Samjens Partners I v. Burlington Industries, Inc.

• Decision Date: 22 June 1987
• Docket Number: No. 87 Civ. 3721 (SWK).,87 Civ. 3721 (SWK).
• Citation: 663 F. Supp. 614
• Parties: SAMJENS PARTNERS I and Samjens Acquisition Corp., Plaintiffs, v. BURLINGTON INDUSTRIES, INC., BI/MS Holdings, Inc., BII Acquisition Corp., Frank S. Greenberg, Donald R. Hughes, Lanty L. Smith, Joseph F. Abely, Jr., Joseph W. Barr, Michael J. Dargan, John P. Harbin, John J. Horan, Frank S. Jones, William A. Klopman, John K. McKinley, Paul J. Rizzo and Louis Von Planta, Defendants.
• Court: U.S. District Court — Southern District of New York

663 F. Supp. 614

SAMJENS PARTNERS I and Samjens Acquisition Corp., Plaintiffs, v. BURLINGTON INDUSTRIES, INC., BI/MS Holdings, Inc., BII Acquisition Corp., Frank S. Greenberg, Donald R. Hughes, Lanty L. Smith, Joseph F. Abely, Jr., Joseph W. Barr, Michael J. Dargan, John P. Harbin, John J. Horan, Frank S. Jones, William A. Klopman, John K. McKinley, Paul J. Rizzo and Louis Von Planta, Defendants.

No. 87 Civ. 3721 (SWK).

United States District Court, S.D. New York.

June 22, 1987.

COPYRIGHT MATERIAL OMITTED

Paul, Weiss, Rifkind, Wharton & Garrison by George P. Felleman, Jay Greenfield, New York City, for plaintiffs.

Davis Polk & Wardwell by Arthur F. Golden, John G. Rich, David G. Golden, David D. Brown, IV, Julie R. O'Sullivan, New York City, for defendants, Burlington Industries and individual defendants.

Shearman & Sterling by Kenneth M. Kramer, Dennis P. Orr, David J. Mark, Kenneth A. Freeling, Barbara J. Gould, New York City, for defendants, BI/MS Holdings, Inc. and BII Acquisition Corp.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

Plaintiff Samjens Partners I ("Samjens") is a partnership which as of May 5, 1987 owned approximately 13 percent of Burlington's outstanding common stock. Plaintiff Samjens Acquisitions Corporation is a wholly owned subsidiary of Samjens. On May 6, 1987, Samjens commenced a tender offer for all shares of Burlington Industries, Inc. common stock at $67 per share. Subsequently, Samjens has raised its offer twice: to $72 and then $77 per share.

Defendant Burlington is a textile manufacturer incorporated in Delaware. Defendants BI/MS Holdings, Inc. and BII Acquisition Corp. are subsidiaries of Morgan Stanley Group, Inc. ("Morgan"). While the Samjens offer was pending, Morgan entered into a merger agreement (the "merger agreement") with Burlington pursuant to which it has commenced a $76 per share and later a $78 per share tender offer for all outstanding shares of Burlington common stock. Defendants Frank S. Greenberg, Donald R. Hughes, and Lanty L. Smith are directors and officers of Burlington. The remaining defendants (the "directors" or the "Board") are independent directors of Burlington.

Plaintiffs bring nine claims for relief. In Counts I through IV, plaintiffs assert that various defendants violated Sections 13(e), 14(d), and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(e), 78n(d), and 78n(e). Plaintiffs allege that defendants made various material omissions and misrepresentations in: 1) the Burlington Schedule 14D-9 filed in response to Samjens' first tender offer; 2) a May 13, 1987 letter from Greenberg to Burlington stockholders with respect to Samjens' offer; 3) Burlington's May 14, 1987 tender offer for up to eight million shares of its common stock (the "self-tender offer") at $80 per share; and 4) Morgan's offer to purchase Burlington's common shares and Burlington's Schedule 14D-9 recommending acceptance of the offer. Counts V through IX allege various state law violations including: 1) breach of fiduciary duty by approving the merger agreement, refusing to negotiate with plaintiffs, and disseminating false and misleading information to stockholders; 2) using corporate assets to pay the fees and expenses of Morgan, agree to pay a $25 million fee (the "break-up fee") to Morgan should its offer fail, and refusing to pay the fees and expenses of other bona fide offerors; and 3) interfering with plaintiffs' business advantage.

This case is presently before the Court upon plaintiffs' motion, pursuant to Rule 65 of the Federal Rules of Civil Procedure, for a preliminary injunction prohibiting the defendants from: 1) implementing the merger agreement or accepting shares tendered pursuant to Morgan's tender offer until defendants have either terminated the break-up fee and expense reimbursement provision of the merger agreement or granted other competitive bidders the same terms as offered to Morgan; 2) pursuing Burlington's May 14, 1987 self-tender offer; 3) accepting for payment or paying for any shares tendered into the self-tender offer; and 4) pursuing the merger agreement or the Morgan tender offer until they have filed corrective disclosures.

