Citations
- 725 F. Supp. 351
Full opinion text
MEMORANDUM OPINION AND ORDER
ZAGEL, District Judge.
This dispute arises out of plaintiff New-ell Company’s (“Newell”), attempts to obtain a significant stake in Vermont American Corporation. Defendants are Vermont American and, Lee Thomas, Jr., Chairman of the Board of Directors of Vermont American (collectively referred to as “Vermont American” or the “Board”). Although Vermont American has been a public corporation since 1966, it has several characteristics reminiscent of its origins as a family run organization. Many members of the Thomas family sit on the Board and are involved in the management of the company. The company’s growth, profit and defined culture are a product of the management style of Lee Thomas, Sr. when he was alive, and now, Lee Thomas, Jr. (“Lee Thomas”).
Since at least 1986 Newell has sought to increase its ownership in Vermont American. Its advances have not been overwhelmingly successful. Most recently, on June 5, 1989, Newell commenced a partial tender offer to purchase approximately 10% of Vermont American’s outstanding stock to add to the approximately 11% Newell already owned. On June 29, 1989, Newell came before this Court seeking to enjoin Vermont American; it complained that certain actions by Vermont American since Newell announced its tender offer, specifically Vermont American’s stock repurchase program, the restructuring of the proposed merger with Clairson, International and the lowering of the trigger point on an existing Shareholder Rights Plan, violate Delaware state law and the federal securities law. I granted a preliminary injunction (Oral Ruling, June 30, 1989), enjoining Vermont American from continuing with its repurchase program. Newell, in effect, was also enjoined, as the injunction was contingent on Newell no longer purchasing shares through its tender offer.
Discovery ensued. Vermont American filed counterclaims alleging that Newell has failed to make proper disclosures under the federal securities laws with respect to its investments in Vermont American. The matter was tried on its merits.
I.FINDINGS OF FACT
A. The Defendants
1. Vermont American Corporation is a Delaware corporation, with its principal place of business in Louisville, Kentucky. It is the world’s largest manufacturer and marketer of cutting tools and quality hand tools, as well as a manufacturer in the lawn and garden products industry.
2. Until the late 1960’s, all of the stock of Vermont American was privately held by the members of the family of Lee Thomas, Sr., who founded the company. Mr. Thomas, Sr. died in March, 1988.
3. In approximately 1966 Vermont American became a public corporation. Its stock is traded publicly on the American Stock Exchange. Currently, there are approximately 9,810,675 outstanding shares of Class A Common Stock, and 1,024,231 outstanding shares of Class B common Stock. Holders of Class B Common Stock are not entitled to vote. In all other respects the rights of Class A and Class B shareholders are identical.
4. The management of Vermont American is dominated by the Thomas family. Lee Thomas, Sr. had three children: Lee Thomas, Jr., the Chairman of the Vermont American Board of Directors; Ellen Thomas Dunbar, a member of the Board; and Jane Thomas Hamilton who has no affiliation with the company, but whose husband is a member of the Board.
5. Defendant Lee Thomas beneficially owned (as defined under SEC regulations), as of June 14, 1989, more than 3,500,000 shares or approximately 34.8% of the outstanding Class A Common Stock of Vermont American. As of March 3, 1989, Thomas’ son, Glenn Thomas, the company’s Vice President-Engineering and director, beneficially owns approximately 5.9% of Class A shares. Ellen Dunbar owns approximately 8.6% of the stock. Her son, Tom Dunbar, is President of a subsidiary, Vermont American Canada, Inc., and a director of Vermont American and owns approximately .4% of the stock. Additional stock is owned by other members of the Thomas and Dunbar families.
6. Lee Thomas’ salary for 1988 was just under $200,000. He receives an additional $2,000 for his services as Chairman of the Board. He also receives dividend income from his equity interest in Vermont American.
7. The only member of the Board of Directors of Vermont American who ever voted differently from Lee Thomas was Ellen Dunbar; and she did so only twice. Thomas explains that he manages the company in keeping with the Quaker philosophy — by consensus. According to Thomas, although members of the Board frequently will disagree, issues are thoroughly discussed and a consensus is reached prior to any formal vote.
8. The investment goals of the Thomas and Dunbar families have evolved over time. Lee Thomas and Glenn Thomas primarily were interested in a long-term investment in the company. In late 1986, the Dunbars began considering the need to diversify their holdings. They have recently explored the possibility of selling all of their stock holdings in Vermont American. The Dunbars renewed their interest in selling their stock after Newell announced its tender offer and ultimately had direct discussions with Daniel C. Ferguson, Newell’s Chief Executive Officer, about doing so.
9. Throughout its history, Vermont American has pursued policies and practices intended to achieve long-term profit maximization. Toward that end, the corporation has made substantial investments in research, development, plants and other physical assets, and in other measures designed to develop high quality products and services to customers, even at the cost of decreasing short-term value maximization.
10. Over the last five years, Vermont American has invested about 6.5% of sales in capital improvements. These policies have been beneficial; Vermont American has grown and prospered over the years. Net sales have grown at an annual compounded rate of 12.6% since 1973; operating income at 11.8%; and net income at 12.3%. The corporation’s shareholders have reaped substantial benefits. An investment of $100 in Vermont American stock made on July 31, 1974 was worth approximately $2,646 on July 31, 1989.
B. The 1987 Report of the Ad Hoc Committee
11. In late 1986, a special ad hoc committee of Vermont American directors was formed to consider the competing interests of the Thomas and Dunbar families, as well as general concerns with the growing takeover climate in the business community. The Board appointed Henning Hilliard, Robert Denison, Frank Furst and William Joseph Biggers to the committee. None of these appointees was a member of management and none was related to any branch of the Thomas family. One concern of the committee was to assure that Vermont American remained an independent company.
12. The organizational meeting of the committee was held on December 30, 1986. The committee discussed at that meeting, among other matters, ways to accommodate the divergent family interests of the Dunbars and Thomases. One issue was the Dunbars’ desire to liquify or diversify their stock and the potential impact such a sale might have on the long-term interests of the company and other shareholders. The committee expressed concern over how this potential sale might affect the Thomas family’s longstanding control over the company since its founding and the ability of the company to remain independent from outside, hostile acquirors. The three committee members present at the meeting (Biggers was unavailable) concluded that they should retain competent investment advisors and independent legal counsel. They expressed no firm convictions as to how to solve the problems before them.
