Hills Stores v. Bozic
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY HILLS STORES COMPANY, et al., Plaintiffs, Civil Action No. lq j V. MICHAEL BOZIC, et al., Defendants, - GAYLE DOLOWICH, et al., Civil Action No. 14460 Plaintiffs, V. CHAIM Y. EDELSTEIN, et al., Defendants. - PETER M. FUSCO, et al., Plaintiffs, Civil Action No. &%7 V. CHAIM Y. EDELSTEIN, et al., Defendants. MEMORANDUM OPlNION Date Submitted: February 9,200O Date Decided: February 22,200O % y. C.) David C. McBride, Esquire and Martin S. Lessner, Esquire of YOUNG CONAWAY STARGATT & TAYLOR, Wilmington, Delaware; OF COUNSEL: Alan R. Friedman, Esquire, Jonathon M. Wagner, Esquire, and Elizabeth Wolstein, Esquire, of KRAMER LEVIN NAFTALIS & FRANKEL, New York, New York, Attorneys for Plaintiffs in C.A. No. 14527. Joseph A. Rosenthal, Esquire of ROSENTHAL, MONHAIT, GROSS & GODDESS, Wilmington, Delaware, Attorney for Plaintiffs in C.A. Nos. 14460 and 14787. Kevin G. Abrams, Esquire, Raymond J. DiCamiIlo, Esquire, Thad J. Bracegirdle, Esquire, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware; OF COUNSEL: John D. Donovan, Jr., Esquire, Robert G. Jones, Esquire, Alexandra D. Furth, Esquire, of ROPES & GRAY, Boston, Massachusetts, Attorneys for Defendants. STRINE, Vice Chancellor In this case, the winning slate in a June 1995 proxy contest has caused the plaintiffs, the Hills Stores Company ( Hills ) and its subsidiary Hills Department Stores Company ( HDS ), to sue the former members of the Hills board. The winning slate was proposed by Dickstein Partners, an investment fund that promised either to buy all of the shares of Hills for $22 in cash and $5 in junk bonds per share or to sell Hills to a higher bidder in the auction its slate pledged to conduct. Dickstein assured the Hills stockholders that it had the wherewithal to finance the acquisition and to cover the costs that would accompany a change in control of the Hills board. Those costs included the payment of severance to certain top executives of Hills pursuant to employment agreements entered into the year before in response to a previous Dickstein-initiated control contest. Those agreements provided that the executives covered by the contracts would have the right to resign and receive full severance in the event of any change in control, other than one approved by the Hills board. In a judicial settlement, Hills and Dickstein both agreed not to challenge the validity of the employment agreements. After Dickstein made its acquisition offer in the spring of 1995, the Hills board determined that the offer was inadequate and shakily financed and that Dickstein s proposed strategy for the company was harmful. Rather than erecting substantial defensive measures, decided to let the stockholders decide whether to acce t the Dickstein offer for themselves in a board election contest at the Hills The day before that meeting the Hills board Dickstein s demand that the board vote on whether to pprove the Dickstein change in control solely for purposes of the employme t agreements. After receiving advice from legal counsel, the members oft e Hills board without an interest in that decision unanimously decided not to approve the Dickstein change in control. They, the undisputed evidence shoIs, believed that change in control to be a serious threat to Hills and that the company had promised the covered executives severance in such a s..tuation. After the Dickstein slate took office, the covered executives resigned and received their severance. The company s creditors terminated their debt agreements with Hills. Dickstein, however, lacked the financing to deal with these known and foreseeable never consummated its acquisition offer nor did it conduct an auction. Inst ad, its slate caused Hills to bring this suit against the former Hills board i alleging that the payment of severance resulted from b duty and contract by the former Hills directors. Near1 four years after Dickstein prevailed in its effort to secure control of th Hills board, the sale of Hills for $1.50 a share was consummated. In this opinion, I find that the defendant-direct0 s are entitled to summary judgment on the plaintiffs breach of fiduciarh, duty claims. Because of the defensive origins and purpose of the employment agreements, I apply the Unoca12 standard of review an /j conclude that the defendant-directors have submitted evidence suffcienj to entitle them to summary judgment under that standard. The plaintiffs have produced no evidence to rebut the evidence that the defendant-direators decision to oppose the Dickstein change in control was made on aI well-informed and good faith basis. Nor have they submitted a convincing argument as to why g that the company the defendant-directors were unreasonable in had contractual duties to the covered executives that r e the payment of severance if the board could not, in good faith, approv a change in control as benign to the company and its stockholders. I But because the plaintiffs have produced unrebutted evidence that some of the covered executives received severance in bxcess of that required are defendants as In this opinion, I refer to the former members of the Hills board defendants or defendant-directors. 3 I by their employment agreements, I also grant the plainnffs motion for partial summary judgment to recover those amounts.3 I. Factual Background I A. The Genesis Of The Emnlovment Agreements At all relevant times, Hills was a Delaware corporation engaged in the retail discount department store business. Its shares were traded on the New York Stock Exchange. Hills managed its 152 stores t$ough its whollyowned operating subsidiary, HDS. I In the fall of 1993, Hills emerged from bankrup{cy under the managerial leadership of its Chief Executive Officer Michael Bozic, who is a defendant in this litigation, and a new board of directors. Aside from Bozic, that board consisted of defendants Thomas H. Gee, James L. Moody, Jr., Richard B. Loynd, Susan E. Engel, John G. Reen, nd Norman S. P Matthews, as well as Michael S. Gross4 Only three of the Hills board members were inside directors: Bozic was CEO, Reen was Chief Financial Officer, and Matthews was a full-time cons 4 ltant and the company s chief merchant. 3 Two of the three civil actions affected by this opinion were initiate on behalf of a purported class of Hills stockholders. The class plaintiffs have joined in the filed by the Hills company plaintiffs and are not differently situated from them in any aterial respect. As such, this opinion will dispose of the class plaintiffs claims as well. 4 Gross left the board in January 1995. 4 I The relative placidity of the Hills board s post-b soon disturbed, however, by the unwanted attentions o Mark Dickstein and Dickstein Partners Inc. (collectively Dickstein ). 12% or so of Hills s stock in exchange for claims in kruptcy it purchased during Hills s reorganization. In August 1994 - less than a year after Hills e bankruptcy - Dickstein wanted Hills to repurchase si million of its shares for $150 million by using leveraged financing. To impact of its suggestion, Dickstein initiated a consent elicitation to remove four members of the Hills board and replace them wit its own nominees who were pledged to support the stock buy-back. After retaining outside advice from the law firm of Cravath, Swaine & Moore and the investment bank of SmithBarney, the -ills board decided to oppose the Dickstein initiative as adverse to the company s best interests. In particular, the board believed that it was unwise to take on such substantial debt so soon after emerging from bankruptcy and that t was preferable to stick with management s existing game plan. As the :hairman of the Board, defendant Lee, put it, [Dickstein] was perceived as a had just emerged from bankruptcy, didn t want anythi weakening our balance sheet. We saw Dickstein as w 5 I balance sheet by paying out a lot of cash to shareholde s and possibly taking on a lot of debt. 5 t As part of its response to the Dickstein initiative1 the Hills board decided to enter into new employment agreements wit seven of Hills s top executives (the Covered Executives ) as well as a ne agreement with Matthews. The employment agreements were intended to provide the Covered Executives with enough security o allow them to focus on doing their jobs without distraction by Dickstein s : vertures. The task of crafting the employment agreement fell in the first instance to the board s Compensation Committee, h was comprised of four outside directors. That Committee was aided in t White and David Feinberg from the law firm of endeavor by Barry & Eliot as well as Allen Finkelson from Cravath. On August 19, 1994, the Hills board met to consider the Compensation Committee s recommendations. Critically for present purposes, the proposed employment agreements conta ned a provision entitling the Covered Executives to severance paymen: s ( Severance ) in certain circumstances. As the agreements were presented to the board by the Lee Dep. I at 23. 6 The plaintiffs have not contested the evidence that Bozic and his m nagement team had other employment options. See Loynd Dep. at 20; Bozic Dep. at 53, 79. 