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In re NYMEX S’Holder Litig., C.A. No. 3621-VCN and Greene v. New York Mercantile Exchange, Inc., et al., C.A. No. 3835-VCN (Del. Ch. Sept. 30, 2009)

September 30, 2009

In these two class actions challenging the acquisition of the parent company of the New York Mercantile Exchange, the Court granted the defendants’ motions to dismiss for failure to state a claim. Plaintiffs in one of the actions were holders of common stock of NYMEX Holdings (“NYMEX”) which was acquired in 2008 for cash and stock by defendant CME Group, Inc. (“CME”). Plaintiffs in the other action were “seat holders” on the exchange, known as Class A Holders. Both sets of plaintiffs alleged breaches of fiduciary duty by the NYMEX board of directors in connection with the acquisition of NYMEX by CME. Both sets of plaintiffs additionally alleged a claim of aiding and abetting the NYMEX board’s breaches of fiduciary duty against CME. As a result of such breaches, the NYMEX shareholders alleged that they had not received fair value for their stock in the merger. The Class A Members alleged that the NYMEX board’s breaches resulted in inadequate compensation for the decline in the value of their exchange seats and for their loss of certain rights and privileges, particularly with respect to revenue sharing.

In addressing the plaintiffs’ claims of breach of fiduciary duty, the Court first held that because NYMEX’s charter contained a 102(b)(7) provision exculpating the board from damages arising out of a breach of the fiduciary duty of care, the plaintiffs’ contention that the merger should be evaluated under the well-known Revlon standard was irrelevant. The Court made this determination on the grounds that plaintiffs had no well-pled allegations in their complaint that a majority of the NYMEX board was either interested in the merger or dominated and controlled by someone that was interested in the merger. The Court noted that plaintiffs had alleged that two members of the board, its chairman, Richard Schaeffer, and NYMEX’s chief executive officer, James Newsome, were interested in the merger. However, plaintiffs, the Court also noted, must plead sufficient facts that a majority of the board breached the fiduciary duty of loyalty in order to prevail on their challenge to the merger. Even assuming that plaintiffs had adequately alleged that Schaeffer and Newsome were interested in the merger, plaintiffs had not alleged such interest on behalf of a majority of the sixteen-member board. Nor had plaintiffs alleged that a majority of the board was dominated or controlled by Schaeffer and/or Newsome. Instead, plaintiffs argued that the Court should infer domination and control because the board had voted in favor of the challenged aspects of the merger, including a change in control severance plan that benefitted Schaeffer and Newsome, and because the board failed to obtain a “collar” with respect to the stock portion of the CME offer. The Court held that the board’s endorsement of actions that may appear questionable is not enough to support an inference of domination and control. At most, the Court held, plaintiffs took issue with the process that the board followed leading to the CME acquisition. Such claims, the Court held, implicate the duty of care, not loyalty, and as such, were fully exculpated by NYMEX’s 102(b)(7) provision. As a result, plaintiffs’ merger-related claims were dismissed.

The Court next considered plaintiffs’ claims asserted against Schaeffer and Newsome for individual breaches of fiduciary duty. Plaintiffs asserted that these individuals, as NYMEX’s principal negotiators of the CME merger, breached their fiduciary duties by failing to disclose to the full board that CME had offered a collar with respect to its stock price as part of the deal and by allegedly committing to CME that NYMEX would not renegotiate any of the economic terms of the deal without informing the NYMEX board of such a commitment. Plaintiffs also asserted a claim for breach of fiduciary duty against Schaeffer for allegedly rejecting a prior offer by the New York Stock Exchange (“NYSE”) because the NYSE would not accede to Schaeffer’s personal demands. The Court rejected each of these claims, finding that they were either within the business judgment of the board and Schaeffer and Newsome as the appointed negotiators or lacking in sufficient factual support in the complaint. With respect to the claim that Schaeffer had improperly rebuffed a prior offer by the NYSE, the Court found that claim to be derivative and thus plaintiffs’ standing to pursue it had been extinguished by the merger with CME.

With respect to the plaintiffs’ claims of aiding and abetting against CME, the Court rejected such claims because plaintiffs had failed to adequately allege CME’s knowing participation in any of the alleged breaches.

Finally, the Court addressed the claims asserted by the Class A Members to the extent that they were different from the claims asserted by NYMEX’s common stockholders. The Court held that the NYMEX board did not owe the Class A Members fiduciary duties. For that reason, the Court dismissed any additional fiduciary duty claims that were brought by the Class A Members.

The full opinion is available here