On Appeal From the United States District Court For the District of Delaware (D.C. Civil Action No. 88-424).
Gibbons, Chief Judge, and Stapleton, and Weis, Circuit Judges.
STAPLETON, Circuit Judge:
This suit was instituted by City Capital Associates Limited Partnership (City Capital) seeking preliminary and permanent injunctive relief against Interco Incorporated (Interco), and certain Delaware officials to foreclose application of Section 203 of the General Corporation Law of Delaware, Del. Code Ann. Tit. 8, § 203 (1987), to City Capital's tender for Interco stock. Interco counterclaimed alleging violations of the Williams Act. The district court denied Interco's motion for a preliminary injunction on its counterclaim and this appeal followed. The appeal raises only a single Williams Act issue.
Interco, formerly known as International Shoe Company, is a St. Louis business with total assets of approximately $2 billion and a shareholder's equity of $1.2 billion dollars. The company is listed on the New York and Midwest Stock Exchanges and has 36 million shares outstanding. City Capital is a partnership owned by two limited partners who each have a one (1%) percent interest and two general partners, City GP I, Inc. (City GP I) and City GP II, Inc. (City GP II) which each own forty-nine (49%) percent. Steven M. Rales is the sole stockholder of City GP I and his brother, Mitchell P. Rales, is the sole stockholder in City GP II. City Capital owns 100% of Cardinal Holdings Corporation (Holdings) which in turn owns 100% of Cardinal Acquisition Corp. (Acquisition), the entity that is making the tender offer for Interco stock. Acquisition was organized by City Capital as a vehicle for the acquisition of Interco stock.
On July 18, 1988, City Capital, City GP I, City GP II, Steven Rales and Mitchell Rales filed a Schedule 13D with the Securities and Exchange Commission advising that City Capital had acquired 8.10 percent of Interco stock. On July 27, 1988, City Capital proposed a friendly merger with Interco at $64 per share and on August 8, 1988, increased the offer to $70 per share. Interco's Board of Directors, maintaining that the company's shares were fairly valued at $76 each, rejected the merger offer. On August 15, 1988, Acquisition, Holdings, City Capital, City GP I, City GP II, Steven Rales and Mitchell Rales filed a Schedule 13D and a Schedule 14D-1 notifying the SEC of a hostile takeover bid for Interco shares to be made by Acquisition as the "bidder," at $70. This tender offer commenced on August 15, 1988. The bid price has since been increased to $72.
The tender materials disclose that $2.6 billion in financing will be required to consummate the tender offer. It is expected that $1.225 billion will be borrowed from a syndicate of banks led by Chase National Bank (Chase). Drexel Burnham Lambert, Inc. (Drexel) has been engaged to raise the remaining $1.375 billion through the sale of preferred securities of Acquisition. Acquisition's obligation to purchase tendered shares is conditioned, among other things, upon the tender of a sufficient number of shares which, when added to the Interco shares owned by City Capital, will constitute 75% of the outstanding Interco stock. If the tender is successful it is expected that Interco will be combined with Acquisition or one of its affiliates in a merger in which each share of Interco, other than shares owned by Acquisition or its affiliates or by Interco stockholders who have perfected their appraisal rights, will be cashed out for an amount equal to the price paid in the tender offer. While preferred and common stock of Acquisition will be issued in connection with the financing of the offer, City Capital will retain a minimum of 63% of the common stock of Acquisition, through Holdings or otherwise, and thus will remain in control of Acquisition.
The tender materials also disclose the consideration to be received by Drexel for its services as financial adviser and dealer manager. City Capital agreed to make available to Drexel or its designees between 29% and 36% of the common equity of Acquisition, depending upon the amount of preferred stock Drexel is asked to sell. The right to place the common equity was sought by Drexel so that it could offer common equity as a "sweetener" to prospective purchasers in order to encourage them to purchase the preferred securities that Drexel has undertaken to place. However, Drexel has the right to keep for itself up to one-half of the 36%. Drexel is under no obligation to purchase any equity interest in Acquisition.*fn1 In connection with the placement of the preferred stock, Drexel is also entitled to a $12 million fee if the takeover is successful and a $6 million fee if it is not. Further, Drexel is promised a 1.125% fee for funds for which it secures written commitments, and 3 percent to 5.25 percent of the total gross proceeds from the sale of debt or equity securities it underwrites. In addition, Drexel is to receive a $2 million fee for performing exclusive financial adviser services and is to receive $1 million for acting as dealer manager. Finally, Drexel has the right to 15% of profits the Rales brothers make in the event that acquired shares are sold following an unsuccessful takeover.
