Summary
holding that "[e]ven if one accepts in its entirety the defendants' position that they had no economic choice but to issue the Preferred to Yampol, Battery, and Manor, no reason has been shown why, at the very least, the transaction could not have been made conditional upon the Preferred not being voted until after the May 13, 1986 election . . . . as a factual matter, defendants' claim that they had no other alternatives lacks adequate record support"
Summary of this case from Coster v. UIP Cos.Opinion
No. C.A. No. 8432.
Submitted: April 11, 1986.
Decided: April 18, 1986.
Charles F. Richards, Jr., Esquire, Thomas A. Beck, Esquire, and Gregory P. Williams, Esquire of RICHARDS, LAYTON FINGER, Wilmington, Delaware, and Anthony F. Phillips, Esquire, Gerald Kerner, Esquire, and Ziporah J. Szydlo, Esquire, of WILLKIE, FARR GALLAGHER, New York, New York, for Plaintiffs.
Lawrence C. Ashby, Esquire and Stephen E. Jenkins, Esquire of ASHBY, McKELVIE GEDDES, Wilmington, Delaware, and Edward Brodsky, Esquire and William J. McSherry, Jr., Esquire of SPENGLER, CARLSON, GUBAR, BRODSKY FRISCHLING, New York, New York, for Defendant Graphic Scanning Corp.
Lawrence A. Hamermesh, Esquire, Jack B. Blumenfeld, and Matthew B. Lehr, Esquire of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware, and Robert L. Laufer, Esquire, and Alisa D. Shudofsky of PAUL, WEISS, RIFKIND, WHARTON GARRISON, New York, New York, for Defendants Michael Beckman, Nathan Bellow, Stanley Itskowitch and Arthur J. Radin.
Arthur G. Connolly, Jr., Esquire of CONNOLLY, BOVE, LODGE HUTZ, Wilmington, Delaware and Melvyn I. Weiss of MILBERG, WEISS, BERSHAD, SPECTHRIE LERACH, New York, New York for Defendant Barry Yampol.
Michael D. Goldman, Esquire, Donald J. Wolfe, Jr., Esquire and Richard L. Horowitz, Esquire, of POTTER, ANDERSON CORROON, Wilmington, Delaware, and Kevin J. Walsh, Esquire, Richard E. Donovan, Esquire, Joy Feigenbaum, Esquire, and Jonathan K. Cooperman, Esquire of KELLEY, DRYE WARREN, New York, New York, for Defendants Battery N.V. and Monar Company N.V.
OPINION
As an outgrowth of an impending proxy contest for control of the board of directors of Graphic Scanning Corp., ("Graphic" or "the Company"), the plaintiffs, who are Graphic shareholders, commenced two actions in this Court on March 3 and March 7, 1986. In Packer v. Yampol, et al., C.A. No. 8403, filed on March 3, the plaintiffs sought to compel the holding of an annual meeting on the ground that no election of directors had been held for two and one-half years and that two of the five directors of Graphic had never been elected by the stockholders. That action was resolved by the entry of a consent Order that a meeting of Graphic stockholders be convened on May 13, 1986 with an April 15, 1986 record date. In Packer v. Graphic Scanning Corp., C.A. No. 8411, filed on March 7, one of the plaintiffs herein sought to compel Graphic to produce its stockholders list. That action was also resolved by way of a consent Order entered on March 12, 1986, whereby the defendants agreed to produce the stock list.
Two weeks later, on March 24, 1986, Graphic's directors caused Graphic to issue to its Chairman and Chief Executive Officer, Barry Yampol ("Yampol") and also to two Netherlands Antilles corporations, Battery, N.V. ("Battery") and Monar Company, N.V. ("Monar"), shares of two newly-created series (Series A and Series B) of Graphic Preferred Stock. Because each series of Preferred stock possessed "supervoting" features, the result was to create 17,700,000 additional votes which Yampol, Monar and Battery would be entitled to cast at the May 12, 1986 stockholders meeting. As explained more fully below, the creation and issuance of the Series A and the Series B Preferred Stock to Yampol, Monar and Battery (i) increased Yampol's voting power from 17.2% to 23.1% of the outstanding Graphic shares entitled to vote, (ii) conferred upon Battery and Monar voting power representing approximately 21% of the outstanding shares of Graphic entitled to vote, and (iii) conferred upon Yampol, Battery, and Monar collectively, aggregate control over 44% of Graphic's total voting power.
On March 31, 1986, plaintiffs filed this action for injunctive and other equitable relief, attacking the validity of the newly-issued preferred stock on various equitable grounds. The plaintiffs also moved for a preliminary injunction that would prohibit the Preferred shares from being entitled to vote at the May 13, 1986 stockholders' meeting. At plaintiffs' request, an order granting expedited discovery was entered and a hearing on the preliminary injunction motion was scheduled. Following expedited discovery and the development of a voluminous record, extensive briefs were submitted. The hearing took place, as scheduled, on April 11, 1986.
This is the decision of the Court on the plaintiffs' motion for a preliminary injunction.
I. FACTUAL BACKGROUND
Except where otherwise noted, the essential background facts are not disputed.
A.
Graphic, a Delaware corporation, is a leading company in the telecommunications services industry. Graphic operates one of the nation's largest radio and paging and cellular telephone businesses. It also operates pay television systems and a nationwide computer-controlled network that electronically receives, processes, and transmits records and data communications.
Graphic was founded in 1968 by defendant Yampol, who from its inception has served as Chairman of the Board and Chief Executive Officer. In 1971 Graphic sold its common stock in an initial public offering. By September 30, 1985, through successive offerings and stock splits, Graphic's issued and outstanding common shares had increased to 37,099,514 shares which are publicly traded in the over-the-counter market. Yampol presently owns or controls approximately 17% of Graphic's common stock.
Besides Yampol, Graphic's board of directors consists of four persons, all of whom have personal or business ties with Yampol, who invited them to serve. Those directors are Nathan Bellow, Arthur Radin, Michael Beckman, and Stanley Itskowitch. Two of those directors, Messrs. Beckman and Itskowitch, have never been elected as directors by Graphic stockholders.
