The opinion of the court was delivered by: GOETTEL
After months of extensive motion practice and pretrial maneuvering in this action involving an ongoing struggle for control over Treadway Companies, Inc. ("Treadway"), a trial was held before this Court. The following findings and conclusions have been reached.
The prize involved in the instant action is Treadway, a New Jersey corporation principally engaged in the operation and management of bowling centers, and in the franchising, operation, and management of motor inns. The principal characters involved are, on the one side, the incumbent management of Treadway, lead by the chairman of its board of directors, Daniel Parke Lieblich ("Lieblich"), and on the other side, Care Corporation ("Care"), a Delaware corporation with its principal offices in Michigan which is engaged in the operation of long term health care facilities and in the operation of recreational facilities, including bowling centers. Individual named defendants are: Dr. Robert W. Browne ("Browne"), who is Care's chairman of the board and is also a Treadway director; Philip deJourno ("deJourno"), Care's former president and also a Treadway director; and Daniel Cowin ("Cowin"), formerly a director and paid financial consultant as well as the largest shareholder of Treadway. A late entrant in the dispute (named but not served as a defendant in the counterclaims) is Treadway's "white knight," Fair Lanes, Inc. ("Fair Lanes"), a Maryland corporation engaged in the operation of bowling facilities, restaurants, and real estate.
The case began in January of 1978. At that time Browne approached Chauncy Leake ("Leake"), an investment banker and securities analyst who had assisted Care in its initial public offering and was a member of its original board of directors (which he rejoined in August 1978), and asked him to prepare a study of companies, including Treadway, involved in the bowling industry. In furtherance of this study, Leake suggested that he talk, on Browne's behalf, with Cowin, an investment banker whom he had known professionally since the early 1960's, and whom he knew to be a director of Treadway. (Allegedly, Leake did not know that Cowin was its financial advisor.)
Cowin, by as early as November 1, 1977, (in conjunction with his wife, who held 50,000 shares in her own account) was Treadway's largest shareholder. He did not, however, control the corporation, a fact made clear on December 21, 1977, when his request to the board of directors that he be made chairman was denied (although he was made chairman of the executive committee). Cowin had been a director of Treadway since August 1974. During that time he had also served as financial consultant to the company, a part-time position for which he was paid $ 500 per month until May 1, 1978, at which time his contract, at his request, was extended and his compensation increased to $ 1,000 per month.
Browne, like Leake, knew that Cowin was a director of Treadway, and, in fact, professed to believe that Cowin was the reason for the corporation's success. (Browne also denies knowing, at that time, that Cowin was also the corporation's financial adviser but acknowledges that he learned of this prior to November 1978.) Browne agreed with Leake that talks with Cowin would be useful. Subsequently Leake called and spoke with Cowin in late February and early March 1978, and subsequently met with him. At that meeting Leake told Cowin about Browne and Care, and informed him that Care was considering buying Treadway stock.
Following this meeting, Leake telephoned Browne to let him know that Cowin would be willing to meet with him. The Browne-Cowin meeting was then arranged for March 21, 1978. During the talks (which were also attended by John Bouwer ("Bouwer"), the president of Care's bowling subsidiary Concordia Corp.) Cowin was informed that Care had just started to purchase Treadway stock on the open market, and was asked how Care, which had a considerable amount of cash on hand, could best acquire a "reasonable amount" of Treadway stock. Cowin informed Browne that, while Care could purchase the stock through a tender offer at a premium, it could also buy the same stock on the open market and thereby avoid paying the premium. Cowin, however, also claims he told Browne that he had no interest in selling his own stock.
Leake again met with Cowin on April 5, 1978, and once more discussed the purchase of Treadway stock. Cowin did not inform any one at Treadway about this or any of his prior meetings and contacts with Care. Although all involved parties profess to have failed memories concerning these contacts, contemporaneous documents indicate that they were then thought important by all involved.
Care's first purchases of Treadway stock occurred about the time of these meetings. These purchases were made by Leake, who, although no specific volume or dollar limitation had been placed on his power to buy, realized that he should consult with Care before purchasing blocks costing $ 10,000 or more. Leake was directed to buy near the bid side in order to avoid putting upward pressure on the price of the stock. Leake continued to make such purchases through April.
At the same time as Care's interest in purchasing Treadway stock was developing, Treadway was considering a "spin-off" of its then unprofitable Inns Division. In furtherance of this, a report was prepared by Helmsley-Spear, Inc. on the liquidation value of the inns. This report was discussed by Cowin and Lieblich with representatives of Helmsley-Spear, and was a topic of discussion at the March 8 board meeting of Treadway. Subsequently, on April 7, 1978, Lieblich sent to all directors, including Cowin, a letter marked confidential, stating that the liquidation value of the Inns Division greatly exceeded its going concern value, even though its earnings were improving.
