Court Opinion

ID: 8937699
Source: CourtListenerOpinion
Date Created: 2022-11-27 07:39:49.726499+00
Date Added: 2024-06-11T17:09:39.639812
License: Public Domain

KEARSE, Circuit Judge,
dissenting:
With all due respect, I dissent. In my view the majority has paid insufficient attention to (1) the proper standard for review of a district court’s denial of a preliminary injunction, (2) the proper standard of review of a district court’s findings of fact, and (3) the substance of New York law.
The proper standard for appellate review of an order of the district court denying a preliminary injunction is whether or not the denial constituted an abuse of judicial discretion. Coca-Cola Co. v. Tropicana Products, Inc., 690 F.2d 312, 315 (2d Cir.1982); see also Doran v. Salem Inn, Inc., 422 U.S. 922, 931-32, 95 S.Ct. 2561, 2567-68, 45 L.Ed.2d 648 (1975) (granting of preliminary injunction likewise subject to abuse of discretion test on appeal). Normally, to conclude that the district court abused its discretion, the appellate court must find either that the district court applied incorrect legal standards or that its findings of fact are clearly erroneous. See, e.g., Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 54 (2d Cir.1985) (“An abuse of discretion may be found when the district court relies on clearly erroneous findings of fact or on an error of law in [denying] the injunction.”).
The role of the appellate court in reviewing the factual findings of the district court is substantially circumscribed. “Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.” Anderson v. City of Bessemer City, N.C., — U.S. —, 105 S.Ct. 1504, 1512, 84 L.Ed.2d 518 (1985). Further, “[w]hen ... the issue involves the credibility of the witnesses and therefore turns largely on an evaluation of demean- or, there are compelling and familiar justifications for leaving the process of applying law to fact to the trial court and accord*286ing its determinations presumptive weight.” Miller v. Fenton, — U.S. —, 106 S.Ct. 445, 452, 88 L.Ed.2d 405 (1985).
The majority pays little more than lip service to these principles. Instead, it commences its discussion with the statement that this Court is “asked to determine whether SCM’s Board of Directors’ approval of a lock-up option of substantial corporate assets is protected by the business judgment rule,” (ante at 272), and it proceeds to engage in extensive factfinding normally reserved to the district court. And while purporting to apply the business judgment rule, the majority proceeds to engage in extensive exploration of asset valuation of the sort normally reserved to corporate directors.
I bypass here, in the interests of expedition, such matters as whether certain of the majority’s factual findings have support in the record-and whether it is at all appropriate for this Court to direct the granting of a preliminary injunction on the basis of conclusory findings made by the court of appeals on questions of irreparable injury and balance of hardships when the district court has not even reached those questions. I dissent here solely on the basis that application of the proper standards of review and the proper principles of substantive law compels the conclusion that the district court did not abuse its discretion in denying the motion of Hanson Trust PLC, et al. (“Hanson”), for a preliminary injunction against the exercise by a subsidiary of Merrill Lynch, Pierce, Fenner & Smith (“Merrill Lynch”) of an option to purchase two businesses owned by SCM Corporation (“SCM”), and that the decision of the district' court should therefore be affirmed.
A. The District Court Applied Proper Legal Principles.
The substantive law governing this action is the law of New York; the predominant principle applicable to the facts before us is the business judgment rule. The New York Court of Appeals has explained that the business judgment rule
bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. “Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” (Pollitz v. Wabash R.R. Co., 207 N.Y. 113, 124, 100 N.E. 721, 724.)
* * * * * #
It appears to us that the business judgment doctrine, at least in part, is grounded in the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments. The authority and responsibilities vested in corporate directors both by statute and deci-sional law proceed on the assumption that inescapably there can be no available objective standard by which the correctness of every corporate decision may be measured, by the courts or otherwise. Even if that were not the case, by definition the responsibility for business judgments must rest with the corporate directors; their individual capabilities and experience peculiarly qualify them for the discharge of that responsibility. Thus, absent evidence of bad faith or fraud (of which there is none here) the courts must and properly should respect their determinations.
