David J. Greene Co. v. Schenley Industries, Inc.

• Decision Date: 15 June 1971
• Citation: 281 A.2d 30
• Parties: DAVID J. GREENE & CO. et al., Plaintiffs, v. SCHENLEY INDUSTRIES, INC., et al., Defendants.
• Court: Court of Chancery of Delaware

Page 30

281 A.2d 30

DAVID J. GREENE & CO. et al., Plaintiffs, v. SCHENLEY INDUSTRIES, INC., et al., Defendants.

Court of Chancery of Delaware, New Castle County.

June 15, 1971.

Irving Morris of Cohen, Morris & Rosenthal, Wilmington, and Julius Levy of Pomerantz, Levy, Haudek & Block, New York City, for plaintiffs.

S. Samuel Arsht of Morris, Nichols, Arsht & Tunnell, Wilmington, and Leon Silverman of Fried, Frank, Harris, Shriver & Jacobson, New York City, for defendant Glen Alden Corporation.

Louis J. Finger, of Richards, Layton & Finger, Wilmington, for defendant Schenley Industries, Inc.

MARVEL, Vice Chancellor:

The complaint herein, which was filed on March 5, 1971, seeks a preliminary and final order enjoining the consummation of a contemplated plan of merger proposed to be effected under the terms of 8 Del.C. § 251. It is claimed in the complaint that such projected merger is so grossly unfair to plaintiffs and other minority stockholders of the defendant Schenley that it must be enjoined as being an attempt by self-dealing officers and directors improperly to eliminate to a large extent the equity of minority stockholders to the corresponding advantage of the defendant Glen Alden.

On or before February 25, 1971, the defendant Glen Alden, the holder of approximately 86% ¹ of Schenley's common stock and in complete control of such subsidiary by reason of its selection of Schenley's directors and officers, conceived of a plan for the merger of the defendant Schenley (for whose benefit plaintiffs sue derivatively as well as representatively as minority stockholders of Schenley) into a subsidiary of the defendant Glen Alden. Plaintiffs contend that such proposed merger is being undertaken for the benefit of the defendant Glen Alden at the expense of plaintiffs and other minority stockholders of Schenley. A detailed description of the plan under attack is set forth in a proxy statement ² mailed out to Schenley's stockholders as of May 21, 1971, preliminary to Schenley's annual meeting of stockholders which is scheduled to be held on June 17, 1971. Following the filing of the complaint, plaintiff filed interrogatories and two requests to produce, dated March 12, 1971. However, discovery was not pressed and the case remained inactive until June 3 when plaintiff's present motion was noticed for argument on June 9.

The plan, as described in the complaint and in the later proxy statement, proposes to furnish to Schenley's minority stockholders who accede to the proposed merger $5 in cash and a 7 1/2% 15 year subordinated debenture in the principal amount of $30 for each share of common stock, and $4.50 in cash and a similar debenture in the principal amount of $27 for each share of $1.40 preferred stock. These debentures are to be subordinated to all senior and superior indebtedness, however, no cash dividends may be paid on Glen Alden's common stock during the continuance of an event of default under the trust indenture. The parties agree that the $1.40 preferred stock of Schenley has a value of 9/10ths of the Schenley common stock, and the amount proposed to be paid to the preferred shareholders is based on such difference in valuation.

It is charged in the complaint that after an appropriate discounting of the speculative debentures involved in the plan, the total fair market value of the offer made to minority stockholders of Schenley would be $28 per share for each share of their common stock and $25 per share for each share of their $1.40 convertible preferred stock. Schenley's common stock has been recently traded on the New York Exchange at between $27--$29 per share. During the worst of the 1970 market break Schenley's common stock declined to a low of $19.50. The market price of Schenley's convertible preferred stock has moved in close correlation with that of its common stock taking into consideration its voluation at 9/10ths of the common stock. The preferred stock 1970 low was $17.25. Schenley's preference stock is not affected by the plan of reorganization.

The complaint lays particular emphasis on the estimated value of the proposal made to Schenley's minority stockholders as compared with the much higher prices bid for Schenley stock in 1968, when Glen Alden and Lorillard, battling for control of Schenley, drove up the price of its stock beyond what defendants deem normal market levels. Plaintiffs also point out that a consummation of the plan would mean that the estimated $15 per share interest in Schenley's Buckingham Corporation, which they and other minority stockholders of Schenley might expect to receive were the plan of merger not to be consummated, would be denied them, such sum being the calculated pro rata amount allocable to each share of stock of Schenley from the $120,000,000 derived from the sale of Schenley's merged subsidiary, Buckingham Corporation, which has been required by an anti-trust consent decree. Finally, it is alleged that the monetary value of the offer made to Schenley's minority stockholders represents a price earnings ratio of nine times such corporation's present earnings, a formula for earnings far below that of Schenley's principal competitors in the liquor industry.

Plaintiffs' prayers are for preliminary and permanent injunctive relief against effectuation by the defendants and their agents of the contemplated merger of which plaintiffs complain, and the matter for decision by the Court is plaintiffs' pending motion for a preliminary injunction against such plan's immediate effectuation following stockholder approval at the meeting to be held on June 17, at which Glen Alden, unless enjoined, will have far more than the required number of votes to insure the adoption and effectuation of the plan in controversy. This is the opinion of the Court on said motion.

Glen Alden concedes that its control of the affairs of Schenley, including the naming of its directors and officers, is such as to call into play the rule applicable in all instances of corporate self-dealing, namely that when officers and directors stand on both sides of a transaction complained of '* * * they bear the burden of establishing its entire fairness, and it (the transaction) must pass the test of careful scrutiny by the courts', Sterling v. Mayflower Hotel Corp., 33 Del.Ch. 293, 93 A.2d 107, citing Keenan v. Eshleman, 23 Del.Ch. 234, 2 A.2d 904, and Gottlieb v. Heyden Chemical Corp. 33 Del.Ch. 82, 90 A.2d 660.

In the opinion below in Sterling v. Mayflower Hotel Corp., supra (33 Del.Ch. 20, 89 A.2d 862), the Chancellor noted in a situation involving the exchange of stock of the resulting corporation for that of the corporation to be merged:

'I conclude that all relevant value figures of both corporations may be examined and compared in order to arrive at a decision as to the fairness of the plan. Thus, while not determinative, nevertheless, the value of each corporation for various purposes, e.g., going concern value, book value, net asset value, market value, is pertinent to the issue presented.'

In the case at bar, however, cash and a debenture of Glen Alden rather than its common stock are being tendered for each share of Schenley proposed to be eliminated by the contemplated merger. Thus the matter to be decided is the fair value of the offer being made to plaintiffs and other minority stockholders of Schenley and whether or not this amount approximates the fair value of the shares of Schenley which the plan proposes to eliminate.

While the complaint, as noted above, gives a higher value to the Glen Alden offer, plaintiff's expert, Lawrence J. Goldstein, by valuing the debentures in question at 70% Of their face value, arrives at a value of $26 for each share of Schenley common stock, and $23.40 for each share of Schenley convertible preferred. Defendant's expert, CBWL-Hayden, Stone, Inc., values the offer for common stock at between $28--$29, and for the preferred at between $26--$27, while its expert, Stanley S. Shuman, is of substantially the same opinion. Thus, unless the fair value of Schenley stock is so much greater than the total amount offered, or that plaintiffs and other minority stockholders are being otherwise deprived of clear rights or otherwise so taken advantage of by those charged with a fiduciary duty towards them as to constitute a form of constructive fraud, or the like, then it...