San Francisco Real Estate Investors v. Real Estate Inv. Trust of America

• Decision Date: 09 March 1983
• Docket Number: 82-1865,Nos. 82-1853,s. 82-1853
• Parties: Fed. Sec. L. Rep. P 99,115 SAN FRANCISCO REAL ESTATE INVESTORS, Plaintiff, Appellant, v. REAL ESTATE INVESTMENT TRUST OF AMERICA, et al., Defendants, Appellees. SAN FRANCISCO REAL ESTATE INVESTORS, Plaintiff, Appellee, v. REAL ESTATE INVESTMENT TRUST OF AMERICA, Defendant, Appellee. Unicorp American Corporation, et al., Defendants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 1000

701 F.2d 1000

Fed. Sec. L. Rep. P 99,115

SAN FRANCISCO REAL ESTATE INVESTORS, Plaintiff, Appellant, v. REAL ESTATE INVESTMENT TRUST OF AMERICA, et al., Defendants,

Appellees.

SAN FRANCISCO REAL ESTATE INVESTORS, Plaintiff, Appellee, v. REAL ESTATE INVESTMENT TRUST OF AMERICA, Defendant, Appellee.

Unicorp American Corporation, et al., Defendants, Appellants.

Nos. 82-1853, 82-1865.

United States Court of Appeals, First Circuit.

Argued Jan. 7, 1983.

Decided March 9, 1983.

Douglas M. Kraus, Cleveland, Ohio, with whom Dennis J. Drebsky, Charles M. Yablon, Skadden, Arps, Slate, Meagher & Flom, New York City, Earle C. Cooley, Jeffrey B. Rudman, Kenneth R. Berman, Thomas N. O'Connor, and Hale & Dorr, Boston, Mass., were on brief, for San Francisco Real Estate Investors.

Robert B. Mazur, New York City, with whom Louis J. Barash, Daniel N. Perlmutter, and Wachtell, Lipton, Rosen & Katz, New York City, were on brief, for Unicorp American Corp., et al.

Jacob H. Stillman, Associate Gen. Counsel, and David A. Sirignano, Sp. Counsel, Washington, D.C., were on brief for S.E.C., amicus curiae.

Don M. Kennedy, Boston, Mass., with whom James J. Dillon, James B. Farmer, Boston, Mass., Cerise H. Lim Epstein, Brookline, Mass., Frank D. Saylor, IV, Boston, Mass., Goodwin, Procter & Hoar, Boston, Mass. and Squire, Sanders & Dempsey, New York City, were on brief, for Real Estate Inv. Trust of America, et al.

Before COFFIN, Chief Judge, BOWNES and BREYER, Circuit Judges.

COFFIN, Chief Judge.

This appeal concerns a struggle for control of one large company by another through a tender offer. Both the target company and the bidder are real estate investment trusts (REITs), organized pursuant to 26 U.S.C. Sec. 856 and subject to certain constraints ¹ and possessing the advantage of avoiding a separate income tax on the corporate entity, a single tax being paid by shareholders on their receipt of distributions.

Plaintiff-appellant, San Francisco Real Estate Investors (SFREI), on October 28, 1982, made a tender offer of $40 a share (about $9 above the then current market price) for 34 percent of the shares (558,000) of defendant Real Estate Investment Trust of America (REITA). Acquisition of this amount of shares would give SFREI control of REITA. A brief account of SFREI's corporate "family" relationships and its present and potential holding of REITA's shares explaining how this result would be achieved is set forth in the margin. ² REITA, a venerable Massachusetts business trust, tracing its origins from 1886, with a record of 340 consecutive dividends, invests in commercial and light industrial real estate, the value of such investments being estimated at $63 a share or approximately twice the market price per share.

Long before the tender offer, REITA had kept a watching brief on Mann and his corporate entities. REITA had several meetings with Mann in 1979 and 1980, and observed Mann's (or UCC's) acquisition of UAC, which thereafter gave up its status as a REIT, his unsuccessful but profitable effort to acquire another REIT, First Union, and the acquisition of a majority position in SFREI. ³ REITA's trustees concluded that they were on a "collision course" with Mann, and that not only was control of REITA his object, but that Mann's investment philosophy was not that of the steady and full distribution of income of a REIT but rather one of accumulating income and engaging in "high leverage" borrowing for reinvestment. In the spring of 1982, the trustees discussed, had counsel draft, and on May 24, three days after they learned of SFREI's stock purchases, adopted a by-law that precluded the possibility that over 50 percent of REITA's stock could be owned by five or fewer persons--a circumstance that, see n. 1, supra, could result in losing REIT status. ⁴

Realizing that the by-law constituted a roadblock in its path, SFREI brought suit in the district court against REITA and its seven Trustees to enjoin enforcement of the by-law at the same time as it made its tender offer on October 28, 1982. Indeed, the completion of stock purchases under the tender offer was made conditional on obtaining a preliminary injunction against enforcement of the by-law. Five days later REITA counterclaimed, charging SFREI, Mann, UCC, and UAC with nondisclosure of their intent and fraudulent market manipulation, and seeking injunction of the tender offer.

