Moran v. Household Intern., Inc.
| Citation | 500 A.2d 1346 |
| Parties | , Fed. Sec. L. Rep. P 92,371 John A. MORAN and the Dyson-Kissner-Moran Corporation, Plaintiffs Below- Appellants, and Gretl Golter, individually and in a derivative capacity, Plaintiff Intervenor Below-Appellant, v. HOUSEHOLD INTERNATIONAL, INC., a Delaware Corporation, Donald C. Clark, Thomas D. Flynn, Mary Johnston Evans, William D. Hendry, Joseph W. James, Mitchell P. Kartalia, Gordon P. Osler, Arthur E. Rasmussen, George W. Rauch, James M. Tait, Miller Upton, Bernard F. Brennan and Gary G. Dillon, Defendants Below- Appellees. . Submitted: |
| Decision Date | 21 May 1985 |
| Court | United States State Supreme Court of Delaware |
Upon appeal from Court of Chancery. Affirmed.
Irving S. Shapiro (argued), Rodman Ward, Jr., Stuart L. Shapiro, Stephen P. Lamb, Thomas J. Allingham II and Andrew J. Turezyn of Skadden, Arps, Slate, Meagher & Flom, Wilmington, and Michael W. Mitchell, Jeffrey Glekel, Jeremy A. Berman and Joseph A. Guglielmelli of Skadden, Arps, Slate, Meagher & Flom, New York City, for plaintiffs below-appellants.
Joseph A. Rosenthal and Norman M. Monhait of Morris and Rosenthal, P.A., Wilmington, and Marshall Patner of Orlikoff, Flamm and Patner, Chicago, Frederick Brace of Brace & O'Donnell, and Geoffrey P. Miller (argued), Chicago, Ill., of counsel, for plaintiff intervenor below-appellant.
Charles E. Richards, Jr. (argued), Donald A. Bussard, Jesse A. Finkelstein, and Gregory P. Williams of Richards, Layton & Finger, Wilmington, and George A. Katz, William C. Sterling, Jr., Michael W. Schwartz, Eric M. Roth, Warren R. Stern and Karen B. Shaer of Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for defendants below-appellees.
Lawrence C. Ashby, of Ashby, McKelvie & Geddes, Wilmington, Marc P. Cherno, Harvey L. Pitt, Pamela Jarvis, of Fried, Frank, Harris, Shriver & Jacobson, New York City, amicus curiae, and Matthew P. Fink, Thomas D. Maher, Investment Co. Institute, Washington, D.C., of counsel, for Investment Co. Institute.
Robert J. Katzenstein and Clark W. Furlow of Lassen, Smith, Katzenstein & Furlow, Wilmington, and Kurt L. Schultz, Columbus R. Gangemi, Jr., Robert F. Wall, Jerome W. Pope of Winston & Strawn, Chicago, Ill., amicus curiae, for the United Food and Commercial Workers Intern. Union.
Joseph J. Farnan, Jr., U.S. Atty., Sue L. Robinson, Asst. U.S. Atty., Wilmington, Del., Daniel L. Goelzer, Jacob H. Stillman, Eric Summergrad, Gerard S. Citera, amicus curiae, and Paul Gonson, of counsel, for Securities and Exchange Com'n, Washington, D.C.
Before CHRISTIE, Chief Justice, and McNEILLY and MOORE, JJ.
This case presents to this Court for review the most recent defensive mechanism in the arsenal of corporate takeover weaponry--the Preferred Share Purchase Rights Plan ("Rights Plan" or "Plan"). The validity of this mechanism has attracted national attention. Amici curiae briefs have been filed in support of appellants by the Security and Exchange Commission ("SEC") 1 and the Investment Company Institute. An amicus curiae brief has been filed in support of appellees ("Household") by the United Food and Commercial Workers International Union.
In a detailed opinion, the Court of Chancery upheld the Rights Plan as a legitimate exercise of business judgment by Household. Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059 (1985). We agree, and therefore, affirm the judgment below.
The facts giving rise to this case have been carefully delineated in the Court of Chancery's opinion. Id. at 1064-69. A review of the basic facts is necessary for a complete understanding of the issues.
On August 14, 1984, the Board of Directors of Household International, Inc. adopted the Rights Plan by a fourteen to two vote. 2 The intricacies of the Rights Plan are contained in a 48-page document entitled "Rights Agreement". Basically, the Plan provides that Household common stockholders are entitled to the issuance of one Right per common share under certain triggering conditions. There are two triggering events that can activate the Rights. The first is the announcement of a tender offer for 30 percent of Household's shares ("30% trigger") and the second is the acquisition of 20 percent of Household's shares by any single entity or group ("20% trigger").
