MEMORANDUM OPINION
Bеfore this Court are the parties’ motions for preliminary injunctive relief for alleged violations of federal securities laws and New York common law. 1 Plaintiff International Banknote Company, Inc. (“IBC” or the “Company”) seeks to enjoin defendant shareholders and all others acting in concert with them, from: (1) purchasing additional shares of IBC stock; (2) voting in person or by proxy any IBC shares at the May 25, 1989 shareholders’ meeting, or (3) soliciting any proxies with respect to IBC shares for the election of directors at the May 25, 1989 shareholders’ meeting. Plaintiff also seeks a declaration that the Company be permitted to refuse to recognize any votes cast by or on behalf of defendants and all others acting in concert with them.
Defendants seek a preliminary injunction enjoining the enforcement of a recently enacted corporate by-law (the “By-law”) that requires 45 days notice prior to submitting a nomination to IBC’s Board of Directors (the “Board”). Defendants also seek to enjoin plaintiff from issuing improper proxy solicitations.
For the reasons stated below, plaintiff’s motion for an injunction and for declaratory relief is denied; defendants’ mоtion to enjoin enforcement of the By-law is granted, and defendants’ motion to enjoin plaintiff from disseminating illegal proxy solicitation is denied.
I. Procedural History
On April 5, 1989, IBC filed its complaint alleging that defendants violated sections 13(d) and 14(a) of the Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78m(d) and 78n(a). The Court granted plaintiff’s request for expedited discovery at a hearing in this matter on April 6,1989.
On April 7,1989, defendants filed a separate action alleging that IBC’s recently en
II. Background
Plaintiff IBC is a New York corporation with its principal place of business in New York City. Complaint in Action 1 at ¶ 4. IBC is engaged through its subsidiaries in the design, engraving and printing of stock certificates, currency, stamps and food coupons and in the design and manufacture of holograms and holographic products. IBC’s shares are traded on the American Stock Exchange and the Philadelphia Stock Exchange. Id.
The individual defendants are for the most part IBC shareholders who organized the Shareholders’ Committee of International Banknote Company, Inc. (the “Committee”). The Committee has announced its intention to seek the removal of the incumbent IBC Board of Directors. Schedule 13D, Harper Aff. at Ex. D. As of April 24, 1989, the Committee held beneficial ownership of approximately 11.7 percent of the outstanding shares of IBC and the Committee’s shares were worth an estimated $9.1 million. Transcript from January 24, 1989 preliminary injunction hearing (“Hearing”) at 86.
Defendant N. Norman Muller, a New York resident, is a “consultant” to the shareholders committee, hired at a flat fee of $60,000 plus expenses. Muller at 131-141. 3 He is currently a director and the President of defendant Admiral Capital Cоrporation (“Admiral”), a company that purchases leases, Id. at 12; a consultant to defendant Dorian Industries, Inc. (“Dorian”) 4 , which is a consultant service owned entirely by Muller’s daughters, Id. at 9; and the President of GBI International Industries, Inc. (“GBI”), a public corporation engaged in the industrial insulation business. Id. at 15.
Defendant Thomas Smith, a Texas resident, is the Vice President and Chief Financial Officer of Admiral and the Chief Financial Officer of defendant Double Helix Films, Inc. (“Double Helix”). Pursuant to the Shareholders’ Committee Agreement (the “Agreement”) adopted on March 15, 1989, the Committee appointed Smith “coordinator” of the Committee and gave him the power to direct the vote of all the shares of the members of the Committee. Smith at 213-215.
Defendant Arthur E. Bohrer, a New Jersey resident, has been in the wholesale food business for 40 years and has been a shareholder of IBC for more than three years. Bohrer at 13-17, 21, 59.
Defendant Robert Hesse, a New Jersey resident, is a former investment banker. He was recently named Chief Executive Officer and Chairman of the Board of Beaf-uels Inc., a coal mining company located in Georgia. Hesse owns 30 percent of Admiral. Schedule 13D, Harper Aff. at Ex. D.
Defendants Jerry Silva, a New York resident, and Stanley Wakefield, a New Jersey resident, are, respectively, Chairman of the
Defendant William Kunz, a New Jersey resident, is vice president of sales of H.H. Cutler Co., a children’s clothing company located in New York City.
Defendant Millard Chiang is the sole proprietor of Transnational Capital Corporation, which is in the business of global trade financing. Chiang at 10.
Defendant Tsunesaburo Kurosawa is a Japanese businessman and is President and controlling shareholder of defendants Kurosawa Co., Ltd., and T. Kurosawa Co., Ltd. 5
Defendant Tai Tsuchiya is a Japanese attorney.
Defendants C.C. Tung and Michael Wang are the sole shareholders and the President and Vice President, respectively, of defendant Panacrown Limited (“Panacrown”), a Hong Kong corporation.
