Gibbons v. Schenley Industries, Inc.

• Citation: 339 A.2d 460
• Parties: E. F. GIBBONS et al., Petitioners, v. SCHENLEY INDUSTRIES, INC., Respondent.
• Decision Date: 16 May 1975
• Court: Court of Chancery of Delaware

Page 460

339 A.2d 460

E. F. GIBBONS et al., Petitioners, v. SCHENLEY INDUSTRIES, INC., Respondent.

Court of Chancery of Delaware, New Castle County.

Submitted Jan. 29, 1975.

Decided May 16, 1975.

Bruce M. Stargatt and Jack B. Jacobs of Young, Conaway, Stargatt & Taylor, Wilmington, and James L. Adler, Jr., of Greenbaum, Wolff & Ernst, New York City, for petitioner Dade & Co.

Howard L. Williams and Edward M. McNally of Morris, James, Hitchens & Williams, Wilmington, and Philip S. Ehrlich of Ehrlich, Allison & Rovens, San Francisco, Cal., for petitioner Bank of America.

William O. LaMotte, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, and Leon Silverman and Marc P. Cherno of Fried, Frank, Harris, Shriver & Jacobson, New York City, for respondent Schenley Industries, Inc.

MARVEL, Vice Chancellor:

Approximately two hundred and fifty former minority stockholders of Schenley Industries, Inc., whose rights as stockholders have been abolished (except for their right to have their shares of stock appraised) as a result of the June 17, 1971 merger here complained of, now seek a review of an appraisal of their shares made by a Court-appointed appraiser. Such stockholders having made timely and otherwise adequate objection to such merger as well as a correct demand for payment for their shares, thus qualified for such appraisal. They have now filed exceptions to the appraiser's final report, claiming that the values fixed by him were too low. Schenley has also excepted to such appraisal, contending that the appraiser's fixing of values for its minority stock here in issue was too high.

In passing on the value of shares of stock of those dissenting stockholders of Schenley Industries, Inc. who had declined to accept their company's offer of cash and debentures in exchange for their Schenley stock, the appraiser fixed a value of $43.87 for each share of Schenley common stock and $39.48 for each share of such corporation's convertible preferred stock, the latter having a stipulated value of 9/10ths of the former.

This is the opinion of the Court on exceptions to the appraiser's report as well as on the appropriate amount of interest to be added to the sums to be allowed to those excepting stockholders who have qualified for an appraisal of the value of their shares, 8 Del.C. § 262(f) and (h).

On June 17, 1971, Schenley Industries, Inc. and Glen Alden Subsidiary Corp., Inc., a wholly-owned subsidiary of Glen Alden Corporation expressly organized for the purpose of accomplishing the merger here complained of, pursuant to the terms of an agreement of merger, were merged, with Schenley surviving as the resulting corporation. The formal decision to merge such corporations had been announced on February 24, 1971.

Prior to the merger complained of Glen Alden Corporation had become the holder of 86% Of the common stock of Schenley as well as the holder of 84% Of all of the shares of such corporation entitled to vote, the classes of such corporation's stock, other than its common, being a cumulative preference stock and a $1.40 convertible preferred stock carrying a right to have each such share converted to one share of common stock.

As a result of the merger complained of, Schenley's cumulative preference stock remained unaffected, however, the other two classes of Schenley stock, namely its common and convertible preferred stock were cancelled and retired. Under the terms of the merger plan Schenley's minority common shareholders were offered a cash payment of $5.00 per share together with a 7 1/2% Glen Alden debenture in the principal amount of $30 due 1985 in exchange for their shares, while each holder of shares of Schenley preferred convertible stock was offered $4.50 in cash per share together with the equivalent of a principal payment in the amount of $27.00 per share in the form of the aforesaid 7 1/2% Debentures.

The minority stockholders, who now except to the appraiser's findings of value for their stock, having declined to accept Glen Alden's exchange offer, as noted above, thereupon proceeded to perfect their right to have their Schenley stock appraised, a right preserved to them by the provisions of 8 Del.C. § 262(k) inasmuch as the nature of the exchange offered to such objecting stockholders for their Schenley stock did not consist of a class of securities, the holding of which under the applicable terms of the statute now bars an exceptant to a merger to a right to an appraisal of his shares.

