STRINE, Vice Chancellor.
Several stockholders of Intercargo Corporation have sued the (now former) directors of Intercargo (the "defendant directors") for breach of fiduciary duty in connection with the acquisition of Intercargo by XL America, Inc. for $12.00 a share (the "XL merger"). Earlier in this litigation, the plaintiffs sought a preliminary injunction against the consummation of the XL merger. That request was denied by Vice Chancellor Jacobs,
In their amended complaint,
The defendant directors have moved for judgment on the pleadings. In this opinion, I grant the defendant directors' motion for the following reasons.
The XL merger has been consummated and rescission is not a practicable remedy. Therefore, the plaintiffs are left with a claim for damages against the defendant directors. Because Intercargo's certificate of incorporation contained an exculpatory provision immunizing its directors from liability for due care violations, the plaintiffs may survive this motion only if the complaint contains well-pleaded allegations that the defendant directors breached their duty of loyalty by engaging in intentional, bad faith, or self-interested conduct that is not immunized by the exculpatory charter provision.
After according the plaintiffs the favorable inferences owed to them in this procedural posture, I conclude that the complaint fails to allege such a breach of the duty of loyalty. The plaintiffs concede that a majority of Intercargo's board was disinterested and independent, and the plaintiffs have failed to allege facts that, if true, support a reasonable inference that the loyalties of two of the other three directors were conflicted. And even if one or more of those three directors were interested in the merger, the plaintiffs have failed to allege that those directors dominated or controlled, or otherwise influenced in any improper way, the concededly disinterested board majority.
Finally, the complaint itself paints a picture that is incongruent with a loyalty breach. The complaint:
In sum, the complaint alleges no facts from which a reasonable inference can be drawn that any conflicting self-interest or bad faith motive caused the defendant directors to fail to meet their obligations to seek the highest attainable value or to provide the Intercargo stockholders with all material information.
I. Factual Background
A. The Merger Partners
Defendant Intercargo is a Delaware corporation that specialized in underwriting marine insurance. As of the time of the XL merger, Intercargo had 7.3 million outstanding common shares. At the $12.00 per share merger price, the equity value placed on Intercargo in the XL merger was approximately $88 million.
XL Capital Ltd. is a Cayman Islands corporation that functions as a holding company for subsidiaries in the insurance industry. Its subsidiaries operate in the insurance, reinsurance, and financial risk protection industries on an international basis.
XL Capital used its indirectly wholly-owned subsidiary, XL America, a Delaware corporation, as its acquisition vehicle for its transaction with Intercargo. XL America serves as XL Capital's holding company for its American insurance operations. For ease of reference, I hereinafter refer to XL Capital and XL America indistinguishably as "XL."
B. The Defendant Directors
The complaint's allegations regarding the defendant directors are sparse at best. The Intercargo board was comprised of eight directors. As to five of the defendant directors — a clear board majority — the complaint simply states each defendant's name and status as a director. Thus the complaint alleges no facts suggesting that the independence and disinterestedness of these five directors were in any way compromised. The complaint is devoid of facts suggesting any motive on the part of these five directors to do anything other than advance the best interests of Intercargo and its stockholders.
The complaint contains somewhat more information about the three other defendant directors. As to defendant Stanley A. Galanski, the complaint alleges that he was the President, Chief Executive Officer, and director of Intercargo. Without explaining the terms of his post-merger employment, the complaint states that Galanski "is personally interested in the Merger because he is being hired by XL."
As to defendant Michael L. Sklar, the complaint alleges that Sklar was a partner in the Chicago law firm of Rudnick & Wolfe, which was Intercargo's primary outside counsel before the merger and which represented Intercargo in the merger with XL. Nothing in the complaint indicates that Sklar or Rudnick & Wolfe stood to obtain legal work from XL after the merger.
