S.E.C. v. Carter Hawley Hale Stores, Inc.

• Decision Date: 13 May 1985
• Docket Number: Nos. 84-5897,84-6001,s. 84-5897
• Citation: 760 F.2d 945
• Parties: , Fed. Sec. L. Rep. P 92,038 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. CARTER HAWLEY HALE STORES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 945

760 F.2d 945

53 USLW 2595, Fed. Sec. L. Rep. P 92,038

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. CARTER HAWLEY HALE STORES, INC., Defendant-Appellee.

Nos. 84-5897, 84-6001.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 3, 1985.

Decided May 13, 1985.

Paul Gonson, Washington, D.C., for plaintiff-appellant.

Gwen L. Feder, Michael H. Diamond, Skadden Arps, Slate, Meagher & Flom, Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before GOODWIN, SNEED, and SKOPIL, Circuit Judges.

SKOPIL, Circuit Judge:

The issue in this case arises out of an attempt by The Limited ("Limited"), an Ohio corporation, to take over Carter Hawley Hale Stores, Inc. ("CHH"), a publicly-held Los Angeles corporation. The SEC commenced the present action for injunctive relief to restrain CHH from repurchasing its own stock in an attempt to defeat the Limited takeover attempt without complying with the tender offer regulations. The district court concluded CHH's repurchase program was not a tender offer. The SEC appeals from the district court's denial of its motion for a preliminary injunction. We affirm.

FACTS AND PROCEEDINGS BELOW

On April 4, 1984 Limited commenced a cash tender offer for 20.3 million shares of CHH common stock, representing approximately 55% of the total shares outstanding, at $30 per share. Prior to the announced offer, CHH stock was trading at approximately $23.78 per share (pre-tender offer price). Limited disclosed that if its offer succeeded, it would exchange the remaining CHH shares for a fixed amount of Limited shares in a second-step merger.

In compliance with section 14(d) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. Sec. 78n(d) (1982), Limited filed a schedule 14D-1 disclosing all pertinent information about its offer. The schedule stated that (1) the offer would remain open for 20-days, (2) the tendered shares could be withdrawn until April 19, 1984, and (3) in the event the offer was oversubscribed, shares would be subject to purchase on a pro rata basis.

While CHH initially took no public position on the offer, it filed an action to enjoin Limited's attempted takeover. Carter Hawley Hale Stores, Inc. v. The Limited, Inc., 587 F.Supp. 246 (C.D.Cal.1984). CHH's motion for an injunction was denied. Id. From April 4, 1984 until April 16, 1984 CHH's incumbent management discussed a response to Limited's offer. During that time 14 million shares, about 40% of CHH's common stock, were traded. The price of CHH stock increased to approximately $29.25 per share. CHH shares became concentrated in the hands of risk arbitrageurs.

On April 16, 1984 CHH responded to Limited's offer. CHH issued a press release announcing its opposition to the offer because it was "inadequate and not in the best interests of CHH or its shareholders." CHH also publicly announced an agreement with General Cinema Corporation ("General Cinema"). CHH sold one million shares of convertible preferred stock to General Cinema for $300 million. The preferred shares possessed a vote equivalent to 22% of voting shares outstanding. General Cinema's shares were to be voted pursuant to CHH's Board of Directors recommendations. General Cinema was also granted an option to purchase Walden Book Company, Inc., a profitable CHH subsidiary, for approximately $285 million. Finally, CHH announced a plan to repurchase up to 15 million shares of its own common stock for an amount not to exceed $500 million. If all 15 million shares were purchased, General Cinema's shares would represent 33% of CHH's outstanding voting shares.

CHH's public announcement stated the actions taken were "to defeat the attempt by Limited to gain voting control of the company and to afford shareholders who wished to sell shares at this time an opportunity to do so." CHH's actions were revealed by press release, a letter from CHH began to repurchase its shares on April 16, 1984. In a one-hour period CHH purchased approximately 244,000 shares at an average price of $25.25 per share. On April 17, 1984 CHH purchased approximately 6.5 million shares in a two-hour trading period at an average price of $25.88 per share. By April 22, 1984 CHH had purchased a total of 15 million shares. It then announced an increase in the number of shares authorized for purchase to 18.5 million.

CHH's Chairman to shareholders, and by documents filed with the Securities and Exchange Commission ("SEC")--a Schedule 14D-9 and Rule 13e-1 transaction statement. These disclosures were reported by wire services, national financial newspapers, and newspapers of general circulation. Limited sought a temporary restraining order against CHH's repurchase of its shares. The application was denied. Limited withdrew its motion for a preliminary injunction.

On April 24, 1984, the same day Limited was permitted to close its offer and start purchasing, CHH terminated its repurchase program having purchased approximately 17.5 million shares, over 50% of the common shares outstanding. On April 25, 1984 Limited revised its offer increasing the offering price to $35.00 per share and eliminating the second-step merger. The market price for CHH then reached a high of $32.00 per share. On May 21, 1984 Limited withdrew its offer. The market price of CHH promptly fell to $20.62 per share, a price below the pre-tender offer price.

