Opinion
No. CV-09-4044848-S
August 31, 2009
MEMORANDUM OF DECISION ON MOTION FOR TEMPORARY INJUNCTION
The plaintiffs, Joseph Chalverus, Harvey Baker and Carol Sullivan, have filed an application for a temporary injunction to preclude the merger between the defendant, Axsys Technologies, Inc. ("Axsys"), and General Dynamics Advanced Information Systems, Inc., a wholly owned subsidiary of General Dynamics Corp. (collectively "General Dynamics").
Harvey Baker and Carol Sullivan filed a separate action which was consolidated with the present action on July 7, 2009. Joseph Chalverus, Harvey Baker, and Carol Sullivan own, respectively, 850, 90 and 100 shares of Axsys stock. There are 11,622,629 outstanding shares of Axsys stock.
The parties have agreed that the evidence upon which the court will rely in ruling on the application for temporary injunction are the affidavits, documents attached thereto, including the Proxy Statement, and depositions transcripts appended by the parties to their respective memoranda.
Facts
Axsys, a publicly held Delaware corporation with its headquarters in Rocky Hill, Connecticut, designs and manufactures high performance optical infrared systems, cameras, infrared lenses, optical systems and components and other products for defense, aerospace, homeland security and commercial uses. The directors of Axsys, all defendants in this suit, are Stephen W. Bershad, Anthony J. Fiorelli, Jr., Eliot M. Fried, Richard F. Hamm, Jr., and Robert G. Stevens. Mr. Bershad has been the CEO of Axsys since 1986 and also has served as Axsys' president. The other four directors, who all have extensive experience with industrial and technology companies, are not employees of Axsys.
The Axsys board of directors had for some period of time considered the sale of the company as a viable means of enhancing shareholder value. In late 2008, Mr. Bershad had multiple conversations with David Baxt, the head of Aerospace Defense for Jefferies Company, Inc., an investment bank, concerning the sale of Axsys. At the time, several companies, including Raytheon and DRS, had mentioned their possible intention to acquire Axsys. Mr. Baxt and Mr. Bershad discussed their belief that Axsys was an attractive acquisition target, particularly in light of current U.S. defense spending.
Jefferies is the largest investment bank on Wall Street with expertise in the defense industry. In mid-December 2008, the directors instructed Mr. Bershad to hire Mr. Baxt and Jefferies to attempt to sell Axsys. Axsys entered into an engagement agreement with Jefferies on January 26, 2009.
In early February 2009, Jefferies began contacting defense and aerospace companies and private equity firms to determine whether they had an interest in acquiring Axsys. During this period, Jefferies contacted 24 parties, including General Dynamics. Sixteen of the companies signed confidentiality agreements and received summary non-public information about Axsys. Those companies were asked to provide a nonbinding, preliminary indication of interest by March 10, 2009, but none of them did so.
On March 10, 2009, Axsys stock price closed at $27.37 per share. On March 11, 2009 Axsys issued a press release announcing that it was "evaluating the possible sale of the company." Thereafter, an additional 11 parties contacted Jefferies concerning the possible acquisition of Axsys.
Through March and April Axsys and Jefferies dealt with four serious potential buyers, including General Dynamics. On April 30, 2009, Jefferies distributed a final bid instruction letter and a draft merger agreement to the four bidders. On May 7th, the Axsys board met and discussed with management the status of the bidders, and reasons why other bidders had dropped out of the process. On May 13th General Dynamics submitted an all-cash bid of $654 million ($53. per share) to purchase 100% of Axsys stock. General Dynamics also submitted a markup of the merger agreement. Two days later a foreign company made an all cash bid for all of the Axsys stock. The bid was substantially lower than the General Dynamics bid and the foreign company did not submit a merger agreement. The two other companies that had received bid packages did not bid.
