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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------------------------------
SCHEDULE TO/A
TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR 13(e)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 18)
TAUBMAN CENTERS, INC.
(Name of Subject Company (Issuer))
SIMON PROPERTY ACQUISITIONS, INC.
SIMON PROPERTY GROUP, INC.
WESTFIELD AMERICA, INC.
(Names of Filing Persons (Offerors))
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
876664103
(CUSIP Number of Class of Securities)
---------------------------------------------------------------
James M. Barkley, Esq. Peter R. Schwartz, Esq.
Simon Property Group, Inc. Westfield America Inc.
National City Center 11601 Wilshire Boulevard
115 West Washington Street 12th Floor
Suite 15 East Los Angeles, CA 90025
Indianapolis, IN 46024 Telephone: (310) 445-2427
Telephone: (317) 636-1600
(Name, Address and Telephone Numbers of Person
Authorized to Receive Notices and Communications on Behalf of Filing Persons)
---------------------------------------------------------------------
Copies to:
Steven A. Seidman, Esq. Scott V. Simpson, Esq.
Robert B. Stebbins, Esq. Skadden, Arps, Slate, Meagher & Flom LLP
Willkie Farr & Gallagher One Canada Square
787 Seventh Avenue Canary Wharf
New York, New York 10019 London, E14 5DS, England
Telephone: (212) 728-8000 Telephone: (44) 20 7519 7000
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CALCULATION OF FILING FEE
================================================================================
TRANSACTION VALUATION* AMOUNT OF FILING FEE**
- --------------------------------------------------------------------------------
$1,243,725,540 $248,745.11
================================================================================
* Estimated for purposes of calculating the amount of the filing fee only.
Calculated by multiplying $20.00, the per share tender offer price, by
62,186,277 shares of Common Stock, consisting of (i) 52,207,756 outstanding
shares of Common Stock, (ii) 2,269 shares of Common Stock issuable upon
conversion of 31,767,066 outstanding shares of Series B Non-Participating
Convertible Preferred Stock, (iii) 7,097,979 shares of Common Stock
issuable upon conversion of outstanding partnership units of The Taubman
Realty Group, Limited Partnership ("TRG") and (iv) 2,878,273 shares of
Common Stock issuable upon conversion of outstanding options (each of which
entitles the holder thereof to purchase one partnership unit of TRG which,
in turn, is convertible into one share of Common Stock), based on the
Registrant's Preliminary Proxy Statement on Schedule 14A filed on December
20, 2002, the Registrant's Schedule 14D-9 filed on December 11, 2002 and
the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2002.
** The amount of the filing fee calculated in accordance with Regulation
240.0-11 of the Securities Exchange Act of 1934, as amended, equals 1/50th
of one percent of the value of the transaction.
/X/ Check the box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $248,745.11 Filing Party: Simon Property Group, Inc.; Simon Property
Form or Registration Schedule TO (File No. 005-42862), Acquisitions, Inc.; Westfield America, Inc.
No.: Amendment No. 1 to the Schedule TO Date Filed: December 5, 2002, December 16, 2002 and
and Amendment No. 5 to the January 15, 2003
Schedule TO
|_| Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
|_| Check the appropriate boxes below to designate any transactions to which
the statement relates.
|X| third-party tender offer subject to Rule 14d-1.
|_| issuer tender offer subject to Rule 13e-4.
|_| going-private transaction subject to Rule 13e-3.
|_| amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting
the results of the tender offer: |_|
================================================================================
SCHEDULE TO
This Amendment No. 18 amends and supplements the Tender Offer Statement on
Schedule TO originally filed with the Securities and Exchange Commission (the
"Commission") on December 5, 2002, as amended and supplemented by Amendment No.
1 thereto filed with the Commission on December 16, 2002, by Amendment No. 2
thereto filed with the Commission on December 27, 2002, by Amendment No. 3
thereto filed with the Commission on December 30, 2002, by Amendment No. 4
thereto filed with the Commission on December 31, 2002, by Amendment No. 5
thereto filed with the Commission on January 15, 2003, by Amendment No. 6
thereto filed with the Commission on January 15, 2003, by Amendment No. 7
thereto filed with the Commission January 16, 2003, by Amendment No. 8 thereto
filed with the Commission on January 22, 2003, by Amendment No. 9 thereto filed
with the Commission on January 23, 2003, by Amendment No. 10 thereto filed with
the Commission on February 7, 2003, by Amendment No. 11 thereto filed with the
Commission on February 11, 2003, by Amendment No. 12 thereto filed with the
Commission on February 18, 2003, by Amendment No. 13 thereto filed with the
Commission on February 21, 2003, by Amendment No. 14 thereto filed with the
Commission on February 21, 2003, by Amendment No. 15 thereto filed with the
Commission on February 27, 2003, by Amendment No. 16 thereto filed with the
Commission on February 27, 2003 and by Amendment No. 17 thereto filed with the
Commission on February 28, 2003 (as amended and supplemented, the "Schedule TO")
relating to the offer by Simon Property Acquisitions, Inc., a Delaware
corporation (the "Purchaser") and wholly owned subsidiary of Simon Property
Group, Inc., a Delaware corporation ("SPG Inc."), to purchase all of the
outstanding shares of common stock, par value $.01 per share (the "Shares"), of
Taubman Centers, Inc. (the "Company") at a purchase price of $20.00 per Share,
net to the seller in cash, without interest thereon, upon the terms and subject
to the conditions set forth in the Offer to Purchase, dated December 5, 2002
(the "Offer to Purchase"), and the Supplement to the Offer to Purchase, dated
January 15, 2003 (the "Supplement"), and in the related revised Letter of
Transmittal (which, together with any supplements or amendments, collectively
constitute the "Offer"). This Amendment No. 18 to the Schedule TO is being filed
on behalf of the Purchaser, SPG Inc. and Westfield America, Inc. ("WEA").
Capitalized terms used and not defined herein shall have the meanings
assigned to such terms in the Offer to Purchase, the Supplement and the Schedule
TO, as applicable.
The item numbers and responses thereto below are in accordance with the
requirements of Schedule TO.
Item 11. ADDITIONAL INFORMATION.
On February 28, 2003, the parties hereto filed Amendment No. 17 to the
Schedule TO. Due to an electronic transmission error, the signature pages
and exhibit index to Amendment No. 17 to the Schedule TO were not included
as part of the filing. This Amendment No. 18 is identical to Amendment No.
17, except that it also includes signature pages and an exhibit index.
Item 12. EXHIBITS.
(a)(5)(X) Reply Memorandum of Law in Support of Simon Property Group Inc.
Plaintiffs' and Randall Smith's Motion for a Preliminary Injunction,
filed by Simon Property Group, Inc., Simon Property Acquisitions,
Inc. and Randall J. Smith on February 28, 2003 in the United States
District Court for the Eastern District of Michigan.
(a)(5)(Y) Affidavit of Keith R. Pauley.
(a)(5)(Z) Affidavit of Robert H. Steers.
(a)(5)(AA) Appendix of Exhibits in Support of Reply Memorandum of Law in
Support of Simon Property Group Inc. Plaintiffs' and Randall Smith's
Motion for a Preliminary Injunction, filed by Simon Property Group,
Inc., Simon Property Acquisitions, Inc. and Randall J. Smith on
February 28, 2003 in the United States District Court for the
Eastern District of Michigan.
SIGNATURE
After due inquiry and to the best of their knowledge and
belief, the undersigned hereby certify as of February 28, 2003 that the
information set forth in this statement is true, complete and correct.
SIMON PROPERTY GROUP, INC.
By: /s/ JAMES M. BARKLEY
---------------------------------------
Name: James M. Barkley
Title: Secretary and General Counsel
SIMON PROPERTY ACQUISITIONS, INC.
By: /s/ JAMES M. BARKLEY
---------------------------------------
Name: James M. Barkley
Title: Secretary and Treasurer
After due inquiry and to the best of its knowledge and belief,
the undersigned hereby certifies as of February 28, 2003 that the information
set forth in this statement is true, complete and correct.
WESTFIELD AMERICA, INC.
By: /s/ PETER R. SCHWARTZ
---------------------------------------
Name: Peter R. Schwartz
Title: Senior Executive Vice President
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a)(5)(X) Reply Memorandum of Law in Support of Simon Property Group,
Inc. Plaintiffs' and Randall Smith's Motion for a Preliminary
Injunction, filed by Simon Property Group, Inc., Simon
Property Acquisitions, Inc. and Randall J. Smith on February
28, 2003 in the United States District Court for the Eastern
District of Michigan.
(a)(5)(Y) Affidavit of Keith R. Pauley.
(a)(5)(Z) Affidavit of Robert H. Steers.
(a)(5)(AA) Appendix of Exhibits in Support of Reply Memorandum of Law in
Support of Simon Property Group Inc. Plaintiffs' and Randall
Smith's Motion for a Preliminary Injunction, filed by Simon
Property Group, Inc., Simon Property Acquisitions, Inc. and
Randall J. Smith on February 28, 2003 in the United States
District Court for the Eastern District of Michigan.
Exhibit (a)(5)(X)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- ------------------------------------------x
:
SIMON PROPERTY GROUP, INC.,
SIMON PROPERTY ACQUISITIONS, INC., :
AND RANDALL J. SMITH,
:
Plaintiffs, :
- against - CIVIL ACTION NO. 02-74799
:
TAUBMAN CENTERS, INC., A. ALFRED The Honorable Victoria A. Roberts
TAUBMAN, ROBERT S.TAUBMAN, LISA :
A. PAYNE, GRAHAM T. ALLISON, PETER Magistrate Judge Virginia M. Morgan
KARMANOS, JR., WILLIAM S. TAUBMAN, :
ALLAN J. BLOOSTEIN, JEROME A.
CHAZEN, AND S. PARKER GILBERT, :
Defendants. :
- ------------------------------------------x
REPLY MEMORANDUM OF LAW IN SUPPORT OF SPG PLAINTIFFS' AND
RANDALL SMITH'S MOTION FOR A PRELIMINARY INJUNCTION
-----------------------------------------------------------------
Carl H. von Ende (P21867) WILLKIE FARR & GALLAGHER
Todd A. Holleman (P57699) 787 Seventh Avenue
MILLER, CANFIELD, PADDOCK & New York, New York 10019
STONE, P.L.C. Telephone: (212) 728-8000
150 West Jefferson, Suite 2500 Facsimile: (212) 728-8111
Detroit, Michigan 48226-4415 Attorneys for SPG Plaintiffs
Telephone: (313) 963-6420
Facsimile: (313) 496-7500 SKADDEN, ARPS, SLATE,
Attorneys for all Plaintiffs MEAGHER, & FLOM LLP
300 South Grand Avenue
Los Angeles, California 90071
Telephone: (213) 687-5000
Facsimile: (213) 687-5600
Attorneys for Randall J. Smith
TABLE OF CONTENTS
PAGE
Table Of Authorities.......................................................................ii
Index To Appendix...........................................................................v
Statement of Issues Presented...............................................................x
Controlling Or Most Appropriate Authorities...............................................xii
A. Defendants Have Breached And Continue To Breach Their Fiduciary Duties................2
B. The "Group" Shares May Not Be Voted Under the Control Share Act......................11
C. A Preliminary Injunction Is Warranted................................................14
CONCLUSION.................................................................................15
i
TABLE OF AUTHORITIES
CASES
PAGE(S)
ALA. BY-PRODUCTS CORP. V. CEDE & CO., 657 A.2d 254 (Del. 1995)..........................................10
AM. STATES INS. CO. V. TAUBMAN CO., 352 F. Supp. 197 (E.D. Mich. 1972)..................................10
AVACUS PARTNERS, L.P. V. BRIAN, 1990 WL 161909
(Del. Ch. Oct. 24, 1990)............................................................................9
BANK OF NEW YORK V. IRVING TRUST CO., 528 N.Y.S.2d 482 (1988)...........................................14
BLASIUS INDUS., INC. V. ATLAS CORP., 564 A.2d 651 (Del. Ch. 1988)........................................3
BOROCK V. COMERICA BANK-DETROIT, 938 F. Supp. 428 (E.D. Mich. 1996).....................................10
CAMPAU V. MCMATH, 185 Mich. App. 724 (1990)..............................................................3
CARDIZEM CD ANTITRUST LITIG., 90 F. Supp. 2d 819 (E.D. Mich. 1999)....................................8, 9
CHESAPEAKE V. SHORE, 771 A.2d 293 (Del. Ch. 2000)........................................................6
CLARK V. SAKOWSKI, 2000 WL 33405937 (Mich. App. Oct. 13, 2000)...........................................9
CROWLEY V. LOCAL NO. 82, 679 F.2d 978 (1st Cir. 1982),
REV'D ON OTHER GROUNDS, 467 U.S. 526 (1984)........................................................14
CRTF CORP. V. FEDERATED DEP'T STORES, INC.,
683 F. Supp. 422 (S.D.N.Y. 1988)....................................................................7
EMERSON RADIO CORP. V. INT'L JENSON, INC., 1996 WL 483086
(Del. Ch. Aug. 20, 1996)............................................................................7
FDIC V. HYDE PARK APARTMENTS, 1996 WL 138558 (9th Cir. Mar. 27,1996).....................................8
GAF CORP. V MILSTEIN, 453 F.2d 709 (2d Cir. 1971)......................................................132
IN RE GAYLORD CONTAINER CORP. S'HOLDERS LITIG., 747 A.2d 71 (Del. Ch. 1999)..............................9
GIBRALT CAPITAL CORP. V. SMITH, 2001 WL 647837 (Del. Ch. May 9, 2001)...................................11
GRAND METRO. V. PILLSBURY CO., 558 A.2d 1049 (Del. Ch. 1988).............................................7
HILTON HOTELS CORP. V. ITT CORP., 978 F. Supp. 1342 (D. Nev. 1997).......................................5
ii
HOFFMAN V. VULCAN MATERIALS CO., 19 F. Supp. 2d 475 (M.D.N.C. 1998)......................................8
K-N ENERGY, INC. V. GULF INTERSTATE CO., 607 F. Supp. 756 (D. Colo. 1983)...............................13
LEXINGTON-FAYETTE URBAN COUNTY GOV'T V. BELLSOUTH TELECOMM., INC., 14 Fed. Appx. 636 (6th Cir. 2001)....14
LIPTON V. NEWS INT'L, 514 A.2d 1075 (Del. 1986)..........................................................9
LOTHIAN V. CITY OF DETROIT, 414 Mich. 160 (1982)........................................................11
MCCANN V. BRODY-BUILT CONSTR. CO., 197 Mich. App. 512 (1992).............................................9
MEEK V. MICH. BELL TEL. CO., 193 Mich. App. 340 (1991)..................................................10
MM COS., INC. V. LIQUID AUDIO, INC., 813 A.2d 1118 (Del. 2003)...........................................4
NEARY V. MARKHAM, 155 F.2d 485 (10th Cir. 1946).........................................................11
OLDEN V. LAFARGE CORP., 203 F.R.D. 254 (E.D. Mich. 2001).................................................9
O'MALLEY V. BORIS, 742 A.2d 845 (Del. 1999)..............................................................6
OMNICARE, INC. V. NCS HEALTHCARE, INC., 809 A.2d 1163 (Del. Ch. 2002),
REV'D ON OTHER GROUNDS, 2002 Del. LEXIS 723 (Del. Dec. 10, 2002)....................................7
PACKER V. YAMPOL, 1986 WL 4748 (Del. Ch. Apr. 18, 1986).................................................14
PROF'L HOCKEY CLUB V. DETROIT RED WINGS, 787 F. Supp. 706
(E.D. Mich. 1992)...................................................................................8
IN RE SHELL OIL CO., 1990 WL 201390 (Del. Ch. Dec. 11, 1990).............................................7
STAHL V. APPLE BANCORP, INC., 579 A.2d 1115 (Del. Ch. 1990)..............................................4
STENBERG V. CHEKER OIL CO., 573 F.2d 921 (6th Cir. 1978)...............................................14
STEWART V ALVAREZ, 2002 U.S. Dist. LEXIS 19195 (E.D. La. Oct. 8, 2002)...................................9
STROMBERG METAL WORKS, INC. V. PRESS MECH., INC., 77 F.3d 928 (7th Cir. 1996)............................9
TOMCZAK V. MORTON THIOKOL, INC., 1990 WL 42607 (Del. Ch. 1990)...........................................4
IN RE TRI-STAR PICTURES, INC. LITIG., 634 A.2d 319 (Del. 1993)...........................................9
iii
UNITED FOOD & COMMERCIAL WORKERS V. S.W. OHIO REG'L TRANSIT AUTHORITY,
163 F.3d 341 (6th Cir. 1998).........................................................................14
UNITRIN, INC. V. AM. GEN. CORP., 651 A.2d 1361 (Del. 1995)...............................................5
UNOCAL CORP. V. MESA PETROLEUM CO., 493 A.2d 946 (Del. 1985).............................................4
STATUTES
17 C.F.R. Sections 240 13d-3(a), 13d-5(b)(1),...........................................................11
28 U.S.C. Section 1367...................................................................................9
Fed. R. Civ. P. 17.......................................................................................8
Fed. R. Civ. P. 19.......................................................................................8
Fed. R. Evid. 801(2)(D); 803(5), (6).....................................................................1
MCLs Sections.450 1791 (1), (2).....................................................................11, 12
Official Comments to Ind. Code 23-1-42-1................................................................12
iv
INDEX TO APPENDIX
Volume I: Public Documents
Page
SPG Offer to Purchase for Cash, dated Dec. 5, 2002......................................................A1
SPG and Westfield Supplement to the Offer to Purchase, dated Jan. 15, 2003.............................A56
TCI Schedule 14D-9/A Amendment No. 3, dated Dec. 20, 2002..............................................A95
TCI Common Stock Prospectus, dated Nov. 20, 1992 (Defendants' Exhibit 7)..............................A158
TCI Articles of Incorporation, dated Aug. 9, 2000.....................................................A348
TCI Second Amendment and Restatement of Agreement of
Limited Partnership, dated Sept. 30, 1998.......................................................A383
TCI Form 8-K, dated Aug. 18, 1998 (Payne Exhibit 1)...................................................A448
TCI Form 8-K, dated Sept. 30, 1998 (Payne Exhibit 2)..................................................A468
TCI Schedule 14D-9, dated December 11, 2002 (Gilbert Exhibit 10)......................................A486
Press Release, Taubman Centers, Inc., dated Jan. 21, 2003.............................................A512
TCI Schedule 13D/A, dated Nov. 14, 2002...............................................................A516
Press Release, Taubman Centers, Inc., dated Dec. 17, 2002 ............................................A570
TCI Schedule 13D/A, dated Jan. 28, 2003...............................................................A573
v
Volume II: Deposition Exhibits/Documents
Page
NOVA Restructuring and Recapitalization Plan Goldman Sachs as Advisor
to the NOVA Family (Rosenberg Exhibit 7).........................................................A600
Project NOVA Goldman Sachs Value Added (Rosenberg Exhibit 8)..........................................A602
Memorandum to IBD Innovation Award Committee, dated Nov. 18, 1998
(Rosenberg Exhibit 10)...........................................................................A608
Goldman Sachs Handwritten Notes (Bloostein Exhibit 3) ................................................A610
Separation and Relative Value Adjustment Agreement, dated Aug. 17, 1998...............................A775
REIT Flowchart (Bloostein Exhibit 2)..................................................................A845
Morgan Stanley Handwritten Notes (Niehaus Exhibit 3)..................................................A846
Letter from Morgan Stanley to the Taubman Partnership Committee and Board of
Directors, dated Aug. 17, 1998 (Niehaus Exhibit 8)...............................................A847
Minutes of Meeting of the Partnership Committee of TCI, dated June 24, 1998
(Gilbert Exhibit 3)..............................................................................A850
Project NOVA, Preliminary Transaction Term Sheet Unit Redemption Transaction,
revised June 29, 1998............................................................................A854
1998 Draft Press Releases (Taubman Exhibit 12)........................................................A861
TCI Ownership Structure, May 2001 Proxy (Rosenberg Exhibit 5) ........................................A912
Letter from Goldman Sachs to R. Taubman, dated Oct. 25, 2002 (R. Taubman Exhibit 9) ..................A914
Minutes of a Special Meeting of the Board of Directors of TCI,
dated Oct. 28, 2002 (Rosenberg Exhibit 1)........................................................A923
Voting Agreements, dated Nov. 14, 2002 (R. Taubman Exhibit 13) .......................................A928
Letter from D. Simon to R. Taubman, dated Oct. 22, 2002 (Bloostein Exhibit 4) ........................A935
vi
Volume III: Deposition Testimony/Cases & Authorities
Page
Excerpts from the Deposition Transcript of Allan J. Bloostein, taken Jan. 14, 2003 ............................A938
Excerpts from the Deposition Transcript of Simon Parker Gilbert, taken Jan. 9, 2003............................A984
Excerpts from the Deposition Transcript of G. William Miller, taken Jan. 22, 2003.............................A1030
Excerpts from the Deposition Transcript of Lisa Payne, taken Jan. 17, 2003....................................A1037
Excerpts from the Deposition Transcript of Christopher J. Niehaus, taken Jan. 17, 2003........................A1060
Excerpts from the Deposition Transcript of Adam Rosenberg, taken Jan. 24, 2003................................A1087
Excerpts from the Deposition Transcript of David Simon, taken Jan. 24, 2003...................................A1119
Excerpts from the Deposition Transcript of Robert Taubman, taken January 16, 2003.............................A1124
MICH. COMP LAWS Sections 450.1790-1799 .......................................................................A1163
DAVID M. EINHORN ET AL, REIT M&A TRANSACTIONS-PECULIARITIES AND
COMPLICATIONS, 55 BUS. LAW. (Feb. 2000) ..................................................................A1172
MILLER V. VILL. HILL DEV. CORP., No. 220297, 2001 WL 754050
(Mich. Ct. App. July 3, 2001) ..........................................................................A1214
MM CO., INC. V. LIQUID AUDIO, INC., No. 606, 2002, 2003 WL 58969
(Del. Jan. 7, 2003) ....................................................................................A1217
PACKER V. YAMPOL, 1986 WL 4748 (Del. Ch. 1986) ...............................................................A1228
PHILLIPS V. INSITUFORM OF N. AM., INC., Civ. A. No. 9173, 1987 WL 16285
(Del. Ch. 1987) ........................................................................................A1240
SCHAFFER EX REL. LASERSIGHT INC. V. CC INV., LDC, No. 99 Civ. 2821 (VM), 2002 WL
31869391 (S.D.N.Y. Dec. 20, 2002)........................................................................A1249
SEILON, INC. V. LAMB, No. C 83-314, 1983 WL 1354 (N.D. Ohio July 27, 1983)....................................A1257
vii
Volume IV
Page
SPG Press Release, dated Feb. 17, 2003........................................................................A1273
Computershare Report of Shares Tendered, dated Feb. 14, 2003..................................................A1275
REIT Wrap, dated Feb. 18, 2003................................................................................A1276
TCI Schedule 14D-9A, dated Feb. 19, 2003......................................................................A1281
TCI Schedule 14D-9A, dated Feb. 4, 2003.......................................................................A1288
Defendants' Response to Plaintiffs' Third Request For
Production Of Documents.................................................................................A1293
The Rouse Company Letter to R. Taubman, dated May 1, 1998.....................................................A1298
TCI Closing Stock Price, May 1, 1998..........................................................................A1299
TCI 2002 Proxy Statement......................................................................................A1300
Excerpts from the Deposition Transcript of Lucian Bebchuk, taken Feb. 19, 2003................................A1331
Excerpts from the Deposition Transcript of Martin Cicco, taken Feb. 5, 2003...................................A1347
Excerpts from the Deposition Transcript of Simon Parker Gilbert, taken Jan. 9, 2003...........................A1350
Excerpts from the Deposition Transcript of M. Travis Keath, taken Feb. 13, 2003...............................A1352
Excerpts from the Deposition Transcript of Peter Lowy, taken Feb. 19, 2003....................................A1368
Excerpts from the Deposition Transcript of G. William Miller, taken Jan. 22, 2003.............................A1373
Excerpts from the Deposition Transcript of Adam Rosenberg, taken Jan. 24, 2003................................A1381
Excerpts from the Deposition Transcript of David Simon, taken Jan. 24, 2003...................................A1389
Excerpts from the Deposition Transcript of Randall J. Smith, taken Feb. 14, 2003..............................A1393
Excerpts from the Deposition Transcript of Robert Taubman, taken Jan. 16, 2003................................A1405
Excerpts from the Deposition Transcript of Philip Ward, taken Jan. 17, 2003...................................A1409
viii
17 C.F.R. Sections 240. 13d-3(a), 13d-5(b)(1),................................................................A1415
IND. CODE ANN. Section 23-1-42-1..............................................................................A1419
AVACUS PARTNERS, L.P. V. BRIAN, Civ. A. No. 11001, 1990 WL 161909
(Del. Ch. Oct. 24, 1990)................................................................................A1423
CLARK V. SAKOWSKI, No. 210508, 2000 WL 33405937
(Mich. App. Oct. 13, 2000.).............................................................................A1432
EMERSON RADIO CORP. V. INT'L JENSEN INC., Civ. A. Nos. 15130, 14992,
1996 WL 483086 (Del. Ch. Aug. 15, 1996).................................................................A1436
FDIC V. HYDE PARK APARTMENTS, No. 94-56673, 1996 WL 138558
(9th Cir. Mar. 27. 1996)................................................................................A1457
GIBRALT CAP. CORP. V. SMITH, No. 17422, 2001 WL 647837
(Del. Ch. May 9, 2001)..................................................................................A1461
OMNICARE, INC. V. NCS HEALTHCARE, INC., No. 605, 649, 2002 Del. LEXIS 723
(Del. Ch. Dec. 10, 2002)................................................................................A1475
IN RE SHELL OIL CO., Civ. A. No. 8080, 1990 WL 201390
(Del. Ch. Dec. 11, 1990)................................................................................A1480
STEWART V. ALVAREZ, No. Civ. A. No. 02-1159, 2002 U.S. Dist. LEXIS 19195
(E.D. La. Oct. 7, 2002) ................................................................................A1519
TOMCZAK V. THIOKOL, INC., Civ. A. No. 7861, 1990 WL 42607 (Del. Ch. Apr. 5, 1990).............................A1523
SPG Schedule TO/A, Amendment No. 16, dated Feb. 27, 2003......................................................A1537
Affidavit of Keith R. Pauley..................................................................................A1546
Affidavit of Robert H. Steers.................................................................................A1548
ix
STATEMENT OF THE ISSUES PRESENTED
(i) Whether defendants have discharged their burden under CAMPAU V.
MCMATH, 185 Mich. App. 724 (1990) of demonstrating that issuance of the Series B
to the Taubman family had a valid and proper corporate purpose rather than the
improper purpose of transferring control to the Taubman family.
THE PLAINTIFFS SAY: NO
(ii) Whether the defendants have discharged their "heavy burden of
demonstrating a compelling justification" for issuance of the Series B to the
Taubman family under BLASIUS INDUS., INC. V. ATLAS CORP., 564 A.2d 651 (1990).
THE PLAINTIFFS SAY: NO
(iii) Whether the defendants have discharged their burden under UNOCAL
V. MESA PETROLEUM CO., 493 A.2d 946 (Del. 1985) of demonstrating that issuance
of the Series B to the Taubman family in response to the unsolicited offer by
the Rouse Company to purchase the shares of TCI for $17.50 per share, was
reasonable, proportionate and non-preclusive to third party offers.
THE PLAINTIFFS SAY: NO
(iv) Whether TCI's board of directors is breaching its fiduciary
duties by relying upon the improperly-issued Series B to the Taubman family, and
refusing to allow shareholders to take advantage of the SPG/Westfield $20 per
share offer, despite the tender by approximately 85% of TCI's shares of common
stock into the SPG/Westfield tender offer.
THE PLAINTIFFS SAY: YES
(v) Whether, SPG, as a bidder-shareholder, has standing to assert its
breach of fiduciary duty claims where the defendant directors have breached and
are continuing to breach their fiduciary duties both before and after SPG became
a stockholder of TCI.
THE PLAINTIFFS SAY: YES
(vi) Whether the Court has subject matter jurisdiction over this
action, despite the absence of an entity called TG Partners Limited Partnership
("TG"), where defendant Alfred Taubman (a) controls TG, (b) is the beneficial
owner of TG's Series B and partnership units, (c) votes TG's Series B on behalf
of all the partners of TG, and (d) can adequately protect the interests of TG.
THE PLAINTIFFS SAY: YES
x
(vii) Whether the Court has subject matter jurisdiction over the
action where plaintiff Randall Smith, a TCI stockholder since 1993, (a) is
seeking an injunction to set aside the Taubman family's valuable Series B voting
rights, (b) the value of the injunction to the defendants, including the cost of
complying with the injunction, is more than $75,000, and (c) 28 U.S.C. Section
1367 explicitly permits supplemental jurisdiction to be exercised over claims by
plaintiffs joined under Fed. R. Civ. P. 20.
THE PLAINTIFFS SAY: YES
(viii) Whether Randall Smith's claims are derivative in nature where
Smith asserts that the Series B improperly interfered with his voting rights in
TCI because the Series B improperly diluted and shifted voting control away from
other public shareholders to the Taubman family.
THE PLAINTIFFS SAY: NO
(ix) Whether plaintiffs' breach of fiduciary duty claims are
time-barred where (a) SPG and other TCI shareholders first suffered injury from
the Taubman family's blocking position in November 2002 when that blocking
position was used -- by the Taubman family and the TCI board -- to thwart SPG's
all cash offer, (b) defendants are engaged in a pattern of wrongful conduct that
began in 1998 and which continues to this day, and (c) plaintiffs' equitable
fiduciary duty claims seek "purely equitable" relief.
THE PLAINTIFFS SAY: NO
(x) Whether the group formed in November 2002 for the purpose of
collectively voting their 33.6% voting interest against the SPG offer may vote
their shares against the SPG/Westfield offer, where TCI's shareholders have not
conferred voting rights on those shares in accordance with Michigan Control
Share Acquisitions Act.
THE PLAINTIFFS SAY: NO
(xi) Whether, absent injunctive relief, the plaintiffs will suffer
irreparable injury if the Series B is permitted to vote at an upcoming meeting
of TCI's shareholders, where the defendants have been engaged in a campaign of
disinformation designed to persuade shareholders that the Series B is valid and
that the SPG/Westfield offer cannot succeed absent a judicial ruling in this
litigation.
THE PLAINTIFFS SAY: YES
xi
CONTROLLING OR MOST APPROPRIATE AUTHORITY
DEFENDANTS HAVE BREACHED AND CONTINUE TO BREACH THEIR FIDUCIARY DUTIES
BLASIUS INDUS., INC. V. ATLAS CORP., 564 A.2d 651 (Del. Ch. 1988)
CAMPAU V. MCMATH, 185 Mich. App. 724 (1990)
HILTON HOTELS CORP. V. ITT CORP., 978 F. Supp. 1342 (D. Nev. 1997)
UNOCAL CORP. V. MESA PETROLEUM CO., 493 A.2d 946 (Del. 1985)
PLAINTIFFS HAVE STANDING
CRTF CORP. V. FEDERATED DEP'T STORES, INC., 683 F. Supp. 422 (S.D.N.Y. 1988)
EMERSON RADIO CORP. V. INT'L JENSON, INC., 1996 WL 483086 (Del. Ch. Aug. 20,
1996)
THE COURT HAS SUBJECT MATTER JURISDICTION
CARDIZEM CD ANTITRUST LITIG., 90 F. Supp. 2d 819 (E.D. Mich. 1999)
FDIC V. HYDE PARK APARTMENTS, 1996 WL 138558 (9th Cir. 1996)
OLDEN V. LAFARGE CORP., 203 F.R.D. 254 (E.D. Mich. 2001)
PROF'L HOCKEY CLUB V. DETROIT RED WINGS, 787 F. Supp. 706 (E.D. Mich. 1992)
STROMBERG METAL WORKS, INC. V. PRESS MECH., INC., 77 F.3d 928 (7th Cir. 1996)
SMITH'S CLAIMS ARE INDIVIDUAL, NOT DERIVATIVE
IN RE TRI-STAR PICTURES, INC. LITIG., 634 A.2d 319 (Del. 1993)
LIPTON V. NEWS INT'L, 514 A.2d 1075 (Del. 1986)
PLAINTIFFS' BREACH OF FIDUCIARY DUTY CLAIM IS NOT BARRED BY THE STATUTE OF
LIMITATIONS
BOROCK V. COMERICA BANK-DETROIT, 938 F. Supp. 428 (E.D. Mich. 1996)
CLARK V. SAKOWSKI, 2000 WL 33405937 (Mich. App. Oct. 13, 2000)
MCCANN V. BRODY-BUILT CONSTR. CO., 197 Mich. App. 512 (1992)
MEEK V. MICH. BELL TEL. CO., 193 Mich. App. 340 (1991)
xii
THE GROUP SHARES MAY NOT BE VOTED UNDER THE CONTROL SHARE ACT
GAF CORP. V. MILSTEIN, 453 F.2d 709 (2d Cir. 1971)
Mich. Comp. Laws Sections 450.1791-1799
15 U.S.C. Section 78m(d)
17 C.F.R. Section 240.13d-5(b)(1)
Official Comments to Ind. Code 23-1-42-1
A PRELIMINARY INJUNCTION IS WARRANTED
CROWLEY V. LOCAL NO. 82, 679 F.2d 978 (1st Cir. 1982)
LEXINGTON-FAYETTE URBAN COUNTY GOV'T V. BELLSOUTH TELECOMM., INC., 14 Fed.
Appx. 636 (6th Cir. 2001)
PACKER V. YAMPOL, 1986 WL 4748 (Del. Ch. Apr. 18, 1986)
STENBERG V. CHEKER OIL CO., 573 F.2d 921 (6th Cir. 1978)
xiii
TCI's shareholders have now spoken: EIGHTY-FIVE PERCENT (85%) of the
common shares of TCI, or some 44 MILLION out of 52 million common shares, have
been tendered in response to the SPG/Westfield $20 per share offer. SEE
A1273-75. This response demonstrates that TCI's shareholders overwhelmingly
favor the all-cash offer, that they want to accept the 50% premium created by
the offer, and that they want the TCI board to remove the impediments to the
offer put in place by the Taubman family.
Unfortunately for the shareholders, the directors do not care. Barely
an hour after the tender results were announced, and without even convening a
board meeting, TCI reiterated its implacable opposition to the offer, stating
that "the facts have not changed" because "more than 30 percent of outstanding
.. . . voting shares [i.e., the Taubman family] have publicly announced their
opposition" to the offer. A1276-80; A1281, 1285. Robert Taubman has publicly
called the tender of shares "irrelevant." A1288, 1292. This startling response
proves that the group formed to oppose the offer is still alive and well, that
TCI is being run by and for the Taubman family, and that what the shareholders
want (even 85% of them) does not matter.
As for what defendants decry as a "lurid and utterly false picture" of
their conduct in 1998 (Def. Br. 1), the facts are not the invention of SPG, but
are straight out of the contemporaneous record documented by one of defendants'
then AND CURRENT professional advisors. Their author has not disavowed the
contents or accuracy of a single item in those materials, either in his
deposition or in any affidavit submitted to the Court.(1) That daily chronicle
of the deal, and not the revisionist history proffered by defendants, discloses
what really happened in 1998. And what happened in 1998 is even clearer now that
SPG has
- --------
(1) Adam Rosenberg, a magna cum laude graduate of Harvard Law School and
four-year veteran of the Skadden Arps law firm before he joined Goldman Sachs,
testified that he strives for truthful and honest written communications and
that he tried to make his notes as accurate as possible. A1382-1387b. He became
the ONLY member of the 1998 Goldman team to be assigned to the current defense
of the SPG offer. A1388. Defendants' claim that his notes are hearsay is also
incorrect. SEE Fed. R. Evid. 801(2)(D); 803(5), (6).
obtained, through subpoena, a copy of the "Rouse letter" in which a 30% premium
offer, like SPG/Westfield's offer today, was made to TCI, rejected by the board
and concealed from the shareholders because of the Taubman family's ardent wish
to avoid a sale. The Series B was created and designed to allow the Taubman
family to veto offers made to TCI's shareholders by the Rouses, SPGs and
Westfields of the world. If permitted to stand, the Series B will serve that
intended, and improper, purpose here.
A. DEFENDANTS HAVE BREACHED AND CONTINUE TO BREACH THEIR FIDUCIARY
DUTIES.
Defendants' effort to justify the issuance of the Series B under the
"business judgment" rule is unavailing. The premise of defendants' argument is
that the Series B was "interrelated" with the overall GM Exchange and that
because the GM Exchange was approved by disinterested directors after an
"exemplary process" it is immune from attack. (Def. Br. 27-28). But the premise
is unfounded: the Series B was NOT a necessary part of the GM Exchange, nor was
there any "obligation" to issue the Series B, as falsely claimed by TCI in an
8-K filing that defendants still utterly fail to explain. A468-69; SEE A1353-54
(Keath); A1338-41 (Bebchuck).
The record establishes that the sole purpose of the Series B was to
grant the Taubman family, for the first time, a veto right in the public
company. It was appended to the deal late in the game at the behest of the
family and its advisors without any assessment of its value by the board, (2)
without consideration of any alternatives by the board, and with no discussion
of its blocking impact.(3) All of the so-called benefits the REIT obtained from
the GM Exchange (i.e., majority ownership of TRG) would have happened by default
had GM simply exited TRG, which the family was happy to see it do. SEE A601, 609
(TCI "removed a potentially contentious
- ----------
(2) Tellingly, the lead banker who signed Morgan Stanley's fairness opinion on
the GM Exchange had "no recollection" of the Series B and said his firm did no
financial analysis of it. A1081, 1076 (Niehaus). The opinion does not even
mention the Series B. A1077-78; A1011-12.
(3) Defendants claim they "knew" as a matter of "arithmetic" that the Series B
would give the family a 30% vote in TCI (Def. Br. 12-13), but they admit there
was no discussion or deliberation by the board about the drastic consequences of
the Series B. A970-71, 975; A1148.
2
shareholder"). The Series B was not necessary to preserve a "say over the
management of TRG's assets" for the TRG partners (Def. Br. 11), because even
without the Series B the TRG partners retained (indeed increased) their
percentage ownership of TRG, obtained a veto over any sale of TRG, and increased
their representation on the TCI board from 4 of 11 members to 4 of 9.
A606-07.(4)
Neither the alleged financial fairness of the "malls for units"
exchange, the meticulousness with which the board is said to have considered the
restructuring, nor the fact that multiple professional advisors blessed the
overall deal, insulates the Series B from scrutiny. The real question is whether
the Series B is fundamentally fair and equitable STANDING ON ITS OWN. The answer
to that must be no, because:
- It was issued for a mere $38,400;
- It gave the family an effective veto over third party offers,
thereby disenfranchising the public shareholders who own 99%
of TCI;
- It effectively gave away the board's ability to exercise
independent judgment over premium offers in the future, such
as the current SPG/Westfield offer (A982-83);
- It effectively eliminated the ability of the shareholders to
remove directors through a two-thirds vote (SEE A109,
by-laws Section.308).
Properly viewed on its own, the Series B served no purpose other than
to deliver control of TCI to the Taubman family. The business judgment rule
simply does not apply to board action, such as issuance of the Series B,
designed to cause a reallocation "of effective power with respect to governance
of the corporation." BLASIUS INDUS., INC. V. ATLAS CORP., 564 A.2d 651, 660
(Del. Ch. 1988); SEE CAMPAU V. MCMATH, 185 Mich. App. 724 (1990) (stock issued
"for the purpose of establishing control of the corporation, and not having some
corporate goal as its
- ----------
(4) As a result of the GM Exchange both the public AND THE FAMILY "got bigger
slices of a smaller pie," I.E., increased ownership of a partnership that owned
ten fewer malls, but the public lost -- and the family gained -- the ability to
control major transactions involving TCI. A1360-61 (Keath); A1342-46 (Bebchuk)
(public was "much, much worse off" after GM Exchange). What really happened is
that where before 1998 it took two of the three parties (GM, the family and
public) to block major transactions, after GM's exit the sole blocking power was
consolidated at the REIT and TRG level in a single party, the Taubmans.
3
principal purpose, is fraudulent as against the other shareholders and cannot be
permitted to stand."). Instead, the board "bears the heavy burden of
demonstrating a compelling justification for such action." MM COS., INC. V.
LIQUID AUDIO, INC., 813 A.2d 1118, 1128 (Del. 2003); SEE STAHL V. APPLE BANCORP,
INC., 579 A.2d 1115, 1122 (Del. Ch. 1990) (noting a virtually "per se rule that
board action taken for the principal purpose of impeding the effective exercise
of the stockholder franchise is inequitable and will be restrained or set aside
in proper circumstances"). An inequitable purpose does not require proof of
dishonest motive. ID. at 1121.
The assertion that the Series B produced "no change" because the
family's "support" for a sale was required prior to 1998 (Def. Br. 12) is wrong.
Prior to the GM Exchange the family had "NO ABILITY to block transactions at
EITHER [the] REIT or OP level." After the Series B the family obtained a veto at
BOTH the REIT and partnership level. A606; A968-69, 972; A1158. And the
contention that the Series B made TCI's governance consistent with its "peers"
(Def. Br. 10) misses the point, which is that the family's prior "influence," to
the extent it existed, was elevated to a permanent veto by the Series B.(5)The
change was substantive, preclusive and real.
It was also "defensive," which makes the business judgment rule
inapplicable for this reason as well. As a result, the heightened standard of
conduct under UNOCAL applies. The family's determination to deter "interlopers"
(A600, 603) would alone be enough to trigger UNOCAL, which applies even where a
defensive measure is "put in place to ward off possible future advances and not
[as] a mechanism adopted in reaction to a specific threat." TOMCZAK V. MORTON
THIOKOL, INC., 1990 WL 42607, at *8 (Del. Ch. 1990) (A1523). But here, there WAS
a specific threat -- Rouse. The Rouse letter -- obtained just two days ago by
SPG through a third
- ----------
(5) Defendants' effort to make an issue of Simon's governance also must fail;
the SPG/Westfield offer is for all CASH, so Simon's governance is irrelevant
to TCI shareholders. SEE Bebchuk Dec. P. 44. In any event Simon's governance
differs from TCI's in three critical respects: (1) SPG's "excess share"
provision is waivable by the board; (2) the Simon family has no ability to
prevent anyone from acquiring the REIT's common stock; and (3) most important of
all, SPG's governance provisions were all voted on and approved BY THE
SHAREHOLDERS. A1390-92 (Simon); A1374-80 (Miller); A1410-14 (Ward).
4
party subpoena, after defendants refused to produce it in discovery (A1295) --
contained a specific offer on May 1, 1998 to acquire both the REIT and the
partnership units of TRG for $17.50, representing almost a 30% premium to the
then-trading price of $13.69. See A1298; A1299. TCI NEVER DISCLOSED THIS PREMIUM
OFFER TO ITS SHAREHOLDERS. A1351. But the Taubmans made sure that the Series B
was put in place so that neither Rouse nor any future offeror would be able to
acquire TCI without the family's consent. TCI adopted the Series B in direct
response to the Rouse offer,(6) then obscured its true purpose by claiming the
Series B was an "obligation" of the GM Exchange. The Series B was draconian and
preclusive and is invalid under UNOCAL. SEE UNITRIN, INC. V. AM. GEN. CORP., 651
A.2d 1361, 1373 (Del. 1995).(7)
That defendants structured the GM Exchange to avoid a shareholder vote
- -- even if one was not legally required, as they contend -- is further evidence
that the primary purpose of the Series B was to seize control of TCI for the
family. SEE HILTON HOTELS CORP. V. ITT CORP., 978 F. Supp. 1342, 1349 (D. Nev.
1997) (enjoining restructuring plan designed to maintain control where board
"offered no credible justification for not seeking shareholder approval" even
though shareholder vote not legally required).(8) The ultimate "malls for units"
structure was chosen
- ----------
(6) Defendants' contention that the restructuring process was "initiated" before
receiving a specific offer from Rouse (Def. Br. 29 n.27) ignores the fact that
the Series B was not proposed until relatively late in the process, AFTER the
Rouse offer had been received. A850, 852, 996-97.
(7) The Rouse letter also refutes Robert Taubman's testimony that Rouse was only
interested in buying the partnership, and made no offer for the public REIT.
A1406-07 ("Absolutely not"). Rouse offered to buy both, but stated that if the
Taubman family wished to retain its partnership units it could do so, with the
option to convert them later. A1298. Thus, defendants' statement that "there is
no evidence that any third party was interested in acquiring anything other than
the entire enterprise" prior to the 1998 restructuring (Def. Br. 3; SEE ID. at
31) is both untrue and misleading. SEE ALSO A1332-37 (Bebchuk); A1348-49
(Cicco).
(8) Defendants' assertion that the opposition to a shareholder vote in 1998 was
limited to the discarded "SaleCo/DevCo" plan (Def. Br. 7-8) is incorrect: the
family was "vigorously opposed" to "ANY proposal which includes a shareholder
vote" and wanted to "avoid a shareholder vote at all costs." A603, 607 (emphasis
added); SEE A600, 603, 613-14, 617; A1062-63, 1072-73. This position continued
well after rejection of the "SaleCo/DevCo" proposal on June 24, which did not
even feature the Series B. SEE A850-51; A846 (July 18 Morgan Stanley note: "GS
Objection - Shareholder Vote"). And if it is true, as defendants suggest, that
at one
5
precisely BECAUSE the parties apparently thought it avoided the need for a
shareholder vote. The Series B power grab had to be accomplished
surreptitiously, and was. SEE A739; A1117-18 (Goldman Sachs banker advised,
"Don't mention governance -- can of worms"). SEE ALSO A661 ("Veto rights -- must
dig deep to discover[arrow sign] investors don't know/care").(9)
The board's current position that it is impossible for the offer to
succeed without the family's support(10) merely proves that the Series B is
preclusive and that its issuance violated the board's fiduciary duties. The
board is now a mere rubber stamp for the Taubman family, as further evidenced by
the press release rejecting the initial SPG offer immediately after it was made
public (A501-02) and TCI's recent press release disparaging the 85% tender an
hour after the results were made known.(11) TCI's assertion that the offer is
"inadequate" rings hollow given that in 1998 the board GAVE AWAY its ability to
exercise independent judgment over unsolicited
- ----------
point Robert Taubman was "about to concede" the "shareholder vote issue" (Def.
Br. 7), that means he was "opposed" to it beforehand, which is inconsistent with
his sworn testimony that he never opposed a shareholder vote in any way, shape
or form. A1138-40.
(9) Defendants are not aided by their laundry list of public filings that, if
pieced together like a jigsaw puzzle, allegedly constitute adequate disclosure.
The pre-1998 "disclosures" were all very general in nature, and none of the
post-1998 filings explained in straightforward, understandable terms that the
Series B gave the Taubman family a veto power. SEE A1394-95, 1399-1401 (Smith).
Defendants' fiduciary duty of candor is not satisfied by piecemeal, partial
disclosures that the average shareholder would be unable to figure out. SEE
O'MALLEY V. BORIS, 742 A.2d 845, 851 (Del. 1999) ("Investors should not be
required to correctly `read between the lines' to learn all of the material
facts relating to the transaction at issue."); A1366-67 (Keath).
(10) SEE, E.G., A500, 502 ("Given the family's position, any efforts to purchase
Taubman Centers would not be productive"); A120 (meeting to amend Excess Share
Provision is a "waste of time" because it requires two-thirds vote which "Simon
cannot get" in light of family's intention to vote against the offer).
(11) In fact, the 85% tender by TCI shareholders is nearly "unprecedented."
A1277-78. The conclusory declaration of Alan Miller, TCI's proxy solicitor,
speculating about why shareholders may have bought and tendered their shares is
without factual basis, as he does not indicate he actually spoke to any
shareholders about these matters. Similar "offerings" by Miller have been
judicially criticized and rejected. SEE CHESAPEAKE V. SHORE , 771 A.2d 293,
334-36 (Del. Ch. 2000). For the actual views of two of TCI's largest
shareholders, owning over 10% of the common shares, SEE Affidavits of Keith R.
Pauley and Robert H. Steers (A1546; A1548).
6
offers. Price no longer even matters.(12) In any event, the adequacy of the
offer should be decided by TCI's shareholders. SEE GRAND METRO. V. PILLSBURY
CO., 558 A.2d 1049, 1052, 1057-60 (Del. Ch. 1988) (where 87% of shareholders
tendered for 60% premium offer, court enjoined board to eliminate preclusive
poison pill because shareholders were entitled to determine for themselves
whether to accept the offer).
SPG has standing as a bidder-shareholder to assert its breach of
fiduciary duty claim. Defendants rely on cases such as OMNICARE, INC. V. NCS
HEALTHCARE, INC., 809 A.2d 1163 (Del. Ch. 2002), REV'D ON OTHER GROUNDS, 2002
Del. LEXIS 723 (Del. Dec. 10, 2002) (A1475), where plaintiff owned no shares at
the time of the breach. But here, SPG alleges the directors have breached AND
ARE CONTINUING TO BREACH fiduciary duties both before and after the time SPG
became a stockholder of TCI. Cplt. P.P. 84(b), 92-93. This "continuing wrong"
gives SPG standing. SEE CRTF CORP. V. FEDERATED DEP'T STORES, INC., 683 F. Supp.
422, 437 (S.D.N.Y. 1988).(13)
Recognizing that Smith's presence as a plaintiff moots any issue of
SPG's standing,(14) defendants argue that his California citizenship destroys
diversity jurisdiction because TG Partners Limited Partnership ("TG"), which
owns shares of the Series B, has two limited partners
- ----------
(12) Given Goldman's loyalties to the family, the board cannot hide behind the
Goldman "inadequacy" opinion. Courts may appropriately discount the financial
advice of a conflicted advisor. SEE IN RE SHELL OIL CO., 1990 WL 201390, at *33
(Del. Ch. Dec. 11, 1990) (A1480).
(13) As a current TCI shareholder SPG also has standing to seek declaratory
relief with respect to the voting of the Series B shares. In OMNICARE, the court
held that the plaintiff DID have standing to pursue a declaratory judgment
action with respect to the voting rights of certain "Class B" stock held by
corporate insiders. 809 A.2d at 1173-74 (A1475).
(14) SEE EMERSON RADIO CORP. V. INT'L JENSON, INC., 1996 WL 483086, at *14 (Del.
Ch. Aug. 20, 1996) (A1436) (that plaintiff-bidder did not own the target
corporation's stock did not preclude consideration of the bidder's fiduciary
duty claims, because other shareholders who DID own the company's stock
supported the bidder's claims, the merits of which had been the subject of
significant discovery); OMNICARE, 2002 Del. LEXIS 723, at *6 (A1475) (finding
issue of plaintiff's standing moot because "there are stockholders with standing
who have asserted those [fiduciary duty] claims").
7
who are citizens of California. Defendants claim that TG is a "real party in
interest" which must be joined as a defendant. Def. Br. 21-22. Notably,
defendants never raised any such claim until now.
The argument in any event is misplaced; TG is not an indispensable
party. As defendants concede, Alfred Taubman controls TG because he is
"authorized to take all actions on behalf of TG partners" and "votes TG
Partners' Series B Preferred Stock on behalf of all the partners of TG."
(Poissant Dec.P. 7, Def. Ex. 29). Alfred Taubman is also the BENEFICIAL OWNER of
TG's Series B shares and limited partnership units. A1306, 1309-10. As Alfred
Taubman is the legal and beneficial owner of TG's voting rights, TG and its
limited partners are in no sense "indispensable" parties under Fed. R. Civ. P.
19, which governs the joinder analysis. SEE FDIC V. HYDE PARK APARTMENTS, 1996
WL 138558 (9th Cir. 1996) (A1457) (limited partnership not indispensable party
where general partner named as defendant).(15) No showing has been made that, in
the absence of TG, the Court cannot accord complete relief to the parties, or
that disposition of the action in TG's absence may impair TG's ability to
protect its interests.(16) Indeed, whatever "interest" TG may claim is identical
to that of Alfred Taubman and can be adequately protected by him as well as the
other defendants who are aligned in defending the validity of the Series B. SEE
PROF'L HOCKEY CLUB V. DETROIT RED WINGS, 787 F. Supp. 706, 713-14 (E.D. Mich.
1992). Thus, diversity remains intact.
Defendants next contend that Smith fails to meet the $75,000
jurisdictional threshold, but because plaintiffs seek an injunction, the amount
in controversy may be measured from defendants' viewpoint. CARDIZEM CD ANTITRUST
LITIG., 90 F. Supp. 2d 819, 834-35 (E.D. Mich.
- ----------
(15) The "real party in interest" rule embodied in Fed. R. Civ. P. 17 applies to
PLAINTIFFS and has no application here. RMP CONSULTING GROUP, INC. V. DATRONIC
RENTAL CORP. (Def. Br. 22) is therefore inapposite as it addressed whether,
under Rule 17(a), the court should consider the citizenship of a limited
partnership, as a PLAINTIFF.
(16) Defendants mistakenly contend that plaintiffs seek to enjoin the voting
right of all of the Series B, constituting 38% of TCI's voting power. In fact,
plaintiffs only seek to enjoin the Series B voting rights controlled by the
Taubman family. (Cplt.P.P. 61, 70, 87)
8
1999); SEE HOFFMAN V. VULCAN MATERIALS CO., 19 F. Supp. 2d 475, 483 (M.D.N.C.
1998). The Series B voting rights are clearly worth more than $75,000 to
defendants. SEE Keath Dec.P. 5.G.(vi); A1362-65 (Keath); A1397-98 (Smith) (the
Series B "is worth millions because it basically controls any outcome, any
decision" of TCI). Indeed, the cost of complying with the injunction alone is
undoubtedly more than $75,000. SEE CARDIZEM, 90 F. Supp. 2d at 834-36.
Even if a "plaintiffs' viewpoint" rule were adopted, there is federal
jurisdiction because the amount in controversy for the SPG plaintiffs exceeds
$75,000 and there is supplemental jurisdiction under 28 U.S.C. Section. 1367
over the related claims of Smith. SEE OLDEN V. LAFARGE CORP., 203 F.R.D. 254,
264-65 (E.D. Mich. 2001). Section 1367 specifically permits supplemental
jurisdiction to be exercised over claims by plaintiffs joined under Rule 20,
as Smith was here. SEE STROMBERG METAL WORKS, INC. V. PRESS MECH., INC., 77 F.3d
928, 932 (7th Cir. 1996); STEWART V ALVAREZ, 2002 U.S. Dist. LEXIS 19195
(E.D. La. Oct. 8, 2002) (A1519).
The contention that Smith's claims are derivative claims is also
incorrect. Smith alleges that the Series B has improperly diluted and shifted
voting control away from him and other public shareholders to the Taubman
family. SEE Cplt. P.P. 41-42, 49, 87; A1394-96, 1402-03 (Smith). Such a dilution
claim is individual, not derivative. IN RE TRI-STAR PICTURES, INC. LITIG., 634
A.2d 319, 330 (Del. 1993); LIPTON V. NEWS INT'L, 514 A.2d 1075, 1078-79 (Del.
1986).(17)
SPG's breach of fiduciary duty claim is not barred by the statute of
limitations. The claim does not accrue until "all the elements of the cause of
action, including the element of damage, have occurred and can be alleged in a
proper complaint." SEE CLARK V. SAKOWSKI, 2000 WL 33405937, at * 2 (Mich. App.
Oct. 13, 2000) (A1432). A claim accrues "when one is
- ----------
(17) Merely calling this an "entrenchment" claim does not make it a derivative
claim. "Where the entrenching actions of a corporate board have the purpose and
effect of reducing the voting power of stockholders, the affected stockholders
may bring an individual action." IN RE GAYLORD CONTAINER CORP. S'HOLDERS LITIG.,
747 A.2d 71, 81-83 (Del. Ch. 1999); SEE ALSO AVACUS PARTNERS, L.P. V. BRIAN,
1990 WL 161909, at *7 (Del. Ch. Oct. 24, 1990) (A1422).
9
injured, not when the wrong is committed." MCCANN V. BRODY-BUILT CONSTR. CO.,
197 Mich. App. 512, 515 (1992).(18)
SPG's breach of fiduciary duty claim could not have accrued until
November 2002. That is when SPG and TCI's other shareholders first suffered
INJURY from the Taubman family's seizure of its 30% blocking position because
the Taubman family used -- and the board relied upon -- that wrongfully-obtained
blocking position to thwart SPG's offer. SEE BOROCK V. COMERICA BANK-DETROIT,
938 F. Supp. 428, 431 (E.D. Mich. 1996) (breach of fiduciary duty claim accrued
not when bank gave bad advice but when plaintiff was injured by bank's pulling
credit line).
The continuing nature of defendants' wrongful conduct also tolls the
statute of limitations. SEE MEEK V. MICH. BELL TEL. CO., 193 Mich. App. 340, 344
(1991) (continuing wrong doctrine applies where acts are "so sufficiently
related as to constitute a pattern"). Defendants are engaged in a pattern of
conduct that BEGAN with the Taubman family's seizure of a blocking position in
1998, and continues to this day with the board's failure to take any steps to
remove that blocking position, as well as the recent amendment of the bylaws, in
direct response to the SPG offer, to make it even more difficult for the
shareholders to remove the Excess Share Provision. A95; A1403-04 (Smith).(19)
- ----------
(18) MCL Section 600.5827's inclusion of the phrase "regardless of the time
when the damage results" was merely "intended to prevent subsequent damages from
extending the period of limitations," which is not the situation here. SEE AM.
STATES INS. CO. V. TAUBMAN CO., 352 F. Supp. 197, 200 (E.D. Mich. 1972).
(19) All but one of the cases cited by defendants (Def. Br. 24 & n.24) applied
the "continuing wrong" doctrine not to the statute of limitations but instead to
the contemporaneous ownership requirement for derivative suits, a procedural
rule that has "no relevance to individual shareholder suits claiming a private
wrong." ALA. BY-PRODUCTS CORP. V. CEDE & CO., 657 A.2d 254, 266 (Del. 1995). The
lone non-derivative suit case, HORVATH V. DELIDA, involved continued flooding
damage caused by a single act of dredging, not (as here) a related pattern of
wrongdoing.
10
Lastly, even if the statute of limitations were to apply, the Court
would have discretion to entertain plaintiffs' fiduciary duty claim which seeks
"purely equitable" relief, especially given TCI's misleading and incomplete
disclosures concerning the Series B. SEE LOTHIAN V. CITY OF DETROIT, 414 Mich.
160, 170-75 (1982); GIBRALT CAPITAL CORP. V. SMITH, 2001 WL 647837 (Del. Ch. May
9, 2001) (A1461); NEARY V. MARKHAM, 155 F.2d 485, 489 (10th Cir. 1946).
B. THE "GROUP" SHARES MAY NOT BE VOTED UNDER THE CONTROL SHARE ACT.
Defendants attempt to avoid application of the Control Share Act by
arguing that (1) the termination of the Voting Agreements between Robert Taubman
and certain family friends and allies makes those agreements "moot"; (2) the
formation of a group is not a "control share acquisition"; and (3) even if the
Taubman family is a "group" they have been so since at least 1998. These
arguments misread the Court's January 22 Order, ignore applicable Section 13(d)
precedent and SEC Rules, and are inconsistent with the Indiana Commentary.
FIRST, Robert Taubman, the Taubman family and its allies clearly
formed a "group" in November 2002. The family came together for the specific
purpose of voting their collective 30% voting power against the SPG offer,
deputized Robert Taubman to acquire another 3.6% of voting power from the
friends and allies,(20) and filed a Schedule 13D announcing the shareholder
group's common objective. A543.
SECOND, that group's acquisition of voting power over a 33.6%
controlling block of shares constitutes a "control share acquisition." The
acquisition of voting power is clearly an "acquisition" under the Act. MCL
Section 450.1791(1). When Robert Taubman and the Taubman family members joined
to oppose the SPG offer, they acquired, for purposes of Section 13(d) and the
Control Share Act, the voting power held collectively by the family. 17 C.F.R.
Sections 240.13d-5(b)(1), 13d-3(a) (A1415). The voting power acquired by Robert
Taubman from the family friends, in turn, is "considered to have been acquired
in the same transaction" as the acquisition
- ----------
(20) Two of these individuals (Max Fisher and Robert Larson) themselves acquired
shares in the open market and immediately turned over the voting rights to
Robert Taubman. A545.
11
of voting power by the family upon formation of the group. MCL Section
450.1791(2). Thus, Robert Taubman, together with the family and the other
supporting shareholders, acquired in one transaction a total of 33.6% of the
issued and outstanding voting shares of TCI.
Defendants purport to derive support from the Indiana Commentary for
the proposition that the formation of a group, without an acquisition of new
shares, cannot be a control share acquisition. Def. Br. 34. But they ignore the
portion of the Indiana Commentary stating that "the ACQUISITION of control
shares MAY BE . . . AS PART OF A GROUP," i.e., by "two or more persons acting
cooperatively or in concert." A1421. (emphasis added). As the Court has noted,
citing the Indiana Commentary, a control share acquisition occurs when in "any
transaction or series of transactions . . . A GROUP OF PERSONS ACTING TOGETHER,
ACQUIRES THE SUBSTANTIVE PRACTICAL ABILITY TO VOTE" more than 20%, 33-1/3% or a
majority of the voting shares. Jan. 22 Order at 13 (emphasis added). This is
entirely consistent with the principle under 13(d) that each member of the group
is deemed to have acquired the voting power of each other member EVEN WITHOUT
ADDITIONAL PURCHASES OF STOCK. SEE GAF CORP. V MILSTEIN, 453 F.2d 709, 718 (2d
Cir. 1971) ("It hardly can be questioned that a group holding sufficient shares
can effect a takeover without purchasing a single additional share of stock").
(21)
- ----------
(21) Defendants' heavy reliance on ATLANTIS GROUP, INC. V. ALIZAC PARTNERS (Def.
Br. 35) is badly misplaced. Plaintiffs there sought to enjoin three shareholder
groups from voting their shares based on actions taken in their capacity as
DIRECTORS, not shareholders. Def. Ex. 63 at 3-4. SPG's counsel here, Miller
Canfield, advanced the unremarkable proposition that action taken by directors
solely in their capacity as directors (and not as shareholders) is not subject
to the Control Share Act, "nor should it be." ID. at 45. Here, by contrast, SPG
challenges the Taubman family's acquisition of voting control as a shareholder
group, and not in any other capacity. The court in ATLANTIS held that because
plaintiffs had not produced sufficient evidence of an agreement among the
shareholders AS SHAREHOLDERS to act in concert, they were not a "group" within
the meaning of section 13(d) or, by analogy, the Control Share Act. The court
went on to note, in dicta, that whatever "alignment" existed among the three
shareholder groups "probably" was not a control share acquisition, but that has
nothing to do with whether formation of a shareholder group constitutes an
acquisition under the Act. For all of defendants' efforts to suggest that Miller
Canfield's position in ATLANTIS is somehow inconsistent with SPG's position
here, that case has nothing to do with this one. Shareholders who combine
together to vote as a group, such as the Taubmans, ARE a proper subject for
application of the Control Share Act.
12
THIRD, termination of the Voting Agreements covering 3.6% of TCI's
voting power in no way "moots" this conclusion. Even if one believes that the
other shareholders no longer have any understanding with the Taubman family to
oppose the offer -- which defies common sense and all the evidence -- all that
means is that certain group members have exited. It does NOT mean that the group
has been terminated, or that the Taubman family remains other than resolute in
using the group's remaining 30% voting power to stop the SPG offer. Tearing up
the Voting Agreements changes nothing except, at most, reduces the number of
"tainted" control shares from 33.6% to 30.6%. Nothing in the Michigan Act or
Indiana Commentary provides that a transfer (or return) of tainted control
shares from a group to someone who has allegedly exited the group "cleanses" the
control shares that remain in the hands of the group. SEE A1420.
FOURTH, the argument that the Taubman family could not have formed a
group in 2002 because it has been a group since 1998 is again contrary to
Section 13(d) law. A group may be found based on "evidence that indicates AN
INTENTION TO ACT IN CONCERT OVER AND ABOVE THE PRIOR AND CONTINUING
RELATIONSHIPS BETWEEN THE VARIOUS PARTIES." K-N ENERGY, INC. V. GULF INTERSTATE
CO., 607 F. Supp. 756, 765 (D. Colo. 1983) (emphasis added). Such an intention
is clear from the 13D, WHICH INCLUDED THE FAMILY'S 30% VOTING SHARES FOR THE
FIRST TIME, and is confirmed by the family's public statements that it intends
to vote against the offer, as well as Robert Taubman's testimony that "we" --
the FAMILY (a) decided to oppose the offer; (b) agreed to seek the Voting
Agreements; and (c) jointly filed the 13D. SEE SPG Opening Br. 22-23. It is
irrelevant whether the family was -- or currently is -- a group for other
purposes, since the only group that matters here -- the one formed to vote
against the SPG offer -- could not have existed prior to November 2002, when the
family filed a 13D.
Because TCI's shareholders have not conferred voting rights on the
Taubman family's controlling Series B shares, those shares cannot validly voted
under the Control Share Act.(22)
- ----------
(22) As CURRENT shareholders of TCI, SPG and Smith plainly both have standing
under the Act to challenge the FUTURE voting of control shares by the Taubmans.
13
C. A PRELIMINARY INJUNCTION IS WARRANTED.
It is not true that the Court is powerless to grant a preliminary
injunction because it would "irrevocably alter" the "status quo." Def. Br. 40.
The Court's "focus always must be on prevention of injury by a proper order, not
merely on preservation of the status quo." STENBERG V. CHEKER OIL CO., 573 F.2d
921, 925 (6th Cir. 1978) (citations omitted). Thus, "if the currently existing
status quo itself is causing one of the parties irreparable injury, it is
necessary to alter the situation so as to prevent the injury." ID.; SEE ALSO
UNITED FOOD & COMMERCIAL WORKERS V. S.W. OHIO REG'L TRANSIT AUTH., 163 F.3d 341,
348 (6th Cir. 1998).
Furthermore, a preliminary injunction may issue based solely on
documentary evidence and deposition testimony, LEXINGTON-FAYETTE URBAN COUNTY
GOV'T V. BELLSOUTH TELECOMM., INC., 14 Fed. Appx. 636, 639 (6th Cir. 2001), and
may also grant the ultimate relief sought by plaintiff so long as proper notice
and a hearing are afforded. SEE CROWLEY V. LOCAL NO. 82, 679 F.2d 978, 997-98
(1st Cir. 1982), REV'D ON OTHER GROUNDS, 467 U.S. 526 (1984). And preliminary
injunctions are commonly granted to bidders in takeover cases. SEE SPG Opening
Br. at 24.
Enjoining the Series B from voting will not irreparably harm the
Taubmans. Even if the SPG offer succeeds, the family will retain its significant
economic interests in TRG and the veto rights they have to control a merger or
sale of the partnership assets. All they would lose is the ability to block a
sale of the public company in which their economic interest is nil.
Finally, the contention that any harm to plaintiffs can be remedied by
adjustment of the shareholder vote at a later time is wrong. Injunctions have
issued PRIOR TO A SHAREHOLDER VOTE where management's conduct "will have a
chilling effect on the plaintiffs' proxy solicitation" or "harm . . . the
corporate electoral process, a process which carries with it the right of
shareholders to a meaningful exercise of their voting franchise and to a fair
proxy contest with an informed electorate." PACKER V. YAMPOL, 1986 WL 4748, at
*11 (Del. Ch. Apr. 18, 1986) (A1234); BANK OF NEW YORK V. IRVING TRUST CO., 528
N.Y.S.2d 482 (1988) (injunction where target's conduct "taint[s] electoral
process"). TCI has repeatedly told shareholders that the offer
14
cannot succeed "absent a Court ruling in litigation" (A504), which is clearly
designed to dissuade shareholders from exercising their franchise.(23)
CONCLUSION
Plaintiffs respectfully request that the Court: (1) preliminarily
enjoin the Taubman family from voting the Series B shares controlled by them;
and (2) grant such other and further relief as the Court deems fair and
equitable.
Dated: February 28, 2003
MILLER, CANFIELD, PADDOCK & WILLKIE FARR & GALLAGHER
STONE, P.L.C. 787 Seventh Avenue
New York, New York 10019
By: /s/ Carl H. Von Ende Telephone: (212) 728-8000
----------------------------------
Carl H. von Ende (P21867) Facsimile: (212) 728-8111
Todd Holleman (P57699) Attorneys for SPG Plaintiffs
150 West Jefferson, Suite 2500 SKADDEN, ARPS, SLATE,
Detroit, Michigan 48226-4415 MEAGHER, & FLOM LLP
Telephone: (313) 963-6420 300 South Grand Avenue
Facsimile: (313) 496-7500 Los Angeles, California 90071
Attorneys for all Plaintiffs Telephone: (213) 687-5000
Facsimile: (213) 687-5600
Attorneys for Randall J. Smith
- --------
(23) Given TCI's manipulation of its by-laws, it is not surprising that
Westfield CEO Peter Lowy declined to disclose to TCI's counsel the bidders'
strategic plans for a meeting or proxy contest. SPG and Westfield have now
announced their intention to propose a charter amendment to eliminate the Excess
Share Provision at TCI's Annual Meeting in May. A1537, 1543. And while Mr. Lowy,
a non-lawyer, testified at one point to his layman's understanding that the
offer could proceed without a favorable court ruling, he later confirmed that
the Excess Share Provision must be amended for the offer to go through and that
"unless the court rules in [SPG's] favor or the board changes its mind" a less
than two-thirds shareholder vote is "not enough to do the deal." A1369-72.
15
A1546
EXHIBIT (a)(5)(Y)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- ------------------------------------------------x
SIMON PROPERTY GROUP, INC., :
SIMON PROPERTY ACQUISITIONS, INC.,
AND RANDALL J. SMITH, :
Plaintiffs, :
- against - :
CIVIL ACTION NO. 02-74799
TAUBMAN CENTERS, INC., A. ALFRED :
TAUBMAN, ROBERT S. TAUBMAN, LISA JUDGE VICTORIA A. ROBERTS
A. PAYNE, GRAHAM T. ALLISON, PETER :
KARMANOS, JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. :
CHAZEN, AND S. PARKER GILBERT,
:
Defendants.
:
- ------------------------------------------------x
AFFIDAVIT OF KEITH R. PAULEY
COUNTY OF BALTIMORE )
) ss.:
STATE OF MARYLAND )
Keith R. Pauley, being duly sworn, deposes and says as follows:
1. I am a Managing Director and the Chief Investment Officer of LaSalle
Investment Management (Securities), L.P. ("LaSalle"). I make this affidavit
based upon personal knowledge and in support of plaintiffs' motion for a
preliminary injunction. LaSalle is a real estate investment manager that
primarily invests in the securities of Real Estate Investment Trusts and real
estate operating companies. LaSalle currently has approximately $3 billion in
assets under management.
2. LaSalle has been a shareholder of Taubman Centers, Inc. ("TCI") since
approximately 1993. LaSalle currently owns approximately 2.3 million shares of
A1547
common stock of TCI. This represents approximately 4.5% of the outstanding
common stock of TCI.
3. On February 13, 2003, LaSalle tendered 2,178,488 shares of TCI common
stock into the all cash offer made by Simon Property Group, Inc. and Westfield
America, Inc. to purchase all outstanding shares of TCI common stock for $20 per
share.
4. LaSalle's decision to tender was not dictated by any internal policies
or preexisting rules. Rather, our decision to tender was because: a) LaSalle
believes the $20 per share tender offer represents an attractive price to exit
our investment in TCI and b) LaSalle is eager to encourage the TCI board and TCI
management to explore strategic alternatives in order to maximize the value of
TCI shares.
/s/ Keith R. Pauley
-------------------
Keith R. Pauley
Managing Director and Chief
Investment Officer
LaSalle Investment Management
(Securities), L.P.
/s/ Lisa A. Garrison
- --------------------
Lisa A. Garrison
Notary public
Sworn to me this 26th day of February, 2003, in the County of Baltimore and
State of Maryland.
