Motient Affirmed: Fifth Circuit Holds No Private Cause of Action for Monetary Damages under Section 13(d)
by Keith E. Gottfried & Jane K. Storero

On May 27, the U.S. Court of Appeals for the Fifth Circuit affirmed a decision by the U.S. District Court for the Northern District of Texas in, Motient Corp. v. Dondero et al.,1 holding that there is no private cause of action for monetary damages under Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act).

Section 13(d), which was enacted as part of the Williams Act amendments to the Federal securities laws, imposes disclosure and reporting requirements with respect to attempts to acquire control of publicly-traded companies. The purpose of Section 13(d) is to provide investors with adequate disclosure with respect to the accumulation of blocks of stock representing in excess of 5% of a public company’s registered equity securities. Pursuant to Rule 13d-1, as promulgated by the Securities and Exchange Commission (SEC), under Section 13(d), any person, who acquires, directly or indirectly, beneficial ownership of more than 5% of an issuer’s registered equity securities, is generally required to file with the SEC a statement on Schedule 13D containing information regarding the following: (i) the identity and background of the acquiring person; (ii) the source and amount of funds or other consideration used to purchase the issuer’s securities; (iii) the purpose of the transaction, including any plans or proposals which such person may have to effect a change in the present board of directors or management of the issuer, effect a change in the issuer’s charter or bylaws, impede the acquisition of control of the issuer by any person, liquidate the issuer, sell its assets to or merge it with any other persons, or make any other major change in its business or corporate structure; (iv) the number of shares of the securities which are beneficially owned by such person; and (v) any contracts, arrangements, understandings or relationships with respect to such securities. The SEC’s rules also require that the Schedule 13D be filed no later than 10 days from the time that the acquiring person became the beneficial owner of more than 5% of the issuer’s registered equity securities and that a copy of the Schedule 13D also be sent to the issuer at its principal executive offices.

If any material change occurs in the facts set forth in the Schedule 13D, including, but not limited to, any material increase or decrease in the percentage of the class beneficially owned, the person or persons who were required to file the Schedule 13D are required to promptly file or cause to be filed with the SEC an amendment disclosing that change.(2) Pursuant to Rule 13d-2 of the Exchange Act, an acquisition or disposition of beneficial ownership of securities in an amount equal to 1% or more of the issuer’s registered equity securities is deemed “material” for these purposes; acquisitions or dispositions of less than those amounts may be material, depending upon the facts and circumstances.

Litigation involving Section 13(d) is not uncommon between issuers and activist shareholders, and such litigation, while costly, is one of the various quivers in an issuer’s arsenal that it may utilize in its attempt to defend itself against a contested solicitation brought by a hedge fund or other activist shareholder. The issues that are the subject of Section 13(d) litigation relate to, among others: (i) whether or not the shareholder fully reported its beneficial ownership of the issuer’s shares when it was otherwise required to file a Schedule 13D; (ii) whether or not the shareholder timely filed its Schedule 13D; (iii) whether or not the shareholder engaged in an arrangement to prevent the vesting of beneficial ownership as apart of a plan or scheme to avoid the disclosure that would have otherwise been required under Section 13(d); (iv) whether or not the shareholder is a member of a group that should have its ownership aggregated for purposes of meeting the more than 5% beneficial ownership threshold that triggers the requirement to file a Schedule 13D; (v) whether or not the shareholder has made less than accurate and complete disclosure in its Schedule 13D about its holdings, plans and motivations in violation of Section 13(d); and (vi) whether or not the shareholder has made materially false and/or misleading disclosures in its Schedule 13D.