Nathan Bellow, a director since 1971, was a Graphic employee between 1968 and 1979, during which time he served as Graphic's Vice President of Financial Services, reporting to Yampol. Since his retirement in 1979, Bellow has served as a consultant for Graphic at $20,000 per year, has had a close personal relationship with Yampol, and currently serves as a director of one or more of Yampol's private corporations. Arthur Radin, a managing partner of a public accounting firm, and a Graphic director since 1983, had previously been a partner of Touche, Ross Co. in charge of the Graphic account. Mr. Radin has done tax work of a personal nature for Yampol and for entities in which members of Yampol's family have interests. Mr. Radin is compensated at the rate of $200 per hour for his services as a director. Stanley Itskowitch, a director since 1984, was a partner in accounting firms that performed accounting work for Graphic until he became president of a small non-public chemical marketing company. Mr. Itskowitch has done some personal accounting work for Yampol and his family. Michael Beckman, a director of Graphic since April, 1985, and a partner in a New York City law firm, has represented Yampol personally in certain recent commercial dealings, and has performed legal services for Mr. Yampol's family. Mr. Beckman's firm is compensated at the rate of $200 per hour for whatever time that Mr. Beckman spends, whether as a director or attorney, on Graphic matters.
B.
Because of the nature of Graphic's business, large amounts of capital are required to develop and conduct its operations. Since many of those operations, particularly the cellular telephone systems, are still in their initial developmental stages, Graphic has experienced ongoing, episodic cash flow problems. For example, Graphic is the part owner of numerous FCC licenses to provide cellular mobile radio telephone service to various cities throughout the United States. These licenses are owned by various partnerships, of which Graphic is a partner, that control licenses in 30 cellular markets. The partnership agreements typically provide that when a majority of the partners decide to build the system, the partnership can place a "cash call" on the individual partners, requiring them either to put up additional cash or to sell their partnership interests. At present only a few of these systems have begun operations. Although the initial capital requirements for such systems are high, the promise for future profits is great, because a cellular system, once completed and successfully marketed, promises to generate significant cash flow.
Thus, as with many high-technology start-up operations, Graphic has a constant need for cash but finds itself unable to fund those needs internally from operations. To solve its periodic cash flow problems, Graphic has had to raise money from outside sources. Indeed, Graphic's entry into several of its present business ventures was financed by public offerings of its own common stock, of the common stock of its subsidiaries (Switchco and Fundsnet), and by a 1981 offering of $105 million of 10% convertible debentures. During the period July 1, 1983 through December 31, 1985, Graphic has been required to expend $163,700,000 over and above the cash generated by its business operations. Those funds were raised from the following sources: loans from Switchco ($7.7 million), loans from Yampol and family trusts ($11 million), issuance of Graphic common stock ($16.9 million), sales of assets, largely cellular partnership interests, ($37 million), borrowings through equipment financings ($16 million) and financing through cellular partnerships ($12.8 million).
During the past three fiscal years, Grahic has not been profitable on a consolidated basis. However, Graphic's Security Service division is a consistent cash generator with high profitability, and its consulting subsidiary (R.L. Vega) will likewise be profitable.
Of the various techniques utilized by Graphic to raise cash, the issuance of "supervoting" preferred stock, i.e., preferred stock having the right to more than one vote per share, was not included among them. Insofar as the record discloses, the only time that Graphic management considered using supervoting preferred stock was as a possible antitakeover defense measure. In March, 1985, there were rumors that Metromedia might attempt a hostile takeover of Graphic. Messrs. Yampol, Radin and Itskowitch reacted by meeting with attorneys of Paul, Weiss, Rifkind, Wharton Garrison ("Paul, Weiss"), a prominent New York law firm, for advice concerning possible antitakeover defense measures. Paul, Weiss considered and recommended several antitakeover measures. Among them was the creation and issuance of two new series of preferred stock: a proposed Series A that would have 20 votes per share and the right to an 80% class vote to approve certain transactions including a merger, liquidation, and sale of more than 10% of Graphic's assets; and a proposed Series B which would carry 200 votes per share. Paul, Weiss recommended that Graphic issue to Yampol 10,000 Series A preferred shares for $1 million in cash, plus $2.5 million of notes that would be convertible into 25,000 shares of Series B preferred stock. If the notes were converted, Yampol would have an additional 5,200,000 votes.
That the purpose of the proposed preferred stock was to thwart a hostile takeover attempt is evidenced by a Paul, Weiss memorandum dated March 11, 1985 transmitting to Messrs. Yampol, Itskowitch, and Radin drafts of various documents, including certificates of designation of the proposed supervoting preferred. That memorandum states in pertinent part:
"The package achieves a variety of goals. First, the issuance of the Series A and Series B stock gives Mr. Yampol effective veto power over any proposed plan of merger which is presented for shareholder vote. The Series A stock and Series B stock each vote as a separate class on this issue and Mr. Yampol will be the sole shareholder of each of these series.* Second, the likelihood of a successful public tender offer is lessened. A raider might only make a public offer for securities if it believes that it can get 51% of the outstanding voting rights of the Company. Mr. Yampol already holds 21% of such voting rights. The Series B stock it [sic] purchased, another 5,000,000 votes and the Series A stock adds 200,000 more. Moreover, the stock options, exercisable in full upon the initiation of a public offer, give Mr. Yampol the opportunity to acquire 3,300,000 more votes. A raider will have to acquire a very high percentage of the remaining outstanding shares to gain a 51% voting interest. . . ."
* In the case of the Series B, if the conversion right is exercised. (Itskowitch Dep., Exhib. 3).
Graphic apparently adopted certain of the antitakeover measures recommended by Paul, Weiss. However, it did not adopt the proposal to issue supervoting preferred stock.
C.
Graphic has a history of transactions with Yampol, many of which have resulted in litigation. Without intimating any view about their merits (which are not in issue), I describe certain of the transactions between Yampol and the Company for background purposes.
In 1981 Graphic's board approved an agreement ("the 12.5% agreement") which granted Yampol the right to acquire up to 12.5% of the equity in certain business ventures engaged in by Graphic that were formulated by Yampol. Pursuant to that agreement, Yampol was granted an option for 12.5% of the equity in several different Graphic ventures which, plaintiffs claim, represent 10-15% of Graphic's revenues. Yampol was also granted an option to acquire, for less than $10,000, over 985,000 shares of Switchco, a Graphic subsidiary, said to be currently worth over $2 million. The plaintiffs claim that the 12.5% agreement and its application to the various new ventures was a windfall to Yampol and unfair to Graphic. Defendants sharply dispute plaintiffs' claim. The propriety of the 12.5% agreement is the subject of a separate derivative action in this Court.
In 1984 Graphic borrowed $11 million from Yampol and two family trusts. The terms of that loan included interest at rates ranging from 15% to 16-3/4%, the right to convert Graphic's notes into common stock at a price less than Graphic's current market price, plus warrants to purchase up to 384,951 shares of common stock (currently worth $8.75 per share) claimed to represent a potential profit of $3.36 million. Similarly controversial are Yampol's compensation arrangements. Yampol's salary was increased to $500,000 at a time when his employment agreement did not require him to devote his full time to Graphic. "Golden parachute" termination benefits were awarded to Yampol and other executives, including a $1.8 million termination payment to Yampol if a change of control occurred. The complaint alleges other transactions involving Yampol and the company which are characterized as self-dealing. The defendants dispute those characterizations.
