Count I of the complaint alleges that on December 31, 1973, and January 2, 1974, the defendants, Arthur Epstein and Paul Epstein (hereinafter "Epstein defendants"), their families and trusts for their benefit, owned a total of 144,238 shares of Epko common stock, which on those dates they sold to the defendant K B Marketing Systems, Inc. at a price of $9.06 per share pursuant to an agreement executed March 28, 1973, and amended on December 31, 1973. Plaintiff further alleges that the price was in fact in excess of $9.06 per share because as a condition to the purchase agreement, the Epstein defendants entered into employment and consulting contracts with Epko. Also, pursuant to said agreement (hereinafter called the "Epstein Agreement"), defendant K B Marketing Systems, Inc. was required to offer to all shareholders of Epko, for a period of 30 days, the right to exchange each Epko common share for a security of K B Marketing Systems, Inc., which in the opinion of an investment banking firm, was the economic equivalent of the terms and conditions under which the Epko shares were purchased from the Epstein defendants.
Pursuant to this agreement, K B Marketing Systems, Inc., on May 1, 1974, made a tender offer to all shareholders of Epko common stock (except K B Marketing Systems, Inc.) of one share of K B Marketing Systems, Inc. Series A -- non-voting preferred stock for each share of Epko common. The preferred stock has a $10 preference over common shares in liquidation, is redeemable at any time at a price of $10 per share, and is convertible after June 1, 1974 into one-half share of K B Marketing Systems, Inc. common.
Count II of the complaint incorporates all of the allegations of Count I and invokes pendent jurisdiction for what appears to be a claim for breach of fiduciary duty.
Under Count I of the complaint plaintiff alleges that the prospectus for the tender offer is materially false and misleading, claiming jurisdiction under Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, as amended (hereinafter "the Act"), 15 U.S.C. §§ 78j(b) and 78n(e).
Specifically, plaintiff puts forth two grounds for this allegation. First that the Epstein defendants received more than $9.06 per share by virtue of the consulting contracts which were a part of the agreement (complaint, paragraph 17), and secondly that the prospectus represents that the K B Marketing Systems, Inc. offer is the "economic equivalent" of $9.06 per share, when in fact it is worth substantially less (complaint, paragraph 16).
STANDING UNDER § 14(e) AND § 10(b) OF THE ACT
Defendants first argue that the plaintiff as a nontendering shareholder does not have standing to challenge the tender offer, since he was neither a purchaser or seller of Epko stock during the period of the tender offer. Defendants' argument is based on the purchaser-seller rule announced in the case of BIRNBAUM v. NEWPORT STEEL CORP., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952). However, this ruling was made in an action brought under § 10(b) of the Act. In 1968, Congress amended the Act
by adding § 14(e) which specifically deals with tender offers. The overriding purpose of § 14(e) is the protection of the investor. H. K. PORTER CO., INC. v. NICHOLSON FILE CO., 482 F.2d 421 (1st Cir. 1973); RONSON CORP. v. LIQUIFIN AKTIENGESELLSCHAFT, 370 F. Supp. 597 (D. N.J. 1974), aff'd, 497 F.2d 394 (3d Cir. 1974). By not using the words "purchase or sale" as used in § 10(b) of the Act it appears that one of the goals of § 14(e) was to eliminate the purchase and sale requirement in the tender offer situation. See Cash Tender Offers, 83 Harv. L. Rev. 377 (1969). The Court of Appeals for the Second Circuit in the case of ELECTRONIC SPECIALTY CO. v. INTERNATIONAL CONTROLS CORP., 409 F.2d 937 (2d Cir. 1969) announced its intention to hold that a nontendering shareholder does have standing under § 14(e) to challenge a tender offer. To hold otherwise it would be clearly contrary to the legislative purpose of protection of the investor. Plaintiff's standing also includes an action for damages not just injunctive relief. CHRIS-CRAFT INDUSTRIES, INC. v. PIPER AIRCRAFT CORP., 480 F.2d 341 (2d Cir. 1973), cert denied, 414 U.S. 910, 38 L. Ed. 2d 148, 94 S. Ct. 231, 94 S. Ct. 232; H. K. PORTER CO., INC. v. NICHOLSON FILE CO., supra ; DYER v. EASTERN TRUST AND BANKING CO., 336 F. Supp. 890 (D. Me. 1971); See Also EMMI v. FIRST-MANUFACTURERS NATIONAL BANK OF LEWISTOWN & AUBURN, 336 F. Supp. 629 (D. Maine 1971). The fact that the tender offer has now been completed cannot be allowed to preclude all relief for violation of the securities law. CRANE CO. v. WESTINGHOUSE AIRBRAKE CO., 419 F.2d 787 (2d Cir. 1969), cert denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41. There may be various forms of relief which are appropriate in this case. We will not at this early point in the case hold that one particular type of relief is inappropriate or not available to plaintiff.
In light of our holding with respect to plaintiff's standing under § 14(e), we need not decide the issue of plaintiff's standing under § 10(b) of the Act. Suffice it to say that at least as to injunctive relief it appears that plaintiff would also have standing under § 10(b). KAHAN v. ROSENSTIEL, 424 F.2d 161 (3d Cir. 1970), cert denied, 398 U.S. 950, 90 S. Ct. 1870, 26 L. Ed. 2d 290 (1970). Defendants argue that there can be no injunctive relief because the tender offer and exchange have now been consummated. As stated earlier, this is not the law. See e.g. CRANE CO. v. WESTINGHOUSE AIRBRAKE CO., supra.
RELIANCE IN § 14(e) ACTION BY NONTENDERING SHAREHOLDER
Defendant further argues that since plaintiff did not tender his shares, he could not have relied on any alleged misrepresentation. This argument was ably dealt with by the Court of Appeals of the Second Circuit in the case of CRANE CO. v. WESTINGHOUSE AIRBRAKE CO., supra, where the court stated at 419 F.2d, page 797:
". . . reliance is an element of causation which plays little role in nondisclosure cases. As we pointed out in List [ List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir. 1965), cert denied, 382 U.S. 811, 86 S. Ct. 23, 15 L. Ed. 2d 60 (1965)], 'the test of 'reliance' is whether 'the misrepresentation is a substantial factor in determining the course of conduct which results in [the plaintiff's] loss.' . .. The reason for this requirement . .. is to certify that the conduct of the defendant actually caused the plaintiff's injury,' since a 'basic . . . element of tort law' is 'the principle of causation in fact.' 340 F.2d at 462, 463."