Bear Stearns, the Shotgun Merger, and Fiduciary Duties

The NY Supreme Court ruled on the class action brought by shareholders alleging that the forced merger between Bear Stearns and JP Morgan violated the board's fiduciary duties.  The case dismissed the suit on a motion for summary judgment. 

It is hard to argue with the decision and, frankly, presents a good example of how the business judgment rule ought to work.  There was an opportunity for discovery and an exploration of the underlying facts.  The opinion demonstrates relatively conclusively that the board operated under severe conditions, including financial turmoil and weak capital markets.  The fact that the company was originally sold for $2 a share (a price subsequently raised to $10) illustrates that the process was far from perfect but given the difficulties confronted by the board a not unreasonable outcome.  As the opinion noted, it could have been worse, something that Lehman Brothers would discover first hand.

We do note this observation, however.  The court took the opportunity to praise the board.  The opinion pointed out that three directors (Schwartz, Cayne and Greenberg), "were also members of Bear Stearns' management."  The other nine members, however, were outside directors.  They were described as having "broad business and life experience" and the accompanying footnote set out their highly credentialed background.

Fair enough and were we looking at the board from the perspective of this transaction alone, it would be hard to find anything but the most professional of conduct.  But this is a classic example of the type of board that could be viewed has having been captured by management.  Several members of management sat on the board and a number of directors served with them for long periods, providing plenty of time to be captured (if they weren't already when they joined).  It was also an undivese group, not particularly likely to provide top management with differing views.  They were well paid (providing incentives to not "rock the boat") and, in 2006, attended only six board meetings.  Many also served on multiple boards, which presumably stretched their attention span. 

The question, therefore, isn't about the mishandling of the merger with JP Morgan, but how the board allowed Bear Stearns to get into the position where a shotgun merger was the only real salvation.