The opinion of the court was delivered by: BRODERICK
The above captioned cases are two related securities actions which arise from an unusual set of factual circumstances and which present some rather novel legal issues. The amended complaint in the Enterra case (Civil Action No. 84-2174) alleges, inter alia, that the defendant partnership SGS Associates and its individual partners (herein collectively referred to as SGS), which is Enterra Corporation's largest shareholder, violated various federal and state securities laws in connection with the defendants' negotiation, execution, and subsequent alleged violation of a "standstill agreement" with Enterra's Board of Directors ("the Board"). The standstill agreement provided, inter alia, that SGS would not purchase or acquire more than 15% of Enterra's outstanding shares and would not make any tender offers to Enterra's shareholders for the purchase of Enterra stock. Enterra's complaint also includes causes of action against SGS for fraud, breach of contract, and the currently popular allegation of a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. Enterra seeks, inter alia, permanent injunctive relief prohibiting SGS from acquiring or offering to acquire any shares of Enterra stock in violation of the standstill agreement.
(1) Enjoining the Board to consider the adequacy of any proposal made by defendants to purchase shares of Enterra;
(2) Enjoining the Board, within ten (10) business days after receipt of a proposal, to disclose in writing to defendants its recommendation regarding the proposal and all of the reasons therefor;
(3) Enjoining the Board, within ten (10) business days after receipt of a proposal and if the Board recommends against acceptance of the proposal, to disclose in writing to defendants all of the reasons for such recommendation, including, without limitation, its view of the adequacy of the proposal from a financial standpoint; and
(4) Enjoining the Board, within ten (10) business days after receipt of a proposal and if the Board recommends against acceptance of the proposal, to disclose in writing to each shareholder of record the fact and terms of the proposal and its recommendation, and to allow each shareholder to decide whether to accept or reject the offer.
In support of its motion for a mandatory preliminary injunction, SGS contends that there exists a common law fiduciary duty owed by the Board to the shareholders which, notwithstanding the standstill agreement, requires the Board to (1) consider the adequacy of any SGS offer to purchase Enterra shares; (2) disclose to shareholders the facts and terms of the offer along with the Board's analysis and decision; and (3) convey the offer to the shareholders and permit the shareholders to accept or reject the SGS offer.
Subsequent to the filing of SGS' counterclaims and motion for preliminary injunction, the plaintiff in Wallen v. Ballengee (Civil Action No. 84-4050) filed a shareholders' derivative action against the directors of Enterra Corporation alleging, inter alia, that the Board breached its fiduciary duty to the corporation and shareholders by entering into the standstill agreement which restricted SGS' ability to purchase Enterra stock. Wallen also has moved for a preliminary injunction seeking relief identical to the relief sought by SGS in its motion. Wallen's motion is grounded upon the same legal propositions advanced by SGS. A consolidated argument on the motions for a preliminary injunction was held before this Court, and generally was directed to whether or not the parties seeking the injunctive relief against the Board had any reasonable probability of succeeding on the merits of the legal propositions underpinning the requested relief. Indeed, at oral argument, counsel for SGS characterized the issues presented by the motions as purely issues of law, in the nature of "summary judgment on admitted facts." (Tr. of Oral Argument at 30, 61). For the reasons which follow, this Court has determined that the motions filed by SGS and Wallen seeking a mandatory preliminary injunction against Enterra's Board of Directors must be denied.
The essential facts with respect to the issues presented are not, for the purposes of the motions for a preliminary injunction, seriously disputed. Enterra is a Pennsylvania corporation with its principal place of business in Radnor, Pennsylvania. Enterra's common stock is traded on the New York and Philadelphia stock exchanges. As of March 30, 1984, Enterra had approximately nine million shares of common stock outstanding held by approximately five thousand shareholders of record. Enterra's Board is composed of seven independent or outside directors and three management or inside directors, including its chairman and president, James Ballengee. The individual defendants in the Enterra case, Philip Sassower, James Goren, and Lawrence Schneider (who comprise the SGS Associates partnership) are investors with considerable experience in the field of corporate investment.
In the spring of 1982, Sassower and other members of SGS met with James Ballengee, Enterra's chairman. The SGS group indicated that its members had accumulated a significant amount (nearly 5%) of Enterra's common stock, and that they desired to purchase additional Enterra shares. Apparently, SGS' purchases had generated significant market interest in Enterra stock, including the anticipation of a possible takeover bid, and the price of Enterra's common stock had increased. This rise in market price, of course, made it more expensive for SGS to acquire additional Enterra shares. At the time of the initial meeting with Ballengee, SGS did not indicate any desire to acquire control of Enterra, but rather expressed an interest in acquiring additional Enterra shares for investment purposes.
