Gelco Corp. v. Coniston Partners

• Decision Date: 10 November 1986
• Docket Number: Civ. No. 3-86-847.
• Citation: 652 F. Supp. 829
• Parties: GELCO CORPORATION, a Minnesota corporation, Plaintiff, and The State of Minnesota by Hubert H. Humphrey, III, its Attorney General, Plaintiff-Intervenor, v. CONISTON PARTNERS; GEL Associates; Paul E. Tierney; Keith R. Gollust; Augustus K. Oliver; Gollust, Tierney and Oliver, Inc., Defendants and Counterclaimants, and GEL ACQUISITION CORPORATION, Counterclaimant, and Cubit Corporation, Counterclaimant-Intervenor, v. GELCO CORPORATION; Samuel D. Addoms; Neil E. Goldschmidt; Harold I. Grossman; Michael J. Morris; Clarence W. Spangle; Jaye F. Dyer; William F. Foss; Andrew C. Grossman; Mark H. Willes; Jack J. Crocker; N. Bud Grossman; M.D. McVay; Sam Singer; and The State of Minnesota by Hubert H. Humphrey, III, its Attorney General, Counterclaim Defendants.
• Court: U.S. District Court — District of Minnesota

652 F. Supp. 829

GELCO CORPORATION, a Minnesota corporation, Plaintiff, and The State of Minnesota by Hubert H. Humphrey, III, its Attorney General, Plaintiff-Intervenor, v. CONISTON PARTNERS; GEL Associates; Paul E. Tierney; Keith R. Gollust; Augustus K. Oliver; Gollust, Tierney and Oliver, Inc., Defendants and Counterclaimants, and GEL ACQUISITION CORPORATION, Counterclaimant, and Cubit Corporation, Counterclaimant-Intervenor, v. GELCO CORPORATION; Samuel D. Addoms; Neil E. Goldschmidt; Harold I. Grossman; Michael J. Morris; Clarence W. Spangle; Jaye F. Dyer; William F. Foss; Andrew C. Grossman; Mark H. Willes; Jack J. Crocker; N. Bud Grossman; M.D. McVay; Sam Singer; and The State of Minnesota by Hubert H. Humphrey, III, its Attorney General, Counterclaim Defendants.

Civ. No. 3-86-847.

United States District Court, D. Minnesota, Third Division.

November 10, 1986.

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George F. McGunnigle, Jr., Leonard, Street and Deinard, Minneapolis, Minn., Andrew Sussman, William Frelich, Gregory Joseph, Fried, Frank, Harris, Shriver & Jacobson, New York City, for plaintiff.

Irwin H. Warren, Weil, Gotshal & Manges, New York City, Jerry Simon, Mann, Green, Hayes, Simon, Johanneson & Brehl, St. Paul, Minn., for defendants.

Alan Gilbert, Barry Greller, Minn. Office of Atty. Gen., St. Paul, Minn., for plaintiff-intervenor.

RENNER, District Judge.

Before the Court is Counterclaimants' motion for a preliminary injunction to enjoin Counterclaim-defendants, and all persons acting in concert with them, from taking any action to enforce or apply provisions of the Minnesota Control Share Acquisition Act, Minn.Stat. § 302A.671, to, against, or with respect to Counterclaimants' pending tender offer for Gelco shares.¹ Argument was heard on November 3, 1986 and the Court took the issue under advisement. Jerry Simon and Irwin Warren appeared for Counterclaimants. Alan Gilbert appeared for Plaintiff-intervenor and Counterclaim-defendant State of Minnesota. Gregory Joseph and George McGunnigle, Jr. appeared for the remaining Counterclaim-defendants. All parties agreed that it was not necessary for the Court to hear testimony on the issues raised by the challenge to the Minnesota statute. Accordingly, the Court will treat the preliminary injunction hearing as a hearing for final injunctive relief. Fed.R. Civ.P. 65(a)(2).

Also before the Court is Counterclaimants' motion for a preliminary injunction to: (1) enjoin the purchase by Gelco of any shares of Gelco common stock pursuant to the Exchange Offer announced by Gelco on October 7, 1986; (2) enjoin Gelco from using the cash proceeds from the sale of Gelco preferred stock to Merrill, Lynch & Co.; (3) void any voting or conversion rights attendant to the preferred stock issued to Merrill Lynch; (4) enjoin enforceability of Gelco's Preferred Stock Purchase Rights Plan; and (5) direct defendant directors of Gelco to redeem, rescind or amend Gelco's Rights Plan so as to make it inapplicable to Counterclaimants' tender offer. Argument was heard on the motion on November 5, 1986. Jerry Simon and Irwin Warren appeared for Counterclaimants. Alexander Sussman and George McGunnigle, Jr. appeared for Counterclaim-defendants.² The Court took the matter under advisement.

The pending motions stem from a battle for corporate control.³ Counterclaimants contend that incumbent management of Plaintiff and Counterclaim-defendant Gelco Corporation is illegally thwarting the counterclaimants' $26 all-cash tender offer for all outstanding shares of Gelco common stock.

