Eisenberg v. Chicago Milwaukee Corp.
Delaware Court of Chancery, 1987.
537 A.2d 1051.
(Company declines to pay dividends on preferred stock, threatens to de-list, coercive)
FACTS
-D sold off most of its business and held approximately $300M in cash and real estate valued at $90M while it sought new business(es).
-Outstanding approx. 2.5M shares of common stock, 464K of noncumulative preferred stock with annual dividend preference of $5/share.
-Company declined to pay dividends on preferred during years in which it sought new line of business.
-Pref. stockholders elected 2/10 directors. 8/10 and affiliates owned no preferred, but owned 41% common.
-Pref. stock dropped from 80.25 to low of 41.50. Directors decided to take advantage of sharp price decline, caused company to make tender offer for its pref. stock at $55/share and announced co. would delist pref. stock.
-Holders of Pref. stock sought to enjoin tender offer on basis of:
1) Tender solicitation materials were misleading in failing to disclose conflict of interest of common stock directors and purpose to take advantage of price drop, and
2) Tender offer was improperly coercive.
Court found:
1) Directors owed preferred the ‘exacting duty of disclosure imposed upon corporate fiduciaries’ and found that duty not to be met.
Analysis (2)
P Argued Coercive b/c
1) purposely timed to coincide with lowest market price for Preferred since 1983.
2) offer occurs against background of an announced board policy of not paying dividends, despite CMS’s present ability to do so.
3) CMC has announced that it intends to seek the de-listing of preferred shares.
-Given the circumstances, Pref. stockholders may perceive that unless they tender, they might not realize any return on or value for their investment in the foreseeable future.
ISSUE
-In what sense do corporate directors behave inequitably if they cause the corporation to offer to purchase its own publicly held shares at a premium above market, even if the market price is at a historic low?
HOLDING
-Court says the issue here is that D has told Pref. stockholders that CMC intends to request de-listing of the shares from NYSE.
-CMC’s directors are fiduciaries for the Pref. stockholders, have an duty to safeguard their interests, consistent with the fiduciary duties owed by those directors to CMC’s other shareholders and CMC itself.
-NYCE listing is a valuable attribute of pref. stock, elimination will adversely affect the interests of non-tendering preferred shareholders.
-Coercive: apparent purpose of such a disclosure would be to induce shareholders to tender by converting a possibility of de-listing into a likelihood or certainty.
Delaware Court of Chancery, 1987.
537 A.2d 1051.
(Company declines to pay dividends on preferred stock, threatens to de-list, coercive)
FACTS
-D sold off most of its business and held approximately $300M in cash and real estate valued at $90M while it sought new business(es).
-Outstanding approx. 2.5M shares of common stock, 464K of noncumulative preferred stock with annual dividend preference of $5/share.
-Company declined to pay dividends on preferred during years in which it sought new line of business.
-Pref. stockholders elected 2/10 directors. 8/10 and affiliates owned no preferred, but owned 41% common.
-Pref. stock dropped from 80.25 to low of 41.50. Directors decided to take advantage of sharp price decline, caused company to make tender offer for its pref. stock at $55/share and announced co. would delist pref. stock.
-Holders of Pref. stock sought to enjoin tender offer on basis of:
1) Tender solicitation materials were misleading in failing to disclose conflict of interest of common stock directors and purpose to take advantage of price drop, and
2) Tender offer was improperly coercive.
Court found:
1) Directors owed preferred the ‘exacting duty of disclosure imposed upon corporate fiduciaries’ and found that duty not to be met.
Analysis (2)
P Argued Coercive b/c
1) purposely timed to coincide with lowest market price for Preferred since 1983.
2) offer occurs against background of an announced board policy of not paying dividends, despite CMS’s present ability to do so.
3) CMC has announced that it intends to seek the de-listing of preferred shares.
-Given the circumstances, Pref. stockholders may perceive that unless they tender, they might not realize any return on or value for their investment in the foreseeable future.
ISSUE
-In what sense do corporate directors behave inequitably if they cause the corporation to offer to purchase its own publicly held shares at a premium above market, even if the market price is at a historic low?
HOLDING
-Court says the issue here is that D has told Pref. stockholders that CMC intends to request de-listing of the shares from NYSE.
-CMC’s directors are fiduciaries for the Pref. stockholders, have an duty to safeguard their interests, consistent with the fiduciary duties owed by those directors to CMC’s other shareholders and CMC itself.
-NYCE listing is a valuable attribute of pref. stock, elimination will adversely affect the interests of non-tendering preferred shareholders.
-Coercive: apparent purpose of such a disclosure would be to induce shareholders to tender by converting a possibility of de-listing into a likelihood or certainty.
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