Unitrin, Inc. v. American General Corp.

• Decision Date: 06 December 1994
• Docket Number: No. 418,1994,418
• Court: United States State Supreme Court of Delaware
• Parties: , Fed. Sec. L. Rep. P 98,519 UNITRIN, INC., James E. Annable, Reuben L. Hedlund, Jerrold V. Jerome, George A. Roberts, Fayez S. Sarofim, Henry E. Singleton and Richard C. Vie, Defendants Below, Appellants, v. AMERICAN GENERAL CORP., Plaintiff Below, Appellee. In re UNITRIN, INC. Shareholders Litigation. . Submitted:

Page 1361

651 A.2d 1361

63 USLW 2511, Fed. Sec. L. Rep. P 98,519

UNITRIN, INC., James E. Annable, Reuben L. Hedlund, Jerrold V. Jerome, George A. Roberts, Fayez S. Sarofim Henry E. Singleton and Richard C. Vie Defendants Below, Appellants, v. AMERICAN GENERAL CORP., Plaintiff Below, Appellee In re UNITRIN, INC. Shareholders Litigation.

No. 418, 1994.

Supreme Court of Delaware.

Submitted: Dec. 6, 1994.

Decided: Jan. 11, 1995.

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

Richard L. Sutton (argued), Thomas R. Hunt, Jr., Alan J. Stone and Michael L. Vild of Morris, Nichols, Arsht & Tunnell, Wilmington, Kenneth R. Heitz and David I. Gindler, Irell & Manella, Los Angeles, CA, for appellants.

Rodman Ward, Jr., Marc B. Tucker (argued), R. Michael Lindsey, Cathy L. Reese, Joseph M. Asher and Herbert W. Mondros of Skadden, Arps, Slate, Meagher & Flom, Wilmington, Anna J. Rastor of Skadden, Arps, Slate, Meagher & Flom, New York City, for appellee American General Corp.

Joseph A. Rosenthal and Norman M. Monhait of Rosenthal, Monhait, Gross & Goddess, Wilmington, Edward Labaton (argued), and Ira A. Schochet of Goodkind, Labaton Rudoff & Sucharow, New York City, for appellees Unitrin Shareholders.

Before VEASEY, C.J., HOLLAND and BERGER, JJ.

HOLLAND, Justice.

This is an appeal from the Court of Chancery's entry of a preliminary injunction on October 13, 1994, upon plaintiffs' motions in two actions: American General Corporation's ("American General") suit against Unitrin, Inc. ("Unitrin") and its directors; and a parallel class action brought by Unitrin stockholders. ¹ An interlocutory appeal was certified by the Court of Chancery on October 24, 1994. This Court accepted the appeal on October 27, 1994.

American General, which had publicly announced a proposal to merge with Unitrin for $2.6 billion at $50- 3/8 per share, and certain Unitrin shareholder plaintiffs, filed suit in the Court of Chancery, inter alia, to enjoin Unitrin from repurchasing up to 10 million shares of its own stock (the "Repurchase Program"). ² On August 26, 1994, the Court of Chancery temporarily restrained Unitrin from making any further repurchases. After expedited discovery, briefing and argument, the Court of Chancery preliminarily enjoined Unitrin from making further repurchases on the ground that the Repurchase Program was a disproportionate response to the threat posed by American General's inadequate all cash for all shares offer, under the standard of this Court's holding in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985) ("Unocal ").

Unitrin's Contentions

Unitrin has raised several issues in this appeal. First, it contends that the Court of Chancery erred in assuming that the outside directors would subconsciously act contrary to their substantial financial interests as stockholders and, instead, vote in favor of a subjective desire to protect the "prestige and perquisites" of membership on Unitrin's Board of Directors. Second, it contends that the Court of Chancery erred in holding that the adoption of the Repurchase Program would materially affect the ability of an insurgent stockholder to win a proxy contest. According to Unitrin, that holding is unsupported by the evidence, is based upon a faulty mathematical analysis, and disregards the holding of Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346, 1355 (1985). Furthermore, Unitrin argues that the Court of Chancery erroneously substituted its own judgment for that of Unitrin's Board, contrary to this Court's subsequent interpretations of Unocal in Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 45-46 (1994), and Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140 (1990). Third, Unitrin submits that the Court of Chancery erred in finding that the plaintiffs would be irreparably harmed absent an injunction (a) because the Court of Chancery disregarded Unitrin's proffered alternative remedy of sterilizing the increased voting power of the stockholder directors and (b) because there was no basis for finding that stockholders who sold into the market during the pendency of the Repurchase Program would be irreparably harmed.