My Commission expires: 3-1-2004
A1548
EXHIBIT (a)(5)(Z)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- ------------------------------------------------x
SIMON PROPERTY GROUP, INC., :
SIMON PROPERTY ACQUISITIONS, INC.,
AND RANDALL J. SMITH, :
Plaintiffs, :
- against - :
CIVIL ACTION NO. 02-74799
TAUBMAN CENTERS, INC., A. ALFRED :
TAUBMAN, ROBERT S. TAUBMAN, LISA JUDGE VICTORIA A. ROBERTS
A. PAYNE, GRAHAM T. ALLISON, PETER :
KARMANOS, JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. :
CHAZEN, AND S. PARKER GILBERT,
:
Defendants.
:
- ------------------------------------------------x
AFFIDAVIT OF ROBERT H. STEERS
COUNTY OF NEW YORK )
) ss.:
STATE OF NEW YORK )
Robert H. Steers, being duly sworn, deposes and says as follows:
1. I am Chairman of Cohen & Steers Capital Management, Inc ("Cohen &
Steers"). I make this affidavit based upon personal knowledge. This affidavit is
submitted solely for the purpose of explaining why Cohen & Steers tendered its
shares of common stock of Taubman Centers, Inc. ("TCI") into the all cash offer
made by Simon Property Group, Inc. ("SPG") and Westfield America, Inc. to
purchase all outstanding shares of TCI common stock for $20 per share (the
"Tender Offer") prior to the then-expiration date of February 14, 2003.
A1549
2. Cohen & Steers was founded in 1986 as the first U.S. investment advisor
focused exclusively on real estate securities. The firm is a leading U.S.
manager of portfolios dedicated to investing primarily in Real Estate Investment
Trusts ("REITs"). Cohen & Steers currently has approximately $7 billion in
assets under management. Its current clients include pension plans, endowment
funds and registered investment companies, including the eight funds that
currently make up the Cohen & Steers family of funds.
3. Cohen & Steers, on behalf of its client accounts, held 3,216,375 shares
of common stock of TCI as of February 3, 2003 (approximately 6% of TCI's
outstanding common stock) and continues to hold shares of TCI common stock.
Cohen & Steers first invested in shares of TCI common stock in 1995.
4. Cohen & Steers was under no obligation to tender its shares of TCI
common stock into the Tender Offer. Rather, our goal is and always will be to
maximize our clients' interests consistent with our fiduciary duty.
5. Cohen & Steers' decision to tender into the Tender Offer was neither
automatic, nor dictated by pre-existing policies of the firm. To the contrary,
Cohen & Steers has actively analyzed a potential transaction between SPG and TCI
since SPG first made public its desire to pursue a business combination. We have
met with management of SPG to ensure ourselves that SPG could adequately finance
a business combination with TCI and also to gather as much information as we
could regarding the longer-term plans of SPG should a transaction with TCI be
successfully completed.
6. At the same time, we met on a number of occasions with the management of
TCI and provided a letter to each of the TCI directors seeking to substantiate
the decision of management and the board not to pursue a transaction with SPG.
Because TCI's
A1550
management and board did not present us with sufficient information, we made the
decision prior to February 14, 2003 that it would be in the best interests of
our clients if we tendered all of the shares of TCI common stock into the Tender
Offer.
7. Of course, if the management of TCI had provided its common stockholders
with what we would view as a credible plan to take the stock price to at least
the $20 per share level, or if another party had emerged with a greater than $20
per share offer prior to February 14, 2003, our decision to tender into the
Tender Offer might have been different.
8. Because we owe a fiduciary duty to our clients and our goal is to
maximize their interests, we must continually review this situation. We have no
pre-ordained bias toward TCI, SPG, or Westfield or any interest in controlling
any of these entities. We view the decision to have tendered as no different
than any sound portfolio management decision in which a third party offers to
purchase shares of stock at what we view to be an attractive price relative to
the prospect of choosing to pass on that trade and hold onto those shares.
/s/ Robert H. Steers
------------------------
Robert H. Steers
/s/ Jay J. Chen
- --------------------
Notary public
Sworn to me this 27 day of
February, 2003
[SEAL]
EXHIBIT (a)(5)(AA)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- ---------------------------------------x
SIMON PROPERTY GROUP, INC., :
SIMON PROPERTY ACQUISITIONS, INC.,
AND RANDALL J. SMITH, :
Plaintiffs, :
CIVIL ACTION NO. 02-74799
- against - :
The Honorable Victoria A. Roberts
TAUBMAN CENTERS, INC., A. ALFRED :
TAUBMAN, ROBERT S. TAUBMAN, LISA Magistrate Judge Virginia M. Morgan
A. PAYNE, GRAHAM T. ALLISON, PETER :
KARMANOS, JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. :
CHAZEN, AND S. PARKER GILBERT,
:
Defendants.
:
- ---------------------------------------x
APPENDIX TO SPG PLAINTIFFS' AND RANDALL J. SMITH'S
MOTION FOR A PRELIMINARY INJUNCTION
VOLUME IV
A1273 - A1550
INDEX TO APPENDIX
TO SPG PLAINTIFFS' AND RANDALL J. SMITH'S
MOTION FOR A PRELIMINARY INJUNCTION
VOLUME I: PUBLIC DOCUMENTS
Page
SPG Offer to Purchase for Cash, dated Dec. 5, 2002..............................................Al
SPG and Westfield Supplement to the Offer to Purchase, dated Jan. 15, 2003.....................A56
TCI Schedule 14D-9/A Amendment No. 3, dated Dec. 20, 2002......................................A95
TCI Common Stock Prospectus, dated Nov. 20, 1992 (Defendants' Exhibit 7)......................A158
TCI Articles of Incorporation, dated Aug. 9, 2000 ............................................A348
TCI Second Amendment and Restatement of Agreement of
Limited Partnership, dated Sept. 30, 1998 ..............................................A383
TCI Form 8-K, dated Aug. 18, 1998 (Payne Exhibit 1)...........................................A448
TCI Form 8-K, dated Sept. 30, 1998 (Payne Exhibit 2)..........................................A468
TCI Schedule 14D-9, dated December 11, 2002 (Gilbert Exhibit 10)..............................A486
Press Release, Taubman Centers, Inc., dated Jan. 21, 2003.....................................A512
TCI Schedule 13D/A, dated Nov. 14, 2002.......................................................A516
Press Release, Taubman Centers, Inc., dated Dec. 17, 2002 ....................................A570
TCI Schedule 13D/A, dated Jan. 28, 2003.......................................................A573
VOLUME II: DEPOSITION EXHIBITS/DOCUMENTS
Page
NOVA Restructuring and Recapitalization Plan Goldman Sachs as Advisor
to the NOVA Family (Rosenberg Exhibit 7)................................................A600
Project NOVA Goldman Sachs Value Added (Rosenberg Exhibit 8)..................................A602
Memorandum to IBD Innovation Award Committee, dated Nov. 18, 1998
(Rosenberg Exhibit 10) ...................................................................A608
Goldman Sachs Handwritten Notes (Bloostein Exhibit 3) ........................................A610
Separation and Relative Value Adjustment Agreement, dated Aug. 17, 1998.......................A775
REIT Flowchart (Bloostein Exhibit 2)..........................................................A845
Morgan Stanley Handwritten Notes (Niehaus Exhibit 3) .........................................A846
Letter from Morgan Stanley to the Taubman Partnership Committee and Board of
Directors, dated Aug. 17, 1998 (Niehaus Exhibit 8) ......................................A847
Minutes of Meeting of the Partnership Committee of TCI, dated June 24, 1998
(Gilbert Exhibit 3) ......................................................................A850
Project NOVA, Preliminary Transaction Term Sheet Unit Redemption Transaction,
revised June 29, 1998 ....................................................................A854
1998 Draft Press Releases (Taubman Exhibit 12) ...............................................A861
TCI Ownership Structure, May 2001 Proxy (Rosenberg Exhibit 5) ................................A912
Letter from Goldman Sachs to R. Taubman, dated Oct. 25, 2002 (R. Taubman Exhibit 9) ..........A914
Minutes of a Special Meeting of the Board of Directors of TCI,
dated Oct. 28, 2002 (Rosenberg Exhibit 1) ................................................A923
Voting Agreements, dated Nov. 14, 2002 (R. Taubman Exhibit 13) ...............................A928
Letter from D. Simon to R. Taubman, dated Oct. 22, 2002 (Bloostein Exhibit 4) ................A935
VOLUME III: DEPOSITION TESTIMONY/CASES & AUTHORITIES
Page
Excerpts from the Deposition Transcript of Allan J. Bloostein, taken Jan. 14, 2003 ...........A938
Excerpts from the Deposition Transcript of Simon Parker Gilbert, taken Jan. 9, 2003 ..........A984
Excerpts from the Deposition Transcript of G. William Miller, taken Jan. 22, 2003............A1030
Excerpts from the Deposition Transcript of Lisa Payne, taken Jan. 17, 2003 ..................A1037
Excerpts from the Deposition Transcript of Christopher J. Niehaus, taken Jan. 17, 2003 ......A1060
Excerpts from the Deposition Transcript of Adam Rosenberg, taken Jan. 24, 2003..............A1087
Excerpts from the Deposition Transcript of David Simon, taken Jan. 24, 2003 .................A1119
Excerpts from the Deposition Transcript of Robert Taubman, taken January 16, 2003 ...........A1124
MICH. COMP LAWS ss. 450.1790-1799 ..........................................................A1163
DAVID M. EINHORN ET AL, REIT M&A TRANSACTIONS-PECULIARITIES AND
COMPLICATIONS, 55 BUS. LAW. (Feb. 2000) ...............................................A1172
MILLER V. VILL. HILL DEV. CORP., NO. 220297, 2001 WL 754050
(Mich. Ct. App. July 3, 2001) .........................................................A1214
MM CO., INC. V. LIQUID AUDIO, INC., No. 606, 2002, 2003 WL 58969
(Del. Jan. 7, 2003) ...................................................................A1217
PACKER V. YAMPOL, 1986 WL 4748 (Del. Ch. 1986) ..............................................A1228
PHILLIPS V. INSITUFORM OF AM., INC., Civ. A. No. 9173, 1987 WL 16285
(Del. Ch. 1987) .......................................................................A1240
SCHAFFER EX REL. LASERSIGHT INC. V. CC INV., LDC, No. 99 Civ. 2821 (VM), 2002 WL
31869391 (S.D.N.Y. Dec. 20, 2002) .....................................................A1249
SEILON, INC. V. LAMB, No. C 83-314,1983 WL 1354 (N.D. Ohio July 27, 1983) ...................A1257
VOLUME IV
Page
SPG Press Release, dated Feb. 17, 2003 ......................................................A1273
Computershare Report of Shares Tendered, dated Feb. 14, 2003.................................A1275
REIT Wrap, dated Feb. 18, 2003...............................................................A1276
TCI Schedule 14D-9A, dated Feb. 19, 2003 ....................................................A1281
TCI Schedule 14D-9A, dated Feb. 4, 2003 .....................................................A1288
Defendants' Response to Plaintiffs' Third Request For
Production Of Documents ...............................................................A1293
The Rouse Company Letter to R. Taubman, dated May 1, 1998....................................A1298
TCI Closing Stock Price, May 1, 1998 ........................................................A1299
TCI 2002 Proxy Statement ....................................................................A1300
Excerpts from the Deposition Transcript of Lucian Bebchuk, taken Feb. 19, 2003...............A1331
Excerpts from the Deposition Transcript of Martin Cicco, taken Feb. 5, 2003..................A1347
Excerpts from the Deposition Transcript of M. Travis Keath, taken Feb. 13, 2003..............A1352
Excerpts from the Deposition Transcript of Peter Lowy, taken Feb. 19, 2003 ..................A1368
Excerpts from the Deposition Transcript of G. William Miller, taken Jan. 22, 2003............A1373
Excerpts from the Deposition Transcript of Adam Rosenberg, taken Jan. 24, 2003...............A1381
Excerpts from the Deposition Transcript of David Simon, taken Jan. 24, 2003 .................A1389
Excerpts from the Deposition Transcript of Randall J. Smith, taken Feb. 14, 2003 ............A1393
Excerpts from the Deposition Transcript of Robert Taubman, taken Jan. 16, 2003...............A1405
Excerpts from the Deposition Transcript of Philip Ward, taken Jan. 17, 2003 .................A1409
17 C.F.R. ss. 240.13d-3(a), 13d-5(b)(1).....................................................A1415
IND. CODE ANN. s. 23-1-42-1...................................................................A1419
AVACUS PARTNERS, L.P. V. BRIAN, Civ. A. No. 11001, 1990 WL 161909
(Del. Ch. Oct. 24, 1990) ..............................................................A1423
CLARK V. SAKOWSKI, No. 210508, 2000 WL 33405937
(Mich. App. Oct. 13, 2000.) ...........................................................A1432
EMERSON RADIO CORP. V. INT'L JENSEN INC., Civ. A. Nos. 15130, 14992,
1996 WL 483086 (Del. Ch. Aug. 15, 1996) ...............................................A1436
FDIC V. HYDE PARK APARTMENTS, No. 94-56673, 1996 WL 138558
(9th Cir. Mar. 27. 1996) ..............................................................A1457
GIBRALT CAP. CORP. V. SMITH, No. 17422, 2001 WL 647837
(Del. Ch. May 9, 2001) ................................................................A1461
OMNICARE, INC. V. NCS HEALTHCARE, INC., No. 605, 649, 2002 Del. LEXIS 723
(Del. Ch. Dec. 10, 2002) ..............................................................A1475
IN RE SHELL OIL CO., Civ. A. No. 8080, 1990 WL 201390
(Del. Ch. Dec. 11, 1990) ..............................................................A1480
STEWART V. ALVAREZ, No. Civ. A. No. 02-1159, 2002 U.S. Dist. LEXIS 19195
(E.D. La. Oct. 7, 2002) ...............................................................A1519
TOMCZAK V. THIOKOL, INC., Civ. A. No. 7861, 1990 WL 42607 (Del. Ch. Apr. 5, 1990) ...........A1523
SPG Schedule TO/A, Amendment No. 16, dated Feb. 27, 2003 ....................................A1537
Affidavit of Keith R. Pauley ................................................................A1546
Affidavit of Robert H. Steers ...............................................................A1548
A1273
EXHIBIT NO. (a) (5) (S)
(SIMON PROPERTY GROUP LOGO] [WESTFIELD LOGO]
Simon Contact: Westfield Contact:
Shelly Doran Katy Dickey
Simon Property George Sard/Paul Caminiti/ Westfield America
Group, Inc. Hugh Burns 310/445-2407
Citigate Sard Verbinnen
317/685-7330 212/687-8080
85% OF TAUBMAN CENTERS COMMON SHARES
TENDERED INTO SPG/WESTFIELD OFFER
----------------------------------------------------------------
NEW YORK, February 17, 2003 - Simon Property Group, Inc. (NYSE: SPG) and
Westfield America, Inc., the U.S. subsidiary of Westfield America Trust (ASX:
WFA), today announced that approximately 85% of the outstanding common shares of
Taubman Centers, Inc. (NYSE: TCO), or a total of 44,135,107 of the 52,207,756
common shares outstanding, have been tendered as of February 14, 2003 into the
$20.00 per share all-cash offer by SPG and Westfield.
The offer has been extended until midnight, New York City time, on March
28, 2003, unless further extended. The offer was previously scheduled to expire
on February 14, 2003.
David Simon, Chief Executive Officer of SPG, and Peter Lowy, Chief
Executive Officer of Westfield America, Inc., issued the following joint
statement: "We are gratified to have received such an unprecedented and
overwhelming mandate from TCO's public shareholders in support of our $20.00 per
share all-cash offer. The shareholders have sent a powerful message to TCO's
Board of Directors. The TCO Board should now respect the wishes of TCO's public
shareholders, who own 99% of TCO, and take all steps necessary to facilitate the
offer. We again invite the TCO Board to meet with us so that we can quickly
complete this mutually beneficial transaction."
The complete terms and conditions of the offer are set forth in the Offer
to Purchase, as amended, and the related Letter of Transmittal, copies of which
are on file with the SEC and available by contacting the information agent,
MacKenzie Partners, Inc. at (800) 322-2885. Merrill Lynch & Co. is acting as
financial advisor to SPG and Westfield America, Inc. and is the Dealer Manager
for the Offer. Willkie Farr & Gallagher is acting as legal advisor to SPG and
Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to Westfield
America, Inc. Simpson Thacher & Bartlett is acting as legal advisor to Merrill
Lynch & Co.
1
A1274
About Simon Property Group
Headquartered in Indianapolis, Indiana, Simon Property Group, Inc. is a real
estate investment trust engaged in the ownership and management of
income-producing properties, primarily regional malls and community shopping
centers. Through its subsidiary partnerships, it currently owns or has an
interest in 242 properties containing an aggregate of 183 million square feet of
gross leasable area in 36 states, as well as eight assets in Europe and Canada
and ownership interests in other real estate assets. Additional Simon Property
Group information is available at http://about.simon.com/corpinfo/index.html.
About Westfield America, Inc.
Westfield America, Inc. is a United State's subsidiary of Westfield America
Trust (ASX: WFA), the second-largest property trust listed on the Australian
Stock Exchange. WFA owns a majority interest in the Westfield America portfolio
of 63 centers, branded as Westfield Shoppingtowns. Westfield Shoppingtowns are
home to more than 8,400 specialty stores and encompass 64 million square feet in
the states of California, Colorado, Connecticut, Florida, Illinois, Indiana,
Maryland, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio and
Washington.
# # #
Important Information
This news release is for informational purposes only and is not an offer to buy
or the solicitation of an offer to sell any TCO shares, and is not a
solicitation of a proxy. Simon Property Group and Simon Property Acquisitions,
Inc., a wholly owned subsidiary of Simon Property Group, filed a tender offer
statement on Schedule TO with the Securities and Exchange Commission on December
5, 2002 (as amended), with respect to the offer to purchase all outstanding
shares of TCO common stock. Investors and security holders are urged to read
this tender offer statement as amended because it contains important
information. Investors and security holders may obtain a free copy of the tender
offer statement and other documents filed by SPG and WFA with the Commission at
the Commission's web site at http://www.sec.gov. The tender offer statement and
any related materials may also be obtained for free by directing such requests
to MacKenzie Partners, Inc. at (800) 322-2885.
Forward-looking statements
This release contains some forward-looking statements as defined by the federal
securities laws which are based on our current expectations and assumptions,
which are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those anticipated, projected or implied. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.
2
A1275
[COMPUTERSHARE LOGO]
Computershare Trust Company of New York
Wall Street Plaza, 88 Pine St, 19th Floor
New York, New York 10005
14-Feb-03
JAMES M. BARKLEY
General Counsel and Secretary
Simon Property Group, Inc.
National City Center
115 West Washington Street, Suite 15 East
Indianapolis, IN 46204
jbarklev@simon.com
REPORT: 47
RE: SIMON PROPERTIES ACQUISITIONS, INC. A WHOLLY OWNED SUBSIDIARY OF
SIMON PROPERTY GROUP, INC. OFFER TO PURCHASE SHARES OF COMMON STOCK
OF TAUBMAN CENTERS, INC.
Effective: December 5, 2002
Dear Mr. Barkley:
In our capacity as Depositary for the subject offer, the following is our
report of activity through 12:00 Midnight on 2/14/2003.
PHYSICAL TENDERS BOOK-ENTRY DELIVERIES & TOTAL TENDERED
- ------------------------------------------------------------------------------------------------------------
Items Shares Items Shares Items Shares Items Shares
- ------------------------------------------------------------------------------------------------------------
PREVIOUS 62 37,779.428 395 38,697,502 37 5,397,142 457 38,735,281.428
- ------------------------------------------------------------------------------------------------------------
Herewith 0 0.000 0 0 8 2,684.595 0 0.000
- ------------------------------------------------------------------------------------------------------------
Cleared 0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------
Withdrawn 0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------
TOTAL 62 37,779.428 395 38,697,502 45 5,399,826.595 457 38,735,281.428
- ------------------------------------------------------------------------------------------------------------
*=protects not included in totals until cleared
If you have questions concerning this report, please contact Brendan Bulfin at
212.701.7635 or myself at, 212.701.7622.
Sincerely,
Robert Neff
Operations Manager
cc: Neda Meshkaty Mark Harnett
Richard Campbell MacKenzie Partners, Inc.
Computershare mharnett@mackenziepartners.com
Charlie Koons Dan Burch
A1276
SUBJECT: REIT WRAP
for TUESDAY,
FEBRUARY 18, 2003
"REALTY STOCK REVIEW"
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02/18/2003 09:07 AM PLEASE RESPOND TO BVINOCUR
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CC:
SUBJECT: REIT WRAP for TUESDAY, FEBRUARY 18, 2003
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REIT Wrap for Tuesday, February 18th
Front Page: REITs Slip, A Bit. Plus, The Just Say "No" Defense.
Odds & Ends: ProLogis Leases Space to Giraud Logistique; Sherman Resigns from
Crescent Board; and Kimco to Joint Market Kmart Stores.
Standbys: Market Recap, including the Credit Markets; Winners & Losers; and New
Highs and Lows, including Preferreds.
The Morgan Stanley REIT Index (RMS) shed 0.44%, or 1.83 points, on Valentine's
Day. Volume (see below) was lighter than usual. Year-to-date through Friday's
close, RMS had posted a negative 4.3% total return.
Losers outnumbered gainers, on Friday. 73 of the 113 companies that comprise the
Morgan Stanley REIT Index closed down; 36 ended the day up; and 4 were
unchanged.
The average weighted yield on the Morgan Stanley REIT Index (at Friday's close)
was 7.6%. RMS finished 2002 with an average weighted yield of 7.1%.
19.5 million shares changed hands, on Friday; down from Thursday's 21.9 million
shares. Over the prior 30-day period, RMS' average daily volume was 22.2 million
shares.
02/21/2003
Page 2 of 5
A1277
The Just Say "No" Defense
As we reported in a REIT Flash yesterday, approximately 85% of the outstanding
common shares of Taubman Centers (TCO) were tendered in response to
Simon/Westfield's $20 per share offer.
According to a Simon/Westfield press release, a total of 44,135,107 of the
52,207,756 common shares outstanding had been tendered as of midnight on
February 14, 2003. Simon/Westfield extended their tender until midnight East
Coast time on March 28.
ROUGHLY AN hour after the tender results hit the wire, Taubman Centers issued a
statement reiterating that its board believes the Simon/Westfield offer is
"inadequate, opportunistic and does not reflect the underlying value of the
company's assets or its growth prospects."
Taubman's press release dismissed what buy-siders and analysts said was a much
greater-than-expected response to the Simon/Westfield tender offer. "We figured
the number, at best, would be in the low- to mid-70% range, one buy-sider told
us. The vote, he added, signals that investors who have been at this a long time
believe the Simon/Westfield offer is a credible one. "We believe it's now up to
the Taubman family and TCO's independent directors either to come up with a
better deal, or to sell the company to Simon/Westfield," he stressed.
He added the suggestion by the Taubman family and the company's independent
directors that the company is worth north of the $20 now on the table
conveniently ignores at least two crucial points.
First, he said, the issue isn't what the company is worth, but rather whether a
$20 per share offer today is superior to what a lot of savvy investors believe
the company is likely to be trading at, say, 3 years from today. "To reject this
offer you have to believe that TCO would be changing hands at a price that on a
present value basis would exceed $20 per share, today. We don't think that's
case."
Second, he underscored, that discussions about what Taubman is "worth" are
rendered moot by the family's and board's action. "Management and the board have
demonstrated an unwillingness to unlock what they contend is substantial value
in excess of what the shares are trading for, today. If you look back at the
roughly ten-year trading history for this company, it has always changed hands
at a very significant discount to estimates of net asset value; larger than for
any of its mall peers. For NAV to have any real meaning, investors have to
believe that a company's management and board are committed to unlocking value
by whatever means necessary. This management team and this board are sending
exactly the opposite signal."
Taubman added in its release yesterday afternoon: "According to Simon's
announcement, approximately 44 million of the 84 million shares of Taubman
Centers voting stock were tendered into the offer. This amount is insufficient
to meet Simon's own minimum Tender Offer condition or to purchase the company
since at least two-thirds of Taubman Centers' 84 million issued and outstanding
voting shares - approximately 56 million voting shares - must approve any sale
transaction or amendment to the corporate charter."
One analyst characterized Taubman's interpretation of the results as
"particularly lame". He added, "This is but the latest evidence of a
02/21/2003
Page 3 OF 5
A1278
management team and a board that is out of touch with the common shareholders,
as well as the current climate in corporate America, generally." The analysts
pointed out, "An 85% vote is damn near unprecendented."
That said, other analysts said that absent a change-of-heart by the Taubman
family, it will be up to a Michigan court, which is scheduled to hear arguments
on the lawsuit brought by Simon on March 21, to decide whether Simon/Westfield
will have a shot to close on their offer. Said one veteran portfolio manager,
"The sad fact is that the independent Taubman directors probably cannot do much
unless, the Taubman family says, 'okay.'" Added the portfolio manager, "Even if
they cannot change the rules on their own, we're hoping the Taubman directors
will at least hire their own team of advisers. To do anything less, in our view,
is a breach of their fiduciary duty."
Buy-siders said today's trading should signal whether the arbs believe it's now
more likely that TCO will change hands. "We expect the shares to trade up, at
least modestly today," a buy-sider told us early this morning.
Odds & Ends
ProLogis Leases Space to Giraud Logistique...ProLogis (PLD) signed a lease with
Giraud Logistique for a 213,000 square foot facility at Cergy-Pontoise
Distribution Center located northeast of Paris, France. Giraud Logistique, a
third-party logistics provider, will use the facility for the distribution of
cosmetics.
ProLogis owns seven facilities for a total of 813,256 square feet of
distribution space in Cergy. Additional ProLogis tenants in the park include
Lear Corporation, Siemens and TNT Jet Services.
The company's website is at http://www.prologis.com._
Sherman Resigns from Crescent Board... Crescent Real Estate Equities Company
(CEI) said David Sherman resigned from its board, effective immediately. In a
statement, the company said Sherman will be devoting more time to his other
business activities, which include being a co-managing member of Metropolitan
Real Estate Equity Management, LLC, as well as continuing his role as an adjunct
professor of real estate at Columbia University Graduate School of Business
Administration.
The company's website is at http://www.cei-crescent.com.
Kimco to Joint Market Kmart Stores ...Kmart Corp. (KMRTQ) said Friday it reached
an agreement with Kimco Realty Corp. (KIM) for the joint marketing of
approximately 317 Kmart locations and related properties in the United States
and Puerto Rico that KMRTQ is in the process of closing.
The locations range in size from approximately 50,000 square feet to more than
190,000 square feet and are located in freestanding, strip and mall locations in
44 states and Puerto Rico. This group of stores includes 57 Kmart SuperCenter
locations.
Kimco's website is at http://www.kimcorealty.com.
Recapping The Action
All four non-REIT benchmarks we track daily rallied, on Friday. The Dow
A1279
Page 4 OF 5
Jones Industrial Average rose 2.05%, or 158.93 points, to 7908.80; the Standard
& Poor's 500-stock index gained 2.14%, or 17.52 points, to 834.89; the Nasdaq
Composite climbed 2.56%, or 32.73 points, to 1310.17; and the Russell 2000
closed up 1.05%, or 3.73 points, to 358.50.
The 10-year Treasury fell 21/32, on Friday; its yield climbed to 3.963%. The
30-year bond dropped 1 and 6/32, on February 14; its yield rose to 4.887%.
The Morgan Stanley REIT Index (RMS) fell 0.44%, or 1.83 points, to 409.47, on
Friday. (The high on February 14 was 412.03; the low was 408.62.) Year-to-date
through Friday's close, RMS had posted a negative 4.33% total return. As of the
close on February 14, RMS' average weighted yield was 7.58%.
Cohen & Steers Realty Majors (RMP), which we use to follow the performance of
large-cap REITs, finished Friday at 353.35, down 0.43%, or 1.52 points. (The
high on February 14 was 355.75; the low was 352.47.) Year-to-date through
Friday's close, RMP had posted a negative 4.04% total return. As of the close on
February 14, RMP's average weighted yield was 7.15%.
Of the 113 companies that comprise the Morgan Stanley REIT Index: 36 finished
up; 73 closed down; and 4 were unchanged, on Friday. Of the 30 companies that
make up Cohen & Steers Realty Majors: 8 closed up and 22 finished down, on
February 14.
Over the past 30 trading sessions (i.e., January 2 through February 13), the
Morgan Stanley REIT Index's trading volume averaged 22.2 million shares. RMS
traded 19.5 million shares on Friday; down from Thursday's 21.9 million shares.
Cohen & Steers Realty Majors' average trading volume over the past 30 trading
sessions was 12.0 million shares. On February 14, RMP traded 9.4 million shares;
down from Thursday's 10.8 million shares. (Editor's Note: Trading volumes
represent consolidated share volumes. The companies that comprise Cohen &
Steers Realty Majors are 30 large-cap REITs. Both RMS and RMP are total return
indices, with dividends reinvested.)
Winners and Losers
February 14's big winners were: Mid-Atlantic Realty (MRR) up 2.21%, or 38 cents,
to $17.60; Starwood (HOT) up 2.05%, or 45 cents, to $22.45; U.S. Restaurant
Properties (USV) up 1.72%, or 24 cents, to $14.19; FelCor (FCH) up 1.65%, or 11
cents, to $6.79; Associated Estates (AEC) up 1.42%, or 8 cents, to $5.70; and
Kimco (KIM) up 1.36%, or 43 cents, to $32.02.
Friday's big losers were: Universal Health Realty (UHT) down 5.03%, or $1.35, to
$25.51; MeriStar (MHX) down 4.93%, or 18 cents, to $3.47; Nationwide Health
(NHP) down 2.69%, or 36 cents, to $13.00; Hospitality Properties (HPT) down
2.66%, or.82 cents, to $29.98; Malan (MAL) down 2.54%, or 10 cents, to $3.83;
and Trizec (TRZ) down 2.02%, or 18 cents, to $8.72.
New Highs and Lows
Two REITs/REOCs (nonREIT real estate operating company) set new highs, on
Friday: Brookfield Homes (BHS) and Newcastle Investment Corp. (NCT).
One REIT/REOC preferred (tickers vary depending on quote service) set a new
high, on February 14: Mills Corp. 9.0% Series C CUMUL RDM PFD (MLS-C).
A1280
Page 5 of 5
Twelve REITs/REOCs set new lows, on Friday: Archstone-Smith (ASN); AvalonBay
(AVB); Chateau (CPJ); Health Care Property Investors (HCP); Nationwide Health
(NHP); Prime Hospitality (PDQ); Reckson (RA); Reckson Class B (RAB); RFS Hotel
Inv (RFS); Shurgard (SHU); Sovran (SSS); and West Coast Rlty Investors (MPQ).
One REIT/REOC preferred set a new low, on February 14: FelCor 9.0% B CUMUL RDM
DEP SHRS PFD (FCH-B).
Have a Great Week,
Barry Vinocur
direct dial: 732-493-8172
EMAIL: mailto:bvinocur@rainmaker-media.com
Websites: http://www.realtystockreview.com and http://www.property-mag.com
- -------------------------------------------------------------
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A1281
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------------------
Schedule 14D-9/A
SOLICITATION/RECOMMENDATION STATEMENT UNDER
SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 17)
-----------------------------------------------
Taubman Centers, Inc.
(Name of Subject Company)
Taubman Centers, Inc.
(Name of Person(s) Filing Statement)
Common Stock, Par Value $0.01 Per Share (Title of Class of Securities)
876664103
(CUSIP Number of Class of Securities)
-----------------------------------------------
Lisa A. Payne
Taubman Centers, Inc.
200 East Long Lake Road
Suite 300, P.O. Box 200
Bloomfield Hills, Michigan 48303
(248) 258-6800
(Name, Address and Telephone Number of Person Authorized to Receive Notice
Communications on Behalf of the Person(s) Filing Statement)
-----------------------------------------------
With copies to:
Cyril Moscow Jeffrey H. Miro Adam 0. Emmerich
Honigman Miller Schwartz Kenneth H. Gold Trevor S. Norwitz
and Miro, Weiner & Kramer Robin Panovka
Cohn, LLP 38500 Woodward Avenue, Wachtell, Lipton, Rosen
2290 First National Building Suite 100 & Katz
660 Woodward Avenue Bloomfield Hills, 51 West 52nd Street
Detroit, Michigan Michigan 48303 New York, New York 10019
48226-3583 (248) 646-2400 (212) 403-1000
(313) 465-7000
- - Check the box if the filing relates solely to preliminary communications made
before the commencement of a tender offer.
- --------------------------------------------------------------------------------
A1282
This Amendment No. 17 amends and supplements the Solicitation/Recommendation
Statement on Schedule 14D-9 initially filed with the Securities and Exchange
Commission (the "Commission") on December 11, 2002 (as subsequently amended, the
"Schedule 14D-9"), by Taubman Centers, Inc., a Michigan corporation (the
"Company" or "Taubman Centers") relating to the tender offer made by Simon
Property Acquisitions, Inc. ("Offeror"), a wholly owned subsidiary of Simon
Property Group, Inc. ("Simon") and Westfield America, Inc. ("Westfield"), as
set forth in a Tender Offer Statement filed by Simon on Schedule TO, dated
December 5, 2002 (the "Schedule TO") and a Supplement to the Offer to Purchase,
dated January 15, 2003 filed by Simon on Schedule TO-T/A (Amendment No. 6) (the
"Supplement"), to pay $20.00 net to the seller in cash, without interest
thereon, for each Common Share, upon the terms and subject to the conditions set
forth in the Schedule TO and the Supplement. Unless otherwise indicated, all
capitalized terms used but not defined herein shall have the meanings ascribed
to them in the Schedule 14D-9.
ITEM 9. Exhibits.
Item 9 is hereby amended and supplemented by adding thereto the following:
Exhibit No. Description
- ----------- -----------
(a)(43) Press release issued by Taubman Centers on February 17, 2003
(a)(44) Letter to Taubman Centers Associates
A1283
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: February 19, 2003 Taubman Centers, Inc.
By: /s/ Robert S. Taubman
-------------------------------
Robert S. Taubman
Chairman of the Board, President
and Chief Executive Officer
A1284
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
a)(43) Press release issued by Taubman Centers on February 17,
2003
(a)(44) Letter to Taubman Centers Associates
A1285
[Taubman Logo] Taubman Centers, Inc.
200 East Long Lake
Bloomfield Hills, MI 48304
(248) 258-6800
CONTACT:
Barbara Baker Joele Frank/Matthew Sherman
Taubman Centers, Inc. Joele Frank, Wilkinson Brimmer Katcher
(248) 258-7367 (212) 355-4449
www.taubman.com
FOR IMMEDIATE RELEASE
TAUBMAN CENTERS COMMENTS ON SIMON PROPERTY GROUP'S
TENDER OFFER STATUS
Bloomfield Hills, Mich., Feb 17, 2003 - Taubman Centers, Inc. (NYSE:TCO)
today responded to Simon Property Group's (NYSE:SPG) announcement of the status
of its unsolicited hostile cash tender offer made in conjunction with a
subsidiary of Westfield America Trust (ASX:WFA) for Taubman Centers:
As we have previously stated, Taubman Centers' Board of Directors
believes that the Simon offer is inadequate, opportunistic and does not
reflect the underlying value of the Company's assets or its growth
prospects.
According to Simon's announcement today, approximately 44 million of the
84 million shares of Taubman Centers voting stock were tendered into the
offer. This amount is insufficient to meet Simon's own minimum Tender
Offer condition or to purchase the Company since at least two-thirds of
Taubman Centers' 84 million issued and outstanding voting shares -
approximately 56 million voting shares - must approve any sale
transaction or amendment to the corporate charter.
Simon's hostile offer is not a logical catalyst for a sale. The Board's
position remains clear - the Company is not for sale and there is no
roadmap to completion of this offer. The facts have not changed: more
than 30 percent of outstanding Taubman Centers voting shares have
publicly announced their opposition to Simon's hostile offer.
A1286
Our collection of upscale regional mall assets cannot be replicated.
They represent the most productive portfolio of regional malls in the
public sector and have always been and will always be highly coveted.
The Company has a strong track record, has delivered more than an 80%
total return to shareholders over the past five years, and has also
achieved a nearly 20% FFO (Funds From Operations) per share growth rate
for 2002, the highest among retail REITs.
Taubman Centers, Inc., a real estate investment trust, currently owns
and/or manages 30 urban and suburban regional and super regional shopping
centers in 13 states. In addition Stony Point Fashion Park (Richmond, Va.) is
under construction and will open September 18, 2003, and NorthLake Mall
(Charlotte, N.C.) will begin construction later this year and will open August
5, 2005. The Taubman Centers Board of Directors on February 10, 2003 announced
that it has authorized the expansion of its existing buyback program to
repurchase up to an additional $100 million of the Company's common shares.
Taubman Centers is headquartered in Bloomfield Hills, Mich.
This press release contains forward-looking statements within the meaning of the
Securities Act of 1933 as amended. These statements reflect management's current
views with respect to future events and financial performance. Actual results
may differ materially from those expected because of various risks and
uncertainties, including, but not limited to changes in general economic and
real estate conditions including further deterioration in consumer confidence,
changes in the interest rate environment and availability of financing, and
adverse changes in the retail industry. Other risks and uncertainties are
discussed in the Company's filings with the Securities and Exchange Commission
including its most recent Annual Report on Form 10-K. Notwithstanding any
statement in this press release, Taubman Centers acknowledges that the safe
harbor for forward-looking statements under Section 21E of the Securities
Exchange Act of 1934, as amended, added by the Private Securities Litigation
Reform Act of 1995, does not apply to forward-looking statements made in
connection with a tender offer.
# # #
A1287
Exhibit (a) (44)
----------------
Dear Taubman Centers Associates:
As you will see in the attached press release, today the Company responded to
Simon and Westfield's announcement of the status of their hostile unsolicited
tender offer.
According to their announcement, approximately 44 million of the 84 million
shares of Taubman Centers voting stock were tendered into the offer. This amount
is insufficient to purchase the company since at least two-thirds of Taubman
Centers' 84 million issued and outstanding shares - approximately 56 million
voting shares - must approve any sale transaction or amendment to the corporate
charter. We anticipate that there will be significant press coverage of the
tender results, and that Simon and Westfield will "proclaim victory" because
they have received more than two-thirds of the common shares; however, the only
two-thirds that count is the two-thirds of the 84 million issued and outstanding
shares as required by the company's charter.
The Board's position remains clear - the company is not for sale and there is no
roadmap to completion of Simon and Westfield's inadequate and opportunistic
offer.
We greatly appreciate your continued support and hard work. If you have any
questions, please contact Barb Baker or me. We will keep you updated as events
progress.
A1288
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
SCHEDULE 14D-9/A
SOLICITATION/RECOMMENDATION STATEMENT UNDER
SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 14)
--------------------
TAUBMAN CENTERS, INC.
(Name of Subject Company)
TAUBMAN CENTERS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class of Securities)
876664103
(CUSIP Number of Class of Securities)
--------------------
LISA A. PAYNE
TAUBMAN CENTERS, INC.
200 EAST LONG LAKE ROAD
SUITE 300, P.O. BOX 200
BLOOMFIELD HILLS, MICHIGAN 48303
(248) 258-6800
(Name, Address and Telephone Number of Person Authorized to Receive Notice and
Communications on Behalf of the Person(s) Filing Statement)
--------------------
WITH COPIES TO:
CYRIL MOSCOW JEFFREY H. MIRO ADAM 0. EMMERICH
HONIGMAN MILLER SCHWARTZ AND KENNETH H. GOLD TREVOR S. NORWITZ
COHN, LLP MIRO, WEINER & KRAMER ROBIN PANOVKA
2290 FIRST NATIONAL BUILDING 38500 WOODWARD AVENUE, WACHTELL, LIPTON, ROSEN
660 WOODWARD AVENUE SUITE 100 & KATZ
DETROIT, MICHIGAN 48226-3583 BLOOMFIELD HILLS, 51 WEST 52ND STREET
(313) 465-7000 MICHIGAN 48303 NEW YORK, NEW YORK 10019
(248) 646-2400 (212) 403-1000
/ / Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
================================================================================
A1289
This Amendment No. 14 amends and supplements the Solicitation/ Recommendation
Statement on Schedule 14D-9 initially filed with the Securities and Exchange
Commission (the "Commission") on December 11, 2002 (as subsequently amended, the
"Schedule 14D-9"), by Taubman Centers, Inc., a Michigan corporation (the
"Company" or "Taubman Centers") relating to the tender offer made by Simon
Property Acquisitions, Inc. ("Offeror"), a wholly owned subsidiary of Simon
Property Group, Inc. ("Simon") and Westfield America, Inc. ("Westfield"), as set
forth in a Tender Offer Statement filed by Simon on Schedule TO, dated December
5, 2002 (the "Schedule TO") and a Supplement to the Offer to Purchase, dated
January 15, 2003 filed by Simon on Schedule TO-T/A (Amendment No. 6) (the
"Supplement"), to pay $20.00 net to the seller in cash, without interest
thereon, for each Common Share, upon the terms and subject to the conditions set
forth in the Schedule TO and the Supplement. Unless otherwise indicated, all
capitalized terms used but not defined herein shall have the meanings ascribed
to them in the Schedule 14D-9.
ITEM 9. EXHIBITS.
Item 9 is hereby amended and supplemented by adding thereto the following:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit (a)(36) Letter to Taubman Centers Associates
A1290
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: February 4, 2003 Taubman Centers, Inc.
By: /s/ Lisa A. Payne
--------------------------
Lisa A. Payne
Executive Vice President,
Chief Financial Officer
A1291
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit (a)(36) Letter to Taubman Centers Associates
A1292
Dear Taubman Centers Associates:
As the attached press release makes clear, today the Company announced that
results for the fourth quarter and full year 2002 are expected to significantly
exceed the Company's previously announced guidance to investors. We are very
pleased with these strong results, which we believe validate both the strategies
and the value of this Company. The Company also announced that it is increasing
its guidance for 2003 as a result of the strong fourth quarter performance as
well its progress on leasing and the favorable interest rate environment. The
Company will release final results for 2002 including its supplemental
disclosures on February 10, 2003.
Each of you has played an integral role in the success of our Company. You have
remained focused on our business and have continued to deliver. I want to thank
each of you for your hard work and dedication.
I also wanted to take this opportunity to update you on some of the latest
developments regarding the Simon offer. In November, certain non-family
stockholders granted me durable proxies providing me with the sole and absolute
right to vote their shares. As you may know, on January 28, at my request, these
voting agreements were terminated. The voting agreements formed the basis for at
least one of the claims alleged by Simon in its litigation against the Company
and by terminating these voting agreements we believe we have taken this issue
off the table.
You may have heard that Simon has imposed February 14 as a deadline and stated
that it will withdraw its offer unless at least two-thirds of the common shares
are tendered by the deadline. We believe that this "deadline" is illusory and
irrelevant to the outcome of Simon's unsolicited hostile takeover effort. It is
illusory because Simon cannot complete its offer unless at least two-thirds of
Taubman Centers' 84 million voting shares - that's 56 million voting shares -
approve the offer. As the members of the Taubman family hold approximately 30
percent of the voting shares and are opposed to the offer, this is extremely
unlikely to happen. Accordingly, while I believe Simon will likely take the
opportunity to generate significant press coverage if it receives two-thirds of
the common shares - about 35 million of 52 million common shares - the
underlying facts have not changed. There is no path to completion to Simon's
offer, and therefore their statements will be irrelevant.
We deeply appreciate your continued support and efforts. If you have any
questions, please contact Barb Baker or me. We will keep you updated as events
progress.
A1293
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SIMON PROPERTY GROUP, INC., and
SIMON PROPERTY ACQUISITIONS, INC.,
Plaintiffs, File No. 02-74799
v. The Honorable Victoria A. Roberts
Magistrate Judge Virginia M. Morgan
TAUBMAN CENTERS, INC., A. ALFRED
TAUBMAN, ROBERT S. TAUBMAN, LISA A.
PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS, JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTE1N, JEROME A. CHAZEN,
and S. PARKER GILBERT,
Defendants.
Carl H. Yon Ende (P 21867) Joseph Aviv (P 30014)
Todd A. Holleman (P 57699) Bruce L. Segal (P 36703)
Miller, Canfield, Paddock & Stone, P.L.C. Matthew F. Leitman (F 48999)
Attorneys for Plaintiffs Miro Weiner & Kramer
Suite 2500 Attorneys for Defendants
150 West Jefferson Avenue Suite 100
Detroit, Michigan 48226-4415 38500 Woodward Avenue
Telephone: (313) 963-6420 Bloomfield Hills, Michigan 48303-0908
Facsimile: (313) 496-7500 Telephone: (248) 258-1207
Facsimile: (248) 646-4021
I.W. Winsten (P 30528)
Raymond W. Henney (P 35860)
Honigman Miller Schwartz and Cohn, LLP
Attorneys for Defendants
2290 First National Building
Detroit, Michigan 48226-3583
Telephone: (313) 465-7000
Facsimile: (313) 465-7411
DEFENDANTS' RESPONSE TO PLAINTIFFS' THIRD
REQUEST FOR PRODUCTION OF DOCUMENTS
A1294
The defendants by their attorneys, Miro Weiner & Kramer, a professional
corporation, and Honigman Miller Schwartz and Cohn, LLP, for their response to
the Plaintiffs' Third Request for Production of Documents, say:
GENERAL OBJECTIONS
1. Defendants object to each document request to the extent that it
seeks disclosure of information protected by the attorney client privilege, the
work product doctrine, and any other privilege recognized or conferred by law.
2. Defendants object to each document request to the extent it purports
to seek production of documents created or reviewed after the date the complaint
was filed, December 5, 2002.
3. Defendants object to the "INSTRUCTIONS" to the extent they purport to
impose on the defendants obligations greater than or inconsistent with the
obligations of Rules 26 and 34 of the Federal Rules of Civil Procedure.
4. Defendants object to the "DEFINITIONS" to the extent they purport to
impose on the defendants obligations greater than or inconsistent with the
obligations of Rules 26 and 34 of the Federal Rules of Civil Procedure.
5. Defendants object to the "DEFINITIONS" and the definitions of the
"Company," "relating to," "concerning," and "documents," in particular, because
the definitions are overbroad and unduly burdensome and oppressive.
6. Defendants object to the direction to produce documents for
inspection and copying at the offices of Willkie Farr & Gallagher, 787 Seventh
Avenue, New York, New York 10019 because that direction is not reasonable.
Documents produced in response to this request will be made available for
inspection and copying at the offices of Miro Weiner & Kramer,
A1295
38500 Woodward Avenue, Bloomfield Hills, Michigan 48304, and of Wachtell,
Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019, unless
otherwise specified.
7. Defendants object to the specified date, time, and manner of
inspection because they are not reasonable and are unduly burdensome and
oppressive.
8. Defendants object to each document request to the extent it fails to
describe with reasonablec particularity the items to be inspected.
RESPONSE TO DOCUMENT REQUESTS
DOCUMENT REQUEST NO. 1: All documents concerning any expression of interest
between January 1, 1996 and December 31, 1998 TO ACQUIRE the Company's stock or
assets by The Rouse Company.
RESPONSE: Defendants object to this request because it (i) seeks documents
containing confidential and propriety business and commercial information, {iii)
seeks documents protected by the attorney-client privilege, and (iv) seeks
documents that are not relevant or reasonably calculated to lead to the
discovery of admissible evidence.
DOCUMENT REQUEST NO. 2: All documents concerning changes or amendments to the
management agreement between or among The Taubman Company Limited Partnership,
The Taubman Realty Group Limited Partnership and/or the Company in connection
with the Company's 1998 restructuring, including but not limited to a copy of
the management agreement that reflects any such changes or amendments.
RESPONSE: Subject to, and without waiving, the objection that this request (i)
seeks documents that are not relevant or reasonably calculated to lead to the
discovery of admissable evidence and (ii) seeks documents containing
confidential and propriety business and commercial information, and subject to
the protective order regarding the use and disclosure of
A1296
confidential discovery material, defendants have already produced documents
responsive to this request. To the extent this requests seeks documents other
than those which have already been produced, defendants object to their
production because the request (i) is overbroad and unduly burdensome and
oppressive, (ii) seeks documents containing cinfidential and proprietary
business and commercial information, (iii) seeks documents protected by the
attorney-client privilege, and (iv) seeks documents that are not relevant or
reasonably calculated to lead to the discovery of admissible evidence.
DOCUMENT REQUEST NO. 3: All documents concerning any approval or
acknowledgment, whether oral or written, by the New York Stock Exchange
concerning the Series B Preferred Stock.
RESPONSE: Subject to, and without waiving, the objection that this request seeks
documents (i) that are not relevant or reasonably calculated to lead to the
discovery of admissible evidence and (ii) documents containing confidential and
propriety business and commercial information, and subject to the parties'
execution, and the entry by the Court, of a reasonable protective order
regarding the use and disclosure of confidential discovery material, defendants
will make the following documents available for inspection and copying:
Correspondence from David A. Handelsman to John Longobardi dated July 6,
1998
Correspondence from David A. Handelsman to John Longobardi dated August 18,
1998 Additional documents may be made available for inspection and copying as
they are received and reviewed by counsel for defendants. As to any remaining
documents that may be responsive to this request, Defendants object to their
production because the request (i) is overbroad and unduly burdensome and
oppressive, (ii) seeks documents containing confidential and propriety business
and commercial information, (iii) seeks documents protected by the
attorney-client
A1297
privilege, and (iv) seeks documents that are not relevant or reasonably
calculated to lead to the discovery of admissible evidence.
DOCUMENT REQUEST NO. 4: The engagement letter between the Company and Goldman,
Sachs & Co. in connection with the SPG Offer and/or the SPG Tender Offer.
response: subject to, and without waiving, the objection that this request seeks
documents (i) that are not relevant or reasonably calculated to lead to the
discovery of admissible evidence and (ii) documents containing confidential and
propriety business and commercial information, and subject to the parties'
execution, and the entry by the Court, of a reasonable protective order
regarding the use and disclosure of confidential discovery material, defendants
will make the requested document available for inspection and copying.
MIRO WEINER & KRAMER HONIGMAN MILLER SCHWARTZ
a professional corporation AND COHN, LLP
Attorneys for Defendants Attorneys for Defendants
J.W. Winsten (P 30528)
Raymond W. Henney (P 35860)
By: /s/ Joseph Aviv 2290 First National Building
-------------------------------- Detroit, Michigan 48226-3583
Joseph Aviv (p 30014) Telephone: (313) 465-7000
Bruce L. Segal (P 36703)
Matthew F. Leitman (P 48999)
Suite 100
38500 Woodward Avenue
Bloomfield Hills, MI 48303-0908
Telephone: (248) 258-1207
Facsimile: (248) 646-4021
Of Counsel:
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, New York 10019
A1298
THE ROUSE COMPANY
May 1, 1998
Anthony W. Deering
Chairman and
Chief Executive Officer
Mr. Robert S. Taubman
President and Chief Executive Officer
Taubman Centers, Inc.
200 East Long Lake Road
Bloomfield Hills, Michigan 48304
Dear Bobby:
I enjoyed having the opportunity of seeing you and spending some time
together last week.
I hope that, as you reflect further on our discussions, you will share my
view that a merger of our two companies would create significant value for our
respective shareholders. The Rouse Company and Taubman Centers, Inc. have a
great deal in common, and I believe that a combination of our companies would
result in substantial synergistic benefits, including reduced costs and enhanced
revenues. The many recent transactions just confirm the increasing consolidation
in our industry.
Recognizing the significant benefits and value creation that a
combination of our companies would produce, The Rouse Company is prepared to
acquire Taubman Centers, Inc. (and partnership units in The Taubman Realty
Group Limited Partnership) in a tax-free merger based on a purchase price of
$17.50 per share, payable in common stock of The Rouse Company. We are also
prepared to offer a cash alternative for those investors so inclined. We
understand that members of the Taubman Family and related parties might wish
to retain their partnership units, in which event such units could be
converted at a later date.
Our offer is based on information which is generally available to the
public, and we would be prepared to reconsider our offer based on any additional
information you might make available. We have not had access to documents that
describe the management arrangements for your properties, and our offer assumes
that The Rouse Company would be able to assume management and leasing of all
properties.
I look forward to discussing this proposal with you.
Very truly yours,
/s/ Tony Deering
Anthony W. Deering
cc: Board of Directors
Taubman Centers, Inc.
10275 Little Patuxent Parkway Columbia, Maryland 21044-3466
414-992-6543
A1299
PAGE P233 EQUITY GPO
Hit (MENU) to return to graph or (PAGE) to continue.
PRICE TABLE W/MOV AVE & VOL PAGE 2 OF 2
TCO US USD
THIS PAGE: 5/1/98 TO: 511/98
- -----------------------------------------------------------------------------------------------------
DATE OPEN HIGH LOW CLOSE MA1 MA2 VOL VAVE
- -----------------------------------------------------------------------------------------------------
F 5/ 1 13.6875 13.875 13.5625 13.6875 13.212 13.14 415200
Australia 61 2 9777 8600 Brazil 5511 3048 4500 Europe 44 20 7330 7500
Germany 49 69 920410 Hong Kong 852 2977 6000 Japan 81 3 3201 8900
Singapore 65 6212 1000 U.S. 1 212 318 2000 Copyright 2003 Bloomberg L.P.
G510-698-0 26-Feb-03 12:28:58
[BLOOMBERG PROFESSIONAL LOGO]
A1300
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement. / / Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).
/X/ Definitive proxy statement.
/ / Definitive additional materials.
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
Taubman Centers. Inc.
-------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
-------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials;
-------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule O-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------------
A1301
[TAUBMAN LOGO]
TAUBMAN CENTERS, INC.
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
TO BE HELD MAY 30, 2002
To the Shareholders of
Taubman Centers, Inc.
The Annual Meeting of Shareholders of TAUBMAN CENTERS, INC. (the "Company")
will be held on Thursday, May 30, 2002, at the Community House, 380 South Bates
Street, Birmingham, Michigan, at 11:00 a.m., local time, for the following
purposes:
1. To elect two directors to serve until the annual meeting of
shareholders in 2005;
2. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the year ending December 31, 2002; and
3. To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed the close of business on April 1, 2002 as
the record date for determining the shareholders that are entitled to notice of,
and to vote at, the annual meeting or any adjournment or postponement.
By Order of the Board of Directors
ROBERT S. TAUBMAN,
Chairman of the Board, President and
Chief Executive Officer
Bloomfield Hills, Michigan
April 12, 2002
EVEN IF YOU INTEND TO BE PRESENT AT THE MEETING IN PERSON, PLEASE SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE TO
ENSURE THE PRESENCE OF A QUORUM. ANY PROXY MAY BE REVOKED IN THE MANNER
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN
VOTED AT THE MEETING.
A1302
TABLE OF CONTENTS
ABOUT THE MEETING ................................................................ 1
What is the purpose of the annual meeting?..................................... 1
Who is entitled to vote?....................................................... 1
What counts as Voting Stock?................................................... 1
What is the Series B Preferred Stock?.......................................... 1
What constitutes a quorum?..................................................... 2
How do I vote?................................................................. 2
Can I change my vote after I return my proxy card?............................. 2
What are the Board's recommendations?.......................................... 3
What vote is required to approve each item?.................................... 3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................... 4
Section 16(a) Beneficial Ownership Reporting Compliance......................... 8
ITEM 1 -- ELECTION OF DIRECTORS.................................................... 8
MANAGEMENT .................................................................... 9
Directors, Nominees and Executive Officers ................................ 9
The Board of Directors and Committees...................................... 11
Compensation of Directors ................................................. 12
Certain Transactions ...................................................... 12
REPORT OF THE AUDIT COMMITTEE ................................................. 13
EXECUTIVE COMPENSATION ........................................................ 16
Summary Compensation Table ................................................ 16
Long-Term Incentive Plan -- 2001 Awards ................................... 18
Senior Short Term Incentive Plan .......................................... 18
Incentive Option Plan...................................................... 18
Aggregated Option Exercises During 2001 and Year-End
Option Values............................................................. 19
Long-Term Performance Compensation Plan.................................... 19
Ccmpensation Committee Report on Executive
Compensation ............................................................. 20
Shareholder Return Performance Graph ...................................... 22
Certain Employment Arrangements ........................................... 22
ITEM 2 -- RATIFICATION OF SELECTION OF INDEPENDENT
AUDITORS ....................................................................... 24
OTHER MATTERS...................................................................... 24
COSTS OF PROXY SOLICITATION ....................................................... 25
ADDITIONAL INFORMATION............................................................. 25
Presentation of Shareholder Proposals at 2003 Annual
Meeting ................................................................... 25
Annual Report................................................................... 25
A1303
TAUBMAN CENTERS, INC.
200 EAST LONG LAKE ROAD, SUITE 300
P.O. BOX 200
BLOOMFIELD HILLS, MICHIGAN 48303-0200
PROXY STATEMENT
This Proxy Statement contains information regarding the annual meeting of
shareholders of Taubman Centers, Inc. (the "Company"), to be held at 11:00 a.m.,
local time, on Thursday, May 30, 2002, at the Community House, 380 South Bates
Street, Birmingham, Michigan. The Company's Board of Directors is soliciting
proxies for use at the meeting and at any adjournment or postponement. The
Company expects to mail this Proxy Statement on or about April 12, 2002.
ABOUT THE MEETING
What is the purpose of the annual meeting?
At the annual meeting, holders of the Company's Common Stock and Series B
Non-Participating Convertible Preferred Stock (the "Series B Preferred Stock"
and, together with the Common Stock, the "Voting Stock") will act upon the
matters outlined in the accompanying Notice of meeting, including the election
of two directors to serve three-year terms, and the ratification of the Board's
selection of the independent auditors. In addition, management will report on
the performance of the Company during 2001 and will respond to questions from
shareholders.
Who is entitled to vote?
Only record holders of Voting Stock at the close of business on the record
date of April 1, 2002, are entitled to receive notice of the annual meeting and
to vote those shares of Voting Stock that they held on the record date. Each
outstanding share of Voting Stock is entitled to one vote on each matter to be
voted upon at the annual meeting.
What counts as Voting Stock?
The Company's Common Stock and Series B Preferred Stock constitute the
Voting Stock of the Company. The Common Stock and the Series B Preferred Stock
vote together as a single class. The Company's 8.30% Series A Cumulative
Redeemable Preferred Stock (the "Series A Preferred Stock") does not entitle its
holders to vote. Although the Company has authorized the issuance of shares of
additional series of Preferred Stock pursuant to the exercise of conversion
rights granted to certain holders of preferred equity in The Taubman Realty
Group Limited Partnership ("TRG"), the Company's majority-owned subsidiary
partnership through which the Company conducts all of its operations, at this
time no other shares of capital stock other than the Voting Stock and the Series
A Preferred Stock are outstanding.
What is the Series B Preferred Stock?
The Series B Preferred Stock was first issued in late 1998 and is currently
held by partners in TRG other than the Company. The Series B Preferred Stock
entitles its
holders to one vote per share on all matters submitted to the Company's
shareholders. In addition, the holders of Series B Preferred Stock (as a
separate class) are entitled to nominate up to four individuals for election as
directors. In connection with Mr. A. Alfred Taubman's resignation from the Board
of Directors in December 2001, the holders of the Series B Preferred Stock
waived until May 2003 the nine member Board requirement set forth in the
Company's Articles, thereby permitting the size of the Board of Directors to be
temporarily reduced to eight members and eliminating the vacancy caused by such
resignation. The number of individuals the holders of the Series B Preferred
Stock may nominate in any given year is reduced by the number of directors
nominated by such holders in prior years whose terms are not expiring and, in
this year, by the seat eliminated when the Board of Directors was reduced to
eight members. The holders of Series B Preferred Stock are entitled to nominate
two individuals for election as directors of the Company at the annual meeting.
What constitutes a quorum?
The presence at the annual meeting, in person or by proxy, of the holders
of a majority of the shares of Voting Stock outstanding on the record date will
constitute a quorum for purposes of electing directors and ratifying the Board's
selection of auditors. As of the record date, 82,784,497 shares of Voting Stock
were outstanding. Proxies received but marked as abstentions and "broker
non-votes" that may result from beneficial owners' failure to give specific
voting instructions to their brokers or other nominees holding in "street name"
will be counted as present to determine whether there is a cuorum.
How do I vote?
If you complete and properly sign the accompanying proxy card and return it
to the Company, it will be voted as you direct. If you attend the annual
meeting, you may deliver your completed proxy card in person or vote by ballot.
If you own your shares of Common Stock through a broker, trustee, bank or other
nominee but want to vote your shares in person, you should also bring with you a
proxy or letter from such broker, trustee, bank or other nominee confirming that
you beneficially own such shares.
Can I change my vote after I return my proxy card?
You may change your vote at any time before the proxy is exercised by
filing with the Secretary of the Company either a notice revoking the proxy or a
properly signed proxy that is dated later than the proxy card. If you attend the
annual meeting, the individuals named as proxy holders in the enclosed proxy
card will nevertheless have authority to vote your shares in accordance with
your instructions on the proxy card unless you indicate at the meeting that you
intend to vote your shares yourself.
2
A1305
What are the Board's recommendations?
Unless you give different instructions on the proxy card, the proxy holders
will vote in accordance with the recommendations of the Board of Directors. The
Board recommends a vote:
for election of the nominated slate of directors (see pages 8 through
24); and
for ratification of Deloitte & Touche LLP as the Company's independent
auditors for 2002 (see page 24)
With respect to any other matter that properly comes before the annual meeting,
the proxy holders named in the proxy card will vote as the Board recommends or,
if the Board gives no recommendation, in their own discretion.
What vote is required to approve each item?
ELECTION OF DIRECTORS. Nominees who receive the most votes cast at the
annual meeting will be elected as directors. The slate of directors discussed in
this Proxy Statement consists of two individuals, one for each director whose
term is expiring. A properly signed proxy marked "WITHHOLD AUTHORITY" with
respect to the election of one or more directors will not be voted for the
director(s) so indicated, but it will be counted to determine whether there is a
quorum.
RATIFICATION OF AUDITORS. The affirmative vote of a majority of the votes
cast at the annual meeting will be necessary to ratify the Board of Directors'
appointment of Deloitte & Touche LLP as the Company's independent auditors for
2002.
OTHER MATTERS. If any other matter is properly submitted to the
shareholders at the annual meeting, its adoption will require the affirmative
vote of two-thirds of the shares of Voting Stock outstanding on the record date.
The Board of Directors does not propose to conduct any business at the annual
meeting other than the election of two directors and the ratification of
auditors.
EFFECT OF BROKER NON-VOTES AND ABSTENTIONS. The election of directors and
the ratification of the Board's appointment of auditors will be determined by
votes cast. Because "broker non-votes" and abstentions are included only in the
calculation of shares present and do not count as votes cast, they will not
affect the election of directors and the ratification of auditors.
3
A1306
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The Company owns a 62% managing partner's interest in TRG, through which
the Company conducts all of its operations. TRG is a partnership that owns,
develops, acquires, and operates regional shopping centers nationally. The
following table sets forth certain information regarding the beneficial
ownership of the Company's Voting Stock and of partnership interests in TRG
("Units of Partnership Interest" or "Units") as of April 1, 2002.
The share information in the table (both numbers of shares and percentages)
reflects ownership of Common Stock and Series B Preferred Stock, which for this
purpose are treated as a single class of voting stock; however, the footnotes to
the table provide ownership information for the Common Stock and Series B
Preferred Stock on a separate basis, including (for any shareholder owning at
least one percent of the Common Stock or Series B Preferred Stock, as
applicable) the percentage of the outstanding shares of the separate class that
the holder's shares represent.
PERCENTAGE
UNITS OF OWNERSHIP OF
PARTNERSHIP UNITS OF
NO. OF PERCENT OF INTEREST IN PARTNERSHIP
DIRECTORS. EXECUTIVE OFFICERS AND 5% SHAREHOLDERS SHARES(1) SHARES(1) TRG INTEREST IN TRG
- --------------------------------------------------- ---------- ---------- ----------- ---------------
Robert S. Taubman.................................. 3,919.506(2) 4.6%(2) 3,911,506(3) 4.5%
William S. Taubman................................. 753,489(4) * 739,989(5) *
Lisa A. Payne ..................................... 608,328(6) * 0 0
Courtney Lord...................................... 195,129(7) * 193,095(8) *
John L. Simon...................................... 26,918(9) * 0 0
Graham T. Allison.................................. 1,430 * 0 0
Allan J. Bloostein................................. 5,000 * 0 0
Jerome A. Chazen .................................. 10,000(10) * 0 0
S. Parker Gilbert ................................. 130,000(11) * 0 0
Peter Karmanos, Jr ................................ 40,000(12) * 0 0
A. Alfred Taubman ................................. 24.856,024(13) 30.0%(13) 24,669,087(14) 29.8%
Morgan Stanley, Dean Witter, & Co. ................ 6,123,024(15) 7.4%(15) 0 0
Morgan Stanley Dean Witter
Asset Management, Inc.
1585 Broadway
New York, New York 10036
Security Capital Group Incorpcrated................ 5,327,175(16) 6.4%(16) 0 0
Security Capital Research Management Incorporated..
125 Lincoln Avenue
Santa Fe, New Mexico 87501
LaSalle Investment Management, Inc. ............... 4,253,350(17) 5.1%(17) 0 0
LaSalle Investment Management
(Securities), L.P.
200 East Randolph Drive
Chicago, Illinois 60601
4
A1307
PERCENTAGE
UNITS OF OWNERSHIP OF
PARTNERSHIP UNITS OF
NO. OF PERCENT OF INTEREST IN PARTNERSHIP
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS SHARES(1) SHARES(1) TRG INTEREST IN TRG
- -------------------------------------------------- ---------- ---------- ----------- ---------------
Cohen & Steers Capital Management, Inc...... 2.950,455(18) 3.6%(18) 0 0
757 Third Avenue
New York, New York 10017
GMPTS Limited Partnership(19) .............. 2,890,925(20) 3.5%(20) 0 0
767 Fifth Avenue
New York, NY 10153
European Investors, Inc..................... 2,832,712(21) 3.4%(21) 0 0
EII Realty Securities, Inc.
667 Madison Avenue
New York, New York 10021
Stichting Pensioenfonds voor de Gezondheid,... 2,548,000(22) 3.1%(22) 0 0
Geestelijke en Maatschappelijke Belangen
Kroostwey-Noord 149
P. 0. Box 117
3700 AC Zeist
The Netherlands
Directors and Executive Officers as a Group... 5,701,846(23) 6.5%(23) 4,844,590(23) 5.6%(23)
- --------------
* less than 1%
(1) The Company has relied upon information supplied by certain beneficial
owners and upon information contained in filings with the Securities
Exchange Commission. Figures shown include shares of Common Stock and
Series B Preferred Stock, which vote together as a single class on all
matters generally submitted to shareholders. Each share of Common Stock and
Series B Preferred Stock is entitled to one vote. Under certain
circumstances, the Series B Preferred Stock is convertible into Common
Stock at the ratio of 14,000 shares of Series B Preferred Stock for each
share of Common Stock (any resulting fractional shares will be redeemed for
cash). Share figures shown assume that individuals who acquire Units of
Partnership Interest upon the exercise of options ("Incentive Options")
granted under TRG's 1992 Incentive Option Plan (the "Incentive Option
Plan") exchange the newly issued Units for an equal number of shares of
Common Stock under the Company's exchange offer (the "Continuing Offer") to
certain partners in TRG and holders of Incentive Options. Share figures and
Unit figures shown assume that outstanding Units are not exchanged for
Common Stock under the Continuing Offer and that outstanding shares of
Series B Preferred Stock are not converted into Common Stock. As of April
1, 2002, there were 82,784,497 outstanding shares of Voting Stock,
consisting of 51,017,431 shares of Common Stock and 31,767,066 shares of
Series B Preferred Stock.
(2) Consists of 5,925 shares of Series B Preferred Stock that Mr. Robert S.
Taubman owns, 547,945 shares of Series B Preferred Stock held by R & W-TRG
LLC ("R&W"), a company that Mr. Taubman and his brother, William S.
Taubman, own (or, in aggregate, 1.7% of Series B Preferred Stock),
3,357,636 shares of Common Stock that Mr. Taubman has the right to receive
in exchange for Units of Partnership Interest that are subject to vested
Incentive Options and an additional 8,000 shares of Common Stock owned by
his wife and son for which Mr. Taubman
5
A1308
disclaims any beneficial interest (or, in aggregate, 6.2% of Common Stock).
Excludes all shares of Voting Stock held by TRA Partners ("TRAP"), Taubman
Realty Ventures ("TRV"), Taub-Co Management, Inc. ("Taub-Co"), or TG
Partners, Limited Partnership ("TG"), because Mr. Taubman has no voting or
dispositive control over such entities' assets, see notes 13 and 14 below.
Mr. Taubman disclaims any beneficial interest in the Voting Stock held by
or through entities beyond his pecuniary interest in the entities that own
the securities.
(3) Consists of 5,925 Units of Partnership Interest that Mr. Robert S. Taubman
owns, 547,945 Units of Partnership Interest held by R&W, and 3,357,636
Units of Partnership Interest that Mr. Taubman has the right to receive
upon the exercise of vested Incentive Options. Excludes all Units of
Partnership Interest owned by TRAP, TRV, Taub-Co, or TG. Mr. Taubman
disclaims any beneficial ownership in the Units held by R&W or the other
entities beyond his pecuniary interest in R&W and the other entities.
(4) Consists of 5,925 shares of Series B Preferred Stock that Mr. William S.
Taubman owns, 734,064 shares of Common Stock that Mr. Taubman has the right
to receive upon the exchange of Units of Partnership Interest that are
subject to vested Incentive Options and 13,500 shares of Common Stock owned
by his children and for which Mr. Taubman disclaims any beneficial interest
(or, in aggregate, 1.4% of Common Stock). Excludes 547,945 shares of Series
B Preferred Stock that R&W holds and that are included in Robert S.
Taubman's holdings described above. Excludes all shares of Voting Stock
held by TRAP, TRV, Taub-Co, or TG because Mr. Taubman has no voting or
dispositive control over such entities' assets, see notes 13 and 14 below.
Mr. Taubman disclaims any beneficial interest in the Series B Preferred
Stock held by R&W and in the Voting Stock held by TRAP, TRV, Taub-Co, and
TG beyond his pecuniary interest in the entities that own the securities.
(5) Consists of 5,925 Units of Partnership Interest that Mr. William S. Taubman
owns and 734,064 Units of Partnership Interest subject to vested Incentive
Options held by Mr. Taubman. Excludes 547,945 Units that R&W holds and that
are included in Robert S. Taubman's holdings described above. Excludes all
Units of Partnership Interest owned by TRAP, TRV, Taub-Co, or TG. Mr.
Taubman disclaims any beneficial ownership in the Units held by R&W or the
other entities beyond his pecuniary interest in R&W and the other entities.
(6) Consists of 7,500 shares of Common Stock that Ms. Payne owns and 600,828
shares of Common Stock that Ms. Payne will have the right to receive in
exchange for Units of Partnership Interest that are subject to vested
Incentive Options (or, in aggregate, 1.2% of Common Stock).
(7) Consists of 1,504 shares of Common Stock owned by Mr. Lord, 530 shares of
Common Stock owned by Mr. Lord's wife for which he disclaims any beneficial
interest; and 193,095 shares of Series B Preferred Stock acquired by Mr.
Lord in exchange for all of Mr. Lord's equity interest in Lord Associates,
Inc. in November 1999. Does not include 174,058 shares of Series B
Preferred Stock acquired by Mr. Lord in connection with the Lord Associates
transaction for which Mr. Lord has granted to TG Partners an irrevocable
proxy and over which Mr. Lord has no voting or dispositive power, see note
14 below.
6
A1309
(8) Consists of 193,095 Units of Partnership Interest acquired by Mr. Lord in
exchange for all of Mr. Lord's equity interest in Lord Associates, Inc. in
November 1999. Does not include 174,058 Units of Partnership Interest
acquired by Mr. Lord in connection with the Lord Associates transaction for
which Mr. Lord has granted to TG Partners an irrevocable proxy, which are
not presently entitled to receive any partnership distributions, except
upon liquidation and over which Mr. Lord has no voting or dispositive
power. Such units are released from the irrevocable proxy and become
entitled to receive partnership distributions over the three years
remaining in the original five-year vesting period. See note 14 below. See
also "Certain Employment Arrangements."
