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Pogostin v. Leighton

Decided: January 29, 1987.


On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County.

Michels, O'Brien and Skillman. The opinion of the court was delivered by Michels, P.J.A.D.


Objector William Leighton appeals from a final judgment of the Chancery Division which, in part: (1) approved a settlement agreement concerning the merger and restructuring of defendant Uniroyal, Inc. (Uniroyal) and a class action and derivative suit instituted by plaintiff Bernard Pogostin; (2) permanently enjoined plaintiff and other interested parties from instituting an action on any of the claims extinguished by the settlement agreement, and (3) awarded plaintiff $600,000 attorneys fees, exclusive of $150,000 to be paid by Uniroyal to plaintiff's investment banker.

The chronology of events underlying this litigation is not in dispute. Uniroyal, Inc., a New Jersey corporation with its principal place of business in Middlebury, Connecticut, manufactures

and markets chemical, rubber and plastic products for transportation, industry, agriculture and the home. At the time this action was commenced, Uniroyal had two outstanding classes of stock: common and first preferred. The first preferred stock had a par value and liquidation preference of $100, and a non-cumulative 8% dividend preference. On April 15, 1985, Robin Acquisition Corp., a company controlled by Uniroyal shareholder Carl Icahn (Icahn), commenced a tender offer for approximately 53% of the outstanding Uniroyal common stock at $18 per share. Under Icahn's plan, common stock not acquired in the tender offer would ultimately be exchanged for undetermined debt securities having a purported value of $18 per share. Icahn did not offer to acquire any of the first preferred shares.

As the book value of Uniroyal common stock exceeded $18 per share at that time, the Uniroyal Board of Directors unanimously rejected Icahn's proposal. Efforts to find a better deal for Uniroyal shareholders resulted in a single offer made by Clayton & Dubilier, Inc. (C & D). The offer was to merge an entity called CDU Acquisition, Inc. (Acquisition) into Uniroyal. All Uniroyal common stock would be "cashed out" at $22 per share and each share of Acquisition common stock would be converted into one share of common stock in the surviving corporation, Uniroyal. Funds to accomplish the merger would be obtained by floating approximately $950 million in debt securities. Upon consummation of the merger, Uniroyal's common stock would be entirely owned by CDU Holding, Inc. (Holding), Acquisition's parent company. Shares of Uniroyal first preferred would remain issued and outstanding. Moreover, there was to be a new issue of approximately $26 million of Uniroyal second preferred stock, the rights of which would be subordinate to the rights of Uniroyal first preferred stock. C & D or its affiliates would purchase this new issue in its entirety.

To facilitate the transaction, on May 6, 1985, Uniroyal entered into an agreement with Icahn whereby he promised to

terminate his offer and to support the one proposed by C & D. In consideration thereof, Uniroyal agreed to reimburse Icahn $5.9 million of the expenses he incurred in making his tender offer. On this same day, May 6, 1985, Uniroyal's Board of Directors and C & D signed the merger agreement. A special meeting of Uniroyal's stockholders was scheduled for September 23, 1985 for the stockholders to vote on the proposed merger and also on certain amendments to Uniroyal's charter and by-laws.

On August 1, 1985, plaintiff, a holder of first preferred stock, filed suit against Uniroyal individually and on behalf of other first preferred stockholders. One of the allegations in the complaint was that the proposed merger amounted to a plan of liquidation, thus triggering the liquidation rights of the holders of first preferred stock. Accordingly, plaintiff sought, among other things, a mandatory injunction requiring Uniroyal to redeem the shares of first preferred, a temporary injunction against Uniroyal's proceeding with the merger and a declaratory judgment determining the rights of the first preferred shares.

In light of the shareholders' meeting scheduled for September 23, 1985, the parties had expedited discovery and engaged in settlement negotiations. These efforts culminated in the parties' signing on September 9, 1985 a Memorandum of Understanding outlining the general terms of a settlement. The principal terms of this document were embodied in a formal Settlement Stipulation on October 4, 1985. The proposed merger and the charter and by-law revisions were in fact approved at the September 23, 1985 meeting of Uniroyal's shareholders.

Pursuant to the September 9, 1985 Memorandum of Understanding, on October 3, 1985, plaintiff filed an amended complaint adding the individual Uniroyal directors as defendants and asserting derivative as well as class claims. Some of the charges made therein were that: (1) the merger was in violation of Uniroyal's by-laws; (2) the payment of certain costs in

connection with the merger and restructuring and a bonus to defendant Flannery constituted a breach of fiduciary duty and a waste of corporate assets, and (3) the proxy materials for Uniroyal's September 23, 1985 shareholders' meeting contained material misstatements and omissions in violation of New Jersey law.

On October 3, 1985, the trial court signed a consent order which (1) established a schedule of proceedings for a hearing on the proposed compromise contemplated by the parties; (2) set out the form of notice to be sent to the holders of first preferred stock and (3) established October 11, 1985 as the date for a hearing for the purpose of approving the manner of notice to be given to the holders of Uniroyal first preferred stock and the procedures to be followed by first preferred shareholders who desired to object to the compromise. The trial court entered another order on October 11, 1985 to help bring the proposed settlement to fruition. For purposes of settlement only, the order certified the action as a class action, the class being defined as all beneficial owners of Uniroyal first preferred stock as of May 6, 1985. The trial court found that plaintiff would fairly represent the interests of all those similarly situated and thus designated him class representative. Additionally, the order directed Uniroyal to mail to all current record holders of Uniroyal first preferred stock and to all record holders of Uniroyal first preferred stock as of May 6, 1985 notice, explaining: (1) certain background information, including the Icahn tender offer and the C & D merger; (2) the action instituted by plaintiff; (3) the terms of the Settlement Stipulation, and (4) other relevant information contained in the October 11, 1985 order. Uniroyal was similarly ordered to publish a short-form notice of the proposed settlement in The Wall Street Journal and the Bergen Record. The order also enjoined the institution, maintenance or prosecution of any action as to matters pertinent to the Settlement Stipulation. Additionally, the order stated that, upon providing timely notification, any person objecting to the proposed settlement "or who

otherwise wishes to be heard" may attend a hearing scheduled for November 21, 1985. As stated in the order, the purpose of this hearing was to determine:

(i) the fairness, reasonableness and adequacy of the agreement of settlement and compromise provided for in the Settlement Stipulation, and

(ii) whether a final judgment and order should be entered approving the proposed settlement and compromise and dismissing the action against Uniroyal and the Director Defendants as provided for in the Settlement Stipulation, and to pass on the fee application of plaintiff's counsel in an amount not to exceed $600,000 inclusive of disbursements.

On October 16, 1985, Uniroyal mailed the requisite notice to the first preferred shareholders and on October 20 and 21, 1985 complied with the requirements of publication notice. "[T]he only one that object[ed] to this one billion dollar transaction" was Leighton. In a letter dated November 6, 1985, Leighton identified himself as a person "who otherwise wishes to be heard" and set forth reasons why he believed the settlement should be rejected. Leighton owns five shares of Uniroyal first preferred stock. According to the records of Uniroyal's transfer agent and by ...

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