In the spring of 1988, Shamrock Holdings, an investment group headed by Roy Disney, bought a position of roughly 5 percent in Polaroid Corp. The stock of the imaging company was then trading at $30–$35 a share.

This trading range was low, considering Polaroid’s distinguished history. Since its formation in 1937, the company can rightly claim to be one of America’s most innovative. Under the leadership of Edwin Land – who had more patents to his name than any other American inventor save Thomas Edison – Polaroid developed many leading-edge technological products, most notably its signature instant camera.

But such stellar achievements did not guarantee commercial success. Though Polaroid is credited with developing and advancing instant-imaging technology, the company suffered heavy competition from increasingly cheap, high-quality, 35mm cameras and film. By the late 1980s, Polaroid was seen as a ripe candidate for takeover, for the following reasons:

The company’s profits were relatively low.

It carried a small amount of debt.

It owned a potentially enormous, though unliquidated, asset in the form of a patent infringement suit against Eastman Kodak. It was anticipated that Polaroid would obtain a very substantial damage award against Kodak, possibly up to $6 billion.

Polaroid already had significant antitakeover defenses in its charter, including:

a shareholder rights plan, or “poison pill”;

a prohibition on shareholder action by written consent;

a prohibition on shareholders’ ability to call special meetings;

authorized issue of “blank check” preferred stock.

Shamrock was known as a potential acquirer. There was no question but that it intended to use its 5 percent stake as a springboard for a Polaroid bid. On June 16, Roy Disney and Stanley Gold of Shamrock Holdings tried to reach Polaroid CEO I. MacAllister Booth by phone to request a meeting. Booth, then out of town, instructed his secretary to tell Shamrock that he would be unavailable for a meeting in the near future. Booth, however, cut short his trip and returned to Boston the next day to meet with representatives of Shearson Lehman Brothers, Polaroid’s investment bank.

Disney, unable to reach Booth by phone, wrote a letter on June 17, reiterating his interest in a meeting. The later stated that the purpose of such a meeting would be “to establish the ground work for a good relationship with the company.” Though Shamrock gave no indication that it intended a hostile bid – indeed, Booth later testified that the letter “had no threatening aspect to it”[ii] – there could be no doubt that Shamrock was determined to take Polaroid over. Shamrock was a takeover vehicle; Polaroid was a prime target.

Polaroid management finally agreed to meet with Shamrock, and set a date for July 13. Polaroid insisted on certain conditions, including a demand that Shamrock not exceed a 5 percent holding by the time of the meeting. Shamrock agreed, and reversed some commitments it had made to continue buying the stock. Shamrock later charged that it cost $500,000 to reverse these commitments and stay below a 5 percent holding. In return, Shamrock sought assurance that Polaroid was not merely trying to buy time to erect antitakeover barriers. In later court testimony, representatives of both sides directly disagreed. A Shamrock associate said that he received an assurance from Polaroid that the company had no plans to alter the status quo. A Polaroid representative, by contrast, said that the company merely promised not to sell itself to a third party before the July 13 meeting.[iii]

The meeting between Booth and Shamrock never took place. On July 12, one day before the scheduled meeting, a special meeting of the Polaroid board was convened to approve a “comprehensive plan” for the reorganization and redir-ection of the company. Included in the scheme was a proposal for an Employee Stock Ownership Plan (ESOP) that would account for 14 percent of Polaroid’s shares. Other details of the “comprehensive plan” included a commitment to enter the worldwide market for 35mm film, and various streamlining and cost-cutting measures.

The board approved the strategy, and issued a press release announcing the formation of the 14 percent ESOP. At the same time, Shamrock was informed that the meeting scheduled for the next day was canceled.

Under Delaware law, a hostile acquirer must gain 85 percent of a company’s shares to consummate a merger within three years. If the ESOP shares remained beholden to incumbent management, this would all but destroy Shamrock’s chances of taking Polaroid over.

Shamrock bitterly protested the decision of Polaroid’s board. Gold wrote to Booth, saying, “Contrary to your assertion that the so-called ‘comprehensive plan’ will improve shareholder value. . . . I believe some of the actions planned will have a significant adverse impact on such value.” At the same time, Shamrock announced that it would seek to have the ESOP invalidated in the Delaware courts, on the grounds that the Polaroid directors had breached their fiduciary duty in hastily adopting the ESOP in the face of a presumed threat.

