Lawson Mardon Wheaton Inc. v. Smith
| Decision Date | 26 August 1998 |
| Citation | 315 N.J.Super. 32,716 A.2d 550 |
| Parties | LAWSON MARDON WHEATON INC., formerly known as Wheaton Inc., Plaintiff-Respondent, v. Douglas Frederick SMITH, a/k/a Douglas F. Smith and Anthony D. Smith, Trustee for Douglas Frederick Smith, Defendants, and Susan Huffard Ball; P. Phillippi Huffard, IV; Trevor Lansing Huffard; Whitney Lancaster Huffard; Courtney Montagu Huffard; Robert D. Robertson, a/k/a Robert Shaw; Frank H. Wheaton, III, a/k/a Frank H. Wheaton III; Frank H. Wheaton, III, custodian for Christopher Bainbridge Wheaton; Ada A. Strasenburgh; James A. Strasenburgh; John B. Strasenburgh; John Griffin Strasenburgh; John B. Strasenburgh, Trustee for John Griffin Strasenburgh, Jr.; John B. Strasenburgh, Trustee for Blair Baldwin Strasenburgh; Louise Houghton Strasenburgh; John B. Strasenburgh, Trustee for Sarah Houghton Strasenburgh; John B. Strasenburgh, Trustee for Toby E.A. Strasenburgh; Sally Strasenburgh Applegate Lane; John B. Strasenburgh, Trustee for Samuel Church Applegate; John B. Strasenburgh, Trustee for Amos Eighmy Applegate; John B. Strasenburgh, Trustee for George Guthrie Applegate; John B. Strasenburgh, Trustee for Allison Webb Strasenburgh; and John B. Strasenburgh, Trustee for Oliver James Strasenburgh, Defendants-Appellants. |
| Court | New Jersey Superior Court — Appellate Division |
Frederick L. Whitmer, Morristown, for all defendants-appellants except Frank H. Wheaton, III, Individually and as Custodian for Christopher Bainbridge Wheaton and Amanda Elizabeth Wheaton and Robert D. Robertson, a/k/a Robert Shaw (Pitney, Hardin, Kipp & Szuch, attorneys; Mr. Whitmer, on the brief).
Marc J. Sonnenfeld, Philadelphia, PA, for defendants-appellants Frank H. Wheaton, III, Individually and as Custodian for Christopher Bainbridge Wheaton and Amanda Elizabeth Wheaton and Robert D. Robertson, a/k/a Robert Shaw (Morgan, Lewis & Bockius, attorneys; Robert A. White, Princeton, and Mr. Sonnenfeld, on the brief).
Jesse A. Finkelstein, Wilmington, DE (Richards, Layton & Finger) of the Delaware bar, admitted pro hac vice, for plaintiff-respondent (Kenney & Kearney, and Mr. Finkelstein, attorneys; Joseph H. Kenney, Cherry Hill, appearing and with Mr. Finkelstein on the brief).
Before Judges KING, MUIR, Jr., and CUFF.
The opinion of the court was delivered by
CUFF, J.A.D.
Twenty-six shareholders of closely held Wheaton Inc. invoked their right to an appraisal and purchase of their shares pursuant to N.J.S.A. 14A:11-1 to -11. They had dissented from a corporate restructuring. Their appeal of the valuation of those shares primarily raises the issue of whether a discount to reflect the lack of marketability of the shares of this closely-held corporation should be applied.
The Wheaton Glass Company was founded in 1888 by Theodore Carson Wheaton. Throughout the years, Wheaton has remained a privately-held, family-controlled business. As shares have been passed down from generation to generation, the number of individual shareholders has increased to 159, and the number of shares to over five million. The dispute in this case involves the third and fourth generation of Theodore C. Wheaton's descendants.
Wheaton's headquarters is located in Millville. The company is a producer of glass and plastic containers, closures and components; tubing products; molded rubber products and aluminum seals; and related scientific and medical products. It serves the pharmaceutical, cosmetic, personal care, scientific/medical and food industries. Its largest customers included Avon, Eli Lilly and Revlon. By 1991, Wheaton's operations were divided into seven groups: glass, plastics, scientific, international, machinery, corporate, and miscellaneous.
Wheaton experienced its best financial year in 1989, as a result of securing a patent on a new type of plastic molding process. However, the company began experiencing significant operational problems in 1990 because of loss of sales in its plastics business and an investigation by the Internal Revenue Service into use of the company's assets by certain individuals. By 1991 the company was having problems passing through price increases to its customers. In addition, in January 1991, Frank Wheaton, Jr., the long-term President of the corporation, took a leave of absence under pressure, and the board of directors appointed Robert Veghte as President and Chief Executive Officer of the company.
