The opinion of the court was delivered by: KRAM
MEMORANDUM OPINION AND ORDER
SHIRLEY WOHL KRAM, U.S.D.J.
This is a case in which each of the relevant actors asserts that it is truly concerned with furthering the interests of a takeover target's shareholders. The hostile tender offeror argues that it is concerned with giving the target's shareholders the highest price for their equity. The "white-knight" argues that it has secured, for its own benefit, a lock-up option for two of the target's most valuable divisions in order to create additional value for the target's shareholders. For their part, the senior members of the target's management, some of whom may be equity participants in the surviving entity of a leveraged buy-out transaction, argue that they were also concerned with securing the greatest value for the target's shareholders. Similarly, the financial and legal advisors on all sides, who have already received or will receive substantial fees, assert that they too acted to secure the highest value for the target's shareholders. Finally, members of the target's board of directors, who authorized the payment of enormous fees and granted certain lock-up options, assert that they acted to secure the highest possible price for the target's shareholders. Apparently, the target's shareholders disagree with at least some of the foregoing.
Some would consider this scenario to be the free market place and the forces of competition operating at their best; others take serious issue with this state of affairs.
The current state of affairs, and the appropriate role for this Court to play in the instant drama, was recently aptly summarized by the Second Circuit, which stated:
Contests for corporate control have become ever more frequent phenomena on the American business scene. Waged with the intensity of military campaigns and the weaponry of seemingly bottomless bankrolls, these battles determine the destinies of large and shall corporations alike. Elaborate strategies and ingenious tactics have been developed both to facilitate takeover attempts and to defend against them. Skirmishes are fought in company boardrooms, in shareholders' meetings, and with increasing regularity, in the courts.
The efforts of targeted management to resist acquisitive moves, and the means they employ, have been alternatively praised and damned. Proponents of corporate "free trade" argue that defensive techniques permit managers to entrench themselves and thus avoid accountability for their performance, at the expense of shareholders who are denied the opportunity to maximize their investment in sought-after corporations. Opponents contend that takeover struggles squander enormous capital resources which could better be spent to improve industrial productivity and to develop and commercialize new technologies.
When these battles for corporate dominance spawn legal controversies, the judicial role is neither to displace the judgment of the participants nor to predetermine the outcome. Rather, the responsibility of the court is to insure that rules designed to safeguard the fairness of the takeover process be enforced. Our most important duty is to protect the fundamental structure of corporate governance. While the day-to-day affairs of a company are to be managed by its officers under the supervision of directors, decisions affecting a corporation's ultimate destiny are for the shareholders to make in accordance with democratic procedures.
Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 258 (2d Cir. 1984) (footnotes omitted).
Amid the unfolding drama outlined above, plaintiffs in the instant consolidated actions seek a preliminary injunction pursuant to Fed. R. Civ. P. 65(a).
The following constitutes the Court's findings of fact and conclusions of law.
Hanson Trust PLC is a corporation organized under the laws of the United Kingdom. HSCM Industries Inc. is a Delaware corporation and an indirect wholly owned subsidiary of Hanson Trust PLC. Hanson Holdings Netherland, B.V. is a limited liability company incorporated under the laws of the Kingdom of the Netherlands, and is an indirect wholly owned subsidiary of Hanson Trust PLC. HMAC Investments Inc. is also a Delaware corporation and is a wholly owned subsidiary of Hanson Trust PLC. Hanson Trust PLC, HSCM Industries Inc., Hanson Holdings Netherlands B.V. and HMAC Investments Inc. (hereinafter collectively referred to as "Hanson") are the plaintiffs in three separate actions which have been consolidated for the purposes of the instant preliminary injunction motion.
Hanson filed its initial complaint on September 20, 1985.
That complaint named SCM Corporation ("SCM") and its twelve directors as defendants. Subsequently, Hanson commenced a second action against Manufacturers Hanover Trust Company ("Manufacturers Hanover"). Manufacturers Hanover is the escrow agent for certain agreements to which SCM is a party. Hanson commenced a third action against various entities which are all related to Merrill Lynch, Pierce, Fenner & Smith Incorporated in some manner. These entities are hereinafter collectively referred to as "Merrill Lynch". The Prudential Insurance Company of America was Merrill Lynch's partner in the LBO offers made to SCM, and in certain "lock-up" options granted to Merrill Lynch.
