Studebaker Corporation v. Allied Products Corporation

• Decision Date: 21 May 1966
• Docket Number: Civ. A. No. 5283.
• Citation: 256 F. Supp. 173
• Parties: STUDEBAKER CORPORATION, a Michigan corporation, Plaintiff, v. ALLIED PRODUCTS CORPORATION, a Michigan corporation, Burt S. Kleiner, and Kleiner, Bell & Co., a California limited partnership, Defendants.
• Court: U.S. District Court — Western District of Michigan

256 F. Supp. 173

STUDEBAKER CORPORATION, a Michigan corporation, Plaintiff, v. ALLIED PRODUCTS CORPORATION, a Michigan corporation, Burt S. Kleiner, and Kleiner, Bell & Co., a California limited partnership, Defendants.

Civ. A. No. 5283.

United States District Court W. D. Michigan, S. D.

May 21, 1966.

COPYRIGHT MATERIAL OMITTED

McCobb & Heaney, Grand Rapids, Mich., Edward C. McCobb, William K. Van't Hof, Hillary F. Snell, Grand Rapids, Mich., of counsel, Warner, Nor-cross & Judd, Grand Rapids, Mich., Harold S. Sawyer, Wallson G. Knack, Thomas J. McNamara, Grand Rapids, Mich., of counsel, Nixon, Mudge, Rose, Guthrie & Alexander, New York City, Robert Walsh, Milton Black, New York City, of counsel, for plaintiff.

Hillman, Baxter & Hammond, Grand Rapids, Mich., Douglas W. Hillman, Grand Rapids, Mich., of counsel, Fischer, Sprague, Franklin & Ford, Detroit, Mich., Richard Ford, Detroit, Mich., of counsel, Hindin, Sterling, McKittrick & Powsner, Beverly Hills, Cal., Maurice J. Hindin, Ronald M. Sohigian, Beverly Hills, Cal., of counsel, for defendant Allied Products Corp.

Varnum, Riddering, Wierengo & Christenson, Grand Rapids, Mich., F. William Hutchinson, Peter J. Armstrong, Robert J. Eleveld, Jon F. DeWitt, Grand Rapids, Mich., of counsel, for defendants Burt S. Kleiner and Kleiner, Bell & Co.

OPINION

FOX, District Judge.

OUTLINE OF THE FACTS

1. Plaintiff Studebaker Corporation is a Michigan corporation and has been known primarily as a producer of automobiles. However, this had been a consistent loss division for Studebaker, and in 1963 it was decided to discontinue the company's automobile division at South Bend, Indiana. Studebaker operates nine other divisions in such areas as appliances, floor machines, small tractors, and electric generators, to name a few.

Studebaker has 2,839,283 outstanding shares of common stock. Members of the Board of Directors own 6,462 shares, of which 5,040 have been acquired since October 1, 1965.

2. Defendant Burt Kleiner is a partner in the Los Angeles brokerage firm of Kleiner, Bell & Co. (hereafter referred to as Kleiner, Bell). He has a history of close association with members of the operating management of defendant Allied Products (including an $8,000 fee in 1965 for an analysis of a finance arrangement for Allied Products, and an integral part in bringing together two predecessor corporations which merged and then in turn merged with Allied Products), and holds 20,800 shares of the common stock of Allied Products. The firm itself holds 5,000 shares of Allied common, and associates in the firm hold an undetermined amount of that stock, not exceeding 5,000 shares.

Allied Products Corporation has an account with the firm, as do Messrs. Emerman, Sherman and Drexler, board chairman, president, and treasurer, respectively, of Allied Products.

3. Defendant Allied Products Corporation (hereafter referred to as Allied), is primarily a producer of stampings for the automobile industry; however, it also has significant operations in the fields of fasteners and chemicals. It has 1,396,000 shares of common stock, of which 39% is owned or controlled by its present management.

The common stock of Allied is listed on a national securities exchange, to-wit, the New York Stock Exchange, and is registered under the Securities Exchange Act of 1934, as amended. Its transfer agents are Chemical Bank & Trust Company, New York, and Continental Illinois National Bank and Trust Company, Chicago. Its registrars are Hanover Bank of New York, and American National Bank & Trust Company, Chicago.

It is an aggressive corporation, actively engaged in diversification and acquisitions. Allied has never invested over $300,000 in stock purchases in other corporations without ultimately acquiring them. However, all were smaller than Studebaker Corporation.

In May of 1964, Allied purchased Studebaker's stamping plant facilities in South Bend, Indiana, following Studebaker's decision to transfer its automotive operations to Hamilton, Ontario.

On occasion during 1965, there had been some conversations between Mr. Charles Pratt, Studebaker Vice President of Administration, and Allied officials concerning possible acquisition by Studebaker of Allied.

4. Kleiner, Bell & Co. began purchasing Studebaker stock for themselves and their clients in January 1966, and by late January held between 20,000 and 30,000 shares.