The following are the Court’s findings of fact and conclusions of law: 6
The events leading up to the formation of the Committee begin with a conversation between defendants Muller and Hesse. Muller testified that Hesse, a former investment banker, identified IBC as an “undervalued” company in Deсember of 1988. Muller at 30. Hesse had begun to purchase IBC stock in December and continued purchasing the stock in January and February. Hesse Schedule 14B, Harper Af-#. at Ex. T. In January 1989, Hesse, at Muller’s request, provided Muller with additional information about the Company. Muller at 31-33.
In late December of 1988, Muller had a dinner party at his home and mentioned IBC to defendant Jerry Silva as something he wanted Silva to “look at.” Silva at 16. Muller gave Silva IBC’s annual report and Form 10-K and an article on the Company’s management. Id. at 16-17; Muller at 55.
Muller next discussed IBC with defendant Chiang, referring to the stock as “underrated,” Muller at 68, Chiang at 20, and with defendant Thomas Smith, a business associate who works out of the same offices in New York City. Smith at 116-117. Muller testified at his deposition that he asked Smith to look into the Company and give him his “opinion.” Muller at 37. Smith testified that he reported back to Muller that the Company was “abysmally managed.” Smith at 57.
Also in January 1989, Muller formed defendant Dorian Industries, Inc. — a consultant service owned entirely by his two daughters. Dorian has been retained as a consultant to the Committee. Dorian owns 50% of the stock of defendant Admiral Capital and Hesse owns 30% of the stock of Admiral Capital. Schedule 13D, Harper Aff. at Ex. D.
Around the end of January or the early part of February, Muller asked Smith to prepare a written research report on IBC. Muller at 37; Smith at 52. Smith testified that he prepared the report (hereinafter the “Smith Report” or the “Report”) himself, using only publicly available information
The Smith Report includes 18 pages of text and charts plus an inch thick appendix containing IBC’s 1987 Annual Report, IBC’s September 30, 1988 10-Q filing, and an assortment of articles on the Company. Smith suggest in the first paragraph of the Report that the Company offers investors “a unique opportunity to achieve significant near-term profits_” He recom-
mends in the same paragraph that in order to achieve these profits, “it will be necessary to acquire an equity position in International [Banknote] large enough to influence the company’s management to redeploy the company’s assets.”
Smith blames the Company’s recent weak performance on “poor, inattentive management,” Id. at 7, and makes clear what is required to make the Company more profitable. Under the section captioned “Proposed Strategy,” Smith states:
[i]t will be necessary for the shareholders to force a change in the direction of the company. This may be accomplished most rapidly by obtaining an equity position with adequate votes to replace all or at least a substantial portion of the company’s board of directors at the company’s annual meeting. This will require rapid action since the meeting is to be held in late May 1989....
The management of the company must be changed. It is imperative that new, innovative and aggressive management be put in charge of the company. The new management must be given the charge to maximize the value of the company by taking advantage of the many opportunities now open to it by virtue of its lead in holographic technology.
Id. at 10. Not surprisingly, plaintiff refers to the Smith Report as the “smoking gun” that demonstrates the defendants’ unequivocal intention to wage a proxy fight several weeks before the Committee filed its Schedule 13D in late March. Plaintiff’s Reply Memorandum of Law (“Reply Memorandum”) аt 7. Smith admits that he and Muller discussed the possibility of waging a proxy fight when they first reviewed the Report but states that it was only an option. Smith at 63.
During the first two weeks of February, Muller discussed IBC for the first time with several of the other defendants. Hesse had met Arthur Bohrer, a longstanding IBC shareholder, at a dinner party of a mutual friend in December. In the course of a general discussion on the stock market, IBC was briefly mentioned. Bohr-er at 22. Two or three weeks later, Hesse called Bohrer, inquired whether he still owned his IBC stock, and invited him to dinner at a restaurant in New Jersey. Id. at 23-24. Bohrer arrived at the restaurant expecting only to meet with Hesse, but found that Hesse was accompanied by Muller and Silva, neither of whom he had previously met. Id. at 25. Bohrer testified that he did most of the talking about the Company at the dinner. He told his dinner companions that he had expressed dissatisfaction with the Company’s management in the past at stockholders’ meeting and in numerous telephone calls with IBC directors Eugene Jonas and Edward H. Weit-zen. Id. at 30. Bohrer denies that there was any discussion during the dinner about a proxy contest or about working with other people to change management. Id. at 31.
On February 10, 1989, Admiral (of which Mullеr is President), and Smith made their first purchases of IBC stock. Schedule 13D, Harper Aff. at Ex. D. On February 12, 1989, Muller travelled to Japan with defendant Millard Chiang. Muller testified that he went to Japan primarily in connection with his work as a consultant for defendant Double Helix Films and sought to interest a Japanese businessman, defendant Tsunesaburo Kurosawa, in acquiring Double Helix’s film distribution rights in Japan. Muller at 80. Chiang testified that Kurosawa had been recommended to him by Mike Shirota, a broker in the New York office of Wako Securities, a Japanese securities firm, and that he, in turn, suggested to Muller that they should speak with Kurosawa about the purchasing the Double
Muller and Chiang met with Kurosawa twice during the week they were in Japan. At the first meeting, Muller gave Kurosawa a copy of the Smith Report. Chiang testified that there was no discussion of changing mаnagement, Id. at 35, and could not recall a single bad thing that was said about the Company. Id. at 37. The second meeting was held at the request of Kurosawa. According to Muller, there was again no discussion of waging a proxy contest. Muller at 96-99. Kurosawa asked Muller several questions about IBC, especially regarding its holographic business. Id. at 95-97. Defendant Tai Tsuchiya, a Japanese lawyer who Muller retained while in Japan, attended the second meeting primarily to act as Muller’s interpreter. Id. at 94. Chiang testified that he believed Muller also showed Tsuchiya a copy of the Smith Report. Chiang at 44-45.