Later on May 21st General Dynamics raised its bid to $54. Between May 21st and June 3, 2009, the merger agreement was finalized. On June 3, 2009 the board met to consider the proposed merger with General Dynamics, and unanimously approved and adopted the merger and the merger agreement, resolved to recommend that the Axsys shareholders vote to adopt the merger agreement, and authorized the company's officers to execute the merger agreement. The parties executed the merger agreement and publicly announced the transaction on June 4, 2009.
Axsys filed its proxy statement on August 4, 2009 ("Proxy"). Market analysts that track Axsys agree that the $54 per share price obtained by the board was fair and reasonable. The report of Stephens, Inc. stated that "[w]e think the price is more than fair from an Axsys shareholder perspective." Platt Affidavit, Ex. 26. Stifel Nicolaus analyst report of June 10, 2009 stated, "We think this is . . . a fair deal to Axsys shareholders, given market conditions, the state of the economy, the potential for higher capital gains taxes, and other risks, including quarterly variability, that could affect the share price going forward." Platt Affidavit, Ex. 27.
The plaintiffs own 1040 shares of a total of 11.6 million outstanding shares of Axsys. Many of the outstanding shares are owned by institutional shareholders. The shareholders have been submitting their proxies concerning the sale and the shareholders meeting will occur on September 1, 2009 at which time the final vote on the approval of the merger will occur. If approved by the shareholders, the merger will occur on September 2, 2009.
Discussion of the Law and Ruling
The elements necessary to support a temporary injunction are: (1) the plaintiffs have no adequate legal remedy; (2) the plaintiffs will suffer irreparable injury absent an injunction; (3) the plaintiffs are likely to prevail on the merits; and (4) the balance of the equities favors a temporary injunction. Waterbury Teachers Assn. v. Freedom of Info. Comm., 230 Conn. 441, 446, 645 A.2d 978 (1994).
Where money damages are adequate compensation, a temporary injunction will not issue since equity should not intervene where there is an adequate remedy at law. Loveridge v. Pendleton Woolen Mills, Inc., 788 F.2d 914, 918 (2nd Cir. 1986). "'Adequate remedy at law' means a remedy vested in the complainant, to which he may, at all times, resort, at his own option, fully and freely, without let or hindrance." Stocker v. Waterbury, 154 Conn. 446, 449, 226 A.2d 514 (1967).
The parties agree that the plaintiffs have a remedy at law under Connecticut General Statutes 33-856(a)(5), which provides that appraisal rights are available where they are provided by "a resolution of the board of directors." The Merger Agreement in this case, adopted by a resolution of the Axsys board, provides for appraisal rights of shareholders. The parties disagree as to whether the appraisal process is the exclusive remedy for the plaintiffs.
The defendants rely on Yanow v. Teal Industries, Inc., 178 Conn. 262, 422 A.2d 311 (1979) [ 13 Conn. L. Rptr. 282], in which the Connecticut Supreme Court construed Connecticut General Statutes § 33-373, the predecessor to Connecticut General Statutes § 33-856(d), which provides:
d) Where the right to be paid the value of shares is made available to a shareholder by this section, such remedy shall be the exclusive remedy as holder of such shares against the corporate transactions described in this section, whether or not the shareholder proceeds as provided in sections 33-855 to 33-872, inclusive.
In Yanow, the Court stated, "an exclusive appraisal remedy [means] exactly what is says: as to the fact of the merger and claims addressed to it, a shareholder is entitled only to payment of the value of his shares in accordance with the [appraisal] procedures." Yanow, supra, at 280.
This court, Berger, J. followed Yanow in Brandt v. Travelers Corp., 44 Conn.Sup. 12, 16, 665 A.2d 616 (1995). The plaintiffs in Brandt, as the plaintiffs here, urged the court to follow the rule of the Supreme Court of Delaware in Weinberger v. UOP, Inc., 457 A.2d 701, (Del. 1983), which held that "[t]he appraisal remedy . . . may not be adequate in certain cases, particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved." Id., 714. The court in Brandt found that by enacting the above referenced statute, and failing to change the "exclusive remedy" language even after it substantially revised the Connecticut law on corporations, the Connecticut legislature had clearly rejected the so-called Weinberger rule. 44 Conn.Sup. at 18.
