SG Securities, Inc. v. Fuqua Inv. Co., Civ. A. No. 78-2392-S.

• Decision Date: 17 January 1979
• Docket Number: Civ. A. No. 78-2392-S.
• Citation: 466 F. Supp. 1114
• Parties: S-G SECURITIES, INC., Plaintiff, v. The FUQUA INVESTMENT COMPANY and J. B. Fuqua, Defendants.
• Court: U.S. District Court — District of Massachusetts

466 F. Supp. 1114

S-G SECURITIES, INC., Plaintiff, v. The FUQUA INVESTMENT COMPANY and J. B. Fuqua, Defendants.

Civ. A. No. 78-2392-S.

United States District Court, D. Massachusetts.

December 19, 1978.

Memorandum and Order on Motion for Reconsideration January 17, 1979.

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Brackett B. Denniston, III, Joshua M. Berman, Carol Goodman, Boston, Mass., Goodwin, Procter & Hoar, Boston, Mass., for plaintiff.

Robert Rothberg, Thomas F. Maffei, Mark A. Michelson, Choate, Hall & Stewart, Boston, Mass., for defendants; Milton S. Gould, Michael Lesch, Larry F. Gainen, Richard M. Goldstein, Shea, Gould, Climenko & Casey, New York City, of counsel.

MEMORANDUM AND ORDER

SKINNER, District Judge.

Plaintiff, S-G Securities, Inc. ("S-G"), has moved for a preliminary injunction to restrain defendants Fuqua Investment Company ("FIC") and J. B. Fuqua, the president and sole shareholder of FIC, from acquiring additional shares of S-G common stock; from voting or otherwise exercising rights of ownership of S-G shares it now holds; and from otherwise attempting to influence or control S-G and its management. As grounds for such relief, plaintiff S-G alleges that FIC has violated various provisions of the Williams amendments to the Securities Exchange Act of 1934 (commonly known as "the Williams Act") and the rules promulgated thereunder and of Chapter 110C of the General Laws of Massachusetts, the Massachusetts takeover law, in connection with certain privately negotiated and open market purchases of S-G common stock. Defendants, in turn, have moved to dismiss this action for lack of jurisdiction; to dismiss the federal law claims for improper venue; or, alternatively, to transfer venue to the United States District Court for the Southern District of New York pursuant to 28 U.S.C. § 1404(a).

I. THE PARTIES

Plaintiff S-G, a Delaware corporation organized in 1973 with its principal place of business in Massachusetts, is a regulated investment company registered under the Investment Company Act of 1940. S-G operates as a closed-end mutual fund invested primarily in debt and equity securities of corporations and real estate investment trusts. Plaintiff's capital structure consists of common and preferred stock, both of which are traded on the American Stock Exchange. As of September 14, 1978, S-G had outstanding 1,425,795 shares of common stock.

Defendant J. B. Fuqua, a Georgia resident, is president and sole shareholder of defendant FIC, a Georgia corporation organized on July 10, 1978 for the purpose of acquiring and holding the common stock of S-G.

II. FACTS

In the latter part of 1977, J. B. Fuqua approached representatives of S-G with the proposal of a business combination between S-G and a Fuqua-controlled corporation. The preliminary merger discussions subsequently conducted by the parties in November 1977 proved fruitless.

Fuqua renewed his overtures to S-G in July 1978. Michael Tennenbaum, a partner in the investment banking firm of Bear, Stearns & Co., acting on Fuqua's behalf, arranged a meeting with representatives of S-G on July 12, 1978 in New York to discuss a possible tender offer for S-G common stock.

At the July 12th meeting, Fuqua proposed a cash tender offer for as many as 600,000 shares of the common stock of S-G at $3.00 per share if the S-G board of directors recommended to its shareholders acceptance of the tender offer, and at $2.50 per share if they did not.¹ The tender offer was to be made through FIC.

Following a meeting of the S-G board of directors on July 17 at which Fuqua's tender offer proposal was unanimously rejected, S-G drafted a press release stating in substance that it was engaged in discussions with several unnamed parties interested in purchasing S-G common shares or in effectuating a merger with S-G and that these proposals were being evaluated by the S-G board of directors. This S-G draft was released at 5:40 p. m. EDT on July 17, 1978 to the PR Newswire service.

FIC, without knowledge of the actions of the S-G board of directors on July 17, issued its own public announcement on July 18, in which it disclosed the specific terms of its tender offer proposal for S-G common. The Dow Jones broad tape reported this public announcement at 3:09 p.m. EDT on July 18, 1978 as follows:

Atla-DJ-Fuqua Investment Co. said it is proposing a tender offer for between 475,000 and 600,000 shares of S-G Securities Inc. at a price of $3 a share.

