Gantler v. Stephens

Facts

(Note: These facts are not in the Bauman Casebook). First Niles, a Delaware corporation headquartered in Niles, Ohio. Ps collectively own 121,715 First Niles shares. P was a First Niles director from April 2003 until April 2006. Stephens (D) is the Chairman of the Board, President, and CEO of both First Niles and the Bank, and has been employed by the Bank since 1969. Kramer (D) has been director of First Niles and the Bank since 1994, is president of William Kramer & Son, a heating and air conditioning company in Niles that provides heating and air conditioning services to the Bank. Eddy (D) has been a director of First Niles and the Bank since 2002. Csontos (D) has been a director of First Niles and the Bank since April 2006. Csontos (D) has also been a full-time employee, serving as compliance officer and corporate secretary of both institutions since 1996 and 2003, respectively. Shaker, (D) who became a director of First Niles and the Bank in January of 2006 after former director Zuzolo passed away, is a principal of a law firm in Niles, Ohio. Safarek (D) is the Treasurer and Vice President of both First Niles and the Bank. First Niles was operating in a depressed local economy. The acquisition market for banks like Home Federal was brisk, and First Niles was thought to be an excellent acquisition for another financial institution. The Board sought advice on strategic opportunities. After authorizing the sale of the Company, the First Niles Board retained an investment bank, Keefe, Bruyette & Woods (the “Financial Advisor”), and a law firm, Silver, Freedman & Taft (“Legal Counsel”). The Board then advocated abandoning the Sales Process in favor of a proposal to “privatize” the Company. First Niles would delist its shares from the NASDAQ SmallCap Market, convert the Bank from a federally chartered to a state-chartered bank, and reincorporate in Maryland. The Board did not act on that proposal, and the Sales Process continued. Three potential purchasers sent bid letters. Farmers stated in its bid letter that it had no plans to retain the First Niles Board, and the Board did not further pursue the Farmers’ offer. Cortland offered $18 per First Niles share, 49% in cash and 51% in stock, representing a 3.4% premium over the current First Niles share price. Cortland also indicated that it would terminate all the incumbent Board members, but would consider them for future service on Cortland’s board. First Place’s bid letter proposed a stock-for-stock transaction valued at $18 to $18.50 per First Niles Share, representing a 3.4% to 6.3% premium. The Financial Advisor stated that accepting the stock-based offers would be superior to retaining First Niles shares. They pursued two bids and Cortland withdrew its bid for First Niles on February 10. First Place made its due diligence request and asked for a due diligence review session the following week. After Cortland withdrew its bid, due diligence materials were supplied to First Place. First Place’s made a revised offer that had an improved exchange ratio. The directors were informed of First Place’s revised offer. The Board did not discuss the offer. They scheduled a special Board meeting for March 9 to discuss the First Place offer. First Place increased the exchange ratio of its offer to provide an implied value of $17.37 per First Niles share. Without any discussion or deliberation, the Board voted 4 to 1 to reject that offer, with only P voting to accept it. Stephens (D) then discussed Management’s privatization plan and instructed Legal Counsel to further investigate that plan. Stephens (D) presented the privatization proposal by reclassification The Board appointed Zuzolo to chair a special committee to investigate issues relating to the Reclassification. Powell Goldstein then orally presented the Reclassification proposal to the Board. The Board voted 3 to 1 to direct Outside Counsel to proceed with the Reclassification program. P cast the only dissenting vote. From April of 2006 on, the Board consisted of Stephens, Kramer, Eddy, Shaker, and Csontos. The Board voted unanimously to amend the Company’s certificate of incorporation to reclassify the shares held by owners of 300 or fewer shares of common stock into shares of Series A Preferred Stock that would have the features and terms described in the Privatization Proposal. The Board submitted a proxy to the SEC. P initiated this lawsuit after an amended filing of the proxy, claiming that the preliminary proxy was materially false and misleading. Ds amended the proxy and Ps amended their complaint. The Company’s shareholders approved the Reclassification on December 14, 2006. P alleges that Ds breached their fiduciary duties to the First Niles shareholders by rejecting the First Place merger offer and abandoning the Sales Process, by disseminating a materially false and misleading Reclassification Proxy, and by affecting the Reclassification. Ds moved to dismiss the complaint in its entirety. The Court of Chancery dismissed the complaint. This appeal followed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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