NORTHROP GRUMMAN CORP. v. TRW, INC., (N.D.Ohio 2002)

JOHN M. MANOS, United States District Judge

On March 4, 2002, Northrop Grumman Corp., plaintiff, initiated the above-captioned case against TRW, Inc., Betty D. Montgomery, and Gary Suhadolnik, defendants, wherein Northrop seeks to enjoin the enforcement of the allegedly unconstitutional Ohio Control Share Acquisition Act, Ohio Revised Code § 1701.831, and Merger Moratorium Act, Ohio Revised Code, § 1704.01, et seq. On March 18, 2002, Northrop filed a Motion for Preliminary Injunction (Docket No. 22), and, on March 29, 2002, each of the parties filed a brief regarding the merits of the plaintiff's claims and the necessity of expedited adjudication. (Docket Nos. 31, 33 and 34).

Defendants Montgomery and Suhadolnik serve as Ohio's Attorney General and Director of the Department of Commerce, respectively.

Northrop's Complaint also challenged the constitutionality of Ohio's Control Bid Act, Ohio Revised Code § 1707.041. This portion of the claim, however, appears to have been dropped.

Based upon a review of the extensive pleadings and appended exhibits, the Court finds that a hearing is unnecessary. For the following reasons, the plaintiff's motion for a preliminary injunction is denied.

I. FACTS

Northrop Grumman Corp. ("Northrop") is a Delaware corporation, headquartered in Los Angeles, California. (Complaint ¶ 7). TRW, Inc. ("TRW") is an Ohio corporation, headquartered in Cleveland, Ohio. (Complaint ¶ 8).

On February 21, 2002, Northrop sent a letter to TRW in which it proposed a stock-for-stock exchange whereby TRW shareholders would receive $47 of Northrop stock for each TRW share tendered. (Complaint ¶¶ 4, 11). On March 3, 2002, TRW publically announced that its Board of Directors had rejected the offer and considered it "financially inadequate." (Complaint ¶¶ 4, 15). As a result, on March 4, 2002, Northrop commenced a "hostile" exchange offer for TRW by filing the appropriate documents with the Securities and Exchange Commission and by initiating this lawsuit.

This letter was contemporaneously issued to the public. (Plaintiff's Exh. 3-A, p. 2).

The first statute at issue is the Ohio Control Share Acquisition Act, Ohio Revised Code § 1701.831. Because it seeks to acquire more than 20% of an Ohio corporation, Northrop delivered to TRW an "Acquiring Person Statement," wherein Northrop formally and publically disclosed its intentions. See Ohio Revised Code § 1701.831(B). Upon receipt of the statement, TRW scheduled a special meeting of its shareholders "for the purpose of voting on the proposed control share acquisition." See Ohio Revised Code § 1701.831(C). The meeting, which by statute must occur within fifty (50) days of the receipt of the "Acquiring Person Statement," is presently scheduled for April 22, 2002.

At the April 22 meeting, the exchange offer proposed by Northrop must be approved by both (1) a majority of TRW's voting power present at the meeting and (2) a "second majority" of such voting power, which excludes the voting power of "interested shares." Thus, the shareholder's vote is tallied twice, first by counting all the votes, and second by counting only the votes of "disinterested" shares. See Ohio Revised Code § 1701.01 (CC)(1).

Specifically, Ohio Revised Code § 1701.01 (CC)(1) provides:

"Interested shares" means the shares of an issuing public corporation in respect of which any of the following persons may exercise or direct the exercise of the voting power of the corporation in the election of directors:

(a) An acquiring person;

(b) Any officer of the issuing public corporation elected or appointed by the directors of the issuing public corporation;

(c) Any employee of the issuing public corporation who is also a director of such corporation;

(d) Any person that acquires such shares for valuable consideration during the period beginning with the date of the first public disclosure of a proposed control share acquisition of the issuing public corporation or any proposed merger, consolidation, or other transaction that would result in a change in control of the corporation or all or substantially all of its assets, and ending on the record date established by the directors pursuant to section 1701.45 and division (D) of section 1701.831 of the Revised Code, if either of the following applies:

(i) The aggregate consideration paid or given by the person who acquired the shares, and any other persons acting in concert with the person, for all such shares exceeds two hundred fifty thousand dollars;

(ii) The number of shares acquired by the person who acquired the shares, and any other persons acting in concert with the person, exceeds one-half of one per cent of the outstanding shares of the corporation entitled to vote in the election of directors.

