Newell Co. v. Vermont American Corp.
| Decision Date | 13 October 1989 |
| Docket Number | No. 89 C 5202.,89 C 5202. |
| Citation | 725 F. Supp. 351 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | NEWELL CO., a Delaware corporation, Plaintiff, v. VERMONT AMERICAN CORPORATION, a Delaware corporation, and Lee B. Thomas, Jr., Defendants. |
COPYRIGHT MATERIAL OMITTED
Walter C. Greenough, Frederick J. Sperling, Yvonne E. Mena and Jonathan H. Margolies, Schiff, Hardin & Waitee, Chicago, Ill., for plaintiff.
Stephen D. Alexander and Diana Tabacopoulos, Fried, Frank, Harris, Shriver & Jacobson, Los Angeles, Cal., Alan S. Rutkoff, William P. Schuman and Kenneth A. Grady, McDermott, Will & Emery, and Tyrone C. Fahner, Herbert L. Zarov and Michael J. Alter, Mayer Brown & Platt, Chicago, Ill., for defendants.
This dispute arises out of plaintiff Newell Company's ("Newell"), attempts to obtain a significant stake in Vermont American Corporation. Defendants are Vermont American and, Lee Thomas, Jr., Chairman of the Board of Directors of Vermont American (collectively referred to as "Vermont American" or the "Board"). Although Vermont American has been a public corporation since 1966, it has several characteristics reminiscent of its origins as a family run organization. Many members of the Thomas family sit on the Board and are involved in the management of the company. The company's growth, profit and defined culture are a product of the management style of Lee Thomas, Sr. when he was alive, and now, Lee Thomas, Jr. ("Lee Thomas").
Since at least 1986 Newell has sought to increase its ownership in Vermont American. Its advances have not been overwhelmingly successful. Most recently, on June 5, 1989, Newell commenced a partial tender offer to purchase approximately 10% of Vermont American's outstanding stock to add to the approximately 11% Newell already owned. On June 29, 1989, Newell came before this Court seeking to enjoin Vermont American; it complained that certain actions by Vermont American since Newell announced its tender offer, specifically Vermont American's stock repurchase program, the restructuring of the proposed merger with Clairson, International and the lowering of the trigger point on an existing Shareholder Rights Plan, violate Delaware state law and the federal securities law. I granted a preliminary injunction (Oral Ruling, June 30, 1989), enjoining Vermont American from continuing with its repurchase program. Newell, in effect, was also enjoined, as the injunction was contingent on Newell no longer purchasing shares through its tender offer.
Discovery ensued. Vermont American filed counterclaims alleging that Newell has failed to make proper disclosures under the federal securities laws with respect to its investments in Vermont American. The matter was tried on its merits.
1. Vermont American Corporation is a Delaware corporation, with its principal place of business in Louisville, Kentucky. It is the world's largest manufacturer and marketer of cutting tools and quality hand tools, as well as a manufacturer in the lawn and garden products industry.
2. Until the late 1960's, all of the stock of Vermont American was privately held by the members of the family of Lee Thomas, Sr., who founded the company. Mr. Thomas, Sr. died in March, 1988.
3. In approximately 1966 Vermont American became a public corporation. Its stock is traded publicly on the American Stock Exchange. Currently, there are approximately 9,810,675 outstanding shares of Class A Common Stock, and 1,024,231 outstanding shares of Class B common Stock. Holders of Class B Common Stock are not entitled to vote. In all other respects the rights of Class A and Class B shareholders are identical.
4. The management of Vermont American is dominated by the Thomas family. Lee Thomas, Sr. had three children: Lee Thomas, Jr., the Chairman of the Vermont American Board of Directors;1 Ellen Thomas Dunbar, a member of the Board; and Jane Thomas Hamilton who has no affiliation with the company, but whose husband is a member of the Board.
5. Defendant Lee Thomas beneficially owned (as defined under SEC regulations), as of June 14, 1989, more than 3,500,000 shares or approximately 34.8% of the outstanding Class A Common Stock of Vermont American. As of March 3, 1989, Thomas' son, Glenn Thomas, the company's Vice President-Engineering and director, beneficially owns approximately 5.9% of Class A shares. Ellen Dunbar owns approximately 8.6% of the stock. Her son, Tom Dunbar, is President of a subsidiary, Vermont American Canada, Inc., and a director of Vermont American and owns approximately .4% of the stock.2 Additional stock is owned by other members of the Thomas and Dunbar families.
