Cottle v. Storer Communication, Inc.

Decision Date14 July 1988
Docket Number87-5805,Nos. 87-5669,s. 87-5669
Citation849 F.2d 570
Parties, Fed. Sec. L. Rep. P 93,918 Michael Eden COTTLE, derivatively and individually and in a representative capacity, Plaintiff-Appellant, v. STORER COMMUNICATION, INCORPORATED, an Ohio Corporation, Nominal Defendant- Appellee. Kenneth L. Bagwell, et al., Defendants-Appellees. Michael Eden COTTLE, Plaintiff-Appellant, v. STORER COMMUNICATION, INC., an Ohio corporation, Nominal Defendant-Appellee, Kenneth L. Bagwell, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Eleventh Circuit

Marshall Patner, Robert A. Holstein, Holstein, Mack & Dupree, Chicago, Ill., for plaintiff-appellant.

Earl D. Waldin, Jr., Kelley, Drye & Warren, Miami, Fla., for Storer.

Fredric J. Zepp, Latham & Watkins, New York City, Jonathan Rosenberg, Michael J. Chepiga, Simpson, Thacher & Bartlett, New York City, for Kohlberg, Kravis & Roberts.

Appeals from the United States District Court for the Southern District of Florida.

Before FAY and VANCE, Circuit Judges, and HOFFMAN *, Senior District Judge.

VANCE, Circuit Judge:

This is a shareholder derivative action involving white knights, poison pills, shark repellants, stalking horses, crown jewels, hello fees, goodbye fees and asset lock-up options. The district court granted summary judgment in favor of the defendants. Although summary judgments should be granted sparingly in these kinds of cases, we believe that this is a case where summary judgment is appropriate. We therefore affirm.


Storer Communications, Incorporated, an Ohio corporation, was a family run company which originally owned radio stations, and eventually expanded into broadcast and cable television. Although Storer became a publicly held corporation in the 1950s, the Storer family continued to play an active role in the company's management, retaining approximately seven to eight percent of the total equity. At the time of the events involved in this case, Peter Storer, whose father had founded the company in 1922, was the corporation's chairman and chief executive officer.

In March 1985 a dissident group of stockholders known as the Coniston Group announced publicly that it would solicit proxies for nominees to Storer's board of directors. The Coniston Group sought to elect directors to Storer's board to implement a liquidation and distribution of all the company's assets. Storer's directors retained Dillon Read & Company to advise them on the options and procedures relating to the Coniston Group's acquisition of shares and proxy challenge, including consideration of various shark repellants and a search for a possible white knight. On March 28, 1985 the board determined that the Coniston Group's liquidation proposal was not in the best interests of the shareholders.

In late March and April, George Wiegers, managing director of Dillon Read, contacted twenty-two potential purchasers of Storer. Weigers provided confidential information to twelve of these potential white knight investors, including Kohlberg, Kravis, Roberts & Company (KKR) and Comcast Corporation (Comcast).

KKR moved first. On April 22, KKR offered to purchase Storer for a per share price of $75 cash, plus one share of preferred stock with a $25 liquidation preference. KKR also asked for a $3 million "hello fee" in consideration of KKR's preparation and submission of the offer, 1 and an $18 million termination or "goodbye fee" payable if the companies failed to consummate the merger for reasons other than KKR's failure to obtain financing. The offer also included management participation in the new company.

The Storer board rejected KKR's offer as inadequate. Instead, the board voted to adopt a recapitalization program in which the corporation would offer to repurchase up to six million Storer shares. After Storer's major institutional shareholders expressed disapproval of the recapitalization, the board withdrew its plan and dropped the idea. KKR simultaneously improved its April 22 offer by including warrants to purchase up to ten percent of the surviving company. After receiving the advice of its advisors, Storer's board accepted the revised offer on April 25 by a vote of six to zero. 2

At the corporation's annual shareholder meeting in May, Paul Tierney spoke on behalf of the Coniston Group, also known as the Committee for Full Value. According to the minutes, Tierney stated that the KKR agreement was a substantial step towards ensuring that the shareholders would receive full value for their shares, but that there might be other bidders besides KKR. He stated that the Coniston Group's nominees, if elected, would encourage other bidders to come forward quickly. He concluded that if the KKR offer turned out to be the best offer, the Coniston Group nominees would use every effort to close the KKR-Storer merger in the way that would maximize the value of Storer shares.

