In re New York Trap Rock Corp.
| Decision Date | 16 November 1993 |
| Docket Number | No. 93 Civ. 5480 (VLB).,90 B 21334 and 90 B 21335,Adv. No. 92-5403A,No. 90 B 27276 to 90 B 21286,90 B 27276 to 90 B 21286,93 Civ. 5480 (VLB). |
| Citation | 160 BR 876 |
| Parties | In re NEW YORK TRAP ROCK CORPORATION, Lone Star Industries, Inc., et al., Debtors. LONE STAR INDUSTRIES, INC., a Delaware corporation, Debtor and Debtor-in-Possession, Plaintiff-Appellant, v. COMPANIA NAVIERA PEREZ COMPANC, Sacfimfa, Sudacia, SA, Invesora Patagonica, SA and Lomo Negra Compania Industrial Argentina SA, all Argentine corporations, Defendants-Appellees. |
| Court | U.S. District Court — Southern District of New York |
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Steven M. Kayman, Proskauer, Rose, Goetz & Mendelsohn, New York City, for plaintiff-appellant.
Howard, Darby & Levin, New York City, for defendant Perez Companc.
Curtis, Mallet Prevost, Colt & Mosle, New York City, for defendant-appellee Lomo Negra.
This bankruptcy appeal involves sale of the debtor Lone Star's 50% interest in a series of Argentine corporations. The holder of the other 50% interest, the defendant Perez Companc, sold its share to a potential buyer at a higher price than obtained by Lone Star, to the only other interested bidder for shares in the Argentine entities.1 Prior to this sale, Perez Companc held an advantage in bidding for Lone Star's share because as the existing 50% owner, only it could deliver 100% of the shares involved to a third party. Only Perez Companc could offer complete control of the Argentine companies to a new owner.
Lone Star, on the other hand, chose to take advantage of its ability to file for a noninsolvency bankruptcy for purposes of effecting a corporate reorganization under Chapter 11 of the United States Bankruptcy Code, and pursuant to that Chapter sought to liquidate its 50% interests in the Argentine entities. Because a 50% share of what amounts to a corporate partnership with parties with whom one has no prior dealings is difficult to sell, Lone Star found Perez the only available buyer — for the very reason that only it could obtain for itself or a third party complete ownership of the Argentine entities. Lone Star, of course, knowingly entered into the corporate betrothals involved which would doubtless be profitable if and only if both 50% owners cooperated, and which would foreseeably be difficult to sell successfully to others at a desirable price.
As is often the case in bargaining, a party which must complete a transaction is in a weaker position than one which can walk away from it. See Roth, "Toward a Theory of Bargaining: An Experimental Study in Economics," 220 Science 687 (May 13, 1983); Hofstadter, "Mathematical Themas," 245 Sci Am 18 (July 1981). Where a party is irrevocably committed to sell an asset and bail out of a relationship, the opportunities for win-win bargaining in a nonzero sum game which are available in ongoing relationships are thinned to a point approaching nonexistence. Compare T. Schelling, The Strategy of Conflict (1960) with E. Goffman, Strategic Interaction (1969).
Lone Star, having chosen to enter a 50%-50% corporate shareholder relationship and further to commit itself to sell its holdings within a finite time, was quite predictably able to obtain only a fire sale price for its share in the Argentine entities. Dissatisfied, it brought this litigation asserting that Perez Companc should have acted in such a way as to equalize the inherently unequal structure of the situation.
In its adversary complaint before the Bankruptcy Court, Lone Star contends that Perez Companc's conduct and related acts of other defendants violated 11 U.S.C. § 363(n) which provides for adverse consequences when "the sale price of an asset sold in bankruptcy was controlled by an agreement among potential bidders at such sale." Lone Star also asserted a large number of related state law claims.
United States Bankruptcy Judge Howard Schwartzberg in a carefully reasoned 41-page opinion reported at 155 B.R. 871 (1993) held that it was impossible for a sale of property other than that belonging to the debtor to violate § 363(n); the seller of non-debtor property was acting independently and any consequences to the debtor were not regulated by the statute. He also rejected Lone Star's nonfederal claims. I affirm the decision of the Bankruptcy Court for the reasons set forth by Judge Schwartzberg in his opinion, and for additional reasons set forth in greater detail below. I do not repeat here the reasoning articulated by the Bankruptcy Judge, with which I agree,2 and discuss only my additional reasons for reaching the same conclusions as did the Bankruptcy Judge:
(1) Failure to obtain a corporate control premium does not represent a judicially cognizable loss of a property right absent special circumstances such as violation of the Williams Act, designed to protect public shareholders against potential pressure in connection with tender offers for traded securities.
