ContractsProf Blog

Business Associations Limerick of the Week: Paramount Communications v. QVC Network, Inc.

Paramount v. QVC is a lot like Paramount v. Time, and the decisions are entirely consistent: Paramount always loses.  Beyond that, it is hard to say what principles are operative here.  In this case, Paramount was trying to protect a friendly merger with Viacom and fend off a hostile offer from QVC.  Viacom and Paramount agreed to the usual array of defensive measures and treated QVC disdainfully.  Sounds a lot of like the way Time treated Paramount.  

This time, however, the Delaware Supreme Court enjoined the key defensive measures.  Because Viacom's chief, Sumner Redstone, was a controlling shareholder and would be so in the newly combined entity, this transaction contemplated a change in control, an element missing from the proposed Time/Warner merger.  This difference necessitated the imposition of Revlon duties, so Paramount could not engage in defensive measures that shut down an active bidding process.

Paramount v. QVC

The Court invokes the old adage;

We expect that managers manage.

But Boards must patrol:

Where there's loss of control,

Shareholders must win some advantage.

[Jeremy Telman]

Business Associations Limerick of the Week: Paramount Communications v. Time, Inc.

This case is again very complicated and involves a full panoply of defensive measures.  You might think that just a few years after its Revlon decision, the Delaware Supreme Court would be eager to apply that decision to another case in which management arguably shut down an auction of a firm that was clearly not going to continue to exist in its prior form.  But the court believed that Time's management acted within its powers in fending off Paramount's tender offer and locking up with Warner Brothers in order to preserve Time's corproate culture and preserve the entity for future long-term payoffs. 

Paramount Communications v. Time, Inc.

Time's lock-up and no-shop don't trigger
Revlon's protections -- go figger!
A Paramount vulture
Threatened Time's culture
And justified defensive vigor. 

[Jeremy Telman]

Business Associations Limerick of the Week: Revlon v. MacAndrews & Forbes

Ron Perelman, cigar-chomping CEO of Pantry Pride, wanted to acquire Revlon.  Revlon's CEO, Michel Bergerac, did everything in his power to prevent the acquisition.  The case is a great vehicle for teaching defensive measures, because Revlon's efforts to escape Perelmans' grasp were extensive: we've got a poison pill, a stock buy-back, a white knight, and a lock-up involving a no-shop provision, a cancellation fee and a crown jewel transaction. After several rounds of bidding, Revlon locked up with Forstmann Little.  The latter would acquire the company. The security of the deal was enhanced through the no-shop provision, a hefty cancellation fee and an option to purchase Revlon's key divisions (the "crown jewels") at a discount.  

Pantry Pride sought to enjoin the transaction.  The Delaware Supreme Court found that, when management has determined that the corporation is going to be sold, its duty is to maximize the sales price.  Fiduciary duties to other stakeholders must now be subordinated the duty of getting shareholders the greatest possible bang for their buck.  The court thus adds a heightened level of scrutiny in the context of defensive measures.  Just months before Revlon, the court had decided Unocal, in which it permitted an exclusive self-tender to fend off a (two-tiered, front-loaded and potentially coercive) tender offer from T. Boone Pickens.  There, the court determined that Pickens' offer was a threat to the corporation and that management had taken reasonable and proportional measures to counteract the threat.

Here, however, because Revlon was now up for sale and the lock-up with Forstmann precluded further bids that could have benefitted shareholders, there was a fiduciary breach and the transaction was enjoined.

Revlon v. MacAndrews & Forbes

If you put your firm up for sale

And entice a White Knight with a grail,

Lock-ups are out.

In this heavyweight bout,

Shareholder rights must prevail.

[Jeremy Telman]

Business Associations Limerick of the Week: Cheff v. Mathes

Cheff has great facts, although the facts do not really affect the opinion.  Holland Furnace, it turns out, was a thoroughly corrupt business that was also losing money.  Its means of selling furnaces was to send a crew over to people's houses to "inspect" the furnaces.  The inspectors would often find (or perhaps create) problems and then sell the unsuspecting homeowner a new furnace.  Arnold Maremont, who owned a muffler business (and a lot of modernist art), took an interest in taking over Holland furnace and started buying up shares.

Maremont had a reputation for buying corporations and then liquidating them.  The principals of Holland feared he would do the same to them or at least streamline their business model by selling furnaces the way he sold mufflers -- through retailers -- thus eliminating much of Holland's workforce.  Incumbent Holland management decided to use corporate funds to buy back Holland's stock from Maremont, a defensive measure known as greenmail.  Dissatisfied shareholders filed a derivative action, claiming the payments were improper because motivated by a desire to maintain control of the corporation rather than by the best interests of its shareholders.  

The trial court bought this argument, but its finding was reversed on appeal.  Although the trial court applied the right standard, management's conduct in this case was justified, in the court's view, by the real threat to the corporation's well-being posed by the prospect of Maremont's takeover.  The court deferred to Holland's management's business judgment as to the long-term best interests of the firm.  The deference was misplaced in this instance, because the fraudulent scheme described was discovered, leading to the demise of Holland Furnace.  

