The opinion of the court was delivered by: POLLACK
POLLACK, Senior District Judge:
This is a motion by the plaintiff under Rule 65, Federal Rules of Civil Procedure, for provisional relief in advance of a full-scale trial on the merits. Much is argued here by plaintiff which would be more appropriate for discussion following a full-scale submission of all the relevant facts and circumstances. Much of that sort of argument is just that -- it is grounded largely on hypotheses, speculations, and elusive concepts.
Analysis of the plaintiff's claims shows that it is arguing, in essence, that, in the judgment of the tender offeror, the Directors went further as a matter of degree than was necessary to protect the legitimate corporate interests to be conserved. There are two sides to that sort of opinion. A suggestion of overkill involves a matter of conflicting judgment.
Another cardinal misconception of the plaintiff, the tender offeror, is that the Board of Directors of Carbide owe the tender offeror duties, or at least the duty, to so fashion a competitive offer as to aid the success of the hostile tender. That notion was struck down many years ago in a contest for control. See Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 51 L. Ed. 2d 124, 97 S. Ct. 926 (1976).
Peering through the haze created by the conflicting submissions is that portion of the last sentence of the plaintiff's brief reading -- plaintiff seeks a direction "prohibiting the consummation of (1) Carbide's exchange offer (or at least directing that provision be made for the notes to be callable by an acquiror)." (emphasis added).
The tender offeror thus seeks to have Union Carbide ("Carbide" or "the Company") make liquid assets available to pay for the control of the Company that the plaintiff seeks.
The principal issue posed by this application for a Preliminary Injunction brought by a shareholder of the corporation boils down to whether a disinterested Board of Directors of a New York business corporation, without a Charter amendment, as part of an exchange offer -- presenting shareholders with an alternative offer to another Company's attempt to buy control -- may lawfully authorize the creation and issuance of high-interest corporate debentures and notes containing covenants to protect their credit value which restrict for various periods of time the sale, in any year, of more than 25% of the Company's net assets and, in certain circumstances, not more than 5% thereof.
Such debentures and notes have been authorized by the Board of Directors of Union Carbide and are being offered by the Company, together with $20 in cash, in exchange for 23,550,000 (35%) and up to 47,100,000 (70%) shares of the Company's outstanding voting common stock. That offer is a competitive alternative to an offer by GAF of $68 in cash for 48,000,000 of the Company's shares, providing GAF gets the minimum number of shares they seek and raises the funds to pay for them. GAF presently owns approximately 10% of the Company's stock and seeks to acquire control of the corporation.
The Board of Directors of Carbide has stamped the opposing all cash offer and the accompanying plan of liquidation of large segments of the assets to finance the offer as grossly inadequate and unfair and not in the best interests of the Company and its shareholders. The Company's offer is not conditioned upon any minimum number of shares being tendered to the Company. The GAF offer is conditioned, among other things, upon (i) a minimum of 31,000,000 shares (46% of the capital stock) being validly tendered, and (ii) the bidder having obtained sufficient financing to pay for the stock tendered to GAF together with all related fees and expenses and to satisfy certain other obligations and financial requirements.
Restrictive covenants in the debentures and notes offered by the Company for its outstanding stock could deter consummation of the GAF offer if the Company's offer were to be accepted in substantial part and also could deter other persons from purchasing the Company's shares in an attempt to acquire control of the Company, especially persons who would hope to finance such acquisitions by utilizing the Company's own assets or borrowing capacity.
corporate actions complained of herein, believed to violate shareholder rights and improperly to impair the plaintiff's tender offer, are all matters cognizable under the Business Judgment Rule for corporate management and do not require charter amendments approved by the shareholders; each is within the wide latitude of management authority conferred on a Board of Directors by New York law and may be considered under the Business Judgment Rule. The defendants, in adopting those actions, did not assume powers and make decisions that rightfully may be exercised only by a shareholder body. The Business Judgment Rule keeps courts from becoming enmeshed in complex corporate decision-making, a task courts are ill-equipped to handle.
A dispassionate review of the sequence of events and the perceived interests to be safeguarded, and the manner in which the informed judgment of the Board of Directors was exercised failed to establish a prima facie showing that the Directors acted in bad faith. The standard of review that the Court has adopted and has applied herein is the strictest standard of inquiry. The Court allocated to the Directors the burden to prove that the transactions complained of were reasonable and fair as well as made in the exercise of independent judgment. Fundamentally, resolution of this issue posed questions of fact, rather than of law and involved a resolution of issues of credibility of the oral testimony.
