February 3, 2009
Gantler v Stephens: Delaware Chancery Court Struggles Con't
An en banc panel of the Delaware Supreme Court recently overruled a decision by Vice Chancellor Parsons in a notable case. See Gantler v Stephens (Jan. 27, 2009). The Chancellors usually circulate their individual opinions to the full court before they are filed and therefore the lower opinion has passed muster by the other Vice Chancellors. How could they all be so wrong on such a fundamental application of a well-known standard? At issue was whether the board of directors of a Niles, Ohio bank breached their fiduciary duties in not accepting a friendly takeover offer. The Ohio bank had solicited offers to buy and attracted three interested suitors. The board apparently had second thoughts about selling to another bank and asked shareholders to approve a going private stock reclassification plan (which they did). In the first opinion, a Vice-Chancellor dismissed the case under the business judgment rule. In the en banc opinion, the Court agreed that the Unocal threshold was not applicable but refused to apply the business judgment rule nevertheless, stating that the bank board and its officers violated their duty of loyalty by acting under conflicts of interest. Similarly, the proxy was flawed for not revealing the conflicts and any board ratification was tainted by the conflicts that were not revealed. Two directors were conflicted because they were associated with companies or firms that did business with the bank and could lose a client. One director (also an officer) was conflicted because he refused to respond in a timely fashion to requests for information in a due diligence investigation. A second officer was conflicted because he was loyal to the first and worried about losing his job. Focus on this last fellow: The Court is coming very close to saying that a board or an officer is inherently conflicted if he or she is worried about losing a job. Once again, this would put all takeover decisions in the duty of loyalty category. The Delaware Court had never defined carefully what conflicts count and what conflicts do not count in board decisions in takeovers. The Vice-Chancellor's decision that was overruled is evidence of that. Why should outside directors worried about losing a client be different that an inside director worried about losing a job??? Why is a refusal to supply information evidence of a conflict (a director could just think it was a bad deal) neutral of a director's concern over a loss of his job? Unless the loss of the job is the conflict. A careful resolution of this issue is long, long overdue and this case does not help much. Corrected.
February 3, 2009 | Permalink
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