Moran v. Household Intern., Inc.

• Decision Date: 10 December 1984
• Citation: 490 A.2d 1059
• Parties: John A. MORAN and the Dyson-Kissner-Moran Corporation, Plaintiffs, and Gretl Golter, Individually and in a derivative capacity, Plaintiff Intervenor, 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. HOUSEHOLD INTERNATIONAL, INC., Counterclaim Plaintiff, v. John A. MORAN, Charles H. Dyson and The Dyson-Kissner-Moran Corporation, Counterclaim Defendants. . Submitted:
• Court: Court of Chancery of Delaware

Page 1059

490 A.2d 1059

John A. MORAN and the Dyson-Kissner-Moran Corporation, Plaintiffs, and Gretl Golter, Individually and in a derivative capacity, Plaintiff Intervenor, 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.

HOUSEHOLD INTERNATIONAL, INC., Counterclaim Plaintiff, v. John A. MORAN, Charles H. Dyson and The Dyson-Kissner-Moran

Corporation, Counterclaim Defendants.

Court of Chancery of Delaware,

New Castle County.

Submitted: Dec. 10, 1984.

Decided: Jan. 29, 1985.

Rodman Ward, Jr., Stuart L. Shapiro, Stephen P. Lamb, Thomas J. Allingham, II, and Andrew J. Turezyn, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del. and Michael W. Mitchell, Jeremy A. Berman, and Joseph A. Guglielmelli, New York City, for plaintiffs and appearing counterclaim-defendants.

Joseph A. Rosenthal, and Norman M. Monhait, of Morris and Rosenthal, P.A., Wilmington, Del., Marshall Patner, of Orlikoff, Flamm and Patner, Frederic Brace, of Brace & O'Donnell, and Geoffrey P. Miller, Chicago, Ill., for plaintiff-intervenor.

Charles F. Richards, Jr., Donald A. Bussard, Jesse A. Finkelstein, and Gregory P. Williams, of Richards, Layton & Finger, Wilmington, Del. and George A. Katz, William C. Sterling, Jr., Michael W. Schwartz, Eric M. Roth, Warren R. Stern, and Donald N. Cohen, of Wachtell, Lipton, Rosen & Katz, New York City, for defendants and for counterclaim-plaintiff.

WALSH, Vice Chancellor.

This action brought individually and derivatively by certain shareholders of Household International, Inc. ("Household") seeks to invalidate a preferred stock rights dividend plan (the "Rights Plan") adopted by a majority of Household's Board of Directors on August 14, 1984. The original plaintiffs are John A. Moran, a Household director who voted against the Rights Plan and the company of which he is Chairman, Dyson-Kissner-Moran Corporation ("D-K-M") the largest single shareholder of Household. On the eve of trial, Gretl Golter, the holder of 500 shares of Household was permitted to intervene as an additional plaintiff. In addition to Household, all its directors other than Moran and John C. Whitehead, who also voted against adoption of the Rights Plan, and Raymond C. Tower have been named defendants. Although the defendants filed a motion to dismiss the Complaint on a variety of grounds, it was agreed that it was in the interest of all concerned to expedite discovery and trial while preserving defendants' right to pursue their motion post-trial. After nine days of trial and post-trial briefing this is the decision thereon.

Plaintiffs contend that the Rights Plan, which has resulted in the issuance of what they call a "poison pill preferred," abridges fundamental rights of stock ownership by restricting the alienability and marketability of Household shares and severely limits the ability of shareholders to engage in proxy contests. Household maintains that the Rights Plan provides a drastic but highly effective deterrent device designed to prevent hostile, bust-up takeovers, for the protection of both the corporation and its shareholders. This case represents the first judicial testing of the latest defensive mechanism in the arsenal of corporate takeover weaponry.

I

Household is a diversified holding company with its principal subsidiaries engaged in financial services, transportation and merchandising. HFC, National Car Rental System, Inc. and Vons Grocery Co. are three of its wholly-owned entities. Its present earnings exceed $200 million annually and, at current market prices, its securities approach $2 billion in value. Its present composition is the result of a series of acquisitions in recent years. In fact, the presence of Moran on the Household board is attributable to the acquisition by Household of Wallace-Murray Corporation, then controlled by D-K-M, and the resultant receipt by D-K-M of a substantial number of Household shares. Of the sixteen Household directors, nine are outside directors and one, Arthur E. Rasmussen, is a retired Chief Executive Officer and Chairman of Household. All directors are subject to annual election.

