Opinion
01 Civ. 0087 (RO)
January 24, 2001
William J. Snipes, Esq., David Gaukrodger, Esq., Sullivan Cromwell, New York, New York, for plaintiff
Jonathan I. Blackman, Esq., Allyson W. Haynes, Esq., Cleary, Gottlieb, Steen Hamilton, New York, New York, for defendant
OPINION ORDER
Plaintiff First Eagle, a U.S. mutual fund, initiated this action pursuant to the federal securities laws against defendant Bank for International Settlements, an international bank organized by international governmental agreements signed at the Hague in 1930, chartered under the laws of Switzerland and headquartered in Basel, Switzerland. First Eagle now seeks an order temporarily restraining the Bank from completing a buy-back of its rather unique privately-held shares until the Court holds a hearing on its motion for a preliminary injunction.
While the Statutes provide for a "shares" issuance, they are quite unlike "shares" as the United States corporate world knows them. They are very unusual and limited "instruments" as described hereafter.
The Bank is a quasi-governmental entity in that its shares were intended to be and the bulk in fact are owned by a number of different foreign government central banks, and none is publicly traded. The Bank was chartered pursuant to the Hague Agreements of 1930 primarily to handle Germany's World War I reparations payments. Under the original conception, the Bank was to be funded by an issuance of shares to the six central banks of the founding countries, Belgium, France, Germany, Great Britain, Italy and the United States. However, it appears that the central banks of Belgium and France, for whatever reason, did not dedicate assets for that purpose and in the United States, the isolationist policies of post-war American politics led to the rejection of U.S. government funding of this multi-national financial institution. As a result, in those countries, the Bank's shares were put to private investors, whereas in Germany, Great Britain and Italy, the national governments were and are the sole owners of their allocated portions.
Further, the characteristics of the Bank's "stock" are quite unusual and the rights conferred upon shareholders are severely limited as compared to the rights and privileges possessed by an owner of ordinary common stock. The reason for this, aside from the Statutes creating the Bank, is partly attributable to the Bank's role in the international economy. The Bank's basic purpose is the cooperation of central banks and to contribute to global financial stability. It does not have the traditional corporate purpose of maximizing asset value for its shareholders. Although the instrument holders do receive dividends, the by-laws, called the Statutes of the Bank for International Settlements, provide that they have no right to an asset distribution until dissolution of the Bank. nor may they transfer their instruments without the Bank's consent, nor have they voting rights, nor any right of participation in the annual meeting.
Both the instrument issued to the owners and the Statutes explicitly state that ownership of the Bank's instruments is subject to the terms and conditions enumerated in the Statutes. The Statutes, specifically Article 54(1), also contains an arbitration clause which reads: "If any dispute shall arise between the Bank . . . and its shareholders, with regard to the interpretation or application of the Statutes of the Bank, the same shall be referred for final decision to the Tribunal provided for by the Hague Agreement of January, 1930."
On September 11, 2000, the Bank's Board of Directors announced a proposed buy-back of all privately-held shares at a price of CHF (Swiss Francs) 16,000, approximately $10,000 per share according to press reports enclosed with First Eagle's papers. The price per share was determined by valuation methods and on recommendations of J.P. Morgan Cie SA and Arthur Anderson. For whatever reason, First Eagle delayed filing this action alleging violation of the federal securities laws and other related claims until January 5, 2001. On January 8, 2001, the Bank's Board held an Extraordinary General Meeting to amend its Statutes and, under its general amending powers, adopted the buy-back proposal. Pursuant to the amended Statutes, Article 18(a)(1)-(5), the private shares were thereupon cancelled in the Bank's books on January 8, 2001 and each private shareholder received a "statutory right to the payment" of the buy-back price. Subsequently, on January 16, 2001, First Eagle filed an amended complaint together with this application for a temporary restraining order and preliminary injunction to prevent the Bank from "soliciting or accepting the tender of any of the Bank's share certificates from any U.S. resident or citizen." On that date, I heard argument from counsel for both parties, and thereafter, there were further submissions.
First Eagle, owner of 12.5 % of the privately-held instruments, essentially makes two claims. First, it asserts that the Bank's Statutes and general tenets of corporate, contract and property law prohibit a corporation to make non-callable stock suddenly callable or redeemable. Thus, First Eagle contends that the forced withdrawal of private shares is improper and violates U.S. tender offer, registration and anti-fraud rules. Second, First Eagle argues that the Bank is attempting to take the stock from private owners at a price that "grossly undervalues" its worth. First Eagle asserts that the Bank's action violates, among other provisions, Rule 10b-5 in that the buy-out contains false and misleading statements with respect to the value of the Bank's shares.
