relating to gaining a significant equity interest in Vermont American and Board representation. At the same time, Ferguson formed the objective to swap Newell's stock in Thomas Industries, another Louisville-based firm founded by Lee Thomas, Sr., for its paint applicator business.
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
30. Between April 1988 and June 1989, Newell slowly accumulated more Vermont American stock. On June 5, 1989 Newell announced that it owned about 11% of Class A Common Stock, and it announced a tender offer to purchase 1,200,000 additional shares or approximately 10% of Vermont American stock at $ 30.50 per share. If Newell acquired the full amount of stock it sought pursuant to its offer, it would own approximately 22.6% of the outstanding common stock of Vermont American. Newell stated that the purpose of its offer was "to acquire a more significant minority position in the Company as an investment." Newell noted that it might be able to use the equity method of accounting for its investment if it owned 20% or more of Vermont American stock.
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.
36. The Board was further advised by legal counsel that: a) it was the Board's fiduciary obligation to take measures to protect the corporation and all of its shareholders from any tender offer or takeover bid that it deemed to be contrary to the interests of the corporation and its shareholders and b) under Vermont American's charter -- enacted in April 1981, well before the events at issue in this litigation -- it was permitted to consider the interests of employees and customers of Vermont American, as well as the interests of the communities in which the corporation does business.
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.
On June 22, 1989 Vermont American filed with the SEC an amendment to its Schedule 14D-9. In this document, the directors elaborated upon their response to Newell's tender offer, stating that they:
did not have a sufficient basis for a recommendation, believing that it was the type of offer that each stockholder should respond to in the light of his or her own circumstances, financial or otherwise.
49. Notwithstanding the sound financial basis articulated for resumption of the share repurchase program, a primary motivation for the Board action at this time was to frustrate Newell's tender offer. Between October 1988 and June 14, 1989, Vermont American repurchased only 84,647 shares out of the 1,100,000 shares it was authorized to repurchase. The highest price paid for any of these shares was $ 26.75. One of the reasons that Vermont American repurchased only 84,647 shares was that the prices were too high. Between June 15 and June 30, 1989, however, Vermont American repurchased 345,458 shares of its common stock at prices ranging up to $ 31.00 per share. This stock was not needed for any existing or planned corporate purposes, since Vermont American already had 835,331 shares in its treasury before it resumed its repurchase program on June 15, 1989. The prices paid by Vermont American in June of 1989 to repurchase its stock were the highest prices at which Vermont American's stock had ever traded. If Vermont American obtained all the shares it authorized the combined interest of the Thomas and Dunbar family would exceed 50%.
50. The next Board meeting was held on June 28, 1989. One director, Furst, noted that Bloomberg had recommended that the Board not endorse Newell's tender offer; instead, Bloomberg urged the directors to use an "aggressive" repurchase program. Furst's notes also attribute to Lee Thomas the statement that "we need to be certain we control -- we can forget about Newell." Another director, Hirsch, noted: "Screw Newell -- go get the shares."
51. At least one director expressed concern that the measures being taken by Vermont American were devices to entrench management. The other directors and management, however, believed that they had two priorities: "Take control" and "Stop Newell." Bloomberg recommended that the Board meet with Newell, but the Board refused to do so.
52. Bloomberg previously had represented Newell and was acquainted with Dan Ferguson. After the June 22, 1989 Board meeting, Bloomberg contacted Ferguson to "open a dialogue" between the two companies. Ferguson stated that he wanted to achieve equity accounting. Bloomberg responded that a long-term standstill agreement coupled with one Board member acceptable to both parties, joint marketing and/or a position on an advisory board might accommodate both parties. When Ferguson responded to Bloomberg, he increased Newell's demand to a 19% stake in the company, two board seats and a three year standstill agreement. Bloomberg concluded that Ferguson could not be accommodated and that his interests went beyond mere association. He reported his conversations and conclusions to the Vermont American Board on June 28, 1989.
53. On June 29, 1989 Newell brought suit seeking to enjoin the share repurchase program. On June 30, 1989, after a hearing, this Court issued an order restraining further purchases pursuant to the share repurchase program. The Court conditioned this restraining order upon Newell's not purchasing shares under its tender offer. The share repurchase program was terminated by the Board on July 12, 1989, in light of the Board's decision to authorize management to explore a possible sale of the company. As of the time of termination, the shares purchased between the June 13, 1989 authorization and termination increased the number of shares voted by Lee Thomas by less than 1%.
b) The Clairson Transaction
54. Clairson International, Inc. is a Florida corporation engaged in the design, manufacture and sale of welded wire home shelving and storage products. Approximately 57.5% of Clairson's stock is owned by Norman O. and Donald P. Sauey. The rest of the stock is publicly owned and traded on the NASD Automated Quotation System.
55. Beginning in at least the Fall of 1988, members of Vermont American's management discussed the possibility of a business combination with Clairson. Vermont American's management believed that Clairson's business would be a desirable acquisition for Vermont American and would complement the other products Vermont American manufactured. Historically Vermont American had acquired other entities through cash deals.
