Condec Corp. v. Lunkenheimer Co.

• Decision Date: 02 June 1967
• Citation: 230 A.2d 769,43 Del.Ch. 353
• Parties: CONDEC CORPORATION, a New York corporation, Plaintiff, v. The LUNKENHEIMER COMPANY, U.S. Industries, Inc. and U.S. Industrial Corporation, Delaware corporations, Defendants.
• Court: Court of Chancery of Delaware

Page 769

230 A.2d 769

43 Del.Ch. 353

CONDEC CORPORATION, a New York corporation, Plaintiff, v. The LUNKENHEIMER COMPANY, U.S. Industries, Inc. and U.S Industrial Corporation, Delaware corporations, Defendants.

Court of Chancery of Delaware, New Castle County.

June 2, 1967.

Richard F. Corroon and Hugh L. Corroon, of Berl, Potter & Anderson, Wilmington, and Hays, Algase, Feuer, Porter & Spanier, New York City, for plaintiff.

William E. Wiggin, of Richards, Layton & Finger, Wilmington, for defendant The Lunkenheimer Co.

George Tyler Coulson, of Morris, Nichols, Arsht & Tunnell, Wilmington, and Patterson, Belknap & Webb, New York City, for defendants U.S. Industries, Inc. and U.S. Industrial Corporation.

MARVEL, Vice Chancellor:

Plaintiff was organized during the early part of World War II under the name Consolidated Diesel Electric Corporation and has grown in the past ten years from a one plant operation employing six hundred fifty people to an enterprise operating ten plants and employing over two thousand persons. It manufactures, among other things, diesel operated generators, valves, and special-purpose military vehicles, ranging from aircraft refuelers to amphibious vehicles, a substantial part of its earnings being derived from military procurement of the type indicated. Its consolidated balance sheet for the year ending July 31, 1966, discloses total current assets of $22,755,000 and total current liabilities of $15,765,000. During the same period it purportedly made net sales of $45,847,000 and earned net income of $1,369,000. According to its prospectus of April 21, 1967, which invited tenders of stock from the stockholders of the defendant The Lunkenheimer Company, Condec's commercial sales in fiscal 1966 accounted for 45% Of its business and for approximately three-fourths of its profits. In order to pay for the more than 190,000 shares of Lunkenheimer stock which it bargained for on the basis of its April 21 offer and which it has now agreed to purchase, Condec will incur additional indebtedness of $8,250,000. Accordingly, following such acquisition, it will apparently be in debt on a short term basis in an amount in excess of $20,000,000. However, as of January 31, 1967, it reported retained earnings of $6,647,000 and a backlog of orders totalling approximately $100,000,000.

The defendant, The Lunkenheimer Company, has been in existence over one hundred years during which time it has engaged in manufacturing a variety of valves. These are marketed through a number of distributors many of whom have handled such defendant's products over periods of up to fifty years. Its consolidated balance sheet as of December 31, 1966, discloses total current assets of $9,545,152 and total current liabilities of $3,741,922. During the year 1966 it reported net sales of $23,322,655 and net income of $1,945,470. Lunkenheimer competes with Hammond Valve Corporation, a subsidiary of Condec. Earlier this year Lunkenheimer filed an action against Condec under the Clayton and Sherman Acts in which it sought injunctive relief against Condec's efforts to buy a controlling interest in Lunkenheimer stock. The grounds asserted were that such an acquisition would tend substantially to lessen competition because of Condec's ownership of Hammond Valve Corporation. On May 5, 1967, the United States District Court for the Southern District of New York declined to grant a preliminary injunction as prayed for. 268 F.Supp. 667. Lunkenheimer has appeared to be an attractive business acquisition to several modern diversified industries, and over recent months not only plaintiff and the defendant U.S. Industries, Inc., but also Textron, Inc., have each evinced an interest in establishing a business connection of some sort with Lunkenheimer.

On May 10, 1967, the defendant, United States Industries, Inc., entered into a contract with Lunkenheimer for the purchase of the latter's assets. This contract, if approved by a majority of the Lunkenheimer stockholders, will presumably result in U.S. Industries taking over operation of Lunkenheimer's business. U.S. Industries' consolidated balance sheets reflect total current assets of $68,689,308 and total current liabilities of $27,038,322 as of December 31, 1966. Said report also discloses net sales for the year of $152,996,308. Its earning record, however, has been erratic in the recent past, and in its accounting it has made use of a tax-loss carry-forward which runs out this year.