Auerbach v. Bennett, 47 N.Y.2d 619, 629-31, 419 N.Y.S.2d 920, 926-27, 393 N.E.2d 994, 1000-01 (1979).
As the New York court’s exposition reveals, the district court’s first task in determining whether the business judgment rule *287precludes examination into the correctness of directors’ decisions is to consider whether the directors have acted in good faith, without fraud, and without self-interest. As this Court has held, the law presumes that the directors have so acted unless the party challenging their decision can prove to the contrary:
“Under the business judgment rule, directors are presumed to have acted properly and in good faith, and are called to account for their actions only when they are shown to have engaged in self-dealing or fraud, or to have acted in bad faith. Once a plaintiff demonstrates that a director had an interest in the transaction at issue, the burden shifts to the director to prove that the transaction was fair and reasonable to the corporation. Daloisio v. Peninsula Land Co., supra, 127 A.2d at 893; Geddes v. Anaconda Copper Co., 254 U.S. 590, 599, 41 S.Ct. 209, 212, 65 L.Ed. 425 (1921). Only if the director carries this burden will the transaction be upheld. The initial burden of proving the director’s interest or bad faith, however, always rests with the plaintiff.”
Crouse-Hinds Co. v. InierNorth, Inc., 634 F.2d 690, 702 (2d Cir.1980) (quoting with emphasis Treadway Cos. v. Care Corp., 638 F.2d 357, 382 (2d Cir.1980) (“Treadway”)). Accord Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 265 (2d Cir.1984). When the decision at issue relates to a transaction approved by directors who have proceeded honestly and with no self-interest, the burden does not shift to those directors to justify their decisions, and questions of adequacy of consideration are in general to be left to them even if “ ‘the results show that what they did was unwise or inexpedient.’ ” Auerbach v. Bennett, 47 N.Y.2d at 629, 419 N.Y.S.2d at 926, 393 N.E.2d at 1000 (quoting Pollitz v. Wabash R.R. Co., 207 N.Y. 113, 124 (1912)).
These principles do not give the directors cartes blanche to act without some degree of care. As this Court has previously stated, “when courts say that they will not interfere in matters of business judgment, it is [presupposed] that judgment — reasonable diligence — has in fact been exercised.” Treadway, 638 F.2d at 384. Thus, if the district court finds that the directors have engaged in no self-dealing, had no conflict of interest, and have not acted in bad faith, it must next determine whether the directors’ decisions have been arrived at after an exercise of judgment.
In determining whether sufficient judgment has been exercised, the court must apply the principles established under governing law. New York law provides that
[i]n performing his duties, a director shall be entitled to rely on information, opinions, reports or statements including financial statements and other data, in each case prepared or presented by ... counsel, public accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence....
N.Y.Bus.Corp.Law § 717 (McKinney Supp. 1984); see Buffalo Forge Co. v. Ogden Corp., 555 F.Supp. 892, 904, 905 (W.D.N.Y.), aff'd, 717 F.2d 757 (2d Cir.), cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983).
In the present case, the district court scrupulously adhered to these substantive principles, looking first to see whether the independent directors of SCM (“Directors”) had any self-interest, or engaged in fraud, or proceeded in bad faith. Finding, unim-peachably, that they had not {see Part B. below), the court concluded, as required by the above authorities, that the burden did not shift to the Directors to prove that the transactions at issue were reasonable and fair.
The court next proceeded, again as required by the above authorities, to the question of whether the Directors had in fact exercised their judgment. Although its opinion intimates that had the court been a director, it would not have been content to rely as heavily on legal and financial advisors as it found the SCM Directors had done, the court recognized that New York law permits such reliance by the directors.
*288I cannot see that the district court in any respect applied erroneous legal standards.
