490 F.2d 332 (2nd Cir. 1973), 437, Crane Co. v. American Standard, Inc.

Docket Nº:437, 438, 602, 603, 73-2273, 73-2462, 73-2640, 73-2641.
Citation:490 F.2d 332
Party Name:CRANE CO., Plaintiff-Appellant, v. AMERICAN STANDARD, INC., et al., Defendants-Appellees. AMERICAN STANDARD, INC., Plaintiff-Appellant-Appellee, v. CRANE CO., Defendant-Appellee-Appellant. AMERICAN STANDARD, INC., Petitioner, v. Hon. Robert J. WARD, United States District Judge, and Crane Co., Respondents.
Case Date:December 19, 1973
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 332

490 F.2d 332 (2nd Cir. 1973)

CRANE CO., Plaintiff-Appellant,

v.

AMERICAN STANDARD, INC., et al., Defendants-Appellees.

AMERICAN STANDARD, INC., Plaintiff-Appellant-Appellee,

v.

CRANE CO., Defendant-Appellee-Appellant.

AMERICAN STANDARD, INC., Petitioner,

v.

Hon. Robert J. WARD, United States District Judge, and Crane Co., Respondents.

Nos. 437, 438, 602, 603, 73-2273, 73-2462, 73-2640, 73-2641.

United States Court of Appeals, Second Circuit.

December 19, 1973

Argued Nov. 19, 1973.

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[Copyrighted Material Omitted]

Page 334

David W. Peck, New York City (Sullivan & Cromwell, George C. Kern, Jr., Edward W. Keane and Robert M. Osgood, New York City, of counsel), for American Standard, Inc.

John W. Castles, 3d, New York City (Lord, Day & Lord, Michael J. Murphy, Pomerantz, Levy, Haudek & Block; Abraham L. Pomerantz and William E. Haudek, New York City, of counsel), for Crane Co.

Before LUMBARD, FRIENDLY and FEINBERG, Circuit Judges.

FRIENDLY, Circuit Judge.

Four years after this court's decision in Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2 Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970), we find the combatants, Crane Co. (Crane) and American Standard, Inc. (Standard), in a Brobdingnagian procedural imbroglio that has prevented any progress in carrying out our decision. 1 During the week of September 10, 1973, this panel received a petition from Standard seeking the issuance of mandamus to require Judge Ward to vacate so much of his order of July 6, 1973, described below, as permitted Crane to seek damages on remand. When called upon for an answer, see F.R.App.P. 21(b), Crane informed us that Judge Ward was considering certification of his order under 28 U.S.C. § 1292(b), and we directed that if he did this, any motion for leave to appeal should be referred to us in light of the effect that grant of such leave would have on the mandamus petition. 2 Judge Ward then certified his order of July 6

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and a subsequent order of September 26, 1973, as well as an earlier order entered by Judge Mansfield (then in the District Court) on February 10, 1971. Crane moved that we grant leave to appeal and Standard joined in the request. Since it appeared that a ruling by this court on the important issues raised by the parties might prevent much waste of valuable time in the district court, we granted the motion. As the appeals permit us to examine all the issues free from any constraints concerning the limited office of mandamus, the petition for mandamus can be dismissed.

I.

While we shall assume familiarity with Judge Smith's opinion when the case was last here, 419 F.2d 787, intelligibility requires some recounting.

The underlying controversy presents the familiar situation of a publicly-held company, here Westinghouse Air Brake, Inc. (Air Brake), confronted with a prospective take-over by a company not to its liking (here Crane) and turning to a more agreeable partner (here Standard). To enhance its prospects in the take-over effort, Crane had purchased large amounts of Air Brake stock; on February 20, 1968, it filed with the SEC statements under Schedule 14-B as required by Rule 14a-11(c)(1) to enable it to solicit votes for the election of Air Brake directors. Air Brake's stock was then selling on the New York Stock Exchange at about $36 per share. Shortly thereafter a majority of Air Brake's directors agreed, subject to stockholder approval, to merge Air Brake into Standard for a convertible preferred stock worth about $50. This caused the Air Brake stock to rise to $44.

