The opinion of the court was delivered by: CARTER
Status of the Proceedings
This litigation stems from the acquisition by Sun Company, Inc. ("Sun"), a Pennsylvania corporation whose principal business is oil and gas, of roughly 34% Of the stock of Becton, Dickinson & Company ("BD"), a New Jersey corporation which manufactures health care products and medical testing and research equipment. Sun's brilliantly designed, lightning strike took place in January, 1978, and gave rise to seven separate actions which were consolidated for trial. In 78 Civ. 1055, the Securities and Exchange Commission ("Commission") brings an enforcement action against Sun, L.H.I.W., Inc. (an acronym for Lets Hope It Works ), the corporation Sun formed to receive the BD shares; Salomon Brothers ("Salomon"), a New York limited partnership engaged in the investment banking and brokerage business; F. Eberstadt & Co., Inc., ("Eberstadt"), a Delaware corporation engaged in investment banking, institutional stock brokerage and the management of pension funds and advisory accounts and which, along with Salomon, handled the Sun acquisition; F. Eberstadt & Co. Managers & Distributors, Inc. ("M & D"), a Delaware company 75% Owned by Eberstadt and 25% Owned by the estate of Ferdinand Eberstadt,
which manages the two Eberstadt mutual funds involved in this proceeding; Robert Zeller, chief executive officer of Eberstadt and vice chairman of M & D; Fairleigh S. Dickinson, Jr., former chairman of BD and one of its principal stockholders; J.H. Fitzgerald Dunning, a former director and large stockholder in BD; and Kenneth Lipper, a partner in Salomon. The Commission charges the defendants with violating or aiding and abetting the violation of Sections 10(b), 13(d), 14(d) and 14(e) of the Securities Exchange Act of 1934, as amended (15 U.S.C. §§ 78j(b),
); Rules 10b-5 (17 C.F.R. § 240.10b-5)
and 10b-13 (17 C.F.R. §§ 240.13d-1 and 13d-2),
and Regulation 14D (17 C.F.R. § 240.14d-1
and § 240.14d-101
), promulgated thereunder; Sections 17(d) and 17(e) of the Investment Company Act of 1940, as amended (15 U.S.C. §§ 80a-17(d),
); and Rule 17d-1 (17 C.F.R. § 270.17d-1),
In 78 Civ. 539, BD, its officers and several of its shareholders individually and derivatively sue Sun, L.H.I.W., Dickinson, Dunning, Salomon, Eberstadt, Chemical Fund, Inc., and Surveyor Fund, Inc., alleging violations of the Exchange Act similar to those charged in the Commission's case, and in addition, charging Dickinson and Dunning with violations of their fiduciary obligation to BD and its shareholders. The Chemical and Surveyor Funds are open end investment companies managed by M & D and registered with the Commission under the Investment Company Act of 1940.
78 Civ. 284, 78 Civ. 291, 78 Civ. 345, 78 Civ. 1025 and 78 Civ. 1156 are class actions against various combinations of the defendants in the Commission's and BD cases and Ann Dickinson Turner, a daughter of Dickinson and a substantial shareholder of BD stock. The class actions allege violations of Sections 10(b), 13(d), 14(d) and 14(e) of the Exchange Act, Sections 2(L )(1) and 9(b) of the New Jersey Corporation Takeover Bid Disclosure Law, New Jersey Laws of 1977, Chapter 76,
and Rule 390
of the New York Stock Exchange ("NYSE"). The class plaintiffs are all the persons who, as of the close of business January 16, 1978, owned either BD stock or BD 4 1/8 % Convertible debentures due in 1988 (except, of course, defendants and those who sold BD stock to Sun).
All defendants have answered by denying the basic allegations of wrongdoing. All defendants argue that no cause of action has been stated against them, that all plaintiffs except the Commission lack standing and that none of the plaintiffs have been injured. In addition, Sun, Dickinson, Salomon, Eberstadt, M & D, Lipper and Zeller allege that BD and the individual plaintiffs in 78 Civ. 539 come into court with unclean hands because they embarked on a course of untoward conduct designed to bring political and public pressure and disfavor on defendants. In the enforcement proceedings, Salomon, Eberstadt, M & D, Lipper and Zeller charge that the Commission denied defendants procedural due process in flagrant violation of its own rules of procedure and that it brought this enforcement proceeding in response to political pressure generated by BD. Accordingly, all defendants urge dismissal of the complaints.
The defendants opposed class action certification, but their contentions were held to be meritless. Class certification was granted and defined as stated above. See Wellman v. Dickinson, 79 F.R.D. 341 (S.D.N.Y.1978) (Carter, J.). The class plaintiffs waived their jury trial demands and the Commission agreed to have its case consolidated for trial with those of the private parties. A bifurcated trial dealing only with the issues of liability began on November 13, 1978 and ended on December 8. During the trial Dunning reached a settlement with the class plaintiffs. The parties have made an abundance of pre-trial, trial and post-trial submissions with the latter continuing as late as July 1, 1979. Counsel have been scrupulously diligent in bringing to the court's attention any newly decided relevant cases not cited nor discussed in their pre-trial, trial and post-trial briefs and memoranda. Although all but inundated by the deluge of exhibits and filings in these proceedings, the court is appreciative of the parties' diligence in bringing to the court's attention every conceivable document that might possibly be relevant to the decision.
