Hanson Trust PLC v. ML SCM Aquisition, Inc.

• Decision Date: 06 January 1986
• Docket Number: D,Nos. 693,726,s. 693
• Citation: 781 F.2d 264
• Parties: , Fed. Sec. L. Rep. P 92,418 HANSON TRUST PLC, HSCM Industries Inc., Hanson Holdings Netherlands B.V., and HMAC Investments Inc., Plaintiffs-Appellants, v. ML SCM ACQUISITION INC., ML L.B.O. Holdings Inc., Merrill Lynch Capitol Partners, Inc., Merrill Lynch Capitol Markets, Merrill Lynch & Co., Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, SCM Corporation, Paul H. Elicker, D. George Harris, Robert O. Bass, Robert P. Bauman, John T. Booth, George E. Hall, Crocker Nevin, Charles W. Parry, Thomas G. Pownall, E. Everett Smith, David W. Wallace, and Richard R. West, Defendants-Appellees. ockets 85-7951, 85-7953.
• Court: U.S. Court of Appeals — Second Circuit

Page 264

781 F.2d 264

54 USLW 2359, Fed. Sec. L. Rep. P 92,418

HANSON TRUST PLC, HSCM Industries Inc., Hanson Holdings Netherlands B.V., and HMAC Investments Inc. Plaintiffs-Appellants, v. ML SCM ACQUISITION INC., ML L.B.O. Holdings Inc., Merrill Lynch Capitol Partners, Inc., Merrill Lynch Capitol Markets Merrill Lynch & Co., Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, SCM Corporation, Paul H. Elicker, D George Harris, Robert O. Bass, Robert P. Bauman, John T Booth, George E. Hall, Crocker Nevin, Charles W. Parry, Thomas G. Pownall, E. Everett Smith, David W. Wallace, and Richard R. West, Defendants-Appellees.

Nos. 693, 726, Dockets 85-7951, 85-7953.

United States Court of Appeals, Second Circuit.

Argued Dec. 18, 1985.

Decided Jan. 6, 1986.

Dennis J. Block, New York City, (Nancy E. Barton, Richard L. Levine, Stephen A. Radin, Patricia A. Olah, Weil Gotshal & Manges, New York City, of counsel) and Milton S. Gould, New York City, (Peter C. Neger, Shea & Gould, New York City, of counsel), for Hanson Trust PLC, et al.

Bernard Nussbaum, New York City (Michael W. Schwartz, Robert B. Mazur, Theodore N. Mirvis, Eric M. Roth, Barbara Robbins, Karen B. Shaer, Wachtell, Lipton, Rosen & Katz, New York City, of counsel) and Bernard J. Nussbaum, Chicago, Ill. (Harold C. Hirshman, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, Ill., of counsel), for SCM Corporation, et al.

Jeremy G. Epstein, New York City, (Robert S. Fischler, James P. Bodovitz, Shearman & Sterling, New York City, of counsel), for ML SCM Acquisition Inc., et al.

Before OAKES, KEARSE, and PIERCE, Circuit Judges.

PIERCE, Circuit Judge:

Hanson Trust PLC, HSCM Industries Inc., Hanson Holdings Netherlands B.V., and HMAC Investments Inc. (hereinafter sometimes referred to collectively as "Hanson") appeal from an order, dated November 26, 1985, in the United States District Court for the Southern District of New York, Shirley Wohl Kram, Judge, denying their motion for a preliminary injunction restraining Merrill Lynch, Pierce, Fenner & Smith Incorporated and related entities, including ML SCM Acquisition Inc. (hereinafter "Merrill"), and SCM Corporation (hereinafter "SCM"), and their respective officers, agents and employees, and all persons acting in concert with them, from exercising or seeking to exercise an asset purchase option (hereinafter sometimes referred to as a "lock-up option") pursuant to an Asset Option Agreement and a Merger Agreement between those corporate entities. Under those Agreements, in the event that by March 1, 1986, any third party acquires one third or more of SCM's outstanding common stock or rights to acquire such stock, Merrill would have the right to purchase SCM's Pigments and Consumer Foods Divisions for $350 million and $80 million, respectively. After an eight-day evidentiary hearing, the district court denied Hanson's motion for a preliminary injunction, principally because it found that under New York law approval of the lock-up option by the SCM directors (hereinafter sometimes referred to as the "Board"), and the lock-up option itself, were, in the exercise of business judgment, "part of a viable business strategy, as the law currently defines those terms," and because "Hanson failed to adduce sufficient credible proof to the contrary." Hanson Trust PLC v. SCM Corp., 623 F.Supp. 848, 859-60 (S.D.N.Y.1985) (hereinafter "Op."). We reverse and remand.

