Kysor Indus. Corp. v. Margaux, Inc.

• Decision Date: 10 January 1996
• Docket Number: No. 94C-12-196-JOH,94C-12-196-JOH
• Citation: 674 A.2d 889
• Parties: KYSOR INDUSTRIAL CORPORATION, Plaintiff, v. MARGAUX, INC., Defendant, and Dover Diversified, Inc., Defendant-Intervenor. Civil Action . Submitted:
• Court: Delaware Superior Court

Page 889

674 A.2d 889

KYSOR INDUSTRIAL CORPORATION, Plaintiff, v. MARGAUX, INC., Defendant, and Dover Diversified, Inc., Defendant-Intervenor.

Civil Action No. 94C-12-196-JOH.

Superior Court of Delaware,

New Castle County.

Submitted: Jan. 10, 1996.

Decided: Jan. 31, 1996.

Upon Motion of Kysor Industrial Corporation for Summary Judgment-- GRANTED in part, DENIED in part.

Wayne N. Elliott, and Ronald A. Brown, Jr., of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, for plaintiff.

Richard D. Heins, of Ashby & Geddes, Wilmington, for defendant.

Martin P. Tully, and Elaine C. Reilly, of Morris, Nichols, Arsht & Tunnell, Wilmington, and Thomas C. Ewing of Foley & Lardner, Milwaukee, Wisconsin, for defendant-intervenor.

OPINION

HERLIHY, Judge.

This is Kysor Industrial Corporation's [Kysor] renewed motion for summary judgment.

PROCEDURAL POSTURE

Kysor filed this action on December 19, 1994, seeking damages for an alleged breach of contract on the part of Margaux, Inc. [Margaux]. Pursuant to a letter of intent between Kysor and Margaux, the latter would pay a $300,000 termination fee plus expenses upon the occurrence of one or more of the stated triggering events. ¹ After the Kysor/Margaux letter was signed, Margaux entered into an agreement to sell and did sell its assets to Dover Diversified, Inc. [Dover], now Margaux's parent company.

On March 22, 1995, Kysor filed a motion for summary judgment. On April 11, 1995, this Court denied the motion without prejudice to renew it following additional discovery. On May 2, 1995, there was a stipulation providing that by June 23, 1995, discovery would be cutoff and briefing on Kysor's renewed motion for summary judgment would occur during July and August 1995. On May 19, 1995, this Court denied Dover's motion to intervene as of right, but granted Dover's motion for permissive intervention. Dover and Margaux have submitted a joint brief. The Court also asked that the summary judgment briefing address whether Dover can assert any defenses different from the defenses Margaux asserts.

FACTS

Before Dover acquired Margaux, there existed three prominent competitors in the refrigerator market in Georgia: Margaux, Kysor and Phoenix Refrigeration Systems, Inc. [Phoenix], a wholly owned subsidiary of Dover. Margaux and Phoenix's rivalry not only stemmed from competing in the industry, but also from a personal conflict between Margaux's CEO, Stephen Clark [Clark] and Phoenix's president, Grant Brown [Brown]. ² Years earlier, Margaux had acquired a company of which Brown was the principal. Two years later, Clark terminated Brown. Subsequent to Brown's termination, however, Margaux sued Brown alleging theft and unfair competition. After his termination, Brown started Phoenix and competed with his old employer and rival.

Margaux exited Chapter 11 bankruptcy in 1989 ³ and at the request of the creditors' committee, Clark attempted to locate a purchaser for Margaux. In 1992, Phoenix, acting through Brown, made a number of attempts to purchase Margaux. Clark and Margaux's board refused to entertain this offer. In November 1993, Dover acquired Phoenix. Brown continued to run Phoenix until his death in the Fall of 1994.

In May of 1994, as Margaux's financial condition worsened, Phoenix once again tried to acquire Margaux. Brown corresponded with members of the creditors' committee regarding the acquisition of Margaux but its board thought the proposal to be without merit. Both Clark and Leiv Lea, Margaux's chief financial officer and director, believed the proposals to be merely an attempt to gain a competitive advantage over Margaux. Dover than became fully aware of the history between Clark and Brown and decided to make the bid itself, rather than through its subsidiary, Phoenix. Dover's president, Jerry Yochum, wrote Clark making a formal offer to purchase all of Margaux's assets for $7,107,800 in cash. ⁴ Clark notified Dover that its bid would be considered at Margaux's August board meeting. Clark contacted Kysor to elicit a bid from them and informed Kysor that he had no intention of considering Dover's bid.