6 I Compensation Committee, the Covered Executives right to Severance would have been triggered automatically in the event of a Change in Control. A Change in Control was defined as occur/ring when any person became the beneficial owner of more than fifty percent; of Hills s voting stock or elected more than thirty percent of the membeks of the Hills board as the result of an actual or threatened election contest.1 After discussion, the board decided to adopted aldifferent approach. That approach triggered the Covered Executive s rightlto Severance, in among other circumstances, when (i) the Covered Exe#utive was demoted or tired within one year of any Change in Control or (ii) any Change in Control other than an Approved Change in Control occurred/ An Approved Change in Control was defined as follows: I [T]he term Approved Change in Control shall mean a Change of Control that has occurred with the prior approval of a majority of the Continuing Directors and the term Continuing Director shall mean any member of the Board of Directors of the Company who is not an Acquiring Pe -son or a nominee or representative of an Acquiring Person or of any affiliate or associate of an Acquiring Person and any successor to a Continuing Director who was recommenc.ed for election or elected to succeed a Continuing Director my a majority of the Continuing Directors then on the Board of Directors of the Company.7 7 PX 6 6 10(c). Two reasons motivated the board s decision to move away from an automatic vesting of Severance rights upon any Change in Control (a single trigger approach) to the more nuanced, or double trigger approach. The primary reason was that the double trigger <.pproach gave the Hills board the ability to deliver management to a fr.endly acquirer in a negotiated transaction.8 The flip side of this ability WE.S that the board could refuse to approve the Change in Control if the prospective acquir[or] didn t seem to-be offering sufficiently for the company . . . . That is, the Hills board could use the double trigger as negotiating leveJage. If an acquirer agreed to the board s terms, the board could approve t e Change in Control ,ered Executives or, at and allow the acquirer the opportunity to keep the Co : the very least, avoid the Severance. If an acquirer did not agree to the board s terms, the board could protect the expectation s of the Covered Executives and deter the unwanted overture by failing to approve the Change in Control. This guaranteed the Covered Exe c utives their Severance while increasing the potential acquirer s cost of acqui i ition. The secondary reason the board opted for the d uble trigger approach was more narrowly confined to the dynamic it then co fronted. At that time, Moody Dep. at 29-30; see also Loynd Dep. at 32. 9 Moody Dep. at 30. Dickstein was seeking to replace half the board. The oard feared that a single trigger might unsettle the company s creditors, would be troubled by an automatic or, put more precisely, fully incentivi4ed management exodus if Dickstein succeeded. The double trigger gaje the creditors some reassurance that the Continuing Directors would have he discretion to conclude that a Change in Control was acceptable and Ithereby avoid any automatic vesting of the Covered Executives right to everance. Following the board s discussion of the Change Pin Control provisions, the three directors with an interest in the agreements ( ozic, Reen, and Matthews) stepped out of the meeting. The five rema ning directors then : unanimously voted to approve the employment contracts with the double trigger (the Employment Agreements ). B. The Basic Components Of Severance Under The Emnlovment Agl-eements Severance payable under the Agreements was an amount equal to three (3X) times [the Covered] Executive s Annual Compensation . . . . O The Executive s Annual Compensation was defined as the sum of (A) the executive s base salary for 1994 plus (B) any bonus c mpensation to which [the Covered] Executive would have been entitled if PX 6 Q IO(c). I Executive continued to be employed under [the] Agreement to the end of e 1994 . . . . I In addition, the Covered Executive was ntitled to a gross-up payment for taxes owed pursuant to 9 4999 of Title 26~of the United States Code. That statutory provision imposes an excise tax on severance payments that exceed a certain threshold. I C. The Hills Board Is Sued BY Class Plaintiffs And1 Ouicklv Reaches A Settlement With Them And Dickstkin Five days later, on August 24, 1994, a derivative and class action suit was tiled in this court, captioned Weiss v. Lee, et al., C.A. No. 13707 (the Weiss Action ). The Weiss Action plaintiffs alleged, lamong other things, that the Hills board had breached its fiduciary duties bk entering into the Employment Agreements. By the next month, the Weiss plaintiffs, Dickstebn, and Hills had reached a settlement involving the following basic pro 1 isions: l Hills agreed to repurchase up to three mil ion of its shares for $25 apiece. l Hills agreed to revise the Employment to reduce their terms from three years to somewhat shorter period and to agree that a Change 01 would not occur unless forty percent (rather than thirty p cent) of the board was elected by an acquirer, if the from eight to nine or more. Id. (emphasis added). The Employment Agreements contained a s mewhat different definition as of this time, but that difference is immaterial. IO I l Dickstein agreed to drop its consent solic tation and support the removal from Hills charter of the right o stockholders to act by consent. i l Dickstein agreed not to institute, prosec claim] against (or in the right of) [Hills] Employment Agreements] . I2 0 The Weiss Action class of plaintiffs - which consisted of all Hills stockholders on or after August 16, 994, including Dickstein - agreed to compromise, relea e, and settle [a]11 claims . . . that arise now or hereafter out f . . . the Employment Agreements. . . . These in I luded all claims that had been or could have been brought by Hills, the shareholders of Hills, or any member of the Class. . . . ? I3 or pursue [any . with respect to [the With the agreement to settle, peace seemed on the horizon for Hills. The company was doing relatively well, with increased sales, earnings, and net income. As a result of this turnaround, a retailing {ndustry publication named Hills s CEO Bozic as its 1994 Retailer of the k ear. 14 In January 1995, Hills completed the share buy-back it had agreed to accomplish. That same month, Hills adopted a Supplemental Executive Retirement Plan ( SERP ) covering twenty top execu$ves at Hills. Unlike the Employment Agreements, the SERP benefits vested automatically upon a Change in Control. A Change in Control was defined for purposes of the I2 DX 6 4 2.2(a). DX473. I4 DX 8. 11 SERP in the same manner as in the Employment Agreements (as modified by the Weiss settlement). D. The Weiss Action Settlement Is Anaroved On March 20, 1995, Chancellor Allen signed a final order resolving the Weiss Action on the basis of the September 1994 settlement terms. As contemplated, the final order released all claims that could have been brought in the Action arising out of the Employment A.greement including by Hills itself - which was a party to the Weiss Action and bound by the judgment.15 E. Oons! The Emulovrnent Ameements Are With T ?e Wrong Comnanv! The Employment Agreements had one major technical flaw caught by none of the parties to the settlement or this court: the Agreements ran between the Covered Executives and HDS, Hills s subsidiary, and not between the Covered Executives and Hills. In one sense, this was understandable because HDS was the operating compa,ny and the Covered Executives did work for it. But in the context of the Change in Control provision, the use of HDS made absolutely no sense. HDS was a wholly-owned subsidiary of Hills. Thus a Change in Control at HDS was not the threat tE~e Change in Control Is DX 5 7 7. ~ 12 provision was attempting to guard against. Rather, that provision was designed to protect the Covered Executives if a Change in Control at Hills occurred. I This was so obviously the intent of the Employment Agreements that the settlement agreement and final order in the Weiss ction each define those Agreements as being between Hills and the Cov red Executives. It t appears undisputed that Hills, Dickstein, the Weiss plaintiffs, and this court believed that Hills was a party to the Employment Agdeements and that the Change in Control provision applied at the Hills, not IIDS, level. F. Dickstein Puts Hills In Plav A&in Having settled one dispute with the Hills board,~Dickstein promptly started another. On May 3, 1995, Dickstein sent Bozic a letter stating in part as follows: We have been keenly observing your investment community that by spending annually on capital expenditures, Hills earnings per share that justify valuing Obviously, either the message has not has not been believed. We seriously question the wisdom, in environment, of spending the capital new stores a year, particularly when wei alternative of repurchasing Hills own at approximately three times EBITDA an when you have not I6 DX 4 7 D; DX 5 7 7(b). 