United States v. Tracinda Inv. Corp.

• Decision Date: 14 September 1979
• Docket Number: No. CV 79-0174-AAH (SX).,CV 79-0174-AAH (SX).
• Citation: 477 F. Supp. 1093
• Court: U.S. District Court — Central District of California
• Parties: UNITED STATES of America, Plaintiff, v. TRACINDA INVESTMENT CORPORATION and Kirk Kerkorian, Defendants.

477 F. Supp. 1093

UNITED STATES of America, Plaintiff, v. TRACINDA INVESTMENT CORPORATION and Kirk Kerkorian, Defendants.

No. CV 79-0174-AAH (SX).

United States District Court, C. D. California.

September 14, 1979.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Alan L. Marx, Dennis C. Cuneo, Washington, D. C., Robert J. Rose, and Leon W. Weidman, Los Angeles Field Office of the Antitrust Division, U. S. Dept. of Justice, Los Angeles, Cal., for plaintiff.

Wyman, Bautzer, Rothman & Kuchel by Frank Rothman, Terry Christensen, Los Angeles, Cal., and George Miron, Washington, D. C., for defendants.

MEMORANDUM OF DECISION AND ORDER OF JUDGMENT FOR DEFENDANTS

HAUK, District Judge.

Defendant Tracinda Investment Corporation hereinafter "Tracinda" is a Nevada corporation, the stock of which is owned entirely by defendant Kirk Kerkorian hereinafter "Kerkorian" with Kerkorian serving as its only Director. Kerkorian owns approximately 6% of the outstanding common stock of Metro-Goldwyn-Mayer, Inc. hereinafter MGM. Tracinda owns approximately 42% of MGM's common stock. Thus, Kerkorian, individually, and through Tracinda, owns approximately 48% of MGM's common stock and is its controlling shareholder.

As of November 17, 1978, Kerkorian owned 490,700 shares of the common stock of Columbia Pictures Industries, Inc., hereinafter "Columbia", representing approximately five percent (5%) of Columbia's outstanding common stock. On or about December 26, 1978, Tracinda commenced a tender offer for approximately 1,750,000 shares of the common stock of Columbia, representing approximately nineteen percent (19%) of Columbia's outstanding common stock. Tracinda's tender offer for Columbia stock was consummated on or about January 16, 1979. As a result of the tender offer and subsequent purchases, Kerkorian individually and through Tracinda now owns 2,438,700 shares of Columbia's common stock, representing approximately twenty-five percent (25%) of Columbia's outstanding common stock.

In January, 1979, plaintiff had originally sought a Temporary Restraining Order staying the Tracinda tender offer, alleging violation of Section 7 of the Clayton Act. 15 U.S.C. § 18.¹ This Court denied that application for Temporary Restraining Order and Motion for Preliminary Injunction,² but allowed plaintiff leave to amend its complaint to seek divestiture of the Columbia stock held by Tracinda. Plaintiff did amend its complaint to seek divestiture, still basing this action upon an alleged violation of Section 7 of the Clayton Act.

Court trial in this action commenced on August 1, 1979, and ended August 14, 1979. Having heard the testimony of the witnesses, having read the pleadings and all relevant papers in support of and in opposition to this action, having reviewed the evidence presented in this action and having heard from counsel for plaintiff and counsel for defendants, this court now enters its Memorandum of Decision and Order for Judgment, which shall constitute its findings of fact and conclusions of law herein pursuant to Rule 52(a), F.R.Civ.P.

NON-CORPORATE DEFENDANT

Plaintiff's First Amended Complaint names as defendants herein Tracinda and Kerkorian. The prayer of that complaint asks this Court to adjudge the acquisition of Columbia stock by Kerkorian and Tracinda to be in violation of Section 7 of the Clayton Act and to order Kerkorian and Tracinda to divest themselves of their stock in Columbia. Since Section 7 of the Clayton Act only extends to acquisitions made by corporations, Hudson Valley Asbestos Corporation v. Tougher Heating & Plumbing Co., Inc., 510 F.2d 1140, 1145 (2d Cir. 1975); GAF Corporation v. Circle Floor Co., 329 F.Supp. 823, 829 (S.D.N.Y.1971), aff'd 463 F.2d 752 (2d Cir. 1972), cert. dismissed 413 U.S. 901, 93 S.Ct. 3058, 37 L.Ed.2d 1045 (1973), the first question to be confronted by this Court is whether plaintiff may properly seek divestiture under Section 7 of the Clayton Act of the Columbia stock personally purchased and owned by Kerkorian.

