Sharon Steel Corp. v. Whaland

• Decision Date: 02 July 1981
• Docket Number: No. 80-333,80-333
• Citation: 433 A.2d 1250,121 N.H. 607
• Parties: , Blue Sky L. Rep. P 71,630, Fed. Sec. L. Rep. P 98,303 SHARON STEEL CORPORATION et al. v. Frank E. WHALAND.
• Court: New Hampshire Supreme Court

Page 1250

433 A.2d 1250

121 N.H. 607, Blue Sky L. Rep. P 71,630,

Fed. Sec. L. Rep. P 98,303

SHARON STEEL CORPORATION et al. v. Frank E. WHALAND.

No. 80-333.

Supreme Court of New Hampshire.

July 2, 1981.

Devine, Millimet, Stahl & Branch P. A., Manchester, and Shearman & Sterling, New York City (Danforth Newcomb, Manchester, on the brief and orally), for plaintiffs.

Gregory H. Smith, Acting Atty. Gen. (Andrew R. Grainger, Asst. Atty. Gen., on the brief and orally), for defendant.

Hamblett & Kerrigan P. A., Nashua, and Davis Polk & Wardwell, New York City (Steven F. Goldstone, New York City, on the brief and orally), for intervenor, Nashua Corp.

William H. Shaheen, U. S. Atty., D. New Hampshire (James J. Junewicz, Sp. Counsel, Washington, D. C., on the brief and orally), for Securities and Exchange Commission, as amicus curiae.

LAMPRON, Chief Justice (Ret.).

This is an interlocutory transfer to this court without ruling of an appeal from a decision of the insurance commissioner to the superior court under section 12 of RSA ch. 421-A (Supp.1979), this State's "Security Takeover Disclosure Act" (act).

The plaintiffs are Sharon Steel Corporation (Sharon), organized under Pennsylvania law with its principal place of business in Ohio, and Summit Systems, Inc. (Summit), organized under Delaware law with its principal place of business in Florida. They appeal from an opinion of the defendant, Frank E. Whaland, the New Hampshire Insurance Commissioner (commissioner), whose order continued in effect a cease-and-desist order forbidding the plaintiffs from purchasing or offering to purchase, or in any way acquiring or controlling the stock of Nashua Corporation pending compliance with the act. Nashua Corporation (Nashua) is organized under the laws of Delaware, with its principal place of business in Nashua, New Hampshire. About 1,100 residents of New Hampshire own ten to fifteen per cent of Nashua's outstanding shares.

The commissioner's opinion and order were rendered after hearings on Nashua's petition alleging that on March 19, 1980, Summit and Sharon beneficially owned 476,100 shares of Nashua's common stock, which represented 10.252 per cent of its common stock outstanding. Nashua further alleged that the plaintiffs' solicitations of sales, which had resulted in the above acquisition of its stock, constituted a "takeover bid" as defined in RSA 421-A:2VI (Supp.1979) and that the plaintiffs had violated diverse sections of RSA ch. 421-A (Supp.1979). A cease-and-desist order was issued by the commissioner. He also sought an injunction against the plaintiffs, which was granted by the Superior Court (Cann, J.) pursuant to RSA 421-A:11 (Supp.1979).

The issues presented on this transfer are: (1) whether our "Security Takeover Disclosure Act," RSA ch. 421-A (Supp.1979), which provides that a "takeover bid" does not include "(a)n offer by or through a broker-dealer in the ordinary course of his business without solicitation of orders to sell equity securities of the target company," RSA 421-A:2VI(a)(1) (Supp.1979), applies to the block transactions executed on national security markets by the plaintiffs; and (2) whether the act, as applied to the block transactions of the plaintiffs, is constitutional under the Supremacy Clause and the Commerce Clause of the United States Constitution.

I. FACTS AND OPINION OF THE COMMISSIONER

The plaintiffs' principal brief states that "(t)he facts are straightforward and undisputed." It is not contested that the plaintiffs' acquisitions caused them to become "a record or beneficial owner of more than 5 per cent of any class of the issued and outstanding equity securities" of Nashua, thus bringing their actions within the definition of "takeover bid" under the act unless covered by one of the statutory exclusions. RSA 421-A:2 VI (Supp.1979). The plaintiffs, however, claim that their acquisitions do not constitute a takeover bid because they were effected by means of "(a)n offer by or through a broker-dealer in the ordinary course of his business without solicitation of orders to sell equity securities of the target company." RSA 421-A:2VI(a)(1) (Supp.1979). (Emphasis added.)

