Gearhart Industries, Inc. v. Smith Intern., Inc.

Citation741 F.2d 707
Decision Date31 August 1984
Docket NumberNos. 84-1483,84-1620,s. 84-1483
PartiesFed. Sec. L. Rep. P 91,667 GEARHART INDUSTRIES, INC., et al., Plaintiffs-Appellees, Cross Appellants, v. SMITH INTERNATIONAL, INC., a Delaware Corporation, Defendant Third Party Plaintiff-Appellant, Cross Appellee, v. TEXAS AMERICAN/FORT WORTH N.A., Trustee, et al., Third Party Defendants- Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Shank, Irwin & Conant, A.B. Conant, Jr., Ivan Irwin, Jr., Robert B. Cousins, Jr., Brett Ringle, Dallas, Tex., Hughes, Hubbard, & Reed, Norbert A. Schlei, Los Angeles, Cal., for defendant third party plaintiff-appellant, cross appellee.

Law, Snakard, Brown & Gambill, Jonathan Kerr, Robert F. Watson, Dallas, Tex., Milton R. Ackman, Alexander Sussman, New York City, Cantey, Hanger, Gooch, Minn & Collins, Robert S. Travis, Fort Worth, Tex., Fried, Frank, Harris, Shriver & Jacobson, Marc P. Cherno, New York City, for Gearhart Industries, Inc.

Chester J. Hinshaw, Hugh R. Whiting, Dallas, Tex., for intervenor AETNA.

Fredric J. Zepp, H. Steven Wilson, New York City, Edmund Glen Johnson, Wesley N. Harris, Janice A. Schattman, Fort Worth, Tex., for Texas American Fort Worth.

Jacob H. Stillman, David A. Sirignano, S.E.C., Washington, D.C., amicus curiae, for S.E.C.

Appeals from the United States District Court for the Northern District of Texas.

Before GEE, POLITZ and RANDALL, Circuit Judges.

GEE, Circuit Judge:

On this appeal we review a preliminary injunction and various other orders entered by the district court in connection with an attempt by Appellant Smith International, Inc. (Smith) to acquire control of Appellee Gearhart Industries, Inc. (Gearhart), another company operating in the general area of oil field service. A cross-appeal by Gearhart complains of the court's refusal to sterilize voting rights in a large block of Gearhart shares purchased by Smith early in the takeover attempt from General Electric Venture Capital Corporation.

The movant must prove four prerequisites to secure a preliminary injunction: (1) a substantial likelihood of success on the merits; (2) a substantial threat that the movant will suffer irreparable injury if the injunction is not issued; (3) that threatened injury to the movant outweighs any damage the injunction might cause to the opponent; and (4) that the injunction will not disserve the public interest. Apple Barrel Productions, Inc. v. Beard, 730 F.2d 384, 386 (5th Cir.1984). The grant or denial of a preliminary injunction by the district judge may be reversed on appeal only by a showing of abuse of discretion. Id. The four elements for preliminary injunctive relief are mixed questions of fact and law. Id. The district court's findings of fact must be upheld unless they are clearly erroneous. Id. Its conclusions of law, however, are subject to broad review and will be reversed if incorrect. Id.; see also Houston Agricultural Credit Corp. v. United States, 736 F.2d 233 at 235 (5th Cir.1984). Whether we might have done as the trial court did is thus of no consequence; the question for us is whether the trial court exceeded the broad limits within which its power could properly be exercised, and we conclude that in some respects it did.

The situation in which the parties and the trial court are placed demands of us speed rather than art, nor--as we note above--need we engage in the sort of plenary review that an appeal of permanent relief would require. Henry v. First Nat'l Bank, 595 F.2d 291, 302 (5th Cir.1979). Hence, we shall be as brief as possible, consistent with explaining the reasons for our rulings. A more full exposition of the facts leading up to the tender offer will be found in the opinion of the trial court, reported at 592 F.Supp. 203 (N.D.Tex.1984). We state them here only briefly, adding more particulars where needful in the body of our opinion.

