IN RE UNION CARBIDE CON. PROD. BUS. SEC. LITIGATION

• Decision Date: 31 July 1987
• Docket Number: No. MDL 692 (CLB).,MDL 692 (CLB).
• Citation: 666 F. Supp. 547
• Parties: In re UNION CARBIDE CORPORATION CONSUMER PRODUCTS BUSINESS SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

666 F. Supp. 547

In re UNION CARBIDE CORPORATION CONSUMER PRODUCTS BUSINESS SECURITIES LITIGATION.

No. MDL 692 (CLB).

United States District Court, S.D. New York.

July 31, 1987.

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Jerome M. Congress, Milberg Weiss Bershad Specthrie & Lerach, New York City, for Sy Richard Lippman and Ralph R. Scott.

Daniel W. Krasner, Wolf Haldenstein Adler Freeman & Herz, New York City, Richard D. Greenfield, Greenfield & Chimicles, Haverford, Pa., Larry A. Sucharow, Goodkind, Wechsler, Labaton & Rudoff, Harvey Greenfield, New York City, for Harry Abrevaya, Evelyn H. Summers and Charles S. Tanenbaum.

Dianne M. Nast, Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa., Elwood S. Kendrick, Elwood S. Kendrick, Inc., Los Angeles, Cal., for Selden Ring.

Kenneth H. Hanson, Chicago, Ill., for Richard James Stevens.

Raymond L. Falls, Denis McInerney, David R. Hyde, Kevin J. Burke, Ronald I. Keller, Cahill Gordon & Reindel, New York City, for Union Carbide Corp., Warren M. Anderson, John J. Creedon, Roberto DeJesus Toro, Harry J. Gray, James M. Hester, Jack B. Jackson, Horace C. Jones, Robert D. Kennedy, Ronald L. Kuehn, Jr., C. Peter McColough, William S. Sneath, J. Clayton Stephenson, Heinn F. Tomfohrde, III, Russell E. Train, Kathryn D. Wriston and Alec Flamm.

Bartlett H. McGuire, Jo Backer Laird, Jacqueline O. Stern, Douglas I. Brandon, Davis, Polk & Wardwell, New York City, for Morgan Stanley & Co.

Stuart L. Shapiro, Henry P. Wasserstein, Anne W. Crawford, David E. Bamberger, Skadden, Arps, Slate, Meagher & Flom, New York City, for First Boston Corp., First Boston, Inc. and First Boston Acquisition Holdings, Inc.

John S. Martin, Jr., Janet Neustaetter, Schulte Roth & Zabel, New York City, for Alfred E. Dudley and Alan C. Egler.

MEMORANDUM AND ORDER

BRIEANT, Chief Judge.

This securities class and derivative litigation was transferred to the Southern District of New York by the Judicial Panel on Multidistrict Litigation on August 14, 1987, pursuant to 28 U.S.C. § 1407, for coordinated or consolidated pretrial proceedings. This Court on September 11, 1986 entered Pretrial Order No. 1, approving plaintiffs' steering committee as lead counsel and certifying other ministerial and procedural matters. Since that time, the parties have engaged in substantial pretrial discovery, with the cut-off date for merits discovery extended, by Stipulation and Order filed June 16, 1987, to September 30, 1987 and for expert witness discovery to November 30, 1987.

Defendant Union Carbide ("Carbide"), on behalf of the Corporation and the individually named directors and officers,¹ has moved to dismiss pursuant to Rule 12(b)(6), F.R.Civ.P., for failure to state a claim, or in the alternative, for summary judgment pursuant to Rule 56, F.R.Civ.P.² Defendants First Boston Corporation, First Boston, Inc. and First Brands Corporation (sued herein as First Boston Acquisition Holdings, Inc.) ("First Boston"); Morgan Stanley & Co. Incorporated ("Morgan Stanley"); and the individual defendants Alfred E. Dudley and Alan C. Egler, who were officers of the Home and Automotive ("H & A") division of Union Carbide during the relevant time periods; move separately to dismiss on several grounds, or in the alternative, for summary judgment incorporating the briefs and arguments of Union Carbide. Oral argument on these motions was held on April 28, 1987, and a specimen of the Rights Certificate central to this action was submitted by counsel for Union Carbide on May 14, 1987. After supplemental submissions essentially comprised of a series of correspondence among the parties and with the Court as to additional facts disclosed or confirmed through ongoing discovery, these motions were fully submitted for a decision on July 7, 1987, with the filing of a letter to the Court from plaintiffs' liaison counsel in response to additional arguments proffered by defendant Union Carbide via letter filed June 24, 1987.

