulty of ascertaining when a group was.

formed is akin to an attempt to grasp quicksilver.” 324

F. Supp. at 1068. This supposed difficulty, however, would

not be dissipated even under his view—that individual

members must acquire more that 2% after July 29, 1968,

before the group can be compelied-to file. The court still

would be required to determine whether the individuals in-

. deed constituted a “group.” But, we hardly envision this —

as an insuperable obstacle to stating a claim in a com-

plaint. GAF, in order to succeed on the merits, will have

to carry its burden of proof by a fair preponderance of

the evidence. It will have to produce evidence establish-

ing that the conspiracy came into being after July 29, 1968,

with the purpose of seizing control. If GAF should suc-

ceed on the merits, any difficulty in pinpointing the precise

date, as distinguished from an approximate time, when the

conspiracy was formed and the group became subject to

Several commentators have lauded tender. offers as a healthy

process for unseating inefficient, entrenched management; they

warned against giving management another sword which would

stifle all takeovers. See, e.g., Brudney, A Note an Chilling Tender

Offers, 21 Rutgers L. Rev. 309 (1967); Fleischer and Mundheira,

Corporate Acquisition by Tender Offer, 115 U. Pa. L. Rev. 317.

321-22, 360-70 (1967). Congress was full apprised of these views

light of the recent amendment which broadened the impact of sec-

tion 13(d) by reducing the threshold triggering of the statute from

10% holdings to a See note 4 supra. though we are well

aware that it was gress’s intention primarily to protect inves-

tors in the security, the statute cannot be faulted if it achieves ‘this

goal without a question, and as a by-product management also be-

comes aware of those seeking to seize control of the corporation.

veisecnall

EN a eee

hah Bak tet 2 at AD ts

- ~~ =r

16a

Appendix A

section 13(d) can.be one of the elements considered by the

district judge in fashioning appropriate equitable relief.

The Milsteins also caution us against throwing our hook

into the water and catching too many fish—namely, hun-

dreds of families and other management groups which

control companies with registered securities and whose

members collectively own more than 5% of a class of the

company’s stock. Although this problem is not part of the

_ Narrow issue we must decide, we cannot close our eyes*to

the implications of our. decision. Upon examination, how-

ever, the argument while superficially appealing proves to

be tofally without substance. Management groups per se,

are not customarily formed for the purpose of “acquiring,

holding, or disposing of securities of [the] issuer” and

would not be required to file unless the members conspired

to pool their securities interests for one of the stated

purposes.”

II.

It is not sufficient that we merely.conclude that the

allegations of the complaint state a violation of section

13(d). Wealso must determine whether GAF has stand- -

ing to assert those violations. Here, unlike in our prior

discussion we write with the aid of substantial precedent.

The Milsteins do not contend, with good reason, that

there is no private right of action under section 13(d).

The more difficult question, and a question we need hot decide

on this appeal, is whether management groups which expressly

agree to pool their interests to fight a potential takeover are sub-

ject to section 13(d). Nor do we intimate any view on whether an

insurgent group which has filed under section 13¢d) and subse-

quently is successful in its takeover bid remains subject to the

section. In any event, as we have already indicated, the Commis-

sion can forestall any untoward effects under the exemptive power

conferred upon it by section 13(d)(6)(D).

17a

Appendix A

_ The teachings of J. J. Case Co. v. Borak, 377 U. S. 426.

(1964), are part of the ABC’s of securities law. Nor do

the Milsteins challenge the standing of GAF as an issuer.”

_- We have already held that an issuer has standing to

assert violation of section 14(a), governing proxy con-

tests, Studebaker Corp. v. Gittlin, 360 F. 2d 692 (2d Cir.

_ 1966), and of section 14(d) and (e), governing cash ten-

der offers. Electronic Specialty Co. v. International Con-

trols Corp., 409 F. 2d 937 (2d Cir. 1969). These sections,

enacted at the same time as section 13(d), are the close

companions of that section in the regulatory scheme re-

quiring disclosure in the context of struggles for corpo-

rate power. |

' ‘There are compelling reasons in addition to preserving

symmetry which mandate that GAF has standing: “In de-

termining who has standing to enforce duties created by

statute, a court’s quest must be for what will best accom-

plish the purposes of the legislature.” Electronic Spe-

cialty, supra, at 946. See also J. I. Case Co. v. Borak,

supra, at 433 (“. . . it is the duty of the courts to be alert

to provide such remedies as are necessary to make effec-

tive the congressional purpose.”). GAF, as the issuer, un-

questionably is in the best position to enforce section

13(d). The statute requires a copy of the statement to be

sent by registered mail to the issuer (this provision alone ~

might support the issuer’s“standing), and the issuer, in

the course of constantly monitoring transactions in its

stock, better than anyone else will know when there has

been a failure to file. Cf. Comment, 81 Harv. L: Rev. 501,

502 (1967).- Moreover, the issuer has not only the re-

sources, but the self-interest so vital to maintaining an

- "Clearly, a shareholder has standing. See Grow Chemical Corp.

v. Uran, 316 F. Supp. 891 (S. D. N. Y. 1970).

WOME.

2 aera ti

Sp UA poi RRS OA

‘

“

‘

18a

| Appendix A

injunctive action. See Electronic Specialty, supra, at 946.

To play upon management’s self-interest, of course raises

some threat to Congress’s express desire not to tip the

scales in favor of incumbent management as-against the .

‘takeover group. But, this danger can be adequately coun-

teracted if the district court carefully scrutinizes self-

serving management claims allegedly made in the interest

of investor protection.’ And, as Electronic S pecialty, supra

at 946, recognized, “in cases ‘where management causes

the corporation to bring a suit ‘motivated by its own inter-

ests and contrary to the best interests of the true owners,

shareholders have their usual remedies for waste.”

‘TI.

The more difficult question is whether GAF has standing

under section 13(d) to seek an-injunction against allegedly

false and misleading filings. The Milsteins in their brief

argue that “the short answer” is that false filing does not

violate the section that requires the filing—i.e., section

13(d)—but rather the penal provision on false filings, sec-

tion 32(a), or one of the anti-fraud provisions, for exam-

ple, section 10(b). This response, deceptively pleasing in

its simple, compartmental approach to the Securities Ex-

change Act, immediately brings to mind the Supreme

Court’s instruction that the securities acts should not’ be

construed technically and restrictively, but “flexibly to effec-

tuate [their] remedial purposes.” S. FE. C. v. Capital

Gains Research Bureau, Inc., 375 U. S. 180, 195 ( 1963).

