The opinion of the court was delivered by: CLARY
BLH is a manufacturer of 'capital goods.' Armour, primarily known as a food and meat processing corporation, has also diversified into the chemical and other fields in recent years. The ostensible purpose of the merger is to further diversify its activities. There is no claim in this case that the merger will run afoul of antitrust statutes. The gist of the plaintiff's complaint is that the proposed merger is the result of a conspiracy on the part of three interlocking directors of BLH and Armour to push through the merger to the detriment of individual stockholders of BLH. The moving party in this case, T. M. Evans, owned no shares of BLH stock until late December, 1964 or early January, 1965. The only proof adduced at the hearing indicates that he is the beneficial owner of some 46,000 shares of stock, or less than 1.25% Of the total outstanding shares of BLH.
The charges are mainly leveled at three of the defendants: William Wood Prince, who is chairman of the board and chief executive officer of Armour and also a director and member of the executive committee of BLH; George A. Rentschler, a director and member of the executive committee of Armour and director and chairman of the executive committee of BLH, and Milton Steinbach, a director and member of the executive committee of Armour and BLH and also the managing partner of Wertheim & Co., an investment banking firm. Another defendant who is intimately connected in plaintiff's charges is Francis L. Elmendorf, a director of BLH and a limited partner of Wertheim & Co. He is also a director of International Packers, Ltd., in which Armour has a substantial investment of some $ 13,000,000, but over which, the evidence clearly shows, Armour has absolutely no control since the shares have been placed in a voting trust by court order.
In late January or early February, 1965, defendants, Prince and Rentschler, while vacationing in Mississippi, had occasion to discuss the business problems of both Armour and BLH. Prince suggested to Rentschler that some thought should be given to the possibility of merging the two companies. They agreed that they should consider the matter carefully and to explore the proposition further.
After an executive committee meeting of BLH held in the Barclay Hotel in Philadelphia on February 24, 1965, Prince and Rentschler were discussing the matter in a suite jointly occupied by Steinbach and Rentschler. At that time, they decided that the proposal merited further attention, and Steinbach was brought into the discussion. Recognizing that all three were members of the executive committees of both corporations, they concluded that counsel should be consulted. It was also determined that Steinbach of Wertheim & Co. should act as financial advisor, if counsel first approved of his assuming this role. Arthur H. Dean, of the New York law firm of Sullivan and Cromwell, was selected as counsel. Prince and Rentschler decided at this time to refrain from any future negotiations, except for participating in the discussion of the final form. Rentschler designated Perry A. White, president, director and a member of the executive committee of BLH, also a defendant, to act as negotiator if a merger were thought feasible. Prince designated Edward McAdams, Armour's financial vice president, as negotiator for Armour in the event any feasible proposition were advanced.
McAdams first met with Steinbach, whose job consisted of developing the framework for any merger proposals. McAdams at the outset took a dim view of merger possibilities. Armour had recently offered rights to their shareholders which, from an earnings point of view, represented a ten percent dilution, and he didn't think the company ought to suffer any further earnings dilution. McAdams maintained this position until the suggestion was advanced that 'purchase accounting' be used. Thereafter, he expressed interest in the merger plans because in his judgment the use of purchase accounting overcame the dilution problem. Steinbach thereupon notified Rentschler that this framework for negotiations had developed; Rentschler in turn instructed White to confer with McAdams to investigate further the merger terms. McAdams and White then met in their roles as chief negotiators for their respective companies.
Discussions began with the tentative proposal that each share of the common stock of BLH would be converted into one-eighth (or $ 12.50) of a share of preferred stock (cumulative and $ 100 par value), and one-sixth of a share of common stock ($ 5.00 par value) of Armour, then selling at approximately $ 47.00 per share. This would mean a transfer of securities having a value of approximately $ 21.00 for each share of BLH stock which had over the previous ten-year period sold between $ 12.00 and $ 15.00 per share. Negotiations continued in the normal give and take fashion. White attempted to get convertible preferred which McAdams stated he would not accept under any circumstances. When it became obvious to White that insistence upon this feature would mean no merger or prospect of it, he agreed to a straight preferred stock. However, he did negotiate the one-eighth share of stock to 13/100ths, or an additional $ 2,000,000 for the BLH stock. From the beginning White took the firm position that the dividend rate on the preferred should be $ 4.75, while McAdams talked in terms of $ 4.60 or $ 4.65. In the interim, Goldman, Sachs & Co., an investment banking firm, had been consulted, and after analysis of the terms, rendered its oral opinion that the proposed exchange would be fair and equitable to both companies, and that the preferred stock would sell at par if the projected dividend rate were maintained at $ 4.75. In light of this opinion, McAdams agreed to the $ 4.75 rate.
There followed a meeting of the board of directors of both companies on March 31 and April 1, 1965 in Chicago, which approved the merger in principle, and a later meeting in Philadelphia of both boards on April 20, 1965, where the terms of the merger were formally approved. At neither of these meetings did Prince, Rentschler or Steinbach vote on the proposition, although they participated in the discussions. Printing difficulties and the press of time made it impossible to have the notice of the proposed merger in the mails in time for the annual stockholders' meeting on May 6, 1965 and accordingly, the matter was not there discussed. Because of the institution of this suit on May 13, 1965, a special meeting of the directors was held in Philadelphia on May 19, 1965 to which were invited the named plaintiff and his counsel. Evans presented reasons to the board why he thought the merger was unfair to stockholders, and after reviewing his proposals, the directors ratified their previous action, but not before Prince, Rentschler and Steinbach left the meeting.
On May 25, 1965, the present motion for preliminary injunction was filed to enjoin the stockholders' meeting scheduled for June 10, 1965. Testimony began on June 1 and continued through June 4, 1965. In the complaint and motion the plaintiff charges, in broad outline, conflict of interest, violations of the Securities and Exchange Commission's regulations regarding the proxy statement, breach of corporate fiduciary duty, and fraud. In addition, there is a charge of over-all unfairness to individual stockholders in the exchange and that unless enjoined, irreparable harm will be suffered by plaintiff and the individual stockholders. All of these charges can be grouped under two broad headings: false and misleading statements in the BLH proxy solicitation and the questions of the fairness of the BLH board of directors. They will be discussed in this fashion.
The plaintiff complains of false and misleading statements and omissions in the proxy statement sent to BLH shareholders on May 5, 1965 (Exhibit P-25). Rule 14a-9 of the Securities and Exchange Commission provides in part that no proxy solicitation shall be made containing any statement which under the circumstances is:
'* * * false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading * * *' (Emphasis added.)
They key to determining whether or not a violation of this regulation has been committed is the word 'material.' The word has been subjected to many definitions and much litigation, but in essence the statement or omission claimed to be misleading must amount to one that would influence the stockholder's vote. See 2 Loss, Securities Regulation 917-18 (1961).
Plaintiff contends that the failure to include in the proxy statement: the relation of Elmendorf with Wertheim & Co. as a limited partner, his management consulting relationship with Wertheim, and that he was a director of International Packers, Ltd., in which Armour had a substantial interest, constituted material omissions.
The uncontradicted testimony of Mr. Steinbach is quite clear on these points. At the suggestion of Mr. Steinbach whom he had known for many years, Mr. Elmendorf invested $ 100,000 in the firm of Wertheim & Co. for which he receives a fixed return of 5% On his investment. As a limited partner he receives absolutely no share in the profits and would continue to receive his return whether or not Wertheim was used and paid for its work on this merger. At no time was he consulted, nor did he appear with any of the Wertheim people when they were studying and analyzing proposals for the exchange. It was testified that he resides in ...