Continuing the usual scenario, Crane countered with an offer, good until 5 p.m. on April 19, to exchange Crane stock and debentures, also worth approximately $50, for each Air Brake share. 3 At about the same time, Air Brake mailed proxies for a May 16 stockholders meeting seeking approval of its proposed merger into Standard. By April 10, Air Brake's stock had risen to $49. Both Crane and Standard were heavy buyers. On April 17, 1968, Crane, again following the familiar script, brought the first of two suits in the District Court for the Southern District of New York. Alleging various misrepresentations in Air Brake's proxy statement, the complaint sought injunctions against further solicitation and use of the proxies and 'such other and further relief as to this Court may seem just and proper . . ..' The second (hereafter 'the fraud action'), filed on May 6, 1968, sought to enjoin Standard from voting Air Brake stock or purchasing votes of Air Brake stockholders, from consummating the merger, and from engaging in any manipulative practices or other acts in violation of the Securities Exchange Act. The complaint did not seek damages but included a prayer for 'such other and further relief as may be just and proper.'

The two actions were tried together before Judge Ryan, the applications for a preliminary injunction being consolidated with a trial on the merits pursuant to F.R.Civ.P. 65(a)(2). No request was made for a jury trial. The trial began on May 21. This was five days after the Air Brake stockholders meeting, but the proxies were still being tallied at that time. We were told at argument that the judge received daily reports of the voting and that it was apparent before his decision that votes sufficient to authorize the merger had been obtained. On June 5, 1968, the judge dismissed both complaints; on June 7 the merger was consummated.

On Crane's appeal to this court, Standard prevailed on every point save one. This was a claim by Crane in the

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fraud action relating to transactions in Air Brake stock by Standard on April 19, 1968. The transactions were a series of open market cash purchases of 170,200 shares of Air Brake at an average price of $49.08 per share accompanied by undisclosed sales of 100,000 shares to a well-disposed investment company at 44 1/2 and of 20,000 shares to a well-disposed investment banking house at 44 7/8. Standard contended that its purpose was simply to increase its voting position in Air Brake 4 while keeping its holdings of Air Brake shares below 10% In order to avoid problems under § 16(b) of the Securities Exchange Act and for other reasons. Rejecting that argument, the court concluded, 419 F.2d at 793, that Standard had intentionally created 'the appearance of an extraordinary demand for Air Brake stock and a dramatic rise in market price, as a result of which Air Brake shareholders were deterred from tendering to Crane.' The court held that this conduct violated § 9(a)(2) of the Securities Exchange Act, which makes it illegal to effect 'a series of transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others,' and that non-disclosure of the sales violated SEC Rule 10b-5(3) which makes it illegal 'to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.' Apparently because of Crane's later forced sale of the American Standard stock it received in the merger, 419 F.2d at 794, the court further concluded that Crane came within the class of persons whom § 9(e) protects against violation of § 9(b), to wit, 'any person who shall purchase or sell any security at a price which was affected by such act or transaction.' Finally, the court held that under Vine v. Beneficial Finance Co., 374 F.2d 627, 634-635 (2 Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967), Crane met the 'in connection with' requirement of Birnbaum v. Newport Steel Co., 193 F.2d 461 (2 Cir.) cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952).

On the basis of these conclusions, the court reversed the dismissal of the complaint in the fraud action. At two points in its opinion, it gave instructions concerning further proceedings in the case. After quoting a passage from Vine, supra, 374 F.2d at 635, to the effect that the plaintiff need not show he was misled if 'there was deception which misled (other) stockholders and that this was in fact the cause of plaintiff's claimed injury,' the court said, 419 F.2d at 797:

Standard's deception caused injury to Crane. Crane's tender offer could only be successful if its value to investors was attractive in comparison with the indicated value of Air Brake on the New York Stock Exchange. The extent of the damage will have to be determined by the District Court, in fashioning an appropriate remedy, and the burden of proof thereon will be on Crane. It is sufficient that the causation requirement is satisfied here to the extent of imposing liability upon Standard for the consequences of concealing from the public material information relevant to the market value of Air Brake in a free market.

In the concluding paragraphs of the opinion, the court said, 419 F.2d at 803-804:

We affirm the District Court's dismissal of the claim as to the Air Brake proxy statement; we reverse

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the judgment below dismissing the claim based upon market manipulation and deception, and remand for a further determination in the District Court of the appropriate remedies. Without limitation, these remedies may include damages, if any, prospective injunctive relief, as well as appropriate retrospective relief, notwithstanding the consummation of the merger. See J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423, supra. The manipulation may be found to have deprived Crane of success in its tender offer in the free market to which it was entitled, in which case divestiture or separation of Air Brake may be required. Consummation of the transaction cannot be allowed to preclude any relief for violations of...

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