13. The committee retained Elliott Gold-stein of the Atlanta law firm of Powell, Goldstein, Frazier and Murphy as legal counsel and Jay Levine of Dean Witter as investment advisor. Both men were chosen independently without Lee Thomas’ assistance.
14. In January and February 1987, the committee met on at least four separate occasions and conferred with its professional advisors. Many ideas for protecting Vermont American from hostile takeover were discussed tentatively, including issuance of super voting stock, eliminating cumulative voting, taking the company private, creating a shareholder agreement, and adopting a shareholder rights plan.
15. On February 20, 1987 the ad hoc committee issued its report and recommendations. The committee made eight recommendations. Of these, the Board ultimately rejected two outright: the proposal to convert Class B shares to Class A and the recommendation that the corporation obtain a right of first refusal on the converted Class B shares and provide for a transfer of that right to Lee Thomas at the company’s option. The Board ultimately accepted in one form or another the committee’s recommendation as to issuance of blank check preferred stock and the elimination of cumulative voting. Lee Thomas acknowledged that he supported issuance of preferred stock as a measure to assure that the current management continued to run the corporation. The authorization of blank check preferred and the elimination of cumulative voting were eventually approved by a vote of the shareholders.
16. The ad hoc committee never recommended and the Board never approved issuance of high vote common stock, taking the company private or any number of ideas that were floated, some of which appear in memos and notes created by committee members.
C. The Plaintiff
1. Newell Acquires a Stake in Vermont American
17. Newell Company is a Delaware corporation headquartered in Freeport, Illinois, which is engaged in the manufacture and marketing of consumer products for the do-it-yourself hardware/housewares market. In early 1986, Daniel Ferguson contacted Lee Thomas and proposed a business combination or other association between Newell and Vermont American.
18. No agreement was reached and Newell began to explore various strategies to acquire shares of Vermont American. One alternative pursued by Newell in 1986 was the acquisition of an option to buy the shares held by the Dunbars and the Hamil-tons. Newell engaged the investment banking firm of Wertheim Schroeder & Co. to assist it in that regard. Newell’s efforts to acquire an option on the Dunbars’ stock were not successful at this time.
19. In April 1988, Newell filed a Schedule 13D, announcing that it owned over 5% of the common stock of Vermont American. From the moment that Newell filed this Schedule 13D, the directors of Vermont American concluded that Newell’s intent was hostile. The Thomas family was distressed at the news, believing that Newell would seek to acquire Vermont American and that they would lose control of the company.
20. Robert I. Baker, the President and a director of Vermont American, did not perceive Newell to be as threatening to the independence of Vermont American as did the Thomases. In a memo he sent to the company's division managers in July 1988, he noted that “over 54%” of Vermont American’s stock was owned by insiders, and that the company had taken various measures to protect it from “unfair or coercive takeover tactics.”
21. One week later Baker received a telephone call from another director of Vermont American, Ned Furst, reporting on a conversation Furst had had with Dan Ferguson. According to Furst, Ferguson had said that he felt it was impossible to take over Vermont American in light of the family ownership and that he had no intention of trying to take over the company. Ferguson said that his objective was to acquire 20% of the stock and get a seat on the Board so that Newell could use equity accounting for its investment in Vermont American. In addition, he said that he would be willing to accept a standstill agreement at 25%. Furst also reported the conversation to Lee Thomas. Furst told Thomas that given Newell’s prior acquisition history its interest in Vermont American constituted “a serious situation”.
22. In August 1988, Ferguson spoke with Lee Thomas, and repeated his proposals relating to gaining a significant equity interest in Vermont American and Board representation. At the same time, Ferguson formed the objective to swap Newell’s stock in Thomas Industries, another Louisville-based firm founded by Lee Thomas, Sr., for its paint applicator business.
2. Vermont American’s Response to Newell
23. After Newell filed its Schedule 13D, revealing its purchases of Vermont American stock, Vermont American’s Board and management undertook to inform itself officially about Newell, its business, its business practices, and its reputation in the business community. In April 1988, Bear, Stearns & Co. (“Bear Stearns”), the investment bankers retained by the company, prepared a detailed report of Newell’s prior acquisition history and strategies.
24. In addition to the Bear Stearns report, members of the Board relied on other sources to inform themselves about New-ell. Some members of the Board had firsthand familiarity with Newell based on Newell’s investment in Thomas Industries. Members of Vermont American’s Board read and reviewed a report from Kidder Peabody to Thomas Industries that was consistent with the Bear Stearns profile of Newell. Furst also advised the Board that the Bear Stearns report was consistent with his own knowledge of Newell and Ferguson.
25. The Vermont American Board was aware that the primary source of Newell’s profitability was through its successful acquisitions. Today Newell is the product of twenty-five acquisitions and these acquisitions generate about 90% of Newell’s sales and profits. At times Newell had acquired public corporations at bargain prices through “creeping acquisitions” and two-tier tender offers. This was true, for example, in Newell’s acquisition of Anchor Hocking Corporation in 1986. There New-ell accumulated the company’s stock and eventually acquired complete equity control of Anchor Hocking. In order to generate increased profitability Newell at times would follow its acquisitions by asset-stripping, plant closures and layoffs.
26. Newell had also acquired several companies in non-hostile transactions.
27. The Board’s inquiry included examination of the contrasting corporate cultures and business philosophies of Vermont American and Newell. Newell is a marketing oriented company; its success is due primarily to acquisitions, not new product development or internal growth. It does not invest substantial amounts in new product research, development, or new plants and equipment. In the first quarter of 1989, for example, Newell spent $73 million acquiring companies and $3 million on capital investment. It has spent approximately 2.7% of sales on capital improvements as compared to 6.5% which Vermont American allocated to capital expenditures.