B. The Court’s Findings of Fact Are Not Clearly Erroneous.
Within this substantive legal framework the district court made findings of fact that cannot, under the proper standard of review, be ruled clearly erroneous. Having conducted an eight-day evidentiary hearing during which it “had an opportunity to view and assess the credibility and demean- or of all the witnesses who testified,” district court opinion, 623 F.Supp. 848, 855 n. 7 (S.D.N.Y.1985), and basing its factual findings “in large part on th[at] testimony,” id., and in part on the moving papers and exhibits submitted by the parties, id. at 850 n. 3, the district court made findings of fact that included the following:
(1) The Directors did not take any action out of self-interest, or bad faith, or fraud, or for any other improper purpose.
(2) None of the Directors owned significant amounts of SCM stock or received any significant amount of remuneration from SCM; none was affiliated with any entity that did business with SCM or otherwise held a position that would present a conflict of interest for him in his capacity as an SCM director. In short, none of the Directors had any conflict of interest with his fiduciary obligations.
(3) At all relevant times during the battle for control of SCM, the firms of Goldman, Sachs & Co. (“Goldman Sachs”) and Wachtell, Lipton, Rosen & Katz (“Wachtell Lipton”), on whom the Directors relied for financial and legal advice, respectively, represented SCM and the board, and did not represent or act on behalf of SCM’s management in any manner. Neither firm had any conflict of interest.
(4) The Directors knew that regardless of who prevailed in the takeover battle between Hanson and Merrill Lynch, the Directors would have no role in the businesses purchased by Merrill Lynch and would no longer continue to serve on the SCM board.
(5) The Directors knew that some members of SCM’s management would participate in the resulting company if Merrill Lynch prevailed, but the Directors did not approve the offer in order to entrench management.
(6) The Directors were not influenced by management in their consideration of whether to approve the proposed transaction with Merrill Lynch.
(7) The Directors relied on Wachtell Lipton and Goldman Sachs to negotiate with Merrill Lynch.
(8) The $74 offer, the lock-up option, and the prices of the optioned assets were the result of arm’s-length negotiations between Goldman Sachs and Merrill Lynch.
(9) In approving the $74 offer from Merrill Lynch and the accompanying lock-up option agreement, the Directors relied in part on the advice of Wachtell Lipton and Goldman Sachs.
(10) In advising the Directors, Goldman Sachs did not define the range of value for the assets to be optioned or for the company as a whole. However, it did advise the Directors that, while a higher price might be obtained for these assets if there were more time to seek other buyers, the prices offered by Merrill Lynch for the assets were fair.
(11) Each of the Directors had extensive business experience and a thorough working knowledge of SCM, its operations, and its financial'condition.
(12) In approving the $74 offer and the accompanying lock-up option agreement, the Directors relied not only on their legal and financial advisors but also on their own business experience and their own knowledge of SCM’s operations and financial condition.
(13) Goldman Sachs and Wachtell Lipton informed the Directors at the September 10 meeting that Merrill Lynch would not make the $74 offer without receiving the lock-up option.
*289(14) Merrill Lynch confirmed that it would not make its $74 offer without receiving the lock-up option.
(15) The Directors approved the lockup option only after concluding that they could not secure the $74 offer without granting the option.
(16) At all times the Directors acted from a motivation to secure offers for SCM that would be superior to the offers of Hanson.
(17) The Directors approved the $74 offer and the lock-up option not with any desire to end the bidding for SCM but only in an attempt to secure value for SCM’s shareholders above the then-current Hanson offer of $72.
(18) Hanson’s offer of $75 per share on October 8 would not have been forthcoming absent Merrill Lynch’s offer of $74 per share approved by the Directors on September 10.
The district court found that there was no evidence that the Directors had acted improperly in relying on the advice of Goldman Sachs and Wachtell Lipton, and found that “the nine disinterested directors exercised independent judgment.” 623 F.Supp. at 857.
