We accepted this expedited interlocutory appeal from a decision of the Court of Chancery, denying a preliminary injunction to plaintiffs, in order to address certain defensive maneuvers taken in a battle for the control of Newmont Mining Corporation ("Newmont"), one of the largest gold producers in North America. In an attempt to block a hostile tender offer by Ivanhoe Partners and Ivanhoe Acquisition
Ivanhoe sought to enjoin the foregoing maneuvers as inequitable entrenchment devices violative of Newmont's and Gold Fields' fiduciary duties to Newmont shareholders under Delaware law. The Court of Chancery granted a temporary restraining order enjoining the consummation of Gold Fields' street sweep pending determination of Ivanhoe's motion for a preliminary injunction.
However, after a subsequent hearing, the court vacated the temporary restraining order and denied Ivanhoe's motion for a preliminary injunction, ruling that any breach of fiduciary duty which may have existed prior to the temporary restraining order had been rectified by a subsequent amendment to the standstill agreement between Newmont and Gold Fields. See Ivanhoe Partners v. Newmont Mining Corp., Del.Ch., 533 A.2d 585, 609 (1987). We therefore consider the propriety of all these transactions under the fiduciary obligations established in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings Inc., Del.Supr., 506 A.2d 173 (1986).
The Vice Chancellor found, and the record supports his conclusions, that the decisions of Newmont's board to facilitate the street sweep by issuance of the dividend, and to consumate a new standstill agreement, were taken in good faith after reasonable investigation in response to threats by both Gold Fields and Ivanhoe to Newmont's corporate policy and effectiveness. Under the circumstances, Newmont had both the power and the duty to oppose Ivanhoe's tender offer. Unocal, 493 A.2d
The facts are fully detailed in the trial court's lengthy opinion. See Ivanhoe Partners, 533 A.2d 585. We will not repeat them here except as is necessary for an explication of our views.
The critical events of this case occurred in the brief span of five weeks between August 18 and September 22, 1987. Also of significance are certain facts occurring before 1987 which shaped the historical relationship between Newmont and Gold Fields.
In 1981 Gold Fields began vigorously acquiring Newmont stock.
On August 13, 1987 Ivanhoe announced that it had acquired 8.7% of Newmont. Significantly, Ivanhoe soon took the deliberate step to increase its Newmont holdings to 9.95%, which thereby freed Gold Fields to terminate the standstill agreement. This was done intentionally with the hope that Gold Fields then would ally itself with Mr. Pickens and his Ivanhoe affiliates, either to take over Newmont and to divide it among themselves, or to reach some other mutually advantageous arrangement. This Ivanhoe tactic prompted a series of strategic maneuvers and responses by each of the three parties. In anticipation of a battle with Ivanhoe, Newmont began implementing traditional defensive measures.
On August 31 Ivanhoe sent Newmont a letter requesting a meeting to discuss the acquisition by Ivanhoe of all of the remaining Newmont common stock.
Furthermore, the Offer to Purchase disclosed that Ivanhoe would seek to acquire all remaining shares in a second step transaction at $95 per share cash which, likewise, was subject to obtaining financing. The offer stated that no specific second step transaction had been devised, and that there was no firm commitment to do so.
The Newmont directors had to quickly address numerous problems.
Ivanhoe then raised its tender offer price to $105 on September 16. Two days later the Newmont Board met to consider the revised offer and found that it, too, was inadequate. The Board's decision was made after a second presentation by Goldman Sachs which included revised figures based on the Gold Plan.
Although Gold Fields had considered breaking the standstill agreement and going into the open market to purchase control of Newmont, Ivanhoe Partners, 533 A.2d at 596, the prospect of accomplishing a similar yet more restricted objective with only a small capital investment was very attractive.
By September 20, 1987 Newmont and Gold Fields had reached an accord. This new agreement allowed Gold Fields to purchase up to 49.9% of Newmont stock, but effectively limited its representation on the Newmont board to 40% of the total directors. Additionally, Gold Fields was required to support the board's slate of nominees for the remaining board positions, and was prohibited from transferring its interest to any third party who refused to be bound by the standstill.
Once executed, the new agreement was delivered to Newmont in escrow conditioned upon the declaration of a $33 dividend.
On September 23, Ivanhoe sued to enjoin or rescind the $33 per share dividend and the street sweep. On the same day the Court of Chancery granted Ivanhoe's motion for a temporary restraining order prohibiting future trading by Gold Fields in Newmont stock.