28. The Vermont American Board never met with Ferguson to discuss an association with Newell, nor did they seriously consider entering into an association with the company.
29. On August 17, 1988, the Board of Directors called a Special Meeting of Stockholders to amend the company’s Certificate of Incorporation to eliminate cumulative voting for directors. Although the Board considered this proposal before Newell filed its 13D Statement, it was proposed at this time to prevent Newell from using cumulative voting to elect a representative to the Board. In September 1988 the Vermont American shareholders approved the elimination of cumulative voting.
3. Newell’s Tender Offer and Vermont American’s Response
30. Between April 1988 and June 1989, Newell slowly accumulated more Vermont American stock. On June 5, 1989 Newell announced that it owned about 11% of Class A Common Stock, and it announced a tender offer to purchase 1,200,000 additional shares or approximately 10% of Vermont American stock at $30.50 per share. If Newell acquired the full amount of stock it sought pursuant to its offer, it would own approximately 22.6% of the outstanding common stock of Vermont American. Newell stated that the purpose of its offer was “to acquire a more significant minority position in the Company as an investment.” Newell noted that it might be able to use the equity method of accounting for its investment if it owned 20% or more of Vermont American stock.
31. Vermont American’s directors were immediately notified of Newell’s tender offer. The Board sought legal and investment banking advice before responding to Newell. It engaged investment bankers, Bear Stearns, and legal counsel, McDer-mott, Will & Emery. Representatives of both firms were present at the Board meeting held on June 13, 1989 to discuss New-ell’s tender offer.
32. The company’s investment banker, Jeffrey Bloomberg, gave his opinion that the offering price of $30.50 per share, although greater than the price at which the stock traded, was less than the “enterprise value” of the company. Bloomberg did not give an opinion as to a fair price for a minority position in the company. Bloom-berg advised the Board that Newell’s tender offer, in all probability, was the opening line of attack in a takeover effort — similar to those Newell had pursued in other cases — designed to effect a creeping acquisition of Vermont American at a price below the company’s “enterprise” value. Once again, Furst indicated that the pattern of creeping acquisitions described by Bear Stearns was consistent with his knowledge of Newell. In addition to hearing evidence of Newell’s practice of creeping acquisitions and two-tiered tender offers, the Board received information about other situations in which Newell used a significant stock purchase to obtain a price for its shares not available to other shareholders.
33. Among the matters discussed at the meeting, with respect to which the Board received advice, were the financial and economic aspects of Newell’s partial tender offer, the range of possible responses, Newell’s history, business and acquisition practices, the obligations of the Board in responding to the tender offer, and various provisions in the corporation’s charter, bylaws, corporate structure, and applicable law which would have or which were likely to have an impact on any attempt to acquire Vermont American.
34. The Board was advised that the nature of partial tender offers, such as New-ell’s, meant that even a shareholder who normally would not desire to sell his shares at the price offered by Newell could feel constrained to do so out of fear that a failure to sell could leave him as a minority shareholder in a company dominated and controlled by Newell. Such a shareholder eventually could be deprived entirely of his shares through a “back end” merger in which shareholders would receive less valuable consideration than the price offered under Newell’s partial tender offer.
35. Bear Stearns cautioned the Board that if Newell obtained a foothold in Vermont American or board representation, it would jeopardize the long-term value of Vermont American’s stock. If Newell succeeded, it could disrupt the business practices and methods of operation which had resulted in Vermont American’s steady, sustained, and long-term growth, and could implement policies designed to generate short-term results without regard to long-term growth and development. At a minimum, with Newell owning 22% or more of Vermont American’s stock and seeking to influence the company’s affairs a potential existed for chronic conflict over Newell’s short-term goals and strategy and the company’s long-term business philosophies.
36. The Board was further advised by legal counsel that: a) it was the Board’s fiduciary obligation to take measures to protect the corporation and all of its shareholders from any tender offer or takeover bid that it deemed to be contrary to the interests of the corporation and its shareholders and b) under Vermont American’s charter — enacted in April 1981, well before the events at issue in this litigation — it was permitted to consider the interests of employees and customers of Vermont American, as well as the interests of the communities in which the corporation does business.
37. The directors then concluded that the company’s “stockholders and other constituencies will be best served if the Company remains an independent entity” and that an “association” with Newell would not benefit Vermont American’s shareholders.
38. On June 15, 1989 Vermont American filed with the SEC its Schedule 14D-9 form. Although the directors themselves would not tender their shares, this Schedule announced that the directors had “determined to make no recommendation as to whether stockholders should sell or retain their shares” pursuant to Newell’s tender offer.
39. Notwithstanding their claim of neutrality, the directors were unanimously opposed to Newell’s tender offer. The directors began exploring methods to assure that the current Board remain independent of Newell. Three strategies were adopted that were intended to obstruct Newell’s tender offer. First, the Board directed management immediately to begin repurchase of the corporate stock. This worked both to give shareholders an alternative to Newell’s offer and to decrease the amount of stock available for Newell. Second, the Board structured the proposed acquisition of Clairson International Corporation so that any stock issued in connection with this transaction would “be controlled by the Company as to voting and transfers for some period of time.” Third, the Board lowered the trigger on an existing Shareholder Rights Plan from 27% to 15%.
a) The Stock Repurchase Program
40. Vermont American had in place since October 1987 a repurchase program that was reviewed by the Board annually. The Board approved stock repurchases in response to the recent stock market crash. The most recent program, reviewed and reaffirmed in October 1988, authorized the Board to repurchase up to 1,000,000 shares (later adjusted for stock dividends to 1,100,-000 shares). Management was authorized to repurchase stock from time to time based upon various factors including stock price, effect on long-term shareholder values, availability of stock, and the possibility of better investments elsewhere.
41. On June 13, 1989, acting upon Bear Stearns’ advice, the Board concluded that continuing with share repurchases constituted a reasonable and prudent investment for the corporation because it would: (1) benefit selling shareholders by offering them an opportunity to sell all their shares without risk of proration or of Newell’s exercising of its right to withdraw its partial tender offer; (2) benefit non-selling shareholders who wished to maintain a long-term investment in Vermont American by reducing the specter of a Newell takeover, and the consequent corporate disruption that the Board perceived would ensue; (3) benefit the corporation by preventing a disruptive influence from achieving a significant control position; and (4) enable the company to follow Bear Stearns’ advice to increase leverage and, by taking additional debt, to increase earnings per share for shareholders who did not wish to sell.
