Elco Corporation v. Microdot Inc.

• Decision Date: 06 June 1973
• Docket Number: Civ. A. No. 4605.
• Citation: 360 F. Supp. 741
• Parties: ELCO CORPORATION, Plaintiff, v. MICRODOT INC. and Microdot Investing Inc., Defendants.
• Court: U.S. District Court — District of Delaware

360 F. Supp. 741

ELCO CORPORATION, Plaintiff, v. MICRODOT INC. and Microdot Investing Inc., Defendants.

Civ. A. No. 4605.

United States District Court, D. Delaware.

March 23, 1973.

On Motion to Modify Preliminary Injunction June 6, 1973.

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Robert K. Payson, Richard E. Poole of Potter, Anderson & Corroon, Wilmington, Del., Stephen M. Axinn, Stuart L. Shapiro, and William V. Alesi of Skadden, Arps, Slate, Meagher & Flom, New York City, for plaintiff.

Richard L. Sutton of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., John L. Hawkins, and Samuel P. Shaw, Jr., of Shaw, Bernstein, Scheuer, Boyden & Sarnoff, New York City, for defendants.

OPINION

STAPLETON, District Judge:

I. THE BACKGROUND.

On March 6, 1973, Microdot Investing Inc., a Delaware corporation, ("Microdot Investing") made a tender offer for shares of common stock of Elco Corporation, a Pennsylvania corporation, ("Elco"). Microdot Investing is a wholly owned subsidiary of Microdot Inc., a Delaware corporation, ("Microdot"), and was formed by Microdot for the purpose of acquiring and holding Elco common stock. Elco's common stock is listed on the American Stock Exchange. There are approximately 1,461,000 common shares outstanding which are held by approximately 3,500 shareholders. Elco's consolidated revenues for fiscal 1972 were $20,374,796. Microdot's common shares are listed on the New York and Pacific Coast Stock Exchanges. It had consolidated revenues for 1971 of $158,968,000.

On March 12, 1973, Elco filed this action seeking, among other things, an injunction preliminarily and permanently enjoining Microdot and Microdot Investing from taking any further steps to consummate the tender offer. Elco contends that the acquisition of Elco stock by Microdot Investing pursuant to the tender offer would violate Section 7 of the Clayton Act, 15 U.S.C. § 18, and that in the course of making the tender offer they have violated Sections 10 and 14 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and 78n, and the regulations promulgated thereunder. On March 14, 1973, this Court entered a temporary restraining order and established an affidavit and briefing schedule on plaintiff's motion for a preliminary injunction. A hearing on this motion was held on March 21, 1973 and the Court then extended the restraining order until 5:00 P.M. on March 23, 1973.

Both Elco and Microdot's Malco division manufacture and sell products known as a metal plate connector or metal plate backpanel connectors. The typical metal plate connector produced by Elco and Malco consists of an aluminum plate into which are plugged variously designed units called connectors. Modules or electric signal processing units are in turn plugged into the connectors which are themselves interconnected by a maze of wires which carry signals between the modules. Electrical impulses which are fed into the system via a computer keypunch, a magnetic tape or a variety of other means are transmitted in a predetermined fashion along the pathways provided by the system through various processing units which transform them into signals which can control anything from machining or manufacturing equipment to computer print out equipment or visual display panels connected to the system. In effect, the total system translates instructions in the form of electrical impulses into orders understandable to a machine on the output end of the system.

Metal plate connectors are purchased by manufacturers of sophisticated electronics equipment for use as component parts in technologically advanced products such as weapons, control computers for Polaris and Poseidon submarines, ground control equipment for NASA, calculators, automated telecommunications systems and computer peripheral systems, among many others. No two customers and no two pieces of equipment require the same metal plate connector system. As a result, metal plate connectors are sold on a custom order basis.

In the early sixties Malco Manufacturing Company, a then small electronics terminal manufacturer in Chicago, developed, in conjunction with the United States Navy, the first metal plate connector for the purpose of furnishing connectors of extremely fine tolerances and dependability for the Navy's Polaris missile submarine program. The first deliveries to the Navy were made in 1961. Thus Malco Manufacturing Co. was initially the only manufacturer of metal plate connectors in the United States. In 1961 sales of these connectors were less than $500,000. Between 1961 and 1963 Amphenol (now a division of Bunker Ramo), National Connector and Elco began making metal plate connectors. Elco and Malco Manufacturing Company competed in the sale of metal plate connectors from that time until January of 1971.

