Gantler v. Stephens, C.A. 2392-VCP (Del. Ch. Feb. 14, 2008) (Parsons, V.C.)
The Court of Chancery granted defendants’ motion to dismiss a stockholder suit alleging breaches of fiduciary duties by corporate directors and officers in connection with a decision to terminate a process to sell the company in favor of a transaction involving a reclassification of the company’s shares. Specifically, the plaintiff stockholders claimed: 1) that certain directors and officers breached the duty of of loyalty in failing to sell the company; 2) that all defendants breached fiduciary duties by issuing a misleading proxy statement in connection with the reclassification; and 3) that all defendants breached the duty of loyalty in carrying out the reclassification. Significantly, in evaluating the claims against a defendant who was an officer but not also a director, the Court confirmed that corporate officers owe fiduciary duties of care and loyalty to the corporation and its stockholders. The Court also stated, in dicta, that officers are entitled to the protections of the business judgment rule. The Court declined to apply Unocal enhanced scrutiny review to the decision not to sell the company because there was no threat posed, and thus no reason to consider the defendants’ actions to be “defensive.” The Court also noted that the entire fairness standard of review was inapposite to the decision not to sell the company because there was no transaction, and therefore, no fair price issue to consider. The Court relied on the analysis in TW Services Inc. v. SWT Acquisition Corp., in which the Court had hold that a board of directors may properly decline a merger provided that it does so “in good faith pursuit of legitimate corporate interests and advisedly.” The Court found no indicia of bad faith based on the board’s decision not to sell because the board had pursued the sales process to find strategic alternatives to reduce existing administrative and legal costs of SEC compliance, a goal the Court found to be consistent with legitimate corporate concerns. The Court also found no facts to support the due care prong of SWT, and therefore dismissed the breach of duty claims stemming from the termination of the sales process. In its analysis of the reclassification, the Court determined there were facts pleaded sufficient to indicate that a majority of directors as of the date the reclassification proxy was submitted to stockholders were not independent. Responding to defendants’ claim that despite the lack of independence, the decision to reclassify was ratified by the stockholders, the Court clarified that to bring a challenged action within the protections of the business judgment rule on the basis of stockholder ratification, the action must have been ratified by fully informed and unaffiliated stockholders holding a majority of the shares held by such stockholders, not merely by a majority of shares held by those unaffiliated stockholders who actually did vote. In calculating the vote, the Court took judicial notice of facts in the reclassification proxy as to the number of shares eligible on the record date and refused to consider options in the total number of shares because the options were not eligible to vote as of the record date. After finding that the plaintiffs’ alleged disclosure failures did not alter the total mix of information in any material manner, and that the stockholders were therefore fully informed, the Court dismissed both the disclosure claims and the remaining duty of loyalty claim with respect to the reclassification.