The opinion of the court was delivered by: LEVAL
PIERRE N. LEVAL, U.S.D.J.
On April 9, 1986, the Secretary of Labor brought this action seeking removal of Thomas F. Latimer as trustee of the employee stock ownership plan ("ESOP") of Chicago Pneumatic Tool Co. ("CP") and the appointment of a receiver. At the time there was pending before the court Danaher Corporation's action and motion seeking rescission of CP's transfer of one million shares of its stock to its ESOP. The Labor Department's motion for a temporary restraining order was heard on Thursday morning, April 10 at 9.00 a.m., at which time the court entered its ruling denying the preliminary relief sought by Danaher. The discussion in my opinion of April 10 is here incorporated by reference.
At the April 10 hearing, the Labor Department argued that Latimer's conduct in receiving the one million shares into the Plan had breached his fiduciary duties, requiring his removal as trustee. I had already rejected similar contentions in denying Danaher's motion for rescission of the transfer. I asked the Department whether its application for Latimer's removal was based on objections of conflict resulting from his status as Chief Executive Officer of CP, or only on allegations of misconduct. The Department, at the time, expressly disavowed contentions based on status, arguing only misconduct. The Department's application for a TRO was denied. The evidence showed that the one million share funding of the ESOP had been planned and set motion prior to Danaher's acquisitions; it was not it was not shown to have been a subterfuge done to fight off an invader. Nor did I accept the Labor Department's argument that Latimer's acceptance of shares into the plan after their recent price increase constituted breach of fiduciary duties; this was done pursuant to previous plans made in good faith without reference to or knowledge of Danaher's takeover ambitions.
Danaher meanwhile pursued its tender offer for CP stock, amending the terms by dropping the condition that a court order rescission of the million share ESOP funding and by seeking the tender of those million shares.
On Thursday, April 17, the Labor Department made new submissions, and counsel were heard that evening. The Department argued that irrespective of whether Latimer's prior conduct had breached fiduciary obligations, he was in a position of conflict of interest that made it inappropriate for him to continue as ESOP trustee. After hearing argument I advised that I found considerable merit in the Department's new position. As President of CP, Latimer had taken a strong stance against Danaher's tender offer. In an April 3, 1986 letter to CP's shareholders, he advised against tendering, adding that as trustee of the ESOP he did not plan on tendering the ESOP's shares. His continued employment as CP's President in all likelihood depended on Danaher's failure to capture control of CP. His personal interests conflicted with his duty to act in the interests of the Plan beneficiaries in deciding whether to tender its shares to Danaher. See Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir. 1984); Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.1982) (J. Friendly]. It seemed inappropriate for him to continue as Plan trustee during the fight for control. I offered CP an overnight recess to consider whether Latimer would withdraw as trustee before the court acted on the application to remove him. At the same time I suggested that I found far less persuasive the Department's argument for appointment of a receiver, because the appointment by CP of a neutral independent trustee seemed a less drastic but satisfactory solution. See Donovan v. Bierwirth, supra at 276 ("[T]he appointment of a receiver is a harsh remedy, not to be imposed without a showing of necessity.").
The next morning, Friday, April 18 at 9:30 a.m., CP advised the court by telephone that Latimer had submitted his resignation and that a substitute trustee would be proposed at the lunchtime session with the court. The court met with counsel at 1:00 p.m., at which time CP advised of the designation of Wayne A. McGrew of Utica, N.Y.
Danaher meanwhile reported that it had acquired 63% of the CP stock and had accepted the tenders. Danaher's offer, unless extended, would expire at 5:00 p.m. that day.
The Department and Danaher opposed the appointment of McGrew, as trustee, arguing that he was not sufficiently independent. Although McGrew has no present formal connection with CP, he had been a high ranking officer and head of a CP division for 9 years until his retirement in 1980. It was argued that his close connection with the management of CP suggests he would undertake the role with a view to helping CP management fight the Danaher takeover attempt.
I commented that although McGrew might not be subject to challenge if he had been named prior to Danaher's challenge for control of CP, his selection in the context of CP's opposition to the tender offer (CP had instituted suit against Danaher in the New Jersey courts) raised a question whether McGrew had been selected to act independently or with the expectation that he would protect his old friends and colleagues by refusing to tender the ESOP's shares.
CP defended the selection of McGrew on the grounds that his friendship with CP's employees would equip him to consu1t with the employees benefitted by the Plan, enabling him to take account of their wishes in discharging his responsibilities. The court thereupon asked whether the issue could not be properly resolved short of a receivership by CP appointing McGrew and two additional trustees of unquestionable independence.
The Department advised that it would accept such a resolution. After a brief recess to permit CP's counsel to consult with its client, CP advised it would not appoint two additional independent trustees. The parties requested an opportunity for briefing as to whether McGrew's appointment should be approved or a receiver appointed.
Briefs were submitted Saturday, April 19, 1986 at 9:30 a.m. Although CP's brief defended the propriety of the McGrew appointment as sole trustee, its covering letter altered its position and proposed the appointment of two additional trustees alleged to be wholly independent of CP. The proposed nominees were Dr. Austin Murphy, who is said to have been recommended by Morgan Guaranty Trust Company, and Dr. William F. Whyte. CP advised that if the court preferred an institution in place of one of the three individual trustees, it would appoint either East River Savings Bank (of which Mr. Murphy is the Chief Executive Officer) or Morgan Guaranty Trust Company. Together with its statement that Whyte and Murphy are wholly independent of CP, CP submitted their biographical sketches from Who's Who in America, demonstrating a very high degree of professional qualification to discharge the duties of an ESOP trustee and to evaluate the tender offer for the ESOP's shares.
A reply submitted by Danaher on Saturday evening, April 18, 1986 opposed CP's proposal arguing that CP has demonstrated a determination throughout the litigation to insure that the ESOP's shares would be used to fight the Danaher offer and that CP resisted at each state until the point where it faced a likely adverse court decision. Danaher argued that designees of CP's Board in these circumstances ...