Opinion ID: 2308864
Heading Depth: 1
Heading Rank: 4

Heading: The Transfer Agreement

Text: The Transfer Agreement provided that Tri-Star would acquire the Coca-Cola subsidiaries comprising the Entertainment Sector at their unappraised book value of $745 million in exchange for just over 75 million shares of newly issued Tri-Star common stock that, when added to the Tri-Star shares Coca-Cola already owned, would increase the latter's equity interest in Tri-Star from 36% to 80%. [4] Thereafter, Coca-Cola intended to declare a special dividend to its stockholders, of 31,400,000 of the approximately 75,000,000 Tri-Star shares it was to receive in the Combination. This would reduce Coca-Cola's common stock holdings in Tri-Star to 49%. The number of shares to be received by Coca-Cola under the terms of the Transfer Agreement was based on a net book value ratio of the Entertainment Sector assets ($745 million) to those of Tri-Star ($265 million). The net book values used to set the ratio were determined by Coca-Cola's chief financial officer on July 31, 1987, and were clearly designed to ensure Coca-Cola's 80% ownership of Tri-Star. Under the Transfer Agreement, Coca-Cola retained certain assets of the Entertainment Sector, including $300 million in cash, a $240 million inter-company receivable, certain real estate, stock and assets. Coca-Cola also reserved the right to purchase $100 million of newly created Tri-Star preferred stock having liquidation and dividend preferences over the common stock. Defendants' proxy materials seem to suggest that Coca-Cola acquired Tri-Star by transferring to it $745 million in unappraised Entertainment Sector assets in exchange for 75,176,667 Tri-Star shares having a market value of $12-13 per share. Coca-Cola therefore received stock worth between $900 and $977 million. However, the notes to the unaudited pro forma combined condensed financial statements disclose that the transaction was actually treated as a purchase of Tri-Star by the Entertainment Sector for $291 million. (A172). [5] Interestingly, the body of the proxy statement omits reference to the $291 million purchase price, stating that the Combination will be accounted for as a purchase by the Entertainment Sector of Tri-Star in a step-purchase transaction. (A163). The Transfer Agreement also required stockholder approval of several restrictive amendments to Tri-Star's certificate of incorporation and bylaws. These amendments were an integral part of the Combination. They provided for a classified board, elimination of the stockholders' right to act by written consent under 8 Del.C. § 228, and a 662/3% super-majority voting requirement for certain stockholder actions. The practical effect of the super-majority provision gave Coca-Cola voting power to veto any merger, business combination or asset sale involving Tri-Star. The certificate amendments also sought to reduce liability to Coca-Cola, Tri-Star and Time, including all officers and directors, for taking corporate opportunities that might belong to Tri-Star. Allen & Company Incorporated (Allen) rendered a fairness opinion to Tri-Star that the financial terms of the Combination are fair and equitable to the common stockholders of Tri-Star other than the Coca-Cola Company. It received fees totaling $5 million for services rendered in connection with the Combination and related matters, which included participation in developing the terms of the Combination (A143). Tri-Star also paid Allen's expenses and agreed to indemnify it against certain liabilities, including those arising under the federal securities laws (A143). The relationships of Allen and Coca-Cola are inextricably tied. Herbert A. Allen, president, chief executive officer, and a director of Allen, was the beneficial owner of over 1.1 million shares of Coca-Cola stock. He also was a director of both Coca-Cola and Columbia Pictures Industries, Inc. He was chairman of the board of directors of Columbia before its acquisition by Coca-Cola in June 1982, and was scheduled to become, and became, a director of the combined entity. (A195). According to the proxy statement, Allen has provided investment banking services to Tri-Star and Coca-Cola. At the time it gave Tri-Star the fairness opinion Allen was a party to an agreement to provide investment banking services to the Entertainment Sector, and expected to seek to continue providing investment banking services to both the combined entity and Coca-Cola. (A133). Allen's fairness opinion issued to Tri-Star is almost reminiscent of that in Weinberger, 457 A.2d at 706-07, in terms of its questionable reliability under the circumstances of this transaction. This is demonstrated in part by certain limitations of the opinion, which state: In formulating our opinion we have relied on information furnished to us by Tri-Star and the Coca-Cola Company ... (emphasis added).       We have not, however, undertaken or obtained an independent appraisal of the assets of the Entertainment Business Sector. For the purpose of expressing our opinion set forth herein, we have assumed the accuracy and completeness of all such information. (A316).
Consistent with the General Corporation Law of Delaware, Coca-Cola sought approval of the Combination from both the board of directors and Tri-Star's stockholders. The Combination detailed in the Transfer Agreement was unanimously approved by all seven directors who voted at the September 30, 1987 meeting, including four board members who were either Coca-Cola executives or stockholders. [6] On October 1, 1987, the Transfer Agreement was executed, setting the date for stockholder approval of the Combination as December 15, 1987. Despite the early execution of the Transfer Agreement, the defendants' three-hundred page complex and convoluted proxy statement was not mailed to the stockholders until November 24, 1987, just twenty days before the meeting. The proxy materials disclosed that under the Transfer Agreement Coca-Cola would not vote its shares in favor of the Combination unless a majority of other shares first approved the Combination. Given the effect of the two previously described Voting Agreements between Coca-Cola, HBO, Technicolor and Rank, this essentially meant that before Coca-Cola could vote its shares in favor of the Combination, 24.4% of the common stock not owned by Coca-Cola and its related entities had to first approve the Transfer Agreement. (A140). The Combination was submitted to Tri-Star stockholders for approval at a special meeting held on December 15, 1987. The Combination (including the certificate amendments) was approved by the requisite vote. The formal closing of the Combination occurred on January 27, 1988.