<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14D-1
TENDER OFFER STATEMENT PURSUANT TO SECTION 14(D)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 21)
----------------
WALLACE COMPUTER SERVICES, INC.
(Name of Subject Company)
MOORE CORPORATION LIMITED
AND
FRDK, INC.
(Bidders)
COMMON STOCK, PAR VALUE $1.00 PER SHARE
INCLUDING THE ASSOCIATED PREFERRED STOCK
PURCHASE RIGHTS
(Title of Class of Securities)
932270101
(CUSIP Number of Class of Securities)
JOSEPH M. DUANE, ESQ.
FRDK, INC.
1 FIRST CANADIAN PLACE
TORONTO, ONTARIO, CANADA M5X 1G5
(416) 364-2600
(Name, Address and Telephone Number of Persons Authorized to
Receive Notices and Communications on Behalf of Bidder)
-------------------
COPY TO:
DENNIS J. FRIEDMAN, ESQ.
DAVID M. WILF, ESQ.
DAVID M. SCHWARTZBAUM, ESQ.
CHADBOURNE & PARKE LLP
30 ROCKEFELLER PLAZA
NEW YORK, NY 10112
(212) 408-5100
================================================================================
<PAGE> 2
FRDK, Inc. and Moore Corporation Limited hereby amend and
supplement their Tender Offer Statement on Schedule 14D-1 (as amended, the
"Statement"), originally filed on August 2, 1995, as amended by Amendments No.
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19 and 20 with
respect to their offer to purchase all outstanding shares of Common Stock, par
value $1.00 per share, of Wallace Computer Services, Inc., a Delaware
corporation (together with the associated preferred stock purchase rights), as
set forth in this Amendment No. 21. Capitalized terms not defined herein shall
have the meanings assigned thereto in the Statement.
ITEM 10. ADDITIONAL INFORMATION.
On December 4, 1995, the Delaware Court issued an
Order (the "Order") and an Opinion (the "Opinion") in the
Moore Action. Pursuant to the Order and the Opinion, the
Delaware Court granted Moore and the Purchaser's motion to
dismiss the Company's antitrust counterclaim on standing
grounds and accordingly, denied the Company's motion for a
preliminary injunction on antitrust grounds as moot. In
addition, the Delaware Court denied Moore and the Purchaser's
motion for a preliminary injunction with respect to the breach
of fiduciary duty claim.
A copy of the Order and the Opinion are attached
hereto as Exhibit (g)(16) and the foregoing description is
qualified in its entirety by reference to Exhibit (g)(16).
On November 21, 1995, the plaintiffs in Koff v.
Dimitriou, et al. and LaPerriere v. Wallace Computer Services,
Inc., et al. filed a Second Amended Class Action Complaint
(the "Second Amended Complaint") in the Court of Chancery of
the State of Delaware. The Second Amended Complaint
incorporated information obtained during discovery.
In the Seconded Amended Complaint, plaintiffs
allege that the Company's directors breached their fiduciary
duties by, among other things, failing to properly investigate
and fully consider the Offer and failing to disclose the
following material information to the Company's shareholders:
(i) that the Board of Directors of the Company never asked
Goldman Sachs, the Company's financial advisor, to determine
what an adequate price would be for the Company's common
stock; (ii) that the Board's announcements regarding the
alleged inadequacy of the Moore bids were made absent any
knowledge of what an adequate per Share price would be; (iii)
that Goldman Sachs performed no independent analysis of the
Company's future financial performance or management's
projections thereof, but relied instead on management's own
projections of financial results in doing its work, which were
modified several times during the course of Goldman Sachs'
engagement; (iv) that Goldman Sachs' principal
1
<PAGE> 3
analyses supporting per Share values in excess of $56 and $60
per Share were almost entirely a function of these projections
and formed the basis of its opinions that $56 and $60 per
Share were inadequate; (v) the directors' failure even to
consider the appointment of an independent committee of
outside directors to consider the Offer; (vi) that Goldman
Sachs changed the judgmental portions of its analyses in ways
which support higher values for the Company and make the Offer
appear inadequate; and (vii) that the Board of Directors of
the Company was not informed of the changes in projections,
ratios, and discount rates used in Goldman Sachs' analyses.
A copy of the Second Amended Complaint is attached
hereto as Exhibit (g)(17) and the foregoing description is
qualified in its entirety by reference to Exhibit (g)(17).
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS
(a)(31) Press Release, dated December 4, 1995.
(g)(16) Order and Opinion, each dated December 4, 1995,
issued by the United States District Court for
the District of Delaware.
(g)(17) Second Amended Class Action Complaint to Koff v.
Dimitriou , et al. and LaPerriere v. Wallace
Computer Services, Inc., et al. , filed in the
Court of Chancery of the State of Delaware in and
for New Castle County on November 21, 1995.
2
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SIGNATURE
After due inquiry and to the best of my knowledge and belief,
I certify that the information set forth in this statement is true, complete and
correct.
Dated: December 5, 1995
FRDK, Inc.
By: /s/ Joseph M. Duane
-------------------------
Name: Joseph M. Duane
Title: President
MOORE CORPORATION LIMITED
By: /s/ Joseph M. Duane
-------------------------
Name: Joseph M. Duane
Title: Vice President and
General Counsel
3
<PAGE> 5
EXHIBIT INDEX
(a)(31) Press Release, dated December 4, 1995.
(g)(16) Order and Opinion, each dated December 4, 1995,
issued by the United States District Court for the
District of Delaware.
(g)(17) Second Amended Class Action Complaint to Koff v.
Dimitriou , et al. and LaPerriere v. Wallace
Computer Services, Inc., et al., filed in the Court
of Chancery of the State of Delaware in and for New
Castle County on November 21, 1995.
<PAGE> 1
Hilda Mackow
Vice President, Communications
Moore Corporation Limited
(416) 364-2600
Lissa Perlman
Kekst and Company
(212) 593-2655
COURT DENIES WALLACE COMPUTER SERVICES' MOTION FOR
PRELIMINARY INJUNCTION ON ANTITRUST GROUNDS
TORONTO (December 4, 1995) -- Moore Corporation Limted (TSE, ME, NYSE; MCL)
said today that Judge Schwartz of the United States Court for the District of
Delaware denied Wallace Computer Services' (NYSE: WCS) request for a
preliminary injunction against Moore on antitrust grounds. The Court also
found that Wallace's Board was not required to redeem its "poison pill."
Reto Braun, Chairman and CEO of Moore said, "With the antitrust issue resolved,
nothing stands between Wallace's shareholders and our offer except Wallace's
Board of Directors and its poison pill. Wallace shareholders will have an
opportunity to voice their point of view at this Friday's annual meeting."
###
Moore Corporation Limited (TSE, ME, NYSE: MCL) is a global leader in delivering
information handing products and services that create efficiency and enhance
competitiveness for customers. Founded in Toronto in 1882, Moore has
approximately 20,000 employees and over 100 manufacturing facilities serving
customers in 59 countries. Sales in 1994 were US$2.4 billion.
<PAGE> 1
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
MOORE CORPORATION LIMITED )
and FRDK, INC., )
)
Plaintiffs, )
)
v. ) Civil Action No. 95-472 MMS
)
WALLACE COMPUTER SERVICES, )
INC., ROBERT J. CRONIN, )
THEODORE DIMITRIOU, FRED F. )
CANNING, WILLIAM N. LANE, III, )
NEELE E. STEARNS, JR., )
R. DARRELL EWERS, RICHARD F. )
DOYLE and WILLIAM E. OLSEN, )
)
Defendants. )
ORDER
At Wilmington this 4th day of December, 1995, for the reasons
set forth in the accompanying Opinion issued this date,
IT IS ORDERED:
1. Plaintiff's motion for preliminary injunction is
denied.
2. Plaintiff's motion to dismiss the defendant Wallace's
antitrust counterclaim is granted.
3. Defendants' motion for preliminary injunction is
denied as moot.
/s/ Murray M. Schwartz
--------------------------------
United States District Judge
<PAGE> 2
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
MOORE CORPORATION LIMITED )
and FRDK, INC., )
)
Plaintiffs, )
)
v. ) Civil Action No. 95-472 MMS
)
WALLACE COMPUTER SERVICES, )
INC., ROBERT J. CRONIN, )
THEODORE DIMITRIOU, FRED F. )
CANNING, WILLIAM N. LANE, III, )
NEELE E. STEARNS, JR., )
R. DARRELL EWERS, RICHARD F. )
DOYLE and WILLIAM E. OLSEN, )
)
Defendants. )
-------------------------------------
Jesse A. Finkelstein, Esq., and Daniel A. Driesbach, Esq., of Richards, Layton
& Finger, Wilmington, Delaware; Of Counsel: Donald I Strauber, Esq., Thomas J.
McCormack, Esq., William S. D'Amico, Esq., Robert A. Schwinger, Esq., and Eric
Welsh, Esq., of Chadbourne & Parke LLP, New York, New York; attorneys for
plaintiffs.
Michael D. Goldman, Esq., Stephen C. Norman, Esq., and Michael A. Pittenger,
Esq., of Potter Anderson & Corroon, Wilmington, Delaware; Of Counsel: Walter
C. Carlson, Esq., William H. Baumgartner, Jr., Esq., Richard B. Kapnick, Esq.,
and Brandon D. Lawniczak, Esq., of Sidley & Austin, Chicago, Illinois;
attorneys for defendants.
-------------------------------------
OPINION
Dated: December 4, 1995
Wilmington, Delaware
<PAGE> 3
Schwartz, Senior District Judge
I. INTRODUCTION
Before the Court in this securities and antitrust matter are
the parties' cross motions for preliminary injunctive relief and plaintiffs'
motion to dismiss defendant's counterclaim. In their motion for a preliminary
injunction, plaintiffs Moore Corporation Limited and its wholly-owned
subsidiary FRDK, Inc. (collectively, "Moore") seek to enjoin defendants Wallace
Computer Services, Inc. and its Board of Directors (collectively, "Wallace,"
"Board," or "Wallace Board") from implementing Wallace's antitakeover devices
or taking any other actions to impede Moore's tender offer. Moore contends
that such antitakeover maneuvers constitute a breach of fiduciary duty to the
Wallace shareholders. As principal relief, Moore seeks to compel Wallace to
redeem its "poison pill," which according to Moore presents the most serious
obstacle to the consummation of the tender offer.
Wallace has counterclaimed that Moore's tender offer, if
consummated, would violate Section 7 of the Clayton Act, 15 U.S.C. Section 18.
In response, Moore has moved for dismissal of the counterclaim pursuant to Fed.
R. Civ. P. 12(b)(6), arguing that Wallace has not alleged sufficient antitrust
injury and therefore lacks standing to bring this claim. Wallace has also
moved for a preliminary injunction as to this antitrust counterclaim.(1)
- --------------------
(1.) Wallace also alleged that both Moore and counterclaim defendant Reto
Braun ("Braun"), Moore's Chairman and Chief Executive Officer, have made
misleading statements in connection with the tender offer, in violation of
Sections 14(d) and (e) of the Securities Exchange Act of 1934 (the "Securities
Exchange Act"). Alleging false and misleading statements in violation of
Section 14(a) of the Securities Exchange Act, Wallace sought to enjoin Moore's
proxy contest concerning the upcoming annual Wallace Board meeting, to be held
on Friday, December 8, 1995. The Wallace pre-hearing and post-hearing briefs
(continued...)
<PAGE> 4
Consonant with the high stakes in this case, the parties have
erected a voluminous record for the Court's consideration. Prior to,
contemporaneous with, and following a preliminary injunction hearing, the Court
has been "carpet bombed"(2) with a rash of legal memoranda, over two hundred
exhibits, myriad depositions, with separately filed excerpts and highlights
from those same depositions, and a salmagundi of other documents. In addition
to considering all of the above, the Court also will refer to testimony
elicited at a three day preliminary injunction hearing held November 7-9, 1995.
Jurisdiction is based on diversity of citizenship, 28 U.S.C.
Section 1332, and federal question jurisdiction, 28 U.S.C. Section Section
1331, 1337(a), 15 U.S.C. Section 26. Venue is proper under 28 U.S.C. Section
1391(c) and 15 U.S.C. Section 22. This opinion contains this Court's findings
of fact and conclusions of law, pursuant to Fed. R. Civ. P. 52(a); to the
extent that findings of fact are placed among conclusions of law, they should
be deemed findings of fact.
For the reasons set forth below, the Court will deny Moore's
motion for preliminary injunction with respect to the breach of fiduciary duty
claim and grant Moore's motion to dismiss Wallace's Clayton Act counterclaim.
Wallace's motion for preliminary injunction with respect to the antitrust
claims will therefore become moot.
- --------------------
(...continued)
contained no discussion whatsoever of these allegations. Additionally,
Wallace's counsel advised that Wallace was taking no steps to impede the proxy
contest. The Court will therefore treat the allegations as withdrawn.
(2.) Bon-Ton Stores, Inc. v. May Dep't Stores Co., 881 F. Supp. 860, 863
(W.D.N.Y. 1994) (citing Consolidated Gold Fields PLC, Inc. v. Anglo Am. Corp.,
713 F. Supp. 1457, 1475 (S.D.N.Y.), op. amended, 890 F.2d 569 (2d Cir.), cert.
dismissed, 492 U.S. 939 (1989)).
2
<PAGE> 5
II. THE PARTIES
Plaintiff Moore Corporation Limited is an Ontario, Canada
corporation engaged in the business of delivering information handling products
("business forms" or "forms") and services, with its principal place of
business in Toronto, Ontario. Docket Item ("D.I.") 1, paragraph 7. Plaintiff
FRDK, Inc. is a New York corporation with its principal place of business in
Toronto, Ontario. Id. paragraph 8. As a wholly-owned subsidiary of Moore
Corporation Limited, FRDK, Inc. was incorporated for the purpose of making a
tender offer for all outstanding Wallace stock in connection with a proxy
solicitation and merger. Id. paragraph 8. Counterclaim defendant Braun is the
Chairman and Chief Executive Officer of Moore Corporation, Limited.
Defendant Wallace is a Delaware corporation engaged
predominately in the computer services and supply industry, with its principal
place of business in Hillside, Illinois. Id. paragraph 9. Defendants Robert
J. Cronin ("Cronin"), Theodore Dimitriou ("Dimitriou"), Fred F. Canning
("Canning"), William N. Lane, III ("Lane"), Neele E. Stearns, Jr. ("Stearns"),
R. Darrell Ewers ("Ewers"), Richard F. Doyle ("Doyle"), and William E. Olsen
("Olsen") are members of the eight-member Wallace Board of Directors. Of these
eight directors, all but Cronin and Dimitriou are independent directors.
Cronin presently serves as President and Chief Executive Officer of Wallace.
Dimitriou formerly served as Chief Executive Officer, and now serves as
Chairman of the Wallace Board.
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III. MOORE'S FIDUCIARY DUTY CLAIM
A. Facts
As with all actions alleging breach of fiduciary duty by a
target corporation's Board of Directors, a detailed examination of the actions
of the Wallace Board is required to provide context to the claim. In February,
1995, Moore's Chief Executive Officer Braun approached Wallace management
proposing a possible business combination between Moore and Wallace. D.I. 176
at 2-3. On March 8, 1995, the Wallace Board instructed its Chief Executive
Officer Cronin to advise Braun that Wallace had no interest in a business
combination with Moore. Between February and June, 1995, attempts were made by
Braun to meet with Cronin over lunch to discuss the matter, but the lunch
meeting never occurred. On June 14, 1995, the Wallace Board approved an
employment agreement for Cronin that provided Cronin, among other items, a
severance package in the amount of $8 million in the event of a change in his
job duties. D.I. 107, Deposition of Doyle ("Doyle Depo."), at 52. The
substance of this agreement, in all pertinent respects, was identical to a
prior agreement between Wallace and Dimitriou, Cronin's predecessor as Chief
Executive Officer. Additionally, the Wallace Board adopted a bylaw amendment
creating a 60-day notice requirement applicable to shareholders desiring to
bring business for consideration at Wallace's annual meeting. Id. at 56.
On July 30, 1995, a Sunday, Moore announced its intention to
commence a tender offer for all outstanding shares of Wallace common stock
(together with the associated preferred stock purchase rights that were issued
in connection with Wallace's poison pill) at a
4
<PAGE> 7
price of $56 per share, a number which was determined with the advice of
Moore's financial consultant Lazard Freres. The value of the proposed
transaction was approximately $1.3 billion. D.I. 1, paragraph 20. Moore int
ends, as soon as practicable after the consummation of the tender offer, to
cause Wallace to merge with FRDK, and purchase all shares not tendered.
Concurrently with the tender offer, Moore has delivered proxy solicitation
materials to the Wallace shareholders in order to nominate three individuals to
serve as and replace the entire membership of the Wallace Board. Id. paragraph
paragraph 21, 22.(3)
The $56 tender offer was an all-cash offer for all shares that
would provide Wallace shareholders a premium of 27% over the market price of
Wallace stock value as of the date of the announcement of the offer. Id.
paragraph paragraph 24, 25. The offer was conditioned upon, inter alia, (a)
the valid tender of a majority of all outstanding shares of Wallace's common
stock on a fully-diluted basis on the date of purchase; (b) the redemption,
invalidation or inapplicability of the rights allowed under the Preferred
Stockholder Rights Plan (the poison pill);(4) (c) Wallace Board approval of the
acquisition of shares pursuant to the offer and proposed merger under Section
203 of the Delaware Business Combination Statute ("Section
- --------------------
(3.) On August 2, 1995, FRDK filed a Schedule 14D-1 with the Securities and
Exchange Commission ("SEC"), detailing the provisions of the tender offer.
D.I. 28 at 19.
(4.) The poison pill was adopted on March 14, 1990, and caused the Wallace
Board to declare a dividend of one preferred stock purchase right per share of
common stock, payable to each shareholder of record as of March 28, 1990. Each
right entitles the holder to purchase from Wallace one two-hundredth of a share
of designated stock at a price of $115. Additionally, following the occurrence
of certain events, including the acquisition of 20% or more of Wallace's common
stock, each holder of a right is entitled to exercise that right by purchasing
common stock of Wallace at half-price. D.I. 1, paragraph 29.
5
<PAGE> 8
203");(5) (d) the proposed merger having been approved pursuant to Article
Ninth of Wallace's Restated Certificate of Incorporation ("Article Ninth"), or
the inapplicability of such article to the offer and proposed merger;(6) and
(e) the availability of sufficient financing to consummate the offer and
proposed merger.(7) Id. paragraph 20.
Moore communicated its intent to launch the tender offer to
Wallace by leaving a telephone message that Sunday evening at Cronin's home.
Upon receiving the information, Cronin contacted the Wallace Board and
officers, and a group of advisors met them at their corporate headquarters. On
Monday, July 31, Wallace, based on the recommendation of Dimitriou, retained
Goldman Sachs ("Goldman") as its financial advisor to review the adequacy of
the Moore tender offer. Dimitriou recommended Goldman based on the fact that
Goldman had previously done work for Wallace, and that Goldman enjoyed the
reputation as being a leading investment firm.
- --------------------
(5.) Section 203 applies to any Delaware corporation that has not opted out
of the statute's coverage. It provides that any person acquiring 15% or more
of a company's voting stock (thereby becoming an "interested shareholder") may
not engage in any business combination, including a merger, for three years
after becoming such, unless that person obtains or has obtained certain
approvals by the Board of Directors, or the affirmative vote of at least
two-thirds of the outstanding voting stock not owned by the interested
shareholder. See 8 Del. C. Section 203.
(6.) Article Ninth, entitled "Certain Business Combinations," is designed
to impede coercive and inadequate tender offers. It prohibits certain business
combinations by any "interested shareholder" (defined to include any person who
directly or indirectly owns 20% or more of the outstanding voting power of
Wallace, or an affiliate or assigned thereof), unless the affirmative vote of
at least 80% of the combined voting power of the then outstanding shares of
Wallace stock is obtained. D.I. 1, paragraph paragraph 34, 35. Like the
poison pill, Article Ninth was in place years before the initiation of the
Moore tender offer.
(7.) Testimony at the November hearing was to the effect that financing had
been obtained, with a commitment for the same extending to December 11, 1995.
6
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That same day, at 8:30 a.m., Moore filed the complaint in this
action seeking the Court to compel the removal of the antitakeover devices and
to declare that the proposed merger complied with all applicable laws. See
Moore Corp. v. Wallace Computer Servs., 1995 WL 590561 (D. Del. Sept. 19,
1995). Wallace moved to dismiss the complaint on the dual grounds that the
action was not yet ripe, and that plaintiffs engaged in impermissible forum
shopping. The motion was denied. See id. On August 1, 1995, the Wallace
Board met for the first time to consider the offer and to ratify the retention
of Goldman as the company's financial advisor. Doyle Depo. at 107.(8)
Cody Smith ("Smith"), a Goldman partner, headed his firm's
evaluation of the proposed tender offer. In accordance with requests from
Goldman, Wallace management provided a series of documents reflecting historic
information and future projections to Goldman on Monday, July 31, 1995. D.I.
107, Deposition of Michael J. Halloran ("Halloran Depo."), at 72-73. These
documents, assembled and presented by Michael J. Halloran ("Halloran"), a
Wallace vice president and its Chief Financial Officer, included the following:
annual reports for preceding years, Securities and Exchange Commission Form 10K
reports, proxy reports, quarterly statements for the first three fiscal
quarters of 1995, and any current analysts reports Wallace had on file. Id.
Additionally, Halloran provided Goldman with its
- --------------------
(8.) The fee arrangement negotiated between Wallace and Goldman merits a
brief description at this point, since Moore argues that the compensation
arrangement biased Goldman in favor of finding inadequacy. Under the
provisions of the arrangement, if Wallace remained independent, Goldman would
receive $500,000 initially, plus additional $1.5 million increments, up to a
total of $8 million. If Moore's $56 tender offer succeeded, Goldman would
receive 6.2% of the total amount of the offer, up to approximately the same $8
million. However, because the fee is structured on a percentage scale, Goldman
would obviously receive more than the $8 million if the eventual offer was for
a price over $56 per share.
7
<PAGE> 10
June, 1995 Strategic Plan (the "Strategic Plan"). Id. at 73-74. All of the
figures and data provided to Goldman were prepared exclusively by Wallace.
The Strategic Plan contained projections which were, in large
part, dependent upon future acquisitions. However, Smith testified that but
for one acquisition, the Strategic Plan acquisition-related projections were
not used by Goldman in preparing its report. Transcript of Hearing ("Tr.")
440, 444-45. Goldman made no independent investigation of the figures supplied
by Wallace, nor did it make any changes thereto, but did speak with department
heads at Wallace to review their component businesses, the basis of their
forecasts, and the evidence supporting their forecasts. Id. at 423.
