In a decision that should cheer the managers of corporate takeover targets, a federal judge on Monday endorsed steps taken by Union Carbide Corp. to defend against a hostile $5.1-billion acquisition by GAF Corp.
U.S. District Judge Milton Pollack rejected GAF’s request for an injunction against Carbide’s offer to buy back up to 70% of its own shares, a step that Warren Anderson, chairman of the Danbury, Conn., chemical giant, testified earlier this month was largely intended to thwart the GAF bid.
Pollack also refused to bar Carbide’s directors from implementing a plan to give as much as $800 million in surplus pension assets to the company’s employees and pensioners in the event that GAF gains control. GAF and its president, Samuel J. Heyman, were counting on that money to help finance their takeover.
Pollack further refused to reverse a recent change in Carbide’s bylaws that raises the requirement for a quorum at shareholders’ meetings and prevents GAF from calling a special meeting to oust Carbide’s management.
GAF said it will appeal what it called Pollack’s erroneous decision. Union Carbide said it welcomed the ruling but needed time to study it.
The practical effect of Pollack’s decision in the complex takeover fight remains to be seen. In raising its all-cash offer from $68 to $74 a share last week, GAF attempted to sidestep Carbide’s defenses by allowing the company’s shareholders to participate in both the company buy-back plan and the GAF tender offer. GAF said it is willing to acquire the package of cash and debt securities, valued at $85 a share by Carbide and about $72 a share by analysts, that Carbide is offering its shareholders.
Board ‘Reasonable and Fair’
The Carbide board is scheduled to meet Thursday to decide what to do in response to GAF’s new, higher offer. The company’s original strategy had been to encourage shareholders to tender their stock to the company instead of to GAF and, in the process, to restrict the disposal of Carbide’s assets so as to make it impractical for GAF to go ahead with its plan to gain control and then sell pieces of the company to pay for the takeover.
In his stinging 20-page opinion, Pollack said the Carbide board was within its rights in attempting to “foster the future intact existence” of the company.
“The actions of the directors complained of were reasonable and fair, not motivated by self-interest, nor did they go beyond that permissibly and reasonably viewed as necessary,” Pollack wrote. “The transactions complained of were grounded on sound reason, made with a good-faith intent to serve the shareholders’ best interests. . . . The Carbide board owed no duty to GAF as a tender offer or to facilitate an unfair takeover bid by making the company’s assets available to finance it.”
In a finding that could have broad implications in other takeover fights, Pollack ruled that the Carbide directors had a right to protect the interests of management with “golden parachute” severance packages, and of employees with higher pension benefits, in the event of a hostile takeover. GAF contended that such actions violated the board’s obligations to represent the interest of stockholders.
“Under friendly terms, the interests of employees can be ironed out on the bargaining table with equity to all sides,” the judge wrote. “It was the board’s judgment, and it appears entirely reasonable, that it was prudent to reserve to itself this power in the event of an unfriendly assault on control to prevent a takeover bidder from jeopardizing future appropriate and necessary increases of pension benefits by his use of the funds to finance a takeover. Labor, at whatever level, should not be victimized or go unrequited by control contests.”
It was the second time in less than two months that a federal court has invoked the “business judgment rule” in refusing to block anti-takeover efforts of a target company. The business judgment rule is a doctrine in which courts generally decline to intervene in a company’s affairs unless, as Pollack observed, there is “no reasonable business justification” for management’s actions.
On Nov. 26, U.S. District Judge Shirley Wohl Kram, also in Manhattan, refused under the business judgment rule to void the “lock-up options” that SCM Corp. had granted on two of its prized assets to keep them from falling into the hands of takeover-minded Hanson Trust PLC. Hanson has asked the U.S. 2nd Circuit Court of Appeals to reverse that ruling, and a decision is expected soon.