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475 F.Supp. 783 

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        Securities and Exchange Commission, Washington, D.C. (Theodore Sonde, Charles L. Lerner, Robert B. Blackburn, Robert M. Romano, Washington, D.C., of counsel), for the Securities and Exchange Commission.

        Paul, Weiss, Rifkind, Wharton & Garrison, New York City (Arthur Liman, Robert S. Smith, Jack Hassid, Susan P. Carr, Colleen McMahon, Paul B. Kertman, New York City, of counsel), for Becton, Dickinson & Co.

        Parker, Auspitz, Neesemann & Delehanty, New York City (Jack C. Auspitz, Barrington

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D. Parker, Jr., New York City, of counsel), for other plaintiffs.

        Kreindler & Kreindler, New York City (Paul Bernstein, Edward A. Grossmann, New York City, of counsel), for Jay-Gro Fabrics, Inc. Pension Trust and Lead Counsel for class plaintiffs.

        Kaye, Scholer, Fierman, Hays & Handler, New York City, Wachtell, Lipton, Rosen & Katz, New York City (Peter M. Fishbein, Jay G. Strum, Vincent J. Syracuse, Harvey Belkin, Barry Willner, Jay Wishingrad, Douglas S. Liebhafsky, Peter C. Hein, New York City, of counsel), for Sun Co., Inc.

        Orans, Elsen, Polstein & Naftalis, New York City (Sheldon H. Elsen, Leslie A. Lupert, Robert Polstein, Paul Summit, New York City, of counsel), for Fairleigh S. Dickinson and Ann Turner Dickinson.

        Cleary, Gottlieb, Steen & Hamilton, New York City (Edmund H. Kerr, Judith Ripps, Steven E. M. Hartz, New York City, of counsel), for Salomon Bros., F. Eberstadt & Co.

        Sullivan & Cromwell, New York City (Marvin Schwartz, Michael Barron, New York City, of counsel), for Chemical Fund, Inc., Surveyor Fund Inc.

        ROBERT L. CARTER, District Judge.

        Status of the Proceedings

        This litigation stems from the acquisition by Sun Company, Inc. ("Sun"), a Pennsylvania corporation whose principal business is oil and gas, of roughly 34% of the stock of Becton, Dickinson & Company ("BD"), a New Jersey corporation which manufactures health care products and medical testing and research equipment. Sun's brilliantly designed, lightning strike took place in January, 1978, and gave rise to seven separate actions which were consolidated for trial. In 78 Civ. 1055, the Securities and Exchange Commission ("Commission") brings an enforcement action against Sun, L.H.I.W., Inc. (an acronym for Lets Hope It Works), the corporation Sun formed to receive the BD shares; Salomon Brothers ("Salomon"), a New York limited partnership engaged in the investment banking and brokerage business; F. Eberstadt & Co., Inc., ("Eberstadt"), a Delaware corporation engaged in investment banking, institutional stock brokerage and the management of pension funds and advisory accounts and which, along with Salomon, handled the Sun acquisition; F. Eberstadt & Co. Managers & Distributors, Inc. ("M & D"), a Delaware company 75% owned by Eberstadt and 25% owned by the estate of Ferdinand Eberstadt,¹ which manages the two Eberstadt mutual funds involved in this proceeding; Robert Zeller, chief executive officer of Eberstadt and vice chairman of M & D; Fairleigh S. Dickinson, Jr., former chairman of BD and one of its principal stockholders; J.H. Fitzgerald Dunning, a former director and large stockholder in BD; and Kenneth Lipper, a partner in Salomon. The Commission charges the defendants with violating or aiding and abetting the violation of Sections 10(b), 13(d), 14(d) and 14(e) of the Securities Exchange Act of 1934, as amended (15 U.S.C. §§ 78j(b),² 78m(d),³ 78n(d)⁴ and 78n(e)⁵); Rules 10b-5

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(17 C.F.R. § 240.10b-5)⁶ and 10b-13 (17 C.F.R. §§ 240.13d-1 and 13d-2),⁷ and Regulation 14D (17 C.F.R. § 240.14d-1⁸ and § 240.14d-101⁹), promulgated thereunder;

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Sections 17(d) and 17(e) of the Investment Company Act of 1940, as amended (15 U.S.C. §§ 80a-17(d),¹⁰ 80a-17(e)¹¹); and Rule 17d-1 (17 C.F.R. § 270.17d-1),¹² promulgated thereunder.

        In 78 Civ. 539, BD, its officers and several of its shareholders individually and derivatively sue Sun, L.H.I.W., Dickinson, Dunning, Salomon, Eberstadt, Chemical Fund, Inc., and Surveyor Fund, Inc., alleging violations of the Exchange Act similar to those charged in the Commission's case, and in addition, charging Dickinson and Dunning with violations of their fiduciary obligation to BD and its shareholders. The Chemical and Surveyor Funds are open end investment companies managed by M & D and registered with the Commission under the Investment Company Act of 1940.

        78 Civ. 284, 78 Civ. 291, 78 Civ. 345, 78 Civ. 1025 and 78 Civ. 1156 are class actions against various combinations of the defendants in the Commission's and BD cases and Ann Dickinson Turner, a daughter of Dickinson and a substantial shareholder of BD stock. The class actions allege violations of Sections 10(b), 13(d), 14(d) and 14(e) of the Exchange Act, Sections 2(l)(1) and 9(b) of the New Jersey Corporation Takeover Bid Disclosure Law, New Jersey Laws of 1977, Chapter 76,¹³ and Rule 390¹⁴ of the New York Stock Exchange ("NYSE"). The class

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plaintiffs are all the persons who, as of the close of business January 16, 1978, owned either BD stock or BD 4 1/8% convertible debentures due in 1988 (except, of course, defendants and those who sold BD stock to Sun).

        All defendants have answered by denying the basic allegations of wrongdoing. All defendants argue that no cause of action has been stated against them, that all plaintiffs except the Commission lack standing and that none of the plaintiffs have been injured. In addition, Sun, Dickinson, Salomon, Eberstadt, M & D, Lipper and Zeller allege that BD and the individual plaintiffs in 78 Civ. 539 come into court with unclean hands because they embarked on a course of untoward conduct designed to bring political and public pressure and disfavor on defendants. In the enforcement proceedings, Salomon, Eberstadt, M & D, Lipper and Zeller charge that the Commission denied defendants procedural due process in flagrant violation of its own rules of procedure and that it brought this enforcement proceeding in response to political pressure generated by BD. Accordingly, all defendants urge dismissal of the complaints.

        The defendants opposed class action certification, but their contentions were held to be meritless. Class certification was granted and defined as stated above. See Wellman v. Dickinson, 79 F.R.D. 341 (S.D.N.Y. 1978) (Carter, J.). The class plaintiffs waived their jury trial demands and the Commission agreed to have its case consolidated for trial with those of the private parties. A bifurcated trial dealing only with the issues of liability began on November 13, 1978 and ended on December 8. During the trial Dunning reached a settlement with the class plaintiffs. The parties have made an abundance of pre-trial, trial and post-trial submissions with the latter continuing as late as July 1, 1979. Counsel have been scrupulously diligent in bringing to the court's attention any newly decided relevant cases not cited nor discussed in their pre-trial, trial and post-trial briefs and memoranda. Although all but inundated by the deluge of exhibits and filings in these proceedings, the court is appreciative of the parties' diligence in bringing to the court's attention every conceivable document that might possibly be relevant to the decision.

        Findings of Fact

        The background and governing facts¹⁵ in this complex drama embrace personality

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conflicts, animosity, distrust, and corporate politics, as well as a display of ingenuity and sophistication by brokers, investment bankers and corporate counsel.

        Fairleigh S. Dickinson, Jr. was the son of one of the founders of BD. He held the reins of the company from 1948 until 1973. When he became BD chief in 1948, BD was a private family enterprise with gross sales of 10 million dollars annually. When he released the reins of the company in 1973, it was a public company with gross sales of $300 million annually. Dickinson loosened his hold on the helm but did not entirely let go. In 1974, he stepped upstairs to become Chairman of the Board, while Wesley Howe became Chief Executive and Marvin Asnes became Chief Operating Officer. Differences between the management team and the chairman became evident in late 1976 when Dickinson threatened to fire Asnes.

        Sometime prior to January, 1977, Howe became interested in the acquisition by BD of National Medical Care Corp. Negotiations went well, and BD announced a proposed merger with the company in January, 1977. Without advising the board or management, Dickinson engaged the services of Salomon and Eberstadt to look into the proposal and advise him about it. Dickinson

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was a personal friend of William Salomon, a senior partner of Salomon, and Eberstadt had been BD's investment banker. Robert Zeller, Eberstadt's chief executive, had arranged the first underwriting in 1962 when BD became a public company, and until 1975 had performed the same function when BD made additional public offerings. In addition, Zeller had advised Dickinson on the handling of some of his personal affairs. Both Salomon and Eberstadt filed negative reports on the National Medical Care proposal. Dickinson sent the Salomon report to BD board members in February, and on March 3 at a meeting of the Executive Committee, the proposal was abandoned.

