Gilbert v. El Paso Co.

• Citation: 575 A.2d 1131
• Parties: , Fed. Sec. L. Rep. P 95,303 Peter GILBERT, William Steiner, and Herbert Breitman, as sole Trustee of Ed Rosenthal Neckwear, Inc. Profit Sharing Plan, and all other parties similarly situated and circumstanced, Plaintiffs Below, Appellants, v. The EL PASO COMPANY, Travis H. Petty, Richard S. Morris, William V. Holick, Ben F. Love, L. Emery Katzenbach, Howard Boyd, John R. Hubbard, William D. Noel, Willard F. Rockwell, Jr., Kenneth Rush, Burlington Northern, Inc., a Delaware Corporation, Royal D. Alworth, Jr., Zane E. Barnes, Richard M. Bressler, Daniel P. Davison, Thomas E. Deacy, Walter A. Drexel, Mary Garst, Richard C. Grayson, Warren J. Hayford, Hutchinson Pemberton, Louis W. Menk, Thomas H. O'Leary, Paul L. Parker, Bruce M. Rockwell, Gerald C. Ryan, Elliot H. Stein and David R. Williams, Defendants Below, Appellees. . Submitted:
• Decision Date: 11 April 1989
• Court: United States State Supreme Court of Delaware

Page 1131

575 A.2d 1131

58 USLW 2719, Fed. Sec. L. Rep. P 95,303

Peter GILBERT, William Steiner, and Herbert Breitman, as sole Trustee of Ed Rosenthal Neckwear, Inc. Profit Sharing Plan, and all other parties similarly situated and circumstanced, Plaintiffs Below, Appellants, v. The EL PASO COMPANY, Travis H. Petty, Richard S. Morris William V. Holick, Ben F. Love, L. Emery Katzenbach, Howard Boyd, John R. Hubbard, William D. Noel, Willard F. Rockwell Jr., Kenneth Rush, Burlington Northern, Inc., a Delaware Corporation, Royal D. Alworth, Jr., Zane E. Barnes, Richard M. Bressler, Daniel P. Davison, Thomas E. Deacy, Walter A Drexel, Mary Garst, Richard C. Grayson, Warren J. Hayford Hutchinson Pemberton, Louis W. Menk, Thomas H. O'Leary, Paul L. Parker, Bruce M. Rockwell, Gerald C. Ryan, Elliot H. Stein and David R. Williams, Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted: April 11, 1989.

Decided: May 16, 1990.

William Prickett and Vernon R. Proctor of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Mordecai Rosenfeld, New York City, of counsel, Abraham G. Levin, Martin A. Coleman (argued), Stephen A. Marshall and Serene K. Nakano of Rubin, Baum, Levin, Constant & Friedman, New York City, of counsel, for appellants.

Robert K. Payson and James F. Burnett of Potter, Anderson & Corroon, Wilmington, Howard W. Goldstein (argued), and Robert J. Gunther, Jr. of Mudge, Rose, Guthrie, Alexander & Ferdon, New York City, of counsel, for appellees El Paso.

A. Gilchrist Sparks, III and Lawrence A. Hammermesh of Morris, Nichols, Arsht & Tunnell, Wilmington, Marc P. Cherno (argued), and Terri L. Newman, of Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel, for appellees Burlington defendants.

Before MOORE, J., BIFFERATO and TAYLOR, Judges, (sitting by designation pursuant to Del. Const. art. IV, § 12).

MOORE, Justice.

In this consolidated class action, plaintiffs are stockholders of The El Paso Company ("El Paso"), who appeal from a 1984 Opinion and Order ¹ ("Gilbert I ") and a 1988 Memorandum Opinion and Order ² ("Gilbert II ") of the Court of Chancery. The suit arises from a December, 1982 tender offer ("the December offer") by co-defendants Burlington Northern, Inc. and R-H Holdings, Inc. (collectively, "Burlington") for 51.8% of the common stock of El Paso, the El Paso response to that offer, and a negotiated settlement which led to the termination of the December offer and the substitution of a new tender offer in January, 1983 ("the January offer").

Plaintiffs represent the class of El Paso shareholders who had tendered into the December offer, and contend that defendants El Paso and its directors destroyed plaintiffs' inchoate proration rights as a result of the settlement agreement terminating the December offer. Additionally, plaintiffs maintain that the settlement with Burlington was negotiated primarily to enable the El Paso directors to tender their own shares into the January offer, and that Burlington knowingly aided and abetted this breach of the El Paso directors' fiduciary duties to shareholders. Finally, plaintiffs contend that Burlington's directors improperly and knowingly breached a contractual obligation to complete the December offer, and that Burlington could not interfere with plaintiffs' contract rights thereunder.

In Gilbert I, the Court of Chancery granted partial summary judgment to Burlington as to all allegations against it except for the conspiracy claim. Thereafter, in Gilbert II the trial court granted summary judgment to the defendants on all remaining claims, finding that under a traditional business judgment analysis the actions of El Paso's directors constituted a reasonable and proper response to the Burlington offer, and that defendants had not breached any fiduciary duties owed to the class plaintiffs.

