March 22, 1990
MORRIS M. COTTLE, PLAINTIFF,
STANDARD BRANDS PAINT COMPANY, STUART D. BUCHALTER, MARVIN S. WAGER, ERIC BECK, IRWIN R. BUCHALTER, MARVYN CARTON, RICHARD R. LOEFFLER, WAYNE H. FISHER, LINDA J. WACHNER AND GERALD M. LUSHING, DEFENDANTS. WILLIAM STEINER, PLAINTIFF, V. STANDARD BRANDS PAINT COMPANY, STUART D. BUCHALTER, MARVIN S. WAGER, ERIC BECK, IRWIN R. BUCHALTER, MARVYN CARTON, RICHARD R. LOEFFLER, WAYNE H. FISHER, LINDA J. WACHNER AND GERALD M. LUSHING, DEFENDANTS. DANIEL LIFSHITZ, PLAINTIFF, V. STANDARD BRANDS PAINT COMPANY, STUART D. BUCHALTER, MARVIN S. WAGER, ERIC BECK, IRWIN R. BUCHALTER, MARVYN CARTON, RICHARD R. LOEFFLER, WAYNE H. FISHER, LINDA J. WACHNER AND GERALD M. LUSHING, DEFENDANTS
Before Berger, Vice Chancellor.
The opinion of the court was delivered by: Berger
BERGER, VICE CHANCELLOR
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) Standard announced its intention not to pay dividends in the foreseeable future following the self-tender.
A claim for coercion must state that plaintiffs, the tendering stockholders, "were wrongfully induced by some act of the defendants to sell their shares for reasons unrelated to the economic merits of the sale." Ivanhoe Partners v. Newmont Mining Corp., Del. Ch., 533 A.2d 585, 605, aff'd Del. Supr., 535 A.2d 1334 (1987). Thus, a two-tier tender offer in which the buyer plans to freeze out non-tendering stockholders, giving them subordinated securities in the back end, is coercive. Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946, 956 (1985). Similarly, a "tender offer structured so as to afford shareholders no practical choice but to tender for an unfair price" or one at "a fair price, but structured and timed so as to effectively deprive stockholders of the ability to choose a competing offer -- also at a fair price -- that the shareholders might have found preferable" is coercive. Ivanhoe, 533 A.2d at 605 (citations omitted).
Actionable coercion does not exist, however, simply because a tender offer price is too good to pass up. Id. Further, a self-tender offer at a premium above the shares' market price does not appear to be actionably coercive, even if paying that premium may adversely affect the market value of the remaining outstanding shares, provided that the offering materials make full disclosure of such an adverse effect. Eisenberg v. Chicago Milwaukee Corp., Del. Ch., 537 A.2d 1051, 1061-62 (1987).
Standard's self-tender was not a prelude to a forced merger through which minority stockholders were frozen out of their equity positions. Thus, it was not coercive because of any "back end" transaction. Further, this Court sees nothing inherently coercive in the structure of a dutch auction as it was held in this case. unquestionably, the dutch auction format Steiner complains of encouraged those stockholders who wished to maximize the chance that Standard would buy their shares to tender at the low end of the price range, that is, at $25.00. The offering materials, however, stated clearly that Standard probably would not purchase shares tendered at prices in excess of $25.00 and specifically informed stockholders 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. Given those disclosures, the dutch auction did not function much differently from an ordinary tender offer at $25.00.
Steiner argues that Standard's self-tender was coercive because it forced stockholders to tender at an inadequate price to avoid being left with shares worth less than $25.00, as predicted in the offering materials. In Kahn v. United States Sugar Corp., Del. Ch., Civil Action No. 7313, Hartnett, V. C. (December 10, 1985), the Court held to be coercive a highly leveraged tender offer for an unfair price. In Kahn, as here, the stockholders were offered the chance to sell their shares at a price that was both a premium over pre-offer market value and in excess of the predicted post-offer value. Had the tender offer price been fair, such an offer apparently would not have presented a problem. However, because the price was unfair, the Court found the offer in Kahn to be actionably coercive. See Kahn, Mem. op. at 15.
Thus, the pivotal question in analyzing Steiner's claim of coercion is whether Steiner's complaint alleges facts from which this Court may conclude that the price range offered was unfair. Steiner argues that it does by complaining of defendants' July, 1987 rejection of the Entregrowth proposal. Steiner urges this Court to infer, from the rejection of a $21.00 cash, $7.00 securities offer in July, 1987, the unfairness of a $25.00 cash offer in November, 1987. Steiner's own complaint, however, contradicts that inference. It alleges that Standard's stock price during the second and third quarters of 1987 had been above $31.00 per share. Defendants received and rejected Entregrowth's offer during that period. The market price, however, "dropped precipitously during the [October, 1987] stock market crash to $16." Steiner's First Amended Complaint at para. 13. A fair reading of these allegations simply does not support an inference that the self-tender price was unfair. Rather, they demonstrate that conditions had changed dramatically between July and November, 1987. Since I find that Steiner has not adequately alleged any unfairness in the offering price, I also conclude that his complaint fails to state a claim of coercion.
