Dan River, Inc. v. Icahn

• Decision Date: 07 January 1983
• Docket Number: No. 82-2014,82-2014
• Citation: 701 F.2d 278
• Parties: Blue Sky L. Rep. P 71,798, Fed. Sec. L. Rep. P 99,043 DAN RIVER, INC., Appellee, v. Carl C. ICAHN, Icahn Holding Corporation, Icahn Capital Corporation, Icahn & Co., Inc., Wolf Investors Plan, Inc., Brett Investors Corporation, C.C.I. & Associates, Crane Associates, and Michelle Investors Corporation, Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 278

701 F.2d 278

Blue Sky L. Rep. P 71,798, Fed. Sec. L. Rep. P 99,043

DAN RIVER, INC., Appellee, v. Carl C. ICAHN, Icahn Holding Corporation, Icahn Capital Corporation, Icahn & Co., Inc., Wolf Investors Plan, Inc. Brett Investors Corporation, C.C.I. & Associates, Crane Associates, and Michelle Investors Corporation, Appellants.

No. 82-2014.

United States Court of Appeals Fourth Circuit.

Argued Nov. 18, 1982.

Decided Jan. 7, 1983.

Theodore Altman, New York City (Gordon, Hurwitz, Butowsky, Baker, Weitzen & Shalov, Kent T. Stauffer, Franklin B. Velie, Mathew E. Hoffman, Clarence Otis, Jr., Robert J. Schechter, New York City, of counsel), and Edward G. Turan, New York City, Charles F. Witthoefft, Hirschler, Fleischer, Weinberg, Cox & Allen, Linda L. Royster, Richmond, Va., for appellants.

Max Gitter, New York City (Moses Silverman, Andrew J. Peck, Allan J. Arffa, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Lewis T. Booker, Virginia W. Powell, Hunton & Williams, Richmond, Va.), for appellees.

Before WINTER, Chief Judge, MURNAGHAN, Circuit Judge, and BUTZNER, Senior Circuit Judge.

MURNAGHAN, Circuit Judge:

On November 12, 1982, the district court granted a preliminary injunction which prohibited the appellants, Carl C. Icahn and several companies under his control, ¹ from exercising the voting rights appurtenant to any shares owned or acquired in Dan River, Inc., the appellee here. The temporary injunction was to endure until a full scale trial on the merits, scheduled for February 1983, could take place. Because the parties were in the midst of a heated battle for corporate control, we agreed to hear Icahn's appeal on an expedited basis. Our order reversing the district court's injunction was issued on November 19, 1982, with the assurance that written opinions would follow in due course.

I.

Dan River, Inc. is a major textile manufacturer whose stock is publicly traded on the New York Stock Exchange. During the spring and summer months of 1982, Icahn began to purchase shares of Dan River's common stock on the open market. Once Icahn amassed more than five percent of Dan River's outstanding stock--that occurred on September 13, 1982--the group became subject to the disclosure requirements of section 13(d) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78m(d)(1).

As required by the 1934 Act, Icahn promptly filed a schedule 13D disclosure statement which, among other things, set forth the group's intentions with regard to Dan River. Icahn, to say the least, is no passive investor. As the 13D statement indicated, ² Icahn intended to obtain control of Dan River and commit the company to an active course of transactions potentially including a merger with one of the corporations controlled by Icahn or a sale of Dan River's assets so as to generate cash for additional business combinations. The Icahn group was not singleminded, though. The group conceded in the 13D statement that, given an acceptable offer, it would be willing to abandon the takeover plans and sell its Dan River shares.

Dan River has emphasized that Icahn has taken such a position in other companies before. According to management, Icahn's position is nothing short of an extortionate scheme: Icahn purchases a significant interest in a company and then, by threatening a battle for control, puts pressure on management to either buy out its interest or to find a third party, the so-called "white knight," to do so--all at a considerable profit to Icahn. It appears that Icahn rarely needs actually to engage in a battle for corporate control by way of a tender offer; its mere presence and its ability to engage in a control struggle, according to Dan River, have convinced the management of other companies to rid themselves of Icahn through a buy-out at inflated prices.

Not so here, however. Dan River management met with Icahn, rejected its overtures, and took two immediate steps to fend off the Icahn group. On October 4, 1982, Dan River issued 1.7 million shares of preferred stock to a newly created employee stock bonus plan. The shares enjoy voting rights and, as is customary for issues of preferred stock, stand ahead of the common shares with regard to dividend payments and distribution rights in the event of dissolution. The bonus plan awards the preferred stock on the basis of an employee's salary, and therefore may be expected to help management--the highest paid employees--consolidate control of the company while diluting Icahn's position in Dan River.