On August 4th, 1995, Goldman visited the Wallace headquarters
in Hillside, Illinois. Wallace provided Goldman with its 1996 budget and
additional supporting papers thereto. Wallace also gave Goldman its
projections for fiscal year 1996 by quarter, as well as a projection through
fiscal year 2000. The numbers set forth in the projections contained
adjustments to reflect additional financial information which Wallace had
gained in the two month interim since the Strategic Plan was created. Wallace
then was asked to provide additional figures to include projections through the
year 2002, which Wallace gave Goldman on August 9th. These projections
contained more generous assumptions than previously supplied. Wallace
explained that these more optimistic figures were given to Goldman because "we
realized that we really had not given ourselves credit for some major
initiatives we were taking to redo our manufacturing system," which was
expected to be completed by the end of the calendar year 1996. Halloran Depo.
at 118-119. Both subsequent sets of figures contained higher projected
earnings that the first set.
8
<PAGE> 11
On August 11, 1995, the Wallace Board met for the purpose of
reviewing the adequacy of the Moore offer. Goldman presented its preliminary
opinion that $56 was inadequate. The Wallace Board took no action at that
time. On August 14, 1995, the Board met again, when Goldman issued its final
opinion as to the inadequacy of the Moore offer.(9) The Board unanimously
concluded that the offer was inadequate. Their decision was based on the
presentation of Goldman and the results from the fourth quarter of fiscal 1995
(May, June and July). Wallace sales had increased 32% to 33% over the prior
year and profits had increased 32%. Both the actual figures from the fourth
quarter of fiscal 1995 and all of fiscal 1995 were record results and were
above those projected by financial analysts. Additionally, the Wallace Board
believed that the proposed union between the companies would present antitrust
concerns. On August 15, 1995, Wallace formally rejected Moore's offer. D.I.
28 at 2.
On October 12, 1995, Moore raised its offer price to $60 per
share. Again, the Walllace Board met to consider the offer. Additional
material was given to Goldman to provide an updated set of data regarding their
financial status. On October 17, 1995, Goldman presented its opinion that the
$60 offer was inadequate. Goldman based its opinion in part on the fact that
Wallace is presently generating and receiving the benefits of its capital
expenditure plan for infrastructure such as the Wallace Information Network
("WIN") system,
- --------------------
(9.) The report prepared for the August 14 presentation differed from that
prepared for the August 11th presentation, because the latter contained two
assumptions which were inconsistent with one another, yielding an incorrect
result.
9
<PAGE> 12
which has become successful only within the past two years.(10) Tr. 429-30.
Further, Wallace's recent alliance with United Stationeres, an office products
company, had begun to produce favorable returns. Id. at 430. Goldman also
believed that a reorganization or recapitalization plan, which Wallace could
adopt, would produce current value which could exceed $60 per share, yet still
allow its shareholders to retain their ownership interest in the company, a
result the Moore cash-out offer could not achieve. Id. at 431.
The Board concurred in the Goldman conclusion that the price
was inadequate, because recent financial results demonstrated continued
improvement and momentum in the marketplace. At neither the August 14th nor
the October 17th meeting did Goldman provide Wallace with a range of values
that would be adequate or fair. Similarly, Goldman did not inform the Board
the margin by which the Moore offers fell short of adequacy, nor did the Board
ask. At both meetings, however, Goldman went through its materials with the
Wallace Board and answered questions posed by the Board regarding the Goldman
analysis. Tr. 421.
A hearing on Moore's motion for a preliminary injunction was
held on November 7-9th, 1995. At that time, 73.4% of Wallace shareholders had
tendered their
- --------------------
(10.) A major asset of Wallace is its recently-developed computer system
known as the "Wallace Information Network" ("WIN"). The WIN system is a set of
computer programs that links together several other Wallace systems, such as
its order entry, order management, manufacturing, inventory management,
distribution and billing systems, for the purpose of delivering services and
assisting the customer, as well as reducing costs. Tr. 220. The benefits WIN
provides largely accrue to large, out-source customers because it enables them
to control inventories, manage accounts and identify items for consolidation.
Moore's internal documents reveal that (1) the WIN system is a superior system;
(2) Moore entered into an agreement with Electronic Data Systems in a bid to
engage in a technological catch-up which has not been successful, Tr. 60; and
(3) Wallace has been beating Moore in head-to-head competition for large,
forms-intensive customers with multiple locations.
10
<PAGE> 13
shares. Moore alleges that the all cash tender offer, proposed merger, and
proxy solicitation cannot be completed unless Wallace agrees to remove or make
inapplicable its anti-takeover devices, including its poison pill, Article
Ninth, and the protection of Section 203. D.I. 1, paragraph 27. The Board's
failure to redeem the poison pill, however, is the gravamen of Moore's prayer
for injunctive relief.(11)
B. Analysis
1. Standard of Review
Before reaching the substantive issues in this case, the Court
must determine the standard of review applicable to the Wallace Board's
challenged actions. A shareholder challenge to board actions usually entails
one of the following standards of judicial review: the traditional business
judgment rule, the Unocal standard of enhanced judicial scrutiny, see Unocal
Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), or the entire fairness
standard, see, e.g., AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d
103, 111 (Del. 1986). Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361,
1371 (Del. 1995). Determining the appropriate standard of review is not a task
this Court takes lightly.
- --------------------
(11.) The Wallace Board is entitled under its poison pill to redeem the
rights or make the poison pill inapplicable to the offer and proposed merger by
an amendment to the rights agreement. D.I. 1, paragraph 30. The Board is also
empowered under Article Ninth to avoid the shareholder vote requirement by
approving the transaction by a majority vote of the Board. Id. paragraph 36.
Finally, the Board has the right to opt out of Section 203's protection under
Delaware law. Id. paragraph 31. While the court notes that Moore also seeks
to compel Wallace to make inapplicable Article Ninth of its Restated
Certificate of Incorporation, and opt out of the protection of 8 Del. C.
Section 203, Moore's briefs submitted before and after oral argument confine
its discussion to the poison pill. Additionally, no portion of oral argument
was devoted to these defenses. Accordingly, the Court will so limit its
discussion.
11
<PAGE> 14
"Because the effect of the proper invocation of the business judgment rule is
so powerful. . ., the determination of the appropriate standard of judicial
review frequently is determinative of the outcome of [the] litigation." Id.
(quoting Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279 (Del.
1988)). While the entire fairness standard has no application to the case
presently before the Court,(12) the business judgment rule and Unocal enhanced
scrutiny will apply. Accordingly, the Court will first address the interplay
between the two standards of review.
The business judgment rule is a judicially-created doctrine
which gives recognition to the fundamental tenet of Delaware General
Corporation Law that directors are charged with managing the business and
affairs of the corporation. See 8 Del. C. Section 141. It is a presumption
that in making a business decision, the directors of a corporation act on an
informed basis, in good faith and honest belief that the action taken was in
the best interests of the corporation. Aronson v. Lewis, 473 A.2d 805, 812
(Del. 1984). The bedrock principle embodied in the business judgment rule is
the court's reluctance to substitute its judgment for
- --------------------
(12.) The "entire fairness" standard of review applies "where a
self-interested corporate fiduciary has set the terms of a transaction and
caused its effectuation." AC Acquisitions Corp. v. Anderson, Clayton & Co.,
519 A.2d 103, 111 (Del. 1986). A reviewing court must review the transaction
and determine that the merits satisfy the court of its entire fairness, id.,
including scrutiny of both "fair dealing" and "fair price." Mills Acquisition
Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1988). The "entire fairness"
standard applies "only if the presumption of the business judgment rule is
defeated," Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988) (citing Aronson v.
Lewis, 473 A.2d 805, 812-17 (Del. 1984)), due to allegations of board
self-dealing. See, e.g., Unitrin Inc. v. American Gen. Corp., 651 A.2d 1361,
1372 (Del. 1995) ("The Court of Chancery concluded that the Board's
implementation of the poison pill and the Repurchase Program, in response to
American General's Offer, did not constitute self-dealing that would require
the Unitrin Board to demonstrate entire fairness."). Since there are no
allegations in the present case of an interested transaction, this standard is
inapplicable and will not be discussed.
12
<PAGE> 15
that of a board if the board's decision can be attributed to any rational
business purpose. Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).
The plaintiff bears the initial burden and must establish facts sufficient to
persuade the Court that the presumption of the business judgment rule has been
rebutted and therefore the Court should substitute its own judgment for that of
the Board. See Unitrin, 651 A.2d at 1374.
When a board is confronted with a hostile tender offer, it has
the obligation to determine whether the offer is in the best interests of the
corporation and its shareholders. The board's duty to the shareholders in this
context is no different from its duty in any other situation, and its decision
should be entitled to the same deference it would receive in other matters.
Unocal, 493 A.2d at 954. However, because directors might have some
entrenchment motive, described by the Supreme Court of Delaware as the
"omnipresent specter that a board may be acting primarily in its own interests,
rather than those of the corporation and its shareholders," an "enhanced
judicial scrutiny" is applicable to board decisions in the tender offer
context. That standard must be satisfied before the board's actions are
reviewed under the traditional business judgment rule. Id. This enhanced test
places the initial burden upon the board to demonstrate compliance therewith
before the presumption of the business judgment rule may be invoked. See
Unitrin, 651 A.2d at 1374.
Under the enhanced judicial scrutiny test set forth in Unocal,
the directors must show they had reasonable grounds for believing that a danger
to corporate policy and effectiveness existed, a burden which is satisfied by
showing good faith and reasonable investigation. Unocal, 493 A.2d at 955
(quoting Cheff v. Mathes, 199 A.2d 548, 554-55 (Del. 1964)). This proof is
materially enhanced where the board is comprised of a majority of
13
<PAGE> 16
outside independent directors who have complied with their duties of good faith
and reasonable investigation. Unocal, 493 A.2d at 955; see also Aronson, 473
A.2d at 812. However, the board is not empowered with unbridled discretion to
defeat any perceived threat by whatever draconian means available. Unocal, 493
A.2d at 955. A defensive measure may only survive enhanced judicial scrutiny
and fall within the purview of the business judgment rule if it is reasonable
in relation to the threat posed. Id.
Once the directors meet their burden under Unocal of showing a
threat and response proportional to that threat, their actions will be
subjected to review under the traditional business judgment rule. See
Macmillan, 559 A.2d at 1288; see also In re Sea-Land Corp. Shareholders
Litigation, 642 A.2d 792, 804 (Del. Ch. 1993) ("[B]efore a board may receive
the normal protection of the business judgment rule, it must demonstrate that
its actions were reasonable in relation to the advantage sought to be achieved
or to the threat allegedly posed."). The Supreme Court of Delaware and
Chancery Court have repeatedly held that the refusal to entertain an offer may
comport with a valid exercise of the board's business judgment. Paramount
Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1152 (Del. 1989) ("Time");
Macmillan, 559 A.2d at 1285 n.35; Smith v. Van Gorkom, 488 A.2d 858, 881 (Del.
1985).
2. Preliminary Injunction Standard
In addition to bringing its legal position within the
strictures of substantive Delaware corporate law, Moore must satisfy the
procedural criteria for granting a preliminary injunction. Not surprisingly,
at some point, the two burdens become intertwined. In a
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<PAGE> 17
preliminary injunction proceeding, plaintiff bears the burden of establishing
(1) the likelihood of success on the merits; (2) the extent of irreparable
injury from the conduct complained of; (3) the extent of irreparable harm to
the defendants if the preliminary injunction issues; and (4) effect on the
public interest if relief were granted. Clean Ocean Action v. York, 57 F.3d
328, 331 (3d Cir. 1995); Opticians Ass'n of Am. v. Independent Opticians of
Am., 920 F.2d 187, 191-92 (3d Cir. 1990). In effect, the board must defeat the
plaintiff's ability to discharge this burden by demonstrating that even under
Unocal's enhanced scrutiny, the board's actions merited the protection of the
business judgment rule. See Unitrin, 651 A.2d at 1375. Plaintiff's likelihood
of success on the merits, therefore, is a function of the board's inability to
discharge its Unocal burden. See id.
In accordance with the Unocal analysis utilized by the Supreme
Court of Delaware and the standard for a preliminary injunction recognized by
the Third Circuit Court of Appeals, the Court will review the facts of the case
sub judice under the following analytical framework. As to the likelihood of
success on the merits: (1) Were the actions of the Wallace Board defensive?
(2) If so, did the Wallace Board satisfy its burden under Unocal? (a) What was
the nature of the threat perceived by the Wallace Board by the Moore tender
offer? (b) Were the Wallace Board's actions reasonably proportionate to the
perceived threat of the Moore tender offer? As to the balance of the equities
and the public interest: (1) Has Moore demonstrated irreparable injury if the
relief sought is not granted? (2) Is the extent of Moore's injury if the
injunction does not issue greater than the injury to Wallace if the injunction
issues? (3) Has Moore shown that the relief sought is not adverse to the
public interest?
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<PAGE> 18
a) Likelihood of Success on the Merits
i) Were the Actions Taken by the Wallace Board "Defensive"?
A defensive measure taken by the board in response to some
perceived threat to the corporation is the sine qua non triggering Unocal's
enhanced judicial scrutiny. See Unitrin, 651 A.2d at 1372. Whether board
action is "defensive" can be determined from a variety of factual
circumstances, such as the timing of consideration and implementation of the
measure in relation to the initial appearance of the corporate threat. See id.
(poison pill, advance notice bylaw provision for shareholder proposals, and
stock repurchase program, adopted by board after commencement of tender offer,
deemed defensive measures); Gilbert v. El Paso Co., 575 A.2d 1131, 1136 (Del.
1990) (golden parachute agreements, Employee Savings and Stock Ownership Plans
and shareholder supermajority voting provisions adopted after initiation of
tender offer deemed defensive measures). Proper determination of the defensive
nature of the board's challenged actions is critical. If a particular measure
taken by the board is not found to be defensive, the reviewing court must
review the board's action under the business judgment rule. Id. at 1143-44 (a
business combination plan which predates the outside bid is not a defensive
measure and therefore not subject to Unocal's enhanced judicial scrutiny).
In the case sub judice, the allegedly defensive measures taken
by the Wallace Board include the following: (1) the failure to redeem the
poison pill; (2) the adoption of a "golden parachute" employment contract with
Cronin; and (3) the amendment to the Wallace bylaws to require a 60-day advance
notice period for shareholder proposals for the Wallace
16
<PAGE> 19
annual meeting. With respect to the failure to redeem the poison pill, the
Court finds this to be a defensive measure. Poison pills are, by definition,
defensive. Even when they are adopted prior to a takeover bid as a
preventative measure, they become defensive when the board fails to redeem them
after a hostile tender offer is commenced. See Moran v. Household Int'l, Inc.,
500 A.2d 1346, 1350 (Del. 1985).
Evidence adduced at the evidentiary hearing persuaded the
Court that the golden parachute component of Cronin's employment agreement was
not adopted as a defensive measure. Doyle testified that the Wallace Board
fully intended to adopt an employment agreement for Cronin, identical in all
pertinent respects to that of Dimitriou, Cronin's predecessor, but for some
reason failed to get around to it in a timely fashion. During this period of
laxity, Moore had been attempting to lure Wallace management over to its
company. Tr. 292. In addition to finding Doyle's testimony to be credible,
the facts that such agreements are commonplace among chief executives of major
companies and that Cronin's severance package was identical to that of his
predecessor, persuade this Court that the adoption of the golden parachute
agreement was not a defensive measure. The advance notice amendment to the
Wallace bylaws is a mild defensive measure, see Unitrin, 651 A.2d at 1369.
However, it has played no role in either the tender offer or the proxy contest,
which explains why it was not briefed or argued by either party. Accordingly,
enhanced judicial scrutiny will be limited to the Wallace Board's failure to
redeem the poison pill.
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<PAGE> 20
ii) Unocal's Enhanced Judicial Scrutiny
(A) Did the Moore Offer Pose a Threat to Wallace?
Unocal's first inquiry focuses upon the existence and nature
of the threat to the target company. Unocal, 493 A.2d at 955. Under this
inquiry, the target board must demonstrate that after reasonable investigation,
the board determined, in good faith, that the tender offer posed a threat to
the corporation or its shareholders which warranted the adoption of a defensive
measure. See Unitrin, 651 A.2d at 1375. An affirmative and precise
determination of a threat must be demonstrated before moving to the second
inquiry under Unocal, as this first inquiry informs the second. See Unitrin,
651 A.2d at 1384 ("the nature of the threat associated with a particular
hostile offer sets the parameters for the range of permissible defensive
tactics."); see also Time, 571 A.2d at 1154 ("The obvious requisite to
determining the reasonableness of a defensive action is a clear identification
of the nature of the threat."). The Unocal Court also held that the presence
of a majority of outside directors will materially enhance the board's proof on
this issue. Unocal, 493 A.2d at 955.
Wallace argues that the Moore tender offer posed a serious
threat to Wallace in that (1) the $56 and $60 offers are inadequate, (2) the
offer is squarely contrary to Wallace's successful business strategy, and (3)
the tender offer is illegal under the antitrust laws. Moore argues that the
tender offer poses no threat to Wallace because, at least as to inadequacy, the
Wallace Board never undertook to discover what an adequate or "fair" price for
Wallace stock would be. Thus, Moore argues, Wallace has no basis upon which to
determine that the allegedly inadequate price constitutes a threat. Second,
Moore argues that the alleged threat to
18
<PAGE> 21
Wallace's business plan is not legally cognizable, and dismisses as unwarranted
Wallace's analogy to Time, 571 A.2d 1140. Third, Moore argues that the alleged
antitrust concerns do not constitute a threat to Wallace, because, as Wallace
itself admits, the antitrust litigation was commenced solely for the purposes
of deterring the consummation of Moore's offer.
Since Unocal, Delaware courts have struggled to determine what
threats cited by target management as justification for defensive measures are
legally cognizable. Early decisions presented easy cases for an affirmative
determination of a threat. For example, in Unocal itself, the threat posed by
the offer was due to the coercive nature of the offer.(13) See Unocal, 493
A.2d at 956 (two-tier, "front-loaded" cash tender offer for approximately 37%
of company's outstanding stock is inadequate and coercive, and posed a threat
to shareholders); see also El Paso, 575 A.2d at 1145 (coercive, two-tier,
partial tender offer is "serious" threat to shareholders). In those cases, the
threat is obvious: shareholders will feel compelled to tender their shares to
avoid being treated less favorably in the second stage of the transaction. See
Time, 571 A.2d at 1152.
An inadequate, non-coercive tender offer may also pose a
legally cognizable threat in two ways. First, the target corporation may be
inclined to provide the shareholders
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(13.) A "coercive" offer is a term of art used to describe an offer which
has the effect of compelling shareholders to tender their shares out fear of
being treated less favorably in the second stage. A classic example of a
coercive offer is a partial, front-loaded tender offer. In that case, a
shareholder might elect to tender immediately, since he cannot be guaranteed
the same terms should he elect not to tender and the tender offeror succeeds.
At that point, as a minority shareholder, he might be treated adversely. A
"noncoercive" offer, on the other hand, is one which does not create that
compulsion. An example of a noncoercive tender offer would be an all shares,
all cash, fully negotiable tender offer, where all shareholders are treated
equally, no matter when they tender. For a detailed explanation of these
terms, see City Capital Assoc. v. Interco Inc., 551 A.2d 787, 797 (Del. Ch.
1988).
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<PAGE> 22
with a more attractive alternative, but may need some additional time to
formulate and present that option. During the interim, the threat is that
shareholders might choose the inadequate tender offer only because the superior
option has not yet been presented. See, e.g., City Capital Assoc. v. Interco
Inc., 551 A.2d 787, 798 (Del. Ch. 1988) (retention of poison pill is
appropriate response to give target time to develop an alternative plan to
maximize shareholder value). Second, in addition to the threat of inadequacy,
the board might also find that the danger that shareholders, tempted by the
suitor's premium, might tender their shares in ignorance or mistaken belief as
to management's representations of intrinsic value and future expectations.
See, e.g., Time, 571 A.2d at 1153 (threat posed by the fact that "shareholders
might elect to tender into Paramount's cash offer in ignorance or in a mistaken
belief of the strategic benefit which a business combination with Warner might
produce."); see also Unitrin, 1994 WL 698483 at *6 (Del. Ch. Oct. 13, 1994)
("Board action may be necessary to protect stockholders form a 'low ball'
negotiating strategy, or to allow the board to make an important decision over
the management of the corporation. There are no limited categories of threats
posed by an unsolicited offer, but the board's perception of a threat must be
reasonable.") (citations omitted), rev'd on other grounds, 651 A.2d 1361.(14)
- --------------------
(14) In an effort to delineate different types of threats for the purposes
of Unocal, the Time Court quoted the collected views of commentators as set
forth in Ronald J. Gilson & Renier Kraakman, Delaware's Intermediate Standard
for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus.
Law. 247, 267 (1989). Types of threats include the following:
(i) opportunity loss . . . [where] a hostile offer might
deprive target shareholders of the opportunity to select a
superior alternative offered by target management [or, we
would add, offered by another bidder];
(continued....)
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20
<PAGE> 23
In determining whether the Wallace Board made a good faith
determination after reasonable investigation that the Moore offer posed a
threat, the Court is guided by a recent and closely analogous decision of the
Supreme Court of Delaware in Unitrin, 651 A.2d 1361. There, the court
determined that the Unitrin board reasonably perceived a threat to the
corporation from the suitor's offer in that shareholders might mistakenly
tender without knowledge as to the projected future value of the shares. The
board cited several reasons for its determination of a threat: the board's
belief that (1) Unitrin stock was worth more than the 50-3/8 offer price; (2)
the tender offer price did not reflect Unitrin's long term business prospects
as an independent company; (3) the "true value" of Unitrin was not reflected in
the current market price of its common stock; (4) because of its strong
financial position, Unitrin was well positioned to "pursue strategic and
financial opportunities;" and (5) the merger with American General would have
anticompetitive effects and thus raise antitrust concerns. Id. at 1370. The
court deferred to the board's reasonable perception of the threat. Id.; cf.
Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 278, 289-90 (Del. Ch. 1989)
(noncoercive, all cash, all shares, inadequate tender offer constitutes a
cognizable threat since target was on verge of winning a judgment in excess of
$5 billion, an asset with a present value shareholders would be unable to
value).
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(...continued)
(ii) structural coercion, . . . the risk that disparate
treatment of non-tendering shareholders might distort
shareholders' tender decisions; and
(iii) substantive coercion, . . . the risk that shareholders
will mistakenly accept an underpriced offer because they
disbelieve management's representations of intrinsic value.
