Blue Sky L. Rep. P 71,773, Fed. Sec. L. Rep. P 98,776
AGENCY RENT-A-CAR, INC., Plaintiff, Appellee,
v.
Michael J. CONNOLLY, etc., et al., Defendants, Appellees.
Spencer Companies, Inc., Defendant, Appellant.
AGENCY RENT-A-CAR, INC., Plaintiff, Appellee,
v.
Michael J. CONNOLLY, etc., et al., Defendants, Appellants.
Nos. 82-1337, 82-1338.
United States Court of Appeals,
First Circuit.
Argued May 7, 1982.
Decided Aug. 16, 1982.
David W. Walker, with whom Sandra L. Lynch, and Foley, Hoag & Eliot, Boston, Mass., were on brief, for defendant, appellant Spencer Companies, Inc.
Paul W. Johnson, Asst. Atty. Gen., with whom Francis X. Bellotti, Atty. Gen., and Carolyn V. Wood, Asst. Atty. Gen., Boston, Mass., were on brief, for defendants, appellants Connolly, Unger and Bellotti.
Joshua M. Berman, with whom David L. Engel, and Berman, Dittmar & Engel, P. C., Boston, Mass., were on brief, for plaintiff, appellee Agency Rent-A-Car, Inc.
Before CAMPBELL, BOWNES and BREYER, Circuit Judges.
LEVIN H. CAMPBELL, Circuit Judge.
This is an appeal from a preliminary injunction entered by the district court,
Factual and Procedural Background
Agency initially began buying shares of Spencer early in 1981. By the end of March, it owned at least five percent of Spencer's outstanding shares and was therefore required to file a Schedule 13D disclosure statement pursuant to section 13(d) of the Securities Act and regulations thereunder. Agency filed its first Schedule 13D on March 31, 1981. It subsequently filed several amended schedules. Through open market purchases and privately negotiated transactions, Agency acquired 28 percent of Spencer's shares by the middle of August 1981. A state administrative proceeding-"Spencer I "-determined on August 12 that these acquisitions did not constitute a tender offer under the Massachusetts statute ("Chapter 110C").
Agency continued to purchase Spencer stock. By November 13, 1981, it had acquired over 700,000 shares, just over 38 percent of those outstanding. On that date, amendments to Chapter 110C became effective which, inter alia, changed the definition of "take-over bid" so as to encompass open market and private transactions as well as tender offers. Compare Mass.Gen.Laws ch. 110C, § 1 (before amendment) with 1981 Mass.Acts ch. 508, § 1 (amending Chapter 110C). Agency has since made no further purchases of Spencer stock.
On January 27, 1982, Agency announced a cash tender offer for up to 250,000 shares of Spencer stock at $15 per share (if the offer were completely successful, Agency would acquire a majority interest in Spencer). The Massachusetts Securities Division ("the Division") issued a temporary cease and desist order on January 28, and scheduled a hearing for February 1. Hearings before the Division began on that date, with subsequent delays in order to accommodate counsel for both sides. On March 19, 1982, the Division issued its opinion, findings and order, captioned "Spencer II." At the conclusion of its 35-page opinion, the Division ordered that Agency cease and desist from acquiring Spencer shares pursuant to a take-over bid until November 14, 1982. This one-year prohibition from the last date of purchase was premised on a violation of section 3 of Chapter 110C, which will be discussed below. The Division further ordered that Agency cease and desist from making a take-over bid for Spencer, without limitation as to time. This latter prohibition was based on a finding that Agency had violated section 7 of Chapter 110C, also discussed below. Agency did not seek review of these orders in the state courts. See generally Mass.Gen.Laws ch. 30A, § 14.
Agency filed its complaint in federal district court on January 26, 1982, the day before the announcement of its tender offer. After the Division's March 19 order, Agency moved for a preliminary injunction against the enforcement of that order. Oral argument was had on March 30; no evidentiary hearing was held. On April 12, the district court granted the preliminary injunction. This court has stayed the district court's order pending appeal.1
The Massachusetts Take-Over Statute
It is necessary to understand the provisions of Chapter 110C in order to assess Agency's claim that sections 3 and 7 are preempted by the Williams Act. See generally Perez v. Campbell,
the acquisition of or offer to acquire, whether by a formal public announcement, by a tender offer or request or invitation for tenders, by the accumulation of stock in the market or the solicitation of particular shareholders, or otherwise any equity security of a target company if, after acquisition thereof, the offeror ... would be directly or indirectly the beneficial owner( ) of more than ten percent of any class of the issued and outstanding equity securities of such target company....
