965 A.2d 695 (Del. 2009)
First Niles Financial, Inc., a Delaware corporation headquartered in Niles, Ohio, is a holding company whose sole business is to own and operate the Home Federal Savings and Loan Association of Niles.1 The Bank is a federally chartered stock savings association that operates a single branch in Niles, Ohio.2 The plaintiffs, Leonard T. Gantler and his wife Patricia A. Cetrone, John and Patricia Gernat, and Paul and Marsha Mitchell, collectively own 121,715 First Niles shares.3 Plaintiff Gantler was a First Niles director from April 2003 until April 2006.4
Defendant William L. Stephens is the Chairman of the Board, President and CEO of both First Niles and the Bank, and has been employed by the Bank since 1969.5 Defendant P. James Kramer, a director of First Niles and the Bank since 1994, is president of William Kramer & Son, a heating and air conditioning company in Niles that provides heating and air conditioning services to the Bank.6 Defendant William S. Eddy has been a director of First Niles and the Bank since 2002.7 Defendant Daniel E. Csontos has been a director of First Niles and the Bank since April 2006.8 Defendant Robert I. Shaker, who became a director of First Niles and the Bank in January of 2006 after former director Ralph A. Zuzolo passed away, is a principal of a law firm in Niles, Ohio.9 Defendant Lawrence Safarek is the Treasurer and Vice President of both First Niles and the Bank.10
In late 2003, First Niles was operating in a depressed local economy, with little to no growth in the Bank’s assets and anticipated low growth for the future.11 At that time Stephens, who was Chairman, President, CEO and founder of First Niles and the Bank, was beyond retirement age and there was no heir apparent among the Company’s officers.12 Accordingly, the First Niles Board sought advice on strategic opportunities available to the Company, and in August 2004, decided that First Niles should put itself up for sale.13 After authorizing the sale of the Company, the First Niles Board specially retained an investment bank, Keefe, Bruyette & Woods, and a law firm, Silver, Freedman & Taft.14
In December 2004, three potential purchasers sent bid letters to Stephens.15 Farmers stated in its bid letter that it had no plans to retain the First Niles Board, and the Board did not further pursue the Farmers’ offer.16 In its bid letter, Cortland offered $18 per First Niles share, 49% in cash and 51% in stock, representing a 3.4% premium over the current First Niles share price.17 Cortland also indicated that it would terminate all the incumbent Board members, but would consider them for future service on Cortland’s board.18 First Place’s bid letter, which made no representation regarding the continued retention of the First Niles Board, proposed a stock-for-stock transaction valued at $18 to $18.50 per First Niles Share, representing a 3.4% to 6.3% premium.19
On January 18, 2005, the Board directed the Financial Advisor and Management to conduct due diligence in connection with a possible transaction with First Place or Cortland.20 The Financial Advisor met with Stephens and Safarek, and all three reviewed Cortland’s due diligence request.21 Stephens and Safarek agreed to provide the materials Cortland requested and scheduled a due diligence session for February 6.22 Cortland failed to receive the materials it requested, canceled the February 6 meeting, and demanded the submission of those materials by February 8.23 The due diligence materials were never furnished, and Cortland withdrew its bid for First Niles on February 10.24 Management did not inform the Board of these due diligence events until after Cortland had withdrawn its bid.25
First Place began its due diligence review on February 18, 2005, and submitted a revised offer to First Niles on March 4.26 As compared to its original offer, First Place’s revised offer had an improved exchange ratio.27 Because of a decline in First Place’s stock value, the revised offer represented a lower implied price per share of $17.25 per First Niles share, but since First Niles’ stock price had also declined, the revised offer still represented an 11% premium over market price.28 On March 8, First Place increased the exchange ratio of its offer to provide an implied value of $17.37 per First Niles share.29 At the March 9 special Board meeting, Stephens distributed a memorandum from the Financial Advisor describing First Place’s revised offer in positive terms.30 Without any discussion or deliberation, however, the Board voted 4 to 1 to reject that offer, with only Gantler voting to accept it.31
Five weeks later, on April 18, 2005, Stephens circulated to the Board members a document describing a proposed privatization of First Niles.32 That Proposal recommended reclassifying the shares of holders of 800 or fewer shares of First Niles common stock into a new issue of Series A Preferred Stock on a one-to-one basis.33 The Series A Preferred Stock would pay higher dividends and have the same liquidation rights as the common stock, but the Preferred holders would lose all voting rights except in the event of a proposed sale of the Company.34 On June 19, the Board voted unanimously to amend the Company’s certificate of incorporation to reclassify the shares held by owners of 300 or fewer shares of common stock into shares of Series A Preferred Stock that would have the features and terms described in the Privatization Proposal.35 The Company’s shareholders approved the Reclassification on December 14, 2006.36 Taking judicial notice of the Company’s Rule 13e-3 Transaction Statement, the trial court concluded that of the 1,384,583 shares outstanding and eligible to vote, 793,092 shares, or 57.3%, were voted in favor and 11,060 shares abstained.37 Of the unaffiliated shares, however, the proposal passed by a bare 50.28% majority vote.38