The Committee’s Schedule 13D reveals that defendant Kurosawa Company, Ltd. (“KCL”), a company controlled by Kurosawa, began purchasing IBC stock on February 15,1989, while Muller and Chiang were still in Japan. Schedule 13D, Harper Aff. at Ex. D. Muller testified at his deposition, however, that at the conclusion of his second meeting with Kurosawa, he did not know whether Kurosawa intended to purchase IBC stock. Muller at 98. Defendant Double Helix Films, at the direction of its President, Silva, began to purchase IBC stock on February 17, 1989. Chiang’s wife purchased IBC stock on February 24,1989, Id, and later assigned her voting rights to Chiang. Chiang at 86.
Muller and Chiang went from Japan to Hong Kong, where they met defendants Tung and Wang at a large dinner party. Id. at 125. Tung and Wang are each 50 percent shareholders in defendant Panac-rown Ltd. Schedule 13D, Harper Aff. at Ex. D. Muller told Tung and Wang about his meeting with Kurosawa and showed them a copy of the Smith Report, which they kept overnight.
Muller and Chiang returned to New York on February 26, 1989. Chiang at 57. Pa-nacrown (which is owned by Tung and Wang) made its first purchase of IBC stock on February 28, 1989. On that same day, KCL purchased an identical large block of IBC stock. On the next day, March 1, 1989, KCL, Panacrown, and Double Helix each bought an identical large block of IBC stock. In just these two days, more than one percent of all the outstanding shares of the Company were bought by KCL and Panacrown. Hearing at 62.
Purchases of large blocks of IBC stock occurred again on two separate occasions: March 9 (KCL and Double Helix, who purchased an identical block of stock) and March 10, 1989 (KCL and Panacrown, who purchased a identical block of stock). Furthermore, KCL, Panacrown, Double Helix, Chiang, and Tsuchiya all made purchases through one broker at Smartwood Hesse, Inc., a small brokerаge firm in New York City which, until last year, was the employer of defendant Hesse. Transcript at 67; Reply Brief at 16 n. 8. Smartwood Hesse’s offices are also located at the same floor of the same building as the offices of Muller, Smith, and Chiang. Reply Brief at 16 n. 8.
Muller testified that he was contacted by Norio Kasai, Kurosawa’s United States representative, on approximately March 1, 1989, or about two weeks after Muller had last met with Kurosawa. Kasai told Muller that Kurosawa would like to meet with him in about two weeks during his next regular visit to the United States. Muller at 100-101. Muller also testified that Tsu-chiya, the lawyer he hired while in Japan, contacted him during March to tell him he was interested in making a personal investment in IBC. Tsuchiya also told Muller that “[h]e [Tsuchiya] was in touch with Mr. Kurosawa, and Mr. Kurosawa liked International Banknote.”
Id.
at 103. Tsuchiya
On March 3 or 4, 1989, Muller called Bohrer in Florida and asked him to come to New York for a meeting to be held on March 6, 1989 regarding IBC. Bohrer at 36. Muller told Bohrer that there were several people who “felt similarly” about IBC and asked him to come to the meeting to discuss his “common woes.” Id. Bohr-er flew to New York specifically for the March 6 meeting and immediately thereaftеr returned to Florida. Id. at 37. The meeting was held at the offices of Mandel, Resnik & Mortman, the law firm that later became counsel to the Committee. Id. at 36.
Bohrer testified that the meeting was initially attended by Muller, Smith, Chiang, Hesse, and Scott Schwartz (Bohrer’s son-in-law). At the hour and a half meeting, they discussed, among other things, changing IBC’s management, “get[ting] together [to influence management]”, and a proxy contest. Id. at 39, 42-43. Bohrer also testified that “we retained counsel on the 6th. Then we went ahead formally on the 15th or 16th.” Id. at 55-56. Smith testified that no agreements were made at this meeting. Smith at 244-245.
On March 9,1989, the combined holdings of the individual defendants reached 5 percent. Muller Aff. at 115. On Friday March 10, 1989, IBC released its fourth quarter report, showing earnings $1 million lower than IBC had projected. Bohrer at 50; Smith at 93.