        Intrigue deepened at BD. Howe's secretary, Dorothy Matonti, began listening to telephone conversations that Dickinson's administrative assistant, Adele Piela, had with Jerome Lipper, Dickinson's attorney, and Board members. Matonti copied Piela's shorthand notes and material from Dickinson's appointment book, and Piela's secretary and Dickinson's driver kept Matonti informed of Dickinson's activities. This surveillance was duly recorded in memoranda given to Howe. On March 27, Dickinson held a meeting with Salomon attended by Kenneth Lipper, his brother Jerome Lipper, Dr. Edwards, an employee of BD, and several BD directors. At the meeting the participants discussed the financial community's reaction to changes in BD that Dickinson was contemplating. Dickinson apparently felt he had sufficient power in the company to bring about a change in management. Events, however, were soon to prove him wrong.

        In early April, Dickinson, Howe, and Asnes met, presumably to bring their differences into the open and to resolve them. The meeting settled nothing. Howe and Asnes then decided on a show of strength. They canvassed the board, found enough votes to get rid of Dickinson, and on April 18 sent out notices for an April 20 meeting. Jerome Lipper knew the purpose of the meeting but Dickinson did not attend. Whether this was because Dickinson had also counted the votes, we do not know. At any rate, he spent part of the day in Washington, and part in Baltimore with Dunning. Howe prevailed. Dickinson was deposed as chairman and nudged out the back door with the title of Honorary Chairman.¹⁶

        Obviously this must have been a terrible personal blow. Dickinson was now stripped of all power within what he must still have regarded as a family enterprise. On April 21, Dickinson had a meeting at Salomon to secure advice on how to proceed. Richard Rosenthal, John Gutfreund, and Kenneth Lipper of Salomon, two BD directors, Kane and Thompkins, Jerome Lipper and Salomon Brothers counsel, Martin Lipton were in attendance. The meeting centered on BD's trouble and the possibility of restoring Dickinson to power. A lawsuit based on procedural irregularities at the board meeting was ruled out. Nor was a proxy fight considered a viable option when the small percentage of total BD shares Dickinson held was revealed. Although Dickinson and members of his family still held the largest segment of stock in the company, acquisitions, public offerings and the sale of some of their holdings had caused their aggregate portion to be reduced to approximately 5% of BD's outstanding shares. Discussion then turned to more practical solutions, e. g., for Dickinson to sell his shares on the open market to BD or to a third party, or to bring pressure on management through the outside directors. Dickinson vetoed the idea of selling his stock on the open market since he felt that that course would leave the shareholders of BD saddled with bad management. He accepted two remaining optionsto vote with outside directors to bring pressure on management and to sell his stock to a company interested in a takeover of BDand engaged Salomon for the latter purpose.

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        A few days later, on or about April 25, Dickinson advised Zeller that he was asking Salomon to involve Eberstadt in the effort to interest a company in acquiring his stock. Zeller confirmed these arrangements with Gutfreund.

        At first, the relationship of Dickinson to Salomon and Zeller as principal and agent or broker for the sale of Dickinson's stock was merely an oral understanding. Events during the summer of 1977, however, caused the parties to alter the arrangement. By that time, there had been merger discussions with Avon Products Co. ("Avon") and American Home Products Corp. ("AHP"), and William LaPorte, chairman of the board of AHP, had met with Howe and Henry Becton, Dickinson's successor as chairman of the board of BD, seeking BD management's approval of an AHP acquisition. Howe was thus aware that Dickinson was seeking a takeover of BD by another company. Joseph Flom, BD counsel, called Lipton and threatened a lawsuit if Dickinson continued to try to secure a buyer for a large percentage of BD stock. Lipton suggested to Salomon that it secure an indemnification from Dickinson. Lipton drafted such a document for Dickinson to sign and sent it to Kenneth Lipper in July. Jerome Lipper and one of the senior partners of Salomon were opposed to the idea, but in late September or October, Flom renewed his threats to Lipton. Lipton again advised Lipper to have Dickinson sign the indemnification. This time Lipper took the document directly to Dickinson. He agreed to sign it, and after Jerome Lipper made some modifications, the revised document was signed by Dickinson and Kenneth Lipper. The letter of indemnification is dated October 12, 1977, and it confirms Dickinson's engagement of Salomon "in connection with seeking an offer for [his] shares" of BD stock. Dickinson agrees to indemnify Salomon against all claims relating to or arising out of the firm's acting on his behalf in securing a buyer for his stock.

        From the spring of 1977 forward, Salomon and Eberstadt, particularly Lipper and Zeller, worked zealously to interest a company in acquiring a minority interest or in buying 100% of BD. Between April 25 and December, 1977, Salomon and Eberstadt arranged meetings with Avon, AHP, Monsanto Corp., ("Monsanto"), Hoffman-LaRoche, Inc. ("Hoffman-LaRoche"), Shering-Plough Corp. ("Shering-Plough"), Squibb Corp. ("Squibb"), and Sun in an effort to interest those institutions in acquiring a position in BD. Dickinson himself participated in these activities until late December when he was hospitalized for about one month. In part, these efforts failed to bear fruit before Sun Company came on the scene because most of the other corporations were not interested in a takeover attempt in the face of hostile management. Since Sun's strategy was to move as quickly as possible, without public notice, the hostility of management was no deterrent.

        The campaign to find a company interested in buying Dickinson's stock as part of a BD takeover bid was launched without delay. The first contact was a telephone call to David Mitchell, Chief Executive of Avon, by either Richard Rosenthal or John Gutfreund to indicate Salomon's desire to discuss the BD situation with Avon's representatives. Eberstadt had earlier in the year initiated discussions with Avon about a possible merger with BD. Zeller had arranged a meeting in January, 1977 between Dickinson and Mitchell. Zeller was set to sponsor a meeting between Howe and Asnes and representatives of Avon to secure management's consent to such a merger, but the National Medical Care Corp. issue intervened, and further negotiations aborted.

        After speaking to the Salomon representative, Mitchell asked Robert Greenhill, managing director of Morgan Stanley, Avon's investment banker, to meet with Salomon. Greenhill followed through, and a meeting at Salomon was held on April 27. In attendance were Rosenthal, Gutfreund and Lipper of Salomon, John Hogan of Eberstadt, Greenhill and Bradford Evans of Morgan Stanley and Lipton, the attorney. Dickinson was not present. Gutfreund related Dickinson's disenchantment with BD management and his desire to dispose of his

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BD stock. Gutfreund advised Greenhill that Salomon and Eberstadt were working on Dickinson's behalf and that Dickinson's stock and a block of stock they represented would be useful to Avon in acquiring BD. Gutfreund proposed that Morgan Stanley, Salomon and Eberstadt work together on the matter. Greenhill countered that Morgan Stanley was Avon's exclusive representative. He then asked how much stock they were talking about. The reply was 20%, but on closer questioning, he was advised that they presently controlled 9% of BD stock and believed 20% could be delivered. Dickinson's daughter was mentioned. No specific price was discussed except a premium over the market that related to acquisition of a controlling interest. Greenhill inquired whether a group had been formed and whether a form 13(d) had been filed. The reply was negative. He then addressed Lipton and Rosenthal directly, "does this mean that a group has been formed and that a 13(d) [has been] filed . . .." The response given was "no 13(d) has been filed" (Tr. 1098-99). Greenhill indicated that Avon had no interest in a block of stock unless BD management would be receptive to Avon's acquisition, and that Avon would not proceed unless it could explore with BD management its attitude about the potential combination and the business future of the combined operation.

        When the meeting broke up, Greenhill shared a taxi with Lipton and spoke to Lipton about filing a 13(d) statement. Lipton replied that he had only just become involved but would look into the matter. Greenhill spoke to Mitchell the next day to confirm the correctness of the statement he, Greenhill, had made at the meeting that Avon would only be interested in an acquisition with the cooperative participation of BD management, and Mitchell agreed. Greenhill so advised Rosenthal, and that conversation ended the Avon episode.

        Lipton does not recall the discussion at the April 27 meeting and during the taxi ride about the group or failure to file a 13(d) form. Sometime after the April 27 meeting, however, Lipton learned that M & D was investment adviser to Chemical Fund which held approximately 500,000 shares of BD stock.¹⁷ In either May or early June he had Zeller and Lipper meet with him to discuss whether in view of Eberstadt's relationship to Chemical Fund, a 13(d) filing should be made. Zeller advised Lipton that Eberstadt and Chemical Fund were independent of each other; that there was no relationship between Eberstadt's investment banking function and Chemical Fund; that investment decisions for the fund were made by a majority of Chemical Fund's independent or outside directors and that Eberstadt had no authority to make such decisions for the fund. He also advised Lipton that the Chemical Fund was represented by Sullivan & Cromwell and that Stephen West, the partner-in-charge, had reviewed the matter and concluded that no problem existed. West's recollection is not so specific or pointed, and he remembers the discussion with Zeller about a 13(d) filing and group membership in relation to Chemical Fund as occurring after this conversation with Lipton. At any rate, Lipton was familiar with the Tannenbaum v. Zeller litigation¹⁸ and was personally acquainted with Roger Murray, one of Chemical Fund's outside directors who is very knowledgeable in the securities field. He accepted Zeller's explanation and concluded that all was well and that there was no need to make a 13(d) filing.