Factual Background

Gearhart, the target, is a Texas corporation engaged in the business of oil well evaluation. Its common stock, consisting at the time of the district court's opinion of just over sixteen million shares issued and outstanding, is listed and traded on the New York Stock Exchange and elsewhere. Smith, the would-be acquirer of control, is a Delaware corporation, admitted to do business in Texas and engaged in oil field service work there. For well over ten years, Smith and Gearhart have considered joining forces in some fashion, going so far about a year ago as to discuss specific merger ratios of Smith shares per Gearhart share. About the same time, however, Smith, with a view to acquiring Gearhart, employed an investment banker and assembled an internal acquisition team.

Shortly after this, and in connection with their merger discussions, Smith obtained permission from Gearhart to talk with General Electric Venture Capital Corporation (GE) about a block of 3,640,514 Gearhart shares it owned. Discussions of various proposals followed, including the possibility that GE might buy out both companies. In mid-October 1983, however, Smith secretly negotiated a purchase of the GE block at $31 a share. When Gearhart learned of the purchase, it expressed approval.

Smith filed a 13(d) disclosure statement just before purchasing the GE shares stating that its purpose in buying the GE block was "acquiring a significant investment" in Gearhart and that, if Gearhart's prospects appeared to justify it, "Smith may determine to increase its position in [Gearhart]." Over the course of the next half year, Smith increased its position in Gearhart by the purchase of about a half-million shares, most in two blocks totalling over 330,000 shares from Jeffries & Co., a brokerage house, at a price of $21, and some on the open market. By February 1984, Gearhart had apparently become apprehensive about Smith's activities and retained counsel and an investment banker. In addition, it began to discuss these activities with Smith, seeking to obtain a standstill agreement or otherwise to deflect Smith's apparent acquisition project. Smith was not cooperative.

By early April, Gearhart rightly concluded that Smith had thrown down the gauntlet. The tempo picked up: in the first week of that month Smith bought over a quarter-million Gearhart shares on the open market at prices between $25 and $27 per share. By April 10, when it filed an amended 13(d) disclosure statement owning up at last to a purpose to continue its acquisition program "by tender offer or otherwise," it had obtained a 26.5 percent position in Gearhart. Two days later, Smith made a firm offer to purchase a block of well over a million shares of Gearhart from Kemper Financial Services, Inc. The transaction was consummated on April 16, at a time when--as the trial court concluded--an oral standstill agreement was in effect between Smith and Gearhart. With this, Smith had acquired over one third of Gearhart's outstanding common stock. Gearhart brought suit on April 18 in both state and federal court seeking to abort the Smith charge.

That same day, the Gearhart board authorized the issuance and sale of a large amount of subordinated debentures and accompanying warrants. Nine days later, Gearhart sold $98,700,000 of the debentures at a discount, grossing about $73,000,000. The accompanying warrants allowed purchase of 2,961,000 shares of Gearhart stock and contained an unusual feature, a provision for reduction of the stock purchase price should certain "triggering events" occur. For its part, on April 27 Smith announced its partial tender offer, a triggering event, for Gearhart stock and, after the district court declined Gearhart's request to enjoin it, made the offer on April 30: $31 a share for 3,700,000 shares, enough to give Smith control at the then existing level of issued stock, but leaving a major percentage of stock outstanding in the hands of what would then be minority stockholders of Gearhart.

Thereafter the trial court held an extended evidentiary hearing in connection with Gearhart's request that the tender offer be halted for claimed violations of both state and federal law by Smith and on Smith's counterclaim and third-party claim by which it sought an injunction against the holders of the recently-issued debentures and warrants forbidding disposition of the debentures or exercise of the warrants. On June 5, the court filed its memorandum opinion and order enjoining the tender offer on the basis of violations of Sections 13(d) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78m(d)(1) and 78n(e), as amended by the Williams Act, as well as of Smith's breach of a standby agreement that it found the parties had entered into under state law. In addition, it upheld the warrants and debentures transaction as permissible under the business judgment rule and declined to interfere in it by injunction. Smith quickly appealed the decision.

