CANADIAN PAC. ENTERPRISES (US) INC. v. Krouse

• Decision Date: 16 January 1981
• Docket Number: No. C-2-80-1056.,C-2-80-1056.
• Citation: 506 F. Supp. 1192
• Parties: CANADIAN PACIFIC ENTERPRISES (U.S.) INC. et al., Plaintiffs, v. Kenneth E. KROUSE, Commissioner of the Ohio Division of Securities, Defendant.
• Court: U.S. District Court — Southern District of Ohio

506 F. Supp. 1192

CANADIAN PACIFIC ENTERPRISES (U.S.) INC. et al., Plaintiffs, v. Kenneth E. KROUSE, Commissioner of the Ohio Division of Securities, Defendant.

No. C-2-80-1056.

United States District Court, S. D. Ohio, E. D.

January 16, 1981.

John J. Chester, Chester, Saxbe, Hoffman & Willcox, Roderick H. Willcox, Donald A. Antrim, Smith & Schnacke, Columbus, Ohio, for plaintiffs.

William J. Brown, Atty. Gen. of Ohio, Roger P. Sugarman, Asst. Atty. Gen., trial counsel, Columbus, Ohio, for defendant Krouse.

John C. Elam, Vorys, Sater, Seymour & Pease, Columbus, Ohio (William H. Wallace and James T. Crowley, Thompson, Hine & Flory, Cleveland, Ohio, Morgan Shipman, Vorys, Sater, Seymour & Pease, Columbus, Ohio, of counsel), for defendant Hobart.

THE Securities and Exchange Commission, amicus curiae; Paul Gonson, Solicitor, James R. Farrand, Asst. Gen. Counsel, James J. Junewicz, Sp. Counsel, Securities and Exchange Commission, Washington, D. C., on brief.

OPINION AND ORDER

KINNEARY, District Judge.

Plaintiffs Canadian Pacific Enterprises (U.S.) Inc. and its wholly owned subsidiary CPE Acquisition Co. collectively referred to herein as CPE brought this action pursuant to 28 U.S.C. Sections 1331(a), 1343(3), and 2201 for a declaratory judgment and injunctive relief. Plaintiffs assert that Ohio Revised Code Section 1707.041(B)(1)— the provision of the Ohio takeover statute that requires public announcement of a takeover bid at least twenty days before it is made—is unconstitutional because it conflicts with the Securities Exchange Act of 1934 Exchange Act, 15 U.S.C. Sections 78m(d)-(e), 78n(d)-(f), as amended,¹ and regulations promulgated thereunder, 17 C.F.R. Sections 240.14d-1 et seq., which forbid public announcement of a tender offer more than five business days before it is made.

The case was tried to the Court on December 29, 1980. Based upon the evidence adduced at trial, the pleadings, the trial memoranda of the parties, and other materials now before it, the Court makes the following findings of fact and conclusions of law.

Findings of Fact

On December 15, 1980 CPE publicly announced a tender offer for all outstanding shares of common stock of Hobart Corporation Hobart, an Ohio corporation with its principal place of business at Troy, Ohio and substantial assets in Ohio. The announcement specified an offering price of $32.50 per share. On that same date CPE filed its offering materials with the Securities and Exchange Commission SEC, Commission and the Ohio Division of Securities Division.

Plaintiffs are subject to Rule 14d-2(b),² which provides that when specified material terms of a cash tender offer are publicly announced the tender offer is deemed to have commenced for purposes of the Williams Act. Within five days of the date of public announcement the offeror must either file a Schedule 14D-1 with the SEC, distribute prescribed information to shareholders, and proceed with the offer in compliance with federal law, or publicly announce that it will not pursue the offer, in which event the offer will be deemed never to have begun. If the bidder elects to proceed, the offer will be deemed to have commenced on the date the filing and dissemination requirements are satisfied, rather than on the date of the earlier public announcement.

Plaintiffs are also subject to Ohio Revised Code Section 1707.041(B)(1), which prevents an offeror from making its offer until at least twenty days after public announcement of the terms.³

Having publicly announced the identities of bidder and target, the amount and class of securities sought, and the price, CPE was required by federal law to "commence" or withdraw its offer within five business days of the announcement. The Ohio twenty day rule, however, prohibited CPE from making its offer during the federally mandated period.

Confronted with the impossibility of simultaneous obedience to both federal and state law, plaintiffs brought this action on the same date that they announced and filed their tender offer, seeking temporary and permanent injunctive relief against enforcement of the twenty day provision of the Ohio Act. This Court permitted Hobart, the target, to intervene as a defendant, and granted Hobart's motion for a temporary restraining order against the tender offer as violative of the Ohio Act. Hobart and Commissioner Krouse answered, raising as a defense the invalidity of Rule 14d-2.