        With Avon eliminated, Zeller and Lipper in late April and early May sought without success to interest Bristol Myers and Pepsico in the acquisition of BD. Dickinson then decided to take some initiative on his own. On May 10, at William Salomon's suggestion, Dickinson called William LaPorte,

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Chief Executive of AHP, whom he knew socially and who was then in the Philippines. Dickinson asked LaPorte whether the latter felt a discussion of the association of the two companies, BD and AHP, would be worthwhile. He told LaPorte that Salomon was acting on his behalf and that Kenneth Lipper, a Salomon partner, would be calling him shortly. Lipper did call sometime thereafter. He told LaPorte that Dickinson was seeking a company desirous of merging with BD; that Eberstadt held 500,000 BD shares in Chemical Fund and that these, along with Dickinson's and Dunning's shares were available and would go with the deal; that approximately 2.5 million shares could be acquired, roughly 16-17% of the total shares; that some 813 shareholders held 17.5 million shares of the 19 million outstanding BD shares, and that in the event LaPorte decided on the acquisition of BD, Dickinson would want to be chairman.

        LaPorte met with Dickinson when he returned to New York, about 2 weeks later on May 24, and they discussed the possibility of a merger of the two companies. On May 25, LaPorte met with Zeller, Lipper, Gutfreund and Rosenthal. LaPorte was again advised that they were seeking to sell Dickinson's stock. The meeting bogged down because LaPorte sought to make certain that AHP was not assuming any obligation to pay Eberstadt or Salomon, and throughout LaPorte offered only a very small premium over market price. A flurry of meetings then took place. LaPorte met again with Dickinson along with Dunning and several other BD directors. Dickinson sent his private plane to Baltimore to bring Dunning to this meeting. LaPorte met with Salomon a second time, and he also met with Howe and Becton, but neither manifested interest. He sent letters to each director spelling out AHP's interest and the proposed terms for a merger of the two companies. On June 22, BD's board of directors rejected AHP's proposal and issued a public statement giving notice of its strong desire to remain an independent company. Thereafter, Lipper called LaPorte and sought to persuade him to continue his efforts to acquire an interest in BD despite BD management's hostility. Lipper assured LaPorte that Dickinson would support any effort he made. LaPorte, however, considered the hazards too great to attempt a takeover of BD against hostile management and on June 27 advised Dickinson's representatives that he was withdrawing from the field.

        The next corporation Salomon and Eberstadt sought to interest in acquiring BD was Hewlett-Packard, which Salomon contacted in August without success. Later in August, Salomon, subsequently joined by Zeller and Dickinson, began discussions with Monsanto and with John Whitehead, senior partner of Goldman Sachs & Co., investment bankers for Monsanto. On September 20, Lipper had breakfast with Whitehead, luncheon with John Kerley, executive vice president of Monsanto, and that evening hosted a dinner at his apartment to enable John Hanley, Monsanto's chief executive, to meet directly with Dickinson and question him about BD. Beside the three already named, Whitehead and Kerley were present as was Zeller, Jerome Lipper, William Salomon, Mrs. Kenneth Lipper and the Lipper children. This was apparently a long dinner meeting, and Hanley used the occasion to question Dickinson closely about the origin of BD, the nature of its business, recent disagreements between him and management and Dickinson's desire as to the disposition of his own stock. Dickinson indicated that animosity between him and BD management had fueled his determination to sell his shares and that his disenchantment was shared by others whom he felt would also be interested in selling their shares. Dickinson asserted that he and his family held 1,200,000 shares: some shares he owned directly, but others were held in trust. While he could not commit the stock in trust, he expressed reasonable confidence that 1,200,000 shares were available. In addition, Dickinson indicated that friends and associates of his, mentioning Dunning by name, were equally distressed and that their holdings aggregating 1,300,000 shares were also for sale.

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        Although Whitehead could not recall whether Zeller, Lipper, or Dickinson made any reference to the 500,000 shares of Chemical Fund at the dinner, he came away with the "clear understanding that the 500,000 shares that were owned by Chemical Fund were part of the shares that were being talked about." But Whitehead could not be certain whether that understanding resulted from discussions at the dinner meeting or from what he had learned earlier (Tr. 1171). In the prior weeks either Zeller, Dickinson or Lipper had told him "that there were 500,000 shares owned by Chemical Fund that were for sale" (Tr. 1174). The price defendants suggested to Whitehead was 10% premium over the market price.

        Whitehead had a final meeting in October with Lipper, Zeller, Rosenthal and Lipton. He expressed a desire to talk to BD management before making a decision, but Lipper and Zeller were unwilling to arrange such a meeting. Later in October Monsanto advised Salomon that it had no further interest.

        In late October, Zeller attempted to interest Shering-Plough in purchasing an interest in BD. Zeller indicated that the Dickinsons' family-held shares of 1,200,000 were available, plus 400,000 shares controlled by Edward Scarff, and 350,000 shares owned by Dunning. He also represented that there were 500,000 shares held by Eberstadt managed funds, but that their disposition had to be determined by the appropriate people. A number of meetings ensued in which Shering-Plough representatives were told by Zeller that 2,500,000 shares were readily available and that it would not be difficult to proceed from that base to a 20% acquisition. Shering-Plough decided, however, that it was not interested in attempting a takeover of BD against hostile management, and it removed itself from consideration.

        At roughly the same time these negotiations were taking place, Allan Lowenstein, a New Jersey attorney, asked Dickinson's permission to talk to Robert Clark, a personal friend and president of Hoffman-LaRoche, about acquiring an interest in BD. Lowenstein called Clark on November 22. Lowenstein said that Dickinson's interests controlled approximately 15-20% of all BD shares outstanding. The two had a number of telephone calls culminating in a meeting and luncheon attended by Clark, Lowenstein and Robert Johnson of Loeb Rhoades, Hoffman-LaRoche's investment banker. Lowenstein stated that with the holdings of Dickinson and those in sympathy with him, including Dunning's and Chemical Fund's shares, a 15-20% position could be purchased, and then the company could proceed to obtain the remaining shares. The conversations seemed to be going well. Johnson had meetings with Salomon, and he was pressured for early action because another company was also interested in a BD takeover. Lowenstein advised Clark that a decision should be made before BD's annual meeting in February because Dickinson was afraid management would put through a charter amendment substantially increasing the authorized capital stock. In mid-December Clark advised Lowenstein that Hoffman-LaRoche could no nothing before March, and because of the February deadline, it removed itself from contention.

        Sometime late in October, 1977, Dickinson lunched with Robert Furlaud, chief executive of Squibb, and related to the latter his disenchantment with the state of affairs at BD and his interest in selling his holdings in the company. Furlaud was unenthusiastic but agreed to further discussions. On November 10, Dickinson, Furlaud and George Maginness, a Squibb vice president, lunched together. Dickinson talked of wanting to sell his own BD stock and his family holdings to Squibb. He stated that his financial advisors could give more detailed information. On November 14th Maginness had a meeting at Salomon with Kenneth and Jerome Lipper and Zeller. Kenneth Lipper suggested that BD would be a good investment, that Salomon and Eberstadt could secure up to 20% of all BD stock for Squibb, and that such an acquisition would provide the base for a possible takeover. He offered to send a further analysis from Salomon. Maginness' reaction

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was negative but he agreed to give the matter further thought. A few days later Kenneth Lipper called Maginness to inquire whether he had reconsidered. When reminded of his promise to send additional material, Lipper mailed Salomon's calculations to Maginness about one week later. This, however, failed to convince Furlaud or Maginness that the proposition was attractive, and Salomon was so advised.

        Harry Sharbaugh, Sun's chief executive, had determined in 1977 that Sun needed to diversify by investing in institutions outside the energy field. Sun sought the acquisition of no less than a 20% interest and not more than a 50% interest in 3 or 4 companies over the succeeding two or three years by investing some 300-400 million dollars in each organization. Sun's corporate development committee was given responsibility for developing major acquisition opportunities for Sun. In August, Salomon was engaged to undertake some studies in connection with Sun's diversification program and Horace Kephart, a senior vice president concerned with corporate development and diversification, was given responsibility for dealing with Salomon. Kenneth Lipper was one of the Salomon partners in charge of the Sun account. Thus, the stage was now set for the main event.

        Kephart discussed Sun's diversification program with Lipper, and in late November the two met at Salomon. Kephart was given a copy of BD's annual report, and Lipper suggested that Sun might consider BD as an acquisition possibility in its corporate development program. After studying the report, Kephart had further conversations with Lipper about BD. He learned about the rift between Dickinson and management, and about Salomon and Eberstadt's connection to Dickinson. In these discussions Kephart was told that a block of roughly 15% of BD shares was available, and that this included 1.2 million shares owned by Dickinson, 400,000 shares owned by Lufkin, 500,000 shares owned by Chemical Fund and 300-400,000 shares owned by Dunning. He was also informed that BD was attempting to buy back Dickinson's stock, and that Dickinson had refused but would be willing to sell his shares to a major company. Kephart further learned that BD had publicly announced in June its desire to remain independent and had hired special counsel to assist it in resisting any takeover efforts. Moreover, Lipper told Kephart that a foreign company (Hoffman-LaRoche) and a domestic chemical company (Monsanto) were ready to move to acquire an interest in BD after the first of the year, giving Kephart the impression that speedy action was needed.

        In early December, Kephart attended a meeting of Sun's senior executives and mentioned BD as a possible acquisition opportunity. Sun's business analysis group, which was support staff for the corporate development committee, was assigned the task of making a business study of the health care field in general and BD in particular to determine whether an investment in BD would make sound business sense.