All parties agree that the issue of a temporary injunction involves procedure, governed by the law of Connecticut, Paine Webber Jackson Curtis, Inc. v. Winters, 22 Conn.App. 640, 650, 579 A.2d 545 (1990). However, the plaintiffs argue that Connecticut General Statutes 33-856 applies only to Connecticut corporations. They cite Connecticut General Statutes 33-602(5) which defines "Corporation" as "a corporation with capital stock, which is not a foreign corporation, incorporated under the law of this state, whether general law or special act and whether before or after January 1, 1997."
The defendants refer to Connecticut General Statutes § 33-855(3), which provides definitions of terms used in §§ 33-855 to 33-872, including, of course, § 33-856, and states that "Corporation" means "the issuer of the shares held by a shareholder demanding appraisal and, for purposes of sections 33-862 to 33-872, inclusive, includes the surviving entity in a merger." They argue that when general and specific statutes conflict they should be harmoniously construed so the more specific statute controls. State v. Cote, 286 Conn. 603, 619, 945 A.2d 412 (2008); Dartmoor Condominium Assn., Inc. v. Guarco, 111 Conn.App. 566, 960 A.2d 1076 (2008); Sullivan v. State, 189 Conn. 550, 556 n. 7, 457 A.2d 304 (1983).
The statutory definitions specifically referring to appraisal rights do not limit corporations to only Connecticut corporations. See § 33-855(3). Therefore, this court concludes that following Yanow, the appraisal rights section of the Connecticut General Statutes § 33-856, provides the plaintiffs' exclusive remedy. However, for the reasons set forth below, this court finds that even if § 33-856 is not the plaintiffs' exclusive remedy, they have failed to satisfy the aforementioned requirements for the granting of a temporary injunction. Based on the lack of any fraud or material omissions from the Proxy, even if the appraisal process is not the plaintiffs' exclusive remedy, it is clearly an adequate remedy at law sufficient to warrant the denial of the extraordinary remedy of a temporary injunction.
The plaintiffs seek an injunction here based wholly on alleged omissions from the Proxy. The directors' duty of disclosure requires that the board "disclose fully and fairly all material information within the board's control when it seeks shareholder action." Arnold v. Society for Savings Bancorp., Inc., 650 A.2d 1270, 1277 (Del. 1994) (quoting Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992). An omitted fact is only material if there is a substantial likelihood that it would be considered important in a reasonable shareholder's deliberation and decision making process before casting his or her vote. In re Netsmart Technologies, 924 A.2d 171, 199 (Del.Ch. 2007), citing Zirn v. VLI Corp., 621 A.2d 773, 778-79 (Del. 1993). When plaintiffs seek to prevent shareholders from making a fundamental decision, "they bear a heavy burden to persuade the court that shareholders are somehow unable to provide for their own protection, or that effective use of the corporate franchise is barred by some critical lack of information." Louisiana Municipal Police Employees Ret. Sys. v. Crawford, 918 A.2d 1172, 1176 (Del.Ch. 2007).
To prove materiality, it is not enough for plaintiffs to show that an item of information may be helpful (or relevant); instead, the information must "significantly alter the total mix of information made available." In re CheckFree Corp., 2007 WL 3262188, at *2. "Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse stockholders or inundate them with an overload of information." (Internal quotation marks omitted.) Wayne City Employees' Retirement Sys. v. Corti, 954 A.2d 319, 330 (Del.Ch. 2008). "The plaintiff must demonstrate how each allegedly omitted fact would significantly alter the total mix of information already provided." (Internal quotation marks omitted.) Id.
The plaintiffs allege that the Proxy omitted various items regarding Jefferies' opinions and analyses. Specifically, they claim that the Proxy discloses only a part of management's financial projections that Jefferies used for its Discounted Cash Flow Analysis; fails to disclose the names of comparable companies used in Jefferies' Comparable Public Companies Analysis; fails to disclose the value of each transaction that Jefferies used for its selected Comparable Transaction Analysis; and fails to disclose the methodology Jefferies used to reach a discount rate of 11% to 12% and perpetual growth rates of free cash flow of 3% to 5%.