13 I yet gone up against Target Stores, toughest competition. Notwithstanding t believe that Hills existing franchise is a s result we are proposing to acquire, pursua Hills outstanding shares for $25 per to a merger, all of Dickstein Partners is willing to provide u to one half of the higher than $25 per share. If we are successful in acquiring Hills, ou preference would be to continue to employ existing managem have prepared for the possibility of leaving by retaining Chaim we would intend to install as Hills interim Chief Executive search for a permanent management tea . Mr. Edelstein was formerly chairman of division of Federated Department Stores. In case the Hills Board chooses to reject proposal we are taking the precaution of ominating a slate of directors for election at Hills upcoming elected, our nominees would, as soon as racticable, seek to have Jack Reen and yourself added to Our nominees would seek to have Hills sold to the high st bidder. Subject to obtaining financing and other standard co ditions we would be prepared to offer at least $25 per an auction. NatWest Bank N.A. has also advised us t at, subject to certain conditions, it is highly confident that it can arrange up to $335 million of new senior secured bank financing which may be required, together with Hills availabl cash, to refinance those portions of Hills existing debt (i.e. the working capital facility and the $160 million of public deI t) which could 14 I accelerate upon the change of control that will occur if our nominees are elected to the Hills Board. G. The Hills Board Rejects The Dickstein Proposal But Agrees To Let Its Stockholders Decide To Accept That Proposal A: The Ballot Box The Hills board retained outside advisors to help them decide how to respond to the latest Dickstein overture (the Dickstein Proposal or Dickstein Change in Control ). Cravath was again bdought in to provide legal advice in addition to Foley, Hoag, as was the Del~aware firm of Morris, Nichols, Arsht & Tunnell. The board retained SmithBbmey to provide financial advice and D.F. King to act its proxy solicitor. On May 15, 1995, the board met to consider thelDickstein Proposal. Cravath provided the board with an overview of its legal and contractual duties, including the Employment Agreements and other contracts - in particular the company s debt facilities - that had Ch/mge in Control triggers. SmithBarney presented its financial analysis ~of the Dickstein Proposal, which concluded that the Dickstein Proposal was inadequate from a financial point of view. Management, through Bozic, presented its view1 of the Dickstein Proposal and its belief that the company s current straiegy would deliver I7 DX 11, at l-2. * DX 12. I9 DX 14, at 3. 15 more value. Bozic also expressed management s view1 that it would prefer not to work at Hills under Dickstein s plan, because th t plan would leave a the company in a highly leveraged condition. Bozic did not, however, recommend aggressive defensive measures. Instead, he advised that the board allow the stockholders to decide at the annual meeting whether to support the current Board and its policies for continue4 expansion or the Dickstein Proposal. * ~ Bozic, Reen, and Matthews were then excused f#om the meeting because of their interests in the Employment Agreements. At this point, the meeting minutes reflect that the following occurred: ~ Mr. Finkelson explained to the outside various employment and consulting executive under contract would be paid t ee (3) times his 1994 salary and full bonus if Dickestein replacing the current Board and the perso resigned, but, if the Company was sold with Board approval, uch payments would not be made. The outside directors then reviewed the s ategic alternatives that had been presented by Smith Barney management s recommendations, and ex ressed the view that the Dickstein Proposal was not in the shareholders.* a Id., at 2. Id., at 3. 16 After the outside directors had reached their 04 determination that the Dickstein Proposal should be rejected, the insiders etumed to the 1 meeting. The full board then voted unanimously to rejbct that Proposal. Several reasons existed for their decision: I l several low-end retailers were having bad time of it and this was hurting the market valuation cfall low-end retailers, making it an inopportune tim to sell the company; ? l the directors believed that the s existing strategic plan - which involved stores - would deliver more value th l at $25 a share, the total cost of Dickst million, yet only $75 million of that equity, the rest from debt; l of the $75 million in equity, put up half and did not have a firm co half; and l Dickstein s debt financing was also q estionable, and consisted of a conditioned highly co fident letter from NatWest Bank, N.A. ( NatWest ). b The same day, Bozic wrote Dickstein and told it that the board had rejected its proposal.22 On May 24, 1995, Dickstein revised its Proposdl. The new Proposal offered Hills stockholders $22 per share in cash and $$ principal amount per share of new 14% payable-in-kind holding company debentures (a.k.a. DX 15. I PIK or junk bonds ). Dickstein backed up this offe with a conditional : highly confident letter from NatWest to finance the ebt portion of the offer, but Dickstein still had found no one to supply th other half of the equity financing required. Dickstein s letter stated that: NatWest was highly confident that it could refinance Hills s existing debt, most of which would accelerate upon the election of the Dickstein slate.23 The Hills board met again on May 30, 1995 to consider the revised Dickstein Proposal. SmithBarney concluded that the revised Proposal had an implied valuation of $24.50 to $25.5 1 and was thus only questionably and marginally an increase over Dickstein s original Proposal. SmithBarney also told the board that the NatWest letter was subject YO more than the typical conditions, that NatWest had never served as lead manager in a deal like the one Dickstein was proposing, and that Dickste..n still had no commitment to the necessary level of equity financing The board decided to reject the revised Dickstei Proposal and to r continue its efforts to secure reelection. Again, the placing any defensive barriers in the path of On June 1, 1995, the Hills board mailed its pro connection with the company s June 23, 1995 annual * DX 17. I 18 stockholders. Those materials explained the board s reasons for rejecting the Dickstein Proposal and for recommending against jhe election of the Dickstein slate. In particular, the board argued that the company s current strategy was sound, that it was a bad time to sell a low]end retailing company because such companies were trading at or near their twelvemonth lows, that the Dickstein leverage strategy was of the kind that had caused other retailers to descend into bankruptcy, and t/hat Dickstein had not secured firm financing for its Proposal. I The board also disclosed the impact a Change in Control could have under the company s agreements with its creditors and1 under the Employment Agreements: Election of the Dickstein nominees would trigger a change in control under the Indenture covering HiUs 10.25% Senior Notes, the Credit Agreement governing the Company s $22.5 million working capital facility, the employment agreements of Hills key senior executives and other sigr@cant arrangements to which Hills is a party. Hills could be required immediately to repay - at a premium - approximate .y $160 million in principal of existing senior debt as well as any accrued but unpaid interest. The loss of the credit fat lity could adversely affect the terms under which Hills purchases inventory from vendors. The Dickstein Proposal also cals for replacing Hills unsecured working capital facility with a secured facility - a change that management believes will ha vendors and reduce the amount of trade available to the Company, adversely affecting the Comp Election of the Dickstein nominees also ould be extremely expensive for the Company. Such a chaa ge in control could 19 I require Hills to refinance its 10.25% Seni I r Notes and working capital credit facility. In addition, subst tial payments could be required under certain sale-leaseback a angements to which the Company is a party, under employme t agreements with certain of the Company s senior executiv s, and under the Company s supplemental executive retire ent plan. If the parties to the various arrangements descri ed above exercise their rights upon a change in control, man gement estimates that a change in control could cost Hills a proximately $60 to $70 million. This estimate does not even onsider many of the I transaction costs involved in these retina cings and similar activities. Hills would incur these change in control costs even if the Dickstein nominees do not succeed n selling the Company, Merely electing Dickstein s n minees triggers a change in control. i Perhaps even more important than the fin ncial burdens, if the Dickstein nominees are elected, the key s nior executives who have been responsible for Hills success ill be able to terminate their employment and obtain s stantial severance benefits. See Employment Contracts b low. There is no assurance that Hills senior management1 ould remain with the Company upon such a change in those executives would be franchise. . . . In the event an executive terminates his e within one year after a Approved Change in Control) such exec lump sum payment equal to (i) all pro rated bonus to the time of terminatio such executive s 1994 base salary and bo adjustment under certain circumstances; will continue to be entitled to benefits an the stated term of the agreement.24 ployment agreement ive will receive a and (ii) three times perquisites during 24 DX 1 at 3, 17 (emphasis in original); see also PX 18 at 6-7 (disclo 1 ing same risks). 20 I Dickstein s own proxy materials acknowledged :he same potential effects and specifically noted that under the Employment Agreements the Covered Executives could terminate their employmer t agreements [and receive their Severance] within one year following the occurrence of a Dickstein Change in Control without the approval of the existing Directors of Hills. 