On Appeal from the District of Delaware, D.C. Civil No. 88-00525
Becker, Hutchinson and Cowen, Circuit Judges.
This is an appeal by Polaroid Corporation ("Polaroid") from an order of the district court denying Polaroid's motion for a preliminary injunction against a tender offer for Polaroid stock which, if successful, would vest control of Polaroid in interests controlled by appellees Roy and Patricia Disney. The appeal presents the first impression question of the standing of a target company to assert a violation of the Security and Exchange Commission's All Holders Rule, 17 C.F.R. § 249.14d-10(a) (1987). It also raises the question whether the Disney interests violated section 14(e) of the Williams Act, 15 U.S.C. § 78n(e) (1982), by making misrepresentations concerning whether their tender offer complied with Federal Reserve Board margin regulations limiting the use of debt securities by shell corporations to finance corporate takeovers.
For the reasons that follow, we hold that Polaroid does not have standing to raise a claim under the All Holders Rule and will therefore affirm the district court's refusal to grant a preliminary injunction on the basis of Polaroid's All Holders Rule claim. We also hold, however, that Polaroid has demonstrated a reasonable probability of success on the merits of its section 14(e) misrepresentation claim; that Polaroid's shareholders will be irreparably harmed absent relief; and that Polaroid has otherwise met its burden of demonstrating the need for a preliminary injunction. We will therefore reverse the district court's refusal to grant injunctive relief on this basis and remand for further proceedings.
I. FACTS AND PROCEDURAL HISTORY
On September 9, 1988, Shamrock Acquisition III, Inc. ("Shamrock") commenced a $2.6 billion cash tender offer ("Offer") for all outstanding common shares of Polaroid at $42 per share, excluding shares held by Polaroid's Employee Stock Ownership Plan ("ESOP"). Shamrock, the acquisition entity, is wholly owned by Emerald Isle Associates, L.P. ("Emerald"). Emerald's general partner is Shamrock Capital Investors III, Inc., which is wholly owned by Shamrock Holdings of California, Inc., which is in turn wholly owned by Shamrock Holdings, Inc. Shamrock Holdings, Inc. is controlled by Roy E. Disney and Patricia A. Disney.
For our purposes, the critical facet of Shamrock's Offer is that it is expressly conditioned on satisfaction of several conditions, including that: (1) at least 90% of the outstanding shares be tendered, excluding the ESOP shares ("Minimum Condition"); and (2) the issuance of stock to the Polaroid ESOP be "invalidated or rescinded pursuant to a final judicial determination or the Purchaser [Shamrock] otherwise being satisfied that the ESOP Shares are not validly outstanding" ("ESOP Condition"). The Offer also states that if the ESOP Condition is not satisfied prior to the expiration of the Offer, or if Shamrock determines, in its sole discretion, that the ESOP Condition cannot timely be satisfied, Shamrock "currently intends to amend the Offer" so as to: (1) waive the ESOP Condition; (2) reduce the tender offer price to $40 per share; and (3) adjust the number of shares required to satisfy the Minimum Condition to take into account the additional ESOP shares.
While Shamrock maintains that the ESOP Shares are invalid, it has presented no evidence in this case to substantiate that claim. Rather, Shamrock rests on its description of a suit it filed against Polaroid in the Delaware Chancery Court on July 20, 1988. In that suit, Shamrock has alleged that the ESOP was adopted by Polaroid's directors
in violation of their fiduciary duties to the company's public stockholders in that, among other things, (i) the . . . ESOP was hastily adopted with the primary and improper purpose of entrenching incumbent management and without due consideration or investigation of the facts; and (ii) the . . . ESOP was an unreasonable response to Shamrock's expressions of interest in meeting with Polaroid on a friendly basis.
Appellee's Brief at 8. The trial in that action began on October 19, 1988; scheduling difficulties have prevented its completion to date.
Polaroid brought the instant action for a preliminary injunction on September 20, 1988. Polaroid alleged, inter alia, that Shamrock's exclusion of the Polaroid ESOP shares from its tender offer violated the All Holders Rule, 17 C.F.R. § 240.14d-10(a), and that Shamrock's disclosure regarding its compliance with Federal Reserve Board margin regulations violated the anti-fraud provision of the Williams Act, section 14(e), 15 U.S.C. § 78n(e).*fn1 Named as defendants were Roy and Patricia Disney; Shamrock; Shamrock's president, Stanley P. Gold; Emerald; Shamrock Capital Investors III, Inc.; Shamrock Holdings of California, Inc.; and Shamrock Holdings, Inc. After expedited discovery and a hearing, the district court, for reasons set forth below, denied Polaroid's motion for a preliminary injunction. Polaroid Corp. v. Disney, 698 F. Supp. 1169 (D.Del. 1988). Polaroid immediately appealed and moved for an injunction pending appeal. We reserved ruling on the motion and expedited the appeal, hearing argument on October 27, 1988.
