Joseph E. Seagram & Sons v. Conoco, Inc.

• Decision Date: 23 July 1981
• Docket Number: Civ. A. No. 81-276.
• Citation: 519 F. Supp. 506
• Parties: JOSEPH E. SEAGRAM & SONS, INC. and Jes Holdings, Inc., Plaintiffs, v. CONOCO, INC., a Delaware Corporation, Defendant.
• Court: U.S. District Court — District of Delaware

519 F. Supp. 506

JOSEPH E. SEAGRAM & SONS, INC. and Jes Holdings, Inc., Plaintiffs, v. CONOCO, INC., a Delaware Corporation, Defendant.

Civ. A. No. 81-276.

United States District Court, D. Delaware.

July 21, 1981.

As Amended July 23, 1981.

R. Franklin Balotti, Allen M. Terrell, Jr., Jesse A. Finkelstein and Samuel A. Nolen of Richards, Layton & Finger, Wilmington, Del., Simpson, Thacher & Bartlett, New York City, of counsel, for plaintiffs Joseph E. Seagram & Sons, Inc., and Jes Holdings, Inc.

Bruce M. Stargatt, Jack B. Jacobs and Richard A. Levine of Young, Conaway, Stargatt & Taylor, Wilmington, Del., Dewey, Ballantine, Bushby, Palmer & Wood, New York City, of counsel, for defendant Conoco, Inc.

MEMORANDUM OPINION

LATCHUM, Chief Judge.

Plaintiffs, Joseph E. Seagram & Sons, Inc. ("Seagram"), and its wholly-owned subsidiary, JES Holdings, Inc. ("JES"), are engaged in a hostile tender offer to acquire a controlling interest in defendant, Conoco, Inc. ("Conoco"). On June 25, 1981, the date on which the material terms of the offer were publicly announced, plaintiffs brought this action, seeking a declaratory judgment: (1) that the provisions of the Delaware Takeover Statute 8 Del.C. § 203, are unconstitutional; (2) that a recently enacted amendment to Conoco's bylaws which purports to place restrictions on the transfer of Conoco stock to a designated class of "aliens," including plaintiffs, is invalid under Delaware law; and (3) that a proposed amendment to Conoco's certificate of incorporation containing parallel restraints on stock transferability and additional restrictions on the ownership rights of "aliens" similarly violates Delaware law. (Docket Item "D.I." 1.) Plaintiffs' complaint, as filed, further sought to enjoin Conoco and the Attorney General of the State of Delaware from taking any action to enforce the Takeover Statute against plaintiffs and to enjoin Conoco from acting to implement and enforce the bylaw and proposed charter amendment. (Id.)

On the same day this suit was filed, the Court issued an order temporarily restraining Conoco and the Attorney General of the State of Delaware from invoking the provisions of the Delaware Takeover Statute to delay the commencement of plaintiffs' tender offer. (D.I. 6.)¹ Thereafter, the parties entered into a stipulation, dated June 30, 1981, and approved by the Court, under which Conoco agreed not to seek enforcement of the Takeover Statute, thus eliminating that issue from the case. (D.I. 15.) Subsequently, the Attorney General of the State of Delaware was removed as a defendant by agreement of the parties. (D.I. 14, 20.) In addition, plaintiffs recently decided to abandon that part of their complaint challenging the proposed charter amendment, and a stipulation to dismiss that count without prejudice was approved by the Court. (D.I. 25, 27.) The only issue now remaining in this action is plaintiffs' contention that the bylaw amendment enacted by Conoco's Board of Directors is invalid and unenforceable against Conoco's shareholders because it contravenes Delaware law. Before addressing this question, the Court will examine the factual background giving rise to this dispute.

I. Background

The contested bylaw was formulated in response to an earlier tender offer in May 1981 by Dome Petroleum Limited ("Dome"), a Canadian corporation, to purchase 20% of Conoco's outstanding common stock. (D.I. 27 at 8.) The avowed purpose of Dome's offer was not to seek control of Conoco itself, but to increase Dome's bargaining leverage in its efforts to acquire Conoco's 53% interest in Hudson's Bay Oil and Gas Limited, a Canadian subsidiary of Conoco. (Id.) Although Conoco's Board of Directors steadfastly counseled its shareholders against accepting the Dome offer (id.), the offer was successful and Dome subsequently exchanged the 22 million Conoco shares it had acquired, plus a cash settlement, for Conoco's interest in the Canadian subsidiary. (D.I. 26 at A-47.)