The Court finds, on evaluating the evidence and the credibility of the witnesses, under all of the facts and circumstances in evidence and after placing the burden on the Directors of going forward on the issues, that the actions of the Directors complained of were reasonable and fair, not motivated by self-interest, nor did they go beyond that permissibly and reasonably viewed as necessary. The transactions complained of were grounded on sound reason, made with a good-faith intent to serve the shareholders' best interests and, in the case of the debt securities under the Exchange Offer, to provide conscionable security for and protection of their credit value. Independent outsiders, comprising a majority of the Board, legally and factually disinterested in the benefits of their decisions approved the actions taken. The Board did not act, as charged by plaintiff, to keep control of the Company entrenched within the present Board of Directors regardless of Carbide's real best interests. The Carbide offer was not intended to and does not discriminate against bidders for control. It was an alternative available for the stockholders' consideration. It is a measured and responsible action taken with a purpose to protect the best interests of Carbide and its shareholders, and those who acquired the debt securities to be issued.
What the plaintiff plainly fails, or wishes not, to recognize is that shareholders might well decline its cash buyout offer and prefer instead either to remain with the Company as stockholders or to accept the position formulated by the Directors. In addition, even accepting the Company's self-tender offer, they might wish to assure fair and equitable recognition and treatment for its relationships with pensioners, employees and management.
The Directors are not to be faulted for their caution in not leaving to chance the resolution of questions settled by the actions complained of. The protection of loyal employees, including managers, of the organization is not anathema in the Courthouse. To be compared are the situations in which similar protection to the well-being and security of employees, pensioners, and loyal members of management is regularly accorded when a business is moved or substantially liquidated; they are similarly directly affected by unfriendly raids on control.
Much of the plaintiff's argument relies on the notion that the actions of the Directors were too broad. But one may ask the question, in whose judgment? Certainly such an arguable position does not deserve preliminary injunctive relief to act as a herald for the tender offeror's side of the contest.
The expert testimony offered by plaintiff to dispute the restrictions set out in the debt instruments contained in the Company's offer disintegrated upon a showing that the challenged restrictions were of the kind basically used by that expert's own securities firm (of which he claimed unawareness), and the terms thereof essentially followed a pattern developed by the takeover Bar, depending upon which side of the fence it was called to serve.
When asked if the restrictive provisions of the debt securities in Carbide's offer challenged by the plaintiff were substantially similar to others tested in the marketplace by his own banking firm, the plaintiff's expert acknowledged that they were. When asked whether the language in the two looked like they came from the same form book, the witness answered, in part, that "[i]t does appear the language is generally similar."
The Carbide Board owed no duty to GAF as a tender offeror to facilitate an unfair takeover bid by making the Company's assets available to finance it. Its duty is solely to the welfare of Carbide's investors and to deal with the interests of Carbide's employees and management fairly, in furtherance of those interests of investors.
The Board of Directors of Carbide owed no duty to assist GAF to finance its quest for control of Carbide by use of financing, directly or indirectly, to be derived from the dismemberment and liquidation of divisions representing 40% of Carbide's assets.
The Chairman of GAF testified concerning the restrictive covenants:
Q. So the covenants that we heard about in the course of the last day, restrict asset sales, don't prevent you from making your offer, is that correct?
A. It does not legally prevent us, if we wanted to continue with a very highly leveraged company.
He admitted that GAF's offer compels liquidation of vast segments of Carbide's assets:
Q. So as a commercial matter, you cannot proceed with your offer unless you liquidate substantial assets after taking control, is that correct?
A. We think it's necessary to do so, yes.
The GAF Chairman further testified to the scope of that liquidation. He said, "we plan asset sales of approximately 4 billion dollars in terms of this asset disposition program."
The action of the Board to foster the future intact existence of Carbide, except for such sales of assets as would reasonably be needed to prune aspects of the Company and leave it substantially alive as it presently is, represents a reasonable view on the part of the Board of what is best for shareholders.
The actions of the Board were within the bounds of the law, and the only question -- one of fact involving credibility -- is whether the actions taken were based on informed reasonable judgment of an admittedly independent Board with no personal interests at stake.
A corporation with a perceived threat of dismemberment of large divisions of the enterprise, employing thousands of employees, owes substantial regard for their pension benefits, and in the case of loyal management, severance benefits. These legitimate concerns for their past conduct of the enterprise and its requirements need not be left to the goodwill of an unfriendly acquirer of corporate control in the jungle warfare involving attempted takeovers. The exercise of independent, honest business judgment of an enlightened and disinterested Board is the traditional and appropriate way to deal fairly and even-handedly with both the protection of investors, on the one hand, and the legitimate concerns and interests of employees and management of a corporation who service the interests of investors, on the other. Where such a Board, which has been voted into office, exists, their judgment on corporate management, obligations and policy -- and any actions appropriate in that regard -- are and should be controlling. Such a result is necessary in order to maintain balance and serenity in the marketplace and in corporate affairs, and to make sure that the existing shareholders are not lost someplace in the shuffle.
