Opinion
Civil Action No. 10761.
Submitted: April 24, 1989.
Decided: April 25, 1989.
A. Gilchrist Sparks, III, Esquire, Lawrence A. Hamermesh, Esquire, Alan J. Stone, Esquire, and Frederick H. Alexander, Esquire, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware, and John J. Huber, Esquire, of LATHAM WATKINS, Los Angeles, California, Attorneys for Plaintiffs.
Joseph A. Rosenthal, Esquire, of MORRIS, ROSENTHAL, MONHAIT GROSS, P.A., Wilmington, Delaware, and Ronald Litowitz, Esquire, of BERNSTEIN, LITOWITZ, BERGER GROSSMAN, New York, New York, and Judith A. Schultz, Esquire, of GOODKIND, LABATON RUDOFF, New York, New York, Attorneys for Plaintiff-Intervenors.
R. Franklin Balotti, Esquire, C. Stephen Bigler, Esquire, and James C. Strum, Esquire, of RICHARDS, LAYTON FINGER, Wilmington, Delaware, and Sheldon Raab, Esquire and Sandra Lipsman, Esquire, of FRIED, FRANK, HARRIS, SHRIVER JACOBSON, New York, New York, Attorneys for Defendants NWA Inc. and Northwest Airlines, Inc.
MEMORANDUM OPINION
Plaintiff Davis Acquisition Inc. is a Delaware corporation formed for the purpose of acquiring Northwest Airlines and its affiliated companies. Plaintiff NWA Co. is a Colorado general partnership that indirectly owns all of the outstanding stock of Davis Acquisition; it is controlled by Marvin Davis and persons related to him. Davis Acquisition is awaiting SEC clearance of its proxy material seeking to elect a full slate of directors to the board of defendant NWA Inc., the corporate parent of Northwest Airlines. In addition to this imminent proxy solicitation, on April 20, 1989, Davis Acquisition, after seeking unsuccessfully to open merger discussions with NWA Inc., announced the commencement of a public tender offer for up to all of NWA's shares for $90 per share cash. That offer may close no sooner than May 17, 1989. NWA will have its annual meeting on May 15, 1989.
On March 27, 1989, the board of directors of NWA authorized the issuance on April 27, 1989 of defensive stock rights to the holders of all of NWA's common stock. Pending is an application to enjoin, until the holding of defendants' annual meeting on May 15, 1989, the issuance of these stock rights. The rights are the now familiar flip-in/flip-over stock rights. These rights, however, contain a novel provision that is at the heart of this case. Plaintiffs claim that this innovative provision has the effect of interfering impermissibly with the election of the board of directors at the annual meeting and is otherwise invalid.
The innovation involved is a provision (referred to by defendants as the Deferred Redemption Provision) that in effect provides that any board that is comprised predominately of members who were not nominated by the incumbent board (and for whom there had not been 45 days' prior notice that they would be nominated) may in no event redeem the stock rights for a period of 180 days following its election, if to do so would facilitate a transaction with an "interested person" (i.e., loosely stated, someone who was involved in the nomination of such non-incumbent director candidates). The incumbent board, or a successor that is predominately composed of persons nominated to office by the incumbent board, would not suffer under any such limitation. It would be free, in the exercise of its business judgment, to redeem the stock rights at any time before they became exercisable.
Here, it is uncontested that plaintiffs did not have sufficient notice to permit them to comply with a 45 day notice condition.
Davis Acquisition claims that this provision substantially affects the proxy contest election that will be held this year. That is, it is said that shareholders are actively discouraged by the Delayed Redemption Provision from voting for the Davis slate of directors, since a board comprised predominately of such persons would have less corporate power than the incumbent board's slate. The distinction in corporate power is material in these circumstances, plaintiffs assert. The Davis slate of directors will run on a "platform" that promises that if elected, they will promptly cause the sale of the Company at the highest available price. The constituency that could be expected to embrace this platform most warmly, it is said, is obviously those who seek a prompt sale. But such shareholders will be chilled, it is claimed, from voting for the Davis slate since it, but not the management slate, cannot authorize a prompt Davis transaction.
Plaintiffs assert that the Delayed Redemption Provision is invalid or (alternatively) cannot be applied to the Davis slate of directors for a number of reasons.
First. It is said to constitute a direct, intended impairment of the voting process that constitutes an offense to the principal-agent, legal relation that exists between the board and the shareholders. See Aprahamian v. HBO Co., Del. Ch., 531 A.2d 1204 (1987); Lerman v. Diagnostic Data, Inc., Del. Ch., 421 A.2d 906 (1980); Blasius Industries, Inc. v. Atlas Corp., Del. Ch., C.A. No. 9720, Allen, C. (July 25, 1988).
