Swygert, Chief Judge, Hastings, Senior Circuit Judge, and Kiley, Circuit Judge.
HASTINGS, Senior Circuit Judge.
This is an appeal from an order of the district court granting plaintiff's motion for a preliminary injunction enjoining appellants and other defendants, as well as "all persons controlled by them or in active concert with them," from "proceeding with their plan (including, but not limited to removing the chief executive officer of [plaintiff] Bath and calling for a special shareholders' meeting) until they have complied with Section 13(d) of the 1934 [Securities Exchange] Act." The injunction is to remain in effect until it is determined that defendants have filed legally sufficient statements pursuant to Section 13(d).
Section 13(d), 13(e), 14(d), 14(e) and 14(f) were added to the 1934 Act by a 1968 amendment, the Williams Act. In general, the last four named subsections deal with acquisitions of stock by the issuer and with those by tender offers. Section 13(d)*fn1 deals with acquisitions of stock by substantial stockholders and is the only section of the Williams Act involved in the present appeal. The legislative history shows that the purpose of the Williams Act was to close a gap in the disclosure requirements of existing securities laws by requiring full disclosure by persons or groups who "purchase by direct acquisition or by tender offers * * * substantial blocks of the securities of publicly held companies." 113 Cong.Rec. 24664 (1967). Senator Harrison A. Williams, Jr., of New Jersey, stated the purpose of his bill to be "to require the disclosure of pertinent information * * * when a person or group of persons seek to acquire a substantial block of equity securities of a corporation by a cash tender offer or through the open market or privately negotiated purchases * * *." Id.
Broadly stated, under new Section 13(d) (1), any person who, after acquiring the beneficial ownership of an equity security of an issuer, is the owner of more than 10% of the outstanding amount of such security, must file statements with the SEC, the issuer and stock exchanges disclosing specified information. Section 13(d) (3) defines "person" as used in Section 13(d) (1) to include any "group" acting "for the purpose of acquiring, holding, or disposing of securities of an issuer." Section 13(d) (5) exempts from the application of Section 13(d) acquisitions which do not amount to 2% of the security outstanding within a twelve month period.
In the most simplified form, the issues for our review are when do a number of stockholders of a corporation become a "group" within the meaning of the Williams Act and when must such group comply with the filing and notification provisions of that Act. Also involved is the propriety of the preliminary injunction entered by the trial court.
Only two other courts of appeal have dealt with the Williams Act. Neither touched the issues now before us. In Electronic Specialty Co. v. International Controls Corp., 2 Cir., 409 F.2d 937 (1969), the Second Circuit dealt with new Section 14(d) and chiefly with issues of the adequacy rather than the timing of compliance. In Susquehanna Corp. v. Pan American Sulfur Co., 5 Cir., 423 F.2d 1075 (1970), the Fifth Circuit did deal with new Section 13(d), which is before us, but again the primary issue was the adequacy of the compliance. Thus the issues raised on this appeal are said to be of first impression.
Plaintiff Bath Industries, Inc. (Bath) is a Delaware corporation with its principal place of business in Milwaukee, Wisconsin. Bath was organized as a holding company in 1967. Its Milwaukee office consists of a small staff including its president and chief executive officer, William D. Kyle, Jr. (Kyle), its executive vice president, Robert R. Greenwalt, and other personnel whose function it is to furnish overall policy, planning, financial, operating and legal guidance to Bath's subsidiaries.
Bath has three wholly-owned subsidiaries. Bath Iron Works Corporation (BIW), located in Bath, Maine, has been engaged in shipbuilding for over 70 years. Since about 1935 its principal business has been the construction of destroyers for the United States Navy. Ninety-five percent of its current business is with the Navy. Congoleum Industries, Inc. (Congoleum) was acquired by Bath in 1968. It is engaged in the manufacture of floor coverings, household furnishings and related products. It has seventeen plants located in New Jersey and throughout the country. Pennsylvania Crusher Corporation manufactures and sells gyratory crushers, impacters and other equipment.
Nine named defendants were made parties to the original complaint. Three of these were dismissed without prejudice after they signed a settlement agreement with Bath. Three others have indicated a desire to be similarly treated, but have been denied dismissal pending a later determination of the validity of the settlement agreements by the trial court.*fn2 Two of the original defendants join in this appeal.
Defendant-appellant Emmet J. Blot (Blot) is the president and sole owner of Godolphin, Inc. Blot and Godolphin operate as financial consultants. Blot is a shareholder of Bath. Since April, 1966, he has been a director of Bath*fn3 and served as chairman of its executive committee from April, 1967 to April, 1969.
Defendant-appellant Hambro American Bank & Trust Co. (Hambro American) is a New York banking corporation. It is owned by a Delaware holding company, Eurus, Inc. Eurus, Inc., is, in turn, owned fifty per cent by Hambros Bank, Ltd. (Hambros), a London, England investment banking corporation, and fifty per cent by approximately twenty-five American stockholders, including Blot who has been a director of Eurus, Inc., since August, 1969. Hambros is a stockholder of Bath and, while not a defendant, is named in the preliminary injunction.
Defendant Edward A. Merkle (Merkle) is president of defendant Madison Fund, Inc., and a stockholder of Bath. Merkle was dismissed by stipulation in the trial court.
Defendant Madison Fund, Inc. (Madison) in a Delaware registered, closed end investment company located in New York City. It is a stockholder of Bath. Madison was dismissed by stipulation in the trial court.
Defendant MAD International, Inc. (MAD) is a foreign investment corporation with offices in Switzerland and New York. It is associated with defendant Madison and is a stockholder of Bath. MAD was dismissed by stipulation in the trial court.