Since the decision below denying Ivanhoe's motion for a preliminary injunction was based entirely on a paper record,
A plaintiff seeking a preliminary injunction must demonstrate both that there is a reasonable probability of success on the merits and that, absent the injunction, some irreparable harm will occur. Additionally, the plaintiffs must show that the harm they will suffer if the relief is denied outweighs the harm defendants will suffer if the relief is granted. Gimbel v. Signal Companies, Inc., Del.Ch., 316 A.2d 599, 602, aff'd, Del.Supr., 316 A.2d 619 (1974); Revlon, 506 A.2d at 179.
Since this case involves the actions of a board of directors in the face of a takeover, the probability of success of Ivanhoe's claim must be analyzed under the well established standard of Unocal. Ivanhoe contends that the standstill agreement tainted the Newmont directors with a personal interest which requires that the challenged acts be evaluated under the intrinsic fairness test rather than the business judgment rule. See Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710 (1983). However, the record does not support a conclusion that the directors appeared on both sides of the transaction, or that they derived any personal financial benefit from it which did not devolve upon the corporation and the shareholders generally. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984); Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971). Thus, we do not start with an intrinsic fairness analysis.
The board of directors has the ultimate responsibility for managing the business and affairs of a corporation. 8 Del.C. § 141(a) (1983).
A. The Ivanhoe Threat
This Court has recognized the coercive nature of two-tier partial tender offers. Unocal, 493 A.2d at 956. Here, not only did the Ivanhoe offer fit perfectly the mold of such a coercive device, but after reasonable investigation the offer was found by the Newmont board to be inadequate. The Vice Chancellor held that this finding of inadequacy was justified, and his conclusion is fully supported by the record. Ivanhoe Partners, 533 A.2d at 597 n. 12. Furthermore, Newmont and Gold Fields specifically recognized that Mr. Pickens, who controls Ivanhoe, had been involved in several attempts to acquire and break-up other corporations, resulting in the payment of "greenmail" or severe restructuring of the target companies. See, e.g., Unocal, 493 A.2d at 952, 956-57; Mesa Partners v. Phillips Petroleum Co., Del. Ch., 488 A.2d 107 (1984). The series of Ivanhoe maneuvers, including the secret acquisition of shares, the "bear hug" letter, the coercive partial tender offer and inadequate bid were all viewed by the defendants as classic elements of Mr. Pickens' typical modus operandi. Thus, the Newmont board could properly conclude that the Ivanhoe tender offer was not in the shareholders' best interests or those of their company. Unocal, 493 A.2d at 952, 956-57.
B. The Gold Fields Threat
Gold Fields did not make a public bid for Newmont, and in more recent years there appears to have been a congenial relationship between the two companies. From the outset Gold Fields publicly expressed its support for the Newmont management. A Gold Fields press release stated:
Throughout the weeks of harried activity Gold Fields continued to publicly support Newmont's management. Despite this, Newmont contends that it was threatened by the stark possibility that Gold Fields would cancel the 1983 standstill agreement and acquire control of the company, thus leaving the remaining shareholders without protection on the "back end". The record is replete with examples of the reality of this threat. A clear danger was posed by Ivanhoe's deliberate acquisition of 9.95% of Newmont shares, designed to free Gold Fields from the agreement, thereby permitting Ivanhoe and Gold Fields to ally themselves against Newmont. But even without Ivanhoe, Gold Fields now could wrest control away from the public shareholders. In addition, as the Newmont board was aware, Gold Fields had the necessary financial backing to unilaterally "sweep the street" and obtain control of Newmont. See Ivanhoe Partners, 533 A.2d at 607. Finally, the threat which Gold Fields posed was real. The Gold Fields board had in fact paused to weigh its options. Throughout these maneuvers it had considered in earnest the possibility of either independently purchasing control of Newmont or selling its interest to Ivanhoe. Id. at 595.
C. The Response
Ivanhoe argues that, even if it and Gold Fields did pose a threat to Newmont's corporate policy and effectiveness, the Newmont directors failed to satisfy the second part of their Unocal burden — that their response be reasonable in relation to the threat posed. Unocal, 493 A.2d at 955. In examining that contention, Unocal requires us to carefully assess the reasonableness of the defensive measures employed
It is significant that throughout the consideration and adoption of these proposals, the Gold Fields directors recused themselves from participation in the Newmont board meetings, leaving an alliance of four independent and three management directors. Thus, with the independent directors in the majority, proof that the board acted in good faith and upon reasonable investigation is materially enhanced. Id. at 955. See Polk v. Good, Del.Supr., 507 A.2d 531, 537 (1986); Revlon, 506 A.2d at 176 n. 3; Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346, 1356 (1985); Aronson, 473 A.2d at 812, 815; Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971).