Subsequent to this meeting, the parties entered into negotiations which led to the execution of a Standstill Agreement (the Agreement) between Enterra and SGS on November 30, 1982. The Agreement was finalized only after considerable negotiation by counsel representing both parties, and after the preparation and revision of several draft agreements. The Agreement is thirty-four pages in length and provides that it shall remain in effect until November 30, 1992, subject to the occurrence of certain contingencies not applicable here. The provisions of the Agreement pertinent to the issues presently before the Court provide that, subject to certain exceptions not applicable here, SGS will not increase its holdings of Enterra voting securities to more than 15% of those outstanding; that SGS will not acquire or offer to acquire any Enterra voting securities by means of a tender offer; that SGS will not publicly suggest or announce its willingness or desire to make or have another party make such a tender offer; that SGS will not assist or participate in such an offer made by any other party, and that SGS will not recommend that any other party commence a tender offer for Enterra voting securities.
The terms of the Agreement were disclosed by Enterra in a press release issued in December of 1982, and in Enterra's 1983 and 1984 proxy statements mailed to shareholders. By February of 1983, SGS had acquired 5% of Enterra's outstanding shares, and filed a Schedule 13D with the Securities and Exchange Commission as required by 17 C.F.R. § 240.13d-1. Attached to the Schedule 13D was a copy of the standstill Agreement. The Schedule 13D stated that the Enterra shares had been acquired for the purpose of investment, and that it was the intention of SGS, subject to the terms of the Agreement, to acquire additional shares of Enterra stock. SGS filed several amendments to its Schedule 13D in 1983 and 1984, reflecting increases in its acquisitions of Enterra shares.
Towards the latter part of 1983, SGS requested Enterra's Board to amend the Agreement in some respects, notably to permit SGS to acquire greater than 15% of the outstanding shares as set forth in the Agreement. The Board declined to amend the Agreement. At this time, the market price of Enterra's shares was declining and relations between SGS and the Board deteriorated thereafter.
In February of 1984, SGS filed an amendment to its Schedule 13D which stated, inter alia, that it "had decided to explore other alternatives that may be available." At that time, Enterra's shares were trading at approximately $16 per share. On May 1, 1984, members of the SGS group met with Enterra's chairman and requested that the Agreement be amended to permit acquisition of Enterra shares above the 15% limit, and to permit greater participation by SGS in Enterra's management. When Enterra's chairman stated that the Board's position on amending the Agreement was not favorable, SGS presented him with a letter dated May 1, 1984 which stated, inter alia :
The SGS Group, with the approval of the Enterra Corporation, hereby offers to acquire for cash any and all outstanding shares of Enterra at a price of $21 per share. This offer is subject to the approval of the Board of Enterra . . . and execution of an agreement incorporating terms and conditions that would be mutually satisfactory to the SGS Group and Enterra.
The letter requested a response by May 9, 1984. On May 3, 1984, five independent and three management directors of Enterra's Board participated in a meeting and considered the SGS proposal. The Board considered the proposal and declined to approve the offer or to amend the Agreement. That afternoon, after counsel for SGS was informed of the Board's decision, SGS filed an amendment to its Schedule 13D which included a copy of the May 1, 1984 letter offering to acquire all of Enterra's shares. There was an immediate disruption in the trading market for Enterra stock, causing the New York Stock Exchange to halt trading of Enterra shares that day and causing a delay in the opening of trading the following day. On May 4, 1984, Enterra filed the present action against SGS. On May 10, 1984, the entire Board of Enterra met at its regularly scheduled meeting, together with counsel and Enterra's financial advisor, Merrill Lynch. The proposal submitted by SGS again was considered and discussed. Merrill Lynch advised the Board that the $21 per share price offered by SGS was inadequate from a financial point of view. The Board determined that it was not in the best interests of the corporation or the shareholders to accept the SGS proposal at that time or to amend the Agreement.
Currently, SGS owns close to 15% of Enterra's outstanding shares. It is undisputed that if SGS made an offer to purchase all of Enterra's shares directly to Enterra's shareholders, SGS would be in violation of the Agreement. Absent the Agreement, of course, SGS would be free (as is any other party) to make a tender offer for all of Enterra's shares. As of this date, SGS has not made any such offer directly to Enterra's shareholders, presumably because it seeks to avoid the risk of incurring liability for breach of the Agreement. SGS and Wallen now contend, however, that there exists a fiduciary duty on the part of the Board, notwithstanding the Agreement negotiated by SGS, to consider the adequacy of any SGS offer; to relay the terms of the offer and the Board's decision to all shareholders; and most important, to actually convey the offer to the shareholders and provide the means by which any shareholder can accept the offer and sell his or her stock to SGS. SGS and Wallen ask this Court to order the Board to do, on behalf of SGS, that which SGS contractually obligated itself not to do -- that is, to make a tender offer for the purchase of all Enterra stock. In effect, granting the preliminary injunction would enable SGS to ...