Cheff v. Mathes

Cheff, who controlled Holland Furnace,

Said, "Pay Maremont greenmail to spurn us."

The court was not peeved

Because Cheff believed

"That Maremont will buy us and churn us."

[Jeremy Telman]

Business Associations Limerick of the Week: Stuparich v. Harbor Furniture

This is a case about a family-owned close corporation.   The father, Malcolm, Sr. gave a controlling share to his son, Malcolm, Jr., leaving two sisters, Candi and Ann, as minority shareholders.  The siblings disagreed about the direction of the business.  The main business, which involved furniture was stagnating, so the sisters wanted to expand the family's side business in trailer parks. 

But Malcolm had a controlling interest, and while the sisters had the ability to voice their opinions, Malcolm never paid them any heed, and he ran the business according to his own lights.  One of the disputes allegedly involved Malcolm hitting one of the sisters, but the court did not give any weight to that fact. 

The sisters claimed that they were being improperly frozen out and deprived of the benefits of ownership, so they sought a court-ordered dissolution of the company.  The court sided with Malcolm.  The sisters still got their dividends, so their ownership interest in the company was not frustrated.

Stuparich v. Harbor Furniture

Two sisters, Candi and Ann,
Preferred trailers to chairs of rattan.
Dividends they receive
And so they must leave
It to Malcolm the business to plan.

[Jeremy Telman]

Business Associations Limerick of the Week: Pedro v. Pedro

Pedros was a family business run by three brothers.  Alfred discovered that his brothers, Carl and Eugene were embezzling from the business, and he wouldn't shut up about it.  After two investigations, some funds could not be accounted for.  Carl and Eugene repeatedly warned Alfred to move on, but he refused.  Eventually, they were forced to tell employees that poor Alfred had suffered a nervous breakdown and would no longer be able to work.  I mean really -- what choice did they have?  He was also frozen out of the decision-making process and otherwise deprived of the benefits of his ownership share in the corporation. 

They court found that Carl and Eugene had violated their fiduciary duties to Alfred and ordered damages, including his reasonable expectation of lifetime employment, without any requriement that Alfred show that his brothers' misconduct caused actual harm to the corporation,

Pedro v. Pedro

Alred loved Carl and Eugene,
Though they thought him off his bean.
Their breaches frenetic
Made judges splenetic
So they paid for their freeze-out routine.

[Jeremy Telman]

Business Associations Limerick of the Week: Wilkes v. Springside Nursing Home, Inc.

I am heading off for a conference this week and am behind in preparations, so this will be a short post and probably the last for the week from me.

Wilkes sets out the standard for fiduciaries in the context of a close corporation in Massachusetts. In doing so, it departs from an earlier Massachusetts precedent, Donahue v. Rodd Electrotype. While Donahue treated close corporations like partnerships and thus treated shareholders with all the rigor demanded by Cardozo's punctilio, Wilkes held that standard too demanding. Rather, when challenged by a minority shareholder, the remaining shareholders must show that their actions were inspired by a legitimate business purpose and that the actions taken were narrowly tailored to minimize the harm to the minority shareholder. In short, the court recognized the legitimacy of shareholders looking out for their "selfish ownership interest" in the company.

In this case, the defendants breached their fiduciary duty to Wilkes by freezing him out and depriving him of the benefits of his status as a shareholder

Wilkes v. Springside Nursing Home, Inc.

A freeze may be allowed
Where a proper purpose 's avowed.
But minority rights
May be extinguished like lights
'Neath a selfish ownership shroud.

[Jeremy Telman]

Business Associations Limerick of the Week: Galler v. Galler

Like the case memorialized in last week's Limerick, this is a case about the enforceability of a shareholders' agreement. Like Owen v. Cohen, this case offers the opportunity to develop the Catskills shtick theme in the Limericks for Lawyers.

The Galler brothers, Benjamin and Isadore (Izzy to me) each owned 47.3% shares in a wholesale drug business. They entered into a shareholders' agreement in 1955 that would guarantee each family two seats on the corporation's four-member board, even if one of the brothers died. It also provided for dividends and a death benefit to the widow of either brother. Ben had a heart attack while the agreement was being negotiated. When he died two years later, Isadore and his son Aaron refused to honor the agreement. In a close corporation in which minority shareholders excluded from the agreement do not object, the test for the enforceability of such agreements is simple reasonableness.

The court found the agreement in question here reasonable in terms of the amount to be paid, the terms for payment (contingent upon a specified earned surplus), and duration. The last of these factors is interesting in this case. The agreement provided that it was to last for the lifetimes of the Galler brothers and their wives. The court's rendition of the facts of the case suggests that Ben's widow, Emma, was a generation younger than he was. Perhaps the in-laws weren't crazy about Ben's taste in women. Perhaps Emma was a second wife, viewed as an interloper or a gold-digger.

It is interesting to explore with students why the business's minority shareholder (a long-time employee of the firm) raised no objections to the agreement.

