Fiduciary Duties of Officers and Directors: Gantler v. Stephens (The Importance of Shareholder Ratification)(Part 5)

We are examining the recent decision by the Delaware Supreme Court in Gantler v. Stephens.

The Supreme Court touched upon the standard for determining the independence of directors and the fiduciary obligations of officers.  The Court also discussed the impact of disinterested shareholder approval. 

In considering whether shareholder ratification altered the standard of review for a conflict of interest transaction, the Court emphasized the need for full disclosure.  Only if approval was informed would ratification result in the application of the business judgment rule.  Plaintiffs alleged that the board misled shareholders by stating that it had rejected the First Place bid after "careful deliberations." Plaintiffs alleged that in fact the offer had been rejected "without any discussion."

The Court agreed that this was a sufficient misstatement to withstand a motion to dismiss.

• Given the defendant fiduciaries’ admitted conflict of interest, a reasonable shareholder would likely find significant—indeed, reassuring—a representation by a conflicted Board that the Reclassification was superior to a potential merger which, after “careful deliberations,” the Board had “carefully considered” and rejected. In such circumstances, it cannot be concluded as a matter of law, that disclosing that there was little or no deliberation would not alter the total mix of information provided to the shareholders.

It was the type of statement that would unquestionably be actionable under federal law but ordinarily not the type of thing that a Delaware court would find material.  The difference in the state and federal approach to materiality is outlined in Speaking With Complete Candor: Shareholder Ratification and the Elimination of the Duty of Loyalty. 

The decision had potentially broad implications, essentially requiring disclosure of a board's indolence when it came to a competing offer.  The Court attempted to limit the implications of the holding by emphasizing the interested nature of the board and that it was an affirmative misstatement.  In fact, shareholders would presumably always want to know that the board received a superior offer and rejected it without any serious consideration.  The fact that the board allegedly lied about its level of consideration merely transformed the false statement from an omission to a material misstatement.

Primary materials from the Chancery Court can be found on the DU Corporate Governance web site.