The purported purpose of excluding the votes of "interested shares" from the second tally is to ensure a fair vote by not counting the votes of those with a specific financial stake in the outcome. Thus, for example, shares owned by the acquirer, and those owned by the officers and directors of the target corporation are excluded. In addition, however, shares purchased after the "first public disclosure" of the proposed transaction by an individual or a group acting in concert are likewise considered "interested shares" if: (1) the amount paid for such shares exceeds $250,000, or (2) the number of shares purchased exceeds 0.5% of the outstanding shares. Northrop specifically objects to the statute's allegedly over-broad definition of "interested shares," and contends that it disproportionately excludes from the vote independent shareholders, mostly from outside Ohio, who favor the merger. Northrop avers that such disenfranchisement renders the statute unconstitutional on a number of grounds.

Northrop also challenges the Ohio Merger Moratorium Act, Ohio Revised Code § 1704.01, et seq. This Act prohibits for three years certain transactions between a corporation such as TRW and an "interested shareholder" (i.e. anyone acquiring or controlling more than 10% of the outstanding shares), unless the intended transaction is approved by the corporation's directors before the "interested shareholder "becomes an interested shareholder." See Ohio Revised Code § § 1704.01 (C)(8), 1704.02. Northrop essentially argues that the Act is unconstitutional on a variety of grounds because it would have the effect of precluding the completion of the proposed merger for three years.

In its motion, Northrop maintains that the Ohio Control Share Acquisition Act and Merger Moratorium Act violate a variety of provisions of the United States Constitution. Accordingly, it alleges that "[p]reliminary injunctive relief is urgently needed before the scheduled April 22 shareholder meeting to prevent Ohio's unconstitutional anti-takeover statutes from disrupting Northrop's legitimate attempt to acquire TRW." (Brief in Support of Motion for Preliminary Injunction, p. 4). Unless the Court preliminarily enjoins these allegedly offensive statutes, the plaintiff contends that "commerce will be stymied, and Northrop, its shareholders, and TRW's shareholders will be irreparably harmed." (Id.).

The Court disagrees.

II. LAW ANALYSIS

The plaintiff seeks a preliminary injunction to preclude enforcement and application of the Ohio Control Share Acquisition Act and Merger Moratorium Act,

. . . to the extent those statutes, individually or in combination, would (1) prevent Northrop from acquiring shares or proxies without prior approval of defendant TRW, Inc.'s board of directors or shareholders; (2) deprive Northrop and other shareholders of the right to vote on Northrop's proposed acquisition of TRW based on Ohio's statutory concept of "interested" shares or shareholders; (3) frustrate and defeat the fulfillment of the objectives of federal securities laws; (4) discriminate against non-Ohio companies and interstate commerce; (5) deprive Northrop of the ability to effect a post-acquisition merger with TRW and reincorporate in another State; or (6) allow the State of Ohio to prevent Northrop's solicitation of proxies and tenders of shares, or the shareholder vote regarding the proposed acquisition, or any post-merger transactions that would otherwise be permitted but for these challenged statutes. (Motion for Preliminary Injunction, pp. 1-2).

Injunctive relief is available if there would be no adequate remedy at law. Reese v. City of Columbus, 71 F.3d 619, 622 n. 2 (6th Cir. 1995), cert. denied, 117 S.Ct. 386 (1996). The purpose of a preliminary injunction is to preserve the relative positions of the parties until a trial on the merits can be held. Six Clinics Holding Corp., II v. Cafcomp Systems, Inc., 119 F.3d 393, 400 (6th Cir. 1997).

