On Appeal From the United States District Court For the District of Delaware, Civil Action No. 89-00125.
This appeal arises out of a campaign by the appellee-defendants to elect their slate of candidates to CNW Corporation's (CNW) board at the annual shareholders meeting on May 16, 1989. CNW, resisting appellees' attempt, sought preliminary and permanent injunctive relief in the district court, claiming that appellees' Schedule 13D and 14B filings violated §§ 13(d) and 14(a) of the Securities and Exchange Act of 1934 (the 1934 Act) and SEC rules promulgated thereunder. The district court denied CNW's request for a preliminary injunction and its request for an injunction pending appeal on April 14, 1989.
CNW filed this appeal and promptly moved for expedition and injunctive relief. We expedited the briefing and heard argument on the merits of the appeal on May 10, 1989. Immediately following oral argument, we entered an order enjoining appellees, pending the filing of an opinion and judgment, from soliciting proxies for the upcoming meeting until it disclosed the names of the limited partners of Botanic Partners, L.P., Pigeon Investors, L.P., Raven Partners, L.P., and Bates Partners, L.P., and the names of parties to certain "coinvestor" agreements. Having considered the appeal on its merits, we will affirm in part and reverse in part.
CNW is a major interstate rail carrier. Paul B. Kazarian is the president, director, and controlling person of P.B. Kazarian, Ltd. Michael G. Lederman is the chairman of the board, director, and controlling person of M.G. Lederman, Ltd. Their eponymous companies are the general partners of Japonica Partners, L.P. ("Japonica"), which in turn is the sole general partner of five limited partnerships: Phoenix Partners, L.P.; Botanic Partners, L.P.; Pigeon Investors, L.P.; Raven Partners, L.P.; and Bates Partners, L.P.
In November 1988, Japonica met with CNW's CEO and Chairman, Robert Schmiege, to discuss Japonica's theory that CNW's stock was grossly undervalued by the market. Japonica apparently sought management to take certain steps to exploit CNW's undervalued assets. CNW, however, cut off the discussions, evidently uninterested in cooperating with Japonica.
Japonica began formulating and exploring other steps that could be taken toward acquiring control of CNW, dubbing its efforts "Project Eagle." To attract investors to finance its attempt at control, Japonica developed written materials, with two lengthy books produced in January and February 1988. The books presented various valuations and projected valuations of CNW's assets. In addition, the books presented detailed accounts of several financial scenarios that could be brought into play if control of CNW were obtained, including leveraged buyouts of some of CNW's assets, sale of some or all of the assets, merger, corporate restructuring, and recapitalization. The books further detailed the projected effect of each scenario on an investor's return. The overarching impression these books were apparently intended to impart to the would-be investor was that, because the then-current market price of CNW's stock understated the value of CNW, gaining control of CNW (even at a purchase price per share considerably above the market price), would be very profitable regardless of which scenario was eventually followed. All of the projections were based upon public information.
Japonica's sales pitch was successful. On January 19, 1989, Japonica entered a "coinvestor agreement" with a thus-far undisclosed individual or entity whereby that person would give $10 million to Japonica to invest in CNW stock. The coinvestor retained beneficial ownership of the shares, but Japonica was given the authority to hold or sell these shares as it saw fit, and an irrevocable proxy to vote the shares. The January 19 coinvestor agreement was terminated on March 1. On February 15, 1989, Japonica entered into another coinvestor agreement with an undisclosed individual or entity. That agreement has not been disclosed by Japonica, although a letter terminating it on March 1 has been disclosed, albeit with the name of the coinvestor redacted.
Japonica was also successful in attracting investors willing to become limited partners in partnerships "formed for the purpose of acquiring shares of the Common Stock" of CNW. Japonica's Schedule 13D, item 2(c), app. at 11. Each limited partner -- of which there were no more than ten*fn1 -- contributed at least $3 million. The agreements gave the general partner "full and complete charge of all affairs of the Partnership," including the right to commence a tender offer, but the latter right was subject to the proviso that "a majority in interest of the Limited Partners [does] not object." App. at 286, 290, 294, 298, 301.*fn2 In the case of the Phoenix, Botanic, and Pigeon partnerships, the limited partners contributed an undisclosed number of their own CNW shares to the respective partnerships.*fn3
The limited partnerships came into effect on March 1, 1989, and by March 3, Japonica had crossed the five-percent threshold that triggers a potential acquiror's obligation to file a Schedule 13D within ten days.*fn4 On March 13, 1989, Japonica filed a Schedule 13D, disclosing that it had acquired an 8.8% interest in CNW.
The 13D also revealed that Japonica "sought to acquire control of CNW," see Item 4, app. at 13, possibly through a tender offer, "subject to the availability of financing on acceptable terms, regulatory approvals and certain other conditions." Id. Japonica also stated that it expected to propose nominees for CNW's board of directors at the next annual meeting, and that Kazarian and Lederman would likely be among those nominees. In addition, Japonica outlined its intentions if it were to be successful in gaining control:
If Japonica Partners is successful in obtaining an active role in the management and/or control of the Company, Japonica Partners intends to conduct a detailed review and analysis of the Company. Following such review and analysis, Japonica Partners will consider what actions would be desirable in light of the information then available to Japonica Partners and circumstances which then exist. Such actions could include a going-private transaction, a restructuring of the Company, sales of certain of the Company's assets and changes in the articles of incorporation, by-laws, capitalization, ...