General Aircraft Corp. v. Lampert

• Decision Date: 26 May 1977
• Docket Number: No. 76-1452,76-1452
• Citation: 556 F.2d 90
• Parties: Fed. Sec. L. Rep. P 96,068 GENERAL AIRCRAFT CORPORATION, Plaintiff-Appellee, v. Irwin S. LAMPERT et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 90

556 F.2d 90

Fed. Sec. L. Rep. P 96,068

GENERAL AIRCRAFT CORPORATION, Plaintiff-Appellee, v. Irwin S. LAMPERT et al., Defendants-Appellants.

No. 76-1452.

United States Court of Appeals, First Circuit.

Argued Nov. 5, 1976.

Decided May 26, 1977.

Irwin Lampert, New York City, with whom Lampert & Schneider, P.C., Eugene Wallman, New York City, and Gabriel Robert Caggiano, Boston, Mass., were on brief, for defendants-appellants.

Theodore E. Dinsmoor, with whom Gaston Snow & Ely Bartlett, Boston, Mass., were on brief, for plaintiff-appellee.

Before COFFIN, Chief Judge, CAMPBELL, Circuit Judge, and GIGNOUX, ^* District Judge.

GIGNOUX, District Judge.

This is an appeal from an order of the District Court granting a preliminary injunction against appellants for failure to comply with the disclosure provisions of Section 13(d) of the Securities Exchange Act of 1934 (the 1934 Act), 48 Stat. 894, as added by Section 2 of the Williams Act, 82 Stat. 454, as amended, 84 Stat. 1497, 15 U.S.C. § 78m(d) (1971).

I.

Appellee, General Aircraft Corporation (GAC), is a publicly-held corporation primarily engaged in the manufacture and sale of a type of short take-off and landing light aircraft known generally in the aviation industry as "STOL". Its principal place of business is located in Bedford, Massachusetts. As of March 31, 1976, GAC had 1,243,742 shares of common stock outstanding. The shares of GAC common stock are held of record by approximately 3,000 stockholders and are registered under Section 12 of the 1934 Act, 15 U.S.C. § 78l.

On October 30, 1974, the three individual appellants, Irwin S. Lampert, Leonard Levy and Paul Scuderi, purchased a total of 150,485 shares of GAC common stock. Levy acquired 75,485 shares, Lampert and Scuderi 37,500 shares each. Lampert's and Scuderi's shares were all held in Lampert's name. These acquisitions constituted more than 12% of GAC's outstanding common shares. Appellants were therefore required to comply with the disclosure provisions of Section 13(d) of the Williams Act and its implementing regulations by filing a Schedule 13D with GAC and the Securities and Exchange Commission within ten days. ¹ Appellants did not, however, file a Schedule 13D. On December 31, 1974, Lampert and Scuderi each acquired an additional 2800 shares of GAC common stock. Appellants still, however, did not file a Schedule 13D within ten days of these acquisitions. Finally, on January 31, 1975, Lampert filed a Schedule 13D on behalf of all three appellants. The Schedule 13D thus filed stated "the purpose of the transaction was for investment purposes and not to acquire control of the business of the issuer."

For the next year and a half appellants clashed with GAC's management. By letter dated April 29, 1975, Lampert proposed the enlargement of GAC's Board of Directors from five to seven members, the inclusion of Lampert, Levy and a designee of Levy's on the Board, the retirement of the then Chairman and Chief Executive Officer, and other changes in GAC's corporate structure and business. Appellants next threatened to solicit proxies in opposition to management's nominees for election as directors at the 1975 annual stockholders meeting. To avoid a proxy contest, GAC's management agreed to enlarge the Board of Directors from five to seven members and to recommend the election of Lampert and Levy as directors. On July 1, 1975, at the annual stockholders meeting, Lampert and Levy's nominees were elected directors along with five management representatives. Thereafter, appellants continued to propose drastic changes regarding the business and corporate structure of GAC, including the exploration of merger possibilities and the sale of the company's assets. In early 1976 appellants began to enlist prospective nominees for a dissident slate of directors to be proposed at the 1976 annual stockholders meeting. In April 1976 Lampert requested GAC's stockholders list for the purpose of soliciting proxies to elect representatives to the Board of Directors. On May 13, 1976, faced with the threat of a proxy contest to oust management at the 1976 annual stockholders meeting to be held in July, GAC filed a complaint in the United States District Court for the District of Massachusetts charging, inter alia, ² that appellants had violated Section 13(d) of the Williams Act first by failing to file the required Schedule 13D and then by filing a false one. GAC also filed a motion for a preliminary injunction pending a full hearing on the merits.