Finally, in January, 1985 the Chief Administrative Law Judge of the Federal Communications Commission (FCC) issued a lengthy opinion in which he denied applications for FCC radio paging licenses by four companies that had been formed by Yampol. The FCC Judge found that Graphic had misrepresented its financial interest in the license applicants and that the misrepresentations of the relevant facts were intentional and deliberate. The FCC Judge attributed to Yampol responsibility for Graphic's failure to be forthright, and found that Yampol was a party to Graphic's concealments and misrepresentations. Management has advised Bear Stearns, Graphic's specially retained investment banker, that the FCC decision has created a cloud over its radio paging business; however, Graphic is currently attempting to resolve the dispute which led to the FCC investigation of the licensee applicants. (D. Appendix Exh. 8).
In Re A.S.P. Anser Service, Inc., et al, FCC Docket Nos. 82-587, 588, 589, and 590 (FCC, January 9, 1985).
During 1984 and 1985 Graphic continued to experience cash flow problems. In 1984 Graphic publicly announced plans to sell certain operating assets, and that Drexel Burnham Lambert, Inc. would be retained to assist Graphic with the announced sale. It appears that Drexel Burnham was ultimately not engaged, and that the asset disposition plan did not occur as contemplated. On February 7, 1986, the Graphic board adopted a policy to "immediately pursue substantial sales of assets of the Company in each of its business segments". (D. App., Exh. 28, p. 2). To implement that plan, Mr. Beckman met with Drexel Burnham to discuss its possible retention as investment banker for Graphic, but Drexel Burnham was not retained. Recently, however, management has proposed to sell its interests in its Indianapolis and Milwaukee cellular partnerships.
In its Form 8-K dated February 7, 1986, the Company announced that its directors had entered into an agreement in principle with Yampol to settle Yampol's claims under the 1981 12.5% agreement. Under the proposed settlement, Yampol would release all of his claims against Graphic, would execute a $4.9 million note in favor of Graphic, and in turn would receive the right to acquire specified assets and properties estimated to have a value of "less than $10 million." Included is the stock of an entity which holds Graphic's interests in cellular partnerships in Boston and Worcester, Massachusetts. It was further announced that upon consummation of the settlement terms and upon implementation of the policy to sell assets, Yampol would also withdraw from an active role in the management of the Company. The proposed settlement is presently in abeyance.
D.
The hostile takeover effort which Yampol and the other Graphic directors feared would occur in 1985, instead came nine months later in the form of the instant proxy contest for control of Graphic's board of directors. In August, 1985, Lafer, Amster Co., a New York partnership and investment firm of which plaintiff Joel Packer is a general partner, filed a Schedule 13D with the Securities and Exchange Commission. In its Schedule 13D, the Lafer, Amster group stated that they owned 5.5% of Graphic's common stock which they were holding for investment purposes.
On February 14, 1986, Lafer, Amster filed an amended Schedule 13D, which stated that the Lafer, Amster group owned 10.6% of Graphic's common stock. It also disclosed that, in light of the disclosures made by Graphic in its
Form 8-K dated February 7, 1986, the Lafer, Amster group was not necessarily holding their shares for investment purposes and were considering seeking representation on the Company's board of directors through a proxy contest. On March 2, 1986, Lafer, Amster and certain other Graphic shareholders formally constituted themselves as "Graphic Scanning Shareholders for Independent Management" ("GSSIM"). The following day the members of GSSIM filed Schedules 14B and a Schedule 13D with the SEC, thereby giving notice of their intent (a) to wage a proxy contest to replace Graphic's board of directors with their nominees and (b) to file an action in this Court to compel the holding of a stockholders' meeting, and an action in the United States District Court for the Southern District of New York attacking the propriety of certain previously discussed transactions involving Yampol and the Company. Those lawsuits were filed on March 3, 1986. Thereafter, Graphic countered by filing its own lawsuit in the Southern District against GSSIM and its members.
On February 20, 1986, Graphic's directors learned of Lafer, Amster's February 14, 1986 amendment to its Schedule 13D. That same day a meeting was held at the Paul, Weiss firm, where three of Graphic's directors sought advice as to the significance of the amendment and a recommendation as to what should be the response. At that meeting Mr. Beckman learned of Paul, Weiss's prior 1985 recommendations concerning a possible issuance of supervoting preferred stock. Mr. Beckman requested the 1985 Paul, Weiss memorandum describing the proposed preferred stock. Between February 20 and February 24, 1986, Mr. Beckman had several discussions with Neale M. Albert, Esquire, a partner in the Paul, Weiss firm, regarding the possible issuance of supervoting preferred stock.
On February 24, 1986, Graphic's board of directors held a special meeting which was attended by Messrs. Beckman, Itskowitch and Radin. At that meeting the directors agreed that a new series of preferred stock would be created and issued to Yampol. They then contacted Yampol (who was in Florida) and all concerned agreed that Yampol would advance sufficient funds to the Company to enable it to meet a $5,250,000 debenture interest payment due June 1, 1986. In exchange, Yampol would be issued 52,500 shares of Series A Preferred stock. Although the characteristics of that stock remained to be negotiated and finalized in the future, Yampol understood that the Series A stock would have a $100 par value, a cumulative dividend of 15%, and 140 votes per share. On February 24-26, 1986, Yampol sold 340,000 shares of his Graphic common stock and advanced the $2,639,000 proceeds to Graphic in early March. The $2,611,000 balance was paid by Yampol on March 25, 1986.
Under the 1985 Paul, Weiss supervoting preferred proposal, both Series A and Series B Preferred would have been issued to Yampol. On this occasion, however, it was decided to issue only the Series A Preferred to Yampol. The Series B Preferred would be issued to other different investors, which turned out to be Battery and Monar, two Netherlands Antilles corporations specially formed to complete the acquisition, and which were controlled by Dibo Attar ("Attar"), an Italian citizen and investor. Although the Series A and Series B Preferred were issued to different persons, their terms were negotiated jointly during the same narrow time frame — February 24 through March 24, 1986 — and were issued to Yampol, Battery, and Monar, respectively, on March 25, 1986, the same day.
