Brundage v. New Jersey Zinc Co., A--25

• Citation: 226 A.2d 585,48 N.J. 450
• Decision Date: 23 January 1967
• Docket Number: No. A--25,A--25
• Parties: Charles E. BRUNDAGE, individually and as Trustee for the Charles E. and Edna T. Brundage Charitable Scientific and Wild Life Conservation Foundation, Plaintiff-Appellant, and Eileen H. Carr, Plaintiff-Intervenor-Appellant, v. The NEW JERSEY ZINC COMPANY, a New Jersey corporation, et al., Defendants-Respondents.
• Court: United States State Supreme Court (New Jersey)

Page 450

48 N.J. 450 226 A.2d 585 Charles E. BRUNDAGE, individually and as Trustee for the
Charles E. and Edna T. Brundage Charitable
Scientific and Wild Life Conservation
Foundation, Plaintiff-Appellant,
and
Eileen H. Carr, Plaintiff-Intervenor-Appellant,
v.
The NEW JERSEY ZINC COMPANY, a New Jersey corporation, et
al., Defendants-Respondents. No. A--25. Supreme Court of New Jersey. Argued Nov. 7, 1966.
Decided Jan. 23, 1967.

Page 453

[226 A.2d 586] Elmer J. Bennett, Newark, for appellants (Carpenter, Bennett & Morrissey, Newark, attorneys; Miss Virginia D. Fenton, Newark, on the brief).

William L. Dill, Jr., Newark, for The N.J. Zinc Co. and others (Stryker, Tams & Dill, Newark, attorneys, Covington & Burling, Washington, D.C., of counsel).

Donald B. Kipp, Newark, for Gulf & Western Industries, Inc. and others (Pitney,[226 A.2d 587] Hardin & Kipp, Newark, attorneys, Strasser, Spiegelberg, Fried & Frank, New York City, of counsel).

Page 454

Jeffers & Mountain, Morristown, for Harold U. Zerbe (Pomerantz, Levy, Haudek & Block, New York City, of counsel).

The opinion of the court was delivered by

JACOBS, J.

The Chancery Division dismissed the plaintiff Brundage's complaint seeking to enjoin a proposed merger of defendant The New Jersey Zinc Company (Zinc), a New Jersey corporation, into Gulf & Western Industries, Inc. (G & W), a Michigan corporation. A notice of appeal to the Appellate Division was filed without any accompanying application for a stay and the merger was consummated. We certified the matter before argument in the Appellate Division.

Zinc had a 16-man board of directors composed of two equal factions. One group had been designated by Mr. Jacob Hain, an investment adviser who together with his associates owned or controlled a majority of the Zinc stock. The second group included Mr. R. L. McCann, president of Zinc and chairman of its executive committee, and other directors representing management. A conflict arose between McCann's group which wanted to use corporate funds for expansion and diversification and the Hain group which wanted to increase the corporation's investments in securities. The defendant Harold U. Zerbe, although a member of the Hain group, sided with the management group and the dispute came to a head in August 1965 when Zerbe voted to fill a board vacancy with a nominee of McCann rather than Hain. At this point Hain offered to buy Zerbe's 61,000 Zinc shares at $35 per share. In response to an inquiry from Zerbe, Hain indicated that he and his group might be willing to sell their block of about 2,200,000 Zinc shares at $35 per share if a buyer could be found.

On August 18 and following his conversation with Hain, Zerbe called on Mr. Charles G. Bluhdorn, chairman of the board of G & W. Zerbe was then a director of G & W as well as Zinc. His stockholdings in G & W were worth $670,000

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whereas his stockholdings in Zinc were worth $2,300,000. After some discussion, Bluhdorn indicated that G & W might be interested in purchasing the Hain block of Zinc stock provided Zinc management would approve. Zerbe told McCann about this and McCann expressed interest. On August 26 a meeting was held between Bluhdorn and McCann, and on September 8 a further meeting was held. This latter meeting was attended by all of Zinc's non-Hain directors, many of Zinc's department heads, and several representatives of G & W. There was extensive questioning and satisfying responses with respect to G & W's attitudes towards expansion, research, diversification, sales, employee relations and other matters of management interest.

