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ABSOLUTE RECOVERY HEDGE FUND v. GAYLORD CONTAINER

February 19, 2002

ABSOLUTE RECOVERY HEDGE FUND, L.P., ET ANO., PLAINTIFFS,
V.
GAYLORD CONTAINER CORP., ET AL., DEFENDANTS.



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

MEMORANDUM OPINION

On January 22, 2002, the Temple-Inland defendants commenced the latest in a series of tender offers for the common stock and debt securities of Gaylord Container Corporation ("Gaylord"). The offer is scheduled to expire on February 19, 2002 at 11:59 p.m. Plaintiffs, a hedge fund holding a small amount of certain Gaylord notes and its affiliate, seek a temporary restraining order requiring that $3 million be deducted from the consideration paid to Gaylord securities holders in the event the tender offer closes in order to fund a possible attorneys' fee to their counsel on the theory that the consideration paid in the tender offer, to the extent that it exceeds the consideration offered in the first tender offer, is a common fund attributable at least in part to their efforts and thus the proper subject of a fee award.

I

A. The First Tender Offers and the Start of the Litigation

On September 27, 2001, Temple-Inland and Gaylord announced the signing of a merger agreement (the "Agreement") by which Temple-Inland would acquire Gaylord. Pursuant to the Agreement, Temple-Inland began tender offers (the "First Offer") for all of Gaylord's outstanding shares, 9-3/8% Senior Notes due 2007, 9-3/4% Senior Notes due 2007, and 9-7/8% Subordinated Notes due 2008 (collectively, the "Notes"). The prices offered for the Notes were $735 per $1,000 in principal amount of the Senior Notes and $240 per $1,000 in principal amount of the Subordinated Notes. The First Offer was contingent on the tender of at least two-thirds of the outstanding common stock and 90 percent of the aggregate principal amount of the outstanding notes of each series. In addition, Temple-Inland offered an additional $20 per $1,000 in principal amount for each note tendered prior to the consent payment deadline of midnight on October 12, 2001 in exchange for the tendering noteholders' consent to various amendments to the indentures, most notably a waiver of a change of control provision which, absent amendment, would have prevented consummation of the offers.*fn1 These amendments required for adoption the affirmative vote of the holders of more than 50 percent of the aggregate principal amount of each series of Notes. The offer was scheduled to expire on October 29, 2001.

On October 1, 2001, plaintiffs commenced this action, purportedly on behalf of a class consisting of holders of the Senior Notes. The complaint asserts, inter alia, that Gaylord was insolvent or, at least, in the zone of insolvency, that it therefore had assumed fiduciary duties to its creditors including the noteholders, and that it had breached those duties by entering into the merger agreement. The essence of the claim was that the First Offer constituted a breach of fiduciary duty in that Gaylord's common stockholders were to receive substantial payments before the Notes were to be paid in full.*fn2 In addition, plaintiffs claimed that the consent payment, coupled with the early deadline for obtaining it, improperly coerced noteholders to tender.

On October 9, 2001, plaintiffs moved for a temporary restraining order preventing defendants from proceeding with the tender offer or consummating the merger. Before the application was heard, however, it became clear that the First Offer was a failure. On October 10, 2001, counsel representing more than 50 percent of the aggregate principal amount of the Notes advised Gaylord that his clients would not tender their notes or deliver their consents. He accused the board of "gross breaches of fiduciary duty," arguing in substance that the structure of the First Offer allowed an improper diversion of the purchase consideration to the holders of the Gaylord equity and away from the noteholders, a diversion said to be inappropriate in view of Gaylord's allegedly insolvent state.*fn3 Thus, the First Offer was dead on arrival.

The previously scheduled argument of plaintiff's motion for a temporary restraining order took place on the following day, October 11, 2001. After the Court was informed that there was no need for immediate relief in light of the refusal of so many of the noteholders to tender, counsel reached an agreement to extend the consent solicitation and withdrawal deadlines until October 26, 2001, with a hearing on the motion, if needed, to be scheduled in advance of that date.*fn4 It was apparent, however, that there would be no need for any further proceedings unless a large number of noteholders changed their minds or the offer was changed materially.

Despite these developments, the parties began preparations for discovery. On October 15, 2001, however, they agreed to suspend proceedings on the motion to permit negotiations. Temple-Inland repeatedly extended the expiration date of the tender offers, ultimately until November 30, 2001, at which point they were permitted to expire without Temple-Inland acquiring any shares or notes.

B. The Second Tender Offers

On December 3, 2001, Temple-Inland made a second set of tender offers for the Gaylord securities (the "Second Offer"). The price per common share was reduced from $1.80 to $1.25. The prices for the Notes were increased to $875 per $1,000 in principal amount of both classes of Senior Notes and to $300 for the Subordinated Notes. Thus, had the offers been completed and all outstanding securities tendered, the common stock would have received an aggregate of $16.9 million less than in the First Offer, while the noteholders in the aggregate would have received $86 million more. But these offers were not materially more attractive to the noteholders than the First Offer. They expired without success on January 7, 2002.

C. The Third Tender Offers

Temple-Inland launched its latest attempt on January 21, 2002, announcing the current tender offers, which expire on February 19, 2002 (the "Third Offer"). The consideration for Gaylord common shares again was reduced, now to $1.17 per share. The price offered for the Senior Notes was increased to $900 ...


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