On June 16, 1976 the District Court held a hearing on GAC's motion for a preliminary injunction. After consideration of the verified complaint and answer, and various affidavits and depositions submitted by GAC in support of its motion, the court concluded that (1) in acquiring more than five percent of GAC's common stock on October 30, 1974, appellants acted as a "group" within the meaning of Section 13(d)(3) ³ and hence were required to file a Schedule 13D within ten days thereafter; (2) appellants violated Section 13(d) by not filing a timely Schedule 13D; and (3) appellants further violated Section 13(d) by filing an inaccurate and misleading Schedule 13D stating that the acquisition of the shares was for the purpose of investment only and not for the purpose of acquiring control. Finding that it was likely that GAC would prevail on the merits and that "investing persons who hold shares in (GAC) and potential shareholders," though not necessarily the corporation itself, had demonstrated irreparable harm, the court determined that a preliminary injunction should issue. After separately considering the scope of relief at a second hearing on August 26, 1976, the court issued a preliminary injunction enjoining appellants from: (1) further violating Section 13(d); (2) failing to amend the inaccurate Schedule 13D filed January 31, 1975; (3) acquiring further shares of GAC common stock or soliciting proxies or consents from GAC stockholders until their Schedule 13D was amended to reflect their intentions with respect to control of GAC's Board of Directors and changes in its business and corporate structure; and (4) voting any GAC stock or proxies or consents at the 1976 annual meeting of stockholders. The preliminary injunction was conditioned upon GAC furnishing a bond in the amount of $10,000 for the payment of costs and damages incurred by any party found to have been wrongfully enjoined.

On this appeal appellants challenge the District Court's finding that their activities violated Section 13(d) and contend that the court erred in granting the preliminary injunction. ⁴ After a careful scrutiny of the record, we are satisfied that the findings of the District Court and the order issuing the preliminary injunction were proper in all respects save one appellants should not have been enjoined from voting their own legally acquired shares of GAC common stock at the 1976 annual meeting of stockholders. ⁵

II.

Before considering the claims of errors separately, a brief review of the history and purposes of the Williams Act, and particularly of Section 13(d), is appropriate. The Williams Act was the legislative response to a gap in the federal securities laws which permitted cash tender offers and other acquisitions resulting in shifts of corporate control to occur without adequate disclosure of information to investors. H.R.Rep. No. 1711, 90th Cong., 2d Sess., 1968 U.S.Code Cong. & Admin.News, pp. 2811, 2812-14. Although the rush of tender offers in the 1960s received the greatest Congressional attention, the Williams Act covers a broader range of possible shifts in control:

The Bill before you deals with stock acquisitions in three specific contexts first, the acquisition by means of a cash tender offer of more than (5 percent) of any class of stock of a publicly held company; second, other acquisitions by any person or group of more than (5 percent) of any class of stock of a publicly held company; and third, the repurchase by a corporation of its own outstanding shares.

S.Rep. No. 550, 90th Cong., 1st Sess. 16, 33 (1967) (remarks of then Chairman Cohen). Section 13(d) is concerned with the second type of stock acquisition, requiring after-the-fact disclosure of substantial open market accumulations of securities within a relatively short period of time. H.R.Rep. No. 1711, 1968 U.S.Code Cong. & Admin.News at 2818. Essentially, Section 13(d) requires any person, or group of persons, after acquiring more than five percent of a class of registered equity securities, to send to the issuer and the exchanges on which the securities are traded and file with the Commission the statement required by the Act, disclosing, among other things, the identity of the persons filing, the number of shares owned by them, the source of the funds used to purchase the shares, and the purpose of the purchase. ⁶ Although such disclosure may greatly affect the internal distribution of corporate power, Congress was careful to avoid tipping the balance of federal regulation in favor of either management or those attempting a change in corporate control; the balance was struck in favor of allowing investors to be informed of potential changes in corporate control and permitting the market to value the shares accordingly. See generally Note, Section 13(d) and Disclosure of Corporate Equity Ownership, 119 U.Pa.L.Rev. 853 (1971); James J. Moylan, Exploring the Tender Offer Provisions of the Federal Securities Laws, 43 Geo.Wash.L.Rev. 551, 558-59 (1975). As the Supreme Court has recently had occasion to observe in Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58-59, 95 S.Ct. 2069, 2075, 45 L.Ed.2d 12 (1975):

The purpose of the Williams Act is to insure that public shareholders who are confronted with a cash tender offer for their stock will not be required to respond without adequate information regarding the qualifications and intentions of the offering party. By requiring disclosure of...