Time, 571 A.2d at 1153 n.17.
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<PAGE> 24
With these principles in mind, the court turns to the evidence
proffered by Wallace to determine whether it demonstrates the Board's good
faith belief, made after reasonable investigation, that the Moore offer posed a
legally cognizable threat. First, the procedure followed by the Wallace Board
in assessing each offer by Moore demonstrates reasonable investigation for
purposes of Unocal. When Moore's first offer of $56 was made, the Wallace
Board met three times within two weeks to review the terms of the offer and
assess its merits. Wallace retained Goldman as its investment banker to review
the financial aspects of the proposed transaction. Goldman prepared its
analysis by using projections which were reasonably related to past growth and
historical data which was provided by Wallace management. Collectively, the
Board considered Wallace's current business plans and strategies, its financial
projections, its current financial results and future projections, and the
opinion of Goldman in arriving at its decision that the $56 offer was
inadequate. Further, several individual members of the Board took the position
that, based on their knowledge and experience, the offer seemed to be a "low
ball" offer.(15) The same investigative procedure was
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(15.) Characteristic of the opinions of Wallace Board members as to the
future success of the company is the following excerpt from the testimony of
Mr. Doyle:
I think that Wallace, personally, is the epitome of what a
successful American company ought to be. If we go back to the
middle sixties, Wallace decided that it would change basically
-- would start to change from being basically a manufacturing
and production company to a sales/marketing-oriented company
that was very customer-oriented. It has -- today, it is, in
my judgment, the best company in its field with respect to
technology. It has an exceptionally dedicated and high-morale
work force. It has a good experienced management. It has an
excellent balance sheet with very little debt and a large cash
(continued....)
22
<PAGE> 25
followed when Moore raised its offer price to $60. Updated financial
information was given to Goldman which represented the actual, rather than
projected, 1995 figures. After Goldman analyzed the information, Goldman again
arrived at the conclusion that the $60 offer was also inadequate. The Board
considered the presentation of Goldman and arrived at its conclusion that the
second offer was also inadequate.
The Wallace Board's decision reflected consideration of a
variety of factors which were also reflected in the Goldman report, including
the belief that the fourth quarter of fiscal 1995 (May, June and July, 1995),
promised to be a good one. That belief became a reality: sales had increased
32% to 33% over the prior year, and profits had increased 32%. The fact that
Wallace is generating and receiving the benefits of its capital expenditure
plan, specifically to WIN system, as well as Wallace's recent alliance with
United Stationers which had begun to produce favorable returns, were also
considered. These data suggested to the Board that Wallace could achieve
returns greater than Moore's offer, while allowing the shareholders to retain
their ownership interest. Accordingly, the Court cannot conclude that the
Wallace Board lacked good faith or acted unreasonably in its investigation of
the Moore offer.
Moore argues that the Wallace Board has not demonstrated good
faith and reasonable investigation, on the ground that the preparation
performed by Goldman was
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(...continued)
position. It's in a -- in a market where many of its
competitors are in trouble and, therefore, Wallace has great
opportunity for success over the next five, ten years.
Tr. 459-60.
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<PAGE> 26
unreliable because of the optimistic figures provided by Wallace management.
Specifically, Moore argues that Goldman based its future earnings projections
on management's assumption that 30% of future profits and 38% of future sales
were expected to be derived from acquisitions. However, the associated costs,
share dilution, and amortization of goodwill in connection therewith were not
similarly figured into it projections, and thus the results, reflecting the
benefits but not the costs, were "useless." Smith, however, specially denied
using the acquisition-related figures, with the exception of one projected
acquisition, testimony which was unrebutted by Moore. The testimony of
Halloran corroborated Smith's statement. Tr. 375, Defense Exhibit ("DX") 33B.
Additionally, the Court finds that the financial projections
assumed by Wallace were not unrealistic. In its Strategic Plan, which was
provided to Goldman, Wallace had assumed certain growth percentages which
proved to be conservative with respect to actual numbers. Halloran Depo. at
172-73. When Wallace was asked to provide updated figures to Goldman, Halloran
determined the percentage of actual growth of the company by using actual
numbers representing the growth for fiscal 1994 and fiscal 1995. That
percentage was then used to project future growth through the year 2002. To
the extent that any prediction of future values has any indicia of
trustworthiness, this was a reasonable means to project future values. This
finding is bolstered by the fact that its previous projections, based on
projected growth in the 1995 strategic plan, had been lower than actual
results. Furthermore, Wallace's projections for growth into fiscal years 1996
and 1997 were lower in most instances than the
24
<PAGE> 27
actual growth Wallace experienced in fiscal 1995.(16) While these statistics
might be misleading since the Court cannot ascertain the viability of future
markets in those areas, at the very least, they indicate a principled
assessment of future growth, which hardly rises to the level of bad faith.(17)
Furthermore, the Wallace Board could reasonably conclude,
based on the upward trend in earning per share, that the company was
well-positioned to reap economic benefits in the future, which would support
their initial reaction that the Moore offer seemed "low ball." A review of the
earnings per share growth data from recent quarters demonstrates this
trend.(18) For the first quarter of fiscal 1995, Wallace reported $0.52
earnings per share growth. This number increased to $0.60 for the second
quarter of fiscal 1995, to $0.64 for the third quarter, and finally reached
$0.70 for the fourth quarter. Figures for the first quarter of fiscal 1996,
recently released, confirmed this upward trend: earning per share growth
reached $0.85.(19) Additionally, the results from the first quarter of fiscal
1996, as compared to
- --------------------
(16.) For example, in the Business Forms Division, fiscal 1995 actual growth
rate was 21%, as compared to its projected growth rate for fiscal 1996, at 14%
and for fiscal 1997, at 10%. The same conservative approach was taken with
other segments of Wallace's business. In its Continental Division, the 1995
actual growth rate was 24%. Its projected growth rates for fiscal years 1996
and 1997, respectively, were 17% and 15%. Similarly, in its TOPS Division, the
actual growth rate for fiscal 1995 was 45%, while its projections of fiscal
1996 and 1997 were, respectively, 14% and 5%.
(17.) For example, Mr. Cronin testified that some of the markets in which
Wallace is engaged are declining. The business forms industry is predicted to
decline between 3% and 5% per year, according to industry analysts. Tr. 317.
Thus a declining market would probably require Wallace to predict declining
sales and profits growth in that area.
(18.) The following series of numbers excludes takeover-related costs.
(19.) Moore argues that these increasing numbers demonstrate a phenomenon
other than
(continued....)
25
<PAGE> 28
the same quarter of fiscal 1995, surpassed management's projections.
Management projected a 34% increase in sales and a 50% increase in earnings for
the first quarter of fiscal 1996 over the same quarter for 1995. Tr. 409-10.
The actual figures for the first quarter of fiscal 1996 were 35.4% and 63.5%,
respectively.(20) See D.I. 181 at Exh. A.(21)
Finally, as the Unocal court noted, the target board's proof
under Unocal is materially enhanced where board's approval was comprised of a
majority of outside
- --------------------
(...continued)
Wallace's continued success in the business. In particular, Moore argues that
the recent strike at Ampad, a Wallace competitor, caused Wallace to receive a
percent of the industry's business it would otherwise not have enjoyed.
Second, Moore argues that Wallace's unexpected ability to pass on the increase
of paper costs to customers yielded unexpected profits. The Court is
unpersuaded, in light of the fact that Wallace is so well-positioned in the
industry with its technologically advanced computer services system, that these
external events were the primary cause of Wallace's upward growth trend.
(20.) On November 20, 1995, Wallace reported results from the first quarter
of fiscal 1996 as follows:
Wallace Computer Services, Inc. . . . reported that sales for
its first quarter ended October 31, 1995 increased 35.4
percent to $214.4 million compared to $158.4 million for the
first quarter last year. Before takeover expenses, net income
rose 65.5 percent to $19.3 million compared to $11.6 million
last year, and earnings per share rose 63.5 percent to 85
cents compared to 52 cents per share achieved in fiscal 1995.
These results exceed the company's most recent forecast and
all analyst projections.
D.I. 181, at Exh. A.
(21.) The Court also recognizes that these increases in growth have been
somewhat retarded by the pendancy of the Moore bid. As Wallace's November
20,1995 press releases states, "the hostile takeover bid was delaying the
signing of some new contracts, and in its absence, results could be even
higher."
D.I. 181 at Exh. A
26
<PAGE> 29
independent directors who exercised good faith and reasonable
investigation.(22) Unocal, 493 A.2nd at 955. Their "independent" status,
coupled with the substance of and procedures utilized in their review of the
Moore offers, satisfies this Court that Wallace has met its initial burden
under Unocal to demonstrate, by proof of good faith and reasonable
investigation, that the Moore offer posed a threat to Wallace and its
shareholders.
This case presents a factual scenario different from that
which normally occurs. In most cases, the target seeks to persuade the Court
that the hostile tender offer posed a threat to the company's future plans and
the company's shareholders which justified the defensive measures until the
expected benefits of the plan come into fruition. Here, however, the directors
seek to prove that the hostile tender offer poses a threat of a different
nature. The favorable results from the board's past actions are now beginning
to be translated into financial results which even surpass management and
financial analyst projections, and the financial data which manifests these
results are facts only known to them. Therefore, Moore's tender offer poses a
threat that shareholders might tender their shares without appreciating the
- --------------------
(22.) The eight-person Wallace Board is comprised of two insiders, Cronin
and Dimitriou (the former Chief Executive Officer treated as an insider), and
six independent directors. The independent directors are successful
businessmen with proven track records. Mr. Doyle has held positions as Senior
Vice President, Chief Financial Officer, Chief Administrative Officer and a
member of the board at various major domestic corporations. Mr. Olsen is the
former President of IGA, a wholesale and retail grocery company. Mr. Canning
is the former President of the Walgreen Company, a drug retailer. Mr. Lane is
Chairman of both General Binding and Lane Industries. Mr. Ewers is the former
Executive Vice President of Wrigley, a chewing gum manufacturer. Mr. Sterns is
the former President of a major company. Suffice it to note that all the
members of the Wallace Board have substantial experience in serving as high
level executives and board members. There was no evidence that Wallace
management had either the ability or desire to influence the thinking of the
independent directors with respect to the adequacy of the offer.
27
<PAGE> 30
fact that after substantial capital investment, Wallace is actually witnessing
the beginning of the pay-off of its business strategy. The Court therefore
finds that Moore's tender offer poses a threat to Wallace that shareholders,
because they are uninformed, will cash out before realizing the fruits of the
substantial technological innovations achieved by Wallace. Accordingly, the
Court turns its attention to the second Unocal inquiry, which evaluates the
proportionality of the target board's response.
(B) Did the Action of the Wallace Board Constitute
a Reasonable Response?
The second prong of the Unocal enhanced scrutiny requires that
once the threat has been identified, the board must prove that its defensive
measure[s] constituted a response which was reasonably proportionate to the
magnitude of the threat. Unocal, 493 A.2d at 955. A claim for breach of
fiduciary duty arising out of a board's failure to redeem a poison pill are
reviewed under the enhanced scrutiny provided by Unocal. Moran, 500 A.2d at
1356; Stahl v. Apple Bancorp, Inc., 1990 WL 114222 at *6 (Del. Ch. Aug. 9,
1990). Reasonableness turns on an assessment by the directors of the nature of
the tender offer and the effect such offer would have on the corporate
enterprise. Unocal, 493 A.2d at 955. Factors relevant to this assessment
include (1) inadequacy of the price offered; (2) nature and timing of the
offer; (3) questions of illegality; (4) the impact on "constituencies" other
than the shareholders (i.e., creditors, customers, employees, and perhaps even
the community generally); (5) the risk of nonconsummation; and (6) the
qualities of the securities being offered in the exchange. Id.
28
<PAGE> 31
Wallace argues the since the Moore tender offer has commenced,
it has only taken three actions: (1) rejected the Moore offers of $56 and $60
per share, (2) authorized the commencement of antitrust litigation, and (3)
declined to redeem the poison pill. Wallace argues that these actions are
clearly reasonable and proper, given the gravity of the threat posed by Moore's
offer. Wallace asserts that the decision not to redeem the poison pill is not
draconian, because it in no way presents any obstacle to Moore's proxy contest.
Moore argues that a fortiori, no threat exists, but that in any event,
Wallace's actions were not reasonably proportionate. Since the Wallace Board
never informed itself as to what a "fair" or "adequate" price would be, Moore
reasons, it was poorly positioned to determine whether a threat due to
inadequacy exists as an initial matter, thus obfuscating any meaningful
determination of proportionate response, and concomitantly negating any
justification for keeping the poison pill in place.
As an initial matter, the Court notes that poison pills serve
legitimate functions which create no fiduciary duty issue. For example, if a
hostile tender offer is commenced at a share value which the board, in good
faith and after reasonable investigation, determines to be "inadequate," the
board may justifiably leave the pill in place for a period of time so as to
enable it to take steps necessary to protect and advance shareholder interests.
See, e.g., City Capital, 557 A.2d at 798. Such permissible actions include
negotiation on behalf of the shareholders with the offeror, recapitalization or
restructuring as an alternative to the offer, Revlon-style auctioning, should
Revlon duties be triggered, or the arrangement for an otherwise better and
value-maximizing alternative than that posed by the tender offer. Id.; see
also Stahl, 1990 WL 114222 at *8 (failure to redeem pill was reasonable in
relation to threat
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since it preserved the board's ability to explore alternatives to enhance
shareholder value). After the period in which such alternatives may be
considered has ended, and the board has determined that such alternatives are
not feasible or, at any rate, not better for the shareholders, the legitimate
role of the poison pill has expired. City Capital, 557 A.2d at 798. At that
point, the only function the pill serves is to prevent the shareholders from
exercising their right to tender, as the poison pill, once activated,
effectively forecloses the consummation of the tender offer.
However, failing to redeem a poison pill can be justified by
considerations other than maximizing current share value. In Time, the Supreme
Court of Delaware noted, "[A]bsent a limited set of circumstances as defined
under Revlon, a board of directors, while always required to act in an informed
manner, is not under any per se duty to maximize shareholder value in the short
term, even in the context of a takeover." Time, 571 A.2d at 1150. The Time
court further observed that "[d]irectors are not obliged to abandon a
deliberately conceived corporate plan for a short-term shareholder profit
unless there is clearly no basis to sustain the corporate strategy." Id. at
1154; see also Mai Basic Four, Inc. v. Prime Computer, 1988 WL 140221 at *4
(Del. Ch. Dec. 20, 1988) ("Prime has recently obtained new management and is
only now on the verge of reaping the economic benefits of its recent
acquisition of Computervision. As a result, the projections by Prime's
management for the future are optimistic."); compare, Sutton Holding Corp. v.
DeSoto, Inc., 1990 WL 13476 at *8 (Del. Ch. Feb. 5, 990) (management's failure
to attempt to maximize shareholder value, and reliance on a modest
restructuring plan which had been prepared in the ordinary
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course of business, falls short of the business plan of Time, and thus ordering
of the immediate redemption of the poison pill would ordinarily be required).
Delaware courts have recognized that at some point, the
failure to redeem a poison pill can constitute a fiduciary breach. "Our cases,
however, also indicate that in the setting of a noncoercive offer, absent
unusual facts, there may come a time when a board's fiduciary duty will require
it to redeem the rights and to permit the shareholders to choose." City
Capital, 551 A.2d at 798-99 (failure to redeem the poison pill, to enable board
to implement restructuring plan projected to produce modest increase in share
value, constituted an unreasonable response to the threat posed by noncoercive
tender offeror) see also Grand Metro. Public Ltd. v. Pillsbury Co., 558 A.2d
1049, 1057-58 (Del. Ch. 1988) (failure to redeem poison pill in order to
implement board's restructuring plan projected to offer greater share value was
unreasonable in relation to threat posed by noncoercive tender offer, since
projected benefits of plan my never come into fruition).
While Unocal gave no direct guidance to courts applying the
proportionality test, the Court did expressly define the outer parameter of
board action by condemning any action which is "draconian" as not reasonably
proportionate to the perceived threat. Unocal, 493 A.2d at 955. Draconian
measures have been described as measures which are coercive or preclusive with
respect to the outside bid. See Unitrin, 651 A.2d at 1387-88. Board actions
that are coercive in nature or force upon shareholders a management-sponsored
alternative to a hostile offer, even if the threat is valid, may be struck down
as unreasonable and nonproportionate responses. See Time, 571 A.2d at 1154-55
("Time's responsive action to Paramount's tender offer was not aimed at
'cramming down' on its shareholders a
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management-sponsored alternative, but rather had as its goal the carrying
forward of a pre-existing transaction in an altered form. Thus, the response
was reasonably related to the threat."). If a defensive measure is not
preclusive or coercive, Unocal requires the action to fall within a "range of
reasonableness." Unitrin, 651 A.2d at 1387-88; Paramount Communications Inc.
v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1993) ("QVC"). As the Unitrin
court noted, "proper and proportionate defensive responses are intended and
permitted to thwart perceived threats," and the board need not wait for the
actual takeover to be commenced, when it reasonably perceives the takeover
threat to be imminent:
When a corporation is not for sale, the board of
directors is the defender of the metaphorical medieval
corporate bastion and the protector of the
corporation's shareholders. The fact that a defensive
action must not be coercive or preclusive does not
prevent a board from responding defensively before a
bidder is at the corporate bastion's gate.
Unitrin, 651 A.2d at 1388. The rationale for this "range of reasonableness"
standard, as explained by the Unitrin court, is that directors need a degree of
latitude in discharging their fiduciary duties when defending against threats
to the company. That latitude, combined with an appropriate amount of judicial
restraint, results in a reviewing court's upholding the board's defensive
actions, provided the actions are not coercive or preclusive. See id. at 1388.
In Unitrin, the board's response to the hostile tender offer
was found not to be preclusive or coercive. The challenged actions taken were
the adoption of poison pill, advance notice provision in bylaws for shareholder
proposals, and a repurchase program. The Unitrin board determined that the
inadequate price of the offer and potential antitrust complications caused the
American General offer to be a threat. Discarding the antitrust concerns as
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frivolous, see Unitrin, 1994 WL 698483, at *8 the Chancery Court determined
that the inadequate price threat was "mild" because the offer was negotiable
both in price and structure. Id. at *7. However, even in the face of a mild
threat, the Chancery Court upheld the board's adoption of the poison pill
because the board reasonably believed the price was inadequate and feared that
the shareholders would not realize that the long term value of Unitrin was not
reflected in the market price of the stock. Id. at *8. This finding was not
contested on appeal to the Supreme Court of Delaware. Compare, QVC, 637 A.2d
at 49-50 (defensive measures designed to protect desired merger with Viacom
deemed draconian in light of "threat" posed by QVC all cash tender offer for
majority of Paramount shares, offering aggregate premium of over $1 billion).
In the present case, retention of the poison pill is not
draconian. The Board's decision not to redeem the pill is not coercive or
preclusive. First, retention of the pill will have no discriminatory effect on
shareholders, as is generally the result in any situation involving a coercive
offer. See Unitrin, 651 A.2d at 1388 ("A selective repurchase of shares in a
public corporation the market, such as Unitrin's Repurchase Program, generally
does not discriminate because all shareholders can voluntarily realize the same
benefit by selling."). Second, and more important, retention of the pill will
have no effect on the success of the proxy contest. See Moran, 500 A.2d at
1357 ("We reject appellants' contentions . . . that the Rights Plan
fundamentally restricts proxy contests."); see also Unitrin, 651 A.2d at 1383
(concluding that a proxy contest is not precluded by the existence of a poison
pill, supermajority voting requirement fully implemented stock repurchase
plan); Time, 571 A.2d at 1155 (Time board's response to the Paramount bid not
preclusive because Paramount
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was still able to make an offer for the combined Time-Warner entity or amend
the conditions of its offer to eliminate the requirement that the Time-Warner
agreement be nullified). Here, the poison pill is only triggered upon the
acquisition of 20% of the shares of Wallace stock. therefore, so long as Moore
maintains a stock ownership percentage below that amount, it may safely wage
its proxy contest free from the dramatic effect of the poison pill.
Since the Court finds that the retention of the poison pill
was not a coercive or preclusive response, it must merely be satisfied that it
fell within a "range of reasonableness" to survive Unocal scrutiny. QVC, 637
A.2d at 45-46. The evidence demonstrates that the Wallace Board reasonably
believed that the shareholders were entitled to protection from what they
considered to be a "low ball" offer. See e.g., Unitrin, 1994 WL 698483 at *8
("It is the prerogative of the directors of a Delaware corporation to determine
that the market undervalues the price of its stock and to protect its
stockholders from offers that do not reflect the long term value of the
corporation under its present management plan.") After substantial capital
investment spanning several years, Wallace had finally begun to reap the
financial benefits from its WIN system. Cf. Mai Basic Four, 1988 WL 140221 at
*4 ("Prime has recently obtained new management and is only now on the verge of
reaping the economic benefits of its recent acquisition"). These benefits,
however, were reflected in data which remained peculiarly within the province
of the Wallace Board. Shareholders, at the time of the Moore offer, were
unable to appreciate the upward trend in Wallace's earnings which have been set
forth in detail above. Given this situation, the Wallace Board's response can
hardly be deemed unreasonable. In light of the foregoing, the Court concludes
the Wallace Board has
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demonstrated that its retention of the poison pill falls within the range of
reasonableness required under Unocal. See Unitrin, 651 A.2d at 1388.(23)
Having concluded that retention of the poison pill was
proportionate to the threat the Wallace Board believes Moore's tender offer
poses, the poison pill is entitled to review under the business judgment rule.
The burden now shifts "'back to the plaintiffs who have the ultimate burden of
persuasion [in a preliminary injunction proceeding] to show a breach of the
directors' fiduciary duties.' In order to rebut the protection of the business
judgment rule, the burden on the plaintiffs will be to demonstrate, 'by a
preponderance of the evidence that the directors' fiduciary duties.' In order
to rebut the protection of the business judgment rule, the burden on the
plaintiffs will be to demonstrate, 'by a preponderance of the evidence that the
directors' decision were primarily based on [(1)] perpetuating themselves in
office or [(2)] some other breach of fiduciary duty such as fraud,
overreaching, lack of good faith, or [(3)] being uninformed.' Unocal, 493 A.2d
at 958 (emphasis added)." Unitrin, Inc., 651 A.2d at 1390 (internal citation
omitted).
Moore has not carried its burden. It is held the decision of
the Wallace Board not to redeem the poison pill was a valid exercise of its
business judgment.
