Hanson Wins Appeal, Resumes Bid for SCM
Hanson Trust PLC forged ahead Tuesday with its bid to acquire SCM Corp. after a divided federal appeals court voided the “lock-up option” that SCM used to keep its key assets in friendly hands.
In a 2-1 ruling, a panel of the 2nd U.S. Circuit Court of Appeals said SCM’s board of directors did not exercise “due care” when it agreed to sell the company’s prized pigment and Durkee frozen foods businesses to a group headed by Merrill Lynch. The agreement was made in the event that Hanson blocked the Merrill group’s rival bid to take over SCM in a leveraged buy-out.
If Merrill Lynch had succeeded in acquiring those two lines of SCM’s business for the option price of $430 million, it would have been economically senseless for Hanson, which had built a one-third stake in SCM last fall, to complete its own $75-a-share tender offer. But Hanson announced late Tuesday that, in the wake of the appeals court’s ruling, it had raised its share of SCM to about 66% by buying 4.187 million shares that had been tendered to it.
Hanson’s chief argument was that the two businesses were worth $600 million to $700 million and that SCM’s board breached its duties to shareholders by optioning them for $430 million.
SCM officials said in a statement that the company would ask the entire 11-judge membership of the 2nd Circuit Court to reconsider the ruling.
The court decision had an immediate effect on SCM’s stock. On the New York Stock Exchange, SCM climbed $2.50 a share to close at $74.75.
U.S. District Judge Shirley Wohl Kram ruled in November that the SCM board was within its rights to grant the lock-up option, even though it may have been economically unwise. She based her decision on the longstanding “business judgment rule,” in which courts have generally declined to intervene in management decisions except in cases of fraud or other clear breaches of duty.
But in the majority opinion reversing her ruling, Circuit Judge Lawrence Pierce wrote that the SCM board acted hastily and without enough information about the value of the two businesses, the company’s so-called crown jewels, before agreeing to grant the option.
“We view the board as only minimally fulfilling, if not abdicating, its role,” Pierce wrote. In a concurring opinion, Circuit Judge James L. Oakes said that board members must exercise even more care when weighing an offer from a group that includes the company’s own management, as did the Merrill Lynch group.
In her dissent, Circuit Judge Amalya L. Kearse wrote that “the information before the (SCM) directors was not so scant as the majority would have it,” and she added that there was no reason to believe that Kram abused her discretion in refusing to issue the injunction sought by Hanson.
Devise Alternative
Hanson, a London-based combine that has American interests in shoes, hot dogs and garden tools, launched one of the most complex--and bitter--takeover fights of 1985 last August when it offered $60 a share in cash for SCM’s 12.25 million shares outstanding.
SCM’s management advised shareholders to reject that bid and worked with Merrill Lynch to devise an alternative. That proposal was to pay $70 a share--$59.50 of it in cash--for 85% of the company’s stock in a leveraged buy-out that would give SCM management up to a 15% stake in the company. In a leveraged buy-out, a target is acquired largely with borrowed funds that are paid off with the target’s operating earnings or through the sale of its assets.
Hanson came back with a $72 cash offer, and Merrill Lynch responded by raising its bid to $74 but with no additional cash. To induce Merrill Lynch to make the $74 offer, SCM agreed to give it the lock-up option.
In addition, testimony last fall showed that SCM paid Merrill a $1.5-million “hello fee” just to make a bid, a $6-million “hello again” fee for making the second offer and a $9-million “goodby fee” when Hanson raised its holdings to one-third, thus making Merrill’s takeover impossible.
Hanson topped the last Merrill offer by bidding $75, still in cash, but only on the condition that the lock-up option was rescinded or invalidated.
The decision, if it stands, seems likely to put a damper on the use of lock-up options to thwart hostile takeover bids. In many respects the 2nd Circuit panel’s ruling followed the reasoning that the Delaware courts used last year in invalidating a lock-up option granted by Revlon to thwart a bid from Pantry Pride.