(9) Consists of 2,000 shares of Common Stock that Mr. Simon owns, 3,191 shares
of Common Stock which Mr. Simon may be deemed to own through his investment
in the Taubman Centers Stock Fund, one of the investment options under the
Company's 401(k) Plan, and 21,727 shares of Common Stock that Mr. Simon has
the right to receive in exchange for Units of Partnership Interest that are
subject to vested Incentive Options.
(10) Excludes 15,000 shares of Series A Preferred Stock owned by Mr. Chazen and
20,000 shares (or, in the aggregate, less than 1%) of Series A Preferred
Stock owned by his children and for which Mr. Chazen disclaims any
beneficial ownership. The Series A Preferred Stock does not entitle its
holders to vote.
(11) includes 80,000 shares of Common Stock held by The Gilbert 1996 Charitable
Remainder Trust, an irrevocable trust of which Mr. Gilbert is a co-trustee.
Mr. Gilbert disclaims any beneficial interest in such shares beyond any
deemed pecuniary interest as the result of his wife's current beneficial
interest in the trust.
(12) Consists solely of shares of Common Stock.
(13) Includes 100 shares of Common Stock owned by Mr. A. Alfred Taubman's
revocable trust and 186,837 shares of Common Stock held by TRAP. Mr.
Taubman's trust is the managing general partner of TRAP and has the sole
authority to vote and dispose of the Common Stock held by TRAP. The
remaining shares consist of 24,669,087 outstanding shares (or 77.7%) of
Series B Preferred Stock that may be deemed to be owned by Mr. Taubman in
the same manner as the Units of Partnership Interest described in note 14
below. Mr. Taubman disclaims any beneficial ownership of the Common Stock
or Series B Preferred Stock held by TRAP and the other entities identified
in note 14 below beyond his pecuniary interest in the entities that own the
securities.
(14) Consists of 9,875 Units of Partnership Interest held by Mr. A. Alfred
Taubman's trust, 17,699,879 Units of Partnership Interest owned by TRAP,
11,011 Units of Partnership Interest owned by TRV, of which Mr. Taubman's
trust is the managing general partner, and 1,975 Units of Partnership
Interest held by Taub-Co. Because the sole holder of voting shares of
Taub-Co is Taub-Co Holdings Limited Partnership, of which Mr. Taubman's
trust is the managing general partner, Mr. Taubman may be deemed to be the
beneficial owner of the Units of Partnership interest held by Taub-Co. Mr.
Taubman disclaims beneficial ownership of any Units held by Taub-Co beyond
his pecuniary interest in Taub-Co. Also includes 6,327,098 Units of
Partnership Interest owned by TG Partners, 445,191 Units held by a
subsidiary of TG Partners (such subsidiary and TG Partners are collectively
7
A1310
referred to as "TG") and 174,058 Units of Partnership Interest which are
held by Mr. Lord but for which Mr. Lord has granted an irrevocable proxy to
TG Partners. The 174,058 Units held by Mr. Lord are not presently entitled
to any partnership distributions except in the event of a liquidation. Such
Units will be released from the irrevocable proxy and become entitled to
receive distributions over the three years remaining in the original
five-year vesting period. Because Mr. Taubman, through control of TRV's and
TG Partners' managing partner, has sole authority to vote and (subject to
certain limitations) dispose of the Units of Partnership Interest held by
TRV and TG, respectively, Mr. Taubman may be deemed to be the beneficial
owner of all of the Units of Partnership Interest held by TRV and TG. Mr.
Taubman disclaims beneficial ownership of any Units of Partnership Interest
held by TRG and TG beyond his pecuniary interest in those entities.
(15) Consists solely of shares of Common Stock (12.0%) held on behalf of various
investment advisory clients, none of which holds more than 5% of the Common
Stock.
(16) Consists solely of shares of Common Stock (10.4%).
(17) Consists solely of shares of Common Stock (8.3%) and includes ownership of
Common Stock on behalf of Stichting Pensioenfonds Voor de Gezondheid
Geestelijke en Maatschappelijke Belangen.
(18) Consists solely of shares of Common Stock (5.8%).
(19) Wholly-owned by two employee pension funds of General Motors Corporation.
(20) Consists solely of shares of Common Stock (5.7%).
(21) Consists solely of shares of Common Stock (5.6%).
(22) Consists solely of shares of Common Stock (5.0%).
(23) See Notes 2 through 12 above.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's officers and directors and persons who own more than 10% of a
registered class of the Company's equity securities ("insiders") file reports of
ownership and changes in ownership with the Securities Exchange Commission (the
"SEC"). Insiders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms that they file. Based on the Company's review
of the insiders' forms furnished to the Company and representations made by the
Company's officers and directors, no insider failed to file on a timely basis a
Section 16(a) form with respect to any transaction in the Company's equity
securities.
ITEM 1 -- ELECTION OF DIRECTORS
The Board of Directors consists of eight members serving three-year
staggered terms. Two directors are to be elected at the annual meeting to serve
until the annual meeting of shareholders in 2005. The two nominees, Robert S.
Taubman and Lisa A. Payne, are both presently serving on the Board of Directors.
8
A1311
Both Robert S. Taubman and Lisa A. Payne have consented to serve a
three-year term. If either of them should become unavailable, the Board may
designate a substitute nominee. In that case, the proxy holders named as proxies
in the accompanying proxy card will vote for the Board's substitute nominee.
Additional information regarding the nominees, the directors whose terms are not
expiring, and management of the Company is contained under the caption
"Management" below.
MANAGEMENT
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The Board of Directors consists of eight members divided into three classes
serving staggered terms. Under the Company's Articles of Incorporation, a
majority of the Company's directors must be neither officers nor employees of
the Company or its subsidiaries. Officers of the Company serve at the pleasure
of the Board.
The directors and executive officers of the Company are as follows:
TERM
NAME AGE TITLE ENDING
---- --- ----- ------
Robert S. Taubman* ............... 48 Chairman of the Board, President and 2002
Chief Executive Officer
Lisa A. Payne*.................... 43 Executive Vice President, Chief Financial 2002
and Administrative Officer, and Director
Graham T. Allison ................ 61 Director 2003
Peter Karmanos, Jr................ 59 Director 2003
William S. Taubman ............... 43 Executive Vice President and Director 2003
Allan J. Bloostein ............... 72 Director 2004
Jerome A. Chazen ................. 75 Director 2004
S. Parker Gilbert ................ 68 Director 2004
Esther R. Blum ................... 47 Senior Vice President, Controller, and
Chief Accounting Officer
Courtney Lord ................... 51 Senior Vice President of Leasing
John L. Simon ................... 55 Senior Vice President of Development
- ----------
* Standing for re-election to a three-year term.
Robert S. Taubman is the Chairman of the Board, President and Chief
Executive Officer of the Company and The Taubman Company LLC (the "Manager"),
which is the indirect subsidiary of TRG (the Company's operating partnership)
that manages the Company's regional shopping center interests. Mr. Taubman has
been a director of the Company since 1992. Mr. Taubman is also a director of
Comerica Bank and of Sotheby's Holdings, Inc., the international art auction
house, and represents the Company as a director of fashionmall.com, Inc., a
company originally organized to market and sell fashion apparel and related
accessories and products over the internet. He is also a member of the Board of
Governors of the National Association of Real Estate Investment
9
A1312
Trusts, a director of the Real Estate Roundtable, a Trustee of the Urban Land
Institute, and a former trustee of the International Council of Shopping
Centers. Mr. Taubman is the brother of William S. Taubman.
Lisa A. Payne is an Executive Vice President and the Chief Financial and
Administrative Officer of the Company and the Manager. Ms. Payne has been a
director of the Company since 1997. Prior to joining the Company in 1997, Ms.
Payne was a vice president in the real estate department of Goldman, Sachs &
Co., where she held various positions between 1986 and 1996.
Graham T. Allison is the Douglas Dillon Professor of Government at Harvard
University and a director of CDC Nvest Funds. Mr. Allison has been a director of
the Company since 1996 and previously served on the Board from 1992 until 1993,
when he became the United States Assistant Secretary of Defense.
Peter Karmanos, Jr. is the founder and has served as a director since the
inception of Compuware Corporation, a global provider of software solutions and
professional services headquartered in Farmington Hills, Michigan. Mr. Karmanos
has served as Compuware's Chairman since November 1978 and as its Chief
Executive Officer since July 1987. He is also a member of the Board of Trustees
of the Detroit Medical Center.
William S. Taubman is an Executive Vice President of the Company and the
Manager and has been a director of the Company since 2000. His responsibilities
include the overall management of the development, leasing, and center
operations functions. He has held various executive positions with the Manager
since prior to 1994. He is also a director of the Detroit Institute of Arts. Mr.
Taubman is the brother of Robert S. Taubman.
Allan J. Bloostein is a former Vice Chairman of The May Department Stores
Company and the President of Allan J. Bloostein Associates, and serves as a
consultant in retail and consumer goods marketing. Mr. Bloostein was, until his
retirement during 2000, a director of CVS Corporation, which operates the CVS
Pharmacy chain, and is a director or trustee of over 20 mutual fund companies
that Salomon Smith Barney sponsors. Mr. Bloostein has been a director of the
Company since 1992.
Jerome A. Chazen is Chairman Emeritus of Liz Claiborne, Inc. He is a
director of fashionmall.com, Inc., a company originally organized to market and
sell fashion apparel and related accessories and products over the internet, and
Chairman of Chazen Capital Partners, a private investment company. Mr. Chazen
has been a director of the Company since 1992.
S. Parker Gilbert is a retired Chairman of Morgan Stanley Group, Inc. Mr.
Gilbert has been a director of the Company since 1992.
Esther R. Blum is a Senior Vice President, the Controller, and Chief
Accounting Officer of the Company. Ms. Blum became a Vice President of the
Company in January 1998, when she assumed her current principal functions, and a
Senior Vice President in March 1999. Between 1992 and 1997, Ms. Blum served as
the Manager's Vice President of Financial Reporting and served the Manager in
various other capacities between 1986 and 1992. Prior to joining the Manager in
1986, Ms. Blum was a C.P.A. and audit manager for Deloitte & Touche LLP.
10
A1313
Courtney Lord is the Manager's Senior Vice President of Leasing. Mr. Lord
became the Senior Vice President of Leasing of the Manager in November of 1999,
having been hired in connection with TRG's acquisition of all of the outstanding
stock of Lord Associates, Inc. Between 1989 and 1999, Mr. Lord served as
president of Lord Associates, Inc., a retail-leasing firm based in Alexandria,
Virginia.
John L. Simon is the Manager's Senior Vice President of Development and
has served in such position since 1988.
THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors of the Company held four meetings and acted by
unanimous written consent twice during 2001. The Board of Directors has four
standing committees: a five-member Audit Committee, a three-member Compensation
Committee, a three-member Executive Committee, and a three-member Nominating
Committee. During 2001, all directors attended at least 75% of the aggregate of
the meetings of the Board of Directors and all committees of the Board on which
they served. Directors fulfill their responsibilities not only by attending
Board and committee meetings, but also through consultation with the Chief
Executive Officer and other members of management on matters that affect the
Company.
During 2001, the Audit Committee consisted of Jerome A. Chazer, Chairman,
Graham T. Allison, Allan J. Bloostein, S. Parker Gilbert and Peter Karmanos,
Jr. The Audit Committee is responsible for providing independent, objective
oversight and review of the Company's auditing, accounting and financial
reporting processes, including reviewing the audit results and monitoring the
effectiveness of the Company's internal audit function. In addition, the Audit
Committee recommends to the Board of Directors the appointment of the
independent auditors. The Audit Committee met twice during 2001.
During 2001, the Compensation Committee consisted of S. Parker Gilbert,
Chairman, Jerome A. Chazen and Peter Karmanos, Jr. The Compensation Committee's
primary responsibility is to review the compensation and employee benefit
policies applicable to employees of the Manager and, in particular, senior
management. The Compensation Committee met twice during 2001.
During 2001, the Executive Committee consisted of Robert S. Taubman,
Chairman, Allan J. Bloostein, and Graham T. Allison. The Executive Committee has
the authority to exercise many of the functions of the full Board of Directors
between meetings of the Board and met once and acted by written consent twice
during 2001.
During 2001, the Board's Nominating Committee consisted of Allan J.
Bloostein, Chairman, S. Parker Gilbert, and Robert S. Taubman. The Nominating
Committee is responsible for advising and making recommendations to the Board of
Directors on matters concerning the selection of candidates as nominees for
election as directors in the event a vacancy arises on the Board of Directors,
other than vacancies for which holders of the Series B Preferred Stock are
entitled to propose nominees. In recommending candidates to the Board, the
Nominating Committee seeks individuals of proven competence who have
demonstrated excellence in their chosen fields. The Nominating Committee does
not have a procedure for shareholders to submit nominee recommendations. The
Nominating Committee did not meet during 2001.
11
A1314
COMPENSATION OF DIRECTORS
During 2001, the Company paid directors who are neither employees nor
officers of the Company or its subsidiaries an annual fee of $35,000, a meeting
fee of $1,000 for each Board or committee meeting attended, and reimbursed
outside directors for expenses incurred in attending meetings and as a result of
other work performed for the Company. For 2001, the Company incurred costs of
$214,000 relating to the services of Messrs. Allison, Bloostein, Chazen, Gilbert
and Karmanos, as directors of the Company.
As part of its overall program of charitable giving, TRG maintains a
charitable gift program for the Company's outside directors. Under this
charitable gift program, TRG matches an outside director's donation to one or
more qualifying charitable organizations. TRG generally limits matching
contributions to an aggregate maximum amount of $10,000 per director per year.
Individual directors derive no financial benefit from this program since all
charitable deductions accrue solely to TRG. During 2001, TRG made 2 matching
contributions in the total amount of $10,000.
CERTAIN TRANSACTIONS
TRG recently entered into a definitive purchase and sale agreement to
acquire a 50% general partnership interest in SunValley Associates, a California
general partnership that owns the SunValley Shopping Center located in Contra
Costa County, California. The transaction is expected to close sometime during
the first half of 2002. The Manager has managed the property since its
development and will continue to do so after the acquisition. Although TRG is
purchasing its interest in SunValley from an unrelated third party, the other
partner is an entity owned and controlled by Mr. A. Alfred Taubman, the
Company's largest shareholder, recently retired Chairman of the Board of
Directors and the father of Robert and William Taubman. In determining whether
or not to proceed with the acquisition, the Company's directors considered,
among other things, the advice of independent outside counsel, the fact that the
purchase price of the interest had been negotiated at arm's length with the
independent third party, and Mr. A. Alfred Taubman's agreement to amend
SunValley's partnership agreement upon consummation of the acquisition to name
TRG as the managing general partner, to provide that so long as TRG has an
ownership interest in the property, the Manager will remain its manager and
leasing agent pursuant to an agreement containing the same favorable terms as in
the existing leasing and management agreement between SunValley and the Manager,
and to otherwise contain terms similar to partnership agreements the Company has
negotiated with unrelated third parties. Messrs. William and Robert Taubman
recused themselves from the Board's discussion regarding, and did not vote on
the decision to go through with, the acquisition. TRG will be represented by
independent outside counsel in the negotiation of a definitive partnership
agreement with Mr. A. Alfred Taubman.
When the Company acquired Lord Associates, Inc. in November 1999, Courtney
Lord, who in connection with such acquisition became the Manager's Senior Vice
President of Leasing, retained his interest in certain agreements with third
parties entitling him to receive a commission or other remuneration in the event
TRG purchases, leases and/or develops certain parcels of real estate. The
remuneration Mr. Lord is entitled to receive is fixed for certain agreements;
for others the remuneration ultimately paid to Mr. Lord will depend on the terms
of any transaction between TRG and such third party. During 2000, Mr. Lord
received $320,000 in commissions paid by the joint venture
12
A1315
between TRG and Swerdlow Real Estate Group to develop Dolphin Mall. During 2001,
Mr. Lord did not receive any such payments.
A. Alfred Taubman and certain of his affiliates receive various property
management services from the Manager. For such services, Mr. A. Taubman and
affiliates paid the Manager approximately $3.1 million in 2001.
During 2001, the Manager paid approximately $2.7 million in rent and
operating expenses for office space in the building in which the Manager
maintains its principal offices and in which A. Alfred Taubman, Robert S.
Taubman, and William S. Taubman have financial interests.
During 1997, TRG acquired an option to purchase certain real estate on
which TRG was exploring the possibility of developing a shopping center. A.
Alfred Taubman, Robert S. Taubman, and William S. Taubman HAVE A FINANCIAL
INTEREST IN the optionor. The option agreement required option payments of
$150,000 during each of the first five years, $400,000 in the sixth year, and
$500,000 in the seventh year. To date, TRG has made payments of $450,000. In
2000, TRG decided not to go forward with the project and reached an agreement
with the optionor to be reimbursed at the time of the sale or lease of the real
estate for an amount equal to the lesser of 50% of the project costs to date or
$350,000. Under the agreement, TRG's obligation to make further option payments
was suspended. TRG expects to receive $350,000 in total reimbursements, though
the timing will depend on the sale or lease of the real estate and is uncertain.
After receipt of such amount, the option will be terminated.
Committees of outside directors review business transactions between the
Company and its subsidiaries and related parties to ensure that the Company's
involvement in such transactions, including those described above, is on arm's
length terms.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board is responsible for providing independent,
objective oversight and review of the Company's accounting functions and
internal controls. The Audit Committee acts under a written charter first
adopted and approved by the Board of Directors in 1993. Each of the members of
the Audit Committee is independent as defined in such charter and the New York
Stock Exchange listing standards. A copy of the Audit Committee Charter was
filed as an exhibit to the Company's Proxy Statement for the 2001 Annual
Shareholders Meeting in accordance with SEC requirements.
The responsibilities of the Audit Committee include recommending to the
Board an accounting firm to be engaged as the Company's independent accountants.
Additionally, and as appropriate, the Audit Committee reviews and evaluates, and
discusses and consults with management, internal audit personnel and the
independent accountants regarding, the following:
- the plan for, and the independent accountants' report on, each audit of
the Company's financial statements;
- the Company's quarterly and annual financial statements contained in
reports filed with the SEC or sent to shareholders;
13
A1316
- changes in the Company's accounting practices, principles, controls or
methodologies, or in its financial statements;
- significant developments in accounting rules;
- the adequacy of the Company's internal accounting controls, and
accounting, financial and auditing personnel; and
- the continued independence of the Company's outside auditors and the
monitoring of any engagement of the outside auditors to provide non-audit
services.
In March 2002, the Audit Committee reviewed the Audit Committee Charter
and, after appropriate review and discussion, the Audit Committee determined
that the Committee had fulfilled its responsibilities under the Audit Committee
Charter.
The Audit Committee is responsible for recommending to the Board that the
Company's financial statements be included in the Company's annual report. The
Committee took a number of steps in making this recommendation for 2001. First,
the Audit Committee discussed with Deloitte & Touche LLP ("Deloitte"), the
Company's independent accountants for 2001, those matters required to be
communicated and discussed between an issuer's independent accountants and its
audit committee under applicable auditing standards, including information
regarding the scope and results of the audit. These communications and
discussions are intended to assist the Audit Committee in overseeing the
financial reporting and disclosure process. Second, the Audit Committee
discussed with Deloitte its independence and received a letter from Deloitte
concerning such independence as required under applicable independence standards
for auditors of public companies. This discussion and disclosure informed the
Audit Committee of Deloitte's independence, and assisted the Audit Committee in
evaluating such independence. Finally, the Audit Committee reviewed and
discussed, with management and Deloitte, the Company's audited consolidated
balance sheets at December 31, 2001 and 2000, and consolidated statements of
income, cash flows and stockholders' equity for the three years ended December
31, 2001. Based on the discussions with Deloitte concerning the audit, the
independence discussions, and the financial statement review and such other
matters deemed relevant and appropriate by the Audit Committee, the Audit
Committee recommended to the Board (and the Board agreed) that these financial
statements be included in the Company's 2001 Annual Report on Form 10-K.
AUDIT FEES. The aggregate fees billed for professional services rendered by
Deloitte for the audit of the Company's annual financial statements for the year
ended December 31, 2001 and its reviews of the financial statements included in
the Company's quarterly reports on Form 10-Q for fiscal year 2001 (collectively,
the "Audit Services"), were $870,000. This includes $408,000 related to
individual shopping center audit reports, an employee benefit plan audit and
accounting consultations.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES. The aggregate
fees billed for the provision by Deloitte of information technology services,
including the operation, design and implementation of hardware and software
which generated information significant to the Company's financial statements
(the "Financial Information Systems Design and Implementation Services"), for
fiscal year 2001, were $102,000.
14
A1317
ALL OTHER FEES. The aggregate fees billed for services rendered by
Deloitte, other than the Audit Services and the Financial Information Systems
Design and Implementation Services, for fiscal year 2001 were $1,249,000. These
services included fees for consulting services related to process improvement
projects in the development and leasing departments and tax consultations.
The Audit Committee, based on its reviews and discussions with management
and Deloitte noted above, determined that the provision of the Other Services
and the Financial Information Systems Design and Implementation Services by
Deloitte was compatible with maintaining Deloitte's independence.
THE AUDIT COMMITTEE
Jerome A Chazen, Chairman
Graham T. Allison
Allan J. Bloostein
S. Parker Gilbert
Peter Karmanos, Jr.
15
A1318
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation of those persons who during 2001 were (i) the chief
executive officer and (ii) the other executive officers of the Company whose
compensation is required to be disclosed pursuant to the rules of the Securities
Exchange Commission (the "Named Officers"). As explained more fully below,
amendments to the Company's long-term compensation plan affected the manner in
which awards under such plan are reported. As a result, in order to understand
the total compensation granted to the Named Officers in 2001, the following
Summary compensation Table must be read in conjunction with Long-Term Incentive
Plan Awards table contained on page 18.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- -----------------------
AWARDS PAYOUTS
---------- -----------
NUMBER OF
SHARES
UNDERLYING LTIP ALL OTHER
SALARY BONUS(1) OPTIONS(2) PAYOUTS(3) COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (*) ($) (5)
--------------------------- ---- --------- --------- ---------- ----------- ------------
Robert S. Taubman................ 2001 $ 750,000 $ 468,800 0 $ 1,196,250 $ 25,614(4)
Chairman of the Board. President 2000 750,000 450,000 0 0 25,678
and Chief Executive Officer 1999 750,000 500,625 0 0 23,320
Lisa A. Payne.................... 2001 $ 500,000 $ 325,000 0 $ 453,750 $ 22,444(5)
Executive Vice President and 2000 500,000 300,000 0 0 21,936
Chief Financial and 1999 500,000 337,813 500,000 0 270,332
Administrative Officer
William S. Taubman............... 2001 $ 474,994 $ 312,500 0 $ 453,750 $ 25,135(6)
Executive Vice President 2000 468,270 285,000 0 0 25,111
1999 436,547 301,219 500,000 0 272,840
Courtney Lord(7) ................ 2001 $ 273,656 $ 240,875 0 $ 0 $ 15,316(8)
Senior Vice President 2000 272,740 241,313 0 0 44,507
John L. Simon.................... 2001 $ 290,616 $ 255,063 0 $ 275,000 $ 24,506(9)
Senior Vice President 2000 282,500 230,325 0 0 24,353
1999 273,000 239,625 0 0 22,256
- ----------
(1) Bonus amount awarded under the Senior Short Term Incentive Plan. Awards
made pursuant to the Manager's Long-Term Performance Compensation Plan are
not reportable on the date of grant and, instead, are reported in the
Long-Term Incentive Plan Awards table immediately following.
(2) All Incentive Options were granted under the Incentive Option Plan with
respect to Units of Partnership Interest exchangeable for an equal number
of shares of Common Stock pursuant to the Continuing Offer.
(3) Reflects payout of 1998 Cash Awards made under the Manager's Long-Term
Performance Compensation Plan (the "Performance Plan"). Robert Taubman and
William Taubman have elected to defer receipt of the payout amount in
accordance with the terms of the Performance Plan. Amounts deferred under
the Performance Plan accrue interest until the deferred payment date. The
Performance Plan was amended effective January 1, 1999 (the "First
Amendment") and further amended effective January 1, 2000 (the "Second
Amendment"). Prior to the Second Amendment awards made under the
Performance Plan were made in the form of Notional Shares of Common Stock
and were reported as restricted stock awards. The Second Amendment, in
addition to affecting future awards, modified the 1998 and 1999 awards,
particularly with regard to
16
A1319
the determination of the payout value of such awards. The payout value of
awards under the Performance Plan as revised by the Second Amendment is no
longer tied to the value of the Company's Common Stock, but instead is tied
to the achievement of a target compounded growth rate of the Company's per
share funds from operations over the three year vesting period of the
award. As a result of the change, awards are no longer reported as
restricted stock awards but instead are reflected in the Long-Term
Incentive Plan Award Table following and are denominated as Cash Awards.
Because the Second Amendment did not affect awards made in 1996 and 1997
which vested in 1999 and 2000, respectively, these prior awards continue to
be restricted stock awards and as such were reported when granted as
opposed to when paid. See "Long-Term Performance Compensation Plan" below
for more information about the Performance Plan.
(4) Includes $13,692 contributed to the defined contribution plan (the
"Retirement Savings Plan") on behalf of Mr. Robert S. Taubman and $11,922
accrued under the supplemental retirement savings plan (the "Supplemental
Retirement Savings Plan").
(5) Includes $13,692 contributed to the Retirement Savings Plan on behalf of
Ms. Payne and $8,752 accrued under the Supplemental Retirement Savings
Plan.
(6) Includes $13,692 contributed to the Retirement Savings Plan on behalf of
Mr. William S. Taubman and $11,443 accrued under the Supplemental
Retirement Savings Plan.
(7) Mr. Lord first became an executive officer of the Company on January 1,
2000.
(8) Includes $8,592 contributed to the Retirement Savings Plan on behalf of Mr.
Lord, and $6,724 accrued under the Supplemental Retirement Savings Plan.
(9) includes $13,692 contributed to the Retirement Savings Plan on behalf of
Mr. Simon and $10,814 accrued under the Supplemental Retirement Savings
Plan.
17
A1320
LONG-TERM INCENTIVE PLAN -- 2001 AWARDS(1)
NUMBER OF ESTIMATED FUTURE PAYOUTS UNDER
SHARES, PERFORMANCE OR NON-STOCK PRICE-BASED PLAN
UNITS OR OTHER PERIOD ---------------------------------------
NAME AND OTHER RIGHTS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
PRINCIPAL POSITION ($) OR PAYOUT ($) ($)(2) ($)
------------------ ------------ ---------------- ----------- ----------- -----------
Robert S. Taubman ................... $ 1,122,375 1/1/01-1/1/04 $ 1,122,375 $ 1,290,731 $ 1,459,088
Chairman of the Board, President
and Chief Executive Officer
Lisa A. Payne ....................... $ 506,250 1/1/01-1/1/04 $ 506,250 $ 582,188 $ 658,125
Executive Vice President and Chief
Financial and Administrative Officer
William S. Taubman................... $ 506,250 1/1/01-1/1/04 $ 506,250 $ 582,188 $ 658,125
Executive Vice President
Courtney Lord........................ $ 240,625 1/1/01-1/1/04 $ 240,625 $ 276,719 $ 312,513
Senior Vice President
John L. Simon ....................... $ 240,525 1/1/01-1/1/04 $ 240,625 $ 276,719 $ 312,813
Senior Vice President
- ----------
(1) Awards were made under the Performance Plan. Awards vest and, unless
deferred in accordance with the Performance Plan, are payable on the third
January 1 after the date of grant. See "Long-Term Performance Compensation
Plan" below for more information about the Performance Plan.
(2) The target is the amount which'would be payable if the target compounded
growth rate in per share funds from operations is achieved.
SENIOR SHORT TERM INCENTIVE PLAN
The Manager's officers and senior management receive part of their annual
compensation pursuant to the Manager's Senior Short Term Incentive Plan (the
"SSTIP"). Under the SSTIP, the actual amount awarded to a participant depends
upon a review and assessment of the employee's and the Company's performance.
Performance that meets expectations results in a bonus of approximately 100% of
an employee's target amount. Performance beyond expectations may result in an
employee receiving up to 150% of his target bonus. Performance below
expectations results in a payment of less than the bonus target.
INCENTIVE OPTION PLAN
TRG maintains the 1992 Incentive Option Plan for its employees with respect
to Units of Partnership Interest in TRG. Upon exercise, it is anticipated that
substantially all employees will exchange each underlying Unit for one share of
the Company's Common Stock under the Continuing Offer. Mr. Robert Taubman,
however, has elected to defer
18
A1321
his receipt of Units of Partnership Interest and right to exchange such Units
under the Continuing Offer, see "Certain Employment Arrangements."
The Company's chief executive officer makes periodic recommendations to the
Compensation Committee of the Board, which, after reviewing such
recommendations, determines grants. The exercise price of each Incentive Option
is equal to the fair market value of a Unit of Partnership Interest on the date
of grant. The 1992 Incentive Option Plan was amended in December 2001 to permit
a holder of an Incentive Option to pay the exercise price in cash or by
surrender of Units of Partnership interest having an aggregate fair market value
equal to the exercise price. In the event that the exercise price for an
incentive option is paid by surrendering Units of Partnership Interest, only
those Units of Partnership Interest issued to the optionee in excess of the
number of Units of Partnership Interest surrendered are counted for purposes of
determining the remaining-number of Units of Partnership Interest available for
future grants of Incentive Options under the 1992 Incentive Option Plan.
Generally, an Incentive option vests in one-third increments on each of the
third, fourth, and fifth anniversaries of the date of grant, although the
Compensation Committee may allow an exercise at any time more than six months
after the date of grant. If the optionee's employment terminates within the
first three years for reasons other than death, disability, or retirement, the
right to exercise the Incentive Option is forfeited. If the termination of
employment is because of death, disability, or retirement, the Incentive Option
may be exercised in full. Outstanding Incentive Options also vest in full upon
the termination of the Manager's engagement by TRG, upon any "change in control"
of TRG, or upon TRG's permanent dissolution. No Incentive Option may be
exercised after ten years from the date of grant. As discussed under
"Compensation Committee Report on Executive Compensation," the 1992 Incentive
Option Plan has been replaced by the Performance Plan as the primary source of
long-term compensation. There were no Incentive Option grants to Named Officers
in 2001.
AGGREGATED OPTION EXERCISES DURING 2001 AND
YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT YEAR END AT 12/31/01(1)
ACQUIRED ON REALIZED -------------------------- ----------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ------------ -------------
Robert S. Taubman...... 0 $ 0 3,357,636 0 $ 12,542,746 0
Lisa A. Payne.......... 0 0 317,218 283,610 764,742 707,372
Williem S. Taubmen..... 38,500 148,648 484,064 250,000 1,702,098 650,000
Courtney Lord.......... 0 0 0 0 0 0
John L. Simon.......... 32,919 128,863 21,727 0 23,582 0
- ----------
(1) In accordance with the SEC's rules, based on the difference between fair
market value of Common Stock and the exercise price.
LONG-TERM PERFORMANCE COMPENSATION PLAN
The Performance Plan was adopted by the Manager and approved by TRG's
compensation committee in 1996 (the Compensation Committee of the Board now
19
A1322
performs such functions). The Company's Performance Plan was amended effective
January 1, 1999 (the "First Amendment") and again effective January 1, 2000 (the
"Second Amendment"). The following discussion relates to the 2001 grants under
the Performance Plan that are reflected in the Long-Term Incentive Plan -- 2001
Awards table.
The amount of a participant's award is based on individual and Company
performance for the fiscal year prior to the date of the award and the
individual's position in the Company. Each eligible participant is granted A
Cash Award (A "Cash Award") and the final payout value of an award is tied to
the achievement of a target compounded growth rate of the Company's per share
funds from. operations over the three-year vesting period of the award. If the
target is achieved, the payout amount of each Cash Award is increased, subject
to a maximum premium of 30%; otherwise the payout amount remains the amount of
the original grant. Funds from Operations ("FFO") is defined as income before
extraordinary items, real estate depreciation and amortization, and the
allocation to the minority interest in TRG, less preferred dividends and
distributions. Gains on dispositions of depreciated operating properties are
excluded from FFO. In 2001, a $1.9 million charge related to a technology
investment was also excluded. Each Cash Award vests on the third January 1 after
the date of grant. Upon vesting, the value of the award under the Performance
Plan will be paid to the participant in a lump sum, unless the participant
elects to defer payment in accordance with the terms of the Performance Plan.
The payout amount is determined on the vesting date; and such amount will accrue
interest from the vesting date until the deferred payment date.
Prior to the Second Amendment, awards were made in respect of Notional
Shares of Common Stock and the payout value of an award was based on the value
of the Company's Common Stock. The Second Amendment affected awards made for
fiscal years 1998 and 1999 as well as awards made after the effective date of
the Second Amendment. Awards made in 1998 and 1999 were converted from Notional
Shares into Cash Awards at a rate based on the value, determined by reference to
the price of the Company's Common Stock, of the Notional Shares held by the
individual at the time of the Conversion. The 1998 Cash Awards vested and,
unless deferred in accordance with the provisions of the Performance Plan, were
paid during 2001.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Revenue Reconciliation Act of 1993. The Omnibus Reconciliation Act of 1993
limits to $1 million the amount that may be deducted by a publicly held
corporation for compensation paid to each of its named executives in a taxable
year, unless the compensation in excess of $1 million is "qualified
performance-based compensation." Although TRG and the Manager are now part of
the Company's consolidated group for financial reporting purposes, this
deduction limit does not affect the Company and does not apply to TRG or the
Manager because TRG and the Manager are partnerships for federal tax purposes,
and the Company itself has no employees.
Compensation Philosophy. The Manager has had a long-standing philosophy of
targeting executive compensation at a level above the average of competitive
practice. As part of this philosophy, the mix of compensation elements has
emphasized variable, performance-based programs. As a result of this philosophy,
the Manager has been
20
A1323
successful at recruiting, retaining, and motivating executives who are highly
talented, performance-focused, and entrepreneurial. The Compensation Committee
has continued to apply this philosophy to its decisions on compensation matters.
The independent compensation consultant retained by the Compensation Committee
has compared the Manager's compensation practices with those of industry
competitors and confirmed that the 2001 compensation of the Named Officers was
consistent with the Manager's compensation philosophy.
The Manager's compensation program for executive officers consists of the
following key elements: annual compensation in the form of base salary, bonus
compensation under the SSTIP, and long-term compensation under the incentive
Option Plan and the Performance Plan. The compensation of the Named Officers is
determined based on their individual performance and the performance of the
Company, TRG, and the Manager.
Since 1996, awards under the Performance Plan have been selected over
Incentive Options as the primary source of incentive compensation to the
executive officers. Incentive Option grants have been and will continue to be
made in special situations.
Base Salaries. Base salaries for the Manager's executive officers are generally
targeted at a level above the average for executives of industry competitors.
The salaries of the Named Officers are reviewed and approved by the Compensation
Committee based on its subjective assessment of each executive's experience and
performance and a comparison to salaries of senior management of industry
competitors.
Performance Plan. In 2001, the Compensation Committee made grants of Cash Awards
under the Performance Plan to the Named Officers, as shown in the Long-Term
Incentive Plan -- 2001 Awards table.
Compensation of Chief Executive Officer. Robert S. Taubman's base salary for
2001 was at an annual rate of $750,000. Mr. Taubman's performance evaluation is
based 25% on the Compensation Committee's evaluation of his individual
performance and 75% of the Compensation Committee's evaluation of the
performance of the Company, which includes the consideration of objective and
subjective criteria. Based on that evaluation and the report of the independent
consultant, the Compensation Committee confirmed that Mr. Taubman's base salary,
his bonus under the SSTIP for 2001 in the amount of $468,800 and his incentive
compensation under the Performance Plan, as set forth in the Summary
Compensation Table and Long-Term Incentive Plans -- Awards table, were
consistent with the Manager's compensation philosophy.
THE COMPENSATION COMMITTEE
S. Parker Gilbert, Chairman
Jerome A. Chazen
Peter Karmanos, Jr.
21
A1324
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following line graph sets forth the cumulative total returns on a $100
investment in each of the Company's Common Stock, the S&P Composite -- 500 Stock
Index, and the NAREIT Equity Retail REIT Index for the period December 31, 1996
through December 31, 2001 (assuming, in all cases, the reinvestment of
dividends).
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
TAUBMAN CENTERS, INC., THE NAREIT EQUITY RETAIL REIT INDEX,
AND THE S&P 500 INDEX
[LINE GRAPH)
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
------------------------------------------------------------------------------------------------------
Taubman Centers, Inc. $ 100.00 $ 108.29 $ 122.75 $ 104.00 $ 115.48 $ 169.09
NAREIT Equity Retail REIT Index $ 100.00 $ 116.95 $ 113.91 $ 100.50 $ 118.56 $ 154.63
SLP 500 Index $ 100.00 $ 133.36 $ 171.48 $ 207.56 $ 188.66 $ 166.24
------------------------------------------------------------------------------------------------------
Please note: The stock price performance shown on the graph above is not
necessarily indicative of future price performance.
CERTAIN EMPLOYMENT ARRANGEMENTS
In January 1997, the Manager entered into a three-year agreement with Lisa
A. Payne regarding her employment as an Executive Vice President and the Chief
Financial
22
A1325
Officer of the Manager and her service to the Company in the same capacities. In
January 1999 and January 2000, the agreement was extended for an additional year
and continues to have automatic, one-year extensions unless either party gives
notice to the contrary. In March 2002, Ms. Payne became the Manager's and
Company's Chief Financial and Administrative Officer and continued her position
as an Executive Vice President of each entity. The employment agreement
provides for an annual base salary of not less than $500,000, to be reviewed
annually. The agreement also provides for Ms. Payne's participation in the
Manager's SSTIP, with a target award of $250,000 and a maximum annual award of
$375,000.
In November 1999, in connection with TRG's acquisition of the outstanding
stock of Lord Associates, Inc., the Manager entered into an employment agreement
with Courtney Lord pursuant to which Mr. Lord became the Manager's Senior Vice
President of Leasing. The agreement terminates on January 1, 2005 unless sooner
terminated by either the Company or Mr. Lord for cause or by Mr. Lord due to his
death, disability or voluntary termination. The employment agreement provides
for an annual base salary of not less than $270,000, to be reviewed annually.
The agreement also provides for Mr. Lord's participation in the Manager's SSTIP,
with a minimum award of $195,000 for each of the years beginning January 1, 2000
and January 1, 2001 and for a grant (effective January 1, 2000) of a Cash Award
having an initial payout value of $137,500 under the Performance Plan. Under the
Agreement, the Manager paid Mr. Lord $50,000 as a hiring bonus in 1999 and
reimbursed Mr. Lord for certain relocation expenses of approximately $26,500 in
2000. Mr. Lord has agreed that in the event his employment is terminated he will
not thereafter compete with the Company for a period (depending on the
circumstances surrounding such termination) of between one and two years. In
addition, part of the consideration received by Mr. Lord in exchange for his
shares of Lord Associates, Inc. included 435,153 Units of Partnership Interest
and 435,153 shares of Series B Preferred Stock. Units of Partnership Interest
granted to Mr. Lord are subject to vesting as described below and, once fully
vested, may be exchanged for shares of the Company's Common Stock under the
Continuing Offer. At this time, after taking into account Mr. Lord's exercise of
his rights under the continuing Offer with respect to 68,000 Units of
Partnership Interest, Mr. Lord has both voting and distribution rights with
respect to 193,095 Units of Partnership interest and 193,095 shares of Series B
Preferred Stock. Mr. Lord has granted an irrevocable proxy to TG Partners with
respect to the remaining Partnership Units and shares of Series B Preferred
Stock. The remaining Partnership Units are not entitled to receive partnership
distributions and allocations except upon liquidation. Under the terms of the
irrevocable proxy executed by Mr. Lord in favor of TG Partners and a letter
agreement between Mr. Lord and TRG, the remaining Partnership Units and shares
of Series B Preferred Stock will be released from the proxy and such Partnership
Units will become entitled to partnership distributions and allocations over a
period of five years. Mr. Lord has pledged 65,271 Partnership Units and shares
of Series B Preferred Stock to be released from the proxy as collateral for his
obligation to remit to TRG a portion of the cash consideration he received in
exchange for his shares of Lord Associates, Inc., in the event the acquired
business does not meet certain performance criteria. In addition, if Mr. Lord's
employment is terminated, the Manager has the right to purchase up to 100% of
any Partnership Units which have not been released from the proxy and become
entitled to partnership distributions and allocations for a cash lump sum
payment of $50,000.
23
A1326
In December 2001, the Manager, TRG and Robert S. Taubman entered into an
Option Deferral Agreement (the "Deferral Agreement") with respect to an
Incentive Option for 2,962,620 Units of Partnership Interest granted to Mr. R.
Taubman in 1992 pursuant to the 1992 Incentive Option Plan (the "Option"). The
Deferral Agreement provides for the deferral of gains (i.e. the difference
between the fair market value of the Units of Partnership Interest subject to
the Option and the aggregate exercise price of the Option) that would be
recognized by Mr. R. Taubman upon his exercise of the option. Mr. R. Taubman is
expected to pay the exercise price for the option by surrendering Units of
Partnership Interest held by him in accordance with the terms of the plan as
recently amended, see "Incentive Option Plan." Upon exercise of the Option, Mr.
R. Taubman will receive a number of Units of Partnership Interest having a fair
market value equal to the aggregate exercise price of the Option and will defer
receipt of the remaining Units of Partnership Interest covered by the Option for
a period of ten years from the date of exercise. Until the deferred amount has
been distributed in full, Mr. Taubman will receive distribution equivalents on
the deferred amounts in the form of cash payments as and when TRG makes
distributions on actual Units of Partnership Interest outstanding. Beginning
with the ten year anniversary of the date of exercise, the deferred Units of
Partnership Interest will be paid to Mr. R. Taubman in ten annual installments.
The Deferral Agreement will terminate and the deferred Units of Partnership
Interest will be paid to Mr. R. Taubman in a single distribution upon the
earlier of Mr. R. Taubman's cessation of employment for any reason, a "change in
control" of TRG, and TRG's permanent dissolution.
ITEM 2 -- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed Deloitte & Touche LLP as the independent auditors to audit the
financial statements of the Company for 2002. The Board of Directors recommends
that the shareholders vote FOR the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the year ending December 31, 2002. Although
shareholder approval of the appointment is not required by law and is not
binding on the Board of Directors, the Board will take the appointment of
Deloitte & Touche LLP under advisement if such appointment is not approved by
the affirmative vote of a majority of the votes cast at the annual meeting.
The Company expects that representatives of Deloitte & Touche LLP will be
present at the annual meeting and will be afforded an opportunity to make a
statement if they desire to do so. The Company also expects that such
representatives of Deloitte & Touche LLP will be available to respond to
appropriate questions addressed to the officer presiding at the meeting.
OTHER MATTERS
The Board of Directors does not know of any other matters to be determined
by the shareholders at the annual meeting; however, if any other matter is
properly brought before the meeting, the proxy holders named in the enclosed
proxy card intend to vote in accordance with the Board's recommendation or, if
there is no recommendation, in their own discretion.
24
A1327
COSTS OF PROXY SOLICITATION
The cost of preparing, assembling, and mailing the proxy material will be
borne by the Company. The Company will also request nominees and others holding
shares for the benefit of others to send the proxy material to, and to obtain
proxies from, the beneficial owners and will reimburse such holders for their
reasonable expenses in doing so.
ADDITIONAL INFORMATION
PRESENTATION OF SHAREHOLDER PROPOSALS AT 2003 ANNUAL MEETING
Any shareholder proposal intended to be presented for consideration at the
annual meeting to be held in 2003 must be received by the Company at 200 East
Long Lake Road, Suite 300, P.O. Box 200, Bloomfield Hills, Michigan 48303-0200
by the close of business on December 10, 2002.
ANNUAL REPORT
The Annual Report of the Company for the year ended December 31, 2001,
including financial statements audited by Deloitte & Touche LLP, independent
accountants, and their reports dated February 12, 2002, is being furnished with
this Proxy Statement. IN ADDITION, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 2001, AS FILED WITH THE SECURITIES EXCHANGE
COMMIISSION, WILL BE SENT TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON WRITTEN
REQUEST SENT TO THE COMPANY'S EXECUTIVE OFFICES: TAUBMAN CENTERS INVESTOR
SERVICES, 200 EAST LONG LAKE ROAD, SUITE 300, P.O. BOX 200, BLOOMFIELD HILLS,
MICHIGAN 48303-0200.
Please complete the enclosed proxy card and mail it in the enclosed
postage-paid envelope as soon as possible.
By Order of the Board of Directors,
Robert S. Taubman,
Chairman of the Board, President and
Chief Executive Officer
April 12, 2002
25
A1328
TAUBMAN CENTERS, INC.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF SHAREHOLDERS -- MAY 30, 2002
The undersigned appoints each of Robert S. Taubman and Lisa A. Payne, with
full power of substitution, to represent the undersigned at the annual meeting
of shareholders of Taubman Centers, Inc. on Thursday, May 30, 2002, and at any
adjournment, and to vote at such meeting the shares of Common Stock that the
undersigned would be entitled to vote if personally present in accordance with
the following instructions and to vote in their judgment upon all other matters
that may properly come before the meeting and any adjournment. The undersigned
revokes any proxy previously given to vote at such meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN FAVOR OF ITEMS (1) AND (2)
IF NO INSTRUCTION IS PROVIDED.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
POSTAGE PAID ENVELOPE.
(CONTINUED AND TO BE SIGNED AND DATED ON THE REVERSE SIDE.)
A1329
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.
1. ELECTION OF DIRECTORS
Nominees: 01 Robert S. Taubman and 02 Lisa A. Payne
(each for a three-year term)
FOR WITHHOLD WITHHOLD AUTHORITY
AUTHORITY to vote for Nominee(s)
to vote for all Nominees named below
[ ] [ ] [ ] ________________
Please mark (X)
your votes as
indicated in this
example
2. RATIFICATION INDEPENDENT AUDITORS
Ratification of the selection of Deloitte & Touche LLP as independent
auditors for 2002.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Please sign exactly as name appears below. When shares are held by joint
tenants both should sign. When signing as attorney executor, administrator,
trustee, or guardian please give full title as such. If a corporation.
partnership, or other business entity, please sign in the name of the entity by
an authorized person.
- ----------------------------------
Signature
Dated: , 2002
-----------------------------
A1330
TAUBMAN CENTERS, INC.
PROXY
SERIES B NON-PARTICIPATING CONVERTIBLE PREFERRED STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF SHAREHOLDERS -- MAY 30, 2002
The undersigned appoints each of Robert S. Taubman and Lisa A. Payne, with full
power of substitution, to represent the undersigned at the annual meeting of
shareholders of Taubman Centers, Inc. on Thursday, May 30, 2002, and at any
adjournment, and to vote at such meeting the shares ofSeries B Non-Participating
Convertible Preferred Stock that the undersigned would be entitled to vote if
personally present in accordance with the following instruction and to vote in
their judgment upon all other matters that may properly come before the meeting
and any adjournment. The undersigned revokes any previously given to vote at
such meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN FAVOR OF ITEMS (1) AND (2)
IF NO INSTRUCTION IS PROVIDED.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
POSTAGE PAID ENVELOPE.
(PLEASE SIGN AND DATE BELOW)
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2 Please [X]
mark your
vote as
indicated
in this
example
1. ELECTION OF DIRECTORS 2. RATIFICATION OF
AUDITORS INDEPENDENT AUDITORS
Nominees: Robert S. Tautman and Ratification of the selection
Lisa A. Payne of Deloitte & Touche LLP
(each for a three-year term) as independent auditors for 2002.
FOR WITHHOLD WITHHOLD AUTHORITY FOR AGAINST ABSTAIN
AUTHORITY To vote for Nominee(s)
To vote for ail Named below
Ncminees
[ ] [ ] [ ] _________ [ ] [ ] [ ]
Please sign exactly as name appears below. When shares are
held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee, or guardian
please give full title as such. If a corporation,
partnership, or other business entity, please sign in the
name of the entity by an authorized person.
------------------------------------------------------------
Signature
Dated: , 2002
------------------------------------------------
[Material in the following Sections is hand-marked to show
specific excerpts from certain transcripts.]
A1331
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- -----------------------------------------------------------
SIMON PROPERTY GROUP INC., and
SIMON PROPERTY ACQUISITIONS INC.,
Plaintiffs,
vs.
TAUBMAN CENTERS INC., A. ALFRED
TAUBMAN, ROBERT S. TAUBMAN, LISA
A. PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. CHAZEN,
and S. PARKER GILBERT,
Defendants.
Civil Action No. 02-74799
- -----------------------------------------------------------
DEPOSITION OF: Professor Lucian Bebchuk
DATE: February 19, 2003
LOCATION: New York, New York
LEAD: Stephen DiPrima, Esquire
REPORTER: Jane Rose, CSR-CRR
FINAL COPY, SIGNED 02-21-03
JANE ROSE REPORTING, 1-800-825-3341
A1332
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 89
acquisition offer that they haven't received an acquisition offer for a
significant period prior to that.
BY MR. DiPRIMA:
[BEGINNING OF EXCERPT]
Q. I think the testimony you reviewed on the Rouse offer indicated
that the Rouse offer was for the entire partnership and not just Taubman
Centers, standing alone.
Is that correct?
A. I don't have a clear recollection, and the record is fairly
minimal about the Rouse overture.
And for my analysis, it didn't really matter one way or the
other.
Q. To your knowledge, prior to the '98 restructuring, no one ever
made a tender offer for all or part of the shares of Taubman Centers.
Is that correct?
A. I'm not aware, and my guess is that there was probably no tender
offer for the shares of Taubman Center until now, but it would not have
surprised me if a tender offer had come as a prior -- you know, if we didn't
have the restructuring, so that I do not think
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1333
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 90
that we have a reason to think that only the restructuring made tender offers
considerable.
Essentially, both before and after, what you had are shares of a company
that represents a bundle of assets, and under some circumstances, depending on
the appearance of merger that we were discussing before, you could imagine
somebody wishing to buy those shares or to buy the company as a whole.
Q. Are you aware of any situation in which an UPREIT -- a public
company in an UPREIT structure that owned a minority interest in a real estate
partnership was able to sell its shares at a premium to the market price?
MR. OTTENSOSER: Objection.
THE WITNESS: I don't know of any study that focuses on takeovers
in the REIT industry, and I personally did not attempt to do such a study.
But for _the reasons I just explained, I think that a tender
offer for a REIT of the nature that you described is not something that
economically or businesswise is something that one should rule out as
inconceivable or not something that one should
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1334
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 91
expect to happen.
BY MR. DiPRIMA:
Q. Could you name a company that might have been interested, in
your view, in acquiring Taubman Centers on a stand-alone basis prior to the 1998
restructuring?
MR. OTTENSOSER: Objection.
THE WITNESS: Whether someone is interested or not would depend
on lots of things, and this particular feature of how many members you have in
the partnership committee would certainly not be the first one.
What would matter, among other things, is the price at which the
company is right now selling.
And I could imagine, as a matter of just understanding -- since
that's what you are thinking of, understanding the situation, you could imagine
a situation in which, right now, SPG is not interested in buying the company,
even though the structure is somewhat different than prior to 1998, because the
price right now is high, and they don't think they can make a return on it.
And I could imagine a situation
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1335
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 92
which, as history had it, did materialize, under which, in 1997, SPG would have
made an offer for the shares; all you need to do is assume that the price of
those shares, in '98, was 20 percent of the price that it actually was. And my
guess is that it would make sense for SPG, or for other potential buyers, to
make a tender offer for the public company.
So it would all depend very much on the question of whether that
asset, which, in '97, had a series of attributes, whether this asset, the price
at which it was selling in '97, was attractive, and this is certainly something
that was certainly not inconceivable.
And as I said, all you need to do is go back to '97, see what
the price was it was trading, and assume that the price was just 20 percent of
that, and there would have been many potential buyers for this -- for the
company.
Q. But you can't name any.
A. You mean as specific -- who --
Q. I'm trying to --
A. Who they would be? I mean, I can give you the
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1336
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 93
category. I mean, this could have been even somebody -- I don't want to say that
this -- I mean, nobody can predict -- nobody could have predicted a year before
SPG came sight now. If you asked me a year ago, "Can you imagine a tender
offer," I would say yes.
If you say, "Can you name me who it is going to be," I wouldn't
necessarily say SPG.
If you asked me would the price provide, I could imagine someone
outside the REIT industry; I could imagine Carl Icahn, I could imagine Kirk
Kerkorian -- I imagine, if I had enough money, I could make a bid myself.
Q. I think at this point we are theorizing and imagining and
assuming things.
Is that --
A. No, I think we are just identifying for ourselves and kind of
really reaching an understanding why it is not -- that the '98 restructuring was
not a "but for" essential cause for the possibility of a tender offer, because
we just identified why, prior to '97, under appropriate circumstances--which are
not imaginary situations; they are situations
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1337
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 94
that have to do with the price just being sufficiently low--that you could have
a tended offer.
And we could say SPG would have~ come in '97 had the price been
sufficiently low.
[END OF EXCERPT]
Q. Is it your testimony that a potential acquirer, prior to 1998,
would have paid a premium to the market price for Taubman Centers in order to
acquire the right to put five people on a thirteen-member partnership committee?
MR. REISBERG: Objection.
MR. OTTENSOSER: Objection.
BY MR. DiPRIMA:
Q. Is that your testimony?
MR. REISBERG: Objection.
THE WITNESS: As I said, it's quite possible. It's even plausible
for somebody to pay a lot of money for assets -- or to pay more for assets than
they are trading right now, even if those assets are assets that are limited in
one way or another.
So if you have a company - to -- just to clarify this to you,
which would
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1338
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 99
[BEGINNING OF EXCERPT]
Q. I could.
When we were talking about what Taubman Centers had to sell
prior to the 1998 restructuring, their right was to appoint five members to a
thirteen-member partnership committee.
After the 1998 restructuring, did they not have the power to
sell control of the real estate assets owned by the partnership?
MR. REISBERG: Objection.
MR. OTTENSOSER: Objection.
THE WITNESS: I think that the term "controlling" here is a bit
too loose for our purposes of understanding what was happening. Because the
public company, as we know, doesn't own directly the assets, but we can -- it
would be fair to say that if somebody bought all the assets of the public
company, then what they would be getting is a larger economic interest also in a
smaller pool of underlying assets, as well as the right to appoint five members
of the committee.
BY MR. DiPRIMA:
Q. Would you agree that obtaining
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1339
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 100
control of the TRG partnership for Taubman Centers as a result of the 1998
restructuring was a benefit to the Taubman Centers 4 shareholders?
MR. REISBERG: Objection.
THE WITNESS: Obviously one would have to think about everything
in the total framework in which something is happening.
My ability, sitting here, to make an assessment is only -- I
cannot assess, for example, whether the GM exchange was a fair one.
BY MR. DiPRIMA:
Q. Let's assume for the sake of my question --
MR. REISBERG: Excuse me.
MR. OTTENSOSER: Let him answer the question.
You can continue.
THE WITNESS: So obviously, if you have a larger fraction, but of
much worse assets, you haven't really improved your positions.
For our purposes, let's assume
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1340
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 101
that -- it's an underlying assumption. Let's assume that the GM exchange was at
least fair to the shareholders of the public company, in the sense that the
assets that were given to GMPT were not more valuable than their respective
fraction of ownership of economic interest.
Assuming that's the case, then the -- if you assume that this is
the case,then I would say -- if we assume this is the case, then this is the
case.
If we assume the GM exchange is valuable, which I cannot express
a view of, then we would be assuming that it is valuable.
The only assessment that I could make as a corporate governance
expert here is just the following two conclusions:
One is that if the GM exchange was valuable for the public
company and its shareholders, they could have accomplished it (without the
consent of the Taubman family, and therefore whatever is the value of this, that
would not have provided any reason, or any corporate purpose, for granting the
Taubman family the Class B shares.
[END OF EXCERPT]
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1341
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 102
[BEGINNING OF EXCERPT]
The other -- my other assessment is that even if you
hypothetically assumed that the Taubman family had the veto power, that the
overall governance and control situations that public shareholders find
themselves in now is clearly worse off than it was before, but this is, you
know, an assessment -- I brought in a hypothetical case because my assessment is
that, assuming the GM exchange was valuable, then the public company and its
shareholders could have received it and should have received it, assuming that
the directors are doing what's good for the shareholders, without issuance of
the Class B shares, which is the focus of my report.
BY MR. DiPRIMA:
Q. Let's go back to my question, which was whether the Taubman
Centers obtaining a majority position in the partnership for the first time as a
result of the 1998 restructuring was, in your view, a benefit to the public
shareholders.
And to put it a slightly different way, would the public
shareholders rather have 60 percent interest in the
[END OF EXCERPT]
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1342
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 106
[BEGINNING OF EXCERPT]
MR. DiPRIMA: Issued or not issued.
I'm focusing on this feature of the deal in which Taubman
Centers goes from a minority position to a majority position, and I'm trying to
understand whether Professor Bebchuk believes that would have been a benefit to
the public company, putting aside whether it was outweighed by the detriment you
see in the issuance of the Series B preferred stock.
MR. REISBERG: Objection.
THE WITNESS: I think I answered this question before, but since
you are asking, I'm happy to answer it again.
I said before, even in this hypothetical scenario in which the
Taubman family had a veto right, the shareholder would have been made -- the
shareholders were made worse off.
And since you are asking me to explain that, let me do so.
In the questions we are now assessing, the economic interest is
going to be the same regardless of the governance arrangements.
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1343
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 107
The economic interest is given by -- we already had the GM exchange, and
the public shareholders have whatever economic interests they have.
And then we are asking ourselves, would they be better off with
the fact that they now have this -- and assuming everything was just fair, are
they better off in a situation in which they have five out of nine, with the
Class B shares?
If we focus just on those governance aspects, that if none of
this happens, and the answer is they were made worse off. Because if you think
about this in terms of entrenchment, the five members of the board, which you
are saying is control, might be slight illusory; it's not as accessible to the
public shareholders as you were thinking at first glance.
And the reason is that even when the company has five members on
the partnership committee, and the Taubmans have only four, the Class B
shares --
BY MR. DiPRIMA:
Q. You are referring to the board
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1344
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 108
now?
A. I'm saying the public company has the right to -- right.
So we eliminated the partnership, and right now we have the
board and we have the Taubman family having the right to nominate and having
their voting shares.
Then the public shareholders are, as it were, more in the hands
- -- to use a metaphor, more in the hands of the Taubman family than before. The
public shareholders have less power to control their destiny than before.
Sure, you might say before you had only five members out of
thirteen, but should the public shareholders not like what the Taubmans are
doing, there was an easy way through the exercise of their franchise -- for the
shareholders' franchise to do things differently with whatever you have.
After the restructuring, you are -- the public shareholders have
lost, to a large extent, their ability to determine their destiny and
ultimately what would affect their welfare.
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1345
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 109
So for this reason, if you just focus on the control dimension,
which is your question, they are made strictly and clearly worse off.
BY MR. DiPRIMA:
Q. I don't think you answered my question, and let me maybe try to
go at it a different way. Let's assume --
A. Perhaps if I could help your understanding of the situation.
You can think about the following situation:
Imagine that you are -- that you could personally either elect
two people out of some committee -- as opposed to a management committee. So you
could elect two people out of ten, or you could have a situation in which
formally you might be able to get three, but somebody else really has control
over this, and you can't really, through a meaningful exercise of your powers,
select your destiny; then you would be much better off selecting two people than
having no say at all, which is what, practically speaking, the public investors
find
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1346
US DISTRICT COURT - MICHIGAN FINAL PROFESSOR LUCIAN BEBCHUK
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 110
themselves in now.
Their hands, for any shareholder action, are completely tied
without the concept of the Taubman family, that has very different interests
than those of the public shareholders.
So there is, therefore, no question that their situation is made
much, much worse off, in my judgment.
[END OF EXCERPT]
Q. So in your view, it would have been improper for the independent
directors of the Taubman Centers to waive -- the fact that Taubman Centers was
going from a minority to majority position in deciding to review the 1998
restructuring, to view that as a benefit to the Taubman Center shareholders?
MR. OTTENSOSER: Objection.
MR. REISBERG: Objection.
BY MR. Di PRIMA. :
Q. Is that your view?
A. Again --
Q. Maybe I can clarify the question.
Is that what you are saying, or are you saying that the issuance
of the
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1347
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- -----------------------------------------------------------
SIMON PROPERTY GROUP INC., and
SIMON PROPERTY ACQUISITIONS INC.,
Plaintiffs,
vs.
TAUBMAN CENTERS INC., A. ALFRED
TAUBMAN, ROBERT S. TAUBMAN, LISA
A. PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. CHAZEN,
and S. PARKER GILBERT,
Defendants.
Civil Action No. 02-74799
- -----------------------------------------------------------
DEPOSITION OF: Martin Cicco (Merril Lynch)
DATE: February 5, 2003
LOCATION: New York, New York
LEAD: Jonathan Moses, Esquire
REPORTER: Nancy Mahoney, CSR
FINAL COPY, SIGNED 02-06-03
JANE ROSE REPORTING, 1-800-825-3341
A1348
US DISTRICT COURT - MICHIGAN FINAL MARTIN CICCO (MERRILL LYNCH)
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 5, 2003
Page 119
interest provided a different level of governance because the charter changed at
the parent company required a two third vote.
I think Mike and I have had just debates as to the ramifications
of what impact that has, and I think the one he subscribed to is -- and I've had
the contention that pre '98 you could have made a bid to acquire all the REIT
shares and post '98 that has been the issue.
That's been the essence of our conversations.
Q. In pre '98 it was your understanding that the assets were held
by the partnership?
A. That is correct.
Q. That's also true post '98. Correct?
A. That is correct, my understanding today, yes.
[BEGINNING OF EXCERPT]
Q. Based on your experience as an investment banker, do you think
any of your clients would be interested in acquiring the REIT shares alone in
the structure that existed pre '98?
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1349
US DISTRICT COURT - MICHIGAN FINAL MARTIN CICCO (MERRILL LYNCH)
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 5, 2003
Page 120
MR. YOUNGWOOD: Objection to form.
A. Yes
[END OF EXCERPT]
Q. Did anyone ever tell you that they were interested in doing
that?
A. When?
Q. Any time pre '98.
A. Pre '98? No.
Q. Did David Simon every say that he would be interested in
acquiring the REIT shares alone in your conversations pre '98?
A. Pre '98? To my recollection, no.
Q. Was it your understanding that if -- in David Simon's mind that
if a transaction were to occur, again, pre '98, they would have to involve units
at the partnership level as well?
MR. YOUNGWOOD: Objection to form.
A. Not necessarily. I don't remember -- there was not a specific
analysis of that, not necessarily is the answer.
Q. Do you recall anything else about your conversations with
Mr. Kirby?
JANE ROSE REPORTING 1-800-825-3341
NEW YORK, NEW YORK www.janerose.net
A1350
Page 1
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SIMON PROPERTY GROUP, INC., )
and SIMON PROPERTY )
ACQUISITIONS, INC., )
Plaintiffs, )
)
VS. ) No. 02-74799
)
TAUBMAN CENTERS, INC., A. )
ALFRED TAUBMAN, ROBERT S. )
TAUBMAN, LISA A. PAYNE, )
GRAHAM T. ALLISON, PETER )
KARMANOS, JR., WILLIAM S. )
TAUBMAN, ALLAN J. BLOOSTEIN, )
JEROME A. CHAZEN, and S. )
PARKER GILBERT, )
)
Defendant. )
- -------------------------------)
VIDEOTAPED DEPOSITION OF SIMON PARKER GILBERT
New York, New York
Thursday, January 9, 2003
Reported by:
Philip Rizzuti
JOB NO. 143921
Esquire Depositions Services
1-800-944-9454
A1351
Page 47
Gilbert
board, and concluded that the offer was not sufficiently attractive to enter
into discussions, and I am not even sure that it required a response. I think it
kind of just died of it's own weight.
[BEGINNING OF EXCERPT]
Q. Do you know whether or not there was a response made to Rouse?
A. My recollection is that we decided we didn't have to respond to
it.
Q. Was this before or after the closing of the General Motors
transaction?
A. I can't remember whether it was -- I think it was probably
before the closing, but I don't remember.
Q. Did the company ever make public this initiative by Rouse?
A. No. Nor were we advised that we needed to.
[END OF EXCERPT]
Q. So to go back to my earlier question as to whether there was any
concern about an interloper or a new bidder, whether it be Rouse or anyone else
coming in as being a factor in the discussions the committee was having in any
way?
A. I don't recall there being any serious concern.
Esquire Depositions Services
1-800-944-9454
A1352
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
LIONEL Z. GLANCY, on behalf of himself and all others similarly situated,
Plaintiff, Civil Action No. 02-75120
vs. The Honorable Victoria A. Roberts
ROBERT S. TAUBMAN, WILLIAM S. TAUBMAN,
LISA A. PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS, JR., ALLAN J. BLOOSTEIN, JEROME A.
CHAZEN, AND S. PARKER GILBERT,
Defendants,
- -and-
TAUBMAN CENTERS, INC.
Nominal Defendant.
***********************************************************
VIDEO DEPOSITION OF M. TRAVIS KEATH
***********************************************************
ANSWERS AND DEPOSITION OF M. TRAVIS KEATH, produced as a witness at the
instance cf the Defendants, taken in the above-styled and -numbered cause on the
13th day of February, 2003, A.D., beginning at 9:02 a.m., before Lisa Smith, a
Certified Shorthand Reporter in and for the State of Texas, in the offices of
Value, Incorporated, located at 5221 North O'Connor Boulevard, Suite 830,
Irving, Texas, in accordance with the Federal Rules of Civil Procedure and the
agreement hereinafter set forth.
A1353
was a separation of relative adjustment agreement that then said -- had kind of
a table of contents of various exhibits and schedules and attachments, none of
which were attached or appended to the SCC filings, but there was a
parenthetical note or whatever that said we're not making this available unless
the SCC asks for it, and then we'll provide it if they do, and I didn't see that
it was ever provided to the SCC.
Q. But judging from No. 5 on Page 16 of Exhibit 2, you thought that
would be useful in performing the evaluation you were engaged to perform?
A. I thought that it could be.
Q. Did you ever receive the information described in No. 5 on that
e-mail?
A. No.
[BEGINNING OF EXCERPT]
Q. What about No. 6? Why were you asking for the partnership agreement
prior to and after the '98 restructuring?
A. Well, this was as I was trying to get a handle still, as I said, on
the -- on the transaction, the -- some of the peculiar things about the
transaction are that there was very little disclosure. My recollection right now
is that on September 30, Taubman said we've done this deal, and by the way,
we're gonna have to issue Series B preferred to ourselves, the Taubman family,
basically in
A1354
56
the various minority -- I think they called them minority partners, I believe,
was the term they used. That was very puzzling to me that there wasn't -- you
know, we had a very large class of securities issued by a public company without
any kind of registration, and -- so I couldn't quite figure that out.
I couldn't figure out why the dealings between the Taubman family and
the General Motors Pension Trust obligated the REIT to issue shares to the
Taubman family. There were lots of questions like that that came up as I was
looking through this stuff that I couldn't answer from the disclosure. So just
in the interest of getting a better handle on how things happened, I noted that,
you know, here are documents that aren't in the public domain that may have some
information to lend to the process.
[END OF EXCERPT]
Q. Do you get any of the documents listed in Items 5 through 14?
A. Only to the extent that they were available in the SCC filings.
Q. What was the response of Ms. Weiser when you asked for Items 1 through
14 on the e-mail?
MS. WEISER: Objection to the form.
A. I don't believe she responded to this e-mail, or if she did, I don't
remember.
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Ms. Weiser's time, and I was trying not to keep her at the office any later than
necessary.
Q. Did Ms. Weiser or anybody else ever indicate to you the need to work
quickly?
A. Well, I was asked to send it out Federal Express that night, so I
needed to get it done that night.
Q. Would you look at the next page, Mr. Keath? Before I turn to this
page, did you feel that you had sufficient time to prepare and edit your
declaration?
A. Yes.
Q. Mr. Keath, are these notes your handwritten notes on the
second-to-last page of Exhibit 2?
A. Yes, they are.
Q. Mr. Keath, there's what appears to be a notebook page on the left-hand
side of the page of the exhibit that we're looking at, and there's an entry
about a third of the way down that page. It says 4/30/98, restructuring with a
W/GMP complete; do you see that?
A. That's actually 9/30/98. It looks like it just didn't copy very well.
Q. Oh, I'm sorry. Okay. 9/30/98 rather. And there's sort of a block of
text there going seven lines of text; do you see that?
A. Starting with that restructuring?
[BEGINNING OF EXCERPT]
Q. Starting with 9/30/98, there are seven lines of
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text, and then there are two spaces; do you see the seven lines of text I'm
referring to?
A. Yes.
Q. It starts with 9/30/98, and it ends with dash, grossly inadequate
disclosure; do you see that text?
A. Yes.
Q. Okay. Where did the information come from that's written in the text
that I just referenced?
A. From my review of the publically available information.
Q. So the text here is -- these are your comments, not information that
you were given by any attorney or anyone else?
A. That is correct.
Q. Do you know when these notes were made?
A. Early in the engagement.
Q. Mr. Keath, in the fourth line of text, it reads, and correct me if I'm
wrong, gave Taubman family 37.3 percent of vote of TCO; do you see that?
A. Yes.
Q. Do you recall where you got that information?
A. From the SCC filings and publicly available information.
Q. Do you have any understanding as to whether that bit of information is
correct?
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A. As we sit here, no, I don't. I'd have to see the last line of where I
derived the 37.3 percent figure.
Q. Mr. Keath, three more lines down, the last line of this block of text
reads grossly inadequate disclosure; do you see that?
A. Yes.
Q. What about disclosure of the -- what were you referring to there?
A. I was referring to the issuance of a whole new series of capital stock
that conveyed a significant voting interest in TCO with what I consider just
from, you know, an investor/financial analyst perspective to be grossly
inadequate disclosure.
Q. What would have had to have been disclosed for disclosure of the
Series B stock to have been adequate in your opinion?
A. It would be easier for me to say that there would have to be
significantly more disclosure than was in there. 1 don't know that, as we sit
here, I could tell you if ABC and D were available; that would have constituted
adequate disclosure, but you've seen the various questions that I came up with
in the course of analyzing that transaction. I should be able to answer all of
those based on disclosure that was made. I shouldn't have -- it shouldn't be a
matter of discovery. It should be a matter of public
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record.
Q. What aspects of the disclosure were inadequate, the characteristics of
the Series B stock or the transaction that led up to it? What parts are you
focusing on?
A. Well, again, the questions that I had before. Why is TCO obligated to
issue these shares? All that I saw in the disclosure was as a result of the
restructuring of GMPT; we are obligated to issue shares to the minority
partners, and you just can't get there from here because of what wasn't
disclosed in the SCC filings. Why is that? I would want to know that. I would
consider it inadequate disclosure until I knew that, until it was enough
disclosure that I could determine that.
You know, how is it that these shares conveying all this voting
privilege could be issued with no registration? Ordinarily, issuance of common
stock in my experience or -- I'm sorry -- not common stock, but just a new -- a
new issue of stock, a new class of stock. There's all kinds of disclosure that
goes along with that, and registration statements are very thick and very
detailed, and they answer a lot of questions. There was no such registration
statement for this, and -- so all those questions go unanswered.
Q. What sort of questions are answered on a
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registration statement?
A. The kind of questions that I've raised in the course of this
deposition that you see in my notes, you know, with respect to why did the
company become obligated to issue Series B preferred? Why weren't the common
shareholders told about it before -- before they were obligated to issue Series
B preferred? You know, what's behind the voting interest issue, and why are the
common shareholders having to cede so much of a voting interest in their
company? They used to have collectively, between all the common shareholders, a
hundred percent of the voting power. Now they've got less than two-thirds. Why
is that? How did the transaction GMPT lead to that, and how is that fair to the
common shareholders? Lots of questions like that that bear on a publically
traded security where you would expect a high element of disclosure.
[END OF EXCERPT]
Q. You just listed a bunch of questions. Do all those questions bear on
the value of that security, of a security?
A. They bear really more on the adequacy of the disclosure than
necessarily the value specifically. When I'm valuing a security, again, I like
- -- I like a lot of information, and if it seems like there's, you know, far too
little information, that concerns me, so -- I mean, I don't know if that has any
relevance to your valuation
A1360
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UPREIT increased following the transaction?
MS. WEISER: Objection to the form.