        On December 20, at Sun's headquarters in Radnor, Pennsylvania, the business analysis group presented its findings and conclusions to Sun's senior executives. Among those in attendance were Sun's two top executives, Sharbaugh and Theodore Burtis, its president. Six other acquisition possibilities were also recommended. There was general agreement that the matter should be explored further. Pursuit of BD as an acquisition possibility was given priority over the six other companies recommended by the business analysis group because Lipper had advised Kephart that "other companies [were] in the process of taking action to acquire" an interest in BD (Tr. 134). Lipper suggested that Sharbaugh call Dickinson personally and make arrangements to meet him. A meeting through Lipper was proposed so that Sharbaugh and Burtis could talk to Dickinson face to face. Such a meeting was first set for December 20 and then cancelled and rescheduled for January 3 or 4. However, Dickinson became ill and required hospitalization, causing the meeting to be cancelled again.

        On December 22, Kephart assembled a study team of Sun executives to carry the

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analysis of the potential BD acquisition to "the next stage of sophistication" (Tr. 168). That is, this group "was to find out more about the health care products industry and [BD] in preparation for future reports to senior management [and] the board" (Tr. 169-170). In short, it was to provide top executives with necessary information to enable them to make an informed determination on whether to acquire an interest in BD.

        On December 27, there was a meeting in New York attended by Sun's study team, Salomon, Eberstadt, Arthur Andersen and James Fogelson of Wachtell, Lipton (Salomon counsel), at which possible strategies for acquiring BD were discussed. Partial tender was dismissed as having a limited chance of success, and a friendly takeover bid was ruled out. There was discussion of soliciting individuals and institutions. Kephart was shown a list of available holdings including Dickinson's, Dunning's and Lufkin's. By this time he knew that a large percentage of BD shares were held by institutions, and he was assured that the Chemical Fund's 500,000 shares were available to Sun. Rosenthal proposed a two tier pricea higher price with no recourse and a lower figure with a guaranty to make up the difference between the lower price and the highest price eventually paid for any shares acquired. This was the so-called most favored nation clause, and the idea was accepted in principle. It was understood that a premium over the market was a prerequisite.

        There was further discussion at Radnor, Pennsylvania on January 3 and 4 by the study team, Sun officials, Salomon, Eberstadt and Fogelson, all of whom were brought together by Kephart in preparation for a presentation on January 5 to Sun's board. Kephart prepared and Sharbaugh signed a personal and confidential letter for study by the board members at the January 5 meeting, which stated that a block of 15% of the shares of BD was available and an additional 10-20% could be quickly acquired. Kephart testified at trial that he had counted Dunning's, Lufkin's and Dickinson's in the 15% calculation. On January 5, Kephart presented the study team's findings to the corporate development committee at a meeting to which members of the board were invited to attend in informal session. The board heard the presentation. It was not asked to vote, but Kephart stated that a decision had to be made within a week. The consensus was that the matter should go forward. On the next day Wachtell, Lipton was employed as Sun's counsel and thereafter, Cleary, Gottlieb, Steen & Hamilton ("Cleary, Gottlieb") was employed by Salomon.

        On January 9, there was a meeting of lawyers at Salomon. The lawyers indicated that the law regarding tender offers was still murky and that the concept of a tender offer had not been precisely defined. The lawyers wanted to structure a "privately negotiated" transaction. Fogelson and Charles Nathan of Cleary, Gottlieb felt this required that those solicited be limited in number. One felt that up to 60 solicitees was safe; the other argued for an upper limit of 40, but within those limits the lawyers felt there would be no problem.

        Between December 22 and January 13 (when the executive committee authorized the acquisition and the expenditure of up to 350 million dollars), the study group was engaged in the examination of a myriad of alternatives. The study team knew that 10-13% of BD shares were held by nonmanagement individuals who were willing to sell and that a large percentage of BD stock was in the hands of institutions. The study team concluded that the optimum percentage level for Sun to reach was over 33 1/3%. At that level, Sun could utilize equity accounting and would have sufficient holdings to have a significant voice in BD's future direction. Even if BD increased the number of authorized shares, Sun's strength could not be diluted enough to frustrate these two objectives. The study team considered it acceptable for Sun to hold 20-30% of the stock for a short time, but a percentage in excess of 33 1/3% was the basic objective.

        On January 10 and 11, Kephart and the study team, augmented by Salomon (Rosenthal,

Page 806

Lipper, Gutfreund), Eberstadt (Zeller), Fogelson, Howard Blum, Sun's staff counsel, and Nathan met in Sun's headquarters to devise final recommendations to present to the Sun Board. There was an extended discussion of strategy. Kephart led the discussion, considering (1) open market purchases, (2) a conventional tender offer, and (3) private purchases. In the face of a hostile target, a conventional tender offer was not considered attractive. It was felt that it would lead to competitive bidding which would make the desired acquisition more expensive, and there was certain to be time consuming legal maneuvering to try to thwart the acquisition effort. What was needed was a procedure that would enable the acquisition to be effectuated quickly and put Sun in physical possession of the shares in the shortest possible time. There was a discussion of legal risk, but this was not a concern about the risk of litigation itself since everyone accepted that as inevitable. Rather, the participants were concerned with the chance that Sun's objective would be thwarted in mid-stream by legal maneuvers.

        Four possible strategies were listed by Kephart on a blackboard and rated in terms of legal risk, quick control and price: (1) to seek shares sequentially, first from individuals, then from institutions; (2) to seek shares simultaneously from these two groups; (3) to tender immediately; and (4) to contact management.

        Simultaneous acquisition was considered the most desirable in terms of quick control and price, although there was a measurable legal risk that the effort would be aborted. Sun was advised by its lawyers that the exact boundary line between a private purchase and a tender offer had not been defined in the law. Nonetheless, the lawyers believed simultaneous purchases from large individual and institutional shareholders, carried out off the market after the New York Stock Exchange had closed and with as much secrecy as possible, constituted the strategy best suited to meet Sun's needs. The tender offer approach was rated best in terms of legal risk, but disadvantageous in terms of price. It would also give BD a wide opportunity to make counter moves. The lawyers felt it necessary to keep the solicitees limited in number in order for the acquisition to be considered a private transaction. There were discussions of the possibility of attaining the objective with purchases from 4 individuals and 6 institutions, but approaching as many as 40 solicitees was discussed. In order to avoid possible infraction of Rule 390, NYSE, the lawyers advised that a Sun official, not Salomon or Eberstadt, had to accept the solicitees' agreement to sell their shares. Also, there was a discussion of the New Jersey Corporation Takeover Bid Disclosure Law, and the lawyers sought to steer clear of that statute.

        On January 11, these recommendations were presented to Sun senior officials. On January 13, the executive committee approved the "private transaction" proposal and authorized a $350 million expenditure for a 34% acquisition. Burtis testified that the maximum authorized was 38% of BD's outstanding shares, but Sharbaugh recalled the upper limit percentage as being 40%-50%. Salomon and Eberstadt were engaged at a fee of $350,000 each, conditioned on Sun's acquiring at least 20% of BD stock, and Sun provided each with a letter of indemnification.

        On January 11, Fogelson, Nathan and Blum carefully considered the approach to be made to solicitees. When they learned that the strategy envisioned approaches to a number of individuals and institutions, they initially wanted Rosenthal to make all the solicitations. When he said that was impossible because there were too many solicitees, the lawyers decided on preparing two scripts: one for those soliciting individuals and a second one for those soliciting institutions.¹⁹ The instructions stressed

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confidentiality and it was agreed that a lawyer would be at the side of each solicitor to monitor the latter's side of the conversation.

Page 808

        Rosenthal's two tiered price offer with a most favored nation clause was agreed upon. At his suggestion, solicitees were to be offered a top price of $45 per share with no recourse or $40 per share with the right to receive the highest price subsequently paid to any other solicitee. It was the understanding of Salomon, Sun and Eberstadt that all solicitees would get the benefit of the highest price paid.

        Blum advised Rosenthal that the price should be negotiated, not fixed, and that if another price were suggested by solicitees, it should not be rejected but referred back to Sun. He told Rosenthal that there should be no specified time to respond, but Rosenthal said time deadlines would be set within the time frame normally allowable in block trading. Rosenthal was told that the principal was not to be disclosed and that solicitees should be told to keep the matter confidential, lest a 13(d) group develop as a result of leaks.

        Kephart advised Lipper on January 13 that the executive committee had given the go ahead sign. He authorized the making of an offer to Dickinson and Dunning prior to January 16. In mid-December, Lipper had sent Dickinson Sun's annual report. Lipper, Zeller and Jerome Lipper arranged to see Dickinson in his hospital room the next day, January 14. Dickinson was told that the matter must be kept confidential and that Sun was the purchaser. After the price options were outlined, Dickinson indicated that he was ready to accept but only if the proposal was presented to Dunning as well. Dickinson chose the $45 price and asked that his shares be paid for with a cash down payment and the remainder in installments. He was told that the propriety of the installment payments would have to be referred to the lawyers.

        After assuring them that he could vouch for Dunning's discretion, Dickinson called Dunning from his hospital room and spoke to him while Jerome and Kenneth Lipper and Zeller were still present. He told Dunning that Salomon and Eberstadt had brought him an attractive proposal for the sale of his BD stock but "he was conditioning his acceptance" on the same offer being made to Dunning (Tr. 2467). He identified Kenneth Lipper and Zeller to Dunning, indicated that they desired to go to Baltimore to talk to him as soon as possible about the sale of his stock, and requested that Dunning see them the next day. On completing the call, Dickinson advised Zeller and Lipper that Dunning would see them, and they agreed to get to Dunning's home in the early afternoon of January 15. Mrs. Turner then arrived in Dickinson's hospital room, and Zeller and Lipper offered her the same proposition offered to her father. Zeller and Lipper kept their appointment the next day with Dunning and made the proposal to him. Dunning liked the proposition and promised to advise them as soon as he talked to his brothers and to his co-trustee.

