The opinion of the court was delivered by: ZAGEL
JAMES B. ZAGEL, UNITED STATES DISTRICT JUDGE
This dispute arises out of plaintiff Newell Company's ("Newell"), attempts to obtain a significant stake in Vermont American Corporation. Defendants are Vermont American and, Lee Thomas, Jr., Chairman of the Board of Directors of Vermont American (collectively referred to as "Vermont American" or the "Board"). Although Vermont American has been a public corporation since 1966, it has several characteristics reminiscent of its origins as a family run organization. Many members of the Thomas family sit on the Board and are involved in the management of the company. The company's growth, profit and defined culture are a product of the management style of Lee Thomas, Sr. when he was alive, and now, Lee Thomas, Jr. ("Lee Thomas").
Since at least 1986 Newell has sought to increase its ownership in Vermont American. Its advances have not been overwhelmingly successful. Most recently, on June 5, 1989, Newell commenced a partial tender offer to purchase approximately 10% of Vermont American's outstanding stock to add to the approximately 11% Newell already owned. On June 29, 1989, Newell came before this Court seeking to enjoin Vermont American; it complained that certain actions by Vermont American since Newell announced its tender offer, specifically Vermont American's stock repurchase program, the restructuring of the proposed merger with Clairson, International and the lowering of the trigger point on an existing Shareholder Rights Plan, violate Delaware state law and the federal securities law. I granted a preliminary injunction (Oral Ruling, June 30, 1989), enjoining Vermont American from continuing with its repurchase program. Newell, in effect, was also enjoined, as the injunction was contingent on Newell no longer purchasing shares through its tender offer.
Discovery ensued. Vermont American filed counterclaims alleging that Newell has failed to make proper disclosures under the federal securities laws with respect to its investments in Vermont American. The matter was tried on its merits.
1. Vermont American Corporation is a Delaware corporation, with its principal place of business in Louisville, Kentucky. It is the world's largest manufacturer and marketer of cutting tools and quality hand tools, as well as a manufacturer in the lawn and garden products industry.
2. Until the late 1960's, all of the stock of Vermont American was privately held by the members of the family of Lee Thomas, Sr., who founded the company. Mr. Thomas, Sr. died in March, 1988.
3. In approximately 1966 Vermont American became a public corporation. Its stock is traded publicly on the American Stock Exchange. Currently, there are approximately 9,810,675 outstanding shares of Class a Common Stock, and 1,024,231 outstanding shares of Class B common Stock. Holders of Class B Common Stock are not entitled to vote. In all other respects the rights of Class A and Class B shareholders are identical.
4. The management of Vermont American is dominated by the Thomas family. Lee Thomas, Sr. had three children: Lee Thomas, Jr., the Chairman of the Vermont American Board of Directors;
Ellen Thomas Dunbar, a member of the Board; and Jane Thomas Hamilton who has no affiliation with the company, but whose husband is a member of the Board.
5. Defendant Lee Thomas beneficially owned (as defined under SEC regulations), as of June 14, 1989, more than 3,500,000 shares or approximately 34.8% of the outstanding Class A Common Stock of Vermont American. As of March 3, 1989, Thomas' son, Glenn Thomas, the company's Vice President-Engineering and director, beneficially owns approximately 5.9% of Class A shares. Ellen Dunbar owns approximately 8.6% of the stock. Her son, Tom Dunbar, is President of a subsidiary, Vermont American Canada, Inc., and a director of Vermont American and owns approximately.4% of the stock.
Additional stock is owned by other members of the Thomas and Dunbar families.
6. Lee Thomas' salary for 1988 was just under $ 200,000. He receives an additional $ 2,000 for his services as Chairman of the Board. He also receives dividend income from his equity interest in Vermont American.
7. The only member of the Board of Directors of Vermont American who ever voted differently from Lee Thomas was Ellen Dunbar; and she did so only twice. Thomas explains that he manages the company in keeping with the Quaker philosophy -- by consensus. According to Thomas, although members of the Board frequently will disagree, issues are thoroughly discussed and a consensus is reached prior to any formal vote.
8. The investment goals of the Thomas and Dunbar families have evolved over time. Lee Thomas and Glenn Thomas primarily were interested in a long-term investment in the company.
