16 Tomczak vs. Morton Thiokol, Inc.
Meanwhile, Morton learned that a specialty chemical business, Bee
No. 7861 Court of Chancery of State of Delaware | Hartnett | Lopez, A.
Topic: Fiduciary Duties of Officials [super long case again…]
Doctrine: The presumption under the business judgment rule attaches only
to the decisions of directors who are fully independent and wholly
disinterested. When the business judgment rule applies, it insulates directors
from liability, and imposes upon the party challenging the decision the burden
of rebutting the presumption. A hallmark of the business judgment rule is that
a court will not substitute its judgment for that of the board if the latter's
decision can be 'attributed to any rational business purpose.”
Facts:
1. Morton Thiokol (Morton) operates four major business segments:
Aerospace, Specialty Chemicals, Salt and Texize Household
Products (Texize). Texize marketed a number of household cleaners
and insecticides.
2. Morton had two inside directors: Mr. Locke (Chairman and CEO) and
Mr. Hyndman (President and COO). The other ten Morton directors
were outside and independent directors.
3. The inside directors became concerned with the future of Texize and
began considering the divesture of Texize, despite the fact that it was
still profiting. The outside directors shared the same concern.
4. Dow Chemical Company (Dow) expressed its interest in acquiring
Texize, but Morton refused to negotiate such acquisition. A few years
later, Dow began to make market purchases of Morton’s common
stock, amounting to 5.9% of Morton’s common stock, which Dow
stated was for the purpose of mere “investment”.
5. Believing that it was not for investment but was a creeping tender
offer which would allow Dow to acquire Morton without paying any
premium to Morton’s stockholders, Mr. Locke and the Morton
management spoke with its corporate lawyers, Wachtell Lipton and
Goldman Sachs for the discussion of possible options. Mr. Locke met
with Dow’s chairman, Mr. Oreffice.
6. Mr. Locke also met with the Board of Directors to discuss the
possible creeping tender offer of Dow. The Board of Directors did not
adopt any defensive measures since they allegedly remained open
to the possibility of takeover at a fair price.
7. Goldman Sachs, upon an extensive study, concluded that the range
for sale price of Texize to a third party was $225-250 Million, based
on historical financial information, comparison of market price
performance, market value and price earnings rations of stocks.
8.
Chemical, was for sale and they wanted to acquire it.
9. During a stockholder meeting, Morton approved the increase of
number of authorized shares from 32M to 200M shares. Morton said
that this was not an anti-takeover device, but a way to allow more
people to buy Morton’s stock.
10. Dow subsequently purchased additional Morton shares, which brings
its total to 8.23% Morton shares. All the while, Morton’s Board still
discussed the possibility of a creeping tender offer.
11. Goldman Sachs recommended the sale of Texize to Dow, since such
sale would divest Texize and at the same time, remove the threat of
a possible creeping tender offer. Such proposal was offered to
Morgan Stanley, the financial adviser of Dow.
12. Dow, upon recommendation of Morgan Stanley, entered into an
agreement with Morton, where Dow will purchase Texize in
exchange for 1.4M Morton shares and $131Million in cash. The
parties also entered into a standstill agreement, where it was
stipulated that Dow will refrain to purchase Morton stocks for 10
years.
13. The Morton Board approved the Sale Agreement between Dow and
Morton. On the day that the transaction was closed, Morton acquired
Bee Chemical for $77Million.
14. Plaintiffs, as Morton stockholders, filed a complaint, challenging the
sale of Texize to Dow. They prayed for a preliminary injunction to
hold the sale, but was denied. Plaintiffs also alleged that the decision
of the Morton Board is not protected by the business judgment rule.
15. Morton filed a Motion to Dismiss but was denied. Hence, Morton
moved for summary judgment, contending that the presumptions of
the business judgment rule shile from further judicial scrutiny the
decision of Morton’s directors to sell Texize.
16. Plaintiff, however, contends that Morton directors must first meet the
two-step “enhanced duty” according to Unocal Corp. vs. Mesa
Petroleum. Plaintiffs also argued that the Morton directors were not
in good faith and were not disinterested. Also, plaintiffs argued that
the Morton Board failed to exercise their business judgment on an
informed basis.
17. Morton countered that the Unocal case does not apply as they were
not implementing a defensive measure, and that Dow’s market
purchases did not rise to the level of a takeover bid.
Preliminary Issue: W/N the Unocal case applies to the market purchases of
Dow
Held: Yes.