Second. Since these plaintiffs never had an opportunity to give 45 days' notice of an intention to nominate a slate of directors (the terms of the stock rights not becoming publicly known until after the 45 day period could no longer be complied with given the meeting date), they claim that the Delayed Redemption Provision constitutes a manipulation of the corporate machinery for the purpose of self-interested entrenchment. See Schnell v. Chris-Craft Industries, Del. Supr., 285 A.2d 437 (1971); Aprahamian v. HBO Co., supra. Third. Plaintiffs claim that it is beyond the power of defendants to limit the power of a future board of directors of NWA Inc. to take such action as it may in good faith deem expedient and in the corporation's best interest at the time a redemption of the stock rights might be considered. See Abercrombie v. Davis, Del. Ch., 123 A.2d 893 (1956), rev'd on other grounds, 130 A.2d 338 (1957); Chapin v. Benwood Foundation, Inc., Del. Ch., 402 A.2d 1205 (1975). Indeed, the existence of the ability to make a specific judgment whether or not to redeem stock rights at the time a tender offer is made, is, it is claimed, the essential condition that allowed our Supreme Court to recognize that issuing such securities was not necessarily a violation of duty. Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346 (1985). The stock rights here would, because of the Delayed Redemption Provision, purport to deprive a duly elected board of the power to make such a judgment with effect.
In answer to defendants' contention that boards very frequently do take valid action that has the effect of constraining future boards, plaintiffs add that the limitation that the Delayed Redemption Provision imposes upon the scope of a future board's effective power is not similar to the host of matters that may collaterally and properly limit that discretion. Surely, it is admitted, the effect, for example, of the mortgage of all assets by one board will limit the practical alternative that a later board has open to it. Similarly, loan covenants (such as restrictions on dividends) may properly be imposed by one board upon a later one. But here, plaintiffs say, the effect complained about is not the collateral effect of a decision made with respect to the firm's operations (as in the cited examples). Rather, the limitation on a future board's discretion is the principal intended effect of the contested provision. Moreover, that provision discriminates between possible future boards based upon who nominates a majority of the new board. In what way, plaintiffs wonder, can the current board justify trying to impose restrictions upon a future board's discretion that will be effective only if a majority of the current directors are released from their duties to the Company and its management is placed in other hands by the stockholders?
To all of this defendants, as I understand them, say several things. First, they say there has been no showing that the Delayed Redemption Provision will have any material effect upon the proxy contest. The NWA board has announced its willingness to explore extraordinary transactions designed to enhance share values. Thus, the principal issue before the shareholders would appear to be which set of directors do the shareholders prefer to have responsibility to conduct this effort: the Davis slate that is committed to selling the Company promptly for the highest available price (and is a potential buyer), or the incumbent board that is committed to exploring value-enhancing, extraordinary transactions. This issue, defendants say, is the principal issue and not whether the Davis slate will be impaired in doing a self-dealing transaction.
Second, defendants assert that any "impairment" of a future Davis slate board is immaterial because it is likely that a careful, advised study of alternatives and sale of the Company, which the Davis slate says it would do if elected, would absorb all or much of the 180 day delay anyway. Therefore, the 180 day delay is not much of an additional burden, if any. Indeed, defendants' expert offers the view that given the $90 price of the Davis offer and the $102 current market price of the NWA stock, some shareholders who would not vote for the Davis slate without the Delaying Redemption Provision (because the Davis interests would be in a position to redeem the stock rights immediately and close the below market tender offer) will do so with that provision in place.
Finally, with respect to injury, the Company claims that any injunction by this court does threaten the incumbent slate with irreparable injury that should be taken into account. It is asserted in that connection that any injunction by this court threatens to be misunderstood as a reprimand of the incumbent board by a court charged with supervising fiduciary obligations. Such a misunderstanding could have an important effect upon the forthcoming election and care should be taken, it is respectfully suggested, so that may be avoided or minimized.
Passing beyond the denial of any demonstrated threat to the integrity of the forthcoming election, defendants, of course, deny that the Delayed Redemption Provision is (or is likely finally to be held to be) invalid under Delaware corporation law. It is a defensive measure that the board has legal power to take (see 8 Del. C. §§ 141, 157; Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346 (1985)) and insofar as the claim is one of impermissible motive, this action is to be judged by the standard of Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946 (1985). It passes inspection under that test, defendants assert. The Delayed Redemption Provision represents, they say, a reasonable response to a threat to shareholder interests. It is indeed a moderate, measured response. The threat is that shareholders might, without the board having 45 days: notice, misguidedly elect a board in a proxy contest or by consent that would either then breach its fiduciary duties or proceed in a hurried way (to the shareholders' detriment) to accomplish a change in control transaction:
The Board recognized that a Rights Plan without a Delayed Redemption Provision left shareholders vulnerable to an unsolicited bidder's attempt to conduct a consent solicitation or surprise short-notice proxy contest to replace the Board with a slate that would be willing to effectuate a transaction with the unsolicited bidder on an accelerated schedule. (Thornton Aff. ¶ 5).
