Krieger v. Gast
| Decision Date | 09 November 2001 |
| Docket Number | No. 4:99-CV-86.,4:99-CV-86. |
| Parties | Mark A. KRIEGER, Plaintiff, v. Warren E. GAST, et al., Defendants. |
| Court | U.S. District Court — Western District of Michigan |
Thomas A. Baird, Charles R. Watkins, Robert J. Emanuel, John R. Wylie, Chicago, IL, for Plaintiff.
Jon R. Muth, Grand Rapids, MI, Anne N. DePrez, Karoline W. Jackson, Indianapolis, IN, Kevin Abraham Rynbrandt, Grand Rapids, MI, Kevin J. O'Brien, Chicago, IL, for Defendants.
TABLE OF CONTENTS
I. Facts ...................................................................... 766
II. Procedural History ......................................................... 769
III. Motion Standard ............................................................ 770
IV. Discussion ................................................................. 770
A. Was There A Plan? ....................................................... 770
B. Does Michigan Law Permit An "Entire Fairness" Challenge To A
Freeze-Out Merger? ..................................................... 774
C. Did Defendants Breach Their Fiduciary Duties To Krieger And The
Class? ................................................................. 778
1. Misrepresentations ................................................... 779
a. The Terms on Which the Continuing Shareholders Would
Sell Most of Their Stock to Gast ................................. 779
b. The $140 Per Share Price to be Paid by RDV Aria ................... 780
2. Omissions ............................................................ 781
a. The "Plan" ........................................................ 781
b. Financial Statements .............................................. 781
c. The Lack of a Fairness Opinion .................................... 784
d. Retention of McDonald & Co. ....................................... 784
e. The Deloitte & Touche Valuation ................................... 785
f. Determination of Merger Consideration ............................. 785
g. Other Omissions ................................................... 786
D. Are Krieger's Claims Barred By Gast's Articles Of Incorporation? ........ 786
V. Conclusion ................................................................... 787
OPINION
This case arises out of a merger in which Plaintiff, Mark Krieger ("Krieger"), and the class he represents were frozen out of their minority shareholder interests in Gast Manufacturing Corporation ("Gast"). Krieger claims that the amount he and the other minority shareholders were paid for their shares was far less than what those shares were actually worth and that the majority shareholders of Gast, including the directors named as defendants in this case, profited at the expense of Krieger and the minority shareholders. Krieger claims that the merger was not procedurally or substantively fair to the minority shareholders and that Defendants breached their fiduciary duties through misrepresentations or omissions in the merger notice.
Among other things, the Defendants assert that the price paid to Krieger and the minority shareholders for their shares was fair and that Krieger cannot offer any evidence of wrongdoing by Gast or its directors.
Pending before the Court are Defendants' motion for summary judgment and Krieger's motion for partial summary judgment.
Gast, a Michigan corporation established in 1921, was engaged in the business of manufacturing and selling compressors, pumps, blowers, and related items. By 1995, Gast employed over 700 persons and had operations in both the United States and Europe with sales of almost $100 million. At that time, there were approximately 86 Gast shareholders, many of whom were either former Gast employees or descendants of former Gast employees. However, the majority of the stock was held by Defendant Warren E. Gast, his immediate family (including his son, Defendant Kevin C. Gast), his sister and her children, and three Gast directors, Allan Westmaas, William E. Johnson, and Jay Van Den Berg (referred to together with Warren E. Gast and Kevin C. Gast as the "Director Defendants"). The shares of Gast were all privately held. Therefore, there was no established market for the stock.
During 1994, Gast began to seriously investigate the possibility of an initial public offering ("IPO") of its stock. Gast's interest in an IPO was driven by two considerations. The first was the lack of liquidity, i.e., an established market, for the stock. Historically, Gast had a policy of repurchasing shares of stock for 75% of book value. (Westmaas 4/25/00 Dep. at 104-05.) However, because some of the repurchases involved substantial amounts, (see Johnson 11/14/00 Dep. at 119-20 ()), and Warren Gast's family desired to liquidate part of their interest in Gast, Gast decided to explore other means of providing liquidity for its shareholders.1 The second consideration behind a possible IPO, although less important than liquidity, was the lack of a succession plan. Warren Gast was nearing retirement age, and Kevin Gast, the only one of Warren Gast's children who had worked at or had any interest in Gast, quit his employment with Gast in 1993.2 (Kevin Gast 11/03/00 Dep. at 62-63.)