With this teaching in mind, we conclude that the obli- -

gation to file truthful statements is implicit in the obligation

to file with the issuer, and a fortiori, the issuer has stand-

Appendix A of

ing under section 13(d) to seek relief in the event of a false

filing.” | ee Saeed , 3

The Williams Act was entitled “An Act Providing for

full disclosure of corporate equity ownership of securities

under the Securities Exchange Act of 1934.” In particular,

section 13(d) was intended to alert investors to potential

* changes in corporate control so that they could properly

evaluate the company in which they had invested or were

‘investing. Disclosure which ‘is false or misleading subverts

this purpose. In some instances, a false filing may be more .

detrimental to the informed operation of the. securities

markets than no filing ‘at all. We also find support for our

conclusion in section 13(d)(2)} which places a continuing

*2We have not lost sight of the fact that Congress, when it

enacted section 14(d), requiring disclosure by tender offerors, also

enacted section 14(e), declaring it illegal to make false or mislead-

ing statements in connection with a tender offer, and that section

13(d) has no parallel section. It has been urged that this statutory

scheme evidences an intent to bar fraud actions under section

13(d). But, without a clearer indication from Congress, we cannot

ovetlook the fact that a tender offer transaction entails methods -

clearly distinguishable from section 13(d) dealings. When one

makes a tender offer, there is extensive communication to the share-

holders. Since section 10(b); which deals with fraud “in connec-

tion with the purchase or sale of any security,” doés not provide a’

remedy to shareholdérs with respect to such communications, see

Iroquois Industries, Inc. v. Syracuse China Corporation, 417 F. 2d

963 (2d Cir. 1969), cert. denied, 399 U.S. 909 (1970), there. was

a clear need for an antifraud provision. A 13(d) transaction, on

the other hand, ordinarily does not entail regular communications

with the shareholders. We should not be wooden or rigid ii grant-

. ing the right to the issuer seeking equitable or prophylactic relief—not

monetary damages—to take the necessary steps to. effectuate the

purposes of section 13(d). Sed J. J. Case Co. v. Borak, supra, at

“433; Mutual Shares Corp. v. Genesco, Inc., 384 F. 2d 540, 546-47

(2d Cir. 1967) ; cf. Electronic Specialty, supra, at 946.

Of course, persons subject to section 13(d) may confer or com-

municate with shareholders in the course of a takeover attempt. If

there is a purchase or sale of securities, section 10(b) will apply.

If there is a proxy solicitation, section 14(a) will apply.

sion had the requisite manpower to delve into the details

of each Schedule 13D filing, it does not have the issuer’s

day-to-day familiarity with the facts which would enable it

to appraise accurately the statements in the Schedule. An

Commission staff, taxed with review-

- come “a necessary supplement” to its action.

Nor is it realistic to expect shareholders to deter persons

. from filing inaccurate statements by resort to thé anti-

' GAF us that the Milsteins’ first Schedule 13D, dated

September 24, 1 was false because it disclaimed any present

_ 2la

Appentis A

fraud provisions. Suidielties et q<uaelly cnawiee of

the necessary background information to judge the truth

or falsity of the statements. Additionally, since the Act

does not require the statements to be disseminated to share-

holders, they do not have the immediate access of the issuer

to the filings. Moreover, there may be instances where no

shareholder has purchased or sold shares “in reliance” on

the statements. In that event, even if the shareholders had

standing, cf. Mutual Shares Corp. v. Genesco, Inc., 384

F.2d 540 (2d Cir. 1967) (non-selling shareholder given

standing % sock injunctive relief), there would be Bette

incentive to maintain an action.

IV.

Finally, we deal with Judge Pollack’s dismissal of GAF’s

second claim, which asserted violations of section 10(b)

and Rule 10b-5, on the ground that an issuer has no stand-

ing. Section 10(b) prohibits, inter alia, the use of any

Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.),

cert. denied, 343 U.S. 956 (1952) (only a purchaser or

seller of a security can maintain an action under the sec-

tion), may be subject to exception, see, ¢.g., Mutual Shares

Corp. v. Genesco, Inc., supra, this Court has steadfastly

refused to extend the reach of 10b-5 to give standing to an

issuer." See, ¢.g., General Time Corp. v. Talley Industries,

ta Ri cee’ on Ghaler on them tas one aee

der section ) and Rule 10d-5. °

A * ij A ‘ o

Inc., 403 F. 2d 159, 164-65 (2d Cir. 1968), cert. denied, 333

U. S..1026 (1969).

Moreover, in this context as opposed to standing under

. section 13(d),™ the implications of the enactment of sec-

tion 14(e) making it illegal to make false or misleading -

statements “in connection with any tender offer,” as distin-

guished from the “purchase or sale of any security,” are

somewhat clearer. We recognized in /roquois Industries,

Inc. v. Syracuse China Corporation, 417 F. 2d 963 (2d

Cir. 1969), cert. denied, 399 U. S. 909 (1970), “[t]}hat Con-

gress enacted the new Settion . . . is at least an indication

thet in tender offer contests such as‘that at bar there was

is just as meaningful in the framework of section 13(d)

and accordingly, we are chary of finding that GAF, based

on the allegations before us, has standing under Rule 10b-S.

Since we have found that GAF has standing under sec-

tion 13(d) to seek its remedy based on the alleged fraudu-

lent statements in the Schedules,” we see no compelling

reason to open the door to issuers to bring the broad range

of fraud actions, in some instances, seeking more than —

“injunction”. relief, which are cognizabl ae aul

10(b). See Bankers Life and Casualty Co.——U. S.——

— oe

23a

Appendix A

can an issuer have standing to seek an injunction.”™ 403

F. 2d at 164.

dismissed Claim I of GAF’s complaint on the ground that

it failed to state a claim on which relief could be granted,

~ _ we emphasize that we are not yet called upon to determine

whether the Milsteins have in fact violated section 13(d)

or, if they have, what relief would be appropriate. That

‘part of Judge Pollack’s order dismissing Claim II of the

complaint under section 10(b) is affirmed. Costs to the

GAF CorporaTION,

Plaintiff,

Paut Mitstetn, Seymour MILstern, GLORIA

Mitstern FLANzer and Morris MItstern,

Defendants.

No. 70 Civ. 5502.

(

United States District Court,

S. D. New York.-\

March 22, 1971.

[1063]* Winthrop, Stimson, Putnam & Roberts, New-

. York City, for plaintiff by Edwin J. Wesely, and Richard

_ A. Horgan, New York City, of counsel.

Stroock & Stroock & Lavan, New York City, for de-

. fendants; Louis Loss, Cambridge, Mass., David Sher,

David Lubart, Charles G. Moerdler, Gerald D. Fischer,

Stephen Block, New York City, of counsel.