Summary of the Claims

Plaintiffs bring this litigation as a class action³ under provisions of federal securities law and pendent state law on behalf of all persons who received the original issue of approximately 31 million Rights from Union Carbide on March 3, 1986, or subsequently purchased such Rights on the open market, and who continue to hold such Rights to their detriment allegedly as a result of the conduct charged.

The facts, alleged or represented by the plaintiffs, which must be taken as true for the purpose of resolution of the within motions, are as follows. The Union Carbide Rights were created, and issued without cash consideration, to common shareholders of Carbide as an outgrowth of a power struggle during which the Union Carbide management and directors sought to avoid a takeover of the company as a result of a public tender offer by the GAF Corporation ("GAF"). In response to an offer by GAF to acquire Carbide shares at $78.00 per share, a price publicly claimed by Union Carbide management to be grossly unfair and less than true value, at a meeting on January 2, 1986, Union Carbide's Board of Directors decided as part of its strategy to resist GAF, to sell its two major Consumer Products businesses and to distribute the proceeds of these sales to shareholders as a special dividend payable on March 1, 1986. It was also determined at this meeting, and announced publicly by Letter to the Shareholders dated January 2, 1986 and Supplement dated January 3, 1986 (Exhibits B and C, respectively, to Fusaro Aff. of Union Carbide), that if the Consumer Products businesses were not sold by March 1, 1986, holders of record as of February 15, 1986 would receive transferable Rights which would enable the holder to realize such proceeds upon sale.

The sale of the Consumer Products businesses, comprised of two divisions, Home and Automotive Products and Battery Products, was not accomplished by March 1, 1986. In consequence, on March 3, 1986, Union Carbide issued transferable and marketable Rights Certificates to all persons who were shareholders of record of Union Carbide as of February 15, 1986, which entitled the holder to a pro rata share of the proceeds from the sale of the Consumer Products businesses. This special cash dividend was to be equal, in the aggregate, to the difference between the pretax net sale proceeds and the net book value of the Consumer Products business at the time of sale (Complaint para. 36).⁴ The Rights Certificate provided on its face that each Right:

"entitles the registered holder thereof, to receive from Union Carbide Corporation ... from time to time payments in accordance with the Rights Agreement, dated as of March 1, 1986 ... between the Company and Manufacturers Hanover Trust Company, as Rights Agent ..., provided that the final payment hereunder shall only be made after presentation and surrender of this Rights Certificate by hand....

Nothing contained in the Rights Agreement or herein shall be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders, or to receive dividends or subscription rights, or otherwise." (See Specimen Security, docketed as No. 56).

These Rights were distributed to shareholders pursuant to a contract between Union Carbide and Manufacturers Hanover Trust Co. ("Rights Agreement", Fusaro Aff. Exh. D). On February 21, 1986 the Rights were listed for trading on the New York Stock Exchange, separately from the Union Carbide shares, and trading began on March 3, 1986 (Memorandum of Defendant Union Carbide at 5-6). The Rights were not registered under the Securities Exchange Act of 1933 ("1933 Act"), one of plaintiffs' many issues tendered in this litigation (Count Two, Complaint para. 57).

In a letter dated March 3, 1986, which accompanied the Rights Certificates, Union Carbide represented to its shareholders that a "competitive bidding process" was presently occurring with respect to the sale of the Consumer Products businesses. However, Union Carbide also represented that the Consumer Products businesses would be sold by means of a process which would "achieve the objective of realizing maximum value for our shareholders while acting in the best interests of employees, customers, and suppliers of these businesses and the communities where they operate" (January 2nd Letter to Shareholders at 3; January 3rd Supplement at 3). Defendant Morgan Stanley conducted the sale by what plaintiffs claim was not a competitive bidding process. Ultimately, defendant First Boston and divisional management through a corporate vehicle, First Brands Corporation, purchased the Home and Automotive business, with the highest bid of $800 million, which was announced on April 21, 1986 (Fusaro Aff.Exh. F). Ralston Purina purchased the Battery Products business for $1.415 billion, announced on April 7, 1986 (Fusaro Aff.Exh. E).

As of October 14, 1986, when the latest distribution of sale proceeds was made, the distribution per Right was $33.22 (see Memorandum of Defendant Union Carbide at 7). At that time, the price of Union Carbide stock was $20.875 per share. Taking into account an intervening triple stock split, the value of the package was $62.625 plus $33.22, totalling $95.85 per share/Right. Defendant Union Carbide emphasizes that this figure represents 30 percent more than the final GAF offer (which defendants claim was $74 per share, rather than the $78 value stated by plaintiffs).

In connection with issue of the Rights, plaintiffs claim that Union Carbide and its directors made materially misleading representations to the purported class members and the investing public concerning the Rights, and agreed to sell...