Defendants' memorandum, p. 8.
The Delayed Redemption Provision is said to be a moderate response to this "threat." It does not interfere with the right to vote, it is said. The delay that it does impose lasts only 180 days and even during that period the rights may be redeemed in order to facilitate transactions with third parties (i.e., arm's-length transactions).
Accordingly, the defendants say that issuance of the stock rights is within the power of the board under Sections 141 and 157 of the Delaware Corporation Law; that in exercising that legal power they have not breached any fiduciary duty since they are taking the action they propose to take in a good faith effort to protect the NWA shareholders from a risk they reasonably perceive.
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The motion is brought as one for a temporary restraining order. Because there was an opportunity to take some discovery and to submit briefs and affidavits from both sides, I allowed that it would be treated as a motion for preliminary injunction. See Cottle v. Carr, Del. Ch., C.A. No. 9612, Allen, C. (February 9, 1988). The distinction, however, is not material in this instance. Ordinarily, a preliminary injunction motion will present the court with a fuller record and a better opportunity to evaluate the substantive merits of the complaint than will a restraining order application. However, the sine qua non of each remedy is the existence of a threat of irreparable injury and each requires a shaping of relief, if any is to be afforded, so that detrimental impacts upon others may be minimized. It is this similar characteristic that is most salient in this instance.
The test for the issuance of a preliminary injunction, of course, focuses upon the existence and scope of a threatened irreparable injury to plaintiff; the establishment of a reasonable likelihood that the claim asserted will be found to be valid and the other circumstances present that bear upon considerations of fairness — customarily referred to as a balance of the hardships. E.g. Ivanhoe Partners v. Newmont Mining, Del. Supr., 535 A.2d 1334 (1987). There is no mathematical aspect to the "reasonable probability of success" portion of the test. That probability that is found to be reasonable in the circumstances may vary depending upon how grievous the injury that is threatened is perceived to be, or how damaging to defendant an improvidently granted injunction may turn out to be. Similarly, a court of equity will respond particularly to particular threats of injury. The standard formulation of the legal test is more akin to a checklist of appropriate concerns stated as abstractions than it is a formula.
In this instance, proper resolution of the pending motion turns most importantly upon an evaluation of the harms that can reasonably be expected to flow from granting or denying the application. This evaluation, which is always an explicit or implicit part of the process by which an application for interim injunctive relief is considered, is especially significant in a case such as this.
This court, in recent years, (and down through the years no doubt) has been required to act with respect to litigated legal claims asserted in the midst of an ongoing public election campaign, as well as those asserted as part of contested election for internal political party office. In those instances, as in this instance where an ongoing proxy contest for the control of a publicly traded corporation provides context, the court's function is to strive to protect established rights (or in a preliminary motion, those that appear likely to be established) while being mindful that the expression of opinion by a court may have an impact upon the outcome of the election. Since, in my view, a court should ordinarily do what it can to minimize any impact that its statements may have upon the outcome of an election (beyond assuring when such a matter is appropriately placed before it that the process by which the election is being conducted is proper), this spectre that an expression by the court may have a substantial impact requires that a court in such a setting exercise particular care and imagination to minimize the risks of such danger.
I am mindful that defendants have asserted this threat as a real one here and I am not in a position to dismiss that concern as extravagant.
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I do view the balance of harm here as critical and turn to that subject immediately. I confess to being rather unimpressed that plaintiffs' fear that the Delayed Redemption Provision will be a material factor to those NWA shareholders who might otherwise vote for the Davis slate is well grounded. Had the NWA board not recently announced itself willing to consider a value "enhancing" transaction, I would feel more confident that the real issue facing the shareholders is whether they want the Company sold now or not. In that context, the issue would have been clearly joined and the Delayed Redemption Provision would have seemed a relatively insignificant cloud. But NWA has announced its intention to consider alternatives and so the stark issue referred to above has been muted. As a consequence, the Delayed Redemption Provision may take on relatively greater importance. Shareholders who have an interest in consummating an extraordinary transaction promptly may now find the incumbent slate somewhat more appealing than they did before the announcement, and the Delayed Redemption Provision would provide some further reason for such a shareholder to vote for the incumbent slate. This threatened injury does not strike me as compelling. Several of defendants' counter arguments have force. But in the present situation, I must conclude that the provision in question is likely to have some effect upon the voting by the shareholders.
