Bauman v. Bish

• Decision Date: 23 September 1983
• Docket Number: Civ. A. No. 82-90-W.
• Citation: 571 F. Supp. 1054
• Court: U.S. District Court — Northern District of West Virginia
• Parties: Stephen BAUMAN, et als., Plaintiffs, v. Walter F. BISH, et als., Defendants.

571 F. Supp. 1054

Stephen BAUMAN, et als., Plaintiffs, v. Walter F. BISH, et als., Defendants.

Civ. A. No. 82-90-W.

United States District Court, N.D. West Virginia, Wheeling Division.

September 23, 1983.

Straughton Lynd, Northeast Ohio Legal Services, Youngstown, Ohio, Allan N. Karlin, Morgantown, W.Va., James D. McNamara, Southeastern Ohio Legal Services, Steubenville, Ohio, Arthur Z. Schwartz, Hall, Clifton & Schwartz, New York City, for plaintiffs.

Bogarad & Robertson, Weirton, W.Va., for defendants, Bush and ISU.

Anthony F. Phillips, Gerald Kerner, Wilkie, Farr & Gallagher, New York City, for defendant, Joint Study Committee.

MEMORANDUM OPINION AND ORDER

MAXWELL, Chief Judge.

Plaintiffs commenced this action in October, 1982, to establish a right of access to certain information allegedly relevant to a proposed employee buy-out, which includes an Employee Stock Ownership Plan (ESOP) for the Weirton Steel Division of National Steel Corporation. This Court has faced many issues regarding the employee buy-out in this and other civil actions. This civil action is now before the Court on motions for summary judgment by all Defendants and a motion for preliminary injunction by Plaintiffs.

The record includes the various pleadings and motions in the case file; testimony and exhibits adduced at hearings held November 5, 1982, and April 27 and September 20, 1983; affidavits submitted in support and opposition to the instant motions and earlier motions; and other matters of record. From an examination of these items, the Court finds the following facts:

The Weirton Division of National Steel is an integrated steel mill which produces hot-rolled and cold-rolled galvanized and electroplated sheet steel and a full line of tin mill products. Historic peak employment at Weirton Steel Division was 16,000 following World War II, but the employment level has dwindled to some 8,000 currently.

In early 1982, National Steel announced that it would no longer make capital investments in its Weirton Division and that it would "downsize" the facility to a finishing operation with total employment reduced to 2,000 or fewer persons. However, the Corporation also indicated willingness to discuss purchase of the Division's assets by its employees.

Shortly after the announcement by National Steel, two of the unions representing employees at Weirton Division joined management employees at the Division to form the Weirton Joint Study Committee to investigate and determine the course of transition to proposed employee ownership. The Committee's board of directors has twenty-one representatives of the Independent Steelworkers Union; three representatives of the Independent Guard Union; and five management representatives. All persons on the board are directors by virtue of offices they hold with the organizations they represent.

The Joint Study Committee has operated using funds provided by a grant from the State of West Virginia, by contributions from the unions and the Division's management personnel, and by gifts from community members.

The Weirton Steel Division is the largest private-sector employer in the State of West Virginia. If the proposed employee buy-out becomes reality, the new entity will be the largest employee-owned company in the country. Many complex problems faced the Committee as it moved through a feasibility study phase and into making actual plans for the employee-owned venture.

The Committee retained several consulting firms having nationally-recognized expertise in the areas for which they were hired. These include the economic consulting firm of McKinsey & Co., of Washington, D.C., to conduct a feasibility study on the economic viability of an employee-owned steel company; the law firm of Ludwig & Curtis, of San Francisco, to advise on the structure of an employee stock ownership plan; the law firm of Wilkie, Farr & Gallagher of New York, to represent the Committee and the new entity in negotiations with National Steel and prospective financeers; the investment banking firm of Lazard Freres & Co., of New York, to assist in evaluating financial problems and in obtaining financing; the accounting firm of Towers, Perrin, Forster & Crosby, of Pittsburgh, to conduct an audit of pension calculations, and others.

