MMI Investments, L.L.C. v. Eastern Co.
| Decision Date | 03 December 1996 |
| Docket Number | Nos. CV960134473,CV960134839,s. CV960134473 |
| Citation | 45 Conn.Supp. 101,701 A.2d 50 |
| Court | Connecticut Superior Court |
| Parties | MMI INVESTMENTS, L.L.C., v. EASTERN COMPANY. EASTERN COMPANY, v. MMI INVESTMENTS, L.L.C. |
Gager & Peterson, Litchfield, for defendant in the first case and for plaintiff in the second case.
These two actions have been consolidated for trial. In the first action, MMI Investments, L.L.C. (MMI), as party plaintiff, seeks, under General Statutes § 33-334(c), a writ of mandamus commanding the defendant, Eastern Company (Eastern), to make its record of shareholders available to MMI for inspection and copying. In the second action, Eastern, as party plaintiff, seeks an injunction and declaratory judgment to prevent MMI, as party defendant, from calling, as authorized in General Statutes § 33-326(c), 1 a special meeting of Eastern shareholders, on the ground of alleged noncompliance with the statutory requirements for the calling of such a special meeting.
The parties filed "Joint Stipulations of Fact and Law," dated October 2, 1996. The trial lasted three days, October 2 through 4, 1996. In addition, the parties filed extensive pretrial memoranda. The parties stipulated on the record that all evidence presented at trial would apply to both actions.
MMI is a limited liability company organized and existing under the laws of the state of Delaware, with its principal place of business in Millbrook, New York. It was formed in January, 1996, as a vehicle to buy and to sell securities. MMI is exclusively managed by Millbrook Capital Management, Incorporated (Millbrook), a New York corporation with its principal place of business in Millbrook, New York. MMI's principal business is the management of investments in public and private companies.
Eastern is a Connecticut corporation with its principal office in Naugatuck. It manufactures various products. Other than a small facility in New Britain, Eastern's manufacturing facilities are located outside of Connecticut. It has plants in Ohio, Illinois, New York, Ontario and Taiwan. Of its approximately 500 employees, somewhat in excess of fifty are employed at the New Britain plant, and about a dozen at its Naugatuck headquarters. Eastern's shares are publicly traded on the American Stock Exchange.
As of the date of trial, there were issued and outstanding 2,699,284 shares of Eastern common stock, its only class of stock. MMI on the trial date was the record holder of 178,400 shares of Eastern common stock. At the time in August, 1996, when it commenced the present mandamus action, MMI was the record holder of 1000 such shares, the bulk of its shares being held in street name.
On July 16, 1996 Millbrook made an offer to purchase for fifteen dollars per share all the issued and outstanding shares of Eastern common stock pursuant to a merger of Eastern into a controlled affiliate of Millbrook (the Millbrook proposal), subject to certain conditions set forth in the Millbrook proposal. On July 25, 1996, the board of directors of Eastern rejected the Millbrook proposal. On August 12, 1996, MMI, acting through its managing agent, Millbrook, requested Eastern to permit MMI access to Eastern's shareholder list. On August 14, 1996, Eastern rejected MMI's request. MMI then commenced the present mandamus action. 2
On September 25, 1996, MMI submitted the request of shareholders together claiming to own in excess of one tenth of the voting power of all shares entitled to vote at a meeting of the shareholders of Eastern, that Eastern's president call a special meeting of shareholders for purposes set forth in this request. 3 Eastern has rejected this request on the ground that the statutory requirements for such a request or call have not been met. Eastern then commenced the present injunction and declaratory judgment action. 4
These two actions will be reviewed in order. Material issues of first impression under the laws of this state are involved.
The first action, MMI Investments, L.L.C. v. Eastern Company, Docket No. CV960134473, concerns the right of MMI to the Eastern shareholders list. Before reviewing the applicable law, the court will first outline additional relevant facts.
The ostensible purpose for obtaining the list was stated by MMI in its operative August 12, 1996 request as follows: "The purpose for obtaining this list is to permit MMI to communicate with other shareholders, including the call of a special meeting of shareholders to discuss the [Millbrook] proposal to purchase all of the outstanding shares of Eastern at a substantial premium pursuant to an all-cash merger of Eastern into a controlled affiliate of [Millbrook]." The use of the list "to communicate" with the shareholders, including at a special meeting, concerning the Millbrook proposal is reiterated in its operative complaint.