* Poxtack, District Judge.

The defendants have moved for a dismissal of the com-

plaint pursuant to Fed. R. Civ. P. its dae linaienatn tiaras

*Page references in brackets indicate opts e

ee ee R.

Civ

s : Hh

Appendix B

that the first and second counts set forth in the complaint

fail to state a claim upon which relief can be granted.

The two counts in the complaint respectively charge that

the defendants constitute a group in violation of Sections

13(d) and 10(b) of the Securities and Exchange Act of

1934, as amended,” [1064] for failing timely: to file a

Schedule 13D* required by Section-13(d) and for making

material misstatements and omissions in. the Schedule 13D

that they did eventually file.

The four defendants are related, three of them children

of the fourth. -They hold approximately :324,166 shares

of GAF Corporation convertible preferred stock,‘ consti-

tuting 10.25% of the outstanding shares of that class.

These shares were acquired as an outgrowth of the ac-

quisition by GAF of the Ruberoid Company in 1967. At

the time of the GAF-Ruberoid merger, defendants owned.

- about 8% of Ruberoid’s common stock while GAF owned

26%. As part of the merger, the GAF holdings in Rub-

eroid were cancelled and defendants’ holdings automati-_

cally rose from approximately 8% (in Ruberoid) to

slightly more than 10% (of GAF preferred) solely by

reason of GAF’s cancellation of its own holdings.. Since

obtaining their preferred shares in the merger proceed-

215 U. S. €. § 78 et seq. For simplicity, it will be called the\

Act. Effective July 29, 1968, the Williams Bill amended /

Act and enacted the statutes to be referred to herein.

the

Pub. L. No. 90-439, 82 Stat. 454 (1968).

*The statute requires the Schedule 13D to be sent to the issuer

and each Exchange where the securities in question are traded as well

to be filed with the Securities and Ex Commfesion. § 13(4)(1).

For simplicity, this duty will be referred to as filing with the Com-

mission.

*This figure excludes 28,808 trust shares as to which defendants

disclaim beneficial ownership. : :

‘—

; Appendix B

ings, the defendants have not acquired any additional

shares of GAF preferred. == - ~ —

The only securities of GAF purchased by defendants

since the merger are approximately 209,300 shares of com-

mon stock, a different class, or 1.6% of the total number

of outstanding shares of that class. The total voting

power of defendants in GAF (preferred and common vote

together) approximates 4%. i

Plaintiff alleges that defendants, acting in conspiracy, .

determined to take ovet GAF sometime after July . 29,

1968, the effective date of the Williams Bill. Fhe plain-

tiff claims that Section 13(d)* obligated defendants to file

Schedule 13D within ten days after this group was formed.

Instead, says plaintiff, the defendants failed to file Sched-

ule 15D until September 24, 1979, which plaintiff says

was untimely filing. (The defendants contend that they

are not subject to Section 13(d) and that their filing of

a Schedule 13D was purely voluntary). GAF additionally

claims that the Schedule 13D that was filed, as well as

amendments, contained inter alia detiberately false and mis-

leading statements to conceal the take-over conspiracy and

plans of the group. _ ;

The plaintiff contends that the violations have caused

and continue to cause irreparable injury to GAF’s share-

holders and the investing public and such irreparable harm

will continue unless defendants and others allegedly conspir-

ing with them are enjoined from their unlawful activities.

In its prayer for relief, the plaintiff seeks both a pre-

liminary and permanent injunction against the defendants

, Preventing them from acquiring any shares of aiy class of

GAF stock; soliciting any proxies to vote GAF stock; vot-

ing any shares of GAF stock acquired during the con-

*Sections cited herein refer to the Exchange Act, as amended.

‘

tne

a =. re

Appendix B

spiracy? and otherwise acting in furtherance of the alleged

conspiracy. This relief is requested to be operative until the

‘effects of the alleged conspiracy have been fully dissipated

-and the alleged unlawful acs fully. corrected. .

The ultimate issue presented by the defendants’ motion

to dismiss the first count is whether, organizing a group of

stockholders owning more than 10% of a class of equity

securities with a view to seeking control is, without more,

a reportable event under Section 13(d) of the Exchange

Act; and as to the second count, whether in the absence of

a connected purchase or sale of securities, the target corpo-

ration claiming vio- [1065] lation of Section 10 and Rule

10b{5)*, has standing to seek an injunction against a con-

trol contestant for falsity in a Schedule 13D filing.

At the threshold, it is well to note that the congressional

purpose of the Exchange Act was “to provide for regula-

tion and control” of “transactidns in securities” and “to

insure the maintenance of fair and honest markets in such

transactions.” $2.

The Williams Bill was added to the Exchange Acf on

July 28, 1968. It had its genesis in the wave of cash

tender offers that had become increasingly popular in the

_ years immediately preceding enactment. There was an

increasing use of the cash tender offer to acquire control

of corporations. Existing legislation did not require dis-

closure to investors of facts concerning the offeror, and

a need was felt to enact legislation which would require

_disclosure to shareholders not only by those making cash

tender offers but also by substantial holders entering into

*17 C.F. R. § 240.10b-5.

: Sb

hija ; Appendix B

the securities markets to acquire stock of a target com-

pany. Means were sought by Congress to help maintain

honest securities markets and to insure that public investors

have truthful information on which to make investment

decisions. .-

Accordingly, thé Williams Bill, effective July 29, 1968,

required the filing of public information in response to

prescribed questions, if, a tender offer for an equity

security of a publicly held company would result in bene-

ficial ownership of more than 10 percent’ of the securities

of that class. § 14(d)(1). In addition, with an exemption

to be mentioned later, the Williams Bill required a similar

report—even if no tender offer is made—by any person

who after acquiring securities of the class is the beneficial

owner of mol than 10% of the class. § 13(d)(1). The

public report must be made “within ten days after such

acquisition.” This requirement applies to persons who

beneficially have owned more than-10% of a class before

the acquisition of additional stock as well as to persons

- who become the beneficial owners of more than 10% of |

the class as a result of the acquisition. See SEC Release

of August 30, 1968, CCH Fed. Sec.L.Rep: § 77,597;

Release of January 18, 1971, CCH Fed.Sec.L.Rep. § 77,946.

When the purpose of such a person’s “prospective pur-

’ chases” is to gain control, he must disclose his “plans” to

liquidate, merge, or make any other major change in the

target company’s business or structure. § 13(d)(1)(C).