We affirm the rulings in Gilbert I and reject plaintiffs' argument that Burlington improperly and impermissibly terminated the December offer. However, the legal analysis of Gilbert II is inconsistent with the principles and standards of Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985). The heightened scrutiny mandated by Unocal applies at the threshold of inquiry when, under the circumstances here, a board of directors opposes a hostile bid for control of a corporate enterprise. See Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140, Horsey, J. (1990); Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261, 1287 (1989); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173, 180 (1986); Unocal, 493 A.2d at 954. Gilbert II ignored this basic legal standard.

We have nevertheless conducted our own legal analysis of the record and find that the Vice Chancellor's ultimate conclusions were correct. Thus, we conclude that El Paso's directors acted in good faith and on an informed basis. Accordingly, their actions were a reasonable response to the threat posed by Burlington's unsolicited and highly conditional December offer. Furthermore, there is nothing to support plaintiffs' claim that El Paso's directors arranged the termination of the December offer solely for the purpose of enabling the subsequent tender of their shares. The directors' actions in connection with the December and January offers meet the enhanced judicial scrutiny of Unocal. Thus, we affirm the judgments.

I.

In 1982 El Paso, a Delaware corporation, was a diversified energy company principally engaged in the exploration, production and marketing of natural gas and oil products, with approximately 49,541,000 common shares issued and outstanding as of December, 1982. ³ At all times relevant here, El Paso's board consisted of ten members, seven of whom were outside, independent directors. ⁴ Burlington, also a Delaware corporation, is a publicly-held concern, principally involved in the transportation services and natural resource industries.

On the afternoon of December 20, 1982, Travis Petty, El Paso's chairman and chief executive officer, received a telephone call from Richard Bressler, the chairman and chief executive officer of Burlington. Bressler confirmed long-circulating rumors of Burlington's interest in acquiring El Paso, ⁵ and notified Petty that Burlington's board of directors had recently authorized him to initiate a tender offer to gain control of El Paso. The following day, December 21, 1982, Petty received a letter from Bressler confirming that Burlington had launched a tender offer for up to 25,100,000 common shares of El Paso, representing approximately 49.1% of the company's outstanding common stock. The ownership of these shares, when added to the 537,800 already beneficially owned by Burlington, would give Burlington control of over 51.8% of all outstanding El Paso common shares. ⁶

The offer stipulated that tendered shares could be withdrawn until January 12, 1983, and that the offer would expire at 12:00 midnight on January 19, 1983. Burlington stated that if the December offer was oversubscribed, any shares tendered before December 30, 1982 would be entitled to proration rights. ⁷ Significantly, Burlington revealed no future plans to purchase the remaining 49% of El Paso's common shares upon completion of a fully-subscribed December offer. In fact, Burlington specifically cautioned that any future second-step transaction with El Paso's minority shareholders "might be on terms (including the consideration offered per share) the same as, or more or less favorable than, those of the [December] offer." Additionally, Burlington expressly reserved the right to terminate its highly-conditional offer upon the occurrence of any one of a number of specified events. ⁸

El Paso's directors retained Merrill Lynch White Weld Capital Markets Group ("Merrill Lynch"), its regular investment bank, to advise the board on financial matters and to render an opinion on the adequacy of the December offer. Additionally, El Paso consulted its regular counsel, Mudge, Rose, Guthrie, Alexander & Ferdon, and specially retained Wachtell, Lipton, Rosen & Katz ("Wachtell, Lipton") for legal advice concerning Burlington's bid.

The directors of El Paso met two days later at a special meeting on December 23, 1982, to consider Burlington's offer. El Paso's financial and legal advisers presented their evaluations of the December offer. During the meeting, representatives of Merrill Lynch advised the directors that the December offer was subject to certain complex, restrictive financing arrangements that could inhibit Burlington's ability to acquire the remaining 49% of El Paso's common shares in a second-step transaction or to otherwise subsequently increase a prospective investment in El Paso. Merrill Lynch also explained the dangers posed by such partial tender offers to the company's remaining shareholders, who would be vulnerable as minority shareholders in a Burlington-controlled corporation.

Merrill Lynch concluded that the December offer was both unfair and inadequate, and recommended that the board explore alternative transactions that might achieve greater value for El Paso's shareholders. Additionally, El Paso's management outlined the company's future financial and operational prospects, and predicted that the company was well-positioned to benefit from anticipated developments in the energy industry. Finally, representatives of Wachtell, Lipton explained the directors' fiduciary responsibilities to the company's shareholders in light of Burlington's bid, and reviewed the variety and consequences of defensive tactics available to El Paso.

Based in part upon these presentations, the El Paso board unanimously rejected Burlington's December offer, concluding that it was not in the best interests of the company or its shareholders. The directors were principally concerned with the perceived inadequacy of the $24 offering price, the partial nature of the bid, and the potentially adverse impact...