Polk v. Good

• Decision Date: 01 October 1985
• Parties: Fed. Sec. L. Rep. P 92,530 William J. POLK, Jr., et al., Objectors Below, Appellants, Miriam Gelband and Leo Kayser, III, Objectors Below, Appellants, Seagoing Uniform Corporation, Objector Below, Appellant, Mollie Pin, Objector Below, Appellant, Mandel, Lipton & Stevenson Profit Sharing Plan, Objector Below, Appellant, v. Howard GOOD, et al., Plaintiffs Below, Appellees, and Texaco, Inc., et al., Defendants Below, Appellees. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 531

507 A.2d 531

Fed. Sec. L. Rep. P 92,530

William J. POLK, Jr., et al., Objectors Below, Appellants Miriam Gelband and Leo Kayser, III, Objectors Below, Appellants Seagoing Uniform Corporation, Objector Below, Appellant Mollie Pin, Objector Below, Appellant Mandel, Lipton & Stevenson Profit Sharing Plan, Objector Below, Appellant, v. Howard GOOD, et al., Plaintiffs Below, Appellees, and Texaco, Inc., et al., Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted: Oct. 1, 1985.

Decided: March 10, 1986.

Rehearings Denied March 27, 1986.

Upon appeal from the Court of Chancery in and for New Castle County. AFFIRMED.

Thomas G. Hughes of O'Donnell & Hughes, P.A., Wilmington, and Lemoine Skinner, III (argued) of Titchell, Maltzman, Mark, Bass, Ohleyer & Mishel, A.P.C., of counsel, San Francisco, Cal., and Edward K. Fehlig of Ziercher, Hocker, Human, Michenfelder & Jones, of counsel, St. Louis, Mo., for appellants Polk Trustees.

Peter M. Sieglaff and Robert K. Payson of Potter, Anderson & Corroon, Wilmington, Leo Kayser, III (argued), and H. Miles Jaffe of Raggio, Jaffe & Kayser, of counsel, New York City, for appellants Gelband and Kayser.

Victor F. Battaglia and Pamela S. Tikellis of Biggs & Battaglia, Wilmington, Sidney B. Silverman (argued) and Joan Harnes of Silverman & Harnes and Levy & Sonet, of counsel, New York City, for appellants Seagoing Uniform Corp.

Victor Battaglia and Pamela S. Tikellis of Biggs & Battaglia, Wilmington, Lowell E. Sachnoff (argued), Charles R. Watkins and Barbara F. Wolf of Sachnoff, Weaver & Rubenstein, Ltd., of counsel, Chicago, Ill., and William C. Garrett, of counsel, Dallas, Tex., for appellant Mollie Pin.

Thomas G. Hughes of O'Donnell & Hughes, P.A., Wilmington, and Marshall Patner (argued) of Orlikoff, Flamm & Patner, of counsel, Chicago, Ill., for appellant Mandel, Lipton & Stevenson Profit Sharing Plan.

Joseph A. Rosenthal (argued) and Kevin Gross of Morris & Rosenthal, P.A., Wilmington, for plaintiffs-appellees.

R. Franklin Balotti of Richards, Layton & Finger, Wilmington, George M. Newcombe (argued), Roy L. Reardon and Mary Elizabeth McGarry of Simpson, Thacher & Bartlett, of counsel, New York City, and Dee J. Kelly of Kelly, Appleman, Hart & Hallman, of counsel, Fort Worth, Tex., for Bass appellees.

Rodman Ward, Jr. (argued), David J. Margules and Thomas P. White of Skadden, Arps, Slate, Meagher & Flom, Wilmington, and Eric M. Roth of Wachtell, Lipton, Rosen & Katz, of counsel, New York City, for individual Texaco appellees.

Before McNEILLY, HORSEY and MOORE, JJ.

MOORE, Justice:

Appellants, shareholders of Texaco, Inc., appeal a decision of the Court of Chancery approving the settlement and dismissal of these consolidated stockholders' class and derivative actions against Texaco, its board of directors, and several investors known collectively as the Bass Brothers group (the Bass group or Bass). The settlement disposed of claims challenging Texaco's repurchase at a premium of the Bass group's Texaco stock. The appellants, who either moved to intervene in the consolidated suit or objected to its termination, seek reversal on the ground that the Chancellor abused his discretion in approving the settlement. They base this on the following: (1) the current validity of certain Delaware case law, and the Chancellor's interpretation and application of that law; (2) the alleged lack of valid consideration for the settlement; (3) the alleged interest on the part of the Texaco directors; (4) the alleged insufficiency of the settlement notice; and (5) the factual bases upon which the Chancellor rested his approval. Given our scope of review, abuse of discretion below, we find no merit to appellants' contentions, and affirm the decision of the Court of Chancery.

I.

The nature of this appeal requires a somewhat detailed discussion of the facts.

A.

The Bass Group's Purchases, the Getty Acquisition and Texaco's Buyout.

