Opinion
Corporation to challenge certain decisions made by the board of directors in response to the acquisition of approximately 8.8 percent of Chevron’s common stock by the Pennzoil Company. The trial court found the directors’ decisions protected by the business judgment rule and granted summary judgment in favor of Chevron. The shareholders appeal. We affirm the judgment.
Statement of the Case and Facts
In early 1989, following a period in which Chevron Corporation’s annual shareholder return was somewhat lower than that of other major oil companies, Chevron began to develop a five-year plan with the goal of increasing shareholder value. By the fall of 1989, planning for the 1990-1994 business plan was in its final stages and senior management felt its chances of success were good.
In mid-October, Chevron retained the law firm of Fried, Frank, Harris, Shriver & Jacobson (Fried Frank) to assist Pillsbury, Madison & Sutro (Pillsbury), which was already advising the Board, in recommending actions that might be appropriate or necessary to protect and ensure the best interests of the shareholders in light of the stock accumulation. Chevrоn also hired the investment banking firm Goldman, Sachs & Co. (Goldman Sachs) to attempt to identify the accumulator, ascertain its motives and objectives and make recommendations. In addition, Chevron retained the Delaware law firm of Morris, Nichols, Arsht & Tunnell (Morris Nichols) to advise the Board on
On October 24, representatives of Goldman Sachs and Fried Frank met with management and the ad hoc committee for several hours, circulating and reviewing a draft briefing book that contained information about recent stock activity, press reports, and possible accumulators. On October 25, at a regularly scheduled Board meeting, the directors were updated on the stock activity, informed that the various firms had been retained as expert advi-sors, and told that the advisors suspected Pennzoil, British Petroleum and Carl Icahn as possible accumulators. 5 Concerns were voiced that the accumulator’s objectives might be inconsistent with Chevron’s long term goals or other shareholders’ interests.
On October 31, a special Board meeting was held concerning the stock situation. Derr advised the Board that Chevron stock price was continuing to rise on heavy volumes and that management was considering recommending authorization of an additional credit facility. Goldman Sachs presented detailed information about the stock activity and strategies the accumulator might attempt and their possible impact. Pennzoil was identified as a prime suspect because it had been making comments about its desire to buy oil and gas properties worth $3 billion; other possible accumulators were identified. Fried Frank reviewed Chevron’s existing defensive mechanisms and analyzed possible changes to better protect shareholders if the Board determined the accumulation posed a threat to the corporation and shareholders’ interests. These included amending the shareholder rights plan to lower the threshold for exercise of rights by which shareholders could dilute the voting power of an acquiror of a specified percentage of Chevron stock
6
and
By the beginning of November, Chevron was experiencing significant disruption in its operations. Rumors were spread in the media that Pennzoil was accumulating Chevron shares, Chevron employees were distracted from their jobs by concern about the future of the corporation and management was diverted from activities directed at implementation of the five-year plan.
Another special Board meeting on November 6 devoted entirely to the stock activity lasted most of the morning. 8 The directors had previously been provided with a legal memorandum by Fried Frank and Pillsbury analyzing Chevron’s current defenses, vulnerabilities, and possible actions to protect shareholders and a booklet prepared by Goldman Sachs, Fried Frank and Pillsbury summarizing topics to be discussed at the meeting. At the meeting, the directors received a briefing book similar to the previously provided materials. Fried Frank advised the Board about the business judgment rule, informing the directors that their actions would be protected if they reasonably believed there was a threat to corporation policy and effectiveness and took reasonable steps in response to that threat. The Board was also informed of possible strategies of the accumulator such as attempting to force a restructuring of the corporation, interfering with the business plan, working with a partner to take over Chevron or forcing a swap of its Chevron stock for oil and gas assets.
