The opinion of the court was delivered by: LEVAL
PIERRE N. LEVAL, U.S.D.J.
These are motions for preliminary injunction brought in the context of litigation over a tender offer for the stock of defendant Chicago Pneumatic Tool Co. ("CP"). The plaintiffs and movants in these two consolidated actions are Danaher Corp. (and related entities), the tender offeror for CP stock, and John D. Spears, a shareholder of CP who brings a derivative action against CP's directors. The principal object of both motions (and actions) is to rescind CP's recent funding of its Employees' Stock Ownership Plan ("ESOP") with one million shares of its common stock. A hearing was held on the motions for preliminary injunction by the taking of depositions over the course of the week, submission of briefs and affidavits, and oral argument conducted on April 7, 1986.
The principal thrust of the plaintiffs' complaints is that CP's Board violated the duties of care and loyalty in establishing and in funding the ESOP, actions which the plaintiffs allege were taken for the purpose of protecting management from hostile tender offers. Plaintiffs also allege that CP violated the fraud provisions of § 10(b) of the 1934 Act and of § 14(e) of the Williams Act by failing to disclose pertinent provisions of the ESOP to the shareholders. In order to prevail on a motion for preliminary injunction in this Circuit, the moving party must show irreparable harm and either likelihood of success on the merits or a fair question for litigation with the balance of hardships tilting decidedly in favor of the movant. Jackson Dairy v. Hood, 596 F.2d 70 (2d Cir. 1979). I find that the plaintiffs have failed to meet the Jackson Dairy standard and that the motions for preliminary injunction must be denied.
In 1984, CP's Board of Directors and Management began to give intensive consideration to the establishment of an ESOP under recent changes in the tax laws. It consulted its outside counsel and an actuarial consultant. At a meeting of the Board of Directors on February 12, 1985, the subject was discussed extensively and a presentation was made by a financial officer, Ralph Brandifino. Mr. Brandifino and outside counsel made a further presentation at the next Board meeting on March 12, 1985. The Board then voted to authorize the establishment of an ESOP and designated Thomas P. Latimer, the Chief Executive Officer of the Company, as its trustee. In April 1985, CP distributed its notice of annual meeting and proxy statement making no mention of the Board's resolution to adopt an ESOP. On May 14, 1985, the ESOP was formally established pursuant to the Board's prior resolution. The trust agreement was formally signed. This was reported and a copy of the agreement filed with the company's current Form 10-Q. The ESOP provides that its trustee Latimer was to have the sole power to vote unallocated shares held in the plan. It provides also that the trustee, although at other times removable by the Board of Directors, cannot be removed during a tender offer or proxy contest. The trustee was given the power to decide whether to tender unallocated shares held by the Plan in the event of a tender offer.
In June 1985, CP made an initial funding of the ESOP with two blocks of ten thousand shares each. The purpose of this initial funding was to test accounting procedures based on two different patterns of contribution. The Board ratified this funding on August 6, 1985.
A question the company regarded as significant was whether the ESOP should be funded with stock little by little in accordance with its needs over the years or, at the outset, with a large block sufficient to cover many years' future needs. The comparative impacts on tax and on per share earnings were considered. At the Board meeting on November 5, 1985, Mr. Latimer proposed that the ESOP should be funded with one million shares of CP's stock. The impact of such action on the company's finances was discussed, and the Board adopted a proposal to increase the ESOP's stockholdings to one million shares.
In order to offset the dilutive effect on per share earnings of the issuance of new shares to the Plan, the company embarked on a program of acquisition of shares in the marketplace, holding them in treasury to he used to fund the Plan. It acquired 1,400,000 treasury shares during the next months.
The funding of the ES0P was on the agenda to he considered at the Board meeting of February 1986; it was not taken up at that time, Mr. Latimer having directed that the discussion be deferred pending his receipt of further information concerning integration of the plan with the company's pension plans and the positions of CP's lending banks with respect to loan covenants.
On March 7, 1986, a notice was circulated to CP's directors of a meeting to be held on Tuesday, March 11. The notice was accompanied by an agenda which included a discussion of the Employee Stock Ownership Plan. The agenda stated:
At this time management is proposing to contribute up to 1.0 million shares to the ESOP and these shares would be amortized over a 20 year period at up to 50 thousand shares per year. The source of the share contribution would come from the present 1.4 million shares held in the treasury. . . .
In line with this, a resolution is attached for Board of Director consideration for up to a 1.0 million share contribution. Exhibit II is a tabular presentation reflecting the change in common stock ownership positions as a result of contributions (from Treasury) to the ESOP at amounts of 25O thousand shares or 1.0 million shares.
This agenda was accompanied by a proposed resolution authorizing the contribution of 1 million shares to the ESOP and by tables illustrating the effect on various financial figures of contributions to ...