Rosenblatt v. Getty Oil Co.

• Decision Date: 25 June 1984
• Citation: 493 A.2d 929
• Parties: Emanuel G. ROSENBLATT, Joseph Gruss, Carolyn Skelly Burford, et al., Plaintiffs Below, Appellants, v. GETTY OIL COMPANY, Defendant Below, Appellee. . Submitted:
• Court: Supreme Court of Delaware

Page 929

493 A.2d 929

Emanuel G. ROSENBLATT, Joseph Gruss, Carolyn Skelly Burford, et al., Plaintiffs Below, Appellants, v. GETTY OIL COMPANY, Defendant Below, Appellee.

Supreme Court of Delaware.

Submitted: June 25, 1984.

Decided: May 9, 1985.

Upon appeal from the Court of Chancery. AFFIRMED.

Irving Morris (argued) and Norman M. Monhait, Morris & Rosenthal, P.A., Wilmington, for Emanuel G. Rosenblatt, plaintiff below-appellant; William Prickett and Wayne J. Carey, Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, for Joseph Gruss, Carolyn Skelly Burford and the Gruss Entities, plaintiffs below, appellants.

Charles F. Richards, Jr. (argued), Donald A. Bussard, William J. Wade, Thomas A. Beck, Richards, Layton & Finger, Wilmington, for defendant below, appellee.

Before McNEILLY, MOORE, and CHRISTIE, JJ.

MOORE, Justice:

In this class action brought on behalf of the minority stockholders of Skelly Oil Company (Skelly) we review a Court of Chancery decision holding that the 1977 stock-for-stock merger of Skelly and Mission Corporation (Mission) into Getty Oil Company (Getty) was entirely fair to the plaintiffs.

For the first time since Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701 (1983), we address certain principles upon which the parties' basic disputes are centered. These include the allocation of the burden of proof on the fairness issue, the continued viability of the Delaware Block method of valuation, and the circumstances necessitating disclosure by a majority stockholder of the price it ultimately is prepared to pay the minority for its elimination. Applying the fairness analysis in Weinberger, we conclude that Getty, as the majority shareholder of Skelly, dealt fairly with the Skelly minority throughout the transaction. We also conclude that the stock exchange ratio in this merger was the product of sound valuation methods and arm's length bargaining. Accordingly, we affirm the trial court's decision on the merits.

I.

A somewhat detailed factual discussion is helpful to an understanding of the issues before us.

A.

Background and Operations of the Companies.

Immediately before this merger Getty directly owned 7.42% of Skelly's outstanding shares and 89.73% of Mission, which in turn held 72.6% of Skelly's stock.

Getty was a large petroleum company concerned primarily with the exploration for and development of crude oil and natural gas throughout the world. Its operations and activities were integrated vertically to include the exploration and development of petroleum, natural gas, and minerals both on land and offshore; the production and refining of petroleum and natural gas, both domestically and in other countries; the transportation of these products by its own fleet of five domestic and twelve international flag vessels, as well as by rail car, tank truck, and pipeline; the manufacturing of petroleum products and chemicals; and the wholesale and retail distribution of these products in the United States and Phillipines.

Apart from Getty's operations and significant assets, qualifying it as an integrated oil company, Getty had important subsurface properties of oil and natural gas reserves in the United States, Canada, Spain, the Middle East, and the North Sea. Among the United States reserves was the Kern River field in the San Joaquin basin of California. ¹

Getty's foreign holdings included reserves in the Piper and Claymore fields located in the British North Sea. ² Getty held a 23.5% interest in Piper, estimated in 1975 to contain 642 million barrels of recoverable oil reserves. Getty's share of the crude oil reserves for the Piper and Claymore fields was estimated at 132 and 73 million barrels, respectively. Getty's 1975 annual report listed Claymore's estimated recoverable oil reserves at 356 million barrels. Apart from its North Sea properties, Getty also had offshore interests in Spain, Sumatra, the South China Sea, Algeria, Iran, and the Saudi Arabia--Kuwait Partitioned Neutral Zone, an area of disputed ownership administered jointly by both nations. Getty owned uranium, coal, gold, copper and oil shale reserves in the United States, and maintained an interest in uranium--gold ore reserves in Australia's Northern Territory.

Like Getty, Skelly was an integrated oil company with far flung, diversified operations and activities at the time of the merger. Skelly had significant domestic offshore petroleum reserves in the production stage, as well as large leaseholdings onshore in North America. The latter included 325,000 acres in the Powder River Basin of Montana and Wyoming. Internationally, Skelly had a 25% interest in a 500,000 acre concession, including the Mubarek field, in the Persian Gulf. ³ Skelly also had a 31.25% interest in the Heather field in the North Sea. ⁴ It was disclosed that in 1975, 59% of Skelly's crude oil production was a result of enhanced recovery techniques, principally waterflooding.