Fuqua Investment Co. is wholly owned by J. B. Fuqua, Chairman and Chief Executive of Fuqua Industries, Inc.

The investment company said that if S-G's Board doesn't recommend acceptance of the offer it might make an offer for all of S-G's 1.4 million shares at $2.50 each.

At 4:20 p. m. EDT on July 18, 1978, a news wire service reported the contents of S-G's press release of July 17. This report also contained the statement of John Frabotta, President of S-G, that FIC was one of the suitors interested in S-G and restated in part the terms of the earlier reported FIC tender offer proposal. The substance of both the FIC and S-G press releases was reported in The Wall Street Journal on the following day, July 19.

The effect of these announcements in the marketplace was immediate. In the two week period from July 3 through July 14, S-G common stock had traded within a range of 1 7/8 -2 per share on an average trading volume of approximately 475 shares per day. On July 17, S-G common traded between 2 1/8 -2¼ on a volume of 3,800 shares.² On July 18, the date of the first public announcements, S-G traded between 2¼-2½ on a volume of 7,200 shares. On the following two days, July 19 and July 20, S-G's daily trading volume averaged 35,700 shares in a price range of 2½-2¾. Between July 18 and August 31, the date upon which FIC made its first open market and privately negotiated purchases, S-G traded within a range of 2¼-2 7/8 on an average volume of greater than 6,800 shares per day.

At a meeting of the parties on July 26, S-G informed FIC that its board of directors had rejected the tender offer proposal. FIC then proposed a purchase of authorized but unissued S-G common shares. Negotiations over the terms of the possible purchase continued until August 14, 1978. On that date, FIC offered to purchase 700,000 authorized but unissued shares of S-G common at $3.50 per share subject to acceptance by noon EDT on August 17.

Also on August 14, FIC made a second public announcement in which it stated the terms of its August 14 offer. The FIC press release further stated that "FIC reserves the right, if today's offer is rejected to buy S-G shares in the market by tender or otherwise, but is not now committed to do so." The substance of FIC's press release was reported over the Dow Jones broad tape at 3:17 p. m. EDT and in the August 15 edition of The Wall Street Journal. S-G, in turn, issued another press release on August 18 reporting that it had rejected FIC's August 14 offer. This announcement was reported in The Wall Street Journal on August 19.

Shortly after S-G rejected FIC's August 14 proposal, FIC sought to obtain a control block of S-G stock through a series of privately negotiated transactions with shareholders and open-market purchases on the American Stock Exchange. Through these means, FIC accumulated a total of 400,000 shares of S-G between August 31 and September 11.

The first group of purchases by FIC of S-G common shares took place on the American Stock Exchange on August 31, as follows:

1) FIC purchased at $3 per share a block of 57,400 shares beneficially owned by Michael Tennenbaum and members of his family. These shares had been purchased by Tennenbaum prior to April 1978.

2) FIC purchased at $3 per share 110,600 shares owned by CAW Associates, a Connecticut limited partnership. Tennenbaum had telephoned Claude A. Wilson, the general partner of CAW Associates, in Connecticut on or about August 27 with a proposal to purchase CAW Associates' holdings in S-G, a proposal that Wilson accepted. CAW Associates had obtained its interest in the shares it sold prior to June 1978.

3) FIC purchased at $3 per share 65,000 shares owned by Gruss & Co., a New York brokerage firm engaged primarily in risk arbitrage. Gruss & Co. obtained its holdings in S-G through a series of purchases on the American Stock Exchange from July 18 through July 20, 1978. According to Martin Gruss, a partner in Gruss & Co., these purchases were made by Gruss & Co. for the purpose of risk arbitrage with the awareness of Fuqua's interest in S-G. This block sale, as with that of CAW Associates, was negotiated in August 1978 through the efforts of Tennenbaum. The selling shareholders or the principals thereof in all three of these privately negotiated transactions sold with the knowledge that defendants were purchasing large blocks of S-G common with the intention of gaining control of the issuer.

4) FIC executed two large open market purchases from four brokers through the Amex specialist in S-G common stock pursuant to the Exchange's "clean up" rules:

a) 15,000 shares at $2 7/8 per share; and

b) 16,200 shares at $3 per share.

The next series of purchases took place from September 5 through September 7 when FIC purchased 20,200 shares of S-G common in the open market from various brokers in New York, Florida and Georgia.

In a third press release issued on September 8, as reported over the Dow Jones broad tape and in The Wall Street Journal, FIC announced its purchases of S-G common stock to date, its intention to gain operating control of S-G, and the possibility that it might require additional S-G shares in the future. FIC also made its initial Schedule 13D filing³ with the SEC on September 8 in which it disclosed its acquisitions of S-G common stock and its intention to acquire operating control of S-G.

The final large block purchase of S-G shares by FIC was made over the counter with the...