683 F. Supp. 458 (D. Del. 1988)
BNS Inc. is a Delaware corporation formed by three entities including Bright Aggregates Inc. as a wholly-owned subsidiary of Beazer PLC, SL-Merger, Inc. as a wholly-owned indirect subsidiary of Shearson Lehman Brothers Holdings Inc., and Speedward Limited as a wholly-owned indirect subsidiary of NatWest Investment Bank.1 BNS was incorporated specifically to make a tender offer for Koppers Company, Inc.2
Koppers is a Delaware corporation headquartered in Pittsburgh.3 Its business consists primarily of construction materials and services work along with approximately forty percent chemicals and allied products activity.4
On March 3, 1988, BNS commenced its tender offer for all outstanding shares of Koppers common stock and cumulative preferred stock.5 BNS initially offered $45 per common share and $107.75 per preferred share.6 The offer was later extended twice to expire at midnight on April 7, 1988.7
BNS raised its offer to $56 per common share on March 20, 1988.8 BNS then raised its offer to $60 per common share on March 25, 1988.9 Koppers's board recommended rejection of the initial bid.10 The stock traded above the offer prices in the early days.11
BNS stated in its offer materials that following a successful takeover it would seek a merger converting remaining shares into the right to receive the same cash price.12 BNS conditioned the offer on a judicial finding that the Delaware Act is unconstitutional or inapplicable.13
Governor Castle signed the Delaware Business Combinations statute on February 2, 1988.14 The statute applies to all Delaware corporations except those meeting narrow criteria.15 Koppers could not avoid opting out of the statute because of its staggered board terms.16
In February 1986 Koppers adopted a stock purchase rights plan as a dividend of one right per common share to purchase 1/100th of a share of junior participating preferred stock at an exercise price of $75.17 The plan was amended on March 15, 1988, to provide that rights do not detach or become exercisable until ten days after a person acquires 20 percent or more of the common stock or ten business days after commencement of a tender offer.18
The rights become exercisable upon acquisition of more than 30 percent.19 This triggers a flip-in allowing holders to buy Koppers stock at double the exercise price.20 It also triggers a flip-over allowing purchase of $150 worth of acquirer stock for $75.21 Rights held by the acquirer are voided.22 The board may redeem the rights for five cents each until ten days following the stock acquisition date.
BNS conditioned its offer on redemption of the rights or escape from the resulting dilution.23
BNS filed this action in the United States District Court for the District of Delaware against Koppers, Attorney General Charles M. Oberly, III, and Secretary of State Michael E. Harkins.24 BNS sought a declaratory judgment that the Delaware Act is unconstitutional under the Supremacy Clause as preempted by the Williams Act and under the Commerce Clause.25 BNS also sought a declaratory judgment that the rights plan is invalid because the board's refusal to redeem the rights violates fiduciary duties.26 BNS moved for a preliminary injunction.27
The court evaluated the motion under the requirements of reasonable probability of success on the merits and irreparable injury. The court also considered harm to other parties and the public interest.28
Whether the Delaware Business Combinations statute is preempted by the Williams Act?29
A state statute regulating tender offers is preempted by the Williams Act only if it frustrates the full purposes and objectives of Congress by eliminating any meaningful opportunity for hostile offers beneficial to shareholders to succeed.30 The determination asks whether the statute protects independent shareholders from coercion.31 It also asks whether the statute gives management or the offeror an advantage in consummating or defeating an offer.32 It further asks whether the statute imposes an indefinite or unreasonable delay on offers.33 Finally, it asks whether the statute allows the state government to interpose its views of fairness between willing buyers and sellers.34
No. The Delaware statute protects independent shareholders from coercion by preventing unapproved freezeouts after a successful tender offer.35 This directly addresses BNS's stated plan to merge with Koppers and sell its chemicals business following acquisition of the shares.36
The statute gives target management an advantage in fighting unwanted takeovers.37 However, this advantage does not outweigh the benefits conferred on shareholders through the 85 percent exception and two-thirds vote option.38 The court found on the record of BNS's escalating offers from $45 to $60 per share that hostile bidders retain a meaningful opportunity to effect a business combination.39
The statute imposes no delay on the actual purchase of shares during the tender offer period ending April 7, 1988.40 The three-year moratorium on combinations is comparable to the two-year delay already caused by Koppers's staggered board.41
The statute does not allow the state government to interpose its views of fairness.42 Instead, it permits incumbent management and a minority of stockholders to decide.43 This is consistent with the norm of entrusting management to protect shareholders under Delaware law.44
Applying these elements to the facts of BNS conditioning its offer on a finding that the Act is unconstitutional shows that the statute and the Williams Act can coexist.45
The Delaware Business Combinations statute is not preempted by the Williams Act.46
Whether the Delaware Business Combinations statute violates the Commerce Clause?47
A state takeover statute survives Commerce Clause scrutiny if its effects are not discriminatory against interstate commerce.48 The statute must not create an impermissible risk of inconsistent regulation by other states.49 The statute must promote stable corporate relationships and protect shareholders.50
No. The effects of the Delaware statute are not discriminatory because it regulates all Delaware corporations equally regardless of the offeror's state of incorporation.51 It applies the same 15 percent interested stockholder threshold and three-year moratorium to BNS as to any other bidder.52
The statute creates no impermissible risk of inconsistent regulation because it applies only to Delaware corporations such as Koppers and BNS.53 Both are incorporated in Delaware.54 The statute does not reach corporations chartered elsewhere or impose extraterritorial burdens beyond the state's authority over its own corporate citizens.55
The statute promotes stable corporate relationships and protects shareholders by shielding them from coercive two-tier offers through the business combination moratorium.56 This is evidenced by BNS's plan to convert remaining shares at the tender offer price after acquiring control.57 The statute still allows exceptions that preserve shareholder choice.58
Applying these elements to the facts of BNS's tender offer for a Delaware corporation headquartered in Pittsburgh demonstrates that the statute harmonizes with Commerce Clause requirements.59
The Delaware Business Combinations statute does not violate the Commerce Clause.60
Whether Koppers's board of directors breached its fiduciary duties by refusing to redeem the stock purchase rights?61
Directors responding to a hostile tender offer must first demonstrate reasonable grounds for believing there was a danger to corporate policy and effectiveness.62 They must also show that their response was reasonable in relation to the threat posed.63 Once these Unocal hurdles are cleared, the business judgment rule applies unless the plaintiff shows the directors acted primarily for entrenchment or otherwise breached fiduciary duties such as lack of good faith.64
No. Koppers's board demonstrated reasonable grounds for perceiving a danger by reviewing the company's financial position in depth at its regular monthly meeting just prior to the March 3, 1988 offer.65 The board reviewed the position again at a March 10 meeting after the $45 bid.66 It obtained advice from First Boston that the offer was inadequate except for the preferred shares.67
The board's response of rejecting the offers as inadequate after raising the price to $56 and then $60 was reasonable in relation to the threat.68 The board extended the rights detachment date.69 The inadequacy of the offering price presented a danger to shareholders.70 The board had not yet implemented any irrevocable recapitalization plan.71
The board's actions were taken in good faith after investigation.72 A majority of the directors were disinterested.73 BNS has not produced evidence that the refusal to redeem was undertaken primarily to entrench the directors or involved fraud, overreaching, or lack of good faith.74
Applying these elements to the facts of BNS conditioning its offer on redemption of the rights and the board's unanimous rejection of each increased bid shows that the directors have not breached their fiduciary duties.75
Koppers's board of directors did not breach its fiduciary duties by refusing to redeem the stock purchase rights.76