42. At the suggestion of Lee Thomas, the Board limited the repurchases to no more than approximately 300,000 shares unless further, specific authorization from the Board was obtained. The Board was to be informed fully of the company’s repurchases. The repurchases were to be made at or close to the market price with close guidance from legal counsel. The Board further instructed Bear Stearns to report back with further studies analyzing the financial aspects of the repurchase program and other available alternatives. The Board asked Bear Stearns to prepare financial projections regarding the repurchase program based on the most extreme economic possibilities.
43.After the Board’s actions on June 13, the company filed a Schedule 14D-9 and a Rule 13e-l Transaction Statement as required under the federal securities laws. The only reason given in this statement for the repurchases is that the shares “will be held in the corporate treasury to be used for corporate purposes.” The press release issued by Vermont American on June 15 stated as follows:
Vermont American Corporation announced that its Board of Directors met with Bear, Stearns & Co., its investment bankers, to consider the tender offer of Newell Co. for 1.2 million shares of Vermont American’s Class A Common Stock. In view of Vermont American’s past growth record and its current condition and business prospects, the Board concluded that the Company’s future is good and that its stockholders and other constituencies will be best served if the Company remains an independent entity. None of the directors will sell any of their shares in the tender. The Board has no recommendation as to whether other stockholders should sell or retain their shares.
The Company also announced that it is filing a 13e-l statement with the SEC to permit the resumption of its previously authorized Class A Common Stock repurchase program. That program, announced on October 28,1988, covered the repurchase of up to 1,100,000 shares, of which 84,647 shares have previously been repurchased. All repurchases have and will be made on the American Stock Exchange or in privately negotiated transactions out of the Company’s own financial resources including its previously existing credit lines. The shares will be held in the corporate treasury to be used for corporate purposes.
44.On June 15, one director, John Le-ahy, suggested to Ned Purst that they create a special committee of independent directors, consisting of themselves, Ken Hirsch and Joe Biggers, to separately assess the threat posed by Newell and to evaluate the proper response. As in 1987, this committee hired its own counsel, Elliot Goldstein, and investment banker Jay Levine of Dean Witter Reynolds. Ken Hirsch is President of Paramount Foods Co. in Louisville, Kentucky. John Leahy is Chairman of the Board of Master Power Corporation and was former President of the North American division of Black & Decker Manufacturing Company. He was recommended to the Vermont American Board by Robert Baker.
45. During the June 22 meeting, Bear Stearns presented the Board with projected financial statements and summary statements which compared the impact of various buyback proposals on the company’s capital structure, debt coverage ratios, and earnings per share under both pessimistic and realistic assumptions. Those studies showed that the expansion of the share repurchase program would be financially beneficial to Vermont American. It would increase earnings per share and give the company certain tax advantages by shifting some of the company’s capitalization, on which dividends are paid, to debt, on which interest may be deducted. Bear Stearns also provided the Board with information about various means by which the expanded share repurchases could be accomplished, including the issuance of put rights to all existing shareholders, a dutch auction, and private transactions.
46. The Board, following Bear Stearns’ recommendation, authorized the repurchase of up to an additional 1,100,000 shares to give the company greater flexibility in the emerging situation. This recommendation was discussed and was approved by the Board, subject to the caveat that no more than an additional 300,000 shares be purchased without further study and proposals being brought back to the Board.
47. Bloomberg urged the Board to expand the repurchase program so that the company would have the utmost flexibility to deal with the fluid situation created by Newell’s tender offer and to provide a cushion for the market price of the shares if Newell precipitously terminated its highly conditioned offer or dumped its shares on the market.
48. The committee of independent directors of the corporation met on June 22, 1989 and separately and unanimously approved the expanded authority for the repurchase of shares. Prior to voting, the independent directors consulted with their own lawyer, and examined the company’s financial forecasts, the long-range future of the company, the benefits of the repurchase program to both selling and remaining shareholders, and the dangers posed by Newell’s hostile, partial tender offer. At the time it doubled the repurchase program, Vermont American did not have any existing or planned corporate purpose for the stock it was going to repurchase, but the Board did believe that this was a financially prudent course of action. On June 22, 1989 Vermont American filed with the SEC an amendment to its Schedule 14D-9. In this document, the directors elaborated upon their response to Newell’s tender offer, stating that they:
did not have a sufficient basis for a recommendation, believing that it was the type of offer that each stockholder should respond to in the light of his or her own circumstances, financial or otherwise.
49. Notwithstanding the sound financial basis articulated for resumption of the share repurchase program, a primary motivation for the Board action at this time was to frustrate Newell’s tender offer. Between October 1988 and June 14, 1989, Vermont American repurchased only 84,-647 shares out of the 1,100,000 shares it was authorized to repurchase. The highest price paid for any of these shares was $26.75. One of the reasons that Vermont American repurchased only 84,647 shares was that the prices were too high. Between June 15 and June 30, 1989, however, Vermont American repurchased 345,458 shares of its common stock at prices ranging up to $31.00 per share. This stock was not needed for any existing or planned corporate purposes, since Vermont American already had 835,331 shares in its treasury before it resumed its repurchase program on June 15, 1989. The prices paid by Vermont American in June of 1989 to repurchase its stock were the highest prices at which Vermont American’s stock had ever traded. If Vermont American obtained all the shares it authorized the combined interest of the Thomas and Dunbar family would exceed 50%.
50. The next Board meeting was held on June 28, 1989. One director, Furst, noted that Bloomberg had recommended that the Board not endorse Newell’s tender offer; instead, Bloomberg urged the directors to use an “aggressive” repurchase program. Furst’s notes also attribute to Lee Thomas the statement that “we need to be certain we control — we can forget about Newell.” Another director, Hirsch, noted: “Screw Newell — go get the shares.”
