Court: Court of Chancery of Delaware; March 18, 1993; Delaware; State Appellate Court
Defendants' motions for summary judgment are currently before the court in a consolidated class action initiated by former shareholders of Sea-Land Corporation, challenging the 1986 acquisition of Sea-Land by CSX Corporation. The plaintiffs assert that CSX's acquisition, which involved a $28 per share offer and subsequent tender offer, improperly favored the Simmons Group, which sold a 39.5% stake to CSX for approximately $50 million, leading to allegations of a breach of fiduciary duty by Sea-Land's directors. They claim the directors failed to secure equivalent value for all shareholders, specifically the $33 per share that CSX paid the Simmons Group. Defendants include Sea-Land, six of its eight directors, the Simmons Group, and the CSX defendants, all of whom deny the allegations. The case has a lengthy procedural history, with multiple filings and motions dating back to April 1986. The current opinion addresses the summary judgment motions from both CSX and Sea-Land defendants, which were argued in October 1992.
Sea-Land, a Delaware corporation involved in containerized cargo transport, had eight directors, all independent except for Chairman and CEO Joseph F. Abely, prior to a merger in September 1986. In spring 1985, Simmons began acquiring Sea-Land stock and proposed to buy all outstanding shares for $25 each on November 18, 1985. The board, advised by Dillon, Read & Co. Inc., deemed the proposal financially inadequate and rejected it on November 25, 1985. They discussed defensive strategies, including a shareholder rights plan, and instructed Abely to explore alternatives to maximize shareholder value, including negotiations with Simmons.
Dillon Read contacted 23 potential acquirers, with nine receiving confidential information under agreements prohibiting use for stock purchases without board consent. By mid-December 1985, only two showed interest, with CSX withdrawing in January 1986. Simmons met with Abely on December 3, 1985, requesting the same confidential information but was denied due to his refusal to sign a confidentiality agreement. On December 4, Simmons made a second proposal for $25 per share, offering not to trade shares without board approval if allowed to top any higher bid, which was rejected by December 9. The board then adopted a shareholder rights plan triggering at 40%.
On December 17, 1985, Simmons publicly disclosed ownership of 34.8% of Sea-Land stock and intent to acquire up to 39.9%. He later announced plans to nominate three board members in anticipation of the May 1986 annual meeting. In a January 6, 1986, board meeting, Simmons was invited to make a firm, adequate offer. On January 7, he revealed an increased ownership of 39.5%. Subsequent meetings between Sea-Land and Simmons occurred, with the board indicating a willingness to recommend a formal $26 per share offer, provided it received a fairness opinion from Dillon Read. Negotiations on January 18 and 19 ultimately failed.
On January 21, 1986, the Sea-Land board chose not to redeem previously distributed shareholder rights after Simmons acquired over 35% of the company’s stock. To prevent a proxy contest, the board agreed to support Simmons’ nominees and permit him to attend future meetings, leading to the decision that directors J. Paul Sticht and James J. Kerley would not seek reelection. However, harmony was short-lived; on March 6, 1986, Simmons demanded the resignation of CEO Abely. Simmons later communicated with the board regarding his position, but Abely indicated that the board would decide on his retention.
In mid-March, CSX re-engaged with Sea-Land, arranging a meeting between Abely and CSX Chairman Hays Watkins to explore a potential business combination. On April 8, Simmons proposed acquiring Sea-Land for $26 per share, prompting Abely to suggest drafting a formal proposal. Simmons publicly announced his offer on April 11, subject to financing conditions. After learning of CSX's interest in a higher offer, Sea-Land canceled a meeting with Simmons on April 16.
During a separate meeting that day, CSX representatives expressed interest in acquiring Sea-Land, leading Abely to instruct his team to negotiate terms. Later, CSX communicated a potential offer of $28 per share, contingent on Sea-Land granting them an option to purchase 6.5 million newly issued shares at that price. Abely found this option acceptable, believing it would influence Simmons' actions. Following this, on April 18, CSX's board approved a proposal to acquire Sea-Land at a price not exceeding $32 per share, contingent upon obtaining the Sea-Land Option.
