City Capital Associates Ltd. v. Interco, Inc.

• Decision Date: 23 September 1988
• Docket Number: Civ. A. No. 88-424-JJF.
• Citation: 696 F. Supp. 1551
• Parties: CITY CAPITAL ASSOCIATES LIMITED PARTNERSHIP, Cardinal Holdings Corp. and Cardinal Acquisition Corp., Plaintiffs, v. INTERCO, INC., et al., Defendants. INTERCO, INC., Counterclaimant and Third Party Plaintiff, v. CARDINAL ACQUISITION CORP., Cardinal Holdings Corp., City Capital Associates Limited Partnership, Counterclaim Defendants, and Steven M. Rales, Mitchell P. Rales, City GP I, Inc., City GP II, Inc., ASM Group, Inc. and Arthur M. Bylin, Third Party Defendants.
• Court: U.S. District Court — District of Delaware

696 F. Supp. 1551

CITY CAPITAL ASSOCIATES LIMITED PARTNERSHIP, Cardinal Holdings Corp. and Cardinal Acquisition Corp., Plaintiffs, v. INTERCO, INC., et al., Defendants.

INTERCO, INC., Counterclaimant and Third Party Plaintiff, v. CARDINAL ACQUISITION CORP., Cardinal Holdings Corp., City Capital Associates Limited Partnership, Counterclaim Defendants, and Steven M. Rales, Mitchell P. Rales, City GP I, Inc., City GP II, Inc., ASM Group, Inc. and Arthur M. Bylin, Third Party Defendants.

Civ. A. No. 88-424-JJF.

United States District Court, D. Delaware.

September 23, 1988.

Robert E. Zimet (argued), and Jay B. Kasner, of Skadden, Arps, Slate, Meagher & Flom, New York City. Rodman Ward, Jr., and Randall Thomas-Peterhans, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del., Steven D. Goldberg (argued), and John G. Mulford, of Theisen, Lank, Mulford & Goldberg, Wilmington, Del., for plaintiffs.

Michael W. Schwartz (argued), of Wachtell, Lipton, Rosen & Katz, New York City. John Michael Clear, and Terrence J. O'Toole, of Bryan, Cave, McPheeters & McRoberts, St. Louis, Missouri. Charles F. Richards, Jr. (argued), of Richards, Layton & Finger, Wilmington, Del., for defendants (Except Oberly and Harkins) and Counterclaimant and Third Party Plaintiff.

Grover C. Brown (argued), of Morris, James, Hitchens & Williams, Wilmington, Del., for defendants Oberly and Harkins.

FARNAN, District Judge.

OPINION

Plaintiff and counterclaim defendant, City Capital Associates ("City Capital"), brings this motion for a preliminary injunction against Interco Incorporated ("Interco"), the Attorney General of the State of Delaware, Charles M. Oberly, III, and the Secretary of State of Delaware, Michael E. Harkins, to enjoin the application and enforcement of the Delaware Business Combinations Statute, 8 Del.C. § 203 ("§ 203") on the grounds the statute is unconstitutional on its face and as applied. Defendant and counterclaim plaintiff, Interco, seeks a preliminary injunction of City Capital's tender offer contending the offer was commenced in violation of certain disclosure provisions of the Williams Act, sections 14(d) and 14(e) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78n(d), (e), and the rules and regulations promulgated thereunder. This Court has jurisdiction over the case under 28 U.S.C. § 1331.

Since this case involves a web of factual and procedural threads, the Court will review what led to the parties' current crossmotions for preliminary injunctions.

I. FACTUAL AND PROCEDURAL BACKGROUND.

A. The Parties and the Bidding.

Interco, formerly the International Shoe Company, is a Delaware corporation that maintains its principal place of business in St. Louis, Missouri. The company's consumer products are sold under several common brand names, including Christian Dior, Converse, Ethan Allen, Florsheim, and London Fog. Interco's total assets amount to $2 billion; shareholders' equity totals $1.2 billion. The company's common stock, of which there are over 36 million outstanding shares, is traded on both the New York and Midwest Stock Exchanges and is registered under the Securities Exchange Act of 1934 ("Exchange Act").

City Capital is a Delaware limited partnership. The partnership is owned by two limited partners, Patrick W. Allender and Michael G. Ryan, each of whom owns a one percent interest, and two general partners, City GP I, Inc. ("GP I") and City GP II, Inc. ("GP II"), each of which owns a forty-nine percent interest in City Capital. Steven Rales is the sole shareholder of GP I, and Mitchell Rales, Steven's brother, is the sole shareholder of GP II. Each of the Rales brothers owns more than $10 million in assets. Moving down the corporate structure, City Capital owns one hundred percent of Cardinal Holdings Corporation ("Cardinal Holdings") which, in turn, owns one hundred percent of Cardinal Acquisition Corporation ("Cardinal Acquisition"). Cardinal Acquisition is the entity involved in the contemplated takeover of Interco.

