The opinion of the court was delivered by: LASKER
In this representative stockholders' action on behalf of Schenley Industries, Inc. ("Schenley") plaintiffs move for a preliminary injunction against the adoption of a plan and agreement of reorganization ("the Plan") the effect of which will be to merge Glen Alden Corporation ("Glen Alden") and Schenley. Plaintiffs are owners of 14% of Schenley's common stock and sue on behalf of a class of minority public holders of Schenley's common and its preferred convertible into common. Glen Alden is the owner of the remaining 86% of Schenley common stock. The Plan provides that each outstanding share of Schenley common, except shares owned by Glen Alden, which will be cancelled, will be converted into $5 in cash and $30 principal amount of a new 7 1/2% Glen Alden subordinated sinking fund debenture due 1985. Plaintiffs contend that the value of this "package" is $26.60 per share. Defendants value it at $29.00 per share.
The proxy statement accompanying the notice of annual meeting of stockholders of Schenley announces that Glen Alden has the necessary voting power to cause the reorganization to be consummated and that it intends to vote in favor of the reorganization.
Plaintiffs predicate jurisdiction on an alleged violation of Section 10(b) of the Securities Exchange Act of 1934 ("the Act"). A pendent claim under state common law is added. Since the facts supporting the pendent claim occurred chronologically earlier than the facts supporting the federal claim, their content and relationship can be better understood by describing the state cause of action first.
A. The pendent third party beneficiary claim:
By agreement dated March 20, 1968, Glen Alden acquired 1,417,689 shares of Schenley common stock from Lewis N. Rosensteil, chief operating officer of Schenley, and six other related sellers. The purchase price was $53.33 1/3 per share. The transaction was at arm's length. The agreement of March 20, 1968 provided that it was "the intention of the parties" that the holders of Schenley common would be afforded an opportunity to sell their shares for a total consideration comparable to or more favorable than the purchase price paid to the Rosensteil group.
Plaintiffs claim that, by virtue of the stock purchase agreement of March 1968, they became third party beneficiaries of Glen Alden's contractual obligation and are now entitled to $54 per share rather than the $26.60 per share which is their valuation of the "package" they would receive under the Plan.
By prospectus of August 8, 1968 (clearly designed to carry out the "intention" clause of the March agreement), Glen Alden offered to purchase the stock of the holders of Schenley common at a formula which produced approximately $53.10 per share. Plaintiffs and the class they represent declined to tender their stock; that is, they refused the offer made by Glen Alden in August 1968. They claim, nevertheless, that, by virtue of the March 1968 agreement, they have a continuing "vested right" as third party beneficiaries of the March 1968 agreement to receive $53 to $54 at the present time.
As a subordinate argument, plaintiffs contend that Glen Alden is estopped from contending that a lesser price per share is fair because, in connection with the August 1968 tender offer, stockholders of Glen Alden sought to enjoin the offer on the ground that it was a waste of Glen Alden's assets, and Glen Alden asserted in that litigation that the price of $53.33 1/3 per common share was fair and reasonable. This argument may be disposed of summarily since, while Glen Alden might be estopped on a showing that the present factual situation is substantially identical to that which existed in 1968, no such showing has been made (other than a conclusory allegation in the complaint), and it is highly doubtful that such a showing can be made.
B. The 10(b)-10b-5 Claim:
The Glen Alden prospectus of August 8, 1968 contained the following paragraph:
"After completion of the Exchange Offer, Glen Alden may (subject to future conditions) make a further tender offer to the remaining holders of Schenley Common Stock or propose to combine Glen Alden and Schenley. In connection with any such further tender offer or combination, the consideration to be received by the holders of Schenley Common Stock who have not accepted the Exchange Offer may be more than, less than, or the same as that provided in the Exchange Offer."
It is claimed that the prospectus falls awry of the requirements of Section 10(b), since neither in this passage or elsewhere did the prospectus "disclose what future conditions would prompt or justify a lesser consideration than that provided in the said Exchange Offer, in view of Glen Alden's obligations under the Rosensteil Stock Purchase Agreement, and in view of the vested third party beneficiary interest therein of plaintiffs and the other members of the class."
It is further argued that the instant Plan, which would result in the conversion of plaintiffs' common stock for a package of cash and debentures valued by them at $26.60 per share, is "unfair to the minority, is designed to injure the minority, and its effect is so grossly unfair to the minority as to be shocking and fraudulent." (Complaint, par. 25).
Finally, in the conclusory language which often characterizes 10b-5 complaints in this court, it is alleged that the Plan "constitutes, and the use by Glen Alden of its majority stockholdings in Schenley and its control and domination of Schenley's Board of Directors to effectuate the same, would constitute an act, practice, and course of business which operates or would operate as a fraud and deceit upon the minority public common stockholders of Schenley, including the plaintiffs, as a class, in connection with the forced sale of their Schenley shares under the proposed merger, in violation of the prohibitions of Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities and Exchange Commission thereunder."
Claiming that they have no rights of appraisal (under Delaware law, which controls as to that issue), plaintiffs argue that they will be irrevocably damaged by the consummation of the Plan, which will require them to accept cash and securities valued by them at $26.60 for each share of common stock ...