ER Holdings, Inc. v. Norton Co.

• Decision Date: 11 April 1990
• Docket Number: Civ. A. No. 90-10666-T.
• Citation: 735 F. Supp. 1094
• Parties: ER HOLDINGS, INC., Plaintiff, v. NORTON COMPANY, et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

735 F. Supp. 1094

ER HOLDINGS, INC., Plaintiff, v. NORTON COMPANY, et al., Defendants.

Civ. A. No. 90-10666-T.

United States District Court, D. Massachusetts.

April 11, 1990.

Harvey J. Wolkoff, Ropes & Gray, Boston, Mass., for plaintiff.

Stephen Daniel Poss, Marshall Simonds, Don M. Kennedy, Goodwin, Procter & Hoar, Boston, Mass., Paul K. Rowe, William C. Sterling, Bernard W. Nussbaum, Wachtell, Lipton, Rosen & Katz, D. Scott Wise, Davis, Polk & Wardwell, New York City, for defendants.

MEMORANDUM

TAURO, District Judge.

Plaintiff ER Holdings Inc. ("ER"), a Delaware corporation, is a wholly-owned subsidiary of BTR plc, a holding company organized under the laws of the United Kingdom. The defendant Norton Company ("Norton") is a manufacturing concern incorporated in Massachusetts with headquarters in Worcester. Additionally, a number of individuals have been named as defendants, including the twelve members of Norton's Board of Directors ("the Board").¹

The underlying litigation concerns ER's attempt to acquire Norton by means of a hostile, all-cash/all-shares tender offer, together with a contemporaneous proxy solicitation. Presently at issue is ER's motion for partial summary judgment or, in the alternative, for a mandatory preliminary injunction requiring Norton to hold its annual meeting of shareholders on April 26, 1990.

I.

On March 16, 1990, ER commenced a $75 all-cash/all-shares tender offer to purchase Norton. Simultaneously, ER disclosed its intention to solicit proxies for Norton's annual meeting, in order to elect a board of directors that would accept this tender offer should it be rejected by the existing Board. Also on March 16, 1990, ER moved for a temporary restraining order to prevent Norton or the Commonwealth of Massachusetts from enforcing Mass.Gen.L. ch. 110C (Massachusetts Take-Over Bid Regulation Act), and for an order requiring any related litigation to be filed in this court. After a hearing, those motions were allowed on the same day. Preliminary injunctive relief on these matters was provisionally vitiated by the entry of a stipulation in which the defendants agreed to extend the forum limitation, and to seek enforcement of Mass.Gen.L. ch. 110C only after five days notice to ER.

The Board rejected ER's tender offer on March 29, 1990. After rejecting ER's offer, the Board voted unanimously on March 29, 1990 to cancel the Norton annual meeting, set in the by-laws for the fourth Thursday in April (April 26 this year). In its place, the Board scheduled a "special meeting" for June 26, 1990, four days before the last possible day for such a meeting. See Mass.Gen.Laws Ann. ch. 156B, § 33 (West Supp.1989) (requiring annual meeting be held within six months of end of corporation's fiscal year). As justification for this action, Norton cited the advice of its financial advisor, Morgan Stanley & Co., Inc., to the effect that the ER offer was inadequate, and that as many as sixty days would be needed to properly explore "alternatives."

On March 30, ER then filed an Amended Verified Complaint For Declaratory And Injunctive Relief. In it, ER seeks, among other things, to ensure, in furtherance of its proxy solicitation, that Norton's annual meeting will be held on April 26, 1990.² It is the Board's decision to cancel the annual meeting in favor of a later special meeting that prompts ER's alternative motions for partial summary judgment and injunctive relief.³ Specifically, ER seeks an order that the annual meeting be held on April 26, 1990, as provided by Norton's by-laws. Additionally, ER contends that, even if the by-laws could be construed to permit a postponement, the Board's manipulation of Norton's corporate machinery for its own self-perpetuation requires that its efforts to postpone the annual meeting be declared invalid.

Norton, on the other hand, contends that the Board's substitution of a special meeting for the annual meeting is fully authorized by the by-laws. Moreover, Norton contends that the Board's decision to postpone is a reasonable exercise of business judgment.

II.

The first inquiry this court must make is as to whether Norton's by-laws preclude the Board's cancellation of its scheduled April 26, 1990 annual meeting.