25 The approximate amount of the Covered xecutives Severance was easily calculable from the information on materials.26 On June 5, 1995, Dickstein wrote a letter to Bo all Hills stockholders, stating: As you are probably aware, in the event a change of control that the existing Hills Board does not there will be approximately $20 million be made to members of management and even fthe beneficiaries continue to be et lployed by Hills. However, if the existing Board approves If the change in control, then the severance payments are 2nly made if the respective individual is no longer employ ed by Hills in a similar capacity. Obviously, in such a ci cumstance a prospective buyer for Hills can, all other hings being equal, afford to pay a higher price for Hills. AI: 1, due to the fact that our stated preference is to continue to err 310~ all of Hills existing management, ifthe existing Hill; Board does not automatically trigger the $20 million go1 ten parachute upon a change in control then we believe it prob rble that we can raise our existing offer. DX 13, at 12. 26 Id. 21 I also think that if the Hills Board does n approve of this fiduciary obligations change in control it would be ignoring to shareholders by effectively transfer-tin $20 million from shareholders to management just when a ale of the company is about to occur.* H. The Hills Board Takes Action To Ensure That The Employment Ameements Are Honored In the days leading up the June 23, 1995 annual ~meeting, the Hills board met on four occasions. During these meetings, he board took action t to ensure that the Covered Executives would receive their Severance in the event of a Dickstein Change in Control. I Thus the board authorized the creation of so-called Rabbi Trusts, into which funds sufficient to pay the Severance and okher benefits due under the Employment Agreements, the SERP, and other relevant plans were deposited. The funds would then be payable by /he trustee automatically upon the occurrence of events giving the Covered Executives the contractual right to payments. The board set these1 up in reliance upon the advice of Cravath, using funds from the company$ revolving credit DX 20, at 1 (emphasis added). 22 facility with Chemical Bank.28 I The board also corrected the error in the original) Employment Agreements which triggered a right to Severance in the event of an unapproved Change in Control at HDS, rather than at $ills. The board reasoned that the Employment Agreements obviously contemplated that a Change in Control at Hills - not Hills s wholly-owne# subsidiary which was not subject to a takeover except after a spin-off byI its parent - would be the trigger for certain rights.2 I. Dickstein Urges The Board To Approve The Change in Control For Pm-noses Of The Emnlovment Agreements Onlv On June 21, 1995, Dickstein s lawyer, David P. ~Levin of the firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, wrote to Hills s counsel at Cravath, Allen Finkelson. The letter speaks for itself: [W]e begin with the incontrovertible pro osition that whatever the existing Board provisions must be in the best interests o The plaintiff alleges that the board with Chemical Bank the use of the facility for this purpose. Yet the any contractual duty on the part facility to pay Severance and other with outside counsel, who agreed imagine that Chemical Bank did Executives right to severance was likely to Dtckstein Proposal. For these and other reasons, I conclude that insubstantial to sustain any relief and give it no further the fact that the use of the Again, the plaintiffs challenge this action. This Dickstein s own understanding and that of this Court was that the between Hills and the Covered Executives. justifying reformation, this was it. I reject this challenge without fu 23 I shareholders. It is equally incontrovertibl present circumstances, it is not its shareholders for management to be termination) to parachute payments shareholders electing directors Thus, it is necessary for the incumbent bo action may avoid that possible change of control that would result from t Dickstein slate. . . . election of the [I]f the incumbent Board were to fail to a prove the change of control (for whatever reason), that decisio would be a selfinterested one under Delaware law since i imposes upon the shareholders a penalty for not re-electing he incumbent Board. That decision would require the incumbe t directors to prove that their inaction was entirely fair to H 11s and its shareholders. Quite simply, it cannot be ir for the incumbent directors to cause a penalty to be imposed on the Hills shareholders when there is action those di ectors could take under the golden parachute contracts to a oid that possible liability.30 i The clear import of Levin s letter was that the ills board was supposed to consider whether to approve the Change in Control for purposes of the Employment Agreements without consideration of the facts that: 1) the Covered Executives had stayed with the company hroughout the t turbulence of 1994 and 1995 in reliance upon their contractual protections; and 2) the board had already voted that the Change in bontrol was, in its view, harmful to the company and its stockholders. The simple analysis Levin believed was in order was whether, in the eventlthat Dickstein won, it 3o DX 22, at 1 (emphasis in original). ~ 24 would be good or bad for the stockholders of Hills if the company were to trigger an immediate right on the part of the Covered Elxecutives to resign and receive their Severance. J. The Board Meets To Consider Levin s Letter And To Vote On Whether To Annrove The Dickstein Change in Control For Purposes Of The Emolovment Aareements Finkelson brought Levin s letter to the attention of the board the next day and according to his unrebutted affidavit gave the Joard the following advice: I advised the board that, in my opinion, c ncurred in by Johnston, Levin s analysis was wrong. i advised the board that the obligation of the directors was toIdetermine whether a Dickstein-led change in control of Hills as in the best interests of Hills stockholders. If they determined that it was not, the directors were under no obligation to ap rove such change in control for purposes of the employment a reements. I advised that, particularly in light of the history of the approval provision - an exception designed to all w Hills to retain ! management in the case of a transaction believed by the directors to be in the best interests of the stockholders of Hills - and in light of the directors[ ] belief tl at a Dickstein-led change in control was not in the best inte .ests of the stockholders of Hills, a board decision nc t approving a potential Dickstein takeover for purposes of the er iployment agreements was justifiable.32 The board then discussed whether to approve tl ie Change in Control for purposes of the Employment Agreement. By this i ime, the board knew 3 This refers to Andrew M. Johnston of the Morris, Nichols firm. Finkelson Aff. 1 19. 25 that it was probable that Dickstein would win the elect members still harbored hope that a couple of the camp stockholders would decide to stick with the current boad and thus tilt the outcome toward the incumbents. In considering whether to approve the Change in Control for purposes of the Employment Agreements, it is evident that the toard s view was that it was not appropriate to consider that question through the narrow prism recommended by Levin. Rather, the board followed tl-.e advice given it by Finkelson. In doing so, the board was not unaware of the fi-lancial and operational consequences to the company of triggering the Covered Executives right to resign and receive Severance, but the board did not give those factors much weight. Instead, the board believed that the company had made contracts with the Covered Executives, and hat these contracts should be honored. As director Loynd put it, Hills fat circumstances that had been anticipated going to than a year earlier. . . . 33 Loynd continued, I have al ays . . . honored the commitments that I have made. And I expect my co Loynd Dep. at 94. 26 same. 34 The outside directors felt that the company hbd a contractual obligation to the Covered Executives to trigger their ht to Severance, unless the board believed in good faith that the Chang in Control was not harmful to the company. In that regard, the board continued to adhere to i strongly held view that, for the reasons previously identified, the Dickstei Change in Control would be seriously adverse to the interests of the stockholders. Therefore, the outside directors voted the Change in Control for purposes of the Employmen; Agreements. Then the full board voted the same way. K. Dickstein Wins The Election But Doesn t Buv The Company Or Run An Auction On June 23, 1995, the Hills annual meeting too : place. The Dickstein slate won election by a decisive margin. On July 5, 1995, the election results were certified. As both the board and Dickstei knew, this Change in Control had important consequences under the Agreements, the SERP, the indenture agreement governing Hills s seni r notes, and Hills s major credit agreement. The same day the election results were certified the Covered Executives all resigned. Upon resignation, they recei !,ed the Severance, 34 Loynd Dep. at 99. ~ 27 SERP, and other benefits due them under their various Icontracts and benefit plans. Soon thereafter, Hills s primary creditor, Chemical Bank, exercised its default rights, forcing Dickstein to refinance the camp a ny s debt.35 Despite the fact that Dickstein had assured Hills s stockholders it had the wherewithal to refinance the company s debt and bear lthe other costs associated with a Change in Control (including the Sejerance and SERP obligations) and to acquire all the shares of the compa 6 y for $22 in cash plus $5 in PIK, Dickstein never did so. Nor did it run the p&omised auction. Instead, the Dickstein slate simply managed the compzhry. In April 