Norlin Corp. v. Rooney, Pace Inc.
| Decision Date | 27 June 1984 |
| Docket Number | No. 1427,D,1427 |
| Citation | 744 F.2d 255 |
| Parties | Fed. Sec. L. Rep. P 91,564, 5 Employee Benefits Ca 2706 NORLIN CORPORATION, Plaintiff-Appellant, v. ROONEY, PACE INC., Patrick J. Rooney, Piezo Electric Products, Inc. and John Does 2-10, Defendants-Appellees, PIEZO ELECTRIC PRODUCTS, INC., Defendant and Counterclaimant-Appellee, v. NORLIN CORPORATION, Counterclaim Defendant-Appellant, and Andean Enterprises, Inc., Norlin Industries, Inc., Norton Stevens, Gilbert A. Simpkins, Zachary Marantis, James McGuiness, Harold Krensky, Katharine T. O'Neil, Edward R. McPherson, Jr. and James K. Baker, Additional Counterclaim Defendants-Appellants. ocket 84-7360. |
| Court | U.S. Court of Appeals — Second Circuit |
John Logan O'Donnell, Olwine, Connelly, Chase, O'Donnell & Weyher, New York City, for counterclaim defendants-appellants Norlin Corp., Andean Enterprises, Inc., and Norlin Industries, Inc.
Gregory P. Joseph, Fried, Frank, Harris, Shriver & Jacobson, William G. McGunness (on the brief), New York City, for counterclaim defendants-appellants Norton Stevens, Gilbert A. Simpkins, Zachary Marantis, James McGuiness, Harold Krensky, Katharine T. O'Neil, Edward R. McPherson, Jr., and James K. Baker.
Jonathan J. Lerner, Skadden, Arps, Slate, Meagher & Flom, New York City, for counterclaimant-appellee Piezo Elec. Products, Inc.
Before FEINBERG, Chief Judge, KAUFMAN and PIERCE, Circuit Judges.
Contests for corporate control have become ever more frequent phenomena on the American business scene. Waged with the intensity of military campaigns and the weaponry of seemingly bottomless bankrolls, these battles determine the destinies of large and small corporations alike. Elaborate strategies and ingenious tactics have been developed both to facilitate takeover attempts and to defend against them. Skirmishes are fought in company boardrooms, in shareholders' meetings, and, with increasing regularity, in the courts.
The efforts of targeted management to resist acquisitive moves, and the means they employ, have been alternatively praised and damned. Proponents of corporate "free trade" argue that defensive techniques permit managers to entrench themselves and thus avoid accountability for their performance, at the expense of shareholders who are denied the opportunity to maximize their investment in sought-after corporations. 1 Opponents contend that takeover struggles squander enormous capital resources which could better be spent to improve industrial productivity and to develop and commercialize new technologies. 2
When these battles for corporate dominance spawn legal controversies, the judicial role is neither to displace the judgment of the participants nor to predetermine the outcome. Rather, the responsibility of the court is to insure that rules designed to safeguard the fairness of the takeover process be enforced. Our most important duty is to protect the fundamental structure of corporate governance. While the day-to-day affairs of a company are to be managed by its officers under the supervision of directors, decisions affecting a corporation's ultimate destiny are for the shareholders to make in accordance with democratic procedures.
The instant case involves defensive action taken by a company that feared it might soon be the target of a takeover attempt. The first salvo in this battle was fired by appellee Piezo Electric Products, Inc., which in conjunction with Rooney, Pace Inc., began buying up large blocks of stock of appellant Norlin Corporation. In response, the board of directors of Norlin issued new common and voting preferred stock to a wholly-owned subsidiary and a newly-created employee stock option plan. Since Norlin would control the voting of the newly-issued stock, the effect of the transactions was to concentrate greater voting control in the hands of its board of directors, and thus to ward off any acquisitive moves that might be made against the company. Piezo sought and the district court granted a preliminary injunction barring the board from voting the stock in question. The judge found that any vote resulting from these transfers would likely be illegal, and that a possible consequence of the stock transfer--delisting from the New York Stock Exchange--would cause irreparable injury to Norlin's shareholders. We hold that the district court's findings were not erroneous, and therefore affirm. Before analyzing the legal issues presented, we shall describe the events that gave rise to the present dispute.
