RP Acquisition Corp. v. Staley Continental, Inc., Civ. A. No. 88-190-JRR.

• Decision Date: 09 May 1988
• Docket Number: Civ. A. No. 88-190-JRR.
• Citation: 686 F. Supp. 476
• Parties: RP ACQUISITION CORPORATION, Plaintiff, v. STALEY CONTINENTAL, INC.; Charles M. Oberly, III, Attorney General, State of Delaware and Michael E. Harkins, Secretary of State of Delaware, Defendants.
• Court: U.S. District Court — District of Delaware

686 F. Supp. 476

RP ACQUISITION CORPORATION, Plaintiff, v. STALEY CONTINENTAL, INC.; Charles M. Oberly, III, Attorney General, State of Delaware and Michael E. Harkins, Secretary of State of Delaware, Defendants.

Civ. A. No. 88-190-JRR.

United States District Court, D. Delaware.

May 9, 1988.

Steven D. Goldberg, of Theisen, Lank, Mulford & Goldberg, Wilmington, Del., for plaintiff.

Charles S. Crompton, Jr., Peter M. Sieglaff, Gregory A. Inskip, and Steven C. Norman, of Potter, Anderson & Corroon, Wilmington, Del., for defendant Staley Continental, Inc.

Grover C. Brown, Edward M. McNally, and Mary M. Johnston, of Morris, James, Hitchens & Williams, Wilmington, Del., for defendants Oberly and Harkins.

Daniel L. Goelzer, Jacob H. Stillman, Eric Summergrad, and Rada L. Potts, Washington, D.C., for the S.E.C., amicus curiae, Paul Gonson, Solicitor, of counsel.

OPINION

ROTH, District Judge.

In BNS Inc. v. Koppers Company, Inc., 683 F.Supp. 458 (D.Del.1988), this Court confronted the question of whether the recently enacted Delaware Business Combinations statute, Del. Code Ann. tit. 8, § 203 (1988), violated the Supremacy or Commerce Clauses of the United States Constitution. On a meager evidentiary record, Judge Schwartz declined to rule that the statute was most likely unconstitutional. He refused to issue a preliminary injunction based either on Section 203's alleged unconstitutionality or on other grounds. In the action now before us, we are presented solely with a challenge to the constitutionality of Section 203. While plaintiff here has buttressed its argument with additional statistical evidence, we once again find that the facts adduced are insufficient to support a determination that Section 203 is most likely unconstitutional. We, therefore, deny plaintiff's Motion for a Preliminary Injunction.

I. FACTS.

RP Acquisition Corporation ("RP"), a Delaware corporation, is an indirect wholly owned subsidiary of Tate & Lyle PLC ("Tate & Lyle"), an English corporation. Tate & Lyle, based in London, is primarily engaged in the sweetener industry, especially sugar production and refining. Staley Continental, Inc. ("Staley"), a Delaware corporation based in Illinois, also participates in the sweetener industry, although it in addition has a substantial food service arm.

On April 8, 1988, RP launched the current tender offer for any or all of Staley's outstanding (i) common stock (and its associated preferred stock purchase rights), (ii) $3.50 depositary preferred shares, and (iii) $3.75 cumulative preference stock (the "preference shares"). Only the common stock bears voting rights. RP amended the offer on April 29, 1988 to raise the amount offered for the common stock. The common stock had traded in 1987 between a low of 16 7/8 and a high of 32; RP currently offers $35 per share. For the depositary preferred shares, which had traded in 1987 between a low of 37½ and a high of 54¼, RP currently offers $53.15 per share. For the preference shares, for which market information is not available, RP currently offers $105 per share. The offer expires on May 10, 1988.

If RP acquires control of Staley, it plans to merge Staley into the operations of Tate & Lyle. In addition, RP plans to sell the food service business of Staley. Under the terms of the anticipated merger, each Staley common share would be converted into the right to receive the same cash price paid pursuant to the tender offer; each preference share would be converted into the right to receive $105 per share (the same as the current tender offer price) plus dividends accrued but unpaid at the time of the effective date of the merger; depositary preferred shares would remain outstanding but each depositary preferred share could, at the option of the holder, be converted into the amount of cash the holder would have received had the holder converted the shares into common immediately prior to the effective date of the merger.

RP conditions its tender offer on, inter alia, "the purchaser being satisfied that the restrictions on business combinations contained in Section 203 of the Delaware General Corporation Law are invalid or inapplicable to the proposed merger ... as a result of action by Staley's board of directors, the acquisition of a sufficient number of common shares, judicial action or otherwise." Plaintiff here seeks such "judicial action."