1999, Hills was acquired from its stockholders by Ames Department Stores in exchange for $ I SO a share and share in the upside of i this lawsuit. I II. The Claims Of The Parties, b This matter is before me now on motions for su mary judgment. The director-defendants have moved for summary judgment on the following claims made by the plaintiffs: Mark Dickstein and one of his slate attribute this to Chemical s over the triggering of the Severance and the resignation of outgoing management. But no hemical witness has said that is so, and Chemical had a contractual right to pull its financing pon a Change in Control, which Dickstein well knew. 28 I l that the defendant-directors by refusing to approve the Dickstein purposes of the Employment Agreeme * that the defendant-directors committe waste by refusing to 01 for purposes of the approve the Dickstein Change in Employment Agreements; l l that defendant-directors Bozic, Reen, nd Matthews were unjustly enriched by the Severance th received under the Employment Agreements; and that defendant-directors Bozic, Reen, received Severance and other paymen was due them under the Employment and other relevant plans. For their part, the plaintiffs have moved for partial summary judgment on their claim that the Covered Executives who are defendants - Bozic, Reen, and Matthews - received payments of Severance that exceeded the proper amount due them under the Employment Agreements. In addressing these claims, I apply the familiar standard under Court of Chancery Court Rule 56. Under that standard, summary judgment should be granted where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law.36 When a d oving party has properly supported its motion, the non-moving party must submit admissible j6 See, e.g., Williams v. Geier, Del. Supr., 671 A.2d 1368, 1375 (199 ). 29 I evidence sufficient to generate a factual issue for trial or suffer an adverse III. Is There A Triable Issue Regarding Whether The Defendant-Directors Breached Their Fiduciarv Duties Bv Failing To Approve The Dickstein Change in Control For Purposes Of The Emnlovrnent Agreements? Resolving whether summary judgment should be granted on the plaintiffs fiduciary duty claims is made a bit more dif$icult by two factors. First, the plaintiffs and the defendant-directors have offered up virtually every possible standard of review as the appropriate pdsm through which to evaluate this question. For their part, the plaintiffs sayi that either the Blasius Industries, Inc. v. Atlas Corp., 38 the Unocal,39 or the e4 tire fairness standard of review applies. The defendant-directors, meanwhile, contend that their decisions are to be reviewed under the deferential business judgment rule standard. I The second complicating factor is that the plain iffs have no right to t challenge the initial decision of the Hills board to enter into the Employment Agreements in 1994. Thus they have no right to challenge and therefore must concede that those Agreements were entered into for a proper purpose 37 See, e.g.. In re Liquidation of National Heritage Life Insur. Co.,723 A.2d 52,56, aff d, Del Supr., 723 A.2d 397 (1998). Del. Ch., 564 A.2d 65 1 (1988). 39 493 A.2d 946. 30 and that Hills received adequate consideration from th Covered Executives in exchange for their rights under those Agreements. 1 s will be noted, the plaintiffs current arguments often appear to be an attempt to second-guess Dickstein s own decision to accept the Weiss Action s cttlement and thereby waive any right on its own or Hills s part to challenge :he decision of the Hills board to execute the Employment Agreements. I will not permit them to do so, but will only allow them to challenge whethe:- the directordefendants made appropriate decisions in 1995 regarding whether to oppose the Dickstein Change in Control and to trigger the Covered Executives Right to Severance. A. What Is The Annronriate Standard Of Review? The plaintiffs attack on the board s decision to trigger the Severance does not fall neatly within any of the traditional stand rds of review. But, i for reasons I now explain by process of elimination, I elieve it is most appropriate to apply the Unocal standard of review. In reaching this conclusion, I start with a rejecti n of plaintiffs argument that the Blasius compelling justification sta dard of review should apply. The plaintiffs are estopped from arguing and h ve produced no I evidence that the Employment Agreements were entered into for the 31 primary purpose of thwarting the exercise of a stockhdlder vote. 40 Rather, they essentially admit that the Employment Agreemen$ were executed as an incentive for current management to remain at Hills in khe face of a takeover threat fi-om Dickstein and that the double trigger was pbt in place to give the Hills board negotiating leverage with potential acquirots and to assuage the company s creditors. The record is simply devoid of aby hint that the Hills board decided to adopt the Employment Agreements a$ a method of placing pressure on the Hills electorate to vote against a Chan d e in Control.4 Nor are the Employment Agreements the sort ofi corporate action that directly affects the electoral rules or process; rather, th/z plaintiffs contend that the Employment Agreements have the incidental dffect of coercing or placing an undue toll on the free exercise of the sharehblder vote. That is, the plaintiffs allege that the Severance under the Agredment exacts a financial penalty on the company and therefore the sto/&holders if they vote 4o Blasius, 564 A.2d at 660. 4 This distinguishes this case from Sutton Holding Corp. v. Desoto, drc., Del. Ch., C.A. No. 12051, mem. op., 1991 Del. Ch. LEXIS 85, Allen, C. (May 14, 1991 In Sutton, a company s pension plans provided that the plans could not be terminated nor benefits be reduced under the plans for five years following an unap roved change in control. In dicta, Chancellor Allen said that this provision of the plan appeared t implicate Blasius, because it was designed to deter a change in control (by denying an acquirer !I e opportunity to use excess pension funding to finance the acquisition) and not to create useful ri hts m pension plan beneficiaries. Id.. 1991 Del. Ch. LEXIS 85, at *3-*6. In this case, u like Sutton, there is no evidence that the Hills s board s dominant motivation was to see to coerce shareholders in the exercise of the vote, id. at *4 & *3, and ample evidence that the Employment Agreements were intended to create valuable economic right[s] in the Cove i Executives. Id. at *4. ed 32 I for an unapproved Change in Control. This, the sufficient to trigger Blasius review. Put simply, Blasius standard is triggered because the Employment proportionality prong of Urzocal, which already prose defensive measures. I admit that our case law Blasius applies by examining whether the challenged coercive or preclusive of electoral action, an exercise t at is duplicative of Unoca1.42 Rather than extend this unwieldy and redundantlpractice to corporate action that is not directed specifically at the electoral p it is more rational and efficient to apply the more flexi le, but still exacting, Unocal standard in situations like this, but with a sha out eye for electoral coercion.43 In so concluding, I am conscious that a subject a variety of measures commonly reviewed un er Unocal to Blasius scrutiny. For example, a termination fee payable in th event of a negative stockholder vote on a merger places the same sort franchise as the Employment Agreements. Our law has traditionally See generally Chesapeake Corporation v. Shore, Del. Ch., C.A. N Strine, V.C. (Feb. 7, 2000, rev. Feb. 11, 2000). Id. at 66. 17626, op. at 52-67, :/ 33 I reviewed the propriety of these fees under the Unocaf Q r Revlor~~~ standards depending on the circumstances,45 or under the compal-pble liquidated damages standard used in the Brazen case.46 Because d,hese standards can already be applied to strike down termination fees or s#verance payments that coerce stockholders, there is no need to layer Blasjus on top of them. Similarly, I reject the plaintiffs argument that Bkasius applies because the defendant-directors informed the Hills stockholder$ of the financial and personnel effects under the Employment Agreements that could result from an unapproved Change in Control. [T]he mere fact tl/at the stockholders knew that voting to approve the Dickstein Change in (I:ontrol may trigger b the Covered Executives right to Severance does not y itself constitute stockholder coercion. 47 The Hills board was duty-bobnd to inform its stockholders of the possible financial and operational {mplications of a Change in Control.48 The board did so, and Dickstein informed the stockholders of the same risks. There is no evidence ib the record to support 44 Revlon, Inc. v. MacAndrews 6; Forbes Holdings, Inc., Del. Supr., 06 A.2d 173 (1986). See QVC Network v. Paramount Communications, Inc., Del. Ch., 35 A.2d 1245, 1271 (1993), afjd, Paramount Communications v. QVC Network Inc., Del. Supr., !637 A.2d 34 (1994). Brazen v. Bell Atlantic Corp., Del. Supr., 695 A.2d 43, 47-50 (199b ). 47 Brazen, 695 A.2d at 50. In re General Motors Class H Shareholders Liiig, Del. Ch., 734 A 2d 6 11, 620-2 1 (1999) (where board fulfilled its duty to inform stockholders of the implicat ons of rejecting a boardproposed transaction in a non-threatening manner, no coercion was I und). 