Shamrock's Offer was originally set to expire on October 6, 1988, unless extended. On September 30, Shamrock extended its Offer until October 17. On October 14, after the District Court's decision, Shamrock further extended its Offer until October 27. On October 24, Shamrock again extended its Offer until November 7. And on October 31, Shamrock extended its Offer until November 17. In its October 31 press release, Shamrock stated its intentions as follows:
The trial in the litigation brought by Shamrock against Polaroid in Delaware Chancery Court challenging Polaroid's recently adopted ESOP is scheduled to resume on Thursday, November 3, 1988, and the last trial date in that litigation is scheduled for Thursday, November 10. Accordingly, Shamrock intends to extend the offer at least until the Chancery Court renders a decision in that litigation.
On November 14, Shamrock further extended its Offer until November 28.
In reviewing the denial of a preliminary injunction, we must affirm the order of the district court "unless the court abused its discretion, committed an error of law, or seriously misjudged the evidence." Eli Lilly & Co. v. Premo Pharmaceutical Laboratories, Inc., 630 F.2d 120, 136 (3d Cir.), cert. denied, 449 U.S. 1014, 66 L. Ed. 2d 473, 101 S. Ct. 573 (1980). The party seeking the preliminary injunction has the burden of showing
(1) a reasonable probability of eventual success in the litigation and (2) that the movant will be irreparably injured pendente lite if relief is not granted. . . . While the burden rests upon the moving party to make these two requisite showings, the district court "should take into account, when they are relevant, (3) the possibility of harm to other interested persons from the grant or denial of the injunction, and (4) the public interest."
Id. (quoting Constructors Association of Western Pennsylvania v. Kreps, 573 F.2d 811, 814-15 (3d Cir. 1978)).
Of the three issues that Polaroid presses on appeal, we confine our plenary discussion to the All Holders and misrepresentation issues.*fn2
The All Holders Rule states that a bidder's tender offer must be open to "all security holders of the class of securities subject to the tender offer." 17 C.F.R. § 240.14d-10(a). The SEC promulgated the Rule to ensure "fair and equal treatment of all holders of the class of securities that is the subject of a tender offer." Amendments to Tender Offer Rules: All-Holders and Best-Price, 51 Fed. Reg. 25,873, 25,874 (July 17, 1986). The Rule was responsive to the situation which gave rise to the litigation in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 949 (Del. 1985), in which the Delaware Supreme Court upheld the power of a corporation to effect a self-tender for its shares which excluded shares of a minority shareholder who was attempting to take over the corporation.
Polaroid argues that Shamrock's tender offer violates the Rule because it is not open to all holders of Polaroid common stock; the Polaroid ESOP is a holder (of 9.7 million shares) of Polaroid common stock and Shamrock has not offered to purchase the ESOP shares. Shamrock's argument in response is that its tender offer is "premised on the invalidity of the ESOP shares." Appellee's Brief at 19. Polaroid responds by analyzing what Shamrock means by "invalidity."
The tender offer is expressly conditioned, inter alia, on the satisfaction of the ESOP condition. There are two parts to this condition. The first part assumes that the ESOP shares have been "invalidated or rescinded pursuant to a final judicial determination." If the first part is met, the ESOP Condition is satisfied and the tender offer may be closed. If it is not, Shamrock could still close the tender offer if the second part is satisfied. This second part allows Shamrock to close the tender offer as long as it is "otherwise . . . satisfied that the ESOP Shares are not validly outstanding." Shamrock may thus close the tender offer without purchasing any of the ESOP shares simply by declaring that the ESOP shares are "not validly outstanding" even though no judicial determination, final or otherwise, has been made with respect to the validity of those shares. Polaroid therefore argues -- and with great force -- that to hold that a tender offer such as Shamrock's complies with the All Holders Rule would permit the Rule to be evaded at will. A tender offeror would merely need to declare the invalidity of the shares that it did not wish to purchase and then proceed as if the All Holders Rule did not exist.
Shamrock's response is that it has done more than merely declare that the Polaroid ESOP shares are invalid. In addition, it has instituted a "massive litigation" to have the ESOP shares declared invalid, which has included "over 30 depositions and the production of some 60,000 pages of documents" and is currently in the midst of a multi-day trial.
