Bache & Co. v. International Controls Corp.

• Decision Date: 29 March 1971
• Docket Number: No. 68 Civ. 4133.,68 Civ. 4133.
• Citation: 324 F. Supp. 998
• Parties: BACHE & CO., Incorporated, Plaintiff, v. INTERNATIONAL CONTROLS CORP., Defendant.
• Court: U.S. District Court — Southern District of New York

324 F. Supp. 998

BACHE & CO., Incorporated, Plaintiff, v. INTERNATIONAL CONTROLS CORP., Defendant.

No. 68 Civ. 4133.

United States District Court, S. D. New York.

March 29, 1971.

Sullivan & Cromwell, New York City, for plaintiff; Howard T. Milman, Joel M. Miller, New York City, of counsel.

Cahill, Gordon, Sonnett, Reindel & Ohl, New York City, Hogan & Hartson, Washington, D. C., for defendant; David R. Hyde, Allen S. Joslyn, New York City, David A. Ludtke, James A. Hourihan, Washington, D. C., of counsel.

OPINION, FINDINGS OF FACT and CONCLUSIONS OF LAW

LEVET, District Judge.

This action arises from a tender offer which defendant International Controls Corp. ("ICC") made in the fall of 1968 for the securities (common stock and debentures convertible into common stock) of Electronic Specialties Co. ("ELS"). Plaintiff Bache & Co. Incorporated ("Bache") claims that it properly tendered ELS securities in response to that offer; ICC denies that Bache made proper tender.

The case was tried to the court without a jury on the issue of liability only.

After hearing the testimony of the parties, examining the exhibits, the pleadings and the proposed findings of fact and conclusions of law submitted by counsel, this court makes the following Findings of Fact and Conclusions of Law:

FINDINGS OF FACT

1. Plaintiff is a corporation organized and existing under the laws of the State of Delaware, engaged in a general securities business, a member of the New York Stock Exchange and other national securities exchanges, and has its principal office at 100 Gold Street, New York, New York (Complaint par. 1; Answer par. 1).

2. Defendant is a corporation of the State of Florida having its principal place of business at 88 Clinton Road, Fairfield, New Jersey (Complaint par. 2; Answer par. 2).

3. The action was commenced by attachment in the Supreme Court of the State of New York, County of New York, and was removed to this court pursuant to 28 USC § 1441. There is diversity of citizenship and the amount in controversy exceeds $10,000 (Pretrial Order¹ par. 3(a) (i).

4. On August 19, 1968, ICC published a tender offer seeking to purchase such number of the outstanding securities, common stock and convertible debentures of ELS as would result in its acquiring 500,000 shares (assuming conversion of the debentures) of the common stock at a price of $39.00 per share for common stock and $1,236 per $1,000 debenture, net to the seller in cash, plus a commission of 70¢ per share of common stock and $22.19 per $1,000 debenture to soliciting securities dealers (PX 1).² The tender offer was captioned "Offer to Purchase."

5. On September 9, 1968, defendant published a press release carried on the Dow Jones Broad Tape and The Wall Street Journal which read:

"International Controls Corp. announced today that its tender offer for common stock and 5% convertible debentures of Electronic Specialty Co. has already resulted in the tender of more than the 500,000 shares for which it tendered. International Controls Corp. has amended its tender offer to now accept all Electronic Specialty Co. Common Stock and convertible debentures tendered without limit and has extended the time in which to tender until 5:00 P.M., Pacific Coast time, Thursday, September 12, 1968. The price to be paid in cash is $39.00 per share of common stock and $1,236.00 per convertible debenture, all net to the Seller.

"Securities dealers will receive $.70 per share of common stock and $22.19 per $1,000.00 debenture solicited by them and accepted by International Controls Corp." (PTO par. 3(a) (v))

6. The tender offer was twice extended and expired at 5:00 P.M., Pacific Coast Time, September 12, 1968 (PTO par. 3(a) (iii))

7. Between August 30, 1968 and September 12, 1968, Bache tendered to ICC's forwarding agent for itself 9,348 shares of common stock and on behalf of approximately 145 of its customers 21,301 shares of common stock (a total of 30,649 shares of common stock) and at least 42 $1,000 debentures of ELS (Tr. 103-106; PX 9, PX 11, PX 7A-E; PTO par. 3(a) (iv)). Those tenders were made in Bache's name (PX 9, PX 11) by means of a letter of transmittal form (PX 2) supplied by ICC, without delivery of certificates. This printed form was subtitled "Tender of Shares in Acceptance of Offer."

8. Bache, however, executed letters of transmittal for some 148 more shares than it had been instructed to by its customers (Tr. 146, 185-187, 189-192). Bache, immediately upon discovery of this error on the day following the close of the offer, purchased an additional 148 shares (Tr. 198).