Although the adoption of the Rights Plan by the Household Board on August 14, 1984, is the focus of the present inquiry, the events which led to that step are also important. As early as February, 1984, Household's management became concerned about the company's vulnerability as a takeover target and began considering various charter amendments which would render a takeover more difficult. It requested Georgeson & Co., a leading proxy solicitation consultant, to evaluate the prospect of shareholder approval of a fair price amendment ¹ at the upcoming annual meeting. On March 2, Georgeson, after analyzing Household's shareholder profile opined that such an amendment would pass, but barely, with the estimated approval rate varying from 50.8% to 58.3%. Because it was believed that there was not sufficient time available before the annual meeting, scheduled for May 8, to present management's position on the fair price amendment and in view of the predicted closeness of the vote, management decided not to pursue such an amendment.

In the meantime, Household had become the subject of scrutiny as a takeover candidate by one of its own directors, the plaintiff Moran acting on behalf of D-K-M. As the result of financial studies performed by D-K-M personnel, Moran concluded that Household's stock was significantly undervalued in relation to the company's break-up value. Thus, if Household could be acquired in a leveraged buy-out, its component assets could be partially liquidated at prices sufficient to defray the cost of acquisition and yield a substantial net profit. Moran determined to pursue this prospect directly with Household's management. To that end, he held discussions with Household's Chairman, Donald C. Clark, who in turn, requested Household's Chief Financial Officer, Rod Dammeyer to participate. During this same period D-K-M increased its Household ownership position by purchasing an additional 500,000 shares of Household common on the open market. A further disquieting development occurred on May 14, when Clark received a letter from a representative of the Murchison group, a Dallas-based investment company, requesting a meeting to discuss a matter of "mutual interest." Clark declined the meeting but reported the overture to the Household Board, including Moran.

Although Clark and Moran engaged in follow-up discussions for several weeks, Moran's suggestion of a leveraged buy-out with management's participation never got beyond the discussion stage. It does not appear that Clark gave Moran any specific encouragement although he clearly appeared to be an interested listener. Clark claims that, disregarding Moran's request, he kept certain of Household's directors advised of Moran's approach. Household claims that Moran used insider information acquired as a director to plan and propose a takeover by D-K-M, contrary to the interests of the shareholders. Whether or not Moran used information acquired as a director, and not otherwise available to him or D-K-M, is unclear from the evidence. Moran denies the use of insider information and there is no indication that Moran ever intended a hostile takeover of Household. To the contrary, his approach assumed the cooperation and participation of Household's management. In any event, at the time of the adoption of the Rights Plan, the Moran approach was not in active discussion and had not received the overt support of Clark or anyone else in Household management.

While fending off Moran's advances Clark took the lead in securing advice concerning takeover defenses. He secured the services of Wachtell, Lipton, Rosen and Katz ("Wachtell, Lipton") to advise Household on legal matters and turned to the Company's investment banker, Goldman, Sachs & Co. for financial advice. It was agreed that both Wachtell, Lipton and Goldman, Sachs would jointly formulate a takeover policy for recommendation to the Household Board at its August 14, meeting. Goldman, Sachs had previously prepared a "Raid Preparedness" study for Household on May 29, 1984, which provided an overall view of the takeover climate and a listing of various takeover defenses employed by major companies in recent years. On July 31, Clark met in New York with Martin Lipton, Esquire of the Wachtell, Lipton firm for a detailed discussion of a rights plan devised by Lipton. A three page summary of this plan was mailed by Household to all directors on August 7, as part of the pre-meeting distribution of material to be discussed at the August 14 meeting. Also included were copies of articles from various business publications detailing takeover tactics and dangers including an article from Fortune magazine entitled: "Oops! My Company Is On The Block." Clark also discussed the plan as well as Moran's buy-out approach with the Chicago-area directors, constituting a majority of the Board, at a brief meeting preceding a directors' dinner on August 13.

Lipton accompanied by Gordon McMahon and Peter Fahey of Goldman, Sachs made a presentation at the August 14 meeting, which was attended by all directors. Approximately two hours was devoted to a discussion of proposed by-law amendments including the rights plan. Lipton explained that the takeover strategy involved four proposals: (1) a statement by the Board affirming that it is in the long term interests of the corporation to remain independent, (2) certain by-law amendments regulating the call of special shareholder meetings, the nature of business to be conducted in such meetings and the use of written consents, (3) changes in employee benefit plans (ESOPs) permitting the beneficial...