Throughout July and August 1994, Clark met exclusively with Kysor representatives and allowed them access to Margaux's financial information. Clark took the position that Kysor was the only legitimate offer without even meeting with Dover. Three days prior to Margaux's August board meeting, Kysor sent Margaux a letter of intent which did not contain the no-shop and termination fee provisions on which Kysor bases this action and failed to state that it was non-binding.

On August 25, 1995, Margaux's board rejected the Dover bid and, based on Kysor's August 22, 1995 letter of intent, decided to pursue the transaction with Kysor. Before rejecting Dover's offer, the board made no attempt to discover whether Dover was willing to negotiate the terms of its bid. Moreover, Margaux's board did not notify Dover of the rejection.

Peter Gravelle, Kysor's chief operating officer, and Terry Murphy, Kysor's chief financial officer phoned Clark and stated that Kysor was adding additional terms to the letter of intent. These additional terms included the no-shop and termination fee clauses and a statement claiming that the letter was non-binding. Clark did not engage in any dialogue with Kysor regarding the meaning of the no-shop and termination fee provisions nor did he have the provisions reviewed by counsel. The Margaux board did nor formally meet to authorize Clark to sign the August 31, 1995 letter containing the no-shop and termination fee provisions. However, Clark testified that he checked with the directors about these provisions and received approval of the new provisions.

The provisions of the August 31 letter of intent pertinent to this case stated:

CERTAIN UNDERTAKINGS

1. For a period of 120 days from the date of this letter, Margaux shall not, directly or indirectly, solicit or entertain offers from, negotiate with or in any manner encourage, discuss, accept or otherwise consider any proposal of any person other than Kysor to acquire capital stock of Margaux, or any of its assets or business, in whole or in part, regardless of the form of transaction (other than sales of inventory in the ordinary course).

2. In the event that Margaux breaches its undertakings under the foregoing paragraph of this section, if the Board of Directors of Margaux fails to approve the contemplated transactions or withdraws its approval, or if the transactions are not approved by Margaux's stockholders, Margaux shall promptly: (a) reimburse Kysor for all expenses incurred in connection with the transaction, including without limitation, its due diligence expenses and the fees and expenses of its professional advisors, and (b) pay as liquidated damages to Kysor a termination fee equal to Three Hundred Thousand Dollars ($300,000).

3. Pending execution of a definitive purchase agreement, Margaux shall conduct its business operations only in the ordinary and usual course and shall not engage in any extraordinary transaction without Kysor's prior written consent.

4. Except as provided in paragraph 2 of this section, each party shall be responsible for and bear all of its own costs and expenses incurred in connection with the proposal transaction.

CONCLUSION

The purpose of this letter is to state our present intentions with respect to the proposed transaction. Except for the provisions set forth under the heading "Certain Undertakings" above (as to which provisions this letter constitutes our agreement), this letter does not constitute a legally binding agreement between us or obligate either of us with respect to the proposed transaction and no such agreement or obligation shall exist unless and until we execute a mutually acceptable definitive purchase agreement.

Dover continued to pursue the acquisition of Margaux after Margaux signed the revised letter of intent with Kysor. Tom Bell, Dover's vice president, wrote to Clark explaining that Dover's previous offer remained open and Dover would consider increasing its offer. Clark never responded to Dover. Clark never made any attempt to determine the validity of Dover's offer.

On October 25, 1994, Dover sued Margaux in the Court of Chancery alleging that Clark and Margaux's other directors had breached their fiduciary duties by refusing to negotiate with Phoenix and Dover and by not providing them with the financial information which was freely given to Kysor. Chancery ruled that Dover's request for preliminary relief was premature because Kysor and Margaux had not yet entered into a formal transaction. That Court stated that "it would not be prudent for directors who have not preformed any market check in advance, to enter into an agreement that did not have a fiduciary out in circumstances of this kind." Dover Diversified, Inc. v. Margaux, Inc., Del.Ch., C.A. No. 13829, Allen, C. (November 4, 1994).

When Dover sued Margaux, the latter issued a press release stating, in pertinent part,

Margaux has agreed that if the transaction is not approved by its stockholders or if Margaux takes certain specified actions in connection with any other offer, Margaux will reimburse Kysor for certain expenses it incurred in the transaction and pay a termination fee of $300,000.

In an Securities and Exchange Commission filing several days later, Margaux repeated this statement.

At a time which is not exactly clear, Kysor offered to purchase Margaux's assets for $3.6 million and assume liabilities of around $7 million. While the records supplied to the Court are slightly fuzzy on this offer, it is uncontroverted that Kysor made such an offer. The record also shows Kysor undertook an extensive due diligence review in contemplation of making its offer.

On November 8, 1994, Dover made an offer to purchase Margaux for $11 million. Even after receiving this offer, Clark continued to favor a transaction with Kysor. After Clark failed to persuade Kysor...