A. Yeah, I don't know.
Q. (BY MR. LEITMAN) You don't understand the question?
A. Mainly because I don't think I understand what you're asking.
Q. What's unclear about it?
A. The ability. You said something about the ability of the shareholders
of the REIT, and by that I assume you mean only the common shareholders, after
the transaction, to control the assets of the REIT. Did -- did I fairly --
Q. The assets of the -- owned by the operating partnership.
A. Owned by the -- okay, that was the distinction, owned by the
operating partnership.
Q. Okay. So let me try the question again to try to make it more clear.
A. Okay.
[BEGINNING OF EXCERPT]
Q. It there any aspect, in your understanding, in which the ability of
the shareholders of the REIT to exercise control over the assets of the
operating partnership increased after the transaction?
A. The only thing I can think of that you might be referring to there is
that when GM Pension Trust went away,
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the remaining asset -- everybody got bigger slices of a smaller pie. Everybody
being the TCO common shareholders on the one hand, and the minority partners on
the other hand. So the -- the percentage ownership grew of a shrinking portfolio
of assets or a diminished portfolio of assets. It didn't, to my knowledge,
didn't continue to shrink, but it was kind of instantaneously reduced when the
GMPT exchange happened.
Q. And that gave the -- isn't it fair to say that that gave the REIT
shareholders more control over the assets of the operating partnership?
MS. WEISER: Objection to the form of the question.
A. No, I don't think that's a fair statement.
Q. (BY MR. LEITMAN) Why not?
A. Because what in effect happened by virtue of the transaction, is that
the -- the TCO common shareholders had their voting interest in their own
company diluted below two-thirds, which precluded them from -- from being able
to vote on -- on matters of importance to shareholders -- or it didn't preclude
them from being able to vote. It precluded them from the ability to have their
votes count, because of the virtue of the veto power that was conveyed in that
Series B transaction.
[END OF EXCERPT]
Q. Mr. Keath, to your knowledge, can the Series B
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other. As I just try to construct a mental model here. And I don't know how to
answer the points in between, but it would have to do with to what extent the
shareholders can control their own destiny with regard to their ability to reach
through, grab the underlying assets, and if they want to cash out, cash out. You
know, I guess. I don't know if that's responsive to your question or not. I
don't know that I have a better answer than that, though. Sorry.
[BEGINNING OF EXCERPT]
Q. Mr. Keath, looking at Page 4 of your final declaration, three lines
down from the top, this is Exhibit 5, is the line: Such voting power is
obviously quite valuable; do you see this?
A. Yes.
Q. And the voting power that you are referring to there is the voting
power of the identified minority partners subsequent to the transaction to
effectively block the sale of TCO to a potential client; correct?
A. The voting power of the minority partners in TCO's voting matters,
yes.
Q. Okay. And you say such voting power is obviously quite valuable;
correct?
A. Yes.
Q. What is the basis of that assertion?
A. It -- I think it's highlighted by the remainder of the document where
we see that the ability to block this
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142
transaction keeps shareholders from tendering their shares for $20 and realizing
- -- what is it, a $5.43 premium, a substantial premium, like around 40 percent.
That option is not available to them.
Q. Let me ask it this way: Is the assertion that such voting power is
obviously quite valuable based on anything outside of your final declaration,
Exhibit 5?
A. Sure.
Q. What?
A. It's -- it's generally understood that voting power carries with it
some value. Sometimes it's easier to analyze that, and sometimes it's not as
easy, but it's - it's generally understood and accepted that voting power is
valuable.
Q. Mr. Keath, as we sit here today, can you point out for me any
scholarly or professional literature that -- that I could look to to test or
support the proposition that the voting power you identify in Paragraph 5C is
obviously quite valuable?
MS. WEISER: 5B?
MR. LEITMAN) 5B, I'm sorry. Thank you.
A. Any of the articles or chapters that I mentioned earlier in the
deposition.
Q. Anything else?
A. I'm sure there are plenty of other references,
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probably not that I can call to mind at the moment, but there's no shortage of
information out there to -- to support that voting power is valuable.
Q. I want to be very specific with my question. I understand you have
referenced earlier in this deposition literature that in your view supports the
view that voting power is valuable. I want to be more specific. Understanding
and accepting that answer, I want to be more specific. Do you know of any
literature, scholarly or professional, that supports the view that the extent of
voting power exercised by the identified minority partners is obviously quite
valuable?
MS. WEISER: Objection to the form.
A. I -- I seriously doubt that anything has been published, scholarly,
professional, or otherwise bearing on the identified minority partners in this
transaction.
Q. (BY MR. LEITMAN) Fair enough. In case I didn't make it clear, I meant
the extent of power. What I'm getting at is, here you are referring to an
effective blocking position for certain extraordinary transactions, correct?
A. Yes.
Q. Okay. What I'm asking you is very specifically, do you know of any
scholarly or professional literature that addresses the value of such a voting
position?
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144
A. Yes, including the stuff that I mentioned, and I couldn't tell you
which one specifically, but the classic example for a matter like this is to
say, three shareholders, common stock, 49 percent interest, 49 percent interest,
2 percent interest. That 2 percent interest being characterized as a swing vote,
because it may have the power to move position if the two 49 percent interest
holders are opposed on a -- on a voting matter.
So there's some swing vote discussion in the various control value
literature, and I think that's pertinent, although it's, you know, 2 percent is
not 37 percent. I understand that. But some of the general underlying economic
ramifications of the ability of a small interest or at least a less than 50
percent interest to wield an undue amount of influence. Yeah, you'll see -- I
would imagine you'll see that repeatedly in the literature that I mentioned and
elsewhere.
[END OF EXCERPT]
Q. Can you specifically point to any others as you sit here today, any
other sources of literature?
A. Not as we sit here.
Q. Mr. Keath, do you know of any real world examples in which stock with
similar rights and limitations as a Series B preferred stock has been valued?
MS. WEISER: Objection to the form.
A. I can't think of an example of another stock, you
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Inc.'s Articles of Incorporation creating the Series B stock had been filed with
the SCC, correct?
A. If that's the document that creates the Series B stock.
Q. Yes.
A. I don't know exactly what the genesis of the class of stock is in
legal terms.
[BEGINNING OF EXCERPT]
Q. The article provision concerning the Series B stock has been filed
with the SCC by April 1, 1999, correct?
A. Okay.
Q. Are you saying it is not fair to conclude that by virtue of the filing
of that document with the SCC, the market is aware of the rights and preferences
of the Series B stock?
A. Sure.
Q. You're saying it is not fair to make that conclusion?
A. I'm saying sure, it's not fair to make that conclusion.
Q. Okay. Why is that?
A. Because, again, lOQs are received by investors with relatively little
fanfare, and if you think they're gonna go and start reading bylaws, you
overestimate how diligent most investors are. That's why I say the SCC
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requires disclosure in the manner it does for a reason, and that's because they
want to make it so easy for investors to make themselves informed that you don't
have to hunt under every little rock and behind every corner and check every
nook and cranny to pull the information. It's got to be right, there ready to go
and ahead of time, for that matter, again, in the case of something like a big
issuance of a new class of voting stock.
[END OF EXCERPT]
Q. Are you aware of any code of ethics or regulations or any sort of
standards against which the disclosure related to Series B shares should be
judged? In other words, you say it's inadequate. Is there an objective standard
or set of guidelines that you're judging it against?
A. That's beyond the scope of my analysis.
Q. That's what I'm asking.
A. I'm comparing the disclosure that was made to the disclosure that I'm
accustomed to seeing for the issuances of new classes of securities. I don't
know what all the rules are, but I can tell you that there's a big difference
between what I'm accustomed to seeing and what was made available in this
instance.
Q. If we assume that at some point, be it in the fourth quater of 1998 or
1999 or 2000, the market learned of the series B and its rights and preferences
and the
A1368
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- -----------------------------------------------------------
SIMON PROPERTY GROUP INC., and
SIMON PROPERTY ACQUISITIONS INC.,
Plaintiffs,
vs.
TAUBMAN CENTERS INC., A. ALFRED
TAUBMAN, ROBERT S. TAUBMAN, LISA
A. PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. CHAZEN,
and S. PARKER GILBERT,
Defendants.
Civil Action No. 02-74799
- -----------------------------------------------------------
DEPOSITION OF: Peter Lowy
DATE: February 19, 2003
LOCATION: New York, New York
LEAD: I.W. Winsten, Esquire
REPORTER: Brad Rainoff, CSR
FINAL COPY, SIGNED 02-20-03
JANE ROSE REPORTING, 1-800-825-3341
A1369
US DISTRICT COURT - MICHIGAN FINAL PETER LOWY
SIMON PROPERTY V. TAUBMAN CENTERS FEBRUARY 19, 2003
Page 176
MR. WAXMAN: Same objection. Same instruction.
Q. Isn't it true that Simon or Westf ield do not intend to cause any
proposed amendment to the articles of incorporation of Taubman to be presented
to Taubman shareholders for a vote?
MR. WAXMAN: Have you done with your question?
MR. WINSTEN: Yes.
MR. WAXMAN: Same objection. Same instruction.
[BEGINNING OF EXCERPT]
Q. Isn't it true, sir, that as you understand it, the tender offer cannot
go through unless there is an amendment to Taubman's charter that is passed but
the shareholders by the requisite percentage?
MR. WAXMAN: That's been asked and answered. You can answer it again.
A. You have to asked me again now.
Q. You didn't know that that was your question?
(Question read)
A. No.
Q. Let me have you turn to page one of Exhibit 5, I believe, document
number 194. If
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Page 177
you look at the last paragraph --
MR. WAXMAN: Exhibit 6.
MR. WINSTEN: Excuse me, Exhibit 6. Thank you.
A. Sorry, 194?
Q. Yes. Last paragraph?
A. Okay.
Q. There is a reference there that to facilitate the offer, there is
going to be a request for a special meeting to amend the company's articles to
provide that the purchase would not trigger the company's excess share
provision, do you see that?
A. Yes. Can you just point out to me, actually? Sorry.
Q. I am paraphrasing it. Feel free to read all the words.
A. Thanks.
(Pause)
A. Okay.
Q. I want to make sure I understand your testimony. Is it your testimony,
sir, that this hostile tender offer can succeed and Simon Property Acquisitions,
Inc., can acquire control of Taubman Centers, Inc., without an amendment
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Page 178
of the company's articles of incorporation providing that the acquisition
doesn't trigger the excess share provision?
A. I think that was the question you asked me before.
Q. I want to make sure I understand that. You are saying you don't need
the amendment?
A. That's not what you asked me before.
Q. That's why I am re-asking it, because I was troubled by your answer.
It didn't make sense to me. Isn't it true, sir, that in order for your tender
offer to go, through the articles of Taubman have to be amended to provide that
the acquisition does not trigger the excess share provision?
A. Yes.
MR. WAXMAN: He interpreted your question as there are different paths
of getting there. Hope springs eternal that the board will awaken to their
fiduciary duty.
BY MR. WINSTEN:
Q. Go to page three which is document number 196. Are you there?
A. Yes.
Q. Do you see there are certain
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conditions to this offer?
A. Yes.
Q. Then over the next few pages those conditions are identified?
A. Yes.
Q. The first condition is the minimum tender condition?
A. Yes.
Q. That's two-thirds of the total voting power of the company?
A. As I understand it, yes.
Q. And the tender that occurred as of February 14 was not two-thirds of
the total voting power as things now stand, isn't that true?
A. Correct, it was more than -- the bid that we put to the shareholders
or the offer we put to the shareholders was $20 a share and two-thirds of the
common stock of which we obtained an 85 percent acceptance.
Q. And unless the court rules in your favor or the board changes its
mind, that's not enough to do the deal?
A. Correct.
[END OF EXCERPT]
Q. So isn't it true that the whole
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Page 1
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- --------------------------------------------------------------------------------
SIMON PROPERTY GROUP INC,. and
SIMON PROPERTY ACQUISITIONS INC.,
Plaintiffs,
v.
TAUBMAN CENTERS INC., A. ALFRED
TAUBMAN, ROBERT T. TAUBMAN, LISA
A. PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. CHAZEN,
and S. PARKER GILBERT,
Defendants.
Civil Action No. 02-74799
- --------------------------------------------------------------------------------
DEPOSITION OF: G. William Miller
Pages 1 through 270
DATE: January 22, 2003
TAKEN BY: Jonathan Moses, Esquire
LOCATION: New York, New York
REPORTER: Nancy Mahoney, CSR, RPR
FINAL COPY, SIGNED 1 -23-03, NANCY MAHONEY
JANE ROSE REPORTING 1-800-825-3341
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US DISTRICT COURT - MICHIGAN FINAL G. WILLIAM MILLER
SIMON PROPERTY V. TAUBMAN CENTERS JANUARY 22, 2003
Page 33
and qualification for REIT that have to be brought into focus and those usually
require protective measures, not unusual.
[BEGINNING OF EXCERPT]
Q. Are you finished your answer? In connection with your consideration of
the Simon/DeBartolo merger, was there any discussion of the Simon family's power
as provided by the limited partnership agreement?
A. I don't recall any specific discussion of it. Certainly it was well
understood the Simons were large and important owners and that they had the
usual protections against -- in order to maintain the REIT status, in order to
protect against the tax events that could impair the lifetime build-up of their
assets which have been private.
When they became public, locking in those recapture provisions were
very important, and we understood that generally. Whether there was a specific
discussion of those provisions, I don't recall.
Q. In your experience, based on your involvement with the REIT industry,
at least since 1994, having such provisions is not
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unusual for REIT companies?
A. I think that many of them have some form of those aspects.
Incidentally, the REIT industry goes back to 1990, as you probably
know. Until the recent development of the public REITs, most of the experiences
in real estate investment trusts have been unsuccessful.
Q. Am I correct that you were aware at the time of the merger that the
Simon family could exercise a veto power over a merger with an unaffiliated
company by the public REIT?
A. I don't recall whether I knew that specific point. I knew -- I must
have known, but I don't recall that we focused on that.
Q. But it wasn't something that troubled you in recommending the board to
DeBartolo shareholders -- recommending the merger to DeBartolo shareholders?
A. It didn't trouble me, and all of it was disclosed and voted on by
the shareholders of both companies, and fully -- they were fully exposed and
informed of those
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Page 35
and voted on them.
I was a director, but I was not a major holder. If the holders are
satisfied, I think I can feel quite comfortable as a director that that's
something the shareholders have blessed.
Q. But you recommended the merger, correct?
A. I did indeed. I did indeed as part of a board.
Q. Thank you for that clarification.
These powers of the Simon family, am I correct that you recommended
the merger because you thought those powers were reasonable and customary for
the REIT industry?
A. I think you're putting words in my mouth.
Q. I'm trying to clarify.
MR. POSEN: No, you were putting words in his mouth. Let's not have a
conversation. You get to ask questions and he gets to give answers. Don't argue
with him.
MR. MOSES: I don't think I have.
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THE WITNESS: What I want to say is that the recommendation that you
were asking me about is a recommendation, as you well understand, is a board of
directors to the shareholders saying, "We recommend this transaction."
The shareholders have an absolute right to approve it or reject it. I
did not approve it. The shareholders approved it. The board recommended it to
shareholders. I didn't recommend it and make it happen. The shareholders made it
happen.
[END OF EXCERPT]
BY MR. MOSES:
Q. Would you have recommended the merger if you thought there was
something improper about the governance structure of SPG?
A. I would not.
Q. Since 1996, the time that you've served on the SPG, have you ever
voted differently than Mr. David Simon?
A. I don't recall that.
Q. Have you ever voted differently than Herbert Simon?
A. I don't recall that.
Q. Have you ever voted differently
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consideration?
A. I don't recall.
[BEGINNING OF EXCERPT]
Q. If you could turn to Page 97, again, this is the upper left-hand
corner.
A. Okay. Yes, sir.
Q. You see under Class C common stock?
A. Right.
Q. It says, "4,000 shares of Class C common stock will be authorized in
the amended SPG charter. Class C common stock will be issued to EJDC for nominal
consideration in connection with the transactions contemplated by the merger to
enable the DeBartolos to elect two Class C directors"?
A. I'm sorry, would you point out -- okay.
Q. Does that refresh your recollection that the DeBartolos were given
their Class C stock for nominal consideration?
A. It does indeed. I think this is probably an accurate statement.
Q. You believe that it was in the best interest of shareholders to give
the DeBartolos Class C stock for nominal
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consideration?
A. It was approved by the shareholders.
[END OF EXCERPT]
Q. Did you believe it was in the bet interest of the shareholders?
A. I think it was in the best interest of the shareholders to get the
economic benefits of the merger.
Q. And getting the economic benefits of the merger --
A. Included this term which they knew about and approved.
MR. MOSES: I'd like to take a quick break.
THE VIDEOGRAPHER: Going off the video record now at 11:09.
---
(Recess taken.)
---
THE VIDEOGRAPHER: The time now is 11:22. We're back on the video
record.
BY MR. MOSES:
Q. Mr. Miller, do you understand that one of the issues in this case is
whether
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"This provision ostensibly, for the purpose of preserving the company's status
as a REIT, goes well beyond what is necessary for that purpose as stands between
the company's shareholders and the ability to realize the substantial premium
for their shares."
A. I read that.
Q. was there any discussion as to whether Simon's excess share provisions
go well beyond what is necessary for the purpose of protecting it as REIT?
MR. POSEN: Discussion where?
MR. MOSES: At this meeting.
A. I don't believe so. We were not dealing with Simon.
[BEGINNING OF EXCERPT]
Q. Have you ever been involved in discussions as to whether Simon's
excess share provisions go well beyond what is necessary for preserving its
status as a REIT?
A. In the context and format you put it in, I don't believe so. In terms
of was it considered fair when it was incorporated, yes, because the board has
the right to waive it.
[END OF EXCERPT]
Q. Do you believe Simon's excess
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NEW YORK, NEW YORK www.janerose.net
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UNITED STATES DISTRICT COURT 2
EASTERN DISTRICT OF MICHIGAN
SIMON PROPERTY GROUP, INC., )
and SIMON PROPERTY )
ACQUISITIONS, INC., ) ORIGINAL
Plaintiffs, ) No. 02-74799
)
vs. )
)
TAUBMAN CENTERS, INC., A. )
ALFRED TAUBMAN, ROBERT S. )
TAUBMAN, LISA A. PAYNE, )
GRAHAM T. ALLISON, PETER )
KARMANOS, JR., WILLIAM S. )
TAUBMAN, ALLAN J. BLOOSTEIN, )
JEROME A. CHAZEN, and S. )
PARKER GILBERT, )
)
Defendant. )
-------------------------------------
RESTRICTED CONFIDENTIAL VIDEOTAPED DEPOSITION OF
ADAM ROSENBERG
New York, New York
Friday, January 24, 2003
Reported by:
Philip Rizzuti
JOB NO. 144613A
Esquire Depositions Services
1-800-944-9454
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A. I majored in economics and I majored in 3 philosophy.
Q. Graduated with honors?
A. Yes.
Q. What honors?
A. Magna cum laude; phi beta cappa; philosophy honors program; highest
distinction in major.
[Beginning of Excerpt]
Q. Then I think you continued your education at Harvard Law School?
A. That is correct.
Q. Received honors there as well?
A. Yes.
Q. Could you describe them, please?
A. Magna cum laude.
[End of Excerpt]
MR. HARDIMAN: Everybody gets magna cum laude at Harvard, don't they?
THE WITNESS: Is that a question?
MR. HARDIMAN: I'm sorry, I went to Duke.
Q. Prior to your graduation from law school did you have any jobs that
I will call serious grown up jobs?
A. Yes.
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Q. Transactional documents as well?
A. Mostly litigation related.
[Beginning of Excerpt]
Q. When you graduated, you then rejoined the Skadden firm, was it again
here in New York?
A. Yes.
Q. Were you assigned to a particular department?
A. Yes.
Q. What department?
A. Product liabilit group.
Q. For what period of time was that your assignment?
A. Approximately two years.
Q. During that time tell me the kinds of things that you did for the
firm?
A. Well, I was in a pocket of the department that was focused on
environmental insurance related litigation.
Q. Coverage litigation?
A. Yes. So I did legal research and memo and brief writing and document
production. That kind of stuff.
Q. Where were you then reassigned after
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A. Into the intellectual property group.
Q. What kinds of task did you do there?
A. Similar things on the litigation side, and also got to participate
in some transactional work, which is one of the reasons I wanted to change
groups.
Q. What sorts of transactional projects did you have?
A. Ranging from very small parts of general security offerings or M&A
deals, and when I say small parts, I mean from the intellectual property
perspective to the extent that patent reps came up or something like that, to
transactions that related solely to software or technology or things that were
more at their heart related to intellectual property.
Q. In that sort of work I take it you would be doing some of the
drafting of agreements and instruments related to the transactions you were
working on; would that be right?
A. That is fair.
Q. In that -- let me back up. How long did you spend in the IP end of
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A. Approximately two years; a little less.
[End of Excerpt]
Q. I take it you also would, in that context, be conducting legal
research and reporting the results of your research to others on the team?
A. Yes.
Q. Did you attend closings?
A. I don't recall. I don't think so.
Q. Do you recall whether you gathered any factual information necessary
to prepare the appropriate agreement provisions, or to assess your client's
position in the transaction?
MR. HARDIMAN: Aren't those two separate questions?
Q. Let's divide them up if you would like?
A. Great.
Q. Let's have it read back and I will pick one half and restate it for
you.
(Record read.)
Q. I actually don't think it is compound, but I will break it up.
In connection with the work you did at 25 Skadden in the IP department,
were there occasions
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[Beginning of Excerpt]
Q. I want to ask you some questions about your personal beliefs. Is it
your personal belief that truthfulness and honesty are important?
A. Yes.
Q. Is it your personal belief that truthful, honest communication is
what you will strive for?
A. Yes.
Q. Does that belief extend to things you say orally?
A. Yes.
Q. And to things that you write?
A. Yes.
Q. Has it been your training that matters involving your professional
practice, both as a lawyer and an investment banker, that client matters are
important and should be handled with care?
A. Yes.
[End of Excerpt]
Q. Do you consider yourself a flippant person?
A. Not particularly. But there are times when I have an occasional
witty comment. MR. HARDIMAN: We will be the judge of
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going to be working on; correct?
A. Sometimes.
Q. They might have to do with things that you would be reporting on to
other people on the Goldman, Sachs team; is that correct?
A. I think for the most part the calls and meetings that I was involved
in, were calls and meetings that other members of the Goldman, Sachs team were
involved in as well.
[Beginning of Excerpt]
Q. Would it be fair to say that you never consciously put down
erroneous or inaccurate statements?
A. Consciously?
Q. Yes.
A. To the extent these notes would help me understand, I tried to help
myself understand as best I could.
Q. In doing to you did not put down consciously false statements;
correct?
A. I think that is fair.
[End of Excerpt]
Q. I am going to ask you to decode of your handwriting for me?
A. If I can.
Q. If you can, I appreciate your help.
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Q. What does it say, Lisa:
A. I read it as Jeff and Bob Larson, L-A-R-S-O-N: We lost SH vote
issue.
MR. VON ENDE: Let's take a break to change tape.
THE VIDEOGRAPHER: We are now going off the record at 2:51 p.m., this is
the end of the tape labelled number 2, and we will continue on the tape labeled
number 3.
(Recess taken.)
THE VIDEOGRAPHER: This is the tape labelled number 3 of the videotape
deposition of Adam Rosenberg, we are now going on the record, the time is 3:02
p.m.
Q. Before the break, Mr. Rosenberg, you and I were talking about the
document marked as page 892. Do you still have that before you?
A. Yes, I do.
[Beginning of Excerpt]
Q. I want to ask a question about your taking practices. It may seem
obvious, but would I be correct to assume that you begin at the top of the page
and you continue to take notes from the top to the bottom?
A. For the most part, although I come back
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and review notes, and as ideas change or I realize I may have gotten
something wrong or incomplete, I will come back or fill in or add dash, dash,
another thought or an arrow.
Q. Or something in the margin, a circle?
[End of Excerpt]
A. A star, other notations.
Q. But you would agree that your normal practice in putting the text of
notes together would be to work from top to bottom?
A. For the most part.
Q. Do you have any reason to believe that the note that begins with the
word Lisa was put down after the notes that are above it on this page?
A. Do I have any reason to believe that it was after?
Q. Yes.
A. You mean other than what I just said which is my practice is to go
from top to bottom.
Q. Let me rephrase the question so it is clear?
A. Okay.
Q. The Lisa message appears further down the page and you have told me
that at least in
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on the 1998 transaction?
A. Yes.
Q. In what capacities?
A. He was -- I think I testified at that time he was either a senior
vice president or a junior managing director, but it was right about the time
that he got promoted from vice president to managing director.
[Beginning of Excerpt]
Q. Was there anyone else other than yourself and Mr. Nydick who worked
on both the 1998 transaction and is currently working on the team?
A. Well, Jay Nydick is not working on the current transaction. I am the
only person who worked on the '98 transaction for Goldman, Sachs, who is also
working on the current transaction.
[End of Excerpt]
Q. Okay.
Have you spoken with Bobby Taubman since his deposition was taken
approximately a week ago?
A. Not on a one on way basis.
Q. How did you speak to him?
A. Well, I think I have -- I believe I have been on calls that he
has been on. It is possible that the last board meeting was after his
deposition, in which case I would have been in a
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- -----------------------------
SIMON PROPERTY GROUP INC., and
SIMON PROPERTY ACQUISITIONS INC.,
Plaintiffs,
vs.
TAUBMAN CENTERS INC., A. ALFRED
TAUBMAN, ROBERT S. TAUBMAN, LISA
A. PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. CHAZEN,
and S. PARKER GILBERT,
Defendants.
Civil Action No. 02-74799
- ----------------------------------------------
DEPOSITION OF: David Simon
DATE: January 24th, 2003
LOCATION: Indianapolis, Indiana
LEAD: Allan Martin, Esquire
REPORTER: Patrice Matthews, CSR
FINAL COPY, SIGNED 01-27-03
JANE ROSE REPORTING, 1-800-825-3341
A1390
US District Court - Michigan FINAL David Simon
Simon Property v. Taubman Centers January 24, 2003
Page 125
strictly speaking, this statement was 'a mistake.' It said that the
family apparently can block a merger, just not in the same way the Taubmans
can." Is this the article that you were making reference to -
A Yes.
Q -- in your prior testimony?
A Yes.
[Beginning of Excerpt]
Q And is it a fact, sir, that you knew prior to November 18 that your
family, the Simon family, has the power to block, or has the veto power that
could block a sale of SPG?
A I was really unaware of it until after this article. We went public
in '93; we disclosed the -- our partnership agreement. As far as I know, we've
never changed it. We've had a couple of deals where we've had shareholder
approval that have approved it. And I've never thought about it much, frankly,
and it was all news to me when I read this article.
[End of Excerpt]
Q. I just want to make sure I've understood your testimony.
Is it your testimony that prior to November 18, you did not have an
understanding that the Simon family could block a sale or merger of
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US District Court - Michigan FINAL David Simon
Simon Property v. Taubman Centers January 24, 2003
Page 137
Q Would you explain it to me.
MR. POSEN: Mr. Martin, I'm going to instruct him not to answer. Let's
go on to a new subject.
Q Now, sir, when you read the November 18th, 2002 press statement, did
you understand that TCI was taking issue with the SPG press statement of
November the 18th. Did you understand that?
A Yeah. In rereading it, yes.
Q At or about the time that -- at or about November the 18th, the time
that you read Exhibit 55, did you understand that TCI was taking issue with
the press statement issued by SPG on November the 18th?
A Could you restate your question?
Q Yes. We'll make it very simple. When you read 15 Exhibit 55, did you
understand that TCI was taking issue with what SPG had published that day?
A Yes. In rereading this, yes.
Q At the time that you read this. You used the word "reread."
A As I said to you, in -- November 18th, I don't have a specific
recollection of dueling press releases and what my reaction to those press
releases were.
[Beginning of Excerpt]
Q When you read the headline, "SIMON PROPE RTY GROUP CONTINUES TO
MISLEAD," did you ask anybody what was meant by that headline?
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Simon Property v. Taubman Centers January 24, 2003
Page 138
A Well, the distinction that I made was that the Simon family did
not have the ability to keep anyone from acquiring the SPG stock, unlike the
Taubman family.
So, in other words, if someone wanted to tender and acquire the SPG
stock, they -- other than the excess share provision, which, in our case, can be
waived by the board and the independent board, that we had no -- Simon family
had no blocking position in that transaction. And that's all that we've -- are
focused on with respect to Taubman Centers, Inc., or TCO, and the Taubman family
does have a blocking position.
And that's kind of the way I analyzed it from my point of view.
[End of Excerpt]
Q When you read Exhibit 55, did you have conversation with anyone to
discuss with them the merits or demerits of what's indicated in Exhibit 55?
A I told you the best that I can recall is after the, you know, the New
York Times article, I was then concerned about what had transpired, and I
focused on it at that time.
Q Is it fair to say then, sir, that between December -- November 18th
and at or about December the 1st you had no conversation that you can recall
Jane Rose Reporting 1-800-825-3341
New York, New York www.janerose.net
A1393
Simon Property Group v. Taubman Centers
Randall Smith
2/14/2003
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
SIMON PROPERTY GROUP, INC., )
SIMON PROPERTY ACQUISITIONS, ) Civil Action
INC., and RANDALL SMITH, ) No. 02-74799
Plaintiffs, )
V. )
TAUBMAN CENTERS, INC., ) Judge Victoria Roberts
A ALFRED TAUBMAN, ROBERT )
S. TAUBMAN, LISA A. PAYNE, ) Magistrate Judge Moran
GRAHAM T. ALLISON, PETER )
KARMANOS, JR., WILLIAM S. )
TAUBMAN, ALLAN J. BLOOSTEIN, )
JEROME A. CHAZEN, and )
S. PARKER GILBERT, )
Defendants. )
)
- ----------------------------------
VIDEO DEPOSITION
DEPONENT: RANDALL J. SMITH
DATE: Friday, February 14, 2003
TIME: 9:29 a.m.
LOCATION: Honigman Miller Schwartz and Cohn, LLP
2290 First National Building, Detroit MI
REPORTER: Michele E. French, CSR-3091, RPR, CRR
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Randall Smith
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Q. Okay. And do you have any recollection of whether or not you
actually reviewed this 1998 annual report when you received it, or any piece of
it?
A. (Reviewing Smith Exhibit 3.) I actually don't have a recollection
either way.
[Beginning of Excerpt]
Q. Okay. Are you aware now, sir, that at page 62 of this annual
report, in note 11, there is a reference to the company's issuance of series
B preferred stock?
A. Is it okay if I go ahead and read note 11?
Q. Absolutely.
A. (Reviewing Smith Exhibit 3.) Could you please read the question back
to me, please.
Q. I would have bet the ranch on that.
(Record read as follows:
QUESTION: "Okay. Are you aware now, sir, that at page 62 of this annual
report, in note 11, there is a reference to the company's issuance of series B
preferred stock?")
THE WITNESS: Yes, I've read note 11 on page 62, and in the second
paragraph it refers to the series B preferred stock.
BY MR. WINSTEN:
Q. Okay. Now, were you aware that this annual report contained this
information in note 11 on page 62 before
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your deposition today?
A. I did not.
Q. Okay. And, obviously, if you had read page 62 back when you
received the annual report, you would have known it then; correct?
A. If I would have received the annual report and read this paragraph,
I probably wouldn't have recognized it because I'm not -- not being a lawyer or
really kind of a corporate finance person, I probably would not have understood
the paragraph.
This is really part of my claim because of when the fact that it says
here, for example, that the company was obligated to issue. And I do not believe
that for $38,400 that the Board of Directors should have sold 29 percent of the
voting rights to the Taubman family. And that is probably the most single
important reason why I joined the claim, because I just feel that I was harmed,
and it had much greater value than that.
Q. Okay.
A. I would have loved to pay $38,400 myself and had 29 percent of the
voting rights of the company; and I just recently, through the press, understood
that.
Q. Okay. Well, how have you, Randall Smith, been harmed by that?
A. In 1993, when I purchased my shares, the Taubman
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Corporation Inc. the common shareholders had 99 percent of the voting stock.
That's what I acquired.
From this note, when the Board of Directors sold the series B preferred
stock to the Taubman family for only $38,400, my voting rights were reduced from
99 percent to 70 percent; therefore, because of the fact that 30 percent is an
effective control of the voting rights, I no longer, along with all the other
common shareholders, have the same weight, you might say, in voting.
In other words, the Taubman family can basically control the outcome,
and I have lost -- I have been harmed because I have lost the ability, with the
other common shareholders, to basically make our wishes known.
[End of Excerpt]
Q. Okay. And what you want to do, Randall Smith wants to do, is to sell
your shares for $20 to Simon?
A. There are two things that I would like. I would like the fact that
the Simon Westfield offer be considered by the shareholders and that the
shareholders have their original rights basically to vote on those.
As far as I understand it, just recently the Board of Directors have
made it more difficult for the shareholders to actually have a general meeting
and, basically, vote on that.
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succeed.
Q. Okay. And so if that offer were to succeed, you would be able to
sell your 300 shares for $20 a share and get $6,000?
A. That is correct.
Q. Okay. And
MR. WAXMAN: Don't forget about his mom's shares.
BY MR. WINSTEN:
[Beginning of Excerpt]
Q. And from an economic standpoint, the harm that Randall Smith is
suffering, am I correct, is that Randall Smith is in jeopardy of not being able
to sell his stock for $6,000?
MR. WAXMAN: Vague, argumentative. You may answer.
THE WITNESS: That is part of it; but the real harm that I'm asking for
is the fact that the Board of Directors, by selling the B preferred shares to
the Taubman family for only $38,400, I feel that is worth it millions because
it basically controls any outcome, any decision of Taubman Corporation, Inc.
BY MR. WINSTEN:
Q. But if you succeed in all your claims, whatever they are, the end
result of it all is that Randall Smith gets $6,000; is that correct?
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A. Okay, $20 times 300 is $6,000. If the shareholders are
successful in successful and actually accept and selling their shares to Simon
and Westfield, I would have, yes, $6,000.
Q. Okay. So am I correct then, that it's true that if you succeed in
all of your claims here, at the end of day, Randall Smith gets $6,000; that's
the outcome?
[End of Excerpt]
MR. WAXMAN: Asked and answered.
THE WITNESS: Not the complete outcome because I -- because of the
fact that I am asking for the removal of the votes from the Taubman family
for their preferred shares so that that outcome could be accomplished.
BY MR. WINSTEN:
Q. And I hear you on that, but what I'm trying to do is focus on
means and ends here for a moment. The end you want, the end that Randall
Smith wants, is to be able to sell your shares for $20 a share or a total of
$6,000, and the means to accomplish that is with respect to whether -- with
respect to potentially invalidating the series B preferred voting power?
MR. WAXMAN: Asked and answered for a third time. You may answer it
again.
THE WITNESS: As I understand it, yes. other words, if I and the other
shareholders are
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BY MR. WINSTEN:
Q. Okay. And to see who your competitors are in various communities?
A. I wouldn't necessarily consider them competitors. Basically, I'm
interested in the regional mall industry because I follow it.
[Beginning of Excerpt]
Q. Okay. I ask you to turn to the first page of this Exhibit 4, and the
first page is actually the page before page 2, is the one that I'm referring to.
A. Okay.
Q. That starts out with the words "proxy statement." Do you see that?
A. Yes.
Q. And had you read Exhibit 4 back in spring of 1999, do you see that
on this page 1 there are sections entitled, "What counts as voting stock?" And
then another section entitled, "What is the series B stock?"
A. I see those two questions.
Q. Okay. And do you see under the heading, "What is the series B
stock?" an explanation of the series B stock? Do you see that, sir?
A. Yes. It answers its question. I don't know if it answers it
completely, but it says what is the series B stock.
Q. Okay.
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A. And that's one of my, you know, issues with the fact that -- that
I'm not quite sure I really understand the actual -- being basically kind of
naive from the standpoint of the legal aspects of it, I'm not quite sure I
understand it.
Q. Are you -- do you consider yourself a naive person, sir?
A. Not -- well, I guess it depends on what you're talking about. From a
standpoint of legal corporate structure, that's not my field, is what I'm trying
to say.
Q. Okay.
A. It's not my expertise.
Q. Do you recall whether or not back in spring of 1999 you focused on
the language here on page 1 of this proxy statement in Exhibit 4?
A. No, I do not recall that.
Q. I take it, though, that given your mind-set back then as a small
investor in Taubman, you weren't terribly concerned about who had voting rights
at that time?
MR. WAXMAN: That's not what he testified to.
THE WITNESS: I -- I would have been terribly concerned if I understood
that for $38,400 that the common shareholders lost 29 percent of their voting
rights. As I stated before, I think common sense tells you that it's worth an
awful lot more than that, and I
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could not recognize that from this statement.
BY MR. WINSTEN:
Q. Okay. This statement does indicate, doesn't it, that the series B
shareholders get one vote per share on all matters submitted to the company's
shareholders? You see that, don't you?
A. Yes, but I don't understand that.
Q. Okay. And do you understand it now?
A. No. I don't understand for $38,400 why they were -- they were
given the vote -- so many voting rights.
[End of Excerpt]
Q. No. I'm asking you a different question.
A. Okay.
Q. Do you understand today that the series B stock entitles its holders
to one vote per share on all matters submitted to the company's shareholders?
Isn't that why you're suing, sir?
A. That's what is stated here.
Q. Okay. But isn't that why you're suing?
A. No --
MR. WAXMAN: Counsel, don't argue with the witness, and keep your tone
moderate.
THE WITNESS: I think that --
BY MR. WINSTEN:
Q. Sir, here's my question; okay?
A. Okay.
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Q. Please answer the question.
MR. WAXMAN: I made a legal objection. It misstates the testimony, and I
did not instruct him not to answer.
MR. WINSTEN: There is no objection misstates the testimony when I'm
asking a new question.
MR. WAXMAN: I beg to differ.
MR. WINSTEN: Could you please re-read the question.
THE WITNESS: I'm sorry, I need it re-read.
(Record read as follows:
QUESTION: "And as a result of that, you're upset about the fact that
the series B stock entitles its holders to one vote per share on all matters
submitted to the company's shareholders, aren't you?")
THE WITNESS: No, I do not believe that's my claim.
BY MR. WINSTEN:
[Beginning of Excerpt]
Q. Okay. Am I correct that your claim is, in part, that the series B
holders did not pay enough money for their series B stock?
A. Yes, sir, that is one of my....
Q. Okay.
A. I don't know how they valued it to get 30 some million
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shares of Taubman Corporation, Inc., I believe it is, for $38,400.
Q. Okay.
A. The voting rights.
Q. Is that the essence of what your complaint is?
A. And there's an additional complaint, additional issues.
Q. Okay. What are the additional issues? What are the additional
complaints you have, in your own words, beyond the, in your view, the inadequacy
of the price paid?
A. Okay. Because of the price -- because of the series B, myself and
the other common shareholders lost their voting --their 99 percent voting
rights, which basically is control of the company.
With the series B, the Taubman family now has a total of 30 percent
and, therefore, the control of decisions in the future.
I believe I lost that, and that is one of my major, major claims.
Q. Okay.
A. I've got two others.
Q. Please go.
A. Okay. The other one is the fact that the Board of Directors made it
much more difficult for me to -- for me and the other shareholders to actually
call -- to
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A1404
Simon Property Group v. Taubman Centers
Randall Smith
2/14/2003
actually call a meeting so that we could actually make a decision on the common
shares.
And, third, that Robert Taubman wouldn't really talk about or meet
personally with David Simon to discuss it. I believe as a common shareholder, as
chairman of the Taubman Corporation, Inc., that he should have -- that he should
basically look in the shareholders' interest and kind of leave it up to us to
see if we felt this was a fair offer.
[End of Excerpt]
Q. When in time -- strike that.
How did you become a Plaintiff in this lawsuit?
MR. WAXMAN: Vague.
THE WITNESS: I was in New York City, and we were in New York because
of the week of the -- that Westfield was going to join the Simon offer to the
common shareholders. When I say we, a couple of Westfield employees. I was
there as a public -- because of the public relations aspect of it.
I mentioned to our general counsel, Peter Schwartz, that I had 300
shares of Taubman stock, and asked if they're making an SEC filing, wasn't that
important, that basically they should know that. And he said, "Yes, you're
right."
In that conversation there were two
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1
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
SIMON PROPERTY GROUP, INC. and
SIMON PROPERTY ACQUISITIONS, INC.,
Plaintiffs,
vs. NO. 02-74799
Hon. Victoria Roberts
TAUBMAN CENTERS, INC., A. ALFRED
TAUBMAN, ROBERT S. TAUBMAN, LISA A.
PAYNE, GRAHAM T. ALLISOIN, PETER
KARMANOS, JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. CHASEN,
and S. PARKER GILBERT,
Defendants.
- --------------------------------------
VIDEOTAPED DEPOSITION OF
ROBERT TAUBMAN
Esquire Deposition Services, LLC
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64
partnership committee. It was a minority owner of the partnership, of the master
partnership, Taubman Realty Group, that literally had no rights other than to
appoint those members. It had no special voting or no special rights or anything
like that.
I would assume that if an unsolicited offer came to that board for its
shares, that, yes, it would have considered as the board of that REIT that kind
of an offer, but, you know, and its full board would have done that and had nine
seats as I recall on the board: the five independents, two nominees from the
Taubman family and two nominees from General Motors Pension Fund; but why anyone
would do that at that moment in time is inconceivable to me.
Q. It was 11 seats, wasn't it?
A. I don't believe it was 11.
Q. On the board, on the public board?
A. I don't believe it was 11. I think it was nine.
Q. Okay. The record will -
A. I'm sure the record will show whatever it was.
[Beginning of Excerpt]
Q. The Rouse proposal, was that made for the REIT?
A. Absolutely not. It was made for the
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65
partnership.
Q. There was no mention in the proposal of acquiring shares of the
REIT?
A. Rouse wasn't interested in buying any -- the REIT. Nobody would
have been interested in buying the REIT. They were interested in buying the
partnership. That was the company, as we testified earlier.
Q. I'm just asking whether Rouse's indication of interest and letter
offered to buy shares of the REIT.
A. They offered to buy the partnership. Buy. They offered to merge. I'm
not sure exactly what the letter said, but the offer would have been not to be a
minority partner in the partnership but to be the owner of the partnership.
There are no rights. The REIT had no rights to control or manage or
merge or finance or hypothecate or do anything in the partnership. It only had
the right to place its appointees on the partnership committee, and they then
represented the REIT and all of its shareholders on that basis.
[End of Excerpt]
Q. I could have been mistaken. I thought the board of the REIT approved
the '98 restructuring.
A. It probably did.
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A1409
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SIMON PROPERTY GROUP INC., and
SIMON PROPERTY ACQUISITIONS INC.,
Plaintiffs,
vs.
TAUBMAN CENTERS INC., A. ALFRED
TAUBMAN, ROBERT S. TAUBMAN, LISA
A. PAYNE, GRAHAM T. ALLISON, PETER
KARMANOS JR., WILLIAM S. TAUBMAN,
ALLAN J. BLOOSTEIN, JEROME A. CHAZEN,
and S. PARKER GILBERT,
Defendants.
Civil Action No. 02-74799
- ------------------------------------------
DEPOSITION OF: Philip J. Ward
DATE: January 17th, 2003
LOCATION: New York, New York
LEAD: Allan Martin, Esquire
REPORTER: Jane C. Rose, CSR-CRR
FINAL COPY, SIGNED 01-18-03
JANE ROSE REPORTING, 1-800-825-3341
A1410
US District Court - Michigan FINAL Philip Ward
Simon Property v. Taubman Centers January 17, 2003
Page 79
BY MR. MARTIN:
Q. I would like an answer to my question, sir.
A. If you would rephrase the question, I will try -- I thought I gave
you an answer.
Q. Do you understand, sir, that the Simon family members have the power
to block a merger of SPG with an unaffiliated company, even if public
shareholders of SPG believe that that merger is in their best interests?
MR. POSEN: Asked and answered.
If you have anything to add, go ahead.
[Beginning of Excerpt]
THE WITNESS: As an independent director of the company, if we ever came
to that circumstance, I believe the independent directors would, regardless of
what you say they have, work to accomplish the goals of the public shareholders.
BY MR. MARTIN:
Q. Does the operating partnership, the Simon Operating Partnership,
provide authority for -- to your knowledge, authority for the Simon family to
block a merger of SPG
Jane Rose Reporting 1-800-825-3341
New York, New York www.janerose.net
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US District Court - Michigan FINAL Philip Ward
Simon Property v. Taubman Centers January 17, 2003
Page 80
with an unaffiliated company even if shareholders believe that a merger would be
in their best interests?
A. Yes, subject to the comments I've just made.
Q. To the best of your knowledge, sir, has SPG ever disclosed that the
Simony family can block a merger even if SPG shareholders believe that such a
merger is in their best interests?
A. Yes.
And it was approved by the shareholders when they went public, it was
approved as part of the Simon/DeBartolo merger, and it's been approved since
with several transactions by the shareholders.
Q. What was approved?
A. What you've just described as the Simons' rights.
Q. What is the impact of public shareholders approving?
A. They are aware of that issue that you just described.
[End of Excerpt]
Q. And to your knowledge, sir, and information, are the public
shareholders of TCI
Jane Rose Reporting 1-800-825-3341
New York, New York www.janerose.net
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US District Court - Michigan FINAL Philip Ward
Simon Property v. Taubman Centers January 17, 2003
Page 95
(Defendants' Exhibit-6 marked.)
BY MR. MARTIN:
[Beginning of Excerpt]
Q. I'd like to direct your attention to the next exhibit, sir, which
is Defendants' Exhibit-6, which I will describe as the restated certificate
of incorporation of Simon Property Group Inc.
Can you identify the document?
A. Yes.
Q. What is it?
A. It's the restated certificate of incorporation of Corporate Property
Investors Inc.
Q. Would you look at the next page, page 2?
There is a name that appears, "Simon Property Group Inc."
Do you see that?
A. Mm-hmm.
Q. Do you understand that this document is the restated certificate
of incorporation of Simon Property Group Inc.?
A. Yes.
Q. I'd like you to go to page 23 of
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US District Court - Michigan FINAL Philip Ward
Simon Property v. Taubman Centers January 17, 2003
Page 96
the document, and specifically where it refers to "ownership limit shall mean."
Do you see that provision?
A. Yes, I do.
Q. And there is a percentage number next to the Simon family group.
Do you see that?
A. Yes, I do.
Q. What is the percentage?
A. 18 percent.
Q. And then there is a reference, in the case of any other person,
there is a percentage.
What percentage is that?
A. 8 percent.
Q. Do you understand that the Simons are permitted to own up to 18
percent of the company, SPG's -- any member of the Simon family group are
permitted to own up to 18 percent of SPG capital stock, but any other person is
limited to 8 percent?
A. Yes.
Q. Now, sir, how does the ownership limit -- which is intended, as
you've testified, to preserve status as a REIT. How
Jane Rose Reporting 1-800-825-3341
New York, New York www.janerose.net
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US District Court - Michigan FINAL Philip Ward
Simon Property v. Taubman Centers January 17, 2003
Page 97
does it preserve SPG's status as a REIT to permit any member of the Simon
family to own up to 18 percent versus any other person owning up to 8 percent?
MR. POSEN: Object to the form.
It's argumentative.
THE WITNESS: I don't know the answer to that question.
BY MR. MARTIN:
Q. Do you know what the reason is, sir, for permitting the Simon group
- -- any member of the Simon group to own up to 18 percent versus 8 percent for
any other person?
A. The reason is that that was what was negotiated and approved by the
shareholders of Simon Property Group Inc. as part of this restatement of the
partnership.
[End of Excerpt]
Q To your knowledge, sir, permitting any member of the Simon family to
own up to 18 percent, does that, in your view, go beyond what is necessary to
preserve the REIT status of SPG?
A. I don't know the answer to that question.
Jane Rose Reporting 1-800-825-3341
New York, New York www.janerose.net
A1415
17
PART 240 TO END
Revised as of April 1, 2002
COMMODITY AND SECURITIES EXCHANGES
Containing a codification of documents of general applicability
and future effect
As of April 1, 2002
WITH ANCILLARIES
Published by
Office of the Federal Register
National Archives and Records
Administration
A Special Edition of the Federal Register
Code of Federal Regulations
A1416
SECURITIES AND EXCHANGE COMMISSION Section 240.13D-3
1(c) or Section 240.13d-l(d) shall amend the statement within forty-five days
after the end of each calendar year if, as of the end of the calendar year,
there are any changes in the information reported in the previous filing on that
Schedule: PROVIDED, HOWEVER, That an amendment need not be filed with respect to
a change in the percent of class outstanding previously reported if the change
results solely from a change in the aggregate number of securities outstanding.
Once an amendment has been filed reflecting beneficial ownership of five percent
or less of the class of securities, no additional filings are required unless
the person thereafter becomes the beneficial owner of more than five percent of
the class and is required to file pursuant to Section 240.13d-1.
(c) Any person relying on Section 240.13d-1(b) that has filed its initial
Schedule 13G (Section 240.13d-102) pursuant to that paragraph shall, in addition
to filing any amendments pursuant to Section 240.13d-2(b), file an amendment on
Schedule 13G (Section 240.13d-102) within 10 days after the end of the first
month in which the person's direct or indirect beneficial ownership, computed as
of the last day of the month, exceeds 10 percent of the class of equity
securities. Thereafter, that person shall, in addition to filing any amendments
pursuant to Section 240.13d-2(b), file an amendment on Schedule 13G (Section
240.13d-102) within 10 days after the end of the first month in which the
person's direct or indirect beneficial ownership, computed as of the last day of
the month, increases or decreases by more than five percent of the class of
equity securities. Once an amendment has been filed reflecting beneficial
ownership of five percent or less of the class of securities, no additional
filings are required by this paragraph (c).
(d) Any person relying on Section 240.13d-1(c) and has filed its initial
Schedule 13G (Section 240.13d-102) pursuant to that paragraph shall, in
addition to filing any amendments pursuant to Section 240.13d-2(b), file an
amendment on Schedule 13G (Section 240.13d-102) promptly upon acquiring,
directly or indirectly, greater than 10 percent of a class of equity
securities specified in Section 240.13d-1(d), and thereafter promptly upon
increasing or decreasing its beneficial ownership by more than five percent
of the class of equity securities. Once an amendment has been filed
reflecting beneficial ownership of five percent or less of the class of
securities, no additional filings are required by this paragraph (d).
(e) The first electronic amendment to a paper format Schedule 13D (Section
240.13d-101 of this chapter) or Schedule 13G (Section.240-13d-102 of this
chapter) shall restate the entire text of the Schedule 13D or 13G, but
previously filed paper exhibits to such Schedules are not required to be
restated electronically. SEE Rule 102 of Regulation S-T (Section.232.102 of
this chapter) regarding amendments to exhibits previously filed in paper
format. Notwithstanding the foregoing, if the sole purpose of filing the
first electronic Schedule 13D or 13G amendment is to report a change in
beneficial ownership that would terminate the filer's obligation to report,
the amendment need not include a restatement of the entire text of the
Schedule being amended.
NOTE TO Section 240.13D-2: For persons filing a short-form statement
pursuant to Rule 13d-1(b) or (c), see also Rules 13d-1(e), (f), and (g). (Secs.
3(b), 13(d)(1), 13(d)(2), 13(d)(5), 13(d)(6), 14(d)(1), 23; 48 Stat. 882, 894,
895, 901; sec. 203(a), 49 Stat. 704, sec. 8, 49 Stat. 1379; sec. 10, 78 Stat.
88a; sees. 2, 3, 82 Stat. 454, 455; sees. 1, 2, 3-5, 84 Stat. 1497; secs. 3, 18,
89 Stat. 97, 155 (15 U.S.C. 78c(b), 78m(d)(1), 89m(d)(2), 78m(d)(5), 78m(d)(6),
78n(d)(1), 78w): sec. 23, 48 Stat. 901; sec. 203(a), 49 Stat. 704; sec. 8, 49
Stat. 1379; sec. 10, 78 Stat. 580; sec. 18, 89 Stat. 155; secs. 102, 202, 203,
91 Stat. 1494, 1498, 1499; 15 U.S.C. 78m(g), 78w(a))
[43 FR 18495, Apr. 28, 1978, as amended at 45 FR 81558, Dec. 11, 1980;
47 FR 49964, Nov. 4, 1982; 58 FR 14683, Mar. 18, 1993; 59 FR 67764, Dec. 30,
1994; 62 FR 36459, July 8, 1997; 63 FR 2866, Jan. 16, 1998)
Section 240.13D-3 DETERMINATION OF BENEFICIAL OWNER.
(a) For the purposes of sections 13(d) and 13(g) of the Act a beneficial
owner of a security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or shares:
(1) Voting power which includes the power to vote, or to direct the voting
of, such security; and/or,
(2) Investment power which includes the power to dispose, or to direct the
disposition of, such security.
137
A1417
Section 240.13D-3 17 CFR Ch. 11 (4-1-02 Edition)
(b) Any person who, directly or indirectly, creates or uses a trust, proxy,
power of attorney, pooling arrangement or any other contract, arrangement, or
device with the purpose of effect of divesting such person of beneficial
ownership of a security or preventing the vesting of such beneficial ownership
as part of a plan or scheme to evade the reporting requirements of section 13(d)
or (g) of the Act shall be deemed for purposes of such sections to be the
beneficial owner of such security.
(c) All securities of the same class beneficially owned by a person,
regardless of the form which such beneficial ownership takes, shall be
aggregated in calculating the number of shares beneficially owned by such
person.
(d) Notwithstanding the provisions of paragraphs (a) and (c) of this rule:
(1)(i) A person shall be deemed to be the beneficial owner of a security,
subject to the provisions of paragraph (b) of this rule, if that person has the
right to acquire beneficial ownership of such security, as defined in Rule
13d-3(a) (Section 240.13d-3(a)) within sixty days, including but not limited to
any right to acquire: (A) Through the exercise of any option, warrant or right;
(B) through the conversion of a security; (C) pursuant to the power to revoke a
trust, discretionary account, or similar arrangement; or (D) pursuant to the
automatic termination of a trust, discretionary account or similar arrangement;
provided, however, any person who acquires a security or power specified in
paragraphs (d)(1)(i)(A), (B) or (C), of this section, with the purpose or effect
of changing or influencing the control of the issuer, or in connection with or
as a participant in any transaction having such purpose or effect, immediately
upon such acquisition shall be deemed to be the beneficial owner of the
securities which may be acquired through the exercise or conversion of such
security or power. Any securities not outstanding which are subject to such
options, warrants, rights or conversion privileges shall be deemed to be
outstanding for the purpose of computing the percentage of outstanding
securities of the class owned by such person but shall not be deemed to be
outstanding for the purpose of computing the percentage of the class by any
other person.
(ii) Paragraph (d)(1)(i) of this section remains applicable for the purpose
of determining the obligation to file with respect to the underlying security
even though the option, warrant, right or convertible security is of a class of
equity security, as defined in Section 240.13d-1(i), and may therefore give rise
to a separate obligation to file.
(2) A member of a national securities exchange shall not be deemed to be a
beneficial owner of securities held directly or indirectly by it on behalf of
another person solely because such member is the record holder of such
securities and, pursuant to the rules of such exchange, may direct the vote of
such securities, without instruction, on other than contested matters or matters
that may affect substantially the rights or privileges of the holders of the
securities to be voted, but is otherwise precluded by the rules of such exchange
from voting without instruction.
(3) A person who in the ordinary course of his business is a pledgee of
securities under a written pledge agreement shall not be deemed to be the
beneficial owner of such pledged securities until the pledgee has taken all
formal steps necessary which are required to declare a default and determines
that the power to vote or to direct the vote or to dispose or to direct the
disposition of such pledged securities will be exercised, provided, that:
(i) The pledgee agreement is bona fide and was not entered into with the
purpose nor with the effect of changing or influencing the control of the
issuer, nor in connection with any transaction having such purpose or effect,
including any transaction subject to Rule 13d-3(b);
(ii) The pledgee is a person specified in Rule 13d-1(b)(ii), including
persons meeting the conditions set forth in paragraph (G) thereof;
and (iii) The pledgee agreement, prior to default, does not grant to
the pledgee;
(A) The power to vote or to direct the vote of the pledged securities; or
(B) The power to dispose or direct the disposition of the pledged
securities, other than the grant of such power(s) pursuant to a pledge agreement
under
138
A1418
SECURITIES AND EXCHANGE COMMISSION SECTION 240.13d-6
which credit is extended subject to regulation T (12 CFR 220.1 to 220.8) and in
which the pledgee is a broker or dealer registered under section 15 of the act.
(4) A person engaged in business as an underwriter of securities who
acquires securities through his participation in good faith in a firm commitment
underwriting registered under the Securities Act of 1933 shall not be deemed to
be the beneficial owner of such securities until the expiration of forty days
after the date of such acquisition.
(Secs. 3(b), 13(d)(1), 13(d)(2), 13(d)(5), 13(d)(6), 14(d)(1). 23: 48 Stat. 882,
894, 895, 901; sec. 203(a), 49 Stat. 704, sec. 8, 49 Stat. 1379; sec. 10, 78
Stat. 88a; secs. 2. 3, 82 Stat. 454, 455; secs. 1, 2, 3-5 84 Stat. 1497; secs.
3, 18, 89 Stat. 97, 155 (15 U.S.C. 78c(b), 78m(d)(1), 89m(d)(2), 78m(d)(5),
78m(d)(6). 78n(d)(1), 78w)
[43 FR 18495, Apr. 28, 1978, as amended at 43 FR 29768, July 11, 1978: 63 FR
2867, Jan. 16, 1998]
SECTION 240.13D-4 DISCLAIMER OF BENEFICIAL OWNERSHIP.
Any person may expressly declare in any statement filed that the filing of
such statement shall not be construed as an admission that such person is, for
the purposes of sections 13(d) or 13(g) of the Act, the beneficial owner of any
securities covered by the statement.
(Secs. 3(b), 13(d)(1), 13(d)(2), 13(d)(5), 13(d)(6), 14(d)(1), 23; 48 Stat. 882,
894, 895, 901; sec. 203(a), 49 Stat. 704, sec. 8. 49 Stat. 1379; sec. 10, 78
Stat. 88a; secs. 2, 3, 82 Stat. 454, 455; secs. 1, 2, 3-5, 84 Stat. 1497; secs.
3, 18, 89 Stat. 97, 155 (15 U.S.C. 78c(b), 78m(d)(1), 89m(d)(2), 78m(d)(5).
78m(d)(6), 78n(d)(1), 78w)
SECTION 240.13D-4 ACQUISITION OF SECURITIES.
(a) A person who becomes a beneficial owner of securities shall be deemed
to have acquired such securities for purposes of section 13(d)(1) of the Act,
whether such acquisition was through purchase or otherwise. However, executors
or administrators of a decedent's estate generally will be presumed not to have
acquired beneficial ownership of the securities in the decedent's estate until
such time as such executors or administrators are qualified under local law to
perform their duties.
(b)(1) When two or more persons agree to act together for the purpose of
acquiring, holding, voting or disposing of equity securities of an issuer, the
group formed thereby shall be deemed to have acquired beneficial ownership, for
purposes of sections 13(d) and (g) of the Act, as of the date of such agreement,
of all equity securities of that issuer beneficially owned by any such persons.
(2) Notwithstanding the previous paragraph, a group shall be deemed not to
have acquired any equity securities beneficially owned by the other members of
the group solely by virtue of their concerted actions relating to the purchase
of equity securities directly from an issuer in a transaction not involving a
public offering: PROVIDED, That:
(i) All the members of the group are persons specified in Rule
13d-1(b)(1)(ii);
(ii) The purchase is in the ordinary course of each member's business and
not with the purpose nor with the effect of changing or influencing control of
the issuer, nor in connection with or as a participant in any transaction having
such purpose or effect, including any transaction subject to Rule 13d-3(b);
(iii) There is no agreement among, or between any members of the group to
act together with respect to the issuer or its securities except for the purpose
of facilitating the specific purchase involved; and
(iv) The only actions among or between any members of the group with
respect to the issuer or its securities subsequent to the closing date of the
non-public offering are those which are necessary to conclude ministerial
matters directly related to the completion of the offer or sale of the
securities.
(Secs. 3(b), 13(d)(1), 13(d)(2), 13(d)(5), 13(d)(6), 14(d)(1), 23; 48 Stat. 882,
894, 895, 901; sec. 203(a), 49 Stat. 704, sec. 8, 49 Stat. 1379; sec. 10, 78
Stat. 88a; sees. 2, 3, 82 Stat. 454, 455; secs. 1, 2, 3-5, 84 Stat. 1497; secs.
3, 18, 89 Stat. 97, 155 (15 U.S.C. 78c(b), 78m(d)(1), 89m(d)(2), 78m(d)(5),
78m(d)(6), 78n(d)(1), 78w))
SECTION 240.13D-6 EXEMPTION OF CERTAIN ACQUISITIONS.
The acquisition of securities of an issuer by a person who, prior to such
acquisition, was a beneficial owner of more than five percent of the outstanding
securities of the same class as
139
A1419
23-1-42-1 BUSINESS CORPORATIONS 142
SECTION.
23-1-42-5. Law applicable to control share voting rights.
23-1-42-6. Notice of control share acquisition.
23-1-42-7. Shareholder meeting to determine control share voting rights.
23-1-42-8. Notice of shareholder meeting.
23-1-42-9. Resolution granting control share voting rights.
23-1-42-10. Redemption of control shares.
23-1-42-11. Rights of dissenting shareholders.
INDIANA COMMENT
INTRODUCTORY COMMENT. The Control Share Acquisitions Chapter, which has no
RMA counterpart, was added to give the shareholders of Indiana corporations with
more than 100 shareholders and other substantial ties to Indiana (SEE IC
23-1-42-4(a), defining an "issuing public corporation" subject to the Chapter) a
right to vote collectively on a potentially fundamental change in the nature of
their corporation - namely, its shift to being an entity in which a single
shareholder acquires a significant level of dominance over the future governance
of the corporation.
As State corporation laws have traditionally done, the BCL gives
shareholders the right to vote on significant matters not in the ordinary course
of corporate business, such as mergers (SEE IC 23-1-40-1(a)), share exchanges
(SEE IC 23-1-40-2(a)) and sales of all or substantially all of a corporation's
assets (SEE IC 23-1-41-2(a)). The Control Share Acquisitions Chapter reflects
the General Assembly's recognition that a single shareholder's acquisition of a
controlling block of shares can be an equally fundamental, far-reaching event
for the corporation, and its decision (consistent with the historic power of the
States to establish internal corporate governance rules for corporations created
under State law, SEE CORT V. ASH, 422 U.S. 66 (1975)) that it is appropriate for
shareholders to vote collectively on this issue as well. Specifically, the
Chapter permits disinterested shareholdERS (I.E., shareholders other than the
acquirer, officers of the corporation or employees who are also directors of the
corporation, SEE IC 23-1-42-3) to decide whether voting power will be given to
the acquirer's "control shares" (i.e., shares that would, if permitted to vote,
put the acquirer over any one of three thresholds - one-fifth, one-third or
one-half, SEE IC 23-1-42-1 of corporate voting power)
Indiana's authority to enact the corporate governance rules established by
the Control Share Acquisitions Chapter was affirmed by The the United States
Sureme Court in the land mark case of CTS CORP U DYNAMICS CORP. OF AMERICA,
481 U.S. (69) 95 L. Ed 2d 67 (1987). In CTS both the Federal District Court
SEE 637 F.Supp.389 (N.D. Ill.1986), and Court of Appeals, SEE 794 f.2D 250
(7TH cIR. 1986) had held that the Chapter (a) violated the Supremacy Clause,
U.S. CONST. art. VI, cl. 2, because it allegedly conflicted with and
therefore was preempted by the Williams Act genera amendments to the
Securities Exchange Act of 1934, and (b) violated the Commerce Clause, U.S.
CONST. art. I, Section 8, cl. 3, because it allegedly interfered with or
imposed impermissible burdens on interstate commerce in corporate securities
In reversing these lower court decisions, the United States Supreme Court
expressly upheld Indiana's constitutional authority to enact the Chapter,
holding that the statute (a) was consistent with the Williams Act's shareholder
protection purposes, and did not conflict with any provisions of the Federal
statute, and (b) was a valid exercise of Indiana's authority to establish the
corporate governance rules for Indiana corporations, and did not impermissibly
interfere with or burden interstate commerce in corporate securities, which the
Court noted exist at all only because the State has authorized them in its
corporation law.
The CTS decision is the first (and, to date, voting only) case in which
the United States Supreme Court has upheld the constitutionality owner of a
State statute of this sort, often described as a "change of control" statute.
23-1-42-1. "CONTROL SHARES" DEFINED. As used in this chapter, "control
shares" means shares that, except for this chapter, would have voting power
with respect to shares of an issuing public corporation that, when added to
all other shares of the issuing public corporation owned by a person or in
respect to which that person may exercise or direct the exercise of voting
power, would entitle that person, immediately after acquisition of the shares
(directly or indirectly, alone or as a part of a group), to exercise or
direct the exercise of the voting power of of the issuing public corporation
in the election of directors within any of the following ranges of voting
power.
140
A1420
143 CONTROL SHARE ACQUISITIONS 23-1-42-1
(1) One-fifth (1/5) or more but less than one-third (1/3) of all voting
power.
(2) One-third (1/3) or more but less than majority of all voting power.
(3) A majority or more of all voting power
INDIANA COMMENT
Section 1 defines "control shares" as shares that, when added to an
acquiring person's pre-acquisition voting power, would (but for the rules of the
Chapter) put that person over any of three thresholds of voting power in the
election of directors of "an issuing public corporation" - one-fifth, one-third
or a majority.
The thresholds were not selected arbitrarily. One-fifth (or 20%) is the
level of ownership considered significant enough, under equity accounting rules,
to permit a corporation to report the results of its investment in another
corporation as a line item on its financial statements. It also represents a
significant level of dominance that, in a public corporation in which other
shareholdings are generally dispersed, can amount to effective control for many
purposes. The Commission believed that the second threshold, one-third, is
generally recognized as a sufficient block of shares to constitute effective
control of such a corporation for most if not all practical purposes. A majority
or more of voting power is, of course, literal control. Though the Commission
believed these thresholds were appropriate for the purposes of the Control Share
Acquisitions Chapter, different thresholds of control can be equally appropriate
in other contexts. SEE, E.G., IC 23-1-43-8(b) and Official Comment (10%
threshold for purposes of Business Combinations Chapter); 15 U.S.C. Section
78p(a) (10% threshold for short-swing profits rule of section 16a of the
Securities Exchange Act).
Since the definition of "control shares" is tied to whether such shares
would, but for the rules of Chapter 42, put an acquiring person over one of the
three statutory thresholds of voting power, such shares will cease to be
"control shares" in the hands of a subsequent owner who thereafter obtains them
from the acquiring person (unless their acquisition by that subsequent owner
would itself constitute a "control share acquisition" by that subsequent owner).
Hence, even if an acquiring person's "control shares" are not granted voting
power by disinterested shareholders under IC 23-1-42-9, such shares will have
voting power if thereafter obtained from the acquiring person by a subsequent
owner for whom the shares do not constitute "control shares." SEE IC 23-1-42-5 &
- -9 and Official Comments.
"Control shares" are NOT "all shares" owned by the acquiring person, but
only the shares acquired in the "control share acquisition" (which can be
acquired in separate purchases over a considerable period of time, see IC
23-1-42-2) that, when added to the acquiring person's pre-acquisition holdings,
put the person over one of the three specified thresholds of voting power. The
facts in CTS CORP. V. DYNAMICS CORP. OF AMERICA, 481 U.S. (69), 95 L. Ed. 2d 67
(1987), are illustrative. The acquiring person in CTS owned approximately 9.6%
of the issuing public corporation's shares before the acquisition, and then
acquired approximately 17.9% in a tender offer, giving it a total of about
27.5%. SEE 95 L. Ed. 2d at 76. Only the 17.9% acquired in the tender offer -
which put the acquirer over the one-fifth threshold - were "control shares"
whose voting power would be determined, under IC 23-1-42-9, by a vote of the
disinterested shareholders.
In that shareholder vote on the voting power of the "control shares," however,
NONE of the acquiring person's shares (I.E., both its shares owned before the
acquisition and the "control shares") are permitted to vote. SEE IC 23-1-42-3
and Official Comment. Hence, in the CTS example, the shareholder vote (which
the acquiring person in CTS lost after the United States Supreme Court
decision) determined the voting power only of the 17.9% that were "control
shares"; but none of the acquiring person's shares (i.e., both the 17.9%
"control shares" and the 9.6% previously owned) were permitted to vote on the
voting power issue.
Section 1 provides that "voting power" or the Chapter means "voting
power in the election of directors." Under the BCL, shares may have either
unlimited voting power or "special, conditional, or limited votng rights, or
no right to vote, except to the extent prohibited by this article." IC
23-1-25-1(c)(1). Whatever other voting or other rights shares may have,
however, if they have voting power "in the election of directors" their
acuisition in sufficient amounts will make hem "control shares" subject to
the Chapter's rules.
Section 1 also includes several provisions that make it clear that a
person's acquisition of substantive ability to control the voting power over
the requisite percentages of shares, and not mere formal, record ownerhip, is
the key to determining whether the shares are "control shares." Thus, the
section counts both shares "owned by a person" and shares "in respect to
which that person may exercise or direct the exercise of voting power"
141
A1421
23-1-42-2 BUSINESS CORPORATIONS-TYPES 144
- - thereby covering, for example, shares owned by a subsidiary of the acquiring
person, or shares that are owned by an unrelated person but as to which the
acquiring person has contractual rights to direct their voting. Similarly, the
acquisition of control shares may be "directly or indirectly, alone or as part
of a group" - meaning that the legal form of the acquisition, or whether the
acquisition is made by one person or by two or more persons acting cooperatively
or in concert, will not affect application of the Chapter. This is similar to
the "group" approach adopted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934. SEE Reg. 13d-5, 17 C.R.R. Section 240.13d-5.
These examples are illustrative, not exhaustive. In each case, the relevant
inquiry is whether one or more acquiring persons have acquired sufficient
practical ability in fact "to exercise or direct the exercise of the voting
power of the issuing public corporation" within the statutory ranges, and not
simply whether a single person acquires actual record ownership of a certain
percentage of shares.
"Person," as used in this section and elsewhere in the Chapter, has the
same meaning it has throughout the BCL under IC 23-1-20-18 - "individual or
entity."
----------
INDIANA LAW JOURNAL. Target Corporations, Hostile Horizontal Takeovers and
Antitrust Injury Under Section 16 of the Clayton Act After Cargill, 66 Ind. L.J.
625.
NOTRE DAME LAW REVIEW. Target Directors' Fiduciary Duties: An Initial
Reasonableness Burden, 61 Notre Dame L. Rev. 722 (1986).
The Continuing Validity of State Takeover Statutes - A Limited Third
Generation, 62 Notre Dame L. Rev. 412 (1987).
The Proper Relationship Between Federal and State Law in the Regulation of
Tender Offers. 66 Notre Dame L. Rev. 241 (1990).
VALPARAISO UNIVERSITY LAW REVIEW. The Indiana Experiment in Corporate Law:
A Critique, 24 Val. U.L. Rev. 185 (1990).
NOTES TO DECISIONS
CONSTITUTIONALITY OF CHAPTER. This chapter is neither pre-empted by the
Williams Act, 15 U.S.C. Sections 78m(d)-(e), 78n(d)M, nor in violation of the
commerce clause of the federal Constitution, Art. I, Section 8, cl. 3. CTS Corp.
v. Dynamics Corp. of Am., 481 U.S. 69, 107 S. Ct. 1637, 95 L. Ed. 2d 67 (1987).
COLLATERAL REFERENCES. "Golden parachute" defense to hostile corporate
takeover. 66 A.L.R.4th 138.
Lockup option defense to hostile corporate takeover. 66 A.L.R.4th 180.
23-1-42-2. "CONTROL SHARE ACQUISITION" DEFINED-(a) As used in this
chapter, "control share acquisition" means the acquisition (directly or
indirectly) by any person of ownership of, voting power with respect to,
issued and outstanding control shares.
(b) For purposes of this section, shares acquired within ninety (90)
or shares acquired pursuant to a plan to make a control share acquisition are
considered to have been acquired in the same acquisition.