In late 1986, the Dunbars began considering the need to diversify their holdings. They have recently explored the possibility of selling all of their stock holdings in Vermont American. The Dunbars renewed their interest in selling their stock after Newell announced its tender offer and ultimately had direct discussions with Daniel C. Ferguson, Newell's Chief Executive Officer, about doing so.
9. Throughout its history, Vermont American has pursued policies and practices intended to achieve long-term profit maximization. Toward that end, the corporation has made substantial investments in research, development, plants and other physical assets, and in other measures designed to develop high quality products and services to customers, even at the cost of decreasing short-term value maximization.
10. Over the last five years, Vermont American has invested about 6.5% of sales in capital improvements. These policies have been beneficial; Vermont American has grown and prospered over the years. Net sales have grown at an annual compounded rate of 12.6% since 1973; operating income at 11.8%; and net income at 12.3%. The corporation's shareholders have reaped substantial benefits. An investment of $ 100 in Vermont American stock made on July 31, 1974 was worth approximately $ 2,646 on July 31, 1989.
B. The 1987 Report of the Ad Hoc Committee
11. In late 1986, a special ad hoc committee of Vermont American directors was formed to consider the competing interests of the Thomas and Dunbar families, as well as general concerns with the growing takeover climate in the business community. The Board appointed Henning Hilliard, Robert Denison, Frank Furst and William Joseph Biggers to the committee.
None of these appointees was a member of management and none was related to any branch of the Thomas family. One concern of the committee was to assure that Vermont American remained an independent company.
12. The organizational meeting of the committee was held on December 30, 1986. The committee discussed at that meeting, among other matters, ways to accommodate the divergent family interests of the Dunbars and Thomases. One issue was the Dunbars' desire to liquify or diversify their stock and the potential impact such a sale might have on the long-term interests of the company and other shareholders. The committee expressed concern over how this potential sale might affect the Thomas family's longstanding control over the company since its founding and the ability of the company to remain independent from outside, hostile acquirors. The three committee members present at the meeting (Biggers was unavailable) concluded that they should retain competent investment advisors and independent legal counsel. They expressed no firm convictions as to how to solve the problems before them.
13. The committee retained Elliott Goldstein of the Atlanta law firm of Powell, Goldstein, Frazier and Murphy as legal counsel and Jay Levine of Dean Witter as investment advisor. Both men were chosen independently without Lee Thomas' assistance.
15. On February 20, 1987 the ad hoc committee issued its report and recommendations. The committee made eight recommendations. Of these, the Board ultimately rejected two outright: the proposal to convert Class B shares to Class A and the recommendation that the corporation obtain a right of first refusal on the converted Class B shares and provide for a transfer of that right to Lee Thomas at the company's option. The Board ultimately accepted in one form or another the committee's recommendation as to issuance of blank check preferred stock and the elimination of cumulative voting. Lee Thomas acknowledged that he supported issuance of preferred stock as a measure to assure that the current management continued to run the corporation. The authorization of blank check preferred and the elimination of cumulative voting were eventually approved by a vote of the shareholders.
16. The ad hoc committee never recommended and the Board never approved issuance of high vote common stock, taking the company private or any number of ideas that were floated, some of which appear in memos and notes created by committee members.
1. Newell Acquires a Stake in Vermont American
17. Newell Company is a Delaware corporation headquartered in Freeport, Illinois, which is engaged in the manufacture and marketing of consumer products for the do-it-yourself hardware/housewares market. In early 1986, Daniel Ferguson contacted Lee Thomas and proposed a business combination or other association between Newell and Vermont American.
18. No agreement was reached and Newell began to explore various strategies to acquire shares of Vermont American. One alternative pursued by Newell in 1986 was the acquisition of an option to buy the shares held by the Dunbars and the Hamiltons. Newell engaged the investment banking firm of Wertheim Schroeder & Co. to assist it in that regard. Newell's efforts to acquire an option on the Dunbars' stock were not successful at this time.
19. In April 1988, Newell filed a Schedule 13D, announcing that it owned over 5% of the common stock of Vermont American. From the moment that Newell filed this Schedule 13D, the directors of Vermont American concluded that Newell's intent was hostile. The Thomas family was distressed at the news, believing that Newell would seek to acquire Vermont American and that they would lose control of the company.