(b) Hardship to Moore, Wallace, and the Public Interest
While Moore has not succeeded in showing a likelihood of
success on the merits, the Court will briefly discuss the other requirements
for a preliminary injunction. In
- --------------------
(23.) The Wallace Board also had concerns as to whether the acquisition of
Wallace by Moore would violate federal antitrust law. Although this Court has,
for preliminary injunction purposes, concluded that it would not, as appears
infra, one cannot say there was not legitimate substance to this concern. If
there were antitrust standing, it is unknown what result would obtain after a
full-blown trial.
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ruling on a preliminary injunction, the Court must weigh the extent of hardship
to the plaintiff if the requested relief is not granted against the hardship to
the defendant if the relief is granted. See Clean Ocean Action, 57 F.3d at
331. Moore argues that if the Court does not issue a preliminary injunction,
Moore will continue to suffer the consequences of the Wallace Board's breach of
fiduciary duty by not having its tender offer put to the shareholders.
Furthermore, Moore argues, the availability of the proxy contest does not
negate Moore's right to an equitable remedy, especially since Wallace plans to
rely on its defensive supermajority voting requirements to block the offer and
thwart the overwhelming desires of the shareholders. Wallace argues that Moore
has failed to put forward any evidence of injury since the option of a proxy
contest is till available to Moore. Furthermore, Wallace argues it will suffer
irreparable injury in that the company will cease to exist if the tender offer
were to succeed, and there could therefore never be a trial on the merits.
Finally, since this would be a cash-out merger, the Wallace shareholders will
be deprived of their right to participate in the emerging glowing financial
results of Wallace. A preliminary injunction would also grant Moore access to
Wallace's WIN system, a move which could not later be "unscrambled." It is
Wallace's technology which is enabling it to beat Moore in head-to-head
competition. If a preliminary injunction were granted, there is a real
possibility that Moore would gain access to that technology prior to trial. If
that were to happen, Wallace will have lost its technological advantage and
with it, its competitive edge.
The Court finds Wallace's arguments persuasive. First, Moore
has not demonstrated irreparable injury if the preliminary injunction does not
issue. Moore may still wage its proxy contest. Second, and perhaps most
importantly, to the extent that Moore
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would suffer injury if relief were denied, Wallace's injury if the injunctive
relief is granted would be greater. At the preliminary injunction stage of a
hostile tender offer case, the Court must be extremely cautious when
determining whether to grant the relief, given the dramatic consequences of the
action. Cf. United States v. Spectro Foods Corp., 544 F.2d 1175, 1181 (3d Cir.
1876) ("The power to issue a preliminary injunction, especially a mandatory
one, should be sparingly exercised."). Finally, the public interest favors
neither side.
IV. WALLACE'S ANTITRUST COUNTERCLAIM
A. Antitrust Standing
1. Background
Moore concedes that "on a motion to dismiss for failure to
state a claim, all allegations in the pleadings must be accepted as true."
Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991); see also In re Solar
Mfg Corp., 200 F.2d 327, 333 (3d Cir. 1952) (applying same standard to
counterclaims), cert. denied, 345 U.S. 940 (1953). The Court will assume the
veracity of the facts as averred by Wallace in the context of Moore's motion to
dismiss.
According to Wallace's allegations, Moore and Wallace compete in the
manufacture and sale of business forms. Wallace Counterclaim, Count One,
paragraph 13, D.I. 40. Wallace asserts in its antitrust counterclaim that
"[i]f Moore were to acquire Wallace, the effect of such acquisition may be
substantially to lessen competition in the relevant product and geographic
market, thus violating Section 7 of the Clayton Act, 15 U.S.C. Section 18."
D.I. 40,
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Counterclaim at paragraph 19. Wallace also avers that unless the Court enjoins
Moore's takeover attempt, Wallace will suffer irreparable harm flowing from the
antitrust infirmity, including but not limited to, "loss of independent
decision making authority, loss of trade secrets, loss of employees, and loss
of customers." Id. at paragraph 20.
2. Analysis
Under Section 16 of the Clayton Act, "[a]ny person, firm,
corporation, or association shall be entitled to sue for and have injunctive
relief . . . against threatened loss or damage by a violation of the antitrust
laws . . . ." 15 U.S.C. Section 26. As an antitrust plaintiff, Wallace must,
however, allege and ultimately prove that it would suffer threatened loss of
damage constituting an "antitrust injury." Cargill, Inc. v. Monfort of
Colorado, Inc., 479 U.S. 104, 113 (1986); The Treasurer, Inc. v. Philadelphia
Nat'l Bank, 682 F. Supp. 269, 273 (D.N.J.), aff'd mem. op., 853 F.2d 921 (3d
Cir. 1988). Antitrust injury involves injury "of the type the antitrust laws
were intended to prevent and that flows from that which makes defendants' acts
unlawful." Cargill, 479 U.S. at 109 (citing Brunswick Corp. v. Pueblo
Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)).
Prior to the Cargill decision, Supreme Court precedent under
the Clayton Act required a Clayton Act plaintiff to demonstrate the threat of
"antitrust injury" when suing for damage. Brunswick Corp., 429 U.S. at 489.
However, there raged a debate in the lower courts as to whether a Clayton Act
injunctive plaintiff needed to establish antitrust injury when seeking
injunctive relief. See, e.g., CIA Petrolera Caribe, Inc. v. ARCO Caribbean,
Inc., 754 F.2d 404, 407-08 (1st Cir. 1985) (plaintiff need only show threat of
injury emanating from the
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antitrust violation); Board of Regents v. National Collegiate Athletic Assoc.,
707 F.2d 1147, 1151 (10th Cir.), aff'd, 468 U.S. 85 (1983) (Brunswick standing
limitation not fully applicable to suit for injunctive relief); but see, e.g.,
Local Beauty Supply, Inc. v. Lamaur Inc., 787 F.2d 1197 (7th Cir. 1986)
(plaintiff need show 'antitrust injury" to fulfill standing requirement);
Schoenkopf v. Brown & Williamson Tobacco Corp., 637 F.2d 205 (3d Cir. 1980)
(same). This debate extended to merger cases involving standing of target
companies to assert Clayton Act violation as well. See, e.g., Laidlaw
Acquisition Corp. v. Mayflower Group, Inc., 636 F. Supp. 1513, 1516-17 (S.D.
Ind. 1986) (target plaintiff has standing to sue in antitrust case); Gearhart
Indus., Inc. v. Smith Int'l, Inc., 592 F. Supp. 203, 211 n.1 (N.D. Tex.)
(same), aff'd in part, modified and vacated in part, 741 F.2d 707 (5th Cir.
1984); but see, e.g., Central Nat'l Bank v. Rainbolt, 720 F. 2d 1183, 1186-87
(10th Cir. 1983) (target corporation lacked standing in antitrust case to sue
for injunctive relief): A.D.M. Corp. v. SIGMA Instruments, Inc., 628 F.2d 753
(1st Cir. 1980) (same); Carter Hawley Hale Stores, Inc. v. Limited, Inc., 587
F. Supp. 246, 250 ((C.D. Cal. 1984).
In Cargill, the Supreme Court finally repaired the rent in the
Circuits over this issue. The Court held that a plaintiff seeking an
injunction under Section 16 of the Clayton Act must show a threat of "antitrust
injury" in order to fulfill the standing requirement. In that case, the
nation's fifth-largest beef packer, Monfort of Colorado ("Monfort"), sought an
injunction in a challenge to a merger between the nation second and
third-largest beef packers. Cargill, 479 U.S. at 106. The Court first
acknowledged that under the Clayton Act's statutory scheme, its standing
analysis for injunctive relief would "not always be
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identical" to standing analysis for damages. Id at 111 n.6. Notwithstanding
this caveat, the Court went on to declare it to be "anomalous . . . to read
the Clayton Act to authorize a private plaintiff to secure an injunction
against a threatened injury for which he would not be entitled to compensation
if the injury actually occurred." Id. at 112. Following this reasoning, the
Court held that a plaintiff seeking injunctive relief under Section 16 of the
Clayton Act must allege antitrust injury. Id. at 113.
A survey of both case law and scholarly commentary subsequent
to the Cargill decision spurs this Court to conclude that the target of a
hostile takeover has no standing to bring a Section 7 Clayton Act claim. See
e.g., Anago, Inc. v. Tecnol Medical Prod., Inc., 976 F.2d 248 (5th Cir. 1992)
(target has no standing to bring Clayton antitrust claim), cert. dismissed, 114
S. Ct. 491 (1993); Burnup & Sims, Inc. v. Posner, 688 F. Supp. 1532 (S.D. Fla.
1988) (same); Burlington Indus., Inc. v. Edelman, 666 F. Supp. 799 (M.D.N.C.
1987) (same), aff'd, 1987 WL91498 (4th Cir. June 22, 1987); II Phillip Areeda &
Herbert Hovenkamp, Antitrust Law, paragraph 381b, at 332 (Rev. Ed. 1995)
(same); Andrew Zuckerman, Standing of Targets of Hostile Takeovers to Enjoin
Their Acquisition on Antitrust Grounds, 1992/1993 Ann. Sur. Am. Law 447 (same);
but see contra Joseph F. Brodley, Antitrust Standing in Private Merger Cases:
Reconciling Private Incentives and Public Enforcement Goals, 94 Mich. L. Rev. 1
(1995). This line of cases and commentary has cited various grounds pursuant to
Cargill to justify a lack of target standing in Clayton Act cases.
For example, courts have regarded any alleged injury suffered
by a target in a merger as being inherent to the merger process rather than
flowing from any anticompetitive
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effect of the merger. See Burnup, 688 F. Supp. at 1534; Burlington, 666 F.
Supp. at 805. Another rationale for finding a lack of target standing is the
view that rather than suffering injury, the target and its shareholders
ultimately benefit from any increased prices or decreased competition stemming
from the merger. Anago, 976 F.2d at 251; Burlington, 666 F. Supp. at 805.
Finally, courts have even found that disingenuous antitrust suits may be
brought by targets to thwart the loss of control to be suffered by management,
as opposed to any motives relating to antitrust. In that vein, courts have not
shied from the type of cynicism first articulated by Judge Friendly:
Drawing Excalibur from a scabbard where it would doubtless
remain sheathed in the face of a friendly offer, the target
company typically hopes to obtain a temporary injunction which
may frustrate the acquisition since the offering company may
well decline the expensive gambit of a trial . . .
Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 854 (2d Cir.),
cert denied, 419 U.S. 883 (1974). See also Burnup, 688 F. Supp. at 1534 ("The
suit must be understood in its true sense, an attempt by the incumbent
management to defend their own positions, not as an attempt to vindicate any
public interest.").
Demonstrating a resistance to change even in light of Cargill,
precedent from the Second Circuit Court of Appeals takes the opposite view.
See Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252 (2d Cir. 1989)
(target corporation found to have standing to sue for Clayton Act violation),
cert. dismissed, 492 U.S. 939 (1989). In Consolidated Gold Fields, the court
held that the plaintiff target would suffer antitrust injury because its "loss
of independence [was] causally linked to the injury occurring in the
marketplace." Consolidated
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Gold Fields, 871 F.2d at 258. However, the loss of independent decision
making, intrinsic to any takeover case, runs counter to Cargill's mandate that
"plaintiffs must show more than simply an "'injury causally linked' to a
particular merger." Cargill, 479 U.S. at 109 (citing Brunswick, 429 U.S. at
489).
This principle is further illuminated in the Consolidated Gold
Fields dissenting opinion, where Judge Altimari posed the following
hypothetical:
[E]ach of the injuries [such as loss of decision making power]
alleged by Gold Fields would occur if the combining
corporations controlled a total market share of only 2%
[implying no anticompetitive result], or if the entity
attempting the takeover was not a competitor of the target.
Consolidated Gold Fields, 871 F.2d at 264 (Altimari, J., dissenting). The
dissent also pointed to a further flaw in the Consolidated Gold Fields
reasoning, where the majority expressly relied on a decision which did not have
the benefit of the Supreme Court's reasoning in Cargill and whose continued
vitality was therefore limited. Id. (citing Grumman Corp. v. LTV Corp., 665
F.2d 10 (2d Cir. 1981)).
The Third Circuit Court of Appeals has recognized that
articulation of a precise formulation for antitrust standing is a continuing
struggle, as standing is a somewhat "malleable concept." Alberta Gas
Chemicals, Ltd. v. E.I. du Pont de Nemours and Co., 826 F.2d 1235, 1239 (3d
Cir. 1987), cert. denied, 486 U.S. 1059 (1988). In Alberta Gas, the Third
Circuit analyzed antitrust standing under Section 7 of the Clayton Act.
Plaintiff Alberta Gas was a methanol producer who challenged the merger of a
competitor, DuPont, with another company that produced methanol, Conoco. Id.
at 1236-37. Alberta Gas claimed
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injury resulting in that it allegedly lost sales when the merger induced Conoco
to no longer participate in the push to stimulate market demand for methanol.
Id. at 1237. Applying Cargill, the court declined to find this type of loss as
connected with or resulting from DuPont's market power in the
methanol-producing industry. Id. 1242. Refusing to take a lenient stance on
what constitutes antitrust injury, and instructive to the case sub judice, the
court also noted that the same type of harm, i.e., non-antitrust harm, would
have occurred if any acquiror decided to curtail the target's production and
marketing plans. Id.
The Third Circuit appellate court has not faced squarely the
issue of target antitrust standing. However, with the above weaknesses in the
Consolidated Gold Fields majority's reasoning, as well as the strict approach
countenanced by the Alberta Gas court, I conclude that the Third Circuit Court
of Appeals would join the Anago line of cases rather follow Consolidated Gold
Fields. The purposes of the requirement of antitrust injury is to ensure that
the harm alleged by a plaintiff corresponds to the rationale for finding a
violation of the antitrust laws in the first place. Ansell, Inc. v. Schmid
Laboratories, Inc. 757 F. Supp. 467, 484 (D.N.J.), aff'd, 941 F.2d 1200 (3d
Cir. 1991). In the event of a Moore takeover, Wallace alleges it will be
harmed by a loss in independent decision making authority, loss of customers,
loss of employees, and loss of trade secrets. These alleged injuries do not
occur because of the potential lessening of competition; rather, they occur due
to a change in corporate control. See Burlington Indus., 666 F. Supp. at 805.
In other words, these sequelae can occur with the consummation of any merger,
even those that are not violative of the
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Clayton Act, and are divorced from any considerations that less competition may
exist in the open market. Id.
In sum, because Wallace has not alleged injury "of the type
the antitrust law were intended to prevent," the Court will grant Moore's
motion to dismiss Count I of Wallace's counterclaim.
Ordinarily, this opinion would stop here and the Wallace
motion to preliminarily enjoin the merger on antitrust grounds would not be
treated. However, the plain fact is the circuits have divided on the issue of
antitrust standing. The Fifth Circuit, Anago., and the Fourth Circuit,
Burlington Indus. (summary affirmance), have concluded a takeover target does
not have antitrust standing while the Second Circuit in Consolidated Gold
Fields has concluded the opposite. Antitrust standing is a prudential, not
constitutional limitation on federal court jurisdiction. As such, it is not
surprising the Circuits have reached opposite conclusions. Similarly, while I
believe there should be this prudential limitation on antitrust jurisdiction,
those possessed of a higher commission might feel otherwise. In an abundance
of caution, in order to facilitate appellate review should that contingency
occur, the merits of the Wallace motion for preliminary injunction based on an
alleged antitrust violation will be addressed.
B. Preliminary Injunction - Wallace's Antitrust Counterclaim
Wallace have moved to preliminarily enjoin a proposed merger
with Moore. As stated above, Wallace asserts in its Section 7 counterclaim
that "[i]f Moore were to acquire Wallace, the effect of such acquisition may be
substantially to lessen competition in
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relevant product and geographic market . . . ." D.I. 40 Counterclaim at
paragraph 19. Wallace alleges that for most customers in the relevant product
and geographic markets, the only acceptable vendors are Wallace, Moore and the
Standard Register Company; thus, the acquisition of Wallace by Moore would
transform a three-firm market into a two-firm market. Id. at paragraph
paragraph 16-17. Wallace identifies the relevant product market to be the sale
of forms and forms services to large, forms-intensive multi-location customers.
Tr. 564.
1. Facts
a) Wallace's Evidence
As an obligatory preamble for setting the stage for its
definition of the relevant product market as the forms and form services market
encompassing large, forms-intensive customers with multiple locations, Wallace
offered a historical backdrop to contextualize the current market conditions.
Over the past two decades, the business forms market has been pressured to
redefine itself in response to evolving customer needs, technology, and
availability of raw resources. According to Douglas Fitzgerald, Wallace's Vice
President of Marketing, a business customer in the mid-1970s would typically
manage most or all of its forms needs in-house. Tr. 98-100. The customer
would invariably initiate a given form's inception, design, and utilization;
ultimately the customer would print the form on-site or solicit bids to have a
vendor (such as Wallace) print a supply of forms. Once the forms were mass
produced and/or shipped to the customer, the customer would warehouse the forms
and monitor the form's inventory level and restock at the appropriate time.
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In this so-called traditional method of forms management,
vendors competed on the basis of price and quality, as well as service, which
was evaluated primarily by the turn-around time measured between time of
placement of order and delivery. Tr. 100. Over time, the business forms
market has mushroomed beyond the mere printing and delivery of forms.
Fitzgerald described two trends at the heart of this market transition: first,
the proliferation of computers has created a corresponding need for forms and
other related supplies. Second, a trend towards "out-sourcing" has evolved:
having the vendor assumed the forms-management responsibilities formerly
achieved internally. For some customers, out-sourcing their forms management
functions is efficient and results in significant cost savings. For example, a
Wallace customer, Pacific Bell, credits an annual savings of $2 million to its
out-sourcing of forms management services. Tr. 105.
Currently, the trend towards customer out-sourcing is a force
to be reckoned with, and business forms vendors fiercely compete by offering an
ever-expanding breadth of services. To do effectively, forms providers such as
Wallace offer a smorgasbord of options tailored specifically to the customer's
particular needs. For example, in response to the changing demands of the
forms marketplace, Wallace provides on-site forms management, i.e., a Wallace
employee(s) is stationed at the customer's workplace to perform such diverse
tasks as forms design, forms utilization review (e.g., elimination of
duplicative forms), forms inventory management, distribution, and purchasing.
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Fitzgerald identified a subset of customers who demand
out-sourcing services as "large, forms-intensive(24) customers with multiple
location" ("LFICwMLs"). Tr. 106. According to Fitzgerald, these customers
typically solicit contract bids for forms and forms-related services from
various competing vendors. The LFICwML will submit to each vendor-candidate a
request for information or a proposal outlining the required forms and
accompanying services it seeks. Many of the needs presented by the customer
require the vendor to showcase its best attributes, i.e., provide concrete
reasons shy one vendor should be considered superior over another. In
Wallace's experience, a LFICwML may solicit requests for proposals or bids from
as little as two to as many as "multiple dozens" of vendors. Tr. 261.
Sometimes, if Wallace is a finalist in the bidding contest, it may lower its
proposed price in order to be more competitive, especially if the other
finalists are Moore or Standard Register. Tr. 262. However, Wallace does not
generally lower its bid price if it is a finalist against vendors other than
these; Wallace perceives Moore and Standard Register to be its main
competitors, while it views the others as lacking the breadth of service and
sophisticated out-sourcing capabilities to be considered competitive when
courting LFICwMLs. Wallace did acknowledge, at least in one instance, however,
the existence of a LFICwML, Kaiser Permanente, that elected to solicit bids for
its forms and forms management functions from regional vendors and not Moore,
Wallace, or Standard Register. Tr. 209.
- --------------------
(24.) Forms-intensive has been described by one Wallace witness as referring
to either the significance of the form within the customer's organization, or
to the volume of forms within the organization, or both. Testimony of Michael
Leatherman, Tr. 255.
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Notwithstanding its view as to its major competitors, Wallace
admitted that there are other suppliers who serve LFICwMLs, such as Duplex,
Ennis, Reynolds & Reynolds, Vanier, GIS, Better Business Forms, Bowater,
Williamette, Jerome Business, Rittenhouse, Avery Dennison, and Ross Martin.
Tr. 135-45, 155, 159, 161-62, 165-68. These suppliers may merely provide forms
without forms management services, or forms management services without forms,
or a mixture of forms management services. Further, when Wallace wins a
contract bid, the bid may be "split" or shared with one or more of these or
other competitors. Tr. 129-30. For example, Wallace prints Domestic Air Bill
forms for the Federal Express corporation, where Standard Register prints its
International Air Bills. Tr. 155.
To compete effectively for customers, Wallace has developed
state-of-the-art computer technology allowing customer orders to be
automatically routed to the optimum warehouse location, where storage and
shipping are bar-code driven. Tr. 117. Inventory and quality control programs
track and assure accuracy or order filling; customers are provided with
summary invoicing that organizes order data in a concise format.
Additionally, Wallace has developed the WIN computer system.
Fitzgerald described this program as allowing "customers access to a variety of
sophisticated forms management services." Tr. 171. Generally, a customized
WIN program if offered to Wallace customers who purchase a combination of
products that exceeds $1 million. A similar program with lesser customization
called Select Services, is offered to Wallace customers with accounts of over
$400,000 but less than $1 million. Tr. 213. Customers who utilize either of
these programs are charged via pricing methodology that accounts for both
product and
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service. Charges for the services provided are not broken down separately,
rather, they are incorporated into a single price incurred for both product and
correlative service. Tr. 174.
The WIN program is Wallace's flagship computer program. As
described above, it links together order entry, order management,
manufacturing, inventory, distribution, and billing systems. Tr. 220. With
all these functions coordinated and available in a single software format, WIN
allows Wallace to provide LFICwMLs, many of who are out-source customers, with
tools to streamline their forms management. If a Wallace customer qualifies
for the WIN program, that customer can promptly access the gamut of WIN
services on the customer's own personal computer. Tr. 251. Michael
Leatherman, a Wallace Senior Vice President and its Chief Information Officer,
testified that Wallace invested $34 million over a nine-year period to
cultivate the WIN software, basically from scratch, as its software needs were
sui generis. Tr. 240. Leatherman was unaware of any commercially available
software that could readily supplant the WIN software.
Wallace counts its WIN system as a trump card in the
competition against its competitors. Since the WIN system has become
available, Wallace has won LFICwML accounts from other vendors, including
Moore. Tr. 268-70. One of Moore's consultants has admitted that the WIN
system "could put Wallace four years ahead of [Moore] in terms of order
management." DX60 at 834454. Moore has been struggling intensively to improve
its own computer system, retaining Electronic Data Systems as an adscititous
partner in systems development. Tr. 60. Moore's costs in its quest for
computer system enhancement have been staggering: in 1995, Moore budgeted $44
million, and for 1996, it had budgeted $35 million. McKay Depo. at 111, D.I.
