American Smelting and Refining Co. v. Pennzoil United, Inc.

• Decision Date: 24 January 1969
• Docket Number: Civ. A. No. 3647.
• Citation: 295 F. Supp. 149
• Parties: AMERICAN SMELTING AND REFINING COMPANY, Plaintiff, v. PENNZOIL UNITED, INC., Defendant.
• Court: U.S. District Court — District of Delaware

295 F. Supp. 149

AMERICAN SMELTING AND REFINING COMPANY, Plaintiff, v. PENNZOIL UNITED, INC., Defendant.

Civ. A. No. 3647.

United States District Court D. Delaware.

January 24, 1969.

COPYRIGHT MATERIAL OMITTED

James M. Tunnell, Jr., Morris, Nichols, Arsht & Tunnell, Wilmington, Del., Daniel Gribbon, Henry Sailer and Robert Muth, Covington & Burling, Washington, D. C., of counsel, for plaintiff.

Richard F. Corroon, Potter, Anderson & Corroon, Wilmington, Del., Whitney N. Seymour, Eleanor Fox and Arthur Settles, Simpson, Thacher & Bartlett, New York City, John Bagalay, Jr., Baker, Botts, Shepherd & Coates, Houston, Tex., of counsel, for defendant.

OPINION

WRIGHT, Chief Judge.

This is an action by plaintiff, American Smelting and Refining Company (Asarco), for a preliminary injunction restraining defendant, Pennzoil United, Inc. (Pennzoil), from acquiring a substantial ownership interest in Asarco by way of a tender offer to Asarco shareholders. Plaintiff bases its action on Section 7 of the Clayton Act, 15 U.S.C. § 18, alleging that a Pennzoil takeover of Asarco would substantially lessen competition in each of several lines of commerce in the United States. Jurisdiction is based on 28 U.S.C. §§ 1331, 1337 and 15 U.S.C. §§ 22, 26.

The subject matter of this action is the effect of a Pennzoil-Asarco combination on competition in the copper and molybdenum industries. Asarco is a New Jersey corporation with consolidated assets of more than $750 million engaged in exploration for and development of copper mines, mining and milling of copper ores, smelting and refining of copper concentrates, sale of refined copper, and production and sale of molybdenum. Pennzoil is a Delaware corporation with consolidated assets of more than $1 billion engaged, through its 99% owned subsidiary Duval Corporation (Duval), in exploration for and development of copper mines, mining and milling of copper ores, sale of refined copper, and production and sale of molybdenum. Duval is a comparatively recent entrant into the copper and molybdenum industries, commencing operations in 1959. Its significance in both industries, however, has increased rapidly and, with the opening later this year of its new Sierrita mine (the second largest domestic copper mine), its participation in both industries will more than double.

There is no dispute that Pennzoil seeks to acquire a substantial interest in Asarco. On January 22, 1969, Pennzoil made public a tender offer for "any and all outstanding shares" of Asarco stock. Nor is there any dispute that the acquisition is for the purpose of merging the two corporations and thus not solely for purposes of investment. See Liedtke Affidavit (filed December 20, 1968); Pennzoil Registration Statement, Amendment 1 to Form S-1, p. 5.

I. THE CLAYTON ACT

Section 7 of the Clayton Act, 15 U.S.C. § 18, prohibits acquisition, in whole or in part, of the stock of a corporation "where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition * * *." Section 7 does not require a showing of existing or certain anti-competitive effects; indeed, its purpose is to interfere with movement toward undue concentration of economic power before anti-competitive effects can manifest themselves. United States v. Philadelphia National Bank, 374 U.S. 321, 362, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963); Vanadium Corporation of America v. Susquehanna Corp., 203 F.Supp. 686, 695 (D.Del. 1962). Accordingly, it is sufficient for the complaining party to establish a "reasonable likelihood * * * that the acquisition will result in a restraint of commerce * * *" United States v. E. I. duPont de Nemours Co., 353 U.S. 586, 592, 77 S.Ct. 872, 877, 1 L. Ed.2d 1057 (1957).

Injunctive relief is particularly suited to the preventive function of Section 7 and Congress has expressly extended the availability of the injunctive remedy to private parties. 15 U.S.C. § 26. The standards applicable to preliminary injunctive relief, sought here, are well-settled:

"To justify a temporary injunction it is not necessary that the plaintiff's right to a final decision, after a trial, be absolutely certain, wholly without doubt; if the other elements are present (i. e., the balance of hardships tips decidedly toward plaintiff), it will ordinarily be enough that the plaintiff has raised questions going to the merits so serious, substantial, difficult and doubtful, as to make them a fair ground for litigation and thus for more deliberate investigation."

Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2 Cir. 1953); see also Vanadium Corporation of America v. Susquehanna Corp., supra 203 F. Supp. at 697. In other words, plaintiff must demonstrate a reasonable probability of success on final hearing. United States v. Ingersoll-Rand Co., 320 F.2d 509, 525 (3 Cir. 1963).

Turning to the specific facts of this case, the Court will consider plaintiff's anti-trust allegations in terms of five separate lines of commerce—exploration for and development of copper mines,¹ mining and milling of copper (as measured by domestic copper consumption), processing of copper concentrates (including both smelting and refining of copper), sale of refined copper to independent fabricators, and production and sale of molybdenum. The relevant geographic area for each line of commerce is the United States.

A. EXPLORATION AND DEVELOPMENT

Both Asarco and Pennzoil are active in exploration for new copper deposits and in the development of new copper mines. Each corporation invests several million dollars annually on exploration and substantially more on development. See Strauss Affidavit, para. 11; PX-16. Indeed, of some 16 mines developed since World War II, two were efforts by Asarco, four by Duval.² Transcript of Hearing, January 16, 1969 (Tr.), p. 14.

However, activity in this line of commerce extends well beyond Asarco and Pennzoil. Of the 15 companies with significant participation in the domestic copper industry, 13 are active in exploration and development. Strauss Affidavit, Exhibit A. Furthermore, exploration activity extends well beyond the copper industry. Exhibit B to the Just Affidavit lists 17 companies outside the copper industry actively engaged in exploration for non-ferrous metals, including copper. And Asarco's Strauss testified that "There is intense activity in exploration for copper." Tr. 12.

Asarco argues, however, that, notwithstanding the vigorous activity in this line of commerce, the productivity of these efforts is low (only 16 mines since World War II) and that nearly one half of the concrete product of these efforts (6 out of 16 mines) is attributable to Asarco and Pennzoil. Thus, an Asarco-Pennzoil merger would eliminate a major portion of the meaningful competition in this area. Asarco argues further that, should Pennzoil and Asarco combine, the sum total of effort devoted to exploration and development by the combined enterprise will be less than the total efforts of the two separate companies. Again, competition would be substantially reduced.

After careful review of the record, the Court is not persuaded that, as to this line of commerce, there is reasonable probability of demonstrating a Section 7 violation at final trial. The vast number of large enterprises engaged in exploration and development indicates vigorous and adequate competition. While it is true that only 16 mines have been developed in the past two decades, that figure is not a good index of productivity because it does not reflect the number of deposits actually discovered and held in reserve for future development. Finally, the Court is not convinced that a Pennzoil-Asarco combination would significantly affect the total effort devoted to this activity. Accordingly, the record provides no basis for concluding that a substantial lessening of the vigorous competition can be shown at final trial.

B. MINING AND MILLING OF COPPER

Asarco and Pennzoil do not agree on the proper index for measuring the participation of the two corporations in this line of commerce. Asarco contends that "domestic mine production" is the proper measure; Pennzoil contends that "domestic copper consumption," which it defines as domestic mine production plus imported copper plus scrap copper, is the proper measure. See Cohen Affidavit, para. 6.

After considering each argument, the Court concludes that domestic copper consumption is the proper index for measuring market shares in this line of commerce. However, the Court does not accept the definition of domestic copper consumption put forth by Pennzoil, nor does the Court accept the figures provided by Pennzoil.³ Specifically, the Court does not agree that "toll scrap" should be included in the definition of copper consumption for the reasons set forth by Strauss, Tr. 66-71. See Cohen Affidavit para. 7. And the Court does not agree that the quantity of copper released from Government reserves in 1966 should be included in the 1966 consumption figures.⁴ Tr. 74.

Taking these adjustments into account, Cohen's 1966 copper consumption figure of 2,359,954 tons of copper per year should be reduced by 323,000 tons per year (toll scrap. See Tr. 71) and 150,000 tons per year (Government release. See Tr. 74) to 1,886,954 tons per year. By the same token, Cohen's estimate for 1970 becomes 1,973,753 tons per year,⁵ the figure which the Court considers relevant to determination of market shares.

The record indicates that the correct estimates for 1970 market participation by the parties to this suit are 130,000 tons per year for Asarco,⁶ Tr. 76, and 122,700 tons per year for Duval, Cohen Affidavit, para. 8. Accordingly, Asarco's 1970 market share will be 6.58%, Pennzoil's 6.22% and the combined share will be 12.8%.

The copper industry is properly characterized as highly concentrated, the top four companies having 70% of the total market. A Pennzoil-Asarco combination would, in view...