The opinion of the court was delivered by: DEBEVOISE
Defendant and counterclaimant Weeks Petroleum Limited, seeks to enjoin preliminarily plaintiff, Asarco, Incorporated, a New Jersey corporation, and its directors from issuing Asarco Series C Preferred Stock declared as a dividend to common stockholders on April 7, 1985.
The pleadings and the procedural history of this case are described in my bench opinion of April 22, 1985. On April 29 a hearing was held on Weeks' application for an order preliminarily enjoining issuance of the Preferred Stock. After the hearing I reserved decision until May 1 at 3:30, and temporarily restrained the issuance of the Preferred Stock until then.
This opinion constitutes my findings of fact and conclusions of law.
Item 4 of Weeks' Schedule 13D stated that the "purpose of the acquisition . . . is for investment as part of the general investment portfolio" of Weeks and that Weeks "does not presently intend to seek to acquire control" of Asarco. Eight days after the initial Schedule 13D filing, another member of the Holmes A Court group, Bell Resources Limited, filed a Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 seeking approval for the purchase of up to 49.9 percent of Asarco's common stock stating that it was seeking to purchase at least 25 percent of Asarco's outstanding shares. A week later, on March 14, Weeks amended its Schedule 13D to state that it "intends to acquire additional [Asarco] shares" and that "such purchases could be made with a view toward acquiring control of [Asarco]." On April 7, 1985, the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 expired, permitting further purchases of Asarco's common stock by Weeks and other Holmes A Court entities.
Asarco has a 12 member board of directors. Three are members of Asarco management and nine are outside directors, each of whom is actively serving as an officer and/or director of one or more major business corporations. It was the Board's perception that, as characterized in Asarco's brief, "Holmes A Court is no stranger to takeover tactics, unfair to target company shareholders, having engaged in a number of 'creeping' acquisitions, 'greenmail' or low value bust up techniques on target companies to achieve a profit for himself at the expense of the target company and its remaining shareholders. By his own admission, Holmes A Court has been involved in an estimated 25 to 30 takeover attempts in recent years." Asarco brief at 7. The Board concluded that Holmes A Court was not a passive investor, that if his prior transactions are any guide, his plans for Asarco would probably not include an offer to all of Asarco shareholders, and that instead he would use his stock position to gain access to the Asarco assets for less than their fair value. The Board therefore further concluded that Holmes A Court represented a threat to the interest of Asarco stockholders and that steps should be taken to repel the threat.
On April 3rd, 1985, Asarco released a proxy statement asking its stockholders to adopt various proposed anti-takeover measures which would create a staggered Board, increase the authorized number of shares of common stock, prohibit stockholder action by written consent and require special approval for certain transactions or for a special meeting of stockholders.
At its March 14th meeting, the Board considered a possible Preferred Stock dividend as a means of preventing a Holmes A Court takeover. On Easter Sunday evening, April 7, the Board convened and further considered the issuance of a Preferred Stock having designated preferences and voting rights. The following day the Holmes A Court interests would again be free to acquire Asarco stock, the Hart-Scott-Rodino Antitrust Improvements Act waiting period having just expired. Faced with that situation, the Board unanimously approved the issuance of the Series C Preferred Stock. The purpose for issuing this stock, as Asarco's Chairman candidly testified, was to prevent Holmes A Court or anyone like him from acquiring a controlling position in Asarco.
The dividend to be issued to all common shareholders on April 30, 1985 was one-tenth of a share of Series C Preferred Stock for each share of common stock. Since there are approximately 31.1 million shares of Asarco common stock, Asarco proposed to issue 3.1 million shares of Series C Preferred. The terms of the Series C Preferred are set forth in Asarco's Certificate of Amendment of Restated Certificate of Incorporation filed by the Board. No further corporate authorization was deemed necessary.
According to the amendments adopted by the Board, each one-tenth of a share of Series C Preferred Stock would be entitled to a quarterly dividend of ten cents if any dividend is declared. This dividend has priority over common stock dividends. After both the Series C and the common stock dividends have been paid, each one-tenth of a share of Series C Preferred would participate equally with each full share of common stock in all additional dividends.
The Series C stock is entitled to a liquidation preference of $15 per one-tenth share or $150 per share. (This is nearly six times the current market value of Asarco's common stock). It also carries with it the right to purchase one-seventh of a share of Asarco's common stock, exercisable between April 1 and June 30, 1987 at a cash price of 50 percent of the average market price for Asarco common stock during March of 1987. After three years, Asarco has the option to convert any outstanding shares of Series C into common shares based on their market value. The most extraordinary aspect of the Series C Preferred Stock is its voting rights. Initially, Series C shares possess no voting rights except on matters affecting the preferential rights of the series. However, if any person or group becomes the "beneficial owner" of more than 20 percent of either Asarco's common stock or its Series C Preferred, then each one-tenth of Series C owned by anyone other than the 20 percent holder would have five votes in all matters submitted to the common stockholders. The Series C shares owned by the 20 percent holder would continue to have no voting rights. This 20 percent figure, of course, is high enough so that MIM's holdings of Asarco common stock would not of itself trigger the voting provisions of the Series C Preferred Stock. I have not checked through the Series C definitions or the facts relating to MIM ownership to determine whether MIM might be deemed to be an associate or an affiliate of any holder of Asarco stock.
