The Securities and Exchange Commission (SEC) intended Rule 13d-3(a) of the Securities Exchange Act, 17 C.F.R. § 240.13d-3(a), to provide a broad definition of beneficial ownership so as to ensure disclosure from all those persons who have the ability to change or influence control. By stating that a beneficial owner "includes" rather than "means" any person who comes within their criteria, it made plain that the language does not exhaust the circumstances in which one might come within the term.
Plaintiff railroad brought an action against defendants, a first hedge fund, a second fund, two individuals, and others, alleging that defendants failed timely to file a Schedule 13D after forming a group to act with reference to the shares of the railroad and that the Schedule 13D and the proxy statement they filed were false and misleading. Defendants filed counterclaims against the railroad and counterclaim defendant president of the railroad. The first fund created and used total return equity swaps with the purpose and effect of preventing the vesting of beneficial ownership in the first fund as part of a plan or scheme to evade the reporting requirements of § 13(d) of the Securities Exchange Act, 15 U.S.C.S. § 78m(d).
Was the railroad entitled to a permanent injunction restraining future violations of § 13(d)?
The railroad was entitled to a permanent injunction restraining future violations of § 13(d) and the rules thereunder. The counterclaims were dismissed. The court was foreclosed as a matter of law from enjoining defendants from voting the 6.4 percent of the railroad's shares that they acquired between the expiration of the 10 days following the formation of the group and the date of the trial. The court found that the first fund was deemed to be a beneficial owner of the shares held by its counterparties to hedge their short exposures. Defendants formed a group within the meaning of § 13(d) months before they filed the necessary disclosure statement. The Schedule 13D was not materially false. Defendants made no materially misleading statements or omissions in its proxy filings. The individuals were jointly and severally liable for the violations of § 13(d). The railroad's proxy statement was not incomplete and misleading. A threat of irreparable injury was essential to obtain an injunction sterilizing any of defendants' voting rights and the railroad failed to establish such a threat. Finally, a permanent injunction against future § 13(d) violations was appropriate because there was a substantial likelihood of future violations and the legal remedy, if any, would have been inadequate.