51. At least one director expressed concern that the measures being taken by Vermont American were devices to entrench management. The other directors and management, however, believed that they had two priorities: “Take control” and “Stop Newell.” Bloomberg recommended that the Board meet with Newell, but the Board refused to do so.
52. Bloomberg previously had represented Newell and was acquainted with Dan Ferguson. After the June 22, 1989 Board meeting, Bloomberg contacted Ferguson to “open a dialogue” between the two companies. Ferguson stated that he wanted to achieve equity accounting. Bloomberg responded that a long-term standstill agreement coupled with one Board member acceptable to both parties, joint marketing and/or a position on an advisory board might accommodate both parties. When Ferguson responded to Bloomberg, he increased Newell’s demand to a 19% stake in the company, two board seats and a three year standstill agreement. Bloomberg concluded that Ferguson could not be accommodated and that his interests went beyond mere association. He reported his conversations and conclusions to the Vermont American Board on June 28, 1989.
53. On June 29, 1989 Newell brought suit seeking to enjoin the share repurchase program. On June 30, 1989, after a hearing, this Court issued an order restraining further purchases pursuant to the share repurchase program. The Court conditioned this restraining order upon Newell’s not purchasing shares under its tender offer. The share repurchase program was terminated by the Board on July 12, 1989, in light of the Board’s decision to authorize management to explore a possible sale of the company. As of the time of termination, the shares purchased between the June 13, 1989 authorization and termination increased the number of shares voted by Lee Thomas by less than 1%.
b) The Clairson Transaction
54. Clairson International, Inc. is a Florida corporation engaged in the design, manufacture and sale of welded wire home shelving and storage products. Approximately 57.5% of Clairson’s stock is owned by Norman 0. and Donald P. Sauey. The rest of the stock is publicly owned and traded on the NASD Automated Quotation System.
55. Beginning in at least the Fall of 1988, members of Vermont American’s management discussed the possibility of a business combination with Clairson. Vermont American’s management believed that Clairson’s business would be a desirable acquisition for Vermont American and would complement the other products Vermont American manufactured. Historically Vermont American had acquired other entities through cash deals.
56. Beginning prior to April 18, 1989, negotiations with respect to the acquisition of Clairson by Vermont American took place. A merger agreement was entered on July 1, 1989.
57. A corporation formed by Newell also was pursuing an acquisition of Clair-son. On April 24, 1989 that corporation announced publicly that it had made an offer to acquire Clairson. Prior to that date, Newell’s interest in acquiring Clair-son was not known to Vermont American.
58. The Clairson deal was originally proposed as a cash deal. In the initial stages of negotiations for the acquisition of Clairson, Vermont American considered using non-voting stock as part of the consideration to be paid for Clairson. After New-ell announced its tender offer, however, Vermont American chose to issue voting stock which, by agreement, would be voted in accord with the recommendations of the Board of Directors of Vermont American. Lee Thomas was not enthusiastic about the Clairson acquisition until it was proposed that the Board of Vermont American would have control over the voting of the Saueys’ shares in Vermont American.
59. The Saueys preferred that their Clairson stock be purchased for stock so that the transaction could be tax free to them and they would have an equity interest and potential upside in the acquiring company. However, the Clairson acquisition was structured as an Internal Revenue Code Section 368(a)(2)(D) reorganization. As such, it did not require the use of voting stock, and the tax consequences would have been the same if non-voting stock had been used.
60. The use of voting stock in payment to the Saueys was in response to what Vermont American perceived as attempts by Newell to gain control of Vermont American.
61. Under the merger agreement the stock to be issued to the Saueys is voting Convertible Preferred Stock. The Saueys will receive 755,883 shares of Convertible Preferred Stock or equal to approximately 7% of Vermont American’s voting stock on a diluted basis. Lee Thomas’ voting power will be lowered from about 30% to 28%. If issued, the stock will be subject to an agreement under which it will be voted for ten years in accordance with the recommendations, if any, of Vermont American’s Board. If the Saueys sell their stock, the voting agreement lapses.
62. Approval of the Clairson transaction was given by the Board on June 22, 1989. In the course of that meeting, the independent directors met separately and approved the transaction based on the business benefits and synergies provided by the proposed combination of the two companies.
63. On June 29, 1989, the independent members of the Vermont American Board, meeting separately in a telephone meeting as a special committee, considered the terms of the Convertible Preferred Stock called for under the proposed merger agreement, including the provisions with respect to the voting of that stock. After a presentation by Elliot Goldstein, the independent legal counsel specifically retained by the committee, the committee concluded that the voting agreement was in the best interests of the corporation. The issuance of the preferred stock was approved by the entire Board, later, on June 29.
64. The special committee of independent directors recommended to the Board on July 11, 1989 that if Convertible Preferred Stock ever is issued to the Saueys as called for under the merger agreement, it should be voted in accordance with the recommendations, if any, of the committee of independent directors instead of the entire Board’s recommendations. The special committee’s recommendation for the transfer of authority was approved and implemented by the entire Board on July 12, 1989. One director, Ellen Dunbar, testified that she was unaware of the transfer of voting control before this lawsuit. Nothing prevents the Vermont American Board from revoking this transfer of authority.
65. The Clairson merger agreement has not yet been submitted to the shareholders of Clairson for their approval, and no Vermont American stock has been issued as a result of that transaction. No vote of Vermont American’s shareholders has been scheduled or is imminent.
c) The Rights Plan
66. On July 12, 1989, the directors of Vermont American amended the existing Shareholder Rights Plan to lower the trigger on the Plan, upon an acquisition of stock, from 27% to 15% for a period of 120 days. A press release was issued announcing the change in the Rights Plan and that the Board was exploring a possible sale of the company. The press release issued by Vermont American on July 12, 1989 stated the following:
LOUISVILLE, KY., July 12, 1989—Vermont American Corporation (AMEX) announced that its Board of Directors has authorized management to explore a possible sale of the Company. In this regard, the Board has retained Bear Stearns & Co. to act as the Company’s financial advisor and to enter into discussions with qualified prospective purchasers. The Board has not made a final decision to sell the Company and there can be no assurance that any transaction will result from these discussions. At the same time, the Board terminated Vermont American’s previously announced stock repurchase program and made temporary amendments to its shareholder rights plan.