Before the case reached the hallowed chambers of Wilmington, however, Shamrock launched its long-expected bid for the company. In September 1988, Shamrock bid $42 in cash for all of Polaroid’s shares, conditional upon 90 percent of outstanding shares being tendered and the ESOP being declared invalid in court. Later, Shamrock raised its bid to $45, and declared it would raise it to $47 if the ESOP were struck down. Polaroid’s board of directors ruled that the Shamrock bid was “inadequate” and announced its opposition, citing:

an insufficient price;

the highly conditional financing of the Shamrock bid;

the extent of Polaroid’s leverage if Shamrock succeeded;

Polaroid’s bright future prospects;

the prospect that a takeover by Shamrock might jeopardize the expected return from the Kodak litigation. On this last point, directors claimed that Shamrock would be forced to settle early for less than the possible award, or that Shamrock would not be viewed as the “victim” of the patent infringement and would therefore receive a lesser reward.

In a September 20 press release confirming the rejection of the offer, MacAllister Booth said, “The board also considered several factors including Polaroid’s excellent initial progress in implementing its comprehensive strategic plan, announced July 12.”

Shamrock’s interest in Polaroid had now become a fully fledged takeover battle. Shamrock had to persuade Polaroid shareholders to tender their shares despite the strong recommendation from Polaroid management that they not do so. Of course, Shamrock’s bid depended wholly on the ESOP. If the Delaware court ruled the ESOP invalid, Shamrock had a far better chance of succeeding in its bid. If the ESOP was upheld, Shamrock’s chances were next to non-existent.

The case was heard before Vice-Chancellor Carolyn Berger in December and January 1988–89.

The case went into great detail about the timing of the ESOP and the effects it was intended to have. The following questions were raised:

When directors approved the 14 percent ESOP, were they fully informed about the terms of the plan? For instance, did the board consider the effect the ESOP would have on productivity or on the independence of the company? Did the board know how the company’s employees felt about the plan?

Did the board have a fiduciary duty to study such issues

Did Polaroid adopt the ESOP primarily as a device to thwart Shamrock, or did the plan serve a fundamental business purpose?

On January 6, 1989, Berger delivered her opinion, upholding the Polaroid ESOP. Before we weigh the merits of the opinion, let us consider the facts.

Polaroid’s ESOP: Delaware sits in judgment

An ESOP of sorts had been under consideration at Polaroid since 1985. In that year management floated a proposal that would allocate 4 million shares over 10 years. At the time, management noted that one of the benefits of such a scheme, aside from the intrinsic merits, was that it would help deter a hostile acquirer.

In 1987, the company approached the issue in greater depth. Management decided that the ESOP would have to be funded by the employees, who would exchange various benefits in exchange for their shares in the plan. Various meetings were held with employee representatives to see what employee bene-fits could be exchanged to pay for the plan and the size of plan that could be created from such exchanges.

At a meeting in March 1988, Polaroid’s corporate benefits committee debated and approved an ESOP of “up to 5 percent” of the company’s stock. Their proposal was put to Polaroid’s board of directors four days later on March 29, 1988. The board approved in principle, though the size of such a plan was not discussed. Minutes of the meeting noted, “[T]he plan should also serve to introduce a note of stability at this time of increased corporate takeover activity.”[iv] The board approved the idea of an ESOP, but stipulated that it would be funded by an exchange of employee benefits, and that the shares would be purchased in the open market to avoid a dilutive effect on shareholders.

At the presentation to the board, chief financial officer Harvey Thayer showed that the costs of the employee 401(k) plan and the profit-sharing retirement contributions could be exchanged for an ESOP somewhat less than 5 percent. Several directors recommended an ESOP of larger than 5 percent as long as the plan remained shareholder neutral.

Polaroid issued a press release after the meeting, announcing the formation of a smaller ESOP. The release said, “The ESOP as currently envisioned will own somewhat less than 5 percent of the outstanding shares in the company.”

