UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
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DWIGHT E. WININGER, On Behalf of Himself and All Others Similarly Situated, Plaintiff, v. SI MANAGEMENT L.P., a Limited Partnership; SYNTHETIC MANAGEMENT, G. P., a/k/a, SI MANAGEMENT G. P., a General Partnership; LEONARD CHILL; JON P. BECKMAN; W. WAYNE FREED; RALPH KENNER; W. GARDNER WRIGHT; CHILL INVESTMENTS, INC., a Delaware corporation; BECKMAN INVESTMENTS, INC., a Delaware corporation; FREED INVESTMENTS, INC., a Delaware corporation; KENNER INVESTMENTS, INC., a Delaware corporation; and WRIGHT INVESTMENTS, INC., a Delaware corporation, Defendants. ___________________________________________ |
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Case No.: C-97-1622 CW |
I. INTRODUCTION AND BACKGROUND
V. DEFENDANTS HAVE FRAUDULENTLY INDUCED LIMITED PARTNERS TO VOTE FOR THE PROPOSED PLAN
VIII. CONCLUSION
AC Acquisitions Corp. v. Anderson, Clayton & Co.,
519 A.2d 103 (Del. Ch. 1986)
Alaska v. Native Village of Venetie,
856 F.2d 1384 (9th Cir. 1988)
Brazen v. Bell Atlantic Corp.,
695 A.2d 43 (Del. 1997)
Calumet Industries v. MacClure,
464 F. Supp. 19 (N.D. Ill. 1978)
Canadian Javelin Ltd. v. Brooks,
462 F. Supp. 190 (S.D.N.Y. 1978)
Eisenberg v. Chicago Milwaukee Corp.,
537 A.2d 1051 (Del. Ch. 1987)
Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co.,
476 F.2d 687 (2d Cir. 1973)
Katell v. Morgan Stanley Group, Inc.,
1993 WL 205033 (Del. Ch. June 8, 1993)
Kaufman v. Cooper Cos.,
719 F. Supp. 174 (S.D.N.Y. 1989)
Mayo v. U.S. Government Printing Office,
839 F. Supp. 697 (N.D. Cal. 1992)
Mills v. Electric Auto-Lite Co.,
396 U.S. 375 (1970)
Pabst Brewing Co. v. Jacobs,
549 F. Supp. 1068 (D. Del. 1982)
Riggs Nat. Bank of Washington D.C. v. Allbritton,
516 F. Supp. 164 (D.D.C. 1981)
S.E.C. v. M. A. Lundy Assocs.,
362 F. Supp. 226 (D.R.I. 1973)
S.E.C. v. Musella,
578 F. Supp. 425 (S.D.N.Y. 1984)
S.E.C. v. North Am. Research & Dev. Corp.,
424 F.2d 63 (2d Cir. 1970)
Studebaker Corp. v. Gittlin,
360 F.2d 692 (2d Cir. 1966)
TSC Industries v. Northway, Inc.,
426 U.S. 438 (1976)
Union Pac. R. Co. v. Chicago & N.W. Ry. Co.,
226 F. Supp. 400 (N.D. Ill. 1964)
Williams v. Geier,
671 A.2d 1368 (Del. 1996)
SEC Rule 10b-5, 17 C.F.R. § 240.10b-5
SEC Rule 14a-9, 17 C.F.R. § 240.14a-9
Section 11(a) of the Securities Act of 1933, 15 U.S.C. § 77k(a)
Section 12(a) of the Securities Act of 1933, 15 U.S.C. § 77l(a)
Plaintiff Wininger is a limited partner in Synthetic Industries, L.P., a Delaware limited partnership ("the Partnership"). Ex. R at 2.1 He brings this action as a class action on behalf of all the other limited partners ("the Limited Partners"). The defendants are the individuals and entities which control the Partnership. Ex. R at 2.
The Partnership owns two-thirds of the stock of Synthetic Industries, Inc. ("the Company"). Ex. G at 37. The Partnership's limited partnership units ("the Units") are not publicly traded. Ex. G at 19, 82. The defendants have proposed a "Plan of Withdrawal and Dissolution" for the Partnership ("the Proposed Plan" or "the Plan"), under which all the Partnership's shares in the Company would either be sold in a public offering or distributed directly to the Limited Partners. Ex. E at 1. This would prevent the Partnership from receiving a control premium for its controlling block of shares.
The Proposed Plan consists of two phases -- the "Withdrawal" and the "Dissolution." Ex. G at 1. While Limited Partners can participate in one or both phases (Ex. E at 1), the Withdrawal is far more attractive than the Dissolution. Limited Partners who participate in the Withdrawal will receive cash for their currently illiquid investment quickly by exchanging their Units for shares of the Company which will then be sold in an underwritten public offering ("the Underwritten Sale"). Ex. G at 6-7. Limited Partners who participate in the Dissolution will receive shares of stock in the Company in one to three distributions that will take place one to two years after approval of the Plan. Ex. G at 7. In either case, if the Proposed Plan is approved, all the Limited Partners will exchange their interests in the Partnership for Company stock.