On Monday, March 13, 1989, Muller met with Kurosawa, Kasai, Chiang, and counsel David Mortman at the law offices of Man-del, Resnik & Mortman. Muller at 104. Muller testified that Kurosawa was aggrieved over the poor performance of the Company in the fourth quarter and asked Muller and Mortman “what should be done to remove management.” Id. at 120. Muller testified that in response to Kurosawa’s concern, “[w]e made some calls and told people of Mr. Kurosawa’s feelings. Some of the people said, yes, we agree with that and we would like to join Mr. Kurosawa.” Id. Muller met with Kurosawa again on March 14, and he and counsel arranged for a meeting of dissatisfied shareholders on March 15, 1989. Id. at 121-123.
Committee coordinator Smith testified that after the fourth quarter earnings were released on March 10, 1989, “it was kind of like somebody set off a firecracker.” Smith at 226. Smith stated that the defendants in attendance at the March 15, 1989 meeting decided to form a shareholders’ committee to act together to change IBC’s management. Id. at 207. Smith was asked and agreed to act as the coordinator of the Shareholders’ Committee. Id. at 213-214. He testified that his appointment as coordinator came about as “the consensus of opinion amongst the various people that were involved.” Id.
Muller testified that there was no discussion at the March 15, 1989 meeting of any role Muller would play in replacing the management of IBC. Muller at 130. At the March 15, 1989 meeting, the Committee hired Dorian Industries, a company owned entirely by Muller’s two daughters and of which Muller is a consultant, to act as a consultant to the Committeе for a flat fee of $50,000 plus expenses. Id. at 131-141.
III. Discussion
1. Plaintiffs Motion for a Preliminary Injunction
It is well established in this Circuit that to obtain a preliminary injunction, plaintiff must establish irreparable harm and either (1) a likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and balance of hardships tipping decidedly in its favor.
See Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc.,
a) Irreparable Harm
Plaintiff contends that unless the Committee is enjoined from waging a proxy contest for control of IBC’s Board of Directors, the shareholders will be compelled to make hasty and ill-informed decisions regarding the voting of Company stock on the basis of false and misleading informa
b) Section 13(d)
Section 13(d) of the Act, 15 U.S.C. § 78m(d), requires that any person or group which directly or indirectly becomes the beneficial owner of more than 5 percent of any registered security must file a Schedule 13D with the Securities and Exchange Commission (“SEC”) within 10 days. 17 C.F.R. § 240.13d-l. A “beneficial owner” inсludes any person with 1) voting power, or 2) investment power over the securities.
Id.
§ 240.13d-(a)(l), (2). A group for purposes of section 13(d) need not be formally organized nor need it memorialize its intentions in writing; all that is required is that its members combine in furtherance of a common objective.
Wellman v. Dickinson,
A “group” owning less than 5 percent of the stock, no matter what its intentions, need not file a Schedule 13D. Thus, as a matter of law, defendants could not have been required to file a Schedule 13D until 10 business days from March 9, 1989, the first day that their combined holdings reached 5 percent of the common stock.
Defendants contend that a group was not formed for purposes of Section 13(d) until March 15, 1989, five days after IBC released its quarterly earnings. Smith testified that “after the [March 10] earnings [report for the fourth quarter] came out, it was kind of like somebody set off a firecracker.” Smith at 266. The Court has difficulty crediting this testimony given the strong circumstantial evidence indicating that defendants intended at a much earlier date to seek control of the Company. The Smith Report, prepared in early February, specifically states that
[i]t will be necessary for the shareholders to force a change in the direction of the company. This may be accomplished most rapidly by obtaining an equity position with adequate votes to replace all or at least a substantial portion of the company’s board of directors at the company’s annual meeting.
Smith Report at 10. Defendants admit this report was shown prior to March 9,1989 to at least five of the defendants (Chiang, Kurosawa, Tsuchiya, Tung, and Wang). The Committee argues that each defendant made an independent investment decision to acquire the stock, but Committee members in almost every instance purchased stock shortly after meeting with Muller. Four defendants met at their counsel’s office on March 6, 1989, four days before the “firecracker” fourth quarter loss was posted. Smith at 176-177; Bohrer at 36, 55-56. Bohrer further testified that a proxy contest was discussed at the March 6, 1989 meeting and that counsel was retained on that day. Bohrer at 51. Moreover, the Court draws an inference that defendants were acting in concert at least by early March from the fact that large block purchases in identical quantities were made by KCL, Double Helix, and Panacrown from Smartwood Hesse, Inc., a small brokerage firm located in New York City in the same offices as Muller, Smith, and Chiang.
Based on the record currently before it, the Court therefore finds that plaintiff is likely to be able to show at trial that defendants combined in furtherance of a common objective at least as of March 6, 1989 and thus failed to comply with section 13(d) of the 1934 Act by not filing a Schedule 13D 10 days after their combined holdings equalled 5 percent.
Despite having demonstrated that defendants likely violated of section 13(d), plaintiff has not shown that it is entitled to the extreme remedy it seeks. In
Rondeau v. Mosinee Paper Corp.,
In
Universal Container Corp. v. Horwitz,
[1977-78 Transfer Binder] Fed.Sec.L. Rep. (CCH) ¶ 96,161 at 92,242,
the chief lesson to be drawn from Ron-deau ... is that a private suitor in a case such as this must, if he seeks and is to receive equitable relief, do more than establish a technical violation of the statute. That is, in the absence of a showing of ‘irreparable harm and other usual prerequisites for injunctive relief,’422 U.S. at 65 , Rondeau instructs us that a late filing of a Schedule 13D is alone not enough to support the grant of an injunction, whatever the form.
