Liberty Nat. Ins. Holding Co. v. Charter Co.

Decision Date01 June 1984
Docket NumberNo. 82-7260,82-7260
Citation734 F.2d 545
PartiesFed. Sec. L. Rep. P 91,539 LIBERTY NATIONAL INSURANCE HOLDING COMPANY, Plaintiff-Appellant, v. The CHARTER COMPANY, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Eleventh Circuit

Ira L. Burleson, Ralph B. Tate, Birmingham, Ala., Shereff, Friedman, Hoffman & Goodman, Barry Lloyd Katz, Martin Nussbaum, Robert Jeffrey Jossen, New York City, for plaintiff-appellant.

Samuel H. Franklin, C. Larimore Whitaker, Hobart A. McWhorter, Jr., Birmingham, Ala., for defendants-appellees.

David A. Sirignano, S.E.C., Washington, D.C., amicus curiae S.E.C.

Appeal from the United States District Court for the Northern District of Alabama.

Before TJOFLAT and VANCE, Circuit Judges, and MORGAN, Senior Circuit Judge.

TJOFLAT, Circuit Judge:

In this securities case, we are called upon to decide whether an issuer can bring suit under sections 10(b), 13(d), and 14(d) and (e) of the Securities and Exchange Act of 1934 1 (the Exchange Act) to require a shareholder to divest himself of his stock holdings in the issuer. None of these sections expressly authorizes such a suit. We hold that none of these sections impliedly authorizes such a suit. The district court dismissed the issuer's complaint. We affirm.


Between May 4 and December 22, 1981, the Charter Company, and certain of its subsidiaries 2 (Charter), purchased an aggregate of 962,400 shares of the common stock of Liberty National Insurance Holding Company (Liberty), representing approximately 5.1% of Liberty's outstanding common stock. On December 28, 1981, Charter filed a schedule 13D statement with the Securities and Exchange Commission (SEC or Commission) reporting those purchases and other information as required by law. 3 From December 22, 1981, through January 22, 1982, Charter acquired an additional 255,100 shares of Liberty stock, increasing its holdings of outstanding Liberty stock to approximately 6.5%. This additional purchase was the subject of Amendment 1 to Charter's schedule 13D.

On February 1, 1982, Liberty brought this suit against Charter in the district court alleging that Charter had embarked on an unlawful scheme to reap illicit profits by manipulating the market for Liberty stock to bring about an upward displacement in the price, and "attempting to precipitate an auction for control of Liberty" 4 by use of false and misleading schedule 13D statements. Liberty alleged that Charter's conduct violated various provisions of the Exchange Act 5 and of state law 6 and sought an injunctive order requiring Charter to divest itself of all its Liberty shares and in the interim to refrain from exercising its right to vote those shares or otherwise participate as a stockholder in Liberty's affairs. Charter moved to dismiss Liberty's complaint on February 4.

On February 16, Charter filed a second amendment to its schedule 13D, which incorporated a copy of the complaint Liberty had filed in the district court and set forth Charter's position with respect to Liberty's allegations. Amendment 2 also reported Charter's acquisition of an additional 78,000 shares of Liberty stocks raising its holdings to approximately 6.9%. On March 17, 1982, Charter filed a third amendment to its schedule 13D, reporting the acquisition of an additional 188,200 shares which increased its holdings to approximately 7.9% of the total outstanding Liberty common stock. On April 27, 1982, the district court, acting on Charter's February 4 motion, dismissed Liberty's complaint with leave to amend. Liberty filed an amended complaint on May 17, 1982.

Liberty alleged in its amended complaint that Charter had pursued a widespread and pervasive scheme in violation of the Exchange Act to enrich itself at the expense of the investing public, including former and present Liberty shareholders. Charter's putative scheme was to accumulate a block of Liberty shares large enough 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 Liberty shareholders. Liberty's amended complaint asserted three distinct claims for relief. Each claim sought the same injunctive relief Liberty had asked for in the original complaint: that the court order Charter to divest itself of its holdings of Liberty stock, either by rescinding its purchases or selling on the open market, and pending such divestiture to refrain from voting its shares or otherwise exercising its rights in those shares. 7 Liberty's first claim for relief was based on section 13(d) 8 of the Exchange Act. Liberty alleged that Charter, in carrying out its scheme to acquire a control position filed false and misleading schedule 13D statements. Section 13(d) of the Exchange Act requires that anyone acquiring more than five percent of any class of equity securities of a company registered with the SEC file with the Commission, any exchanges on which the stock is traded, and the issuing company a schedule 13D statement setting forth, among other things: (a) the background and identity of the purchaser; (b) the source of funds used to purchase the securities; and (c) the purpose of the acquisition and the purchaser's future plans and intentions with respect to the issuer. SEC rule 12(b)20, 17 C.F.R. Sec. 240.12(b)-20 (1983), promulgated under section 13(d), requires periodic updating of schedule 13D statements to reflect changes in the facts previously disclosed. Liberty alleged that Charter's schedule 13D statement, including the amendments thereto, was false and misleading as to the identity of the purchaser, the source of the funds, the purpose of the acquisition and the purchaser's future plans. 9