In recent months, in addition to the Motient case, there have been a number of other relatively high-profile cases brought by issuers alleging various violations of Section 13(d). Among those is the litigation brought by CSX Corp. against The Children’s Investment Fund (TCI) and 3G Capital Partners which relates to a proxy contest brought by TCI against CSX.(3) In the CSX Corp. litigation, CSX alleged that TCI, as the holder of cash-settled total return equity swap (TRS), was the beneficial holder of the CSX stock that is referenced by such TRS and, accordingly, had violated Section 13(d) by not filing a Schedule 13D sooner than it did and, when TCI did eventually file its Schedule 13D, it did not report the CSX shares referenced by the TRS as being beneficially owned by it.(4) In an opinion, issued on June 11, 2008, the Federal District Court for the Southern District of New York, avoided deciding whether the holder of a TRS is the beneficial holder of the stock referenced by the TRS.(5) Instead, the District Court held that TCI was deemed the beneficial owner of the CSX shares referenced by the TRS pursuant to Rule 13d-3(b)(6) of the Exchange Act because it had created and used the TRS with the “purpose and effect of preventing the vesting of beneficial ownership in TCI as part of a plan or scheme to evade the reporting requirements of Section 13(d).”(7) While much of the CSX Corp. decision focuses on the issue of beneficial ownership under Rule 13d-3, the District Court’s decision is also noteworthy for its discussion of the limited nature of the remedies available to an issuer for violations of Section 13(d). The Second Circuit has long held that while an issuer does not have a private cause of action for monetary damages for violations of Section 13(d), an issuer does have a private cause of action and standing to sue for
injunctive relief for such violations.(8) Accordingly, it is not a surprise that CSX, in its complaint against TCI, did not seek monetary damages for violations of Section 13(d), only various forms of injunctive relief.(9) Among the injunctive relief sought by CSX was an order to prevent TCI from voting the CSX shares it had acquired during the time that it was not in compliance with Section 13(d). However, while holding that TCI had violated Section 13(d), the Court concluded that it was foreclosed as a matter of law from enjoining TCI from voting its CSX shares acquired during a time when it was not in compliance with Section 13(d).(10) The Court noted its frustration with its limited ability to order injunctive relief for violations of Section 13(d) and indicated that if it were free to so enjoin TCI from voting its CSX shares, it would have exercised its discretion to do so.(11)

While litigation brought by an issuer in connection with a proxy contest may have a variety of strategic purposes and may seek various forms of relief, typically injunctive, many issuers look to the litigation option as a way to force a resolution of the proxy contest by creating another “battle front” on which to engage the activist shareholder and, accordingly, to increase the cost to the activist shareholder of continuing its proxy contest. Clearly, if the activist shareholder was faced with the prospect of Section 13(d) litigation that, if decided unfavorably, could result in it being forced to pay substantial compensatory, and perhaps punitive, exemplary and/or special, damages, the activist shareholder may be inclined to consider either (i) full and strict compliance with the requirements of Section 13(d), particularly with respect to its completion and timely filing of its Schedule 13D, such that litigation against it is less likely, as least on the basis of a violation of Section 13(d); or (ii) once litigation has been commenced, an early resolution of the proxy contest to forestall a court decision on the issue of damages.

Unfortunately for issuers, Section 13(d) does not provide any express right for issuers, or even the stockholders that Section 13(d) was enacted to protect, to bring a private cause of action seeking monetary damages to redress violations of Section 13(d). Nor is there is an express right for issuers to seek injunctive relief for violations of Section 13(d). Therefore, issuers have, on numerous occasions, sought to have a federal court infer that a private cause of action to seek such remedies exists for violations of Section 13(d). These efforts, at least with respect to the right to seek monetary damages, have generally not been successful. The Federal Circuits, though certainly not all, have been somewhat more receptive to inferring the right of issuers to seek injunctive relief for violations of Section 13(d). The decision of the Fifth Circuit in the Motient case is just the latest decision by a federal court to hold that there is no private cause of action for monetary damages under Section 13(d).

The background of the Motient case is as follows. James Dondero is the majority owner and president of Highland Capital Management, L.P., an investment company that operates through a number of other affiliated entities (Mr. Dondero and the Highland Entities are collectively referred to as “Highland”). On June 10, 2002, Highland filed an initial Schedule 13D indicating that it beneficially owned in excess of 5% of the common stock of Motient Corp., a provider of integrated satellite wireless communications services.12 Between June 2002 and June 2007, Highland filed with the SEC 35 separate amendments to its Schedule 13D with respect to its investment in Motient’s common stock. Highland would also later commence a proxy contest against Motient seeking to replace the entire board of directors and seeking shareholder approval to amend Motient’s bylaws.

In 2005, Motient filed suit against Highland alleging that Highland had filed six Schedule 13D amendments between September and October 2005 that contained materially false, incomplete and misleading information about Motient, its management and its board. Motient alleged that the six Schedule 13D amendments in question included false and misleading statements that were made intentionally, negligently and with reckless disregard for the truth. The company further alleged that these statements were designed to improperly influence the vote by Motient stockholders on a number of corporate transactions and to persuade shareholders to cede control of Motient to Highland. Accordingly, Motient alleged, these statements constituted disguised proxy solicitations in violation of the SEC’s proxy rules. In its suit, Motient sought various forms of injunctive relief as well as monetary damages for alleged violations of
Schedule 13D.