As to defendant Robert B. Sanborn, the complaint alleges that he served on the Intercargo board at the request of Orion Capital Corporation, which owned 26% of Intercargo's stock and had agreed to vote for the merger. The complaint refers to the fact that the proxy statement indicated that "`[a]s a designee of Orion, Mr. Sanborn's investment aims may differ from those of some stockholders....' In addition, the proxy statement discloses that during at least one [Intercargo] board meeting at which XL's offer was discussed, `Mr. Sanborn excused himself from the meeting upon the commencement of the discussion regarding the Company's strategic
C. The Complaint's Allegations Regarding The Defendant Directors' Compliance With Their Revlon Duties
As is the case when ruling on any motion addressed solely to the pleadings, the court finds itself in the sometimes frustrating position of being confined to the allegations of the complaint.
For example, the idea of selling Intercargo in a change of control transaction did not originate with XL. Rather, the complaint acknowledges that the proxy statement indicates that the investment bank of Fox-Pitt, Kelton, Inc. ("FPK") was engaged by the Intercargo board in Spring 1998 to help the board look for strategic alternatives, including a possible sale of the company. FPK's engagement and its purpose were not publicly disclosed by Intercargo until after the XL merger was announced.
In the course of FPK's search for strategic alternatives, "`FPK evaluated twenty-seven prospective purchasers of the Company, and the Company entered into confidentiality agreements with eleven prospective purchasers. All of these entities received confidential information about the Company, and several conducted due diligence.'"
In the midst of this process of identifying possible strategic partners, XL somehow arrived on the scene on June 19, 1998 and signed a confidentiality agreement. The complaint does not say how XL got involved but notes that the "proxy statement does not even say that XL was one of the companies contacted [by FPK]."
By June 23, 1998, XL had sent Intercargo a proposal to acquire all of Intercargo's shares at $14.00 a share. The complaint then confusingly skips to December 2, 1998, when Intercargo's board announced that it had accepted an offer from XL to purchase all of the stock of Intercargo at $12.00 a share.
The complaint gives no coherent explanation as to why the Intercargo board accepted $2.00 less a share than XL's initial
The complaint also asserts that Intercargo's "reorganization strategy ... combined with recent difficult market conditions (including well publicized problems in Asian markets) [had] caused [Intercargo's] recent financial results to be artificially depressed to some extent and to fail to reflect [Intercargo's] true worth."
Not only that, Intercargo's balance sheet was strong. The company had sold a subsidiary for $41 million in cash in 1997, still had that cash on hand, owed no debt, and had cancelled its bank credit line because its resources were more than adequate to fund its operations. As a result, the complaint avers that Intercargo was an "extremely attractive acquisition candidate."
According to the complaint, the defendant directors failed, however, to obtain an adequate price for Intercargo by bungling the auction process. The complaint claims that "an aggressive public `shopping' strategy was ... the only reasonable way to ensure that, if [Intercargo] [was] to be sold and its publicly announced ongoing long-term plan [was] to be abandoned, the highest value [would be] obtained for ... [Intercargo's]... stockholders."
The complaint also alleges that the merger agreement contained an preclusive and coercive termination fee of $3.1 million plus expenses. The fee equals approximately 3.5% of the $88 million value placed on Intercargo's equity in the XL merger. The complaint also alleges that the merger agreement contained a preclusive no-shop provision that prevented the Intercargo board from actively seeking a better transaction after the board had executed the merger agreement.
Without linkage to either of these assertedly preclusive provisions, the complaint states that two other companies, Swiss Re and Houston Casualty Corp., would have been "interested in negotiating a merger with Intercargo," if they have
Thus while the complaint is replete with assertions that the defendant directors' actions were unreasonable,
The most specific allegations of the complaint in this regard are as follows:
D. The Plaintiffs' Disclosure Claims
For reasons I will soon discuss, there is no need to detail the disclosure claims set forth in the complaint. These claims are essentially unchanged from those ably considered by Vice Chancellor Jacobs in his opinion rejecting plaintiffs' application to enjoin the XL merger.