(2) Section 363(n) of the Bankruptcy Code, in addition to not covering sales of non-debtor property as pointed out by Judge Schwartzberg, bars only collusion among actual or potential bidders for a debtor's property and not secret or other use of one's own bargaining power.
(3) Exercise of supplemental jurisdiction over the remaining, nonfederal, claims in this case was properly declined, in addition to the reasons given by Judge Schwartzberg, because of inappropriateness of such exercise under the criteria set forth in 28 U.S.C. § 1367(c).
The essence of Lone Star's complaint is that the "control premium" inherent in ability to determine the policies of a corporation is an asset belonging in part to Lone Star, so that any machinations to deprive Lone Star of its share of that premium are illegal under one or more sources of law.
The existence of a control premium is based on the ability of the controlling party to utilize the assets of the controlled corporation for the benefit of the controlling party rather than exclusively for the benefit of all stockholders equally. In some instances, a side benefit to the controlling party and benefit to the shareholders collectively are sufficiently aligned that both gain from the coincidence of interests. Thus, corporate law does not forbid all self-interested transactions involving officers or directors of an entity, but requires full disclosure of them to independent directors and frequently bars voting on such transactions by the interested parties.
Where coincidence of interests is attenuated and a transaction benefitting those in control of an entity does not redound to the benefit of all, there is a breach of the fiduciary duty of the directors of the entity chosen by the controlling party. The combination of legitimate coincident interests and temptations of breaches of fiduciary duty by directors or management at the behest of holders of control, yields a control premium as a result of buyers' and sellers' evaluation of how much a position in a corporation is worth. See City National Bank v. American Commonwealth Financial Corp., 801 F.2d 714, 715 n. 1 (4th Cir.1986), cert. denied 479 U.S. 1091, 107 S.Ct. 1301, 94 L.Ed.2d 157 (1987); Bayne, "A Legitimate Transfer of Control," 18 Stan L Rev 438 (Jan 1966); Berle, "The Price of Power: Sale of Corporate Control," 50 Cornell LQ 628 (1965); Bayne, "The Sale of Corporate Control," 33 Fordham L Rev 583 (1965); Comment, 31 Emory LJ No 1 at 139 (Winter 1982); see also Note, 27 Geo LJ 217 (1938).
Trading in corporate control has at times functioned to the detriment of noncontrolling shareholders (generally holding far less than 50% interests in the entity involved), leading Congress to adopt restrictions on the practice in connection with tender offers for publicly held corporations in the United States. These restrictions involved waiting periods for mature consideration of such offers and mandatory proration of tender offers among public shareholders whether or not they rushed to buy first before the offeror had the necessary number of shares to seize control. See § 14(d)(6) of the Williams Act, 15 U.S.C. § 78n(d)(6); Securities & Exchange Commission Rules 14-d-8, 17 CFR 240.14d-8 and 14-d-6(e)(vi), 17 CFR 240.14(e)(vi); Piper v. Chris-Craft Industries, 430 U.S. 1, 23, 97 S.Ct. 926, 940, 51 L.Ed.2d 124 (1977); Pryor v. United States Steel Corp, 794 F.2d 52, 55-56 (2d Cir.1986).
No such statutory restriction on purchases and sales of securities involving corporate control has been enacted with regard to privately held companies not traded on United States exchanges. Apart from such special cases, a control premium — as opposed to any market or agreed value of the shares themselves — is not ordinarily recognized as an independent legally protected property interest.
Absent specific statutory protection such as that provided by the Williams Act, a corporate control premium is not a benefit to which the holder is entitled to rely absent violation of contractual commitments, fraud, breach of trust or other legally prohibited behavior. As discussed below, such claims in this case, if sustainable, are based on state or foreign, not federal law, and it is questionable whether this country is the proper location for their exploration.
Acknowledgement of the monetary value of a share of control, in contrast to a share of the profits of an enterprise, as a separate, independent property right to be protected by the courts would require the judiciary to determine just how far directors could practicably go in violation of their fiduciary duty to proceed exclusively for the benefit of all shareholders. This is not a tenable position for the courts.
Awarding half of the difference between the proceeds obtained by the debtor and that obtained by Perez Companc is not a satisfactory substitute because this would deprive Perez...
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