Barkan v. Amsted Industries, Inc.

• Decision Date: 21 March 1989
• Citation: 567 A.2d 1279
• Parties: , Fed. Sec. L. Rep. P 94,887 Leonard BARKAN, Plaintiff and Settlement Objector Below, Appellant, v. AMSTED INDUSTRIES, INCORPORATED, Robert H. Wellington, Gordon R. Lohman, Warren W. Rasmussen, Edward J. Williams, Robert P. Reuss, Roger E. Anderson, O.C. Davis, Thomas L. Martin, Jr., Bert E. Phillips, Robert T. Powers and Donald E. Nordlund, Defendants and Settlement Proponents Below, Appellees, Enid Mindich, Harry Lewis, Joseph S. Blumenthal and Ernest Brooks, III, Plaintiffs and Settlement Proponents Below, Appellees. . Submitted:
• Court: Supreme Court of Delaware

Page 1279

567 A.2d 1279

58 USLW 2381, Fed. Sec. L. Rep. P 94,887

Leonard BARKAN, Plaintiff and Settlement Objector Below, Appellant, v. AMSTED INDUSTRIES, INCORPORATED, Robert H. Wellington Gordon R. Lohman, Warren W. Rasmussen, Edward J. Williams Robert P. Reuss, Roger E. Anderson, O.C. Davis, Thomas L Martin, Jr., Bert E. Phillips, Robert T. Powers and Donald E. Nordlund, Defendants and Settlement Proponents Below, Appellees Enid Mindich, Harry Lewis, Joseph S. Blumenthal and Ernest Brooks, III, Plaintiffs and Settlement Proponents Below, Appellees.

Supreme Court of Delaware.

Submitted: March 21, 1989.

Decided: Dec. 18, 1989.

Henry N. Herndon, Jr. of Morris, James, Hitchens & Williams, Wilmington, Harvey S. Kronfeld (argued) and Martin J. D'Urso of Harvey S. Kronfeld, P.C., Philadelphia, Pa., for appellant.

Thomas J. Allingham, II, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, for defendant below, appellee, Amsted Industries, Inc.

R. Franklin Balotti and C. Stephen Bigler of Richards, Layton & Finger, Wilmington, for individual defendants below, appellees.

William C. Sterling, Jr. (argued), of Wachtell, Lipton, Rosen & Katz, New York City, for defendants below, appellees.

Irving Morris (argued), and Kevin Gross of Morris, Rosenthal, Monhait & Gross, P.A., Wilmington, for plaintiffs below, appellees.

Before CHRISTIE, C.J., and HORSEY and WALSH, JJ.

WALSH, Justice:

This is an appeal from a Court of Chancery decision that approved the settlement of several class action lawsuits. The litigation arose out of a management-sponsored leveraged buyout ("MBO") of all of the common stock of Amsted Industries, Inc. ("Amsted") by members of Amsted's management and a newly formed employee stock ownership plan ("ESOP"). Plaintiffs in four of the five class actions, together with the defendants below, appear as appellees here to urge affirmance of the Court of Chancery's decision. Another plaintiff-shareholder, Leonard Barkan ("Barkan"), appeals from the settlement order, charging that the Chancellor's decision constituted an abuse of discretion.

Barkan asserts three separate grounds for challenging the Chancellor's approval of the settlement. First, he argues that the Chancellor neglected to recognize that Amsted's directors had breached their fiduciary duties of loyalty and due care. Specifically, Barkan argues that the directors failed to implement procedures designed to maximize Amsted's sale price once its sale became inevitable, as required by Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986). According to Barkan, the Chancellor applied an impermissibly strict standard in determining the likelihood of this claim's success. Second, Barkan contends that the Chancellor applied the wrong standard in evaluating the materiality of certain information allegedly misstated or not disclosed to shareholders in connection with the MBO. Finally, Barkan asserts that the Chancellor was not free to approve a settlement that was not supported by present consideration.

The record contains evidence that the MBO was essentially fair to shareholders and that Amsted's directors did not seek to thwart higher bids. Under our standard of review, we cannot say that the Chancellor abused his discretion in approving the settlement. We further conclude that the Chancellor applied the correct standard in evaluating the materiality of the alleged nondisclosures and misstatements and that his findings pursuant to that standard do not constitute an abuse of discretion. Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929 (1985). Finally, we find evidence to support the Chancellor's conclusion that this settlement fits within an exception to the general rule that settlements of class actions must be supported by present consideration. Chickering v. Giles, Del.Ch., 270 A.2d 373 (1970). Accordingly, we affirm the Chancellor's decision in all respects.

