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UNITED STATES v. R. J. REYNOLDS TOBACCO CO.

June 22, 1976

United States of America,
v.
R. J. Reynolds Tobacco Co., RJI Corp., Sea-Land Service, Inc., Walter Kidde & Co., Inc., and United States Lines, Inc.


Biunno, District Judge.


The opinion of the court was delivered by: BIUNNO

Transcript of Proceedings

This is a civil action by the United States which mainly calls upon the Court to exercise its authorization to enter a declaratory judgment as to the rights and legal relations of the parties in respect to two contracts claimed to violate the antitrust laws. See 28 U.S.C. Sec. 2201. Aside from the declaratory remedy, the United States also seeks the equitable remedies of injunction and rescission. See 28 U.S.C. Sec. 2202.

 The particular contracts involved are two: a contract for the acquisition by merger of U.S. Lines (the Merger Agreement); and a contract guaranteeing the seller the merger purchase price, plus interest, after sale of U.S. Lines to someone else if the Merger Agreement be frustrated (the Supplemental Agreement).

 A brief review of the history is essential at the start in order to provide context for an understanding of the contracts and of the issues in dispute.

 At some time in the past, United States Lines, Inc. (U.S. Lines), was a separate company operating both passenger and cargo vessels in ocean and coastal trade. In the international competition between England, France, Italy, Germany and the United States (with vessels like the Mauretania, the Bremen, the Normandie, the Queen Mary, the Andrea Doria and others), it was the flagship of this company, the United States, which attained the highest speed (35.59 knots) in 1952 on a crossing from New York to Bishop's Rock. See "Lincoln Library of Essential Information," Frontier Press, Columbus, Ohio 34th Ed., 1971, at p. 1212. The coming of the international air services a short time later soon tolled the knell for most ocean passenger service, and U.S. Lines became a cargo carrier. At some time in the 1960's it was acquired by Walter Kidde & Company (Kidde) during its conglomerate formation years.

 Sea-Land Service, Inc. (Sea-Land) was a cargo carrier that was a subsidiary of McLean Industries, Inc., a trucking company, which pioneered the concept of handling cargo in containers suitable for transport on trucks or by rail as well as by ship. This concept was an evolution of an earlier one, conceived by Seatrain, of putting whole railroad cars on ships. At some time in the 1960's, as part of its diversification program, R. J. Reynolds Tobacco Company (Reynolds) acquired McLean and its subsidiary, Sea-Land.

 In 1969, Kidde management was disenchanted with the U.S. Lines acquisition. U.S. Lines had converted some traditional cargo ships into container ships, but had heavy commitments to construct more. It had leases for piers on the North River (New York) with rentals of millions of dollars a year but which were not suited to handle container ships. Kidde's first approach was to negotiate a charter agreement for the ships to Sea-Land. Under the charter, U.S. Lines would provide the ships, crews, maintenance and repair, and was to receive a fixed payment by the year for 20 years, thus establishing what was essentially a fixed, long-term investment structure.

 The charter agreement was filed for approval with the Federal Maritime Commission (FMC), under 46 U.S.C. Sec. 814 (Sec. 15 of the Shipping Act of 1916). But, before final action and consummation, the fast decaying economic conditions led Kidde to the conclusion that only a complete disposition of U.S. Lines would meet the parent's corporate needs.

 It will be remembered that late 1969 saw the first strong rise in interest rates in decades, and that the spring of 1970 saw the "credit crunch" and liquidity crisis, marked by the collapse of Penn-Central, the collapse of Rolls-Royce, the near collapse of Lockheed, and the brink of financial disaster for many otherwise long-established and successful enterprises. This history is not long behind us, but it is too easily submerged as an unpleasant experience not to be remembered.

 In any event, Kidde sought through traditional channels to find a buyer for U.S. Lines, but without result. There was a proposal from the president of U.S. Lines, who had owned a substantial interest before the Kidde acquisition, but it was largely to be paid out of future earnings, without providing the cash infusion that Kidde management felt it needed.

 At this point, Sea-Land and Reynolds learned of Kidde's desire to sell. Sea-Land itself was in a potentially precarious operating position because, as a pioneer in container shipping, it had gained a head start by assembling a fleet of World War II tankers which it had converted to carry containers. These ships were approaching the twilight of their useful life, and the availability of newer ships from U.S. Lines offered an opportunity to solve that problem readily.

 From the negotiations and legal drafting that followed, the Merger Agreement and the Supplemental Agreement were developed. They were signed on November 9, 1970, and the Department of Justice, Antitrust Division, was promptly informed of them, as was FMC.

 A reading of the Merger Agreement shows conclusively that it was drawn in reliance upon the existing law as then on the books. Although the Shipping Act had been in existence for some 54 years, the only judicial ruling on the point was Matson Navigation Co. v. FMC, 405 F.2d 796 (CA-9, 1968). There were also similar rulings by FMC, such as Agreement No. 8555, between Isbrandtsen S.S. Co., Inc., and American Export Lines, Inc., 7 FMC 125 (1962). That sole judicial ruling, as well as the FMC ruling, concluded that agreements for the merger of common carriers subject to the FMC chapter of Title 46 came within Sec. 15 of the Shipping Act of 1916 (46 U.S.C. Sec. 814) and upon their filing and approval by that agency, were immune from the antitrust laws.

