Dan River, Inc. v. Unitex Ltd.

• Citation: 624 F.2d 1216
• Decision Date: 29 May 1980
• Docket Number: No. 79-1267,79-1267
• Parties: Fed. Sec. L. Rep. P 97,515 DAN RIVER, INC., Appellant, v. UNITEX LIMITED; Mannip Limited; Cheng Fur She; Cheng Lee Kit-Yiu; Philip Y. S. Cheng; Lee Chen Che; Liu Han Tang; Yang Yuan Loong; Dora Yang; The "Roe" Bank of Hong Kong; The "Doe" Finance Company of Hong Kong; "XYZ" Company, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 1216

624 F.2d 1216

Fed. Sec. L. Rep. P 97,515

DAN RIVER, INC., Appellant, v. UNITEX LIMITED; Mannip Limited; Cheng Fur She; Cheng Lee

Kit-Yiu; Philip Y. S. Cheng; Lee Chen Che; Liu Han Tang;

Yang Yuan Loong; Dora Yang; The "Roe" Bank of Hong Kong; The

"Doe" Finance Company of Hong Kong; "XYZ" Company, Appellees.

No. 79-1267.

United States Court of Appeals, Fourth Circuit.

Argued Jan. 9, 1980.

Decided May 29, 1980.

As Modified Aug. 11 and 18, 1980.

Max Gitter, New York City (Arthur L. Liman, Jack Hassid, Colleen McMahon, Andrew J. Peck, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Lewis T. Booker, Gregory N. Stillman, Hunton & Williams, Richmond, Va., on brief), for appellant.

Michael W. Schwartz, New York City, Baldwin B. Tuttle, Kutak, Rock & Huie, Washington, D.C., Edmund H. Kerr, New York City, Bernard E. Goodman, Vienna, Va., Philip B. Morris, Richmond, Va., Paul Vizcarrondo, New York City, Stephen R. Larson, Michael W. Smith, Richmond, Va. (Wachtell, Lipton, Rosen & Katz, New York City, Christian, Barton, Epps, Brent & Chappell, Richmond, Va., Kutak, Rock & Huie, Denver, Colo., Wickwire, Peterson & Gavin, Los Angeles, Cal., Cleary, Gottlieb, Steen & Hamilton, New York City, on brief), for appellees.

Before RUSSELL, Circuit Judge, FIELD, Senior Circuit Judge, and SPROUSE, Circuit Judge.

DONALD RUSSELL, Circuit Judge.

This is an action by the plaintiff Dan River for injunctive relief under the Williams Act ¹ against the defendants, Unitex Limited, a Hong Kong corporation, its subsidiary Mannip Limited, a British Virgin Islands corporation, Unitex's controlling directors and stockholders, and two Hong Kong banks. The district court at first granted the plaintiff a temporary restraining order pending further clarification of the defendants' 13D Schedule as required under the Williams Act, but, after the defendants amended their earlier filing, it dismissed the action on jurisdictional grounds. The plaintiff has appealed. We reverse.

I.

The plaintiff is a large textile manufacturing corporation chartered under the laws of Virginia with its headquarters in Danville, Virginia. Its capital stock at times appropriate to this action consisted of 5,595,035 shares of common stock. The defendant Unitex Limited is a corporation engaged in the manufacture in Hong Kong of textiles which it offers for sale in Europe and the United States. The individual defendants, all residents of Hong Kong, own over two-thirds of the capital stock of Unitex and are its controlling directors.

Sometime in the fall of 1978, Unitex, on the recommendation of its retained investment advisor, Lazard Freres & Company, an internationally known investment firm, determined to acquire a substantial equity position in Dan River stock. In order to finance such purchases, it began negotiations with the executive director of the defendant Wardley Limited, a Hong Kong financial institution, for a loan to finance its purchases of Dan River stock. Wardley expressed a willingness to consider such financing, "provided that Wardley's could be assured of the fundamental financial soundness of Unitex's plan." (Italics added) Apparently, Wardley received sufficient assurances of "the fundamental financial soundness of Unitex's plan" for acquiring an equity interest in Dan River, for Wardley advanced Unitex initially what is described as bridge financing in the amount of $2,700,000 for the purpose of initiating the purchase of Dan River stock.