Id. at 92,255.
Similarly, in
Pantry Pride, Inc. v. Rooney,
[t]he only prejudice that it could cause plaintiff would be that plaintiff remained ignorant of the proxy challenge for two weeks.... In such a situation, the Court would consider an application to adjourn the election so that managеment would have sufficient opportunity to investigate the Committee and make the results of the investigation known to the stockholders. However, plaintiff does not move for any adjournment of the election.
Id.
at 900.
See also Standard Metals Corp. v. Tomlin,
Plaintiff has also not shown that it lacks the information necessary to evaluate defendants’ slate of directors. As a result of the expedited discovery the Court granted in these actions, plaintiff has amassed volumes of information concerning the defendants which it will undoubtedly disclose to stockholders (within the limits of the proxy rules) during the ensuing proxy contest. Thus, the Court finds that defendants’ probable late filing of its Schedule 13D does not constitute irreparable harm to plaintiff.
Plaintiff also alleges that IBC shareholders have been irreparably harmed by defendants’ false and misleading disclosures. Plaintiff claims that defendants’ original Schedulе 13D contains numerous false and deceptive statements, many of which have yet to be corrected despite the multitude of amendments defendants have filed and continue to file with the SEC.
Defendants’ most serious possible misstatement of fact is their claim in Item 4 of their Schedule 13D that “prior to March 15, 1989, [shares] were acquired for investment.” Schedule 13D, Harper Aff. at Ex.
[i]n furtherance of that purpose [maximizing the value of the Company’s stock], the members of the Shareholders’ Committee intend to seek a change in the composition of the Board of Directors of the Company at the Company’s annual meeting of the shareholders, which the Shareholders’ Committee believes is scheduled for May 25,1989, by proposing a slate of directors in opposition to management’s slate and by taking such other steps as the Shareholders’ Committee considers appropriate.
Id.
at 6-7. No reasonable shareholder or investor could have any doubt about the intentions of the Committee after reading this statement. IBC was thus placed on notice at the time of the filing of the Original Schedule 13D (March 27, 1989) that the Committee intended to seek a change in corporate control. To the extent that the statement concerning the Committee’s pri- or intent is inaccurate (and material), legal remedies are adequate to rectify any harm that might have occurred,
see Standard Metals Corp.,
503 F.Supp at 602, and proper relief on these facts would be a curative disclosure, not a preliminary injunction.
Rondeau,
Plaintiff further contends that defendants’ original Schedule 13D was misleading for failure to state in Item 2 that Muller was the subject of two related SEC enforcement actions (defendants listed one case and claimed the other was a “companion action”), for falsely describing in Item 3 the source of defendant Kurosawa’s funds (his funds were listed as corporate rather than personal), and for claiming in Item 6 that Muller was a “Consultant” (rather than the prime motivator behind defendants’ plan). The Court finds that these minor misstatements have not caused the type of harm that only equity could redress or prevent, see Universal Container Corp, [1977-78 Transfer Binder] Fed.Sec.L.Rep. (CCH) at 92,257, and have been cured through subsequent disclosures.
Plaintiff also contends that irreparable harm will result from the Committee’s continued failure to disclose the statutorily required information.
See General Aircraft Corp. v. Lampert,
Therefore, plaintiff has not shown that defendants’ possible violations of Section 13(d) justify the broad based injunctive relief sought.
c) Section H(a)
Plaintiff also argues that defendants’ alleged violations of section 14(a) of
Plaintiff first contends that the Committee members belatedly filed their Schedules 14B because more than 10 people were solicited by Muller and others acting in concert with him bеfore the March 28, 1989 filing of their original Schedules 14B. 9 By plaintiffs own count, however, plaintiff only has “hard evidence of ... 10 people who were solicited,” Hearing at 76, and suggests just two other possible solicitees by name. Id. Plaintiff has thus, by its own admission, failed to meet its burden of showing that more than 10 people were solicited; the extreme remedy of injunctive relief is not appropriate.
Moreover, there has also been no showing that anyone has been misled by defendants’ activities. As stated by Judge Conner in Pantry Pride,
The purpose of court-sanctioned enforcement of nonsolicitation provisions is not to frustrate shareholders who wish to exercise their franchise in favor of a proposed change in management, but rather, to ensure that adequate information is disclosed.
Plaintiff next alleges that defendants have filed false and misleading Schedules 14B. As discussed in connection with the alleged false and misleading statеments contained in defendants’ Schedule 13D, the Court finds that any possible misstatements have been cured by the amended filings, the voluminous discovery, and the ample time for plaintiff to communicate its message to its shareholders.