On August 4, 1997, this Court found that plaintiff had demonstrated a likelihood of success on the merits on claims that defendants violated federal securities laws by advocating in favor of the Proposed Plan, prior to disseminating a proxy statement, in a March 21, 1997 letter and a June 9, 1997 press release. Ex. R at 8-10. The Court declined to issue an injunction at that time, ruling that "the equities weigh against granting injunctive relief." Ex. R at 13. However, the court stated that "the equities in this case would be altered" if they committed additional violations. Ex. R at 13.
On September 19, 1997, defendants sent definitive solicitation materials, which included a definitive proxy statement ("the Proxy Statement"), to the Limited Partners ("the Definitive Solicitation Materials"). Ex. A through I. On September 26, 1997, defendants sent an additional solicitation ("the Additional Solicitation") to the Limited Partners. Ex. J. As explained in detail in plaintiff's proposed First Amended and Supplemental Complaint, the Definitive Solicitation Materials and the Additional Solicitation contain numerous false and misleading statements and fail to disclose a plethora of material facts.
The most critical document in the Definitive Solicitation Materials is defendants' form of proxy ("the Proxy") -- a form which must be executed if a Limited Partner wishes to take part in the Withdrawal. Ex. E at 3, Ex. F. After a one-page cover letter, the Proxy is the first document a Limited Partner sees after opening the Definitive Solicitation Materials. See Luchenitser Decl. ¶¶ 2-4. The Proxy Statement represents that Limited Partners must "properly complete" the Proxy in order to participate in the Underwritten Sale. Ex. E at 3, Ex. F. For these reasons, and since all votes must be cast on the Proxy, the Proxy is the one document in the thick Definitive Solicitation Materials that every Limited Partner is likely to read. This motion focuses on two glaring misrepresentations in the Proxy which completely contradict other statements made by the defendants.
First, the Proxy makes a key misrepresentation about the voting rights of the Limited Partners in an extraordinary transaction such as this one, which involves the sale or transfer of substantially all the Partnership assets. Under the Partnership Agreement, the General Partner is prohibited from going forward with such a transaction without the approval of two-thirds of the Limited Partners. Ex. L. But, to require such a vote, 10 percent of the Limited Partners must first endorse a specified legal opinion ("the Opinion of Counsel"). Ex. M. Contradicting what defendants have previously told the Limited Partners, the Proxy (as well as many passages in the Definitive Solicitation Materials and the Additional Solicitation) falsely and absurdly represents that, in order for the Proposed Plan to require approval by a two-thirds vote instead of majority approval, two-thirds, not just ten percent (in interest) of the Limited Partners must first approve the Opinion of Counsel. Ex. C at 2, Ex. E at 2-3, Ex. G at 1-2, Ex. J at 25. In other words, defendants represent that two-thirds (in interest) of the Limited Partners must affirmatively endorse an Opinion of Counsel to disapprove the Plan in order to trigger the requirement that two-thirds (in interest) vote in favor of the Plan.
There is no doubt that this representation is not only nonsensical, but knowingly false. Just last year, in connection with an earlier and abandoned version of the Plan, defendants admitted that the Opinion of Counsel requires approval only by more than ten percent in interest of the Limited Partners. Ex. K, P.
The Proxy's second glaring misrepresentation states, in all-capital type, that in order to participate in the Withdrawal and the Underwritten Sale, rather than be relegated to the unattractive Dissolution, the Limited Partners must vote for the Proposed Plan. Ex. C at 2. In other words, the Proxy screams out that if you want to get cash soon -- rather than shares of the Company as much as two years later -- you must vote in favor of the Proposed Plan. Yet, in the Proxy Statement and the Additional Solicitation, defendants admit that Limited Partners do not have to vote for the Plan in order to participate in the Underwritten Sale. Ex. E at 3, Ex. I at C-4, Ex. J at 29. Here, again, defendants admit the falsity of their representation.
Having gotten these critical misrepresentations in the hands of the Limited Partners, the defendants, with the aid of D.F. King & Co., Inc., their solicitation agent ("the Solicitation Agent"), are currently soliciting proxies in favor of the Proposed Plan. Ex. B, Ex. G at 32. The defendants have set October 19, 1997 as the deadline for returning an Opinion of Counsel and have scheduled the special meeting at which the Proposed Plan would be voted on ("the Special Meeting") for October 24, 1997. Ex. F. Unless the Court enjoins the defendants from continuing to solicit proxies, and orders defendants to issue a corrective disclosure and corrected proxy materials, the Limited Partners will suffer irreparable harm to their rights to cast a fully informed vote on the Proposed Plan.
Defendants mailed out their Definitive Solicitation Materials on September 19, 1997. Ex. A. The Proposed Plan described in the Definitive Solicitation Materials consists of two phases -- a "Withdrawal" and a "Dissolution." Ex. G at 1. While Limited Partners may choose to participate in the Withdrawal, the Dissolution, or both (Ex. E at 1), the Withdrawal is far more attractive than the Dissolution.
Limited Partners who choose to participate in the Withdrawal will be earmarked shares of stock in the Company ("the Withdrawn Shares") in exchange for their limited partnership units ("the Units"), and these Withdrawn Shares will then be sold in an underwritten public offering ("the Underwritten Sale"). Ex. G at 6-7. Limited Partners who participate in the Withdrawal will receive the cash proceeds of the Underwritten Sale promptly after the Underwritten Sale's completion. Ex. G at 7. The Underwritten Sale must be completed within 180 days after approval of the Proposed Plan. Ex. G at 6. Thus, those Limited Partners who participate in the Withdrawal will receive cash for their Units approximately six months after approval of the Plan.