Appellant Norlin Corporation ("Norlin") is a diversified company whose principal lines of business are the manufacture of musical instruments and financial printing. Norlin is incorporated in the Republic of Panama, but has no significant operations in that country. The company's principal place of business and executive offices are located in White Plains, New York, and its shareholder and directors' meetings take place in New York as well.
Appellee Piezo Electric Products, Inc. ("Piezo") is primarily engaged in the research, development, manufacture and sale of piezoelectric and thermistor products. It is a Delaware corporation with its principal place of business in Cambridge, Massachusetts. On the two trading days of January 6 and 12, 1984, and in conjunction with the investment banking firm Rooney, Pace Inc., Piezo purchased some 32% of Norlin's common stock in a number of separate transactions. Fearful that a takeover attempt was imminent, Norlin filed suit on January 13, alleging various violations of the federal securities laws. The company sought to enjoin appellees from acquiring any additional Norlin stock, to force divestiture of stock already purchased, and to bar voting of Norlin stock owned by them. After hearing oral argument, Judge Edelstein denied Norlin's motions for a temporary restraining order and expedited discovery, finding that the company had not demonstrated irreparable harm stemming from the stock purchases.
Having failed to secure protection in the courts, Norlin immediately took defensive measures on its own. On January 20, 1984, the same day the judge ruled on its motions, Norlin's board transferred 28,395 shares of common stock to Andean Enterprises, Inc. ("Andean"), a wholly-owned subsidiary of Norlin also incorporated in Panama. The transfer was purportedly made in consideration for Andean's cancellation of a Norlin promissory note in the amount of $965,454. Three days later, on January 23, Norlin announced it had "retained the investment banking firm of Dillon, Read & Co., Inc. to explore various opportunities which may be available to Norlin, including the merger or sale of Norlin, the repurchase of shares of Norlin Common Stock or the sale or issuance of shares or other securities of Norlin."
On January 25, Norlin's board approved two additional transfers of large blocks of stock. The board conveyed 800,000 shares of authorized but unissued preferred stock, which would vote on a share for share basis with Norlin common, to Andean in exchange for a $20 million interest-bearing note. On the same day, the board created the Norlin Industries, Inc. Employee Stock Option Plan and Trust ("ESOP"), and appointed three Norlin board members as trustees. The board immediately transferred 185,000 common shares to the ESOP in consideration for a promissory note in the principal amount of $6,824,945. In filings with the Securities and Exchange Commission, Norlin acknowledged that it would be the beneficial owner of all of the transferred shares. Moreover, it is undisputed that the board retained voting control of the shares conveyed to Andean and to the ESOP. Together with shares already under the board's control, the January 20 and 25 transactions resulted in the Norlin directors controlling the votes of 49% of the corporation's outstanding stock.
Also on January 25, Norlin's Chairman and Chief Executive Officer, Norton Stevens, and President, Gilbert A. Simpkins, wrote to the company's shareholders explaining these actions. Their letter mentioned the Piezo and Rooney, Pace acquisitions, and asserted that "[t]he Board of Directors and management are strongly opposed to the stated purposes of Rooney, Pace and Piezo and are taking all steps deemed necessary or appropriate to protect Norlin's shareholders and the value of their investment in the Company." The letter offered no justification for the stock transfers to Andean and the ESOP other than to ward off a prospective attempt to obtain control of Norlin.
Norlin's directors concede that prior to taking the steps described above, they were warned by their financial advisers that absent shareholder approval, the stock transactions violated the rules of the New York State Exchange ("NYSE") and might result in the delisting of Norlin common stock. On March 15, the NYSE did in fact suspend trading in Norlin common, and indicated its intention to delist the stock. A release announcing the move explained:
The Exchange said it deems [the stock issuances to Andean and to the ESOP] to have resulted in a change in control of the company.
The Exchange said its policy requires that a company obtain shareholder approval in such circumstances and it said its decision to delist the Norlin securities results from the fact that Norlin didn't seek shareholder approval of the issuance.
In addition Norlin is presently below the Big Board's continued listing criteria relating to the number of publicly held shares--at least 600,000 shares--and the number of holders of 100 shares or more--at least 1,200--the Exchange said.
On February 9, some time before the NYSE announcement was issued, Piezo filed the counterclaim that is the basis of the instant action. Its complaint alleged that the Norlin stock transfers violated Panama and New York law in addition to several provisions of the federal securities laws. Piezo contended that the transactions had no valid...
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