Turning to the $33 dividend, it served two significant purposes in defending against Ivanhoe's inadequate and coercive tender offer. First, the dividend distributed the heretofore undervalued non-gold assets to all of Newmont's shareholders. In doing so Newmont effectively eliminated the means by which Ivanhoe might have acquired Newmont's gold assets at a substantial discount to the detriment of the other stockholders. Second, the dividend provided the financial impetus needed to persuade Gold Fields to engage in the street sweep. Although Gold Fields had the requisite financing to implement such action independently of the dividend, its board was reluctant to invest the $1.6 billion dollars needed to obtain a majority interest in Newmont.
The resulting standstill agreement also was a reasonable response to the Gold Fields threat. To forestall Gold Fields entry into the open market to purchase a controlling interest to the detriment of Newmont's public shareholders, Newmont obtained the new standstill agreement which restricted Gold Fields' ability to purchase and exercise control of the corporation. Thus, Newmont exchanged the $33 dividend for a revised standstill agreement, which not only limited Gold Fields' ownership to 49.9%, but, significantly, restricted its board membership to 40%. This guaranteed Newmont's continued independence under a board consisting of 40% Gold Fields directors, 40% independent directors and 20% management nominated directors. Further, the 49.9% limit on Gold Fields' stock ownership protected Newmont's public shareholders from being squeezed out by an unbridled majority shareholder.
The final element of the tripartite defensive measure employed against Ivanhoe was the so-called "street sweep". Ivanhoe contends that Newmont and Gold Fields breached their fiduciary duties to the shareholders who sold their stock in that maneuver. Specifically, Ivanhoe claims that the shareholders were wrongfully coerced into selling in the street sweep, and that Gold Fields was privy to material inside information which facilitated the maneuver. Under Unocal we must determine whether the use of the street sweep, aided by Newmont, was a reasonable response to the Ivanhoe threat. Viewed in isolation the measure was a Gold Fields defense to protect its own interest in Newmont. However, for the purpose of evaluating the fiduciary duties of Newmont, we view the street sweep as part of Newmont's own comprehensive defensive strategy.
Ivanhoe's claim that the Newmont board supplied Gold Fields with inside information is without merit. The Vice Chancellor found that Gold Fields did not have access to any confidential material information about Newmont. Ivanhoe Partners, 533 A.2d at 604. While Newmont had given Gold Fields a financial analysis of the company, the information furnished was obsolete and immaterial. Id.
Ivanhoe's allegation that the street sweep was inequitably coercive is likewise unsupported by the record. In advancing this argument Ivanhoe relies on conclusory form affidavits executed by arbitrageurs who sold in the street sweep, and on a
We, therefore, are satisfied that under all the circumstances Newmont's actions in facilitating the street sweep were reasonable. The measure was an essential part of Newmont's defensive plan, which enabled Newmont to maintain its independent status for the benefit of its other stockholders.
Finally, Ivanhoe's claim that Gold Fields breached its duty to the shareholders who sold in the street sweep is unfounded. Under Delaware law a shareholder owes a fiduciary duty only if it owns a majority interest in or exercises control over the business affairs of the corporation. Unocal, 493 A.2d at 958; Aronson, 473 A.2d at 815. By definition Gold Fields owed no fiduciary duty to the other shareholders of Newmont. Moreover, it is well established law that nothing precludes Gold Fields, or for that matter Ivanhoe, as a stockholder from acting in its own self-interest. Unocal, 493 A.2d at 958. It cannot be denied that it was very much in Gold Fields' interest to execute the street sweep in order to deter the break-up and squeeze out threat which Ivanhoe's inadequate, coercive two-tier bid posed to other shareholders, including Gold Fields. In the balance of the equation, and for sound reasons which we will not second guess, Gold Fields obviously considered its alignment with Newmont, even with the limitations the standstill agreement imposed, to be preferable to any arrangement with Ivanhoe and its affiliates.
Of course we recognize that one who knowingly joins with a fiduciary, including corporate officials, in a breach of a fiduciary obligation is liable to the beneficiaries of the trust relationship. Penn Mart Realty v. Becker, Del.Ch., 298 A.2d 349, 351 (1972). But having found that Newmont breached no duty of loyalty to its shareholders by facilitating the street sweep, it follows that Gold Fields could not have violated Unocal's applicable principles.