If an announcement of a tender offer for 30 percent of Household's shares is made, the Rights are issued and are immediately exercisable to purchase 1/100 share of new preferred stock for $100 and are redeemable by the Board for $.50 per Right. If 20 percent of Household's shares are acquired by anyone, the Rights are issued and become non-redeemable and are exercisable to purchase 1/100 of a share of preferred. If a Right is not exercised for preferred, and thereafter, a merger or consolidation occurs, the Rights holder can exercise each Right to purchase $200 of the common stock of the tender offeror for $100. This "flip-over" provision of the Rights Plan is at the heart of this controversy.
Household is a diversified holding company with its principal subsidiaries engaged in financial services, transportation and merchandising. HFC, National Car Rental and Vons Grocery are three of its wholly-owned entities.
Household did not adopt its Rights Plan during a battle with a corporate raider, but as a preventive mechanism to ward off future advances. The Vice-Chancellor found that as early as February 1984, Household's management became concerned about the company's vulnerability as a takeover target and began considering amending its charter to render a takeover more difficult. After considering the matter, Household decided not to pursue a fair price amendment. 3
In the meantime, appellant Moran, one of Household's own Directors and also Chairman of the Dyson-Kissner-Moran Corporation, ("D-K-M") which is the largest single stockholder of Household, began discussions concerning a possible leveraged buy-out of Household by D-K-M. D-K-M's financial studies showed that Household's stock was significantly undervalued in relation to the company's break-up value. It is uncontradicted that Moran's suggestion of a leveraged buy-out never progressed beyond the discussion stage.
Concerned about Household's vulnerability to a raider in light of the current takeover climate, Household secured the services of Wachtell, Lipton, Rosen and Katz ("Wachtell, Lipton") and Goldman, Sachs & Co. ("Goldman, Sachs") to formulate a takeover policy for recommendation to the Household Board at its August 14 meeting. After a July 31 meeting with a Household Board member and a pre-meeting distribution of material on the potential takeover problem and the proposed Rights Plan, the Board met on August 14, 1984.
Representatives of Wachtell, Lipton and Goldman, Sachs attended the August 14 meeting. The minutes reflect that Mr. Lipton explained to the Board that his recommendation of the Plan was based on his understanding that the Board was concerned about the increasing frequency of "bust-up" 4 takeovers, the increasing takeover activity in the financial service industry, such as Leucadia's attempt to take over Arco, and the possible adverse effect this type of activity could have on employees and others concerned with and vital to the continuing successful operation of Household even in the absence of any actual bust-up takeover attempt. Against this factual background, the Plan was approved.
Thereafter, Moran and the company of which he is Chairman, D-K-M, filed this suit. On the eve of trial, Gretl Golter, the holder of 500 shares of Household, was permitted to intervene as an additional plaintiff. The trial was held, and the Court of Chancery ruled in favor of Household. 5 Appellants now appeal from that ruling to this Court.
The primary issue here is the applicability of the business judgment rule as the standard by which the adoption of the Rights Plan should be reviewed. Much of this issue has been decided by our recent decision in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985). In Unocal, we applied the business judgment rule to analyze Unocal's discriminatory self-tender. We explained:
When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.
Id. at 954 (citation and footnote omitted).
Other jurisdictions have also applied the business judgment rule to actions by which target companies have sought to forestall takeover activity they considered undesirable. See Gearhart Industries, Inc. v. Smith International, 5th Cir., 741 F.2d 707 (1984) (); Treco, Inc. v. Land of Lincoln Savings and Loan, 7th Cir., 749 F.2d 374 (1984) (amendment to by-laws); Panter v. Marshall Field, 7th Cir., 646 F.2d 271 (1981) (); Johnson v. Trueblood, 3d Cir., 629 F.2d 287 (1980), cert. denied, 450 U.S. 999, 101 S.Ct. 1704, 68 L.Ed.2d 200 (1981) (refusal to tender); Crouse-Hinds Co. v. InterNorth, Inc., 2d Cir., 634 F.2d 690 (1980) (); Treadway v. Cane Corp., 2d Cir., 638 F.2d 357 (1980) (sale to White Knight), Enterra Corp. v. SGS Associates, E.D.Pa., 600 F.Supp. 678 (1985) (standstill agreement); Buffalo Forge Co. v. Ogden Corp., W.D.N.Y., 555 F.Supp. 892, aff'd, (2d Cir.) 717 F.2d 757, cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983) (); Whittaker Corp. v. Edgar, N.D.Ill., 535 F.Supp. 933 (1982) (); Martin Marietta Corp. v. Bendix Corp., D.Md., 549 F.Supp. 623 (1982) (Pac-Man defense). 6
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