These findings were amply supported by the evidence, but the majority accords them no deference. Rather, the majority finds generally that the Directors, though free of any self-interest, fraud, and bad faith, did not exercise “due care” because they relied “baldly” on the recommendations of their financial advisors. In so finding, the majority ignores New York law which, as discussed above, permits directors to rely on such advisors. As demonstrated below, the district court’s application of this principle to the record before it to find that the SCM Directors did in fact exercise sufficient judgment should not be overturned because it is supported by the record.
The critical focus in this case, of course, is the approval of the optioning of SCM’s consumer foods business for $80 million and its pigments business for $350 .million. The record shows that the information before the Directors was not so scant as the majority would have it; nor was the reliance of the Directors “bald[ ].” For example, the minutes of the September 10 board of directors meeting reflect that Willard J. Overlock, Jr., the head of Goldman Sachs’s mergers and acquisitions department, informed the Directors, inter alia, that the price for the consumer foods business represented a price-earnings ratio of 13.3 times fiscal 1985 earnings and 15.4 times projected 1986 earnings; that the option price for the pigments business was 10.2 times fiscal 1985 earnings and 8 times projected 1986 earnings; and that the price negotiated for each business exceeded book value — for the foods business by 43.6% and for pigments by 25%. He advised that on a per ton basis, “which would be one benchmark though not necessarily the best one,” the pigments business would be worth about $310 million. Overlock informed the Directors that the prices were in the range of fair value. As the majority notes, ante at 276, Goldman Sachs had earlier compiled an extensive set of financial data which, while not stating a value or range of values for the pigments and foods businesses, offered quantitative bases for assessing whether the option prices indeed were “within the range of fair value.” The majority fails to note, however, that these data had been in the Directors’ possession for a week prior to the September 10 meeting, having been given to them at the board’s September 3 meeting in connection with Merrill Lynch’s earlier $70 offer, as to which the district court found the Directors had refused to grant a lock-up option. At the September 10 meeting, Overlock informed the Directors that while higher prices for these businesses might be obtained in an orderly sale, Goldman Sachs might not, in such a sale, be able to obtain prices at the high end of the range of fair values, and the actual selling prices could be below the option prices.
Thus, the record reveals that the Directors were in fact presented with a substantial amount of information as to prices and values of the businesses to be optioned. Nor was the Directors’ reliance on *290the views of their advisors so unquestioning as the majority suggests. The minutes of the September 10 meeting indicate that after the initial description of the proposed deal by SCM’s counsel and its investment banker, the directors asked questions as to, inter alia,
—the valuation of the Merrill Lynch deal,
—the possibility that Hanson would raise its bid,
—whether asset options such as that proposed had been legally upheld,
—the Goldman Sachs evaluation of the Merrill Lynch deal and the valuation of the debentures,
—the possibility of a shareholder suit,
—the trigger of the asset option,
—what parts of the SCM business Hanson was interested in,
—the impact of the proposed deal on the employees of the company,
—the continuing viability of the company,
—whether a higher price might be obtained for these assets,
—what the equity ownership of the new company would be under the new deal, and
—whether Merrill Lynch would do the deal without the asset option.
The minutes indicate that questions regarding the prices at which the assets were to be sold were asked repeatedly. I find it impossible, given the record supporting the district court’s finding that sufficient independent judgment was exercised, to agree that the majority should be allowed to substitute its own finding that the Directors simply did not exercise judgment.
The majority finds particular fault with the Directors principally for (1) not having insisted on a price for the foods and pigments businesses that would match the percentage of SCM’s income stream produced by those businesses, (2) not having asked Goldman Sachs precisely what a fair range of prices would be for the businesses, (3) not having viewed Merrill Lynch’s $74 offer as perhaps only a little better than Hanson’s $72 offer, and (4) having approved the proposed assets option after meeting for only three hours on September 10 without, unlike the directors in Tread-way, adjourning the meeting for a week to ponder the matter. None of these concerns is appropriate here.