This Court

Ultimate Disposition

This Court has concluded that the Court of Chancery erred in applying the proportionality review Unocal requires by focusing upon whether the Repurchase Program was an "unnecessary" defensive response. See Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d at 45-46. The Court of Chancery should have directed its enhanced scrutiny: first, upon whether the Repurchase Program the Unitrin Board implemented was draconian, by being either preclusive or coercive and; second, if it was not draconian, upon whether it was within a range of reasonable responses to the threat American General's Offer posed. Consequently, the interlocutory preliminary injunctive judgment of the Court of Chancery is reversed. This matter is remanded for further proceedings in accordance with this opinion.

The Parties

American General is the largest provider of home service insurance. On July 12, 1994, it made a merger proposal to acquire Unitrin for $2.6 billion at $50- 3/8 per share. Following a public announcement of this proposal, Unitrin shareholders filed suit seeking to compel a sale of the company. American General filed suit to enjoin Unitrin's Repurchase Program.

Unitrin is also in the insurance business. It is the third largest provider of home service insurance. The other defendants-appellants are the members of Unitrin's seven person Board of Directors (the "Unitrin Board" or "Board"). Two directors are employees Richard C. Vie ("Vie"), the Chief Executive Officer, and Jerrold V. Jerome ("Jerome"), Chairman of the Board. The five remaining directors are not and have never been employed by Unitrin. These directors are:

(1) Dr. Henry E. Singleton ("Singleton"), who co-founded Teledyne, Inc. (from which Unitrin is a spin-off) in 1961, and served as its Chairman and Chief Executive Officer until 1988. He is Unitrin's largest shareholder, owning 7,242,260 shares, in excess of 14% of the outstanding stock;

(2) Fayez S. Sarofim ("Sarofim"), the Chief Executive Officer and 70% owner of Fayez Sarofim & Co., which manages over $23 billion in investments for its clients. Sarofim personally owns 1,062,335 shares of Unitrin common stock, 2.26% of the outstanding stock;

(3) Dr. George A. Roberts ("Roberts"), retired Chairman and former President of Teledyne, Inc. He owns more than 400,000 shares of Unitrin stock. Dr. Roberts managed Teledyne's operations for more than 25 years and was apparently responsible for acquiring the companies that make up Unitrin's core businesses;

(4) James E. Annable ("Annable"), Chief Economist for First National Bank of Chicago and a former professor of economics at the Massachusetts Institute of Technology; and

(5) Reuben L. Hedlund ("Hedlund"), a trial lawyer in Chicago, with experience in antitrust law.

The record reflects that the non-employee directors each receive a fixed annual fee of $30,000. They receive no other significant financial benefit from serving as directors. At the offering price proposed by American General, the value of Unitrin's non-employee directors' stock exceeded $450 million.

American General's Offer

In January 1994, James Tuerff ("Tuerff"), the President of American General, met with Richard Vie, Unitrin's Chief Executive Officer. Tuerff advised Vie that American General was considering acquiring other companies. Unitrin was apparently at or near the top of its list. Tuerff did not mention any terms for a potential acquisition of Unitrin. Vie replied that Unitrin had excellent prospects as an independent company and had never considered a merger. Vie indicated to Tuerff that Unitrin was not for sale.

According to Vie, he reported his conversation with Tuerff at the next meeting of the Unitrin Board in February 1994. The minutes of the full Board meeting do not reflect a discussion of Tuerff's proposition. Nevertheless, the parties agree that the Board's position in February was that Unitrin was not for sale. It was unnecessary to respond to American General because no offer had been made.

On July 12, 1994, American General sent a letter to Vie proposing a consensual merger transaction in which it would "purchase all of Unitrin's 51.8 million outstanding shares of common stock for $50- 3/8 per share, in cash" (the "Offer"). The Offer was conditioned on the development of a merger agreement and regulatory approval. The Offer price represented a 30% premium over the market price of Unitrin's shares. In the Offer, American General stated that it "would consider offering a higher price" if "Unitrin could demonstrate additional value." American General also offered to consider tax-free "[a]lternatives to an all cash transaction."

Unitrin's Rejection

Upon receiving the American General Offer, the Unitrin Board's Executive Committee (Singleton, Vie, and Jerome) engaged legal counsel and scheduled a telephonic Board meeting for July 18. At the July 18 special meeting, the Board reviewed the terms of the Offer. The Board was advised that the existing charter and bylaw provisions might not effectively deter all types of takeover strategies. It was suggested that the Board consider adopting a shareholder rights plan and an advance notice provision for shareholder proposals.

The Unitrin Board met next on July 25, 1994 in Los Angeles for seven hours. ³ All directors attended the meeting. The principal purpose of the meeting was to discuss American General's Offer.

Vie reviewed Unitrin's financial condition and its ongoing business strategies. The Board also received a presentation from its investment advisor, Morgan Stanley & Co. ("Morgan Stanley"), regarding the financial adequacy of American General's proposal. Morgan Stanley expressed its opinion that the Offer was financially inadequate. ⁴ L...