Kennecott Copper Corp. v. Curtiss-Wright Corp.

• Decision Date: 01 May 1978
• Docket Number: No. 78 Civ. 1295 (LFM).,78 Civ. 1295 (LFM).
• Citation: 449 F. Supp. 951
• Parties: KENNECOTT COPPER CORPORATION, Plaintiff, v. CURTISS-WRIGHT CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

449 F. Supp. 951

KENNECOTT COPPER CORPORATION, Plaintiff, v. CURTISS-WRIGHT CORPORATION, Defendant.

No. 78 Civ. 1295 (LFM).

United States District Court, S. D. New York.

May 1, 1978.

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Sullivan & Cromwell, New York City by Marvin Schwartz, Richard J. Urowsky and Robert D. Owen, New York City, for plaintiff.

Kaye, Scholer, Fierman, Hays & Handler, New York City by Paul J. Curran, Allan M. Pepper, Cynthia Cohen and Kenneth Hicks, New York City, for defendant.

OPINION

MacMAHON, District Judge.

Plaintiff Kennecott Copper Corporation ("Kennecott") brought this action on March 22, 1978 alleging multiple violations of the securities and antitrust laws by defendant Curtiss-Wright Corporation ("Curtiss-Wright"). Kennecott seeks a permanent injunction: (1) prohibiting the further solicitation of proxies and the voting of Kennecott shares and proxies now held by Curtiss-Wright at the Kennecott annual meeting set for May 2, 1978; and (2) directing Curtiss-Wright to divest itself of its holdings of Kennecott stock. Curtiss-Wright denies Kennecott's allegations and counterclaims for permanent injunctive relief prohibiting further solicitation by Kennecott and the voting of shares and proxies held by Kennecott at the May 2 meeting.

Time is of the essence due to the imminence of Kennecott's annual meeting. We, therefore, on motion of Kennecott, ordered the trial of the action on the merits to be advanced and consolidated with the hearing of the application for a preliminary injunction. Rule 65(a), Fed.R.Civ.P. The trial was held on April 24 through April 27; 17 witnesses testified and 59 exhibits were received in evidence.

I. INTRODUCTION

This litigation is the fall-out of an ongoing proxy contest launched by Curtiss-Wright for control of Kennecott. Between November 23, 1977 and March 10, 1978, Curtiss-Wright quietly purchased some 9.9% of Kennecott's outstanding shares in transactions both on and off the national securities exchanges. Curtiss-Wright filed its Schedule 13D with the Securities and Exchange Commission ("SEC") on March 13. The schedule stated, in part, that Curtiss-Wright was "considering soliciting proxies from Kennecott's shareholders . . . looking to the election of directors" to Kennecott's board. Four days later, Kennecott management distributed its proxy materials, soliciting shareholders to return a proxy empowering the holder to vote the shares in favor of incumbent management.

On March 23, the battle lines were formally drawn when the Curtiss-Wright board authorized its management to wage a proxy contest to elect its own slate of directors to the Kennecott board. On April 4, Curtiss-Wright's proxy materials were mailed to Kennecott shareholders. Since that date, both sides have sent several additional communications to Kennecott shareholders. With this background, we turn now to the parties' contentions.

II. RULE 14a-9(a) CLAIMS

Kennecott contends that Curtiss-Wright's proxy materials are false and misleading in several respects, in violation of Section 14(a) of the Securities Exchange Act of 1934 (the "Act") and Rule 14a-9(a) thereunder. Section 14(a) provides:

"It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 12 of this title."

Rule 14a-9(a), in turn, provides:

"No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading."

The elements of a private cause of action for a violation of Rule 14a-9(a) are well-established. The plaintiff must demonstrate: (1) that the proxy materials contain a false or misleading statement of a material fact or omit to state a material fact necessary in order to make the statement made not false or misleading; (2) that the misstatement or omission of a material fact was the result of knowing, reckless or negligent conduct; and (3) that the proxy solicitation was an essential step in effecting the proposed corporate action. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976); Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 381-84 (2d Cir. 1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1291-1303 (2d Cir. 1973).