In conclusion, because plaintiff has not demonstrated that defendants’ possibly material omissions and misstatements cannot be cured by full disclosure or that defendant is engaged in a continued practice of non-disclosure, the Court finds that plaintiff has not shown that it will suffer irreparable harm unless the broad relief it seeks is granted. Thus, plaintiff’s motion for a preliminary injunction is denied.
2. Defendants’ Motion for a Preliminary Injunction
Defendants seek to enjoin enforcement of a recently enacted IBC by-law (“the By-law”), which requires,
inter alia,
that slates of proposed directors be filed with IBC's Board of Directors no later than 45 days prior to an annual meeting.
10
The
a) Irreparable Harm,
Courts have consistently found that corporate management subjects shareholders to irreparable harm by denying them the right to vote their shares or unnecessarily frustrating them in their attempt to obtain representation on the board of directors.
See Danaher Corporation v. Chicago Pneumatic Tool Co.,
No. 86 Civ. 3499 (PNL) slip op.,
b) Success on the Merits
Defendants first argue that the By-law is invalid under New York common law because it was enacted fоr the sole purpose of entrenching management. In
Schnell v. Chris Craft Industries, Inc.,
In
Lerman v. Diagnostic Data, Inc.,
Plaintiff argues that notwithstanding the narrow exception in the above cases, the business judgment rule protects the Board’s decision to enact the By-law from judicial scrutiny.
See Auerbach v. Bennett,
[the] cases are clear, that the by-law must be sustained even on this hypothesis where one purpose is bad provided it was not the sole or the predominant purpose and that the — there were other valid corporate reasons for the action.
Hearing at 43. Plaintiff goes so far as to claim that the Board could have properly precluded nominations at 1989 annual meeting altogether by adopting a 60 day advance notice by-law (58 days before the meeting), but they chose not to. Memorаndum of Law In Opposition to [the Committee’s] Motion for a Preliminary Injunction at 19-20.
In support of its argument that the business judgment rule protects this action from scrutiny, plaintiff cites
American International Rent A Car, Inc. v. Cross,
9 Del.J.Corp.L. 144,
Plaintiff also cites Huffington v. Enstar Corp., 9 Del.J.Corp.L. 185 (Del.Ch.1984), where the court refused to enjoin a board of directors from postponing a shareholders’ meeting at which the directors were up for reeleetion. Huffington, however, found that Schnell and Lerman were not applicable because
[t]he Plaintiffs are not being forced to prepare their proxy contest so hastily that they are denied sufficient time to effectively preparе for the contest. Furthermore, they are not being denied the opportunity to vote or to participate in the annual meeting. They are given more time to prepare for it. The patent conclusion, therefore, is that this is not a Schnell or Lerman situation.
Huffington, 9 Del.J.Corp.L. at 190 (emphasis added). Huffington thus does not assist plaintiff here because IBC significantly shortened the amount of time defendants had to prepare for the annual meeting.
Finally, IBC cites one case that upheld the validity of a similar by-law amendment.
Nomad Acquisition Corp. v. Damon Corp.,
C.A. no. 10173, slip op.,
The Court concludes that under the circumstances presented here, the directors cannot seek refuge in the business judgment doctrine. The record now before the Court suggests that the corporate board members breached their fiduciary duty of care by adopting without careful consideration a provision which drastically shortened the amount of time defendants had to prepare for the proxy contest. As stated by the Second Circuit:
the exercise of fiduciary duties by a corporation board member includes more than avoiding fraud, bad faith and self-dealing. Directors must exercise their ‘honest judgment in the lawful and legitimate furtherance of corporate purposes,’ Auerbach,419 N.Y.S.2d at 926 [,393 N.E.2d at 1000 ]. It is not enough that directors merely be disinterested and thus not disposed to self-dealing or other indicia of a breach of the duty of loyalty. Directors are also held to a standard of due care. They must meet this standard with a ‘conscientious fairness,’ [citation omitted]. For example, where their ‘methodologies and procedures’ are so restricted in scope, so shallow in execution, or otherwise so pro forma or halfheartеd as to constitute a pretext or sham, then inquiry into their acts is not shielded by the business judgment rule.
Hanson Trust PLC v. ML SCM Acquisition, Inc.,
Here, the IBC directors enacted the Bylaw less than 24 hours after receiving the Committee's Schedule 13D, Handler Aff. at Ex. S, and only 58 days before the previously scheduled annual meeting. Eugene Jonas, the Executive Vice President of IBC and a member of the Board, testified that it was his idea to adopt the By-law, Id. at 115, but he also stated that before he received the Schedule 13D the day before the board meeting, he had never even considered amending the by-laws with an advance notice provision. Id. at 113. Furthermore, Jonas testified that the purpose of the Bylaw was to disseminate nominee information to the shareholders, but he acknowledged that the By-law did not even require the Board to distribute the information supplied by the Committee. Id. at 123.
