# Petition for Writ of Certiorari — Milstein v. GAF Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0595%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 406 U.S. 910 ## Text - Oy > p Pes os ¥ pean — | = 4912 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, v. 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 ae 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. es 15°U. 15 U. 15 U. 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: a - 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, V. '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 2 - 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 oo — _ 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 aS . _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 oe 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 6 % 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 os 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.” (c) Because of the position of New York City in the 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 — 9 > 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 3 % simply and obviously a device to prevent evasion through the use of joint ventures. There is no.warrant for reading . f BS § 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. (c) Under the Second Circuit’s reading of the statute 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. 5 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.). 11 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 BY 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): (c) Perhaps the. most significant consideration . — r I 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- ing more than 10% of the outstanding shares of the © 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-— @s _ 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). | 4 — 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 Shares Corp. v. Genesco, Inc., 384 F. 2d 540 (2d Cir. © 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) = 2b 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 codification of existing case law under Rule 10b-5 “except © 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 ae 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: . > ‘ ¢@ 7 o - sg e ° : . x se ° . . * o ° ° ~ ° e -” 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 issuer of the security at its principal executive. office, by © _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; : (C) if the. purpose of the purthases or Giacaianitee’ 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— i: 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0595%3A1. Public record. Not legal advice.