The district court "assumed . . . arguendo that Polaroid does have standing" to raise the issue but found no violation of the Rule. Dist, Ct. Op. at 11. The court reasoned that "Shamrock should not be forced to make its offer to holders of ESOP shares, the issuance of which Shamrock is challenging in another action." Id. The court emphasized, however, that it was
not holding . . . that a tender offeror's mere good-faith belief as to the validity of shares controls, as a matter of law, the shares to which a tender offer must be made. Rather, the court holds that, under the particular facts of this case, Shamrock's exclusion of the ESOP shares in its original Offer was not inconsistent with the All Holders Rule given Shamrock's belief, as detailed in its Offer, that the ESOP shares were not validly issued. The particular circumstances to which the Court refers include, inter alia, the timing and scope of Polaroid's ESOP as well as the fact that Shamrock has sued to challenge the validity of the ESOP. Because of this belief on the part of Shamrock and its stated intention to amend its Offer to include the ESOP shares at $40 per share upon a judicial determination of the ESOP's validity, the Court does not deem this the type of situation that the All Holders Rule was designed to remedy.
Id. at 12 (original emphasis).
Polaroid maintains on appeal that the "particular circumstances" of this case cannot cure the defect in Shamrock's offer, which gives Shamrock unfettered discretion to determine that the ESOP shares are invalid and close the tender offer without purchasing the ESOP shares. Polaroid emphasizes that: (1) the ESOP shares are presumed valid under Delaware law until a court determines otherwise; (2) the Offer's representation that Shamrock may amend the Offer to include the ESOP shares has no binding effect and cannot at any rate cure the Offer's violation of the All Holders Rule; and (3) if particular circumstances do justify an exception to the Rule, Shamrock should have applied to the SEC for a determination that compliance with the Rule is not "in the public interest" or "necessary . . . for the protection of investors" pursuant to the exception written into the Rule, 17 C.F.R. § 240.14d-10(e).
We turn to the threshold question of Polaroid's standing to assert these claims.
B. Standing of a Target Corporation to Raise a Claim Under the All Holders Rule
In considering the standing of Polaroid as a target corporation to assert a violation of the All Holders Rule, we are confronted with two strains of jurisprudence: the private right of action cases and the standing cases. Logically, the first resort is to the private right of action cases. If a private right of action exists in favor of a party, standing follows as a matter of course. As will be seen, with respect to shareholders of the target corporation, we conclude that a private right of action exists in their favor and, consequently, they have standing. As will also be seen, with respect to target corporations, the private right of action cases suggest that a target corporation does not have a private right of action because it is not one for whose "especial benefit" the statute was enacted. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 35, 37, 51 L. Ed. 2d 124, 97 S. Ct. 926 (1977). In the context of the Williams Act, however, the Supreme Court has intimated that because of the strength of the evidence that Congress intended to create a private right of action, this conclusion as to "especial benefit" should be given less weight than is ordinarily appropriate with respect to the issue of who may sue. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 391, 72 L. Ed. 2d 182, 102 S. Ct. 1825 n. 92 (1982) (dictum). We thus also look to the cases that the Supreme Court has decided in the standing area, which have, on occasion, allowed a plaintiff to raise the rights of a third party under statutes that create an express right of action in favor of the third party.*fn3
Neither the Williams Act nor the All Holders Rule expressly creates a private right of action to supplement the enforcement powers of the SEC. Furthermore, the only references in the legislative history to private rights of actions are two briefly stated suggestions that, in light of J. I. Case Co. v. Borak, 377 U.S. 426, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964), which implied a private right of action under section 14(a) of the Exchange Act, courts are likely to allow private rights of action to enforce the Williams Act. These two statements occurred only in two commentators' written, uncommented upon submissions and are thus "entitled to little weight." Chris-Craft, 430 U.S. at 31 n. 20 (discussing the two commentators' references to Borak and quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 204, 47 L. Ed. 2d 668, 96 S. Ct. 1375 n. 24 (1976)). See also Pitt, Standing to Sue Under the Williams Act After Chris-Craft: A Leaky Ship on Troubled Waters, 34 Bus. Law. 117, 142 n. 186 (1978) (quoting submissions in greater detail).
Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939 (3d Cir.), cert. denied, 474 U.S. 935, 88 L. Ed. 2d 274, 106 S. Ct. 267 (1985) explicates the methodology for making the private right of action determination. It requires that we first address three questions: (1) "whether the agency rule is properly within the scope of the enabling statute"; (2) "whether the statute under which the rule was promulgated properly permits the implication of a private right of action"; and (3) "whether implying a private right of action will further the purpose of the enabling statute." Id. at 947. If a private right of action is determined to exist, we must then decide the difficult question whether a target corporation has standing to bring injunctive relief to vindicate the rights of shareholders under the Rule. Cf. Curran, 456 U.S. at 388-95 (turning to standing issue only after determining that a private cause of action was ...