Rabkin v. Philip A. Hunt Chemical Corp.

• Decision Date: 04 June 1985
• Citation: 498 A.2d 1099
• Parties: Frieda H. RABKIN, Harry Lewis, Eric Emory, Alan Emory, Nancy Emory, Howard Greenwald, Werner Klugman and Samuel Kaufman, Plaintiffs Below, Appellants, v. PHILIP A. HUNT CHEMICAL CORPORATION, Olin Corporation, Alfred T. Blomquist, Robert T. Zetena, John M. Henske, John R. Bonniwell, Charles J. Lause, Stephen R. Petschek and George J. Haufler, Defendants Below, Appellees. . Submitted:
• Court: Supreme Court of Delaware

Page 1099

498 A.2d 1099

54 USLW 2230

Frieda H. RABKIN, Harry Lewis, Eric Emory, Alan Emory, Nancy Emory, Howard Greenwald, Werner Klugman and Samuel Kaufman, Plaintiffs Below, Appellants, v. PHILIP A. HUNT CHEMICAL CORPORATION, Olin Corporation Alfred T. Blomquist, Robert T. Zetena, John M. Henske, John R. Bonniwell, Charles J. Lause, Stephen R. Petschek and George J. Haufler, Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted: June 4, 1985.

Decided: Sept. 23, 1985.

Upon appeal from the Court of Chancery. REVERSED AND REMANDED.

Irving Morris (argued) and Norman M. Monhait, of Morris and Rosenthal, P.A., Wilmington; Wolf, Popper, Ross, Wolf & Jones, New York City, of counsel; Garwin, Bronzaft & Gerstein, New York City, of counsel; Lowey, Dannenberg & Knapp, P.C., New York City, of counsel; Tenzer, Greenblatt, Fallon & Kaplan, New York City, of counsel, for appellants.

R. Franklin Balotti (argued) and Karen L. Johnson, Richards, Layton & Finger, Wilmington; Cravath, Swaine & Moore, New York City, of counsel, for appellees Olin Corporation and John M. Henske.

Martin P. Tully and David A. Jenkins, Morris, Nichols, Arsht & Tunnell, Wilmington, for defendants Philip A. Hunt Chemical Corporation, Alfred T. Blomquist and Robert T. Zetena.

Michael Hanrahan, Prickett, Jones, Elliott, Kristol & Schnee, Wilmington; Richard F. Czaja (argued), Arnold S. Jacobs and Lynne M. Fischman, of Shea & Gould, New York City, of counsel, for appellees John R. Bonniwell, Charles J. Lause, Stephen R. Petschek and George J. Haufler.

Before McNEILLY, HORSEY and MOORE, JJ.

MOORE, Justice.

These consolidated class actions were filed in the Court of Chancery on behalf of the minority stockholders of Philip A. Hunt Chemical Corporation (Hunt), challenging the merger of Hunt with its majority stockholder, Olin Corporation (Olin). For the first time since our decision in Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701 (1983), we examine the exclusivity of the appraisal remedy in a cash-out merger where questions of procedural unfairness having a reasonable bearing on substantial issues affecting the price being offered are the essential bases of the suit. The Vice Chancellor ordered these cases dismissed on the ground that absent deception Weinberger mandated appraisal as the only remedy available to the minority. The plaintiffs sought and were denied leave to amend their complaints. They appeal these rulings.

In our view, the holding in Weinberger is broader than the scope accorded it by the trial court. The plaintiffs have charged, and by their proposed amended complaints contend, that the merger does not meet the entire fairness standard required by Weinberger. They aver specific acts of unfair dealing constituting breaches of fiduciary duties which if true may have substantially affected the offering price. These allegations, unrelated to judgmental factors of valuation, should survive a motion to dismiss. Accordingly, the decision of the Court of Chancery is reversed, and the matter is remanded with instructions that the plaintiffs be permitted to amend their complaints.

I.

The factual background of the merger is critical to the issues before us and will be set forth in substantial detail. ¹ On July 5, 1984, Hunt merged into Olin pursuant to a merger agreement that was recommended by the Hunt board of directors. ² Hunt was a Delaware corporation, while Olin is incorporated in Virginia. On March 1, 1983, Olin bought 63.4% of the outstanding shares of Hunt's common stock from Turner and Newall Industries, Inc. (Turner & Newall) at $25 per share pursuant to a Stock Purchase Agreement (the agreement). ³

At Turner & Newall's insistence, the agreement also required Olin to pay $25 per share if Olin acquired the remaining Hunt stock within one year thereafter (the one year commitment). It provided:

Subsequent Acquisitions of Common Stock

Should [Olin] or an affiliate of [Olin] acquire, through a merger, consolidation, tender offer, or similar transaction, all or substantially all of the remaining outstanding shares of common stock within one year of the closing date [March 1, 1983], [Olin] agrees that the per share consideration to be paid in any such transaction shall, in the opinion of a reputable investment banking firm, be substantially equivalent in value to at least the net purchase price per share paid pursuant to this agreement.