Limited Partners who participate only in the Dissolution, on the other hand, will not receive cash but will only receive shares of stock in the Company long after the other Limited Partners are cashed out. The Dissolution will consist of one to three distributions ("the Distributions"). Ex. G at 7. The first Distribution is scheduled to take place 360 days (about one year) after approval of the Proposed Plan. Ex. G at 7. The second Distribution is scheduled to take place 540 days after approval of the Proposed Plan. Ex. G at 7. The third Distribution is scheduled to take place 720 days (about two years) after approval of the Proposed Plan. Ex. G at 7. Furthermore, one or more of the Distributions may be delayed and may not take place as scheduled. Ex. G at 7.
Thus, Limited Partners who do not participate in the Withdrawal and the Underwritten Sale, but only participate in the Dissolution, will not receive any liquidity or return for their illiquid Units for approximately a year after approval of the Proposed Plan, and will not receive full liquidity for two years or longer after approval. In the meantime, they will remain as Limited Partners in a Partnership which pays no distributions, which has no public trading market for its Units, and which in all likelihood will then hold only a devalued minority interest in the Company. See Ex. G at 19, 82. Indeed, defendants' proxy statement ("the Proxy Statement") itself emphasizes that the price of the Company's stock at the time of the Distributions may be far lower than the price the stock sells for in the Underwritten Sale, because the influx of a large number of shares onto the market in the Underwritten Sale may drive down the price. Ex. G at 2, 9, 24. For these reasons, if the Proposed Plan is passed, it is likely that virtually all rational Limited Partners will prefer to participate in the Withdrawal instead of the Dissolution.
Defendants' September 19 and September 26 mailings, of course, constitute proxy solicitations. SEC Rule 14a-9 provides that no proxy solicitation may contain "any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading." 17 C.F.R. § 240.14a-9(a) (emphasis added). For purposes of Rule 14a-9, "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). Misrepresentations concerning voting rights of investors are material. See Calumet Industries v. MacClure, 464 F. Supp. 19, 27-28 (N.D. Ill. 1978) (enjoining defendants from exercising shareholders' consents where defendants had misrepresented that consents were irrevocable).
Defendants' Definitive Solicitation Materials and Additional Solicitation are also subject to section 12(a) of the Securities Act of 19331 and to SEC Rule 10b-5. Section 12(a) prohibits the making of false or misleading statements in connection with the offer or sale of any security. 15 U.S.C. § 77l(a). SEC Rule 10b-5 prohibits, among other things, the making of untrue or misleading statements in connection with the sale or purchase of any security. 17 C.F.R. § 240.10b-5. Section 12(a) and Rule 10b-5 apply here because the defendants are offering the Limited Partners securities in the Company in exchange for their Partnership Units. Indeed, defendants themselves characterize the thickest part of their Definitive Solicitation Materials as a "Joint Proxy Statement and Prospectus." Ex. G at 1 (emphasis added).
Furthermore, section 11(a) of the Securities Act of 19331 prohibits the making of any untrue or misleading statement in a registration statement. 15 U.S.C. § 77k(a). All of defendants' proxy materials have been filed as parts of, or as amendments to, a registration statement filed under the Securities Act of 1933. E.g., Ex. J at 1.
As discussed below, defendants have violated all four of these anti-fraud provisions.
Defendants have violated SEC Rules 14a-9 and 10b-5, as well as sections 11(a) and 12(a) of the Securities Act of 1933, by falsely representing that two-thirds in interest of the Limited Partners must approve an Opinion of Counsel in order to subject the Proposed Plan to approval by a two-thirds vote.
Section 7(i) of the Partnership Agreement provides that two-thirds in interest of the Limited Partners must approve any transaction involving the sale, transfer, exchange, or other disposition of all or substantially all the Partnership assets, unless the Partnership's general partner ("the General Partner") gives thirty days notice of its intent to enter into such a transaction ("the Asset Sale Notice") and the Limited Partners fail to obtain an Opinion of Counsel which satisfies certain requirements of the Partnership Agreement. Ex. L. Under Section 12(d) of the Partnership Agreement, the Opinion of Counsel must be approved by just over ten percent in interest of the Limited Partners in order to trigger the two-thirds approval requirement of Section 7(i). Ex. M.
As defendants concede, the Proposed Plan is subject to Section 7(i) because it is a sale, transfer and/or exchange of all the Partnership's assets. The Partnership's only asset is its stock in the Company. Ex. G at 19. Under the Proposed Plan, all this stock would be transferred to Limited Partners in exchange for their Partnership Units, sold in the Underwritten Sale, and/or distributed directly to the Limited Partners in the Dissolution. Ex. G at 5-7. The Definitive Solicitation Materials give an Asset Sale Notice, and thereby admit that the Proposed Plan is subject to the two-thirds approval requirement of Section 7(i). Ex. C at 2, Ex. F, Ex. G at 2.