The shareholders elected four Coniston Group directors to the board. The new board thus contained seven outside directors, four of them from the Coniston Group, and only two inside directors, Peter Storer and Terry Lee.

All was quiet on the merger front until July. On July 16, 1985 Comcast sent a merger proposal to the Storer board. Comcast offered to purchase Storer for a per share price of $82 in cash, 1.2 shares of preferred stock with a $25 liquidation preference of the surviving company, and 1.2 warrants to purchase common stock of the surviving company. In terms of management incentives, the Comcast offer provided that Peter Storer would remain as chairman of the board, the company would remain independently run, and Comcast would honor all existing contracts with management. The offer included a stock lock-up provision, which would give Comcast a stock option on 3,470,000 newly issued Storer shares, exercisable in the event another bidder subsequently acquired Storer for a higher price. The proposal also included a no-shop clause prohibiting Storer from soliciting other bids.

Over the next ten days, the parties met to confer, compare and negotiate. Dillon Read met with Comcast, Storer met with Dillon Read, Comcast met with Storer. 3 The Storer board then advised both Comcast and KKR that it would meet on July 29 to consider and review any and all current and revised offers.

On the morning of July 29 both bidders presented revised offers. Comcast increased its cash offer to $83.50 per share, plus .353 of preferred stock with a liquidation preference of $25, and $35 principal amount of twelve year subordinated zero coupon debentures. 4 The offer included the right to receive, within 180 days after the merger, the net proceeds from the underwritten sale by Merrill Lynch Capital Markets of an additional .517 shares of such preferred stock or, at Comcast's option, approximately $5.25 per share in cash. Comcast removed the stock lock-up provision included in its July 16 offer, but added an $18 million goodbye fee. The revised offer retained the no-shop clause and management commitments. Comcast indicated that it would hold the offer open until 5:00 p.m. the next day, and expressed its desire to continue negotiating with Storer.

KKR increased its cash offer to $90 per share, plus one merger warrant. The revised KKR offer retained the $18 million goodbye fee, and added an asset lock-up provision in the form of an option to purchase either Storer's cable stations for $835 million, or three of Storer's television stations for $535 million. KKR held the offer open until 5:00 p.m. that day.

In the afternoon the board met for two and a half hours to discuss the two offers with its legal and financial advisors. By 4:00 p.m. the board had reached a consensus that KKR's offer was preferable for three reasons: (1) KKR offered a higher cash value per share, (2) Comcast's offer contained several uncertain tax consequences, and (3) there was a greater risk of missing the closing deadline in Comcast's proposal. The board then met again with KKR, and within fifteen minutes KKR increased its cash offer by one dollar to $91 per share, and increased the option price for the network television stations by $100 million to $635 million.

At 4:15 p.m. the Storer board reconvened. The two inside directors, Peter Storer and Terry Lee, stated that they favored approval of the KKR bid, and that they would forego the investment offered them by KKR if necessary to get the Storer board to accept KKR's proposal. The board then approved KKR's offer by a vote of seven to zero, 5 with Peter Storer and Terry Lee abstaining.

On October 23, 1985 the board issued its proxy statement prospectus, giving notice of a special shareholders' meeting on November 22, 1985 to vote on the Storer-KKR merger proposal, and urging shareholder approval. At the November 22 meeting, the shareholders approved the Storer-KKR merger by a vote of 15.3 million shares (approximately 99.3% of the votes cast, 81% of all shares outstanding) to 39,247 shares (approximately 0.7% of the votes cast, .25% of the shares outstanding), with 65,373 shares abstaining.

Meanwhile, while merger negotiations were proceeding on center stage, appellant Michael Cottle, a Storer shareholder and the plaintiff in this derivative action, had initiated a small skirmish with the Storer board. On July 3, 1985 Cottle made a demand on the board to investigate unidentified corporate officers and directors engaged in "entrenchment conduct" with respect to the proposed KKR merger transaction, and who were allegedly exposing Storer to $21.2 million in liability. On July 19, the directors responded by asking Cottle to furnish additional information concerning his shareholder status and the basis of his allegations.

On November 11, in response to an October 21 invitation from the Storer board, Cottle met with counsel for the directors. Cottle demanded that the board seek a declaratory judgment regarding the validity of the Storer-KKR merger, and that the board postpone the...

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