The stock repurchase program was for up to a total of 2,200,000 shares, of which 430,105 shares had been repurchased since the original adoption of the program in October of last year. The rights plan amendments lowered the percentage ownership of Vermont American Class A Common Stock that triggers the rights to 15% and eliminated the 20-day window permitting redemption of the rights after a triggering event. These amendments are intended to protect the Board’s ability to manage the exploration of the sale of the Company. These amendments will terminate and the rights plan will revert to its prior form at the end of 120 days unless contract for the sale of the Company is entered into during that period, in which event the amendments will continue in force until such agreement has been completed or terminated.
Robert I. Baker, President and Chief Executive Officer, of Vermont American commented with regard to the Board’s action: “The Board has decided to explore the possibility of a transaction that will enable all stockholders to better realize the value accumulated in the Company. In addition, in this process, and consistent with our obligations, we will seek to preserve the relationships Vermont American has enjoyed with its employees, customers, suppliers and local communities over the years.” ...
Bear Stearns had recommended that the Board temporarily lower the “trigger” of the Rights Plan for a period of 120 days, the anticipated length of the period during which the Company was to explore the possibility of a sale.
67. The amendment to the Stockholders Rights Plan was prepared by the law firm of McDermott, Will & Emery, which represents Lee Thomas. Legal counsel advised the Board regarding its fiduciary obligations and advised that as a means of facilitating a possible sale of the company, the proposed 120 day lowering of the trigger recommended by Bear Stearns to provide a level playing field was a reasonable corporate action which would maximize shareholder value for all shareholders.
68. At the meeting at which the Vermont American Board amended the Rights Plan, neither the amendment nor a written description was given to the Board of Directors.
69. The effect of this amendment was that the amount of stock which Newell could purchase without triggering the pill was reduced to about 4% of the outstanding stock while Lee Thomas and his son could each acquire an additional 9% of the outstanding stock without triggering the pill. The original draft of the amendment proposed lowering the trigger only to 20%, a level which might have allowed Newell to obtain equity accounting.
D. Termination of Newell’s Tender Offer and Vermont American’s Decision To Sell
70. Newell’s tender offer was scheduled to expire at midnight Friday, June 30,1989. Although Newell had until 9:00 a.m. on Monday, July 3, 1989 to inspect the shares and announce its intentions concerning its tender offer, at 11:03, June 30, Newell issued a press release stating that it would terminate or extend its tender offer and that it would announce its decision later that day. This announcement gave notice to the market that Newell would not take down tendered shares on June 30 and effectively cut off the possibility of further tender.
71. The great majority of shares tendered in a tender offer come in on the last day, after 5:00 p.m. Newell announced its decision to terminate the tender offer early in the evening of June 30 at a time when the noon figure for tendered shares was the last available information.
72. As of noon, Chicago time, on June 30,1989, 260,585 shares of Vermont American stock had been tendered to Continental Bank, the depository for Newell’s tender offer; 46,427 of those shares had been examined and approved. Later, on June 30, Continental Bank had approved the tender of a total of 171,015 shares, and a total of 179,796 additional shares had been submitted to, but not yet been examined by, Continental Bank. Following the termination of Newell’s tender offer, Continental Bank continued to receive notice of additional tenders of stock for approximately one week. There is no complete record of the number of shares so tendered. Continental’s best “guess” is that 475,000 to 500,000 shares were tendered. Under its tender offer, Newell could have purchased fewer than all of the shares which it offered to buy. i
73. Pursuant to the térms of this Court’s restraining order, Néwell terminated its offer and did not purchase any shares. Ferguson testified-'that he terminated the tender offer without waiting to see how many shares would be tendered because it was his understanding that he could not buy the Dunbar shares without first terminating the tender offer. Discussions with the Dunbars began immediately following the termination.
74. Had Ferguson purchased the Dunbar block, he would have owned approximately 24% to 33% of Vermont American stock and apart from Lee Thomas, would be the only other large shareholder in Vermont American.
75. Prior to Newell’s commencement of its tender offer on June 5, 1989 Vermont American stock was trading at just under $26.00 per share. Announcement of the tender offer was followed by an immediate jump to 29%.
76. Between the time Vermont American announced its repurchase plan, on June 15, 1989, and June 22, 1989 when it issued a press release announcing the doubling of the authorization, the stock price hovered at the $30.00 mark.
77. Between June 22, 1989 and this Court’s June 30 Order, the stock price moved between $30 and $31. During the life of the June 1989 repurchase plan, all trading in Vermont American shares to-talled approximately 400,000 shares. Thus, the great majority of Vermont American shareholders held on to their shares.
78. On July 12, 1989, the Vermont American Board approved a resolution authorizing management to explore a possible sale of the entire corporation. The resolution was approved after the Board considered all available options; statements were made by Lee Thomas and Ellen Dunbar concerning their intentions with respect to the retention of their stock; the likelihood that the sale of substantial blocks of stock by major shareholders would pose a threat to the corporation’s continued independence; and the advice of investment bankers that even though the company could prosper if it remained independent, the interests of all shareholders would be served best by a sale of the entire company in which all shareholders are treated equally, rather than by the separate sale of major blocks of stock. Bear Stearns was engaged to advise the company with respect to the solicitation of offers from potential bidders.
79. Lee Thomas and Ellen Dunbar expressly have stated that they support the process of exploring the possibility of a sale of the company in their capacities as shareholders.
80. At the July 12 Board meeting, Bear Stearns advised the company that the process of exploring a potential sale probably could be completed within a 120 day period. For the sale process to achieve maximum potential for its success, however, Bear Stearns emphasized that the Board must maintain a “level playing field” for all potential bidders and avoid the formation of additional large blocks of Vermont American stock. Specifically, Bear Stearns advised the Board that if Newell renewed its tender offer or if it made open market purchases and acquired more than 15% of Vermont American’s stock, Newell could utilize its stock as a “blocking position” to prevent or hinder the sale of the company to any other bidder.
