Prudent Real Estate Trust v. Johncamp Realty, Inc.

• Decision Date: 12 April 1979
• Docket Number: D,No. 1009,1009
• Citation: 599 F.2d 1140
• Parties: Fed. Sec. L. Rep. P 96,833 PRUDENT REAL ESTATE TRUST, Appellant, v. JOHNCAMP REALTY, INC., et al., Appellees. ocket 79-7215.
• Court: U.S. Court of Appeals — Second Circuit

Page 1140

599 F.2d 1140

Fed. Sec. L. Rep. P 96,833

PRUDENT REAL ESTATE TRUST, Appellant, v. JOHNCAMP REALTY, INC., et al., Appellees.

No. 1009, Docket 79-7215.

United States Court of Appeals, Second Circuit.

Argued April 4, 1979.

Decided April 12, 1979.

Harry I. Rand, New York City (Botein, Hays, Sklar & Herzberg, Stanley M. Kolber, and Lawrence M. Kaye, New York City, of counsel), for appellant.

Richard C. Tufaro, New York City (Milbank, Tweed, Hadley & McCloy, Harry L. Simmons, Charles E. Dropkin, Sarah Lichtenstein, Michael L. Michael, and Edward G. Williams, New York City, of counsel), for appellees.

Before MOORE, FRIENDLY and MESKILL, Circuit Judges.

FRIENDLY, Circuit Judge:

On March 28, 1979, we heard a motion by appellant Prudent Real Estate Trust (Prudent), the target of a tender offer by the defendant Johncamp Realty, Inc. (Johncamp), for an injunction pending appeal from an order of the District Court for the Southern District of New York, which had denied Prudent's motion for a temporary injunction against the continuation of a tender offer on the ground that the material filed with the Securities and Exchange Commission (SEC) pursuant to 17 C.F.R. § 240.14d-100 implementing § 14(d) of the Securities and Exchange Act was insufficient and that, because of certain statements and omissions, the offer violated § 14(e) of the Act. We granted the motion until argument of an expedited appeal on April 4, and then extended the injunction pending decision. We now reverse and instruct the district court to issue an appropriate temporary injunction.

Prudent is a New York business trust whose shares are traded on the American Stock Exchange, which has qualified as a real estate investment trust under §§ 856-859 of the Internal Revenue Code. It now has six trustees, only two of whom receive substantial compensation. Defendant Johncamp is a Delaware close corporation which was founded by Johncamp Netherlands Antilles, N.V. (Johncamp N.V.) and The Pacific Company, a California corporation (Pacific). Johncamp N.V. owns 60% And Pacific 40% Of the common shares of Johncamp. All of the stock of Johncamp N.V. is owned by Campeau Corporation (Campeau), a publicly held Ontario corporation; Robert Campeau, a resident of Canada, is chairman of its board and chief executive officer. John E. Wertin, a resident of California, is president, secretary and a director of Johncamp, president and a director and sole stockholder of Pacific, and president and director of John Wertin Development Corporation (JWDC), a California corporation, 95% Of the stock of which is owned by Pacific. Johncamp, Pacific and JWDC have their principal places of business at the same address in Irvine, California; Johncamp N.V. and Campeau have their principal places of business at the same address in Ottawa. In an elaborate stockholders' agreement dated March 12, 1979, Johncamp N.V. and Pacific contracted that in order to enable Johncamp to make the tender offer for shares of Prudent, Johncamp N.V. would invest up to $20,000,000 and Pacific up to $5,000,000 in Johncamp preferred shares. The agreement also provided that subsequent to Johncamp's acquisition of Prudent shares, Pacific should have exclusive control of the voting of such shares and, with an exception not here material, management of any property received in respect of such shares including the right to dispose of such property for cash; all other matters relating to the management of Johncamp would be controlled jointly by Johncamp N.V. and Pacific. The parties would also cause Johncamp to retain Pacific "as an independent contractor responsible for supervising implementation of decisions of the parties with respect to the management and operation" of Johncamp. Another agreement between Campeau, Johncamp N.V., Pacific, Wertin and Johncamp related to further details connected with the tender offer. Wertin and JWDC guaranteed to Campeau and Johncamp N.V. the performance by Pacific of certain covenants in the agreements.

