35 Del. Ch. 325 | New York Court of Chancery | 1955
Plaintiff, a minority stockholder, suing for himself and all other stockholders of Pressed Metals of America, Inc., seeks a permanent injunction against a proposed sale of assets of the corporate defendant to the defendant, Richmond. The complaint which asked for preliminary injunctive relief was filed on August 3, 1955, however, by stipulation between plaintiff and the defendant corporation argument on the motion for preliminary relief was dispensed with and the stockholders met and approved the sale on August 16. Thereafter the case was tried and the consummation of the sale is being held in abeyance by agreement pending decision by the Court.
Plaintiff charges that the proposed sale to Richmond is for a price so inadequate as to constitute a gift of corporate assets and a fraud on the stockholders in that not only the fair value but the book value of the assets proposed to be sold to the buyer are so much in excess of the offered price as to indicate either improper motives
The corporate defendant began as a small Canadian corporation, which, during the first world war using a process invented by Mr. John W. Leighton, then and now president of the corporation, manufactured bronze shrapnel tubes for the Canadian government. After the war this process was adapted to making bronze bushings for piston pins for the Ford Motor Company. When changes in design at Ford threatened to end the need for extruded bronze parts, Mr. Leighton turned his inventive genius to the job of designing steel automotive parts including steel shackles for car springs and later a threaded steel bearing for use in the independently suspended front wheels of automobiles. As each new invention was designed and patented, Mr. Leighton entered into an agreement granting the corporate defendant the exclusive right to manufacture the patented article. Such agreements forbid sub-licensing without the permission of the inventor but required permission to be granted to any financially responsible person provided royalty payments due from any sub-licensee were guaranteed by the licensee.
Starting in 1933 with the perfecting of the threaded bearing for wheel suspensions, the manufacture of this device became the principal business of the corporation and with the exception of the war years 95% of the production of this part until recently was sold to General Motors, Ford Motor Company and Chrysler Corporation. During the war years when automobile production was virtually halted, war work was engaged in principally the making of shackles for jeep springs. The company’s success during this period is attributable to its ability to produce specialized automobile parts more cheaply than could the big automobile manufacturers.
A darkening of the bright post-war outlook for the company was foreshadowed in 1951 when Ford Motor Company gave notice that the design for its 1952 Lincoln would eliminate the corporate defendant’s wheel suspension parts and that the same change would be made in Ford and Mercury design effective with the 1954 models. In 1953, Chevrolet gave similar notice and final orders from that
In March, 1955, Mr. Albert, president of Bellanca Aircraft Corporation, offered to purchase Pressed Metals’ live assets at book value for stock in Bellanca at its market price on the trading day next preceding the closing day for the transaction. The directors of Pressed Metals could find out little about Bellanca’s financial situation and business prospects and were skeptical of the transaction which they found hard to evaluate. Nonetheless it was submitted without approval to the stockholders in a proxy statement and accompanying letter which made it clear that the board of directors opposed
On May 13, 1955, Mr. Richmond submitted a new offer in writing to Mr. Herbert L. Hutner, who had become a director of Pressed Metals on April 29. Richmond stated that he proposed to acquire the assets of Pressed Metals, “* * * subject to an assumption of its liabilities, for a purchase price of $6,800,000 so that the holders of the issued $1.00 par capital stock of the company shall realize the sum of $20.00 per share on each share of said stock.” This proposal was discussed at a meeting attended by all but one of Pressed Metals’ directors held in New York on May 27, at which Mr. Leighton, and his son disclosed that Mr. Richmond in the event the purchase was consummated proposed to retain present employees, • to name the Leightons respectively chairman of the board and president of the successor company and to pay the Leightons $500,000 for their interest in the patent rights held by them. The board reacted favorably to the offer and management was directed to request Mr. Richmond to submit a formal agreement. On June 28th the directors again met, Mr. Dozor being the only absentee. It was reported to the meeting by Mr. Sheriff, one of the directors, that he had met that morning with Mr. Albert of Bellanca, who again expressed a desire to purchase the corporate assets but not the Leighton patents at a price designed to net stockholders at least $2 more per share than Mr. Richmond’s offer. Mr. Albert was told to submit his offer in writing for consideration at the directors’ meeting to be held at 1 o’clock. No word having been received from Mr. Albert prior to adjournment of the meeting late in the afternoon and the directors being satisfied that the proceeds of the sale, added to an anticipated tax refund and a passing of the usual quarterly dividend would aggregate an amount equivalent to $20.50 per share for Pressed Metals’ stockholders, approved the Richmond contract.
