Anago Inc. v. Tecnol Medical Products, Inc., Civ. A. No. 3-92-250-H.

• Citation: 792 F. Supp. 514
• Decision Date: 26 February 1992
• Docket Number: Civ. A. No. 3-92-250-H.
• Parties: ANAGO INCORPORATED and Timothy J. McKibben, Plaintiff, v. TECNOL MEDICAL PRODUCTS, INC., Capital Southwest Venture Corp., Patrick Hamner, Joel Douglas Inman, and Margaret Kathryn Inman, Defendants.
• Court: U.S. District Court — Northern District of Texas

792 F. Supp. 514

ANAGO INCORPORATED and Timothy J. McKibben, Plaintiff, v. TECNOL MEDICAL PRODUCTS, INC., Capital Southwest Venture Corp., Patrick Hamner, Joel Douglas Inman, and Margaret Kathryn Inman, Defendants.

Civ. A. No. 3-92-250-H.

United States District Court, N.D. Texas, Dallas Division.

February 26, 1992.

T. Richard Handler, Stephen E. Fox, Jenkens & Gilchrist, Dallas, Tex., for plaintiff.

Rebecca P. Adams, James A. Ellis, Jr., Rodney H. Lawson, Stephen J. Pierce, Carrington, Coleman, Sloman & Blumenthal, Dallas, Tex., for defendant Tecnol Medical Products.

Eric R. Cromartie, Hughes & Luce, Dallas, Tex., for defendants Capital Southwest, Patrick Hamner.

Thomas F. Harkins, Jr., Gandy Michener Swindle Whitaker & Pratt, Fort Worth, Tex., for defendants Joel Douglas, Margaret Kathryn Inman.

MEMORANDUM OPINION AND ORDER

SANDERS, Chief Judge.

Plaintiff Anago Incorporated ("Anago") seeks a preliminary injunction enjoining Defendant Tecnol Medical Products ("Tecnol") from further pursuing its attempt to acquire control over Anago and effectuate a merger between the two companies. Anago contends that Tecnol's activities violate Section 7 of the Clayton Act, 15 U.S.C. § 18, which prohibits mergers that substantially lessen competition, and Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e), as amended (the "Williams Act"), which prohibits certain deceptive or manipulative practices in connection with a tender offer.¹

The Court held an evidentiary hearing on the Application for Preliminary Injunction on February 14, 1992. Based on the testimony and facts presented at the hearing, as well as the affidavits, depositions, arguments, and briefs presented by counsel, the Court concludes that the Plaintiff has not demonstrated a threat of "antitrust injury" sufficient for issuance of a preliminary injunction under Section 16 of the Clayton Act. Nor will a preliminary injunction issue on Plaintiff's securities claim. The Court concludes that Defendant's attempt to acquire control over Anago did not constitute a "tender offer" within the meaning of Section 14 of the Williams Act, and thus, the Plaintiff is not likely to prevail on the merits.

I. BACKGROUND

Anago and Tecnol design, manufacture and market disposable operating room apparel and certain related disposable medical specialty products. The disposable medical products market, by all accounts, is highly competitive and dominated by a relatively small number of companies. Although Anago and Tecnol do not make all of the same products, they are direct competitors with respect to several of their most important products — surgical face masks, isolation masks, and ice filled insulated ice packs. The two companies do not sell to exactly the same markets, but both focus their marketing strategy on hospitals within the United States. Together, they control a large percentage of the market for surgical face masks, isolation masks, and insulated ice packs sold to U.S. hospitals. Both Anago and Tecnol are based in Fort Worth, Texas.

Incorporated in 1978, Anago is the smaller corporation, privately held, with approximately eighty shareholders and 700 employees. Anago prides itself as a "price maverick," operating on a smaller margin of profit than its competitors. Since its formation, Anago's net sales and market share have steadily increased, particularly with respect to its face mask and insulated ice pack product lines. The growth in business is largely attributable to Anago's willingness and ability to undercut the prices of its competitors, principally Tecnol. Anago's marketing strategy has focused almost exclusively on U.S. hospitals, although in recent years Anago has begun to experience some success in international markets. Anago had about $19 million in sales for the fiscal year ended November 1991.

Tecnol is a publicly held corporation, incorporated in 1976, with sales of approximately $55 million in 1991. Tecnol is the industry leader in surgical masks, isolation masks, and insulated ice packs, capturing the largest market share of each product as sold to U.S. hospitals. Tecnol's marketing strategy, for the most part, is broader and more developed than Anago's; Tecnol sells a broader range of products to a wider array of users. Tecnol has sought to enhance its sales to dentists and industrial users, not simply hospitals. Additionally, international sales of its products comprised approximately 20 percent of its gross sales in 1991.