Goldman Sachs made a presentation about Pennzoil, which it considered the most likely accumulator, addressing Pennzoil’s history as an aggressive stock accumulator (including a hostile tender offer for United Gas Company in 1965, an unsolicited tender offer for Getty Oil in 1983 and subsequent $3 billion cash settlement of litigation with Texaco over Texaco’s interference with Pennzoil’s merger with Getty Oil, and secret acquisition of an 8 percent stake in Burlington Resources in 1989); Pennzoil’s public statements that it could defer $800 million in federal income taxes by reinvesting the Texaco settlement proceeds in oil and gas properties similar tо the Getty Oil assets it had bargained for before Texaco “interfered” with its bargain, and Pennzoil’s possession of $2.6 billion in ready cash from the Texaco settlement
Legal counsel also advised the Board regarding possible responses to the accumulation, recommending changing the threshold for triggering the grant of rights under the rights plan from 20 percent to 10 percent and amending the bylaws to eliminate shareholders’ ability to call special meetings. The Board was given information about other companies with rights plan thresholds below 20 percent. Goldman Sachs advised that in its opinion, lowering the rights plan threshold to 10 percent would not adversely affect the Chevron stock price; in Goldman Sachs’s experience with hundreds of such plans, they had discerned no empirical evidence of stock prices being adversely affected. Georgeson provided its opinion that reducing the rights plan threshold would not materially affect the ability of a shareholder to successfully wage a proxy fight in opposition to management. Counsel advised that shareholders do not have an inherent right under Delaware law to call special shareholders meetings and most Delaware corporations do not provide such a right.
The directors also discussed the possibility of arranging a special credit facility for the corporation, in response to concerns that if a hostile accumulator announced acquisition of Chevron shares, Chevron might not be able to secure the funds necessary to maintain ordinary operations. Further consideration of this issue was deferred to the next meeting.
On November 21, the Boаrd held a regularly scheduled meeting that lasted most of the day. 9 The directors were informed that Georgeson had reported that almost 15 million shares were being held in unidentified bank accounts. Major presentations were made by senior managers of Chevron’s principal operating companies and divisions regarding the five-year business plan. With respect to the proposed credit facility, Chevron’s treasurer explained that the corporation’s existing credit line was fully subscribed, additional credit for general corporate purposes was necessary to maintain flexibility, and Chevron’s access to credit could be severely curtailed if a hostile accumulator surfaced. The Board voted unanimously to authorize the facility.
After the November 21 meeting, the trading volume of Chevron shares increased again. Investigation by Georgeson and others led the directors to
On December 7, Derr received a telephone call from Pennzoil’s chairman, Hugh Liedtke, informing him that Pennzoil owned about nine percent of Chevron’s common stock and planned to file a schedule 13D that day. Liedtke indicated the purpose of the Pennzoil investment was to defer about $800 million in taxes, that Pennzoil might purchase additional shares to maximize its tax situation and that the relationship between Chevron and Pennzoil could be “either friendly or adversarial.” Pennzoil’s schedule 13D indicated it had spent more than $2.1 billion to acquire 8.8 percent of Chevron’s stock (31,524,500 shares), having purchased the majority of this stock within the 60 days preceding the filing of the schedule 13D. According to the schedule 13D, the stock had been acquired as a long term investment which Pennzoil believed might allow it to defer a portion of the federal income tаxes it owed on the proceeds from the 1988 settlement of its litigation with Texaco. The schedule 13D further stated that Pennzoil might decide to continue to expend up to an amount equal to the original Texaco settlement net proceeds (approximately $2.6 billion) to purchase additional shares from time to time and that “Pennzoil will monitor on a regular basis its investment in the Shares and the Issuer’s business affairs and financial position, as well as the market value of the Shares, conditions in the securities markets and general economic and industry conditions. Depending on the results of Pennzoil’s ongoing review, Pennzoil may in the future take such actions in respect of its investment in the Shares as it deems appropriate in light of circumstances existing from time to time.”