Following a CSX board meeting, Schwarzman contacted Sea-Land Senior Vice President Robert J. Fahey to discuss a merger authorized by the CSX board. Schwarzman indicated that CSX was willing to negotiate favorably and planned to call Abely the next day regarding a meeting with Simmons and to discuss Abely's proposed agenda for that meeting. Schwarzman suggested that Abely might want to publicly announce the CSX Offer to complicate Simmons' position with two boards.
Later that day, Abely arranged a meeting with Simmons for April 21, where CSX representatives aimed to persuade Simmons to tender his shares into the CSX Offer and provide Simmons an opportunity to submit a final offer for Sea-Land. On April 21, Abely, accompanied by attorney Blaine V. Fogg, met with CSX officers before visiting Simmons. During the meeting, Abely informed Simmons that CSX was willing to pay $28 per share, which Sea-Land regarded as favorable. After Abely and Fogg left, Schwarzman directly told Simmons about CSX's intention to acquire his 39.5% stake at the same price, warning of a potential "freeze-out" in a subsequent merger if he refused to sell.
Simmons declined to sell or negotiate further and asked the CSX representatives to leave. Afterward, Abely indicated to Simmons that Sea-Land would consider a higher offer, which Simmons acknowledged could be possible. Abely then provided Simmons with Sea-Land's confidential information package, though Simmons felt informed enough to make a decision without further data.
The CSX group subsequently reported to Watkins about the meeting and decided to maintain their offer at $28 per share. CSX publicly announced the acquisition proposal later that day, which would remain open until April 25 and was contingent upon obtaining the Sea-Land Option. Following the announcement, Sea-Land's management issued a supportive press release, and a special board meeting was scheduled to discuss the proposal.
On April 21, Simmons expressed his dissatisfaction to Watkins regarding an ultimatum from CSX, stating his intent to remain a long-term partner and warning of conflict if pressured out without profit. The following day, they discussed a potential sale of Simmons’ 39.5% Sea-Land share block, with Simmons proposing an option for CSX to purchase at $28 per share for $7 per share. Watkins countered at $5, which Simmons agreed to if CSX reimbursed him $4 million for legal and banking costs. This agreement was finalized on April 23, allowing CSX an option to buy Simmons’ shares between July 15 and August 31, 1986, while barring Simmons from buying Sea-Land or CSX stock for ten years. After formalizing the agreement, Simmons informed the Sea-Land board of his absence from meetings during the option's duration.
Abely learned of the option after its terms were set and reacted negatively. He sought to persuade Watkins to increase CSX's offer for remaining Sea-Land shares, but Watkins maintained that the terms with Simmons were independent of that offer. Abely later indicated to Schwarzman that he would recommend accepting CSX's offer to the Sea-Land board while requesting CSX to indemnify the board against potential litigation due to disparate treatment of shareholders. Watkins agreed, and the merger agreement included this indemnification provision as allowed by Delaware law.
On April 25, 1986, the Sea-Land board convened to evaluate the CSX Offer, which followed discussions about the Simmons Option. The board reviewed a draft merger agreement and received financial analysis from Dillon Read, supporting the CSX Offer as fair. Following management's recommendation, the board approved the merger agreement.
The amended complaint alleges that the Sea-Land defendants breached their fiduciary duties to shareholders by endorsing a transaction that favored certain shareholders over others, violating the so-called "rule of equality." Plaintiffs argue this breach occurred as the defendants did not adequately consider alternative strategies, such as rejecting the CSX Offer to negotiate a higher bid. Similar claims are made against the CSX defendants, who are accused of aiding the Sea-Land defendants' violations.
Both sets of defendants seek summary judgment, with Sea-Land arguing that their decision is protected by the business judgment rule and that the plaintiffs' rule of equality claim is legally unfounded. The CSX defendants assert that Delaware law allows non-fiduciaries to act in self-interest, that the facts do not support aiding and abetting claims, and that the plaintiffs failed to demonstrate injury.
Summary judgment will be granted only if there are no material factual disputes and the moving party is entitled to judgment as a matter of law. The court will resolve any uncertainties in favor of the non-moving party, requiring evidence to support each claim's elements. The opinion will address the plaintiffs' rule of equality claims, including allegations that CSX and Sea-Land conspired to provide Simmons a premium at the expense of other shareholders, and will examine claims of breached fiduciary duties by the Sea-Land defendants regarding the approval of the CSX Offer. The plaintiffs' claims are based on the principle that all shares of the same type are inherently equal, asserting that discrimination among similarly situated shareholders during a corporate sale is per se illegal.