Chapter 110C, § 1. Thus, any purchase or offer to purchase shares is a regulated take-over bid if after the purchase, the shareholder would be over the ten percent ownership level. By definition, then, any further acquisition by one who already is a ten percent shareholder comes within the scope of a take-over bid.2
Two provisions of the statute are challenged by Agency: section 3, "on its face and as applied"; and section 7, as made operative by sections 2 and 6, "insofar as they prohibit Agency from making its tender offer." No other provisions of Chapter 110C are challenged. By virtue of its severability clause, § 13, only the challenged sections need be addressed.
Section 3 provides as follows:
No offeror shall make a take-over bid if he and his associates and affiliates are directly or indirectly the beneficial owners of five per cent or more of the issued and outstanding equity securities of any class of the target company, any of which were purchased within one year before the proposed take-over bid, and the offeror, before making any such purchase, or before the thirtieth day following the effective date of this section, whichever is later, failed to publicly announce his intention to gain control of the target company, or otherwise failed to make fair, full and effective disclosure of such intention to the persons from whom he acquired such securities.
As interpreted by the Division in Spencer II,3 section 3 mandates that a five percent shareholder4 cannot make a take-over bid if, within the last twelve months, he purchased any shares-even before reaching five percent ownership-without disclosing an intention to gain control if such existed. The prohibition runs from the date of the last purchase. Since any purchase by a ten percent shareholder is a take-over bid, supra, such a shareholder who has violated section 3 is barred from making any subsequent purchases for one year, unless he comes within one of the exceptions, see, e.g., note 2, supra. The Division found that Agency had made purchases of Spencer stock without disclosing its contemporaneous intent to gain control,5 and therefore ordered that it not make a take-over bid until November 14, 1982, one year from its last purchase of Spencer stock.
Section 7 of Chapter 110C provides first thatIt is unlawful for any offeror or target company or any affiliate or associate of an offeror or target company to make any untrue statement of a material fact or to conceal any material fact in order to make the statements misleading, or to engage in any fraudulent, evasive, deceptive, manipulative or grossly unfair practices in connection with a take-over bid.
It then goes on to specify that "(n)o take-over bid shall be made unless it is made under the provisions of" Chapter 110C. Under section 6, if "the (state) secretary (or his delegate) finds the take-over bid is in violation of this chapter ... he shall so adjudicate." Under section 2, a take-over bid is deemed in compliance with the statute upon the secretary's adjudication that there are no violations. The Division interpreted sections 2 and 6 to "mandate an adjudication as to whether a take-over bid is in violation of the Act," judging the bid against "all pertinent provisions." Spencer II, at 29. It further stated that a finding of a violation of section 7 "necessitates an adjudication under Sections 2 and 6 that the take-over bid cannot go forward." Id.
The Division found Agency's conduct to be "evasive, deceptive and grossly unfair," id. at 32, relying primarily on Agency's failure to disclose its true intentions with respect to Spencer. It therefore adjudicated that the take-over bid was in violation of Chapter 110C, and accordingly issued a further cease and desist order, without time limitation, enjoining Agency from making a take-over bid for Spencer.
The Williams Act
We turn next to the Williams Act, the federal statute which allegedly preempts the state law described above. The Williams Act regulates tender offers and other take-over bids in two ways: first, by requiring disclosure of information about any five percent shareholder, Securities Act § 13(d), or tender offeror, id. § 14(d), and second, by giving shareholders of the target of a tender offer certain substantive protections, such as withdrawal and proration rights, id. There is also a prohibition of fraudulent and deceptive practices in connection with tender offers, id. § 14(e), similar to that of Chapter 110C's § 7.
No private cause of action is expressly created by the Williams Act. Courts have found and enforced an implied private equitable remedy, generally in favor of the target corporation and its shareholders against an offeror who made an improper tender offer. The traditional equitable prerequisites to injunctive relief are required. See Rondeau v. Mosinee Paper Corp.,
In Piper v. Chris-Craft Industries, Inc.,
Piper presented the question of whether an unsuccessful bidder has an implied cause of action under the Williams Act. In a recent case involving preemption of a state take-over statute, Edgar v. MITE Corp., --- U.S. ----,
Edgar was actually decided by the Court on commerce clause grounds, see infra pages 1039-1040, as Justice White's discussion of preemption did not command a majority of the Court. Justice Stevens, concurring in part and concurring in the judgment, apparently accepted the view that the Williams Act evinced a policy of neutrality. See at ----,
agree(d) with Justice Stevens that the Williams Act's neutrality policy does not necessarily imply a congressional intent to prohibit state legislation designed to assure-at least in some circumstances-greater protection to interests that include but often are broader than those of incumbent management.