Beyond its oil reserves, Skelly owned 50% of a wood products manufacturer, held 50% of a petrochemical manufacturer, and maintained interests in two pipeline companies, a Republic of Korea fertilizer manufacturer, a domestic fertilizer plant in Clinton, Iowa (the Hawkeye plant), and a timber concession in Liberia, where it was building a saw mill and plant. It also owned and operated a crude oil refinery in Kansas with an approximate daily capacity of 90,000 barrels, as well as a natural gas plant in Texas. Skelly's operations included oil and gas exploration and development, the production, transportation, refining and sale of crude oil and natural gas, and wholesale and retail marketing.

Mission was a Nevada corporation controlled by Getty, and was primarily an investment company with minimal assets other than its Skelly stock.

B. Merger Discussions and Negotiations

Until his death on June 6, 1976, J. Paul Getty, the majority shareholder of Getty, had continually opposed the merger of Getty and Skelly. His reasons were varied, but they apparently centered on his notion that a healthy competition existed between the two companies which enhanced their profitability to a greater extent than the synergy to be anticipated from a merger.

However, there were others with differing views. At the May 1976 annual meeting of Mission an attorney representing Joseph Gruss, a Skelly minority shareholder, argued for a merger of Mission into Getty, and threatened suit on his client's behalf. In late June or early July 1976, after Mr. Getty's death, Harold E. Berg, then Getty's executive vice president and chief operating officer, met with C. Lansing Hays, Jr., a Getty director and counsel to Getty, and Moses Lasky , another Getty lawyer, to explore the anti-trust implications of a merger. ⁵ They noted that since a Getty-Mission merger also would require a valuation of Mission's 72.6% interest in Skelly, a merger of all three companies would be more efficient. At trial Berg testified that one of the reasons for the proposed merger was to minimize stockholder dissension by meeting the demands of persons like Joseph Gruss.

On July 12, 1976, Berg called James E. Hara, president of Skelly, to inform him that a combination of Getty, Skelly, and Mission was being considered. Berg suggested a conference of high-level Getty and Skelly personnel. This meeting was held in Dallas, Texas, on July 15, 1976, attended by the principle officers of both companies. All acknowledged the desirability of a merger. The consensus was that the fairest way to achieve this result would be an exchange of common stock, continuing shareholder participation in a larger post-merger company. Thereafter, a memorandum was distributed summarizing the pertinent legal considerations affecting the proposal.

Generally, it was agreed at the July 15 meeting that DeGolyer and MacNaughton (D & M), a Dallas, Texas, petroleum engineering firm with an outstanding reputation, would assist the parties in evaluating their respective oil, gas and mineral reserves. D & M had worked periodically with both Skelly and Getty since 1939, and had prepared annual estimates of oil and gas reserves for both companies for many years. In addition, D & M had begun preparing annual reports on Getty's mineral properties for the last several years prior to the merger. Accordingly, D & M was contacted on July 15, 1976 by Getty and Skelly and asked to estimate the reserves of both companies, to make an economic valuation based on those estimates, and then to deliver this analysis to the companies for their use in negotiating the merger exchange ratio.

After the July 15 Dallas meeting, Getty and Skelly promptly began evaluating their respective surface and subsurface assets. It is clear that both parties devoted substantial internal resources in preparing to negotiate the exchange ratio of Getty and Skelly stock. In addition, both companies hired reputable investment banking firms to assist in the valuation task, and to render opinions on the fairness of the merger's ultimate terms. Getty retained Blyth, Eastman, Dillon & Co. ("Blyth Eastman"), and Skelly chose Smith Barney, Harris Upham & Co. ("Smith Barney").

Significantly, Skelly and Getty approached the merger with entirely different objectives which remained constant throughout the negotiations. Already, Getty had been threatened with suit by Gruss, a Skelly minority shareholder, and had every expectation that the transaction would lead to litigation. Thus, it carefully sought to comply with applicable Delaware law in meeting the test of complete fairness. It was for this reason that in negotiating the exchange ratio Getty recommended use of the Delaware Block method to value the companies' stock. ⁶ Skelly's object on behalf of its minority shareholders was one of direct economic interest--to obtain the best possible price for its stock by a highly favorable exchange ratio of Skelly to Getty shares.

In utilizing the Delaware Block method, Skelly attempted to maximize the...