Eisenberg v. Chicago Milwaukee Corp.
537 A.2d 1051, 1987 Del. Ch. LEXIS 516 (1987)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A corporate self-tender offer violates directors' fiduciary duties and may be enjoined if it is inequitably coercive or fails the duty of entire candor. A statement of intent to delist the shares is actionably coercive, and failure to disclose the true purpose of the offer, material facts about price fairness, and director conflicts of interest violates the duty of disclosure.
Facts:
- Chicago Milwaukee Corp. (CMC) had two classes of stock: common and $5 Prior Preferred Stock ('Preferred'), which had a noncumulative dividend.
- CMC's board, many of whom owned significant amounts of common stock but not Preferred, had a long-standing policy of not paying dividends on the Preferred stock to conserve cash for acquisitions.
- Following the 'Black Monday' market crash on October 19, 1987, the market price of CMC's Preferred stock fell to $41.50, its lowest level in five years.
- Immediately after the crash, CMC's management decided to capitalize on the low price and initiated a plan for a self-tender offer.
- CMC retained PaineWebber, which performed a rushed three-day analysis over a weekend, to provide a fairness opinion.
- On October 28, 1987, CMC formally commenced a tender offer to purchase any and all of its Preferred stock for $55 per share.
- The offer documents stated that a purpose of the offer was to save administrative costs through delisting and that CMC 'intends to request delisting of the Shares from the NYSE' if the offer was successful.
Procedural Posture:
- On October 28, 1987, Chicago Milwaukee Corp. (CMC) commenced a self-tender offer for its Preferred stock.
- On November 2, 1987, a Preferred stockholder filed a class action lawsuit against CMC and its directors in the Delaware Court of Chancery.
- The plaintiff moved for a preliminary injunction to stop the consummation of the tender offer.
- The Court of Chancery held an argument on the plaintiff's motion for a preliminary injunction.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate self-tender offer become actionably coercive and violate the fiduciary duty of disclosure when it is timed to take advantage of a market crash, misrepresents its purpose, omits key details about the price's fairness, and includes the company's stated intention to delist the shares?
Opinions:
Majority - Jacobs, Vice-Chancellor
Yes, the self-tender offer violates the fiduciary duties of disclosure and loyalty (by being coercive) and must be enjoined. Directors owe a heightened, 'more onerous' duty of disclosure in a self-tender because of the inherent conflicts of interest. The offer failed this duty in three ways: 1) it misleadingly cited 'cost savings' as a primary purpose when the true motive was to opportunistically capitalize on the market crash; 2) it failed to disclose material facts undermining the fairness of the price, such as the fact that the 33% premium was calculated from a five-year stock price low and that the financial advisor's work was rushed; and 3) it omitted the directors' significant conflict of interest as large common stockholders who would benefit from repurchasing the Preferred stock cheaply. Furthermore, the offer was inequitably coercive because the explicit statement that CMC 'intends to request de-listing' converted a mere possibility into a near certainty, pressuring shareholders to tender for reasons unrelated to the offer's economic merits—namely, the fear of being left with illiquid, unmarketable shares.
Analysis:
This case establishes a crucial protection for minority shareholders in corporate self-tenders, reinforcing that directors' fiduciary duties are at their highest in such transactions due to inherent conflicts. It clarifies that a tender offer can be deemed 'inequitably coercive' not just by its structure but by the issuer's stated intentions. The court draws a sharp line between merely disclosing a potential for delisting (permissible) and expressing an intent to seek delisting (impermissible coercion). This precedent forces corporate boards to be scrupulously candid about their motivations and conflicts, and prevents them from using threats of illiquidity to pressure shareholders into accepting an offer.
