426 A.2d at 1342-1343, 1348-1350
In 1974 Signal Companies sold its Signal Oil and Gas subsidiary for $420 million in cash and began seeking investment opportunities.1
In April 1975 Signal negotiated with UOP and agreed to purchase 1.5 million newly issued UOP shares plus 4.3 million publicly held shares via tender offer, all at $21 per share, giving Signal 50.5 percent ownership.2 UOP stock had been trading just under $14 per share immediately before the announcement.3 Signal nominated six directors to UOP's thirteen-member board and later replaced UOP's president with James C. Crawford, a longtime Signal subsidiary executive who also joined Signal's board.4
UOP recorded a $35 million operating loss in 1975 after the Come-By-Chance refinery entered bankruptcy, but by the end of 1977 its gross revenues reached $730 million and net income per share stood at $2.74, nearly matching 1974 performance.5 In February 1978 Signal officers Arledge and Chitea, who also served as UOP directors, prepared a feasibility study concluding that acquiring the remaining 49.5 percent interest at any price up to $24 per share would be a good investment for Signal.6 Signal's Executive Committee then authorized management to negotiate a cash merger at a price in the $20 to $21 range.7
On February 28, 1978 Signal issued a press release announcing negotiations for acquisition of UOP's minority interest.8 Crawford contacted UOP's non-Signal directors individually and retained Lehman Brothers to render a fairness opinion, agreeing to a $150,000 fee after initial discussions of $250,000.9 On March 6, 1978 the boards of both companies met and approved the merger agreement at $21 per share, with Signal-affiliated UOP directors abstaining on advice of counsel.10 Lehman Brothers delivered its two-page opinion letter stating that $21 was fair.11
The May 1978 proxy statement described the price determination as resulting from "discussions" between Crawford and Signal officers, attached the Lehman Brothers opinion letter, and reported that UOP's board had approved the merger unanimously.12 At the May 26, 1978 annual meeting 56 percent of the minority shares were voted, approving the merger by a nearly 12-to-1 margin among those voting and producing 76.2 percent overall approval when combined with Signal's shares.13 The merger closed the same day, converting each minority share into a right to receive $21 cash.14
William B. Weinberger, a former UOP shareholder, filed a class action in the Court of Chancery on behalf of all UOP shareholders as of May 26, 1978 who had not exchanged their shares for the merger price.15 An initial complaint was dismissed for failure to state a claim.16 An amended complaint followed, and the case proceeded to an eleven-day trial in October 1980.17
Whether Signal had a bona fide business purpose for proposing the merger other than eliminating UOP's minority shareholders?18
Under Tanzer v. International General Industries, Inc., a majority shareholder may pursue its own corporate interests in causing a subsidiary to merge, including achieving 100 percent ownership, provided the purpose is bona fide and not a mere subterfuge to rid itself of the minority.19 Even with a bona fide purpose, the transaction remains subject to the entire fairness test of Sterling v. Mayflower Hotel Corp., which requires judicial scrutiny of all terms under the careful review of the courts.20
Yes. Signal's Executive Committee authorized management to negotiate the cash merger at $20 to $21 per share after reviewing the Arledge and Chitea feasibility study.21
The study concluded acquisition of the remaining 49.5 percent interest would be a good investment at any price up to $24 per share.22 Signal sought the transaction to place a portion of its 1974 surplus cash from the Signal Oil and Gas sale.23
It also sought to eliminate the accounting distortion of consolidating 100 percent of UOP's debts and sales while recognizing only 50.5 percent of earnings.24 Signal wanted to realize tax, accounting, and insurance savings.25 All of these constituted legitimate business reasons comparable to the voluntary integration purpose approved in Sterling rather than a subterfuge.26
Signal possessed a proper and bona fide business purpose for the merger that was not designed merely to eliminate the minority shareholders.27
Whether the press releases and proxy statement contained material misrepresentations or omissions concerning the nature of the price discussions and the Lehman Brothers fairness opinion?28
Under Lynch v. Vickers Energy Corp. and TSC Industries, Inc. v. Northway, Inc., a majority shareholder and controlled board must disclose all germane facts with complete candor so that minority shareholders receive a full and fair picture of the transaction.29 Material misrepresentations or omissions that prevent an informed vote may vitiate reliance on shareholder approval.30