81. Newell has been offered the opportunity to purchase on the same basis as all other potential acquirors in the sale process, but has not taken any steps in that direction.
82. On September 28, 1989, Vermont American issued a press release stating that it had entered into a merger agreement with Emerson Electric Company and Robert Bosch GmbH. A new corporation, Maple Acquisition Corporation, will be formed by Emerson and Bosch which will acquire Vermont American for approximately $440 million. Under the agreement Maple Acquisition will commence a tender offer which will be made for all Vermont American shares at $40.00 per share in cash, subject to upward adjustment to a maximum of $41.00 depending upon the resolution of this litigation. The tender offer will be followed by a merger between Vermont American and the acquisition company in which any of the remaining shareholders will receive the same price as paid in the tender offer for their stock.
E. Vermont American’s Counterclaim
83. In early 1986, Daniel Ferguson initiated discussions with Vermont American to explore specifically the possibility of a combination between Vermont American and Newell. Ferguson proposed no passive investment or minority equity position. Disclosure of these contacts was omitted from Newell’s Schedule 13D filed on April 6, 1988 and they were not revealed publicly until Newell filed amendment no. 1 to New-ell’s Schedule 13D on June 15, 1988.
84. Only after Newell’s proposal was rebuffed did Newell begin its accumulation of Vermont American stock.
85. Newell contacted its principal investment banker, Wertheim Schroeder & Co., in 1986 to consider the acquisition of stock in Vermont American. As a first step, Newell instructed Wertheim to attempt to get an option on family-held blocks.
86. Though Newell says that it subsequently retained Rothschild, Inc., specifically and for the limited purpose of assisting in Newell’s tender offer, Rothschild prepared for Newell a memorandum devoid of reference to equity accounting and minority positions as early as October 1987. The memorandum catalogued issues addressed in connection with efforts to obtain equity control. Notably, Rothschild listed Vermont American’s anti-takeover measures and compiled a list of potential acquisition issues. The memorandum also included an analysis of the maximum price Newell would pay in an equity acquisition. This product from Rothschild is not surprising and cannot necessarily be attributed to an all-consuming desire by Newell to acquire other companies. Rothschild is also motivated by profit-making and stands to gain if Newell makes an acquisition upon their recommendation.
87. Just prior to filing its initial Schedule 13D, Newell received a report prepared by Salomon Brothers discussing acquisition candidates for Newell, including Vermont American. Ferguson said that although he threw away the rest of the report, he held on to this one and relied on it in making decisions to acquire more stock in Vermont American.
88. On April 6, 1988, Newell disclosed that it owned in excess of 500,000 shares, or approximately 5.5% of the outstanding Vermont American stock. These shares had been accumulated through market purchases over a period of nearly two years. In its Schedule 13D, Newell stated that its only purpose was investment.
89. Newell amended its Schedule 13D twice in 1988. On neither occasion did it alter in any way its previously stated purposes and intentions regarding Vermont American. Rather, it continued to maintain that it had purchased the shares solely “for investment” and that it “[did] not presently plan to become actively involved in the management of the Company.” Newell did not reveal that it sought to exert substantial influence over the business operations of Vermont American. Although implicit in the desire to achieve equity accounting is the ability 'to exert influence over the corporate operation, this is not necessarily the same objective as actually seeking control or board representation for the purpose of exerting control over the corporation.
90. Newell never amended its Schedule 13D to reflect Ferguson’s two conversations with Ned Furst — one in April 1988 and the other in July 1988 — in which he articulated his desire for Board seats or his similar discussions with Lee Thomas in August 1988.
91. On March 2, 1989, Newell again amended its Schedule 13D to reflect ownership of more than 10% of the outstanding voting stock of Vermont American, of which 500,000 shares were purchased at prices 25% below the current market. No change in Newell’s “investment only” purpose was expressed.
92. When Newell commenced its tender offer for Vermont American stock on June 5, 1989, seeking to raise its stake to over 20%, the company continued to maintain that its ownership purpose was solely “for investment.”
93. For the first time, in its combination amendment no. 4 to its Schedule 13D and 14D-1 tender offer, Newell publicly acknowledged that ownership of 20% or more of Vermont American’s stock “may make it appropriate for [Newell] to account for its investment in [Vermont American] using the equity method of accounting.” But Newell still did not disclose that it sought to obtain Board representation and that its other goals were an association or combination of the companies.
94. During the pendency of Newell’s tender offer and shortly after Newell terminated its tender offer, Newell negotiated with the Dunbars in an effort to buy the Dunbars’ substantial block of Vermont American stock. These facts were never disclosed in Newell’s amendments to its Schedule 13D or in any other way.
95. During the pendency of Newell’s tender offer, Ferguson also spoke with Bloomberg and reiterated his intention to obtain board seats. These facts were never disclosed in Newell’s amendments to its Schedule 13D.
96. In an affidavit attached to Newell’s Hart-Scott-Rodino Notification and Report Form, filed on July 6, 1989, William All-drege, Newell’s chief financial officer, stated that Newell had a definite intention to purchase in excess of 25% of the stock of Vermont American.
97. On July 10, 1989, Newell again amended its Schedule 13D and still did not disclose any control objective and its intent to acquire more stock in Vermont American. Newell asserted that the association of the two companies that would result from a more significant minority position could be “beneficial”, and continued to cite only the equity method of accounting as a possible outcome of its increasing ownership.
98.On August 4, 1989, Newell filed its amendment no. 7 to its Schedule 13D in which it stated that Newell’s “primary objective continues to be to acquire a more significant equity interest in [Vermont American] and to obtain representation on the Board of Directors.” Newell further disclosed in amendment no. 7 that its purpose had been to put itself in an ownership position that “gives it the ability to exercise significant influence over operating and financial policies of [Vermont American].”