A few examples will illustrate the effects of the voting provisions.
Because any stockholder who acquires 20 percent of the common or Preferred Stock will not be allowed to vote his Preferred Stock, and because the less than 20 percent owners will be able to vote their common stock and will receive 50 votes per share of Preferred Stock held by them, a stockholder who held 20 percent of the common and 20 percent of the Preferred Series C would have only 4.1 percent of the total vote, although he held one-fifth of the stock.
If Weeks acquires 49 percent of the common stock and by virtue of its present holdings of 10 percent of the common stock receives 10 percent of the Series C Preferred Stock as a dividend, then it would have 8.9 percent of the total vote.
A stockholder who held 80 percent of both the common and Series C Preferred which would constitute substantially all of the shares other than those held by Asarco management and MIM -- would have only 38.3 percent of the total vote.
I am informed by Asarco that between the hearing date and the date of this opinion Asarco's Board of Directors authorized a further amendment of the Restated Certificate of Incorporation which explicitly provides that the power to vote shares by reason of the grant of proxies will not trigger the Series C Preferred voting provisions. Weeks contends that through sloppy craftsmanship the amendment fails to achieve this effect. It can at least be said that the Board does not wish to have the 20 percent ownership provision trigger a restructuring of voting power in the proxy situation and presumably at some point it could find language to effect this intent if it has not already done so.
All voting rights of the Preferred Stock can be extinguished by an offer to purchase for cash any and all outstanding shares of Asarco, provided that such offer conforms to certain so-called fair price criteria. A "fair price" with respect to the common stock is defined as the higher of: (i) the highest price paid by the offeror in the past two years, or (ii) a price determined to be fair by a nationally recognized investment banking firm selected by the Asarco Board of directors. A "fair price" with respect to the Preferred Stock would be defined as the higher of: (i) the highest price paid by the offeror in the past two years, or (ii) the liquidation preference of the Preferred Stock plus accrued dividends. These provisions would deter tender offers for less than 100 percent of Asarco's shares and would deter the so-called two tier offer that includes consideration other than cash. In addition, even a cash offeror would be confronted with the necessity of paying $465 million for the Series C Preferred.
Weeks attacks the validity of the issuance of the Series C Preferred Stock on a number of grounds, namely: (i) It conflicts with Article 7 of Asarco's Certificate of Incorporation which cannot be altered without the affirmative vote of four-fifths of Asarco's shareholders; (ii) It is contrary to the Business Corporation Act and the Certificate of Incorporation because a blank check preferred authorized by statute contemplates only the issuance of stock to facilitate corporate financing and because Asarco's stockholders, when adopting the blank check provisions, did not authorize stock issued as a takeover defense; (iii) Asarco's Board may not issue preferred that alters underlying shareholder voting rights; (iv) issuance of the Series C Preferred Stock is not a valid dividend because it discriminates among shareholders of the same class; (v) because the Series C Preferred Stock plan would deter tender offers in proxy contests, any statute authorizing such stock for that purpose would violate the Supremacy and Commerce Clauses of the United States Constitution; (vi) the Board's action would unlawfully manipulate Asarco's corporate machinery and (vii) the issuance of the Series C Preferred Stock violates Asarco's fiduciary duty to all of its stockholders.
For the reasons set forth in my April 22, 1985 bench opinion I conclude the Court has jurisdiction.
Weeks seeks preliminary injunctive relief. In order to obtain such relief the moving party must demonstrate a reasonable likelihood of eventual success on the merits as well as a probability of irreparable injury if relief is not granted. The trial court must also consider the likely consequences on the parties and the overall public interest. Freixenut, S.A. v. Admiral Wine & Liquor Co., 731 F.2d 148 (3d Cir. 1984).
A. Success on the Merits :
The first factor which must be considered is Weeks' likelihood of success on the merits.
Under the business judgment rule, which derives from the fundamental principle that the business and affairs of the corporation are managed by its board of directors, the courts have held that absent evidence of self-dealing, conflict of interest, bad faith or fraud, directors of the corporation will be presumed to have exercised their business judgment in the best interests of the corporation, and the courts will respect their determination. For example, Papalexiou v. Tower West Condominium, 167 N.J. Super 516, 401 A.2d 280 (Ch. Div. 1979).
Weeks urges that Asarco and its directors cannot claim the benefit of the business judgment rule because all of the directors have an interest of their own at stake. The interest of the three directors from management is obvious -- their interest in the retention of their positions and all the emoluments which the positions entail. Weeks urges that even the outside directors have an interest which precludes their reliance on the presumption of the validity of their determinations. They are the holders of significant amounts of common stock, which, since they do not contemplate acquiring a 20 percent interest, will benefit from the voting provisions of the Series C Preferred. Further, the purpose of the issuance of the Series C Preferred is to prevent a takeover. This, according to Weeks, brings this case within the rule of the ...