The background and governing facts
in this complex drama embrace personality conflicts, animosity, distrust, and corporate politics, as well as a display of ingenuity and sophistication by brokers, investment bankers and corporate counsel.
Fairleigh S. Dickinson, Jr. was the son of one of the founders of BD. He held the reins of the company from 1948 until 1973. When he became BD chief in 1948, BD was a private family enterprise with gross sales of 10 million dollars annually. When he released the reins of the company in 1973, it was a public company with gross sales of $ 300 million annually. Dickinson loosened his hold on the helm but did not entirely let go. In 1974, he stepped upstairs to become Chairman of the Board, while Wesley Howe became Chief Executive and Marvin Asnes became Chief Operating Officer. Differences between the management team and the chairman became evident in late 1976 when Dickinson threatened to fire Asnes.
Sometime prior to January, 1977, Howe became interested in the acquisition by BD of National Medical Care Corp. Negotiations went well, and BD announced a proposed merger with the company in January, 1977. Without advising the board or management, Dickinson engaged the services of Salomon and Eberstadt to look into the proposal and advise him about it. Dickinson was a personal friend of William Salomon, a senior partner of Salomon, and Eberstadt had been BD's investment banker. Robert Zeller, Eberstadt's chief executive, had arranged the first underwriting in 1962 when BD became a public company, and until 1975 had performed the same function when BD made additional public offerings. In addition, Zeller had advised Dickinson on the handling of some of his personal affairs. Both Salomon and Eberstadt filed negative reports on the National Medical Care proposal. Dickinson sent the Salomon report to BD board members in February, and on March 3 at a meeting of the Executive Committee, the proposal was abandoned.
Intrigue deepened at BD. Howe's secretary, Dorothy Matonti, began listening to telephone conversations that Dickinson's administrative assistant, Adele Piela, had with Jerome Lipper, Dickinson's attorney, and Board members. Matonti copied Piela's shorthand notes and material from Dickinson's appointment book, and Piela's secretary and Dickinson's driver kept Matonti informed of Dickinson's activities. This surveillance was duly recorded in memoranda given to Howe. On March 27, Dickinson held a meeting with Salomon attended by Kenneth Lipper, his brother Jerome Lipper, Dr. Edwards, an employee of BD, and several BD directors. At the meeting the participants discussed the financial community's reaction to changes in BD that Dickinson was contemplating. Dickinson apparently felt he had sufficient power in the company to bring about a change in management. Events, however, were soon to prove him wrong.
In early April, Dickinson, Howe, and Asnes met, presumably to bring their differences into the open and to resolve them. The meeting settled nothing. Howe and Asnes then decided on a show of strength. They canvassed the board, found enough votes to get rid of Dickinson, and on April 18 sent out notices for an April 20 meeting. Jerome Lipper knew the purpose of the meeting but Dickinson did not attend. Whether this was because Dickinson had also counted the votes, we do not know. At any rate, he spent part of the day in Washington, and part in Baltimore with Dunning. Howe prevailed. Dickinson was deposed as chairman and nudged out the back door with the title of Honorary Chairman.
Obviously this must have been a terrible personal blow. Dickinson was now stripped of all power within what he must still have regarded as a family enterprise. On April 21, Dickinson had a meeting at Salomon to secure advice on how to proceed. Richard Rosenthal, John Gutfreund, and Kenneth Lipper of Salomon, two BD directors, Kane and Thompkins, Jerome Lipper and Salomon Brothers counsel, Martin Lipton were in attendance. The meeting centered on BD's trouble and the possibility of restoring Dickinson to power. A lawsuit based on procedural irregularities at the board meeting was ruled out. Nor was a proxy fight considered a viable option when the small percentage of total BD shares Dickinson held was revealed. Although Dickinson and members of his family still held the largest segment of stock in the company, acquisitions, public offerings and the sale of some of their holdings had caused their aggregate portion to be reduced to approximately 5% Of BD's outstanding shares. Discussion then turned to more practical solutions, e.g., for Dickinson to sell his shares on the open market to BD or to a third party, or to bring pressure on management through the outside directors. Dickinson vetoed the idea of selling his stock on the open market since he felt that that course would leave the shareholders of BD saddled with bad management. He accepted two remaining options to vote with outside directors to bring pressure on management and to sell his stock to a company interested in a takeover of BD and engaged Salomon for the latter purpose.
A few days later, on or about April 25, Dickinson advised Zeller that he was asking Salomon to involve Eberstadt in the effort to interest a company in acquiring his stock. Zeller confirmed these arrangements with Gutfreund.
