Emhart Corp. v. USM Corp.

• Decision Date: 07 November 1975
• Docket Number: No. 75--1395,75--1395
• Citation: 527 F.2d 177
• Parties: 1975-2 Trade Cases 60,598 EMHART CORPORATION, Plaintiff-Appellant, v. USM CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 177

527 F.2d 177

1975-2 Trade Cases 60,598

EMHART CORPORATION, Plaintiff-Appellant, v. USM CORPORATION, Defendant-Appellee.

No. 75--1395.

United States Court of Appeals First Circuit.

Argued Nov. 5, 1975.

Decided Nov. 7, 1975.

Raymond L. Falls, Jr., New York City, with whom Gaston Snow & Ely Bartlett, Boston, Mass., and Cahill Gordon & Reindel, New York City, were on brief, for appellant.

Taggart Whipple, New York City, with whom Choate, Hall & Stewart, Boston, Mass., and Davis, Polk & Wardwell, New York City, were on brief, for appellee.

David F. Cavers, Jr., Robert L. Klivans, Palmer & Dodge and Walter G. Van Doran, Boston, Mass., on brief, for Bernard Patrick McDonough and Alma G. McDonough, amici curiae.

Before COFFIN, Chief Judge, ALDRICH and McENTEE, Circuit Judges.

ALDRICH, Senior Circuit Judge.

On October 14, 1975, the District Court for the District of Massachusetts issued a preliminary injunction ¹ enjoining the carrying out of a tender offer made by appellant Emhart Corporation on September 9, 1975, to purchase from public shareholders of appellee USM Corporation, formerly United Shoe Machinery Corporation, 1,000,000 common shares, at $23 a share. Emhart already owned 1,241,500 shares, and if the tender offer were successful it would possess some 54% of USM's common stock and 43% voting power. The court based its order on its finding that 'the proposed acquisition seems plainly to threaten, if not involve, a violation of the Sherman Act.' On Emhart's appeal extensive briefing was rapidly accomplished. Following argument on November 5 we vacated the injunction, stating that an opinion would follow. As of that date the tender offer, except that it was suspended by the injunction, was still open, viz., until November 10.

We need not recite the travel of the case, except to note that the court found relevant earlier stages of the judicial history of USM in another, still open, antitrust proceeding, but which the court declined to consolidate herewith, United States v. United Shoe Machinery Corp., D.Mass., 1953, 110 F.Supp. 295, aff'd, 347 U.S. 521, 74 S.Ct. 699, 98 L.Ed. 910, 1967, D.C., 266 F.Supp. 328, rev'd, 391 U.S. 244, 88 S.Ct. 1496, 20 L.Ed.2d 562, hereinafter the Decree case. ² Without repeating what is disclosed in these decisions, the important substance of which was referred to in its opinion accompanying the October 14 order, the court found therefrom, as brought down to date by extensive submissions made during the present proceeding, that USM has long been the most powerful domestic manufacturer of shoe machinery, and that in spite of 'purgative efforts' in the Decree case to remedy monopolistic practices there found, '(e)very time Antaeus has touched the ground, he has been strengthened.' We by no means criticize the court's metaphor. To adopt it, the question before us is whether further efforts, and particularly the Herculean action now taken, are called for in the present case.

The court, of course, did not mean that previous purges had had a negative or reverse effect, or intend to compare USM's shoe machinery manufacturing business with another Herculean antagonist, Hydra. As a result of the original decree USM was reduced from some 85% of the United States market to about 62%. However, this was not enough. The second decree's ordered divestiture brought down its proportion, the court found, to 33%. The court's reference was to the unfortunate necessity of a second order, and also to the fact that, whether 28%, 33%, or 38%, it found the figure has now risen to 42%. ³ USM does have a resemblance to a Hydra, in that to replace what it was required to dispose of by the decree it has taken on many other lines of manufacturing. USM's domestic shoe machinery business, which, from an antitrust standpoint, is all that we are concerned with, now produces only 4% of its total revenues. The court referred to this circumstance, but not, seemingly, as a presently relevant fact.

Emhart's business is also diversified. None of it, however, is shoe machinery, or directly related thereto. If what is described as a proposed takeover of USM should be regarded as a merger, it is strictly one between non-competitors. The court's total description of Emhart is as follows.