Moreover, under Schedule 13D, such a person must dis-

close, in any event, just what the “purpose or purposes

of the purchase or proposed purchase of securities of the

*Now 5% pursuant to Pub. L. No. 91-567, 84 Stat. 1497 (1970).

During the relevant period the operative figure was 10%, which will

be used below unless otherwise noted.

Appendix B

issuer” is.® "The schedule covers past, ats cues and

proposed purchases.

(d)(1) Any person who, afver acquiring erect or

- indirectly the beneficial ownership of any equity security

of a class which is registered pursuant to section 12 of

this title * * *, is directly or indirectly the beneficial own- -

er of more than 10 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

“mail, send to each exchange where the security is traded,

and file with the Commission, a statement containing

such of the following information, and such additional

information, as the Commission may by rules and reg-

ulations prescribe * *. :

(2) If any material change occurs in the facts set

forth in the statements to the issuer and the exchange,

and in the statement filed with the Com-[ 1066] mission,

an amendment shall be transmitted to the issuer and the

exchange and shall be filed with the Commission, in ac-

cordance with such rules and’ regulations as the Com-

mission may prescribe as necessary or appropriate in the

public interest or for the protection of investars.

(3) When two or more persons act as a partnership,

limited partnership, syndicate, or other group for the

purpose of acquiring, holding, or disposing of securities

of an issuer, such syndicate or group shall be deemed a

“person” for the purposes of this subsection. ~

piten veer

(5) The provisions of this subsection shall not apply

t Nas 7 :

817 C\E-R. § 240.13d-101, Item 4. i °

ducing the bill:

Appendix B .

(B) any acquisition of the beneficial ownership ofa

security which, together with all other acquisitions by

the same person of securities of the same class during

the preceding twelve mnie, does not exceed 2 per

centum of that class.

The statute is clearly designed to treat persons acting” '

in concert as if the group were an individual. The sponsor,

Senator Williams, explained the reason for this in intro-

This definition would successfully close the loophole that

now exists which allows a syndicate, where no member

owns ‘more than 10 percent, to escape the reporting

requirements of the Securities Exchange Act. 113 Cong.

Rec. S445 oy ed. Jan. 18; 1967). —

On’ its face Section 13(4) (1) clearly does not apply,

in respect of an. individual, in the absence of an acquisi-

tion of securities subsequent to the enactment of that law.

The statute says that “any person who, after acquiring

~ * * * ownership of any equity security of a class * * * -is

—* * * the * * * owner of more than-10 per centum of such

a shail, * *” (emphasis' added). However, if the pur-

chases are of less than 2% of the shares of ‘a class within

a 12 month period, they are exempt ‘and do not create a

reportable event. § 13(d) (5) (B).

The plaintiff forcefully urges, howe that a group

should be treated differently from an indiSdual and that.

if a group is organized with a view to control, it‘ must re-

port if its holdings of a class are more than 10% of the

- outstanding shares even though no one in the group makes

any purchases after the creation of the group. Statutory

authority for such a position is te to be found in

Appendix B

Section 13(d)(3) which. treats a group as an individual.

From there, plaintiff claims that a constructive conyeyance

of the shares from the individual to the group occurs and.

results in aw “acquisition” when the group is formed, thus

allegedly complying with the language of after acquiring

_ in Section 13(d) (1). ,

The statute does not dite * ‘acquisttion”’ (other than to

exer:pt 2% of the class from the requisite acquisition) nor -

does it tinequivocally state that the words “aftér acquiring”

are to be understood to refer only to acquisitions taking

place after the effective date of the Williams Bill. More-

over, both Houses of Congress expressly’ stated: that the

_: group would be deemed to have. become beneficial owners

” of the shares held by its individual members and that a

filing would consequently be required upon formation of -

the group, whether or not any member of the group had

acquired securities at that. time. Each committee report

_ Stated as follows: erete

[ Section. 13(d) (3) ]- would prevent a group on persons

- who seek to pool their voting or other interests in the

‘securities of an issuer from evading: the provisions of

the statute’ because no one individual owns more than

10 percent of the securities. The group would be

- deemed to have become the beneficial owner, directly

or indirectly, of more than 10 percent of a class of

——— ‘securities at the time they agreed to act in concert.

Consequently, the group would be required to file the

in- [1067] formation called ‘for in section 13(d)(1) -

‘within 10 days after they agree to act together, whether

or not any, member of the group had acquired any

- securities at that time. This provisidn is designed to

_ obtain full disclosuré of the identity of any person ar

' group obtaining the benefits of ownership of securities

Appendix B

by reason of any contract, understanding, relationship, .

agreement or other arrangement.. S. Rep. No. 550,

: tee

0th Cong., Ist Sess. 8 (1967); H. R. Rep. No. 1711, ~

90th Cong., 2d’ Sess. 8-9 (1968).

It is easy to see how the strong language in the commit-

reports gives a superficial acceptance to plaintiff’s view

, that a filing is necessary upon formation of a group, with-

out

purchases. In. fact, Professor Logs, a leading -text

writer in the-sectritiés area reported the statute in the terms _

‘of these congressional reports in his 1969 supplement :

So far as both new filing provisions—§§ 13(d) and

14(d)—are concerned,.a “class” consists of all the out-

standing securities of the ‘class exclusive of. any held by .

. or for the issuer or-a subsidiary. §§ 13(d) (4), 14(d4) |

(3); cf. Rule 16a-2(a), supra p. 3058. Again, two or

‘More persons acting as a partnership “or other group”

for the purpose of acquiring, -holding or disposing of —

securities are considered a “person.” §§ 13(d) (3);

14(d) (2). -Any such group is considered to become the

beneficial owner of more than 10 percent at the time its

members agree to act in concert. Cf. pp. 705-06 supra

(Sec. Act Rule 154(b)):; pp.. 1101-04 supra (Sec. Ex.

- Act §16(a)).° Consequently, the group must file the

after its members agree to act together, whether or not.

information specified in § 13(d)(1) within ten days

any member has acquired any security at that time. 6

Loss, Securities Regulation 3664 (Supp. 1969).

‘Professor Loss has appeared herein as co-counsel for

the

ent

law as enacted. |

defendants and has advised the Court that it is. his pres-

view that the reports do ‘not appropriately ‘reflect the

NICHES EY ces SS)

. ’

-10b

vaieuens B- . Sie

Legislative reports ‘do mak take precedence over clear

_ statutory language; and any inquiry must “begin with the

language of the statute itself.” Jones v. Alfred H. Mayer

Co., 392-U. S. 409, 420, 88 S. Ct. 2186, 2193, 20 L. Ed. 24

1189, 1197 (1968). “There is, of. course, no more persua-

» sive evidence of the purpose of a statute than the words by

' which the legislature undertook to give expression to its

wishes:”” United States v. American Trucking’ Ass’ns.,

Inc., 310. U.S. 534, 543, 60 S. Ct..1059, 1063, 84 L. Ed.

