United States District Court, Northern District of Illinois, E.D
February 27, 1969
NORTHWEST INDUSTRIES, INC., PLAINTIFF,
THE B.F. GOODRICH COMPANY ET AL., DEFENDANTS.
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
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.
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
"(e) Unless otherwise provided in the certificate
shares * * * offered for sale * * * shall not be
subject to preemptive rights if they: (1) Are to be
issued by the board * * * for consideration other
Since the half interest which is being acquired constitutes
consideration other than cash, Goodrich's shareholders cannot
protest the diminution of their voting power.*fn8
III. Valuation of Chemicals
Plaintiff's final claim is that corporate assets are being
wasted by the desire of the officers and directors to retain
office. The issuance of the 700,000 authorized shares will
allegedly decrease the value per share of the outstanding stock.
On the other hand, if $35 million is a fair price, per share
value will be unaffected because the company will receive as much
as it delivers.
Due to the 50%-50% joint ownership of Chemicals, a half
interest in that company can realistically be sold only to
Goodrich or to Gulf. Lacking a market to value Chemicals, the
officers and directors of the respective companies must use their
business judgment to establish the proper price. The detailed
studies and financial data assembled for the 1965 negotiations,
and recently updated, provided ample support for Gulf to conclude
that its interest was worth at least $45 million in 1965 and no
less than $35 million in 1969.*fn9 The 1965 bargaining was at arms
length, establishing a value then between $40 million and $45
million. While the subsequent drop in earnings somewhat reduced
the subsidiary's value, $35 million appears to be a fair price at
the present time. Approximately fifteen times the projected
annual earnings for 1969-1971, that figure is substantially less
than the $50 million valuation provided by Chemicals' chief
Furthermore, Chemicals is particularly valuable to Goodrich
because consolidation of the two companies' activities will
result in considerable cost savings, including economies of
personnel and plant. Goodrich will also obtain a source for its
peculiar research requirements and raw material needs, some of
which cannot be satisfied in the open market.
Although Northwest complains that Goodrich is paying more than
twice the net worth for its acquisition, plaintiff's announced
tender offer purports to offer an even larger multiple for
Goodrich's net worth. Since the takeover attempt is essentially
an offer to purchase Goodrich's assets, including the latter's
half interest in Chemicals, Northwest has bid even more than $35
million for 50% of Chemicals.
IV. Preliminary Injunction
To obtain a preliminary injunction, the moving party must (1)
establish a reasonable probability that it will prevail on the
merits, (2) demonstrate that irreparable injury will occur to
itself if the injunction is not granted, (3) show that others
will not suffer serious adverse effects, and (4) have no adequate
remedy at law. See, e.g., Virginia Petroleum Jobbers Ass'n v.
Federal Power Comm'n, 104 U.S.App.D.C. 106, 259 F.2d 921, 925
(1958); Doeskin Products, Inc. v. United Paper Co., 195 F.2d 356,
358-359 (7th Cir. 1952); Yakus v. United States, 321 U.S. 414,
440, 64 S.Ct. 660, 88 L.Ed. 834 (1944). Moreover, as stated in
Parsons College v. North Central
Ass'n of Colleges and Secondary Schools, 271 F. Supp. 65, 69
"Even the greatest harm * * * will not support the
issuance of a preliminary injunction if the defendant
has committed no legal or equitable wrong."
The latter three of the four preceding criteria are probably
not satisfied. Any possible irreparable harm to Northwest is
outweighed by the adverse effect an injunction would have upon
Gulf, an innocent third party seller. In Corica v. Ragen,
140 F.2d 496
, 499 (7th Cir. 1944), the Seventh Circuit explained
"A court of equity must exercise its discretion in
such manner as to safeguard the interests of both
parties, and, in certain circumstances, such as those
in the instant case, it is an abuse of judicial
discretion to issue an injunction which permits one
party to obtain an advantage by acting, while the
hands of the adverse party are tied by the writ."
Gulf was not involved in any impropriety nor did it know of any
wrongdoing. Accordingly, it should neither be denied the property
for which it has bargained nor deprived of the right to vote the
stock received as consideration. Gulf is at least entitled to
equal rights with Northwest in the struggle for stockholder
control. See, e.g., Wildes v. Rural Homestead Co., 54 N.J. Eq. 668,
35 A. 896 (1896); Luther v. C.J. Luther Co., 118 Wis. 112,
94 N.W. 69 (1903); Restatement (Second), Agency §§ 161 and 165.
Moreover, since the New York statute unequivocably denies
Northwest preemptive rights in the 700,000 shares, the plaintiff
can only complain that its shares are diminished in economic
value. This injury may be redressed in a court of law by a damage
Disregarding the foregoing obstacles to plaintiff's recovery,
however, Northwest is not entitled to a preliminary injunction
because it has shown no chance of prevailing at a trial on the
merits. See, e.g., Unicon Management Corp. v. Koppers Company,
366 F.2d 199, 204 (2nd Cir. 1966), where the Second Circuit
"We reaffirm our holding in H.E. Fletcher Co. v.