Defending this plan later before Judge Berger, Polaroid’s chairman and former CEO William J. McCune testified that he had no recollection of an ESOP in excess of 5 percent being discussed during this period.

Judge Berger concluded, “In short, I am satisfied that the press release was accurate – the board approved, in principle, an ESOP of approximately 5 percent of the outstanding stock.”[v] Such was the situation when Shamrock principals confirmed in a letter to Polaroid that they were substantial holders of Polaroid’s stock, and interested in a meeting with management. Booth would later testify that the letter was “a jolt of reality.” Norwood said that it was received like a “cold shower.”[vi]

On June 26, nine days after receiving the “good relationship” letter from Shamrock, the management executive committee (MEC), consisting of Polaroid’s senior managers, met in a special Sunday morning meeting to discuss their response to Shamrock’s overture. Judge Berger wrote, “As Booth explained, there was ‘no question’ but that everyone wanted to put together the ESOP quickly because of the Shamrock letter.”[vii]

However, there also seemed to be no question but that an ESOP accounting for 5 percent of the stock was inadequate. In Judge Berger’s words:

Booth announced that he wanted a larger ESOP funded in part by the five year seniority increase (this was an automatic 5 percent pay raise granted to all employees after they had served five years). Booth apparently was surprised that the MEC (which in April had been unable to agree upon even a 2 percent pay cut to fund the ESOP) was aggressively pushing a larger ESOP. Booth even got to the point where he had to play “devil’s advocate” and point out to his senior people that the pay cuts would not be an easy thing to sell to the employees. . . . During the course of the discussion, the committee members were advised that an ESOP greater than 18.5 percent would require stockholder approval. Although the committee members were pushing for an ESOP of 20 percent or larger at this meeting, when they learned of this additional requirement, they agreed that 18.5 percent would be the cap on the ESOP.[viii]

On June 29, Booth met with two employee representatives. He told them he had decided on funding a $300 million ESOP with an across-the-board 5 percent pay cut, the 401(k) matching funds, a delayed pay-scale change, and the profit-sharing retirement contribution. The employees did not cheer the news, as the Berger court later noted: “The two employee representatives argued against the 5 percent pay cut and pointed out the severe financial impact that [it] would have on employees.”[ix]

Having decided on the enlarged ESOP and the means of funding, Booth wished to implement the plan before the next scheduled board meeting on July 26. His motive, he testified, was that the last two weeks of July coincided with Polaroid’s annual “summer shutdown,” and he didn’t want employees to read of the new ESOP and pay cuts (if approved by the board) in their holiday newspaper. Booth therefore called a special meeting of the board for the earliest convenient date, which was July 12 – one day before the scheduled meeting with Shamrock.

Due to the short notice of the special meeting, three directors were unable to attend and a fourth had to leave before any votes were taken.

At least one Polaroid executive managed to attend in spirit, however. Judge Berger commented, “The minutes are not a model of accuracy . . . [they] refer to two proposals made by [vice president of corporate personnel, John] Harlor, who did not even attend the meeting.”[x] At the meeting, Booth explained the “comprehensive plan” to the board and sought approval of the enlarged ESOP.

The ESOP was discussed for two hours. Berger wrote, “Although the directors had approved the concept of an ESOP on March 29. . . . they had never considered an ESOP as large as $300 million and they had never considered funding an ESOP (regardless of size) with employee pay cuts . . . The directors did not question the ESOP size chosn by management and they did not ask about or discuss alternative funding sources.”[xi] Directors also failed to discuss two other important points. Judge Berger noted:

that employee representative groups strongly opposed the use of a pay cut and had proposed alternative funding sources;

that a 14 percent ESOP would make a hostile takeover of Polaroid almost impossible.

One of the chief issues before the Berger court was whether Polaroid directors would be protected by the business judgment rule (discussed at length on page 182).

Under Delaware law, directors are “charged with an unyielding fiduciary duty to the corporation and its shareholders” (Smith v. Van Gorkom). Normally, their decisions will be protected by the business judgment rule, “a presumption that in making a business decision the directors . . . 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” (Aronson v. Lewis). The protection of the business judgment rule will not be afforded to directors who fail “to inform themselves, prior to making a business decision, of all material information reasonably available to them” (Aronson v. Lewis).

