For affirmance -- Chief Justice Weintraub and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. For reversal -- None. The opinion of the Court was delivered by Jacobs, J.
The Chancery Division dismissed the plaintiff Brundage's complaint seeking to enjoin a proposed merger of defendant The New Jersey Zinc Company (Zinc), a New Jersey corporation, into Gulf & Western Industries, Inc. (G & W), a Michigan corporation. A notice of appeal to the Appellate Division was filed without any accompanying application for a stay and the merger was consummated. We certified the matter before argument in the Appellate Division.
Zinc had a 16-man board of directors composed of two equal factions. One group had been designated by Mr. Jacob Hain, an investment adviser who together with his associates owned or controlled a majority of the Zinc stock. The second group included Mr. R. L. McCann, president of Zinc and chairman of its executive committee, and other directors representing management. A conflict arose between McCann's group which wanted to use corporate funds for expansion and diversification and the Hain group which wanted to increase the corporation's investments in securities. The defendant Harold U. Zerbe, although a member of the Hain group, sided with the management group and the dispute came to a head in August 1965 when Zerbe voted to fill a board vacancy with a nominee of McCann rather than Hain. At this point Hain offered to buy Zerbe's 61,000 Zinc shares at $35 per share. In response to an inquiry from Zerbe, Hain indicated that he and his group might be willing to sell their block of about 2,200,000 Zinc shares at $35 per share if a buyer could be found.
On August 18 and following his conversation with Hain, Zerbe called on Mr. Charles G. Bluhdorn, chairman of the board of G & W. Zerbe was then a director of G & W as well as Zinc. His stockholdings in G & W were worth $670,000
whereas his stockholdings in Zinc were worth $2,300,000. After some discussion, Bluhdorn indicated that G & W might be interested in purchasing the Hain block of Zinc stock provided Zinc management would approve. Zerbe told McCann about this and McCann expressed interest. On August 26 a meeting was held between Bluhdorn and McCann, and on September 8 a further meeting was held. This latter meeting was attended by all of Zinc's non-Hain directors, many of Zinc's department heads, and several representatives of G & W. There was extensive questioning and satisfying responses with respect to G & W's attitudes towards expansion, research, diversification, sales, employee relations and other matters of management interest.
During the period of these meetings, G & W was also in the process of negotiating with the Hain group for the purchase of its block of Zinc stock. Zerbe was the intermediary in the negotiations. After his conversation with Bluhdorn, he told Hain about G & W's interest in purchasing the Zinc stock at $35 per share and Hain told him that he would have to discuss the matter with Morris Shilensky, a member of the Hain group. Shilensky was on the board of directors of Zinc and was counsel to Bush Terminal Co. Hain was the major stockholder and chairman of the board of Bush Terminal which owned 758,000 shares of Zinc stock. Shilensky told Zerbe that the $35 price was too low and that the Bush people would not sell under $40 per share. After further negotiations, G & W expressed its willingness to pay $40 per share and on September 10, G & W entered into an agreement with Bush Terminal for the purchase of its 758,000 Zinc shares at $40 per share. The closing price of Zinc stock on that date on the New York Stock Exchange was $38.50 per share. The agreement provided that Bush would furnish a list of other stockholders whose shares might be available and that five Hain directors would resign. From September 17 until early in October, G & W acquired pursuant to the agreement, 2,084,306 shares of stock which represented 57.5% of Zinc's capital stock. G & W financed its purchases of the
Zinc stock by borrowing $83,372,240 from the Chase Manhattan Bank on a demand note.
Shortly after G & W agreed to purchase the Zinc stock it issued a press release announcing the agreement and stating that an offer for an exchange of stock would subsequently be submitted for the approval of the directors of G & W and Zinc "leading to an amalgamation of the two companies." On September 16 there was a meeting between representatives of G & W and Zinc and at that meeting McCann is said by Zerbe to have insisted that on merger the minority stockholders of Zinc should receive somewhat more than the $40 per share paid to the Hain group. In August, G & W had consulted Kidder, Peabody & Co., Incorporated, a well-known investment banking concern, and had asked it to submit a proposal which would be fair and equitable to Zinc minority stockholders and would result in their receiving a security worth at least $40 for each Zinc share. Kidder, Peabody proposed a new series B cumulative convertible preferred stock with a $3.50 annual dividend redeemable after 5 years. The exchange ratio contemplated that Zinc shareholders would receive .4125 of the convertible preferred for each share of Zinc common stock. The ratio by which the G & W preferred could be converted into common would be based on 112.5% of the price of the common at the time the conversion rate was established.
