Tanzer Economic Associates, Inc. Profit Sharing Plan v. Universal Food Specialties, Inc.

• Citation: 383 N.Y.S.2d 472,87 Misc.2d 167
• Parties: TANZER ECONOMIC ASSOCIATES, INC. PROFIT SHARING PLAN, Plaintiff, v. UNIVERSAL FOOD SPECIALTIES, INC., et al., Defendants.
• Decision Date: 10 March 1976
• Court: United States State Supreme Court (New York)

Page 472

383 N.Y.S.2d 472

87 Misc.2d 167

TANZER ECONOMIC ASSOCIATES, INC. PROFIT SHARING PLAN, Plaintiff, v. UNIVERSAL FOOD SPECIALTIES, INC., et al., Defendants.

Supreme Court, Special Term, New York County, Part I.

March 10, 1976.

Kreindler & Kreindler, New York City (Ronald Litowitz, of counsel), for plaintiff.

Cravath, Swaine & Moore, New York City (Allen F. Maulsby, New York City, of counsel), for defendants.

EDWARD J. GREENFIELD, Justice:

Expansion and contraction, like all movements affecting nations, institutions, individuals and corporations, create turbulence and discomfort in varying degrees of intensity, and almost inevitably, dislocations. Those affected, the threatened and the dispossessed, often turn to the courts as a last resort to protect their positions and to attempt to stave off the ultimate change.

In this case the proposed change being resisted is a consolidation or merger of two substantial corporations which will effectively eliminate all the holdings of the public at large, and vest complete control in the acquiring corporation. This elimination of public shareholders or 'going private' as it has come to be called, is characterized by those shareholders as a 'freeze-out'. Plaintiff, as a shareholder, has commenced a class action pursuant to CPLR § 901 on behalf of all owners of common stock similarly situated, to enjoin the defendants from effectuating a merger between Libby, McNeil & Libby (hereinafter 'Libby'), a food processor, canner and distributor, and Universal Food Specialties (hereinafter 'UFS'), a wholly owned subsidiary of Nestle Alimentana S.A., a Swiss company (hereinafter 'Nestle'). Nestle is a publicly held corporation whose shares are traded in security exchanges in Europe. It controls operating companies throughout the world which manufacture and sell food products including chocolate, coffee, tea and frozen foods. It has assets of approximately $3.4 billion, and annual sales in excess of $6 billion.

Plaintiff now moves for an injunction Pendente lite against the proposed merger. Defendants, on the other hand, contend that the merger is 'a consummation devoutly to be wished', and urge denial of the temporary injunction.

The essential facts, as divulged in the papers of the respective parties, are these:

Libby is a Maine corporation licensed to do business in New York. It has annual net sales in excess of $400 million. There are outstanding 9,721,799 shares of common stock, traded on the New York Stock Exchange. In addition, there are 20,000 shares of 5 1/4% Cumulative Preferred Stock outstanding.

Nestle and its affiliates began purchasing Libby shares in 1960 and have been the principal shareholders of Libby since 1967, when they acquired 36% Of the outstanding common stock. In 1970, its holdings increased to 51%, and they stood at 61% On May 29, 1975. On that date UFS, the Nestle affiliate holding the Libby shares, announced a cash tender offer to purchase the remaining outstanding shares of Libby common stock at 8 1/8 (it was then trading on the Stock Exchange at 4 7/8), and its $1000 Convertible Debentures at $700 (trading about $580 at market). In the Offer to Purchase, UFS announced that if it acquired more than 90% Of the Libby common stock, it intended, 'as soon as reasonably practicable' to merge Libby into UFS, which under Maine law could then be done without any meeting or vote of shareholders. Shareholders remaining at the merger would be paid 8 1/8 per share, with dissenting shareholders having the right to appraisal and judicial determination of the fair value of their shares if they thought they were worth more.

The tender offer expired on June 13, 1975. As a result $2,966,869 shares were tendered, and UFS increased its ownership of common stock to 91.86%. It also acquired ownership of $11,988,000 (face value $15,000,000) in outstanding convertible debentures. Thereupon, UFS proceeded to purchase all of the outstanding shares of Libby's cumulative preferred stock.