Steiner also claims that defendants breached their duty of candor by omitting material information from the Offer to Purchase. Specifically, Steiner complains that the offering materials failed to disclose that the Special Committee did not have its own financial advisers. In addition, the Offer to Purchase omitted any statement of the directors' opinion as to the fairness of the offer and failed to disclose any recommendation by the board as to whether Standard's stockholders should tender.
The legal standard governing defendants' disclosure obligations is settled. Standard's directors have a duty of candor that requires them to disclose all material or germane information in their possession. Omitted information is material if a reasonable stockholder would consider it important in deciding whether to tender his shares or would view the information as having significantly altered the "total mix" of information available. Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 944 (1985) (citing TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Steiner relies upon Eisenberg in suggesting that defendants must satisfy an even higher disclosure standard where, as here, the disclosures relate to a self-tender offer.
In Eisenberg, this Court noted that the "exacting duty of disclosure imposed upon corporate fiduciaries is even 'more onerous' [in a self-tender] than in a contested offer." Eisenberg, 537 A.2d at 1057. However, as our Supreme Court recently explained, Eisenberg did not adopt a different, and higher, standard of materiality than that announced in Rosenblatt, Barkan v. Amsted Indus., Del. Supr., 567 A.2d 1279, 1288 (1989) (confirming the single standard in the context of a management buy-out) Eisenberg noted the conflict of interest presented by a self-tender. The Supreme Court in Barkan agreed that this Court should be mindful of conflicts faced by fiduciaries, but stated:
A recognition of these dangers does not affect the definition of materiality, however. Thus, if an omission is immaterial, the fact that it was made by a party with some incentive to be less than candid cannot render the omission material.
Id. at 1288.
Applying the Rosenblatt standard to the Steiner disclosure allegations, I find that none of the omissions were material. The first was the failure to disclose that the Special Committee did not retain its own financial advisers. The Offer to Purchase does disclose that two financial advisers were retained by the board, as a whole, and their opinion as to the financial viability of the company after implementation of the recapitalization plan is included in the offering materials. The Special Committee did not retain financial advisers and there is nothing in the Offer to Purchase to suggest that it did. However, Steiner argues that a stockholder may have mistakenly believed that the Special Committee had its own advisers because other special committees sometimes do retain independent experts.
I find this argument unpersuasive. The duty of complete candor cannot possibly mean that companies are required to disclose not only all material existing facts but also the absence of all other relevant facts. Steiner offers no basis for his premise that a stockholder, having been told nothing on this point, would assume that a special committee had retained advisers. Moreover, common sense suggests the opposite. If there is no disclosure as to the existence of financial advisers, the most likely reason is that there are none. In short, I conclude that this non-disclosure was immaterial because a reasonable stockholder would have understood, without being told, that the Special Committee did not retain financial advisers. The omitted information, therefore, would not have significantly altered the total mix of information available to the stockholders.
The two remaining non-disclosures -- as to the fairness of the offer and any recommendation by the board -- are closely related and will be discussed together. First, it is important to note that Steiner does not attack the adequacy of the financial disclosures relating to the recapitalization plan as a whole or the self-tender. Thus, one can assume that the stockholders had the information they needed to evaluate the merits of the self-tender in light of their own particular circumstances. Nonetheless, Steiner argues that it would be important to the stockholders to know whether the directors considered the offer fair and to receive defendants' recommendation whether or not to tender and at what price.
Although the directors' views might have been of interest to the stockholders, I am not satisfied from Steiner's argument that their opinions needed to be disclosed. First, the non-disclosures were not material. The Offer to Purchase states that Standard's directors unanimously approved making the offer after considering that it provided all stockholders the opportunity to sell a portion of their stock at a premium over the market price while retaining an equity interest in the Company. Although no recommendation was made, the stockholders were repeatedly advised that, in light of the anticipated post-tender market price, the stockholders could be assured of maximizing the market value of their holdings only by tendering all of their stock at the minimum price. These disclosures strongly suggest that the directors considered the offer fair, in the sense that it gave the stockholders a chance to receive a premium, and that they recommended all tendering stockholders to tender at the minimum price. Thus, express recommendations or opinions would have added little to the total mix of information presented to the stockholders.
Second, opinions, as opposed to facts, generally need not be disclosed. See Seibert v. Harder & Row, Letter Op. at 15-16. This general principle seems especially appropriate here, where the stockholders were not being eliminated from future equity participation in the company, and the directors, in consequence, were not obligated to offer a "fair" price. Lewis v. Fuqua, Del. Ch., Civil Action No. 6534, Hartnett, V.C. (February 16, 1982), Letter Op. at 7. Finally, it is noteworthy that, under federal law, defendants were expressly permitted to make no recommendation to the stockholders. 17 C.F.R. § 240.14e -2 (1989). Thus, I conclude that the omitted opinions and recommendations did not have to be disclosed regardless of any question of materiality. Steiner's complaint is therefore dismissed for its failure to state a claim upon which relief may be granted.