149. Despite these efforts, Moore has suffered delays in
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implementing enhanced computer systems, with consequential disappointing
earnings figures in its U.S. Forms Divisions. Tr. 60.
i) Wallace's Customers
As anecdotal testimonial support, Wallace also offered
evidence from two of its satisfied customers. John W. Rountree, an
administrator at Public Service Electric and Gas Company of New Jersey
("PSE&G), testified that his company uses about 1200 forms in its day-to-day
operations. Rountree stated that PSE&G is a satisfied WIN system user, and
that it has out-sourced both the printing and managing of its forms. When
asked hypothetically if Moore acquired Wallace, and Moore raised prices by five
percent for the same services PSE&G currently received, Rountree answered that
if no other vendor could provide those services, PSE&G would pay the increased
price. Tr. 338.
Similarly, Frank Cuomo, Purchasing Manager with the Pershing
Division of Donaldson, Lufkin and Jenrette Securities Corporation, testified
that his company uses several hundred forms. Like his PSE&G counterpart, Cuomo
is a satisfied WIN customer, and takes advantage of Wallace's forms management
services for its national needs. Unlike his PSE&G counterpart, however, Cuomo
also uses local vendors for forms purchases where no forms management is
needed, so as to not be totally dependent on a single supplier. Tr. 356. In
the hypothetical event of a Moore takover and price hike, Cuomo would likewise
absorb a price increase of five percent for the same services he currently
receives from Wallace. Tr. 353.
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ii) Wallace's Antitrust Expert
Dr. Jerry Hausman, a Professor of Economics at Massachusetts
Institute of Technology, testified as Wallace's expert on the antitrust claim.
Hausman's expert opinion was based on econometric analyses(25) he performed on
raw data provided to him by Wallace. Hausman had Wallace collect all of their
bidding data for their LFICwMLs, specifically those with annual contracts worth
$500,000 or more. These data were culled for the time period commencing
January 1, 1994 up through the present.
Initially, Hausman explained that for the statistical
population of large (greater than $500,000) contracts on which Wallace chose to
bid during the above time period, the four largest incumbent contract holders
were Moore at 44%, Wallace at 18%, Standard Register at 15%, and Uarco at 12%.
Tr. 547, DX56. After the bidding process closed, these incumbent contracts
were awarded anew, with a resultant reshuffling into new proportions: Wallace
subsequently won over 50% of the contracts, Moore won about 15%, Standard
Register won 12%. Uarco was not able to hold onto any contracts at all. Tr.
547-48, DX 57.
From these data, Hausman concluded that the three companies,
Moore, Standard Register, and Wallace, are "very important competitive
companies," Tr. 548, and are "primarily responsible for servicing large,
multi-location customers that wish to out-source the forms function," Tr. 545.
He added that the increase in contract wins for Wallace in light of the
concurrent decrease for Moore shows that these two entities significantly
compete head-
- --------------------
(25.) An econometric study is the "use of statistical techniques to analyze
economic data." Testimony of Jerry Hausman, Tr. 541.
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to-head. He pointed out the statistics also showed that Wallace competed
against Moore about 75% of the time. Tr. 552.
Hausman additionally looked to information generated by Moore
itself. On a document entitled "Target Competitor Forms Management Accounts,"
Moore compiled a list of target customers in the eastern United States whose
forms management programs were not administered by Moore as of late summer
1995. DX 51, Deposition of Kathleen W. Sakal at 65. Of these target accounts
coveted by Moore, 34 accounts were deemed as having a potential value of $1
million or more. Hausman looked at these accounts and concluded that Wallace
and Standard Register each held 38% of those million dollar contracts; together
they constituted the majority of Moore competitors.
Hausman conceded, however, that there are other LFICwMLs that
are serviced primarily by vendors other than Moore, Wallace, and Standard
Register. His review of DX 7 demonstrated that may LFICwMLs had contract with
other vendors: (company - vendor) Woodward & Lothrop - Duplex; Alex & Alex -
Duplex; Alex Brown & Co. - Duplex; Beneficial Management - shared between
Wallace and Federal; Shering-Plough - NCR; Wyeth Labs - Federal; Certainteed -
shared between Amberst local jobber(26) and Moore; Smith Kline - Duplex; Show
Boat - Janice Group; Sun. Co - Ross Martin; Caesars - Ross Martin; Fleet
Bank/Shawmut - Duplex; Bankers' Trust - Howard Press; Canada Life - Reynolds &
Reynolds; Cole Haan Shoes - Creative Business Forms; Blue Cross/Blue Shield of
Maine - uses its own in house program; Bloomingdale's - Uarco; United
Technologies - Uarco; NEC -
- --------------------
(26.) Jobbers have been described as forms distributors that do not
manufacture the forms they distribute. Tr. 179.
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Uarco; Northeast Utilities - Duplex; United Utilities - Duplex; CenterBank -
Duplex; United Illuminating - Duplex; Service America - Uarco; Fag Bearings
- -Uarco; Mercedes Benz Credit - Jobber; Perrier Group of America - Duplex;
Cincinnati Bell Info. Systems - Better Business Forms; Tech Data - Reynolds &
Reynolds; People Gas - Better Business Forms; Tampa Electric Co. - Better
Business Forms; Glaxo/Burroughs - Wellcome - shared between Uarco and Standard
Register; Guilford Mills - Jordan Graphics; Overnite Transportation - NCR;
Phillip Morris USA - Reynolds & Reynolds; Owens & Manor - Reynolds & Reynolds;
Crawford Co. - Duplex; Turner Broadcasting - Reynolds & Reynolds. DX 7; Tr.
588-91.
Finally, Hausman deduced further conclusions from the data
supplied him by Wallace. His econometric analysis showed that Wallace's gross
margin (defined as price minus cost) was lower when Moore was bidding than when
Moore was not bidding. DX 12 at paragraph 11; Tr. 566. When Wallace went
head-to-head against Moore in the bidding process, Hausman found the Wallace
gross margin was lower by about seven to eight percent. Tr. 56. From this,
Hausman concluded that "if Moore were not going out head-to-head against
Wallace, . . . on average, prices to customer will go up by between seven and
eight percent." Tr. 567. Hausman based his conclusion on the premise that if
Moore takes over Wallace, Wallace and Moore will be bidding together rather
than as competitors; competition between these two companies will therefor be
eliminated. Further, he opined that this elimination of competition will not
just affect pricing; the technological rivalry between these two competitors
will also be abolished, with a resultant inertia in the improvement of overall
services.
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Despite his econometric prowess, Hausman could not offer a
definition of Wallace's market share as to LFICwMLs. Neither could he "sort
out" what percentage of the total forms sales market is represented by
LFICwMLs. Tr. 573. He could not testify as to how many LFICwMLs there are in
the U.S. market; other Wallace testimony elucidated that there are
approximately 170 Wallace WIN and Select Service customers who fall into this
alleged submarket. Tr. 252-254.
b) Moore's Evidence
i) Expert Testimony
Not surprisingly, Moore presented economist Dr. Sumanth
Addanki from the National Economic Research Associates whose testimony was at
stark variance with that of Dr. Hausman. Addanki concluded that the relevant
market within which to analyze Moore's acquisition of Wallace is no smaller
than U.S. market for the sale of business forms and related services. Tr. 641.
He characterized this market as "unconcentrated, vigorously competitive," with
customers having a variety of alternative ways to meet their business forms and
services needs. Tr. 641. He found that some of these alternatives include
local suppliers, regional suppliers, and national suppliers.
Addanki also reasoned that here is no logical basis for
discerning a discrete product submarket LFICwMLs, and that no one in the
industry tracks market share in such a theoretical arena. Tr. 653. Rather
than the size of the customer, number of customer locations, or dollar amount
spent on forms and forms management services, he concluded that the primary
distinguishing factor is the type of industry within which the customer works
and
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how the customer organizes its forms procurement process. He found large
customers and small customers expressing similar demands regardless of their
size, albeit with idiosyncrasies varying from customer to customer.
Addanki's review of bidding data for both Moore and Wallace
revealed that vendors are often called upon by large customers to bid on supply
requirements without any forms-related management services. American Express,
Frank Parsons Paper, and Melville Corp. requested quotes from Moore excluding
forms management services. See Sakal Depo. at 41, 47, 53. Further, many large
customers are supplied on a "non-contract" or ad hoc basis, as in Wallace's
relationship with United Parcel Service, DiscoverCard Services, and State Farm
Insurance. See PX 229. Other customers request contracts ranging in duration
from one to five years, with the capability of being terminated upon notice by
either party. Some customers rely on multiple suppliers for their forms need,
such Avis, Homedco, Federal Express, Bank One, Nationwide Insurance and Boeing.
See Fitzgerald Depo. at 200, 204, 214-15, 269-71, 315-17, 325. From this,
Addanki concluded the following:
[T]here is no single set of requirements that distinguishes
'large forms-intensive customers with multiple locations.'
Rather, these customers can, and do, satisfy their forms need
in a variety of alternative ways, out-sourcing as little or as
much of the management and distribution functions as they
choose, arranging their forms procurement process accordingly,
buying forms locally, regionally or centrally as needed.
Addanki Expert Report, PX 119 at 7-8.
Like Wallace's Vice President Fitzgerald, Addanki also
described the forms industry as one in transition. Demand for traditional core
products in the forms industry, such
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as single and multi-ply forms and continuous feed forms, is declining because
of technological progress and its impact on customer demands. Shipments of
these core products declined by five percent in 1992 and by approximately 4
percent in 1993. PX 119 at 9. As one alternative to paper forms, customers
have the option to perform many of their business functions via electronic mail
(e-mail) and transmission over local and wide area computer networks. PX 119
at 5.
Additionally, LFICwMLs have increasingly restructured and
consolidated their forms use and forms suppliers, thus intensifying the
competitive pressures between vendors in the forms industry. Corporations such
as Andersen Consulting, CSC Index, and Price Waterhouse offer management
consulting to re-engineer a given business entity, including the revamping of
information systems and the forms generating by those systems. Id. at 12. In
sum, Addanki opined that the market for business forms today is vigorously
competitive because vendors must continue to grow their sales despite the
declining demand for core products. Id.
Finally, as a corollary to forms customers' consolidation of
their purchases, Addanki identified a growing trend in which many informed and
sophisticated forms customers asset their bargaining power by demanding and
obtaining favorable pricing by playing one vendor against its competitors. Tr.
683. These factors also exert pressure on the forms vendors to create new
methods of servicing customers' form needs more completely.
Along with his qualitative evaluation of competition in the
business forms industry, Addanki quantified his economic data. Following U.S.
Department of Justice Merger Guidelines, Addanki used the Herfindahl-Hirschmann
Index ("HHI") to measure
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concentratin in the relevant product market he identified as the business forms
industry in the United States. He postulated that there are over 600 vendor
participants in this market, with the top 20 vendors accounting for 67% of
total sales. PX 119 at 16. As HHI calculations require, each vendor's market
share was mathematically squared and then all the squared shares was added.
Addanki calculated the HHI of the current market as 432.5. If Moore acquires
Wallace, the HHI would increase to 527, an increase of 95 points. Tr. 651.
According to Addanki, this figure, well below the Merger Guideline's safe
harbor level of 1000, represents an unconcentrated market where a competitively
healthy amount of alternative suppliers are available to customers. In terms
of real dollars and cents, the entire business forms market in the United
States is approximately $7.5 billion dollars; Moore's and Wallace's combined
sales total approximate $1.3 billion or less than 18% of the total business
forms market.
Based on his evaluation of data supplied by Moore, Addanki
concluded that the acquisition of Wallace by Moore would not cause competitive
harm in the forms industry in the United States.
ii) Other Moore Evidence
Gregory Lynch, Vice President of Moore's Financial Services
Group, testified that in the course of its marketing and sales development
plans, Moore identified a list of what could be considered LFICwMLs (as defined
by Wallace) as potential clients. Out of a possible 2000 LFICwMLs, Moore
targeted a limited number (125) of "national accounts," which were defined in
Moore's National Account Pocket Dossier as accounts valued at a potential for
$1
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million or more. DX 3 at C6130516. In this National Account Pocket Dossier,
Moore estimated its market share for these types of accounts as 25%; the
remaining 75% were served by other suppliers. Id. at C6130555. Recently,
Moore has shifted its focus to customers who potentially spend over $250,000 in
forms and forms-related services. Tr. 626. Moore also classifies its customers
into three "vertical segments" by industry type rather than merely by account
value: Financial Services, Health Services, and Government Services.
Lynch testified as to the competitive nature of the forms and
forms services marketplace. In his experience, each individual customer is
different and pursues a strategy related to its own needs and goals. Tr. 618.
He agreed that there are many alternatives to supplying customer's needs
available to Moore's customers, and the range of alternatives itself is ever
increasing. He also agreed that the industry has witnessed a trend where
customers out-source functions not related to their core business. Although
there are businesses that still produce and manage forms internally, using
in-house print shops and in-house employees, other businesses may decide to
out-source the production of forms, but retain forms management in-house.
Other customers out-source both forms management and production.
Lynch also testified that, in his experience, his customers
are very well informed. Customers insist on "30 day out clauses" which allow
them to change suppliers after 30 days. Tr. 624. Competitive conditions in
the industry itself are responding to the multiplicity of customer demands. Of
increasing importance is the emergence of forms jobbers and distributors,
middleman organizations which sell but do not manufacture forms. The industry
has witnessed these vendors teaming up with warehousing and distribution firms
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that provide inventory, distribution, and billing systems. Tr. 178-79; 621-22.
Paper mills themselves have also recently entered the competitive fray with
various offerings.
Effects of the potpourri of alternatives available to Moore
customers has not escaped Moore's notice. When Moore informs a customer of a
price hike, Moore increasingly runs the risk that the customer will defect to
another vendor or vendors. Lynch cited several instances where Moore lost
large accounts to smaller vendors when Moore attempted to raise prices; a
large contract with a uniform company in Cincinnati was lost to Miami Business
Forms; a $4 million American Express contract was lost to a five person
organization called General Credit; contracts with CIGNA and Bank of New York
were lost to Willliamette. Tr. 623.
2. Likelihood of Success on the Merits
Before this Court can preliminarily enjoin Moore's proposed
merger based on this issue, Wallace, as movement and counterclaimant, must
first establish that it has demonstrated a likelihood of success on the merits
of its Section 7 claim. See Clean Ocean Action v. York, supra, 57 F.3d 328,
331 (3d Cir. 1995); Allis-Chalmers Mfg. Co. V. White Consol. Indus., Inc., 414
F.2d 506, 510 (3d Cir. 1969), cert. denied, 396 U.S. 1009 (1970). Section 7
of the Clayton Act proscribes mergers or acquisitions "where in any line of
commerce or in any activity affecting commerce in any Section of the country,
the effect of such acquisition may be substantially to lessen competition, or
tend to create a monopoly." 15 U.S.C Section 18. Accordingly, to demonstrate
a likelihood of success on the merits, Wallace must fulfill two criteria;
first, it must show that it is more probable than not that acquisition of
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Wallace by Moore will affect a "line of commerce" in "any Section of the
country." These respective determinations are informed by the elucidation of a
relevant product market and a relevant geographic market. Brown Shoe Co. v.
United States, 370 U.S. 294, 324 (1962). Wallace argues that the relevant
product market is the forms and forms services market encompassing large,
forms-intensive customers with multiple locations; it posits the geographic
market as the entire United States.
Second, Wallace must show that it is more probable that not
the Moore takeover may substantially lessen competition in the relevant product
and geographic markets; the mere possibility of substantial impairment to
competition will not suffice. Fruehauf Corp. v. FTC, 603 F.2d 345, 351 (2d
Cir. 1979); see also United States v. Marine Bancorporation, Inc., 418 U.S.
602, 622-23 (1974) (Clayton Act Section 7 "deals in probabilities" rather than
"ephemeral possibilities"). Of equal note, however, is that Wallace need not
prove the fruition of actual anticompetitive effects of the acquisition, FTC v.
Proctor & Gamble Co., 386 U.S. 568, 577 (1967), as Section 7's underlying
purpose is to "arrest apprehended consequences of intercorporate relationships
before those relationships could work their evil," Brunswick Corp. v. Pueblo
Bowl-O-Mat, 429 U.S. 477, 485 (1977).
a) The Relevant Product and Geographic Markets
A necessary predicate to a finding of a violation of Section 7
of the Clayton Act is the definition of the relevant product market and
relevant geographical market. United States v. E.I. du Pont de Nemours & Co.,
353 U.S. 586, 593 (1957). These market
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determinations confer the requisite context within which the Court can analyze
whether there has been a substantial lessening of competition. Id.
i) Relevant Geographic Market
The United States Supreme Court has defined relevant
geographic market as the region "where, within the area of competitive overlap,
the effect of the merger on competition will be direct and immediate." United
States v. Philadelphia Nat'l bank, 374 U.S. 321, 357 (1963). Both parties
agree that the relevant geographic market in this case encompasses the entire
United States. Tr. 564, 641, and the Court so finds.
ii) Relevant Product Market
Determination of the relevant product market quite often is
the major battleground in Section 7 litigation, and this case is no exception.
See 3 Julian O. von Kalinowski, Antitrust Laws and Trade Regulation, Section
18.01[2] (1995). Another commentator concurs:
However wide or narrow the range of inquiry for appraising a
merger, market definition is frequently critical. For
example, viewed in a wider product . . . market than the
minimum necessary to include the merging firms, a merger will
appear to have a less significant effect. In contrast, when
the products . . . of the merging firms differ, a definition
wide enough to bring the merging firms into the same market
makes the merger . . . more likely to be seen as troublesome.
Phillip Areeda & Louis Kaplow, Antitrust Analysis, paragraph 506, at 814-15
(4th ed. 1988).
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The criteria relating to product market definition have been
set forth by the Supreme Court in the seminal decision Brown Shoe Co. v. United
States, 370 U.S. 294 (1962). The Court held that "[t]he outer boundaries of a
product market are determined by the reasonable interchageability of use [by
consumers] or the cross-elasticity of demand between the product itself and
substitutes for it." Id. at 325. Interchangeability of use implies that one
product or service is approximately equivalent to another; discounting any
degree of preference for the one over the other, either product would work just
as well. Allen-Myland, Inc. v. International Business Machines Corp., 33 F.3d
194, 206 (3d Cir. 1994), cert. denied, 115 S. Ct. 684 (1994). Cross-elasticity
of demand refers to whether the demand for the second good or service would
respond to change in the price of the first. Id. In short, "defining a
relevant product market is a process of describing those groups of producers
which, because of the similarity of their products [or services], have the
ability-actual or potential-to take significant amounts of business away from
each other." SmithKline Corp. c. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d
Cir.), cert. denied, 439 U.S. 838 (1978).
The Supreme Court has also recognized that under appropriate
circumstances, a broad product market may be parsed into well-defined
submarkets, each comprising a discrete line of commerce unto itself for Section
7 purposes. Brown Shoe, 370 U.S. at 325. If such a submarket(s) does exist,
the Court must scrutinize not only the broad, overall market, but must also
"examine the effects of a merger in each such economically significant
submarket to determine if there is a reasonable probability that the merger
will substantially lessen competition." Id. The Brown Shoe Court set forth
seven "practical indicia" for lower courts to consider when determining whether
a submarket exists: "industry or public
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recognition of the submarket as a separate economic entity, the product's
peculiar characteristics and uses, unique production facilities, distinct
customers, distinct prices, sensitivity to price changes, and specialized
vendors." Id. All of these indicia need not be present for a well-defined
submarket to exist. General Food Corp. v. FTC, 386 F.2d 936, 941 (3d Cir.
1967), cert. denied, 391 U.S. 919 (1968).
iii) Application of the Brown Shoe Criteria:
Wallace's Proposed Submarket
The record evidence shows that the parties are sharply divided
on their characterizations of the relevant product market. Moore, the
aggressor corporation and antitrust defendant, argues for an expensive
definition of the relevant product market, as being "comprised of the sales of
all business forms and forms management services." Expert Report of Sumanth
Addanki, PX119 at 8. In its Securities and Exchange Commission filing Form
10-K for 1994, Moore views itself as serving the "information needs of
businesses, government and other enterprises." PX 122 at 5. Similarly, in its
Form 10-K, Wallace describes itself as a corporation engaged "predominantly in
the computer services and supply industry." PX 26 at 23. Both companies
overlap in the supply of products and services, such as business forms, labels,
commercial printing, direct mail, and office supplies.
Even if Moore's broad characterisation of the relevant product
market were accurate, definition of a relevant product submarket would not be
foreclosed under Brown Shoe. Wallace contends that there exists a well-defined
submarket in this case: "the sale of forms and forms services" to large,
multi-location customers." Tr. 564. Wallace argues
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that application of the Brown Shoe factors conclusively demonstrate that the
relevant product market is a submarket within the broad market definition
proposed by Moore, and that this submarket is a "line of commerce" unto itself
for purposes of the Clayton Act. Ansell Inc. v. Schmid Laboratories, Inc.,
757 F. Supp. 467, 471-74 (D.N.J.) (applying the Brown Shoe criteria to
determine relevant product market), aff'd mem. op., 941 F.2d 1200 (3d Cir.
1991).
(A) Industry or Public Recognition of the
Submarket as a Separate Economic Entity
Recognized sources of evidence of industry or public
recognition include (1) statements of the merging parties and their own market
surveys, annual reports, marketing materials, and preacquisition reports; (2)
Industry or trade association publications; (3) the existence of a discrete
trade association for the product or services involved; (4) perceptions and
statements of major customers; and (5) Industry classification codes of the
United States Census Bureau. Von Kalinowski, 3 Antitrust Laws and Trade
Regulation Section 18.02[2] (1995) (collecting cases).
In support of its proposed submarket definition of LFICwMLs,
Wallace relies heavily on the first type of evidence; statements and marketing
materials of the parties in this case. The record, however, shows that neither
company has historically considered LFICwML as a category unto itself. The
best evidence Wallace offers is differential treatment of customers according
to account size based on dollar value; even then, there seem to be no well
defined or accepted parameters. Wallace demonstrated that only accounts valued
at $1 million or above qualify for participation on the WIN system; another
Wallace customer
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category includes those accounts valued at over $400,000. For reasons known
only to Wallace, its economics expert used yet another dollar value for his
analyses, i.e., $500,000.
Moore documentation was equally all over the scale. In one
document, the National Accounts Pocket Dossier, Moore targeted accounts worth
$1 million or more for intensive sales promotion and marketing, DX 3 at
C6130564, although these efforts have been apparently redefined to include
accounts with a floor value of $250, 000. In another document complied for
similar purposes, Moore lumped together accounts both small and large, valued
from thousands of dollars up through millions of dollars. DX 7.