Plaintiffs then moved to dissolve the temporary restraining order. Immediately after hearing argument on December 17, 1980, the Court dissolved that order and entered a new order:

In the interests of fairness and to preserve, so far as possible, the status quo pending decision on the merits, the Court hereby (1) SUSPENDS the operation and enforcement against plaintiffs in their bid to acquire Hobart Corporation of Ohio Revised Code Section 1707.041(B)(1) insofar as it requires that commencement of plaintiff's sic offer be delayed twenty days following initial public announcement; and (2) ORDERS that the offer remain open, that withdrawal rights remain in force, and that plaintiffs not purchase tendered shares until 12:01 A.M., New York City Time, on the eighth day following the issuance of this Court's opinion and order on the merits or an adjudication by the Ohio Division pursuant to Ohio Revised Code Section 1707.041(B)(4), whichever comes later.

In its order of December 17 the Court also identified as the primary issue of law whether Rule 14d-2(b) exceeds the rule-making authority of the SEC and set the case for expedited hearing on the merits.

The Court heard testimony from only one witness, Mr. Francis Wheat, who served as a Commissioner with the SEC from 1964 until 1969, the period when the Williams Act was considered and enacted by the Congress (tr. 51). He directed a study that culminated in a widely read document, "Disclosure to Investors, A Study of the Policies of the Securities and Exchange Commission," better known as the "Wheat Report" (tr. 52-53).

Mr. Wheat also served as an advisor to Professor Loss, the Reporter for the American Law Institute's comprehensive study of federal securities law. That study yielded draft legislation, the so-called "Loss Code," which includes a ten day advance announcement requirement that parallels the twenty day advance filing requirements of the takeover statutes of Ohio and other states, as well as a specific preemptive provision. (Tr. 64, 70, 101.)

In his testimony Mr. Wheat cited the SEC's formal endorsement of the Loss Code as evidence of the Commission's desire to impose preemption for preemption's sake:

Since the Loss Code contains a specific preemptive provision, the Commission obtains, by the adoption of that code, what it wants, which is the preemption of the state laws, and is no longer really concerned with whether or not there is an advanced filing requirement. It is concerned with the advanced filing requirement apparently only to obtain preemption.

(Tr. 101-02.) He further observed that he was unaware of any factual data adduced by the SEC to support either its five day rule or its assertion that state takeover statutes frustrate the operation and purposes of the Williams Act, and testified that the absence of studies reinforced his conclusion that the SEC sought preemption for its own sake (tr. 104-05, 120).

Counsel for amicus SEC elicited from Mr. Wheat the fact that defendants' exhibit G—the Commission's Statement Concerning Codification of the Federal Securities Laws, Release No. 33-6242—lacked certain documents that had been appended to it at the time it was released. These included a letter from Professor Loss explaining certain negotiations and agreements he had conducted with the SEC, and acknowledging that the SEC, despite its expressed support for the proposed Code, had reserved the right to bring before the Congress its own tender offer legislation at a time of its own choosing. The SEC has now submitted a broad legislative proposal concerning the regulation of large acquisitions of shares of major companies. That proposal, in contrast to the Loss Code, is silent with respect to pre-commencement public announcement of the terms of a tender offer. (Tr. 143-46.)

Mr. Wheat identified several effects of the five day rule which he finds undesirable. Some states, attempting to accommodate the new federal rule, have modified their own rules to make the advance filing confidential rather than public. The witness believes that because insiders might pierce the confidentiality, the strong public disclosure policy of the securities laws will be contravened. (Tr. 109-10.)

Rule 14d-2 does not apply to "paper tenders," tender offers in which the consideration is securities rather than cash, an exception which Mr. Wheat acknowledges to be required by federal securities statutes but apparently feels to be otherwise unjustified (id. 110-14). Mr. Wheat noted that the rule, as written, would not govern a tender offer that is ninety-five percent for cash and five percent for securities (id. 119).

Upon cross-examination Mr. Wheat conceded that Rule 14d-2 imposed no detriment upon Hobart shareholders, noting, however, that hardship was avoided only through the offeror's voluntary expansion of withdrawal rights beyond federal requirements (id. 127).

There are few disputed facts implicated in this action. The parties agree that CPE's tender for Hobart is subject to the requirements of Rule 14d-2 and Ohio Revised Code Section 1707.041(B)(1), by virtue of Hobart's status as an Ohio corporation with principal executive offices and substantial assets in Ohio, registered pursuant to Section 12 of the Exchange Act and traded on the New York and Cincinnati Stock Exchanges. The Court thus concerns itself with the apparently irreconcilable conflict of state and federal law here presented.⁴

Discussion

The question before the Court is whether Rule 14d-2(b) is valid and preempts an ostensibly conflicting...