However, the Proxy Statement, the Proxy, and the Additional Solicitation each falsely represent that the Proposed Plan will require two-thirds approval only if two-thirds in interest of the Limited Partners first approve an Opinion of Counsel. Ex. C at 2, Ex. E at 2-3, Ex. G at 1-2, Ex. J at 25. The Proposed Plan would otherwise, according to defendants, require only majority approval. Ex. C at 2, Ex. E at 2, Ex. G at 2, Ex. J at 25. In fact, however, the Opinion of Counsel requires approval of just over ten percent in interest of the Limited Partners. Ex. M.
Defendants' own words show that the statements in the Definitive Solicitation Materials are false. The chain of events leading to the Proposed Plan began in August 1996, when the General Partner proposed to sell all the Partnership's stock in the Company in an initial public offering ("the IPO"). Ex. K at 1. On August 2, 1996, as he has done now in the Definitive Solicitation Materials, the General Partner sent the Limited Partners an Asset Sale Notice. Ex. K at 1. The August 1996 Asset Sale Notice revealed that the Limited Partners could call a meeting for voting on the IPO at which the IPO would require two-thirds approval. Ex. K at 4. The August 1996 Asset Sale Notice stated:
By the terms of the Partnership Agreement, the Limited Partners can, subject to certain conditions, elect to exercise certain rights with respect to the IPO, including but not limited to, the right to call a meeting and the right to vote on the transaction. The holders of 10% of the limited partner interests have thirty (30) days from the date of this letter to make a formal request to exercise these rights at a meeting and to obtain certain unqualified opinions of legal counsel about any actions that the Limited Partners wish to pursue at the meeting.
Ex. K at 4 (emphasis added). Thus, in his August 1996 Asset Sale Notice, the General Partner admitted that the Opinion of Counsel needs to be approved by only ten percent in interest of the Limited Partners.
On August 28, 1996, Limited Partners holding over ten percent of the Units requested a meeting to vote on the IPO and submitted an Opinion of Counsel approved by over ten percent (but less than two-thirds) in interest of the Limited Partners. Ex. O. On September 10, 1996, defendant Chill sent the Limited Partners a letter stating that he had abandoned the proposed IPO because he had "received notification from certain of the Limited Partners requiring a vote on the sale of the shares of Company common stock owned by the Partnership." Ex. P at 2 (emphasis added). The General Partner's September 10, 1996 letter thereby admitted that the Limited Partners triggered the two-thirds approval requirement of Section 7(i) by obtaining an Opinion of Counsel endorsed only by more than ten percent (in interest) of the Limited Partners.
Defendants' new position that two-thirds in interest of the Limited Partners must show opposition to the Proposed Plan by endorsing an Opinion of Counsel in order to require the General Partners to obtain two-thirds approval of the Proposed Plan is also contradicted by their letter of March 21, 1997. In that letter, which the Court has already found to probably have been an illegal proxy solicitation (Ex. R at 8-10, 12), defendants flatly stated that the Proposed Plan "will be subject to approval by at least two-thirds of the limited partners." Ex. Q at 2. Defendants have conceded that the March 21 letter concerned the Plan now being pursued -- in a brief filed by defendants with this Court, the defendants admitted that the Proposed Plan is "essentially the same potential transaction that was referred to in the March 21 letter." Ex. S at 4-5. Yet, in their March 21 letter, the defendants said nothing about the purported requirement that two-thirds in interest of the Limited Partners approve an Opinion of Counsel.
Even if it did not contradict their own statements, defendants' construction of the Partnership Agreement -- that the Opinion of Counsel must be endorsed by two-thirds in interest of the Limited Partners in order to subject the Proposed Plan to the two-thirds approval requirement of Section 7(i) -- would still clearly be wrong. This is an absurd interpretation -- Section 7(i) was obviously designed to protect minority interests. It would make no sense to require two-thirds in interest of the Limited Partners to effectively vote against a proposed transaction in order for the transaction to need two-thirds affirmative approval.
The Partnership Agreement confirms that defendants' earlier admissions were based on the plain terms of the Agreement and that the defendants are misrepresenting the facts now. Section 7(i) states, in relevant part,
the General Partner, without the consent, approval or ratification of two-thirds in Interest of the Limited Partners, may not cause the Partnership or a Corporation, as the case may be, to sell, exchange, mortgage, pledge, transfer, finance or refinance all or substantially all of the assets of the Partnership or such Corporation . . . unless the General Partner shall have given the Limited Partners 30 days notice of its intention to enter into such a sale, exchange, mortgage, pledge, transfer, financing or refinancing . . . and the Limited Partners shall not have obtained the opinion of counsel described in subparagraph 12(d).
Ex. L. Section 12(d), in turn, states, in relevant part,
Except as provided below, meetings of the Partners may be called . . . by the Limited Partners holding more than ten percent (10%) of the then outstanding Interests for any matters for which the Partners may vote as set forth in this Agreement . . . . Anything in this Agreement to the contrary notwithstanding, the rights of the Limited Partners as outlined in this paragraph 12(d) and in subparagraphs 7(g) and 12(h)(ii) shall not come into existence or be effective in any manner unless and until (a) the Partnership has received an unqualified opinion of counsel of recognized standing, which counsel is selected by Limited Partners whose aggregate Interests exceeds [sic] 10% of the aggregate Interests of all of the Limited Partners ("Special Counsel"), and which opinion is affirmatively approved in writing by the same percentage in Interest of the Limited Partners as is required to take the action to which the opinion relates . . . .
Ex. M.