The business judgment rule is available to directors even when they are facing a takeover threat. In such circumstances, however, there is “an omnipresent specter that a board may be acting primarily in its own interests” (Unocal v. Mesa Petroleum). Thus, the Delaware courts have established a more burdensome business judgment standard for takeover situations. Directors must show that they had “reasonable grounds for believing that a danger to corporate policy and effectiveness existed” and that the measures taken to oppose takeover were “reasonable in relation to the threat posed” (Unocal v. Mesa Petroleum). The board must make such a determination, referred to as a “Unocal analysis,” if they are to be afforded the protection of the business judgment rule when faced with a takeover threat.

Shamrock’s argument was simple. The decision of Polaroid’s board could not be protected by the business judgment rule because, in approving the ESOP, the directors had breached their fiduciary duties.

The directors, charged Shamrock, were both uninformed and misinformed. They had not fulfilled their duty to consider “all material information reasonably available to them” (Aronson v. Lewis). In particular, the board approved a massive alteration of Polaroid’s capital structure without questioning management’s conclusion that the ESOP would enhance productivity. The board simply accepted this argument as valid, without subjecting it to any independent or expert examination. Also, the board was uninformed – or rather misinformed by Booth – with regard to the opposition of the employees to the pay cut. Shamrock, in its pretrial memorandum, wrote, “We believe that the directors’ virtually unquestioning reliance on management’s conclusory recommendation to triple the size of the ESOP reflects a self-interested motivation to protect the corporate ‘fiefdom’ they have shared with management for many years.”[xii] Shamrock also argued that the board had approved the ESOP as a defensive measure yet failed to apply a Unocal analysis. Shamrock asserted, “Polaroid’s board cannot establish, as it must, (i) that the defensively oriented Lock-Up ESOP was the product of a reasonable investigation into any perceived threat and (ii) that the Lock-up ESOP was itself a reasonable response to any such threat.”[xiii] Polaroid’s actions, concluded Shamrock, “were certainly an unwarranted and unreasonable response to a request by a substantial shareholder to meet with management – a request conceded by Booth to be non-threatening and which in any event could not reasonably be perceived by anyone as any sort of threat at all.”[xiv]

For these reasons, argued Shamrock, the decision to approve the ESOP could not be protected by the business judgment rule. The directors had breached their fiduciary duties in reaching their decision, so the ESOP should be invalidated by the court.

Polaroid argued, in Judge Berger’s words, that, “The ESOP can withstand even the highest level of judicial scrutiny. That being so, it becomes irrelevant whether the ‘process’ was tainted, since the result is a plan that is entirely fair.”[xv] In other words, Polaroid asserted that the court should not worry about the means, given that the end result was a workable, effective ESOP.

Judge Berger’s ruling

The judge first considered the question of the business judgment rule. Were the directors informed of “all material information?” Judge Berger concluded that the board did indeed act hastily, deciding to implement the ESOP in only two hours discussion in a meeting called at short notice, with no materials distributed beforehand, and at which three directors were absent: “There is no question but that the directors did not know all of the relevant facts.”[xvi]

Judge Berger, however, sided here with the defendants, agreeing with them that “a board’s failure to become fully informed does not take its decision outside of the protection of the business judgment rule unless its lack of information was so extreme as to reflect gross negligence on the part of the directors.”[xvii] Polaroid admitted that the directors were unaware of the opposition of the employee groups to the pay cuts, but said this was not crucial to the decision to enlarge the ESOP. The directors, after all, were hardly to assume that the employees would welcome a pay cut. Thus, the failure of the board to become informed on this point did not render them “grossly negligent.”

Next, Judge Berger considered whether Polaroid had responded inappropriately to the takeover threat, if indeed Shamrock’s advance constituted such a threat. Her opinion discussed some of the previous cases that had come to Delaware in which would-be acquirers had charged their targets with unfair defenses. She wrote: “However, none of those cases address the issue, arguably presented here, of whether a board, largely composed of disinterested directors, should be deemed to be acting from the same motives as the members of management who proposed the transaction.”[xviii] In other words, what if management had enlarged the ESOP as an antitakeover device, but the board had approved it for very different reasons, such as to enhance productivity?