20. Robert I. Baker, the President and a director of Vermont American, did not perceive Newell to be as threatening to the independence of Vermont American as did the Thomases. In a memo he sent to the company's division managers in July 1988, he noted that "over 54%" of Vermont American's stock was owned by insiders, and that the company had taken various measures to protect it from "unfair or coercive takeover tactics."
21. One week later Baker received a telephone call from another director of Vermont American, Ned Furst, reporting on a conversation Furst had had with Dan Ferguson. According to Furst, Ferguson had said that he felt it was impossible to take over Vermont American in light of the family ownership and that he had no intention of trying to take over the company. Ferguson said that his objective was to acquire 20% of the stock and get a seat on the Board so that Newell could use equity accounting for its investment in Vermont American. He also said that he would be willing to accept a standstill agreement at 25%. Furst also reported the conversation to Lee Thomas. Furst told Thomas that given Newell's prior acquisition history its interest in Vermont American constituted "a serious situation".
2. Vermont American's Response to Newell
23. After Newell filed its Schedule 13D, revealing its purchases of Vermont American stock, Vermont American's Board and management undertook to inform itself officially about Newell, its business, its business practices, and its reputation in the business community. In April 1988, Bear, Stearns & Co. ("Bear Stearns"), the investment bankers retained by the company, prepared a detailed report of Newell's prior acquisition history and strategies.
24. In addition to the Bear Stearns report, members of the Board relied on other sources to inform themselves about Newell. Some members of the Board had first-hand familiarity with Newell based on Newell's investment in Thomas Industries. Members of Vermont American's Board read and reviewed a report from Kidder Peabody to Thomas Industries that was consistent with the Bear Stearns profile of Newell. Furst also advised the Board that the Bear Stearns report was consistent with his own knowledge of Newell and Ferguson.
25. The Vermont American Board was aware that the primary source of Newell's profitability was through its successful acquisitions. Today Newell is the product of twenty-five acquisitions and these acquisitions generate about 90% of Newell's sales and profits. At times Newell had acquired public corporations at bargain prices through "creeping acquisitions" and two-tier tender offers. This was true, for example, in Newell's acquisition of Anchor Hocking Corporation in 1986. There Newell accumulated the company's stock and eventually acquired complete equity control of Anchor Hocking. In order to generate increased profitability Newell at times would follow its acquisitions by asset-stripping, plant closures and layoffs.
26. Newell had also acquired several companies in non-hostile transactions.
27. The Board's inquiry included examination of the contrasting corporate cultures and business philosophies of Vermont American and Newell. Newell is a marketing oriented company; its success is due primarily to acquisitions, not new product development or internal growth. It does not invest substantial amounts in new product research, development, or new plants and equipment. In the first quarter of 1989, for example, Newell spent $ 73 million acquiring companies and $ 3 million on capital investment. It has spent approximately 2.7% of sales on capital improvements as compared to 6.5% which Vermont American allocated to capital expenditures.
28. The Vermont American Board never met with Ferguson to discuss an association with Newell, nor did they seriously consider entering into an association with the company.
29. On August 17, 1988, the Board of Directors called a Special Meeting of Stockholders to amend the company's Certificate of Incorporation to eliminate cumulative voting for directors. Although the Board considered this proposal before Newell filed its 13D Statement, it was proposed at this time to prevent Newell from using cumulative voting to elect a representative to the Board. In September 1988 the Vermont American shareholders approved the elimination of cumulative voting.
3. Newell's Tender Offer and Vermont American's Response
31. Vermont American's directors were immediately notified of Newell's tender offer. The Board sought legal and investment banking advice before responding to Newell. It engaged investment bankers, Bear Stearns, and legal counsel, McDermott, Will & Emery. Representatives of both firms were present at the Board meeting held on June 13, 1989 to discuss Newell's tender offer.