Defendant Richard E. McConnell (McConnell) is vice president of defendant Donner Corporation. The record does not show that McConnell is a stockholder of Bath. Bath sought to dismiss McConnell by stipulation in the trial court pursuant to a signed settlement agreement, but the court refused to so order.
Defendant Donner Corporation (Donner) is a Pennsylvania corporation which acts as the investing agent and nominee for the William H. Donner family. It holds warrants to purchase Bath stock. Bath sought to dismiss Donner by stipulation in the trial court pursuant to a signed settlement agreement, but the court refused to so order.
Defendant Clark Estates, Inc. (Clark Estates) is a New York corporation. Although it owns no Bath stock, the trial court found that it provides investment advice and related services to a number of accounts owning Bath shares and in most instances determines how those shares will be voted. In the trial court, Clark Estates expressed a desire to enter into a settlement agreement with Bath. However, the court refused to permit the execution of such agreement and none was ever consummated. Clark Estates did not appeal, but we granted leave to its attorney to present a brief oral argument on its behalf in this appeal.
Defendant Norton Penturn (Penturn) is a Bath stockholder residing in Toronto, Ontario, Canada. He was not dismissed in the trial court but did not join in this appeal.
Also named as defendants were presently unknown X, Y and Z Investment Companies and A, B and C Investment Banking and Brokerage Firms.
The district court held that plaintiff Bath had demonstrated a likelihood that it would ultimately prevail in its attempt to show that defendants had violated the Williams Act. It concluded that defendants and certain others constituted a "group" which had acted together for the purpose of acquiring or holding Bath securities, as that term is defined in Section 13(d) (3), supra, of the Williams Act. Such group, the court found, owned beneficially, directly or indirectly, more than 10% of Bath's stock, a precondition to the disclosure requirements of the Act. The court further concluded that the members of the group had agreed to pool their voting interests in Bath securities and to act in concert to carry out a plan to take control of Bath by replacing Kyle as its chief executive officer and by increasing the size of its board of directors. The court also found that some members of the group had acquired additional Bath stock to insure the success of their plan.
The court construed the Williams Act to require the "group" to comply with its disclosure provisions "within ten days after the group * * * agreed to act together * * *." Finding that the required Schedule 13D had not been filed with the SEC nor sent to Bath and the securities exchanges on which its stock is traded, the court concluded that the group had violated the Act. Finally, the court found that unless enjoined from carrying out its plan, the group would cause Bath permanent and irreparable harm in that the group contemplated a strongly contested proxy fight to achieve its goals. Such a proxy fight, the court found, would probably severely limit BIW's chances to obtain a large contract for which it had been actively contending and on which its future might depend.
This so-called "DX Contract" and matters related to it have become significant in this case. In 1967, BIW became engaged in competition with five other firms for the DX Contract, which may be the largest shipbuilding contract ever awarded by the United States Navy. As many as 100 destroyers eventually may be built under this contract over the next ten years. Billions of dollars are said to be involved. The only two firms remaining in competition for the proposed contract are BIW and Litton Industries. The DX Contract was originally scheduled to be awarded on November 18, 1969. The award has been delayed a number of times and its timing is now uncertain. Should BIW succeed in winning the contract, it would require a substantial amount of new capital, it would construct an entirely new shipyard and it would more than double its current number of employees.
Much has been said concerning Blot's feelings about the DX Contract. Bath charges that he has always opposed it and was not concerned if Bath lost it. However, the record shows that with one exception Blot voted for pursuing the competition each time it came before the board. The one exception was an abstention when the matter was first considered. Here, however, the record shows no more than an honest and not unfounded reservation about getting into a costly competition for a contract with little hope of success in winning it. As soon as Blot learned that Bath had been able to secure an outstanding naval architect and the necessary financial strength through the Congoleum acquisition, he consistently voted to continue the competition for the contract. In fact, when this litigation began to generate publicity adverse to Bath's chances for the contract, Blot was quick to communicate with the Navy and with members of Congress assuring them of his belief that Bath should get the contract.
Bath further charges that Blot exhibited his opposition to the contract by opposing a financing plan which was necessary if Bath was to get the contract. However, it appears from the record that this "opposition" was no more than an attempt to secure a better financing plan and that similar "opposition" was voiced by a number of the Bath directors, including Kyle and those who have supported him most strongly.
We may now turn to the series of events which led to the present litigation. Blot and Roger D. Lapham, another Bath director who has appeared in this litigation on behalf of Bath, had been associated in an investment partnership since about 1961. This association was terminated in the fall of 1968. While associated, Blot and Lapham had on several occasions acquired substantial blocks of stock in various corporations with the intent of gaining control. They were assisted in these efforts by Hambros. Blot has apparently been advising Hambros on its American investments for some time.
In February, 1966, Blot and Lapham heard of a large block of BIW stock for sale by a firm in Philadelphia. The total available was over 80,000 of the then outstanding 400,000 BIW shares. They were unable to buy this whole amount, but with the aid of Hambros bought about half of it. The other half was purchased by Kyle and an associate of his, John O'Boyle, who were both directors of BIW at the time. This purchase gave Kyle and O'Boyle each about 9% of the outstanding BIW shares. Shortly after these February purchases, Blot and Lapham were elected to the BIW board. In 1967, when BIW was reorganized and Bath formed, Kyle, with Blot's support, became chairman of BIW and president of Bath.
As early as July, 1968, Blot spoke to a director of Hambros, John Clay, concerning his own belief that Kyle should be replaced as the chief executive officer of Bath. In August, 1968 he told Kyle of his view that now that Bath was purely a holding company and taking on a national scope, it should be headed by a "professional chief executive officer." Blot, also during August, presented these views to the Bath board and further expressed his opinion that the offices of the holding company should be moved from Milwaukee to New York. Blot was supported in these ...