(c) For purposes of this section, a person who acquires shares in the
ordinary course of business for the benefit of others in good faith and not
for the purpose of circumventing this chapter has voting power only of shares
in respect of which that person would be able to exercise or direct the
exercise of votes without further instruction from others.
(d) The acquisition of any shares of an issuing public corporation does not
constitute a control share acquisition if the acquisition is consummated in any
of the following circumstances:
(1) Before January 8, 1986.
A1422
Not Reported in A.2d
Fed. Sec. L. Rep. P 96,232
(CITE AS: 1990 WL 161909 (DEL.CH.), 16 DEL. J. C PR P.L. 1425)
((KeyCite Yellow Flag))
UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.
Court of Chancery of Delaware, New Castle
County.
AVACUS PARTNERS, L.P., INDIVIDUALLY
AND DERIVATIVELY ON BEHALF OF
INFOTECHNOLOGY, INC., A DELAWARE
CORPORATION, PLAINTIFF,
V.
EARL W. BRIAN, M.D., JOHN E. KOONCE,
JOHN M. ABELES, M.D., DWIGHT GEDULDIG,
WALLACE 0. SELLERS, AND INFOTECHNOLOGY,
INC., A DELAWARE CORPORATION,
DEFENDANTS.
CIV.A. NO. 11001.
Submitted: July 25, 1990.
Decided: Oct. 24, 1990.
**1429 Howard M. Handelman, Peter J. Walsh, and John H. Newcomer, Jr., of
Bayard, Handelman & Murdoch, P.A., Wilmington, for plaintiff
Lawrence C. Ashby, and Keith R. Sattesahn, of Ashby, McKelvie & Geddes,
Wilington, for defendants Earl W. Brian, M.D., John E. Koonce, John H. Abeles,
M.D., Dwight Geduldig, and Wallace O. Sellers.
Kenneth J. Nachbar, of Morris, Nichols, Arsht & Tunnell, Wilmington,
Mitchell A. Karlan, of Gibson, Dunn & Crutcher, New York City, for defendant
Infotechnology, Inc.
MEMORANDUM OPINION
ALLEN, Chancellor,
*1 Avacus Partners, L.P. brings this action individual as a shareholder of
Infotechnology, Inc. ("Infotech") and derivatively on behalf of Infotech against
the directors of that company. [FN1] Broadly speaking, Avacus alleges that
Infotech's directors participated in the misappropriation of a corporate
opportunity, wasted corporate assets, and engaged in a series of transactions
designed for the principle purpose of entrenching themselves in office.
Defendants have moved to dismiss all claims. Infotech argues that Avacus has no
standing to challenge the alleged misappropriation of a corporate opportunity
because the disputed events occurred before Avacus became a shareholder of
Infotech. With respect to the claims of entrenchment and waste, Infotech argues
first, that they are derivative in nature so Avacus has no standing to bring
them individually, and, second, as derivative claims they must be dismissed
because Avacus made no demand before bringing the suit and demand would not have
been futile.
Infotech has filed three affidavits in support of its motion to dismiss,
which, under Chancery Rule 12(b)(6), converts the motion into a motion for
summary judgment. Thus, I take the facts as those pleaded in the complaint
except to the extent they are otherwise established by uncontradicted
affidavits. From those sources the following facts appear.
**1430 I.
The facts are involved. They find their beginning in a failed takeover
attempt. In 1985, Infotech and a group of investors (the "1985 Investors
Group") attempted to gain control of United Press International, Inc.
("UPI"), which at that time was emerging from bankruptcy. This attempt
failed, and UPI was purchased by a Mexican investor and newspaper publisher
named Mario Vazquez-Rana.
Some members of the 1985 Investors Group initiated litigation against Mr.
Vazquez-Rana over the bidding for UPI. As part of a settlement agreement in that
litigation, Mr. Vazquez-Rana transferred 40% of the common stock of Comtex
Scientific Corporation [FN2] to FNN Group, Inc. [FN3] a corporation all of whose
shareholders were members of the 1985 Investors Group. FNN Group then
transferred a block of Comtex shares
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*1 (CITE AS: 1990 WL 161909 (DEL.CH.), 16 DEL. J. CORP. L. 1425, **1430)
amounting to 8% of Comtex's stock to a wholly owned subsidiary of Infotech,
leaving FNN Group with a 32% share of Comtex's stock. Also as part of the
1986 settlement agreement with Vazquez-Rana, approximately twenty-seven
members of the 1985 Investor Group purchased Comtex notes that were
convertible into Comtex stock. [FN4] - At that time Infotech entered into
put/call agreements with these noteholders permitting them to put the notes
to Infotech in exchange for Infotech stock. Infotech entered into a similar
agreement with FNN Group and its shareholders.
After Vazquez-Rana's acquisition of UPI in 1985, that company continued to
incur substantial losses. By late 1987, Infotech learned that Vazquez-Rana was
willing to sell his interest in UPI allegedly "for a negligible amount"
(Am.Cmpl. P37). In January 1988, Dr. Earl Brian, Infotech's CEO, formed WNW
Group, Inc. ("WNW Sub") to acquire control of UPI. WNW Sub is a Delaware
corporation and is a wholly-owned subsidiary of a Turks and Caicos **1431
corporation, also called WNW Group, Inc. (" WNW Parent"). WNW Parent was owned
by approximately nineteen individuals and entities, three of whom were also
shareholders of FNN Group, and all of whom were members of the 1985 Investors
Group. Infotech became a stockholder of WNW Parent at some point, but it is
unclear whether Infotech was a WNW Parent stockholder in January 1988.
*2 On February 19, 1988, Vazquez-Rana sold a ten-year irrevocable proxy to
vote the shares of New UPI, Inc. ("NewUPI") to WNW Sub for $110,000. [FN5]
NewUPI owns a controlling interest in UPI, and evidently has no other
significant assets. Dr. Brian, apparently acting for WNW Sub, then replaced the
officers and directors of UPI with himself and other persons affiliated with
him. Infotech immediately began to make direct and indirect loans (via WNW Sub)
to UPI, allegedly to fund UPI's working capital needs. Infotech also
participated in a $15 million private placement of UPI convertible preferred
stock, purchasing at least $2 million of such stock and purchasing an option for
an additional $2 million of such stock. The remaining shares were acquired by
persons and entities who were shareholders of WNW Parent and FNN Group.
In September 1988, NewUPI increased its authorized capital and granted an
option to WNW Sub to acquire 100,000 shares of common stock allegedly for no
consideration. This option provided WNW Sub with the opportunity to own 99% of
NewUPI's equity and to reduce Mr. Vazquez-Rana's interest in NewUPI's equity
from 95% to less than 1%.
To review this chain of ownership as of the end of 1988, NewUPI owned a
controlling interest in UPI, WNW Sub owned a proxy to vote NewUPI's shares and
an option to acquire 99% of NewUPI's equity, and WNW Parent owned WNW Sub.
Infotech owned a 20% interest in WNW Parent, and many of the officers and
directors of WNW Sub, NewUPI, and UPI were also officers or directors of
Infotech.
* * *
Infotech is a publicly traded company that holds, as its primary asset, a
45% interest in Financial News Network, Inc. ("FNN"). In late 1988, reports in
the financial press indicated that there was lively interest in acquiring FNN.
One route to that objective could **1432 have entailed a hostile takeover of
Infotech. Avacus maintains that the Infotech board responded to these rumors by
amending Infotech's corporate by-laws and issuing stock into "friendly" hands to
consolidate the board's control over the corporation. At a series of board
meetings in early 1989, the Infotech directors discussed amending the corporate
by-laws to increase the difficulty of removing directors from office. Chief
among these amendments was a provision requiring the vote of 80% of the
outstanding stock in order to remove a director from office. The board voted to
amend the by-laws at meetings on January 6, and March 23, 1989.
At a January 6, 1989 meeting the Infotech board also discussed increasing
Infotech's
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WESTLAW (R)
Not Reported in A.2d Page 67
*2 (Cite as: 1990 WL 161909 (Del.Ch.), 16 Del. J. Corp. L. 1425, **1432)
ownership in Comtex (recall that Infotech had acquired 8% of that stock after
the settlement with Vazquez-Rana) and discussed acquiring UPI for stock. At a
meeting on February 3, the Infotech board resolved to exercise its rights under
the 1986 put/call agreements to exchange Infotech stock for the Comtex stock
owned by FNN Group, as well as for the convertible Comtex notes held by members
of the 1985 Investors Group. These exchanges together with Infotech's existing
8% stock interest in Comtex, would apparently give Infotech a controlling
interest in Comtex.
*3 At the February 3, 1989 board meeting, the Infotech board also affirmed
its desire to acquire UPI, and the directors instructed management to hire
Prudential-Bache to advise the company in that connection.
In three transactions in February and March of 1989 (the "Comtex
Exchanges"), Infotech issued shares of its common stock in exchange for the
Comtex stock and notes. The exchange rate was based on a $10 million asset
valuation of Comtex obtained from an independent appraiser.
* * *
Plaintiff alleges that all of this activity was directed at placing
Infotech stock in friendly hands to protect against a threatened takeover.
Avacus had been acquiring stock; rumors about FNN had been in the press. On
February 27, 1989 Avacus delivered a Schedule 13D to Infotech, indicating that
it was considering seeking control of Infotech. At 10:00 p.m. that night the
Infotech board met to consider the acquisition of UPI by merging WNW Sub into
Infotech with Infotech surviving (the "WNW Merger"). The merger was to be
structured so that Infotech would issue stock to WNW Parent in exchange for WNW
Parent's shares in WNW Sub. WNW Parent would then dissolve, distributing the
Infotech stock to its shareholders other than Infotech. Prudential-Bache advised
Infotech that it believed **1433 it would be in a position to conclude its work
and give an opinion to the effect that the exchange ratio contemplated by the
proposed merger agreement was fair to the stockholders of Infotech. The board
was informed that the merger agreement provided for an adjustment in the
exchange ratio if Prudential-Bache could not render a fairness opinion with
respect to the ratio as it was set at that time. The board then approved the
proposed merger. Press releases announcing a merger agreement, however, actually
were released to the public about five hours before the Infotech board met to
pass upon the merger on February 27. The merger agreement was filed with the
Secretary of State of Delaware on February 28, the morning after the board
meeting approving the merger.
* * *
Avacus claims that the Comtex Exchanges and the WNW Merger served to
entrench the Infotech directors by placing a substantial block of shares in
"friendly" hands. A total of twenty-seven individuals and entities received
Infotech stock in the Comtex Exchanges and in the WNW Merger. [FN6] All of these
shareholders were members of the 1985 Investors Group. All had a history of
investing in projects with Dr. Brian.
Altogether Infotech issued a total of approximately 2 million shares in the
WNW Merger and the Comtex Exchanges, increasing the number of its outstanding
shares from approximately 7.3 million to approximately 9.3 million. Avacus
alleges that these transactions increased the number of shares in the hands of
the directors or persons friendly to them from 13% to 32%. The transactions also
diluted Avacus's holdings in Infotech from 9.88% to 7.78%.
Avacus also claims that Infotech received grossly inadequate consideration
in exchange for its stock. In the Comtex Exchanges, Avacus claims that Infotech
exchanged stock that the directors valued at approximately $5 million for
1,786,181 Comtex shares with a market value of $279,000 and Comtex notes
convertible into shares with a market value of about $125,000. In the WNW
Merger, Infotech issued shares the directors valued at over $16 million for a
company whose primary
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A 1425
Not Reported in A.2d Page 68
*3 (CITE AS: 1990 WL 161909 (Del.Ch.), 16 Del. J. Corp. L. 1425, **1433)
asset, the option to vote NewUPI's stock, had been acquired one year earlier for
$110,000. According to the amended complaint, NewUPI did not appreciate in value
during this year since UPI had continued to lose millions of dollars. Moreover,
**1434 at the time of the merger, NewUPI owed Infotech $4.5 million, which could
constitute additional consideration for the merger.
II.
*4 The amended complaint contained five counts alleging breach of fiduciary
duty or interference with voting rights. [FN7] As characterized by plaintiff:
Count I alleges that the Directors converted to themselves and/or persons
closely associated with them the corporate opportunity to acquire the
controlling interest of United Press International, Inc. ("UPI") and that they
then financed the operation of UPI with the corporate treasury of Infotech. Am.
Cmpl. P.3-5,92.
Count II alleges that the Directors caused Infotech to enter into an
agreement to acquire WNW Group, Inc. (the "WNW Merger") and to issue to
themselves and/or persons closely associated with them the equivalent of 19.74
percent of Infotech's then outstanding stock in exchange for grossly and
fraudulently inadequate consideration. The Directors failed to candidly disclose
the terms and effect of the transaction to the stockholders. A purpose of the
transaction and of the nondisclosure was entrenchment. Am.Cmpl. P. 7, 96-97.
Count III alleges that the Directors caused Infotech to enter into three
separate transactions involving stock and notes of Comtex Scientific Corporation
(the "Comtex Transactions") and to issue to themselves and/ or persons closely
associated with them the equivalent of approximately 5 percent of Infotech's
then outstanding stock in exchange for grossly and fraudulently inadequate
consideration. The Directors failed to candidly disclose the terms of these
transactions to the stockholders. A purpose of these transactions and of the
nondisclosure was entrenchment. Am.Cmpl. 17, 101-102.
**1435 Count IV alleges that the challenged transactions resulted in a
dilution of Avacus's Infotech stock and significant reduction in Avacus's voting
power. Am.Cmpl. P.1106.
Count V alleges that the Directors enacted certain by-law amendments for
the purposes of entrenchment and protection from liability for their wrongful
conduct. Am.Cmpl. P.111.
Avacus seeks an order canceling the shares issued in the complained of
transactions; enjoining the exercise of their voting rights, declaring the
transactions void and rescinding the transactions. Avacus also seeks the
appointment of a receiver to manage the affairs of Infotech, and an equitable
accounting and damages from the Infotech directors for the complained of
transactions.
* * *
Infotech has moved to dismiss the individual claims in Counts II through V
and the derivative claim in Count I on the grounds that Avacus lacks standing to
litigate all those matters. It has moved to dismiss all the derivative claims on
the grounds that pre-suit demand on the board of directors was not excused and
was not made. In support of its motion, Infotech has filed several affidavits,
which under Chancery Rule 12(b)(6) converts its motion to dismiss into a motion
for summary judgment. None of the affidavits touch on Infotech's grounds for
seeking dismissal of the various individual claims, however, so these claims
will be evaluated under the test for motions to dismiss. [FN8]
*5 The legal standard for determining the pending application is not
controversial. A motion to dismiss will be granted only when no state of facts
reasonably foreseeable under the well pleaded allegations of the complaint would
entitle plaintiff to relief. Delaware State Troopers Lodge v. O'Rourke, De1.Ch.,
403 A.2d 1109 (1979). Generally "mere conclusions" are not to be considered.
Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988).
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A1426
Not Reported in A.2d Page 69
*5 (CITE AS: 1990 WL 161909 (DEL.CH.), 16 DEL. J. Corp. L. 1425, **1435)
A motion for summary judgment is to be granted only when no material facts
are in dispute and the moving party is entitled to **1436 judgment as a matter
of law. Bershad v. Curtiss Wright Corp., Del.Supr., 535 A.2d 840, 844 (1987).
A. Plaintiff has no Standing to Litigate Claims of Misappropriation of
Infotech Opportunity
Count I alleges that the Infotech directors participated in the
misappropriation of a corporate opportunity in breach of their fiduciary duties
when they caused WNW Sub to purchase a proxy to vote the shares of NewUPI rather
than having Infotech itself purchase that proxy. Avacus alleges further that the
directors caused Infotech to finance WNW Sub's acquisition of the proxy by
loaning money to WNW Sub to cover the operating expenses of UPI. The act of
loaning money, if it constitutes a wrong at all, could be seen either as an
independent wrong or as a constituent part of the diversion of the claimed
corporate opportunity. The amended complaint is consistent with either
interpretation, but seems to emphasize the latter.
How the amended complaint is interpreted on this score is important to
Avacus because Avacus was not a shareholder of Infotech on February 19, 1988,
when WNW Sub purchased the proxy, but was a shareholder when Infotech loaned
money to WNW Sub the following summer. Section 327 of the Delaware General
Corporation Law requires that the plaintiff in a derivative suit be a
shareholder at the time of the transaction it complains about. Thus, Avacus
lacks standing to challenge a wrong to the Company that occurred on February 19.
Avacus argues that the wrong it complains about was the acquisition of ownership
(rather than control) of NewUPI (and hence of UPI) at a bargain price. WNW Sub
did not acquire ownership of NewUPI, it is argued, until September 1988 when
New UPI increased its authorized capital and, apparently for no consideration,
granted an option to WNW Sub to vote 99% of NewUPI's stock.
This attempt to move back the date of the alleged wrong is unavailing in my
opinion. Acquisition of control over NewUPI is plainly the relevant event. If
that were no wrong to Infotech, on what possible basis could the acquisition of
ownership by WNW Sub be thought to be a wrong to Infotech? If, however,
acquisition of the proxy was a misappropriation of an opportunity that
rightfully belongs to Infotech, then all that flowed from that wrong could be
compensable to Infotech. In either event, it is the acquisition of control that
is the critical event. When that occurred Avacus was not a stockholder of
Infotech. It therefore has no standing to litigate **1437 the claim that the
proxy transaction constituted a wrong to the company. See Levien v. Sinclair Oil
Corp., Del.Ch., 261 A.2d 911, 921-22 (1969), rev'd on other grounds, Del.Supr.,
280 A.2d 717 (1971). [FN9] Avacus asserts that, even if the diversion of the
corporate opportunity occurred with the sale of the proxy on February 19, 1988,
it nevertheless has standing to challenge the transaction because it is in
privity with an individual who did purchase shares on February 19. This
individual, Johannes Nyks, the president and general partner of Avacus, placed
an order with a broker on February 19 to purchase Infotech stock. He did not
take title to these shares, however, until the trade settled. An affidavit filed
by Infotech establishes that the trade did not settle until February 26.
*6 This argument raises the question of when does a purchaser of stock
become a stockholder of the firm for purposes of Section 327. This court has had
occasion to note that the purpose of Section 327 is to deter individuals from
purchasing stock solely to institute litigation. E.g., Newkirk v. W.J. Rainey,
Inc, Del.Ch., 109 A.2d 830 (1954). This policy might be easily frustrated if
individuals could place orders to purchase stock on the same day the challenged
transaction occurred. The wholesome policy of Section 327 will be best promoted
by regarding a buyer of stock to qualify as a stockholder under Section 327 only
upon the settlement of the trade. Since it appears undisputed that Mr. Nyks did
not get title to
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A1427
Not Reported in A.2d Page 70
*6 (CITE AS: 1990 WL 161909 (DEL.CH.), 16 DEL. J. CORP. L. 1425, **1437)
his stock until February 26, he also has no standing to challenge Infotech's
failure to acquire UPI. Infotech, therefore, is entitled to summary judgment of
dismissal on the allegations in Count I pertaining to the acquisition of the
proxy to vote NewUPI's shares. [FN1O]
B. Claims of Entrenchment Are, in the Circumstances Alleged, Individual,
Not Corporate Claims
Count II alleges that the Infotech directors breached their fiduciary
duties because they approved the WNW Merger for grossly **1438 inadequate
consideration, and for the purpose of entrenching themselves in office. Count
III contains identical allegations about the Comtex Exchanges. Count V alleges
that the directors breached their fiduciary duties by amending the company's
by-laws to entrench themselves in office. These counts were brought individually
and derivatively. Count IV alleges that the WNW Merger and the Comtex Exchanges
improperly reduced Avacus's voting power. This count was brought individually.
Infotech moved to dismiss the individual claims in each of these counts,
arguing that the claims are for waste and entrenchment and may only be brought
derivatively.
* * *
An alleged wrong involving a corporation is individual in nature when it
injures the shareholders directly or independently of the corporation. Kramer v.
Western Pac. Indus., Del.Ch., 546 A.2d 348, 351; Moran v. Household Int'l.,
Inc., Del.Ch., 490 A.2d 1059, 1070 (1985), affd, Del.Supr., 500 A.2d 1346
(1985). A wrong is derivative in nature when it injures the shareholders
indirectly and dependently through direct injury to the corporation. Kramer, 348
A.2d at 353.
To illustrate, if a board of directors authorizes the issuance of stock for
no or grossly inadequate consideration, the corporation is directly injured and
shareholders are injured derivatively. The claim that this act constituted waste
of corporate assets could be asserted only by the corporation itself or, in
proper circumstances, by a shareholder derivatively. If, instead, a board issues
stock for adequate consideration but with the wrongful intent of entrenching
itself, there is no injury to the corporation. The corporation has been fully
compensated for its stock. But if one accepts that the stock was issued
primarily for entrenchment purposes (to an associate, let's suppose, who had
confidentially promised to keep the board in office), it may constitute a wrong
to the shareholders. What has arguably been affected is not a corporate property
or right, but the right of shareholders to elect the board without unfair
manipulation. In all events, whether it is a strong claim or a weak claim, such
a claim as may exist is individual, not corporate. The fact that all
shareholders have been affected equally does not make this claim of improper
interference with the right to vote a corporate claim.
*7 Claims of waste will always be derivative claims, but claims of
entrenchment may be either individual or derivative or both depending on the
circumstances. An entrenchment claim will be an individual claim when the
shareholder alleges that the entrenching **1439 activity directly impairs some
right she possesses as a shareholder, such as the right to vote her shares.
[FN11] Shareholders do have a right to vote their shares, however, so a claim
that the board improperly acted to entrench itself by issuing stock that impacts
the shareholders' voting power may state either an individual or a derivative
claim. Lipton v. News Int'l., PLC, Del.Supr., 514 A.2d 1075, 1078-79 (1986); see
also Williams v. Geier, Del.Ch., C.A. No. 8456, Berger, V.C. (May 20, 1987)
(allegation that a recapitalization plan impaired shareholders' voting power
states an individual claim). Assuming the stock is issued for an adequate
consideration, the claim will be only individual. If the stock is issued for
inadequate consideration, the corporation itself will be directly injured as
well and both individual and derivative wrongs might be alleged.
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Applying this analysis to the amended complaint, it is clear that the
entrenchment claims in Counts II and III are individual in nature, as is the
claim of stock dilution in Count IV. The claim in Count V that the board amended
the by-laws to entrench itself in office also is an individual claim. The
changed by-laws can harm only the shareholders directly because this change in
the governance structure of the corporation is a matter that directly involves
the shareholders rights to elect and remove directors. The claims of waste in
Counts II and III are derivative claims.
Infotech argues that Avacus cannot ground any individual claims on
diminished voting power because Infotech has not eliminated the shareholders'
power to vote. This argument, I think, is based on a misreading of the cases
discussed above. These cases make clear that arguments about the degree of
interference with the shareholders' right to vote go to the validity of a claim,
not to its nature as individual or corporate. Lipton, 514 A.2d at 1079 n. 4.
That issue cannot be resolved on the current record.
C. Derivative Claims: Pre-Suit Demand on the Board was Excused in the
Circumstances Alleged
The preceding discussion indicates that Avacus has asserted two possible
derivative claims--the claims of waste in Counts II and III **1440 attacking the
WNW Merger and the Comtex Exchanges. Infotech argues that it is entitled to
summary judgment of dismissal on these claims because demand on the board would
not have been futile but nevertheless was not made. [FN12] Avacus alleged
several reasons in the amended complaint why demand is excused; I need discuss
only one. Accepting the allegations made as true, the disparity between value
received by Infotech in the Comtex Exchanges and the WNW Merger and the value it
paid out was such that one cannot say now that they were not wasteful. For the
reasons that follow, I conclude that this state of affairs excuses pre-suit
demand in this instance.
*8 The test for deciding when demand is excused is whether the facts
alleged in the complaint, if true, create a reasonable doubt that 1) the
directors are disinterested and independent, and 2) the challenged transaction
was otherwise the product of a valid business judgement. Aronson v. Lewis,
Del.Supr., 473 A.2d 805, 815 (1984). The first prong of this test appears to be
directed to the interestedness of the directors at the time the action was
filed, while on the second prong focuses on the board's approval of the
challenged transaction. Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984).
If the court concludes that the facts alleged create room for a reasonable doubt
about the availability of business judgment protection at either time, then
demand is excused. Id. at 624-25.
I focus here only on the second aspect of the test and conclude that the
pleading does raise a reasonable doubt that the Comtex Exchanges and the WNW
Merger constituted waste and hence were not the product of a valid business
judgment. The question for the court when a plaintiff alleges waste is whether
the consideration received by the corporation was "so inadequate that no person
of ordinary, sound business judgment would deem it worth that which the
corporation paid." Grobow v. Perot, Del.Supr., 539 A.2d 180, 189 (1988); Saxe v.
Brady, Del.Ch., 184 A.2d 602, 610 (1962).
In the Comtex Exchanges, Avacus alleges that Infotech exchanged stock worth
$5 million for Comtex shares and notes with a market value of about $400,000. In
the WNW Merger, Avacus alleges that Infotech exchanged stock worth $16 million
to gain control **1441 of a company whose primary asset, according to the
complaint, had been purchased a year earlier for $110,000. In both cases Avacus
has alleged a litigable case of waste under the Grobow test. More importantly,
Avacus has alleged specific facts that quantify the alleged inadequacy of the
consideration received. The facts alleged in the complaint indicate that
Infotech paid over 10 times fair market value for a large block of stock and
convertible notes of one company,
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and that Infotech paid 100 times the price paid a year earlier for control of a
second company. To corroborate the claim that the value of these two companies
could not possibly justify the amount of consideration paid, the complaint also
includes specific allegations about the dismal operating performance of both
companies.
Infotech argues that Avacus can only state a valid claim of waste if the
corporation received no consideration for what it paid. As is clear from the
statement of the law quoted above, this is not the law of Delaware. I cannot say
as a matter of law that transactions as disproportionate as these are alleged to
be do not constitute actionable waste.
Infotech argues further that the board's reliance on a report of an
independent appraiser when it set the exchange rate for the Comtex Exchanges,
and its reliance on an independent fairness opinion when it approved the WNW
Merger, insulates the board from any claim that the decisions were not the
product of valid business judgments. Defendants here attempt to raise an
evidentiary matter to the status of a rule of law. I cannot say as a matter of
law that a plaintiff cannot prove a claim of waste because the board acts on the
basis of an independent asset appraisal or fairness opinion. These are
matters--the reliability of these opinions (see Smith v. Van Gorkom, Del.Supr.,
488 A.2d 858 (1985))--that require adjudication.
*9 Turning to the record, Infotech cites facts that it maintains rebut
Avacus's claim of waste. With regard to the Comtex Exchanges, Infotech argues
that the Comtex stock was so thinly traded that its market value was not a good
measure of its intrinsic value. While this may be so, it serves only to raise an
issue of fact, which itself precludes summary judgment. Next, Infotech argues
that the Comtex Exchanges cannot be unfair because the exchange ratio was
determined according to agreements entered into in 1986. This, too, raises
triable issues of fact. The exchange ratio was set based on an asset appraisal
the accuracy of which plaintiff seeks to draw into question.
Infotech also argues that the facts surrounding the WNW Merger rebut any
claim that that transaction was wasteful. Specifically, Infotech claims that a
private placement by UPI of stock worth $15 **1442 million indicates that
outside investors valued UPI at over $30 million. The record indicates, however,
that many of the investors in this private placement may have been shareholders
of WNW Parent. In all events, this again, raises triable issues of fact.
* * *
Finally, Infotech argues that its response to a demand by another
dissatisfied shareholder conclusively demonstrates that demand by Avacus would
not have been futile. The same month Avacus filed its original complaint,
Infotech received a demand from another shareholder challenging the same
transactions challenged by Avacus. The Infotech board established a special
committee consisting of two newly appointed board members to investigate the
transactions. Neither member of the special committee had any prior connections
with Infotech or the challenged transactions. The special committee retained
independent counsel, and, in April, 1989, issued a report recommending that
Avacus not take any action with respect to the challenged transactions. There
has been no discovery of the work of that committee.
Infotech argues that these events establish that demand upon the board
would not have been futile. While this argument has some intuitive appeal, it
misapprehends the issue presented to the court when a shareholder institutes a
derivative litigation without first making a demand upon the board. The court is
to decide whether the complaint has alleged "with particularity the efforts, if
any, made by the plaintiff to obtain the action he desires from the directors
[or] the reasons ... for not making the effort." Chancery Court Rule 23.1. If a
shareholder chooses to forego demand, he bears the burden of pleading that
demand is excused. The Aronson test sets forth the standards the court should
apply to decide whether the shareholder has met this
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burden.
Once a plaintiff has alleged facts to establish that demand is excused, the
corporation is required to meet the different test of Zapata Corp. v. Maldonado
before it can prevail on an argument that the suit should be dismissed.
Del.Supr., 430 A.2d 779 (1981); Allison on Behalf of G.M.C. v. General Motors
Corp., 604 F.Supp. 1106, 1120-21 (D.Del.1985). Zapata shifts to the corporation
the burden of proving the independence, good faith, and reasonableness of the
special committee's investigation. In addition, it requires the court to decide
independently if the committee's decision to dismiss the case should be
respected. Zapata, 430 A.2d at 788-89. The Supreme Court created a heightened
standard of review in Zapata in recognition that the members of a special
committee, even if they otherwise **1443 adhere to the standards of
"independence, good faith, and reasonable investigation," may not be able to
objectively review their peers on the board. Id. 430 A.2d at 787. In other
words, demand may be futile even if the board responds in a procedurally correct
manner.
*10 Zapata establishes a special process that places weight upon the trial
court's discretionary judgment. When a shareholder can allege such facts
excusing demand (a question that is determined under the test in Aronson ), then
the more exacting review of Zapata is required before the board can take control
and seek dismissal if it so desires. Avacus has met the requirements of the
Aronson test, so the responses of the Infotech board to another shareholder's
demand is not sufficient to compel dismissal of Avacus's claims at this point.
The case is not in a posture for any responsible decision by the court of the
kind Zapata requires.
* * *
Infotech's motion for summary judgment on Count I of the amended complaint
is granted only insofar as that Count purports to allege a claim of
misappropriation of a corporate opportunity in WNW Sub's acquisition of control
over NewUPI; it is denied insofar as that count alleges corporate wrongs arising
from improperly made loans. The motion to dismiss the individual claims of
entrenchment in Counts II, III, IV, and V is denied. The motion for summary
judgment on the claims of waste in Counts II and III is denied.
The stay of discovery in this matter is hereby lifted.
FN1. The company itself is necessarily named as a defendant as well.
FN2. Comtex is UPI's principal distributor of newswires to electronic
data base vendors and publishers. The 40% block of Comtex stock
transferred to FNN were shares owned by UPI, and apparently
constituted all such shares held by UPI.
FN3. Perhaps coincidentally, FNN is the acronym used to refer to the
company that is Infotech's primary asset, Financial News Network, Inc.
FNN Group also has the same address as Infotech, but no direct
corporate connection is alleged between Infotech and FNN Group.
FN4. According to an affidavit submitted by defendants, in early 1989
the WNW Group shareholders numbered nineteen, FNN Group shareholders
numbered seven, and the Comtex shareholders numbered twenty-three, but
some individuals or entities were members of two or all three of the
groups. The record contains no evidence of the number of Comtex
noteholders, FNN Group shareholders, and WNW Parent shareholders
before that time.
FN5. This is the allegation in the amended complaint. There is some
indication in the record that there may have been additional,
contingent consideration. That matter is left unclear currently.
FN6. See note 4, supra.
FN7. The amended complaint also contained a Count VI alleging breach
of the duty of candor for failing to disclose information about the
complained of transactions in the proxy materials issued before the
November 20, 1989 shareholders meeting. Avacus's brief states that
this claim is moot. It will be dismissed on that ground.
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FN8. Infotech also argues that the requests to rescind the
transactions and cancel the newly issued shares should be stricken
because the individuals receiving the stock are indispensable parties
but were not joined. This argument is, in effect, an invitation to
determine an appropriate remedy should a claim be stated and proved. A
more appropriate time to determine the nature of a remedy is after a
right to a judgment has been established. Therefore, I will not rule
now on the possible availability of rescission-type remedies.
FN9. Count I can also be read to allege that the Infotech directors
breached their fiduciary duties when they thereafter approved loans to
WNW Sub and UPI. Plaintiff plainly was a shareholder at the time such
loans were made. If they were made for an improper purpose defendants
will be liable for any injury to the corporation that arose from them.
There is no defect in plaintiffs standing to litigate a claim of that
sort. Infotech is not entitled to summary judgment on these latter
allegations.
FN10. This holding makes it unnecessary to decide whether Avacus's
privity with Nyks would have given Avacus standing to challenge the
loss of corporate opportunity.
FN11. Cf. Moran v. Household Int'l., Inc., Del.Ch., 490 A.2d 1059,
1070 (1985), aff'd, Del.Supr., 500 A.2d 1346 (1985) where it was held
that shareholders have no individual right to receive takeover bids
and therefore any wrongfully motivated board activity that deters such
bids and protects incumbency states only a corporate action.
FN 12. Rule 23.1 looks to the allegations in the complaint, therefore
a motion made under that rule seems to demand resolution pursuant to
the test governing a motion to dismiss. If, however, the allegations
of the complaint can satisfy the test of Rule 23.1 but a defendant
files affidavits definitively rebutting the allegations of the
complaint, the defendant would be entitled to summary judgment
dismissing the complaint.
1990 WL 161909 (Del.Ch.). Fed. Sec. L. Rep. P 96.232, 16 Del. J.
Corp. L. 1425
END OF DOCUMENT
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Only the Westlaw citation is currently available.
UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.
Court of Appeals of Michigan.
Estate of Jon W.H. CLARK, by Anita G.
McIntyre, Conservator, Plaintiff
Appellant,
v.
Walter SAKOWSKI, Defendant-Appellee,
and
Lance FERTIG, David Frost, Paul
Steinberg, Goldstein Bershad & Fried,
P.C., and
John Doe Bonding Company, Defendants.
No. 210508.
Oct. 13, 2000.
Before: BANDSTRA, C.J., and HOOD and GAGE, JJ.
PER CURIAM.
*1 Plaintiff appeals as of right from an order granting summary disposition
of his legal malpractice and breach of fiduciary duty claims pursuant to MCR
2.116(C)(10). We affirm in part, reverse in part, and remand for further
proceedings.
Plaintiff's action sought damages arising out of the actions of defendant,
an attorney, while acting as plaintiff's guardian, conservator and social
security respresentative payee after the Wayne Probate Court declared plaintiff
legally incapacitated. The trial court ruled that plaintiff's claims were time
barred and that, because plaintiff invoked the doctor-patient privilege to
preclude discovery concerning his mental condition, the insanity period of
limitations, M.C.L. Section 600.5851; MSA 27A.5851, was inapplicable.
We first consider plaintiff's contention that the trial court erred in
ruling that plaintiff untimely filed the instant action. We review de novo an
order granting or denying summary disposition. The applicability of a period of
limitations constitutes a question of law that we also review de novo. Solowy v.
Oakwood Hosp Corp, 454 Mich. 214, 230; 561 NW2d 843 (1997). A trial court may
grant a motion for summary disposition under MCR 2.116(C)(10) if the available
pleadings and documentary evidence, viewed in the light most favorable to the
plaintiff, reveal no genuine issue of material fact and the moving party is
entitled to judgment as a matter of law. Smith v. Globe Life Ins Co, 460 Mich.
446, 454-455; 597 NW2d 28 (1999).
Plaintiff's first amended complaint contained two claims against defendant,
(1) legal malpractice and (2) wrongful actions regarding plaintiff's social
security benefits, which the parties refer to as a breach of fiduciary duty. The
trial court's grant of summary disposition disposed of both counts of plaintiffs
complaint.
Legal malpractice actions are governed by a two-year period of limitations.
MCL 600.5805(4); MSA 27A.5805(4). Pursuant to M.C.L. Section 600.5838(1); MSA
27A.5838(1), a legal malpractice claim accrues at the time the defendant
"discontinues serving the plaintiff in a professional or pseudoprofessional
capacity." Defendant's professional responsibilities ended on May 16, 1994, when
he was removed as plaintiffs conservator. [FN1] Hooper v. Hill Lewis, 191
Mich.App 312, 315; 477 NW2d 114 (1991) (noting that for purposes of the period
of limitations, an attorney discontinues serving the client when either the
client or a court relieves the attorney of the obligation, and rejecting
plaintiff's contention that discharge required a court order). Because defendant
ceased to represent plaintiff after May 1994, plaintiff's cause of action for
legal malpractice accrued by May 1994. Therefore, unless the period of
limitations was extended or tolled, plaintiff's November 8, 1996 filing of the
complaint occurred beyond the two-year period of limitations. [FN2]
FN1. Although defendant was not officially discharged as plaintiffs
guardian until 1997, the successor conservator to defendant
acknowledged
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her appointment in August 1994.
FN2. We note that plaintiff does not argue he only discovered his
cause of action within six months of the tiling date. See M.C.L.
Section 600.5838(2); MSA 27A.5838(2).
If a party is disabled by insanity when his claim accrues, the period of
limitations extends for one year "after the disability is removed ... to make
entry or bring the action although the period of limitations has run." MCL
600.5851(1); MSA 27A.5851(l). Plaintiff contends that because the probate court
had declared him a legally incapacitated person when the instant claims accrued,
he must be considered "insane" for the purpose of receiving the extended period
of limitations. [FN3] A probate court's finding of legal incapacity for the
purposes of appointing a guardian or conservator, however, does not
dispositively qualify a person as "insane" under M.C.L. Section 600.5851(2); MSA
27A.5851(2). See also Professional Rehabilitation Associates v State Farm Mutual
Auto Ins Co, 228 Mich.App 167, 176; 577 NW2d 909 (1998). Subsection 5851(2)
explicitly declares that an individual's insanity "is not dependent on whether
or not the person has been judicially declared to be insane," and this Court has
observed that "the definition of insanity in [MCL 600.5851(2); MSA 27A.5851(2)]
is somewhat different from the definition of insanity which is applied under the
probate code." Geisland v. Csutoras, 78 Mich.App 624, 628; 261 NW2d 537 (1977).
Because the probate court's ruling was not determinative of plaintiff's alleged
insanity under subsection 5851(2), to establish his insanity plaintiff to needed
to produce further evidence that he could not "comprehend[ ] rights he ... [wa]s
otherwise bound to know." Id.
FN3. Plaintiff argues that because defendant did not raise
plaintiff's competency as an affirmative defense, it cannot
constitute the basis of summary disposition. We clarify that
defendant's affirmative defenses raised the period of limitations
defense to plaintiff's action, and the trial court dismissed
plaintiff's claims on this basis.
*2 Plaintiff sought and received from the trial court, however, a
protective order precluding any discovery concerning his mental condition. As a
consequence of receiving this protection, plaintiff cannot "present or introduce
any physical, documentary, or testimonial evidence relating to the party's
medical history or mental or physical condition." MCR 2.314(B). Because
plaintiff cannot meet his burden to establish some genuine issue of fact
regarding his alleged insanity beyond the mere fact that a probate court
declared him a legally incapacitated person, which in itself is insufficient to
establish the insanity contemplated by subsection 5851(2), we conclude that the
trial court properly granted defendant summary disposition of plaintiff's time
barred legal malpractice claim pursuant to MCR 2.116(C)(10). [FN4) Warren
Consolidated Schools v. W R Grace & Co, 205 Mich.App 580, 583; 518 NW2d 508
(1994); Geisland, supra.
FN4. We note that the trial court erroneously opined that appointments
of conservators and guardians for plaintiff after defendant's removal
essentially rendered inapplicable M.C.L. Section 600.5851. MSA
27A.5851. The appointment of a guardian for a legally incapacitated
person does not constitute a removal of a disability that begins the
running of the period of limitations. Professional Rehabilitation,
supra.
With respect to plaintiff's claim that defendant mishandled plaintiff's
social security benefit payments, Michigan treats breach of fiduciary duty as a
common law tort governed by a three-year period of limitations. MCL 600.5805(8);
MSA 27A.5805(8); Miller v. Magline, Inc, 76 Mich.App 284, 313; 256 NW2d 761
(1977). "[A) plaintiff's cause of action for a tortious injury accrues when all
the elements of the cause of action, including the element of damage, have
occurred and can be alleged in a proper complaint." Travelers Ins Co v Guardian
Alarm Co of Michigan, 231 Mich.App 473, 479; 586 NW2d 760 (1998).
As plaintiff's conservator, defendant was plaintiff's fiduciary. MCL
700.1104(e); MSA 27.11104(e). Plaintiff's breach of fiduciary count of his
amended complaint alleged
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defendant's misuse of plaintiff's social security disability benefits. [FN5]
Plaintiff's amended complaint and a December 1993 letter from plaintiff to
defendant indicate plaintiff's awareness that from January through December
1993, defendant allegedly mismanaged plaintiff's monthly social security benefit
payments by refusing plaintiffs repeated requests for funds to meet his basic
needs. Plaintiff filed this action on November 8, 1996. In light of the
applicable three-year period of limitations, [FN6] any alleged breaches by
defendant that occurred before November 8, 1993 fall outside the period of
limitations and therefore cannot be raised by plaintiff. [FN7] We conclude,
however, that to the extent the trial court's grant of summary disposition
encompassed alleged breaches of fiduciary duty occurring after November 8, 1993,
the trial court erred.
FN5. From January 1993 until May 1994, defendant acted as plaintiff's
social security representative payee.
FN6. Pursuant to the above analysis, M.C.L. Section 600.5851(1): MSA
27A.5851(l) period of limitations for insane persons does not apply in
this case.
FN7. Whether we consider defendant's refusals throughout 1993 to pay
plaintiff any benefits as separate and distinct monthly breaches of
defendant's fiduciary duty or as a continuing wrongful act, plaintiff
may only timely raise any alleged breaches that occurred after
November 8, 1993, within three years of plaintiff's initial complaint
filing. See Horvath v. Delida, 213 Mich.App 620, 626-627; 540 NW2d 760
(1995) (While a continuing wrong, which consists of continual tortious
acts, may prevent running of the period of limitations until the wrong
is abated, "the damages recoverable are limited to those occurring
within the applicable limitation period.").
Plaintiff also argues that the trial court abused its discretion in denying
his motion to strike defendant's answer to the amended complaint. A plaintiff
may seek to strike an answer not in conformity with the court rules. MCR
2.115(B). [FN8] We review for an abuse of discretion a trial court's decision on
a motion to strike a pleading pursuant to MCR 2.115. Jordan v. Jarvis, 200
Mich.App 445, 452; 505 NW2d 279 (1993). An abuse of discretion occurs when a
result is so "palpably and grossly violative of fact and logic that it evidences
not the exercise of will but perversity of will, not the exercise of judgment
but defiance thereof, not the exercise of reason but rather of passion or bias."
Alken-Ziegler, Inc v. Waterbury Headers Corp, 461 Mich. 219, 227; 600 NW2d 638
(1999).
FN8. According to 1 Dean & Longhofer, Michigan Court Rules Practice, p
347, a motion to strike under MCR 2.115(B) should he allowed at any
reasonable time.
*3 In his answer to plaintiff's first amended complaint, defendant
responded to thirty-six of the complaint's fifty numbered paragraphs with a
single word, "Proofs," [FNG] and answered seven of the paragraphs with the word
"Deny." These answers do not meet the requirements of the court rules. See MCR
2.111(D) ("Each denial must state the substance of the matters on which the
pleader will rely to support the denial."); Dacon v. Transue, 441 Mich. 315,
328; 490 NW2d 369 (1992) ("[G]eneral, conclusory allegations ... do not provide
reasonable notice."); Stanke v State Farm Mut Automobile Ins Co, 200 Mich.App
307, 316; 503 NW2d 758 (1993) ("[T]he court rules envision more than a simple
denial.").
FN9. Prior to his repeated, simple restatements of "proofs,"
defendant explained in one paragraph of his answer that he left
plaintiff "to their [sic] proofs on the balance of the allegations."
We observe, however, that plaintiff failed to file his motion to strike
until more than ten months had passed since the filing of his initial complaint.
[FN10] The motion to strike occurred approximately eight months after defendant
filed his original answer, and more than three months after defendant filed the
answer to plaintiff's amended complaint. While defendant similarly submitted
monosyllabic answers to plaintiff's initial complaint, plaintiff never protested
the form of defendant's responses. The record contains
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an August 21, 1997 letter from plaintiff to defendant stating hat "[y]our answer
[to the amended complaint] does not conform to the Michigan Court Rules," and
inquiring "if you will be filing an Amended Answer," but plaintiff did not prior
to moving to strike defendant's answer move for a more definite statement
seeking clarification of the answer. MCR 2.115(A). Moreover, plaintiff did not
explain the manner in which the form of defendant's answer prejudiced him. In
light of plaintiff's repeated references in his motion to strike to his
inability to successfully conduct depositions of defendant and others, it
appears that plaintiff filed the motion to strike defendant's answer in
frustration regarding his failure to obtain requested discovery. [FN11]
Plaintiff's motion to strike asserted prejudice in preparing for trial arising
from his inability to conduct desired depositions. Given plaintiff's delay in
filing the motion to strike, [FN12] we cannot conclude that the trial court
abused its discretion in refusing to strike defendant's answer. While we
recognize that defendant's vague, defective answer provides plaintiff little
guidance with respect to defendant's theories and trial strategy and that the
ruling regarding plaintiff's motion to strike represents a close call, we are
unable to characterize the trial court's ruling as "so palpably and grossly
violative of fact and logic that it evidences not the exercise of will but
perversity of will, not the exercise of judgment but defiance thereof, not the
exercise of reason but rather of passion or bias." Alken-Ziegler, supra.
FN10. At the time of plaintiffs motion to strike in this case, there
was no scheduled trial date.
FN11. When plaintiff filed his motion to strike, discovery apparently
was closed but for outstanding, unsatisfied discovery requests, and
the mediation date had passed. MICR 2.313(B)(2)(c) and (D)(1)(a)
contemplate the striking of a pleading for a party's failure to attend
a scheduled deposition. These subrules provide, however, that the
party failing to appear must have disobeyed a court order demanding
discovery. MCR 2.313(B)(2). No court order in this case demanded that
defendant provide discovery.
FN12. The trial court's questioning of the timeliness of plaintiff's
motion to strike is reflected in the court's following inquiry at the
motion hearing: "This case is almost a year old, and this is the first
objection to the answer made on this case?"
We affirm the trial court's grant of summary disposition regarding
plaintiff's legal malpractice claim, the trial court's grant of summary
disposition regarding defendant's alleged breaches of fiduciary duty
occurring before November 8, 1993, and the trial court's denial of
plaintiff's motion to strike defendant's answer. We reverse the trial court's
grant of summary disposition regarding plaintiff's breach of fiduciary duty
claim to the extent that it encompassed defendant's alleged breaches
occurring after November 8, 1993, and we remand for further proceedings
consistent with this opinion. We do not retain jurisdiction.
2000 WL 33405937 (Mich.App.)
END OF DOCUMENT
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UNPUBLISHED OPINION. CHECK COURT RULES BEFORE
CITING.
Court of Chancery of Delaware, New Castle
County.
EMERSON RADIO CORP., A DELAWARE
CORPORATION, PLAINTIFF,
V.
INTERNATIONAL JENSEN
INCORPORATED, A DELAWARE
CORPORATION, ROBERT G. SHAW,
DAVID G. CHANDLER, DONALD W. JENKINS,
ROBERT H. JENKINS, NORMAN H. MCMILLAN,
WILLIAM BLAIR LEVERAGED CAPITAL FUND,
L.P., A DELAWARE LIMITED PARTNERSHIP, RC
ACQUISITION SUB, INC., A DELAWARE
CORPORATION, IJI ACQUISITION CORP., A
DELAWARE CORPORATION, AND RECOTON
CORPORATION, A NEW YORK CORPORATION,
DEFENDANTS.
IN RE INTERNATIONAL JENSEN INCORPORATED
SHAREHOLDERS LITIGATION.
CIV. A. NOS. 15130, 14992.
Submitted: Aug. 15, 1996.
Decided: Aug. 20, 1996.
Vernon R. Proctor, Edmond D. Johnson and Michael L. Vild of Bayard,
Handelman & Murdoch, P.A., Wilmington; and Jeffrey M. Davis of Wolff & Samson,
Roseland, New Jersey, for Plaintiff Emerson Radio Corp.
Wayne N. Elliott, Michael Hanrahan, and Bruce E. Jameson of Prickett,
Jones, Elliott, Kristol & Schnee, Wilmington; Norman M. Monhait of Rosenthal,
Monhait, Gross & Goddess, Wilmington; and Wechsler, Harwood, Halebian & Feffer;
New York City, for Shareholder Plaintiffs.
Bruce M. Stargatt, David C. McBride, Bruce L. Silverstein and Martin S.
Lessner of Young, Conaway, Stargatt & Taylor, Wilmington; and John R. Obiala and
Donald W. Jenkins of Vedder, Price, Kaufman & Kammholz, Chicago, Illinois, for
Defendants International Jensen Incorporated and Special Committee of
International Jensen Board of Directors.
R. Franklin Balotti, Daniel A. Dreisbach, and Matthew E. Fischer of
Richards, Layton & Finger, Wilmington; and Bruce H. Schneider of Stroock &
Stroock & Lavan, New York City, for Defendants Recoton Corporation and RC
Acquisition Corp.
Lewis H. Lazarus, Joseph R. Slights, III, and Michael A. Weidinger of
Morris, James, Hitchens & Williams, Wilmington; and Thomas 0. Kuhns and Peter D.
Doyle of Kirkland & Ellis, Chicago, Illinois, for Defendants David G. Chandler,
William Blair & Company, LLC; and William Blair Leveraged Capital Fund Limited
Partnership.
Richard L. Sutton, Martin P. Tully, and David J. Teklits of Morris,
Nichols, Arsht & Tunnell, Wilmington; and Richard B. Thies and Michael R.
Diocktermann of Wildman, Harrold, Allen & Dixon, Chicago, Illinois, for
Defendant Robert G. Shaw.
MEMORANDUM OPINION
JACOBS, Vice Chancellor.
*1 Emerson Radio Corporation ("Emerson") and a class of shareholders (the
"Shareholder Plaintiffs") of International Jensen Incorporated ("Jensen") seek a
preliminary injunction against a proposed merger of Jensen into Recoton
Corporation ("Recoton"). At stake is who will acquire Jensen, which has been for
sale since 1995.
After a lengthy auction process only two bidders for Jensen have emerged:
Recoton and Emerson. The successful bidder was Recoton, which entered into
agreements with Jensen. Under those agreements (1) Jensen will sell its Original
Equipment Manufacturing business ("OEM") for $18.4 million cash plus $7 million
of non-cash consideration, to Mr. Robert Shaw ("Shaw"), Jensen's President,
Chairman, CEO, and owner of 37% of Jensen's common stock ("OEM sale"); and (2)
immediately thereafter,
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Jensen will be merged into a subsidiary of Recoton, and as a result (a) Jensen's
public shareholders will receive $11 per share cash, and (b) Mr. Shaw and the
William Blair Leveraged Capital Fund, L.P., an Illinois Limited Partnership that
owns 26% of Jensen's outstanding shares ("Blair Fund"), will receive $8.90 per
share cash for their shares ("the Merger"). [FN1]
FN1. Mr. Shaw will also receive payments pursuant to an employment
contract with Recoton, and will become a member of Recoton's board.
The Jensen shareholders are being asked to approve both transactions
(referred to collectively as the "Recoton/Shaw transaction") at a special
shareholders meeting noticed for August 28, 1996. Mr. Shaw and the Blair Fund,
who together own 63% of Jensen's outstanding shares, intend to vote for the
Recoton/Shaw transaction.
Emerson filed a lawsuit and a motion for preliminary injunctive relief,
seeking to halt the consummation of the Recoton/Shaw transaction and to require
Jensen to conduct a new auction that would treat all bidders fairly and equally.
The Shareholder Plaintiffs filed separate actions (now consolidated) and a
motion for a preliminary injunction prohibiting the Blair Fund from voting its
stock interest at the shareholders meeting, halting the OEM sale, and directing
the Jensen board to correct certain alleged proxy misdisclosures.
Following extremely expedited discovery and briefing, oral argument was
held on August 15, 1996. This is the Opinion of the Court on the pending motions
for a preliminary injunction.
I. FACTS
The history of Jensen's efforts to explore and negotiate a sale of itself
goes back over one year. Although the Court earnestly wishes that that history
could be quickly summarized, the number of competing proposals and counter
proposals, and the manner of their evolution over the past eight months, defies
summary presentation. Thus, the factual narrative that follows will be somewhat
extended. However, because the narrative does convey the full flavor of how the
parties arrived at this point, it should illuminate the issues presented and
correspondingly shorten their legal treatment.
* * *
The critical facts are undisputed. Jensen is a Delaware corporation
headquartered in Lincolnshire, Illinois. It designs, manufactures and markets
loudspeakers, loudspeaker components, and related audio products for the
automotive and home audio markets within the United States and abroad. Jensen's
equity consists of 5,738,132 shares of publicly traded common stock, of which
37% is owned by Shaw and 26% is owned by Blair Fund. Thus, Shaw and Blair Fund
together own the controlling interest (63%) in Jensen. The remaining 37% is
owned by the public.
*2 Jensen's Board of Directors consisted at all relevant times of Mr. Shaw,
David Chandler (a member of the three-person general partnership that manages
the Blair Fund), Donald Jenkins (a Chicago attorney), Robert Jenkins (CEO of
Sunstrand, a multi-billion dollar company listed on the New York Stock
Exchange), and Norman McMillan (a partner in the business consulting firm of
McMillan & Doolittle). Other than Mr. Shaw, the Board has at all times
consisted of independent, outside directors. [FN2]
FN2. Although the plaintiffs dispute the characterization of Mr.
Chandler as an independent director, Mr. Chandler did not have even an
appearance of a material conflict before May 1, 1996, when Blair Fund
signed its Voting/Option Agreement with Recoton. See footnote 11,
infra, at p. 11. After Blair Fund entered into that agreement, Mr.
Chandler immediately resigned from the Special Committee that was
formed to negotiate with Emerson and Recoton.
1. Events Leading to the First Recoton/Shaw Merger Offer
In April 1995, the Jensen Board decided to
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explore the sale of the company. It engaged Lehman Brothers ("Lehman"), a well
known investment banking firm, as its financial advisor.
Lehman searched for potential acquirors and contacted several potential
candidates. Lehman did not engage in a broad based solicitation, but focused
instead upon potential acquirors likely to pay a fair price in a negotiated
transaction. [FN3] Emerson, which had recently emerged from bankruptcy, was not
on Lehman's list of potential acquirors. [FN4] Recoton, a leading supplier of
consumer electronic accessory products in North America, was one of the
companies Lehman contacted. Recoton, which had previously explored a possible
strategic alliance with Jensen between July 1994 and April 1995, expressed
interest.
FN3. One company that expressed an interest in Jensen was Semi-Tech
(Global) Company Ltd. ("Global"). Lehman participated in discussions
with Global's financial advisor, Bankers Trust, but decided not to
pursue the Global opportunity, because Global appeared to be
interested in acquiring less than 100% of Jensen, and would not likely
be willing to pay a fair price.
FN4. Bankers Trust also made a presentation to be Jensen's financial
advisor in which it provided Jensen a list of 44 potential acquirors.
Emerson, which Bankers Trust later came to represent, was not on
Bankers Trust's list either.
Recoton's management met with the Jensen Board on August 21, 1995.
Initially, Recoton was interested only in those portions of Jensen's business
relating to Jensen's trademarks and branded business, but, after the Jensen
Board told Recoton that it wanted to sell all of Jensen, Recoton said that it
might be interested in acquiring Jensen in its entirety.
Throughout the fall of 1995, Recoton and Jensen explored a possible merger.
In the course of those discussions, the two companies negotiated an agreement
allowing Recoton to conduct due diligence on an exclusive basis, and requiring
Jensen to reimburse Recoton's costs if Jensen accepted an alternative
transaction. []FN5]
FN5. In that agreement, Jensen reserved its right to respond to a
tender offer, to furnish information concerning its businesses to
third parties, and to explore alternative transactions with other
interested parties.
In December of 1995, Recoton informed Jensen that it was not interested in
acquiring the OEM business. Recoton then offered to acquire Jensen, exclusive of
OEM, for $6.00 per share, and in addition, the proceeds of any separate OEM sale
would pass through directly to Jensen's stockholders. On December 5, 1995, the
Jensen Board met and considered Recoton's proposal. Although the Jensen Board
knew that Recoton did not want to acquire OEM, the Board thought it imprudent to
seek out an independent buyer, because a sale of OEM to an unknown party might
adversely affect Jensen's relationship with its OEM business customers. Also,
the Board did not want to jeopardize any possible merger with Recoton.
Consequently, the Jensen Board decided to continue negotiating with Recoton, and
instructed Lehman not to seek a potential acquiror for OEM at that point.
Soon thereafter, the Board's dilemma was resolved, because Mr. Shaw came
forward and offered to purchase OEM from Jensen for approximately $15 million
cash, subject to certain conditions. [FN6] On December 19, 1995, the Jensen
Board (other than Shaw) met to discuss a potential Shaw/OEM sale. At that
meeting, the Board designated two of its independent directors to advise Recoton
that while its December 5, 1996 bid was not acceptable, Jensen still wished to
negotiate. After further negotiations, the independent directors and Recoton
agreed on a transaction that contemplated a merger with Recoton and a concurrent
sale of OEM to Shaw.
FN6. At that time the net book value of the OEM business was
approximately $25.5 million.
*3 On December 21, 1995, the Jensen Board met to consider the offers and
(with Shaw
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abstaining) approved in principle the proposed Recoton merger and the OEM sale
to Shaw. From December 21 to December 29, 1995, Jensen and Recoton negotiated
the details of the transactions, and reduced them to writing.
2. The January 3, 1996 Recoton/Shaw Merger Agreement and Emerson's Emergence As
A Bidder
On January 3, 1996, Recoton and Jensen executed the Merger Agreement, and
Jensen and IJI Acquisition (Shaw's acquisition vehicle) executed the OEM
Agreement. The principal terms of the Merger Agreement included: (i) $8.90 per
share for all Jensen shares, payable 60% in cash and 40% in Recoton common
stock; (ii) a $6 million termination fee if Jensen accepted a competing offer;
and (iii) a one-year license and an option for Recoton to acquire the "AR" and
"Acoustic Research" trademarks for $6 million (the "AR Trademark Agreement").
[FN7] Under the OEM Agreement, Shaw would concurrently purchase OEM for $15
million cash. As part of these contractual arrangements, Shaw waived his right
under his 1991 employment contract to receive severance ("golden parachute")
payments of up to $4.8 million upon a change of control of Jensen.
FN7. The $6 million price for the trademarks and the termination fee
were intended to offset each other. That is, if Jensen accepted a
competing offer. Recoton would receive the AR trademarks in lieu of
Jensen paying the $6 million fee.
The January 3 Merger Agreement was conditioned upon Lehman providing
fairness opinions that: (a) the Recoton/Shaw merger consideration was fair to
Jensen shareholders, and (b) the Shaw/OEM sale was fair to Jensen. On January 2,
1996, Lehman issued its fairness opinion to that effect.
3. Emerson Enters the Picture.
Shortly after the public announcement of the January 3, 1996 Recoton/Shaw
Merger and OEM Agreements, Bankers Trust informed Lehman that its client,
Emerson, was interested in possibly acquiring Jensen. On January 11, 1996,
Emerson's President, Mr. Eugene Davis, wrote Jensen to advise that Emerson was
prepared to offer $8.90 per share cash for all Jensen shares.
On January 15, 1996, the Jensen Board met to discuss Emerson's proposal.
Jensen's legal counsel and Lehman described Emerson's then-current financial
situation (based upon available public information) to evaluate Emerson's
financial ability to acquire Jensen. Financing capability was an issue of
concern because Emerson had just recently emerged from a bankruptcy
reorganization and had reported a loss of $13.4 million for the past fiscal year
and a loss of $7.7 million for the last reported quarter. The Board concluded
that Emerson's proposal was not superior to Recoton's equivalent offer, and
because the Board had serious doubts concerning Emerson's ability to finance an
acquisition, it decided that there was no basis to pursue further discussions.
On January 31, 1996, Bankers Trust advised Lehman that Emerson would be
able to make an all cash, all shares offer for Jensen materially higher than the
value of Recoton's January 3 cash and stock proposal. On February 1, 1996,
Lehman and Bankers Trust conferred by telephone. Lehman, as instructed by Jensen
management, asked Emerson to furnish the Board an investment bank "highly
confident" letter regarding its financing capability, as well as a specific
offering price or price range.
4. Emerson's Draft Proposals and Due Diligence
*4 On February 5, 1996, Emerson sent a letter to Jensen's Board advising
that Emerson was prepared to make an all cash offer for Jensen of between $9.75
and $10.50 per share. Emerson did not include the previously-requested "highly
confident" letter. The Jensen Board instructed management to tell Emerson that
the Board would be willing to discuss Emerson's proposal, if Emerson could meet
certain conditions that included furnishing a "highly confident" letter
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evidencing Emerson's ability to finance an acquisition.
On February 29, 1996, Bankers Trust sent a letter to Lehman advising that
Emerson and Global (see Footnote 3, infra ), as joint venturers, would offer to
acquire Jensen for $9.75 to $10.50 per share, either for cash or a combination
of cash and Emerson securities, subject to reasonable due diligence. Because the
Jensen Board had confidence in Global's financial capability, it authorized
discussions to explore a possible transaction with Emerson/Global. [FN8]
FN8. Soon thereafter Global lost interest in acquiring Jensen. On
April 16, 1996, Emerson notified Jensen that Global was no longer a
party to Emerson's acquisition proposal.
Jensen and Emerson representatives met on March 4, 1996. At that time,
Emerson signed a confidentiality agreement containing a standstill provision
that precluded Emerson from purchasing Jensen shares. Thereafter, from March 5
through April 16, Emerson conducted due diligence. Emerson essentially completed
its due diligence by April 26, 1996.
On April 4, 1996, Emerson representatives met with Mr. Shaw to discuss the
sale of OEM and other issues, including waiving his right to "golden parachute"
payments under his employment agreement. Those negotiations, however, proved
unsuccessful. [FN9]
FN9. According to Emerson, Shaw demanded that Emerson pay him the full
$4.8 million due under his 1991 employment contract, which Shaw was
willing to waive in connection with the Jensen/ Recoton Merger
Agreement, because under his agreement with Recoton, he would receive
a new employment contract and side benefits from a Jensen/Recoton
merger. Shaw would not be receiving those or comparable benefits as
part of a Jensen Emerson merger.
Emerson made its first definitive acquisition proposal on April 16, 1996.
Under that proposal, Emerson would acquire Jensen for $9.90 per share cash for
all Jensen shares, excluding OEM. Although Emerson preferred not to buy OEM, it
said it would acquire all of Jensen, including OEM, if that became necessary. On
April 23, 1996, Emerson advised the Board that it would make an offer for
Jensen, including OEM. In response, that same day the Jensen Board designated a
special committee, consisting of the four Jensen directors other than Shaw (the
"Special Committee"), to negotiate a merger and related sale of OEM with
Emerson, Recoton and Shaw. Thereafter, between April 17 and April 26, 1996,
Emerson was permitted to (and did) conduct additional due diligence relating to
OEM.
5. Events Leading to the May 1 Recoton/Shaw Agreement
The Special Committee conferred with Emerson on April 23 and April 25,
1996. During those conferences Emerson made clear that it would reduce its $9.90
offering price if either (i) Jensen remained obligated to pay Shaw the full $4.8
million amount due under his employment contract or (ii) if Recoton's
contractual right to a license and option to purchase the AR trademarks under
the AR Trademark Agreement, remained in effect. On April. 26, 1996, Mr.
Chandler, the Special Committee's Chairman, contacted Recoton's CEO in an effort
to persuade Recoton to increase its bid by $.35 per share. On April 27, 1996,
Emerson forwarded to the Special Committee a commitment letter from Congress
Financial Corporation ("Congress") relating to the financing of an Emerson
offer. The Congress letter contained conditions and contingencies that the
Special Committee found unsatisfactory. [FN10]
FNIO. For example, as a condition of its financing, Congress required
that agreements satisfactory to Congress be reached with Shaw relating
to his employment agreement, and with Recoton relating to the AR
trademarks. Neither condition had been satisfied, and both were
outside the control of the Special Committee.
*5 On April 28, 1996, the Special Committee met by telephone and retained
special Delaware counsel to advise it. Lehman then informed the Committee that
given the price
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reductions that would have to be made to Emerson's offer because of the Shaw
employment contract and the AR Trademark contingencies, the realistic value of
Emerson's offer was $8.25 to $9.25 per share. The Committee was also notified
that Recoton might increase its prior offer to $9.15 per share to Jensen's
public shareholders if Shaw and Blair were willing to accept $9.00 per share for
their stock. Based on that information, the Special Committee decided to defer a
decision until April 30, 1996. On April 29, 1996, Emerson was so advised, and
was asked to furnish any new input by that time.
On April 30, 1996, several events occurred. First, Emerson informed the
Special Committee that its offer was based on the assumption that Shaw would
waive his employment contract benefits. Second, Mr. Shaw's counsel informed
Emerson that Shaw expected his 1991 employment agreement to be honored. Third,
the Special Committee met and compared the Emerson offer with an enhanced offer
by Recoton to pay $9.15 to the Jensen public stockholders, with Shaw and Blair
Fund agreeing to accept $9.00 for their stock, and Shaw concurrently acquiring
OEM for $15 million. Lehman advised the Committee that Emerson's offer was not
better than Recoton's, because Emerson's proposal was subject to the
above-described potential price reductions. After considering both offers and
Lehman's financial advice, the Special Committee recommended, [FN11] and the
Jensen Board approved (with Shaw abstaining), the improved Recoton merger and
OEM sale proposal.
FN11. Mr. Chandler chaired the April 30, 1996 meeting of the Special
Committee. At that meeting, Chandler disclosed that Blair Fund was
then currently negotiating an agreement with Recoton in which Blair
Fund would commit to vote its shares in favor of Recoton's proposal.
Mr. Chandler stated his belief that at that time no circumstance
existed which compromised his independence or the integrity of his
view that Jensen should pursue a merger with Recoton. Mr. Chandler
joined in the Special Committee's unanimous recommendation of the
Recoton/Shaw proposal. On May 1. 1996, Blair Fund entered into a
voting agreement with Recoton (discussed infra ), and Mr. Chandler
immediately resigned from the Special Committee.
6. The Blair Voting/Option Agreement
The following day (May 1, 1996), in connection with the Recoton Merger
Agreement and related OEM sale, Blair Fund and Recoton entered into an agreement
(the "Blair Voting/Option Agreement") in which Blair Fund (i) granted Recoton an
option to purchase Blair Fund's 26% stock interest in Jensen for $9.00 per share
(plus any increment above $10.00 per share if Recoton later sold those shares at
a higher price), and (ii) agreed to vote its shares in favor of the Recoton/Shaw
transaction and to give Recoton a proxy to vote its shares in specified
circumstances. The Blair Fund entered into the Voting/Option Agreement for the
reasons described by Mr. Chandler:
And we agreed that this was the right thing to do because we were at wits
end on how to get Emerson to show us what they could really do. We
couldn't get anything out of them. We didn't have a merger agreement. We
had been negotiating and had been promised to us that we would have
financing commitments by April 27th.
We didn't get them. They had holes in them, big holes in them which said
you got to have the AR agreement signed or you have to have dealt with the
acoustic research agreement, and you have to have dealt with Bob Shaw's
contract. At the same time Gene Davis was telling us, I don't want to deal
with either of those ...
* * *
*6 We considered all relevant information as it related to our ownership
position as the shareholder, and we were trying to move the Recoton transaction
along. Because in our opinion, the auction process was absolutely totally
stalled.
So you tell me what you conclude. We're trying to get a deal done, and it was
our opinion that this was going to help get a deal done at an attractive value.
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Chandler Dep. at 212-216.
7. Emerson's May, 1996 Proposals
On May 1, 1996, Emerson countered by publicly announcing a two-tiered offer
similar to the enhanced Recoton/Shaw proposal that the Jensen Board had approved
the day before. Under Emerson's May 1 proposal, Emerson would acquire Jensen
(including OEM) for (i) $9.90 per share cash payable to Jensen public
shareholders, and (ii) $9.00 per share payable to Shaw and Blair Fund. Moreover,
(iii) Emerson would remove all contingencies except for normal and customary
conditions of closing, and (iv) Emerson would share with Jensen's public
shareholders (other than Shaw and Blair Fund) half of any Emerson recovery in
litigation challenging the Shaw 1991 employment agreement and/or the AR
Trademark Agreement with Recoton.
In response, on May 4, 1996, the Special Committee's legal counsel advised
Emerson that the Committee could not recommend any offer that required Shaw and
Blair Fund to accept, without their consent, less consideration than the public
stockholders would be receiving. Moreover, and in any event, such a transaction
could not be approved without the support of Shaw or Blair Fund, who together
owned 63% of Jensen's outstanding shares.
On May 6, 1996, Emerson responded by submitting a revised offer as follows:
(i) $9.90 per share cash for all Jensen shares, including the shares held by
Shaw and Blair Fund, (ii) Emerson would honor "in an appropriate manner" Shaw's
employment contract and the AR trademark agreement with Recoton, (iii) Emerson
would deposit a $5 million letter of credit towards any Jensen termination fees,
and (iv) Emerson would remove all but the usual and customary closing
conditions. In materials forwarded to Jensen the following day, Emerson proposed
an additional term, namely that (v) Blair Fund would enter into a voting
agreement with Emerson (even though it knew that Blair Fund had already signed a
binding agreement with Recoton). [FN12]
FN12. On the morning of May 6, 1996, Emerson's president held a
conference call with stock analysts in which he criticized the Recoton
offer and encouraged Jensen shareholders to sue. Three days later, on
May 9, the first shareholders action was filed in this Court, alleging
breaches of fiduciary duty by Jensen's board of directors for (inter
alia ) approving the Jensen/Recoton merger and the OEM sale to Shaw. A
second shareholder suit was filed on May 20, 1996, alleging the same
claims. Jensen's Board regarded Mr. Davis' public discussion of the
Recoton offer as a violation of the confidentiality agreement Emerson
had executed in March. On May 10, 1996 the Board authorized Jensen to
commence legal action against Emerson and its President for violating
the confidentiality agreement. Jensen filed an action in the Federal
District Court in Chicago, Illinois. On May 20, 1996, Emerson filed a
counterclaim against Jensen and a third party complaint against Shaw
in the federal action, alleging fraudulent inducement of the
confidentiality agreement and bad faith dealing.
On May 8, 1996, the Special Committee met to discuss Emerson's latest (May
6) offer. It determined that the problems inherent in negotiating Emerson's
offer necessitated Emerson making a good faith deposit of $1.00 per share, plus
an additional $3 million. Those deposits were believed necessary to protect
Jensen against the risk that it might lose the Recoton deal, and thereafter, the
Emerson deal, if the latter were unable to close.
8. Recoton's Revised Offer
During its May 8 meeting, the Special Committee was told that Recoton would
increase its offer to $10.00 per share to Jensen's public shareholders, and
$8.90 per share to Shaw and Blair Fund. Recoton later did so, and Shaw increased
his purchase price for OEM by $1.3 million. Shaw and Blair Fund advised the
Special Committee that they favored the revised May 8 Recoton/Shaw offers and
opposed the pending Emerson proposals. After further deliberations, by May 10,
1996, the Special Committee had recommended, and the Jensen board had approved
(with Shaw abstaining), the Recoton/Shaw May 8 revised offer. [FN13]
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FN13. By then, the termination fees provided in the Recoton May 8
Offer had been further reduced to S1.5 million dollars, plus up to
$2.5 million in expenses.
9. Emerson Ups Its Offers in Response
*7 On May 13, 1996, Emerson announced (through a press release) two new
alternative offers. The first was for $10.25 per share cash for all Jensen
shares, including the shares held by Shaw and Blair Fund. The second was for (i)
$10.75 per share to all Jensen shareholders including Blair Fund, but excluding
Shaw, and (ii) $8.90 per share to Shaw or $10.75 per share if Shaw purchased OEM
for a price equal to its then-book value of $27.6 million. Emerson proposed the
same termination fee and expense arrangement provided for in the May 10 Recoton
Agreement, and stated that its offer was not conditioned upon its having a
voting agreement with Blair Fund.