By December 1, 1978 Unitex, or individuals affiliated with it in its plan for acquiring a substantial equity position in Dan River stock, had accumulated at least 62,700 Dan River shares. Of these, 47,800 shares were purchased by two of the individual defendants, or members of their immediate families. Between December 1 and December 12, Unitex itself acquired 216,900 shares of Dan River stock by purchases made on the New York Stock Exchange. If these purchases were combined with the earlier purchases, the plaintiff contends, though the defendants deny, that Unitex or persons within its controlling group would have owned 279,600 Dan River shares or just over 5 percent of Dan River's outstanding stock. Under the provisions of § 13(d) of the Williams Act, any person, upon acquiring more than 5 percent of the stock of any corporation, is required to file with the Securities and Exchange Commission within ten days after acquiring such stock ownership, and to mail to the target corporation, a Schedule 13D disclosing (a) the identities and background of the purchasers, (b) their purposes in acquiring the stock, (c) the sources of their financing, (d) the extent of their acquisitions, (e) any arrangement or contracts with other persons concerning the stock and (f) any other material information. This statute was supplemented by more specific regulations issued by the Securities and Exchange Commission. 17 C.F.R. § 240.13d-1, et seq. (1978). The parties, however, did not file the required 13D Schedule and, on December 14, the individual defendants sold 47,800 shares in block trades on the Stock Exchange. Of these, forty thousand appear to have been sold back to Unitex but 7,800 shares were disposed of to another party. It is the plaintiff's contention that these sales were made for the purpose of avoiding any possible obligation to file a 13D Schedule. The defendants, however, deny the necessity to sell such stock in order to avoid any obligation to file a 13D Schedule and assert that these sales were made because the purchase by the individuals, made allegedly without the knowledge of Lazard, violated a Lazard policy that "whenever it is advising a client (here, Unitex) with respect to a program of stock purchases, its client must see to it that no purchases of the stock in question are made by related firms or individuals at the same time." ²

Whatever the purpose of the sale of 47,800 shares previously purchased, Unitex discontinued after December 14 any further purchases of Dan River stock until (1) it had established a corporate subsidiary, the defendant Mannip Limited, in the British Virgin Islands, whose sole purpose was to acquire all future purchases of Dan River stock on Unitex's behalf and to hold all Dan River stock then owned or later acquired on behalf of Unitex, and (2) until it had completed its final financing arrangements with Wardley and its associated bank, the defendant Chartered Bank. Sometime in January, 1979, it, however, had completed both the incorporation of Mannip Limited and finalized its financing arrangements with Wardley and the Chartered Bank.

Under its agreement with the two financial institutions, Unitex was granted a line of credit in the amount of $13,300,000 in order to purchase Dan River stock. However, under the loan agreement, the price at which Unitex purchased stock required approval of the banks. To secure this loan, Unitex pledged its interests in Mannip (that is, it pledged all the Dan River stock acquired by it) and the worth of Unitex itself. In addition, four Unitex directors personally agreed to advance approximately $1,000,000 against the loan and to guarantee individually the remainder of the loan should Unitex default.

On January 29, 1979, Unitex resumed purchasing Dan River stock, quickly acquiring sufficient shares to bring Unitex within the filing requirements of § 13(d). At this point it transferred all its Dan River stock to its nominee, the corporate subsidiary Mannip, and all future purchases were made in Mannip's name but with funds advanced by Unitex. Because its holdings had by the end of January gone over the 5% level, thereby triggering the requirement of a § 13(d) filing, a 13D Schedule was filed with the Securities and Exchange Commission by Mannip on February 9, 1979, and mailed to Dan River on the same date.

This 13D Schedule, as filed only by Mannip, fixed Mannip's ownership of Dan River stock at that time as 333,700 shares, described the relationship between Unitex and Mannip, and included some information about Unitex's directors and their transactions in Dan River stock. It stated the purpose of the Dan River stock purchases as follows:

"While Mannip is not solely a passive investor in the Company, neither Mannip nor Unitex has any present intention to seek control of the Company or to propose a merger or similar transaction with the Company. Mannip may seek to acquire a significant equity interest in the Company with a view toward establishing a long term relationship with the Company. Mannip is continuing to purchase Shares in open market transactions, and, depending on market and other conditions, Mannip may continue in the future to purchase Shares from time to time in open market or private transactions."

Dan River filed on February 22 its action against the defendants alleging various omissions and misleading statements in Mannip's filing and improper failure by other defendants either to join in Mannip's filing or to make their own filing. It sought declaratory, injunctive, and other equitable relief. In connection with the commencement of its action, Dan River also moved for a preliminary injunction and applied for a temporary restraining order pending the hearing on the motion for an injunction. After a hearing on the application for a temporary restraining order held on February 23, 1979, the district court ruled that "plaintiff's right to (additional) disclosure (was) clear" and restrained the defendants from making any additional purchases of stock until they had filed "an amended or new Schedule 13D which makes the appropriate disclosures." The district court proceeded to specify the additional material to be included in the "amended new Schedule 13D":

"a. The identities and backgrounds of PAS, Ltd. and CMS, Ltd.;

"b. The extent of the non-passive position and objectives that defendants propose to be able to effect from their holdings of plaintiff's stock;

"c. The entities which defendants propose for...