Care's interest in Treadway continued. In April 1978 Bouwer visited all or most of Treadway's inns and all but two of its bowling centers. Thereafter, inquiries were made to Cowin concerning the spin-off, and subsequently Leake and Cowin met on June 6 to discuss the likelihood that the spin-off would actually be carried out.
At this time Care's ownership in Treadway was approaching 5% and as a result Care would soon be required to file a Schedule 13D with the Securities and Exchange Commission ("SEC"). Accordingly, Leake suggested that a meeting between Browne and Lieblich be arranged so that Care could explain its intentions prior to the filing. At the meeting which took place on June 30, 1978, Browne informed Lieblich that Care had bought the shares for investment purposes only. Lieblich asked Browne whether he would be interested in obtaining a position on Treadway's board and Browne said that he would not. Also discussed was the possibility of a merger by the two companies and the sale by Care to Treadway of Care's bowling interests. Both subjects were raised by Lieblich. In a further discussion by telephone on July 12 between Lieblich and Leake, Lieblich renewed his offer to buy Care's bowling concerns. At none of these discussions was any mention made of Cowin's prior contacts with Care, and Leake's notes of his conversation specifically state: "No mention of Cowin."
On July 17, 1978, Care filed its Schedule 13D with the SEC. It indicated that Care then owned 7.16% of Treadway stock and stated that Care's current purpose in obtaining the stock was as an investment.
Meanwhile, the proposed spin-off was moving forward. In furtherance of it, Treadway's SEC counsel, Lawrence Bangser, sent a letter and memorandum, on or about June 23, 1978, to all directors indicating that they should not trade publicly in Treadway stock because of the spin-off. This directive was repeated in a memorandum sent by Bangser on August 22 to the directors stating that, as a necessary requirement for the effectuation of the spin-off, a representation had to be made that they had no present intention to sell their Treadway stock. Soon after, Cowin, Lieblich, and a partner of Bangser discussed this memorandum. Subsequently, on August 24, 1978, Cowin indicated at a meeting of the board of directors that he had no present intention to sell his shares. He made no mention of his contacts with Care. Bangser sent another letter on October 6 to the directors, this time stating that the spin-off was unlikely to get favorable tax treatment unless all the directors signed an Internal Revenue Service ("IRS") intent letter stating that they had no present intention to sell their stock. He also noted that Care was willing to sign such a letter provided that the officers and directors of the company did so.
Cowin's contacts with Care were continuing at this time. Cowin had been invited during the course of his meeting with Browne on March 21, 1978, to visit Care's offices and facilities in Grand Rapids. On September 11, he made the trip, accompanied by Leake, and returned the following day.
Prior to leaving for Grand Rapids, Cowin had informed Lieblich about his impending visit. Lieblich, who was extremely unhappy about this (believing that he should be present at any discussions), called immediately upon Cowin's return to ask about the trip. Cowin reported to him that Care's purpose in buying Treadway stock was purely as an investment and that they were happy with the current management of Treadway. Participants at the Grand Rapids meeting testified that, concerning Treadway, only the proposed spin-off was discussed.
Cowin apparently began to consider the sale of his stock sometime during the summer of 1978. It was not until October, he claims, that he first informed Leake that he was interested in selling his shares, (assuming that Leake would speak with Browne). Cowin represented that he had 175,000 shares (about 14% of Treadway's outstanding stock) for sale, which included shares owned by his wife and by his real estate partner. Leake relayed this information to Care and subsequently met with Cowin, who stated that his price for the sale was either $ 9 a share if paid on a pay-out basis, or some lesser price if paid in cash. Ultimately, Browne and Cowin agreed on a price of $ 9 per share to be paid partly in cash and the rest over a three-year period.
During this period Cowin was refusing to sign the IRS intent letter. Believing that Cowin's refusal jeopardized the proposed spin-off, Lieblich arranged to meet with Cowin on October 18. The meeting did not proceed harmoniously. Lieblich informed Cowin that if he was unhappy with the way the company was being run and wished to sell his stock he should consider selling his shares back to the corporation. Cowin, in turn, told Lieblich that he did not believe that Treadway could afford such a purchase and that he believed there would be a problem in a director, who was also the largest stockholder, making such a sale. Cowin did not reveal to Lieblich that he had already discussed a sale with Care. Nor did he disclose it on October 25, when he met again with Lieblich and some of the other directors, or at a board meeting held the next day. On both the 25th and 26th, however, he did state that the spin-off was no longer a good idea economically and that he no longer favored it. At the October 26 board meeting, Cowin was renominated as a director. The Treadway board subsequently determined that the proposed spin-off was not in the best interests of the corporation and should not be carried out.
On October 30, Care filed its third amended Schedule 13D, stating that it owned 10.18% of Treadway stock and that, although its purpose in acquiring the stock was for investment, Care would consider discussing or consulting with the management of Treadway regarding corporate affairs.
