WLR Foods, Inc. v. Tyson Foods, Inc.

• Decision Date: 06 December 1994
• Docket Number: Civ. A. No. 94-012-H.
• Citation: 869 F. Supp. 419
• Parties: WLR FOODS, INC., Plaintiff, v. TYSON FOODS, INC., Defendant. TYSON FOODS, INC. and WLR Acquisition Corp., Counterclaimants, v. WLR FOODS, INC., et als., Counterclaim-defendants.
• Court: U.S. District Court — Western District of Virginia

869 F. Supp. 419

WLR FOODS, INC., Plaintiff, v. TYSON FOODS, INC., Defendant.

TYSON FOODS, INC. and WLR Acquisition Corp., Counterclaimants, v. WLR FOODS, INC., et als., Counterclaim-defendants.

Civ. A. No. 94-012-H.

United States District Court, W.D. Virginia, Harrisonburg Division.

December 6, 1994.

Douglas Leigh Guynn, Wharton, Aldhizer & Weaver, Harrisonburg, VA, William R. Norfolk, Sullivan & Cromwell, New York City, for WLR Foods, Inc.

Leslie Allan Grandis, Thomas Francis Farrell, II, McGuire, Woods, Battle & Boothe, Richmond, VA, James Vernon Lane, Litten & Sipe, Harrisonburg, VA, James Linwood Sanderlin, McGuire, Woods, Battle & Boothe, Richmond, VA, James Rothgeb Sipe, Litten & Sipe, Harrisonburg, VA, Thomas Edward Spahn, McGuire, Woods, Battle & Boothe, Richmond, VA, Russell E. Brooks, Milbank, Tweed, Hadley & McCloy, New York City, for Tyson Foods, Inc.

John Walter Zunka, Richard H. Milnor, Taylor & Zunka, Charlottesville, VA, for William H. Groseclose, Herman D. Mason, George E. Bryan, Clavin G. Germroth, Charles W. Wampler, Jr., James L. Keeler, William D. Wampler, Charles L. Campbell, Stephen W. Custer, J. Craig Hott.

MEMORANDUM OPINION

MICHAEL, District Judge.

WLR Foods, Inc. ("WLR") filed a complaint seeking a declaratory judgment affirming the validity of certain Virginia statutes and certain of its actions taken in defending itself against a hostile takeover commenced by Tyson Foods, Inc. and WLR Acquisition Corp. ("Tyson"). Tyson filed a counterclaim attacking the defenses undertaken by WLR in warding off the takeover attempt. Tyson included various counts asserting claims falling into three general categories: (1) the unconstitutionality of the Virginia statutory scheme regulating corporate takeovers; (2) the invalidity of certain actions undertaken by WLR pursuant to the Virginia Control Share Acquisitions Act ("Control Share Act"), Va.Code Ann. §§ 13.1-728.1 to 13.1-728.9 (Michie 1993); and (3) breaches of fiduciary duty by WLR's Board of Directors. This matter is now before the court for findings of fact and conclusions of law.

I.

All of the parties have vigorously and voluminously asserted their positions throughout this case. In getting to this point, the court has made three significant rulings. First, the court held that Va.Code Ann. § 13.1-690 (Michie 1993) ("Business Judgment Statute"), is a procedural rather than substantive statute requiring "good faith ... to be measured by the directors' resort to an informed decisionmaking process, not by the rationality of the decision ultimately taken." WLR Foods, Inc. v. Tyson Foods, Inc., 857 F.Supp. 492, 494 (W.D.Va.1994). Next, the court denied Tyson's motion for a preliminary injunction seeking to prevent certain votes from being counted in the shareholder referendum held pursuant to the Control Share Act. WLR Foods, Inc. v. Tyson Foods, Inc., 857 F.Supp. 496 (W.D.Va.1994). Lastly, the court denied another Tyson motion for a preliminary injunction requesting the court to declare unconstitutional Virginia's statutory scheme regulating hostile tender offers. WLR Foods, Inc. v. Tyson Foods, Inc., 861 F.Supp. 1277 (W.D.Va.1994). These three rulings have addressed in some form all of the parties' claims and counterclaims, except for the claims and counterclaims relating to alleged breaches of fiduciary duty by WLR's directors.

After the court's most recent ruling, the parties agreed to submit the case for the court's decision based upon all of the evidence previously presented plus supplemental affidavits. Most of the supplemental affidavits add little, except reiteration of points already addressed by other evidence. The affidavits submitted by WLR seem to focus upon clarifying the steps taken and the general advice received by WLR's Board of Directors in defending against Tyson's takeover bid. The supplemental affidavit of James Blair, general counsel of Tyson Foods and president of WLR Acquisition Corp., discloses that WLR agreed to acquire Cuddy Farms, Inc. ("Cuddy") on July 27, 1994. This transaction places approximately 10% of WLR stock in Cuddy's hands, and Cuddy has agreed to vote the stock in accordance with the directions of WLR's Board of Directors for a four year period. Tyson contends that this transaction was consummated for the purpose of defeating its attempt to takeover WLR. Based upon what Tyson contends is an excessive overpayment for Cuddy, Blair states that WLR is no longer worth $30 per share to Tyson. The Cuddy acquisition and the uncertainty and delay caused by this litigation have prompted Tyson to withdraw its tender offer. Blair's affidavit asserts, however, that Tyson stills desires to acquire all of WLR's outstanding shares. If this dispute ends favorably for Tyson, it intends to commence a new tender offer to acquire WLR.