In its initial complaint, Hanson alleged that SCM and its twelve directors had committed several violations of the federal securities laws, and that the directors had breached their fiduciary duties to SCM and SCM shareholders. This complaint also alleged that the SCM directors had committed a "waste" of corporate assets. In addition, the complaint alleged violations of N.Y. Bus. Corp. Law §§ 717, 720 and 909. Hanson alleges that Merrill Lynch aided and abetted SCM and its directors in the foregoing violations of law, and that Merrill Lynch conspired with SCM and its directors to commit the foregoing violations. As for Manufacturers Hanover, Hanson seeks to enjoin it from executing various allegedly unlawful escrow agreements for which it is the escrow agent.
The instant dispute arises out of a battle for control of SCM between Hanson and Merrill Lynch. On August 21, 1985, Hanson announced that it would commence an all cash tender offer for any and all shares of SCM's common stock. This offer was for any and all shares of SCM's common stock at a price of $60.00 per share.
On September 3, 1985, the SCM Board of Directors and Merrill Lynch reached a merger agreement. This agreement provided for Merrill Lynch to acquire SCM through a leveraged buy-out ("LBO") transaction. This agreement provided, inter alia, that Merrill Lynch would make a cash tender offer for up to 85.7 percent (10,500,000 shares) of SCM's common stock at a price of $70.00 per share. This tender offer would be followed by a merger in which each share of the remaining 14.3 percent of SCM's common stock would be exchanged for a high risk, high yield "junk bond" valued at $70.00. This agreement provided for the payment of certain fees to Merrill, Lynch and also contemplated participation by some members of SCM's management in the surviving LBO company. The current SCM management could ultimately own up to 15 percent of the surviving LBO company. This agreement was contingent upon Merrill Lynch acquiring at least 66 2/3 percent (8,254,000 shares) of SCM's common stock through the tender offer. The SCM board recommended to the shareholders that they accept this offer.
In response to this agreement, Hanson announced, on September 3, 1985, that it would raise the price of its tender offer to $72.00 per share. This $72.00 offer was an all cash offer for any and all shares of SCM's common stock. The $ 72.00 offer was contingent upon SCM not granting any "lock-up" options to any other party. Neither Hanson's $60.00 offer nor its $72.00 offer were conditioned on a minimum number of shares being tendered.
In response to Hanson's $72.00 offer, Merrill Lynch made a new offer to SCM. This offer, which was unanimously accepted and approved by nine of SCM's directors (three directors abstained) on September 10, 1985, was also an LBO in which SCM management would participate on the same terms as in the $70.00 LBO offer. Merrill Lynch would commence a cash tender offer for up to 80 percent of SCM's common stock at a cash price of $74.00 per share. This would be followed by a merger in which each remaining share of SCM's common stock would be exchanged for a high risk, high yield "junk bond" valued at $74.00. This tender offer was also contingent on Merrill Lynch acquiring a minimum of 8,254,000 shares of SCM's common stock. This figure represents 66 2/3 percent of SCM's common stock on a fully diluted basis. The SCM board recommended to the shareholders that they accept this offer. This agreement also granted to Merrill Lynch certain lock-up options. The options permitted Merrill Lynch to purchase SCM's pigments business at a price of $350,000,000.00 and SCM's Durkee Famous Foods business (also known as the consumer foods business) at a price of $80,000,000.00 if a certain triggering event occurred. The right to exercise the option would be triggered if any person or group, other than Merrill Lynch, acquired more than one-third of SCM's common stock.
In response to this agreement Hanson announced, on October 8, 1985, that it would increase its tender offer to $75.00, all cash, for any and all shares of SCM's common stock. This offer was not contingent upon the tender of a minimum number of shares, but was contingent upon the termination or injunction of the lock-up options granted to Merrill Lynch.
On October 10, 1985, the SCM Board of Directors approved an exchange offer or "self-tender" offer. This offer provides that each share of SCM common stock could be exchanged for $10.00 in cash and one share of a new series of SCM preferred stock with an effective stated value of $64.00. This offer is for up to two-thirds, or 8,254,000 shares, of SCM's common stock, and is not conditioned on the tender of a minimum number of shares. It is undisputed, and the Court so finds, that this offer was made in an attempt to ...