Gantler v. Stephens

In Gantler v. Stephens, 2009 WL 18828 (Del. Jan. 27, 2009), plaintiffs sued First Niles' ("Company") officers and directors, claiming that they breached a fiduciary duty to shareholders by rejecting a merger offer, abandoning the Company's sales process, and distributing a materially false and misleading reclassification proxy statement. The Court of Chancery dismissed the complaint, holding that plaintiffs failed to allege sufficient facts to overcome the business judgment rule and to state a claim that the proxy was materially false. The Delaware Supreme Court reversed and remanded, holding that officers of Delaware corporations have the same fiduciary duties as directors.

The Company is a Delaware corporation that owns and operates the Home Federal Savings and Loan Association of Niles ("Bank"). The Bank is a single branch, federally chartered stock savings association. In August 2004, with no succession plan and CEO Stephens beyond retirement age, the Board of Directors (“Board”) decided to sell the Company. Throughout the sale process, however, management advocated privatizing it. Moreover, management failed to provide in a timely manner due diligence materials to potential bidders and subsequently failed to inform the Board of their failure until after one bidder withdrew. Despite an increased offer from one bidder, the Board voted to reject it without discussion and Stephens started the privatization process.

Privatization included reclassifying common stock shares into new Series A Preferred Stock on a one to one basis. The Series A would pay higher dividends with the same liquidation rights as the common stock. Holders would only have voting rights, however, if there was a proposed sale of the company. In December 2005, the Board voted to privatize, with Gantler again casting the only dissenting vote.

In June 2006, the Board submitted a preliminary proxy to the SEC and in August filed an amended version. After plaintiffs filed suit, the Board again amended the proxy and sent a definitive proxy statement to Company shareholders. In November 2006, plaintiffs filed an amended complaint claiming that the reclassification proxy contained material misstatements and omissions. The proxy stated the officers and board had "a conflict of interest with respect to [the Reclassification] because he or she is in a position to structure it in such a way that benefits his or her interests differently from the interests of unaffiliated shareholders." The proxy also stated that the Company had received one firm merger offer and that "after careful deliberations, the board determined in its business judgment the proposal was not in the best interests of the Company or our shareholders and rejected the proposal." The shareholders approved the reclassification in December 2006.

Reviewing the decision de novo, the Delaware Supreme Court found that the Court of Chancery had misapplied the business judgment rule. In reaching its conclusion, the Court used a two-prong analysis that focused first on whether the Board reached its decision in the good faith pursuit of a legitimate corporate interest and, second, on whether the Board did so advisedly.

The Court found that the plaintiffs rebutted the business judgment rule because: (1) the proxy itself stated the officers and board had a conflict of interest; (2) the majority of the board was conflicted; (3) Stephens failed to respond to Cortland's due diligence request; (4) the Board failed to discuss a bid for the Company; and (5) the other Board members' livelihoods depended on the Company's continued relationship with their outside businesses.

The Court held that the fiduciary duties of officers are the same as those of directors. The Court also held that while director actions are subject to business judgment review by the shareholders, a ratifying vote does not extinguish any future claims as to the legality of the directors' actions.

The primary materials for this post are available on the DU Corporate Governance website.

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