As has been held many times in this Court there is a presumption that directors act honestly and in the best interests of the stockholders in negotiating a contract for the sale of corporate assets, Robinson v. Pittsburgh Oil Refining Corp., 14 Del.Ch. 193, 126 A. 46, Gropper v. North Central Texas Oil Co., Del.Ch., 114
In a series of cases decided in the 1920’s Chancellor Josiah Wolcott discussed valuation problems presented in cases arising under present § 271 of Title 8, Del.C. He decided that the right of the majority of stockholders to authorize a sale of assets is absolute even though dissenting stockholders are thereby deprived of the opportunity for future profits, provided, however, that the price to be paid, the manner of payment, and such like questions meet the test of the corporation’s best interest. A large disparity between an appraisal based on the estimated cost of replacement of assets less depreciation based upon age and condition and the sale price troubled him in Allied Chemical & Dye Corp. v. Steel & Tube Co., supra. This difference
In the several phases of the case the Chancellor reiterated that value in a sale of corporate assets is not one of cost or replacement value but of value in connection with a sale; that such a sale presupposes a willing buyer and a willing seller; that a buyer can be expected to anticipate a profit, and that majority stockholders of a selling corporation are not guilty of improper motives in wanting to make a speculative profit. In the case of Allaun v. Consolidated Oil Co., supra, these principles were restated and reaffirmed. The Chancellor also considered important in the last cited case the fact that the defendant’s assets had been for sale for some time, emphasizing not only the point that the value placed on assets by a purchaser can be expected to be made with an eye to the profit to be realized but also that the price offered in the agreement of sale which a substantial stockholder sought to enjoin was equal to the highest price contained in offers made by four other companies.
Plaintiffs’ contention is that a sale of assets, worth in his opinion in excess of $15,000,000, for approximately $2,000,000 is not in the best interests of the corporation. These figures require analysis. The equivalent amount per share available to stockholders if the Richmond proposal is consummated will be $20.50. Mr. Richmond’s cash offer for the assets to be sold is the sum of $2,063,480.
The book value of Pressed Metal’s assets taking into consideration its liabilities as of May 31, 1955, was $8,102,480, or the equivalent of $23.75 for each of the 341,615 outstanding shares of stock of the corporate defendant. The book value of the assets to be sold as of the same date was $4,902,826. Taking this latter figure as a
Insofar as land, plant and equipment are concerned plaintiff submits that according to an appraisal made at the corporate defendant’s request as of December 31, 1954, these assets had a “sound valuation” of $7,470,860.55 and a liquidation value of $2,471,284. A summary of this appraisal to which are also added assets of Acorn Products Company, a wholly owned subsidiary, was submitted to stockholders at the time of the Bellanca proposal, and again in the proxy statement sent out in connection with the final Richmond proposal. While the difference between the book value of these assets and the appraisal figures submitted in the report of Manufacturers Appraisal Company is substantial, the absence of any bid approximating the values set out in the appraisal and the factors considered below incline me to give little weight to its conclusions. While the appraisal itself was admitted in evidence, the persons who prepared it were not before the Court, and there is nothing in the record to show what consideration, if any, was given to the fact that much of the plant equipment involved is highly specialized and unsuitable for making anything other than the corporate defendant’s specialized parts, the future use for which appears most problematical. While the appraisal was prepared for the purpose of giving directors and stockholders information about the value of the corporate assets in preparation for their disposal, it purports to be merely a “disinterested statement” of the cost of reproduction of assets and their sound valuation after allowance for depreciation. It was not accepted by the corporate defendant’s directors as an accurate reflection of market, value for specialized plant and equipment under current business conditions. The fact that a summary of the appraisal values was used to persuade stockholders to vote against the Bellanca proposal does not in my opinion work any estoppel. The same summary was submitted in' the proxy statement which preceded the stockholders’ meeting which authorized the sale of assets to the defendant, Richmond, at a price below book value.