On September 17, 1974, the appraiser filed his final report fixing the values above stated, and exceptions having been taken to such report, the basic questions presented for decision are namely, that of the intrinsic value of the common stock as well as that of the convertible preferred stock of Schenley, and finally the appropriate rate of interest, if any, to be allowed to those Schenley stockholders who perfected their right to an appraisal of their shares and are still awaiting payment therefore.

The genesis of this litigation is found in the acquisition on March 20, 1968 of 1,467,689 shares of common stock of Schenley Industries, Inc. by Glen Alden Corporation from Lewis M. Rosensteil, the then chief executive officer of Schenley, and a small group of investores associated with him, at a price of $53.33 per share, the agreement of purchase and sale of such shares reciting that it was the intention of the parties that the remaining minority holders of Schenley common stock were to be afforded an opportunity to sell their shares to Glen Alden at a price comparable to or more favorable than the price paid to Mr. Rosensteil and his group of investors for their shares of Schenley. In fact, it appears that Mr. Rosensteil insisted as a condition to the sale of his Schenley stock that other Schenley stockholders be made essentially the same offer.

Thus, pursuant to such express intent, on August 8, 1968, Glen Alden made a formal offer to purchase the common stock of the remaining minority shareholders of Schenley on the basis of a formula, which, on acceptance, would result in a price being paid of approximately $53.10 for each share of common stock of Schenley offered for sale. And, as a result of purchases of Schenley stock by Glen Alden during the period from March 20, 1968 through September 1, 1968 not only from Mr. Rosensteil and his group but from other stockholders who tendered their shares as well as through purchases in the public market, Glen Alden, as noted above, became the holder of approximately 86% Of the common stock of Schenley.

The August 8, 1968 formal offer of Glen Alden to purchase Schenley stock of Glen Alden, also stated:

'After completion of the Exchange Offer, Glen may (subject to future conditions) make a further tender offer to the remaining holders of Schenley common stock or propose to combine Glen Alden and Schenley. In connection with any such further tender offer of combination, the consideration to be received by the holders of Schenley common stock who have not accepted the exchange offer may be more than, less than, or the same as that provided for in this exchange offer.'

Why such offer was not more generally accepted by minority stockholders of Schenley in light of its amount and the clear message contained in such offer is not clear on the present record.

Schenly was incorporated in 1933, and its principal business has since been the distilling, importing and sale of spiritous beverages. Schenley sells its domestic and imported spiritous beverages under brand names, and although it markets a full-line of alcoholic beverages, it has concentrated its domestic production principally on bourbons and blended whiskies. Schenley also sells certain wines and manufactures and markets barrels. It also processes farm feeds, the latter being a relatively insignificant part of its business. It is also the sole importer and distributor of Dewar's Scotch whiskey, under a three year non-transferrable franchise which has been renewed regularly to date. This franchise is extremely profitable, Dewar's accounting for approximately 25--20% Of Schenley's gross profits after expenses. In 1964, Schenley also acquired a controlling interest in Buckingham Corporation which owned the exclusive rights to distribute Cutty Sark Scotch whiskey in the United States.

As is the case in the distillery business generally, Schenley ages its whiskies, production being scheduled to meet the public demand for matured whiskies. Accordingly, inventories and carrying costs are necessarily larger vis a vis sales and total assets than in most other industries. In addition, at the time of the merger in issue there was substantial idle plant capacity throughout the liquor industry, there having been a chronic industry-wide surplus of domestic whiskies dating from the Korean War, the inception of which brought about over-production of domestic liquors due to the fear of the imposition of government controls of the production of alcoholic beverages for civilian use.

By 1950, Schenley had become one of the nation's leading full-line whiskey producers and distributors. But thereafter and into the mid-1960's a falling off took place in its business, which is intensely competitive, and Schenley's position in its field began to decline. And while Schenley continued to earn a profit each year during this period, the popularity of several of its more popular brands began to slump seriously. Such decline in Schenley's competitive strength was naturally reflected in the market price of its common stock which over the period from 1960 until 1966 never exceeded $29 3/8 per share and at one point dropped as low as $10 3/8 per share.

During this period of business decline, however, Schenley was accumulating inventories and accounts receivable in excess of those of distillers generally, such accumulations of inventory and receivables carrying a prospect of an eventual strong ¹ cash position for such business....