BACKGROUND

This is the second suit arising out of an intense struggle for control of a large public corporation, SCM. In the first case, Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir.1985)(hereinafter referred to as "Hanson I" ), we held that Hanson's termination of a $72 offer and nearly immediate purchases of several large blocks of stock amounting to approximately twenty-five per cent of the outstanding shares of SCM privately from five sophisticated institutional investors and in one open market transaction did not violate Secs. 14(d)(1) and (6) of the Williams Act, 15 U.S.C. Sec. 78n(d)(1) and (6) and rules promulgated by the Securities and Exchange Commission thereunder. In the present case, the issue presented is whether it was proper under New York law for SCM and Merrill to execute a lock-up option agreement as part of a $74 offer by Merrill for SCM common stock. In Hanson I, Judge Mansfield summarized the "fast-moving bidding contest" as follows: first, a $60 per share cash tender offer by Hanson, for any and all shares of SCM; next, a counter tender offer of $70, part cash and part debenture, by the SCM Board and their "white knight," Merrill Lynch Capital Markets (with underwriting participation by Prudential Insurance Co.), for a "leveraged buyout" (hereinafter sometimes referred to as an "LBO"); then an increase by Hanson to $72 cash, conditioned on SCM not locking up corporate assets; then a revised $74 cash and debenture offer by SCM-Merrill, with "a 'crown jewel' irrevocable lock-up option to Merrill designed to discourage Hanson from seeking control by providing that if any other party (in this case Hanson) should acquire more than one-third of SCM's outstanding shares (66 2/3 being needed under N.Y.Bus.Corp.L. Sec. 903(a)(2) to effectuate a merger) Merrill would have the right to buy SCM's two most profitable businesses" (Pigments and Consumer Foods) at $350 million and $80 million, respectively. Hanson I at 50-51. Hanson, evidently deterred by the option and faced with the $74 LBO offer, terminated its $72 offer, but made the September 11 purchases upheld in Hanson I, and later announced a $75 cash tender offer conditioned on the withdrawal or judicial invalidation of the subject lock-up options. A more detailed account of the relevant background follows.

SCM is a New York corporation with its principal place of business in New York City. It consists of several divisions, including Chemicals, Coatings and Resins, Paper Products, Foods, and Typewriters. Pigments, a subdivision of Chemicals, and Consumer Foods, a subdivision of Foods, referred to by Hanson as the "crown jewels" of the SCM Corporation, have generated approximately 50% of SCM's net operating income in recent years. SCM's Board of Directors consists of twelve members. Three directors, Messrs. Elicker, Hall, and Harris, are also members of SCM's management: Elicker is Chairman of the Board and Chief Executive Officer; Harris is SCM's President and Chief Operating Officer; Hall is a Senior Vice President of SCM. The remaining nine members of the board are "outside" or "independent" directors. None of the nine holds a management position in SCM, owns significant amounts of SCM common stock, or receives any remuneration from SCM other than the standard directors' fee. The district court also found that none is affiliated with any entity that does business with SCM and that all of the directors have considerable business experience and working knowledge of SCM and its operations. Op. at 853.

Hanson Trust PLC is a corporation organized under the laws of the United Kingdom. HSCM Industries Inc. is a Delaware corporation and an indirectly wholly owned subsidiary of Hanson Trust PLC. Hanson Holdings Netherlands B.V. is a limited liability company incorporated under the laws of the Kingdom of the Netherlands, and is an indirectly wholly owned subsidiary of Hanson Trust PLC. HMAC Investments Inc. is also a Delaware corporation and is a wholly owned subsidiary of Hanson Trust PLC.

On August 21, 1985, Hanson announced its intention to make a $60 cash tender offer for any and all shares of SCM common stock. The evidence showed that SCM common stock traded below $50 per share in July 1985, and that between August 1 and August 19, Hanson had purchased over 87,000 shares for between approximately $54 and $56. See Offer to Purchase For Cash Any and All Outstanding Shares of Common Stock of SCM Corporation (Aug. 26, 1985), PX 37 at II-1. ¹ On August 22, 1985, the day after the Hanson offer was announced, the price of SCM stock closed on the New York Stock Exchange at 64 1/8.

It is not disputed that also on August 22--three days prior to the SCM Board's first meeting regarding Hanson's offer--SCM management met with representatives of the investment banking firm of Goldman Sachs & Co. and the law firm of Wachtell, Lipton, Rosen & Katz to discuss a response to Hanson's bid. ² Tr. 27, 30; PX 1 at 31-33. Among the alternatives considered in response to Hanson's offer was the possibility of a leveraged buyout that would include SCM management participation. Tr. 1119. By August 23 or 24, SCM management and Goldman Sachs had initiated discussions with the leveraged buyout firms of Kohlberg, Kravis, Roberts & Co. and Merrill Lynch. Tr. 30-33, 51, 1119-21, 1202-03. SCM's Board met on August 25, and approved the retention of Goldman Sachs and Wachtell Lipton on behalf of SCM and the SCM Board. PX 16 at 11.

The parties agree that the August 25 Board meeting was called to discuss alternatives to the Hanson offer; that discussions focused principally on finding either another public company to act as a "white knight" or one or more financial institutions to underwrite a leveraged buyout. Willard J. Overlock, Jr., SCM's principal adviser at Goldman Sachs, advised that because SCM was a highly diversified conglomerate, finding another company to act as a "white knight" in time to defeat Hanson was unlikely. Martin Lipton of Wachtell Lipton advised that a leveraged buyout might be the best approach, assuming SCM could find institutional or private investors. The minutes show that the Board delegated to management the responsibility of investigating both options with Goldman Sachs and Wachtell Lipton. During the next five days, Goldman Sachs and SCM management, pursuing the Board's mandate, found that none of over forty companies contacted were willing to act as a "white knight," and that of three LBO firms contacted, by August 30 only Merrill was interested in participating in a...