Thus, under Section 12(d), Limited Partners holding more than 10 percent of the Units may call a meeting for a two-thirds vote on a transaction which disposes of all the Partnership assets (such as the Proposed Plan), if they obtain an Opinion of Counsel. The Opinion of Counsel must specify that the action to be taken is legal, that the action will not cause any Limited Partner to lose his limited liability status, and that the action will not cause the Partnership's tax status to be changed. Ex. M. As defendants' expressly represented to the Limited Partners a year ago, the counsel which presents the Opinion must be selected, and the Opinion must be approved, by in excess of 10 percent, not two-thirds, of the Limited Partners (in interest). There is nothing in Section 7(i) or Section 12(d) which requires two-thirds approval of the Opinion of Counsel.
Defendants' false (and silly) construction of the Partnership Agreement appears to be based on a requirement in Section 12(d) that the Opinion of Counsel be approved "by the same percentage in Interest of the Limited Partners as is required to take the action to which the opinion relates." Ex. M (emphasis added). However, "the action to which the opinion relates" here is calling a meeting at which the proposed transaction would require approval by a two-thirds vote, which requires action by just over 10 percent in interest of the Limited Partners.
The requirement in Section 12(d) that an Opinion of Counsel be obtained (and that it be approved by the same percentage as is required to take "the action to which the opinion relates") is prefaced by a clause which states, "the rights of the Limited Partners as outlined in this paragraph 12(d) and in subparagraphs 7(g) and 12(h)(ii) shall not come into existence or be effective in any manner unless and until [they obtain an Opinion of Counsel]." Ex. M (emphasis added). Importantly, Section 7(i), the section subjecting the Proposed Plan to two-thirds approval, is not mentioned in this clause. The language "the action to which the opinion relates" therefore cannot refer to the rights outlined in Section 7(i).
Thus, the only rights an Opinion of Counsel is required to vindicate are the Limited Partners' rights under Sections 12(d) (which provides for calling a meeting), 7(g) (which provides for removal of the General Partner), and 12(h)(ii) (which provides for amending the Partnership Agreement). See Ex. N. Triggering the two-thirds approval requirement of Section 7(i) does not involve amending the Partnership Agreement or removing the General Partner. In order to activate Section 7(i), the Limited Partners must call a meeting pursuant to Section 12(d), which requires action by over ten percent in interest of the Limited Partners. Therefore, with respect to subjecting the Proposed Plan to two-thirds instead of majority approval, the language "action to which the opinion relates" can only refer to the action provided for by Section 12(d) of calling a meeting, meaning that the Opinion of Counsel requires only ten percent approval.2
Defendants' construction -- that "the action to which the opinion relates" is approval of the Proposed Plan itself -- would make the two-thirds provision of Section 7(i) a nullity. Under defendants' construction, two-thirds in interest of the Limited Partners would effectively have to oppose the Proposed Plan before two-thirds had to approve it, which would make Section 7(i) virtually meaningless. This would violate established canons of construction of partnership agreements. See Katell v. Morgan Stanley Group, Inc., 1993 WL 205033 at *5 (Del. Ch. June 8, 1993) (partnership agreement must be construed so as to give effect to all of its provisions); see also id. at *4 (any ambiguities in partnership agreement must be construed against general partner).
Defendants' false representation that two-thirds in interest of the Limited Partners must approve the Opinion of Counsel in order for the Proposed Plan to require two-thirds approval is obviously material and is highly prejudicial to the Limited Partners' voting rights. Because of this misrepresentation, it is very unlikely that any Limited Partner would attempt to obtain approval of an Opinion of Counsel. Getting two-thirds in interest of the Limited Partners to approve an Opinion of Counsel would appear to be a hopeless endeavor. And such an effort could only succeed if two-thirds in interest of the Limited Partners opposed the Proposed Plan, which would mean that the Plan would have failed in any event and that the effort itself was unnecessary.3
As explained above, the Proposed Plan is divided into two phases -- the Withdrawal (of which the Underwritten Sale is a part) and the Dissolution. The Withdrawal is much more attractive than the Dissolution, because Limited Partners who participate in the Dissolution will not receive full liquidity for their Units for one to two years after approval of the Plan, and are likely to receive a lower return than those Limited Partners who participate in the Withdrawal. Attempting to take advantage of the disparity between the Withdrawal and the Dissolution, defendants falsely represented in their Proxy -- the most prominent document in their Definitive Solicitation Materials -- that Limited Partners must vote for the Proposed Plan in order to participate in the Withdrawal and the Underwritten Sale.
Defendants' Definitive Solicitation Materials are arranged in the following order: A one-page cover letter is on top. Ex. B. The cover letter is followed by the Proxy. Ex. C. The Proxy is followed by the "Withdrawal Election Agreement," which Limited Partners must execute in order to participate in the Withdrawal and the Underwritten Sale. Ex. D. The Proxy Statement itself, which is a bound document consisting of a three-page cover letter, a "Notice of Special Meeting," a "Joint Proxy Statement and Prospectus," and appendices, is all the way in the back. Ex. E through I; see also Luchenitser Decl. ¶¶ 2-11. Therefore, upon receipt of the Definitive Solicitation Materials, a Limited Partner is likely to read the one-page cover letter and the Proxy first.