A corporation may be found to be in violation of Section 7 where the stockholders made purchases on behalf of the corporation. GAF Corporation v. Circus Floor Co., supra. This case, however, does not present such a situation. Plaintiff did not allege, nor was there any evidence presented, that Kerkorian acquired any Columbia stock on behalf of Tracinda or any other corporation or that his personal acquisitions are otherwise attributable to Tracinda or any other corporation. Moreover, in its complaint, plaintiff only alleges the 19% acquisition by Tracinda to be a violation of Section 7 and is silent in this respect upon the acquisitions by Kerkorian.³ Accordingly, plaintiff has not stated sufficient facts, nor presented evidence, upon which relief may be granted against defendant Kerkorian and, in respect to this defendant, the complaint is hereby dismissed for lack of jurisdiction. Thus this action may be properly maintained only for divestiture of the 19% of Columbia stock acquired by Tracinda.

Even if the personal acquisitions by Kerkorian were properly before this Court, since each of the findings of fact and conclusions of law reached by this Court and contained herein apply equally to Tracinda and to Kerkorian, this Court must nevertheless order judgment in favor of Kerkorian as well as Tracinda. Thus the findings and conclusions set forth below apply and cover both defendants in this action.

INVESTMENT EXEMPTION

Section 7 of the Clayton Act does not condemn every acquisition that may result in the prohibited anticompetitive consequences. An acquisition may escape a challenge under Section 7, even though it may be in violation of the section's substantive provisions, if it falls within the specific exemptions provided for in Section 7, one of which provides that acquisitions of stock where the acquisition is made solely for purposes of investment are not included in the prohibition of Section 7.⁴ 2 Von Kalinowski, Antitrust Laws and Trade Regulations § 15.03. Furthermore, it is necessary to make a clear distinction between an exemption and a defense. 7 Von Kalinowski, supra., § 44.01(2). Some courts have made this distinction, noting that this provision constitutes an exemption rather than a defense, United States v. du Pont & Co., 353 U.S. 586, 589, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1957); Anaconda Co. v. Crane Co., 411 F.Supp. 1210, 1218 (S.D.N.Y.1975), while another Court has failed to make this distinction, Gulf & Western Indus., Inc. v. Great A. & P. Tea Co., Inc., 476 F.2d 687, 693 (2d Cir. 1973). In view of the specific language of this section it would appear that the former cases are correct.

Once a defendant has demonstrated to the Court that a stock purchase was solely for investment, then the burden is upon the plaintiff to prove that the defendant is not covered by the investment exemption. As stated in Anaconda Co. v. Crane Co., 411 F.Supp. 1210, 1219 (S.D.N.Y. 1975):

In cases where the "solely for investment" exemption does not apply, a plaintiff need only show a reasonable probability of a lessening of competition. . . Thus the anti-competitive effects may be attacked in their incipiency. The statutory exemption, however, conspicuously omits this language. Once it is established to the satisfaction of the Court that the acquisition is "solely for investment," the statute requires a showing that the defendant is "using the stock by voting or otherwise to bring about or in attempting to bring about, the substantial lessening of competition . .."

Thus, whenever the pleadings of the parties and the evidence adduced at trial in a Section 7 action bring forth facts which reasonably support a determination that the purchase of stock was "solely for investment," then this exemption issue must be addressed by the Court, regardless of whether it has been raised as an affirmative defense by defendants.

Here plaintiff submitted as Exhibit 262, the "Stockholders' Agreement"—a contract entered into by Kerkorian and Tracinda, and by Columbia, at the time the tender offer was extended. This contract specifically recites that the acquisition of Columbia stock was "solely for investment" and "not with a view to exercising control over the Company" Columbia. This contract also limits the extent to which Kerkorian may utilize the newly acquired stock, specifically providing that in a shareholders vote for directors, Kerkorian shall vote his stock in favor of the nominees for election of directors as proposed by the management of Columbia, and shall cast this vote proportionately to the other shares present at the meeting and voting in favor of such nominees. Additionally, the contract places a limit on Tracinda and Kerkorian's Columbia stock ownership at 25.5%. Accordingly, this contract in and of itself raises the issue of the investment exemption in the first sentence of the third paragraph of Section 7 of the Clayton Act, which the Court is then required to determine at the onset, before it takes up or engages in any meaningful examination of the substantive prohibitions contained in the first and second paragraphs of Section 7.

In discussing this investment exemption, the cases have not specifically used any particular approach. The statute and the cases, however, do support a 2-pronged test: (1) a factual determination of whether the acquisition was made solely for investment; and (2) a factual determination of whether the stock is being used by voting or otherwise to bring about or attempt to bring about a substantial lessening of competition. United States v. du Pont & Co., supra; Pennsylvania R. Co. v. Interstate Commerce Commission, 66 F.2d 37, 39-40 (3d Cir. 1933) aff'd per curiam, 291 U.S. 651, 54 S.Ct. 559, 78 L.Ed. 1045 (1934); Swift & Co. v. Federal Trade Commission, 8 F.2d 595, 599 (7th Cir. 1925); Anaconda Co. v. Crane Co., supra, at 1218-1219; Hamilton Watch Co. v. Benrus Watch Co., 114 F.Supp. 307, 314 (D.Conn.1953).

Before the...