Woodward & Lothrop, Inc. v. Schnabel

• Decision Date: 10 September 1984
• Docket Number: 84-2051 and 84-2102.,84-2028,Civ. A. No. 84-1716
• Citation: 593 F. Supp. 1385
• Parties: WOODWARD & LOTHROP, INC., Plaintiff, v. Robert V. SCHNABEL, et al., Defendants. Margaret C. DUDLEY, et al., Plaintiffs, v. Edwin K. HOFFMAN, et al., Defendants. Jo V. SEIBERT, Plaintiff, v. Edwin K. HOFFMAN, et al., Defendants. Barnett STEPAK, Plaintiff, v. Edwin K. HOFFMAN, et al., Defendants.
• Court: U.S. District Court — District of Columbia

593 F. Supp. 1385

WOODWARD & LOTHROP, INC., Plaintiff, v. Robert V. SCHNABEL, et al., Defendants.

Margaret C. DUDLEY, et al., Plaintiffs, v. Edwin K. HOFFMAN, et al., Defendants.

Jo V. SEIBERT, Plaintiff, v. Edwin K. HOFFMAN, et al., Defendants.

Barnett STEPAK, Plaintiff, v. Edwin K. HOFFMAN, et al., Defendants.

Civ. A. Nos. 84-1716, 84-2028, 84-2051 and 84-2102.

United States District Court, District of Columbia.

July 26, 1984.

On Motion for Preliminary Injunction September 10, 1984.

COPYRIGHT MATERIAL OMITTED

Peggy Kerr, Skadden, Arps, Slate, Meagher & Flom, Washington, D.C., for plaintiff in No. 84-1716.

Calvin Cobb, Jr., Kenneth Johnson, Steptoe & Johnson, Washington, D.C., for defendants in No. 84-1716 and for plaintiffs in No. 84-2028.

John T. Kotelly, Dickstein, Shapiro & Morin, Margaret K. Pfeiffer, Sullivan & Cromwell, Reed E. Hundt, Irwin Goldbloom, Latham, Watkins & Hills, Larraine S. Holbrooke, Gibson, Dunn & Crutcher, Washington, D.C., for defendants in Nos. 84-2028, 84-2051 and 84-2102.

Michael I. Smith, Harvey A. Levin, Freedman, Levy, Kroll & Simonds, Washington, D.C., for plaintiff in No. 84-2051.

Gene A. Bechtel, Bechtel & Cole, Washington, D.C., for plaintiff in No. 84-2102.

TEMPORARY RESTRAINING ORDER

JOYCE HENS GREEN, District Judge.

Before the Court is plaintiffs' motion for a preliminary injunction in Dudley, et al. v. Hoffman, et al. ("Dudley"), C.A. No. 84-2028, which motion, at the suggestion of the Court and by agreement of the parties, shall be treated as a motion for a temporary restraining order.¹ The Dudley action has been consolidated for all purposes with Woodward & Lothrop, Inc. v. Schnabel, et al. ("Schnabel"), C.A. No. 84-1716, and Seibert v. Hoffman, et al. ("Seibert"), C.A. No. 84-2051, and those actions have been consolidated for purposes of this motion with Stepak v. Hoffman, et al. ("Stepak"), C.A. No. 84-2102. Each of these cases arises from the parties' activities in connection with a proposed merger between Woodward and Lothrop, Inc. ("W & L") and defendants Taubman, Taubman Holdings, Inc. ("THI") and/or Taubman Acquisitions ("TDC"). The merger proposal is scheduled to be presented to W & L shareholders for approval at a special stockholders' meeting to be held on July 31, 1984, and the Dudley, Seibert and Stepak plaintiffs (hereinafter plaintiffs or Dudley) now seek to postpone the shareholders' vote on the merger pending correction of allegedly false or misleading statements contained in the company's proxy materials mailed to shareholders and allegedly violative of Section 14(a) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78n(a) (1982) ("Section 14(a)").

Although plaintiffs' complaints raise numerous federal and state law claims, the motion for temporary injunctive relief now before the Court focuses only on plaintiffs' claims under Section 14(a) of the 1934 Act.

Woodward and Lothrop is a publicly owned corporation which is engaged primarily in the retail merchandising business. Founded in 1880 as a partnership and incorporated in the District of Columbia in 1906, Woodward and Lothrop operates a chain of seventeen stores in the Washington/Baltimore metropolitan area and also maintains service units incidental to the operation of its stores. Its assets include holdings in fee of fifteen of the properties on which it conducts business and leaseholds for seven other stores. The company also owns the building for one of its stores while holding a ground lease for the underlying land.

It is undisputed that the authorized capital stock of the company is 6,018,672 shares of which 6,000,000 shares are common stock and the remainder are preferred stock. On June 1, 1984 the company redeemed all of its outstanding preferred stock. As of June 21, 1984, the record date utilized for purposes of proxy solicitation, there were 3,749,512 shares of common stock outstanding and publicly traded by approximately 3600 shareholders.

