CT of Virginia, Inc. v. Barrett
| Decision Date | 10 August 1990 |
| Docket Number | Civ. A. No. 90-0024-L. |
| Citation | 124 BR 689 |
| Parties | C-T OF VIRGINIA, INC., f/k/a Craddock-Terry Shoe Corporation, Plaintiff, v. James S. BARRETT, II, et al., Defendants. |
| Court | U.S. District Court — Western District of Virginia |
Edward B. Lowry, Charlottesville, Va., Harold Bonacquist, Traub, Bonacquist, Yellen & Fox, New York City, for plaintiff.
William Tracey Shaw, Lynchburg, Va., Benjamin C. Ackerly, Hunton & Williams, Richmond, Va., for defendants.
This matter is before me on the motion to dismiss filed by the defendants on October 20, 1989, in the United States Bankruptcy Court for the Western District of Virginia, Lynchburg Division. This case was transferred to the United States District Court for the Western District of Virginia, Lynchburg Division, on April 4, 1990. The defendant's motion has been briefed and argued and, therefore, this matter is now ripe for disposition.
This is an adversary proceeding brought by the Official Committee of Unsecured Creditors of C-T of Virginia, Inc. ("C-T"), formerly Craddock-Terry Shoe Corporation on behalf of C-T of Virginia against certain former directors and officers of Craddock-Terry. This suit arises out of a statutory merger approved by Craddock-Terry directors in January 1986 and consummated in April 1986. The background of this merger is as follows:
In April 1985, C-T hired Prudential-Bache Securities, Inc. ("Prudential"), as financial advisor to study strategic financial alternatives available to C-T. Prudential presented the results of its study to C-T's Board of Directors on May 20, 1985. One of Prudential's recommendations was that C-T pursue a leveraged buy out ("LBO"). The Board decided that an LBO by management would most likely realize maximum value for shareholders because it (i) would provide the highest expected value to shareholders and had a high probability of success, (ii) would maintain the viability of the enterprise, and (iii) would protect the interests of employees and other constituents. The Board authorized management to explore an LBO at a price of $15 per share.
On June 12, 1985, after an announcement of a proposed LBO by management, C-T received an unsolicited proposal from Southwestern General Corporation proposing a merger under which holders of C-T would receive $17.50 per share. Southwestern withdrew its offer on August 26, 1985, following an announcement by President Reagan that he would not limit the importation of shoes into the United States.
On November 11, 1985, HH Holdings, Inc., a Delaware holding company, made an unsolicited offer for a cash merger in which each share of C-T common stock would be exchanged for $19.00 cash.
On November 25, 1985, HH Holdings increased its offer to $20.00 cash per share of C-T common stock. As a result of negotiations, an Agreement in Principle was signed on December 11, 1985, and an Agreement and Plan of Merger ("Merger Agreement") was executed on January 24, 1986, between C-T, HH Holdings and HH Acquisition, Inc., a wholly-owned subsidiary of HH Holdings formed for the purpose of completing the proposed merger. The Merger Agreement provided that on April 30, 1986, HH Acquisition would merge into C-T, with C-T as the surviving corporation owned by HH Holdings. On April 30, 1986, the merger was consummated.
The plaintiff claims that as of January 20, 1986, the officers and directors of C-T knew, or should have known that:
1. Financing the proposed merger required not less than $43.66 million in cash to pay stockholders, creditors, and transaction costs;
2. HH Holdings intended to raise most of the money needed to finance the merger by obtaining short-term debt financing secured by liens on the assets of C-T;
3. Repayment of the secured debt would require C-T to increase sales or reduce costs;
4. C-T's financial performance was significantly below management projections; and
5. C-T would be grossly undercapitalized if the merger were consummated.
The plaintiff alleges that as a result of the financial burdens placed by the merger, the C-T became unable to pay its debts and was forced to file for bankruptcy. First, the plaintiff claims that the defendants, who approved or assisted in the consummation of the merger, breached their fiduciary obligation imposed pursuant to Va.Code Annot. § 13.1-690 to exercise the highest care, loyalty and good faith in their dealings with respect to C-T. Secondly, the plaintiff claims that the payments made to stockholders pursuant to the merger constituted distributions to shareholders, within the meaning of Va.Code Annot. § 13.1-603, which violated Va.Code Annot. § 13.1-653.
The defendants filed their motion to dismiss on the grounds that the defendants did not breach any fiduciary duty owed to pre-merger shareholders of Craddock-Terry, and owed no fiduciary duty to post-merger shareholders and creditors or to the acquiring company. The defendants further argue that the plaintiff's claim based on breach of fiduciary duty is barred by the statute of limitations, and that a distribution within the meaning of § 13.1-653 was not made.
1. Fiduciary Duty
The defendants argue that under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.1986), their legal duty in approving a merger offer was to obtain for shareholders the highest price possible for the company. Under corporation law developed in Delaware, "corporate directors have a fiduciary duty to act in the best interests of the corporation's shareholders." Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del.1985). This duty is paramount when directors undertake to sell their company requiring directors to maximize the company's value for the sole benefit.
As stated in Revlon:
When Pantry Pride increased its offer to $50 per share, and then to $53, it became apparent to all that the break-up of the company was inevitable. The Revlon board\'s authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale the duty of the board . . . thus changed from the preservation of Revlon as a corporate entity to the maximization of the company\'s value at a sale for the stockholder\'s benefit.
The Delaware Court further explained the two circumstances that implicate Revlon duties in In re Time, Incorporated Shareholder Litigation, 571 A.2d 1140 (Del.1989):
The first, and clearer one, is when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company.
Id. (citations omitted).
The plaintiff argues that Revlon duties were not applicable to the HH holdings and C-T merger because the "sale" of C-T in a transaction "involving the clear break-up of the company" was not inevitable. Where the sale of a company is not inevitable, Unocal requires that a board approve a takeover bid only if it is in the best interests of the company. This determination is made based on an analysis of the takeover bid and its effect on the corporate enterprise taking into account concerns such as the "impact on `constituencies' other than shareholders (i.e., creditors, customers, employees and perhaps even the community generally) . . ." Unocal, 493 A.2d at 954-55 (Del.1985).
In order to determine whether Revlon or Unocal duties applied to the business judgment by C-T at issue in this case, I must determine whether C-T initiated an active bidding process to sell itself or effect C-T's reorganization.
The defendants assert that the Board's announcement on May 17, 1985, that it had authorized the sale of the company to management in an LBO signalled that the company was for sale. I agree. This fact is evidenced by the Board's subsequent receipt of bids from Southwestern and HH Holdings. At this point, the Board was not merely considering a possibility of merger with a particular corporation; it had already determined that the best way to serve shareholder interests was to place the firm on the market. A Proxy Statement allowing the Board some flexibility if the shareholders were to reject the LBO is not evidence to the contrary; this does not appear to have been intended to take the company out of the market, but only to preserve the Board's negotiating position with other...
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