Rock of Ages Corp., 326 F.2d 13, 17 (2 Cir. 1963),
that the party seeking a preliminary injunction has a
`burden of convincing [the court] "with reasonable
certainty" that it "must succeed at final hearing."
Hall Signal Co. v. General Ry. Signal Co., 153 F.
907, 908 (2 Cir. 1907)' * * *."
See also Selchow & Righter Co. v. Western Printing & L. Co.,
112 F.2d 430
(7th Cir. 1940); Hamilton Watch Co. v. Benrus Watch Co.,
206 F.2d 738
, 740 (2nd Cir. 1953).
Specifically, the hopelessness of plaintiff's case results from
two mutually reinforcing facts. First, rather than constituting
a fraud on the defendant corporation, the $35 million acquisition
price represents a fair value for Gulf's ownership of
Chemicals.*fn11 Second, and equally significant, the Goodrich
officers' and directors' determination that the exchange was in
the best interests of the corporation is conclusive.
V. Defendants' Business Judgment
Since Goodrich is a New York corporation, the duties and powers
of the officers and directors are governed by New York law.
National Lock Co. v. Hogland, 101 F.2d 576, 587-588 (7th Cir.
1939); 3 Fletcher, Corporations, § 990, n. 16 (1965).
In performing their duties, directors are held to a standard of
exercising honest business judgment, defined as the exercise of
that care which businessmen of ordinary prudence use in managing
their own affairs. Greenbaum v. American Metal Climax, Inc.,
27 A.D.2d 225, 228. 278 N.Y.S.2d 123, 129-130 (1967); N.Y.Business
§ 717. Because of the wide measure of discretion allowed officers
and directors, mere differences of judgment are not sufficient to
warrant equity intervention. Diston v. Loucks, Sup., 62 N.Y.S.2d
138, 145 (1941), aff'd 264 App. Div. 758, 35 N.Y.S.2d 715 (1942).
See also Chelrob, Inc. v. Barrett, 293 N.Y. 442, 57 N.E.2d 825,
833 (1944). Rather, there must be proof of fraud or manifestly
oppressive conduct to set aside an action of the directors.
Kalmanash v. Smith, 291 N.Y. 142, 51 N.E.2d 681, 687 (1943).
In the absence of fraud,*fn12 the judgment of the board of
directors of Goodrich as to the value of the consideration
received for the 700,000 shares is conclusive. N.Y.Business
Corporation Law § 504(a). That section declares:
"In the absence of fraud in the transaction, the
judgment of the board or shareholders, as the case
may be, as to the value of the consideration received
for shares shall be conclusive."
More specifically, while Northwest's January 20 announcement
prompted the purchase, such a catalyst does not invalidate the
transaction if the exchange was in the best interests of
Goodrich. As stated in Cummings v. United Artists Theatre
Circuit, Inc., 237 Md. 1, 204 A.2d 795, 805-806 (1964):
"Thus the cases relied on by the appellants
[Northwest] do not support their contention that
where a board of directors has as one of its motives
manipulation for control the transaction is invalid,
regardless of fairness, and regardless of whether a
legitimate corporate purpose is also being
served. * * *
"Therefore we hold that where a good corporate
purpose is being furthered and is the principal
motivation for an action by a board of directors, the
fact that the consummation of such transaction may
have some effect on the control of the corporation is
immaterial and the agreement will stand or fall
depending on whether it is fair to the corporation."
Northwest's tender offer announcement galvanized Goodrich and
Gulf to complete the purchase at this time. Although the officers
of both Goodrich and Gulf claim there was no mutual agreement to
defeat plaintiff's takeover bid, there was a remarkable empathy
between the companies. On the other hand, Northwest appears
unable to establish that Goodrich officials' desire to remain in
office was the sole or the primary motivation for their
Plaintiff has not shown any likelihood that it can prove that
the transaction amounts to fraud. Considering all factors of
value, the persuasive evidence indicates that $35 million is a
fair price for Gulf's one half of Chemicals. Goodrich's officers
and directors appear to have been exercising their honest
business judgment, so that their decision is conclusive.
Furthermore, whenever a tender offer is extended and the
management of the threatened company resists, the officers and
directors may be accused of trying to preserve their jobs at the
expense of the corporation. The alleged conflict of interest was
created by Northwest, not by Goodrich. Yet, management has the
responsibility to oppose offers which, in its best judgment, are
detrimental to the company or its stockholders. In arriving at
such a judgment, management should be scrupulously fair in
considering the merits of any proposal submitted to its
stockholders. The officers' and directors' informed opinion
should result from that strict impartiality which is required by
duties. After taking these steps, the company may then take any
step not forbidden by law to counter the attempted capture.
Although the haste displayed by Goodrich officials casts some
doubt on the management's actions, I find no violation of the
preceding principles of sufficient magnitude to warrant judicial
interference. The instant economic struggle should be resolved in
the market place and by the stockholders at their meeting, not in
the courts. Accordingly, I have entered an order today denying
plaintiff's motion for a preliminary injunction. The order shall
be effective nunc pro tunc as of February 25, 1969, so that
Gulf's newly acquired shares will qualify to vote at the
forthcoming annual meeting.