Opinion
C.A. 7974.
April 4, 1985.
Joseph A. Rosenthal, Esquire, Norman M. Monhait, Esquire, Morris Rosenthal, P.A., P.O. Box 1070, Wilmington, Delaware 19899.
E. Norman Veasey, Esquire, Jesse A. Finkelstein, Esquire, Richards, Layton Finger, P.O. Box 551, Wilmington, Delaware 19899.
Steven J. Rothschild, Esquire, Anthony W. Clark, Esquire, Skadden, Arps, Slate, Meagher Flom, Box 636, Wilmington, Delaware 19899.
UNREPORTED OPINION
Plaintiff, Harry Lewis ("Lewis"), filed this purported class action to enjoin defendant, LFC Holding Corp. ("LFC"), from proceeding with a tender offer for all the shares of Levitz Furniture Corp. ("Levitz") at $39 cash per share. The offer commenced on March 11, 1985 and originally was due to expire on April 5, 1985. The complaint alleges that a management group consisting of three inside directors of Levitz, acting together with a substantial beneficial stockholder of Levitz, an investment banking firm and a corporate investor is attempting to freeze out the public stockholders of Levitz at an unfair price through this coercive and manipulative tender offer.
The complaint was filed on March 19, 1985 and names as defendants Robert M. Elliott ("Elliott"), George H. Bradley ("Bradley") and John W. Duall ("Duall") (collectively the "management group"); J. A. Pritzker ("Pritzker") who allegedly controls 22.5% of the common stock of Levitz; Drexel Burnham Lambert, Inc. ("Drexel") and one of its senior officers; Citicorp Capital Investors, Ltd. ("CCIL") and one of its senior officers; and LFC. Levitz, a Pennsylvania corporation engaged in the retail sale of home furnishings, is not a party to this action.
As sometimes happens in injunctive actions of this nature, plaintiff sought and obtained an ex parte order for expedited discovery on the same day that the complaint was filed. Upon learning of the complaint and discovery order, defendants immediately attempted to vacate the discovery order and moved to dismiss or stay on various grounds including lack of personal jurisdiction, failure to join indispensable parties and forum non conveniens. Given the time constraints involved, resolution of these potentially dispositive preliminary motions prior to the initiation of any discovery would have effectively prevented plaintiff from obtaining evidence to support his motion for a preliminary injunction. Accordingly, plaintiff was allowed to take limited discovery with the understanding that all the pending motions would be considered at the same time.
The Court's decision to allow expedited discovery and hear this matter should not be relied upon as precedent in any future case. Several factors, set forth in the corporate defendants' motion to dismiss or stay, strongly suggest that it would be more appropriate for plaintiff to litigate his claims in another forum. Two prior filed actions are currently pending in the Circuit Court of Dade County, Florida. Those actions, representing the same plaintiff class, raise substantially the same claims as those presented here. In addition to all the defendants named in this action, the Florida actions include Levitz, the target of the tender offer, as a defendant. Levitz' headquarters are in Florida and two of the three management group defendants are residents of Florida. Thus, Florida would be more convenient in terms of access to documents and at least some of the key witnesses.It seems that the only reason for pursuing this litigation in Delaware is that it is apparently more difficult in the Florida courts to obtain expedited discovery and an accelerated preliminary injunction hearing date than it is in this Court. I am not at all sure that under a similar set of facts I would agree again to schedule a preliminary injunction hearing. See: McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., Del. Supr., 263 A.2d 281 (1970). However, having allowed the matter to proceed this far, I feel constrained to decide the preliminary injunction motion.
It is settled law that a preliminary injunction will not issue unless plaintiff establishes a probability of success on the merits, irreparable injury and that the harm to plaintiff if injunctive relief is denied will be greater than that which defendant will suffer if the injunction is granted. Gimbel v. Signal Companies, Inc., Del. Ch., 316 A.2d 599, aff'd., Del. Supr., 316 A.2d 619 (1974).