The circumstances leading up to the issuance of the Series B Preferred to Monar and Battery are as follows: Attar first became involved with Graphic in 1984. At that time he and other co-investors considered making a $50 million investment in Graphic. The feasibility of accomplishing this by means of a hostile tender offer was considered and ultimately rejected. Melvyn Weiss, Esquire, Yampol's present legal counsel and a person known to Attar for many years, then suggested the possibility of a "friendly" offer. Weiss subsequently introduced Attar to Yampol, who negotiated with Attar's group for three months over the terms of a proposed $50 million investment. Virtually on the eve of closing the Graphic board decided to terminate the negotiations. According to Yampol, Graphic was interested in having the transactions take the form of a loan, but Yampol became convinced that the Attar group was "more interested in doing a leveraged buyout than in giving a straight loan to Graphic" and was "less interested in a straight loan than in some sort of an equity deal where they ended up with a large piece." (Yampol Dep., p. 171). Yampol had no interest in any leveraged buyout.
Although Attar's affidavit suggests that the parties to the 1984 negotiations left on somewhat acrimonious terms, he and Yampol maintained contact. During the Passover season in 1985, Attar called on Yampol while in Miami, Florida, and over coffee they discussed a computer program of interest to Attar for an hour and a half. On one occasion Yampol also visted Attar's apartment at the Hotel Pierre in New York City.
During the week of March 4, 1986, Attar met Donald Carter, an acquaintance who manages The Carter Organization, a New York proxy solicitation firm. Mr. Carter mentioned that he had participated in discussions with GSSIM regarding a proxy contest. Attar offered to introduce Mr. Carter to Melvyn Weiss, because he thought that Mr. Weiss might in turn introduce Mr. Carter to Graphic's management. Later, Mr. Weiss called Attar to advise him that he (Weiss) had been retained by Yampol in connection with the proxy fight, and that the Carter Organization had been retained to assist Graphic management in their proxy solicitation.
Thereafter, Yampol telephoned Attar, who was then in Europe. Yampol advised Attar that Graphic was involved in a proxy contest (a fact which Attar already knew) and asked Attar whether he would be interested in discussing a capital investment in Graphic. Attar's response was to inquire if given the history of the abortive negotiations in 1984, it was likely that a financing deal could be concluded. Yampol's response was that "if [Attar] can raise money, we need the money." (Yampol Dep., p. 180) and that "we have a real need for the capital because the cost of the proxy contest is extreme and putting tremendous pressure on the company." (Id., p. 181).
On March 11, 1986, Attar flew to New York and met with Yampol. Yampol told Attar that although Graphic was losing money, it was "asset rich" and a good investment, and he suggested that Attar and other investors consider an equity investment in Graphic. Over the next two weeks, Attar or his representatives negotiated directly with defendant Beckman and legal representatives of Graphic, over the terms of an equity investment of approximately $10 million. These negotiations took place from March 11-24, 1986. In his affidavit, Attar states that because of the Company's cash flow situation, he was concerned that his group be given adequate security for its $10 million investment. For that reason, Attar claims that he insisted on various protections, including securities having multiple voting rights, so that he could "participate in and have a substantial influence on corporate decisions." (Attar Aff., ¶ 25). The plaintiffs strenuously urge that it had always been a foregone conclusion that Attar would be issued supervoting preferred stock, and that only the specific features of such stock remained to be negotiated. In any event, Attar states that agreement on the "broad terms" of the proposed investment was reached on March 11, 1986, the very same day that Attar met with Yampol. (Id., ¶ 26).
During the following two weeks, the parties negotiated the final terms of the preferred stock transactions and prepared a series of drafts of the numerous, complex corporate documents by which the terms of those transactions would be expressed. On March 19, 1986, Graphic retained the investment banking firm of Bear Stearns Co. to render a fairness opinion and to consult with Graphic's directors. On March 24, 1986, the day the Preferred stock issuance was formally approved, Bear Stearns rendered an opinion that the to-be-issued preferred stock was fair to Graphic's stockholders (other than Yampol) "from a financial point of view." According to the Bear Stearns representative who participated in its due diligence investigation, the opinion addressed only the economic impact of the new securities, not their impact upon a pending proxy contest or upon control of the company. (Seibert Dep., pp. 65-66). In its opinion Bear Stearns further advised that it had not explored or solicited any alternative means for obtaining financing.
As finally issued, the two new series of Preferred stock have,inter alia, the following features: Series A Preferred has a par value of $100 per share, pays an annual 12.5% dividend on par value, which dividends accrue if not paid, and entitles the holder to 120 votes per share. A total of 52,500 Series A Preferred shares were issued to Yampol for $5,250,000, thereby conferring upon Yampol an additional 6,300,000 votes on all matters to be voted on by Graphic stockholders.
The Series B Preferred has a par value of $100 per share, it pays an 11.25% dividend, it is entitled to 114 votes per share, and it is convertible into Graphic common stock at the equivalent of $8.75 per share (the closing market price of Graphic common stock on March 21, 1986). Moreover, the holders of Series B Preferred are entitled to block certain mergers, asset sales and other transactions, because such transactions must receive the approval of 80% of the Series B Preferred — in this case, Monar and Battery. This "80% veto" right is triggered if: (a) an entity acquires voting securities representing 50% or more of the votes entitled to be cast for the election of directors, (b) a majority of the directors of Graphic are replaced at a stockholders meeting or by written consent, or if (c) Yampol's ownership of 52,500 shares of the Series A Preferred is reduced to 80% or less. Thus, Monar and Battery will have an effective veto power over significant corporate transactions if the defendant directors are replaced in a proxy contest or if Yampol unilaterally decides to dispose of 20% of his Series A Preferred shares.
Once a triggering event occurs, none of the following transactions involving Graphic can be effected until January 1, 1989 or until such time as less than 50,000 shares of the series B Preferred are owned by Battery and Monar, absent the approval of 80% of the Series B Preferred: (i) the sale, mortgage or other similar transaction involving all or substantially all of Graphic's assets, (ii) the merger or consolidation of Graphic or any significant subsidiary with or into another corporation, (iii) the issuance of stock to a third party, (iv) any transaction not in the ordinary course of business "which transaction involves net sales proceeds to the company which proceeds equal or exceed more than ten percent (10%) of the total consolidated assets of the Company . . .," or (v) the liquidation or dissolution of Graphic or a significant subsidiary.
Monar and Battery were issued 100,000 shares of Series B Preferred (50,000 shares apiece) for a total of $10,000,000. In addition, Monar and Battery were issued warrants to purchase $1 million shares of common stock at $8.75 per share for two years, at a cost of $.0001 per warrant or $100 in the aggregate. As a result of the issuance of the Series B Preferred, Battery and Monar obtained the right to 11,400,000 votes on all matters to be voted on by Graphic stockholders.
Four hundred thousand dollars ($400,000) of the amount was paid to Cherry Hill, N.V., a Netherlands Antilles corporation with which Attar is affiliated.