On this record we are satisfied that the defensive plans adopted by the Newmont board were reasonable in relation to the threats posed by Gold Fields and Ivanhoe. The Newmont board acted to maintain the company's independence and not merely to preserve its own control. It succeeded in that goal. Thus, the Newmont directors have satisfied their burden under Unocal, and their actions are within the ambit of the business judgment rule. Unocal, 493 A.2d at 954-55. See also Revlon, 506 A.2d at 180 n. 10.
Ivanhoe claims that the Newmont directors breached the duties imposed upon them in Revlon by refusing to entertain Ivanhoe's bid. Ivanhoe argues that under Revlon the board was charged with securing the highest available price for the company. However, the facts presented here do not implicate this Revlon principle.
Revlon involved the lock-up of a corporation amidst a bidding war for the company between a hostile party and a friendly bidder. The lock-up was effected after the board of directors had authorized management to "sell" the corporation. This Court held that when "the break-up of [a] company [is] inevitable ... [t]he duty of the board ... change[s] from the preservation of [the company] as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit." Revlon, 506 A.2d at 182. Under such circumstances the directors became auctioneers "charged with getting the best price
Revlon applies here only if it was apparent that the sale of Newmont was "inevitable". The record, however, does not support such a finding for two reasons.
First, Newmont was never for sale. During the short period in which these events occurred, the Newmont board held fast to its decision to keep the company independent. Ivanhoe Partners, 533 A.2d at 603. Ultimately, this goal was achieved by the standstill agreement and related defensive measures.
Second, there was neither a bidding contest, nor a sale. The only bidder for Newmont was Ivanhoe. Gold Fields was not a bidder, but wished only to protect its already substantial interest in the company. It did so through the street sweep. Thus, the Newmont board did not "sell" the company to Gold Fields. The latter's purchases were from private sellers. While Gold Fields now owns 49.7% of the stock, its representation on the board is only 40% because of the restrictions of the standstill agreement. These facts do not strip the Newmont board of the presumptions of independence and good faith under the business judgment rule. Aronson, 473 A.2d at 815. Even though Newmont's declaration of the dividend facilitated the street sweep, it did not constitute a "sale" of the company by Newmont.
On this record we are satisfied that the fiduciary obligations imposed by Revlon to sell a company to the highest bidder are not applicable here. We, therefore, find no merit in plaintiffs' contentions.
In conclusion, Newmont's directors had both the duty and responsibility to oppose the threats presented by Ivanhoe and Gold Fields. Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984); Unocal, 493 A.2d at 954. Further, the actions taken were reasonable in relation to the threats posed. Id. at 956. The comprehensive defensive scheme consisting of the dividend, standstill agreement, and street sweep accomplished the two essential objectives of thwarting the inadequate coercive Ivanhoe offer, and of insuring the continued interest of the public shareholders in the independent control and prosperity of Newmont. Under the circumstances, the board's actions taken by a majority of independent directors, are entitled to the protection of the business judgment rule. Aronson, 473 A.2d at 812, 815, 817; Polk v. Good, Del.Supr., 507 A.2d 531 (1986); Revlon, 506 A.2d at 176 n. 3, 180; Unocal, 493 A.2d at 955-56; Puma v. Marriott, Del. Ch., 283 A.2d 693, 695 (1971). Thus, unless the appellants demonstrate that the directors were solely or primarily motivated by entrenchment concerns, or another breach of a duty of loyalty or care, "this Court will not substitute its judgment for that of the board." Unocal, 493 A.2d at 958. The record does not support an entrenchment claim respecting the Newmont board's actions, and Ivanhoe failed to present evidence of any other breach of fiduciary duty. While the Vice Chancellor initially found two entrenching effects of the September 20 standstill agreement, which were cured by the September 27 amendment, we do not agree that the September 20 standstill breached any fiduciary duty. The agreement ensured an independent
The Securities and Exchange Commission (SEC) has unsuccessfully challenged street sweeps as a violation of the Williams Act. See Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir.1985); SEC v. Carter Hawley Hales Stores, Inc., 760 F.2d 945 (9th Cir.1985). As a result, the SEC has proposed a rule which would require that all purchases during and shortly after a tender offer that would increase any shareholder's ownership by 10% or more be made in compliance with the rules applicable to tender offers. Acquisitions of Substantial Amounts of Securities and Related Activities Undertaken During and Following a Tender Offer for those Securities, Exchange Act Release No. 24976, [Current] Fed.Sec.L.Rep. (CCH) par. 89,160 (Oct. 1, 1987).
On September 7, Newmont's board approved a 2.25 billion dollar revolving credit agreement which provided for default of the loans if an entity acquired 50% or more of Newmont.