In the late spring and early summer of 1988, City Capital began purchasing Interco stock. On July 28, 1988, City Capital reported that it had bought approximately 8.7% of Interco's outstanding common shares. Also on July 27, City Capital made its first "friendly" bid for Interco, offering to pay $64.00 per share of outstanding common stock in a negotiated merger. On August 8, 1988, City Capital increased its bid to $70.00 per share which Interco's Board of Directors rejected.

One week later, on August 15, City Capital commenced a $2.6 billion hostile tender offer for all of Interco's outstanding shares at $70.00 per share. Interco's Board of Directors recommended on August 22 that Interco's shareholders reject City Capital's offer and not tender their shares. Most recently, on September 10, 1988, City Capital increased its bid to $72.00 per share.

B. The Procedural Setting.

On July 27, 1988, City Capital, having acquired 8.7% of Interco's stock, filed a Schedule 13D with the Securities and Exchange Commission ("SEC"). Also on July 27, City Capital commenced two actions, one in the United States District Court for the District of Delaware, and the other in the Delaware Court of Chancery. In this Court, City Capital seeks, inter alia, declaratory judgments that its Schedule 13D is in compliance with federal law and that Delaware's so-called "Anti-Takeover Statute," 8 Del.C. § 203, is unconstitutional. In the Court of Chancery, City Capital alleges various breaches of fiduciary duties by Interco's Board of Directors.

On August 15, the same day that City Capital initiated its $70.00 per share tender offer, Cardinal Acquisition, Cardinal Holdings, GP I, GP II, and both Rales brothers filed a Schedule 14D-1. Also on the 15th, City Capital amended its original complaint to request a declaratory judgment that this filing complied with federal requirements.

On August 18, Interco filed a motion in this Court, seeking to have City Capital's counsel disqualified for an alleged conflict of interest. After briefing and argument, the Court denied Interco's motion on August 20.

On August 22, Interco commenced suit in the United States District Court for the Eastern District of Missouri ("St. Louis action"), seeking declaratory and injunctive relief, alleging that City Capital had violated Sections 7, 14(d), and 14(e) of the Exchange Act, 15 U.S.C. §§ 78g, 78n(d), and 78n(e), and the regulations promulgated thereunder.

By order dated September 7, 1988, the Missouri court stayed the action, pending disposition of the matters before this Court. Interco Inc. v. Cardinal Acquisition Corp., No. 88-1617C(3), slip op. at 10-11 (E.D.Mo. Sep. 7, 1988). Two days later, on September 9, Interco filed an answer, along with counterclaims, and third party claims in this Court, seeking injunctive and declaratory relief on the grounds that City Capital had violated the disclosure requirements of the Williams Act. Also on the 9th, Interco filed its motion for preliminary injunction on its counterclaims and third party claims. City Capital's motion for preliminary injunction on its amended complaint had previously been filed on August 24. Oral arguments on these cross-motions for preliminary injunctions were heard on September 16, 1988. This Opinion shall constitute this Court's findings of fact and conclusions of law as required by F.R.C.P. 52(a).

II. DISCUSSION.

A. Preliminary Injunction Standard.

To succeed on a motion for a preliminary injunction in the Third Circuit, the moving party must establish:

(1) a reasonable probability of eventual success in the litigation, and (2) that irreparable injury will ensue if relief is not granted. In addition, the court may consider (3) the possibility of harm to other interested persons from the grant or denial of relief, and (4) the public interest. Constructors Ass'n of Western Penna. v. Kreps, 573 F.2d 811, 815 (3d Cir.1978); Delaware River Port Auth. v. Transamerica Trailer Transp., Inc., 501 F.2d 917, 919-20 (3d Cir.1974).

Kennecott Corp. v. Smith, 637 F.2d 181, 187 (3d Cir.1980). For the reasons discussed below, the applications of both parties for preliminary injunctions are denied. The Court concludes that neither party has demonstrated with a reasonable probability that it would ultimately be successful on their claims in this litigation.

B. Constitutionality of Section 203.

1. Background.

In February 1988, the Delaware General Assembly enacted a Business Combinations Statute commonly referred to as an "anti-takeover" statute, 8 Del.C. § 203 ("§ 203"), which restricts the ability of an "interested stockholder" to merge with, sell, lease, or enter into other combinations with that company for a period of three years after becoming "interested". § 203(a), (c)(3)(i-v). Generally, a stockholder becomes "interested" when he or she acquires fifteen percent or more of the outstanding voting stock. § 203(c)(5). However, § 203 does not apply if (1) the board of directors of the corporation approves either the transaction which results in a stockholder becoming interested or any subsequent combination with that stockholder; (2) the stockholder receives 85% or more of the outstanding voting stock of the corporation in the transaction which resulted in his or her becoming interested, excluding shares owned by directors who are also officers and certain employee stock plan shares; or (3) the combination is approved by the board and authorized by 66 2/3 % of the outstanding voting stock which is not owned by the interested shareholder. § 203(a). A Delaware corporation may also expressly elect not to be governed by § 203 if it does so in its original certificate of incorporation, or if the board amends its bylaws to opt out of § 203 within 90 days of the effective date of the statute, or if the stockholders adopt an amendment to the certificate of incorporation or bylaws by at least a majority of shares entitled to vote. § 203(b)(1-3). Furth...