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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 24, 2000
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RIDGEWOOD HOTELS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-14019 58-1656330
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(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION
INCORPORATION) NUMBER)
2859 PACES FERRY ROAD, SUITE 700, ATLANTA, GEORGIA 30339
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 434-3670
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Item 5. Other Events.
(a) The Board of Directors on February 4, 2000 decided to postpone
the Registrant's Annual Meeting of Stockholders, previously
scheduled for February 15, 2000. It is anticipated that the
meeting will take place in late May, with the specific date
and time to be announced.
(b) On January 24, 2000, the Court of the Chancery of the State of
Delaware, New Castle County, issued an opinion in Strassburger
v. Earley, et al., C.A. No. 1427, a copy of which is attached
as Exhibit 1.
On February 7, 2000, defendants Michael M. Earley, John C.
Stiska and Triton Group, Ltd. (collectively the "Triton
Defendants") filed a Motion of Triton Defendants for a New
Trial in this matter. A copy of the motion filed by the Triton
Defendants is attached as Exhibit 2.
On February 8, 2000, defendant Russell Walden filed a Motion
for a New Trial or, In the Alternative, to Reopen the Record
to Allow for the Introduction of Newly Discovered Evidence. A
copy of the motion filed by Mr. Walden is attached as
Exhibit 3.
Item 7. Financial Statements and Exhibits.
(c) Exhibits. The following is a list of the Exhibits attached
hereto:
Exhibit #1: Opinion of the Court of the Chancery of the State of
Delaware, New Castle County, in Strassburger v. Earley, et al., C.A.
1427
Exhibit #2: Motion of Triton Defendants for a New Trial in
Strassburger v. Early, et al.
Exhibit #3: Motion for a New Trial of, In the Alternative, to Reopen
the Record to Allow for the Introduction of Newly Discovered Evidence
in Strassburger v. Early, et al.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIDGEWOOD HOTELS, INC.
By: /s/ Henk H. Evers
-------------------------------------
Henk H. Evers
President
Dated as of February 11, 2000
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EXHIBIT 1
*REVISIONS ARE TO PAGES 6, 10,
37, 40, 42, 45, 46, 52 AND 54
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
WILLIAM M. STRASSBURGER, :
:
Plaintiff, :
:
v. : C.A No. 14267
:
MICHAEL M. EARLEY, LUTHER A. :
HENDERSON, JOHN C. STISKA, :
N. RUSSELL WALDEN, and :
TRITON GROUP, LTD., a :
Delaware corporation, :
:
Defendants, :
:
and :
:
RIDGEWOOD PROPERTIES, INC., :
a Delaware corporation, :
:
Nominal Defendant. :
O P I N I O N
Date Submitted: September 24, 1999
Date Issued: January 24, 2000
DATED REVISED: JANUARY 27, 2000*
Craig B. Smith and Charles E. Butler, Esquires, of SMITH, KATZENSTEIN & FURLOW
LLP, Wilmington, Delaware; Attorneys for Plaintiff
Stephen E. Jenkins, Esquire of ASHBY & GEDDES, Wilmington, Delaware; Phillip S.
McKinney, Esquire, or ROGERS & HARDIN, Atlanta, Georgia; Attorneys for
Defendant Luther Henderson and Nominal Defendant Ridgewood Properties, Inc.
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John T. Dorsey, Esquire, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware;
Attorneys for Defendant N. Russ Walden
Michael D. Goldman, James F. Burnett and Matthew E. Fischer, Esquires, of
POTTER, ANDERSON & CORROON LLP, Wilmington, Delaware; Attorneys for Defendants
Michael M. Earley, John C. Stiska and Triton Group, Inc.
JACOBS, VICE CHANCELLOR
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In August, 1994, at a time when it was desperately short of cash,
Ridgewood Properties, Inc., a Delaware corporation ("Ridgewood" or "the
Company") repurchased 83% of its outstanding common stock from its two largest
stockholders -- Triton Group, Ltd. ("Triton") and Hesperus Limited Partners
("Hesperus"). To finance those repurchases, Ridgewood had to sell its principal
operating assets. At issue in this post-trial Opinion is whether those
repurchases constituted a breach of the fiduciary duty of loyalty owed by
Ridgewood's board of directors to the Company and its minority stockholders.
The plaintiff, who is a Ridgewood stockholder suing derivatively,(1)
claims that the repurchases constituted a breach of fiduciary duty because they
had no purpose other than to benefit one person -- N. Russell Walden ("Walden")
- -- Ridgewood's President, a director, and the Company's third large stockholder
- -- by increasing Walden's stock ownership interest from 6.9% to a 55% position
of absolute majority control. The plaintiff also claims that those transactions
were highly unfair to Ridgewood's remaining stockholders and also a waste of
corporate assets.
The case was tried on April 19-21, 1999. This is the Court's
post-trial
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(1) All counts of the complaint except one were derivative; the
remaining Count purported to assert a class action claim. A class was
certified, but the Court later granted the defendants' motion to dismiss the
class action count, leaving only the derivative claims.
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Opinion on the merits. For the reasons discussed below, the Court finds that
the repurchase transactions constituted breaches of fiduciary duty owed by the
directors to Ridgewood's minority shareholders, and that therefore, the
plaintiffs have established their entitlement to relief.
I. THE FACTS(2)
A. THE PARTIES
Ridgewood is a small publicly-held real estate company that was formed
in 1985 by a stock spin off of certain real estate interests of Pier 1, Inc.
("Pier 1"). At the time of the spin off, Intermark, Inc., Triton's corporate
predecessor, held 48% of Pier 1's stock. After the spin off, Intermark
(Triton)(3) ended up as Ridgewood's controlling stockholder. Share repurchases
that Ridgewood conducted between 1985 and 1992 enlarged Triton's stock
ownership to a 74.4% controlling interest.
Following the 1985 spin off, Walden became Ridgewood's President and a
member of its board of directors, and has served in both capacities ever since.
As of August 1994, the time of the challenged repurchase transactions,
Ridgewood's
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(2) Many underlying facts are undisputed, but where there are disputes
the facts are as found herein.
(3) Intermark changed its name to Triton Group, Ltd. in 1993. For ease
of reference, Intermark and Triton are referred to interchangeably as "Triton."
2
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other directors were Luther A. Henderson, Michael M. Earley and John C. Stiska,
who, together with Walden and Triton, are the defendants in this action. Earley
and Stiska were senior executives of Triton and served as Triton's designees to
the Ridgewood Board. Henderson, who was not affiliated with Triton, was a co-
founder and former Chairman and CEO of Pier 1, and had been a board member of
Ridgewood's predecessor since 1981.
As of August 1994 Ridgewood's three largest stockholders were Triton,
(which owned 74.4% of Ridgewood's outstanding shares), Hesperus (which owned
9%), and Walden (who owned 6.9%). The remaining 9.7% of Ridgewood's shares were
owned by members of the public. It is undisputed that Triton and Hesperus were
not affiliated or otherwise connected in any relevant way.
Ridgewood's business was developing and selling real estate, and its
assets consisted of raw land and "operating properties." Ridgewood would
develop vacant land and then sell it, realizing net profits only upon the
eventual sale of the developed land. After the 1985 spin off, an important
element of Ridgewood's business was to purchase partially developed mobile home
parks, complete their development (i.e., sell enough units to fill the parks),
and then sell the developed mobile home parks to an operator.
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By the beginning of 1994, many of Ridgewood's valuable real estate
assets had been sold. At that point the company had only two hotels, five
mobile parks, and several parcels of vacant land that had been for sale for
several years. Because of a scarcity of operating properties and adverse
developments in the mobile home market, Ridgewood could not sustain itself on
operating revenues alone, and had to sell its inventory of vacant land to meet
expenses.(4) In December, 1993 Ridgewood had borrowed $500,000 from Triton to
pay expenses. By February, 1994 Ridgewood's equity per share had declined to
$9.46 -- down from $10.51 in August, 1993. At that time Walden was reporting
to his fellow board members that:
Cash is a serious concern. Poor performance at the
hotels, combined with no home sales, has left us
nearly destitute. If we don't get the apartment sale
closed in early March, we may be in deep dog
droppings.(5)
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(4) As defendants explain it, although the business of developing and
selling mobile home parks was initially profitable, by the early 1990s changes
in the Florida real estate market had made it increasingly difficult to
complete the parks and operate the parks cost effectively. As a result,
defendants claim, in 1993 Ridgewood decided to exit the business.
(5) Joint Trial Exhibit ("JTX") 1 at 2.
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B. TRITON'S FINANCIAL DIFFICULTIES AND
ITS EVENTUAL DECISION TO LIQUIDATE
During the early 1990s, Ridgewood's controlling stockholder, Triton,
was also experiencing significant financial difficulty. In late 1992, Triton
filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. In the reorganization that followed, Triton merged with a
subsidiary, and the bondholders of both entities became the equity owners of
the merged company. In 1993, two months after Triton emerged from bankruptcy,
Triton sent to its stockholders a letter advising them that management no
longer believed that the company had "reason to exist indefinitely as a
publicly traded vehicle," and that Triton would attempt to return "as much real
value to our stockholders over a short period of time."(6) Triton management
(which included Stiska and Earley) further advised that Triton's plan involved
delivering value to its shareholders in the form of cash and liquid securities,
and that it would take about two years to complete.
Triton began negotiating arrangements with the managements of its more
valuable holdings over how Triton would exit those investments. At a Triton
board of directors meeting held in October 1993, Stiska advised the board that
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(6) JTX 2 at 1.
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Triton would be giving increased attention to its Ridgewood investment, from
which Triton hoped to realize $13 million to $16 million in value over the next
two years.(7) Shortly thereafter, Stiska and Earley asked Walden to prepare a
plan that would "get Triton out of Ridgewood within two years -- by liquidation,
sale or whatever."(8)
None of these developments came as a surprise to Walden, who had been
closely following Triton's financial problems for some time. Walden had every
reason to be concerned about Triton's continued majority stock investment in
Ridgewood: Walden's Ridgewood stock represented 65% of his net worth.
Furthermore, he depended on Ridgewood for his livelihood. Walden's compensation
package included a $200,000 annual salary, company-financed insurance policy and
a private club membership, a post-employment contract that would pay his salary
for a specified period, and a supplemental retirement plan that would pay him
$100,000 annually for life, plus cash bonuses. As time went on, Walden became
concerned that Triton's financial problems would cause Triton either to
liquidate Ridgewood's assets or sell its controlling interest in Ridgewood to a
"bone picker" short term investor that would liquidate Ridgewood at "fire
- ----------------------------------------
(7) JTX 3 at 7.
(8) JTX 5; Trial Transcript ("Tr.") at 313.
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sale" prices.
That concern prompted Walden to develop his own plan that would enable
Triton to exit its investment in Ridgewood yet also (in defendants' words)
protect "the long term interests of Ridgewood and its minority
stockholders."(9) As it turned out, however, the plan that Walden ultimately
negotiated, and that was eventually approved and carried out, did little to
protect or benefit any Ridgewood stockholders other than Triton, Hesperus, and
Walden.
C. THE RIDGEWOOD BOARD'S CONSIDERATION
OF ALTERNATIVES AND ITS RESPONSE TO TRITON
The eventual solution to the Triton problem was that Ridgewood
repurchased the 74.4% and 9% blocks of its stock held, respectively, by Triton
and Hesperus. The defendants claim that before adopting that solution they
considered and rejected several alternatives. Whether or not those alternatives
were in fact considered, and the reasons why they were rejected, are disputed
issues. To resolve those issues, I pause at this point to discuss the
"non-repurchase" alternatives.
The defendants claim that Walden first proposed that Triton distribute
its block of Ridgewood shares to its shareholders. That, according to Mr.
Walden,
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(9) Def. Answering Postrial Br. ("Def Br.") At 11.
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would increase the liquidity of Ridgewood's stock, which for years had not been
actively traded,(10) and would also eliminate Triton's control over Ridgewood's
destiny. According to defendants, this share distribution proposal was rejected
as unworkable because in any spin-off of Triton's Ridgewood shares, the much
larger Triton shareholder base would result in each Triton stockholder
receiving only a small number of Ridgewood shares.
This portrayal of the facts lacks persuasive support. No document of
record evidences that this proposal was in fact made (or when it was made) by
Ridgewood, or that the proposal was in fact considered and rejected by Triton.
Moreover, this "stock distribution" scenario was never mentioned during
discovery and surfaced for the first time in the defendants' trial testimony.
Also suspect is the defendants' stated reason for rejecting the share
distribution proposal. If in fact the only obstacle to a share distribution was
the small number of Ridgewood shares relative to the Triton shareholder base,
an obvious solution would have been to split the Ridgewood stock into whatever
number of shares would suffice to overcome that problem. Indeed, three months
after the
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(10) Ridgewood's stock was delisted from NASDAQ because of low trading
volume. After it was delisted, Ridgewood stock traded through the "pink
sheets." Defendants concede that at the time of the challenged transactions,
Ridgewood stock was not actively traded. Def. Br. at 9, n. 6.
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challenged repurchases closed, Ridgewood did precisely that -- in late October
1994, it effectuated a 3 for 1 stock split. No explanation is offered for why
that possible solution was never considered or proposed in late 1993. For these
reasons the defendants have not persuaded me that a share distribution was an
alternative that Ridgewood's board in fact considered or proposed.(11)
Similarly unpersuasive is the defendants claim that they also
considered liquidating Ridgewood, but that Walden rejected this alternative
because he believed a complete liquidation within a relatively short time frame
would force Ridgewood to accept "...'fire sale' prices" for many of its assets.
The only evidence cited in support of this rejected liquidation scenario is a
memorandum from Walden to Earley and Stiska, unilaterally communicating
Walden's point of view. There is no evidence that the full Ridgewood board ever
met, formally or informally, and collectively considered this alternative, and
the testimony of Earley and Henderson affirmatively shows that the board did
not.(12)
A third alternative the defendants claim to have considered was a pro
rata
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(11) The defendants concede that the Triton repurchase transaction is
subject to the entire fairness standard of review and that as a result the
defendants have the burden of persuasion. As discussed elsewhere in this
Opinion, the Court determines that the defendants must carry the burden of
proving the entire fairness of both the Triton and the Hesperus transactions.
(12) Earley testified that liquidation was never "actively proposed by
us or discussed as an alternative." JTX 56 at 82. Henderson testified that he
did not "recall that [the board] ever discussed liquidating [Ridgewood]." JTX
55 at 117.
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self-tender by Ridgewood for its own shares. That alternative does appear to
have been discussed, but whether it was formally considered by all the
directors meeting collectively as a board is not clear.(13) Be that as it may,
the evidence shows that Triton favored this form of transaction because it
would provide Triton with immediate cash yet still allow Triton to continue its
large equity participation in Ridgewood. A self-tender would, moreover, afford
liquidity to all shareholders on an equal (pro rata) basis. That alternative
was rejected, nonetheless, because in Walden's view, "such an approach ...
[would not] accomplish one of the goals that management had in mind, which was
eliminating the overhang of the 74 percent shareholder."(14)
The fourth and final alternative the Ridgewood board considered was a
cash dividend to all Ridgewood shareholders. That approach, like the self-
tender, would deliver cash to all shareholders on a pro rata basis. Triton also
favored this alternative because it would provide Triton with cash yet allow
Triton to maintain its controlling equity position in Ridgewood. This
alternative was also rejected because Walden was unwilling to approve any
transaction that did not eliminate
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(13) Although the defendants quote Earley's and Henderson's views on
that issue, they omit reference to Henderson's testimony that he did not
recall a specific discussion of this alternative with Walden, Stiska or Earley
about this subject. JTX 55 at 71-75, 79.
(14) Tr. at 257; see also, JTX 15; Tr. at 68, 210, 257, 282.
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Triton as a Ridgewood shareholder.(15) By this process of elimination Walden
and the other directors ultimately came to focus upon their final alternative
- -- a repurchase by Ridgewood of Triton's control block of Ridgewood shares.
D. EVENTS LEADING UP TO
THE STOCK REPURCHASES
1. THE SALE OF THE MOBILE HOME PARKS
From a financial perspective 1994 was the least propitious time for
Ridgewood to repurchase Triton's 74.4% control block. Ridgewood desperately
needed cash, but it lacked sufficient money to finance its own operations let
alone repurchase Triton's controlling interest. To raise cash of that
magnitude, Ridgewood would have to sell significant assets, which ultimately is
what it did. By January 1994, when Walden formally proposed a plan to "take
out" Triton for $10.2 million (approximately $7 per share), it had already
been decided that the purchase price would be raised by selling Ridgewood's
five mobile home parks. Indeed, by then Walden had received an offer from
Clayton Homes of Tennessee to buy the mobile home parks for $12.6 million.
Walden communicated his $7 per share proposal to Triton, which responded
negatively because (as Stiska and Earley told Walden) Triton wanted $12 million
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(15) JTX 56 at 60-61.
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for its Ridgewood stock. Walden told Stiska and Earley that he would not sell
Ridgewood's mobile home parks for $12.6 million, and then exhaust all but $.6
million of those proceeds to buy out Triton. By then, however, Walden knew that
to effect a repurchase of Triton's stock interest, the mobile home parks would
have to command a price higher than $12.6 million. Accordingly, the proposed
$12.6 million Clayton Homes deal soon fell by the wayside, and from January
1994 forward, Walden engaged in simultaneous efforts to sell the mobile home
parks at a higher price, and also to negotiate the repurchase of Triton's
control block of shares. By April, 1994, Walden had successfully negotiated a
sale of the mobile home parks to Sun Communities for $14.5 million -- $13
million in cash and a $1.45 million promissory note payable in two years. That
sale closed on June 16, 1994.
At trial Walden denied that the mobile home parks were sold to raise the
funds needed to finance the share repurchase.(16) In my view that denial lacks
credibility and is contrary to the weight of the evidence. In his deposition Mr.
Earley testified that Walden was willing to undertake the sale of the mobile
home parks "but at the same time only if he knew he could take out [Triton] at
$8 per
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(16) Tr. at 147.
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share."(17) And in a memorandum to his own attorneys, Walden stated that in
order to finance the stock repurchase..."[w]e set about to raise a substantial
pool of cash. That goal was accomplished by the sale of our mobile home
parks..."(18)
2. THE ISSUANCE OF STOCK OPTIONS TO WALDEN
During 1993, Walden had been granted options for 50,000 Ridgewood shares.
In January 1994 -- at the onset of his negotiations with Triton -- Walden was
granted, at his request, options for an additional 125,000 shares. Other
members of Ridgewood management received options as well. By the spring of
1994, the option grants had increased Ridgewood's total outstanding shares (on
a fully diluted basis) to 2,194,320, with Walden holding either stock or
options totaling 309,280 shares. The significance of the options -- as
plaintiff points out and defendants do not dispute -- is that if the Triton
repurchase had occurred in December, 1993 (before the January, 1994 options
were issued), Walden's ownership interest would have increased to only 33%. If
Hesperus' shares were also repurchased at that time, Walden's ownership
interest would have increased to 49.6% -- still short of an absolute majority.
But with the January stock options in place and the Hesperus shares being
repurchased as well, those combined
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(17) JTX 56 at 77.
(18) JTX 61.
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transactions would (and did) increase Walden's ownership interest to 55% -- a
position of absolute control.
3. THE HESPERUS REPURCHASE OPPORTUNITY
While Walden was negotiating to sell the mobile homes to Sun Communities,
Peter Foreman of Harrison Associates (which was the managing partner of
Hesperus) learned of Ridgewood's plans to buy out Triton. Foreman wanted
Ridgewood to repurchase Hesperus's 9% stock interest as well. Foreman had
previously expressed his interest in a buyout to Walden in 1993, but at that
time Walden was not interested. Now, however, when Foreman expressed interest
again in the spring of 1994, Walden was very receptive. He began negotiating
with Foreman (while also negotiating with Triton) for Ridgewood to buy back
Hesperus's stock interest.
The prospect of repurchasing Triton's shares influenced Walden's
negotiating strategy for the sale of the mobile parks to Sun Communities.
Initially, Sun Communities wanted Ridgewood to accept (in addition to cash) a
promissory note of $2.5 million. Walden was able to negotiate that amount down
to $1.45 million. That was no coincidence. Based on his earlier discussions
with Foreman, Walden believed that Hesperus might accept a Sun Communities
promissory note for $1.45 million as part of the consideration to repurchase
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Hesperus's Ridgewood stock at $8 per share. Walden's intuition was correct: on
May 11, 1994 Walden proposed those terms to Hesperus, and after some bargaining
and modifications of repurchase terms, Hesperus agreed to the proposal on or
about May 15, 1994.(19)
At the trial Walden testified that the concurrent repurchase of the
Hesperus and the Triton Ridgewood stock was coincidental. The defendants insist
that as long as Hesperus was willing to accept the Sun Communities note for its
shares, Ridgewood would have repurchased the Hesperus 9% block regardless of
what happened with Triton. The reason was Walden's belief that the Hesperus
block could be bought at a favorable price well below its book value, using
non-cash consideration.
It is true that the Hesperus block was available for repurchase at a
favorable price, but the claim that the Hesperus repurchase was independent of
and unrelated to the Triton transaction defies credulity. The only evidence
supporting the defendants' effort to "decouple" these two repurchases is
Walden's
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(19) To induce Hesperus to accept the Sun Communities promissory note
as part of the consideration, Walden agreed to have Ridgewood pay the interest
on the note for the first year. (The note carried interest only for the second
year.) Walden also agreed to allow Hesperus to "put" the note to Ridgewood in
the event of a default by Sun. JTX 62 at 27-30; JTX 18; Tr. at 173. In effect,
Ridgewood would become the guarantor of the note, and would also pay an
additional one year's interest that would not otherwise be payable.
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uncorroborated testimony, but the weight of the credible (non self-serving)
evidence points to the opposite conclusion. The opportunity for the Company to
repurchase Hesperus's Ridgewood stock had been presented the year before. At
that time, Walden could have pursued an equally valuable below-book-value
purchase price but chose not to do so. Only when forced to deal with the
"Triton issue" did the Hesperus opportunity suddenly become attractive. Mr.
Foreman, who was the only other person in a position to know of Walden's motive
and who had no stake in the outcome of this case, expressed the following view
about Walden's motive:
A. Well, I think there is no question he wanted to buy Triton out. My
only, the only reason he would want to buy them out is to protect his
position.
Q. Okay. So there came a time when you began to discuss the purchase,
buying you out?
A. Well, you see, if he buys Triton out, I own around 10 percent, all of
a sudden I'm his boss.
Q. Okay.
A. Because I don't remember how much Triton owned, but my percentage goes
up proportionately if theirs comes down, and so his, I think, view
was to get us both out.(20)
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(20) JTX 62 at 20-21.
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I find that the Triton and Hesperus repurchases, which closed within two
weeks of each other and were financed from the same source, were not
coincidental. They were inextricably connected parts of a single transaction.
4. NEGOTIATION OF THE FINAL TERMS
OF THE MOBILE HOME PARKS AND
OF THE REPURCHASE TRANSACTIONS
On May 12, 1994, Walden wrote Stiska and Early, proposing that Ridgewood
repurchase the blocks of its stock held by Triton and Hesperus. In those
transactions, (1) Hesperus would receive the Sun Communities promissory note
and (2) Triton would receive approximately $8 per share cash for slightly over
1 million of its Ridgewood shares, plus preferred stock for its remaining
450,000 shares.
Over the next three months Walden negotiated with representatives of Triton
to arrive at a mutually agreeable transaction terms. Ultimately, those parties
negotiated a stock repurchase agreement whereby Triton sold its 1,455,280 shares
to Ridgewood for (a) $8,042,240 cash plus (b) 450,000 shares of Ridgewood Series
A Convertible Preferred Stock. The Preferred Stock was non-voting, would have
an $8 redemption price, and would be convertible into common stock after two
years. The Preferred Stock would also pay dividends at the annual rate of 5% (a
total of $180,000 per year) for the first two years, and at
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10% (a total of $360,000 per year) for each year thereafter.
During this same time period Walden and Hesperus also negotiated their
agreement for Hesperus to sell its 179,880 Ridgewood shares to Ridgewood in
exchange for the $1.45 million Sun Communities promissory note. Although the
Sun Communities note did not pay interest for the first year, Ridgewood agreed
to pay interest for that year at the prime rate. Ridgewood also agreed to give
Hesperus a "put right" whereby Hesperus could require Ridgewood to repurchase
the note if Sun Communities defaulted on the obligation.
These two repurchases closed on August 15 and August 29, 1994,
respectively. They affected the relevant "players" in different ways, as
follows:
Ridgewood: As a result of buying out its two largest stockholders,
Ridgewood had repurchased (and retired) almost 84% of its stock. To accomplish
that, Ridgewood had to sell its primary business, leaving the Company with (as
operating properties) only two hotels plus several parcels of vacant land that
for many years had been for sale. Ridgewood also had approximately $5 million in
cash left over from the mobile home park sale, but those monies had to be used
to pay down pre-existing debt (including $500,000 borrowed from Triton), as well
as newly-created obligations. Ridgewood had now become obligated (a) to Hesperus
on its financial guarantee of the $1.45 million Sun Communities note (including
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the first year of interest), and (b) to Triton for $180,000 of annual dividends
on the Preferred Stock during the first two years and $360,000 annually
thereafter.
Ridgewood's Shareholders Other Than Walden: The repurchases enabled
Triton and Hesperus (Ridgewood's two largest shareholders who together held
almost 84% of its stock) to exit their investments for $8 per share. Also,
Triton has received its Preferred Stock dividends, which total over $1 million
since 1994.
The Ridgewood stockholders whose shares were not repurchased remained
holders of an illiquid minority interest. Although the below-book-value
repurchase price did cause the book value of the remaining stock to increase by
over $2 per share, the minority shareholders received no other benefit
(including any liquidity benefit) from those transactions.
Walden: The repurchases benefited Walden in a way significantly
different from all other post-repurchase Ridgewood shareholders. As a result of
the repurchases -- accomplished with no personal financial investment by Walden
- -- his 6.9% stock interest (including stock options) became enlarged to 55%.
That position of absolute control carried with it the unique right to a premium
if the controlling interest were later sold. Further, no one would be able to
dislodge Ridgewood's new controlling shareholder from his position as
Ridgewood's President or from his contractual entitlement to receive salaries,
bonuses, and
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other compensation worth hundreds of thousands of dollars per year.(21)
5. FORMATION OF THE ONE
MAN SPECIAL COMMITTEE
Recognizing that three of Ridgewood's four directors had conflicts of
interest in relation to the proposed Triton repurchase,(22) the Ridgewood board
formed a special committee authorized "to act with the full power and authority
of the Board and to determine the advisability and feasibility of the Proposed
Purchase [of Triton's Ridgewood shares]."(23) As the only unconflicted member of
the Ridgewood board, Henderson was appointed as an independent committee of one
on July 28, 1994. Both sides agree that Henderson was independent, unconflicted,
and an astute businessman, having founded several companies (including Pier 1)
and having served as a director of Ridgewood since its creation.
Henderson did not negotiate the Triton transaction, but as a Ridgewood
director he had been kept informed of the status of the Triton negotiations.
Between July 28 and August 13, 1994, Henderson reviewed the proposed
- ------------
(21) Since the 1994 repurchases, Walden has received approximately $1
million in salary, apart from other compensation components. Tr. at 187.
(22) Walden's percentage ownership of the outstanding shares would
increase to 42% after the Triton repurchase, without regard to the Hesperus
buy-back. If the Hesperus transaction were included, Walden's percentage
ownership would increase to 55%.
(23) JTX 39 at 3.
20
<PAGE> 23
transaction, including the terms of the Preferred Stock. He concluded that the
Triton repurchase was in the best interests of Ridgewood and its minority
stockholders, and on August 14, 1994, executed a written consent approving the
repurchase. At trial Henderson testified that he approved the transaction
because it would eliminate the controlling stockholder who "clearly wanted out"
and whose presence would interfere with the company's "long term progress."(24)
The infirmity in Henderson's independent committee role is that he was
not asked to, and therefore did not, consider all information highly relevant to
his assignment. Although the Hesperus repurchase would occur more or less
contemporaneously with the Triton repurchase, and although both transactions
(plus the sale of the mobile home parks) had been negotiated during the same
period as part of a single package, Henderson was not asked to (and did not)
consider the effect of the Hesperus transaction upon Ridgewood's minority
shareholders. That omission was significant, because the incremental effect of
the Hesperus repurchase would be to shift corporate control from Triton to
Walden. That shift posed potential problems of fairness to the minority
stockholders that Henderson would have had to confront, had he considered the
issue and been
- ------------
(24) Tr. at 209-10.
21
<PAGE> 24
advised by independent legal counsel or even an experienced investment banking
firm. But Mr. Henderson did not retain legal counsel, and he specifically
decided not to engage an investment bank, because in his view it was not worth
incurring significant financial expense to be told "something we already
knew."(25)
It further appears that Mr. Henderson was not provided accurate
information about the trading price of Ridgewood's stock. Mr. Henderson
testified that Walden told him that the sporadic trading in Ridgewood stock had
been in the range of $8 per share. In fact, the last recorded trading price was
$3 per share.(26) That error was significant because Henderson testified that if
Ridgewood had paid Triton more than the market price for its own stock, it would
have been "unfair to the company to overpay certain shareholders at the expense
of others."(27)
II. THE CONTENTIONS AND ISSUES
A. THE CONTENTIONS
The following summary of the parties' respective contentions is
abbreviated. A more detailed recital is set forth in the analysis of the
plaintiff's claims in Part III, infra of this Opinion.
- ------------
(25) Tr. at 109.
(26) JTX 55 at 144; JTX 8; JTX 58 at 77-78.
(27) JTX 55 at 143.
22
<PAGE> 25
The plaintiff seeks the invalidation of the Triton and Hesperus stock
repurchases on the ground that they constituted three distinct breaches of the
Ridgewood directors' fiduciary duty of loyalty. The first claim is that because
the two repurchases were components of a unitary transaction approved by
self-interested directors, those directors must carry the burden of
demonstrating that the transaction was entirely fair to Ridgewood and its
minority public stockholders. The plaintiff contends that the directors have not
carried that burden, as the evidence shows that the repurchases were the product
of unfair dealing and an unfair purchase price. The second fiduciary claim is
that the share repurchases constituted an improper expenditure of corporate
funds for the purpose of placing and perpetuating Walden in a position of
corporate control. The third claim is that the repurchases were a waste of
corporate assets.
To remedy these breaches of duty, the plaintiff seeks rescission and
rescissory damages. Specifically, the plaintiff asks the Court to rescind the
Triton repurchase transaction by (a) directing Triton to return to Ridgewood the
$8,042,420 cash plus the Preferred Stock (and all dividends paid thereon) that
Triton received for its 74.4% interest; and (b) in exchange, directing Ridgewood
to convey back to Triton the repurchased Ridgewood shares.
The plaintiff concedes that the Hesperus transaction cannot be
rescinded
23
<PAGE> 26
because Hesperus is not a party to this action and is not charged with
wrongdoing. Therefore, the plaintiff seeks rescissory damages against the
parties who he claims did commit actionable wrongdoing, namely, Ridgewood's
directors. Specifically, plaintiff requests a money judgment in Ridgewood's
favor against the directors for the $1,450,000 Hesperus repurchase price, plus
interest.(28)
* * *
The defendants assiduously dispute these claims, and resist the relief
that plaintiff seeks.
First, the defendants argue that the plaintiff's entire fairness claim
lacks merit for the following reasons:
- Although defendants concede that the Triton repurchase is
subject to entire fairness review, they contend that the
plaintiff has the burden of proving the Triton transaction was
unfair because that transaction was the result of vigorous
arms-length bargaining and was approved by a disinterested and
independent committee. On the other hand, defendants argue
that the Hesperus repurchase must be reviewed under the
business judgment standard, because the two transactions were
unrelated except for having occurred (coincidentally) within
the same time period.
- ------------
(28) Plaintiff suggests that in exchange for being required to pay
rescissory damages, the directors "may individually receive the Hesperus shares
in return or the Court may order those shares to remain in the Company as
treasury stock, as equity dictates." Pl. Opening Postrial Br. at 44.
24
<PAGE> 27
- The defendants next argue that the plaintiff failed to prove
that the Triton repurchase involved unfair dealing, because
the negotiation process replicated true, arms-length
bargaining and the repurchase was fair in terms of initiation,
timing and structure. Nor, defendants argue, has the plaintiff
proved that the Triton repurchase price was unfair. As a
result of the Triton (and Hesperus) repurchase, book value per
share increased. Moreover, the defendants' expert, Chris
Battel of Legacy Securities, testified that under conventional
valuation methods $8 per share was a fair price for the
Ridgewood stock, particularly because a control premium had to
be paid. Battel's valuation is the only record evidence of
Ridgewood's value, since the plaintiff offered no evidence
that supports a different fair value.
- Lastly, the defendants urge that the plaintiff's challenge to
the Hesperus transaction must be reviewed under the business
judgment standard, and therefore must fail, because in
approving that transaction the directors acted in good faith
and were not motivated to entrench Walden in control. Rather,
they were taking advantage of a unique opportunity for the
company to repurchase a block of its shares at a highly
favorable price.(29)
Second, the defendants contend that the plaintiff's "entrenchment-
motivated repurchase" claim lacks merit, because Walden pursued the two
repurchases not to acquire corporate control, but because he believed the
transactions would serve the best interests of Ridgewood and its minority
stockholders. Defendant concede
- ------------
(29) The defendants argue, in the alternative, that even if the Triton
and Hesperus repurchases are viewed as a unitary transaction, they (the
defendants) have established that both repurchases were entirely fair both as to
process and price.
25
<PAGE> 28
that the repurchases significantly increased Walden's proportionate ownership of
the company, but argue that that was the transactions' effect, not their intent.
Walden's ownership increase, they say, does not prove a motive to gain control
and the record evidence independently negates any such motive. Moreover, the
remaining stockholders' ownership interest increased in the same proportion.
Third, the defendants deny that the repurchases amounted to corporate
waste. Not only did Walden engage in vigorous arms length bargaining with Triton
and Hesperus over the repurchase terms, but also the resulting $8 per share
repurchase price ($2.65 on a fully diluted basis) was highly favorable to
Ridgewood. The only independent evidence of Ridgewood's intrinsic or fair value
in August 1994 was the valuation performed by Legacy's Mr. Battel, who based his
analysis upon the number of outstanding shares at the end of August, 1994,
adjusted for the 3:1 stock split that occurred in October, 1994.(30) Battel
testified that Ridgewood's value was $6.06 to $8.93 per share, using a
comparable companies method, was $4.29 per share using a comparable transaction
approach, and was $3 to $3.48 per share using a discounted cash flow analysis.
These valuations all compared favorably with the $2.65 per share (fully diluted
basis)
- ------------
(30) That approach was employed to maintain consistency with
Ridgewood's annual report, which adjusted all per-share information to reflect
the post-repurchase stock split.
26
<PAGE> 29
purchase price that Ridgewood actually paid, and plaintiff introduced no
valuation evidence to show the contrary.
Fourth, the defendants argue that none of the relief that plaintiff
seeks is legally or equitably warranted.
B. THE ISSUES
These contentions frame five issues, which are:
1) Does the entire fairness standard of review govern both repurchase
transactions or only the Triton repurchase?
2) Assuming that both transactions are reviewable under the entire
fairness standard, are they invalid because the defendants failed to prove that
they were entirely fair to Ridgewood and its minority stockholders?
3) Are the repurchases invalid on the separate ground that their
primary or sole purpose was to entrench Mr. Walden in a position of control?
4) Are the repurchases invalid on the separate ground that they
constituted corporate waste?
5) If the transactions are invalid, should rescission and/or rescissory
damages be awarded, and if not, what remedy is appropriate?
I turn to these issues.
27
<PAGE> 30
III. ANALYSIS
A. THE STANDARD OF REVIEW
The parties' first dispute concerns the appropriate standard of review.
The defendants admit that in connection with the Triton repurchase, three of
Ridgewood's four directors had a conflict of interest, and that therefore the
Triton transaction must be scrutinized under the entire fairness standard. Under
that exacting standard, where the controlling shareholder and the directors
stand on both sides of the transaction, they bear the burden to demonstrate that
the transaction was entirely fair to the corporation and the minority
stockholders, both as to process and price.(31)
The defendants argue, however, that the entire fairness standard does
not govern the Hesperus repurchase. Because that transaction was separate and
unrelated, defendants claim that it must be reviewed under the business judgment
standard. Moreover, defendants say, even though the Triton repurchase is subject
to entire fairness review, the burden of proof does not rest upon them, but
shifts to the plaintiff, to show the transactions were unfair. The reason,
defendants argue, is that the Triton transaction was the product of arms length
negotiation, and
- -------------
(31) Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701, 703 (1983);
Kahn v. Lynch Communications Sys. Inc., Del. Supr., 638 A.2d 1110, 1115 (1994).
28
<PAGE> 31
Triton did not set the terms of the transaction or cause its effectuation.
In my view, the defendants are wrong on both counts. As discussed on
pages 15-17, supra, the overwhelming weight of credible evidence shows that the
two repurchases and the sale of the mobile home were components of a single,
unified package.(32) Because the Triton repurchase is concededly subject to
entire fairness review, it follows that the Hesperus transaction -- which was
inextricably linked to it -- is also.
Nor is there merit to the defendants' argument that the burden of
persuasion must shift to the plaintiff. I agree, as a doctrinal matter, that
where the terms of a conflict transaction (specifically, a parent-subsidiary
merger) result from a process structured to replicate arm's-length negotiations,
the burden of proof will shift from the defendants to the plaintiff shareholder,
who must prove that the transaction is unfair. But that burden-shifting result
obtains only where minority stockholders effectively ratify the transaction or
where a committee of disinterested, independent directors effectively represents
the interests of the minority stockholders in the negotiations.(33) That did not
occur here.
- -----------------
(32) As Mr. Henderson testified, the Hesperus repurchase was part of
the "total plan that had been worked out." Tr. 228-29; JTX 55 at 81-82.
(33) See Kahn v. Lynch Communications, Inc., 638 A.2d at 1115;
Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929 (1985); Citron v. E.I.
DuPont de Nemours & Co., Del. Ch., 584
29
<PAGE> 32
Although arms length negotiations between Triton and Ridgewood did take
place, they were not conducted by an independent committee acting on behalf of
the Ridgewood minority. The negotiations were conducted by Walden, an interested
party, and Triton, another interested party on the "other side of the table."
Walden was serving his own personal interest in negotiating a transaction he
intended as part of a larger plan to confer control upon himself. His "vigorous
negotiation" focused only on one term -- the purchase price that Ridgewood would
pay. While that negotiation process did protect one of the minority
stockholder's interests, it did not protect them all, because Walden's interests
were antagonistic to the minority's other significant interests. As negotiated,
the repurchases would afford only two stockholders -- Triton and Hesperus -- an
opportunity to liquidate their investment, and they would give a third
stockholder (Walden) voting control -- all at corporate expense. The only
benefit the minority would receive from these transactions was an arithmetic
boost in the book value of their stock, but in all other respects they would be
worse off. The minority would end up holding illiquid investments in a company
now having no significant productive assets and now controlled by a
stockholder-executive with strong incentives to continue
- --------------
A.2d 490 (1990); Kahn v. Dairy Mart Convenience Stores, Inc., Del. Ch., C.A. No.
12489, Jacobs, V.C. (Mar. 29, 1996).
30
<PAGE> 33
paying himself annual compensation at a six figure level, but with weak
incentives to part with control in any transaction (such as, for example, a sale
of the company) that would enable the minority to realize on their investment.
In these circumstances, the minority's predominate interest would be for these
transactions not to take place at all -- at least in the form of a
company-financed repurchase of control.
To be relieved of their exacting burden of proof, the defendants would
have to establish that the minority's true interests were adequately represented
by advocates committed to their cause. There were no such advocates and there
was no adequate representation.
Even the defendants cannot bring themselves to argue that Mr.
Henderson, acting as a one man independent committee, effectively performed that
advocacy function. Henderson conducted no negotiations, and although he did
conclude that the Triton repurchase was in the best interests of Ridgewood and
its minority stockholders, Henderson based that conclusion on an investigation
that he was required to conduct practically blindfolded. Henderson's assignment
and investigation was restricted solely to the Triton repurchase. It did not
include any assessment of the combined Triton-Hesperus transaction. The narrow
scope of Henderson's assignment was highly significant, because the effectuation
of the
31
<PAGE> 34
Triton repurchase alone would not give Walden absolute control, but the combined
Triton and Hesperus repurchases would. Consequently, and with all due respect
for Henderson's acumen as a businessman and his good intentions, his independent
committee role could not and did not provide meaningful protection for the
Ridgewood minority.
For these reasons the Triton and Hesperus repurchase transactions must
be evaluated under the entire fairness standard with the burden of proof resting
upon the defendants.(34)
B. THE SUBSTANTIVE VALIDITY OF
THE REPURCHASE TRANSACTIONS
As earlier discussed, the plaintiff claims that the defendants breached
their fiduciary duty of loyalty to Ridgewood and its minority shareholders in
three
- ----------------
(34) I note that, in any event, the defendant directors have the burden
of proof on plaintiff's separate claim that the repurchases were an improper use
of corporate funds for the purpose of perpetuating Walden in control. In Bennett
v. Propp, Del. Supr., 187 A.2d 405, 409 (1962), a classic case involving such an
improper expenditure, the Supreme Court held:
"We must bear in mind the inherent danger in the purchase of shares
with corporate funds to remove a threat to corporate policy when a
threat to control is involved. The directors are of necessity
confronted with a conflict of interest, and an objective decision is
difficult... Hence, in our opinion, the burden should be on the
directors to justify such a purchase as one primarily in the corporate
interest. . ."
Accord, Crane Co. v. Harsco Corp., 511 F. Supp. 294, 305 (1981) (citing Bennett,
187 A.2d at 409).
32
<PAGE> 35
separate respects: (a) effectuating a self-dealing transaction that was unfair
to the minority, (b) improperly expending corporate funds to repurchase stock to
perpetuate control in a single member of the board, and (c) wasting corporate
assets. I conclude that the plaintiffs have prevailed on their first two claims.
That is, the overwhelming weight of the evidence shows that the repurchase of
the Ridgewood shares held by Triton and Hesperus constituted an expenditure of
corporate funds for the primary purpose of conferring and perpetuating control
upon Walden, and the defendants have not persuaded me to the contrary.
Moreover, for that and other reasons, the defendants have not carried their
burden of proving that the repurchase transactions were entirely fair. Having so
concluded, I do not reach address the plaintiff's corporate waste claim.(35)
- -------------------
(35) Were the Court required to address the waste claim on its merits,
the claim would likely fail. The plaintiff's true grievance is not that
Ridgewood overpaid for its shares but that the corporation was caused to expend
funds at any price to repurchase the control block of its own shares in order to
shift control to Walden. Moreover, the plaintiff adduced no affirmative proof
that $8 per share was an unfair price. Plaintiff's case consisted of arguing
that it was inappropriate to require the corporation to pay a control premium
for its own shares since control has no value to the corporation, and caviling
with certain details of Mr. Battel's valuation analysis. Plaintiff's position
falls short of the mark. Mr. Battel's valuation analysis and his conclusion that
$8 per share was a fair repurchase price were well reasoned and credible, and
the plaintiff made no contrary showing. Nor would the inclusion of a control
premium in the repurchase price change that conclusion. As the Supreme Court
stated in Cheff v. Mathes, Del. Supr., 199 A.2d 548, 555 (1964):
"...[I]t is elementary that a holder of a substantial number
of shares would expect to receive the control premium as part of his
selling price, and if the corporation desired to obtain the stock, it
is
33
<PAGE> 36
1. THE CLAIM THAT THE REPURCHASES
WERE ENTRENCHMENT-MOTIVATED
The legal principles that govern this claim are well-established and
undisputed. By statute, a Delaware corporation has the power to repurchase its
own shares.(36) The corporation may, moreover, lawfully repurchase shares of
particular stockholders selectively, without being required to offer to
repurchase the shares of all stockholders generally.(37) The exercise of this
power is constrained only by the board's fiduciary duties.
The limiting fiduciary principle upon which plaintiff relies is that it
is improper to cause the corporation to repurchase its stock for the sole or
primary
- ------------------
unreasonable to expect that the corporation could avoid paying what any
other purchaser would be required to pay for the stock..."
Although the defendant's expert's valuation testimony negates the waste
claim, it does raise an entire fairness issue. Specifically, if conventional
valuation techniques suggest a per share value that exceeds what the
shareholders could actually obtain in the marketplace, is it entirely fair for
management to authorize a stock repurchase from some shareholders at that
above-market level while leaving the remaining stockholders with no realistic
possibility of obtaining similar value? Because the plaintiff did not address
this issue, I have no record basis to consider this question.
(36) 8 Del.C. ss. 160; Crane Co. v. Harsco Corp., 511 F. Supp. at 305.
(37) Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946,
953-54 (1985).
34
<PAGE> 37
purpose of maintaining the board or management in control. In such a case the
purchase is deemed unlawful even if the purchase price is fair.(38) As the
Supreme Court held in Bennett v. Propp:
".... Sadacca's purchases [of the corporation's stock] were made to
preserve the control of the corporation in himself and his fellow
directors .... The use of corporate funds for such a purpose is
improper. The general principle has been recognized in Delaware
...."(39)
Similarly, in Cheff v. Mathes, the Supreme Court held that "...if the board has
acted solely or primarily because of the desire to maintain themselves in
office, the use of corporate funds for such purpose is improper."(40) Although
this case involves an alleged effort to shift control to a single director
rather than the entire board, that principle still applies and the defendants do
not contend otherwise.
In this case all elements of this claim but one are conceded. It is
undisputed that the Ridgewood stock held by Triton and Hesperus was repurchased
with corporate funds. It also is undisputed that the effect of the repurchase
was to put Walden into a position of absolute control. The only issue
- --------------------
(38) Bennett v. Propp, 187 A.2d at 411 (1962) (transaction illegal);
Potter v. Sanitary Co. of America, Del. Ch., 194 A. 87, 120 (1937) (fair price
no justification).
(39) Bennett, 187 A.2d at 408 (citations omitted).
(40) 199 A.2d at 554.
35
<PAGE> 38
is whether the sole or primary purpose of those repurchases was to entrench
Walden into that control position. That issue is factual, and requires the Court
to resolve a conflict between the defendants' testimony and the objective
evidence.
The defendants' testimony incants a consistent choral refrain: they
caused the Company to repurchase Triton's Ridgewood stock because (a) some
solution was needed to protect against the potential threat implicit in
Triton's plan to liquidate its investment in Ridgewood, and (b) after
considering all available alternatives, the board determined that a repurchase
was the best solution. In addition to the reasons previously discussed, a
repurchase would be at an advantageous, below-book-value price that would
benefit all stockholders equally. The defendants further contend that the
Hesperus repurchase represented a second opportunity -- unrelated to Triton but
serendipitously timed -- to buy another significant block at the same equally
favorable price.
The defendants concede that the repurchases elevated Walden's stock
ownership level from 6.9% to absolute control, but insist that that was only the
transactions' incidental effect, not their purpose. Indeed, defendants assert
that Walden did not actually even obtain board control, because the newly issued
Preferred Stock entitled Triton to designate two of Ridgewood's four directors.
Moreover, defendants claim, if Walden's motive was to serve his personal
36
<PAGE> 39
interests at Ridgewood's expense, he would have advocated a cash dividend, that
would have netted him $1.2 million personally while enabling him to continue on
as Ridgewood's CEO.(41)
If credible, that testimony would constitute a valid defense to the
entrenchment claim. The difficulty is that the testimony is not credible, not
only because it is self-serving but also because it does not square with the
objective facts.
First, the evidence does not support the contention that the board
seriously considered the alternatives to a repurchase, and to the extent
alternatives were (in fact) raised, they were quickly brushed aside because
Walden disfavored them. As previously discussed, the first alternative -- a spin
off of Triton's Ridgewood shares -- was supposedly considered by the Ridgewood
board and then proposed to Triton, which rejected it because the Triton
stockholder base was too large to allow a meaningful distribution of Triton's
Ridgewood shares. But that scenario is nowhere documented in the record, and
defendants do not explain why the board did not consider an immediately obvious
solution to this supposed problem:
- ------------------
(41) The defendants also argue that Walden's (brief) termination of
negotiations with Triton on May 18, 1994, and his consideration of other
possible uses of Ridgewood's cash, negates the argument that his objective was
to seek a transaction that would catapult him into a position of control.
37
<PAGE> 40
a stock split. Nor is there evidence that the full board ever met and
considered the second alternative -- a liquidation of Ridgewood.(42) The third
and fourth alternatives -- a pro rata self-tender and a cash dividend -- were
considered but rejected because Walden would not approve any transaction that
did not eliminate Triton as a Ridgewood stockholder.
Thus, I remain unpersuaded that two of the defendants' four "alternatives"
were in fact considered. Moreover, the alternatives that were considered and
that would have benefited all shareholders equally if adopted, were vetoed by
Walden, who favored only one alternative -- a repurchase of the controlling
interest. That alternative, however, would benefit only Walden and the selling
shareholder(s). Finally, the evidence shows that the remaining directors
passively allowed Walden -- the fiduciary having the strongest conflicting
interest -- to dominate the decision making process with the result that the
outcome was favorable to him.
Second, the defendants' stated rationale for the Triton repurchase -- to
eliminate a controlling shareholder that might sell its stock to a third party
that would disserve the remaining shareholders' best interests -- is
inconsistent with the objective facts. If only Triton's shares were being
reacquired, that rationale
- ----------------
(42) The only documentary evidence touching on that subject is a memorandum
from Walden to Stiska and Earley opposing that approach.
38
<PAGE> 41
might be credible, but the Triton repurchase was part of a larger package that
included the Hesperus transaction. The Hesperus repurchase, when included in
the total mix, fatally undercuts the professed rationale for the Triton
repurchase, because in terms of that rationale the Hesperus repurchase made no
sense.
In the Spring of 1994, Ridgewood was so desperately in need of cash that
it had to sell assets and also borrow $500,000 from Triton just to pay
expenses. In those straitened circumstances, for Ridgewood's board to sell off
the mobile home parks -- Ridgewood's then-crown jewel - - and then use a
significant part of the proceeds to repurchase the control block, would strike
any prudent businessman striving to serve the interests of all shareholders as
an extravagance. That would be not unlike an unemployed person whose savings
account is depleted, deciding to sell his family's only valuable asset (the
house) and use the proceeds to buy a luxury car.(43) From a business
standpoint, to sell Ridgewood's remaining productive assets (the mobile home
parks) to purchase a nonproductive asset (Ridgewood stock) even at below book
value, would diminish, not enhance, Ridgewood's prospects for future growth and
profit. In these circumstances, only
- ----------------
(43) Had Ridgewood used the mobile home proceeds to buy a fleet of luxury
vehicles, it might have been better off since that might at least position the
Company to go into the limousine transportation business. There is no evidence
that Ridgewood's management intended to go into the business of selling
Ridgewood's treasury stock to the public for a profit.
39
<PAGE> 42
a crisis that threatened the ongoing viability of the Company, and that was so
grave as to outweigh these negative business concerns, might arguably justify a
repurchase of control.(44)
Had the board voted to repurchase only the Triton shares, that at least
would have been consistent with defendants' claim that they were motivated only
by a desire to protect the Company and its minority stockholders from "bone
pickers." But the repurchase of Hesperus's shares fatally undercuts this
rationale, because Hesperus held only 9% of Ridgewood's stock. It did not own
control and it did not pose any threat to the enterprise. There was no need to
buy back Hesperus's stock to eliminate a potentially threatening controlling
stockholder. The buyout of Triton's shares was sufficient to accomplish that.
Given Ridgewood's shaky financial condition, a prudent businessman-fiduciary
would spend not one penny more than was necessary to acquire Triton's
controlling interest. Once Triton's control block was acquired, a further
expenditure of $1.45 million to acquire Hesperus's 9% block would accomplish
nothing except to further deplete Ridgewood's badly needed working capital. I
conclude, for these reasons, that a repurchase of Hesperus's shares could
further only one purpose -- to confer
- ----------------
(44) Delaware case law would support a repurchase of control in such
circumstances. See Unocal, 493 A.2d at 954-55; Cheff, 199 A.2d at 555.
40
<PAGE> 43
absolute control on Walden.
Third, the defendants' remaining factual arguments are also unpersuasive.
Although Triton (as the holder of newly issued Preferred Stock) retained the
power to appoint two directors, that power had a limited life span, and would
end when the Preferred Stock was converted or redeemed. In all events, Walden
would remain Ridgewood's controlling stockholder for as long as he chooses.
Unpersuasive also is defendants' argument that if Walden's true motive was to
serve his personal interests, he would have advocated a cash dividend that
would have paid him $1.2 million and allowed him to remain as CEO. The short
answer is that becoming Ridgewood's new controlling stockholder was worth far
more to Walden in the long run. Lastly, Walden's strategy to cease
(temporarily) negotiating with Triton does not change the fact that at the end
of the day, the Triton deal went forward and Walden had influenced the board to
approve the one course of action that was most beneficial to his interests and
least beneficial to the interests of the minority stockholders for whom the
directors were fiduciaries.
In short, I find that the defendants have not met their burden of proving
that the repurchase of the Ridgewood shares owned by Triton and Hesperus was
41
<PAGE> 44
"primarily in the corporate interest."(45)
That this finding properly flows from these adjudicated facts is most
graphically illustrated by Potter v. Sanitary Company of America.(46) In Potter
(as here), the corporation (Sanitary Company), was majority-owned by another
company (Consolidated), which had placed its designees on Sanitary's board. Two
of those board members, Keenan and Brewer, whose group also controlled
Consolidated, had accumulated substantial stock in Sanitary. Although Sanitary
(like Ridgewood) was in financially straitened circumstances and could ill
afford the expense, these directors caused Sanitary to repurchase
Consolidated's controlling stock interest. The effect was to enlarge the
Keenan-Brewer group's holdings to a "safe majority." There, as here, the
directors argued that the repurchase was done for non-control related
business reasons, namely, because the company needed to have common shares
available to pay a bonus on its preferred stock. Rejecting that argument, the
Chancellor observed:
"Why, in view of the reduced state of Sanitary's
business, the necessity of curtailment of expenses
all around..., and the daily progress of its losses,
did its officers reduce its cash position by another
twenty-five hundred dollars laid out in the purchase
- ----------------
(45) Bennett v. Propp, 187 A.2d at 409.
(46) Potter, 194 A.2d at 120.
42
<PAGE> 45
of its own stock? To be sure, twenty-five hundred
dollars is not a large sum. But it was a substantial
sum for this relatively small company with its
business running into the red, as the saying is, every
week...(47)
Finding that the repurchase constituted a breach of the directors'
fiduciary duties, the Court held:
"... [A]s officers of Sanitary... [the defendants]
caused that company to make purchases of its
own stock in such an amount that, by reason
of the stockholdings of their own group,
they were firmly in control of Sanitary's affairs in
their individual rights. That control was shifted
to themselves from Consolidated whose officers
and dominant directors they were. The property
of the two corporations which they dominated
was so used by them .... as to perpetuate their
control over the subsidiary in which they held
important stock interests. Before they were in a
minority; now, they are in a safe majority, in
that subsidiary....."
Concluding that "....officers in possession of corporate power [had] used
that power to advance their own individual ends," the Court found that the
repurchase transaction "cannot stand the test of close scrutiny," and declared
it invalid.(48) No different conclusion or result is justified in this case,
which is
- ----------------
(47) Id. at 117.
(48) Id. at 118, 121
43
<PAGE> 46
factually indistinguishable from Potter.
2. THE CLAIM THAT THE REPURCHASES
WERE UNFAIR TO THE MINORITY
The facts that invalidate the Triton/Hesperus repurchases under the
"entrenchment-motivated repurchase" doctrine are equally invalidating under
conventional "entire fairness" analysis. Indeed, any different result would be
hard to fathom, since it cannot be supposed that a stock repurchase paid for
with corporate assets to install a fiduciary-director in control would be a
breach of fiduciary duty under one well-settled doctrine, yet still be
"entirely fair" to minority shareholders under another doctrine that is closely
related. In this case the "entrenchment purpose" and "entire fairness" analyses
conflate, and for that reason alone the legal discussion could conclude at this
point. Nonetheless, I proceed to scrutinize the repurchases through the
separate and analytically different lens of "entire fairness," because that
perspective illuminates the analysis of the problematic issue of the
appropriate remedy.
For reasons previously discussed, this case implicates only the "fair
dealing" aspect of entire fairness.(49) The analysis of fair dealing "embraces
questions of when the transaction was timed, how it was initiated, structured,
- ----------------
(49) See n. 35 at pp. 33-34, supra.
44
<PAGE> 47
negotiated, disclosed to the directors, and how the approvals of the directors
and the stockholders were obtained."(50)
Here, the board's decision to repurchase the Triton and Hesperus stock was
triggered by Triton's announcement of its plan to exit its investment. The
board's response to that announcement -- the repurchases -- was initiated by
Walden, whose intense self interest in making that happen guided his conduct.
To assure that the board would arrive at the specific outcome (structure) he
desired, Walden subtly assumed control of the decision making process -- a feat
that was not difficult to carry off because the remaining directors trusted
Walden and followed his lead. In that sense the three relevant fair dealing
factors -- initiation, structure and negotiation -- converged. The board, at
Walden's initiation and urging, approved a transaction structure that would
benefit only Walden and the two largest shareholders whose holdings were to be
repurchased. Walden then negotiated with those two shareholders to obtain
favorable price and other terms. Missing from the negotiating process and the
board decision making process, however, was any independent representation of
the interests of Ridgewood's minority public stockholders. In those
circumstances, there was no fair dealing,
- ----------------
(50) Weinberger, 457 A.2d at 711.
45
<PAGE> 48
because there was no advocate committed to protect the minority's interests,
and because the players were either indifferent, or had objectives adverse, to
those interests.
This failure of process explains, at least in part, why the Ridgewood
board did not observe its duty to assure that the repurchases were fair to the
corporation and its minority shareholders. The transactions were the functional
equivalent of Ridgewood (a) purchasing the control block of its own stock for
$8 million and then (b) transferring the repurchased block to a single
shareholder without receiving any consideration in return. The fiduciary duty
implications of such a transaction should have been apparent had the board
members straightforwardly acknowledged that they were about to approve a gratis
transfer of corporate control to a single stockholder -- Walden -- and as a
result, leave the minority stockholders worse off than they were before.(51)
I therefore conclude that the repurchases are invalid for the additional
reason that the defendants have not demonstrated that those transactions were
- ----------------
(51) The corporation in which the minority stockholders were investors
would have sold its only productive asset and would end up with $5 million in
cash, a substantial portion of which would be subject to creditors' and
dividend claims. Moreover, the likelihood that those shareholders would have an
opportunity to liquidate their investment would be markedly lessened, because
Ridgewood's new majority stockholder had strong financial incentives to remain
in his control position and not put the Company up for sale.
46
<PAGE> 49
entirely fair to Ridgewood or its minority stockholders. Having found the
repurchases invalid on fiduciary duty grounds, I address the final issue, which
is what should be the remedy?
C. THE APPROPRIATE REMEDY
As previously noted, the plaintiff seeks rescission of the Triton
transaction, and rescissory damages to remedy the Hesperus repurchase.
Specifically in connection with the Triton repurchase, the plaintiff asks the
Court (a) to order Triton to repay to Ridgewood the $8,042,420 cash and the
Preferred Stock, plus all dividends paid thereon, that Triton received for its
Ridgewood stock, and (b) to direct Ridgewood to reconvey the repurchased
Ridgewood shares to Triton. To remedy the Hesperus repurchase, the plaintiff
asks the Court to award rescissory damages in favor of Ridgewood and against the
defendant directors for the $1,450,000 repurchase price, plus interest; and
order Ridgewood to reconvey to those directors the shares repurchased from
Hesperus. From the corporation's standpoint that latter remedy would amount, in
functional terms, to a rescission of the Hesperus transaction except that it
would substitute Ridgewood's directors (who never owned the shares) for Hesperus
(which did own them but was never made a party to this lawsuit).
The defendants respond that the plaintiff has failed to establish any
47
<PAGE> 50
entitlement to that relief, because rescission and rescissory damages would be
factually and legally inappropriate in this case. Due to the passage of time,
it is no longer feasible to rescind the Triton repurchase, especially since the
plaintiff failed either to sue on a timely basis and request preliminary
injunctive relief to halt the repurchases, or seek to expedite the proceedings
to preserve rescission as a viable remedy. Moreover, defendants argue,
rescission would be inequitable because although Triton's successor still holds
the Ridgewood Preferred Stock issued to Triton in August 1994, a court-ordered
return of that stock to Ridgewood would not restore the parties to the position
they occupied at that time. The reason is that the cash paid to Triton in 1994
was distributed to Triton's stockholders in 1995, and Triton was acquired by
another company in 1997. Because Triton's successor never enjoyed the benefit
of the cash component of the stock repurchase price, defendants urge that it
would be inequitable to compel it to repay cash it never received.
The defendants urge that it would also be inequitable to award rescissory
damages on account of the Hesperus repurchase. Rescissory damages must
approximate as closely as possible the financial equivalent of rescission, and
may be recovered only for a breach of the duty of loyalty. Here, defendants
argue, the only person that financially benefited was Hesperus, which is not a
party to this
48
<PAGE> 51
action and is not charged with any wrongdoing. To subject Stiska, Earley and
Henderson to rescissory damages would be inequitable and inappropriate, because
those defendants derived no personal benefit from, and were not unjustly
enriched by, the repurchase transactions, and those gentlemen did not act in
bad faith or engage in self dealing. Nor (defendants urge) did Walden benefit
financially from the Hesperus repurchase or otherwise breach any duty of
loyalty, because he pursued that transaction in good faith and not for his
personal benefit.
These contentions are now addressed.
1. RESCISSION
If it were feasible, the remedy that would be most responsive to, and
curative of, the harm that was inflicted here is a complete rescission of the
Triton and Hesperus repurchase transactions. A complete rescission would (1)
undo the harm to the minority caused by Walden being installed in control and
thereby in a position to dictate what opportunity (if any) the minority would
have to realize on their investment, and (2) undo the harm done to Ridgewood by
restoring the millions of dollars the Company expended to finance the
repurchases. Thus, a total rescission would divest Walden of control and
restore him to his original (6.9%) minority position, and would also restore
the transaction purchase price to Ridgewood.
49
<PAGE> 52
Regrettably, however, complete rescission is not feasible in these
circumstances. The Hesperus transaction cannot be rescinded because Hesperus is
not a party to this lawsuit, nor is there any claim or evidence that Hesperus
engaged in culpable conduct that would make it equitable to subject it to the
rescission remedy.(52)
As for the Triton repurchase, only a partial rescission is feasible at
this time. Rescission requires that all parties to the transaction be restored
to the status quo ante, i.e., to the position they occupied before the
challenged transaction.(53) In this case, the only portion of the repurchase
consideration that Triton (actually, its corporate successor) presently holds
is the Ridgewood Series A Preferred Stock that was issued to Triton in 1994.
The cash component of the purchase price was distributed by Triton to its
shareholders in 1995, and thereafter Triton was acquired by the firm that now
holds the Ridgewood Preferred Stock but never enjoyed the cash component of the
total purchase price.
- --------------------------
(52) Hesperus owed no fiduciary or other duty to Ridgewood, and even
though Mr. Foreman expressed his view of Walden's motive for repurchasing
Hesperus's stock, there is no claim or evidence that Foreman (as Hesperus's
agent) knowingly aided and abetted Walden's breach of duty.
(53) Norton v. Poplos, Del. Supr., 443 A.2d 1, 4 (1982); In Re MAXXAM,
Inc., Del. Ch., 659 A.2d 760, 775 (1995).
50
<PAGE> 53
The plaintiff argues that Triton's distribution of the cash in 1995
ought not to defeat the required rescission, because Triton's successor was on
notice of plaintiff's rescission claim at the time it acquired Triton.
Therefore, plaintiff contends, because the acquiring company assumed that
potential liability, it is not unfair to hold the acquiring company liable to
restore to Ridgewood the cash paid to Triton.
I cannot agree, for two reasons. First, the record is bare of any
evidence of what potential liabilities Triton's successor actually assumed or
had notice of. The absence of such evidence leaves no solid foundation that
could support a conclusion that it would be appropriate to order Triton's
successor to repay to Ridgewood cash it never received. Moreover, any doubt on
that score, is dispelled by the plaintiff's delay in prosecuting this action in
a way that would have preserved a full rescission remedy. The Triton repurchase
took place in August, 1994. This lawsuit was not brought until May, 1995. No
effort was made to expedite the trial, which took place four years later, in an
effort to preserve complete rescission as a viable remedy. A significant delay
of that kind, without more, will normally make impractical any rescission of a
corporate transaction,
51
<PAGE> 54
particularly one involving publicly traded securities.(54)
For these reasons, the only Triton-related rescission remedy that can
be granted is partial. That remedy would involve restoring to Ridgewood the
Preferred Stock currently held by Triton's successor, which in turn would
receive from Ridgewood, newly issued Ridgewood shares in an amount that would
be equivalent in value to the Preferred Stock. The balance of the remedy must
take the form of rescissory damages and other forms of equitable relief, for
which reason I turn next to the rescissory damages question.
2. RESCISSORY DAMAGES
The plaintiff's request for a rescissory damages award against the
defendant directors is also problematic, although for different reasons. To
explain why, it becomes necessary to explore the troublesome character of
rescissory damages, and also the differing levels of culpability of the four
defendant directors.
The traditional measure of damages is that which is utilized in
connection with an award of compensatory damages, whose purpose is to
compensate a plaintiff for its proven, actual loss caused by the defendant's
wrongful conduct.
- -------------------------
(54) Ryan v. Tad's Enterprises, Inc., Del. Ch., 709 A.2d 682 (1996,
aff'd, Del. Supr., 693 A.2d 1082 (1997); Patents Management Corp. V. O'Conner,
Del. Ch., C.A. No. 7710, Walsh, V.C., Ltr. Op. At 6 (June 10, 1985)
(rescission of a merger that occurred three years before was "not a feasible
remedy given the length of time that has elapsed since the merger."); see
Gaffin v. Teledyne, Inc., Del. Ch., C.A. No. 5786, Hartnett, V.C., Mem. Op. At
49 (Dec. 4, 1990).
52
<PAGE> 55
To achieve that purpose, compensatory damages are measured by the plaintiff's
"out-of-pocket" actual loss. Thus, where a merger is found to have been
effected at an unfairly low price, the shareholders are normally entitled to
out-of-pocket (i.e., compensatory) money damages equal to the "fair" or
"intrinsic" value of their stock at the time of the merger, less the price per
share that they actually received.
Rescissory damages is an exception to the normal out-of-pocket
measure. They are exceptional, because such damages are measured as of a point
in time after the transaction, whereas compensatory damages are determined at
the time of the transaction. As a consequence, rescissory damages may be
significantly higher than the conventional out-of-pocket damages, because
rescissory damages could include post-transaction incremental value elements
that would not be captured in an "out-of-pocket" recovery.
In Lynch v. Vickers Energy Corp., a corporate majority stockholder
made a tender offer to acquire the minority interest in its subsidiary. Finding
that the tender offer was misleading and a breach of the parent corporation's
fiduciary duty of loyalty, the Supreme Court held that the shareholders would
be entitled to rescissory damages measured by the value of the tendered shares
as of the date of the trial on damages. In arriving at that result, the Court
characterized rescissory
53
<PAGE> 56
damages as "the monetary equivalent of rescission ... which will, in effect,
equal the increment in value that .... [the majority stockholder] enjoyed as a
result of acquiring and holding the ... stock in issue."(55)
Thereafter, in Weinberger v. UOP, Inc.,(56) and in Cede & Co. v.
Technicolor, Inc.,(57) the Supreme Court expanded the universe of defendants
against whom rescissory damages could be awarded, to include corporate
directors found to have breached their fiduciary duties in approving a self
dealing merger. That expansion generated several questions, which include: in
what specific circumstances will it be an appropriate exercise of discretion to
award rescissory damages? Should rescissory damages be awardable against
directors who vote to approve the transaction but who did not benefit from it?
If so, is the directors' state of mind relevant, i.e., does it matter if the
directors acted (a) in bad faith, or (b) in good faith but without appropriate
due care?
These issues arose because of the problematic character of this form
of money damage relief that potentially could include elements of value
causally unrelated to the wrongdoing. In an article discussing rescissory
damages in the
- ------------------------
(55) Lynch v. Vickers Energy Corp., Del. Supr., 429 A.2d 497, 501, 505
(1981).
(56) 457 A.2d at 714.
(57) Del. Supr., 634 A.2d 345, 372 (1993).
54
<PAGE> 57
context of the Lynch v. Vickers Energy case, Professor (now Dean) Daniel R.
Fischel made the following observations:
The Delaware Supreme Court...focused...
on the difference between the value of
TransOcean's stock at the time of the tender
offer in October 1974 and the time of the
trial on damages in July 1978. The rationale
...was to deprive defendant of any gains
obtained by its wrongful acquisition of the
additional TransOcean stock....
The obvious problem with attempting to
measure the gains obtained by comparing a
price in 1974 with one in 1978 is that any
changes that occur may be attributable to
events having nothing to do with the
challenged conduct. Inflation or falling
interest rates may be responsible, the
industry as a whole may have experienced an
increase in demand for its products. There
is simply no way to determine from
comparing two stock prices two years apart
what percentage, if any, of the gains
experienced over such period are
attributable to the event four years
previous.(58)
For this reason, and also because of the potentially devastating
effect (from the directors' standpoint) of a rescissory damage award, there was
a felt need to establish boundaries that would define more clearly the
circumstances where that
- ----------------------------------
(58) Daniel R. Fischel, The "Race to the Bottom" Revisited: Reflections
on Recent Developments in Delaware's Corporation Law, 76 Nw. L. Rev. 913, 917
(1982).
55
<PAGE> 58
remedy would be deemed equitably appropriate. Those boundaries have not yet
been fully formulated, which is an important reason why this Court has been
reluctant to award rescissory damages,(59) although in one recent case
involving egregious conduct by a director, the Court has done so.(60)
The most helpful boundary-defining decision to date is former
Chancellor Allen's opinion in Cinerama, Inc. v. Technicolor, Inc.(61) There, the
Chancellor located two theoretical foundations for the rescissory damages
remedy: (i) principles of restitution and (ii) principles of trust law that
permit a damage award against a trustee, to compensate the beneficiary for the
harm resulting from the trustee's breach of trust. Under the restitutionary
theory (of which Lynch v. Vickers is an example), rescissory damages may be
awarded against a fiduciary who becomes unjustly enriched as a result of his
wrongdoing. The measure of the damages, in those circumstances, is the amount of
the unjust enrichment. Under the trust theory, however, the Court held that only
where the fiduciary has engaged in self dealing (or, in the case of a trustee,
has violated an express term of the
- -----------------------------------
(59) Donald J. Wolfe, Jr. and Michael A. Pittenger, Commercial and
Corporate Practice in the Delaware Court of Chancery, 835-36 (LEXIS Law
Publishing 1998).
(60) Bomarko, Inc. et al v. International Telecharge, Inc. et al, Del.
Ch., C.A. Nos. 13052 and 14727, Lamb, V.C., Mem. Op. at 47, n.9 (Nov. 4, 1999).
(61) Del. Ch., 663 A.2d 1134 (1995), aff'd, Del. Supr., 663 A.2d 1156
(1995).
56
<PAGE> 59
trust) would it be "deemed equitable to impose upon the trustee the risk of
future fluctuations in the market value of the asset."(62)
Chancellor Allen's scholarly analysis of the conceptual roots of the
rescissory damages remedy, led him to conclude that rescissory damages should
never be awarded as a remedy solely for a breach of a corporate director's duty
of care. In order to be equitably appropriate, rescissory damages must redress
an adjudicated breach of the duty of loyalty, specifically, cases that involve
self dealing or where the board puts its conflicting personal interests ahead
of the interests of the shareholders.
The foregoing discussion is prologue to the next issue, which is:
against which defendants (if any) is it appropriate to award rescissory
damages? That question requires the Court to assess the levels of culpability
of the four defendant-directors -- Earley, Stiska, Walden and Henderson.
Rescissory damages are most clearly and appropriately awardable
against Walden, who, as a result of his wrongful conduct, personally obtained a
unique benefit paid for entirely with corporate assets. In terms of the
Technicolor criteria, Walden (a) was unjustly enriched, (b) engaged in
self-dealing, and (c) placed his
- -------------------------
(62) Lynch, 663 A.2d at 1146.
57
<PAGE> 60
personal interests ahead of the interests of the minority shareholders.
Therefore, on either restitutionary or trust/compensatory grounds, Walden is
properly subject to a rescissory damage award.
Two of the remaining three directors -- Stiska and Earley -- would
also be, but for different reasons. Unlike Walden, Messrs. Stiska and Earley,
were not unjustly enriched and they did not otherwise obtain a personal benefit
at the shareholders' expense, as a consequence of the repurchases. Nor is there
evidence that those two directors conspired with Walden, in the sense that they
acted intentionally and in bad faith to enable him wrongfully to benefit at the
corporation's expense. Nonetheless, in approving the repurchases, Earley and
Stiska did violate their fiduciary duty of loyalty. Their sin was not one of
venality, but, rather, of indifference to their duty to protect the interests
of the corporation and its minority shareholders. Stated differently, because
their primary loyalty was to the interest of their employer, Triton, in exiting
Ridgewood, Stiska and Earley were willing to subordinate those interests to
Walden's. The inevitable consequence was that Stiska and Earley gave priority
to Triton's interest, and ignored their fiduciary obligation as Ridgewood
directors to assure that all Ridgewood stockholders would be treated fairly.
The fourth director, Mr. Henderson, is differently situated from the
rest.
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<PAGE> 61
Henderson received no personal benefit from the repurchases, and he had no
conflicting interest that would motivate him to act in other than what he
believed to be the corporation's best interests. Nor is there evidence that
Henderson acted in bad faith, i.e., deliberately to benefit Walden, Triton and
Hesperus at the expense of the Ridgewood minority. At best, Henderson's belief
that he was furthering the interests of all Ridgewood shareholders was
misguided, and at worst, it was misinformed, i.e., was not the product of due
care. But the absence of due care is not a legally sufficient ground to hold
Henderson liable for rescissory damages,(63) and a misguided decision cannot
subject Henderson to even compensatory damages. The business judgment rule
shields directors from liability for good faith business decisions, even those
that turn out to be mistaken.
Accordingly, rescissory damages will be awarded against Walden, Earley
and Stiska, but not Henderson. The final issue becomes: in what amount and what,
if any, further relief is required?
3. QUO VADIMUS?
The Court has held that the remedy must include two elements: (i) a
partial rescission of the Triton transaction, namely, the return of the
Preferred Stock to
- -------------------------------
(63) Cinerama, 663 A.2d at 1134.
59
<PAGE> 62
Ridgewood in exchange for the issuance to Triton of whatever number of
Ridgewood shares that would be equivalent in value, and (ii) an award of
rescissory damages, payable to Ridgewood, for which Walden, Stiska and Earley
shall be jointly and severally liable.(64)
That remedy structure poses two issues that must be resolved, but
cannot on the present record. The first concerns the size of the rescissory
damages award. If the measure of the damages award is the full repurchase price
of Triton's and Hesperus's Ridgewood stock less the value of the
(to-be-returned) Preferred Stock, such an award could cause the Company to be
over-compensated, unless Walden, Stiska and Earley receive, in return,
equivalent value in the form of Ridgewood stock. If that is the approach taken,
the practical effect would be to order those three defendants to buy a large,
if not controlling, block of Ridgewood shares. That result would generate, in
turn, two additional problems: (1) determining what purchase price per share
the defendants should pay for the Ridgewood stock and (2) if the result would
be to leave Walden, Stiska and/or Earley in majority or working control of the
Company and thus in a position to dictate how the newly-recovered damages award
will be spent, assuring that the
- -------------------------------
(64) Such a damages award may generate crossclaims for indemnity and/or
contribution among the individual defendants, as well as claims for
indemnification against Triton's successor. None of those potential claims is
addressed in this Opinion.
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<PAGE> 63
minority stockholders will enjoy the benefit of the derivative recovery that
their legal counsel strived so hard to achieve.
To address these problems, and undo the harm caused the minority by
the defendants having installed Walden in control to begin with, the remedy
must therefore include elements that go beyond a rescissory damages award. A
mechanism that will limit Walden's (and the other defendants') ability to
exercise their voting control may be needed. Or, if it is decided to allow the
defendants to remain in control, it may be necessary and appropriate to impose
protective conditions, such as (for example) requiring the defendants to cause
Ridgewood to offer to repurchase the interest of the minority stockholders at a
price equal to the greater of the 1994 repurchase price ($8 per share) or the
current fair value of the Ridgewood stock.
Other solutions that come to mind may also be appropriate. The point
is that although the Court is able to determine some of the essential elements
of the remedy at this stage, on the present record it cannot determine them all
without further guidance from counsel. Accordingly, further proceedings will be
necessary to determine what precise form the final decree will take.
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<PAGE> 64
IV. CONCLUSION
Counsel for the parties shall confer and submit an order providing for
such other proceedings, including supplemental briefing, that will be required
to determine the remedy that most appropriately implements the rulings made in
this Opinion, and also to settle a final order.
62
<PAGE> 1
EXHIBIT 2
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
WILLIAM N. STRASSBURGER, )
)
Plaintiff, )
)
v. )
)
MICHAEL A EARLY, LUTHER A. ) Civil Action No. 14267
HENDERSON, JOHN C. STISKA, )
N. RUSSELL WALDEN, and )
TRITON GROUP, LTD., a )
Delaware corporation, )
)
Defendants, )
and )
)
RIDGEWOOD PROPERTIES, INC., )
a Delaware corporation, )
)
Nominal Defendant. )
MOTION OF TRITON DEFENDANTS FOR A NEW TRIAL
Defendants Michael M. Earley, John C. Stiska and Triton Group, Ltd.
(the "Triton Defendant"), by their undersigned counsel, hereby move for a new
trial in this action pursuant to Court of Chancery Rules 59 and 60(b). The
grounds for this motion are as follows.
PRELIMINARY STATEMENT
1. The Triton Defendants believe that newly discovered evidence,
discussed more fully below, should become part of the record in this case
because such evidence demonstrates that the challenged transactions were not
pursued for the purpose of entrenching defendant N. Russell Walden at the
expense of the minority stockholders and that neither Ridgewood nor its minority
stockholders suffered any cognizable harm or injury as a result of the
challenged transactions.
<PAGE> 2
2. The Court's decision of January 24, 2000 contemplates further
proceedings to determine, among other matters, the appropriate amount of
rescissory damages to be paid by Messrs. Walden, Stiska and Earley. While the
Triton Defendants believe that the newly discovered evidence is extremely
relevant to that determination, and therefore admissible in that regard, they
are filing this motion for a new trial to preserve their rights under Court of
Chancery Rules 59 and 60 to have the Court reconsider its January 24 Opinion
based on the new evidence.
BACKGROUND
3. On April 19-21, 1999, this matter was tried before the Court. On
September 24, 1999, after the parties had filed post-trial briefs, the Court
held oral argument. On January 24, 2000, the Court issued its post-trial Opinion
(the "Decision").
4. In the Decision, the Court ruled that Mr. Walden, the CEO and a
director of Ridgewood Hotels, Inc. (formerly Ridgewood Properties, Inc.), acted
solely in his own self-interest in arranging the two challenged stock repurchase
transactions. The Court further determined that Messrs. Earley and Stiska, who
were appointed to the board by Triton, a 74% stockholder, also breached their
fiduciary duty of loyalty by "approving the repurchases." (Decision at p.58).(1)
The Company's fourth director, Mr. Henderson, was exonerated of liability
despite a finding by the Court that he may have breached his duty of care in
approving the repurchases. The Court held that Mr. Walden and the
Triton-appointed directors (Messrs. Stiska and Earley) were jointly and
severally liable to Ridgewood for
- -------------
(1) In fact, Earley and Stiska abstained from consideration of the
Triton repurchase. Only Mr. Henderson approved the Triton repurchase, as the
Court correctly noted in "The Facts" section of the Decision. See Decision at p.
21.
-2-
<PAGE> 3
rescissory damages in an amount to be determined by way of further proceedings.
5. The Court imposed liability on these three directors based on its
conclusions that (a) the two repurchases had to be considered as a "package",
(b) the sole purpose for the transactions was to confer absolute control of the
Company on Walden, and (c) the repurchases left the minority stockholders "worse
off than they were before." (Decision at 46). The Court did, however, find "well
reasoned and credible," the valuation analysis of defendant's expert, and his
conclusion that the price paid in the transaction was "a fair repurchase price."
Decision at n.35.
6. In determining an appropriate remedy for the found breaches of duty
by Messrs. Walden, Stiska and Earley, the Court ruled that the preferred stock
component of the Triton repurchase should be rescinded. The Court declined to
order rescission of the cash component of the Triton transaction and ruled that
it could not order rescission of the Hesperus transaction because Hesperus had
not been made a party to the lawsuit. (Decision at 50). The Court said that
Messrs. Walden, Stiska and Earley should be required to pay rescissory damages
to Ridgewood in an amount to be determined. In providing guidance with respect
to such a determination, the Court indicated that the current status of
Ridgewood and its minority shareholders would be relevant. See Decision at 53
(noting that rescissory damages are "measured as of a point in time after the
transaction") (emphasis in original).
RECENT DEVELOPMENTS AT RIDGEWOOD HOTELS CONFIRM
THAT THE PURPOSES OF THE REPURCHASES WERE BONA FIDE,
THAT NEITHER RIDGEWOOD NOR ITS MINORITY STOCKHOLDERS
WERE INJURED AS A RESULT OF THE CHALLENGED TRANSACTIONS,
AND THAT NONE OF THE DEFENDANTS WAS UNJUSTLY
ENRICHED BY THE CHALLENGED TRANSACTIONS
7. As the trial testimony indicated, the Ridgewood board decided (prior
to
-3-
<PAGE> 4
the time of the repurchases) to exit the mobile home business and to focus
instead on the business of managing and operating hotel properties. (See
Decision, n. 4). By 1999, Ridgewood Hotels was operating 21 mid to luxury hotels
across the United States. (See Exhibit A attached hereto). In the Fall of 1999,
one of the owners of these properties, Fountainhead Development Corp., Inc.
("Fountainhead"), expressed an interest in investing in Ridgewood for the
long-term and enhancing Ridgewood's luxury hotel management operations.
8. On or about January 24, 2000 (which is, coincidentally, the date on
which this Court issued the Decision), an Information Statement was mailed to
the stockholders of Ridgewood Hotels announcing a change of control of the
Company as a result of a series of agreements described below. A copy of the
Information Statement is attached as Exhibit B hereto.
9. On January 10, 2000, Ridgewood entered into a management agreement
with Fountainhead pursuant to which Fountainhead retained Ridgewood to perform
management services at Chateau Elan Winery and Resort, one of Fountainhead's
properties, for a period of five years. In exchange for Fountainhead's agreement
to retain Ridgewood and a payment of $10,000 by Fountainhead to Ridgewood,
Ridgewood issued to Fountainhead one million shares of Ridgewood common stock.
The management agreement provides for the payment by Fountainhead to Ridgewood
of a management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties.
10. On January 11, 2000, following execution of the management
agreement, Fountainhead entered into an agreement with Mr. Walden to purchase
650,000
-4-
<PAGE> 5
shares of Ridgewood common stock held by Mr. Walden for $2 per share.
Fountainhead also entered into an agreement with Triton's successor, ADT
Security Services, Inc. ("ADT"), to purchase the 450,000 shares of Ridgewood
preferred stock held by ADT for approximately $1.65 million. The agreement with
ADT provided that Fountainhead would return the preferred stock to ADT if this
Court were to order ADT to return the preferred stock to Ridgewood. In such a
case, Fountainhead would be obligated to purchase any common stock received by
ADT.
11. In connection with these transactions, Mr. Walden made significant
concessions regarding his termination and retirement benefits and resigned his
positions as President and CEO of Ridgewood. See Exhibit B at pp. 9-10. In
addition, the board of Ridgewood was expanded from 3 to 7 members, with
designees of Fountainhead filling the 4 vacancies.(2)
12. These developments confirm that the repurchase transactions were in
the best long-term interests of the Company and its minority stockholders, and
that neither Ridgewood Hotels nor its minority shareholders suffered damages or
injury as a result thereof. In short, these developments vindicate the business
judgment of the director defendants in connection with the repurchases.
13. What is discussed above is only a general summary of the evidence
that the Triton Defendants seek permission to introduce into the record in this
action. The Triton Defendants respectfully submit that this and related
evidence, when fully presented to the
- -------------
(2) After announcement of the transactions, the stock of Ridgewood
began to trade more actively and has traded as high $6.00 per share. See Exhibit
C. On an equivalent post-split basis, the assumed price paid in the Triton
repurchase was $2.65 per share.
-5-
<PAGE> 6
Court, will provide a compelling basis upon which the Court should rule that the
payment of rescissory damages is unnecessary and unwarranted, and that
plaintiff's claims in this action are without merit.
STANDARD FOR ALLOWING A NEW TRIAL
14. Court of Chancery Rule 59(a) provides as follows:
(a) Grounds. A new trial may be granted to all or any of the
parties, and on all or part of the issues for any of the reasons for
which rehearings have heretofore been granted in suits in equity. The
Court may open the judgment if one has been entered, take additional
testimony, amend or make new factual findings and legal conclusions,
and direct the entry of a new judgment. A new trial will not be granted
after the filing of an appeal.
Ch.Ct.R. 59(a). Court of Chancery Rule 60(b), in conjunction with Rule 59(a),
provides that a new trial can be granted based on "newly discovered evidence" or
"any other reason justifying relief from the operation of the judgment." Ch.Ct.
R. 60(b). To be entitled to a new trial, the movant must show that the proffered
evidence has come to its knowledge since the trial and that it could not, in the
exercise of reasonable diligence, have been discovered for use at trial. Rosauri
v. Ferguson, Del. Ch., C.A. No. 6616, slip op. at 2, Hartnett, V.C. (Mar. 11,
1983), aff'd, Del. Supr., 467 A.2d 452 (1983) (Exhibit D attached hereto). See
also Secretary of Fin. v. Nor-Mar, Inc., Del. Ch., C.A. No. 16605, slip op. at
8, Jacobs, V.C. (Aug. 27, 1999) (Exhibit E attached hereto) (indicating that an
appropriate procedural vehicle to introduce new evidence is a motion for new
trial based on newly discovered evidence under Rule 60(b)). As this Court has
noted, "applications for a new trial are 'always addressed to the judicial
discretion of the Court so that injustice may be prevented ...'"Ross Sys. Corp.
v. Ross Del. Ch., C.A. No. 10378, slip op. at 3-4, Jacobs, V.C. (May 9, 1994)
(Exhibit F attached hereto) (quoting Rappa,
<PAGE> 7
Inc. v. Hanson, Del. Supr., 209 A.2d 163, 166 (1965).
15. The Triton Defendants respectfully submit that the prerequisites
for entitlement to a new trial or to reopen the record have been met here. This
case was tried in February of last year before Fountainhead and other interested
parties had appeared to express their interest in Ridgewood Hotels. In addition,
the Fountainhead transactions were closed in mid-January of this year, well
after the case had been tried and submitted, and were not publicly disclosed
until the day the Decision was issued. The Triton Defendants further submit that
the newly discovered evidence is relevant to the issues previously presented for
decision and, at a minimum, bear importantly on the issue of what remedies, if
any, should be ordered in this case.
CONCLUSION
For all of the foregoing reasons, the Triton Defendants respectfully
request that their motion for a new trial, or, in the alternative, to reopen the
record to allow for the introduction of newly discovered evidence, be granted.
POTTER ANDERSON & CORROON LLP
By: /s/
--------------------------------
Michael D. Goldman
James F. Burnett
Matthew E. Fischer
1313 North Market Street, Hercules Plaza
P.0. Box 951
Wilmington, Delaware 19899
(302) 984-6000
Attorneys for Defendants Michael M. Earley,
John C. Stiska and Triton Group, Ltd.
Dated: February 7, 2000
<PAGE> 8
MEDIA CONTACT:
Tracy Louthain
The Headline Group
(404) 262-3000
FOR IMMEDIATE RELEASE:
FOUNTAINHEAD LTD. ACQUIRES MAJORITY INTEREST IN RIDGEWOOD HOTELS
RIDGEWOOD TO MANAGE FOUNTAINHEAD'S COLLECTION OF HOTELS AND RESORTS
ATLANTA - FEBRUARY 3, 2000 -- Fountainhead, Ltd., a privately held
holding company with the majority of its assets in real estate recently
purchased Ridgewood Hotels, Inc., (NASDAQ: RWHT), a publicly traded hotel
management company. The acquisition will provide Fountainhead and its collection
of hotels and resorts, marketed under the Chateau Elan brand, a management base
to continue its high level of customer amenities and service.
"We are ecstatic to find Ridgewood, which shares a common vision for
first class service and places high value in recruiting and retaining
exceptional employees," said Henk Evers, who immediately moves into the
President role with more than 17 years hotel experience. "Working closely with
Ridgewood's seven member board, we plan to become a forward thinking company
and create added value for our shareholders."
Ridgewood Hotels currently operates 21 mid to luxury hotels across the
United States. Fountainhead, owned by Dr. Donald and Nancy Panoz, who will
become Chairman and Vice Chairman respectively, holds luxury resort properties
including Chateau Elan Winery & Resort, Georgia and the soon to open Chateau
Elan Lodge, Sebring, FL, and is currently developing four star, destination golf
resorts in Diablo Grande, CA and St. Andrews Bay, Scotland. These properties
will experience a seamless transition over the next 90 days as Ridgewood steps
in with over 20 years of experience in hotel operations.
Superior service and amenities provided by an accommodating,
detail-oriented staff will continue to be the reigning focus for both Ridgewood
and Fountainhead properties. The new partnership will allow Dr. Donald and Nancy
Panoz more involvement in operations at Fountainhead properties and help
Ridgewood Hotels continue to grow in the upper tier to luxury hotel segment.
###
<PAGE> 9
RIDGEWOOD HOTELS, INC.
2859 PACES FERRY ROAD, SUITE 700
ATLANTA, GEORGIA 30339
INFORMATION STATEMENT
Pursuant to Section 14(f) of the
Securities Exchange Act of 1934
and Rule 14f-1 Thereunder
NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS
REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT.
NO PROXIES ARE BEING SOLICITED AND YOU ARE NOT REQUESTED
TO SEND THE COMPANY A PROXY
January 24, 2000
INTRODUCTION
This Information Statement is being mailed on or about January 24,
2000 (the "Statement Date") to holders of record at the close of business on
January 14, 2000 (the "Record Date") of shares of common stock, par value $.01
per share ("Common Stock"), of Ridgewood Hotels, Inc., a Delaware corporation
(the "Company") and to the holder of record at the close of business on the
Record Date of the shares of Series A Convertible Preferred Stock, par value
$1.00 per share ("Preferred Stock"), of the Company. This Information Statement
is being furnished in connection with the appointment to the Company's Board of
Directors, other than at a meeting of the Company's stockholders, of four new
directors (the "Buyer Designees"), each designated by Fountainhead Development
Corp., Inc., a Georgia corporation ("Buyer" or "Fountainhead"). Fountainhead is
engaged principally in the business of owning and operating hotel, resort and
other real estate properties. Fountainhead's principal executive offices are
located at 1394 Broadway Avenue, Braselton, Georgia 30517.
As more fully described below, pursuant to an Agreement, dated January
10, 2000, and a Management Agreement, dated January 10, 2000, each between Buyer
and the Company (together, the "Management Agreement"), the Company issued to
Buyer 1,000,000 shares of Common Stock. In connection with the Management
Agreement, the number of directors constituting the full Board of Directors of
the Company was increased from three to seven, and the four Buyer Designees were
appointed by the directors of the Company to fill the vacancies on the Company's
Board of Directors, such appointments to be effective on February 3, 2000 (the
"Appointment Effective Date"), ten days after this Information Statement is
delivered to stockholders of the Company and filed with the Securities and
Exchange Commission (the "Commission").
<PAGE> 10
Following the execution of the Management Agreement, one of the
principal stockholders of the Company, N. Russell Walden, entered into a Common
Stock Purchase Agreement (the "Walden Agreement") and another of the principal
stockholders of the Company, ADT Security Services, Inc. ("ADT"), entered into a
Stock Purchase Agreement (the "ADT Agreement"), respectively, each dated as of
January 11, 2000, with Buyer. Pursuant to the terms of the Walden Agreement, Mr.
Walden sold to Buyer, subject to certain terms and conditions, 650,000 shares of
Common Stock (the "Walden Shares"), and pursuant to the ADT Agreement, ADT sold
to Buyer, subject to certain terms and conditions, 450,000 shares of Preferred
Stock, of the Company (the "ADT Shares"). Through the issuance of the Common
Stock pursuant to the Management Agreement and the acquisitions of the Walden
Shares and the ADT Shares, Buyer has obtained beneficial ownership of
approximately 79% of the Common Stock. As of the Record Date, the Company had
2,513,480 shares of Common Stock issued and outstanding that were held of record
by approximately 190 persons. Each share of Common Stock is entitled to one
vote.
As of the Record Date, the Company had 450,000 shares of Preferred
Stock issued and outstanding, and Buyer owned of record all such issued and
outstanding shares of Preferred Stock. Shares of Preferred Stock of the Company
are entitled to vote only as permitted by the Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock of Ridgewood
Properties, Inc. ("Certificate of Designations") and as required by the Delaware
General Corporation Law ("DGCL"). Pursuant to the Certificate of Designations,
shares of Preferred Stock, voting as a single class, are entitled to elect one
director to serve on the Board of Directors of the Company for so long as a
minimum of 50,000 shares of preferred stock are outstanding. Shares of Preferred
Stock become entitled to vote on all matters presented to stockholders of the
Company, together with and not separate from the shares of Common Stock, in the
event that, and for so long as, the Company has failed to pay, in full, two
quarterly dividends, whether or not consecutive, payable on the Preferred Stock.
Due to the failure of the Company to pay dividends for the quarters ended April
30, 1999, July 31, 1999 and October 31, 1999, Buyer, as the holder of all the
issued and outstanding Preferred Stock, has and will have for so long as the
Company fails to cure two of such dividend defaults, the right to vote on all
matters presented to the stockholders of the Company for consideration. The ADT
Shares are subject to certain rights of ADT to require Buyer to return the
Preferred Stock to ADT in the event that ADT is required by a court order, in
litigation pending in the Court of Chancery in Delaware involving ADT, the
Company and the directors of the Company, to return the Preferred Stock to the
Company. In such case, Buyer has the obligation to purchase any Common Stock
that may be issued to ADT as a result of such a court order.
The purpose of this Information Statement is to provide certain
information concerning the Buyer, the Company's Board of Directors and the
appointment of the Buyer Designees.
-2-
<PAGE> 11
CHANGE OF CONTROL OF THE COMPANY
MANAGEMENT AGREEMENT
On January 10, 2000, the Company entered into the Management Agreement
with Buyer, pursuant to which Buyer retained the Company to perform management
services at Chateau Elan Winery and Resort, one of Buyer's properties, for a
period of five years. In consideration of Buyer's agreement to enter into the
Management Agreement and a payment of $10,000 by Buyer to the Company, the
Company issued to Buyer 1,000,000 shares of Common Stock. In the Management
Agreement, Buyer agreed to pay the Company a base management fee equal to 2% of
the gross revenues of the properties being managed, plus an annual incentive
management fee to be determined each year based on the profitability of the
properties being managed during that year.
The Management Agreement has a term of five years but is terminable
upon the transfer by Buyer of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by Buyer,
Buyer shall pay to the Company a portion of the projected fees owed to the
Company under the Agreement, with adjustments based on the term of the
Management Agreement remaining. In such event, Buyer may elect to surrender to
the Company shares of Common Stock in lieu of a cash payment.
In connection with the Management Agreement, the number of directors
constituting the full Board of Directors of the Company was increased from three
to seven members, effective on January 6, 2000. Further, the four Buyer
Designees were appointed by the directors of the Company to fill the resulting
vacancies on the Company's Board of Directors, effective as of the Appointment
Effective Date. The four Buyer Designees are Donald E. Panoz, Nancy C. Panoz,
Sheldon E. Misher and Henk H. Evers. N. Russell Walden, Luther A. Henderson and
Michael M. Earley, currently directors of the Company, are presently continuing
to serve in that capacity (the "Continuing Directors").
Upon the Appointment Effective Date, the Buyer Designees will
constitute a majority of the Company's directors. The Continuing Directors and
the Buyer Designees will hold office as directors for a term of one year or
until their successors are elected and qualified.
STOCK ACQUISITIONS
Walden Agreement. Pursuant to the Walden Agreement, Buyer purchased
from Mr. Walden 650,000 shares of Common Stock. The consideration paid by Buyer
for the Walden Shares was $1,300,000, or $2.00 per share. To fund the
acquisition of the Walden Shares, Buyer used its own funds for an initial cash
payment of $780,000 and issued two promissory notes to Walden, each in the
principal amount of $260,000, representing the balance of the purchase price of
the Walden Shares. These notes become due and payable in full on January 11,
2001 and
-3-
<PAGE> 12
January 11, 2002, respectively. Each note bears interest at a rate of 6% per
year, which interest is payable quarterly, commencing March 31, 2000. Pursuant
to the Walden Agreement, Buyer has an option to purchase up to 65,000 additional
shares of Common Stock from Mr. Walden, which option remains in effect for 15
months from the date of the Walden Agreement. In the event Mr. Walden wishes to
sell any of the Common Stock owned by him and subject to Buyer's option, Buyer
has a right of first refusal to purchase such shares at a purchase price of
$2.00 per share.
ADT Agreement. Pursuant to the ADT Agreement, Buyer purchased from ADT
450,000 shares of Preferred Stock. The consideration paid by Buyer for the ADT
Shares was approximately $1,650,000. Each share of Preferred Stock is
convertible into three shares of Common Stock. To fund the acquisition of the
ADT Shares, Buyer used working capital and paid the purchase price in cash. The
ADT Shares are subject to certain rights of ADT to require Buyer to return the
ADT Shares to ADT in the event ADT is required by a court order, in litigation
pending in the Court of Chancery in Delaware involving ADT, the Company and the
directors of the Company, to return the ADT Shares to the Company. In such case,
Buyer would receive a return of all consideration paid to ADT pursuant to the
ADT Agreement and would be obligated to purchase any Common Stock issued to ADT
as a result of such court order.
CHANGE IN MANAGEMENT
Effective as of January 11, 2000, Mr. Walden was replaced as President
and Chief Executive Officer of the Company. Donald E. Panoz was appointed to
serve as Chairman of the Board and Chief Executive Officer of the Company, Nancy
C. Panoz was appointed to serve as Vice Chairman and Henk H. Evers was appointed
to serve as President and Chief Operating Officer, in each case effective
January 11, 2000, except that the prospective directors will take office as of
the Appointment Effective Date. Mr. and Mrs. Panoz are directors and executive
officers of Buyer and collectively may be deemed to be the beneficial owners of
all of the voting stock of Fountainhead Holdings, Ltd. ("Holdings"), the owner
of all of the voting stock of Buyer. Although Mr. and Mrs. Panoz may be deemed
to beneficially own such voting shares of Holdings, they do not have any
economic benefit in such shares. Mr. Evers serves as Chief Executive Officer and
President of Buyer.
-4-
<PAGE> 13
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information about the individuals who
currently serve as directors and executive officers of the Company, as well as
those individuals who will serve as directors of the Company pursuant to the
management changes described above.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ----- ---------------------------------------------------
<S> <C> <C>
Donald E. Panoz + 64 Chairman of the Board and Chief Executive
Officer
Nancy C. Panoz + 63 Vice Chairman of the Board
Henk H. Evers + 40 President, Chief Operating Officer and Director
Karen S. Hughes 45 Vice President and Chief Financial Officer
Byron T. Cooper 49 Vice President, Planning and Development
Sheldon E. Misher + 58 Secretary and Director
Michael M. Earley 44 Director
Luther A. Henderson 79 Director
N. Russell Walden 61 Director
</TABLE>
- ---------------------
+ Each of these individuals was elected to the Board of Directors on January
6, 2000, but shall not take office as a director of the Company until the
Appointment Effective Date.
DONALD E. PANOZ was elected as Chairman of the Board and Chief
Executive Officer of the Company on January 11, 2000 and will take office as
Chairman of the Board on the Appointment Effective Date. In 1986, Mr. Panoz
founded Fountainhead and has served as its Chairman since inception. Since July
1999, Mr. Panoz has served as the Chairman of Elan Motor Sports Technologies,
Inc., an auto racing design, development and manufacturing company located in
Braselton, Georgia. Since 1997, Mr. Panoz has served as the Chairman of Panoz
Motor Sports, a race car manufacturer and competitor that he founded. Since
1996, Mr. Panoz has served as the Chairman and Chief Executive Officer of
L'Auberge International Hospitality Company, a hotel and resort management
company that he co-founded with his wife. From 1969 until 1996, Mr. Panoz served
as the Chairman and Chief Executive Officer of Elan Corporation plc, a leading
worldwide pharmaceutical research and development company located near Dublin,
Ireland that he co-founded with his wife. Since 1992, Mr. Panoz has been a
director of Warner Chilcott plc, a publicly traded company headquartered in
Dublin, Ireland, and served as its Chairman from 1996 to 1998. Since 1981, Mr.
Panoz has served as the Chairman and Chief Executive Officer of Chateau Elan
Winery and Resort, a 422 bedroom inn, conference center and winery located
approximately 40 miles northeast of Atlanta, Georgia. Mr. Panoz also serves on
the Board of Directors of the Georgia Chamber of Commerce. Mr. Panoz is married
to Nancy C. Panoz.
-5-
<PAGE> 14
NANCY C. PANOZ was elected as Vice Chairman of the Board of Directors
of the Company on January 11, 2000 and will take office in such capacity as of
the Appointment Effective Date. Since 1996, Mrs. Panoz has also served as the
Vice Chairman of L'Auberge International Hospitality Company in 1996, a company
that she co-founded with her husband. In 1989, Mrs. Panoz became President of
the Chateau Elan Winery and Resort, which she founded with her husband in 1981.
In 1985, Mrs. Panoz founded Elan Natural Waters, Inc., a company that owns and
operates a mineral water bottling plant in Blairsville, Georgia, and has served
as its President and Chairman since inception. In 1985, Mrs. Panoz founded Nanco
Holdings, Inc., an investment and real estate holding company. In 1969, Mrs.
Panoz co-founded Elan Corporation with her husband, Donald E. Panoz and served
as Elan's Managing Director from 1977 to 1983 and its Vice Chairman from 1983 to
1995. Mrs. Panoz currently serves on the board of directors of numerous
non-profit organizations, including the Atlanta Convention and Visitors Bureau,
the Georgia Chamber of Commerce and Gwinnett Foundation, Inc.
HENK H. EVERS was elected as President, Chief Operating Officer and a
director of the Company on January 11, 2000 and will take office as a director
of the Company on the Appointment Effective Date. Since January 1999, Mr. Evers
has been the Chief Executive Officer of Fountainhead. From November 1994 until
January 1999, Mr. Evers was the General Manager of the Chateau Elan Winery and
Resort, where he was in charge of developing the Chateau Elan brand name and
properties in Georgia, California, Florida and Scotland. Prior to that, Mr.
Evers was a member of the executive committee for various Marriott International
properties for approximately 13 years.
KAREN S. HUGHES has served as Vice President and Chief Financial
Officer of the Company since the Company was formed in October 1985. Ms. Hughes
also served as the Secretary of the Company from October 1985 until January
2000.
BYRON T. COOPER has served as the Vice President, Planning and
Development of the Company since its formation.
SHELDON E. MISHER was elected as Secretary and a director of the
Company on January 11, 2000 and will take office as a director on the
Appointment Effective Date. Since May 1999, Mr. Misher has been associated with
Commonwealth Associates, a broker-dealer located in New York, New York. From
1969 to 1999, Mr. Misher practiced law with the firm of Bacher, Tally, Polevoy &
Misher, located in New York, New York, where he was most recently a Senior
Partner.
MICAEL M. EARLEY has been a director of the Company since June 1993.
Mr. Earley is a director of ADT and principal of Triton Group Management, Inc.,
a company that provides management and consulting services. He was President
of Triton Group Ltd. ("Triton") from July 1994 until April 1997 and its Chief
Executive Officer from January 1996 until April 1997. Prior to that time,
Mr. Earley held various senior management positions, including that of Chief
Financial Officer, with Triton and related entities since 1986.
-6-
<PAGE> 15
LUTHER A. HENDERSON has been a director of the Company since its
formation in 1985. From 1983 to 1985, he served as a director of CMEI, Inc.
("CMEI"), the Company's predecessor. From 1980 to 1993, Mr. Henderson served as
a director of Pier 1 Imports, Inc., a commercial retailer. Mr. Henderson is also
a member of the Board of Directors of Beeba's Creations, Inc. and is President
of Pirvest, Inc.
N. RUSSELL WALDEN was President and Chief Executive Officer of the
Company from its formation in 1985 until January 2000. Mr. Walden has also been
a director of the Company since 1985. Mr. Walden was a director of Sunbelt
Nursery Group, Inc. from 1983 until 1990. He is the former President, Chief
Executive Officer and Director of CMEI and a former director of Pier 1 Imports
Inc.
MEETINGS AND COMMITTEES OF THE BOARD
For fiscal year 1999, the Board established an Audit Committee, a
Compensation Committee and a Stock Option Committee, but does not have a
nominating committee.
During fiscal year 1999, the Board held a total of five meetings. Each
of the directors attended all of these meetings. Each director also attended
each of the meetings of the committees on which he served that were held during
the periods that he served as a member of such committee.
COMMITTEES OF THE BOARD
The Audit Committee reviews the professional services and independence
of the Company's certified public accountants, the results of the Company's
internal audits, and the Company's accounts, procedures and internal controls.
During fiscal year 1999, the Audit Committee was comprised of Messrs. Earley and
Henderson. The Audit Committee met once during fiscal year 1999.
The Compensation Committee, which did not meet separately during the
1999 fiscal year, is responsible for reviewing matters relating to compensation
and making recommendations to the Board concerning compensation of the Company's
officers, directors and employees. During fiscal year 1999, the Compensation
Committee was comprised of Messrs. Earley and Henderson.
The Stock Option Committee, which did not meet during the 1999 fiscal
year, is responsible for administering the Company's Stock Option Plan.
During fiscal year 1999, the sole member of the Stock Option Committee was Mr.
Earley.
-7-
<PAGE> 16
EXECUTIVE COMPENSATION AND OTHER INFORMATION
DIRECTOR COMPENSATION
During fiscal year 1999, directors who are not employees of the Company
received a retainer of $13,200 per year plus $800 for each Board meeting
attended. All directors were reimbursed for expenses incurred in connection with
attending Board and committee meetings.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation of
the Company's Chief Executive Officer for the Company's past three fiscal years.
The cash compensation of the Company's other executive officers did not exceed
$100,000 for the last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL -------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- ------------------------------------- --------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
N. Russell Walden(2) .............. 1999 $ 200,000 $ 0 $ 1,186
President and Chief Executive 1998 200,000 41,000 4,500
Officer 1997 200,000 0 2,535
</TABLE>
- ---------------------
(1) The amounts shown in this column consist of Company matching
contributions on behalf of the named person under the Ridgewood Hotels
Employee Savings Plan.
(2) As of January 11, 2000, Mr. Walden was no longer an executive officer
of the Company.
STOCK OPTION PLAN
In September 1993, the Board of Directors adopted the Ridgewood Hotels,
Inc. 1993 Stock Option Plan (the "Plan"). Under the Plan, the Company may grant
to key employees and eligible directors of the Company and its subsidiaries
incentive and non-qualified stock options. The Plan is administered by a
committee of two or more members of the Board of Directors, which interprets the
Plan and is authorized to determine the type of options to be granted, option
exercise prices, the persons eligible to receive awards, the number of shares
subject to each option and the other terms, conditions and limitations
applicable to each such grant of options.
Incentive stock options must comply with all of the requirements
imposed by the Internal Revenue Code of 1986, as amended, with respect to such
options. Incentive stock options granted under the Plan will have an exercise
price of not less than 100% of the fair market value of the shares of Common
Stock on the date on which the option is granted. With respect to an incentive
stock option granted to a participant who owns more than 10% of the combined
voting stock of the Company or any parent or subsidiary of the Company, the
exercise price must be at
-8-
<PAGE> 17
least 110% of the fair market value of the shares subject to the option on the
date of grant. The exercise price of a non-qualified stock option granted under
the Plan shall also be determined by the committee, but such exercise price must
be at least the par value of the Common Stock.
There are 1,200,000 shares authorized for possible issuance under the
Plan. As of the Record Date, options to purchase 678,000 of such reserved shares
of Common Stock have been granted under the Plan and not otherwise cancelled or
terminated, and options to purchase 228,000 shares remain outstanding.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted during fiscal year 1999 to the
executive officer named in the Summary Compensation Table.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the number and
value of unexercised options held by the officer named in the Summary
Compensation Table as of August 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SUM UNDERLYING UNEXERCISED MONEY OPTIONS AT
ACQUIRED OPTIONS AT FISCAL YEAR END FISCAL YEAR-END
ON VALUE (#) ($) (1)
EXERCISE REALIZED --------------------------------- ---------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ---------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
N. Russell Walden........ 0 $ 0 150,000 0 $ 0 $ 0
</TABLE>
- ---------------------
(1) The 150,000 shares were not considered in-the-money since the exercise
price of the options ($1.83 per share) was greater than the average of
the bid and ask prices ($0.84 per share) of the Common Stock on August
31, 1999.
EMPLOYMENT AND TERMINATION AGREEMENTS
Mr. Walden was a party to a Post-Employment Consulting Agreement with
the Company, dated September 4, 1991, and amended as of August 13, 1998 (the
"Employment Agreement"), until such agreement was terminated effective January
11, 2000. Under the terms of the Employment Agreement, in the event Mr. Walden's
employment was terminated by the Company without cause or Mr. Walden terminated
his employment with cause (defined as (1) removal from his present position or
title by the Company, (2) a decrease in his salary or (3) forcing him to
relocate), Mr. Walden was permitted to remain with the Company as a consultant
for a period of 12 months. In exchange for such consulting services, the Company
was obligated to pay Mr. Walden an amount equal to his annual salary immediately
prior to the event of termination and to provide him with certain other
benefits.
On January 11, 2000, Mr. Walden entered into a Consulting Agreement
with the Company (the "Consulting Agreement"). According to the terms of the
Consulting Agreement, Mr. Walden
-9-
<PAGE> 18
will serve as a consultant to the Company for a period of six months, for which
he will receive a payment of $50,000. The Company also agreed to provide Mr.
Walden with health insurance benefits substantially similar to those offered to
employees of the Company for a period of three years. In the Consulting
Agreement, Mr. Walden released all claims against the Company except with
respect to such health insurance benefits and compensation and terminated his
Employment Agreement and participation in the Company's Supplemental Retirement
and Death Benefit Plan. Mr. Walden also agreed to the cancellation of 150,000
options to purchase Common Stock of the Company, for which the Company agreed to
pay him $25,000.
SUPPLEMENTAL RETIREMENT AND DEATH BENEFIT PLAN
The Ridgewood Hotels, Inc. Supplemental Retirement and Death Benefit
Plan (the "SERP") was adopted, effective January 1, 1987, to provide
supplemental retirement benefits for selected employees of the Company. As of
August 31, 1999, only one employee of the Company was a participant in the SERP.
However, there are currently no employees of the Company participating in the
SERP.
Estimated annual benefits payable upon separation from employment,
determined using the SERP formula, are equal to 50% of the participant's "final
three-year average compensation," defined under the SERP as salary plus bonus,
commissions and any amounts deferred under any deferred compensation plan, less
the total of the participant's (i) Primary Social Security benefit for the
period during which benefits are to be paid and (ii) certain benefits provided
under the qualified retirement plans of the Company or Triton. Benefits vest at
the rate of 10% for each year of credited service for the Company or Triton,
with up to five years of credited service permitted at the time the SERP was
adopted. Benefits are paid monthly over a 15-year period, and commence within 45
days of a participant's retirement. If the participant's employment terminates
before scheduled retirement, benefit payments commence within 30 days of the
participant reaching age 65. The form of benefit payment under the SERP may be
modified at the discretion of the Pension Committee, which administers the SERP.
The SERP also provides for payment of a pre-retirement lump sum death
benefit to the participant's beneficiary equal to 600% of the participant's
final annual compensation if the participant is in the Company's employ or is
less than age 65 and totally and permanently disabled as of his date of death,
and a post-retirement lump sum death benefit to the participant's beneficiary
equal to 200% of the participant's final annual compensation if death occurs
after the participant has retired from the Company or has attained age 65 after
becoming totally and permanently disabled.
Mr. Walden was the sole participant in the SERP until January 11, 2000,
when he was replaced as an officer of the Company. He subsequently entered into
a Consulting Agreement with the Company in which he agreed to a full termination
of his rights and benefits under the SERP. However, the Company agreed to pay
Mr. Walden $55,000 per year for a period of 15 years in accordance with the
terms and conditions of the SERP. Such annual payment represented a decrease in
the amount of benefit to which Mr. Walden would otherwise have been entitled
under the
-10-
<PAGE> 19
SERP.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1999, the Company's Compensation Committee consisted
of Michael M. Earley and Luther A. Henderson. Mr. Walden, the then President and
Chief Executive Officer of the Company, participated in deliberations concerning
executive officer compensation during fiscal year 1999 in his capacity as a
member of the Board. He did not, however, participate in any decisions regarding
his own compensation as an executive officer of the Company.
BENEFICIAL OWNERSHIP OF THE COMPANY'S SECURITIES
The following table sets forth information as of the Record Date
regarding the beneficial ownership of the capital stock of the Company by (a)
each person who is currently a director of the Company; (b) each person who will
be a director of the Company as of the Appointment Effective Date, (c) each
executive officer of the Company named in the Summary Compensation Table, (d)
each beneficial owner of more than 5% of the Common Stock and Preferred Stock of
the Company, and (e) all directors and executive officers as a group, including
those directors who will serve as directors of the Company as of the Appointment
Effective Date.
Except as otherwise indicated, each individual or group named has sole
investment and voting power with respect to the securities shown. The share
amounts in the table below include shares of capital stock deemed to be
outstanding for those persons who have the right to acquire beneficial ownership
of such shares within 60 days of the date of this Information Statement through
the exercise of stock options, convertible securities or otherwise. Shares of
capital stock underlying such options, convertible securities or other
securities are deemed to be outstanding for the purpose of computing the
percentage of outstanding shares of the class owned by such person but are not
deemed to be outstanding for the purpose of computing the percentage of the
class owned by any other person.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF CLASS OF SHARES BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER (1) BENEFICIALLY OWNED OWNED OF CLASS
- ----------------------------------------- -------------------------- ------------------------- -------------------
<S> <C> <C> <C>
Fountainhead Development Corp., Inc. Common Stock 3,065,000(2) 79.3%
1394 Broadway Avenue
Braselton, GA 30517 Series A Preferred
Stock 450,000(3) 100.0%
Donald E. Panoz Common Stock 3,065,000(4)(5) 79.3%
Series A Preferred
Stock 450,000(3)(5) 100.0%
Nancy C. Panoz Common Stock 3,065,000(4)(5) 79.3%
</TABLE>
-11-
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
Series A Preferred
Stock 450,000(3)(5) 100.0%
Sheldon E. Misher Common Stock 0 0%
Henk H. Evers Common Stock 0 0%
Karen S. Hughes Common Stock 135,440(6) 5.3%
Michael M. Earley Common Stock 0 0%
500 West Harbor Drive #1115
San Diego, CA 92101
Luther A. Henderson Common Stock 58,800(7) 2.3%
5608 Malvey Avenue, Suite 104-A
Fort Worth, TX 76107
N. Russell Walden(8) Common Stock 130,000 5.2%
3190 Ridgewood Road
Atlanta, GA 30327
All executive officers and directors Common Stock 3,457,160(5)(9) 86.4%
as a group (9 persons)
Series A Preferred
Stock 450,000(3)(5) 100.0%
</TABLE>
- ---------------
(1) Unless otherwise indicated, the address of each beneficial owner is 2859
Paces Ferry Road, Suite 700, Atlanta, Georgia 30339.
(2) Includes (i) 1,350,000 shares of Common Stock that may be received upon the
conversion of the ADT Shares and (ii) 65,000 shares of Common Stock
underlying an option granted to Fountainhead by N. Russell Walden that is
immediately exercisable.
(3) Pursuant to the terms and conditions of the ADT Stock Purchase Agreement,
Fountainhead may be required to return all of these shares of Preferred
Stock to ADT in certain circumstances. See "Change of Control -- Stock
Acquisitions ADT -- Agreement."
(4) Includes (i) 1,350,000 shares of Common Stock that may be received upon the
conversion of the ADT Shares held by Fountainhead, (ii) 1,650,000 shares of
Common Stock held by Fountainhead, and (iii) 65,000 shares of Common Stock
underlying an option granted to Fountainhead by Mr. Walden that is
immediately exercisable.
(5) Mr. and Mrs. Panoz, who are husband and wife, are directors and
collectively may be deemed to beneficially own all of the voting stock of
Holdings, which in turn owns all of the voting stock of Fountainhead.
Although they may be deemed to meet the definition of beneficial ownership
with respect to the voting stock of Holdings, they have no economic
interest in such voting stock. Because these shares of the Company are held
of record by Fountainhead, each of Mr. and Mrs. Panoz may be deemed to be a
beneficial owner of all of such shares.
(6) Includes 60,000 shares of Common Stock underlying options that are
immediately exercisable.
(7) Includes 18,000 shares of Common Stock underlying options that are
immediately exercisable.
(8) As of January 11, 2000, Mr. Walden was no longer an executive officer of
the Company.
(9) Includes (i) 1,350,000 shares of Common Stock that may be received upon the
conversion of the ADT Shares held by Fountainhead, (ii) 7,920 shares of
Common Stock held by persons not listed in the table above and (iii)
203,000 shares of Common Stock underlying options that are immediately
exercisable, including 60,000 shares of Common Stock underlying options
granted to persons not listed in the table above.
-12-
<PAGE> 21
COMPLIANCE WITH SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and persons who own more than 10% of the Common Stock to file
reports of beneficial ownership and changes in beneficial ownership with the
Company and the Securities and Exchange Commission with respect to all classes
of the Company's capital stock. Based solely on its review of the copies of such
reports furnished by such reporting persons to the Company, the Company believes
that during the fiscal year ended August 31, 1999, all filing requirements
applicable to its officers, directors and greater than 10% stockholders were
satisfied.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 10, 2000, the Company entered into the Management Agreement
with Buyer, in which Buyer retained the Company to perform management services
at Chateau Elan, one of Buyer's properties, for a period of five years. In
consideration of Buyer's agreement to enter into the Management Agreement and in
consideration of a payment of $10,000 by Buyer to the Company, the Company
issued to Buyer 1,000,000 shares of Common Stock.
The Management Agreement has a term of five years but is terminable
upon the transfer by Buyer of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by Buyer,
Buyer shall pay to the Company the projected fees owed to the Company under the
Agreement, with adjustments based on the term of the Management Agreement
remaining. In such event, Buyer may elect to surrender to the Company shares of
Common Stock in lieu of making a cash payment to the Company.
By order of the Board of Directors of
RIDGEWOOD HOTELS, INC.
By: /s/ Henk H. Evers
---------------------------------
Henk H. Evers
President and Chief Operating Officer
Atlanta, Georgia
January 24, 2000
-13-
<PAGE> 22
EXHIBIT 22
RWHT - RIDGEWOOD HOTELS INC. Short BASIC Detailed
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
4.00 AS OF HIGH LOW OPEN PREV CLOSE BID - ASK 52-WK RANGE
10:39 AM EST 4.50 3.94 4.50 4.56 3.44 - 3.44 0.50 - 6.00
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
-0.56 12.33% VOLUME P/E EPS DIVIDEND YIELD MARKET CAP
7,500 N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TIME FRAME 1m - 2m - 3m - 6m YTD - 1y - 2y - 3y - 5y - 10y MOVING AVERAGES NONE - [13,50] day - [50,200] day (Exponential)
SCALE LOG+ - Log - Linear COMPARE TO INDEX NONE - S&P 500 - DJIA - NASDAQ - TSE 300
</TABLE>
[CHART]
<PAGE> 23
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
COURT HOUSE
MAURICE A. HARTNETT, III DOVER, DELAWARE
VICE-CHANCELLOR 10 March 1983 GEORGETOWN, DELAWARE
WILMINGTON, DELAWARE
Mrs. Dorothy F. Dunleavy
Mr. Steven D. Ferguson
Mrs. Hilda D. Ferguson
11 Holly Oak Drive
Newark, DE 19713
Bartholomew J. Dalton, Esquire
Charles Brandt, Esquire
BRANDT & BENSON
P. O. Box 248
Wilmington, DE 19801
Leonard L. Williams, Esquire
237 Delaware Trust Building
Wilmington, DE 19801
RE: Rosauri et al v. Ferguson
Civil Action #6616 (1981) - New Castle County
Submitted: February 11, 1983
ON DEFENDANT'S POST-TRIAL MOTIONS: DENIED
Ladies and Gentlemen:
Defendant sua sponte, and without the knowledge of her attorneys of
record in this case, filed post-trial motions after my Opinion of December 2,
1982. All of them are without merit and must be denied.
One of defendant's motions was a motion for reargument. It was filed
on December 30, 1992. It was, therefore, not timely and must be denied. Rule
59(f). She also filed a request for additional time to file additional papers,
which was granted as to the other motions.
<PAGE> 24
RE: C.A. #6616-NC
Rosauri et al v. Ferguson
Page 2
Defendant also filed "a motion for reopening the original hearing" and
"a motion for a new hearing". These two motions are, for all practical
purposes, the same and will be considered together as a motion for a new trial.
Defendant sets forth numerous reasons that she thinks she is entitled to a
new trial - none of them have merit. One of the basis for the motions is that
there was not introduced at the trial any evidence from a real estate appraiser
that the value of the property in question exceeded $16,000. There was evidence
at the hearing, however, in the form of the testimony of the defendant, that
she had been advised by a real estate appraiser that the value of the property
was $15,000.
Defendant also, in effect, claims that she should be excused from her
obligations under the contract she entered into because of her age and lack of
business experience. This area was covered in the trial.
A motion for a new trial to enable a party to introduce additional
evidence will not be granted where the movant fails to show that with
reasonable diligence he could not have discovered the evidence before trial.
Sussex Poultry Co. v. American Ins. Co., Del. Supr., 301 A.2d 281 (1973). He
must show that the proffered evidence has come to his knowledge since the trial
and that it could not, in the exercise of reasonable diligence, have been
discovered for use at the trial. Bata v. Bata, Del. Supr., 170 A.2d 711 (1961).
There has been no showing here that defendant could not have obtained
before trial the evidence she now seeks to assert.
<PAGE> 25
RE: C.A. #6616-NC
Rosauri et al v. Ferguson
Page 3
Evidence which is only cumulative at best does not justify granting a
new trial. Cashuan v. Darling, Del. Ch., 107 A.2d 896 (1954). The evidence
which defendant now seeks to assert, even if true and even if it had been
presented at the trial, would not have changed the result. The most persuasive
evidence at trial was the uncontroverted fact that defendant not only received
a $500 down payment but also later received $1,000, then another $1,000 and
finally $500 from the plaintiff at the request of defendant and after she had
time to reflect on the agreement and was aware of all its ramifications.
Defendant also moved to set aside the judgment or order. Since no
final judgment or order has been entered in this case, this motion is, on its
face, without merit. Defendant's other arguments were all considered by me
after trial or are without foundation or merit. Defendant has shown no legally
adequate reason why the result in this matter should be changed.
This case was vigorously litigated by the attorneys involved and,
like many cases, it was not easy to decide. Parties to litigation often are
unable to accept an adverse ruling because they believe they are right. The
Court does not enjoy seeing a litigant lose but as an impartial tribunal its
job is to rule in favor of one or the other. It is not an easy task and the
Court can only do its best.
<PAGE> 26
RE: C.A. #6616-NC
Rosauri et al v. Ferguson
Page 4
Litigation, like everything else in life, must have a conclusion. A
litigant is entitled to his day in Court and is entitled to a full and fair
opportunity to present his case -- once to the trial court and then again, if he
desires, to an appellate court. That is all that a litigant is ordinarily
entitled to. The almost impossible burden of a heavy case load does not permit
a litigant two trials on the same issue unless there is error or extremely
unusual circumstances. In my opinion, there is neither here and all the
post-trial motions of the defendant are denied.
IT IS SO ORDERED.
A final order (a copy of which is enclosed) is hereby entered. The
time for an appeal is 30 days from today.
Yours truly,
/s/ Maurice A. Hartnett, III
MAH: jds
Enc.
cc: Register in Chancery
File
<PAGE> 27
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JACK B. JACOBS COURT HOUSE
VICE-CHANCELLOR WILMINGTON, DELAWARE 19801
August 27, 1999
Allison E. Reardon, Esquire Joseph D. Kulesza, Jr., Esquire
Deputy Attorney General 824 N. Market Street
Carvel State Building Suite 810
820 N. French Street P.O. Box 2323
Wilmington, DE 19801 Wilmington, DE 19899
RE: The Secretary of Finance v. Nor-Mar,
Inc. t/a The Smoke Shop and Steven
H. Rudnitsky, C.A. No. 16605
Dear Counsel:
On August 20, 1999, the Court heard the plaintiff's motion to hold the
defendants in contempt of this Court's Order, dated August 11, 1999, which
enjoined the defendants from transacting any business in this State in
connection with or related to the business known as Nor-Mar, Inc., trading as
The Smoke Shop. Based upon the testimony of Defendant Steven H. Rudnitsky
("Rudnitsky"), as well as the facts stipulated by the defendants' counsel, this
Court found the defendants in contempt of the August 11 Order, in that they
had continued to operate the Smoke Shop in violation of the injunction
prohibiting them from so doing.
<PAGE> 28
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 2
On August 23, 1999, the defendants filed a Motion for Reargument, based
upon purported new evidence that was not presented at the contempt hearing held
three days before.(1) This is the Opinion of the Court on that Motion which,
for the reasons set forth, is denied.
I.
To understand the Motion for Reargument, it becomes necessary to recount
the basis for the contempt ruling from which the defendants seek relief. At the
August 20, 1999 contempt hearing the defendants admitted that (i) they knew of
the prohibitions contained in the August 11 injunction Order, and that (ii)
despite that Order, Mr. Rudnitsky had continued to operate The Smoke Shop.
Nonetheless, the defendants argued that those activities did not violate the
August 11, 1999 injunction, because on or about August 13, 1999 Nor-Mar had
sold its assets (i.e., The Smoke Shop business, including its inventory) to
Moishe, Inc., a separate corporation purportedly owned by one Howard Hyman, who
(Mr. Rudnitsky testified) is a distant cousin. Thereafter (Mr. Rudnitsky
testified),
- ----------------------
(1) Although the defendants continue to be represented by counsel of
record, the Motion for Reargument was signed (and personally filed) by Mr.
Rudnitsky, but was not signed by counsel of record, as our Rules require.
<PAGE> 29
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 3
Moishe, Inc. hired Rudnitsky to operate The Smoke Shop as Moishe's employee.
As a consequence of these events, the defendants claimed, Rudnitsky's
continued operation of The Smoke Shop did not constitute a contempt. The August
11 Order enjoined Nor-Mar and Rudnitsky, but Nor-Mar no longer owned or
operated the business, and Rudnitsky was prohibited only from "transacting any
business...related to or connected with the business known as Nor-Mar, Inc.
t/a The Smoke Shop." Because Nor-Mar was no longer involved with that business
and because Rudnitsky was no longer acting as an agent of Nor-Mar, defendants
maintained that the continued operation of The Smoke Shop did not violate the
August 11 Order.
The infirmity in that position is that it rested entirely upon the premise
that The Smoke Shop, including the business and assets associated therewith,
had been sold to a third party in a bona fide transaction. The evidence
presented at the August 20 contempt hearing established, however, that that
premise was factually unsupported.
The evidence presented to support the bona fides of the sale to Moishe,
Inc./Howard Hyman consisted essentially of the uncorroborated (and
<PAGE> 30
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 4
self-serving) testimony of Mr. Rudnitsky. More specifically:
1. The defendants presented no documentary evidence (such as a written
agreement of sale or a written agreement evidencing Moishe, Inc.'s employment of
Mr. Rudnitsky) that any such sale and employment relationship had actually
occurred. Mr. Rudnitsky did show that he had formed Moishe, Inc., (using a
Nor-Mar check to pay the incorporation fee). The only relevant document produced
at the hearing was a one page "Bill of Sale," signed by Mr. Rudnitsky on behalf
of Nor-Mar, Inc. which purported to transfer (effective as of August 13, 1999)
"the property described in the attached Exhibit for the amount of $1.00." No
"Exhibit" describing the property being sold was attached, and the "Bill of
Sale" bore no signature of Mr. Hyman on behalf of Moishe, Inc., the putative
buyer. Mr. Rudnitsky testified that that "Bill of Sale" was the only
documentation created in connection with the transaction, and conceded that he
never delivered the Bill of Sale to Mr. Hyman.
2. Mr. Hyman, who Rudnitsky claimed was the other party to this
transaction, never came forward, either in person or by affidavit, to vouch for
its bona fides. His absence is telling, because if in fact Mr. Hyman (or his
<PAGE> 31
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 5
corporation) had acquired the business, one would expect him to manifest some
interest in defending his acquisition. In fact, the evidence showed that
throughout this entire scenario there was only one actor -- Mr. Rudnitsky --
who had the strongest self interest in keeping The Smoke Shop's doors open.
Mr. Rudnitsky alone formed Moishe, Inc., caused the "Bill of Sale" to be
prepared, and testified at the contempt hearing. Mr. Hyman never surfaced.
3. In addition, Mr. Rudnitsky testified to facts that were wholly
inconsistent with any bona fide sale. Although Mr. Rudnitsky conceded that The
Smoke Shop had been the source of his livelihood for almost 25 years, and that
the inventory being sold could be liquidated for $20,000, he was unable to
explain why he would be willing to divest his interest in that business for
only $1.00 -- an amount Rudnitsky admitted he never actually received.
Based on this record, the Court found that no legitimate sale of the
business had ever occurred, but also that if a transfer of some kind to Moishe,
Inc. did take place, it had no legal significance because Moishe, Inc. was the
agent or a1ter ego of Mr. Rudnitsky. For these reasons, the Court found the
defendants in contempt of its August 11, 1999 Order.
<PAGE> 32
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 6
II.
Three days later, on August 23, 1999, Mr. Rudnitsky served and filed a
document styled a "Motion for Reargument" of the Court's contempt ruling. The
thrust of the Motion is that at the contempt hearing the defendants had no fair
opportunity to produce documentation showing (contrary to the Court's finding)
that the Moishe, Inc. sale was a bona fide transaction. Expedited reargument
was requested to enable the defendants to make that showing.
Attached to the Motion was a document purporting to be an "affidavit"
of Howard Hyman, bearing the date August 23, 1999. That document recites that
(i) Mr. Hyman is the purchaser named in "the agreement of sale attached hereto,
dated July 17, 1999, concerning the business...known as the Smoke Shop," that
(ii) the "said agreement is a true and correct agreement;" and that (iii) Mr.
Hyman is the owner of RMCO, Inc., which "to the best of [his] knowledge," owns
Moishe, Inc.(2)
Attached to the Hyman affidavit is a 16 page document that purports
- ----------------------
(2) Although the "affidavit" purports to be signed by Mr. Hyman, the
signature is not acknowledged by a notary. Accordingly, the affidavit is
defective because it does not show on its face that the affiant is, in fact,
Mr. Hyman.
<PAGE> 33
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 7
to be an "Agreement of Sale" between Nor-Mar, Inc. and Moishe, Inc. which is
described in the document as an entity yet to be incorporated. That "Agreement"
recites the assets being sold and a purchase price of $25,000. One of the
several attachments to the "Agreement of Sale," is the "Bill of Sale" that was a
subject of Rudnitsky's testimony at the contempt hearing. The attached "Bill of
Sale," however, now shows a signature above the signature line for "Howard M.
Hyman," and an asterisk next to the recited $1.00 purchase price, which directs
the reader to a handwritten notation at the bottom of the page which states:
"Business name The Smoke Shop and goodwill, only."
III.
The plaintiff, Secretary of Finance, opposes the Motion for Reargument.
I agree that the Motion lacks merit on both procedural and substantive grounds.
1. The standard on a Rule 59 motion for reargument is whether the Court
has misapprehended a material fact or rule of law. Any such determination must
be based on the record existing at the time of the decision. Rule 59(f) does not
authorize the submission of affidavits on motions for reargument. Miles v.
<PAGE> 34
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 8
Cookson, Del. Ch., 677 A.2d 505, 506 (1995).
The defendants do not argue that the Court misapprehended any facts
based upon the record existing at the time of the decision. What defendants in
truth are asking for is that the Court revisit the issue of the bona fides of
the sale, on the basis of new evidence. The only procedural vehicle appropriate
for that purpose is a motion for new trial based on newly discovered evidence
under Rule 60(b).
2. Even if this Motion could properly be viewed as a Rule 60(b)
application, it would be denied because according to the dates referenced in the
documents (July 17 and August 13, 1999), the defendants cannot argue that this
evidence was "newly discovered." That is defendants cannot argue that the
evidence came to their knowledge after the contempt hearing and that they could
not have produced that evidence at the contempt hearing by exercising due
diligence. See Bata v. Bata, Del. Supr., 170 A.2d 711, 714 (1961).
3. The Court strongly suspects that these documents were not presented at
the contempt hearing because they did not then exist. For this Court to find
that the documents did exist, it would have to reject Mr. Rudnitsky's sworn
testimony
<PAGE> 35
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 9
that there was no documentation of the transaction other than the unexecuted,
undelivered one page "Bill of Sale" of The Smoke Shop for $1.00. Now the Court
is being told that that sale was evidenced by a formal Agreement of Sale dated
July 17, 1999 -- almost one month before the August 20, 1999 contempt hearing.
The Court is also asked to believe that (i) the one-page Bill of Sale, which
Rudnitsky testified was not executed by or delivered to Mr. Hyman, had in fact
been executed by and delivered to him several weeks before; and that (ii) the
recited $1.00 purchase price was not for the entire business (as the Bill of
Sale presented at the hearing stated and as Mr. Rudnitsky testified), but only
for the name and goodwill of the business.
The defendants' only explanation for this apparent repudiation of Mr.
Rudnitsky's testimony is a statement in the Reargument Motion that he
[Rudnitsky] "was unable to obtain all material documentation and evidence in
time for the hearing." If that were true, Mr. Rudnitsky's counsel could have
informed the Court of the existence of the "documentation and evidence" and
sought a postponement of the hearing. Neither Rudnitsky nor his counsel did
that. Rather, Mr. Rudnitsky testified under oath that no such documentation
existed.
<PAGE> 36
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 10
Mr. Rudnitsky cannot now be heard to contend otherwise, now that the Court has
heard that testimony and ruled adversely to him.
4. Finally, relief must be denied because it is sought by parties with
unclean hands. The defendants were ordered to cease doing business as The Smoke
Shop at its present location. They openly defied that Order, and to this day
have continued to do so. Even if the defendants believed that the injunction was
erroneous, they were not free to disobey it. Their duty was to abide by the
injunction until relieved from it by this Court. Instead they granted themselves
the relief that they seek and now ask this Court to ratify their conduct. Such
behavior will not be countenanced.
* * *
I have enclosed a copy of the Order entered this date, adjudicating the
defendants in contempt and denying the pending Motion.
<PAGE> 37
Allison E. Reardon, Esquire
Joseph D. Kulesza, Jr., Esquire
August 27, 1999
Page 11
Very truly yours,
/s/ Jack B. Jacobs
Enclosure
cc: Register in Chancery
Mr. Steven H. Rudnitsky
Nor-Mar, Inc.
1624 Delaware Avenue
Wilmington, DE 19806
<PAGE> 38
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
THE SECRETARY OF FINANCE :
FOR THE STATE OF DELAWARE, :
:
Plaintiff, :
:
v. : C.A. No. 16605
:
NOR-MAR; INC., t/a :
THE SMOKE SHOP and :
STEVEN H. RUDNITSKY, :
:
Defendants. :
ORDER
Upon the Motion of Plaintiff for a Rule to Show Cause why the
Defendants should not be held in contempt, and the Court having heard the Motion
on August 20, 1999, and having issued its Opinion of even date, denying the
defendants' Motion for Reargument;
WHEREFORE, IT IS HEREBY DETERMINED, FOUND AND ORDERED this 27th day of
August 1999, as follows:
1. Defendants, Nor-Mar, Inc. t/a The Smoke Shop, its officers,
directors and agents are in contempt of this Court's Order dated August 11,
1999, enjoining them from transacting any business in this State in connection
with or related to the business known as Nor-Mar, Inc. t/a The Smoke Shop.
<PAGE> 39
2. Steven H. Rudnitsky, individually and as an officer and agent of
Nor-Mar, Inc. t/a The Smoke Shop, is in contempt of this Court's Order dated
August 11, 1999, enjoining him from transacting any business in this State in
any way related to or connected with the business known as Nor-Mar, Inc. t/a The
Smoke Shop.
3. The defendants' Motion for Reargument is denied.
4. Defendants Nor-Mar, Inc. t/a The Smoke Shop ("The Smoke Shop") and
Steven H. Rudnitsky are ordered immediately to cease doing business and
immediately to close and lock the doors of the business premises located at 1624
Delaware Avenue.
5. Should the defendants fail to comply with Paragraph 4 of this Order,
the Secretary of Finance (a) is authorized to cause the business premises at
1624 Delaware Avenue to be locked or otherwise secured, and (b) may apply for an
order or orders imposing appropriate sanctions, including sanctions authorized
by 10 Del. C. ss.370.
/s/ Jack B. Jacobs
-----------------------------------
Vice Chancellor
<PAGE> 40
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JACK B. JACOBS COURT HOUSE
VICE-CHANCELLOR May 9, 1994 WILMINGTON, DELAWARE 19801
David A. Jenkins, Esquire
Smith, Katzenstein & Furlow
P. O. Box 410
Wilmington, DE 19899
Victor F. Battaglia, Esquire
Francis S. Babiarz, Esquire
Biggs & Battaglia
P.O. Box 1489
Wilmington, DE 19899
Re: ROSS SYSTEMS CORPORATION AND LEWIS M. SANG
V. STANLEY E. ROSS, C.A. NO. 10378
DATE SUBMITTED: MARCH 29, 1994
Dear Counsel:
On February 15, 1994, this Court issued its Memorandum Opinion ("Ross
II") determining, inter alia, that the plaintiff, Mr. Lewis M. Sang, was
entitled to damages for loans he made to Ross Systems Corporation (the "Company"
or "Ross Systems") prior to May, 1988. In that Opinion, the Court established
the period from the founding of the Company up to May, 1988 as the so-called
"damage period," during which Mr. Sang's damages were found to have been
proximately induced by the defendant's (Dr. Stanley E. Ross') fraud. The Court
denied that part of Mr. Sang's damage claim based upon his guarantee of the
Company's $254,000 line of credit, because Mr. Sang had not proved that he made
that guarantee within the damage period.
Mr. Sang now moves for a new trial, pursuant to Chancery Court Rule
59(a), in order to supplement the record with documents that would prove that
$174,500 of his loan guarantee
<PAGE> 41
was in fact made within the damage period. Mr. Sang contends that those
documents conclusively corroborate his uncontroverted trial testimony that Ross
Systems borrowed $174,500 pursuant to a line of credit (which he guaranteed)
during February and March of 1988. P1. Mar. 30, 1994 Memorandum at 2. Mr. Sang
admits that at all relevant times most of these documents existed in his
personal files. Thus, Mr. Sang does not claim that he exercised proper diligence
to obtain those documents either before or during the trial, or during
post-trial briefing. Id. at 5 n.2. He contends, nonetheless, that it would be a
"grave miscarriage of justice" for the Court not to allow him to reopen the
record, or to modify its adverse factual finding based on this newly proffered
evidence. Id. at 7.
In support of his position, Mr. Sang relies on Ferrell v. Trailmobile,
223 F.2d 697, 698 (5th Cir. 1955), where the Fifth Circuit created a narrow
exception to the general rule that a new trial based upon "newly discovered
evidence" will not be granted where the evidence was available or, by use of
reasonable diligence could have been available, at the trial.(1) In Ferrell,
judgment had been entered against the defendant. Thereafter, the defendant
obtained copies of money orders that demonstrated that he had, in fact, made the
payment which the Court had previously found had not been made. Reversing the
District Court's denial of the defendant's motion for a new trial, the Fifth
Circuit held:
If, in fact, practically conclusive evidence shows that the appellant
had actually paid [his debt], it is obvious that the judgment should be
set aside to prevent a manifest miscarriage of justice. In such a case,
the ends of justice may require granting a new
- ---------------
(1) Federal case law requires that before a new trial may be granted on
the basis of "newly discovered evidence," the court must be satisfied that the
alleged newly discovered evidence: (1) was discovered since the trial; (2) could
not with due diligence have been discovered earlier; (3) is not merely
cumulative or impeaching; (4) is material to the issues; and (5) is such that
upon a retrial it would probably produce a different result. Estate of Kraus v.
Commissioner of Internal Revenue, 875 F.2d 597, 602 (7th Cir. 1989); McCullough
Tool Co. v. Well Surveys, Inc., 343 F.2d 381, 410 (10th Cir. 1965).
2
<PAGE> 42
trial even though proper diligence was not used to secure such evidence
for use at the trial.
Id. at 698. See also Johnson Waste Materials v. Marshall, 611 F.2d 593, 599 (5th
Cir. 1980) (applying Ferrell on a motion under Rule 60(b)(2)); Ope Shipping,
Ltd. v. Underwriters at Lloyds, 100 F.R.D. 428, 432 (S.D.N.Y. 1983) (applying
Ferrell on a motion under Rule 59(a)). Mr. Sang contends that because the facts
here are comparable to those in Ferrell, this Court should follow Ferrell and
its progeny and grant a new trial to avoid a "manifest miscarriage of justice."
Dr. Ross does not dispute Mr. Sang's contention that the evidence he
seeks to introduce would establish that his guarantee became effective within
the damage period. What Dr. Ross does contend is that Mr. Sang's motion should
be denied because (i) evidence was in his possession, and was fully available to
him, before the Court rendered its damage determination; and (ii) the Court has
already afforded Mr. Sang at least one opportunity to supplement the record.
Therefore, no "miscarriage of justice" would result from a denial of Mr. Sang's
motion.
Mr. Sang's position rests upon the notion that a "manifest miscarriage
of justice" will occur if a party is not permitted to reopen the record to
introduce "practically conclusive evidence" that concededly could have been
presented earlier had the moving party been diligent. That proposition, as thus
articulated, has not been accepted as the law of Delaware. In Delaware, a motion
for a new trial will normally be denied where the moving party fails to show
that by exercising reasonable diligence it could not have discovered the
evidence before trial. See Sussex Poultry Co., Inc. v. American Ins. Co., Del.
Supr., 301 A.2d 281, 283 (1973). Moreover, our Supreme Court has explicitly
recognized that applications for a new trial are "always addressed to the
judicial discretion of the Court so that injustice may be prevented...."
3
<PAGE> 43
Rappa, Inc. v. Hanson, Del. Supr., 209 A.2d 163, 166 (1965) (emphasis added).
Thus, our law in its present form is adequate to avoid injustice.
I find it unnecessary in this case to decide whether Ferrell should be
adopted as a principle of general application. For even if Ferrell were the
governing principle, Mr. Sang would still not be entitled to relief. Mr. Sang is
misguided in suggesting that the goal of reaching a just result based on all the
facts is the only principle to be considered. To the contrary, the Court must
also consider an equally valid principle, namely, that judicial determinations,
once made, are usually final and that litigation at some point must conclude. In
balancing those potentially conflicting principles, the need for finality of a
judgment will sometimes outweigh the need to consider all available facts
(particularly when the trial is long over) to reach the just result. In this
case, the interests of finality must prevail, because Mr. Sang has already had
opportunities to augment the record, but did not utilize them.
In its February 19, 1993 trial Opinion ("Ross I"), the Court noted that
the plaintiffs' briefs were "largely devoid of explanatory damage-related
facts." Ross I at 45. At that stage the Court could have properly rejected the
plaintiffs' unsupported damage claim outright, but instead it afforded Mr. Sang
an opportunity to submit further briefs in order to address its concerns and to
avoid a "miscarriage of justice." Id. at 47. After the parties submitted their
supplemental memoranda, the Court again became concerned that two of Mr. Sang's
damage claims remained unsupported by adequate documentation, and specifically
asked counsel whether documentation existed to support those claims. The Court's
first inquiry concerned Mr. Sang's damage claim of $109,500. That amount
included a $10,000 note dated September 22, 1987 that Mr. Sang had inadvertently
omitted from his trial exhibits. In a letter to the Court dated January
4
<PAGE> 44
24, 1994, W. Sang's counsel noted that oversight, and moved to reopen the record
to include the $10,000 note. The Court granted that motion. Ross II at 4 n.4.
The second inadequately documented claim was for the loss arising out of Mr.
Sang's guarantee of Ross Systems' $254,500 line of credit. Regarding that
guarantee, Mr. Sang's counsel wrote:
Your Honor is ... correct that no document from 1988 concerning this
guarantee of Mr. Sang is in the trial record. Nevertheless, as
plaintiffs have previously argued, this uncontroverted amount should be
included among his damages.
Pl. Jan. 24, 1994 Letter at 2.
Thus, Mr. Sang has already been given at least one--and arguably
two--opportunities since the trial to supplement the record to support his
damage claims. One of those opportunities arose in connection with the very
guarantee that is the subject of Mr. Sang's present request for a new trial. Mr.
Sang was specifically put on notice of the Court's concern that his claim for
recovery of the loss arising out of the loan guarantee was not adequately
documented, and Mr. Sang's January 24, 1994 response to the Court evidenced his
awareness that he could move to reopen the record. In fact, Mr. Sang did move
(successfully) to reopen the record with respect to the $10,000 note. However,
for unknown reasons, Mr. Sang consciously decided not to do so with respect to
the loan guarantee Instead, he rested upon the then-existing record.
In these circumstances, and given the substantial judicial resources
already invested in this case, it would not be unjust (let alone "manifestly"
unjust) to deny Mr. Sang yet another opportunity to prove his damage case. Mr.
Sang has had more "bites out of the apple" than any litigant is normally
afforded, and he cannot seriously claim to have been treated unfairly. The time
has now come in this lengthy and highly contentious litigation for the interest
of finality
5
<PAGE> 45
to prevail. Any other result would undermine the integrity of the litigation
process.
For the foregoing reasons, the plaintiff's motion to open the record,
some 32 months after the trial, to introduce evidence that was available to him
before and during the trial, is denied. See Rappa, Inc., 209 A.2d at 166 (Rule
59(a) motion to supplement the record denied where the movant made its
application 17 months after trial using evidence available to it at the time of
the original hearing). Counsel shall submit a form of final order implementing
this ruling and the relevant prior ruling of this Court.(2)
Very truly yours,
/s/ Jack B. Jacobs
-----------------------------------
Jack B. Jacobs
cc: Register in Chancery
- -------------------
(2) It should be noted that the only undecided issue remaining after this
Court's Ross II Opinion, the plaintiff's Rule 11 claims, was resolved through
mediation. Accordingly, that matter need not be referred to a Special Master as
it would otherwise have been. See Ross II at 20.
6
<PAGE> 46
CERTIFICATE OF SERVICE
I hereby certify that on February 7, 2000, two copies of the within MOTION
FOR A NEW TRIAL were served by hand delivery on the following attorneys of
record at the addresses indicated:
Charles E. Butler, Esquire
Smith Katzenstein & Furlow
800 Delaware Avenue
Wilmington, Delaware 19801
Stephen E. Jenkins, Esquire
Ashby & Geddes
One Rodney Square
Wilmington, Delaware 19801
John T. Dorsey, Esquire
Richards, Layton & Finger
One Rodney Square
Wilmington, Delaware 19801
/s/ Matthew E. Fischer
------------------------------------
Matthew E. Fisher
<PAGE> 1
EXHIBIT 3
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
WILLIAM N. STRASSBURGER, )
)
Plaintiff, )
)
v. ) Civil Action No. 14267
)
MICHAEL M. EARLY, LUTHER A. )
HENDERSON, JOHN C. STISKA, N. )
RUSSELL WALDEN and TRITON )
GROUP, LTD., a Delaware corporation, )
)
Defendants, )
)
and )
)
RIDGEWOOD PROPERTIES, INC., )
a Delaware corporation, )
)
Nominal Defendant. )
NOTICE OF MOTION
To: Charles E. Butler, Esquire Stephen E. Jenkins, Esquire
Smith, Katzenstein & Furlow Ashby & Geddes
800 Delaware Avenue One Rodney Square
Wilmington, Delaware 19801 Wilmington, Delaware 19801
Matthew E. Fisher, Esquire
Potter, Anderson & Corroon
1313 N. Market Street
P. O. Box 951
Wilmington, Delaware 19899
PLEASE TAKE NOTICE that the within Motion shall be presented to the
Court at the convenience of the Court and counsel.
<PAGE> 2
/s/ John T. Dorsey
-----------------------------------------
Gregory P. Williams (#2168)
John T. Dorsey (#2988)
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
(302) 658-6541
Attorneys for Defendant N. Russell Walden
Dated: February 8, 2000
2
<PAGE> 3
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
WILLIAM N. STRASSBURGER, )
)
Plaintiff, )
)
v. ) Civil Action No. 14267
)
MICHAEL M. EARLEY, LUTHER A. )
HENDERSON, JOHN C. STISKA, N. )
RUSSELL WALDEN and TRITON )
GROUP, LTD., a Delaware corporation, )
)
Defendants, )
and )
RIDGEWOOD PROPERTIES, INC., )
a Delaware corporation, )
)
Nominal Defendant. )
MOTION FOR A NEW TRIAL OR, IN THE ALTERNATIVE,
TO REOPEN THE RECORD TO ALLOW FOR THE
INTRODUCTION OF NEWLY DISCOVERED EVIDENCE
Defendant, Russell Walden, hereby joins in the motion for a new trial
or, alternatively to reopen the record, filed by defendants Michael M. Earley,
John C. Stiska and Triton Group, Ltd. (the "Triton Defendants"). Walden
incorporates herein by reference as a basis for this motion the reasons set
forth in the Triton Defendants' papers.
<PAGE> 4
/s/ John T. Dorsey
------------------------------------------
Gregory P. Williams (#2168)
John T. Dorsey (#2988)
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
(302) 658-6541
Attorneys for Defendant N. Russell Walden
Dated: February 8, 2000
2
<PAGE> 5
CERTIFICATE OF SERVICE
It is hereby certified that true and correct copies of the
foregoing were served this 8th day of February, 2000, via hand delivery, on
counsel as follows:
Charles E. Butler, Esquire
Smith, Katzenstein & Furlow
800 Delaware Avenue
Wilmington, Delaware 19801
Stephen E. Jenkins, Esquire
Ashby & Geddes
One Rodney Square
Wilmington, Delaware 19801
Matthew E. Fisher, Esquire
Potter, Anderson & Corroon
1313 N. Market Street
P. O. Box 951
Wilmington, Delaware 19899
/s/ John T. Dorsey
-----------------------------------
John T. Dorsey