The Proxy contains the following statement, in all-capital type: "IF THE PROPOSED PLAN IS NOT APPROVED, SUCH APPROVAL WILL BIND ALL HOLDERS, AND ANY HOLDER WHO DOES NOT VOTE FOR THE PLAN WILL BE ISSUED COMMON STOCK IN THE DISSOLUTION AS DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS." Ex. C at 2 (emphasis added). Thus, the Proxy represents that a Limited Partner must vote for the Proposed Plan in order to participate in the Withdrawal and Underwritten Sale, or else the Limited Partner will receive potentially devalued shares of stock one to two years from now in the Proposed Plan's unattractive Dissolution phase.4
Again, defendants own words demonstrate that this representation is false. In direct contradiction to the highlighted, all-capital warning in the Proxy itself, the Proxy Statement states that "each Limited Partner will be distributed Common Stock in the withdrawal or the dissolution as described in the accompanying Proxy Statement and Prospectus, regardless of whether he voted for the Plan." Ex. E at 3 (emphasis added). Likewise, a "procedural fairness opinion" in the Proxy Statement states that the Proposed Plan was changed from what it had been earlier so that "Limited Partners will no longer be required to vote for the Plan in order to participate in the Underwritten Sale." Ex. I at C-4. While these admissions are by no means highlighted, they demonstrate that the prominently displayed statement in the Proxy is false.
On September 24, 1997, plaintiffs filed an amended complaint and a preliminary injunction motion in Delaware state court, alleging, among other things, that the Proposed Plan is unlawfully coercive because of the Proxy's statement that Limited Partners must vote for the Plan in order to participate in the Underwritten Sale.5 In response, on September 26, 1997, acknowledging the falsity of the statement in the Proxy, the defendants mailed an additional solicitation to the Limited Partners ("the Additional Solicitation"). Ex. J at 29.
The Additional Solicitation consists of a cover letter ("the Cover Letter") (Ex. J at 29), a revised proxy ("the Revised Proxy") (Ex. J at 24-29), and a revised Withdrawal Election Agreement ("the Revised Withdrawal Election Agreement") (Ex. J at 2-16). The Cover Letter admits that Limited Partners do not have to vote for the Proposed Plan in order to participate in the Withdrawal and the Underwritten Sale. Ex. J at 29.
Because the representation in the original Proxy was clearly false, it violated SEC Rules 14a-9 and 10b-5 and sections 11(a) and 12(a) of the Securities Act of 1933. And if the Additional Solicitation is an attempt by defendants to make a "curative disclosure," it is woefully inadequate.
While the misrepresentation in the Proxy is in all-capital type, the statement in the Cover Letter which advises the Limited Partners that they do not have to vote for the Proposed Plan in order to participate in the Underwritten Sale is not highlighted and appears in the middle of a long paragraph. Ex. J at 29. And the Revised Proxy makes no representation, one way or another, as to whether Limited Partners have to vote for the Proposed Plan in order to participate in the Withdrawal and the Underwritten Sale. Ex. J at 24-29.6
On the other hand, the Cover Letter advises the Limited Partners, in all-capital type, that, if they have already sent in their Proxy, there is no need to send in the Revised Proxy because the original Proxy "SHALL BE DEEMED MODIFIED" and will be validly counted. Ex. J at 29. The Cover Letter states:
IF YOU HAVE ALREADY COMPLETED AND DELIVERED THE ORIGINAL PROXY AND/OR WITHDRAWAL ELECTION AGREEMENT TO THE SOLICITATION AGENT, SUCH PROXY AND/OR WITHDRAWAL ELECTION AGREEMENT SHALL BE DEEMED MODIFIED AS DESCRIBED ABOVE AND YOU DO NOT NEED TO RESUBMIT THEM ON THE ENCLOSED REVISED FORMS UNLESS YOU WISH TO CHANGE YOUR VOTE AND/OR ELECTION THEREON.
Ex. J at 29. If the Limited Partners read the Additional Solicitation at all, they may only read the emphasized language in the Cover Letter and may not even realize that they were falsely told that they had to vote for the Proposed Plan in order to participate in the Underwritten Sale.
Moreover, the Proxy Statement states that, in order to participate in the Withdrawal, a Limited Partner "must properly complete the enclosed Proxy." Ex. E at 3, Ex. F (emphasis added). Thus, the Proxy Statement, which has not been replaced by a corrected proxy statement, requires the Limited Partners to complete the Proxy -- not the Revised Proxy -- in order to participate in the Withdrawal and the Underwritten Sale. The Proxy is still in the hands of the Limited Partners and still represents that a Limited Partner does have to vote for the Proposed Plan in order to participate in the Withdrawal and the Underwritten Sale. Ex. C at 2. The combination of the Definitive Solicitation Materials and the Additional Solicitation will therefore lead many Limited Partners to be affirmatively misled, and many others to be hopelessly confused.
Plaintiffs doubt whether there is any way to remedy the dissemination of the false information in the original Proxy. In order to compensate for the false statements that have already been made, plaintiffs believe that, at the very least, defendants would have to issue a revised proxy which would state, in bold-faced and all-capital type, immediately above the boxes in which the Limited Partners are to mark their votes, that Limited Partners do not have to vote for the Proposed Plan in order to participate in the Underwritten Sale.