McKinsey & Co. was one of the first consulting firms retained. Hired in April, 1982, the firm utilized data supplied by management of the Division and its own internal sources to conduct the feasibility analysis. In July, 1982, McKinsey & Co. announced the results of its study in a three-part report: A summary letter; a fifty-six page document entitled "Assessing the Feasibility of an Independent Weirton Steel," and a so-called confidential appendix. The report concludes that an employee-owned venture could succeed if production costs were reduced, if labor costs were reduced by 32%, if substantial capital improvements were made over a ten-year period, and if management and labor could forge the leadership necessary to shape and direct the new entity.

Although the fifty-six page report contains a substantial amount of data, the confidential appendix contains further data utilized by the staff of McKinsey & Co. to complete its analysis. It appears the appendix includes cost information, largely cost of equipment and production data, which McKinsey & Co. assembled from study of every major steel making facility in the world. The firm has developed a computerized steel industry model, using the cost production information as a data base, which McKinsey staff use to analyze a client's cost of production in relation to its competition, on a step-by-step basis.

It is undisputed that the confidential appendix has not been released and circulated either to Joint Study Committee members or the membership of either union. The only complete copy of the confidential appendix released by McKinsey & Co. was delivered to Wilkie Farr & Gallagher, the law firm retained by the Committee. (An edited version was supplied to the investment banking firm retained by the Joint Study Committee.) During the hearing on the instant motions held September 20, 1983, at the Wheeling point of holding court, Plaintiffs called Anthony Phillips as a witness. Mr. Phillips, one of the attorneys representing Defendant Joint Study Committee, refused to voluntarily produce the confidential appendix for Plaintiffs. However, pursuant to the direction of the Court, Mr. Phillips produced a copy of the confident appendix as an exhibit. The document was immediately sealed and made a part of the record for appellate purposes only.

The information contained in the appendix was presented orally and by charts to the Joint Study Committee and McKinsey staff spent two days in informational meetings with Weirton employees where the entire report was discussed, and questions answered. Employees were also invited to send follow-up questions to McKinsey & Co. Approximately six questions were received and answered.

The McKinsey report recommends an initial 32% compensation reduction for all employees. It is recommended that wages and benefits be reduced by 20% to aid cash flow for the new company and 12% be deferred to aid in equity financing for needed capital investments. Plaintiffs contend that the released portions of the report contains "naked, unsubstantiated assertions that the proposed 32% reduction in compensation is the only way to ensure the viability of a new employee-owned company." In argument to the Court, Plaintiffs have said they cannot adequately evaluate the proposed 32% compensation reduction without a detailed analysis of Weirton's costs of producing finished products in comparison with other U.S. steel companies and without a detailed list of capital improvements (and their costs) which McKinsey & Co. recommends to maintain and improve operations at Weirton.

In contrast, Defendants contend that the cost information in the confidential appendix is sensitive. They argue that the economic and cost information in the released portions of the report is summary in nature in order to avoid revealing enough detail to allow competitors to predict the precise business strategy of the new company, thus rendering corporate planning ineffectual. In addition, Defendants argue that the consulting firm, McKinsey & Co., which has gathered the data underlying the analysis made public, has a strong proprietary interest in keeping the comparative equipment and cost information confidential.

In March, 1983, negotiators for the Joint Study Committee and National Steel announced an agreement in principle on the terms of sale of the Weirton Division. The agreement sets forth provisions for a current assets purchase price; a fixed assets purchase price; a division of liabilities for pension benefits and other benefit programs for active and retired workers; property transfers, and other matters.

In April, 1983, the Independent Steelworkers Union released information to the membership revealing that the terms of sale by which National would remain liable for its pro rata share of pension and other employee benefit programs reduces the 32% reduction in compensation recommended by McKinsey & Co. by 13.17%. This means that compensation for future employment with the new company will only need be reduced by slightly less than 19% in order to meet the McKinsey & Co. recommendation for hourly workers. (The actual reduction in compensation to be taken by an individual employee depends on category of employment. It ranges from 20.90% for salary, non-exempt members of the Independent Steelworkers Union to 6.89% for a group labeled excluded, salary, non-exempt.)

The terms of sale as announced will necessitate amendments to collective bargaining agreements now in existence with National Steel Corporation. In addition, compensation, working conditions, and other matters of concern between the unions and the new, proposed employer will differ from...