In the end, Judge Berger decided that all these questions were irrelevant. “Neither a board’s failure to become adequately informed nor its failure to apply a Unocal analysis, where such an approach is required, will automatically inval-idate the corporate transaction. Under either circumstance, the business judgment rule will not be applied and the transaction at issue will be scrutinized to determine whether it is entirely fair.”[xix] Thus Berger put aside the issue of whether the board’s decision-making process was tainted. She deemed that question secondary to that of whether the approved ESOP was one that would benefit the company and its shareholders.

The judge addressed this latter question along three lines:

Would the ESOP impair productivity?

Would it unduly discourage takeovers?

Would it unfairly dilute share value?

She answered no to all three questions. On the first question, Berger concluded that even if the 14 percent ESOP was not very popular with employees, it would be unlikely to impair productivity. Moreover, the costs of the ESOP would not be damaging to the company’s ability to operate.

As to the second question, the judge agreed that ESOP shares were more likely to be voted for incumbent management, but she pointed out that employees retained the right to vote their ESOP shares confidentially, and so were open to solicitation by an acquirer. She observed:

I find that the anti-takeover aspect of the ESOP does not make it less than fair. Given its confidentiality provisions, it cannot be said that management controls the [ESOP share block, or] that the leg up it gives management in any way harms the company or its public stockholders. The ESOP may mean that a potential acquirer will have to gain the employees’ confidence and support in order to be successful in its takeover effort. However, there has been no showing that such support is or would be impossible to obtain.[xx]

Lastly, she found dilution but dismissed its unfairness. Because the ESOP shares were issued by the company and not purchased on the open market, the interests of public stockholders were diluted. But that, in her view, did not render the ESOP unfair. Berger decided that there was no hard evidence that the dilution would adversely affect Polaroid’s non-employee shareholders. Indeed, she added that if the ESOP resulted (as hoped) in increased productivity, such dilution would be more than made up for by improved earnings.

Judge Berger wrapped up her opinion as follows:

After considering all of the evidence, including the timing of the ESOP’s establishment, its structure and operation, its purposes and likely impact (both as a motivational device and an anti-takeover device) I am satisfied that the Polaroid ESOP is fundamentally fair. It is essentially stockholder neutral although it does have some dilutive effect. It is structurally fair in its voting and tendering provisions and I do not find either the timing of its implementation or its possible anti-takeover effect objectionable under the facts of this case. . . .[xxi]

Defendants rushed to put this ESOP in place before Shamrock took any other steps to express its interest in Polaroid. The timing of the meeting, change in allocation provisions and decision to issue treasury shares all had to have been motivated, at least in part, by a desire to add one more obstacle to Shamrock’s potential acquisition bid. The fact that the ESOP was partly defensive, however, does not make it unfair. This is a defensive device (assuming it is one) that is designed to and appears likely to add value to the company and all of its stockholders. It does not prevent the stockholders from receiving or considering alternatives. In sum, the plan adopted by the directors, whether adequately considered or not, is fair and should not be invalidated.[xxii]

Shamrock did not abandon its bid. Rather, it appealed Berger’s decision.

Let us look at Judge Berger’s decision in a broader context. What does this case tell us about the interrelationship of managers, the board of directors, shareholders and employees? Who is entrusted with what, on behalf of whom?

It universally accepted that the shareholders entrust the board to oversee management. Directors are entrusted with seeing that the corporation is managed in its own long-term interests.

Did Judge Berger lose sight of this truism?

The court accepted that the board was uninformed. Judge Berger wrote, “There is no question but that the directors did not know all of the relevant facts.”

As a shareholder, would you expect the board that you elected to consider the reallocation of 14 percent of a company’s capital in a two-hour meeting, at which four directors weren’t present?

When Polaroid’s stockholders bought their shares, did they trust the com-pany’s board to have a more thorough oversight of management than that?