Nine of the twelve directors were present at the December 7 meeting, four management and five outside. Several directors expressed disbelief in Pennzoil’s stated investment intent because of such factors as its history, its tax situation, and, among other things, that the investment represented about 150 percent of Pennzoil’s nеt worth. Legal counsel advised the directors that under securities and antitrust laws, investors were required to report their investment intent accurately in schedule 13D statements and to make certain reports upon acquiring more than $15 million in any stock unless the intent was to hold the stock for investment purposes. Counsel recommended litigation against Pennzoil for violation of these reporting requirements. After reviewing the pros and cons of amendments to reduce the voting rights plan threshold to 10 percent and eliminate the special shareholder meeting
According to the declaration оf appellants’ expert, Arthur S. Ainsberg, there was “no conceivable possibility” Pennzoil could independently mount a takeover of Chevron because on December 7, 1989, Chevron’s market value was $25 billion, Pennzoil’s net worth was $1.5 billion, and Pennzoil’s total investment in Chevron was approximately $2 billion. Ainsberg further stated that based on news articles and financial analysts’ reports, it was “the consensus of the marketplace” that Pennzoil would receive favorable tax treatment due to its investment in Chevron. Finally, Ainsberg declared that the closing price of Chevron stock fell from $72 to $66.75 per share between December 6 and December 7, 1989, the drop was a direct result of the four actions taken by the Board in response to Pennzoil’s schedule 13D filing, and (based on numerous studies and Ainsberg’s own experience) there is a statistically significant deterioration in equity value of a company that enacts a shareholder rights plan.
Appellants filed the present action on December 11, 1989. Respondents’ motion for summary judgment was filed on January 24, 1992. After a hearing on March 13, this motion was granted аnd judgment was entered for respondents on May 1, 1992. Appellants’ notice of appeal was filed on June 29, 1992.
Discussion
I.
Under Code of Civil Procedure section 437c, subdivision (c), a motion for summary judgment “shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is
Appellants initially contend the trial court erroneously utilized the federal rather than thе California standard in reviewing the summary judgment motion. Appellants correctly note that under California law, a defendant moving for summary judgment must make a sufficient showing that there are no triable material issues of fact and there is no burden on the plaintiff to show he or she has a cause of action unless the defendant’s initial showing is sufficient to justify summary judgment.
(Tresemer
v.
Barke
(1978)
Appellant’s contention is frivolous. The trial judge expressly stated that the question whether appellants had presented evidence demonstrating the existence of a triable material issue of fact arose because respondents had made a showing negating appellants’ case. Thus, in stating his tentative view at the beginning of the hearing, the judge explained that respondents had “made a showing that unless contradicted would entitle them to have their
Appellants also rely on the principles that summary judgment “is a drastic measure which should be used with caution so that it does not become a substitute for trial”
(Biljac Associates
v.
First Interstate Bank, supra,
The cases upon which appellants rely in urging the considerations applicable in antitrust litigation should also apply to corporate litigation do not warrant a conclusion that summary judgment was necessarily inappropriate in this case. In
Morse
v.
Abbott Laboratories
(N.D.Ill. 1991)
In
Will
v.
Engebretson & Co.
(1989)
II.
The parties agree on the general principles of law governing this case; their disagreement is with application of those principles to the facts. “The business judgment rule is a ‘presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’ [Citation.] A hallmark of the business judgment rule is that a court will not substitute its judgment for that of the board if the latter’s decision can be ‘attributed to any rational business purpose.’ [Citation.]”
(Unocal
v.
Mesa Petroleum Co.
(Del. Super. Ct. 1985)
When corporate directors adopt defensive measures, however, the possibility that they might be acting to protect their own interests rather than those of the corporation and shareholders creates “an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.”
(Unocal Corp.
v.
Mesa Petroleum Co., supra,
Appellants contend that triable issues of material fact exist as to whether the Chevron directors reasonably perceived a threat to Chevron’s policies and effectiveness and whether the defensive mechanisms adopted were reasonable in proportion to the threаt With respect to the former, the directors’ burden of showing reasonable grounds for believing a threat to corporate policy and effectiveness exists may be satisfied “ ‘by showing good faith and reasonable investigation.’ ”
(Unocal Corp.
v.
Mesa Petroleum Co., supra,
First, appellants note the principle that proof of good faith and reasonable investigation “is materially enhanced ... by the approval of a board comprised of a majority of outside independent directors . . . .”
(Unocal Corp.
v.
Mesa Petroleum Co., supra,
A director’s association with a company that does business with the corporation does not in and of itself establish a lack of indepеndence.
(Kaplan
v. Wyatt,
supra,
Appellants next contend the directors’ investigation was insufficient. A prima facie showing of good faith and reasonable investigation is established when a majority of the board is comprised of outside directors and the
Appellants’ attempt to find a triable issue of material fact in the brevity of the December 7 meeting is unavailing. In the cases upon which appellants rely, directors’ investigation was found inadequate because extraordinary actions were adopted after single, relatively short board meetings at which insufficient information was considered. Thus, in v.
