Florida Commercial Banks v. Culverhouse

• Decision Date: 07 October 1985
• Docket Number: No. 84-5921,84-5921
• Citation: 772 F.2d 1513
• Parties: , Fed. Sec. L. Rep. P 92,321 FLORIDA COMMERCIAL BANKS, Plaintiff-Appellant, v. Hugh F. CULVERHOUSE, Sr. and the John Doe Group, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1513

772 F.2d 1513

54 USLW 2226, Fed. Sec. L. Rep. P 92,321

FLORIDA COMMERCIAL BANKS, Plaintiff-Appellant, v. Hugh F. CULVERHOUSE, Sr. and the John Doe Group, Defendants-Appellees.

No. 84-5921.

United States Court of Appeals, Eleventh Circuit.

Oct. 7, 1985.

Paul J. Levine, Richard J. Bischoff, John S. Fletcher, Gary S. Koenigsberg, Robert M. Brochin, Morgan, Lewis & Bockius, Miami, Fla., A.A. Sommer, Jr., Morgan, Lewis & Bockius, Washington, D.C., for plaintiff-appellant.

Stephen DeTore, S.E.C., Robert Mills, Rosalind Cohen, Paul Gonson, Washington, D.C., for amicus curiae.

Michael R. Josephs, Haddad, Josephs & Jack, Denise V. Powers, Coral Gables, Fla., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before FAY and JOHNSON, Circuit Judges, and HOFFMAN ^*, District Judge.

JOHNSON, Circuit Judge:

This appeal challenges the district court's dismissal of claims brought under Sections 13(d), 14(d), and 14(e) of the Securities and Exchange Act of 1934 ("Exchange Act"). Appellant asserts that those provisions provide a target corporation (or "issuer corporation") with a private cause of action to obtain corrective disclosures from a tender offeror who has filed with the Securities and Exchange Commission ("SEC"), and disseminated to shareholders, false and misleading tender offer materials. The district court dismissed the claims on the grounds that appellant did not have standing under those provisions to maintain this cause of action. We reverse.

Appellant Florida Commercial Banks, Inc. ("the Bank"), a Florida corporation, brought this action against Hugh F. Culverhouse, Sr. ("Culverhouse") and an unknown entity styled as the John Doe Group ("the Group"). In October 1981, Culverhouse's ownership of the Bank's common stock reached 5% of the shares outstanding; later that month Culverhouse filed with the SEC the required Schedule 13D, pursuant to Section 13(d) of the Exchange Act. Over the next three years, Culverhouse continued to acquire stock in the Bank and filed 12 amendments to the Schedule 13D. In August 1984, Culverhouse made a tender offer in which he sought to acquire enough shares to gain a controlling interest in the Bank, a total of approximately 54.8% of the Bank's outstanding common stock. At about that time, Culverhouse also filed with the SEC a Schedule 14D-1 Tender Offer Statement, pursuant to Section 14(d)(1) of the Exchange Act.

The Bank's amended complaint alleged that Culverhouse and the Group were engaged in a conspiracy that either would permit Culverhouse to acquire control of the Bank for later resale to the Group, or would permit the Group to sell the Bank's stock to, or merge the Bank with, another unnamed financial institution. The complaint alleged that the Schedule 13D and its amendments failed to disclose Culverhouse's intention systematically to purchase the Bank's stock for other than "investment purposes," and his simultaneous negotiations with others for the sale of the Bank's stock. The complaint further alleged that Culverhouse made 23 material misrepresentations and omissions in the tender offer materials that he filed with the SEC and disseminated to shareholders. The complaint charged Culverhouse with violations of Sections 10(b), 13(d), 14(d), and 14(e) of the Exchange Act; and violations of Chapter 517 of the Florida Statutes. The Bank sought injunctive relief that would require Culverhouse to make corrective disclosures to cure the false statements and omissions in his tender offer materials, and would enjoin Culverhouse from proceeding further with the tender offer until such disclosures were made.

Culverhouse moved to dismiss for failure to state a claim, arguing that the Bank lacked standing under this Court's holding in Liberty National Insurance Holding Co. v. Charter Co., 734 F.2d 545 (11th Cir.1984). The district court dismissed the federal claims with prejudice on the standing issue, citing only Liberty National, and dismissed the pendent state claim in the exercise of the court's discretion.