On September 29 there were lengthy meetings of Zinc's executive committee and board of directors. Kidder, Peabody representatives explained their proposal and supported their view that it was fair and equitable to Zinc minority shareholders. McCann objected to the .4125 exchange ratio and suggested that it be raised to .430. After discussion with Bluhdorn and over objection voiced by the treasurer of G & W, the ratio was fixed at .425. Zerbe and Mr. Ellison, a member of Zinc's board and a partner in the law firm of Covington & Burling, had strongly supported McCann in obtaining the increased exchange ratio.
At the board meeting on September 29, five of the Hain directors resigned and Bluhdorn along with two other G & W representatives was elected to the Zinc board. Mr. Passino, the head of Zinc's research department, was also elected to the board and the fifth vacancy remained unfilled. Zerbe states that McCann turned down Bluhdorn's request that the fourth directorship be filled by another G & W representative rather than Passino. At this point, G & W had three members on the board not including Zerbe who was on both boards. A resolution adopted by the Zinc board on September 29 approved the basic terms of the proposed merger of Zinc into G & W and directed that the Zinc officers prepare the necessary documents, subject to final approval by the Zinc board prior to submission of the merger for vote by the stockholders.
At the September 29 meeting Ellison had also objected to the Kidder, Peabody formula insofar as it provided that the privilege of converting the preferred stock into G & W common would be based on a percentage of the average price, without any ceiling, during the two-week period following the mailing of the proxy statement. He was concerned that a sharp rise in G & W common after the mailing of the proxy would significantly reduce the number of shares to the Zinc minority on conversion and he suggested that a ceiling be incorporated in the formula. He was supported on this by McCann and Zerbe, and several days after the September 29 meeting, McCann and Bluhdorn agreed on a modification which provided for an $80 ceiling and a $65 floor on G & W common stock for purposes of the conversion. Although the $65 floor protected G & W in the event of a sharp decline in its common stock, it was anticipated that the G & W common would go up sharply rather than decline. This ultimately proved to be the case for the average price during the two-week period following the mailing of the proxy was $92.72 per G & W common share and the modification which resulted in the inclusion of the $80 ceiling is said thus to have entailed an $18 million dollar benefit to the Zinc minority.
At a meeting of the Zinc board on October 29, the change in the formula which incorporated the $80 ceiling and the $65 floor was approved. At the same time communications from White, Weld & Co., a prominent investment banking firm, and Standard Research Consultants, Inc., a well-known management engineering and consultant firm, were presented to the board. These firms had earlier been consulted because the directors of Zinc thought it advisable to have expert opinions by responsible financial concerns other than Kidder, Peabody. White, Weld stated that the new preferred stock would probably have a market value between $95 and $100 a share and Standard Research expressed the view that the probable market value would be between $98 and $100 per share. A subsequent letter from White, Weld set forth its opinion, based on its study of the two companies, that the exchange of securities in the proposed merger was fair and equitable to the Zinc minority stockholders. At the October 29 meeting the Zinc board voted to recommend the proposed merger to the stockholders on the basis of a legal opinion from Covington & Burling that the exchange and conversion of the company's common stock would be a tax-free transaction; apparently it was decided not to await a formal ruling from the Internal Revenue Service because of the fear of extensive delay.
On November 24, a further meeting of the Zinc board was held. It was attended by all of the directors, except one who was excused, and by several other persons including two members of Covington & Burling and Zinc's comptroller and counsel. A proposed amendment of Zinc's certificate of incorporation was adopted as was a proposed form of agreement of merger with G & W and a proposed notice of stockholders' meeting and proxy statement. The amendment of the certificate of incorporation was designed to broaden Zinc's corporate objects so as to conform with those of G & W. The approval of the agreement of merger in the form submitted was subject to such changes and modifications not materially affecting its substance as might be deemed advisable by counsel
and approved by the directors executing the agreement. The officers of the company were directed to file the notice of stockholders' meeting and proxy statement with the Securities and Exchange Commission and to make such changes as might be requested by the Commission or might be deemed advisable by counsel.
On or about November 30, 1965 the agreement of merger was signed by the companies. Thereafter G & W made arrangements for the refinancing of its demand loan from the Chase Manhattan Bank; a group of institutional investors agreed to purchase G & W's long term notes in the sum of $100,000,000 provided the merger was consummated by April 1, 1966. Under date of December 27 McCann addressed a letter to Zinc stockholders notifying them that a special meeting would be held on January 26, 1966 to consider and take action upon the proposed merger with G & W. Accompanying the letter were a notice of the meeting, a proxy statement, the proposed amendment to Zinc's certificate of incorporation, and a form of proxy. The proxy statement had been submitted to the Securities and Exchange Commission and changes suggested by its representatives had been incorporated.