In order to ward off future attempts by foreign concerns to acquire significant blocs of Conoco stock, the Board of Directors passed a resolution on May 18, 1981, adopting an amendment to the corporate bylaws, which purported to limit the number of shares which could be held by "alien" companies at any given time. The amended bylaw ("alien ownership restriction" or "bylaw") provides in pertinent part:

(i) Notwithstanding any other provision of these bylaws, any transfer, or attempted or purported transfer, of any shares of capital stock issued by the corporation or any interest therein or right thereof which would result in the ownership or control by one or more Aliens of an aggregate percentage of the shares of all capital stock of the corporation or of any interest therein or right thereof in excess of any applicable Alien Permitted Percentage shall, to the full extent permitted by law, and for so long as such excess shall exist, be void and shall be ineffective as against the corporation and the corporation shall not recognize the purported transferee as a stockholder of the corporation for any purpose whatsoever except for the purpose of making a further transfer which will cause such excess to be reduced or eliminated and not otherwise be prohibited under this subsection (i);

Article XVIII, Section 5(b)(i). (D.I. 23A at A-84.)

"Alien" is broadly defined in the bylaw to include inter alia any "person," including an individual, partnership or corporation, who is not a United States citizen, any corporation in which the president, chief executive officer or chairman of the board is not a United States citizen, and any corporation organized under the laws of a foreign government. In addition, a corporation which is 20% owned or controlled, directly or indirectly, by aliens or who acts as a representative or fiduciary for an alien, is itself classified as an alien for purposes of the bylaw. Article XVIII, Section 5(c)(i). (D.I. 23A at A-85.) The bylaw further vests the Board of Directors with broad discretion to establish the applicable "Alien Permitted Percentage." Shares held by all aliens may not exceed, in the aggregate, 20% of the outstanding shares of capital stock of the corporation or such other percentage as the Board may deem necessary. Article XVIII, Section 5(c)(ii) (D.I. 23A at A-85.) In addition, the Board is empowered to set separate "Alien Permitted Percentages" to govern all shares held by aliens of individual foreign countries.² In establishing these percentages, the Board is to insure that alien holdings of Conoco stock will not, under federal or state law, be likely to hinder or prevent the corporation from conducting any business in which it is now engaged, or which it is contemplating. Id. Finally, the Board may suspend the effectiveness of the bylaw at any time or for any period during which, in the Board's judgment, the restrictions are unnecessary to the conduct of any business or contemplated business of the corporation. Article XVIII, Section 5(a). (D.I. 23A at A-84.)

Every stock certificate issued by Conoco on the transfer of authorized and outstanding shares, since the bylaw was adopted on May 18, 1981, has been imprinted with a legend alerting the holder to the alien ownership restriction. Approximately 30,111 legended stock certificates representing 59,637,806 shares of Conoco stock have been issued since that date. (D.I. 27 at 17.)

Seagram is a corporation organized under the laws of Indiana with its principal place of business in New York. It is a wholly-owned subsidiary of The Seagram Company, Ltd., a corporation organized under the laws of Canada and a principal producer and marketer of liquor and wine. JES is a wholly-owned subsidiary of Seagram which was organized for the sole purpose of making a cash tender offer for Conoco stock. (D.I. 1 at ¶¶ 10, 11.) Plaintiffs claim, and Conoco concedes, that Seagram and JES qualify as "aliens" under the Conoco bylaw. (D.I. 1 at ¶ 50; D.I. 18 at ¶ 50.)

On May 29, 1981, Seagram opened negotiations with Conoco aimed at a possible substantial acquisition of Conoco stock. (D.I. 23A at A-11; D.I. 27 at 17-18.) As part of a draft agreement submitted to Conoco, Seagram proposed that the alien ownership restriction be rescinded (id.). Negotiations subsequently broke down, however, and at a meeting held on June 17, 1981, Conoco formally rejected Seagram's offer to make a significant investment in Conoco. (D.I. 23A at A-12; D.I. 27 at 18.) Within the next two days, JES acquired 143,800 shares of Conoco stock in open market purchases (D.I. 23A at A-8), and on June 25, 1981, Seagram announced that JES would commence a cash tender offer for up to 35,000,000 shares or 41% of the outstanding stock of Conoco at a price of $73 per share. (Id. at A-1.) Simultaneously with the announcement of the tender offer, Seagram and JES filed this action. The Court granted the plaintiffs' motion for expedited discovery and briefing, both parties submitted memoranda on the legal questions posed by the adoption of the alien ownership restriction, and a hearing on this issue was held on July 13, 1981.

During the pendency of the proceedings in this Court, Conoco and E.I. DuPont de Nemours & Co. ("DuPont") signed a merger agreement under which DuPont consented to pay Conoco shareholders $87.50 for each share tendered, or to exchange 1.6 shares of DuPont stock for each Conoco share held. In response to this development, Seagram modified its original cash tender offer and now seeks to acquire 51% of the outstanding shares of Conoco at a purchase price of $85.00 per share. Recently, Mobil Oil Co. announced its own tender offer to gain control of Conoco, and DuPont, Seagram and Mobil Oil Co. are now engaged in a bidding war which has been well chronicled in the financial pages of the major newspapers in this country. In addition, rumors are adrift that other major corporations may enter the fray and make independent bids for control of Conoco. It is against...