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HARRIS TRUST & SAV. BANK v. E-II HOLDINGS

August 30, 1989

HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation, not individually but as Trustee; and LASALLE NATIONAL BANK, a national banking association, not individually but as Trustee, Plaintiffs,
v.
E-II HOLDINGS, INC., a Delaware corporation, Defendant


Harry D. Leinenweber, United States District Judge.


The opinion of the court was delivered by: LEINENWEBER

HARRY D. LEINENWEBER, UNITED STATES DISTRICT JUDGE

 Plaintiffs, Harris Trust and Savings Bank as Trustee ("Harris") and LaSalle National Bank as Trustee ("LaSalle") (jointly referred to as the "Trustees"), are Trustees under certain Indenture Agreements dated July 1, 1987 covering two $ 750 million note issuances of defendant, E-II Holdings, Inc. ("E-II"). Trustees seek declaratory judgment under Fed.R.Civ.P. 57 and the Federal Declaratory Judgment Act ("FDJA"), 28 U.S.C. § 2201, seeking determination whether certain acquisitions and transactions were in compliance with the terms of the Note Indentures and the terms of the Trust Indenture Act of 1939, as well as a declaration as to the rights of the Trustees to obtain information from E-II. E-II has moved to dismiss on the grounds of lack of subject matter jurisdiction and failure to state a claim upon which relief could be granted. Alternatively, E-II moves for transfer pursuant to 28 U.S.C. § 1404(a). For the reasons stated herein, the motion to dismiss is granted.

 A. The Creation of E-II and the Issuance of the Debt Securities

 In April 1986 BCI Holdings Corporation ("BCI") acquired Beatrice Companies, Inc. ("Beatrice") in a $ 6.2 billion leveraged acquisition (cmplt., para. 11). Subsequent to the acquisition of Beatrice, E-II was formed by BCI. In May 1987 E-II had an initial portfolio of fifteen businesses that were once part of Beatrice. These fifteen companies fell into two groups: the "Consumer Products" companies and the "Food Specialties" companies (cmplt., para. 12).

 The nine "Consumer Products" companies were:

 
(a) Aristokraft, Inc. ("Aristokraft"), a manufacturer of kitchen and bath cabinets;
 
(b) Culligan International Company ("Culligan"), a producer of water softening equipment and water treatment systems;
 
(c) Day-Timers, Inc. ("Day-Timers"), a marketer of daily planners and time management aids;
 
(d) Home Fashions, Inc. ("Home Fashions"), a manufacturer of non-drapery window coverings;
 
(e) Samsonite Corporation ("Samsonite"), a manufacturer of luggage;
 
(f) Samsonite Furniture Co. ("Samsonite Furniture"), a manufacturer of leisure and casual furniture;
 
(g) the Stiffel Company ("Stiffel"), a manufacturer of high quality lamps;
 
(h) Twentieth Century Companies, Inc. ("Twentieth Century"), a manufacturer and distributor of plumbing supplies; and
 
(i) Waterloo Industries, Inc. ("Waterloo"), a manufacturer of tool storage products (cmplt., para. 13).

 The six "Food Specialties" companies were:

 
(a) Aunt Nellie's Farm Kitchens, Inc. ("Aunt Nellie's"), which cans and glass pack produce;
 
(b) Beatreme Food Ingredients, Inc. ("Beatreme"), a producer of ingredients and food flavorings used by large food manufacturers;
 
(c) Frozen Specialties, Inc. ("Frozen Specialties"), a producer of frozen pizzas;
 
(d) Lowery's Meat Specialties, Inc. ("Lowrey's"), a producer of meat snacks;
 
(e) Martha White Food Specialists, Inc. ("Martha White"), a processor of corn meal and grits; and
 
(f) Pet Specialties, Inc. ("Pet"), a producer of pet foods (cmplt., para. 14).

 For E-II's fiscal year ending February 28, 1987, its Consumer Products companies announced operating earnings of $ 111 million on sales of $ 1.1 billion. For the same period the Food Specialties companies announced operating earnings of $ 34.1 million on sales of $ 343.8 million (cmplt., para. 15). On July 1, 1987, pursuant to Indentures, E-II issued to the public $ 1.5 billion in public debt; $ 750 million in Notes and $ 750 million in Debentures. With respect to all relevant matters hereto, the Indentures are identical. In the prospectus for the sale of both Notes and Debentures, E-II represented that it would use a substantial portion of the proceeds of the public debt offering to pursue acquisitions for the holding company (cmplt., para. 16).