Deterring an unfair offer is entirely legitimate. GAF is not entitled to have the terms of an exchange offer dictated by GAF, free of competition.
Self-appointed potential acquirers of control are not a protected species in corporate law. The hostile offeror is not entitled to have Boards of Directors smooth his path to control. That has to be earned with fairness and proof in the competition for the voting stock that satisfies the shareholders that they should sell and are being offered a fair price.
Carbide argues that the Company's Exchange Offer was designed to ensure that profits from its business operations would flow through to the shareholders of Carbide, rather than to the shareholders of GAF. Carbide claims that GAF's plans would, after paying off its acquisition indebtedness through a substantial liquidation, result in a virtual gift to GAF of Carbide's valuable industrial gas and chemicals and plastics businesses, because GAF would acquire them at no cost.
To satisfy the burden of proving the reasonableness and fairness of the judgments of the Directors on each of the four complaints asserted by GAF, Carbide adduced acceptable evidence, as explained below, on each of the challenged provisions.
The Restrictive Covenants
Today, investment securities do not come pre-packaged in one standard form but instead are as varied as are the imaginations of those who market them. Formulating the terms of a security is a highly complex task, requiring both a solid understanding of the needs and resources of the company issuing the security (e.g., its need for funds, prior indebtedness, cash flow, long-term growth plans, industry structure) and an awareness of the current investment market. Consequently, the terms of these investment securities vary wildly. Inevitably, only some of these marketing strategies are successful and are greeted with acceptance by investors. Courts, therefore, should be very circumspect in entering this area at the behest of a tender offeror and declaring some of these methods of raising capital proper, some improper, unless there is no reasonable business justification, evaluated according to that particular company's situation, for the restrictions placed in the debt instruments. Whether the covenants have an ancillary effect on the tender offeror's plans for the target company is irrelevant, even if that effect was intended.
The Carbide Board was advised by competent experts and believed that the covenants in the debt instruments proposed in the Exchange Offer were fair and reasonable and had acceptance in the marketplace. Those covenants, designed to protect the credit value of the debt securities, placed a limitation on the amount of assets that can be sold each year, a limitation on future debt, and the non-callability of the senior notes for various terms of years.
The Board was similarly advised and believed that the covenants would support an investment grade rating for the debt securities; that advice was vindicated on December 23, 1985, when Moody's gave the debt securities a rating of BAA3, an investment grade rating. The Board was concerned that the shareholders receive a debt security that would retain its value, an obligation that was backed by the assets and cash flow of Carbide. Even if the 70% Exchange took place, the Board was competently advised and believed that the Company could be operated, debt could be serviced, and growth could be sustained under the covenants. There was no credible showing to the contrary.
Self-evidently, the covenants will never come into effect unless the shareholders select the Carbide offer and do not tender to GAF. GAF is not prevented by the Exchange Offer from raising its bid and satisfying the question of its acceptability to control in order to defeat the Exchange Offer or from financing its offer through equity markets or long-term debt.
Under the Exchange Offer, sales of as much as $1.7 billion of assets would be permitted, the first year, if the 35% Exchange takes place. Assuming that the 70% Exchange took place, the Company could sell 5% of Carbide's consolidated adjusted net assets, i.e., approximately $310 million in the first year. While these figures would not pay off GAF's debt to secure control, the Board had no obligation to facilitate the dismemberment of Carbide by exposing it to wholesale liquidation of its divisions to achieve a greater amount of cash. The asset sales limits were a reasonable term, appropriate in the Board's judgment to enable legitimate restructuring in an atmosphere of continuing the enterprise. There was no showing otherwise.
Assuming that the 35% Exchange is consummated, Carbide would be free to take on an additional $1.1 billion in senior debt under the "basket" exception to the debt limit test. No additional senior debt could be taken on were there a 70% Exchange consummated. The Board, however, was competently advised and believed that this restriction is not at all unusual for a company that is highly leveraged. There was no showing against this reasonable assumption.