On May 2, 1984, two and one-half weeks after the repurchase program was announced and one week after its apparent completion, ¹ the SEC filed this action for injunctive relief. The SEC alleged that CHH's repurchase program constituted a tender offer conducted in violation of section 13(e) of the Exchange Act, 15 U.S.C. Sec. 78m(e) and Rule 13e-4, 17 C.F.R. Sec. 240.13e-4. On May 5, 1984 a temporary restraining order was granted. CHH was temporarily enjoined from further stock repurchases. The district court denied SEC's motion for a preliminary injunction, finding the SEC failed to carry its burden of establishing "the reasonable likelihood of future violations ... [or] ... a 'fair chance of success on the merits'...." SEC v. Carter Hawley Hale Stores, Inc., 587 F.Supp. 1248, 1257 (C.D.Cal.1984) (citations omitted). The court found CHH's repurchase program was not a tender offer because the eight-factor test proposed by the SEC and adopted in Wellman v. Dickinson, 475 F.Supp. 783 (S.D.N.Y.1979), aff'd on other grounds, 682 F.2d 355 (2d Cir.1982), cert. denied, 460 U.S. 1069, 103 S.Ct. 1522, 75 L.Ed.2d 946 (1983), had not been satisfied. SEC v. Carter Hawley Hale Stores, Inc., 587 F.Supp. at 1255. The court also refused to adopt, at the urging of the SEC, the alternative test of what constitutes a tender offer as enunciated in S-G Securities, Inc. v. Fuqua Investment Co., 466 F.Supp. 1114 (D.Mass.1978). 587 F.Supp. at 1256-57. On May 9, 1984 the SEC filed an emergency application for an injunction pending appeal to this court. That application was denied.

DISCUSSION

The grant or denial of a preliminary injunction is reviewed to determine if the district court abused its discretion. Lopez v. Heckler, 725 F.2d 1489, 1497 (9th Cir.), rev'd on other grounds, 463 U.S. 1328, 104 S.Ct. 10, 77 L.Ed.2d 1431 (1984). A district court abuses its discretion if it rests its conclusion on clearly erroneous factual findings or an incorrect legal standard. Id.; Apple Computer, Inc. v. Formula International, Inc., 725 F.2d 521, 523 (9th Cir.1984).

The SEC urges two principal arguments on appeal: (1) the district court erred in concluding that CHH's repurchase program was not a tender offer under the eight-factor Wellman test, and (2) the district court erred in declining to apply the definition of a tender offer enunciated in S-G Securities, 466 F.Supp. at 1126-27. Resolution of these issues on appeal presents the difficult task of determining whether CHH's repurchase of shares during a third-party tender offer itself constituted a tender offer.

1. The Williams Act.

A. Congressional Purposes

The Williams Act amendments to the Exchange Act were enacted in response to the growing use of tender offers to achieve corporate control. Edgar v. Mite Corp., 457 U.S. 624, 632, 102 S.Ct. 2629, 2635, 73 L.Ed.2d 269 (1982) (citing Piper v. Chris-Craft Industries, 430 U.S. 1, 22, 97 S.Ct. 926, 939, 51 L.Ed.2d 124 (1977)). Prior to the passage of the Act, shareholders of target companies were often forced to act hastily on offers without the benefit of full disclosure. See H.R.Rep. No. 1711, 90th Cong., 2d Sess. (1968), reprinted in 1968 U.S.Code, Cong. & Admin.News 2811 ("House Report 1711"). ² The Williams Act was intended to ensure that investors responding to tender offers received full and fair disclosure, analogous to that received in proxy contests. The Act was also designed to provide shareholders an opportunity to examine all relevant facts in an effort to reach a decision without being subject to unwarranted pressure. House Report 1711.

This policy is reflected in section 14(d), which governs third-party tender offers, and which prohibits a tender offer unless shareholders are provided with certain procedural and substantive protections including: full disclosure; time in which to make an investment decision; withdrawal rights; and pro rata purchase of shares accepted in the event the offer is oversubscribed. 15 U.S.C. Sec. 78n(d) (1981); 17 C.F.R. Sec. 240.14d-6 (1984); 17 C.F.R. Sec. 240.14d-7(a)(1)-14d-7(a)(2) (1984).

There are additional congressional concerns underlying the Williams Act. In its effort to protect investors, Congress recognized the need to "avoid favoring either management or the takeover bidder." Edgar, 456 U.S. at 633, 102 S.Ct. at 2636; see also Financial General Bank Shares, Inc. v. Lance, [1978] Fed.Sec.L.Rptr. (CCH) p 96,403 at 93,424-25 (D.D.C.1978) (quoting Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 95 S.Ct. 2069, 2075, 45...