Judge Berger even concluded that the board accepted management’s recommendation for a 14 percent ESOP while approaching the question with a different set of assumptions. The judge wrote: “The evidence establishes that management was responding to a takeover threat. It is not as clear that the outside directors were operating in a defensive mode.”[xxiii] In other words, Judge Berger validated the board’s decision to approve the ESOP, even though that approval was granted without a full understanding of management’s motives for recommending the ESOP in the first place.

Given the admitted failure of the board to inform itself of all the facts, or to inform themselves as to management’s motives, would you, as a Polaroid shareholder, continue to entrust those directors with the oversight of the company?

Judge Berger decided that these questions did not need to be answered. Though she accepted that the board was uninformed, she did not believe that its lack of information was so extensive as to constitute gross negligence. Berger said that the information withheld from the board was relatively unimportant, and, while the board’s decision making was hasty, they had ended up, by hook or by crook, in approving a plan that was fundamentally fair.

Do you trust directors to make reasoned, informed decisions? Or do you trust to luck?

Let us look at this a little more closely at the judge’s reasoning. On the one hand, the courts had to ensure that managers were accountable to shareholders; and on the other, they didn’t wish to chill management’s incentives for risk taking and innovation. The result was the business judgment rule’s emphasis on process. As long as directors made informed decisions with care and attention, the results would not be second guessed.

In this case, however, Berger completely reversed this accepted principle. She judged that although the process was suspect, the end result was fair. In other words, if the process is fair, but the end result is not, directors have the protection of the business judgment rule. And, if the process is not fair, but the end result is, the courts won’t oppose that decision making either.

Who can lose, apart from the shareholders?

There can be no doubt that Polaroid management and the board of directors faced a conflict of interest. A successful Shamrock bid, after all, would mean unemployment for the incumbents. As the judge in Unocal stated, there is the “omnipresent specter” that management and the board will act in their own interests when facing a possible takeover. According to many of the depositions in the case, at least one of the motives for the ESOP was to render the company less susceptible to takeover. It may not have been the leading motive (indeed, if it had been, the court would have no choice but to invalidate the ESOP, since Delaware directors aren’t allowed to issue new stock for defense purposes), but both Polaroid executives and directors admit that protection was among their motives for creating and enlarging the ESOP.

Given this fact, shouldn’t we subject their decision making to closer examination?

Shouldn’t we require that the directors be even more rigorous in their analysis of the ESOP?

Or should we agree with Judge Berger that it really doesn’t matter whether the board’s approval of the ESOP was hasty and uninformed, as long as the end result is fair?

This line of questioning leads to another: Who gets the ultimate say over what constitutes fairness? Shareholders own the corporation, and they hire managers to run it for them. But because shareholders are numerous and diverse, they elect a board of directors to oversee management on their behalf. The question is: who should protect the shareholders if the board is derelict in its duty? In this instance, Judge Berger decided she should. She argued that the directors had failed to exercise “business judgment,” and thus “the transaction at issue will be scrutinized to determine whether it is entirely fair.” Judge Berger did such scrutinizing herself and decided to approve the transaction on behalf of the shareholders. Couldn’t the shareholders decide that for themselves? It would be a simple matter to explain the 14 percent ESOP in the proxy statement, and put it to a vote at the annual meeting. We already know that one issue management discussed when they enlarged the ESOP was avoiding the 18.5 percent thresh-old that would need shareholder approval.

Why was management afraid of seeking such approval?

Can’t shareholders be trusted to act in their own best interests?

Should crucial decisions relating to a company’s capital structure be left to a judge?

What do you believe was the motivation behind the formation of the 14 percent Employee Stock Ownership Plan?

Do you believe the decision to move from a 5 percent ESOP to a 14 percent ESOP was the result of Shamrock’s interest in the company?

Do you believe the ESOP was created primarily in the employees’ interests, or to fend off a possible hostile bid?

Before the case reached the Delaware court of appeal, Polaroid pulled more tricks from out of the corporate sleeve. On January 29, the company announced a sweeping recapitalization. Polaroid said it would spend up to $1.1 billion to buy back up to 22 percent of its stock at $50 a share, and that a special issue of preferred stock would be issued to Corporate Partners, an investment concern run by the Wall Street firm Lazard Frères. The issue, for which Corporate Partners would pay $300 million, would be convertible into 10 percent of the common stock.