Within a two week period voluminous affidavits, depositions, exhibits, and memoranda were assembled and on November 16, 1982 the district court heard argument and received brief testimony from one of REITA's officers at a hearing. On November 17 it denied SFREI's request to enjoin the by-law and granted REITA's motion for an injunction against the tender offer. We refused to stay the injunction but agreed to hear the appeal on an expedited basis.

Denial of SFREI's Request to Enjoin Enforcement of the By-Law

We first consider the court's refusal to enjoin enforcement of the by-law. Even though the injunction against the tender offer did not rest on the by-law, consummation of the offer expressly depends upon obtaining a ruling of its invalidity. Only if we could say that under no circumstances could we foresee the lifting of the injunction against the tender offer, which we cannot, could we reasonably avoid deciding this issue. As did the district court, we shall deal independently with both requests for injunctive relief.

The district court properly noted the familiar four part inquiry into (1) plaintiff's likelihood of success on the merits, (2) the irreparability of harm to plaintiff if relief is not granted, (3) the excess of such harm over harm to defendant if relief is granted, and (4) the adverse effect on the public interest if relief is granted. Agency Rent-A-Car, Inc. v. Connolly, 686 F.2d 1029 (1st Cir.1982). We note in addition the constraint laid on us to defer to the district court's action unless we find an abuse of discretion or error of law. Burgess v. Affleck, 683 F.2d 596 (1st Cir.1982); Crowley v. Local No. 82, 679 F.2d 978, 994 (1st Cir.1982). We agree with appellees that deference to factual determinations does not in this circuit diminish because most or all of the evidence is documentary. Custom Paper Products Co. v. Atlantic Paper Box Co., 469 F.2d 178, 179 (1st Cir.1972).

The court did not explicitly address the question, in the context of SFREI's request for an injunction, of REITA's irreparable harm should the operation of the by-law be enjoined. It seems clear to us, however, that it clearly felt that if the by-law were inoperative, Mann and companies might mount a successful and wholly legal tender offer effort, which would result in the change of control of REITA and loss of its REIT status, to the irreparable harm of REITA and its shareholders.

The court did address the harm that SFREI would suffer from denial of relief. Because SFREI conditioned its tender offer on the granting of preliminary injunctive relief, the court reasoned that it had lost nothing except time and money and, but for self imposed limitations of "economic rationality" and time, could still purchase shares at a premium. In so reasoning, we think the court erred as a matter of law. There can be no doubt that enforcement of the by-law would substantially chill, if not freeze in its tracks, any continued takeover effort. While time and money are lost, so also is diminished if not destroyed any chance of success. Whether one questions the wisdom of such efforts or not, the fact is that "loss of [a] best opportunity to seize control of a major corporation ... could be crucial." Dan River, Inc. v. Carl C. Icahn, 701 F.2d 278 at 284(4th Cir.1983); National City Lines, Inc. v. LLC Corp., 524 F.Supp. 906, 912 (W.D.Mo.1981), aff'd, 687 F.2d 1122 (8th Cir.1982). Congress has endeavored, in enacting the Williams Act governing takeovers, to assure a "policy of neutrality in contests for control", Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 29, 97 S.Ct. 926, 943, 51 L.Ed.2d 124 (1977), which is frustrated by unjustifiably delaying tender offers, Edgar v. MITE Corp., --- U.S. ----, ----, 102 S.Ct. 2629, 2637, 73 L.Ed.2d 269 (1982); Kennecott Corp. v. Smith, 637 F.2d 181, 190 (3d Cir.1980).

Not only did the district court's error, as we see it, in finding no risk of irreparable harm to SFREI disable it from balancing such risk against that faced by REITA, but it also prevented it from explicitly addressing the impact on the public interest should the by-law be enjoined. This part of the analysis, it seems to us, merges with our consideration of the merits. If the by-law was a perfectly proper one for REITA's trustees to enact and not in violation of the Williams Act, the public interest could not be said to be served by enjoining its enforcement; the public interest in stimulating a competitive assault would be at least balanced by seeing a defense in place. If, however, the by-law was not a proper expedient, the public interest would be ill served by allowing it to determine the outcome of the fight. We therefore consider the remaining factor, which we deem crucial in the weighing process--SFREI's likelihood of success in ultimately demonstrating the by-law to be illegal.

The district court first considered SFREI's charge that the by-law constituted a manipulative device used in connection with a tender offer, in violation of Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78n(e). It held that it was not persuaded that the by-law was enacted solely to prevent a tender offer, and that the Trustees, perceiving Mann's intention (through SFREI) as that of controlling REITA, were justified in enacting the by-law as "a reasonable and good-faith exercise of their business judgment." The court had earlier stated that "the by-law was a proper means to protect REITA's status." Addressing the contention that the by-law was unauthorized, the court began by noting that ...