At first, the relationship of Dickinson to Salomon and Zeller as principal and agent or broker for the sale of Dickinson's stock was merely an oral understanding. Events during the summer of 1977, however, caused the parties to alter the arrangement. By that time, there had been merger discussions with Avon Products Co. ("Avon") and American Home Products Corp. ("AHP"), and William LaPorte, chairman of the board of AHP, had met with Howe and Henry Becton, Dickinson's successor as chairman of the board of BD, seeking BD management's approval of an AHP acquisition. Howe was thus aware that Dickinson was seeking a takeover of BD by another company. Joseph Flom, BD counsel, called Lipton and threatened a lawsuit if Dickinson continued to try to secure a buyer for a large percentage of BD stock. Lipton suggested to Salomon that it secure an indemnification from Dickinson. Lipton drafted such a document for Dickinson to sign and sent it to Kenneth Lipper in July. Jerome Lipper and one of the senior partners of Salomon were opposed to the idea, but in late September or October, Flom renewed his threats to Lipton. Lipton again advised Lipper to have Dickinson sign the indemnification. This time Lipper took the document directly to Dickinson. He agreed to sign it, and after Jerome Lipper made some modifications, the revised document was signed by Dickinson and Kenneth Lipper. The letter of indemnification is dated October 12, 1977, and it confirms Dickinson's engagement of Salomon "in connection with seeking an offer for (his) shares" of BD stock. Dickinson agrees to indemnify Salomon against all claims relating to or arising out of the firm's acting on his behalf in securing a buyer for his stock.
From the spring of 1977 forward, Salomon and Eberstadt, particularly Lipper and Zeller, worked zealously to interest a company in acquiring a minority interest or in buying 100% Of BD. Between April 25 and December, 1977, Salomon and Eberstadt arranged meetings with Avon, AHP, Monsanto Corp., ("Monsanto"), Hoffman-LaRoche, Inc. ("Hoffman-LaRoche"), Shering-Plough Corp. ("Shering-Plough"), Squibb Corp. ("Squibb"), and Sun in an effort to interest those institutions in acquiring a position in BD. Dickinson himself participated in these activities until late December when he was hospitalized for about one month. In part, these efforts failed to bear fruit before Sun Company came on the scene because most of the other corporations were not interested in a takeover attempt in the face of hostile management. Since Sun's strategy was to move as quickly as possible, without public notice, the hostility of management was no deterrent.
The campaign to find a company interested in buying Dickinson's stock as part of a BD takeover bid was launched without delay. The first contact was a telephone call to David Mitchell, Chief Executive of Avon, by either Richard Rosenthal or John Gutfreund to indicate Salomon's desire to discuss the BD situation with Avon's representatives. Eberstadt had earlier in the year initiated discussions with Avon about a possible merger with BD. Zeller had arranged a meeting in January, 1977 between Dickinson and Mitchell. Zeller was set to sponsor a meeting between Howe and Asnes and representatives of Avon to secure management's consent to such a merger, but the National Medical Care Corp. issue intervened, and further negotiations aborted.
After speaking to the Salomon representative, Mitchell asked Robert Greenhill, managing director of Morgan Stanley, Avon's investment banker, to meet with Salomon. Greenhill followed through, and a meeting at Salomon was held on April 27. In attendance were Rosenthal, Gutfreund and Lipper of Salomon, John Hogan of Eberstadt, Greenhill and Bradford Evans of Morgan Stanley and Lipton, the attorney. Dickinson was not present. Gutfreund related Dickinson's disenchantment with BD management and his desire to dispose of his BD stock. Gutfreund advised Greenhill that Salomon and Eberstadt were working on Dickinson's behalf and that Dickinson's stock and a block of stock they represented would be useful to Avon in acquiring BD. Gutfreund proposed that Morgan Stanley, Salomon and Eberstadt work together on the matter. Greenhill countered that Morgan Stanley was Avon's exclusive representative. He then asked how much stock they were talking about. The reply was 20%, but on closer questioning, he was advised that they presently controlled 9% Of BD stock and believed 20% Could be delivered. Dickinson's daughter was mentioned. No specific price was discussed except a premium over the market that related to acquisition of a controlling interest. Greenhill inquired whether a group had been formed and whether a form 13(d) had been filed. The reply was negative. He then addressed Lipton and Rosenthal directly, "does this mean that a group has been formed and that a 13(d) (has been) filed . . . ." The response given was "no 13(d) has been filed" (Tr. 1098-99). Greenhill indicated that Avon had no interest in a block of stock unless BD management would be receptive to Avon's acquisition, and that Avon would not proceed unless it could explore with BD management its attitude about the potential combination and the business future of the combined operation.
When the meeting broke up, Greenhill shared a taxi with Lipton and spoke to Lipton about filing a 13(d) statement. Lipton replied that he had only just become involved but would look into the matter. Greenhill spoke to Mitchell the next day to confirm the correctness of the statement he, Greenhill, had made at the meeting that Avon would only be interested in an acquisition with the cooperative participation of BD management, and Mitchell agreed. Greenhill so advised Rosenthal, and that conversation ended the Avon episode.
Lipton does not recall the discussion at the April 27 meeting and during the taxi ride about the group or failure to file a 13(d) form. Sometime after the April 27 meeting, however, Lipton learned that M & D was investment adviser to Chemical Fund which held approximately 500,000 shares of BD stock.