Significantly, in only one instance did either company define a market share
for a sub-category of the entire forms industry; Moore choose a cutoff figure
of $250,000. DX 61.
The evidence also showed in specialized circumstances, that
rather than segregating LFICwMLs as a submarket, Moore analyzes its customer
base in terms of vertical segments by industry type, such as Financial
Services, Health Care, and Governmental. Common sense dictates there will be
similarity in forms needs within a given industry sector, such as the banking
industry, as contrasted to other, diverse types of businesses, such as
hospitals. Finally, and perhaps most significantly, both parties agreed that
it is not unusual for a customer to split its forms and forms servicing
loyalties among different vendors. As a result, a "large" customer in terms of
corporate demographics does not necessarily translate into large business forms
customer whose account dollar value corresponds to the breadth of its business
form needs. In other words, even assuming there exists a subset of customers
defined as LFICwMLs, a given LFICwML may not surrender all of its business
form and form service requirements to a single or even primary vendor. Instead
of falling into well-
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defined submarkets based on corporate size, locations, or dollar value of
account, business forms and form service customers are aligned along a
continuum of diverse needs. Accordingly, the Court finds that there is no
industry or public recognition of submarket composed of LFICwMLs.
(b) The Product's Peculiar Characteristics
and Uses
Both parties presented convincing evidence of the overwhelming
importance of serving a forms and forms service customer's distinct needs.
Because customers needs are as diverse as the customers themselves, there is no
one forms product or forms service (or set of products and/or services) that
can be readily distinguished as its own category. Even if the Court were to
accept the premise that LFICwMLs compose a circumscribed subset of forms and
forms service customer, the record shows that here is no single product and/or
service that is marketed to these target customers alone. A relatively small
business forms customer with only one location may desire the same forms and
forms management services as a LFICwML, albeit on a different scale. Although
out-sourcing may be considered a particular type of service frequently utilized
by LFICwMLs, the gamut of out-sourcing options available apply to customers
large and small alike.
Typically, under this Brown Shoe factor, courts have
distinguished products with specialized end uses or characteristics from
similar products. See, e.g., Ansel, Inc. v. Schmid, 757 F. Supp. at 473
(different packaging and distribution of latex condoms enough to distinguish
between product lines); United States v. American Tech. Indus. Inc., 1974 Trade
Cas. paragraph 74,873 (M.D. Pa. 1974) (artificiale Christmas trees considered a
separate market from
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natural Christmas trees). In the case sub judice, there is no basis in the
record for discerning any distinct products or services sold to LFICwMLs as
compared with those sold to other types of business forms and forms management
customers.
(C) Unique Production Facilities
This Brown shoe factor requires the Court to evaluate whether
business forms and forms management services for LFICwMLs require unique
facilities or technology different than that which underlies forms and
forms-related services demanded by non-LFICwMLs. See General Foods Corp. v.
FTC,, 386 F.2d 936, 943 (3d Cir. 1967) (production facility for steel wool
markedly different from facilities for other cleaning devices), cert. denied,
391 U.S. 919 (1968). Wallace argues that the services demanded by LFICwMLs are
'mainly produced by using integrated and sophisticated computer systems" such
as WIN. Tr. 543. The record demonstrates that many LFICwMLs, especially those
that out-source their forms management functions, derive great benefit from a
vendor's sophisticated computer technology.
However, the record also shows many LFICwMLs as contracting
with companies other than Moore, Wallace, or Standard Register. DX 7.
Although Wallace characterizes these other forms vendors as "second-tier"
because of a perceived lack of technological out-sourcing capability, the
objective evidence demonstrates that even with "inferior" technology (as
compared to WIN), these vendors still compete effectively for LFICwML
contracts. The Court finds that the evidence does not support a finding that
these
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types of customers are served by unique production facilities as typified by
the Wallace facility.
(D) Distinct Customers
An oft-cited case, Reynolds Metals Co. v. FTC, 309 F.2d 223
(D.C. Cir. 1962), sets forth a clear paradigm of a distinct customer class. In
that case, the parties disputed whether a class of customers who purchased
decorative aluminum foil used in the floral industry could be considered
unique. The court found that:
the sole purchasers of florist foil are the nation's 700 wholesale
florist outlets and, through these, the 25,000 retail florists
throughout the country. Despite a clearly lower price for florist
foil, . . . other end users of decorative foil have not joined the
identifiable mass of florist foil purchasers in noticeable numbers.
Id. at 228.
Like the aluminum foil manufacturer in Reynolds, Wallace also
attempted to portray LFICwMLs as somehow coalescing into a distinct class of
customers. The record evidence, however, shows the opposite to be true: the
needs of the customers differ greatly by industry type and idiosyncratic
customer preference. For customers that could be described as LFICwML, Moore
adduced evidence showing that its forms and forms service demands defy simple
classification. For example, American Express requested a bid from Moore for
forms and no forms services. Avis, Homedco, and Federal Express were cited as
companies that prefer to rely on multiple forms and forms service suppliers.
Furthermore, Wallace's Chief of Information Systems testified that a particular
LFICwML's needs can vary greatly
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depending on the customer, one may handle its own forms management in-house,
and another may out-source those same functions. Tr. 254-56.
Diversity of forms, forms service needs, and out-sourcing are
not limited to the LFICwML type of customer. In a document generated by Moore
well before the initiation of litigation, Moore identified forms and forms
management needs for its smaller customers ranging by account size of $5,000 to
$250,000. PX 131 at M4631332. The catalog of products and services primarily
used and available to these smaller customers paralleled those described by
Wallace as peculiar attributes of LFICwMLs: e.g., custom and stock forms,
mailing systems, forms handling equipment, forms management services,
warehousing and distribution, and electronic data interchange. Because there
appears to be no easy demarcation of forms and forms management attributes as
between LFICwML and other smaller customers, as well as within the population
of LFICwMLs itself, the Court finds that there is no distinct class of LFICwML
customers under Brown Shoe.
(E) Distinct Prices
During the hearing, and in its briefs, Wallace emphasized its
pricing strategy for LFICwMLs who purchase a bundle of forms management
services as an accompaniment to its forms purchases. Such LFICwMLs incur a
unified charge that incorporates both product and service; a separate breakdown
of price per form and price per service is not available. However, Wallace
also presented evidence that other LFICwMLs choose to manage their own forms;
it follows that these LFICwMLs are charged no differently for their forms
purchases than any other customer who purchases only forms. While a subgroup
of LFICwMLs may
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encounter a distinct pricing scheme, the Court finds that the industry does not
price its forms and forms management services based merely on a customer's
being pigeonholed as a LFICwML.
(F) Sensitivity to Price Changes
Wallace offered testimony of two selected WIN customers who
expressed a loyal degree of satisfaction in their corporate relationship with
Wallace. Both PSE&G and Pershing witnesses admitted without hesitation that if
Wallace raised its prices by five percent, they would incur the additional cost
and remain Wallace customers.
On the other hand, in equally anecdotal fashion, Moore offered
concrete evidence where it had informed some of its LFICwMLs of a price
increase, the customers fled to another vendor. In light of these competing
offerings, the Court cannot conclusively find that LFICwMLs react uniformly
with respect to price changes in the forms and forms services industry.
(G) Specialized Vendors
This final Brown Shoe criterion looks to whether the product
or service is sold or marketed by a unique class of vendor. For example, in
United States v. Healthco, Inc., 387 F. Supp. 258 (S.D.N.Y.), aff'd mem. op.,
535 F.2d 1243 (2d Cir. 1975), the court distinguished between submarkets for
dental equipment and dental sundries. This distinction was based in part on
the two industries' different methods for distributing and marketing those
products. Dental equipment was marketed via specialized dental dealers and
salespeople and
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<PAGE> 73
was personally detailed to dental customers; dental sundries were frequently
marketed and sold via mail-order. Id. at 261, 265. Thus, the court justified
the different submarkets in part on the existence of the two different types of
vendors.
Wallace has similarly argued that only three specialized
vendors, Moore, Wallace, and Standard Register, offer a complete menu of
options capable of serving the forms and forms management needs of LFICwMLs.
Pointing to the worst case scenario of a LFICwML that completely out-sources
its forms and forms management services, Wallace convincingly showed that
extremely sophisticated vendor technology is required to be competitive, and
that Moore, Wallace, and Standard Register offer the most competitive, state of
the art technology available. The PSE&G customer's testimony highlighted this
assertion: as a completely out-sourced customer, dependent on a single vendor,
the witness regarded only the larger forms companies Moore, Standard Register,
Wallace, and Uarco as viable vendors for PSE&G's out-sourcing needs. Tr. 333.
If the evidence showed all LFICwMLs as desiring to out-source
the majority of their forms and concomitant services, the Court would agree
that only a limited number of "specialized" vendors exist to serve those
customers. However, as discussed supra, the evidence showed that LFICwMLs
operate along a continuum of out-sourcing needs. Some require little or no
out-sourcing; others prefer to liberally out-source. The evidence also showed
that a significant number of LFICwMLs contract with vendors not designated by
Wallace as specialized, such as Duplex, Vanier, Williamette, Federal, Reynolds
& Reynolds, Ross Martin, and Better Business Forms. See, e.g., DX7.
Consequently, the Court cannot
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agree that only specialized vendors support the forms and forms management
needs of LFICwMLs.
(H) Barriers to Entry
In Ansell, Inc. v. Schmid Laboratories, Inc., 757 F. Supp.
467, 474-75, (D.N.J.), aff'd mem. op. 941 F.2d 1200 (3d Cir. 1991), the Third
Circuit Court of Appeals affirmed the district court's augmentation of the
Brown Shoe criteria with consideration of another factor, barriers to entry.
See also Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 120 n.15
(1986) ("It is also important to examine the barriers to entry into the market,
because 'without barriers to entry it would presumably be impossible to
maintain supracompetitive prices for an extended time.'")(citation omitted).
Low barriers to entry into the market invite entry by new competitors and also
expose firms well established in the market to the threat of potential entry.
This in turn can induce those firms to hold prices, services, quality, and
developments at competitive levels. See 3 Von Kalinowski, supra, at Section
26.02[4]. The converse is also true: high entry barriers reduce the potential
for increased competition by dissuading smaller firms from aggressively
competing. FTC v. Proctor & Gamble, 386 U.S. at 578.
Wallace presented extensive videotape, testimonial, and
documentary evidence featuring the superiority of its WIN computer system.
Focusing on Moore's struggle to create comparatively competitive technology,
Wallace argues that a new entrant into the purported LFICwML submarket would
face several years of computer research and development to become competitive.
Once again, however, Wallace overlooks the heterogeneity of forms and
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forms-management needs among the LFICwML user population. For customers like
PSE&G who totally out-source forms management, the WIN system is unparalleled.
The costs of building a comparable information system would be monumental and
no doubt form a high barrier to entry for those customers.
However, further down the consumer spectrum is Pershing, who
uses both WIN and local/regional forms vendors; these smaller vendors compete
effectively without WIN-type technology for a subset of Pershing's forms
business. Depending on how much or little forms services a LFICwML decides to
out-source, the evidence shows vendors with lesser technological capabilities
successfully vying for those customers. See e.g., DX7. Wallace has
demonstrated that its WIN and Select Service LFICwMLs number around 170. Moore
has placed the total number of LFICwMLs at 2000; Wallace's share of theses
customers is less than ten percent. Even if one assumes that Moore and
Standard Register each serve twice as many LFICwML customers as Wallace (a
generous assumption), 50% of the LFICwML market remains served by vendors
beside Moore, Wallace, and Standard Register. Therefore, even without computer
technology approaching that of the WIN system, other vendors compete
effectively for a large share of LFICwMLs. A vendor need not surmount as
ambitious a hurdle as Wallace erects to enter the forms and forms services
market for LFICwMLs.
In sum, the evidence has failed to support Wallace's
contention that the relevant product market in this case constitutes the sale
of business forms and forms-related services to large, multi-location
customers. Mindful that the Brown Shoe factors are "practical indicia," and
not intended to be mechanically applied, the Court has considered the factors
and finds that they fall short of identifying LFICwMLs as a discrete segment of
the forms and forms-
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related services market that can fairly be considered a well-defined submarket.
See Bon-Ton Stores, Inc. v. May Dep't Stores Co., 881 F. Supp. at 875. At
best, Wallace, leading the pack in technological innovation responsive to the
needs of large, form-intensive customers with multiple locations, is beginning
to successfully carve out a niche in an industry in transition. That
transition has not yet matured to the point where there is an identifiable
submarket. Instead, at this time, because customer needs for forms and
forms-related services fall along a continuum without regard to corporate size
or location, the realities of the forms and forms-related services industry,
Wallace has not established that there is a submarket beyond the broader
relevant product market in this case, i.e., the entire U.S. market for business
forms.(27)
b) Substantial Lessening of Competition
Once the relevant product and geographic markets
circumscribing the area of effective competition have been defined, the Court
must analyze whether the effect of the merger "may be substantially to lessen
competition." Brown Shoe, 370 U.S. at 328 (quoting
- --------------------
(27.) The parties have not argued for the Court's consideration of the
relevant product market under the U.S. Department of Justice Merger Guidelines
("Merger Guidelines"), which call for analysis of factors similar to some noted
in Brown Shoe. Courts have frequently looked to these Merger Guidelines (most
recently promulgated in 1992) as an advisory aid in determining the relevant
product market, see 57 Fed. Reg. 41552 (1992); see e.g., Allis-Chalmers Mfg.
Co., 414 F.2d at 524; Ansell Inc. v. Schmid, 757 F. Supp. at 475. Because
neither party has advanced evidence or data supporting a relevant product
market using Merge Guideline analysis, the Court will refrain from considering
whether the Merger Guidelines would have yielded that same conclusion as
reached under decisional law. However, as discussed infra, Moore has offered
evidence under the Merger Guidelines as to the effects of a Moore-Wallace
merger on competition within the relevant market.
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15 U.S.C. Section 18). Inquiry into the likely effect of a Moore-Wallace
merger on competition starts with an evaluation of the level of economic
concentration in the U.S. market for business forms. While statistics
reflecting market share controlled by industry leaders are the focal point of
the Court's analysis, the Court is also mindful that statistics must be viewed
in light of the particular market's structure, history, and probable future.
Brown Shoe, 370 U.S. at 322 n.38.
The Department of Justice Merger Guidelines reference the
Herfindahl-Hirschman Index ("HHI"), a statistical formula used to calculate and
compare market concentration pre- and post-merger. As indicated by Moore's
expert Addanki, a market's HHI is calculated by adding the squares of the
market shares of those vendors participating in the market. See Merger
Guidelines Section 1.5. The Merger Guidelines contemplate a product market to
fall into one of three categories: unconcentrated (HHI below 1000), moderately
concentrated (HHI between 1000 and 1800), and highly concentrated (HHI above
1800). Id. at Section 1.51.
Finding the relevant product and geographic market to be the
forms industry in the entire U.S., Addanki looked at market shares of the top
20 forms vendors (who account for approximately 67% of the forms market
dollars). He found the pre-merger HHI value at 432, indicating an
unconcentrated market. Following an acquisition of Wallace by Moore, the
post-merger HHI value would be 527, indicating that the forms industry market
would remain unconcentrated. According to the Merger Guidelines, an
unconcentrated product or service market post-merger is indicative of a market
"unlikely to have adverse competitive effects." Merger Guidelines Section
1.51. Based on his statistical analysis and qualitative market
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considerations discussed above, Addanki concluded that a Wallace-Moore merger
is unlikely to cause competitive harm. He reported that post-acquisition,
forms and forms-related service customers will still enjoy realistic
alternatives to which they can readily turn for their needs. DX 119 at 17.
Addanki further opined that in such a competitive environment, a Wallace-Moore
combination could neither successfully exercise unilateral market power, nor
facilitate coordination and collusion among remaining vendors. See Merger
Guidelines Section 2.2 (cautioning against the danger that, post-acquisition, a
merged firm may be able to unilaterally elevate the price and suppress the
output of a product and still capture any sales lost due to that price rise, if
Buyers will substitute another product that is now sold by the merged firm);
Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1386 (7th Cir. 1986) (courts must
consider whether acquisition will make it "easier for the firms in the market
to collude, expressly or tacitly, and thereby force price above or farther
above the competitive level"), cert. denied, 481 U.S. 1038 (1987).
In direct contrast, Wallace's expert, Hausman, offered no such
market share or market concentration statistics in his data, all of which
incorrectly assumed a relevant product submarket of sales of large,
forms-intensive customers with multiple locations. In fact, Hausman explicitly
disclaimed any knowledge of Wallace's market share of LFICwMLs and what
percentage of the total forms sales market is represented by LFICwMLs.
Notwithstanding his incomplete information base, Hausman concluded that were
Moore to acquire Wallace, Moore would be able to raise prices of forms and
forms-related services to LFICwML by seven or eight percent, a figure Hausman
termed as statistically significant.
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First, Hausman drew his conclusion based on 51 bidding
situations in 1994 and 1995 where Wallace bid on LFICwML contracts valued at
$500,000 or greater. TR. 584. Where Wallace successfully competed directly
against Moore for such contract bids, the data showed that Wallace had enjoyed
a lesser gross profit margin by seven or eight percent. These figures are
corroborated by the testimony of Wallace's Chief Executive Officer Cronin.
Cronin confirmed that when competing directly against Moore as finalists for a
customer contract, Wallace's corporate strategy involved lowering its bid price
to be more competitive. With respect to other competitors, however, Wallace
did not lower its prices as much or even at all. Hausman's data also showed
that for this same time period, Wallace was able to win over 46% of Moore's
LFICwLMs with its with its bidding tactics.
From the data, Hausman then assumed the converse to be true:
post-acquisition, with Wallace eliminated from the marketplace, Moore would be
able to raise its contract prices by this same seven or eight percent. Hausman
postulated this effect to be the sine qua non of substantially lessened
competition. The Court will assume Wallace has preliminary established that
when Moore competes against Wallace for LFICwMLs, those customers will receive
a lower price than if the two entities did not compete. However, the Court
cannot credit Hausman's other empirical assertions, unsupported by market share
data, that no matter how broadly or narrowly one defines the market, there
would be a substantial lessening of competition post-acquisition. Hausman
cannot draw his conclusion in a vacuum; market definition provides the
necessary context within which the lessening vel non of competition must be
evaluated. United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 593
(1957).
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The Court is unaware of any precedent where a substantial
lessening of competition was found without regard to definition of a relevant
product market, submarket, market share, or market concentration. To the
contrary, an antitrust plaintiff cannot prevail by simply alleging a lessening
of competition within a limited subset of customers; plaintiff must also
evaluate the significance of this impact in the "universe" of the relevant
product market. United States v. Gillette Co., 828 F. Supp. 78, 83 (D.D.C.
1993). Here, as stated above, Wallace has not shown any probability of
establishing its proposed submarket of LFICwML within the entire U.S. business
forms industry; the only realistic market definition supported by the evidence,
at least at this stage of the litigation, it the broad U.S. forms industry.
The Court is willing to assume arguendo that there is a subset of LFICwMLs that
would only look to Moore, Standard Register, or Wallace for their forms and
forms-management services, and that these will pay higher prices is there is a
Moore takeover of Wallace. Even so, Wallace's failure to show that the
lessening of competition for these customers would have the effect of
substantially lessening competition in the overall relevant product market is
fatal.
Similarly, the Court is willing to assume as true that if
Moore were to merge with Wallace, Moore's arch-rival in the technology and
service arena would be removed from the competitive mix. However, the evidence
showed that other competitors are "attempting to create similar services" to
the WIN system, Tr. 256-57, some of which "compete[ ] favorably with WIN," PX
128 at 2. Moore has demonstrated that it views competitors other than Wallace
as posing real and significant competitive threat; it therefore unlikely that
Moore will be content with the status quo in terms of staying competitive on
the technological and service fronts.
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In short, the uncontroverted evidence shows that the relevant
product market in this case is currently unconcentrated and will remain so even
if Moore acquires Wallace. HHI calculations confirm that the merger falls
within the safe harbor as defined by the Department of Justice Merger
Guidelines. In addition, most likely stymied by both lack of time and the
transitional nature and state of flux of the forms industry, Wallace did not
present a requisite showing under decisional law that competition in the
relevant product market will be substantially lessened in the event of a Moore
takeover. Accordingly, the Court finds that Wallace has failed to show a
likelihood of success on the merits of its Section 7 Clayton Act counterclaim.
3. Irreparable Injury and Harm to Public Interest
Wallace has presented uncontroverted testimony that customers
have deferred their award of contracts to Wallace because of the uncertainty of
the pending takeover offer. If these customers eventually choose other
vendors, Wallace will certainly suffer damage in the form of lost profits.
Moreover, Wallace correctly asserts if Wallace is merged into Moore, Moore will
gain access to its proprietary computer technology, thereby negating its
technological advantage and consequent competitive superiority. The Wallace
technological and correlative competitive superiority could never be reclaimed
if an eventual trial should result in a finding that Moore violated Section 7
of the Clayton Act. In contrast, the injury Moore would suffer if the merger
were preliminarily enjoined on antitrust grounds is loss of incremental profit
anticipated by reason of the merger. The Count concludes that if the
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merger goes through and there is no injunction, Wallace will suffer far more
irreparable injury than Moore.
Those form intensive customers with multiple locations who
require the full panaply of forms and form services, which can only be met by
Moore, Wallace and Standard Register, will incur higher costs if in fact there
is a merger of Moore and Wallace. In that sense, since those customers are
part of the public, the public interest would be served by grant of an
injunction.
4. Balancing of All Four Preliminary Injunction Factors
The Court has found Wallace has failed to satisfy the first
criteria for grant of injunctive relief in that it has not demonstrated a
likelihood it will prevail on the merits at a final hearing. However, the
Court has found Wallace did carry its burden in demonstrating that the
irreparable harm it will suffer far exceeds the irreparable injury to Moore if
the injunction does not issue. Similarly, the fact that there will a
decrease in competition for even a limited subset of business forms customers
weighs in favor of finding that Wallace has carried its burden in demonstrating
the public interest will be served if an injunction were granted on antitrust
grounds.
AT&T Co. v. Winback and Conserve Program Inc., 43 F.2d 1421,
1429 (3d Cir. 1974), instructs that "[t]he injunction should issue only if the
plaintiff (movant for the
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injunction) produces evidence sufficient to convince the district court that
all four(28) factors favor preliminary relief." In a footnote in the same
opinion, the above-quoted language was blunted with the instruction that the
"district court should award preliminary injunctive relief only upon weighing
all four factors." Id. at 1427, n.8. Weighing all four factors and
recognizing that three of the criteria counsel for issuance of the injunction,
the fact remains that without both a probability of success on the merits and
irreparable injury to the movant, a preliminary injunction should not issue.
