We are examining the recent decision by the Delaware Supreme Court in Gantler v. Stephens. The action was brought by six shareholders of First Niles Financial for breach of fiduciary duties arising out a decision to not sell the company and instead engage in a reclassification of the company's shares. The reclassification resulted in the company being delisted from the Nasdaq SmallCap Market.
The company put itself up for sale and received letters of interest from three potential purchasers. Ultimately, two of the companies (Courtland and First Place) indicated a desire to undertake due diligence. Courtland requested due diligence materials by a certain date and when they did not arrive, withdrew its bid. First Place conducted due diligence and submitted a revised bid involving an 11% premium over First Nile's market price. The board ultimately rejected the offer "[w]ithout any discussion or deliberation." Instead, the board approved a reclassification that had the effect of taking First Nile private. The reclassification was ultimately approved by the board and shareholders. Of the unaffiliated shares, 50.28% voted to approve the transaction.
Plaintiffs alleged that the board violated its fiduciary obligations by terminating the outside bidding process and rejecting the offer from First Place. The board did so, plaintiffs alleged, in order to maintain their positions as directors and "valuable outside business opportunities." In other words, the shareholders alleged that the directors were motivated by a desire for job preservation rather than the interests of shareholders. As the Court noted in describing the claim, it was not enough to allege that directors would lose their job.
- A claim of this kind must be viewed with caution, because to argue that directors have an entrenchment motive solely because they could lose their positions following an acquisition is, to an extent, tautological. By its very nature, a board decision to reject a merger proposal could always enable a plaintiff to assert that a majority of the directors had an entrenchment motive. For that reason, the plaintiffs must plead, in addition to a motive to retain corporate control, other facts sufficient to state a cognizable claim that the Director Defendants acted disloyally.
The issue was, therefore, whether plaintiffs had alleged sufficient "other facts" to establish an entrenchment motive. With that in mind, we will examine what the court had to say in the next post.
Primary materials from the Chancery Court can be found on the DU Corporate Governance web site.