        Kephart was authorized to go to New York on January 16 to supervise the solicitations, and he was instructed not to deviate from the agreed upon two tier price without getting prior approval from either Burtis or Sharbaugh. Kephart was told that Sun's acceptance should be conditioned on its securing a minimum of 25% of the total outstanding shares. When Rosenthal learned from Kephart on the morning of January 16, that Sun's minimum was 25%, he argued that it was too high a percentage to work to Sun's advantage. Rosenthal felt that many institutions might turn down the

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opportunity if Sun's acceptance were conditioned on its obtaining 25%, and he urged a 20% minimum. Kephart called Burtis and related Rosenthal's concerns to him, and Burtis agreed to the lower percentage.

        On the morning of January 16, Rosenthal and Lipper went to Lufkin's office and made him the offer. The purchaser was not identified, but Lufkin was told that Dickinson favored the proposition and that the purchaser was a decent company. However, Lufkin learned that Sun was the purchaser and so advised his partner. He volunteered to transmit the proposal to the Madison Fund and that was agreed to. Lufkin told Rosenthal and Lipper that he could discuss only the 93,000 shares owned by the Scarff partnership, Edward L. Scarff & Co. Lufkin called San Francisco and spoke to Scarff and told him of the proposition. The Scarff partnership, Richard Drake, Charles Willock and Robert Smith had been the 4 principals of a kidney dialysis company that BD took over in 1977.²⁰

        Scarff agreed that the partnership shares should be sold at the $45 price, and promised to get in touch with Willock, Drake and Smith, who lived in Portland, Oregon. He called Willock and Smith and told them he was coming to Portland the next day and that they had the opportunity to dispose of their BD stock at $45 per share. He spoke to Drake the next morning on his arrival in Portland and told him that he could sell his stock for $45 per share and that Sun Oil was the purchaser. He collected the shares of the three, had them sign purchase agreement contracts and sign over their proxies, and then flew to New York to deliver the shares and contracts to Sun.

        At noon on January 16, there was a meeting at Salomon of those persons who were to solicit the institutions. In addition to Rosenthal, Gutfreund, Lipper and Zeller, those present were Morris Offit, a Salomon partner, and Pike Sullivan and Joy Gidley of Eberstadt. A Salomon partner in its Boston office, Joseph Lombard, was tuned into the meeting via telephone. At mid-afternoon, Fogelson, Nathan, and the other lawyers arrived. Each solicitor was given a script and it was dictated over the phone to Lombard. Nathan explained the purpose the script served, and the solicitors were told to specify that only shares held by discretionary accounts were desired. The institutions were then called to determine whether someone would be available after 4:00 P.M. to receive a proposal.

        Nilsen of Chemical Fund was called at 3:45, and was offered the proposal before the offer was made to any other institution. Nilsen accepted the $45 price for the two Eberstadt funds, Chemical and Surveyor, and for Eberstadt's discretionary accounts.

        At 4:00 P.M. all the persons assigned to do the solicitation met in the trading room of Salomon. Each solicitor had a script from which to read, and a lawyer was teamed up with each caller. Shortly after 4:00 P.M. the telephoning began. Some 30 institutions were contacted.²¹ The following institutions accepted the offer and sold their BD shares at $45 per share: American Security and Trust Co. sold 180,700 shares, Bank of America in California sold 143,400 shares, First National Bank of Boston sold 778,731 shares, First Wisconsin Trust Co. sold 96,625 shares, Hartford Fire Insurance Co. in Connecticut sold 99,300 shares, Home Indemnity Co. sold 10,000 shares, Home Insurance Company sold 28,600 shares, Investors Mutual Fund of Minnesota sold 200,000 shares, Investors Variable Fund of Minnesota sold 250,000 shares, Lincoln First Bank of Rochester sold 127,200 shares, Madison Fund sold 135,000 shares, Massachusetts Investors Growth Stock Fund sold 100,000 shares, Central Pension Fund of Massachusetts sold 15,000 shares, Seaboard Surety Co. sold 15,000 shares, State Street Research and Management Corp. of Massachusetts sold 508,300 shares, T. Rowe Price

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Growth Stock Fund of Maryland sold 461,000 shares, T. Rowe Price New Era Fund of Maryland sold 68,000 shares, T. Rowe Price Investment Counsel Account of Maryland sold 672,612 shares, Travellers Fund A for Variable Annuities of Connecticut sold 35,000 shares, the Massachusetts Fund sold 35,000 shares, Union Bank of California sold 1,100 shares, and the State of Wisconsin Investment Board sold 413,700 shares.

        The following rejected the offer for various reasons: United States Trust Co. held 38,930 shares, North Carolina National Bank held 129,800 shares, Bankers Trust Co. held 394,880 shares, First National Bank of Chicago held 2,000 shares, First National Bank of Minneapolis held 2,000 shares. Morgan Guaranty Trust Co. was one of the institutions alerted to have someone available at 4:00 P.M., but it manifested no interest unless the offer was available to all of its accounts.

        The calls from Boston were made only to the Massachusetts institutions, but the calls from Salomon's office in New York were made to cities throughout the United States.

        The callers followed the script. There were slight variations, but each solicitee was told that a non-disclosed purchaser, sometimes identified as in the top fifty of Fortune Magazine's 500, was looking for 20% of BD stock; that no transaction would be final unless 20% of the shares were acquired; that the $45 option was a top final price and the $40 option could be accepted with protection in the event shares were later bought at a higher figure; and that the desired 20% goal was within reach or that the order was filling up fast and a hurried response was essential. Each solicitee was asked to respond within one hour or less, although some were given until the next day. Sun was identified to a few institutions, but to most the purchaser's specific identity was not revealed.

        The institutions solicited had to consult with their in-house officials hurriedly. By 4:45 Kephart advised Burtis that verbal commitments for 3.1 million shares had been obtained. At 5:35 P.M. the total had reached 20%, and Kephart was given authorization to seal the bargain with these institutions that had committed their shares. Those institutions were called again, and Kephart was put on the phone. He identified himself, and after confirming that the solicitees were interested in selling at $45 a share, he accepted on behalf of Sun's subsidiary L.H.I.W. The project had gone so well that Kephart was concerned that the total might far exceed 34%, and he called Sharbaugh and asked whether he was to pro rate the shares if the 34% figure was exceeded. Sharbaugh replied that there would be no problem unless the figure was over 50%. Before retiring for the night on January 16, Sun officials knew that they had obtained their objective in that there were verbal commitments for at least 30% of BD's outstanding shares. Indeed, there was some concern that they might have overreached their goal by a wide margin.

        On January 17 and 18, couriers were dispatched all over the country with Sun's checks to pay for the stock, to obtain signatures or collect prepared purchase agreements, to take physical possession of the stock certificates and to have the solicitees sign powers of attorney to allow Sun to vote their proxies.

        Success had been achieved, but the lawyers were now concerned that the legal risks of the transaction were not entirely past. The solicitors had been in communication with a goodly number of individuals. To a few of these, Sun had been identified, and the solicitees had consulted with others in their organization to determine the institution's reaction to the offer. Thus, there was the likelihood that the transaction had already been traced to Sun, and the news would spread. Sun wanted to have physical possession of the stock certificates it had purchased before its identity was generally revealed. Blum feared that verbal commitments were not binding. The lawyers debated whether it was wiser to adopt a wait and see approach and react to the unfolding events or to seek to halt trading in BD stock on the NYSE. Fogelson and Nathan wanted trading halted.

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        The latter course was approved, but Sun executives forbade disclosure of Sun's identity to NYSE officials. At 9:20 on the morning of January 17, Fogelson called the NYSE and spoke to Richard Grasso, vice president for corporate services. Fogelson identified himself as a "partner of Wachtell, Lipton," said that "a client would be making a Williams Act filing with respect to [BD] by approximately noon the next day," and asked that trading be halted in BD (Tr. 432). Grasso asked Fogelson to identify the client and reveal the purpose of the Williams Act filing, but Fogelson refused to give that information. Grasso told him that the NYSE could not order a halt in trading without further data. Some 15 minutes later Grasso received a second call from Fogelson. The latter said that rumors had come to his attention concerning BD. He repeated his earlier statement about a Williams Act filing the next day and requested that Grasso reconsider his trading halt request. Again Grasso asked Fogelson to identify the client and the nature of the Williams Act filing, and again Fogelson refused to provide the requested response. Grasso said trading could not be halted without further information and that he would have to communicate with BD. Fogelson suggested that he could confirm the rumors by speaking to Rosenthal, and Grasso said he would call him. Grasso then called Rosenthal and told the latter that the information Fogelson supplied him with was insufficient to warrant a halt in trading. Rosenthal said that there would be a material development announced upon the Williams Act filing and recommended that trading be halted.