Id. at ----,
The Preliminary Injunction Standard
The plaintiff's burden in obtaining preliminary relief is clear:
"In the First Circuit, a plaintiff must satisfy four criteria in order to be entitled to a preliminary injunction. The Court must find: (1) that plaintiff will suffer irreparable injury if the injunction is not granted; (2) that such injury outweighs any harm which granting injunctive relief would inflict on the defendant; (3) that plaintiff has exhibited a likelihood of success on the merits; and (4) that the public interest will not be adversely affected by the granting of the injunction."
Planned Parenthood League v. Bellotti,
"It is also well-settled, however, that the application of an improper legal standard in determining the likelihood of success on the merits is never within the district court's discretion. Similarly, misapplication of the law to particular facts is an abuse of discretion."
Id.; Planned Parenthood,
With these standards in mind, we proceed to a review of the grant of a preliminary injunction in this case. While our primary focus will be on the merits of Agency's preemption claims, we note now without repetition later that because of the posture of the case, our discussion of course must be understood as reflecting only our views on the probable final outcome of the case, and is not a definitive holding on the issues presented. See Planned Parenthood,
The District Court's Opinion
While citing to the other prerequisites for preliminary injunctive relief, the district court focused almost exclusively on only one factor: Agency's likelihood of success on the merits of its preemption claim.6 In finding section 3 invalid on its face, the court stated that the automatic sanction imposed for violations-a one-year delay-benefited not shareholders but target management, and thereby "operates at cross-purposes" to the Williams Act.7 As noted supra, the court arrived at its conclusions without holding an evidentiary hearing. The court found section 7 invalid as applied because the Division relied in part on Agency's Schedule 13D filings in finding a violation of section 7. The court stated that "(t)he sufficiency of 13D filings are (sic) exclusively a matter of federal law." Memorandum and Order at 7-8. As will be noted infra, Agency does not now press this point. Rather, it argues that, as with section 3, it is the sanction imposed under section 7 that renders these provisions preempted by the Williams Act.
The court briefly noted its finding of irreparable harm to Agency in the Commonwealth's delay of its take-over bid for Spencer. It also cursorily stated that the public interest would be served by the preliminary injunction and that the harm to the defendants from it did not outweigh the harm to Agency if the injunction were not entered. It therefore entered the preliminary injunction that is the subject of this appeal. The district court did not pass judgment on the merits of Agency's alternative claim that the Massachusetts statute violated the commerce clause.
Discussion: Balance of Harms and the Public Interest
Before considering the merits of the preemption issue, we briefly examine the other factors involved in the grant of the preliminary injunction. The district court noted that the delay of Agency's tender offer constituted irreparable injury because it would afford Spencer's management time to erect a successful defense to the take-over bid. See, e.g., Kennecott Corp. v. Smith,
This is not to say that these factors alone would have necessitated a denial of preliminary relief. Rather, these considerations should simply serve to indicate the closeness of the question, to show that there are, even apart from the merits of the preemption issue, strong arguments against the preliminary injunction. We are not in a position to weigh these considerations for the first time: careful treatment of them by the district court would perhaps have shown a more reasoned basis for the exercise of its discretion. In the absence of such an analysis, it becomes more difficult to support that discretion.
Discussion: Preemption
We turn, then, to the merits and consideration of Agency's preemption argument. It is vital at the outset to distinguish this case from others involving tender offer regulation preemption issues. In Edgar v. MITE Corp., --- U.S. ----,
Here, on the other hand, Agency does not challenge the disclosure, filing, or hearing requirements of Chapter 110C. Rather, in its own words, "Agency contends that the sanction imposed by section 3, and the sanction imposed by sections 2 and 6 (for violations of section 7), in the circumstances of this case, conflict with the policies of the federal Williams Act ...." Brief for Appellee at 8 (emphasis in original). Its argument is that the automatic delays imposed for violations of what are for purposes of this case concededly valid disclosure requirements are preempted because they go further than is necessary to protect investors, thereby tipping the scales too far in favor of target management. The defendants respond that the sanctions are a reasonable deterrent to violations and do not impermissibly conflict with federal policies.