Delaware courts have specifically rejected claims virtually identical to the ones plaintiffs make here. For example, where the plaintiff alleged that an investment banker's valuation analysis "should have disclosed the discount rate used, the reasons for using different sets of comparable companies in different analyses, and additional details regarding the private companies used in the analyses," the court in Globis Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024 at *12, ruled that the omission of such details was not even sufficient to withstand a motion to dismiss. The court in Globis Partners also held that "Delaware law does not require disclosure of all the data underlying a fairness opinion such that a shareholder can make an independent determination of value." Id. The court noted that "the Merger Proxy note[d] exactly the comparable transactions and companies used," and that there was no allegation that the investment banker used companies or transactions different than the ones disclosed in the Proxy. Id., *13.
In In re CheckFree Corp, supra, 2007 WL 3262188, the court found that the proxy statement contained an adequate and fair summary of the investment banker's work where "[o]ver the course of seven pages, the proxy statement details the various sources upon which Goldman relied in coming to its conclusions, . . . notes exactly the comparable transactions and companies Goldman used, and describes or otherwise discloses management's estimated earnings and estimated EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for 2007 and 2008 and a range of earnings derived from management estimates for 2009." Id., *3.
The plaintiffs rely on In re Pure Resources Inc., Shareholders Litigation, 808 A.2d 421 (Del.Ch. 2002) to support their claim that the Proxy statement here contained insufficient information about Jefferies' work. However, in Pure Resources the proxy statement was found to be deficient because it failed to disclose "any substantive portions" of the bankers' work. Moreover, the plaintiffs misattribute the quote on page 21 of their Memorandum and propositions of law, regarding the underlying methods used for valuation, to Pure Resources. The quote is really from In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del.Ch. 2007).
In David P. Simonetti Rollover IRA v. Margolis, Court of Chancery of Delaware, Civil No. 3694 VCN. 2008 WL 5048692, at *10 (Del Ch. June 27, 2008), relied upon by the plaintiffs, the plaintiffs claimed that the proxy statement should have disclosed more context in relation to a disclosure about the financial advisor's prior involvement in previous transactions with companies involved in the current merger. The court found that the proxy statement was adequate because it disclosed that the advisor had worked with the companies in the past, even though it was not as detailed as the plaintiffs would have liked.
Axsys' Proxy provides seven pages of single-spaced detail (Proxy at pages 21-27) about each of the analyses Jefferies performed as well as the full fairness opinion that Jefferies rendered to the Axsys board. The Proxy here is much more analogous to the proxies in Globis Partners, and CheckFree than it is to those in Pure Resources or Netsmart.
The plaintiffs rely heavily on In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del.Ch. 2007). However, the factual matrix present in that case is not analogous to that here. In Netsmart, the target company was a microcap company with a thin float and a unique market niche. 924 A.2d at 197. The CEO and the board had made insufficient efforts to determine whether larger publicly traded corporations, so-called strategic buyers, would be interested in acquiring it, opting, instead to pursue only a course in which they sought a private equity buyer. The bidding competition present in this case was absent in Netsmart. Moreover, the Netsmart company was so small that it was followed by only one research analyst. Therefore, there was a dearth of information from which shareholders could determine the value of the company in order to determine whether the proposed merger was fair or unfair to their interests. In light of the foregoing, the financial projections in the proxy statement were critically important in determining valuation. However, the financial projections included in Netsmart's proxy statement differed from the projections the banker actually used in its discounted cash flow model and fairness opinion. By contrast, the projections disclosed in the Proxy in this case were the same projections used by Jefferies in evaluating the fairness of the proposed merger.