The Cowin-Care stock sale was closed on November 9, 1978. The terms of the three parallel agreements provided for the sale of 175,000 shares (including the shares of Mrs. Cowin
and of the partnership) at $ 9 per share, 20% of which was to be paid in cash upon the settlement, another 20% to be paid on January 15, 1979, and the rest to be paid over the next three years. The future payments were evidenced by notes at 6% interest, all of which were secured by the shares sold and were, except for the last one, non-recourse. The per share present value of the sale has been calculated at $ 8 a share, representing a premium of about 35% over the market price.
Lieblich testified that, if given the chance, Treadway could have afforded to buy the Cowin stock, even at the premium actually paid. He also testified that, had he known that Care was the proposed purchaser and that it was intent on a takeover, he would have hired investment bankers and lawyers to assess the situation. The evidence does not support Lieblich's testimony. In order to have consummated a deal with Cowin, Treadway, with its enormous working capital deficit, would have had to borrow the funds necessary and divert funds needed for capital and operating purposes. Yet, for all this, the only purported benefit to the shareholders would have been an increase in the per share earnings of the company at best a minimal gain.
It is clear that the principal effect of, and the only reason for, a purchase by Treadway of the Cowin stock would have been to enhance the likelihood of incumbent management's retaining control over the corporation. These facts compel the conclusion that the purchase of the Cowin shares by Treadway would not have been in the best interests of its shareholders at that time and should not have been undertaken.
Cowin informed Lieblich about the sale of the 175,000 shares to Care
on November 10, 1978. Displeased by this turn of events, Lieblich asked Cowin what his present intentions were as to staying on the board. Cowin indicated that he would leave it up to the other members. Lieblich, believing that Cowin should not remain a director, thereafter informally polled the board and found that the consensus was that Cowin should not continue as a member. Thereafter, Lieblich informed Browne that the board wanted Cowin removed and asked if he would fill the vacancy. Browne replied that he wanted Cowin to remain on the board. Nevertheless, on or about December 9 or 10, Lieblich called Cowin and stated that, in light of the board's decision, Cowin should remove his name from the proxy materials filed with the SEC. Cowin refused. At a special meeting of the board held on December 19, however, Cowin finally, under pressure, consented to step down.
Care had filed its fourth amended Schedule 13D on November 14, in which it set forth the details of the Cowin transaction and stated it then owned 24.21% of Treadway stock. (By mid-December this figure had reached approximately 26%.) In view of this large interest, Lieblich, at a luncheon meeting with Browne on December 19, inquired whether this might not be a takeover attempt. Browne denied this, saying "I don't even know what a takeover situation is." He also stated that Care's intentions were purely for investment, and that the purchase of Cowin's stock was made so that Care could start equity accounting. In view of all the facts, the Court does not find this claim to be credible. It developed at trial that Cowin and Browne had discussed a possible tender offer on both March 21 and December 19; that Bouwer, in a memorandum of December 14 sent to Browne, had suggested that Treadway might become "the full time job of more than one of (its) top management" and that Care should pursue (its) Treadway investment until (it understood) the management and financial resources it will require to conclude it"; that Care owned 26% of Treadway; that Browne had discussed a tender offer with Cowin's SEC attorney Fred Gerard on December 21, and wrote to Cowin about it again on January 5, 1979; and that Browne had some recollection that Leake might have suggested a merger or tender offer in a conversation with Bouwer. From these facts and others, the Court concludes that, at least by the time of the acquisition of Cowin's stock, Care had decided to seek control of Treadway.
On the evening of December 19, Cowin had Leake and Browne to dinner. Among the topics of discussion there were Cowin's removal from the board, the character of the various directors of Treadway, and the ability of Fred Gerard ("Gerard"), Cowin's attorney, who had accompanied him to the meeting. Subsequently, Cowin provided Browne with Gerard's telephone number, and a meeting was arranged between Browne and Gerard for December 21. Browne also asked Leake to attend this meeting, and explained to him that its purpose was to discuss Treadway-Care relations with Gerard, an attorney who was close to "the Treadway situation."
The next day, Lieblich, on the request of the directors, formally invited Browne to fill the vacancy. Browne stated that he was too busy, but suggested that deJourno be considered. At the annual meeting held on December 20, deJourno was elected a director of Treadway.
Intermittent contacts between Cowin and Browne continued into 1979. As has been previously noted, on January 5 a letter was sent from Browne to Cowin. In it Browne mentioned, among other things, that deJourno would be in New York City on January 11 and would ask Cowin how best to proceed with Lieblich and his "group."
(Browne testified that he assumed "group" meant the board.) In the letter, Browne also mentioned his desire to "get close to (director) Sam Dobrow and whoever (sic) else you think appropriate." Browne further informed Cowin that he had spoken to Gerard and that Gerard had "painted a black picture regarding a tender offer just yet," a statement which Browne attempted to explain at trial by ...