Estate of Detwiler v. Offenbecher

Decision Date16 August 1989
Docket NumberNo. 86 Civ. 7150 (RWS).,86 Civ. 7150 (RWS).
PartiesESTATE OF Grace A. DETWILER, Grace A. Detwiler Trust for George A. Detwiler and his Family, Grace A Detwiler Trust for Peter M. Detwiler and his Family, Grace A. Detwiler Trust for Frederic B. Detwiler and his Family, Grace A. Detwiler Trust for Children of Frederic B. Detwiler, Grace A. Detwiler Trust for Phyllis S. Detwiler and Her Family, George A. Detwiler Trust, the Estate of George A. Detwiler, Peter M. Detwiler, Frederic B. Detwiler, Phyllis D. Henderson, Helen S. Bryant Trust, John A. Bryant, II and William R. Bryant, Jr., Plaintiffs, v. Dale J. OFFENBECHER, John B. Davies and Sidney W. Smith, Jr., Defendants.
CourtU.S. District Court — Southern District of New York

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Cadwalader, Wickersham & Taft (Harvey M. Spear, Richard H. Walker, Robert Knuts and Jane K. Rushton, of counsel), New York City, for plaintiffs.

Olwine, Connelly, Chase, O'Donnell & Weyher (John Logan O'Donnell, Grace M. Healy and Lisa M. Hughes, of counsel), New York City, Foley & Lardner (Maurice J. McSweeney, of counsel), Milwaukee, Wis., and Davis Markel & Edwards (Thomas Manick, of counsel), New York City, for defendants.

OPINION

SWEET, District Judge.

Defendants Dale J. Offenbecher ("Offenbecher"), John B. Davies ("Davies"), and Sidney W. Smith, Jr. ("Smith") (collectively, the "Defendants") have moved pursuant to Rule 56, Fed.R.Civ.P., for an order dismissing the amended complaint of plaintiffs Estate of Grace A. Detwiler, et al. (collectively, the "Plaintiffs"). For the reasons set forth below, the motion is granted, and the amended complaint is dismissed.

By virtue of the skill of counsel for both sides — as well as their care and diligence — a thorough and professional autopsy of a complicated corporate transaction has been presented for diagnosis. This dispute has been driven by the differing views of well advised, ably represented shareholders and executives of a closely held corporation as to the proper course of the corporation's affairs. Despite the inherent complications surrounding an almost $100 million transaction, these factors have made this motion a case study in the propriety of pretrial resolution.

The Parties and Players

Ferro Manufacturing Corporation ("Ferro" or "the Company") was a closely held Michigan corporation with its principal place of business in Detroit, Michigan. Since the early 1980s, Ferro had been organized as a corporate holding company that owned three businesses, each operating independent of one another, with a separate President, Vice President of Finance or Controller, and other officers.

The Automotive Division ("Automotive") manufactured equipment for cars and trucks. Automotive included Ferro Plastics Products, Inc. ("Plastics"), which produced custom injection molded plastic products for Automotive and automotive original equipment manufacturers. In 1978, Ferro acquired the Von Weise Gear Company ("VWG"), which manufactured fractional horsepower gear motors for industrial and other applications. Ferro acquired the Aerospace Division ("Aerospace") in 1983. That division was comprised of two subsidiaries, Gentz Industries, Inc. ("Gentz") and Johnson Technology, Inc. ("JT"), that manufactured commercial and military aircraft parts.

For the fiscal year ended August 31, 1984, Ferro earned $11,698,000 on net sales of $195,200,000 — $134,800,000 for Automotive, $37,800,000 for VWG, and $22,600,000 for Aerospace. In 1980, the Company had sales of $69 million.

During 1984 and 1985, various individuals and trusts owned Ferro's stock, distributed among Ferro's management and descendants of the Company's four founding families in the following proportions:

                Family                  Number   Percent
                Rollo W. Detwiler       184,356   16.4%
                William C. Devereaux    747,840   42.5%
                Ward A. Detwiler        193,920   17.3%
                John A. Bryant          206,856   18.4%
                Management               60,000    5.3%
                

The Plaintiffs are members of the Ward A. Detwiler and John A. Bryant families and trusts benefitting members of those families. The parties connected to the Ward A. Detwiler family include Estate of Grace A. Detwiler, Grace A. Detwiler Trust for George A. Detwiler and his family, Grace A. Detwiler Trust for Peter M. Detwiler and his family, Grace A. Detwiler Trust for Frederic B. Detwiler and his family, Grace A. Detwiler Trust for Children of Frederic B. Detwiler, Grace A. Detwiler Trust for Phyllis S. Detwiler and her family, George A. Detwiler Trust, Estate of George A. Detwiler, Peter M. Detwiler, Frederic B. Detwiler, and Phyllis D. Henderson. The parties connected to the John A. Bryant family include the Helen S. Bryant Trust, John A. Bryant, II, and William R. Bryant, Jr.