The other principal plus factors, which, according to .plaintiff, create a disparity of over $5,000,000 between actual value
Two other plus factors cited by plaintiff are the good will inherent in the corporate defendant’s name and the value to the defendant, Richmond, of the seller’s agreement not to compete. No specific value is placed on these factors, and I do not find it necessary to evaluate them. Because John D. Leighton’s abilities were the life blood of Pressed Metals, and because the corporation’s earning record in recent years has not been impressive, I do not think corporate good will is a measurable factor. As for the agreement not to compete, it would appear that the future of the selling corporation is one of orderly liquidation after limited continuance as an investment trust for tax purposes. It has surrendered nothing of value in agreeing not to compete.
On the other hand the minus factors which have been extensively reviewed in this opinion tend to make the proposed sale a desirable corporate act. So-called “going concern” value cannot but be affected by these factors. In the light of the corporation’s type
Plaintiff next charges concealment from the stockholders of a provision of the contract of sale which gives to the buyer the benefit of any profits made by the corporation from the date of the contract to the closing date. By the same token the buyer must sustain any loss during this period. Because of net losses in June and July, if the closing date had been July 31, 1955, the buyer would have been obligated to advance over $300,000 more than the amount shown in the proxy statement as payable by the buyer. The provision in question was designed to work both ways.
Implicit in plaintiff’s attack as to fairness is a charge of self-interest on the part of certain New York stockholders, who with their customers bought heavily into Pressed Metals’ stock when they discovered in 1954 that the book value of the corporate stock was substantially in excess of its market value. In view of the announced plan of sale of assets or merger, buyers of Pressed Metals stock could expect to profit. Undoubtedly several of them engaged actively in seeking out a willing buyer, and it was to Mr. Hutner, one of four of the so-called broker group, who came on the board of nine directors, that Mr. Richmond addressed his proposal of May
I conclude that plaintiff has not sustained the burden of proving the proposed sale of assets under attack to be in violation of the fiduciary duty of directors and majority stockholders. Judgment. for the corporate defendant will be entered.
Order on notice.
. In the later case of Mitchell v. Highland-Western Glass Co., 19 Del.Ch. 326, 167 A. 831, 833, the Chancellor defined a legally inadequate price for corporate assets to be an inadequacy “so gross as to display itself as a badge of fraud”.
. A difference between a so-called “book value” or “sound value” of $94,000,000 (the appraisal figure) and a sale price of $73,000,000.
. A meticulous analysis of the value of seller’s assets after the taking of depositions convinced the Court that the terms and conditions of the proposed sale were expedient and for the best interests of the corporation and resulted in the granting of defendant’s motion to dissolve the injunction. See opinion at 14 Del. Ch. 64, 122 A. 142.
. In Robinson v. Pittsburgh Oil Refining Corp., supra, the Chancellor upheld a sale for a price which on its face was less in amount than a competing bid because the smaller bid also assumed corporate liabilities and offered cash.
. Compare Cottrell v. Pawcatuck Co., supra, in which this Court approved a sale of assets. Plaintiff was unsuccessful in her argument as to disparity between book value of $6,539,345 and the sale price of $3,194,448. In the cited case a tax refund was not counted by the Court in testing the fairness of the sale price, however, it was not ignored in determining the wisdom of the decision to sell. In the case at bar the buyer has in effect guaranteed a tax refund in the amount of $712,700 provided Pressed Metals conforms to the requirements of the federal tax law allowing a refund when assets are sold below book value. This refund is not included in the sum of $2,063,480.