In either May or early June he had Zeller and Lipper meet with him to discuss whether in view of Eberstadt's relationship to Chemical Fund, a 13(d) filing should be made. Zeller advised Lipton that Eberstadt and Chemical Fund were independent of each other; that there was no relationship between Eberstadt's investment banking function and Chemical Fund; that investment decisions for the fund were made by a majority of Chemical Fund's independent or outside directors and that Eberstadt had no authority to make such decisions for the fund. He also advised Lipton that the Chemical Fund was represented by Sullivan & Cromwell and that Stephen West, the partner-in-charge, had reviewed the matter and concluded that no problem existed. West's recollection is not so specific or pointed, and he remembers the discussion with Zeller about a 13(d) filing and group membership in relation to Chemical Fund as occurring after this conversation with Lipton. At any rate, Lipton was familiar with the Tannenbaum v. Zeller litigation
and was personally acquainted with Roger Murray, one of Chemical Fund's outside directors who is very knowledgeable in the securities field. He accepted Zeller's explanation and concluded that all was well and that there was no need to make a 13(d) filing.
With Avon eliminated, Zeller and Lipper in late April and early May sought without success to interest Bristol Myers and Pepsico in the acquisition of BD. Dickinson then decided to take some initiative on his own. On May 10, at William Salomon's suggestion, Dickinson called William LaPorte, Chief Executive of AHP, whom he knew socially and who was then in the Philippines. Dickinson asked LaPorte whether the latter felt a discussion of the association of the two companies, BD and AHP, would be worthwhile. He told LaPorte that Salomon was acting on his behalf and that Kenneth Lipper, a Salomon partner, would be calling him shortly. Lipper did call sometime thereafter. He told LaPorte that Dickinson was seeking a company desirous of merging with BD; that Eberstadt held 500,000 BD shares in Chemical Fund and that these, along with Dickinson's and Dunning's shares were available and would go with the deal; that approximately 2.5 million shares could be acquired, roughly 16-17% Of the total shares; that some 813 shareholders held 17.5 million shares of the 19 million outstanding BD shares, and that in the event LaPorte decided on the acquisition of BD, Dickinson would want to be chairman.
LaPorte met with Dickinson when he returned to New York, about 2 weeks later on May 24, and they discussed the possibility of a merger of the two companies. On May 25, LaPorte met with Zeller, Lipper, Gutfreund and Rosenthal. LaPorte was again advised that they were seeking to sell Dickinson's stock. The meeting bogged down because LaPorte sought to make certain that AHP was not assuming any obligation to pay Eberstadt or Salomon, and throughout LaPorte offered only a very small premium over market price. A flurry of meetings then took place. LaPorte met again with Dickinson along with Dunning and several other BD directors. Dickinson sent his private plane to Baltimore to bring Dunning to this meeting. LaPorte met with Salomon a second time, and he also met with Howe and Becton, but neither manifested interest. He sent letters to each director spelling out AHP's interest and the proposed terms for a merger of the two companies. On June 22, BD's board of directors rejected AHP's proposal and issued a public statement giving notice of its strong desire to remain an independent company. Thereafter, Lipper called LaPorte and sought to persuade him to continue his efforts to acquire an interest in BD despite BD management's hostility. Lipper assured LaPorte that Dickinson would support any effort he made. LaPorte, however, considered the hazards too great to attempt a takeover of BD against hostile management and on June 27 advised Dickinson's representatives that he was withdrawing from the field.
The next corporation Salomon and Eberstadt sought to interest in acquiring BD was Hewlett-Packard, which Salomon contacted in August without success. Later in August, Salomon, subsequently joined by Zeller and Dickinson, began discussions with Monsanto and with John Whitehead, senior partner of Goldman Sachs & Co., investment bankers for Monsanto. On September 20, Lipper had breakfast with Whitehead, luncheon with John Kerley, executive vice president of Monsanto, and that evening hosted a dinner at his apartment to enable John Hanley, Monsanto's chief executive, to meet directly with Dickinson and question him about BD. Beside the three already named, Whitehead and Kerley were present as was Zeller, Jerome Lipper, William Salomon, Mrs. Kenneth Lipper and the Lipper children. This was apparently a long dinner meeting, and Hanley used the occasion to question Dickinson closely about the origin of BD, the nature of its business, recent disagreements between him and management and Dickinson's desire as to the disposition of his own stock. Dickinson indicated that animosity between him and BD management had fueled his determination to sell his shares and that his disenchantment was shared by others whom he felt would also be interested in selling their shares. Dickinson asserted that he and his family held 1,200,000 shares: some shares he owned directly, but others were held in trust. While he could not commit the stock in trust, he expressed reasonable confidence that 1,200,000 shares were available. In addition, Dickinson indicated that friends and associates of his, mentioning Dunning by name, were equally distressed and that their holdings aggregating 1,300,000 shares were also for sale.
Although Whitehead could not recall whether Zeller, Lipper, or Dickinson made any reference to the 500,000 shares of Chemical Fund at the dinner, he came away with the "clear understanding that the 500,000 shares that were owned by Chemical Fund were part of the shares that were being talked about." But Whitehead could not be certain whether that understanding resulted from discussions at the dinner meeting or from what he had learned earlier (Tr. 1171). In the prior weeks either Zeller, Dickinson or Lipper had told him "that there were 500,000 shares owned by Chemical Fund that were for sale" (Tr. 1174). The price defendants suggested to Whitehead was 10% Premium over the market price.
