The Fruehauf Corporation (Fruehauf) is engaged in the manufacture of large trucks and industrial vehicles. The Edelman group (Edelman) made a cash tender offer for the shares of Fruehauf for $ 48.50 per share. The stock had sold in the low $ 20 per share range a few months earlier. Fruehauf’s management decided to make a competing management led leveraged buyout (MBO) tender offer for the company in conjunction with Merrill Lynch. The MBO would be funded using $ 375 million borrowed from Merrill Lynch, $ 375 million borrowed from Manufacturers Hanover Bank, and $ 100 million contributed by Fruehauf. The total equity contribution to the new company under the MBO would be only $ 25 million: $ 10 million to $ 15 million from management and the rest from Merrill Lynch. In return for their equity contributions, management would receive between 40 and 60 percent of the new company.
Fruehauf’s management agreed to pay $ 30 million to Merrill Lynch for brokerage fees that Merrill Lynch could keep even if the deal did not go through. Management also agreed to a no shop clause whereby they agreed not to seek a better deal with another bidder. Incumbent management received better information about the goings on. They also gave themselves golden parachutes that would raise the money for management’s equity position in the new company.
Edelman informed Fruehauf’s management that it could top their bid, but Fruehauf’s management did not give them the opportunity to present their offer. Management’s offer was accepted. Edelman sued, seeking an injunction against Management taking over the corporation. Did Fruehauf’s management act unethically in this case? Did Fruehauf’s management act legally in this case? Edelman v. Fruehauf Corporation, 798 F. 2d 882, 1986 U. S. App. Lexis 27911 (United States Court of Appeals for the Sixth Circuit)