32. The company's investment banker, Jeffrey Bloomberg, gave his opinion that the offering price of $ 30.50 per share, although greater than the price at which the stock traded, was less than the "enterprise value" of the company. Bloomberg did not give an opinion as to a fair price for a minority position in the company. Bloomberg advised the Board that Newell's tender offer, in all probability, was the opening line of attack in a takeover effort -- similar to those Newell had pursued in other cases -- designed to effect a creeping acquisition of Vermont American at a price below the company's "enterprise" value. Once again, Furst indicated that the pattern of creeping acquisitions described by Bear Stearns was consistent with his knowledge of Newell. In addition to hearing evidence of Newell's practice of creeping acquisitions and two-tiered tender offers, the Board received information about other situations in which Newell used a significant stock purchase to obtain a price for its shares not available to other shareholders.
33. Among the matters discussed at the meeting, with respect to which the Board received advice, were the financial and economic aspects of Newell's partial tender offer, the range of possible responses, Newell's history, business and acquisition practices, the obligations of the Board in responding to the tender offer, and various provisions in the corporation's charter, by-laws, corporate structure, and applicable law which would have or which were likely to have an impact on any attempt to acquire Vermont American.
34. The Board was advised that the nature of partial tender offers, such as Newell's, meant that even a shareholder who normally would not desire to sell his shares at the price offered by Newell could feel constrained to do so out of fear that a failure to sell could leave him as a minority shareholder in a company dominated and controlled by Newell. Such a shareholder eventually could be deprived entirely of his shares through a "back end" merger in which shareholders would receive less valuable consideration than the price offered under Newell's partial tender offer.
35. Bear Stearns cautioned the Board that if Newell obtained a foothold in Vermont American or board representation, it would jeopardize the long-term value of Vermont American's stock. If Newell succeeded, it could disrupt the business practices and methods of operation which had resulted in Vermont American's steady, sustained, and long-term growth, and could implement policies designed to generate short-term results without regard to long-term growth and development. At a minimum, with Newell owning 22% or more of Vermont American's stock and seeking to influence the company's affairs a potential existed for chronic conflict over Newell's short-term goals and strategy and the company's long-term business philosophies.
37. The directors then concluded that the company's "stockholders and other constituencies will be best served if the Company remains an independent entity" and that an "association" with Newell would not benefit Vermont American's shareholders.
38. On June 15, 1989 Vermont American filed with the SEC its Schedule 14D-9 form. Although the directors themselves wouldn't tender their shares, this Schedule announced that the directors had "determined to make no recommendation as to whether stockholders should sell or retain their shares" pursuant to Newell's tender offer.
39. Notwithstanding their claim of neutrality, the directors were unanimously opposed to Newell's tender offer. The directors began exploring methods to assure that the current Board remain independent of Newell. Three strategies were adopted that were intended to obstruct Newell's tender offer. First, the Board directed management immediately to begin repurchase of the corporate stock. This worked both to give shareholders an alternative to Newell's offer and to decrease the amount of stock available for Newell. Second, the Board structured the proposed acquisition of Clairson International Corporation so that any stock issued in connection with this transaction would "be controlled by the Company as to voting and transfers for some period of time." Third, the Board lowered the trigger on an existing Shareholder Rights Plan from 27% to 15%.
a) The Stock Repurchase Program
40. Vermont American had in place since October 1987 a repurchase program that was reviewed by the Board annually. The Board approved stock repurchases in response to the recent stock market crash. The most recent program, reviewed and reaffirmed in October 1988, authorized the Board to repurchase up to 1,000,000 shares (later adjusted for stock dividends to 1,100,000 shares). Management was authorized to repurchase stock from time to time based upon various factors including stock price, effect on long-term shareholder values, availability of stock, and the possibility of better investments elsewhere.
41. On June 13, 1989, acting upon Bear Stearns' advice, the Board concluded that continuing with share repurchases constituted a reasonable and prudent investment for the corporation because it would: (1) benefit selling shareholders by offering them an opportunity to sell all their shares without risk of proration or of Newell's exercising of its right to withdraw its partial tender offer; (2) benefit non-selling shareholders who wished to maintain a long-term investment in Vermont American by reducing the specter of a Newell takeover, and the consequent corporate disruption that the Board perceived would ensue; (3) benefit the corporation by preventing a disruptive influence from achieving a significant control position; and (4) enable the company to follow Bear Stearns' advice to increase leverage and, by taking additional debt, to increase earnings per share for shareholders who did not wish to sell.
