Kidsco Inc. v. Dinsmore
| Decision Date | 21 November 1995 |
| Docket Number | 14657 and 14684,Nos. 14649,s. 14649 |
| Citation | 674 A.2d 483 |
| Parties | KIDSCO INC., and Softkey International, Inc., Plaintiffs, v. William A. DINSMORE III, Maurice J. Duca, John W. Glynn Jr., Nywood Wu, William R. Rauth III, The Learning Company and Broderbund Software, Inc., Defendants. Ernest HACK and Irving Kas, Plaintiffs, v. The LEARNING CO., et al., Defendants. Civil Action . Submitted: |
| Court | Court of Chancery of Delaware |
JACOBS, Vice Chancellor.
Pending are motions for partial summary judgment and for a preliminary injunction in this action brought by Kidsco Inc. and its corporate parent, SoftKey International Inc. (collectively "SoftKey") against The Learning Company ("TLC"), TLC's directors, and Broderbund Software, Inc. ("Broderbund"). Joining in the motion for injunctive relief are the plaintiffs in two class actions brought by shareholders of TLC.
The motions arise out of a contest to acquire TLC. On July 31, 1995, TLC and Broderbund entered into an agreement contemplating a stock-for-stock merger of TLC into Broderbund. On October 30, 1995, SoftKey announced that it would conduct a two-tiered tender offer to acquire, for cash, a majority of TLC's outstanding shares, to be followed by a second-step stock-for-stock merger. To facilitate its tender offer, SoftKey simultaneously announced that it would solicit proxies to call a special stockholders meeting of TLC, pursuant to Section 2.3 of TLC's by-laws, to replace TLC's directors with SoftKey nominees. In response to that announcement, the TLC Board amended TLC's by-laws on November 6, 1995 to extend from 35 days to 60 days the minimum time for calling a stockholder-initiated special board meeting. As a result of that amendment, no meeting to replace the TLC Board may take place until 25 days or so after the Broderbund transaction is first considered by TLC stockholders.
The plaintiffs challenge the November 6 by-law amendment as a violation of their contract rights and as a breach of the defendants' fiduciary duties. On these motions they seek the by-law amendment's invalidation. After expedited discovery and briefing, the matter was argued on November 21, 1995. This is the Opinion of the Court on the plaintiffs' motions for partial summary judgment and a preliminary injunction.
TLC, a Delaware corporation, produces and distributes educational personal computer software products for use at home and in school. As of June 30, 1995, TLC had outstanding 7,468,292 shares of common stock, which are quoted on the NASDAQ National Market ("NASDAQ"). On July 31, 1995, the last trading day before the announcement of the proposed Broderbund merger, the closing sales price was $39 per common share. At that price TLC's value is approximately $291 million.
Broderbund is a Delaware corporation engaged in developing and distributing a broad range of personal computer software for the home, school and small business markets. With 20,507,247 outstanding common shares (as of May 31, 1995) quoted on NASDAQ at $72 per share (as of July 31, 1995), Broderbund's market capitalization is approximately $1.5 billion.
SoftKey is a Delaware corporation that is the product of a 1993 merger of three software companies. 1 SoftKey develops and distributes consumer software, produced primarily on CD-ROM, for personal computers. On October 30, 1995, SoftKey announced an agreement to merge with Minnesota Educational Computing Corporation ("MECC"), a producer of children's educational software designed for use in the home and at school. That same day, SoftKey launched its cash tender offer for TLC and commenced its campaign to replace the TLC board.
The individual defendants are the five members of TLC's board of directors. William A. Dinsmore III ("Dinsmore") is the Chief Executive Officer of TLC, and the owner of 70,769 TLC shares and options to purchase a further 329,477 shares. Maurice J. Duca ("Duca") is the Chairman of the Board and the owner of 15.7% of the outstanding shares of TLC. John Glynn and Nywood Nu have been non-employee directors of TLC since 1984 and 1985, respectively. William R. Rauth III is a non-employee director of TLC, and a partner of a Newport Beach, California law firm that has served as TLC's outside counsel over the years.
On July 31, 1995, the TLC board announced that it had approved a merger agreement with Broderbund. The announcement culminated a review by the TLC board of strategic alternatives and an assessment of Broderbund's complementary strengths. Convinced that TLC must become larger and obtain greater resources to expand its publishing and distribution capabilities to compete effectively in the educational software industry, the board decided that it would be in TLC's best interests to merge with Broderbund. In TLC's proxy materials disseminated in connection with the stockholders meeting (then scheduled for November 9) to vote on the proposed merger, the board explained that Broderbund and TLC have many complementary product lines and product development philosophies, and expressed the belief that TLC will benefit from Broderbund's experienced management and greater investment resources. The board recommended that shareholders approve the merger.
Under the July 31 merger agreement TLC shareholders would receive .8125 shares of Broderbund common stock for each share of TLC common stock. The TLC board agreed to except the Broderbund merger from the TLC shareholder rights plan ("rights plan") which was adopted in June 1994 to deter unsolicited takeover attempts. TLC covenanted that it would not disable the rights plan in favor of any other prospective purchaser of TLC without Broderbund's consent. TLC also committed not to solicit, negotiate, or facilitate a competing acquisition offer, and agreed to a mutual break-up fee of $10 million if the merger failed to occur. TLC reserved the right, however, to terminate the merger agreement if the board decided to accept a "Superior Proposal." 2
Messrs. Duca and Dinsmore, who own approximately 16.5% of TLC's stock, agreed to vote their shares in favor of the Broderbund merger. Broderbund also indicated that it would enter into an employment contract with Dinsmore, under which Dinsmore would serve as President of TLC for three years following the merger. Broderbund would also enter into a consulting agreement with Duca, under which Duca would provide consulting services to Broderbund of up to one day per month over a three year period.
The board scheduled a special shareholders meeting of TLC to vote on the Broderbund merger for November 9, 1995. TLC and Broderbund disseminated their Joint Proxy Statement/Prospectus relating to the proposed merger, and also began soliciting proxies, on October 11, 1995.
Although the TLC/Broderbund transaction had been publicly known since July 31, SoftKey did not make its bid for TLC until October 30, 1995, only days before the scheduled stockholders meeting. With no prior communication to TLC, SoftKey announced a tender offer for 50.1% of outstanding TLC common stock for $65 per share cash as the first step of a planned takeover of TLC. 3 Simultaneously, SoftKey filed this action seeking a court-ordered postponement of the November 9 TLC shareholders meeting to vote on the Broderbund merger. Regarding the second step of its planned acquisition, SoftKey disclosed that it intended to exchange SoftKey shares valued at $65 for each outstanding TLC share after the close of the tender offer in a merger of TLC into SoftKey.
Most importantly for present purposes, SoftKey also announced its intent to solicit the holders of 10% of TLC shares to make demand upon the TLC board to call a special meeting pursuant to Section 2.3 of TLC's by-laws. 4 The purpose of the contemplated special meeting was to remove all of TLC's current directors and replace them with three SoftKey executives who would dismantle the TLC rights plan and thereafter implement the SoftKey takeover proposal. Thus, the sole purpose of the SoftKey-initiated special meeting was to facilitate SoftKey's hostile offer by removing the major obstacle to it.
After it learned of the SoftKey tender offer, TLC assembled a team of advisers. TLC also issued a press release requesting the shareholders to defer making a decision with respect to SoftKey's tender offer until after the TLC board had the opportunity to evaluate it.
On November 1, 1995, Messrs. Duca, Dinsmore and Rauth, together with TLC advisors, met with Broderbund representatives and urged them to consider improving the terms of the TLC/Broderbund merger agreement.
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