Following a major legal victory that allowed it to proceed with its hostile takeover bid, Hanson Trust PLC more than doubled its stake in SCM Corp. yesterday to 66 percent, giving the British conglomerate effective control of the maker of Smith-Corona typewriters and Durkee foods.
SCM, which vigorously has opposed Hanson's $75-a-share, $630 million bid for the two-thirds of SCM Hanson did not own already, said its board of directors will meet today to review developments. Before Hanson increased its stake yesterday from about one-third to two-thirds, SCM said it planned to ask the U.S. Court of Appeals for the Second Circuit to rehear the legal dispute between SCM and Hanson, but that no longer appears to be a viable strategy.
Sir Gordon White, chairman of Hanson's North American operations -- which include Ball Park hotdogs and Endicott Johnson shoes -- said the developments yesterday represent a "great victory for the forces of the free marketplace, and completely vindicated Hanson's strategy over the past months."
And in a comment directed at criticism of Hanson's takeover strategy that appeared in the British press in recent days, Sir Gordon said, "Hanson has again demonstrated that it was one of the few UK companies that was able to successfully compete in the world's most sophisticated market."
Soon after SCM's board of directors meets today, Hanson is expected to officially become the second company to win a major takeover battle following an influential court ruling that "lock-up agreements" were used improperly. The Delaware Supreme Court recently handed Pantry Pride Inc. a victory in its bid to acquire Revlon Inc. after ruling that Revlon could not exercise lock-ups.
To avoid a takeover by Hanson, SCM had agreed to be acquired last year for $74 a share by Merrill Lynch Capital Partners and certain members of SCM management. A key part of that deal was the use of lock-up agreements giving Merrill Lynch the right to buy SCM's valuable pigment and food businesss for $430 million if a rival bidder such as Hanson acquired a one-third stake in SCM.
Robert Pirie, president of Rothschild Inc., Hanson's investment banker, has said those businesses are worth between $600 million and $700 million. By agreeing to sell the operations to Merrill Lynch for less than their fair market value, SCM management was trying to make the company less attractive so that Hanson would end its bid.
But Hanson, offering $1 a share more for SCM than Merrill Lynch, challenged the lock-ups in court, saying they were not in the best interest of SCM stockholders, and instead were designed to allow SCM management to maintain control. In a strongly worded majority opinion, New York's Second Circuit Court of Appeals voted 2 to 1 to block the lock-ups.
"This decision very strongly says that there are significant limits on what management can do to defend against tender offers," Rothschild's Pirie said. "The courts are saying that the burden is particularly great when management is involved on both sides of the deal. I think this decision also says there are significant burdens on the independent directors directors who do not work full time for a company to make proper inquiry. They can't simply hire experts" to give legal and finanical advice.
SCM said the decision represents a departure from precedent and "casts doubt on the ability of any board of directors to excercise its business judgment without the risk of judicial second-guessing."
In a dissenting opinion supporting SCM, Judge Amalya Kearse said the SCM directors "at all times acted from a desire to secure offers for SCM and its shareholders that would be superior to the offers of Hanson. Without the $74 offer from Merrill Lynch, the bidding would have died at $72, Hanson's then-current offer."