Whitehead had a final meeting in October with Lipper, Zeller, Rosenthal and Lipton. He expressed a desire to talk to BD management before making a decision, but Lipper and Zeller were unwilling to arrange such a meeting. Later in October Monsanto advised Salomon that it had no further interest.
In late October, Zeller attempted to interest Shering-Plough in purchasing an interest in BD. Zeller indicated that the Dickinsons' family-held shares of 1,200,000 were available, plus 400,000 shares controlled by Edward Scarff, and 350,000 shares owned by Dunning. He also represented that there were 500,000 shares held by Eberstadt managed funds, but that their disposition had to be determined by the appropriate people. A number of meetings ensued in which Shering-Plough representatives were told by Zeller that 2,500,000 shares were readily available and that it would not be difficult to proceed from that base to a 20% Acquisition. Shering-Plough decided, however, that it was not interested in attempting a takeover of BD against hostile management, and it removed itself from consideration.
At roughly the same time these negotiations were taking place, Allan Lowenstein, a New Jersey attorney, asked Dickinson's permission to talk to Robert Clark, a personal friend and president of Hoffman-LaRoche, about acquiring an interest in BD. Lowenstein called Clark on November 22. Lowenstein said that Dickinson's interests controlled approximately 15-20% Of all BD shares outstanding. The two had a number of telephone calls culminating in a meeting and luncheon attended by Clark, Lowenstein and Robert Johnson of Loeb Rhoades, Hoffman-LaRoche's investment banker. Lowenstein stated that with the holdings of Dickinson and those in sympathy with him, including Dunning's and Chemical Fund's shares, a 15-20% Position could be purchased, and then the company could proceed to obtain the remaining shares. The conversations seemed to be going well. Johnson had meetings with Salomon, and he was pressured for early action because another company was also interested in a BD takeover. Lowenstein advised Clark that a decision should be made before BD's annual meeting in February because Dickinson was afraid management would put through a charter amendment substantially increasing the authorized capital stock. In mid-December Clark advised Lowenstein that Hoffman-LaRoche could no nothing before March, and because of the February deadline, it removed itself from contention.
Sometime late in October, 1977, Dickinson lunched with Robert Furlaud, chief executive of Squibb, and related to the latter his disenchantment with the state of affairs at BD and his interest in selling his holdings in the company. Furlaud was unenthusiastic but agreed to further discussions. On November 10, Dickinson, Furlaud and George Maginness, a Squibb vice president, lunched together. Dickinson talked of wanting to sell his own BD stock and his family holdings to Squibb. He stated that his financial advisors could give more detailed information. On November 14th Maginness had a meeting at Salomon with Kenneth and Jerome Lipper and Zeller. Kenneth Lipper suggested that BD would be a good investment, that Salomon and Eberstadt could secure up to 20% Of all BD stock for Squibb, and that such an acquisition would provide the base for a possible takeover. He offered to send a further analysis from Salomon. Maginness' reaction was negative but he agreed to give the matter further thought. A few days later Kenneth Lipper called Maginness to inquire whether he had reconsidered. When reminded of his promise to send additional material, Lipper mailed Salomon's calculations to Maginness about one week later. This, however, failed to convince Furlaud or Maginness that the proposition was attractive, and Salomon was so advised.
Harry Sharbaugh, Sun's chief executive, had determined in 1977 that Sun needed to diversify by investing in institutions outside the energy field. Sun sought the acquisition of no less than a 20% Interest and not more than a 50% Interest in 3 or 4 companies over the succeeding two or three years by investing some 300-400 million dollars in each organization. Sun's corporate development committee was given responsibility for developing major acquisition opportunities for Sun. In August, Salomon was engaged to undertake some studies in connection with Sun's diversification program and Horace Kephart, a senior vice president concerned with corporate development and diversification, was given responsibility for dealing with Salomon. Kenneth Lipper was one of the Salomon partners in charge of the Sun account. Thus, the stage was now set for the main event.
Kephart discussed Sun's diversification program with Lipper, and in late November the two met at Salomon. Kephart was given a copy of BD's annual report, and Lipper suggested that Sun might consider BD as an acquisition possibility in its corporate development program. After studying the report, Kephart had further conversations with Lipper about BD. He learned about the rift between Dickinson and management, and about Salomon and Eberstadt's connection to Dickinson. In these discussions Kephart was told that a block of roughly 15% Of BD shares was available, and that this included 1.2 million shares owned by Dickinson, 400,000 shares owned by Lufkin, 500,000 shares owned by Chemical Fund and 300-400,000 shares owned by Dunning. He was also informed that BD was attempting to buy back Dickinson's stock, and that Dickinson had refused but would be willing to sell his shares to a major company. Kephart further learned that BD had publicly announced in June its desire to remain independent and had hired special counsel to assist it in resisting any takeover efforts. Moreover, Lipper told Kephart that a foreign company (Hoffman-LaRoche) and a domestic chemical company (Monsanto) were ready to move to acquire an interest in BD after the first of the year, giving Kephart the impression that speedy action was needed.
