Before Berger, Vice Chancellor.
The opinion of the court was delivered by: Berger
This is the decision on motions to dismiss three separate actions brought by Messrs. Lifshitz, Steiner and Cottle, stockholders of Standard Brands Paint Co. ("Standard") *fn1 Defendants are the company and its nine directors (three of whom are also officers) The complaints all relate to a series of events that began in July, 1987 when Entregrowth International Ltd. ("Entregrowth") made a proposal to acquire Standard. However, the allegations in the three complaints are not entirely the same and plaintiffs' legal theories also differ somewhat. As a result, after describing the factual background, as set forth in Standard's November 27, 1989 Offer to Purchase, I will address the sufficiency of each complaint separately.
Standard, whose principal executive offices are in California, was a Maryland corporation until June, 1987, when it reincorporated in Delaware. The company, together with its subsidiaries, is primarily involved in the retail "do-it-yourself" home decorating business. Prior to the self-tender (described below) , Standard had approximately 11 million shares of stock outstanding, which shares were traded on the New York Stock Exchange at prices ranging from $16.125 to $31.875 during the two years before the self-tender.
As noted above, the company received an acquisition proposal in July, 1987 from Entregrowth, an affiliate of Chase Corporation Ltd. of New Zealand. Entregrowth expressed an interest in buying Standard's outstanding stock for $21.00 in cash and a debenture with a purported value of $7.00. Standard's board rejected the Entregrowth proposal on July 24, 1987, and authorized management to investigate alternatives that would be beneficial to the company and its stockholders. Over the next several months Entregrowth apparently remained interested in acquiring Standard and, in a Schedule 13D filed on October 29, 1987, Entregrowth and related companies reported that they owned 749,300 shares of Standard stock -- approximately 6.7% of the company.
The Standard board was considering various restructuring alternatives during the same time period. At a September 25, 1987 board meeting, the directors discussed a possible restructuring and recapitalization and authorized a committee of independent directors to discuss and assess any employee incentive programs and shareholder rights agreements that would be a part of the restructuring plan. After further meetings of the entire board as well as the independent committee, the board unanimously approved a plan of restructuring and recapitalization that included: (1) a self-tender for 6 million shares of the company's stock; (2) the adoption of a shareholder rights agreement; (3) various employee incentive arrangements including an Employee Stock Purchase Plan available to senior management and a Non-Tender Agreement; and (4) the shifting of retail store locations to concentrate on the most profitable markets. The self-tender, announced on November 10, 1987, was conducted as a dutch auction at a price of $25.00 to $28.00 per share. A dutch auction is a form of tender offer in which the selling stockholders, rather than the buyer, determine the price to be paid for the shares bought. When tendering their shares, stockholders designate the price (here within the $25.00 - $28.00 range) at which they are willing to sell. The company then determines the lowest price at which it will be able to purchase the 6 million shares and buys, on a pro rata basis if necessary, all shares tendered at or below that lowest price. Any shares tendered above that price are excluded.
The Offer to Purchase describes the manner in which shares were to be selected for purchase and states that the market price of Standard's stock following the self-tender was expected to be substantially less than the tender offer price. Accordingly, stockholders were advised that they could "be assured of maximizing the market value of their holdings only by tendering all of their shares at the minimum price of $25.00 per share." Offer to Purchase, at ii, 2, 10 and 11.
Defendants moved to dismiss the three actions on the alternative grounds that the complaints fail to state claims upon which relief may be granted and, in any event, that the purported claims are derivative and plaintiffs have not complied with the requirements of Chancery Court Rule 23.1. Both Lifshitz and Steiner styled their complaints as class actions. Thus, there are no allegations of demand futility and the only issue with respect to the Rule 23.1 argument is whether the claims are individual or derivative. Different issues arise in Cottle's complaint because Cottle purports to bring his claim derivatively and the complaint alleges, alternatively, that demand was made and refused or that demand would have been futile.
The Lifshitz complaint pre-dates the self-tender and addresses only the purported wrongs relating to the Entregrowth proposal. Lifshitz alleges that the director defendants breached their fiduciary duties by (1) failing to give prudent consideration to the Entregrowth proposal; (2) failing to negotiate with Entregrowth or any other potential acquiror; and (3) failing to provide Entregrowth with confidential information that might have supported a higher bid. In essence, Lifshitz is alleging that the directors breached their fiduciary duties by interfering with the stockholders' receipt of a takeover offer from Entregrowth.
Lifshitz' characterization of his claims as individual, rather than derivative, does not make them so. The Court, not the plaintiff, makes this determination based on the nature of the wrong plaintiff alleges in the body of the complaint. Kramer v. Western Pacific Indus., Del. Supr., 546 A.2d 348, 352 (1988). This Court recently reaffirmed that claims of the nature Lifshitz asserts are derivative, not individual. Lewis v. Spencer, et al., Del. Ch., Civil Action No. 8651, Berger, V.C. (October 31, 1989), Mem. Op. at 3-4. In Lewis, a stockholder of Honeywell, Inc. sued that company's chairman for rejecting a takeover proposal from Sperry Corporation. The plaintiff in Lewis, much like Lifshitz, claimed that the chairman failed to give meaningful consideration to the Sperry overture, that this failure was motivated by the chairman's desire to retain his position, and that, had the chairman negotiated with Sperry, "a transaction favorable to stockholders could have been consummated." Lewis, Mem. Op. at 3.
The claims in Lewis were held to be derivative because the alleged wrongs affected all stockholders equally and did not involve any contractual right of the stockholders. See also Sumers v. Beneficial Corp., et al., Del. Ch., Civil Action No. 8788, Hartnett, V. C. (March 9, 1988). The same is true of the allegations in the Lifshitz complaint. As noted earlier, the Lifshitz complaint makes no effort to satisfy the requirements of Rule 23.1. Therefore, having found that the purported claims asserted by Lifshitz are derivative, it follows that the complaint must be dismissed for failure to comply with Rule 23.1.
The Steiner complaint, also alleged to be a class action, focuses almost entirely on Standard's recapitalization plan and defendants' actions in connection with that plan. Steiner alleges that the director defendants breached their fiduciary duties by (1) extending to Standard's stockholders an allegedly coercive tender offer; (2) failing to make full and complete disclosures in the Offer to Purchase; and (3) adopting certain defensive measures in order to entrench themselves in office rather than maximizing stockholder values by negotiating an acquisition of the company.
It is settled law that the entrenchment claims are derivative. See Lewis v. Spencer, Mem. Op. at 3-4; Moran v. Household Int'l, Inc., Del. Ch., 490 A.2d 1059, aff'd, Del. Supr., 500 A.2d 1346 (1985). Defendants argue that Steiner's remaining claims are also derivative. Cf. Kramer v. Western Pacific Indus., 546 A.2d at 352-53 (claims of waste and depression of stock value are derivative). But see Seibert v. Harper & Row, Publishers, Inc., Del. Ch., Civil Action No. 6639, Berger, V. C. (December 5, 1984) (proxy violation claim may be brought in direct action). The Court need not reach this issue, however, since neither the coercion nor the disclosure allegations state a claim upon which relief may be granted.
Steiner alleges that the self-tender was wrongfully coercive because (1) Standard intended to pay the lowest price offered, within the $25.00 - $28.00 range, that would permit it to purchase 6 million shares; (2) the company was not going to buy shares tendered at a higher price; (3) the post-tender market price was predicted to be substantially lower than the range set in the self-tender; and (4) ...