There was introduced in evidence a schedule 13D under the Securities Exchange Act of 1934 (15 U.S.C. § 78m(a)(1) (1976)) filed by the plaintiffs with the Securities and Exchange Commission and dated November 15, 1979. This showed that plaintiff Summit owned at that time 301,900 shares of Nashua stock, which was five per cent or more of Nashua's shares outstanding. It was stated therein that "Sharon and Summit periodically will review Summit's investment and may at any time determine to increase or decrease it, depending upon various factors including but not limited to, the price of securities of Nashua and terms and conditions for their sale."

The Wall Street Journal carried an article reporting this Schedule 13D filing in its November 26, 1979 edition. There was also evidence of a press release on the matter at about that time. The cover letter with the copy of the Schedule 13D sent to Nashua stated that a copy of that schedule was being sent to each of the exchanges on which Nashua's common stock is listed. There was evidence of activity in Nashua stock in the late afternoon of November 27, 1979, and thereafter.

The plaintiffs acquired their eventual total of 476,100 shares of Nashua common stock in nine separate open market block transactions between October 11, 1979, and March 25, 1980. Brokers who were involved in eight of the nine purchases testified. There was evidence as to broker conduct in general, as well as to the specific conduct of the brokers involved in these transactions. There was also expert testimony on large block trading by "Aut-Ex," which provides interconnecting video terminals among several hundred clients interested in large block trading, and which was characterized by a witness as a "mechanical salesman." Such large block trading is also done by means of the daily "block list," which is updated every morning by brokerage houses. The list is distributed to all brokers in a firm and provides the basis for the brokerage houses showing both the buy and the sell side for the clients on a national hook-up.

There was also testimony of an understanding in the securities industry that once a customer makes an initial large purchase in the stock of a company, the brokerage house will, on behalf of that customer, solicit further stock in the company, unless the customer expressly instructs the brokerage house not to do so. The commissioner found that "(t)hese solicitation methods were clearly employed on behalf of Offeror (plaintiff) Posner."

On the evidence presented, the commissioner arrived at the following conclusion. The plaintiffs "engaged in a course of conduct which had as its natural and foreseeable consequence the solicitation of orders to sell Nashua common stock. Offerors (plaintiffs) cannot disclaim this solicitation. As persons familiar with the customs and practices of the securities industry, they knew or had reason to know that just such solicitation would take place." Consequently, the commissioner ruled that the plaintiffs were not entitled to the broker-dealer exemption under the act, RSA 421-A:2VI(a)(1) (Supp.1979) and were engaged in making a takeover bid within the meaning of the act. He further continued his cease -and-desist order, thereby preventing the plaintiffs from purchasing or offering to purchase, or in any way acquiring or controlling, the stock of Nashua Corporation pending compliance with the "Security Takeover Disclosure Act," RSA 421-A:1 et seq. (Supp.1979). The plaintiffs appealed the commissioner's order to the Superior Court (Cann, J.) who transferred without ruling the questions involved.

The plaintiffs state that whether the block trading practices they used in obtaining their stock in Nashua constitute solicitation is a question of first impression. Our act does not define solicitation, and apparently neither does any other business takeover act.

Defendant commissioner and intervenor Nashua maintain that the broker-dealer exemption claimed by the plaintiffs is designed to exclude from the act's definition of a takeover bid the ordinary anonymous open market transaction in which buy orders and sell orders meet independently without the sell order being solicited by the buyer. They maintain further that any solicitation destroys the anonymity of the auction market and puts added pressure on sellers. They also argue that the act does not attempt to distinguish between differing types or degrees of solicitation, but simply requires an "offeror" to comply with the act unless the acquisition of more than five per cent of outstanding stock is accomplished "without solicitation of orders to sell...." RSA 421-A:2VI(a)(1) (Supp.1979).

The commissioner in his opinion stated:

"that the central purpose of the statute is to provide advance disclosure to shareholders of the circumstances of those buyers of shares who may be acquiring control of the company.... Two considerations of fairness underlie this ethical premise: First, that the selling price of shares that carry control will normally reflect a premium for such control; and, second, that a shareholder before he decides to sell the element of control is entitled to disclosure as to who the new controlling authority will be."

No such considerations of fairness apply if the sell order is unsolicited because the buyer has purchased only stock which has come to market without his solicitation hence, the exemption under RSA 421-A:2VI(a)(1) (Supp.1979).

The plaintiffs maintain, on the other hand, that their method of acquiring Nashua stock solely by open market purchases does not constitute a takeover bid even if it is aimed at acquiring control of a target company. See Matter of City Investing Co., 411 N.E.2d 420, 429 (Ind.App.1980). Depending on the accompanying circumstances, however, open...