Harbor Finance Partners v. Huizeng

Facts

Republic (D) operates several business lines, including a solid waste disposal, collection, and recycling business. In 1996, Republic expanded into the automobile rental and retailing business The other defendants are all members of the board of directors of Republic (the 'Board'). Four of the directors were AutoNation stockholders before the Merger. Three were not. Republic directors have worked together as fellow directors, managerial colleagues, and shareholders in a variety of business enterprises over the years. Several Republic directors helped form AutoNation. Huizenga and members of his family initially held 55% of AutoNation's stock; this was reduced to 37.4% through subsequent transfers. Directors Johnson, Melk, and Hudson also bought substantial blocks of AutoNation shares. Before AutoNation opened a single store, it embarked on merger discussions with Republic. Republic held a Board meeting. At that meeting, Huizenga proposed that Republic acquire AutoNation for $250 million worth of Republic shares. The Board agreed to the proposal and Republic issued a press release later that day announcing that it intended to purchase AutoNation on those terms. This amounted to 17,467,248 Republic shares or 0.217796 Republic shares for every AutoNation share (the 'Exchange Ratio'), based on the trading price of Republic shares at the close of the market on March 26, 1996. The Board formed a special committee (the 'Special Committee') to consider the acquisition proposal. Bryan, Burdick, and DeGroote were appointed. DeGroote was selected to be the Chairman. The Special Committee undertook to hire an independent investment advisor to assist it in reviewing the acquisition proposal. Rejecting proposals from other prestigious investment banking firms, the Special Committee retained Merrill Lynch. It did so despite Merrill Lynch's forthright disclosure of its relationship with AutoNation and the fact that Merrill Lynch had already ''built a substantial valuation model of AutoNation's history, operations and financial prospects' on this very issue for 'certain stockholders of AutoNation.' Negotiations proceeded without participation by any members of the Special Committee or Merrill Lynch. On May 7, 1996, Merrill Lynch delivered a written opinion to the Special Committee indicating that the Exchange Ratio was fair to Republic's stockholders from a financial point of view. The next day the Special Committee approved the Merger, and the full Board met thereafter and approved the Merger Agreement. The Merger was contingent on approval by the stockholders of Republic. A Loan Agreement required Republic to provide AutoNation with a line of credit to fund AutoNation's cash flow requirements before consummation of the Merger. On December 16, 1996, Republic sent its stockholders the Proxy Statement in connection with the Merger vote. By this time, the implied merger consideration to be provided to AutoNation stockholders had risen to $558 million because of a sharp increase in the value of Republic's stock price. By December 31, 1996, AutoNation had also drawn down $247.5 million under the Loan Agreement. The Proxy Statement disclosed that Republic had advanced $112.9 million to AutoNation as of September 30, 1996, but did not disclose the specific amounts of any subsequent advances. On January 16, 1997, the Republic shareholders overwhelmingly voted to approve the Merger. Although the complaint does not mention this fact, the Proxy Statement indicates that the Republic directors who owned AutoNation shares controlled no more than 27% of the votes. Ps sued. Ds contend that Count I of the complaint, which challenges the Merger's fairness to Republic, should be dismissed pursuant to Chancery Court Rule 23.1 because P failed to make a demand on the Republic Board. Ds contend that Counts I and II fail to state a claim upon which relief can be granted.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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