1345, 1350-1351 (1940); Movielab, Inc. y. Berkey: Photo,

Inc., 321 F. Supp. 806 (S..D. N. Y. 1970) (Mansfield, J.).

' Legislative history is extremely useful for interpreting

a statute when the Act’s language is ambiguous. However,

. the legislative reports should not be resorted to here since

the spectfic.statutory language is clear and compels the con-

struction that the reportable event is the acquisition of the

requisite amount of shares and not the mere formation of a

_-group with a view to eines The Supreme Court has said:

Legislative: materials may - -be without probative ‘value,

or éontradictory, or ambiguous, * * * and in such cases

will not be permitted to control the customary meaning

of words.* * or construction found by experience to be

.-° workable. . United States v. Dickenson, 310 U. S, 554, . |

562, reed = 1034, 1038, 84 L. Ed. 1356, 1362 —

This is. such a case in which the reports of Congress are at

odds with the statute as-it was enacted. In these circum-

_ stances, the words of the enactment control over the incon-

sistent explanation of those who described the statute. |

It is not for the Court to speculate how or why the i incon-

sistent corigressional reports were made; the function of

the Court is to administer the law as written by the Con-

gress. The words of a statute are designed to give notice

I1b

Appendix B

to the public and if the public is told that words do not mean

_. what'they say because of committee reports which are

inconsistent, the public will have no way of insuring com-.

pliance with congression- [1068] al dictates—if only Because

the public will.have no idea which dictate to follow. In

short, we do not legislate by committee report, we legislate

by. statute. aa ‘

- Not only does the statute require an acquisition before

there need be a filing, but the language of Section 13(d) (3)

indicates that groups are not to be treated differently from

individuals.°® It says: | if

‘When two or more persons act as a partnership * ** or

other group for the purposé of acquiring, holding, or

disposing of securities * *%*, such * * * group shall be

deemed a “person” for the purposes of this subsection.

The statute -was clearly intended to prevent persons act- |

ing in concert from concealing information important for

investor protection by making transactions as individuals.

But if a group is “deemed a ‘person’”’, then a group need

not do what an individual does not have to do.

Throughout our law we have statutes which make group

-- action ‘more “reprehensible” than individual action. A

criminal conspiracy may occur when the same acts, if done

by an individual, would not constitute a substantive crime

_hecause society*has greater difficulty defending against con-

®*Individuals who acquire their shares after the effective date of the

Act will, of course, have to file. Therefore, the number of individuals

holding their shares prior to enactment and-thereby avoid’ filing: will

decline over timc. Conceivably, a distinction can be drawn between

groups whose members acquired shares prior to the effective date and

those whose members acquired shares later, with groups whose-mem-

bers acquired no shares after July 29, 1968 not having to file since

they are to be treated like individuals. However, this decision does

not rest upon such a distinction. a eet

UP REAR IG Rod Ye att a Shyets

4 " i "ti hy. ra PERS . WSS EMT symenaatrs

- . “ . ri

UN nage rs _— —_ S

EE EY ONE aR TENE te Mevenemmm Spee ocees

SVAN a a Ullal ond

PURPA Nata i aR ARERR MEME Pence hiy oy se re a ae

Dass Wi Aa Se ia?

12b"

is Appendix 2B

| certed-action. E. g., United States v. Hutto; 256 U. S: 524,

— 41S. Ct. 541, 65 L. Ed. 1073 (1921); United States v.

Wiesner, 216 F. 2d 739 (2d Cir. 1954).- Similarly, re-

straints of trade may be more harmful if committed by two

or more parties acting together than if done by one person.

Sherman Act §§ 1, 2,15 U.S.C. §§ 1,2. But in the context

' of tender offers and corporate eahedinkes. the number of -

people involved is unimportant compared to the financial

resources available-to the insurgents. A’ person of large

financial resources can be a far greater threat to entrenched |

management than an entire family of substantially lesser

- means. It is money and not numbers that counts here.

GAF would force a group to file when it is created,

yet: when the group later purchases less than 2% of the

outstanding shares of a class in a twelve month. -period,

it need not amend its filing because of the exemption in

Section 13(d)(5)(B). Conceivably,. Congress may. have ~

felt that a first filing—when the group is formed—is more

important to the public than later filings when a small

_ amount of stock is purchased, but nowhere i is it indicated -

that the legislators felt, one filing is more significant than

another. There is simply no statutory.authority for say-

‘ing that a group or an individual’s purchase of not more

than 2% is exempt, but a group must report when it makes

no purchases at all. |

Nowhere does the statute say “that the seinen of a

group witha view to gaining control but without making -

any purchases of securities, triggers the filing requirement.

That result cannot be achieved by attributing ownership of -

the members to the group, without any other purchase..

As was pointed out above, it is not for this Court to .

decide this case on the basis of what was best for Congress

to do. but rather only on the basis of what Congress did.

13b

Appendix B

The inherent- difficulty of ascertaining. when a group

‘was formed is akin to an attempt ‘to grasp quicksilver. “In

all probability, the usual case would present a continuous

unfolding. stream of events leading to the group’s determi-

nation to attempt a take-over. At what stage then would

Section 13(d): require a filing? In the instant litigation,

for [1069] for example, all four defendants are close rela-

tives and it is conceivable that the alleged conspiratorial

agreement began as complaints voiced during a dinner or

other family gatherings. These may have included or been

followed by utterances against GAF management and the

erosion-of. the investment value of defendants’ stock inter-

ests. Yet, if it is determined later to read these complaints

as the establishment of a group with intent to act. and the

group has not filed ‘timely, it is left open to ‘a sweeping

injunction as has been requested here. eee

‘A legal controversy to determine the birth date of. the

group, in the absence of trading in securities, is of no

especial value to the maintenance of fair and honest markets.

In contrast, the requirement to file, when the group has

invaded the securities markets and acquired shares in excess

of the 2% exemption, supplies a perfectly clear, reportable

event keyed to the objects of the securities laws.

