Hanson Trust PLC v. ML SCM Acquisition Inc.

OAKES, Circuit Judge

(concurring):

Concurring fully in Judge Pierce’s opinion and its reference to the shift in the burden of proof, I write solely in partial *284 reply to points made in Judge Kearse’s dissent.

I do not think that the New York “business judgment” rule as set forth in Auerbach v. Bennett, 47 N.Y.2d 619 , 393 N.E.2d 994 , 419 N.Y.S.2d 920 (1979), particularly in the light of the gloss given it by this court in Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir.1984), goes so far as to immunize directors merely because they act in' good faith, without self-dealing. Rather, even though “independent directors” make a decision, they have a duty to exercise due care, a duty which I think the dissent recognizes. Due care requires full inquiry. To obtain the benefit of the business judgment rule, then, directors must make certain that they are fully informed, and, to the extent that they are relying on advisers, that the advisers are fully informed and in turn fully inform the directors. This is particularly true, it seems to me, when the decision is whether to agree to an asset lock-up, which by definition implies making some asset available to the potential buyer at a price less than those assets would bring in an orderly sale, thereby tending to foreclose further bidding for the target company. And this duty of care is, if anything, heightened — it certainly is not weakened — when the favored buyer obtaining the lock-up is a consortium including within it the management/non-independent directors who will have a substantial participation in the future equity of the potential buyer and whose interests by virtue of that participation, at that stage, are to favor the buyout at the lowest price. This directorial duty of care is heightened because management interests are then in direct conflict with those of the shareholders of the target corporation to obtain the highest price either for their shares or for the company's assets. In other words, a management-participation leveraged buyout, when coupled with a lock-up option, calls for close scrutiny of the exercise of care on the part of independent directors to make certain that their collective judgment is informed sufficiently to enable them objectively to weigh the delicate balance of potential gain, if any, to the stockholders from the lock-up, as against possible loss from closing out the bidding or, in the event of a tender-offer standoff, having some of the corporate assets sold at an unconscionably low price. That there was some concern about the possibility of a standoff is evident from SCM’s own “exchange offer” made October 10, 1985, in which it proposed to offer $10 in cash and $64 in preferred stock for two-thirds of its outstanding stock, in the event neither the management-Merrill Lynch tender offer nor the Hanson tender offer is completed.

In terms of deference to the trial court’s findings as to the exercise of due care, I only quote those findings as set forth in its conclusions:

The board appears to have given little or no consideration to whether the trigger event for the lock-up option was already satisfied when the option was granted, or how quickly thereafter it might be satisfied. As it turns out, Hanson triggered the lock-up option on September 11, 1985 — one day after it was granted. Similarly, the board appears not to have carefully and closely scrutinized the actual superiority of the $74.00 offer (which involved a cash purchase for up to 80 percent of SCM’s common stock with the remaining 20 percent being exchanged for “junk bonds”), particularly when coupled with the risk that if the option was triggered and exercised, SCM would be a company without two of its most valuable divisions. The board also failed to read and review carefully Merill [sic] Lynch’s offers, Hanson’s various offers, and the lock-up option agreement. They relied instead primarily on their advisors’ description of the terms of these agreements and offers. Finally, the board accepted Goldman Sachs’ conclusion that the prices of the optioned assets were fair without ever inquiring about the range of fair values. The foregoing is not condoned by this Court. Rather, based on the record before this Court and the current state of the law, these, actions do not rise to the level of a *285 breach of the fiduciary obligation owed to SCM and its shareholders by the board.

I think these findings show a likelihood of a breach of the duty of due care, at least when coupled with the valuation evidence fully explicated in Judge Pierce’s opinion.

Finally, when it comes to the standard of review of a district court’s grant or denial of a preliminary injunction, while we often use the rubric that there must be a showing of “abuse of discretion,” that rubric has no application to a pure question of law — here whether under the New York business judgment rule, so-called independent directors have a duty of due care— and only limited application to the mixed question of law and fact whether there is a likelihood that that duty has been breached in a specific instance. See Friendly, Indiscretion About Discretion, 31 Emory L.J. 747 , 773 (1982) (“Perhaps the most important area where parroting the discretion phrase is likely to lead to wrong decision is the review of the grant or denial of preliminary injunctions.”); National Association of Letter Carriers v. Sombrotto, 449 F.2d 915, 921 (2d Cir.1971) (Friendly, J.); see also Blackwelder Furniture Co. v. Seilig Manufacturing Co., 550 F.2d 189, 193 (4th Cir.1977) (Craven, J.) (“When the grant or denial of interim injunctive relief is reviewed, it is simplistic to say or imply, as we sometimes do, that it will be set aside only if an abuse of discretion can be shown.... A judge’s discretion is not boundless and must be exercised within the applicable rules of law and equity.”), cited with approval in Friendly, supra, 31 Emory L.J. at 777.

This is an extremely close case, I have no doubt. It is also an important one since the federal courts seem to attract tender offer cases and the substantive New York law will govern many of them, at least in this circuit. I note parenthetically that this would be, I think, a much easier case for the plaintiffs were Delaware’s the governing law, under MacAndrew & Forbes Holdings, Inc. v. Revlon, Inc., 501 A.2d 1239 (Del.Ch.1985), aff'd, Nos. 353 & 354 (Del. Sup. Nov. 1, 1985). In any event, I thought it worth noting these few points in the light of the persuasiveness of the dissent, though I by no means want to detract from the force of Judge Pierce’s majority opinion, in which, as I say, I fully concur.