The Series A and Series B Preferred together represent 17,700,000 votes, or almost 33% of the total voting power of the Company. Combining that with Yampol's present holdings of common stock results in Battery, Monar, and Yampol controlling 44% of the voting power of the Company. Through this transaction, the defendants obtained 17,700,000 votes for $15,250,000, an average cost per vote of $.86. At the current market price of Graphic's common stock of $8.75 per share, a purchaser of common stock would have had to invest approximately $155,000,000 to obtain voting power equivalent to that obtained by Yampol, Battery and Monar for an investment of $15,250,000.
II. IRREPARABLE HARM AND BALANCING OF THE EQUITIES
To be entitled to the extraordinary relief of a preliminary injunction, the plaintiffs have the burden of showing that (a) they will probably prevail on the ultimate merits of their claims, (b) they will suffer irreparable harm if such relief is not granted and (c) the harm to plaintiffs if preliminary injunctive relief is denied outweighs the harm to defendants if such relief is granted. Bayard v. Martin, Del. Supr., 101 A.2d 329, 333 (1953), cert. denied, 347 U.S. 944 (1954); Gimbel v. Signal Companies, Del. Ch., 316 A.2d 599, 602-03, aff'd., Del. Supr., 316 A.2d 619 (1974); Shields v. Shields, Del. Ch., 498 A.2d 161 (1985).
In this case an understanding of the irreparable harm involved is central to a proper evaluation of the merits of plaintiffs' claims. For that reason, the irreparable harm issue is first addressed.
* * *
The plaintiffs' claim of irreparable harm, simply stated, is that by virtue of newly issued supervoting Preferred Stock, Yampol and the Attar group now control 44% of the voting power of the Company, thereby virtually assuring the outcome of the election of directors on May 13, 1986. Moreover, even if the outcome were not assured, the concentration of such voting power in the defendants' hands will nonetheless cause stockholders to perceive that the result is a foregone conclusion, thereby fatally chilling any proxy solicitation by the dissident shareholders' group.
Plaintiffs rely upon the affidavit of John J. Gavin, Executive Vice President of D.F. King, a New York proxy soliciting firm. The thrust of Mr. Gavin's affidavit is that if the defendants' entire 44% voting block were cast in favor of management, it would be impossible as a practical matter for an opposition group of shareholders to win the election. To achieve even a tie vote, 88% of the total number of votes entitled to be cast would have to actually be voted. That is highly unlikely, since only 80-85% of the vote normally turns out in a contested election of directors. Assuming that 100% of the shares entitled to vote were actually present and voting, the dissident slate would need over 38% of the remaining vote to win, as opposed to only 6% for management. Thus, the dissidents would have to outpoll management by over 7 to 1, an almost impossible feat in the world of corporate elections where a 4 to 1 margin of victory is considered a landslide. Even if the voting shares represented were at the 90-95% range, the opposition would have to outpoll management at a rate that is impossible to achieve for a company that pays no dividends, engages in no regular communications with its stockholders, has not held an annual meeting in 2½ years, and is traded over-the-counter.
The dissidents presently control 12% of the vote and the defendants control 44%, for a total "affiliated" vote of 56%, leaving only 44% of the vote to decide the outcome.
Mr. Gavin also concludes that the issuance of the Preferred, and the disclosure of its supervoting aspects, will chill the plaintiffs' group's proxy solicitation, because management will be perceived as having an insurmountable lead. That perception will normally diminish both the overall voter turnout and the number of shareholders who are willing to vote for the party that appears to be losing. Graphic shareholders will also be chilled from voting for the opposition slate because of the provision that would entitle the Series B Preferred stockholders, upon a change in control of Graphic's board of directors, to block transactions such as a sale of substantially all of Graphic's assets or a merger. Since the values underlying the shareholders' investment are often (and sometimes only) achieved by such transactions, many shareholders would be reluctant to vote to oust management if the cost would be to imperil future opportunities to realize upon their investment.
The defendants have submitted no evidence to controvert Mr. Gavin's conclusions or reasoning. Instead they attack plaintiffs' underlying premise that the defendants should be treated as a single 44% voting block. Defendants insist that Attar has no agreement or commitment to vote with management and that the Attar group represents a "swing vote" that could go for either side.
Even if that argument were correct, it would tend to prove only that the outcome of the election is not preordained. It would not negate the proposition that in any event, the plaintiffs' proxy solicitation will nonetheless be chilled by the perception that management has an overwhelming voting advantage.
Moreover, the present record suggests a strong possibility, if not likelihood, that Attar will in fact, support incumbent management in the election. The record clearly shows that Attar is presently inclined to vote with present management, although he is not formally obligated to do so. Such an inclination on Attar's part is fully understandable. As counsel for Monar and Battery suggested at the hearing, ". . . if you invest $10,000,000 in a company you've got to know something about management, and you've got to have some confidence in current management." (Tr. of April 11, 1986 Hearing, p. 130). By the same token, human experience makes it unlikely that Graphic's current directors (who are standing for reelection) and Yampol would have sought out Attar to invest in Graphic and would have conferred significant voting and "transaction blocking" rights upon his group, without having some confidence that Attar would support their bid for continued incumbency.
Defendants next argue that while the Preferred stock issuance may create legal uncertainty for the plaintiffs, that does not constitute irreparable harm. They suggest that what plaintiffs are really seeking is an advisory opinion to eliminate these uncertainties before they undertake the expense of a proxy solicitation. Relying on Newell Co. v. William E. Wright Co., Del. Ch., 500 A.2d 974 (1985), the defendants urge that no harm will result in having the proxy contest proceed without a preliminary adjudication of the validity of the Preferred stock, because a final post-meeting adjudication (either in this action or in a proceeding under 8 Del. C. § 225) that the Preferred stock is invalid would afford plaintiffs a complete remedy.
That argument is not correct. In Newell v. Wright, supra, Chancellor Allen declined to enjoin the implementation of a rights plan which, if valid, would seriously have discouraged the plaintiff from proceeding with a tender offer for the corporate defendant. In Newell there was no showing that the tender offer itself would be jeopardized by the rights plan. Moreover, the Court specifically found that no injury would be sustained by postponing an adjudication until final hearing. Quite the opposite is true here. It has been established, at least for present purposes, that the supervoting Preferred will, at the very least, substantially influence the outcome of the election and will have a chilling effect on the plaintiffs' proxy solicitation. If the May 13, 1986 election went forward and the Preferred stock were thereafter found to be valid, then admittedly the Preferred would have no actionable impact upon the election. However, if the Preferred were ultimately found to be invalid, the election would have been prejudicially tainted, would have to be invalidated, and a new election, free of any tainting influence, would have to be held. A course that might yield such an undesirable result should be avoided if possible. No authority is cited which would require such an approach.