1. In Moran vs. Household Int’l, the Unocal standard was applied to the
adoption of a defensive mechanism (poison pill) which was put in
place “to ward off possible future advances and not as a mechanism
adopted in reaction to a specific threat. The Unocal standard applies
to any corporate board decision or action that is "reasonably
determined to be defensive”.
2. Dow made no specific takeover proposal to Morton, although Dow
had purchased approximately 8.23% of Morton’s outstanding stock
through market transactions. The sale of a single division, like
Texize, is clearly different from other defensive measures. From all
the facts and circumstances, however, it is clear that Morton sold
Texize to Dow, at least in part, to remove Dow as a possible
takeover threat. Hence, the Unocal standard apply.
Main Issue 1: W/N the acts of the directors satisfied the Unocal standard
Held: Yes!
1. First, the Morton Board must show that it had "reasonable grounds
for believing there was a danger to corporate policy and
effectiveness" from Dow. The Morton Board can satisfy this prong by
"showing good faith and reasonable investigation." Here, the vote by
all outside directors present, coupled with the advice rendered by the
investment banker (Goldman Sachs) and legal counsel (Wachtell
Lipton), constitute a prima facie showing of good faith and
reasonable investigation. With 8 of the 10 Morton directors who
approved the sale of Texize to Dow being independent, the plaintiffs
bear "a heavy burden of overcoming the presumptions thus attaching
to the board's decisions."
2. The second prong of the Unocal standard requires the Morton
Thiokol directors to establish that their action was "reasonable in
relation to the threat posed." Here, the threat perceived by the
Morton Board was the possibility of a creeping tender offer by Dow
which would avoid or minimize the payment of any premium to the
stockholders of Morton. Removing this threat by profitably divesting
Texize was reasonable for several reasons.
a. First, unlike many defensive actions, the sale of Texize to
Dow did not have a direct negative impact on the value of
Morton since the price received by Morton for Texize was
within the range of values placed on Texize by Goldman
Sachs, and essentially no premium was paid by Morton for
the stock it repurchased from Dow.
b. Second, Morton's management had informally considered
the possible divestiture of Texize since Morton's
restructuring in 1982. When Dow entered the picture,
however, it presented Morton Thiokol with a good
opportunity to divest Texize at a fair price, while at the same
time removing a takeover threat. The sale of Texize also
gave Morton the opportunity to use some of the cash
received in the sale of Texize to purchase Bee Chemical
Co., whose specialty chemical business was a better
"strategic fit" with Morton’s other divisions than was Texize's
household products business.
3. The Morton directors have, therefore, met their burden of showing
compliance with the "enhanced duties" espoused in Unocal.
Consequently, Morton’s decision to sell Texize to Dow is protected
from further judicial scrutiny by the presumption of propriety afforded
by the business judgment rule.
Main Issue 2: W/N the Morton directors were not disinterested
Held: No, the Morton directors were disinterested.
1. In order to be disinterested, "directors can neither appear on both
sides of the transaction nor expect to derive any personal financial
benefit from it in the sense of self-dealing.
2. Here, the Morton Board was comprised of ten members, eight of
whom were outside directors. Only two inside directors sat on the
Morton Thiokol Board-Mr. Locke and Mr. Hyndman. There are no
facts indicating that they dominated or controlled the other eight
outside directors.
3. The plaintiffs have also failed to adduce any evidence showing that a
majority of the Morton directors were on both sides of the transaction
or expected to derive any personal financial benefit.
Main Issue 3: W/N the Morton Board failed to exercise their business
judgment in an informed basis
Held: No.
1. The standard for determining whether directors are liable for
breaching their duty of care to properly inform themselves is
"predicated on concepts of gross negligence”.
2. Here, plaintiffs have failed to adduce any facts to support their
allegations of gross negligence. It is upon the records that Mr. Locke
and the Board had several meetings as to the discussions regarding
the proposed sale of Texize. Each of the Morton directors received a
copy of the proposed agreement, and the discussion of the proposed
deal included presentations from Mr. Locke, Goldman Sachs and
Wachtell Lipton.
3. Morton Board had a solid background of information upon which to
consider the sale of Texize to Dow. The directors also knew for over
a year before the disputed transaction that the divestiture of Texize
was a possibility.
4. The plaintiffs, therefore, have failed to rebut the presumption of
propriety afforded by the business judgment rule, and consequently,
Morton Thiokol's decision to sell Texize to Dow is protected from
further judicial scrutiny.