The events which brought the two companies before this Court began sometime in Fall 1991 when Tecnol began discussions with two major Anago shareholders, Joel Douglas Inman and Paul Shepard, about purchasing their stock. Inman was a co-founder of the company and former chairman of the board. He owned 11.4 percent of Anago's outstanding common stock, and was the third largest common shareholder. Shepard, also a former chairman of the board, owned 14.7 percent of Anago's outstanding common stock, and was Anago's second largest shareholder. Tecnol's negotiations with Inman and Shepard culminated in an agreement to purchase all of their shares.

With Inman's help, Tecnol contacted representatives of Anago's four preferred shareholders and a select number of common shareholders in late 1991 and early 1992. The four preferred shareholders were sophisticated venture capital groups, Anago Partners, L.P., LKCM Investment Partnership, Capital Southwest Venture Corporation, and Cumberland Capital Corporation. After extensive negotiations, Tecnol purchased 100 percent of Anago's preferred stock in late January 1992. Tecnol also contacted about ten common shareholders regarding purchase of their stock, a number of whom have agreed to sell.

At present, Tecnol owns a substantial portion, though not a majority, of Anago's stock. Anago's motion for preliminary injunction is designed to prevent any further acquisition of Anago stock by Tecnol. In the Fifth Circuit, a preliminary injunction will issue only when the movant has established the following: (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) the 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. Gearhart Indus., Inc. v. Smith Int'l, Inc., 741 F.2d 707 (5th Cir. 1984); Canal Authority of State of Florida v. Callaway, 489 F.2d 567, 573 (5th Cir.1974).

II. SECURITIES CLAIM

Anago asserts that Tecnol violated Section 14(e) of the Williams Act by not disclosing to various Anago shareholders information regarding the true value of Anago stock. Specifically, Anago asserts that Tecnol obtained confidential inside information from Inman and Shepard about Anago, and did not disclose that information when negotiating with Anago shareholders. Without that information, says Anago, the shareholders could not make an informed decision of whether to sell.

Section 14(e) makes it unlawful to include in a tender offer any untrue statement of a material fact or to omit any material fact necessary to make statements not misleading. Section 14(e), however, is not triggered unless the stock transactions at issue constituted a "tender offer"; privately negotiated transactions are outside the province of Section 14. See, e.g., Wellman v. Dickinson, 475 F.Supp. 783 (S.D.N.Y.1979), aff'd on other grounds, 682 F.2d 355 (2d Cir.1982), cert. denied, 460 U.S. 1069, 103 S.Ct. 1522, 75 L.Ed.2d 946 (1983). The critical preliminary determination, therefore, is whether Tecnol's purchases of Anago stock constituted a "tender offer," or merely a series of privately negotiated transactions.

The most widely cited test for determining whether a stock purchase is a tender offer is the eight-factor analysis developed by the SEC and first applied in Hoover Co. v. Fuqua Indus., Fed.Sec.L.Rep. (CCH) ¶ 97,107 (N.D.Ohio June 11, 1979). The eight factors are: (1) whether there is an active and widespread solicitation of public shareholders for shares of an issuer; (2) whether the solicitation is made for a substantial percentage of the issuer's stock; (3) whether the offer to purchase is made at a premium over the prevailing market price; (4) whether the terms of the offer are firm rather than negotiated; (5) whether the offer is contingent on the tender of a fixed minimum number of shares, and perhaps, subject to the ceiling of a fixed maximum number to be purchased; (6) whether the offer is open for only a limited period of time; (7) whether the offerees are subject to pressure to sell their stock; and (8) whether public announcements of a purchasing program concerning the target company precede or accompany a rapid accumulation of large amounts of target company securities. Pin v. Texaco, Inc., 793 F.2d 1448, 1454 (5th Cir.1986). Many courts have applied this test. See, e.g., SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 949-52 (9th Cir.1985); Energy Ventures, Inc. v. Appalachian Co., 587 F.Supp. 734, 740 (D.Del.1984); Wellman v. Dickinson, 475 F.Supp. at 823-26.

The Second Circuit has cautioned against elevating the SEC's eight-factor analysis to a "mandatory litmus test," and has applied a second test to determine whether stock purchases constitute a tender offer. Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir.1985). In Hanson, the court inquired whether there is "a substantial risk that solicitees will lack information needed to make a carefully considered appraisal of the proposal put before them." Id. at 57. The court also asked "whether the particular class of persons needs the protection of the Act." Id. (quoting SEC v. Ralston Purina Co., 346 U.S. 119, 125, 73 S.Ct. 981, 984, 97 L.Ed. 1494 (1953)).

In determining the presence of a tender offer, the Fifth Circuit has taken both tests into account. See Pin v. Texaco, Inc., 793 F.2d at 1454-55. It is...