Plaintiff also calls attention to the language of Section

13(d)(3) defining a person as including a group formed _

“for the purpose of acquiring, holding or disposing of se-

curities.” (emphasis added. ) If a filing is necessary only

after acquiring securities, § 13(d)(1), then, according to

plaintiff, holding or disposing has no meaning. To give

effect to those words, plaintiff wiuld require a group formed’

to hold securities—as defendants are alleged to have done

here—to. file. These words may have meaning in’ other

_ contexts, but they certainly do not apply here. Section 13(d)

(1) does not fix-the filing date as the date when a group

RR Tatee Peat ce eaeem

Aaa

NN Tok ced ty ret eee

SS a

14b-

_ Appendix Bo

is’ said to become a holder or a seller of securities ; it estab-

lishes acquisition as the reportable event. |

An examination of the regulatory scheme of the’ Ex-

- change Act indicates that the interpretation of the statute |

to reqitire a non-exempt acquisition as the reportable event,

is fully consistent with the statutory scheme found in. Sec-

tions, 13, 14 and 16 of the. Exchange Act. As previously *

noted, the goals of the federal securities statutes are to pro-

vide freely and fairly functioning markets.

Each corporation whose shares are traded on a ‘national:

securities exchange or otherwise registered with the Com-’ |

mission must file periodic reports with the Commission

(which are avaitable to the public). These reports, which

must be filed morithly in some instances, are designed to keep

investors apprised of matérial current events in companies .

whose stock is traded or held by a significant number of

people. -§.13(a);17C. F. R. § 240.13a-11(a).

Similarly, proxies to vote the shares of such companies |

cannot be solicited by either management or insurgents

without furnishing the stockholder w ith material informa--

tion. § 14(a);17C. F. R. § 240.14a-3. These informational

requirements cannot be avgided by — failure

to solicit proxies. § FAC)...

Prior to the passage of the Williams Bill, the investor

_ protections given in proxy fights were missing when take- -

_. overs occurred by tender offers in which a “loser” could still

frequently sell his holdings for a profit after the battle.

E. g., ‘Crane Co. v. Westinghouse Air Brake Co., 419° e

2d 787, 791 (2d Cir. 1969), cert. denied; 400 U. S. 822: 91.

S.Ct. 41,27 L. Ed. 2d 50. (1970). Part of thé Williams

_ Bill, Seetion 14(d) (1) gives substantial investor protection

by requiring disclosure of information directly to share-

holders as well as to the Commission prior to or simul-

taneously with the tender offer. The statute could have re-_ -

15b

Appendix B.° ’

| quired filing in advance of the ‘initiation of the tender

offer." But to do so, it was thought by some, would have -

given entrenched management an unwarranted advantage

in a struggle for corporate control. | ae

There are those among the experts and commentators

who considered tender offers and stock acquisitions in pur-

suit [1070] of. control as a healthy process. Corporate

Acqtisitions‘ by Tender Offer, 115 U. Pa. L. Rev. Si,

321-22, 360-71 (1967); A Note-on Chilling Tender Soli-

‘citations, 21 Rutgers L. Rev. 309 (1966-67) ; Mergers and

the. Market for Corporate Control, 73 J. Pol. Econ. 110, |

113 (1965) .* While management and its supporters cogeritly °

argued. that managements need protection against the cor-

porate raider, see Comment, Senate Bill 510 and tlie Cash.

Térider Offer, 14 Wayne _L. Rev. 568, 585-86 (1968), the

Williams Bill: concentrated on an investor protection goal

rather than on providing protection for management’s |

ability to repel raiders.

Section 14(d), as it was enacted. gave no information |

to investors prior to the tender offer even though it was

recognized that there. could be occasions in which investors

should have information prior to the tender offer. Section.

_13(d) filled the gap somewhat—it supplements Section

14(d) by requiring the public report of purchases of stock

which exceed a prescribed minimum, 2% of the class, and

result in holdings of 10% or more of the class—regardless_

of whether the acquisitions are followed by a tender offer

or proxy contest. . - #4

The 2% exemption. provided in Section 13(d)(5)(B)

recognizes that such small purchases do not alter sub- |

stantially the equilibrium between supply and demand and

_t0See S. 2731, 89th Cong:, Ist Session (1965) (forerunner of the

Williams Bill, requiring filing 20 days in advance of initiating a

tender offer). °

f | iin romps

UR Nee:

- than purchases when a tender offer is made, a

16b *

. A ppendix B

therefore the market price of the stock in question. It is

significant that the exemption is phrased not in terms of

the total values of purchases but in percentage terms, indi-

cating that it is the relative effect of the purchases to the

total shares outstanding that is important.** :The inapplica-

bility of the 2% exemption to sales indicates that Congress

therefore

felt that sales at crucial times may ‘be even ap rere ,

the holder must report any material change in his holdings

_ caused by disposing of securities. § 13(d) (2). -

Similarly, a constructive “conveyance” from individuals

to the group, by aggregating the holdings of. a group, by

itself does not affect the equilibrium between supply and

demand and. therefore cannot affect market values. The

basic protection of Section 13(d) is to indicate who 1s

~ behind large holdings that are created or supplemented by -

market trading, cf. Crane Co. v. Westinghouse, ‘supra at.

792-793, and showing the cause of various price. move-

ments is not needed when there have been neither open

‘market purchases nor any tender offer. Requiring:a group

te file in such a situation, as plaintiff argues should be the

case, is superfluous in the context of the Williams Bill's

goals, if not counter to them altegether. ie ;

The Court realizes that holders of ‘more than 10% of

any class of securities must also. register under Section

16(a). However, the purpose“and operation Of Section 16

are different from Section 13(d). Section 16 insures that

officers, directors, and large shareholders—the people most

‘likely to have access to “inside” information—cannot use

their positions to trade in securities to the disadvantage of

bs! “Compliance with registration and filing refuirements in the

securities laws is grounded on both absolute and relative terms. E.q..,

§ 12(g*) (1) of the Exchange Act;. Rule 154(b) promulgated under

the Sectirities Act of 1933, 17 C. F. R. § 230.154(b).

eee.

Appendix B

the public and tthe corporation. This goal is achieved by

requiring disgorging of any profits earned through short

term holdings of the securities in question. §16(b). To

effectuate this disgorging of ‘profits, filings must be made

' with the Commission whenever there is a ch nge in hold-

ings by those covered by Section 16(a). However, Section -

16(a) requires the disclosure of changes in holdings within

> ten days of the close of a calendar month in which the

changes take place. This means that in a quickly moving

‘tender offer. situation, transactions taking place at the

beginning ‘%f a month need not be reported, under Section

16(a) un- [1071] til forty days later—when the result of

_ the tender offer is ‘history. In contrast, Section 13(d) (2) -

requires disclosure Of material changes in the facts set

forth int filed statements as soon thereafter as the Com-

‘mission requires by rule or regulation. The Commission’s

regulation in respect to any material change requires amend-__

_ ments. to be “promptly file[d]” after the change. occurs.