In undertaking preemption analysis, it is first necessary to determine whether Congress has intended to occupy the entire field, thus rendering invalid all state regulation on the subject. See, e.g., Hines v. Davidowitz,
At first glance, it might seem difficult to conceive how sanctions alone could ever be preempted. If it is permissible for the state to regulate the conduct in question, then it might seem that no conflict could be presented by state penalties for violation of the valid regulations. Such a position finds some support from California v. Zook,
It is the sanction here imposed, and not the duty to report, which brings about a situation inconsistent with the federally protected process of collective bargaining.... Such an obstacle to collective bargaining cannot be created consistently with the Federal Act.
Id. at 543,
It might be tempting to analogize from Hill to this case, finding the one-year ban of section 3 in impermissible conflict with the Williams Act. For many reasons, however, we do not find Hill dispositive. First, the Court has cautioned that its "prior cases on pre-emption are not precise guidelines ..., for each case turns on the peculiarities and special features of the federal regulatory scheme in question." City of Burbank v. Lockheed Air Terminal, Inc.,
Finally, we have recognized that Supreme Court cases of the last decade demonstrate a new solicitude toward state interests and an elevation of the threshold of conflict required before a state statute is preempted. See Kargman v. Sullivan,
In Merrill Lynch, Pierce, Fenner & Smith v. Ware,
In Kewanee Oil Co. v. Bicron Corp.,
Other recent cases state that a mere possibility of state-federal conflict is not sufficient to justify preemption. See, e.g., Goldstein v. California,
Applying the Court's conflict analysis as interpreted in these cases, we cannot say that section 3's one-year ban is preempted by the Williams Act's policy of investor protection.10 The validity of section 3's regulation of creeping tender offers is not in itself attacked. When the prohibition does come into play, it is only after a take-over bid is made, as here, without proper disclosure. The delay imposed by section 3 does not become operative unless there has been a violation. This distinguishes Chapter 110C from other state statutes found wanting because of delays built-in for every tender offer. See supra pages 1035, 1036. Here, the delay is easily avoided by compliance with the statute. When compliance occurs, therefore, there is no conflict at all with the Williams Act.
It is true that the one-year delay may often be a more serious penalty than is necessary to protect investors from the consequences of improper disclosure in a particular situation. To that extent it may be said to conflict with federal policy. On the other hand, the deterrent effect of the sanction is obviously beneficial to investors and is therefore in keeping with federal goals.11 Indeed, it may be that the deterrent effect is so powerful that violations can be expected only very rarely, further reducing the degree of conflict. Agency of course stresses the conflict here, where its own tender offer has been enjoined under section 3. But our analysis must have a more distant horizon in order to assess the conflict presented by these statutes. See generally Kewanee Oil,
Our approach serves to reconcile the federal and state statutes, the preferred approach under Ware. Leeway is given to the state's choice of remedy, as suggested by Kewanee. The mere possibility of a significant degree of conflict is not given controlling weight, in accord with Goldstein. Indeed, Hill itself-the strongest case in support of Agency's position-may be distinguished: neither the filing requirement nor the injunction in Hill were linked to protection of employees, the purpose of the federal Labor Act. The injunction thus stood on tenuous ground as interfering with federal policy without redeeming effect. Here, on the other hand, the disclosure requirements of section 3 and the deterrent effect of its one-year ban operate in general toward the same end as the federal statute: protection of investors. The conflict here is thus of a lesser degree than that condemned in Hill. For all these reasons, we conclude that the district court erred in finding that Agency was likely to succeed on the merits of its preemption claim with respect to section 3. We accordingly vacate its preliminary injunction-premised on the preemption claim-with respect to the Division's order under section 3.
With respect to section 7, and the indefinite ban imposed by the Commonwealth for Agency's violation of it, we conclude that the proper course at this time is for the federal courts to abstain from making a determination of its constitutionality. While the Division's opinion and order appear final, we are informed by the Commonwealth that the Division is free to and indeed will (if requested by Agency) re-examine its section 7 order when the section 3 order expires (November 14, 1982). It may be, as Agency argues, that the order is indeed final or that in any event Chapter 110C requires a permanent injunction for all violations of section 7. These matters are, however, best left to the state courts in the first instance before a federal determination of the constitutionality of section 7, as applied in this case. Indeed, since Agency attacks section 7 only as applied, it will be necessary to obtain a final ruling on how section 7 does apply to its conduct before a federal court can adjudicate the matter. The preliminary injunction will thus be vacated with respect to section 7 as well.