The events leading up to the tender offer may be summarized as follows. Approximately one year ago, Pritzker approached Elliott about the possibility of acquiring the outstanding stock of Levitz. Following several discussions and a June 1, 1984 press release on the subject, Dalfort Corporation ("Dalfort"), an affiliate of a company wholly-owned by certain Pritzker interests, submitted a written merger proposal to a special meeting of the Levitz' Board of Directors held on June 28, 1984. Under the Dalfort proposal, each Levitz share would be exchanged for a combination of $20 in cash, five-year equity participation certificates entitling the holder to receive a portion of Levitz' pre-tax earnings above a certain level, and certain Dalfort convertible preferred stock. The offer contemplated a 5% participation in the surviving corporation by Levitz' management.
At that meeting, an ad hoc committee (the "Committee") consisting of four non-management members of the Board was formed. The Committee was assigned to evaluate and make recommendations with respect to the Dalfort offer as well as any other offers that might be forthcoming.After the Committee negotiated several changes in the Dalfort offer, including a provision permitting the Board to consider and support any other acquisition proposal, the Board approved the offer conditioned upon receipt of a fairness opinion, among other things.
On August 7, 1984, Drexel, the firm retained by the Committee as its financial adviser, reached a preliminary conclusion that it could not issue a fairness opinion as to the Dalfort offer. The Committee was unsuccessful in its efforts to negotiate a higher offer and on August 13, 1984 Levitz and Dalfort issued a joint press release stating that Drexel was unable to issue a fairness opinion. The press release also indicated that the Pritzker interests, holding approximately 22.5% of the outstanding Levitz stock, would consider selling their holdings at a higher price than that offered by Dalfort.
Levitz received several acquisition inquiries and one other offer during the next two and one-half months. The offer, from Alger Associates, Inc. ("Alger"), was for a combination of cash and subordinated debentures valued by Alger at approximately $37 per Levitz share. Drexel advised the Committee that it would be unable to provide a fairness opinion as to the Alger offer and, on October 16, 1984, the Board followed the Committee's recommendation and rejected the offer. Of the several inquiries, none suggested a possible price above $38.50 per share and none developed into firm offers.
In late September, 1984, CCIL began looking into the possibility of a leveraged buyout of Levitz. After discussing its interest with Elliott, CCIL contacted Drexel to discuss financing. Drexel's possible involvement in an acquisition offer created a conflict of interest inasmuch as another of Drexel's offices was advising the Committee. On October 10, 1984 Drexel advised the Committee of its interest in working with CCIL and the Committee, after determining that it would be in the best interests of the Levitz stockholders, released Drexel.
On November 6, 1984 a merger proposal from CCIL, Drexel and the management group was presented to the Levitz Board. After evaluation and negotiations, the Committee recommended and the Board approved the CCIL/Drexel merger proposal at a price per share of $39 in cash, subject to receipt of a favorable opinion of an investment banker. Dean Witter Reynolds, Inc. ("Dean Witter") was retained by the Committee on November 12, 1984 to render a fairness opinion on the CCIL/Drexel merger.
On November 29, 1984 Dean Witter orally advised the Committee of its preliminary opinion that $39 was fair from a financial point of view. After receiving the unanimous recommendation of the Committee, the Levitz Board approved the CCIL/Drexel merger at its December 13, 1984 meeting. Pursuant to the merger agreement, a wholly-owned subsidiary of LFC (which was to be owned by CCIL, the management group and Drexel) would be merged with and into Levitz. The management group abstained from voting on the merger agreement.
On February 12, 1985, Dean Witter advised the chairman of the Committee that it might be unable to reaffirm the preliminary fairness opinion orally given to the Committee in November. Dean Witter's reasons were not based upon any unusual developments at Levitz but rather on the recent rise in the stock market and in the price/earnings multiples of companies Dean Witter deemed comparable to Levitz as well as recent declines in prevailing interest rates. In response to this information, CCIL, Drexel and members of the management group considered their alternatives if Dean Witter declined to provide a fairness opinion. The alternatives discussed were terminating the merger agreement, seeking a second fairness opinion or commencing a tender offer at the merger price of $39 per share.