No. The February 28 and March 2, 1978 press releases accurately described ongoing discussions between Signal and UOP management concerning the price range and other merger terms such as employee stock options and incentive programs.31 The proxy statement correctly reported that the price resulted from discussions between Crawford and Signal officers.32 It attached the full Lehman Brothers opinion letter that disclosed reliance on UOP-furnished information without independent appraisals.33 It noted the unanimous board approval because no director voted against the proposal even though Signal-affiliated directors abstained on counsel's advice.34
The press releases and proxy statement contained no material misrepresentations or omissions that would require discounting the minority shareholder vote.35
Whether UOP's board fulfilled its fiduciary duties to the minority shareholders by negotiating the merger price, obtaining an independent appraisal, and considering the value of UOP's assets?36
Under Sterling v. Mayflower Hospital Corp., directors standing on both sides of a merger owe a fiduciary duty to demonstrate entire fairness to the minority. This duty includes considering all pertinent elements such as price, asset values, and procedural safeguards.37 Failure to obtain an independent appraisal or to negotiate a higher price does not constitute a breach if the evidence ultimately shows the terms were fair.38
Yes. UOP's non-Signal directors, including former senior executives who owned substantial shareholdings, reviewed the financial data, market prices, and Lehman Brothers fairness opinion before approving the $21 price on three business days' notice, and although no independent appraisal of timberland or patent assets was obtained and no counteroffer above $21 was made, the board's consideration of the 1975 tender offer oversubscription at the same price and UOP's comparable 1977 performance to 1974 satisfied the duty, with subsequent evidence confirming that those assets did not materially affect fairness.39
UOP's board fulfilled its fiduciary duties to the minority shareholders in approving the merger terms.40
Whether the $21 per share cash price paid to UOP's minority shareholders was fair under the circumstances of the transaction?41
Under Sterling v. Mayflower Hotel Corp., the ultimate test of entire fairness requires that minority shareholders receive the substantial equivalent in value of the shares they held before the merger.42 All relevant factors including market value, investment value, net asset value, and any premium must be considered.43 The majority shareholder bears the burden of demonstrating fairness by a preponderance of the evidence once the plaintiff raises a colorable claim.44
Yes. Dillon, Read's analysis showed that $21 represented a 44.8 percent premium over the February 28, 1978 closing price of $14.50. It fell within the 41 to 48 percent median and average premiums for comparable acquisitions.4546 It corresponded to an investment value of approximately 6.5 to 7.0 times 1977 earnings and 80 to 85 percent of book value.47 Although plaintiff's expert Bodenstein opined that a 70 to 80 percent premium or discounted cash flow analysis supported a value of at least $26, the court found the subjective discount rates and 100 percent ownership perspective unreliable.48
The court concluded that the $21 price satisfied the substantial equivalent standard when viewed against market trading history and the overwhelming minority vote of approval.49
The $21 per share cash price was fair to UOP's minority shareholders under the circumstances of the transaction.50
Whether Lehman Brothers conspired with Signal and UOP's management to provide a misleading fairness opinion to UOP's minority shareholders?51
A civil conspiracy requires a combination of two or more persons for an unlawful purpose or for a lawful purpose by unlawful means, together with resulting damages.52 An investment banking firm retained to render a fairness opinion does not owe the same fiduciary duty to minority shareholders as the majority shareholder unless evidence establishes an agreement to defraud.53
No. Although Lehman Brothers had a prior relationship with both UOP and Signal, it had prepared an internal 1976 memorandum suggesting a $17 to $21 range for Signal's benefit. That document was never shown to Glanville or to any Signal or UOP officer before the merger and was not relied upon in preparing the March 1978 opinion.54 The three-person Lehman team conducted a due diligence visit, reviewed SEC filings and financial statements, and produced a letter that disclosed its reliance on management information.55 There was no evidence of an overt agreement or damages to the minority at the $21 price.56
Lehman Brothers did not conspire with Signal and UOP's management to provide a misleading fairness opinion.57