II.

After reviewing all of the evidence submitted by the parties, including all of the supplemental affidavits, the objections to the affidavits, and the responses to the objections to the affidavits, the court sees no reason to alter any of its prior rulings in this case. As a result, the court adopts the findings of fact and conclusions of law contained in its three previous decisions, as supplemented herein.

Both sides seek a ruling concerning WLR's directors' exercise of their fiduciary duty.¹ A Virginia corporation's directors and officers owe a duty of loyalty both to the corporation and to the corporation's shareholders. Glass v. Glass, 228 Va. 39, 321 S.E.2d 69, 74 (1984); Adelman v. Conotti Corp., 215 Va. 782, 213 S.E.2d 774, 779 (1975). Tyson alleges that WLR breached its duty by undertaking the following measures in defending against Tyson's takeover attempt: (1) adoption of a discriminatory shareholder rights plan ("Poison Pill") and refusal to redeem it in the face of Tyson's tender offer; (2) adoption of lucrative severance agreements for senior officers to take effect in the event of a change in control of WLR ("Golden Parachutes"); (3) adoption of similar, less lucrative severance agreements for most WLR employees ("Other Parachutes"); (4) amendment of the bylaws setting the record date for any special meeting held pursuant to the Control Share Act as the date on which the acquiring person requests such a meeting ("Record Date Amendment"); (5) amendment of the bylaws to clarify that the Chairman and Vice Chairman of the Board are officers of the Board of Directors, rather than officers of WLR ("Officers Amendment"); and (6) resignation as employees of four directors for the purpose of voting in the control share referendum ("Resignations").

The court already has interpreted Va. Code § 13.1-690, which sets the standard for director conduct. See WLR Foods, Inc. v. Tyson Foods, Inc., 857 F.Supp. 492 (W.D.Va. 1994). This statute applies to all of Tyson's challenges regarding the directors' fiduciary duty in defending against the takeover attempt.² Only if the directors did not discharge their duty "in accordance with their good faith business judgment of the best interests of the corporation" will Tyson's challenges succeed.

The directors held a four and one-half hour meeting on January 28, 1994 to discuss the situation presented by Tyson's tender offer. At that meeting, they received independent legal advice from Wharton, Aldhizer & Weaver and Sullivan & Cromwell, and they received independent financial advice from Goldman, Sachs, & Co. and Wheat First Butcher & Singer (collectively, the "Advisors"). There is no dispute that the directors believed in good faith that the advice received was within the advisors' professional or expert competence. The advice received at that meeting concerned, inter alia, the legal and financial implications of Tyson's offer, whether to adopt a Poison Pill and what its terms should be, and whether to adopt Golden Parachutes. The advisors responded to several questions from the directors, no action was taken, and the directors were given various materials to review before the next meeting.

The next official meeting of the directors occurred on February 4, 1994, lasted over four hours, and was attended by all of the Advisors. At that meeting, the Advisors presented a comprehensive review of the financial details of Tyson's offer and concluded that the offer was inadequate. This presentation included discussion of WLR's recent past financial performance; important considerations taken into account in valuing WLR; the performance, ownership, and trading activity of WLR's common stock; a summary of comments by research analysts regarding WLR; a comparison of WLR to other, similarly situated publicly traded companies; analysis of other recent acquisitions by Tyson; a detailed valuation of WLR and financial analysis at different offer prices; a summary of factors warranting Tyson's interest in acquiring WLR; analysis of several different merger scenarios incorporating numerous financial variables; and an examination of several alternatives to Tyson's offer.³ The Advisors' presentations were followed by additional presentations from some of WLR's officers. After questions and discussion by the directors, they voted unanimously to reject Tyson's $30 per share offer. Also at the February 4 meeting, in reliance upon advice given by the Advisors and WLR's Executive Compensation Committee, the directors enacted the Officers Amendment, the Record Date Amendment, the Golden Parachutes, the Other Parachutes, the Poison Pill, and post-retirement health insurance coverage for the four executives who resigned pursuant to the Resignations.⁴

At a further meeting on March 11, 1994, the directors again heard detailed, updated presentations from the Advisors regarding the adequacy of Tyson's tender offer, focusing on most of the same general topics as those that were discussed at the February 4 meeting. After again receiving advice from the Advisors that Tyson's offer was inadequate, the directors decided unanimously that the offer was inadequate and...