In this case, a preliminary adjudication in advance of the shareholders' meeting appears to be the more sensible way to proceed. The harm threatened here is to the corporate electoral process, a process which carries with it the right of shareholders to a meaningful exercise of their voting franchise and to a fair proxy contest with an informed electorate. See,Colonial Securities Corp. v. Allen, Del. Ch., C.A. No. 6778, Longobardi, V.C. (April 18, 1983), at p. 7; American Pacific Corp. v. Super Food Services, Inc., Del. Ch., C.A. No. 7020, Longobardi, V.C. (December 6, 1982), at p. 12. Harm of that nature must be prevented before a shareholders' meeting in cases where, as here, any post-meeting adjudication might come too late.
For the foregoing reasons, I am satisfied that plaintiffs have met the criteria for establishing irreparable harm. Mesa Petroleum Co. v. Unocal Corp., Del. Ch., C.A. No. 7997, Berger, V.C. (April 22, 1985), at pp. 8-9.
Finally, the balance of hardships favors plaintiffs' side. Defendants argue that a grant of preliminary injunctive relief would inflict greater harm than would its denial, because Battery and Monar would be denied the voting protections for which they bargained, and the $10 million invested by the Attar group will thereby become subject to rescission. The result, defendants say, would be to revive the very cash flow problem that the Company by this transaction attempted to solve.
That argument is unpersuasive. In their Purchase Agreement governing the sale of the Series B Preferred, Graphic, Battery and Monar contractually provided for the legal consequences if an injunction were to issue. Paragraph 10.5 of the Agreement grants Battery and Monar the right to a refund of the $10 million purchase price either in cash or by a six month promissory note secured by collateral (i.e., Switchco stock and other acceptable assets) equal to 150% of the purchase price. Thus, both Graphic and the Attar Group have contractually protected themselves in the event the Series B stock were to be invalidated. Having contractually agreed upon a remedy that must be presumed to have been acceptable to the parties if plaintiffs' motion were to be granted, it comes with poor grace for the defendants now to argue that their agreed upon remedy would not be acceptable. The balancing of hardships favors the plaintiffs.
I turn now to the merits of the plaintiffs' claims.
III. PROBABILITY OF SUCCESS ON THE MERITS
A. The Contentions
By way of overview, two preliminary observations are appropriate.
First, this case does not present a question of whether supervoting preferred stock may validly be issued under the Delaware General Corporation Law or Graphic's charter. Plaintiffs concede that as an abstract matter, supervoting preferred is statutorily permissible and that in other circumstances it might be legitimately employed as a corporate finance vehicle. What plaintiffs contend is that in these particular circumstances the creation and issuance of supervoting Preferred stock was impermissible, because its effect was to shift significant voting power to Yampol and the Attar group, and the defendants' purpose was to maintain in control the same management which has avoided holding an election of directors for two and one-half years. Specifically, plaintiffs contend that defendants' conduct was an inequitable manipulation of the corporate machinery for the primary purpose of maintaining the defendants in control and an impermissible interference with the processes of shareholder democracy.
The plaintiffs also claim that the Series B Preferred, by virtue of its right to veto any significant transaction involving Graphic's assets, constitutes an illegal "lockup" of Graphic's assets in favor of the Attar group and a violation of the defendants' fiduciary duty to obtain the best available price for corporate assets that they have previously determined to sell. Plaintiffs also attack the Preferred stock issuance on grounds that the Graphic directors acted without due care, violated their duty to make full and candid disclosure of all material facts, engaged in illegal vote buying, and violated 8 Del. C. § 153. Those contentions are noted, but I find it unnecessary to, and therefore do not, address them in this Opinion.
Second, the defendants' factual and legal slant on this matter is so diametrically different from the plaintiffs' that one cannot help but wonder whether the transaction being attacked and the transaction being defended are one and the same. The defendants categorically deny that the supervoting Preferred was created to thwart plaintiffs' effort to wage a proxy contest. They insist that the Preferred stock transaction was required because they had no other choice: Graphic was in desperate need of cash and had no other way to raise it but to approach Yampol and Attar as "lenders of last resort." Alternative capital sources had previously been tried but without success. Defendants insist that Yampol and Attar required as a condition to making an investment, that they be issued securities having supervoting features, and that Attar further demanded a veto power over significant corporate transactions. Given the exigent circumstances confronting them, Graphic's directors urge that they were entitled as a matter of business judgment to accede to those conditions. Only in that way could they save a corporation that was projected to run out of money, and that would face the prospect of defaulting on its loans, by the late Spring of 1986. For that reason, defendants argue, the case prohibiting corporate transactions intended for entrenchment purposes are inapposite, because the directors had no entrenchment purpose. The defendants emphasize that Yampol will not be standing for reelection at the May, 1986 meeting, that the directors other than Yampol are independent and disinterested, and that Attar is an independent investor who is not controlled by Yampol and not committed to vote for management. Accordingly, defendants argue that the issuance of Series A and Series B Preferred stock should be upheld under the business judgment rule.
These contentions are now addressed.
B. Application of Rule 23.1 and The Business Judgment Rule
The merits of plaintiffs' claim depend upon the resolution of two threshold issues. The defendants argue that the plaintiffs lack standing to bring this action, because their claim is derivative in nature and therefore subject to the demand requirements of Chancery Court Rule 23.1. Since the plaintiffs made no demand and have pleaded no facts that would excuse a demand, defendants conclude that this action should be dismissed.
That argument fails for lack of a valid premise. The plaintiffs' claim is individual in nature, not derivative, because it is separate and distinct from that suffered by other shareholders. As stated by this Court in Moran v. Household International, Inc., Del. Ch., 490 A.2d 1059, 1070, aff'd, Del. Supr., 500 A.2d 1346 (1985):
Of course, a board of directors may not use the corporate machinery for the purpose of obstructing the legitimate efforts of dissident stockholders to undertake a proxy contest against management. Schnell v. Chris-Craft Industries, Inc., Del. Supr., 285 A.2d 437 (1971). However, where as here, no shareholder is presently engaged in a proxy battle, and the alleged manipulation of corporate machinery does not directly prohibit proxy contests, such an action must be brought derivatively.
The plaintiffs here are engaged in a proxy contest. They claim that they are being wrongfully obstructed. Their claim is individual. See, also, Schnell v. Chris-Craft Industries, Inc., supra; Lerman v. Diagnostic Data, Inc., Del. Ch., 421 A.2d 906 (1980) and Mesa Petroleum Co. v. Unocal Corp., Del. Ch., C.A. No. 7997, Berger, V.C. (April 22, 1985), all of which were actions brought individually by proxy contestants seeking judicial aid in remedying management manipulation of proxy fights.
