Sonesta Int'l Hotels Corp. v. Wellington Associates

• Decision Date: 03 July 1973
• Docket Number: Docket 73-1785.,No. 1055,1055
• Parties: SONESTA INTERNATIONAL HOTELS CORPORATION, Plaintiff-Appellant, v. WELLINGTON ASSOCIATES et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

483 F.2d 247 (1973)

SONESTA INTERNATIONAL HOTELS CORPORATION, Plaintiff-Appellant, v. WELLINGTON ASSOCIATES et al., Defendants-Appellees.

No. 1055, Docket 73-1785.

United States Court of Appeals, Second Circuit.

Argued June 5, 1973.

Decided July 3, 1973.

Robert W. Sweet, New York City (Kurt Koegler, Henry P. Wasserstein, Thomas J. Schwarz, Skadden, Arps, Slate, Meagher & Flom, New York City, of counsel), for plaintiff-appellant.

Jesse Climenko, New York City (Sheldon D. Camhy, Shea Gould Climenko & Kramer, New York City, of counsel), for defendants-appellees.

Before HAYS, MANSFIELD and MULLIGAN, Circuit Judges.

MANSFIELD, Circuit Judge:

Sonesta International Hotels Corp. ("Sonesta") appeals from the denial of a preliminary injunction sought against Wellington Associates, the latter's partners Sol Goldman and Alex DiLorenzo, and all persons acting on their behalf (herein collectively referred to as "Wellington"), to enjoin Wellington, during the pendency of this action, from (a) acquiring or attempting to acquire in any manner any shares of stock of Sonesta, (b) voting any shares of Sonesta stock held or acquired after the initiation of the plan, combination or conspiracy of the defendants alleged by Sonesta in its complaint, (c) exercising, directly or indirectly, any influence upon the management of Sonesta, and (d) otherwise utilizing any such stock or shares of Sonesta stock previously acquired as a means of controlling or affecting the management of Sonesta. Sonesta also sought an order directing Wellington to vote its shares of Sonesta stock in favor of Proposals Nos. 3 and 4 set forth in Sonesta's Notice of Annual Meeting, dated April 16, 1973, which relate to shareholder authorization for the sale of Sonesta's interests in two hotels and the distribution of the net proceeds of the sales to common shareholders, expected to amount to about $2 per share, subject to a favorable tax ruling and the adoption of a plan of partial liquidation by Sonesta's Board of Directors.

The gravamen of Sonesta's complaint, brought on by order to show cause before Judge Ryan, is that Wellington failed to disclose, in connection with its cash tender offer announced in the Wall Street Journal on May 9, 1973, for 1,000,000¹ shares of Sonesta common at $7 per share, several material facts which were necessary to make the cash offer, as published, and the Schedule 13D filed with the SEC on May 8 concerning the cash offer, not misleading, in violation of §§ 10(b), 13(d), 14(d), and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(d), 78n(d), and 78n(e) (1971). These laws are founded on the principle that full and fair disclosure of all material facts must be made to investors so that they may have the benefit of the facts in making their investment decisions. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); 1968 U.S.Code Cong. & Adm.News p. 2813.

Sonesta filed its complaint on May 14, 1973. Judge Ryan heard argument on May 17, and on May 22 he rendered a written decision denying Sonesta's request for a preliminary injunction, finding no showing of irreparable injury on the part of Sonesta or likelihood of success on the merits, and specifically finding no false or misleading statements or omissions in the 13D statement or in the tender offer. The offer expired on May 21, according to its terms, with 419,623 shares having been tendered to Wellington. On May 23 Judge Ryan entered an order in accordance with his decision of the previous day. Sonesta thereupon sought and obtained a stay from another panel of this court, which also expedited the appeal. Sonesta's Annual Meeting, scheduled for May 24, went forward as planned, and the necessary two-thirds shareholder approval was obtained for Sonesta's Proposals 3 and 4, described above.

For reasons hereinafter stated we hold that Wellington failed to disclose material facts in its Schedule 13D filed with the SEC and in its Tender Offer announced to the public. We therefore reverse with directions to enter a preliminary injunction preventing consummation of the offer subject to the conditions of supplemental disclosure and rescission noted below.