34 I a claim that the Hills board purposely used the Severa Ice lever so as to place unwarranted pressure on the Hills stockholders. Indee , it would have been absurd for the board to use such a harmless weapon ag inst Dickstein. After all, Dickstein had assured the electorate that it could c ver the Severance, refinance the company s debt facilities and senior not , and offer a 1 minimum of $22 plus $5 in PIK a share. Given that th s was Dickstein s electoral platform, there is no basis to conclude that th possibility of post1 election Severance payments would coerce an electora e that Dickstein had already promised to largely cash out - regardless of hether that Severance was paid. At worst, stockholders knew that if the they might lose out on Dickstein s promise that it existing offer if the Severance was not paid.49 The plaintiffs are also estopped from making th Severance is so large as to constitute a coercive influe stockholder vote. When it was agreed and ordered th Hills could not bring suit challenging the Employment Agreements, that a eement and order meant many things. One of them was that Hills was n t entitled to claim that the level of the Severance in the Agreements was excessive as to be coercive. Dickstein (who caused the Hills companies bring this suit) 49 DX 20. ~ 35 cannot credibly claim that it was unaware of the magni de of the Severance P payments at the time it released its claims. Nor can Hi ~1s and the Hills f stockholders who are bound by a similar release. For different reasons, I reject plaintiffs invitatio to apply the entire fairness standard of review. In the purest sense, only t ee of the seven Hills directors had a self-dealing interest in the Employm 1 Agreements.so nt Thus to the extent that plaintiffs wish me to concentrate solely on the June 22, 1995 vote of the Hills board to disapprove the Dick:stein Change in Control for purposes of the Employment Agreements, .;he plaintiffs face the insuperable dilemma that a majority of disinterested directors made that decision. The plaintiffs, however, contend that all of the directors were interested because they desired reelection and that defendant Lee was interested because his firm received $250,000 annually to act as a financial advisor to Hills and because entities affiliated with Lee allegedly would have lost certain rights to purchase Hills shares at a favorab..e price if a merger with Dickstein occurred. As to the latter point, the plaintiffs must present admissible evidence creating a genuine issue of material fact whether Lee ia interested under the materiality standard applicable to non-g 144 interests under Cede & Co. See 8u. $ 144. 36 v. Technicolor, Inc5 and Cinerama, Inc. v. Technicolo(r, Inc.52 This they 0 have not done. At oral argument, the defendant-direct rs assured me that Lee was far too wealthy to be influenced by the interests cited by plaintiffs. They backed this assertion up with an affidavit indicat g that Lee s adjusted gross income for 1994 and 1995 combined was in exe ss of $200 million.53 Moreover, I note that Lee (or his affiliated businesses)i owned nearly 800,000 Hills shares during the spring and summer of 995 and thus stood to receive over $20 million in proceeds if Dickstein s pro ised strategy panned oUt.54 Although it is true that the test to be applied is a one,55 that subjectivity does not permit a plaintiff to wait until tri to present plausible evidence of a material self-interest on the part of a dir P The $250,000 that went to Lee sfirm represents an infinitesimal pro ortion of his annual income. Moroever, the plaintiffs have failed to produce evidence that the rights Lee s affiliates possessed would in fact have be n extinguished by a merger or other Change in Control, or that these rightsI overrode Lee s Del. Supr., 634 A.2d 345, 364 (1993) (subsequent history omitted) j2 Del. Supr., 663 A.2d 1156, 1169-71 (1995) (subsequent history o itted). j3 Given that the plaintiffs had ample opportunity to take discovery o this issue and have been mp permitted to advance new arguments in response to the affidavit, I w ll accept the affidavit as being non-prejudicial. The affidavit should have been presented soo er, however. a DX 1, at 15. j Cede II, 634 A.2d at 364. n 37 interest in maximizing his return from the 800,000 Hills shares he already controlled. Given these facts and the plaintiffs failure (through depositions and other discovery) to demonstrate that Lee was abnomally obsessed (apologies to Benjamin Franklin) with (what to Lee ar ) pennies rather than dollars, I conclude that there is no triable issue regarding Lee s disinterested status. Even if Lee was interested under the Cinerama 2nd Cede II standards, it would not change my decision. To date, Delaware 1z.w has not taken the position that a board of directors decision to oppose a takeover is subject to the entire fairness standard simply because a majority of the board has an interest in continuing to remain in control. Rather, t.ne potential conflict always inherent in a challenge to a board s control is the very foundation for the Unocal standard of review itself. that standard, the court is to consider whether a majority of personal interest in securing the control of the corporation,56 but the presence of a maj interested in this sense does not trigger the entire fai ess standard of review unless the defensive measure under challenge i 56 Unocal, 493 A.2d at 955. 38 review by virtue of the application of 8 Del. C. 5 144.57 A credible argument can be made, of course, that a board s decision to take steps to maintain itself in office is an inherently self-interested decision t lat invariably ought to be evaluated under the exacting entire fairness stand;sd.58 But the extremity of this approach might well inhibit defensive action that is in fact stockholder-protective and act as a disincentive for qualified businesspeople to serve on boards. The current Delaware approach avoids these costs while providing stockholders with sufficient protection from improper entrenching tactics - so long as our courts apply Unocal with the :.ppropriate rigor and sanction only well-justified and proportionate defensive measures.59 Thus as an initial matter, it is inappropriate to apply the entire aimess standard of review. Hence, the choice of the initial standard of revie comes down to Unocal and the business judgment rule. Although the Agreements are not so self-evidently defensive as a Chesapeake Corp. v. Shore, op. at 52 n. 32. * See Joel Se&man, The New Corporate Law, 59 BROOKLYN L. 1, 11 (1993). 59 In this regard, one should not forget the proven willingness of Del ware courts to strike down purposely entrenching board action and even well-intentioned board ction that has the primary purpose of thwarting a stockholder vote. Schnell v. Chris-Craft Inc., Del. Supr., 285 A.2d 431 (1971); Blasius, 564 A.2d 651. 39 and purpose convince me that they have objectively defensive characteristics justifying heightened scrutiny. I The Employment Agreements were concededly bdopted as a reaction to a perceived threat to corporate policy and effectiveness which touches upon issues of control. 60 The Hills board feared that it would lose management in the face of Dickstein s 1994 overtures.) Not only that, the Hills board decided to adopt a double trigger approachlso as to provide the board with negotiating leverage in the context of a change of control battle. This approach gave the board the flexibility to use the /zontractual Change in Control approval process as an incentive to a friendly +ansaction, as a tool to extract a higher bid from a potential acquirer, or as a financial barrier to an acquisition bid the board believed was inadvisable.1 Delaware case law has assured stockholders that the fact that the court has approved a board s decision to put defenses in plaie on a clear day does not mean that the board will escape its burden to just@ its use of those 1 defenses in the heat of battle under the Unocal standard. 62 The ominpresent Stroud v. Grace, Del. Supr., 606 A.2d 75, 82 (1992) (quoting Gilb rt v. El Paso Co., Del. Supr.,575A,2d 1131, 1144(1990)). See MAI Basic Four, Inc. v. Prime Computer, Inc., Del. Ch., C.A. o. 10428, mem. op., 1988 WL 140221, mem. op., Hartnett, V.C. (Dec. 20, 1988) (considering nder Ufrocal standard whether a target board responded reasonably to a tender offer by, am ng other things, refusing to rescind severance rights payable to executives after a change in con 01). 62 See, e.g., Moran v. Household International, inc., Del. Supr., 500I .2d 1346, 1354 (1985). 40 I specter that a board may be acting primarily in its own interests, 63 is, if anything, more ominously haunting when a board is faced with an actual contest for control, such as was the case here, and must decide how to deploy its defensive arsenal. By contrast, the defendant-directors would have me apply the business judgment rule because, according to them, there is no evidence that the Hills board decided to trigger the Severance in order to deter the Dickstein Change in Control. In support of this proposition, they cite to the board s decision to let the stockholders decide who should run the company in a fair election. I am reluctant, however, to adopt this approach, given the concededly defensive capabilities the double trigger g ve the Hills board. 7 Dickstein all but invited the board to sit down with it and negotiate an increase in its bid in exchange for a board decision not to trigger the Severance. Thus the board had the chance to exercise the sort of negotiating leverage the double trigger was intended to give it. decision how to exercise that leverage in an actual conflict is entitled t no more deference s a result, I conclude than its original decision to give itself that leverage. that the Unocal standard of review is appropriate in th/e first instance. 