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SUN CHEM. CORP. v. DAINIPPON INK & CHEMS.

May 30, 1986

SUN CHEMICAL CORPORATION, Plaintiff,
v.
DAINIPPON INK & CHEMICALS, INC., Defendant



The opinion of the court was delivered by: LEVAL

OPINION AND ORDER

PIERRE N. LEVAL, U.S.D.J.

Sun Chemical Corp. seeks by this action and preliminary injunction motion to bar Dainippon Ink & Chemicals, Inc. from buying stock in Sun. Sun contends that by announcing an intention to purchase Sun stock Dainippon is committing a number of actionable wrongs under New York law including extortion, duress, coercion, interference with contract relations and prima facie tort. The motion was made by an order to show cause on May 12, 1986. Intensive discovery was conducted pursuant to a schedule set by the court with the consent of the parties, and the preliminary injunction hearing was conducted by submissions on May 22.

 The background of the action is as follows:

 Sun is a Delaware corporation. It was founded by its Chief Executive Officer Norman Alexander who until recently owned 33% of its stock. Recently, and apparently in response to Dainippon's interest, Mr. Alexander purchased additional stock bringing his holdings up to 44.6%.

 The major volume of Sun's business and profits is constituted by its graphic arts materials and equipment divisions. Between them, they amounted to 72% of Sun Chemical's 1985 sales and 66% of its operating income (totaling $634.8 million in sales and $53.6 million in operating income).

 Sun also is engaged in the manufacture of optical and electronic instruments through its Kollsman Instrument Division, which in 1985 contributed 18% of sales and 16% of operating income. The Kollsman business is divided between commercial and military instrumentation. During the past seven years, Sun has made a substantial investment (carried on its books at $102 million) in the stock of Chromalloy American Corp., amounting to 44% of Chromalloy's stock. This investment has resulted in significant charges against Sun's earnings. In 1985, Sun reported an $8 million charge against earnings resulting from the Chromalloy investment, including a charge of $0.6 million representing its pro rata share of Chromalloy's operating loss. Chromalloy is engaged in metal fabrication (in part for the Department of Defense), transportation, apparel, petroleum services and financial services. A part of Chromalloy's business consists of the ownership and operation of barges and other vessels carrying freight in U.S. coastwise trade.

 Dainippon is a Japanese company engaged primarily in the manufacturing of printing materials and machinery. Dainippon reported revenues of $1.6 billion in 1985 and net profits of $19.6 million. Dainippon has a wholly owned U.S. subsidiary, DIC Americas, Inc. which imports inks and pigments; it reported revenues of $30 million in 1985.

 For a number of years, Dainippon has had an interest in acquiring Sun's graphic arts materials business. Since 1978 it has had occasional discussions with Mr. Alexander concerning such an acquisition.

 In June 1985 Dainippon entered into renewed discussions with Mr. Alexander about its possible acquisition of either the graphic arts materials business or the entire Sun company. Mr. Alexander spoke at the time of $600 million as a possible price for the graphic arts materials business. At the time the stock market value of Sun was under $300 million. In September Dainippon engaged investment bankers Dillon, Read & Co. to evaluate different proposed transactions. Dillon Read estimated the graphic arts materials group at $300-400 million and Sun overall at $55-65 per share, or between $430 and 510 million. Sun retained Salomon Brothers. Its preliminary study of the graphic arts materials group brought an estimate of $358-457 million, based on projected earnings which later proved to have been overly optimistic. (This estimate, it should be noted, was never approved by the partners of Salomon Brothers.) The weakness of Sun's 1985 earnings led Alexander to discontinue talks for the time.

 Beginning in late 1985, Dainippon acquired 388,900 shares of Sun Chemical on the open market. These purchases, at an average price of $34.92 per share, amounted to 4.9% of Sun's outstanding stock. In the spring of 1986, as the price of Sun's stock began to increase on the market, Dainippon reasserted its interest and sought to reopen discussions. On April 15, and on successive days, meetings were held between representatives of the two companies. Mr. Alexander met in New York with Dainippon's president Mr. Shigekuni Kawamura. Alexander spoke of a $600 million price for the graphic arts materials group. Dainippon offered $ 510 million for the combined graphic materials and graphic equipment (representing $425 million and $85 million). Alternatively, Dainippon offered $75 per share [or $585 million) to acquire Sun. Alexander rejected these offers.

 Alexander then purchased a block of 11.4% of Sun's stock at $62/share.

 Dainippon increased its offer on April 22 to $77 a share and on May 9 to $85 a share or $663 million. Sun in the meantime appointed an independent committee of directors to study the offer. The independent committee has made no report and the Board of Directors of Sun has made no response to the Dainippon proposals. Sun's investment bankers, Salomon Bros., have not delivered an opinion of valuation. Mr. Alexander stated that the offer was personally unacceptable to him.

 On May 12, 1986, Sun began this action.

 The Theory of Sun's Action

 Certain aspects of Sun's business -- the classified military contracting of Kollsman Instrument and Chromalloy and the coastwise marine transport business carried on by subsidiaries of Chromalloy .. are subject to statutes and regulations requiring that they be conducted by United States citizens or entities. (Those activities of Sun and its subsidiaries are here referred to as the "Citizen Businesses.") Some of the relevant tests to determine U.S. citizenship are triggered by 5% and by 25% foreign stock ownership. Some turn on control. Sun postulates that if its shares were acquired by Dainippon, it would cease to be a U.S. entity according to the relevant statutes, with the alleged consequence that it would no longer be permitted to conduct its Citizen Businesses. It argues further that ship financing ...


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