Pursuant to the agreement Zinc was to be merged into G & W as the surviving corporation. Each share of Zinc stock, except those owned by G & W which were to be cancelled, was to be exchanged for .425 shares of a new series B preferred stock of the surviving corporation. Each of the new preferred shares was to be entitled to a $3.50 cumulative annual dividend and upon liquidation would be entitled to a preference of $100 plus accumulated dividends. The preferred shares would not be subject to redemption for 5 years but thereafter each could be redeemed at $100 plus accumulated dividends. Each preferred share, at the option of the holder, could be converted at any time into G & W common. In his letter of December 27, McCann advised that each share of preferred would be convertible into G & W common at the rate of not less than 1.25 nor more than 1.538, depending
on the average market price of G & W common during the two-week period following the mailing of the proxy. On January 11, 1966 he advised the Zinc stockholders that the average market price for that period was $92.72 and that the exact rate of conversion was 1.25 shares of G & W common for each preferred share.
On January 14, 1966 the plaintiff Brundage, a Zinc stockholder, filed his complaint seeking to enjoin the proposed merger of Zinc into G & W. He alleged that unanimous consent of the stockholders of Zinc was required, that the proposed amendment of Zinc's certificate of incorporation was improper, that the proposed merger would deprive him of his contractual and property rights and impair the value of his investment, and that it constitutes "an inequitable, unlawful and unconscionable scheme of the defendant G & W as majority stockholder of Zinc to appropriate the rights and property of plaintiff as a minority stockholder." On January 22, 1966, Eileen H. Carr, a Zinc stockholder, was permitted to intervene as a plaintiff and thereafter she rested entirely on the plaintiff Brundage's showing. The trial court permitted the January 26 meeting to proceed but enjoined any additional steps towards consummation of the merger, pending its further order.
At the January 26 meeting a vote was first taken on the amendment of Zinc's certificate of incorporation. The amendment was approved and the meeting was adjourned until the amended certificate was filed with the Secretary of State of New Jersey. The meeting was then resumed and a vote was taken on the merger agreement. The eligible shares totaled 3,636,350; the total vote was 3,317,143 of which 3,208,785 voted for and 108,358 against the merger. Excluding the 2,084,306 shares owned by G & W, 1,232,837 shares voted; of these non-G & W shares 1,124,479 (91.2%) voted in favor and 108,358 (8.8%) against the merger.
In February 1966 a five-day trial was held before Judge Waugh who at its close rendered a full opinion dismissing the complaint. He made various legal and factual determinations
adverse to the position of the plaintiff Brundage. He held that a two-thirds vote of Zinc stockholders was sufficient (see R.S. 14:12-3) under our present merger statute which he determined to be validly applicable to Zinc though it was incorporated in 1880 when no comparable merger statute was in effect. He also determined that there was nothing improper in amending Zinc's certificate to enlarge its corporate objects for the purpose of satisfying the merger requirements of R.S. 14:12-1. He saw nothing materially false or misleading in the proxy statement, particularly in the light of its alteration to meet suggestions from the representatives of the Securities and Exchange Commission, and the fact that it contained all the information on which the plaintiff Brundage's presentation was based.
Judge Waugh determined that the proposed merger was not unlawful, inequitable or unconscionable as charged by the plaintiff Brundage and found explicitly that the Zinc minority stockholders were being treated fairly. He concluded his opinion with the following recapitulation of the reasons supporting his factual findings and his judgment in favor of the defendants:
"(a) The purchase of control at $40 per share was an arm's length transaction; (b) the merger procedures were regular and the Zinc board acted in good faith as reasonable men. They acted in good faith on the advice of qualified financial advisors; (c) Zinc minority stockholders are treated fairly no matter which stock they choose to accept -- preferred or common; (d) All conflicts of interest were fully disclosed to the stockholders prior to the merger vote; (e) The proxy statement was not false or misleading; (f) The right of appraisal in accordance with statute is available to dissenters; (g) The price being paid for the stock supports the expert opinion of market value of stock given Zinc minority."
The Chancery Division's dismissal of the complaint was on February 23, 1966. On the same day a notice of appeal to the Appellate Division was filed but was not accompanied by any application for a stay. On February 25, the merger was consummated. G & W as the ...