A Court considers the following four factors when determining whether to grant a preliminary injunction: (1) the likelihood of success on the merits by the party seeking the injunction; (2) whether the party seeking the injunction will suffer irreparable harm for which there is no adequate remedy at law if the injunction does not issue; (3) the probability of harm to the parties against which the injunction is directed; and (4) the public interest in the grant or denial of the injunction. McPherson v. Michigan High School Athletic Ass'n. Inc., 119 F.3d 453, 459 (6th Cir. 1997); Six Clinics, 119 F.3d at 399; Golden v. Kelsey-Hayes Co., 73 F.3d 648, 653 (6th Cir.), cert. denied, 519 U.S. 807 (1996). The factors are not prerequisites, but are to be balanced to determine whether the equities warrant issuing the preliminary injunction. McPherson, 119 F.3d at 459; Six Clinics, 119 F.3d at 400; Golden, 73 F.3d at 654.

In the instant case, the Court finds that Northrop will not suffer irreparable harm if the requested injunction does not issue and that public policy favors a more cautious and contemplative resolution of the Constitutional issues.

A. Irreparable Harm

Northrop maintains that "[i]f the acquisition of TRW is thwarted, the injury is permanent and irreparable, as there is no way to recreate in the future the complex set of economic circumstances that have converged to make this particular bid for TRW the same opportunity that it is now." (Brief in Support of Motion for Preliminary Injunction, p. 36). The Court finds that this argument does not warrant injunctive relief prior to the April 22, 2002 shareholder meeting and vote.

Northrop concedes that any merger, hostile or friendly, will take months to effectuate, as the proposed transaction must be approved by Northrop's own shareholders and undergo antitrust review by both the United States and European Union. (Plaintiff's Exhs. 3-A, ". . . we believe a transaction could reasonably be completed in the third quarter of this year."; 3-D, pp. 34-38). Moreover, as Northrop's tender offer is conditioned on the approval of TRW's directors (the so-called "1704 Limitation"), the Court finds that the plaintiff's Merger Moratorium Act claim also need not be adjudicated on an expedited basis. (Plaintiff's Exh. 3-D, pp. 34-35). Therefore, an expedited decision prior to April 22, 2002 is not necessary to effectuate the merger within Northrop's anticipated timetable.

Additionally, recent news reports indicate that the United States Department of Justice has requested additional information about the proposed transaction and has extended its antitrust inquiry. See Business Brief: TRW. Inc., Wall St. J., April 12, 2002, at A17.

Moreover, TRW has warranted that all proxies voted at the meeting will be maintained and, if necessary, may be re-called in short order. (Declaration of Joseph J. Morrow, ¶ 45). As stated above, the votes cast at the April 22 meeting will be tallied twice: first by including all shares, and second by excluding all "interested shares." The Court's ultimate ruling may alter which shares are "interested shares." If this occurs, because all proxies are maintained, the second tally can simply be re-counted to include shares (if any) that are improperly excluded on April 22. Thus, even if the Court invalidates all or certain portions of Ohio antitakeover statutes, the purported harm may be remedied by ordering that any improperly excluded shares be included in the recount. Northrop, therefore, has not shown that the Court must act prior to the April 22, 2002 shareholder meeting.

B. Public Policy

Additionally, public policy favors an approach whereby adjudication of issues of constitutional import can potentially be avoided. See Three Affiliated Tribes of Fort Bethold Reservation v. Wold Eng'g. P.C., 467 U.S. 138, 157-58 (1984); Aswander v. Tennessee Valley Auth., 297 U.S. 288, 346-47 (1936) (Brandeis, J. concurring) (noting that a court should "not anticipate a question of constitutional law in advance of the necessity of deciding it"); Liverpool. N.Y. Philadelphia Steam-ship Co. v. Comm'rs of Emigration, 113 U.S. 33, 39 (1885).

In the present matter, the special vote of the shareholders, herein sought to be enjoined, may render moot many of the issues contested by the parties. If the "disinterested" shareholders vote to approve the transaction, the issue of the Control Share Acquisition Act's constitutional validity becomes moot. This being so, the Court must be wary to prematurely (and possibly unnecessarily) decide the issues before it. Instead, the magnitude of the issues presented counsels the Court to take a more deliberate and thoughtful course and to delay ruling on the merits of the plaintiff's claims until after the special meeting of TRW's shareholders.

III. CONCLUSION

Accordingly, considering the balance of the equities and the caution with which the Court must approach issues of constitutional import, the plaintiff's motion for preliminary injunction (Docket No. 22) must be DENIED.