The second threshold issue is whether the business judgment rule applies to the conduct of the defendant directors in this case. If it does, then the directors of Graphic are entitled to the benefit of "a presumption that in making a business decision . . . [they] . . . acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Moran v. Household International, Inc., supra, 500 A.2d at 1356, quoting Aronson v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984). Where that presumption comes into play, the decisions of directors will not be disturbed if they can be "attributed to any rational business purpose."Sinclair Oil Corp. v. Levien, Del. Supr., 280 A.2d 717, 720 (1971); Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946, 954 (1985). Defendants contend that raising capital was a purpose of the Preferred stock and because that purpose was rational, they are protected by the business judgment rule.
I disagree. The protections of the business judgment rule are available only to directors who are independent and disinterested with respect to the transaction under challenge. Aronson v. Lewis, supra, 473 A.2d at 814; see, Revlon, Inc. v. McAndrews Forbes Holdings, Inc., Del. Supr., Nos. 353 and 354 (1986) (Moore, J.). On the present record, neither label can fairly be said to fit the directors of Graphic. As a beneficiary of the Preferred stock transaction, Yampol was clearly interested and no one contends otherwise. The remaining directors had professional, financial and personal relationships with Yampol, and received financial benefits from the company of which he was Chairman, which suggests a motivation for such directors' loyalty to Yampol and dependence upon his continued goodwill. These relationships, which are more fully described in footnote 1, p. 5, supra, preclude a finding at this preliminary stage that a majority of Graphic's directors were motivated to, or did, act independently of Yampol in approving the issuance of the Preferred stock.
Nor can the directors other than Yampol be deemed to have been "disinterested" with respect to the challenged transaction, because they stood to benefit from the issuance of the Preferred shares to Yampol. The benefit, while not financial in nature, consisted of an increased likelihood of the directors' continued incumbency by virtue of the additional voting power conferred upon Yampol with whom they were allied. Increased voting power has been found, although in a different factual setting, to constitute a benefit sufficient to negate the element of disinterest. See, Good v. Texaco, Inc., Del. Ch., C.A. No. 7501, Brown, C. (May 14, 1984).
That Graphic's directors appreciated the significance of Yampol's voting power is evidenced by a petition they filed with the FCC on March 27, 1986 (two days after they issued the Preferred) urging the FCC to deny GSSIM's petition for approval of a "pro forma" transfer of certain licenses held by Graphic. In their petition, Graphic's directors (including Yampol) made the following statement to the FCC:
One of the present Directors, Barry Yampol, the founder of the company, has a substantial ownership interest now amounting to 30%. While the directors do not contend that Yampol individually is in control of Graphic, it is a fact that the other four directors are in agreement with him as to what the company's policies and actions should be, and that they are, as a group, "backed up" by his substantial economic interest. (Szydlo Aff., Exh. C, p. 10).
C. The Plaintiffs' Claim
The legal principles governing plaintiffs' claim of entrenchment are well established. As this Court stated in Moran v. Household International, Inc., supra, 490 A.2d at 1080:
The subversion of corporate democracy by manipulation of corporate machinery will not be countenanced under Delaware law. Schnell v. Chris-Craft Industries, supra. Special scrutiny will be given a situation in which directors, bent on entrenchment, use their authority to restrict the ability of shareholders to replace them. Giuricich v. Emtrol Corp., Del. Supr., 449 A.2d 232 (1982); Lerman v. Diagnostic Data, Inc., Del. Ch., 421 A.2d 906 (1980).
Our Supreme Court in Giuricich v. Emtrol Corp., supra, 449 A.2d at 239, articulated the principle as follows:
The courts of this State will not allow the wrongful subversion of corporate democracy by manipulation of the corporate machinery or by machinations under the cloak of Delaware law. [citation omitted]. Accordingly, careful judicial scrutiny will be given a situation in which the right to vote for the election of successor directors has been effectively frustrated and denied. . . .
In the landmark decision of Schnell v. Chris-Craft Industries, Inc., supra, 285 A.2d at 439, Justice Herrmann stated:
[M]anagement has attempted to utilize the corporate machinery and the Delaware law for the purpose of perpetuating itself in office; and, to that end, for the purpose of obstructing the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management. These are inequitable purposes, contrary to established principles of corporate democracy.
In cases where management has wrongfully attempted to perpetuate itself in office by issuing securities that would adversely impact on a shareholder legitimately seeking to obtain majority control or to assert majority control already obtained, this Court has not hesitated to grant appropriate relief against such conduct. Canada Southern Oils v. Manabi Exploration Co., Del. Ch., 96 A.2d 810 (1953); Condec Corp. v. Lunkenheimer Co., Del. Ch., 230 A.2d 769 (1967); Telvest v. Olson, Del. Ch., C.A. No. 5798, Brown, V.C. (March 8, 1979).
The defendants do not dispute these principles, only their application to this case. Defendants claim that obstructing plaintiffs' proxy solicitation formed no part of their purpose. They say that their sole objective was to raise capital to save Graphic from an impending cash crisis under circumstances where the only available means was to issue supervoting preferred stock and the only available sources of cash were Yampol and the Attar group.
For the reasons that follow, I am satisfied that the defendants' position is not legally or factually supported. While raising capital may have been a purpose for the directors' conduct their primary purpose was to obstruct plaintiffs' ability to wage a meaningful proxy contest in order to maintain themselves in control. Attar, whose knowledge is attributable to Battery and Monar, was aware of that purpose. That being the case, plaintiffs have established, at least on the present record, that they will probably succeed on the ultimate merits of their claim at final hearing.
As previously discussed, the effect of the newly issued Preferred will be to inflict a severe, if not fatal, wound upon the plaintiffs' proxy solicitation. See Section II, supra of this Opinion. The undisputed events, and the sequence in which they occurred, lead inescapably to the conclusion that the defendants knew full well that such would be the consequences of their actions.
For many years Graphic has experienced cash flow problems. For years Graphic has solved those problems by employing a variety of capital-raising techniques. Never has supervoting preferred stock been used as one of them. The only time that the use of supervoting preferred was even considered was as an antitakeover defensive measure in 1985. What Graphic's counsel recommended in 1985 to avoid a takeover is precisely what Graphic did in 1986: it created and issued two series of supervoting preferred stock. The only difference is that the 1985 proposal contemplated creating fewer new votes. Even so, in 1985 the defendants recognized and clearly understood that the creation of the new preferred and its issuance to Yampol would render a hostile takeover extremely difficult. Those same defendants could hardly claim a different understanding of the antitakeover effect of an identical transaction, implemented only one year later, that involved creating three times as many new votes.
Added to this are the circumstances of timing and sequence. The supervoting preferred stock concept which was proposed in 1985 and thereafter shelved, was resurrected at a February 20, 1986 meeting between three Graphic directors and attorneys from Paul, Weiss. The purpose of the meeting was to seek advice as to how Graphic should respond to Lafer, Amster's signaled intent, made clear in its amendment to its Schedule 13D, to seek control of the Graphic board of directors. At that meeting defendant Beckman requested a copy of the Paul, Weiss memorandum describing the proposal, and he proceeded to discuss the concept with Paul, Weiss during the next four days. By February 24, 1986, only four days later, the Graphic board had committed itself to issue to Yampol what became Series A Preferred.
If both Series of Preferred had been issued to Yampol, the strong appearance of an entrenchment purpose would have been difficult to deny. Although bringing in an outside purchaser for the Series B Preferred would limit the amount of money that Yampol would have to invest, it would also have the felicitous effect of avoiding unsavory appearances.
Ten days after the board had committed to issue the Series A Preferred, Yampol telephoned Attar, who, because of his earlier discussion with Donald Carter, knew of the impending proxy contest. (Indeed, Attar had steered Carter to Melvyn Weiss, with the intent that Weiss would introduce Carter to Yampol.) Yampol told Attar that Graphic had a real need for capital because the cost of the proxy contest was extreme. Shortly thereafter, Attar flew to New York to meet with Yampol. On the day of his arrival, Attar met with Yampol and they agreed on the "broad terms" of Attar's investment, which would include supervoting preferred stock. That the proxy contest played more than a fortuitous role in Yampol's dealings with Attar is further inferable from the fact that all of the subsequent negotiations, document drafting, and meetings between representatives of Attar and Graphic commenced immediately after this Court had entered its March 12, 1986 consent Order directing the holding of a stockholders' meeting on May 12, 1986. The period of negotiation and document preparation occupied no more than two weeks, and the preferred stock was issued on March 25, 1986, i.e., in time to be eligible to be voted at the stockholders' meeting which had a record date of April 15, 1986.
It is against the backdrop of these undisputed facts that the defendants' quite different perspective on these events must be evaluated. For the reasons which follow, the defendants' position is legally insufficient and, in any event, it is not adequately supported by the record.
As a legal matter, even if the defendants were found not to have a subjectively intended to obstruct the plaintiffs' effort to wage a proxy contest, it would make no difference in this case. An inequitable purpose can be inferred where the directors' conduct has the effect of being unnecessary under the circumstances, of thwarting shareholder opposition, and of perpetuating management in office. Lerman v. Diagnostic Data, Inc., supra, 421 A.2d at 912, 914. For the reasons discussed in Part II, supra, the defendants' conduct would have the effect of thwarting shareholder opposition and perpetuating management in office. And clearly, what was done here has not been shown to be necessary. Even if one accepts in its entirety the defendants' position that they had no economic choice but to issue the Preferred to Yampol, Battery, and Manor, no reason has been shown why, at the very least, the transaction could not have been made conditional upon the Preferred not being voted until after the May 13, 1986 election of directors.
Defendants argue that Yampol's recently announced intent not to stand for reelection negates any entrenchment motive. However, that development took place after the issuance of the Preferred under challenge and it would appear to be of minimal relevance. Yampol has a substantial economic interest in Graphic and, therefore, has a continuing interest in how Graphic is managed. The remaining directors, all allied with Yampol, are standing for reelection. Given his substantial voting power, Yampol would be in a position (albeit behind the scenes) to continue having significant influence.
Moreover, as a factual matter, defendants' claim that they had no other alternatives lacks adequate record support. To be sure, affidavits of Graphic's directors and of certain officers (none of whom can be considered disinterested) unanimously trumpet the defendants' point of view. Unfortunately, those affidavits are long on conclusions, short on specifics, and more notable for what they do not say than for what they do say.
It is undisputed that during the period July 1, 1983 through December 31, 1985 Graphic was able to raise over $163 million in cash through a variety of sources, including conventional financing and sales of cellular partnerships. What defendants are saying, in essence, is that all of those financing doors were closed to Graphic after 1985. However, it would appear from the affidavits of Louis Haggis, and William Wheatley, Graphic's Assistant Treasurer and President, respectively, that management's efforts to obtain conventional bank financing ceased after 1984. There is no record evidence of any post-1984 specific effort to seek bank financing except for an effort to negotiate a $5.5 million loan from Irving Trust Company to the Boston cellular partnership (which would have then loaned the money to Graphic). That opportunity was not pursued to a conclusion because the consent of Graphic's 50% partner (Metromedia) was required. The affiants claim, without being more specific, that Graphic ceased negotiations on the loan, because Metromedia, as a condition to the consent, would have gained "a greater position to control the partnership's construction and sales budget." The asset is still available as a financing source; however, on February 7, 1986 (one week before Lafer, Amster amended its Schedule 13D), the board voted to transfer that asset to Yampol as part of the settlement of his claims under the 12.5% contract.
Perhaps the most fruitful avenue for raising capital was to sell interests in one or more of Graphic's cellular phone partnerships. Why that possibility was not vigorously pursued in this period is not satisfactorily explained. According to Graphic's Director of Marketing, during the past several months, Graphic received offers for certain properties, but such offers were "substantially below what Graphic believed the fair value of the properties actually was." (Sherwin Aff., ¶ 6). No details are offered to substantiate this subjective, conclusory statement. Clearly not all of graphic's cellular phone properties are unmarketable at a fair price. An internal Bear, Stearns memorandum prepared in March, 1986 discloses that management has recently proposed to sell its cellular phone interests in Indianapolis and Milwaukee.
The defendants' "no-other-option" scenario also founders on the shoals of two other undisputed circumstances. Corporations needing to raise significant cash not uncommonly enlist the aid of an investment banker. Graphic did not lack the opportunity to do so: twice it considered engaging Drexel Burnham, and it did hire Bear, Stearns in connection with the Preferred stock transaction. Yet Bear, Stearns was not requested to seek alternative sources of capital. Defendants' failure to enlist the services of an investment banker for the purpose is difficult to reconcile with a capital-raising motive. Similarly inconsistent is the disparity between the magnitude of the rights given up by Graphic in issuing the Preferred and the relatively small amount of cash which Graphic received in turn. In creating and issuing the Preferred, the defendants caused Graphic to sell the right to one-third (1/3) of the aggregate voting power of the company, plus a right to veto all merger and significant sales of assets, plus warrants to purchase one million shares of common stock at $8.75 per share. For this Yampol, Battery, and Monar paid $15,250,000 plus $100 for the warrants. To purchase the equivalent voting power a purchaser of common stock would have had to pay $155,000,000 at the current market prices.
IV. CONCLUSION
For the foregoing reasons, a preliminary injunction restraining the voting of the Series A and Series B Preferred stockpendente lite will issue. Counsel are requested to submit an appropriate form of order and to advise the Court concerning their positions as to an injunction bond.