Van Gorkom, supra,
According to respondent’s evidence, the actions challenged in the present case were taken only after an assessment of the situation over the course of two months, including six meetings and extensive discussion with retained expert advisers. While Pennzoil was not known with certainty to be the accumulator of Chevron stock until December 7, it was identified as the
Appellants suggest a triable issue of fact exists as to how well the Board informed itself because the minutes of the Board’s meetings fail to indicate which members were prеsent in person and which by telephone. Under Delaware (and California) law, directors are permitted to attend board meetings by telephone and participation by telephone constitutes presence in person at the meeting. (Del. Code Ann. tit. 8, § 141, subd. (i); Corp. Code, § 307, subd. (a)(6).) The directors’ declarations make clear that the directors who attended meetings by telephone were active participants in the meetings. In the absence of any evidence to the contrary, appellants’ unsupported suggestion that directors who attend by telephone are “missing something” is insufficient to create a triable issue as to whether the directors were informed. 14
Appellants also suggest a question exists as to the reasonableness of respondents’ perception of a threat posed by Pennzoil because respondents failed to communicate with Pennzoil to discover its true intentions. In
Robert M. Bass Group, Inc.
v.
Evans
(Del. Ch. 1988)
Appellants also contend the court could not properly find the directors reasonably perceived a threat from Pennzoil because respondents “give no coherent description of exactly what the Pennzoil threat consisted.” Appellants urge that Pennzoil did not have the resources to mount a takeover of Chevron, did not have a partner with whom to do so, did not ask for board representation and did not threaten a proxy fight.
According to respondents’ evidence, the Board was concerned because of Pennzoil’s history of hostile stock transactions, its secret accumulation of $2 billion in Chevron stock, its chairman’s statement to Derr that the relationship between the two companies could be “friendly or adversarial,” its statement in its schedule 13D that it would monitor its investment and take such future action as it deemed appropriate, and the fact the Board had been advised Pennzoil could realize its tax deferral only by acquiring control over Chevron or part of its assets. Respondents do not suggest Pennzoil cоuld have mounted a take over of Chevron but maintain they were advised and believed that Pennzoil, as a large shareholder, could have facilitated a third party’s acquisition of control, attempted a restructuring or spinoff of Chevron oil and gas properties, or taken other actions for its own interest that could have been contrary to Chevron’s five-year plan or the interests of other shareholders. This evidence demonstrates the directors reasonably perceived a threat from Pennzoil; appellants’ evidence that Pennzoil could not itself have mounted a takeover does not create a triable issue as to the reasonableness of respondents’ perceptions of the potential threat posed by a major shareholder.
Appellants also contend a triable issue of material fact existed as to the reasonableness of the measures adopted by the Board. They rely upon
In
In DeSoto, the directors failed to explore obvious opportunities to negotiate a potentially lucrative offer that might have maximized shareholder values. In the present case, by contrast, the directors were not faced with a tender offer from a party expressing willingness to negotiate but with a secret accumulation of a massive amount of stock followed by a schedule 13D statement that appeared misleading in light of Pennzoil’s stated objectives in acquiring the stock. Nothing in DeSoto suggests any unreasonableness in the directors actions here.
In Robert M. Bass Group, Inc. v. Evans, supra, 552 A.2d at pages 1242-1246, the board responded to a tender offer by adopting a restructuring plan that effectively gave control to incumbent management without affording shareholders a control premium, in the face of a tender offer which posed no threat except that the tender offer might not be the highest price that would be obtained if the company were sold. The restructuring, which was economically inferior to the outside offer and made a portion of the company “takeover proof’ by tending to entrench management, was held unreasonable in response to the threat posed. The present case, again, does not involve a tender offer that might be in the shareholders’ best interests but the threat of disruptive actions by a major shareholder.
In NCR Corp.
v.
Tel. and Tel. Co.