FINDINGS OF FACT

Plaintiff and Counterclaim-defendant Gelco ("Gelco") is a Minnesota corporation with its principal place of business in Minnesota. Its common stock is publicly held and traded on the New York Stock Exchange.⁴ The remaining Counterclaim-defendants are each, and at all relevant times hereto were, Directors of Gelco (collectively, "the Board"). The majority of the Gelco Board are outside directors who lack significant stockholdings. However, all executive officers and directors as a group beneficially own approximately 17% of the outstanding shares (substantially all of which is held by the Grossman family).

Defendant and Counterclaimant Coniston Partners is a New Jersey based limited partnership that is engaged in the business of buying and selling securities. Defendant and Counterclaimant GEL Associates is a Bahamas partnership of which Coniston is the principal limited partner. Defendant and Counterclaimant Gollust, Tierney and Oliver, Inc. is a New York based investment firm and is a principal of Coniston. The remaining Defendants and Counterclaimants are members of Coniston. Counterclaimant GEL Acquisition Corporation is a wholly owned subsidiary of Coniston. For purposes of this memorandum, the Defendants and Counterclaimants will be referred to collectively as "Coniston."

In early 1986, Gelco began evaluating defensive strategies to protect the corporation against unsolicited bids for the corporation's stock. On May 6, 1986, the Directors of Gelco, without a shareholder vote, adopted a Preferred Stock Purchase Rights Plan (the "Rights Plan" or "Poison Pill") pursuant to which a dividend of one preferred stock purchase right was declared for each outstanding share of Gelco stock.

Under the plan's "flip-in" provisions, this right, once exerciseable, entitles the shareholder to purchase, for the exercise price of $63, common stock (one twentieth of a share of Class B, Series 1 Participating Preferred stock) worth two times the exercise price ($126). The right is not exerciseable by any acquiring person.

The right is exerciseable on the tenth day following the earlier of (i) the public announcement that, without the prior consent of the Gelco Board, a person or group has acquired, or obtained the right to acquire, beneficial ownership of securities having 20% or more of the voting power of all outstanding voting Gelco securities, or (ii) the commencement of, or announcement of, an intention to make a tender offer or exchange offer which would result in any person or group having beneficial ownership of securities having 20% or more of the outstanding common stock.

The plan also contains "flip-out" provisions. In the event that (a) Gelco merges with or into, or consolidates with, any other entity, or (b) any entity merges with and into Gelco where Gelco is not a surviving corporation, each right holder becomes entitled to purchase for the exercise price of $63 a number of shares of common stock of such other entity having a market value of two times the exercise price.

Once triggered the rights are redeemable by the Gelco Board on several conditions: (1) at any time before a 20% position has been acquired without prior approval of the Board; (2) if the 20% shareholder reduces his ownership below 5% in transactions not involving the company; or (3) in connection with certain transactions not involving the 20% shareholder, e.g., a merger with a friendly company; and (4) after the expiration of any period during which a holder may exercise the rights, if, and for as long as, a 20% shareholder owns less that 20% of the voting power of the company.

The Gelco Board gave itself discretion to unilaterally amend the Rights Plan and did so on October 7, 1986 when it announced that the plan would not be triggered by Gelco's Exchange Offer.

Significantly, Gelco was not aware of any acquisition effort by any person or entity at the time of plan adoption. The Board unanimously approved the plan only after hearing presentations from the company's independent investment advisor, Drexel Burnham Lambert, Incorporated ("Drexel Burnham"), and outside legal counsel. According to the Minutes of the May 6, 1986 Board meeting, the presentations specifically addressed the basis for the plan's exercise price of $63 and the reasonability of the exercise price as an estimate of the long-term value of the corporation.

The plan, without question, makes it difficult for an outsider to acquire control of the Company without Board approval. However, it does not appear that the plan was adopted with the sole purpose of entrenching incumbent management. Instead, the record shows that the directors were worried that Gelco's short term stock market value did not reflect the future benefits of the ongoing corporate restructuring plans. This made the Company particularly vulnerable to hostile raiders who could acquire the Company without paying an adequate control premium.

On June 26, 1986, the Board was advised of Unicorp Corporation's interest in acquiring between 15 and 25 percent of Gelco's shares. By agreement dated July 11, 1986, and subsequently approved by the Gelco Board on July 14, 1986, Gelco purchased 680,700 shares from Unicorp at $19 per share (a $4.50 premium above market value). In addition, Unicorp promised not to purchase any Gelco shares for at least 10 years.

In late August, as part of an ongoing business plan to streamline company operations and reduce unsecured corporate debt and interest expense, Gelco adopted a restructuring plan proposed by its investment advisor Merrill Lynch. The plan, which was announced on August 26, 1986, included the sale of four Gelco business units, and a self-tender offer to purchase up to three million shares of outstanding common stock for not more than $20 nor less than $17 per share through a "dutch auction" procedure. The self-tender was to be financed by the sale of newly issued preferred stock to Merrill Lynch.

The preferred stock sales agreement calls for the sale of up to 3 million shares of newly created Class B, Series 2 Participating Cumulative Preferred Stock for $20 per share, for a maximum purchase price of $60,000,000. Pursuant to the agreement, the preferred stock pays dividends at a rate of 13% per annum for the first five months and 15% per annum thereafter. According to defendants, the agreement increases Gelco's domestic...