5. Studebaker has a loan agreement with a network of six banks, including the First National Bank of Minneapolis. Mr. Robert Fischer is a Vice President of this bank and has association with Studebaker's dealings with the bank.

6. On January 27, 1966, Studebaker submitted a letter to its lending banks requesting a modification of its loan agreements. This letter contained confidential information relating to estimated profits for 1966, as well as a financial breakdown of divisional operations, which are not revealed in Studebaker's consolidated balance sheet in its annual report.

7. Mr. Fischer has known Mr. Kleiner since late 1964. Mr. Kleiner and his firm have been customers of the bank since 1965.

In November 1965, Mr. Kleiner met with Mr. Fischer and Mr. H. L. Korda, in Minneapolis. During their conversation Mr. Fischer mentioned that Studebaker was on the upswing, that they were a valued client of the bank and a major employer in the Minneapolis area (with three divisions there), that there were no large holders of stock in Studebaker, and that he would like to see stock purchased by people friendly to management, since this would insure the best interests of Minneapolis and the bank.

8. On January 11, 1966, Mr. Fischer had contacted Mr. Guthrie, chairman of the board of Studebaker, on behalf of a Mr. Quest of Minneapolis, a representative of a Minneapolis brokerage firm. Mr. Quest was desirous of discussing a possible community of interest between Studebaker and Gould National Batteries.

9. On February 7, Mr. George Murphy, a Hawaiian industrialist of some repute in the financial field, submitted a tender offer for 500,000 shares of Studebaker stock at $30 per share, which was 3¼ points above the market price of the stock on that day.

On February 8, Mr. Kleiner phoned Mr. Fischer, asking him to ascertain what Mr. Murphy's position was vis-a-vis management, since Mr. Kleiner was trying to decide whether to submit the firm's shares and how to advise clients on the tender offer.

Mr. Fischer telephoned Mr. Guthrie and learned that Mr. Murphy had come "out of the blue," as far as Studebaker was concerned. This information was relayed to Mr. Kleiner.

10. Studebaker released its preliminary figures on 1965 earnings on February 7, but the Studebaker board adopted a neutral position regarding the tender offer, leaving Studebaker stockholders to decide themselves whether to accept the offer.

Mr. Kleiner took this to mean that Studebaker was not concerned about anyone taking a substantial position in its stock. On February 11, he called Mr. Sherman and Mr. Drexler and asked if they could come up with a more attractive offer than the Murphy tender. They said they would, and Mr. Kleiner then called Mr. Fischer and explained that Allied might be in a position to make an offer to Studebaker of more than the Murphy tender and asked him to call Mr. Guthrie to see if there would be any interest in such an offer on the part of Studebaker.

As a result, a meeting between officials of Allied and officials of Studebaker was scheduled for February 15.

Mr. Kleiner stated that his interest at this point, aside from being a Studebaker shareholder, was in compensation for bringing the two companies together should anything materialize.

11. On February 14, Mr. Kleiner received a call from Mr. David Gottesman, of First Manhattan Corporation, a New York brokerage firm, advising him of the availability of a block of 175,000 shares of Studebaker stock at $32 per share. Mr. Kleiner unsuccessfully attempted to purchase less than the block at less than the asking price.

12. On February 15, the meeting between Allied and Studebaker managements was held in South Bend. There were general discussions about the possibility of an arrangement whereby the two companies would come together through the use of convertible preferred stock. There were a number of alternative approaches, but under all, present Studebaker shareholders would become holders of convertible preferred stock, present Allied shareholders would be holders of common stock. In order to preserve the benefits of Studebaker's sizeable tax loss carry-forward, it was imperative that Studebaker shareholders have 51% or more ownership in both equity and voting rights.

Studebaker expressed some interest, but because of the uncertainties surrounding Mr. Murphy's final position in the company, it was agreed that nothing further would be done until after that matter was resolved.

13. That same afternoon, Mr. Kleiner was called by Messrs. Drexler and Sherman, and advised that the meeting had gone well and that Studebaker appeared interested. Mr. Kleiner advised them of the existence of the block of Studebaker stock and offered them a portion of it. They declined the offer, and later that day decided they would sell the Studebaker stock they then held. (Late in January, Emerman, Drexler and Sherman had purchased 4,200 shares of Studebaker stock through Kleiner, Bell.)

14. On February 16, having obtained sufficient orders, Kleiner, Bell purchased the block and additional shares of Studebaker. They continued to purchase Studebaker stock for themselves and their customers until the issuance of the restraining order in this case.

Rumors connecting Allied Products with a Studebaker takeover immediately appeared in financial circles. These rumors were no doubt fueled by Allied's purchase of Studebaker's stamping plant in 1964, and its hiring of several of Studebaker's former automotive employees, plus its reputation for acquisitions.

15. On February...