On May 14, 1996, counsel for the Special Committee wrote Emerson, again
advising that the Committee could not recommend Emerson's second alternative
proposal under Delaware law without the consent of Shaw and the Blair Fund.
On May 15, 1996, the Special Committee met to review Emerson's latest
offer, and concluded that it needed additional information from Emerson. On May
21, Lehman informed Emerson's financial advisor, Bankers Trust, that the bidding
process needed to be brought to a close soon. [FN14] Emerson was formally
requested to supply: (a) evidence of its ability to finance an offer, including
the removal of all contingencies in its financing, (b) a $30 million financing
commitment letter from Bankers Trust, (c) evidence of Emerson's contemplated
equity contribution, and (d) a legal opinion that a vote of Emerson's
convertible bondholders was not required to effectuate a Jensen/Emerson merger.
On May 24, 1996, Emerson was advised that the Special Committee would be meeting
on May 29, 1996 to consider which transaction to recommend.
FNI4. In that letter, Lehman told Bankers Trust that the parties had
been negotiating for three months, and that Emerson had yet to provide
a contingency-free proposal that was superior to the competing Recoton
bids.
On May 28, 1996, Shaw, and later Emerson, met with representatives of the
Special Committee. Recoton and Emerson were told that they should make their
highest and best bids by June 3, 1996. Jensen's investment advisor reiterated
that advice on May 30 and May 31, 1996.
On June 3, 1996, Recoton increased its offer to $10.25 per share for
Jensen's public stockholders, and to $8.90 per share for Shaw and Blair Fund,
predicated on Shaw increasing his offer for OEM by $623,000, to $17,160,000.
Shaw confirmed to Lehman that he would pay that price increase. On the morning
of June 4, 1996, Emerson faxed its proposed merger agreement, and some of the
requested proof of its financing capability, to Jensen's representatives.
Certain items were still missing, however. As of June 4, 1996, Emerson had not
increased its bid from the $10.25 all cash, all shares, that it had previously
bid on May 13, 1996.
At the Special Committee's June 4, 1996 meeting, Lehman informed the
Committee that both sides might be willing to increase their offers, and
requested more time to review the submitted materials. Accordingly, the Special
Committee decided to defer a decision in order to elicit higher bids. The
Special Committee informed Recoton, Shaw and Emerson of its decision the next
day, and requested that they submit higher bids (if they so chose), with
appropriate documentation, ready for signature, by June 10, 1996.
*8 On June 10, 1996, Emerson made a new cash and stock proposal for $10.75
per share for all shares--55% in cash, and 45% in a new series of to-be-issued
Preferred Stock. Recoton, however, did not submit a new proposal.
That same day (June 10), the Special Committee met and discussed Emerson's
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latest offer and the fact that Recoton had not moved. Lehman advised the Special
Committee that it appeared Emerson could finance its offers with the help of a
$5 million equity investor. Lehman also stated that both offers appeared to be
fair, but that Lehman needed more time to investigate the terms of the preferred
stock Emerson would issue as part of its latest offer. In Lehman's preliminary
view, that stock appeared to be worth significantly less than its face value.
The Special Committee decided to defer a recommendation until June 14, 1996,
after its advisors had completed their analysis. On June 12, 1996, Lehman
informed Recoton, Shaw and Emerson of the Committee's decision, and again asked
them to submit their highest and best bids.
On June 14, 1996, the Special Committee met. It considered the pending
Recoton and Emerson bids, but concluded that no decision could be made because
there were problems with each proposal. Lehman advised the Special Committee
that because of OEM's recently improved financial picture, it could not render a
fairness opinion with respect to the OEM sale and that Shaw would have to offer
increased consideration. The problems identified with Emerson's proposal
included its lack of majority shareholder (i.e., Shaw's and Blair Fund's)
support, and Emerson's insistence that Jensen pay a termination fee to Emerson
if Jensen's shareholders did not approve the Emerson offer. Special Committee
counsel informed each side of the problems with its respective bid, and that no
decision had yet been reached.
On June 18, 1996, Emerson wrote to the Special Committee, Lehman and Blair,
expressing its concern over the Committee's inability to make a decision.
Emerson said that it wanted a response to its offers by June 20, and would
consider the absence of a response as a rejection of its proposal.
On June 20, 1996, Lehman, on behalf of the Special Committee, wrote to
Shaw, Recoton and Emerson, informing them that Recoton said that it was planning
to increase its bid, and encouraging Emerson to do likewise. Lehman added that
the Special Committee also wished to bring the auction process to a prompt
resolution, but that the Committee could not meet on June 20, 1996 as Emerson
had requested.
10. Recoton and Shaw Increase Their Bids
On June 21, 1996, the Special Committee received Recoton's revised bid,
which offered $11.00 per share to Jensen shareholders and $8.90 per share to
Shaw and Blair. Shaw increased his offer to acquire OEM to $18.4 million. On
June 21, Lehman wrote Emerson, Recoton and Shaw to advise that the Special
Committee would be meeting on June 23, 1996 to consider Recoton's and Shaw's
latest proposal. Emerson informed Lehman that it saw no reason to increase its
bid, and that the Special Committee should make its decision based on Emerson's
then-submitted proposals.
*9 The Special Committee met on June 23, 1996, reviewed the Emerson and
Recoton offers, and determined that Recoton's $11.00 per share offer to Jensen's
public stockholders was higher than any comparable Emerson proposal. The
Committee was also informed that both Shaw and Blair Fund would not accept
Emerson's proposals because Shaw and Blair Fund were unwilling to accept less
consideration for their shares (under Emerson's proposals) than the Jensen
public shareholders would receive.
Lehman then furnished its opinion that from a financial point of view the
merger consideration received in the Recoton offer was fair to Jensen's public
stockholders, and that the sale of OEM to Shaw was fair to Jensen. [FN 15] The
Special Committee recommended, and the Jensen Board (with Shaw abstaining) later
approved, the Recoton merger offer of $11.00 per share to Jensen public
shareholders and $8.90 per share to Shaw and Blair, and the offer to sell OEM to
Shaw.
FN15. Regarding THE OEM sale, Lehman took into account both the $18.4
million cash consideration, and the fact that (a) Shaw would give up
his
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"golden parachute" payments from the 1991 employment agreement, and (b)
Shaw would accept approximately $4.4 million less from Recoton for his
shares in the merger than it would receive if all of Jensen's stockholders
were receiving the same price. On that basis, Lehman determined that Jensen
would receive, for the OEM sale, approximately $25.4 million in direct and
indirect consideration from Shaw, which was approximately 93 % of OEM's
book value.
11. Emerson's Post-Auction Proposals
Although Emerson had decided to stand pat as the auction closed, two days
later, on June 25, 1996, it issued a press release announcing a new
offer--$12.00 per share to Jensen public shareholders and $8.90 per share to
Shaw and Blair Fund. In its press release, Emerson also announced that it
intended to conduct a proxy solicitation to defeat the Recoton/Shaw transaction.
That same day the Special Committee met and discussed, and ultimately
recommended the rejection of, Emerson's latest offer, for the same reasons
Emerson's previous offers were rejected: (i) Shaw and Blair supported the
Recoton transaction and had stated that they would vote against the Emerson
proposal, and (ii) under Delaware law, and as a practical matter, the Special
Committee could not recommend Emerson's two-tiered proposal that would
discriminate against Shaw and Blair Fund, who did not consent to the proposal
and represented a majority of Jensen's shares. Moreover, (iii) several terms in
Emerson's proposed merger agreement were unacceptable to Jensen and had never
been resolved in numerous negotiations. These included Emerson's insistence that
Jensen stock options be converted into Emerson stock options rather than being
cashed out, and Emerson's insistence that Jensen pay Emerson a termination fee
in the (highly likely) event that Jensen shareholders did not vote for the
Emerson merger. Because Jensen was insisting that Emerson bear the risk of
Jensen's shareholders disapproving a Jensen/Emerson merger, that latter
condition was especially problematic.
Accordingly, the Jensen Board (with Shaw abstaining) approved the Special
Committee's recommendation that Emerson's June 25 offer be rejected.
On July 16, 1996, Emerson wrote to Jensen, expressing its belief that Blair
Fund's Voting/Option agreement with Recoton had expired or could be avoided,
and asking permission for Emerson to buy Blair Fund's Jensen stock. The
standstill provision in the March 4 Jensen/Emerson confidentiality agreement
prohibited any such purchases.
*10 That same day, Emerson issued a press release announcing a revised
Emerson offer to pay $12.00 per share to Jensen's public shareholders, $10.00
per share for the shares held by Blair Fund, and $8.90 per share for the shares
held by Shaw. In its press release, Emerson asserted that Blair Fund was free to
vote for the Emerson transaction.
On July 17, 1996, Blair Fund's counsel formally advised Emerson of his
client's position that its Voting/Option agreement with Recoton remained in
effect, and that the Fund was contractually bound to support the Recoton.
proposal. On July 18, 1996, the Special Committee again met, considered, and
recommended that Emerson's three-tiered offer be rejected, for the reasons
previously described. The Committee's counsel informed Emerson of the
Committee's decision, and stated that, given Blair Fund's July 17, 1996 letter,
Emerson's request for permission to purchase Blair Fund's shares appeared moot.
On July 23, 1996 Jensen mailed proxy materials to its shareholders seeking
their approval of the Recoton/Shaw transaction in connection with the
shareholders meeting scheduled for August 28, 1996.
On July 24, 1996, Emerson issued a press release announcing its offer to
purchase OEM for $18.2 million, and proposing to establish a $2.2 million fund
that (Emerson claimed) would result in Jensen's public stockholders receiving an
additional $1.00 per share if Recoton acquired Jensen (minus OEM) and Emerson
acquired OEM.
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On July 30, 1996, Emerson filed this Delaware action seeking to enjoin the
Recoton/Shaw merger.
On August 1, 1996, the Special Committee met to consider Emerson's $18.2
million offer for OEM. Recoton's counsel informed the Special Committee that
Recoton would not enter into the agreements Emerson was proposing for the OEM
sale, nor would Recoton waive the condition to its offer that OEM be sold to
Shaw. Shaw's counsel informed the Committee that Shaw would not agree to accept
less consideration than the other Jensen shareholders if he was not permitted to
acquire OEM.
The Special Committee then recommended that Jensen reject Emerson's offer
for OEM, because (i) the Special Committee already had in hand $11.00 per share
for Jensen's public shareholders in the Recoton/Shaw merger transaction, (ii) a
sale of OEM to Emerson would result in the loss of that merger transaction, and
(iii) Shaw would not accept less than $11.00 per share from Recoton unless he
was purchasing OEM. The Special Committee again concluded that it could not
recommend any of Emerson's two-tiered offers if the disadvantaged shareholders
did not consent, as Shaw and Blair Fund had said that they would not do. The
Jensen Board, with Shaw abstaining, approved the Special Committee's
recommendation to reject Emerson's latest merger proposal.
On August 8, 1996, Emerson commenced a proxy solicitation of Jensen
stockholders, seeking their vote in opposition to the Recoton/Shaw merger
transaction being recommended by the Jensen Board.
12. Emerson's Loss of Financing
*11 On August 2, 1996, Emerson lost a critical component of its financing
for its offer(s)--a fact not known until the discovery taken in connection with
the pending motions. Until August 2, Emerson's financing had included (i) a $32
million equity contribution from Emerson (including $5 million from a public
offering that has not occurred), (ii) a $32.5 million bridge loan from Bankers
Trust, and (iii) a $50 million line of credit from Congress, which was
conditioned upon the Bankers Trust financing commitment. On July 4, 1996,
Bankers Trust terminated its investment banking relationship with Emerson, and
on August 2, 1996, the bridge loan financing commitment expired by its own
terms. Thus, insofar as the record discloses, Emerson is presently without the
financing it needs to close on the transactions contemplated by its latest
offer.
II. CONTENTIONS OF THE PARTIES
To prevail on their motion for a preliminary injunction, the plaintiffs
must demonstrate a reasonable probability of success on the merits,
irreparable harm that will occur absent the injunction, and that the balance
of equities favors the grant of injunctive relief. QVC Network v. Paramount
Communications, Inc., Del.Ch., 635 A.2d 1245, 1261 (1993); aff d., Del.Supr.,
637 A.2d 34 (1994) ("QVC "); Revlon, Inc. v. MacAndrews & Forbes Holdings,
Inc., Del.Supr., 506 A.2d 173, 179 (1985) ("Revlon "). The plaintiffs contend
that their showing satisfies all of these criteria; the defendants argue that
it satisfies none of them.
Although they overlap to some extent, the contentions advanced by Emerson
and the Shareholder Plaintiffs in support of their respective motions for
injunctive relief are distinct. Those contentions are separately described at
this point.
Emerson seeks an injunction (1) prohibiting the Recoton/Shaw merger
transaction currently proposed to Jensen's shareholders from being consummated,
and (2) directing the Jensen Board to conduct a new auction wherein all bidders
are treated equally and fairly. Emerson's argument in support of that requested
relief is that the Jensen Board has at all times favored a transaction with
Recoton (and Shaw) and has rebuffed Emerson at every turn, even though Emerson
consistently made higher bids, and even though Emerson's present bid(s) would
result in Jensen's public stockholders receiving the
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highest price being offered for their shares. Emerson contends that the
auction the Jensen Board conducted was a sham, and that the directors'
persistent refusal to deal fairly with Emerson, and their endorsement of all
of Recoton/Shaw inferior proposals, violated the Board's fiduciary duties
under Revlon to obtain the highest possible price for shareholders, and under
Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1988)
("Macmillan"), to treat all bidders equally and fairly in carrying out their
Revlon duties.
Moreover, Emerson argues that Shaw and Blair Fund, by committing to vote
their majority stock interest to approve the inferior Recoton/Shaw transaction
in the face of Emerson's superior proposals, have made shareholder approval of
the Recoton/Shaw transactions a foregone conclusion. That conduct, Emerson
argues, will preclude Jensen's public shareholders from choosing the transaction
that offers the highest value, and breaches the fiduciary duties owed by Shaw
and Blair Fund as Jensen's majority stockholders.
*12 In addition (or in the alternative), Emerson contends that because
Jensen's directors abdicated their responsibility to oversee the auction, and
have ceded that power to Mr. Shaw who had a conflicting self interest, the
defendants' conduct must be scrutinized under the entire fairness standard.
Emerson claims that because it made the highest bid, the defendants cannot meet
their burden of proving that their recommendation and approval of the inferior
Recoton/Shaw transaction is entirely fair to Jensen's public stockholders.
Finally, Emerson urges that unless the Court grants injunctive relief,
Emerson and Jensen's public shareholders will be irreparably harmed, because
once the Recoton/Shaw deal closes, Emerson will lose forever its opportunity to
acquire Jensen, and the public shareholders will be precluded from realizing the
benefit of the highest price bid at a fairly conducted auction.
The Shareholder Plaintiffs seek a different form of injunction that would
(1) prohibit Blair Fund from voting its shares at the forthcoming stockholders
meeting, (2) halt the consummation of the OEM sale to Shaw unless and until
there is a separate shareholder vote on that transaction, and (3) require the
correction of certain claimed misdisclosures in Jensen's proxy statement.
Although that relief is narrower in form than the relief sought by Emerson, in
reality it would yield the same result. [FN16]
FN16. If the OEM transaction is enjoined, the Recoton/Jensen merger
could not go forward. because the consummation of the former
transaction is a condition precedent for the latter.
The Shareholder Plaintiffs advance three separate claims in support of
their requested relief. First, they argue that the OEM Sale Agreement between
Shaw and Jensen requires a separate approving shareholder vote, and that by
seeking a single, combined vote on the Merger and the OEM sale, Jensen's
directors are violating that contractual requirement. Because the harm
threatened by that violation would be irreparable, plaintiffs contend that the
OEM sale must be enjoined.
Second, the Shareholder Plaintiffs claim that Blair Fund owes fiduciary
duties to Jensen's public shareholders, which the Fund breached by entering into
the May 1, 1996 Voting/Option Agreement that commits the Fund to vote in favor
of the Recoton/Shaw transaction regardless of the circumstances. The appropriate
remedy for that breach of duty, plaintiffs argue, is an injunction prohibiting
Blair Fund from voting any of its stock in connection with the Recoton/Shaw
transaction.
Third, and finally, the Shareholder Plaintiffs contend that Lehman's
fairness opinion relating to the OEM sale is not the opinion that is required by
the OEM Sale Agreement, and that the proxy disclosures relating to that fairness
opinion are materially misleading. Those violations, plaintiffs urge, require
corrective disclosure before the OEM sale can be voted upon.
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The defendants vigorously dispute these arguments. They contend, for
various reasons, that there is no legal basis for Emerson's or the Shareholder
Plaintiffs' breach of fiduciary duty claims. To recapitulate the defendants'
contentions at this point would unnecessarily burden this Opinion. Those
contentions will be addressed in the analysis of Emerson's and the Shareholder
Plaintiffs' claims that now follow.
III. PROBABILITY OF SUCCESS ON THE MERITS
A. Emerson's Injunction Claims
*13 The issues posed by Emerson's attack on the Recoton/Shaw transaction
are framed by the defendants' arguments in response, which are: First, the
defendants' conduct is not subject to scrutiny under the entire fairness or the
Revlon/Macmillan standards of review, because (a) the auction process was
meticulously conducted, and all critical decisions were recommended by a Special
Committee of independent directors that was guided by highly competent and
independent legal and financial advisors; (b) the ultimate decision will be made
by Jensen's stockholders, who remain free to grant their proxies to Jensen's
Board or Emerson as they see fit; and (c) the defendants have erected no
barriers to Jensen's shareholders accepting a tender offer by Emerson, should
Emerson choose to make one.
Second, because Emerson owns no Jensen stock, the defendants owe no
fiduciary duties to Emerson qua shareholder, nor do the defendants owe a duty to
deal with Emerson in its capacity as a bidder. Therefore, Emerson has no
standing to raise the fiduciary duty claims upon which its injunction motion is
predicated.
Third, and in any event, whatever may be the review standard, the
defendants have satisfied it because the Recoton/Shaw transaction, in fact,
represents the "best value reasonably available to the stockholders" (QVC, 637
A.2d at 43), and is therefore also entirely fair.
For the reasons next discussed, the Court concludes that Emerson has not
demonstrated a probability of success on the merits of its claims.
1. Standing
Any standing Emerson may have to assert its claims can only derive from
Emerson's status either as a bidder for Jensen or as a Jensen stockholder. In
its capacity as a bidder, Emerson has no claims to raise, because neither Jensen
nor its Board owes a duty to an interested potential acquiror to deal with that
acquiror. As the Chancellor has aptly put it:
[I]t is a simple and I would have thought well understood fact that one [in
the position of a tender offeror] possesses no legal right to have an owner
of an asset supply him with information or negotiate with him. Thus, it
simply is not a legal wrong to a would-be buyer for an owner to ignore or
reject an offer of sale.
Gagliardi v. Trifoods Int'l, Inc., Del.Ch., C.A. No. 14725, Mem.Op. at 21,
Allen, C. (July 19, 1996). Rather, any duty Jensen's board may have to deal with
Emerson as a potential buyer was owed solely to Jensen's stockholders, as a
corollary of the Board's fiduciary duty to achieve the highest available value
for shareholders. That is why plaintiffs who seek to assert breach of fiduciary
duty claims of this kind have been persons to whom such fiduciary duties were
owed, i.e., stockholders of the target corporation.
Defendants argue that because Emerson owns no stock in Jensen, it has no
standing to enforce a duty owed only to stockholders. Accordingly, defendants
point out, no Delaware court has recognized the standing of a non-stockholder
bidder for a target company, to assert fiduciary claims against the target
company's directors.
*14 Emerson responds that for this Court to refuse to entertain its claims
when it would entertain them if Emerson owned even one share of Jensen stock,
would exalt form over substance. Moreover, Emerson urges, the defendants'
standing objection ignores the
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reality that the defendants' conduct is adversely impacting Emerson's
substantial economic interest as a bidder in the same way it affects the
interests of Jensen's public stockholders. Therefore, Emerson concludes, it has
a significant stake in the controversy, which merits recognition of its standing
to assert breach of fiduciary duty claims against the Jensen Board, even though
the Board's fiduciary duties are owed to the stockholders.
This question need not be decided to resolve Emerson's motion. That motion
can be determined on other grounds with no different result. Moreover, a refusal
by this Court to entertain the fiduciary duty claims on this threshold ground
would disserve the interests of the parties and the public. Although the
Shareholder Plaintiffs do not advance the same claims as Emerson, they do own
Jensen stock and they have joined in Emerson's position. And importantly, the
merits of the defendants' conduct have now been the subject of discovery,
briefing and argument (albeit expedited). For this Court now to refuse to review
that conduct would be wasteful of the parties' considerable investment of effort
and resources, and deprive Jensen's shareholders and the public of such benefit
that this Court's (and any reviewing Court's) determinations might have.
Accordingly, the Court will proceed on the assumption, but without
deciding, that Emerson has standing to assert its claims.
2. The Applicable Standard of Review
As noted, Emerson contends that the defendants' conduct must be reviewed
under the entire fairness standard, or, alternatively, under the enhanced
scrutiny standard mandated by Revlon and QVC.
a. Entire Fairness Standard
Emerson's entire fairness argument attempts to liken this case to
Macmillan, where the board of the target corporation was found to have abdicated
its oversight authority over the conduct of an auction to sell the company,
thereby enabling the CEO and the management group, whose personal interests were
aligned with one of two competing bidders, to control the conduct of the auction
and manipulate the board into approving their favored (and lower priced)
transaction. The Delaware Supreme Court held that the entire fairness standard
would govern in that situation, because the interests of the corporation and its
public shareholders had not been represented by disinterested fiduciaries.
Emerson contends that the same standard should apply here because the
Special Committee ceded its oversight authority to Mr. Shaw, who is an
interested party. That contention, however, finds no support in the record. Mr.
Shaw stepped aside as a representative of Jensen in these matters in late 1995,
and played no role in the Board's (or the Special Committee's) deliberations
ever since. There is no evidence that Mr. Shaw was able to, or did, exert any
influence over those deliberations, nor is it likely that Shaw could have done
so, because none of the remaining members of the Committee, or their advisors,
were beholden to Mr. Shaw. [FN17] Moreover, the Committee's arm-length
relationship to, and independence of, Mr. Shaw, is persuasively evidenced by
their having negotiated successive improvements in the bids of Mr. Shaw and
Recoton. Accordingly, the plaintiffs' contention that Mr. Shaw took control of
the Committee's process, and that the entire fairness standard governs, fails
for lack of proof.
FN17. The plaintiffs contend that Lehman was beholden to Shaw because
Shaw participated in Lehman's selection as Jensen's financial advisor
and in negotiating the terms of Lehman's engagement. However, there is
no evidence that Lehman ever improperly contacted Shaw once he
announced his intention to acquire OEM.
b. Revlon/QVC Standard
*15 That leaves for consideration the enhanced scrutiny standard mandated
by Revlon and QVC. Here, it is undisputed that Jensen was for sale, that the
Special Committee was trying to achieve the highest
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value for it, and that the transaction the Committee has recommended (and the
Board has approved) would result in Jensen's shareholders being cashed out and
left with no further opportunity to realize a control premium for their shares.
In such circumstances the applicability of the Revlon/QVC review standard would
seem uncontroversial. See QVC, 637 A.2d at 42-44.
The defendants argue, nonetheless, that Revlon is inapplicable because the
Board's action in recommending the Recoton/Shaw transaction is not unilateral.
That is, the shareholders (not the Board) will ultimately decide who will
acquire Jensen, and should Emerson mount a competing tender offer, the
defendants have erected no obstacles to its acceptance by Jensen's shareholders.
In Williams v. Geier, Del.Supr., 671 A.2d 1368, 1376-77 (1996), our Supreme
Court recently held that an antitakeover defensive measure will not be reviewed
under the enhanced scrutiny standard of Unocal Corp. v. Mesa Petroleum Co.,
Del.Supr., 493 A.2d 946 (1985), when the defensive measure is approved by
shareholders, as opposed to being adopted unilaterally by the directors.
Presumably inspired by that ruling, the defendants seek its extension to
situations that would, in the absence of shareholder approval, be subject to the
enhanced scrutiny required by Revlon and QVC.
Again, the Court is able to decline the invitation to make new law in this
important area, because on these facts there is no need to do so. Although the
defendants now argue that Revlon does not apply, in point of fact the Special
Committee at all times conducted itself as if it were subject to the
value-maximizing duties imposed by Revlon and QVC. The Committee's Delaware
counsel candidly conceded that at oral argument. Most importantly, the Revlon
issue, no matter how it were decided, would not affect the outcome of this
proceeding, because to the extent that the defendants had a Revlon - based duty
to maximize value, the record establishes (preliminarily) that that duty was
fully discharged. See Section III A.3., below.
Accordingly, the Court will evaluate the defendants' conduct against the
standards prescribed by Revlon, QVC, and Macmillan.
3. The Merits: Whether the Auction Was Fairly Conducted, and Whether The Value
Achieved Was the Best Available
This brings us to the merits of Emerson's argument, which is that the
conduct of the auction was a sham, designed to create the appearance but not the
reality of a fair process. The unfairness of the process, Emerson claims, is
evidenced by the inadequacy of the result, which is that the Committee and the
Board have accepted and recommended the approval of an inferior bid that would
provide Jensen's public shareholders $1 per share less than Emerson's competing
bid. This argument, in my view, fails as a matter of fact and law.
*16 Regarding the auction, the lengthy recital of background facts (see
Section I, supra, of this Opinion) establishes that the Committee meticulously
conducted itself in good faith, was motivated to obtain the highest available
value, and at all times sought to act in an informed manner. The Committee
sought all available information to enable it to evaluate the competing bids,
and made no decisions until its advisors were able to evaluate that information.
The record establishes that the Committee afforded both bidders a full
opportunity to make their best and highest bids, not once but on multiple
occasions over a seven month period.
Emerson complains that it was treated in a discriminatory manner. Emerson
did receive disparate treatment, but it was for valid reasons, and that
treatment did not impede Emerson from making its best bid(s). Although Emerson
was not allowed to conduct due diligence until March of this year, that was
because it did not sign a confidentiality agreement until March 4, 1996. For six
weeks thereafter, Emerson was permitted to conduct due diligence, which was
completed by April 26, 1996.
The Committee also required Emerson to
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furnish evidence of its ability to finance its proposals, but the Committee had
valid reasons for concern on that score. Emerson had recently emerged from
bankruptcy and had reported a loss of $7.7 million for the last quarter, and a
loss of $13.4 million for the past fiscal year. Negotiating with Emerson could
put at risk the fully financed transaction that Jensen had already contracted
for with Recoton. The Special Committee was, therefore, entitled to assurance
that any competing offer would be "for real", i.e., financeable. Upon receiving
the necessary financing documentation and Global's commitment to participate,
the Committee was willing to--and did--deal with Emerson. Thus, any disparate
treatment of Emerson was for the benefit of Jensen's shareholders, and had no
adverse impact upon Emerson's ability to compete in the auction. Macmillan, 559
A.2d at 1288.
Emerson next claims that the Recoton/Shaw transaction does not represent
the best available value, because Jensen's public shareholders will receive $11
per share--$1 per share less than they would receive under Emerson's current
proposal. However, that argument overlooks the fact that under Emerson's
proposal, Shaw and Blair Fund, who own a majority of Jensen's stock, would be
forced to accept less for their shares than the public shareholders would
receive. Shaw is willing to accept less in the Recoton transaction because he
would be acquiring OEM and receiving other benefits from Recoton that Emerson is
not offering. And Blair Fund is willing to accept less, because it contractually
committed to do so in order to induce Recoton to increase its bid and move the
then-stalled auction process toward a resolution. However, neither Shaw nor
Blair Fund is willing to accept less consideration for their shares than the
public shareholders in a merger with Emerson.
*17 Emerson's offer of $12 per share to the public shareholders is
predicated upon Shaw receiving $8.90 per share and Blair Fund receiving $10 per
share. For Shaw and Blair Fund to be treated equally with the public
shareholders, the total consideration would have to be reallocated. In such a
pro rata reallocation, Jensen's public shareholders (as well as Blair Fund and
Shaw), would receive $10.34 per share, not the $12 per share plaintiffs claim.
That $10.34 per share amount is less than the $11 per share that the public
shareholders will receive under the current Recoton/Shaw proposal.
Thus (and to express it in Revlon/QVC terms), because of the opposition of
Shaw and Blair Fund, the Emerson proposal to pay $12 per share to the public
shareholders (and less to Shaw and Blair Fund) is not a transaction that is
available to the public shareholders. The only circumstance (if any) in which
Emerson's proposal might be available would be if all shareholders, including
Shaw and Blair Fund, receive the same per share consideration; but in that
event, the public shareholders would receive less than what they are being
offered in the Recoton/Shaw proposal. Under either scenario, the highest
available transaction is the Recoton/Shaw proposal, and because the defendants
have achieved that transaction through a fair auction process, they have
satisfied their fiduciary obligations under Revlon, Macmillan and QVC.
The plaintiffs' response is that if its $12 per share transaction is not
"available" to Jensen's public shareholders, it is only because Shaw and Blair
Fund have wrongfully caused it to be unavailable by breaching their fiduciary
duty. To put it differently, if Emerson's latest offer is unavailable, it is
only because Shaw and Blair Fund have breached their fiduciary duty to support
that offer or (at a minimum) not to oppose it.
That argument finds no support in our law, because Shaw and Blair Fund, as
individual minority stockholders, have no fiduciary duty to Jensen's remaining
stockholders to support Emerson's proposal or any other proposal. If Shaw and
Blair Fund could be viewed collectively as a "controlling" stockholder, they
would have fiduciary duties to the minority in certain limited circumstances,
but the record does not establish that those two shareholders are connected
together in any
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legally significant way (e.g., by common ownership or contract). But even if
Shaw and Blair Fund were Jensen's "controlling" stockholder, they violate no
fiduciary duty by opposing Emerson's proposal or by supporting Recoton's,
because even a majority stockholder is entitled to vote its shares as it
chooses, including to further its own financial interest. See, e.g., Thorpe v.
Cerbco, Inc., Del.Supr., 676 A.2d 436, 444 (1996); Bershad v. Curtiss-Wright
Corp., Del.Supr., 535 A.2d 840, 845 (1987); In Re Sea-Land Corp. Shareholders
Litigation, Del.Ch., 642 A.2d 792 (1993); Jedwab v. MGM Grand Hotels, Inc.,
Del.Ch., 509 A.2d 584, 598 (1986).
*18 Accordingly, Emerson has failed to establish that it will probably
succeed in establishing the merits of its claims. The Court now turns to the
claims of the Shareholder Plaintiffs.
B. The Shareholder Plaintiffs' Injunction Claims
1. The OEM Shareholder Vote Claims
The Shareholder Plaintiffs claim first that the OEM Sale Agreement between
Shaw and Jensen requires a separate shareholder vote approving that transaction.
It is undisputed that at the August 28, 1996 shareholders meeting, the
shareholders will be casting a single vote approving (or disapproving) the
combined Recotont/Shaw transaction. The Jensen proxy materials plainly disclose
that a vote in favor of "the Merger Agreement and the transactions contemplated
thereby ... will constitute approval of the Merger and the OEM Asset Sale." See
July 23, 1996 Letter from CEO Shaw to Jensen Shareholders, at 2. It is that
combined, unitary vote that the plaintiffs contend violates Jensen's contractual
obligation to have a separate shareholder vote on the OEM sale, and renders
materially false and misleading the proxy disclosures relating to the unified
vote.
The Court concludes that the defendants have no obligation, and the
shareholders have no entitlement, to a separate vote on the OEM sale, and that
the resulting disclosure claim fails for lack of a valid premise.
It is conceded that because the OEM transaction is not a sale of
substantially all of Jensen's assets, no approving shareholder vote is required
under 8 Del.C. ss. 271. Nor is a shareholder vote required by any provision in
Jensen's certificate of incorporation. The only reason Jensen's shareholders are
being afforded an opportunity to vote on the OEM sale is that the parties to the
OEM Agreement have so provided by contract. Therefore, any entitlement Jensen's
shareholders may have to a separate vote on the OEM sale, distinct from the vote
on the merger, must be found in the OEM Agreement.
The Shareholder Plaintiffs concede that the OEM Agreement nowhere
explicitly mandates a separate shareholder vote on the OEM sale. They insist,
nonetheless, that that Agreement must be read to so require. Their argument runs
as follows: Section 8.2 of the OEM Agreement provides that "[t]he Agreement and
the transaction contemplated hereby shall have been approved and adopted by the
vote of the stockholders of [Jensen] in accordance with Section 2.21." (emphasis
added). The only transaction "contemplated" by the Agreement is the merger.
Therefore, the vote on the OEM sale cannot be combined with the vote on the
merger.
This argument finds no support in the OEM Agreement; moreover, it leads
nowhere. The "Agreement" being referred to in Section 8.2 is the OEM Agreement,
and the transaction "contemplated" by that Agreement is clearly the OEM sale.
Thus, all that Section 8.2 provides is that shareholder approval is required as
a condition for the OEM sale becoming effective. Section 8.2 does not speak to
the question of whether the shareholder vote must be a "stand alone" vote, or
whether it may be combined.
*19 The Shareholder Plaintiffs argue (somewhat confusingly) that the phrase
"transaction contemplated hereby" refers to a transaction contemplated by the
Merger Agreement, and that the only transaction contemplated by the Merger
Agreement is the
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merger. That argument fails on two counts. First, its premise finds no basis in
Section 8.2 of the OEM Agreement, which is the contractual foundation for
plaintiffs' position. Second, even if one can read into the OEM Agreement a
requirement that the OEM sale be "contemplated" by the Merger Agreement, that
requirement is clearly satisfied here. Section 8.3(e) of the Merger Agreement
expressly conditions Recoton's obligation to effect the merger upon "the closing
of the sale of the assets of the Original Equipment Business pursuant to the
OE[M] Agreement ... prior to the Effective Time." The third recital of the
Merger Agreement states that contemporaneously with the execution of the Merger
Agreement, Jensen and IJI Acquisitions (Shaw's acquisition vehicle) have entered
into the OEM Agreement. Finally, the uncontroverted record establishes the
contracting parties' understanding that the OEM sale is a transaction
contemplated by the Merger Agreement.
Accordingly, no basis exists in either the OEM or the Merger Agreement to
imply a contractual obligation to provide Jensen's shareholders a separate vote
on the OEM sale. For that reason, the proxy statement contains no misdisclosures
relating to the combined shareholder vote on these transactions.
2. The Blair Fund/Recoton Voting Agreement Claims
The Shareholder Plaintiffs next claim that Blair Fund must be enjoined from
voting its 26% stock interest at the forthcoming shareholders meeting. To
support that claim, the plaintiffs proffer two arguments. First, they argue that
the Voting/Option Agreement, requiring Blair Fund to vote its shares for the
Recoton transaction, has expired by its own terms. Second, they contend that by
entering into the Voting/Option Agreement with Recoton, Blair Fund breached its
fiduciary duty to Jensen's shareholders. Neither argument, in my view, has any
probability of success.
To begin with, nowhere have the plaintiffs demonstrated that they have
standing to claim that the Voting/Option Agreement has expired. That Agreement
is a private contract between Blair Fund and Recoton. It confers no rights upon
anyone else, including Jensen's remaining shareholders or Emerson. The parties
to that contract take the position that it is still binding. But even if the
Voting/Option Agreement is no longer binding, that does not help Emerson,
because the only consequence is to leave Blair Fund free to vote its shares as
it sees fit. The expiration (or invalidity) of the Voting Agreement is not a
basis for this Court to strip Blair Fund of its fundamental right to vote its
shares.
If there exists any Voting/Option Agreement-related claim that the
Shareholder Plaintiffs might have standing to raise, it would be that that
Agreement constitutes a breach of a fiduciary duty owed by Blair Fund to
Jensen's remaining stockholders. The infirmities in that contention are too
multifold to cover in any comprehensive way. Time constraints permit discussion
of only the major ones.
*20 First, Blair Fund owes no fiduciary duty, because the Fund is not a
fiduciary either for Jensen or its other stockholders. As a stockholder, Blair
Fund could attain fiduciary status only if it were a majority shareholder or it
if actually controlled the affairs of Jensen. Kahn v. Lynch Communication
System, Inc., Del.Supr., 638 A.2d 1110, 1114 (1994); In Re Sea-Land Corporation
Shareholders Litigation, Del.Ch., C.A. No. 8453, Jacobs, V.C., Mem.Op. at 8 (May
13, 1988). Blair Fund is not a majority stockholder--it owns only 26% of
Jensen's shares--and there is no claim or evidence that the Fund has in any way
controlled Jensen's affairs. [FN18]
FN18. Presumably aware of its inability to satisfy this test,
Shareholder Plaintiffs contend that because David Chandler is a
director (and, hence, a fiduciary) of Jensen, and because Mr. Chandler
is one of the three general partners who control the entity that is
the Fund's sole general partner. the Fund acquired fiduciary status on
that basis as well. The argument has no legal foundation, and the
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Shareholder Plaintiffs cite no authority for it. If plaintiffs'
argument were the law, then whenever a director is affiliated with a
significant stockholder, that stockholder automatically would acquire
the fiduciary obligations of the director by reason of that
affiliation alone. The notion that a stockholder could become a
fiduciary by attribution (analogous to the result under the tort law
doctrine of respondeat superior ) would work an unprecedented,
revolutionary change in our law, and would give investors in a
corporation reason for second thoughts about seeking representation on
the corporation's board of directors.
Second, even assuming Blair Fund is a fiduciary, Shareholder Plaintiffs
have nowhere shown how its entering into the Voting/Option Agreement breached a
duty. At most, the effect of the Agreement was to "lock up" 26% of Jensen's
shares in favor of the Recoton deal. Mr. Shaw, however, is under no contractual
restraint. Therefore, 74% of Jensen's shares remain free to reject the Recoton
proposal if they choose. That Mr. Shaw has decided to vote his shares in favor
of that proposal is not a circumstance for which Blair Fund can be charged with
legal responsibility, as a fiduciary or otherwise.
Third, even if (arguendo ) Blair Fund's conduct were found in violation of
some fiduciary precept, that would not support the relief that Shareholder
Plaintiffs request-sterilization of the Fund's shares. If there is a nexus
(i.e., a logical relationship) between the fiduciary violation and that remedy,
the Shareholder Plaintiffs have not shown it and the Court is unable to fathom
it.
3. The Claims Relating to Lehman's Fairness Opinion
Finally, the Shareholder Plaintiffs argue that the proxy disclosures
relating to Lehman's fairness opinion in connection with the OEM sale violate
the defendants' fiduciary duty of disclosure, because the proxy statement: (a)
fails to disclose that Lehman's July 23, 1995 fairness opinion was not the
opinion called for by the OEM Agreement, (b) fails to disclose the substance of
Lehman's prior January 2, 1996 opinion, and (c) falsely implies that Shaw's
agreement to accept less for his shares than the public shareholders, and his
agreement with Recoton to waive the change of control payments under his 1991
employment agreement (the "give-ups"), supply additional consideration for the
OEM Agreement.
I conclude that the Shareholder Plaintiffs have shown no probability of
success on the merits of these claims. The first disclosure argument lacks
merit, because Lehman's July 23, 1996 fairness opinion does, in fact, satisfy
the condition in Section 8.3 of the OEM Agreement that Lehman provide "an
opinion stating that the transaction contemplated by this Agreement is 'fair
from a financial point of view' to [Jensen]." That fairness opinion states that:
... from a financial point of view ... since Recoton requires the prior
sale of the OEM Business a condition to the consummation of the Proposed
[Merger] Transaction, the consideration to be received by [Jensen] in the
proposed OEM Sale, within the context of the overall Proposed [Merger]
transaction and the consideration to be received by the Public Stockholders
in the Proposed [Merger] Transaction, is fair to [Jensen].
*21 July 23, 1996 Jensen Proxy Statement, at Annex IV-3.
Although the July 23, 1996 fairness opinion does not track in haec verba the
exact language of Section 8.3, the uncontroverted record establishes that Lehman
intended no substantive difference by its choice of words. The record further
establishes that the parties to the OEM Agreement (who do not include
plaintiffs) are satisfied that the fairness opinion condition has been met.
Having independently compared the language of Section 8.3 with the pertinent
language of the July 23 fairness opinion, the Court is unable to perceive any
difference in their substance.
The Shareholder Plaintiffs next argue that even if the language of the July
23 fairness opinion is found to satisfy the Section 8.3 condition, the proxy
disclosure that relates to it is materially false and misleading, because it
implies that the value of Shaw's "give-ups"
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(taking less merger consideration and waiving the "change of control" employment
agreement payments), was additional consideration to Jensen for the sale of OEM.
That implication, plaintiffs claim, is false because unlike the $18.4 million of
cash Mr. Shaw was paying directly to Jensen, any golden parachute payments or
merger consideration that Mr. Shaw agreed to forego would not represent
consideration flowing directly to Jensen for the sale of OEM.
I disagree. The proxy statement (at page 47) clearly discloses that Lehman
determined that Jensen would receive both direct and indirect consideration
equivalent to approximately $25.4 million for its OEM business. The direct
consideration is $18.4 million cash. The indirect consideration is $7 million of
"give-ups" by Shaw, specifically, $2.6 million of foregone golden parachute
payments, and his agreement to accept $4.4 million less for his shares in the
Recoton merger than the public shareholders would be receiving. Admittedly, the
proxy statement does not explain specifically how that $7 million is the
economic equivalent of a direct infusion of cash. Nonetheless, the plaintiffs
have not established that Lehman erred by treating the $7 million as
consideration flowing to Jensen, nor have they shown that the proxy disclosures
concerning this subject were improper.
The OEM transaction could have been structured in such a way that Mr. Shaw
actually received the $7 million (representing $2.6 million in golden parachute
payments and the $4.4 million increment represented by receipt of the full $11
per share price for his stock) immediately before and in contemplation of the
merger. [FN 19] Had that occurred, Shaw would then have had to pay back that
same $7 million directly to Jensen as part of the purchase price for OEM, again
before the merger took place. Instead, however, the parties structured the
transaction to have the same economic effect but in a different form--the
intermediate step involving payment of the $7 million first to Shaw, and then
back to Jensen, was simply omitted. Thus, Lehman had a valid basis to treat the
$7 million as part of the consideration flowing to Jensen for the sale of OEM to
Shaw.
FN19. For example, Recoton could have acquired Shaw's stock at $11
per share, and Jensen could have paid Shaw the $2.6 million, all
immediately before the merger.
*22 Finally, the Shareholder Plaintiffs contend that the disclosures
relating to Lehman's fairness opinion were improper, because they omitted to
disclose the substance of Lehman's January 2, 1996 fairness opinion issued in
connection with the now-superseded original Merger and OEM Agreements. At that
time Lehman opined that the consideration Mr. Shaw would be paying for OEM--$15
million cash, plus the assumption of approximately $1 million of Jensen debt and
liabilities--was fair to Jensen.
The Shareholder Plaintiffs claim that that omission is material, because in
January, Lehman was able to opine that $16 million was fair without regard to
any "give-ups" by Mr. Shaw, yet in July, Lehman was unable to opine that $18.4
million was fair unless the "give-ups" are also taken into account. Had the
substance of the January 2, 1996 fairness opinion been disclosed, plaintiffs
say, Jensen shareholders would have been given reason to question the fairness
of the consideration being paid for OEM in the transaction as currently
proposed.
In my view, this concept of materiality is flawed. In January of this year,
Lehman opined that $16 million was a fair price for OEM. Six months later, in a
different transaction involving changed circumstances, Lehman opined that $25.4
million is Fair consideration for a more valuable OEM. If the $7 million of
indirect, non-cash consideration for OEM were "bogus," then the plaintiffs'
materiality argument might have cogency, but the $7 million, although being
received in an indirect form, is genuine. Therefore, to require the disclosure
of Lehman's January 2, 1996 fairness opinion would add nothing material to the
total mix of information being furnished to Jensen's
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shareholders.
* * *
For all of these reasons, the plaintiffs have failed to establish that they
will probably succeed on the merits of their claims.
IV. THE BALANCE OF EQUITIES
Because the plaintiffs have failed to establish probable success on the
merits, the analysis could end here. However, an important additional reason why
injunctive relief should be denied requires brief discussion. An injunction
would create a risk of harm to Jensen's shareholders that significantly
outweighs whatever benefit an injunction would likely confer.
The avowed purpose of the relief being requested here is to stop the
Recoton transaction so that a higher value might be obtained in a fair auction
conducted on a level playing field. While that argument has theoretical appeal,
it ignores the reality of the situation that confronts Jensen's Board and public
stockholders. Jensen has been for sale and has been involved in an auction
process for eight months. The marketplace has long been well aware of Jensen's
availability, and no obstacles have been erected to prevent any interested
bidder from coming forward. Yet only two bidders--Recoton and Emerson--have done
so. For months the Jensen Special Committee has negotiated with those bidders,
and Jensen now has in hand a firm transaction with Recoton at the highest
available price that has been offered thus far.
*23 If that transaction is enjoined, there is a risk that Recoton may
depart the scene, leaving only Emerson in the picture. Given the history, there
is no demonstrated likelihood that any other bidder will enter the fray. Yet an
auction in which Emerson is the only likely bidder creates a plausible risk that
in the end there may be no transaction with anyone. That is because Emerson
presently has no financing, and there is no showing that Emerson will be able to
finance its present bid or any future higher bid if this Court requires the
auction process to begin anew. Therefore, injunctive relief must be denied for
the additional reason that the balance of equities weighs heavily against it.
V. CONCLUSION
For the above reasons, the pending motions for a preliminary injunction are
DENIED. IT IS SO ORDERED.
1996 WL 483086 (Del.Ch.)
END OF DOCUMENT
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Unpublished Disposition
(CITE AS: 81 F.3D 167, 1996 WL 138558 (9th Cir.(Cal.)))
(KeyCite History)
NOTICE: THIS IS AN UNPUBLISHED OPINION.
(The Court's decision is referenced in a "Table of Decisions Without Reported
Opinions" appearing in the Federal Reporter. Use FI CTA9 Rule 36-3 for rules
regarding the citation of unpublished opinions.)
United States Court of Appeals, Ninth Circuit.
FEDERAL DEPOSIT INSURANCE
CORPORATION, PLAINTIFF,
v.
HYDE PARK APARTMENTS, PLAINTIFF
intervenor Appellant,
v.
Ranbir S. SAHNI, Defendant-Appellee.
No. 94-56673.
Argued and Submitted Feb. 5, 1996.
Decided March 27, 1996.
Appeal from the United States District Court, for the Central District of
California, D.C. NO. CV-94-00319-GLT (EEx); Judge Gary L. Taylor, District
Judge, Presiding.
C.D.Cal.
AFFIRMED.
Before: WALLACE, FERGUSON, and T.G. NELSON, Circuit Judges.
MEMORANDUM [FN*]
**1 The Hyde Park Apartments, a California limited partnership which
operates a HUD housing development called the Hyde Park Apartments, appeals the
district court's order denying its motion to intervene in litigation between the
FDIC and Ranbir S. Sahni. In FDIC V. SALUNI, the FDIC, in its capacity as
receiver, filed suit against Sahni to enforce the collection of a $1.2 million
debt Sahni owed to Metro North State Bank, a failed bank. As collateral for this
loan, Sahni had pledged his interest as sole general partner in ten limited
partnerships, including the Hyde Park limited partnership. Upon motion by the
FDIC, the district court appointed Timothy Strack as a receiver to protect and
preserve the collateral, the apartment complexes, during the pendency of the
litigation. Hyde Park moved to intervene in order to challenge the appointment
of the receiver and the district court denied the motion. In its order, the
district court invited the individual limited partners to intervene in ADC V.
STRACK, No. 95-55648. [FN 1]
DISCUSSION
Hyde Park asserts three claims in this appeal: 1) the district court erred
by denying its motion to intervene; 2) the district court erred by not finding
Hyde Park to be an indispensable party; and 3) the district court erred by
appointing a receiver to manage and control Hyde Park.
A. Intervention as a Matter of Right
Hyde Park argues that the district court erred by denying its motion to
intervene because the partnership has an ownership interest in the subject of
the lawsuit and this interest is being impaired. The FDIC contends that this
motion to intervene is really a ruse by Sahni to have another opportunity to
challenge the district court's order appointing the receiver. The district court
apparently agreed with the FDIC. The court denied the motion to intervene as to
the limited partnership entity and invited the individual limited partners to
intervene.
The district court's decision regarding intervention as a matter of right
is reviewed de novo. IDAHO FARM BUREAU FED'N V. BABBITT, 58 F.3d 1392, 1397
(9th Cir.1995). The rule of intervention as of right is construed broadly in
favor of applicants for intervention. UNITED STATES V. OREGON, 839 F.2d 635, 637
(9th Cir.1988). Fed.R.Civ.P. 24(a) provides in
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pertinent part:
Upon timely application anyone shall be permitted to intervene in an
action: ... (2) when the applicant claims an interest relating to the
property or transaction which is the subject of the action and the
applicant is so situated that the disposition of the action may as a
practical matter impair or impede the applicant's ability to protect that
interest, unless the applicant's interest is adequately represented by
existing parties.
In SAGEBRUSH REBELLION, INC. V. WATT, 713 F.2d 525 (9th Cir.1983), this
court interpreted Rule 24(a)(2) to require the district court to grant a motion
to intervene if the applicant meets the following four criteria: 1) timeliness;
2) an interest in the subject matter of the litigation; 3) absent intervention
the party's interest may be practically impaired; and 4) other parties
inadequately represent the intervenor. ID. at 527.
**2 In the case at bar the main controversy involves the fourth factor.
Hyde Park contends that Sahni, the general partner, does not adequately
represent the interests of the limited partnership. The Ninth Circuit has ruled:
In determining adequacy of representation, we consider whether the interest
of a present party is such that it will undoubtedly make all the
intervenor's arguments; whether the present party is capable and willing to
make such arguments; and whether the intervenor would offer any necessary
elements to the proceedings that other parties would neglect. CALIFORNIA
V. TAHOE REGIONAL PLANNING AGENCY, 792 F.2d 775, 778 (9th Cir.1986).
In UNITED STATES V. HIGH COUNTRY BROADCASTING CO., 3 F.3d 1244 (9th
Cir.1993) (per curiam), CENT. DENIED, 115 S.Ct. 93 (1994), this court held that
the denial of the sole shareholder's motion to intervene was appropriate where
it was an apparent attempt to avoid the requirement that a corporation could
only appear in federal court through licensed counsel. ID. at 1245. In HIGH
COUNTRY, Crisler was the sole shareholder and president of the corporation.
Crisler, who was not a licensed attorney, attempted to represent High Country in
federal court. The court ordered High Country to retain counsel pursuant to 28
U.S.C. ss. 1654. When High Country did not comply with the order, the court
ordered a default judgment against the corporation. ID. Crisler attempted to
intervene in the action and the district court denied the motion. ID. On appeal
the Ninth Circuit affirmed the denial of the motion to intervene and reasoned:
But here Crisler's application to intervene pro se was nothing more than an
end run around section 1654. As High Country's President, statutory agent and
only shareholder, Crisler was singularly to blame for High Country's failure to
retain counsel. As an intervenor, Crisler sought to accomplish the exact same
objectives that he did as High Country's counsel--to represent High Country pro
se. To allow a sole shareholder with interests identical to the corporation's to
intervene under such circumstances, rather than hire corporate counsel, would
eviscerate section 1645. We decline to read Rule 24 as condoning such a result.
ID. The court supported its conclusion by citing Fed.R.Civ.P. 1 which
articulates the broad principle behind the rules of civil procedure. Rule 1
provides, "[these rules] shall be construed and administered to secure the just,
speedy, and inexpensive determination of every action." Thus, Rule 1 prevents a
party from flouting the spirit of the rules, even if the party fits within their
literal meaning. ID.
The sole shareholder's misuse of Rule 24 in HIGH COUNTRY, is analogous to
general partner Sahni's manipulation of Rule 24 in the case at bar. The FDIC
opposed Hyde Park's motion to intervene on the grounds that: 1) only the
receiver had the authority to hire counsel for Hyde Park; and 2) there was no
evidence that the entity of the partnership was anyone other than Sahni, who was
already represented by counsel and a party to the litigation.
**3 In its motion to intervene, Hyde Park was represented by attorney
Robert Graham, who admitted that Sahni hired him:
After the receiver had filed a motion for leave to engage counsel at the
expense of the
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partnership, Mr. Sahni approached me and requested, in his capacity as general
partner of Hyde Park Apartments, that I represent Hyde Park for the purposes of
protecting the partnership and its limited partners from the unwarranted charge
of the legal cost of the receiver.
At the time that Sahni retained Graham, the court had issued an injunction
which required Sahni to "refrain from exercising any rights or powers of the
general partner in the limited partnerships, including the power to vote,
consent, oversee, manage and otherwise operate the limited partnerships as the
general partner." The fact that Sahni hired Graham is evidence that Sahni, and
not the entity of the limited partnership, was the real intervenor.
Additionally, the parties presented the district court with conflicting evidence
of the ownership of Hyde Park and the identities of the other limited partners.
Sahni claimed that he owned only a 10% interest in the limited partnership,
while the FDIC asserted that Sahni had a 99% interest in the limited
partnership.
The district court fashioned a remedy which effectively prevented Sahni
from abusing Rule 24(a)(2) and protected the interests of Sahni's partners. The
remedy was to give the individual limited partners the opportunity to intervene.
The court did not ignore the fact that a partnership is a separate entity which
may sue and be sued in its own name. Cal.Civ.Proc.Code ss. 369.5(a) (West
1996), Fed.R.Civ.P. 17(b). The court also recognized that a limited partner is
not a proper party to an action by or against the partnership. Cal.Corp.Code ss.
15526 (West 1996). Nonetheless, the court responded to the unusual circumstances
presented in this case. In allowing the limited partners to intervene, the
district court relied on California cases in which state courts had permitted
limited partners to intervene in litigation where the interests of the limited
partners were not being protected. SEE KOBERNICK V. SHAW, 70 Cal.App.3d 914
(1977); LINDER V. VOGUE INV.,INC., 239 Cal.App.2d 338 (1966).
On appeal the record contains conflicting evidence of the ownership of Hyde
Park. Moreover, the record clearly shows that none of the individual limited
partners attempted to intervene. The district court's order was a practical
solution to ferret out abuse of Rule 24. This court will not permit Sahni to
flout procedural rules for his own advantage. SEE HIGH COUNTRY, 3 F.3d at 1245.
The issue of the appointment of the receiver was exhaustively addressed by the
parties before the district court. Thus, the district court did not err when it
denied Hyde Park's motion to intervene and invited the limited partners to
intervene as individuals.
B. Indispensable Party
On appeal Hyde Park argues that the limited partnership is an indispensable
party in FDIC V. SAHNI and therefore the district court should have dismissed
the action. [FN2] To determine if an action must be dismissed for failure to
join an indispensable party, a court must conduct a two-part analysis: 1) is the
absent party "necessary" to the suit; and 2) if the party is necessary and
cannot be joined, then is the party "indispensable" so that in equity and good
conscience the suit should be dismissed? UNITED STATES EX REL. MORONGO BAND OF
MISSION INDIANS V. ROSE, 34 F.3d 901, 907 (9th Cir.1994).
**4 The determination of whether the absent party is necessary also
involves a two-part test which is set out in Fed.R.Civ.P. 19(a). The rule
provides in pertinent part: (a) Persons to be Joined if Feasible. A person ...
shall be joined as a party in the action if (1) in the person's absence complete
relief cannot be accorded among those already parties, or (2) the person claims
an interest relating to the subject of the action and is so situated that the
disposition of the action in the person's absence may (i) as a practical matter
impair or impede the person's ability to protect that interest or (ii) leave any
of the persons already parties subject to a substantial risk of incurring
double, multiple or otherwise inconsistent obligations by reason of the claimed
interest. Fed.R.Civ.P. 19(a). The dispute in the case at bar involves Rule
19(a)(2)(i) which addresses whether the absent party is adequately
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represented in the action. This question parallels the inquiry under Rule 24(a),
intervention of right, of whether a party's interests are inadequately
represented by the existing parties. SHERMOEN V. UNITED STATES, 982 F.2d 1312,
1318 (9th Cir.1992), CERT. DENIED, 113 S.Ct. 2993 (1993). The purpose of Rule
19(a)(2)(i) "is to protect the legitimate interests of absent parties, as well
as to discourage multiplicitous litigation." UNITED STATES EX REL. MORONGO BAND
OF MISSION INDIANS V. ROSE, 34 F.3d 901, 908 (9th Cir.1994).
In the case at bar, the district court did not err by proceeding with the
case in the absence of Hyde Park. As discussed above, the interest of the
partnership entity was indistinguishable from the interest of its general
partner, Sahni, who was already a party to the litigation. Nonetheless, the
district court fashioned a remedy to ensure the protection of the individual
limited partners' interests which may have been impaired by the appointment of
the receiver. The apparent identity of interest between Sahni and the limited
partnership compels the conclusion that Hyde Park was not a necessary party who
needed to be joined if feasible. Therefore, Hyde Park was not an indispensable
party.
CONCLUSION
The district court's denial of Hyde Park's motion to intervene is AFFIRMED.
Since we hold that the district court did not err in denying Hyde Park's motion
to intervene, we do not reach the issue of whether the district court erred in
appointing a receiver.
FN* This disposition is not appropriate for publication and may not he
cited to or by the courts of this Circuit except as provided by 9th
Cir.R. 36-3.
FN1. Hyde Park's complaint in intervention was filed against Strack.
the receiver, not against the FDIC. This may help explain why the
district court order stated: "The limited partners are invited,
however. To participate on their own behalf in ADC V. STRACK, to
protect the interests they have in their contributions to and income
from Hyde Park Apartment. The limited partners may file documents in
such case to set forth their positions."
FN2. The FDIC did not address this issue in its brief on the ground
that Hyde Park could not raise the issue on appeal because Hyde Park
did not list the issue in its motion to appeal and Hyde Park does not
have standing. Nonetheless, we address the issue because an appellate
court can raise the issue of indispensable parties sua sponte to
protect the interests of the absent party. PIT RIVER HOME AND AGRIC.
COOP. ASS'N V. UNITED STATES, 30 F.3d 1088, 1099 (9th Cir.1994).
81 F.3d 167 (Table), 1996 WL 138558 (9th Cir.(Cal.)), Unpublished Disposition
END OF DOCUMENT
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(KeyCite History)
Only the Westlaw citation is currently available.
UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.
Court of Chancery of Delaware.
GIBRALT CAPITAL CORPORATION, FOR
ITSELF, AS CLASS REPRESENTATIVE AND
DERIVATIVELY ON BEHALF OF DMMMOND
FINANCIAL CORPORATION, A DELAWARE
CORPORATION, PLAINTIFF,
V.
MICHAEL J. SMITH, JIMMY S.H. LEE, ROY
ZANATTA, OQ-HYUN CHIN, AND MFC
BANCORP,
LTD.,
AND
DRUMMOND FINANCIAL CORPORATION, A
DELAWARE CORPORATION, SOLELY as A NOMINAL
DEFENDANT.
NO. 17422.
Submitted Jan. 22, 2001.
Decided May 8, 2001.
Revised May 9, 2001.
Stephen E. Jenkins and Richard D. Heins, of Ashby & Geddes, Wilmington,
Delaware; for Plaintiff.
Brett D. Fallon, of Morris, James, Hitchens & Williams, LLP, Wilmington,
Delaware; and James V. Keamey, of Latham & Watkins, New York, New York; for
Defendants Michael J. Smith, Jimmy S.H. Lee, Roy Zanatta, Oq-Hyun Chen and MFC
Bancorp Ltd.
John L. Reed, of Duane, Morris & Heckscher, LLP, Wilmington, Delaware; for
Nominal Defendant Drummond Financial Corporation.
MEMORANDUM OPINION
JACOBS, Vice Chancellor.
*1 A shareholder of Drummond Financial Corporation ("Drummond" or "the
Company") brings this action both individually and derivatively on Drummond's
behalf. The plaintiff claims that the defendants, who controlled Drummond,
effected numerous self-dealing stock and bond transactions designed specifically
to bleed the Company of its cash. The plaintiff also claims that the defendants
usurped a corporate opportunity belonging to Drummond. The plaintiff seeks
damages and equitable relief, including the appointment of a liquidating
receiver.
The defendants have moved to dismiss the complaint for failure to state a
claim and for lack of personal jurisdiction over Drummond's controlling
stockholder. This is the Opinion of the Court on that motion.
I. FACTUAL BACKGROUND
The facts recited herein are based on the well-pled allegations of the
complaint.
This lawsuit grows out of an earlier action brought by the plaintiff,
Gibralt Capital Corporation (the "plaintiff"' or "Gibralt"), to inspect
Drummond's books and records under 8 DEL. C. ss. 220. Based on the documents
produced in that action, Gibralt commenced this lawsuit. After the defendants
moved to dismiss the original complaint, Gibralt filed an Amended and
Supplemental Derivative and Class Action Complaint and Petition For a Receiver
(the "complaint"), which is the subject of the pending motion to dismiss.
A. The Parties
Gibralt is a shareholder of Drummond, and at all relevant times has held
approximately 2 1 % of Drummond's common stock.
Drummond, which is a nominal defendant, is a Delaware corporation whose
principal place of business is currently Geneva, Switzerland. Drummond's
business activities have included merchant banking and asset-based commercial
lending. Drummond stock is listed on the NASDAQ system, but trades infrequently.
Besides Drummond, Gibralt has named five defendants, four of which are
Drummond
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directors: Michael Smith ("Smith"), Jimmy Lee ("Lee"), Roy Zanatta ("Zanatta"),
and Oq-Hyun Chin ("Chin").
Smith is Chairman, President and Chief Financial Officer of Drummond, and
has been a director since March 1995. Since June 1996, Smith has also been the
President and a director of the corporate defendant, MFC Bancorp, Ltd. ("MFC"),
which is Drummond's controlling stockholder. By virtue of those positions, Smith
controls Drummond. In late 1996, Mr. Smith became a director of Ichor
International ("Ichor"), a publicly traded company that was a controlled
subsidiary of Drummond; and he was also a director of Logan International
Corporation ("Logan"), a State of Washington corporation that is controlled by
MFC.
Defendant Lee who is a citizen of the Republic of Korea, was appointed to
Drummond's board in March 1995, but stepped down in late 1996 or early 1997.
[FN1] Lee also was a director of Logan.
FN1. Complaint. at P. 12.
Defendant Zanatta is a Canadian citizen who at all relevant times was vice
president, secretary and one of Drummond's three directors. Zanatta is also an
employee and director of MFC, which paid him over $293,000 of compensation in
1998, and awarded him options for 125,000 MFC shares during the three years
before this action was filed. Zanatta is also an officer and director of several
other companies that Smith controls.
*2 Defendant Chin, a citizen of the Republic of Korea, is the: third
current director of Drummond. Chin is also a director of MFC.
The fifth defendant, MFC, is alleged to own a majority of the voting stock
of Drummond, and to have exercised actual control over Drummond since at least
June 1996. MFC is controlled and dominated by Smith.
B. The Challenged Transactions
1. THE PREFERRED STOCK TRANSACTIONS
A major subject of the complaint is a series of transactions by which the
defendants gained 76% voting control over the Company. In June 1996, MFC
obtained a large minority stock interest that represented effective control over
Drummond. MFC could not acquire more than 35% voting control at that point,
however, because of an anti-takeover provision in a bond indenture between
Drummond and its bondholders. The defendants could gain voting control only by
eliminating that indenture provision, which they did by means of the
transactions next described.
First, in June 1996, the defendants caused Drummond to issue 3 million
shares of preferred voting stock, worth $6 million, to MFC. Simultaneously, the
defendants caused Drummond to purchase $6 million of preferred stock in Logan,
which MFC effectively controlled. Immediately thereafter, the defendants caused
Logan to purchase $6 million of MFC's preferred stock. The end result of this
"round robin" was 'that each of these entities ended up with the same amount of
capital, that it had before the transaction, yet MFC was able to gain control of
Drummond without spending any of its own funds, by virtue of the voting
preferred stock Drummond had issued to MFC.
To give this transaction legal effect, MFC caused Drummond to file, with
the Delaware Secretary of State, a certificate of designation for the
newly-issued preferred stock. That certificate provided that each of those.
three million preferred shares had one vote. The certificate further provided,
however, that no single stockholder could hold more than 35% of the Company's
voting stock unless the indenture was amended.
Next, in the fall of 1996, the defendants caused Drummond to enter. into an
agreement with the agent for the Company's bondholders, which permitted the bond
indenture to be amended to allow MFC to control up to 49% of the Company's
voting stock. Finally, in 1998, MFC acquired all of Drummond's outstanding bonds
at a discount, which purchase enabled MFC to amend the indenture to eliminate
the voting power restriction altogether. That
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enabled MFC to increase its voting power in Drummond to its present 76% level.
In this manner, Gibralt claims, MFC acquired absolute control over Drummond
without paying a control premium. Indeed, Gibralt argues, by virtue of these
circular preferred-stock transactions, MFC effectively acquired absolute control
of Drummond for nothing. Gibralt also claims that two material facts, namely,
(i) MFC's use of the Drummond preferred stock to acquire absolute control of the
Company by modifying the indenture, and (ii) Logan's acquisition of MFC
preferred stock to complete the circular transactions that resulted in MFC
obtaining control over Drummond-were not disclosed to Drvmmond's stockholders.
2. THE ICHOR TRANSACTIONS
*3 After the defendants established control over Drummond and Logan, they
next effected a series of complex transactions that gave MFC majority control
over a Drummond subsidiary, PDG Remediation, Inc., now called Ichor Corporation
("Ichor"). The complaint alleges that the defendants (i) caused Ichor to issue
preferred stock to WC and its affiliates on. questionable terms, and (ii) caused
Drummond to sell approximately 17% of its Ichor stock: to the defendants and/or
their affiliates at a deep discount. These transactions were not disclosed to
Drummond's stockholders either.
3. THE SALE OF THE ENVIRONUR LOAN TO LOGAN
In the fall of 1996, Drummond had an outstanding loan receivable from
Enviropur Waste Refining and Technology, Inc. ("Enviropur"). That loan was
secured by, among other things, the assets of a waste-oil recycling facility
located in Illinois. In December 1996, MFC and Smith caused Logan (then
controlled by MFC) to buy the Enviropur loan from Drummond (also controlled by
MFC) for $2.4 million.
Logan immediately then sold the loan to Ichor, which then was also majority
controlled by Drummond. [FN2] In exchange, Ichor gave Logan a promissory note
for $1.4 million, that carried an 8% interest rate; plus 2.5 million shares of
Ichor common stock. As a result, Logan obtained 50.3% voting control of Ichor.
Moreover, Logan received from Ichor consideration worth $3 million, for an asset
Drummond had sold to Logan only moments before, for $2.4 million. [FN3] Thus,
plaintiff claims, $600,000 of immediate value, as well as voting control of
Ichor, were transferred from Drummond to Logan for no consideration in a
transaction that could have been structured to benefit Drummond. That is,
Drummond, rather than Logan, could have received the promissory note and the
Xchor stock that Ichor had transferred to Logan to acquire the loan. Had that
been done, plaintiff alleges, Drummond would have maintained majority control of
Kchor.
FN2. The boards of all three companies were controlled by MFC. Smith
and Zanatta. In addition, Lee sat on the Logan board.
FN3. Assuming that the Ichor shares issued to Logan were valued at S
.82 per share-the price Drummond paid for its Ichor stock only weeks
before this transaction-and that the promissory note was valued at
par. ($1.4 million).
The only disclosure of this transaction that was made to Drummond
shareholders '(months later, when the Company filed its Form 10Q on February 14,
1997) was the fact that Drummond had sold the loan to Logan. Smith, Zanatta and
MFC knew that fact, yet did not cause Drummond to disclose that Logan had
immediately resold the loan to Ichor for a $600,000 profit.
4. THE DRUMMOND BOND TRANSACTIONS
In 1997, the defendants caused the Company to repurchase Drummond bonds
from MFC or its affiliates at a substantial premium. That repurchase cost the
Company millions of dollars. In addition, in 1998 MFC launched an "exchange
offer" whereby MFC offered to exchange its own bonds, having an aggregate par of
$16 million, for the outstanding Drummond bonds worth approximately $26 million.
Although the Company received no
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benefit from that exchange offer, Drummond, not MFC, paid the costs of the
offer. The party that benefited was MFC, which obtained the bonds at a discount,
partly by the use of confidential financial information about the Company.
5. OTHER TRANSACTIONS
*4 In addition to the transactions previously described, the complaint
claims other breaches of duty allegedly committed by the defendants.
Specifically, Smith repeatedly caused Drummond to invest in the securities of
MFC and Mercer with no benefit to Drummond; and he also caused Drummond to make
large, interest-free loans to affiliates of MFC. For example, in 1997, the
Company was caused to make interest-free loans and "advances" to Sutton Park. On
June 30, 199'7 Drummond was caused to make identical $4.7 million advances to
"Blake Limited" and "Harping Management," two entities apparently affiliated
with Smith. The defendants are also charged with having caused Drummond to pay
excessive fees, commissions and other expenses to MFC, Smith, Zanatta and
others.
* * *
These transactions form the subject matter of the complaint. The relief
that Gibralt requests includes damages, an accounting, and the appointment of a
receiver to manage Drummond. As earlier noted, the defendants have responded by
moving to dismiss for failure to state a claim and for lack of personal
jurisdiction over MFC. The bases for this motion are next discussed.
II. THE PARTIES' CONTENTIONS AND THE GOVERNING LAW
The complaint alleges two sets of claims. The first is that the defendants
failed to disclose to the Drummond shareholders material facts relating to the
self-dealing transactions described above. The second set of claims attacks the
self-dealing transactions themselves, as constituting breaches by the defendants
of their fiduciary duties owed to Drummond and its shareholders.
The defendants challenge to the complaint is two-fold. First, the
defendants argue that the Court lacks personal jurisdiction over MFC, which is
said to be a foreign corporation having no ties to Delaware. Second, the
defendants contend that all but two of the nine Counts of the complaint fail to
state a claim upon which relief may be granted. [FN4] Specifically, the
defendants urge that Gibralt's disclosure claims should be dismissed because the
alleged non-disclosures were not material, and because the pled facts are
insufficient to support an inference of materiality. In addition, the defendants
argue that the substantive fiduciary duty claims are themselves not legally
cognizable.
FN4. Counts III and IV are not contested by the defendants at this
stage, and will therefore not be discussed. In addition, two claims
under Court II, found at P. 74 (a) and (f) of the complaint. are
similarly not contested or addressed.
A motion to dismiss for lack of jurisdiction under Court of Chancery Rule
12(b)(2) presents a factual matter that may be resolved on the basis of the
complaint or evidence extrinsic to the complaint. Thus, a Rule 12(b)(2) motion
differs from a Rule 12(b)(6) motion in that the Court is not constrained simply
to accept the well pleaded allegation of the complaint as true. [FN5]
FN5. SEE, HART HOLDING CO. V. DREXEL BUNRHAM LAMBERT INC., Del. Ch.,
593 A.2d 535.538 (199 1). In this case the motion is resolved on the
basis of the allegations of the complaint, as no extrinsic evidence
has been presented.
On a motion to dismiss under Court of Chancery Rule 12(b)(6), however, the
Court must take the well-pled facts of the complaint as true and construe them
in the light most favorable to the non-moving party. [FN6] A complaint will be
dismissed only where it appears with reasonable certainty that under no set of
facts that could be proven to support the claims asserted, would the plaintiff
be entitled to relief? [FN7] The Rule 12(b)(2) and 12(b)(6) issues are analyzed
in accordance with
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These standards.
FN6. IN RE TRI-STAR PICTURES, INC. LITIG., Del.Supr., 634 A.2D 319,
326 (1993).
FN7. ID.
III. ANALYSIS
A. Whether This Court Has Personal jurisdiction Over MFC
1. UNDER THE DELAWARE LONG; ARM STATUTE
*5 The Court first addresses the threshold issue of whether this Court has
personal jurisdiction over MFC, the corporate defendant. MFC argues that Gibralt
cannot establish personal jurisdiction over it in Delaware, because the
complaint fails to allege facts that satisfy any of the six jurisdictional
criteria in 10 DEL. C. SS. 3 104, Delaware's general long arm statute.