The tender materials further disclosed that Drexel has received subpoenas from a grand jury investigation in New York and is the subject of an impending SEC civil enforcement action.
On September 9, 1988, Interco filed a counterclaim alleging that the tender offer violated the Williams Act and the regulations thereunder in that (1) the tender materials failed to disclose that the proposed transaction would violate the margin requirements because the "preferred" stock is in reality debt, (2) those materials also failed to disclose that the transaction would violate the Hart-Scott Act, and (3) both Drexel and Chase were "bidders", as that concept is employed in the Williams Act regulations, and both had failed to make the filings and disclosures required of "bidders" under those regulations. Interco stockholders were advised of the filing of this counterclaim and of these contentions in supplemental tender materials.
Discovery concerning the tender offer, including depositions of the Drexel personnel involved in the tender, was conducted prior to the September 16, 1988 presentation of Interco's motion for a preliminary injunction to the district court and numerous affidavits, documentary exhibits and deposition excerpts were submitted supporting and opposing that motion. On September 23, 1988, the district court filed its opinion finding that Interco had failed to show a likelihood of success on any of its contentions. In particular, the district court concluded that neither Drexel nor Chase was a "bidder."
On October 3, 1988, Interco appealed from the order denying its motion for a preliminary injunction. We expedited consideration of the appeal and heard argument October 11, 1988. Before us, Interco contends only that Drexel is a "bidder" and that, accordingly, the tender offer has been made in violation of the applicable Williams Act regulations. 17 C.F.R. § 240.14d-1 to § 240.14d-101 (1987).
We agree with Interco that the Williams Act was intended to require one making a tender offer of the requisite size to disclose all information material to decisions about the tender. However, there is no dispute that in connection with the tender offer giving rise to this case, Acquisition, Holdings, City Capital, City GP I, City GP II, Steven M. Rales and Mitchell P. Rales filed a timely and complete Schedule 14D-1 as "reporting persons."*fn2 Despite Interco's access to the documents, employees, and agents of both these entities and Drexel, it has been unable to point to any material misrepresentation or material omission in these filings.*fn3 In particular, Interco can point to no material misrepresentation or omission about the role of Drexel in the proposed transaction. As a result, it is forced to argue that Drexel is a "bidder" as that term is used in the regulations adopted under Section 14D and that the Schedule 14D filing is deficient because it includes no Drexel financials. In support of this contention, Interco cites the evidence indicating that Drexel will be paid very substantial fees for services rendered in connection with the tender offer and will receive for itself and its designees the right to purchase between 29% and 36% of the common equity of the corporation that will purchase the tendered stock. In our view, the former evidence is irrelevant to the "bidder" issue and the latter is insufficient to make Drexel a "bidder."
The undisputed facts of record indicate that the Rales brothers decided to make a tender for Interco stock and, in fact, made an offer at $64 per share before engaging the services of Drexel.*fn4 While the Rales subsequently enlisted Drexel's assistance and agreed to pay its substantial fees and grant it the above-referenced option, there is no indication that the Rales relinquished to Drexel any control over the tender offer. Moreover, it is undisputed that City Capital will retain at least 63% of the common stock of the purchased of the tendered shares and there is no evidence that Drexel is to have any role with respect to the purchased other than that of an investor.*fn5 Accordingly, the legal issue presented is whether the filing by the Rales brothers and their related entities of a Schedule 14D, both complete and accurate from their perspective, satisfied the disclosure requirements of the Act or whether a person who will hold a minority investment position in the surviving entity must also file a similar schedule, viewing itself as an additional "bidder."
Before turning to this issue it is important to stress two considerations that must guide our analysis. First, the Securities and Exchange Commission has been entrusted by Congress with the interpretation, administration, and enforcement of the Securities Acts. As a result, we must defer to its interpretation of the Williams Act and the regulations thereunder unless we are prepared to say there is a conflict between those interpretations and the Congressional mandate. Securities & Exchange Commission v. Chenery Corporation, 332 U.S. 194, 91 L. Ed. 1995, 67 S. Ct. 1575 (1947); Chevron, U.S.A. v. Natural Res. Def. Counsel, 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984). Second, this is an area of the law in which predictability is of crucial importance. The regulations are provided for the guidance of those seeking to comply with the law and it would be a serious mistake to reach a result in this case of which the regulations do ...