On the following day, Dan River management brought suit in the United States District Court for the Western District of Virginia. Dan River raised five arguments in the complaint, and sought equitable relief in the nature of an injunction prohibiting Icahn from dealing with Dan River in any way. The first ground alleges that Icahn's "buy-me-out-or-face-a-takeover" ultimatum is a manipulative and deceptive scheme in violation of section 10(b) of the 1934 Act, 15 U.S.C. Sec. 78j, and its Rule 10b-5, 17 CFR Sec. 240.10b-5 (1982). The second ground alleges that Icahn's disclosures in the Schedule 13D were deficient. The third ground maintains that Icahn's interests in Dan River are being financed with money derived from a pattern of racketeering activity in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-68. The fourth claim is that Icahn's disclosures are insufficient under the Virginia Take-Over Bid Disclosure Act, Va.Code Secs. 13.1-528 through 13.1-541. The fifth ground asserted is that Icahn intends to "loot" Dan River in violation of the corporation law of the Commonwealth of Virginia.

Having failed to receive an acceptable offer from management for its shares, Icahn responded to Dan River's unreceptive stance with a tender offer. On October 25, 1982, Icahn proposed to buy 3.1 million shares of common stock at a price of $18 per share subject to a key condition--that Dan River management not oppose the offer. In the event management should resist the offer, Icahn would only purchase 700,000 shares at the lower price of $15 per share. Icahn made the appropriate filings under section 14(d) of the 1934 Act, 15 U.S.C. Sec. 78n(d). ³

Management was undeterred in its opposition by the offer. It actively sought to frustrate the success of Icahn's bid and, moreover, amended its complaint filed in the United States District Court for the Western District of Virginia to add a two-fold challenge to the legality of the offer. Dan River claims the offer is an illegal "bait-and-switch" offer proscribed by section 14(e) of the 1934 Act, 15 U.S.C. Sec. 78n(e), and that the disclosures made by Icahn pursuant to section 14(d) of the Act, 15 U.S.C. Sec. 78n(d), were misleading in their representations and in their omissions.

The $18 conditional offer on November 9, 1982 lapsed by its own terms. Icahn then revised its tender offer. Under that latest proposal, Icahn offers to buy 2 million shares at $16.50 per share. Under the terms of the offer, Icahn reserves the right to purchase more than 2 million shares if they are tendered.

Management was not without a counter. With the tender offer under way and nearing its completion, Dan River moved for a preliminary injunction to block Icahn's purchase of stock under the bid.

The district court, sensing that both parties had a great deal at stake, fashioned what it deemed to be a fair compromise. It permitted the tender offer to go forward, subject to an extension of the withdrawal date by one week and a requirement that certain inconsistencies in Icahn's disclosure statements be corrected. Neither party appeals that portion of the injunction. At issue are the provisions of the district court's order which prevent Icahn from exercising any of the rights which inhere in the shares already bought and the shares to be acquired in the tender offer. Icahn is enjoined from voting, from calling shareholder meetings, from seeking proxies and from attempting in any way to change the management or board of directors of Dan River until the merits of the action are resolved sometime in or after February of 1983. The district court also endeavored to minimize any harm which Icahn might suffer from the "sterilization" of its shares, wisely enjoining management from taking any actions outside the ordinary course of business in the interim.

Icahn appeals the "sterilization" of its shares.

II.

Our jurisdiction is predicated upon 28 U.S.C. Sec. 1292(a) and we accordingly limit our review to the propriety of the preliminary injunction issued by the district court.

The trial court standard for a preliminary injunction is the balance-of-hardship test. As succinctly stated in North Carolina State Ports v. Dart Containerline Co., 592 F.2d 749 (4th Cir.1979):

Four factors enter into the determination of whether to grant or to withhold interim injunctive relief: (a) plaintiff's likelihood of success in the underlying dispute between the parties; (b) whether plaintiff will suffer irreparable injury if interim relief is denied; (c) the injury to defendant if an injunction is issued; and (d) the public interest.

Id. at 750. We there provided further guidelines regarding the weight to be assigned each factor:

There is a correlation between the likelihood of plaintiff's success and the probability of injury to him. If the likelihood of success is great, the need for showing the probability of irreparable harm is less. Conversely, if the likelihood of success is remote, there must be a strong showing of the probability of irreparable injury to justify issuance of the injunction.

Id. See also Fort Sumter Tours, Inc. v. Andrus, 564 F.2d 1119 (4th Cir.1977); Blackwelder Furniture Co. v. Seilig Manufacturing Co., 550 F.2d 189 (4th Cir.1977). The standards are fully applicable in cases involving tender offers and the strictures of the Williams Act. See Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 95 S.Ct....