At about the same time, Pritzker came back into the picture. Pritzker approached Drexel about the possibility of the Pritzker interests participating in the acquisition with CCIL, Drexel and the management group. Following discussions among the interested parties, it was agreed that the Pritzker interests would acquire 20% of the outstanding common stock of LFC for $3 million and that, upon consummation of the merger, LFC would retain a corporation controlled by the Pritzker interests as a consultant for three years and pay $4 million for its advisory services.
At a meeting held on March 4, 1985, the Levitz Board was advised of Dean Witter's position on the fairness opinion as it was conveyed to the Committee a few weeks earlier. The Board then placed a call to Dean Witter and was told that Dean Witter would not reaffirm its prior opinion that $39 per share was a fair price. The Board was then advised that LFC was prepared to make a tender offer for all of Levitz' outstanding stock at $39 per share.
Drexel's counsel told the Board that, as conditions precedent to the proposed tender offer, the Board would have to either support the offer or remain neutral and the parties would have to reach a mutually satisfactory resolution of any disputes over the fees due to Drexel under the merger agreement. After extensive discussions with counsel as to Levitz' obligations under the merger agreement, the Board agreed to pay Drexel $4.75 million under certain circumstances as a compromise of Drexel's $6 million claim. The parties agreed to terminate the merger agreement upon commencement of the tender offer and the Board agreed to remain neutral as to the tender offer. The resolution relating to the tender offer as well as the minutes of the March 4th meeting indicate that the Board considered Dean Witter's inability to provide a fairness opinion as well as the events of the preceeding nine months and decided that it was in Levitz' best interests to give its stockholders an opportunity to decide for themselves whether they want to receive the $39 per share.
The Offer to Purchase (the "Offering Circular") was distributed on March 11, 1985. In response to plaintiff's non-disclosure claims, but without conceding their validity, LFC issued a Supplement to the Offering Circular on April 3, 1985. The Supplement extends both the withdrawal date and expiration date of the tender offer until midnight on April 10, 1985. It includes, among other items not relevant to this decision, a detailed description of the two Florida actions as well as this one, the press release issued on March 15, 1985 disclosing Levitz' fiscal year 1985 and 4th quarter financial results and information in addition to that contained in the Offering Circular as to estimated real estate values.
The parties agree that Pennsylvania law governs at least as to defendants' fiduciary obligations, if any. Plaintiff argues that the management group defendants and Pritzker, as officers and directors and controlling stockholder respectively, owe fiduciary duties to the Levitz stockholders in connection with the tender offer. These defendants allegedly breached their fiduciary duties by commencing a tender offer at an unfair price and failing to disclose all germane facts in the Offering Circular. Plaintiff contends that the corporate defendants are liable for these same wrongs as co/conspirators or aiders and abettors.
On the issue of price, plaintiff says that Dean Witter's unwillingness to provide a fairness opinion clearly establishes that the price is unfair. As to the disclosures, plaintiff's briefs focus on four purported deficiencies: (1) failure to include fiscal year 1985 financial results; (2) failure to disclose the "true value" of Levitz' real estate holdings; (3) misrepresentation in disclosing the basis for LFC's purported belief that the tender offer price is fair; and (4) misrepresentation in disclosing the nature of Pritzker's relationship to LFC. At argument, plaintiff asserted that information contained in an LFC private placement memorandum is material and was omitted from the Offering Circular and that the Offering Circular is misleading because it fails to state that the Levitz Board agreed to remain neutral on the tender offer in order to avoid Drexel's fees.
Based upon the authorities cited by the parties and the record, I find that plaintiff has not satisfied his burden of establishing a likelihood of success on the merits. There is no question but that directors and controlling stockholders of Pennsylvania corporations are accountable as fiduciaries as a general rule. See, e.g. Selheimer v. Manganese Corporation of America, Pa. Supr., 224 A.2d 634 (1966) (directors liable for mismanagement and waste of corporate assets); Seaboard Industries, Inc. v. Monaco, Pa. Supr., 276 A.2d 305 (1971) (officers liable for diversion of corporate opportunity); Weisbecker v. Hosiery Patents, Inc., Pa. Supr., 51 A.2d 811 (1947) (complaint alleging majority stockholders froze out minority at grossly inadequate price through dissolution states a claim). However, plaintiff acknowledges that there appears to be no Pennsylvania case law recognizing fiduciary duties in the context of a tender offer. The only cases cited to this Court relating to the purchase of stock hold that, absent special circumstances, a director or controlling stockholder owes no fiduciary duty to the selling individual stockholder. See, e.g. Binns v. Copper Range Co., Pa. Supr., 6 A.2d 895 (1939); Howell v. McClosky, Pa. Supr., 99 A.2d 610 (1953).