Discussion: Commerce Clause
Agency also argues that section 3 is invalid under the commerce clause. Although presented to it, the district court did not pass on this contention. In Edgar v. MITE Corp., --- U.S. ----,
While Edgar indicates that the constitutionality of the Massachusetts statute presents very serious and substantial questions, leaving its validity very much in doubt, we do not feel that it is appropriate for this court to decide the issue without further development of the record and without allowing the district court to perform the required balancing and exercise its discretion concerning preliminary relief in the first instance. The benefits and burdens of the Massachusetts statute are not entirely clear on the record now before us. Cf. Florida Lime & Avocado Growers,
A four-member plurality in Edgar also thought the Illinois statute invalid as a direct restraint on interstate commerce, regardless of any balancing of benefits and burdens. --- U.S. at ----,
The preliminary injunction is vacated. However, our disagreement with the district court on the close and difficult issue of preemption is in no way intended to suggest that we either favor or disfavor injunctive relief following consideration of the commerce clause issue. The case is remanded to the district court for consideration of the propriety of preliminary (and possibly final) relief premised on Agency's commerce clause claim, in light of the Supreme Court's decision in Edgar v. MITE Corp., supra.
So ordered.
Notes
There is one other proceeding arising out of these facts: Spencer has brought an action against Agency in federal court, alleging violations of the Williams Act
There is, inter alia, an exception for acquisitions of less than two percent of the shares within a twelve-month period. Chapter 110C, § 1
There is some language in Spencer II suggesting that section 3 requires not only the disclosure of a definite intent to gain control of the target, but also of a conditional intent to gain control as one of several alternative plans. Other parts of the opinion, however, make it clear that Agency was held to be in violation of section 3 because of an actual undisclosed intention to gain control of Spencer. Thus, Agency could not complain that section 3's disclosure requirements were too broad, since it was found to have violated them even on a more narrow interpretation. Resolution of this possible ambiguity is in any event not necessary for our present purposes, as Agency does not argue that the disclosure requirements in themselves are preempted
The statute is perhaps arguably ambiguous as to whether a take-over bid may successfully be launched from a position of less than five percent ownership, or whether even if it is launched from such a starting point, it will be halted once the five percent level is reached. This question of interpretation is not germane to any issue now before us
Agency does not challenge any of the Division's factual findings
The court did not address Agency's claim that the Massachusetts statute violates the commerce clause. This issue presents substantial questions which should be considered on remand. See infra page 1040
The court also noted briefly that the Division's language concerning disclosure of alternative plans was broader than any disclosure required under federal law. As we have stated, supra, note 3, both the Division's opinion and section 3 may be ambiguous with respect to the required degree of disclosure, but this problem is not relevant to the questions now presented
Like most recent scholarship, these Notes argue that state regulation of tender offers should usually not be found preempted by the Williams Act
In dissent, Justice Frankfurter stated that "of course" a state "may provide appropriate sanctions" for violations of its valid regulations. Id.
Nor do we think section 3 preempted by the policy of neutrality as between target and bidder, see supra pages 1033-1034. For the same reasons as discussed in text with respect to the policy of investor protection, section 3's sanction does not impermissibly tip the balance in favor of target management. It does not represent a forbidden "weapon" in the hands of the target, compare cases discussed supra at pages 1035, 1036, but rather is simply designed to ensure compliance with the disclosure provisions. And, as we have said, see supra page 1036, the disclosure provisions in the context of this case are assumed by the parties to be valid. While a more narrowly drawn sanction might be more neutral, the one-year ban does not appear so far out of bounds as to be preempted
Reliance on equitable remedies under the Williams Act, see, e.g., Rondeau v. Mosinee Paper Corp.,
Factual development below (should Agency pursue its preemption claim with respect to final relief) may show this view to be too sanguine, and demonstrate that in actual operation section 3 may be expected to halt so many tender offers as to conflict impermissibly with the Williams Act. We are not now, however, presented with such factual support for Agency's position