On March 12, 1979, Johncamp filed with the SEC a Schedule 14 D-1 as required for a tender offer by 17 C.F.R. § 240.14d-100. The schedule contained the form of offer, which was advertised the following day in the New York Times. The offer, which was to expire on March 23 unless extended, was to purchase any and all of Prudent's outstanding shares at $7 net per share, as against the last available market price of 47/8, and was not conditioned upon any minimum number of shares being tendered. In addition to usual warnings of such possible consequences of the offer as delisting on the American Stock Exchange, cessation of qualification as margin securities, and termination of registration under the Securities Exchange Act, the offer had this to say with respect to the possible effect on REIT status:

If the Purchaser acquires all of the Shares of the Company, the Company will not qualify as a real estate investment trust for its taxable year ending November 30, 1979. Moreover, even if the Purchaser acquires less than all of the Shares of the Company, it is possible that the Company will not qualify as a real estate investment trust for any taxable year if, as a result of the Offer or any other transactions not related to the Offer: (1) fewer than 100 persons beneficially own Shares of the Company during at least 31 days of such taxable year or (2) more than 50 percent in value of the Shares is owned (directly or indirectly under the provisions of Section 544 of the Internal Revenue Code of 1954, as amended) at any time during the last half of any such taxable year by or for not more than 5 individuals.

If the Company's qualification as a real estate investment trust is terminated as a result of the above-described rules or for any other reason, the Company will not be eligible to elect to be treated as a real estate investment trust until the fifth taxable year after the termination is effective unless the Company establishes to the satisfaction of the Internal Revenue Service that its failure to qualify as a real estate investment trust was due to reasonable cause and not due to willful neglect.

For any year in which the Company does not qualify as a real estate investment trust, it will be subject to Federal, State and local taxation as a corporation and will not be entitled to the favorable tax treatment accorded qualified real estate investment trusts and distributions to its shareholders would not be deductible by the Company in computing its taxable income.

The offer went on to state that 80% Of the required funds would be furnished by Johncamp N.V. which would obtain them from Campeau, out of the latter's own funds or from a $50,000,000 (Canadian) line of bank credit described in some detail, and that 20% Would be supplied by Pacific which would obtain the funds from JWDC and Wertin. The purpose of the offer was to acquire all the shares of Prudent but if this did not occur pursuant to the offer, Johncamp, Campeau, Johncamp N.V. and Pacific desired to acquire enough shares to exercise control. The purchaser intended to reconstitute the board of trustees of Prudent as soon and as much as possible. Although no specific plans for Prudent's future had been formulated, Johncamp N.V. and Pacific had established a procedure to increase the likelihood that Campeau's investment in Johncamp would be fully recovered; pursuant to such procedure Johncamp N.V. could cause a liquidation of Prudent if Johncamp acquired at least two-thirds of the outstanding shares. The offer continued:

Implementation of any plans resulting from a review of the Company would require approval of the Board of Trustees and, if required by the Declaration of Trust, the approval of shareholders. The Declaration of Trust provides that the Trustees shall not sell all or substantially all of the assets of the Company without the affirmative vote of not less than a majority in interest of the Shares then outstanding and entitled to vote, nor can there be a termination of the Company without the affirmative vote of not less than two-thirds in interest of the Shares then outstanding and entitled to vote.

The only other portion of the Schedule 14 D here relevant is Item 9. Financial Statements of Certain Bidders. This was answered: "Not applicable, but see Exhibit 1." Exhibit 1 consisted of the printed annual reports of Campeau for 1976 and 1977 and audited consolidated financial statements for 1978.

On March 16, 1979, Prudent initiated this action to enjoin the defendants from proceeding with the tender offer and moved for a temporary restraining order and a preliminary injunction on various grounds. One of these, not pressed on this appeal but reserved for future presentation in the district court after further discovery, is that there is a secret undisclosed plan to liquidate Prudent. The three points urged below which continue to be pressed here are the failure to disclose in the Offer or the Schedule any financial information about the Wertin interests, to wit, Pacific, JWDC, and Wertin himself, as 17 C.F.R. § 240.14d-100, Item 9, allegedly requires; the claimed inadequacy of the discussion of the effects of loss of REIT status; and the falsity of the statement that Prudent could be terminated only by a vote of two-thirds of the outstanding shares when Prudent's declaration of trust also allowed this to be done by the board of trustees acting alone.

At a hearing on March 16, at which Judge Owen declined to issue a temporary restraining order, Johncamp's counsel stated that, although Johncamp did not believe the erroneous statement with respect to termination of Prudent to be material, it was considering correction of that statement by amendment of the offering documents. At a further hearing counsel announced that it was filing a correcting amendment with the SEC and would issue a press release to that effect. However, the amendment was not advertised in the New York Times and, so far as appears,...