The limit on debt does not apply to debt used for working capital purposes, providing that the principal amount of such debt did not exceed 10% of Consolidated Adjusted Net Assets. As of September 30, 1985, this would have allowed borrowings of $600 million under either a 35% or a 70% Exchange. The Company may also borrow an additional unlimited amount of subordinated debt, and may borrow any amount to refinance existing debt.
GAF made a point of the non-callability of the debt securities in Carbide's offer for periods of four, five, and seven years. In response to the point that there is no escape from the covenants, Carbide pointed out that either it or GAF could, under the Indenture, make a tender or exchange offer for the debt securities in which the acceptance under such offer is conditioned upon execution and delivery of written consents to amendment of the Indenture on the debt securities. That would effectively permit redemption of some or all of the debt securities prior to their redemption dates. At the hearing, GAF's own expert conceded that such an offer could accomplish the same result as a call provision, and that the requisite 80% of the consents would command a premium as low as 12%, the amount of a typical call premium.
The remaining three actions of the Board complained of herein require little notice. They do not provide any substantial basis for attacking the reasonableness of the Board's decisions.
1. The two actions taken by the Board on July 24, 1985, involved the revision of the definition of a quorum at a shareholders meeting from 40% to a majority of those entitled to vote, and limited the call of a special meeting of the shareholders to the Board of Directors, the Chairman, and the President. These actions are so self-evidently routine and within the wide latitude of business judgment afforded to a Board of Directors under New York corporate law, that no further notice thereof is required here. Indeed, the lower quorum requirements previously followed by Carbide were unusual. Regulating special meeting procedures aids in establishing an orderly means for submitting matters to shareholders and avoids precipitation of issues that are unnecessarily distracting and ill-timed.
2. The so-called "Pension Parachute" refers to the amendment to the Retirement Plan that allows the Board to vest, for the benefit of the participating employees and retired employees, amounts of corporate funds that are technically "excess" (sometimes created by revaluation of fund investments) in the event of an "unfriendly change of control."
In justification of the reasonableness of the Board's action, it was pointed out that it was desirable to retain this flexibility to enable the Board to increase the pension benefits as they had done three times in the past when no tender offer was on the horizon.
The amendment does nothing more than allow the Board to treat the pensioners equitably and fairly in the manner and in the measure in which past negotiated transactions enabled the Board to do. Under friendly terms, the interests of employees can be ironed out on the bargaining table with equity to all sides. It was the Board's judgment, which appears entirely reasonable, that it was prudent to reserve to itself this power in the event of an unfriendly assault on control to prevent a takeover bidder from jeopardizing future appropriate and necessary increases of pension benefits by his use of the funds to finance a takeover. Labor, at whatever level, should not be victimized or go unrequited by control contests. It is entirely reasonable for a Board to take such steps as will assure workers against such a possibility arising from the necessity for financing the obligations incurred in a control contest.
Moreover, as admitted by GAF in its post-hearing brief, at 14, this so-called "Pension Parachute" issue is, in reality, a non-issue. GAF, in its brief, concedes that this contested amendment to the Retirement Plan gives Carbide's Board no greater power than it possessed without the amendment:
But Carbide's board already had the power before adoption of the pension parachute to cause excess pension funds to vest whenever it chose. In the event of an "unfriendly" change in control, the board would still have the time to cause the surplus pension funds to vest before being replaced by a new board, if it believed this action to be in the best interest of the corporation. The pension parachute thus does not enhance the ability of Carbide to protect employees; it serves as a warning to "unfriendly" acquirors.
Carbide's Board of Directors has met its burden of going forward with proof of reasonableness and fairness that satisfies invocation of the Business Judgment Rule. See Norlin Corp. v. Rooney Pace, Inc., 744 F.2d at 255, 264 (2d Cir. 1984) (the Business Judgment Rule "affords Directors wide latitude in devising strategies to resist unfriendly advances" and to protect the legitimate interests of shareholders, employees and management). None of the steps taken by Carbide were steps forbidden by the law. Cf. Turner Broadcasting System, Inc. v. CBS, Inc., 627 F. Supp. 901, slip op. at 16-17 (N.D. Ga. 1985). In administering the Business Judgment Rule in takeover contests, no inference of self-interest is to be drawn from the mere fact that an outside Director acts to defeat a hostile offer and that his action allows him to remain on the Board. See Crouse-Hinds Co. v. InterNorth, Inc., 634 F.3d 696, 702 (2d Cir. 1980).
To entitle a tender offeror seeking a preliminary injunction against a rival offer for the stock of the corporation, it must show (1) irreparable damage from the act sought to be restrained; and (2) either (a) a probability of its ultimate success on the merits, or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation, and a balance of hardships ...