The opinion of the court was delivered by: KELLY
This is an individual and derivative action brought by plaintiff Ronald Baron and two companies which he controls, Baron Capital, Inc. ("BCI") and Berry Acquisition Co. ("Berry")
in connection with Baron's attempt to acquire control of defendant Strawbridge & Clothier ("the Company"), a publicly held corporation. The defendants are the company and all twelve members of its Board of Directors. The suit seeks, inter alia, to enjoin certain actions to be taken at the annual meeting of the Company's shareholders and to recover damages which are claimed to exceed tens of millions of dollars. The plaintiffs' claims are brought under Sections 10(b), 13(d), 14(a) and 14(e) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78m(d), 78n(a) and 78n(e) and the rules and regulations promulgated thereunder by the Securities and Exchange Commission; under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.; and under Pennsylvania statutory and common law.
The defendants vigorously contest the plaintiffs' characterization of the Company's management as entrenched or abusive. The defendants also move to dismiss the derivative claims in this action on the basis that Baron cannot fairly and adequately represent the shareholders, as required by Fed. R. Civ. P. 23.1, because his interests are antagonistic to the interest of his fellow Strawbridge & Clothier shareholders.
Following an expedited period of discovery and a four day hearing, and for the reasons set forth in the following memorandum, the plaintiffs' derivative claims will be dismissed for want of fair and adequate representation and the plaintiffs' request for preliminary injunctive relief will be denied for want of a showing of irreparable harm or probability of success on the merits.
FACTUAL BACKGROUND AND FINDINGS
Defendant Strawbridge & Clothier is a corporation organized under the laws of Pennsylvania with its principal place of business at Philadelphia, Pennsylvania. Although Strawbridge & Clothier's shares have been publicly held since the 1930's, approximately 40% of its stock continues to be owned directly or beneficially by descendants of the two founders, Justus C. Strawbridge and Isaac H. Clothier. Five members of the third and fourth generations of the Strawbridge family are engaged full-time in the management of the Company, and other Strawbridge descendants, as well as one Clothier descendant, serve as directors. The Company's Board of Directors ("board") is composed of twelve individuals, (the individual defendants in this action) eleven of whom are the company's current or former senior officers or their relatives.
In the last decade, many retail chains have been acquired by national or international chains or conglomerates. Strawbridge & Clothier has avoided this trend. The Company's management ("management") and its board view this independence to be a predominant factor in the company's success. Each manager and director who testified in this matter emphasized that in his or her view, the company's independence is its most highly prized asset. Two reasons were repeatedly articulated for supporting this conclusion: that the influence of continuous, local family management (1) fosters a unique relationship, based on loyalty and dedication, between the company's employees and managers, and (2) makes it possible for the Company to plow earnings back into the business and opt for greater long term growth instead of smaller, more immediate short-term profits. An expert witness from the retail business, who is not associated with the Company, also testified to these benefits of local, independent management.
Plaintiff Ronald Baron, a resident and citizen of New York and plaintiff BCI, a New York corporation, have both owned common stock of Strawbridge & Clothier continuously for the past four years. Plaintiff Berry, a corporation organized under Delaware laws with its principal place of business at New York, was organized in 1986 for the purpose of making a tender offer for Strawbridge & Clothier's shares.
Management proposed to its shareholders that they approve various measures designed to discourage a hostile takeover. These measures (the "1984 proposals") included the elimination of cumulative voting; an increase in the percentage of shares necessary to call a special meeting of shareholders; the requirement of two-thirds shareholder approval of actions not proposed by a majority of the board; and a requirement that candidates for election to the board be nominated at least 45 days prior to a meeting of shareholders. The "anti-takeover" purpose of these proposals was disclosed in the 1984 proxy materials. Management had been planning these proposals for some time, but accelerated their presentation in direct response to the threat presented by Baron's activities; this, too, was fully disclosed in the proxy materials. All of the antitakeover proposals were approved by the shareholders at a special meeting held on April 10, 1984.
Thereafter, Baron made other overtures, culminating in Berry's April 21, 1986 tender offer (the "tender offer"). The tender offer has a two-tiered structure: it proposes to buy two-thirds of the Company's outstanding common stock at a price of $60 per share and total purchase price of $276.25 million; if successful, the purchasers plan to then buy out the remaining shareholders for cash, or for debt securities of unspecified terms.
Management reviewed the tender offer, and solicited the advice of two firms of independent investment bankers, Drexel Burnham Lambert Incorporated ("Drexel") and Kidder Peabody & Co., Incorporated ("Kidder Peabody"). Both firms opined that the tender offer price was financially inadequate for the Company's shareholders. For that reason and others, including expert advice that the two-tiered offer, by its structure, constitutes a coercive choice for shareholders, the Company decided to oppose the offer, and so advised the shareholders. Also in response to the tender offer, holders of 47.9% of the Company's common stock agreed among themselves not to sell their stock through October 31, 1986 ("the agreement"). An appropriate filing of this agreement was made with the Securities and Exchange Commission on Schedule 13D.
In the Company's current proxy materials, distributed May 12, 1986 for a scheduled June 11, 1986 annual meeting of shareholders, management proposes a reclassification of stock which is, like the 1984 proposals, designed to discourage hostile takeovers. The number of shares would be doubled and reclassified into two series: Series A with one vote per stock, and Series B with ten votes per stock. The one vote stock would be entitled to dividends at least 10% higher than the ten vote stock. There would be no restriction on the transfer of the one vote stock. The ten vote stock may not be transferred except to a "permitted transferee": (a) any lineal descendant of a great grandparent of the holder of the ten vote stock, including adopted children, and any spouse of such lineal descendent; (b) a trust principally for the benefit of the holder's lineal descendants; (c) the holder's spouse; (d) the estate of such holder; (e) a co-owner, and (f) in the case of shareholder corporations or partnerships, their beneficial owners at the effective date of the reclassification. The ten vote stock is convertible into one vote stock; the one vote stock may not be converted into ten vote stock. The ten vote stock will not constitute over-the-counter margin stock, and thus, such shares will not be assigned any value in a margin account maintained with a broker-dealer. The proxy materials plainly disclose that the purpose of the reclassification plan is "to further strengthen our defenses against hostile takeover threats from outside sources". Testimony revealed similar plans have been proposed and put into effect in other corporations.