After interviewing several investment banking firms, members of Gast's board of directors concluded that an IPO would not be appropriate for Gast given market conditions at that time.3 However, Gast ultimately retained McDonald & Company to assist Gast in exploring alternative financing arrangements. McDonald & Company presented several alternatives for providing liquidity, including the possibility of selling a substantial minority interest in Gast to an outside investor as part of a recapitalization (referred to as a "Private IPO"). In the Private IPO, Gast would sell a substantial minority interest to an outside investor and incur substantial bank debt that would be used to redeem some of the existing stock, thus reducing the number of outstanding shares. A Private IPO would provide the desired liquidity, allow share redemption proceeds to be taxed at capital gains rather than at ordinary tax rates, and permit the existing shareholders to maintain control of the company. Gast was receptive to the idea, and McDonald & Company introduced two potential purchasers to Gast, RDV Corporation ("RDV") and Heritage Partners. Ultimately, Gast negotiated a sale agreement with RDV.
At the February 1996 shareholders meeting, Warren Gast announced that an IPO was unlikely but that there was a possibility of a purchase of a substantial minority interest by an outside investor which would allow existing stockholders to sell part or all of their stock. (1996 Annual Shareholder Meeting Minutes at AW 0000925, Westmaas Aff.App. E.) Warren Gast also told shareholders that Gast would not repurchase shares of stock while negotiations were occurring. (Id.) During negotiations between Gast and RDV, the primary issue on the table was the amount that RDV would pay for its minority interest. Initially, the deal called for RDV to put in $12 million, with $8 million of that amount being allocated to common stock and $4 million being allocated to preferred stock. (Mem. of 3/25/96 from Nelson to W. Gast, Johnson, and Westmaas, Ex. 86.) Later, the amount was reduced to $10 million, split equally between common and preferred stock. (Id.) Finally, the amount was reduced to $8.4 million, split equally between common stock and debt. The amount RDV agreed to pay was determined by RDV's targeted internal rate of return of 30% as applied to a five-year plan prepared by Gast's Strategic Management Team. (Id.; Johnson Dep. at 18-19.) For its protection, RDV insisted on a provision called a "clawback", under which if certain performance targets were not met by Gast at the end of five years, RDV would acquire enough shares to obtain control of Gast.
At some point during negotiations, Gast and RDV agreed that the shares of all shareholders other than directors and members of the immediate families of Warren Gast and his sister, i.e., the minority, would be cashed out.4 Thus, the minority shareholders would not be included in the Private IPO. As finally structured, the recapitalization consisted of the following components: (1) a merger between a new corporation known as Gast Investment Corporation ("GIC"), owned by the Gast majority shareholders, and Gast, in connection with which the minority shareholders' interests would be redeemed by Gast for $140 per share, leaving the majority shareholders with 100% of the stock of Gast (the "Merger"); (2) a multi-million dollar bank loan to Gast; (3) a redemption of 356,304 of the majority shareholders' common shares (Class A and Class B) for $140 per share, leaving the majority shareholders with 30,770 shares of common stock (100% ownership of Gast); (4) a $4.2 million loan by RDV Capital Management L.P. (an affiliate of RDV) to Gast; and (5) a purchase of 30,000 shares of Gast common stock from treasury (slightly over 49%) by RDV Aria for $4.2 million, or $140 per share.5 The $140 per share price paid for the redeemed shares and used to value the shares purchased by RDV was determined through negotiations between Gast and RDV. (Damstra Dep. at 181-82; Westmaas 4/25/00 Dep. at 20.)
On August 21, 1996, a special meeting of Gast shareholders was held for the purpose of voting on the Merger. Prior to the meeting, a notice ("Notice") signed by Warren Gast and approved by the Gast board of directors was sent to Gast shareholders informing them of the details of the Merger. The Notice, drafted by Gast's counsel,...
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...Duty to Third-Party Shareholders," 60 Fordham L.Rev. 133, 137 (1991). 2 In support of its argument, Defendant cites Krieger v. Gast, 179 F.Supp.2d 762, 784 (W.D.Mich.2001). for the proposition that "courts do not require fairness opinions as a matter of law." However, this statement was tak......