The present case contains none of the facts present in Netsmart. Axsys is not a micro-cap company. It has stock that is broadly held and is followed by eight research analysts — J.P. Morgan, Stifel Nicolaus, Morgan Joseph, Boenning Scattergood, Stephens, Inc., Morgan Keegan, and William Blair. Unlike in Netsmart, the proposed acquisition in this case was offered to 35 potential bidders over the course of four months followed by a two-month period after the merger was announced where the proposed sale was subject to press review and public scrutiny. In other words, the quantity and quality of information in Netsmart was much smaller than in the present case, and, correspondingly, the discounted cash flow analysis in that case was much more important than it is here. The Delaware courts have distinguished Netsmart on these grounds. See, e.g., In re Lear Corp Shareholder Litigation, 926 A.2d 94, 123 n. 22 (Del.Ch. 2007).
It is not enough for the plaintiffs to claim that certain projections were not disclosed. Rather, they must demonstrate that disclosing those projections "would have materially altered the total mix of information provided" to Axsys shareholders. David P. Simonetti Rollover IRA, 2008 WL 5048692, at *10. In light of Jefferies' detailed analysis set forth in the Proxy and the other information contained therein, the court finds that the fact that the Proxy in one section stated that Jefferies performed a discounted cash flow analysis based on projections through December 31, 2013 (Proxy at 26) and in another section disclosed financial projections covering only 2009 and 2010 (Proxy at 28) would not have materially altered the total mix of information provided to the shareholders of Axsys.
The plaintiffs claim that the Proxy here failed to disclose "the names of the companies and criteria used to select the companies used in Jefferies' Comparable Public Company Analysis." Plaintiffs' Memorandum at 21. This claim is not correct. The Proxy identifies the five companies used in the analysis and explains that "Jefferies selected [these companies] because their businesses, end markets and operating profiles are reasonably similar to that of Axsys." Proxy at 24.
The plaintiffs also incorrectly assert that the Proxy's failure to disclose the value of each of the transactions Jefferies reviewed for its Selected Comparable Transactions Analysis is a material omission. The Proxy sets forth the transactions considered and any stockholder interested in the value of the transactions used by Jefferies can find that information in the public domain. Asset appraisal value that "was based almost entirely on publicly available information" was not required to be disclosed in a merger notice because it was not material. Citron v. Fairchild Camera Instrument Corp., 569 A.2d 53, 70 (Del. 1989).
The plaintiffs also contend that the Proxy fails "to disclose the extent of Jefferies' conflicts of interest." Plaintiffs' Memorandum at 17. Jefferies' alleged conflicts of interest consist of the "longstanding relationship of Mr. Baxt and Jerry DeMuro at General Dynamics." Plaintiffs' Memorandum at 17. The plaintiffs have presented no evidence to support any conflicts of interest. Mr. Baxt averred that he spoke to Mr. DeMuro and people at the other large defense contractor firms about mergers and acquisitions as a routine part of his job, but that he had not spoken to Mr. DeMuro about Jefferies being hired by General Dynamics and had not contacted Mr. DeMuro about other potential business opportunities since December 2008.
The evidence concerning the alleged conflict of interest of Mr. Baxt of the Jefferies firm does not even rise to the level of other personal relationships which have been held insufficient to create a conflict of interest. "[A]llegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about . . . independence." Benihana of Tokyo, Inc. v. Beninhana, Inc., 891 A.2d 150, 179 (Del.Ch. 2005) (quoting Beam v. Stewart, 845 A.2d 1040, 1051-52 (De. 2004)); See also Kohls v. Duthie, 765 A.2d 1274, 1284 (De. Ch. 2000).
The plaintiffs assert that the Proxy deprives the shareholders of material information because it does not disclose the amount of options that are unvested. The Proxy sets forth the total number of options to be cashed out for each director. Four of the five directors have no unvested options. Mr. Bershad holds 14,000 unvested options and 53,000 vested options. It is not possible that a reasonable shareholder would consider such a disclosure material.