During the period of these meetings, G & W was also in the process of negotiating with the Hain group for the purchase of its block of Zinc stock. Zerbe was the intermediary in the negotiations. After his conversation with Bluhdorn, he told Hain about G & W's interest in purchasing the Zinc stock at $35 per share and Hain told him that he would have to discuss the matter with Morris Shilensky, a member of the Hain group. Shilensky was on the board of directors of Zinc and was counsel to Bush Terminal Co. Hain was the major stockholder and chairman of the board of Bush Terminal which owned 758,000 shares of Zinc stock. Shilensky told Zerbe that the $35 price was too low and that the Bush people would not sell under $40 per share. After further negotiations, G & W expressed its willingness to pay $40 per share and on September 10, G & W entered into an agreement with Bush Terminal for the purchase of its 758,000 Zinc shares at $40 per share. The closing price of Zinc stock on that date on the New York Stock Exchange was $38.50 per share. The [226 A.2d 588] agreement provided that Bush would furnish a list of other stockholders whose shares might be available and that five Hain directors would resign. From September 17 until early in October, G & W acquired pursuant to the agreement, 2,084,306 shares of stock which represented 57.5% Of Zinc's capital stock. G & W financed its purchases of the

Page 456

Zinc stock by borrowing $83,372,240 from the Chase Manhattan Bank on a demand note.

Shortly after G & W agreed to purchase the Zinc stock it issued a press release announcing the agreement and stating that an offer for an exchange of stock would subsequently be submitted for the approval of directors of G & W and Zinc 'leading to an amalgamation of the two companies.' On September 16 there was a meeting between representatives of G & W and Zinc and at that meeting McCann is said by Zerbe to have insisted that on merger the minority stockholders of Zinc should receive somewhat more than the $40 per share paid to the Hain group. In August, G & W had consulted Kidder, Peabody & Co., Incorporated, a well-known investment banking concern, and had asked it to submit a proposal which would be fair and equitable to Zinc minority stockholders and would result in their receiving a security worth at least $40 for each Zinc share. Kidder, Peabody proposed a new series B cumulative convertible preferred stock with a $3.50 annual dividend redeemable after 5 years. The exchange ratio contemplated that Zinc shareholders would receive .4125 of the convertible preferred for each share of Zinc common stock. The ratio by which the G & W preferred could be converted into common would be based on 112.5% Of the price of the common at the time the conversion rate was established.

On September 29 there were lengthy meetings of Zinc's executive committee and board of directors. Kidder, Peabody representatives explained their proposal and supported their view that it was fair and equitable to Zinc minority shareholders. McCann objected to the .4125 exchange ratio and suggested that it be raised to .430. After discussion with Bluhdorn and over objection voiced by the treasurer of G & W, the ratio was fixed at .425. Zerbe and Mr. Ellison, a member of Zinc's board and a partner in the law firm of Covington & Burling, had strongly supported McCann in obtaining the increased exchange ratio.

Page 457

At the board meeting on September 29, five of the Hain directors resigned and Bluhdorn along with two other G & W representatives was elected to the Zinc board. Mr. Passino, the head of Zinc's research department, was also elected to the board and the fifth vacancy remained unfilled. Zerbe states that McCann turned down Bluhdorn's request that the fourth directorship be filled by another G & W representative rather than Passino. At this point, G & W had three members on the board not including Zerbe who was on both boards. A resolution adopted by the Zinc board on September 29 approved the basic terms of the proposed merger of Zinc into G & W and directed that the Zinc officers prepare the necessary documents, subject to final approval by the Zinc board prior to submission of the merger for vote by the stockholders.

At the September 29 meeting Ellison had also objected to the Kidder, Peabody formula insofar as it provided that the privilege of converting the preferred stock into G & W common would be based on a percentage of the average price, without any ceiling, during the two-week period following the mailing of the proxy statement. He was concerned that a sharp rise in G & W common after the mailing of the proxy would significantly reduce the number of shares to the Zinc minority on conversion and he suggested that a ceiling be incorporated in the formula. He was supported on this by McCann and Zerbe, and several days after the September 29 meetng, McCann and Bluhdorn agreed on a modification which provided for an $80 ceiling and a $65 floor on G & W common [226 A.2d 589] stock for purposes of the conversion. Although the $65 floor protected G & W in the event of a sharp decline in its common stock, it was anticipated that the G & W common would go up sharply rather than decline. This ultimately proved to be the case for the average price during the two-week period following the mailing of the proxy was $92.72 per G & W common share and the modification which resulted in the inclusion of the $80 ceiling is said thus to have entailed an $18 million dollar benefit to the Zinc minority.

Page 458

At a meeting of the Zinc board on October 29, the change in the formula which incorporated the $80 ceiling and the $65 floor was approved. At the same time communications from White, Weld & Co., a prominent investment banking firm, and Standard Research Consultants, Inc., a well-known management engineering and consultant firm, were presented to the board. These firms had earlier been consulted because the directors of Zinc thought it advisable to have expert opinions by responsible financial concerns other than Kidder, Peabody. White, Weld stated that the new preferred stock would probably have a market value between $95 and $100 a share and Standard Research expressed the view that the probable market value would be between $98 and $100 per share. A subsequent letter from White, Weld set forth its opinion...