Berlin v. Emerald Partners

• Decision Date: 15 August 1988
• Citation: 552 A.2d 482
• Parties: , 57 USLW 2466 Ronald P. BERLIN, David L. Florence, Craig Hall, Rex A. Sebastian, Theodore H. Strauss and May Petroleum, Inc., a corporation of the State of Delaware, Defendants Below, Appellants, v. EMERALD PARTNERS, a New Jersey limited partnership, Plaintiff Below, Appellee. . Submitted:
• Court: Supreme Court of Delaware

Page 482

552 A.2d 482

80 A.L.R.4th 641, 57 USLW 2466

Ronald P. BERLIN, David L. Florence, Craig Hall, Rex A Sebastian, Theodore H. Strauss and May Petroleum Inc., a corporation of the State of Delaware, Defendants Below, Appellants, v. EMERALD PARTNERS, a New Jersey limited partnership Plaintiff Below, Appellee.

Supreme Court of Delaware.

Submitted: Aug. 15, 1988.

Oral Decision: Aug. 15, 1988.

Written Opinion: Jan. 12, 1989.

William Prickett, Wayne N. Elliott, John H. Small, Vernon R. Proctor of Prickett, Jones, Elliott, Kristol & Schnee, Michael D. Goldman, Donald J. Wolfe, Jr., William J. Marsden, Jr. of Potter, Anderson & Corroon, Wilmington, A.B. Conant, Jr. (argued), Ivan Irwin, Jr. of Shank, Irwin, Conant, Lipshy & Casterline, Louis Bickel, Margaret L. Vandervalk, of Akin, Gump, Strauss, Hauer & Feld, Dallas, Tex., and Daniel F. Berry of Simpson & Moran, Birmingham, Mich., on behalf of appellants.

R. Franklin Balotti (argued), and Gregory V. Varallo of Richards, Layton & Finger, Wilmington, Robert J. Schechter of Koether, Harris & Hoffman, New York City, on behalf of appellee.

Before CHRISTIE, C.J., HORSEY, MOORE, HOLLAND, JJ., and BIFFERATO, Judge (sitting by designation pursuant to Del. Const. art. IV., § 12) (constituting the Court en banc ).

HOLLAND, Justice, for the majority.

Emerald Partners ("Emerald"), a New Jersey limited partnership, brought this action in the Court of Chancery on March 1, 1988. The defendants are May Petroleum, Inc. ("May"), a Delaware corporation; its three outside directors, David L. Florence, Rex A. Sebastion, and Theodore H. Strauss; and its two inside directors, Craig Hall and Ronald P. Berlin (collectively, "the May Board"). Emerald originally brought this suit individually, and subsequently amended its complaint to allege class and derivative claims.

Emerald sought to enjoin the consummation of a merger between May and thirteen corporations owned by Craig Hall ("Hall"), the Chairman and Chief Executive Officer of May. Following extensive discovery, a preliminary injunction hearing was held on March 16, 1988. The Court of Chancery entered an order on March 18, 1988, preliminarily enjoining consummation of the May merger with the Hall corporations on the grounds that:

(a) Under a provision of the May certificate of incorporation, a supermajority vote of the May stockholders on the merger was required; and

(b) At the special meeting of the May stockholders, either no quorum was present or the merger did not receive the requisite supermajority vote.

This case was accepted, on an expedited basis, as an interlocutory appeal under Supreme Court Rule 42. Following oral arguments and deliberations on August 15, 1988, this Court announced its decision. ¹ A majority of this Court held that the provision of the May certificate of incorporation requiring a supermajority vote was not applicable, under the facts of this case, to the merger proposal presented to the May stockholders. However, the Court was in unanimous agreement that if the supermajority provision in the May certificate of incorporation was applicable to the merger proposal, the requisite supermajority vote had been achieved. Therefore, the judgment of the Court of Chancery preliminarily enjoining the merger was reversed, the injunction was vacated, and a mandate remanding the case was issued forthwith. This opinion sets forth the reasons for the decision that was announced on August 15, 1988. Supr.Ct.R. 19.

Facts

The parties to the challenged merger are May and thirteen Sub-chapter S corporations owned by Hall ("the Hall corporations"). The Hall corporations are primarily engaged in the real estate service business. May is a Delaware corporation headquartered in Dallas, Texas. May had been engaged in the business of oil and gas exploration until July 30, 1987, when May sold substantially all of its income producing properties. Since that time, May has ceased to be an operating company. Its assets consist primarily of cash, marketable securities, a limited partnership interest, and net operating loss and capital loss carry forwards (collectively "NOL's"). Although May had not been financially successful in recent years, reporting losses of approximately $80 million from 1983 to 1986, May remained an attractive takeover target due to the liquidity of its assets and a net operating loss carryover of approximately $54 million.

