Epstein v. Celotex Corp.

• Decision Date: 14 February 1968
• Citation: 43 Del.Ch. 504,238 A.2d 843
• Parties: William S. EPSTEIN, Plaintiff, v. The CELOTEX CORPORATION, The South Coast Corporation, South Shore Oil& Development Company and Jim Walter Corporation, Defendants.
• Court: Court of Chancery of Delaware

Page 843

238 A.2d 843

43 Del.Ch. 504

William S. EPSTEIN, Plaintiff, v. The CELOTEX CORPORATION, The South Coast Corporation, South Shore Oil& Development Company and Jim Walter Corporation, Defendants.

Court of Chancery of Delaware, New Castle County.

Feb. 14, 1968.

Ernest S. Wilson, Jr., of Wilson & Lynam, Wilmington, for plaintiff.

Richard F. Corroon, Hugh L. Corroon and Robert K. Payson, of Potter, Anderson & Corroon, Wilmington, for defendants The Celotex Corp. and Jim Walter Corp.

Richard L. Sutton, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendants The South Coast Corp. and South Shore Oil and Development Co.

MARVEL, Vice Chancellor:

The amended complaint in this action, the allegations of which are stated to be true solely on the information and belief of plaintiff's attorney, avers that plaintiff is the owner of shares of common stock of the defendant The South Coast Corporation '* * * and has been such at all times stated herein * * *'. Plaintiff also claims to be the owner of shares of common stock of the defendant South Shore Oil & Development Company and avers that he '* * * has been such ¹ indirectly through (South) Coast at all times stated herein and directly since on or about February 9, 1967 * * *'.

Plaintiff's action arises out of the following events. On February 8, 1967, the defendant Jim Walter Corporation, then the direct or indirect owner of 56% Of the capital stock of South Shore, made a written proposal to the public holders of such stock, offering to purchase their holdings for $35 per share. The offering letter contained information concerning Jim Walter Corporation and its subsidiaries, including South Shore, and stated inter alia:

'* * * The Board of Directors of Jim Walter Corporation has carefully considered the purchase price of $35.00 per share and in its opinion such price is fair and reasonable. Since the officers of South Shore are also officials of Jim Walter Corporation or its subsidiaries, no opinion concerning the purchase price is expressed on behalf of South Shore. Each South Shore stockholder should consider the offer in light of his own investment objectives.'

During the years 1965 and 1966, the lowest bid for South Shore stock in the over-the-counter market was $23 per share, and the highest $33. On February 3, 1967, the highest bid for such stock was $33 per share. Included in the Jim Walter offering letter was a statement of John F. Bricker, a former president of South Shore, to the effect that he considered the Jim Walter offer fair and reasonable and that he intended to accept it on behalf of the 22,422 South Shore shares owned by him and members of his family.

As of February 3, 1967, there were approximately 1130 holders of record of South Shore's capital stock, and no individual stockholder of such corporation other than Jim Walter Corporation, its subsidiaries and affiliates, owned more than 10% Of such stock. Jim Walter Corporation owned or controlled 22.1% Of such shares, an interest calculated on a formula which takes into account its direct and indirect ownership of such shares. In other The Celotex Corporation, a wholely owned subsidiary of Jim Walter Corporation, owned 10.9% Of such shares, Southeastern Guaranteed Title & Insurance Company, also a wholly owned subsidiary of Jim Walter Corporation, owned .6%, and South Coast Corporation (59.5% Of the stock of which was held by the Jim Walter's wholely-owned subsidiary, Celotex), owned 22.4% Of such shares. The percentage of outstanding shares of South Shore thus owned or controlled by Jim Walter Corporation, on or about February 8, 1967, totalled 56% Of the outstanding capital stock of such subsidiary corporation.

At the time of the transaction complained of, the boards of directors of Jim Walter, South Coast and Celotox separately included at least two members of the board of South Shore, and there was other substantial dual holding of office in the several corporations which made up the Jim Walter hierarchy. Furthermore, five of the nine directors of South Shore were also members of the boards of Jim Walter, and/or South Coast, and/or Celotex.

According to plaintiff, the Jim Walter offer was made for the express purpose of enabling such corporation to acquire at least 90% Of the outstanding capital stock of South Shore at the allegedly inadequate price of $35 per share and thereafter merging South Shore into Jim Walter under the short form merger provisions of 8 Del.C. § 253. Plaintiff, relying on the figures contained in the Crutcher offer, hereinafter referred to, contends that at the time in question the net assets of South Shore were worth 31.8 million dollars, a figure, which, if translated into stock value, according to plaintiff, gave a value of $50 to each share of such corporation's capital stock, whereas the proposal advanced to South Shore stockholders by Jim Walter, translated into net asset figures, meant the acquisition of the former by the latter at a cost of only 22.2 million dollars. It must be noted however, in limine, that the Jim Walter offer sought stock at the aforesaid price of $35 per share and was not an offer for net assets.

Plaintiff further charges that Jim Walter, in order to accomplish its allegedly improper purpose, caused its subsidiary, South Coast, a majority of the board of directors of which were at the same time directors of Jim Walter, and/or Celotex, and/or South Shore, to distribute to its stockholders as a dividend, all of the shares of South Shore held by South Coast, thus facilitating Jim Walter's aim to purchase additional shares of South Shore. No mention is made of the fact that Jim Walter could have no doubt made such purchase of stock in toto directly from its subsidiary, South Coast. Plaintiff goes on to contend that because such stock dividend constituted income in the hands of its recipients, it tended to coerce such stockholders into selling such shares to Jim Walter in order to pay the income tax accruing as a result of the receipt of such stock dividends.

Finally, plaintiff, in seeking to establish the precise damages allegedly suffered by the stockholders of South Shore and South Coast as a result of Jim Walters' allegedly misleading offer, stresses the fact that on February 27, 1967, while the Jim Walter proposal to its stockholders was pending, such corporation declined to back the bona fide offer of one Albert B. Crutcher, Jr., to purchase all of South Shore's '* * * assets and disclosed liabilities * * *' for the approximate sum of 31.8 million dollars, an amount equivalent to a liquidating value of about $50 for each share of South Shore's outstanding stock.

Plaintiff charges that the quick response of Jim Walter to such proposal to the effect that it would not vote its majority stock in favor of such proposed sale, a decision taken before the board of South Shore had an opportunity to vote on such proposal, was obviously precipitate and improper and that the independent stockholders of South Shore should have an opportunity to vote on the aforesaid Crutcher offer after consideration of the proposal by the board of South Shore. He also contends that damages should be assessed against Jim Walter and its subsidiary,...