Rule J3d-2, 17.C. F. R. § 240,13d-2. is a,

The difference: inthe coverage and purposes ‘between

Section 13(d) and 16(a) are highlighted by the recent - _

amendment to Section 13(d)(4), not applicable to this liti-.

gation, redticing the holdings now required to be reported -

from 10% to 5%. Pub. L.-No. 91-567 (1970).. we

» Reporting changes in holdings is also important in an

attempted take-over by proxy fight if one contestant ‘claims

~. another has effected changes in stock prices.’ ie

The Court notices that the letter sent by QAF’s Board of Di-

' rectors to shareholders on March 2, [971 ‘said \inter alia: “ T]he

Milsteins could not care less if GAF stock went down since they

. would then ‘buy, buy, buy’”’» While the defendant Milstein family —

has not-had the substantial number of transactions required to trigger

§ 13(d)(1)’s reporting requirement, it is conceivable that substantial

transactions, if disclosed, could explain price movements argued

about in proxy fights. In another context, couisel for defendants said

in oral argument that management should: equally be required to’ dis-

. close important information during a take-over fight.

we -

; 18b ° °

Appendix B

The only reported Court determination closely in point

to the instant problem is Bath Industries, Inc. v. Blot, 427,

F. 2d 97:(7th Cir. 1970). The language of. the Seventh Cir-

_ cuit opinion makes it seem that the Court determined that a

group would have. to file when there is an ‘agreement to’

"ws acquire shares:

[E]ti is-out conclusion that the a should be c interpretel

to require’ compliance with its, disclosure provisions

‘ when, -but only when, any group of stockholders own-

corporation agree to act in concert fo acquire additional

shares. 427 F. 2d at i? (emphasis in original)

The -Seventh Circuit itself recognized that the 2% ”

exemption should be read ‘into that statement. 427 F. 2d at

llimn. 7.

The actual facts in the record of Bath were that no

filing was made until after the litigation began; the group

involved held in excess of 50% of thie voting power ; after

the group was formed purchases in excess of the exempt

_Jimit were in fact made of securities of the applicable class;

the Court mentioned that the statute required compliance

_ within 10 days of the purchases ; and the Court’s mention

in footnote 7 of the 2% exemption showed its’ actual reliance

on purchases and’ not the mere organization of a group.

_ Consequently, Bath must.be read in the context of the facts

there under adjudication; ‘and: the language ‘used: in the

‘opinion presumably was nat “intended as an adjudication

' outside the situation presented. *

- Unlike the’ apparent stivation. in Bath, the Milstein

family has: bought. but 1.6% of the outstanding shares of

common stock since the enactment of Section 13(d)-and

those shares are not even in the class of convertible. pre-

19b |

s Appendix

_« ferred of which the Pe ee own moré than 10%. Eyen

- under a broader interpretation of Bath than is warranted.

by its: facts, the’ Milsteins need not have filed. ; ie

. Congress clearly knew how to require holders to file

est without making any acquisitions. It did so in Section 16(a), .

_ but different language was used’in Section 13(d)(1). As

"interpreted here, the Williams Bill does “close -the loop- —

* ” hole * * * which allows a syndicate, where no member owns -

more than 10% to escape the reporting requirement of the

Securities Exchange Act.” 113 Cong. Rec. S445 (daily

ed. Jan..18, 1967). A group can avoid filing under Section

13(d)(1) only if it acquires no significant amount of

securities after its creation. If there are no#purchases after

the creation of the group, there can be no take: [1072]

- over absent a proxy fight, where disclosure i is guaranteed

by Section 14(a) and the rules promulgated thereunder.

If the purchases are made pursuant to a tender offer, there

will be, of course, a filing under Section 14(d).

: II.

Turning now to GAF’s claim that even if the Milsteins

did not have to make a filing under Section 13(d)(1), the

schedule that was filed was false and misleading and there-

fore in violation of Section 10(#) and Rule 10b 5 promul-

gated thereunder. Defendants move to dismiss this count on /

the ground that GAF has no standing because it is neither’.

a purchaser nor a seller of Shares in question and therefore

does not-come under the operative language of Rule 10b-5,

“in connection with the purchase or sale of any security.”

E. g.,. Iroquois Industries, Inc. v. Syracuse China Corp., —

_ 417 F. 2d 963 (2d Cir. 1969), cert. denied, 399 U. S. 909,

90S. Ct. 2199, 26 L. Ed. 2d 561 (1970) ; Birnbaum v. New-—

20b-

> Appendix B

- port Steel Corp, 193 F.'2d 461 (2d Cir.), cert. denied, 343

U.S. 956, 72 §. Ct. 1051, 96 L. Ed. 1356 (1952). |

—

GAF answers that the complaint’ seeks only injunctive

relief and that the purchaser-seller limitations of Birnbaum

-. and its progeny apply only to actions at law. E. g., Mutual

1967); Butler: Aviation Int'l, Inc. v. Comprehensive De-

signers, Inc., 307 F. Supp. 910 (S..D. N.Y. 1969) (Can-

nella, J.), aff'd on other. grounds, 425 F. 2d 842 (2d Cir.

1970); Christophides v. Porco, 289 F. Supp. 403, 406

woe & ee A 1968) (Pollack, J.) ; Marino v. Coburn Corp.,

CCH Fed. Sec. L. Rep. § 92,959 (E. D. N. Y. 1971) ( Dool-

ing, J,), 3 . aay

_ .Plaintiff says itis logical for a corporation to seek

private enforcement of the Commission’s rules and regula-

_ tions when there are violations involving its own sharehold-

ers. J. I. Case Co, v. Borak, 377 U. S. 426, 84 S. Ct. 1555,

12 L. Ed. 2d 423 (1964) ; Electronic Specialty Co. v. Inter-

national Controls Corp., 409 F. 2d 937 (2d Cir. 1969).