I

The facts giving rise to this litigation are essentially uncontroverted, but their complexities merit some discussion. In early 1985, Charles Hurwitz ("Hurwitz") began acquiring a significant number of shares of Amsted common stock through an entity known as MAXXAM Associates. Although Hurwitz claimed that the shares were being purchased for investment purposes only, he was widely recognized as a sophisticated investor in the market for corporate control. Accordingly, Amsted's board of directors retained Goldman, Sachs & Co. in May, 1985 to counsel them concerning possible responses to Hurwitz's overture. Goldman Sachs advised the board that Hurwitz had earned a reputation for attempting to acquire control of a corporation at a price below its real value or, alternatively, to extract "greenmail." The investment bankers suggested an array of possible defenses to the challenge posed by Hurwitz. These included a stock purchase rights plan, a stock repurchase by the corporation, a friendly acquisition by a third party, a management-sponsored leveraged buyout, and a management-sponsored leveraged buyout involving an ESOP.

Amsted's board chose to adopt a common stock purchase rights plan, commonly referred to as a "poison pill". Under its terms, in the event that any person or group acquired 20% or more of Amsted's common shares or announced an offer that would enable any person or group to own 30% or more of such shares, holders of rights issued pursuant to the plan would be entitled to purchase newly issued Amsted stock. More important, the plan contained a "flip-over" provision, which enabled rights holders to buy the stock of any acquiring corporation at a significant discount. The goal of the plan was to prevent any business combination of which the board did not approve. The board could give a merger its blessing by redeeming the plan rights.

With the rights plan in place, Amsted began to consider the possibility of undertaking a leveraged buyout involving an ESOP. Because such a transaction offered significant tax advantages, it was felt that it would provide shareholders with the highest possible price for their shares. On September 26, 1985, the Amsted board authorized the establishment of an ESOP, although no definite proposal for undertaking an MBO was discussed at that time. On October 22, 1985, however, the Amsted board established a Special Committee of its members to investigate the merits of any transaction involving a change of corporate control. The Special Committee was composed of directors who were neither officers of Amsted nor beneficiaries of the ESOP. Although the Special Committee was given the power to evaluate the fairness of any acquisition proposal made by a third party, the Committee was instructed not to engage in an active search for alternatives to an MBO.

Several days later, on October 29, 1985, the Amsted board terminated certain pension plans covering substantially all Amsted employees who were not subject to collective bargaining agreements. The board's goal was to make the excess assets in the plans (estimated by Goldman Sachs to be worth approximately $75 million) available to finance an MBO. On November 4, 1985, an MBO proposal was finally presented to the Amsted board by the ESOP trustees and members of Amsted senior management (the "MBO Group"). Under the proposal, the MBO Group would purchase all of Amsted's outstanding stock for $37 per share of cash and $27 per share in principal amount of a new issue of subordinated discount debentures, valued at $11 per share.

The next day, the first of the suits involved in this litigation was filed. Three similar suits were filed in the course of the following week. It was the plaintiffs in these four suits who eventually reached the settlement with Amsted that is the subject of this appeal. ¹ At about the same time, the MBO proposal hit a roadblock. Citibank, which had informally agreed to assemble financing for the deal, concluded that the proposed transaction was too highly leveraged and withdrew its support. On November 13, 1985, First National Bank of Chicago ("First National") agreed to take Citibank's place. However, First National proposed that $3 per share of cash in the original proposal be replaced with preferred stock having a face value of $4 and a market value of $3. The total value of this package of consideration remained $48 per share.

Through the rest of November, December, and much of January, Goldman Sachs and the MBO Group worked to arrange financing for the transaction proposed by First National. By late January, however, the MBO Group decided that the value of the consideration offered would have to be reduced. Decreased earnings in the first quarter of fiscal year 1986 (which ended December 31, 1985) led the MBO Group to doubt Amsted's ability to perform at the level previously anticipated. Accordingly, when the MBO Group finally went to Amsted's board with a proposal on January 29, 1986, they offered a $45 per share package, with $31 per share in cash, $4 per share in preferred stock valued at $3 per share, and $27 in principal amount of subordinated discount debentures valued at $11 per share.

The Special Committee met that day to consider the proposal. Salomon Brothers, the Special Committee's investment advisors, opined that a price of $45 was "high in the range of fairness." The Special Committee, however, directed Salomon Brothers to seek an increase in the cash component of the package. The MBO Group quickly agreed to offer an additional $1.25 in cash, making the total consideration worth $46.25 per share. The Special Committee approved the increased offer and recommended it to the full board, which also gave its blessing to the MBO. The board also voted to redeem the common stock purchase rights plan in order to make the transaction possible. An Exchange Offer followed shortly thereafter on February 5, 1986.

At this point, the long-quiescent Hurwitz approached Goldman Sachs and voiced his dissatisfaction with the adequacy of...