This representation and warranty was recited almost verbatim in the Schedule 13D Olin filed with the Securities and Exchange Commission on January 6, 1983. There, Olin also stated:

If the remaining equity interest in [Hunt] is acquired after such year, the per share consideration paid in any such transaction may be greater or less than the net purchase price per share of Common Stock pursuant to the Agreement, depending upon developments with respect to the business of [Hunt] and general economic and other conditions existing at the time of such transaction.

On March 1, 1983, concurrently with the closing of the agreement, the two Hunt directors affiliated with Turner & Newall resigned. They were replaced by John M. Henske, chairman of the board and chief executive officer of Olin, and Ray R. Irani, then president and chief operating officer of Olin. In June 1983, Dr. Irani resigned as a director of both Olin and Hunt. At that time the Hunt board was expanded to nine members, and the resulting vacancies were filled by Richard R. Berry and John W. Johnstone, Jr., executive vice presidents and directors of Olin.

When Olin acquired its 63.4% interest in Hunt, Olin stated in a press release that while it was "considering the acquisition of the remaining public shares of Hunt, it [had] no present intention to do so." Apparently, there were no discussions or negotiations between the boards of Hunt and Olin regarding any purchase of Hunt stock during the one year commitment period.

However, it is clear that Olin always anticipated owning 100% of Hunt. Several Olin interoffice memoranda referred to the eventual merger of the two companies. One document dated September 16, 1983 sent by Peter A. Danna to Johnstone, then a director of both Olin and Hunt, spoke of Olin's long-term strategy which would be relevant "when the rest of Hunt is acquired." Another communication from R.N. Clark to Johnstone and Berry concluded as follows:

In any event, until Hunt is all Olin and we are in the position to have their leadership participate in a centralization decision, any activity to bring Hunt to a new central location must be in abeyance. (Emphasis added.)

Finally, on September 19, 1983, Thomas Berardino, then an Olin staff vice-president in Planning and Corporate Development, sent a confidential memorandum to four of the Olin directors, three of whom, Berry, Henske and Johnstone, were also Hunt directors. That document catalogued the "pros and cons of doing a backend of Hunt acquisition this year." Nine "pros" were listed for acquiring Hunt stock prior to March 1, 1984. On the "con" side the following three considerations were detailed:

--Immediate control will cost approximately $7.3M more in purchase payments than waiting until mid-1984 (e.g. $25 vs 21 1/2 share) ⁴

--Can recoup $1.2--$1.4M (after tax) of this amount within 12 months through savings noted above

--Since Hunt's performance is currently not covering Olin's goodwill and borrowing costs, additional ownership will increase the dilution of Olin's reported earnings from the current projected 3cents to 5cents/share.

--Potential negative reaction of Hunt personnel

--Will be risk whenever Olin buys backend

The Court of Chancery found that it was "apparent that, from the outset, Olin anticipated that it would eventually acquire the minority interest in Hunt." Rabkin v. Philip A. Hunt Chemical Corp., Del.Ch., 480 A.2d 655, 657-58 (1984). This observation is consistent with the Olin board's authorization, a week before the one year commitment period expired, for its Finance Committee to acquire the rest of Hunt should the Committee conclude on the advice of management that such an acquisition would be appropriate.

On Friday, March 23, 1984, the senior management of Olin met with a representative of the investment banking firm of Morgan, Lewis, Githens & Ahn, Inc. (Morgan Lewis) to discuss the possible acquisition and valuation of the Hunt minority stock. Olin proposed to pay $20 per share and asked Morgan Lewis to render a fairness opinion on that price. Four days later, on Tuesday, March 27, Morgan Lewis delivered its opinion to Olin that $20 per share was fair to the minority. That opinion also contained the following statement:

We have conducted such investigations as we deemed appropriate including, but not limited to, a review of current financial statements, projections, business activities of Hunt (which information has been supplied to us by Olin) as well as comparative information on other companies. We have not had an appraisal of the assets of Hunt made in connection with our evaluation. We have also regularly monitored the activity of the Hunt stock on the New York Stock Exchange during 1983 and to date. However, we have not met directly with the management of Hunt because of the requirement that Olin maintain total confidentiality prior to you making this merger proposal.

In reaching its conclusion Morgan Lewis evidently gave no consideration to Olin's obligation, including the bases thereof, to pay $25 per share if the stock had been acquired prior to March 1, 1984.

The same day, March 27, 1984, Olin's management presented the Morgan Lewis fairness opinion to the Olin Finance Committee with the recommendation that the remaining Hunt stock be acquired for $20 per share. At that meeting it was stated that management had determined the price based on the following factors: the Morgan Lewis analysis, Hunt's net worth, Hunt's earnings history, including current prospects for 1984, Hunt's failures to achieve the...