6 Unocal, 493 A.2d at 954. I 41 B. Has The Hills Board Demonstrated Its Entitlement To Summary requires the board to demonstrate that, after a determined in good faith that the corporation faced a t defensive response.65 The second requires the board t demonstrate the proportionality of its defensive measures to presence of a majority of outside independent director materially enhances a board s ability to meet these burdens. In this case, the first prong is of preeminent im brtance. The plaintiffs waived their right to challenge the validity ( the Employment Agreements. That waiver is consequential. The plan iffs cannot in good faith claim that the Severance is a disproportionate re nonse in a situation when the Hills board, on a good faith and informed b; jis, concluded that a Change in Control was adverse to the interests of Hill and its stockholders. 64 Unitrin. Inc. v. American Gen I Corp., Del. Supr., 65 1 A.2d 1361 1373 (1995) Unocal, 493 A.2d at 955. 66 Id. at 955-57. 67 Unitrin, 65 1 A.2d at 1375; Unocal, 493 A.2d at 955; Chesapeake orp. v. Shore, op. at 81 & n. 86. 42 To find otherwise would be to say that the plaintiffs wa.ived nothing when they agreed not to challenge the adoption of the Employment Agreements. This is not to say that the board could ignore the circumstances facing the company in 1995 when it triggered the Severance, but it is to emphasize that the board s prior decision to promise the Covered Zxecutives Severance in the context of a non-Approved Change in Control ard the plaintiffs waiver of the right to challenge that basic promise are critically important foundational facts. These facts greatly restrict the court s ability to secondguess the board s decision to trigger the Severance if the court concludes that the board has met its burden to demonstrate that it made a good faith and informed judgment that the Dickstein Change in Control was a threat to Hills and its stockholders. Turning to that question, my job becomes surpri ingly simple. The plaintiffs have failed to challenge the board s conclusi n that the Dickstein Change in Control constituted a threat to Hills and its tockholders. In the i face of abundant evidence supporting the board s dete ination, the plaintiffs have remained steadfastly mute. Thus they ave conceded away most of their case. I reach this conclusion because I reject the narr w prism through which the plaintiffs would have me view the board s : a, tions. According to 43 I plaintiffs, the Hills board was duty-bound on June 22, 1995 to consider the narrow question of whether, if the Dickstein slate prevdiled, as the board thought was likely, it was in the best interests of Hills tb trigger the Severance rights of the Covered Executives. I In answering this narrow question, the plaintiffs (suggest, the board was to ignore the fact that the Covered Executives had Iremained loyal employees during a period of corporate turbulence and1 had resisted the opportunity to go to work for other employers. The bobrd was to ignore the fact that the Covered Executives had signed contracts that gave them the right to Severance unless the board affirmatively appro(ved a Change in Control, contracts that were subject to an implied co Ji enant of good faith and fair dealing.69 Finally, the board was to ignore then fact it had in good faith and with the advice of outside financial and legal ladvisors reached the judgment that the Dickstein Change in Control was adi/erse to the interests of the company and its stockholders. Confessedly, the logic of this approach escapes by comprehension. Unless the Employment Agreements are read as contajning a wholly illusory 68 That is, the Employment Agreements clearly contemplate a right t Severance in the absence of a board vote on whether to approve a Change in Control. This plaintiffs argument that the board s supposed duty was to consider the Change in visability f?om the singular perspective of whether it was wise to trigger the Severance, assumin the Change in Control was in fact going to occur. 44 I promise of Severance when the board does not approvet a Change in Control, the plaintiffs approach is baffling. Because I do not believe that a responsible board could read the Employment Agreem :nts as providing the Covered Executives with an essentially phony promise, I do not accept the plaintiffs approach. Rather, the board s decision, per Finkelson s ad consistent approach to the issue of whether to in Control was a reasonable response in the circumsta Because the board had determined, for many Dickstein Change in Control was harmful to the corn:pa my, it would have exercised bad faith under the Employment Agreemen It: ; if it had voted to approve the Change in Control simply so as to avoid tr iggering the Covered Executives right to Severance. After one party to a ( : ntract has given its consideration for a promised payment, it is often in tf let other party s narrow, selfish interest to accept that consideration and avoid t.:re promised payment. Acting on that interest is commonly referred to as a b ri:ach of contract. A majority of the Hills board had no self-intere t in the Employment Agreement. Their decision to trigger the Severance t cause they believed that the Dickstein Change in Control was a harmful tl eat and because they See 8 Del. C. 4 141(e). 45 believed that the company should live up to its contractual commitments was a reasonable decision in the circumstances. Having produced no evidence rebutting the board s showing that the Dickstein Chan e in Control was Ep reasonably considered by it to be dangerous, the plaintjffs have failed to generate a triable question about whether the board ha failed to meet its burden under Unocal. Notable in this regard is the fat: that if Dickstein had been capable of doing what it assured the Hills stockh lders it could do consummating an acquisition of Hills that required the(Ipayment of the Severance and the refinancing of the company s debt a/nd senior notes this case would not be here. C. The Plaintiffs Have Not Otherwise Produced Evidence Of A Breach Of Fiduciary Dutv Sufficient To Generate A Material Issue Of Fact For Trial Under Unocal, it putatively remains open to the plaintiffs to show that board action that has been found to be proper under heightened scrutiny is, nonetheless, invalid because it resulted from breaches bf the duty of care or loyalty by the board.7 The plaintiffs have not come c ose to generating a triable issue regarding whether the defendant-director i breached their E.g., Unitritz, 65 1 A.2d at 1373, 1390. See In re Gaylord Contain r Shareholders Litig., Del Ch., C.A. No. 14616, op. at 26-33, Strine, V.C. (Jan. 26, 2000) (ques ioning the logic of this approach). : 46 fiduciary duties by failing to approve the Dickstein Ch nge in Control for purposes of the Employment Agreements. As to loyalty, a majority of the board had no Employment Agreements. On at least two occasions, t separately to consider whether to approve the Dickstei Change in Control and unanimously decided not to do so. Furthermore, t ere is no evidence that would support the proposition that the three ted directors either possessed the capability to or in fact did exercise undue influence on the disinterested majority. And the board s unrebutted showing that it legitimately opposed that Change in Control for good faith reasons makes any inference of a loyalty breach impossible. Notably, this is not a situation where the plaintiffs have produced evidence that the board, realizing it was going to be thrown out of office, triggered the Severance out of spite or hard feelings. Elvidence that would support a finding that board members were sore losers and took action out of a bad faith desire to exact revenge on the stockholders for voting the wrong way would justify a trial to determine whether the board had violated its duty of loyalty. But the plaintiffs have produced no e idence of this nature. Finally, the plaintiffs have failed to submit evid nce that would support a conclusion that the board breached its duty ? care. Although the qf 47 I plaintiffs contend that the board ignored or gave inadeduate weight to certain factors, their due care argument really rehashes their v ew that on June 22, i 1995 the board was supposed to blind itself to its contractual obligations and its previous good-faith determination that the Dickstein Change in Control was inadvisable. I But the evidence is clear that the board believedlthat the departure of the Covered Executives would hurt the company; kne$ that at least some, if not all, of the Covered Executives were likely to depar/ if granted Severance; and understood the size of the payments to be made to Ithe Covered Executives. Indeed, the board informed the Hills stockholders of all these issues. A proper application of the gross negligence stbndard therefore precludes judicial second-guessing of their presumptidely good-faith decision to honor the agreements and oppose the Dickstein Change in Control.72 The record evidence simply will not suppo 4 a finding of gross negligence in the face of the substantial evidence of th board s careful consideration of the merits of the Dickstein Change inlContro1, the board s decision to allow the stockholders to choose that Chanbe in Control in a fair A good example of the plaintiffs unique approach to this case is should have considered amending the SERP to deprive the Covered under that plan. That is, after the Covered Executives had stuck wit to amend the SERP at the last minute to deprive them of their cannot bolster a due care claim. 