I. Background of the Williams Act

Sections 13(d), 14(d) and 14(e) of the Exchange Act, adopted by Congress in 1968, are collectively referred to as the "Williams Act" amendments. The Williams Act was adopted in 1968 in response to the growing use of cash tender offers as a means for achieving corporate takeovers. Piper v. Chris-Craft Industries, 430 U.S. 1, 22, 97 S.Ct. 926, 939-40, 51 L.Ed.2d 124 (1977). The purpose of the Williams Act was to protect the investors in target corporations from takeover bidders who up to that point had been able to operate in secrecy. See id. at 26-29, 97 S.Ct. at 941-43. Congress did not enact the Williams Act in order to protect either the tender-offeror or the target corporation but, rather, intended to maintain a neutral posture between the takeover bidder and existing management. Id. at 30-31, 97 S.Ct. at 943-44. The legislation was designed solely to get needed information to the investor. Id. at 31, 97 S.Ct. at 944. See generally S.Rep. No. 550, 90th Cong., 1st Sess. 3 (1967); H.R.Rep. No. 1711, 90th Cong., 2d Sess. 3, reprinted in 1968 U.S.Code Cong. & Ad.News 2811, 2813.

Section 13(d) of the Exchange Act requires that anyone who acquires more than five percent of any class of equity securities of a company registered with the SEC file with the Commission and the issuing company, as well as any exchanges on which the stock is traded, a Schedule 13D statement. This statement must set forth: (1) the background and identity of the purchaser; (2) the source of the funds used to purchase the securities; and (3) the purpose of the acquisition and the purchaser's future plans and intentions with respect to the issuer. Liberty National, supra, 734 F.2d at 550.

Section 14(d) requires that tender-offerors disclose certain prescribed information by filing it with the SEC. This information includes all the information that is required in a Schedule 13D statement. Id. at 551. Section 14(e) is a broad antifraud provision, proscribing misleading or fraudulent conduct, statements, or omissions in connection with tender offers. Piper, supra, 430 U.S. at 24, 97 S.Ct. at 940.

None of these provisions provides explicitly for causes of action on behalf of a target corporation or any other private party. Liberty National, supra, 734 F.2d at 554. Nonetheless, the Supreme Court has held that in some circumstances a private cause of action can be implied with respect to the Exchange Act's antifraud provisions, even where such provisions do not expressly provide for remedies. Piper, supra, 430 U.S. at 25, 97 S.Ct. at 941.

II. This Court's Decision in Liberty National

In Liberty National, one company (Charter) accumulated approximately seven percent of the common stock of the target company (Liberty) and filed a Schedule 13D statement with several amendments. Liberty filed a complaint, alleging that Charter sought to accumulate enough shares of Liberty stock to enable Charter either to sell the shares at a control premium, or to coerce Liberty's management to give Charter business concessions to the economic detriment of the Liberty shareholders. Liberty alleged that Charter's actions violated Sections 13(d), 14(d), and 14(e) of the Exchange Act, as well as other securities laws. Liberty sought injunctive relief requiring Charter to divest itself of its holdings of Liberty stock and to refrain from voting its shares or otherwise exercising its rights in those shares pending such divestiture. Liberty National, supra, 734 F.2d at 548.

This Court held that Liberty did not have an implied right of action under Section 13(d) to expel an unwanted shareholder from the company. This Court also held that Sections 14(d) and 14(e) did not create implied rights of action on behalf of a target corporation for the type of injunctive relief sought. Although Sections 14(d) and 14(e) would apply only if Charter made a tender offer, this Court did not reach the question of whether Charter actually made a tender offer. Id. at 568.

The main focus of Liberty National concerned the question of whether providing an issuer corporation with a private right of action under the Williams Act would have a greater tendency to effectuate the purposes of the Williams Act by protecting the shareholders or, instead, would have a greater tendency to give the management an unfair advantage over tender offerors in takeover battles, ultimately to the detriment of the shareholders. The remedy that was requested in that case--divestiture--was clearly relevant to the issue of whether providing Liberty with the private right of action would tend to effectuate or thwart the purpose of the Williams Act to benefit the investor. The significance of the particular remedy sought in this Court's decision is apparent in the following passage from Liberty National:

Congressional intent not to imply the right of action Liberty has brought is also made apparent when one focuses on the particular injunctive remedy Liberty seeks; it is both inappropriate and lacking in proportion to the wrong alleged. Section 13(d) creates an affirmative duty in a person after he has acquired more than five percent of the shares of an issuer to file a form for purely informational purposes. It strikes us that the obvious antidote for an allegedly false filing is a corrected filing. Yet Liberty does not request such a remedy. Instead, it seeks to force a major stockholder to unload its vast holdings and to lose its voting power over the shares it owns. The primary effect of such relief, if granted, would be to lower the market price of Liberty shares, which plainly would not be beneficial to the shareholders. This result would be plainly contrary to congressional intent in adopting the Williams Act.

Id. at 565 (citations omitted).

Appellants in the instant case do not seek to force the tender offeror to divest itself of its holdings in the...