Gearhart Industries, Inc. v. Smith Intern., Inc.

• Decision Date: 05 June 1984
• Docket Number: Civ. A. No. 4-84-152-E.
• Citation: 592 F. Supp. 203
• Parties: GEARHART INDUSTRIES, INC., a Texas Corporation, et al. v. SMITH INTERNATIONAL, INC., a Delaware Corporation v. TEXAS AMERICAN/FORT WORTH, N.A., Trustee, et al.
• Court: U.S. District Court — Northern District of Texas

592 F. Supp. 203

GEARHART INDUSTRIES, INC., a Texas Corporation, et al. v. SMITH INTERNATIONAL, INC., a Delaware Corporation v. TEXAS AMERICAN/FORT WORTH, N.A., Trustee, et al.

Civ. A. No. 4-84-152-E.

United States District Court, N.D. Texas, Fort Worth Division.

June 5, 1984.

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Law, Snakard, Brown & Gambill by Thos. H. Law, Robert M. Randolph, Robert F. Watson, Fort Worth, Tex., Cantey, Hanger, Gooch, Munn & Collins by Robert S. Travis, Fort Worth, Tex., for plaintiff.

Fried, Frank, Harris, Shriver & Jacobson, Milton R. Ackman, Alan J. Russo, New York City, Kelly, Appleman, Hart & Hallman, Dee Kelly, Forth Worth, Tex., for plaintiff.

Shank, Irwin & Conant, Ivan Irwin, Jr., A.B. Conant, Jr., Robert B. Cousins, Jr., Brett A. Ringle, Dallas, Tex., Skadden, Arps, Slate, Meagher & Flom, New York City, Hughes, Hubbard & Reed, Los Angeles, Cal., for defendants.

Kilgore & Kilgore by W. Stephen Swayze, Robert M. Thornton, Dallas, Tex., for Gruss Partners.

MEMORANDUM OPINION

MAHON, District Judge.

On April 18, 1984 plaintiffs, Gearhart Industries, Inc., Marvin Gearhart, Troy P. Wakefield, Earl Collins and Donald E. Mahrt, on behalf of all owners of the Common Stock of Gearhart Industries, Inc., except Smith International, Inc. and Albert M. Birnie (hereinafter Gearhart), filed the above-captioned case to enjoin a proposed tender offer by the defendant, Smith International, Inc. (hereinafter, Smith) alleging that Smith had committed acts in violation of sections 10(b), 13(d), 14(d) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(d), 78n(d) and 78n(e); Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (hereinafter RICO); had engaged in fraudulent conduct in violation of state law; misused confidential information; breached various alleged agreements and breached an alleged fiduciary duty to Gearhart; and violated Section 7 of the Clayton Act, 15 U.S.C. § 18. Smith filed a counterclaim against Gearhart and added a number of third party defendants under § 14(d) and § 14(e), 15 U.S.C. § 78n(d) and § 78n(e), and Rules 14d-9 and 14e-2 promulgated by the S.E.C. This case is currently before this Court on Gearhart's and Smith's motions for preliminary injunctions. An evidentiary hearing was had lasting nine days. On the motions the parties rely on affidavits, depositions and on facts developed at said hearing.

This Court has jurisdiction of this action under Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., 28 U.S.C. §§ 1331(a), and 1337. The state claims fall under the Court's pendent jurisdiction. Venue is proper in the Northern District of Texas.

I. Background

Gearhart is a corporation organized under the laws of the state of Texas and has its principal place of business in Tarrant County, Texas, located in the Northern District of Texas, Fort Worth Division. Gearhart is engaged in the business of providing evaluation services in connection with the drilling and completion of oil and gas wells and of manufacturing and selling equipment and supplies which are required to perform well evaluation. It has approximately 16,017,626 shares of common stock issued and outstanding. The common stock of Gearhart is listed and traded on the New York Stock Exchange and the Midwest Stock Exchange and has been registered for such purpose pursuant to Section 12 of the Securities Exchange Act, 15 U.S.C. § 78l.

Defendant Smith is a corporation organized and doing business under the laws of the state of Delaware, with its principal place of business in the state of California. Smith transacts business in the state of Texas as a foreign corporation under a Certificate of Authority issued by the Texas Secretary of State. Smith is an oil field service company whose divisions and subsidiaries provide such products and services as oil well drill bits, drill string and down hole motors and directional services for use in the drilling and completion of oil and gas wells. Smith currently owns 33.2% of the common stock of Gearhart.