The plaintiffs claim of personal jurisdiction over MFC rests upon only one
of the statutory categories, namely, that MFC "transacted business in Delaware."
[FN8] Gibralt argues that by causing Drummond to amend its charter twice, first
to expand the Company's authority to engage in other lines of business and
second, to designate the terms of the preferred stock; and also by otherwise
exercising control over Drummond, MPC "transacted business" in Delaware within
the meaning of ss. 3 104(C)(L).
FN8. 10 DEL. C. $3104(C)(1).
MFC responds that the 'business" that it allegedly transacted in Delaware,
namely, causing Drummond to amend its charter, does not constitute "doing
business" within the meaning of the statute. On this issue MFC has the better
side of the argument.
As was stated in UNITED STATES V. CONSOLIDATED RAIL CORP., "[tlhe language
of [ss. 3 104(C)(L) ] requires that some action BY THE DEFENDANT occur within
the state". [FN9] Here, it is not alleged that MFC took action in Delaware, but
only that MFC caused another person to take action in Delaware. The only
connection alleged between MFC and Delaware is MFC's ownership of a controlling
interest in Drummond stock. As a general rule, ownership of stock in a Delaware
corporation, without more, will not suffice to establish general IN PERSONAL:
jurisdiction. [FN10] Although transactions between NYC and Drummond did occur,
none of those transactions are alleged to have taken place in Delaware. For that
reason, I conclude that personal jurisdiction over MFC cannot be predicated upon
the Delaware long arm statute, unless MFC can be deemed to have transacted
business "through an agent" in Delaware. [FN11)
FN9. 674 F.Supp. 138,142 (D.Del. 1987) (emphasis added).
FN10. OUTOKUMPU ENG'G ENTERS., INC. R. KVAERNER ENVIROPOWER-, INC.,
Del.Super., 685 A.2d 724 n. 1 (1996).
(1) Transacts any business ... in the State:" (emphasis added).
FN11. 10 DEL. C. SS. :3104(c)(1): [A] court may exercise personal
jurisdiction over any nonresident ... who in person OR THROUGH AN
AGENT:
2. UNDER THE CONSPIRACY THEORY
The theory upon which the plaintiff seeks to obtain personal jurisdiction
over MFC under the agency standard of ss. 3 104(cXl) is predicated on the common
law "conspiracy theory" of jurisdiction. Under that theory, a nonresident
defendant who conspires with a defendant that is subject to jurisdiction in
Delaware, to breach a duty owned to the: plaintiff, would also be subject to IN
PERSONAL: jurisdiction in Delaware. [FN12] If Gibralt is able to satisfy the
conspiracy theory, jurisdiction under the long arm statute would be proper
because the acts of NYC's co-conspirators in Delaware would satisfy the agency
standard under ss. 3 104(c)(l).
FN 12. As this Court has held, "[t]he conspiracy theory works well in
tandem with ss. 3 104 because a conspiracy analysis is relevant to
determining whether a person has committed acts satisfying ss. 3104
'through an agent.' " HMG/COURTLAND
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PROPERTIES, INC. V. GRAY, Del. Ch., 729 A.2d 300, 307 (1999).
To establish personal jurisdiction over MFC under the conspiracy theory, a
plaintiff must show that:
(1) a conspiracy to defraud existed; (2) the defendant was a member of that
conspiracy; (3) a substantial act or substantial effect--in furtherance of
the conspiracy occurred in the forum state; (4) the defendant knew or had
reason to know of the act in the forum state or that acts outside the forum
state would have an effect in the forum state; and (5) the act in, or
effect on, the forum state was a direct and foreseeable result of the
conduct in furtherance of the conspiracy. [FN13]
FN13. INSTITUTO BANCARIO ITALIANO SPA V. HUNTER ENG'G CO., Dep.Supr.,
449 A.2d 210,225 (1982).
*6 I am satisfied, for the following reasons that the plaintiff has
established that MFC meets all of these requirements.
FIRST, the complaint alleges that a conspiracy existed to obtain majority
control of Drummond by amending Drummond's charter to authorize the creation of
new preferred stock, tiling the certificate of designation in Delaware, and then
issuing the preferred stock to MFC. Specifically, MFC first caused Drummond to
amend its charter to allow it to engage in "any lawful activities." That
amendment was required to enable Drummond to enter into the merchant banking
business. The existence and significance of the conspiracy is alleged to be as
follows:
as a crucial part of their stripping of Drummond's assets,... MFC ...
caused Drummond to amend its certificate of incorporation to allow the
Company to engage in 'any lawful activity.' The ... primary purpose for
this amendment was to allow MFC to gain access to Drummond's cash." [FN14]
FN14. Complaint, at P. 17.
Next, MFC caused Drummond to amend its charter a second time, by its
filing a certificate of designation defining the terms of the preferred stock
that the defendants caused Drummond to issue to MFC.
SECOND, the complaint alleges that MFC was a member of the conspiracy. It
was MFC that is claimed to have caused the Drummond board to undertake the
charter amendment and file the certificate of designation.
THIRD, the filing of the certificate of amendment and the certificate of
designation "constituted ... act(s) within the State of Delaware and one step in
a part of a conspiracy that allowed the defendants to take other wrongful acts
that allowed them to gut Drummond." [FN15) That is, the filing of the two
certificates were substantial acts in furtherance of the conspiracy-acts that
took place in Delaware and satisfy ss. 3 104(c)(l).
FN15. Complaint, at P. 17.
FOURTH, it is alleged that MFC knew of the acts that occurred in Delaware
and knew that those acts would have an effect in the forum state; otherwise, MFC
would have had no reason to cause Drummond to amend its charter.
Fifth, those amendments are what enabled the defendants to exercise control
over Drummond and, ultimately to accomplish the self-dealing transactions by
which Drummond was stripped of its assets. Specifically, the complaint alleges
that in 1996, MFC acquire 48% of the outstanding common stock of Logan. In mid-
1996, MFC gained effective control over Drummond, and thereafter, used its
control over Logan and Drummond to gain absolute voting control of both
corporations, by having each company issue new preferred shares having almost
identical economic terms. [FN16)
FN16. MFC bought $6 million of Drummond voting preferred stock;
Drummond bought $6 million of Logan voting preferred stock; and Logan
bought $6 million of MFC preferred stock. Through these circular
issuances of preferred stock, MFC obtained majority control over
Logan, and eventually obtained majority control over Drummond as well.
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MFC caused Drummond to file a certificate of designation, signed by
defendant Lee, for the newly issued shares in July 1996. That filing is claimed
to have constituted a wrongful act within Delaware, and is an integral part of
the chain of events that led to MFC's eventual seizure of absolute control over
Drummond in the fall of 1996. That seizure would not have been legally possible
without the certificate amendments and the filing of the certificate of
designation.
* * *
*7 I am mindful that the "conspiracy theory" is not invoked lightly, and
has only rarely been invoked successfully as a basis for attributed personal
jurisdiction under ss. 3 104(c)(l). The complaint in this case, however, alleges
facts that are sufficient to implicate that theory of personal jurisdiction as
to MFC. The defendants' motion to dismiss MFC for lack of personal jurisdiction
will therefore be denied.
Having resolved the jurisdictional issue, I next address the defendants'
several challenges to the legal sufficiency of the plaintiffs claims for relief.
B. The Disclosure Claims
Count VIII of the complaint alleges that the defendants violated their
fiduciary duty of disclosure in various respects. Specifically, the complaint
claims that the defendants, when seeking election to the Drummond board, had a
duty to disclose their many conflicts of interest, which duty the defendants
breached by electing to disclose only sorne of those conflicts and to conceal
the rest from Drummond's stockholders. In addition, the plaintiff alleges five
other disclosure violations, which arise out of: (1) the Logan purchase of the
MFC preferred stock, (2) the sale of the Enviropur loan to Logan, (3) the
omission to report all self-dealing transactions involving fees, commissions and
other items, (4) the omission to disclose a $14 million loan by Drummond to
MFC, only $12 million of which was repaid, and (5) the omission to disclose the
terms of the bond repurchase program.
For a duty of disclosure claim to survive a motion to dismiss, a plaintiff
must allege that the fiduciary (i) disseminated (ii) materially false and
misleading information (iii) resulting in (iv) injury to the stockholders.
[FN17] The defendants argue that the complaint fails to meet this standard,
because it does not sufficiently plead that Drmnmond stockholders would have
considered any of the alleged self-dealing transactions to be material. In
addition, the 'defendants contend, the complaint fails to plead that Drummond
stockholders suffered any actual, quantifiable damage that resulted from any of
the omitted disclosures.
FN17. SEE MALONE R. BRINCAT, Del.Supr., 722 A.2d 5, 9. 12 (1998); SEE
ALSO O'REILLY V. TRANSWORLD HEALTHCARE, INC., Del. Ch., 745 A.2d
902, 920 (1999).
The plaintiff responds that the complaint establishes that the nondisclosed
facts were material because by concealing those facts the defendants were able
to continue engaging in self-dealing transactions at the Company's expense.
Moreover, Gibralt claims, had Drummond's stockholders been told of the
transactions, they could have waged a proxy fight to wrest control of the
Company or, alternatively, sued to enjoin the transactions rather than having to
bring this action for damages after the fact. In addition, the plaintiff
contends that it has adequately pled damage to Drummond and its stockholders,
because the complaint alleges that as a result of these transactions, Drummond
was rendered insolvent.
The complaint, in my view, adequately alleges breaches of the defendants'
fiduciary duty of disclosure. That pleading makes it clear that the defendants
disclosed some, but not all, of their self-interested transactions. An omitted
fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote. [FN18] The
plaintiff must show a substantial likelihood that the disclosure of the omitted
fact would have been
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viewed by the reasonable investor as having significantly altered the
"total mix" of information made available. [FN19] Although the complaint does
not state IN HAEC VERBA that the undisclosed transactions were material, their
materiality is inferable from the facts that are alleged, namely, that (a) the
concealment of the undisclosed information enabled the defendants to continue
engaging in self-dealing transactions at the Company's expense, and (b) had the
plaintiff and Drununortd's other public stockholders been aware of these
transactions, that knowledge would likely have influenced how the plaintiff and
Drummond's other public stockholders voted. Finally, the nondisclosures, by
keeping Gibralt in the dark, prevented it from taking any corrective action such
as filing an action for injunctive: relief or waging a proxy fight for control
of the Company. For these reasons, I find that the plaintiff has adequately pled
that the alleged undisclosed facts were material.
FN18. TSC INDUSTRIES V. NORTHWAY AV, INC., 426 U.S. 438. 96 S.Ct.
2126 48 L.Ed.2d 757 (1976) (cited with approval in ROSENBLATT V.
GETTY OIL CO., Del.Supr., 493 A.2D 929, 944-45 (1985).
FN19. SEE, LOUDON V. ARCHER-DANIEL+MIDLAND COMPANY, Del.Supr.. 700
A.2D 135, 143 (1997).
*8 The complaint also fairly alleges resulting injury to the Company and
its shareholders. The plaintiff describes a series of transactions undertaken by
the defendants that systematically looted Drummond and drove it into insolvency.
Taking these allegations as tru-as I must on this motion-they show that the
plaintiff was significantly damaged by the loss in value of its investment that
was caused by the defendants' wrongdoing.
For the preceding reasons, Count VIII of the complaint states cognizable
disclosure claims and will not be dismissed.
C. Whether a Receiver Should Be Appointed
Count IX of the complaint asserts a claim for the appointment of a
liquidating receiver for an insolvent corporation under 8 DEL. C. SS. 291.
A corporation is insolvent for purposes of ss. 291 if(i) it is unable to pay
its current expenses as they mature in the usual course of business; or (ii) it
suffers a deficiency of assets below liabilities (i.e., a negative net worth)
with no reasonable prospect that the business can be continued in the face
thereof. [FN20]
FN20. SEE, BANKS V. CHRISTINA COPPER MINES, INC., Del. Ch., 99 A.2d
504 (1953), SEE ALSO SIPLE V. S & K PLUMBING & HEATING, INC., Del.
Ch.. C.A. No. 6731, Brown, V.C. (April 13, 1982).
The defendants contend that Gibralt's claim for the appointment of a
receiver must be dismissed, for two reasons. First, they argue that the
complaint makes no allegation of insolvency, in the sense that the Company is
unable to meet its expenses as they come due. Second, defendants argue that the
complaint pleads no threatened imminent loss that can be remedied only by a
receivership.
The plaintiff responds that the complaint does allege that the Company is
insolvent, and that two of the defendants have so admitted. [FN21] Gibralt
further argues that a receiver is necessary because the defendants continue to
control the company and it is they who drove Drummond into insolvency.
FN21. Complaint at P.P. 64 and 88.
In my view, the claim to appoint a receiver is legally sufficient. The
complaint alleges that Drummond is insolvent: it states that "[i]f Drummond pays
the note to MFC, there will be nothing left of Drummond," [FN22] and that "Mr.
Zanatta flatly told Gibralt that Drummond intended to eventually redeem all of
the bonds from MFC at par, which he acknowledges will leave essentially no value
in the company." [FN23] The plaintiff has also sufficiently pled that the
activities of the defendants, detailed elsewhere in this Opinion, are what
placed Drummond in its current financial crisis. Lastly, a receivership is the
only remedy that will oust the defendants from their controlling positions in
Drummond. For those reasons, the claim for appointment of a liquidating receiver
survives this dismissal motion.
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FN22. Complaint. at P. 88.
FN23. Complaint, at P. 64.
D. Whether the Bond Exchange Usurped A Corporate Opportunity of Drummond
In Count VI, the plaintiffs claim that in March 1998 MFC exchanged
approximately $18 million of its own bonds for Drummond bonds worth $26 million.
The Drummond bonds MFC acquired were later exchanged for a promissory note
secured by all of Drummond's assets. Drummond paid all the costs of, yet it
received no benefit from, that exchange. Ratlher, Gibralt alleges, because the
defendants had previously stripped the Company of its cash, Dru mmond was
rendered unable to take advantage of the opportunity to buy back its own bonds
at the then-low market price. Instead, the defendants captured that opportunity
for themselves and forced Drummond to pay their expenses, which conferred no
benefit on the Company. As a consequence of this wrongdoing, the plaintiff
claims, Drummond is entitled to an order canceling the promissory note and
reimbursing it for all the transaction costs the Company was forced to incur.
*9 The defendants respond that the complaint states no cognizable claim,
because it alleges no facts that Drummond was financially able to repurchase its
own bonds in early 1998. [FN24] Moreover, the defendants urge, the allegation
that Drummond lacked sufficient funds because of the defendants' wrongdoing is
both legally irrelevant and an admission that is fatal to the corporate
opportunity claim.
FN24. SEE BENEROFE V. CHA, Del. Ch., C.A. No. 14614, Chandler, C.,
Mem. Op. at 10 (Feb. 20, 1998) (to state a claim for usurpation of
corporate opportunity, plaintiff must allege that corporation had
ability to exploit allegedly misappropriated opportunity).
I concur that the plaintiff has not stated a cognizable claim for
usurpation of a corporate opportunity. To plead such a claim, the plaintiff must
plead (INTER ALIA ) facts that demonstrate that the company had the financial
means to take advantage of the alleged opportunity. [FN25] The pled facts
clearly show that Drununond did not have enough cash to repurchase all or even
some of the bonds at the time MFC purchased them. For that reason, insofar as it
alleges usurpation of a corporate opportunity, Count VI cannot survive this
motion.
FN25. SEE ID.
Although Count VI does not state a cognizable claim for usurpation of a
corporate opportunity, it does not follow that that Count must be dismissed.
Conduct that does not run afoul of the corporate opportunity doctrine may
nonetheless constitute a violation of the broader, and more fundamental,
fiduciary duty of loyalty. [FN26] The conduct alleged in Count VI appears to be
of that character. At this stage the Court cannot conclude as a matter of law
that the pled facts would not justify a grant of relief under any circumstances.
Accordingly, insofar as Count VI alleges a breach of the defendants' fiduciary
duty of loyalty, that claim will stand.
FN26. See, e.g., Johnston v. Greene. Del.Supr., 121 A.2d 919 (1956).
E. The 1997' Bond Repurchase
In Count V, the plaintiff alleges that in May 1997, Drummond was caused to
repurchase $14.4 million of its bonds for approximately $13.4 million-an amount
that was significantly higher than the prevailing market price. [FN27] The bonds
were repurchased from MFC and its affiliates, which previously had purchased
those bonds at prices significantly below $13.4 million. Gibralt alleges that
the purpose of this self-dealing repurchase transaction was to funnel money to
MFC and its affiliates at the expense of Drummond. In the alternative, the
plaintiff claims that the bond repurchase constituted waste.
FN27. Drummond is alleged to have paid S82 per hundred, significantly
above the market price, which
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ranged from $54.50 to $72.50 per hundred for the quarter ending June
30, 1997. Complaint, at P. 52.
The defendants respond that Gibralt has not stated a cognizable claim for
self-dealing, because its allegations neither directly state, nor permit an
inference, that the defendants and their affiliates were the sellers of the
bonds. [FN28] Because the Court cannot infer that the defendants were the
sellers, the defendants argue, the only claim that is alleged is waste. That
claim, defendants insist, cannot survive because the complaint does not allege
that the price Drummond paid for these bonds was above market, or otherwise was
so excessive as to satisfy the demanding test for corporate waste.
FN28. MCMILLAN V. INTERCARGO CORP., Del. Ch., C.A. No. 16963, Strine,
V.C., Mem. Op. at 15 (April 20, 2000) ("neither inferences nor
conclusions of fact unsupported by allegations of specific facts ...
are accepted as true") (quoting IN RE LUKENS INC. SHAREHOLDER LITIG.,
Del. Ch.. Cons.C.A. No. 16102, Lamb, V.C., Mem. Op. at 10-11 (Dec. 1,
1999)).
I find, contrary to the defendants' position, that the complaint's
allegations raise the inference that MFC was the seller of the bonds. The
complaint specifically pleads that MFC was the seller of some of the bonds.
[FN29] It further alleges that MFC's financial statements disclose the sale of a
large block of Drummond bonds, [FN30] and that the plaintiff communicated with
every other large Drummond bondholder, each of which denied that it had sold
the bonds to Drummond at a premium. Indeed, those bondholders told the
plaintiff that the Company had never approached them about a possible bond
repurchase. [FN31] Because the other large bondholders were not the sellers, it
is logically inferable, by process of elimination, that the seller was MFC- the
only other large bondholder. That being the defendants' only argument, the claim
survives the motion to dismiss. [FN32]
FN29. Complaint. at P. 55.
FN30. ID.
FN3I. ID. at P. 54.
FN32. Because the Count survives as a claim for breach of fiduciary
duty, the Court need not address whether Count V also states a legally
sufficient claim for waste.
F. The Preferred Stock Issuance
1. THE THREE-STEU-ACQUISITION OF CONTROL OF DRUMMOND
*10 Count I claims that the defendants breached their fiduciary duty in
connection with MFC's acquisition of control of Drummond. More specifically,
Count I alleges that the issuance of voting preferred stock to MFC violated the
defendants' fiduciary duties to the Drummond minority, because the transaction
had no economic substance and was designed solely to enable MFC to capture
absolute control of Drummond without paying a control premium. The plaintiff
alleges that Smith (who controlled and was a director of both MFC and Drummond),
Zanatta (who was an employee of MFC), and Lee (who had substantial ties to
Smith) all had material conflicts of interest when they voted to approve the
transactions. Therefore, Gibralt urges, the defendants breached their fiduciary
duties of loyalty by approving this self-dealing transaction that conferred no
benefit on Drummond.
The defendants respond, first, that the claim is barred by the doctrine of
laches and the three-year statute of limitations in 10 DEL. C. ss. 8106, because
(i) the transaction was fully and completely disclosed to Drummond stockholders
in Drummond's June 27, 1996 Form 8-K, yet (ii) the original complaint was not
filed until September 17, 1999, over three years later. Gibralt responds that
this claim is not barred by the statute of limitations or laches, because the
claim was equitably tolled until such time as the stockholders learned or should
have discovered the breach of duty. [FN33]
FN33. Plaintiff relies on KAHN V. SEABOARD CORP., Del. Ch., 625 A.2d
269 (1993).
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At this stage I am unable to conclude as a matter of law that this claim is
time-barred, because the complaint alleges facts that implicate the doctrine of
equitable tolling. It is correct that more than three years elapsed between the
first of the series of transactions complained of, and the filing of the
original complaint. The issuance of the preferred stock was only the first step
in a series of transactions, accomplished by defendants, whereby MFC obtained
absolute control over Drummond. But, there also were other steps: the defendants
caused Drummond to purchase $6 million of Logan preferred stock, and then caused
Logan to purchase $6 million of MFC stock. By means of these three transactions,
MFC gained absolute control over both Drummond and Logan. The first two of these
transactions were publicly disclosed. The problem for defendants is that
material facts about the third were not.
Specifically, the defendants did not disclose the Logan purchase of MFC
stock. Had defendants done that, then the true nature of the transaction would
have been apparent-the seizure of control, in which event the shareholders would
have been on inquiry notice of a potential claim of wrongdoing. But, the
defendants' nondisclosure of Logan's participation enabled the other two
components of the three-part transaction --which were disclosed-to be portrayed
(misleadingly) as simply an investment by MFC in Drummond that enabled Drummond
to invest the proceeds in Logan securities.
The disclosure of one component of this transaction cannot operate to put
the stockholders on notice of a claim that the entire transaction constituted
a-- breach of duty. [FN34] Here, the entire three-step transaction is what is
said to constitute the alleged breach of duty. Because the third step was not
disclosed, the statute of limitations was equitably tolled as to the entire
claim until such time as the stockholders were properly put on notice that a
potentially actionable wrong had been committed. [FN35] What is uncertain on the
present record is the precise time when the stockholders of Drummond were put on
inquiry notice. Because that is a factual matter which cannot presently be
determined from the complaint, Count I will not be: dismissed on the basis that
it is time-barred.
FN34. IN RE MAXXAM, INC. /FEDERATED DEVELOPMENT STOCKHOLDER
LITIGATION, Del. Ch. Consol. C.A. No. 12111, Jacobs, V.C., Mem. Op. at
17, n.5 (June 21, 1995).
FN35. Because the plaintiffs delay in bringing this action is
attributable to the defendants' nondisclosure of facts that would have
alerted the plaintiff to the existence of a claim, the delay was not
"unreasonable." and therefore the defense of laches would not apply.
2. MODIFICATION OF THE INDENTURE
*11 The second claim alleged in Count I is that the defendants breached
their fiduciary duty by modifying Drummond's bond indenture to delete its anti-
takeover provision. The defendants argue that Drummond's shareholders lack
standing to assert this claim, because the eliminated provision protected
bondholders, not stockholders. In addition, defendants urge, the complaint
alleges that MFC, which owned 35% of Drummond's voting stock, already had
effective voting control at the time of the indenture revision, and that after
the modification, MFC owned 49%. Thus, the defendants argue that because the 14%
increase in MFC's voting power had no practical effect on its already formidable
ability to influence Drummond's actions, the bond indenture modification caused
no harm to the stockholders. Indeed, defendants say, the complaint does not
allege that the amendment was either unfair to Drummond or that it benefited MFC
at the expense of Dru mond's other stockholders.
Gibralr: responds that it has standing to challenge the modification of the
indenture, whose sole purpose was to enlarge Smith's and MFC's voting control
over Drummond, because Drummond's shareholders were intended beneficiaries of
the anti-takeover provision in two respects. First, the provision made an
unwanted acquisition of Drummond
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more difficult; second, the Company benefited from the value that a potential
control premium added to the market price of its stock. In all events, the
plaintiff argues, whether or not the indenture amendment harmed Drummond or its
stockholders presents a factual issue that cannot be decided at this stage. The
plaintiff also argues that MFC'S increase in ownership from 35% to 49% was
significant and did harm Drummond's stockholders, because as a practical matter
it eliminated the risk that Gibralt and the other public stockholders could join
forces to oust MFC from board control.
I conclude that the elimination of the voting power restriction provision
of the indenture, PER se, does not state a cognizable claim. Here, it is claimed
that the modification of the indenture resulted in the (deletion of a provision
that was designed to prevent the ouster of Drummond's management, by making it
more difficult for any bidder to take control of Drummond. That provision was
intended to protect Drummond's bondholders. And although Drummond's
shareholders may have received some incidental benefit from the indenture
provision, the complaint does not allege that the stockholders were its intended
third party beneficiaries. Having no standing to enforce the provision, the
stockholders would not have an enforceable claim for breach of fiduciary duty
arising from the deletion of that provision. If that conduct amounted to a
wrong,, any resulting claim belonged to the bondholders. Accordingly, this
claim, insofar as it sleeks relief SOLELY by reason of the indenture
modification, will be dismissed. [FN36]
FN36. The dismissal may turn out to be a pyrrhic victory for the
defendants, because that claim is dismissed only to the extent it
exists as a freestanding claim for relief in isolation, i.e., without
regard to the role the indenture modification played in the
defendants' larger scheme to gain control of Drummond and to strip its
assets. Even though the modification of the indenture, by itself
without more, will not warrant relief, that conduct, in combination
with the other conduct that is alleged as part of a larger scheme of
wrongdoing, would support the plaintiffs broader claim for relief.
G. Claims Concerning Ichor
Count II of the complaint alleges that the defendants engaged in four
specific transactions, all involving Ichor, that resulted in harm to Drummond
which, at the time of these transactions, held 60% of Ichor's stock. Each of
these transactions is separately discussed.
1. THE LINE OF CREDIT TO ICHOR
*12 The plaintiff first claims that the defendants breached their fiduciary
duties to Drummond by causing Drummond to loan Ichor $800,000, at a time when
Ichor was in dire financial straits. According to the complaint, that was done
to enable Ichor to pay off a $400,000 debt to MFC. The effect of this
transaction, Gibralt claims, was to transfer the risk of default from MFC to
Drummond.
The defendants urge that this claim must be dismissed, because the
complaint does not allege that the terms of the loan amounted to self-dealing or
were unfair to Drummond.
I conclude that the complaint sufficiently alleges that the transaction
amounted to self-dealing by the defendants and was unfair to Drummond. This
claim alleges that Drummond was caused to make the loan to Ichor in order to
allow MFC to eliminate its loan to "a company going downhill." [FN37] From this
it may be inferred that the defendants stand accused of causing Drummond to
assume the significant financial risk of default by Ichor in a transaction that
benefited MFC but provided no benefit to Drummond.
FN37. Complaint, at P. 32.
2. THE ISSUANCE OF "DEATH SPIRAL " PREFERRED STOCK
The complaint next alleges that after Ichor became a majority-owned
subsidiary of Drummond in 1996, the defendants wrested control of Ichor from
Drummond by (among other things) causing Ichor to issue "death spiral"
preferred stock to the defendants and
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their affiliates. [FN38] The plaintiff alleges that Drummond was harmed by the
issuance of the Ichor death spiral preferred stock, because the effect was to
dilute Drummond's stock interest in Ichor solely to benefit MFC.
FN38. "Death spiral" is a term used in the market to describe
convertible preferred stock which, unlike normal preferred stock, has
no fixed conversion price. Rather, the lower the common price stock
drops, the more common shares into which they are convertible.
Complaint, at P. 36.
The defendants argue that this claim must be dismissed for lack of
standing. Specifically, defendants contend that a shareholder of one corporation
(Drummond) has no right to bring a derivative action on behalf of a "sister"
affiliate of that corporation (i.e.Ichor). In addition!, the defendants urge
that the claim is on its face impermissibly speculative, because there is no
allegation that any dilution ever in fact occur-red.
In my view, the lack-of-standing argument is without merit, because the
claim is asserted on behalf of Drummond, which directly owned 60% of Ichor's
stock. Using its control of Drummond, MFC placed two of its representatives,
Smith and Zanatta, on the Ichor board. Smith and Zanatta then caused Ichor to
issue the "death spiral" stock., which diluted DRUMMOND'S Ichor holdings.
Because it is not alleged that MFC was involved in the issuance, Drummond would
have no direct claim against MFC for stock dilution damage. But, Drummond would
have a direct claim against Ichor and its board (who were also directors of
Drummond) for wrongful dilution of Drummond's Ichor stock as a result of this
transaction. [FN39] Indeed, that claim is being asserted by Gibralt derivatively
on behalf of Drummond. Because Gibralt has standing to sue in that derivative
capacity, [FN40] this claim will stand.
FN39. SEE, IN RE TRI-STAR PICTURES INC., LITIGATION, Del.Supr., 634
A.2d 319, 330 (1993).
FN40. The argument that the claim must be dismissed because there is
no allegation that any dilution has yet occurred, is also defective.
First, it is not a "standing" argument, but, rather, goes to the
substance of the transaction that forms the basis for the claim.
Second, the fact that the outstanding death spiral stock could be
converted in the future indicates that the stock, when converted, will
cause Drummond harm at some future time, and therefore would be a
proper subject of equitable relief that could prevent the harm.
3. THE CANCELLED GUARANTEE
*13 Third, the plaintiff claims that the defendants caused Drummond to
allow Ichor to cancel a $750,000 guarantee Ichor previously made in favor of
Drummond. Sutton Park, an MFC affiliate, received 175,000 preferred shares of
Ichor in exchange for $1 million in cash, plus the release of the $750,000
guarantee. The wrongdoing, plaintiff alleges, consisted of the defendants
causing Drummond to release the guarantee for no consideration, to enable the
defendants' affiliate, Sutton Park, to receive the Ichor shares. Gibralt claims
that because it was Drummond that gave value in the form of the release of
guarantee, the Ichor preferred shares rightfully belong to Drummond. Moreover,
the plaintiff alleges, because the defendants cannot prove the entire fairness
of this transaction, the complaint states a cognizable derivative claim against
the defendants on Drummond's behalf.
The defendants respond that because the complaint alleges no facts to
support the ccnclusory allegation that the guarantee was in favor of Drummond,
tlhe claim fails for lack of an essential premise.
The defendants are wrong. The complaint alleges, in a nonconclusory way,
that the guarantee operated in favor of Drummond, [FN41] and that the
defendants caused Drummond to surrender the guarantee for no consideration.
[FN42] If these facts are true and their truth must be assumed at this stage
then the plaintiff has adequately pled a breach of fiduciary duty that the
defendants disloyally exercised their voting control for the benefit of Ichor
and Sutton Park and to the detriment of Drummond. Accordingly, this claim
survives the motion to dismiss.
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FN41. Complaint. P. 38. FN42.
Complaint. P. 38.
4. THE SALE OF ICHOR SHARES BELOW MARKET PRICE
Lastly, Gibralt alleges that in June 1998, the defendants caused Drummond
to sell 400,000 of its Ichor shares for $1.257 per share, a price that
represented a 17% discount from the lowest price at which the stock had ever
traded in the market ($1 .50 per share). Gibralt claims that the stock was sold
to the defendants and their affiliates, and it bases that conclusion on the fact
that no party other than the defendants was in a position to negotiate such a
large discount from the market price. In addition, the plaintiff urges, that
conduct fits the defendants' historical pattern of self-dealing. Accordingly,
Gibralt concludes, causing Drummond to sell a large block of its Ichor shares,
at a price far below the market value, to the defendants, states a claim for
unlawful self-dealing.
The defendants contend that this claim must fail for two reasons. First,
the defendants argue that the complaint does not allege that the discounted
price for such a large block of shares was below market value. Second, the
complaint does not state a cognizable claim of self-dealing, because the
defendants are not charged with having received anything of value to the
exclusion and detriment of Drummond's other shareholders.
Although the sale of a large block of stock at a below market price does
raise suspicion, I conclude that this claim cannot survive this motion. The
reason is that the allegations critical to that claim are conclusory. The
complaint alleges that "[b]ased upon the large discount to market --- Ichor
shares never sold below $1.50 at this time-plaintiff believes, and therefore
alleges, that the shares were sold to the defendants or their affiliates."
[FN43] Although the plaintiff is entitled to the benefit of any reasonable
inference that can be drawn from the well-pled allegations of the complaint, the
Court must disregard conclusory allegations unaccompanied by specific averments
of supporting fact. [FN44] Here, the plaintiff alleges no specific averments of
fact that would support a favorable inference that this transaction involved
unlawful self dealing.
FN43. Complaint, at P. 139.
FN44. SEE, MCMILLAN, note 26, SUPRA at 15.
*14 Nor could this claim survive the dismissal motion even if it were
viewed as a claim for waste. To withstand a motion to dismiss, the pled facts
must demonstrate the sale of Ichor stock was "so completely bereft of
consideration that '[s]uch transfer is in effect a gift." ' [FN45] Here, the 17%
alleged discount, without more, cannot be said to satisfy that strict standard.
FN45. IN RE 3 CON, CORP. SHAREHOLDERS LITIG., Del. Ch., C.A.
No. 16721, Steele. V.C., Mem. Op. at 11 (Oct. 25, 1999) (citing
LEWIS V. VOGELSTEIN, Del. Ch., 699 A.2d 327, 336 (1997)).
IV. CONCLUSION
Counsel shall confer and submit an appropriate form of order implementing
the ruling made in this Opinion.
2001 WL 647837 (Del.Ch.)
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A1475 PAGE 1
LEXSEE 2002 Del. LEXIS 723
OMNI CARE, INC., Plaintiff Below, Appellant, v. NCS
HEALTHCARE, INC., JON H. OUTCALT, KEVIN B. SHAW, BOAKE A.
SELLS, RICHARD L. OSBORNE, GENESIS HEALTH VENTURES, INC. and
GENEVA SUB, INC., Defendants Below, Appellees. ROBERT M.
MILES, GUILLERMO MARTI, ANTHONY NOBLE, JEFFREY TREADWAY,
TILLIE SALTZMAN, DOLPHIN LIMITED PARTNERSHIP I, L. P.,
RAMESH MEHAN, RENEE MEHAN, RENEE MEHAN IRA, SAROJ MEHAN,
MANEESH MEHAN, RAHUL MEHAN, JOEL MEHAN, LAJIA MEHAN, DARSHAN
MEHAN IRA, DANSHAL MEHAN (ROLLOVER IRA), ARSH N. MEHAN, ARSH
N. MEHAN (ROTH IRA), ASHOK K. MEHAN, and ASHOK K. MEHAN IRA,
Plaintiffs Below, Appellants, v. JON H. OUTCALT, KEVIN E.
SHAW, BOAKE A. SELLS, RICHARD L. OSBORNE, GENESIS HEALTH
VENTURES, INC., GENESIS SUB, INC., and NCS HEALTHCARE, INC.,
Defendants Below, Appellees.
No. 605, 2002, No. 649, 2002, CONSOLIDATED
SUPREME COURT OF DELAWARE
2002 Del. LEXIS 723
December 10, 2002, Submitted
December 10, 2002, Decided
NOTICE:
*1 THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW
REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
PRIOR HISTORY:
Court Below: Court of Chancery of the State of Delaware in and for New
Castle County. C.A. No. 19800. Court Below: Court of Chancery of the State of
Delaware in and for New Castle County C.A. No. 19786.
Order granting motion to dismiss: Omnicare, Inc. v. NCS Healthcare, Inc., 2002
Del. Ch. LEXIS 120 (Del. Ch. Oct. 25, 2002).
Order ruling on voting agreement: Omnicare, Inc. v. NCS Healthcare, Inc., 2002
Del Ch. LEXIS 131 (Del. Ch. Oct. 29, 2002).
DISPOSITION:
Appeal from first order dismissed as moot. Second order reversed and remanded.
Third order reversed in part and remanded.
CASE SUMMARY
PROCEDURAL POSTURE: Appellants, a bidder and various stockholders, appealed
orders by the Court of Chancery of the State of Delaware in and for New Castle
County in two separate proceedings involving a merger between appellees, a
corporation and a company.
OVERVIEW: The bidder sought to invalidate a merger agreement between the company
and the corporation on fiduciary grounds. The stockholders of the corporation
also sought to invalidate the merger on fiduciary grounds. The effect of the
trial court's decisions was that the merger had the requisite votes for
[L O G O]
LexisNexis(TM)
A1476 PAGE 2
2002 Del. LEXIS 723, *1
approval. The appellate court held that the trial court properly dismissed the
bidder's fiduciary claim based on lack of standing. The fiduciary claims were
being asserted by the stockholders. Even if the board of directors attempted to
seek a transaction that would yield the highest value reasonably available to
the stockholders, its deal protection measures were preclusive and coercive. The
directors irrevocably locked up the merger. The trial court's decision permitted
implementation of a voting agreement contrary to the parties' fiduciary duty.
OUTCOME: The bidder's appeal was dismissed as moot. The orders were reversed and
remanded for the entry of a preliminary injunction consistent precluding the
implementation of the merger.
CORE TERMS: merger, stockholder, stock, fiduciary duty, conversion, automatic,
preliminary injunction, class action, consolidated appeal, voting power, per
share, shareholder, board of directors, approving, standing to assert, summary
judgment, set forth, irrevocably, invalidate, expedited, scheduled, casting,
charter, bid
LexisNexis(TM) HEADNOTES - Core Concepts
Business & Corporate Entities > Corporations > Directors & Officers > Management
Duties & Liabilities
HN1 Even if one assumes that a board of directors attempts to seek a
transaction that would yield the highest value reasonably available to the
stockholders, deal protection measures must be reasonable in relation to a
threat and neither preclusive nor coercive.
JUDGES:
Before VEASEY, Chief Justice, WALSH, HOLLAND, BERGER, and STEELE, Justices
constituting the Court en Banc. The Chief Justice and Justice Steele decline to
join in the Court's Order and would affirm.
OPINION BY:
Joseph T. Walsh
OPINION:
ORDER
This 10th day of December, 2002, it appears to the Court as follows:
(1) NCS Healthcare, Inc. ("NCS"), a Delaware corporation, is the object of
competing acquisition bids, one by Genesis Health Ventures, Inc. ("Genesis"), a
Pennsylvania corporation, and the other by Omnicare, Inc. ("Omnicare"), a
Delaware corporation.
(2) This is a consolidated appeal from orders of the Court of Chancery in
two separate proceedings.
(3) One proceeding is brought by Omnicare seeking to invalidate a merger
agreement between NCS and Genesis on fiduciary duty grounds. In that *2
proceeding, Omnicare also challenges Voting Agreements between Genesis and Jon
H. Outcalt and Kevin B. Shaw, two major NCS stockholders, who collectively own
over 65% of the voting power of NCS stock. These Voting Agreements irrevocably
commit these stockholders to vote for the merger. The Omnicare action was C.A.
No. 19800 in the Court of Chancery and is No. 605, 2002, in this Court.
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(4) The other proceeding is a class action brought by NCS stockholders
seeking to invalidate the merger primarily on the ground that the directors of
NCS violated their fiduciary duty of care in failing to establish an effective
process designed to achieve the transaction that would produce the highest value
for the NCS stockholders. The stockholder action was C.A. No. 19786, 2002 Del.
Ch. LEXIS 131, in the Court of Chancery and is No. 649, 2002, in this Court.
(5) In Appeal No. 605 (the "Omnicare appeal") the Court of Chancery entered
two orders. The first decision and order (the "Standing Decision"), dated
October 25, 2002, dismissed Omnicare's fiduciary duty claims because it lacked
standing to assert those claims. The trial court refused to dismiss Omnicare's
declaratory judgment claim, holding that Omnicare had standing, *3
notwithstanding the timing of its purchase of NCS stock to assert its claim, as
a bona fide bidder for control, that the NCS charter should be interpreted to
cause an automatic conversion of Outcalt's and Shaw's Class B stock (with ten
votes per share) to Class A stock (with one vote per share).
(6) The second decision and order of the Court of Chancery that is before
this Court in Appeal No. 605, 2002, is the trial court's order of October 29,
2002 (the "Voting Agreements Decision") adjudicating the merits of the Voting
Agreements issue as to which the trial court held Omnicare had standing, as set
forth in the preceding paragraph.
(7) In the Voting Agreements decision on summary judgment, the trial court
interpreted the applicable NCS charter provisions adversely to Omnicare's
contention that the irrevocable proxies granted in those agreements by Outcalt
and Shaw to vote for the Genesis merger resulted in an automatic conversion of
all of Outcalt's and Shaw's Class B stock into Class A stock. Omnicare's claim
with respect to the Voting Agreements was therefore dismissed.
(8) Because Outcalt's and Shaw's collective 65% voting power depended on
their holdings of Class B stock that *4 had ten votes per share, the ultimate
approval of the merger would be in substantial doubt given the fact that the NCS
board had recently withdrawn its recommendation in favor of the merger with
Genesis in view of a potentially higher bid represented by an Omnicare tender
offer. The effect of the trial court's decision that the Voting Agreements did
not trigger an automatic conversion of the Class B stock to Class A stock is
that the merger of NCS with Genesis has the requisite votes for approval, and
the casting of the stockholders' votes on the merger is scheduled to take place
at a stockholders' meeting pending decision on this appeal. The trial court's
Voting Agreements decision granting summary judgment to the defendants would, if
affirmed, remove the automatic conversion obstacle to the casting of Outcalt's
and Shaw's 65% voting power in favor of the merger.
(9) A class action to enjoin the merger was brought by certain stockholders
of NCS in the Court of Chancery in 2002 Del. Ch. LEXIS 131, C.A. No. 19786. The
trial court denied a preliminary injunction in a decision and order dated
November 22, 2002, and revised November 25, 2002 (the "Fiduciary Duty
Decision"). That decision is now before this Court *5 upon interlocutory review
in 2002 Del. LEXIS 716, Appeal No. 649, 2002. The standing of these stockholders
to seek injunctive relief based on alleged violations of fiduciary duties by the
NCS directors in approving the proposed merger is apparently not challenged by
the defendants. Accordingly, the fiduciary duty claims, including those claims
Omnicare sought to assert are being asserted by the class action plaintiffs.
(10) The proceedings before this Court on appeal have been expedited due to
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exigent circumstances, including the pendency of the stockholders' meeting to
consider the NCS/Genesis merger. That meeting had been scheduled for Thursday,
December 6, 2002, but was voluntarily postponed to provide this Court with an
opportunity to hear and determine this consolidated appeal in an orderly manner.
(11) The factual background and the bases for the decisions of the Court of
Chancery are set forth in its various decisions and orders set forth above and
are hereby incorporated by reference without repetition in view of the expedited
nature of this appeal.
(12) The determinations of this Court as set forth in this order are being
entered promptly in this summary manner in order to provide clarity and *6
certainty to the parties going forward. The Court intends to explicate these
determinations in a written opinion in due course.
NOW, THEREFORE, IT IS ORDERED by majority decision as follows:
(A) With respect to the appeal to this Court of that portion of the
Standing Decision constituting the order of the Court of Chancery dated October
25, 2002, that granted the motion to dismiss the remainder of the Omnicare
complaint, holding that Omnicare lacked standing to assert fiduciary duty claims
arising out of the action of the board of directors that preceded the date on
which Omnicare acquired its stock, the appeal is DISMISSED AS MOOT on the ground
that there are stockholders with standing who have asserted those claims in 2002
Del. LEXIS 716, Appeal No. 649, 2002 that is before this Court in this
consolidated appeal.
(B) With respect to the Fiduciary Duty Decision, the order of the Court of
Chancery dated November 22, 2002, denying plaintiffs' application for a
preliminary injunction is REVERSED on the ground that, HN1 even if one assumes
that the board of directors attempted to seek a transaction that would yield the
highest value reasonably available to the stockholders, the deal protection *7
measures must be reasonable in relation to the threat and neither preclusive nor
coercive. The action of the NCS board fails to meet those standards because, by
approving the Voting Agreements, the NCS board assured shareholder approval, and
by agreeing to a provision requiring that the merger be presented to the
shareholders, the directors irrevocably locked up the merger. In the absence of
a fiduciary out clause, this mechanism precluded the directors from exercising
their continuing fiduciary obligation to negotiate a sale of the company in the
interest of the shareholders.
(C) With respect to the Voting Agreements Decision, the order of the Court
of Chancery dated October 29, 2002, is REVERSED to the extent that decision
permits the implementation of the Voting Agreement contrary to this Court's
ruling on the Fiduciary Duty claims.
(D) These proceedings are REMANDED to the Court of Chancery for the entry
of a preliminary injunction consistent with this Order precluding the
implementation of the NCS/Genesis merger.
The Chief Justice and Justice Steele decline to join in the Court's Order
and would affirm.
BY THE COURT:
/s/ Joseph T. Walsh
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< KeyCite History >
Only the Westlaw citation is currently available.
UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.
Court of Chancery of Delaware, New Castle
County.
IN THE MATTER OF THE APPRAISAL OF SHELL
OIL CO.
CIV. A. NO. 8080.
Submitted: June 25, 1990.
Decided: Dec. 11, 1990.
Clark W. Furlow, and Michele C. Gott, Lassen, Smith, Katzenstein & Furlow,
Wilmington, of counsel: H. Lee Godfrey, and Kenneth E. McNeil, Susman Godfrey,
Houston, Tex., for petitioners.
Thomas P. Preston, Judith N. Renzulli, and John L. Olsen, Duane, Morris &
Heckscher, Wilmington, of counsel: Edward M. Selfe, Bradley, Arant, Rose &
White, Birmingham, Ala., for petitioners.
Richard L. Sutton, and Thomas C. Grimm, Morris, Nichols, Arsht & Tunnell,
Wilmington, of counsel: Rory 0. Milison, Cravath, Swaine & Moore, New York City,
for respondent.
DECISION AFTER TRIAL IN AN APPRAISAL ACTION
HARTNETT, Vice Chancellor.
*1 Petitioners, former minority shareholders of respondent Shell Oil
Company ("Shell Oil" or "Shell"), sought an appraisal of the fair value of their
shares as of June 7, 1985--the date that Shell's minority shareholders were
cashed-out at $58 per share in a short-form merger effectuated by Shell's 94.6%
majority stockholder, SPNV Holdings, Inc. ("Holdings"). After weighing all the
admissible evidence, the Court finds that at the time of the cash-out merger the
fair value of petitioners' shares was $71.20 per share, which is less than the
$89 per share value asserted by petitioners and more than the $55 per share
asserted by the respondent. The Court further finds that interest should be paid
at the rate of 10.0%.
I
HISTORY OF THE LITIGATION AND
BACKGROUND FACTS
The underlying factual history is complex and has been addressed by this
Court and the Delaware Supreme Court in several opinions. Smith v. Shell
Petroleum, Inc., Del.Ch., C.A. No. 8395-NC, Hartnett, V.C. (June 19, 1990)
(holding that defendant failed to adequately disclose all material facts to the
minority shareholders prior to the cash-out merger); Joseph v. Shell Oil Co.,
Del.Ch., 482 A.2d 335 (1984); Joseph v. Shell Oil Co., Del.Ch., C.A. Nos. 7450 &
7699-NC, Hartnett, V.C. (April 19, 1985) (Opinion approving proposed settlement
of class action); Selfe v. Joseph, Del.Supr., 501 A.2d 409 (1985); Smith v. SPNV
Holdings, Inc., Del.Ch., C.A. No. 8395NC, Hartnett, V.C. (Oct. 28, 1987; Revised
Nov. 2,.1987) (Opinion denying defendant's motion to dismiss); Smith v. SPNV
Holdings, Inc., Del.Ch., C.A. No. 8395-NC, Hartnett, V.C. (April 26, 1989)
(Opinion denying defendant's motion for summary judgment). An exhaustive
discussion of all the underlying facts in this case is not necessary, because
the only litigable issue in an appraisal action brought pursuant to 8
Del.C.SS.262 "is the determination of the value of the appraisal petitioners'
shares on the date of the merger." See Cede & Co. v. Technicolor, Inc.,
Del.Supr., 542 A.2d 1182, 1187 (1988). Rather, a review of the pertinent
underlying facts will suffice.
For over 60 years prior to the cash-out merger, Royal Dutch Petroleum
Company ("Royal Dutch") controlled a majority of the outstanding common shares
of Shell Oil. In 1982, Royal Dutch began considering the acquisition of the
minority shares of Shell and retained Morgan Stanley & Co. ("Morgan Stanley"),
an investment banking firm, to prepare an estimate of the value of the
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minority shares of Shell. However, no effort to acquire Shell's minority shares
took place at that time.
In early 1984, Royal Dutch again became interested in acquiring the
minority shares of Shell, and Royal Dutch formally retained Morgan Stanley as
its financial advisor. On January 24, 1984, Morgan Stanley completed its
valuation and concluded that, in its opinion, the value of Shell's minority
shares was $53 per share. On the same day, Royal Dutch announced its intention
to merge Shell into its subsidiary, SPNV Holdings, Inc., by cashing-out the
minority stockholders for $55 per share.
*2 Immediately after learning of the January 24, 1984 offer, the Board of
Directors of Shell created a Special Committee, comprised of six outside
directors, to evaluate the merger proposal. The Special Committee then retained
Goldman Sachs & Co. ("Goldman Sachs"), a New York investment banker, to estimate
the value of Shell's minority shares. The Special Committee also employed the
Sullivan & Cromwell law firm as independent legal counsel and H.J. Gruy and
Associates, Inc. as its independent petroleum consultants. Ultimately, Goldman
Sachs concluded that $80-S85 per share was the "high confidence" range of value
of Shell's outstanding common stock, with the lowest fair price being $70 per
share. Consequently, the Special Committee rejected the $55 merger offer by
Royal Dutch as being unacceptable and indicated it would be willing to negotiate
a $75 per share offer, which Goldman Sachs opined was in the low range of
fairness.
Eventually, Royal Dutch withdrew its $55 per share merger proposal and
commenced a tender offer for the minority shares of Shell at $58 per share. On
April 5, 1984, Shell Oil's Board, by a vote of the Special Committee, also
rejected the $58 Tender Offer as inadequate and not in the best interests of
Shell Oil or its minority shareholders. On the same day, Shell Oil's President,
John F. Bookout, mailed a letter to Shell's minority stockholders advising them
of the Board's decision. Also included with the letter was Shell's most recent
Schedule 14D-9, as filed with the Federal Securities and Exchange Commission
("SEC"), which included financial studies developed by Shell's management
indicating per share values of $77 to $152 per share, but which were allegedly
"based on numerous assumptions, many of which were highly uncertain."
Shell's Special Committee also requested Mr. Bookout to prepare a "bid"
case analysis, which would simulate the type of analysis that Shell Oil normally
used when bidding on oil and gas properties. The Special Committee believed that
such an analysis would serve as a "cross check" for the other evaluations
already performed. The "bid" case, which arrived at a $91 per share value, was
not a market analysis, but was derived from Shell's internal asset analysis.
After the Special Committee rejected the $58 per share tender offer as
inadequate, Royal Dutch, through its subsidiary SPNV Holdings, Inc.
("Holdings"), continued to pursue its tender offer and contemplated short-form
merger, and a number of minority shareholders of Shell Oil then sought
injunctive relief against such an occurrence. In May 1984, this Court granted,
in part, plaintiffs application for injunctive relief. Joseph v. Shell Oil
Company, Del.Ch., 482 A.2d 335 (1984). The Court held that the Tender Offer
materials did not "satisfy the requirement of disclosure of all germane facts
with complete candor," and therefore recommended that new fairness studies be
undertaken and that all shareholders who had tendered be given an opportunity to
withdraw their tender after receipt of revised disclosures. Id. at 342-45.
*3 In response to the Joseph opinion Morgan Stanley reviewed its fairness
opinion and concluded that $55 per share remained fair to Shell shareholders
from a financial point of view. After receipt of the additional disclosures
ordered by the Joseph opinion, only about 363,000 of the 78,277,566 shares
previously tendered (or less than 1/2 of 1% of the outstanding shares) were
withdrawn and
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nearly 78 million shares were reconfirmed as being tendered to Holdings for $58
per share. Consequently, Holdings' ownership interest was increased to 94.6% of
Shell's outstanding stock. Holdings, however, did not go forward with its
short-form merger plans at that time because of the pendency of the Joseph
litigation, which continued to attack the transaction.
In early 1985, the Joseph litigation was settled after substantial
discovery and "intensive arms-length negotiations." The settlement provided an
additional $2 per share for all members of a subclass of Shell stockholders who
had accepted the $58 tender offer and tendered their shares and the same
additional $2 per share for the members of another subclass consisting of
non-tendering stockholders if they waived their statutory right to opt for a
court appraisal of their shares in the forthcoming short-form merger at the $58
per share merger price.
The consideration for payment of those sums was the release of all claims
arising from or related to the subject matter of the consolidated actions (the
"Settled Claims"). The release and dismissal of the breach of fiduciary duties
claims therefore were to apply to and bind all former stockholders of Shell,
even non-tendering stockholders who later opted for a court appraisal. The
stockholders who subsequently sought an appraisal were therefore precluded by
the terms of the settlement from asserting in any future appraisal action any
claim for breach of fiduciary duty encompassed within the Settled Claims.
This Court then approved the Joseph settlement as being, in its business
judgment, intrinsically fair to all members of the class, including both
subclasses. Joseph v. Shell Oil Company, Del.Ch., C.A. Nos. 7450 & 7699NC,
Hartnett, V.C. (Apr. 19, 1985). The Delaware Supreme Court subsequently affirmed
this Court's decision as being supported by the record. Selfe v. Joseph,
Del.Supr., 501 A.2d 409, 411 (1985).
Shortly after this Court approved the Joseph settlement, on May 15, 1985,
Holdings transferred ownership of its Shell Oil stock to its wholly-owned
subsidiary, Testa Corporation ("Testa"). Subsequently, on June 7, 1985, Holdings
caused Testa to be merged into Shell Oil pursuant to 8 Del.C. ss. 253 for $58
per share in cash, unless the holder sought an appraisal (the "short-form
merger"). If, however, a stockholder waived the right to seek an appraisal prior
to July 1, 1985, the stockholder received the $58 plus $2 per share.
After the merger, Shell minority shareholders were sent additional
disclosure documents, including a "Notice of Merger and Right of Appraisal," an
"Information Circular," and a document entitled "Certain Information About
Shell." These disclosure documents were later challenged as being defective and
in June 1990 this Court held that the 1985 merger disclosure documents were
defective because they did not adequately disclose to the then remaining
minority shareholders of Shell Oil Company all the material facts a dissenting
shareholder reasonably needed to make a fully informed decision whether or not
to seek an appraisal. Smith v. Shell Petroleum, Inc., Del.Ch., C.A. No. 8395-NC,
Hartnett, V.C. (June 19, 1990), slip op. at 2. The primary disclosure violation
occurred because the defendant failed to disclose the existence of oil and
gas reserves having a value of approximately $1 billion. Id. See also Smith
v. Shell Petroleum, Inc., Del.Ch., C.A. No. 8395-NC, Hartnett, V.C. (Nov. 26,
1990).
*4 Approximately 1,005,552.837 shares qualified for an appraisal in this
action, which was ordered to be tried separately from the disclosure claims.
Smith v. SPNV Holdings, Inc., Del.Ch., C.A. No. 8395-NC, Hartnett, V.C. (Apr.
26, 1989). A seven-day trial was held in January of 1990 on the single issue
before the Court--the "fair value of the petitioners' shares on the date of the
merger." Cede & Co. v. Technicolor, Inc., Del.Supr., 542 A.2d 1182, 1187 (1988).
The record in this case is extensive and includes, among other things:
approximately 439 trial exhibits of petitioner and 205 trial
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exhibits of respondent, numerous deposition transcripts; over 1,000 pages of
trial transcripts; and extensive post-trial briefs.
II
APPRAISAL STANDARD
Shareholders who dissent from a cash-out merger and seek an appraisal are
entitled to have the Court determine the fair or intrinsic value of their
shares. Cavalier Oil Corp. v. Harnett, Del.Supr., 564 A.2d 1137, 1142 (1989).
Under Delaware law, the sole remedy available to minority shareholders in a
cashout merger, absent challenges to the merger itself, is an appraisal under 8
Del.C.SS. 262. Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 703 (1983). An
appraisal action is intended to provide shareholders who dissent from a merger,
on the basis of the inadequacy of the offering price, a judicial determination
of the "fair value" of their shares. Cede and Co. v. Technicolor, Inc.,
Del.Supr., 542 A.2d 1182, 1186 (1988); Weinberger, 457 A.2d at 714.
The standard for determining the "fair value" of a company's outstanding
shares was liberalized in Weinberger, which broadened the exclusive use of the
"Delaware Block" method to include all generally accepted techniques of
valuation used in the financial community. Weinberger, 457 A.2d at 712-13. See
also Cavalier Oil Corp., 564 A.2d at 1142; Cede and Co., 542 A.2d at 1186-87.
The scope of an appraisal action is limited, however, with the only litigable
issue being the determination of the value of petitioners' shares on the date of
the merger. Cede and Co., 542 A.2d at 1187. Although the justiciable issue in an
appraisal action is a limited one, as the Delaware Supreme Court held in
Weinberger, "all relevant factors" are to be considered in determining the fair
value of the shares subject to appraisal. Weinberger, 457 A.2d at 713. See also
8 Del.C. ss. 262(h).
"A proceeding under Delaware's appraisal statute, 8 Del.C.SS. 262, requires
that the Court of Chancery determine 'fair value' of the dissenting
stockholders' shares." Cavalier Oil Corp., 564 A.2d at 1144. The Delaware
Supreme Court has stated that the fairness concept involves two considerations:
fair dealing and fair price. Weinberger, 457 A.2d at 711. If the fairness of the
merger process, however, is not in dispute, the Court of Chancery's sole task in
an appraisal is to value what was taken from the shareholder: "viz. his
proportionate interest in a going concern." Cavalier Oil Corp., 564 A.2d at
1144; Tri-Continental Corp. v. Battye, Del.Supr., 74 A.2d 71, 72 (1950).
*5 In order to reach a going concern value, "the company must be first
valued as an operating entity by application of traditional value factors,
weighted as required, but without regard to post-merger events or other possible
business combinations." Cavalier Oil Corp., 564 A.2d at 1144. See also Bell v.
Kirby Lumber Corp., Del.Supr., 413 A.2d 137 (1980). A dissenting shareholder's
proportionate interest can be determined only after the company as an entity has
been valued. Cavalier Oil Corp., 564 A.2d at 1144. In determining a dissenting
shareholder's proportionate interest, "the Court of Chancery is not required to
apply further weighting factors at the shareholder level, such as discounts to
minority shares for asserted lack of marketability." Cavalier Oil Corp., 564
A.2d at 1144 (emphasis added). The application of a discount to the value of a
minority stockholder's shares at the shareholder level is contrary to the
requirement that the company be viewed as a "going concern." Cavalier Oil Corp.,
564 A.2d at 1145. However, there may be specific circumstances in which the use
of a discount at the company level will be upheld. See, e.g., Tri-Continental
Corp. v. Battye, Del.Supr., 74 A.2d 71(1950).
In applying these concepts to the evidence adduced by the parties, it
becomes clear that the estimates of the fair value of Shell stock on June 7,
1985, the merger date, by both sides are significantly flawed.
Nor should this be surprising. Both sides relied on expert witnesses
retained by the party offering them. In Kahn v. U.S. Sugar
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Corporation, Del.Ch., C.A. No. 7313-NC, Hartnett, V.C. (Dec. 10, 1985), this
Court made an observation which applies with equal force to the present case:
"A review of this testimony clearly shows the reason that testimony as to
value by experts is of such limited use to a trier of fact.
It has been succinctly stated:
"In common law countries we have the contentious, or adversary, system of
trial, where the opposing parties, and not the judge as in other systems, have
the responsibility and initiative in finding and presenting proof. Advantageous
as this system is in many respects, its present application in the procurement
and presentation of expert testimony is widely considered a sore spot in
judicial administration. There are two chief points of weakness in the use of
experts. The first is the choice of experts by the party, who will naturally be
interested in finding, not the best scientist, but the 'best witness.' As an
English judge has said:
'... the mode in which expert evidence is obtained is such as not to give the
fair result of scientific opinion to the Court. A man may go, and does
sometimes, to half-a-dozen experts ... He takes their honest opinions, he finds
three in his favor and three against him, he says to the three in his favor,
'will you be kind enough to give evidence?' and he pays the three against him
their fees and leaves them alone; the other side does the same ... I am sorry to
say the result is that the Court does not get that assistance from the experts
which, if they were unbiased and fairly chosen, it would have a right to
expect.'
*6 The second weakness is that the adversary method of eliciting scientific
testimony, by direct and cross-examination in open court, frequently upon
hypothetical questions based on a partisan choice of data, is ill-suited to the
dispassionate presentation of technical data, and results too often in
overemphasizing conflicts in scientific opinions which a jury is incapable of
resolving.'
McCormick on Evidence (3rd ed.) Section 17 (1984).
The valuations expressed by the several expert witneses were all based on
numerous value judgments. While the assumptions had a basis, almost every figure
used, whether a base figure or a multiplier, could have just as well been a
different figure and the selection of the figure to be used necessarily involved
a choice or guess by the witness, who in turn was being handsomely paid by one
side or the other."
Kahn, supra, slip op. at 17-18.
As respondent's primary expert witness candidly admitted at trial, "Valuation
is an art rather than a science." [Case Tr. at 1024].
One thing is clear from the evidence in this trial: whether consciously or
unconsciously, the opinions expressed by the expert witnesses significantly
reflected the desires of their clients.
The range of values of the shares at the time of the merger was a high of $89
per share (or even $100) expressed by plaintiff's chief witness and a low of $55
expressed as the value by defendant's chief witness. Supposedly both of these
experts were using generally accepted and accurate techniques to evaluate the
same corporation.
III
PETITIONERS' ASSERTION OF FAIR
VALUE
Petitioners contend, based on a study conducted by their expert witness, Mr.
Kurt Wulff, that the fair value of Shell Oil Company on June 7, 1985 was $100
per share on a buyer's tax cost basis or $89 per share on a seller's tax cost
basis.
Petitioners assert that such a value is consistent with the valuations
completed by Shell Oil and Goldman Sachs in 1984-1985 which showed:
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Assigned Value
Date Study (Per Share)
----- ---------------- -------------
1984 Shell GEO Study $92-116
1984 Shell "bid" case $91
1984 Goldman Sachs $84
1985 Shell "update" $85-104
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Mr. Wulff, who has a bachelor of science degree in chemical engineering, a
master's degree in business administration from Harvard Business School and over
20 years of experience in analyzing (and working for) oil and gas companies, was
qualified as an expert in the valuation of oil and gas companies. Mr. Wulff's
analysis in this case utilized a three-pronged approach. He first calculated the
Present Value of Equity for Shell Oil as of 1985 by creating an adjusted balance
sheet for Shell. He then compared his Present Value of Equity estimate to a
"deal" market in order to predict the discount or premium, if any, the deal
market would have placed on Shell's Present Value of Equity. Finally, Mr. Wulff
constructed a hypothetical price at which Shell stock would have traded in 1985
if Royal Dutch had not made an offer in 1984.
*7 Mr. Wulff's three-pronged analysis, which parallels a study by Morgan
Stanley for Shell, was based on the underlying premise that Shell was a
high-quality company with no other major integrated oil company having a
stronger combination of well-run businesses. Since Mr. Wulff viewed Shell as
such an outstanding company, he believed it should only be compared to the top
of its competition, not the median of its competition as Morgan Stanley decided.
WULFF'S PRESENT VALUE OF EQUITY
ANALYSIS
Mr. Wulff utilized a balance sheet format for analyzing the Present Value of
Equity for Shell on a going-concern basis, and concluded that the present value
of Shell's equity in June, 1985 was $100 per share on a buyer's tax cost basis
and $89 on a seller's tax cost basis. Petitioners contend that Mr. Wulff's
approach parallels studies done by Shell, Goldman Sachs and Morgan Stanley.
Petitioners further assert that if Shell had updated a 1984 "bid" analysis it
prepared in 1985, it would have compared favorably to Mr. Wulff s analysis using
a seller's tax cost basis:
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Wulff's 1989
Shell's Shell's
(Seller's 1985
1984
Tax Cost) "updated"
"bid"
COMPONENTS OF VALUE Analysis Analysis
Case
- ------------------------------- ------------ ------------ ------------
Exploration and Production
Assets (Upstream Assets)
Oil & Gas Reserves
Proven Reserves $16,800 $15,563
Probable Reserves $3,200 $2,020
Exploratory Acreage $1,900 $2,800
"Other" E & P $1,800 $4,400
------------ ------------ ------------
Total $23,700 $24,783 $25,610
Downstream Assets
Oil Products $3,700
Chemical Products $3,600
------------ ------------ ------------
Total $7,300 $7,600 $7,600
Present Value of Equity
Total Asset Value $31,000 $32,383 $33,210
Total Debt ($3,500) ($3,544) ($4,820)
------------ ------------ ------------
Present Value of Equity $27,500 $28,839 $28,390
Value Per Share $89 $93 $91
============ ============ ============
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Although the evidence does not support plaintiffs' claim that Shell formally
updated its 1984 internal "bid" analysis in 1985, petitioners' reconstruction of
such an analysis using internal Shell information is admissible as being
relevant to their assertions of fair value, but the weight to be accorded to
such evidence must be minimal. See Shell v. Shell Petroleum, Inc., Del.Ch., C.A.
No. 8395-NC, Hartnett, V. C. (June 19, 1990). The items contained in Mr. Wulff's
adjusted balance sheet for Shell will be addressed seriatim.
Respondent, however, asserts that Mr. Wulff's technique of equating Present
Value of Equity with fair value is not a generally accepted technique in the
financial community and is not used by major investment bankers in rendering
fairness opinions. Respondent also claims that Mr. Wulff's Present Value of
Equity analysis contains inherent flaws in that it: (1) is merely a Liquidation
Analysis, which cannot be the sole measure of fair value in an appraisal action.
See Bell v. Kirby Lumber Corp., Del.Supr., 413 A.2d 137 (1980); (2) is a
subjective measure of value deliberately biased in favor of upward "lurches" in
oil prices; and (3) contains numerous errors because Mr. Wulff relied on public
data or assumptions rather than specific information provided by Shell.
Additionally, respondent charges that Mr. Wulff was not candid in testifying
about the fair values of other integrated oil and gas companies and that Mr.
Wulff "gerrymandered" data to derive a $100 per share Present Value of Equity
for Shell, on a buyer's tax cost basis ($89 on a seller's tax cost basis).
*8 As will be seen, Mr. Wulff's Present Value of Equity Analysis is seriously
flawed. It, however, is a sufficiently accurate and accepted technique to be
entitled to considerable weight in determining the fair value of the shares.
Upstream Assets (Exploration and Production)
Mr. Wulff began his construction of an adjusted balance sheet for Shell, to
be used as part of his Present Value of Equity Model, with a valuation of
Shell's "upstream" assets (also known as exploration and production assets),
which consist of proved and probable oil and gas reserves, exploratory acreage,
and "other" exploration and production assets.
The first component of Mr. Wulff's upstream assets is Shell's proved and
probable reserves, which Mr. Wulff viewed as the most important determinant of
Shell's going-concern value because such reserves represent a reasonably
predictable stream of earnings that flow from Shell's actual production. In
addition, Mr. Wulff asserted that the present value of those reserves was the
reason why acquirors were willing to pay premiums substantially above stock
trading prices for oil and gas companies in 1984 and 1985.
The first step in Mr. Wulff's adjusted balance sheet analysis was to adjust
the book value of Shell's reserves to reflect actual market value. Mr. Wulff
asserted, and the respondent did not dispute, that the standard methodology for
determining the present value of oil and gas reserves is the "discounted cash
flow" ("DCF") analysis. Mr. Wulff's DCF analysis, as all such analyses, was
based on numerous value judgment assumptions, such as: (1) the volume of proved
reserves; (2) a production profile (in playout of reserves); (3) future oil and
gas prices; (4) future production expenses (including taxes); and (5) a discount
rate to compute the present value of future production.
Mr. Wulff's analysis used oil and gas reserve volumes, as reported in Shell's
1984 annual report and January 1, 1985 reserve report. Mr. Wulff used the net
reserve volumes for oil and gas, while the model used by Shell initially used
gross volumes, then deducted royalty interest as part of costs. By using the
reported net volumes, Mr. Wulff apparently accepted the royalty percentages
which Shell used. However, Mr. Wulff, in preparing his analysis, added the 295
million barrels of oil that were mistakenly omitted from Shell's internal
discounted cash flow valuation for 1985. Smith v. Shell Petroleum, Inc., C.A.
No. 8395-NC, Hartnett, V.C. (June 19, 1990).
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Mr. Wulff claimed that the reserve volumes reported by Shell and used by him
were conservative estimates. Mr. Jack E. Little, executive vice president of
Shell's Exploration & Production Division, apparently agreed, because he stated
at the Smith v. Shell Petroleum, Inc. trial on the disclosure violations:
Q: And that chart, if we had it, would show that actually Shell has
underestimated future production consistently, correct?
A: That chart would show--I don't have a copy of it before me. I can't recall
exactly from year to year, but that chart would show that in some years, we had
underestimated what our production is going to be in the future. Yes, that's
correct.
*9 Id.
Mr. Wulff also utilized a 20-year production profile in his Presesnt Value of
Equity analysis, meaning that all of Shell's reserves were projected to be
produced within 20 years. Petitioners assert that Mr. Wulff's 20-year playout of
reserve volumes is the same as used in Shell's 1983 long-term forecast ("LTF")
model, which was developed by Shell's field engineers. Petitioners contend that
Mr. Murphy, the Shell employee responsible for the 295 million barrels, S1
billion error, wrongly played out Shell's adjusted reserves over a 30-year
period rather than a 20-year period.
Petitioners assert that the pricing premises used by their expert, Mr. Wulff,
were reasonable because they were even more conservative than Shell's and Royal
Dutch's internal pricing premises, although they were more optimistic than
Morgan Stanley's premises. Because oil and gas prices are very difficult to
accurately predict, the Court cannot definitively determine whether petitioners'
or respondent's pricing premises were more appropriate. As it turned out, Morgan
Stanley's 1985 premises were closer to actual prices than Mr. Wulff's, but both
were overly optimistic.
Additionally, Mr. Wulff utilized a projected discount rate in his analysis of
13.0%. Although Mr. Wulff's rate is somewhat higher than the rate used by Morgan
Stanley, his rate is as justifiable as is the rate used by Morgan Stanley.
Mr. Wulff concluded that Shell's production costs would be approximately $34
billion over the production period. His estimate consists of two parts--fixed
and variable costs. Mr. Wulff estimated fixed costs at about $500 million a year
(for the production profile period), assuming that productivity improvements
offset inflation. Variable costs, on the other hand, were estimated as a
percentage of revenue. Mr. Wulff calculated the percentage so that the fixed and
variable components of expense for the first year approximate what Shell
reported for the previous year.
Mr. Wulff also projected that the federal excise or windfall profits tax
would decline and eventually disappear in accordance with the provisions of the
1985 tax law. Petitioners assert that the windfall profits tax was designed so
that the government received most of the benefit from oil price increases in the
early years of the production profile and that producers were to receive the
full benefit of price increases in latter years.
In addition, Mr. Wulff estimated that development costs for proven
undeveloped reserves would be about $5 billion, approximately one-fourth for gas
and the remainder for oil. Mr. Wulff s model also projected those development
outlays to be completed in five years (rather than over the entire 20-year
production period), because that rate matched Shell's actual spending in 1984.
Mr. Wulff further assumed that such an accelerated rate of development outlays
was appropriate because the rate of development outlays typically influences the
rate of production. All of Mr. Wulff s assumptions were based on acceptable, but
speculative, factors.
*10 Mr. Wulff based his evaluation of Shell's probable reserves on his
premise that Shell
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historically understated its volumes of probable reserves. The Shell Oil Company
Policy on Reserves Reporting states:
A review of primary reserve bookings in the Annual Reserves Report over the
last five years indicates that the primary development potential has been
understated.... The reserves have been understated because of future additions
from exploratory prospects and as a result of future or current field studies
have not been included in the unproved reserves.
Mr. Wulff then determined that the value of Shell's probable reserves was at
least equal to 20% of Shell's proved reserves. Petitioners contend that Mr.
Wulff's estimate is confirmed by Shell's 1984 General Executive Office ("GEO")
estimate, which shows the value of its probable reserves at about 20% of the
value of proved reserves.
Mr. Wulff, using a "capitalized cost" method, valued Shell's exploratory
acreage at approximately $1.9 to $2 billion. Mr. Wulff apparently based his
opinion on his assumption that the historical cost for Shell's exploratory
acreage was about $1.733 billion. On the other hand, the respondent contends
that the historical cost was actually $1.128 billion, as of 1984. However,
respondent's expert, Morgan Stanley, used only 1984 data in its analysis because
it was allegedly unable to obtain more recent data from Shell. Respondent
contends that there was no substantial change in acreage between 1984 and 1985.