I do doubt that it was the intention of defendants to coerce the NWA shareholders with respect to any proxy contest that may develop. Rather, it does seem that the likely purpose of the Delayed Redemption Provision, insofar as Mr. Davis was concerned, was to discourage him from conducting a proxy contest or a consent solicitation. While these aims might not be unrelated, they can meaningfully be distinguished.
In addition to the factual claim that the existence of the Delayed Redemption Provision presents the threat of affecting the vote, plaintiffs assert the claim of legal injury: that violation of a statutory right justifies the issuance of an injunction in all events. The statutes said to be violated by the Delayed Redemption Provision are Sections 141(a) and 228. The legal proposition that violation of a statute may be enjoined without more has force. See, e.g., Prime Computer, Inc. v. Allen, Del. Ch., C.A. No. 9557, Allen, C. (January 22, 1988), aff'd, 540 A.2d 417, 421 (1988). This principle has its clearest application when legal rights have been finally determined after trial. I note, however, that Prime Computer was a preliminary injunction case. In that case, however, I note that the Supreme Court made special mention of the fact that a strong case on the merits (as there) may compensate for a weak showing of irreparable harm. 540 A.2d at 421. I do not mention this as an implied comparison with the strength of plaintiffs' claims here, but rather to demonstrate that, where the matter is before the court at a preliminary stage, no violation of legal rights is established and all of the factors — including the likelihood and the type of injury that may result from an improvident issuance of the injunction, as well as the prospect for ultimate success by plaintiffs — should be considered in determining the motion.
How compelling this source of legal injury (the claimed violation of a statute) will be perceived at the preliminary injunction phase, however, is likely to be a function of a number of factors relating to the court's evaluation of the merits of the claim, all of which reduce to how confident the court feels that its preliminary judgment is sound. In this instance, all I wish to say on this topic is that I have considered in reaching this decision the extent to which the Delayed Redemption Provision would limit the statutory right of future directors to exercise power under Section 141(a).
As indicated above, I am mindful of claims of injury that may result from issuance of an improvident injunction. They are deserving of weight. Indeed, even were I to assume that plaintiffs have advanced strong claims, this factor, together with alternative steps that can be taken to eliminate or minimize the threat to the voting process, would persuade me, on condition, to decline to issue the remedy now sought.
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A result here may be shaped that accommodates the contending claims but recognizes that there has been no procedure contemplating nor any time for an authoritative determination of the claims of right asserted. Plaintiffs claim a necessity to have a decision today — the record date for the distribution of rights.
The essential claim of injury is that NWA shareholders may be disinclined to vote for the Davis slate because — while it could be in a position in fact within one month or two to conclude its promised review and sale — it may not be able to sell to one known prospect (Davis Acquisition Inc.) for a period of six months.
This threat can be eliminated by an undertaking by this court, upon timely application, to hear and finally determine the validity of the Delayed Redemption Provision promptly — within 45 days — of the closing of the polls at the annual meeting and by appropriate notice of that fact to the shareholders. Such notice will, in effect, inform shareholders that if this provision is invalid, it will not substantially delay effectuation of a sale transaction by the Davis slate. Shareholders receiving such notice will, of course, still have to contend with their own evaluation of whether the provision will ultimately be found to be invalid or not. But that circumstance is a function of the fact that that question has not been (and could not on this motion have been) determined authoritatively. While the court does — as part of its analysis in deciding to enter a preliminary injunction or not — oftentimes express tentative or preliminary views on the merits of a case, where, as here, that is not required in order to resolve the motion, plaintiffs have no right to a preliminary declaratory statement evaluating the strengths and weaknesses of contending positions. Thus, a judicial commitment to finally resolve this matter promptly, if necessary, will minimize or eliminate the risk that shareholders will fail to understand that if the Delayed Redemption Provision is invalid it will not interfere with a relatively prompt sale of NWA to Davis Acquisition. Such a judicial commitment, however, will not eliminate the risk that shareholders may, correctly or incorrectly, evaluate the Delayed Redemption Provision as valid and be affected in their voting by such view. But prior to final judgment, that uncertainty cannot appropriately be reduced by this court.
Plaintiffs' application will be denied on condition that defendants undertake, in connection with the distribution of any certificates representing the stock rights, (1) to give notice to the persons to whom they are distributed and to note on the face of such certificates, in effect, that the validity of the provision that places special restrictions upon the power of certain future boards to redeem the rights has been challenged in this litigation and the scope of the rights and the holders of such rights may be affected by any final judgment entered in such action; and (2) that defendants cause any Summary of Rights of Purchase Preferred Shares distributed pursuant to Section 3(c) of the Rights Agreement, as amended, to contain a similar notice together with notice of this court's intention to finally determine the validity of Section 24(c) of the Rights Agreement within 45 days of the Company's annual meeting, upon timely application by any party to this litigation. See Newell Co. v. Wm. E. Wright Co., 500 A.2d 974 (1985).