The plaintiffs' argument concerning the unvested options is premised on the substantive complaint that accelerated vesting of options impairs a director's loyalty to the Company. The Delaware court has rejected such a claim in Ryan v. Lyondell Chemical Co., 2008 WL 2923427, at *10, stating:
Where, as here, the options vesting in connection with a merger were awarded as part of an established compensation plan, the accelerated vesting does not confer a special benefit upon the directors. The options, instead, are a legitimately earned benefit and, in fact, provide the directors with a powerful incentive to seek a transaction offering the highest value per share; thus, the vesting of the directors' options advanced the desired result of aligning the Board's interests with those of the Lyondell stockholders.
Similarly, in Globis Partners, supra, 2007 WL 4292024, the court stated that "the value of the acceleration option increased incrementally with the acquisition price — each additional penny BEA had to pay for a Plumtree share raised the value of the accelerated option and share equally. Thus the acceleration of the unvested stock options was not a financial benefit accruing only to the Directors." Id., *8.
The plaintiffs claim that the Proxy fails to disclose the "synergies" experienced by a potential buyer were valued by Axsys management at $9 million. However, the Proxy clearly discloses such "synergies" or savings. See Proxy at 28.
The plaintiffs claim that the Proxy fails to adequately disclose the circumstances of the Axsys' retention of Jefferies. However, there is no requirement that a Proxy disclose its manner or selecting an investment banker, of a law firm, or accountant, for that matter. The plaintiffs rely heavily on Braunschweiger v. American Home Shield Corp, No. 10755, 1991 WL 3920, at *6 (Del.Ch. Jan 7, 1991), in which the court held that a CEO's involvement in the hiring of a special committee's investment banker might be material. In contrast to the present case, the CEO in Braunschweiger and his son, who was also a director, had been excluded from the special committee because they stood on both sides of the transaction. In this case, the plaintiffs fail to state a claim that Mr. Bershad was impaired by any conflict. Moreover, the Proxy does describe Mr. Bershad's involvement in the hiring of Jefferies. Proxy at 16.
Based on the foregoing, the plaintiffs have not proved that there is a substantial likelihood that they will succeed on the merits.
The plaintiffs also fail to demonstrate that they will suffer irreparable harm if the injunction is not granted. The shareholders are capable of rejecting the merger if they think it does not serve their interests. When "self-help measures" are available to educated stockholders who simply may vote down a transaction they dislike, "it is not for this Court to ride to their rescue." Phelps Dodge Corp. v. Cyprus Amax Minerals Co., No. 17398, 1999 WL 1054255, at *2 (Del.Ch. Sept. 27, 1999). In Phelps Dodge the court denied the temporary injunction brought by a competing bidder to enjoin the vote in a stock-for-stock merger because there was no demonstration of irreparable harm. The Delaware courts carefully protect the rights of shareholders to exercise their voting rights. Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651, 659 n. 2 (Del.Ch. 1988). The Axsys shareholders should determine for themselves whether to approve or reject the merger.
The balance of the equities here favors the denial of the application for temporary injunction. As stated above, the plaintiffs represent an infinitesimal percentage of the total shareholders of Axsys. The proposed merger offers a price per share which may well be deemed quite favorable by the majority of the shareholders. The granting of the injunction might result in the merger not taking place. An injunction should not be granted except in a clear case of irreparable injury and "with full conviction on the part of the court of its urgent necessity," Gimbel v. Signal Cos., 316 A.2d 599, 602 (Del.Ch. 1974), aff'd, 316 A.2d 619 (Del. 1974). An injunction threatens much greater harm than benefit to the shareholders of Axsys where, as here, there is no competing offer to the proposed merger. See Abrons v. Maree, 911 A.2d 805, 810-11 (Del.Ch. 2006); McMillan v. Intercargo Corp., 1999 WL 288128, at *4. Granting an injunction in this case would potentially cause much greater harm than denying it.
In summary, the plaintiffs here have an adequate remedy at law, the statutory appraisal process, which this court and other courts have found to be the plaintiffs' exclusive remedy. However, even if the plaintiffs are entitled to pursue injunctive relief, for the reasons set forth above, they have failed to satisfy any element necessary for the granting of the injunction and the application for temporary injunction is, therefore, denied.