Martin v. Drummond Co., Inc.
| Citation | 663 So.2d 937 |
| Parties | John H. MARTIN, et al. v. DRUMMOND COMPANY, INC., et al. AmSOUTH BANK, as Trustee of the Leo Mendel Family Trust, et al. v. DRUMMOND COMPANY, INC., et al. Arthur B. DURKEE, Jr., et al. v. DRUMMOND COMPANY, INC., et al. 1930066 to 1930070. |
| Decision Date | 07 July 1995 |
| Court | Supreme Court of Alabama |
Clarence M. Small, Jr., Thomas W. Christian, Deborah Alley Smith and Rhonda Pitts Chambers of Rives & Peterson, and James L. North and J. Timothy Francis of James L North & Associates, Birmingham, for John H. Martin, et al.
Hobart A. McWhorter, Jr., T. Michael Brown and Matthew H. Lembke of Bradley, Arant, Rose & White, Birmingham, for Arthur B. Durkee, Jr., et al.
Alton B. Parker, Jr., Steve R. Burford and Damon P. Denney of Spain, Gillon, Grooms, Blan & Nettles and James D. Pruett, Birmingham, for AmSouth Bank, et al.
Michael L. Edwards of Balch & Bingham, Birmingham, for Drummond Company, Inc. and Drummond Coal Sales, Inc.
William Anthony Davis III and W. Stancil Starnes of Starnes & Atchison, Birmingham, for Elbert A. Drummond and Garry N. Drummond.
J. Mark White, Birmingham, for Charles W. Adair and the Estate of R. Weaver Self.
William J. Baxley and Joel Dillard of Baxley, Dillard, Dauphin & McKnight, Birmingham, for Joseph E. Nicholls, Jr.
The plaintiffs, former holders of stock in Alabama By-Products Corporation ("ABC"), appeal from a summary judgment for the defendants on the plaintiffs' claims that the defendants acquired their stock through coercion, fraud, or breach of fiduciary duty. The same claims were presented in a class action in the Delaware Chancery Court of New Castle County, Hynson v. Drummond Corp. (CV 7904, Del.Ch.1990), and were extinguished in a settlement awarding damages to the plaintiff class. The issue is whether the Hynson judgment bars this action under the doctrine of res judicata or is not binding on these plaintiffs on the basis that the Delaware Chancery Court certified the class without giving class members the right to exclude themselves from the action. 1
This dispute concerns the value of the stock of ABC, a Delaware corporation, at the time it was acquired by Drummond Coal Company, Inc., now Drummond Company, Inc. ("Drummond"). In 1977, Drummond, through a subsidiary, acquired a controlling interest in ABC. It thereafter initiated several attempts to merge ABC into Drummond. In response to one such attempt in 1983, several ABC stockholders formed the Shareholders' Protective Committee ("SPC"). The members of the SPC were lawyers and stockbrokers in Birmingham. ABC stock was traded over the counter, and Sterne, Agee & Leach, Inc., a Birmingham investment firm, was the principal market maker of ABC stock. A senior member of the firm was one of the members of the SPC. The SPC opposed Drummond's 1983 attempt to merge ABC into Drummond for $65 per share of ABC stock. In 1982, market bid prices for ABC ranged from a high at the beginning of the year of $69 to a low at the end of the year of $44, which is about where it stood on March 17, 1983, when the $65 merger proposal was announced. The SPC obtained information on ABC through a court action, hired an analyst to derive a value for ABC stock, and took the position that the stock was worth more than $100 per share. It sent a detailed explanation of its valuation to the stockholders other than Drummond. Drummond sought an independent evaluation from Kidder, Peabody & Co., which informed Drummond that it was "unable to conclude that the consideration ... is fair from a financial point of view to [the] shareholders." Drummond withdrew the 1983 merger proposal in September.
On December 5, 1984, Drummond made a tender offer to pay $75 per share for all of the shares of ABC that it did not own. 2 The tender offer circular detailed the history of Drummond's acquisition of a majority interest, of its efforts to acquire the remainder of the stock, and of other valuations of the stock, including the SPC's valuation of the stock at more than $100 per share. The circular stated: "The Offerors 3 believe that the cash price of $75 per Share offered hereby is fair to unaffiliated ABC stockholders." This statement forms the basis of the allegation of fraud against Drummond; the plaintiffs here contend, as did the class representatives in Hynson, that Drummond knew that ABC stock was worth substantially more on an asset valuation basis as opposed to a market valuation. A principal factor in the alleged undervaluation is Drummond's knowledge of the value of ABC's proven coal reserves, its timberland, and its cash flow.
