Malpiede v. Townson

780 A.2d 1075 (Del. Supr.2001)


Frederick's of Hollywood ('Frederick's') is a retailer of women's lingerie and apparel with its headquarters in Los Angeles, California. This case involves the merger of Frederick's into Knightsbridge Capital Corporation ('Knightsbridge') under circumstances where it became a target in a bidding contest. Frederick's common stock was divided into Class A shares (each of which has one vote) and Class B shares (which have no vote). There were 2,995,309 Class A shares and 5,903,118 Class B shares. The trusts of Frederick and Harriet Mellinger held a total of about 41% of the outstanding Class A voting shares and a total of about 51% of the outstanding Class B non-voting shares of Frederick's. On June 14, 1996, the Frederick's board announced its decision to retain an investment bank, Janney Montgomery Scott, Inc. ('JMS'), to advise the board in its search for a suitable buyer for the company. JMS initiated talks with Knightsbridge. Knightsbridge offered to purchase all of the outstanding shares of Frederick's for between $6.00 and $6.25 per share. The Frederick's board granted Knightsbridge the exclusive right to conduct due diligence. On June 13, 1997, the Frederick's board approved an offer from Knightsbridge to purchase all of Frederick's outstanding Class A and Class B shares for $6.14 per share in cash in a two-step merger transaction. The terms of the merger agreement prohibited the board from soliciting additional bids from third parties, but the agreement permitted the board to negotiate with third party bidders when the board's fiduciary duties required it to do so. The Frederick's board then sent to stockholders a Consent Solicitation Statement recommending that they approve the transaction, which was scheduled to close on August 27, 1997. On August 21, 1997, Frederick's received a fully financed, unsolicited cash offer of $7.00 per share from a third-party bidder, Milton Partners ('Milton'). Four days after the board received the Milton offer, Knightsbridge entered into an agreement to purchase all of the Frederick's shares held by the Trusts for $6.90 per share. The Trusts granted Knightsbridge a proxy to vote the Trusts' shares, but the Trusts had the right to terminate the agreement if the Frederick's board rejected the Knightsbridge offer in favor of a higher bid. Knightsbridge sent a letter to the Frederick's board to inform it that Knightsbridge had 'acquired' the Trusts' shares and that it would 'not vote in favor of' any competing third party bids. That letter did not mention the Trusts' right to terminate the agreement in favor of a higher offer. Knightsbridge also sent a letter to the Frederick's board on September 1, 1997, restating its intention to consummate the merger on September 3, 1997, under the terms of the original merger agreement. On August 27, 1997, the Frederick's board received a fully financed, unsolicited $7.75 cash offer from Veritas Capital Fund ('Veritas'). The board postponed the Knightsbridge merger in order to arrange a meeting with the two new bidders. The board sent a memorandum to Milton and Veritas outlining the conditions for participation in the bidding process. Veritas submitted a merger agreement and the $2.5 million escrow payment in accordance with these conditions. Milton did not. The board met with representatives of Veritas to discuss the terms of the Veritas offer. There is dispute whether the board y informed Veritas that it was required to produce its 'final, best offer' by September 4, 1997. Knightsbridge and the Trusts amended their stock purchase agreement to eliminate the Trusts' termination rights and other conditions on the sale of the Trusts' shares. On September 4, 1997, Knightsbridge exercised its rights under the agreement and purchased the Trusts' shares. Knightsbridge immediately informed the board of its acquisition of the Trusts' shares and repeated its intention to vote the shares against any competing third party bids. Veritas representatives suggested that, if the board elected to accept the Veritas offer, the board could issue an option to Veritas to purchase authorized but unissued Frederick's shares as a means to circumvent the 41% block of voting shares that Knightsbridge had acquired from the Trusts. Veritas also agreed to indemnify the directors from a Knightsbridge suit if they canceled that merger. On September 6, 1997, Knightsbridge increased its bid to match the $7.75 Veritas offer, but on the condition that the board accept a variety of terms designed to restrict its ability to pursue superior offers. Two days later, Knightsbridge purchased additional Frederick's Class A shares on the open market, at an average price of $8.21 per share, thereby acquiring a majority of both classes of Frederick's shares. On September 11, 1997, Veritas increased its cash offer to $9.00 per share. Before the merger closed, Ps filed in the Court of Chancery the purported class action complaint. The Court of Chancery denied the requested injunctive relief. An amended complaint alleged that the Frederick's board had breached its fiduciary duties in connection with the sale of the company and had misstated and omitted material information in the Consent Solicitation Statement. The plaintiffs also sued Knightsbridge, alleging that it aided and abetted the board's breach of fiduciary duties and it tortiously interfered with the stockholders' prospective business relations (that is, the. $9.00 Veritas bid). The Court of Chancery granted the directors' motion to dismiss the amended complaint under Chancery Rule 12(b)(6) in that: (1) the complaint did not support a claim of breach of the board's duty of loyalty, (2) the exculpatory provision in the Fredrick's charter precluded money damages against the directors for any breach of the board's duty of care, and (3) any misstatements or omissions in the Consent Solicitation Statement were immaterial as a matter of law. This appeal resulted.