On June 10, 1975, just three days before the expiration of the tender offer, the plaintiff, as the owner of 50 shares of Libby common stock purchased in August 1973, brought this action on behalf of itself and all other common shareholders. The original complaint sought monetary damages alone, premised upon the alleged inadequacy of the tender offer, and sought no injunctive relief. In addition to this action, the court has been informed that there are seven other class actions prompted by the tender offer, four involving debenture holders and three involving shareholders. Five of the actions are pending in the United States District Court, Southern District, one in the New York State Supreme Court, Nassau County, and one in the Superior Court of California.

Seven months after the commencement of this action, on January 26, 1976, plaintiff served an amended complaint objecting to the proposed merger between UFS and Libby, seeking compensatory and punitive damages, accounting for unjust enrichment, a rescission of sales of stock made pursuant to the tender offer and an injunction against the proposed merger. Concomitant with the amended complaint plaintiff moved for a preliminary injunction to restrain the defendants from taking any further steps to consummate the UFS--Libby merger.

On oral argument of this motion, the defendant requested permission of the Court to send a letter and notice to the remaining Libby shareholders, advising them of the fact that they intended to carry out a merger of UFS and Libby in 30 days, pursuant to the Maine Business Corporation Act. After several meetings with the parties concerned, the Court gave its approval to the sending of such a letter, upon being satisfied that the notice contained a full disclosure that the alternative courses of action available to the shareholders were set forth with clarity and that the shareholders who elected to have their shares appraised would be permitted to withdraw that demand at any time up to twenty days after the merger. The underlying financial information, and the rights of the dissenting shareholders, including the fact that the appraisal proceedings would be conducted at corporate expense were also to be set forth. The effect of the letter would be to require anyone choosing appraisal to elect that course, subject to withdrawal, within 15 days of the notice, as provided in Maine law, so that there would be a clear understanding as to exactly hom many dissenting shareholders there were. All other shareholders would either sell their shares in the market or have them cancelled on the effective merger date, at which time they would receive $8.125 per share. The letter and notice made it clear that there was litigation pending in the federal and state courts and that a preliminary injunction was being sought against the merger. The letter acknowledged that the merger might be delayed or prevented by such pending litigation and shareholders were informed of the identity of the attorneys representing the various parties should they require further information.

On February 18, 1976, the Board of Directors of UFS approved the Plan of Merger, to become effective without any further action by Libby's Board of Directors or by its shareholders upon the filing of the Articles of Merger in Maine and in Delaware. The intended date of consummation of the merger was March 22, 1976, but UFS notified its shareholders that it would not consummate the merger so long as this motion for a temporary injunction of any application for a stay pending appeal was before the Court.

Pursuant to Maine law, which controls in the case of Libby, and Delaware law which controls the corporate actions of UFS, UFS and Libby are permitted to effectuate a 'short-form merger' (Maine Business Corporation Act, Tit. 13--A, § 904, et seq.; Delaware Corporation Law, Tit. 8, § 253). Such short form merger statutes are in effect in 38 states, including New York (New York Business Corporation Law, § 905). These short form merger statutes are largely based upon Section 71 of the Model Business Corporation Act of the American Law Institute. Such statutes permit a merger between a subsidiary and corporation owning at least 90% Of its stock (New York and eight other states require the holding of 95% Prior to short form merger, Illinois calls for 99%). Upon the payment of the set cash price for the remaining shares, with the right of a dissatisfied stockholder to seek a judicial appraisal of the stock value in the state courts, the minority position of the 10% Or less would be extinguished. Such a merger does not require the approval of either the Libby shareholders or board of directors.

Plaintiff seeks a preliminary injunction of the proposed short form merger despite meticulous compliance by defendants with every provision of the statutory merger requirements on the grounds that the minority shareholders will suffer irreparable injury in being deprived foreover of their equity position in Libby, that monetary damages will not adequately compensate them for their loss, and that an injunction is justified because the so-called 'squeeze out' is unjust, fraudulent, a breach of defendants' fiduciary obligations, and without proper business purpose.

Appraisal or Injunction

Until recently, the law was clear that if the statutory requirements were complied with, the exclusive remedy of dissenting minority stockholders was the right to demand appraisal of their stock. Our Court of Appeals has held that there is no inherent or constitutional right of a stockholder to preserve his status forever.

'In short, the merged corporation's shareholder has only one real right; to have the value of his holding protected, and that protection is given him by his right to an appraisal, see Voeller v. Neilston Warehouse Co., 311 U.S. 531, 535, 61 S.Ct. 376, 85 L.Ed.2d 322. He has no right to stay in the picture, to go along into the merger, or to share in his future...