Smith and Gearhart have discussed the possibility of a business combination between the two companies since at least 1970. During 1982 and 1983, General Electric Venture Capital Corporation (hereinafter GE), a wholly owned subsidiary of General Electric Company, acquired 3,640,514 shares of Gearhart common stock, representing approximately 23% of Gearhart's outstanding common shares (sometimes hereinafter referred to as "the GE block"). During 1983, GE informed Marvin Gearhart, Gearhart's chairman and chief executive officer, of GE's interest in effecting a business combination with Gearhart, and perhaps acquiring the remaining shares of Gearhart common stock. GE sent personnel to the Gearhart plants and offices to conduct audits and to assist Gearhart in some management problems it had been experiencing. Mr. Gearhart told the Gearhart board of his talks with GE, and the board suggested that other possible purchasers, including Litton and Hughes Tool, be contacted to determine if they had any interest in Gearhart. Albert Birnie, a director on both the Gearhart and Smith boards, suggested that Smith might be interested in a merger with Gearhart. He caused Jerry Neely, Smith's chairman and chief executive officer to call Mr. Gearhart.

Neely and Mr. Gearhart met on August 23, 1983 to discuss a possible combination of the two companies. At that meeting, they discussed a merger ratio of 1.1 Smith shares per one Gearhart share. Mr. Gearhart gave Neely a draft five-year strategic plan dated August 15, 1983, which Gearhart had prepared at the behest of GE. Mr. Gearhart was skeptical of the plan, indicating that implementing such plans was more difficult than drafting them. Shortly after this initial meeting, Smith hired Morgan, Stanley & Company, Inc., (hereinafter Morgan Stanley) to act as its investment banker with respect to the possible acquisition of Gearhart. An internal acquisition team also was assembled. Both Morgan Stanley and Smith's own team began extensive analyses of Gearhart. Thereafter, Mr. Gearhart and Neely spoke on the telephone and the merger ratio was raised to 1.125 of Smith shares per one Gearhart share. Mr. Neely told Mr. Gearhart that he believed that some degree of cooperation from GE would be necessary for any possible transaction and received Mr. Gearhart's permission to talk to GE. Negotiations ensued concerning a possible three-way transaction, with talk of GE buying out both Smith and Gearhart or a myriad of other possibilities. GE made several proposals to buy Gearhart's remaining stock, but no formal offer was made. However, in mid-October 1983, in negotiations secret from Gearhart, Smith arranged to buy the GE block for $31 per share. The Smith board voted on October 17, 1983 to accept the proposal and also formally authorized the purchase of up to 35% of Gearhart stock. Mr. Gearhart found out through GE that GE had sold its Gearhart stock; he was also notified because Smith filed a request on October 24, 1983 pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (hereinafter HSR), to acquire over 25% of Gearhart. Smith could not actually purchase the GE block for almost a month, pursuant to HSR. Mr. Gearhart stated that he was glad to be rid of GE as a major stockholder because some problems had developed in the GE-Gearhart relationship. On October 24, 1983 Smith and Gearhart issued a joint press release which stated that Gearhart welcomed Smith as a major stockholder.

On October 31, 1983, Smith filed a Schedule 13D with the Securities and Exchange Commission (hereinafter SEC). On the form, under Item 4, Smith indicated that it had acquired the GE block "for the purpose of acquiring a significant investment" in Gearhart. Smith stated on the form that it:

intends to review on a continuing basis its interest in Gearhart and, depending upon its evaluation of Gearhart's operations and prospects and upon market conditions and future developments (including without limitation other business opportunities, developments with respect to the business and operations of Smith, general economic conditions as well as regulatory conditions), Smith may determine to increase its position in Gearhart.

On November 23, 1983, Smith filed its First Amendment to the Schedule 13D, in which it announced that Smith's purchase of the GE block had been consummated on November 22, 1983. Amendment No. 1 made no change in the text of Item 4.

On November 30, 1983, Neely attended a portion of a Gearhart board meeting at which he stated that the two companies should endeavor to find areas in which each could help the other. He stated that Smith might in the future decide to acquire 100% of Gearhart, but that was not Smith's objective at that time. At that meeting, Mr. Neely received a Gearhart budget prediction. He also was given a revised five-year strategic plan of Gearhart's, dated October 1983.

On December 12, 1983, Smith bought another 202,500 shares of Gearhart stock at $21 per share from Jeffries & Co., a brokerage house specializing in the trading of blocks of shares. Mr. Neely telephoned Mr. Gearhart prior to the purchase, telling Mr. Gearhart that a block had been offered to Smith and that Smith intended to accept the offer. On that same day Smith filed its Second Amendment to its Schedule 13D, disclosing that it had increased its position in Gearhart to 24.2%. The text of Item 4 was not altered. On or about December 28, 1983 Smith again purchased Gearhart stock from Jeffries. Smith bought 130,000 shares at a price of $21 per share. After the transaction had been consummated, Mr. Russell of Smith notified Mr. Banks, Gearhart's chief financial officer.

Mr. Neely attended Gearhart's January 31, 1984 board meeting. He received Gearhart's eleven month financial results. At the meeting the...