 B. The Acquisition of E-II by American Brands

 On or about December 4, 1987 E-II began acquiring a significant stock position in American Brands, Inc. ("American Brands"). As of December 4, 1987 this position was purportedly 4.3 percent of the common equity. American Brands was a holding company with subsidiaries engaged in various businesses, including the manufacture and sale of tobacco products, distilled spirits, office products and consumer products. On January 21, 1988 E-II filed with the Securities and Exchange Commission ("SEC") Schedule 13D, delineating its position in American Brands stock and its intention thereto (cmplt., para. 17). However employing what is sometimes referred to as the "pac man" defense, American Brands, through its wholly-owned subsidiary AMBR Holdings, Inc. ("AMBR"), commenced on January 22, 1988 a takeover of E-II whereby AMBR offered to purchase all of E-II's common stock for $ 13.00 per share. Thus American Brands defended against any forthcoming E-II hostile takeover attempt by launching a takeover bid against the potential acquirer (cmplt. para. 18).

 On January 25, 1988 AMBR also made an offer to purchase the Notes at 103 percent of their principal amount plus accrued interest ("Offer to Purchase"). The Offer to Purchase was premised on 51 percent of the Holders of the Notes and Debentures ("Holders") accepting the Offer to Purchase and included exit consents whereby tendering Holders waived their rights to the protective covenants of the Indentures (the Note Indenture and Debenture Indenture are referred to jointly herein as "Indentures"). The Offer to Purchase informed the Holders that American Brands intended to establish a core group of companies in E-II after merging it into a subsidiary of American Brands. The Offer to Purchase stated that other than this restructuring and merger, no transactions involving E-II were contemplated by American Brands (cmplt., para. 19).

 Specifically, the Offer to Purchase contained the following statement:

 
"Parent [American Brands] believes that an acquisition of the Company [E-II] by Parent on the terms contemplated thereby represents an attractive business opportunity for Parent consistent with Parent's ongoing restructuring. In this regard, Parent intends to establish a core business consisting of Parent's Master Lock and Dexter Lock subsidiaries and the Company's Home Fashions, Waterloo, Aristokraft and Twentieth Century subsidiaries and to place the Company's Day-Timers subsidiary in Parent's office products group, which has been identified as one of Parent's emerging core businesses. The Samsonite and Culligan businesses of the Company, although not clearly complementary to Parent's core business strategy, are well regarded as leaders in their respective markets. Parent presently intends to give serious consideration to retaining such businesses although it has made no final determination in this regard. Parent intends to dispose of the specialty food segment and other businesses of the Company. The timing of any such dispositions would, of course, depend, among other things, upon market conditions and price levels that could be achieved" (cmplt., para. 20).

 As set forth above, the Offer to Purchase also stated that E-II would be merged with either AMBR or another subsidiary of American Brands:

 
"Following consummation of the Equity Offer, Parent [American Brands] intends to seek to influence the management of the Company [E-II], to seek at least majority representation on the Company's Board of Directors and to seek to affect a business combination between the Company and the Purchaser or another affiliate of Parent. Parent and the Purchaser presently intend that the business combination will take the form of a merger of the Company with the Purchaser [AMBR] or another subsidiary of Parent (cmplt., para. 21).

 Attached to the Offer to Purchase as exhibit A was a copy of the Offer to Purchase E-II's common stock which set forth at page 26 a statement confirming American Brand's plans for E-II:

 
"Except as indicated in this Offer to Purchase, neither [American Brands] nor the Purchaser [AMBR] has any present plans or proposals which relate to or would result in an extraordinary corporate transaction of operations, or sale or transfer of assets, involving the Company [E-II] or any of its subsidiaries, or any material changes in the Company's corporate structure or business or the composition of its Board of Directors, management or personnel" (cmplt., para. 22).

 As referred to above, the Offer to Purchase also contained a solicitation of exit consents from the Holders of the Notes and Debentures asking them to waive the protections of Sections 4.02 (restricting the payment of dividends and other corporate actions), 4.06 (maintenance of properties), and 5.01 (when company may merge, etc.) of the Indentures (cmplt. para. 25 and exs. 1 and 2 thereto). On February 1, 1988 American Brands and E-II announced that E-II had agreed to be acquired by AMBR at an increased price per common share of $ 17.05. Following the announcement the market price of the Notes and Debentures increased above the price offered by ...


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