What is most important for present purposes is the fact that the complaint pleads nothing reasonably supportive of the proposition that any omission from the merger proxy statement resulted from disloyalty (including bad faith) on the part of the defendant directors. The complaint does allege that the defendant directors "in a knowing and bad faith manner" failed to disclose all material facts. Yet the complaint pleads no facts corroborative of that assertion aside from the facts that defendant Galanski was going to work for XL after the merger, that defendant Sklar was a Rudnick & Wolfe partner, and that defendant Sanborn was an Orion designee.
II. Procedural Standard
This court will grant a motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c) when there are no material issues of fact and the movant is entitled to judgment as a matter of law.
In analyzing a motion to dismiss, the court may consider, for carefully limited purposes, documents integral to or incorporated into the complaint by reference.
III. Legal Analysis
A. Rescission Is Not An Available Remedy And Therefore The Plaintiffs' Only Remedy Is A Damages Award Against The Defendant Directors
At this stage of this case, the plaintiffs are left with a suit for money damages. Having unsuccessfully attempted to obtain an injunction against the consummation of the merger, the metaphorical merger eggs have been scrambled. Under our case law, it is generally accepted that a completed merger cannot, as a practical matter, be unwound.
Because rescission is not an available remedy and the plaintiffs possess only a claim for damages against the defendant directors, it is therefore necessary to give careful consideration to the facts the plaintiffs must plead to state a claim for damages.
B. The Intercargo Certificate Of Incorporation Bars A Damages Award Against The Defendant Directors For Breach Of Their Duty of Care
Intercargo's certificate of incorporation contains an exculpatory provision authorized by 8 Del. C. § 102(b)(7) that immunizes Intercargo's directors for liability for monetary damages as a result of a breach of their duty of care.
C. Because The Plaintiffs' Due Care Claims Are Not Cognizable, The Complaint Must Be Dismissed Unless It States A Claim That The Defendant Directors Breached Their Duty of Loyalty
The exculpatory certificate provision has an important, but confined, influence on the court's analysis of this motion. Because the plaintiffs may not recover damages for a breach of the duty of care by the defendant directors, the court's focus is necessarily upon whether the complaint alleges facts that, if true, would buttress a conclusion that the defendant directors breached their duty of loyalty or otherwise engaged in conduct not immunized by the exculpatory charter provision.
Under this approach, the defendants do not obtain a dismissal of the plaintiffs' loyalty claims as a result of the exculpatory charter provision; they obtain a dismissal because the complaint fails to properly plead a loyalty claim or another claim premised on behavior not immunized by the exculpatory charter provision.
When applying this approach in this case, I will focus on the question of whether the plaintiffs have stated a claim that the defendant directors — as a result of bad faith, self-interested, or other intentional misconduct rising to the level of a breach of the duty of loyalty — failed to seek the highest attainable value for Intercargo's stockholders and/or failed to provide Intercargo stockholders with all the material information necessary to determine whether to approve XL's offer.
D. Does The Complaint State A Claim That The Defendant Directors Breached Their Duty Of Loyalty And Thereby Failed To Obtain The Highest Value Reasonably Attainable?
Once a board of directors determines to sell the corporation in a change of control transaction — as the Intercargo board did — their responsibility is to endeavor to secure the highest value reasonably attainable for the stockholders.
The fact that a corporate board has decided to engage in a change of control transaction invoking so-called Revlon duties does not change the showing of culpability a plaintiff must make in order to hold the directors liable for monetary damages. For example, if a board unintentionally fails, as a result of gross negligence and not of bad faith or self-interest, to follow up on a materially higher bid and an exculpatory charter provision is in place, then the plaintiff will be barred from recovery, regardless of whether the board was in Revlon-land.
As applied to this case, this means that the defendant directors are entitled to dismissal unless the plaintiffs have pled facts that, if true, support the conclusion that the defendant directors failed to secure the highest attainable value as a result of their own bad faith or otherwise disloyal conduct.