Early in December, 1966, the president of Condec, Mr. Shafler, and a Mr. Russell, one of the latter's directors, requested and were granted a meeting with Lunkenheimer's president and other principal officers of the latter corporation in its offices in Cincinnati. Condec's initial proposal was that the two companies merge. However, these initial direct efforts to interest Lunkenheimer in a business combination with Condec failed. This meeting was followed by a second trip to Cincinnati on the part of Condec's president and one of its attorneys early in February, 1967, on the eve of a public invitation by Condec to Lunkenheimer's stockholders to tender their shares to a Condec subsidiary known as Conval for $36 per share. This second meeting led to outright rejection of Condec's overtures, including a refusal to grant Mr. Shafler's request to appear before Lunkenheimer's board of directors. Notwithstanding such rejection, Condec followed up its February 6 offer for tenders and acquired 21,000 shares of Lunkenheimer. The latter company, in the meantime, had entered into negotiations with Textron, Inc., looking towards a sale of its assets to such company. As a result of such negotiations, a formal agreement of purchase and sale was entered into on March 8, 1967. Condec then made a second public offer to purchase shares of Lunkenheimer as set forth in a prospectus dated April 21, 1967, in which it undertook on a 'first come first served' basis to buy the first 190,000 shares of Lunkenheimer common stock offered for sale at a price of $50 per share plus one share of cumulative $10 par value preferred stock of Condec. The avowed purpose of this second offer was to increase the 21,000 shares of Lunkenheimer already held by Condec by an additional 190,000 shares, thereby causing Condec to become the holder of slightly more than half of the some 414,000 shares of Lunkenheimer common stock then outstanding.

In the meantime, The Lunkenheimer Company had issued an April 14 call for a special meeting of its stockholders for May 10 for the purpose of voting on the March 8 purchase agreement with Textron, a contract which provided for the sale of the assets and business of Lunkenheimer for cash in an amount equal to $50 for each share of Lunkenheimer outstanding on a closing date fixed for May 15.

By May 5, however, Condec, as a result of its invitation for tenders of Lunkenheimer stock, had purportedly acquired sufficient irrevocable proxies to prevent a two-thirds vote in favor of the proposed sale of Lunkenheimer's assets to Textron, Inc., and by the time fixed for the Lunkenheimer stockholders' meeting the Textron offer had been withdrawn. The meeting, when convened, was indefinitely adjourned. By the close of business on May 9 the number of Lunkenheimer shares tendered to Condec totalled 191,017.

Anticipating, no doubt, the probable outcome of the Textron proposal, the president of U.S. Industries, Inc., who had been interested in Lunkenheimer for some time and whose company in February, 1967, had unsuccessfully sought to acquire the Lunkenheimer business at a price of $46 for each of its outstanding common shares, had written to the president of Lunkenheimer on May 1, as follows:

'If you find yourself unable to consummate your deal with Textron, we would be glad to meet with you or your representatives.

We would have no interest in talking unless we are invited by the Lunkenheimer management.'

Such overture was followed by hurriedly called meetings between representatives of Lunkenheimer and those of U.S. Industries, and on May 10 these two corporations entered into a plan and agreement of reorganization under the terms of which Lunkenheimer agreed to transfer to U.S. Industries its entire business and assets other than a small amount of cash to be applied to the former's reorganization expenses and those shares of the special preference U.S. Industries stock to be tendered by the buyer in return for Lunkenheimer's business and assets. This agreement was preceded by the execution of a so-called stock purchase agreement of May 9 under the terms of which U.S. Industrial Corporation, a wholly owned subsidiary of U.S. Industries, Inc., subscribed for 75,000 shares of authorized but unissued shares of Lunkenheimer common stock in exchange for 75,000 shares of the same class of preference stock of U.S. Industries which made up the stated consideration for the purchase of Lunkenheimer by U.S. Industries.

It is the claimed invalidity of the issuance of the 75,000 authorized but unissued shares of Lunkenheimer to U.S. Industrial Corporation which is the matter for decision here. ¹ In its complaint plaintiff alleges, on information and belief, that the sale of such shares by Lunkenheimer '* * * served no legitimate corporate purpose but was designed by the officers and directors of Lunkenheimer solely to serve their personal interests * * *', that '* * * the primary purpose of said sale was to frustrate control of Lunkenheimer by its majority stockholder, Condec * * *' and that '* * * said sale was not made in good faith or in the exercise of prudent judgment but was made with precipitous haste with insufficient consideration or opportunity for consideration of the interest of the corporation or its stockholders * * *'.

According to the Lunkenheimer statement to its stockholders made in connection with the call of a stockholders' meeting to vote on the proposed sale of Lunkenheimer assets to Textron,...