56. Beginning prior to April 18, 1989, negotiations with respect to the acquisition of Clairson by Vermont American took place. A merger agreement was entered on July 1, 1989.
57. A corporation formed by Newell also was pursuing an acquisition of Clairson. On April 24, 1989 that corporation announced publicly that it had made an offer to acquire Clairson. Prior to that date, Newell's interest in acquiring Clairson was not known to Vermont American.
58. The Clairson deal was originally proposed as a cash deal. In the initial stages of negotiations for the acquisition of Clairson, Vermont American considered using non-voting stock as part of the consideration to be paid for Clairson. After Newell announced its tender offer, however, Vermont American chose to issue voting stock which, by agreement, would be voted in accord with the recommendations of the Board of Directors of Vermont American. Lee Thomas was not enthusiastic about the Clairson acquisition until it was proposed that the Board of Vermont American would have control over the voting of the Saueys' shares in Vermont American.
59. The Saueys preferred that their Clairson stock be purchased for stock so that the transaction could be tax free to them and they would have an equity interest and potential upside in the acquiring company. However, the Clairson acquisition was structured as an Internal Revenue Code Section 368(a)(2)(D) reorganization. As such, it did not require the use of voting stock, and the tax consequences would have been the same if non-voting stock had been used.
60. The use of voting stock in payment to the Saueys was in response to what Vermont American perceived as attempts by Newell to gain control of Vermont American.
61. Under the merger agreement the stock to be issued to the Saueys is voting Convertible Preferred Stock. The Saueys will receive 755,883 shares of Convertible Preferred Stock or equal to approximately 7% of Vermont American's voting stock on a diluted basis. Lee Thomas' voting power will be lowered from about 30% to 28%. If issued, the stock will be subject to an agreement under which it will be voted for ten years in accordance with the recommendations, if any, of Vermont American's Board. If the Saueys sell their stock, the voting agreement lapses.
62. Approval of the Clairson transaction was given by the Board on June 22, 1989. In the course of that meeting, the independent directors met separately and approved the transaction based on the business benefits and synergies provided by the proposed combination of the two companies.
63. On June 29, 1989, the independent members of the Vermont American Board, meeting separately in a telephone meeting as a special committee, considered the terms of the Convertible Preferred Stock called for under the proposed merger agreement, including the provisions with respect to the voting of that stock. After a presentation by Elliot Goldstein, the independent legal counsel specifically retained by the committee, the committee concluded that the voting agreement was in the best interests of the corporation. The issuance of the preferred stock was approved by the entire Board, later, on June 29.
64. The special committee of independent directors recommended to the Board on July 11, 1989 that if Convertible Preferred Stock ever is issued to the Saueys as called for under the merger agreement, it should be voted in accordance with the recommendations, if any, of the committee of independent directors instead of the entire Board's recommendations. The special committee's recommendation for the transfer of authority was approved and implemented by the entire Board on July 12, 1989. One director, Ellen Dunbar, testified that she was unaware of the transfer of voting control before this lawsuit. Nothing prevents the Vermont American Board from revoking this transfer of authority.
65. The Clairson merger agreement has not yet been submitted to the shareholders of Clairson for their approval, and no Vermont American stock has been issued as a result of that transaction. No vote of Vermont American's shareholders has been scheduled or is imminent.
c) The Rights Plan
66. On July 12, 1989, the directors of Vermont American amended the existing Shareholder Rights Plan
to lower the trigger on the Plan, upon an acquisition of stock, from 27% to 15% for a period of 120 days. A press release was issued announcing the change in the Rights Plan and that the Board was exploring a possible sale of the company. The press release issued by Vermont American on July 12, 1989 stated the following:
LOUISVILLE, KY., July 12, 1989 -- Vermont American Corporation (AMEX) announced that its Board of Directors has authorized management to explore a possible sale of the Company. In this regard, the Board has retained Bear Stearns & Co. to act as the Company's financial advisor and to enter into discussions with qualified prospective purchasers. The Board has not made a final decision to sell the Company and there can be no assurance that any transaction will result from these discussions. At the same time, the Board terminated Vermont American's previously announced stock repurchase program and made temporary amendments to its shareholder rights plan.
The stock repurchase program was for up to a total of 2,200,000 shares, of which 430,105 shares had been repurchased since the original adoption of the program in October of last year. The rights plan amendments lowered the percentage ownership of Vermont American Class A Common Stock that triggers the rights to 15% and eliminated the 20-day window permitting redemption of the rights after a triggering event. These amendments are intended to protect the Board's ability to manage the exploration of the sale of the Company. These amendments will terminate and the rights plan will revert to its prior form at the end of 120 days unless contract for the sale of the Company is entered into during that period, in which event the amendments will continue in force until such agreement has been completed or terminated.
Robert I. Baker, President and Chief Executive Officer, of Vermont American commented with regard to the Board's action: "The Board has decided to explore the possibility of a transaction that will enable all stockholders to better realize the value accumulated in the Company. In addition, in this process, and consistent with our obligations, we will seek to preserve the relationships Vermont American has enjoyed with its employees, customers, suppliers and local communities over the years." . . .