More action was to come. After negotiations with Aetna Life and Casualty Company while the parties were awaiting oral argument of Smith's appeal, Gearhart purchased complete ownership of Aetna's Geosource investment, a seismograph concern carried on the Aetna books at a value of $450 million. In exchange, Aetna received 10,000,000 shares of Gearhart common stock, which it agreed to vote as recommended by a majority of Gearhart's directors, and other consideration. After a hearing held on July 6 at Smith's behest, the trial court set the annual meeting of Gearhart's shareholders for August 20, 1984, declined to enjoin Gearhart from proceeding further with the Geosource acquisition, but found that "equity and fairness dictate that the shares of [Gearhart] stock issued or to be issued pursuant to the Aetna [Geosource] transaction should not be permitted to be voted in the upcoming shareholders meeting" nor in determining a quorum there.

We heard appeals from the above actions of the trial court on July 19, entering in connection with that hearing a comprehensive order designed to halt all...

To continue reading

Request your trial
151 cases
  • Moore Corp. Ltd. v. Wallace Computer Services, Inc., Civ. A. No. 95-472 MMS.
    • United States
    • U.S. District Court — District of Delaware
    • 4 Diciembre 1995
    ...Indus., Inc. v. Smith Int'l, Inc., 592 F.Supp. 203, 211 n. 1 (N.D.Tex.1984) (same), aff'd in part, modified and vacated in part, 741 F.2d 707 (5th Cir.1984); but see, e.g., Central Nat'l Bank v. Rainbolt, 720 F.2d 1183, 1186-87 (10th Cir.1983) (target corporation lacked standing in antitrus......
  • South Cent. Bell Telephone Co. v. Louisiana Public Service Com'n, 83-3494
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • 11 Octubre 1984
    ...the "clearly erroneous" standard of review as articulated in Federal Rule of Procedure 52(a). See Gearhart Industries, Inc. v. Smith International, Inc., 741 F.2d 707, 710 (5th Cir.1984); Apple Barrel Productions, Inc. v. Beard, 730 F.2d 384, 386 (5th Cir.1984). The district court's conclus......
  • King v. Douglass
    • United States
    • U.S. District Court — Southern District of Texas
    • 23 Diciembre 1996
    ...under Texas law, unlike Delaware law, that a fiduciary duty to shareholders directly is not cognizable. Gearhart Indus., Inc. v. Smith Int'l, Inc., 741 F.2d 707, 721-11 (5th Cir.1984)("the directors' duty of loyalty and care run to the corporation, not to individual shareholders or even to ......
  • U.S. v. LULAC
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • 2 Julio 1986
    ...(1979); United States v. Gregory-Portland Independent School District, 654 F.2d 989 (5th Cir.1981).2 Gearhart Industries v. Smith International, Inc., 741 F.2d 707, 710-11 (5th Cir.1984); Apple Barrel Productions, Inc. v. Beard, 730 F.2d 384, 386 (5th Cir.1984).3 Gearhart, supra; Enterprise......
  • Request a trial to view additional results
2 firm's commentaries
2 books & journal articles
  • Relevant Market and Concentration
    • United States
    • ABA Antitrust Library Mergers and Acquisitions. Understanding the Antitrust Issues. Fourth Edition
    • 6 Diciembre 2015
    ...is a distinct technology used in specific oil drilling processes), aff’d in part, modified in part & vacated in part , 741 F.2d 707 (5th Cir. 1984); United States v. General Elec. Co., 2004 U.S. Dist. LEXIS 3614 (D.D.C. 2004) (critical 106 Mergers and Acquisitions recognition of separate ma......
  • Table of Cases
    • United States
    • ABA Antitrust Library Mergers and Acquisitions. Understanding the Antitrust Issues. Fourth Edition
    • 6 Diciembre 2015
    ...80 F.T.C. 79 (1972), 537 Gearhart Indus. v. Smith Int’l, 592 F. Supp. 203 (N.D. Tex.), aff’d in part, modified in part & vacated in part , 741 F.2d 707 (5th Cir. 1984), 105, 116, 139, 348 General Elec. Capital Corp. v. Grossman, 991 F.2d 1376 (8th Cir. 1993), 469, 470 General Foods Corp., 1......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT