<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 15
TO
SCHEDULE 14D-1
TENDER OFFER STATEMENT
(PURSUANT TO SECTION 14(d)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
HEALTHDYNE TECHNOLOGIES, INC.
(Name of Subject Company)
I.H.H. CORP.
INVACARE CORPORATION
(Bidders)
------------------------
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class of Securities)
18139610
(CUSIP Number of Class of Securities)
------------------------
THOMAS R. MIKLICH, ESQ.
CHIEF FINANCIAL OFFICER, GENERAL COUNSEL, TREASURER AND CORPORATE SECRETARY
INVACARE CORPORATION
899 CLEVELAND STREET
ELYRIA, OHIO 44035
TELEPHONE: (216) 329-6000
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications on Behalf of Bidders)
------------------------
COPY TO:
ROBERT E. SPATT, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3954
TELEPHONE: (212) 455-2000
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<PAGE>
This Amendment No. 15 amends and supplements the Tender Offer Statement on
Schedule 14D-1 filed on January 27, 1997 (as amended, the Schedule 14D-1)
relating to the offer by I.H.H. Corp., a Delaware corporation (the "Purchaser")
and a wholly owned subsidiary of Invacare Corporation, an Ohio corporation (the
"Parent"), to purchase all of the outstanding shares of Common Stock, par value
$0.01 per share (the "Shares"), of Healthdyne Technologies, Inc., a Georgia
corporation (the "Company"), and (unless and until the Purchaser declares that
the Rights Condition as defined in the Offer to Purchase referred to below is
satisfied) the associated Preferred Stock Purchase Rights (the "Rights") issued
pursuant to the Rights Agreement, dated as of May 22, 1995, as amended, between
the Company and SunTrust Bank, Atlanta (formerly Trust Company Bank), as Rights
Agent, at a purchase price of $13.50 per Share (and associated Right), net to
the seller in cash, without interest thereon, upon the terms and subject to the
conditions set forth in the Offer to Purchase dated January 27, 1997 (the "Offer
to Purchase"), as amended and supplemented by the Supplement thereto dated April
4, 1997 (the "Supplement"), and in the revised Letter of Transmittal (which,
together with any other amendments or supplements thereto, constitute the
"Offer").
The Schedule 14D-1 is hereby amended and supplemented as follows:
The Parent and the other parties to the Loan Agreement entered into a
modification letter dated April 4, 1997 the full text of which is set forth
in Exhibit 11(b)(3) and is incorporated herein by reference.
On May 1, 1997, the Court granted leave to Healthdyne to file the
Counterclaim opposing the Dead-Hand Elimination Proposal and the related
Motion for Summary Judgment.
On May 14, 1997, Skadden, Arps, Slate, Meagher & Flom LLP, counsel to
the Company (the "Company's Counsel"), on behalf of the Company, sent a
letter to Simpson Thacher & Bartlett, counsel to the Parent and the
Purchaser (the "Parent's Counsel"), responding to the letter sent on May 12,
1997 by the Parent's Counsel.
On May 16, 1997, the Parent's Counsel, on behalf of the Parent, sent a
letter to the Company's Counsel disagreeing with the interpretation of the
Georgia Fair Price Statute set forth by the Company's Counsel in its May 14
letter and reiterating concerns about statements made by the Company in the
Company's Preliminary Proxy Statement filed with the Commission on May 5,
1997 regarding the Georgia Fair Price Statute Condition. The Parent's
Counsel enclosed a letter dated May 16, 1997, from King & Spalding, the
Parent's Georgia counsel ("King & Spalding"), to the Commission expressing
King & Spalding's opinion as to the correct interpretation of the Georgia
Fair Price Statute. The full text of the Parent's Counsel letter, including
the enclosed King & Spalding letter, is set forth in Exhibit 11(g)(10).
On May 16, 1997, the Parent and the Purchaser filed a Motion for a
Preliminary Injunction (the "Dead-Hand Motion") seeking an order declaring
the "dead-hand" provisions of the Rights Agreement invalid and ordering the
director defendants to amend the Rights Agreement to remove such provisions.
The parties have agreed to a schedule for the Dead-Hand Motion which
contemplates a hearing before the Court on Monday, June 16, 1997, subject to
the Court's approval. A copy of the brief filed in support of the Dead-Hand
Motion is set forth in Exhibit 11(g)(11).
The Parent has retained The Robinson-Humphrey Company, Inc.
("Robinson-Humphrey"), an Atlanta, Georgia investment banking firm, to
provide advice in connection with the Offer. To date, the Parent has paid
Robinson-Humphrey a fee of $100,000. Upon the acquisition of the Company,
the Parent has agreed to pay Robinson-Humphrey an additional fee of
$200,000. Salomon Brothers has agreed to reduce the amount of the
acquisition fee payable by the Parent to Salomon Brothers in an amount equal
to the fee that the Parent is obligated to pay Robinson-Humphrey upon an
acquisition of the Company. The Parent will also reimburse Robinson-Humphrey
for reasonable expenses (including attorneys' fees and expenses) in an
amount not to exceed $15,000, and has also agreed to
2
<PAGE>
indemnify Robinson-Humphrey against certain liabilities and expenses in
connection with the Offer, including certain liabilities under the federal
securities laws.
ITEM 11. EXHIBITS
<TABLE>
<S> <C>
(b) (3) Letter dated April 4, 1997 modifying Loan Agreement.
(g) (10) Letter from the Parent's Counsel to the Company's Counsel dated May 16, 1997.
(g) (11) Brief in support of Motion for a Preliminary Injunction filed by the Parent
and the Purchaser on May 16, 1997.
</TABLE>
3
<PAGE>
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.
INVACARE CORPORATION
By: /s/ THOMAS R. MIKLICH
-----------------------------------------
Name: Thomas R. Miklich
Title: Chief Financial Officer
I.H.H. CORP.
By: /s/ THOMAS R. MIKLICH
-----------------------------------------
Name: Thomas R. Miklich
Title: President
Date: May 20, 1997
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
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<S> <C> <C>
Exhibit 11(b)(3) Letter dated April 4, 1997 modifying Loan Agreement.
Exhibit 11(g)(10) Letter from the Parent's Counsel to the Company's Counsel dated May 16, 1997.
Exhibit 11(g)(11) Brief in Support of Motion for a Preliminary Injunction filed by the Parent and the
Purchaser on May 16, 1997.
</TABLE>
<PAGE>
NBD Bank, as Agent
611 Woodward Avenue
Detroit, Michigan 48226
April 4, 1997
Invacare Corporation
899 Cleveland Street
P.O. Box 4028
Elyria, Ohio 44036-2125
Attention: Chief Financial Officer
Re: Loan Agreement dated as of February 27, 1997 (the "Loan Agreement")
among Invacare Corporation (the "Company"), the Banks named
therein, NBD Bank, as Agent, and KeyBank National Association, as
Co-Agent.
Ladies and Gentlemen:
The Borrower has requested certain modifications to the Loan Agreement.
The parties hereby agree that the Loan Agreement shall be amended as follows:
(a) Section 1.1 shall be amended by adding the following
definitions in appropriate alphabetical order:
"MARGIN STOCK" means Margin Stock within the meaning of Regulation U.
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System.
"RESTRICTED MARGIN STOCK" means Margin Stock owned by the Company or
any of its Subsidiaries which represents not more than 25% of the
aggregate value (determined in accordance with Regulation U), on a
consolidated basis, of the property and assets of the Company and
its Subsidiaries (other than any Margin Stock) that is subject to
the provisions of Section 5.2(d).
"UNRESTRICTED MARGIN STOCK" means any Margin Stock owned by the
Company or any of its Subsidiaries which is not Restricted Margin
Stock.
(b) Section 4.7 shall be amended and restated in its entirety
to read as follows:
4.7 USE OF LOANS. Each Borrower will use the proceeds of the
Loans for the Healthdyne Acquisition, including purchases
of capital stock on the open market, for other Acquisitions
and for its other general corporate purposes. After
applying the proceeds of each Loan, Margin Stock will not
constitute more than 25% of the value of the assets (either
of a Borrower alone or of the Borrowers and their
respective Subsidiaries on a consolidated basis) that are
subject to any provisions of this Agreement that may cause
the Loans to be deemed secured, directly or indirectly, by
Margin Stock.
<PAGE>
(c) Section 5.2(d) shall be amended by adding the following
language after the reference to "Subsidiaries" in the third line of the first
paragraph: "(except Unrestricted Margin Stock),".
The agreements set forth herein shall not become binding on any party
hereto until a duly authorized officer of each party hereto shall have
executed a counterpart of this letter and delivered such counterpart to the
Agent. The terms used but not defined herein shall have their respective
meanings ascribed thereto in the Loan Agreement.
INVACARE CORPORATION
By: Thomas R. Miklich
--------------------------------
Thomas R. Miklich
Its: Chief Financial Officer
---------------------------
NBD Bank, as Agent
By: Winifred S. Pinet
--------------------------------
Winifred S. Pinet
Its: First Vice President
---------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By: Winifred S. Pinet
--------------------------------
Winifred S. Pinet
Its: First Vice President
---------------------------
NATIONAL CITY BANK
By: Michael P. McCuen
--------------------------------
Michael P. McCuen
Its: Vice President
---------------------------
KEYBANK NATIONAL ASSOCIATION
By: Thomas J. Purcell
--------------------------------
Thomas J. Purcell
Its: Vice President
---------------------------
2
<PAGE>
SOCIETE GENERALE, CHICAGO BRANCH
By: Joseph A. Philbin
--------------------------------
Joseph A. Philbin
Its: Vice President
---------------------------
SUN TRUST BANK, CENTRAL FLORIDA, NA
By: Janet P. Sammons
--------------------------------
Janet P. Sammons
Its: Vice President
---------------------------
WACHOVIA BANK OF GEORGIA, N.A.
By: Michael Ripps
--------------------------------
Michael Ripps
Its: Vice President
---------------------------
PNC BANK, NA
By: Byron A. Pike
--------------------------------
Byron A. Pike
Its: Vice President
---------------------------
COMMERZBANK AKTIENGESELLSCHAFT,
CHICAGO BRANCH
By: Mark D. Monson and
William J. Binder
--------------------------------
Mark D. Monson and
William J. Binder
Its: Vice President,
Vice President
---------------------------
THE SANWA BANK, LIMITED,
CHICAGO BRANCH
By: James P. Byrnes
--------------------------------
James P. Byrnes
Its: First Vice President
---------------------------
THE BANK OF NEW YORK
By: Edward J. Dougherty
--------------------------------
Edward J. Dougherty
Its: Vice President
---------------------------
3
<PAGE>
SIMPSON THACHER & BARTLETT
A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATIONS
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3954
(212) 455-2000
Direct Dial Number Facsimile: E-Mail Address
(212) 455-2685 (212) 455-2502
Telex: 129158
BY FACSIMILE AND COURIER May 16, 1997
Re: Healthdyne Technologies, Inc.
Preliminary Proxy Statement
Blaine V. Fogg, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Dear Mr. Fogg:
On behalf of our client, Invacare Corporation ("Invacare"), we have
reviewed your May 14 response to our May 12 letter regarding the Preliminary
Proxy Statement (the "Preliminary Proxy Statement") publicly filed on May 5,
1997 by your client, Healthdyne Technologies, Inc. ("Healthdyne").
We strongly disagree with your interpretation of the definition of
"beneficial owner" under the Georgia Fair Price Statute. We cannot understand
how you can credibly contend that the receipt by Invacare of a mere tender of
Healthdyne shares, subject to withdrawal by the shareholder at any time prior to
purchase, can constitute "the right to acquire" such shares, especially when
many significant conditions to Invacare's tender offer remain unfulfilled.
Similarly, we are perplexed by your position that the receipt by Invacare of
proxies which are revocable at any time, and which merely authorize Invacare to
cast votes on behalf of the shareholder in a certain manner at a particular
meeting, constitute the "right to vote" such shares. We note that the "right to
acquire" and "right to vote" concepts are the underpinnings of the definition of
"beneficial ownership" for virtually all purposes, including Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, and other
federal and state laws and regulations, yet it is regularly accepted that
"beneficial ownership" for those purposes is not attributed by virtue of
revocable tenders or proxies.
<PAGE>
Blaine V. Fogg, Esq -2- May 16, 1997
Your purported interpretation would, among other things, yield the
absurd result that Invacare has already become the beneficial owner of more than
20% of Healthdyne's shares by virtue of fully revocable tenders, despite the
fact that Invacare and its affiliates hold less than 5% of Healthdyne's stock.
It would also result, among other things, in the strange conclusion that
Healthdyne itself and various of its officers have been the beneficial owner of
extremely high percentages of its own stock in the past, and would therefore be
"interested shareholders," having received proxies in connection with various
annual meetings.
Although you note that the Georgia Business Combination Statute (a set
of statutory provisions wholly distinct from the Georgia Fair Price Statute)
explicitly excludes both unaccepted tenders and revocable proxies from the
definition of "beneficial owner", you fail to point out that the Georgia
Business Combination Statute was adopted 3 years subsequently to the Georgia
Fair Price Statute and that the two were based on very different models. The
"belt-and-suspenders" inclusion of the exception in the later-adopted Georgia
Business Combination Statute (not to mention various other later-generation
state statutes and numerous later-generation poison pills) was merely a minor
refinement as the state-of-the-art language evolved in the intervening years.
This excess-of-caution clarification to address theoretical positions like yours
occasionally advocated by target companies and other similar parties does not
call into question the proper interpretation of the earlier-adopted language
lacking the over-cautious exceptions. For example, Rule 13d-3 itself lacks any
such exception language, yet it is well settled that bidders are not required to
file a Schedule 13D for shares tendered or revocable proxies granted to them.
King & Spalding, our Georgia counsel, has rendered its opinion (a copy
of which is attached hereto) that the definition of "beneficial ownership" in
the Georgia Fair Price Statute does not include the shares which have been
tendered to a party subject to withdrawal rights nor does it include shares with
respect to which a party has received or voted revocable proxies, and that any
contrary interpretation would raise very serious constitutional issues under the
Supremacy and/or Commerce Clauses of the U.S. Constitution using the same
analysis as that applied to the early anti-takeover statutes.
We continue to be extremely concerned that Healthdyne apparently
intends to disseminate, or perhaps even has already disseminated, proxy
materials to its shareholders which are materially misleading in this regard.
We once again urge you to take
<PAGE>
Blaine V. Fogg, Esq -3- May 16, 1997
immediate and effective steps to rectify this issue in Healthdyne's Preliminary
Proxy Statement.
Very truly yours,
/s/ Robert E. Spatt
Robert E. Spatt, Esq.
Attachment
cc: Catherine M. Dixon, Esq. and
Dennis O. Garris, Esq., Securities and Exchange Commission
Thomas R. Miklich, Esq., Invacare Corporation
Bruce N. Hawthorne, Esq., King & Spalding
Leslie R. Jones, Esq., Healthdyne Technologies, Inc.
Winifred D. Simpson, Esq., Troutman Sanders LLP
<PAGE>
KING & SPALDING
191 Peachtree Street
Atlanta, Georgia 30303-1763
Telephone: 404/572-4600
Facsimile: 404/572-5100
Direct Dial: Direct Fax:
404/572-4903 404/572-5146
May 16, 1997
VIA FACSIMILE AND COURIER
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attn: Catherine M. Dixon, Esq., and
Dennis O. Garris, Esq.
Office of Mergers and Acquisitions
Mail Stop 7-9
Re: Healthdyne Technologies, Inc. -- Preliminary Proxy Statement --
Application of Sections 14-2-1110 - 14-2-1113 of the Georgia
Business Corporation Code (the "Fair Price Statute")
Ladies and Gentlemen:
We have acted as Georgia counsel to Invacare Corporation ("Invacare") in
connection with the tender offer for common stock of Healthdyne Technologies,
Inc. ("Healthdyne") described in Invacare's Offer to Purchase, dated January 27,
1997, as supplemented by the Supplement thereto, dated April 4, 1997 (the
"Tender Offer"), Invacare's proposed solicitation of proxies for use at the
upcoming Healthdyne Annual Meeting of Shareholders described in Invacare's
Preliminary Proxy Statement on Schedule 14A, filed on April 4, 1997 (the
"Invacare Preliminary Proxy Statement"), and the related proposed merger (the
"Merger") with Healthdyne. You have received a copy of a letter from Simpson
Thacher & Bartlett, counsel to Invacare, challenging the assertion in
Healthdyne's Preliminary Proxy Statement on Schedule 14A, filed on May 5, 1997,
that Invacare's nominees would not be "continuing directors" who could approve
the Tender Offer and the Merger and thereby satisfy the Georgia Fair Price
Statute Condition referred to in the Invacare Preliminary Proxy Statement. You
have also received a copy of a letter from Skadden, Arps, Slate, Meagher & Flom
LLP defending the assertion on the grounds that, at the time of Healthdyne's
Annual Meeting, Invacare will be the beneficial owner of shares tendered in the
Tender Offer but not accepted for purchase and of shares for which revocable
proxies are granted pursuant to its proposed proxy solicitation.
<PAGE>
May 16, 1997
Page 2
Based on the analysis set forth below, we are of the opinion that Invacare
is not the "beneficial owner" (within the meaning of Section 14-2-1110 of the
Fair Price Statute) of shares tendered in the Tender Offer prior to acceptance
for purchase, nor will it be the beneficial owner of shares for which revocable
proxies are granted or voted pursuant to its proposed proxy solicitation.
To be the beneficial owner of a share of Healthdyne stock under the Fair
Price Statute, Invacare must have either (i) the "right to acquire" such share
"whether such right is exercisable immediately or only after the passage of
time, pursuant to any agreement, arrangement, or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise," or (ii) the "right to vote" such shares "pursuant to any agreement,
arrangement, or understanding."
Under the plain meaning of the Fair Price Statute, Invacare has no "right
to acquire" shares tendered subject to an unconditional right of withdrawal.
Under the Williams Act and the Commission's Regulation 14D, tendering
shareholders have an unconditional right of withdrawal and Invacare is legally
prohibited from acquiring tendered shares while the Tender Offer is being held
open. Thus, Invacare does not have a "right to acquire" the shares during such
period. Further, the definition of "beneficial owner" in the Fair Price Statute
is virtually identical to the definition of beneficial owner under the
Commission's Rule 13d-3. It is well settled that the mere receipt of tenders
prior to acceptance does not give rise to beneficial ownership under Rule 13d-3,
with the result that bidders are not required to file a Schedule 13D for shares
tendered to them prior to acceptance for purchase. Finally, the only case known
to us that has addressed this general issue, ALLEN V. WEST POINT-PEPPERELL,
INC., 1996 WL 2004 (S.D.N.Y. Jan. 3, 1996), concluded that a person could not be
a beneficial owner of shares tendered to such person because such shares could
be withdrawn from the tender at any time until the expiration of the offer. We
note that the definition of beneficial ownership construed by the court in ALLEN
was arguably much broader than the definition under the Fair Price Statute, yet
the court still found that the presence of withdrawal rights prevented a finding
of beneficial ownership.
Similarly, Invacare will have no "right to vote" shares that are the
subject of a revocable proxy granted in the proposed proxy solicitation. A
revocable proxy merely creates a limited agency for a specific purpose that is
revocable by the grantor at any time. MORAN V. HOUSEHOLD INTERNATIONAL, INC.,
500 A.2d 1346 (1985). As stated by the court in MORAN, "it has long been
recognized that the relationship between grantor and recipient of a proxy is one
of agency, and the agency is revocable by the grantor at any time. Henn,
Corporations Section 196, at 518. Therefore, the holder of a proxy is not the
beneficial owner of the stock." ID. at 1355. It is also well settled that the
receipt of a revocable proxy does not give rise to beneficial ownership under
Rule 13d-3, and persons conducting proxy solicitations are thus not required to
file a Schedule 13D for shares subject to the grant of revocable proxies to
them.
<PAGE>
May 16, 1997
Page 3
The Fair Price Statute requires that transactions with interested
shareholders must meet at least one of the following three criteria: (a) the
transaction must be unanimously approved by the "continuing directors" of the
corporation; (b) the transaction must be approved by two-thirds of the
continuing directors and a majority of shares held by shareholders other than
the interested shareholder; or (c) the transaction must meet specified fair
pricing criteria and certain other terms, which are purportedly designed to
assure that all shareholders receive a "fair price" and equivalent consideration
for their shares regardless of the point in time at which they sell to the
acquiring party (the "Fair Price Exception"). The Fair Price Exception
requires, among other things, that after a person becomes an "interested
shareholder," there must have been "no increase in the interested shareholder's
percentage of ownership of any class or series of shares of the corporation by
more than 1 percent in any 12 month period." However, if a person is considered
to be the beneficial owner of stock tendered pursuant to a tender offer prior to
acceptance for purchase or of stock subject to a revocable proxy granted in a
proxy solicitation, it will be impossible for such a person to satisfy this
limitation. In other words, once tenders or grants of revocable proxies reach
the 10% level, the recipient would become an interested shareholder, and the
receipt of the additional tenders or revocable proxies in excess of 1% during
the continuation of the tender offer or proxy solicitation would make it
impossible to comply with the Fair Price Exception because the recipient would
have acquired additional beneficial ownership of more than 1% during a 12 month
period. In the context of the typical tender offer or proxy solicitation it
would be impossible for persons to avail themselves of the Fair Price Exception
because the Fair Price Exception would be lost once tenders and/or revocable
proxies cause the bidder to exceed 11%. We do not believe that a Georgia court
would construe the statutory definition of "beneficial ownership" in such a
manner because it would frustrate the statute's purpose of allowing persons
engaged in contests for control to proceed without continuing director approval
by meeting the fair pricing criteria. It would also have a substantial
frustrating effect (in many cases, involving impossibility) on hostile tender
offers and proxy contests, causing the statute to be in conflict with the
federal regulatory scheme and raising very serious constitutional issues. (1)
From a policy standpoint, the obvious rationale behind the continuing
director provision contained in the Fair Price Statute is to ensure that the
director approval methods of satisfying the statute are not effectuated by a
person who has actually achieved control over voting power of the company in
excess of the 10% threshold at which level such a person is in effect
presumed by the statute to be able to unduly influence the outcome of
stockholder or Board deliberations. Under a tender offer and proxy
solicitation process such as that occurring in the Invacare/Healthdyne
situation, a bidder typically would not achieve control over voting power
until shares are actually purchased by it. In fact, Invacare currently
controls only 4.8% of Healthdyne's voting power,
- -------------------
(1) See, EDGAR V. MITE CORP., 457 U.S. 624 (1982); CTS CORP.
V. DYNAMICS CORP. OF AMERICA, 481 U.S. 69 (1987) (Indiana statute not
unconstitutional because hostile offeror can condition tender offer on
successful control share vote of stockholders at special meeting which must
occur no later than 50 days after commencement of tender offer).
<PAGE>
May 16, 1997
Page 4
which reflects its ownership of 600,000 shares that were purchased by it prior
to commencing the Tender Offer. Thus, until Invacare actually purchases shares
in the Tender Offer, it would control less than one-half of the "interested
shareholder" threshold in the Fair Price Statute and the composition of the
Board of Directors after the annual meeting will reflect the decision of the
public stockholders of Healthdyne, uninfluenced by any controlling block held by
the bidder, as to whether or not the board shall be comprised of directors
committed to the sale of the company on terms acceptable to such holders.
We note that the Business Combinations with Interested Stockholders Statute
(Sections 14-2-1131 through 14-2-1133 of the Georgia Business Corporation Code)
(the "Business Combination Statute"), which was adopted three years after the
adoption of the Fair Price Statute, contains provisions that adopt the
definition of the term "beneficial owner" from the Fair Price Statute, with
express exceptions for stock tendered but not accepted for payment and for
shares subject to revocable proxies. We do not believe that a Georgia court
would infer an intention on the part of the Georgia Legislature in adopting the
Business Combination Statute to construe the Fair Price Statute in a manner
inconsistent with the conclusions expressed herein, the effect of which would be
to ignore the plain meaning of the language of the statute, frustrate the
statutory purpose and expose the statute to constitutional challenge. Rather,
we believe a Georgia court would conclude that such exceptions in the Business
Combination Statute are merely clarifications of the definition. In this regard
we note that the Business Combination Statute was based on a Delaware statute
that contained such clarifying language, whereas the Fair Price Statute was
based on earlier generation laws in Connecticut, Kentucky, Louisiana, Michigan
and Wisconsin, none of which contained such clarifying language.
Lastly, we note that we are unaware of any controlling Georgia judicial
precedent that governs the conclusions expressed herein and that, accordingly,
it is not possible to predict with absolute certainty the manner in which such
matters would be resolved by a Georgia court. Nonetheless, as stated above and
based on the analysis set forth herein, we are of the opinion that Invacare is
not the "beneficial owner" (within the meaning of Section 14-2-1110 of the Fair
Price Statute) of shares tendered in the Tender Offer prior to acceptance for
purchase, nor will it be the beneficial owner of shares for which revocable
proxies are granted or voted pursuant to its proposed proxy solicitation.
We would be pleased to discuss any of the foregoing conclusions with you at
your convenience. We are rendering this opinion to you solely for the use of
the Commission's staff in
<PAGE>
May 16, 1997
Page 5
reviewing the issues presented, and no other person may rely on this opinion
without our prior written consent.
Very truly yours,
KING & SPALDING
By: /s/ BRUCE N. HAWTHORNE
______________________
Bruce N. Hawthorne
BNH:tlew
<PAGE>
FILED UNDER SEAL*
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
- ------------------------------- * Certain portions of this
) document have been redacted
INVACARE CORPORATION, et al., ) from the version filed with
) the Court in accordance with
Plaintiffs, ) a Stipulation and Protective
) Order under which the
v. ) defendants have designated as
) confidential certain materials
HEALTHDYNE TECHNOLOGIES, ) produced by them in discovery.
INC., et al., )
) CIVIL ACTION NO:
Defendants. ) 1:97-CV-0205-CC
)
- -------------------------------
PLAINTIFFS' BRIEF IN SUPPORT OF ITS MOTION
FOR A PRELIMINARY INJUNCTION AGAINST THE USE OF
THE "DEAD HAND" PROVISION OF HEALTHDYNE'S POISON PILL
KING & SPALDING
191 Peachtree Street, N.E.
Suite 4900
Atlanta, Georgia 30303-1763
SIMPSON THACHER & BARTLETT
425 Lexington Avenue
New York, New York 10017
<PAGE>
PRELIMINARY STATEMENT
By this motion, plaintiffs do not ask the Court to favor one side over
another in the contest for control of defendant Healthdyne, or to find that
plaintiffs' offer is fair and adequate. Plaintiffs merely ask the Court to
allow Healthdyne's shareholders to make those decisions for themselves.
The extraordinary facts relevant to this motion are undisputed. Plaintiffs
have made an offer to all shareholders of defendant Healthdyne to pay cash for
any or all of their shares at a price fifty-two percent higher than the price on
the last trading day before plaintiffs made their initial offer. The individual
defendants, who stand to lose their positions as Healthdyne board members if
Healthdyne's shareholders accept plaintiffs' offer, oppose the offer and have
locked into place an array of defensive mechanisms to block it. One of these
mechanisms is an illegal component of its "poison pill" shareholder rights plan
known as a "dead hand provision," which has never been upheld by any court
anywhere and was struck down by the only court to consider it.
As their alternative to plaintiffs' premium all-cash offer, Healthdyne
affords its shareholders no more than the hope that it will improve its dismal
financial performance of the last two years. At Healthdyne's upcoming annual
meeting on July 30, 1997, Healthdyne's shareholders are supposed to have the
opportunity to choose for themselves between plaintiffs' premium cash offer or
Healthdyne's message of better times to come. Whether they actually will have a
free choice is up to this Court.
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Plaintiffs have nominated a slate of new directors committed to giving
Healthdyne's shareholders what should be their inalienable right as the owners
of the company: a bona fide opportunity to choose a board of directors that will
pursue the course of action preferred by the shareholders. Defendant
Healthdyne, however, has promised to invoke its Dead Hand Provision to preclude
a meaningful shareholder vote. The Dead Hand Provision states that a
newly-elected board, unlike Healthdyne's incumbent directors or their
hand-picked successors, cannot redeem or amend Healthdyne's poison pill which,
unless redeemed or amended, makes an acquisition of the company prohibitively
expensive. Such mechanisms are known as "dead-hand" provisions because "people
who are no longer directors [attempt to use them] to rule from the grave."(1)
If the shareholders do not want Healthdyne's poison pill used against
plaintiffs' offer and accordingly vote the current directors out of office, the
Dead Hand Provision would purport to block the new board of directors from
removing the poison pill until it expires by its own terms in 2005. In this
way, Healthdyne has rigged the upcoming vote before the ballots are even cast.
How can the shareholders freely vote for a new board of directors knowing that
the new board members will be stripped of the authority necessary to take the
actions for which they were
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(1) Note, PREVENTING CONTROL FROM THE GRAVE: A PROPOSAL FOR
JUDICIAL TREATMENT OF DEAD HAND PROVISIONS IN POISON PILLS, 96 Columbia Law
Review 2175, 2176 n.5 (December 1996) (citation omitted).
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elected? The shareholders thus will be denied their right to freely elect a new
board, and with it the opportunity to receive plaintiffs' premium all-cash offer
if they so desire. In addition, any future board of Healthdyne would be
precluded from exercising the full authority to govern that company to which it
is entitled under Georgia law. Healthdyne itself will be injured by losing the
ability to redeem or amend its poison pill for the next eight years in response
to any offer, and plaintiffs will be denied the opportunity to have their offer
freely considered by the Healthdyne shareholders and the chance to acquire
Healthdyne at a fair price if the shareholders want to accept that offer. The
only way these illegalities can be corrected is for this Court to invalidate the
Dead Hand Provision, which was implemented by fiat of the Healthdyne board
without approval of its shareholders.
Accordingly, plaintiffs Invacare Corporation and I.H.H. Corp.
(collectively, "Invacare" or "Plaintiffs") file this Memorandum of Law in
Support of their motion for preliminary injunction against defendant Healthdyne
Technologies, Inc. ("Healthdyne") and certain individual members (the "Director
Defendants") of Healthdyne's Board of Directors (the "Board"). On this motion,
Plaintiffs do not seek to invalidate Healthdyne's poison pill in its entirety.
Rather, Plaintiffs merely seek a declaration that the Dead Hand Provision in
Healthdyne's shareholder rights plan is invalid, illegal and unenforceable; and
an injunction directing the Director Defendants to amend the shareholder rights
plan to remove any such provision.
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I. STATEMENT OF FACTS
A. The Parties.
Plaintiff Invacare is an Ohio corporation with its principal place of
business in Elyria, Ohio. Counterclaim of Healthdyne Technologies, Inc.
("Counterclaim"), PARA 2. Invacare designs, manufactures, and distributes
an exclusive line of medical equipment for the home health care and
extended care markets. Complaint, PARA 1. Invacare had over $600 million
total revenue in 1996. April 7, 1997 Michael Smith Affidavit ("Smith
Aff.") Ex. 3 at Ex. 11(a)(1), p. 24. Plaintiff I.H.H. Corp. is a Delaware
corporation with its principal place of business in Ohio. Answer of
Healthdyne Technologies, Inc. ("Answer"), PARA 12. I.H.H., is a
wholly-owned subsidiary of Invacare. Complaint, PARA 12; Smith Aff., Ex. 3
at Ex. 11(a)(1), p. 20.
Defendant Healthdyne is a Georgia corporation with its principal place
of business in Cobb County, Georgia. Answer, PARA 13. The other defendants
are directors of Healthdyne. Id. PARA 14. Healthdyne is engaged in
businesses that complement Invacare's businesses, namely the designing,
manufacturing, and marketing of technologically advanced medical devices
for use in the home and specialized clinical settings. Counterclaim,
PARA 1. Healthdyne had approximately $118 million in revenue in 1996. Id.
B. Invacare's Proposal to Acquire Healthdyne
On January 2, 1997, Invacare proposed an acquisition in which
Healthdyne shareholders would receive $12.50 per share in cash. That price
represented a more than 40% premium over Healthdyne's
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December 31, 1996 stock price of $8.88 per share, the last trading day
before Invacare made its proposal. Answer, PARAPARA 21, 29. Invacare
stated its willingness "to discuss all aspects of" its proposal "[i]n the
context of a negotiated, friendly transaction." Id.; Smith Aff., Ex. 3 at
Ex. 11(a)(1), pp. 24-25. However, armed with the illegal Dead Hand
Provision and other defensive measures they had put in place without a
shareholder vote, the Director Defendants rejected Invacare's proposal on
January 24, 1997, without even discussing it with Invacare. Answer, PARA
1.
In light of defendants' refusal to negotiate, Invacare took its
proposal directly to Healthdyne's shareholders by commencing an all cash
tender offer on January 27 for all outstanding Healthdyne shares for $13
per share (the "Offer"). Answer, PARA 1. Invacare intends, as soon as
practicable after the Offer, to consummate a merger with Healthdyne.
Complaint, PARA 12. Any shares not tendered in the Offer would receive the
exact same amount of cash per share in the subsequent merger (the "Proposed
Merger"). Smith Aff., Ex. 3 at Ex. 11(a)(1), p.1.
On January 31, Healthdyne urged its shareholders to reject the Offer
as "grossly inadequate", despite the fact that the pending Offer
represented a premium of more than 45% over the December 31, 1996 market
price. Smith Aff., Ex. 4 at Exs. 22 and 23; Answer, PARA 2. This claim of
inadequacy was especially disingenuous since Healthdyne's most recent
quarterly earnings for the fourth-quarter of 1996 had dropped 22% from the
same period one year earlier. Indeed, Healthdyne had for EIGHT CONSECUTIVE
QUARTERS failed to
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meet analysts' quarterly earnings estimates. Smith Aff., Ex. 7; April 7,
1997 Affidavit of Mark H. Harnett ("Harnett April 7 Aff."), PARA 10.
In light of Healthdyne's continuing refusal to discuss the Offer,
Invacare gave notice on March 20 that it would propose a slate of new
directors at Healthdyne's next annual meeting. Smith Aff., Ex. 8 at p. 2,
Item 3. In an effort to facilitate consideration of the Offer, Invacare
announced on March 31 that it had raised the tender offer price to $13.50
in cash per share. Smith Aff., Ex. 17; Counterclaim, PARA 5. Defendants
continued to refuse to talk with Invacare and, on April 3, again urged
their shareholders to reject the Offer because it was "grossly inadequate"
despite the increased price. Smith Aff., Ex. 18; Counterclaim, PARA 5.
Defendants' characterization of the offer price as "grossly
inadequate" is contradicted by recent stock sales by Healthdyne's top
management. During 1996, Healthdyne's Chairman Parker Petit sold at least
105,000 shares of Healthdyne stock at prices at or below Invacare's $13.50
offer (and another 50,000 shares at prices less than $1 higher), and
exchanged another 185,000 shares for interests in an "investment pooling"
limited partnership at a time when the stock was trading at around $12.50.
May 16, 1997 Affidavit of Michael Smith ("Smith May 16 Aff."), Ex. 1.
Likewise, just last year Healthdyne's Vice President of Sales, Vincent
Persano, sold another 19,232 shares at $12.50. ID., Ex. 2. The fact that
top insiders of Healthdyne saw fit to sell millions of
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dollars of their personal holdings of Healthdyne stock at or below
Invacare's $13.50 offer price speaks volumes about the adequacy of
Invacare's Offer.
It is an objective fact that Plaintiffs' Offer is a fully financed,
all-cash offer, available to all Healthdyne shareholders, for all
outstanding shares. It is not coercive or "front-end loaded" because it is
an all-cash offer that treats all shareholders equally and does not
threaten non-tendering shareholders with a lower back-end price than
tendering shareholders will receive. Most importantly, it gives all
Healthdyne shareholders the opportunity to realize a substantial 52%
premium over Healthdyne's year-end stock price. The Offer and the Proposed
Merger thus present Healthdyne shareholders with an outstanding opportunity
to maximize the value of their Healthdyne shares, particularly given the
24% drop in Healthdyne's share price in 1996 -- a year in which the S&P 500
rose nearly 23%. May 13, 1997 Affidavit of Wilder Fulford ("Fulford May 13
Aff."), PARA 3. In short, it is simply beyond question that a fair
opportunity to consider Plaintiffs' Offer is in the best interests of
Healthdyne's stockholders.
Healthdyne's annual shareholders meeting is scheduled for July 30,
1997. Prior to that meeting, both Invacare and Healthdyne will have a full
opportunity to communicate with Healthdyne's shareholders and solicit their
support at the upcoming election. However, the ultimate decision on the
future direction of Healthdyne must rest with the owners of Healthdyne -- its
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shareholders. As shown below, the Dead Hand Provision violates this
immutable principle by taking this decision-making power out of the hands
of the shareholders.
C. Healthdyne's Poison Pill and Its Illegal Dead Hand Provision.
Defendants have made clear that they will attempt to prevent their
shareholders from even CONSIDERING the Offer with every conceivable
defensive measure.(2) The only defensive measure at issue here -- the Dead
Hand Provision -- would lock in the Poison Pill regardless of the wishes of
Healthdyne's owners, the shareholders. Because the Dead Hand Provision is
in clear violation of the Georgia Business Corporation Code ("GBCC") and
the Director Defendants' fiduciary duties, the Court should declare that
the Dead Hand Provision in Healthdyne's shareholder rights plan is invalid,
illegal and unenforceable and issue an injunction directing the Director
Defendants to amend the shareholder rights plan to remove any such
provision.
1. Healthdyne's Poison Pill
Like many publicly traded corporations, Healthdyne has a Poison Pill
that purports to give its board of directors the power unilaterally to
frustrate unsolicited acquisition proposals and tender offers. Healthdyne
has admitted that its Poison Pill blocks
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(2) Plaintiffs' Complaint alleges that the Director
Defendants' continued reliance on these defensive measures violates their
fiduciary duties under Georgia law. SEE Complaint, Counts IV through VI.
This motion for preliminary injunction only addresses one defensive measure
-- the illegal Dead Hand Provision.
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<PAGE>
any acquisition that is not approved by the Board by inflicting massive
economic penalties on the would-be acquiror through substantial dilution of
the acquiror's equity interest in Healthdyne to the point that an
acquisition or tender offer becomes prohibitively expensive. Counterclaim,
PARA 6; SEE also Fulford May 13 Aff., PARA 6.
Except for its illegal Dead Hand Provision, Healthdyne's Poison Pill
plan is of a fairly standard variety.(3) In summary, if Healthdyne's Poison
Pill is triggered, each shareholder except Invacare will have rights to
purchase additional shares of common stock at half-price (the "Rights")
under certain circumstances. Smith May 16 Aff, Ex. 3 at p. 2. If a
potential acquiror such as Invacare becomes the beneficial owner of 20% or
more of Healthdyne's outstanding shares, all Rights holders, except
Invacare, would be entitled to purchase $100 worth of Healthdyne common
stock for a purchase price of $50 per Right (the "flip-in" provision). ID.
at p. 3. The Poison Pill's half-price stock sale would drastically dilute
Invacare's ownership of Healthdyne stock and dramatically increase the
number of shares Invacare would have to purchase to gain control of
Healthdyne. Fulford May 13 Aff., PARA 7.
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(3) Healthdyne's 70-plus page Poison Pill shareholder
rights agreement, as amended, is attached to the Smith May 16 Aff. as
Ex. 3.
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<PAGE>
2. The Illegal Dead Hand Provision
Healthdyne's Poison Pill, like most others, provides the board of
directors with methods for removing its punitive provisions by redeeming
the Rights (I.E., purchasing them for a nominal price) or amending the
Poison Pill to make it inapplicable to a particular transaction. Smith
May 16 Aff., Ex. 3, p. 4. However, the Dead Hand Provision allows only the
incumbent directors or their hand-picked successors to redeem or amend the
Poison Pill in the circumstances presented here. ID.
The Dead Hand provision accomplishes this by creating a new class of
"Continuing Directors" (hereafter "Dead Hand Continuing Directors"),
defined as directors who were directors when the Poison Pill was adopted in
1995 or their hand-picked successors. Smith May 16 Aff., Ex. 3, pp. 4-5.
The Rights may be redeemed ONLY if there are "Continuing Directors then in
office" and ONLY with "the concurrence of a majority of such Continuing
Directors" (1) whenever someone has become the beneficial owner of 15% or
more of Healthdyne's stock (an "Acquiring Person"), or (2) even if there is
no Acquiring Person, after any change in a majority of the directors as the
result of a proxy or consent solicitation by anyone who has stated that he
intends to take or even "may consider taking" any action which would result
in his becoming an Acquiring Person. ID., Section 23, pp. 53-56;
Counterclaim, PARA 7.
Accordingly, if the Dead Hand Provision stands, a vote by Healthdyne's
shareholders at the upcoming annual meeting to replace all incumbent
directors with new directors who support Invacare's
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Offer and Proposed Merger will be counter-productive. The new board could
not redeem or amend the Poison Pill to permit the shareholders to get the
benefit of the Offer because they would not be Dead Hand Continuing
Directors. Moreover, after such an election, NO ONE would have any power
to redeem or amend the Poison Pill until the expiration of the Rights in
2005. The shareholders, who by their vote will have expressed their desire
to accept Plaintiffs' Offer, would be effectively precluded from accepting
it.(4)
As a result of its draconian provisions, the Dead Hand Provision will
deter shareholders from voting their proxies in favor of Invacare's board
of director nominees EVEN IF the shareholders favor the Offer. May 14,
1997 Affidavit of Mark H. Harnett ("Harnett May 14 Aff."), PARA 7.
Instead, the shareholders will be coerced into keeping the incumbent
directors in place, and the incumbents will have succeeded in a "cram down"
on the shareholders of management's position in the proxy contest. ID.,
PARA 8; Affidavit of William J. Carney ("Carney Aff."), PARA 28.
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(4) When Healthdyne's board adopted the Poison Pill in
1995, it expressly stated that the Pill served two purposes: "to deter
coercive takeover tactics" and "to help prevent situations in which one
group of shareholders may derive a benefit that is not available to all
shareholders." Smith May 16 Aff., Ex. 4. Neither circumstance is present
here. Obviously, defendants are trying to use the Poison Pill in a manner
that conflicts with its stated purpose by attempting to block Invacare's
premium all-cash/all shares Offer.
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<PAGE>
D. Defendants' Other Director-Entrenchment Devices.
1. Defendants' attempt to annihilate shareholders' voting
rights in the Legislature.
Defendants' invocation of the Dead Hand Provision is not their only
attempt to deny Healthdyne's shareholders any say on the future governance
of the company. On March 20, 1997, Invacare gave Healthdyne notice of
Invacare's proposed slate of director nominees. Smith Aff., Ex. 8 at
Ex. 11(a)(13). That VERY day, in what THE ATLANTA CONSTITUTION decried as
a "stealth" maneuver, Smith Aff., Ex. 9, the defendants prevailed upon a
Cobb County legislator to propose amending the GBCC to eliminate the rights
of all shareholders of all publicly held Georgia corporations to elect a
full Board at each annual meeting and to remove directors at any time.
Smith Aff., Exs. 10-12. Under Healthdyne's proposed amendment to H.B. 294,
a majority of Healthdyne's incumbent board (including the Director
Defendants herein) could not have been voted out of office for two years,
effectively rendering Healthdyne takeover-proof. Most notorious is the
fact that the defendants sought to accomplish this without a vote of
Healthdyne's shareholders. Smith Aff., Ex. 11.
This amendment served one purpose only -- to prevent all of
Healthdyne's directors from having to face re-election against Invacare's
slate of nominees. Smith May 16 Aff., Ex. 5. As noted by THE ATLANTA
CONSTITUTION, Healthdyne "submit[ted] the proposal to legislators . . .
[at] the last minute because executives
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realized they were vulnerable to a maneuver to replace the Board." Smith
Aff., Ex. 13; SEE ALSO ID., Ex. 14.
The House of Representatives resoundingly defeated the bill by a more
than 2 to 1 margin. ID., Ex. 15. Nonetheless, this legislative foray
illustrates the extreme lengths to which defendants are willing to go to
entrench themselves at the expense of the rights of Healthdyne's
shareholders.
2. Defendants' Delay of Healthdyne's 1997
Annual Meeting.
Facing the prospect of being voted out of office by angry
shareholders, defendants also embarked on a campaign to delay Healthdyne's
1997 annual meeting. For the past two years, Healthdyne held its annual
meeting by the end of May. Smith Aff., Exs. 20, 21. [REDACTED] However,
after Plaintiffs made their Offer, defendants tried to delay the meeting for
as long as possible.
Healthdyne had a bylaw that specified that if the directors did not
set a different date, the annual meeting would take place on the fourth
Tuesday in April. Smith Aff., Ex. 6 at H01543. The Director Defendants
repealed that bylaw on January 23, 1997. Answer, PARAPARA 3, 33. This
clearly indicated that the Director Defendants intended to delay a
shareholders' meeting indefinitely.
To force the recalcitrant directors to comply with their legal
obligations to hold a timely annual meeting, Plaintiffs, on April 7, 1997,
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filed a Motion for Preliminary Injunction Requiring Healthdyne to Hold Its
Annual Shareholders' Meeting. Only in response to this motion did the
Healthdyne Board meet and set July 30, 1997 as the date for the annual
meeting. April 28, 1997 Consent Order ("Consent Order").
3. Defendants' Other Extreme Entrenchment Devices.
On March 20, the same day they commenced their desperate legislative
maneuver, the Director Defendants also gave themselves the power to
challenge shareholder demands for special meetings and to delay such
special meetings for more than FOUR MONTHS after a valid shareholder demand
is received. Smith Aff., Ex. 16 at Ex. 31.
The Director Defendants also gave themselves and Healthdyne's officers
extremely broad indemnification agreements. These agreements purport to
insulate the Director Defendants from liability for any actions taken or
failed to be taken by them -- presumably including their actions to delay
the annual meeting, pursue director-entrenching legislation, adopt
director-entrenching bylaws or to refuse to redeem or amend the Poison
Pill. Smith Aff., Ex. 16 at Exs. 29-30.
4. Healthdyne's Counterclaim to Block its Shareholders from
Voting on a Bylaw Proposal to Eliminate the Dead Hand
Provision.
In yet another attempt to insulate itself from the will of its
shareholders, Healthdyne has filed a motion for summary judgment in this
Court seeking to invalidate a bylaw proposed by Invacare to be voted upon
by Healthdyne's shareholders at the upcoming annual
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meeting. The proposed bylaw would eliminate the Dead Hand Provision,
prohibiting Healthdyne's board from hiding behind it to frustrate the will
of Healthdyne's shareholders. The stated purpose of Healthdyne's motion
is to block Healthdyne's shareholders from even VOTING ON the proposed
bylaw, once again attempting to prevent Healthdyne's owners from expressing
their will. The significance of Healthdyne's motion is not in its merits --
it is flatly wrong under even the Georgia authorities and treatises it
cites -- but in its intended effect: to further suppress the rights of
Healthdyne's shareholders to decide the fate of their company for
themselves.
In short, the Director Defendants have taken every step possible to
frustrate a shareholder vote and avoid accountability to their owners.
They are engaging in a take-no-prisoners campaign to block the Offer and
prevent their shareholders from considering their ouster.
II. ARGUMENT
A. Applicable Standard for a Preliminary Injunction.
The standards for entry of a preliminary injunction are well-settled
in this Circuit:
To be entitled to injunctive relief, the moving party must
establish that (1) there is a substantial likelihood that he
ultimately will prevail on the merits of the claim; (2) he will
suffer irreparable injury unless the injunction issues; (3) the
threatened injury to the movant outweighs whatever damage the
proposed injunction may cause the opposing party; and (4) the
public interest will not be harmed if the injunction should
issue.
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CATE V. OLDHAM, 707 F.2d 1176, 1185 (11th Cir. 1983). To determine the
proof required to establish these elements, "a sliding scale is utilized,
which takes into account the intensity of each in a given calculus." STATE
OF TEXAS V. SEATRAIN INT'L, S.A., 518 F.2d 175, 180 (5th Cir. 1975). Thus,
"a much stronger showing on one or more of the necessary factors lessens
the amount of proof required for the remaining factors." COLLINS & CO. V.
CLAYTOR, 476 F. Supp. 407, 408 (N.D. Ga. 1979).
As shown below, Invacare has a strong likelihood of success on the
merits of its claims that the Dead Hand Provision violates the GBCC and the
Director Defendants' fiduciary duties under Georgia law. Invacare also
shows that it will suffer irreparable injury if defendants are allowed to
use the Dead Hand Provision to coerce the shareholders' vote at the
upcoming annual meeting and otherwise thwart Invacare's Offer, while the
defendants will suffer no harm if the Court invalidates the Dead Hand
Provision. Finally, the public interest will be served by an injunction
invalidating the Dead Hand Provision.
B. Plaintiffs Have a Strong Likelihood of Success on the Merits of
Their Claim that the Dead Hand Provision Violates Georgia Law.
The Dead Hand Provision purports to deprive future directors, duly
elected by the shareholders, of the power to exercise their statutory and
fiduciary obligations to manage the corporation. Because this limitation
was not approved by the shareholders, it controverts the express provisions
of the GBCC and is therefore
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invalid. Indeed, judicial, statutory and academic authority all establish
that dead hand provisions are illegal.
Moreover, courts have given limited approval to poison pills only if
such plans do not block the OWNERS of the company -- the shareholders --
from waging a proxy contest and electing a new group of directors who have
the power to redeem or amend the poison pill and allow the proposed
transaction to go forward. In MORAN V. HOUSEHOLD INTERNATIONAL, INC., 500
A.2d 1346, 1355 (Del. 1985), the seminal case recognizing the validity of
poison pills, see O.C.G.A. Section 14-2-624, the Delaware Supreme Court's
ruling was specifically based on a determination that the poison pill's
"effect upon proxy contests will be minimal." SEE ALSO UNITRIN, INC. V.
AMERICAN GEN. CORP., 651 A.2d 1361, 1383 (Del. 1995) (approving board's
refusal to redeem poison pill because a proxy contest "remained a viable
alternative".)(5) The Dead Hand Provision, however, closes off the crucial
alternative of a proxy contest by purporting to strip a newly elected board
of the power to remove the Poison Pill obstacle to a tender offer or merger
transaction. Thus, the Dead Hand Provision also violates
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(5) Both federal and state courts in Georgia, as well
as the Georgia Legislature, rely heavily on Delaware authority
for guidance in corporate jurisprudence. PELLER V. SOUTHERN CO.,
911 F.2d 1532, 1536 (11th Cir. 1990); INT'L. INS. CO. V. JOHNS,
874 F.2d 1447, 1459 n. 22 (11th Cir. 1989); GRACE BROS. V. FARLEY
INDUS., 450 S.E.2d 814, 816 (Ga. 1994). SEE ALSO, Official
Comment, O.C.G.A. Sections 14-2-163; 624; 702; 806; 901; 1006;
1103; 1109; and 1132 (statutes follow Delaware law). Healthdyne
concedes as much. Response Brief of Healthdyne Technologies,
Inc. in Opposition to Plaintiffs' Motion for a Preliminary
Injunction at 13. n.3.
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the current board's fiduciary responsibilities under Georgia corporate law
by infringing on the free exercise of the shareholders' voting rights in a
preclusive manner and by coercing the shareholders to vote for the
incumbent board.
1. The Dead Hand Provision Is Illegal under the Georgia
Business Corporation Code.
a. The Dead Hand Provision Violates O.C.G.A. Section
14-2-801 By Restricting The Ability Of Future Directors
To Manage Healthdyne
Under Georgia law, limitations on the powers of directors to manage
the corporation must either be approved by the shareholders or provided by
statute. The Healthdyne Dead Hand Provision exists solely by fiat of the
current board and is therefore invalid.
The duties of the board of directors of a Georgia corporation are set
forth in the GBCC:
All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the
corporation managed under the direction of, its board
of directors, SUBJECT TO ANY LIMITATION SET FORTH IN
THE ARTICLES OF INCORPORATION, BYLAWS APPROVED BY THE
SHAREHOLDERS, OR AGREEMENTS AMONG THE SHAREHOLDERS
WHICH ARE OTHERWISE LAWFUL.
O.C.G.A. Section 14-2-801(b) (emphasis added). The Georgia Supreme Court
has recognized the strong public policy limitations on the ability of
directors to bargain away, delegate, or limit the powers and business
judgment which Georgia law expects them to exercise over the affairs of the
corporation. SEE MILTON FRANK ALLEN PUBLICATIONS, INC. V. GEORGIA
ASSOCIATION OF PETROLEUM RETAILERS, INC., 224 Ga. 518, 527 (1968) ("[A]n
agreement by which the
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individual directors, or the entire board, abdicate or bargain away in
advance the judgment which the law contemplates that they shall exercise
over the affairs of the corporation is void."); WHEELER V. LAYMAN
FOUNDATION, 188 Ga. 267, 271 (1939) ("It is the general rule that not even
the directors of a corporation can delegate the entire control and
supervision of the corporation to others.")
The Dead Hand Provision violates Section 14-2-801(b) because it
deprives directors duly elected by the shareholders of important corporate
powers and authority that are necessary to manage the business and affairs
of the corporation. Carney Aff., PARAPARA 21-22. Healthdyne shareholders
did not approve the Dead Hand Provision. The provision is not in the
articles of incorporation which the shareholders control, or in a
shareholder-approved bylaw. Instead, this drastic limitation on the
authority of future directors was imposed solely by the action of the
current directors and was never presented to Healthdyne's shareholders.
Only one reported case has ruled on the legality of a dead hand
provision in a poison pill, and it declared the provision to be invalid and
enjoined its enforcement on grounds directly parallel to O.C.G.A. Section
14-2-801(b). BANK OF NEW YORK V. IRVING BANK CORPORATION, 528 N.Y.S.2d 482
(Sup. Ct. 1988), concerned a Bank of New York (BNY) tender offer for all of
the shares of Irving Bank Corporation (IBC) and a proxy contest seeking the
election of a new board of directors. The IBC poison pill included a dead
hand continuing director" provision that had the effect of severely
limiting the authority of any directors other than the existing directors
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to redeem the pill. The board could redeem the pill only if it consisted
of a majority of "continuing directors" (I.E., current directors or those
approved by the current directors) OR if the new directors were elected by
two-thirds of the shares, although only a simple plurality was required for
election to the board. The court found that the dead hand provision in that
case did several things:
First, it creates several different classes of
directors--having different powers, or having to be
elected by different majorities to exercise all of the
powers. Second, it effectively limits the powers of a
future board which is not a continuation of the present
board or which is not approved by it, while still
leaving those powers to a board which is approved. For
example, the present board, or one approved by it, may
redeem the rights. A future board, properly elected by
a fifty-one percent majority, but not approved by the
present board, may not redeem the shares.
528 N.Y.S.2d at 484.
In BANK OF NEW YORK, the court squarely addressed the legality of a
dead hand provision. The New York Business Corporation Law provided that a
duly elected board was empowered to manage the corporation's business by a
majority vote if a quorum was present. The court determined that, even
though poison pills may be valid (citing MORAN), the dead hand provision
was invalid because it prevented a new board from doing its job:
By statute any restriction on the power of the board of
directors must be placed in the Certificate of
Incorporation . . . which was not done by IBC.
Accordingly, the board of directors was without
authority to adopt a
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provision restricting the action of a future
board. . . .
528 N.Y.S.2d at 485.
As made explicitly clear in the accompanying affidavit of former
Commissioner of the United States Securities and Exchange Commission,
Professor Joseph A. Grundfest, a decision to uphold the Healthdyne Dead
Hand Provision would be "without precedent and contrary to the views of
respected experts, knowledgeable practitioners, and emerging scholarship in
the field." Affidavit of Joseph A. Grundfest ("Grundfest Aff."), PARA 9;
SEE ALSO Lese, PREVENTING CONTROL FROM THE GRAVE: A PROPOSAL FOR JUDICIAL
TREATMENT OF DEAD HAND PROVISIONS IN POISON PILLS, 96 Columbia L. Rev.
2175, 2177 (1996) (dead hand provisions are (1) "inconsistent with board's
fiduciary duties to shareholders;" (2) "serve no purpose but to entrench
management and consequently infringe shareholder sovereignty;" and (3)
"should be found invalid per se"). The effects of the Dead Hand Provision
- -- including making it "impossible for shareholders to elect new directors
who are free to act on views that differ from the current boards on
takeover transactions," disabling newly-elected directors, and entrenching
management -- "stan[d] basic principles of corporate governance on their
head." Grundfest Affidavit PARAPARA 9-10. As Professor Grundfest
concludes, "[s]imply put, upholding the Healthdyne dead hand provision
would be the equivalent of blessing a corporate COUP D' ETAT . . . indeed,
a "more overreaching usurpation of control by a
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board would be difficult to construct." ID. PARAPARA 9, 11. SEE ALSO,
PREVENTING CONTROL FROM THE GRAVE, SUPRA, n.1.
Applying this reasoning and the BANK OF NEW YORK analysis under
Georgia law to Healthdyne's MORE SEVERE Dead Hand Provision mandates the
same conclusions here.(6) Like the New York Business Corporation Law, the
GBCC requires that any limitation on the powers of directors must either be
in the articles of incorporation, a shareholder-approved bylaw, or a
shareholders' agreement. O.C.G.A. Section 14-2-801(b). The Dead Hand
Provision meets none of these requirements. Instead, it was simply adopted
by the Healthdyne board of directors without a shareholder vote. As stated
by the court in BANK OF NEW YORK, "[t]his retention of authority is beyond
the powers of the Board." 528 N.Y.S.2d at 485.
b. O.C.G.A. Section 14-2-624 Does Not Authorize the Dead
Hand Provision
In October 1988, William Farley commenced an unsolicited tender offer
for all of the shares of West-Point Pepperell, Inc. ("West Point"), a
Georgia corporation. One of West Point's defenses was a poison pill
shareholder rights plan, which contained discriminatory rights provisions,
but which, unlike Healthdyne's poison pill, did not contain a dead hand
provision. Farley challenged the legality of the poison pill under Georgia
law.
- ------------------------------
(6) Healthdyne's Dead Hand Provision is even more onerous
than the provision struck down in BANK OF NEW YORK. The dead hand
provisions in Irving Bank's poison pill were not applicable if newly
elected directors received a two-thirds shareholder vote.
Healthdyne's Dead Hand Provision nullifies a two-thirds majority vote,
and even a unanimous vote.
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Judge Tidwell ruled that the West-Point poison pill was illegal on the
basis that it discriminated among shareholders of the same class or series
in violation of what is now O.C.G.A. Section 14-2-601(a), which required
that all shares of a given class must have relative rights identical with
those of other shares of the same class. WEST-POINT PEPPERELL, INC. V.
FARLEY, INC., 711 F. Supp. 1088, 1095 (N.D. Ga. 1988). In response, the
Georgia General Assembly amended the GBCC by adding the following language
in the 1989 amendments:
Nothing contained in Code Section 14-2-601 shall be
deemed to limit the board of directors' authority to
determine, in its sole discretion, the terms and
conditions of the rights, options, or warrants issuable
pursuant to this Code Section. Such terms and
conditions need not be set forth in the articles of
incorporation.
O.C.G.A. Section 14-2-624(c). The purpose of the amendment was to reject the
WEST-POINT ruling and to modify the limitations in Section 601 on discriminatory
rights to permit the use by Georgia corporations of shareholder rights plans
incorporating discriminatory rights provisions:
The concluding sentences of subsection (c) were added
to the Model Act language to clarify the fact that the
discretion granted to the board of directors to issue
rights, options, or warrants and set their terms under
subsection (a) is intended to be limited only by the
directors' fiduciary obligations to the
corporation. . . .The language was intended to permit
the approach of courts interpreting Delaware law,
including the Delaware Supreme Court in MORAN V.
HOUSEHOLD INTERNATIONAL, INC., . . . which have held
that the board of directors is authorized to issue
rights pursuant to shareholder rights plans. . . .
The language rejects the holding of the
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Federal District Court for the Northern District of
Georgia in WEST POINT PEPPERELL, INC. V. FARLEY INC.
(Nov. 14, 1988) and was intended specifically to permit
the use by Georgia corporations of shareholder rights
plans incorporating both so-called "flip-over" and
discriminatory "flip-in" provisions.
O.C.G.A. Section 14-2-624, Comment, Note to 1989 Amendment.
Emory University Law School professor William J. Carney -- a
recognized expert on Georgia corporate law and Reporter for the Corporate
Code Revision Committee of the State Bar of Georgia from 1986 to 1989 --
confirms the narrow purpose of the 1989 amendment to Section 624.
Professor Carney's attached affidavit shows that the amendment to Section
624 was intended only to address the question of the general authority of
boards of directors to issue poison pill rights; it was not intended to
eliminate the numerous restrictions on board power set forth in other
provisions of the GBCC or otherwise alter the fundamental relationship
between boards of directors and shareholders in Georgia by granting the
board CARTE BLANCHE power to adopt whatever form of poison pill necessary
to entrench incumbent directors without shareholder approval. SEE Carney
Aff., PARAPARA 38-43. Any broader reading of the "sole discretion"
language in the 1989 amendments to Section 624 would be totally at odds
with other fundamental provisions of the GBCC, such as Section 801,
discussed above, Section 830(a) -- which requires that every director act
in a manner he believes in good faith to be in the best interest of the
corporation -- and Sections 860 through 863, which broadly restrict
self-dealing transactions by the board. Id. There is simply no indication
in the amendments to Section 624
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or the comments that the amendments were in any way intended to exempt the
board's actions in adopting a poison pill from compliance with all of the
other sections of the GBCC limiting powers of directors or otherwise to
change the common law fiduciary duties of the board. ID.
c. The Georgia Fair Price and Business Combination
Statutes Lend No Support To Healthdyne's Illegal Dead
Hand Provision.
The Georgia Fair Price statute (O.C.G.A. Section 14-2-1110 ET SEQ.)
and Business Combination statute (O.C.G.A. Section 14-2-1131 ET SEQ.)
specify that "continuing directors" have certain powers with respect to
certain business combinations that directors who are not statutory
continuing directors do not have. These statutory continuing director
provisions do not authorize, justify or support Healthdyne's illegal Dead
Hand Provision.
First, unlike the Dead Hand Provision, neither of these statutes
precludes a proxy contest by which shareholders can replace a majority of
the existing directors with new candidates of their own choice who are
empowered to approve a merger or acquisition transaction under the
statutes. Second, both statutes provide mechanisms for shareholder
approval and acceptance of tender offers and merger proposals without
approval of continuing directors. Third, it is the statutes themselves
which impose limitations on the power of the board of directors to act,
unlike the Dead Hand Provision which was unilaterally adopted by
Healthdyne's board, without the required statutory authority or shareholder
approval.
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First, if a party such as Invacare, while beneficially owning less
than the triggering amount of shares under the statutes (10%), were to
succeed in a proxy solicitation to replace the incumbent directors with its
own nominees, these newly elected directors would be "continuing directors"
within the statutory definition -- although they would not be "continuing
directors" under the far more onerous Dead Hand Provision. See O.C.G.A.
Section 14-2-1110(4), (6), and (11). As statutory continuing directors,
the newly elected board could avoid the restrictions of the Fair Price and
Business Combination statutes by approving the Offer and Merger, whereas
they would not be able to avoid the deadly effects of the Dead Hand
Provision of Healthdyne's Poison Pill.(7) SEE Carney Aff., PARA 34.
Second, both the Fair Price and Business Combination statutes can be
satisfied without any action by the "continuing directors"
- -------------------
(7) Any assertion that Invacare's nominees would not
be statutory continuing directors on the grounds that, by virtue of
having received tenders of (but not yet purchased) shares under the
Offer or proxies under a proxy solicitation, Invacare would have the
"right to acquire" or the "right to vote" such shares (making it the
"beneficial owner" of more than 10% of the shares and thus an
"Interested Shareholder") is specious. It is well-settled that a
person cannot be the "beneficial owner" of shares tendered to such
person that, as in the Offer, can be withdrawn from the tender at any
time until the expiration of the offer. ALLEN V. WEST
POINT-PEPPERELL, INC., 1996 WL 2004 (S.D.N.Y. Jan. 3, 1996), and,
since a revocable proxy merely creates a limited agency for a specific
purpose that is revocable by the grantor at any time, "the holder of a
proxy is not the beneficial owner of the stock." MORAN, 500 A.2d at
1355. Moreover, tenders subject to withdrawal and revocable proxies
do not give rise to beneficial ownership under federal securities Rule
13d-3, which has a definition very similar to the Georgia Fair Price
Statute.
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whatsoever. As is explained in more detail in Plaintiffs' tender offer
filings, the Fair Price statute will be satisfied, even without "continuing
director" approval of the transaction, if Plaintiffs meet certain pricing
and minor procedural requirements. See Smith May 16 Aff., Ex. 6 at pp.
7-9, 35-37; O.C.G.A. Section 14-2-1112(b). The Business Combination
statute permits any board of directors to approve the business combination
and only requires approval of "continuing directors" to repeal a bylaw
opting into the statute.
In short, unlike Healthdyne's Dead Hand Provision, the Fair Price
Statute does not reserve to incumbent directors or their cronies a veto
power over these transactions.
2. In Addition to the Outright Violation of the GBCC,
Defendants' Reliance On The Dead Hand Provision Violates
Their Fiduciary Duties As a Matter of Law.
a. Defendants Infringement of Shareholder Voting Rights
Violates Their Fiduciary Duties.
Delaware courts have been vigilant in their protection of the free and
effective exercise of shareholder voting rights because "the shareholder
franchise is the ideological underpinning upon which the legitimacy of
directorial power rests." BLASIUS INDUSTRIES, INC. V. ATLAS CORP., 564
A.2d 651, 659 (Del. Ch. 1988). The corporate election process provides one
of the few, IF NOT THE ONLY, protections which shareholders have against
"perceived inadequate business performance." ID. (emphasis added).
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Thus, shareholders must have an unfettered right to replace the board if
they so choose. ID.
In keeping with these principles, Delaware courts view provisions that
are intended to restrain or coerce the free exercise of shareholder voting
rights as "deeply suspect". SUTTON HOLDING CORP. V. DESOTO, 1991 Del. Ch.
LEXIS 85, Fed. Sec. L. Rep. (CCH) PARA 96,012 (Del. Ch. 1991). Delaware
courts will not apply the traditional business judgment rule to board
actions intended to interfere with or frustrate shareholder voting rights
unless the directors are able to show a "compelling justification" for
their actions. STROUD V. GRACE, 606 A.2d 75, 92 n.3 (Del. 1992); HUBBARD
V. HOLLYWOOD PARK REALTY ENTERPRISES, INC., Case No. 11779, 1991 WL 3151 at
*8 (Del. Ch. Jan. 14, 1991); BLASIUS, 564 A.2d at 659; APRAHAMIAN V. HBO &
CO., 531 A.2d 1204 (Del. Ch. 1987).
The Dead Hand Provision unquestionably infringes on shareholder voting
rights; indeed, that is its purpose. It destroys the power of a newly
elected board to redeem or amend the Poison Pill, rendering futile the
shareholders' exercise of their right to vote the incumbent board out of
office. SEE Carney Aff., PARA 46. The Dead Hand Provision perversely
distorts the shareholders' voting choice: The more the shareholders favor
Invacare's proposed transaction, the more incentive they have to vote for
the incumbent board -- and against Invacare's new slate of directors --
because a new board could not redeem or amend the Poison Pill and allow
this transaction (or any other transaction)
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<PAGE>
to go forward. ID. But the current board has announced its intention to
reject the Invacare Offer, without negotiation. Thus, the shareholders are
trapped, denied a meaningful voice.
There is no justification, let alone a "compelling justification", for
such a director-entrenching and coercive anti-takeover device. The Dead
Hand Provision adds nothing to Healthdyne's other defensive measures except
to coerce the shareholders to re-elect the existing board.(8) Carney Aff.,
PARA 44. The only function of the Dead Hand Provision is to entrench the
current Healthdyne board. ID.
Even if one were to assume that the Healthdyne board genuinely
believed that the company and its shareholders deserved protection from a
supposedly "inadequate" offer, the Dead Hand Provision would still be an
illegal interference with shareholder voting rights. BLASIUS held that
EVEN IF the board were acting in subjective good faith, it could not
validly act for the purpose of preventing the shareholders from electing a
new majority of the board:
The only justification that can, in such a situation, be offered
for the action taken [packing the board to prevent shareholders
from electing a majority] is that the board
- ----------------------
(8) Healthdyne's Poison Pill (minus the Dead Hand
Provision) and its bylaws opting into the Georgia Business Combination
Statute and the Georgia Fair Price Statute provide Healthdyne
significant protection from coercive, inadequate tender offers and
acquisition proposals. SEE Carney Aff., PARA 44. Unlike the Dead
Hand Provision, however, a new board elected in a proxy contest can
remove these obstacles and approve the transaction. Id., PARA 6.
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<PAGE>
knows better than the shareholders what is in the corporation's
best interest. While that premise is no doubt true for any
number of matters, it is irrelevant . . . when the question is
who should comprise the board of directors. The theory of our
corporation law confers power upon directors as the agents of the
shareholders; it does not create Platonic Masters.
BLASIUS, 564 A.2d at 663. Healthdyne and the Director Defendants have
displayed just this kind of paternalistic attitude, as evidenced by their
assertion in Healthdyne's Preliminary Proxy Statement that the Dead Hand
Provision does not prevent a proxy contest or tender offer "at a price that
is DETERMINED BY A MAJORITY OF THE CONTINUING DIRECTORS to be a fair and
otherwise in the best interests of the shareholders. . ." Smith May 16
Aff., Ex. 7 at p. 28 (emphasis added). Defendants' own expert witness,
stated in an affidavit that he believes Dead Hand Provisions are not fatal
to acquisition transactions precisely because "WHEN [CONTINUING DIRECTORS]
BOARDS DETERMINE that an offer is in the best interests of the corporation
and its shareholders, they will approve it." Affidavit of Jerry Margotta,
PARA 19 (emphasis added). No matter how good or evil the intentions behind
the Dead Hand Provision, the law is clear: a board cannot act to block the
shareholders from electing a new board that has the ability to redeem or
amend the Poison Pill to allow the Offer to be fairly considered.
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<PAGE>
b. The Dead Hand Provision Must be Invalidated Under the
Unocal Case Because It Is Preclusive and Coercive.
In the leading case dealing with defensive measures taken by boards of
directors, UNOCAL V. MESA PETROLEUM CO., 493 A.2d 946, 954 (Del. 1985), the
Delaware Supreme Court mandated enhanced judicial scrutiny of directors'
adoption and use of anti-takeover devices because of the "omnipresent
specter" that a board may be acting primarily for entrenchment purposes
rather than in the best interests of the shareholders.
UNOCAL sets forth a two-part test by which Delaware courts evaluate
board action regarding anti-takeover devices and other defensive measures.
The first prong places the burden on the board to demonstrate that, after a
reasonable investigation, it made a good faith determination that the
bidder's offer posed a "threat" to corporate policy. If the first prong is
satisfied, the board must then establish that its defensive maneuvers were
"proportional" to the threat presented by the proposed transaction. If
both parts of the UNOCAL test are satisfied, then the board's actions will
be reviewed under the deferential business judgment rule. Id.
The recent case of UNITRIN, 651 A.2d 1361, further refined the Unocal
test. The UNITRIN court reiterated the concerns expressed in Unocal
regarding the threat that in adopting defensive measures, the board may be
acting primarily out of a desire to perpetuate themselves in office. ID.
at 1387. The court also reiterated the importance of safeguarding the
viability of proxy contests from
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<PAGE>
defensive measures adopted by and incumbent board as expressed in MORAN.
ID. at 1388. In addressing the UNOCAL test, the UNITRIN court stated that
defensive measures which are either "preclusive" or "coercive" fail the
second prong of the UNOCAL analysis because they are not "proportional" to
the threat posed by the proposed change in control and are therefore not
within the required "range of reasonableness". ID. at 1387-88. A
defensive measure is "preclusive" if it deprives "the stockholders of their
rights to receive tender offers [or] fundamentally restrict[s] proxy
contests." ID. A defensive measure is "coercive" if it is "aimed at
'cramming down' on . . . shareholders a management-sponsored alternative."
ID.
Here, the Dead Hand Provision is both preclusive and coercive: it
deprives the shareholders of a fair chance to consider Invacare's Offer,
and leaves them little alternative but to accept the status quo. Thus, it
fails the UNOCAL and UNITRIN tests. The Dead Hand Provision is preclusive
because it makes a proxy contest to replace the incumbent board futile and
thereby precludes any unsolicited tender offer or merger and acquisition
transactions not favored by incumbent management. Carney Aff. at PARA 33.