II. ANALYSIS, CONCLUSIONS OF LAW AND FURTHER FINDINGS OF FACT
A. Jurisdiction and Standing
1. Jurisdiction is appropriate in this Court with respect to Counts I-IV alleging violations of various provisions of the Williams Act (codified at 15 U.S.C. secs. 78m(d)-(e), 78n(d)-(f), at 15 U.S.C. secs. 78m(d)-(e), 78n(d)-(f)), and Count VI, a pendent state law claim, alleging breach of fiduciary duties by the Vermont American Board.
1. Injury Alleged
2. Under Delaware law a shareholder may bring an individual action where there is “an injury which is separate and distinct from that suffered by other shareholders.” Moran v. Household Int'l, Inc., 490 A.2d 1059, 1070 (Del.1985). If the cause of action is based on unlawful acts affecting only the stock owned by the plaintiff, an individual action is appropriate. Where, for example, the shareholder is denied a contractual right attaching to his or her ownership, such as the right to vote or to inspect the corporate books, there exists an individual action. Fletcher, Cyclopedia Corporations sec. 5915, at 440.
Essentially the complaint alleges that the Vermont American Board breached certain fiduciary duties and failed to fulfill certain disclosure requirements under the Securities Exchange Act of 1934, 15 U.S.C. secs. 78a et seq. Because of the Vermont American Board’s actions, Newell was neither able to obtain 20% of Vermont American’s stock through its tender offer nor use the equity accounting method with respect to its investment in Vermont American. Newell, along with all the other shareholders of Vermont American, was prevented from acquiring some stock because of the Board’s repurchase program. Similarly, all shareholders were affected by the modified Rights Plan and the Clairson transaction.
Newell argues that it has an injury distinct from other shareholders because it alone sought a certain percentage of Vermont American’s stock in order to utilize the equity accounting method with respect to its investment. Shareholders, however, have no independent right to equity accounting, as they are not guaranteed the right to a particular accounting method when investing in a corporation. If, in fact, the Vermont American Board did breach its fiduciary obligations to the shareholders, Newell was not denied “differently” from any other shareholder. Perhaps if Newell already accounted for its investment in Vermont American by the equity method and the Board’s actions disturbed this practice, Newell would have a better claim to an individual injury.
3. Neither does Newell have an individual claim in its capacity as a tender offeror for the Board’s breach of fiduciary duties. Established precedent is that a board owes no duty to a tender offeror. Moran, 490 A.2d 1059. See also Crane v. Harsco Corp., 511 F.Supp. 294, 304 (D.Del.1981) (“the ‘right’ to make a tender offer is not a contractual right owed to the shareholder by the corporation ...” and tender offer- or’s complaint that the repurchase program frustrated its tender offer “is not a sufficient basis for an individual action under Delaware law”).
4. A shareholder must bring a derivative action, in the name of the corporation, when the injury complained of is common to all shareholders. Newell’s complaint does state a derivative cause of action. Assuming that the well-pleaded facts of the complaint are true, as I must, the allegations raise reasonable doubt that the Board’s action was: a) independent and disinterested and b) otherwise the product of a valid business judgment. Demand would be futile if, in fact, the Board did act to entrench itself, and is properly excused. Starrels v. First National Bank of Chicago, 870 F.2d 1168, 1170 (7th Cir.1989) (whether plaintiff was required to make a demand to the board prior to bringing suit is an issue left to the discretion of the district court). See also E. Folk, R. Ward, Jr. & E. Welch, Folk on the Delaware General Corporation Law sec. 327.4, at 363 (2nd ed.1988).
5. Defendant questions Newell’s ability to represent adequately the shareholders in a derivative suit. Derivative suits are governed by 8 Del.Code sec. 327 and Ch. Ct. Rule 23.1 under Delaware law. It is implicit in these rules that the plaintiff must adequately and fairly represent the interests of the shareholders. See E. Folk, R. Ward & E. Welch, Delaware General Corporation Law sec. 327.3.3, at 359 (1988). See also Youngman v. Tahmoush, 457 A.2d 376, 379 (Del.Ch.1983). A shareholder need not necessarily be disqualified from bringing a derivative action against the corporation merely because that shareholder is also the potential acquiror. MacAndrews & Forbes Holding Co., Inc. v. Revlon, C.A. No. 8126, slip op., 1985 WL 21129 (Del.Ch. Oct. 9,1985). To be disqualified defendant must show that the plaintiff-representative’s interests are intrinsically at variance with those of the other shareholders. Youngman, 457 A.2d at 381.
The reviewing court may look to extrinsic factors to determine the adequacy of representation. The most important consideration should be antagonistic economic interests. Owen v. Modern Diversified Industries, Inc., 643 F.2d 441, 443 (6th Cir.1981). Newell’s claims here indicate that it is interested, like other shareholders, in maximizing the value of its investment and insuring that management does not manipulate the corporate machinery for improper purposes. Simply because there is some evidence that Newell may have been interested in attaining control of the corporation does not put it at variance with the other shareholders. See ALPA, Int’l v. UAL Corp., 717 F.Supp. 575, 579 (N.D.Ill.1989). Newell is a proper representative of the shareholders in a suit putting the Vermont American Board’s activity at issue.
2. Williams Act Claims
6. Newell complains that Vermont American violated the Williams Act by failing to make proper disclosures under Rules 13e-1, 14e-2 and 14d-9 of the Securities Exchange Act 1934. Rule 13e-1 requires that an issuer who purchases its own stock during a tender offer identify “the purpose for which the purchase is to be made and whether the securities are to be retired, held in the treasury of the issuer or otherwise disposed of, indicating such disposition.” Newell argues that Vermont American’s disclosure that it was repurchasing stock to be “used for corporate purposes” violated the statute because, in fact, Vermont American was repurchasing shares in order to defeat Newell’s tender offer.
Rules 14e-2 and 14d-9 required that Vermont American disclose to its shareholders whether it recommended acceptance or rejection of Newell’s tender offer or expressed no opinion toward it. Newell claims that the Board misled Vermont American shareholders by stating that it had no recommendation regarding Newell’s tender offer, thereby implying its neutrality, when it actually was taking actions to oppose the tender offer. Before reaching the substance of these arguments, however, I consider whether Newell has standing under the securities laws to bring these claims.
7. Congress enacted the Williams Act in 1968 in response to the p