As to the majority’s suggestion of undue haste, Hanson apparently made the same argument to the district court. That court found that
[tjhis argument ignores the realities of a heated takeover battle. The directors did not have the luxury of unlimited time; unlimited time either to consider the Merrill Lynch $74.00 offer or to find an alternative buyer for the two optioned assets. See Joy v. North, 692 F.2d 880, 886 (2d Cir.1982), cert. denied, 460 U.S. 1051 [103 S.Ct. 1498, 75 L.Ed.2d 930] (1983) (... business imperatives often call for quick decisions).
623 F.Supp. at 858. Given the “realities” reflected in this record, the district court’s finding was undoubtedly correct. The record shows, inter alia, that the right of shareholders tendering to Hanson to withdraw those tenders was to expire at midnight on September 16; and that a new bid by Merrill Lynch could cause the extension of that withdrawal deadline but only if the new bid were commenced before midnight on September 16. Because the merger phase of the Merrill Lynch transaction was to involve the issuance of registered debentures, Merrill Lynch would need time between the Directors’ approval of the transaction and the date of its bid in order to make the detailed filing with the Securities and Exchange Commission required in order for its offer to commence. Given these facts and the history of the Directors’ consideration of the prior Merrill Lynch offer, the finding of the district court that the Directors did not give their September 10 approval in undue haste cannot properly be overturned.
As to the majority’s valuation concerns, i.e., that the Directors did not insist on a price based on the income-producing role of the two businesses, did not ask Goldman Sachs about the range of values of the businesses, and did not adequately evaluate *291the superiority of the new Merrill Lynch offer, these are precisely the types of issues that courts are ill-equipped to explore and whose judicial exploration the business judgment rule is designed to preclude. So long as conflict-free directors have in fact exercised their judgment, they are not to be second-guessed as to other valuation bases they might have used or other questions they might have asked. As this Court has stated, where it is clear that the directors have asked a number of questions, the fact “ [t]hat the record does not reveal the substance of these questions is of little importance. Once it becomes clear that the directors have exercised their business judgment, they will not be second-guessed by the courts: ‘What has been uncovered and the relative weight accorded in evaluating and balancing the several factors and considerations are beyond the scope of judicial concern.’ ” Treadway, 638 F.2d at 384 n. 52 (quoting Auerbach v. Bennett, 47 N.Y.2d at 634, 419 N.Y.S.2d at 929, 393 N.E.2d at 1003). Here the record showed that the Directors had a significant amount of information to consider and easily permitted the inference that the Directors did in fact exercise their judgment. The district court’s decision to draw that inference is entitled to deference; its finding that the Directors sufficiently exercised their independent judgment in the manner permitted by New York law cannot properly be ruled clearly erroneous.
CONCLUSION
In sum, according to the district court’s amply supported findings, the Directors had no self-interest, engaged in no fraud or bad faith, and were not improperly influenced by management. The agreement for Merrill Lynch’s $74 offer in exchange for the assets option was negotiated at arm’s-length by the Directors’ legal and financial advisors, who also had no conflict of interest. The Directors at all times acted from a desire to secure offers for SCM and its shareholders that would be superior to the offers of Hanson. Without the $74 offer from Merrill Lynch, the bidding would have died at $72, Hanson’s then-current offer. The Directors had extensive business experience and a thorough working knowledge of SCM, its operations, and its financial condition. They relied on their legal and financial advisors. They also relied on their own business experience and their own knowledge of SCM’s operations and financial condition. They were informed of, inter alia, at least three bases for the Goldman Sachs conclusion that the option prices were fair — price-earnings ratios, book values, and, with respect to pigments, capacity — and had other data offering quantitative bases for assessing whether the option prices were within the range of fair value. The Directors were informed that a more leisurely sale of these businesses might, but might not, bring higher prices. They asked many questions before approving the transaction. They were informed that Merrill Lynch would not make its $74 offer without receiving the assets option. They “exercised independent judgment.”
In the circumstances, the district court’s decision to deny a preliminary injunction against consummation of the assets option transaction because judicial second-guessing of the Directors’ actions was precluded by the business judgment rule was hardly an abuse of discretion. I would affirm that decision.