GAF CORPORATION v. Milstein

• Decision Date: 13 December 1971
• Docket Number: Docket 71-1503.,No. 280,280
• Citation: 453 F.2d 709
• Parties: GAF CORPORATION, Plaintiff-Appellant, v. Paul MILSTEIN et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

453 F.2d 709 (1971)

GAF CORPORATION, Plaintiff-Appellant, v. Paul MILSTEIN et al., Defendants-Appellees.

No. 280, Docket 71-1503.

United States Court of Appeals, Second Circuit.

Argued November 10, 1971.

Decided December 13, 1971.

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Edwin J. Wesely, New York City (Winthrop, Stimson, Putnam & Roberts, New York City, Richard A. Horgan, Eugene Guenard McGuire, New York City, of counsel), for plaintiff-appellant.

Louis Loss, Cambridge, Mass. (Stroock & Stroock & Lavan, New York City, David Lubart, Charles G. Moerdler, Stephen A. Block, Robert P. Stein, New York City, of counsel), for defendants-appellees.

Before KAUFMAN and MANSFIELD, Circuit Judges, and LEVET, District Judge.^*

KAUFMAN, Circuit Judge:

This appeal involves the interpretation of section 13(d) of the Securities Exchange Act,¹ hitherto a largely unnoticed provision² added in 1968 by the Williams Act.³ We write, therefore, on a relatively tabula rasa, despite the burgeoning field of securities law. Essentially, section 13(d) requires any person, after acquiring more than 10% (now 5%⁴) of a class of registered equity security, to send to the issuer and the exchanges on which the security is traded and file with the Commission the statement required by the Act.⁵ Although the section has not attracted as much comment as section 14(d), also added by the Williams Act and requiring disclosure by persons engaging in tender offers, the section has potential for marked impact on holders, sellers and purchasers of securities.

GAF Corporation filed its complaint in the United States District Court for the Southern District of New York alleging that Morris Milstein, his two sons, Seymour and Paul, and his daughter, Gloria Milstein Flanzer, violated section 13(d) of the Securities Exchange Act first by failing to file the required statements and then by filing false ones. The complaint also alleged violation of section 10(b) based on the same false statements and, in addition, market manipulation of GAF stock. The Milsteins moved for dismissal under Rule 12(b)(6), F.R.Civ.P., on the ground that the complaint failed to state a claim on which relief could be granted or, in the alternative, for summary judgment under Rule 56. Judge Pollack aptly framed the issues involved:

The ultimate issue presented by the defendants\' motion to dismiss the first count is whether, organizing a group of stockholders owning more than 10% of a class of equity securities with a view to seeking control is, without more, a reportable event under Section 13(d) of the Exchange Act; and as to the second count, whether in the absence of a connected purchase or sale of securities, the target corporation claiming violation of Section 10 and Rule 10b (5), has standing to seek an injunction against a control contestant for falsity in a Schedule 13D filing. (Footnote omitted.)

324 F.Supp. 1062, 1064-1065 (S.D.N.Y. 1971). Judge Pollack granted the Milsteins' motion to dismiss under Rule 12(b) (6), and GAF has appealed. We disagree with Judge Pollack's determination that GAF failed to state a claim under section 13(d) and Rule 13d-1 promulgated thereunder, and thus reverse his order in this respect, but we affirm the dismissal of the second claim of the complaint on the ground that GAF, as an issuer, has no standing under section 10(b).

Before considering the merits of the issues involved on appeal, a statement of the facts as presented in the complaint and the briefs is in order.⁶ We note also that in this posture of the proceeding we must accept as true all well pleaded allegations in the complaint.

The four Milsteins received 324,166 shares of GAF convertible preferred stock, approximately 10.25% of the preferred shares outstanding, when The Ruberoid Company, in which they had substantial holdings, was merged into GAF in May, 1967. They have not acquired any additional preferred shares since the merger.⁷

The complaint informs us that at some time after July 29, 1968, the effective date of the Williams Act,⁸ the Milsteins "formed a conspiracy among themselves and other persons to act as a syndicate or group for the purpose of acquiring, holding, or disposing of securities of GAF with the ultimate aim of seizing control of GAF for their own personal and private purposes." It is necessary for our purposes to examine only a few of the nine overt acts GAF alleged were taken in furtherance of this conspiracy.