In early December, Kephart attended a meeting of Sun's senior executives and mentioned BD as a possible acquisition opportunity. Sun's business analysis group, which was support staff for the corporate development committee, was assigned the task of making a business study of the health care field in general and BD in particular to determine whether an investment in BD would make sound business sense.
On December 20, at Sun's headquarters in Radnor, Pennsylvania, the business analysis group presented its findings and conclusions to Sun's senior executives. Among those in attendance were Sun's two top executives, Sharbaugh and Theodore Burtis, its president. Six other acquisition possibilities were also recommended. There was general agreement that the matter should be explored further. Pursuit of BD as an acquisition possibility was given priority over the six other companies recommended by the business analysis group because Lipper had advised Kephart that "other companies (were) in the process of taking action to acquire" an interest in BD (Tr. 134). Lipper suggested that Sharbaugh call Dickinson personally and make arrangements to meet him. A meeting through Lipper was proposed so that Sharbaugh and Burtis could talk to Dickinson face to face. Such a meeting was first set for December 20 and then cancelled and rescheduled for January 3 or 4. However, Dickinson became ill and required hospitalization, causing the meeting to be cancelled again.
On December 22, Kephart assembled a study team of Sun executives to carry the analysis of the potential BD acquisition to "the next stage of sophistication" (Tr. 168). That is, this group "was to find out more about the health care products industry and (BD) in preparation for future reports to senior management (and) the board" (Tr. 169-170). In short, it was to provide top executives with necessary information to enable them to make an informed determination on whether to acquire an interest in BD.
On December 27, there was a meeting in New York attended by Sun's study team, Salomon, Eberstadt, Arthur Andersen and James Fogelson of Wachtell, Lipton (Salomon counsel), at which possible strategies for acquiring BD were discussed. Partial tender was dismissed as having a limited chance of success, and a friendly takeover bid was ruled out. There was discussion of soliciting individuals and institutions. Kephart was shown a list of available holdings including Dickinson's, Dunning's and Lufkin's. By this time he knew that a large percentage of BD shares were held by institutions, and he was assured that the Chemical Fund's 500,000 shares were available to Sun. Rosenthal proposed a two tier price a higher price with no recourse and a lower figure with a guaranty to make up the difference between the lower price and the highest price eventually paid for any shares acquired. This was the so-called most favored nation clause, and the idea was accepted in principle. It was understood that a premium over the market was a prerequisite.
There was further discussion at Radnor, Pennsylvania on January 3 and 4 by the study team, Sun officials, Salomon, Eberstadt and Fogelson, all of whom were brought together by Kephart in preparation for a presentation on January 5 to Sun's board. Kephart prepared and Sharbaugh signed a personal and confidential letter for study by the board members at the January 5 meeting, which stated that a block of 15% Of the shares of BD was available and an additional 10-20% Could be quickly acquired. Kephart testified at trial that he had counted Dunning's, Lufkin's and Dickinson's in the 15% Calculation. On January 5, Kephart presented the study team's findings to the corporate development committee at a meeting to which members of the board were invited to attend in informal session. The board heard the presentation. It was not asked to vote, but Kephart stated that a decision had to be made within a week. The consensus was that the matter should go forward. On the next day Wachtell, Lipton was employed as Sun's counsel and thereafter, Cleary, Gottlieb, Steen & Hamilton ("Cleary, Gottlieb") was employed by Salomon.
On January 9, there was a meeting of lawyers at Salomon. The lawyers indicated that the law regarding tender offers was still murky and that the concept of a tender offer had not been precisely defined. The lawyers wanted to structure a "privately negotiated" transaction. Fogelson and Charles Nathan of Cleary, Gottlieb felt this required that those solicited be limited in number. One felt that up to 60 solicitees was safe; the other argued for an upper limit of 40, but within those limits the lawyers felt there would be no problem.
Between December 22 and January 13 (when the executive committee authorized the acquisition and the expenditure of up to 350 million dollars), the study group was engaged in the examination of a myriad of alternatives. The study team knew that 10-13% Of BD shares were held by non-management individuals who were willing to sell and that a large percentage of BD stock was in the hands of institutions. The study team concluded that the optimum percentage level for Sun to reach was over 33 1/3 %. At that level, Sun could utilize equity accounting and would have sufficient holdings to have a significant voice in BD's future direction. Even if BD increased the number of authorized shares, Sun's strength could not be diluted enough to frustrate these two objectives. The study team considered it acceptable for Sun to hold 20-30% Of the stock for a short time, but a percentage in excess of 33 1/3 % Was the basic objective.
On January 10 and 11, Kephart and the study team, augmented by Salomon (Rosenthal, Lipper, Gutfreund), Eberstadt (Zeller), Fogelson, Howard Blum, Sun's staff counsel, and Nathan met in Sun's headquarters to devise final recommendations to present to the Sun Board. There was an extended discussion of strategy. Kephart led the discussion, considering (1) open market purchases, (2) a conventional tender offer, and (3) private purchases. In the face of a hostile target, a conventional tender offer was not considered attractive. It was felt that it would lead to competitive bidding which would make the desired acquisition more expensive, and there was certain to be time consuming legal maneuvering to try to thwart the acquisition effort. What was needed was a procedure that would enable the acquisition to be effectuated quickly and put Sun in physical possession of the shares in the shortest possible time. There was a discussion of legal risk, but this was not a concern about the risk of litigation itself since everyone accepted that as inevitable. Rather, the participants were concerned with the chance that Sun's objective would be thwarted in mid-stream by legal maneuvers.