Because of the changes in personnel and in the financial climate, in early 1991 management held a series of informal meetings with the shareholders. At these meetings, the third generation shareholders expressed the desire that the company play a greater role in estate tax management. Defendants Frank Wheaton III and James Strasenburgh were particularly vocal on this issue. As a result, Veghte, with board approval, developed a shareholder liquidity plan that was sent to, and approved by, a majority of the shareholders in April 1991. Frank Wheaton III and Strasenburgh did not vote in favor of this plan. Under the plan, shareholders were to receive the required liquidity to pay federal estate and gift taxes; in return, the shareholders agreed to give the company a right of first refusal for any proposed transfer of their Wheaton shares outside the line of Theodore C. Wheaton's descendants and spouses. The board also asked corporate counsel to come up with ideas to allow for further shareholder liquidity. Additionally, around this time, Veghte met with Frank Wheaton III and James Strasenburgh, who indicated their intention to sell their shares. However, while Strasenburgh was willing to sell his shares to the company, Frank Wheaton III wanted to sell his shares to an outside buyer.
At Wheaton's annual meeting on June 11, 1991, Veghte presented several alternatives for providing current liquidity to shareholders. Among the alternatives presented was an employee stock option plan, whereby Wheaton would have incurred approximately $100 million in debt to buy 30% of the common stock of the company at approximately $66 per share. Ultimately, this alternative was rejected because of the significant debt load that the corporation would assume. Other alternatives which were considered and rejected were a declaration of a large, one-time dividend and sale of the entire company to a third party. Another alternative which received considerable interest was a limited initial public offering (IPO), whereby limited voting common shares would be sold to the public so that the Wheaton family would retain control of the company.
In July 1991, the company sent a survey to the shareholders regarding the proposed public offering. Approximately seventy percent of the shareholders responded to the survey. Most expressed interest in the IPO but expressed a reluctance to part with their shares in order to create the offering. As a result of the survey, the company proceeded to solicit bids for an IPO. Three investment bankers made presentations for a limited IPO, with estimates of per share value ranging from $57 to $68. Wheaton chose First Boston Corporation, Inc. (First Boston) to manage the IPO in the event the board decided to so proceed. However, because of ensuing budgetary and environmental problems affecting the company in the second half of 1991, as well as general financial market conditions, plans for an IPO were delayed.
In early August 1991, Bowater, Inc., a British company, purchased 100,000 shares of Wheaton stock from the former Wheaton President, Frank H. Wheaton, Jr., at $64 per share and secured options for an additional 17.66% of the company's common stock. Frank Wheaton, Jr.'s sale to Bowater was the first instance of a sale of Wheaton stock to a non-family member. On August 14, 1991, Bowater made an offer to purchase Wheaton for $64 per share; Bowater's board of directors had authorized a bid as high as $70 per share. The offer was subject to adjustment based upon due diligence and Wheaton's financial results to date in 1991. Soon thereafter, Veghte met with Bowater's principals to discuss the offer. Veghte told Bowater's principals that based on First Boston's IPO price range he believed $64 per share was too low. On August 28, 1991, Wheaton's board of directors rejected the offer and unanimously adopted a resolution stating that the company was not for sale.
On that same date, 71% of Wheaton's shareholders agreed to and signed a shareholder's agreement which restricted the sale of company stock to any outside party unless the transfer was approved by both 75% of the shareholders and five of the six members of a newly-created shareholder committee. No defendant signed the agreement.
On October 3, 1991, Veghte and George Straubmuller met with the chairman of Bowater in London and offered to repurchase its shares at $64 per share plus expenses. Bowater rejected the offer.
In the fall of 1991, Wheaton discovered fraud at one of its wholly-owned subsidiaries, American International Container (AIC), which resulted in a financial loss to the Florida subsidiary of $13 million. According to Veghte, this development was an additional reason for Wheaton's failure to proceed with an IPO.
As part of the plans for an IPO, and for certain tax advantages, First Boston advised Wheaton to restructure the company and become a Delaware corporation. Ultimately, however, while Wheaton decided to restructure, only one of its newly-created subsidiaries, a holding company, became a Delaware corporation. Under the restructuring plan, Wheaton would change its name to Wheaton Inc., three new wholly-owned subsidiaries would be formed, Wheaton Science Products, Wheaton Industries, Inc. and Wheaton Holding, Inc., and the company would transfer substantially all of its assets to the subsidiaries in exchange for 100% of each subsidiary's stock. In return for their existing shares, each Wheaton shareholder would be issued recapitalized shares in the new company on a...
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