48 I election, and the board s reliance upon advice from re$pected outside advisors. For all these reasons, I grant summary judgmeni for the defendantdirectors on the plaintiffs claim that the board breach$d its fiduciary duties by failing to approve the Dickstein Change in Control Ifor purposes of the Employment Agreements.74 ~ I also note that the four defendant-directors who were not Co responsible for monetary damages for a breach of their duty of exculpatory charter provision adopted under the authority of 8 xecutives cannot be held Hills charter has an 74 I also grant summary judgment to the defendant-directors on plaintiffs concede, as they must, that there was adequate consid Executives for the Employment Agreements. But they contend triggering the Severance on June 22, 1995 and thus the board s to the Covered Executives. The plaintiffs can only do so by di Covered Executives performed their obligations under the Agr during the Change in Control fight - that is, the Cov under the contract. This argument does not come close to meet See, e.g., Glazer v. Zapata, Corp., Del. Ch., 658 A.2d 176, 183 supported by evidence that an exchange . is so on sound judgment could conclude that the corporation has received a also Brehm II. Eisner, Del. Supr., No. 469, 1998, ~ (to effectively challenge a board s decision about executive compe must demonstrate that the board acted unconscionab[ly] by irrati giv[ing] away corporate assets ). ntiffs waste claim. The given by the Covered 11s derived no benefit from But I deny the motion for summary judgment by defendant against plaintiffs breach of contract claim based on thei As fiduciaries of Hills, they are in no position to claim from Hills were contractually due. The funding of the Rabbi Trusts occurred Hills board, the Hills board had ultimate responsibility to ensure c Agreements, and Reen (Bozic s subordinate) was the manager wh Severance. Section 102(b)(7)(iv) of Title 8 precludes Bozic, Reen, that they are insulated from any responsibility to rep overpayments they were in a position to have avoid zic, Reen, and Matthews ess Severance payments. than that to which they e they were still on the remained with Hills already given value us test for waste. e claim must be iness person of ordinary, ate consideration ); see p. at 36 (Feb. 9,200O) n as waste, the plaintiff ly squander[ing] or For a related reason I also deny the defendants motion for plaintiffs unjust enrichment claim. Under either Massachusetts or are only entitled to relief in this dispute involving righ they show that the Covered Executives received Severance improp fiduciary duty by the defendant-directors or breaches of the Emplo If the plaintiffs make either of the required showings of a fiduciary 49 ware law, the plaintiffs mployment Agreements if as a result of breaches of I IV. Are The Plaintiffs Entitled To Summarv Judgmert On Their Claim That Defendants Bozic. Reen. and Matthews Received Severance In Excess Of That Called For Bv The Emnlovment Agreements? The plaintiffs contend that defendants Bozic, R$en, and Matthews were paid Severance in an amount substantially greater than the Employment Agreements authorized.7s Specifically, the plaintiffs allege that these defendants received a windfall because Hills included in the calculation of their Severance a totally discretionary, non-mandatory bonus (the Special Bonus ) that was paid to each of these Executives by the Hills board in early 1995 because of the company s strong I994 performance. These Special Bonuses, which amounted to $100,000 For Bozic and $70,000 each for Reen and Matthews, were included in the Sejerance formula. As a result, the Special Bonuses were multiplied by three and the company was forced to pay gross-up taxes on these amounts - for a total payment of nearly $1.2 million. necessary to ensure that the defendant-directors are not unjustly enr ched will be awarded, see Sunders v. Wang, Del. Ch., C.A. No. 16640, mem. op. 1999 WL 104 880, at *lo, Steele, V.C. (Nov. 8, 1999 rev. Nov. 10, 1999), but not because plaintiffs have prs ven a free-standing unjust enrichment claim. Nonetheless, I leave the unjust enrichment claim n the case for a narrow reason. Even if Bozic, Matthews, and Reen can convince me that th y had no role in causing any excessive payments to themselves, they still would be unjustly emit ed if they received them. Just as someone can t keep a mistakenly excessive tax refund or aut atic teller pay out, these defendants cannot hold on to overpayments from the company to wh ch they owed fiduciary duties. The plaintiffs sought summary judgment on two other contractual laims. The defendants do not oppose the plaintiffs motion as to those claims, and the parties h ve agreed to work together to formulate an agreed-upon order embodying the appropriate relief.I 50 I For the following reasons, I find that there is genuine issue of material fact regarding plaintiffs entitlement to judg ent on this claim, which is supported by the plain language of the yment Agreements. Because the contractual language is dispositive to I cite it now. Under the Employment Agreements, a Covered Executive was to receive Severance in an amount equal to three (3x) ti es [the Covered] Executive s Annual Compensation. . . . y76 Annual C t mpensation, in turn, was defined as the sum of (A) the [Covered] Executi e s base salary for 1994 and (B) any bonus compensation to which [the :overed] Executive would have been entitled if [the employed under [the] Agreement to the end of 1994 Company and individual achieved pursuant to Section 5(b)) [of this Section 5(b) of all of the Agreements, a [Covered] the bonuses specified in Schedule A upon the terms a in Schedule A. Such bonuses shall be within sixty (60) days after the end of each of the Co DX 7 $ IO(c). Id. There is one exception to this definition that the parties agree current dispute regarding the Severance awarded defendants Bozic, 51 no relevance to the een, and Matthews. I during the term of this Agreement. m, provides that the Covered Executive shall receive 50% of his base sala annual goals established for him by the Hills board.79 was headquartered in that state and that the Covered Executives performed the bulk of their services there. Like Delaware courts, Massachusetts courts interpret contracts in accordance with their plain terms.* Unless the terms of the contract are inconsistent or can reasonably be read in two different ways, the contract is considered unambiguous and extrinsic evidence may not be used to vary or contradict its terms.82 In determining whether the discretionary bonuses were properly included in the Severance paid to Bozic, Reen, and Matthews, the most important words of the Employment Agreements con act are would have been entitled . . . . Under the Employment Agreeme Bozic, Reen and Id. 5 5(b). l9 Id., Sched. A. go Wilmington Trust Co. v. Wilmington Trust Co., Del. Ch., 24 A.2d , 09, 3 13 (1942). Suffolk Const. Co. v. Lance Scaffolding Co., 716 N.E.2d 130, 133 (wass. Ct. App. 1999); Boston Edison Co. v. Federal Energy Regulatory Commission, 856 F.2d 361, 365-67 (1 Cir 1988). 82 Davis v. Dawson, Inc., 15 F.Supp.2d 64, 107-08 (D.Mass. 1998). Matthews were entitled only to the bonus compensation identified in Section 5(b) and further detailed in Schedule A of the ~Agreements. The Special Bonuses awarded to them by the Hills board were not bonuses to which the Covered Executives were entit$d. Thus the Special Bonuses did not form a part of the Covered Executive 6 Annual Compensation and should not have been included in their Severance calculation. In fact, the defendants have failed to advance any argument that Bozic, Reen, and Matthews were entitled to the Special Bonuses they received on account of their 1994 performance. This failure is fatal to them.83 I V. Conclusion For the foregoing reasons, I grant the defendants motion for summary judgment as to the plaintiffs claims for breach of tid ciary duty and waste; u deny the defendants motion for summary judgment a$ to the plaintiffs claim for breach of contract and unjust enrichment ag inst defendants Bozic, ;P 83 The defendants extrinsic evidence cannot be used to vary the terms of the Agreements. Merrimack Valley Nat 1 Bank v. Baird, 363 N.E.2d 688,690 (Mass. 856 F.2d at 366-67. Even if it were to be considered, it would summary judgment. All the defendants have presented is evidence that certain had differences of opinion regarding whether the Special Bonuses were to be calculation because they were paid in 1995, rather than on the original meaning of $ 10(c); moreover, the Foley, Hoag atto concluded that the Special Bonuses were not includable, although unclear. In any event, this evidence does not in any way support a ti ding that the Covered Executives were entitled to the Special Bonuses they received of grace on top of the 0 5(b) bonuses they were contractually due. 53 I Reen and Matthews; and grant the plaintiffs motion judgment on their breach of contract and unjust enric directed to confer defendants Bozic, Reen, and Matthews.84 about the appropriate form of order and to present sue an order to me, along with an identification of the remaining no later than seven days from the date of this opinion.8s 84 Under one, if not both of these theories, the plaintiffs are entitled t have these defendants return to Hills the contractually excessive payments made to them. nt of the gross-up tax these payments can be affects the relief to Among the issues the parties must discuss is the appropriate payments on the Special Bonuses. The parties should reflect recouped from the federal government through a refund process and be awarded on this claim. 54 I
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