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In a decision of first impression, the 2nd U.S. Circuit Court of Appeals ruled Thursday that no private damages remedy exists for violations of a federal securities law designed to inform investors about the possibility of a hostile corporate takeover. Writing for a unanimous panel, Judge Guido Calabresi held in Hallwood Realty Partners LP v. Gotham Partners LP, 01-7246, that a failure to comply with � 13(d) of the Securities and Exchange Act did not give rise to a claim for money damages. Rather, the statute provides for injunctive relief only. The law, which was passed in 1968 in response to a spate of hostile takeovers, requires any group that has acquired more than 5 percent of a company’s shares to file a 13D schedule with the company and various regulatory agencies disclosing the name of the group, its activities and its intentions. Shortly after the act was passed, the 2nd Circuit found that targeted companies could sue under � 13(d) for injunctive relief. With the exception of the 11th Circuit, most other circuits have ruled similarly. However, until Thursday’s opinion, the availability of money damages apparently had not been addressed in this or any other circuit court. A number of district courts, including the Southern District of New York, the lower court in this case, have found that such damages are unavailable. In general, the last few years have seen few decisions interpreting takeover law. The 20-page opinion closes one chapter in an ongoing skirmish between Hallwood, a Dallas-based commercial real estate firm, and a group of investors who are purportedly seeking a takeover of the company. The battle is still being fought in a related case pending before the Delaware Supreme Court. Both the New York and Delaware cases arise from events in the early to mid-1990s when several investors began acquiring Hallwood shares. Three of the defendants — Gotham Partners, Interstate Properties and Private Management Group — each acquired more than 5 percent of Hallwood’s outstanding shares and filed separate 13D schedules accordingly. Although each investor said it decided to buy stock in Hallwood on its own, Hallwood claimed that the investors were acting in concert as a 13(d) group with the intent of taking over the company. Typically, the injunctive relief available for a 13(d) violation is weak: The defendant is simply told to file the appropriate disclosures. But according to one lawyer close to the case, such a finding would have cost the defendants millions of dollars because it would have permitted Hallwood to take advantage of a “poison pill” plan that was triggered when a group jointly acquired more than 15 percent of Hallwood’s outstanding stock. Under the plan, the value of the stock would then be significantly diluted. Hallwood filed suit in early 2000 in the U.S. District Court for the Southern District of New York seeking damages and injunctive relief pursuant to � 13(d). Judge Lewis A. Kaplan denied its damages claim, finding that the statute did not provide for such relief. Following a bench trial, Judge Kaplan also dismissed Hallwood’s equitable claims on the grounds that it had not proved the existence of a group of 13(d) investors. Hallwood appealed to the 2nd Circuit, which Thursday affirmed the lower court’s decision. The Delaware action, brought in 1997 in the Court of Chancery by one of Hallwood’s investors, Gotham Partners, accused Hallwood’s general partner and its directors of self-dealing in violation of Hallwood’s partnership agreement and their fiduciary duties. Specifically, Gotham challenged a series of transactions by which the general partner effectively gained control over the company and shielded itself from removal by its partners. In a decision issued last August, Vice Chancellor Leo E. Strine Jr., sided with Gotham, finding that the general partner’s tactics to have been in breach of the partnership agreement, and ordered its directors to pay $3.4 million to the partnership’s investors. However, the chancellor, in Gotham Partners v. Hallwood Realty Partners, 2001 Del. Ch. LEXIS 98 (Del. Ch. Aug. 1, 2001), did not remove them from control of the company, ruling that such a remedy would be too harsh. Gotham appealed the second part of the decision to the Delaware Supreme Court, which heard oral argument en banc last month. The parties are awaiting a decision. Thomas J. McCormack, of Chadbourne & Park represented Hallwood in the New York case. Representing the defendants were Robert J. Giuffra Jr. of Sullivan & Cromwell for Interstate Properties and Steven Roth; Philip H. Schaeffer of White & Case for Gotham; Joseph C. Owens of Lewis, D’Amato, Brisbois & Bisgaard for Private Management Group; and Douglas H. Flaum of Fried, Frank, Harris, Shriver & Jacobson for Hallwood Investors, Liberty Realty Partners and EPO/Liberty Inc.

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