In January of 1971 Microdot acquired the business and assets of Malco Manufacturing Company and Mandex Manufacturing Company, Inc. and created its present Malco Division (hereinafter "Malco"). Since January of 1971 Microdot has competed with Elco in the sale of metal plate connectors.

Between August 1972 and January 1973 Microdot acquired substantial quantities of Elco's common stock in street name accounts. By the end of that period Microdot had acquired approximately 4.3% of all Elco common stock outstanding. In February of 1973 Microdot Investing was formed and these shares were assigned to it.

On March 5, 1973 Microdot filed a Schedule 13D with the SEC announcing its intention to have Microdot Investing acquire by way of cash tender offer a minimum of 700,000 additional shares of Elco common stock at a price of $7.00 per share. The closing price of Elco common stock on the trading day prior to its filing was $5.25. This schedule and the tender offer issued the next day stated that Microdot, "through directly owned divisions and through subsidiaries, is engaged primarily in the United States in the manufacture and sale of fasteners, electrical connectors, ingot molds and cranes, barges and heavy fabrications and a number of other industrial products." Neither described the business of Microdot further. The business of Elco was not mentioned. Both documents stated with respect to the purpose of the transaction:

Microdot intends through this Offer to acquire a number of shares of Elco Common Stock which will give Microdot Parent working control of Elco, and Microdot Parent intends to seek representation on Elco's Board of Directors. Depending on the outcome of the Offer, Microdot and Microdot Parent will consider merging Elco with Microdot Parent, Microdot or another subsidiary of Microdot Parent. In the event of a merger, the then stockholders of Elco would have a right to receive securities or other property of Microdot Parent, Microdot or such other subsidiary at an exchange rate which has not been determined but which would be fixed after consultation with an independent investment banking firm in respect of a fair exchange rate. Neither Microdot nor Microdot Parent has any present plan to liquidate Elco or to sell its assets. Neither of them has formulated any plans as to whether any major changes will be made in Elco's business or organization. Plans in that connection will be determined after an analysis of Elco's operations when working control is obtained.

As the tender offer noted, if Microdot Investing obtains an additional 700,000 shares of Elco common stock pursuant to the offer, it will own about 51% of the presently outstanding Elco common stock.

II. THE PLAINTIFF'S BURDEN.

Section 16 of the Clayton Act, 15 U.S.C. § 26, authorizes this Court to grant relief against a threatened violation of the anti-trust laws "when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity. . .". Thus, while "injunctive relief is particularly suited to the preventive function of § 7,"¹ the rules relating to the prerequisites for preliminary and permanent injunctive relief in Section 7 cases do not differ materially from those applicable in other areas. Where preliminary injunctive relief is sought the Court must weigh the potential of irreparable harm to the plaintiff absent judicial intervention, the potential of irreparable harm to the opposing party from judicial interference, the potential harm to the public interest and the likelihood of the plaintiff's prevailing on the merits. Allis-Chalmers Mfg. Co. v. White Consolidated Indus., Inc., 414 F.2d 506 (3rd Cir. 1969); Winkleman v. New York Stock Exchange, 445 F.2d 786 (3rd Cir. 1971); Nelson v. Miller, 373 F.2d 474 (3rd Cir. 1967).

In the Allis-Chalmers case, the Third Circuit discussed the plaintiff's burden as follows:

Recognizing that preliminary relief is a serious remedy, and because application for such relief, particularly in a complex case, is often based on a record less comprehensive than that which a full adjudication would yield, the courts have required that a plaintiff show a reasonable chance of ultimately prevailing on the merits. In an action by a private party, the plaintiff must also show that it will suffer irreparable injury unless relief is granted. Note, 40 N.Y.U.L.Rev. 771, 778 (1965).

* * * * * *

The burden so imposed is warranted by the extraordinary nature of the relief which is sought. But I am also mindful of the fact that it is preliminary relief which is being requested, and if the moving party establishes a reasonable probability of a § 7 violation the "possibility that the court may decide the right to permanent relief adversely to plaintiff does not preclude it from granting the temporary relief * * *." . . .

This Court has twice recognized,² by reference to Judge Frank's opinion in Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2nd Cir. 1953), that the balance of hardships may have a bearing on the plaintiff's burden with respect to his likelihood of ultimate success. The Second...