Moreover, the Cover Letter represents that defendants intend to count votes cast on the original Proxy. Ex. C at 29. Any meaningful remedy for the blatant misrepresentation in the original Proxy would have to include invalidation of all votes cast on the original Proxy. To do otherwise would risk counting votes by Limited Partners who may have been misled into believing that they had to vote for the Proposed Plan in order to participate in the Withdrawal and the Underwritten Sale. This would unjustly allow defendants to profit from their latest violation of the federal securities laws. Proxies obtained through the use of false or misleading statements are tainted and it is unfair to permit such proxies to be voted. See Kaufman v. Cooper Cos., 719 F. Supp. 174, 185-86 (S.D.N.Y. 1989) (invalidating proxies tainted by misleading statements).
Defendants' Definitive Solicitation Materials contain many other false and misleading statements, fail to disclose numerous other material facts, and violate the federal securities laws in other ways. These violations are described in detail in Counts II to IV of plaintiffs' proposed First Amended and Supplemental Complaint. With respect to many of these violations, it is necessary to conduct expedited discovery in order to present a complete record to the Court.
The Special Meeting at which the Proposed Plan would be voted on is scheduled for October 24. Ex. F. If the Proposed Plan is approved, the Withdrawn Shares will be transferred to the Limited Partners within three business days of the Special Meeting, the Underwritten Sale will commence promptly, and it may quickly become impossible to unwind the transaction. Ex. G at 6. Thus, to prevent irremediable prejudice to plaintiffs' rights, expedited discovery is required.
Plaintiff therefore requests expedited discovery, to be coordinated with discovery in the Delaware state court action where an injunction hearing has been set for October 23, 1997, and expedited discovery has been already ordered by the Vice-Chancellor. The expedited discovery in this action will relate to the violations described in Counts I through IV of the proposed amended complaint. Plaintiff also requests an opportunity to take discovery on and brief all of defendants' numerous additional misrepresentations and nondisclosures in a manner and on a schedule to be determined by the Court.
The test within the Ninth Circuit for granting a temporary restraining order or a preliminary injunction involves the consideration of four factors: "(1) [t]he likelihood of the plaintiffs' success on the merits; (2) the threat of irreparable harm to the plaintiffs if the injunction is not imposed; (3) the relative balance of the harm to the plaintiffs and the harm to the defendants if the injunction is imposed; and (4) the public interest." Mayo v. U.S. Government Printing Office, 839 F. Supp. 697, 699 (N.D. Cal. 1992), aff'd, 9 F.3d 1450 (9th Cir. 1993); see also Alaska v. Native Village of Venetie, 856 F.2d 1384, 1388 (9th Cir. 1988). Here, plaintiffs have demonstrated a strong likelihood of success on the merits -- defendants have made statements in the Definitive Solicitation Materials and the Additional Solicitation which were clearly false.
As this Court stated in its August 4 order, "a violation of the proxy rules constitutes irreparable injury because security holders are denied the ability to make investment decisions on the basis of adequate information." Ex. R at 11; see also Kaufman v. Cooper Cos., 719 F. Supp. 174, 178 (S.D.N.Y. 1989); Riggs Nat. Bank of Washington D.C. v. Allbritton, 516 F. Supp. 164, 181 (D.D.C. 1981). Unless injunctive relief is issued here, plaintiffs will suffer irreparable harm imminently.
Defendants mailed out proxy solicitation materials on September 19 (Ex. A) and September 26 (Ex. J) -- more written solicitations may follow. Defendants have hired D.F. King & Co., Inc. as a Solicitation Agent to "assist the General Partner in the solicitation of Proxies" (Ex. G at 32) and have invited the Limited Partners to telephone the Solicitation Agent in the cover letters to both the Definitive Solicitation Materials and the Additional Solicitation (Ex. B, Ex. J at 29). The deadline set by defendants for obtaining an Opinion of Counsel is October 19, 1997. Ex. F. The Special Meeting is scheduled for October 24, 1997. Ex. F. The transfer of Withdrawn Shares to the Limited Partners is scheduled to occur within three business days of approval of the Proposed Plan -- at that point it may be impossible to unwind the transaction. Ex. G at 6.
While denial of injunctive relief will inflict irreparable harm on plaintiffs, defendants will suffer little or no cognizable "harm" from merely being ordered to comply with the law, unless being forced to tell the truth can be considered "harm." See Studebaker Corp. v. Gittlin, 360 F.2d 692, 696 (2d Cir. 1966). In addition, the public interest in enforcing the securities laws weighs in favor of injunctive relief. See Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687, 699 (2d Cir. 1973); Union Pac. R. Co. v. Chicago & N.W. Ry. Co., 226 F. Supp. 400, 413 (N.D. Ill. 1964). Furthermore, this is not a proxy battle between two corporations -- no Limited Partner can be expected to bear the financial burden of sending a counter-solicitation to the other Limited Partners which corrects defendants' misrepresentations. For these reasons, plaintiffs are entitled to injunctive relief.