        Grasso reported the substance of the telephone conversations to the floor governor. Grasso again called Rosenthal, this time from the trading floor, and requested that he be given additional information. Rosenthal gave no additional information but repeated his request that trading be halted pending announcement of a Williams Act filing. Rosenthal told Grasso that "he and [the] senior partners in his firm were staking their credibility on the request that in fact a material development would be announced and therefore their recommendation was that we not trade in the stock" (Tr. 440). Rosenthal named Gutfreund and Salomon as the senior partners to whom he was referring. Grasso talked to the floor manager again, and the opening in trading was delayed. Trading in BD was officially halted at about 10:40 A.M. At 11:00 A.M., Leonard Quigley representing BD called Grasso to ascertain the reason for the halt in trading. BD at first wanted the trading halt lifted but then acquiesced, and on January 19 it requested the trading halt remain in effect. The halt continued until January 23.

        Instead of the next day as promised, Sun's Williams Act filing did not take place until January 19 when its 13(d) was filed. Jerome Lipper, after discussion with his partner and Fogelson, advised Dickinson and Turner to file 13(d) statements. The statements were prepared and filed on January 19, the same day Sun's statements were filed. Dunning made a 13(d) filing on January 24.

        Post Transaction Facts and Issues

        When BD learned of the acquisition, it undertook a major lobbying effort through Congressional and New Jersey state officials and the media to have the Commission and/or the state investigate or bring suit against Sun. Members of Congress wrote to the Commission at BD's request urging an inquiry. The Commission's investigation began almost as soon as Sun's identity became known through its 13(d) filing and was underway before any communication urging it to do so was received from any public official, state or federal.

        Defendants allege, but the Commission denies, that one of its staff lawyers insisted on talking to Lipper even though advised that Lipper had retained counsel. Lipper never spoke to any Commission official, however, except with his attorney present. The Commission also removed some documents from Eberstadt's file without first notifying its lawyers. It made a similar attempt at Salomon, but did not obtain any papers until agreement was reached with

Page 812

counsel. The Commission commenced this proceeding prior to a written submission being made to it by Cleary, Gottlieb, defendants' counsel. The Commission stated that it was prepared to produce for private plaintiffs various of defendants' submissions. On defendants' objection, the matter was deferred. Pursuant to an agreement among counsel to attempt to complete discovery by the end of the summer and ready the case for trial in November, agreement was reached on this issue. Defendants assert that the Commission, in a wrongful exercise of executive privilege, barred their access to various documents. This matter was not, as were a number of other pre-trial discovery questions, brought to the court's attention during the pre-trial proceeding.

        Zeller, Eberstadt, M & D and The Chemical and Surveyor Funds

        Zeller, chief executive officer of Eberstadt and vice chairman of M & D, is chairman of the board of the Chemical Fund and vice chairman of the board of the Surveyor Funds. Robert Porter, vice chairman of Eberstadt and chairman of M & D, is chief executive officer of both Chemical and Surveyor Funds. Clifford Nilsen, vice president of Eberstadt and M & D, is vice president for investments of the Chemical Fund and an inside director of the Surveyor Fund. Robert Newton, a vice president of Eberstadt and executive vice president of M & D, is vice president of both Chemical Fund and Surveyor Fund.

        M & D, as manager and adviser of both Chemical and Surveyor Funds, is paid a management fee and receives a commission on sales of the funds' shares. The latter funds are open end investment companies registered with the Commission under the Investment Company Act of 1940.

        Eberstadt has a policy and operating committee ("P & O") composed of members of the executive committee (Zeller, Porter, Sullivan, Gelis, Dievler), and other members of the board (Wastrum, Schiefferdecker, Nilsen, Newton, Ward). It meets 3 or 4 times a week. All Eberstadt personnel are on the payroll of M & D, but Eberstadt reimburses M & D for the salaries of those who do not spend all their time on M & D affairs. In such cases M & D pays only a portion of the salary. Eberstadt offices are those of M & D and of the two funds in question.

        A majority of the directors of the two funds have no relationship with Eberstadt or M & D and may properly be classified as disinterested or unaffiliated directors within the meaning of Sections 2(a)(3), 2(a)(19), 10(a) and 10(b) of the Investment Company Act of 1940, 15 U.S.C. §§ 80a-2(a)(3), 80a-2(a)(19), 80a-10(a) and 80a-10(b).²² In another connection, the disinterested directors

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of the Chemical Fund have been described by the court as "men of repute in academia, business and the professions." See Tannenbaum v. Zeller, 399 F.Supp. 945, 947 (S.D.N.Y.1975). The disinterested directors of the Surveyor Fund warrant a similar designation. The directors are compensated by the fund they serve and that remuneration, depending upon the burdens carried, ranges from $6,500 to $12,500 per annum. The board meets 6 times a year. Each has a portfolio committee which meets monthly to consider M & D's investment advice, and M & D controls and votes the funds' proxies in any company in which the funds have holdings.

        The general procedure is that an investment suggestion originates with M & D and

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is presented to the portfolio committee of the fund. Whatever action the Committee takes is written up in its minutes and distributed to the entire board, and these minutes are reviewed at the next meeting of the full board. Between meetings of the portfolio committee, M & D may undertake a transaction if approved by a majority of the disinterested members of the portfolio committee. If such a majority is not accessible, the consent of other disinterested directors is sought. Sometimes an investment is made by M & D without committee or board approval, and such approval is subsequently secured.

        As stated above, Eberstadt has had a long and continuing relationship with BD. In 1975, Zeller began the first effort to interest major companies in acquiring a position in BD. He tried to interest Kodak, Procter & Gamble and Merck, without success.

        Zeller reported regularly to the Eberstadt P & O committee on the progress being made in the various discussions regarding the acquisition of Dickinson's stock. In October he tried out the most favored nation clause on Nilsen and obtained a favorable response, and in January when the matter crystalized in the Sun proposal he discussed the specifics with Nilsen. He testified that he wanted to obtain Nilsen's reaction. Throughout, Eberstadt personnel were kept fully abreast of what was going on. On January 11 or 12 when Zeller returned from Radnor, he reported to Nilsen that he thought they had made real progress and that Sun was likely to allow them to go forward. He told Nilsen that he should get started clearing the transactions with the two funds without disclosing Sun's name to the directors and without mentioning that BD stock was involved. It was understood, however, that if a director indicated a need for that information to make a decision, Nilsen could reveal it. In addition Nilsen could tell them that a healthy premium was being offered, that Eberstadt and Salomon were acting as investment bankers and advisers to the purchasers, and that Eberstadt would earn a fee. Zeller also told Schiefferdecker, who was in charge of Eberstadt's discretionary accounts (some of which held BD stock), to coordinate through Nilsen the selling of BD stock in the accounts. In this regard, Schiefferdecker was warned not to sell from the one discretionary account maintained by a New Jersey resident.

        Nilsen made contact with Chemical Fund directors and told them that Eberstadt and Salomon had been asked by an unnamed client to obtain a significant amount of stock in an unnamed company for the purpose of diversification; that Chemical owned a substantial block of this stock; that a decision would probably be reached before the next meeting of the portfolio committee or the board; and that the stock would be sold at a substantial premium over market price and would result in an attractive profit for Chemical Fund. No mention was made of Eberstadt's or Zeller's role in the transaction. Each director gave his approval. Harvey Mole, another disinterested director, testified that Nilsen revealed both the name of the stock and price options after his persistent questioning. Nilsen's recollection is that he was asked by Mr. Mole to divulge the name of the purchaser, but he refused (Tr. 2206).

        John Martin, an unaffiliated director, was asked by the court to give his rationale for considering it an exercise of independent judgment to be asked to give his approval for the sale of an unidentified stock in the fund's portfolio to an unknown purchaser, without his even knowing the price being offered (except that the fund was receiving a substantial premium for the security). Mr. Martin replied "I relied heavily on the M & D organization. They are professionals. They have the highest integrity. I have never had reason to doubt their judgment. They do a thorough job of analysis and research. They do not enter into recommendations lightly. Under the circumstances, I have the highest regard for Mr. Nilsen and his judgment, and I rely heavily on his considered judgment, analysis and assurance on which to base my decision, which was really a concurrence of his judgment" (Tr. 2222-2223).

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        Newton called the Surveyor Fund directors and sought their approval in a similar fashion, without identifying the stock or the purchaser. All the directors contacted approved. This was the first time the directors of either fund had been asked to approve a sale of a portfolio security on a blind basis (Tr. 2208).

        Porter talked to Roger Murray, probably the director of Chemical Fund most knowledgeable in the securities field, about the sale of BD securities on January 11 while they were both in St. Croix attending a meeting of the Investment Company Institute. Porter gave the name of the stock to Murray. Murray had long made evident his dissatisfaction with BD's performance on the stock exchange and had urged that the fund's BD holdings be sold. He had made clear to his fellow board members his negative views on BD, and, prior to 1978, had liquidated BD holdings in any portfolio over which he had final responsibility. Porter asked for Murray's reaction to sale of the BD holdings of both funds at $40, with the possibility of participating in a higher price if one was offered to other shareholders, as opposed to a no recourse final sale at $45. Murray immediately approved accepting the offer at the $45 figure.