The amended complaint asserts three separate claims.39 Count I alleges that the defendants breached their fiduciary duties to the First Niles shareholders by rejecting the First Place merger offer and abandoning the Sales Process.40 Count II alleges that the defendants breached their fiduciary duty of disclosure by disseminating a materially false and misleading Reclassification Proxy.41 Count III alleges that the defendants breached their fiduciary duties by effecting the Reclassification.42 The defendants moved to dismiss the complaint in its entirety.43 The Court of Chancery credited these arguments and dismissed the complaint.44 This appeal followed.45
Whether Unocal enhanced scrutiny applies to the board's rejection of merger bids and termination of the sales process?46
Enhanced judicial scrutiny under Unocal applies whenever the record reflects that a board of directors took defensive measures in response to a perceived threat to corporate policy and effectiveness which touches on issues of control.47
No. The complaint does not allege any hostile takeover attempt or similar threatened external action from which it could reasonably be inferred that the defendants acted defensively.48 The board initiated the Sales Process on its own accord as a market check as part of an exploration of strategic alternatives.49
The premise of Unocal is that the transaction at issue was defensive. Count I sounds in disloyalty, not improper defensive conduct.50
The Court of Chancery properly refused to apply Unocal scrutiny.51
Whether the complaint pleads facts sufficient to rebut the business judgment presumption and state claims for breach of the duties of loyalty and care against the director and officer defendants?52
The business judgment standard is a presumption that in making a business decision the directors of a corporation 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.53 Procedurally, the plaintiffs have the burden to plead facts sufficient to rebut that presumption by showing a breach of the duty of loyalty or the duty of care.54
Yes. The pled facts establish that a majority of the Director Defendants acted disloyally.55 Stephens failed to respond to Cortland's due diligence request and attempted to sabotage First Place's due diligence to preserve his positions and compensation.56 Kramer faced the loss of his heating and air conditioning company's major client if the Bank were sold.57 Zuzolo stood to lose legal and title business from the Bank.58
These conflicts rebut the business judgment presumption and subject the decision to entire fairness review.59 The same facts support claims against the Officer Defendants Stephens and Safarek for breaching their duties of loyalty in sabotaging due diligence.60
The complaint pleads facts sufficient to rebut the business judgment presumption and state claims for breach of fiduciary duty.61
Whether corporate officers of Delaware corporations owe fiduciary duties identical to those owed by directors?62
Corporate officers owe fiduciary duties of care and loyalty that are identical to those owed by corporate directors.63
Yes. The Court now explicitly holds that officers owe the same fiduciary duties as directors.64 Stephens and Safarek were responsible for preparing due diligence materials for potential acquirers.65 The facts showing Stephens violated his duty of loyalty as a director also establish his violation as an officer. Safarek's assistance in sabotaging due diligence supports a reasonable inference that he breached his duty of loyalty as an officer.66
Corporate officers of Delaware corporations owe fiduciary duties identical to those owed by directors.67
Whether the Reclassification Proxy contained material misrepresentations or omissions regarding the board's deliberations on the First Place offer?68
Directors of Delaware corporations have a fiduciary duty to disclose fully and fairly all material information within the board's control when seeking shareholder action.69 An omitted or misrepresented fact is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.70
Yes. The Reclassification Proxy represented that after careful deliberations the board determined in its business judgment that the First Place proposal was not in the best interests of the Company or shareholders.71 In fact the board voted 4 to 1 to reject the offer without any discussion or deliberation at the March 9 meeting.72
Given the admitted conflicts of interest, a reasonable shareholder would find the claim of careful deliberations significant.73 The representation was therefore materially misleading.74
The Reclassification Proxy contained a material misrepresentation regarding the board's deliberations.75
Whether the doctrine of shareholder ratification applies to the board's approval of the reclassification proposal where a shareholder vote was statutorily required and the proxy was allegedly misleading?76
The scope of the shareholder ratification doctrine is limited to its classic form, that is, to circumstances where a fully informed shareholder vote approves director action that does not legally require shareholder approval to become legally effective.77
No. Amending the certificate of incorporation to effect the reclassification legally required a shareholder vote under the Delaware General Corporation Law.78 Because the vote was statutorily required, it could not operate as a ratification.79 In addition the adjudicated material misrepresentation in the proxy precludes any finding that the shareholder vote was fully informed.80
The doctrine of shareholder ratification does not apply to the board's approval of the reclassification proposal.81