42. At the suggestion of Lee Thomas, the Board limited the repurchases to no more than approximately 300,000 shares unless further, specific authorization from the Board was obtained. The Board was to be informed fully of the company's repurchases. The repurchases were to be made at or close to the market price with close guidance from legal counsel. The Board further instructed Bear Stearns to report back with further studies analyzing the financial aspects of the repurchase program and other available alternatives. The Board asked Bear Stearns to prepare financial projections regarding the repurchase program based on the most extreme economic possibilities.
43. After the Board's actions on June 13, the company filed a Schedule 14D-9 and a Rule 13e-1 Transaction Statement as required under the federal securities laws. The only reason given in this statement for the repurchases is that the shares "will be held in the corporate treasury to be used for corporate purposes." The press release issued by Vermont American on June 15 stated as follows:
Vermont American Corporation announced that its Board of Directors met with Bear, Stearns & Co., its investment bankers, to consider the tender offer of Newell Co. for 1.2 million shares of Vermont American's Class A Common Stock. In view of Vermont American's past growth record and its current condition and business prospects, the Board concluded that the Company's future is good and that its stockholders and other constituencies will be best served if the Company remains an independent entity. None of the directors will sell any of their shares in the tender. The Board has no recommendation as to whether other stockholders should sell or retain their shares.
The Company also announced that it is filing a 13e-1 statement with the SEC to permit the resumption of its previously authorized Class A Common Stock repurchase program. That program, announced on October 28, 1988, covered the repurchase of up to 1,100,000 shares, of which 84,647 shares have previously been repurchased. All repurchases have and will be made on the American Stock Exchange or in privately negotiated transactions out of the Company's own financial resources including its previously existing credit lines. The shares will be held in the corporate treasury to be used for corporate purposes.
44. On June 15, one director, John Leahy, suggested to Ned Furst that they create a special committee of independent directors, consisting of themselves, Ken Hirsch and Joe Biggers, to separately assess the threat posed by Newell and to evaluate the proper response. As in 1987, this committee hired its own counsel, Elliot Goldstein, and investment banker Jay Levine of Dean Witter Reynolds. Ken Hirsch is President of Paramount Foods Co. in Louisville, Kentucky. John Leahy is Chairman of the Board of Master Power Corporation and was former President of the North American division of Black & Decker Manufacturing Company. He was recommended to the Vermont American Board by Robert Baker.
45. During the June 22 meeting, Bear Stearns presented the Board with projected financial statements and summary statements which compared the impact of various buyback proposals on the company's capital structure, debt coverage ratios, and earnings per share under both pessimistic and realistic assumptions. Those studies showed that the expansion of the share repurchase program would be financially beneficial to Vermont American. It would increase earnings per share and give the company certain tax advantages by shifting some of the company's capitalization, on which dividends are paid, to debt, on which interest may be deducted. Bear Stearns also provided the Board with information about various means by which the expanded share repurchases could be accomplished, including the issuance of put rights to all existing shareholders, a dutch auction, and private transactions.
46. The Board, following Bear Stearns' recommendation, authorized the repurchase of up to an additional 1,100,000 shares to give the company greater flexibility in the emerging situation. This recommendation was discussed and was approved by the Board, subject to the caveat that no more than an additional 300,000 shares be purchased without further study and proposals being brought back to the Board.
47. Bloomberg urged the Board to expand the repurchase program so that the company would have the utmost flexibility to deal with the fluid situation created by Newell's tender offer and to provide a cushion for the market price of the shares if Newell precipitously terminated its highly conditioned offer or dumped its shares on the market.
48. The committee of independent directors of the corporation met on June 22, 1989 and separately and unanimously approved the expanded authority for the repurchase of shares. Prior to voting, the independent directors consulted with their own lawyer, and examined the company's financial forecasts, the long-range future of the company, the benefits of the repurchase program to both selling and remaining shareholders, and the dangers posed by Newell's hostile, partial tender offer. At the time it doubled the repurchase program, Vermont American did not have any existing or planned corporate purpose for the stock it was going to repurchase, but the Board did believe that this was a financially prudent course of action.