'Emhart is a large diversified company with operations which include the manufacture of glass machinery and machinery of other types. It has a strong capital position with assets in the millions of dollars. It has engineers of experience and research laboratories of importance. Its position is fairly suggested by, if not defined by the fact that its stock is listed on the New York Stock Exchange.'

The court did find, however, that the coming together of the two companies as a result of Emhart's stock acquisition, if accomplished, would result in benefits for USM. Largely it put this in general terms, of 'strengthen(ing) the capital position, the resources, the scientific knowhow or . . . other asset(s)' see post, adding that it was 'not prepared to make specific findings which enter into details as to the relationship between the machine shops and skill of Emhart and of United.' It did, however, make particular reference to USM's Beverly plant, as to which USM's brief supplies us with a nickname (the Beverly millstone), alleging that substantial red ink figures have resulted from the fact that it is operating at well below capacity. We read the court's reference as meaning that Emhart could be expected to make use of Beverly, resulting in improvement in its efficiency. USM would put it in much stronger terms, and speaks also of other specific benefits, of which more later.

We have no occasion to criticize any of the court's findings, insofar as it made them. Our first inquiry is directed to the use to which the findings were put, what legal standard, what legal provisions, the court applied and relied on. The main thrust of USM's argument below was directed to a violation of section 7 of the Clayton Act, 15 U.S.C. § 18. In the course of the proceedings, however, the court was unimpressed by that approach and called attention both to the Sherman Act, and to the existing decree. In its final opinion there is no reference to section 7. At oral argument we asked counsel whether the opinion relied on the decree as well as on the Sherman Act, receiving a negative answer from Emhart, and, at first, a cloudy answer from USM. Upon it being pointed out that he had told the district court that there was 'no claim whatever' of 'a violation of the decree,' USM counsel left as his final answer that the court 'did not import standards from the decree.'

The full question we asked counsel was whether the court relied on the decree, or on the Sherman Act, or joined the decree to the Sherman Act to produce a standard more easily met (by USM) than that of the Sherman Act alone. We are not certain that counsels' disclaimer of the third alternative is correct. During final arguments below, immediately before it announced its opinion, the court expressly referred to the limitations the Supreme Court had placed upon USM's domestic shoe machinery activities.

'The concern of the Supreme Court as shown in Mr. Justice Fortas' opinion (391 U.S. 244, 88 S.Ct. 1496, 20 L.Ed.2d 562 ante) has been lest United's power be not sufficiently dissipated.

'Were the American Telephone & Telegraph Company or the Rockefeller Foundation--neither of which so far as I know has the slightest interest in shoe machinery manufacture--to acquire a million shares on top of another million shares of USMC, it seems plain beyond the slightest doubt that USMC would be more firmly entrenched than it ever had previously been in the domestic shoe machinery market. It would be even more difficult for an outsider to enter the market and in the situation that would be presented to compete successfully with the company which has this long history of experience, this pool of patents, this group of experts, this history of satisfactory customer relations. And thus it seems to me that the fundamental question in this case is: Is not Emhart like American Telephone & Telegraph or the Rockefeller Foundation in the hypothetical case which I have just suggested coming into a situation where the Supreme Court has sent a flag of warning?'

When it came to its opinion the court first recognized that there were many possible benign reasons, economic and otherwise, not related to the presence of, or to any critizable conduct by USM, as perhaps explaining why it was not 'challenged' by greater competition. It then turned, and made the reference to Antaeus, and the historic fact that '(p)urgative efforts . . . have only been moderately successful.'

'The remedies of this Court in 1953 proved inadequate. The remedies which followed as the result of the stipulation after the latest Supreme Court of the United States case seem also not to be working in exactly the way that had been forecast. Under these circumstances, it seems too plain to be doubted that anything which strengthens the capital position, the resources, the scientific know-how or any other asset of United must be looked at with a cold eye.

'The proposed acquisition by Emhart of another million shares of USMC seems plainly to threaten, if not to involve, a violation of the Sherman Act. Nor can it be doubted that the facts which underlie this conclusion are beyond dispute. There is no testimony that needs to be taken in addition to what has already been recited. There are other matters which supplement these obvious and incontestable recited facts, and without incorporating in this opinion the argument addressed to me by Mr. Whipple this morning, it is enough to say that were this case to go the full way, there might be additional specific points which would further document the conclusion already stated. But since those facts might to some extent be thought disputable, this opinion does not rely upon them.'

We have recited...