The complaint alleged that initially the Milsteins sought senior management and board positions for Seymour Milstein with GAF. When this sinecure was not forthcoming, the Milsteins allegedly caused Circle Floor Co., Inc., a company in their control, to reduce its otherwise substantial purchases from GAF.⁹ It also charged that the Milsteins thereafter undertook a concerted effort to disparage its management and depress the price of GAF common and preferred stock in order to facilitate the acquisition of additional shares. On May 27, 1970, the Milsteins filed a derivative action in the district court, charging the directors, inter alia, with waste and spoliation of corporation assets. A companion action was filed in the New York courts. GAF further alleged that these actions were filed only to disparage management, to depress the price of GAF stock and to use discovery devices to gain valuable information for their takeover conspiracy.

In the meantime, the complaint tells us, Paul and Seymour Milstein purchased respectively 62,000 and 64,000 shares of GAF common stock. When GAF contended that the Milsteins were in violation of section 13(d) because they had not filed a Schedule 13D as required by Rule 13d-1, the Milsteins, although disclaiming any legal obligation under section 13(d), filed such a schedule on September 24, 1970. In their 13D statement (appended to the complaint), the Milsteins disclosed their preferred and common holdings and stated they "at some future time might determine to attempt to acquire control of GAF. . . ." They also stated that they had "no present intention as to whether or not any additional securities of GAF might be acquired by them in the future. . . ." Indeed, within the next two months, commencing with October 2, Paul and Seymour each purchased an additional 41,650 shares of common. The Milsteins thereafter filed a Restated and Amended Schedule 13D on November 10 to reflect these new purchases.

Then, on January 27, 1971, the Milsteins filed a third Schedule 13D, disclosing their intention to wage a proxy contest at the 1971 annual meeting. Although the statement again disclaimed any present intention to acquire additional shares, Paul purchased 28,300 shares of common stock during February, 1971. These last purchases, which brought the Milsteins' total common holdings to 237,600 shares having a value in excess of $2 million and constituting 1.7% of the common shares outstanding, were reflected in a February 23 amendment to the January 27 Schedule 13D.

The last essential datum for our purposes is the proxy contest. On May 10, 1971, it was announced that GAF management had prevailed at the April 16 meeting by a margin of some 2 to 1.¹⁰

GAF's complaint in this action filed on December 16, 1970, requested that the Milsteins be preliminarily and permanently enjoined from (1) acquiring or attempting to acquire additional GAF stock; (2) soliciting any proxy from a GAF shareholder to vote GAF stock; (3) voting any shares of GAF stock held or acquired during the conspiracy; and (4) otherwise acting in furtherance of the conspiracy. It asks for this relief "until the effects of the conspiracy have been fully dissipated and the unlawful acts committed pursuant to the conspiracy fully corrected. . . ."¹¹

I.

At the time the conspiracy allegedly was formed, section 13(d) (1) in relevant part provided:

Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is registered pursuant to section 12 of this title . . ., is directly or indirectly the beneficial owner of more than 10 per centum of such class shall, within ten days after such acquisition, send to the issuer of the security at its principal executive office, by registered or certified mail, send to each exchange where the security is traded, and file with the Commission, a statement. . . .

This section, however, exempts from its filing requirements any acquisition which, "together with all other acquisitions by the same person of securities of the same class during the preceding twelve months, does not exceed 2 per centum of that class." Section 13(d) (6) (B). Section 13(d) (3), which is crucial to GAF's claim, further provides that "when two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a `person' for the purposes of section 13(d)." On the assumption that the facts alleged in the complaint are true, we cannot conclude other than that the four Milsteins constituted a "group" and thus, as a "person," were subject to the provisions of section 13(d). We also are aware of the charge that the Milsteins agreed after July 29, 1968, to hold their GAF preferred shares for the common purpose of acquiring control of GAF. Furthermore, the individuals collectively or as a "group" held more than 10% of the outstanding preferred shares—a registered class of securities. Since the section requires a "person" to file only if he acquires more than 2% of the class of stock in a 12-month period after July 29, 1968,¹² the principal question presented to us is whether the complaint alleges as a matter of law that the Milstein group "acquired" the 324,166 shares of preferred stock owned by its members after that date. We conclude that it does and thus that it states a claim under section 13(d).

The statute refers to "acquiring directly or...