The excerpt outlines two distinct arguments regarding alleged misconduct related to a merger involving Abely, CSX, and Sea-Land. The first argument claims that Abely conspired with CSX to allocate an unfair share of the merger consideration to Simmons, while the second asserts that even without a conspiracy, the Sea-Land board implicitly approved a disproportionate payment to Simmons compared to other shareholders. The conclusion drawn is that the plaintiffs’ claims fail under both scenarios; the first lacks factual support, and the second, while factually supported, is deemed legally proper under Delaware law.
The plaintiffs' reliance on the case of Beaumont v. American Can Co. is critiqued, as it is based on a misinterpretation of the facts. In Beaumont, a merger agreement allowed for different treatment of shareholder payments, which was expressly agreed upon by all parties involved. In contrast, the Sea-Land board did not agree to the Simmons Option or to any preferential treatment for the Simmons Group, thus differentiating this case from Beaumont. The excerpt emphasizes that Sea-Land's board never consented to the terms that would favor Simmons over other shareholders.
Plaintiffs attempt to characterize the case as analogous to Beaumont, alleging that Sea-Land's director Abely and CSX’s Watkins conspired to create the Simmons Option, facilitating Sea-Land's acquisition by CSX rather than Simmons. They argue that this option is part of a unified transaction. Their primary evidence consists of Abely’s meeting notes and undated notes referencing the Simmons Option and CSX Offer. However, the argument is undermined by the lack of evidence showing Abely's involvement in the Simmons Option, as both Watkins and Simmons testified that neither Abely nor any Sea-Land representatives participated in its negotiations. Simmons indicated that the option's concept was initially proposed by an employee, with negotiations conducted solely between him and Watkins. Abely's notes regarding a $4 million reimbursement do not imply involvement in the option's formulation, suggesting they were made after the option was finalized. Consequently, these notes do not create a factual dispute regarding any conspiracy.
In an alternative argument, plaintiffs assert that even if Sea-Land directors did not participate in the Simmons Option's creation, their approval of the CSX Offer was improper. They contend that since the CSX Offer predated the Simmons Option, the board's approval implicitly endorsed the option's terms, including its higher payments. Citing Delaware law, plaintiffs acknowledge that a purchaser can buy shares from one shareholder at a premium and then offer lower prices for remaining shares without breaching fiduciary duties. Despite this, they argue that Sea-Land's directors should be held liable because they approved the CSX Offer after learning of the premium offered to Simmons, suggesting that they could not ethically endorse a lower price for other shareholders.
The timing of a third-party stock purchase negotiated independently between an acquirer and a stockholder does not prevent a corporate board from approving the acquirer’s offer for the corporation's shares. Plaintiffs reference federal securities law, specifically the "best price" rule from the Securities Exchange Act of 1934 and SEC Rule 10b-13(a), suggesting these laws are analogous to the case. However, they did not assert any claims based on these provisions, likely because they were not applicable to the situation. For these provisions to apply, the CSX Offer would need to be classified as a "tender offer," a designation the plaintiffs do not claim.
The plaintiffs seek to expand state fiduciary rules to include these federal provisions, an approach lacking legal or practical justification. Such a rule would hinder Sea-Land directors from fulfilling their fiduciary duty to maximize shareholder value, as it would require them to reject the highest offer received. Additionally, since the Simmons Option was already finalized without Sea-Land’s involvement, the board could not alter this situation or compel CSX to increase its offer. The CSX Offer treated all shareholders equally, negating any claims of unequal treatment by the board.
Consequently, the Sea-Land board did not violate any fiduciary duty related to equal treatment, nor did the CSX defendants aid or abet such a breach. Therefore, summary judgment is granted in favor of the defendants regarding the plaintiffs' claims based on the rule of equality. The plaintiffs' additional claims alleging breaches of the duty of loyalty related to the CSX Offer are also rejected, as they restate previously dismissed arguments.
