Atlantic Coast Airlines Holdings v. Mesa Air Group, CIV.A. 03-2198(RMC).

• Decision Date: 18 December 2003
• Docket Number: No. CIV.A. 03-2198(RMC).,CIV.A. 03-2198(RMC).
• Citation: 295 F.Supp.2d 75
• Parties: ATLANTIC COAST AIRLINES HOLDINGS, INC., Plaintiff, v. MESA AIR GROUP, INC., Defendant.
• Court: U.S. District Court — District of Columbia

295 F.Supp.2d 75

ATLANTIC COAST AIRLINES HOLDINGS, INC., Plaintiff, v. MESA AIR GROUP, INC., Defendant.

No. CIV.A. 03-2198(RMC).

United States District Court, District of Columbia.

December 18, 2003.

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Paul Blenkenstein, Michael L. Denger, James Robert Loftis, III, Gibson, Dunn & Crutcher, Washington, DC, Elizabeth A. Brem, Wayne Smith, Gibson, Dunn & Crutcher, Irvine, CA, Michael Krauss, Gibson, Dunn & Crutcher, New York City, Raymond J. DiCamillo, Richards, Layton & Finger, PA, Wilmington, DE, Robert E. Cooper, Gibson, Dunn & Crutcher, Los Angeles, CA, for Plaintiff.

James K. Robinson, Stephen Michael Chippendale, Cadwalader, Wickersham & Taft, Washington, DC, Jonathan Ian Gleklen, Arnold & Porter, Washington, DC, for Defendant.

Anika Sanders Cooper, Office of Corporation Counsel, D.C., Washington, DC, for Commonwealth of Virginia and District of Columbia.

MEMORANDUM OPINION

COLLYER, District Judge.

At its core, this case involves a dispute over the future of Atlantic Coast Airlines Holdings, Inc. ("Atlantic Coast" or "ACA"): will it be a regional carrier for major airlines or an independent low-fare operator? It is presented to the Court in the context of a consent solicitation to replace the company's Board of Directors.

Atlantic Coast currently operates as a regional air carrier under the United Express and Delta Connection brands in the Eastern and Midwestern United States, as well as Canada. On July 28, 2003, Atlantic Coast announced plans to transform itself into an independent, low-fare airline based at Washington Dulles International Airport ("Dulles"). This new strategy was prompted in large measure by the bankruptcy reorganization of United Airlines, Inc. ("United") and the expectation that United would reject the current United/ACA code-sharing agreement under which ACA operates as a United Express ("UAX") carrier. On October 6, 2003, Mesa Air Group, Inc. ("Mesa"), a fellow regional air carrier and ACA shareholder, submitted an unsolicited proposal to acquire Atlantic Coast for the stated purposes of keeping Atlantic Coast in its traditional role as a UAX carrier and creating the leading regional airline in the United States. When the Atlantic Coast Board of Directors ("ACA Board") rejected the proposal Mesa filed a preliminary consent statement with the Securities and Exchange Commission ("SEC"), pursuant to which Mesa seeks the consent of Atlantic Coast shareholders to replace the ACA Board with Mesa nominees.

Pending before the Court is Atlantic Coast's Amended Motion for a Preliminary Injunction, in which ACA asks the Court to prevent the consent solicitation from going forward. Atlantic Coast brings both securities and antitrust claims against Mesa. ACA alleges that Mesa has violated §§ 14(a) and (e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78n(a) and (e), by issuing a preliminary and two revised preliminary consent statements, press releases, and other public statements that contain materially false and misleading statements and omissions. ACA also alleges that Mesa has violated § 1 of the Sherman Act, 15 U.S.C. § 1, § 7 of the Clayton Act, 15 U.S.C. § 18, and the District of Columbia Antitrust Act, D.C. CODE § 28-4502, by entering into an agreement with United that will have the effect of eliminating competition by blocking the entry of ACA's planned low-fare airline into the marketplace. Mesa counters that its solicitation materials fully and accurately disclose all pertinent information, including the allegations of this lawsuit, and that its actions to continue Atlantic Coast as a feeder airline for United do not run afoul of the antitrust laws. Following a deluge of briefs and exhibits, and a preliminary injunction hearing, the parties agreed that the Court would have ten days to render its decision. Having considered all the materials submitted, the entire record in this matter, and the demeanor and credibility of the testimony of the witnesses, the Court will grant a preliminary injunction enjoining Mesa from proceeding with the consent solicitation or exchange offer until this matter can be heard and decided on the merits. The defendant's motion to dismiss will be denied without prejudice. A confirming order will be issued.

