The opinion of the court was delivered by: BRODERICK
VINCENT L. BRODERICK, District Judge.
I shall be dealing with the plaintiffs' motion for a preliminary injunction and the defendants' motion to stay or dismiss. What I have to say will constitute my findings of fact and conclusions of law for the purposes of the motion for a preliminary injunction.
I find on what is before me that I do have jurisdiction over this action under 28 U.S.C. § 1332 (a)(1) since more than $10,000 is involved and the plaintiffs and defendants are from different states. I also find that I have jurisdiction under 15 U.S.C. section 78aa and 28 U.S.C. § 1331. I have pendent jurisdiction with respect to the state claims and the preliminary injunction pertains to a state claim.
With respect to the defendants' motion for a stay or dismissal on the grounds that the matter involved in this is to such a large extent concerned with New Jersey State law, I shall deal with that later. I will note at this point that the defendants did agree that no distribution of rights certificates would be made until that stay motion was decided.
I will take up now plaintiffs' motion for a preliminary injunction. This motion as originally made was predicated upon two grounds. First that the directors of the defendant corporation did not have the power under New Jersey law to adopt the rights plan which was adopted on April 23, and the second challenge has to do with the duty of the directors in passing upon that whether they breached their duties of using business judgment, acting as fiduciaries, and of loyalty. It has been agreed by the parties that the matter has presently been submitted to me on the single issue of whether the adoption of the rights plan by the directors of NL Industries was ultra vires under New Jersey law.
The Amalgamated Sugar Company is a corporation organized and existing under the laws of Utah with principal place of business in Utah. LLC Corporation, another plaintiff, is a corporation which is organized and existing under the laws of the state of Delaware with principal place of business in Texas. LN Partnership is a general partnership organized and existing under the laws of the state of Texas with principal place of business in Texas. NL Acquisition Corp. is a wholly owned subsidiary of Amalgamated which was formed for the purpose of making a tender offer for any or all shares of NLI common stock. NLI is a corporation organized and existing under the laws of the state of New Jersey with principal place of business in New York. It is primarily engaged in petroleum services and chemicals production.
The individual defendants are directors of NLI including Mr. Theodore Rogers, who is chairman, president and chief executive officer. The individual defendants are all citizens of states other than Delaware, Texas and Utah. There is one director, Mr. St. Clair, who is not a defendant, apparently because his presence would have destroyed diversity.
NLI in recent years has performed poorly in terms of its own operations and in terms of the price of its stock in the market. The company has announced write-offs of nearly $250,000,000 in assets for the second quarter of 1986. Its price on the market has declined in recent years. In 1985 it traded from $9, $10, to $14.50.
On March 25 of this year Coniston Partners, with its affiliates, which then held approximately eight percent of NLI's stock, proposed to acquire NLI at a price of $16 per share in cash and securities. At the time NLI's common stock was trading at $14 per share. The board of directors of NLI apparently rejected Coniston's offer without presenting it to the NLI stockholders. NLI then on or about April 12, 1986 concluded a buy-back agreement with Coniston purchasing, I believe it was, half of the NLI shares held by Coniston and its affiliates for $14.75 per share.
The directors of NLI, apparently concerned by the possibility of another takeover threat such as that posed by Coniston, developed and adopted a restructuring plan which was announced on April 14. This plan included a reversion to NLI of excess pension funds in the amount of some $120,000,000, an initial public offering of a percentage, I believe it was 20 percent, of the stock of its subsidiary NL Chemicals, and a repurchase of NLI shares.
This repurchase was to be effected by the buy-back agreement with Coniston, which I have already discussed, and by making a self tender offer for 7-1/2 to 10 million NLI shares in a price range set by NLI's board of directors between $15-1/8 and $16.
NLI basically consists of two businesses: the oil service business and the chemical business. The oil service business has been in a general recession which is related to the world-wide oil glut. The chemical business has been profitable. The directors of NLI believed that its shares were under-valued in the market. The reason for this under-valuation was that it was basically regarded as an oil service company and monitored by analysts skilled in that field who did not appropriately value the chemical business. The directors were concerned that because of this under-valuation which they perceived, the company would be vulnerable to a takeover -- perhaps a takeover of a two-tier variety where control was secured through a tender for part of the shares and the takeover would be financed by part of the assets of the company with the remaining minority shareholders being bought out for less than adequate consideration.
They feared, in short, that the value they perceived in the company, that was not presently reflected in share market price, would be realized by the acquirer and not the company's shareholders.
In March of 1986, while the Coniston interest was still alive, the NLI board considered but did not adopt a rights plan. At the NLI board meeting which was held on April 23 of this year a rights plan was presented and adopted. The directors received a memorandum from counsel outlining the plan along with drafts of the plan, of a letter to shareholders, and of a press release announcing its adoption.
Counsel's memorandum observed that the purpose of the plan was to deter takeover attempts on terms not approved by the directors. The board adopted the proposed plan on April 23 without submitting it for shareholder approval. The annual shareholders' meeting was also held that day.
Under the plan adopted by the NLI board, NLI declared a dividend of one right per share to all common shareholders of record as of May 30, 1986. These rights initially could be traded only with the shares and could not be exercised. Unless redeemed, the rights, according to the plan, extended for ten years until May 30, 1996. The rights were redeemable for five cents each until the first trigger occurred: an announcement that a shareholder held 20 percent or more of NLI common or that a tender offer was to be commenced for 30 percent or more of NLI stock.