A. The By-Laws

The by-laws of a corporation, along with state corporation law and the corporation's articles of organization and charter, regulate the manner in which a company's officers and directors must conduct the company's business. See generally 13A C.A. Peairs, Massachusetts Practice § 421 (2d ed. 1971). By-laws, while inferior to state law and articles of organization, nonetheless "define the duties and powers of stockholders and directors with reference to each other and the corporation." Bushway Ice Cream Co. v. Fred H. Bean Co., 284 Mass. 239, 244-45, 187 N.E. 537 (1933). See also Kubilius v. Hawes Unitarian Cong. Church, 322 Mass. 638, 644, 79 N.E.2d 5 (1948). The corporate by-laws constitute a contract between the corporation's owners — the shareholders — and its managers, the Board. Id.; Jessie v. Boynton, 372 Mass. 293, 303, 361 N.E.2d 1267, 1273 (1977); Mitchell v. Albanian Orthodox Diocese in America, Inc., 355 Mass. 278, 282, 244 N.E.2d 276, 279 (1969). See also Bushway, 284 Mass. at 245, 187 N.E. 537. And, while it is true that the "stockholders' by-law power is not plenary, but is subject to limitations of statute, public policy in unwritten law, and the charter," 13A Massachusetts Practice § 421, at 84, no party to this litigation has argued, nor has the court found any authority suggesting, that the by-laws here have been nullified by any superceding authority. The Board, therefore, is bound by the provisions of the Norton by-laws.⁴ See Bushway, 284 Mass. at 243, 187 N.E. 537.

Two distinct provisions of the by-laws constitute the heart of the dispute between the parties. Article I provides that:

The Annual meeting of stockholders shall be held on the fourth Thursday of April in each year (or if that be a legal holiday, on the next succeeding full business day) at the principal office of the corporation in Massachusetts at 10:30 o'clock a.m. unless a different hour or place (within the United States) is fixed by the Board of Directors or by the Chairman of the Board of Directors or by the President. The purposes for which the annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization or by these by-laws, may be specified by the Board of Directors or by the President. If no annual meeting has been held on the date fixed above, a special meeting may be held in lieu thereof with all the force and effect of an annual meeting. (emphasis supplied).

Article VII(e) provides that:

These by-laws may be amended or repealed by vote of the stockholders at any annual or special meeting or by the Board of Directors at any regular or special meeting, provided that ... no change in the date of the annual meeting of stockholders may be made within sixty days before the date fixed in these by-laws.... (emphasis supplied).

1. The Plain Meaning Rule

Because Norton's by-laws are a bargained-for agreement between the shareholders and directors, principles of contract construction properly guide the inquiry as to whether the by-laws permit postponement of the meeting. One familiar maxim is that a contract should be construed in accordance with its plain meaning. See DeFreitas v. Cote, 342 Mass. 474, 477, 174 N.E.2d 371, 373 (1961) (citations omitted). In the absence of ambiguity, Massachusetts law enforces the express terms of a contract. See Liberty Mutual Insurance Co. v. Gibbs, 773 F.2d 15, 17 (1st Cir.1985). See also Edwin R. Sage Co. v. Foley, 12 Mass.App. 20, 28, 421 N.E.2d 460 (1981) (where words of contract are plain and free from ambiguity, they must be enforced according to their ordinary meaning).

Article VII expressly deals with amendments to the by-laws. Subsection (e) thereof clearly and unambiguously states that "no change in the date of the annual meeting of stockholders may be made within sixty days before the date fixed in these by-laws...." Article I of Norton's by-laws sets the annual meeting for the fourth Thursday of April — this year, April 26th. Under Article VII(e), that meeting date arguably could have been changed by the Board up until February 26, 1990. The Board's purported cancellation on March 29, 1990, only 28 days before the scheduled annual meeting, was clearly beyond the limitations period provided in the by-laws.

The Board argues, however, that it did not "amend" the by-laws to "change" the meeting date. Rather, the Board contends that the special meeting it called "in lieu of" the annual meeting was expressly authorized by the last sentence in Article I which states: "If no annual meeting has been held on the date fixed above, a special meeting may be held in lieu thereof with all the force and effect of an annual meeting." The Board argues, therefore, that Article VII(e)'s sixty-day rule simply does not apply.

Under Massachusetts contract law, the by-laws must be read as a whole so that, if possible, provisions are harmonized with one another. See Spartans Indus. v. Pilling Shoe Co., 385 F.2d 495, 499 (1st Cir.1967) (harmonizing construction preferred even if certain language, if viewed alone, more readily suggests a different reading); J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 795, 494 N.E.2d 374 (1986) (contracts must be construed to give reasonable effect to each provision). Norton, however, sees no interplay between the two provisions. Indeed, at oral argument defense counsel argued that, assuming good faith, the Board could avoid the sixty-day rule each and every year by changing the annual meeting to a special meeting under the cited provisions of Article I. This court disagrees. Such an interpretation would effectively read Article VII(e) out of the by-laws. See, e.g., Aprahamian v. HBO & Co., 531 A.2d 1204, 1206 (Del.Ch.1987) (recognizing...