In evaluating Motient’s claim for monetary damages under Section 13(d), and in determining to affirm the decision of the District Court that there is no private right of action for monetary damages under Section 13(d), the Fifth Circuit considered the following:

• Legislative history of Section 13(d) and the
  goals of Congress in enacting Section 13(d)
  as part of the Williams Act: The Fifth Circuit
  observed that “Congress did not enact the
  Act to tip the scales in favor of management
  or its opponents, but to ensure that a public
  shareholder, confronted by a cash tender
  offer for his stock, can obtain adequate information
  about the qualifications and intentions
  of the offering party before responding
  to the offer;”
• Decisions by the other Federal Circuits. The
  Fifth Circuit noted that no other Federal Circuit
  has found a private right of action for
  monetary damages under Section 13(d). In
  addition, the Fifth Circuit observed that the
  Second13 and Eleventh14 Circuits had both
  issued opinions holding that Section 13(d)
  does not provide issuers with a private cause
  of action for monetary damages; and
• Lack of a compelling reason for recognizing
  a private right of action for monetary damages
  under Section 13(d). The Fifth Circuit
  noted that Section 13(d), as enacted as part of
  the Williams Act, was enacted to protect investors,
  not issuers, who are forced to make
  decisions between bidders and management.
  Since Section 18(a)15 of the Exchange Act
  provides an investor with a private cause of
  action for monetary damages resulting from
  material misstatements or omissions made to
  an investor who purchase or sells the security
  and actually relies on that information, the
  Court observed that there was no compelling
  reason for recognizing a private cause of action
  under Section 13(d).

The Fifth Circuit then turned to Motient’s request for injunctive relief. Subsequent to Motient filing its complaint, a number of significant events occurred that the Fifth Circuit found removed any threat of irreparable harm and mooted the case. The corporate transactions that Motient was contemplating and had alleged were being unfairly characterized by Highland in its Schedule 13D Amendments were either competed or abandoned. On July 2, 2006, Motient’s shareholders voted in favor of management’s slate of directors which ended Highland’s proxy fight. In addition, Highland divested itself of its holdings in Motient. Accordingly, the Fifth Circuit did not need to rule on what type of injunctive remedies are appropriate for violations of Section 13(d) and concluded that dismissal of all of the claims for injunctive relief is proper since there was no longer any threat of irreparable harm.

As noted above, the Fifth Circuit’s decision that a private cause of action for monetary damages is not available as a remedy for violations of Section 13(d) is consistent with the rulings of other Federal Circuits. To date, no other Federal Circuit has issued a decision to the contrary effect with respect to the availability of monetary damages. However, on the issue of the availability of injunctive relief for violations of Section 13(d), there is less unanimity among the Federal Circuits. While the Fifth Circuit was able to avoid ruling on the requests for injunctive relief in this case, the it has previously held16 that the right to injunctive relief by a private party asserting a violation of Section 13(d) does exist. At least four other Federal Circuits have held that an issuer has the right to assert a private cause of action for injunctive relief for violations of Section 13(d).(17) However, the Eleventh Circuit, in addition to holding that there is no private cause of action for monetary damages for violations of Section 13(d), has held, in that same case, that neither does an issuer have the right to seek injunctive relief for such violations.(18)

In light of the Fifth Circuit’s holding that there is no private cause of action for monetary damages under Section 13(d), and its consistency with the rulings of its fellow Federal Circuits, it appears likely that monetary damages will continue to be unavailable to issuers as a remedy for violations of Section 13(d) by hedge funds and other activist shareholders. Accordingly, issuers will generally not be able to rely on the threat of costly monetary damages that could result from litigation to bring about a swift conclusion to a proxy contest or other contested solicitation being waged by the investor. While issuers may be able to seek some type of injunctive relief against an activist shareholder for violations of Section 13(d), assuming that the issuer can demonstrate that it would harmed irreparably in the absence of such relief, cases like the recent CSX Corp. decision remind us of how limited such injunctive relief is likely to be.

