Tuesday, February 26, 2013

Gantler v. Stephens case brief

Gantler v. Stephens case brief summary
965 A.2d 695

SYNOPSIS: Appellant shareholders challenged the dismissal of their complaint by Court of Chancery of the State of Delaware. The complaint alleged that the appellees, officers and directors, violated their fiduciary duties by rejecting a valuable opportunity to sell the company, deciding instead to reclassify the company's shares in order to benefit themselves, and by disseminating a materially misleading proxy statement to induce shareholder approval.

-The board of directors of First Nile Financial, Inc. put the company up for sale in Aug. 2004 and attracted interest from several firms.
-An offer from Farmers National Banc Corp. was ignored after Farmers stated that it would not retain the First Nile board if its bid were accepted.
-Cortland Bankcorp and First Place Financial Corp. also made offers and submitted due diligence requests.
-William Stephens (D), First Nile’s chairman and CEO, did not inform the rest of the board of the due diligence requests.
-This caused Cortland to drop out of the bidding and First Place to reduce its bid.
-Ultimately the board rejected First Place’s offer and decided to pursue a privatization plan instead of a sale.
-Because the privatization plan involved changes to shareholder rights, it required shareholder approval.
-The board of First Nile submitted a proxy statement to the Securities and Exchange Commission which disclosed that the each of the directors had a conflict of interest with respect to the privatization plan because, by virtue of their positions, they could structure the plan to their own benefit.
-The shareholders nonetheless voted in favor of the privatization plan. A group of dissident shareholders (Ps) brought a derivative action against several First Nile directors (Ds), including Stephens.
-The complaint alleged that the directors breached their fiduciary duty by rejecting a valuable opportunity to sell the company.
-Three directors, constituting a majority that opposed the sale, were alleged to have had improper personal motives in rejecting First Place’s offer.
-All wished to preserve their positions. Director Kramer owned a heating and cooling company which did work for First Nile, which would presumably be lost in the event of a sale.
-Director Zuzolo was a principal in a law firm which likewise did work for First Nile.

-The trial court granted the directors’ motion to dismiss the complaint, on the grounds that (1) the business judgment rule shielded the directors from duty of care claims, and (2) the shareholder vote ratified the board’s actions and also served to shield the directors.
-The dissident shareholders appealed the dismissal.

OVERVIEW: The claim of disloyalty was erroneously dismissed. Shareholders alleged facts sufficient to establish that a majority of the board acted disloyally, and that claim rebutted the business judgment presumption.

The court held that officers, like directors, owed the same fiduciary duties of care and loyalty. It was reasonable to infer from the facts alleged that the duty of loyalty was breached.

Proxy disclosures as to the board's careful deliberations were materially misleading; disclosure that there was little or no deliberation may have altered the total mix of data given to shareholders.
The court clarified the doctrine of shareholder ratification, holding that the scope of the doctrine was limited to circumstances where a fully informed shareholder vote approved director action that did not legally require shareholder approval in order to become legally effective. The only action or conduct that was ratifiable was that which shareholders were specifically asked to approve. The cleansing effect of a ratification was to subject a challenged action to business judgment review. To the extent that Smith v. Van Gorkom held otherwise, it was overruled.

OUTCOME: The court reversed the judgment as to all counts and remanded the case for proceedings consistent with the rulings in the opinion.

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