Either of these occurrences constitutes the first triggering incident, and after either occurrence, the rights certificates were to be distributed to all shareholders. They were at that point to be nonredeemable and to be transferable on the New York Stock Exchange.
The certificates issued to a shareholder who held 20 percent or more were to bear a legend which spelled out that the rights represented by the certificates could become null and void. Once distributed, as I already noted, the rights could be traded separately from the common stock.
Under the plan each right nominally entitles the holder to purchase 1/100th share of a newly issued junior preferred stock of NLI. To purchase a 1/100th share of such stock, the right-holder would have to pay a $50 exercise price. This exercise price was set in this disproportionately high amount, disproportionate relative to the present value of the right, in order that it would be "out of the money."
When any of several types of transactions which constitute a second trigger, such as a merger, occur the plan's flip-in provisions, under Section 11, or flip-over provisions, under section 13, will be activated.
Section 11 of the plan is the flip-in. It comes into play if NLI is the surviving entity in a merger with the 20 percent shareholder. If any one of numerous business transactions occurs or if an acquiring person's stake or the 20 percent shareholder's stake in NLI is increased by 1 percent by reason of a reverse stock split or some other corporate transaction, under the flip-in provision, after trigger, and this is the second trigger, all right's holders, except the acquiring person, are entitled to purchase $100 worth of NLI common stock for $50, and the acquiring person's rights become void.
This process self-evidently effects a substantial dilution of the acquiring person's equity in NLI and of his voting power. It will have a similar effect on the equity and voting power of other common stock shareholders who have transferred their rights.
Under section 13 of the plan, which is the flip-over provision, if an acquiring person merges or otherwise combines with NLI and the acquiring person is the surviving entity, each right would flip-over into a right to buy $100 worth of the acquiring company's stock at a price of only $50.
Once the first trigger occurs, and rights have been triggered, the dilution with respect to a flip-in would occur with respect to subsequent acquiring persons, even white knights. NLI apparently acknowledges that upon the issuance of the rights, the rights plan precludes NLI from being able to negotiate with third persons or complete a transaction for the entire company with a white knight.
The plan is not triggered if the entity purchasing 20 percent of NLI stock is NLI itself or one of its subsidiaries or its employee benefits plan.
Because the thrust of this plan, once the original trigger takes place, and it has taken place, is so important to my resolution of the issue before me, I am going to discuss the operation of the flip-in provision and of the way in which, if the second trigger is pulled, it subjects an acquiring person's interests, voting rights and equity, to discriminatory dilution.
If the flip-in is triggered when NLI's common stock is trading at $12.50 per share, each NLI right-holder, except for the acquiring shareholder, will be entitled to buy eight additional common shares with a value of $100 for the exercise price of $50 and thereby obtain eight additional common shares and eight additional votes. However, the acquiring person, the 20 percent shareholder whose rights have been voided, will not be able to obtain any additional shares in the same manner. Thus the triggering of the flip-in provision would allow all common shareholders who hold rights, except the acquiring shareholder, the 20 percent shareholder, to have nine votes for each common share previously owned. The 20 percent shareholder would have the same number of shares and the same number of votes as he had before. His voting rights therefore would have been substantially diluted.
This flip-in provision similarly subjects an acquiring person's equity to discriminatory dilution. Assume that the flip-in is triggered when there are 60,000,000 common shares outstanding, the market price is $12.50 per share and all rights-holders, other than the acquiring person, exercise their rights by buying eight shares for each right at $6-1/4 per share. Under these circumstances, if the acquirer had paid $450,000,000 for 60 percent of the outstanding common shares of NLI, the triggering of the flip-in provision would reduce the acquirer's equity to $279,000,000.
A letter to shareholders signed by Mr. Theodore Rogers, the president and chairman, stated that a principal purpose of the NLI rights plan was to deter "any attempt to acquire the company in a manner or on terms not approved by the board."
On June 11 of this year, NLI's stock price on the market fell below $12. On June 18 Harold Simmons, who was the chairman of Amalgamated, wrote to NLI proposing to buy all NLI shares for $15 or all shares that had been tendered to NLI at $15-1/4.
On June 24, 1986 Mr. Simmons asked the NLI board of directors to redeem the rights which had been issued under the rights plan in order to preserve the company's flexibility in view of the plaintiffs' interest in purchasing more shares and crossing the 20 percent threshold established under the rights plan. NLI's board met on June 25. It cancelled its self-tender offer; it authorized the sale of 18 percent of NL Chemicals' stock; it rejected Mr. Simmons' proposals and his request that the rights be redeemed; and it explained to shareholders that "underlying these board actions is its belief that the inherent value of the company's component businesses is significantly greater than the price proposed by Mr. Simmons."
On June 25 this suit to enjoin the operation of NLI's rights plan was filed.
On June 30 the plaintiffs announced that their holdings of NLI common exceeded 20 percent. This constituted the first trigger under the rights plan. (Pursuant to the agreement, previously mentioned, defendants have agreed not to distribute the rights certificates. Thus public trading in the rights separate from the common has not occurred.) The next day, plaintiffs announced that they would commence a cash tender offer for any and all NLI shares including rights and later dividends for $15-1/8 per share. That tender offer was formally commenced on July 3rd.
Plaintiffs conditioned their tender offer on judicial invalidation of the Pill. Another principal condition was financing. The plaintiffs have represented that financing ...