Plaintiffs argue that the Sea-Land board approved the CSX Offer due to improper motivations, specifically the indemnity provided by CSX, and displayed favoritism towards CSX over Simmons, violating their duty to secure the best price for Sea-Land as established in Revlon. They assert that the board's decision was unreasonable, suggesting that CSX would have made a higher offer had the board indicated a rejection of the CSX Offer. A critical threshold issue is whether the duty of loyalty claims should be assessed under the business judgment standard or the enhanced scrutiny standard from Unocal. The plaintiffs advocate for the Unocal standard, while the defendants argue for the business judgment standard, claiming the approval was not a defensive measure. The court disagrees with the defendants, asserting that the Unocal standard applies when a board's actions are defensive in response to threats to corporate control. Evidence indicates that the Sea-Land board's actions, including adopting a poison pill and seeking a white knight after Simmons' proposal, were defensive. Minutes from a board meeting reveal that the approval of the CSX Offer was partly due to the risk of Simmons gaining control without fair compensation. Additionally, the board granted the Sea-Land Option to CSX to protect its offer, despite CSX having an agreement with Simmons. Consequently, the Sea-Land board's decisions will be scrutinized under the Unocal standard as interpreted in Macmillan.
Plaintiffs assert that Abely, upon learning of the Simmons Option, improperly pressured CSX to indemnify the Sea-Land board instead of ensuring equal treatment for all shareholders. Defendants contend that such indemnity was standard practice, offered no significantly greater protection than existing Sea-Land provisions, and could not have compromised the board's duty to shareholders. It is acknowledged that Abely requested indemnification for claims related to the merger, but there is no evidence he prioritized this over securing the best price for shareholders. Indemnification is generally seen as a common aspect of corporate governance and does not inherently suggest self-interest.
Plaintiffs argue that the Sea-Land directors sought CSX indemnity at the expense of their fiduciary duties, presuming it provided materially better protection. However, the existing indemnity already covered merger-related expenses and excluded coverage for willful misconduct. The CSX indemnity, while potentially offering some additional coverage, did not provide significantly more protection and would not shield directors from many of the plaintiffs' loyalty claims. Consequently, there is insufficient evidence to suggest that the indemnity influenced the directors' fiduciary responsibilities.
Additionally, plaintiffs claim that Sea-Land directors, particularly Abely, favored CSX over Simmons. The court must assess whether there was disparate treatment of bidders, whether the board believed such treatment would benefit shareholders, and if the directors’ actions were reasonable given their objectives. While plaintiffs do not criticize the solicitation of a competing bid from CSX, they allege that CSX received preferential treatment, specifically being given more information about Sea-Land and a tip regarding Simmons’ potential bid of $26 per share.
Abely was allowed to negotiate with Sea-Land despite having distanced himself from Simmons after a canceled meeting. He received a “lockup” on Sea-Land treasury stock and enlisted Abely to discourage Simmons from increasing his bid. The main evidence for the allegation that Abely conspired with CSX against Simmons includes undated notes from Fahey regarding a conversation between Schwarzman and Abely after CSX's $28 offer was authorized. These notes reference a “script” for meetings with Simmons, but do not conclusively support claims that Abely aimed to assist CSX detrimentally to Simmons and Sea-Land's shareholders. Abely's trip to introduce the CSX group to Simmons is undisputed, and although plaintiffs argue he acted on behalf of CSX, the notes do not substantiate this claim. Simmons testified that Abely allowed him to respond to CSX’s offer as he wished, suggesting Abely was open to a higher bid from Simmons. Abely also provided Simmons with confidential information without a confidentiality agreement, indicating good faith and an effort to encourage a competitive bid. Simmons acknowledged he had enough information to proceed and chose not to make a higher bid. Consequently, the evidence supports that Abely fulfilled his fiduciary duties in his interactions with CSX and Simmons.
The plaintiffs further assert that the Sea-Land board should have rejected the CSX offer during their April 25, 1986 meeting to maximize shareholder value, arguing they had leverage due to CSX's prior $50 million payment to Simmons and the existence of a "poison pill." However, all directors except Abely were independent, and their decision was based on comprehensive market analysis and advice from financial and legal advisors, indicating the board acted in good faith and after reasonable investigation.