BACKGROUND OF THE MERGER PROPOSAL

In late 1983, Ronald S. Baron, a New York broker/dealer and investment advisor, approached defendant Hoffman, W & L's Chairman of the Board and Chief Executive Officer, to discuss a leveraged buyout of W & L at $60 per share. No formal proposal was made at that time, and the company did not pursue further discussion with Baron. On February 17, 1984, W & L commenced an injunctive action in this Court against Baron, Woodward & Lothrop, Inc. v. Baron, C.A. No. 84-0513, alleging that the defendants in that action were assembling a control block of W & L common stock with the intention of selling the stock at a premium either to W & L or to a potential buyer of the company, without making required disclosures under Section 13(d) of the 1934 Act. The complaint also alleged violations of Section 10(b) of the 1934 Act and the District of Columbia common law of fraud. That action was settled and dismissed with prejudice on July 25, 1984.

Against the backdrop of the Baron activity, and amidst concerns that W & L might be faced with a hostile takeover bid, the company's Board of Directors held an informal meeting on March 30, 1984, at which the senior management directors, defendants Hoffman, Mulligan and Mullen, discussed with the other directors the possibility of seeking a purchaser for W & L. The consensus of the group was that the company should seek a purchaser, and to that end members of management met the next day with defendant Taubman and his associates to discuss a possible merger or acquisition. During the month of April, meetings were held among Taubman's representatives, W & L, counsel for W & L, and defendant Goldman, Sachs & Co. (W & L's investment advisor). On April 30, 1984 Taubman and W & L executed a merger agreement, pursuant to which (subject to the approval of the holders of two-thirds of W & L's outstanding shares of common stock) Taubman, through defendants THI and TDC, would acquire W & L in a merger transaction for $220 million. Under the merger agreement, TDC and W & L would merge into a single corporation, and THI would own the equity interest in that surviving corporation.

W & L's shareholders would receive $59 in cash for each share of common stock they held, and pursuant to District of Columbia law, the shareholders would have the right to dissent from the merger and receive fair value for their shares.

The Taubman merger proposal provided that if the merger agreement were consummated, Hoffman, Mulligan and Mullen would receive stock options to acquire 20%, collectively, of the equity in THI for $5 million. The options would vest at the rate of 20% annually and are exercisable for ten years. THI also agreed to provide the senior management directors with stock appreciation rights constituting a right to receive in cash, upon the exercise of an option, the amount by which the stock's fair market value exceeds the option price (less required withholdings). In addition, the senior management directors would receive dividend equivalency rights whereby, in the event THI should declare a dividend on its then outstanding common stock, each optionee would be paid in cash, less required withholdings, an amount equal to the dividend that would have been paid had the optionee then owned shares subject to vested options.

Also on April 30, Taubman and W & L executed a stock purchase agreement giving THI an option to purchase approximately 32% of W & L's common stock at $59 per share, the effect of which is to enable the Taubman interests to block competitive offers for W & L. The merger agreement was conditioned upon approval of the stock purchase agreement, which provided that Taubman's option would be exercisable in whole or in part before January 1, 1985 or until termination of the merger agreement by written mutual consent of the parties, whichever should occur earlier. Absent approval by the shareholders, the merger agreement dissolves on September 30, 1984.

The Taubman merger proposal (including the stock purchase agreement) was presented to the nonmanagement directors at 10:00 a.m. on April 30, 1984 and remained open until 5:00 p.m. on that same day. The nonmanagement directors considered the proposal as well as the advice of defendant Goldman, Sachs that the $59 price per share offered by Taubman was in the high range of fairness to the stockholders. After approximately two hours of deliberation, the Board voted to approve the merger and stock purchase agreement. Defendants Hoffman, Mulligan and Mullen did not participate in that vote.

COMMUNICATIONS TO SHAREHOLDERS

Immediately after the Board meeting, on April 30, 1984, W & L and THI, with the authorization of the W & L Board, issued a press release regarding the merger. The press release included, among other things, the following quote from Hoffman:

This merger, when approved, will provide our stockholders a significant premium for their investment in the company while at the same time providing the stability and continuity needed to maintain Woodward & Lothrop as Washington's premier retail establishment.

W & L mailed a copy of the April 30 press release to each of its shareholders.

In early May, 1984, a group of shareholders descended from the founders of W & L and holding approximately 14.99% of the company's stock formed the "Woodward and Lothrop Shareholders' Protective Committee" ("Shareholders' Committee") and executed an agreement stating the following objectives:

(a) To evaluate the proposal by Taubman Holdings, Inc. to acquire all the Shares of Woodward & Lothrop at a price of $59 per share pursuant to an Agreement and Plan of Merger dated as of April 30, 1984 and/or any amendments or modifications thereof (the "Taubman Proposal");

(b) To consider whether to support or oppose the approval of the Taubman Proposal and whether to solicit proxies of other shareholders of Woodward & Lothrop to vote in favor of or to vote against the Taubman Proposal (c) To consider whether to seek other proposals

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