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February 27, 1969


The opinion of the court was delivered by: Decker, District Judge.


Goodrich-Gulf Chemicals, Inc. ("Chemicals") is a joint venture of B.F. Goodrich Company and Gulf Oil Corporation, each partner having 50% of its stock. During 1965 Goodrich and Gulf seriously considered having one company buy out the other, but they could not agree on the price. On January 20, 1969, however, Northwest Industries announced its intention to make a tender offer for Goodrich and Gulf then reconsidered the further negotiations might be profitable, Goodrich and Gulf then reconsidered the value of a one-half interest in Chemicals. After a single day of negotiations, Goodrich agreed to exchange $35 million of its common stock for Gulf's share. The next day the purchase was approved by Goodrich's board of directors.

When Northwest discovered that Goodrich would finance the transaction by issuing 700,000 shares of common stock, it instituted the instant suit, claiming that the consideration was grossly inflated in order to guarantee that a substantial block of stock would be held by interests friendly to Goodrich's present management. On February 14, 1969 this court issued a restraining order temporarily prohibiting the listing or delivery of the stock. A lengthy hearing has now been concluded, at which the major officers of Goodrich, Gulf and Northwest testified. Since the plaintiff has failed to demonstrate any likelihood of success at the full trial, I deny its request for a preliminary injunction.

After describing the background of the parties' dispute, this opinion will analyze Northwest's three principal allegations of wrongdoing. The half interest in Chemicals will then be valued. Finally, in light of the discretion allowed in the making of corporate business judgments, I will specify why Northwest appears unable to prevail.

I. Background

Since October 1968 Northwest has been studying Goodrich in depth with a view to a possible tender offer. On December 23, 1968, Northwest's president was authorized by the Executive Committee to acquire a 350,000 share investment position, to be purchased at a price averaging not over $50 per share.*fn1 The Northwest press release which announced the tender offer specified that Goodrich stockholders would receive a new Northwest debenture, a fractional share of its common stock, and a warrant to purchase a fractional share of common. The proposed exchange offer was valued by an independent analyst at $77.65 per Goodrich share, in contrast to a closing price of $56.75 on the business day immediately preceding the announcement.

Goodrich-Gulf Chemicals, Inc. was formed in 1952 to produce synthetic rubber and to engage in technical research. A major domestic supplier of synthetic rubber, it manufactures increasing amounts of polybutadiene and polyisoprene. Most of its production is sold directly to Goodrich, and its feed stock has been supplied by Gulf.

By the early 1960's it became apparent to both Gulf and Goodrich that Chemicals could be more effectively utilized by either of the parent companies than as a supplier to both organizations. Each partner analyzed the assets, earning potential, and technological advantages of the subsidiary. Extensive purchase negotiations were held during the summer of 1965, but Goodrich was unwilling to part with its interest. Gulf, on the other hand, would not sell its half for less than $45 million.*fn2 Goodrich initially offered $30 million, later $35 million, and finally $40 million, but refused to rise above the latter figure. Consequently, negotiations were terminated in 1965 and remained dormant until very recently.

Triggered by Northwest's announcement of a tender offer, talks were resumed in late January and early February 1969. After Goodrich prepared a memorandum which valued a half interest in Chemicals at approximately $31 million, it received a telephone call from Gulf's president on January 30, suggesting that negotiations be reopened. On February 5 officers of Goodrich and Gulf bargained most of the day,*fn3 finally agreeing upon a $35 million tax free exchange.*fn4 Due to Northwest's takeover attempt, Goodrich common stock was then priced abnormally high. Discounting this temporary fluctuation, the parties agreed that a realistic value, based on past market performance, was $50.00 per common share.*fn5

Special meetings of the Goodrich board of directors were held on January 30, 1969 and on February 6, 1969, the latter ostensibly called to fix a record date for the annual meeting. At the February 6 meeting, which occurred the day after the negotiations with Gulf, Goodrich officers presented a hastily prepared two page memorandum and a one page statistical analysis of the transaction.*fn6 Management recommended that the board of directors approve the purchase. The entire consideration and approval of the multimillion dollar transaction consumed only the first hour of the directors' luncheon meeting.

II. Northwest's Allegations

Suing as a minority stockholder and derivatively on behalf of Goodrich Company, plaintiff maintains that the proposed purchase will dilute the shareholders' voting rights, will impair per share earnings, and will diminish the value of each share of Goodrich common stock.*fn7

Two of these allegations are clearly meritless. First, the undisputed evidence demonstrates that, rather than reducing Goodrich's earnings per share, the acquisition will result in a substantially enlarged cash flow from Chemicals, thus increasing expected 1969 earnings by fifteen cents per share. Second, in light of § 622(e)(1) of the New York Business Corporation Law, McKinney's Consol.Laws, c. 4, Northwest's objection to the dilution of its voting strength is without legal foundation. That section provides:

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