Petitioners counter that Morgan Stanley's methodology was inaccurate because
it assigned no value to Shell's exploratory acreage in Alaska. In 1984,
however, Shell spent a substantial sum of money to acquire sealed bid leases on
acreage in Alaska, and also devoted nearly 25% of its 1984 domestic exploration
expenditures to its Alaska acreage.
Although the respondent challenges Mr. Wulff's capitalized cost approach,
Morgan Stanley, respondent's expert, used the same type of analysis when
evaluating the exploratory acreage of Superior and Phillips Oil Companies.
In addition, Mr. H.J. Gruy (Holdings' expert on reserves), Shell, and Goldman
Sachs all used a "sunk cost" method to evaluate Shell's 1984 exploratory
acreage, and all three derived a value of approximately $2.6 to $2.7 billion.
Mr. Gruy stated at his 1984 deposition that Shell consistently underestimated
its exploratory acreage:
This is very interesting, and in this case a unique experience for me.
Shell's history on this over the past 10 or 12 years is that the exploratory
acreage in the Gulf, the prospects, have produced on an average 12 percent more
than prediscovery estimates. Now, everywhere else I've been, the geologists have
been so optimistic about what they were going to find that what you actually
found was considerably less. But Shell's history was that they had
underestimated what they would find on these offshore blocks by an average of 12
percent.
[Gruy 1984 Dep. at pp. 72-73 (emphasis added)].
*11 Petitioners contend that Shell's "updated" 1985 figures actually showed a
value of $2.8 billion.
Instead of a discounted cash flow analysis, Mr. Wulff used book values and
annual cash flows as guiding parameters for estimating the value of Shell's
"other" exploration and production assets. Mr. Wulff found that there were
several segments to Shell's "other" exploration and production assets. As of
December 31, 1984, Shell reported as book values for "other" exploration and
production assets: (1) $437 million for coal properties; (2) $515 million for
other energy exploration and production, which could include geothermal
properties or the agricultural value of certain lands; (3) $253 million in
international exploration and production investments; and (4) $251 million in
international property, plant and equipment.
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Mr. Wulff viewed Shell's coal business and international exploration effort,
in particular, as new businesses that offered significant growth potential.
Since those investments were rather new in 1985, he assumed that the market
value of those businesses should have exceeded their book value, which reflected
depreciated costs. In addition, because Mr. Wulff believed those businesses had
growth potential, he applied a higher multiple of market value to book value
than he would have applied for slower growing businesses. Consequently, Mr.
Wulff applied a multiple of 1.3 for property value to allocated book value.
Mr. Wulff also noted that Shell's other exploration and production operations
generated a significant cash flow, at only a slightly lower rate than for mature
businesses. Mr. Wulff therefore found that Shell's 8% cash flow to property
value ratio suggested that Shell could anticipate only modest increases in
future cash flow from those properties.
Ultimately, Mr. Wulff concluded that Shell's "other" exploration and
production assets were worth about $1.8 billion, whereas Shell's "updated"
internal estimate was $4.4 billion.
Downstream Assets
Petitioners assert that on a seller's tax cost basis, Mr. Wulff's valuation of
Shell's downstream assets is extremely close to Goldman Sachs 1984 estimate and
Shell's alleged 1985 internal "update" value. Shell's downstream assets consist
of its oil and chemical products divisions, including its refining and marketing
operations. Mr. Wulff's analysis shows that Shell's downstream assets were worth
$8 billion on a buyer's tax cost basis and $7.3 billion on a seller's tax cost
basis, while Goldman Sachs' estimate for Shell's downstream business is $7.5
billion and Shell's alleged "update" estimate would indicate a value of $7.6
billion.
Mr. Wulff valued Shell's oil products division at $4 billion, or $3.7 billion
on a seller's tax cost basis, which is almost 1.1 times the book value of those
assets. Mr. Wulff viewed such a ratio as reasonable because the cash flow from
Shell's oil products division was about 14% of its property value. In addition,
Mr. Wulff's analysis was also influenced by the fact that Shell's refinery
business was the most profitable of the large oil companies and that according
to Shell, "investors [viewed] Shell's refining and marketing business as the
best in the industry." Petitioners further assert that Mr. Wulff's valuation was
reasonable in light of Goldman Sachs 1984 study, which estimated the value of
Shell's oil products division at $5.4 billion--far higher than Mr. Wulff's
valuation.
*12 Respondent criticizes Mr. Wulff's oil products analysis on several
grounds. First, respondent contends that Mr. Wulff's study failed to consider
capital expenditures needed to keep the oil products division operating, despite
the fact that he recognized such expenditures as necessary. Respondent also
asserts that if Mr. Wulff had taken into consideration future capital
expenditures, Shell's return would have been about 8%, thereby reducing the
value placed on Shell's oil products division by Mr. Wulff.
Respondent further asserts that Mr. Wulff's highly optimistic assumption
regarding Shell's oil products division is contradicted by industry newsletters
that Mr. Wulff prepared in 1985, which indicate a much less optimistic outlook.
In addition, respondent pointed out certain information that Mr. Wulff chose not
to use in his analysis, such as: (1) that net income for Shell's oil products
division declined from 1981-1985; and (2) that net income for the first five
months of 1985 was below net income for the same five months in 1984. Finally,
respondent complains that Mr. Wulff's valuation fails to consider the way the
stock market was valuing publicly-traded refining companies.
In preparing his Present Value of Equity analysis, Mr. Wulff estimated the
value of Shell's chemical products segment at $4 billion on a buyer's tax cost
basis and $3.6 billion on a seller's tax cost basis. Mr. Wulff assigned Shell's
chemical products division a
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value of 1.3 times allocated book value, because the division had a high ratio
of current cash generation and also had, in his opinion, great future growth
potential. In addition, Mr. Wulff favorably viewed Shell's substantial capital
investment in the chemical products segment during the late 1970's and early
1980's. Furthermore, Mr. Wulff considered that Shell had the largest chemical
operation of United States oil and gas companies and that Shell's chemical
segment doubled its income between 1983 and 1984.
Respondent contends that Mr. Wulff's analysis is not as thorough as Morgan
Stanley's because he failed to compare Shell to chemical companies that did not
own oil and gas properties, and that much of his analysis is too simplistic.
Mr. Wulff's chemical products study, like his oil products analysis, allegedly
failed to recognize needed capital expenditures. Furthermore, respondent
contends that Mr. Wulff over-estimated Shell's cash flow and book value because
he used inaccurate information. In addition, respondent argues that Mr. Wulff's
optimistic forecast for Shell's chemicals business was wrong and is refuted by
industry newsletters prepared by Mr. Wulff in 1984 indicating otherwise.
Moreover, respondent claims that Mr. Wulff's analysis failed to utilize certain
internal Shell data that was available to him and also failed to examine the
performance of chemical companies in the stock market.
The amount of Shell's long-term corporate debt obligations is essentially not
disputed. Mr. Wulff, Shell, and Morgan Stanley, used virtually identical
numbers. Petitioners emphasize, however, that Shell's corporate debt declined
between 1984 and mid-1985 by almost $1 billion--thereby increasing the
underlying value of Shell's equity.
*13 In essence, petitioners Present Value of Equity Analysis, although
seriously flawed, must be given considerable weight, provided that the valuation
which it supports ($89 per share on a seller's tax cost basis) is discounted to
reflect its deficiencies. The Court finds that petitioners' estimate of $100 per
share (on a buyer's tax cost basis), cannot be considered because Mr. Wulff's
reliance on a buyer's tax basis to justify a $100 per share value was clearly
shown to be wrong by respondent. Mr. Wulff ignored that any stepped-up basis to
a buyer would have been immediately offset by recapture taxes.
WULFF'S COMPARATIVE DEAL MARKET
ANALYSIS
Because Mr. Wulff"s Comparative Deal Market Analysis is based on his flawed
buyer's tax cost basis Present Value of Equity analysis and because of other
deficiencies, it is entitled to little weight in determining the fair value of
the shares. In his analysis of comparative market transactions in 1984 and 1985,
Mr. Wulff claims that there should have been no discount applied to Shell's $100
per share (on a buyer's tax cost basis) Present Value of Equity as he
calculated. Petitioners, however, contend that the trend in June 1985 was for
oil and gas companies to command a price close to the Present Value of Equity.
Mr. Wulff's study compared purchase price plus debt on 17 oil and gas company
transactions in 1984 and 1985 with his "before-the-fact" estimates of property
values for each company that was actually sold as a going-concern.
Section 4 of Mr. Wulff s report explains the calculation of this ratio--which
he named the "McDep" ratio. Mr. Wulff concluded that the median McDep ratio for
the 17 transactions studied was 1.04, which implies a market value for Shell of
approximately $106 per share.
Mr. Wulff's methodology for comparing Shell to the merger market made value
judgment assumptions about the relevant time period, the transactions that were
comparable, and the method for comparing them. Mr. Wulff limited the relevant
time period to 1984-1985 because he believed the takeover trend that began in
the 1980's was evolving toward purchase prices nearer to asset values.
Respondent's expert, Mr. Case, even admitted that more recent transactions are
more
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reliable because of different economic conditions in earlier years.
In determining the seventeen comparable transactions, which he selected, Mr.
Wulff considered sales of going concerns involving substantial oil and gas
reserves. Mr. Wulff viewed the size of a company's oil and gas reserves as
particularly relevant in choosing comparable transactions because Shell was
predominantly an "upstream" oil and gas exploration company focusing on oil and
gas reserves, and anyone purchasing Shell would be very interested in those
reserve assets.
Respondent challenges Mr. Wulff s analysis as inaccurate, however, because
respondent claims that Present Value of Equity is not an accurate predictor of
the "deal market" price for integrated oil and gas companies. Essentially,
respondent argues that Mr. Wulffs analysis is faulty because he assumed that the
only truly comparable transactions are those involving integrated oil and gas
companies during the period 1980-85. There were only five acquisitions involving
integrated oil and gas companies during this period which respondent considers
comparable to Shell: DuPont's acquisition of Conoco, U.S. Steel's acquisition of
Marathon, Occidental's acquisition of Cities Service, Texaco's acquisition of
Getty and Chevron's acquisition of Gulf Oil. Only two of the five acquisitions
involving integrated oil and gas companies were included in Mr. Wulff s analysis
(Gulf and Getty) and none of the five acquisitions were concluded at a price
equal to Mr. Wulff's Present Value of Equity. Mr. Wulff did not consider the
Conoco, Cities Service and Marathon transactions because they occurred prior to
1984-85.
* 14 Without addressing all of the respondent's particular arguments, it is
sufficient to note that the respondent points out a number of inconsistencies IN
MR. WULFFS deal market analysis based on seventeen allegedly comparable
transactions. Despite the inconsistencies in Mr. Wulff s Comparative Deal Market
Analysis, it is an acceptable method for evaluating a corporation like Shell.
It is unfortunately not unusual for expert analyses, when prepared in the
context of litigation, to contain certain inconsistencies and biases in favor of
the party paying for the analysis. For instance, the liquidation analysis
completed by the respondent's trial expert (see infra), Mr. Case, compared
Shell's refining and marketing and chemical businesses to "pure" chemical
companies, instead of integrated oil and gas companies. Mr. Case also compared
Shell's coal business to pure coal companies instead of integrated oil and gas
companies. The inconsistencies of Mr. Wulff do not totally discredit the method
used in his Comparative Deal Market Analysis, but they do result in it being of
little use to the Court.
In summary, petitioners' Deal Market Analysis is entitled to less
consideration in determining the fair value of Shell's stock than is
petitioner's Present Value of Equity Analysis.
WULFF'S TRADING MARKET ANALYSIS
The final evidence of the fair value of Shell on June 7, 1985 proffered by
the petitioners is Mr. Wulff s Trading Market Analysis. That analysis is based
on the premise that the stock of integrated oil companies typically trade in the
stock market at substantial discounts from their intrinsic value, and when an
integrated oil and gas company, like Shell, is sold in the deal market, it
typically has commanded a large premium over its stock market price.
Consequently, petitioners argue that Shell stockholders should receive a similar
premium if they are to receive fair value.
The first step in Mr. Wulff's reconstructed Trading Market Analysis was to
calculate what the stock price for Shell in June 1985 would have been if no
tender offer had been made. In order to make that calculation, Mr. Wulff used a
comparative measure that related stock price to the value of oil and gas
reserves, because he concluded that the major factor influencing the stock
market prices of integrated oil and gas companies was the value of their
reserves. Mr. Wulff's trading market analysis, unlike Morgan Stanley's
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analysis, did not rely on an earnings comparison because he viewed it as highly
unpredictable. For example, a company that is expanding rapidly would show low
earnings due to heavy expenses, whereas a company curtailing new investment
(possibly a bad sign), might have stronger earnings.
Mr. Wulff concluded that, had there been no tender offer, Shell's stock
trading price would have risen by June 1985 to $58 per share, and that at $58
per share, Shell would have ranked among the leading integrated oil and gas
companies based on the relative ratio of total stock market value plus debt to
overall property value. At trial, Mr. Wulff further pointed out that Shell's
average rank among major oil and gas companies in 1983 was third place and to
retain that rank in 1985, its stock price would have been in the $58 per share
range.
*15 Mr. Wulff's report indicates that if Shell's stock had traded equal to
the composite for seven large integrated companies, its ratio would have been.
62 and its stock price about $56 per share. However, because Mr. Wulff viewed
Shell as a higher quality company than the composite, he constructed Shell's
stock market capitalization ratio at the composite of Amoco and Atlantic
Richfield, .64, or approximately $58 per share.
Petitioners also assert that Mr. Wulff's analysis is consistent with Shell's
internal 1984 analysis which concluded that Shell's stock price would have
rebounded from a low of $44 per share on January 23, 1984, the day prior to the
first Royal Dutch tender offer, to approximately $56 per share on June 7, 1985.
Petitioners further contend that Royal Dutch shrewdly timed its merger offer at
a time when Shell's stock price had bottomed out because of a dip in oil stock
prices at the beginning of 1984, which was exagerated for Shell due to the
announcement of an environmental lawsuit filed against the company.
Shell's internal 1984 analysis showed the premiums paid over stock trading
price for major buy-out transactions such as Gulf, Getty, Marathon, and
Conoco. Using Shell's internal analysis, petitioners contend that if Shell
had sold at the same premium as Gulf, using Mr. Wulff's $58 per share
unaffected trading price, Shell stockholders would have received $126-$143
per share for their shares. Under the same analysis, if Shell sold at the
same premium as Getty, Marathon or Conoco, using Mr. Wulff's $58 per share
unaffected trading price, Shell stockholders would have received $92-$131 per
share.
Additionally, petitioners point out that even using Morgan Stanley's $44 per
share unaffected trading price (see infra), Shell stockholders would have
received prices based on Shell's internal calculations of premiums over stock
trading prices paid in the following transactions:
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Price for Shell Price for Shell
based on the based on the
Premium Over Premium Over
Average Price Closing Price
12 Months Before Just Before
Company First Offer Final Offer
Gulf $108 $96
Getty 86 70
Marathon 86 81
Conoco 87 87
Average 91.75 83.50
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Therefore, petitioners argue that even Morgan Stanley's "reconstructed" stock
trading price confirms values consistent with an $80-to-$100 range for Shell in
1985.
Respondent counters that Mr. Wulff's Trading Market Analysis is faulty
because it is based on the unsound premise that the liquidation value of a
company's oil and gas reserves is the major factor to be used in calculating an
unaffected market price, for an oil and gas company, like Shell. Respondent's
expert, Mr. Case, contended that the stock market in 1985 did not value
integrated oil and gas companies on the basis of liquidation value of their
reserves. Rather, Mr. Case asserted that stocks traded in 1985 on the basis of
price/earnings ratios and price/cash flow ratios. Respondent further argues that
many of the details in Mr. Wulff s Trading Market Analysis are incorrect,
including the ranking he derived for Shell as opposed to other companies.
*16 After considering all of the evidence and arguments regarding Mr. Wulff's
Trading Market Analysis, I find that it is entitled to no weight in calculating
the fair value of Shell's stock as of June 7, 1985. There are numerous flaws in
Mr. Wulffs analysis, including his basic premise that the Shell stockholders are
entitled to a premium over Shell's value. See Cavalier Oil Corp. v. Harnett,
Del.Supr., 564 A.2d 1137 (1989).
In summary, petitioners' estimate of fair value is seriously flawed and
overestimates the value of Shell's stock.
IV
RESPONDENT'S ASSERTIONS OF FAIR
VALUE
As will be seen, respondent's estimate of fair value is also seriously flawed.
Although respondent asserts that the $58 per share cash-out merger price was
fair in that it exceeds its estimate of the fair value of Shell Oil at the time
of the merger, respondent's experts never asserted that a greater value might
not also be fair.
Respondent contends that the $58 per share merger price was even somewhat
generous, because respondent's valuation expert, Morgan Stanley & Company
("Morgan Stanley"), determined that $55 per share was the fair value of Shell
Oil as of June 7, 1985. Respondent's valuation is mainly based upon the
testimony of its expert trial witness, Mr. Robert Case, a managing director
at Morgan Stanley. Although Mr. Case gave testimony in support of Morgan
Stanley's fairness opinion, it is undisputed that the opinion expressed is
that of the Morgan Stanley firm, not Mr. Case's opinion as an individual.
Morgan Stanley is an international investment banking firm, which has numerous
"Fortune 500" companies as clients, including a number of clients in the oil and
gas industry. In addition, Morgan Stanley has vast experience in the field of
mergers and acquisitions, including major transactions involving oil and gas
companies.
In rendering its most recent fairness opinion, Morgan Stanley performed an
analysis of Shell Oil's businesses, building on work it had performed in
1984-85. Morgan Stanley's. five-person team met with Shell management, examined
internal plans, nonpublic information, and studied public data regarding Shell
and other companies in the oil and gas industry. The Morgan Stanley team then
developed a statistical package which forms the basis for Morgan Stanley's
fairness opinion, including a determination of the Liquidation Value, Trading
Market Value and Merger Market Value of Shell on June 7, 1985.
Once the statistical analysis was prepared, a preliminary fairness opinion was
drafted and reviewed at a firm meeting of senior Morgan Stanley personnel. Upon
reviewing each of the analyses in the statistical package, this senior group of
Morgan Stanley employees concluded that, as of June 7, 1985, a Liquidation Value
for Shell Oil was approximately $57.50 per share; a Merger Market Value was
approximately $60 per share; and a Trading Market Value was in the $43-$45 per
share range. After discussing
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these valuations, the Morgan Stanley personnel concluded that $55 per share was
a fair value for Shell on June 7, 1985.
*17 Although Morgan Stanley did not assign any specific weightings to its
three analyses, it did emphasize its Trading Market Value because a sale or
liquidation of Shell was unlikely.
MORGAN STANLEY'S LIQUIDATION
ANALYSIS
The first step Morgan Stanley took in its valuation of Shell was a
Liquidation Analysis, which yielded a value for Shell of approximately $57.50
per share. Morgan Stanley's Liquidation Analysis is very similar to Mr.
Wulff's "Present Value of Equity" Valuation. To perform its Liquidation
Analysis, Morgan Stanley reviewed Shell's assets, which consist of: (1)
"Upstream" or Exploration and Production ("E & P") assets--i.e., proved and
probable oil and gas reserves (AB1 and B2 reserves, respectively);
exploratory acreage; and coal properties; and (2) "Downstream"
assets--consisting of the refining and marketing business ("Oil Products")
and the chemicals business ("Chemical Products").
Upstream Assets
Morgan Stanley valued Shell's proved and probable reserves by using a
discounted cash flow ("DCF") methodology. Petitioners' expert, Mr. Wulff, also
used the DCF methodology for valuing Shell's proved reserves, although he used a
"rule-of-thumb" estimate for valuing Shell's probable reserves. To prepare a DCF
analysis of Shell's proved and probable reserves, Morgan Stanley, like Mr.
Wulff, had to make numerous value judgment assumptions regarding: (1) the
volumes of Shell's proved and probable reserves; (2) the production profile for
those reserves; (3) the future costs of production and capital expenditures; (4)
future prices of oil and gas; and (5) a discount rate based on an estimate of
future interest rates.
Morgan Stanley adopted Shell's internal assumptions for volumes, production
profile and costs, because Morgan Stanley believed that Shell was better suited
to predict those factors. Morgan Stanley, however, believed that because it was
a member of the financial community, it was more skilled at selecting pricing
premises and a discount rate.
The oil and gas volumes utilized by Morgan Stanley were developed internally
by Shell based upon its professional engineering studies. In 1984, Shell's
internal volume estimates were reviewed by H.J. Gruy & Associates ("Gruy"), an
independent petroleum consultant hired by the Shell Special Committee and
acknowledged by Mr. Wulff to be an expert in the field. Gruy determined that
Shell's proved volumes were correctly calculated, but its probable volumes were
overstated.
Nevertheless, Morgan Stanley used the proved and probable reserve volumes from
Shell's January 1, 1985 reserve report without making any of the adjustments
suggested by Gruy. Morgan Stanley did, however, adjust Shell's January 1, 1985
volumes in order to bring them forward to June 7, 1985, taking into account
production, property acquisitions and timing differences in its DCF valuation.
Mr. Wulff, petitioners' expert, on the other hand, accepted neither Shell's,
nor Gruy's volume determinations, concluding that both estimates were
understated. Petitioners contend that if Morgan Stanley's findings were
consistent with the studies it did for Phillips Petroleum and Southland Royalty,
the difference in volumes would disappear. Morgan Stanley's Phillips and
Southland Royalty studies valued proved reserves at an average of 130 percent of
a SEC Value for Shell. The SEC Value is a standardized (although somewhat
arbitrary) method of stating proved reserves mandated by the Federal Securities
& Exchange Commission. It mandates the use of uniform discount rates and pricing
premises. 130 percent of Shell's $13.658 billion SEC value for proved reserves
would be approximately $17.8 billion, or about $15 per share. Morgan Stanley,
however, assigned a "point" liquidation value to Shell's
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proved reserves of $13.078 billion--only 95 percent of the SEC Value.
*18 Morgan Stanley also assigned a relatively low liquidation value to
Shell's probable reserves--only $610 million, whereas Mr. Wulff valued Shell's
probable reserves at $3.2 billion. In the Joseph v. Shell (supra), litigation in
1984, Morgan Stanley placed no value on Shell's probable reserves until this
Court required it to review probable reserve information. Petitioners, however,
assert that if Morgan Stanley valued Shell's probable reserves in the same
manner as it valued probable reserves for Southland Royalty, its probable
reserve valuation would jump from $610 million to approximately $3.3 billion, or
an increase in liquidation value of $9 per share. If petitioners' assertions
regarding proved and probable reserves are correct, Morgan Stanley's liquidation
value would be increased from about $57.50 per share to approximately S82.00.
In preparing its Liquidation Analysis, Morgan Stanley used a 30-year
production profile prepared by Shell by making adjustments to a Long-Term
Forecast it prepared. Shell's Long-Term Forecast, which was developed by Shell
engineers, was based on the estimates of the production to be expected from each
field. As of June 7, 1985, the merger date, the most recent long-term forecast
was based on reserves existing on January 1, 1984. Shell adjusted those figures
to reflect reserves acquired between January 1, 1984, and June 7, 1985--all of
which were assumed to be produced on the same schedule as the existing reserves.
As previously noted, Mr. Wulff did not use the 30-year Shell production
profile, although petitioners contend that the 20-year production profile used
by Mr. Wulff is the same as the profile used in Shell's long-term forecast but
for a shorter period. Respondent argues that Mr. Wulff's shorter 20-year
production profile is incorrect and that Shell's 30-year production profile was
more accurate because it correctly reflected Shell's incentive to produce
reserves as fast as economically possible, while considering capital and
operating expenses, geological limitations on the wells and regulatory concerns.
Because Shell had a 13-year reserve life index, respondent contends a 30-year
production profile was appropriate.
In addition, the respondent contends that it is economically and physically
impossible to produce all Shell's proved reserves in a 20-year period. Gruy's
work for the Special Committee seems to support respondent's assertion. Even
Mr. Wulff conceded that the 20-year case was an oversimplification, and that
there would be production beyond twenty years.
Morgan Stanley estimated total production costs over the relevant period to be
$51.2 billion, whereas Mr. Wulff estimated $34 billion, which is even lower than
the standardized SEC Value of $36.8 billion.
Morgan Stanley used Shell's assumptions about the timing and amount of
operating costs and capital expenditures, while Mr. Wulff made his own
assumptions. For example, Mr. Wulff forecasts that all capital expenditures
would be made in the first five years of his 20-year production profile.
According to Gruy, however, Mr. Wulff's assumption is unrealistic because
capital expenditures are made when needed over the production period, not just
within the first five years.
*19 In addition, Mr. Wulff assumed lower operating costs and capital expenses
for Shell than Morgan Stanley. Morgan Stanley, for example, shared Shell's
assumption that the federal windfall profits tax would be extended beyond its
nominal expiration date, whereas Mr. Wulff assumed the windfall profits tax
would terminate in accordance with the timetable set forth in the 1985 federal
income tax laws. Mr. Wulff also ignored state income taxes which Shell and
Morgan Stanley included. Furthermore, respondent claims that Mr. Wulff ignored
the impact of inflation on fixed operating costs because he assumed that
productivity improvements would offset inflation. Respondent also contends that
Mr. Wulff's estimate of variable costs at 16.3% of
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revenues further ignores inflation because his variable costs do not increase
in years when reserves remain the same.
It is undisputed that oil prices are difficult to predict. Not surprisingly,
therefore, each side had a different view on the appropriate oil price
premises--as might be expected--with petitioners' premises being very optimistic
and respondent's premises being even more conservative than Shell's.
Morgan Stanley used a "consensus price strip" developed by Mr. Barry Good, a
Morgan Stanley managing director, who allegedly provided consistent price
premises for deals in which Morgan Stanley was involved. Mr. Good apparently
developed his "price strip" by being in daily contact with oil and gas
companies, investors, and financial institutions.
Respondent contends that Mr. Good's price premises were reasonable in 1985
because the premises were similar to a consensus forecast produced by the
Society of Petroleum Evaluation Engineers '("SPEE"), and other 1985 forecasts
were lower than Morgan Stanley's, such as those proposed by Ashland Oil, Chase
Econometries and various banks surveyed by SPEE. On the other hand, respondent
claims that Mr. Wulff's price "strip" was unreasonable because it adhered to a
forecast of a very rapid price escalation--7.3%, over 50%% greater than the SPEE
average 1985 forecast of 4.7%.
After considering all the relevant evidence in the record regarding oil and
gas price premises, I find that both sides were overoptimistic, with the
respondent's premises being somewhat more correct. However, in light of the
inherent difficulty in predicting future oil and gas prices, I do not find this
to be a significant difference. In addition, the difference between the price
premises is not significant because lower oil prices do not necessarily lead to
lower discounted cash flow valuations as the respondent asserts. Rather, lower
oil prices are typically offset in a discounted cash flow analysis by lower
discount rates.
Morgan Stanley used a range of discount rates of 11 to 14%, with a point
estimate of 12.4%. Morgan Stanley used a capital asset pricing model, a
well-established technique in the financial community, to calculate the cost of
capital for Shell, as well as for other companies.
*20 As previously discussed, petitioners' expert, Mr. Wulff, used a 13%
discount rate in his analysis, which also was higher than the discount rate used
by Shell in its internal analyses. In light of the closeness in discount rate
estimates, I do not find the difference to be significant, because the rate used
by Morgan Stanley is as justifiable as the rate used by Mr. Wulff.
Morgan Stanley used three techniques to value Shell's exploratory acreage, and
each method produced very similar values. Morgan Stanley first developed a
method in conjunction with DeGolyer & MacNaughton, a recognized firm of
independent oil engineers. This analysis showed a total value of $1.042 billion.
This method multiplied the sum of the prices Shell paid for the acreage and the
capitalized drilling costs by "evaluation factors" developed to reflect the
economic value of the acreage.
Morgan Stanley next looked at Shell's historical cost to acquire its
exploratory acreage, which totaled $1.128 billion. An underlying assumption made
by Morgan Stanley in this analysis was that the acreage was as valuable in 1985
as when Shell purchased it. However, most of the acreage was not as valuable in
1985 as when purchased because oil price expectations had decreased, thereby
decreasing the value of the acreage. Despite the fact that its historical cost
analysis for Shell's exploratory acreage was overvalued, Morgan Stanley still
used it in deriving an overall value for Shell's exploratory acreage.
Finally, Morgan Stanley used the "PDPOD" method developed by Shell in 1984,
which showed a total value of $1.142 billion. Morgan Stanley's PDPOD analysis,
which is similar to a discounted cash flow analysis,
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used the same methodologies as Shell's 1984 analysis, but used its own oil price
premises because it viewed Shell's premises as too high.
After reviewing these three analyses, Morgan Stanley concluded the exploratory
acreage of Shell that existed on January 1, 1985 was worth about $1.1 billion.
To derive a value for Shell's exploratory acreage on June 7, 1985, Morgan
Stanley further assumed that Shell's additional leasehold purchases between
January 1, 1985 and June 7, 1985 were worth what Shell paid for them.
Consequently, Morgan Stanley added them to the $1.1 billion total from January
1, 1985 to arrive at a total acreage value of $1.283 billion.
The valuation of exploratory acreage is extremely difficult, with such
valuations being very tenuous, because acreage values are even more volatile
than the values of oil and gas reserves. Even considering this inherent
volatility in acreage values, Mr. Wulff's $2 billion estimate in June 1985 seems
exaggerated, because he had valued the same acreage in 1984 at $1 billion.
Morgan Stanley next performed a discounted cash flow analysis of Shell's coal
reserves, while also examining prices paid in various acquisition transactions
involving coal companies. Morgan Stanley developed its own cost, pricing and
discount rate assumptions because it decided that Shell's assumptions (such as
real price increases and unit cost decreases), made in 1984, were too
optimistic. In 1985, the coal business was not considered very desirable.
*21 Morgan Stanley relied principally on its discounted cash flow analysis in
determining a range of liquidation values for the mining divisions. In deriving
a "point" estimate, Morgan Stanley considered the fact that coal properties were
low in demand, and therefore chose the low end of the range.
Mr. Wulff, on the other hand, as previously mentioned, based his analysis on
the assumption that Shell's coal properties were worth what Shell paid for
them--i.e., book value. However, such an assumption was unrealistic because the
coal market declined substantially after Shell purchased its principal operating
mine.
Additionally, petitioners argue that Morgan Stanley ignored Shell's
"reinvestment" strategy--i.e., that patience was required due to the lackluster
performance of the coal industry at that time. Furthermore, petitioners point
out that Shell's coal division compared favorably to other publicly-traded coal
companies because it had steam coal, favorable contracts, and no debt.
Downstream Assets
In March 1985, when Morgan Stanley performed the work for its opinion in
connection with the settlement of the litigation in Joseph v. Shell, Del.Ch.,
C.A. Nos. 7450 and 7699-NC, Hartnett, V.C. (April 19, 1985), Shell's most
current forecast for its downstream business was the 1985 Short-Term Operating
Plan prepared in the fall of 1984 (the "1985 STOP"). At that time, Morgan
Stanley reviewed the 1985 STOP and concluded that Shell was overly optimistic in
its assumptions. Morgan Stanley, therefore, developed its own forecast for
Shell's downstream assets, i.e., its Chemical Products and Oil Products
divisions. For its June 7, 1985 opinion, Morgan Stanley used its March 1985
forecast, along with a further downward revision for Chemical Products because
of additional deterioration in industry conditions prior to the merger.
Morgan Stanley's downward projections seem reasonable in light of the
declining projections for income.
Morgan Stanley then performed a detailed analysis of Shell's Chemical and Oil
Products segments. For each business, Morgan Stanley performed a Trading Market
Valuation, a Discounted Cash Flow Analysis and an Acquisition Multiple Valuation
and settled on a combined valuation range of $3.387 to $5.5 billion, with a
"point" estimate of $5.067 billion.
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Morgan Stanley's Trading Market Analysis compared Shell's chemicals business
to publicly-traded chemical companies and to the chemical businesses of other
integrated oil and gas companies. The publicly-traded chemical companies
reviewed by Morgan Stanley had an average return on equity in 1984 of 11.7%,
compared to Shell's return of 4.3%. In addition, Shell's return on its chemical
assets in 1984 was 3.64%, whereas the average return on chemical assets for the
integrated oil and gas companies studied by Morgan Stanley was 5.22%.
After making those comparisons, Morgan Stanley reviewed the values that the
market was placing on publicly-traded companies by examining price-to-earnings,
price to cash income before tax, and price to book value ratios for
publicly-traded chemical companies. Morgan Stanley then derived an implied
trading value for Shell based on the chemical industry's median earnings
multiple times Shell's income and by multiplying Shell's book value by an
appropriate return on equity, which was calculated by a regression analysis.
*22 Morgan Stanley also conducted a discounted cost flow analysis and an
acquisition analysis for Shell's Chemical Products segment. Morgan Stanley,
however, gave its Trading Market Analysis the most weight because it concluded
that there would have been little market for Shell's chemical properties in
June, 1985, despite that a corporate buyer would have required a discounted cash
flow analysis and acquisition analysis.
Based on these considerations, Morgan Stanley's liquidation value for Shell's
Chemical Products segment suggested a range of approximately $1.2-$1.8 billion,
plus the book value of Shell's Saudi plant (despite projected losses).
Petitioners, however, point out several inconsistencies in Morgan Stanley's
analysis. First, Morgan Stanley's report indicates that Shell's chemical
products segment would be worth $2.75 billion to $7.269 billion (with a $5
billion mid-point) when compared to the "deal market" for other companies on a
"multiple of book" basis. Furthermore, Shell had a stronger return on investment
in chemical products than other integrated oil companies, thereby implying a
higher value for Shell's chemical products division.
Morgan Stanley next conducted a Trading Market Analysis that compared Shell's
Oil Products segment (i.e., Refining and Marketing) to those of other companies.
According to Mr. Case, Morgan Stanley's analysis indicated that Shell was not
earning an acceptable rate of return, although other integrated companies were
performing even more poorly than Shell.
Once Morgan Stanley made its preliminary comparisons, it then examined the
values the market placed on publicly-traded refining and marketing companies, by
reviewing price-to earnings, price to cash income before tax and price to book
value ratios for such companies. Morgan Stanley then derived an implied trading
value for Shell based on the industry's median earnings multiple times Shell's
income, and by multiplying Shell's book value by an appropriate return on
equity, which was calculated by a regression analysis.
Morgan Stanley also performed a Discounted Cash Flow Analysis and an
Acquisition Analysis for Shell's Oil Products segment. Again, however, Morgan
Stanley concluded that, although a corporate buyer would look at those
valuations, principal reliance should be placed on the trading market value
because there was only a small market for refining assets in June, 1985.
Morgan Stanley, therefore, concluded that Shell's Oil Products segment had a
liquidation value range of $2.3-$3.4 billion, with a point estimate of $3
billion.
Petitioners contend, however, that Morgan Stanley used its trading market
valuation of Shell's oil products segment only because its discounted cash flow
and deal market analyses indicated substantially higher values--$3.5 billion to
$3.9 billion and $2.4 billion to $9.9 billion, respectively. Additionally,
petitioners
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claim that Morgan Stanley's analysis contained other inconsistencies and also
failed to recognize Shell's oil products segment as the best in the industry.
*23 While the methodology used by Morgan Stanley in its Liquidation Analysis
is acceptable, Morgan Stanley in preparing its estimate obviously made hundreds
of assumptions as to the value of a particular asset. In most instances it chose
the lower, rather than the higher, value. As indicated, petitioners also pointed
out many flaws in Morgan Stanley's Analysis. It is therefore clear that Morgan
Stanley's Liquidation Analysis is substantially flawed.
MORGAN STANLEY'S MERGER MARKET
ANALYSIS
Morgan Stanley's Merger or Deal Market Analysis was an effort by it to
estimate what price a corporate buyer might have paid for the whole of Shell Oil
if Shell had been auctioned off in a sale of control of the company. The
respondent contends, and the petitioners do not dispute, that a potential
corporate buyer would not only consider the value of the target's underlying
assets by performing a Liquidation Analysis, but would also examine the prices
that had been paid in comparable transactions in the 1980's. In making its
Merger Market Analysis, Morgan Stanley considered a number of transactions to be
comparable. Five transactions involved acquisitions of integrated oil and gas
companies--the acquisition of Conoco Oil by DuPont, of Marathon Oil by U.S.
Steel, of Cities Services Oil by Occidental Petroleum, of Getty Oil by Texaco,
and of Gulf Oil by Chevron. These five transactions were the only acquisitions
of integrated oil and gas companies in the 1980's and respondent contends that
these companies were the most comparable to Shell of any acquired companies.
Morgan Stanley's analysis, however, also considered two deals involving
integrated oil and gas companies that did not involve transfers of control--the
recapitalizations of Phillips Petroleum and Unocal. According to Mr. Case,
Morgan Stanley considered those recapitalizations in order to be sure that there
were no "acquirors out there in the first half of 1985 looking to bid at value
levels above those that had been paid historically." [Case Tr. at 983].
Furthermore, Morgan Stanley's study also analyzed the purchase of Superior Oil
by Mobil, even though Superior was not an "integrated" company. Although Morgan
Stanley gave the Mobil acquisition of Superior little weight in its analysis, it
nonetheless considered that transaction relevant because of the size of the
deal.
Petitioners counter that Morgan Stanley's use of only "integrated" companies
in its study was faulty because: (1) Shell was predominantly an "exploration"
company compared with the integrated companies studied by Morgan Stanley; (2)
Shell had a greater percentage of United States proved reserves than Superior
Oil, which Morgan Stanley considered a "pure" exploration company; and (3) Shell
was a superior company to the integrated companies studied by Morgan Stanley,
and therefore, Shell should not have been assigned a median value.
Petitioners note a number of differences between Shell and the integrated
companies studied by Morgan Stanley: (1) Shell's reserve replacement from 1974
to 1982 was 116%, compared to only 49% for Gulf, 47% for Getty, and 67% for
Phillips; (2) Shell's replacement cost per barrel was only $6.03 for the
relevant period whereas the replacement cost per barrel was $12.63 for Gulf,
$16.40 for Getty, and $14.83 for Phillips; (3) Shell's return on investment for
oil products for the relevant period was 11.1% compared with 6.4% for Marathon,
6.7% for Cities Services, 7.7% for Conoco and 8.0% for Gulf; and (4) Shell was
granted 1107 product technology patents over the relevant period, compared to
678 for Gulf, 2 for Getty, 62 for Marathon, and 120 for Cities Services.
Consequently, petitioners urge that Shell should be priced at the top of the
range, not at the median.
*24 From all the facts and circumstances, I find that Morgan Stanley's
decision to use
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integrated oil companies in order to study comparable transactions for its
merger market analysis was appropriate. However, I also find that Shell was a
superior company to most of those studied by Morgan Stanley and should have been
priced above the median.
Morgan Stanley's Merger Market Analysis examined the comparable transactions
on the basis of four measures, the same measures used by Goldman Sachs in its
analysis-adjusted price per net equivalent barrel, price to cash flow, price to
"Herold's value", and adjusted price to SEC value. After examining each of these
measures, Morgan Stanley determined that $60 per share was a reasonable estimate
of the price that would have been paid for Shell had it been sold on the merger
market. Respondent contends that at $60 per share, Shell compared favorably to
the five most comparable transactions listed above, even though it was unlikely
that Shell would be taken over because of the existence of a majority
shareholder and the lack of an identifiable buyer.
Adjusted Price Per Net Equivalent Barrel
For each of the comparable transactions it used, Morgan Stanley calculated the
ratio, adjusted price to net equivalent barrels ("NEB"), for worldwide proved
reserves, developed and undeveloped, to determine a reference point for how much
the acquiror of a company paid for the oil and gas reserves alone. The adjusted
price for the reserves reflects the price paid for the equity plus the debt
assumed in the transaction, less an assigned value for the downstream
properties, usually book value. The NEB measure represents a "rule of thumb" for
converting gas into equivalent amounts of oil. Two conversion ratios are
commonly used in the financial community: 6-to-1 and 10-to-1. The 6-to-1 ratio
is the thermal heat equivalent value of gas when converting it to oil, and the
10-to-1 ratio is the commercial equivalence.
The respondent's expert chose the median adjusted price/NEB ratios of the
transactions selected and arrived at a value for Shell of $53.50 per share (at
10:1) and $55 per share (at 6:1). At $60 per share, Shell's adjusted price/NEB
ratio was above all the transactions except for Superior and Cities Service (on
a 10:1 basis).
Petitioners counter, however, that Morgan Stanley's Merger Market Analysis, if
properly performed, yields a value far in excess of Morgan Stanley's $60 per
share. Morgan Stanley claimed that the primary reason for using a median value
for Shell on the adjusted price/NEB measure is that, essentially, there is no
difference in value between domestic barrels of oil (which made up the majority
of Shell's reserves) and foreign barrels of oil (which made up a majority of the
reserves of Gulf, Getty, Conoco, Marathon, and Superior). In Mr. Case's somewhat
simplistic view, the value of domestic and foreign barrels is basically the same
because: "There is foreign oil that's more profitable than domestic oil and
there is foreign oil that is less profitable than domestic oil." [Case Tr. at
978]. However, at least one of Morgan Stanley's studies of other oil companies
indicates a different result. For example, Morgan Stanley's study of Superior
Oil indicated that Morgan Stanley valued domestic and foreign barrels very
differently:
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U.S. Producing: $8.37--$9.49 per NEB
Canadian Producing: $3.30--$3.62 per NEB
Indonesia Producing: $2.64--$3.69 per NEB
U.K. (North Sea) : $1.37 per NEB
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*25 Petitioners also attack Morgan Stanley's estimate of value because the
companies and transactions considered are not sufficiently comparable to Shell
for purposes of the adjusted price/NEB ratio. Petitioners correctly point out
that the companies considered by Morgan Stanley have much higher percentages of
foreign reserves than Shell, and that overseas barrels are generally worth less
than domestic barrels for a number of reasons, including higher foreign tax
rates and the political risks associated with foreign barrels. Petitioners,
however, failed to point out that a good portion of Shell's domestic reserves
were California heavy crude, which are valued lower in the market place
according to Mr. Case. Such heavy crude reserves are high cost, but not high
price.
Petitioners also assert that Morgan Stanley's adjusted price/NEB ratio is
faulty because three of the merger transactions considered in Morgan Stanley's
study occurred before 1984, thereby making them less comparable to Shell in
1985. Additionally, petitioners contend that the recapitalizations considered by
Morgan Stanley are not comparable because they did not involve the sale or
purchase of going concerns.
Finally, petitioners argue that a more appropriate ratio to apply to Shell is
$9.14 per barrel, which was the cost of the acquisition of Gulf Oil by Chevron
on an adjusted price/domestic barrels basis. Petitioners assert that applying
such a ratio to Shell would yield a price for Shell between $100 and $110 per
share.
Petitioners correctly point out the deficiencies in Morgan Stanley's analysis.
Morgan Stanley's analysis is clearly skewed downward because of Morgan Stanley's
failure to give adequate weight to Shell's domestic oil reserves. Petitioners
reliance, however, on the adjusted price/domestic barrels ratio from the Gulf
transaction is also misplaced, because application of that ratio to Shell's
domestic reserves tends to overvalue Shell's domestic reserves because a large
portion of Shell's domestic reserves are costly California heavy crude.
Price to Cash Flow Ratio
The next measure considered by Morgan Stanley under its Merger Market Analysis
is the "price to cash flow ratio", which represents the underlying cash flow
that an acquired company was generating in comparison with the per share price
paid for it. According to Mr. Case, the median price to cash flow ratio was 4.7
in the transactions examined, which implied a value of $61 per share for Shell.
Morgan Stanley's analysis utilized a worldwide reserve life index placing Shell
at the median on that basis.
Petitioners' expert, Mr. Wulff, however, disputed Morgan Stanley's use of a
world-wide reserve life index, as opposed to a domestic reserve life index,
because such an index mistakenly compares relatively cheap barrels of foreign
oil with Shell's more valuable domestic barrels. Petitioners assert that if
Morgan Stanley had utilized a domestic reserve life index to reflect the
relatively large life of domestic reserves, then Morgan Stanley would have
applied a higher price to the cash flow multiple in order to reflect the longer
life of those reserves.
*26 The respondent apparently does not dispute that a company with a longer
reserve life will sell at a higher multiple of price to cash flow. Petitioners
contend that Morgan Stanley's own study confirms that proposition:
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Company Domestic Reserve Life Price/Discretionary Cash Flow
-------------------------- ----------------------------------
Oil Gas
----- -----
Conoco 7.3 9.3 3.9
Gulf 8.7 8.1 4.5
Getty 11.4 9.1 5.4
Marathon 10.5 12.6 6.8
Shell 11.3 13.8 ---
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Based on the above table, Mr. Wulff concluded that Shell would logically apply
a price to cash flow multiple of 7.5 in comparison to Conoco, Gulf, Getty and
Marathon--thereby yielding a value of $98 per share for Shell--if a domestic
reserve life index were applied.
Respondent's methodology, again, placed too much emphasis on Shell's foreign
reserves and not enough emphasis on Shell's more valuable domestic reserves.
However, petitioners' proposed methodology is also flawed because it improperly
ignored Shell's foreign reserves.
Price to Herold's Value
Morgan Stanley next compared its estimate of value to "the Herold's Value
Ratio" as part of its Merger Market Analysis. Herold's is a public investment
service widely used by the oil and gas industry and the financial community. It
provides estimates of the "appraised worth" for oil and gas companies. Although
petitioners' expert, Mr. Wulff, objected to the use of this report, he stated
that Herold's "is the only public service that will try to give you a feeling
for what oil and gas reserves are worth."
Mr. Wulff further conceded that Herold's Value is an asset appraisal value
which is similar to the Liquidation Value he used in his analysis, but is more
commonly quoted than his Liquidation Value. In fact, Herold's Value Ratio is a
commonly used reference point in the oil and gas industry and was utilized by
Mr. Wulff's former employer, Donaldson, Luftkin & Jenrette (an investment
banking firm) and by Goldman Sachs. As Mr. Case stated:
"It's commonly utilized on Wall Street as a gauge of underlying relative asset
value. It's not--we've found that it can be off, in some cases way off, on
absolute measures, but it is looked at and subscribed to. It's not perfect and
it's not a substitute for doing a liquidation analysis, but it's a commonly-used
benchmark." [Case Tr. at 974.]
According to Morgan Stanley's analysis, the median price to Herold's Value
Ratio for the integrated oil company transactions studied was 71%, which
suggests a $57.58 price per share for Shell. Respondent asserts that at a merger
market price of $60 per share, Shell's price to Herold's value ratio exceeded
every other transaction studied, except for the Getty Oil and Superior Oil
deals.
Petitioners again attack Morgan Stanley's analysis as a "worst case" scenario.
Petitioners rely on internal Shell documents, which Morgan Stanley apparently
ignored, that contain a blistering attack on how Herold's Valuation severely
undervalued Shell. The "backup book" to Shell's "bid" case indicates that
Herold's valuation of Shell was faulty because:
*27 (1) Shell's reserves were discounted at 15 percent nominal--creating a low
reserve value and heavily discriminating against longlife reserves;
(2) Probable reserves were not available to Herold;
(3) Coal was valued at only 25 cents a ton;
(4) The downstream was valued at only four times the average CIBT for the last
three years--a particularly depressed value coming off a recession cycle.
Petitioners contend that despite Shell's own criticism of the Herold's
Valuation, Morgan Stanley failed to compensate for the biases by at least
valuing Shell at 100% of its "depressed" Herold's valuation, which was $81.50
per share.
Petitioners argue that such a valuation would not be out-of-line, because
Herold's use of a high discount rate, a zero value for probable reserves and an
outdated cash flow indicator for products all penalized Shell. Additionally,
petitioners point out that Phillips Oil purchased Aminoil in 1983 for 200% of
its Herold's valuation.
After reviewing all the evidence comparing Morgan Stanley's value to Herold's
value
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ratio, the Court finds that Morgan Stanley's analysis was too pessimistic,
whereas the petitioners' rebuttal evidence was too optimistic, and the true
value for Shell lies somewhere between these two extremes.
Adjusted Price to SEC Value
The next statistic reviewed by Morgan Stanley in its Merger Market Analysis
was the adjusted price to SEC Value Ratios for the transactions studied. The SEC
Value is used in the financial community because it is a discounted cash flow
analysis that the Federal Securities and Exchange Commission ("SEC") requires
each company to use in evaluating its oil and gas reserves. The adjusted price
is calculated in the same manner as previously described for the adjusted price
per net equivalent barrel ratio, but it is based on standardized (and somewhat
arbitrary) rules imposed by the SEC which are used in order to obtain a level of
uniformity in the industry.
Mr. Case stated that the adjusted price to SEC Value Ratio is a "relatively
good way to take into account quality differentials, cost differentials,
production profile differentials, and the like, which existed between barrels of
oil." [Case Tr. at 974]. Although petitioners attack the use of this ratio,
their expert, Mr. Wulff, conceded that the SEC Value provides "a useful
measuring tool" and "is consistent from one year to another." [DX 58 at 2].
Morgan Stanley's analysis indicates that the median SEC Value Ratio for the
transactions it studied suggests a value for Shell of $55.13 per share.
Consequently, the respondent argues that if Shell had a Merger Market Price of
$60 per share, it would have a value higher than every other transaction
studied, except for Getty and Superior.
The adjusted price to SEC Value Ratio clearly has weaknesses that petitioners
have noted. It is undisputed that this ratio is not based on assumptions which
mirror market assumptions, particularly regarding discount rate and price
assumptions. Additionally, Mr. Wulff claimed, and the respondent failed to
dispute, that the SEC Value Ratio Price discriminates against the blue-chip,
long-life quality of Shell's reserves because it does not consider the likely
inflation of oil prices.
*28 Finally, petitioners assert that the adjusted price to SEC Value Ratio,
like most ratios, is subject to extreme manipulation, depending on which
transactions are considered relevant in the analysis. For example, Morgan
Stanley's December 1984 Phillips Petroleum study evaluated Phillips' upstream
assets by comparing Phillips with several "relevant transactions" which differ
from the transactions Morgan Stanley considered relevant when preparing its
Shell analysis. Morgan Stanley's Shell analysis yielded a median adjusted price
to SEC value ratio of 85.2%, which implied a value for Shell of $55.13 per
share. However, Morgan Stanley's report on Phillips indicates a median adjusted
price to SEC value ratio of 150.2%, which petitioners contend, implies a value
for Shell of $82.04 per share.
Although the SEC Value Ratio has weaknesses, it nonetheless should be
considered as one relevant factor. Both petitioners and respondent again have
skewed their analyses of this ratio. Consequently, the true value for Shell
implied by the adjusted price to SEC value ratio lies between the $55.13 per
share asserted by the respondent and the $82.04 per share asserted by
petitioners.
Earnings Per Share
In challenging respondent's Merger Market Analysis, petitioners next assert
that Morgan Stanley used the wrong earnings per share figure in calculating
multiples of earnings for its Merger Market Analysis. Morgan Stanley used a
$4.59 earnings figure in its analysis which eliminated non-recurring items.
Petitioners contend, however, that in order to be consistent with Morgan
Stanley's analyses of other companies, they should have used the $5.64 per share
total earnings figure which appeared on the first page of Morgan Stanley's
report for Shell, the "Summary Statistical Sheet."
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Mr. Case admitted at trial that the median multiple of earnings calculated for
comparable transactions was 13.6 (including recapitalizations) and 14.3
(excluding recapitalizations). These multiples applied to Shell's total earnings
figure yields a range of $76.70 per share (estimated Shell' price including
recapitalizations--13.6 x $5.64) to $80.65 per share (estimated Shell price
excluding recapitalizations--14.3 x $5.64), as opposed to a range of $62.42
($4.59 x 13.6) to $65.64 ($4.59 x 14.3) per share.
Petitioners contend that the primary or total earnings figure for Shell of
$5.64 per share should have been used consistently throughout Morgan Stanley's
study, just as Morgan Stanley had done in its Phillips Petroleum study.
Petitioners argue that Morgan Stanley was inconsistent in order to hold down its
valuation of Shell.
Respondent failed to explain Morgan Stanley's inconsistencies and to rebut
petitioners' claims. Petitioners' unrebutted assertions are further evidence of
Morgan Stanley's attempt to hold down its valuation of Shell.
After considering all of the flaws in Morgan Stanley's Merger Market Analysis,
the Court finds that it is less valid than its Liquidation Value Analysis.
MORGAN STANLEY'S TRADING MARKET
ANALYSIS
*29 The final part of Morgan Stanley's study for the respondent was a Trading
Market Analysis, which attempted to determine the unaffected market price of
Shell stock absent any speculation about a merger, sale, or acquisition.
Respondent asserts that the Trading Market Analysis is an important measure of
value because there was no prospect of a sale or liquidation of Shell, and
therefore, the trading market was the most likely way that stockholders could
have realized value. Furthermore, respondent claims that since there was an
established market for Shell's shares, the trading market value must be
considered the most likely way that Shell shareholders could have realized value
from a going concern. See Application of Delaware Racing Ass'n, Del.Supr., 213
A.2d 203, 211(1965).
In January, 1984, Holdings made a merger proposal to Shell, which clearly
affected Shell's stock price at all dates thereafter. Consequently, Morgan
Stanley used two methods to calculate what the unaffected market price of
Shell's stock would have been on June 7, 1985, but for the January, 1984, merger
proposal and subsequent tender offer. Based on its dual analysis, Morgan Stanley
concluded that Shell's stock would have traded within a $43-45 per share range
on June 7, 1985.
Both of Morgan Stanley's methods of calculating unaffected market price of
Shell's stock began with the price of Shell's stock 30 days prior to the
merger announcement in January, 1984--$40 per share. Petitioners contend,
however, that the proper starting point in a trading market analysis is the
price of Shell's stock on the day prior to the announcement of the merger
proposal, i.e., January 23, 1984, which was $44 per share. See Tannetics,
Inc. v. A.J. Indus., Inc., Del.Ch., C.A. No. 5306, Marvel, C. (July 17,
1979), slip op. at 14-15; Gibbons v. Schenley Indus., Inc., Del.Ch., 339 A.2d
460, 468 (1975); In re Olivetti Underwood Corp., Del.Ch., 246 A.2d 800,
804-05 (1968). Petitioners assert that the $44 per share price on January 23,
1984 was unaffected by any leaks regarding the impending merger and tender
offer proposals. Additionally, petitioners argue that Shell's stock price in
January, 1984 was depressed and was just beginning to rebound prior to the
proposed merger announcement. Consequently, petitioners contend that by
starting with Shell's stock price 30 days prior to the merger announcement,
Morgan Stanley improperly trimmed $4 per share from the starting point of its
reconstructed market price analysis.
Although the cases cited by petitioners tend to support their position, they
are not directly on point and therefore do not control this issue. The cases
cited merely indicate that
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the price "immediately preceding" an offer, i.e., on the day prior to the offer
announcement, is the appropriate starting point. Morgan Stanley's use of Shell's
stock price 30 days prior to the merger announcement, however, was not improper,
as a matter of law, although it appears from all the facts and circumstances,
that this was another attempt by Morgan Stanley to hold down its valuation of
Shell.
*30 Morgan Stanley first chose a methodology which adjusted the $40 per share
price (which it deemed to be the unaffected trading price) by the average
percentage increase in the price of domestic and international oil and gas
stocks that had not been affected by takeover bids or restructuring between
January 1984 and June 1985. The combined average percentage increase in the
price of those stocks from January 1984 to June 1985 was 9.4%, which yielded an
unaffected trading price for Shell of $43.75 per share.
Petitioners argue (as discussed above), that Morgan Stanley should have
started its analysis with a $44 per share price and applied the 11.81% average
market price increase from January 1984 to June 1985 for the three domestic oil
companies on Morgan Stanley's "domestic oil" index. Such an analysis would show
that Shell's stock price would have risen from $44 per share to approximately
$49 per share by June 7, 1985. In addition, petitioners contend that if Morgan
Stanley had used its "S and P Oil Composite" index which it calculated as
increasing by 21.3% by June 7, 1985, Shell's stock would have actually been
$53.37 per share instead of $44.
Morgan Stanley's second approach involved a comparison of the price at
which the domestic and international integrated oil and gas companies were
trading on June 7, 1985, by reference to such measures as price/ earnings and
price/cash flow multiples. Respondent claims that applying a median
price/earnings multiple to the latest twelve month recurring earnings, yields
a $43.20 per share price for Shell.
In adopting an above median price/earning multiple, Morgan Stanley allegedly
considered the high quality of Shell's management because a quality management
generates more earnings from its asset base than a lower quality management.
Petitioners respond, however, that Morgan Stanley's analysis still understated
Shell's June 1985 unaffected market price because it failed to consider that
Shell was a superior company yielding better than average performance and that
Shell's stock price was temporarily depressed in January, 1984.
In summary, petitioners contend that Morgan Stanley's Reconstructed Trading
Price Analysis, if properly done, would have yielded a range of $49-$58 per
share, not $43-$45 per share as respondent asserts. Additionally, petitioners
claim that Shell calculated its reconstructed market price in 1984 as $50 per
share and that Mr. Wulff estimated a reconstructed price of $58 per share for
Shell as of June, 1985.
Morgan Stanley's conclusion that Shell's unaffected market price on June 7,
1985 was approximately $44 per share seems highly illogical. Such a price
represents a zero percent change from the $44 per share closing price for
Shell's stock one day prior to the proposed merger announcement on January 24,
1984, notwithstanding a substantial rise in the market price of oil stocks over
the relevant period. Joseph v. Shell Oil Co., Del. Ch., 482 A.2d 335, 345
(1984).
Morgan Stanley's Trading Price Analysis is therefore less valid than is its
Liquidation Value Analysis.
V
MINORITY DISCOUNT ISSUE
*31 In reaching its fairness opinion, Morgan Stanley specifically considered
the "realistic alternatives" available to the Shell stockholders, including the
fact that there was little or no prospect of the sale or liquidation of Shell
Oil in which the Shell shareholders would be able to participate. Because the
likelihood of Holdings being able to sell or
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liquidate Shell was doubtful, Morgan Stanley emphasized trading value as a
particularly important measure. According to Mr. Case, "in the absence of a
merger proposal, the trading price is a more realistic alternative for the
shareholders than a liquidation value or a merger market value."
Petitioners, however, assert that Morgan Stanley's analysis is synonamous with
the minority discount condemned by the Delaware Supreme Court in Cavalier Oil
Corp. v. Harnett, Del.Supr., 564 A.2d 1137 (1989). In Cavalier, the appraiser
twice discounted the overall value calculated for the two companies involved,
because the shares involved represented only a 1.5% minority interest and
therefore lacked the ability to control operations and were not liquid. This
Court held that such an approach was impermissible because it was tantamount to
appraising the value of specific shares rather than a shareholder's
proportionate interest in a going concern. Cavalier Oil Corp. v. Harnett,
Del.Ch., C.A. No. 7959-NC, Jacobs, V.C. (Feb. 22, 1988), slip OP. AT 21-22,
aff'd, Del.Supr., 564 A.2d 1137, 1144-45 (1989).
It is clear, however, that Morgan Stanley did not utilize such an approach.
Contrary to petitioners' unsupported assertions, Morgan Stanley did not discount
its Liquidation Value, Merger Market Value or Trading Value analysis in order to
reflect a "minority discount." Rather, Morgan Stanley arrived at its $55 per
share going concern value by balancing its liquidation, merger market and
trading value analyses of Shell, and by considering that it was unlikely that
there would be a sale or liquidation of Shell.
As this Court stated in a related opinion, Smith v. Shell Petroleum, Inc.,
Del.Ch., C.A. No. 8395-NC, Hartnett, V.C. (June 19, 1990), slip OP. AT 54-56:
"Recognition of majority control in this manner and consideration of the way
in which in the long run the stockholder is most likely to have realized on his
investment, is in 'relevant factor' under Weinberger v. UOP, supra, and
consistent with Delaware appraisal law. Application of Delaware Racing Ass'n,
Del.Supr., 213 A.2d 203, 214 (1965) (market value given substantial weight where
there were 'no plans to liquidate' and therefore the most likely way in the long
run for an investor to realize on his investment, had he been permitted to
continue in the enterprise, would have been through the sale of his shares); see
also Tri-Continental Corp. v. Battye, Del.Supr., 74 A.2d 71, 72 (1950); Bell v.
Kirby Lumber Corp., Del.Ch., 395 A.2d 730 (1978), aff d in part, rev'd in part
on other grounds, Del.Supr., 413 A.2d 137 (1980); Bershad v. Curtiss-Wright
Corporation, Del.Supr., 535 A.2d 840, 845 (1987) ("Clearly, a stockholder is
under no duty to sell its holdings in a corporation, even if it is a majority
shareholder, merely because the sale would profit the minority.").
*32 In Cavalier the valuation expert, after determining the value of the
company, discounted that value because of the lack of marketability of the
minority shares. Cavalier, 564 A.2d at 1144-45. The Supreme Court held that it
was not appropriate to apply such a discount 'at the shareholder level' after
the company as an entity has been valued. Id. However, the Court distinguished
such a discount from the application of a discount at the company level which
the Court found remains appropriate where, for example (as was the case in
Tri-Continental ), the minority shares being appraised have 'no right at any
time to demand of the company a proportionate share of the company's assets [so
that] a discount had to be applied to the net asset value of the company in
order to arrive at the true or intrinsic value of that particular company's
stock.' Id.
The evidence in this case demonstrates that the type of 'minority discount'
that Cavalier holds as impermissible--i.e., a discount from the value of the
company's shares at the shareholder level to account for a minority
stockholder's lack of control--was not applied by Morgan Stanley. Mr. Case
testified at trial that in concluding that $58 was fair, Morgan Stanley did not
first arrive at a higher per share value and then apply a discount to that value
because the shares being valued
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were a minority. The plaintiffs therefore did not carry their burden at trial of
demonstrating that Morgan Stanley applied such a minority discount.
Consequently, I find that Morgan Stanley's valuation methodology was not
incorrect and was adequately disclosed."
Therefore, based on the evidence adduced at trial and this Court's previous
ruling in Smith v. Shell Petroleum, Inc., supra, the Court finds that Morgan
Stanley, in reaching its fairness opinion on the value of Shell's stock, did not
impermissibly apply a minority discount in violation of Cavalier.
VI
MORGAN STANLEY'S POTENTIAL
CONFLICTS OF INTEREST/BAD FAITH
ISSUE
Petitioners also challenged the credibility of Morgan Stanley's fairness
opinion by alleging that Morgan Stanley was not a disinterested investment
banker in rendering its opinion. In essence, petitioners contend that Morgan
Stanley was biased toward recommending a low price as fair to Shell's minority
shareholders and deliberately skewed its financial analyses of Shell's fair
value, so that it could assure payment of its $3.5 million contingency fee, and
that Morgan Stanley was biased in rendering its opinion because Royal Dutch
indemnified Morgan Stanley with respect to its opinion. Petitioners also claim
that Morgan Stanley had an additional conflict of interest, because it acted as
the dealer-manager for Holdings' Tender Offer, whose job was to encourage Shell
stockholders to tender.
In connection with the 1984 Tender offer, Morgan Stanley received a $500,000
flat fee for services rendered, plus an additional contingency fee of $3.5
million because the Tender Offer was successful in obtaining greater than 90% of
Shell's outstanding shares. Morgan Stanley also received an additional flat fee
of $1 million in connection with work it performed on the short-form merger.
*33 Because Morgan Stanley was dealermanager for the 1984 Tender Offer and
would receive a large contingent fee if the offer was successful, Morgan Stanley
clearly had an incentive to skew its analyses to accommodate Holdings. However,
no direct facts were adduced showing that Morgan Stanley actually deliberately
skewed its analysis of Shell's fair value to attain the result requested by
Holdings. The existence of such an obvious conflict of interest, however, does
diminish the credibility of Morgan Stanley's opinions. See Smith v. Shell
Petroleum, Inc., Del.Ch., C.A. No. 8395-NC, Hartnett, V.C. (June 19, 1990), slip
OP. AT 60. Courts have consistently criticized contingent fees and other
arrangements creating investment banker conflicts of interest. See, e.g., Joseph
v. Shell Oil Co., Del.Ch., 482 A.2d 335, 344 and 345 (1984); Sandberg v.
Virginia Bankshares, Inc., 891 F.2d 1112, 1122 (4th Cir.1989), cert. accepted on
other grounds, 58 U.S.L.W. 3677 (April 23, 1990); Dynamics Corp. of America v.
CTS Corp., 805 F.2d 705, 710-11, 716 (7th Cir.1986); Berkman v. Rust Craft
Greeting Cards, Inc., 454 F.Supp. 787, 791-92 (S.D.N.Y.1978); accord Pinson v.
Campbell-Taggert, Inc., Del.Ch., C.A. No. 7499, Jacobs, V.C., slip OP. AT 17-18
(Feb. 28, 1989); Wilen v. Pollution Control Industries, Inc., Del.Ch.,
Consol.C.A. No. 7254, Hartnett, V.C., slip OP. AT 6 (Oct. 15, 1984).
Additionally, petitioners allege that "Morgan Stanley precluded a full and
fair scrutiny of its analysis by withholding crucial documents until the final
days before trial, and [by) not producing others at all." [Plaintiff's Reply
Brief at 44]. These purportedly crucial documents essentially dealt with work
done for other oil and gas companies (besides Shell) by Morgan Stanley, which
petitioners contend would show inconsistencies between how Morgan Stanley valued
Shell and how it valued other oil companies. Consequently, plaintiffs argue that
this is another reason for this Court to give little, if any, weight to Morgan
Stanley's findings.
Although there appears to have been some lack of good faith in Morgan
Stanley's
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withholding of certain documents until just before trial and in not producing
others at all, Morgan Stanley's analyses based on this evidence should not be
entirely disregarded, because Morgan Stanley had some legitimate claims of
client confidentiality regarding some of the documents withheld. Morgan
Stanley's delay, however, does indicate another reason why less weight must be
given to Morgan Stanley's fairness opinion because petitioners had a somewhat
limited opportunity to conduct a cross examination on the delayed documents. See
Campbell v. Caravel Academy, Del.Ch., C.A. No. 7830-NC, Hartnett, V.C. (Apr. 3,
1987), slip op. at 2, (refusal of expert witness to provide petitioners with
confidential, but relevant, information diminishes the weight the Court will
give to that expert's testimony).
VII
CONCLUSION AS TO FAIR VALUE
*34 The evidence in this appraisal action consists of the conflicting
testimony of each sides' experts. The petitioners' expert, Mr. Wulff, asserts
that the fair value of Shell on June 7, 1985, based on his Present Valuation of
Equity Analysis, was $100 per share on a buyer's tax cost basis or $89 per share
on a seller's tax cost basis. As previously noted, Mr. Wulffs use of a buyer's
tax basis must be totally rejected. Respondent's expert, on the other hand,
contends that $55 per share was "a fair value" although it never stated that a
higher value would not also have been a fair value.
After reviewing all of the relevant and admissible testimony and evidence
presented by these experts, it is obvious to me that the dynamics of this
litigation and the economic interest of the parties contributed to the wide
differences in the expert opinions as to the fair value of Shell Oil on June 7,
1985. As previously noted, expert testimony of this kind must be scrutinized and
evaluated with considerable caution.
This Court, however, is limited in its determination of the fair value of
Shell Oil to the record as established by the parties. The Court, therefore,
must arrive at a fair value by considering the creditability of the admissible
evidence and then giving it a proper weight. Accordingly, the Court must weigh
the various valuation methodologies of the two principal experts and the
evidence proffered to justify them.
After considering all of the admissible evidence, including the data used in
the valuation models, the Court finds none of the valuations correctly reflect
the fair value of Shell Oil on June 7, 1985. Consequently, the Court must reject
each of the specific valuations by the experts--either because of flaws inherent
in the methodology used, or because the data used in the model was faulty.
Nevertheless, the Court finds that the petitioners' Present Value of Equity
Analysis and the respondent's Liquidation Valuation Analysis are the two most
creditable methodologies presented. As previously noted, however, each of these
valuations is flawed--not the methodology itself, but in the data used in the
particular methodology and in the conclusions drawn. As this Court recently
stated, "... methods of valuation ... are only as good as the inputs to the
model. Neal v. Alabama By-Products Corp., Del.Ch., C.A. No. 8282-NC, Chandler,
V.C. (Aug. 1, 1990), slip op. at 22 (citing S. Pratt, Valuing A Business: The
Analysis and Appraisal of Closely Held Companies (2d ed. 1984) at p. 84). Cf.
Cede and Co. v. Technicolor, Inc., De1.Ch., C.A. No. 7129NC, Allen, C. (Oct. 19,
1990).
Clearly the evidence shows that each of the expert's valuations were skewed
either high or low because the expert, for the most part when a choice was
possible, used the data which would reflect a high or low value, depending on
whether the expert was retained by the petitioners or the respondent.
One option for the Court would be for it to adopt one of the expert valuation
methodologies (i.e., either Mr. Wulff s Present Value of Equity Analysis or
Morgan Stanley's Liquidation Analysis), and then substitute corrective figures
in order to more accurately
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relfect the fair value of Shell Oil. This, however, is not an acceptable
alternative here because of the difficulty of interchanging data from differing
models.
*35 I find, however, that Mr. Wulff's Present Value of Equity Analysis, which
is really a variation of the Liquidation Analysis used by respondent, is more
persuasive and therefore entitled to the greater weight. It contains less
distortions or erroneous assumptions than does respondent's best model--its
Liquidation Analysis. Mr. Wulffvs estimate of value is also consistent with an
estimate of value which he publicly expressed long before he was contacted by
the petitioners. It is also noted that none of Morgan Stanley's Analyses
resulted a firm figure of $55 per share.
As discussed previously, however, Mr. Wulff's Present Value of Equity Model is
also not without error and distortion. It would therefore be unfair to merely
adopt his estimate of value of $89 per share. Even Mr. Wulff conceded that the
range of value is $84 to $116 per share.
I find from all the evidence, therefore, that Mr. Wulff's estimate of $89 per
share should be discounted by 20%. This results in a fair value of $71.20 per
share. For purposes of information only, it is noted that this figure is not far
from the $70 per share "low" value arrived at by Goldman Sachs in 1984 when it
prepared an estimate of value for the Independent Committee of Shell appointed
to consider the offer of Holdings.
VIII
FAIR RATE OF INTEREST TO BE
AWARDED
The final issue concerns the "fair rate of interest" to be awarded by the
Court pursuant to 8 Del.C. SS. 262(h) on the amount determined to be the fair
value. Petitioners contend that the fair rate of interest should be 10.0% to
10.5%, compounded semi-annually. Respondent, on the other hand, asserts that the
fair rate of interest should be 7.6% to 7.7%, simple interest.
8 Del.C.SS.262(h) states:
After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding ... (emphasis added)
8 Del.C.SS. 262(i) further provides that the interest awarded, if any, may be
simple or compound. In addition, the setting of "a fair rate of interest" is a
determination reserved to the sound discretion of the Court after considering
"all relevant factors". See, e.g., Pinson v. Campbell-Taggart, Inc., Del.Ch.,
C.A. No. 7499-NC, Jacobs, V.C. (Feb. 28, 1989; Revised Nov. 8, 1989), slip op.
at 55; Charalip. v. Lear Siegler, Inc., Del.Ch., C.A. No. 5178-NC, Walsh, V.C.
(July 1, 1985), slip op. at 2-3; Lebman v. National Union Electric Corp.,
Del.Ch., 414 A.2d 824, 828-29 (1980).
*36 The petitioners rely exclusively upon the report and testimony of their
expert on interest rates, Dr. John C. Beyer, President of Robert Nathan &
Associates. Mr. Beyer's report examined interest rates from two
perspectives--the cost of borrowing by Shell Oil Company and a reasonable rate
of return to a reasonable investor during the time period involved.
Mr. Beyer first examined Shell Oil's cost of borrowing on or about June 7,
1985, and concluded that the range of applicable interest rates was 9.67% to
10.37%. Mr. Beyer's cost of borrowing range is based in part upon bond issuances
by Shell Oil on November 12, 1985 (5-year note for $250 million with a coupon
rate of 9.5% and an effective yield of 9.57%) and on March 13, 1986 (10-year
note for $250
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