 The Merger Agreement was drawn in this context, that is, as an executory contract not to take effect or be consummated unless and until it had been approved by FMC, as well as by the Interstate Commerce Commission (ICC) which has jurisdiction for coastwise (interstate) traffic, and the Federal Martime Administration (FMA), which has a voice in some aspects; but these agencies other than FMC had no function in respect to antitrust immunity; that function under the law as then known belonged to FMC alone.

 The charter agreement covered the 16 container ships (and supporting equipment) owned by U.S. Lines, but not the 14 conventional (breakbulk) ships already on charter to the Military Sealift Command.

 The Merger Agreement, on the other hand, necessarily covered all of the U.S. Lines ships and all its assets. It called for a merger of U.S. Lines with RJI Corporation, a wholly-owned subsidiary of Reynolds which was formed solely for the merger, and which was otherwise inactive. The purchase price for U.S. Lines (net of assets and liabilities) was $65 million, with interest at 8% per annum, and at 6% per annum on the accrued but unpaid 8% interest. These two rates result in a combined accrual of interest at the rate of some $5.5 million a year, or nearly $460,000 per month.

 The Merger Agreement provided a period of 5 years to consummate the closing; if the approvals required were not obtained or if consummation were precluded by order of a court of competent jurisdiction, the Merger Agreement died on November 9, 1975, and the Supplemental Agreement was activated by its own terms.

 The basic provisions of the Supplemental Agreement were that if the merger were frustrated U.S. Lines was to be sold to a third-party buyer. Kidde was assured of receiving the agreed price plus interest, regardless of the price realized on the third-party sale. If that price were less than the Reynolds price plus interest, Reynolds was obligated to make up the difference. If it were more, the excess went to Reynolds.

 Since U.S. Lines is not a fungible commodity with a ready market and ascertainable market price, contractual machinery was set up to accomplish the objects of the Supplemental Agreement. The first step was for Reynolds to designate an independent financial institution to handle the search for a buyer. This was to be done within 30 days, or not later than December 9, 1975. If the effort to find a buyer were not successful by November 9, 1976, then the institution was to arrange for disposition by one or more of several methods: (1) a public stock offering of the U.S. Lines stock; (2) a distribution of U.S. Lines stock pro rata to Reynolds shareholders; (3) a sale of U.S. Lines assets as on a liquidation, with the sale proceeds being first applied to its liabilities and the balance being the net price realized for the purpose of the Reynolds guarantee.

 If a buyer were found during the one-year period Reynolds was to have no standing to object except for one or the other (or both) of two reasons: (1) if the buyer's financial credit was such that Kidde required Reynolds to guarantee satisfaction of the payments (this could only arise if the purchase terms involved installment payments); and (2) if the sale price were below the fair value of U.S. Lines.

 If such a buyer were not found, then the selection of one of the three alternate methods of sale, or a combination of them, was left to the financial institution, subject to the qualification that the selection was not to be one that would be "materially disadvantageous" to Reynolds.

 The procedural history is worth recording. As noted above, the Matson case, supra, had ruled that a merger agreement came within FMC jurisdiction under 46 U.S.C. Sec. 814 and if approved was immune from the antitrust laws. Although no review by the Supreme Court was sought or obtained, the United States did not acquiesce in that decision. When informed of the making of the Merger and Supplemental Agreements, it filed its suit here on December 15, 1970.

 This, of course, it had the right to do since it is only the Supreme Court of the United States that can speak with authority to assure uniformity of federal law among the several circuits and districts. *fn1" Since the issue of jurisdiction of FMC over mergers had not been dealt with by that Court, and since there was no decision on the subject in the Third Circuit, the United States was free to argue a position contrary to the ruling in Matson, supra. And, at the trial level, Judge Garth was free to follow or reject that ruling.

 Contrary to Matson, Judge Garth ruled that FMC jurisdiction under the statute did not extend to a one-time merger or acquisition without "on-going" operations for FMC to regulate, and that this court possessed jurisdiction to rule on the antitrust challenges to both the Merger and Supplemental Agreements. United States v. R. J. Reynolds, etc., 325 F. Supp. 656 (D.N.J. 1971), cert. den., 410 U.S. 964, 93 S. Ct. 1434, 35 L. Ed. 2d 706 (1973).

 The issue was presented on a motion by FMC for dismissal of the complaint, or for stay of the action pending completion of the FMC hearing then in progress. The conflict about jurisdiction, then, arose directly between FMC, an agency of the United States and the Antitrust Division of the Department of Justice, another agency of the United States. Both the motion to dismiss and the motion to stay were denied by Judge Garth, as shown by his reported opinion, which dealt with the Merger Agreement and mentioned the Supplemental Agreement only in his recital of the factual history.

 A petition for the extraordinary writ of certiorari, to review Judge Garth's decision of April 7, 1971, was filed in the Supreme Court, but was not acted on until March 5, 1973, when it was denied. R. J. Reynolds Tobacco Co. v. United States (October ...


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