I. FACTUAL BACKGROUND

Atlantic Coast has operated as a regional air carrier for United at Dulles since 1989. At the beginning of the business relationship between these two airlines, Atlantic Coast received a prorated portion of the revenues collected when a passenger connected from an Atlantic Coast aircraft to a United aircraft. Although all seats were sold as United seats, Atlantic Coast selected which routes to fly and how frequently to fly them. In January 2000, United and Atlantic Coast switched to a "fee-per-departure" arrangement, under which United assumed substantially more control over Atlantic Coast's operations. United now sets the fares for UAX flights, selects which routes ACA flies, and determines how frequently Atlantic Coast serves those routes. In return, United pays Atlantic Coast a pre-negotiated fee for each flight ACA operates as United Express. ACA is the largest UAX carrier; it flies approximately 500 flights per day serving approximately 50 cities.

Atlantic Coast began to explore alternative business strategies in early 2001 to supplement or replace its operations as a regional air carrier servicing major airlines. United's bankruptcy filing on December 9, 2002, added to Atlantic Coast's concern about the wisdom of continuing to do business as a feeder airline. The fact that United has used the bankruptcy process to re-negotiate for significantly lower costs in its UAX agreements with regional airlines across the country has not helped to assuage ACA's concerns. After months of unsuccessful negotiations with United, Atlantic Coast publicly announced on July 28, 2003 that it anticipated that United would reject the existing United/ACA code-share agreement through the bankruptcy court and that Atlantic Coast planned to establish an independent, low-fare airline based at Dulles. Since that time, Atlantic Coast has taken extensive steps to prepare for the launch of "Independence Air," including commitments for route planning consultants, reservations systems, call center ticket counters, gate luggage handling, aircraft servicing, and advertising, to augment its fleet of regional jets and departure/arrival gates at Dulles. In addition, Atlantic Coast announced on November 18, 2003, that it had reached a memorandum of understanding with Airbus Industrie AVSA ("Airbus") to lease and purchase 25 narrow-body planes to fly larger numbers of passengers over longer distances than ACA's current complement of 87 regional jets flies.

In the meantime, while Atlantic Coast was looking to change business models, Mesa sought to regain its stature as a regional air carrier for United following United's 1998 termination of a prior code-share agreement between United and Mesa. Those parties reached a new agreement on February 27, 2003, pursuant to which Mesa would operate ten aircraft under the United Express brand. On July 1, 2003, Mesa and United agreed that Mesa would operate an additional 35 UAX regional jets, with the option of adding 25 regional jets at a later date. The July agreement became effective in August 2003 and will expire in December 2013.

Mesa followed the United/ACA negotiations with a high degree of interest and incredulity that ACA would walk away from its relationship with United. Immediately after ACA announced its July 2003 decision to forego the United relationship and establish a low-cost airline at Dulles, Mesa contacted United and offered its assistance, in whatever way would help. United declined this offer, preferring to continue to negotiate with Atlantic Coast and to maintain its long-standing arrangements for feeder service at Dulles. Nonetheless, Mesa retained an advisor on August 1, 2003, to provide advice on an acquisition and began to acquire large amounts of ACA stock.

The record before the Court reveals that United had two concerns with ACA's announcement of its plans. To those who fly out of Dulles Airport frequently, it will come as no surprise that United depends heavily on the feeder traffic brought to Dulles from the surrounding states by UAX flights operated by Atlantic Coast. The entire hub-and-spoke system of the larger airlines depends on regional feeder airlines, like Atlantic Coast, to return a profit. Therefore, United could ill afford to lose the support of the ACA service at Dulles (or O'Hare Airport in Chicago, where Atlantic Coast is also a mainstay support to United's hub operations). In addition, the parties to this action estimate a potential loss in passenger traffic to United valued at about one-half billion dollars in two years if United were to face competition from a low-fare airline as planned by Atlantic Coast. The record supports the conclusion that potential competition from a low-fare airline operated by ACA is a significant concern to United, even if United believes that such a new airline could only survive for a few years.¹

On October 6, 2003, Mesa announced a bid to acquire Atlantic Coast in a tax-free stock exchange offer because Mesa "[r]ecogniz[ed] both the ill-advised nature of Atlantic's abandonment of its code-sharing model, as well as the strategic benefits associated with combining Atlantic's and Mesa's operations[.]" Defendant's Opposition to Plaintiff's Amended Motion for a Preliminary Injunction ("Defendant's Opposition") at 9. Atlantic Coast issued a press release on October 16, 2003, stating that the ACA Board would consider the merger proposal.

The day before, October 15, 2003, Mesa filed its first preliminary consent statement with the SEC, to which the SEC subsequently provided comments. Eight days later, Atlantic Coast announced its rejection of Mesa's exchange offer and reaffirmed its...