Nemec v. Shrader

Facts

Nemec (P) retired from Booz Allen on March 31, 2006, after 36 years of service. He was elected three times to the Company's board of directors. He ranked third in seniority among Booz Allen partners. Wittkemper (P) retired on the same day after nearly 20 years of service. In July 2008, Booz Allen had approximately 300 shareholders, 21,000 employees, and annual revenues of approximately $ 4.8 billion. Ds were members of Booz Allen's board of directors at the time Ps' shares were redeemed, and at the time Booz Allen's government business was sold to The Carlyle Group. Ds collectively owned about 11% of Booz Allen's outstanding common stock. Under the Stock Plan, each retired officer had a 'put' right, exercisable for a period of two years from the date of his or her retirement, to sell his or her shares back to the Company at book value. After that two-year period expired, the Company then had the right to redeem, at any time, part or all of the retired officer's stock at book value. Nemec (P) owned 76,000 shares, and Wittkemper (P) owned 28,000 shares. In total this was about 3.6% of all the shares. Nemec (P) retained all of his Booz Allen stock during the two-year period following his retirement; Wittkemper (P) sold most of his shares but retained some of them. During the summer of 2007, a possible transaction was discussed wherein Booz Allen would sell its government business. In October 2007, Booz Allen and The Carlyle Group began negotiations, which culminated in The Carlyle Group's November 2007 offer to purchase Booz Allen's government business for $ 2.54 billion. On January 16, 2008, the Wall Street Journal reported that Booz Allen was engaged 'in discussions to sell its government-consulting business to private-equity firm Carlyle Group,' and that 'the sale price will likely be around $ 2 billion.' It was expected to close by March 31, 2008. The board and management learned that the Carlyle transaction would close later than planned. In March 2008, Booz Allen's board of directors extended their (and management's) terms of office by 90 days, until the end of June 2008, and declined to issue new stock rights to its officers. The purchase price of the Carlyle transaction had been agreed upon, and the Booz Allen board and stockholders knew that the transaction would generate over $700 per share to Booz Allen's stockholders. On May 15, 2008, Booz Allen entered into a formal merger agreement, and the transaction closed on July 31, 2008--four months after Ps' put rights expired. In April 2008, the Company redeemed Ps' shares at their pre-transaction book value (approximately $ 162.46 per share). The redemption of Ps' shares added nearly $60 million to the proceeds received by Booz Allen working stockholders. Ps filed this action alleging that by redeeming Ps' shares at a time when the Carlyle transaction was virtually certain to occur, Booz Allen breached its covenant of good faith and fair dealing implied in the Stock Plan. Ps also claimed that Ds breached their fiduciary duty of loyalty to Ps by causing the Company to redeem the shares, in favor of the Directors' personal interests. Ps also alleged that Ds were unjustly enriched. Ds moved to dismiss, and it was granted. Ps appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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