However, this is not a case in which an issuer is a dis-

interested party protecting merely the markets and its

‘shareholders from fraudulent acts. There is an admitted -

_ fight for control of plaintiff between the defendants and

entrenched management. A clear self-interest on the part

_ of the moving parties fakes such a controversy beyond the

rationale which explains the corporation’s vicarious stand-

ing to sue for an injunction, viz., an additional means of

disinterested protection of the market place. and of the

stockholders’ best interests. As the Court of Appeals noted —

in General Time Corp. v. Talley Industries, Inc., 403 F. 2d

' 159, 164 (2d Cir..1968), cert. denied, 393 U. S. 1026, 89

S.Ct. 631, 21 L. Ed. 2d 570 (1969) =

Appendix B

_ There are many practical advantages * * * in allowing

a cic in certain cases to enjoin a of

with caution lest such action become vehicles for rhan-

agement to thwart. purchases in ‘the true interest of. the

‘stockholder. ‘

Even if an issuer would liiaiies be accorded stand-

. ing to sue under Rule 10b-5, when management control as

_ well as the integrity of the markets are sought to be con-

_ served at the same time by the same prime movers, the con-

flicting interests dictate that the embattled management

should not use the equitable assistance afforded by injunc-

tion to insure fair and free markets. It is generally inap-

_ propriate to impede a legitimate fight for the control of the

management of a corporation. Where the corporate man-

agement faces a conflict of interest, and no direct connected

interest of the corporation is to be vindicated by the suit,

the protection of the objects of Rule 10b-5 through equitable

intervention is better left to be administered by the federal

administrative agency, the SEC, or other eligible complaiti-

ants. “A

It is always possible that management will phrase a

complaint in terms that indicate no control fight, to obtain

standing under Rule 10b-5 if the corporation is otherwise

to be granted standing. Qn [1073] the other hand, de-

fendants may try to avoid liability by insisting they are

involved in a fight for control. In such a situation, it may

be appropriate to allow the case to go to an evidentiary

hearing to determine the true motivations of the parties.

However, where the record is clear that there is a control

fight, as the parties here concede, no hearing is needed to

invoke the therapeutic rule that a conflict of interest will.

Whit gw eee

22b

: Appendix B cae A

not be sanctioned by according to the management a stand-

ing to sué under Rule 10b-5. where ‘the corporation’s own |

sBhSiden OY Gees RR

EN ATR LE PAREN GAG ter St Pea

Another approach to the problem hereit. yields the same

result. By including Section 14(e) in the Williams Bill,

Congress indicated that “in respect to tender. offers * * *

there was ho standing to sue under Rule 10b-5 by either |

the tender offeror or by the target corporation.” -Troquois -

Industries, Inc. v. Syracuse China Corp., 417 F. 2d 963,

969 (2d Cir. 1969), cert. denied, 399 U. S. 909, 90 S. Ct.

-. 2199, 26 L. Ed. 2d 561 (1970). Section 14(e) was only a

perhaps for any bearing it may have on the issue of stand-

ing.” Electronic Specialty Co. v. International Controls

_ Corp., 409 F. 2d 937, 940 (2d Cir. 1969) (emphasis added).

The target corporation has standing under Section

14(e) if there are “* * * any fraudulent, deceptive, or

manipulative acts or practices, in connection with any tender

‘offer or request or invitation for tenders, or any solicita-

tion of security holders in opposition to or in favor of any

such offer, request, or invitation.” § 14(e); Butler Aviation

Int'l, Inc. v.:Comiprehensive Designers, Inc., 425 K 2d.

842, 843 n. 1 (2d Cir. 1970); Electronic Specialty Co. v.

_ International Controls Corp., 409 F. 2d 937, 946 (2d Cir. -

1969). The language does not cover. fraudulent misstate-

ments in a Section 13(d) filing when there is no tender

offer. Levine v. Seilon, Inc.; 69 Civ. 209 (S. D. N. Y.

1969) (McLean, J.), aff’d on other grounds, 439 F. 2d

328 (2d Cir. 1971).

‘Congress enacted Sections 13(d), 14(d), and 14(e) at

the same time. The standing accorded the target company

in connection with Section 14(d), but lacking under Rule

23b°

A ppendix B

10b-5, could eabily have been eutanded to Section 13¢a). Pah

The filing made under Section: 14(d) even contains. “the

in OT Tia ion DE nec “Y Sec ior e

However, Congress chose not to extend the in corn-

pany’s standing to complain under the securities laws. when,

‘as here, no tender is ever made. ,

Nothing stated: herein is intended to express any opinion .

on the merits of ‘the claims asserted in the second count.

"The complaint i is dismissed.

So ordered:

‘ ¢@

sg e

x se

-”

ad -

‘

« .

nes

ee , : : as

~ APPENDIX. C

STATUTORY PROVISIONS INVOLVED

Section 13(d) of th iti chi : | 2

15 U.S: C. § 78m(d): |

(1)-Any person who, after acquiring directl y or in-

- directly, the beneficial ownership of any equity security

- Of a Class which is registered pursuant to section 12 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 bene-

_ ficial owner, of more than 10 per centum of such class

* shall, within ten days after such acquisition, send to the

_Tegistered or certified mail, send to each exchange where—

_ the security is traded, and file-with the-Commission,-a——

statement containing such of the following information,.

and such additional information, as the Commission may

by rules and regulations prescribe as necessary or ap-

propriate in the public interest or for the protection of

investors—

(A). the background 7 identity of all 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

consideration used or to be used in making the pur-

chases, and if any part of the purchase price or

proposed purchase price is represented or is to be

represented by funds or other consideration bor-

rowed or otherwise obtained for the. purpose of |

acquiring, holding, or trading such security, a de-

scription of the transaction and the names of the

s ~

ah a

Appendix C oe

‘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 ‘eection 3(a) (6) of this -

title; if the perso ing sv rate o requests;

3 the name of the bank shall not: be made available

to the public; :

purchases is to acquire control of the business of

the issuer of the securities, any plans or proposals

which such persoris 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; —

* * x:

——— 2) if stiy-seateria’ change occurs in 1 the facts set———

“forth in the statements to the issuer and the exchange,

and in the statement filed with the Commission, an

amendment shall be transmitted to the issuer and the

—exchange-and-shall-be- filed with the Commission, in

accordance with such rules and regulations as the Com-

mission may prescribe as necessary or appropriate in

the public interest or for protection of investors.

-. * *

(3) When two or. more ‘persons, act as a partner-

. ship, limited partnership, syndicate, or other group for

the purpose of acquiring, holding, or disposing of se-

curities of an issuer, such syndicate or group shall be

deemed a “‘person”’ for the purposes of this subsection.

* * *

(5} The provisions of this stibsection shall not

apply to—

Appendix C-

oe ok * x

— (B) any acquisition of the beneficial ownership of |

~——a--security-which, together-with ait other acquisi-

tions by the same person of securities of the same

class during the preceding twelve months, does not

exceed 2 per centum of that class;

| * Se: :

_{D).any acquisition or proposed acquisition of a

security which the Commission, by rules or regula-

_ tions or by order, shall exempt from the provisions

of this subsection-as not entered into for the pur-

pose of, and not having the effect of changing or

influencing the control of the issuer or otherwise

as not comprehended within the purposes poses of this —

subsection.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.