Henley Sues, Hits SFSP ‘Sweetheart’ Deal With O

Henley Group asked a Delaware court Tuesday to void an agreement between Santa Fe Southern Pacific and Olympia & York Developments that exchanged two seats on SFSP’s board for O&Y;’s support in a proxy fight with Henley.

The alliance between SFSP and Olympia & York, which was announced Jan. 31, deprived Henley of a potential ally in O&Y; and struck a blow to Henley’s protracted efforts to take control of SFSP, a Chicago-based transportation, energy and real estate concern.

At one point last year, both Henley and O&Y; were considering making tender offers for the SFSP shares they did not already own. Henley, a La Jolla-based multi-industry conglomerate, said it made a $7-billion cash and securities offer in December that SFSP’s board turned down. On Jan. 19, Henley said it would mount a proxy fight to gain representation on SFSP’s board.

Henley, which is SFSP’s largest shareholder with 15.7% of SFSP stock, had hoped to join forces with Olympia & York, owner of 10.15% of SFSP shares, to put forth an alternative slate of directors at SFSP’s annual meeting, now set for May 24. Olympia & York is headquartered in Toronto.

In the amendment made Tuesday to a suit originally filed Jan. 19 in Chancery Court in Delaware, Henley accused SFSP of making a “sweetheart deal” with O&Y;, offering as a “crucial inducement” confidential internal information on SFSP assets that would enable O&Y; to “formulate and negotiate bids for the purchase of Santa Fe, or Santa Fe assets, from a uniquely advantageous position.”

In a prepared statement summarizing the amendment, Henley said that it asked the court to enjoin SFSP from giving such information to O&Y; unless it is also made available to Henley and other bidders.

SFSP President Robert D. Krebs described the Henley amendment in a prepared statement as “baseless litigation,” “public posturing,” and a “continuation of (Henley Group Chairman Michael D.) Dingman’s efforts to obtain control of our company without paying for it.”

Analysts were generally skeptical of Henley’s chances of prevailing in court, noting that Delaware laws--both Henley and SFSP are incorporated in Delaware--give companies wide latitude in anti-takeover defenses.

“It looks like a tough road for Henley,” said Laurence Lytton, vice president of the Drexel Burnham Lambert investment banking firm in New York. “I can sympathize that the situation is not fair to all shareholders, including themselves. But, in my view, since when is the world fair?”

Not a Sure Winner

Isabel Benham, president of Printon, Kane Research of New York, said: “It’s going to be very difficult for Henley. They have changed the laws in Delaware and everyone, even (corporate raider T.) Boone Pickens, says it’s much harder to do a takeover” involving a Delaware corporation.

Richard Jennings, a professor of law emeritus at UC Berkeley and a specialist in securities law, said Henley’s suit is “not a sure winner.”

“If (SFSP) monkeys around and locks up one suitor against another, there can be problems,” Jennings said. “But the court is going to defer to the honest business judgment of the board as long as they individually do not gain. I think the court is going to give a lot of leeway to (SFSP’s) existing board.”

Henley also asked the court for permission to propose a bylaw amendment increasing the size of SFSP’s board.

The amendment would also allow Henley to solicit proxies for a majority of the 19 present directors, not just the five up for reelection at SFSP’s annual meeting in May. Two other board members are scheduled to retire.

Postponement Sought

Among the five up for election are the O&Y; executives, Paul Reichmann and Marshall A. Cohen, who were appointed last month.

In its original complaint, Henley asked the court for an order enabling it to hold talks with O&Y; without triggering a “flip-in” provision of SFSP’s poison pill defense adopted last year.

The provision, aimed at keeping investors or groups of investors from accumulating more than 20% of SFSP stock, would have enabled all other shareholders to buy additional SFSP stock at 50% discounts, severely diluting Henley’s holdings.

Because Henley and O&Y; own a total of more than 20% of the stock, any negotiations between them might have put the SFSP defense plan into effect.

Henley also accused SFSP of issuing the securities portion of its scheduled $4.7-billion payout to shareholders “solely for entrenchment purposes.”

SFSP has said it will issue $5 in principal amount of 16% bonds to each shareholder along with $25 in cash.

A court hearing on Henley’s complaint had been scheduled for Thursday, but Henley officials said Tuesday that they are seeking a postponement.

SFSP stock closed down 12.5 cents a share at $44.375 on Tuesday, while Henley stock closed up 25 cents a share at $21.375.