Neither Edward H. Weitzen, the President of IBC, Jonas, nor four of the directors who attended the March 28, 1989 Board meeting could recollect any specific discussion or questions about the By-law following the presentation by Jonas. Weitzen at 122-123, Jonas at 200-201, Keith at 52-53, Rosenthal at 11-13, Glass at 59-60, Askanase at 61-63. In fact, the directors testified that the actual language of the By-law language had not even been prepared when the vote was taken. Weitzen at 122, Askanase at 66-68, Keith at 55, Rosenthal at 11, Glass at 60.
The Board thus breached its duty of care owed to all shareholders — a duly not excused even by the perceived need to take fast action when threatened by a hostile takeover.
Norlin Corp. v. Rooney, Pace Inc.,
The Court also finds that there is a substantial likelihood that the Committee will succeed at trial in showing that the Board’s primary motivation for adopting the By-law was entrenchment. Under New York law, once a plaintiff has met its initial burden of showing that the directors breached their fiduciary duty of care, the burden of justifying a defensive takeover tactic shifts to
In this case, IBC has not overcome the Committee’s
prima facie
showing that the Board’s adoption of the By-law was done primarily to entrench management.
See Minstar Acquiring Corp. v. AMF, Inc.,
Moreover, plaintiff has not met its burden of justifying a defensive takeover tactic by a showing of good faith and reasonable investigation.
See Unocal Corp.,
The Court rejects plaintiff’s contention made during oral argument that the Court must uphold IBC’s by-law if it was enacted for mixed purposes. According to plaintiff’s counsel,
[i]n short, this hypothesis leads to a bylaw offered for mixed motives. Again, cases are clear, that the bylaw must be sustained even on this hypothesis where one purpose is bad provided it was not the sole or the predominant 12 purpose and that the — there were other valid corporate reasons for the action.
Hearing at 43 (citing the Seventh Circuit decisions in
Panter v. Marshall Field & Co.,
The Court first notes that
Panter, Treco,
and
Unocal
do not protect all defensive tactics employed for mixed purposes. That the directors of IBC may have been motivated, in part, by “good” motives does not save the By-law if their “primary” reason was to protect their jobs. Secondly, plain
[t]he restriction placed upon a selective stock repurchase is that the directors may not have acted solely or primarily out of a desire to perpetuate themselves in office. See Cheff.... Of course, to this is added the further caveat that inequitable action may not be taken under the guise of law. [citing Schnell ] ... The standard of proof established in Cheff v. Mathes ... is designed to ensure that a defensive measure to thwart or impede a takeover is indeed motivated by a good faith concern for the welfare of the corporation and its stockholders, which in all circumstances must be free of any fraud or other misconduct. Cheff v. Mathes,199 A.2d at 554-55 .
Unocal
also does not support plaintiffs position because the Board members here did not conduct a “reasonable investigation” before implementing a defensive measure.
See
The Court thus finds that there is a substantial likelihood that IBC enacted the By-law primarily to frustrate the vote of dissident shareholders, and that a temporary injunction against its enforcement is appropriate.
See Schnell,
c) Balance of Hardships
There is also a second ground for enjoining the enforcement of the By-law. Defendants have made a strong showing that compliance with the By-law would have violated at least the spirit of federal securities regulations. The By-law requires the submission to the Board of, inter alia,
(d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the prоxy rules of the Securities and Exchange Commission.
Harper Aff. at Ex. A. The Court finds this portion of the By-law ambiguous. It is unclear whether, to comply, the Committee was required to submit to the Board the information included in (1) the preliminary proxy materials filed with the SEC 13 , or (2) the proxy materials as finally approved by the SEC.
Here, the Committee could not have given the Board the latter (the information included in the finally-SEC-approved proxy statement) 45 days before the annual meeting. The By-law was adopted 58 days before the annual meeting. This would have allowed the Committee only 13 days to prepare their proxy materials and submit them for, at minimum, a 10 day SEC review process. 14 Even if the SEC approved the Committee’s materials as submitted, the Board did not contend that 3 days was sufficient time for the Committee to prepare their proxies. See Jonas at 114 ("I felt [45 days] would give everyone 13 days for you to prepare your slate and that should be sufficient time since we already had our slate”).
If the By-law requires instead the former (the information included in the draft proxy statement filed with the SEC), the By-law would violate the spirit of the SEC regulation that denies public access to preliminary materiаls filed with the SEC. 15
the alternative would be for the insurgents to apply to this Court for a ruling that would prohibit the board from relying upon the difference, if any, between the initial submission under the bylaw and the final proxy as issued after SEC review.
Hearing at 45.
Nеither party has submitted authority to the Court that specifically discusses defendants’ contention that compliance with the By-law would constitute a violation of the securities laws. While Nomad preliminarily refused to strike language similar to that at issue here, this apparently novel argument was not raised in that decision.
The Court finds the By-law language ambiguous and possibly subject to the interpretation that defendants suggest. The Court is also concerned about the possible misuse by IBC of preliminary proxy material procured prior to SEC approval and does not believe, as an equitable matter, that the Committee was obligated, as IBC suggests, to seek prophylactic relief against misuse of the By-law rather than moving to enjoin its enforcement. The Court thus finds that the Committee has demonstrated sufficiently fair questions going to the merits to make them a fair ground for litigation. Moreover, because the By-law has the possible effect of either precluding the Committee from submitting their slate to the shareholders altogether or forcing them to prepare their materials within an inadequate amount of time, the Court finds a balance of hardships tipping decidedly towаrd the defendants. Therefore, a preliminary injunction is appropriate to prevent the enforcement of this By-law.