On the surface, therefore, it would seem that the proposed communication use of the list, including with regard to the calling of a special meeting of shareholders, would be merely for the dissemination of information about and discussion of the Millbrook proposal, but not for voting purposes. Such is not the case. The true purpose for obtaining the list was made evident both at trial and in the requests for the calling of a special meeting of shareholders. For example, the initial special meeting request, dated August 22, 1996, contains the request of a shareholder, Evelyn B. Spencer, dated August 14, 1996, the same date as that of Eastern's rejection of the shareholders list request dated two days earlier. It is reasonable to infer that the special meeting request was prepared and in being prior to receipt of the shareholders list rejection.
It is MMI's intention that this special meeting not be merely for information and discussion purposes, but, to take by vote, definitive and binding action in furtherance of the Millbrook proposal. The intended action set forth in its request includes the replacement of the present board of directors with a board favorable to Millbrook; bylaw amendments to enable the same; binding the corporation to the Millbrook proposal; and, in the alternative, if no merger has been consummated by December 31, 1996, declaration of a special dividend of three dollars per share. 5 As of the time of trial, however, the requisite documentation to effect this action, including the form of necessary amendments to the certificate of incorporation and bylaws, the proposed merger agreement and plan of merger, 6 as well as the identity of the proposed The Millbrook proposal was elaborated upon at trial, primarily by MMI's witness Clay Lifflander. Lifflander is both a member of MMI and the president of Millbrook. Eastern is to be merged with an "acquisition subsidiary" of B.W. Elliott Manufacturing Company, Incorporated (Elliott), a "controlled affiliate" of Millbrook located in Binghampton, New York. Elliott's acquisition subsidiary had not, as yet, been formed. The merger agreement when drafted would contain conditions and contingencies allowing the Elliott acquisition subsidiary to withdraw from the merger if it decided not to proceed.
replacement directors, was not in being.
The shares held by MMI would be treated differently from those of other Eastern shareholders. MMI would have the option either of accepting payment for its shares in the same manner as the other shareholders, or of participating in whole or in part as an equity holder in the merged enterprise, presumably under a formula not disclosed. According to Lifflander, the decision would be "driven by tax consequences."
Payment for the surrendered Eastern shares would be made after completion of the merger. The funds required for payment, however, will not be on hand prior to the merger, but are to be obtained from a lender through acquisition financing of the merger. This is not a tender offer. It is structured as a highly leveraged acquisition predicated on the loan value of the target company.
Approximately $40,000,000 will be required for payment of the surrendered shares alone, exclusive of closing costs, financing costs and related expenses. 7 Lifflander testified that the "current worth," as distinguished from net worth and book value, of Elliott was approximately $8,000,000. Elliott's present resources are obviously inadequate to support the needed financing. There was no indication, moreover, of whether or to what extent, if any, Elliott or any of its affiliates or controlling parties, including Millbrook, would be obligated on the financing, or what investment, capital or otherwise, was to be made in the yet to be formed Elliott acquisition subsidiary. The financing, therefore, will be based primarily, if not exclusively, on the loan value of Eastern's assets and earnings. Eastern apparently is presently substantially debt free.
Lifflander was confident that the requisite financing was obtainable. No such financing has as yet been arranged. MMI introduced into evidence the proposal letter of what its counsel described as a large international banking corporation. 8 This appears to be only a preliminary draft containing boilerplate provisions and conditions, and expressly stating that it is not to be construed as an offer or a commitment. Apparently, the Millbrook group has not previously dealt with this lender.
General Statutes (Rev. to 1995) § 33-334(c) provides that upon application of a shareholder of record, the court, subject to such limitations as it may prescribe, may, after notice and hearing, permit such shareholder or his agent or attorney to examine and make copies of various corporate records including the record of shareholders. Section 33-334(c) further provides that: "[i]n the case of any application for examination under this subsection, the shareholder shall have the burden of showing that the examination is in good faith in the...
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...denied access to corporation documents, he may apply to the Superior Court for a writ of mandamus. See MMI Investments, LLC v. Eastern Co., 45 Conn. Sup. 101, 108, 701 A.2d 50 (1996). The defendant challenges whether the plaintiff has met these three statutory prongs. No statutory definitio......