In 1982, the Bass group began buying shares of Texaco, and by the end of 1983 had acquired almost 5% of the corporation's outstanding common stock. During this period Bass had urged Texaco to acquire shares of its own stock by either a self-tender or open market purchases. Texaco rejected the idea, but relations between the parties remained cordial. There was no indication that Bass was pressuring the corporation to act.

In January 1984, Texaco became involved in one of the biggest corporate acquisitions in history, when it bought Getty Oil Company (Getty) at a cost of over $10 billion. The Texaco management was consumed with such tasks as obtaining government and shareholder approval of the transaction, selling off expendable assets to refinance the debt incurred, integrating the two huge companies, and dealing with the inevitable litigation.

While Texaco was acquiring Getty, the Bass group continued buying Texaco stock on the open market, and by January 30, it held about 9.9% of the corporation's outstanding shares. Bass also kept urging Texaco to repurchase its own shares. Moreover, the group indicated that it might obtain up to 20% of Texaco, hinting at a possible tender offer. Rumors appeared in the financial press that the Bass group would join with Pennzoil, an adversary of Texaco in the Getty acquisition, to break up Texaco and force a divesture of Getty. All of this concerned Texaco, which, in the midst of the Getty acquisition, would be vulnerable in warding off a hostile shareholder group whose actions might be contrary to the best interests of a majority of the company's stockholders. Although the Bass group was still openly supportive of existing Texaco policy, both the management and the financial community expected Bass to maximize its financial advantage at this critical time.

On February 28, the Bass group suggested a joint venture with the company which would combine some Texaco shares and real estate assets of the Bass group with certain oil reserves of Texaco. Corporate management studied and rejected the plan, considering it nothing more than a means for Bass to realize $68 per share for its stock, a value which greatly exceeded Texaco's market price, and one which management considered excessive. Fearing that rejection of the proposal would trigger some hostile Bass move, Texaco consulted its investment banker, The First Boston Corporation, and its outside corporate counsel. The company and its advisors all concluded that a substantial immediate threat to the corporation's best interests existed, and that the most effective way of meeting the danger was to acquire the Bass stock.

The parties opened negotiations for a repurchase. Bass initially sought $68 per share, but eventually dropped its price to an "absolute bottom" of $55. Texaco's chairman, John K. McKinley, announced a top purchase price of $50. On March 5, the parties reached an agreement in principle for a sale at $50 per share, representing a premium of $1 5/8 over $48 3/8, the market price on March 2, the previous trading day. The Bass group was to receive one half of the proceeds in cash. The other half would be in the form of a new issue of preferred stock with voting rights, similar to the common, in order to provide tax benefits and assurance of the new securities' marketability for the group. However, because one of the reasons behind the repurchase was to prevent a disruption of Getty's assimilation into Texaco, the Bass group volunteered, after the price for its stock was set, to vote the preferred shares as the Texaco board directed. This offer was accepted.

On March 6, the proposal was submitted to the Texaco board, 10 of whose 13 members were outside directors. First Boston informed the board that the premium was reasonable and at the low end of the range other companies were paying in similar transactions, and that the $50 price was consistent with the long-term value of the company. Texaco's legal counsel advised that the corporation had the power to repurchase the shares, and that such action would be protected under Delaware's business judgment rule. The directors unanimously approved the repurchase. The Bass group received approximately $650 million in cash and 12.6 million shares of the preferred voting stock, which now comprised about 5% of the total voting power of Texaco's outstanding shares. The sellers agreed not to acquire any more Texaco stock for a period of ten years, during which time they would vote their shares in accordance with the board's recommendations.

B.

The Subsequent Suits.

Plaintiffs, Howard Good et al., filed a total of 21 suits attacking the repurchase. Fifteen of these actions were filed in the Court of Chancery and thereafter consolidated in this proceeding. The complaints basically charged that (1) the price was excessive, (2) the repurchase constituted a gift of assets, (3) no legitimate corporate purpose was served, (4) the transaction was an impermissible vote-buying scheme, (5) there was an improper object, to entrench Texaco's board, (6) the distribution was a prohibited partial liquidating dividend to the Bass group, and (7) all of this constituted a breach of fiduciary duty by the Texaco directors, aided and abetted by the Bass group. Plaintiffs sought to rescind the transaction, to either enjoin the annual stockholders' meeting or set aside the vote to be taken, and to enjoin exercise of the voting power of the preferred stock, as well as money damages, attorneys' fees, and costs.

After a motion to dismiss was denied, Texaco and the Bass group amended the repurchase agreement to provide that the latter's shares would not be controlled by the Texaco board, but would be voted proportionately to all the votes cast by Texaco's common shareholders. With the Bass voting power thus neutralized, plaintiffs agreed not to seek an injunction of the stockholder vote at the annual meeting scheduled for May 25.

Plaintiffs took extensive discovery, including an inspection of documents and the oral...