Unlike standard poison pills -- which are not preclusive of such
transactions because the bidder can always mount a proxy contest to elect
new directors who will redeem the poison pill (SEE UNITRIN, 651 A.2d at
1387) -- the Dead Hand Provision eliminates this vital alternative.
Therefore, until the Poison Pill plan expires in 2005, the Dead Hand
Provision locks in the Poison Pill obstacle to
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any transaction not favored by incumbent management. SEE Carney Aff., PARA 17.
The Dead Hand Provision also fails the UNOCAL and UNITRIN tests
because it is coercive. The Dead Hand Provision coerces shareholders to
keep incumbent management in place since a new board would be powerless to
remove the Poison Pill obstacle to transaction with Invacare. ID., PARA 33.
Therefore, management will have succeeded in coercively "'cramming down' on
its shareholders a management-sponsored alternative. . ." in violation of their
fiduciary duties. SEE UNITRIN, 651 A.2d at 1387.
In short, even assuming that a fully-financed, non-coercive, all-cash
premium tender offer is a threat, it is clear as a matter of law that the
Dead Hand Provision is a grossly disproportionate response and thus fails
the UNOCAL test.
F. Plaintiffs Meet The Other Requirements For Injunctive Relief.
1. Unless the Dead Hand Provision is invalidated, Invacare and
Healthdyne's other shareholders will be irreparably harmed.
In the BANK OF NEW YORK case, where a Dead Hand Provision was struck
down under New York law, the court had no difficulty in concluding that the
requirements for a preliminary injunction had been met:
If the amendment is invalid, its presence is
likely to taint the electoral process which a
subsequent invalidation by this court will not
cure.
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In this case, a preliminary adjudication in
advance of the shareholders' meeting appears to be
the more sensible way to proceed. The harm
threatened here is to the corporate electoral
process, a process which carries with it the right
of shareholders to a meaningful exercise of their
voting franchise and to a fair proxy contest with
an informed electorate.
In addition, where a provision is illegally adopted in
conflict with the statutory law, an injunction is
appropriate regardless of the extent of the harm. . . . the
balance of the equities favors the resolution of the instant
dispute prior to the election. If [the dead hand provision]
is valid, defendants are not harmed by a resolution at this
stage; however, if invalid, plaintiff, as stated above, may
be irreparably harmed.
528 N.Y.S.2d at 484 (citations omitted). This reasoning is directly
applicable to Invacare's motion.
Courts routinely recognize that a party barred from a tender offer
will suffer irreparable injury because of the loss of an opportunity that
will never recur. SEE DYNAMICS CORP. OF AMERICA V. CTS CORP., 794 F.2d
250, 252 (7th Cir. 1986), REV'D ON OTHER GROUNDS, 481 U.S. 69 (1987) ("[i]f
the tender offer is blocked, [the offeror] will lose an opportunity that
may never recur"); ASARCO INC. V. M.R.H. HOLMES A COURT, 611 F. Supp. 468,
480 (D.N.J. 1985) ("[Plaintiffs'] opportunity to make a tender offer will
be limited by an unlawful device and correspondingly the opportunity of
other shareholders to receive a tender offer will be impaired. All this
constitutes irreparable harm"); PRIME COMPUTER, INC. V. ALLEN, Case No.
9557, 1988 WL 5277 (Del. Ch. Jan 25, 1988)
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<PAGE>
(enjoining bylaw which interfered with shareholder franchise and explaining
that any infringement of "the exercise of the franchise is itself an injury
- -- not reasonably compensable with damages"), AFF'D, 540 A.2d 417 (Del.
1988); NEWELL CO. V. CONNOLLY, 624 F. Supp. 126, 128 (D. Mass. 1985) (The
opportunity to acquire a company "is a valuable right, the loss of which
constitutes irreparable harm."); MINSTAR ACQUIRING CORP. V. AMF, INC., 621
F. Supp. 1252 (S.D.N.Y. 1985) (plaintiff will suffer irreparable harm if
its tender offer is defeated due to illegal defensive tactics); TYSON
FOODS, INC. V. MCREYNOLDS, 865 F.2d 99, 103 (6th Cir. 1989); TRECO, INC.
V. LAND OF LINCOLN SAVINGS AND LOAN, 572 F. Supp. 1447, 1450 (N.D. Ill.
1983) (same).
Plaintiffs unquestionably will suffer irreparable injury if an
injunction against the Dead Hand Provision is not issued; the threat of a
locked in Poison Pill making an acquisition of Healthdyne prohibitively
expensive will deprive Plaintiffs of the opportunity to complete their
tender offer and acquire Healthdyne by asking the shareholders to replace
the incumbent board. Counterclaim, PARA 6; Miklich Aff., PARA 4; Fulford
May 13 Aff., PARAPARA 6-7; Harnett May 14 Aff., PARA 9. Plaintiffs have
clearly established through expert affidavits that Healthdyne's Dead Hand
Provision will obstruct Plaintiffs' tender offer by prohibiting a new Board
- -- even if elected by an overwhelming majority of shareholders -- from ever
redeeming or amending Healthdyne's Poison Pill. Fulford May 13 Aff., PARA
8; Carney Aff., PARA 46.
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<PAGE>
In addition, the Dead Hand Provision will cause irreparable harm
because of its coercive effect on the voting rights of Healthdyne's
shareholders. Expert affidavits establish that because the Dead Hand
Provision prohibits a new board from removing the Poison Pill obstacle to a
transaction with Invacare (or any other acquiror), shareholders who favor a
transaction would have a perverse incentive to vote for the incumbent
directors since a new board would be powerless to redeem or amend the
rights. SEE Harnett May 14 Aff., PARA 8; Carney Aff., PARA 33. This
interference with the free exercise of the shareholders' voting franchise
constitutes irreparable harm. "[T]he denial or frustration of the right of
shareholders to vote their shares or obtain representation on the board of
directors amounts to an irreparable injury." SHOEN V. AMERCO, 885 F. Supp.
1332, 1352 (D. Nev. 1994), MOD., No. 94-0475, 1994 WL 904199 (D. Nev.
Oct. 24, 1994) and VACATED AFTER SETTLEMENT, (D. Nev. Feb. 9, 1995). SEE
ALSO INT'L BANKNOTE CO. V. MULLER, 713 F. Supp. 612, 623 (S.D.N.Y. 1989);
OCILLA INDUS. V. KATZ, 677 F. Supp. 1291, 1301 (E.D.N.Y. 1987) ("The
disenfranchisement of shareholders poses serious risk of irreparable harm
that cannot be measured in monetary damages.")(9)
Damages for all of these losses are incapable of precise calculation,
and, in any event, could not compensate Plaintiffs for
- ----------------------
(8) SEE ALSO APRAHAMIAN, 531 A.2d at 1208 (irreparable
harm is presumed where director action "may well defeat the efforts of
Plaintiffs [in a proxy contest] and the will of a majority of the
stockholders").
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<PAGE>
the unique loss they would suffer. Miklich Aff., PARA 4. Plaintiffs
therefore have no adequate remedy at law.
2. The balance of the hardships and the public interest favors
an injunction.
Plaintiffs' overwhelming showing of a likelihood of success on their
claim that the Dead Hand Provision violates the GBCC and the Director
Defendants' fiduciary duties is sufficient reason alone to grant the
requested relief, regardless of the balance of hardships. It is
well-established that the stronger the showing of a likelihood of success,
the less the balance of hardships must favor issuance of the injunction.
ABBOTT LABS. V. MEADE JOHNSON & CO., 971 F.2d 6, 12 (7th Cir. 1992) (the
greater the likelihood of success, the less strong the balance of harms
need be in plaintiff's favor to support injunctive relief); FLORIDA MEDICAL
ASS'N V. HEW, 601 F.2d 199, 203 n.2 (5th Cir. 1979); Collins & Co., 476 F.
Supp. at 409.
Nonetheless, the balance of hardships caused by the Dead Hand
Provision tips decidedly in Invacare's favor. Absent the injunction, the
Dead Hand Provision will cause Invacare to lose the opportunity to acquire
Healthdyne by asking the shareholders to replace the incumbent board, and
will coerce shareholders who support a transaction with Invacare to
re-elect the incumbent board. The harm to Plaintiffs if this motion is
denied -- the obstruction of their Offer and the preclusion of any fair
shareholder consideration of that Offer -- more than outweighs the harm, if
any, to Defendants. The requested injunction simply would permit
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Healthdyne's shareholders to decide the question of who should be elected
to Healthdyne's board free of the coercive effect of the Dead Hand
Provision. Defendants will still have every opportunity to present their
case to the shareholders in the proxy fight, and thus will suffer no harm
in connection with the proxy contest. APRAHAMIAN, 532 A.2d at 1208. The
incumbent directors have no vested right to continue to serve as directors
and therefore will suffer no cognizable harm if ousted by the shareholders.
Finally, the public interest clearly favors an injunction. Georgia
law embodies a public interest in protecting the voting rights of
shareholders -- the owners -- of Georgia corporations. Healthdyne has over
7,500 beneficial owners. Harnett May 14 Aff., PARA 5. Allowing
Healthdyne's directors to permanently entrench themselves and block
consideration of all offers -- regardless of value or the shareholders'
desire -- defeats the public shareholders' statutory right as owners to
make their own informed decisions about the future management of their
corporation. See O.C.G.A. Sections 14-2-801, 803. The Dead Hand Provision
serves only to entrench incumbent management; impermissibly burden the
voting rights of the shareholders; and irreparably injure the shareholders
by impeding them from considering Invacare's Offer and selling their shares
for a premium price. SEE Carney Aff., PARAPARA 44-46.
III. CONCLUSION
Healthdyne's Directors have every right to recommend that the
shareholders not accept Invacare's Offer. However, the Director
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Defendants have no right to preclude Healthdyne's shareholders from
electing directors who would recommend the Offer. This Court should clear
a path for the shareholders to decide for themselves whether to accept or
reject Invacare's Offer by declaring that the Dead Hand Provision in
Healthdyne's shareholder rights plan is invalid, illegal and unenforceable;
and issuing an injunction directing the Director Defendants to amend the
shareholder rights plan to remove any such provision.
Dated: May 16, 1997.
KING & SPALDING
/s/ Michael R. Smith
---------------------------------------
M. Robert Thornton
Georgia Bar No. 710475
Michael R. Smith
Georgia Bar No. 661689
David J. Onorato
Georgia Bar No. 553826
191 Peachtree Street, N.E. Attorneys for Plaintiffs
Atlanta, Georgia 30303 Invacare Corporation and I.H.H.
Telephone: (404) 572-4600 Corp.
Facsimile: (404) 572-5100
Of Counsel:
SIMPSON THACHER & BARTLETT
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
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