The Irrelevancy of Interested Influence on the Board: In re Nat'l City Corp. Shareholders Litigation
In Delaware, courts consider boards independent if they contain a majority of independent directors. That the board might include some percentage of interested or non-independent directors, who can influence the decision making process, appears to have little relevancy to the court's analysis. This can be seen In re Nat’l City Corp. Shareholders Litig.
In that case, the Delaware Court of Chancery approved a proposed settlement agreement between National City Corporation (“NCC”) and its shareholders. The settlement arises from a suit brought by NCC shareholders to enjoin a merger between NCC and PNC Financial Services Group, Inc. (“PNC”).
The economic crises that produced capital, liquidity and credit problems for the financial sector culminating in the Lehman bankruptcy in September, 2008 forced NCC to consider strategic options to prevent failure. To further complicate the problem, the Office of the Comptroller of the Currency informed NCC that it was “very possible” that NCC would not receive government assistance. The confluence of circumstances narrowed NCC’s options. Consequently, NCC began to shop for potential buyers.
UBS initially offered $2.545 billion, a purchase price of less than half the market capitalization of NCC at the time ($6.3 billion). Prior to a vote to approve the merger with UBS, however, PNC offered $5.45 billion. On October 24, 2008 NCC announced a proposed merger with PNC. NCC was successful in negotiating a slight price increase, and the final proposal would have allowed PNC to acquire NCC in an all-stock transaction valued at $5.58 billion.
NCC shareholders subsequently filed suit seeking to enjoin the merger. The shareholders allege that NCC’s board breached their fiduciary duties and that PNC aided and abetted those breaches. Specifically, the consolidated complaint claimed that (1) NCC’s board had failed to maximize the sale price, (2) NCC’s board had allowed PNC to buy NCC “on the cheap,” and (3) NCC’s board had failed to disclose material facts in the initial proxy report.
The settlement agreement considered by the court provided that plaintiff shareholders would release their claims in exchange for additional disclosures and attorney’s fees. Those additional disclosures included: (1) Potential conflict of interest on the part of Goldman Sachs, who advised both PNC and NCC at various times during the negotiations, (2) status of NCC’s participation in the troubled assets purchase arrangements, (3) NCC’s alternative transaction possibilities, (4) other strategic options for company growth if NCC remained an independent entity, (5) detailed information about the investment agreements and warrants found in reports filed with the SEC, and (6) the method used by NCC’s board to solicit other transaction partners.
The court acknowledged the difficult financial situation in which NCC found itself in September, while noting that the shareholders faced an “uphill battle.” This was due to the application of the Business Judgment Rule (“BJR”) in the absence of a showing of the board’s interestedness or disloyalty. In addition, nothing in the complaint could rebut the presumption of the BJR. Moreover, NCC had a provision in its articles of incorporation that would force plaintiffs to demonstrate bad faith by the board.
The shareholders responded that fourteen officers of the company were interested because they would receive change-in-control payments. However, only one of those officers was on the board. The one officer did happen to be the company's chairman, president and CEO. Nonetheless, the Chancery Court concluded that the Delaware Supreme Court has “never held that one director’s colorable interest in a challenged transaction is sufficient, without more, to deprive a board of the protection of the BJR presumption of loyalty.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993). Balanced against the remoteness of shareholders’ success on their claims, stands the meager benefit of additional disclosures. The Court found that this balance represented a fair and reasonable compromise. As such, the settlement was approved.
The court also addressed the issue of attorney’s fees. Plaintiff’s lawyers requested $1.2 million in fees. The court scoffed at such a “pricey” amount, especially when considered in light of the meager benefit produced for their clients. Thus, the court concluded that a fee of $400,000 was more in line with the benefit received by the shareholder class.
The primary materials for this post are available on the DU Corporate Governance website