Accordingly, if the entire section IV(B) were not dicta, an order would be
entered denying the Wallace motion for preliminary injunction.
V. CONCLUSION
The Court has found Wallace carried its burden under the
Unocal enhanced judicial scrutiny test and Moore has not rebutted the
presumption that the Wallace Board acted properly under the Business Judgment
Rule in refusing to redeem its poison pill. As a consequence, an order will be
entered denying Moore's motion for preliminary injunction.
The Court has also held a target in a hostile tender offer
cannot challenge a proposed merger with the acquiror on the ground the merger
would violate federal antitrust laws because it lacks antitrust standing. In
order to facilitate appellate review in the event the
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(28.) Relativity of harm to the plaintiff and defendant has been combined
into one factor in the text.
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Third Circuit Court of Appeals were to hold a target does have antitrust
standing, this Court concluded that the requested Wallace injunction should not
issue.
An order will be entered denying Moore's motion for
preliminary injunction and granting Moore's motion to dismiss the Wallace
antitrust counterclaim.
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<PAGE> 1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- ------------------------------------------------------------X
BERNARD KOFF, :
:
Plaintiff, :
:
v. :
:
THEODORE DIMITRIOU, FRED CANNING, : C.A. No. 14448
WILLIAM N. LANE, NEELE E. STEARNS, :
JR., ROBERT J. CRONIN, DARRELL R. :
EWERS, RICHARD F. DOYLE, WILLIAM :
E. OLSEN, and WALLACE COMPUTER :
SERVICES, INC., :
:
Defendants. :
- ------------------------------------------------------------X
KITTY LaPERRIERE, :
:
Plaintiff, :
:
-against- : C.A. No. 14449
:
WALLACE COMPUTER SERVICES INC., :
THEODORE DIMITRIOU, and :
ROBERT J. CRONIN, :
:
Defendants. :
- ------------------------------------------------------------X
SECOND AMENDED CLASS ACTION COMPLAINT
Plaintiffs, by their attorneys, for their Second Amended Complaint
allege, upon information and belief, except as to the allegations contained in
paragraphs 2 and 3, which plaintiffs allege upon knowledge, as follows:
1. Plaintiffs bring this action on behalf of themselves and all
other stockholders of defendant Wallace Computer Services Inc. ("Wallace" or the
"Company")
<PAGE> 2
similarly situated (the "Class") for declaratory and injunctive relief, and/or
compensatory damages, arising from defendants' breach of their fiduciary duties
to the stockholders of Wallace. As detailed herein, defendants, Wallace's
directors, have acted unreasonably and contrary to the best interests of
Wallace's public stockholders in an effort to thwart the offer by Moore
Corporation Limited ("Moore") to acquire Wallace and the effort by Moore to
elect its designees to Wallace's Board of Directors and unseat the individual
defendants. Defendants failed to investigate properly and fully consider Moore's
offer. Defendants have withheld from Wallace's shareholders information material
to shareholders' response to the Moore offer and the upcoming election of
Wallace directors. Defendants have also employed entrenchment devices such as
compensation and benefit plan amendments to deny shareholders the benefit of the
Moore offer. Defendants have accordingly breached their fiduciary duties of
care, loyalty and candor.
THE PARTIES
2. Plaintiff Kitty LaPerriere is and has been, at all relevant times
the owner of shares of Wallace common stock.
3. Plaintiff Bernard Koff is and has been at all relevant times the
owner of shares of Wallace common stock.
4. Defendant Wallace is a Delaware corporation with its principal
place of business located at 4600 West Roosevelt Road, Hillside, Illinois.
Wallace is a leading provider of computer services and supplies such as business
forms, commercial and
2
<PAGE> 3
promotional graphics printing, computer labels, machine ribbons, computer
hardware and software, computer accessories and office products.
5. At all relevant times herein, defendant Theodore Dimitriou
("Dimitriou") has been the Chairman of Wallace's Board of Directors. As of
November 9, 1994, Dimitriou owned or controlled less than 0.6% of Wallace common
stock. For the fiscal year ended July 31, 1994, Dimitriou received total
compensation from Wallace in the amount of approximately $519,546.
6. At all relevant times herein, defendant Robert J. Cronin ("Cronin")
has been the President, Chief Executive Officer and a Director of the Company.
As of November 9, 1994, Cronin owned or controlled less than 0.25% of Wallace
common stock. For the fiscal year ended July 31, 1994, Cronin received total
compensation from Wallace in the amount of approximately $568,987.
7. Defendants Fred Canning, William N. Lane, Neele E. Stearns, Jr.,
Darrell Ewers, Richard F. Doyle and William E. Olsen, at all relevant times,
have been Directors of Wallace and, in addition to other compensation, are paid
$19,000 per annum and receive substantial fees for each Board meeting they
attend.
8. The defendants referred to in paragraphs 7-9 above, are
collectively referred to herein as the "Individual Defendants." They have
constituted Wallace's Board of Directors at all times material to the claims
asserted.
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CLASS ACTION ALLEGATIONS
9. Plaintiffs bring this action pursuant to Rule 23 of the Rules of
this Court for declaratory, injunctive and other relief on their own behalf and
as a class action, on behalf of all common stockholders of Wallace (except
defendants herein and any person, firm, trust, corporation or other entity
related to or affiliated with any of the defendants) and their successors in
interest, who are being deprived of the opportunity to maximize the value of
their Wallace shares by the wrongful acts of the defendants described herein,
and who are being denied information material to their votes in the upcoming
annual election of directors and to their decision as to Moore's tender offer.
10. This action is properly maintainable as a class action for the
following reasons:
11. The class of stockholders for whose benefit this action is brought
is so numerous that joinder of all Class members is impracticable. There are
more than 22 million shares of Wallace common stock held by approximately 3,985
stockholders of record who are members of the Class. The holders of these shares
are geographically dispersed throughout the United States. Wallace stock is
listed and actively traded on the New York Stock Exchange.
12. There are questions of law and fact which are common to the
members of the Class including, INTER ALIA, the following:
a. whether the defendants, in bad faith and for improper
motives, have prevented members of the Class from receiving the maximum
value achievable for their shares of Wallace common stock;
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b. whether the defendants have failed to consider, investigate
and inform themselves in good faith, as to the adequacy of unsolicited
offers for the Company, including the adequacy of Moore's offer to purchase
all outstanding Wallace shares;
c. whether the defendants have engaged in conduct constituting
unfair dealing to the detriment of the public stockholders of Wallace; and
d. whether the defendants have breached their fiduciary and
common law duties owed by them to plaintiffs and the other members of the
Class, including their duties of care, loyalty and candor.
13. The claims of plaintiffs are typical of the claims of the other
members of the Class, and plaintiffs have no interests that are adverse or
antagonistic to the interests of the Class.
14. Plaintiffs are committed to the vigorous prosecution of this
action and have retained competent counsel experienced in litigation of this
nature. Accordingly, plaintiffs are adequate representatives of the Class and
will fairly and adequately protect the interests of the Class.
15. The prosecution of separate actions by individual members of the
Class would create a risk of inconsistent or varying adjudications with respect
to individual members of the Class, which would establish incompatible standards
of conduct for defendants.
16. Defendants have acted and are about to act on grounds generally
applicable to the Class, thereby rendering final injunctive or corresponding
declaratory relief appropriate with respect to the Class as a whole.
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SUBSTANTIVE ALLEGATIONS
17. Wallace is a manufacturer and distributor of information
management products, services and solutions. These include paperwork systems and
forms, labeling products and supplies, direct mail printing, and leading edge
electronic forms, products and forms management services. The Company has
manufacturing, distribution and sales facilities throughout the United States.
18. On or about February 24, 1995, representatives of Moore contacted
Wallace to discuss a potential business combination between the two companies.
Moore is a supplier of business forms and related services for tracking
inventory and other corporate data.
19. Wallace's management, including the Individual Defendants, flatly
refused to participate in any discussion concerning a business combination
between the two companies. Wallace did not, and has not to date, even considered
whether any form of combination with Moore would be of value to its
shareholders. Undaunted, Moore's management made six or seven additional
attempts since the initial overtures in February 1995, to open up a dialogue
with Wallace. These efforts, however, proved fruitless as well, because Wallace
adamantly refused even to discuss possibilities for benefitting both companies.
20. During this period, Wallace because increasingly concerned about
Moore's efforts to discuss a business combination. As defendant Ewers described
it in deposition testimony, Moore's expression of interest in the Company served
as a "wake-up call" to Wallace. Desperate to ensure that any takeover attempt by
Moore would not be successful despite the potential benefits to Wallace's
stockholders, the Company's Board enacted various measures to strengthen its
anti-takeover defenses. For example, in June 1995, the Company's
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Board adopted a rule that any business to be presented by a stockholder at an
annual meeting must be presented 60 days before the meeting. Since Wallace's
next annual meeting was then scheduled for November 8, 1995, this provision was
designed to make it extremely difficult for Moore to present any proposal to
Wallace's shareholders at that meeting. In addition, the Board adopted a "golden
parachute" by which defendant Cronin would receive millions of dollars if his
duties were changed as the result of a takeover.
21. The adoption of these anti-takeover measures and the
"stonewalling" of Moore's efforts to discuss a business combination were
accomplished for no legitimate business purpose and were disproportionate to any
"threat" presented by Moore's interest in the Company.
22. On July 30, 1995, as a result of Wallace's continued refusal to
have any discussion with Moore, Moore announced its intention to bring its offer
directly to Wallace's stockholders by commencing a tender offer by a wholly
owned Moore subsidiary, FRDK, Inc. ("FRDK"), for all of Wallace's shares at $56
per share in cash, for a total purchase price of approximately $1.3 billion (the
"Offer"). The $56 per share tender offer price represented an 84% premium over
Wallace's share per price on February 24, 1995, when Moore first contacted the
Company regarding a business combination, and a 42% premium over its then most
recent 30-day average closing price. Moore stated that the tender offer would be
launched within a week and also announced that it would attempt to nominate
three directors to Wallace's Board at the Company's annual stockholders meeting
then scheduled for November, 1995.
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23. In reaction to the announcement of the tender offer, the market
price of Wallace shares surged $14 3/8 per share to close at $58 3/8 on July 31,
1995. This closing price, representing a $2 3/8 premium over the tender offer
price, led analysts to conclude that the market expected a higher offer to
surface, either from Moore or another bidder. For example, Burnham Securities
analyst David Liebowitz was reported as saying "given the way the stock opened
this morning, clearly there are a goodly number of investors who suspect a
higher bid is in the offing." Similarly, Martin McDevitt, an analyst at Cleary
Gull Reiland & McDevitt Inc., stated "people seem to be thinking another offer
may be coming, so we'll just have to wait and see."
24. Also, on July 30, Moore sent a letter to Wallace informing it of
the tender offer and conveying Moore's continued willingness and desire to meet
with Wallace's management to discuss the possibility of a mutually agreed upon
transaction. The letter stated, in part:
As you know from our prior communications, the Board of Directors
and management of Moore Corporation believe the combination of our two
companies makes eminent business sense. Unfortunately, your Board
specifically rejected our proposal to discuss a strategic business
combination. We therefore felt we had no choice but to proceed with an
offer directly to your stockholders. We continue to believe it is in
the best interest of both companies to move expeditiously toward a
mutually-agreed combination of our companies....
In the interim, we have noted your favorable results and our
price reflects both your recent and anticipated performance. We are
confident that your stockholders will find our offer compelling....
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We stand ready to meet with you and the Wallace Board and
management at any time to discuss any aspect of our proposed
combination so that you will share our confidence and enthusiasm for
this transaction -- a transaction that serves the best interests of
both of our companies and our stockholders, employees, customers and
communities.
25. The following day, on July 31, 1995, Moore filed a lawsuit against
Wallace and members of its management in the United States District Court for
the District of Delaware, seeking, INTER ALIA, an injunction to prevent the
Company from exercising its "poison pill". This stockholder rights plan is
triggered when anyone buys 20% or more of the Company's common stock. When
triggered, it allows Wallace stockholders to buy new common stock at half price,
thus rendering a tender offer prohibitively expensive. Moore asserted that
Wallace "should not be allowed to deprive the stockholders of the opportunity to
decide upon the merit of the offer." In addition, Moore alleges that Wallace's
Board created an unreasonable obstacle to Moore's offer when in June it adopted
the 60-day notification rule and golden parachute "in probable response" to
Moore's overtures regarding a merger with Wallace.
26. On August 2, 1995, Moore commenced the Offer and filed a Premerger
Notification and Report Form with the Federal Trade Commission and the
Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of
1978, as amended (the "HSR Act").
27. Wallace has a Preferred Stockholder Rights Plan (the "Poison
Pill"), adopted in 1990, which effectively allows the Board of Directors to
block unilaterally any acquisition offer, even those providing substantial
benefit to Wallace's stockholders. In 1990,
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pursuant to the Poison Pill, Wallace's Board of Directors declared a dividend of
one preferred stock purchase right per share of common stock (a "Right"). Each
Right entitles the registered holder thereof to purchase from Wallace, following
the Distribution Date (as defined in the Poison Pill), one two-hundredth of a
share of Wallace's Series A Preferred Stock at an exercise price of $115.
Following the occurrence of certain other events, including the acquisition of
20% or more of Wallace's common stock, each holder of a Right will be able to
exercise that Right and purchase common stock of Wallace (or the surviving
company in the event of merger) at half-price. Because any current acquiror of
20% or more of Wallace's common stock would not be entitled to exercise Rights
in its possession, the dilutive effect of the Poison Pill, if implemented, on
the value of such acquiror's common stock is overwhelming. Because of this
prohibitive economic consequence, the Poison Pill effectively precludes
consummation of Moore's offer. Wallace's Board of Directors can redeem the
Rights at a redemption price of $.01 per Right, or alternatively, can amend the
Poison Pill to make the Rights inapplicable to the Moore offer and the proposed
merger. Moore has conditioned its offer on the redemption of a Poison Pill or
upon the Poison Pill otherwise being held inapplicable to the Moore offer.
28. On August 3, 1995, Moore obtained the commitment of The Bank of
Nova Scotia for a $1.1 billion financing to finance the Offer and the Proposed
Merger.
29. On August 10, 1995, FRDK waived the financing condition to the
Offer and Moore and FRDK entered into definitive financing agreements with The
Bank of Nova Scotia, as agent for the lenders for a $1.1 billion loan facility
to finance the Offer and the Proposed Merger.
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30. At the same time that Moore was proceeding with its efforts to
acquire Wallace, Wallace was formulating its response to the Moore offer. As
soon as Wallace learned of Moore's offer, it contacted representatives of
Goldman Sachs & Co. in order to have Goldman Sachs act as the Wallace Board's
financial advisor in connection with the offer.
31. An initial analysis was prepared by one of the senior members of
the Goldman Sachs team of the Moore $56 per share offer. In a one-page document
entitled "Summary Thoughts Regarding Adequacy" under the column listing reasons
why the offer should be deemed "Adequate", the document states in relevant part:
* Price represents significant premium to pre-announcement share
price
* 42% premium over 30 day average
* 84% over price on February 24, 1995
* Price offered is premium to [Wallace's] trading range
* 16.1 x LTM operating income versus 12.5x pre-announcement
* 25.1 x LTM net income versus 19.2 x pre-announcement
* [Wallace's] growth highly dependent on gaining market share
* Recent revenue growth driven by paper prices
* Risk to earnings profile if competitor develops WIN-like
technology
* Absence of real market growth (business forms)
* Ongoing risk of margin pressure
* Significant piece of [Wallace] involves commodity product
* Discounted cash follow analysis does not support value in excess
of $56 per share
* Lack of growth in 1998-1999
* margin contraction
* Although present value of projected share prices provides share
values in excess of $56.00, shortfall in projections would result
in values in low to mid $50s
* Straight recapitalization falls short of $56.00
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* Cash and stock in low $50s
* lack of growth after 1998 limits debt capacity
32. While Goldman Sachs and other investment bankers generally perform
a comparable acquisitions analysis, here Goldman Sachs determined that there
were not any sufficiently comparable acquisitions that could be used to make
comparisons with the Moore offer. It became apparent that the principal analyses
of the Moore offer -- a discounted cash flow analysis ("DCF") and a present
value of future share prices analysis -- would depend almost entirely upon
Wallace management's projections of Wallace's future financial results.
33. Goldman Sachs prepared a book dated August 6, 1995, containing a
preliminary analysis of the Moore offer. This book contained Wallace
management's projected financial information for fiscal years 1996-2002,
including estimates of Wallace's net sales, operating income (EBIT), net income,
earnings per share and other data. Surprisingly, these projections were
substantially higher than the projections that management had recently finalized
in the "Wallace Computer Services Inc. Strategic Plan" dated June 7, 1995 (less
than two months earlier). These revised projections supplied by Wallace
management for use in the August 6 Goldman Sachs book were newly prepared in
response to the Moore offer, a fact known to Goldman Sachs.
34. Goldman Sachs used these projections in the August 6 book in a
"Discounted Cash Flow Analysis" and in a presentation of the "Present Value of
Future Share Prices." Using these projections and applying price earnings ratios
of 9 to 14 and discount rates of 10% to 14%, the DCF analysis generated per
share values for Wallace ranging from $38.58 to $64.89, with the great majority
of the values falling below the $56.00 per share
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offer. Similarly, the Present Value of Future Share Prices analysis, using
discount rates of 11% and 13%, generated per share values of between $45.92 and
$62.75. Again, the great majority of the values generated were below the $56.00
per share offer. Importantly, Goldman Sachs stated in a footnote that the
financial projections used came from Wallace management. The per share values of
Wallace stock that were generated by Goldman Sachs were then purely a function
of mathematical computation based on the Wallace management's numbers and the
assumptions as to ratios and discount rates.
35. The individual defendants have testified they were and are
adamantly opposed to a business combination with Moore. This attitude would have
been clear to Goldman Sachs. It was therefore crucial that the Goldman Sachs
analysis generate values to show that the $56.00 per offer was inadequate. The
values presented in the August 6, 1995 book were apparently unsatisfactory for
this purpose. As Cronin testified, if Goldman Sachs had opined that Moore's
offer was adequate, then he would have felt bound to enter discussions with
Moore about a transaction.
36. Goldman Sachs then prepared another book dated August 9, 1995,
which presented new versions of the DCF and Present Value of Future Share Price
analyses. This book contained the same management projections of future
financial results that were utilized in the Goldman Sachs August 6 book. In this
book, however, Goldman Sachs dramatically lowered the discount rates that it
applied in the DCF and the Present Value of Future Share Prices analyses. For
the DCF analysis, Goldman Sachs used discount rates ranging from 8% to 13%
rather than the discount rates of 10% to 14% used in the August 6 book. The
impact of this change was to increase substantially the per share values
generated by the DCF analysis
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so that now the results were more equally balanced above and below the $56.00
per share offer. There was a similar impact on the values generated by the
Present Value of Future Share Prices analysis.
37. Goldman Sachs presented the August 9 book to Wallace management
(but not to the Wallace Board of Directors) at a meeting on August 9, which
Cronin and Dimitriou attended. A Goldman Sachs team member stated in notes of
that meeting that the DCF analysis is a "Bad page for us" with a further note
that Goldman would further lower the discount rate and change the projections.
38. The Wallace Board of Directors met on August 11, 1995 to consider
the Moore offer and to hear Goldman Sachs' preliminary opinion concerning its
adequacy. Goldman Sachs prepared yet another book for this meeting which was
distributed to the board. It contained another version of the DCF and Present
Value of Future Share Prices analyses based on new projections of Wallace's
future financial results increased from those used in the August 9 book. As a
result of the changed projections, a majority of the per share values generated
by the DCF and Present Value of Future Share Prices analyses were in excess of
the $56.00 per share price of the Moore offer.
39. Neither Goldman Sachs nor any of the Wallace management personnel
who attended the August 9 meeting (defendants Dimitriou, the Wallace Chairman
and defendant Cronin) informed the Board of Directors of the various previous
iterations of the August 11 book and of how the financial projections had been
increased and the discount rates had been adjusted to generate the higher per
share values presented in the August 11 book. Nor were they informed of the
conclusions set forth in the document entitled Summary
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Thoughts Regarding Adequacy (PARA31 above). Indeed, defendant Dimitriou has
denied even attending the August 9 meeting and defendant Cronin has denied
having any foreknowledge of where Goldman Sachs was coming out in its valuation
analysis.
40. The Wallace director defendants who have been deposed have
uniformly testified that there was no discussion at this or any other Board
meeting about what an adequate price for Wallace would be.
41. On August 15, 1995, Wallace issued a press release, filed a
complaint against Moore and FRDK in the United States District Court for the
Southern District of New York (the "Wallace Action"), and filed a
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9").
The Wallace Action asserted that the transactions contemplated by the Moore
Offer violate Section 7 of the Clayton Act. 15 U.S.C. Section 18; and that Moore
and FRDK have made false and misleading statements of fact in connection with
the Offer.
42. The Wallace Board recommended in the Schedule 14D-9 that Wallace
stockholders reject the Offer and stated the Board's belief that the interests
of Wallace stockholders would be best served by Wallace's remaining independent
and the Board's intention to continue the business of Wallace as an independent
entity. The Schedule 14D-9 also contained the text of a letter from Cronin to
Moore which stated that the $56 per share offer is "clearly inadequate." The
Schedule 14D-9 also stated that defendants' determination that the offer was
inadequate was principally based on the opinion of Goldman Sachs to that effect.
The director defendants' deposition testimony confirmed that statement and
demonstrated the directors' lack of understanding of the Goldman Sachs analyses.
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43. On August 18, l995, Moore announced that it had jumped another
hurdle in its attempt to acquire Wallace after the takeover was cleared by the
U.S. Justice Department. The Justice Department determines whether proposed
mergers violate federal antitrust laws. On August 17, l995, the waiting period
under the HSR Act expired without further inquiry by the U.S. Department of
Justice, thus satisfying the pre-clearance requirements under the U.S.'s
antitrust laws for Moore's purchase of the Wallace shares pursuant to the Offer
and the Proposed Merger. Despite this announcement, Wallace has decided to
continue its litigation against Moore to obtain a declaration that a
Wallace/Moore merger would violate the antitrust laws. This action by the
Wallace Board is in violation of their fiduciary duties because if Moore does
acquire Wallace (by purchasing all Wallace shares for cash) then any potential
violations of the antitrust laws will be of no concern to Wallace's shareholders
(to whom the Wallace Board owes its fiduciary responsibilities).