9. The tender offer provided, in the Letter of Transmittal, that accepting stockholders and debenture holders could either deliver the securities with the transmittal letter, or they could deliver the Letter of Transmittal without the stock certificates or debentures. In the latter event, the Letter of Transmittal form (PX 2) provided in its second paragraph:

"If the certificates representing the shares and Debentures tendered hereby are not enclosed, a member of a national securities exchange or a commercial bank or trust company must guarantee in the space provided below that such certificates and Debentures will be deposited with you Bank of America National Trust and Savings Association or The First Jersey National Bank, the depositaries, or Chemical Bank New York Trust Company, the forwarding agent not later than 5 business days after written or oral notice from you to such member firm, bank or trust company that this tender has been accepted by the Purchaser ICC."

The guarantee form, appearing in the box headed "TO BE USED ONLY IF CERTIFICATES ARE NOT TRANSMITTED HEREWITH," provided:

"The undersigned, a member of a national securities exchange * * * guarantees to deliver to the Depositary certificates for the shares and the Debentures tendered by this Letter of Transmittal, duly endorsed in blank or accompanied by duly executed stock powers, with signatures guaranteed in accordance with the terms and conditions set forth on the reverse side hereof, not later than 5 business days after written or oral notice of acceptance thereof by the Purchaser is given by the Depositary."

Bache signed the guarantee form on each of the relevant Letters of Transmittal (PX 9, PX 11).

10. The prevailing custom and usage in the securities business industry is for each member of a national securities exchange which guarantees subsequent delivery of certificates representing securities tendered in acceptance of a tender offer to receive written or telephone notice directly from the depositary bank or forwarding agent informing that guarantor that its tender of the securities was properly made and accepted and stating the date by which certificates should be delivered (Tr. 211, 258, 302).

11. On September 12, 1968, defendant published a press release carried on the Dow Jones Broad Tape and The Wall Street Journal which read:

"International Controls Corp. announced today that its tender offer for Common Stock and 5% Convertible Debentures of Electronic Specialty Co. has resulted as of the close of business on September 10, 1968 in the tender of Common Stock and Debentures totaling over 600,000 shares (assuming conversion of the Debentures). International Controls Corp. will accept all Electronic Specialty Co. Common Stock and Convertible Debentures tendered before 5:00 P.M., Pacific Coast Time, Thursday, September 12, 1968. The price to be paid in cash is $39.00 per share of Common Stock and $1,236.00 per $1,000.00 Convertible Debenture, all net to the seller. The sources of the funds to be used by International Controls Corp. are the same as those set forth in its Offer published on August 19, 1968, notwithstanding the fact that International Controls Corp. has amended its Offer to now accept all Common Stock and Convertible Debentures tendered." (PTO par. 3(a) (vi))

12. On September 16, 1968, defendant published a press release carried on the Dow Jones Broad Tape and The Wall Street Journal which read:

"International Controls Corp. announced today that at the conclusion of its tender offer for Common Stock and Convertible Debentures of Electronic Specialty Co. on September 12, 1968, it had received tenders of 1,300,000 shares of Common Stock—(assuming conversion of the Debentures).

"Although International Controls Corp. announced that it would accept and pay for all shares properly tendered, it was taking the unusual step of permitting tendering Electronic Specialty Co. stockholders to withdraw their shares up to and including September 24, 1968. This step was being taken to assure full and fair disclosure to all tendering shareholders and notice to this effect is being mailed to them this week." (PTO par. 3(a) (viii))

Five business days after September 16th was September 23rd.

13. Defendant issued a Withdrawal Offer, dated September 16, 1968, by which defendant offered to persons who had tendered their shares the opportunity to withdraw such shares (PX 12). A copy of that Withdrawal Offer was mailed to Bache by the First Jersey Bank on September 16, 1968 (Tr. 214).

14. ICC instructed its depositary not to give the notice to deliver to banks and brokers required by the contracts (Tr. 205, 209-211).

15. On September 16, 1968, Bache asked Chemical Bank, ICC's agent for such purposes (PX 1, p. 4) when delivery of guaranteed securities was to be made by Bache; Bache was told by a Mr. Reinhardt of Chemical Bank that Chemical Bank would let it know, but such notice was never given to Bache (Tr. 118-119; PX 29).

16. The notice to banks and brokers from the depositary required by the contracts between Bache and ICC was never given by the depositaries or the forwarding agent (Chemical Bank) or received by Bache (Tr. 110, 119, 128, 205, 209-211, 212, 238).

17. Notice was not given to Bache by Mr. Howard A. Singer, an employee of defendant (Tr. 122-123, 168-169, 354-356, 394, 409-431; PX 24).

18. B...