(S.D.Ohio 1991)
Respondents’ evidence suggests the reasonableness of each of the actions it took in response to the perceived threat posed by Pennzoil’s accumulation of Chevron stock. The credit fаcility was adopted on the recommendation of Goldman Sachs and Chevron’s chief financial officer, Klitten. The memorandum prepared by Klitten analyzed Chevron’s need for available capital, the need for increasing Chevron’s access to credit in the face of possible hostile activity that in the cases of other corporations had caused difficulties in obtaining credit, the advantages of establishing the credit facility before any public announcement by an accumulator (to obtain more favorable pricing and terms and to ensure being able to implement the credit facility),
The directors voted to decrease the trigger for the shareholder rights plan upon advice from their retained experts that such a measure would permit the Board to protect shareholders’ interests without adversely affecting shareholder value. The directors’ concern was with the leverage a major shareholder would have with respect to proposals that might be in its own, but not necessarily other shareholders’, interests. They were advised that lowering the threshold would encourage a potential acquiror to negotiate with Chevron, and that a number of companies had rights plans with 10 percent thresholds. Aside from the claim that the Board acted without information as to the lowered threshold adversely affecting stock value, discussed above, appellants do not suggest what was unreasonable in adopting this measure.
With respect to the decision to amend the bylaws to eliminate shareholders’ rights to call special meetings, the directors were advised that under the existing bylaws a raider could use such meetings for the purpose of removing the existing Board or use the threat of such meetings to pressure the Board. The directors were further advised that Delaware law does not give shareholders an inherent right to call special meetings and that elimination of the right afforded by the bylaws would not inhibit a proxy contest in connection with the election of directors at annual shareholders’ meetings. Legal counsel pointed out to the directors potential problems with the proposed amendment—adverse stockholder reaction and perception in the financial community that the corporation was concerned about its vulnerability to a takeover—but on balance recommended taking the action. In response to this showing that the bylaws amendment was reasonable, appellants contend the directors gave no consideration to the adverse effects of their decision on corporate democracy. Notwithstanding this statement, however, they offer nothing to refute respondents’ evidence that they did consider the fact that shareholders would still be able to mount effective proxy fights against management.
Finally, the directоrs voted to commence litigation against Pennzoil upon counsel’s advice that the schedule 13D statement violated federal securities laws. Appellants contend a triable issue exists as to the reasonableness of this action because the fact the district court dismissed Chevron’s complaint suggests the legal advice respondents received was of questionable quality.
In sum, the evidence produced by respondents in support of their motion for summary judgment established that they reasonably perceived a threat from Pennzoil and acted reasonably in response to that threat. Appellants failed to show the existence of any triable material issue of fact with respect to respondents’ defense. Summary judgment was therefore properly granted.
The judgment is affirmed.
Notes
Kеnneth Derr, Chevron’s chief executive officer and president, had worked for Chevron since 1960, J. Dennis Bonney, vice-chairman of the board, had worked for Chevron or its subsidiaries since 1960, William Crain, a Chevron vice-president, had worked for Chevron since 1957; and James Sullivan, vice-president of the board, had worked for Chevron since 1961. Charles Renfrew became a Chevron vice-president in 1983 and a director in 1984, having previously been a partner at the law firm Pillsbury, Madison & Sutro.
Samuel Armacost was a managing director of Merrill Lynch Capital Markets and had previously served a president and chief executive officer of BankAmerica Corporation and Bank of America. Sam Ginn was the chairman of the board and chief executive officer of the Pacific Telesis Group. Charles Pigott was the chairman of the board and chief executive officer of PACCAR Inc. George Schultz was a professor emeritus at Stanford University Graduate School of Business and had previously served as Secretary of State and as president of the Bechtel Corporation. S. Bruce Smart was Seniоr Counsellor of the World Resources Institute and had previously served as Undersecretary of Commerce for International Trade and as chairman and chief executive officer of the Continental Group. George Weyerhaeuser was chairman and chief executive officer of the Weyerhaeuser Company. John Young was president and chief executive officer of the Hewlett-Packard Company.
The minutes of the October 6 meeting state only that “Mr. Derr reviewed the status of the current trading activity in Chevron stock.” Nine of the twelve directors were present.
Chevron is a Delaware corporation.
The minutes of the October 25 meeting simply state that “Mr. Derr reviewed the current activity in Chevron stock and the actions taken and being considered by the Company” and that Chevron had retained Goldman Sachs, Fried Frank, Pillsbury, and Georgeson. All the directors were present.