Four possible strategies were listed by Kephart on a blackboard and rated in terms of legal risk, quick control and price: (1) to seek shares sequentially, first from individuals, then from institutions; (2) to seek shares simultaneously from these two groups; (3) to tender immediately; and (4) to contact management.
Simultaneous acquisition was considered the most desirable in terms of quick control and price, although there was a measurable legal risk that the effort would be aborted. Sun was advised by its lawyers that the exact boundary line between a private purchase and a tender offer had not been defined in the law. Nonetheless, the lawyers believed simultaneous purchases from large individual and institutional shareholders, carried out off the market after the New York Stock Exchange had closed and with as much secrecy as possible, constituted the strategy best suited to meet Sun's needs. The tender offer approach was rated best in terms of legal risk, but disadvantageous in terms of price. It would also give BD a wide opportunity to make counter moves. The lawyers felt it necessary to keep the solicitees limited in number in order for the acquisition to be considered a private transaction. There were discussions of the possibility of attaining the objective with purchases from 4 individuals and 6 institutions, but approaching as many as 40 solicitees was discussed. In order to avoid possible infraction of Rule 390, NYSE, the lawyers advised that a Sun official, not Salomon or Eberstadt, had to accept the solicitees' agreement to sell their shares. Also, there was a discussion of the New Jersey Corporation Takeover Bid Disclosure Law, and the lawyers sought to steer clear of that statute.
On January 11, these recommendations were presented to Sun senior officials. On January 13, the executive committee approved the "private transaction" proposal and authorized a $ 350 million expenditure for a 34% Acquisition. Burtis testified that the maximum authorized was 38% Of BD's outstanding shares, but Sharbaugh recalled the upper limit percentage as being 40%-50%. Salomon and Eberstadt were engaged at a fee of $ 350,000 each, conditioned on Sun's acquiring at least 20% Of BD stock, and Sun provided each with a letter of indemnification.
On January 11, Fogelson, Nathan and Blum carefully considered the approach to be made to solicitees. When they learned that the strategy envisioned approaches to a number of individuals and institutions, they initially wanted Rosenthal to make all the solicitations. When he said that was impossible because there were too many solicitees, the lawyers decided on preparing two scripts: one for those soliciting individuals and a second one for those soliciting institutions.
The instructions stressed confidentiality and it was agreed that a lawyer would be at the side of each solicitor to monitor the latter's side of the conversation.
Rosenthal's two tiered price offer with a most favored nation clause was agreed upon. At his suggestion, solicitees were to be offered a top price of $ 45 per share with no recourse or $ 40 per share with the right to receive the highest price subsequently paid to any other solicitee. It was the understanding of Salomon, Sun and Eberstadt that all solicitees would get the benefit of the highest price paid.
Blum advised Rosenthal that the price should be negotiated, not fixed, and that if another price were suggested by solicitees, it should not be rejected but referred back to Sun. He told Rosenthal that there should be no specified time to respond, but Rosenthal said time deadlines would be set within the time frame normally allowable in block trading. Rosenthal was told that the principal was not to be disclosed and that solicitees should be told to keep the matter confidential, lest a 13(d) group develop as a result of leaks.
Kephart advised Lipper on January 13 that the executive committee had given the go ahead sign. He authorized the making of an offer to Dickinson and Dunning prior to January 16. In mid-December, Lipper had sent Dickinson Sun's annual report. Lipper, Zeller and Jerome Lipper arranged to see Dickinson in his hospital room the next day, January 14. Dickinson was told that the matter must be kept confidential and that Sun was the purchaser. After the price options were outlined, Dickinson indicated that he was ready to accept but only if the proposal was presented to Dunning as well. Dickinson chose the $ 45 price and asked that his shares be paid for with a cash down payment and the remainder in installments. He was told that the propriety of the installment payments would have to be referred to the lawyers.
After assuring them that he could vouch for Dunning's discretion, Dickinson called Dunning from his hospital room and spoke to him while Jerome and Kenneth Lipper and Zeller were still present. He told Dunning that Salomon and Eberstadt had brought him an attractive proposal for the sale of his BD stock but "he was conditioning his acceptance" on the same offer being made to Dunning (Tr. 2467). He identified Kenneth Lipper and Zeller to Dunning, indicated that they desired to go to Baltimore to talk to him as soon as possible about the sale of his stock, and requested that Dunning see them the next day. On completing the call, Dickinson advised Zeller and Lipper that Dunning would see them, and they agreed to get to Dunning's home in the early afternoon of January 15. Mrs. Turner then arrived in Dickinson's hospital room, and Zeller and Lipper offered her the same proposition offered to her father. Zeller and Lipper kept their appointment the next day with Dunning and made the proposal to him. Dunning liked the proposition and promised to advise them as soon as he talked to his brothers and to his co-trustee.