The Court did not hold an evidentiary hearing on plaintiffs' motion. Rather, the parties made voluminous submissions, including documents, affidavits, and deposition transcripts. The Court's examination of these submissions indicates that there are only two unsettled facts — whether Samjens told Burlington on May 18 that it would not make a higher bid and whether there is any agreement between Morgan and Burlington management under which management will receive an equity share of Burlington. The latter issue can be resolved on the papers, and the former is not necessary to a disposition of this case.

FACTS

The following constitutes the Court's findings of fact. Beginning in February 1987, various affiliates of the plaintiffs commenced purchasing Burlington shares in the open market. On April 7, 1987, defendant Frank Greenberg, Burlington's president, heard a report on television that a group led by Asher Edelman and Dominion Textile, principals of Samjens, had acquired a stake in Burlington. The same report was published the next day in the newspaper U.S.A. Today. On April 14, 1987, Samjens filed its Schedule 13D, indicating that it had obtained a 7.6 percent stake in Burlington.

Immediately upon hearing that Edelman had acquired a stake in Burlington, Greenberg began to interview investment banking firms to serve as advisors. The search lasted for approximately one week, and culminated in the retention of First Boston Corporation ("FB") and Kidder, Peabody ("KP") to advise Burlington "with respect to a takeover defense...." (Plaint. exh. 37). Burlington agreed to pay a $1.5 million financial advisory fee and a bonus of from $2 to $4 million if, as of April 15, 1988, nobody had obtained a 30 percent stake in Burlington and a majority of the current board of directors were still in place. Furthermore, Burlington agreed to pay KP and FB a fee in the event certain transactions, such as a merger or acquisition that had the approval of Burlington's Board of Directors ("the Board"), occurred. The next day, at a meeting of the Board, Burlington management (the "management") informed the Board of the takeover rumors. It also informed the Board that it had retained KP, FB, and independent legal counsel to serve as advisors. The Board approved this after a discussion of their expenses.

In response to the takeover rumor, various groups approached Burlington to inquire about a possible deal. On April 21, 1987, Robert Greenhill of Morgan sent a letter to Greenberg requesting a meeting to discuss the possibility of a deal between Morgan and Burlington. The letter stated, "We would have no interest except in proceeding on a basis agreed upon by your management." (Plaint. exh. 33)

Three days later, Edelman sent the first of a series of letters to Greenberg. It stated that Samjens had acquired a 7.6 percent share of Burlington and offered to purchase Burlington in a negotiated transaction at $60 per share. Edelman threatened a hostile tender offer if Burlington refused a negotiated transaction.

On April 29, 1987, representatives of Burlington's management met with Morgan for the first time. Representing Morgan were Donald Brenner, Alan Goldberg, and Robert Greenhill. In preparation for the meeting, Goldberg obtained a "canned" document from Morgan's files that Morgan used when negotiating merger agreements and edited it for use at the meeting with Burlington. The document listed the general issues that arise in mergers and did not represent a draft agreement or offer. The document, titled "Agenda", contained a number of "talking points". Included among them were:

— MS interested in purchasing Vermont¹ with management.

— MS would pursue the transaction only if senior management supported the deal.

— Management would be given 10% of the company equity at closing and allocated an additional 10% upon achieving an agreed to set of performance measures.

— From an operating point of view after the deal this company will be run 100% by the current management team.

— In addition since equity is non-liquidated investment for a time period we would expect senior management's compensation to be significantly adjusted upward. In Container Corp. there was an adjustment factor of 50% and in Mary Kay it was 125%.

— In addition MS is committed to lucrative incentive plans for senior management.

The other points included a description of the proposed financing and a proposed price of $65 per share.

Various topics were discussed at the meeting. Morgan told Burlington that it would decide the future of Burlington's senior management after a merger closed (Brennan dep., p. 45). The evidence indicates that this is, in fact, Morgan's policy in all of its mergers. Morgan also told Burlington that it had closed only one merger in which the company's management did not participate in the ownership (Brennan dep., p. 52). Finally, Morgan told Burlington that it expected that management would participate in the ownership of the new company (Goldberg dep., p. 43). The bulk of the meeting, however, was spent discussing Morgan's proposed financing (Goldberg dep., p. 71). The meeting ended inconclusively, and the parties held a number of subsequent meetings.

On May 6, 1987, Samjens commenced a tender offer for all outstanding shares of Burlington common stock at $67 per share. The offer was to expire on June 3, 1987. On the same date, Edelman sent a letter to the Board informing it of the tender offer and requesting a meeting to discuss the offer and management's participation in the transaction.

Burlington's response to the tender offer was vigorous. On May 11, 1987 the Board met. The investment bankers made a two hour presentation regarding Burlington's value. The Board reviewed slides which depicted the fiscal health of each...