Here, the plaintiffs have fallen far short of pleading facts supporting a reasonable inference of disloyalty. A number of reasons compel this conclusion.
As an initial matter, it is apparent that the plaintiffs have not even mounted a challenge to the independence or disinterestedness of a majority of the Intercargo board. The independence and disinterestedness of five of the eight directors is unchallenged. The presence of an unconflicted board majority undercuts any inference that the decisions of the Intercargo board can be attributed to disloyalty.
And the challenges the plaintiffs do mount to the disinterestedness of the other Intercargo directors are extremely weak. The attack on defendant Sklar depends entirely on Sklar's partnership in Rudnick & Wolfe, Intercargo's outside counsel. If, as the plaintiffs allege, Intercargo had a long-term business plan that would make the company prosper, why would Sklar urge a change of control transaction at a less than optimum price? Would not this tend to be self-destructive in that it would subject Rudnick & Wolfe to the substantial risk of losing a client? Frankly, I don't get it, especially because the plaintiffs do not allege that Rudnick & Wolfe was promised a continued role as counsel for XL (on behalf, for example, of its new Intercargo operations).
The plaintiffs' most substantial attack on a defendant's motive is mounted as to defendant Galanski, who was Intercargo's CEO. According to the plaintiffs, Galanski was motivated to support a subpar deal with XL because XL promised him future employment, the terms of which the plaintiffs do not bother to specify. They ask me to infer that Galanski was motivated not by a desire to get the highest value but to secure a buyer who would keep him on board. At the same time, I am told that Galanski was implementing a long-term strategy that would deliver greater value and that the market did not know Intercargo was for sale.
If Galanski was motivated by entrenchment purposes, why did he apparently support Intercargo's voluntary, uncoerced search for a buyer? Shareholder plaintiffs usually attack the motivations of managers who resist change of control transactions in favor of their own status quo strategies. In this case, the plaintiffs attack the motivation of a CEO who worked with his board to retain an investment bank to look for buyers. The sole basis for this attack is that the CEO was asked by the ultimate buyer to stay on. The plaintiffs do not even allege that the CEO was hired by XL on terms materially more favorable than his (apparently non-threatened) employment with Intercargo.
Even less substantial is the plaintiffs' challenge to defendant Sanborn's disinterestedness. Because Sanborn was nominated
Most important, the plaintiffs have not pled facts suggesting that Orion was anxious to engage in a fire sale. Had Orion wished to sell out fast, it had options of its own and could have marketed its own quite valuable block. The normal presumption is that the owner of a substantial block who decides to sell is interested in obtaining the highest price.
These attempts to plead facts compromising the loyalty of Galanski, Sklar, and Sanborn are not merely weak. They are also unaccompanied by allegations that any of these defendants dominated or controlled the other members of the Intercargo board. Nor does the complaint allege that Galanski, Sklar, or Sanborn misled or deceived their fellow board members in any manner. And the complaint fails to set forth facts indicating why the disinterested board majority would sell out Intercargo's stockholders simply so as to secure Galanski's employment — an employment that could have been secured, according to plaintiffs, simply by continuing to manage the company under its existing business plan. The absence of well-supported allegations of this kind bolsters my conclusion that the complaint fails to plead actionable disloyalty.
The dearth of well-pled facts suggesting improper motives on the part of the Intercargo board is coupled with less than compelling allegations regarding the unreasonableness of the board's compliance with its Revlon duties. Although the complaint takes issue with the board's decision to
Nor do the rather ordinary "deal protection" provisions of the merger agreement provide any support for the plaintiffs' Revlon claims.
Although in purely percentage terms, the termination fee was at the high end of what our courts have approved, it was still within the range that is generally considered reasonable.
