Tuesday, February 26, 2013

Harbor Finance Partners v. Huizenga case brief

Harbor Finance Partners v. Huizenga case brief summary
751 A.2d 879

SYNOPSIS: The matter came before the court on defendants' motions to dismiss plaintiffs' derivative unfairness claim for failure to first make a demand upon the board, and to dismiss plaintiffs' complaint for failure to state a claim that the disclosures in connection with the merger were misleading or incomplete.

OVERVIEW: Plaintiff shareholder's derivative action contended the corporation's acquisition (merger) was a self-interested transaction effected for the benefit of corporate directors owning a substantial block of the acquired corporation's shares, that transaction's terms were unfair to the corporation and its public stockholders, and that stockholder approval was procured through a materially misleading proxy statement. The trial court denied defendant directors' motion to dismiss plaintiff's unfairness claim pursuant to Del. Chancery Ct. R. 23.1, holding plaintiff had pled facts supporting a reasonable doubt concerning the ability of four of the seven directors to consider a demand impartially.

The court granted defendants' motion to dismiss pursuant to Del. Chancery Ct. R. 12(b)(6), holding that, as plaintiff failed to state a claim of tainted stockholder approval of the merger, the business judgment rule insulated the merger from all attacks other than for waste, and plaintiff had failed to adequately state a claim for waste.

OUTCOME: Defendants' motion to dismiss for unfairness denied, holding plaintiff plead facts sufficient to excuse demand; defendants' motion to dismiss for failure to plead facts that, if true, would support an inference that no person of sound business judgment would have believed it a good idea to consummate the merger, granted.

1. Vice Chancellor Strine questioned the equitable safety valve of waste in such a transaction. To say that waste cannot be ratified ignores the type of cases in which waste is alleged, e.g., stock option plans, fee agreement between a mutual fund and an advisor, corporate mergers and acquisitions, stock repurchases.
2. Since the test for waste is whether any person of ordinary sound business judgment could view the transaction as fair, how can a shareholder vote not defeat the action?
3. Is this a sound policy argument or are there reasons to continue waste actions?

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