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AVON PROD., INC. v. CHARTWELL ASSOC. L.P.

April 27, 1990

AVON PRODUCTS, INC., PLAINTIFF,
v.
CHARTWELL ASSOCIATES L.P., LARRY FISHER, ZACHARY FISHER, ARNOLD FISHER, RICHARD L. FISHER, M. ANTHONY FISHER, ARGONAUT PARTNERS I, L.P., THE GORDON P. GETTY FAMILY TRUST, NEW ARROW CORPORATION, MARY KAY COSMETICS, INC., MARY KAY CORPORATION, J.R. INVESTMENTS CORP., RICHARD R. ROGERS, FIRST CHICAGO TRUST COMPANY OF NEW YORK, AND JOHN P. ROCHON, DEFENDANTS.



The opinion of the court was delivered by: Leval, District Judge.

OPINION AND ORDER

This is an action for declaratory judgment. Chartwell Associates L.P. and all other defendants except First Chicago Trust Company of New York ask the court to hold that an amended Rights Plan adopted by Avon Products, Inc. as a defensive maneuver against risk of takeover violates New York law.

Chartwell seeks expedited final determination of three claims: a) that the Rights Plan on its face violates Section 501 of the New York Business Corporation Law ("NYBCL"); b) that the Rights Plan violates Section 505(a)(2)(ii) of that statute because it is not in the best long- and short-term interests of Avon's shareholders; and c) that the Plan breaches Avon's fiduciary duty to its shareholders. Avon objects to the court's adjudication of the second and third claims because, it contends, the brief period during which discovery was conducted on these questions did not give Avon sufficient opportunity to develop a full factual record to put before the court. Chartwell contends that there has been adequate discovery, that Rule 57 of the Federal Rules of Civil Procedure contemplates a "speedy hearing" of declaratory judgments, and that Avon has been fully on notice that the evidence now presented would serve as a basis for a final adjudication.

I need not resolve the dispute as to the amenability of the second and third theories to final declaratory judgment on the present record. Both sides agree that Chartwell's first claim has been fully presented to the court with all pertinent evidence and is ripe for final adjudication. I find that Avon's amended Rights Plan violates Section 501 of the NYBCL.

BACKGROUND

On March 30, 1988, Avon adopted a shareholder Rights Plan, of the type commonly referred to in market parlance as a "poison pill," as a protection against unwelcome takeover bids. The Plan provided for a "Right" to be issued as appurtenant to each share of common stock. Each Right, upon activation, would entitle the holder to purchase from the company a newly issued share of common stock at half the market price, with the exception that the rights appurtenant to shares of a holder of 20% or more of the stock would not participate. The Rights issue was subject to redemption in stated circumstances by Avon's Board of Directors for a nominal price. The Plan provided, however, that ten days following any shareholder's crossing the threshold of 20% ownership, the Rights would become nonredeemable unless the Board previously voted to redeem the Rights. If the ten days expired without redemption, the Rights would activate, or become immediately exercisable (in the vernacular, "flip in") — permitting all stockholders except the 20% holder (whose Rights are automatically voided) to purchase an additional share of Avon's common stock at half price. The impact of the exercise of the Rights would be to dilute the equity and voting power of a 20% holder to approximately 11%.

On November 13, 1989, Chartwell filed a Schedule 13D with the Securities and Exchange Commission, indicating that it was accumulating stock in Avon for the purpose of acquiring control. On November 16, Avon commenced suit against Chartwell in New York state court seeking a declaratory judgment that its Preferred Rights Plan is valid and that the New York state anti-takeover statute, Section 912 of the New York Business Corporation Law, does not violate the Supremacy Clause and Commerce Clause of the United States Constitution. This action was removed to federal court, and on March 1, 1990, I denied a motion by Avon to remand.

Meanwhile, Chartwell had filed an amended Schedule 13D on February 8, 1990, announcing its intention to commence a proxy contest to place four nominees on Avon's Board of Directors, and sought shareholder lists and other records from Avon. When Avon refused to produce the records, Chartwell moved by order to show cause for an order requiring Avon to furnish shareholder information. On February 23, 1990, I entered an order requiring Avon to produce most of the records demanded by Chartwell.

On March 25, 1990, Avon and Chartwell reached an agreement which would terminate the then existing proxy contest. Among the terms of this agreement were that two of Chartwell's nominees were to be supported for Board election by Avon on May 4, 1990, and that another would be hired as a special consultant to Avon. Following the resolution of the proxy contest, Chartwell indicated that it intended to continue to purchase additional shares of Avon stock. Avon contended that additional large purchases by Chartwell would be contrary to the spirit of the settlement the parties had reached.

Chartwell continued to make substantial open market purchases of Avon stock, bringing its ownership share of Avon to roughly 12.2%.

On April 5, 1990, Avon amended its Rights Plan. The amended Plan reduced to 12.5% the threshold at which the Rights become nonredeemable without Board action within ten days. If the ten days expire without redemption, the Board no longer has the power to redeem the Rights with respect to any future bid by the 12.5% holder. The amended Plan maintained 20% as the threshold at which the Rights become exercisable. Thus, if the 12.5% holder later crosses the 20% threshold, the Rights of all other shareholders automatically become exercisable, doubling the amount of stock not held by that stockholder.

The effect of this amendment is to make it more difficult for an unwelcome bidder to acquire control. It creates a strong disincentive to cross the 12.5% boundary. Under the original Plan, the bidder might acquire 19.9%, without adverse effect and use those stockholdings to seek sufficient influence on over the Board to insure that the Rights Plan will be redeemed upon his crossing of the 20% threshold. Under the amended Plan, the Rights become nonredeemable ten days after crossing the 12.5% threshold. If the bidder is not capable of causing redemption within ten days of his acquisition of 12.5%, he is then assured of having his percentage of control diluted after he crosses the 20% mark.

Shortly after Avon amended its Rights Plan, Chartwell amended its counterclaims in the underlying declaratory judgment action to challenge the lawfulness of the amended Rights Plan, ...


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