Cottle's complaint was styled a derivative action. He claims that the board members breached their fiduciary duties by: (1) rejecting the Entregrowth offer; (2) failing to negotiate the acquisition of Standard; (3) enacting defensive measures for entrenchment purposes; and (4) failing to obtain independent financial advice on the fairness of the self-tender offer. In addition, Cottle claims that the directors failed to disclose either the fairness of the offered price range or the directors' reasons for making no recommendation to Standard's stockholders.
As noted in connection with the Lifshitz complaint, claims of improper motivation (entrenchment) or interference with a stockholders' receipt of a takeover bid are derivative. Thus, Cottle may maintain such claims only if (1) a pre-suit demand was wrongly refused; or (2) such demand would have been futile, based upon the particularized allegations in the complaint. Chancery Court Rule 23.1.
Cottle's attorney wrote to the board on September 14, 1987, demanding on Cottle's behalf that the board take a series of actions. The board was instructed, among other things, to offer Entregrowth or other bidders access to confidential information, to refrain from enacting defensive mechanisms that would deter the acquisition of Standard by a third party, and to "ue those responsible if the corporation takes actions contrary to those discussed in this letter." Exhibit A to Cottle Complaint. Cottle offers this as his "demand" letter and argues that the letter together with the company's response satisfy Rule 23.1.
Cottle's "demand refused" argument is deficient in several respects. Pre-suit demand is required in a derivative action to minimize the degree to which the directors' managerial freedom is curtailed. "he demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations." Aronson v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984). It ensures that stockholders exhaust intracorporate remedies before instituting a derivative action, thereby giving the directors the opportunity to pursue the matter on the corporation's behalf. See id. at 811-12.
It follows from the purpose of a demand that there must be an alleged wrong before demand is made. Cf. Brook v. Acme Steel Co., Del. Ch., Civil Action 10,276, Chandler, V. C. (May 11, 1989), Mem. Op. at 6 (noting that, where stockholder's letter antedated alleged wrong, the letter's effectiveness as a demand on the directors was undermined). A demand letter must "identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief." Allison v. General Motors Corp., 604 F. Supp. 1106, 1117 (D. Del.), aff'd without op., 782 F.2d 1026 (3rd Cir. 1985). Here, the stockholder's letter does not identify any act or omission by the Standard directors that is allegedly wrongful. Rather, the letter gives instructions to the directors on how to perform their duties and demands that suit be brought against any unnamed persons who fail to do so. The September 14, 1987 letter is simply too vague and conclusory to satisfy the purposes of the demand requirement.
Even if the letter were deemed an adequate demand, Cottle failed to allege facts to establish that the demand refusal was improper. Plaintiff bears the burden of rebutting the presumption that the directors exercised their sound business judgment in deciding to refuse his demand. Aronson v. Lewis, 473 A.2d at 813 (citing Zapata Corp. v. Maldonado, Del. Supr., 430 A.2d 779, 784 & n. 10 (1981)). Cottle's Third Amended Complaint *fn2 simply ignores this aspect of the "demand refused" requirement.
Alternatively, Cottle alleges and argues that demand was excused. Demand futility is established only where, "taking the well-pleaded facts as true, the allegations [in the complaint] raise a reasonable doubt as to (i) director disinterest or independence or (ii) whether the directors exercised proper business judgment in approving the challenged transaction." Grobow v. Perot, Del. Supr., 539 A.2d 180, 186 (1988) (citing Aronson v. Lewis, 473 A.2d at 814).
Under the first prong of Aronson, Cottle argues that Standard's directors were interested because they "ngaged in a restructuring proposal that the effect of entrenching current management." Cottle's Third Amended Complaint, para. 10. However, a conclusory allegation of entrenchment, such as this one, will not suffice to excuse demand. The complaint must include "particularized facts demonstrating either a financial interest or entrenchment on the part of the . . . directors." Grobow, 539 A.2d at 188. No such particularized facts are included in Cottle's complaint *fn3
Even if there is no directorial interest or lack of independence, demand will be excused under the second prong of Aronson if the facts alleged in a complaint raise a reasonable doubt that the board's actions will be protected by the business judgment rule. Cottle argues that his entrenchment claim is sufficient to raise a reasonable doubt as to the applicability of the business judgment rule. This is but another version of the same argument that has been rejected in the context of director interest. "A plaintiff may not avoid the demand requirement merely by alleging that the challenged transaction has some anti-takeover effect and, therefore, was designed as an entrenchment device." L A Partners L.P. v. Allegis Corp., Del.Ch, Civil Action No. 9033, Berger, V. C. (October 22, 1987), Mem. Op. at 15. Here, unlike in L A Partners, there are no specific factual allegations from which it would be reasonable to infer that the directors' sole or primary purpose was entrenchment. Each aspect of the recapitalization plan that is attacked by Cottle could, at least as easily, serve a valid corporate purpose as an improper purpose, such as entrenchment. Therefore no reasonable doubt is raised as to the business judgment rule's applicability. Thus, I conclude that Cottle's complaint must be dismissed for failure to comply with the requirements of Chancery Court Rule 23.1.
IT IS SO ORDERED.