Liberty did not allege how the false schedule 13D statement enabled Charter to acquire its shares of Liberty stock; Liberty pled no facts that indicated that Charter's 13D statement was ever communicated to the market or to the Liberty shareholders who sold to Charter. 10 Nor did Liberty allege how it was injured by Charter's 13D statement. Notwithstanding the lack of any allegation of a causal relationship between Charter's schedule 13D statement and Charter's acquisition of Liberty stock, Liberty nevertheless sought the injunctive relief stated above: that Charter be divested of its Liberty shares.

Liberty's second claim for relief was that Charter engaged in a tender offer in violation of sections 14(d) 11 and (e) 12 of the Exchange Act. According to Liberty, Charter solicited and purchased large blocks of Liberty shares at a premium, and this constituted a tender offer. Section 14(d) requires that persons making a tender offer for securities disclose certain prescribed information by filing it with the SEC. This information includes all that is required in a section 13(d) filing. Section 14(e) prohibits fraudulent conduct in connection with a tender offer.

Liberty alleged that Charter failed to file the required information under section 14(d), and that Charter's false and misleading schedule 13D statement amounted to fraudulent conduct under section 14(e). Liberty did not allege how it was injured by this fraudulent conduct. Nor did Liberty allege how it was injured by Charter's failure to comply with section 14(d). 13 Liberty merely alleged that Charter, in seeking a control position in Liberty, had violated sections 14(d) and (e) and that Liberty was therefore entitled to an injunction requiring Charter to divest itself of its holdings in Liberty.

Liberty's third claim for relief was based on sections 9 14 and 10(b) 15 of the Exchange Act and rule 10b-5 16 promulgated by the Commission. Liberty alleged that Charter violated these laws by engaging in a scheme to manipulate the market for Liberty stock to bring about an upward displacement in the price. According to Liberty, Charter filed a false and misleading schedule 13D statement and made an illegal tender offer as it pursued this scheme.

Section 9 contains, in four subsections, a variety of proscriptions against price manipulation, and creates a cause of action in favor of "any person who shall purchase or sell any security at [a manipulated price]." Liberty did not specify the provisions of section 9 that Charter supposedly violated. 17 It did allege that Charter had manipulated the market price of Liberty stock and had filed a false schedule 13D statement "for the purpose of inducing the purchase or sale of (Liberty stock) by others," thus conceivably stating a subsection (a)(2) or (4) violation. Liberty did not allege, however, how Charter manipulated the market or that its false schedule 13D statement was communicated to any Liberty shareholders or induced any sales. Finally, Liberty did not allege that it was a purchaser or seller of a security authorized to bring suit under section 9; it simply concluded that because Charter had violated section 9, Liberty was entitled to an injunction requiring Charter to divest itself of all its Liberty stock.

Section 10(b) and rule 10b-5 prohibit the employment of manipulative and deceptive devices, including false statements of material facts, "in connection with the purchase and sale of any security." Liberty, again, did not allege that it was a purchaser or seller of Liberty stock in any transaction affected by Charter's alleged manipulation or false schedule 13D statement. Liberty alleged only that because Charter had engaged in such conduct Liberty was entitled to a court order requiring Charter to divest itself of all of its holdings in Liberty.

Charter moved to dismiss Liberty's amended complaint on May 27, 1982. The district court treated the motion as a motion for summary judgment under rule 12(b) of the Federal Rules of Civil Procedure because it considered, in addition to the allegations of Liberty's amended complaint, amendment 5 to Charter's 13D statement, which summarized the amended complaint, attached a copy of it as an exhibit, and set forth...

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