The following Limerick issues from beyond the grave, from Izzy and Ben's yiddische mama.

Galler v. Galler

Is Emma an utter schllemiel?
Izzy, hear this appeal!
She who life to you gave,
Oy! She'll turn in her grave!
Abide by the '55 deal!

[Jeremy Telman]

Business Associations Limerick of the Week: Ringling Bros.

The Ringling Brothers are pictured at right. Together, they created a successful business enterprise. But when they passed the circus on their heirs, things got a bit messy. So messy, in fact, that I no longer teach this case, as the facts are too complicated and the situation too idiosyncratic to justify the time one has to spend on the case in order the earn the meager reward it offers in terms of useful law. Still, it is at least about the breach of a contract, in this case a shareholders agreement, and that makes it a legit case to discuss on this blog. And the facts of the case certainly render it Limerickworthy. 

Much of the background behind the case is nicely explored in J. Mark Ramseyer's article, which can be found on SSRN here. The short version is as follows. John Ringling, one of the original five brothers (he's the one with the mustache!), controlled the circus until his death in 1936. At that point, control passed to three Ringling factions: John's wife Edith, and her son Robert; Aubrey and James Haley; and Ida Ringling North (a sister to the original five) and her sons John Ringling North and Henry North. John Ringling North was the most industrious of the new generation and he actually knew how to run a business. He was the impressario who engaged Igor Stravinsky and George Balanchine to create a ballet for elephants. John North ran the circus ably until 1943 when the Haleys entered into a vote pooling agreement with Edith and Robert Ringling and thus were able to seize control of the board. They did so, Ramseyer tells us, in order to assure that the circus would continue during World War II. 

This was an unwise decision. John North had decided to shut down the circus for the remainder of the war because of the scarcity of fireproof materials for the tents under which the circus performed. But Robert Ringling and the Haleys were willing to take the risk. The result was the tragic Hartford Fire on July 6, 1944, in which 168 people were killed. Ramseyer reports that the fire was either caused by: a mentally handicapped arsonist employed by the circus; a "dirty son-of-a-b----" in the bleachers who threw a cigarette butt; or a monkey jumping around the upper poritions of the tent with a lit cigar. So much for the value of eyewitness testimony. In any case, the circus ended up paying nearly $4 million to settle civil suits, and James Haley was sentenced to a year in jail for involuntary manslaughter. 

Perhaps out of fellow feeling or perhaps out of business savvy, John North made friendly overtures towards his convicted business partner. Robert Ringling, on the other hand, who was himself lucky to have escaped a prison sentence, stayed away. As a result, when Haley got out of jail, he and Aubrey refused to cast their shareholder votes as previously agreed per their shareholder agreement with Edith and Robert Ringling. Aubrey and John North hatched a plan to return control of the circus to John North, while also allowing James Haley the opportunity to benefit from a position as an officer in the corporation.  

The issue before the court then was whether the Haleys had violated their shareholder agreement by refusing to abide by the ruling of the arbitrator appointed under the agreement, one Mr. Loos, and by refusing to cast their votes as Mr. Loos determined they should. The Delaware Supreme Court found that the Haleys were in breach of the agreement but that Mr. Loos had no power to enforce it. It therefore determined that the Haleys' improper votes simply would not count. The result was that the Haleys were simply left without representation on the newly-elected board, but that board was now evenly split between representatives of the North faction and representatives of the Ringling faction, a recipe for deadlock. 

This Limerick addresses the question of what role the Haleys were to have in the new administration of the circus. 

Ringling Bros. v. Ringling

After the Great Hartford Fire,
Aubrey and John did conspire.
The corporation is close;
Aubrey's misconduct, gross
Now the Haleys perform on high wire.

[Jeremy Telman]

Business Associations Limerick of the Week: Pilsbury v. Honeywell, Inc.

With last week's Limerick, we covered a case that teaches us that a shareholder has a right to inspect a corporation's books and records, including shareholder lists, in the context of a tender offer. State laws, including Section 220 of Delaware's General Corporation Law, provide that a shareholder has inspection rights subject only to the requirement that the shareholder show that she seeks inspection for purposes related to the business of the firm.

In Pilsbury, plaintiff was a member of Project Honeywell, an antiwar group that was trying to get the corporation to stop producing fragmentation bombs for use during the Vietnam War. Pilsbury bought shares in Honeywell so that he could lobby its shareholders on the subject of fragmentation bombs. He said in deposition that his only reason for investing in the company was to call attention to Honeywell's fragmentation bomb production. The court found that his purpose in seeking inspection related to his political views and not to the firm's business. Accordingly, he was denied the right to inspect under Delaware law.

So now, savvy politically-motivated investors know that they have to say in their depositions that they love the corporations that they are seeking to expose, and believe that manufacturing savage weapons is bad for business.

Pilsbury v. Honeywell, Inc.

Pilsbury protests Vietnam
Honeywell could not give a damn.
If he'd only lied,
He'd have not been denied!
Is Section 220 a sham?!?

[Jeremy Telman]