Approximately 86 % (456, 517) of the Bank's "shares" are owned by foreign government central banks. The remaining roughly 14 % (72, 648) of the total "shares" are held privately in Belgium, France and the United States. First Eagle owns 9,085 of these latter "shares" — that is, 12.5 % of the "shares" held by private owners.
In a post-argument submission, First Eagle further states that "the critical issue on which the TRO motion turns" is whether the Bank has 300 shareholders resident in the United States. Plaintiff contends that if the Bank has 300 holders, the requirement to register the transaction with the SEC has not been met and the disclosure rules set forth in Rule 13e-3 and general anti-fraud provisions apply. First Eagle alleges in its complaint, on information and belief, that the Bank has more than 300 U.S. holders see Pl's Am. Compl. ¶¶ 88, 90, but conceded at argument that it had only found approximately 200 holders. The Bank's counsel represented to the Court that there are fewer than 300 U.S. holders and, subsequently, submitted the declaration of Hermann Greve, Secretary to the Bank's Board of Directors, swearing to the same. First Eagle then provided a declaration from John Bibas, a researcher at an investor communications firm, swearing to the existence of more than 300 U.S. investors. The number of U.S. holders is an issue that I need not resolve for the purposes of this motion in light of my conclusion hereafter.
A party seeking preliminary injunctive relief must demonstrate (1) that it will be irreparably harmed in the absence of an injunction, and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits of the case to make them a fair ground for litigation, and a balance of hardships tipping decidedly in its favor. See Brewer v. W. Irondequoit Cent. Sch. Dist., 212 F.3d 738, 743-744 (2d Cir. 2000). In applying these factors, I assume, without deciding, that the Bank's "stock," with all of its unusual history and characteristics, does come within the definition of a "security" as defined by § 2(1) of the Securities Act and § 3(a)(10) of the Exchange Act. I also assume that this Court may properly exercise personal jurisdiction over the defendant.
At the time of the argument, the Bank had not been served with summons and complaint. In a letter to chambers, defendant's counsel advised that the Bank was served on January 23, 2001. The Bank, at argument, also raised the possibility that the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. § 1602 et seq., may apply since the Bank is more than 50 % owned by foreign government central banks. At this time, I make no finding with respect to these issues.
First Eagle rests its argument with respect to irreparable harm on the Bank's purported violation of the securities laws, such as a failure to file registration statements or other disclosures, see, e.g., Reuters Ltd. v. United Press Int'l. Inc., 903 F.2d 904, 907 (2d Cir. 1990), asserting that, "[s]hareholders will be irreparably harmed if they are required to irrevocably decide whether to tender or to seek legal redress against [the Bank] . . . [.]"
It is undisputed that the Bank had, before the motion was made, cancelled its privately-held shares and provided a statutory right to payment in its corporate books. In dispute is whether the Bank had the authority to take such action. However, there appears no irreparable harm resulting from the buy-back because the owners, identifiable from the corporate records, may contest the Bank's action before the designated arbitrators, which is the mandatory forum under the Statutes. Should the arbitrators determine that the Bank's action was improper, the transaction, with a few strokes of computer keys, can be rescinded and the instruments, with all rights thereunder, returned to their prior owners. Alternatively, should the arbitrators approve the transaction but find that the buy-back price is too low, the former holders can be compensated for the difference. On the other hand, should the arbitrators find that the transaction passes muster and the buy-back price appropriate, the former holders are in no different position than they are now. On this record, therefore, the owners possess an adequate remedy at law and face no irreparable harm.
I also observe that the Bank's counsel provided the Court with letters written by First Eagle's investment manager and adviser, dated September 2000 and addressed to the Bank's General Manager, taking issue with the Bank's proposed buy-back and methods of valuation. First Eagle's delay in seeking relief, certainly as to the fact of the cancellation of the instruments, under these circumstances, further cuts against entry of a temporary restraining order since review of the fair amount payable per share can be easily accomplished before the prescribed arbitration forum.
Further, the balance of hardships does not tip in First Eagle's favor of the sought relief. This is not a class-action. First Eagle does not and cannot speak for all of the former private shareholders affected by this transaction. Were I to grant this extraordinary relief, no other former holder could be paid pursuant to the terms of the buy-back, or know if he or she would be paid, until the resolution of this litigation much as that holder might like to be paid under the current formula. The Bank would be forced to withhold payment from all private shareholders who, at this very moment, have a right under the Statutes to payment. Given this, I need not address the issue of likelihood of success on the merits.
First Eagle's position is further undermined by its willingness and desire to have its own shares purchased in a consensual buy-out transaction. See Pl.'s Am. Compl. ¶¶ 3-7. Plaintiffs only real issue is with the price and method of valuation.
Accordingly, First Eagle's application for a temporary restraining order is denied.
So ordered.