Plaintiff argues that the absence of any Pennsylvania authority on point should not deter the Court from concluding that a Pennsylvania court would apply the law of a neighboring state, such as Delaware, where these issues have been judicially determined. See, e.g. Lynch v. Vickers Energy Corp., Del. Supr., 383 A.2d 278 (1977); Joseph v. Shell Oil Co., Del. Ch., 482 A.2d 335 (1984). While this approach seems reasonable, at the preliminary injunction stage, plaintiff has the burden of establishing probability of success on the merits both as a matter of fact and law. Allied Chemical Dye Corporation v. Steel Tube Co., Del. Ch., 122 A. 142 (1923). Where, as here, the Court is called upon to interpret the law of another jurisdiction and in that jurisdiction the legal issues have not been adjudicated, it is difficult to see how plaintiff can meet the second half of that standard. See: National Education Corporation v. Bell Howell Company, et al., Del. Ch., C.A. No. 7278, Brown C. (August 25, 1983) (in case of uncertainity as to the legal position advanced by plaintiff, preliminary injunction denied).
Even assuming that Delaware law would be applied by a Pennsylvania court, the evidence of record does not establish that plaintiff has a reasonable probability of success on the merits. Virtually all of plaintiff's disclosure claims have been mooted by the Supplement. Without ruling on materiality or the adequacy of previous disclosures, the Court notes that the stockholders now have Levitz' fiscal year 1985 results as well as the real estate values found in LFC's private placement memorandum. In its description of this action, the Supplement also puts the stockholders on notice of plaintiff's claims that (i) the Pritzker consulting arrangement is a sham designed to conceal the fact that the Pritzker interests are receiving a $2.45 per share premium and (ii) the statement that LFC believes the $39 per share price to be fair is false. Moreover, as to these last two claims, the evidence does not establish that plaintiff's suspicions are likely to be borne out.
This leaves the two claims advanced at argument. It is true that neither the Offering Circular nor the Supplement states tht, as a condition to making the tender offer, Drexel insisted that the dispute over fees to be paid pursuant to the merger agreement be resolved.However, the record does not support plaintiff's characterization that the Levitz Board was "extorted" into remaining neutral on the tender offer in order to avoid a threatened law suit over the fees. Without such a connection, there is no basis to impugn the Board's decision to remain neutral and the omitted information does not appear to be material.
Finally, plaintiff's argument that various bits of information from the private placement memorandum should have been included in the Offering Circular seems to be premised on the theory that everything told to a potential investor is material to the recipient of a tender offer. I am aware of no such blanket rule and, considering the information that was provided about Drexel's projections and assumptions, I am not satisfied that plaintiff has met its burden of establishing a likelihood that the omitted information would significantly alter the "total mix" of information provided to the stockholders. See T.S.C. Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).
Absent a finding of inadequate or inaccurate disclosures, stockholders generally should be allowed to decide for themselves whether to tender or not. This is not a case where the offeror, "who has a fiduciary duty to the offeree, structures the offer in such a way as to result in an unfair price being offered and the disclosures are unlikely to call the unwary stockholders' attention to the unfairness." Joseph v. Shell Oil Co., Del. Ch., 482 A.2d 335, 341 (1984). Accordingly, plaintiff's unfair price claim will not support injunctive relief.
Based on the foregoing analysis, I conclude that plaintiff's motion for a preliminary injunction must be denied. As a result, it is unnecessary to decide defendants' various motions to dismiss at this time.
IT IS SO ORDERED.