44. According to a Schedule 14A filed by Moore and FRDK with the SEC
on September 12, l995 (the "Moore Schedule 14A") on August 21, l995, a
representative from Lazard Freres, on behalf of Moore and FRDK, contacted a
representative from Goldman Sachs & Co. ("Goldman Sachs"), Wallace's financial
advisor in connection with the Offer, to suggest that Lazard Freres and Goldman
Sachs, Wallace, Moore and FRDK or any combination thereof schedule a meeting to
discuss the Offer. On August 26, l995, the Goldman Sachs representative advised
the Lazard Freres representative that the Wallace Board again refused to meet to
discuss the Offer.
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45. On August 28, l995, Moore issued a press release extending the
Offer until Tuesday, September 19, l995 and stating that it remained committed
to its proposed acquisition of Wallace. The press release included the
following:
In a statement released today, Moore Corporation Limited (NYSE:
MCL; TSE, ME) said, "We are very disappointed to report that the Board
of Directors of Wallace Computer Services rejected outright our
suggestion to meet last week in order to discuss Moor's $56 per share
cash offer. By requesting to meet to discuss the transaction, we had
hoped to allow Wallace to avoid a prolonged proxy contest that would
be disruptive to its customers and employees, and could result in
diminishing Wallace's value. It seems that Wallace's Board is willing
to expend corporate assets in an effort to deny Wallace stockholders
an opportunity to accept Moore's offer.
We had invited Wallace's Board and advisors to meet with us to
demonstrate why they believe our $56 per share offer is "inadequate."
As we have said many times in public and in private, we remain open to
the possibility that the Board will elect to sit down with us in the
near future and are ready at any time to discuss ANY ASPECT OF OUR
PROPOSED COMBINATION. In the meantime, Moore will proceed with the
necessary steps to facilitate its effort to acquire Wallace. (emphasis
added)
46. As disclosed in Amendment No. 3 to Wallace's Schedule 14D-9 filed
with the SEC on September 8, l995, on September 6, l995, the Wallace Board met,
approved and adopted amendments to its existing compensation plan (described in
this paragraph and paragraphs 47-48 hereof), the primary purpose of which is to
make it far more difficult, expensive and less attractive for Moore to proceed
with a takeover of Wallace, to make it less likely that Moore or any other party
would pay well in excess of its per share offering price for Wallace and to
further entrench Wallace's management and directors. For example, the Board
adopted Amendment No. 1 to its Employee Severance Pay Plan (the "Employee Plan")
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which provides that the amount of severance payable to certain participants
shall not be less than one year's compensation upon the occurrence of certain
events following a change in control of Wallace. The Compensation Committee of
the Wallace Board designated 37 participants for this purpose.
47. On September 6, l995, the Wallace Board also approved and adopted
Amendment No. 36 to the Wallace Computer Services, Inc. Profit Sharing and
Retirement Plan (the "Profit Sharing Plan") and Amendment No. 6 to the Wallace
Computer Services, Inc. Profit Sharing and Retirement Trust Agreement (the
"Profit Sharing Trust") (collectively, the "Amendments") which provides, among
other things, that the plan participants, who are members of Wallace's
management, are allowed to vote shares held in the Profit Sharing Plan and
Profit Sharing Trust that they have not earned and do not own based on each
participant's proportionate interest in the Profit Sharing Plan and Profit
Sharing Trust, and which also allows plan participants to instruct the trustee
of the Profit Sharing Plan and Profit Sharing Trust how to respond to a tender
offer for the shares they do not own (based on the same formula). The Board of
Directors also authorized certain officers of the Company to appoint, on behalf
of the Company, an independent institutional trustee to replace the current
individual trustees under the Profit Sharing Trust with respect to the Shares
held thereunder.
48. On September 6, l995, the Wallace Board of Directors also
approved and adopted Amendment No. 1 ("Amendment No. 1") to the Wallace Computer
Services, Inc. Long-Term Performance Plan (the "LTP Plan"), which Amendment No.
1 added a provision relating to the treatment of awards in the event of a
"Material Change." Amendment No. 1 provides, among other things, that (i) a
plan participant's accrued bonus balance under the
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LTP Plan will not be reduced below the amount of the plan participant's accrued
bonus balance as calculated after inclusion of the plan participant's accrued
bonus balance as calculated after inclusion of the plan participant's award, if
any, for the Plan Year (as defined in the LTP Plan) immediately preceding the
Plan Year during which the Material Change occurs and (ii) an individual who is
a plan participant immediately prior to the occurrence of a Material Change (a
"Protected Participant") will be entitled to receive payment of such
participant's accrued bonus balance if, at any time during the two-year period
beginning on the date that the Material Change occurs, the Protected
Participant's employment with the Company terminates, whether voluntarily or
involuntarily, for any reason other than for cause or on account of the
Protected Participant's death or permanent disability.
49. On September 12, l995 Moore filed with the SEC its Schedule 14A,
which states that Moore will solicit proxies from Wallace's stockholders to
elect three Moore nominees to Wallace's Board of Directors at its Annual Meeting
(previously set for November 8, l995 and now scheduled for December 8, l995).
The Moore proxy materials state that Moore's nominees are committed to acting in
the best interest of all Wallace stockholders and will seek to remove barriers
to Moore's consummation of its tender offer. The Moore nominees in the Schedule
14A are Curtis A. Hessler, Albert W. Isenman, III and Robert P. Rittereiser.
50. The Moore Schedule 14A further states that Moore and FRDK are
soliciting the proxies of Wallace stockholders in favor of three stockholders
resolutions (the "Stockholder Resolutions") to be introduced at the Annual
Meeting for the purpose of:
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(i) removing all of the members of the Board of Directors of Wallace
(the "Wallace Board") other than the Moore Nominees, if then directors
of Wallace; (ii) amending the Amended and Restated Bylaws of Wallace
(the "Amended and Restated Wallace Bylaws") to fix the number of
directors at five; and (iii) repealing each provision of the Amended
and Restated Wallace Bylaws or amendments thereto adopted without
approval of Wallace stockholders subsequent to February 15, l995 and
prior to the Annual Meeting.
51. The Moore Schedule 14A further states that:
Moore intends to continue to seek to negotiate with Wallace with
respect to its acquisition proposal. If such negotiations result in a
definitive merger or other agreement between Moore and Wallace, such
negotiations could result in, among other things, termination of this
proxy solicitation.
Although Moore does not presently intend to alter the terms of
the Offer, it is possible that, depending on the facts and
circumstances existing at the time, the terms might be altered in one
or more respects.
52. Moore's ability to complete the transaction in the face of
continued opposition from the Wallace Board is seriously affected by a provision
which requires a vote of 80% of Wallace's shares to remove a director from
office. If Moore succeeds in electing its directors (which requires only 50% of
the vote) but fails to get 80% of the vote, it may not end up with control of a
majority of the board.
53. On September 12, 1995, Moore also announced that it had extended
its $56 per share offer for Wallace to November 8, 1995. On September 21, 1995,
Moore publicly stated that it may raise its $56 per share bid for Wallace.
54. On October 12, 1995, Moore announced the sweetening of its bid
for Wallace from $56 to $60 per share for Wallace's 23 million shares. Moore
said that it would
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withdraw its bid unless a significant number of Wallace's shares were tendered
by November 3, 1995. Moore chairman Reto Braun said, "A high tender response
will be a message the Wallace Board cannot ignore. A low response will cause
Moore to terminate its pursuit of Wallace and redirect the resources of Moore's
stockholders to other opportunities..." In making this statement, Moore said it
believed it could win a proxy contest but that it wanted to avoid wasting
resources and urged Wallace's board to negotiate.
55. The Wallace Board has been and continues to be, determined not to
allow Wallace to be sold, as defendants have testified in their depositions. As
set forth more fully below, the deposition testimony also revealed that Goldman
Sachs' purportedly "independent" financial analysis was not really independent,
and that Goldman Sachs' work was to promote the goal of its client -- the
Wallace Board -- to keep Wallace independent.
56. On October 18, 1995, the Wallace Board publicly rejected Moore's
$60 per share bid, calling it adequate. This announcement followed a meeting of
the Wallace Board on October 17. In reaching this conclusion, the Wallace Board
again relied almost entirely on the opinion of Goldman Sachs, which was based on
a new Goldman Sachs book dated October 17, 1995. The opinion of Goldman Sachs
was principally based on a new DCF analysis and a new Present Value of Implied
Future Share Prices analysis, which were set forth in an October 17 book. While
Goldman Sachs utilized the same Wallace management projections that were used in
the August 11 analysis, Goldman Sachs determined that it had made a
"mathematical" error in its calculation of the terminal value aspect of the DCF
analysis. As a result, the per share values generated by the DCF analysis were
substantially increased in the October 17 book. Because the terminal values were
increased, Goldman
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Sachs was able to increase the range of discount rates used in the analysis to
levels that were more appropriate under the circumstances, but which still
yielded per share values which were generally higher than $60.00 per share.
57. Wallace continues to criticize Moore's offer without having taken
any steps to determine what an adequate price would be. At the depositions
conducted to date, defendants have testified unequivocally they did not ask
Goldman Sachs to determine what an adequate price for Wallace would be, that
they do not know what an adequate per share price for Wallace would be, and that
they do not know whether Moore's $60 per share offer is inadequate by $0.01, $10
or some other sum.
58. Rather than disclosing this key fact to Wallace's stockholders,
the Wallace Board broadly condemned and belittled the $60 per share offer in a
letter to Wallace's shareholders, over Cronin's signature. The letter states in
relevant part:
Moore stated in their October 12 letter to you that one of their
justifications for increasing the offer was that they recognize
Wallace's improved results.
Your Board asks, "WHO IS MOORE TRYING TO KID?"
TWO MONTHS ago, Wallace announced record fourth quarter 1995
earnings per share up 33 percent. We can't believe it has taken Moore
and their financial advisors that long to evaluate our results.
Instead, we think they hoped to convince you and other
shareholders to tender into an offer they knew was inadequate from the
start... despite the assertion in their September 12 letter that the
offer was "full, fair, compelling and reflects Wallace's current
performance and future potential."
Shareholders have twice rejected Moore's offer by not tendering.
Only 368,488 shares, 1.6 percent of the total outstanding, were
tendered as of the last extension. We think Moore has finally
realized that Wallace shareholders will not be pressured into
tendering to an inadequate offer. MOORE'S OFFER
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WAS INADEQUATE BEFORE THEIR RECENT AMENDMENT... AND THEIR AMENDED
OFFER CONTINUES TO BE INADEQUATE ESPECIALLY IN LIGHT OF OUR
ANNOUNCEMENT THAT OUR PRIOR INTERNAL FORECAST ANTICIPATES A 50 PERCENT
FIRST QUARTER EARNINGS INCREASE AND A 33 PERCENT INCREASE IN EARNINGS
FOR FISCAL 1996.
MOORE'S HIGH PRESSURE TACTICS
Moore also says in their October 12 letter that they have
shortened the tender period because they do not want to prolonged
process. You should ask yourself why Moore is doing this. We believe
Moore's true reasons for shortening the tender offer was summarized in
an October 13 WALL STREET JOURNAL article:
"...MOORE IS PUTTING SHAREHOLDERS' FEET TO THE FIRE, WHILE KEEPING A
LID ON THE STOCK PRICE."
We believe Moore realizes that your company is increasing in
value with each passing day, and that their offer is growing ever more
inadequate. Your Board thinks you should reject his coercive effort to
acquire your shares.
We ask you to reject the Moore offer as you have in the past and
make the best decision for yourself.
59. Since Moore's announcement of its hostile tender offer, Wallace
management has been on a campaign to convince stockholders not to tender into
the tender offer. Members of management have made trips to meet with large
stockholders for that very purpose.
60. Despite Wallace's efforts to disparage the Moore tender offer,
Wallace announced, on November 6, 1995, that as of 7:00 p.m. on November 3,
1995, 16,698,706 shares (representing 73.54% of the total outstanding shares of
Wallace) had been tendered into Moore's offer. Moore's Reto Braun observed that
the "Wallace stockholders have spoken...it is time for the Wallace Board to sit
down with Moore in a responsible manner and include an
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agreement to effectuate the wishes of the Wallace stockholders." He went on to
say that "Continued refusal to meet and conclude this transaction will only
result in further waste of Wallace assets on needless litigation and proxy
battles." Moore has extended its tender offer until midnight on December 11,
1995.
CAUSE OF ACTION AGAINST ALL DEFENDANTS
61. As described above, Wallace's Directors and management, which as
of the date of the company's last proxy statement collectively owned or
controlled only 1.2% of Wallace's outstanding stock, has shown a pattern of
entrenchment and failure to consider, in good-faith, Moore's offers to purchase
the Company which offers may be in the best interests of Wallace's public
stockholders. Defendants have breached their fiduciary duties to the Wallace
public stockholders in several ways. Since defendants have purposely avoided
learning what is an adequate per share price for Wallace, they have likewise
failed to determine whether or not, or the extent to which, the Moore offer is a
threat to Wallace stockholders. As such, the director defendants are unable to
decide whether their response to the offer is proportionate to the perceived
threat. They have been motivated in these actions by an implacable hostility to
Moore rather than a reasoned judgment that the Moore offer represents a threat
to Wallace or its shareholders.
62. Defendants have also denied Wallace's stockholders information
material to their determination: a) whether they wish to vote their shares for
defendants' re-election as Wallace directors at the December 8, 1995 Annual
Meeting of Shareholders, or vote for Moore's nominees and proposals; and b)
whether to tender their shares to Moore prior to the expiration of the Moore
tender offer.
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63. Defendants have breached their fiduciary duties by: (i)
reflexively and adamantly refusing, without reasoned analysis or becoming fully
informed, to consider a sale of Wallace or any other transaction with Moore;
(ii) failing to undertake an adequate evaluation of Wallace's worth as a
potential merger or acquisition candidate; (iii) failing to give adequate
consideration to the offer for Wallace submitted by Moore; (iv) considering
and/or adopting extreme and unreasonable measures to prevent the sale of the
Company; (v) failing to meet with Moore or its representatives to fully inform
themselves with respect to the Moore offer and the best price that Moore may be
willing to pay; (vi) improperly usurping to themselves and to other members of
Wallace's management the right to vote and control Wallace shares; and/or (vii)
failing to act so that the interests of the public stockholders of Wallace are
protected.
64. Having taken the firm position that Wallace should not be sold to
Moore (as evidenced by their deposition testimony), defendants breached their
fiduciary duties to fully inform themselves as to the adequacy of Moore's offers
and failed to respond to the offers reasonably and in good faith. Defendants
were in no position to know if Moore's highest offer would be fair or adequate
because they intentionally did not obtain or receive an opinion from Goldman
Sachs as to what an adequate price or fair range of values for Wallace would be,
and refused Moore's invitations to discuss the terms of a transaction betwen
Wallace and Moore. At this time, the fact that over 73% of Wallace's shares have
been tendered into the Moore offer demonstrates that Wallace's shareholders
strongly disagree with the directors' view that the shareholders would be best
served by Wallace's remaining independent. In light of this overwhelming vote,
it is clear that Wallace's shareholders do not need to be protected from
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any threat from the Moore offer that defendants perceive. Defendants have failed
to take the necessary steps to create the best value for Wallace shareholders.
Instead, they assert that their present plans for the Company would deliver the
best value to Wallace's stockholders. Defendants' deposition testimony made
clear that they are unable to determine what that value will be.
65. Defendants' failure to fully inform themselves is evidenced by,
INTER ALIA, the following, supported by defendants' deposition testimony.
a. their failure even to consider the appointment of an
independent committee of outside directors to consider the Moore offer;
b. the non-management directors' undue reliance on Goldman
Sachs' suspect determination of inadequacy because of their own lack of
expertise or lack of understanding of Goldman Sachs' analyses;
c. their refusal to determine, or request their advisors to
determine, what a fair or adequate per share price for Wallace would be;
d. their failure to consider whether Wallace could engage in any
transaction with Moore to provide value to Wallace stockholders; and
e. their rejection of Moore's offer based on the recommendation
of Goldman Sachs which
(1) engaged in exclusive communications with defendant
Cronin (the Company's Chief Executive Officer and President), Michael Halloran
(the Company's Chief Financial Officer) and other members of management on
critical issues regarding its analyses to which the rest of the Board was not
privy;
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(2) was almost purely a function of projections of Wallace's
future financial performance provided by Wallace management, without any
independent evaluation by Goldman Sachs;
(3) were accepted by the Board without any discussion as to
whether the management projections were accurate or whether Goldman Sachs should
make its own estimates of Wallace's future financial results; and
(4) recommendation was based on a set of financial
projections for Wallace which were modified at least three times, (August 6,
August 9, and August 11) and based solely on Wallace's management's projections
in order to support opinions that Moore's $56 per share and $60 per share offers
are inadequate.
Wallace's Board has in effect abandoned its fiduciary responsibility to
management directors whose primary incentive is to maintain their lucrative
positions.
66. In breach of their fiduciary duties to Wallace's public
shareholders, defendants have not only failed to fully inform themselves with
respect to Moore's offer, but have concealed the fact that they so failed.
Discovery conducted to date has revealed that while Wallace has used strong
language in its public disclosures to describe the Moore offer, E.G. "clearly
inadequate" to convey the impression that Wallace is worth far more than the
Moore offer, and have urged stockholders not to tender their shares, defendants
failed to disclose to Wallace's public stockholders that:
a. the Wallace Board did not ask Goldman Sachs what an adequate
price for Wallace would be;
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b. the Wallace Board members admittedly have no idea what an
adequate offer for the Wallace shares would be (in fact, they have testified
that they do not know whether the current Moore offer is inadequacy by $0.01,
$10.00 or some other figure);
c. the opinion of Goldman Sachs that the $60 offer is inadequate
is almost purely a function of Wallace managements' projections of Wallace's
future financial results;
d. the financial projections which formed the bases of the key
Goldman Sachs analyses were repeatedly increased during the course of Goldman
Sachs' work in a way that support higher values of Wallace and makes the Moore
offer appear inadequate;
e. Goldman Sachs changed the judgmental portions of its analyses
in ways which support higher values for Wallace and makes the Moore offer appear
inadequate;
f. the Wallace Board was not informed of the changes in
projections, ratios and discount rates used in Goldman Sachs' analyses; and
g. Wallace's directors did not even consider appointing an
independent committee of outside directors to consider the Moore offer.
67. These undisclosed facts are material to the Wallace public
stockholders' decision whether or not to tender into the Moore tender offer and
how to vote at the upcoming Annual Meeting of Shareholders, I.E. in favor of the
Wallace slate of directors or Moore's proposal to reduce the number of directors
to 5. Disclosure of the facts set forth above must be made immediately so that
the Wallace stockholders may cast fully informed votes on December 8, 1995 and
make a fully informed investment decision by December 11, 1995.
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Shareholders should have a fully informed opportunity to install directors
favorably disposed to the Moore offer.
68. Unless enjoined by this Court, defendants will continue to breach
the fiduciary duties they owe to plaintiffs and the other members of the Class,
and aid and abet such breaches, and will not only prevent Wallace's stockholders
from selling their shares to Moore for a fair and adequate price, but also will
prevent other parties from making offers to acquire Wallace, all to the
irreparable harm of the Class.
69. Plaintiffs and the other members of the Class have no adequate
remedy at law.
WHEREFORE, plaintiffs demand judgment and relief in their favor and in
favor of the Class and against defendants, as follows:
A. Declaring that this action be certified as a proper class action
and certifying plaintiffs as Class representatives;
B. Declaring that the defendants and each of them have breached
their fiduciary duties to plaintiffs and other members of the Class;
C. Issuing a preliminary and permanent injunction requiring defendants
to advise the Wallace stockholders, in an amendment to their Schedule 14D-9 and
in their Proxy Statement for the upcoming Annual meeting, that: 1) the Wallace
Board never asked Goldman Sachs to determine what an adequate price would be for
the Wallace common stock; 2) the Board's announcement regarding the inadequacy
of the Moore bids were made absent any knowledge of what an adequate per share
price would be; 3) Goldman Sachs performed no independent analysis of Wallace's
future financial performance or management's projections
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thereof, but relied instead on management's own projections of financial results
in doing its work, which were modified several times during the course of
Goldman Sachs engagement; 4) that Goldman Sachs' principal analyses supporting
per share values in excess of $56 and $60 per share were almost entirely a
function of these projections and formed the basis of its opinions that $56 per
share and $60 per share were inadequate; 5) the directors' failure even to
consider the appointment of an independent committee of outside directors to
consider the Moore offer; 6) Goldman Sachs changed the judgmental portions of
its analyses in ways which support higher values for Wallace and make the Moore
offer appear adequate; and 7) the Wallace Board was not informed of the changes
in projections, ratios, and discount rates used in Goldman Sachs' analyses.
D. Ordering that the defendants take appropriate measures, including
the appointment of an independent committee of outside directors authorized to
consider the adequacy of the Moore offer and to retain any necessary independent
advisor to assist them;
E. Ordering that defendants meet with Moore and its representatives,
or any other offeror, to ensure that such offer(s) for the acquisition of
Wallace are fully considered and evaluated by adequately and in good faith in
order to maximize stockholder value;
F. Preliminarily and permantly enjoining the defendants from
exercising Wallace's stockholder rights plan or adopting other extreme and
unreasonble measures to prevent the sale of the Company;
G. Preliminarily and permanently enjoining Amendment No. 36 to the
profit Sharing Plan and Amendment No. 6 to the Profit Sharing Trust to the
extent that they permit participants to vote Wallace shares that they do not own
or have not yet earned, and to
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the extent that it would cause the appointment of a new trustee to oversee the
Profit Sharing Plan and the Profit Sharing Trust;
H. Awarding compensatory damages in an amount to be determined upon
the proof submitted to the Court;
I. Awarding plaintiffs the costs and disbursements of this action,
including reasonable attorneys' and experts' fees and expenses; and
J. Such other and further relief which the Court may deem just and
proper.
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Dated: November 21, 1995
ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A.
By: /s/ Norman M. Monhait
-----------------------------------------
Norman M. Monhait
First Federal Plaza, Suite 214
P.O. Box 1070
Wilmington, DE 19899-1070
(302) 656-4433
Attorneys for Plaintiffs
OF COUNSEL:
BERNSTEIN LITOWITZ BERGER
& GROSSMANN
Vincent R. Cappucci
Douglas M. McKeige
1285 Avenue of the Americas
New York, New York 10019
(212) 554-1400
ABBEY & ELLIS
Jill S. Abrams
Shari H. Lichtman
212 East 39th Street
New York, NY 10016
(212) 889-3700
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