The board faced a critical and brief deadline regarding the acceptance or rejection of CSX's $28 Offer, which was the sole remaining bid after extensive outreach to potential acquirers. This context undermines claims that the board acted unreasonably by accepting the offer without negotiation. The plaintiffs argued that rejecting the offer would pressure CSX to improve its bid, but this overlooks that CSX had until August 31, 1986, to decide on exercising the Simmons Option, allowing it to adjust its bid without immediate consequence. The board reasonably assessed that the risks of rejection outweighed any potential leverage. The only supporting evidence for the plaintiffs' assertion came from James J. Cotter's speculative and self-serving testimony, which lacked a solid evidentiary basis.
Regarding the plaintiffs' claim of the board's lack of proper information in approving the CSX Offer, the standard for gross negligence was cited. Plaintiffs referenced testimony indicating that "leverage" was not discussed at the April 25, 1986, meeting, but this does not establish gross negligence given that the board had previously authorized a market canvass and was aware of minimal interest in the company. The board's prior knowledge of Simmons’ unwillingness to exceed a $26 offer further supports their decision. As such, the plaintiffs failed to present a triable issue of fact to contest the summary judgment motions related to both the duty of loyalty and duty of care claims.
The Sea-Land directors held multiple meetings, notably on April 25, where they evaluated the CSX Offer alongside their advisors, considering Sea-Land's alternatives and the implications of rejecting the offer. Their careful deliberation contrasts with the conduct of directors in the Van Gorkom case, indicating a lack of gross negligence, leading to the conclusion that the claim against them should fail. The court granted the defendants' motions for summary judgment based on these findings.
Ownership of a 39.5% block of shares was attributed to two affiliates of Simmons, referred to as the "Simmons Group." Under Sea-Land's rights plan, if a hostile entity acquired 35% of the stock, the board had ten days to act on the rights, which would become exercisable at a 40% threshold, allowing rights holders to obtain shares at a significant market value increase. Notably, the Sea-Land board was unaware of CSX's $32 offer cap until revealed during discovery.
Additionally, Sea-Land directors had indemnification for merger-related expenses unless found grossly negligent. The Sea-Land and CSX defendants argued that there was no injury in the case. Delaware law supports that all shares of the same class are entitled to equal treatment, but allows for unequal treatment of shareholders in certain contexts. The contentious Simmons Option was influenced by Simmons' significant shareholder status.
The unequal treatment of shareholders was determined to violate New York Business Corporation Law § 501(c), which mandates equality among shares of the same class unless designated otherwise. This principle prohibits discrimination among shareholders, as established in case law, including *Bank of New York v. Irving Bank Corp.*, where a "flip-in" poison pill was deemed discriminatory. In contrast, Delaware law allows certain shareholder discrimination.
Notes by Abely regarding the Simmons Option and the CSX-Sea-Land transaction indicated potential offers and options but lacked relevance to the "rule of equality" argument. They instead pertained to claims that Abely favored CSX over Simmons. Despite plaintiffs questioning the credibility of several deponents, they acknowledged Simmons had no ulterior motives during his deposition.
A court discussion highlighted that if CSX had acquired Mr. Simmons and immediately approached Sea-Land, it would not incur director liability. However, if a proposal were made just before the acquisition, it could lead to liability. The case of *Priddy* was referenced, where one bidder compensated another before all shareholders received an offer, illustrating a potential lack of clarity in applying Delaware law. Notably, Delaware law allows for the indemnification of directors acting in good faith, with plaintiffs contending that Sea-Land directors' actions may not have met this standard, questioning their duty of loyalty and adherence to the goal of maximizing sale prices.
Plaintiffs' claims lack support, as Abely and the board's decision to grant the Sea-Land Option in relation to the CSX Offer was deemed reasonable to encourage a stronger bid from CSX, thus not constituting a breach of fiduciary duty. The communication to CSX about Simmons' impending $26 bid, while concerning in an auction context, was intended to stimulate competition rather than breach fiduciary responsibilities. Abely's personal feelings toward Simmons did not adversely affect the bidding process or his duty to secure the best price. Additionally, although Sea-Land had a poison pill strategy, the board was not legally required to employ it against the sole bidder at that time, nor is it clear that such action would have yielded a better outcome. The lack of evidence indicating a potential higher bid reinforces the defendants' stance that no actionable injury was demonstrated. Without proof of injury, plaintiffs cannot claim damages. Furthermore, the plaintiffs' argument regarding damages, based on the difference per share between what Simmons received and other shareholders, presupposes their entitlement to a "rule of equality" claim, which the Court has already rejected.