        During the acquisition labors that Salomon and Eberstadt undertook, Zeller admits that he had heard Lipper state to officials of the various companies they were attempting to interest in a takeover of BD that Chemical Fund's BD shares would be available at the right price and that it was a bellwether institution. Lipper concedes that Chemical Fund was so described with Zeller present at least to Avon, Monsanto and Sun. Zeller states that on all occasions he made clear that he could not speak for the Chemical Fund and there is support for that in the record, but the officials to whom the disclaimer was made were also left with the impression that Chemical Fund shares were available. There is also credible testimony that Zeller expressly indicated that Chemical Fund shares were a part of the package that Lipper proffered as available for sale.

        On January 6, at Blum's insistence, Zeller called West to obtain the opinion of counsel that there were no problems under the Investment Company Act of 1940 regarding Eberstadt's and Chemical Fund's connection with this transaction. Zeller outlined the transaction without identifying the stock or the prospective purchaser. He told West that he and Salomon were acting as joint advisors to a company that might purchase "a very substantial amount of stock in a series of private transactions," and that large shareholders such as Chemical Fund would be approached. He believes he mentioned Surveyor Fund also while asking whether, in view of the fact that Eberstadt would be paid, the sale of Chemical's and Surveyor's shares would create any problems under the Investment Company Act of 1940. He told West that the two concerns, Salomon and Eberstadt, would get a flat fee if the transaction went through. West said he would think about it, and asked whether he was clear on the Williams Act. Zeller replied that Wachtell, Lipton was advising Salomon and Eberstadt on that (Tr. 2294-2296). West sent the Chemical Fund an opinion letter dated January 13, 1978, stating that it would not be a violation of the Investment Company Act for the fund to sell its shares and that since Eberstadt and Salomon were "acting as agents to the purchaser" pursuant to § 17(e)(1) of the Act, Eberstadt should reimburse Chemical for the part of its fee that could be attributable to the sale of Chemical Fund stock. A similar letter was sent to Surveyor Fund on January 30, 1978. By this time the identity of the purchaser was no longer a secret, and in the Surveyor Fund letter West cited a January 16, 1978 agreement between Eberstadt and Sun, pursuant to which Eberstadt agreed to advise and assist Sun in connection with the anticipated purchases of the BD stock and to render financial advisory and investment banking services.

        Determination

        Threshold Considerations

        Before considering the specific assertions of the parties, several broad threshold issues

Page 816

must be disposed of. Defendants contend that BD lacks standing because it is not an intended beneficiary of the Williams Act and that the individual and class plaintiffs lack standing because they are not parties who were confronted with a decision as to whether or not to sell their shares. For both conclusions they rely on Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977). They question plaintiffs' reliance on GAF v. Milstein, 453 F.2d 709 (2d Cir. 1971), cert. denied, 406 U.S. 910, 92 S.Ct. 1614, 31 L.Ed.2d 821 (1972), and Scott v. Multi-Amp Corp., 386 F.Supp. 44 (D.N.J.1974), as supporting standing to assert a Section 14 claim because those decisions concerned Section 13(d) issues. Three other cases relied upon by plaintiffs, Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937 (2d Cir. 1969); Petersen v. Federated Development Co., 387 F.Supp. 355 (S.D.N.Y.1974) (Bonsal, J.); and Smallwood v. Pearl Brewing Co., 489 F.2d 579 (5th Cir.), cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113 (1974), are said to give no support to plaintiffs' 14(d) thesis because they deal with the standing of shareholder plaintiffs to whom a tender offer was actually made and who, therefore, were actually confronted with a decision whether or not to accept the offer. Since such shareholders are admittedly the especial beneficiaries of the Act, defendants do not question their right to litigate Section 14(d) claims. Defendants contend that the only case relied upon by plaintiffs that is squarely on point is Dyer v. Eastern Trust and Banking Co., 336 F.Supp. 890 (D.Me.1971), and since it predated Chris-Craft, they argue that it has no precedential value. In short, defendants urge that Chris-Craft must be read as a broad rejection of much of the federal security case law that predated it. Under this broad rubric, only the Commission has standing in this litigation, but because of certain asserted affirmative defenses, defendants argue that even the Commission itself must be disqualified from litigating the enforcement proceeding.

        While it now seems clear that a target company such as BD lacks standing to bring a damage action against a purchaser of its stock in a takeover or partial takeover transaction for violations of Sections 14(d) and 14(e) of the Williams Act, Chris-Craft specifically states that its holding is to be read narrowly. The Court said:

        Our holding is a limited one. Whether shareholder-offerees, the class protected by § 14(e), have an implied cause of action under § 14(e) is not before us, and we intimate no view on the matter. Nor is the target corporation's standing to sue an issue in this case. We hold only that a tender offeror, suing in its capacity as a takeover bidder, does not have standing to sue for damages under § 14(e).

        Piper v. Chris-Craft Industries, supra, 430 U.S. at 42 n. 28, 97 S.Ct. at 949. Moreover, in the text of the opinion on the same page the Court cites Judge Friendly's observation in Electronic Specialty Co. v. International Controls Corp., supra, 409 F.2d at 947, that the period prior to consummation of the proposed transaction "is the time when relief can best be given." While the Court's reasoning forecloses a damage suit by BD, and supports an equitable remedy before the takeover or partial takeover has been effectuated, Chris-Craft does not deny standing to the target corporation to seek equitable relief after the transaction has been consummated. No other decision cited to the court or found by the court itself holds that a target company may not seek post-acquisition equitable relief. As BD has pointed out, standing in this regard was assumed Kennecott Copper Corp. v. Curtis-Wright Corp., 584 F.2d 1195 (2d Cir. 1978), and the most recent decision by this court in the field, Brascan Ltd. v. Edper Equities Ltd., 477 F.Supp. 773, (S.D.N.Y. 1979) (Leval, J.), operates on the same assumption. Defendants cite a statement Crane Co. v. American Standard, Inc., 439 F.Supp. 945, 953-54 (S.D.N.Y.1977) (Ward, J.), that Chris-Craft must be viewed as a part of a trend of narrowing and circumscribing plaintiffs' rights under the federal securities laws. Yet, Judge Ward nowhere suggests that every pre-Chris-Craft case favorable to a plaintiff has

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been stripped of precedential value. Indeed, on the contrary, the Crane case construes Chris-Craft as emphasizing that "a private right of action should be implied where necessary to protect public investors." Id. at 951. Accordingly, I hold that BD has standing to seek equitable relief under the circumstances of this case. Indeed, it appears from the manner in which the acquisition was secured that one of Sun's primary objectives was to conclude its maneuver swiftly and secretly enough to prevent BD from seeking relief before the transaction had been consummated when a preliminary injunction might have had a meaningful effect. It would be drastic indeed to hold that Sun's tactics have successfully deprived BD of standing to seek a post-transaction equitable remedy as well.

        Defendants' second contention, that only those shareholders confronted with a tender offer have standing to sue, also has no merit. While Chief Justice Burger stated that "the sole purpose of the Williams Act was the protection of investors who are confronted with a tender offer," Piper v. Chris-Craft Industries, supra, 430 U.S. at 35, 97 S.Ct. at 946, that statement must be read in context. He was making a broad distinction between public investors who were the intended beneficiaries of the Williams Act, and tender offeror contestants whom the Williams Act was designed to regulate.

        At another place in the opinion, the Court states that the class the Williams Act sought to protect "are the shareholders of the target corporation . . ." (emphasis in original). Id. at 39, 97 S.Ct. at 948. The Court was not faced in Chris-Craft, as here, with shareholders of the target corporation who were not given the opportunity to decide whether to tender because they were deliberately bypassed. Moreover, to limit standing only to those to whom an offer was actually made is a clear misreading of the statute. The underlying purposes were to give protection to shareholders in shifts of corporate control, to require prior disclosure if the shift occurred through a tender offer, and to require a post acquisition 13(d) filing if the shift occurred otherwise. All shareholders of the target are within the class the Act was designed to protect.

        It was held in Dyer v. Eastern Trust and Banking Co., supra, that both those who tendered their shares and those who did not tender have standing to sue under Section 14, and the court believes that holding to be sound. To the same effect see Smallwood v. Pearl Brewing Co., supra; Spielman v. General Host Corp., 402 F.Supp. 190, 192 n.2 (S.D.N.Y.1975) (Weinfeld, J.), aff'd, 538 F.2d 39 (2d Cir. 1976); Petersen v. Federated Development Co., supra. Under the circumstances of this case, where an offer to purchase was made only to a select group of shareholders, it would certainly defeat the purpose of the Act to deny standing to the shareholders to whom an offer to purchase was not made. Accordingly, I hold that both the class and individual plaintiffs have standing to bring an action for Section 14(d) and 14(e) violations. In addition, there is no doubt that the target corporation and shareholders have standing to contest violations of Section 13(d). Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 95 S.Ct. 2069, 45 L.Ed.2d 12 (1975); GAF Corp. v. Milstein, supra.

        The next threshold inquiry concerns whether this was a privately negotiated transaction or series of such transactions or a public offering. There can be no disagreement that a purely private transaction is not subject to the pre-filing strictures under Section 14. Senator Williams, in stating the purpose of his proposed amendments, recognized that "[t]he essential problem in transfers of control resulting from cash tender offers or open market or privately negotiated purchases is that persons seeking control in these ways are able to operate in almost complete secrecy concerning their intentions, their commitments and even their identities." 113 Cong.Rec. 855 (1967). He recognized that a privately negotiated purchase may "relate to shifts in corporate control of which investors should be aware," id. at 856, and accepted the fact that a valid case could be made for requiring,

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as with a tender offer, that relevant information be filed before the securities are acquired. Nevertheless, Senator Williams concluded that requiring disclosure only after the privately negotiated or substantial open market transaction has been consummated "avoids upsetting the free and open auction market where buyer and seller normally do not disclose the extent of their interest and avoids prematurely disclosing the terms of privately negotiated transactions." Ibid. These activities are covered by Section 13(d) when 5% of a company's shares are acquired.