Under another section of the circular, entitled "Additional Purchases of Shares and Possible Merger," Drummond stated: "Upon consummation of the Offer and from time to time thereafter, the Offerors and their affiliates will consider alternatives available to them to satisfy their ultimate goal of achieving ownership of the entire equity interest in ABC." Drummond said it might purchase additional shares or it might propose a merger, with the "timing, structure and terms of any merger" to be determined by Drummond later. The circular also stated that, if Drummond acquired 90% or more of the ABC stock, "it could effect a merger with [ABC] on any terms it chose." The following section of the circular, "Effects of Offer, Additional Purchases of Shares and Possible Merger; Future Plans for the Company," stated that Drummond might "propose to the Board of Directors of [ABC] that it consider reduction or elimination of dividends." By the time of the tender offer, Drummond had voting control of the board of directors of ABC--a majority of its members had been placed by Drummond through its control of a majority of the ABC stock.
These representations of an uncertain future for non-tendering shareholders, including the possibility of holding stock that did not pay dividends and would probably not be marketable, form the basis of the allegations by the plaintiffs here and in Hynson that the tender offer was coercive.
The board of directors of ABC met quickly in response to the tender offer. Charles Adair, the president and chief executive officer of ABC, who had taken office after Drummond had acquired the majority of the ABC stock and who had previously been Garry Drummond's executive assistant, was in Washington, D.C., the day the tender offer was announced. Adair flew back to Birmingham on a Drummond Company airplane the next day, and a meeting of the ABC board of directors was held at the Drummond Company hangar. The board of directors of ABC voted to take a neutral position on the tender offer. This action, coupled with the board's alleged failure to inquire into the fairness of the offering price or any other aspects of the tender offer, is the basis of the allegations of breach of fiduciary duty against the board members who are the individual defendants in this action and who were defendants in Hynson.
On December 18, the SPC wrote a letter to many of the ABC stockholders indicating its opposition to the tender offer and stating, "The Committee continues to believe that the ABC stock has a value of not less than $100 per share." Among the reasons given by the SPC for its belief that "the disclosures made by Drummond are not adequate" were that "Drummond has not given consideration to the liquidation value of ABC"; "Drummond has failed to inform the public stockholders of ABC as to the value of the coal resources and reserves of ABC"; "ABC has approximately 60,000 acres of timberlands," the value of which was not disclosed by Drummond; and Drummond's income projections for ABC were low. In short, the very points now alleged as bases for the fraud allegations were known to the ABC stockholders at an early stage in the tender offer, if not before.
Enough ABC shareholders responded to the tender offer that Drummond acquired through the tender offer, together with the stock it already owned, approximately 91% of the outstanding stock of ABC. It effected a short-form merger in August 1985 and acquired, for $75.60 per share, the remainder, except that some of the remaining ABC stockholders filed for an appraisal and obtained a higher price, as explained below. The plaintiffs in the actions below, appellants here, owned ABC stock that Drummond acquired either through the tender offer or through the merger.
On January 4, 1985, less than a month after Drummond made the tender offer, several ABC stockholders filed a class action, Hynson v. Drummond Coal Co., supra, in the Delaware Chancery Court of New Castle County on behalf of a class of all ABC stockholders other than the defendants. On December 3, 1985, several shareholders who did not tender their shares and who objected to the merger filed an action in the Delaware Chancery Court of New Castle County for a judicial appraisal of their shares. Neal v. Alabama By-Products Corp., CV No. 8282 (Del.Ch.1990). 4 The Neal plaintiffs were excepted from the Hynson class. Many of the plaintiff ABC shareholders tendered some shares, surrendered some in the merger, and held some for appraisal, or otherwise deliberately took advantage of two of these three options.
In a settlement of Hynson in November 1989, Drummond agreed to pay about $5,000,000, approximately an additional $5 per share of ABC stock. Notice of the settlement was mailed to the class members on November 29, 1989. The notice did not give the class members a right to opt out, but it did provide the following:
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