Under Chevron’s previously adopted stockholder rights plan, the shareholders held rights to purchase, under certain circumstances, fractional shares of preferred stock with voting and dividend rights comparable to common stоck. These rights could be exercised only if 20 percent or more of Chevron’s stock was acquired by a person or group in a transaction not approved by the Board or in the event of a hostile tender offer that would give a person or group ownership of 20 percent or more of the stock. Upon such an event, the shareholders rights would “flip-in” and entitle each holder of rights (not the 20 percent acquiror) to purchase preferred shares at half their fair value. This in turn would seriously dilute the equity position of the 20 percent shareholder. The Board could redeem the rights for $.05 per right any time before the triggering event. Since dilution could be avoided only by having the
According to the minutes of this meeting, Derr and a representative of Goldman Sachs “reviewed the recent activity in Chevron stock and the various market place rumors related to that activity,” the idea of аn additional credit facility was reviewed, and a representative of Fried Frank summarized Chevron’s existing defensive mechanisms for response to an unfriendly takeover attempt and possible changes that might be brought to a subsequent Board meeting. All but one of the directors were present.
All but one of the directors attended this meeting.
All but one of the directors attended this meeting.
Derr’s declaration states that he did not believe Pennzoil could acquire Chevron but felt it might attempt to force a restructuring that would force Chevron to spin off assets to Pennzoil or might take other actions contrary to the company’s long term plan for maximizing shareholder value. Renfrew believed Pennzoil’s accumulation of Chevron stock posed a threat to the corporation and shareholders because it seemed likely that Pennzoil’s tax-driven goals (which appeared to include a need for Pennzoil to force a spin off of Chevron oil and gas producing properties to make its investment similar to what it had had with Getty) were not consistent with Chevron’s long-term plan to enhance shareholder value.
Appellants urge reliance upon
Kaplan
v.
Wyatt, supra,
Appellants additionally urge the question of “materiality” of Armacost’s association with Merrill Lynch was necessarily a question of fact that precluded summary judgment.
TSC Industries, Inc.
v.
Northway, Inc.
(1976)
Finally, the directors’ declarations each state that they voted for the measures taken because they believed them to be in the best interests of Chevron and the shareholders and that they did not gain anything monetarily or personally from the actions taken. Appellants presented no evidence to the contrary.
In a similar vein, appellants suggest respondents’ evidence is insufficient to demonstrate the directors were fully informed and acted independently because the outside directors’ declarations indicate they could not remember specifically what happened at most of the Board meetings. This contention is based on the fact that these directors discussed some of the meetings as a group, without distinguishing the events of each one. Review of the declarations, however, reveals the lack of merit in appellants’ argument, as the directors includеd in their declarations the salient information presented and discussed at the meetings, whether or not tied to the specific date a given discussion occurred. Appellants’ mischaracterization of the declarations is most evident in their statement that “Mr. Young declare[d] that he ‘cannot recall exactly what was said at each of the five meetings that’ he did attend.” What Mr. Young actually stated was: “While I cannot recall exactly what was said at each of the five meetings that I attended, I do recall the general substance of those meetings.”
Appellants also rely on the statement in
Shamrock Holdings, Inc.
v.
Polaroid Corp.
(Del. Ch. 1989)
Appellants urge the Board approved lowering the shareholder rights trigger without information as to how this might adversely affect the price of Chevron stock. Respondents’ evidence shows the Board was advised by Goldman Sachs, bаsed on its experience with the consequences of adoption of such shareholder rights plans, that this action would not adversely affect the price of stock. Boisi acknowledged in his deposition that there had been studies attempting to prove stock would be detrimentally affected by adoption of rights plans but in the view of the leading law firms in the field and the investment banking community the methodology used in these studies was not effective or accurate. Appellants’ expert, however, stated that adoption of shareholder rights plans did have an adverse effect on share value. While this difference in expert advice might suggest the existence of a triable issue as to whether in fact lowering the threshold for a shareholder rights plan adversely affects share value, such a factual issue is essentially irrelevant in this case. Even if it were to be determined that the advice rendered the Board in this regard was erroneous, the Board nevertheless acted upon the advice of its investment banking expert and cannot be considered negligent in so doing.