3. Defendants’ Motion to Enjoin Plaintiff from Violating the Proxy Solicitation Rules
Defendants also seek a preliminary injunction enjoining plaintiff from violating the proxy rules. Defendants maintain that IBC violated section 14(a) of the 1934 Act and Rule 14a-9 by distributing a press release concerning defendant Muller following the filing of this suit. Defendants have not shown either that the Company’s press release was false or misleading or that irreparable harm will result if this injunction is not entered. The motion is therefore denied.
CONCLUSION
For the reasons stated above, plaintiff's motion for a preliminary injunction and for declaratory relief is denied; defendants’ motion to enjoin enforcement of IBC’s advance notice By-law is granted. Defendants’ motion to enjoin plaintiff from disseminating false and misleading proxy materials is denied.
SO ORDERED.
Notes
. For purposes of this Opinion, the plaintiff in Action No. 1 and the defendants in Action No. 2 are referred to hereinafter as "plaintiff’; the defendants in Action No. 1 and plaintiff in Action No. 2 are referred to hereinafter as “defendants.” By Order of April 19, 1989, these two аctions were consolidated before this Court.
. The Court gave both parties the option of presenting live testimony before the Court. Neither party chose to do so.
. Hereinafter, references to deposition testimony of all witnesses will be referred to by the last name of the witness followed by the transcript page number.
.Dorian owns approximately 50 percent of Admiral, and owns approximately 16 percent of the shares of defendant Double Helix Films, Inc.
. As of April 24, 1989, Mr. Kurosawa had not been served with process in this action.
. Because the record presently before the Court is incomplete and discovery is on-going, and because determination of several factual issues must await the Court’s assessment of the credibility of witnesses who have not appeared before the Court (and in some cases, have not yet been deposed), the Court is not prepared to make detailed findings of fact at this time. In deciding these motions, however, the Court has drawn certain inferences from those facts that are undisputed and has assumed other facts as true for purposes of assessing the possible irreparable hаrm to both parties.
On April 26, two days after the conclusion of the hearing in this matter, plaintiff sought to submit to the Court voluminous additional materials, including affidavits, deposition transcripts and legal memoranda. Defendants shortly thereafter requested an opportunity to respond to these additional submissions. In a telephone conference with the parties on April 27, 1989, the Court ruled that in order to issue an expedited decision (as both parties requested), the Court would not accept these additional submissions. This Opinion is thus based on the record as of April 24, 1989.
. Defendants filed their original Schedule 13D on Monday, March 27, 1989, ten days from March 15, 1989 (the tenth day fell on the weekend). Defendants reached the 5 percent threshold on March 9, 1989. Ten days from March 9, 1989 is March 20, 1989.
. Plaintiffs counsel requested that the Court not even consider adjourning the annual meeting. Telephonic conference of April 27, 1989.
. Because Schedules 14B were first filed for members of the Committee on March 28, 1989, any "solicitations" made prior to April 4, 1989 (five days after the filing) would be in violation of Rule 14-11(a).
. The full text of Section 9 of IBC's by-law reads:
SECTION 9. Nominations. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of Directors shall be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of Directors generally. However, any stockholder entitled to vote in the election of Directors generally may nominate one or more persons for election as Directors at a meeting only if written notice of such stockholder’s intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, 45 days in advance of such meeting, and (ii) with respect to an election to be held as a special meeting of stockholders for the election of Directors, the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice from thestockholder to the Secretary shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent o each nominee to serve as a Director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing рrocedure.
See Harper Affidavit, Ex. A (emphasis added).
. This Court entered a Temporary Restraining Order enjoining the enforcement of the by-law on April 7, 1989. The TRO was extended by order of the Court on April 19, 1989.
. The Court notes that the cases cited by plaintiff use the words "primary purpose."
. Rule 14a-6 promulgated under Regulation 14A of the 1934 Act (17 C.F.R. § 240.14a-9) of the proxy solicitation regulations requires that all preliminary proxy materials be filed with the SEC at least 10 days prior to their dissemination to shareholders. The purpose of this regulation is to permit the SEC to review and approve the materials prior to their dissemination to shareholders.
. The review process frequently takes longer than 10 days because the SEC recommends changes which must then be resubmitted and reviewed.
. 17 C.F.R. ¶ 240.14a-6(f) provides:
(f) Public Availability of Information
All copies of preliminary materials filed pursuant to this Regulation shall be clearly marked "Preliminary Copies," shall be for the information of the Commission only and shall not be deemed available for public inspection until definitive material has been filed with the Commission except that such material may be disclosed to any department or agency of the United States government and to the congress, and the Commission may take such inquiries or investigation regard to the material as may be necessary for an adequate review thereof by the Commission.