6. Lee Thomas' salary for 1988 was just under $200,000. He receives an additional $2,000 for his services as Chairman of the Board. He also receives dividend income from his equity interest in Vermont American.
7. The only member of the Board of Directors of Vermont American who ever voted differently from Lee Thomas was Ellen Dunbar; and she did so only twice. Thomas explains that he manages the company in keeping with the Quaker philosophy — by consensus. According to Thomas, although members of the Board frequently will disagree, issues are thoroughly discussed and a consensus is reached prior to any formal vote.
8. The investment goals of the Thomas and Dunbar families have evolved over time. Lee Thomas and Glenn Thomas primarily were interested in a long-term investment in the company.3 In late 1986, the Dunbars began considering the need to diversify their holdings. They have recently explored the possibility of selling all of their stock holdings in Vermont American. The Dunbars renewed their interest in selling their stock after Newell announced its tender offer and ultimately had direct discussions with Daniel C. Ferguson, Newell's Chief Executive Officer, about doing so.
9. Throughout its history, Vermont American has pursued policies and practices intended to achieve long-term profit maximization. Toward that end, the corporation has made substantial investments in research, development, plants and other physical assets, and in other measures designed to develop high quality products and services to customers, even at the cost of decreasing short-term value maximization.
10. Over the last five years, Vermont American has invested about 6.5% of sales in capital improvements. These policies have been beneficial; Vermont American has grown and prospered over the years. Net sales have grown at an annual compounded rate of 12.6% since 1973; operating income at 11.8%; and net income at 12.3%. The corporation's shareholders have reaped substantial benefits. An investment of $100 in Vermont American stock made on July 31, 1974 was worth approximately $2,646 on July 31, 1989.
11. In late 1986, a special ad hoc committee of Vermont American directors was formed to consider the competing interests of the Thomas and Dunbar families, as well as general concerns with the growing takeover climate in the business community. The Board appointed Henning Hilliard, Robert Denison, Frank Furst and William Joseph Biggers to the committee4. None of these appointees was a member of management and none was related to any branch of the Thomas family. One concern of the committee was to assure that Vermont American remained an independent company.
12. The organizational meeting of the committee was held on December 30, 1986. The committee discussed at that meeting, among other matters, ways to accommodate the divergent family interests of the Dunbars and Thomases. One issue was the Dunbars' desire to liquify or diversify their stock and the potential impact such a sale might have on the long-term interests of the company and other shareholders. The committee expressed concern over how this potential sale might affect the Thomas family's longstanding control over the company since its founding and the ability of the company to remain independent from outside, hostile acquirors. The three committee members present at the meeting (Biggers was unavailable) concluded that they should retain competent investment advisors and independent legal counsel. They expressed no firm convictions as to how to solve the problems before them.
13. The committee retained Elliott Goldstein of the Atlanta law firm of Powell, Goldstein, Frazier and Murphy as legal counsel and Jay Levine of Dean Witter as investment advisor. Both men were chosen independently without Lee Thomas' assistance.
14. In January and February 1987, the committee met on at least four separate occasions and conferred with its professional advisors. Many ideas for protecting Vermont American from hostile takeover were discussed tentatively, including issuance of super voting stock, eliminating cumulative voting, taking the company private, creating a shareholder agreement, and adopting a shareholder rights plan.
15. On February 20, 1987 the ad hoc committee issued its report and recommendations. The committee made eight recommendations. Of these, the Board ultimately rejected two outright: the proposal to convert Class B shares to Class A and the recommendation that the corporation obtain a right of first refusal on the converted Class B shares and provide for a transfer of that right to Lee Thomas at the company's option. The Board ultimately accepted in one form or another the committee's recommendation as to issuance of blank check preferred stock and the elimination of cumulative voting. Lee Thomas acknowledged that he supported issuance of preferred stock as a measure to assure that the current management continued to run the corporation. The authorization of blank check preferred and the elimination of cumulative voting were eventually approved by a vote of the shareholders.
16. The ad hoc committee never recommended and the Board never approved issuance of high vote...
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