Notes
1. Motient Corp. v. Dondero et al., N o. 07-10302,(5th Cir. May 27, 2008).
2. Rule 13d-2 under the S ecurities E xchange Act of 1934, as amended.
3. See Complaint of CSX Corp. in CSX Corp. v. The Children’s Investment Fund Management (UK) LLP, et al., N o. 08-Civ. 2764 (S.D.N.Y. filed M arch 17, 2008)
4. See Id.
5. CSX Corp. v. The Children’s Investment Fund Management (UK) LLP, et al., N o. 08 Civ 2764 (LAK) (S.D.N.Y. June 11, 2008).
6. Rule 13d-3(b) of the E xchange Act provides as follows: “Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement, or device with the purpose of effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of section 13(d) or (g) of the Act shall be deemed for purposes of such sections to be the beneficial owner of such security.”
7. See Id. at 72.
8. See GAF Corp. v. Milstein, 453 F.2d 7 09 (2d Cir. 1971), cert. denied 406 U.S. 910 (1972).
9. See Complaint of CSX Corp. in CSX Corp. v. The Children’s Investment Fund Management (UK) LLP, et al., N o. 08-Civ. 2764 (S.D.N.Y. filed M arch 17, 2008), at p 29-30.
10. See Id. at 115.
11. See Id. at 115.
12. In 2 007, M otient changed its name to TerreStar Corp.
13. See H allwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 620 (2d Cir. 2002).
14. See Liberty N at. Ins. H olding Co., v. Charter, 734 F.2d 545, 564 (11th Cir. 1984).
15. Section 18(a) of the E xchange Act: Any person who shall make or cause to be made any statement in any application, report, or document filed pursuant to this title or any rule or regulationthereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 15, which statement was at thetime and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person (not knowing that such statement was false or misleading) who, in reliance upon such statement, shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading. A person seeking to enforce such liability may sue at law or in equity in any court of competent jurisdiction. In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of such suit, and assess reasonable costs, including reasonable attorneys’ fees, against either party litigant.
16. See Gearhart Industries, Inc. v. S mith Intern., Inc., 741 F.2d 707 (5th Cir. 1984).
17. See Chevron Corp. v. Pennzoil Co., 974 F.2d 1156 (9th Cir. 1992); Indiana Nat. Corp. v. Rich, 7 12 F.2d 1180 (7th Cir. 1983); Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216 (4th Cir. 1980), cert. denied, 44 9 U .S. 1101, 101 S .Ct. 896, 6 L.Ed.2d 827 (1981); GAF Corp. v. Milstein, 453 F.2d 7 09 (2d Cir. 1971), cert. denied 4 06 U .S. 910 (192). S ee also CNW Corp. v. Japonica Partners, 874 F.2d 193 (3rd Cir. 1989) and Chromalloy Am. Corp v. Sun Chemical Corp., 6 11 F.2d 24 0 (8th Cir. 1979); and Gen. Aircraft Corp. v. Lampert, 56 F.2d 90 (1st Cir. 1977).
18. See Liberty N ational Insurance H olding Co. v. Charter Co., 734 F.2d 545 (11th Cir. 1984).

The views expressed in this article are the authors’ and do not necessarily represent the views of the partners of Blank Rome LLP or the firm as a whole. This article is intended to provide a general introductory overview of the issues discussed and is not intended to provide a complete analysis of such issues. This article is not intended to provide legal advice or to establish an attorney-client relationship and readers should not act upon the information contained in it without professional counsel. This article may be considered attorney advertising in some jurisdictions. The hiring of an attorney is an important decision that should not be based solely upon advertisements.

About the Author

Barry H. Genkin is a senior partner with the law firm Blank Rome LLP. He also serves as one of the officers of the firm and as a member of its Executive Committee. Mr. Genkin’s practice includes shareholder activism, mergers and acquisitions and corporate governance. Mr. Genkin is a former Special Counsel at the SEC where he handled numerous proxy fights and other contested solicitations. He is available at genkin@blankrome.com. Keith E. Gottfried and Jane K. Storero are Partners at Blank Rome LLP (www. blankrome.com). Mr. Gottfried and Ms. Storero represent public companies in connection with preparing for, and defending against, possible proxy contests, consent solicitations and unsolicited takeover bids. They also assist public companies in assessing their vulnerabilities to activist shareholders and unsolicited takeover bids and in the implementation of various strategies to ameliorate such vulnerabilities. They can be reached at Gottfried@Blankrome.com and Storero@Blankrome.com.*