Ferro had a nine-person board of directors. The four representatives of the founding families included Warren F. (a/k/a Rick) Kendall ("Kendall"), grandson of William C. Devereaux and Vice President Manufacturing of Automotive; Philip B. Detwiler ("Philip Detwiler"), son of Rollo W. Detwiler and a retired senior construction engineer; plaintiff Peter M. Detwiler ("Peter Detwiler"), son of Ward A. Detwiler and Vice-Chairman of the board of E.F. Hutton & Co., Inc. ("Hutton"); and plaintiff John A. Bryant III ("Bryant"), grandson of John A. Bryant and a manufacturer's representative.

The Company's three outside directors included Richard E. Fister ("Fister"), who was President of Fister and Associates, a management consulting firm, and who had served as Professor of Finance at St. Louis University, director of a number of companies, and Chief Executive Officer of VWG before Ferro acquired it; William R. James ("James"), who was Vice President of Capital Cities Communications, Inc. and had served as a Touche Ross & Co. ("Touche Ross") partner in charge of the firm's national manufacturing consulting practice, and who held a Masters in Business Administration from Harvard University; and Paul S. Mirabito ("Mirabito"), a retired Chairman and Chief Executive Officer of Burroughs Corporation who served as director of various companies, including Unisys, Bendix, Warner Lambert, Consumers Power, and Detroit Bank & Trust. None of the three outside directors held Ferro shares or participated in management.

The management representative on the board was defendant Dale J. Offenbecher ("Offenbecher"), who served as Ferro's Chairman, President, and Chief Executive Officer and owned 3.2% of its voting shares.

Defendant Sidney W. Smith, Jr. ("Smith"), a senior partner in the Detroit law firm of Clark, Klein & Beaumont ("Clark Klein"), served as legal counsel on the board. Smith and his firm had been Ferro's general counsel since the Company's inception. Smith also represented Adelyn and Leslie Devereaux on the board and served as legal counsel to members of the Devereaux, Kendall, and Rollo Detwiler families and as legal counsel and/or co-trustee of several trusts holding Ferro stock.

In addition to Offenbecher, Ferro's senior management included defendant John B. Davis, Jr. ("Davies"), the Company's Senior Vice President for Finance and Administration, Secretary, and Treasurer, who owned approximately one percent of Ferro's shares. Offenbecher and Davies ran the Ferro holding company, without primary operational responsibilities for any of its three businesses.

James E. Stewart ("Stewart") was President of Automotive, and he owned approximately one percent of Ferro's shares. James E. Grimes ("Grimes") served as President of Aerospace, and Edward M. Kruske ("Kruske") was President of VWG. Neither Grimes nor Kruske owned any Ferro shares.

Ferro's investment banker was Dillon, Read & Company, Inc. ("Dillon Read"), a firm experienced in the mergers and acquisitions field. In 1985, for example, the firm acted as investment advisor to the purchaser or seller in over thirty transactions. The twenty-one transactions in which price information was disclosed amounted to $10.6 billion.

Significantly, the transaction the Plaintiffs challenge in this lawsuit did not involve a publicly-held company with widely-dispersed shareholders having varying degrees of sophistication and knowledge about the company. Ferro's shareholders included a small number of sophisticated individuals and trusts whose extensive involvement with the company provided them substantial knowledge about its products, operations, and financial structure.

Prior Proceedings

A majority of Ferro's shareholders voted on July 25, 1985 to sell the Company to Hoover Universal, Inc. ("Hoover") for $87.59 per share. The Plaintiffs include the shareholders in the minority who voted against the sale.

On September 17, 1986, the Plaintiffs filed a complaint against Offenbecher, Davies, and Smith, alleging violations of Rule 10b-5 and breaches of fiduciary duties arising out of the events surrounding the sale. They filed an amended complaint on January 10, 1989.

The parties have conducted extensive discovery during the course of this action. More than eighty deposition notices or subpoenas for parties, non-parties, and experts have been issued, and thousands of pages of documents have been produced.

On January 13, 1989, the Defendants moved pursuant to Rule 56, Fed.R.Civ.P., to dismiss the amended complaint in its entirety. Oral argument was held and the motion was considered fully submitted on March 24, 1989.

Findings of Fact1
A. Early Efforts to Sell Ferro

On June 28, 1977, Ferro's board voted unanimously to investigate a possible merger or sale of Ferro. Toward this end, the Company interviewed several investment banking firms, including Hutton, and retained Dillon Read on November 23, 1977. Dillon Read advised Ferro regarding a possible sale or merger in 1977 and performed services for Ferro in connection with the acquisition of VWG in 1978.

After Warren F. Kendall, Sr. died and W. Robert Bryant became terminally ill in ...

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