A. Omissions Respecting the Curtiss-Wright Plan

Kennecott's principal contention is that Curtiss-Wright's proxy materials were misleading due to Curtiss-Wright's knowing or negligent omission of material facts showing Curtiss-Wright's lack of due diligence in investigating the feasibility of its plan before presenting it to the shareholders as a workable program. In pertinent part, Curtiss-Wright's April 4 proxy statement explains the plan as follows:

"The Curtiss-Wright nominees have committed, if elected as the Board of Directors of Kennecott, to pursue a program seeking to sell its wholly-owned subsidiary, The Carborundum Company ("Carborundum") at an advantageous price and to make the proceeds available to the shareholders in the manner which, in the judgment of the Board of Directors at the time, would be most favorable to all shareholders.

The nominees believe that a sale at or above the $567 million which Kennecott paid for Carborundum only a few months ago would be advantageous from the point of view of the Kennecott shareholders. * * * They also believe that additional funds could be provided from Kennecott's cash and marketable securities and from borrowings against the $400,000,000 principal amount of 30-year subordinated income notes received by Kennecott on the sale of its subsidiary, Peabody Coal Company ("Peabody"), which notes are valued by Kennecott on its December 31, 1977 balance sheet at over $171,000,000. * * * The nominees believe, accordingly, that it will be possible to make available sufficient funds for Kennecott either to make a pro rata distribution of approximately $20 with respect to each Kennecott share or to make a tender offer to its shareholders for 50% of the outstanding shares at a price of approximately $40 per share. Curtiss-Wright's present intention is to seek to have 50% of its shares (having an average cost of $23.42 per share) purchased in such a tender offer."

The evidence shows that T. Roland Berner, Curtiss-Wright's chairman and president, generally familiarized himself with Kennecott and other copper companies before proposing his plan to the shareholders on April 4. Berner studied the annual reports of Kennecott and its competitors and reviewed several other financial and copper industry publications. Curtiss-Wright's principal research, however, consisted of an inquiry by Charles Ehinger, Curtiss-Wright's executive vice president. So far as appears in the record, Ehinger analyzed Kennecott's balance sheets, with particular emphasis on Kennecott's cash position, and proposed to Berner several methods by which to improve it. Among other things, Ehinger suggested the sale of additional debt securities, the reduction of inventory, and the cutting of capital expenditures. As an accounting matter, Ehinger showed that Kennecott's negative cash flow would be improved in 1978 by the profits and depreciation generated by Carborundum and by Kennecott's existing carryover tax losses. Ehinger also reported that the Curtiss-Wright plan would not breach certain negative covenants in Kennecott's credit agreements if Kennecott adopted certain unspecified accounting techniques, which would maintain minimum levels of net tangible assets and stay within the maximum debt-asset ratios.

Kennecott maintains that this research is manifestly inadequate to determine whether the Curtiss-Wright plan is feasible. Kennecott points to its own in-depth research, which showed that depressed copper prices have and would continue to yield a drop in Kennecott's earnings. These lagging earnings, coupled with necessary substantial capital expenditures for the existing copper properties, will result in a severely negative cash flow for the foreseeable future. This cash position, Kennecott contends, renders a substantial cash distribution impossible, or, at least, highly perilous.

Kennecott's research further demonstrated that the Carborundum sale would not bring a price sufficient to permit a cash distribution of the magnitude proposed by Curtiss-Wright. Additional funds would have to be obtained for this purpose, and, Kennecott contends, such funds would not be readily available from banks or other conventional credit sources, or from internal economies. Finally, Kennecott notes that the proposed cash distribution would result in a default under existing credit agreements, since it would leave the company with a debt-asset ratio exceeding that permitted by the credit agreements, and with total net tangible assets falling below the minimum levels required by the agreements.

Of course, it is not for us to credit the...