Black & Decker Corp. v. American Standard Inc.

• Decision Date: 23 February 1988
• Docket Number: Civ. A. No. 88-50 LON.
• Citation: 679 F. Supp. 1183
• Parties: The BLACK & DECKER CORPORATION, a Maryland corporation, and B & D Acquisition Inc., a Maryland corporation, Plaintiffs, v. AMERICAN STANDARD INC., a Delaware corporation, and Charles M. Oberly, III, Attorney General of the State of Delaware, and Michael E. Harkins, Secretary of State of State of Delaware, Defendants.
• Court: U.S. District Court — District of Delaware

679 F. Supp. 1183

The BLACK & DECKER CORPORATION, a Maryland corporation, and B & D Acquisition Inc., a Maryland corporation, Plaintiffs, v. AMERICAN STANDARD INC., a Delaware corporation, and Charles M. Oberly, III, Attorney General of the State of Delaware, and Michael E. Harkins, Secretary of State of State of Delaware, Defendants.

Civ. A. No. 88-50 LON.

United States District Court, D. Delaware.

February 23, 1988.

Steven D. Goldberg, of Theisen, Lank, Mulford and Goldberg, Wilmington, Del., of counsel, George Beall (argued), Mark D. Gately (argued) and Ty Cobb, and John H. Culver, III of Miles & Stockbridge, Baltimore, Md., for plaintiffs.

R. Franklin Balotti (argued), Jesse A. Finkelstein, Gregory V. Varallo, C. Stephen Bigler, James C. Strum and Daniel A. Dreisbach, of Richards, Layton & Finger, Wilmington, Del., of counsel, John L. Warden, Gandolfo V. DiBlasi, Samuel W. Seymour, and Karen Patton Bogle, of Sullivan & Cromwell, New York City, for defendant American Standard Inc.

A. Gilchrist Sparks, III (argued), Kenneth J. Nachbar, Michael Houghton, and Robert J. Valihura, Jr., of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for defendants Oberly and Harkins.

Beverly L. Bove, John E. Sullivan, and Cassandra Faline Kaminski, of Tomar, Seliger, Simonoff, Adourian & O'Brien, Wilmington, Del., of counsel, Robert F. O'Brien, and Mark E. Belland, Haddonfield, N.J., amicus curiae.

OPINION

LONGOBARDI, District Judge.

The Black & Decker Corporation ("Black & Decker") and B & D Acquisition Inc. ("B & D Acquisition" sometimes both collectively referred to as "Black & Decker"), an indirect wholly-owned subsidiary, filed a lawsuit against American Standard Inc. ("American Standard"), Charles M. Oberly, III, Attorney General of the State of Delaware, and Michael E. Harkins, Secretary of State of the State of Delaware ("Oberly and Harkins"), seeking a declaration that 8 Del.C. § 203 (sometimes referred to as the "Business Combination Statute" or "Section 203") is unconstitutional.

In the immediate proceedings, Plaintiffs seek a preliminary injunction against the Defendants enjoining them from utilizing or enforcing Section 203 against Plaintiffs in their tender offer for all of American Standard's stock. Since some arguments by the parties are predicated upon the facts surrounding both the Business Combination Statute and the tender offer, the material facts are briefly discussed below.

BACKGROUND

Black & Decker's tender offer commenced on January 27, 1988, with the announced purpose of acquiring control of American Standard and subsequently effecting a merger or similar business combination between American Standard and B & D Acquisition or another affiliate. Black & Decker originally offered $56.00 a share and then increased the offer to $65.00 per share. See Supplement to Offer to Purchase accompanying Amendment No. 4 to Black & Decker's Schedule 14D-1 ("Supplemental Offer to Purchase") Exhibit 1 in Reply Brief in Support of Plaintiffs' Motion for Preliminary Injunction ("Plaintiffs' Reply Brief"), Docket Item ("D.I.") 23. Black & Decker initially conditioned the tender offer on, among other things, its ability to purchase at least a majority of the shares outstanding on a fully diluted basis. It disclosed that its financing was conditioned upon Black & Decker obtaining a majority of American Standard's stock. It also conditioned the tender offer on the enactment of the Business Combination Statute and its application to the proposed merger. Offer to Purchase, D.I. 9A at 23-24. If the proposed merger does not occur within one hundred eighty days of the consummation of the tender offer, all of the borrowed funds will become immediately due and payable and all unused commitments will be cancelled on that date. Id. at 13. In its Supplemental Offer to Purchase, Black & Decker waived the condition with respect to the enactment of Section 203. Supplemental Offer to Purchase, Exhibit 1 to Plaintiffs' Reply Brief, D.I. 23 at 10. A new condition was added. The tender offer was conditioned upon Black & Decker "being satisfied in its sole discretion that upon the purchase of Shares pursuant to the Offer, Black & Decker will be able to cause American Standard to elect expressly not to be governed by Section 203 or Section 203 otherwise being inapplicable." Id. The tender offer is scheduled to close on February 24, 1988, unless Black & Decker, in its sole discretion, extends the period. Id. at 3.