Sonesta claims that in four respects Wellington omitted to state information material to an informed choice by Sonesta shareholders as to whether they should accept Wellington's cash offer of $7 per share. More specifically, it is claimed that the Schedule 13D and the published offer failed to disclose (1) that Wellington owed Sonesta approximately $2.4 million, which amount might be compromised on terms adverse to Sonesta's stockholders if Wellington should acquire control, (2) that Wellington's plan to abstain from voting on Proposals 3 and 4 at the Annual Meeting could result in the defeat of these Proposals for failure to obtain the required approval of two-thirds of Sonesta's issued outstanding shares, thereby causing Sonesta shareholders to be deprived of a partially tax-free cash distribution of about $2 a share, (3) that Sonesta might lose its listing on the New York Stock Exchange if Wellington should receive the number of tenders it sought, and (4) that a number of buildings owned by Wellington had received adverse notoriety in certain publications which had described the buildings as havens of prostitution, illicit massage parlors, pornographic film theaters, and peep shows, and that this negative publicity could harm the business reputation and credit standing of Sonesta if Wellington should acquire control.²

Before turning to consideration of the alleged omissions in greater detail, it is important to restate the standard to be applied in determining whether, at the instance of a target corporation, a preliminary injunction should be issued against the continuation of a proposed tender offer when it is claimed that the offer and supporting materials, such as a Schedule 13D required by 17 C.F.R. § 240.14d-1 (1972), fail to adequately disclose material information necessary to make the statements contained in the offer not misleading. The settled rule is that a preliminary injunction should issue only upon a clear showing of either (1) probable success on the merits and possible irreparable injury, or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. Gulf & Western Industries, Inc. v. The Great Atlantic & Pacific Tea Co., 476 F.2d 687, 692-693 (2d Cir. Mar. 12, 1973); Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319 (2d Cir.), cert. denied, 394 U.S. 999, 89 S.Ct. 1595, 22 L.Ed.2d 777 (1969). Assuming that such a showing is made prior to consummation of the tender offer, a preliminary injunction will normally afford prompt relief against a violation of § 14(e), which makes it unlawful to make any untrue statement of a material fact in connection with any tender or to omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading. Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2d Cir. 1967). As the Supreme Court noted in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 383, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), in dealing with § 14(a), which makes it unlawful to solicit proxies in contravention of SEC rules, including Rule 14a-9 which prohibits solicitations containing misleading statements or omissions, "use of a solicitation that is materially misleading is itself a violation of law, as the Court of Appeals recognized in stating that injunctive relief would be available to remedy such a defect if sought prior to the stockholders' meeting."

Where the foregoing standard has been met preliminary injunctive relief is a particularly useful remedy for prevention of probable violations of the disclosure requirements of the Act, for the reason that prior to consummation of the offer the court still has a variety of methods available to it for correction of the misstatements or omissions. See, e. g., Butler Aviation Int'l Inc. v. Comprehensive Designers, Inc., 425 F.2d 842, 845 (2d Cir. 1970). But once the tender offer has been consummated it becomes difficult, and sometimes virtually impossible, for a court to "unscramble the eggs." Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 947 (2d Cir. 1969); Gulf & Western Industries, Inc. v. The Great Atlantic & Pacific Tea Company, Inc., supra, 476 F.2d 687, 698. On the other hand, preliminary relief does not, in assuring that the offer will be lawfully made, sacrifice the legitimate desires of shareholders to accept the offer. If the offer or is subsequently vindicated after a trial on the merits, the offer may be renewed. Thus, in the normal situation, when it appears likely that the offer may contain materially misleading statements or omissions as made, the interest of the shareholders and of the public in full disclosure of relevant circumstances renders preliminary injunctive relief an appropriate method of remedying the deficiencies in disclosure before the offer is consummated.

The probability of success on the merits in any application for injunctive relief turns greatly upon whether the plaintiff has shown that the tender offer under attack has misstated or omitted material facts. The materiality of facts allegedly misstated or omitted depends, in turn, upon whether a reasonable investor might have considered them to be important in deciding whether to accept the tender offer. This standard was set forth by the Supreme Court in Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154, 92 S. Ct. 1456, 31 L.Ed.2d 741 (1972), where the Court, in finding that the withholding of a material fact established the requisite element of causation in fact, expressed itself as being concerned with materiality "in the sense that a...