        Although the difference between a privately negotiated transaction and a tender offer was alluded to on several occasions in the course of the debate on the Williams Act, see e. g. statement of Manuel F. Cohen, Chairman of the Commission, Full Disclosure of Corporate Equity Ownership and in Corporate Takeover Bids: Hearings on S. 510 Before The Subcomm. on Securities of the Comm. on Banking and Currency, 90th Cong., 1st Sess. 36 (1967); Takeover Bids: Hearings on H.R. 14475 and S. 510 Before the Subcomm. on Commerce and Finance of the Comm. on Interstate and Foreign Commerce, 90th Cong., 2d Sess. 14 (1968), the distinction was never articulated. As Judge Frankel said in Heine v. The Signal Companies, Inc., [1976-77] C.C.H.Fed.Sec.L. Rep. 95,898 at 91, 320 (S.D.N.Y.1977), the "exact line of demarcation between a privately negotiated transaction and a public tender offer has not been . . . identified." Our first responsibility is therefore to distinguish a privately negotiated transaction, which is outside the scope of Section 14 of the Williams Act, from a public transaction, which may not be. While no differentiation between private and public has been spelled out in the Williams Act or the debates leading to its enactment, we have not been cast totally adrift. Some guidelines developed in defining a private offering exemption under Section 4(1) of the Securities Act of 1933, 15 U.S.C. § 77d(1), should be of aid in determining whether this transaction may properly be classified as one privately negotiated or publicly offered.

        Arms-length negotiations between two persons epitomize a private transaction. As the number of actors increases, the identifiable characteristics of a private activity become blurred. "To determine the distinction between `public' and `private' in any particular context, it is essential to examine the circumstances under which the distinction is sought to be established and to consider the purposes sought to be achieved by such distinction." S.E.C. v. Sunbeam Gold Mines Co., 95 F.2d 699, 701 (9th Cir. 1938), quoted with approval S.E.C. v. Ralston Purina Co., 346 U.S. 119, 124, 73 S.Ct. 981, 984, 97 L.Ed. 1494 (1953).

        In the latter case, the Court held that the proper way to interpret the private offering exemption provided under Section 4(1) of the Securities Act of 1933, was in the light of the statutory purpose. "Since exempt transactions are those as to which `there is no practical need for * * * [the bill's] application,' the applicability of § 4(1) should turn on whether the particular class of persons affected need the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction `not involving any public offering.'" S.E.C. v. Ralston Purina Co., supra, 346 U.S. at 125, 73 S.Ct. at 984. The Court held that the statute applied to a public offering whether "few or many," and while it concluded the Commission could rightfully use a "numerical test in deciding when to investigate particular exemption claims," ibid, the Court did not favor embellishing the statute with the addition of a quantitative test as a means for defining a private offering. Finally, the Court stated that those claiming the private offering exemption properly have the burden of persuasion.

        It must be conceded, of course, that Ralston Purina was concerned with the meaning of a private offering exemption under the 1933 Act, and we are faced with an entirely different statutory provision in the case at hand. Yet logic does make its demands. If statutory purpose gives proper definitional aid in distinguishing a public

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from a private offering under the 1933 Act, it would seem to follow that the purposes of the Williams Act would help define the contours of privately negotiated transactions exempted from the reach of Section 14.

        Gloss has been added by case law developments since Ralston Purina. The number and relationship of the offers and the size and manner of the offering are all relevant in determining whether an offering qualifies for private exemption under the 1933 Act. See Doran v. Petroleum Management Corp., 545 F.2d 893, 900 (5th Cir. 1977). An offering to a "diverse and unrelated group . . . would have the appearance of being public," Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 688 (5th Cir. 1971), and each offeree in a private transaction must be afforded the same information that would have been afforded a prospective investor in a public offering, or the offeree must be shown otherwise to have had such information or ready access to it. Woolf v. Cohn, 521 F.2d 591, 613 (5th Cir. 1975). Nor does the "high degree of business or legal sophistication" of the offerees suffice to render a transaction private. Doran v. Petroleum Management Corp., supra, 545 F.2d at 902. Sophistication is not a substitute for access to the kind of information the 1933 Act requires. See Hill York Corp. v. American International Franchises, Inc., supra, 448 F.2d 680, 691. "[T]here must be a sufficient basis of accurate information upon which the sophisticated investor may exercise his skills." Doran v. Petroleum Management Corp., supra, 545 F.2d at 903. As in Ralston Purina, all the above cases place the burden of persuasion on the party who claims that it should not be subjected to the statute's pinch because the activity engaged in was private in nature. Accord, United States v. Custer Channel Wing Corp., 376 F.2d 675 (4th Cir. 1967); Garfield v. Strain, 320 F.2d 116 (10th Cir. 1963); Gilligan, Wills & Co. v. S.E.C., 267 F.2d 461 (2d Cir. 1959). With these guidelines in mind, we now turn to the instant case.

        Here, there were face to face transactions with four personsDickinson, Dunning, Turner and Lufkin. A total of 39 individuals and institutions were solicited with holdings involving a variety of discretionary accounts. There was no common characteristic binding the solicitees together except that they were uniformly shareholders with substantial BD holdings. Among those approaches were highly knowledgeable individuals like Lufkin as well as unsophisticated investors like Smith, Willock and Drake. There were insurance companies, mutual funds, banks, a state entity, partnerships and corporations. The solicitation was nationwide. Some institutions held shares in their own account; others held shares in discretionary and non-discretionary accounts. While the Sun solicitors had been instructed by their lawyers to limit their offer to discretionary accounts, some institutions sold shares in non-discretionary accounts when faced with the demand to respond quickly to the offer lest the opportunity be lost, while others overlooked some of their shares held in discretionary accounts.

        Defendants contend that here, unlike Ralston Purina, the private nature of the transaction cannot be determined by the solicitees' access to information because the distinction between 13(d) and 14(d) turns not on access to information, but on "which types of acquisition transactions should require prior, and which types subsequent, disclosure." (Defendant's Post Trial Brief on Section 14(d) at 39). They argue that a private offering in the 1933 Act and privately negotiated purchases in the Williams Act are not analogous.

        It is true that a private or a public offering of an issuer concerns matters not relevant to considerations which would inform the boundaries separating a tender offer from a privately negotiated transaction. However, the present exercise is not yet an attempt to define a tender offer. Indeed that question need not be reached if what Sun did constituted a "privately negotiated" transaction. In determining the narrow threshold issue under consideration, it is submitted that Ralston Purina and cognate

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cases provide at least some rough guidance.

        It should be noted that Senator Williams proposed exempting privately negotiated transactions from Section 14(d)'s pre-acquisition filing requirements to avoid requiring prematurely the disclosure of the terms of such transactions which the parties involved might prefer be kept secret. None of the solicitees involved here had any concern about any premature disclosure. That was solely Sun's anxiety.

        Since these were undoubtedly not "privately negotiated" transactions in which there was a mutual desire to avoid premature disclosure, the "access to information standard" derived from Ralston Purina and its cognate cases becomes even more relevant. The cases indicate that the supposed sophistication of the solicitees will not suffice to render the transaction private if they are given no information on which to exercise their skills. The procedure employed in this case required a hurried response on the basis of little information other than the price offered. The solicitors had no authorization to engage in negotiations with those they called. Their job was to obtain quick, oral commitments.

        Plaintiffs argued in summation that the defendants chose from the list of shareholders "the ones they knew, they had done business with, hoped to do business with in the future, people they had reason to believe might not have challenged what they were doing." Defendants agree (Defendants' Post Trial Brief on Section 14(d) at 31). However, it is clear on this record that some solicitees were not previously known to defendants. Vickers Guide or some comparable publication was used to identify the institutional holders of BD shares. The information gleaned from these sources, not from Eberstadt or Salomon's private listing, determined who the solicitees were to be.

        Defendants contend that the factors which decide whether a transaction is a "privately negotiated" purchase are the number of shareholders solicited, the way they are located, the publicity or lack thereof before the purchases are consummated and the procedures by which the sales terms are agreed upon and executed (Brief of Defendants on Section 14(d) at 48). They point to similarities between this transaction and those in Kennecott Copper Corp. v. Curtiss Wright Corp., supra. Kennecott, however, does not support defendants' definitional distinctions. The opinion never uses the phrase privately negotiated transaction and never attempts to distinguish a private from a public offering. Moreover, the transactions in Kennecott were in large part effectuated on the floor of the Exchange and it is clear that open market purchases are not subject to Section 14's pre-acquisition filing requirements. That certainly was not the case here.

        This was a well structured, brilliantly conceived, and well executed project. The acquisition itself commenced Saturday, January 14 with the offer to Dickinson and Turner in confidence. Then Sunday, January 15, Dunning was approached, again with a pledge of confidentiality. On Monday morning, January 16, Lufkin was brought in as an insider. On Monday afternoon before the close of the NYSE, calls were made to institutions around the country believed to possess large holdings in BD stock asking each to have someone available to receive an offer after 4:00 P.M., E.S.T., when the NYSE closes for