The Business Combination Statute at issue here is an outgrowth of the Supreme Court decision in CTS Corp. v. Dynamics Corporation of America, ___ U.S. ___, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987). Following the CTS Corp. decision, Delaware began considering the adoption of its own second generation takeover statute patterned on the Indiana statute upheld in CTS Corp. The Council of the Corporation Section of the Delaware State Bar Association (the "Council") began studying the merits of such a statute in April, 1987. The Delaware Takeover Statute: A Report to the Delaware General Assembly (the "Report"), Exhibit 10 in Appendix to Memorandum of Law in Support of Plaintiffs' Motion for a Preliminary Injunction, D.I. 9A at 5. A discussion draft was distributed the following May but the Council voted unanimously not to propose the takeover legislation to the General Assembly at that time. Id. It was felt that not only would a statute similar to that upheld in CTS Corp. not protect stockholders against certain hostile takeovers but it could also make it easier for a company to be put into play to be sold. Id.

An alternative draft statute was circulated by the Council on November 11, 1987. Id. After receiving numerous comments on the proposed draft, the Council modified the proposed statute in order to address some of the concerns raised by the comments which went to the issues of providing protection to stockholders in unfair takeovers and yet not limit the ability of a potential acquirer to make, and the shareholders to receive, a fair and fully priced bid. Id. at 6. The Council approved the draft of Section 203 on December 22, 1987, and the Corporation Law Section of the State Bar Association approved it on January 4, 1988. Id. at 6. It was then approved by the Executive Committee of the State Bar Association and recommended to the Delaware General Assembly. Id. The General Assembly House and Senate Judiciary Committees held a joint hearing on January 20 and 21, 1988, to consider the proposed Business Combination Statute. Affidavit of Michael Houghton, D.I. 15 at 2 (the "Houghton Affidavit"). The Committees heard approximately ten hours of live testimony from thirty witnesses. Id. The House of Representatives of the Delaware General Assembly approved the bill on January 26, 1988, and the Senate approved it on January 28, 1988. Governor Michael N. Castle signed the legislation into law on February 2, 1988.

SECTION 203: "BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS"

The basic function of Section 203 is to prevent a business combination between a Delaware corporation and an interested shareholder for three years unless certain alternative requirements delineated in the statute are satisfied.¹ 8 Del.C. § 203(a). The statute defines an interested shareholder as any person who owns 15% or more of the outstanding voting stock of the corporation. The statutory definition of the terms "own", "owned" or "owner" includes a person who, either individually or with or through any affiliate or associate, (i) either directly or indirectly owns the stock; (ii) has the right to acquire the stock; or (iii) has an agreement for the purpose of acquiring, holding, voting or disposing of the stock with another person who beneficially owns, or whose associates or affiliates beneficially own, the stock. 8 Del.C. § 203(c)(8). Section 203 explicitly excludes from its definition of interested stockholder a person who owned 15% of a corporation's stock prior to December 23, 1987, a stockholder who acquires enough shares to become an interested stockholder through a tender offer commenced prior to December 23, 1987, or a person who would become an interested shareholder pursuant to an exchange offer announced prior to December 23, 1987, and commenced within ninety days of that date. 8 Del.C. § 203(c)(5).

A business combination with the interested shareholder is defined to include any merger or consolidation between the corporation, or its majority owned subsidiary, and the interested shareholder. 8 Del.C. § 203(c)(3)(i). It also includes any business combination between the corporation and any other corporation if the merger or consolidation is caused by the interested shareholder and, if, as a result, Section 203's prohibitions as to a business combination with an interested shareholder would not be applicable to the surviving corporation. Id. The definition also includes any sale, lease, pledge, mortgage, exchange, transfer or other disposition to or with the interested shareholder of the company's assets having a market value equal to or greater than 10% of the aggregate market value of the assets of the company or of all the outstanding stock of the corporation. 8 Del.C. § 203(c)(3)(ii). Under this provision, however, the acquired corporation is free to dispose of the assets to a third-party after the interested shareholder gains control so long as the dividends or liquidation proceeds are distributed to all the shareholders on a pro rata basis. Id. Section 203 exempts business combinations between the corporation and the interested shareholder from the three year moratorium if any one of three statutory requirements are met. The three year prohibition is inapplicable if, before the stockholder becomes an interested stockholder, the board of directors of the corporation approves either the business combination or the transaction which results in the stockholder becoming an interested stockholder. 8 Del.C. § 203(a)(1). Secondly, the...