As stated in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386 (1970), federal courts have broad discretion in fashioning equitable relief for violations of proxy regulations such as SEC Rule 14a-9. See Kaufman, 719 F. Supp. at 174 (voiding proxies and enjoining meeting); Pabst Brewing Co. v. Jacobs, 549 F. Supp. 1068, 1079 (D. Del.) (ordering corrective disclosure), aff'd, 707 F.2d 1392, 1394 (3d Cir. 1982); Canadian Javelin Ltd. v. Brooks, 462 F. Supp. 190, 193-94 (S.D.N.Y. 1978) (injunction against future violations). Injunctive relief is similarly appropriate to remedy violations of SEC Rule 10b-5. See S.E.C. v. North Am. Research & Dev. Corp., 424 F.2d 63, 85 (2d Cir. 1970); S.E.C. v. Musella, 578 F. Supp. 425, 445 (S.D.N.Y. 1984); S.E.C. v. M. A. Lundy Assocs., 362 F. Supp. 226, 235, 239 (D.R.I. 1973). Plaintiffs therefore respectfully request a temporary restraining order and a preliminary injunction prohibiting the defendants from:
(1) continuing to solicit proxies for the Proposed Plan,
(2) voting any proxies solicited with the aid of the Definitive Solicitation Materials or the Additional Solicitation,
(3) holding the Special Meeting on October 24, 1997,
(4) implementing the Proposed Plan, or
(5) taking any other action in furtherance of the Proposed Plan,
until and unless:
(a) all proxies solicited with the aid of the Definitive Solicitation Materials or the Additional Solicitation are declared invalid;
(b) defendants send a curative disclosure to the Limited Partners which is approved by the Court and which points out and corrects all material nondisclosures and misrepresentations in the Definitive Solicitation Materials, the Additional Solicitation, the June 9, 1997 press release, and the March 21, 1997 letter;
(c) defendants send a corrected Proxy to the Limited Partners, which is approved by the Court and which corrects the deficiencies described in Counts I and II of the proposed First Amended and Supplemental Complaint, and states in bold-faced, all-capital type, immediately above the place on the Proxy where Limited Partners are to mark their votes for or against the Proposed Plan, "YOU DO NOT HAVE TO VOTE FOR THE PROPOSED PLAN IN ORDER TO MAKE A WITHDRAWAL ELECTION AND PARTICIPATE IN THE UNDERWRITTEN SALE";
(d) defendants send a corrected Proxy Statement and corrected Withdrawal Election Agreement (both of which must be approved by the Court) to the Limited Partners which correct all the material misrepresentations and nondisclosures described in the proposed First Amended and Supplemental Complaint; and
(e) defendants issue a new Asset Sale Notice, as part of their corrected proxy materials, which is approved by the Court and which reinitiates the 30-day period for obtaining the Opinion of Counsel and states that the Opinion of Counsel must be approved only by more than ten percent in interest of the Limited Partners.
The Court's August 4 order may be interpreted as telling defendants, "Three strikes and you're out." Defendants, however, have now violated the federal securities laws on no less than four separate occasions. Defendants have thus demonstrated a proclivity for violating the securities laws and running roughshod over the Limited Partners' rights to make an investment decision based on full and accurate disclosures from the General Partner. For this reason, plaintiffs not only respectfully request that the Court grant the relief enumerated above, but also suggest that the Court prohibit the defendants from communicating with the Limited Partners without first clearing all proposed communications with the Court.
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Dated: October 1, 1997 |
Respectfully submitted, |
C:winword\syn2\mpapreinj.doc\pdl
1 All exhibit cites herein are to the Declaration of Alex J. Luchenitser in Support of TRO and Preliminary Injunction.
2 By contrast, Limited Partners must obtain majority approval of an Opinion of Counsel in order to implement their rights under Sections 7(g) or 12(h)(ii). Section 7(g) provides for removal of the General Partner by a majority in interest of the Limited Partners. Ex. N. Section 12(h)(ii) provides for amendment of the Partnership Agreement by written request of a majority in interest of the Limited Partners. Ex. N. Thus, since majority approval (not ten percent approval) is required to take the actions referred to in Sections 7(g) and 12(h)(ii), in order for the Limited Partners to remove the General Partner or amend the Partnership Agreement, they must obtain an Opinion of Counsel approved by a majority in interest of the Limited Partners.
3 Defendants concede that at least a majority in interest of the Limited Partners must approve the Proposed Plan. Ex. C at 1.
4 Similarly, the Withdrawal Election Agreement represents that, after the deadline for receipt of proxies (October 23, 1997), "Withdrawal Election Agreements will no longer be revocable, except if a Holder attends the Special Meeting and votes against the Plan." Ex. D at 12.
5 It would be illegal under Delaware law to coerce Limited Partners into voting for the Proposed Plan through the threat of allowing them to participate only in the unfavorable Dissolution phase if they did not cast a "yes" vote. It is well-established under Delaware law that a fiduciary may not use his power to coerce an investor into voting for (or against) a proposed transaction. "An otherwise valid stockholder vote may be nullified by a showing that the structure or circumstances of the vote were impermissibly coercive." Williams v. Geier, 671 A.2d 1368, 1382 (Del. 1996). "Wrongful coercion may exist where the board or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction." Id. at 1382-83. See also Brazen v. Bell Atlantic Corp., 695 A.2d 43, 50 (Del. 1997); Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051, 1062-63 (Del. Ch. 1987); AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 116 (Del. Ch. 1986).
6 Likewise, the Revised Withdrawal Election Agreement makes no representation either way as to whether Limited Partners have to vote for the Proposed Plan in order to participate in the Underwritten Sale. Ex. J at 2-16.