During the years 1983 through 1986, while May was losing approximately $80 million, audited financial statements show that the Hall corporations made approximately $67 million. In October of 1987, Hall controlled at least 52% of May's outstanding common stock. On October 24, 1987, at a special meeting of May's directors, Hall requested that the outside directors of May's Board agree to examine the possibility of a merger with the Hall corporations.

On November 7, 1987, May's Board decided to consider a merger proposal. The outside directors retained the investment banking firm of Bear Stearns & Co., Inc., to assess the terms of any merger and ultimately to issue a fairness opinion. The law firm of Shank, Irwin, Conant, Lipshy & Casterline ² was retained by the outside directors to advise and negotiate a fair arrangement for the minority stockholders. Arthur Anderson & Company was hired to verify the financial statements of May and the Hall corporations.

On November 24, 1987, the May Board met and was presented with the preliminary valuations of May and the Hall corporations. Following this presentation, Hall agreed to accept 27 million shares of May stock in exchange for his shares in the Hall corporations. May and the Hall corporations entered into a proposed merger agreement on November 30, 1987. The execution of the merger agreement was made public through a press release that was disseminated by the May Board.

Emerald is a minority stockholder of May. Emerald was formed and is controlled by Paul Koether ("Koether") and his wife, Natalie Koether, Esquire. On December 10, 1987, Hall met with Koether in Dallas, Texas, at Koether's request. Koether told Hall that he represented interests which owned 450,000 shares of May's stock. ³ Koether explained to Hall that he and his wife made money by selling their stock positions back to the issuing companies at a significant profit. Koether proposed that he and Hall become partners in these types of "greenmail" transactions.⁴

Koether's efforts to persuade Hall to join forces with him for the purpose of investing in several stocks were unsuccessful. However, Hall inquired of Koether about buying out Emerald's stock holdings in May. At the time of Hall's request, May had a nominal market value of approximately $1.00 per share. Koether stated that Emerald would sell its May stock at a price of $1.80 per share before January 1, 1988, and at $2.24 per share thereafter. This offer was rejected by Hall. Koether replied that if Hall did not purchase Emerald's stock holdings in May, he would purchase additional stock in May. Koether suggested that the provisions of Article Fourteenth of the May certificate of incorporation made it possible for him to block, or make it difficult for Hall to complete, the proposed merger.

Article Fourteenth of the May certificate of incorporation requires that for May to be a party to certain business combinations, the proposed combination must receive a supermajority vote. In particular, such a vote is required where the proposed merger is between May and an acquiring entity owning in excess of 30% of May stock. Since Hall owned or controlled approximately 52% of the May stock, the provisions of Article Fourteenth were applicable to the proposed merger with the Hall corporations. Therefore, if Koether followed through with his intention to acquire more of May's stock through Emerald, he arguably would be able to block the proposed merger by virtue of Emerald's minority holdings of May's stock.

Hall was concerned that Emerald would continue to acquire May stock and that the supermajority vote required by Article Fourteenth could not be obtained. In fact, Hall perceived, and the Court of Chancery characterized, Emerald's statements to Hall as a "threat." Accordingly, Hall decided to "drop down", or reduce, the amount of May stock which he controlled. His initial inclination was to donate a substantial portion of his May stock to charity. However, he and the other May directors were advised that such a charitable contribution would result in the loss to May of a very valuable asset, i.e., the NOL's.

Thereafter, Hall and the May Board were advised that Hall could transfer a significant portion of his May stock to an irrevocable trust for his children, with independent trustees, and a smaller percentage of the stock to charity, without the loss of May's NOL's. This suggestion appealed to Hall. A portion of May stock would be removed from Hall's control for purposes of Article Fourteenth and the transfer would further his charitable and estate planning objectives.

On January 28, 1988, the May Board met and set March 8, 1988, as the date for a special meeting of the stockholders to vote upon the merger proposal with the Hall corporations. The record date was set as February 2, 1988. On February 1, 1988, effective January 29, 1988, Hall transferred 3,981,771 shares of May stock (constituting 27% of May's outstanding common stock) to an independent irrevocable trust, set up for the benefit of his four daughters ("Hall 1988 Children's Trust"). The two co-trustees were vested with independent power to vote or dispose of the shares owned by the trust. The net effect of this transfer was to reduce Hall's personal ownership of May stock from 52% to 25%, at a time prior to the record date, and prior to the stockholder vote on the merger.

On February 13, 1988, the May Board reaffirmed the merger agreement which was eventually presented to and voted upon by the May stockholders. ⁵ The May stockholders were advised...