Kephart was authorized to go to New York on January 16 to supervise the solicitations, and he was instructed not to deviate from the agreed upon two tier price without getting prior approval from either Burtis or Sharbaugh. Kephart was told that Sun's acceptance should be conditioned on its securing a minimum of 25% Of the total outstanding shares. When Rosenthal learned from Kephart on the morning of January 16, that Sun's minimum was 25%, he argued that it was too high a percentage to work to Sun's advantage. Rosenthal felt that many institutions might turn down the opportunity if Sun's acceptance were conditioned on its obtaining 25%, and he urged a 20% Minimum. Kephart called Burtis and related Rosenthal's concerns to him, and Burtis agreed to the lower percentage.
On the morning of January 16, Rosenthal and Lipper went to Lufkin's office and made him the offer. The purchaser was not identified, but Lufkin was told that Dickinson favored the proposition and that the purchaser was a decent company. However, Lufkin learned that Sun was the purchaser and so advised his partner. He volunteered to transmit the proposal to the Madison Fund and that was agreed to. Lufkin told Rosenthal and Lipper that he could discuss only the 93,000 shares owned by the Scarff partnership, Edward L. Scarff & Co. Lufkin called San Francisco and spoke to Scarff and told him of the proposition. The Scarff partnership, Richard Drake, Charles Willock and Robert Smith had been the 4 principals of a kidney dialysis company that BD took over in 1977.
Scarff agreed that the partnership shares should be sold at the $ 45 price, and promised to get in touch with Willock, Drake and Smith, who lived in Portland, Oregon. He called Willock and Smith and told them he was coming to Portland the next day and that they had the opportunity to dispose of their BD stock at $ 45 per share. He spoke to Drake the next morning on his arrival in Portland and told him that he could sell his stock for $ 45 per share and that Sun Oil was the purchaser. He collected the shares of the three, had them sign purchase agreement contracts and sign over their proxies, and then flew to New York to deliver the shares and contracts to Sun.
At noon on January 16, there was a meeting at Salomon of those persons who were to solicit the institutions. In addition to Rosenthal, Gutfreund, Lipper and Zeller, those present were Morris Offit, a Salomon partner, and Pike Sullivan and Joy Gidley of Eberstadt. A Salomon partner in its Boston office, Joseph Lombard, was tuned into the meeting via telephone. At mid-afternoon, Fogelson, Nathan, and the other lawyers arrived. Each solicitor was given a script and it was dictated over the phone to Lombard. Nathan explained the purpose the script served, and the solicitors were told to specify that only shares held by discretionary accounts were desired. The institutions were then called to determine whether someone would be available after 4:00 P.M. to receive a proposal.
Nilsen of Chemical Fund was called at 3:45, and was offered the proposal before the offer was made to any other institution. Nilsen accepted the $ 45 price for the two Eberstadt funds, Chemical and Surveyor, and for Eberstadt's discretionary accounts.
At 4:00 P.M. all the persons assigned to do the solicitation met in the trading room of Salomon. Each solicitor had a script from which to read, and a lawyer was teamed up with each caller. Shortly after 4:00 P.M. the telephoning began. Some 30 institutions were contacted.
The following institutions accepted the offer and sold their BD shares at $ 45 per share: American Security and Trust Co. sold 180,700 shares, Bank of America in California sold 143,400 shares, First National Bank of Boston sold 778,731 shares, First Wisconsin Trust Co. sold 96,625 shares, Hartford Fire Insurance Co. in Connecticut sold 99,300 shares, Home Indemnity Co. sold 10,000 shares, Home Insurance Company sold 28,600 shares, Investors Mutual Fund of Minnesota sold 200,000 shares, Investors Variable Fund of Minnesota sold 250,000 shares, Lincoln First Bank of Rochester sold 127,200 shares, Madison Fund sold 135,000 shares, Massachusetts Investors Growth Stock Fund sold 100,000 shares, Central Pension Fund of Massachusetts sold 15,000 shares, Seaboard Surety Co. sold 15,000 shares, State Street Research and Management Corp. of Massachusetts sold 508,300 shares, T. Rowe Price Growth Stock Fund of Maryland sold 461,000 shares, T. Rowe Price New Era Fund of Maryland sold 68,000 shares, T. Rowe Price Investment Counsel Account of Maryland sold 672,612 shares, Travellers Fund A for Variable Annuities of Connecticut sold 35,000 shares, the Massachusetts Fund sold 35,000 shares, Union Bank of California sold 1,100 shares, and the State of Wisconsin Investment Board sold 413,700 shares.
The following rejected the offer for various reasons: United States Trust Co. held 38,930 shares, North Carolina National Bank held 129,800 shares, Bankers Trust Co. held 394,880 shares, First National Bank of Chicago held 2,000 shares, First National Bank of Minneapolis held 2,000 shares. Morgan Guaranty Trust Co. was one of the institutions alerted to have someone available at 4:00 P.M., but it manifested no interest unless the offer was available to all of its accounts.
The calls from Boston were made only to the Massachusetts institutions, but the calls from Salomon's office in New York were made to ...