Polaroid argued that the recapitalization plan represented a better means of realizing shareholder value than the Shamrock offer. Shearson issued an opinion to this effect, based on an estimated $1.2 billion recovery in the Kodak litigation and on management’s financial projections, which assumed growth of about 10 percent over historical results. If such sales growth was achieved, Polaroid would be close to the top of the Fortune 500 list.

In a press release, Booth described the recapitalization as “a program designed to deliver directly to shareholders a portion of the company’s current value while enhancing Polaroid’s prospects for future growth in shareholder value.”

Shamrock put a rather different spin on the announcement. Gold described the recapitalization as “irresponsible and another indication of management entrenchment at any cost. . . . (The moves serve) no discernible business purpose.” Gold continued:

The placement of preferred stock, together with the proposed stock buy-back program, is clearly a defensive action designed to park even more Polaroid shares in “friendly hands” at the expense of Polaroid’s public share-holders. . . . Polaroid’s thinly veiled effort to “stuff” the ballot box in anticipation of its annual meeting vividly demonstrates that Polaroid management is more interested in preserving its position than allowing Polaroid share-holders an opportunity to receive at least $45 per share in cash for all their shares, pursuant to Shamrock’s offer.

In a reprise of the ongoing legal battle over the ESOP, Shamrock announced that it would sue Polaroid and Corporate Partners in the Delaware courts, asserting that the recapitalization plan was adopted to thwart Shamrock’s takeover, and not with any valid business purpose in mind. This case has come to be known as “Polaroid II” – the sequel to the case settled by Judge Berger discussed above.

Days later, Shamrock announced that it would seek control of the company via a proxy fight. That is, Shamrock would nominate its own slate of directors and seek to have them elected in the place of management’s slate at the annual meeting. Even this looked like a vain bid by the California-based acquirer. The effect of the ESOP, the buyback, and the Corporate Partners deal was to put about 30 percent of Polaroid’s stock in management-friendly hands – almost overwhelming opposition.

The viability of Shamrock’s bid now rested with the Delaware Supreme Court, which was reviewing Berger’s judgment on appeal. On March 23, the court upheld Berger and let Polaroid’s ESOP stand. Four days later, Shamrock announced that it was abandoning its nearly year-long interest in Polaroid, and was calling off its proxy fight. “We are disappointed and frustrated by the Delaware Courts,” said Gold.[xxiv] In a settlement deal between Shamrock and Polaroid, the photographic company agreed to repay Shamrock’s expenses to the tune of $20 million, as well as buy $5 million in advertising time on Shamrock’s radio and TV stations. In return, Shamrock agreed not to seek control of the company for a period of ten years.

Notes
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[i] All the information for this case study has, unless cited otherwise, been drawn from relevant court documents. See Shamrock Holdings v. Polaroid Corp., Del. Ch., Civil Action Nos. 10,075 and 10,079, Berger, V.C. (Jan. 6, 1989). Also see “Polaroid II,” a complaint by Shamrock and a purported class of Polaroid stockholders against Polaroid, its directors and Corporate Partners, L.P.

[ii] See Plaintiff’s pretrial memorandum, p. 35.

[iii] Shamrock Holdings v. Polaroid Corp., supra, p. 19.

[iv] Id., p. 11.

[v] Id., p. 13.

[vi] Plaintiff’s pretrial memorandum, p. 35.

[vii] Id., p. 20.

[viii] Id.

[ix] Id., p. 21.

[x] Id., p. 24.

[xi] Id., p. 26.

[xii] Id., p. 96.

[xiii] Id.

[xiv] Id., p. 6.

[xv] Shamrock Holdings v. Polaroid Corp., supra, p. 30

[xvi] Id., p. 33.

[xvii] Id.

[xviii] Id., p. 35.

[xix] Id., p. 36.

[xx] Id., p. 44.

[xxi] Id., p. 48.

[xxii] Id., p. 49.

[xxiii] Id., p. 35.

[xxiv] Dana Kennedy, “Shamrock Holdings Abandons 8-Month Fight for Polaroid,” Washington Post, March 28, 1989, p. E8.