In its effort to take over Staley, RP also faces a panoply of defensive stratagems which Staley has put in place to deter a hostile acquisition. These tactics are currently under review by the Delaware Chancery Court.

In response to the RP takeover bid, Staley's Board of Directors met on April 20, 1988. The Board decided to recommend to Staley common shareholders that they reject the then $32 offer and refuse to tender their shares. The Board deemed the offer inadequate and not in the best interests of Staley. Aside from drawing on its own business acumen, the Board arrived at this conclusion upon considering (1) the written opinions of First Boston Corporation and Merrill Lynch Capital Markets, financial advisors to Staley, that the offer is financially inadequate; (2) the Board's own determination that an alternative transaction more beneficial to Staley stockholders could be arranged; (3) the history of Staley common's trading price; and (4) the fact that the current market price of the common stock exceeded the tender offer price set by RP. In view of the fact that the offer is conditioned upon receipt of sufficient common stock and the Board has recommended that common not be tendered, the Board took no position on RP's offer to buy depositary preferred shares and preference shares.

II. STANDARD FOR ISSUANCE OF A PRELIMINARY INJUNCTION.

Plaintiff is presently before the Court on its motion for a preliminary injunction. In order to succeed on such a motion, plaintiff must establish:

(1) a reasonable probability of eventual success in the litigation, and (2) that irreparable injury will ensue if relief is not granted. In addition, the court may consider (3) the possibility of harm to other interested persons from the grant or denial of relief, and (4) the public interest. Constructors Ass'n of Western Penna. v. Kreps, 573 F.2d 811, 815 (3d Cir.1978); Delaware River Port Auth. v. Transamerica Trailer Transp., Inc., 501 F.2d 917, 919-20 (3d Cir.1974).

Kennecott Corp. v. Smith, 637 F.2d 181, 187 (3d Cir.1980).

Staley, in addition to arguing that Section 203 is constitutional, opposes a preliminary injunction on the ground that no irreparable injury is threatened. Staley contends that various other conditions which RP has placed upon the closing of its tender offer will not be accomplished so that the offer will fail. Included among the obstacles to completing the offer are the Staley Benefit Trust Agreement, the supermajority vote required in the Staley certificate of incorporation before a merger can be approved, and the Flip-In and Flip-Over Rights Agreement, which affects the Staley common stock. RP is presently seeking an injunction in the Delaware Court of Chancery to prevent the operation of these anti-takeover devices. Staley contends that the RP offer will not succeed because one or more of these three deterrents to the takeover will not be removed and for that reason RP will not close its tender offer.

A decision is expected from the Court of Chancery within the next day or two. However, whatever that decision may be, it still may not be immediately apparent whether full, partial or no success in the Chancery action will in and of itself cause RP not to close its offer. Due to the proximity of the takedown date and our inability at this time to determine whether the benefit trust/supermajority/rights agreement conditions will prevent the threat of irreparable harm even if we do not issue a preliminary injunction (because the tendered stock may not be accepted by RP if one or more of these conditions are not lifted), we will go on to analyze whether the other requirements of a preliminary injunction exist here. We will first look at the question of the reasonable probability that RP will convince the Court that Section 203 is unconstitutional.

III. LEGAL ANALYSIS.

A. Application of Section 203.

In the nomenclature of the Delaware statute, RP, once its Staley common holdings reach 15 percent, is an "interested stockholder." § 203(c)(5). As such, RP is restricted from effecting certain "business combinations" involving Staley for a period of three years. § 203(a), (c)(3). Specifically, RP cannot effect the merger of Staley. § 203(a), (c)(3)(i).

Various exceptions to this rule exist. § 203(a), (b). However, only two exceptions avail the hostile acquiror.¹ First, the restriction falls if the interested stockholder acquires at least 85 percent of the outstanding voting stock of the corporation (excluding shares owned by director-officers and certain employee stock ownership (ESOPs)) in the same transaction in which it becomes an interested stockholder (the "85 percent exception"). § 203(a)(2). Second, the restriction falls if the interested stockholder's proposed business transaction is approved at the time of or subsequent to the combination by the board of directors and authorized by an affirmative vote conducted at a shareholders' meeting of at least 66 2/3 percent of the outstanding voting stock that is not owned by the interested stockholder.

Plaintiff claims that in practice these exceptions are illusory and that the Delaware statute will deter hostile takeovers. This restriction on "business combinations," plaintiff further argues, violates the Supremacy and Commerce Clauses of the Constitution.

B. The Supremacy Clause.

Article VI, Clause 2 of the Constitution, the Supremacy Clause, commands:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof, and all Treaties made, or which shall be made, under the Authority of the United States,

...