Likewise, the fact that the merger agreement contained a rather standard no-shop provision does little to bolster the plaintiffs' claim. The no-shop permitted the Intercargo board to consider an unsolicited proposal that the board determined was likely to be consummated and more favorable to Intercargo's stockholders than the XL merger. The presence of this type of provision in a merger agreement is hardly indicative of a Revlon (or Unocal
Finally, it is important to reiterate what this case does not involve. There is no allegation that the Intercargo board rushed into XL's arms in order to protect itself from another, more threatening bidder. There is no allegation that the Intercargo board refused to consider a higher bid
For all these reasons, the allegations of the complaint fail to state a claim that the defendant directors breached their so-called Revlon duties as a result of bad faith, self-interest, or any other reason that would suggest a breach of the duty of loyalty. As a result, the plaintiffs' breach of fiduciary duty claim, which is premised on Revlon, shall be dismissed.
E. The Complaint Fails To State A Claim That The Defendant Directors Knowingly And In Bad Faith Failed To Disclose Material Information
Having reviewed the allegations of the complaint in connection with the plaintiffs' Revlon claim, there is no need for an exhaustive reexamination of its failure to plead facts suggesting that the defendants purposely concealed material information from the Intercargo stockholders. Although the complaint makes the conclusory allegation that the defendants breached their duty of disclosure in a "bad faith and knowing manner," no facts pled in the complaint buttress that accusation.
For all the foregoing reasons, the defendants' motion for judgment on the pleadings is granted and the plaintiffs' amended complaint is dismissed with prejudice.
Goodwin, mem. op. at 51, 1999 WL 64265, at *25, 1999 Del. Ch. LEXIS 5, at *77; see also In re Lukens, 757 A.2d at 730 (where CEO was to receive a $20 million golden parachute payment as a result of a sales transaction but there was no allegation that he dominated or controlled the board, there was "no basis to say that the board as a whole lacked independence"); In re Frederick's of Hollywood, mem. op. at 17, 2000 WL 130630, at *7, 2000 Del. Ch. LEXIS 19, at *22 (where only one director was interested, where board majority that approved merger was disinterested, and where there was no allegation that the sole interested director dominated or controlled the board, "the duty of loyalty claim fails for lack of a valid premise").
In their brief, the plaintiffs admit that the defendant directors were "unaware" of the alleged interest of Swiss Re and Houston Casualty. Pls. Br. at 12. Thus any failure of the defendant directors not to talk to them could hardly have been intentional. Furthermore, the complaint fails to allege any connection between their failure to make an offer and the terms of the XL merger agreement. Nor does our law require merger agreements to contain only such "deal protection" measures as will not deter the timid or those potential acquirors unwilling to bear the costs that may result from the law's acknowledgment that parties to executory merger contracts have legitimate, although constrained, contract rights. As long as no-shop and termination fee provisions are non-preclusive, non-coercive, and otherwise within the boundaries of reason, Delaware law generally recognizes them as valid.
In this respect, I also note that Vice Chancellor Jacobs' well-reasoned preliminary injunction opinion ruling on plaintiffs' disclosure claims — which was decided on a record identical to that I am permitted to consider in ruling on plaintiffs' disclosure claims — supports dismissal of the those claims on the merits. In view of my approach to this case and Vice Chancellor Jacobs' thorough analysis and rejection of those claims, I need not revisit his examination of the merits other than to indicate my agreement with his conclusion that the alleged omissions were not material. See In re Wheelabrator, mem. op. at 10, 1992 WL 212595, at *4, 1992 Del. Ch. LEXIS 196, at *17 (where record had not changed since the court decided that a disclosure claim was without merit on a motion for preliminary injunction, court relied on its prior analysis in dismissing the same claim on a 12(b)(6) motion); Intercargo I, mem. op. at 12-26, 1999 WL 288128, at *5-*10, 1999 Del. Ch. LEXIS 16963, at *15-*36 (examining plaintiffs' disclosure claims and concluding that none of the omitted information was material).